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
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-16931
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UNITED NATIONAL BANCORP
(Exact name of Registrant as specified in its Charter)
New Jersey 22-2894827
- ------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1130 Route 22 East
Bridgewater, New Jersey 08807
- ---------------------------------------- ---------
(Address of principal executive offices) (ZIP CODE)
(908) 429-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
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. ( )
The aggregate market value of United National Bancorp's common stock held by
non-affiliates, as of January 31, 1997, amounted to $131,378,000.
The number of shares of Registrant's Common Stock, $2.50 par value, outstanding
as of March 15, 1997 was 4,369,268.
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Documents Incorporated by Reference
Part(s) Into
Documents Which Incorporated
---------- ---------------------
United's Annual Report to Shareholders
for the year ended December 31, 1996
("United's 1996 Annual Report"),
pages 13 through 52, except for the table
headed "Dividend Payment, 10 Year
Schedule" on page 52. 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 15, 1997 ("United's Proxy
Statement for its 1997 Annual Meeting")
under the captions "Election of
Directors", "Stock Ownership of
Management and Principal Shareholder",
"Executive Compensation", and "Compensation
Committee Interlocks and Insider Participation". Part III
With the exception of information specifically incorporated by reference,
United's 1996 Annual Report and United's Proxy Statement for its 1997 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. 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, 1996, United had consolidated assets of approximately $1
billion, deposits of $881 million and stockholders' equity of $88 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 is
headquartered in Bridgewater, New Jersey and operates 19 branches throughout
Central New Jersey. The Bank operates three branches in Hunterdon County, three
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 23 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 branch and ATM locations include the one branch and ATM
added as a result of the Farrington Bank ("Farrington") acquisition, which was
consummated on February 28, 1997.
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.
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
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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.
On February 28, 1997, the Bank acquired all of the outstanding shares of
Farrington based in North Brunswick, New Jersey. Each share of Farrington was
converted into .7647 shares of the Company's common stock for a total of
approximately 549,000 shares issued. At the time of the acquisition, Farrington
had approximately $63 million in assets. The acquisition has been accounted for
under the pooling-of-interests method of accounting, and accordingly, the
Company's consolidated financial statements presented in future reports will be
restated to include the accounts and results of Farrington. In connection with
the acquisition, the Company expects to take a one-time merger related charge of
$1.7 million in the first quarter of 1997.
Later Development
On March 21, 1997, the Company privately placed $20 million in capital
securities pursuant to Rule 144A under the Securities Act of 1933. The 10.01%
capital securities represent a preferred beneficial interest in the assets of
UNB Capital Trust I, a statutory business trust. The trust exists for the sole
purpose of issuing the trust securities and investing the proceeds in 10.01%
Junior Subordinated Deferable Interest Debentures issued by United which mature
on March 15, 2027. The capital securities have preference over the common
securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation. The $20 million will be included in Tier I
capital for regulatory purposes, subject to certain limitations, but will be
classified as long-term debt for financial reporting purposes.
(b) Industry Segments
The Company has one industry segment - commercial banking.
(c) Narrative Description of Business
Personal Banking Services
The Bank, through its 19 branch network and 23 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 administration was approximately $850 million at December 31, 1996.
Discount Brokerage Service has been offered since 1986 as an additional service
to customers. It is currently managed by TradeStar Investor Services.
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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, United
National Investment Company, Inc. (formerly 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, 1996, approximately $180.0 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. The Company is required
to file reports with the Board and provide such additional information 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
the Board may approve an acquisition by
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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 April 17, 1996, New Jersey enacted legislation to opt-in with respect to
earlier interstate banking and branching and the entry into New Jersey of
foreign country banks. New Jersey did not authorize de novo branching into the
state.
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,
1996, the portion of the Bank's deposit base assessed at the SAIF rate was
approximately $80 million, or 9.0% of the Bank deposits.
For the first three quarters of 1995, both SAIF-member institutions and
BIF-member institutions paid deposit insurance premiums based on a schedule from
$0.23 to $0.31 per $100 of 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 paid by BIF-insured banks from a range of $0.23
to $0.31 per $100 of deposits to a range of $0.04 to $0.31 per $100 of deposits.
The new rate schedule for the BIF was made effective 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 insured
institutions, except for institutions that are not well capitalized and are
assigned to the higher supervisory risk categories.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act"),
signed into law on September 30, 1996, included the Deposit Insurance Funds Act
of 1996 (the "Funds Act") under which the FDIC was required to impose a special
assessment on SAIF-assessable deposits to recapitalize the SAIF. As a result of
the Funds Act, the Bank paid a special assessment of $512,000 for its SAIF
deposits, which it accrued in the third quarter of 1996. Under the Funds Act,
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the FDIC also will charge assessments for SAIF and BIF deposits in a 5 to 1
ratio to pay Financing Corporation ("FICO") bonds until January 1, 2000, at
which time the assessment will be equal. A FICO rate of approximately 1.29 basis
points will be charged on BIF deposits, and approximately 6.44 basis points will
be charged on SAIF deposits. Oakar deposits will be treated as SAIF deposits for
purposes of the FICO bond assessment. The 1996 Act instituted a number of other
regulatory relief provisions.
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, with the new regulations phased in over a period
from July 1, 1995 through July 1, 1997. 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 system focuses 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 will be considered in the application process.
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.
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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 page 18, "Note 1m. Cash Dividend Restrictions" on pages 33-34
and "Note 12-Capital Requirements" on page 41-42 of United's 1996 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, 1996, the Company had Tier 1 capital as a percentage of
risk-weighted assets of 11.00% and total risk-based capital as a percentage of
risk-weighted assets of 11.99%.
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, 1996, the Company had a Leverage Ratio of 7.56%.
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, 1996, the Bank had Tier 1 capital as a
percentage of risk-weighted assets of 10.25% and a total risk-based capital
ratio of 11.23%.
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, 1996, the
Bank had a Leverage Ratio of 7.04%.
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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) and 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 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.
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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
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material portion of the Bank's deposits or loans. No customer accounts for as
much as two percent of the 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, 1996, there were 470 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 following are the statistical disclosures for a bank holding company
required pursuant to Industry Guide 3:
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
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.
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<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- --------------------------- ----------------------------
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 Cost:
Taxable $ 262,086 $17,820 6.80% $229,519 $ 15,488 6.75% $267,165 $ 17,367 6.50%
Non-Taxable 44,554 3,336 7.49 26,283 1,907 7.26 21,188 1,527 7.21
Securities Held to Maturity:
Taxable 39,982 2,902 7.26 90,925 6,491 7.14 46,405 2,820 6.08
Non-Taxable 8,510 661 7.77 17,333 1,442 8.32 24,258 1,995 8.22
Trading Account Securities 344 13 3.78 366 14 3.83 304 10 3.29
------------------------------- -------------------------- ---------------------------
Total Securities 355,476 24,732 6.96 364,426 25,342 6.95 359,320 23,719 6.60
------------------------------- -------------------------- ---------------------------
Federal Funds Sold 3,095 168 5.43 9,203 549 5.97 10,578 439 4.15
Federal Home Loan Bank Deposits 906 48 5.30 6,028 351 5.82 - - -
Loans (Net of Unearned Income) (1):
Commercial 144,599 13,324 9.21 123,626 10,432 8.44 91,907 7,745 8.43
Commercial-Tax Exempt 1,515 145 9.57 1,795 173 9.64 2,248 236 10.50
Real Estate 202,026 17,053 8.44 183,102 17,210 9.40 170,968 13,771 8.05
Credit Card 17,452 3,375 19.34 18,397 3,574 19.43 19,708 4,841 24.56
Installment 187,869 15,694 8.35 179,363 14,892 8.30 132,876 10,280 7.74
Impaired Loans 5,640 131 2.32 4,310 668 15.50 - - -
------------------------------- -------------------------- ----------------------------
Total Loans 559,101 49,722 8.89 510,593 46,949 9.19 417,707 36,873 8.83
------------------------------- -------------------------- ----------------------------
Total Interest Earning Assets 918,578 74,670 8.13 890,250 73,191 8.22 787,605 61,031 7.75
------------------------------- -------------------------- ----------------------------
Non-Interest Earning Assets:
Cash and Due From Banks 43,968 44,551 45,261
Other Assets 54,227 51,800 34,872
Net Unrealized Loss On Securities
Available for Sale (52) (4,816) (2,404)
Allowance for Possible Loan Losses (7,687) (8,912) (10,109)
----------- --------- ---------
Total Non-Interest Earning Assets 90,456 82,623 67,620
----------- --------- ---------
Total Assets $1,009,034 $972,873 $855,225
=========== ========= =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- -------------------------- ---------------------------
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>
Liabilities and Stockholders' Equity:
Interest Bearing Liabilities:
Savings Deposits $ 352,316 6,813 1.93 $376,630 8,882 2.36 $394,033 9,002 2.28
Time Deposits 343,746 18,460 5.37 329,141 17,996 5.47 205,352 7,833 3.81
------------------------------- -------------------------- ----------------------------
Total Savings and Time Deposits 696,062 25,273 3.63 705,771 26,878 3.81 599,385 16,835 2.81
Short-Term Borrowings 50,350 2,653 5.27 29,638 1,631 5.50 25,949 1,144 4.41
Other Borrowings 9,687 929 9.59 6,495 619 9.53 - - -
------------------------------- -------------------------- ----------------------------
Total Interest Bearing Liabilities 756,099 28,855 3.82 741,904 29,128 3.93 625,334 17,979 2.88
------------------------------- -------------------------- ----------------------------
Non-Interest Bearing Liabilities:
Demand Deposits and Non-Interest
Bearing Savings 158,367 146,393 154,533
Other Liabilities 10,369 9,452 6,199
----------- --------- ---------
Total Non-Interest
Bearing Liabilities 168,736 155,845 160,732
Stockholders' Equity (2) 84,199 75,124 69,159
----------- --------- ---------
Total Liabilities and
Stockholders' Equity $1,009,034 $972,873 $855,225
=========== ========= =========
Net Interest Income
(Tax-Equivalent Basis) 45,815 44,063 43,052
Tax-Equivalent Adjustment (1,408) (1,197) (1,277)
-------- -------- --------
Net Interest Income $44,407 $42,866 $41,775
======== ======== ========
Net Interest Spread
(Tax-Equivalent Basis) 4.31% 4.29% 4.87%
===== ===== =====
Net Interest Margin
(Tax-Equivalent Basis) 4.99% 4.95% 5.47%
===== ===== =====
</TABLE>
(1) Average loan balances and yields include non-accruing loans. Loan fees are
included in the interest amounts and are not material. (2) Includes net
unrealized loss on securities available for sale, net of tax, of $34, $3,176 and
$1,603 for 1996, 1995 and 1994, respectively.
13
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1996 Compared with 1995 1995 Compared with 1994
------------------------------- ------------------------------
Increase (Decrease) Increase (Decrease)
Total ------------------- Total ------------------
Increase Due in Change in: Increase Due in Change in:
(In Thousands) (Decrease) Volume Rate (Decrease) Volume Rate
---------- -------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans $2,773 $ 4,075 $(1,302) $10,076 $8,051 $2,025
Securities Available for Sale:
Taxable 2,332 2,196 136 (1,879) (2,546) 667
Non-Taxable 1,429 1,368 61 380 372 8
Securities Held to Maturity:
Taxable (3,589) (3,689) 100 3,671 3,503 168
Non-Taxable (781) (685) (96) (553) (577) 24
Trading Account Securities (1) (1) - 4 2 2
Federal Funds Sold and Deposits
with Federal Home Loan Bank (684) (603) (81) 461 269 192
----------------------------- -----------------------------
Total Interest Income 1,479 2,661 (1,182) 12,160 9,074 3,086
----------------------------- -----------------------------
Interest Expense:
Savings Deposits (2,069) (465) (1,604) (120) (424) 304
Time Deposits 464 792 (328) 10,163 6,760 3,403
Short-Term Borrowings 1,022 1,090 (68) 593 309 284
Other Borrowings 310 306 4 513 513 -
---------------------------- -----------------------------
Total Interest Expense (273) 1,723 (1,996) 11,149 7,158 3,991
---------------------------- -----------------------------
Changes in Net Interest Income $1,752 $ 938 $ 814 $ 1,011 $1,916 $ (905)
============================ =============================
</TABLE>
The change in interest due to both volume and rate has been allocated
proportionally to both, based on their relative absolute values.
14
<PAGE>
INFLATION AND CHANGING INTEREST RATES
Interest rate risk at a given point in time is portrayed by the interest rate
sensitivity position ("gap"). The cumulative gap represents the net position of
assets and liabilities subject to repricing in specific time periods. The gap
presented at any point in time is one measure of the risk inherent in the
existing balance sheet structure as it relates to potential changes in net
interest income. Gap alone does not accurately measure the magnitude of changes
in net interest income since changes in interest rates do not affect all
categories of assets and liabilities equally or simultaneously. The following
table shows the Company's gap position at December 31, 1996.
Interest Rate Sensitivity Analysis
As of December 31, 1996
<TABLE>
<CAPTION>
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) $ 64,884 $ 66,148 $125,495 $ 86,067 $ 6,426 $ 349,020
Loans (Less Unearned Income):
Commercial 132,171 9,256 13,391 1,395 4,231 160,444
Real Estate 29,029 21,435 104,824 65,904 3,464 224,656
Installment 42,460 64,966 71,927 4,185 315 183,853
Credit Cards (2) - - - - 20,301 20,301
- -----------------------------------------------------------------------------------------------------------------------------
Total Loans 203,660 95,657 190,142 71,484 28,311 589,254
- -----------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gain-Securities
Available for Sale
and Trading Account 1,640 - - - - 1,640
Investment in Joint Venture - - - - 3,151 3,151
Other Assets - - - - 94,484 94,484
- -----------------------------------------------------------------------------------------------------------------------------
Total Assets $270,184 $161,805 $315,637 $157,551 $ 132,372 $1,037,549
=============================================================================================================================
Cumulative Total Assets $270,184 $431,989 $747,626 $905,177 $1,037,549
=============================================================================================================================
Liabilities and Stockholders' Equity:
Deposits:
Non-Interest Bearing (2) $ - $ - $ - $ - $ 161,691 $ 161,691
Interest Bearing Transaction
Accounts 15,764 - 36,036 60,808 - 112,608
Other Savings 62,868 - 105,871 66,250 - 234,989
Time 152,556 153,853 64,903 674 - 371,986
- -----------------------------------------------------------------------------------------------------------------------------
Total Deposits 231,188 153,853 206,810 127,732 161,691 881,274
Short-Term Borrowings 25,728 20,600 - - - 46,328
Other Borrowings - - - - 9,693 9,693
Other Liabilities - - - - 12,165 12,165
Stockholders' Equity - - - - 88,089 88,089
- -----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Stockholder's Equity $256,916 $174,453 $206,810 $127,732 $ 271,638 $1,037,549
=============================================================================================================================
</TABLE>
15
<PAGE>
Interest Rate Sensitivity Analysis
As of December 31, 1996
(Continued)
<TABLE>
<CAPTION>
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>
Cumulative Total
Liabilities and
Stockholders' Equity $256,916 $431,369 $638,179 $765,911 $1,037,549
=============================================================================================================================
Interest Sensitivity Gap $ 13,268 $(12,648) $108,827 $ 29,819 $ (139,266)
=============================================================================================================================
Cumulative Interest
Sensitivity Gap $ 13,268 $ 620 $109,447 $139,266
=============================================================================================================================
Ratio of Interest Sensitive
Assets to Liabilities 1.05X 0.93X 1.53X 1.23X
=============================================================================================================================
Ratio of Cumulative Interest
Sensitive Assets to Liabilities 1.05X 1.00X 1.17X 1.18X
=============================================================================================================================
</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.
16
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the book value of the Company's securities held
to maturity portfolio at year-end 1996, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 980 $ - $12,635
Obligations of U.S. Government
Agencies and Corporations 42,921 21,151 49,073
Obligations of States and Political
Subdivisions 12,470 3,612 22,099
Agency Issued Mortgage-Backed
Securities 4,945 - 12,497
Securities Issued by Foreign
Governments 100 75 50
- --------------------------------------------------------------------------------
Total Securities Held to Maturity $61,416 $24,838 $96,354
================================================================================
</TABLE>
The following table sets forth the amortized cost of the Company's available for
sale portfolio at year-end 1996, 1995 and 1994. At December 31, 1996 and 1995
and 1994, these securities are carried at market.
<TABLE>
<CAPTION>
December 31,
-------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ - $ 6,521 $ 27,884
Obligations of U.S. Government
Agencies and Corporations 41,391 74,546 29,186
Obligations of States and Political
Subdivisions 44,765 39,449 22,807
Agency Issued Mortgage-Backed
Securities 175,452 186,217 135,441
- --------------------------------------------------------------------------------
Total Debt Securities 261,608 306,733 215,318
- --------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 21,241 19,817 19,986
Federal Reserve Bank and Federal
Home Loan Bank Stock 4,394 4,219 1,170
- --------------------------------------------------------------------------------
Total Equity Securities 25,635 24,036 21,156
- --------------------------------------------------------------------------------
Total Securities Available for Sale $287,243 $330,769 $236,474
================================================================================
</TABLE>
17
<PAGE>
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, 1996, excluding equity securities, were as follows:
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
U.S. Treasury Securities:
Book Value $ - $ 980 $ - $ - $ 980
Weighted Average Yield -% 6.25% -% -% 6.25%
Obligations of U.S. Government
Agencies and Corporations:
Book Value - 8,946 33,975 - 42,921
Weighted Average Yield -% 6.62% 7.43% -% 7.26%
Obligation of States and
Political Subdivisions:
Book Value 2,457 - 5,057 4,956 12,470
Weighted Average Yield 6.73% -% 7.05% 9.00% 7.76%
Agency Issued Mortgage-Backed
Securities:
Book Value - - - 4,945 4,945
Weighted Average Yield -% -% -% 7.20% 7.20%
Securities Issued by
Foreign Governments:
Book Value - - 100 - 100
Weighted Average Yield -% -% 7.04% -% 7.04%
- --------------------------------------------------------------------------------------------
Total Securities Held
to Maturity:
Book Value $2,457 $ 9,926 $39,132 $ 9,901 $ 61,416
Weighted Average Yield 6.73% 6.58% 7.38% 8.10% 7.34%
============================================================================================
SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government
Agencies and Corporations:
Book Value $1,000 $15,000 $15,391 $ 10,000 $ 41,391
Weighted Average Yield 6.75% 6.32% 7.47% 7.28% 6.99%
Obligations of States and
Political Subdivisions:
Book Value 4,873 15,275 14,627 9,990 44,765
Weighted Average Yield 8.42% 7.14% 7.32% 8.21% 7.58%
Agency Issued Mortgage-Backed
Securities:
Book Value 253 6,334 27,565 141,300 175,452
Weighted Average Yield 7.50% 5.91% 6.98% 6.87% 6.85%
- --------------------------------------------------------------------------------------------
Total Securities Available
for Sale:
Book Value $6,126 $36,609 $57,583 $161,290 $261,608
Weighted Average Yield 8.11% 6.59% 7.20% 6.98% 7.00%
============================================================================================
</TABLE>
18
<PAGE>
LOAN PORTFOLIO
Types of Loans
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) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $160,591 $129,992 $ 88,701 $ 93,730 $ 92,072
Real Estate 225,604 212,457 207,015 167,768 142,158
Installment 223,621 230,290 204,674 123,277 111,392
- --------------------------------------------------------------------------------
Total Loans Outstanding 609,816 572,739 500,390 384,775 345,622
Less: Unearned Income
on Loans 20,562 21,517 18,951 7,983 4,608
- --------------------------------------------------------------------------------
Loans, Net of Unearned
Income $589,254 $551,222 $481,439 $376,792 $341,014
================================================================================
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences and installment loans) outstanding as of December 31,
1996. 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
(In Thousands) One Year Five Years Five Years Total
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, Financial
and Agricultural $128,046 $82,188 $7,759 $217,993
Real Estate-Construction 11,540 - - 11,540
- --------------------------------------------------------------------------------
$139,586 $82,188 $7,759 $229,533
================================================================================
Loans Maturing After One Year With:
Fixed Interest Rates $51,440 $7,759
Variable Interest Rates 30,748 -
- --------------------------------------------------------------------------------
$82,188 $7,759
================================================================================
</TABLE>
19
<PAGE>
Non-Accrual, Past Due and Restructured Loans
The following table provides an analysis of non-performing assets as of December
31 for each of the last five years.
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans (1):
Commercial and Industrial $ 463 $ 705 $ 2,046 $ 1,721 $ 1,324
Loans Secured by Real Estate 6,846 4,926 6,520 5,089 6,197
Loans to Individuals for
Household, Family and Other
Personal Expenditure 351 483 401 28 140
- --------------------------------------------------------------------------------
Total Non-Accrual Loans 7,660 6,114 8,967 6,838 7,661
- --------------------------------------------------------------------------------
Loans Past Due 90 Days
or More (2):
Commercial and Industrial 4 61 730 3,410 71
Loans Secured by Real Estate 781 593 339 984 715
Loans to Individuals for
Household, Family and Other
Personal Expenditures 709 698 363 188 407
- --------------------------------------------------------------------------------
Total Loans Past Due
90 Days or More (2) 1,494 1,352 1,432 4,582 1,193
- --------------------------------------------------------------------------------
Troubled Debt Restructured 67 - - - -
- --------------------------------------------------------------------------------
Total Non-Performing Loans 9,221 7,466 10,399 11,420 8,854
Other Real Estate Owned (3) 1,722 2,747 1,366 2,326 2,724
Other Assets Owned (4) 178 223 181 75 52
- --------------------------------------------------------------------------------
Total Non-Performing Assets $11,121 $10,436 $11,946 $13,821 $11,630
================================================================================
Non-Performing Loans as a
Percentage of Loans (year-end) 1.56% 1.35% 2.16% 3.03% 2.60%
================================================================================
Non-Performing Loans as a
Percentage of Total Assets
(year-end) 0.89% 0.74% 1.18% 1.33% 1.08%
================================================================================
Non-Performing Assets as
a Percentage of Loans, Other
Real Estate Owned and Other
Assets Owned (year-end) 1.88% 1.88% 2.47% 3.64% 3.38%
================================================================================
Non-Performing Assets as
a Percentage of Total Assets
(year-end) 1.07% 1.03% 1.35% 1.61% 1.41%
================================================================================
</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.
20
<PAGE>
(3) Consists of real estate acquired through foreclosure.
(4) Consists of assets, other than real estate, acquired through repossession,
forfeiture or abandonment.
Potential Problem Loans
At December 31, 1996, the Company had no material loans where payments were
presently current or less than 90 days past due, yet the borrowers were known to
the Company to be experiencing severe financial difficulties. Management
continues to review and evaluate all loans on an ongoing basis so that potential
problems can be addressed immediately.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table provides an analysis of the allowance for possible loan
losses for the five year period ending December 31, 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
(Dollars In Thousands) 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, Net of Unearned
Income - December 31, $589,254 $551,222 $481,439 $376,792 $341,014
=============================================================================================
Average Loans Outstanding $559,101 $510,593 $417,707 $350,761 $336,242
=============================================================================================
Allowance for Possible Loan
Losses-January 1, $ 7,412 $ 9,597 $ 10,812 $ 9,239 $ 8,379
Loans Charged Off:
Commercial - (229) (1,608) (1,052) (1,972)
Real Estate (69) (462) (19) (58) (1)
Installment (3,218) (2,619) (2,203) (2,102) (1,975)
- ---------------------------------------------------------------------------------------------
Total Loans Charged Off (3,287) (3,310) (3,830) (3,212) (3,948)
- ---------------------------------------------------------------------------------------------
Recoveries of Loans:
Commercial 85 224 307 189 318
Real Estate - - 150 - 6
Installment 367 451 568 309 346
- ---------------------------------------------------------------------------------------------
Total Recoveries 452 675 1,025 498 670
- ---------------------------------------------------------------------------------------------
Net Loans Charged Off (2,835) (2,635) (2,805) (2,714) (3,278)
Provision for Possible
Loan Losses 2,275 450 1,590 4,287 4,138
- ---------------------------------------------------------------------------------------------
Allowance for Possible Loan
Losses - December 31, $ 6,852 $ 7,412 $ 9,597 $ 10,812 $ 9,239
=============================================================================================
Allowance for Possible Loan
Losses to Non-Performing
Loans - December 31, 74.31% 99.28% 92.29% 94.68% 104.35%
=============================================================================================
Allowance for Possible Loan
Losses to Total Loans
Outstanding - December 31, 1.16% 1.34% 1.99% 2.87% 2.71%
=============================================================================================
Net Loans Charged Off to
Average Loans Outstanding 0.51% 0.52% 0.67% 0.77% 0.97%
=============================================================================================
</TABLE>
21
<PAGE>
Allocation of the Allowance for Possible Loan Losses
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,
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994 1993 1992
- ---------------------------------- --------------- --------------- --------------- ------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
of to Total of to Total of to Total of to Total of to Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,747 27% $2,086 23% $3,387 18% $ 7,364 24% $5,166 27%
Real Estate 1,754 38 1,138 37 1,289 41 1,883 44 2,323 41
Installment 3,351 35 4,188 40 4,921 41 1,565 32 1,750 32
- --------------------------------------------------------------------------------------------------------------
Total $6,852 100% $7,412 100% $9,597 100% $10,812 100% $9,239 100%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
DEPOSITS
The following table reflects the average balances and average rates paid on
deposits and short-term borrowed funds for the years 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ------------------- -------------------
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 $158,367 - $146,393 - $154,533 -
- -----------------------------------------------------------------------------------------
Interest Bearing
Transaction Accounts 116,125 1.46% 125,392 1.99% 122,003 1.98%
Other Savings 236,191 2.13 251,238 2.54 272,030 2.42
Time 343,746 5.37 329,141 5.47 205,352 3.81
- -----------------------------------------------------------------------------------------
Total Savings and Time 696,062 3.63% 705,771 3.81% 599,385 2.81%
- -----------------------------------------------------------------------------------------
Total Deposits $854,429 - $852,164 - $753,918 -
- -----------------------------------------------------------------------------------------
Short-Term Borrowings $ 50,350 5.27% $ 29,638 5.50% $ 25,949 4.41%
- -----------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
The following table sets forth a summary of the maturities of time certificates
of deposit $100,000 and over at December 31, 1996.
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------
<S> <C>
Three Months or Less $54,205
Over Three Through Six Months 12,119
Over Six Through Twelve Months 5,317
Over Twelve Months 5,364
- --------------------------------------------------------------------
Total $77,005
====================================================================
</TABLE>
RETURN ON EQUITY AND ASSETS
United's 1996 Annual Report contains on page 26, "Selected Consolidated
Financial Data", the information required by this Item and that information is
incorporated herein by reference.
SHORT-TERM BORROWINGS
United's 1996 Annual Report contains on pages 40, "Note 10 - Short-Term
Borrowings", the information required by this Item and that information is
incorporated herein by reference.
23
<PAGE>
(f) Executive Officers of the Registrant
The following persons are executive officers of the Company or the Bank who do
not also serve as directors.
Executive
Officer Principal Occupation or Employment
Name Age Since for the Past Five Years
Warren R. Gerleit 49 1992 Executive Vice President-Lending and Branch
Administration since September 10,1996;
Executive Vice President-Lending of the Bank
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 53 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.
Ralph L. Straw, Jr. 54 1993 Vice President and Secretary of the Company
since July 1, 1996; Executive Vice President,
General Counsel and Cashier of the Bank since
July 1, 1996; 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 37 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 52 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 46 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.
Raymond C. Kenwell 45 1995 Senior Vice President-Commercial Lending since
December 21, 1995; Vice President-Commercial
Lending 1993 to 1995; formerly Vice President-
Lending of National Westminster Bank NJ and its
predecessors.
24
<PAGE>
Charles E. Nunn, Jr. 43 1995 Senior Vice President and Director of Human
Resources of the Bank 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 42 1996 Vice President and Director of Marketing since
September 10, 1996; Vice President and Marketing
Manager 1993-1996; formerly Director of
Marketing for Carteret Savings Bank.
Chris Van Der Stad 39 1996 President of United National Investment Company,
Inc. since June 1, 1996 and Vice President and
Comptroller of the Bank since July 1, 1995;
formerly Senior Vice President and Treasurer of
New Era Bank.
25
<PAGE>
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 18 additional branch offices, of
which 12 are owned and 6 are leased. The Bank also owns a two story building of
approximately 30,000 square feet, in Branchburg, New Jersey, which was utilized
as the Bank's operations center, but is now vacant and is under contract of
sale.
United's 1996 Annual Report contains information on page 40, Note 8, page 41,
Note 11 and page 47, Note 16 that is incorporated herein by reference.
Item 3 - Legal Proceedings
United's 1996 Annual Report contains on pages 47 to 48, Note 16, 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, 1996.
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, New
York; Keefe, Bruyette & Woods Inc., New York, New York; and Legg Mason Wood
Walker, Inc., Baltimore, Maryland.
On December 31, 1996, there were 1,294 shareholders of the Company's common
stock.
United's 1996 Annual Report, contains on page 52, 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 Payment, 10 Year
Schedule" on page 52 is specifically excluded from the incorporation by
reference.
26
<PAGE>
Item 6 - Selected Financial Data
United's 1996 Annual Report contains on pages 26 and 31 through 34 (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 1996 Annual Report contains on pages 13 through 25 information required
by Item 7 and that information is incorporated herein by reference.
Item 8 - Financial Statements and Supplementary Data
United's 1996 Annual Report contains on pages 27 through 50 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
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
United's Proxy Statement for its 1997 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 1997 Meeting contains, under the captions
"Executive Compensation", and "Compensation Committee Interlocks and Insider
Participation", 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 1997 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 1997 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.
27
<PAGE>
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 1996 Annual
Report, are incorporated herein by reference.
Page *
Report of Independent Public Accountants 51
Consolidated Balance Sheets at December
31, 1996 and 1995 27
Consolidated Statements of Income for the
Three Years Ended December 31,1996 28
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years Ended December 31, 1996 29
Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1996 30
Notes to Consolidated Financial Statements 31-50
Unaudited Quarterly Financial Data 25
*Refers to respective page numbers of United National Bancorp 1996
Annual Report to Shareholders included as Exhibit 13. Such pages are
incorporated herein by reference.
Report of Independent Public Accountants, dated January 12, 1996 for the year
ended December 31, 1995.
(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
(incorporated by reference to the Company's Annual
Report on Form 10-K for the Year Ended December 31,
1995 filed with the Securities and Exchange
Commission on March 29, 1996 (Exhibit 3(a)).
(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)).
28
<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).
(g) Agreement and Plan of Merger dated November 12, 1996
by and among United National Bancorp, United National
Bank and Farrington Bank (incorporated by reference
to the Company's Report on Form 8-K filed with the
Securities and Exchange Commission on November 21,
1996).
(h) Stock Option Agreement dated November 12, 1996 by and
between United National Bancorp and Farrington Bank
(incorporated by reference to the Company's Report on
Form 8-K filed with the Securities and Exchange
Commission on November 21, 1996).
(13)(a) Portions of United National Bancorp's Annual Report to its
Shareholders for the fiscal Year Ended December 31, 1996, are
incorporated by reference into this Annual Report on Form
10-K.
(b) Report of Independent Public Accountants, dated January 12,
1996 for the year ended December 31, 1995.
(21) List of Subsidiaries
29
<PAGE>
(23) Consent of Independent Public Accountants
(a) KPMG Peat Marwick LLP
(b) Arthur Andersen LLP
(27) Financial Data Schedule
(b) Reports on Form 8-K
A Form 8-K was filed on November 12, 1996. Under Item 5 of Form 8-K;
the intended merger of United National Bancorp and Farrington Bank was
reported. Incorporated by reference were United National Bancorp's
press release dated November 13, 1996 and the Agreement and Plan of
Merger and Stock Option Agreement, both dated November 12, 1996.
30
<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 25, 1997
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 25, 1997
- ---------------------- Board, President
Thomas C. Gregor and Director
/s/ Donald W. Malwitz V.P. & Treasurer March 25, 1997
- ----------------------
Donald W. Malwitz
/s/ Ralph L. Straw, Jr. V.P. & Secretary March 25, 1997
- ------------------------
Ralph L. Straw, Jr.
/s/ George W. Blank Director March 28, 1997
- -----------------------
George W. Blank
/s/ Donald A. Buckley Director March 28, 1997
- ----------------------
Donald A. Buckley
/s/ C. Douglas Cherry Director March 25, 1997
- -----------------------
C. Douglas Cherry
Director March , 1997
- ----------------------
Charles E. Hance
Director March , 1997
- ----------------------
John R. Kopicki
/s/ Richard C. Marder Director March 25, 1997
- ----------------------
Richard C. Marder
Director March , 1997
- ------------------------
Antonia S. Marotta
/s/ John W. McGowan III Director March 25, 1997
- ------------------------
John W. McGowan III
31
<PAGE>
Director March , 1997
- --------------------------
Patricia A. McKiernan
/s/ Charles N. Pond, Jr. Director March 28, 1997
- -------------------------
Charles N. Pond, Jr.
/s/ Kenneth W. Turnbull Director March 25, 1997
- ------------------------
Kenneth W. Turnbull
/s/ David R. Walker Director March 28, 1997
- ------------------------
David R. Walker
/s/ Ronald E. West Director March 28, 1997
- -----------------------
Ronald E. West
/s/ George J. Wickard Director March 28, 1997
- -----------------------
George J. Wickard
32
<PAGE>
<PAGE>
13
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
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. Schedules required by Securities Act Guide 3,
which were included in the prior year's management's discussion and analysis
section, are now included in United National Bancorp's Annual Report on Form
10-K for the fiscal year 1996 filed with the Securities and Exchange Commission.
On June 30, 1995, the Company, through the Bank, acquired all of the outstanding
shares of New Era Bank ("New Era"). The acquisition was accounted for on the
pooling-of-interests accounting method and therefore, the financial statements
for periods prior to the merger have been restated to include the assets and
earnings of New Era.
OVERVIEW
The Company reported net income in 1996 of $11,460,000, an increase of 36.9%
from the $8,374,000 earned in 1995. On a per share basis, net income in 1996 was
$3.01 as compared to the $2.19 reported in 1995.
The Company's operating income for 1996, defined as net income excluding the
one-time after-tax assessment of $307,000, or $0.08 per share, mandated by
Congress to recapitalize the Savings Association Insurance Fund ("SAIF"), was
$11,767,000, a 12.5% increase over the $10,463,000 for the year ended December
31, 1995. Operating income for 1995 was defined as net income excluding the
one-time charges related to the acquisition of New Era and the investment in a
joint venture, United Financial Services, Inc. ("United Financial"), a newly
formed third party service provider. One-time charges in 1995 were $2,089,000,
or $0.55 per share, net of taxes. Operating income per share, adjusted for the
6% stock dividend paid on November 1, 1996, was $3.09, a 12.8% increase over the
$2.74 reported for the year ended December 31, 1995.
The Company reported net income, after one-time charges, for 1995 of $8,374,000,
down 14.7% from the $9,820,000 earned in 1994. Per share results for 1995
declined 16.4% to $2.19 from $2.62 reported in 1994.
Key performance ratios based on operating income increased in 1996. Based on
operating income, return on average assets ("ROA") and return on average equity
("ROE") were 1.17% and 13.98%, respectively, in 1996, compared to 1.08% and
13.93%, respectively, in 1995. ROA and ROE in 1994 were 1.15% and 14.20%,
respectively. As shown in the accompanying graphs, ROA and ROE, based on
operating income, have averaged 1.03% and 13.00%, respectively, over the past
five years.
Based on net income, ROA was 1.14% in 1996 as compared to 0.86% in 1995 and
1.15% in 1994, while ROE was 13.61% in 1996, 11.15% in 1995 and 14.20% in 1994.
The Company's favorable net income results for 1996 were the result of continued
improvement in net interest income and non-interest income, as well as a
decrease in non-interest expense. These increases were offset in part by a
$1,825,000 increase in the provision for loan losses and an increase in the
provision for income taxes.
OPERATING INCOME
Adjusted for merger & restructuring and SAIF charges and extraordinary item (In
Millions)
OPERATING INCOME [Bar Chart]
A bar chart that describes operating income (adjusted for merger & restructuring
charges and SAIF charges and extraordinary item) for the following years: 1992,
$6.4; 1993, $7.7; 1994, $9.8; 1995, $10.5; 1996, $11.8.
RETURN ON AVERAGE ASSETS
Adjusted for merger & restructuring and SAIF 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 and SAIF charges and extraordinary item) for the following years:
1992, 0.81%; 1993, 0.93%; 1994, 1.15%; 1995, 1.08%; 1996, 1.17%.
RETURN ON AVERAGE EQUITY
Adjusted for merger & restructuring and SAIF 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 and SAIF charges and extraordinary item) for the following years:
1992, 10.95%; 1993, 11.94%; 1994, 14.20%; 1995, 13.93%; 1996, 13.98%.
<PAGE>
14
The Company's favorable operating results for 1995, before the one-time charges,
were the result of an 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 declined, however, as a result of one-time charges
due to merger-related and restructuring charges incurred in 1995.
Loan demand throughout 1996 continued to show improvement as business and
consumer confidence in the economy increased. Interest rates, as measured by the
prime rate, declined in January to 8.25% and remained stable throughout the
remainder of the year. Consolidated assets at year-end 1996 totaled
$1,037,549,000, which represented an increase of 2.7% over 1995.
Securities available for sale decreased to $288,732,000 or 27.8% of the total
asset base at December 31, 1996 as compared to $334,156,000 or 33.1% at year-end
1995. Conversely, securities held to maturity increased $36,578,000 and
accounted for 5.9% of total assets versus 2.5% last year. Loans, net of unearned
income, rose $38,032,000 and represented 56.8% of total assets as compared to
54.5% in 1995. Total deposits increased by 3.1% to $881,274,000. As in 1995,
shorter term deposit products and savings deposits became less prevalent
throughout the year as consumers continued moving monies into higher yielding
fixed rate certificates of deposit. Time deposits grew by $40,014,000 or 12.1%
to $371,986,000 at December 31, 1996 compared to $331,972,000 at year-end 1995.
In contrast, demand deposits declined moderately to $148,591,000 at year-end
1996, a 2.9% decrease over the prior year-end. Savings deposits also decreased
by $8,864,000 or 2.4% from 1995 to $360,697,000 at year-end 1996. On average,
time deposits were up $14,605,000 or 4.4% from 1995. Demand deposits and
non-interest bearing savings deposits averaged $158,367,000 in 1996, up 8.2%
from the 1995 average of $146,393,000, while average savings deposits were down
$24,314,000 or 6.5% from 1995's average balance of $376,630,000.
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 $3,514,000 or 6.5% in 1996 as compared to
1995 and increased $1,293,000 or 2.5% in 1995 as compared to 1994.
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 1996, 1995 and 1994
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 $1,752,000 or 4.0% to a level of $45,815,000 in
1996 following a $1,011,000 or 2.3% increase in the prior year. The primary
reasons for the increase were the result of an increase in net
<PAGE>
15
interest earning assets and an increase in the net interest margin. The higher
yielding loan portfolio increased to 60.9% of average earning assets in 1996 up
from 57.4% in 1995.
For 1996, average interest earning assets increased $28,328,000 or 3.2% over
1995 while average rates declined 9 basis points, creating an increase in total
interest income of $1,479,000 or 2.0% from 1995. In 1995, 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.
The Company continued to monitor the rates paid on all categories of interest
bearing liabilities to reflect existing market conditions. As a result of the
current rate environment, the Company was able to reduce the cost of its
deposits and other borrowings. Average interest-bearing deposits decreased by
$9,709,000 or 1.4%, while the cost of deposits declined to 3.63% in 1996 from
3.81% in 1995. This was primarily the result of the Company's decision to reduce
rates on above market rate deposit products acquired from the Resolution Trust
Corporation ("RTC") and New Era in 1995. The Company utilized other borrowings
as an additional funding source. The average balance of other borrowings was
$50,350,000 in 1996 with an average cost of 5.27%, as compared to the average
balance in 1995 of $29,638,000 at a cost of 5.50%. The effect of the above
changes in 1996 created a 2 basis point and 4 basis point increase in the
Company's net interest spread and net interest margin, respectively.
In 1995, 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. In 1995, the above items were the primary factors which
resulted in an increase in total interest expense of $11,149,000 from the prior
year.
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. The net interest margin increased during 1996 to 4.99% from 4.95%
in 1995. The improvement in the net interest margin in 1996 resulted from a
decline in the cost of savings deposits, time deposits and other borrowings,
offset in part by a slight decrease in the yield on interest earning assets.
Conversely, during 1995, the net interest margin decreased to 4.95% from 5.47%
in 1994. 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.
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 1996, total non-interest income amounted to $13,959,000, an increase
of $1,630,000 or 13.2% from 1995, as compared with a 3.9% increase in 1995 from
1994. Included in these figures were net gains from securities transactions of
$792,000 in 1996 as compared to $1,135,000 in 1995 and $871,000 in 1994.
Non-interest income in 1996, not including securities gains, was up $1,973,000
or 17.6% over 1995, compared to
<PAGE>
16
an increase of $202,000 or 1.84% in 1995 from 1994.
Trust income continues to be the major contributor to fee income, representing
31.1% of the total. Trust income rose $114,000 or 2.7% to $4,336,000 in 1996
compared to a $217,000 or 5.4% increase from 1994 to 1995. 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 increased $442,000 or 12.8% to $3,885,000 in
1996 as compared to a $145,000 or 4.0% decrease from 1994 to 1995. The increase
in 1996 resulted from a change in fee structures during the year. This resulted
in increases in selected service charges, as well as several new service charge
policies. In 1995, increased relationship pricing strategies with customers
maintaining higher balances in lieu of paying service charges accounted for the
decrease from 1994.
Other service charges, commissions and fees increased $1,588,000 or 74.0% to
$3,733,000 in 1996 due primarily to increased application fees collected on a
new credit card solicitation program, which began in January 1996. During 1995,
other service charges, commissions and fees declined $48,000 or 2.2% from 1994
to $2,145,000 due to reduced credit card fees, partly offset by increases in
other fees. Credit card fees declined in 1995 as a result of a decline in the
number of credit cards in the Bank's portfolio.
Other income decreased $171,000 or 12.4% from 1995 to $1,213,000 in 1996 due
primarily to reduced gains on sales of other assets, offset in part by increased
gains from sales of the guaranteed portions of Small Business Administration
("SBA") loans. Other income in 1995 included a $247,000 gain on the sale of the
Bank's Bridgewater branch facility. In addition to the sale of the Bank's branch
in 1995, 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 SBA loans, resulted in other income increasing $178,000 or 14.8% over
1994.
Net gains on securities transactions of $792,000 were recorded in 1996 compared
with $1,135,000 in 1995 and $871,000 in 1994. The gains in 1996 and prior years
were the outcome of restructuring the investment portfolio to alter maturities,
due to the changing interest rate environment, to maximize the return on the
investment portfolio. In December 1995, the Financial Accounting Standards Board
("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 portfolio.
Non-Interest Expense
Non-interest expense in 1996 totaled $38,860,000, a decrease of $3,888,000 or
9.1% compared to 1995. This compared to a $5,127,000 or 13.6% increase in 1995
over 1994. Included in 1995 were one-time charges incurred in connection with
both the New Era merger and the joint venture investment in United Financial.
Excluding the one-time charges in 1995, non-interest expense in 1996 decreased
$648,000 or 1.6% from 1995. During the third quarter of 1996, the
<PAGE>
17
Company recorded a pre-tax charge of $512,000 for the one-time special SAIF
assessment. Excluding the SAIF assessment, non-interest expense declined
$1,160,000 or 2.9% from 1995. Management continues to seek opportunities to
control non-interest expense levels.
The largest component of non-interest expense is salaries and employee benefits,
which accounted for 49.5% (50.1% excluding the SAIF assessment) of total
non-interest expense in 1996 compared to 52.7% (excluding merger and
restructuring charges) and 53.6% in 1995 and 1994, respectively. Management
continues to monitor staffing levels, employee benefits and operational
consolidations. Compared to the previous year, the 1996 expense of $19,223,000
represents a 7.7% decrease versus a 3.2% increase between 1995 and 1994.
Specifically, salaries and wages declined $1,129,000 while employee benefits
declined $465,000. Medical health care costs, continuing the trend from the last
several years, declined $203,000 from 1995 and had declined $44,000 in 1995 from
1994. 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 control this expense has been a high priority. Full-time equivalent employees
were 448 at December 31, 1996 compared with 465 and 507 at December 31, 1995 and
1994, respectively. The reduction in full-time equivalent employees during 1996,
as well as the drop in salary and employee benefit expenses, was achieved by
outsourcing facilities management to a third party and by outsourcing additional
back-office functions to United Financial.
Net occupancy and equipment expense decreased $523,000 or 8.2% in 1996 to
$5,823,000 as compared to an increase of $905,000 or 16.6% in 1995 from 1994.
The decrease in 1996 resulted from savings on computer equipment rental and
maintenance achieved by outsourcing data processing in late 1995, offset in part
by the full year's occupancy costs relating to the new headquarters facility.
The increase in 1995 was principally the result of acquiring two branches from
the RTC in January, 1995, and expenses relating to the new headquarters
facility. In May of 1995, Senior Management and certain departments moved to the
Company's new headquarters in Bridgewater, NJ. Additionally, in 1995 there were
increases in rentals and maintenance of equipment, and repairs and maintenance
relating to the Company's owned and leased premises.
Net cost to operate other real estate, which results from costs of holding other
real estate in addition to valuation adjustments, amounted to $306,000 in 1996,
a decrease of $106,000 from 1995. These costs decreased in 1995 to $412,000
compared to $513,000 in 1994. The decrease in 1996 was due to lower carrying
costs and write downs associated with the reduced inventory of other real estate
holdings. For additional discussion on other real estate, see "Asset Quality".
Other expenses, excluding the SAIF assessment, amounted to $8,164,000 in 1996, a
decrease of $1,112,000 or 12.0% compared to the prior year while 1995's expense
was $893,000 or 8.8% lower than that of 1994. The decrease in 1996 was primarily
due to continued 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 of 1995. Included in other
expense in 1995 was a loss of $220,000 from the sale of the Bank's Knowlton
branch facility
<PAGE>
18
and expenses relating to the acquisition of branches from the RTC.
In 1995, the $1,670,000 one-time charge relating to the New Era acquisition
consisted primarily of payouts on existing employment contracts, a penalty on
termination of 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 of
$1,570,000 relating 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 increased $2,148,000 in 1996 to $5,771,000
compared to a decrease in 1995 of $984,000. The increase in 1996 resulted from
the higher levels of taxable income in 1996. The decrease in 1995 resulted from
the tax benefit of $1,151,000 on merger and restructuring charges incurred
during 1995, partially offset by a change in the level of taxable income
relative to tax-exempt income and certain other differences. For further
information regarding the provision for income taxes, see Note 13 to the
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, 1996, total stockholders' equity was $88,089,000, an increase of
$6,690,000 or 8.2% from year-end 1995. The increase was due primarily to net
income of $11,460,000, offset in part by cash dividends of $3,944,000. Capital
was also reduced as a result of the FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," change in net unrealized
gain adjustment, net of tax, of $1,253,000. Other additions resulted from
treasury stock sales, restricted stock activity and stock options exercised. As
detailed in the notes to the consolidated financial statements, the Company and
the Bank currently exceed all minimum capital requirements.
FINANCIAL CONDITION
Total average assets increased $36,161,000 or 3.7% to $1,009,034,000 in 1996,
while total assets reached $1,037,549,000 at year-end, an increase of 2.7% from
the December 31, 1995 balance. Average interest earning assets, which represents
91.0% of total average assets, increased $28,328,000 or 3.2% from 1995 to
$918,578,000 in 1996. Specifically, average loans increased $48,508,000 or 9.5%
in 1996 to $559,101,000, while average total securities decreased $8,950,000 or
2.5% from 1995 and short-term investments decreased $11,230,000 or 73.7%.
Securities
Total securities, which include securities held to maturity, securities
available for sale and trading account securities, averaged $355,476,000 in
1996, a decrease of $8,950,000 or 2.5% from 1995. The portfolio represented
38.7% of average earning assets for 1996 and 40.9% for 1995. The yield on the
total portfolio (on a tax-equivalent basis) remained relatively stable,
increasing 1 basis point to 6.96%.
U.S. Treasury and government agency securi-
<PAGE>
19
ties declined $16,717,000 to average $103,040,000 in 1996. The yield on this
portfolio increased 12 basis points to 7.10% from the reported yield of 6.98% in
1995. 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 $53,064,000 in 1996, an increase of $9,448,000
from 1995. As a part of its tax planning strategy, the Company continues to
invest in these securities. At year-end, tax-exempt securities were $57,302,000,
up $14,241,000 from December 31, 1995. The average tax-equivalent yield on these
securities decreased 10 basis points to 7.58% in 1996 from 7.68% in 1995.
Government guaranteed mortgage-backed securities averaged $172,177,000 in 1996,
a decrease of $4,130,000 from 1995. These securities have an average repricing
term of approximately 4.0 years 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 6.87% compared to 6.84% in 1995.
Equity securities, which consist primarily of money market mutual funds, are
utilized as a source of managing liquidity. Money market mutual funds averaged
$21,092,000 in 1996 compared to $21,442,000 in 1995. The remaining equity
securities averaged $6,103,000, up from the average in 1995 of $3,304,000. Of
the $2,799,000 increase in the average, $1,574,000 resulted from additional
purchases of Federal Reserve Bank stock and Federal Home Loan Bank stock during
1996 and 1995. The balance of the increase was the result of equity investments
made by the Parent Company. The yield on equity securities decreased 51 basis
points to 5.82% from 6.33% in 1995.
Short-term investments, which included Federal funds sold and Federal Home Loan
Bank deposits averaged $4,001,000 in 1996 compared to $15,231,000 in 1995, a
decrease of 73.7%. For 1996, the yield on short-term investments averaged 5.40%,
down from 5.91% in 1995.
Loans
Total loans averaged $559,101,000 during 1996, an increase of $48,508,000 or
9.5% compared with the prior year. At year-end, total loans, net of unearned
income, amounted to $589,254,000, up $38,032,000 or 6.9% compared to 1995. Loan
demand over the past several 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 category is real estate mortgage loans,
which totaled $225,604,000 at December 31, 1996 and represented 37.0% of gross
loans. Real estate mortgage loans included residential and commercial mortgages,
construction loans and first-time home buyer mortgages. Installment loans
amounted to $223,621,000, representing 36.7% of gross loans, and were the
Company's second largest loan category. Several of the loan types within this
category are indirect automobile loans of $162,730,000, direct personal loans of
$16,480,000, home equity loans of $20,346,000, and secured and unsecured credit
cards of $20,301,000. The Company's commercial loan portfolio amounted to
$160,591,000 at December 31, 1996, up 23.5% from the prior year-end.
Average commercial loans increased 16.5% to $146,114,000 from $125,421,000 in
1995
<PAGE>
20
and represented 26.1% of the total average loan portfolio as compared to 24.6%
in 1995. The tax-equivalent yield on the commercial loan portfolio was 9.22% in
1996, up from 8.46% in 1995. The yield on this portfolio increased as a result
of higher rates on loan originations and repricings.
Real estate mortgage loans averaged $202,026,000, an increase of 10.3% from 1995
and represented 36.1% of the total average loan portfolio. This increase was the
result of additional marketing of adjustable rate mortgage loan products in a
favorable mortgage rate environment and the Bank's first-time home buyer program
called "Community Action". The tax-equivalent yield on the total mortgage
portfolio decreased 96 basis points to 8.44% from 9.40% last year as a result of
the effect of a lower interest rate environment on new loan originations and on
the adjustable rate portion of the portfolio. 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 in 1995, the Company has a nationwide
secured credit card program, along with unsecured and affinity card programs
throughout New Jersey. Credit card loans averaged $17,452,000 in 1996, a
decrease of $945,000 or 5.1% from 1995. At year-end 1996, the credit card
balances were $20,301,000, as compared to $16,470,000 at year-end 1995. The
increase during 1996 was the result of a nationwide direct mail advertising
campaign for secured credit cards which started in January 1996 and the local
municipal affinity programs for unsecured credit cards. The average yield in
1996 on credit cards was 19.34%, down slightly from 19.43% in 1995.
Installment loans, on average, increased to $187,869,000 from $179,363,000 in
1996 and represented 33.6% of the total average loan portfolio. The growth in
indirect automobile loans has slowed from the levels seen in 1995. As a result,
the average installment loan portfolio increased by 4.7% in 1996 over 1995, as
compared to the 35% increase in the 1995 average balance over 1994. At year-end
1996, installment loans amounted to $183,853,000, down $20,698,000 or 10.1% from
the same period in 1995. Increased competition in a lower rate environment has
lowered the yields on new loans, therefore the Company has redirected its
lending efforts to higher yielding loan products. The average yield on the total
installment loan portfolio was 8.35% in 1996 compared with 8.30% in 1995.
It is expected that this trend of increased installment, residential and
commercial mortgage loans will continue if the economy continues to maintain its
current course. The Company will continue to take advantage of quality loan
demand in those sectors of the business community where it is most prevalent.
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 $854,429,000 in
1996, up $2,265,000 or 0.3% from $852,164,000 in 1995. At year-end, total
deposits amounted to $881,274,000, up 3.1% from the $854,628,000 reported last
year. The Company's deposit strategy, since the acquisition of New Era and the
two branches from the RTC, has been to allow selected higher rate deposits to
run-off while retaining the lower cost core deposit accounts.
For 1996, time deposits comprised 40.2% of total average deposits as compared to
<PAGE>
21
38.6% in 1995. These deposits, which consist primarily of retail certificates of
deposit and individual retirement accounts, rose $14,605,000 or 4.4% to average
$343,746,000 during 1996. At December 31, 1996, time deposits increased by
$40,014,000 or 12.1% over year-end 1995. The cost of time deposits decreased 10
basis points to 5.37% in 1996 as a result of the lower interest rate environment
in 1996, which allowed higher rate certificates maturing during 1996 to rollover
at lower interest rates. During 1996, certificates of deposit $100,000 and over
averaged $58,448,000, an increase of 8.1% over last year.
Savings deposits, which include savings accounts, money market accounts and
interest bearing transaction accounts, averaged $352,316,000, a decrease of
$24,314,000 or 6.5% from 1995. As interest rates on savings deposits remained at
lower levels, consumers continued to shift from savings type products to higher
paying investment alternatives, including certificates of deposit. The cost of
savings deposits decreased 43 basis points to 1.93% in 1996 as a result of the
lower interest rate environment.
Demand deposits averaged $146,723,000, up 9.6% from the 1995 average of
$133,919,000. Demand deposits at year-end were $148,591,000, down 2.9% from the
prior year. Non-interest bearing secured credit card balances averaged
$11,644,000 in 1996, down 6.7% from the 1995 average of $12,474,000.
Non-interest bearing secured credit card deposits at year-end 1996 amounted to
$10,539,000, as compared to $11,225,000 at December 31, 1995.
Short-term borrowings are available as an additional source of funding for the
loan and investment portfolios, as well as, funding deposit outflows. 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 $20,712,000 or 69.9% to
average $50,350,000. The cost of short-term borrowings declined 23 basis points
from 5.50% in 1995 to 5.27% in 1996 due to the lower average interest rate
environment during 1996 as compared to 1995.
The Bank is 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. At December 31, 1996 and
1995, there were no borrowings outstanding from the FHLB.
ASSET QUALITY
The Company manages asset quality and controls credit risk through a review of
credit applications along with a continued examination and monitoring of
outstanding loans, commitments and delinquencies. This process is intended to
result in early detection and timely follow-up on problem loans. Credit risk is
also sought to be controlled by limiting exposures to specific types of
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.
<PAGE>
22
At December 31, 1996, total non-performing assets totaled $11,121,000 or 1.07%
of total assets, up $685,000 from the $10,436,000 or 1.03% of total assets at
December 31, 1995. Total non-performing assets were down $761,000 or 6.4% from
the $11,882,000 balance at September 30, 1996.
Non-performing loans at December 31, 1996 were $9,221,000 or 1.56% of total
loans, as compared to $7,466,000 or 1.35% of total loans at December 31, 1995.
The $1,755,000 increase from 1995 was primarily in loans secured by real estate,
which increased by $2,175,000, offset in part by a decline of $299,000 in
commercial and industrial loans and $121,000 in loans to individuals for
household, family and other personal expenditures. A majority of the
non-performing loans are well-secured and management does not anticipate
significant losses to materialize.
At December 31, 1996, the Company's holdings in other real estate owned amounted
to $1,722,000 as compared to $2,747,000 at December 31, 1995. 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 1996,
the Company incurred $306,000 of costs relating to these properties as compared
to $412,000 in 1995. Other assets owned amounted to $178,000 at year-end, a
decrease of $45,000 from 1995.
Allowance for Possible Loan Losses
The Company's year-end 1996 allowance for possible loan losses totaled
$6,852,000 and represented 1.16% of total loans. This compared with a loan loss
allowance at year-end 1995 of $7,412,000 and a ratio to total loans of 1.34%.
Loan loss provisions amounted to $2,275,000 in 1996, up from the $450,000 in
1995 and $1,590,000 in 1994. The increase in the provision in 1996 of $1,825,000
resulted primarily from growth in the loan portfolio.
The determination of an appropriate level of the allowance for possible loan
losses (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.
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 a quarterly analysis
of the adequacy of the Allowance is performed. This analysis consists primarily
of evaluating the inherent risk of 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
<PAGE>
23
the amount of such provisions and by the amount of loan recoveries, and is
decreased by the amount of loan charge-offs.
Net charge-offs in 1996 were $2,835,000 or 0.51% of average loans outstanding
compared with $2,635,000 or 0.52% in 1995. Net charge-offs in installment
lending increased to $2,851,000 in 1996, compared with $2,168,000 in 1995.
Management recognizes the risks inherent in the indirect automobile loans which
may be more prevalent at times of faster growth in the portfolio. While there
can be no assurance that the Company is correct, the Company believes it is
addressing those issues and believes that its charge-offs in the indirect
automobile portfolio have been in line with peer group averages. Real estate
loan net charge-offs decreased to $69,000 in 1996 from $462,000 in 1995 while
commercial loans decreased from $5,000 in 1995 to net recoveries of $85,000 in
1996. The charged-off loans are in various stages of collection and litigation.
ASSET/LIABILITY MANAGEMENT
The Company's Asset/Liability Committee ("ALCO") 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 attempt 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.
Historically, the most common method of estimating interest rate risk was to
measure the maturity and repricing relationships between interest-earning assets
and interest-bearing liabilities at specific points in time ("GAP"), typically
one year. Under this method, a company is considered liability sensitive when
the amount of its interest-bearing liabilities exceeds the amount of its
interest-earning assets within the one year horizon.
The Company's GAP model includes certain management assumptions based upon past
experience and the expected behavior of customers during various interest rate
scenarios. The assumptions include principal prepayments for various loan and
security products and classifying the non-maturity deposit balances by degree of
interest rate sensitivity. As of December 31, 1996, utilizing the above
assumptions results in ratios of cumulative interest rate sensitive assets to
interest sensitive liabilities of 1.05% and 1.00% for the three-month and
twelve-month intervals, respectively.
However, assets and liabilities with similar repricing characteristics may not
reprice at the same time or to the same degree. As a result, the Company's GAP
does not necessarily predict the impact of changes in general levels of interest
rates on net interest income.
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis, which expands upon the gap
<PAGE>
24
model, projects 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 1996 was essentially neutral within reasonable ranges; for example, at
December 31, 1996, 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. However, there can be no assurance that interest rate increases or
decreases would not have a significant impact on the Company's net interest
income.
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 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 economic 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 $120,816,000 at year-end
1996. The market value of money market assets, which includes Federal funds
sold, money market mutual funds and corporate stock, amounted to $24,215,000 at
the end of 1996. 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, 1996, debt securities scheduled to mature within
one year based upon estimated cash flows, amounted to $96,601,000 and
represented 30.0% of the total debt securities portfolio. Approximately 62.8% 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 $835,113,000 at
December 31, 1996 and represented 88.8%
<PAGE>
25
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 amounted to $92,489,000 at December 31, 1996.
As mentioned earlier, the Bank is a member of the FHLB system which provides the
Company with an additional source of liquidity by offering financing
alternatives. At year-end 1996, the Company had no advances with the FHLB.
The following table sets forth certain unaudited quarterly financial data for
the periods presented:
<TABLE>
<CAPTION>
(In Thousands, First Second Third Fourth
Except Per Share Data) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Interest Income $17,929 $18,214 $18,387 $18,732
Interest Expense 7,163 6,945 7,294 7,453
- --------------------------------------------------------------------------------
Net Interest Income 10,766 11,269 11,093 11,279
Provision for Possible
Loan Losses 450 550 625 650
Non-Interest Income, excluding
Securities Transactions 3,420 3,422 3,280 3,045
Net Gains from
Securities Transactions 143 216 64 369
Non-Interest Expense 9,776 9,783 9,859 9,442
Provision for Income Taxes 1,391 1,670 1,252 1,458
- --------------------------------------------------------------------------------
Net Income $ 2,712 $ 2,904 $ 2,701 $ 3,143
================================================================================
Net Income Per Share * $ 0.72 $ 0.76 $ 0.71 $ 0.82
================================================================================
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 * $ 0.67 $ 0.35 $ 0.67 $ 0.50
================================================================================
</TABLE>
* Figures have been adjusted for subsequent stock dividends.
<PAGE>
26
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) 1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Interest Income $ 73,262 $ 71,994 $ 59,754 $ 59,539 $ 61,333
Interest Expense 28,855 29,128 17,979 18,959 24,791
- ----------------------------------------------------------------------------------------------------------
Net Interest Income 44,407 42,866 41,775 40,580 36,542
Provision for Possible Loan Losses 2,275 450 1,590 4,287 4,138
- ----------------------------------------------------------------------------------------------------------
Net Interest Income after Provision
for Possible Loan Losses 42,132 42,416 40,185 36,293 32,404
Non-Interest Income 13,959 12,329 11,863 12,845 10,689
Non-Interest Expense 38,860 42,748 37,621 37,482 33,590
- ----------------------------------------------------------------------------------------------------------
Income Before Taxes, Effect of
Accounting Change and
Extraordinary Item 17,231 11,997 14,427 11,656 9,503
Provision for Income Taxes 5,771 3,623 4,607 3,975 3,123
- ----------------------------------------------------------------------------------------------------------
Income Before Effect of Accounting
Change and Extraordinary Item 11,460 8,374 9,820 7,681 6,380
Cumulative Effect of Change in
Accounting for Income Taxes - - - 973 -
Extraordinary Item - Utilization of
Net Operating Loss Carry Forward - - - - 275
- ----------------------------------------------------------------------------------------------------------
Net Income $ 11,460 $ 8,374 $ 9,820 $ 8,654 $ 6,655
==========================================================================================================
Income Before Merger-Related and
Restructuring Charges, Effect of
Accounting Change, Extraordinary
Item and SAIF Assessment $ 11,767 $ 10,463 $ 9,820 $ 7,681 $ 6,380
==========================================================================================================
Balance Sheet Data (at year end):
Total Assets $1,037,549 $1,010,545 $884,541 $859,368 $822,959
Securities 350,660 359,411 320,651 404,955 394,045
Federal Funds Sold - 7,000 11,545 8,270 17,775
Loans (Net of Unearned Income) 589,254 551,222 481,439 376,792 341,014
Allowance for Possible
Loan Losses 6,852 7,412 9,597 10,812 9,239
Deposits 881,274 854,628 757,884 758,508 740,123
Short-Term Borrowings (1) 46,328 53,347 52,301 26,681 12,629
Other Borrowings (2) 9,693 9,680 1,269 1,266 1,263
Stockholders' Equity 88,089 81,399 65,802 66,727 60,742
Adjusted Financial Ratios: (3)
Return on Average Assets 1.17% 1.08% 1.15% 0.93% 0.81%
Return on Average
Stockholders' Equity 13.98% 13.93% 14.20% 11.94% 10.95%
Financial Ratios:
Return on Average Assets 1.14% 0.86% 1.15% 1.04% 0.85%
Return on Average
Stockholders' Equity 13.61% 11.15% 14.20% 13.46% 11.42%
Average Stockholders'
Equity to Average Assets 8.35% 8.02% 8.26% 7.76% 7.40%
Leverage Ratio (year-end) 7.56% 6.80% 8.29% 7.76% 7.45%
Tier I Capital to Risk-Weighted
Assets (year-end) 11.00% 10.33% 13.64% 15.74% 15.48%
Combined Tier I and Tier II
Capital to Risk-Weighted
Assets (year-end) 11.99% 11.47% 14.97% 17.30% 17.07%
Loans to Deposits (year-end) 66.86% 64.50% 63.52% 49.68% 46.08%
Non-Performing Loans to
Loans (year-end) (4) 1.56% 1.35% 2.16% 3.03% 2.60%
Allowance for Possible Loan
Losses to Loans (year-end) 1.16% 1.34% 1.99% 2.87% 2.71%
Dividend Payout Ratio 34.37% 42.29% 27.77% 30.15% 32.61%
Common Share Data: (5)
Net Income Per Share $ 3.01 $ 2.19 $ 2.62 $ 2.33 $ 1.80
Income Per Share Before
Merger-Related and
Restructuring Charges,
Effect of Accounting Change,
Extraordinary Item
and SAIF Assessment $ 3.09 $ 2.74 $ 2.62 $ 2.07 $ 1.73
Cash Dividends Declared
Per Share (7) $ 1.03 $ 0.97 $ 0.89 $ 0.78 $ 0.71
Book Value Per Share (year-end) $ 23.10 $ 21.42 $ 17.69 $ 18.00 $ 16.46
Average Shares Outstanding
(in thousands) 3,808 3,816 3,744 3,711 3,697
Other Data:
Number of Employees
(full-time equivalent) 448 465 507 537 517
Number of Stockholders 1,294 1,457 1,470 1,523 1,521
</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 obligation under capital lease and long-term debt.
(3) Before merger-related and restructuring charges, effect of accounting
change, extraordinary item, and SAIF Assessment.
(4) Non-performing loans consists of non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing.
(5) Adjusted to reflect stock dividends of 6% in 1996, 1995, 1994 and 1993, and
3% in 1992.
(6) Does not include the effect of dividends paid by New Era Bank in 1993.
<PAGE>
27
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
(In Thousands, Except Share Data) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 51,250 $ 45,572
Federal Funds Sold - 7,000
Securities Available for Sale, at Market Value 288,732 334,156
Securities Held to Maturity (Market Value of $61,244 and $25,370
for 1996 and 1995, respectively) 61,416 24,838
Trading Account Securities, at Market Value 512 417
Loans, Net 589,254 551,222
Less: Allowance for Possible Loan Losses 6,852 7,412
- --------------------------------------------------------------------------------------------
582,402 543,810
Premises and Equipment, Net 21,601 22,730
Investment in Joint Venture 3,151 3,151
Other Real Estate 1,722 2,747
Intangible Assets 11,179 12,967
Other Assets 15,584 13,157
- --------------------------------------------------------------------------------------------
TOTAL ASSETS $1,037,549 $1,010,545
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 148,591 $ 153,095
Savings 360,697 369,561
Time 371,986 331,972
- --------------------------------------------------------------------------------------------
Total Deposits 881,274 854,628
- --------------------------------------------------------------------------------------------
Short-Term Borrowings 46,328 53,347
Other Borrowings 9,693 9,680
Other Liabilities 12,165 11,491
- --------------------------------------------------------------------------------------------
Total Liabilities 949,460 929,146
- --------------------------------------------------------------------------------------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, authorized 300,000 shares,
none issued and outstanding - -
Common Stock ($2.50 Par Value Per Share)
Authorized Shares 5,000,000 in 1996 and 4,000,000 in 1995
Issued shares 3,856,678 in 1996 and 3,633,794 in 1995
Outstanding shares 3,812,682 in 1996 and 3,584,889 in 1995 9,642 9,085
Additional Paid-In Capital 59,556 52,411
Retained Earnings 19,422 19,563
Treasury Stock, at Cost - 43,996 Shares in 1996
and 48,905 Shares in 1995 (1,337) (1,578)
Restricted Stock (176) (317)
Net Unrealized Gain on Securities Available for
Sale, Net of Tax 982 2,235
- --------------------------------------------------------------------------------------------
Total Stockholders' Equity 88,089 81,399
- --------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,037,549 $1,010,545
============================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
28
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
(In Thousands, Except Share Data) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $49,673 $46,890 $36,794
Interest and Dividends on Securities Available for Sale:
Taxable Income 17,820 15,488 17,367
Tax-Exempt Income 2,202 1,259 1,007
Interest and Dividends on Securities Held to Maturity:
Taxable Income 2,902 6,491 2,820
Tax-Exempt Income 436 952 1,317
Dividends on Trading Account Securities 13 14 10
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 216 900 439
- --------------------------------------------------------------------------------------------
Total Interest Income 73,262 71,994 59,754
- --------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 6,813 8,882 9,002
Interest on Time Certificates of Deposit $100,000 or More 3,692 3,543 1,241
Interest on Other Time Deposits 14,768 14,453 6,592
Interest on Short-Term Borrowings 2,653 1,581 988
Interest on Other Borrowings 929 669 156
- --------------------------------------------------------------------------------------------
Total Interest Expense 28,855 29,128 17,979
- --------------------------------------------------------------------------------------------
Net Interest Income 44,407 42,866 41,775
Provision for Possible Loan Losses 2,275 450 1,590
- --------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Loan Losses 42,132 42,416 40,185
- --------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income 4,336 4,222 4,005
Service Charges on Deposit Accounts 3,885 3,443 3,588
Other Service Charges, Commissions and Fees 3,733 2,145 2,193
Net Gains from Securities Transactions 792 1,135 871
Other Income 1,213 1,384 1,206
- --------------------------------------------------------------------------------------------
Total Non-Interest Income 13,959 12,329 11,863
- --------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 19,223 20,817 20,181
Occupancy Expense, Net 3,126 2,868 2,209
Furniture and Equipment Expense 2,697 3,478 3,232
Data Processing Expense 3,044 994 666
Amortization of Intangible Assets 1,788 1,663 651
Net Cost to Operate Other Real Estate 306 412 513
Merger Related and Restructuring Charges - 3,240 -
Other Expenses 8,676 9,276 10,169
- --------------------------------------------------------------------------------------------
Total Non-Interest Expense 38,860 42,748 37,621
- --------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 17,231 11,997 14,427
Provision for Income Taxes 5,771 3,623 4,607
- --------------------------------------------------------------------------------------------
NET INCOME $11,460 $ 8,374 $ 9,820
============================================================================================
NET INCOME PER COMMON SHARE $ 3.01 $ 2.19 $ 2.62
============================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
29
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, 1994, 1995 and 1996 Stock Capital Earnings Stock Stock for Sale Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1994 $7,666 $37,773 $21,541 $ (2) $ (67) $(184) $66,727
Net Income-1994 - - 9,820 - - - 9,820
Cash Dividends Declared
($0.89 per share) - - (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
Securities Available for Sale - - - - - (8,065) (8,065)
Restricted Stock 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
($0.97 per share) - - (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 6 71 - (3) (37) - 37
- ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1995 9,085 52,411 19,563 (1,578) (317) 2,235 81,399
Net Income-1996 - - 11,460 - - - 11,460
Cash Dividends Declared
($1.03 per share) - - (3,944) - - - (3,944)
Stock Issued in Payment of
Stock Dividend-218,206 Shares 545 7,092 (7,637) - - - -
Exercise of Stock Options-
4,678 Shares 12 50 (20) - - - 42
Change in Unrealized Gain on
Securities Available for sale - - - - - (1,253) (1,253)
Treasury Stock Sold-7,399 Shares - 3 - 248 - - 251
Restricted Stock - - - (7) 141 - 134
- ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 $9,642 $59,556 $19,422 $(1,337) $(176) $ 982 $88,089
=================================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
30
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $11,460 $ 8,374 $ 9,820
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 3,729 3,280 1,913
Amortization of Securities Premiums, Net 100 423 1,236
Provision for Possible Loan Losses 2,275 450 1,590
(Benefit) Provision for Deferred Income Taxes (333) (376) 579
Net Gain on Disposition of Premises and Equipment (1) (77) (72)
Net Gain on Sale of Securities Available for Sale (679) (928) (889)
Trading Account Securities Activity, Net (95) (96) (25)
(Increase) Decrease in Other Assets (1,449) (2,674) 2,067
Increase in Other Liabilities 621 4,111 1,036
Restricted Stock 134 37 36
- --------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,762 12,524 17,291
- --------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Securities Available for Sale:
Proceeds from Sales of Securities 160,683 48,358 125,592
Proceeds from Maturities of Securities 39,547 58,888 48,127
Purchases of Securities (156,106) (105,478) (49,069)
Securities Held to Maturity:
Proceeds from Maturities of Securities 16,615 28,056 19,005
Purchases of Securities (53,212) (52,097) (72,089)
Net Increase in Loans (40,867) (72,418) (112,178)
Investment in Joint Venture - (4,215) -
Deposit Premium from Branch Acquisition - (11,659) -
Expenditures for Premises and Equipment (1,047) (3,476) (1,463)
Proceeds from Sale of Premises and Equipment 236 1,047 350
Decrease (Increase) in Other Real Estate 1,025 (1,381) 5,649
- --------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (33,126) (114,375) (36,076)
- --------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Decrease in Demand and Savings Deposits (13,368) (13,874) (23,834)
Net Increase in Time Deposits 40,014 110,618 23,210
Net (Decrease) Increase in Short-Term Borrowings (7,019) 1,046 25,620
Repayment of Other Borrowings - (1,269) -
Repayment of Obligation Under Capital Lease - (70) -
Cash Dividends on Common Stock (3,878) (3,312) (2,631)
Proceeds from Exercise of Stock Options 42 532 16
Purchase of Treasury Stock - (1,705) -
Sale of Treasury Stock 251 147 -
Stock Issued from Debenture Conversion - 1,048 -
Stock Issued from Equity Contracts - 221 -
- --------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 16,042 93,382 22,381
- --------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,322) (8,469) 3,596
Cash and Cash Equivalents at Beginning of Year 52,572 61,041 57,445
- --------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $51,250 $52,572 $61,041
============================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year for:
Interest $28,614 $23,619 $17,973
Income Taxes 5,905 2,690 2,987
Capital Lease Obligation Incurred - 9,750 -
Transfer of Loans to Other Real Estate 256 2,492 100
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
31
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 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." This Statement requires securities to be classified as:
(1) held to maturity, (2) available for sale, or (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.
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.
d. Loans
Loans are stated at the principal amount outstanding, net of deferred loan
origination fees/expenses and unearned discounts. Interest on substantially all
loans is accrued
<PAGE>
32
and credited to interest income based upon the principal amount outstanding. Net
fees/expenses associated with originating loans are deferred and amortized over
the lives of the respective loans as an adjustment to the yield utilizing a
method that approximates the level yield. Generally, interest income is not
accrued on loans where principal or interest is 90 days or more past due, unless
the loans are adequately secured and in the process of collection. A loan less
than 90 days past due may be placed on non-accrual if Management believes there
is sufficient doubt as to the ultimate collectibility of the outstanding loan
balance.
When a loan (including impaired loans) 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. Payments received on non-accrual loans, including impaired loans,
are first applied to all principal amounts owed. Once the remaining principal
balance is deemed fully collectible, payments would then be applied to interest
income and fees.
A loan is considered impaired when, based upon current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based upon the present value of expected future cash flows, or, as a practical
expedient, at the loans observable market price, or the fair value of the
underlying collateral, if the loan is collateral dependent. Management has
defined impaired loans as all non-accruing loans with outstanding balances
greater than $50,000.
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, delinquency and change-off trends, 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. Management believes that the allowance for loan losses is adequate.
While Management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based upon changes in economic
conditions. In addition, various regulatory agencies periodically review the
Company's allowance for loan losses. Such agencies may require the Company to
recognize additions to the allowance based upon their judgements of information
available to them at the time of their examination.
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
proceed-
<PAGE>
33
ing 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.
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 on a
straight-line basis over a 10 year period, and 2) goodwill resulting from the
Company's investment in the joint venture, and other acquisitions, which is
being amortized over periods ranging from 10 to 20 years. Management
periodically reviews the potential impairment of intangible assets on a
non-discounted cash flow basis to assess recoverability. If the estimated future
cash flows are projected to be less than the carrying amount, an impairment
write-down, representing the carrying amount of the intangible asset which
exceeds the present value of the estimated expected future cash flows, would be
recorded as a period expense.
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. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
k. 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 (3,808,000, 3,816,000 and
3,744,000 in 1996, 1995 and 1994, 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.
l. 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.
m. 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
<PAGE>
34
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 $19,791,000 for the
payment of cash dividends at December 31, 1996.
n. Stock-Based Compensation
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages recording in current period earnings
compensation expense related to the fair value of certain stock-based
compensation. Companies may choose to continue to follow the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," where compensation expense is not recorded for certain
stock-based compensation plans. However, companies are required to disclose pro
forma net income and earnings per share as if they adopted the fair value based
method of accounting. The Company has elected to continue to account for
stock-based compensation under APB Opinion No. 25 and the pro forma disclosures
required by Statement No. 123 have been included in Note 15-Stock Incentive
Plans. During the initial phase-in-period, the effects of applying Statement No.
123 for providing pro forma disclosures may not be representative of the effects
on reported pro forma disclosures for future years.
o. Recent Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." Statement No.
125 provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishment of liabilities. These standards are based on
consistent application of a financial-components approach that focuses on
control. Under this approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. Statement No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. Statement No. 125 is effective
for transfers that occur after December 31, 1996, and will be applied
prospectively except for certain provisions which were deferred until January 1,
1998 by Statement No. 127 "Deferral of the Effective Date of Certain Provisions
of FASB No. 125" issued in December 1996. The Company does not expect the
adoption of Statement No. 125 to have a material effect on its future financial
position or results of operations.
p. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1996.
NOTE 2 - ACQUISITIONS
a. 1995 Acquisitions
On January 20, 1995, the Company, through the Bank, assumed deposits, including
<PAGE>
35
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
Bank ("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 for the year ended December 31, 1994 are as follows:
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
Net Interest Income after Provision
for Possible Loan Losses
The Company $33,330
New Era 6,855
- --------------------------------------------------------------------------------
Total $40,185
================================================================================
Net Income
The Company $ 8,447
New Era 1,373
- --------------------------------------------------------------------------------
Total $ 9,820
================================================================================
</TABLE>
b. Pending Acquisition
On November 12, 1996, the Company, the Bank and Farrington Bank ("Farrington")
signed a definitive agreement under which the Company, through the Bank, will
acquire Farrington in a merger which is intended to be a tax-free transaction
and which will be accounted for as a pooling-of-interests. Each of the
outstanding shares of Farrington will be exchanged for .7647 shares of the
Company's common stock. The acquisition was conditioned upon necessary bank
regulatory approvals and other customary conditions. In connection with the
merger agreement, Farrington granted the Company an option to purchase 133,000
shares of Farrington's authorized but unissued common stock.
Farrington has outstanding employee stock options for 60,059 of its common
stock, with a weighted average exercise price of $8.33 per share. The merger
agreement provides that each option for one share of Farrington common stock
will be converted into shares of the Company's common stock with a value equal
to the difference between the stock option exercise price and the value of .7647
shares of the Company's common stock.
On February 18, 1997, the stockholders of Farrington approved the merger. On
February 28, 1997, the Company acquired all of the outstanding shares of
Farrington based in North Brunswick, New Jersey. Each share of Farrington was
converted into .7647 shares of the Company's common stock for a total of
approximately 549,000 shares issued. At December 31, 1996, Farrington had
approximately $63 million in assets. The acquisition was accounted for as a
pooling-of-interests, and accordingly, the Company's consolidated financial
statements presented in future reports will be restated to include the accounts
and results of Farrington.
C. Pro Forma Data
The following unaudited pro forma data summarizes the combined results of
operation of
<PAGE>
36
the Company and Farrington as if the combination had been consummated on
January 1, 1994:
<TABLE>
<CAPTION>
Years Ended December 31,
- --------------------------------------------------------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income after Provision
for Possible Loan Losses
The Company $42,132 $42,416 $40,185
Farrington 3,812 4,161 4,163
- --------------------------------------------------------------------------------
Total $45,944 $46,577 $44,348
================================================================================
Net Income
The Company $11,460 $ 8,374 $ 9,820
Farrington 820 1,132 1,052
- --------------------------------------------------------------------------------
Total $12,280 $ 9,506 $10,872
================================================================================
</TABLE>
NOTE 3 - CASH AND DUE FROM BANKS
Balances reserved to meet regulatory requirements amounted to $21,904,000 at
December 31, 1996.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and the estimated market values of securities available for
sale at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
Obligations of U.S. Government
Agencies and Corporations $ 41,391 $ 193 $ (220) $ 41,364
Obligations of States and
Political Subdivisions 44,765 466 - 45,231
Agency Issued
Mortgage-Backed Securities 175,452 - (1,412) 174,040
- --------------------------------------------------------------------------------
Total Debt Securities 261,608 659 (1,632) 260,635
- --------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 21,241 2,683 (221) 23,703
Federal Reserve Bank and
Federal Home Loan Bank Stock 4,394 - - 4,394
- --------------------------------------------------------------------------------
Total Equity Securities 25,635 2,683 (221) 28,097
- --------------------------------------------------------------------------------
Total Securities
Available for Sale $287,243 $3,342 $(1,853) $288,732
================================================================================
</TABLE>
<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
Agency Issued
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>
<PAGE>
37
The amortized cost and estimated market value of debt securities at December 31,
1996, 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 expected prepayment rates and
historical experience, assuming no change in the current interest rate
environment.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $ 55,478 $ 54,801
Due After One Year Through Five Years 100,467 100,472
Due After Five Years Through Ten Years 86,822 86,726
Due After Ten Years 18,841 18,636
- --------------------------------------------------------------------------------
Total Debt Securities Available for Sale $261,608 $260,635
================================================================================
</TABLE>
Proceeds from sales of securities available for sale and gross gains and gross
losses realized during 1996, 1995 and 1994, were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
Proceeds from Sales $109,886 $40,271 $ 92,941
- --------------------------------------------------------------------------------
Gross Gains $ 1,024 $ 657 $ 1,250
Gross Losses (235) (89) -
- --------------------------------------------------------------------------------
Net Gains $ 789 $ 568 $ 1,250
- --------------------------------------------------------------------------------
Equity Securities:
Proceeds from Sales $ 50,797 $ 8,087 $ 32,651
- --------------------------------------------------------------------------------
Gross Gains $ - $ 368 $ -
Gross Losses (110) (17) (361)
- --------------------------------------------------------------------------------
Net Gains (Losses) $ (110) $ 351 $ (361)
- --------------------------------------------------------------------------------
Total Proceeds from Sales $160,683 $48,358 $125,592
================================================================================
Total Gains * $ 679 $ 919 $ 889
================================================================================
</TABLE>
* Total gains in 1995 amounted to $928,000. Three securities called in 1995
had a book gain of $9,000.
NOTE 5 - SECURITIES HELD TO MATURITY
Comparative amortized cost (book value) and estimated market values of
securities held to maturity at December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 980 $ 7 $ - $ 987
Obligations of U.S. Government
Agencies and Corporations 42,921 107 - 43,028
Obligations of States and
Political Subdivisions 12,470 - (158) 12,312
Agency Issued
Mortgage-Backed Securities 4,945 - (131) 4,814
Securities Issued by Foreign
Governments 100 3 - 103
- --------------------------------------------------------------------------------
Total Securities Held to
Maturity $61,416 $117 $(289) $61,244
================================================================================
</TABLE>
<PAGE>
38
<TABLE>
<CAPTION>
1995
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(In Thousands)
- --------------------------------------------------------------------------------
<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>
The amortized cost and estimated market value of securities held to maturity at
December 31, 1996, 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 expected
prepayment rates and historical experience, assuming no change in the current
interest rate environment.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $41,814 $41,800
Due After One Year Through Five Years 4,946 4,950
Due After Five Years Through Ten Years 9,711 9,680
Due After Ten Years 4,945 4,814
- --------------------------------------------------------------------------------
Total Debt Securities Held to Maturity $61,416 $61,244
================================================================================
</TABLE>
There were no sales of securities held to maturity during 1996, 1995 or 1994.
Securities held to maturity and available for sale with amortized costs totaling
$785,000 and $41,484,000, respectively, on December 31, 1996, 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 $7,988,000 and $37,613,000,
respectively, on December 31, 1996, were pledged to secure agreements to
repurchase securities. Securities totaling $9,220,000 remain under the custodial
responsibility of the Company during the period of the applicable agreements.
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 6 - LOANS
Loans outstanding by classification at December 31, 1996 and 1995, are as
follows:
<PAGE>
39
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Loans Secured by Real Estate:
Construction and Land Development $ 30,898 $ 21,938
Secured by Farmland 933 955
Secured by 1-4 Family Residential Properties 158,107 145,628
Secured by Multifamily (5 or more)
Residential Properties 634 720
Secured by Nonfarm Nonresidential Properties 133,020 121,946
Loans to Finance Agricultural Production and Other
Loans to Farmers - 9
Commercial and Industrial Loans 80,149 73,551
Loans to Individuals for Household, Family and
Other Personal Expenditures:
Retail Credit Card Plan 20,301 16,470
Other Installment and Single Payment Loans 183,193 188,761
Other Loans:
All other loans 2,581 2,761
- --------------------------------------------------------------------------------
Total Loans Outstanding 609,816 572,739
Less: Unearned Income on Loans 20,562 21,517
- --------------------------------------------------------------------------------
Loans, Net $589,254 $551,222
================================================================================
</TABLE>
The company extends credit in the normal course of business to its customers,
the majority of whom operate or reside within New Jersey. The ability of its
customers to meet contractual obligations is, to some extent, dependent upon the
economic conditions existing in the state.
The following information is presented for those loans classified as
non-accrual, and considered impaired, at December 31:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income that Would have Been Recorded Under
Original Contract Terms $728 $618 $524
Interest Income Received and Recorded 44 61 15
- --------------------------------------------------------------------------------
Lost Income on Non-Accrual Loans at Year-End $684 $557 $509
================================================================================
</TABLE>
As of December 31, 1996 and 1995, the Company's non-accrual loans were
$7,660,000 and $6,114,000, respectively. Of these, the loans considered to be
impaired were $7,405,000 and $5,640,000, respectively, with related valuation
allowances of $1,516,000 and $1,739,000, respectively. These valuation
allowances are included in the allowance for possible loan losses in the
accompanying consolidated balance sheets. Substantially all impaired loans were
evaluated for impairment losses based upon the fair value of the underlying
collateral of the loan. The average recorded balance in impaired loans during
1996 and 1995 was $5,640,000 and $4,310,000, respectively.
Loans to directors, officers, employees and/or their affiliated interests
amounted to approximately $9,182,000 and $12,597,000 at December 31, 1996 and
1995, 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 1996 activity in these loans
is as follows (in thousands):
<TABLE>
<S> <C>
Balance Outstanding, Beginning of Year $12,597
New Loans 1,672
Repayments (5,087)
- --------------------------------------------------------------------------------
Balance Outstanding, End of Year $ 9,182
================================================================================
</TABLE>
<PAGE>
40
NOTE 7 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses activity for the years ended
December 31, 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year $7,412 $9,597 $10,812
Add:
Provision Charged to Expense 2,275 450 1,590
Deduct:
Losses Charged to Allowance (3,287) (3,310) (3,830)
Less: Recoveries 452 675 1,025
- --------------------------------------------------------------------------------
Net Loan Charge-offs (2,835) (2,635) (2,805)
- --------------------------------------------------------------------------------
Balance, End of Year $6,852 $7,412 $ 9,597
================================================================================
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1996 and 1995, is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises (includes land of $1,728 and
$1,768 in 1996 and 1995, respectively) $12,860 $13,011
Property Under Capital Lease 9,750 9,750
Equipment 10,998 10,536
Leasehold Improvements 739 633
Projects in Progress 193 98
- --------------------------------------------------------------------------------
Total 34,540 34,028
Less: Accumulated Depreciation and Amortization 12,939 11,298
- --------------------------------------------------------------------------------
Premises and Equipment, Net $21,601 $22,730
================================================================================
</TABLE>
Depreciation expense amounted to $1,941,000 in 1996, $1,638,000 in 1995 and
$1,129,000 in 1994.
NOTE 9 - DEPOSITS
Time certificates of deposit $100,000 or more totaled $77,005,000 on December
31, 1996 and $56,078,000 on December 31, 1995.
Time deposits, with remaining maturities greater than one year, mature as
follows:
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------------------------
<S> <C>
1998 $31,930
1999 9,715
2000 22,056
2001 1,202
Thereafter 674
- --------------------------------------------------------------------------------
Total $65,577
================================================================================
</TABLE>
NOTE 10 - SHORT-TERM BORROWINGS
Selected data relating to short-term borrowings for the years ended December 31,
1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
At Year-end:
Securities Sold Under Agreements
to Repurchase $43,634 $50,592 $24,976
Federal Funds Purchased - - 12,000
Federal Home Loan Bank Advances - - 11,000
Demand Notes - U.S. Treasury 2,694 2,755 4,325
- --------------------------------------------------------------------------------
Total Short-Term Borrowings $46,328 $53,347 $52,301
================================================================================
Weighted-Average Interest Rate 5.13% 5.48% 3.19%
================================================================================
For the Year Ended December 31:
Securities Sold Under Agreements
to Repurchase:
Average Balance Outstanding $40,606 $23,283 $15,799
Weighted-Average Interest Rate 5.24% 5.36% 3.79%
Highest Month-End Balance $53,424 $50,592 $24,976
</TABLE>
<PAGE>
41
Securities of $9,220,000, pledged to secure borrowings, remain under the
custodial responsibility of the Company during the period of the applicable
agreements.
NOTE 11 - OTHER BORROWINGS
At December 31, 1996 and 1995, other borrowings consisted of an obligation under
capital lease in the amount of $9,693,000 and $9,680,000, respectively.
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>
1997 $ 917
1998 972
1999 999
2000 999
2001 1,059
Thereafter 17,286
- --------------------------------------------------------------------------------
Total 22,232
Less: Amount Representing Interest (12,539)
- --------------------------------------------------------------------------------
Total Obligation Under Capital Lease $ 9,693
================================================================================
</TABLE>
NOTE 12 - CAPITAL REQUIREMENTS
The Federal Reserve Board in the case of bank holding Companies such as the
Company and the Office of the Comptroller of the Currency ("OCC") in the case of
Federally chartered banks such as the Bank have adopted risk-based capital
guidelines which require a minimum ratio of 8% of total risk-based capital to
assets, as defined in the guidelines. At least one half of the total capital, or
4%, is to be comprised of common equity and qualifying perpetual preferred
stock, less deductible intangibles (Tier I capital).
In addition, the Federal Reserve Board and the OCC supplemented the risk-based
capital guidelines with an additional capital ratio referred to as the leverage
ratio or core capital ratio. The regulations require a financial institution to
maintain a minimum leverage ratio of 4% to 5%, depending upon the condition of
the institution.
Under its prompt corrective action regulations, the OCC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of depository institutions into
five categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage ratio of at
least 5.0%; a Tier I capital ratio of at least 6.0%; and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are subject
to qualitative judgements by the regulatory authorities about capital
components, risk weightings and other factors.
Management believes that, as of December 31, 1996 the Company and the Bank meet
all capital adequacy requirements to which they are subject. Further, based upon
the capital ratios, the Company and the Bank would qualify as "well capitalized"
at December 31, 1996.
The following is a summary of the Company's and the Bank's actual capital
amounts and ratios as of December 31, 1996, compared to the regulatory
authorities minimum capital adequacy requirements and requirements for
classification as a well capitalized institution:
<PAGE>
42
<TABLE>
<CAPTION>
(Dollars In Thousands)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RISK-BASED CAPITAL RATIOS: Company Bank
---------------- ---------------
Tier I Capital
Actual $76,583 11.00% $71,016 10.25%
Regulatory Minimum Requirement 27,845 4.00 27,727 4.00
For Classification as Well Capitalized 41,768 6.00 41,590 6.00
Combined Tier I and Tier II Capital
Actual 83,435 11.99 77,868 11.23
Regulatory Minimum Requirement 55,690 8.00 55,454 8.00
For Classification as Well Capitalized 69,613 10.00 69,317 10.00
LEVERAGE RATIO:
Actual 76,583 7.56 71,016 7.04
Regulatory Minimum Requirement 40,527 4.00 40,364 4.00
For Classification as Well Capitalized 50,659 5.00 50,455 5.00
</TABLE>
NOTE 13 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $5,225 $3,711 $3,265
Deferred Provision (Benefit) (333) (376) 579
- --------------------------------------------------------------------------------
Total Federal 4,892 3,335 3,844
- --------------------------------------------------------------------------------
State 879 288 763
- --------------------------------------------------------------------------------
Total Provision for Income Taxes $5,771 $3,623 $4,607
================================================================================
</TABLE>
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) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Provision for Income Taxes $17,231 $11,997 $14,427
- --------------------------------------------------------------------------------
Tax Calculated at 34% $ 5,859 $ 4,079 $ 4,905
Increase (Decrease) in Tax Resulting from:
Tax-Exempt Income (927) (792) (843)
State Taxes-Net of Federal Tax Benefit 580 190 504
Other-Net 259 146 41
- --------------------------------------------------------------------------------
Provision for Income Taxes $ 5,771 $ 3,623 $ 4,607
================================================================================
Effective Tax Rate 33% 30% 32%
================================================================================
</TABLE>
The components of and changes in the Federal net deferred tax asset are as
follows:
<TABLE>
<CAPTION>
Deferred
January 1, Provision December 31,
(In Thousands) 1996 (Benefit) 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Assets:
Allowance for Possible Loan Losses $1,787 $218 $2,005
Postretirement Benefits 681 217 898
Deferred Directors Fees 68 29 97
Other 1,091 7 1,098
- --------------------------------------------------------------------------------
Total 3,627 471 4,098
- --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Net Unrealized Gain on Securities
Available For Sale (1,152) 646 (506)
Depreciation (814) (61) (875)
Pension Plan (369) 112 (257)
Accretion of Discount (353) (15) (368)
Other (476) (174) (650)
- --------------------------------------------------------------------------------
Total (3,164) 508 (2,656)
- --------------------------------------------------------------------------------
Net Deferred Tax Asset $ 463 $979 $1,442
================================================================================
</TABLE>
<PAGE>
43
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.
Included in stockholders' equity are income tax expenses attributable to net
unrealized gains on securities available for sale in the amounts of $507,000 and
$1,152,000 for the years ended December 31, 1996 and 1995, respectively.
NOTE 14 - 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 1996, 1995 and
1994 was $111,000, $360,000 and $200,000, respectively.
Pension Plan
The following table sets forth the Pension Plan's funded status at December 31,
1996 and 1995.
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation:
Vested Benefits $15,790 $15,565
Non-Vested Benefits 290 250
- --------------------------------------------------------------------------------
Total Accumulated Benefit Obligation 16,080 15,815
Effect of Projected Future Compensation Levels 1,576 1,663
- --------------------------------------------------------------------------------
Projected Benefit Obligation 17,656 17,478
Plan's Assets at Fair Value, Primarily Listed Stocks,
U.S. Bonds and Commingled Funds 21,134 19,380
- --------------------------------------------------------------------------------
Plan's Assets in Excess of Projected Benefit Obligation 3,478 1,902
Unrecognized Prior Service Cost 780 944
Less:
Unrecognized Net Gain Due to Past Experience
Different from Assumptions Made 2,882 1,165
Unrecognized Net Assets Being Recognized in the
Amount of Approximately $211 per year through 1998 398 609
- --------------------------------------------------------------------------------
Prepaid Pension Cost $ 978 $ 1,072
================================================================================
</TABLE>
Net periodic pension cost for 1996, 1995 and 1994 included the following:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits Earned During Period $ 668 $ 601 $ 629
Interest Cost on Projected Benefit Obligation 1,179 1,150 1,076
Return on Plan Assets (2,703) (1,363) 460
Net Amortization and Deferral 950 (47) (1,994)
- --------------------------------------------------------------------------------
Net Periodic Pension Cost $ 94 $ 341 $ 171
================================================================================
Discount Rate 7.25% 7.00% 7.75%
================================================================================
Rate of Increase in Future Salary Levels 6.00% 6.00% 6.00%
================================================================================
Expected Long-Term Rate of Return on Plan Assets 9.00% 9.00% 9.00%
================================================================================
</TABLE>
<PAGE>
44
Non-Qualified Executive Compensation Supplemental Plans
The following table sets forth the Supplemental Plan's funded status at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Benefit Obligation:
Vested Benefits $233 $248
Non-Vested Benefits - -
- --------------------------------------------------------------------------------
Total Accumulated Benefit Obligation 233 248
Effect of Future Projected Compensation Levels - -
- --------------------------------------------------------------------------------
Projected Benefit Obligation 233 248
- --------------------------------------------------------------------------------
Projected Benefit Obligation in Excess of Plan's Assets 233 248
Unrecognized Net Loss Due to Past Experience Different from
Assumptions Made (19) (8)
Less:
Unrecognized Net Obligation Recognized - -
- --------------------------------------------------------------------------------
Unfunded Accrued Pension Cost $214 $240
================================================================================
</TABLE>
Net Periodic pension cost for 1996, 1995 and 1994 included the following:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits Earned During Period $ - $ - $ -
Interest Cost on Projected Benefit Obligation 17 18 24
Return on Plan Assets - - -
Net Amortization and Deferral - 1 5
- --------------------------------------------------------------------------------
Net Periodic Pension Cost $17 $19 $29
================================================================================
</TABLE>
In determining the projected benefit obligation, the weighted average assumed
discount rate was 7.25% in 1996, 7.00% in 1995 and 7.75% in 1994.
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
$6,903,000 and $6,745,000 at December 31, 1996 and 1995, respectively.
The Net Periodic Postretirement Benefit Cost ("NPPBC") is the amount to be
expensed for any given year. The NPPBC for 1996, 1995 and 1994 amounted to
$1,031,000, $974,000, and $1,050,000, respectively.
The NPPBC for 1996, 1995 and 1994 included the following components:
<TABLE>
<CAPTION>
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost of Benefits Attributed to
Employee Service During the Year $ 275 $239 $ 276
Interest Cost on APBO 466 445 484
Amortization of NTO Over a Twenty-Year Period 290 290 290
- --------------------------------------------------------------------------------
NPPBC $1,031 $974 $1,050
================================================================================
</TABLE>
<PAGE>
45
The discount rate used in determining the APBO was 7.25%, 7.00% and 7.75% at
December 31, 1996, 1995 and 1994, respectively. The assumed health care cost
trend rate used in measuring the APBO ranged from 8.0% for post-age 65 and 9.5%
for pre-age 65 in 1996, declining by 0.5% per year to an ultimate level of 5.5%
per year in 2004 (pre-age 65) and 2001 (post-age 65).
If the health care cost trend rate assumptions were increased by 1%, the APBO at
December 31, 1996 would be increased by $810,000 or 11.7%. The effect of this
change on the sum of the service cost and interest cost components of the NPPBC
for 1996 would be an increase of $120,000 or 16.2%.
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 $469,000, $463,000 and $472,000 in 1996, 1995
and 1994, respectively.
NOTE 15 - STOCK INCENTIVE PLAN
During 1991, the Company adopted a Stock Incentive Plan (the "Plan"), in which
267,900 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. Under the Plan, the exercise price of each option equals the market
price of the Company's stock on the date of grant.
During 1995, the Company adopted and the shareholders approved a "Stock Option
Plan for Non-Employee Directors" (the "Directors Plan") in which 39,325 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 options for 1,124 shares at an option price of $28.48. The
options granted have a term of ten years and vest over three years. Under the
Plan, the exercise price of each option equals the market price of the Company's
stock on the date of grant.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for both the Plan and Directors Plans. Accordingly, no compensation cost has
been recognized for the stock options in these Plans. Had compensation cost for
these plans been determined consistent with FASB Statement No. 123, "Accounting
for Stock-Based Compensation," which was previously described in Note 1(n), the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Income:
As Reported $11,460 $ 8,374
Pro Forma 11,343 8,294
Earnings Per Share:
As Reported $ 3.01 $ 2.19
Pro Forma 2.98 2.17
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
46
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
3.1% for both years; expected volatility of 25% and 24%; risk-free interest
rates of 6% and 7%; and expected lives of 5 years for both plans. A summary of
the status of both the Plan and the Directors Plan of the Company as of December
31, 1996, 1995 and 1994 and changes during the years ended on those dates,
adjusted for the effect of stock dividends, is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Option Shares: Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 107,523 $25.35 51,730 $21.18 27,161 $11.42
Granted 36,667 30.31 57,023 28.82 33,350 26.56
Exercised (5,638) 12.54 (1,230) 11.42 (8,781) 11.42
Forfeited (1,121) 28.92 - - - -
- --------------------------------------------------------------------------------
Outstanding at
End of Year 137,431 $27.17 107,523 $25.35 51,730 $21.18
===============================================================================
Options Exercisable
at Year-End 32,596 17,150 9,035
Weighted-Average
Fair Value of
Options Granted
During the Year $7.20 $7.13 N/A
================================================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1996, adjusted for the effect of stock dividends.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/96 Life in Years Price at 12/31/96 Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$11.42 11,882 4.0 $11.42 11,882 $11.42
26.56 33,350 7.0 26.56 16,974 26.56
28.48 to 28.92 55,532 8.1 28.82 3,740 28.48
30.31 36,667 9.5 30.31 - -
- -----------------------------------------------------------------------------------------
$11.42 to $30.31 137,431 7.9 $27.17 32,596 $21.26
=========================================================================================
</TABLE>
The Stock Incentive Plan also provides for granting of Restricted Stock Awards,
which generally vest between two and four years. Transactions involving these
awards are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted Stock Awards:
Outstanding-January 1, 9,500 9,662 4,088
Granted - 2,350 8,100
Canceled (225) (100) (242)
Vested (3,777) (2,412) (2,284)
- --------------------------------------------------------------------------------
Outstanding-December 31, 5,498 9,500 9,662
================================================================================
</TABLE>
Compensation expense recognized related to the restricted stock awards was
$134,000, $37,000 and $36,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
<PAGE>
47
NOTE 16 - 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. 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 $542,000, $462,000 and
$289,000 for the years ended December 31, 1996, 1995 and 1994, 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, 1996, were as follows:
<TABLE>
<S> <C>
1997 $398,000
1998 242,000
1999 213,000
2000 218,000
2001 95,000
</TABLE>
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 $965,000,
$1,793,000 and $1,678,000 in 1996, 1995 and 1994, 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 may require 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.
<PAGE>
48
<TABLE>
<CAPTION>
Financial Instruments Whose
Contract Amount Represent Contract or Notional Amount
Credit Risk at December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
Outstanding Loan Commitments $135,758,000
Standby Letters of Credit 2,673,000
</TABLE>
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 17 - DISCLOSURES 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 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:
Cash and Short-Term Investments
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
Securities
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. Federal Reserve Bank and Federal Home Loan Bank
stock is required to be maintained as part of membership. Cost approximates the
fair value of these securities, as that is the amount at which the stock may be
redeemed.
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.
<PAGE>
49
Short-Term Borrowings
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
Commitments to Extend Credit and Standby Letters of Credit
At December 31, 1996 and 1995, the Bank had standby letters of credit
outstanding of $2,673,000 and $2,791,000, 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 counter parties. On this
basis, these fees approximate the fair value.
At December 31, 1996 and 1995, the Bank had commitments to extend credit
totaling $135,758,000 and $111,187,000 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------------- --------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and Short-Term Investments $ 51,250 $ 51,250 $ 52,572 $ 52,572
Securities Available for Sale 288,732 288,732 334,156 334,156
Securities Held to Maturity 61,416 61,244 24,838 25,370
Trading Account Securities 512 512 417 417
Loans, Net of Allowance for
Possible Loan Losses 582,402 583,058 543,810 554,948
- --------------------------------------------------------------------------------
Financial Liabilities
Deposits
Demand 148,591 148,591 153,095 153,095
Savings 360,697 360,697 369,561 369,561
Time 371,986 372,570 331,972 340,775
- --------------------------------------------------------------------------------
Total Deposits 881,274 881,858 854,628 863,431
- --------------------------------------------------------------------------------
Short-Term Borrowings 46,328 46,328 53,347 53,347
- --------------------------------------------------------------------------------
Off-Balance Sheet Financial
Instruments
Standby Letters of Credit - 33 - 35
- --------------------------------------------------------------------------------
</TABLE>
NOTE 18 - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of United National Bancorp (parent company
only) are presented below:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
(In Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Banks $ 24 $ 31
Securities Available for Sale 4,841 2,709
Trading Account Securities 512 417
Investment in Subsidiary 82,959 78,150
Other Assets 1,308 1,237
- --------------------------------------------------------------------------------
Total Assets $89,644 $82,544
================================================================================
Liabilities and Stockholders' Equity
Other Liabilities $ 1,555 $ 1,145
Stockholders' Equity 88,089 81,399
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $89,644 $82,544
================================================================================
</TABLE>
<PAGE>
50
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Years Ended December 31,
----------------------------------
(In Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiary $ 4,939 $4,541 $3,732
Interest and Dividends on Securities 168 196 121
- --------------------------------------------------------------------------------
Total Interest Income 5,107 4,737 3,853
Net Gain (Loss) from Securities Transactions 111 558 (20)
- --------------------------------------------------------------------------------
Total Income 5,218 5,295 3,833
- --------------------------------------------------------------------------------
Expenses
Other Expenses 257 317 225
- --------------------------------------------------------------------------------
Income Before Taxes 4,961 4,978 3,608
Income Tax Provision (Benefit) (4) 154 (37)
- --------------------------------------------------------------------------------
Income Before Equity in Undistributed Income
of Subsidiary 4,965 4,824 3,645
Equity in Undistributed Income of Subsidiary 6,495 3,550 6,175
- --------------------------------------------------------------------------------
Net Income $11,460 $8,374 $9,820
================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
(In Thousands 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $11,460 $8,374 $9,820
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net (Gain) Loss on Sale of Securities
Available for Sale - (351) 2
Trading Account Securities Activity, Net (95) (96) (25)
Increase in Other Assets (71) (172) (227)
Increase in Other Liabilities 120 180 74
Restricted Stock 134 37 36
Equity in Undistributed Income
of Subsidiaries (6,495) (3,550) (6,175)
- --------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 5,053 4,422 3,505
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available
for Sale 812 3,712 241
Purchases of Securities Available for Sale (2,287) (3,300) (1,041)
- --------------------------------------------------------------------------------
Net Cash (Used In) Provided by
Investing Activities (1,475) 412 (800)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends on Common Stock (3,878) (3,312) (2,631)
Proceeds from Exercise of Stock Options 42 532 16
Purchase of Treasury Stock - (1,705) -
Sale of Treasury Stock 251 147 -
Stock Issued from Debenture Conversion - 1,048 -
Stock Issued from Equity Contracts - 221 -
Capital Contributed to Subsidiary - (1,830) -
- --------------------------------------------------------------------------------
Net Cash Used in Financing Activities (3,585) (4,899) (2,615)
- --------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (7) (65) 90
Cash and Due from Banks at Beginning of Year 31 96 6
- --------------------------------------------------------------------------------
Cash and Due from Banks at End of Year $ 24 $ 31 $ 96
================================================================================
</TABLE>
<PAGE>
51
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of United National Bancorp:
We have audited the accompanying consolidated balance sheet of United National
Bancorp and subsidiary as of December 31, 1996 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
year then ended. 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 audit. The accompanying consolidated financial
statements of United National Bancorp and subsidiary as of December 31, 1995 and
for the years ended December 31, 1995 and 1994 were audited by other auditors
whose report, dated January 12, 1996, on those statements included an
explanatory paragraph that described a change in the Company's method of
accounting for securities in 1994.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
United National Bancorp and subsidiary as of December 31, 1996, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Short Hills, New Jersey
January 14, 1997 except for Note 2b., which
is as of February 28, 1997
<PAGE>
52
INFORMATION FOR STOCKHOLDERS
Form 10-K
Stockholders of United National Bancorp are entitled to receive on request a
copy of United National Bancorp's Form 10-K Annual Report to the Securities and
Exchange Commission for the fiscal year 1996. Stockholder requests for that
report should be mailed to the Vice-President and Secretary, Ralph L. Straw,
Jr., United National Bancorp, 1130 Route 22 East, P.O. Box 6000, Bridgewater,
NJ, 08807-0010.
ANNUAL MEETING
The annual meeting of Bancorp's stockholders is scheduled for April 15, 1997 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.
Market quotations for Bancorp's capital stock during the past two years as
reported on NASDAQ are as follows:
<TABLE>
<CAPTION>
Year Quarter High* Low* Cash Dividends Declared*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 First $30.04 $28.48 $.24
Second 29.37 27.81 .24
Third 34.49 28.25 .24
Fourth 33.38 30.66 .25
1996 First 32.08 30.19 .25
Second 31.60 28.54 .25
Third 35.44 29.48 .26
Fourth 37.00 32.43 .27
</TABLE>
*Adjusted for subsequent stock dividends.
<TABLE>
<CAPTION>
BANK FAMILY
December 31,
--------------
1996 1995
- ---------------------------------
<S> <C> <C>
Stockholders 1,294 1,457
Directors 15 12
Total Staff 470 488
Officers 122 128
Employees 348 360
</TABLE>
<PAGE>
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
the consolidated statements of income, changes in stockholders' equity and cash
flows for each of the two 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 the results of their operations and their
cash flows for each of the two 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.
/s/ Arthur Andersen LLP
Roseland, New Jersey
January 12, 1996
<PAGE>
Exhibit 21
(21) LIST OF SUBSIDIARIES
UNITED NATIONAL BANCORP
-----------------------
UNITED NATIONAL BANK
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANCORP)
UNB CAPITAL TRUST I
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANCORP
FORMED ON FEBRUARY 21, 1997)
UNITED NATIONAL BANK
--------------------
UNITED NATIONAL INVESTMENT COMPANY, INC.
(FORMERLY UNB INVESTMENT CO., INC.)
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANK)
UNITED FINANCIAL SERVICES, INC.
(UNITED NATIONAL BANK
OWNS 50% OF THIS JOINT VENTURE)
UNITED NATIONAL INVESTMENT COMPANY, INC.
----------------------------------------
BRIDGEWATER MORTGAGE COMPANY, INC.
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL INVESTMENT CO., INC.
FORMED ON MARCH 17,1997)
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
United National Bancorp:
We consent to incorporation by reference in the following Registration
Statements filed on Form S-8: the United National Bancorp Stock Based
Incentive Plan, dated May 19, 1993; the United National Bank Profit
Sharing and 401 (k) Plan dated March 16, 1994; and the United National
Bank 1995 Stock Option Plan for Non-Employee Directors, dated June 28,
1995, of our report dated January 14, 1997, relating to the
consolidated balance sheet of United National Bancorp and subsidiary
as of December 31, 1996 and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year
then ended, which report is incorporated by reference in the December
31, 1996 Annual Report on Form 10-K of United National Bancorp.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Short Hills, New Jersey
March 27, 1997
<PAGE>
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. It should be noted that we have not audited any
financial statements of the company 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 27, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 51,250
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 512
<INVESTMENTS-HELD-FOR-SALE> 288,732
<INVESTMENTS-CARRYING> 61,416
<INVESTMENTS-MARKET> 61,244
<LOANS> 589,254
<ALLOWANCE> 6,852
<TOTAL-ASSETS> 1,037,549
<DEPOSITS> 881,274
<SHORT-TERM> 46,328
<LIABILITIES-OTHER> 12,165
<LONG-TERM> 9,693
0
0
<COMMON> 9,642
<OTHER-SE> 78,447
<TOTAL-LIABILITIES-AND-EQUITY> 1,037,549
<INTEREST-LOAN> 49,673
<INTEREST-INVEST> 23,360
<INTEREST-OTHER> 216
<INTEREST-TOTAL> 73,262
<INTEREST-DEPOSIT> 25,273
<INTEREST-EXPENSE> 28,855
<INTEREST-INCOME-NET> 44,407
<LOAN-LOSSES> 2,275
<SECURITIES-GAINS> 792
<EXPENSE-OTHER> 38,860
<INCOME-PRETAX> 17,231
<INCOME-PRE-EXTRAORDINARY> 11,460
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,460
<EPS-PRIMARY> 3.01
<EPS-DILUTED> 3.01
<YIELD-ACTUAL> 4.99
<LOANS-NON> 7,660
<LOANS-PAST> 1,494
<LOANS-TROUBLED> 67
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,412
<CHARGE-OFFS> 3,287
<RECOVERIES> 452
<ALLOWANCE-CLOSE> 6,852
<ALLOWANCE-DOMESTIC> 6,852
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
