SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
or
[ ] 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
United National Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2894827
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1130 Route 22 East, Bridgewater, New Jersey 08807-0010
(Address of principal executive offices) (Zip Code)
(908) 429-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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.
[X] Yes [ ] No
As of July 31, 1998, there were 9,282,441 shares of common stock, $1.25 par
value, outstanding.
<PAGE>
UNITED NATIONAL BANCORP
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
ITEM 1 Financial Statements and Notes to Consolidated
Financial Statements 1-6
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-15
ITEM 3 Quantitative and Qualitative Disclosures about
Market Risk 15-16
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 18
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
United National Bancorp
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 34,018 $ 39,569
Federal Funds Sold 8,200 1,500
Securities Available for Sale, at Market Value 567,667 541,245
Securities Held to Maturity 43,804 45,308
Trading Account Securities, at Market Value 1,221 1,221
Loans (Net of Unearned Income) 654,687 613,712
Less: Allowance for Possible Loan Losses 7,069 7,633
----------------- ----------------
Loans, Net 647,618 606,079
Premises and Equipment, Net 22,313 21,503
Investment in Joint Venture 3,151 3,151
Other Real Estate 1,479 1,463
Intangible Assets, Primarily Core Deposit Premiums 10,017 10,818
Other Assets 41,228 37,979
----------------- ----------------
Total Assets $1,380,716 $1,309,836
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 173,220 $ 166,260
Savings 386,017 380,105
Time 415,586 441,484
----------------- ----------------
Total Deposits 974,823 987,849
Short-Term Borrowings 134,404 79,546
Other Borrowings 119,980 92,706
Other Liabilities 15,441 18,785
----------------- ----------------
Total Liabilities 1,244,648 1,178,886
Company-Obligated Mandatorily Redeemable
Preferred Series B Capital Securities of a
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company 20,000 20,000
----------------- ----------------
STOCKHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares,
none issued and outstanding - -
Common Stock, $1.25 Par Value,
Authorized 16,000,000 Shares,
Issued 9,375,345 in 1998 and 9,366,549 in 1997,
Outstanding Shares 9,281,042 in 1998
and 9,272,246 in 1997 11,719 11,708
Additional Paid-in Capital 80,308 80,102
Retained Earnings 19,470 14,826
Treasury Stock (94,303 shares in 1998 and 1997) (1,352) (1,352)
Restricted Stock (64) (73)
Accumulated Other Comprehensive Income 5,987 5,739
----------------- ----------------
Total Stockholders' Equity 116,068 110,950
----------------- ----------------
Total Liabilities and Stockholders' Equity $1,380,716 $1,309,836
================= ================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $14,231 $13,837 $28,712 $27,748
Interest and Dividends on Securities
Available for Sale:
Taxable Income 8,340 5,629 16,280 9,968
Tax-Exempt Income 703 558 1,400 1,114
Interest and Dividends on Securities
Held to Maturity:
Taxable Income 474 867 948 1,785
Tax-Exempt Income 220 156 413 308
Dividends on Trading Accounts Securities 7 4 13 7
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 45 127 353 353
--------- ---------- ----------- -----------
TOTAL INTEREST INCOME 24,020 21,178 48,119 41,283
----------- ---------- ----------- -----------
INTEREST EXPENSE
Interest on Savings Deposits 1,539 1,682 3,140 3,427
Interest on Time Deposits 5,722 5,500 11,938 10,680
Interest on Short-Term Borrowings 1,419 862 2,350 1,325
Interest on Other Borrowings 1,931 290 3,611 522
----------- ---------- ----------- -----------
TOTAL INTEREST EXPENSE 10,611 8,334 21,039 15,954
----------- ---------- ----------- -----------
Net Interest Income 13,409 12,844 27,080 25,329
Provision for Possible Loan Losses 725 900 1,700 1,800
----------- ---------- ----------- -----------
Net Interest Income After
Provision for Possible Loan Losses 12,684 11,944 25,380 23,529
----------- ---------- ----------- -----------
NON-INTEREST INCOME
Trust Income 1,438 1,200 2,875 2,400
Service Charges on Deposit Accounts 1,052 981 2,119 2,047
Other Service Charges, Commissions
and Fees 1,626 1,495 3,187 3,019
Net Gains from Securities Transactions 223 180 379 336
Other Income 624 469 1,321 906
----------- ---------- ----------- -----------
TOTAL NON-INTEREST INCOME 4,963 4,325 9,881 8,708
----------- ---------- ----------- -----------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 4,979 4,871 10,064 10,012
Occupancy Expense, Net 820 833 1,680 1,656
Furniture and Equipment Expense 857 683 1,730 1,358
Data Processing Expense 1,849 1,181 3,685 2,294
Distributions of Series B Capital
Securities 500 500 1,001 556
Amortization of Intangible Assets 400 440 801 880
Net Cost to Operate Other Real Estate 6 52 69 166
Merger Related Charge and
Loss on Disposition of Assets - 543 - 2,208
Other Expenses 2,895 2,664 5,911 5,199
----------- ---------- ----------- -----------
TOTAL NON-INTEREST EXPENSE 12,306 11,767 24,941 24,329
----------- ---------- ----------- -----------
Income Before Provision for Income Taxes 5,341 4,502 10,320 7,908
Provision for Income Taxes 1,501 1,386 2,840 2,414
=========== ========== =========== ===========
NET INCOME $ 3,840 $ 3,116 $ 7,480 $ 5,494
=========== ========== =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.41 $ 0.34 $ 0.81 $ 0.59
=========== ========== =========== ===========
Diluted $ 0.41 $ 0.33 $ 0.79 $ 0.59
=========== ========== =========== ===========
Weighted Average Shares Outstanding:
Basic 9,280 9,266 9,277 9,262
Diluted 9,451 9,333 9,440 9,333
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Restricted Comprehensive Stockholders'
Stock Capital Earnings Stock Stock Income Equity
----------- ------------ ------------ ------------ ------------ ------------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1998 $11,708 $80,102 $14,826 $(1,352) $(73) $5,739 $110,950
Net Income - - 7,480 - - - 7,480
Cash Dividends Declared
$0.30 Per Share - - (2,804) - - - (2,804)
Exercise of Stock Options
(6,996 Shares) 9 143 (32) - - - 120
Change in Unrealized Gain
on Securities Available
for Sale - - - - - 248 248
Restricted Stock Activity 2 63 - - 9 - 74
---------- ------------ ------------ ------------ ------------- -------------------- -----------
Balance-June 30, 1998 $11,719 $80,308 $19,470 $(1,352) $(64) $5,987 $116,068
========== ============ ============ ============ ============= ==================== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $7,480 $ 5,494
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 1,857 1,975
Amortization of Securities, Net 568 172
Provision for Possible Loan Losses 1,700 1,800
Provision(Benefit)for Deferred Income Taxes 103 (52)
Net Loss (Gain) on Disposition/Writedown
Of Premises and Equipment 56 544
Net Gain on Sale of Securities Available for Sale (390) (160)
Trading Account Securities Activity, Net - (362)
(Increase)Decrease in Other Assets (3,375) 2,956
(Decrease)Increase in Other Liabilities (3,449) 1,633
Restricted Stock Activity 74 91
---------------- ----------------
Net Cash Provided by Operating Activities 4,624 14,091
---------------- ----------------
INVESTING ACTIVITIES Securities Available for Sale:
Proceeds from Sales of Securities 218,001 26,269
Proceeds from Maturities of Securities 56,589 22,239
Purchases of Securities (300,800) (196,599)
Securities Held to Maturity:
Proceeds from Maturities of Securities 25,732 24,510
Purchases of Securities (24,244) (10,919)
Net Increase in Loans (43,239) (6,087)
Expenditures for Premises and Equipment (2,180) (2,031)
Proceeds from Disposal of Premises and Equipment 258 -
(Increase) Decrease in Other Real Estate (16) 217
---------------- ----------------
Net Cash Used in Investing Activities (69,899) (142,401)
---------------- ----------------
FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposits 12,872 (22,749)
Net (Decrease) Increase in Certificates of Deposit (25,898) 27,051
Net Increase (Decrease) in Short-Term Borrowings 54,858 33,568
Net Increase in Other Borrowed Funds 27,274 50,000
Cash Dividends on Common Stock (2,802) (2,341)
Proceeds from Exercise of Stock Options 120 486
Purchase of Treasury Stock - (3)
Sale of Treasury Stock - -
Proceeds of Trust Capital Securities - 20,000
---------------- ----------------
Net Cash Provided by Financing Activities 66,424 106,012
---------------- ----------------
Net Increase(Decrease) in Cash and Cash Equivalents 1,149 (22,298)
Cash and Cash Equivalents at Beginning of Period 41,069 61,279
---------------- ----------------
Cash and Cash Equivalents at End of Period $42,218 $38,981
================ ================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Period:
Interest $22,149 $ 16,248
Income Taxes 5,050 3,454
Reclass to Available for Sale from Held to Maturity - 3,160
Reclass to Other Assets of Vacant Operations Center
From Premises and Equipment Pending Sale - 1,100
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
UNITED NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements included herein
have been prepared by United National Bancorp (the "Company"), in accordance
with generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on Form
10-K.
In the opinion of the Company, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the operating
results for the interim periods have been included. The results of operations
for periods of less than a year are not necessarily indicative of results for
the full year.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("Statement No. 130"). Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. Under Statement No. 130, comprehensive income is
divided into net income and other comprehensive income. Other comprehensive
income includes items previously recorded directly in equity, such as unrealized
gains or losses on securities available for sale. Comparative financial
statements provided for earlier periods have been reclassified to reflect the
application of the provisions of Statement No. 130.
Statement No. 130 requires total comprehensive income and its components to be
displayed on the face of a financial statement for annual financial statements.
For interim financial statements, Statement No. 130 requires only total
comprehensive income to be reported and allows such disclosure to be presented
in the notes to the interim financial statements. For the Company, comprehensive
income is determined by adding unrealized investment holding gains or losses
during the period to net income.
Total comprehensive income amounted to the following for the six-month periods
ended June 30 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
<S> <C> <C>
Net Income $7,480 $5,494
Change in Unrealized Gain on
Securities Available for Sale,
Net of Taxes 248 1,772
---------------- ----------------
Comprehensive Income $7,728 $7,266
================ ================
</TABLE>
In February 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("Statement No. 132").
Statement No. 132 revises employers' disclosures about pension and other
postretirement benefits plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information in changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis, and eliminates certain required
disclosures of previous accounting pronouncements.
5
<PAGE>
Statement No. 132 is effective for fiscal years beginning after December 15,
1997. Earlier application is encouraged. Restatement of disclosures for earlier
periods provided for comparative purposes is required unless the information is
not readily available. As Statement No. 132 affects disclosure requirements, it
is not expected to have an impact on the financial statements of the Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement
No. 133"). This statement establishes accounting and reporting standards for
derivative instruments, and for hedging activities. Statement No. 133 supersedes
the disclosure requirements in Statements No. 80, 105 and 119. This statement is
effective for periods beginning after June 15, 1999. The adoption of Statement
No. 133 is not expected to have a material impact on the financial position or
results of the Company.
(2) Cash and Cash Equivalents
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.
(3) Net Income Per Common Share
Basic income per common share is computed by dividing net income by the weighted
average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by
weighted average number of shares outstanding, as adjusted for the assumed
exercise of options for common stock, using the treasury stock method. Potential
shares of common stock resulting from stock option agreements totaled 163,000,
and 71,000 for the six-month periods ended June 30, 1998 and 1997, respectively.
For the quarters ended June 30, 1998 and 1997, the potential shares of common
stock resulting from stock option agreements totaled 171,000, and 67,000.
All weighted average shares outstanding have been adjusted for the subsequent 6%
stock dividend in 1997 and the 2 for 1 stock split in 1997.
(4) Capital
All share amounts presented have been restated for subsequent stock dividends
and splits.
6
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 0PERATIONS.
The following discussion of the operating results and financial condition at
June 30, 1998 is intended to help readers analyze the accompanying financial
statements, notes and other supplemental information contained in this document.
Results of operations for the three and six months ended June 30, 1998 are not
necessarily indicative of results to be attained for any other period.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect", "believe", "anticipate", or by expressions of confidence such as
"continuing" or "strong" or similar statements or variations of such terms. Such
forward-looking statements involve certain risks and uncertainties. These
include, but are not limited to, expected cost savings not being realized or not
being realized within the expected time frame; income or revenues being lower
than expected or operating costs higher; competitive pressures in the banking or
financial services industries increasing significantly; business disruption
related to program implementation or methodologies; weakening of general
economic conditions nationally or in New Jersey; changes in legal and regulatory
barriers and structures; and unanticipated occurrences delaying planned programs
or initiatives or increasing their costs or decreasing their benefits. Actual
results may differ materially from such forward-looking statements. The Company
assumes no obligation for updating any such forward-looking statements at any
time.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 1998 and June 30, 1997.
OVERVIEW
The Company realized net income of $3,840,000 for the second quarter of 1998, as
compared to $3,116,000 reported for the same period in 1997. The corresponding
1997 period included a loss on the then pending sale of its former operations
center (the "Operations Center Loss") of $326,000, net of taxes, or $0.04 per
diluted share. Earnings per diluted share were $0.41 for the second quarter of
1998 as compared to $0.33 for the second quarter of 1997.
The increase in earnings for the three months ended June 30, 1998, compared to
1997 (before the Operations Center Loss), was the result of an increases in net
interest income and non-interest income, combined with a reduction in the
provision for possible loan losses. These increases were offset in part by
increases in non-interest expenses.
For the six months ended June 30, 1998, net income was $7,480,000, as compared
to $5,494,000 for the same period last year. Earnings per diluted share were
$0.79 and $0.59, respectively. During the first quarter of 1997, the Company
recorded a merger-related charge (the "Merger Charge") of $1,072,000, net of
taxes, in connection with the acquisition of Farrington Bank ("Farrington").
Excluding the Merger Charge and the Operations Center Loss (together defined as
"One-Time Charges"), earnings for the six months ended June 30, 1997 were
$6,892,000, compared to the $7,480,000 reported in 1998.
7
<PAGE>
EARNINGS ANALYSIS
Interest Income
Interest income for the quarter ended June 30, 1998 represented a $2,842,000 or
13.4% increase from the $21,178,000 reported for the same period in 1997. This
was attributable to increases in interest and dividends on securities of
$2,530,000 and interest and fees on loans of $394,000. Interest on federal funds
sold and deposits with Federal Home Loan Bank ("FHLB") decreased by $82,000. The
yield on average interest earning assets on a fully taxable equivalent basis
decreased 25 basis points from 8.19% for the second quarter of 1997 to 7.94% for
the second quarter of 1998. The increase in interest income was primarily
attributable to a $179,440,000 increase in average interest earning assets,
offset in part by the 25 basis point decrease in the yield on earning assets.
During the second and third quarters of 1997, the Company developed and
implemented a strategy to increase earning assets, effectively leveraging its
capital and improving net interest income, by the purchase of $150 million of
additional investment securities funded through advances and repurchase
agreements (the "Growth Strategy"). During the first six months of 1998, the
Company purchased an additional $50 million of investments pursuant to the
Growth Strategy.
For the six months ended June 30, 1998, interest income increased $6,836,000 or
16.6%, to $48,119,000 from the $41,283,000 reported for the same period in 1997.
This was attributable to increases in interest and dividends on securities of
$5,872,000 and interest and fees on loans of $964,000. The increase in interest
income was primarily the result of a $195,307,000 increase in average interest
earning assets. This was offset in part by a decrease in the yield on average
earning assets from 8.22% for the six months ended June 30, 1997 to 8.05% for
the comparable period in 1998.
Interest Expense
The Company's interest expense for the second quarter of 1998 increased
$2,277,000, or 27.3%, to $10,611,000 from $8,334,000 for the same period last
year, as a result of the Growth Strategy, increased average deposits and the
movement of deposits from lower rate savings accounts to higher rate time
deposits. Specifically, interest on other borrowings increased $1,641,000,
interest on short-term borrowings increased $557,000, and interest on savings
and time deposits rose $79,000. The Company's average cost of funds increased
from 3.95% for the second quarter of 1997 to 4.18% for the second quarter of
1998. Average interest bearing liabilities increased by $127,209,000 from the
second quarter of 1997 to the same period in 1998.
For the six months ended June 30, 1998, interest expense increased by $5,085,000
over the same period in 1997. Interest expense on other borrowings increased
$3,089,000, interest expense on short-term borrowings increased by $1,025,000,
and interest on savings and time deposits increased by $971,000.
Net Interest Income
The net effect of the changes in interest income and interest expense for the
second quarter of 1998 was an increase of $565,000 or 4.4% in net interest
income as compared to the second quarter of 1997. The net interest margin and
net interest spread, on a fully taxable equivalent basis, decreased 51 basis
points and 48 basis points, respectively, from the same period last year.
Net interest income for the six months ended June 30, 1998, increased $1,751,000
or 6.9% over the same period last year. The net interest margin decreased 49
basis points, while the net interest spread decreased 52 basis points from the
same period last year.
8
<PAGE>
Provision for Possible Loan Losses
For the three months ended June 30, 1998, the provision for possible loan losses
was $725,000, compared to $900,000 for the same period last year. The provision
for possible loan losses was $1,700,000 for the six months ended June 30, 1998,
as compared to $1,800,000 for the same period last year. The amount of the loan
loss provision and the level of the allowance for possible loan losses are based
upon a number of factors including Management's evaluation of potential losses
in the portfolio, after consideration of appraised collateral values, financial
condition and past credit history of the borrowers as well as prevailing and
anticipated economic conditions.
In the opinion of Management, the allowance for possible loan losses at June 30,
1998 was adequate to absorb possible future losses on existing loans and
commitments that are currently inherent in the loan portfolio.* At June 30,
1998, the ratio of the allowance for possible loan losses to non-performing
loans was 104.76% as compared to 85.03% at June 30, 1997.
Non-Interest Income
For the second quarter of 1998, compared to the second quarter of 1997, total
non-interest income increased $638,000 or 14.8%, due primarily to increases of
$238,000 in trust income, $131,000 of increases in other service charges,
commissions and fees, and $155,000 of increases in other income. The increase in
other service charges, commissions and fees was the result of fees on additional
services implemented during the past year and a higher volume of credit card
annual fees, offset in part by lower volume of credit card application fees. The
increase in other income is the result of the Company's investment in corporate
owned life insurance, partly offset by lower gains on sales of loans guaranteed
by the Small Business Administration ("SBA"). In addition, there were increases
of $71,000 in service charges on deposit accounts and $43,000 in net gains from
securities transactions.
For the six months ended June 30, 1998, non-interest income increased $1,173,000
from the same period in 1997, due primarily to increases of $475,000 in trust
income, $415,000 in other income and $168,000 in other service charges,
commissions and fees. In addition there were increases of $72,000 in service
charges on deposit accounts and $43,000 in net gains from securities
transactions. The increases for the six-month period were due to the same
factors that caused the quarterly increases.
Non-Interest Expense
For the quarter ended June 30, 1998, non-interest expense increased $539,000 or
4.6% from the same period last year. Included in the second quarter of 1997 was
the Operations Center Loss of $543,000, pre-tax. Excluding this charge,
non-interest expense increased $1,082,000 or 9.6% from 1997 to 1998. Salaries
and employee benefits increased $108,000, as salaries increased by $330,000,
while employee benefits decreased $222,000. The increase in salary and benefit
expense was due to additional employees hired for new branches opened during the
latter part of 1997, offset in part by lower retirement benefits cost and lower
hospitalization benefit costs. Occupancy expense decreased $13,000, or 1.6%, as
the increased cost of the new branches was more than offset by the elimination
of costs associated with the former operations center sold in the third quarter
of 1997. Furniture and equipment expense increased $174,000, or 25.5% as a
result of the upgrading of the corporate-wide personal computer network in
mid-1997. Data processing expense increased $668,000, or 56.6% as a result of
increased volume of items processed through United Financial Services, Inc.
("United Financial") as well as increased credit card processing. United
Financial, a data processing joint venture, is 50% owned by the Company.
Distributions on the trust capital securities, issued in March 1997, at an
annual rate of 10.01%, amounted to $500,000, the same as the prior year. Other
expenses, net costs to operate other real estate and amortization of intangible
assets increased $145,000, primarily as a result of additional marketing of
9
<PAGE>
new branch locations and credit card marketing, increased credit card processing
expense and increased other legal and other professional expenses offset in part
by decreased costs to operate other real estate.
For the six months ended June 30, 1998, non-interest expense increased $612,000,
or 2.5% from the same period last year. Included in 1997 were the pre-tax Merger
Charge of $1,665,000 in the first quarter and the Operations Center Loss of
$543,000 in the second quarter. Excluding these One-Time Charges, non-interest
expense increased $2,820,000, or 12.7% from 1997 to 1998. Salaries and employee
benefits increased $52,000, or 0.5% as salaries and wages increased $545,000 and
employee benefits decreased by $493,000. Occupancy expense increased $24,000.
Furniture and equipment expense increased $372,000 or 27.4%. The increases for
the six-month period were due to the same factors that caused the quarterly
increases. Data processing expense increased $1,391,000, or 60.6% over the same
period in 1997 as a result of higher processing volumes. The increase in cash
distributions on the trust capital securities of $445,000 resulted from their
placement in March 1997. Other expenses, including amortization of intangible
assets, increased $536,000 primarily as a result of additional marketing,
postage and telephone expenses incurred for credit card marketing, along with
increases in local marketing expenses, legal and professional fees, offset in
part by decreased costs to operate other real estate.
Income Taxes
Income tax expense increased $115,000 to $1,501,000 for the second quarter of
1998 as compared to $1,386,000 for the same period in 1997. For the six months
ended June 30, 1998, income tax expense increased $426,000 when compared to the
prior year. The increase in income taxes was the result of higher taxable income
than the prior year.
YEAR 2000 Issues
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past computer programs allocated only two
digits to a year, (ie. 1998 was represented as 98). Given this programming, the
year 2000 could be confused with that of 1900. The Year 2000 issue not only
impacts computer hardware and software, but all equipment, which utilizes
processors or computer microchips.
Management has initiated a program to assess the Company's computer systems,
applications and third-party vendors for year 2000 compliance. Management has
formed a Year 2000 Committee with members from all significant areas of the
Bank, which has conducted a comprehensive review of its operations to identify
systems, vendors and customers that could be affected by the year 2000 issue.
The committee has developed an implementation plan to rectify any issues related
to processing of transactions in the year 2000 and beyond. The Company is in
process of obtaining certifications of Year 2000 compliance from its vendors, or
in the alternative will obtain Year 2000 compliant software, hardware and
support services as appropriate. The Company is also working with its
significant borrowers and depositors to ensure they are taking appropriate steps
to become Year 2000 compliant.
The Company expects that all year 2000 compliance testing will be completed by
December 31, 1998.
The Company, however, continues to bear some risk related to the Year 2000 issue
and could be adversely affected, if other entities (ie., vendors) do not
appropriately address their own compliance issues.
The Company continues to evaluate the estimated costs associated with attaining
Year 2000 readiness. Additional costs for 1998, such as testing, software
purchases and marketing are not anticipated to be material to the Company.*
While additional costs will be incurred, the Company believes, based upon
10
<PAGE>
available information, that it will be able to manage its Year 2000 transition
without any significant adverse effect on business operations or financial
condition.*
FINANCIAL CONDITION
June 30, 1998 as compared to December 31, 1997.
Total assets increased $70,880,000 or 5.4% from December 31, 1997. Loans, net of
allowance for possible loan losses, increased $41,539,000. Securities increased
by $24,918,000 as the Company utilized $50 million of advances and repurchase
agreements to fund the growth in the investment portfolio, which in turn
increased net interest income. The $50 million of investments purchased through
the Growth Strategy were partly offset by investments called or matured in the
first quarter. In addition, there were increases in Federal funds sold of
$6,700,000, premises and equipment of $810,000, other real estate of $16,000 and
other assets of $3,249,000. Conversely, there were decreases of $5,551,000 in
cash and due from banks and $801,000 in intangible assets.
Total loans at June 30, 1998 increased $40,975,000 to $654,687,000 from year-end
1997. Commercial loans increased $27,877,000 or 20.4% to $164,211,000 at June
30, 1998. The residential and commercial real estate loan portfolios increased
by $24,480,000 or 8.0% from $306,491,000 at December 31, 1997 to $330,971,000 at
June 30, 1998. In addition, the credit card portfolio increased $1,554,000 or
4.7% from December 31, 1997 to $34,694,000 at June 30, 1998. Partly offsetting
these increases, personal loans decreased $12,936,000 or 9.4% from December 31,
1997 to $124,811,000 at June 30, 1998, as a result of loan payments on the
indirect automobile loan portfolio exceeding new loan growth.
The following schedule presents the components of loans, by type, net of
unearned income, for each period presented.
<TABLE>
<CAPTION>
June 30, December 31,
(In Thousands) 1998 1997
----------------- ----------------
<S> <C> <C>
Commercial $164,211 $136,334
Real Estate 330,971 306,491
Personal Loans 124,811 137,747
Credit Card Loans 34,694 33,140
----------------- ----------------
Loans, Net of Unearned Income $654,687 $613,712
================= ================
</TABLE>
Total securities at June 30, 1998 increased $24,918,000 or 4.2% to $612,692,000
from year-end 1997. Within the securities portfolio, the majority of the
increase occurred in the mortgage-backed securities, which increased
$45,165,000. In addition, obligations of states and political subdivisions
increased by $9,798,000. Trading account securities remained constant, while
Corporate debt securities (trust preferred issues of other banks) increased
$4,873,000. U.S. government agencies and corporations declined by $24,371,000.
Other securities, consisting of money market mutual funds and stock in Federal
Reserve Bank and Federal Home Loan Bank decreased by $7,569,000. U.S. Treasury
securities decreased by $2,978,000.
11
<PAGE>
The amortized cost and approximate market value of securities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------------------------ -----------------------------
Amortized Market Amortized Market
Securities Available for Sale Cost Value Cost Value
- -------------------------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 2,997 $ 2,996 $ 7,987 $ 7,979
Obligations of U.S. Government
Agencies and Corporations 70,143 70,678 85,384 86,079
Obligations of States and
Political Subdivisions 59,320 60,526 55,632 56,887
Mortgage-Backed Securities 356,686 358,052 310,074 312,164
Corporate Debt Securities 17,817 18,793 13,496 13,920
Other Securities 51,642 56,622 59,974 64,216
------------ ------------- ------------ ------------
Total Securities Available
For Sale 558,605 567,667 532,547 541,245
------------ ------------- ------------ ------------
Securities Held to Maturity
- --------------------------------
U.S. Treasury Securities 2,995 2,998 990 995
Obligations of U.S. Government
Agencies and Corporations 18,983 18,930 27,953 27,936
Obligations of States and
Political Subdivisions 17,871 17,923 11,712 11,798
Mortgage-Backed Securities 3,805 3,808 4,528 4,506
Other Securities 150 155 125 129
------------ ------------- ------------ ------------
Total Securities Held
to Maturity 43,804 43,814 45,308 45,364
------------ ------------- ------------ ------------
Trading Securities 623 1,221 581 1,221
- -------------------------------- ------------ ------------- ------------ ------------
TOTAL SECURITIES $603,032 $612,702 $578,436 $587,830
============ ============= ============ ============
</TABLE>
Total deposits decreased $13,026,000 or 1.3%. Time deposits decreased by
$25,898,000, while demand and savings deposits increased $6,960,000 and
$5,912,000, respectively. Short-term borrowings increased by $54,858,000 and
other borrowings increased by $27,274,000, as the Bank continued to utilize
Growth Strategies to increase the investment portfolio. Management continues to
monitor the shift of deposits and level of borrowings through its
Asset/Liability Management Committee.
12
<PAGE>
Asset Quality
At June 30, 1998, non-performing loans decreased $1,558,000 as compared to March
31, 1998 and $1,882,000 as compared to December 31, 1997. Of the decrease in
non-performing loans from March 31, 1998, $1,538,000 was in the real estate loan
portfolio and $106,000 was in the personal loan portfolio. This was partly
offset by an increase of $86,000 in the commercial loan portfolio. The Loan
Review Department reviews the large credits in the performing loan portfolio, as
well as the non-performing loans on a regular basis.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1998 1998 1997 1997 1997
----------- ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Total Assets $1,380,716 $1,345,051 $1,309,836 $1,283,141 $1,217,755
Total Loans (Net of $654,687 $611,712 $613,712 $619,754 $624,949
Unearned Income)
Allowance for Possible
Loan Losses $7,069 $7,064 $7,633 $7,638 $7,682
% of Total Loans 1.08 % 1.15 % 1.24 % 1.23 % 1.23 %
Total Non-Performing
Loans (1) $6,748 $8,306 $8,630 $9,689 $9,034
% of Total Assets 0.49 % 0.62 % 0.66 % 0.76 % 0.74 %
% of Total Loans 1.03 % 1.36 % 1.41 % 1.56 % 1.45 %
Allowance for Possible
Loan Losses to
Non-Performing Loans 104.76 % 85.05 % 88.45 % 78.83 % 85.03 %
Total of Non-Performing
Assets $8,220 $9,970 $10,267 $11,408 $10,636
% of Total Assets 0.59 % 0.74 % 0.78 % 0.89 % 0.87 %
% of Loans, Other Real
Estate Owned and
Other Assets Owned 1.25 % 1.62 % 1.67 % 1.83 % 1.70 %
</TABLE>
(1) Non-performing loans consist of:
(a) impaired loans, which includes non-accrual and renegotiated loans, and
(b)loans which are contractually past due 90 days or more as to principal
or interest, but are still accruing interest at previously negotiated
rates to the extent that such loans are both well secured and in the
process of collection.
13
<PAGE>
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 level of the allowance is
based on Management's evaluation of potential losses in the portfolio, after
consideration of risk characteristics of the loans and prevailing and
anticipated economic conditions. The allowance is increased by provisions
charged to expense and reduced by charge-offs, net of recoveries.
At June 30, 1998, the allowance for possible loan losses was $7,069,000, down
7.4% from the $7,633,000 at year-end 1997. Net charge-offs for the three months
and six months ended June 30, 1998 were $720,000 and $2,264,000, respectively.
Liquidity Management
At June 30, 1998, the amount of liquid assets remained at a level Management
deemed adequate to ensure that contractual liabilities, depositors' withdrawal
requirements, and other operational and customer credit needs could be
satisfied.* This liquidity was maintained at the same time the Company was
managing the interest rate sensitivity of interest earning assets and interest
bearing liabilities so as to improve profitability.
At June 30, 1998, liquid investments, comprised of Federal funds sold and money
market mutual fund instruments, totaled $46,316,000. Additional liquidity is
generated from maturities and principal payments in the investment portfolio.
Scheduled maturities and anticipated principal payments of the investment
portfolio will approximate $161,813,000 throughout the next twelve months.* In
addition, all or part of the investment securities available for sale could be
sold to provide liquidity. These sources can be used to meet the funding needs
during periods of loan growth. Liquidity is also available through additional
lines of credit and the ability to incur additional debt. At June 30, 1998,
there were $240 million of short-term lines of credit, of which $100 million was
available. In addition, the Bank has $8.5 million available on established lines
of credit, which are currently unused, with the Federal Reserve Bank and the
FHLB of New York at June 30, 1998, which further support and enhance liquidity.
Capital
Total stockholders' equity increased $5,118,000 to $116,068,000 at June 30, 1998
from the $110,950,000 recorded at the end of 1997. The increase was due to net
income of $7,480,000, an increase in net unrealized gains on securities
available for sale of $248,000, exercises of stock options of $120,000 and
restricted stock activity of $74,000. These increases were offset in part by
cash dividends declared of $2,804,000.
14
<PAGE>
The following table reflects the Company's capital ratios, as of June 30, 1998
and December 31, 1997, and have been presented in accordance with current
regulatory guidelines.
<PAGE>
<TABLE>
<CAPTION>
(Dollars in Thousands) June 30, 1998 December 31, 1997
---------------------- ---------------------------
Amount Ratio Amount Ratio
----------- --------- --------------- ---------
<S> <C> <C> <C> <C>
Risk-Based Capital
Tier I Capital
Actual $119,882 14.45 % $114,575 14.87 %
Regulatory Minimum
Requirements 33,188 4.00 30,818 4.00
For Classification
as Well Capitalized 49,782 6.00 46,228 6.00
Combined Tier I and
Tier II Capital
Actual 126,951 15.30 122,208 15.86
Regulatory Minimum
Requirements 66,376 8.00 61,637 8.00
For Classification
as Well Capitalized 82,970 10.00 77,046 10.00
Leverage
Actual 119,882 8.96 114,575 8.96
Regulatory Minimum
Requirements 53,537 4.00 51,144 4.00
For Classification
as Well Capitalized 66,921 5.00 63,931 5.00
</TABLE>
The Company's risk-based capital ratios (Tier I and Combined Tier I and Tier II
Capital) and Tier I leverage ratio continue to exceed the minimum requirements
set forth by the Company's regulators. The Tier I ratio and the combined Tier I
and Tier II ratios both decreased from 14.87% to 14.45% and from 15.86% to
15.30%, respectively, while the Tier I leverage ratio was 8.96% at December 31,
1997 and June 30, 1998. The Company's asset growth during the six months ended
June 30, 1998 resulted in the decrease in the risk-based capital ratios.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The primary market risk faced by the Company is interest rate risk. The
Company's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest income in alternative interest rate scenarios. Management
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a 200 basis
point change in rates during the first year, in even monthly increments, with
rates held constant in the second year. The Company's ALCO has established that
interest income sensitivity will be considered acceptable if net interest income
in the above interest rate scenario is within 10% of net interest income in the
flat rate
15
<PAGE>
scenario in the first year and within 15% over the two-year time frame. At June
30, 1998, the Company's income simulation model indicates an acceptable level of
interest rate risk, with no significant change from December 31, 1997.*
Management also monitors interest rate risk by utilizing a market value of
equity model. The model computes estimated changes in net portfolio value
("NPV") of its cash flows from the Company's assets and liabilities in the event
of a change in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities. This analysis assesses the risk of gain or loss in market
risk sensitive instruments in the event of an immediate and sustained 200 basis
point increase or decrease in market interest rates. The Company's ALCO policy
indicates that the level of interest rate risk is acceptable if the immediate
200 basis point change in interest rates would not result in the loss of more
than 30% from the base market value of equity. At June 30, 1998, the market
value of equity indicates an acceptable level of interest rate risk, with no
significant change since December 31, 1997.*
Computation of prospective effects of hypothetical interest rates changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and duration of deposits, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the ALCO could undertake in response to changes in interest rates.
16
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(a) Certificate of Incorporation of the Company as in
effect on July 1, 1997. (Incorporated by reference in
the Company's Report on Form 10-Q for the quarter
ended June 30, 1997 filed with the Securities and
Exchange Commission.)
(3)(b) By-laws of the Company (Incorporated by reference in
the Company's Report on Form 10-K for the year ended
December 31, 1994 filed with the Securities and
Exchange Commission.)
(10) Material Contracts
Agreement and Plan of Merger dated June 25,
1998 by and among United National Bancorp, United
National Bank and State Bank of South Orange
(incorporated by reference to the Company's Report on
Form 8-K filed with the Securities and Exchange
Commission on June 25, 1998).
(27) Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K was filed on July 1, 1998. Under
Item 5 of Form 8-K the intended merger of United
National Bancorp and State Bank of South Orange was
reported. Incorporated by reference were United
National Bancorp's press release dated June 25, 1998
and the Agreement and Plan of Merger and Stock Option
Agreement, both dated June 25, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements 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
(Registrant)
Dated: August 12, 1998 By: /s/Thomas C. Gregor
-------------------
Thomas C. Gregor, Chairman
President and CEO
Dated: August 12, 1998 By: /s/Donald W. Malwitz
---------------------
Donald W. Malwitz
Vice President & Treasurer
(Principal Financial Officer)
18
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule Contains Summary Financial Information Extracted From SEC Form
10-Q and is Qualified in its Entirety by Reference to Such Financial Statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Jun-30-1998
<CASH> 34,018
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,200
<TRADING-ASSETS> 1,221
<INVESTMENTS-HELD-FOR-SALE> 567,667
<INVESTMENTS-CARRYING> 43,804
<INVESTMENTS-MARKET> 43,814
<LOANS> 654,687
<ALLOWANCE> 7,069
<TOTAL-ASSETS> 1,380,716
<DEPOSITS> 974,823
<SHORT-TERM> 134,404
<LIABILITIES-OTHER> 15,441
<LONG-TERM> 119,980
0
0
<COMMON> 11,719
<OTHER-SE> 104,349
<TOTAL-LIABILITIES-AND-EQUITY> 1,380,716
<INTEREST-LOAN> 28,712
<INTEREST-INVEST> 19,041
<INTEREST-OTHER> 353
<INTEREST-TOTAL> 48,119
<INTEREST-DEPOSIT> 15,078
<INTEREST-EXPENSE> 21,039
<INTEREST-INCOME-NET> 27,080
<LOAN-LOSSES> 1,700
<SECURITIES-GAINS> 379
<EXPENSE-OTHER> 24,941
<INCOME-PRETAX> 10,320
<INCOME-PRE-EXTRAORDINARY> 10,320
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,480
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.79
<YIELD-ACTUAL> 4.59
<LOANS-NON> 5,086
<LOANS-PAST> 1,568
<LOANS-TROUBLED> 47
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,633
<CHARGE-OFFS> 2,755
<RECOVERIES> 491
<ALLOWANCE-CLOSE> 7,069
<ALLOWANCE-DOMESTIC> 7,069
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
