SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to ___
Commission File Number: 000-16931
United National Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2894827
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1130 Route 22 East, Bridgewater, New Jersey 08807-0010
(Address of principal executive offices) (Zip Code)
(908) 429-2200
(Registrant's telephone number, including area code)
N/A (Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of November 1, 1999, there were 16,035,973 shares of common stock, $1.25 par
value, outstanding.
<PAGE>
UNITED NATIONAL BANCORP
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
ITEM 1 Consolidated Financial Statements and Notes to
Consolidated Financial Statements 1-11
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
ITEM 3 Market Risk - Asset / Liability Management 23
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<PAGE>
Part I - Financial Information
Item 1 - Financial Statements
United National Bancorp
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
September 30, December 31,
1999 1998
----------- -----------
ASSETS
Cash and Due from Banks $ 67,427 $ 52,867
Federal Funds Sold -- 50,100
Securities Available for Sale, at Market Value 662,272 609,262
Securities Held to Maturity 38,918 63,374
Trading Account Securities, at Market Value 942 1,239
Loans, Net of Unearned Income 1,185,365 1,056,953
Less: Allowance for Possible Loan Losses 10,017 11,174
----------- -----------
Loans, Net 1,175,348 1,045,779
Mortgage Loans Held for Sale -- 128
Premises and Equipment, Net 29,415 29,248
Other Real Estate, Net 82 507
Intangible Assets, Primarily Core Deposit Premiums 7,448 9,288
Other Assets 71,122 55,402
----------- -----------
Total Assets $ 2,052,974 $ 1,917,194
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 251,813 $ 263,700
Savings 544,191 549,095
Time 660,129 590,618
----------- -----------
Total Deposits 1,456,133 1,403,413
Short-Term Borrowings 179,905 154,635
Other Borrowings 236,433 154,942
Other Liabilities 29,082 25,962
----------- -----------
Total Liabilities 1,901,553 1,738,952
Company-Obligated Mandatorily Redeemable
Preferred Series B Capital Securities of a
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company 20,000 20,000
STOCKHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares,
none issued and outstanding -- --
Common Stock, $1.25 Par Value, Authorized
Shares 25,000,000, Issued Shares 16,145,931 in
1999 and 15,318,038 in 1998, Outstanding
Shares 16,035,973 in 1999 and 15,021,180 in 1998 20,182 19,148
Additional Paid-in Capital 129,460 112,015
Retained Earnings 2,974 25,921
Treasury Stock, at Cost - 109,958 shares in 1999
and 296,858 shares in 1998 (1,352) (4,660)
Restricted Stock (97) (248)
Accumulated Other Comprehensive (Loss) Income (19,746) 6,066
----------- -----------
Total Stockholders' Equity 131,421 158,242
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,052,974 $ 1,917,194
=========== ===========
See Accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 23,680 $ 21,900 $ 67,950 $ 64,301
Interest and Dividends on Securities Available for Sale:
Taxable 9,468 9,034 27,135 27,180
Tax-Exempt 1,231 751 3,644 2,175
Interest and Dividends on Securities Held to Maturity:
Taxable 216 752 939 2,718
Tax-Exempt 270 228 781 641
Dividends on Trading Account Securities 9 7 26 20
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 8 902 426 2,144
-------- -------- -------- --------
TOTAL INTEREST INCOME 34,882 33,574 100,901 99,179
-------- -------- -------- --------
INTEREST EXPENSE
Interest on Savings Deposits 2,553 3,179 7,948 9,256
Interest on Time Deposits 7,817 8,762 23,566 25,933
Interest on Short-Term Borrowings 3,107 1,712 6,253 4,456
Interest on Other Borrowings 2,617 2,447 8,166 6,710
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 16,094 16,100 45,933 46,355
-------- -------- -------- --------
Net Interest Income 18,788 17,474 54,968 52,824
Provision for Possible Loan Losses 900 448 2,775 2,394
-------- -------- -------- --------
Net Interest Income After Provision
for Possible Loan Losses 17,888 17,026 52,193 50,430
-------- -------- -------- --------
NON-INTEREST INCOME
Trust Income 1,185 1,437 4,318 4,312
Service Charges on Deposit Accounts 1,276 1,221 3,566 3,835
Other Service Charges, Commissions and Fees 1,575 1,738 4,713 5,046
Net (Losses) Gains from Securities Transactions (196) 654 1,118 1,045
Other Income 968 825 2,582 2,404
-------- -------- -------- --------
TOTAL NON-INTEREST INCOME 4,808 5,875 16,297 16,642
-------- -------- -------- --------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 6,031 6,439 18,295 19,289
Occupancy Expense, Net 1,236 1,316 3,765 3,719
Furniture and Equipment Expense 1,068 1,043 3,242 3,094
Data Processing Expense 1,653 1,970 4,501 5,857
Distributions of Series B Capital Securities 501 501 1,502 1,502
Amortization of Intangible Assets 286 318 970 1,177
Net Cost to Operate Other Real Estate 21 56 122 119
Non-Recurring Charges -- 2,179 17,258 2,179
Other Expenses 3,349 3,590 10,176 10,784
-------- -------- -------- --------
TOTAL NON-INTEREST EXPENSE 14,145 17,412 59,831 47,720
-------- -------- -------- --------
Income Before Provision for Income Taxes 8,551 5,489 8,659 19,352
Provision for Income Taxes 2,306 1,747 2,265 5,697
======== ======== ======== ========
NET INCOME $ 6,245 $ 3,742 $ 6,394 $ 13,655
======== ======== ======== ========
NET INCOME PER COMMON SHARE:
Basic $ 0.39 $ 0.24 $ 0.40 $ 0.87
======== ======== ======== ========
Diluted $ 0.39 $ 0.23 $ 0.39 $ 0.85
======== ======== ======== ========
Weighted Average Shares Outstanding:
Basic 16,036 15,615 16,026 15,613
Diluted 16,218 16,064 16,204 16,078
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Restricted Comprehensive Stockholders'
Stock Capital Earnings Stock Stock (Loss)/Income Equity
--------- ---------- ---------- --------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1998 $ 19,148 $ 112,015 $ 25,921 $ (4,660) $ (248) $ 6,066 $ 158,242
Net Income -- -- 6,394 -- -- -- 6,394
Cash Dividends Declared
$0.57 Per Share -- -- (9,379) -- -- -- (9,379)
Stock Issued in Payment
of 6% Stock Dividend -
913,921 shares 1,142 18,336 (19,478) -- -- -- --
Exercise of Stock Options
(253,891 Shares) 57 594 (484) 1,610 -- -- 1,777
Change in Unrealized Gain on
Securities Available for
Sale, Net of Tax -- -- -- -- -- (25,812) (25,812)
Retirement of Treasury Stock (168) (1,530) -- 1,698 -- -- --
Restricted Stock Activity, Net 3 45 -- -- 151 -- 199
--------- --------- --------- --------- --------- --------- ---------
Balance-September 30, 1999 $ 20,182 $ 129,460 $ 2,974 $ (1,352) $ (97) $ (19,746) $ 131,421
========= ========= ========= ========= ========= ========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
United National Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------
1999 1998
--------- ---------
OPERATING ACTIVITIES
Net Income $ 6,394 $ 13,655
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 3,093 3,353
Amortization of Securities, Net 1,084 880
Provision for Possible Loan Losses 2,775 2,394
(Benefit) Provision for Deferred Income Taxes (253) 26
Net (Gain) Loss on Disposition
Of Premises and Equipment (6) 61
Net Gains from Securities Transactions (1,118) (1,045)
Trading Account Securities Activity, Net 297 178
Increase in Other Assets (1,655) (1,673)
Increase in Other Liabilities 2,880 3,350
Restricted Stock Activity, Net 199 74
--------- ---------
Net Cash Provided by Operating Activities 13,690 21,253
--------- ---------
INVESTING ACTIVITIES Securities Available for Sale:
Proceeds from Sales of Securities 209,059 498,823
Proceeds from Maturities of Securities 76,051 102,457
Purchases of Securities (376,813) (620,081)
Securities Held to Maturity:
Proceeds from Maturities of Securities 33,908 50,150
Purchases of Securities (9,479) (32,993)
Net Increase in Loans (132,216) (86,764)
Expenditures for Premises and Equipment (2,082) (3,107)
Proceeds from Disposal of Premises and Equipment 38 263
Decrease in Other Real Estate 425 1,036
--------- ---------
Net Cash Used in Investing Activities (201,109) (90,216)
--------- ---------
FINANCING ACTIVITIES
Net (Decrease) Increase in Demand and Savings Deposits (16,791) 46,444
Net Increase in Time Deposits 69,511 44,874
Net Increase in Short-Term Borrowings 25,270 4,783
Net Increase in Other Borrowed Funds 81,491 46,873
Cash Dividends on Common Stock (9,379) (5,267)
Proceeds from Exercise of Stock Options 1,777 939
Purchase of Treasury Stock -- (455)
--------- ---------
Net Cash Provided by Financing Activities 151,879 138,191
--------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (35,540) 69,228
Cash and Cash Equivalents at Beginning of Period 102,967 85,148
--------- ---------
Cash and Cash Equivalents at End of Period $ 67,427 $ 154,376
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period:
Interest $45,933 $ 46,988
Income Taxes 5,352 7,236
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
UNITED NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements included herein
have been prepared by United National Bancorp (the "Company"), in accordance
with generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on Form
10-K.
In the opinion of the Company, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the operating
results for the interim periods have been included. The results of operations
for periods of less than a year are not necessarily indicative of results for
the full year.
Effective March 31, 1999, the Company acquired Raritan Bancorp Inc. ("Raritan").
The acquisition has been accounted for as a pooling-of-interests and,
accordingly, the financial statements include the accounts and activities of
Raritan for all periods presented. The transaction resulted in the issuance of
4,023,624 shares of the Company's common stock, not adjusted for subsequent
stock dividends.
In connection with the Raritan acquisition, on March 31, 1999 the Company
recorded a pre-tax merger charge of $9,940,000 which primarily consisted of
estimated severance and outplacement costs of $6,705,000, investment banker and
other professional fees of $2,270,000, expenses related to facilities closures
and fixed asset disposals of $670,000 and consolidation costs directly
attributable to the merger of $295,000. At June 30, 1999, substantially all of
the total merger charge was realized, with no significant changes to amounts
accrued during the first quarter of 1999.
Separate results of the combined entities for the three months ended March 31,
are as follows:
(amounts in thousands)
----------------------
Net Interest Income After 1999 1998
Provision for Possible Loan Losses ------- -------
The Company $13,346 $13,437
Raritan 3,498 3,225
------- -------
Total $16,844 $16,662
======= =======
Net (Loss) Income
The Company $(3,747) $3,827
Raritan 1,173 1,003
------- -------
Total $(2,574) $4,830
======= =======
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities", to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. The Company adopted SFAS No. 134 effective January 1, 1999. The
adoption of this Statement did not have a material impact on the financial
position or results of operations of the Company.
5
<PAGE>
(2) Comprehensive (Loss) Income
Total comprehensive (loss) income amounted to the following for the periods
indicated:
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
(amount in thousands)
Net Income $ 6,394 $ 13,655
Change in Unrealized Gain
on Securities Available for Sale (25,812) 4,017
======== ========
Comprehensive (Loss) Income $(19,418) $ 17,672
======== ========
(3) Net Income Per Common Share
Basic income per common share is computed by dividing net income by the weighted
average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by the
weighted average number of shares outstanding, as adjusted for the assumed
exercise of options for common stock, using the treasury stock method. Potential
shares of common stock resulting from stock option agreements totaled 178,000
and 465,000 for the nine months ended September 30, 1999 and 1998, respectively.
For the quarters ended September 30, 1999 and 1998, the potential shares of
common stock resulting from stock option agreements totaled 182,000 and 449,000,
respectively.
(4) Pending Dissolution of Joint Venture
In the latter part of 1998, the Company decided to terminate its interest in
United Financial Services, Inc. ("UFS"), its joint venture data service
provider. At that time, the Company anticipated that its joint venture partner
would continue to operate UFS. In connection with its decision to exit the joint
venture, the Company evaluated the estimated lives and salvage values of
equipment, software and leases held by UFS, as well as related goodwill during
the fourth quarter of 1998. Based upon this evaluation, the Company accelerated
depreciation and amortization charges totaling approximately $1,200,000 through
the first quarter of 1999. In April 1999, the Company completed the conversion
of its own data processing operations to an independent third-party provider.
In June 1999, the Company was advised that its joint venture partner signed a
definitive agreement with a third party servicer and would not continue to
operate UFS on an ongoing basis. In light of that development, the Company
expects that UFS will eventually cease operations, that the value of the
Company's interest in UFS may be substantially less than it would have been had
UFS continued in operation, and that the Company may incur liabilities in
connection with the obligations of UFS under operating leases which remain in
effect at the time UFS is dissolved, to the extent such liabilities are not
assumed by the joint venture partner's servicer.
The Company reevaluated the potential losses associated with UFS based upon its
joint venture partner's decision to exit the operations of UFS. Based upon this
reevaluation, the Company recognized an additional charge of $4,500,000,
pre-tax, during the second quarter of 1999 relating to the pending dissolution
of UFS. The additional charge related primarily to write-offs of leasehold
improvements of $500,000, equipment and software of $900,000 and accrual for
lease buyouts of $2,900,000 and severance payments of $200,000.
6
<PAGE>
Ultimately, the Company's potential loss on its investment in UFS and liability
for 50% of UFS' obligations to lessors could be reduced based upon, among other
things, the amount of time the Company's joint venture partner continues to run
the operations of UFS during the dissolution process, the ability of UFS to
negotiate discounts with lessors, and the Company's ability to obtain
compensation for the use of the equipment and leases of UFS by a third party
subsequent to dissolution. The Company's joint venture partner has informed the
Company that it anticipates operating UFS through November 30, 1999, and that
the third-party that will undertake its data processing functions thereafter
will require use of some of the equipment and facilities through at least April
2000. Changes in either or both dates mentioned in the preceding sentence could
impact the Company's estimated loss related to UFS.
7
<PAGE>
(5) Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. During the third quarter of 1999, the Company combined computer
systems of Raritan into the Company's computer system. It is impractical to
disclose the Raritan segment for prior periods into the other business segments
due to system limitations. Summary financial information on a fully taxable
equivalent basis for the lines of business is presented below.
<PAGE>
<TABLE>
<CAPTION>
Results of Operations for
The Three Months Ended September 30, 1999 Retail Commercial Investments Trust Corporate Raritan Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 15,800 $ 8,426 $ 11,531 $ -- $ -- $ -- $ 35,757
Interest Expense 10,320 476 5,298 -- -- -- 16,094
Funds Transfer Pricing Allocation 6,950 (6,035) (5,213) (2) 4,300 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 12,430 1,915 1,020 (2) 4,300 -- 19,663
Provision for Loan Losses 785 115 -- -- -- -- 900
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 11,645 1,800 1,020 (2) 4,300 -- 18,763
Non-Interest Income 2,757 263 56 1,275 457 -- 4,808
Non-Interest Expense 10,643 1,179 52 1,092 1,179 -- 14,145
Merger & Other Unallocated Expenses -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 3,759 $ 884 $ 1,024 $ 181 $ 3,578 $ -- $ 9,426
- ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,352,351 $ 21,663 $ 407,197 $ (158) $ 228,090 $ -- $2,009,143
Funds Used: Interest-Earning Assets 709,409 446,619 739,665 -- -- -- 1,895,693
Non-Interest-Earning Assets 15,132 -- -- -- 98,318 -- 113,450
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 627,810 $ (424,956) $ (332,468) $ (158) $ 129,772 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Results of Operations for
The Three Months Ended September 30, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 9,631 $ 6,534 $ 10,271 $ -- $ -- $ 7,627 $ 34,063
Interest Expense 8,665 (189) 3,340 -- -- 4,284 16,100
Funds Transfer Pricing Allocation 8,996 (4,179) (6,571) 7 1,747 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,962 2,544 360 7 1,747 3,343 17,963
Provision for Loan Losses 373 -- -- -- -- 75 448
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 9,589 2,544 360 7 1,747 3,268 17,515
Non-Interest Income 3,034 159 729 1,439 -- 514 5,875
Non-Interest Expense 11,049 997 55 1,028 -- 2,088 15,217
Merger & Other Unallocated Expenses -- -- -- -- 2,195 -- 2,195
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 1,574 $ 1,706 $ 1,034 $ 418 $ (448) $ 1,694 $ 5,978
- ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,117,431 $ 9,501 $ 241,620 $ 446 $ 122,585 $ 416,560 $1,908,143
Funds Used: Interest-Earning Assets 444,817 327,603 616,833 -- (15,063) 390,774 1,764,964
Non-Interest-Earning Assets 28,671 -- -- -- 88,722 25,786 143,179
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 643,943 $ (318,102) $ (375,213) $ 446 $ 48,926 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Results of Operations for
The Nine Months Ended September 30, 1999 Retail Commercial Investments Trust Corporate Raritan Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 32,223 $ 23,262 $ 35,065 $ -- $ -- $ 12,765 $ 103,315
Interest Expense 25,630 1,200 12,782 -- -- 6,321 45,933
Funds Transfer Pricing Allocation 23,435 (15,517) (17,619) (15) 9,716 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 30,028 6,545 4,664 (15) 9,716 6,444 57,382
Provision for Loan Losses 2,391 309 -- -- -- 75 2,775
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 27,637 6,236 4,664 (15) 9,716 6,369 54,607
Non-Interest Income 7,844 783 1,443 4,451 1,272 504 16,297
Non-Interest Expense 31,050 4,252 166 3,623 1,410 2,012 42,513
Merger & Other Unallocated Expenses -- -- -- -- 17,318 -- 17,318
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 4,431 $ 2,767 $ 5,941 $ 813 $ (7,740) $ 4,861 $ 11,073
- ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,196,625 $ 19,639 $ 323,845 $ (394) $ 189,001 $242,797 $1,971,513
Funds Used: Interest-Earning Assets 521,139 399,049 689,701 -- -- 231,292 1,841,181
Non-Interest-Earning Assets 11,011 -- -- -- 107,816 11,505 130,332
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 664,475 $ (379,410) $ (365,856) $ (394) $ 81,185 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Results of Operations for
The Nine Months Ended September 30, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Income $ 27,093 $ 19,567 $ 31,681 $ -- $ -- $ 22,323 $ 100,664
Interest Expense 23,861 399 9,729 -- -- 12,366 46,355
Funds Transfer Pricing Allocation 26,631 (11,445) (19,998) 4 4,808 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 29,863 7,723 1,954 4 4,808 9,957 54,309
Provision for Loan Losses 1,584 585 -- -- -- 225 2,394
- ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 28,279 7,138 1,954 4 4,808 9,732 51,915
Non-Interest Income 9,350 698 1,137 4,317 -- 1,140 16,642
Non-Interest Expense 32,020 2,880 163 2,907 -- 6,304 47,720
Merger & Other Unallocated Expenses -- -- -- -- 3,446 -- 3,446
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 5,609 $ 4,956 $ 2,928 $ 1,414 $ 1,362 $ 4,568 $ 20,837
- ------------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,080,243 $ 6,097 $ 149,142 $ 84 $ 193,753 $ 422,412 $1,851,731
Funds Used: Interest-Earning Assets 430,647 277,305 605,471 -- (5,021) 401,058 1,709,460
Non-Interest-Earning Assets 15,657 -- -- -- 105,260 21,354 142,271
- ------------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 633,939 $ (271,208) $ (456,329) $ 84 $ 93,514 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 0PERATIONS.
The following discussion of the operating results and financial condition at
September 30, 1999 is intended to help readers analyze the accompanying
financial statements, notes and other supplemental information contained in this
document. Results of operations for the three and nine months ended September
30, 1999 are not necessarily indicative of results to be attained for any other
period.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect", "believe", "anticipate", or by expressions of confidence such as
"continuing" or "strong" or similar statements or variations of such terms. Such
forward-looking statements involve certain risks and uncertainties. These
include, but are not limited to, expected cost savings not being realized or not
being realized within the expected time frame; income or revenues being lower
than expected or operating costs higher; competitive pressures in the banking or
financial services industries increasing significantly; business disruption
related to program implementation or methodologies; Year 2000 compliance
programs not addressing Year 2000 computer problems effectively; weakening of
general economic conditions nationally or in New Jersey; changes in legal and
regulatory barriers and structures; and unanticipated occurrences delaying
planned programs or initiatives or increasing their costs or decreasing their
benefits. Actual results may differ materially from such forward-looking
statements. The Company assumes no obligation for updating any such
forward-looking statements at any time.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 and September 30, 1998:
OVERVIEW
The Company realized net income of $6,245,000 for the third quarter of 1999, as
compared to net income of $3,742,000 reported for the same period in 1998. The
third quarter of 1998 included non-recurring charges, net of taxes, totaling
$1,694,000 or $0.11 per diluted share in connection with the acquisition of the
State Bank of South Orange ("SBSO"). Earnings per diluted share were $0.39 for
the third quarter of 1999 as compared to $0.23 for the prior year period.
Third quarter 1999 operating earnings, net of taxes, totaled $6,245,000 or $0.39
per diluted share. This represents an increase of $809,000 or 14.9% from
operating earnings of $5,436,000 for the three months ended September 30, 1998,
before merger related charges
For the nine months ended September 30, 1999, net income totaled $6,394,000, as
compared to $13,655,000 for the same period last year. Earnings per diluted
share were $0.39 and $0.85, respectively. Net income for 1999 reflects
non-recurring charges totaling $12,012,000, net of taxes, which the Company
recorded during the first six months of 1999 in connection with the acquisition
of Raritan, the sale of non-performing assets and the dissolution of the Bank's
joint venture in UFS. Operating earnings, net of taxes, totaled $18,406,000 or
$1.14 per diluted share, before non-recurring charges for the nine months ended
September 30, 1999. This represents an increase of $3,057,000 or 19.9% from
operating earnings of $15,349,000 for the nine months ended September 30, 1998.
12
<PAGE>
The increase in operating earnings before non-recurring charges for the three-
and nine-month periods ended September 30, 1999 compared to 1998 was primarily
the result of increases in net interest income combined with a reduction in
non-interest expense partially offset by a decline in non-interest income. These
improvements are largely attributable to economies of scale and cost reductions
realized as a result of the Raritan acquisition and the acquisition of SBSO,
which was completed in the third quarter of 1998.
EARNINGS ANALYSIS
Interest Income
Interest income for the quarter ended September 30, 1999 was $34,882,000, an
increase of $1,308,000 or 3.9% from the $33,574,000 reported for the same period
in 1998. For the nine months ended September 30, 1999, interest income totaled
$100,901,000, an increase of $1,722,000 or 1.7% from the $99,179,000 reported
for the same period in 1998. These increases are primarily attributable to
increases in earning asset volume. For the three and nine months ended September
30, 1999, average interest earning assets were up 7.4% and 7.7%, respectively,
compared with the same periods in 1998, with most of the growth coming in the
real estate and commercial loan categories. The increase in interest income
resulting from increases in earning asset volume was partially offset by a
reduction in average yield. For the nine months ended September 30, 1999, the
average yield on earning assets declined 37 basis points to 7.48% from 7.85% for
the same period last year.
Interest Expense
The Company's interest expense for the third quarter of 1999 decreased $6,000 to
$16,094,000 from $16,100,000 for the same period last year. For the nine months
ended September 30, 1999, interest expense decreased by $422,000, or 0.9%, to
$45,933,000 from $46,355,000 for the same period last year. The average cost of
interest bearing liabilities declined 26 basis points to 4.04% for the first
nine months of 1999 from 4.30% for the nine months ended September 30, 1998,
primarily as a result of reductions in rates paid on deposits and short-term
borrowed funds. Total average interest bearing liabilities increased by
$16,745,000 for the first nine months of 1999 compared to the same period in
1998, while non-interest bearing deposits increased by $49,343,000.
Net Interest Income
The net effect of the changes in interest income and interest expense for the
third quarter of 1999 was an increase of $1,314,000 or 7.5% in net interest
income as compared to the third quarter of 1998. For the nine months ended
September 30, 1999, net interest income increased $2,144,000 or 4.1% compared
with the same period last year. For the nine months ended September 30, 1999,
the net interest margin and net interest spread, on a fully taxable equivalent
basis, decreased 7 basis points and 11 basis points, respectively, from the same
period last year.
Provision for Possible Loan Losses
For the three months ended September 30, 1999, the provision for possible loan
losses was $900,000, compared to $448,000 for the same period last year. The
provision for possible loan losses was $2,775,000 for the nine months ended
September 30, 1999, as compared to $2,394,000 for the same period last year. The
amount of the loan loss provision and the level of the allowance for possible
loan losses are based upon a number of factors including Management's evaluation
of potential losses in the portfolio, after consideration of appraised
collateral values, financial condition and past credit history of the borrowers
as well as prevailing and anticipated economic conditions.
13
<PAGE>
Non-Interest Income
For the third quarter of 1999, compared to the third quarter of 1998, total
non-interest income decreased $1,067,000 or 18.2%, due primarily to declines of
$252,000 in trust income, $850,000 in net securities gains, and $163,000 in
other service charges, commission and fees.
For the nine months of 1999, compared to the same period last year, total
non-interest income decreased $345,000 or 2.1%. The decrease was due primarily
to declines of $269,000 in service charges on deposit accounts and $333,000 in
other service charges, commission and fees partially offset by an increase of
$178,000 in other income.
Non-Interest Expense
For the quarter ended September 30, 1999, non-interest expense decreased
$3,267,000 from the same period last year. Included in the third quarter of 1998
were non-recurring charges totaling $2,179,000, pre-tax, related to the Bank's
acquisition of SBSO. Excluding these charges, non-interest expense decreased by
$1,088,000 or 7.1% from 1998. Data processing expense declined by $317,000, or
16.1% as a result of reductions in fees charged by UFS and conversion to a new
operating system. UFS, a data processing joint venture, is 50% owned by the
Company. As described in Note 4, the Company has decided to terminate its joint
venture in UFS. See Note 4 for a discussion of the potential impact on future
results of operations. Salaries and benefits expense declined by $408,000 or
6.3% as a result of efficiencies realized in connection with the Raritan and
SBSO acquisitions. Amortization of intangible assets decreased by $32,000 or
10.1% during the third quarter of 1999 compared with 1998.
For the nine months ended September 30, 1999, non-interest expense increased
$12,111,000 from the same period last year. Included in the first nine months of
1999, were non-recurring charges related to the Raritan acquisition, the sale of
non-performing assets, the conversion to a new operating system as well as the
dissolution of the Bank's joint venture in UFS, totaling $17,258,000, pre-tax.
Included in the first nine months of 1998, were non-recurring charges related to
the SBSO acquisition totaling $2,179,000, pre tax. Excluding non-recurring
charges, non-interest expense decreased by $2,968,000 or 6.5% from 1998. Data
processing expense declined by $1,356,000, or 23.2%. Salaries and benefits
expense declined by $994,000 or 5.2%. Amortization of intangible assets
decreased by $207,000 or 17.6%. These reductions in non-interest expense for the
nine months ended September 30, 1999 compared to 1998 are attributable to the
same factors discussed above in the quarterly comparison.
Income Taxes
Income tax expense increased by $559,000 to $2,306,000 for the third quarter of
1999 as compared to $1,747,000 for the same period in 1998. For the nine months
ended September 30, 1999 income tax expense declined by $3,432,000. These
declines are attributable to reductions in taxable income primarily resulting
from non-recurring charges and increases in tax exempt income associated with
municipal securities and corporate owned life insurance policies.
Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. During the third quarter of 1999, the Company combined computer
systems of Raritan into the Company's computer system. It is impractical to
disclose the Raritan segment for prior periods into the other business segments
due to system limitations. Summary financial information on a fully taxable
equivalent basis for the lines of business is presented in Note 5.
14
<PAGE>
The Corporate segment accounted for a pre-tax income of $3,578,000 for the three
months ended September 30, 1999, up from a pre-tax loss of $448,000 for the same
period a year ago. The increase in net income before taxes is primarily
attributable to merger related charges pertaining to the Company's acquisition
of SBSO in the prior year period.
The Retail segment's contribution to net income before taxes increased to
$3,759,000 for the three months ended September 30, 1999, up from $1,574,000 for
the third quarter of 1998. This increase was primarily due to an improvement in
net interest income due to an increase in interest-earning assets coupled with a
decrease in non-interest expense. This was partially offset by an increase in
the loan loss provision.
The Commercial segment produced net income before taxes of $884,000 in the third
quarter of 1999, down from $1,706,000 for the same period in 1998. This decline
is primarily attributable to lower yields on earning asset in 1999 partially
offset by an increase in interest earning assets.
Investment segment produced net income before taxes of $1,024,000 for the third
quarter of 1999, compared to a pre-tax income of $1,034,000 in 1998 as a result
of increases in earning asset volume partially offset by lower yields on
interest earning assets and a decrease in net securities gains.
The Raritan segment for the third quarter of 1999 is combined among the other
business lines as a result of systems conversion during the current quarter.
Raritan's contribution to net income before taxes for the third quarter of 1998
was $1,694,000.
For the third quarter of 1999 compared with 1998, pre-tax net income from the
Trust division declined $237,000 due to an decrease in non-interest income.
For the nine months ended September 30, 1999, the Corporate segment accounted
for a pre-tax loss of $7,740,000, down from pre-tax income of $1,362,000 for the
same period a year ago. The decrease in net income before taxes is primarily
attributable to merger related charges totaling $9,940,000 in 1999, as well as
non-recurring charges pertaining to the Company's conversion to a new operating
system and the pending dissolution of UFS totaling $6,185,000.
The Retail segment's contribution to net income before taxes declined to
$4,431,000 for the nine months ended September 30, 1999, down from $5,609,000
for the first nine months of 1998. Contributing to this decline was the
reduction in yields on interest-earning assets coupled with an increase in the
loan loss provision and a decrease in non-interest income. Partially offsetting
these declines was the increase in interest-earning assets coupled with a
decline in non-interest expense.
The Commercial segment produced net income before taxes of $2,767,000 in the
first nine months of 1999, down from $4,956,000 for the same period in 1998.
This decline is attributable to lower earning asset yields and losses incurred
on the sale of non-performing assets in 1999. In addition, higher non-interest
expense contributed to the decline in net income before taxes.
Investment segment net income before taxes totaled $5,941,000 for the first nine
months of 1999, up from a pre-tax income of $2,928,000 in 1998 as a result of
increases in earning asset volume and an increase in net securities gains.
The Raritan segment's contribution to net income before taxes was $4,861,000 for
the nine months ended September 30, 1999. This amount represents Raritan's
contribution prior to conversion of Raritan's computer system during the third
quarter of 1999. The current quarter's results of Raritan have been combined
among the other business lines as a result of systems conversion. Raritan's
contribution to net income before taxes for the nine months of 1998 was
$4,568,000.
15
<PAGE>
Pre-tax net income from the Trust division fell $601,000 for the nine months
ended September 30, 1999 compared with the same period in 1998 due to an
increase in non-interest expense partially offset by an increase in non-interest
income.
FINANCIAL CONDITION
September 30, 1999 as compared to December 31, 1998:
Total assets increased $135,780,000, or 7.1% from December 31, 1998. Loans, net
of allowance, increased by $129,441,000 securities increased by $28,257,000,
cash and due from banks increased by $14,560,000, premises and equipment
increased $167,000, and other assets increased by $15,720,000. Conversely, there
were decreases of $50,100,000 in Federal funds sold, $1,840,000 in intangible
assets, $425,000 in other real estate owned.
Total loans at September 30, 1999 increased $128,284,000, or 12.1% to
$1,185,365,000 from year-end 1998. Commercial loans contributed $100,287,000 to
the first nine months of loan growth, an increase of 43.4% over December 31,
1998. Lease financing grew by $5,345,000 or 48.5% compared with December 31,
1998. Installment loans increased $2,485,000 or 1.2% from December 31, 1998 and
real estate loans increased by $20,479,000 or 3.3% compared with year-end 1998.
The following schedule presents the components of gross loans, by type, for each
period presented.
September 30, December 31,
(In Thousands) 1999 1998
---------- ----------
Commercial $ 331,418 $ 231,131
Real Estate 635,767 615,288
Lease Financing 16,367 11,022
Installment 208,756 206,271
---------- ----------
Total Loans Outstanding 1,192,308 1,063,712
Less: Unearned Income 6,943 6,631
---------- ----------
Loans, Net of Unearned Income $1,185,365 $1,057,081
========== ==========
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<PAGE>
Within the securities portfolio, the majority of the increase was due to
purchases of corporate debt securities and other securities. The amortized cost
and approximate market value of securities are summarized as follows:
September 30, 1999 December 31, 1998
------------------- -------------------
Amortized Market Amortized Market
Securities Available for Sale Cost Value Cost Value
--------- -------- --------- --------
(in thousands)
U.S. Treasury Securities $ 999 $ 1,001 $ 2,502 $ 2,514
Obligations of U.S. Government
Agencies and Corporations 107,724 101,375 66,872 66,933
Obligations of States and
Political Subdivisions 81,154 75,131 76,930 79,484
Mortgage-Backed Securities 403,587 384,677 388,564 391,123
Corporate Debt Securities 37,911 35,520 23,343 24,000
Other Securities 61,057 64,568 41,830 45,208
-------- -------- -------- --------
Total Securities Available For Sale 692,432 662,272 600,041 609,262
======== ======== ======== ========
Securities Held to Maturity
U.S. Treasury Securities 5,000 4,977 2,000 2,020
Obligations of U.S. Government
Agencies and Corporations 4,997 4,763 14,994 15,010
Obligations of States and
Political Subdivisions 24,162 23,860 22,141 22,445
Mortgage-Backed Securities 4,584 4,500 24,089 24,045
Other Securities 175 175 150 155
-------- -------- -------- --------
Total Securities Held to Maturity 38,918 38,275 63,374 63,675
-------- -------- -------- --------
Trading Securities 684 942 675 1,239
-------- -------- -------- --------
Total Securities $732,034 $701,489 $664,090 $674,176
======== ======== ======== ========
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<PAGE>
Total deposits increased $52,720,000 or 3.8%. Time deposits increased by
$69,511,000, while savings deposits decreased $4,904,000 and Demand deposits
decreased by $11,887,000. Short-term borrowings increased by $25,270,000 while
other borrowings increased by $81,491,000, as the Bank continued to utilize
Growth Strategies to increase the loan and investment portfolios. Management
continues to monitor the shift of deposits and level of borrowings through its
Asset/Liability Management Committee.
Asset Quality
During the first quarter of 1999, the Company sold non-performing assets having
a carrying value of $4,465,000, resulting in a one-time charge of $736,000, net
of tax. The following table provides an analysis of non-performing assets as of
September 30, 1999 and December 31, 1998, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
September 30, December 31, December 31, December 31, December 31,
(Dollars in Thousands) 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Assets $2,052,974 $1,917,194 $1,789,426 $1,550,129 $1,489,773
Total Loans (Net of Unearned
Income) $1,185,365 $1,057,081 $ 931,266 $ 898,788 $ 812,985
Allowance for Possible Loan
Losses $ 10,017 $ 11,174 $ 11,739 $ 11,874 $ 11,440
% of Total Loans 0.85% 1.06% 1.26% 1.32% 1.41%
Total Non-Performing Loans (1) $ 7,054 $ 8,612 $ 9,973 $ 13,018 $ 10,314
% of Total Assets 0.34% 0.45% 0.56% 0.84% 0.69%
% of Total Loans 0.60% 0.81% 1.07% 1.45% 1.27%
Allowance for Possible Loan
Losses
To Non-Performing Loans 142.00% 129.75% 117.71% 91.21% 110.92%
Total of Non-Performing Assets $ 7,138 $ 9,170 $ 11,650 $ 15,163 $ 13,609
% of Total Assets 0.35% 0.48% 0.65% 0.98% 0.91%
</TABLE>
(1) Non-performing loans consist of:
(a) impaired loans, which includes non-accrual and renegotiated loans, and
(b) loans which are contractually past due 90 days or more as to principal or
interest, but are still accruing interest at previously negotiated rates to
the extent that such loans are both well secured and in the process of
collection.
At September 30, 1999, there were $3,742,000 of loans that are considered to be
impaired under SFAS No. 114. There was one troubled debt restructuring of
$32,000, which is performing in accordance with the restructured agreement.
For the nine months ended September 30, 1999, the Company recognized no interest
income on impaired loans.
Allowance for Possible Loan Losses
The allowance is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries. At September 30, 1999, the allowance for
possible loan losses was $10,017,000, down $1,157,000 compared to $11,174,000 at
year-end 1998. Net charge-offs for the nine months ended September 30, 1999 were
$3,139,000. In addition, the allowance was reduced by $793,000 in connection
with the sale of non-performing loans during the first quarter of 1999.
18
<PAGE>
The level of the allowance for possible loan losses is based upon a number of
factors including Management's evaluation of potential losses in the portfolio,
after consideration of appraised collateral values, financial condition and past
credit history of the borrowers as well as prevailing and anticipated economic
conditions.
The allowance for possible loan losses declined from December 31, 1998 despite
overall growth in the loan portfolio, primarily as a result of management's
assessment of improvements in credit quality attributable to the sale of
$3,859,000 in non-performing loans. At September 30, 1999, the ratio of the
allowance for possible loan losses to non-performing loans was 142.00% as
compared to 129.75% at December 31, 1998. In the opinion of Management, the
allowance for possible loan losses at September 30, 1999 was adequate to absorb
possible future losses on existing loans and commitments based upon currently
available information.*
Liquidity Management
At September 30, 1999, the amount of liquid assets remained at a level
Management deemed adequate to ensure that contractual liabilities, depositors'
withdrawal requirements, and other operational and customer credit needs could
be satisfied.* This liquidity was maintained at the same time the Company was
managing the interest rate sensitivity of interest earning assets and interest
bearing liabilities so as to improve profitability.
At September 30, 1999, liquid investments, comprised of money market mutual fund
instruments, totaled $41,696,000. Additional liquidity is generated from
maturities and principal payments in the investment portfolio. Scheduled
maturities and anticipated principal payments of the investment portfolio will
approximate $136,000,000 throughout the next twelve months.* In addition, all or
part of the investment securities available for sale could be sold to provide
liquidity. These sources can be used to meet the funding needs during periods of
loan growth. Liquidity is also available through additional lines of credit and
the ability to incur additional debt. At September 30, 1999, the Company had
$620,586,000 of lines of credit under which $224,767,000 was available.
Capital
Total stockholders' equity decreased $26,821,000 during the current year to
$131,421,000 at September 30, 1999 from $158,242,000 at December 31, 1998. The
decrease during the nine-month period was due to three quarterly cash dividends
declared totaling $9,379,000 and a decrease of $25,812,000 (net of tax) in
September 30, 1999 market value of the Company's available for sale securities
portfolio from the evaluation at December 31, 1998. Partially offsetting these
decreases were the exercises of stock options of $1,777,000, restricted stock
activity of $199,000, and net income of $6,394,000.
19
<PAGE>
The following table reflects the Company's capital ratios, as of September 30,
1999 and December 31, 1998 in accordance with current regulatory guidelines.
(Dollars in Thousands) September 30, 1999 December 31, 1998
------------------ -----------------
Amount Ratio Amount Ratio
-------- ------- -------- -------
Risk-Based Capital
Tier I Capital
Actual $163,725 11.69% $163,304 13.53%
Regulatory Minimum Requirements 56,039 4.00 48,276 4.00
For Classification as Well Capitalized 84,059 6.00 72,414 6.00
Combined Tier I and Tier II Capital
Actual 173,742 12.40 174,139 14.43
Regulatory Minimum Requirements 112,078 8.00 96,552 8.00
For Classification as Well Capitalized 140,098 10.00 120,690 10.00
Leverage
Actual 163,725 8.10 163,304 8.51
Regulatory Minimum Requirements 80,858 4.00 76,777 4.00
For Classification as Well Capitalized 101,072 5.00 95,971 5.00
The Company's risk-based capital ratios (Tier I and Combined Tier I and Tier II
Capital) and Tier I leverage ratio continue to exceed the minimum requirements
set forth by the Company's regulators.
Year 2000 Issue
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past, many computer programs allocated
only two digits to a year, (i.e., 1998 was represented as 98). Given this
programming, the year 2000 could be confused with that of 1900. The Year 2000
issue not only impacts computer hardware and software, but all equipment that
utilizes processors or computer microchips.
Management has formed a Year 2000 Committee with members from all significant
areas of the Company, which has conducted a complete review of its operations to
identify systems, computer hardware, software applications, vendors and
customers that could be affected by the Year 2000 issue. The committee has
developed an implementation plan (the "Plan") to rectify any issues related to
processing of transactions in the Year 2000 and beyond. Progress versus the Plan
is subject to periodic examination by the Office of the Comptroller of the
Currency ("OCC") regulators. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
awareness, assessment, renovation, validation and implementation. These phases
are designed to enable the Company to identify risks, develop an action plan,
and perform adequate testing and complete certification that all systems will be
Year 2000 ready.
20
<PAGE>
As of June 30, 1999, the Company completed all five phases of the Plan, thereby
meeting all regulatory guidelines. The primary operating software systems for
the Company are obtained from and maintained by multiple external providers. The
Company maintains ongoing contact with these vendors who have provided written
assurances that where necessary, their software has been remediated and is now
Year 2000 compliant. As part of the validation phase, the Company tested these
systems for Year 2000 compliance.
The Company has also obtained certifications of Year 2000 compliance from
substantially all other vendors, while also defining contingencies for these
vendors. In the event the Company is unable to obtain such certifications, the
Company will either obtain Year 2000 compliant software, hardware and support
services, or utilize the respective contingency, as appropriate. Each of the
vendors, whose products or services are believed by management to be material to
the Company, has either provided written assurance that it is Year 2000
compliant or has provided written assurance that it expects to be Year 2000
compliant prior to the Year 2000. The Company believes that the risk associated
with the possibility of a processing failure being experienced by any of these
vendors is minimal. This assessment is based on a number of factors. Extensive
documentation has been provided throughout the progress of each vendor's Year
2000 project. Each vendor asserts that it completed its remediation efforts
prior to December 31, 1998. Each vendor asserts that it completed its internal
testing as of December 31, 1998, and the Company has been involved in extensive
user testing of each of these applications. In addition, the Company has
contacted all non-information technology suppliers (i.e., utility systems,
telephone systems and security systems) regarding their Year 2000 state of
readiness.
The Company is also working with its significant borrowers and depositors to
ensure they are taking appropriate steps to become Year 2000 compliant. The
Company has received information from 100% of significant borrowers and 89% of
significant depositors on the status of their Year 2000 readiness. There have
been no resulting downgrades of risk ratings in the loan portfolio. Early in
1997, the Loan Division of UNB commenced an initiative to familiarize the Bank's
borrowing customer base with the Year 2000 issue. The original action was to
discuss the issue with our borrowers and to identify where they were in
relationship to Year 2000 remediation. The next step was to include a synopsis
of each borrower's status in their Credit Assessment. An unsatisfactory response
would then affect overall risk rating assessment of the credit.
The Company, however, continues to bear some risk related to the Year 2000 issue
and could be adversely affected if other entities (e.g., vendors) do not
appropriately address their own compliance issues. If an external provider's
software is determined to have potential problems which it is not able to
resolve in time, the Company would likely experience significant processing
delays, mistakes or failures. These delays, mistakes or failures could have a
significant adverse impact on the financial statements of the Company. In
addition, if any of the Bank's borrowers' experiences significant problems due
to Year 2000 issues, the credit risk inherent in loans to such borrowers would
increase.
The Company continues to evaluate the estimated costs associated with attaining
Year 2000 readiness. Additional costs, such as testing, software purchases and
marketing, are not anticipated to be material to the Company in any one year*.
The Company has incurred costs of approximately $550,000 to date related to Year
2000 readiness. The Company does not anticipate any significant costs to be
incurred during the fourth quarter for Year 2000 readiness. 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
21
<PAGE>
as outlined in the remediation contingency plan. In addition, the
Company also has a comprehensive business resumption plan to facilitate timely
restoration of services in the event of business disruption. The Company's
remediation contingency plan and business resumption plan will be reviewed and
updated as needed throughout 1999. The Company has prepared a contingency plan
for all other hardware, software and vendors.
22
<PAGE>
Item 3 - MARKET RISK - ASSET/LIABILITY MANAGEMENT.
The primary market risk faced by the Company is interest rate risk. The
Company's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest income in alternative interest rate scenarios. Management
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a 200 basis
point change in rates during the first year, in even monthly increments, with
rates held constant in the second year. The Company's ALCO has established that
interest income sensitivity will be considered acceptable if net interest income
in the above interest rate scenario is within 10% of net interest income in the
flat rate scenario in the first year and within 20% over the two-year time
frame. At September 30, 1999, the Company's income simulation model indicates an
acceptable level of interest rate risk, with no significant change from December
31, 1998.*
Management also monitors interest rate risk by utilizing a market value of
equity model. The model computes estimated changes in net portfolio value
("NPV") of its cash flows from the Company's assets and liabilities in the event
of a change in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities. This analysis assesses the risk of gain or loss in market
risk sensitive instruments in the event of an immediate and sustained 200 basis
point increase or decrease in market interest rates. The Company's ALCO policy
indicates that the level of interest rate risk is acceptable if the immediate
200 basis point change in interest rates would not result in the loss of more
than 25% from the base market value of equity. At September 30, 1999, the market
value of equity indicates an acceptable level of interest rate risk, with no
significant change since December 31, 1998.*
Computation of prospective effects of hypothetical interest rates changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and duration of deposits, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the ALCO could undertake in response to changes in interest rates.
23
<PAGE>
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(a) Certificate of Incorporation of the Company as in effect on
the date of this filing. (Incorporated by reference in the
Company's Report on Form 10-Q for the quarter ended June 30,
1997 filed with the Securities and Exchange Commission.)
(3)(b) By-laws of the Company (Incorporated by reference in the
Company's Report on Form 10-K for the year ended December 31,
1994 filed with the Securities and Exchange Commission.)
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATIONAL BANCORP
(Registrant)
Dated: November 15, 1999 By: THOMAS C. GREGOR
Thomas C. Gregor, Chairman
President and CEO
Dated: November 15, 1999 By: A. RICHARD ABRAHAMIAN
A. Richard Abrahamian
Senior Vice President & Chief
Accounting Officer of United National Bank
(Principal Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This Schedule contains summary financial information extracted from SEC Form
10-Q and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000831959
<NAME> United National Bancorp
<MULTIPLIER> 1,000
<CURRENCY> US Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1.0
<CASH> 67,427
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 942
<INVESTMENTS-HELD-FOR-SALE> 662,272
<INVESTMENTS-CARRYING> 38,918
<INVESTMENTS-MARKET> 38,275
<LOANS> 1,185,365
<ALLOWANCE> 10,017
<TOTAL-ASSETS> 2,052,974
<DEPOSITS> 1,456,133
<SHORT-TERM> 179,905
<LIABILITIES-OTHER> 29,082
<LONG-TERM> 236,433
0
0
<COMMON> 20,182
<OTHER-SE> 111,239
<TOTAL-LIABILITIES-AND-EQUITY> 2,052,974
<INTEREST-LOAN> 67,950
<INTEREST-INVEST> 32,525
<INTEREST-OTHER> 426
<INTEREST-TOTAL> 100,901
<INTEREST-DEPOSIT> 31,514
<INTEREST-EXPENSE> 45,933
<INTEREST-INCOME-NET> 54,968
<LOAN-LOSSES> 2,775
<SECURITIES-GAINS> 1,118
<EXPENSE-OTHER> 59,831
<INCOME-PRETAX> 8,659
<INCOME-PRE-EXTRAORDINARY> 8,659
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,394
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.39
<YIELD-ACTUAL> 4.15
<LOANS-NON> 3,742
<LOANS-PAST> 3,280
<LOANS-TROUBLED> 32
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,174
<CHARGE-OFFS> 3,871
<RECOVERIES> 732
<ALLOWANCE-CLOSE> 10,017
<ALLOWANCE-DOMESTIC> 10,017
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
