SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] 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 (I.R.S. EmployerIdentification Number)
incorporation or organization)
1130 Route 22 East
Bridgewater, New Jersey 08807
(Address of principal executive offices) (ZIP CODE)
(908) 429-2200
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock $1.25 par value NASDAQ National Market System
(Title of each class) (Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The aggregate market value of United National Bancorp's common stock held by
non-affiliates, as of March 1, 1999 amounted to $251,840,655.
The number of shares of Registrant's Common Stock, $1.25 par value,
outstanding as of March 1, 1999 was 11,192,918.
Documents Incorporated by Reference
Part(s) Into
Documents Which Incorporated
United's Annual Report to Shareholders
for the year ended December 31, 1998
("United's 1998 Annual Report"),
Financial Review section pages 1 through 59. Part I, Part II
United's Proxy Statement to be used in
connection with the Annual Meeting of
Shareholders which is anticipated to be
held on May 18, 1999 ("United's Proxy
Statement for its 1999 Annual Meeting")
under the captions "Election of Directors",
"Stock Ownership of Management and
Principal Shareholder", "Executive Compensation",
and "Compensation Committee Interlocks and
Insider Participation". Part III
With the exception of information specifically incorporated by reference,
United's 1998 Annual Report and United's Proxy Statement for its 1999 Annual
Meeting are not deemed to be part of this report.
PART I
Item 1 - Business
(a) General Development of Business
United National Bancorp ("United", "Registrant" or the "Company") is a bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "Board") under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). United was incorporated by United National Bank (the "Bank") in the
State of New Jersey on August 13, 1987 and commenced operations August 1, 1988
as a bank holding company for the Bank. The corporate headquarters of both
United and the Bank are located at 1130 Route 22 East, Bridgewater, New Jersey,
and the phone number is (908) 429-2200.
As of December 31, 1998, United had consolidated assets of approximately $1.9
billion, deposits of $1.4 billion and stockholders' equity of $158.2 million.
Banking Subsidiary
The Bank, a wholly-owned subsidiary of United, is a commercial bank established
in 1902 under the laws of the United States of America. The Bank is a member of
the Federal Reserve System and the Federal Home Loan Bank and its deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is
headquartered in Bridgewater, New Jersey and operates 35 branches throughout
Central New Jersey. The Bank operates seven branches in Hunterdon County, three
branches in Middlesex County, one branch in Morris County, thirteen branches in
Somerset County, six branches in Union County and five branches in Warren
County, New Jersey. The Bank also operates 39 automatic teller machines ("ATMs")
affiliated with the MAC System, an eight-state network with membership in the
Plus Nationwide network and Honor, a Florida network.
The Bank provides a full range of commercial and retail bank services, including
the acceptance of demand, savings and time deposits. The Bank also provides
retail and commercial loans and mortgages to a variety of individuals and
businesses and offers full personal, corporate and pension trust and other
fiduciary services.
Growth of United National Bank
On January 23, 1995, the Bank acquired from the Resolution Trust Corporation
("RTC") two branches of the former Carteret Federal Savings Bank. In connection
with the acquisition, the Bank assumed deposits, including accrued interest, of
approximately $99 million. The Bank paid a premium of approximately $11.7
million to the RTC in the transaction.
On June 30, 1995, the Bank acquired all of the outstanding shares of New Era
Bank ("New Era") based in the Somerset section of Franklin Township, New Jersey.
Each share of New Era was converted into 0.7431 shares of the Company's common
stock, for a total of 684,904 shares issued, not adjusted for subsequent stock
dividends and splits. At the time of the acquisition, New Era had approximately
$120 million in assets. The acquisition was accounted for as a
pooling-of-interests.
On November 3, 1995, the Bank and Hudson United Bank ("Hudson") formed a joint
venture under which each now participates equally as owners of a financial
services corporation providing data processing, check processing, management
information services and other automated record keeping functions for the two
banks. The financial services corporation, known as United Financial Services,
Inc., is located in Mahwah, New Jersey. The investment is being accounted for by
the equity method of accounting. The Bank and Hudson have resolved to dissolve
the joint venture and the Company has entered into a contract with a third-party
servicer to provide data processing services.
On February 28, 1997, the Bank acquired all of the outstanding shares of
Farrington based in North Brunswick, New Jersey. Each share of Farrington was
converted into 0.7647 shares of the Company's common stock, for a total of
549,212 shares issued, not adjusted for subsequent stock dividends and splits.
At the time of the acquisition, Farrington had approximately $60 million in
assets. The acquisition was accounted for as a pooling-of-interests.
On March 21, 1997, the Company privately placed $20 million in capital
securities pursuant to Rule 144A under the Securities Act of 1933. The 10.01%
capital securities represent a preferred beneficial interest in the assets of
UNB Capital Trust I, a statutory business trust. The Trust exists for the sole
purpose of issuing the trust securities and investing the proceeds in 10.01%
Junior Subordinated Debentures of the Company due March 15, 2027, which are the
sole assets of the Trust. The capital securities have preference over the common
securities under certain circumstances with respect to cash distributions and
amounts payable on liquidation. The $20 million qualifies as Tier I capital for
regulatory capital purposes, subject to certain limitations, and are accounted
for as minority interest.
In 1997, the Bank established a subsidiary corporation in New Jersey, United
Commercial Capital Group, to provide timely and innovative financing solutions
for real estate and commercial transactions that do not fall within the
boundaries of traditional financing.
On December 6, 1997, the Company, through the Bank, assumed deposits, including
accrued interest, of approximately $21 million from another bank. In addition,
the Bank received $214,000 in cash and cash equivalents and approximately
$692,000 in other assets. In connection with the transaction, the Bank recorded
an intangible asset of $1,400,000, representing the premium paid over the
carrying amount of deposits acquired.
On September 30, 1998, the Company acquired State Bank of South Orange ("SBSO").
Each share of SBSO was converted into 1.245 shares of the Company's common stock
for a total of 796,271 shares issued, not adjusted for subsequent stock
dividends and splits. At the time of the acquisition, SBSO had approximately $75
million in assets. The acquisition was accounted for as a pooling-of-interests.
On March 31, 1999, the Company acquired Raritan Bancorp, Inc. ("Raritan"). Each
share of Raritan was converted into 1.595 shares of the Company's common stock
for a total of approximately 3,785,000 shares issued. At December 31, 1998,
Raritan had approximately $432 million in assets. The combined consolidated
financial information contained herein and in United's 1998 Annual Report,
incorporated herein by reference as Exhibit 13 gives retroactive effect to the
acquisition. The acquisition was accounted for as a pooling-of-interests and
such financial information has been presented as if the merger had been
consummated for all periods presented. This combined consolidated financial
information is presented as supplemental information to the historical
consolidated financial information contained in United's 1998 Annual Report
incorporated herein by reference as Exhibit 13, and in Item 1(e)(2) Statistical
Information (United Only) of this report.
(b) Industry Segments
United's 1998 Annual Report, Financial Review section, contains on pages 32-33,
"Note 20 Segment Reporting," the information required by this Item and that
information is incorporated herein by reference.
(c) Narrative Description of Business
Personal Banking Services
The Bank, through its 35 branch network and 39 MAC installations, provides both
retail and commercial services. Among the services provided at the branch
locations are: checking accounts, money market accounts, Super NOW accounts,
certificates of deposit, statement and passbook savings accounts, individual
retirement accounts ("IRAs"), self-employed pension plans ("SEPs"), safe deposit
services, installment and other personal loans, home equity loans, mortgage
loans, lines of credit and other consumer financing. The Bank also issues
secured and unsecured credit cards.
The Bank offers a full range of trust services for individuals and corporations.
These services include: fiduciary services, estate planning, custodial, employee
benefits, pension as well as profit sharing plans. The market value of trust
assets under administration was approximately $1.2 billion at December 31, 1998.
Discount Brokerage Service has been offered since 1986 as an additional service
to customers. It is currently managed by Fiserv Investor Services, Inc.
(formerly TradeStar Investor Services).
Commercial Banking Services
The Bank provides commercial customers with a wide array of financial services,
which are administered at the branch level as well as at the Headquarters Office
in Bridgewater. These services include secured and unsecured loans, term loans,
lines of credit and corporate credit cards. The Bank also participates in the
New Jersey Economic Development Authority programs, which make tax-exempt, low
interest financing programs available to borrowers who wish to relocate or
expand their activity in New Jersey. As a Small Business Administration ("SBA")
Preferred Lender, the Bank is able to offer streamlined processing on SBA loans.
In addition, the Bank makes other Government loan programs available. As a
member of the Automated Clearing House, the Bank makes direct deposit services
available.
Other Subsidiaries
In 1989, the Bank established a subsidiary corporation in New Jersey, United
National Investment Company, Inc. (formerly UNB Investment Co., Inc.), to manage
a portion of its investment portfolio and to operate under state tax law as an
investment company. As of December 31, 1998, approximately $229.1 million of the
Bank's investment portfolio was managed by this New Jersey Corporation.
In 1997, the Bank established a subsidiary corporation in New Jersey, United
Commercial Capital Group, to provide timely and innovative financing solutions
for real estate and commercial transactions that do not fall within the
boundaries of traditional financing.
Supervision and Regulation
The banking industry is highly regulated. Statutory and regulatory controls
increase a bank holding company's cost of doing business and limit management's
options to deploy assets and maximize income. Areas subject to regulation and
supervision by the bank regulatory agencies include: nature of business
activities; minimum capital levels; dividends; affiliate transactions; expansion
and closing of locations; acquisitions and mergers; interest rates paid on
certain types of deposits; reserves against deposits; terms, amounts and
interest rates charged to various types of borrowers; and investments.
Bank Holding Company Regulation
The Company is a bank holding company within the meaning of the BHCA, and is
registered as such with and is supervised by the Board. The Company is required
to file reports with the Board and provide such additional information as the
Board may require.
The Company is required to obtain the approval of the Board before it may
acquire all or substantially all of the assets of any bank, or direct or
indirect ownership of any voting securities of any bank if, after giving effect
to such acquisition, the Company would, directly or indirectly, own or control
more than 5% of the voting shares of such bank. The BHCA also prohibits
acquisition by the Company of more than 5% of the voting shares of a bank
located outside the State of New Jersey, unless such an acquisition is
specifically authorized by laws of the state in which such bank is located. In
addition to the approval of the Board, prior approval must also be obtained from
any other banking agency having supervisory jurisdiction over the bank to be
acquired before any bank acquisition can be completed. Many states, including
New Jersey, have adopted legislation, which permits banks and bank holding
companies resident in New Jersey to acquire banks and bank holding companies in
states with reciprocal legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act") provides that
the Board may approve an acquisition by a bank holding company of a bank located
in a state other than the bank holding company's home state without regard to
whether such transaction is prohibited under the laws of any state. The
Interstate Banking Act also permits Federal banking agencies to approve
interstate bank mergers without regard to state law effective June 1, 1997.
States have authority to opt out of the legislation subject to certain
conditions and states have the authority to permit interstate merger
transactions prior to the 1997 effective date. In addition, the Interstate
Banking Act permits de novo branching across state lines effective June 1, 1997
but only with respect to states which affirmatively adopt legislation
authorizing de novo interstate branching.
On April 17, 1996, New Jersey enacted legislation to opt-in with respect to
earlier interstate banking and branching and the entry into New Jersey of
foreign country banks. New Jersey did not authorize de novo branching into the
state. However, under federal law, federal savings banks, which meet certain
conditions, may branch into a state, regardless of state law.
A bank holding company is prohibited from engaging in, or acquiring direct or
indirect control of more than 5% of the voting shares of any company engaged in
nonbanking activities unless the Board, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Under the Board's policy, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and is
required to commit resources to support its subsidiary banks.
Regulation of the Bank
The Bank is subject to regulation and examination by the Comptroller of the
Currency ("Comptroller"). The Bank is also subject to regulations of the Federal
Reserve System (the "Federal Reserve"). The deposits of the Bank are insured by
the FDIC to the extent provided by law, primarily through the Bank Insurance
Fund (the "BIF"). As a result of the Bank's acquisition of various branches and
deposits of Savings Association Insurance Fund ("SAIF") member institutions, a
portion of the Bank's deposit base is subject to deposit insurance premiums
calculated at assessment rates paid by SAIF-member institutions. At December 31,
1998, the portion of the Bank's deposit base assessed at the SAIF rate was
approximately $446.1 million, or 31.0% of the Bank deposits.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act"),
signed into law on September 30, 1996, included the Deposit Insurance Funds Act
of 1996 (the "Funds Act") under which the FDIC was required to impose a special
assessment on SAIF-assessable deposits to recapitalize the SAIF. As a result of
the Funds Act, the Bank paid a special assessment of $512,000 for its SAIF
deposits, which it accrued in the third quarter of 1996. Under the Funds Act,
the FDIC also will charge assessments for SAIF and BIF deposits in a 5 to 1
ratio to pay Financing Corporation ("FICO") bonds until January 1, 2000, at
which time the assessment will be equal. A FICO rate of approximately 1.29 basis
points will be charged on BIF deposits, and approximately 6.44 basis points will
be charged on SAIF deposits. Oakar deposits will be treated as SAIF deposits for
purposes of the FICO bond assessment. The 1996 Act instituted a number of other
regulatory relief provisions.
The Company and the Bank are also subject to applicable provisions of New Jersey
law insofar as they do not conflict with or are not preempted by Federal law.
Community Reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations,
a national bank has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community,
including low and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with its examination of a
national bank, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Bank received a "Satisfactory" CRA
rating in its most recent examination.
Dividend Restrictions and Other Actions
The Company is a legal entity, separate and distinct from the Bank. Most of the
Company's revenues, including funds available for the payment of dividends and
for operating expenses, are provided by dividends paid by the Bank. There are
statutory and regulatory limitations on the amount of dividends, which may be
paid to the Company by the Bank. The prior approval of the Comptroller is
required if the total of all dividends declared by the Bank in any calendar year
exceeds the Bank's net profits for that year combined with its retained net
profits for the preceding two years, less any required transfers to surplus.
The Comptroller has the authority to prohibit a national bank from engaging in
what, in the Comptroller's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible that the Comptroller could assert that
the payment of dividends or other payments might, under some circumstances, be
an unsafe or unsound practice for a national bank.
If, in the opinion of the Comptroller, a bank under its jurisdiction is engaged
in or is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
the Comptroller may require, after notice and hearing, that such bank cease and
desist from such practice or, as a result of an unrelated practice, require the
bank to limit dividends in the future. The Federal Reserve Board has similar
authority with respect to bank holding companies. In addition, the Federal
Reserve Board and the Comptroller have issued policy statements, which provide
that insured banks and bank holding companies should generally only pay
dividends out of current operating earnings. Regulatory pressures to reclassify
and charge-off loans and to establish additional loan loss reserves can have the
effect of reducing current operating earnings and thus impact an institution's
ability to pay dividends. The regulatory authorities have established guidelines
with respect to the maintenance of appropriate levels of capital by a bank or
bank holding company under their jurisdiction.
See "Capital" on page 6, "Note 13 - Capital Requirements" on page 26, and "Cash
Dividend Restrictions" on page 35 of United's 1998 Financial Review section of
the Annual Report.
Capital Requirements
The Board measures capital adequacy for bank holding companies on the basis of a
risk-based capital framework and a leverage ratio. The minimum ratio of total
risk-based capital to risk-weighted assets is 8%. At least half of the total
capital must be common stockholders' equity (not inclusive of net unrealized
gains and losses on available for sale securities) and perpetual preferred
stock, less goodwill and other non-qualifying intangible assets ("Tier 1
capital"). The remainder (i.e., the "Tier 2 risk-based capital") may consist of
hybrid capital instruments, perpetual debt, term-subordinated debt, other
preferred stock and a limited amount of the allowance for loan losses. At
December 31, 1998, the Company had Tier 1 capital as a percentage of
risk-weighted assets of 13.53% and total risk-based capital as a percentage of
risk-weighted assets of 14.43%.
In addition, the Board has established minimum leverage ratio guidelines for
bank holding companies. These guidelines currently provide for a minimum ratio
of Tier 1 capital as a percentage of total assets (the "Leverage Ratio") of 3%
for bank holding companies that meet certain criteria, including that they
maintain the highest regulatory rating. All other bank holding companies are
required to maintain a Leverage Ratio of at least 100 to 200 basis points above
the minimum. At December 31, 1998, the Company had a Leverage Ratio of 8.51%.
The Bank is subject to the FDIC's Statement of Policy on Risk-Based Capital, the
requirements of which are substantially identical to the Board's risk-based
capital framework. As of December 31, 1998, the Bank had Tier 1 capital as a
percentage of risk-weighted assets of 12.95% and a total risk-based capital
ratio of 13.86%.
In addition to the Statement of Policy on Risk-Based Capital, the FDIC requires
banks to operate with a minimum Leverage Ratio of 3%. Under these guidelines,
institutions operating at the 3% minimum are expected to have well diversified
risk profiles, including no undue interest rate risk, excellent asset quality,
high liquidity and good earnings. Institutions not meeting these
characteristics, as well as institutions experiencing growth, would be expected
to maintain capital levels at least 100 to 200 basis points above the minimum.
The FDIC is authorized to set higher capital requirements for an individual bank
when the bank's particular circumstances so warrant. At December 31, 1998, the
Bank had a Leverage Ratio of 8.20%.
The Board and the FDIC have adopted regulations effective January 17, 1995 which
identify concentration of credit risk and certain risks arising from
nontraditional activities, as well as an institution's ability to manage these
risks, as important factors in assessing an institution's overall capital
adequacy. The Board adopted amendments to its capital adequacy guidelines
effective April 1, 1995 which limit the amount of certain deferred tax assets
that may be included in a bank holding company's Tier 1 capital for risk-based
and leverage capital purposes. These regulatory amendments, as adopted, had no
material impact on the Company's or the Bank's overall capital adequacy.
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
Under FIRREA, a bank insured by the FDIC can be held liable for any loss
incurred by, or reasonably expected to be incurred by, the FDIC in connection
with (i) the default of a commonly controlled FDIC-insured depository
institution or (ii) any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. The term "default" is
defined to mean the appointment of a conservator or receiver for such
institution and "in danger of default" is defined generally as the existence of
certain conditions indicating that a "default" is likely to occur in the absence
of regulatory assistance. Thus, the Bank could incur liability to the FDIC
pursuant to this statutory provision in the event of the default of any other
insured depository institution owned or controlled by the Company.
At the present time, the Bank is the only FDIC-insured depository institution
controlled by the Company. Such liability to the FDIC is subordinated in right
of payment to deposit liabilities, secured obligations, any other general or
senior liability and any obligation subordinated to depositors or other general
creditors, other than obligations owed to any affiliate of the depository
institution (with certain exceptions) and any obligations to shareholders in
such capacity. The imposition of such liability in sufficient amounts, however,
could lead to the appointment of the FDIC as conservator or receiver for the
Bank.
FIRREA also broadened the enforcement powers of the Federal banking agencies,
including the power to impose fines and penalties, over all financial
institutions. FIRREA also prohibits an insured depository institution from
entering into a written or oral contract with any person for goods, products or
services that would jeopardize the safety or soundness of the institution.
Further, under FIRREA the failure to meet capital guidelines could subject a
financial institution to a variety of regulatory actions, including the
termination of deposit insurance by the FDIC.
In addition, if any insured depository institution becomes insolvent and the
FDIC is appointed its conservator or receiver, within a reasonable period
following such appointment the FDIC may disaffirm or repudiate any contract or
lease to which such institution is a party, the performance of which it
determines to be burdensome, and the disaffirmance or repudiation of which it
determines to promote the orderly administration of the institution's affairs.
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
FDICIA was enacted in December 1991 and was primarily designed to provide
additional financing for the FDIC by increasing its borrowing ability. The FDIC
was given the authority to increase deposit insurance premiums to repay any such
borrowing. In addition, FDICIA identifies the following capital standard
categories for financial institutions: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. As a result of FDICIA, the various banking regulatory agencies
have set certain capital and other measures for determining the categories into
which financial institutions fall. FDICIA imposes progressively more restrictive
constraints on operations, management and capital distributions depending on the
category in which an institution is classified. Pursuant to FDICIA,
undercapitalized institutions must submit recapitalization plans, and a company
controlling a failing institution must guarantee such institution's compliance
with its plan. FDICIA also required the various regulatory agencies to prescribe
certain non-capital standards for safety and soundness relating generally to
operations and management, asset quality and executive compensation, and permits
regulatory action against a financial institution that does not meet such
standards.
Securities and Exchange Commission
The Company's Common Stock is registered with the Securities and Exchange
Commission ("SEC") under the Securities Exchange Act of 1934 (the "1934 Act").
As a result of such registration, the Company and its officers, directors and
major shareholders are obligated to file certain reports with the SEC.
Furthermore, the Company is subject to proxy and tender offer rules promulgated
pursuant to the 1934 Act. Monetary Policy and Economic Conditions
The earnings and business of the Company and the Bank are affected by the
policies of regulatory authorities, including the Board. The monetary policies
of the Board have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future. Because of the changing conditions in the national and international
economy and in the money markets, as a result of actions by monetary and fiscal
authorities, interest rates, credit availability and deposit levels may change
due to circumstances beyond the control of the Company and the Bank.
From time to time, various proposals are made in the United States Congress and
the New Jersey Legislature and before various bank regulatory authorities which
would alter the powers of, and restrictions on, different types of banking
companies and other financial institutions. It is impossible to predict whether
any of the proposals will be adopted and the impact, if any, of such adoption on
the business of the Bank or the Company.
Effects of Inflation
A bank's asset and liability structure differs from that of an industrial
company, since its assets and liabilities fluctuate over time based upon
monetary policies and changes in interest rates. The growth in the bank's
earning assets, regardless of the effects of inflation, will increase net
interest income if the bank is able to maintain a consistent interest spread
between earning assets and supporting liabilities.
A purchasing power gain or loss from holding net monetary assets during the year
represents the effect of general inflation on monetary assets and liabilities.
Almost all of the assets and liabilities of the Company are considered monetary
because they are fixed in terms of dollars and therefore, are not materially
affected by inflation.
Concentration of Customers and Seasonality of Business
No single person, group of persons, enterprise or other entity produces a
material portion of the Bank's deposits or loans. No customer accounts for as
much as two percent of the Bank's overall business. There is no material impact
on the Bank's volume, deposits or loans, as a result of seasonal changes. The
majority of the Bank's customers operate or reside within New Jersey. The
ability of its customers to meet contractual obligations is, to a certain
extent, dependent upon the economic conditions existing in the state.
Competition
Banking in New Jersey has become increasingly competitive. The Bank competes for
loans and deposits with commercial banks, non-bank banks, savings and loan
associations, savings banks, finance companies, credit unions and other large
interstate and foreign banks now allowed to bank in New Jersey. Money market
funds increasingly compete for the deposit dollar. Larger financial institutions
with larger lending limits and a greater array of sophisticated services provide
an additional competitive feature.
Employees
On December 31, 1998, there were 542 full-time equivalent persons employed by
the Company and the Bank.
(e)(1) Statistical Information - Combined Consolidated (Including Raritan)
The following are the statistical disclosures, on a combined consolidated basis
(including Raritan), for a bank holding company required pursuant to Industry
Guide 3. The tables should be read in conjunction with the combined consolidated
financial statements contained in United's 1998 Annual Report, incorporated
herein by reference as Exhibit 13. DISTRIBUTION OF ASSETS, LIABILITIES AND
STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL (INCLUDING
RARITAN)
The following table reflects the components of net interest income, setting
forth, for the three years presented, (1) average assets, liabilities and
stockholders' equity, (2) interest earned on earning assets and interest paid on
interest-bearing liabilities, (3) average rates earned on earning assets and
average rates paid on interest-bearing liabilities, (4) net interest spread
(i.e., the difference between the average rate earned on earning assets and the
average rate paid on interest-bearing liabilities and (5) the net interest
margin (i.e., net interest income divided by average earning assets). Dollar
amounts are presented on a tax-equivalent basis assuming a 34% tax rate. Average
balances have been derived from daily balances.
<TABLE>
<CAPTION>
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1998 1997 1996
------------------------------ ----------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- - ------------------------------------------------------------------------------------------------------------------------------
Assets:
Interest-earning Assets:
Securities (1):
Taxable ...................... $ 609,159 $ 39,564 6.49% $ 512,994 $ 34,340 6.69% $ 441,993 $29,261 6.62%
Non-Taxable .................. 79,919 5,915 7.40 60,556 4,624 7.64 53,997 4,085 7.57
Trading Account Securities.... 3,617 26 0.72 3,392 18 0.53 3,084 13 0.42
------------------------------------------------------------------------------------------
Total Securities ........... 692,695 45,505 6.57 576,942 38,982 6.76 499,074 33,359 6.68
------------------------------------------------------------------------------------------
Federal Funds Sold ............. 55,120 2,676 4.85 41,529 2,285 5.50 35,199 1,853 5.26
Federal Home Loan Bank Deposits. 2,804 153 5.46 1,460 81 5.55 1,001 54 5.39
Loans (Net of Unearned
Income) (2):
Commercial ................... 202,707 18,710 9.23 178,268 17,076 9.58 185,673 17,403 9.37
Commercial-Tax Exempt ........ 1,282 135 10.53 1,401 139 9.92 1,515 145 9.57
Real Estate .................. 586,219 47,870 8.17 489,808 40,837 8.34 382,020 31,943 8.36
Credit Card .................. 34,896 6,579 18.85 32,600 6,317 19.38 30,485 5,982 19.62
Installment .................. 139,063 11,640 8.37 186,308 15,945 8.56 221,658 18,726 8.45
Lease Financing .............. 10,406 1,034 9.94 9,731 910 9.35 8,705 834 9.58
Impaired Loans ............... 5,299 103 1.94 7,975 465 5.83 7,648 131 1.71
------------------------------------------------------------------------------------------
Total Loans .................. 979,872 86,071 8.78 906,091 81,689 9.02 837,704 75,164 8.97
------------------------------------------------------------------------------------------
Total Interest-earning Assets. 1,730,491 134,405 7.77 1,526,022 123,037 8.06 1,372,978 10,430 8.04
------------------------------------------------------------------------------------------
Non-Interest-earning Assets ....... 142,899 119,109 110,938
---------- ---------- ----------
Total Assets ................. $1,873,390 $1,645,131 $1,483,916
========== ========== ==========
Liabilities and
Stockholders' Equity:
Interest-bearing Liabilities:
Savings Deposits ............... $ 559,241 12,341 2.21 $ 522,454 12,191 2.33 $ 539,375 12,164 2.26
Time Deposits .................. 606,634 34,214 5.64 620,165 33,292 5.37 548,612 29,266 5.33
------------------------------------------------------------------------------------------
Total Savings and Time Deposits 1,165,875 46,555 3.99 1,142,619 45,483 3.98 1,087,987 41,430 3.81
Short-Term Borrowings .......... 111,180 5,522 4.97 77,118 4,357 5.65 50,518 2,666 5.28
Other Borrowings ............... 144,559 9,850 6.81 52,448 3,625 6.91 9,824 942 9.59
------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ................... 1,421,614 61,927 4.36 1,272,185 53,465 4.20 1,148,329 45,038 3.92
------------------------------------------------------------------------------------------
Non-Interest-bearing
Liabilities:
Demand Deposits and Non-Interest
Bearing Savings ............... 254,565 200,462 197,772
Other Liabilities .............. 22,411 18,336 13,881
---------- ---------- ----------
Total Non-Interest
Bearing Liabilities ........ 276,976 218,798 211,653
---------- ---------- ----------
Trust Capital Securities .......... 20,000 16,156
Stockholders' Equity .............. 154,800 137,992 123,934
---------- ---------- ----------
Total Liabilities and
Stockholders' Equity ........... $1,873,390 $1,645,131 $1,483,916
========== ========== ==========
Net Interest Income
(Tax-Equivalent Basis) ......... 72,478 69,572 65,392
Tax-Equivalent Adjustment ......... (2,056) (1,622) (1,448)
--------- --------- --------
Net Interest Income ............... $ 70,422 $ 67,950 $63,944
========= ========= ========
Interest Rate Spread .............. 3.41% 3.86% 4.12%
===== ===== =====
Net Interest Margin ............... 4.19 4.56 4.76
===== ===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities ....................... 1.22x 1.20x 1.20x
===== ===== =====
(1) Securities are carried at amortized cost.
(2) Average loan balances and yields include non-accruing loans. Loan fees are
included in the interest amounts and are not material.
</TABLE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1998 Compared with 1997 1997 Compared with 1996
------------------------------- ------------------------------
Increase(Decrease) Increase(Decrease)
Due to Change in: Due to Change in:
Total ---------------------- Total ---------------------
(In Thousands) Increase Volume Rate Increase Volume Rate
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Total Loans ................. $ 4,382 $ 6,522 $ (2,140) $ 6,525 $ 6,163 $ 362
Taxable ..................... 5,224 6,272 (1,048) 5,079 4,750 329
Non Taxable ................. 1,291 1,437 (146) 539 501 38
Trading Account Securities .. 8 1 7 5 1 4
Other Interest-Earning Assets 463 752 (289) 459 371 88
-------- -------- -------- -------- -------- --------
Total Interest-Earning
Assets ................. 11,368 14,984 (3,616) 12,607 11,786 821
-------- -------- -------- -------- -------- --------
Interest Expense:
Savings Deposits ............ 150 832 (682) 27 (388) 415
Time Deposits ............... 922 (737) 1,659 4,026 3,840 186
Short-Term Borrowings ....... 1,165 1,742 (577) 1,691 1,491 200
Other Borrowings ............ 6,225 6,277 (52) 2,683 3,015 (332)
-------- -------- -------- -------- -------- --------
Total Interest-Bearing
Liabilities .......... 8,462 8,114 348 8,427 7,958 469
-------- -------- -------- -------- -------- --------
Net Interest Income ......... $ 2,906 $ 6,870 $ (3,964) $ 4,180 $ 3,828 $ 352
======== ======== ======== ======== ======== ========
The change in interest due to both volume and rate has been allocated
proportionally to both, based on their relative absolute values.
</TABLE>
INVESTMENT PORTFOLIO (INCLUDING RARITAN)
The following table sets forth the amortized cost of securities held to maturity
at year-end 1998, 1997 and 1996.
December 31,
-------------------------------
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury Securities ................... $ 2,000 $ 990 $ 6,967
Obligations of U.S. Government
Agencies and Corporations ................ 14,994 27,953 42,921
Obligations of States and Political
Subdivisions ............................ 22,141 11,712 12,643
Mortgage-Backed Securities ................. 24,089 45,835 56,864
Securities Issued by Foreign Governments ... 150 125 100
-------- -------- --------
Total Securities Held to Maturity ........ $ 63,374 $ 86,615 $119,495
======== ======== ========
The following table sets forth the market value of securities available for sale
at year-end 1998, 1997 and 1996.
December 31,
-------------------------------
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury Securities ................... $ 2,514 $ 22,179 $ 33,901
Obligations of U.S. Government
Agencies and Corporations ................ 66,933 93,831 52,668
Obligations of States and Political ........ 79,484 57,634 45,979
Subdivisions
Mortgage-Backed Securities ................. 391,123 349,913 203,232
Corporate Debt Securities .................. 24,000 13,920 --
-------- -------- --------
Total Debt Securities .................... 564,054 537,477 335,780
-------- -------- --------
Equity Securities:
Marketable Equity Securities ............... 31,358 53,555 23,873
Federal Reserve Bank and Federal
Home Loan Bank Stock ..................... 13,850 11,333 7,066
-------- -------- --------
Total Equity Securities .................. 45,208 64,888 30,939
-------- -------- --------
Total Securities Available for Sale ...... $609,262 $602,365 $366,719
======== ======== ========
The contractual maturity distribution and weighted average yields (calculated on
the basis of the stated yields to maturity, considering applicable premium or
discount), on a tax-equivalent basis (assuming a 34% Federal income tax rate),
of the Company's securities held to maturity and securities available for sale
portfolios at December 31, 1998, excluding equity securities, were as follows:
<TABLE>
<CAPTION>
MATURITIES AND WEIGHTED AVERAGE YIELDS
After 1 Year After 5 Years
Within but Within but Within After
(Dollars in Thousands) 1 Year 5 Years 10 Years 10 Years Total
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury Securities:
Amortized Cost ............... $ - $ 2,000 $ - $ - $ 2,000
Weighted Average Yield ....... -% 5.49% -% -% 5.49%
Obligation of U.S. Government
Agencies and Corporations:
Amortized Cost ............... 14,994 - - - 14,994
Weighted Average Yield ....... 6.34% -% -% -% 6.34%
Obligation of States and
Political Subdivisions:
Amortized Cost ............... 6,109 2,533 7,907 5,592 22,141
Weighted Average Yield ....... 3.51% 4.54% 4.71% 5.91% 4.66%
Mortgage-Backed Securities:
Amortized Cost ............... 1,345 19,558 - 3,186 24,089
Weighted Average Yield ....... 6.42% 5.58% -% 7.20% 5.84%
Securities Issued by
Foreign Governments:
Amortized Cost ............... - 50 100 - 150
Weighted Average Yield ....... -% 7.02% 7.20% - 7.14%
- - -----------------------------------------------------------------------------------------------------
Total Securities Held to Maturity:
Amortized Cost ............... $22,448 $ 24,141 $ 8,007 $ 8,778 $ 63,374
Weighted Average Yield ....... 5.57 5.47% 4.74% 6.38% 5.54%
=====================================================================================================
SECURITIES AVAILABLE FOR SALE
U.S. Treasury Securities:
Amortized Cost ............... $ 2,502 $ - $ - $ - $ 2,502
Weighted Average Yield ....... 5.67% -% -% -% 5.67%
Obligations of U.S. Government
Agencies and Corporations:
Amortized Cost ............... 33,390 33,482 - - 66,872
Weighted Average Yield ....... 6.45% 6.36% -% -% 6.40%
Obligations of States and
Political Subdivisions:
Amortized Cost ............... 2,262 28,133 43,609 2,926 76,930
Weighted Average Yield ....... 4.62% 4.80% 4.79% 6.31% 4.85%
Mortgage-Backed Securities:
Amortized Cost ............... 19,108 109,803 111,975 147,678 388,564
Weighted Average Yield ....... 6.08% 6.73% 6.36% 6.58% 6.53%
Corporate Debt Securities:
Amortized Cost ............... - 5,500 11,315 6,528 23,343
Weighted Average Yield ....... - 9.57% 6.30% 8.70% 7.74%
- - -----------------------------------------------------------------------------------------------------
Total Securities Available for Sale:
Amortized Cost ............... $57,262 $176,918 $166,899 $157,132 $558,211
Weighted Average Yield ....... 6.22% 6.44% 5.95% 6.66% 6.33%
=====================================================================================================
</TABLE>
LOAN PORTFOLIO (INCLUDING RARITAN)
Types of Loans
The following schedule presents the components of gross loans, by type, as of
December 31, for each of the last five years.
<TABLE>
<CAPTION>
(In Thousands) 1998 % 1997 % 1996 % 1995 % 1994 %
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .............. $ 218,929 20.58 $145,100 15.39 $180,876 19.66 $145,690 17.37 $104,195 13.82
Real Estate ............. 652,239 61.32 593,924 62.97 485,858 52.80 430,655 51.36 411,837 54.60
Lease Financing ......... 11,022 1.04 11,852 1.26 9,248 1.01 8,144 0.97 4,790 0.64
Installment ............. 181,522 17.06 192,167 20.38 244,157 26.53 254,049 30.30 233,324 30.94
--------------------------------------------------------------------------------------------
Total Loans Outstanding . 1,063,712 100.00 943,043 100.00 920,139 100.00 838,538 100.00 754,146 100.00
Less: Unearned Income
On Loans ............. 6,631 11,777 21,351 22,553 20,039
--------------------------------------------------------------------------------------------
Loans, Net of Unearned
Income ............... $1,057,081 $931,266 $898,788 $815,985 $734,107
============================================================================================
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences and installment loans) outstanding as of December 31,
1998, and segregates loans with fixed interest rates from those with floating or
variable interest rates.
Maturing
---------------------------------------------
After One
Within But Within After
(In Thousands) One Year Five Years Five Years Total
- - --------------------------------------------------------------------------------
Commercial ..................... $166,419 $ 41,999 $ 10,511 $218,929
Real Estate-Construction ....... 13,016 15,428 2,579 31,023
Real Estate-Commercial ......... 24,371 29,402 86,196 139,969
================================================================================
$203,806 $ 86,829 $ 99,286 $389,921
================================================================================
Amount of Loans Based Upon:
Fixed Interest Rates ...................... $45,277 $38,253
Variable Interest Rates ................... 41,552 61,033
================================================================================
$86,829 $99,286
================================================================================
Non-Accrual, Past Due and Restructured Loans
The following table provides an analysis of non-performing assets as of December
31, for each of the last five years.
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996 1995 1994
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans (1):
Commercial and Industrial ........... $ 754 $ 190 $ 663 $ 809 $ 2,389
Loans Secured by Real Estate ........ 6,029 7,015 9,440 7,344 8,706
Lease Financing ..................... - - - - 9
Loans to Individuals for
Household, Family and Other
Personal Expenditure .............. 498 350 354 483 445
- - -------------------------------------------------------------------------------------------------
Total Non-Accrual Loans ................ 7,281 7,555 10,457 8,636 11,549
- - -------------------------------------------------------------------------------------------------
Loans Past Due 90 Days or More (2):
Commercial and Industrial ......... - - 7 61 730
Loans Secured by Real Estate ...... 986 1,619 1,210 681 339
Lease Financing ................... - 169 - - -
Loans to Individuals for
Household, Family and Other
Personal Expenditures ......... 303 577 1,277 936 991
- - -------------------------------------------------------------------------------------------------
Total Loans Past Due
90 Days or More ................... 1,289 2,365 2,494 1,678 2,060
- - -------------------------------------------------------------------------------------------------
Troubled Debt Restructured ............. 42 53 67 - -
- - -------------------------------------------------------------------------------------------------
Total Non-Performing Loans .......... 8,612 9,973 13,018 10,314 13,609
Other Real Estate Owned (3) ............ 507 1,503 1,967 3,072 2,624
Other Assets Owned (4) ................. 51 174 178 223 181
- - -------------------------------------------------------------------------------------------------
Total Non-Performing Assets ......... $9,170 $11,650 $15,163 $13,609 $16,414
=================================================================================================
Non-Performing Loans as a
Percentage of Loans (year-end) ...... 0.81% 1.07% 1.45% 1.27% 1.85%
=================================================================================================
Non-Performing Loans as
Percentage of Total Assets (year-end) 0.45% 0.56% 0.84% 0.69% 1.02%
=================================================================================================
Non-Performing Assets as
A Percentage of Loans, Other
Real Estate Owned and Other
Assets Owned (year-end) ............. 0.87% 1.25% 1.68% 1.67% 2.23%
=================================================================================================
Non-Performing Assets as
A Percentage of Total Assets (year-end) 0.48% 0.65% 0.98% 0.91% 1.23%
=================================================================================================
</TABLE>
(1) Generally represents those loans on which Management has determined that
borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is past due for a period of 90 days
or more (except when such loans are both well-secured and in the process of
collection). When loans are placed on non-accrual status, all accrued but unpaid
interest is reversed.
(2) Represents loans on which payments of interest and/or principal are
contractually past due 90 days or more, but are currently accruing interest at
the previously negotiated rates, based on a determination that such loans are
both well-secured and in the process of collection.
(3) Consists of real estate acquired through foreclosure. (4) Consists of
assets, other than real estate, acquired through repossession, forfeiture or
abandonment.
Potential Problem Loans
At December 31, 1998, the Company had no material loans where payments were
presently current or less than 90 days past due, yet the borrowers were known to
the Company to be experiencing severe financial difficulties. Management
continues to review and evaluate all loans on an ongoing basis so that potential
problems can be addressed immediately.
SUMMARY OF LOAN LOSS EXPERIENCE (INCLUDING RARITAN)
The following table provides an analysis of the allowance for possible loan
losses for each of the five years ending December 31:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, Net of Unearned
Income - December 31, ........ $1,057,081 $931,266 $898,788 $812,985 $734,107
================================================================================================
Average Loans Outstanding ....... 979,872 $906,091 $837,704 $771,543 $661,081
================================================================================================
Allowance for Possible Loan
Losses-January 1, ............ $ 11,739 $ 11,874 $ 11,440 $ 13,876 $ 15,425
Loans Charged Off:
Commercial ................... (251) (101) - (417) (1,615)
Real Estate .................. (1,466) ( 750) (409) (872) (978)
Lease Financing .............. (28) - - - -
Installment .................. (3,489) (4,700) (3,711) (3,324) (2,752)
- - ------------------------------------------------------------------------------------------------
Total Loans Charged Off ......... (5,234) (5,551) (4,120) (4,613) (5,345)
- - ------------------------------------------------------------------------------------------------
Recoveries of Loans:
Commercial ................... 9 105 95 233 317
Real Estate .................. 306 164 30 29 154
Lease Financing .............. - - - - -
Installment .................. 910 715 435 517 610
- - ------------------------------------------------------------------------------------------------
Total Recoveries ................ 1,225 984 560 779 1,081
- - ------------------------------------------------------------------------------------------------
Net Loans Charged Off ........... (4,009) (4,567) (3,560) (3,834) (4,264)
Provision for Possible
Loan Losses .................. 3,444 4,432 3,691 1,398 2,715
Acquisition ..................... - - 303 - -
- - ------------------------------------------------------------------------------------------------
Allowance for Possible Loan
Losses - December 31, ........ $ 11,174 $ 11,739 $ 11,874 $ 11,440 $ 13,876
================================================================================================
Allowance for Possible Loan
Losses to Non-Performing
Loans - December 31, ......... 129.75% 117.71% 91.21% 110.92% 101.96%
================================================================================================
Allowance for Possible Loan
Losses to Total Loans
Outstanding - December 31, ... 1.06% 1.26% 1.32% 1.41% 1.89%
================================================================================================
Net loans Charged Off to
Average Loans Outstanding .... 0.41% 0.50% 0.42% 0.50% 0.65%
================================================================================================
</TABLE>
Allocation of the Allowance for Possible Loan Losses
The accompanying table sets forth the allocation of the allowance for possible
loan losses (the "Allowance") by category of loans and the percentage of loans
in each category to total loans at December 31 for each of the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in -----------------------------------------------------------------------------------------------
Thousands) 1998 1997 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to to to to to
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .... $ 2,198 21% $ 2,370 16% $ 2,912 20% $ 3,235 18% $ 3,920 14%
Real Estate ... 5,062 61 5,115 63 4,651 53 3,222 51 4,185 54
Lease Financing 152 1 136 1 93 1 84 1 48 1
Installment ... 3,715 17 3,851 20 3,975 26 4,743 30 5,655 31
Unallocated ... 47 - 267 - 243 - 156 - 68 -
- - -------------------------------------------------------------------------------------------------------------
Total ...... $11,174 100% $11,739 100% $11,874 100% $11,440 100% $13,876 100%
=============================================================================================================
</TABLE>
Each element of the allowance for possible loan losses is determined by use of
the Company's internal loan review process. Each loan portfolio is specifically
analyzed over an eight-quarter period, measured for historical loss history and
measured for the inherent risk of loss in the portfolio. The allowance process
utilizes a migration analysis, which tracks the movement of a loan as it
progresses through the loan portfolio. The allocation of the allowance is
determined by using the Company's historical loss history combined with the
inherent risk of loss contained in the loan portfolio as well as the ongoing
loan review process. Based on the respective portfolio's performance trends and
risk analysis, the allowance is then allocated over each portfolio as required
by the quarterly allowance review.
All commercial and commercial real estate loans in non-accrual status, all
impaired loans, as well as loans graded as doubtful that are in excess of
$100,000 are evaluated on an individual basis. All remaining installment loans,
residential mortgage loans, commercial, commercial real estate loans and off
balance sheet items are evaluated as a group.
The Company utilizes a comprehensive approach for its loan review process.
Various committees have been established to monitor and manage credit risk,
which involve account officers, division heads, the Loan Review Officer,
President and CEO, and the Executive Committee. On a monthly basis, management
reviews all portfolios for performance. A monthly report is made to the
Executive Committee regarding the status of the loan portfolio performance. On a
quarterly basis, an independent analysis of the portfolio is performed using the
information provided within the most recent quarter and over the past eight
quarters. After examining the results of the analysis and measuring actual
losses in correlation with estimated losses, factors are then incorporated
within the migration analysis to assist in correcting any differences between
actual and estimated losses. Qualitative factors allow for adjustments to loss
factors based on delinquency and non-accrual and non-performing trends,
portfolio volume, and changes in lending policies and procedures, including
underwriting, charge-off and recovery practices. Additional considerations
include changes in economic conditions, varying concentrations within industries
and geographic locale, and regulatory and legal changes. Each factor may impact
the portfolio depending on observed changes during the portfolio review process.
There have been no material changes made in the methodology or assumptions used
to estimate the allowance during 1998. During the year ended December 31, 1998,
loan quality has exhibited strong improvement throughout the entire loan
portfolio, with reductions in criticized and classified loans, reductions in the
level of non-performing assets and improvements in consumer delinquency trends
and charged-off accounts.
Changes in loan portfolio composition during the period reflect a continued
reduction in the installment portfolio with increases noted in residential and
commercial real estate loans. These mortgage loans have historically reported
lower losses than the installment loans. Due to the historical loss history and
strong underwriting criteria, lower levels of allowance allocation are required.
Additionally, the installment portfolio has reported improved charge-off and
delinquency levels.
Lower non-performing levels further contributed to a reduction in the allowance
levels of the Company, despite an increase in portfolio outstandings. Non
performing loans represent a larger risk of loss. Resolution and/or reduction of
these loans allow for less allocation of the allowance.
Management feels that the allowance for possible loan losses is adequate based
on the Company's historical loss levels as well as the inherent risk of loss
that exists as of the review date. Using the December 31, 1998 allowance level
of $11,174,000 and projecting net charge-offs based on the five year historical
average of net charge-offs as a percentage of average loans outstanding, the
allowance covers 2.13x projected net charge-offs.
DEPOSITS (INCLUDING RARITAN)
The following table reflects the average balances and average rates paid on
deposits for each of the past three years.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- -------------------- ---------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and Non-Interest
Bearing Savings ........ $ 254,565 -% $ 200,462 -% $ 197,772 - %
----------------------------------------------------------------------------------------------------
Interest-bearing
Transaction Accounts.... 143,600 1.69 139,274 1.67 144,852 1.57
Other Savings ............. 415,641 2.26 383,180 2.57 394,523 2.80
Time ...................... 606,634 5.64 620,165 5.37 548,612 5.33
----------------------------------------------------------------------------------------------------
Total Savings and Time . 1,165,875 3.99 1,142,619 3.98 1,087,987 3.81
====================================================================================================
Total Deposits ......... $1,420,440 - $1,343,081 - $1,285,759 -
====================================================================================================
</TABLE>
The following table sets forth a summary of the maturities of time certificates
of deposit $100,000 and over at December 31, 1998.
(In Thousands)
- - ----------------------------------------------------------------------------
Three Months or Less ............................................. $ 59,111
Over Three Through Six Months .................................... 10,808
Over Six Through Twelve Months ................................... 13,349
Over Twelve Months ............................................... 26,399
- - ----------------------------------------------------------------------------
Total ......................................................... $109,667
============================================================================
RETURN ON EQUITY AND ASSETS (INCLUDING RARITAN)
United's 1998 Annual Report, Financial Review section, contains on page 12,
"Selected Combined Consolidated Financial Data," the information required by
this Item and that information is incorporated herein by reference.
SHORT-TERM BORROWINGS (INCLUDING RARITAN)
United's 1998 Annual Report, Financial Review section, contains on page 25,
"Note 10 -Short-Term Borrowings," the information required by this Item and that
information is incorporated herein by reference.
(e)(2) Statistical Information - Consolidated (United Only)
The following are the consolidated (United only) statistical disclosures for a
bank holding company required pursuant to Industry Guide 3. The tables should be
read in conjunction with the consolidated financial statements contained in
United's 1998 Annual Report, incorporated herein by reference as Exhibit 13.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL (UNITED ONLY)
The following table reflects the components of net interest income, setting
forth, for the three years presented, (1) average assets, liabilities and
stockholders' equity, (2) interest earned on earning assets and interest paid on
interest-bearing liabilities, (3) average rates earned on earning assets and
average rates paid on interest-bearing liabilities, (4) net interest spread
(i.e., the difference between the average rate earned on earning assets and the
average rate paid on interest-bearing liabilities and (5) the net interest
margin (i.e., net interest income divided by average earning assets). Dollar
amounts are presented on a tax-equivalent basis assuming a 34% tax rate. Average
balances have been derived from daily balances.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- --------------------------
Interest Average Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning Assets:
Securities (1):
Taxable ..................... $ 538,264 $ 35,131 6.53% $ 423,387 $28,743 6.79% $ 332,973 $22,463 6.75%
Non-Taxable ................. 79,203 5,845 7.38 59,813 4,550 7.61 53,230 4,008 7.53
Trading Account Securities .. 650 26 4.00 516 18 3.49 344 13 3.78
--------------------------------------------------------------------------------------
Total Securities .......... 618,117 41,002 6.63 483,716 33,311 6.89 386,547 26,484 6.85
--------------------------------------------------------------------------------------
Federal Funds Sold ............ 14,349 793 5.53 20,426 1,136 5.56 20,357 1,088 5.34
Federal Home Loan Bank Deposits 2,804 153 5.46 1,460 81 5.55 1,001 54 5.39
Loans (Net of Unearned
Income) (2)
Commercial .................. 191,218 17,598 9.20 168,439 16,096 9.56 175,396 16,407 9.35
Commercial-Tax Exempt ....... 1,282 135 10.53 1,401 139 9.92 1,515 145 9.57
Real Estate ................. 327,044 27,264 8.34 271,069 22,793 8.41 211,310 17,936 8.49
Credit Card ................. 34,896 6,579 18.85 32,600 6,317 19.38 30,485 5,982 19.62
Installment ................. 120,390 9,977 8.29 166,461 14,114 8.48 195,959 16,409 8.37
Lease Financing ............. 10,406 1,034 9.94 9,731 910 9.35 8,705 834 9.58
Impaired Loans .............. 3,785 103 2.72 6,631 465 7.01 5,967 131 2.20
--------------------------------------------------------------------------------------
Total Loans ................. 689,021 62,690 9.10 656,322 60,834 9.27 629,337 57,844 9.19
--------------------------------------------------------------------------------------
Total Interest-earning Assets 1,324,291 104,638 7.90 1,161,924 95,362 8.21 1,037,242 85,470 8.24
--------------------------------------------------------------------------------------
Non-Interest-earning Assets ...... 123,761 100,512 97,700
--------- --------- -----------
Total Assets ................ $1,448,052 $1,262,436 $1,134,942
========= ========= ===========
Liabilities and
Stockholders' Equity:
Interest-bearing Liabilities:
Savings Deposits .............. $ 395,836 6,792 1.72 $ 378,856 7,394 1.95 $ 402,436 7,775 1.93
Time Deposits ................. 472,818 25,515 5.40 454,391 24,506 5.39 386,992 20,824 5.38
----------------------------------------------------------------------------------------
Total Savings and Time Deposits 868,654 32,307 3.72 833,247 31,900 3.83 789,428 28,599 3.62
Short-Term Borrowings ......... 103,125 5,043 4.89 65,177 3,672 5.63 50,350 2,653 5.27
Other Borrowings .............. 115,684 8,192 7.08 48,307 3,368 6.97 9,687 929 9.59
----------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ................. 1,087,463 45,542 4.19 946,731 38,940 4.11 849,465 32,181 3.79
----------------------------------------------------------------------------------------
Non-Interest-bearing
Liabilities:
Demand Deposits and Non-Interest
Bearing Savings ............. 200,078 176,798 175,349
Other Liabilities ............. 17,337 14,517 12,728
----------- ----------- -----------
Total Non-Interest
Bearing Liabilities ....... 217,415 191,315 188,077
----------- ----------- -----------
Trust Capital Securities ......... 20,000 16,156 -
----------- ----------- -----------
Stockholders' Equity ............. 123,174 108,234 97,400
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity ........... $1,448,052 $1,262,436 $1,134,942
=========== =========== ===========
Net Interest Income
(Tax-Equivalent Basis) ........ 59,096 56,422 53,289
Tax-Equivalent Adjustment ........ (2,032) (1,594) (1,419)
--------- -------- ------------
Net Interest Income .............. $57,064 $54,828 $51,870
========= ======== ============
Interest Rate Spread ............. 3.71% 4.10% 4.45%
====== ====== ======
Net Interest Margin .............. 4.46 4.86 5.14
====== ====== ======
Ratio of average
interest-earning assets
to average interest-bearing
liabilities ...................... 1.22x 1.23x 1.22x
====== ====== ======
</TABLE>
(1) Securities are carried at historical cost.
(2) Average loan balances and yields include non-accruing loans. Loan fees are
included in the interest amounts and are not material.
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1998 Compared with 1997 1997 Compared with 1996
------------------------------- --------------------------------
Increase(Decrease) Increase(Decrease)
(In Thousands) Total Due to Change in: Total Due to Change in:
Increase -------------------- Increase ---------------------
(Decrease) Volume Rate (Decrease) Volume Rate
------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans ........................ $1,856 $ 2,988 $(1,132) $2,990 $2,486 $504
Taxable ...................... 6,388 7,527 (1,139) 6,280 6,146 134
Non Taxable .................. 1,295 1,437 (142) 542 499 43
Trading Account Securities ... 8 5 3 5 6 (1)
Other Interest-Earning Assets. (271) (261) (10) 75 28 47
- - ----------------------------------------------------------------------------------------------------
Total Interest-Earning
Assets ................. 9,276 11,696 (2,420) 9,892 9,165 727
- - ----------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits ............. (602) 314 (916) (381) (460) 79
Time Deposits ................ 1,009 965 44 3,682 3,643 39
Short-Term Borrowings ........ 1,371 1,905 (534) 1,019 827 192
Other Borrowings ............. 4,824 4,770 54 2,439 2,758 (319)
- - ----------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities ............ 6,602 7,954 (1,352) 6,759 6,768 (9)
- - ----------------------------------------------------------------------------------------------------
Net Interest Income .......... $2,674 $ 3,742 $(1,068) $3,133 $2,397 $736
====================================================================================================
</TABLE>
The change in interest due to both volume and rate has been allocated
proportionally to both, based on their relative absolute values.
INVESTMENT PORTFOLIO (UNITED ONLY)
The following table sets forth the amortized cost of securities held to maturity
at year-end 1998, 1997 and 1996.
December 31,
----------------------------
(In Thousands) 1998 1997 1996
------- ------- -------
Debt Securities:
U.S. Treasury Securities ....................... $ 2,000 $ 990 $ 6,967
Obligations of U.S. Government
Agencies and Corporations .................... 14,994 27,953 42,921
Obligations of States and Political Subdivisions 22,141 11,712 12,643
Mortgage-Backed Securities ..................... 3,186 4,528 4,945
Securities Issued by Foreign Governments ....... 150 125 100
------- ------- -------
Total Securities Held to Maturity ............ $42,471 $45,308 $67,576
======= ======= =======
The following table sets forth the market value of securities available for sale
at year-end 1998, 1997 and 1996.
December 31,
-----------------------------
(In Thousands) ......................... 1998 1997 1996
-------- -------- --------
Debt Securities:
U.S. Treasury Securities ............ $ 1,002 $ 11,982 $ 16,758
Obligations of U.S. Government
Agencies and Corporations ......... 66,933 93,831 52,668
Obligations of States and Political
Subdivisions ...................... 78,780 56,887 45,231
Mortgage-Backed Securities .......... 364,354 312,164 174,040
Corporate Debt Securities ........... 24,000 13,920 --
-------- -------- --------
Total Debt Securities ............. 535,069 488,784 288,697
-------- -------- --------
Equity Securities:
Marketable Equity Securities ........ 33,886 55,555 23,703
Federal Reserve Bank and Federal
Home Loan Bank Stock .............. 11,178 8,661 4,394
-------- -------- --------
Total Equity Securities ........... 45,064 64,216 28,097
-------- -------- --------
Total Securities Available for Sale $580,133 $553,000 $316,794
======== ======== ========
The contractual maturity distribution and weighted average yields (calculated on
the basis of the stated yields to maturity, considering applicable premium or
discount), on a tax-equivalent basis (assuming a 34% Federal income tax rate),
of the Company's securities held to maturity and securities available for sale
portfolios at December 31, 1998, excluding equity securities, were as follows:
<TABLE>
<CAPTION>
MATURITIES AND WEIGHTED AVERAGE YIELDS
After 1 Year After 5 Years
Within But Within but Within After
(Dollars in Thousands) 1 Year 5 Years 10 Years 10 Years Total
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury Securities:
Amortized Cost ................. $ - $ 2,000 $ - $ - $ 2,000
Weighted Average Yield ......... -% 5.49% -% -% 5.49%
Obligation of U.S. Government
Agencies and Corporations:
Amortized Cost ................. 14,994 - - - 14,994
Weighted Average Yield ......... 6.34% -% -% -% 6.34%
Obligation of States and
Political Subdivisions:
Amortized Cost ................. 6,109 2,533 7,907 5,592 22,141
Weighted Average Yield ......... 3.51% 4.54% 4.71% 5.91% 4.66%
Mortgage-Backed Securities:
Amortized Cost ................. - - - 3,186 3,186
Weighted Average Yield ......... -% -% -% 7.20% 7.20%
Securities Issued by
Foreign Governments:
Amortized Cost ................. - 50 100 - 150
Weighted Average Yield ......... -% 7.02% 7.20% -% 7.14%
- - -------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity:
Amortized Cost ................. $21,103 $ 4,583 $ 8,007 $ 8,778 $ 42,471
Weighted Average Yield ......... 5.52% 4.98% 4.74% 6.38% 5.49%
=======================================================================================================
SECURITIES AVAILABLE FOR SALE
U.S. Treasury Securities
Amortized Cost ................. $ 999 $ - $ - $ - $ 999
Weighted Average Yield ......... 6.14% -% -% -% 6.14%
Obligations of U.S. Government
Agencies and Corporations:
Amortized Cost ................. 33,390 33,482 - - 66,872
Weighted Average Yield ......... 6.45% 6.36% -% -% 6.40%
Obligations of States and
Political Subdivisions:
Amortized Cost ................. 2,262 28,133 43,609 2,281 76,285
Weighted Average Yield ......... 4.62% 4.80% 4.79% 5.01% 4.80%
Mortgage-Backed Securities:
Amortized Cost ................. 17,370 109,803 102,619 132,313 362,105
Weighted Average Yield ......... 6.01% 6.73% 6.33% 6.56% 6.52%
Corporate Debt Securities:
Amortized Cost ................. - 5,500 11,315 6,528 23,343
Weighted Average Yield ......... -% 9.57% 6.30% 8.70% 7.74%
- - -------------------------------------------------------------------------------------------------------
Total Securities Available for Sale:
Amortized Cost ................. $54,021 $176,918 $157,543 $141,122 $529,604
Weighted Average Yield ......... 6.22% 6.44% 5.90% 6.63% 6.31%
=======================================================================================================
</TABLE>
LOAN PORTFOLIO (UNITED ONLY)
Types of Loans
The following schedule presents the components of gross loans, by type, as of
December 31, for each of the last five years.
<TABLE>
<CAPTION>
(In Thousands) 1998 % 1997 % 1996 % 1995 % 1994 %
- - ------------------------ ----------------- ----------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial ............. $212,875 27.99 $139,704 20.69 $176,899 25.84 $144,024 22.40 $103,457 18.14
Real Estate ............ 363,862 47.85 338,791 50.16 257,893 37.67 240,493 37.41 232,141 40.70
Lease Financing ........ 11,022 1.45 11,852 1.76 9,248 1.35 8,144 1.27 4,790 0.84
Installment ............ 172,717 22.71 184,932 27.39 240,625 35.14 250,238 38.92 229,961 40.32
------------------ ----------------- ---------------- ---------------- ----------------
Total Loans Outstanding 760,476 100.00 675,279 100.00 684,665 100.00 642,899 100.00 570,349 100.00
Less: Unearned Income
On Loans ............ 6,600 11,713 20,947 22,086 19,565
--------------------------------------------------------------------------------------------
Loans, Net of Unearned
Income .............. $753,876 $663,566 $663,718 $620,813 $550,784
============================================================================================
</TABLE>
Maturities and Sensitivities of Loans to Changes in Interest Rates
The following table shows the maturity of loans (excluding residential mortgages
of 1-4 family residences and installment loans) outstanding as of December 31,
1998, and segregates loans with fixed interest rates from those with floating or
variable interest rates.
Maturing
--------------------------------------------
After One
Within But Within After
(In Thousands) One Year Five Years Five Years Total
-------- ---------- ----------- --------
Commercial ................ $160,365 $ 41,999 $ 10,511 $212,875
Real Estate-Construction .. 9,114 15,428 2,579 27,121
Real Estate-Commercial .... 20,279 29,402 86,196 135,877
======== ======== ======== ========
$189,758 $ 86,829 $ 99,286 $375,873
======== ======== ======== ========
Amount of Loans Based Upon:
Fixed Interest Rates ... $ 45,277 $ 38,253
Variable Interest Rates 41,552 61,033
======== ========
$ 86,829 $ 99,286
======== ========
Non-Accrual, Past Due and Restructured Loans
The following table provides an analysis of non-performing assets as of December
31, for each of the last five years.
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996 1995 1994
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans (1):
Commercial and Industrial ....... $ 754 $ 190 $ 663 $ 809 $ 2,389
Loans Secured by Real Estate .... 4,030 5,964 8,057 6,289 7,487
Lease Financing ................. -- -- -- -- 9
Loans to Individuals for
Household, Family and Other
Personal Expenditure .......... 498 350 354 483 445
------- ------ ------ ------ --------
Total Non-Accrual Loans ............ 5,282 6,504 9,074 7,581 10,330
------- ------ ------ ------ --------
Loans Past Due 90 Days or More (2):
Commercial and Industrial ..... -- -- 7 61 730
Loans Secured by Real Estate .. 986 1,619 1,210 681 339
Lease Financing ............... -- 169 -- -- --
Loans to Individuals for
Household, Family and Other
Personal Expenditures ..... 303 577 1,277 936 991
------- ------ ------ ------ --------
Total Loans Past Due
90 Days or More ............... 1,289 2,365 2,494 1,678 2,060
------- ------ ------ ------ --------
Troubled Debt Restructured ......... 42 53 67 -- --
------- ------ ------ ------ --------
Total Non-Performing Loans ...... 6,613 8,922 11,635 9,259 12,390
Other Real Estate Owned (3) ........ 507 1,463 1,864 2,902 1,541
Other Assets Owned (4) ............. 51 174 178 223 181
------- ------ ------ ------ --------
Total Non-Performing Assets ..... $ 7,171 $10,559 $13,677 $12,384 $14,112
======= ======= ======= ======= ========
Non-Performing Loans as a
Percentage of Loans (year-end).... 0.88% 1.34% 1.75% 1.49% 2.25%
=======================================================================================
Non-Performing Loans as
Percentage of Total Assets (year-end) 0.44% 0.64% 0.99% 0.82% 1.23%
=======================================================================================
Non-Performing Assets as
A Percentage of Loans, Other
Real Estate Owned and Other
Assets Owned (year-end) 0.95% 1.59% 2.05% 1.98% 2.55%
=======================================================================================
Non-Performing Assets as
A Percentage of Total Assets (year-end) 0.48% 0.76% 1.16% 1.09% 1.41%
=======================================================================================
</TABLE>
(1) Generally represents those loans on which Management has determined that
borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is past due for a period of 90 days
or more (except when such loans are both well-secured and in the process of
collection). When loans are placed on non-accrual status, all accrued but unpaid
interest is reversed.
(2) Represents loans on which payments of interest and/or principal are
contractually past due 90 days or more, but are currently accruing interest at
the previously negotiated rates, based on a determination that such loans are
both well-secured and in the process of collection.
(3) Consists of real estate acquired through foreclosure.
(4) Consists of assets, other than real estate, acquired through repossession,
forfeiture or abandonment.
Potential Problem Loans
At December 31, 1998, the Company had no material loans where payments were
presently current or less than 90 days past due, yet the borrowers were known to
the Company to be experiencing severe financial difficulties. Management
continues to review and evaluate all loans on an ongoing basis so that potential
problems can be addressed immediately.
SUMMARY OF LOAN LOSS EXPERIENCE (UNITED ONLY)
The following table provides an analysis of the allowance for possible loan
losses for each of the five years ending December 31:
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------
(Dollars In Thousands) 1998 1997 1996 1995 1994
- - -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, Net of Unearned
Income - December 31, .. $ 753,876 $ 663,566 $ 663,718 $ 620,813 $ 550,784
========= ========= ========= ========= =========
Average Loans Outstanding . $ 689,021 $ 656,322 $ 629,337 $ 583,427 $ 488,408
========= ========= ========= ========= =========
Allowance for Possible Loan
Losses-January 1, ...... $ 8,434 $ 8,909 $ 8,858 $ 11,147 $ 12,331
Loans Charged Off:
Commercial ............. (242) (99) -- (417) (1,608)
Real Estate ............ (1,228) (376) (162) (659) (191)
Lease Financing ........ (28) -- -- -- --
Installment ............ (3,455) (4,667) (3,578) (3,072) (2,721)
========= ========= ========= ========= =========
Total Loans Charged Off ... (4,953) (5,142) (3,740) (4,148) (4,520)
--------- --------- --------- --------- ---------
Recoveries of Loans:
Commercial ............. 9 105 95 233 317
Real Estate ............ 50 21 30 20 150
Lease Financing ........ -- -- -- -- --
Installment ............ 898 709 425 508 604
--------- --------- --------- --------- ---------
Total Recoveries .......... 957 835 550 761 1,071
--------- --------- --------- --------- ---------
Net Loans Charged Off ..... (3,996) (4,307) (3,190) (3,387) (3,449)
Provision for Possible
Loan Losses ............ 3,144 3,832 3,241 1,098 2,265
--------- --------- --------- --------- ---------
Allowance for Possible Loan
Losses - December 31, .. $ 7,582 $ 8,434 $ 8,909 $ 8,858 $ 11,147
========= ========= ========= ========= =========
Allowance for Possible Loan
Losses to Non-Performing
Loans - December 31, ... 114.65% 94.53% 76.57% 95.67% 89.97%
============================================================================================
Allowance for Possible Loan
Losses to Total Loans
Outstanding - December 31, 1.01% 1.27% 1.34% 1.43% 2.02%
============================================================================================
Net loans Charged Off to
Average Loans Outstanding 0.58% 0.66% 0.51% 0.58% 0.71%
============================================================================================
</TABLE>
Allocation of the Allowance for Possible Loan Losses
The accompanying table sets forth the allocation of the allowance for possible
loan losses (the "Allowance") by category of loans and the percentage of loans
in each category to total loans at December 31 for each of the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------
(Dollars in
Thousands) 1998 1997 1996 1995 1994
- - ------------------------------------ ------------------ ------------------ ------------------ -----------------
% of % of % of % of % of
Loans Loans Loans Loans Loans
to To To to to
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- - ------------------------------------ ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial .... $ 1,831 28% $ 1,772 21% $ 1,842 26% $ 2,162 22% $ 3,460 18%
Real Estate ... 2,334 48 2,557 50 2,827 38 1,790 38 1,987 41
Lease Financing 152 1 136 2 93 1 84 1 48 1
Installment ... 3,218 23 3,702 27 3,904 35 4,666 39 5,584 40
Unallocated ... 47 -- 267 -- 243 -- 156 -- 68 --
------- ----- ------- ---- ------- ---- ------- ---- ------- ----
Total ...... $ 7,582 100% $ 8,434 100% $ 8,909 100% $ 8,858 100% $11,147 100%
======= ===== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
Each element of the allowance for possible loan losses is determined by use of
the Company's internal loan review process. Each loan portfolio is specifically
analyzed over an eight-quarter period, measured for historical loss history and
measured for the inherent risk of loss in the portfolio. The allowance process
utilizes a migration analysis, which tracks the movement of a loan as it
progresses through the loan portfolio. The allocation of the allowance is
determined by using the Company's historical loss history combined with the
inherent risk of loss contained in the loan portfolio as well as the ongoing
loan review process. Based on the respective portfolio's performance trends and
risk analysis, the allowance is then allocated over each portfolio as required
by the quarterly allowance review.
All commercial and commercial real estate loans in non-accrual status, all
impaired loans, as well as loans graded as doubtful that are in excess of
$100,000 are evaluated on an individual basis. All remaining installment loans,
residential mortgage loans, commercial, commercial real estate loans and off
balance sheet items are evaluated as a group.
The Company utilizes a comprehensive approach for its loan review process.
Various committees have been established to monitor and manage credit risk,
which involve account officers, division heads, the Loan Review Officer,
President and CEO, and the Executive Committee. On a monthly basis, management
reviews all portfolios for performance. A monthly report is made to the
Executive Committee regarding the status of the loan portfolio performance. On a
quarterly basis, an independent analysis of the portfolio is performed using the
information provided within the most recent quarter and over the past eight
quarters. After examining the results of the analysis and measuring actual
losses in correlation with estimated losses, factors are then incorporated
within the migration analysis to assist in correcting any differences between
actual and estimated losses. Qualitative factors allow for adjustments to loss
factors based on delinquency and non-accrual and non-performing trends,
portfolio volume, and changes in lending policies and procedures, including
underwriting, charge-off and recovery practices. Additional considerations
include changes in economic conditions, varying concentrations within industries
and geographic locale, and regulatory and legal changes. Each factor may impact
the portfolio depending on observed changes during the portfolio review process.
There have been no material changes made in the methodology or assumptions used
to estimate the allowance during 1998. During the year ended December 31, 1998,
loan quality has exhibited strong improvement throughout the entire loan
portfolio, with reductions in criticized and classified loans, reductions in the
level of non-performing assets and improvements in consumer delinquency trends
and charged-off accounts.
Changes in loan portfolio composition during the period reflect a continued
reduction in the installment portfolio with increases noted in residential and
commercial real estate loans. These mortgage loans have historically reported
lower losses than the installment loans. Due to the historical loss history and
strong underwriting criteria, lower levels of allowance allocation are required.
Additionally, the installment portfolio has reported improved charge-off and
delinquency levels.
Lower non-performing levels further contributed to a reduction in the allowance
levels of the Company, despite an increase in portfolio outstandings. Non
performing loans represent a larger risk of loss. Resolution and/or reduction of
these loans allow for less allocation of the allowance.
Management feels that the allowance for possible loan losses is adequate based
on the Company's historical loss levels as well as the inherent risk of loss
that exists as of the review date. Using the December 31, 1998 allowance level
of $7,582,000 and projecting net charge-offs based on the five year historical
average of net charge-offs as a percentage of average loans outstanding, the
allowance covers 1.68x projected net charge-offs.
DEPOSITS (UNITED ONLY)
The following table reflects the average balances and average rates paid on
deposits for each of the past three years.
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ----------------- ------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Demand and Non-Interest
Bearing Savings ....... $ 200,078 - % $176,798 - % $175,349 - %
- - ----------------------------------------------------------------------------------------------
Interest-Bearing
Transaction Accounts .. 113,240 1.70 115,126 1.59 122,702 1.48
Other Savings ............ 282,596 1.72 263,730 2.11 279,734 2.55
Time ..................... 472,818 5.40 454,391 5.39 386,992 5.38
- - ----------------------------------------------------------------------------------------------
Total Savings and Time 868,654 3.72 833,247 3.83 789,428 3.62
==============================================================================================
Total Deposits ........ $1,068,732 - $1,010,045 - $964,777 -
==============================================================================================
</TABLE>
The following table sets forth a summary of the maturities of time certificates
of deposit $100,000 and over at December 31, 1998.
(In Thousands)
- - --------------------------------------------------------------------------------
Three Months or Less ....................................... $52,642
Over Three Through Six Months .............................. 8,318
Over Six Through Twelve Months ............................. 8,301
Over Twelve Months ......................................... 20,692
- - --------------------------------------------------------------------------------
Total ................................................... $89,953
================================================================================
RETURN ON EQUITY AND ASSETS (UNITED ONLY)
Please refer to Item 6(b) - "Selected Financial Data - Consolidated (United
Only)" in this Form 10-K.
SHORT-TERM BORROWINGS (UNITED ONLY)
United's 1998 Annual Report, Financial Review section, contains on page 48,
"Note 10 -Short-Term Borrowings," the information required by this Item and that
information is incorporated herein by reference.
(f) Executive Officers of the Registrant
The following persons are executive officers of the Company or the Bank who do
not also serve as directors.
Executive
Officer Principal Occupation or Employment
Name Age Since For the Past Five Years
- - ----------------------- ------- ---------- ----------------------------------
Warren R. Gerleit 51 1992 Executive Vice President-Lending
and Branch Administration since
September 10, 1996; Executive Vice
President - Lending of the Bank
since December 20, 1994; Senior
Vice President - Lending since
May 25, 1992.
Donald W. Malwitz 55 1988 Vice President and Treasurer of
the Company since September 28,
1995; Treasurer of the Company
since August 1, 1988; Executive
Vice President and Chief Financial
Officer of the Bank since January
1, 1990.
Ralph L. Straw, Jr. 56 1993 Vice President, General Counsel
and Secretary of the Company since
July 1, 1996; Executive Vice
President General Counsel and
Cashier of the Bank since July 1,
1996; Executive Vice President and
General Counsel of the Bank since
December 21, 1995; Senior Vice
President and General Counsel
since September 13, 1993;
previously Vice President and
Counsel of National Westminster
Bank NJ and its predecessors.
A. Richard Abrahamian 39 1992 Senior Vice President and Chief
Accounting Officer of the Bank.
John J. Cannon 54 1995 Senior Vice President and Senior
Trust Officer of the Bank since
December 21, 1995; Vice President
and Trust Officer since July 11,
1994; formerly Vice President and
Trust Administrator of National
Westminster Bank NJ and its
Predecessors.
Joanne F. Herb 48 1993 Senior Vice President and
Corporate Strategic Planning
Manager of the Bank since May 16,
1995; Vice President and Corporate
Strategic Planning Manager since
May 31, 1993.
Raymond C. Kenwell 47 1995 Senior Vice President-Commercial
Lending since December 21, 1995;
Vice President-Commercial Lending
1993 to 1995; formerly Vice
President Lending of National
Westminster Bank NJ and its
Predecessors.
Charles E. Nunn, Jr. 45 1995 Senior Vice President and Director
of Human Resources of the Bank
since December 21, 1995; Vice
President and Director of Human
Resources 1994-1995; Vice
President of Human Resources
1992-1994.
Donald E. Reinhard 44 1996 Senior Vice President and Director
of Marketing since September 10,
1996; Vice President and
Marketing Manager 1993-1996.
Richard G. Tappen 48 1998 Executive Vice President of the
Bank since December 15, 1998;
President of United Commercial
Capital Group since July 28, 1997;
previously Senior Vice President
of Summit Bank.
Item 2 - Properties
The corporate headquarters of United is located in a three-story facility in
Bridgewater, New Jersey. The building, which is leased, is approximately 65,000
square feet and houses the executive offices of the Company, the Bank, and a
branch office of the Bank. The Bank occupies 34 additional branch offices, of
which 18 are owned and 16 are leased.
United's 1998 Annual Report Financial Review section contains information on
page 24, Note 8; page 25, Note 11 and pages 30 to 31, Note 17 that is
incorporated herein by reference.
Item 3 - Legal Proceedings
United's 1998 Annual Report, Financial Review section, contains on pages 30 to
31, Note 17, the information required by Item 3 and that information is
incorporated herein by reference.
Item 4 - Submission of Matters to a Vote of Shareholders
There were no matters submitted to a vote of Shareholders during the fourth
quarter of the fiscal year ended December 31, 1998.
PART II
Item 5 - Market for Registrant's Common Stock and Related Shareholder Matters
The only voting securities of the Company consist of its common stock
outstanding. The shares are listed on the NASDAQ Stock Market, formerly known as
the National Association of Securities Dealers Automated Quotation National
Market System, under the symbol UNBJ.
On December 31, 1998, there were 2,880 shareholders of the Company's common
stock.
United's 1998 Annual Report, contains on page 14, under the heading "Market and
Dividend Information", the information required by Item 5 and that information
is incorporated herein by reference.
Item 6 - Selected Financial Data
(a) Combined Consolidated (Including Raritan) - United's 1998 Annual Report,
Financial Review section, contains on pages 12 and 17 through 19 (Note
1) information required by Item 6 and that information is incorporated
herein by reference.
(b) Consolidated (United Only)
<TABLE>
<CAPTION>
(Dollars In Thousands,
Except Share Data) 1998 1997 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Interest Income ................ $ 102,606 $ 93,768 $ 84,051 $ 81,979 $ 68,576
Interest Expense ............... 45,542 38,940 32,181 32,116 20,118
Net Interest Income ............ 57,064 54,828 51,870 49,863 48,458
Provision for Possible Loan Losses 3,144 3,832 3,241 1,098 2,265
Net Interest Income after Provision
For Possible Loan Losses ....... 53,920 50,996 48,629 48,765 46,193
Non-Interest Income ............... 22,781 19,930 16,086 15,158 14,887
Non-Interest Expense .............. 54,555 49,551 45,051 49,371 44,478
Income Before Taxes ............... 22,146 21,375 19,664 14,552 16,602
Provision for Income Taxes ........ 6,546 6,836 6,596 4,295 5,270
Net Income ........................ $ 15,600 $ 14,539 $ 13,068 $ 10,257 $ 11,332
Income Before Merger-Related and
Restructuring Charges, and
SAIF Assessment ................ $ 17,294 $ 15,937 $ 13,375 $ 12,346 $ 11,332
Balance Sheet Data (at year-end):
Total Assets ................... $1,488,593 $1,383,376 $1,175,445 $1,134,963 $1,003,551
Securities ..................... 623,843 599,529 384,882 391,049 355,111
Federal Funds Sold ............. -- 7,325 17,372 22,444 22,683
Loans (Net of Unearned Income) . 753,876 663,566 663,718 620,813 550,784
Allowance for Possible
Loan Losses .................. 7,582 8,434 8,909 8,858 11,147
Deposits ....................... 1,046,715 1,055,619 1,003,350 964,598 865,492
Short-Term Borrowings (1) ...... 154,635 79,546 46,328 53,347 52,301
Other Borrowings (2) ........... 119,942 92,706 9,693 9,680 1,269
Stockholders' Equity ........... 126,245 116,627 101,883 93,744 76,154
Adjusted Financial Ratios: (3)
Return on Average Assets ....... 1.19% 1.26% 1.18% 1.13% 1.16%
Return on Average Stockholders'
Equity ....................... 14.04% 14.72% 13.73% 14.30% 14.38%
Financial Ratios:
Return on Average Assets ....... 1.08 % 1.15% 1.15% 0.94% 1.16%
Return on Average Stockholders'
Equity ....................... 12.67% 13.43% 13.42% 11.88% 14.38%
Net Interest Margin ............ 4.46% 4.86% 5.14% 5.08% 5.52%
Efficiency Ratio (4) ........... 63.54% 59.98% 61.86% 67.66% 67.89%
Average Stockholders' Equity to
Average Assets ............... 8.51% 8.57% 8.58% 7.88% 8.07%
Leverage Ratio (year-end) ......... 8.76% 8.93% 7.97% 7.15% 8.53%
Tier I Capital to Risk-Weighted
Assets (year-end) .............. 13.77% 14.56% 11.59% 10.90% 13.98%
Combined Tier I and Tier II
Capital to Risk-Weighted
Assets (year-end) .............. 14.57% 15.57% 12.71% 12.11% 15.38%
Loans to Deposits (year-end) ...... 72.02% 62.86% 66.15% 64.36% 63.64%
Non-Performing Loans to
Loans (year-end) (5) ........... 0.88% 1.34% 1.75% 1.49% 2.25%
Non-Performing Assets as a
Percentage of Loans, Other Real
Estate Owned and Other
Assets Owned (year-end) ........ 0.95% 1.59% 2.05% 1.98% 2.55%
Non-Performing Assets to
Total Assets ................... 0.48% 0.76% 1.16% 1.09% 1.41%
Allowance for Possible Loan
Losses to Loans (year-end) ..... 1.01% 1.27% 1.34% 1.43% 2.02%
Dividend Payout Ratio ............. 46% 40% 38% 45% 36%
Common Share Data: (6)
Net Income Per Diluted Share ... $ 1.39 $ 1.30 $ 1.18 $ 0.93 $ 1.05
Net Income Per Diluted Share
Before Merger-Related and
Restructuring Charges, and
SAIF Assessment .............. $ 1.54 $ 1.43 $ 1.21 $ 1.12 $ 1.05
Cash Dividends Declared Per Share $ 0.65 $ 0.52 $ 0.45 $ 0.42 $ 0.38
Book Value Per Share (year-end). $ 11.39 $ 11.58 $ 10.23 $ 9.44 $ 7.80
Average Diluted Shares Outstanding
(in thousands) ............... 11,248 11,176 11,066 10,999 10,828
Other Data:
Number of Employees
(full-time equivalent) ....... 455 495 488 507 550
Number of Stockholders ......... 1,780 1,662 1,797 1,960 1,973
</TABLE>
(1) Includes Federal funds purchased, securities sold under agreements to
repurchase less than one year, Federal Home Loan Bank advances, demand
notes-U.S. Treasury and borrowed funds.
(2) Includes other borrowed funds, securities sold under agreements to
repurchase greater than one year, and obligation under capital lease.
(3) Before merger-related and restructuring charges, and SAIF Assessment.
(4) Efficiency ratio is calculated by dividing adjusted non-interest expense by
tax equivalent net interest income and adjusted non-interest income. Adjusted
non-interest expense is total non-interest expense less merger related and
restructuring charges, distributions on Series B Capital Securities and net
costs to operate other real estate. Adjusted non-interest income is non-interest
income less distributions on Series B Capital Securities and net gains from
securities transactions.
(5)Non-performing loans consist of non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing.
(6) Adjusted for the 10% stock dividend paid in 1998.
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
(a) Combined Consolidated (Including Raritan)
United's 1998 Annual Report, Financial Review section, contains on pages 1
through 11 information required by Item 7 and that information is incorporated
herein by reference.
(b) Consolidated (United Only)
This section is presented to assist in understanding the operating results of
United National Bancorp (the "Parent Company") and its wholly-owned
subsidiaries, United National Bank (the "Bank"), and UNB Capital Trust I (the
"Trust") or when consolidated with the Parent Company, the ("Company"), for each
of the past three years and financial condition for each of the past two years.
This section should be read in conjunction with the consolidated financial
statements, the accompanying notes and selected financial data provided within
this report and incorporated herein by reference.
On September 30, 1998, the Company acquired State Bank of South Orange ("SBSO")
by merging SBSO into the Bank. This acquisition was accounted for on the
pooling-of-interests accounting method and therefore, all financial statements
for periods prior to the merger have been restated to include the amounts and
results of operations of SBSO.
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.
OVERVIEW
The Company reported net income in 1998 of $15,600,000, an increase of 7.3% from
the $14,539,000 earned in 1997. Diluted net income per share was $1.39 in 1998
compared to $1.30 reported in 1997. Basic net income per share in 1998 was $1.41
as compared to the $1.31 reported in 1997.
The Company's operating income for 1998, defined as net income excluding the
effects of one-time charges, net of taxes, was $17,294,000, an 8.5% increase
over the $15,937,000 for the year ended December 31, 1997. During 1998, a
one-time charge totaling $1,694,000 or $0.15 per diluted share, net of taxes,
was related to the acquisition of SBSO while in 1997, the Company incurred
one-time charges totaling $1,398,000 or $0.13 per diluted share, net of taxes,
relating to the acquisition of Farrington and the sale of the Company's former
operations center. Operating income per diluted share, adjusted for the 10%
stock dividend paid in 1998, was $1.54, a 7.7% increase over the $1.43 reported
for the year ended December 31, 1997.
The Company reported net income, after one-time charges, for 1997 of
$14,539,000, up 11.3% from the $13,068,000 earned in 1996. Diluted per share
results for 1997 increased 10.2% to $1.30 from $1.18 reported in 1996. Operating
income for 1997 was $15,937,000 or $1.43 per diluted share as compared to
$13,375,000 or $1.21 per diluted share in 1996. Operating income for 1996 was
defined as net income excluding the one-time charges of $307,000, or $0.03 per
diluted share, net of taxes related to a one-time special Savings Association
Insurance Fund ("SAIF") assessment.
Key performance ratios based on operating income increased in 1998. Based on
operating income, return on average assets ("ROA") and return on average equity
("ROE") were 1.19% and 14.04%, respectively, in 1998, compared to 1.26% and
14.72%, respectively, in 1997. ROA and ROE in 1996 were 1.18% and 13.73%,
respectively. ROA and ROE, based on operating income, have averaged 1.18% and
14.23%, respectively, over the past five years.
Based on net income, ROA was 1.08% in 1998 as compared to 1.15% in 1997 and
1996, while ROE was 12.67% in 1998, 13.43% in 1997 and 13.42% in 1996. In
addition, the efficiency ratio was 63.54% for 1998 versus 59.98% in 1997 and
61.86% in 1996. During 1998, the increase in the efficiency ratio was due in
part to the four new branches opened during 1998 and the fourth quarter of 1997.
Net income results for 1998 were affected by an increase in net interest income,
a decrease in the provision for loan losses, an increase in non-interest income
and a decrease in the provision for income taxes. These increases were offset by
the increase in non-interest expense.
The Company's favorable net income results for 1997 were the result of an
improvement in net interest income and non-interest income. The increases were
offset in part by an increase in non-interest expense, an increase in the
provision for loan losses and a slight increase in the provision for income
taxes.
Loan demand throughout 1998 was higher than 1997, consequently loan balances at
December 31, 1998 were $90,310,000 higher than the prior year-end. Total loans
averaged $689,021,000 during 1998, an increase of $32,699,000 or 5.0% compared
with the prior year. Interest rates, as measured by the prime rate, began the
year 1998 at 8.50% and were decreased several times throughout the third and
fourth quarters to end the year at 7.75%. Consolidated assets at year-end 1998
totaled $1,488,593,000, which represented an increase of 7.6% over 1997.
Securities available for sale increased to $580,133,000 and represented 39.0% of
the total assets at December 31, 1998 as compared to $553,000,000 or 40.0% at
year-end 1997. Conversely, securities held to maturity decreased $2,837,000 from
1997 to $42,471,000 at year-end 1998 and accounted for 2.9% of total assets at
December 31, 1998, versus 3.3% last year.
Total deposits decreased by 0.8% to $1,046,715,000 at December 31, 1998. Time
deposits declined by $47,396,000 or 10.0% to $428,040,000 at December 31, 1998
compared to $475,436,000 at year-end 1997 primarily as a result of lower levels
of certificates of deposit of $100,000 or more. In contrast, demand deposits
increased to $203,129,000 at year-end 1998, a 13.6% increase over the prior
year-end. Savings deposits also increased by $14,147,000 or 3.5% from 1997 to
$415,546,000 at year-end 1998. On average, time deposits were up $ 18,427,000 or
4.1% from 1997. Demand deposits and non-interest-bearing savings deposits
averaged $200,078,000 in 1998, up 13.2% from the 1997 average of $176,798,000,
while average savings deposits were up $16,980,000 or 4.5% from 1997's average
balance of $378,856,000.
EARNINGS ANALYSIS
Operating Revenue
The Company's earnings have two major components: net interest income and
non-interest income, which includes net gains from securities transactions.
Operating revenue, excluding securities gains, increased $3,057,000 or 4.2% in
1998 as compared to 1997 with an increase of $5,780,000 or 8.6% in 1997 as
compared to 1996.
Net Interest Income
Net interest income, the amount by which interest earned on assets exceeds
interest paid to depositors and other creditors, is the Company's principal
source of revenue. For purposes of this review, interest exempt from Federal
taxation has been restated to a taxable-equivalent basis, which places
tax-exempt income and yields on a comparable basis with taxable income to
facilitate analysis. The Federal income tax rate used for 1998, 1997 and 1996
was 34%. In calculating loan yields, the applicable loan fees have been included
in interest income and non-performing loans are included in the average loan
balances.
Net interest income increased $2,674,000 or 4.7% to a level of $59,096,000 in
1998 following a $3,133,000 or 5.9% increase in the prior year. The primary
reasons for the increase were the result of an increase in net interest-earning
assets, offset in part by a decrease in the net interest margin. The higher
yielding loan portfolio was 52.0% of average interest-earning assets in 1998
from 56.5% in 1997 and 60.7% in 1996, while average securities increased to
46.7% of average interest-earning assets in 1998, up from 41.6% in 1997 and
37.3% in 1996. In 1997, after raising additional Tier I Capital through the
issuance of trust capital securities, the Company developed and partially
implemented a strategy to increase earning assets, effectively leveraging its
new 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"). In the first quarter of 1998, the Company
continued the Growth Strategy and completed an additional $50 million. This was
supplemented by another $20 million of the Growth Strategy in the third quarter
of 1998. For additional discussion on the Growth Strategy see "Financial
Condition - Securities." The Company's net interest margin declined moderately
in 1998 and 1997, largely due to the impact of the Growth Strategy and the
effect of an investment in corporate owned life insurance, which reduces
investable funds while increasing non-interest income.
For 1998, average interest-earning assets increased $162,367,000 or 14.0% over
1997 while average rates declined 23 basis points, creating an increase in total
interest income of $9,276,000 or 9.7% from 1997. In 1997, average
interest-earning assets increased $124,682,000 or 12.0% over the prior year,
offset by slightly lower rates on earning assets, which decreased 3 basis
points. Accordingly, interest income increased $9,892,000 or 11.6% from 1996.
The Company continued to monitor the rates paid on all categories of
interest-bearing liabilities to reflect existing market conditions. Average
interest-bearing deposits increased by $35,407,000 or 4.2%, and the cost of
deposits decreased to 3.72% in 1998 from 3.83% in 1997. This growth in average
deposits was the result of the Bank's new branches opened during the year, in
addition to deposit growth at the existing branches. The decrease in the cost of
funds was the result of the lower interest rate environment during 1998. The
Company utilized short-term and other borrowings as an additional funding source
and to fund the Growth Strategy. The average balance of borrowings, including
the obligation under capital lease, was $218,809,000 in 1998 with an average
cost of 6.05%, as compared to the average balance of $113,484,000 in 1997 with
an average cost of 6.20%. The effect of the above changes in 1998 created a 39
basis point and 40 basis point decline in the Company's net interest spread and
net interest margin, respectively.
In 1997, average interest-bearing deposits increased by $43,819,000 or 5.6%,
while the cost of deposits increased to 3.83% in 1997 from 3.62% in 1996. The
increase in average interest-bearing deposits was mainly attributable to the 21
basis point increase in the average cost. The Company also utilized short-term
and other borrowings as an additional source in 1997 to fund the $150 million of
the Growth Strategy. The average balance of borrowings, including the obligation
under capital lease, was $113,484,000 in 1997 with an average cost of 6.20%, as
compared to the average balance in 1996 of $60,037,000 at a cost of 5.97%. The
effect of the above changes in 1997 created 35 basis point and 28 basis point
decreases in the Company's net interest spread and net interest margin,
respectively.
The net interest margin, which represents net interest income as a percentage of
average interest-earning assets, is a key indicator of net interest income
performance. The net interest margin decreased during 1998 to 4.46% from 4.86%
in 1997. The decline in the net interest margin in 1998 resulted from the
overall lower interest rate environment during the year along with the Growth
Strategy implemented during 1998 and 1997. The net interest margin decreased
during 1997 to 4.86% from 5.14% in 1996. The decline in the net interest margin
in 1997 resulted to a large degree from the Growth Strategy implemented during
1997. Although the Growth Strategy resulted in a decline in the net interest
margin and spread, the overall result was a positive impact on the Company's net
income and return on average equity.
Non-Interest Income
Non-interest income, which has become an increasingly important source of
revenue for the Company, consists primarily of trust income, service charges on
deposit accounts, other service charges, commissions and fees, and securities
gains. In 1998, total non-interest income amounted to $22,781,000, an increase
of $2,851,000 or 14.3% from 1997, as compared with a 23.9% increase in 1997 from
1996. Included in these figures were net gains from securities transactions of
$3,850,000 in 1998 as compared to $1,820,000 in 1997 and $798,000 in 1996.
Non-interest income in 1998, not including securities gains, was up $821,000 or
4.5% over 1997, compared to an increase of $2,822,000 or 18.5% in 1997 from
1996.
Trust income continues to be a major contributor to fee income, representing
23.9% of the total non-interest income. Trust income rose $478,000 or 9.6% to
$5,454,000 in 1998 compared to a $640,000 or 14.8% increase from 1996 to 1997.
This increase was due to growth in the level of assets under management,
assisted through the expansion of new client relationships, as well as the
addition of new investment products. The Trust Division offers a full range of
fiduciary services, ranging from mutual funds to personal trust, investment
advisory and employee benefits. Trust services are expected to continue to play
an important role in the Company's future.*
Service charges on deposit accounts decreased $61,000 or 1.4% to $4,443,000 in
1998 as compared to a $55,000 or 1.2% increase from 1996 to 1997. The decrease
in 1998 resulted from fewer occurrences of overdraft fees assessed. The increase
in 1997 resulted from higher volume of accounts during the year. Other service
charges, commissions and fees increased $346,000 or 5.6% to $6,553,000 in 1998
due primarily to increased automated teller machine ("ATM") transaction fees and
fees generated by outsourcing the Bank's official check function. During 1997,
other service charges, commissions and fees increased $1,590,000 or 34.4% from
1996 to $6,207,000 due to increased credit card application fees, increases in
credit card annual and transaction fees and an increase in ATM transaction fees.
Other income increased $58,000 or 2.4% from 1997 to $2,481,000 in 1998 due to an
increase in income on an investment in corporate owned life insurance partly
offset by a decline in gains from sales of the guaranteed portions of Small
Business Administration ("SBA") loans. Other income increased $537,000 or 28.5%
from 1996 to $2,423,000 in 1997 due primarily to increased gains from sales of
the guaranteed portions of SBA loans.
Net gains on securities transactions of $3,850,000 were recorded in 1998
compared with $1,820,000 in 1997 and $798,000 in 1996. The gains in 1998 and
prior years were the outcome of restructuring the investment portfolio to alter
maturities, due to the changing interest rate environment, to maximize the
return on the investment portfolio. Additional gains were realized from the
trading account portfolio due primarily to favorable conditions in the
marketplace.
Non-Interest Expense
Non-interest expense in 1998 totaled $54,555,000, an increase of $5,004,000 or
10.1% over to 1997. This compared to a $4,500,000 or 10.0% increase in 1997 over
1996. Included in 1998 were one-time charges before tax of $2,179,000 in
connection with the SBSO merger. Included in 1997 were one-time charges before
tax of $2,208,000 incurred in connection with both the Farrington merger and the
sale of the Bank's former operations center. During the third quarter of 1996,
the Company recorded a pre-tax charge of $512,000 for the one-time special SAIF
assessment. Excluding the one-time charges, non-interest expense in 1998
increased $5,033,000 or 10.6% from 1997 and non-interest expense in 1997
increased $2,804,000 or 6.3% from 1996. Management continues to seek
opportunities to control non-interest expense levels.
The largest component of non-interest expense is salaries and employee benefits,
which accounted for 39.0% of total non-interest expense in 1998 compared to
41.6% and 47.6% in 1997 and 1996, respectively. Management continues to monitor
staffing levels, employee benefits and operational consolidations. Compared to
the previous year, the 1998 expense of $21,282,000 represents a 3.3% increase
versus a 3.9% decrease between 1997 and 1996. Specifically, salaries and wages
increased $877,000 in 1998 while employee benefits declined $207,000. Medical
health care costs, a significant component of employee benefits, increased
$234,000 from 1997 and had declined $323,000 in 1997 from 1996. This expense is
based on the level of medical claims and there can be no assurance that these
costs will not increase in the future. The Company's goal to control this
expense continues to remain a high priority.* Full-time equivalent employees
were 455 at December 31, 1998 compared with 495 and 488 at December 31, 1997 and
1996, respectively.
Net occupancy and furniture and equipment expense increased $807,000 or 12.4% in
1998 to $7,331,000 as compared to an increase of $129,000 or 2.0% in 1997 from
1996. The increase in both 1998 and 1997 resulted from the opening of several
new branches offset in part by lower building maintenance costs during the year.
Data processing expense for 1998 increased $1,868,000 or 35.1% to $7,191,000
from $5,323,000 in 1997 and $972,000 or 22.3% in 1997 from $4,351,000 in 1996.
These increases were caused by higher processing volumes as well as the result
of outsourcing a portion of the credit card processing operation in late 1997.
Data processing expense also increased as the Company reevaluated its joint
venture investment in United Financial Services, Inc. Based upon the Company's
decision to convert to a new data processing system, the Company reduced the
amount of amortization and depreciation periods of the underlying assets of the
joint venture. Distributions on trust capital securities of $2,002,000 and
$1,557,000, in 1998 and 1997 respectively, resulted from the placement of such
securities in March 1997. Amortization of intangible assets was $1,845,000 in
1998 compared to $1,761,000 and $1,788,000 in 1997 and 1996 respectively.
Net cost to operate other real estate, which results from costs of holding other
real estate in addition to valuation adjustments, amounted to $225,000 in 1998,
a decrease of $25,000 from 1997. These costs decreased in 1997 to $250,000
compared to $329,000 in 1996. The decrease in 1997 and 1998 was due to lower
carrying costs and write-downs associated with the reduced inventory of other
real estate holdings. For additional discussion on other real estate, see "Asset
Quality".
One-time charges in 1998 of $2,179,000 resulted from the acquisition of SBSO in
the third quarter. This amount consisted primarily of payouts on existing
employment contracts, a penalty on termination of SBSO's data processing
service, the write-off of unusable fixed assets and supplies, professional
services directly attributable to the acquisition, and severance costs.
Substantially all amounts were paid by December 31, 1998. The one-time charge in
1997 amounted to $2,208,000, of which $1,665,000 resulted from the acquisition
of Farrington in the first quarter. Additionally, a non-recurring loss of
$543,000 resulting from the sale of the Bank's operations center was recorded in
the second quarter of 1997.
Other expenses amounted to $12,500,000 in 1998, an increase of $1,184,000 or
10.5% compared to the prior year while 1997's expense was $587,000 or 5.5%
higher than that of 1996. The increases in 1998 and 1997 were primarily 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.
Income Taxes
The provision for income taxes decreased $290,000 in 1998 to $6,546,000 compared
to an increase in 1997 of $240,000. The decrease in income taxes resulted from
higher levels of tax-exempt income than the prior year. The Company implemented
certain tax planning strategies during 1998, which increased the Bank's
investment in tax-exempt securities. The increase in 1997 resulted from the
higher levels of taxable income. For further information regarding the provision
for income taxes, see Note 14 to the Consolidated Financial Statements.
LINES OF BUSINESS
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, and Trust and
Investment Services. Activities not included in these lines are reflected in
Corporate. Summary financial information for the lines of business for the years
1998 and 1997 are presented on pages 55-56, "Note 19 - Segment Reporting," of
United's 1998 Annual Report, Financial Review section and that information is
incorporated herein by reference.
Lines of business information is based on accounting practices that conform to
and support the current management structure and is not necessarily comparable
with similar information for any other financial company. Net income before
taxes includes revenues and expenses directly associated with each line, in
addition to allocations of certain indirect revenues and expenses.
A matched-maturity funds transfer pricing methodology is employed to assign a
cost of funds to the earning assets of each business line, as well as to assign
an earnings credit to the liabilities of each business line. The provision for
loan losses is based on the historical net charge-off ratio for each applicable
line of business.
For purposes of this review, interest income which is exempt from Federal
taxation has been restated to a taxable-equivalent basis, which places
tax-exempt income on a comparable basis with taxable income to facilitate
analysis.
Retail Banking
Retail Banking meets the banking needs of individuals and small businesses. This
segment includes loans secured by 1-4 family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures and lease financing.
In addition, this segment includes the branch network.
The average balance of interest-earning assets declined $11,239,000, or 2.5%, to
$436,167,000 in 1998 from $447,406,000 in 1997. The decline was primarily in the
indirect automobile portfolio within the installment lending area.
Net interest income increased $870,000, or 2.3%, to $38,416,000 in 1998 from
$37,546,000 in 1997. Interest income declined $1,413,000, or 3.8%, resulting
primarily from the decline in rates. Interest expense increased $571,000, or
1.8%, resulting from higher cost of deposits. In 1998, there was an increase of
$2,854,000 in the funds transfer price credit. The increased credit was the
result of the higher earnings credit received for providing funding primarily
from the branch network for other lines of business.
The provision for loan losses declined $1,448,000, from $3,520,000 in 1997 to
$2,072,000 in 1998, as a result of the improvement in both asset quality and net
charge-offs.
Non-interest income, which is comprised primarily of loan and deposit fees,
increased $839,000, or 7.1%, in 1998. The increase was due primarily to
increased ATM transaction fees and fees generated by outsourcing the Bank's
official check function. Non-interest expense increased $5,221,000, or 14.1%,
from $37,117,000 in 1997 to $42,338,000 in 1998. This increase was primarily the
result of the costs associated with the four new branches opened in late 1997
and during 1998.
As a result of the increase in non-interest expense, Retail Banking pre-tax net
income of $6,598,000 in 1998 was down from 1997 results of $8,662,000.
Commercial Banking
Commercial Banking provides term loans, demand secured loans, Small Business
Administration ("SBA") financing, floor plan loans and financing for commercial
real estate transactions.
Net interest income increased $1,581,000 to $9,566,000 in 1998 from $7,985,000
in 1997. The increase was primarily related to loan growth. Average
interest-earning assets increased $38,194,000 or 16.0% from 1997, as all major
product lines showed growth. Partially offsetting the increased loan balance was
a decrease in the yield earned on loans due to the declining rate environment.
The provision for loan losses in 1998 increased $760,000 from 1997, resulting
primarily from the growth in outstandings.
Non-interest income declined $496,000 to $885,000 in 1998 from $1,381,000 in
1997. This decline was primarily the result of lower gains from sales of the
guaranteed portion of SBA loans. Non-interest expense declined $422,000, or
9.5%, from $4,447,000 in 1997 to $4,025,000 in 1998.
As a result of the increase in net interest income and decline in non-interest
expense, pre-tax net income increased $747,000, or 16.2%, to $5,354,000 in 1998
from $4,607,000 in 1997.
Investments
The Investment segment is comprised of the Company's securities portfolio, which
includes U. S. Treasury and government agency securities, tax-exempt securities,
mortgage-backed securities, corporate debt securities, equity securities,
trading accounts and short-term investments.
Net interest income increased $1,561,000 to $4,042,000 in 1998 from $2,481,000
in 1997. This increase was due primarily to a $141,281,000 increase in average
interest-earning assets. Non-interest income increased $2,030,000 to $3,850,000
in 1998 from $1,820,000 in 1997. This increase was the result of increased
securities gains due to restructuring of the investment portfolio and through
sales originating from the trading account portfolio. Non-interest expense
increased $91,000 to $220,000 in 1998.
As a result of the increase in net interest income and non-interest income,
pre-tax net income increased $3,500,000 to $7,672,000 in 1998 from $4,172,000 in
1997.
Trust and Investment Services
Trust and Investment Services revenues are mostly in the form of fees for
services provided. The major sources of fee income are generated from a full
range of fiduciary services, ranging from mutual funds to personal trust,
investment advisory and employee benefits.
Non-interest income increased $478,000, or 9.6%, to $5,454,000 in 1998 from
$4,976,000 in 1997. This increase was due to growth in the level of assets under
management as well as the addition of new investment products. Non-interest
expense increased $200,000, or 5.3%, to $3,939,000 in 1998. This increase was
generally the result of additional expenses, both direct and indirect, based on
the expansion of this line of business.
Pre-tax net income for 1998 was $1,512,000, an increase of $287,000 or 23.4%,
over 1997.
Corporate
Corporate is primarily comprised of the treasury function, which is responsible
for managing interest rate risk. Additionally, certain revenues and expenses
that are not considered allocable to a line of business are reflected in this
area.
Net interest income declined $1,347,000 to $7,075,000 in 1998 from $8,422,000 in
1997. This decrease was generally related to the higher benefit provided to the
other lines of business on loans and deposits.
Non-interest expense decreased $141,000 from $150,000 in 1997. Merger and other
unallocated expenses increased $55,000, or 1.4%, from $3,969,000 in 1997 to
$4,024,000 in 1998. This expense includes one-time charges and amortization of
intangible assets.
Pre-tax net income amounted to $3,042,000 in 1998, down from $4,303,000 in 1997.
CAPITAL
The Company is committed to maintaining a strong capital position. Capital
adequacy is monitored in relation to the size, composition and quality of its
asset base and with consideration given to regulatory guidelines and
requirements, as well as industry standards.
At December 31, 1998, total stockholders' equity was $126,245,000, an increase
of $9,618,000 or 8.2% from year-end 1997. The increase was due primarily to net
income of $15,600,000, offset in part by cash dividends declared of $7,039,000.
Capital was also increased as a result of the change in net unrealized gain
adjustment on securities available for sale, net of tax, of $834,000. Other
additions resulted from restricted stock activity and stock options exercised.
As detailed in Note 13 to the consolidated financial statements, the Company and
the Bank currently exceed all minimum capital requirements.
FINANCIAL CONDITION
Total average assets increased $185,616,000 or 14.7% to $1,448,052,000 in 1998,
while total assets reached $1,488,593,000 at year-end, an increase of 7.6% from
the December 31, 1997 balance. Average interest-earning assets, which represents
91.5% of total average assets, increased $162,367,000 or 14.0% from 1997 to
$1,324,291,000 in 1998. Specifically, average loans increased $32,699,000 or
5.0% in 1998 to $689,021,000, while average total securities increased
$134,401,000 or 27.8% from 1997 and short-term investments decreased $4,733,000
or 21.6%.
Securities
Total securities, which include securities held to maturity, securities
available for sale and trading account securities, averaged $618,117,000 in
1998, an increase of $134,401,000 or 27.8% from 1997. For purposes of this
review, unrealized gains and losses have been excluded. The portfolio
represented 46.7% of average- interest earning assets for 1998 and 41.6% for
1997. The yield on the total portfolio (on a tax-equivalent basis) decreased 26
basis points to 6.63%. The increase in average balances in the security
portfolio was primarily the result of and additional $70 million of Growth
Strategy implemented during 1998 and the full-year effect of the $150 million of
Growth Strategy implemented during the prior year. The Growth Strategy utilized
purchases of U.S. government agency bonds and mortgage-backed securities,
including collateralized mortgage obligations ("CMO's"), funded through advances
and repurchase agreements with various maturities ranging up to 5 years to
increase net interest income. The average lives of the investments purchased in
the Growth Strategy were in the three to five year range.
U.S. Treasury and government agency securities declined $22,085,000 to average
$106,739,000 in 1998. The yield on this portfolio decreased 6 basis points to
6.68% from the reported yield of 6.74% in 1997. The prevailing market rates of
new investments were lower than those of maturing securities.
Tax-exempt securities, consisting primarily of obligations of states and
political subdivisions, averaged $79,203,000 in 1998, an increase of $19,390,000
from 1997. As a part of its tax planning strategy, the Company continues to
invest in these securities. At year-end, tax-exempt securities were $98,426,000,
up $31,082,000 from December 31, 1997. The average tax-equivalent yield on these
securities decreased 23 basis points to 7.38% in 1998 from 7.61% in 1997.
Mortgage-backed securities averaged $364,501,000 in 1998, an increase of
$118,479,000 from 1997. These securities provide liquidity through periodic
principal and interest repayments. The yield on mortgage-backed securities
averaged 6.46% compared to 6.84% in 1997.
Corporate debt securities averaged $18,898,000 during 1998. At December 31, 1998
the amortized investment in corporate debt securities was $23,343,000, and
represented the Company's purchase of trust capital securities of other banks.
The average yield on trust capital securities was 9.39% in 1998. Securities
issued by a foreign government averaged $142,000 in 1998 compared to $115,000 in
the prior year. The year-end balance was $150,000 as compared to $125,000 a year
earlier.
Equity securities increased $12,303,000 during 1998 to $48,634,000. Equity
securities consisted primarily of money market mutual funds averaging
$35,091,000 in 1998 compared to $27,322,000 in 1997. The remaining increase was
the result of equity investments made by the Parent Company. The average yield
on equity securities decreased 8 basis points to 5.56% from 5.64% in 1997.
Short-term investments, which included Federal funds sold and Federal Home Loan
Bank deposits averaged $17,153,000 in 1998 compared to $21,886,000 in 1997, a
decrease of 21.6%. For 1998, the yield on short-term investments averaged 5.52%,
down from 5.56% in 1997. Loans
Total loans averaged $689,021,000 during 1998, an increase of $32,699,000 or
5.0% compared with the prior year. At year-end, total loans, net of unearned
income, amounted to $753,876,000, up $90,310 or 13.6% compared to 1997. Loan
demand over the past several years has shown improvement due to the lower
interest rate environment and as business and consumer confidence in the economy
remains strong. Even though the lower interest rate environment and increased
competition has created an increase in loan payoffs and refinancings, the
Company's aggressive marketing program and diverse product mix created strong
growth that more than offset these declines. The Company's largest loan category
is real estate mortgage loans, which totaled $363,862,000 at December 31, 1998
and represented 48.3% of total loans net of unearned income. Real estate
mortgage loans included residential and commercial mortgages, construction loans
and first-time homebuyer mortgages. Installment loans amounted to $134,206,000,
representing 17.8% of loans net of unearned income. Major loan types within this
category are indirect automobile loans of $55,961,000, direct personal loans of
$57,878,000 and advances on home equity lines of $19,261,000.
The Company's commercial loan portfolio amounted to $212,875,000 at December 31,
1998, up 52.4% from the prior year-end. Average commercial loans increased 13.3%
to $192,500,000 from $169,840,000 in 1997 and represented 27.9% of the total
average loan portfolio as compared to 25.9% in 1997. The tax-equivalent yield on
the commercial loan portfolio was 9.20% in 1998, down from 9.56% in 1997. The
yield on this portfolio decreased as a result of lower rates on loan
originations and repricings.
Real estate mortgage loans averaged $327,044,000, an increase of 20.7% from 1997
and represented 47.5% of the total average loan portfolio. This increase was the
result of additional marketing of adjustable rate mortgage loan products in a
favorable mortgage rate environment and the Bank's first-time homebuyer program
called "Community Action Loans" and an increase in the commercial mortgage
portfolio. The tax-equivalent yield on the total mortgage portfolio decreased 7
basis points to 8.34% from 8.41% last year as a result of the effect of a lower
interest rate environment on new loan originations and on the adjustable rate
portion of the portfolio. This portfolio consists of residential and commercial
mortgages, as well as construction loans, and carries fixed and adjustable
interest rates.
The Company has a nationwide secured credit card program, along with unsecured
and affinity card programs throughout New Jersey. Credit card loans averaged
$34,896,000 in 1998, an increase of $2,296,000 or 7.0% from 1997. At year-end
1998, the credit card balances were $38,511,000, as compared to $33,484,000 at
year-end 1997. The increase during 1998 was the result of the continued
nationwide direct mail advertising campaign for secured credit cards, and the
local municipal affinity programs for unsecured credit cards. The average yield
in 1998 on credit cards was 18.85%, down 53 basis points from 19.38% in 1997.
Installment loans, on average, decreased to $120,390,000 from $166,461,000 in
1997 and represented 17.5% of the total average loan portfolio. Originations of
indirect automobile loans have slowed from the levels seen in 1997 and 1996. As
a result, the average installment loan portfolio decreased by 27.7% in 1998 from
1997. At year-end 1998, installment loans amounted to $134,206,000, down
$17,242,000 or 11.4% from the same period in 1997. Increased competition in a
lower rate environment has lowered the yields on new indirect loans; therefore,
the Company has redirected its lending efforts to higher yielding direct loan
products. The average yield on the total installment loan portfolio was 8.29% in
1998 compared with 8.48% in 1997.
Impaired loans averaged $3,785,000, down $2,846,000 or 42.9% from the prior year
average. For additional discussion on impaired loans, see "Asset Quality -
Non-Performing Assets."
It is expected that a trend of increased refinancing of residential and
commercial mortgage loans will continue if the economy continues to maintain its
current course. The Company will continue to compete for what it believes are
quality loans in those sectors of the business community where such loans are
most prevalent.* Other Assets
At December 31, 1998, other assets totaled $40,660,000, an increase of
$2,010,000 from the prior year-end. The largest component of other assets is the
$21,400,000 investment in corporate-owned life insurance.
Deposits and Other Borrowings
The Company's deposit base is the primary source of funds supporting its
interest-earning assets. Total average deposits increased to $1,068,732,000 in
1998, up $58,687,000 or 5.8% from $1,010,045,000 in 1997. At year-end, total
deposits amounted to $1,046,715,000, down 0.8% from the $1,055,619,000 reported
last year.
For 1998, time deposits comprised 44.2% of total average deposits as compared to
45.0% in 1997. These deposits, which consist primarily of retail certificates of
deposit and individual retirement accounts, rose $18,427,000 or 4.1% to average
$472,818,000 during 1998. At December 31, 1998, time deposits decreased by
$47,396,000 or 10.0% over year-end 1997. The cost of time deposits increased 1
basis point to 5.40% in 1998. During 1998, certificates of deposit $100,000 and
over averaged $99,005,000, an increase of 4.2% over last year.
Savings deposits, which include savings accounts, money market accounts and
interest-bearing transaction accounts, averaged $395,836,000, an increase of
$16,980,000 or 4.5% from 1997. The cost of savings deposits decreased 23 basis
points to 1.72% in 1998.
Demand deposits averaged $200,078,000, up 13.2% from the 1997 average of
$176,798,000. Demand deposits at year-end were $203,129,000, up 13.6% from the
prior year. Non-interest-bearing secured credit card balances averaged
$11,766,000 in 1998, up 7.8% from the 1997 average of $10,915,000.
Non-interest-bearing secured credit card deposits at year-end 1998 amounted to
$11,217,000, as compared to $11,520,000 at December 31, 1997.
Short-term borrowings are available as an additional source of funding for the
loan and investment portfolios, as well as, funding deposit outflows. Short-term
borrowings consist primarily of Federal funds purchased, securities sold under
agreements to repurchase ("repurchase agreements"), demand notes-U.S. Treasury
and Federal Home Loan Bank advances. During the year, short-term borrowings rose
$37,948,000 or 58.2% to average $103,125,000. The cost of short-term borrowings
decreased 74 basis points from 5.63% in 1997 to 4.89% in 1998 due to the lower
interest rate environment during 1998 as compared to 1997. Other borrowings
average for 1998 increased $67,377,000 as a result of borrowings used to fund
the Growth Strategy. Other borrowings had an average cost of 7.08% in 1998
compared to 6.97% in 1997.
The Bank is a member of the Federal Home Loan Bank of New York (the "FHLB"). As
a result, the Company has access to financing from the FHLB with terms ranging
from overnight to up to 10 years. The FHLB advances are secured by securities
and loans receivable under a blanket collateral agreement ("Blanket Advances").
At December 31, 1998, there were $37,000,000 of borrowings outstanding from the
FHLB on the $50,000,000 Blanket Advance line. There were no borrowings
outstanding from the FHLB at the prior year-end. The Company also has access to
financing from the FHLB through advances collateralized by specific securities
("Specific Advances"). At December 31, 1998, the Company had Specific Advances
outstanding from the FHLB of $111,000,000 with maturities ranging from 365 days
to 5 years.
ASSET QUALITY
The Company manages asset quality and controls credit risk through a review of
credit applications along with a continued examination and monitoring of
outstanding loans, commitments and delinquencies. This process is intended to
result in early detection and timely follow-up on problem loans. Credit risk is
also sought to be controlled by limiting exposures to specific types of
borrowers, industries and markets.
Non-Performing Assets
The Company defines non-performing assets as non-accrual loans, impaired loans,
loans past due 90 days or more and still accruing renegotiated loans, other real
estate owned and other assets owned.
At December 31, 1998, total non-performing assets totaled $7,171,000 or 0.5% of
total assets, down $3,388,000 from the $10,559,000 or 0.8% of total assets at
December 31, 1997.
Non-performing loans at December 31, 1998 were $6,613,000 or 0.9% of total
loans, as compared to $8,922,000 or 1.3% of total loans at December 31, 1997.
The $2,309,000 decrease from 1997 resulted from loans secured by real estate,
which decreased by $2,567,000, a decline of $126,000 in loans to individuals for
household, family and other personal expenditures and a decline of $169,000 in
lease financing receivables. This was offset in part by an increase in
commercial and industrial loans of $564,000. Troubled debt restructures declined
by $11,000. A majority of the non-performing loans are well secured and
management does not anticipate the realization of significant losses.*
At December 31, 1998, the Company's holdings in other real estate owned amounted
to $507,000 as compared to $1,463,000 at December 31, 1997. Foreclosures will
continue to result in assets migrating from non-performing loans to other real
estate owned. It is the Company's intent to actively negotiate and dispose of
these properties at fair market values, which are considered reasonable under
the circumstances. In 1998, the Company incurred $225,000 of costs relating to
these properties as compared to $250,000 in 1997. Other assets owned amounted to
$51,000 at year-end, a decrease of $123,000 from 1997.
Allowance for Possible Loan Losses
The Company's year-end 1998 allowance for possible loan losses totaled
$7,582,000 and represented 1.01% of total loans. This compared with a loan loss
allowance at year-end 1997 of $8,434,000 and a ratio to total loans of 1.27%.
Loan loss provisions amounted to $3,144,000 in 1998, down from the $3,832,000 in
1997 and $3,241,000 in 1996.
The determination of an appropriate level of the allowance for possible loan
losses (the "Allowance") is based upon an analysis of the risks inherent in the
Bank's loan portfolio. The analysis is performed on a continuous basis by
account officers, various loan committees, and the Bank's Loan Review Officer.
One tool used in establishing these risks is a risk rating system, consisting of
eight loan grading categories. In assigning a rating to a given loan, various
factors are weighted, including (a) the financial condition and past credit
history of the borrower; (b) available collateral, and its valuation; (c)
available documentation of the loan; and (d) concentrations within industries
and geographic locales.
In conjunction with the review of the loan portfolio, a quarterly analysis of
the adequacy of the Allowance is performed. This analysis consists primarily of
evaluating the inherent risk of loss on all loans and applying risk to loss
ratios derived from this review.
Management then determines the adequacy of the Allowance based on the review of
the loan portfolio. Appropriate recommendations are then made to the Board of
Directors regarding the amount of the quarterly charge against earnings (i.e.,
the provision for possible loan losses), needed to maintain the Allowance at a
level deemed adequate by Management. The Allowance is increased by the amount of
such provisions and by the amount of loan recoveries, and is decreased by the
amount of loan charge-offs.
Net charge-offs in 1998 were $3,996,000 or 0.58% of average loans outstanding
compared with $4,307,000 or 0.66% in 1997. Net charge-offs in the credit card
portfolio were $1,524,000 in 1998, compared to $1,695,000 in 1997. Net
charge-offs in installment lending and lease financing decreased to $1,061,000
in 1998, compared with $2,263,000 in 1997. The net charge-offs in installment
lending is primarily the result of the indirect portfolio, which sustained
strong growth during the mid-1990's. Management recognizes the risks inherent in
the indirect automobile loans, and the Company has made a concerted effort to
redirect its lending efforts to lower risk direct loan products. Net charge-offs
in loans secured by real estate increased to $1,178,000 in 1998 from $355,000 in
1997 while commercial loans incurred net recoveries of $6,000 in 1997 to net
charge-offs of $233,000 in 1998. The charged-off loans are in various stages of
collection and litigation.
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.
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the relationship between earning
assets and supporting funds, which tend to be sensitive to changes in interest
rates during comparable time periods.
ALCO is charged with managing the Company's rate sensitivity to attempt to
optimize net interest income while maintaining an asset/liability mix which
balances liquidity needs and interest rate risk. Interest rate risk arises when
an asset matures, or its interest rate changes, during a time period different
from that of the supporting liability and vice versa.
Historically, the most common method of estimating interest rate risk was to
measure the maturity and repricing relationships between interest-earning assets
and interest-bearing liabilities at specific points in time ("GAP"), typically
one year. Under this method, an asset-sensitive gap means an excess of
interest-sensitive assets over interest-sensitive liabilities, whereas a
liability-sensitive gap means an excess of interest-sensitive liabilities over
interest-sensitive assets.
The Company's GAP model includes certain management assumptions based upon past
experience and the expected behavior of customers during various interest rate
scenarios. The assumptions include principal prepayments for various loan and
security products and classifying the non-maturity deposit balances by degree of
interest rate sensitivity. As of December 31, 1998, utilizing the above
assumptions results in a cumulative interest rate sensitive assets to interest
rate sensitive liabilities of 0.89% and 0.74% for the three-month and
twelve-month intervals, respectively.
However, assets and liabilities with similar repricing characteristics may not
reprice at the same time or to the same degree. As a result, the Company's GAP
does not necessarily predict the impact of changes in general levels of interest
rates on net interest income.
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis captures not only the potential of all assets
and liabilities to mature or reprice, but the probability that such would occur.
Income simulation also permits management to assess the probable effects on the
balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
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 December 31, 1998, the Company's income simulation model indicates an
acceptable level of interest rate risk.
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 December 31, 1998, it is
projected that a 200 basis point increase in rates would cause the base market
value of equity to decline from $170,303,000 to $137,306,000, a change of
$32,997,000 or 19.4%.* In a 200 basis point decrease in rates, the base market
value of equity is projected to increase from $170,303,000 to $177,937,000, a
change of $7,634,000 or 4.5%.* At December 31, 1998, the market value of equity
indicates an acceptable level of interest rate risk and no significant changes
in value from the prior year.
At December 31, 1997, it was projected that a 200 basis point increase in rates
would cause the base market value of equity to decline from $147,299,000 to
$125,379,000, a change of $21,920,000 or 14.9%. In a 200 basis point decrease in
rates, the base market value of equity was projected to increase from
$147,299,000 to $148,501,000, a change of $1,202,000 or 0.8%. At December 31,
1997, the market value of equity indicated an acceptable level of interest rate
risk.
NPV is calculated based on the net present value of estimated discounted cash
flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources. 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.
Mortgage-backed securities, federal agency securities and other borrowings with
call options, which the Company believed would be called, were reported at the
earlier of the next call date or contractual maturity date. Non-maturity
deposits of savings, money market accounts and interest-bearing transaction
accounts were reported with an average duration of 3.5 years.
Non-interest-bearing deposits were based on the most recent regulatory valuation
price tables. Rate shocks, prepayment assumptions and call dates are all
instantaneous and held constant.
Liquidity
Liquidity management involves the Company's ability to maintain prudent amounts
of liquid assets in its portfolio in order to meet the borrowing needs and
deposit withdrawal requirements of customers and to support asset growth.
Current and future liquidity needs are reviewed by ALCO to determine the
appropriate asset/liability mix.
The Company intends to hold its investment securities for the foreseeable
future. However, the level and composition of the portfolio may change as a
result of maturities and purchases undertaken as part of the asset/liability
management process. Unexpected changes in the financial environment are likely
to affect the Company's interest rate risk, liquidity position and the potential
return on the portfolio. Additionally, the Company may also purchase and sell
those securities which are available for sale in order to address these changes.
Overall balance sheet size and capital adequacy are considered in determining
the appropriate level for the portfolio. When economic factors cause changes in
the balance sheet or when the Company reassesses its interest rate risk,
liquidity or capital position, strategic changes may be made in both the
securities held to maturity and securities available for sale portfolios based
on opportunities to enhance the ongoing total return of the balance sheet.
Asset liquidity is represented by the ease with which assets can be converted
into cash. This liquidity is provided by money market assets and debt securities
with maturity dates of one year or less, which totaled $92,645,000 at year-end
1998. The market value of money market assets, which includes Federal funds sold
and money market mutual funds, amounted to $35,124,000 at the end of 1998. Debt
securities consist primarily of U.S. Treasury notes and bonds, obligations of
U.S. Government agencies, and obligations of states and political subdivisions.
All securities held by the Company are readily marketable. As of December 31,
1998, debt securities scheduled to mature within one year based upon estimated
cash flows, amounted to $57,521,000 and represented 10.0% of the total debt
securities portfolio. Approximately 22.6% of the entire debt portfolio is
scheduled to mature within five years, based upon estimated cash flows. There
was no security issue held which represented more than 10% of the Company's
stockholders' equity. Additional liquidity is derived from scheduled loan and
investment payments of principal and interest, as well as prepayments received.
On the liability side, the primary source of funds available to meet liquidity
needs is the Company's core deposit base, which generally excludes wholesale
certificates of deposit over $100,000. Core deposits amounted to $997,438,000 at
December 31, 1998 and represented 72.4% of earning assets. Short-term
borrowings, consisting primarily of Federal funds purchased, securities sold
under agreements to repurchase and FHLB advances, and wholesale certificates of
deposit over $100,000 are used as supplemental funding sources during periods
when growth in the core deposit base does not keep pace with that of earning
assets. Short-term borrowings and wholesale certificates of deposit amounted to
$203,912,000 at December 31, 1998.
As mentioned earlier, the Bank is a member of the FHLB system, which provides
the Company with an additional source of liquidity by offering financing
alternatives. At year-end 1998, the Company had a $50,000,000 advance line with
the FHLB, of which $13,000,000 was available.
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. Execution of the Plan is currently on target.
As of December 31, 1998, the Company is in the validation and implementation
phases. This effort includes hardware and software upgrades and systems
replacements, as necessary. 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 is working to
test these systems for Year 2000 compliance.
The Company is also in the process of obtaining certifications of Year 2000
compliance from 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 is in the process of contacting all non-information
technology suppliers (i.e., utility systems, telephone systems and security
systems) regarding the Year 2000 state of readiness. The renovation phase
involves testing of changes to hardware and software, accompanied by monitoring
and testing with vendors. The validation phase is targeted for completion by
June 30, 1999*. The implementation phase's purpose is to certify that systems
are compliant on a going-forward basis. This phase is targeted for completion by
June 30, 1999*.
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 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 during the validation
phase 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 $500,000 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 is in the process of preparing a
contingency plan for all other hardware, software and vendors which is targeted
for completion by June 30, 1999.*
Item 8 - Financial Statements and Supplementary Data
(a) Combined Consolidated (Including Raritan)
United's 1998 Annual Report, Financial Review section, contains on pages
12 through 35 information required by Item 8 and that information is
incorporated herein by reference.
(b) Consolidated (United Only)
United's 1998 Annual Report, Financial Review section, contains on pages
37 through 58 information required by Item 8 and that information is
incorporated herein by reference. The following table sets forth certain
unaudited quarterly financial data for the periods presented:
(In Thousands, First Second Third Fourth
Except Per Share Data) Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------
1998
Interest Income $25,480 $25,429 $25,947 $25,750
Interest Expense 11,023 11,150 11,816 11,553
- - --------------------------------------------------------------------------------
Net Interest Income 14,457 14,279 14,131 14,197
Provision for Possible Loan Losses 1,023 773 373 975
Non-Interest Income, excluding
Securities Transactions 4,906 4,851 4,739 4,435
Net Gains from
Securities Transactions 161 223 620 2,846
Non-Interest Expense 13,212 12,880 15,322 13,141
Provision for Income Taxes 1,462 1,643 1,234 2,207
- - --------------------------------------------------------------------------------
Net Income $3,827 $4,057 $2,561 $5,155
================================================================================
Net Income Per Share - Basic* $ 0.35 $ 0.37 $ 0.23 $ 0.46
================================================================================
Net Income Per Share - Diluted * $ 0.34 $ 0.36 $ 0.23 $ 0.46
================================================================================
1997
Interest Income $21,372 $22,464 $24,590 $25,342
Interest Expense 8,196 8,904 10,507 11,333
- - --------------------------------------------------------------------------------
Net Interest Income 13,176 13,560 14,083 14,009
Provision for Possible Loan Losses 948 948 948 988
Non-Interest Income, excluding
Securities Transactions 4,381 4,270 4,542 4,917
Net Gains from
Securities Transactions 156 180 494 990
Non-Interest Expense 13,093 12,282 12,051 12,125
Provisions for Income Taxes 1,157 1,516 2,046 2,117
- - --------------------------------------------------------------------------------
Net Income $2,515 $3,264 $4,074 $4,686
================================================================================
Net Income Per Share - Basic* $ 0.23 $ 0.29 $ 0.37 $ 0.42
================================================================================
Net Income Per Share - Diluted * $ 0.23 $ 0.29 $ 0.36 $ 0.42
================================================================================
*Amounts have been adjusted for the 10% stock dividend paid in 1998.
Item 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10 - Directors and Executive Officers of the Registrant
United's Proxy Statement for its 1999 Meeting contains, under the caption
"Election of Directors", the information required by Item 10 with respect to
directors of United and certain information with respect to executive officers
and that information is incorporated herein by reference. Certain additional
information regarding executive officers of United, who are not also directors,
appears in Part I, Item 1(f).
Item 11 - Executive Compensation
United's Proxy Statement for its 1999 Meeting contains, under the captions
"Executive Compensation", and "Compensation Committee Interlocks and Insider
Participation", the information required by Item 11 and that information is
incorporated herein by reference.
Item 12 - Security Ownership of Certain Beneficial Owners and Management
United's Proxy Statement for its 1999 Annual Meeting contains, under the caption
"Stock Ownership of Management and Principal Shareholder", the information
required by Item 12 and that information is incorporated herein by reference.
Item 13 - Certain Relationships and Related Transactions
United's Proxy Statement for its 1999 Annual Meeting contains, under the caption
"Compensation Committee Interlocks and Insider Participation", the information
required by Item 13 and that information is incorporated herein by reference.
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The consolidated financial statements and report of independent public
accountants listed below of United National Bancorp, included in United's 1998
Annual Report, are incorporated herein by reference.
Financial Review Page *
Independent Auditors' Report - Combined Consolidated
(Including Raritan) 59
Independent Auditors' Report - Consolidated
(United Only) 36
Combined Consolidated (Including Raritan):
Combined Consolidated Balance Sheets at December
31, 1998 and 1997 13
Combined Consolidated Statements of Income for the
Three Years Ended December 31,1998 14
Combined Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years Ended December 31, 1998 15
Combined Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1998 16
Notes to Combined Consolidated Financial Statements 17-35
Combined Consolidated Unaudited Quarterly Financial Data 11
Consolidated (United Only):
Consolidated Balance Sheets at December
31, 1998 and 1997 37
Consolidated Statements of Income for the
Three Years Ended December 31,1998 38
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years Ended December 31, 1998 39
Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1998 40
Notes to Consolidated Financial Statements 41-58
*Refers to respective page numbers of United National Bancorp 1998
Annual Report to Shareholders, Financial Review section, included as
Exhibit 13. Such pages are incorporated herein by reference.
(a)(2) Financial Statement Schedules
Financial statement schedules are omitted as the required information, if
applicable, is presented in the above financial statements or notes thereto.
(a)(3) Other Exhibits
List of Exhibits
(2) (a) Agreement and Plan of Merger dated June 25, 1998 by
and between United National Bancorp 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 July 1, 1998 (Exhibit 99(b))).
(b) Amended and Restated Agreement and Plan of Merger dated
September 22, 1998 by and between United National Bancorp,
United National Bank, Raritan Bancorp Inc. and Raritan
Savings Bank (incorporated by reference to the Company's
Report on Form 8-K filed with the Securities and Exchange
Commission on September 23, 1998 (Exhibit 99(a))).
(3) (a) Certificate of Incorporation of the Company
(incorporated by reference to the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1995 filed
with the Securities and Exchange Commission on March 29,
1996 (Exhibit 3(a))).
(b) By-laws of the Company (incorporated by reference to the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 1994 filed with the Securities and Exchange
Commission on March 30, 1995 (Exhibit 3(b))).
(10) Material Contracts
(a) Change of Control Agreements for eight executive officers
effective July 1, 1998 (incorporated by reference to the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on August 28, 1998 (Exhibits 10(a)
through 10(h))).
(b) Stock Purchase and Stockholder Agreement dated as of
October 24, 1995 among HUB Financial Services, Inc.,
HUBCO, Inc., Hudson United Bank, United National Bancorp
and United National Bank (incorporated by reference to the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on November 17, 1995).
(c) Data Processing Service and Clearing Agency Agreement
dated November 2, 1995 between United National Bank and
HUB Financial Services, Inc. (incorporated by reference to
the Company's Report on Form 8-K filed with the Securities
and Exchange Commission on November 17, 1995).
(d) Data Processing Service and Clearing Agency Agreement
dated November 2, 1995 between Hudson United Bank and HUB
Financial Services, Inc. (incorporated by reference to the
Company's Report on Form 8-K filed with the Securities and
Exchange Commission on November 17, 1995).
(e) Administrative Services Agreement dated November 2, 1995
between Hudson United Bank and HUB Financial Services,
Inc. (incorporated by reference to the Company's Report on
Form 8-K filed with the Securities and Exchange Commission
on November 17, 1995).
(f) Executive Supplemental Retirement Income Agreement and
Conditions, Assumptions, and Schedule of Contributions and
Phantom Contributions for six Executive Officers
(incorporated by reference to the Company's Annual Report
on Form 10-K for the Year Ended December 31, 1997 filed
with the Securities and Exchange Commission on March 30,
1998 (Exhibit 10(f))).
(g) Executive Death Benefit Master Agreement (incorporated by
reference to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1997 filed with the Securities
and Exchange Commission on March 30, 1998 (Exhibit
10(g))).
(h) Executive Deferred Compensation Plan (incorporated by
reference to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1997 filed with the Securities
and Exchange Commission on March 30, 1998 (Exhibit
10(h))).
(i) Executive Deferred Bonus Plan (incorporated by reference
to the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1997 filed with the Securities and
Exchange Commission on March 30, 1998 (Exhibit 10(i))).
(j) Directors Deferred Compensation Plan for United National
Bancorp (incorporated by reference to the Company's Annual
Report on Form 10-K for the Year Ended December 31, 1997
filed with the Securities and Exchange Commission on March
30, 1998 (Exhibit 10(j))).
(k) Directors Deferred Compensation Plan for United National
Bank (incorporated by reference to the Company's Annual
Report on Form 10-K for the Year Ended December 31, 1997
filed with the Securities and Exchange Commission on March
30, 1998 (Exhibit 10(k))).
(13) Portions of United National Bancorp's Annual Report to its
Shareholders for the fiscal Year Ended December 31, 1998
are incorporated by reference into this Annual Report on
Form 10-K.
(21) List of Subsidiaries
(23) Consents of Independent Public Accountants
(a) Combined Consolidated (Including Raritan)
(b) Consolidated (United Only)
(27) Financial Data Schedule
(a) Combined Consolidated (Including Raritan)
(b) Consolidated (United Only)
(b) Reports on Form 8-K
A Form 8-K was filed on October 1, 1998. Under Item 5, the completion of
the acquisition of State Bank of South Orange by United National Bancorp
was reported. United's press release dated September 30, 1998 and the
Agreement and Plan of Merger dated as of June 25, 1998 among United
National Bancorp, United National Bank, and State Bank of South Orange
were included as exhibits.
A Form 8-K was filed on November 18, 1998. Under Item 5, the combined
financial results for United and its subsidiaries, including State Bank
of South Orange, for the month ended October 31, 1998 were reported in
order to terminate the prohibition on sales or transfers by affiliates.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED NATIONAL BANCORP
By: /s/ Thomas C. Gregor
--------------------
Thomas C. Gregor
Chairman of the Board,
President and Chief Executive Officer
Dated: March 31, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ Thomas C. Gregor Chairman of the March 31, 1999
- - ---------------------- Board, President
Thomas C. Gregor and Director
/s/ Donald W. Malwitz V.P. & Treasurer March 31, 1999
- - ----------------------
Donald W. Malwitz
/s/ Ralph L. Straw, Jr V.P., General Counsel March 31, 1999
- - ------------------------ and Secretary
Ralph L. Straw, Jr.
/s/ George W. Blank Director March 31, 1999
- - ---------------------
George W. Blank
/s/ Donald A. Buckley Director March 31, 1999
- - ----------------------
Donald A. Buckley
/s/ C. Douglas Cherry Director March 31, 1999
- - -----------------------
C. Douglas Cherry
/s/ Charles E. Hance Director March 31, 1999
- - ----------------------
Charles E. Hance
/s/ John R. Kopicki Director March 31, 1999
- - ------------------------
John R. Kopicki
/s/ Antonia S. Marotta Director March 31, 1999
- - -----------------------
Antonia S. Marotta
/s/ John W. McGowan III Director March 31, 1999
- - -----------------------
John W. McGowan III
/s/ Patricia A. McKiernan Director March 31, 1999
- - ----------------------------
Patricia A. McKiernan
/s/ Charles N. Pond, Jr. Director March 31, 1999
- - ----------------------------
Charles N. Pond, Jr.
/s/ Paul K. Ross Director March 31, 1999
- - ----------------------------
Paul K. Ross
/s/ David R. Walker Director March 31, 1999
- - --------------------------
David R. Walker
/s/ Ronald E. West Director March 31, 1999
- - --------------------------
Ronald E. West
/s/ George J. Wickard Director March 31, 1999
- - ------------------------
George J. Wickard
EXHIBIT 13
Management's Discussion and Analysis of Combined Consolidated
Financial Condition and Results of Operations
This section is presented to assist in understanding the operating results of
United National Bancorp (the "Parent Company") and its wholly-owned
subsidiaries, United National Bank (the "Bank") and UNB Capital Trust I (the
"Trust") or when consolidated with the Parent Company, the "Company", for each
of the past three years and financial condition for each of the past two years.
This section should be read in conjunction with the combined consolidated
financial statements, the accompanying notes and selected financial data
provided within this report.
On March 31, 1999, the Company acquired by merger Raritan Bancorp Inc.
("Raritan"). The acquisition was accounted for on a pooling-of-interests basis;
therefore, the Financial Review is presented as if the Company and Raritan were
always one company, and all prior period financial information has been
restated.
On September 30, 1998, the Company acquired State Bank of South Orange ("SBSO")
by merging SBSO into the Bank. The acquisition was accounted for on the
pooling-of-interests accounting method and therefore, the financial statements
for periods prior to the merger have been restated to include the amounts and
activities of SBSO.
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.
OVERVIEW
The Company reported net income in 1998 of $19,858,000, an increase of 7.6% from
the $18,447,000 earned in 1997. Diluted net income per share was $1.30 in 1998
compared to $1.21 reported in 1997. Basic net income per share in 1998 was $1.33
as compared to the $1.25 reported in 1997.
The Company's operating income for 1998, defined as net income excluding the
effects of one-time charges, net of taxes, was $21,552,000, an 8.6% increase
over the $19,845,000 for the year ended December 31, 1997. During 1998, one-time
charges totaling $1,694,000 or $0.11 per diluted share, net of taxes, were
related to the acquisition of SBSO, while in 1997, the Company incurred one-time
charges totaling $1,398,000 or $0.09 per diluted share, net of taxes, relating
to the acquisition of Farrington Bank and the sale of the Company's former
operations center. Operating income per diluted share, adjusted for the 10%
stock dividend paid on November 2, 1998, was $1.41, an 8.5% increase over the
$1.30 reported for the year ended December 31, 1997.
The Company reported net income, after one-time charges, for 1997 of
$18,447,000, up 14.0% from the $16,176,000 earned in 1996. Diluted net income
per share results for 1997 increased 12.0% to $1.21 from $1.08 reported in 1996.
Operating income for 1997 was $19,845,000 or $1.30 per diluted share compared to
$16,762,000 or $1.12 per diluted share in 1996. Operating income for 1996 was
defined as net income excluding the one-time charges of $586,000, or $0.04 per
diluted share, net of taxes, related to a one-time special Savings Association
Insurance Fund ("SAIF") assessment.
Key performance ratios based on operating income remained strong for 1998. Based
on operating income, return on average assets ("ROA") and return on average
equity ("ROE") were 1.15% and 13.92%, respectively, in 1998, compared to 1.21%
and 14.38%, respectively, in 1997. ROA and ROE in 1996 were 1.13% and 13.52%,
respectively. ROA and ROE, based on operating income, have averaged 1.13% and
13.83%, respectively, over the past five years.
Based on net income, ROA was 1.06% in 1998 as compared to 1.12% in 1997 and
1.09% in 1996, while ROE was 12.83% in 1998, 13.37% in 1997 and 13.05% in 1996.
In addition, the efficiency ratio was 62.46% for 1998 versus 58.77% in 1997 and
61.19% in 1996. During 1998, the increase in the efficiency ratio was due in
part to the four new branches opened during 1998 and the fourth quarter of 1997.
The Company's favorable net income results for 1998 were the result of an
improvement in net interest income and non-interest income coupled with a
reduction in the provision for loan losses and in the provision for income
taxes. These improvements were offset in part by an increase in non-interest
expense.
The growth in net income for 1997 was the result of an increase in net interest
income and non-interest income. This was offset by increases in the provision
for possible loan losses, non-interest expense and provision for income taxes.
Loan demand throughout 1998 was greater than 1997. Loans, net of unearned
income, at December 31, 1998 were $125,815,000 higher than the prior year-end
and represented 55.1% of total assets at year-end 1998 as compared to 52.0% in
1997. Total loans averaged $979,872,000 during 1998, an increase of $73,781,000
or 8.1% compared with the prior year. Interest rates, as measured by the prime
rate, began the year of 1998 at 8.50% and decreased several times throughout the
third and fourth quarters to end the year at 7.75%. Combined consolidated assets
at year-end 1998 totaled $1,917,194,000, which represented an increase of 7.1%
over 1997.
Securities available for sale increased to $609,262,000 and represented 31.8% of
the total assets at December 31, 1998 as compared to $602,365,000 or 33.7% at
year-end 1997. Conversely, securities held to maturity decreased $23,241,000
from 1997 to $63,374,000 at year-end 1998 and accounted for 3.3% of total assets
at December 31, 1998, versus 4.8% last year.
Total deposits increased by 0.8% to $1,403,413,000 at December 31, 1998. Time
deposits decreased by $49,114,000 or 7.7% to $590,618,000 at December 31, 1998
compared to $639,732,000 at year-end 1997 primarily as a result of lower levels
of wholesale certificates of deposit of $100,000 or more. In contrast, demand
deposits increased to $263,700,000 at year-end 1998, a 16.6% increase over the
prior year-end. Savings deposits also increased by $22,221,000 or 4.2% from 1997
to $549,095,000 at year-end 1998. On average, time deposits decreased
$13,531,000 or 2.2% from 1997. Demand deposits and non-interest-bearing savings
deposits averaged $254,565,000 in 1998, up 27.0% from the 1997 average of
$200,462,000, while average savings deposits were up $36,787,000 or 7.0% from
1997's average balance of $522,454,000.
EARNINGS ANALYSIS
Operating Revenue
The Company's earnings have two major components: net interest income and
non-interest income, which includes net gains from securities transactions.
Operating revenue, excluding securities gains, increased $3,731,000 or 4.3% in
1998 as compared to 1997 and increased $7,064,000 or 8.8% in 1997 as compared to
1996.
Net Interest Income
Net interest income, the amount by which interest earned on assets exceeds
interest paid to depositors and other creditors, is the Company's principal
source of revenue. For purposes of this review, interest exempt from Federal
taxation has been restated to a taxable-equivalent basis, which places
tax-exempt income and yields on a comparable basis with taxable income to
facilitate analysis. The Federal income tax rate used for 1998, 1997 and 1996
was 34%. In calculating loan yields, the applicable loan fees have been included
in interest income and non-performing loans are included in the average loan
balances.
Net interest income increased $2,906,000 or 4.2% to a level of $72,478,000 in
1998 following a $4,180,000 or 6.4% increase in the prior year. The primary
reason for the increase was an increase in net interest-earning assets, offset
in part by a decrease in the net interest margin. The higher yielding loan
portfolio was 56.6% of average earning assets in 1998 from 59.4% in 1997 and
61.0% in 1996, while average securities increased to 40.0% of average earning
assets in 1998, up from 37.8% in 1997 and 36.3% in 1996. In 1997, after raising
additional Tier I Capital through the issuance of trust capital securities, the
Company developed and partially implemented a strategy to increase earning
assets, effectively leveraging its new capital and improving net interest
income, by the purchase of $150 million of additional investment securities
funded through short-term and other borrowings (the "Growth Strategy"). The
Company continued the Growth Strategy during 1998 and completed an additional
$50 million in the first quarter and another $20 million in the third quarter of
1998. For additional discussion on the Growth Strategy, see "Financial Condition
- - - Securities." The Company's net interest margin declined in 1998 and 1997,
largely due to the impact of the Growth Strategy and the effect of an investment
in corporate owned life insurance, which reduces investable funds while
increasing non-interest income.
For 1998, average interest-earning assets increased $204,469,000 or 13.4% over
1997 while average rates declined 29 basis points, creating an increase in total
interest income of $11,368,000 or 9.2% from 1997. In 1997, average
interest-earning assets increased $153,044,000 or 11.1% over the prior year
while the yield on earning assets increased 2 basis points. Accordingly,
interest income increased $12,607,000 or 11.4% from 1996.
The Company continued to monitor the rates paid on all categories of
interest-bearing liabilities to reflect existing market conditions. Average
interest-bearing deposits increased by $23,256,000 or 2.0%, and the cost of
deposits increased slightly to 3.99% in 1998 from 3.98% in 1997. This growth in
average deposits was the result of the Bank's new branches opened during the
year, in addition to deposit growth at the existing branches. The Company
utilized short-term and other borrowings as an additional funding source and to
fund the Growth Strategy. The average balance of borrowings, including the
obligation under capital lease, was $255,739,000 in 1998 with an average cost of
6.01%, as compared to the average balance of $129,566,000 in 1997 with an
average cost of 6.16%. The effect of the above changes in 1998 created a 45
basis point and 37 basis point decline in the Company's net interest spread and
net interest margin, respectively.
In 1997, average interest-bearing deposits increased by $54,632,000 or 5.0%,
while the cost of deposits increased to 3.98% in 1997 from 3.81% in 1996. The
increase in average interest-bearing deposits was mainly attributable to the 17
basis point increase in the average cost. The Company also utilized short-term
and other borrowings as an additional source in 1997 to fund the $150 million
Growth Strategy. The average balance of other borrowings, including the
obligation under capital lease, was $129,566,000 in 1997 with an average cost of
6.16%, as compared to the average balance in 1996 of $60,342,000 at a cost of
5.98%. The effect of the above changes in 1997 created 26 basis point and 20
basis point decreases in the Company's net interest spread and net interest
margin, respectively.
The net interest margin, which represents net interest income as a percentage of
average interest-earning assets, is a key indicator of net interest income
performance. The net interest margin decreased during 1998 to 4.19% from 4.56%
in 1997. The decline in the net interest margin in 1998 resulted from the
overall lower interest rate environment during the year along with the Growth
Strategy implemented during 1998 and 1997. The net interest margin decreased
during 1997 to 4.56% from 4.76% in 1996. The decline in the net interest margin
in 1997 resulted to a large degree from the Growth Strategy implemented during
1997. Although the Growth Strategy has resulted in a decline in the net interest
margin and spread, the overall result was a positive impact on the Company's net
income and return on average equity.
Non-Interest Income
Non-interest income, which has become an increasingly important source of
revenue for the Company, consists primarily of trust income, service charges on
deposit accounts, other service charges, commissions and fees, and securities
gains. In 1998, total non-interest income amounted to $24,215,000, an increase
of $3,236,000 or 15.4% from 1997, as compared with a 24.8% increase in 1997 from
1996. Included in these figures were net gains from securities transactions of
$3,891,000 in 1998 as compared to $1,914,000 in 1997 and $799,000 in 1996.
Non-interest income in 1998, not including securities gains, was up $1,259,000
or 6.6% over 1997, compared to an increase of $3,058,000 or 19.1% in 1997 from
1996.
Trust income continues to be a major contributor to fee income, representing
22.5% of the total. Trust income rose $478,000 or 9.6% to $5,454,000 in 1998
compared to a $640,000 or 14.8% increase from 1996 to 1997. This increase was
due to growth in the level of assets under management, assisted through the
expansion of new client relationships, as well as the addition of new investment
products. The Trust Division offers a full range of fiduciary services, ranging
from mutual funds to personal trust, investment advisory and employee benefits.
Trust services are expected to continue to play an important role in the
Company's future.*
Service charges on deposit accounts decreased $48,000 or 0.9% to $5,025,000 in
1998 as compared to a $60,000 or 1.2% increase from 1996 to 1997. The decrease
in 1998 resulted from fewer occurrences of overdraft fees assessed. The increase
in 1997 resulted from higher volume of accounts during the year.
Other service charges, commissions and fees increased $531,000 or 8.2% to
$7,029,000 in 1998 due primarily to increased automated teller machine ("ATM")
transaction fees and fees generated by outsourcing the Bank's official check
function. During 1997, other service charges, commissions and fees increased
$1,726,000 or 36.2% from 1996 to $6,498,000 due to increased credit card
application fees, increases in credit card annual and transaction fees and an
increase in ATM transaction fees.
Other income increased $298,000 or 11.8% from 1997 to $2,816,000 in 1998 due to
an increase in income on an investment in corporate owned life insurance partly
offset by a decline in gains from sales of the guaranteed portions of Small
Business Administration ("SBA") loans. Other income increased $632,000 or 33.5%
from 1996 to $2,518,000 in 1997 due primarily to increased gains from sales of
the guaranteed portions of SBA loans.
Net gains on securities transactions of $3,891,000 were recorded in 1998
compared with $1,914,000 in 1997 and $799,000 in 1996. The gains in 1998 and
prior years were the outcome of restructuring the investment portfolio to alter
maturities, due to the changing interest rate environment, and to maximize the
return on the investment portfolio. Additional gains were realized from the
trading account portfolio due primarily to favorable conditions in the
marketplace.
Non-Interest Expense
Non-interest expense in 1998 totaled $62,967,000, an increase of $5,952,000 or
10.4% over 1997. This compared to a $4,541,000 or 8.7% increase in 1997 over
1996. Included in 1998 were one-time charges before taxes of $2,179,000 in
connection with the SBSO merger. Included in 1997 were one-time charges of
$2,208,000 incurred in connection with both the Farrington Bank merger and the
sale of the Bank's former operations center. During the third quarter of 1996,
the Company recorded a pre-tax charge of $948,000 for the one-time special SAIF
assessment. Excluding the one-time charges, non-interest expense in 1998
increased $5,981,000 or 10.9% from 1997 and non-interest expense in 1997
increased $3,281,000 or 6.4% from 1996. Management continues to seek
opportunities to control non-interest expense levels.*
The largest component of non-interest expense is salaries and employee benefits,
which accounted for 40.6% of total non-interest expense in 1998 compared to
43.6% and 48.0% in 1997 and 1996, respectively. Management continues to monitor
staffing levels, employee benefits and operational consolidations. Compared to
the previous year, the 1998 expense of $25,554,000 represents a 2.9% increase
versus a 1.4% decrease between 1997 and 1996. Specifically, salaries and wages
increased $1,102,000 in 1998 while employee benefits decreased $380,000. Medical
health care costs, a significant component of employee benefits, increased
$55,000 from 1997 and had declined $163,000 in 1997 from 1996. This expense is
based on the level of medical claims and there can be no assurance that these
costs will not increase in the future. The Company's goal to control this
expense continues to remain a high priority. Full-time equivalent employees were
542 at December 31, 1998 compared with 585 and 572 at December 31, 1997 and
1996, respectively.
Net occupancy and furniture and equipment expense increased $1,517,000 or 19.8%
in 1998 to $9,166,000 as compared to an increase of $187,000 or 2.5% in 1997
from 1996. The increase in both 1997 and 1998 resulted from the opening of
several new branches offset in part by lower building maintenance costs.
Data processing expense for 1998 increased $1,973,000 or 35.3% to $7,570,000
from $5,597,000 in 1997 and $985,000 or 21.4% in 1997 from $4,612,000 in 1996.
These increases were caused by higher processing volumes as well as the result
of outsourcing a portion of the credit card processing operation in late 1997.
Data processing expense also increased as the Company reevaluated its joint
venture investment in United Financial Services, Inc. Based upon the Company's
decision to convert to a new data processing system, the Company reduced the
remaining amount of amortization and depreciation periods of the underlying
assets of the joint venture. Distributions on trust capital securities of
$2,002,000 and $1,557,000 in 1998 and 1997 respectively resulted from the
placement of such securities in March 1997. Amortization of intangible assets
was $1,961,000 in 1998 compared to $1,728,000 and $1,842,000 in 1997 and 1996,
respectively.
Net cost to operate other real estate, which results from costs of holding other
real estate in addition to valuation adjustments, amounted to $216,000 in 1998,
a decrease of $60,000 from 1997. These costs decreased in 1997 to $276,000
compared to $380,000 in 1996. The decrease in 1998 and 1997 was due to lower
carrying costs and write-downs associated with the reduced inventory of other
real estate holdings. For additional discussion on other real estate, see "Asset
Quality".
One-time charges in 1998 of $2,179,000 resulted from the acquisition of SBSO in
the third quarter. This amount consisted primarily of payouts on existing
employment contracts, a penalty on termination of SBSO's data processing
service, the write-off of unusable fixed assets and supplies, professional
services directly attributable to the acquisition, and severance costs.
Substantially all amounts were paid by December 31, 1998. The one-time charge in
1997 amounted to $2,208,000, of which $1,665,000 resulted from the acquisition
of Farrington in the first quarter. Additionally, a non-recurring loss of
$543,000, resulting from the sale of the Bank's operations center, was recorded
in the second quarter of 1997. Included in 1996 was the one-time special SAIF
assessment of $948,000.
Other expenses, excluding the one-time charges, amounted to $14,319,000 in 1998,
an increase of $1,151,000 or 8.7% compared to the prior year while 1997's
expense was $1,130,000 or 9.4% higher than that of 1996. The increases in 1998
and 1997 were primarily a result of the additional costs associated with the
four new branches opened in late 1997 and during 1998. Additionally, there were
increases in marketing, postage and telephone expenses incurred for credit card
marketing, along with increases in local marketing expenses, legal and
professional fees.
Income Taxes
The provision for income taxes decreased $667,000 in 1998 to $8,368,000 compared
to an increase in 1997 of $626,000. The decrease in 1998 in income taxes
resulted from higher levels of tax-exempt income than the prior year and a
reduction in the valuation allowance. The Company implemented certain tax
planning strategies during 1998, which included increasing the Bank's investment
in tax-exempt securities. The increase in 1997 resulted from the higher levels
of taxable income. For further information regarding the provision for income
taxes, see Note 14 to the Combined Consolidated Financial Statements.
LINES OF BUSINESS
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 for the lines of business for the years
1998 and 1997 are presented in Note 20 of the Notes to Combined Consolidated
Financial Statements.
Lines of business information is based on accounting practices that conform to
and support the current management structure and is not necessarily comparable
with similar information for any other financial company. Net income before
taxes includes revenues and expenses directly associated with each line, in
addition to allocations of certain indirect revenues and expenses.
A matched-maturity funds transfer pricing methodology is employed to assign a
cost of funds to the earning assets of each business line, as well as to assign
an earnings credit to the liabilities of each business line. The provision for
loan losses is based on the historical net charge-off ratio for each applicable
line of business.
For purposes of this review, interest income which is exempt from Federal
taxation has been restated to a taxable-equivalent basis, which places
tax-exempt income on a comparable basis with taxable income to facilitate
analysis.
Retail Banking
Retail Banking meets the banking needs of individuals and small businesses. This
segment includes loans secured by 1-4 family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures and lease financing. In addition, this segment includes
the branch network.
The average balance of interest-earning assets declined $11,239,000, or 2.5%, to
$436,167,000 in 1998 from $447,406,000 in 1997. The decline was primarily in the
indirect automobile portfolio within the installment lending area.
Net interest income increased $870,000, or 2.3%, to $38,416,000 in 1998 from
$37,546,000 in 1997. Interest income declined $1,413,000, or 3.8%, resulting
primarily from the decline in rates. Interest expense increased $571,000, or
1.8%, resulting from higher cost of deposits. In 1998, there was an increase of
$2,854,000 in the funds transfer price credit. The increased credit was the
result of the higher earnings credit received for providing funding primarily
from the branch network for other lines of business.
The provision for loan losses declined $1,448,000, from $3,520,000 in 1997 to
$2,072,000 in 1998, as a result of the improvement in both asset quality and net
charge-offs.
Non-interest income, which is comprised primarily of loan and deposit fees,
increased $839,000, or 7.1%, in 1998. The increase was due primarily to
increased ATM transaction fees and fees generated by outsourcing the Bank's
official check function. Non-interest expense increased $5,221,000, or 14.1%,
from $37,117,000 in 1997 to $42,338,000 in 1998. This increase was primarily the
result of the costs associated with the four new branches opened in late 1997
and during 1998.
As a result of the increase in non-interest expense, Retail Banking pre-tax net
income of $6,598,000 in 1998 was down from 1997 results of $8,662,000.
Commercial Banking
Commercial Banking provides term loans, demand secured loans, Small Business
Administration ("SBA") financing, floor plan loans and financing for commercial
real estate transactions.
Net interest income increased $1,581,000 to $9,566,000 in 1998 from $7,985,000
in 1997. The increase was primarily related to loan growth. Average
interest-earning assets increased $38,194,000 or 16.0% from 1997, as all major
product lines showed growth. Partially offsetting the increased loan balance was
a decrease in the yield earned on loans due to the declining rate environment.
The provision for loan losses in 1998 increased $760,000 from 1997, resulting
primarily from the growth in outstandings.
Non-interest income declined $496,000 to $885,000 in 1998 from $1,381,000 in
1997. This decline was primarily the result of lower gains from sales of the
guaranteed portion of SBA loans. Non-interest expense declined $422,000, or
9.5%, from $4,447,000 in 1997 to $4,025,000 in 1998.
As a result of the increase in net interest income and decline in non-interest
expense, pre-tax net income increased $747,000, or 16.2%, to $5,354,000 in 1998
from $4,607,000 in 1997.
Investments
The Investment segment is comprised of the Company's securities portfolio, which
includes U. S. Treasury and government agency securities, tax-exempt securities,
mortgage-backed securities, corporate debt securities, equity securities,
trading accounts and short-term investments.
Net interest income increased $1,561,000 to $4,042,000 in 1998 from $2,481,000
in 1997. This increase was due primarily to a $141,281,000 increase in average
interest-earning assets.
Non-interest income increased $2,030,000 from $1,820,000 in 1997 to $3,850,000
in 1998. This increase was the result of increased securities gains due to
restructuring of the investment portfolio and through sales originating from the
trading account portfolio. Non-interest expense increased $91,000 to $220,000 in
1998.
As a result of the increase in net interest income and non-interest income,
pre-tax net income increased $3,500,000 to $7,672,000 in 1998 from $4,172,000 in
1997.
Trust and Investment Services
Trust and Investment Services revenues are mostly in the form of fees for
services provided. The major sources of fee income are generated from a full
range of fiduciary services, ranging from mutual funds to personal trust,
investment advisory and employee benefits.
Non-interest income increased $478,000, or 9.6%, to $5,454,000 in 1998 from
$4,976,000 in 1997. This increase was due to growth in the level of assets under
management as well as the addition of new investment products. Non-interest
expense increased $200,000, or 5.3%, to $3,939,000 in 1998. This increase was
generally the result of additional expenses, both direct and indirect, based on
the expansion of this line of business.
Pre-tax net income for 1998 was $1,512,000, an increase of $287,000 or 23.4%,
over 1997.
Corporate
Corporate is primarily comprised of the treasury function, which is responsible
for managing interest rate risk. Additionally, certain revenues and expenses
that are not considered allocable to a line of business are reflected in this
area.
Net interest income declined $1,347,000 to $7,075,000 in 1998 from $8,422,000 in
1997. This decrease was generally related to the higher benefit provided to the
other lines of business on loans and deposits.
Non-interest expense decreased $141,000 in 1998 from $150,000 in 1997. Merger
and other unallocated expenses increased $55,000, or 1.4%, from $3,969,000 in
1997 to $4,024,000 in 1998. This expense includes one-time charges and
amortization of intangible assets.
Pre-tax net income amounted to $3,042,000 in 1998, down from $4,303,000 in 1997.
Raritan
Raritan has been presented as a stand-alone entity for both 1998 and 1997.
Raritan was primarily in the business of gathering deposits from the general
public and originating residential mortgage, construction and consumer loans,
and small business loans. In addition, a portion of its assets is invested in
securities, including mortgage-backed securities.
Net interest income increased $232,000, or 1.8%, to $13,382,000 in 1998 from
$13,150,000 in 1997. Total interest income increased $2,092,000, or 7.6%, to
$29,767,000 due primarily to a $2,529,000 increase in fees on loans. Average
interest-earning assets totaled $406,200,000, an increase of $42,102,000 from
1997. Total interest expense increased $1,860,000 or 12.8% to $16,385,000 in
1998. This was due primarily to an increase in average deposits and other
borrowings of $42,643,000 from 1997.
The provision for loan losses declined $300,000 to $300,000 in 1998 from
$600,000 in 1997 as a result of the improvement in asset quality.
Non-interest income increased $385,000 to $1,434,000 in 1998. The increase was
primarily due to increased service charges, commissions and fees. Non-interest
expense increased $799,000, or 10.7%, to $8,296,000 in 1998 from $7,497,000 in
1997. This was primarily the result of increased occupancy and furniture and
equipment costs.
As a result of the increase in non-interest expense, which was offset in part by
the increases in revenue, Raritan's pre-tax net income of $6,104,000 in 1998 was
down from 1997 results of $6,135,000.
CAPITAL
The Company is committed to maintaining a strong capital position. Capital
adequacy is monitored in relation to the size, composition and quality of its
asset base and with consideration given to regulatory guidelines and
requirements, as well as industry standards.
At December 31, 1998, total stockholders' equity was $158,242,000, an increase
of $12,776,000 or 8.8% from year-end 1997. The increase was due primarily to net
income of $19,858,000, offset in part by cash dividends declared of $8,480,000.
Capital was also increased as a result of the change in accumulated other
comprehensive income, of $495,000. Other additions resulted from restricted
stock activity and stock options exercised. As detailed in Note 13 to the
Combined Consolidated Financial Statements, the Company and the Bank currently
exceed all minimum capital requirements.
FINANCIAL CONDITION
Total average assets increased $228,259,000 or 13.9% to $1,873,390,000 in 1998,
while total assets reached $1,917,194,000 at year-end, an increase of 7.1% from
the December 31, 1997 balance. Average interest-earning assets, which represents
92.4% of total average assets, increased $204,469,000 or 13.4% from 1997 to
$1,730,491,000 in 1998. Specifically, average loans increased $73,781,000 or
8.1% in 1998 to $979,872,000, while average total securities increased
$115,753,000 or 20.1% from 1997 and short-term investments increased $14,935,000
or 34.7%.
Securities
Total securities, which include securities held to maturity, securities
available for sale and trading account securities, averaged $692,695,000 in
1998, an increase of $115,753,000 or 20.1% from 1997. For purposes of this
review, unrealized gains and losses have been excluded. The portfolio
represented 40.0% of average earning assets for 1998 and 37.8% for 1997. The
yield on the total portfolio (on a tax-equivalent basis) decreased 19 basis
points to 6.57%. The increase in average balances in the security portfolio was
primarily the result of an additional $70 million of Growth Strategy implemented
during 1998 and the full year effect of the $150 million of Growth Strategy
implemented during the prior year. The Growth Strategy utilized purchases of
U.S. government agency bonds and mortgage-backed securities, including
collateralized mortgage obligations, funded through short-term and other
borrowings with various maturities ranging up to 5 years to increase net
interest income.
U.S. Treasury and government agency securities declined $30,695,000 to average
$112,982,000 in 1998. The yield on this portfolio decreased 4 basis points to
6.65% from the reported yield of 6.69% in 1997. The prevailing market rates of
new investments were lower than those of maturing securities.
Tax-exempt securities, consisting primarily of obligations of states and
political subdivisions, averaged $79,919,000 in 1998, an increase of $19,363,000
from 1997. As a part of its tax planning strategy, the Company continues to
invest in these securities. At year-end, tax-exempt securities were $99,071,000,
up $31,032,000 from December 31, 1997. The average tax-equivalent yield on these
securities decreased 24 basis points to 7.40% in 1998 from 7.64% in 1997.
Mortgage-backed securities averaged $428,664,000 in 1998, an increase of
$107,887,000 from 1997. These securities provide liquidity through periodic
principal and interest repayments. The yield on mortgage-backed securities was
6.39% in 1998 compared to 6.64% in 1997.
Corporate debt securities averaged $18,898,000 during 1998. At December 31,
1998, the investment in corporate debt securities was $23,343,000, and
represented the Company's purchase of trust capital securities of other banks.
The average yield on trust capital securities was 9.39% in 1998. Securities
issued by a foreign government averaged $142,000 in 1998 compared to $115,000 in
the prior year. The year-end 1998 balance was $150,000 as compared to $125,000 a
year earlier.
Average equity securities increased $12,883,000 during 1998 to $52,090,000.
Equity securities consisted primarily of money market mutual funds averaging
$37,763,000 in 1998 compared to $29,994,000 in 1997. The remaining increase was
the result of equity investments made by the Parent Company. The average yield
on equity securities decreased 6 basis points to 5.62% from 5.68% in 1997.
Short-term investments, which included Federal funds sold and Federal Home Loan
Bank deposits averaged $57,924,000 in 1998 compared to $42,989,000 in 1997, an
increase of 34.7%. For 1998, the yield on short-term investments averaged 4.88%,
down from 5.50% in 1997.
Loans
Total loans averaged $979,872,000 during 1998, an increase of $73,781,000 or
8.1% compared with the prior year. At year-end, total loans, net of unearned
income, amounted to $1,057,081,000, up $125,815,000 or 13.5% compared to 1997.
Loan demand over the past several years has shown improvement due to the lower
interest rate environment and as business and consumer confidence in the economy
remains strong. Even though the lower interest rate environment and increased
competition has created an increase in loan payoffs and refinancings, the
Company's aggressive marketing program and diverse product mix created strong
growth that more than offset these declines. The Company's largest loan category
is real estate mortgage loans, which totaled $652,239,000 at December 31, 1998
and represented 61.7% of total loans net of unearned income. Real estate
mortgage loans included residential and commercial mortgages, construction loans
and first-time homebuyer mortgages. Installment loans amounted to $143,011,000,
representing 13.5% of loans net of unearned income. Major loan types within this
category are indirect automobile loans of $55,961,000, direct personal loans of
$58,543,000 and advances on home equity lines of $27,401,000.
The Company's commercial loan portfolio amounted to $218,929,000 at December 31,
1998, up 50.9% from the prior year-end. Average commercial loans increased 13.5%
to $203,989,000 from $179,669,000 in 1997 and represented 20.8% of the total
average loan portfolio as compared to 19.8% in 1997. The tax-equivalent yield on
the commercial loan portfolio was 9.23% in 1998, compared to 9.58% in 1997. The
yield on this portfolio decreased as a result of lower rates on loan
originations and repricings.
Real estate mortgage loans averaged $586,219,000, an increase of 19.7% from 1997
and represented 59.8% of the total average loan portfolio. This increase was
primarily the result of an increase in the commercial mortgage portfolio as well
as adjustable rate mortgages and the Bank's first-time homebuyer program called
"Community Action Loans." The tax-equivalent yield on the total mortgage
portfolio decreased 17 basis points to 8.17% from 8.34% last year as a result of
the effect of a lower interest rate environment on new loan originations and on
the adjustable rate portion of the portfolio. This portfolio consists of
residential and commercial mortgages, as well as construction loans, and carries
fixed and adjustable interest rates.
The Company has a nationwide secured credit card program, along with unsecured
and affinity card programs throughout New Jersey. Credit card loans averaged
$34,896,000 in 1998, an increase of $2,296,000 or 7.0% from 1997. At year-end
1998, the credit card balances were $38,511,000, as compared to $33,484,000 at
year-end 1997. The increase during 1998 was the result of the continued
nationwide direct mail advertising campaign for secured credit cards, and the
local municipal affinity programs for unsecured credit cards. The average yield
in 1998 on credit cards was 18.85%, down 53 basis points from 19.38% in 1997.
Installment loans, on average, decreased to $139,063,000 from $186,308,000 in
1997 and represented 14.2% of the total average loan portfolio. Originations of
indirect automobile loans have slowed from the levels seen in 1997 and 1996. As
a result, the average installment loan portfolio decreased by 25.4% in 1998 from
1997. At year-end 1998, installment loans amounted to $143,011,000, down
$15,672,000 or 9.9% from the same period in 1997. Increased competition in a
lower rate environment has lowered the yields on new indirect loans; therefore,
the Company has redirected its lending efforts to higher yielding direct loan
products. The average yield on the total installment loan portfolio was 8.37% in
1998 compared with 8.56% in 1997.
Impaired loans averaged $5,299,000, down $2,676,000 or 33.6% from the prior year
average. For additional discussion on impaired loans, see "Asset Quality -
Non-Performing Assets."
It is expected that a trend of increased refinancing of residential and
commercial mortgage loans will continue if the economy continues to maintain its
current course. The Company will continue to compete for what it believes are
quality loans in those sectors of the business community where such loans are
most prevalent.*
Other Assets
At December 31, 1998, other assets totaled $52,471,000, an increase of
$3,186,000 from the prior year-end. The largest component of other assets is the
$29,200,000 investment in corporate-owned life insurance.
Deposits and Other Borrowings
The Company's deposit base is the primary source of funds supporting its
interest-earning assets. Total average deposits increased to $1,420,440,000 in
1998, up $77,359,000 or 5.8% from $1,343,081,000 in 1997. At year-end, total
deposits amounted to $1,403,413,000, up 0.8% from the $1,392,703,000 reported
last year.
For 1998, time deposits comprised 42.7% of total average deposits as compared to
46.2% in 1997. These deposits, which consist primarily of retail certificates of
deposit and individual retirement accounts, declined $13,531,000 or 2.2% to
average $606,634,000 during 1998. At December 31, 1998, time deposits decreased
by $49,114,000 or 7.7% from year-end 1997. The cost of time deposits increased
27 basis points to 5.64% in 1998. During 1998, certificates of deposit $100,000
and over averaged $118,589,000, an increase of 6.1% over last year.
Savings deposits, which include savings accounts, money market accounts and
interest-bearing transaction accounts, averaged $559,241,000, an increase of
$36,787,000 or 7.0% from 1997. The cost of savings deposits decreased 12 basis
points to 2.21% in 1998.
Demand deposits and non-interest-bearing savings deposits averaged $254,565,000,
up 27.0% from the 1997 average of $200,462,000. Demand deposits at year-end were
$263,700,000, up 16.6% from the prior year. Non-interest-bearing secured credit
card balances averaged $11,766,000 in 1998, up 7.8% from the 1997 average of
$10,915,000. Non-interest- bearing secured credit card deposits at year-end 1998
amounted to $11,217,000, as compared to $11,520,000 at December 31, 1997.
Short-term borrowings are available as an additional source of funding for the
loan and investment portfolios, as well as, funding deposit outflows. Short-term
borrowings consist primarily of Federal funds purchased, securities sold under
agreements to repurchase ("repurchase agreements"), demand notes-U.S. Treasury,
borrowed funds and Federal Home Loan Bank advances. During the year, short-term
borrowings rose $34,062,000 or 44.2% to average $111,180,000. The cost of
short-term borrowings decreased 68 basis points from 5.65% in 1997 to 4.97% in
1998 due to the lower interest rate environment during 1998 as compared to 1997.
Other borrowings average for 1998 increased $92,111,000 as a result of
borrowings used to fund the Growth Strategy. Other borrowings had an average
cost of 6.81% in 1998 compared to 6.91% in 1997.
The Bank is a member of the Federal Home Loan Bank of New York (the "FHLB"). As
a result, the Company has access to financing from the FHLB with terms ranging
from overnight up to 10 years. The FHLB advances are secured by securities and
loans receivable under a blanket collateral agreement ("Blanket Advances"). At
December 31, 1998, there was $37,000,000 outstanding from the FHLB on the
$90,700,000 Blanket Advance line. At December 31, 1997, there were no borrowings
outstanding from the FHLB on the $85,400,000 Blanket Advance line. The Company
also has access to financing from the FHLB through advances collateralized by
specific securities ("Specific Advances"). At December 31, 1998, the Company had
Specific Advances outstanding from the FHLB of $131,000,000 with maturities
ranging from 90 days to 5 years.
ASSET QUALITY
The Company manages asset quality and controls credit risk through a review of
credit applications along with a continued examination and monitoring of
outstanding loans, commitments and delinquencies. This process is intended to
result in early detection and timely follow-up on problem loans. Credit risk is
also sought to be controlled by limiting exposures to specific types of
borrowers, industries and markets.
Non-Performing Assets
The Company defines non-performing assets as non-accrual loans, impaired loans,
loans past due 90 days or more and still accruing renegotiated loans, other real
estate owned and other assets owned.
At December 31, 1998, total non-performing assets totaled $9,170,000 or 0.5% of
total assets, down $2,480,000 from the $11,650,000 or 0.7% of total assets at
December 31, 1997.
Non-performing loans at December 31, 1998 were $8,612,000 or 0.8% of total
loans, as compared to $9,973,000 or 1.1% of total loans at December 31, 1997.
The $1,361,000 decrease from 1997 resulted from loans secured by real estate,
which decreased by $1,619,000, a decline of $126,000 in loans to individuals for
household, family and other personal expenditures and a decline of $169,000 in
lease financing receivables. This was offset in part by an increase in
commercial and industrial loans of $564,000. Troubled debt restructures declined
by $11,000. A majority of the non-performing loans are well secured and
management does not anticipate the realization of significant losses.*
At December 31, 1998, the Company's holdings in other real estate owned amounted
to $507,000 as compared to $1,503,000 at December 31, 1997. Foreclosures will
continue to result in assets migrating from non-performing loans to other real
estate owned. It is the Company's intent to actively negotiate and dispose of
these properties at fair market values, which are considered reasonable under
the circumstances.* In 1998, the Company incurred $216,000 of costs relating to
these properties as compared to $276,000 in 1997. Other assets owned amounted to
$51,000 at year-end, a decrease of $123,000 from 1997.
Allowance for Possible Loan Losses
The Company's year-end 1998 allowance for possible loan losses totaled
$11,174,000 and represented 1.06% of total loans. This compared with a loan loss
allowance at year-end 1997 of $11,739,000 and a ratio to total loans of 1.26%.
Loan loss provisions amounted to $3,444,000 in 1998, down from the $4,432,000 in
1997 and $3,691,000 in 1996.
The determination of an appropriate level of the allowance for possible loan
losses (the "Allowance") is based upon an analysis of the risks inherent in the
Bank's loan portfolio. The analysis is performed on a continuous basis by
account officers, various loan committees, and the Bank's Loan Review Officer.
One tool used in establishing these risks is a risk rating system, consisting of
eight loan grading categories. In assigning a rating to a given loan, various
factors are weighted, including (a) the financial condition and past credit
history of the borrower; (b) available collateral, and its valuation; (c)
available documentation of the loan; and (d) concentrations within industries
and geographic locales.
In conjunction with the review of the loan portfolio, a quarterly analysis of
the adequacy of the Allowance is performed. This analysis consists primarily of
evaluating the inherent risk of loss on all loans and applying risk to loss
ratios derived from this review.
Management then determines the adequacy of the Allowance based on the review of
the loan portfolio. Appropriate recommendations are then made to the Board of
Directors regarding the amount of the quarterly charge against earnings (i.e.,
the provision for possible loan losses), needed to maintain the Allowance at a
level deemed adequate by Management. The Allowance is increased by the amount of
such provisions and by the amount of loan recoveries, and is decreased by the
amount of loan charge-offs.
Net charge-offs in 1998 were $4,009,000 or 0.41% of average loans outstanding
compared with $4,567,000 or 0.50% in 1997. Net charge-offs in the credit card
portfolio were $1,524,000 in 1998, compared to $1,695,000 in 1997. Net
charge-offs in installment lending and lease financing receivables decreased to
$1,083,000 in 1998, compared with $2,290,000 in 1997. The net charge-offs in
installment lending are primarily the result of the indirect portfolio, which
sustained strong growth during the mid-1990's. Management recognizes the risks
inherent in the indirect automobile loans, and the Company has made a concerted
effort to redirect its lending efforts to lower risk direct loan products. Real
estate loan net charge-offs increased to $1,160,000 in 1998 from $586,000 in
1997 while commercial loans incurred net charge-offs of $242,000 in 1998
compared to net recoveries of $4,000 in 1997. The charged-off loans are in
various stages of collection and litigation.
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.
Interest Rate Sensitivity
Interest rate sensitivity is a measure of the relationship between earning
assets and supporting funds, which tend to be sensitive to changes in interest
rates during comparable time periods.
ALCO is charged with managing the Company's rate sensitivity to attempt to
optimize net interest income while maintaining an asset/liability mix which
balances liquidity needs and interest rate risk. Interest rate risk arises when
an asset matures, or its interest rate changes, during a time period different
from that of the supporting liability and vice versa.
Historically, the most common method of estimating interest rate risk was to
measure the maturity and repricing relationships between interest-earning assets
and interest-bearing liabilities at specific points in time ("GAP"), typically
one year. Under this method, an asset-sensitive gap means an excess of
interest-sensitive assets over interest-sensitive liabilities, whereas a
liability-sensitive gap means an excess of interest-sensitive liabilities over
interest-sensitive assets.
The Company's GAP model includes certain management assumptions based upon past
experience and the expected behavior of customers during various interest rate
scenarios. The assumptions include principal prepayments for various loan and
security products and classifying the non-maturity deposit balances by degree of
interest rate sensitivity. As of December 31, 1998, utilizing the above
assumptions results in a cumulative interest rate sensitive assets to interest
rate sensitive liabilities of 0.84% and 0.78% for the three-month and
twelve-month intervals, respectively.
However, assets and liabilities with similar repricing characteristics may not
reprice at the same time or to the same degree. As a result, the Company's GAP
does not necessarily predict the impact of changes in general levels of interest
rates on net interest income.
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis captures not only the potential of all assets
and liabilities to mature or reprice, but the probability that such would occur.
Income simulation also permits management to assess the probable effects on the
balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
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 December 31, 1998, the Company's income simulation model indicates an
acceptable level of interest rate risk.
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 December 31, 1998, it is
projected that a 200 basis point increase in rates would cause the base market
value of equity to decline from $223,490,000 to $185,838,000, a change of
$37,652,000 or 16.8%.* In a 200 basis point decrease in rates, the base market
value of equity is projected to decrease from $223,490,000 to $223,107,000, a
change of $383,000 or 0.2%.* At December 31, 1998, the market value of equity
indicates an acceptable level of interest rate risk and no significant changes
in value from the prior year.
At December 31, 1997, it was projected that a 200 basis point increase in rates
would cause the base market value of equity to decline from $183,867,000 to
$150,029,000, a change of $33,838,000 or 18.4%. In a 200 basis point decrease in
rates, the base market value of equity was projected to increase from
$183,867,000 to $192,892,000, a change of $9,025,000 or 4.9%. At December 31,
1997, the market value of equity indicated an acceptable level of interest rate
risk.
NPV is calculated based on the net present value of estimated discounted cash
flows utilizing market prepayment assumptions and market rates of interest
provided by independent broker quotations and other public sources. 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.
Mortgage-backed securities, federal agency securities and other borrowings with
call options, which the Company believed would be called, were reported at the
earlier of the next call date or contractual maturity date. Non-maturity
deposits of savings, money market accounts and interest-bearing transaction
accounts were reported with an average duration of 3.5 years.
Non-interest-bearing deposits were based on the most recent regulatory valuation
price tables. Rate shocks, prepayment assumptions and call dates are all
instantaneous and held constant.
Liquidity
Liquidity management involves the Company's ability to maintain prudent amounts
of liquid assets in its portfolio in order to meet the borrowing needs and
deposit withdrawal requirements of customers and to support asset growth.
Current and future liquidity needs are reviewed by ALCO to determine the
appropriate asset/liability mix.
The Company intends to hold its investment securities for the foreseeable
future. However, the level and composition of the portfolio may change as a
result of maturities and purchases undertaken as part of the asset/liability
management process. Unexpected changes in the financial environment are likely
to affect the Company's interest rate risk, liquidity position and the potential
return on the portfolio. Additionally, the Company may also purchase and sell
those securities which are available for sale in order to address these changes.
Overall balance sheet size and capital adequacy are considered in determining
the appropriate level for the portfolio. When economic factors cause changes in
the balance sheet or when the Company reassesses its interest rate risk,
liquidity or capital position, strategic changes may be made in both the
securities held to maturity and securities available for sale portfolios based
on opportunities to enhance the ongoing total return of the balance sheet.
Asset liquidity is represented by the ease with which assets can be converted
into cash. This liquidity is provided by money market assets and debt securities
with maturity dates of one year or less, which totaled $142,745,000 at year-end
1998. The market value of money market assets, which includes Federal funds sold
and money market mutual funds, amounted to $85,124,000 at the end of 1998. Debt
securities consist primarily of U.S. Treasury notes and bonds, obligations of
U.S. Government agencies, and obligations of states and political subdivisions.
All securities held by the Company are readily marketable. As of December 31,
1998, debt securities scheduled to mature within one year based upon estimated
cash flows, amounted to $72,975,000 and represented 11.6% of the total debt
securities portfolio. Approximately 23.3% of the entire debt portfolio is
scheduled to mature within five years, based upon estimated cash flows. There
was no security issue held which represented more than 10% of the Company's
stockholders' equity. Additional liquidity is derived from scheduled loan and
investment payments of principal and interest, as well as prepayments received.
On the liability side, the primary source of funds available to meet liquidity
needs is the Company's core deposit base, which generally excludes wholesale
certificates of deposit over $100,000. Core deposits amounted to $1,353,101,000
at December 31, 1998 and represented 76.0% of earning assets. Short-term
borrowings, consisting primarily of Federal funds purchased, securities sold
under agreements to repurchase and FHLB advances, and wholesale certificates of
deposit over $100,000 are used as supplemental funding sources during periods
when growth in the core deposit base does not keep pace with that of earning
assets. Short-term borrowings and wholesale certificates of deposit amounted to
$204,947,000 at December 31, 1998.
As mentioned earlier, the Bank is a member of the FHLB system, which provides
the Company with an additional source of liquidity by offering financing
alternatives. At year-end 1998, the Company had a $90,700,000 advance line with
the FHLB, $53,700,000 of which was available.
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. Execution of the Plan is currently on target.
As of December 31, 1998, the Company is in the validation and implementation
phases. This effort includes hardware and software upgrades and systems
replacements, as necessary. 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 is working to
test these systems for Year 2000 compliance.
The Company is also in the process of obtaining certifications of Year 2000
compliance from 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 effort 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 is in the process of contacting all non-information
technology suppliers (i.e., utility systems, telephone systems and security
systems) regarding the Year 2000 state of readiness. The renovation phase
involves testing of changes to hardware and software, accompanied by monitoring
and testing with vendors. The validation phase is targeted for completion by
June 30, 1999*. The implementation phase's purpose is to certify that systems
are compliant on a going-forward basis. This phase is targeted for completion by
June 30, 1999*.
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 downgrades of risk ratings in the loan portfolio. Early in 1997, the
Loan Division of the Company 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 during the validation
phase 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 $500,000 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 is in the process of preparing a
contingency plan for all other hardware, software and vendors which is targeted
for completion by June 30, 1999.*
The following table sets forth certain unaudited quarterly financial data for
the periods presented:
<TABLE>
<CAPTION>
(In Thousands, First Second Third Fourth
Except Per Share Data) Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest Income $32,728 $32,877 $33,574 $33,170
Interest Expense 14,971 15,284 16,100 15,572
- - --------------------------------------------------------------------------------------------------------------
Net Interest Income 17,757 17,593 17,474 17,598
Provision for Possible Loan Losses 1,098 848 448 1,050
Non-Interest Income, excluding
Securities Transactions 5,201 5,175 5,221 4,727
Net Gains from
Securities Transactions 161 230 654 2,846
Non-Interest Expense 15,313 14,995 17,412 15,247
Provision for Income Taxes 1,878 2,072 1,747 2,671
- - --------------------------------------------------------------------------------------------------------------
Net Income $ 4,830 $ 5,083 $ 3,742 $ 6,203
==============================================================================================================
Net Income Per Share - Basic* $0.33 $0.34 $0.25 $0.41
==============================================================================================================
==============================================================================================================
Net Income Per Share - Diluted * $0.32 $0.33 $0.25 $0.40
==============================================================================================================
1997
Interest Income $28,034 $29,266 $31,462 $32,653
Interest Expense 11,507 12,424 14,184 15,350
- - --------------------------------------------------------------------------------------------------------------
Net Interest Income 16,527 16,842 17,278 17,303
Provision for Possible Loan Losses 1,098 1,098 1,098 1,138
Non-Interest Income, excluding
Securities Transactions 4,558 4,508 4,844 5,155
Net Gains from
Securities Transactions 156 263 501 994
Non-Interest Expense 14,924 14,154 13,908 14,029
Provisions for Income Taxes 1,734 2,115 2,576 2,610
- - --------------------------------------------------------------------------------------------------------------
Net Income $ 3,485 $ 4,246 $ 5,041 $ 5,675
==============================================================================================================
Net Income Per Share - Basic* $ 0.24 $ 0.28 $ 0.34 $ 0.39
==============================================================================================================
==============================================================================================================
Net Income Per Share - Diluted * $ 0.23 $ 0.28 $ 0.33 $ 0.37
==============================================================================================================
</TABLE>
*Amounts have been adjusted for the 10% stock dividend paid in 1998.
SELECTED COMBINED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
combined consolidated financial statements and related notes thereto included
elsewhere in this Annual Report and "Management's Discussion and Analysis of
Combined Consolidated Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
(Dollars In Thousands,
Except Share Data) 1998 1997 1996 1995 1994
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Interest Income $ 132,349 $ 121,415 $ 108,982 $ 105,435 $ 89,468
Interest Expense 61,927 53,465 45,038 45,123 30,110
-------------------------------------------------------------------------
Net Interest Income 70,422 67,950 63,944 60,312 59,358
Provision for Possible Loan Losses 3,444 4,432 3,691 1,398 2,715
-------------------------------------------------------------------------
Net Interest Income after Provision
For Possible Loan Losses 66,978 63,518 60,253 58,914 56,643
Non-Interest Income 24,215 20,979 16,806 15,816 15,589
Non-Interest Expense 62,967 57,015 52,474 55,964 51,199
-------------------------------------------------------------------------
Income Before Provision for Income
Taxes 28,226 27,482 24,585 18,766 21,033
Provision for Income Taxes 8,368 9,035 8,409 5,837 6,847
-------------------------------------------------------------------------
Net Income $ 19,858 $ 18,447 $ 16,176 $ 12,929 $ 14,186
=========================================================================
Income Before Merger-Related and
Restructuring Charges,
And SAIF Assessment $ 21,552 $ 19,845 $ 16,762 $ 15,018 $ 14,186
=========================================================================
Balance Sheet Data (at year-end):
Total Assets $1,917,194 $1,789,426 $1,550,129 $1,489,773 $1,337,097
Securities 673,875 690,201 483,345 503,002 481,791
Federal Funds Sold 50,100 34,025 44,672 53,744 31,958
Loans (Net of Unearned Income) 1,057,081 931,266 898,788 812,985 734,107
Allowance for Possible
Loan Losses 11,174 11,739 11,874 11,440 13,876
Deposits 1,403,413 1,392,703 1,334,528 1,279,636 1,161,658
Short-Term Borrowings (1) 154,635 99,546 56,328 53,347 62,093
Other Borrowings (2) 154,942 107,809 9,693 19,680 1,269
Stockholders' Equity 158,242 145,466 129,466 120,092 99,594
Adjusted Financial Ratios: (3)
Return on Average Assets 1.15% 1.21% 1.13% 1.05% 1.09%
Return on Average Stockholders' Equity 13.92% 14.38% 13.52% 13.44% 13.91%
Financial Ratios:
Return on Average Assets 1.06% 1.12% 1.09% 0.91% 1.09%
Return on Average Stockholders' Equity 12.83% 13.37% 13.05% 11.57% 13.91%
Net Interest Margin 4.19% 4.56% 4.76% 4.65% 5.01%
Efficiency Ratio (4) 62.46% 58.77% 61.19% 66.63% 66.15%
Average Stockholders' Equity to
Average Assets 8.26% 8.39% 8.35% 7.83% 7.84%
Leverage Ratio (year-end) 8.51% 8.56% 7.85% 7.20% 8.22%
Tier I Capital to Risk-Weighted
Assets (year-end) 13.53% 14.04% 11.85% 11.52% 14.15%
Combined Tier I and Tier II
Capital to Risk-Weighted
Assets (year-end) 14.43% 15.10% 13.00% 12.75% 15.52%
Loans to Deposits (year-end) 75.32% 66.87% 67.35% 63.53% 63.19%
Non-Performing Loans to
Loans (year-end) (5) 0.81% 1.07% 1.45% 1.27% 1.85%
Non-Performing Assets as a
Percentage of Loans, Other Real
Estate Owned and Other
Assets Owned (year-end) 0.87% 1.25% 1.68% 1.67% 2.23%
Non-Performing Assets to
Total Assets 0.48% 0.65% 0.98% 0.91% 1.23%
Allowance for Possible Loan
Losses to Loans (year-end) 1.06% 1.26% 1.32% 1.41% 1.89%
Dividend Payout Ratio 49% 42% 41% 47% 39%
Common Share Data: (6)
Net Income Per Diluted Share $ 1.30 $ 1.21 $ 1.08 $ 0.87 $ 0.97
Net Income Per Diluted Share Before
Merger-Related and
Restructuring Charges
And SAIF Assessment $ 1.41 $ 1.30 $ 1.12 $ 1.01 $ 0.97
Cash Dividends Declared Per Share $ 0.65 $ 0.52 $ 0.45 $ 0.42 $ 0.38
Book Value Per Share (year-end) $ 10.53 $ 10.60 $ 9.57 $ 8.89 $ 7.45
Average Diluted Shares Outstanding
(in thousands) 15,307 15,215 14,954 14,912 14,660
Other Data:
Number of Employees
(full-time equivalent) 542 585 572 583 622
Number of Stockholders 2,880 2,762 2,897 3,060 3,073
</TABLE>
(1) Includes Federal funds purchased, securities sold under agreements to
repurchase less than one year, Federal Home Loan Bank advances, demand
notes-U.S. Treasury and borrowed funds.
(2) Includes other borrowed funds, securities sold under agreements to
repurchase greater than one year, obligation under capital lease and employee
stock ownership plan debt.
(3) Before merger-related and restructuring charges and SAIF Assessment.
(4) Efficiency ratio is calculated by dividing adjusted non-interest expense by
tax-equivalent net interest income and adjusted non- interest income. Adjusted
non-interest expense is total non-interest expense less merger related and
restructuring charges, distributions on Series B Capital Securities and net
costs to operate other real estate. Adjusted non-interest income is non-
interest income less distributions on Series B Capital Securities and net gains
from securities transactions.
(5) Non-performing loans consist of non-accrual loans, restructured loans and
loans past due 90 days or more and still accruing.
(6) Adjusted for the 10% stock dividend paid in 1998.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
(In Thousands, Except Share Data) 1998 1997
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 52,867 $ 51,123
Federal Funds Sold 50,100 34,025
Securities Available for Sale, at Market Value 609,262 602,365
Securities Held to Maturity (Market Value of $63,675 and $86,283
for 1998 and 1997, respectively) 63,374 86,615
Trading Account Securities, at Market Value 1,239 1,221
Loans, Net of Unearned Income 1,056,953 931,266
Less: Allowance for Possible Loan Losses 11,174 11,739
- - --------------------------------------------------------------------------------------------------------------
Loans, Net 1,045,779 919,527
Mortgage Loans Held for Sale 128 -
Premises and Equipment, Net 29,248 29,362
Investment in Joint Venture 2,931 3,151
Other Real Estate, Net 507 1,503
Intangible Assets, Primarily Core Deposit Premiums 9,288 11,249
Other Assets 52,471 49,285
- - --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,917,194 $1,789,426
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 263,700 $ 226,097
Savings 549,095 526,874
Time 590,618 639,732
- - --------------------------------------------------------------------------------------------------------------
Total Deposits 1,403,413 1,392,703
Short-Term Borrowings 154,635 99,546
Other Borrowings 154,942 107,809
Other Liabilities 25,962 23,902
- - --------------------------------------------------------------------------------------------------------------
Total Liabilities 1,738,952 1,623,960
- - --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies - Note 17
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 in 1998 and 1997
None issued and outstanding - -
Common Stock ($1.25 Par Value Per Share) Authorized Shares - 16,000,000 in 1998
and 1997 Issued shares - 15,318,038 in 1998 and 14,289,675 in 1997
Outstanding shares - 15,021,180 in 1998 and 13,723,513 in 1997 19,148 17,862
Additional Paid-In Capital 112,015 90,249
Retained Earnings 25,921 37,740
Treasury Stock, at Cost - 296,858 shares in 1998
and 566,162 shares in 1997 (4,660) (5,550)
Restricted Stock (248) (303)
Unallocated Common Stock Acquired by the Employee Stock Ownership Plan (ESOP) - (103)
Accumulated Other Comprehensive Income 6,066 5,571
- - --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 158,242 145,466
- - --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,917,194 $1,789,426
==============================================================================================================
</TABLE>
The accompanying notes to the combined consolidated financial statements are an
integral part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
(In Thousands, Except Share Data) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 86,026 $ 81,639 $ 75,105
Interest and Dividends on Securities Available for Sale:
Taxable Income 36,191 28,586 22,793
Tax-Exempt Income 3,024 2,458 2,253
Interest and Dividends on Securities Held to Maturity:
Taxable Income 3,373 5,754 6,468
Tax-Exempt Income 880 594 443
Dividends on Trading Account Securities 26 18 13
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 2,829 2,366 1,907
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Income 132,349 121,415 108,982
- - --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 12,341 12,191 12,164
Interest on Time Certificates of Deposit $100,000 or More 5,623 6,300 6,054
Interest on Other Time Deposits 28,591 26,992 23,212
Interest on Short-Term Borrowings 5,522 4,357 2,666
Interest on Other Borrowings 9,850 3,625 942
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 61,927 53,465 45,038
- - --------------------------------------------------------------------------------------------------------------------
Net Interest Income 70,422 67,950 63,944
Provision for Possible Loan Losses 3,444 4,432 3,691
- - --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Loan Losses 66,978 63,518 60,253
- - --------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income 5,454 4,976 4,336
Service Charges on Deposit Accounts 5,025 5,073 5,013
Other Service Charges, Commissions and Fees 7,029 6,498 4,772
Net Gains from Securities Transactions 3,891 1,914 799
Other Income 2,816 2,518 1,886
- - --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 24,215 20,979 16,806
- - --------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 25,554 24,832 25,192
Occupancy Expense, Net 5,001 4,155 4,235
Furniture and Equipment Expense 4,165 3,494 3,227
Data Processing Expense 7,570 5,597 4,612
Distributions on Series B Capital Securities 2,002 1,557 -
Amortization of Intangible Assets 1,961 1,728 1,842
Net Cost to Operate Other Real Estate 216 276 380
Merger Related and Restructuring Charges 2,179 2,208 -
Other Expenses 14,319 13,168 12,986
- - --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 62,967 57,015 52,474
- - --------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 28,226 27,482 24,585
Provision for Income Taxes 8,368 9,035 8,409
- - --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,858 $ 18,447 $ 16,176
====================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 1.33 $ 1.25 $ 1.11
====================================================================================================================
Diluted $ 1.30 $ 1.21 $ 1.08
====================================================================================================================
</TABLE>
The accompanying notes to the combined consolidated financial statements are an
integral part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unallocated
(In Thousands, Except Share Data) Additional Common Stock
For the Years Ended Common Paid-In Retained Treasury Restricted Acquired by
December 31, 1996, 1997, and 1998 Stock Capital Earnings Stock Stock the ESOP
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1996 $16,396 $ 66,731 $38,772 $(3,856) $(317) $(206)
Comprehensive Income:
Net Income-1996 - - 16,176 - - -
Unrealized Holding Losses on Securities
Available for Sale Arising During the
Period, Net of Tax of $633 - - - - - -
Less: Reclassification Adjustment for Gains
Included in Net Income, Net of Tax of $227 - - - - - -
Total Comprehensive Income
Cash Dividends Declared ($0.45 per share) - - (4,838) - - -
Stock Issued in Payment of
Stock Dividend- 528,818 Shares 660 7,581 (8,241) - - -
Exercise of Stock Options - 16,534 Shares 12 48 (20) 30 - -
Treasury Stock Purchased - 253,787 Shares - - - (2,938) - -
Treasury Stock Sold - 312,894 Shares - 572 - 1,816 - -
Reduction of Debt Relating to the ESOP - - - - - 52
Restricted Stock Activity, Net - - - (7) 141 -
- - ----------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 17,068 74,932 41,849 (4,955) (176) (154)
Comprehensive Income:
Net Income-1997 - - 18,447 - - -
Unrealized Holding Gains on Securities
Available for Sale Arising During the - - - - - -
Period, Net of Tax of $2,905
Less: Reclassification Adjustment for Gains
Included in Net Income, Net of Tax of $478 - - - - - -
Total Comprehensive Income
Cash Dividends Declared ($0.52 per share) - - (6,458) - - -
Stock Issued in Payment of
Stock Dividend - 529,928 Shares 662 14,441 (15,103) - - -
Exercise of Stock Options - 312,894 Shares 132 766 (995) 1,272 - -
Treasury Stock Purchased - 78,334 Shares - - - (2,025) - -
Reduction of Debt Relating to the ESOP - - - - - 51
Restricted Stock Activity, Net - 110 - 158 (127) -
- - ----------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1997 17,862 90,249 37,740 (5,550) (303) (103)
Comprehensive Income:
Net Income-1998 - - 19,858 - - -
Unrealized Holding Gains on Securities
Available for Sale Arising During the - - - - - -
Period, Net of Tax of $1,594
Less: Reclassification Adjustment for Gains
Included In Net Income, Net of Tax of $1,331 - - - - - -
Total Comprehensive Income
Cash Dividends Declared ($0.65 per share) - - (8,480) - - -
Stock Issued in Payment of
Stock Dividend - 1,017,371 Shares 1,272 21,301 (22,573) - - -
Exercise of Stock Options - 189,220 Shares 12 190 (624) 1,443 - -
Treasury Stock Purchased - 25,391 Shares - - - (553) - -
Reduction of Debt Relating to ESOP - - - - - 103
Restricted Stock Activity, Net 2 275 - - 55 -
- - ----------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1998 $19,148 $112,015 $25,921 $(4,660) $(248) $ -
======================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Accumulated
(In Thousands, Except Share Data) Other Total
For the Years Ended Comprehensive Stockholders'
December 31, 1996, 1997, and 1998 Income Equity
- - ------------------------------------------------------------------------------
<S> <C> <C>
Balance-January 1, 1996 $ 2,572 $120,092
Comprehensive Income:
Net Income-1996 - 16,176
Unrealized Holding Losses on Securities
Available for Sale Arising During the
Period, Net of Tax of $633 (1,229) (1,229)
Less: Reclassification Adjustment for Gains
Included in Net Income, Net of Tax of $227 (441) (441)
--------
Total Comprehensive Income 14,506
========
Cash Dividends Declared ($0.45 per share) - (4,838)
Stock Issued in Payment of
Stock Dividend- 528,818 Shares - -
Exercise of Stock Options - 16,534 Shares - 70
Treasury Stock Purchased - 253,787 Shares - (2,938)
Treasury Stock Sold - 312,894 Shares - 2,388
Reduction of Debt Relating to the ESOP - 52
Restricted Stock Activity, Net - 134
- - ------------------------------------------------------------------------------
Balance-December 31, 1996 902 129,466
Comprehensive Income:
Net Income-1997 - 18,447
Unrealized Holding Gains on Securities
Available for Sale Arising During the 5,596 5,596
Period, Net of Tax of $2,905
Less: Reclassification Adjustment for Gains
Included in Net Income, Net of Tax of $478 (927) (927)
--------
Total Comprehensive Income 23,116
========
Cash Dividends Declared ($0.52 per share) - (6,458)
Stock Issued in Payment of
Stock Dividend - 529,928 Shares - -
Exercise of Stock Options - 312,894 Shares - 1,175
Treasury Stock Purchased - 78,334 Shares - (2,025)
Reduction of Debt Relating to the ESOP - 51
Restricted Stock Activity, Net - 141
- - ------------------------------------------------------------------------------
Balance-December 31, 1997 5,571 145,466
Comprehensive Income:
Net Income-1998 - 19,858
Unrealized Holding Gains on Securities
Available for Sale Arising During the 3,079 3,079
Period, Net of Tax of $1,594
Less: Reclassification Adjustment for Gains
Included In Net Income, Net of Tax of $1,33 (2,584) (2,584)
--------
Total Comprehensive Income 20,353
========
Cash Dividends Declared ($0.65 per share) - (8,480)
Stock Issued in Payment of
Stock Dividend - 1,017,371 Shares - -
Exercise of Stock Options - 189,220 Shares - 1,021
Treasury Stock Purchased - 25,391 Shares - (553)
Reduction of Debt Relating to ESOP - 103
Restricted Stock Activity, Net - 332
- - ------------------------------------------------------------------------------
Balance-December 31, 1998 $ 6,066 $158,242
==============================================================================
</TABLE>
The accompanying notes to the combined consolidated financial statements are an
integral part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 19,858 $ 18,447 $ 16,176
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 4,931 4,157 4,302
Amortization of Securities Premiums, Net 1,210 495 368
Provision for Possible Loan Losses 3,444 4,432 3,691
Provision (Benefit) for Deferred Income Taxes 44 254 (725)
Net Loss (Gain) on Disposition of Premises and Equipment 5 545 (1)
Net Gains from Securities Transactions (3,891) (1,914) (799)
Writedown of Investment in Joint Venture 220 - -
Trading Account Securities Activity, Net (94) (200) 20
Origination of Mortgage Loans Held for Sale (128) - -
Increase in Other Assets (3,186) (1,846) (12,070)
Increase in Other Liabilities 1,753 4,658 438
Reduction of Debt Relating to ESOP 103 51 52
Restricted Stock Activity, Net 332 141 134
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 24,601 29,220 11,586
- - --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES Securities Available for Sale:
Proceeds from Sales of Securities 696,694 126,663 167,788
Proceeds from Maturities of Securities 114,273 76,786 68,391
Purchases of Securities (814,248) (429,528) (191,866)
Securities Held to Maturity:
Proceeds from Maturities of Securities 53,137 41,076 32,805
Purchases of Securities (29,997) (11,448) (59,292)
Maturity (Purchase) of Term Certificate of Deposit - 500 (500)
Purchase of Corporate-Owned Life Insurance - (27,370) -
Net Increase in Loans (129,696) (37,045) (74,054)
Deposit Premium from Branch Acquisition - (1,400) -
Expenditures for Premises and Equipment (3,550) (5,824) (2,021)
Proceeds from Sale of Premises and Equipment 689 1,113 236
Decrease in Other Real Estate 996 464 1,105
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (111,702) (266,013) (57,408)
- - --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposits 59,824 11,936 (4,162)
Net (Decrease) Increase in Time Deposits (49,114) 46,239 59,054
Net Increase in Short-Term Borrowings 55,089 43,218 2,981
Net Increase (Decrease) in Other Borrowings 47,133 98,116 (9,987)
Cash Dividends on Common Stock (8,480) (6,458) (4,838)
Proceeds from Exercise of Stock Options 1,021 1,175 70
Sale of Treasury Stock - - 2,388
Treasury Stock Acquired, at Cost (553) (2,025) (2,938)
Proceeds from Series B Capital Securities - 20,000 -
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 104,920 212,201 42,568
- - --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 17,819 (24,592) (3,254)
Cash and Cash Equivalents at Beginning of Year 85,148 109,740 112,994
====================================================================================================================
Cash and Cash Equivalents at End of Year $ 102,967 85,148 109,740
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 62,510 51,198 45,121
Income Taxes 7,421 6,659 8,475
Reclass to Securities Available for Sale from Held to Maturity - 3,160 -
Transfer of Loans to Other Real Estate 235 490 256
Cash Received from Deposit Acquisition - 18,244 -
</TABLE>
The accompanying notes to the combined consolidated financial statements are an
integral part of these statements.
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United National Bancorp owns United National Bank, which operates through a
branch network primarily located throughout central and northwestern counties in
New Jersey. The Company provides a full range of banking and trust services to
its market area in a competitive environment.
The combined consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and practices within the banking
industry. These statements give a retroactive effect to the merger of United
National Bancorp and Raritan Bancorp Inc. This transaction has been accounted
for as a pooling of interests; therefore, the Combined Consolidated Financial
Statements are presented as if United National Bancorp and Raritan Bancorp Inc.
were always one company. These statements are presented as supplemental
information to the audited historical Consolidated Financial Statements of
United National Bancorp included on pages 37 through 58. The significant
policies are summarized as follows:
a. Principles of Consolidation and Use of Estimates
The accompanying combined consolidated financial statements include the accounts
of United National Bancorp (the "Parent Company") and its wholly-owned
subsidiaries, United National Bank (the "Bank"), and UNB Capital Trust I (the
"Trust"), or when consolidated with the Parent Company, the "Company". All
significant intercompany balances and transactions have been eliminated in
consolidation. Prior period financial statements have been restated to include
the amounts and activities for all acquisitions accounted for as
pooling-of-interests combinations. See Note 2 for further discussion of
acquisitions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. Securities
Securities are classified into one of three categories: held to maturity,
available for sale, or trading account securities.
Securities which the Company has the ability and intent to hold until maturity
are classified as "held to maturity." These securities are stated at cost,
adjusted for amortization of premium and accretion of discount, using the
interest method over the term of the securities.
Securities that may be held for indefinite periods of time which Management
intends to use as part of its asset/liability management strategy and that may
be sold in response to changes in interest rates, changes in prepayment risk, or
other similar factors, are classified as "available for sale" and reported at
estimated market value. Unrealized holding gains and losses (net of related tax
effects) on such securities are excluded from earnings but are included in other
comprehensive income as a component of stockholders' equity. Upon realization,
such gains or losses are included in earnings using the specific identification
method.
Trading account securities are carried at market value. Gains and losses
resulting from adjusting trading account securities to market value, as well as
security sales, are reported in non-interest income. This category includes
securities purchased specifically for short-term appreciation or to be available
for liquidity needs.
c. Federal Home Loan Bank of New York Stock
This stock is carried at cost. The Company is required to maintain such
investment as part of its membership in the Federal Home Loan Bank of New York.
d. Investment in Joint Venture
In November 1995, the Company, through the Bank, acquired a 50% ownership in
United Financial Services, Inc., (UFS) a third party data processing service
bureau. The investment is being accounted for by the equity method. The Company
and its joint venture partner have resolved to dissolve the joint venture and
the Company has entered into a contract with a third-party servicer to provide
data processing services. Third-party data processing services are expected to
commence in the second quarter of 1999. In connection with the plan of
dissolution, the Company will accelerate $1,200,000 of writedowns and
amortization of investment in joint venture and related goodwill during the
first half of 1999.
e. Loans and Lease Financings
Loans and leases are stated at the principal amount outstanding, net of deferred
loan origination fees/expenses and unearned discounts. Interest on substantially
all loans is accrued and credited to interest income based upon the principal
amount outstanding. Loan fees and certain expenses associated with originating
loans are deferred and amortized over the lives of the respective loans as an
adjustment to the yield utilizing a method that approximates the level yield.
Generally, interest income is not accrued on loans (including impaired loans)
where principal or interest is 90 days or more past due, unless the loans are
adequately secured and in the process of collection. A loan less than 90 days
past due may be placed on non-accrual if Management believes there is sufficient
doubt as to the ultimate collectibility of the outstanding loan balance. A loan
is transferred to accrual when it is brought current and its future
collectibility is reasonably assured.
When a loan (including an impaired loan) is classified as non-accrual,
uncollected past due interest is reversed and charged against current income.
Interest income will not be recognized until the financial condition of the
borrower improves, payments are brought current and a consistent payment history
is established. Payments received on non-accrual loans, including impaired
loans, are first applied to all principal amounts owed. Once the remaining
principal balance is deemed fully collectible, payments would then be applied to
interest income and fees.
A loan is considered impaired when, based upon current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based upon the present value of expected future cash flows, or, as a practical
expedient, at the loans observable market price, or the fair value of the
underlying collateral, if the loan is collateral dependent. Management has
defined impaired loans as all non-accruing loans with outstanding balances
greater than $50,000.
Loans held for sale primarily consist of residential mortgages and are carried
at the lower of cost or market using the aggregate method. Gains and losses on
loans sold are included in non-interest income.
f. Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
allowance is based on Management's evaluation of potential losses in the
portfolio, after consideration of appraised collateral values, financial
condition of the borrower, delinquency and charge-off trends, as well as
prevailing and anticipated economic conditions. Management evaluates the
adequacy of the allowance for possible loan losses on a regular basis throughout
the year. Management believes that the allowance for possible loan losses is
adequate. While Management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based upon changes in
economic conditions. In addition, various regulatory agencies periodically
review the Company's allowance for possible loan losses. Such agencies may
require the Company to recognize additions to the allowance based upon their
judgments of information available to them at the time of their examination.
g. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to forty years.
Leasehold improvements are amortized on a straight-line basis over the lives of
the related leases, or the life of the improvement, whichever is shorter.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
h. Other Real Estate
Other real estate owned consists of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. Only collateral of
which the Company has taken physical possession is classified as other real
estate.
Other real estate is carried at the lower of fair value of the related property,
as determined by current appraisals less estimated costs to sell, or the
recorded investment in the property. Write-downs on these properties, which
occur after the initial transfer from the loan portfolio, are recorded as
operating expenses. Costs of holding such properties are charged to expense in
the current period. Gains, to the extent allowable, and losses on the
disposition of these properties are reflected in current operations.
i. Intangible Assets
Intangible assets include: 1) the present value of the future earnings potential
of the core deposit base of acquired banks, which are being amortized on a
straight-line basis over a 10 year period, and 2) goodwill resulting from the
Company's investment in UFS, and other acquisitions, which is being amortized
over periods ranging from 6 months to 20 years. Management periodically reviews
the potential impairment of intangible assets on a non-discounted cash flow
basis to assess recoverability. If the estimated future cash flows are projected
to be less than the carrying amount, an impairment write-down, representing the
carrying amount of the intangible asset which exceeds the present value of the
estimated expected future cash flows, would be recorded as a period expense.
j. Trust Assets
Assets held in fiduciary or agency capacities for customers are not included in
the combined consolidated balance sheets since such items are not assets of the
Company.
k. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
l. 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 year (14,894,000, 14,816,000
and 14,538,000 in 1998, 1997 and 1996, respectively).
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 potential common stock, using the treasury stock method (15,307,000,
15,215,000 and 14,954,000 in 1998, 1997 and 1996, respectively). Potential
common stock resulting from stock option agreements totaled 413,000, 399,000 and
416,000 in 1998, 1997 and 1996, respectively.
Weighted average shares outstanding for all periods presented have been adjusted
for the 10% stock dividend declared in 1998.
m. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and Federal funds sold. Generally, Federal funds are sold for a
one-day period.
n. Stock-Based Compensation
The Company applies the "intrinsic value based method" as described in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Pro forma disclosures, as if the Company applied the "Fair
Value Based Method" for stock issued to employees, have been provided in Note 16
to the combined consolidated financial statements.
o. Retirement Benefits
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 132, Employers' Disclosures about Pension and Other Post
Retirement Benefits. SFAS No. 132 revises employers' disclosures about pension
and other post retirement benefit plans. SFAS No. 132 does not change the method
of accounting for such plans.
The Company maintains a noncontributory defined benefit pension plan which
covers all employees who have met eligibility requirements of the Plan. It is
the Company's policy to fund the plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974.
In addition, the Company provides health care and life insurance benefits for
qualifying employees.
p. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
securities and is presented in the combined consolidated statements of changes
in stockholders' equity. SFAS No. 130 requires only additional disclosures in
the combined consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial statements
have been reclassified to conform to the requirements of SFAS No. 130.
q. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" . This
statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. SFAS 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 SFAS No. 133 is not
expected to have a material impact on the financial position or results of the
Company.
In October 1998, the FASB issued 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 FASB Statement 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. SFAS No. 134 is 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.
r. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1998.
NOTE 2 - ACQUISITIONS
a. 1999 Acquisitions
On March 31, 1999, the Company acquired all of the outstanding shares of Raritan
Bancorp Inc. ("Raritan") based in Bridgewater, New Jersey. Each share of Raritan
was converted into 1.595 shares of the Company's common stock for a total of
approximately 3,785,000 shares issued. At December 31, 1998, Raritan had
approximately $432 million in assets. The acquisition was accounted for as a
pooling-of-interests, and accordingly, the Company's combined consolidated
financial statements have been restated to include the amounts and activities of
Raritan. On March 31, 1999, the Company recorded a pre-tax merger charge of
approximately $10,005,000 which primarily consists 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
$360,000.
b. 1998 Acquisitions
On September 30, 1998, the Company acquired the State Bank of South Orange
("SBSO"). Each share of SBSO was converted into 1.245 shares of the Company's
common stock for a total of 796,271 shares issued, not adjusted for subsequent
stock dividends and splits. The acquisition has been accounted for under the
pooling-of-interests method of accounting and, accordingly, the Company's
combined consolidated financial statements include the amounts and activities of
SBSO for all periods presented. The Company recorded a pre-tax merger charge
related to the SBSO acquisition of approximately $2,179,000. The charge
consisted primarily of severance costs of $1,050,000 and professional fees of
$802,000. The remaining charge pertained to fixed asset dispositions and
contract termination fees. Substantially all of the merger charge has been
realized at December 31, 1998. Separate results of the combined entities for the
years ended December 31, 1998, 1997 and 1996 are as follows:
(In Thousands, Unaudited) 1998 1997 1996
- - -------------------------------------------------------------------------------
Net Interest Income after Provision
For Possible Loan Losses
The Company $53,920 $48,277 $46,181
SBSO - 2,719 2,448
Raritan 13,058 12,522 11,624
- - -------------------------------------------------------------------------------
Total $66,978 $63,518 $60,253
===============================================================================
Net Income
The Company $15,600 $13,880 $12,280
SBSO - 659 788
Raritan 4,258 3,908 3,108
- - -------------------------------------------------------------------------------
Total $19,858 $18,447 $16,176
===============================================================================
c. 1997 Acquisitions
On February 28, 1997, the Company completed the acquisition of Farrington Bank
("Farrington") based in North Brunswick, New Jersey. Each share of Farrington
was converted into 0.7647 shares of the Company's common stock for a total of
549,212 shares issued, not adjusted for subsequent stock dividends and splits.
At the time of the acquisition, Farrington had approximately $60 million in
assets. The acquisition was accounted for as a pooling-of-interests, and
accordingly, the Company's combined consolidated financial statements include
the amounts and activities of Farrington for all periods presented. The Company
recorded a pre-tax merger charge related to the Farrington acquisition of
approximately $1,665,000. The charge consisted primarily of severance costs of
$890,000, contract termination fees of $387,000 and professional fees of
$193,000. The remaining charge primarily pertained to fixed asset dispositions.
All of the merger charge was realized in 1997.
On December 6, 1997, the Company, through the Bank, assumed deposits, including
accrued interest, of approximately $21 million from another bank. In addition,
the Bank received $214,000 in cash and cash equivalents and approximately
$692,000 in other assets. In connection with the transaction, the Bank recorded
an intangible asset of $1,400,000, representing the premium paid over the
carrying amount of deposits acquired.
NOTE 3 - CASH AND DUE FROM BANKS
Balances reserved to meet regulatory requirements amounted to $1,414,000 at
December 31, 1998.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and the estimated market values of securities available for
sale at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 2,502 $ 12 $ - $ 2,514
Obligations of U.S. Government
Agencies and Corporations 66,872 531 (470) 66,933
Obligations of States and
Political Subdivisions 76,930 2,555 (1) 79,484
Mortgage-Backed Securities 388,564 2,934 (375) 391,123
Corporate Debt Securities 23,343 657 - 24,000
- - --------------------------------------------------------------------------------------------------------------------
Total Debt Securities 558,211 6,689 (846) 564,054
- - --------------------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 27,980 3,811 (433) 31,358
Federal Reserve Bank and
Federal Home Loan Bank Stock 13,850 - - 13,850
- - --------------------------------------------------------------------------------------------------------------------
Total Equity Securities 41,830 3,811 (433) 45,208
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $600,041 $10,500 $(1,279) $609,262
====================================================================================================================
1997
--------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury Securities $ 22,134 $ 57 $ (12) $ 22,179
Obligations of U.S. Government
Agencies and Corporations 93,308 723 (200) 93,831
Obligations of States and
Political Subdivisions 56,327 1,314 (7) 57,634
Mortgage-Backed Securities 347,464 2,975 (526) 349,913
Corporate Debt Securities 13,496 424 - 13,920
- - --------------------------------------------------------------------------------------------------------------------
Total Debt Securities 532,729 5,493 (745) 537,477
- - --------------------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 49,840 3,921 (206) 53,555
Federal Reserve Bank and
Federal Home Loan Bank Stock 11,333 - - 11,333
- - --------------------------------------------------------------------------------------------------------------------
Total Equity Securities 61,173 3,921 (206) 64,888
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $593,902 $ 9,414 $ (951) $602,365
====================================================================================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1998, by expected maturity, are shown in the table below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(In Thousands) Cost Market Value
- - ------------------------------------------------------------------------------
Due in One Year or Less $ 38,154 $ 37,913
Due After One Year Through Five Years 67,115 68,568
Due After Five Years Through Ten Years 54,924 56,742
Due After Ten Years 9,454 9,708
Mortgage-Backed Securities 388,564 391,123
- - ------------------------------------------------------------------------------
Total Debt Securities Available for Sale $558,211 $564,054
==============================================================================
Gross gains and gross losses realized during 1998, 1997 and 1996 relating to
securities available for sale were as follows:
(In Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------
Gross Gains $4,107 $1,787 $1,045
Gross Losses 192 382 357
==============================================================================
Total Net Gains $3,915 $1,405 $ 688
==============================================================================
NOTE 5 - SECURITIES HELD TO MATURITY
Comparative amortized cost and estimated market values of securities held to
maturity at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 2,000 $ 20 $ - $ 2,020
Obligations of U.S. Government
Agencies and Corporations 14,994 22 (6) 15,010
Obligation of States and
Political Subdivisions 22,141 304 - 22,445
Mortgage-Backed Securities 24,089 12 (56) 24,045
Securities Issued by Foreign
Governments 150 5 - 155
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $63,374 $363 $ (62) $63,675
====================================================================================================================
1997
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities $ 990 $ 5 $ - $ 995
Obligations of U.S. Government
Agencies and Corporations 27,953 40 (57) 27,936
Obligations of States and
Political Subdivisions 11,712 89 (3) 11,798
Mortgage-Backed Securities 45,835 15 (425) 45,425
Securities Issued by Foreign
Governments 125 4 - 129
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $86,615 $153 $(485) $86,283
====================================================================================================================
</TABLE>
The amortized cost and estimated market value of securities held to maturity at
December 31, 1998, by expected maturity, are shown in the table below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
(In Thousands) Cost Market Value
- - --------------------------------------------------------------------------------
Due in One Year or Less $21,103 $21,120
Due After One Year Through Five Years 4,583 4,614
Due After Five Years Through Ten Years 8,007 8,269
Due After Ten Years 5,592 5,627
Mortgage-Backed Securities 24,089 24,045
- - --------------------------------------------------------------------------------
Total Debt Securities Held to Maturity $63,374 $63,675
================================================================================
There were no sales of securities held to maturity during 1998, 1997 and 1996.
Securities held to maturity and available for sale with amortized costs totaling
$550,000 and $52,864,000, respectively, on December 31, 1998, were pledged to
secure U.S. Government and other deposits and for other purposes as required and
permitted by law. In addition, securities held to maturity and available for
sale having amortized costs aggregating $9,024,000 and $416,003,000,
respectively, on December 31, 1998, were pledged to secure advances and
agreements to repurchase other borrowed funds. Securities totaling $23,381,000
remain under the custodial responsibility of the Company during the period of
the applicable agreements.
Securities with a carrying value of $3,160,000 and a market value of $3,148,000,
previously held by Farrington, which were classified as held to maturity, were
reclassified to available for sale upon consummation of the merger on February
28, 1997 to maintain the Company's interest rate risk position.
NOTE 6 - LOANS
Loans outstanding by classification at December 31, 1998 and 1997 are as
follows:
(In Thousands) 1998 1997
- - ----------------------------------------------------------------------------
Real Estate
Commercial and Residential Mortgage $ 611,676 $553,598
Construction 40,435 40,326
Commercial Loans 218,929 145,100
Lease Financing 11,022 11,852
Installment Loans 143,011 158,683
Retail Credit Card Plan 38,511 33,484
- - ----------------------------------------------------------------------------
Total Loans Outstanding 1,063,584 943,043
Less: Unearned Income 6,631 11,777
Allowances for Loan Losses 11,174 11,739
- - ----------------------------------------------------------------------------
Loans, Net $1,045,779 $919,527
============================================================================
Mortgage Loans Held for Sale $ 128 $ -
============================================================================
The Company extends credit in the normal course of business to its customers,
the majority of whom operate or reside within New Jersey. The ability of its
customers to meet contractual obligations is, to a certain extent, dependent
upon the economic conditions existing in the state.
The following information is presented for those loans classified as
non-accrual, and considered impaired, at December 31:
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Income that Would have Been Recorded Under
Original Contract Terms $665 $44 $1,044
Interest Income Received and Recorded 73 $91 89
- - --------------------------------------------------------------------------------
Lost Income on Non-Accrual Loans at Year-End $592 $53 $ 955
================================================================================
As of December 31, 1998 and 1997, the Company's non-accrual loans were
$7,281,000 and $7,555,000, respectively. Of these, the loans considered to be
impaired were $5,365,000 and $6,408,000 respectively, with related valuation
allowances of $1,300,000 and $1,964,000, respectively. These valuation
allowances are included in the allowance for possible loan losses in the
accompanying combined consolidated balance sheets. Substantially all impaired
loans were evaluated for impairment losses based upon the fair value of the
underlying collateral of the loan. The average recorded balances in impaired
loans during 1998, 1997 and 1996 were $5,299,000, $7,975,000 and $7,648,000,
respectively.
Loans to directors, officers, employees and/or their affiliated interests
amounted to approximately $16,968,000 and $14,080,000 at December 31, 1998 and
1997, respectively. All such loans, which are primarily secured, were current as
to principal and interest payments, and in the opinion of Management, all were
granted on terms which were comparable to loans to unrelated parties at the
dates such loans were granted. An analysis of the 1998 activity in these loans
is as follows (in thousands):
Balance Outstanding, Beginning of Year $14,080
New Loans 8,568
Repayments (5,680)
- - ------------------------------------------------------------------------------
Balance Outstanding, End of Year $16,968
==============================================================================
NOTE 7 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses activity for the years ended
December 31, 1998, 1997 and 1996, is as follows:
(In Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------
Balance, Beginning of Year $ 11,739 $11,874 $11,440
Provision Charged to Expense 3,444 4,432 3,691
Acquisitions - - 303
Recoveries 1,225 984 560
Losses Charged to Allowance (5,234) (5,551) (4,120)
- - -----------------------------------------------------------------------------
Balance, End of Year $11,174 $11,739 $11,874
=============================================================================
NOTE 8 - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1998 and 1997, is as
follows:
(In Thousands) 1998 1997
- - --------------------------------------------------------------------------------
Premises (includes land of $3,347 and $3,153
in 1998 and 1997, respectively). $17,636 $15,832
Property Under Capital Lease 9,750 9,750
Equipment 15,764 16,811
Leasehold Improvements 4,324 3,708
Projects in Progress 12 633
- - --------------------------------------------------------------------------------
Total 47,486 46,734
Less: Accumulated Depreciation and Amortization 18,238 17,372
- - --------------------------------------------------------------------------------
Premises and Equipment, Net $29,248 $29,362
================================================================================
Depreciation expense amounted to $2,970,000 in 1998, $2,429,000 in 1997 and
$2,460,000 in 1996.
NOTE 9 - DEPOSITS
Time certificates of deposit $100,000 or more totaled $109,667,000 on December
31, 1998 and $121,067,000 on December 31, 1997.
Time deposits, with remaining maturities greater than one year, mature as
follows (in thousands):
1999 $201,336
2000 16,117
2001 4,639
2002 4,027
Thereafter 702
======================================================
Total $226,821
======================================================
Interest-bearing deposits amounted to $1,128,496,000 and $1,155,005,000 at
December 31, 1998 and 1997, respectively. Non-interest bearing deposits amounted
to $274,917,000 and $237,698,000 at December 31, 1998 and 1997, respectively.
NOTE 10 - SHORT-TERM BORROWINGS
Selected data relating to short-term borrowings for the years ended December 31,
1998 and 1997, are as follows:
(Dollars In Thousands) 1998 1997
- - --------------------------------------------------------------------------------
At Year-End:
Borrowed Funds $ 75,385 $94,528
Securities Sold Under Agreements to Repurchase 39,475 -
Federal Home Loan Bank Advances 37,000 -
Federal Funds Purchased - 3,000
Demand Notes - U.S. Treasury 2,775 2,018
- - --------------------------------------------------------------------------------
Total Short-Term Borrowings $154,635 $99,546
================================================================================
Weighted Average Interest Rate 4.97% 5.65%
================================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $15,385 -
Weighted-Average Interest Rate 5.64% -
Highest Month-End Balance $81,864 -
- - --------------------------------------------------------------------------------
There were no securities sold under agreements to repurchase during 1997 and
1996.
NOTE 11 - OTHER BORROWINGS
Other borrowings consisted of the following at December 31:
(Dollars In Thousands) 1998 1997
- - --------------------------------------------------------------------------------
Other Borrowed Funds $ 87,277 $ 67,000
Securities Sold Under Agreements to Repurchase 58,000 31,000
Obligation Under Capital Lease 9,665 9,706
ESOP Debt - 103
- - --------------------------------------------------------------------------------
Total Other Borrowings $154,942 $107,809
================================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $53,951 $ 9,898
Weighted-Average Interest Rate 5.80% 5.98%
Highest Month-End Balance $58,000 $31,000
- - --------------------------------------------------------------------------------
There were no securities sold under agreements to repurchase during 1996.
During 1995, the Company entered into a lease agreement on its new headquarters
building. The lease, which has been accounted for as a capital lease, expires in
2015. Lease commitments under this agreement are as follows (in thousands):
1999 $ 999
2000 999
2001 1,059
2002 1,089
2003 1,089
Thereafter 15,108
- - -------------------------------------------------------
Total 20,343
Less: Amount Representing Interest (10,678)
- - -------------------------------------------------------
Total Obligation Under Capital Lease $ 9,665
=======================================================
NOTE 12 - CAPITAL TRUST
On March 21, 1997, the Company placed $20 million of trust capital securities
through UNB Capital Trust I, a statutory business trust formed under the laws of
the State of Delaware, of which all common securities are owned by the Company.
The capital securities pay cumulative cash distributions semiannually at an
annual rate of 10.01%. The dividends paid to holders of the capital trust
securities are deductible for income tax purposes. The semi-annual distributions
may, at the option of the Company, be deferred for up to 5 years. The securities
are redeemable from March 15, 2007 until March 15, 2017 at a declining rate of
105.0% to 100.0% of the principal amount. After March 15, 2017 they are
redeemable at par until March 15, 2027 when redemption is mandatory. Prior
redemption is permitted under certain circumstances such as changes in tax or
regulatory capital rules. The proceeds of the capital securities, along with its
capital, were invested by the Trust in $20,619,000 principal amount of 10.01%
junior subordinated debentures of the Company due March 15, 2027 which are the
sole assets of the Trust. The Company guarantees the capital securities through
the combined operation of the debentures and other related documents. The
Company's obligations under the guarantee are unsecured and subordinate to
senior and subordinated indebtedness of the Company. The capital securities
qualify as Tier I capital for regulatory capital purposes and are accounted for
as minority interest.
NOTE 13 - CAPITAL REQUIREMENTS
The Federal Reserve Board in the case of bank holding companies such as the
Company and the Office of the Comptroller of the Currency ("OCC") in the case of
federally chartered banks such as the Bank have adopted risk-based capital
guidelines which require a minimum ratio of 8% of total risk-based capital to
assets, as defined in the guidelines. At least one half of the total capital, or
4%, is to be comprised of common equity and qualifying perpetual preferred
stock, less deductible intangibles (Tier I capital).
In addition, the Federal Reserve Board and the OCC supplemented the risk-based
capital guidelines with an additional capital ratio referred to as the leverage
ratio or core capital ratio. The regulations require a financial institution to
maintain a minimum leverage ratio of 4% to 5%, depending upon the condition of
the institution.
Under its prompt corrective action regulations, the OCC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of depository institutions into
five categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage ratio of at
least 5.0%; a Tier I capital ratio of at least 6.0%; and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are subject
to qualitative judgments by the regulatory authorities about capital components,
risk weightings and other factors.
Management believes that, as of December 31, 1998 the Company and the Bank meet
all capital adequacy requirements to which they are subject. Further, based upon
the capital ratios, the Company and the Bank would qualify as "well capitalized"
at December 31, 1998.
The following is a summary of the Company's and the Bank's actual capital
amounts and ratios as of December 31, 1998 and 1997, compared to the regulatory
authorities minimum capital adequacy requirements and requirements for
classification as a well capitalized institution:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------------------- ---------------------------------------------
(Dollars In Thousands) Company Bank Company Bank
---------------------- ---------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RISK-BASED CAPITAL RATIOS:
Tier I Capital
Actual $163,304 13.53% $154,267 12.95% $150,013 14.04% $143,047 3.48%
Regulatory Minimum Requirement 48,276 4.00 47,654 4.00 42,745 4.00 42,444 4.00
For Classification as Well Capitalized 72,414 6.00 71,481 6.00 64,118 6.00 63,666 6.00
Combined Tier I and Tier II Capital
Actual 174,139 14.43 165,102 13.86 161,376 15.10 154,410 14.55
Regulatory Minimum Requirement 96,552 8.00 95,307 8.00 85,491 8.00 84,889 8.00
For Classification as Well Capitalized 120,690 10.00 119,134 10.00 106,864 10.00 106,111 10.00
LEVERAGE RATIO:
Actual 163,304 8.51 154,267 8.20 150,013 8.56 143,047 8.21
Regulatory Minimum Requirement 76,777 4.00 75,276 4.00 70,119 4.00 69,690 4.00
For Classification as Well Capitalized 95,971 5.00 94,094 5.00 87,649 5.00 87,112 5.00
</TABLE>
NOTE 14 - INCOME TAXES
The components of the provision for income taxes are as follows:
(In Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------
Federal:
Current $7,702 $7,916 $7,939
Deferred Provision (Benefit ) 44 254 (725)
- - -------------------------------------------------------------------------------
Total Federal 7,746 8,170 7,214
State 622 865 1,195
- - -------------------------------------------------------------------------------
Total Provision for Income Taxes $8,368 $9,035 $8,409
===============================================================================
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income before taxes by the statutory Federal
income tax rate is as follows:
(Dollars In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------
Income Before Provision for Income Taxes $28,226 $27,482 $24,585
================================================================================
Tax Calculated at 35% $ 9,879 $ 9,619 $ 8,605
Increase (Decrease) in Tax Resulting from:
Tax-Exempt Income (1,516) (1,037) (944)
State Taxes-Net of Federal Tax Benefit 404 562 777
Decrease in Valuation Allowance (240) - -
Other-Net (159) (109) (29)
- - --------------------------------------------------------------------------------
Provision for Income Taxes $ 8,368 $ 9,035 $ 8,409
================================================================================
================================================================================
Effective Tax Rate 30% 33% 34%
================================================================================
The components of the net deferred tax asset as of December 31, 1998 and 1997
are as follows:
(In Thousands) 1998 1997
- - -------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for Possible Loan Losses $2,894 $3,266
Post Retirement Benefits 1,317 1,119
Deferred Directors Fees 129 131
Capital Lease 624 454
Intangible Assets 659 493
Other 1,341 1,441
- - -------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 6,964 6,904
- - -------------------------------------------------------------------------------
Valuation Allowance (344) (584)
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
Deferred Tax Assets, Net 6,620 6,320
- - -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Net Unrealized Gain on Securities
Available for Sale (3,155) (2,892)
Depreciation (1,046) (1,076)
Pension Plan (490) (276)
Accretion of Discount (564) (439)
Other (1,508) (1,473)
- - -------------------------------------------------------------------------------
Total (6,763) (6,156)
- - -------------------------------------------------------------------------------
Net Deferred Tax (Liability) Asset $ (143) $ 164
===============================================================================
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates sufficient net taxable
income. Additionally, the Company has sufficient refundable taxes in prior years
that are available through carry back for the realization of tax benefits
recorded. Accordingly, Management believes it is more likely than not that the
Company will realize the benefit of the deferred tax asset. However, significant
changes in the Company's operations and/or economic conditions could affect its
ability to fully utilize the benefits of the deferred tax asset.
Included in other comprehensive income are income tax expense (benefit)
attributable to net unrealized gains or losses on securities available for sale
in the amounts of $263,000, $2,427,000 and $(860,000) for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 15 - EMPLOYEE BENEFIT PLANS
Pension Benefits
The Company has a noncontributory defined benefit plan, funded through a
self-administered trust, covering substantially all full-time employees who have
attained age 21 and have completed one year of service. Annual contributions are
made to the plan equal to the minimum amount currently deductible for Federal
income tax purposes. Plan assets are comprised of debt and equity securities. In
addition, the Company has supplemental pension agreements with an officer and a
director (a former officer), as well as employees who retired prior to the
formation of the current plan.
Post Retirement Benefits
Expected costs of providing these benefits, including medical and life insurance
coverage, are charged to expense during the years that the employees render
service.
The following table sets forth the Pension Plan's Benefits and Post Retirement
Plan's Benefits funded status at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Post Retirement
Pension Benefits Benefits
- - ---------------------------------------------------------------------------------------------------------------------
(In Thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Projected Benefit Obligation at Beginning of Year $ 21,590 $ 20,088 $ 7,387 $ 7,100
Service Cost 860 847 336 319
Interest Cost 1,454 1,408 542 485
Actuarial Gain (Loss) 430 459 793 (13)
Benefits Paid (1,279) (1,212) (544) (504)
- - ---------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at End of Year
23,055 21,590 8,514 7,387
- - ---------------------------------------------------------------------------------------------------------------------
Plan Assets Fair Value at Beginning of Year 28,299 23,683 - -
Actual Return on Plan Assets 8,358 5,785 - -
Employer Contribution 43 43 544 504
Benefits Paid (1,279) (1,212) (544) (504)
- - ---------------------------------------------------------------------------------------------------------------------
Plan Assets Value at End of Year 35,421 28,299 - -
- - ---------------------------------------------------------------------------------------------------------------------
Funded Status 12,366 6,709 (8,514) (7,387)
Unrecognized Transition (Asset) Obligation (2) (190) 4,055 4,345
Unrecognized Prior Service Cost 387 540 9 10
Unrecognized (Gain) Loss (11,497) (6,400) 442 (360)
- - ---------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Cost $ 1,254 $ 659 $(4,008) $(3,392)
- - ---------------------------------------------------------------------------------------------------------------------
Discount Rate 6.72% 7.03% 6.74% 7.01%
Expected Return on Plan Assets 8.91% 8.89% - -
Rate of Compensation Increase 4.50% 5.00% - -
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, the Company adopted a non-tax qualified plan for certain of its
executives ("SERP") to supplement the benefit such executive can receive under
the Company's 401(k) Plan and defined benefit plans. In conjunction with the
SERP, the Company purchased approximately $27.4 million in corporate-owned life
insurance. Pension benefits in the above table include the portion related to
the Non-Qualified Executive Supplemental Plans. The Supplemental Plans projected
benefit obligation was $215,000 and $223,000 in 1998 and 1997, respectively. The
Supplemental Plans have no assets as of December 31, 1998 and 1997.
Net periodic (benefit) expense for 1998, 1997 and 1996 includes the following:
<TABLE>
<CAPTION>
Pension Benefits Post Retirement Benefits
- - -------------------------------------------------------------------------------- --------------------------------
(In Thousands) 1998 1997 1996 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Periodic (Benefit) Expense Components:
Service Cost $ 860 $ 847 $ 761 $ 336 $ 319 $ 288
Interest Cost 1,454 1,408 1,349 542 485 480
Expected Return on Plan Assets (2,462) (2,054) (2,037) - - -
Net Deferral and Amortization (404) (158) 95 282 284 282
- - --------------------------------------------------------------------------------------------------------------------
Net Periodic (Benefit) Expense $ (552) $ 43 $ 168 $1,160 $1,088 $1,050
- - --------------------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions:
Discount Rate 7.04% 7.32% 7.28% 6.77% 7.03% 7.26%
Expected Return on Plan Assets 8.91% 8.89% 8.89% - - -
Rate of Compensation Increase 5.00% 5.93% 5.94% - - -
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend in measuring the expected cost of the post
retirement benefits range from 6.0% through 7.5% in 1999, declining by 0.5% per
year to an ultimate level of 5.0% by the year 2003.
A 1% change in the assumed health care cost trend rate would have the following
effects on the Company's post retirement benefits:
<TABLE>
<CAPTION>
(In Thousands) 1 % Increase 1 % Decrease
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on Total Service and Interest Cost (Net Periodic Expense) $ 186 $ (143)
Effect on the Post Retirement Benefits (Projected Benefit Obligation) 1,494 (1,189)
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
Other Benefits
Employees can make contributions to the Company's 401(k) Plan by means of
payroll deductions of up to 10% of their compensation. Matching contributions
are made by the Company for up to 5% of the employee's compensation at the
discretion of the Board of Directors and totaled $556,000, $550,000 and $581,000
in 1998, 1997 and 1996, respectively.
NOTE 16 - STOCK OPTION PLANS
The Company has a Stock Incentive Plan (the "Plan"), in which shares of the
Company's common stock may be granted to the Company's employees. The Plan
provides for the discretionary granting of stock options with or without stock
appreciation rights. Under the Plan, the exercise price of each option equals
the market price of the Company's stock on the date of grant. The options
granted have a term of nine or ten years and vest over a period of four years.
The Company also has a "Stock Option Plan for Non-Employee Directors" (the
"Directors Plan") in which options to acquire shares of the Company's common
stock may be granted to Non-Employee Directors. Each Non-Employee Director of
the Company or its affiliates is eligible to receive options under the Directors
Plan. The options granted have a term of ten years and vest over three years.
Under the Plan, the exercise price of each option equals the market price of the
Company's stock on the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for both the Plan and Directors Plans. Accordingly, no compensation cost has
been recognized for the stock options in these Plans. Had compensation cost for
these plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," which was previously described in Note 1(n) the
Company's net income and diluted net income per share would have been reduced to
the pro forma amounts indicated below:
(In Thousands, Except Per Share Data) 1998 1997 1996
- - --------------------------------------------------------------------------------
Net Income:
As Reported $19,858 $18,447 $16,176
Pro forma 19,550 18,140 15,995
Basic Net Income Per Share:
As Reported $ 1.33 $ 1.25 $ 1.11
Pro forma 1.31 1.22 1.10
Diluted Net Income Per Share:
As Reported $ 1.30 $ 1.21 $ 1.08
Pro forma 1.28 1.19 1.07
- - --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 3.5%, 2.3% and 3.1% for 1998, 1997 and 1996, respectively; expected
volatility of 17%, 22% and 25% for 1998, 1997 and 1996, respectively; risk-free
interest rates of 5.6%, 6.7% and 6.0% for 1998, 1997 and 1996, respectively; and
expected lives of 5 years for both plans. A summary of the status of both the
Plan and the Directors Plan of the Company as of December 31, 1998, 1997 and
1996 and changes during the years ended on those dates, adjusted for subsequent
stock dividends and splits, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Option Shares Shares Price Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of Year 822,588 $ 9.61 974,721 $ 6.77 881,850 $ 6.01
Granted 77,110 25.66 196,395 15.06 115,811 12.32
Exercised (189,220) 5.52 (332,737) 4.35 (20,326) 4.86
Forfeited (298) 12.40 (15,791) 12.76 (2,614) 12.40
- - ----------------------------------------------------------------------------------------------------------------
Outstanding at
End of Year 710,180 12.44 822,588 $ 9.61 974,721 $ 6.77
================================================================================================================
Options Exercisable
at Year-End 443,046 504,081 720,512
================================================================================================================
Weighted-Average
Fair Value of
Options Granted
During the Year $4.15 $3.65 $3.01
================================================================================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1998, adjusted for the effect of subsequent stock dividends and
splits.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------ -----------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.90-$ 9.61 250,737 5.1 $ 5.77 231,118 $ 5.45
11.39 65,280 5.0 11.39 65,280 11.39
12.21-12.40 101,251 6.1 12.36 80,616 12.34
12.64-13.00 89,795 7.5 12.96 46,020 12.94
16.24-18.68 126,007 8.4 17.85 20,012 16.77
24.77-27.36 77,110 8.2 25.66 - -
- - --------------------------------------------------------------------------------------------------------------------
$ 3.90-$27.36 710,180 6.5 $12.44 443,046 $ 8.87
====================================================================================================================
</TABLE>
The Stock Incentive Plan also provides for granting of Restricted Stock Awards,
which generally vest over a period of six years. Stock dividends and splits are
granted to the employees when paid. Transactions involving these awards are
summarized as follows:
1998 1997 1996
- - --------------------------------------------------------------------------------
Restricted Stock Awards:
Outstanding - January 1, 28,485 10,996 19,000
Granted 1,800 28,710 -
Canceled - (918) (450)
Vested (8,445) (10,303) (7,554)
- - --------------------------------------------------------------------------------
Outstanding - December 31, 21,840 28,485 10,996
================================================================================
Compensation expense recognized related to the restricted stock awards was
$332,000, $141,000 and $134,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
NOTE 17 - LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action arising from its business. Management does not consider that any such
proceedings depart from usual routine litigation and, in its judgment, the
Company's financial position and results of operations will not be materially
affected by such proceedings.
The Company has lease commitments expiring at various dates through 2015. Rent
expense on these leases amounted to approximately $1,405,000, $1,049,000 and
$986,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
headquarters building lease has been accounted for as a capital lease, in
accordance with FASB Statement No. 13 "Accounting for Leases," (See Note 11).
The minimum annual rentals under the terms of the lease agreements, excluding
the capital lease, as of December 31, 1998, were as follows:
1999 $1,308,000
2000 1,297,000
2001 1,113,000
2002 785,000
2003 676,000
Thereafter 2,789,000
The above represents minimum rentals, not adjusted for possible future increases
due to property taxes and cost of living escalation provisions.
The Company also has certain equipment leases, which do not exceed five-year
terms with level monthly payments. Equipment rental expense totaled $1,796,000,
$1,204,000 and $987,000 in 1998, 1997 and 1996, respectively.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. These financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated balance sheets. The contract or notional amounts
of these instruments express the extent of involvement the Company has in each
class of financial instrument.
The Company uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Commitments to extend credit are agreements to lend to customers as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based upon Management's credit
evaluation of the borrower. Collateral held on these commitments varies. Standby
letters of credit are conditional commitments issued by the Company insuring
performance obligations of a customer to a third party. These commitments
commonly involve real estate transactions.
Financial Instruments Whose Contract Contract or Notional Amount
Amounts Represent Credit Risk At December 31, 1998
- - --------------------------------------------------------------------------------
Commitments for Commercial and Construction Loans
Secured by Real Estate $87,866,000
Unused Portion of Credit Card Lines of Credit 42,988,000
Unused Portion of Home Equity Lines of Credit 31,712,000
Used Portion of Commercial Lines of Credit 115,286,000
Standby Letters of Credit 3,800,000
The Company previously entered into agreements with eight executive officers
providing for the payment of cash and other benefits to them in the event of
their voluntary or involuntary termination within three years following a change
of control of the Company. Payment under these agreements in the event of a
change in control would consist of a lump sum payment equal to two or three
years of annual taxable compensation, depending on the officer involved. Under
these agreements, the payment would be reduced if it would be an excess
parachute payment under the Federal tax code and would subject the officer to an
excise tax.
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
The fair value estimates are made at a discrete point in time based upon
relevant market information and information about the financial instruments.
Because no market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgment regarding a number of factors. These
estimates are subjective in nature and involve some uncertainties. Changes in
assumptions and methodologies may have a material effect on these estimated fair
values. In addition, reasonable comparability between financial institutions may
not be likely due to a wide range of permitted valuation techniques and numerous
estimates, which must be made. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities. Federal Reserve Bank and Federal Home Loan Bank
stock is required to be maintained as part of membership. Cost approximates the
fair value of these securities, as that is the amount at which the stock may be
redeemed.
Loans
The fair value of loans is estimated by discounting the future cash flows using
the build-up approach consisting of four components: the risk-free rate, credit
quality, operating expense, and prepayment option price.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the risk-free market rate.
Short-Term and Other Borrowings
For short-term borrowings, the carrying value is a reasonable estimate of fair
value. The fair values for other borrowings are calculated by discounting
estimated future cash flows using current rates offered for borrowings of
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of standby letters of credit is estimated using the fees
currently charged to enter into similar agreements and the present credit
worthiness of the counter parties. On this basis, these fees approximate the
fair value. The Bank does not charge a fee on loan commitments and,
consequently, there is no basis to calculate a fair value.
The estimated fair values of the Company's financial instruments as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ---------------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and Short-Term Investments $ 102,967 $ 102,967 $ 85,148 $ 85,148
Securities Available for Sale 609,262 609,262 602,365 602,365
Securities Held to Maturity 63,374 63,675 86,615 86,283
Trading Account Securities 1,239 1,239 1,221 1,221
Loans, Net of Allowance for Possible Loan Losses 1,045,779 1,055,502 919,527 925,866
Mortgage Loans Held for Sale 128 129 - -
- - ----------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Deposits
Demand 263,700 263,700 226,097 226,097
Savings 549,095 549,095 526,874 526,874
Time 590,618 594,358 639,732 643,729
- - ----------------------------------------------------------------------------------------------------------------------
Total Deposits 1,403,413 1,407,153 1,392,703 1,396,700
Short-Term Borrowings 154,635 154,635 99,546 99,546
Other Borrowings 154,942 155,240 107,809 108,706
- - ----------------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments
Standby Letters of Credit - 27 - 33
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 19 - Employee Stock Ownership Plan
Raritan sponsored an Employee Stock Ownership Plan (ESOP) covering employees
with a minimum of 1,000 hours of service per year. The ESOP, which is a tax
qualified employee benefit plan, provided retirement benefits for the employees
of Raritan.
At December 31, 1998, the ESOP borrowing was repaid in full, all shares were
released and allocated. ESOP compensation expense of $103,000, $129,000 and
$306,000 in 1998, 1997 and 1996, respectively, is included in salaries, wages
and employee benefits in the accompanying combined consolidated statements of
income.
NOTE 20 - SEGMENT REPORTING
The Company has six reportable segments: retail banking, commercial banking,
investments, trust and investment services, Raritan and corporate. The retail
banking segment includes loans secured by 1-4 family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures, and lease financing. In addition, the retail segment
includes the branch network. The commercial banking segment provides term loans,
demand secured loans, Small Business Administration ("SBA") financing, floor
plan loans and financing for commercial real estate transactions. The investment
segment is comprised of the Company's securities portfolio, which includes U. S.
Treasury and government agency securities, tax-exempt securities,
mortgage-backed securities, corporate debt securities, equity securities,
trading accounts and short-term investments. The trust division offers a full
range of fiduciary services, ranging from mutual funds to personal trust,
investment advisory and employee benefits. Raritan is considered a separate
segment in these combined consolidated financial statements. It is anticipated
that Raritan's operations will be combined with those of the Company in the
second quarter of 1999 and thereafter reported in the Company's five core
segments. Raritan is primarily in the business of gathering deposits from the
general public and originating residential mortgage, construction and consumer
loans, and small business loans. The corporate segment is primarily comprised of
the treasury function which is responsible for managing interest-rate risk.
Additionally, certain revenues and expenses that are not considered allocable to
a line of business are reflected in this area.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes not including
one-time charges and amortization of intangible assets. For purposes of this
review, interest income which is exempt from Federal taxation has been restated
to a taxable-equivalent basis, which places tax-exempt income on a comparable
basis with taxable income to facilitate analysis.
The Company utilizes "matched-maturity funds transfer pricing" and cost
allocations to analyze segment reporting. Funds transfer pricing system matches
interest income and expense against market rates to determine a net spread by
product and segment. The system allows for comparable performance evaluation of
funds users and providers and supports asset/liability management. Without a
transfer pricing system, funds users, such as the lending and investment
functions, receive credit for interest income without being charged for the full
amount of associated costs of funds, while funds providers, such as the branch
network, would be charged with interest expense without being credited for the
full amount of associated interest credit. Cost allocations are performed to
allot expenses to the appropriate organizational units, products or
responsibility centers.
The Company's reportable segments are strategic business units that offer
different products and services. Even though they are managed separately, the
Company collectively cross-sells its products and services to customers.
The following table presents the results of operations and average balances by
reportable segment for the years ended December 31, 1998, and 1997. It is
impractical to disclose 1996 results due to system limitations.
<TABLE>
<CAPTION>
Results of Operations for Combined
Year Ended December 31, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 36,056 $ 25,519 $ 43,063 $ - $ - $ 29,767 $ 134,405
Interest Expense 32,642 547 9,578 - 2,775 16,385 61,927
Funds Transfer Pricing Allocation 35,002 (15,406) (29,443) (3) 9,850 - -
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 38,416 9,566 4,042 (3) 7,075 13,382 72,478
Provision for Loan Losses 2,072 1,072 - - - 300 3,444
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 36,344 8,494 4,042 (3) 7,075 13,082 69,034
Non-Interest Income 12,592 885 3,850 5,454 - 1,434 24,215
Non-Interest Expense 42,338 4,025 220 3,939 9 8,296 58,827
Merger & Other Unallocated Expenses - - - - 4,024 116 4,140
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 6,598 $ 5,354 $ 7,672 $1,512 $ 3,042 $ 6,104 $ 30,282
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,085,482 $ 6,471 $ 161,300 $ (68) $194,867 $425,338 $1,873,390
Funds Used:Interest-earning Assets 436,167 276,567 617,401 - (5,844) 406,200 1,730,491
Non-Interest-earning Assets 17,444 - - - 106,317 19,138 142,899
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 631,871 $ (270,096) $(456,101) $ (68) $ 94,394 $ - $ -
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Results of Operations for Combined
Year Ended December 31, 1997 Retail Commercial Investments Trust Corporate Raritan Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 37,469 $ 22,938 $ 34,955 $ - $ - $ 27,675 $ 123,037
Interest Expense 32,071 - 3,906 - 2,963 14,525 53,465
Funds Transfer Pricing Allocation 32,148 (14,953) (28,568) (12) 11,385 - -
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 37,546 7,985 2,481 (12) 8,422 13,150 69,572
Provision for Loan Losses 3,520 312 - - - 600 4,432
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 34,026 7,673 2,481 (12) 8,422 12,550 65,140
Non-Interest Income 11,753 1,381 1,820 4,976 - 1,049 20,979
Non-Interest Expense 37,117 4,447 129 3,739 150 7,497 53,079
Merger & Other Unallocated Expenses - - - - 3,969 (33) 3,936
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 8,662 $ 4,607 $ 4,172 $1,225 $ 4,303 $ 6,135 $ 29,104
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,028,179 $ - $ 70,677 $ (136) $163,716 $382,695 $1,645,131
Funds Used:Interest-earning Assets 447,406 238,373 476,120 - 25 364,098 1,526,022
Non-Interest-earning Assets 23,338 - - - 77,174 18,597 119,109
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 557,435 $ (238,373) $(405,443) $ (136) $ 86,517 $ - $ -
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 21 - COMBINED CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of United National Bancorp (parent company
only) are presented below:
COMBINED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
(In Thousands) 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Banks $ 3,375 $ 93
Securities Available for Sale 5,233 6,178
Trading Account Securities 1,239 1,221
Investment in Subsidiaries 169,009 158,364
Other Assets 3,541 2,530
-----------------------------------------------------------------------------------------------
Total Assets $182,397 $168,386
===============================================================================================
Liabilities and Stockholders' Equity
Junior Subordinated Debentures $20,619 $ 20,619
Loan from Subsidiary 750 -
Other Liabilities 2,786 2,301
Stockholders' Equity 158,242 145,466
-----------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $182,397 $168,386
===============================================================================================
</TABLE>
COMBINED CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Years Ended December 31,
-----------------------------------
(In Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiary $10,590 $ 8,735 $ 7,424
Interest and Dividends on Securities 228 221 168
Net Gain from Securities Transactions 1,794 508 111
- - -------------------------------------------------------------------------------------------------
Total Income 12,612 9,464 7,703
- - -------------------------------------------------------------------------------------------------
Expense
Interest Expense on Junior Subordinated Debentures 2,064 1,605 -
Interest expense on Loan from Subsidiary 50 - -
Other Expenses 367 363 273
- - -------------------------------------------------------------------------------------------------
Total Expense 2,481 1,968 273
- - -------------------------------------------------------------------------------------------------
Income Before Income Tax Benefit 10,131 7,496 7,430
Income Tax Benefit 170 429 9
- - -------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Income
of Subsidiary 10,301 7,925 7,439
Equity in Undistributed Income of Subsidiary 9,557 10,522 8,737
- - -------------------------------------------------------------------------------------------------
Net Income $19,858 $18,447 $16,176
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
COMBINED CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31,
--------------------------------------
(In Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $19,858 $18,447 $16,176
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Gain from Securities Transactions (1,794) (508) (111)
Trading Account Securities Activity, Net (94) (200) 20
Increase in Other Assets (1,011) (1,211) (69)
Increase in Other Liabilities (175) 42 120
Restricted Stock Activity, Net 332 141 134
Equity in Undistributed Income
of Subsidiary (9,557) (10,522) (8,737)
- - ------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 7,559 6,189 7,533
- - ------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available
For Sale 6,079 2,800 812
Purchase of Securities Available for Sale (3,969) (2,400) (1,725)
- - ------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In)
Investing Activities 2,110 400 (913)
- - ------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends on Common Stock (8,480) (6,458) (4,838)
Proceeds from Exercise of Stock Options 1,021 1,175 70
Loan from Subsidiary 750 - -
Purchase of Treasury Stock (553) (2,025) (2,938)
Sale of Treasury Stock - - 2,388
Stock Issued from Equity Contracts 875 613 -
Proceeds from Issuance of Junior Subordinated Debentures - 20,619 -
Capital Contributed to Subsidiary - (20,458) (1,339)
- - ------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,387) (6,534) (6,657)
- - ------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 3,282 55 (37)
Cash at Beginning of Year 93 38 75
- - ------------------------------------------------------------------------------------------------
Cash at End of Year $ 3,375 $ 93 $ 38
================================================================================================
</TABLE>
Cash Dividend Restrictions
Substantially all of the revenue of the Company available for the payment of
dividends on its stock will result from dividends paid to the Company by the
Bank. The Bank is restricted under applicable laws in the payment of cash
dividends to the Company. The Bank is required by Federal law to obtain the
prior approval of the Comptroller of the Currency for the payment of dividends
if the total of all dividends declared by the Board of Directors in any year
will exceed the total of the Bank's net profits for that year combined with the
retained net profits for the preceding two years ("earnings limitation" test).
In addition, a national bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its loan losses and bad
debts.
Under the earnings limitation test, the Bank had available $39,394,000 for the
payment of cash dividends at December 31, 1998.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United National Bancorp:
We have audited the accompanying combined consolidated balance sheets of United
National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the
related combined consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These combined consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The combined consolidated financial statements give retroactive effect to the
merger of United National Bancorp and Raritan Bancorp Inc. on March 30, 1999,
which has been accounted for as a pooling-of-interests as described in Note 2a
to the combined consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation. However, they will become the historical
consolidated financial statements of United National Bancorp and subsidiaries
after financial statements covering the date of consummation of the business
combination are issued.
In our opinion, the combined consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the business combination.
KPMG LLP
Short Hills, New Jersey
March 31, 1999.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
(In Thousands, Except Share Data) 1998 1997
- - -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 41,855 $ 43,807
Federal Funds Sold - 7,325
Securities Available for Sale, at Market Value 580,133 553,000
Securities Held to Maturity (Market Value of $42,811 and $45,364
for 1998 and 1997, respectively) 42,471 45,308
Trading Account Securities, at Market Value 1,239 1,221
Loans, Net of Unearned Income 753,748 663,566
Less: Allowance for Possible Loan Losses 7,582 8,434
- - -------------------------------------------------------------------------------------------------------
Loans, Net 746,166 655,132
Mortgage Loans Held for Sale 128 -
Premises and Equipment, Net 23,530 23,501
Investment in Joint Venture 2,931 3,151
Other Real Estate, Net 507 1,463
Intangible Assets, Primarily Core Deposit Premiums 8,973 10,818
Other Assets 40,660 38,650
- - -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,488,593 $1,383,376
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 203,129 $ 178,784
Savings 415,546 401,399
Time 428,040 475,436
- - -------------------------------------------------------------------------------------------------------
Total Deposits 1,046,715 1,055,619
Short-Term Borrowings 154,635 79,546
Other Borrowings 119,942 92,706
Other Liabilities 21,056 18,878
- - -------------------------------------------------------------------------------------------------------
Total Liabilities 1,342,348 1,246,749
- - -------------------------------------------------------------------------------------------------------
Commitments and Contingencies - Note 17
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 in 1998 and in 1997
None issued and outstanding - -
Common Stock ($1.25 Par Value Per Share)
Authorized Shares 16,000,000 in 1998 and 1997
Issued shares 11,191,116 in 1998 and 10,162,753 in 1997
Outstanding shares 11,087,382 in 1998 and 10,068,450 in 1997 13,989 12,703
Additional Paid-In Capital 105,661 84,107
Retained Earnings 1,542 15,607
Treasury Stock, at Cost - 103,734 shares in 1998
and 94,303 shares in 1997 (1,352) (1,352)
Restricted Stock (64) (73)
Accumulated Other Comprehensive Income 6,469 5,635
- - -------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 126,245 116,627
- - -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,488,593 $1,383,376
=======================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
(In Thousands, Except Share Data) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 62,645 $60,787 $57,788
Interest and Dividends on Securities Available for Sale:
Taxable Income 33,434 25,602 19,117
Tax-Exempt Income 2,978 2,409 2,202
Interest and Dividends on Securities Held to Maturity:
Taxable Income 1,697 3,141 3,346
Tax-Exempt Income 880 594 443
Dividends on Trading Account Securities 26 18 13
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 946 1,217 1,142
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Income 102,606 93,768 84,051
- - --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 6,792 7,394 7,775
Interest on Time Certificates of Deposit $100,000 or More 4,679 5,439 4,354
Interest on Other Time Deposits 20,836 19,067 16,470
Interest on Short-Term Borrowings 5,043 3,672 2,653
Interest on Other Borrowings 8,192 3,368 929
- - --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 45,542 38,940 32,181
- - --------------------------------------------------------------------------------------------------------------------
Net Interest Income 57,064 54,828 51,870
Provision for Possible Loan Losses 3,144 3,832 3,241
- - --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Loan Losses 53,920 50,996 48,629
- - --------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income 5,454 4,976 4,336
Service Charges on Deposit Accounts 4,443 4,504 4,449
Other Service Charges, Commissions and Fees 6,553 6,207 4,617
Net Gains from Securities Transactions 3,850 1,820 798
Other Income 2,481 2,423 1,886
- - --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 22,781 19,930 16,086
- - --------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 21,282 20,612 21,459
Occupancy Expense, Net 3,666 3,357 3,482
Furniture and Equipment Expense 3,665 3,167 2,913
Data Processing Expense 7,191 5,323 4,351
Distributions on Series B Capital Securities 2,002 1,557 -
Amortization of Intangible Assets 1,845 1,761 1,788
Net Cost to Operate Other Real Estate 225 250 329
Merger Related and Restructuring Charges 2,179 2,208 -
Other Expenses 12,500 11,316 10,729
- - --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 54,555 49,551 45,051
- - --------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 22,146 21,375 19,664
Provision for Income Taxes 6,546 6,836 6,596
- - --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 15,600 $14,539 $13,068
====================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 1.41 $ 1.31 $ 1.19
====================================================================================================================
Diluted $ 1.39 $ 1.30 $ 1.18
====================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
(In Thousands, Except Share Data) Additional Other Total
For the Years Ended Common Paid-In Retained Treasury Restricted Comprehensive Stockholders'
December 31, 1996, 1997, and 1998 Stock Capital Earnings Stock Stock Income Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-January 1, 1995 $11,237 $61,266 $20,980 $(1,578) $(317) $ 2,156 $ 93,744
Comprehensive Income:
Net Income-1996 - - 13,068 - - - 13,068
Other Comprehensive Income, Net of Tax:
Unrealized Holding Losses Arising During
The Period, Net of Tax of $493 - - - - - (958) (958)
Reclassification Adjustment for Gains
In Net Income, Net of Tax of $234 - - - - - (453) (453)
---------
Total Comprehensive Income 11,657
=========
Cash Dividends Declared ($0.45 per share) - - (3,945) - - - (3,945)
Stock Issued in Payment of
Stock Dividend - 528,818,Shares 660 7,581 (8,241) - - - -
Exercise of Stock Options - 9,356 Shares 12 50 (20) - - - 42
Treasury Stock Sold - 14,798 Shares - 3 - 248 - - 251
Restricted Stock - - - (7) 141 - 134
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1996 11,909 68,900 21,842 (1,337) (176) 745 101,883
Comprehensive Income:
Net Income-1997 - - 14,539 - - - 14,539
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains Arising During
The Period, Net of Tax of ($2,966) - - - - - 5,755 5,755
Reclassification Adjustment for Gains
In Net Income, Net of Tax of $446 - - - - - (865) (865)
=========
Total Comprehensive Income 19,429
=========
Cash Dividends Declared ($0.52 per share) - - (5,335) - - - (5,335)
Stock Issued in Payment of
Stock Dividend - 529,928 Shares 662 14,441 (15,103) - - - -
Exercise of Stock Options - 105,615 Shares 132 766 (336) - - - 562
Restricted Stock - - - (15) 103 - 88
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1997 12,703 84,107 15,607 (1,352) (73) 5,635 116,627
Comprehensive Income:
Net Income-1998 - - 15,600 - - - 15,600
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains Arising During
The Period, Net of Tax of ($1,746) - - - - - 3,391 3,391
Reclassification Adjustment for Gains
In Net Income, Net of Tax of $1,317 - - - - - (2,557) (2,557)
---------
Total Comprehensive Income 16,434
=========
Cash Dividends Declared ($0.65 per share) - - (7,039) - - - (7,039)
Stock Issued in Payment of
Stock Dividend - 1,017,371 Shares 1,272 21,301 (22,573) - - - -
Exercise of Stock Options - 13,575 Shares 12 190 (53) - - - 149
Restricted Stock Activity, Net 2 63 - - 9 - 74
- - ---------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1998 $13,989 $105,661 $ 1,542 $(1,352) $ (64) $ 6,469 $126,245
=================================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 15,600 $ 14,539 $ 13,068
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 4,190 3,818 3,870
Amortization of Securities Premiums, Net 765 341 219
Provision for Possible Loan Losses 3,144 3,832 3,241
Provision (Benefit) for Deferred Income Taxes 3 137 (631)
Net Loss (Gain) on Disposition of Premises and Equipment 155 545 (1)
Net Gains from Securities Transactions (3,850) (1,820) (798)
Writedown of Investment in Joint Venture 220 - -
Trading Account Securities Activity, Net (94) (200) 20
Origination of Mortgage Loans Held for Sale (128) - -
Increase in Other Assets (2,010) (2,871) (1,247)
Increase (Decrease) in Other Liabilities 1,746 4,564 (47)
Restricted Stock 74 88 134
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 19,815 22,973 17,828
- - --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES Securities Available for Sale:
Proceeds from Sales of Securities 696,145 119,715 167,687
Proceeds from Maturities of Securities 94,765 62,827 46,597
Purchases of Securities (813,579) (407,206) (173,944)
Securities Held to Maturity:
Proceeds from Maturities of Securities 32,794 30,554 23,411
Purchases of Securities (29,997) (11,448) (59,292)
Maturity (Purchase) of Term Certificate of Deposit - 500 (500)
Purchase of Corporate-Owned Life Insurance - (20,170) -
Net Increase in Loans (94,178) (4,155) (46,095)
Deposit Premium from Branch Acquisition - (1,400) -
Expenditures for Premises and Equipment (2,792) (3,280) (1,181)
Proceeds from Sale of Premises and Equipment 263 1,113 236
Decrease in Other Real Estate 956 401 1,038
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (115,623) (232,549) (42,043)
- - --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposits 38,492 1,242 (12,017)
Net (Decrease) Increase in Time Deposits (47,396) 51,021 50,769
Net Increase (Decrease) in Short-Term Borrowings 75,089 33,218 (7,019)
Net Increase in Other Borrowings 27,236 83,013 13
Cash Dividends on Common Stock (7,039) (5,335) (3,945)
Proceeds from Exercise of Stock Options 149 562 42
Sale of Treasury Stock - - 251
Proceeds from Series B Capital Securities - 20,000 -
- - --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 86,531 183,721 28,094
- - --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (9,277) (25,855) 3,879
Cash and Cash Equivalents at Beginning of Year 51,132 76,987 73,108
- - --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 41,855 $ 51,132 $ 76,987
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 46,238 $ 36,769 $ 36,262
Income Taxes 5,264 4,537 6,928
Reclass to Available for Sale from Held to Maturity - 3,160 -
Transfer of Loans to Other Real Estate 235 415 256
Cash Received from Deposit Acquisition - 18,244 -
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
United National Bancorp owns United National Bank, which operates through a
branch network primarily located throughout central and northwestern counties in
New Jersey. The Company provides a full range of banking and trust services to
its market area in a competitive environment.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and practices within the banking
industry. The significant policies are summarized as follows:
a. Principles of Consolidation and Use of Estimates
The accompanying consolidated financial statements include the accounts of
United National Bancorp (the "Parent Company") and its wholly-owned
subsidiaries, United National Bank (the "Bank"), and UNB Capital Trust I (the
"Trust"), or when consolidated with the Parent Company, the "Company". All
significant intercompany balances and transactions have been eliminated in
consolidation. Prior period financial statements have been restated to include
the amounts and activities for all acquisitions accounted for as
pooling-of-interests combinations. See Note 2 for further discussion of
acquisitions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
b. Securities
Securities are classified into one of three categories: held to maturity,
available for sale, or trading account securities.
Securities which the Company has the ability and intent to hold until maturity
are classified as "held to maturity." These securities are stated at cost,
adjusted for amortization of premium and accretion of discount, using the
interest method over the term of the securities.
Securities that may be held for indefinite periods of time which Management
intends to use as part of its asset/liability management strategy and that may
be sold in response to changes in interest rates, changes in prepayment risk, or
other similar factors, are classified as "available for sale" and reported at
estimated market value. Unrealized holding gains and losses (net of related tax
effects) on such securities are excluded from earnings but are included in other
comprehensive income as a component of stockholders' equity. Upon realization,
such gains or losses are included in earnings using the specific identification
method.
Trading account securities are carried at market value. Gains and losses
resulting from adjusting trading account securities to market value, as well as
security sales, are reported in non-interest income. This category includes
securities purchased specifically for short-term appreciation or to be available
for liquidity needs.
c. Federal Home Loan Bank of New York Stock
This stock is carried at cost. The Company is required to maintain such
investment as part of its membership in the Federal Home Loan Bank of New York.
d. Investment in Joint Venture
In November 1995, the Company, through the Bank, acquired a 50% ownership in
United Financial Services, Inc., (UFS) a third party data processing service
bureau. The investment is being accounted for by the equity method. The Company
and its joint venture partner have resolved to dissolve the joint venture and
the Company has entered into a contract with a third-party servicer to provide
data processing services. Third-party data processing services are expected to
commence in the second quarter of 1999. In connection with the plan of
dissolution, the Company will accelerate $1,200,000 of writedowns and
amortization of investment in joint venture and related goodwill during the
first half of 1999.
e. Loans and Lease Financings
Loans and leases are stated at the principal amount outstanding, net of deferred
loan origination fees/expenses and unearned discounts. Interest on substantially
all loans is accrued and credited to interest income based upon the principal
amount outstanding. Loan fees and certain expenses associated with originating
loans are deferred and amortized over the lives of the respective loans as an
adjustment to the yield utilizing a method that approximates the level yield.
Generally, interest income is not accrued on loans (including impaired loans)
where principal or interest is 90 days or more past due, unless the loans are
adequately secured and in the process of collection. A loan less than 90 days
past due may be placed on non-accrual if Management believes there is sufficient
doubt as to the ultimate collectibility of the outstanding loan balance. A loan
is transferred to accrual when it is brought current and its future
collectibility is reasonably assured.
When a loan (including impaired loans) is classified as non-accrual, uncollected
past due interest is reversed and charged against current income. Interest
income will not be recognized until the financial condition of the borrower
improves, payments are brought current and a consistent payment history is
established. Payments received on non-accrual loans, including impaired loans,
are first applied to all principal amounts owed. Once the remaining principal
balance is deemed fully collectible, payments would then be applied to interest
income and fees.
A loan is considered impaired when, based upon current information and events,
it is probable that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans are measured
based upon the present value of expected future cash flows, or, as a practical
expedient, at the loans observable market price, or the fair value of the
underlying collateral, if the loan is collateral dependent. Management has
defined impaired loans as all non-accruing loans with outstanding balances
greater than $50,000.
Loans held for sale primarily consist of residential mortgages and are carried
at the lower of cost or market using the aggregate method. Gains and losses on
loans sold are included in non-interest income.
f. Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
allowance is based on Management's evaluation of potential losses in the
portfolio, after consideration of appraised collateral values, financial
condition of the borrower, delinquency and charge-off trends, as well as
prevailing and anticipated economic conditions. Management evaluates the
adequacy of the allowance for possible loan losses on a regular basis throughout
the year. Management believes that the allowance for possible loan losses is
adequate. While Management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based upon changes in
economic conditions. In addition, various regulatory agencies periodically
review the Company's allowance for possible loan losses. Such agencies may
require the Company to recognize additions to the allowance based upon their
judgments of information available to them at the time of their examination.
g. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to forty years.
Leasehold improvements are amortized on a straight-line basis over the lives of
the related leases, or the life of the improvement, whichever is shorter.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
h. Other Real Estate
Other real estate owned consists of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. Only collateral of
which the Company has taken physical possession is classified as other real
estate.
Other real estate is carried at the lower of fair value of the related property,
as determined by current appraisals less estimated costs to sell, or the
recorded investment in the property. Write-downs on these properties, which
occur after the initial transfer from the loan portfolio, are recorded as
operating expenses. Costs of holding such properties are charged to expense in
the current period. Gains, to the extent allowable, and losses on the
disposition of these properties are reflected in current operations.
i. Intangible Assets
Intangible assets include: 1) the present value of the future earnings potential
of the core deposit base of acquired banks, which are being amortized on a
straight-line basis over a 10 year period, and 2) goodwill resulting from the
Company's investment in UFS, and other acquisitions, which is being amortized
over periods ranging from 6 months to 20 years. Management periodically reviews
the potential impairment of intangible assets on a non-discounted cash flow
basis to assess recoverability. If the estimated future cash flows are projected
to be less than the carrying amount, an impairment write-down, representing the
carrying amount of the intangible asset which exceeds the present value of the
estimated expected future cash flows, would be recorded as a period expense.
j. Trust Assets
Assets held in fiduciary or agency capacities for customers are not included in
the consolidated balance sheets since such items are not assets of the Company.
k. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
l. 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 year (11,084,000, 11,069,000
and 10,962,000 in 1998, 1997 and 1996, respectively).
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 potential common stock, using the treasury stock method (11,248,000,
11,176,000 and 11,066,000 in 1998, 1997 and 1996, respectively). Potential
common stock resulting from stock option agreements totaled 164,000, 107,000 and
104,000 in 1998, 1997 and 1996, respectively.
Weighted average shares outstanding for all periods presented have been adjusted
for the 10% stock dividend declared in 1998.
m. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks and Federal funds sold. Generally, Federal funds are sold for a
one-day period.
n. Stock-Based Compensation
The Company applies the "intrinsic value based method" as described in
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees," and related interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost has been recognized for the
stock option plans. Pro forma disclosures, as if the Company applied the "Fair
Value Based Method" for stock issued to employees, have been provided in Note 16
to the consolidated financial statements.
o. Retirement Benefits
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 132, Employers' Disclosures about Pension and Other
Postretirement Benefits. SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans. SFAS No. 132 does not change the
method of accounting for such plans.
The Company maintains a noncontributory defined benefit pension plan which
covers all employees who have met eligibility requirements of the Plan. It is
the Company's policy to fund the plan sufficient to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974.
In addition, the Company provides health care and life insurance benefits for
qualifying employees.
p. Comprehensive Income
On January 1, 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of financial statements.
Comprehensive income consists of net income and net unrealized gains (losses) on
securities and is presented in the consolidated statements of changes in
stockholders' equity. SFAS No. 130 requires only additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
q. Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" . This
statement establishes accounting and reporting standards for derivative
instruments, and for hedging activities. SFAS 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 SFAS No. 133 is not
expected to have a material impact on the financial position or results of the
Company.
In October 1998, the FASB issued 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 FASB Statement 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. SFAS No. 134 is effective January 1, 1999. The adoption of this
statement is not expected to have a material impact on the financial position or
results of operations of the Company.
r. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1998.
NOTE 2 - ACQUISITIONS
a. 1999 Acquisitions
On March 31, 1999, the Company acquired all of the outstanding shares of Raritan
Bancorp Inc. ("Raritan") based in Bridgewater, New Jersey. Each shares of
Raritan was converted into 1.595 shares of the Company's common stock for a
total of approximately 3,785,000 shares issued. At December 31, 1998, Raritan
had approximately $432 million in assets. The acquisition was accounted for as a
pooling-of-interests, and accordingly, Raritan's amounts and activities will be
combined with those of the Company for all periods presented when financial
statements covering the date of the business combination are issued. On March
31, 1999, the Company recorded a pre-tax merger charge of approximately
$10,005,000 which primarily consists 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
$360,000.
b. 1998 Acquisitions
On September 30, 1998, the Company acquired the State Bank of South Orange
("SBSO"). Each share of SBSO was converted into 1.245 shares of the Company's
common stock for a total of 796,271 shares issued, not adjusted for subsequent
stock dividends and splits. The acquisition has been accounted for under the
pooling-of- interests method of accounting and, accordingly, the Company's
consolidated financial statements include the amounts and activities of SBSO for
all periods presented. The Company recorded a pre-tax merger charge related to
the SBSO acquisition of approximately $2,179,000. The charge consisted primarily
of severance costs of $1,050,000 and professional fees of $802,000. The
remaining charge pertained to fixed asset dispositions and contract termination
fees. Substantially all of the merger charge has been realized at December 31,
1998. Separate results of the combined entities for the years ended December 31,
1997 and 1996 are as follows:
(In Thousands, Unaudited) 1997 1996
- - -----------------------------------------------------------------------------
Net Interest Income after Provision
For Possible Loan Losses
The Company $48,277 $46,181
SBSO 2,719 2,448
- - -----------------------------------------------------------------------------
Total $50,996 $48,629
=============================================================================
Net Income
The Company $13,880 $12,280
SBSO 659 788
- - -----------------------------------------------------------------------------
Total $14,539 $13,068
=============================================================================
c. 1997 Acquisitions
On February 28, 1997, the Company completed the acquisition of Farrington Bank
("Farrington") based in North Brunswick, New Jersey. Each share of Farrington
was converted into 0.7647 shares of the Company's common stock for a total of
549,212 shares issued, not adjusted for subsequent stock dividends and splits.
At the time of the acquisition, Farrington had approximately $60 million in
assets. The acquisition was accounted for as a pooling-of-interests, and
accordingly, the Company's consolidated financial statements include the amounts
and activities of Farrington for all periods presented. The Company recorded a
pre-tax merger charge related to the Farrington acquisition of approximately
$1,665,000. The charge consisted primarily of severance costs of $890,000,
contract termination fees of $387,000 and professional fees of $193,000. The
remaining charge primarily pertained to fixed asset dispositions. All of the
merger charge was realized in 1997.
On December 6, 1997, the Company, through the Bank, assumed deposits, including
accrued interest, of approximately $21 million from another bank. In addition,
the Bank received $214,000 in cash and cash equivalents and approximately
$692,000 in other assets. In connection with the transaction, the Bank recorded
an intangible asset of $1,400,000, representing the premium paid over the
carrying amount of deposits acquired.
NOTE 3 - CASH AND DUE FROM BANKS
Balances reserved to meet regulatory requirements amounted to $1,200,000 at
December 31, 1998.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and the estimated market values of securities available for
sale at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 999 $ 3 $ - $ 1,002
Obligations of U.S. Government
Agencies and Corporations 66,872 531 (470) 66,933
Obligations of States and
Political Subdivisions 76,285 2,496 (1) 78,780
Mortgage-Backed Securities 362,105 2,609 (360) 364,354
Corporate Debt Securities 23,343 657 - 24,000
- - -----------------------------------------------------------------------------------------------------------
Total Debt Securities $529,604 6,296 (831) 535,069
- - -----------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 29,549 4,770 (433) 33,886
Federal Reserve Bank and
Federal Home Loan Bank Stock 11,178 - - 11,178
- - -----------------------------------------------------------------------------------------------------------
Total Equity Securities 40,727 4,770 (433) 45,064
- - -----------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $570,331 $11,066 $(1,264) $580,133
===========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 11,977 $ 16 $ (11) $ 11,982
Obligations of U.S. Government
Agencies and Corporations 93,308 723 (200) 93,831
Obligations of States and
Political Subdivisions 55,632 1,262 (7) 56,887
Mortgage-Backed Securities 310,074 2,591 (501) 312,164
Corporate Debt Securities 13,496 424 - 13,920
- - -----------------------------------------------------------------------------------------------------------
Total Debt Securities 484,487 5,016 (719) 488,784
- - -----------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 51,313 4,448 (206) 55,555
Federal Reserve Bank and
Federal Home Loan Bank Stock 8,661 - - 8,661
- - -----------------------------------------------------------------------------------------------------------
Total Equity Securities 59,974 4,448 (206) 64,216
- - -----------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $544,461 $ 9,464 $ (925) $553,000
===========================================================================================================
</TABLE>
The amortized cost and estimated market value of debt securities at December 31,
1998, by expected maturity, are shown in the table below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated
(In Thousands) Cost Market Value
- - ------------------------------------------------------------------------------
Due in One Year or Less $ 36,651 $ 36,401
Due After One Year Through Five Years 67,115 68,568
Due After Five Years Through Ten Years 54,924 56,742
Due After Ten Years 8,809 9,004
Mortgage-Backed Securities 362,105 364,354
- - ------------------------------------------------------------------------------
Total Debt Securities Available for Sale $529,604 $535,069
==============================================================================
Gross gains and gross losses realized during 1998, 1997 and 1996 relating to
securities available for sale were as follows:
(In Thousands) 1998 1997 1996
- - -----------------------------------------------------------------------------
Gross Gains $4,066 $1,693 $1,044
Gross Losses 192 382 357
=============================================================================
Total Net Gains $3,874 $1,311 $ 687
=============================================================================
NOTE 5 - SECURITIES HELD TO MATURITY
Comparative amortized cost and estimated market values of securities held to
maturity at December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 2,000 $ 20 $ - $ 2,020
Obligations of U.S. Government
Agencies and Corporations 14,994 22 (6) 15,010
Obligation of States and
Political Subdivisions 22,141 304 - 22,445
Mortgage-Backed Securities 3,186 - (5) 3,181
Securities Issued by Foreign
Governments 150 5 - 155
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $42,471 $351 $(11) $42,811
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 990 $ 5 $ - $ 995
Obligations of U.S. Government
Agencies and Corporations 27,953 40 (57) 27,936
Obligations of States and
Political Subdivisions 11,712 89 (3) 11,798
Mortgage-Backed Securities 4,528 - (22) 4,506
Securities Issued by Foreign
Governments 125 4 - 129
- - --------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $45,308 $138 $(82) $45,364
====================================================================================================================
</TABLE>
The amortized cost and estimated market value of securities held to maturity at
December 31, 1998, by expected maturity, are shown in the table below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
(In Thousands) Cost Market Value
- - ------------------------------------------------------------------------------
Due in One Year or Less $21,103 $21,120
Due After One Year Through Five Years 4,583 4,614
Due After Five Years Through Ten Years 8,007 8,269
Due After Ten Years 5,592 5,627
Mortgage-Backed Securities 3,186 3,181
==============================================================================
Total Debt Securities Held to Maturity $42,471 $42,811
==============================================================================
There were no sales of securities held to maturity during 1998, 1997 and 1996.
Securities available for sale with amortized costs totaling $18,802,000 on
December 31, 1998, were pledged to secure U.S. Government and other deposits and
for other purposes as required and permitted by law. In addition, securities
held to maturity and available for sale having amortized costs aggregating
$6,102,000 and $247,070,000, respectively, on December 31, 1998, were pledged to
secure advances and agreements to repurchase securities. Securities totaling
$12,036,000 remain under the custodial responsibility of the Company during the
period of the applicable agreements.
Securities with a carrying value of $3,160,000 and a market value of $3,148,000,
previously held by Farrington, which were classified as held to maturity, were
reclassified to available for sale upon consummation of the merger on February
28, 1997 to maintain the Company's interest rate risk position.
NOTE 6 - LOANS
Loans outstanding by classification at December 31, 1998 and 1997 are as
follows:
(In Thousands) 1998 1997
- - ----------------------------------------------------------------------------
Real Estate
Commercial and Residential Mortgage $331,293 $307,160
Construction 32,441 31,631
Commercial Loans 212,875 139,704
Lease Financing 11,022 11,852
Installment Loans 134,206 151,448
Retail Credit Plan 38,511 33,484
- - ----------------------------------------------------------------------------
Total Loans Outstanding 760,348 675,279
Less: Unearned Income 6,600 11,713
Allowance for Loan Losses 7,582 8,434
- - ----------------------------------------------------------------------------
Loans, Net $746,166 $655,132
============================================================================
Mortgage Loans Held for Sale $ 128 $ -
============================================================================
The Company extends credit in the normal course of business to its customers,
the majority of whom operate or reside within New Jersey. The ability of its
customers to meet contractual obligations is, to a certain extent, dependent
upon the economic conditions existing in the state.
The following information is presented for those loans classified as
non-accrual, and considered impaired, at December 31:
(In Thousands) 1998 1997 1996
- - --------------------------------------------------------------------------
Income that Would have Been Recorded Under
Original Contract Terms $535 $575 $873
Interest Income Received and Recorded 68 16 60
- - --------------------------------------------------------------------------
Lost Income on Non-Accrual Loans at Year-End $467 $559 $813
==========================================================================
As of December 31, 1998 and 1997, the Company's non-accrual loans were
$5,282,000 and $6,504,000, respectively. Of these, the loans considered to be
impaired were $3,366,000 and $5,503,000 respectively, with related valuation
allowances of $1,112,000 and $1,807,000, respectively. These valuation
allowances are included in the allowance for possible loan losses in the
accompanying consolidated balance sheets. Substantially all impaired loans were
evaluated for impairment losses based upon the fair value of the underlying
collateral of the loan. The average recorded balances in impaired loans during
1998, 1997 and 1996 were $3,785,000, $6,631,000 and $5,967,000, respectively.
Loans to directors, officers, employees and/or their affiliated interests
amounted to approximately $14,498,000 and $8,122,000 at December 31, 1998 and
1997, respectively. All such loans, which are primarily secured, were current as
to principal and interest payments, and in the opinion of Management, all were
granted on terms which were comparable to loans to unrelated parties at the
dates such loans were granted. An analysis of the 1998 activity in these loans
is as follows (in thousands):
Balance Outstanding, Beginning of Year $ 8,122
New Loans 7,947
Repayments (1,571)
- - ---------------------------------------------------------------
Balance Outstanding, End of Year $14,498
===============================================================
NOTE 7 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses activity for the years ended
December 31, 1998, 1997 and 1996, is as follows:
(In Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------
Balance, Beginning of Year $ 8,434 $ 8,909 $ 8,858
Provision Charged to Expense 3,144 3,832 3,241
Recoveries 957 835 550
Losses Charged to Allowance (4,953) (5,142) (3,740)
- - -------------------------------------------------------------------------------
Balance, End of Year $ 7,582 $ 8,434 $ 8,909
===============================================================================
NOTE 8 - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1998 and 1997, is as
follows:
(In Thousands) 1998 1997
- - ------------------------------------------------------------------------------
Premises (includes land of $2,901 and
$2,377 in 1998 and 1997,respectively). $14,485 $12,627
Property Under Capital Lease 9,750 9,750
Equipment 12,441 13,761
Leasehold Improvements 1,832 1,345
Projects in Progress 12 633
- - ------------------------------------------------------------------------------
Total 38,520 38,116
Less: Accumulated Depreciation and Amortization 14,990 14,615
- - ------------------------------------------------------------------------------
Premises and Equipment, Net $23,530 $23,501
==============================================================================
Depreciation expense amounted to $2,345,000 in 1998, $2,057,000 in 1997 and
$2,082,000 in 1996.
NOTE 9 - DEPOSITS
Time certificates of deposit $100,000 or more totaled $89,953,000 on December
31, 1998 and $102,712,000 on December 31, 1997.
Time deposits, with remaining maturities greater than one year, mature as
follows (in thousands):
2000 $52,702
2001 9,554
2002 368
2003 917
Thereafter 702
=============================================================================
Total $64,243
=============================================================================
Interest-bearing deposits amounted to $832,369,000 and $865,234,000 at December
31, 1998 and 1997, respectively. Non-interest-bearing deposits amounted to
$214,346,000 and $190,385,000 at December 31, 1998 and 1997, respectively.
NOTE 10 - SHORT-TERM BORROWINGS
Selected data relating to short-term borrowings for the years ended December
31,1998, and 1997, are as follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1998 1997
- - -------------------------------------------------------------------------------------------
<S> <C> <C>
At Year-End:
Borrowed Funds $ 75,385 $74,528
Securities Sold Under Agreements to Repurchase 39,475 -
Federal Home Loan Bank Advances 37,000 -
Federal Funds Purchased - 3,000
Demand Notes - U.S. Treasury 2,775 2,018
- - -------------------------------------------------------------------------------------------
Total Short-Term Borrowings $154,635 $79,546
===========================================================================================
Weighted Average Interest Rate 4.89% 5.63%
===========================================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase
Average Balance Outstanding $ 15,385 -
Weighted-Average Interest Rate 5.64% -
Highest Month-End Balance $ 81,864 -
- - -------------------------------------------------------------------------------------------
</TABLE>
There were no securities sold under agreements to repurchase during 1997 and
1996.
NOTE 11 - OTHER BORROWINGS
Other borrowings consisted of the following at December 31:
(Dollars In Thousands) 1998 1997
- - ------------------------------------------------------------------------------
Other Borrowed Funds $ 67,277 $67,000
Securities Sold Under Agreement to Repurchase 43,000 16,000
Obligation Under Capital Lease 9,665 9,706
- - ------------------------------------------------------------------------------
Total Other Borrowings $119,942 $92,706
==============================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $ 38,951 $ 5,830
Weighted-Average Interest Rate 5.78% 6.08%
Highest Month-End Balance 43,000 16,000
- - ------------------------------------------------------------------------------
There were no securities sold under agreements to repurchase during 1996.
During 1995, the Company entered into a lease agreement on its new headquarters
building. The lease, which has been accounted for as a capital lease, expires in
2015. Lease commitments under this agreement are as follows (in thousands):
1999 $ 999
2000 999
2001 1,059
2002 1,089
2003 1,089
Thereafter 15,108
- - -----------------------------------------------------------------------------
Total 20,343
Less: Amount Representing Interest (10,678)
- - -----------------------------------------------------------------------------
Total Obligation Under Capital Lease $ 9,665
=============================================================================
NOTE 12 - CAPITAL TRUST
On March 21, 1997, the Company placed $20 million of trust capital securities
through UNB Capital Trust I, a statutory business trust formed under the laws of
the State of Delaware, of which all common securities are owned by the Company.
The capital securities pay cumulative cash distributions semiannually at an
annual rate of 10.01%. The dividends paid to holders of the Capital Trust
securities are deductible for income tax purposes. The semi-annual distributions
may, at the option of the Company, be deferred for up to 5 years. The securities
are redeemable from March 15, 2007 until March 15, 2017 at a declining rate of
105.0% to 100.0% of the principal amount. After March 15, 2017 they are
redeemable at par until March 15, 2027 when redemption is mandatory. Prior
redemption is permitted under certain circumstances such as changes in tax or
regulatory capital rules. The proceeds of the capital securities, along with its
capital, were invested by the Trust in $20,619,000 principal amount of 10.01%
junior subordinated debentures of the Company due March 15, 2027 which are the
sole assets of the Trust. The Company guarantees the capital securities through
the combined operation of the debentures and other related documents. The
Company's obligations under the guarantee are unsecured and subordinate to
senior and subordinated indebtedness of the Company. The capital securities
qualify as Tier I capital for regulatory capital purposes and are accounted for
as minority interest.
NOTE 13 - CAPITAL REQUIREMENTS
The Federal Reserve Board in the case of bank holding companies such as the
Company and the Office of the Comptroller of the Currency ("OCC") in the case of
federally chartered banks such as the Bank have adopted risk-based capital
guidelines which require a minimum ratio of 8% of total risk-based capital to
assets, as defined in the guidelines. At least one half of the total capital, or
4%, is to be comprised of common equity and qualifying perpetual preferred
stock, less deductible intangibles (Tier I capital).
In addition, the Federal Reserve Board and the OCC supplemented the risk-based
capital guidelines with an additional capital ratio referred to as the leverage
ratio or core capital ratio. The regulations require a financial institution to
maintain a minimum leverage ratio of 4% to 5%, depending upon the condition of
the institution.
Under its prompt corrective action regulations, the OCC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on the institution's financial statements. The regulations
establish a framework for the classification of depository institutions into
five categories: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. Generally, an
institution is considered well capitalized if it has a leverage ratio of at
least 5.0%; a Tier I capital ratio of at least 6.0%; and a total risk-based
capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are subject
to qualitative judgments by the regulatory authorities about capital components,
risk weightings and other factors.
Management believes that, as of December 31, 1998 the Company and the Bank meet
all capital adequacy requirements to which they are subject. Further, based upon
the capital ratios, the Company and the Bank would qualify as "well capitalized"
at December 31, 1998.
The following is a summary of the Company's and the Bank's actual capital
amounts and ratios as of December 31, 1998 and 1997, compared to the regulatory
authorities minimum capital adequacy requirements and requirements for
classification as a well capitalized institution:
<TABLE>
<CAPTION>
December 31, 1998 December 31,1997
---------------------------------------------- --------------------------------------------
(Dollars In Thousands) Company Bank Company Bank
---------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RISK-BASED CAPITAL RATIOS:
Tier I Capital
Actual $130,379 13.77% $121,905 12.95% $120,356 14.56% $113,442 13.85%
Regulatory Minimum Requirement 37,881 4.00 37,658 4.00 33,065 4.00 32,766 4.00
For Classification as Well Capitalized 56,822 6.00 56,487 6.00 49,598 6.00 49,148 6.00
Combined Tier I and Tier II Capital
Actual 137,961 14.57 129,487 13.75 128,691 15.57 121,777 14.87
Regulatory Minimum Requirement 75,763 8.00 75,315 8.00 66,131 8.00 65,531 8.00
For Classification as Well Capitalized 94,703 10.00 94,144 10.00 82,664 10.00 81,914 10.00
LEVERAGE RATIO:
Actual 130,379 8.76 121,905 8.40 120,356 8.93 113,442 8.48
Regulatory Minimum Requirement 59,561 4.00 58,062 4.00 53,936 4.00 53,510 4.00
For Classification as Well Capitalized 74,452 5.00 72,577 5.00 67,419 5.00 66,887 5.00
</TABLE>
NOTE 14 - INCOME TAXES
The components of the provision for income taxes are as follows:
(In Thousands) 1998 1997 1996
- - -------------------------------------------------------------------------------
Federal:
Current $6,092 $6,011 $6,180
Deferred (Benefit) Provision 3 137 (631)
- - -------------------------------------------------------------------------------
Total Federal 6,095 6,148 5,549
State 451 688 1,047
- - -------------------------------------------------------------------------------
Total Provision for Income Taxes $6,546 $6,836 $6,596
===============================================================================
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income before taxes by the statutory Federal
income tax rate is as follows:
(Dollars In Thousands) 1998 1997 1996
- - ------------------------------------------------------------------------------
Income Before Provision for Income Taxes $22,146 $21,375 $19,664
==============================================================================
Tax calculated at 35% $ 7,751 $ 7,481 $ 6,882
Increase (Decrease) in Tax Resulting from:
Tax-Exempt Income (1,382) (1,021) (927)
State Taxes-Net of Federal Tax Benefit 293 447 681
Other-Net (116) (71) (40)
- - ------------------------------------------------------------------------------
Provision for Income Taxes $ 6,546 $ 6,836 $ 6,596
==============================================================================
==============================================================================
Effective Tax Rate 30% 32% 34%
==============================================================================
The components of the net deferred tax asset are as follows:
(In Thousands) 1998 1997
- - --------------------------------------------------------------------------------
Deferred Tax Assets
Allowance for Possible Loan Losses $ 1,602 $ 2,077
Post Retirement Benefits 1,317 1,119
Deferred Directors Fees 129 131
Capital Lease 624 454
Intangible Assets 659 443
Other 1,062 908
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Total 5,393 5,132
- - --------------------------------------------------------------------------------
Deferred Tax Liabilities:
Net Unrealized Gain on Securities
Available for Sale (3,333) (2,904)
Depreciation (999) (1,048)
Pension Plan (490) (276)
Accretion of Discount (564) (439)
Other (813) (839)
- - --------------------------------------------------------------------------------
Total (6,199) (5,506)
- - --------------------------------------------------------------------------------
Net Deferred Tax Liability $ (806) $ (374)
================================================================================
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates sufficient net taxable
income. Additionally, the Company has sufficient refundable taxes in prior years
that are available through carry back for the realization of tax benefits
recorded. Accordingly, Management believes it is more likely than not that the
Company will realize the benefit of the deferred tax asset. However, significant
changes in the Company's operations and/or economic conditions could affect its
ability to fully utilize the benefits of the deferred tax asset.
Included in other comprehensive income are income tax expense (benefit)
attributable to net unrealized gains or losses on securities available for sale
in the amounts of $429,000, $2,520,000 and $(727,000) for the years ended
December 31, 1998, 1997 and 1996, respectively.
NOTE 15 - EMPLOYEE BENEFIT PLANS
Pension Benefits
The Company has a noncontributory defined benefit plan, funded through a
self-administered trust, covering substantially all full-time employees who have
attained age 21 and have completed one year of service. Annual contributions are
made to the plan equal to the minimum amount currently deductible for Federal
income tax purposes. Plan assets are comprised of debt and equity securities. In
addition, the Company has supplemental pension agreements with an officer and a
director (a former officer), as well as employees who retired prior to the
formation of the current plan.
Post Retirement Benefits
Expected costs of providing these benefits, including medical and life insurance
coverage, are charged to expense during the years that the employees render
service.
The following table sets forth the Pension Plan's Benefits and Post Retirement
Plan's Benefits funded status at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Pension Benefits Post Retirement Benefits
- - ---------------------------------------------------------------------------------- ------------------------------
(In Thousands) 1998 1997 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Projected Benefit Obligation at Beginning of Year $ 19,096 $17,890 $ 7,135 $ 6,903
Service Cost 719 721 321 306
Interest Cost 1,271 1,245 525 469
Actuarial Gain (Loss) 151 427 809 (43)
Benefits Paid (1,234) (1,187) (540) (500)
- - ---------------------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at End of Year 20,003 19,096 8,250 7,135
- - ---------------------------------------------------------------------------------------------------------------------
Plan Assets Fair Value at Beginning of Year 25,199 21,134 - -
Actual Return on Plan Assets 8,354 5,209 - -
Employer Contribution 43 43 540 500
Benefits Paid (1,234) (1,187) (540) (500)
- - ---------------------------------------------------------------------------------------------------------------------
Plan Assets Value at End of Year 32,362 25,199 - -
- - ---------------------------------------------------------------------------------------------------------------------
Funded Status
12,359 6,103 (8,250) (7,135)
Unrecognized Transition (Asset) Obligation - (187) 4,055 4,345
Unrecognized Prior Service Cost 454 617 - -
Unrecognized (Gain) Loss (11,364) (5,713) 568 (242)
- - ---------------------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Cost $ 1,449 $ 820 $(3,627) $(3,032)
- - ---------------------------------------------------------------------------------------------------------------------
Discount Rate 6.75% 7.00% 6.75% 7.00%
Expected Return on Plan Assets 9.00% 9.00% - -
Rate of Compensation Increase 4.50% 5.00% - -
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1997, the Company adopted a non-tax qualified plan for certain of its
executives ("SERP") to supplement the benefit such executive can receive under
the Company's 401(k) Plan and defined benefit plans. In conjunction with the
SERP, the Company purchased approximately $20 million in corporate-owned life
insurance. Pension benefits in the above table include the portion related to
the Non-Qualified Executive Supplemental Plans. The Supplemental projected
benefit obligation was $215,000 and $223,000 as of December 31, 1998 and 1997,
respectively. The Supplemental Plans have no assets as of December 31, 1998 and
1997.
Net periodic (benefit) expense for 1998, 1997 and 1996 includes the following:
<TABLE>
<CAPTION>
Pension Benefits Post Retirement Benefits
- - -------------------------------------------------------------------------------- ------------------------------
(In Thousands) 1998 1997 1996 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Periodic (Benefit) Expense Components
Service Cost $ 719 $ 721 $ 668 $ 321 $ 306 $ 275
Interest Cost 1,271 1,245 1,196 525 469 466
Expected Return on Plan Assets (2,214) (1,850) (1,706) - - -
Net Deferral and Amortization (362) (130) (47) 289 290 290
- - ----------------------------------------------------------------------------------------------------------------------
Net Periodic (Benefit) Expense $ (586) $ (14) $ 111 $1,135 $1,065 $1,031
- - ----------------------------------------------------------------------------------------------------------------------
Weighted-Average Assumptions
Discount Rate 7.00% 7.25% 7.25% 6.75% 7.00% 7.25%
Expected Return on Plan Assets 9.00% 9.00% 9.00% - - -
Rate of Compensation Increase 5.00% 6.00% 6.00% - - -
- - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The assumed health care cost trend in measuring the expected cost of the post
retirement benefits range from 6.0% through 7.5% in 1999, declining by 0.5% per
year to an ultimate level of 5.0% by the year 2003.
A 1% change in the assumed health care cost trend rate would have the following
effects on the Company's post retirement benefits:
<TABLE>
<CAPTION>
(In Thousands) 1 % Increase 1 % Decrease
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on Total Service and Interest Cost (Net Periodic Expense) $ 147 $(117)
Effect on the Post Retirement Benefits (Projected Benefit Obligation) 1,185 (961)
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
Other Benefits
Employees can make contributions to the Company's 401(k) Plan by means of
payroll deductions of up to 10% of their compensation. Matching contributions
are made by the Company for up to 5% of the employee's compensation at the
discretion of the Board of Directors and totaled $457,000, $447,000 and $490,000
in 1998, 1997 and 1996, respectively.
NOTE 16 - STOCK OPTION PLANS
The Company has a Stock Incentive Plan (the "Plan"), in which shares of the
Company's common stock may be granted to the Company's employees. The Plan
provides for the discretionary granting of stock options with or without stock
appreciation rights. Under the Plan, the exercise price of each option equals
the market price of the Company's stock on the date of grant. The options
granted have a term of ten years and vest over a period of four years.
The Company also has a "Stock Option Plan for Non-Employee Directors" (the
"Directors Plan") in which options to acquire shares of the Company's common
stock may be granted to Non-Employee Directors. Each Non-Employee Director of
the Company or its affiliates is eligible to receive options under the Directors
Plan. The options granted have a term of ten years and vest over three years.
Under the Plan, the exercise price of each option equals the market price of the
Company's stock on the date of grant.
The Company applies APB Opinion No. 25 and related interpretations in accounting
for both the Plan and Directors Plans. Accordingly, no compensation cost has
been recognized for the stock options in these Plans. Had compensation cost for
these plans been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," which was previously described in Note 1(n) the
Company's net income and diluted net income per share would have been reduced to
the pro forma amounts indicated below:
(In Thousands, Except Per Share Data) 1998 1997 1996
- - --------------------------------------------------------------------------------
Net Income:
As Reported $15,600 $14,539 $13,068
Pro forma 15,363 14,290 12,943
Basic Net Income Per Share
As Reported $ 1.41 $ 1.31 $ 1.19
Pro forma 1.39 1.29 1.18
Diluted Net Income Per Share:
As Reported $ 1.39 $ 1.30 $ 1.18
Pro forma 1.37 1.28 1.17
- - --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996 respectively: dividend yield
of 3.5%, 2.3% and 3.1% for 1998, 1997 and 1996, respectively; expected
volatility of 17%, 22% and 25% for 1998, 1997 and 1996, respectively; risk-free
interest rates of 5.6%, 6.7% and 6.0% for 1998, 1997 and 1996, respectively; and
expected lives of 5 years for both plans. A summary of the status of both the
Plan and the Directors Plan of the Company as of December 31, 1998, 1997 and
1996 and changes during the years ended on those dates, adjusted for subsequent
stock dividends and splits, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Option Shares: Shares Price Shares Price Shares Price
- - --------------------------------------------------------------------------------------------------------------------
Outstanding at
<S> <C> <C> <C> <C> <C> <C>
Beginning of Year 372,680 $13.65 413,621 $10.62 331,516 $ 9.73
Granted 77,110 25.66 95,671 18.10 97,867 12.96
Exercised (13,732) 12.45 (120,821) 6.92 (13,148) 5.38
Forfeited (298) 12.40 (15,791) 12.76 (2,614) 12.40
- - --------------------------------------------------------------------------------------------------------------------
Outstanding at
End of Year 435,760 $15.81 372,680 $13.65 413,621 $10.62
====================================================================================================================
Options Exercisable
at Year-End 206,959 122,598 159,412
====================================================================================================================
Weighted-Average
Fair Value of
Options Granted
During the Year $4.15 $4.76 $3.08
====================================================================================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1998, adjusted for the effect of subsequent stock dividends and
splits.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------ -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.90 7,579 2.0 $ 4.90 7,579 $ 4.90
11.39 65,280 5.0 11.39 65,280 11.39
12.21 - 12.40 101,251 6.1 12.36 80,616 12.34
12.64 - 13.00 89,795 7.5 12.96 46,020 12.94
16.24 - 18.68 94,745 8.2 18.10 7,464 16.24
24.77 - 27.36 77,110 8.2 25.66 - -
- - ----------------------------------------------------------------------------------------------------------------
$ 4.90 - $27.36 435,760 7.0 $15.81 206,959 $12.04
================================================================================================================
</TABLE>
The Stock Incentive Plan also provides for granting of Restricted Stock Awards,
which generally vest between two and four years. Stock dividends and splits are
granted to the employees when paid. Transactions involving these awards are
summarized as follows:
1998 1997 1996
- - -----------------------------------------------------------------------------
Restricted Stock Awards:
Outstanding - January 1, 4,560 10,996 19,000
Granted 1,800 - -
Canceled - (918) (450)
Vested (3,660) (5,518) (7,554)
- - -----------------------------------------------------------------------------
Outstanding - December 31, 2,700 4,560 10,996
=============================================================================
Compensation expense recognized related to the restricted stock awards was
$74,000, $88,000 and $134,000 for the years ended December 31, 1998, 1997 and
1996 respectively.
NOTE 17 - LITIGATION, COMMITMENTS AND CONTINGENT LIABILITIES
The Company is party, in the ordinary course of business, to litigation
involving collection matters, contract claims and other miscellaneous causes of
action arising from its business. Management does not consider that any such
proceedings depart from usual routine litigation and, in its judgment, the
Company's financial position and results of operations will not be materially
affected by such proceedings.
The Company has lease commitments expiring at various dates through 2015. Rent
expense on these leases amounted to approximately $783,000, $759,000 and
$670,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
headquarters building lease has been accounted for as a capital lease, in
accordance with FASB Statement No. 13 "Accounting for Leases," (See Note 11).
The minimum annual rentals under the terms of the lease agreements, excluding
the capital lease, as of December 31, 1998, were as follows:
1999 $672,000
2000 655,000
2001 516,000
2002 260,000
2003 147,000
Thereafter 447,000
The above represents minimum rentals, not adjusted for possible future increases
due to property taxes and cost of living escalation provisions.
The Company also has certain equipment leases, which do not exceed five-year
terms with level monthly payments. Equipment rental expense totaled $1,796,000,
$1,204,000 and $987,000 in 1998, 1997 and 1996, respectively.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financial needs of its customers.
These financial instruments consist of commitments to extend credit and standby
letters of credit. These financial instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount recognized in
the accompanying consolidated balance sheets. The contract or notional amounts
of these instruments express the extent of involvement the Company has in each
class of financial instrument.
The Company uses the same credit policies and collateral requirements in making
commitments and conditional obligations as it does for on-balance sheet
instruments. Commitments to extend credit are agreements to lend to customers as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the Company upon extension of credit, is based upon Management's credit
evaluation of the borrower. Collateral held on these commitments varies. Standby
letters of credit are conditional commitments issued by the Company insuring
performance obligations of a customer to a third party. These commitments
commonly involve real estate transactions.
<TABLE>
<CAPTION>
Financial Instruments Whose
Contract Amount Represent Contract or Notional Amount
Credit Risk at December 31, 1998
- - ------------------------------------------------------------------------------------ --------------------------------
<S> <C>
Commitments for Commercial and Construction Loans Secured by Real Estate $ 69,745,000
Unused Portion of Credit Card Lines of Credit 42,988,000
Unused Portion of Home Equity Lines of Credit 21,506,000
Used Portion of Commercial Lines of Credit 100,806,000
Standby Letters of Credit 2,193,000
</TABLE>
The Company previously entered into agreements with eight executive officers
providing for the payment of cash and other benefits to them in the event of
their voluntary or involuntary termination within three years following a change
of control of the Company. Payment under these agreements in the event of a
change in control would consist of a lump sum payment equal to two or three
years of annual taxable compensation, depending on the officer involved. Under
these agreements, the payment would be reduced if it would be an excess
parachute payment under the Federal tax code and would subject the officer to an
excise tax.
NOTE 18 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
that the Company disclose estimated fair values for its financial instruments.
The fair value estimates are made at a discrete point in time based upon
relevant market information and information about the financial instruments.
Because no market exists for a portion of the Company's financial instruments,
fair value estimates are based on judgment regarding a number of factors. These
estimates are subjective in nature and involve some uncertainties. Changes in
assumptions and methodologies may have a material effect on these estimated fair
values. In addition, reasonable comparability between financial institutions may
not be likely due to a wide range of permitted valuation techniques and numerous
estimates, which must be made. This lack of uniform valuation methodologies also
introduces a greater degree of subjectivity to these estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and Short-Term Investments
For those short-term instruments, the carrying value is a reasonable estimate of
fair value.
Securities
Fair values are based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities. Federal Reserve Bank and Federal Home Loan Bank
stock is required to be maintained as part of membership. Cost approximates the
fair value of these securities, as that is the amount at which the stock may be
redeemed.
Loans
The fair value of loans is estimated by discounting the future cash flows using
the build-up approach consisting of four components: the risk-free rate, credit
quality, operating expense, and prepayment option price.
Deposits
The fair value of demand deposits, savings accounts and certain money market
deposits is the amount payable on demand at the reporting date. The fair value
of fixed-maturity certificates of deposit is estimated by discounting the future
cash flows using the risk-free market rate.
Short-Term and Other Borrowings
For short-term borrowings, the carrying value is a reasonable estimate of fair
value. The fair values for other borrowings are calculated by discounting
estimated future cash flows using current rates offered for borrowings of
similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of standby letters of credit is estimated using the fees
currently charged to enter into similar agreements and the present credit
worthiness of the counter parties. On this basis, these fees approximate the
fair value. The Bank does not charge a fee on loan commitments and,
consequently, there is no basis to calculate a fair value.
The estimate fair value of the Company's financial instruments as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------ ------------------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and Short-Term Investments $ 41,855 $ 41,855 $ 51,132 $ 51,132
Securities Available for Sale 580,133 580,133 553,000 553,000
Securities Held to Maturity 42,471 42,811 45,308 45,364
Trading Account Securities 1,239 1,239 1,221 1,221
Loans, Net of Allowance for
Possible Loan Losses 746,166 749,383 655,132 653,825
Mortgage Loans Held for Sale 128 129 - -
- - --------------------------------------------------------------------------------------------------------------------
Financial Liabilities
Deposits
Demand 203,129 203,129 178,784 178,784
Savings 415,546 415,546 401,399 401,399
Time 428,040 430,691 475,436 478,860
- - --------------------------------------------------------------------------------------------------------------------
Total Deposits 1,046,715 1,049,366 1,055,619 1,059,043
Short-Term Borrowings 154,635 154,635 79,546 79,546
Other Borrowings 119,942 120,087 92,706 92,706
- - --------------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments
Standby Letters of Credit - 27 - 33
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 19 - SEGMENT REPORTING
The Company has five reportable segments: retail banking, commercial banking,
investments, trust and investment services and corporate. The retail banking
segment includes loans secured by 1-4 family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures, and lease financing. In addition, the retail segment
includes the branch network. The commercial segment provides term loans, demand
secured loans, Small Business Administration ("SBA") financing, floor plan loans
and financing for commercial real estate transactions. The investment segment is
comprised of the Company's securities portfolio, which includes U. S. Treasury
and government agency securities, tax-exempt securities, mortgage-backed
securities, corporate debt securities, equity securities, trading accounts and
short-term investments. The trust division offers a full range of fiduciary
services, ranging from mutual funds to personal trust, investment advisory and
employee benefits. The corporate segment is primarily comprised of the treasury
function which is responsible for managing interest-rate risk. Additionally,
certain revenues and expenses that are not considered allocable to a line of
business are reflected in this area.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes not including
one-time charges and amortization of intangible assets. For purposes of this
review, interest income, which is exempt from Federal taxation, has been
restated to a taxable-equivalent basis, which places tax-exempt income on a
comparable basis with taxable income to facilitate analysis.
The Company utilizes "matched-maturity funds transfer pricing" and cost
allocations to analyze segment reporting. Funds transfer pricing system matches
interest income and expense against market rates to determine a net spread by
product and segment. The system allows for comparable performance evaluation of
funds users and providers and supports asset/liability management. Without a
transfer pricing system, funds users, such as the lending and investment
functions, receive credit for interest income without being charged for the full
amount of associated costs of funds, while funds providers, such as the branch
network, would be charged with interest expense without being credited for the
full amount of associated interest credit. Cost allocations are performed to
allot expenses to the appropriate organizational units, products or
responsibility centers.
The Company's reportable segments are strategic business units that offer
different products and services. Even though they are managed separately, the
Company collectively cross-sells its products and services to customers.
The following table presents the results of operations and average balances by
reportable segment for the years ended December 31, 1998, and 1997. It is
impractical to disclose 1996 results due to system limitations.
<TABLE>
<CAPTION>
Results of Operations for
Year Ended December 31, 1998 Retail Commercial Investments Trust Corporate Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 36,056 $ 25,519 $ 43,063 $ - $ - $ 104,638
Interest Expense 32,642 547 9,578 - 2,775 45,542
Funds Transfer Pricing Allocation 35,002 (15,406) (29,443) (3) 9,850 -
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 38,416 9,566 4,042 (3) 7,075 59,096
Provision for Loan Losses 2,072 1,072 - - - 3,144
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 36,344 8,494 4,042 (3) 7,075 55,952
Non-Interest Income 12,592 885 3,850 5,454 - 22,781
Non-Interest Expense 42,338 4,025 220 3,939 9 50,531
Merger & Other Unallocated Expenses - - - - 4,024 4,024
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 6,598 $ 5,354 $ 7,672 $1,512 $ 3,042 $ 24,178
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,085,482 $ 6,471 $ 161,300 $ (68) $194,867 $1,448,052
Funds Used: Interest-earning Assets 436,167 276,567 617,401 - (5,844) 1,324,291
Non-Interest-earning Assets 17,444 - - - 106,317 123,761
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 631,871 $(270,096) $(456,101) $ (68) $ 94,394 $ -
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Results of Operations for
Year Ended December 31, 1997 Retail Commercial Investments Trust Corporate Consolidated
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income $ 37,469 $ 22,938 $ 34,955 $ - $ - $ 95,362
Interest Expense 32,071 - 3,906 - 2,963 38,940
Funds Transfer Pricing Allocation 32,148 (14,953) (28,568) (12) 11,385 -
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 37,546 7,985 2,481 (12) 8,422 56,422
Provision for Loan Losses 3,520 312 - - - 3,832
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 34,026 7,673 2,481 (12) 8,422 52,590
Non-Interest Income 11,753 1,381 1,820 4,976 - 19,930
Non-Interest Expense 37,117 4,447 129 3,739 150 45,582
Merger & Other Unallocated Expenses - - - - 3,969 3,969
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 8,662 $ 4,607 $ 4,172 $1,225 $ 4,303 $ 22,969
- - ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,028,179 - $ 70,677 $(136) $163,716 $1,262,436
Funds Used: Interest-earning Assets 447,406 238,373 476,120 - 25 1,161,924
Non-Interest-earning Assets 23,338 - - - 77,174 100,512
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 557,435 $(238,373) $(405,443) $(136) $ 86,517 $ -
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 20 - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of United National Bancorp (parent company
only) are presented below:
CONDENSED BALANCE SHEETS December 31,
--------------------------
(In Thousands) 1998 1997
-------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 2,791 $ 55
Securities Available for Sale 5,233 6,178
Trading Account Securities 1,239 1,221
Investment in Subsidiaries 137,575 129,576
Other Assets 3,541 2,507
-------------------------------------------------------------------------------
Total Assets $150,379 $139,537
===============================================================================
Liabilities and Stockholders' Equity
Junior Subordinated Debentures $20,619 $20,619
Loan from Subsidiary 750 -
Other Liabilities 2,765 2,291
Stockholders' Equity 126,245 116,627
-------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $150,379 $139,537
===============================================================================
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME For The Years Ended December 31,
--------------------------------------------
(In Thousands) 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiary $ 9,080 $ 7,125 $ 4,939
Interest and Dividends on Securities 228 221 168
Net Gain from Securities Transactions 1,794 508 111
- - ----------------------------------------------------------------------------------------------------------
Total Income 11,102 7,854 5,218
- - ----------------------------------------------------------------------------------------------------------
Expense
Interest Expense on Junior Subordinated Debentures 2,064 1,605 -
Interest Expense on Loan from Subsidiary 50 - -
Other Expenses 373 298 257
- - ----------------------------------------------------------------------------------------------------------
Total Expense 2,487 1,903 257
- - ----------------------------------------------------------------------------------------------------------
Income Before Income Tax Benefit 8,615 5,951 4,961
Income Tax Benefit 170 407 4
- - ----------------------------------------------------------------------------------------------------------
Income Before Equity in Undistributed Income
Of Subsidiary 8,785 6,358 4,965
Equity in Undistributed Income of Subsidiary 6,815 8,181 8,103
- - ----------------------------------------------------------------------------------------------------------
Net Income $15,600 $14,539 $13,068
==========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS For the Years Ended December 31,
------------------------------------------------
(In Thousands) 1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $15,600 $14,539 $13,068
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Gain from Securities Transactions (1,794) (508) (111)
Trading Account Securities Activity, Net (94) (200) 20
Increase in Other Assets (1,034) (1,241) (71)
Increase (Decrease) in Other Liabilities 829 (254) (379)
Restricted Stock Activity, Net 74 88 134
Equity in Undistributed Income of Subsidiary (6,815) (8,181) (8,103)
- - ---------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 6,766 4,243 4,558
- - ---------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available
For Sale 6,079 2,800 812
Purchase of Securities Available for Sale (3,969) (2,400) (1,725)
- - ----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used In) Investing Activities 2,110 400 (913)
- - ----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends on Common Stock (7,039) (5,335) (3,945)
Proceeds from Exercise of Stock Options 149 562 42
Loan from Subsidiary 750 - -
Sale of Treasury Stock - - 251
Proceeds from Issuance of Junior Subordinated Debentures - 20,619 -
Capital Contributed to Subsidiary - (20,458) -
- - ----------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities (6,140) (4,612) (3,652)
- - ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 2,736 31 (7)
Cash at Beginning of Year 55 24 31
- - ----------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 2,791 $ 55 $ 24
================================================================================================================
</TABLE>
Cash Dividend Restrictions
Substantially all of the revenue of the Company available for the payment of
dividends on its stock will result from dividends paid to the Company by the
Bank. The Bank is restricted under applicable laws in the payment of cash
dividends to the Company. The Bank is required by Federal law to obtain the
prior approval of the Comptroller of the Currency for the payment of dividends
if the total of all dividends declared by the Board of Directors in any year
will exceed the total of the Bank's net profits for that year combined with the
retained net profits for the preceding two years ("earnings limitation" test).
In addition, a national bank may not pay a dividend in an amount greater than
its undivided profits then on hand after deducting its loan losses and bad
debts.
Under the earnings limitation test, the Bank had available $32,118,000 for the
payment of cash dividends at December 31, 1998.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of United National Bancorp:
We have audited the accompanying consolidated balance sheets of United National
Bancorp and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
National Bancorp and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Short Hills, New Jersey
January 19, 1999, except for Note 2a., which is as of March 31, 1999.
EXHIBIT 21
LIST OF SUBSIDIARIES
UNITED NATIONAL BANCORP
UNITED NATIONAL BANK
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANCORP)
UNB CAPITAL TRUST I
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANCORP)
UNITED NATIONAL BANK
UNITED NATIONAL INVESTMENT COMPANY, INC.
(FORMERLY UNB INVESTMENT CO., INC.)
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANK)
UNITED COMMERCIAL CAPITAL GROUP, INC.
(WHOLLY-OWNED SUBSIDIARY
OF UNITED NATIONAL BANK)
UNITED FINANCIAL SERVICES, INC.
(UNITED NATIONAL BANK
OWNS 50% OF THIS JOINT VENTURE)
UNITED NATIONAL INVESTMENT COMPANY, INC.
BRIDGEWATER MORTGAGE COMPANY, INC.
(WHOLLY-OWNED SUBSIDIARY,
EXCEPT FOR PREFERRED STOCK,
OF UNITED NATIONAL INVESTMENT CO., INC.)
EXHIBIT 23 (a)
INDEPENDENT ACCOUNTANTS CONSENT
The Board of Directors
United National Bancorp:
We consent to incorporation by reference in the following Registration
Statements filed on Form S-8: the United National Bancorp Stock Based Incentive
Plan, dated May 19, 1993; the United National Bank Profit Sharing and 401(k)
Plan dated March 16, 1994; and the United National Bank 1995 Stock Option Plan
for Non-Employee Directors, dated June 28, 1995, of our report dated March 31,
1999 relating to the combined consolidated balance sheets of United National
Bancorp and subsidiaries as of December 31, 1998 and 1997 and the related
combined consolidated statements of income, changes in stockholders equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, which report is incorporated by reference in the December 31, 1998 Annual
Report on Form 10-K of United National Bancorp.
KPMG LLP
Short Hills, New Jersey
March 31, 1999
EXHIBIT 23 (b)
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
United National Bancorp:
We consent to incorporation by reference in the following Registration
Statements filed on Form S-8: the United National Bancorp Stock Based Incentive
Plan, dated May 19, 1993; the United National Bank Profit Sharing and 401(k)
Plan dated March 16, 1994; and the United National Bank 1995 Stock Option Plan
for Non-Employee Directors, dated June 28, 1995, of our report dated January 19,
1999, except for Note 2a, which is as of March 31, 1999, relating to the
consolidated balance sheets of United National Bancorp and subsidiaries as of
December 31, 1998 and 1997 and the related consolidated statements of income,
changes in stockholders equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report is incorporated by
reference in the December 31, 1998 Annual Report on Form 10-K of United National
Bancorp.
KPMG LLP
Short Hills, New Jersey
March 31, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extreacted from SEC Form
10-K and is qualified in its entirety by reference to such fianancial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 52,867
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 50,100
<TRADING-ASSETS> 1,239
<INVESTMENTS-HELD-FOR-SALE> 609,262
<INVESTMENTS-CARRYING> 63,374
<INVESTMENTS-MARKET> 63,675
<LOANS> 1,057,081
<ALLOWANCE> 11,174
<TOTAL-ASSETS> 1,917,194
<DEPOSITS> 1,403,413
<SHORT-TERM> 154,635
<LIABILITIES-OTHER> 25,962
<LONG-TERM> 154,942
0
0
<COMMON> 19,148
<OTHER-SE> 139,094
<TOTAL-LIABILITIES-AND-EQUITY> 1,917,194
<INTEREST-LOAN> 86,026
<INTEREST-INVEST> 43,468
<INTEREST-OTHER> 2,829
<INTEREST-TOTAL> 132,349
<INTEREST-DEPOSIT> 46,555
<INTEREST-EXPENSE> 61,927
<INTEREST-INCOME-NET> 70,422
<LOAN-LOSSES> 3,444
<SECURITIES-GAINS> 3,891
<EXPENSE-OTHER> 62,967
<INCOME-PRETAX> 28,226
<INCOME-PRE-EXTRAORDINARY> 28,226
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,858
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 4.19
<LOANS-NON> 7,281
<LOANS-PAST> 1,289
<LOANS-TROUBLED> 42
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,739
<CHARGE-OFFS> 5,234
<RECOVERIES> 1,225
<ALLOWANCE-CLOSE> 11,174
<ALLOWANCE-DOMESTIC> 11,174
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extreacted from SEC Form
10-K and is qualified in its entirety by reference to such fianancial
statements.(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 41,855
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 1,239
<INVESTMENTS-HELD-FOR-SALE> 580,133
<INVESTMENTS-CARRYING> 42,471
<INVESTMENTS-MARKET> 42,811
<LOANS> 746,294
<ALLOWANCE> 7,582
<TOTAL-ASSETS> 1,488,593
<DEPOSITS> 1,046,715
<SHORT-TERM> 154,635
<LIABILITIES-OTHER> 21,056
<LONG-TERM> 119,942
0
0
<COMMON> 13,989
<OTHER-SE> 112,256
<TOTAL-LIABILITIES-AND-EQUITY> 1,488,593
<INTEREST-LOAN> 62,645
<INTEREST-INVEST> 38,989
<INTEREST-OTHER> 946
<INTEREST-TOTAL> 102,606
<INTEREST-DEPOSIT> 32,307
<INTEREST-EXPENSE> 45,542
<INTEREST-INCOME-NET> 57,064
<LOAN-LOSSES> 3,144
<SECURITIES-GAINS> 3,850
<EXPENSE-OTHER> 54,555
<INCOME-PRETAX> 22,146
<INCOME-PRE-EXTRAORDINARY> 22,146
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,600
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.39
<YIELD-ACTUAL> 4.46
<LOANS-NON> 5,282
<LOANS-PAST> 1,289
<LOANS-TROUBLED> 42
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,434
<CHARGE-OFFS> 4,953
<RECOVERIES> 957
<ALLOWANCE-CLOSE> 7,582
<ALLOWANCE-DOMESTIC> 7,582
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
