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, 1999
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 or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
1130 Route 22 East, Bridgewater, New Jersey 08807-0010
- --------------------------------------------------------------------------------
(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, 1999, there were 15,128,276 shares of common stock, $1.25 par
value, outstanding.
UNITED NATIONAL BANCORP
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
ITEM 1 Consolidated Financial Statements and Notes to
Consolidated Financial Statements 1-11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
ITEM 3 Market Risk - Asset / Liability Management 23
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 24
ITEM 6 Exhibits and Reports on Form 8-K 25
SIGNATURES 26
Part I - Financial Information
Item 1 - Financial Statements
United National Bancorp
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
June 30, December
31,
1999 1998
----------- -----------
ASSETS
Cash and Due from Banks $ 65,239 $ 52,867
Federal Funds Sold 4,500 50,100
Securities Available for Sale, at
Market Value 675,387 609,262
Securities Held to Maturity 39,348 63,374
Trading Account Securities, at
Market Value 1,175 1,239
Loans, Net of Unearned Income 1,136,112 1,056,953
Less: Allowance for Possible Loan Losses 10,690 11,174
----------- -----------
Loans, Net 1,125,422 1,045,779
Mortgage Loans Held for Sale - 128
Premises and Equipment, Net 28,944 29,248
Investment in Joint Venture 1,954 2,931
Other Real Estate, Net 129 507
Intangible Assets, Primarily Core
Deposit Premiums 7,771 9,288
Other Assets 63,443 52,471
----------- -----------
Total Assets $2,013,312 $1,917,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 271,197 $ 263,700
Savings 566,012 549,095
Time 652,745 590,618
----------- -----------
Total Deposits 1,489,954 1,403,413
Short-Term Borrowings 137,624 154,635
Other Borrowings 203,424 154,942
Other Liabilities 27,738 25,962
----------- -----------
Total Liabilities 1,858,740 1,738,952
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 Shares 25,000,000,
Issued Shares 15,229,617 in
1999 and 15,318,038 in 1998,
Outstanding Shares 15,125,883
in 1999 and 15,021,180 in 1998 19,037 19,148
Additional Paid-in Capital 111,091 112,015
Retained Earnings 19,229 25,921
Treasury Stock, at Cost - 103,734
shares in 1999 and
296,858 shares in 1998 (1,352) (4,660)
Restricted Stock (97) (248)
Accumulated Other Comprehensive (13,336) 6,066
(Loss) Income
----------- -----------
Total Stockholders' Equity 134,572 158,242
----------- -----------
Total Liabilities and
Stockholders' Equity $2,013,312 $1,917,194
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
United National Bancorp
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
Three Months Six Months
Ended Ended
June 30, June 30,
----------------- ---------------
1999 1998 1999 1998
-------- -------- ------- ------
INTEREST INCOME
Interest and Fees on Loans $22,558 $21,274 $44,270 $42,403
Interest and Dividends on Securities
Available for Sale:
Taxable 9,102 9,214 17,667 18,146
Tax-Exempt 1,308 716 2,413 1,424
Interest and Dividends on Securities Held
to Maturity:
Taxable 225 943 723 1,966
Tax-Exempt 256 220 511 413
Dividends on Trading Account Securities 9 7 17 13
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 21 502 418 1,242
-------- -------- ------- ------
TOTAL INTEREST INCOME 33,479 32,876 66,019 65,607
-------- -------- ------- ------
INTEREST EXPENSE
Interest on Savings Deposits 2,606 3,065 5,395 6,077
Interest on Time Deposits 8,093 8,293 15,749 17,171
Interest on Short-Term Borrowings 1,427 1,811 3,146 2,744
Interest on Other Borrowings 2,992 2,115 5,549 4,263
-------- -------- ------- ------
TOTAL INTEREST EXPENSE 15,118 15,284 29,839 30,255
-------- -------- ------- ------
Net Interest Income 18,361 17,592 36,180 35,352
Provision for Possible Loan Losses 900 848 1,875 1,946
-------- -------- ------- ------
Net Interest Income After Provision for
Possible Loan Losses 17,461 16,744 34,305 33,406
-------- -------- ------- ------
NON-INTEREST INCOME
Trust Income 1,567 1,438 3,133 2,875
Service Charges on Deposit Accounts 1,139 1,294 2,290 2,614
Other Service Charges, Commissions and Fees 1,663 1,695 3,138 3,308
Net Gains from Securities Transactions 639 231 1,314 387
Other Income 825 748 1,614 1,579
-------- -------- ------- ------
TOTAL NON-INTEREST INCOME 5,833 5,406 11,489 10,763
-------- -------- ------- ------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 5,720 6,342 12,264 12,850
Occupancy Expense, Net 1,246 1,183 2,529 2,398
Furniture and Equipment Expense 1,096 1,375 2,174 2,403
Data Processing Expense 1,346 1,972 2,848 3,887
Distributions of Series B Capital Securities 500 500 1,001 1,001
Amortization of Intangible Assets 81 429 684 859
Non-Recurring Charges 6,185 - 17,258 -
Other Expenses 3,452 3,203 6,928 6,908
-------- -------- ------- ------
TOTAL NON-INTEREST EXPENSE 19,626 15,004 45,686 30,306
-------- -------- ------- ------
Income Before Provision for Income Taxes 3,668 7,146 108 13,863
Provision (Benefit) for Income Taxes 945 2,063 (41) 3,950
======== ======== ======= ======
NET INCOME $ 2,723 $ 5,083 $ 149 $ 9,913
======== ======== ======= ======
NET INCOME PER COMMON SHARE:
Basic $ 0.18 $ 0.34 $ 0.01 $ 0.67
======== ======== ======= ======
Diluted $ 0.18 $ 0.33 $ 0.01 $ 0.65
======== ======== ======= ======
Weighted Average Shares Outstanding:
Basic 15,119 14,737 15,005 14,728
Diluted 15,280 15,193 15,243 15,174
See Accompanying Notes to Consolidated
Financial Statements.
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 December 31, 1998 $19,148 $112,015 $25,921 $(4,660) $ (248) $ 6,066 $158,242
Net Income - - 149 - - - 149
Cash Dividends Declared
$0.20 Per Share - - (6,357) - - - (6,357)
Exercise of Stock Options
(237,127 Shares) 54 561 (484) 1,610 - - 1,741
Change in Unrealized
Gain on
Securities Available
for Sale,
Net of Tax - - - - - (19,402) (19,402)
Retirement of Treasury (168) (1,530) - 1,698 - - -
Stock
Restricted Stock 3 45 - - 151 - 199
Activity, Net
------- -------- -------- -------- -------- -------------- -----------
Balance-June 30, 1999 $19,037 $111,091 $19,229 $(1,352) $ (97) $(13,336) $134,572
======= ======== ======== ======== ======== ============== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
United National Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 149 $ 9,913
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Depreciation and Amortization 2,075 2,188
Amortization of Securities, Net 1,037 712
Provision for Possible Loan Losses 1,875 1,946
(Benefit) Provision for Deferred Income Taxes (1,363) 51
Net (Gain) Loss on Disposition
Of Premises and Equipment (6) 56
Net Gains from Securities Transactions (1,314) (387)
Trading Account Securities Activity, Net 9 -
Decrease (Increase) in Other Assets 3,217 (2,745)
Increase (Decrease) in Other Liabilities 1,776 (1,447)
Restricted Stock Activity, Net 199 74
------------ ------------
Net Cash Provided by Operating Activities 7,654 10,361
------------ ------------
INVESTING ACTIVITIES
Securities Available for Sale:
Proceeds from Sales of Securities 145,146 218,541
Proceeds from Maturities of Securities 39,622 71,333
Purchases of Securities (280,950) (300,800)
Securities Held to Maturity:
Proceeds from Maturities of Securities 30,952 39,137
Purchases of Securities (6,926) (30,800)
Net Increase in Loans (81,390) (79,483)
Expenditures for Premises and Equipment (1,148) (3,341)
Proceeds from Disposal of Premises and Equipment 38 258
Decrease (Increase) in Other Real Estate 378 (16)
------------ ------------
Net Cash Used in Investing Activities (154,278) (85,171)
------------ ------------
FINANCING ACTIVITIES
Net Increase in Demand and Savings Deposits 24,414 27,290
Net Increase (Decrease) in Time Deposits 62,127 (30,577)
Net (Decrease) Increase in Short-Term Borrowings (17,011) 34,910
Net Increase in Other Borrowed Funds 48,482 57,119
Cash Dividends on Common Stock (6,357) (3,585)
Proceeds from Exercise of Stock Options 1,741 231
Purchase of Treasury Stock - (457)
------------ ------------
Net Cash Provided by Financing Activities 113,396 84,931
------------ ------------
Net (Decrease) Increase in Cash and
Cash Equivalents (33,228) 10,121
Cash and Cash Equivalents at Beginning of Period 102,967 85,148
============ ============
Cash and Cash Equivalents at End of Period $ 69,739 $ 95,269
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period:
Interest $ 30,196 $ 31,186
Income Taxes 5,214 6,630
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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 March 31, 1999, the Company acquired Raritan Bancorp Inc. ("Raritan").
The acquisition has been accounted for as a pooling-of-interests and,
accordingly, the financial statements include the accounts and activities of
Raritan for all periods presented. The transaction resulted in the issuance of
4,023,624 shares of the Company's common stock.
In connection with the Raritan acquisition, on March 31, 1999 the Company
recorded a pre-tax merger charge of $9,940,000 which primarily consisted of
estimated severance and outplacement costs of $6,705,000, investment banker and
other professional fees of $2,270,000, expenses related to facilities closures
and fixed asset disposals of $670,000 and consolidation costs directly
attributable to the merger of $295,000. At June 30, 1999, substantially all of
the total merger charge was realized, with no significant changes to amounts
accrued during the first quarter of 1999.
Separate results of the combined entities for the three months ended March 31,
are as follows:
- --------------------------------------------------------------------------------
1999 1998
Net Interest Income After Provision for Possible ------ ------
Loan Losses
The Company $13,346 $13,437
Raritan 3,498 3,225
------ ------
Total 16,844 16,662
Net (Loss) Income
The Company (3,747) 3,827
Raritan 1,173 1,003
------ ----
Total $(2,574) $ 4,830
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities", to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. The Company adopted SFAS No. 134 effective January 1, 1999. The
adoption of this Statement did not have a material impact on the financial
position or results of operations of the Company.
(2) Comprehensive (Loss) Income
Total comprehensive (loss) income amounted to the following for the six month
periods ended June 30:
1999 1998
-------------- ------------
Net Income $ 149 $ 9,913
Change in Unrealized Gain on Securities
Available for Sale (19,402) 231
-------------- ------------
Comprehensive (Loss) Income $(19,253) $10,144
============== ============
(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 the
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 238,000
and 446,000 for the six months ended June 30, 1999 and 1998, respectively. For
the quarters ended June 30, 1999 and 1998, the potential shares of common stock
resulting from stock option agreements totaled 161,000 and 456,000,
respectively.
(4) Pending Dissolution of Joint Venture
In the latter part of 1998, the Company decided to terminate its interest in
United Financial Services, Inc. ("UFS"), its joint venture data service
provider. At that time, the Company anticipated that its joint venture partner
would continue to operate UFS. In connection with its decision to exit the joint
venture, the Company evaluated the estimated lives and salvage values of
equipment, software and leases held by UFS, as well as related goodwill during
the fourth quarter of 1998. Based upon this evaluation, the Company accelerated
depreciation and amortization charges totaling approximately $1,200,000 through
the first quarter of 1999. In April 1999, the Company completed the conversion
of its own data processing operations to an independent third-party provider.
In June 1999, the Company was advised that its joint venture partner signed a
definitive agreement with a third party servicer and would not continue to
operate UFS on an ongoing basis. In light of that development, the Company
expects that UFS will eventually cease operations, that the value of the
Company's interest in UFS carried on the Company's balance sheet at $2,704,000
at March 31, 1999 may be substantially less than it would have been had UFS
continued in operation, and that the Company may incur liabilities in connection
with the obligations of UFS under operating leases which remain in effect at the
time UFS is dissolved, to the extent such liabilities are not assumed by the
joint venture partner's servicer.
The Company reevaluated the potential losses associated with UFS based upon its
joint venture partner's decision to exit the operations of UFS. Based upon this
reevaluation, the Company recognized an additional charge of $4,500,000,
pre-tax, during the second quarter of 1999 relating to the pending dissolution
of UFS. The additional charge related primarily to write-offs of leasehold
improvements of $500,000, equipment and software of $900,000 and accrual for
lease buyouts of $2,900,000 and severance payments of $200,000.
Ultimately, the Company's potential loss on its investment in UFS and liability
for 50% of UFS' obligations to lessors could be reduced based upon, among other
things, the amount of time the Company's joint venture partner continues to run
the operations of UFS during the dissolution process, the ability of UFS to
negotiate discounts with lessors, and the Company's ability to obtain
compensation for the use of the equipment and leases of UFS by a third party
subsequent to dissolution. The Company's joint venture partner has informed the
Company that it anticipates operating UFS through at least October 1999, and
that the third-party that will undertake its data processing functions
thereafter will require use of some of the equipment and facilities through at
least April 2000. Changes in either or both dates mentioned in the preceding
sentence could impact the Company's estimated loss related to UFS.
(5) Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. Summary financial information on a fully taxable equivalent basis for
the lines of business is
presented below.
<TABLE>
<CAPTION>
Results of Operations for
The Three Months Ended June 30, 1999 Retail Commercial Investments Trust Corporate Raritan Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 8,120 $ 7,114 $ 13,434 $ - $ - $ 5,637 $ 34,305
Interest Expense 7,770 456 4,126 - - 2,766 15,118
Funds Transfer Pricing Allocation 8,166 (4,849) (6,559) (10) 3,252 - -
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 8,516 1,809 2,749 (10) 3,252 2,871 19,187
Provision for Loan Losses 1,088 (188) - - - - 900
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 7,428 1,997 2,749 (10) 3,252 2,871 18,287
Non-Interest Income 2,708 285 594 1,608 426 212 5,833
Non-Interest Expense 10,016 1,547 60 1,256 177 17 13,073
Merger & Other Unallocated Expenses - - - - 6,553 - 6,553
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 120 $ 735 $ 3,283 $ 342 $ (3,052) $ 3,066 $ 4,494
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,135,479 $ 23,317 $ 320,959 $ (753) $179,541 $306,169 $1,964,712
Funds Used: Interest-Earning Assets 435,190 385,135 717,601 - - 294,703 1,832,629
Non-Interest-Earning Assets 10,808 - - - 109,809 11,466 132,083
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 689,481 $(361,818) $(396,642) $ (753) $ 69,732 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Results of Operations for
The Three Months Ended June 30, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 7,649 $ 6,959 $ 11,339 $ - $ - $ 7,448 $ 33,395
Interest Expense 6,727 539 3,884 - - 4,134 15,284
Funds Transfer Pricing Allocation 8,754 (3,762) (6,915) (2) 1,925 - -
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,676 2,658 540 (2) 1,925 3,314 18,111
Provision for Loan Losses 537 236 - - - 75 848
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 9,139 2,422 540 (2) 1,925 3,239 17,263
Non-Interest Income 2,524 257 272 1,439 583 331 5,406
Non-Interest Expense 10,271 966 58 972 - 2,115 14,382
Unallocated Expenses - - - - 622 - 622
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 1,392 $ 1,713 $ 754 $ 465 $ 1,886 $ 1,455 $ 7,665
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,044,271 $ 6,571 $ 13,732 $ (113) $342,070 $443,267 $1,849,798
Funds Used: Interest-Earning Assets 406,015 262,222 607,192 - - 424,795 1,700,224
Non-Interest-Earning Assets 2,200 - - - 128,902 18,472 149,574
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 636,056 $(255,651) $(593,460) $ (113) $213,168 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Results of Operations for
The Six Months Ended June 30, 1999 Retail Commercial Investments Trust Corporate Raritan Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 16,423 $ 14,836 $ 23,534 $ - $ - $ 12,765 $ 67,558
Interest Expense 15,310 724 7,484 - - 6,321 29,839
Funds Transfer Pricing Allocation 16,485 (9,482) (12,406) (13) 5,416 - -
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 17,598 4,630 3,644 (13) 5,416 6,444 37,719
Provision for Loan Losses 1,606 194 - - - 75 1,875
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 15,992 4,436 3,644 (13) 5,416 6,369 35,844
Non-Interest Income 5,087 520 1,387 3,176 815 504 11,489
Non-Interest Expense 20,407 3,073 114 2,531 231 2,012 28,368
Merger & Other Unallocated Expenses - - - - 17,318 - 17,318
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 672 $ 1,883 $ 4,917 $ 632 $(11,318) $ 4,861 $ 1,647
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,118,761$ 18,627 $ 282,169 $ (512) $169,457 $364,196 $1,952,698
Funds Used: Interest-Earning Assets 427,004 375,264 664,719 - - 346,938 1,813,925
Non-Interest-Earning Assets 8,950 - - - 112,565 17,258 138,773
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 682,807 $(356,637) $(382,550) $ (512) $ 56,892 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Results of Operations for
The Six Months Ended June 30, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 17,464 $ 13,033 $ 21,410 $ - $ - $ 14,696 $ 66,603
Interest Expense 15,196 588 6,389 - - 8,082 30,255
Funds Transfer Pricing Allocation 17,635 (7,266) (13,427) (3) 3,061 - -
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 19,903 5,179 1,594 (3) 3,061 6,614 36,348
Provision for Loan Losses 1,211 585 - - - 150 1,946
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 18,692 4,594 1,594 (3) 3,061 6,464 34,402
Non-Interest Income 5,363 539 408 2,878 949 626 10,763
Non-Interest Expense 20,969 1,883 108 1,879 - 4,216 29,055
Unallocated Expenses - - - - 1,251 - 1,251
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 3,086 $ 3,250 $ 1,894 $ 996 $ 2,759 $ 2,874 $ 14,859
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,061,649 $ 4,395 $ 102,903 $ (97) $229,337 $425,338 $1,823,525
Funds Used: Interest-Earning Assets 423,562 252,156 599,790 - - 406,200 1,681,708
Non-Interest-Earning Assets 9,150 - - - 113,529 19,138 141,817
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 628,937 $(247,761) $(496,887) $ (97) $115,808 $ - $ -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, 1999 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, 1999 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; Year 2000 compliance
programs not addressing Year 2000 computer problems effectively; 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, 1999 and June 30, 1998:
OVERVIEW
The Company realized net income of $2,723,000 for the second quarter of 1999, as
compared to net income of $5,083,000 reported for the same period in 1998. The
second quarter of 1999 included non-recurring charges, net of taxes, totaling
$4,020,000 or $0.26 per diluted share. The non-recurring charges are in
connection with the Bank's recently completed conversion to a new operating
system as well as dissolution of the Bank's joint venture in United Financial
Services. Earnings per diluted share were $0.18 for the second quarter of 1999
as compared to $0.33 for the prior year.
Second quarter 1999 operating earnings, net of taxes, totaled $6,743,000 or
$0.44 per diluted share before non-recurring charges. This represents an
increase of $1,660,000 or 32.7% from operating earnings of $5,083,000 for the
three months ended June 30, 1998.
For the six months ended June 30, 1999, net income totaled $149,000, as compared
to $9,913,000 for the same period last year. Earnings per diluted share were
$0.01 and $0.65, respectively. During the first quarter of 1999, the Company
recorded non-recurring charges, net of taxes, totaling $7,992,000 in connection
with the acquisition of Raritan and the sale of non-performing assets. Operating
earnings, net of taxes, totaled $12,161,000 or $0.80 per diluted share before
non-recurring charges for the six months ended June 30, 1999. This represents an
increase of $2,248,000 or 22.7% from operating earnings of $9,913,000 for the
six months ended June 30, 1998.
The increase in earnings before non-recurring charges for the three and six
months ended June 30, 1999 compared to 1998 was primarily the result of
increases in net interest income and non-interest income combined with a
reduction in non-interest expense. These improvements are largely attributable
to economies of scale and cost reductions realized as a result of the Raritan
acquisition and the acquisition of State Bank of South Orange (SBSO) which was
completed in the third quarter of 1998.
EARNINGS ANALYSIS
Interest Income
Interest income for the quarter ended June 30, 1999 was $33,479,000, an increase
of $603,000 or 1.8% from the $32,876,000 reported for the same period in 1998.
For the six months ended June 30, 1999, interest income totaled $66,019,000, an
increase of $412,000 or 0.6% from the $65,607,000 reported for the same period
in 1998. These increases are primarily attributable to increases in earning
asset volume. For the three and six months ended June 30, 1999, average interest
earning assets were up 7.7% compared with the same periods in 1998, with most of
the growth coming in the real estate and commercial loan categories. The
increase in interest income resulting from increases in earning asset volume was
partially offset by a reduction in average yield. For the six months ended June
30, 1999, the average yield on earning assets declined 48 basis points to 7.47%
from 7.95% for the same period last year.
Interest Expense
The Company's interest expense for the second quarter of 1999 decreased
$166,000, or 1.1%, to $15,118,000 from $15,284,000 for the same period last
year. For the six months ended June 30, 1999, interest expense decreased by
$416,000, or 1.4%, to $29,839,000 from $30,255,000 for the same period last
year. The average cost of interest bearing liabilities declined 35 basis points
to 3.97% for the first half of 1999 from 4.32% for the six months ended June 30,
1998, primarily as a result of reductions in rates paid on deposits and
short-term borrowed funds. Total average interest bearing liabilities increased
by $100,405,000 for the first six months of 1999 compared to the same period in
1998, while non-interest bearing deposits increased by $25,588,000.
Net Interest Income
The net effect of the changes in interest income and interest expense for the
second quarter of 1999 was an increase of $769,000 or 4.4% in net interest
income as compared to the second quarter of 1998. For the six months ended June
30, 1999, net interest income increased $828,000 or 2.3% compared with the same
period last year. For the six months ended June 30, 1999, the net interest
margin and net interest spread, on a fully taxable equivalent basis, decreased
16 basis points and 13 basis points, respectively, from the same period last
year.
Provision for Possible Loan Losses
For the three months ended June 30, 1999, the provision for possible loan losses
was $900,000, compared to $848,000 for the same period last year. The provision
for possible loan losses was $1,875,000 for the six months ended June 30, 1999,
as compared to $1,946,000 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.
Non-Interest Income
For the second quarter of 1999, compared to the second quarter of 1998, total
non-interest income increased $427,000 or 7.9%, due primarily to increases of
$129,000 in trust income and $408,000 in net securities gains, partially offset
by reductions in service charges and fees.
For the first half of 1999, compared to the first half of 1998, total
non-interest income increased $726,000 or 6.7%, due primarily to increases of
$258,000 in trust income and $927,000 in net securities gains, partially offset
by reductions in service charges and fees.
Non-Interest Expense
For the quarter ended June 30, 1999, non-interest expense increased $4,622,000
from the same period last year. Included in the second quarter of 1999 were
non-recurring charges totaling $6,185,000, pre-tax, related to the Bank's
recently completed conversion to a new operating system as well as the
dissolution of the Bank's joint venture in UFS. Excluding these charges,
non-interest expense decreased by $1,563,000 or 10.4% from 1998. Data processing
expense declined by $626,000, or 31.7% as a result of reductions in fees charged
by UFS and conversion to a new operating system. UFS, a data processing joint
venture, is 50% owned by the Company. As described in Note 4, the Company has
decided to terminate its joint venture in UFS. See note 4 for a discussion of
the potential impact on future results of operations. Salaries and benefits
expense declined by $622,000 or 9.8% as a result of efficiencies realized in
connection with the Raritan and SBSO acquisitions. Amortization of intangible
assets decreased by $348,000 or 81.1% during the second quarter of 1999 compared
with 1998 due to the pending termination of the Company's joint venture in UFS.
For the six months ended June 30, 1999, non-interest expense increased
$15,380,000 from the same period last year. Included in the first half of 1999,
in addition to the items discussed above, were non-recurring charges related to
the Raritan acquisition and the sale non-performing assets totaling $11,073,000,
pre-tax. Excluding non-recurring charges, non-interest expense decreased by
$1,878,000 or 6.2% from 1998. Data processing expense declined by $1,039,000, or
26.7%. Salaries and benefits expense declined by $585,000 or 4.6%. Amortization
of intangible assets decreased by $175,000 or 20.4%. These reductions in
non-interest expense for the six months ended June 30, 1999 vs. 1998 are
attributable to the same factors discussed above in the quarterly comparison.
Income Taxes
Income tax expense declined by $1,118,000 to $945,000 for the second quarter of
1999 as compared to $2,063,000 for the same period in 1998. For the six months
ended June 30, 1999 income tax expense declined by $3,991,000, resulting in a
tax benefit of $41,000 as compared to expense of $3,950,000 for the same period
in 1998. These declines are attributable to reductions in taxable income
primarily resulting from non-recurring charges and increases in tax exempt
income associated with municipal securities and corporate owned life insurance
policies.
Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. Summary financial information on a fully taxable equivalent basis for
the lines of business is presented in Note 5.
The Corporate segment accounted for a pre-tax loss of $3,052,000 for the three
months ended June 30, 1999, down from pre-tax income of $1,886,000 for the same
period a year ago. The decrease in net income before taxes is primarily
attributable to non-recurring charges pertaining to the Company's conversion to
a new operating system and the pending dissolution of UFS totaling $6,185,000.
The Retail segment's contribution to net income before taxes declined to
$120,000 for the three months ended June 30, 1999, down from $1,392,000 for the
second quarter of 1998. This decrease was primarily due to a reduction in net
interest income resulting from a decline in average earning assets coupled with
a decrease in earning asset yields.
The Commercial segment produced net income before taxes of $735,000 in the
second quarter of 1999, down from $1,713,000 for the same period in 1998. This
decline is primarily attributable to lower earning asset yields in 1999.
Investment segment net income before taxes totaled $3,283,000 for the second
quarter of 1999, up from $754,000 in 1998 as a result of increases in earning
asset volume and an increase in net securities gains.
The Raritan segment's contribution to net income before taxes for the second
quarter of 1999 grew by $1,611,000 over the same period in 1998, primarily as a
result of reductions in non-interest expense attributable to the merger with and
into the Company, and a lower cost of funds.
For the second quarter of 1999 compared with 1998, pre-tax net income from the
Trust division fell $123,000 due to an increase in non-interest expense.
For the six months ended June 30, 1999, the Corporate segment accounted for a
pre-tax loss of $11,318,000, down from pre-tax income of $2,759,000 for the same
period a year ago. The decrease in net income before taxes is primarily
attributable to merger related charges totaling $9,940,000 in 1999, as well as
non-recurring charges pertaining to the Company's conversion to a new operating
system and the pending dissolution of UFS totaling $6,185,000.
The Retail segment's contribution to net income before taxes declined to
$672,000 for the six months ended June 30, 1999, down from $3,086,000 for the
first half of 1998. This decrease was primarily due to a reduction in net
interest income resulting from a decline in average earning assets coupled with
a decrease in earning asset yields.
The Commercial segment produced net income before taxes of $1,883,000 in the
first half of 1999, down from $3,250,000 for the same period in 1998. This
decline is attributable to lower earning asset yields and losses incurred on the
sale of non-performing assets in 1999.
Investment segment net income before taxes totaled $4,917,000 for the first six
months of 1999, up from $1,894,000 in 1998 as a result of increases in earning
asset volume and an increase in net securities gains.
The Raritan segment's contribution to net income before taxes grew by $1,987,000
for the six months ended June 30, 1999 compared with the same period in 1998,
primarily as a result of reductions in non-interest expense attributable to the
merger with and into the Company, and a lower cost of funds.
Pre-tax net income from the Trust division fell $364,000 for the six months
ended June 30, 1999 compared with the same period in 1998 due to an increase in
non-interest expense.
FINANCIAL CONDITION
June 30, 1999 as compared to December 31, 1998:
Total assets increased $96,118,000 or 5.0% from December 31, 1998. Loans
increased by $79,515,000, net of allowance, securities increased by $42,035,000,
cash and due from banks increased by $12,372,000, and other assets increased by
$10,972,000. Conversely, there were decreases of $45,600,000 in Federal funds
sold, $1,517,000 in intangible assets, $977,000 in investment in joint venture,
$378,000 in other real estate owned, and $304,000 in premises and equipment.
Total loans at June 30, 1999 increased $79,031,000 to $1,136,112,000 from
year-end 1998. Commercial loans contributed $92,744,000 to the first half loan
growth, an increase of 42.3% over December 31, 1998. Lease financing grew by
$3,004,000 or 27.2% compared with December 31, 1998. Partially offsetting these
increases, real estate loans, primarily adjustable rate mortgages, decreased by
$11,169,000 or 1.7% compared with year-end 1998. In addition, installment loans
decreased $6,233,000 or 3.4% from December 31, 1998 as a result of loan payments
on the indirect automobile loan portfolio exceeding new loan growth.
The following schedule presents the components of gross loans, by type, for each
period presented.
June 30, December 31,
(In Thousands) 1999 1998
----------- -----------
Commercial $ 311,673 $ 218,929
Real Estate 641,070 652,239
Lease Financing 14,026 11,022
Installment 175,289 181,522
----------- -----------
Total Loans Outstanding 1,142,058 1,063,712
Less: Unearned Income 5,946 6,631
----------- -----------
Loans, Net of Unearned Income $1,136,112 $1,057,081
=========== ===========
Within the securities portfolio, the majority of the increase was due to
purchases of tax exempt municipal securities and U.S. Government Agency issues,
including mortgage-backed securities.
The amortized cost and approximate market value of securities are summarized as
follows (in thousands):
June 30, 1999 December 31, 1998
-------------------- --------------------
Amortized Market Amortized Market
Securities Available for Sale Cost Value Cost Value
- -------------------------------- -------- --------- -------- --------
U.S. Treasury Securities $ 1,001 $ 1,003 $ 2,502 $ 2,514
Obligations of U.S. Government
Agencies and Corporations 97,711 91,808 66,872 66,933
Obligations of States and
Political Subdivisions 107,783 105,980 76,930 79,484
Mortgage-Backed Securities 405,335 389,826 388,564 391,123
Corporate Debt Securities 32,914 31,533 23,343 24,000
Other Securities 51,756 55,237 41,830 45,208
-------- --------- -------- --------
Total Securities Available For Sale 696,500 675,387 600,041 609,262
-------- --------- -------- --------
Securities Held to Maturity
- --------------------------------
U.S. Treasury Securities 5,000 4,978 2,000 2,020
Obligations of U.S. Government
Agencies and Corporations 4,995 4,797 14,994 15,010
Obligations of States and
Political Subdivisions 23,856 22,812 22,141 22,445
Mortgage-Backed Securities 5,322 5,278 24,089 24,045
Other Securities 175 178 150 155
-------- --------- -------- --------
Total Securities Held to Maturity 39,348 38,043 63,374 63,675
-------- --------- -------- --------
Trading Securities 684 1,175 675 1,239
- -------------------------------- -------- --------- -------- --------
Total Securities $736,532 $714,605 $664,090 $674,176
======== ========= ======== ========
Total deposits increased $86,541,000 or 6.2%. Time deposits increased by
$62,127,000, while savings deposits increased $16,917,000. Demand deposits
increased by $7,497,000. Short-term borrowings decreased by $17,011,000 while
other borrowings increased by $48,482,000, as the Bank continued to utilize
Growth Strategies to increase the loan and investment portfolios. Management
continues to monitor the shift of deposits and level of borrowings through its
Asset/Liability Management Committee.
Asset Quality
During the first quarter of 1999, the Company sold non-performing assets having
a carrying value of $4,465,000, resulting in a one-time charge of $736,000, net
of tax. The following table provides an analysis of non-performing assets as of
June 30, 1999 and December 31, 1998, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
June 30, December 31, December 31, December 31, December 31,
(Dollars in Thousands) 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Assets $2,013,312 $1,917,194 $1,789,426 $1,550,129 $1,489,773
Total Loans (Net of
Unearned Income) $1,136,112 $1,057,081 $ 931,266 $ 898,788 $ 812,985
Allowance for Possible
Loan Losses $ 10,690 $ 11,174 $ 11,739 $ 11,874 $ 11,440
% of Total Loans .94% 1.06 % 1.26% 1.32% 1.41%
Total Non-Performing Loans $ 5,428 $ 8,612 $ 9,973 $ 13,018 $ 10,314
(1)
% of Total Assets 0.27% 0.45% 0.56% 0.84% 0.69%
% of Total Loans .48% 0.81% 1.07% 1.45% 1.27%
Allowance for Possible
Loan Losses to
Non-Performing Loans 196.94% 129.75% 117.71% 91.21% 110.92%
Total of Non-Performing Assets $ 5,562 $ 9,170 $ 11,650 $ 15,163 $ 13,609
% of Total Assets 0.28 % 0.48% 0.65% 0.98% 0.91%
</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.
At June 30, 1999, there were $3,182,000 of loans that are considered to be
impaired under SFAS No. 114. There was one troubled debt restructuring of
$35,000, which is performing in accordance with the restructured agreement.
For the six months ended June 30, 1999, the Company recognized no interest
income on impaired loans.
Allowance for Possible Loan Losses
The allowance is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries. At June 30, 1999, the allowance for possible
loan losses was $10,690,000, down from $11,174,000 at year-end 1998. Net
charge-offs for the six months ended June 30, 1999 were $1,566,000. In addition,
the allowance was reduced by $793,000 in connection with the sale of
non-performing loans.
The level of the allowance for possible loan losses is 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.
The allowance for possible loan losses declined from December 31, 1998 despite
overall growth in the loan portfolio, primarily as a result of management's
assessment of improvements in credit quality attributable to the sale of
$3,859,000 in non-performing loans. At June 30, 1999, the ratio of the allowance
for possible loan losses to non-performing loans was 196.94% as compared to
129.75% at December 31, 1998. In the opinion of Management, the allowance for
possible loan losses at June 30, 1999 was adequate to absorb possible future
losses on existing loans and commitments based upon currently available
information.*
Liquidity Management
At June 30, 1999, 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, 1999, liquid investments, comprised of money market mutual fund
instruments, totaled $35,859,000. 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 $120,000,000 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, 1999, the Company had
$583,020,000 of lines of credit under which $341,048,000 was available.
Capital
Total stockholders' equity decreased $23,670,000 to $134,572,000 at June 30,
1999 from the $158,242,000 recorded at the end of 1998. The decrease was due to
cash dividends declared totaling $6,357,000, and a decrease in net unrealized
gains on securities available for sale of $19,402,000, partially offset by
exercises of stock options of $1,741,000, restricted stock activity of $199,000,
and net income of $149,000.
The following table reflects the Company's capital ratios, as of June 30, 1999
and December 31, 1998 in accordance with current regulatory guidelines.
(Dollars in Thousands) June 30, 1999 December 31, 1998
------------------ --------------------
Amount Ratio Amount Ratio
----------- ------ ------------ ------
Risk-Based Capital
Tier I Capital
Actual $159,741 11.98% $163,304 13.53%
Regulatory Minimum Requirements 53,325 4.00 48,276 4.00
For Classification as Well
Capitalized 79,988 6.00 72,414 6.00
Combined Tier I and Tier II Capital
Actual 170,431 12.78 174,139 14.43
Regulatory Minimum Requirements 106,651 8.00 96,552 8.00
For Classification as Well
Capitalized 133,314 10.00 120,690 10.00
Leverage
Actual 159,741 8.17 163,304 8.51
Regulatory Minimum Requirements 78,221 4.00 76,777 4.00
For Classification as Well
Capitalized 97,776 5.00 95,971 5.00
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.
Year 2000 Issue
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past, many computer programs allocated
only two digits to a year, (i.e., 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 that
utilizes processors or computer microchips.
Management has formed a Year 2000 Committee with members from all significant
areas of the Company, which has conducted a complete review of its operations to
identify systems, computer hardware, software applications, vendors and
customers that could be affected by the Year 2000 issue. The committee has
developed an implementation plan (the "Plan") to rectify any issues related to
processing of transactions in the Year 2000 and beyond. Progress versus the Plan
is subject to periodic examination by the Office of the Comptroller of the
Currency ("OCC") regulators. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
awareness, assessment, renovation, validation and implementation. These phases
are designed to enable the Company to identify risks, develop an action plan,
and perform adequate testing and complete certification that all systems will be
Year 2000 ready.
As of June 30, 1999, the Company completed all five phases of the Plan, thereby
meeting all regulatory guidelines. The primary operating software systems for
the Company are obtained from and maintained by multiple external providers. The
Company maintains ongoing contact with these vendors who have provided written
assurances that where necessary, their software has been remediated and is now
Year 2000 compliant. As part of the validation phase, the Company tested these
systems for Year 2000 compliance.
The Company has also obtained certifications of Year 2000 compliance from
substantially all other vendors, while also defining contingencies for these
vendors. In the event the Company is unable to obtain such certifications, the
Company will either obtain Year 2000 compliant software, hardware and support
services, or utilize the respective contingency, as appropriate. Each of the
vendors, whose products or services are believed by management to be material to
the Company, has either provided written assurance that it is Year 2000
compliant or has provided written assurance that it expects to be Year 2000
compliant prior to the Year 2000. The Company believes that the risk associated
with the possibility of a processing failure being experienced by any of these
vendors is minimal. This assessment is based on a number of factors. Extensive
documentation has been provided throughout the progress of each vendor's Year
2000 project. Each vendor asserts that it completed its remediation efforts
prior to December 31, 1998. Each vendor asserts that it completed its internal
testing as of December 31, 1998, and the Company has been involved in extensive
user testing of each of these applications. In addition, the Company has
contacted all non-information technology suppliers (i.e., utility systems,
telephone systems and security systems) regarding their Year 2000 state of
readiness.
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 has received information from 100% of significant borrowers and 89% of
significant depositors on the status of their Year 2000 readiness. There have
been no resulting downgrades of risk ratings in the loan portfolio. Early in
1997, the Loan Division of UNB commenced an initiative to familiarize the Bank's
borrowing customer base with the Year 2000 issue. The original action was to
discuss the issue with our borrowers and to identify where they were in
relationship to Year 2000 remediation. The next step was to include a synopsis
of each borrower's status in their Credit Assessment. An unsatisfactory response
would then affect overall risk rating assessment of the credit.
The Company, however, continues to bear some risk related to the Year 2000 issue
and could be adversely affected if other entities (e.g., vendors) do not
appropriately address their own compliance issues. If an external provider's
software is determined to have potential problems which it is not able to
resolve in time, the Company would likely experience significant processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial statements of the Company. In
addition, if any of the Bank's borrowers' experiences significant problems due
to Year 2000 issues, the credit risk inherent in loans to such borrowers would
increase.
The Company continues to evaluate the estimated costs associated with attaining
Year 2000 readiness. Additional costs, such as testing, software purchases and
marketing, are not anticipated to be material to the Company in any one year*.
In total the Company estimates that its costs for compliance will amount to
approximately $750,000 over the two-year period from 1998-1999, of which
approximately $550,000 has been incurred to date. The Company expects to fund
these costs out of normal operating cash. While additional costs will be
incurred, the Company believes, based upon available information, that it will
be able to manage its Year 2000 transition without any significant adverse
effect on business operations or financial condition.*
The Company has completed a remediation contingency plan for Year 2000
compliance for its mission critical applications. The remediation contingency
plan outlines the actions to be taken if the current approach to remediating
mission critical applications does not appear to be able to deliver a Year 2000
compliant system when required. Predetermined target dates have been established
for all mission critical applications. If testing of the mission critical
application is not completed by the target date, then alternative actions would
be taken as outlined in the remediation contingency plan. In addition, the
Company also has a comprehensive business resumption plan to facilitate timely
restoration of services in the event of business disruption. The Company's
remediation contingency plan and business resumption plan will be reviewed and
updated as needed throughout 1999. The Company has prepared a contingency plan
for all other hardware, software and vendors.
Item 3 - MARKET RISK - ASSET/LIABILITY MANAGEMENT.
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 scenario in the first year and within 20% over the two-year time
frame. At June 30, 1999, the Company's income simulation model indicates an
acceptable level of interest rate risk, with no significant change from December
31, 1998.*
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 25% from the base market value of equity. At June 30, 1999, the market
value of equity indicates an acceptable level of interest rate risk, with no
significant change since December 31, 1998.*
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.
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
On or about April 16, 1999, the Company mailed to its shareholders a proxy
statement ("Proxy Statement") for the purpose of soliciting proxies for use at
its Annual Meeting of Shareholders. The proxies were solicited pursuant to
Regulation 14A under the Securities Exchange Act of 1934 and there were no
solicitations in opposition thereto.
At the Annual Meeting, held on May 18, 1999, the shareholders approved the
following proposals set forth in the Proxy Statement, by the votes indicated:
1. Election of the seven (7) directors nominated by the Company's Board of
Directors to serve until the expiration of their terms and thereafter
until their successors shall have been duly elected and have been
qualified. The vote tabulation with respect to each nominee for
director is as follows:
Term Affirmative Votes
Director Expiration Votes Against
C. Douglas Cherry 2002 9,190,371 137,450
Thomas C. Gregor 2002 9,190,453 137,368
William T. Kelleher, Jr. 2000 9,185,079 142,742
Patricia A. McKiernan 2002 9,184,742 143,079
Arlyn D. Rus 2000 9,190,603 137,218
David R. Walker 2002 9,190,453 137,368
George J. Wickard 2002 9,188,093 139,728
The following directors' terms of office continued after the meeting:
George W. Blank
Donald A. Buckley
Charles E. Hance
John R. Kopicki
Antonia S. Marotta
John W. McGowan III
Charles N. Pond, Jr.
Paul K. Ross
Ronald E. West
2. Amendment to the Corporation's Certificate of Incorporation increasing
the authorized common stock of the Corporation from 16,000,000 to
25,000,000. The vote tabulation with respect to this proposal is as
follows:
Affirmative Votes Votes
Votes Against Abstained
8,156,204 1,133,216 38,399
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(a) Certificate of Incorporation of the Company as in effect on
the date of this filing. (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.)
(27) Financial Data Schedule
(b) Reports on Form 8-K
On April 15, 1999 the Company reported on Form 8-K under
Items 2 and 5, the completion of the acquisition of Raritan
Bancorp Inc. by United National Bancorp.
On April 28, 1999 the Company reported on Form 8-K its results
of operations for the quarter ended March 31, 1999.
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 13, 1999 By: THOMAS C.GREGOR
Thomas C. Gregor, Chairman
President and CEO
Dated: August 13, 1999 By: DONALD W. MALWITZ
Donald W. Malwitz
Vice President & Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule containd summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000831959
<NAME> United National Bancorp
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
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