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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-16931
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UNITED NATIONAL BANCORP
(Exact name of Registrant as specified in its Charter)
New Jersey 22-2894827
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1130 Route 22 East
Bridgewater, New Jersey 08807
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(Address of principal executive offices) (ZIP CODE)
(908) 429-2200
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(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, 2000 amounted to $271,359,075.
The number of shares of Registrant's Common Stock, $1.25 par value, outstanding
as of March 1, 2000 was 15,537,711.
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Documents Incorporated by Reference
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Part(s) Into
Documents Which Incorporated
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United's Annual Report to Shareholders
for the year ended December 31, 1999
("United's 1999 Annual Report"),
Financial Review section pages 2 through 36. Part I, Part II
United's Proxy Statement to be used in
connection with the Annual Meeting of
Shareholders which is anticipated to be
held on April 18, 2000 ("United's Proxy
Statement for its 2000 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 1999 Annual Report and United's Proxy Statement for its 2000 Annual
Meeting are not deemed to be part of this report.
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PART I
ITEM 1 - BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
United National Bancorp ("United", "Registrant" or the "Company") is a bank
holding company registered with the Board of Governors of the Federal Reserve
System (the "FRB") 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, 1999, United had consolidated assets of approximately $2.1
billion, deposits of $1.5 billion and stockholders' equity of $118.5 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 Essex County, two branches in Morris
County, twelve branches in Somerset County, six branches in Union County and
four branches in Warren County, New Jersey. The Bank also operates 40 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 February 28, 1997, the Bank acquired all of the outstanding shares 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.
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.
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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, not adjusted for
subsequent stock dividends and splits. At December 31, 1998, Raritan had
approximately $432 million in assets. The acquisition was accounted for as a
pooling-of-interests.
(b) INDUSTRY SEGMENTS
During 1999, the Company completed its acquisition of Raritan, merging its
operations into that of the Company's. Raritan's operations were previously
reported as a separate operating segment of the Company. The Company completed
the conversion of its own data processing operations to an independent
third-party provider and did not produce any meaningful segment reporting
information during 1999.
Based on the above, no segment reporting information is provided as such
information was not deemed meaningful.
(c) NARRATIVE DESCRIPTION OF BUSINESS
Personal Banking Services
The Bank, through its 35 branch network and 40 MAC installations, provides both
retail and commercial services. Among the services provided at the branch
locations are: checking accounts, money market accounts, 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, 1999.
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.
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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, 1999, approximately $234.4 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 FRB. The Company is required to
file reports with the FRB and provide such additional information as the FRB may
require.
The Company is required to obtain the approval of the FRB 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 FRB,
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 FRB 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. States have authority to opt out of the legislation subject
to certain conditions. In addition, the Interstate Banking Act permits de novo
branching across state lines but only with respect to states which affirmatively
adopt legislation authorizing de novo interstate branching.
New Jersey has enacted legislation to opt-in with respect to 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 FRB, 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.
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Under the FRB'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,
1999, the portion of the Bank's deposit base assessed at the SAIF rate was
approximately $95.7 million, or 6.5% of the Bank deposits.
The Economic Growth and Regulatory Reduction Act of 1996 (the "1996 Act")
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. Under the Funds Act, the FDIC 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.
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If, in the opinion of the Comptroller, a bank under its jurisdiction is engaged
in or is about to engage in an unsafe or unsound practice (which, depending on
the financial condition of the bank, could include the payment of dividends),
the Comptroller may require, after notice and hearing, that such bank cease and
desist from such practice or, as a result of an unrelated practice, require the
bank to limit dividends in the future. The FRB has similar authority with
respect to bank holding companies. In addition, the FRB 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 8, "Note 13 - Capital Requirements" on page 27, and "Cash
Dividend Restrictions" on page 35 of United's 1999 Financial Review section of
the Annual Report.
Capital Requirements
The FRB 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, 1999, the Company had Tier 1 capital as a percentage of
risk-weighted assets of 10.93% and total risk-based capital as a percentage of
risk-weighted assets of 11.65%.
In addition, the FRB 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, 1999, the Company had a Leverage Ratio of 7.46%.
The Bank is subject to the FDIC's Statement of Policy on Risk-Based Capital, the
requirements of which are substantially identical to the FRB's risk-based
capital framework. As of December 31, 1999, the Bank had Tier 1 capital as a
percentage of risk-weighted assets of 10.16% and a total risk-based capital
ratio of 10.88%.
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, 1999, the
Bank had a Leverage Ratio of 6.95%.
The FRB 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 FRB 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.
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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.
Recent Legislation
On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial
Modernization Act of 1999 into law. The Modernization Act will:
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allow bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in a substantially broader range of
nonbanking activities than currently is permissible, including insurance
underwriting and making merchant banking investments in commercial and
financial companies; if a bank holding company elects to become a financial
holding company, it files a certification, effective in 30 days, and
thereafter may engage in certain financial activities without further
approvals;
allow insurers and other financial services companies to acquire banks;
remove various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
establish the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
This part of the Modernization Act will become effective on March 13, 2000.
On January 19, 2000, the FRB adopted an interim rule allowing bank holding
companies to submit certifications by February 15 to become financial holding
companies on March 13, 2000. The FRB also provided regulations on procedures
which would be used against financial holding companies which have depository
institutions which fall out of compliance with the management or capital
criteria. Only financial holding companies can own insurance companies and
engage in merchant banking.
On January 14, 2000, the OCC proposed rules to allow national banks to form
subsidiaries to engage in financial activities allowed for financial holding
companies. Electing national banks must meet the same management and capital
standards as financial holding companies but may not engage in insurance
underwriting, real estate development or merchant banking. Section 23A and 23B
of the Federal Reserve Act will apply to financial subsidiaries and the capital
invested by a bank in its financial subsidiaries will be eliminated from the
bank's capital in measuring all capital ratios. These rules may be used by
national banks effective March 13, 2000.
The Modernization Act also modifies other current financial laws, including laws
related to financial privacy and community reinvestment.
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 FRB. The monetary policies of
the FRB have had a significant effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future. Because
of the changing conditions in the national and international economy and in the
money markets, as a result of actions by monetary and fiscal authorities,
interest rates, credit availability and deposit levels may change due to
circumstances beyond the control of the Company and the Bank.
From time to time, various proposals are made in the United States Congress and
the New Jersey Legislature and before various bank regulatory authorities which
would alter the powers of, and restrictions on, different types of banking
companies and other financial institutions. It is impossible to predict whether
any of the
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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, 1999, there were 565 full-time equivalent persons employed by
the Company and the Bank.
(e)(1) STATISTICAL INFORMATION - CONSOLIDATED
The following are the statistical disclosures, on a consolidated basis, 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 1999 Annual Report, incorporated herein by reference as Exhibit 13.
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST RATES AND
INTEREST DIFFERENTIAL
The following table reflects the components of net interest income, setting
forth, for the three years presented, (1) average assets, liabilities and
stockholders' equity, (2) interest earned on earning assets and interest paid on
interest-bearing liabilities, (3) average rates earned on earning assets and
average rates paid on interest-bearing liabilities, (4) net interest spread
(i.e., the difference between the average rate earned on earning assets and the
average rate paid on interest-bearing liabilities and (5) the net interest
margin (i.e., net interest income divided by average earning assets). Dollar
amounts are presented on a tax-equivalent basis assuming a tax rate of 35%, 34%
and 34%, in 1999, 1998 and 1997, respectively. Average balances have been
derived from daily balances.
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1999 1998 1997
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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
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Assets:
Interest-earning Assets:
Securities: (1)
Taxable $ 600,245 $ 38,787 6.46% $609,159 $ 39,564 6.49% $ 512,994 $ 34,340 6.69%
Non-Taxable 120,128 8,720 7.26 79,919 5,915 7.40 60,556 4,624 7.64
Trading Account Securities 1,142 35 3.06 3,617 26 0.72 3,392 18 0.53
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Total Securities 721,515 47,542 6.59 692,695 45,505 6.57 576,942 38,982 6.76
-------------------------------------------------------------------------------------------------
Federal Funds Sold 9,385 440 4.69 55,120 2,676 4.85 41,529 2,285 5.50
Federal Home Loan Bank Deposits 33 1 3.03 2,804 153 5.46 1,460 81 5.55
Loans (Net of Unearned
Income)(2)
Commercial 287,647 24,540 8.53 202,707 18,710 9.23 178,268 17,076 9.58
Commercial-Tax Exempt 1,155 120 10.39 1,282 135 10.53 1,401 139 9.92
Real Estate 633,514 48,863 7.71 586,219 47,870 8.17 489,808 40,837 8.34
Credit Card 39,294 6,911 17.59 34,896 6,579 18.85 32,600 6,317 19.38
Installment 160,902 12,232 7.60 139,063 11,640 8.37 186,308 15,945 8.56
Lease Financing 14,396 1,373 9.54 10,406 1,034 9.94 9,731 910 9.35
Impaired Loans 1,172 - - 5,299 103 1.94 7,975 465 5.83
-------------------------------------------------------------------------------------------------
Total Loans 1,138,080 94,039 8.26 979,872 86,071 8.78 906,091 81,689 9.02
-------------------------------------------------------------------------------------------------
Total Interest-earning Assets 1,869,013 142,022 7.60 1,730,491 134,405 7.77 1,526,022 123,037 8.06
-------------------------------------------------------------------------------------------------
Non-Interest-earning Assets 134,357 142,899 119,109
------------- ------------- ------------
Total Assets $2,003,370 $1,873,390 $1,645,131
============= ============= ============
Liabilities and Stockholders'
Interest-bearing Liabilities:
Savings Deposits $553,614 $11,097 2.00 $559,241 12,341 2.21 $ 522,454 12,191 2.33
Time Deposits 650,791 32,407 4.98 606,634 34,214 5.64 620,165 33,292 5.37
-------------------------------------------------------------------------------------------------
Total Savings and Time
Deposits 1,204,405 43,504 3.61 1,165,875 46,555 3.99 1,142,619 45,483 3.98
Short-Term Borrowings 160,381 8,668 5.40 111,180 5,522 4.97 77,118 4,357 5.65
Other Borrowings 195,344 11,838 6.06 144,559 9,850 6.81 52,448 3,625 6.91
-------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities 1,560,130 64,010 4.10 1,421,614 61,927 4.36 1,272,185 53,465 4.20
-------------------------------------------------------------------------------------------------
Non-Interest-bearing Liabilities:
Demand Deposits and Non-Interest
Bearing Savings 253,038 254,565 200,462
Other Liabilities 25,572 22,411 18,336
------------- ------------- ------------
Total Non-Interest
Bearing Liabilities 278,610 276,976 218,798
------------- ------------- ------------
Trust Capital Securities 20,000 20,000 16,156
------------- ------------- ------------
Stockholders' Equity 144,630 154,800 137,992
------------- ------------- ------------
Total Liabilities and
Stockholders' Equity $2,003,370 $1,873,390 $1,645,131
============= ============= ============
Net Interest Income
(Tax-Equivalent Basis) 78,012 72,478 69,572
Tax-Equivalent Adjustment (3,094) (2,056) (1,622)
----------- ------------ ------------
Net Interest Income $74,918 $70,422 $67,950
=========== ============ ============
Interest Rate Spread 3.50% 3.41% 3.86%
========== ========= =========
Net Interest Margin 4.17 4.19 4.56
========== ========= =========
Ratio of average interest-earning
assets to average
interest-bearing liabilities 1.20x 1.22x 1.20x
========== ========= =========
</TABLE>
(1) Securities are stated 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.
11
<PAGE>
ANALYSIS OF CHANGES IN NET INTEREST INCOME (TAX-EQUIVALENT BASIS)
The following table sets forth for the periods indicated a summary of the
changes in interest earned and interest paid resulting from changes in volume
and changes in rates:
<TABLE>
<CAPTION>
1999 Compared with 1998 1998 Compared with 1997
-----------------------------------------------------------------------------
Total Increase(Decrease) Increase(Decrease)
--------------------- ---------------------
Increase Due to Change in: Total Due to Change in:
--------------------- ---------------------
(In Thousands) (Decrease) Volume Rate Increase Volume Rate
- ---------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Total Loans $ 7,968 $13,294 $(5,326) $ 4,382 $ 6,522 $(2,140)
Taxable (777) (546) (231) 5,224 6,272 (1,048)
Non Taxable 2,805 2,921 (116) 1,291 1,437 (146)
Trading Account Securities 9 (28) 37 8 1 7
Other Interest-Earning Assets (2,388) (2,276) (112) 463 752 (289)
- -----------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 7,617 13,365 (5,748) 11,368 14,984 (3,616)
- -----------------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Deposits (1,244) (123) (1,121) 150 832 (682)
Time Deposits (1,807) 2,378 (4,185) 922 (737) 1,659
Short-Term Borrowings 3,146 2,623 523 1,165 1,742 (577)
Other Borrowings 1,988 3,170 (1,182) 6,225 6,277 (52)
- -----------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 2,083 8,048 (5,965) 8,462 8,114 348
- -----------------------------------------------------------------------------------------------------------------------
Net Interest Income $ 5,534 $5,317 $ 217 $ 2,906 $ 6,870 $(3,964)
=======================================================================================================================
</TABLE>
The change in interest due to both volume and rate has been allocated
proportionally to both, based on their relative absolute values.
12
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the amortized cost of securities held to maturity
at year-end 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
(In Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ 5,000 $ 2,000 $ 990
Obligations of U.S. Government
Agencies and Corporations 4,997 14,994 27,953
Obligations of States and Political Subdivisions 25,515 22,141 11,712
Mortgage-Backed Securities 2,221 24,089 45,835
Securities Issued by Foreign Governments 175 150 125
- ------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $37,908 $63,374 $86,615
==================================================================================================================
</TABLE>
The following table sets forth the market value of securities available for sale
at year-end 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
(In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Debt Securities:
U.S. Treasury Securities $ -- $ 2,514 $ 22,179
Obligations of U.S. Government
Agencies and Corporations 88,683 66,933 93,831
Obligations of States and Political Subdivisions 75,223 79,484 57,634
Mortgage-Backed Securities 370,794 391,123 349,913
Corporate Debt Securities 44,021 24,000 13,920
- ---------------------------------------------------------------------------------------------------------------------
Total Debt Securities 578,721 564,054 537,477
- ---------------------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 32,297 31,358 53,555
Federal Reserve Bank and Federal
Home Loan Bank Stock 20,643 13,850 11,333
- ---------------------------------------------------------------------------------------------------------------------
Total Equity Securities 52,940 45,208 64,888
- ---------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $631,661 $609,262 $602,365
=====================================================================================================================
</TABLE>
13
<PAGE>
The contractual maturity distribution and weighted average yields (calculated on
the basis of the stated yields to maturity, considering applicable premium or
discount), on a tax-equivalent basis (assuming a 35% Federal income tax rate),
of the Company's securities held to maturity and securities available for sale
portfolios at December 31, 1999, excluding equity securities, were as follows:
MATURITIES AND WEIGHTED AVERAGE YIELDS
<TABLE>
<CAPTION>
After 1 Year After 5 Years
Within but Within but Within After
(Dollars in Thousands) 1 Year 5 Years 10 Years 10 Years Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
U.S. Treasury Securities:
Amortized Cost $ 2,000 $3,000 $ - $ - $5,000
Weighted Average Yield 5.41 % 5.00 % - % - % 5.17 %
Obligation of U.S. Government
Agencies and Corporations:
Amortized Cost - - - 4,997 4,997
Weighted Average Yield - % - % - % 7.01 % 7.01 %
Obligation of States and
Political Subdivisions:
Amortized Cost 8,259 3,540 6,874 6,842 25,515
Weighted Average Yield 3.61 % 4.54 % 4.71 % 5.89 % 4.64 %
Mortgage-Backed Securities:
Amortized Cost - - - 2,221 2,221
Weighted Average Yield - % - % - % 7.20 % 7.20 %
Securities Issued by
Foreign Governments:
Amortized Cost - 75 100 - 175
Weighted Average Yield - % 6.33 % 7.23 % - % 6.84 %
- ----------------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity:
Amortized Cost $10,259 $6,615 $6,974 $ 14,060 $ 37,908
Weighted Average Yield 3.96 % 4.77 % 4.75 % 6.49 % 6.68 %
==============================================================================================================================
SECURITIES AVAILABLE FOR SALE
Obligations of U.S. Government
Agencies and Corporations:
Amortized Cost $56,568 $26,251 $ 9,946 $ 4,973 $ 97,738
Weighted Average Yield 6.29 % 6.43 % 6.08 % 6.31 % 6.31 %
Obligations of States and
Political Subdivisions:
Amortized Cost 200 4,738 68,218 7,364 80,520
Weighted Average Yield 6.25 % 4.63 % 4.66 % 4.77 % 4.67 %
Mortgage-Backed Securities:
Amortized Cost 13,850 72,246 209,256 102,754 398,106
Weighted Average Yield 8.00 % 6.79 % 6.73 % 6.65 % 6.77 %
Corporate Debt Securities:
Amortized Cost - 5,500 38,408 4,000 47,908
Weighted Average Yield - % 9.57 % 9.15 % 8.57 % 9.15 %
- ------------------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale:
Amortized Cost $70,618 $108,735 $325,828 $119,091 $624,272
Weighted Average Yield 6.63 % 6.75 % 6.57 % 6.59 % 6.61 %
==============================================================================================================================
</TABLE>
14
<PAGE>
LOAN PORTFOLIO
Types of Loans
The following schedule presents the components of gross loans, by type, as of
December 31, for each of the last five years.
<TABLE>
<CAPTION>
(In Thousands) 1999 % 1998 % 1997 % 1996 % 1995 %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $233,956 18.39 $218,929 20.58 $145,100 15.39 $180,876 19.66 $145,690 17.37
Real Estate(1) 776,325 61.02 652,239 61.32 593,924 62.97 485,858 52.80 430,655 51.36
Lease Financing 18,462 1.45 11,022 1.04 11,852 1.26 9,248 1.01 8,144 0.97
Installment 243,493 19.14 181,522 17.06 192,167 20.38 244,157 26.53 254,049 30.30
-------------------------------------------------------------------------------------------------------
Total Loans Outstanding 1,272,236 100.0 1,063,712 100.00 943,043 100.00 920,139 100.00 838,538 100.00
Less: Unearned Income
On Loans 10,893 6,631 11,777 21,351 22,553
-------------------------------------------------------------------------------------------------------
Loans, Net of Unearned
Income $1,261,343 $1,057,081 $931,266 $898,788 $815,985
=======================================================================================================
</TABLE>
(1) Includes mortgage loans held for sale amounting to $23,807,000 and $128,000
as of December 31, 1999 and 1998, respectively.
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,
1999, and segregates loans with fixed interest rates from those with floating or
variable interest rates.
<TABLE>
<CAPTION>
Maturing
-------------------------------------------------------------------
After One
Within But Within After
(In Thousands) One Year Five Years Five Years Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $142,383 $60,104 $31,469 $233,956
Real Estate-Construction 22,023 18,051 1,472 41,546
Real Estate-Commercial 11,061 43,897 121,552 176,510
- ----------------------------------------------------------------------------------------------------------------------
$175,467 $122,052 $154,493 $452,012
======================================================================================================================
Amount of Loans Based Upon:
Fixed Interest Rates $58,517 $107,712
Variable Interest Rates 63,535 46,781
- ----------------------------------------------------------------------------------------------------------------------
$122,052 $154,493
======================================================================================================================
</TABLE>
15
<PAGE>
Non-Accrual, Past Due and Restructured Loans
- ---------------------------------------------
The following table provides an analysis of non-performing assets as of December
31, for each of the last five years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-Accrual Loans (1):
Commercial and Industrial $ 490 $ 754 $ 190 $ 663 $ 809
Loans Secured by Real Estate 3,493 6,029 7,015 9,440 7,344
Lease Financing -- -- -- -- --
Loans to Individuals for
Household, Family and Other
Personal Expenditure 399 498 350 354 483
- ------------------------------------------------------------------------------------------------------------------
Total Non-Accrual Loans 4,382 7,281 7,555 10,457 8,636
- ------------------------------------------------------------------------------------------------------------------
Loans Past Due 90 Days or More (2):
Commercial and Industrial 1,273 -- -- 7 61
Loans Secured by Real Estate 2,196 986 1,619 1,210 681
Lease Financing -- -- 169 -- --
Loans to Individuals for
Household, Family and Other
Personal Expenditures 263 303 577 1,277 936
- ------------------------------------------------------------------------------------------------------------------
Total Loans Past Due
90 Days or More 3,732 1,289 2,365 2,494 1,678
- ------------------------------------------------------------------------------------------------------------------
Troubled Debt Restructured 28 42 53 67 --
- ------------------------------------------------------------------------------------------------------------------
Total Non-Performing Loans 8,142 8,612 9,973 13,018 10,314
Other Real Estate Owned (3) 56 507 1,503 1,967 3,072
Other Assets Owned (4) 53 51 174 178 223
- ------------------------------------------------------------------------------------------------------------------
Total Non-Performing Assets $8,251 $9,170 $11,650 $15,163 $13,609
==================================================================================================================
Non-Performing Loans as a
Percentage of Loans (year-end) 0.65% 0.81% 1.07% 1.45% 1.27%
==================================================================================================================
Non-Performing Loans as
Percentage of Total Assets (year-end) 0.39% 0.45% 0.56% 0.84% 0.69%
==================================================================================================================
Non-Performing Assets as
A Percentage of Loans, Other
Real Estate Owned and Other
Assets Owned (year-end) 0.65% 0.87% 1.25% 1.68% 1.67%
==================================================================================================================
Non-Performing Assets as
A Percentage of Total Assets (year-end) 0.39% 0.48% 0.65% 0.98% 0.91%
==================================================================================================================
</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.
16
<PAGE>
Potential Problem Loans
- ------------------------
At December 31, 1999, the Company had no material loans where payments were
presently current or less than 90 days past due, yet the borrowers were known to
the Company to be experiencing severe financial difficulties. Management
continues to review and evaluate all loans on an ongoing basis so that potential
problems can be addressed immediately.
SUMMARY OF LOAN LOSS EXPERIENCE
The following table provides an analysis of the allowance for possible loan
losses for each of the five years ending December 31:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans, Net of Unearned
Income--December 31, $1,261,343 $1,057,081 $931,266 $898,788 $812,985
==================================================================================================================
Average Loans Outstanding $1,138,080 $ 979,872 $906,091 $837,704 $771,543
==================================================================================================================
Allowance for Possible Loan
Losses--January 1, $ 11,174 $ 11,739 $ 11,874 $ 11,440 $ 13,876
Loans Charged Off:
Commercial (1,291) (251) (101) -- (417)
Real Estate (54) (1,466) (750) (409) (872)
Lease Financing -- (28) -- -- --
Installment (3,442) (3,489) (4,700) (3,711) (3,324)
- ------------------------------------------------------------------------------------------------------------------
Total Loans Charged Off (4,787) (5,234) (5,551) (4,120) (4,613)
- ------------------------------------------------------------------------------------------------------------------
Recoveries of Loans:
Commercial 74 9 105 95 233
Real Estate 48 306 164 30 29
Lease Financing -- -- -- -- --
Installment 845 910 715 435 517
- ------------------------------------------------------------------------------------------------------------------
Total Recoveries 967 1,225 984 560 779
- ------------------------------------------------------------------------------------------------------------------
Net Loans Charged Off (3,820) (4,009) (4,567) (3,560) (3,834)
Reduction Related to Loan Sale (793) -- -- -- --
Provision for Possible
Loan Losses 3,825 3,444 4,432 3,691 1,398
Acquisition -- -- -- 303 --
- ------------------------------------------------------------------------------------------------------------------
Allowance for Possible Loan
Losses--December 31, $ 10,386 $ 11,174 $ 11,739 $ 11,874 $ 11,440
==================================================================================================================
Allowance for Possible Loan
Losses to Non-Performing
Loans--December 31, 127.56% 129.75% 117.71% 91.21% 110.92%
==================================================================================================================
Allowance for Possible Loan
Losses to Total Loans
Outstanding--December 31, 0.82% 1.06% 1.26% 1.32% 1.41%
==================================================================================================================
Net loans Charged Off to
Average Loans Outstanding 0.34% 0.41% 0.50% 0.42% 0.50%
==================================================================================================================
</TABLE>
17
<PAGE>
Allocation of the Allowance for Possible Loan Losses
The accompanying table sets forth the allocation of the allowance for possible
loan losses (the "Allowance") by category of loans and the percentage of loans
in each category to total loans at December 31 for each of the past five years.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------------------------------
(Dollars in
Thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
% of % of % of % of % of
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
of To Total Of to Total of to Total of to Total Of to Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 3,432 18% $ 2,198 21% $ 2,370 16% $ 2,912 20% $ 3,235 18%
Real Estate 1,888 61 5,062 61 5,115 63 4,651 53 3,222 51
Lease Financing 314 2 152 1 136 1 93 1 84 1
Installment 4,605 19 3,715 17 3,851 20 3,975 26 4,743 30
Unallocated 147 - 47 - 267 - 243 - 156 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total $10,386 100% $11,174 100% $11,739 100% $11,874 100% $11,440 100%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</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 1999. During the year ended December 31, 1999,
loan quality has exhibited strong improvement throughout the entire loan
portfolio, with reductions in criticized and classified loans, reductions
18
<PAGE>
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
the Bank's mortgage underwriting criteria, Management believes that 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 believes 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, 1999 allowance
level of $10,386,000 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 2.14x projected net charge-offs.
DEPOSITS
The following table reflects the average balances and average rates paid on
deposits for each of the past three years.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ----------------------- -----------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand and Non-Interest
Bearing Savings $ 253,038 -% $ 254,565 -% $ 200,462 -%
- ----------------------------------------------------------------------------------------------------------------------------
Interest-bearing
Transaction Accounts 228,134 1.88 143,600 1.69 139,274 1.67
Other Savings 325,480 2.09 415,641 2.26 383,180 2.57
Time 650,791 4.98 606,634 5.64 620,165 5.37
- ----------------------------------------------------------------------------------------------------------------------------
Total Savings and Time 1,204,405 3.61 1,165,875 3.99 1,142,619 3.98
- ----------------------------------------------------------------------------------------------------------------------------
Total Deposits $1,457,443 2.98% $1,420,440 3.28% $1,343,081 3.39%
============================================================================================================================
</TABLE>
The following table sets forth a summary of the maturities of time certificates
of deposit $100,000 and over at December 31, 1999.
<TABLE>
<CAPTION>
(In Thousands)
- --------------------------------------------------------------
<S> <C>
Three Months or Less $102,928
Over Three Through Six Months 42,138
Over Six Through Twelve Months 13,770
Over Twelve Months 12,032
- --------------------------------------------------------------
Total $170,868
==============================================================
</TABLE>
19
<PAGE>
RETURN ON EQUITY AND ASSETS
United's 1999 Annual Report, Financial Review section, contains on page 13,
"Selected Consolidated Financial Data," the information required by this Item
and that information is incorporated herein by reference.
SHORT-TERM BORROWINGS
The following table sets forth certain information regarding the Company's
short-term borrowed funds at or for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $ 36,347 $15,385
Weighted Average Interest Rate 5.65% 5.64%
Highest Month-End Balance $ 54,475 $81,864
- -------------------------------------------------------------------------------------------------------------------
Borrowed Funds:
Average Balance Outstanding $ 79,278 $71,775
Weighted Average Interest Rate 5.91% 4.65%
Highest Month-End Balance $128,117 $78,491
- -------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank Advances:
Average Balance Outstanding $ 36,178 $20,669
Weighted Average Interest Rate 4.13% 5.60%
Highest Month-End Balance $ 71,000 $60,048
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
(f) EXECUTIVE OFFICERS OF THE REGISTRANT
The following persons are executive officers of the Company or the Bank who do
not also serve as directors.
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER PRINCIPAL OCCUPATION OR EMPLOYMENT
NAME AGE SINCE FOR THE PAST FIVE YEARS
- ---------------------------- --- --------- ----------------------------------------------
<S> <C> <C> <C>
Warren R. Gerleit* 52 1992 Executive Vice President-Lending and Branch
Administration since September 10, 1996;
Executive Vice President-Lending of the Bank
since December 20, 1994.
Donald W. Malwitz 56 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. 57 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.
A. Richard Abrahamian 40 1992 Senior Vice President and Chief Accounting
Officer of the Bank.
John J. Cannon 55 1995 Senior Vice President and Senior Trust Officer of
the Bank since December 21, 1995; Vice
President and Trust Officer since July 11, 1994;
Joanne F. Herb 49 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.
</TABLE>
*Effective January 1, 2000, Mr. Gerleit was named President and Chief Operating
Officer of United National Bank and was appointed to the Board of Directors of
United National Bank.
21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Raymond C. Kenwell* 48 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. 46 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 45 1996 Senior Vice President and Director of Marketing since
September 10, 1996; Vice President and
Marketing Manager 1993-1996.
Richard G. Tappen 49 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.
</TABLE>
*Effective January 1, 2000, Mr. Kenwell was named Executive Vice President,
Consumer and Commercial Lending.
22
<PAGE>
ITEM 2 - PROPERTIES
The corporate headquarters of United is located in a three-story facility in
Bridgewater, New Jersey. The building, which is leased, is approximately 65,000
square feet and houses the executive offices of the Company, the Bank, and a
branch office of the Bank. The Bank occupies 34 additional branch offices, of
which 16 are owned and 18 are leased.
United's 1999 Annual Report Financial Review section contains information on
page 25, Note 8; page 26, Note 11 and page 32, Note 17 that is incorporated
herein by reference.
ITEM 3 - LEGAL PROCEEDINGS
United's 1999 Annual Report, Financial Review section, contains on page 32, 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, 1999.
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, 1999, there were 2,277 shareholders of the Company's common
stock.
The following table sets forth by quarter the range of high and low closing
market quotations for United National Bancorp's capital stock and the cash
dividends declared per common share during the past two years as reported on
NASDAQ:
<TABLE>
<CAPTION>
Cash Dividends
Year Quarter High* Low* Declared*
<S> <C> <C> <C> <C>
1998 First $ 27.66 $21.87 $0.12
Second 27.34 24.66 0.13
Third 26.70 19.94 0.17
Fourth 22.88 20.28 0.19
1999 First 22.23 20.93 0.19
Second 22.41 21.05 0.19
Third 22.88 18.87 0.19
Fourth 22.94 18.75 0.20
</TABLE>
*Adjusted for the 6% stock dividend declared in 1999.
ITEM 6 - SELECTED FINANCIAL DATA
United's 1999 Annual Report, Financial Review section, contains on pages 13 and
18 through 20 (Note 1) information required by Item 6 and that information is
incorporated herein by reference.
23
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
United's 1999 Annual Report, Financial Review section, contains on pages 2
through 12 information required by Item 7 and that information is incorporated
herein by reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
United's 1999 Annual Report, Financial Review section, contains on pages 12 and
14 through 35 information required by Item 8 and that information is
incorporated herein by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
United's Proxy Statement for its 2000 Meeting will contain, 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 2000 Meeting will contain, 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 2000 Annual Meeting will contain, 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 2000 Annual Meeting will contain, under the
caption "Compensation Committee Interlocks and Insider Participation", the
information required by Item 13 and that information is incorporated herein by
reference.
24
<PAGE>
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 1999
Annual Report, are incorporated herein by reference.
<TABLE>
<CAPTION>
Financial Review Page *
<S> <C>
Independent Auditors' Report 36
Consolidated Balance Sheets at December 31,
1999 and 1998 14
Consolidated Statements of Income for the
Three Years Ended December 31, 1999 15
Consolidated Statements of Changes in
Stockholders' Equity for the Three
Years Ended December 31, 1999 16
Consolidated Statements of Cash Flows
for the Three Years Ended
December 31, 1999 17
Notes to Consolidated Financial Statements 18-35
Consolidated Unaudited Quarterly Financial Data 12
</TABLE>
*Refers to respective page numbers of United National Bancorp's 1999
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))).
25
<PAGE>
(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
26
<PAGE>
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,
1999 are incorporated by reference into this Annual
Report on Form 10-K.
(21) List of Subsidiaries
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K was filed on November 11, 1999. Under Item 5, the Board of
Directors approved a plan to repurchase up to 800,000 shares, or
approximately five percent of its common stock. United's press release
dated November 22, 1999, United National Bancorp Announces Stock
Repurchase Program were included as exhibits.
27
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED NATIONAL BANCORP
By: /s/ Thomas C. Gregor
----------------------
Thomas C. Gregor
Chairman of the Board,
President and Chief Executive Officer
Dated: March 30, 2000
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- -------------- --------------
<S> <C> <C>
/s/ Thomas C. Gregor Chairman of the March 30, 2000
- ---------------------- Board, President and
Thomas C. Gregor Chief Executive Officer
and Director
/s/ Donald W. Malwitz V.P. & Treasurer March 30, 2000
- ---------------------- (Principal Financial Officer)
Donald W. Malwitz
/s/ A. Richard Abrahamian Senior V.P. and Chief March 30, 2000
- -------------------------- Accounting Officer
A. Richard Abrahamian (Principal Accounting Officer)
/s/ George W. Blank Director March 30, 2000
- ---------------------
George W. Blank
/s/ Donald A. Buckley Director March 30, 2000
- ----------------------
Donald A. Buckley
/s/ C. Douglas Cherry Director March 30, 2000
- -----------------------
C. Douglas Cherry
/s/ Charles E. Hance Director March 30, 2000
- ----------------------
Charles E. Hance
/s/ William T. Kelleher, Jr. Director March 30, 2000
- -------------------------------
William T. Kelleher, Jr.
/s/ John R. Kopicki Director March 30, 2000
- -----------------------
John R. Kopicki
/s/ Antonia S. Marotta Director March 30, 2000
- -----------------------
Antonia S. Marotta
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
/s/ John W. McGowan III Director March 30, 2000
- ------------------------
John W. McGowan III
/s/ Patricia A. McKiernan Director March 30, 2000
- ----------------------------
Patricia A. McKiernan
/s/ Charles N. Pond, Jr. Director March 30, 2000
- -------------------------
Charles N. Pond, Jr.
/s/ Paul K. Ross Director March 30, 2000
- ----------------------------
Paul K. Ross
/s/ Arlyn D. Rus Director March 30, 2000
- ---------------------------
Arlyn D. Rus
/s/ David R. Walker Director March 30, 2000
- --------------------------
David R. Walker
/s/ Ronald E. West Director March 30, 2000
- --------------------------
Ronald E. West
/s/ George J. Wickard Director March 30, 2000
- ------------------------
George J. Wickard
</TABLE>
29
<PAGE>
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations
This section is presented to assist in understanding the operating results of
United National Bancorp (the "Parent Company") and its wholly-owned
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.
On March 31, 1999, the Company acquired Raritan Bancorp Inc. ("Raritan").
Raritan was a $435 million asset bank holding company headquartered in
Bridgewater, New Jersey and operated seven offices.
On September 30, 1998, the Company acquired State Bank of South Orange ("SBSO").
SBSO was a $75 million asset, single-office bank headquartered in South Orange,
New Jersey.
Both of these acquisitions were 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 accounts and activities of these
institutions.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect", "believe", "anticipate", or by expressions of confidence such as
"continuing" or "strong" or similar statements or variations of such terms. Such
forward-looking statements involve certain risks and uncertainties. These
include, but are not limited to, expected cost savings not being realized or not
being realized within the expected time frame; income or revenues being lower
than expected or operating costs higher; competitive pressures in the banking or
financial services industries increasing significantly; business disruption
related to program implementation or methodologies; weakening of general
economic conditions nationally or in New Jersey; changes in legal and regulatory
barriers and structures; and unanticipated occurrences delaying planned programs
or initiatives or increasing their costs or decreasing their benefits. Actual
results may differ materially from such forward-looking statements. The Company
assumes no obligation for updating any such forward-looking statements.
OVERVIEW
The Company reported net income in 1999 of $12,140,000, a decrease of 38.9% from
the $19,858,000 earned in 1998. Diluted net income per share was $0.75 in 1999
compared to $1.22 reported in 1998. Basic net income per share in 1999 was $0.76
as compared to the $1.26 reported in 1998.
The Company's operating income for 1999, defined as net income excluding the
effects of one-time charges, net of taxes, was $25,024,000, a 16.1% increase
over the $21,552,000 for the year ended December 31, 1998. During 1999, one-time
charges totaling $12,884,000 or $0.80 per diluted share, net of taxes, were
related to the acquisition of Raritan, the sale of non-performing assets, the
dissolution of the Bank's joint venture in United Financial Services, Inc.
("UFS") and the conversion to a new operating system. 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. Operating income per diluted share, adjusted
for the 6% stock dividend paid on November 1, 1999, was $1.55 in 1999, a 16.5%
increase over the $1.33 reported for the year ended
<PAGE>
December 31, 1998.
The Company reported net income, after one-time charges, for 1998 of
$19,858,000, up 7.6% from the $18,447,000 earned in 1997. Diluted net income per
share results for 1998 increased 7.0% to $1.22 from $1.14 reported in 1997.
Operating income for 1998 was $21,552,000 or $1.33 per diluted share compared to
$19,845,000 or $1.23 per diluted share in 1997. Operating income for 1997 was
defined as net income excluding the one-time charges of $1,398,000 or $0.09 per
diluted share, net of taxes, related to the acquisition of Farrington Bank and
the sale of the Company's former operations center.
Key performance ratios based on operating income continued to remain strong for
1999. Based on operating income, return on average assets ("ROA") and return on
average equity ("ROE") were 1.25% and 17.30%, respectively, in 1999, compared to
1.15% and 13.92%, respectively, in 1998. ROA and ROE in 1997 were 1.21% and
14.38%, respectively. ROA and ROE, based on operating income, have averaged
1.16% and 14.53%, respectively, over the past five years.
Based on net income, ROA was 0.61% in 1999 as compared to 1.06% in 1998 and
1.12% in 1997, while ROE was 8.43% in 1999, 12.83% in 1998 and 13.37% in 1997.
In addition, the efficiency ratio was 56.07% for 1999 versus 62.34% in 1998
2
<PAGE>
and 58.77% in 1997. During 1999, the decrease in the efficiency ratio was due in
part to the cost savings achieved from the Raritan and SBSO acquisitions.
The Company's unfavorable decline in net income results for 1999 were the result
of an increase in one-time-charges compared to the prior year coupled with an
increase in the provision for loan losses and a decline in non-interest income.
These unfavorable events were partially offset by an improvement in net interest
income coupled by a reduction in the provision for income taxes.
The growth in net income for 1998 was 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.
Loan demand throughout 1999 continued to be strong and was greater than 1998.
Loans, net of unearned income, at December 31, 1999 were $204,262,000 higher
than the prior year-end and represented 60.3% of total assets at year-end 1999
as compared to 55.1% in 1998. Total loans averaged $1,138,080,000 during 1999,
an increase of $158,208,000 or 16.1% compared with the prior year. Interest
rates, as measured by the prime rate, began the year of 1999 at 7.75% and
increased several times throughout the third and fourth quarters to end the year
at 8.50%.
Securities available for sale increased to $631,661,000 and represented 30.2% of
the total assets at December 31, 1999 as compared to $609,262,000 or 31.8% at
year-end 1998. Conversely, securities held to maturity decreased $25,466,000
from 1998 to $37,908,000 at year-end 1999 and accounted for 1.8% of total assets
at December 31, 1999, versus 3.3% last year.
Total deposits increased by 5.5% to $1,481,209,000 at December 31, 1999. Time
deposits increased by $92,532,000 or 15.7% to $683,150,000 at December 31, 1999
compared to $590,618,000 at year-end 1998, primarily as a result of higher
levels of wholesale certificates of deposit of $100,000 or more coupled with
higher rates offered on various product types. Demand deposits increased by
$765,000 to $235,386,000 at year-end 1999, a 0.3% increase over the prior
year-end. In contrast, savings deposits decreased by $15,501,000 or 2.7% from
1998 to $562,673,000 at year-end 1999.
On average, time deposits increased $44,157,000 or 7.3% from 1998. Demand
deposits and non-interest-bearing savings deposits averaged $253,038,000 in
1999, down 0.6% from the 1998 average balance of $254,565,000 and average
savings deposits were down $5,627,000 or 1.0% from 1998's average balance of
$559,241,000.
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 $4,413,000 or 4.9% in
1999 as compared to 1998 and increased $3,731,000 or 4.3% in 1998 as compared to
1997.
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 1999 was 35% and for
1998 and 1997 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 $5,534,000 or 7.6% to a level of $78,012,000 in
1999 following a $2,906,000 or 4.2% 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 60.9% of average earning assets in 1999 from 56.6% in 1998 and
59.4% in 1997, while average securities represented 38.6% of average earning
assets in 1999, down from 40.0% in 1998 and up from 37.8% in 1997. 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. During 1999, the Company did not purchase investment
securities under the Growth Strategy. The Company continues to evaluate such
strategies and will implement them when market conditions stabilize. For
additional discussion on the Growth Strategy, see "Financial Condition -
Securities." The Company's net interest margin declined from 1997 through 1999,
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.
3
<PAGE>
For 1999, average interest-earning assets increased $138,993,000 or 8.0% over
1998 while average rates declined 17 basis points, creating an increase in total
interest income of $7,617,000 or 5.7% from 1998. Rates declined during the year
primarily due to the competitive marketplace which the Company serves. In 1998,
average interest-earning assets increased $204,469,000 or 13.4% over the prior
year while the yield on earning assets declined 29 basis points. Accordingly,
interest income increased $11,368,000 or 9.2% from 1997.
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 $38,530,000 or 3.3%, over 1998 while the
cost of deposits declined 38 basis points. The decline in deposit rates was due
primarily to the lower cost of funds in time deposits. During the latter part of
1999, the Company introduced competitive rates on select deposit products in an
effort to attract deposits. This change is expected to cause an increase in the
overall cost of funds for time deposits.* The growth in deposits resulted from
continued growth in existing branches coupled with growth from new branches
opened during the current and prior year. The Company utilized short-term and
other borrowings as an additional funding source and to fund the growth in the
loan portfolio. The average balance of borrowings, including the obligation
under capital lease, was $355,725,000 in 1999 with an average cost of 5.76%, as
compared to the average balance of $255,739,000 in 1998 with an average cost of
6.01%. The effect of the above changes in 1999 created a 9 basis point increase
in the Company's net interest spread and a 2 basis point decline in the
Company's net interest margin.
In 1998, 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 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.
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 1999 to 4.17% from 4.19%
in 1998. The decline in the net interest margin in 1999 resulted from a slightly
overall lower interest rate environment during the year compared to 1998. 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. Although the Growth Strategy has resulted in a
decline in the net interest margin and spread compared to prior years, 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 1999, total non-interest income amounted to $21,190,000, a decrease of
$3,025,000 or 12.5% from 1998, as compared with a 15.4% increase in 1998 from
1997. Included in these figures were net gains from securities transactions of
$949,000 in 1999 as compared to $3,891,000 in 1998 and $1,914,000 in 1997.
Non-interest income in 1999, excluding securities gains, was down $83,000 or
0.4% from 1998, compared to an increase of $1,259,000 or 6.6% in 1998 from 1997.
Trust income continues to be a major contributor to fee income, representing
26.4% of the total. Trust income rose $131,000 or 2.4% to $5,585,000 in 1999
compared to a $478,000 or 9.6% increase from 1997 to 1998. 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 $418,000 or 8.3% to $4,607,000 in
1999 from 1998 as compared to a decrease of $48,000 or 0.9% from 1997 to 1998.
The decrease in 1999 resulted from fewer occurrences of service charges assessed
partially due to customers maintaining higher compensating balances through our
Combined Banking product. Additionally, more customers have taken advantage of
our overdraft protection product to help reduce their transaction costs. The
decrease in 1998 from 1997 resulted from fewer occurrences of overdraft fees
assessed.
Other service charges, commissions and fees decreased $578,000 or 8.2% to
$6,451,000 in 1999 due primarily to a decline in credit card application fees
offset in part by an increase in fees generated from our Financial Services
Group. This group offers uninsured financial products, including the sale of
annuities, insurance and mutual funds. During 1998, other service charges,
commissions and fees increased $531,000 or 8.2% from 1997 to $7,029,000 due to
increased automated teller machine ("ATM") transaction fees and fees generated
by outsourcing the Bank's official check function.
Other income increased $782,000 or 27.8% from 1998 to $3,598,000 in 1999 due
primarily to an increase in income on the Company's investment in corporate
owned life insurance. Other income increased $298,000 or 11.8% from 1997 to
4
<PAGE>
$2,816,000 in 1998 due primarily to an increase in income on the 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.
Net gains on securities transactions of $949,000 were recorded in 1999 compared
with $3,891,000 in 1998 and $1,914,000 in 1997. The rising rate climate
experienced during the later part of 1999 created less of an opportunity to
realize gains as compared to 1998. 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 in 1998 from the trading
account portfolio due primarily to favorable conditions in the marketplace.
Non-Interest Expense
Non-interest expense in 1999 totaled $74,660,000, an increase of $11,693,000 or
18.6% over 1998. This compared to a $5,952,000 or 10.4% increase in 1998 over
1997. Included in 1999 were one-time charges before taxes of $17,258,000 in
connection with the Raritan merger, 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. Included in 1998 were one-time charges of $2,179,000
incurred in connection with the SBSO merger. During 1997, the Company recorded
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. Excluding the
one-time charges, non-interest expense in 1999 decreased $3,386,000 or 5.6% from
1998 and non-interest expense in 1998 increased $5,981,000 or 10.9% from 1997.
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 33.1% of total non-interest expense in 1999 compared to
40.6% and 43.6% in 1998 and 1997, respectively. Management continues to monitor
staffing levels, employee benefits and operational consolidations. Compared to
the previous year, the 1999 expense of $24,746,000 represents a 3.2% decrease
versus a 2.9% increase between 1998 and 1997. Specifically, salaries and wages
decreased $683,000 in 1999 due primarily to the cost savings relating to the
Raritan and SBSO acquisitions. Employee benefits decreased $125,000, which was
due primarily to the strong performance of the Company's pension plan. The
strong return on the plan had the effect of reducing the expense recognized in
1999, which declined $633,000 from 1998. This was offset in part by an increase
in medical health care costs, which is a significant component of employee
benefits. These costs increased $518,000 from 1998 and had increased $55,000 in
1998 from 1997. 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 565 at December 31, 1999 compared with 542
and 585 at December 31, 1998 and 1997, respectively.
Net occupancy and furniture and equipment expense increased $188,000 or 2.1% in
1999 to $9,354,000 as compared to an increase of $1,517,000 or 19.8% in 1998
from 1997. The increase in 1998 resulted from the opening of several new
branches offset in part by lower building maintenance costs.
Data processing expense for 1999 decreased $1,585,000 or 20.9% to $5,985,000
from 1998 compared to an increase of $1,973,000 or 35.3% in 1998 from 1997. The
decrease for 1999 resulted from the Company's decision to convert to a new data
processing system. The increase for 1998 was 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 in 1998 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, $2,002,000 and
$1,557,000 in 1999, 1998 and 1997, respectively, resulted from the placement of
such securities in March 1997.
Amortization of intangible assets was $1,293,000 in 1999 compared to $1,961,000
and $1,728,000 in 1998 and 1997, respectively. The reduction in 1999 was due
primarily to the writedown in the remaining amount of amortization relating to
the dissolution of UFS.
Net cost to operate other real estate, which results from costs of holding other
real estate in addition to valuation adjustments, amounted to $140,000 in 1999,
a decrease of $76,000 from 1998. These costs decreased in 1998 to $216,000
compared to $276,000 in 1997. The decrease in 1999 was the result of a
non-performing asset sale during the first quarter. 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 1999 of $17,258,000 resulted from the acquisition of
Raritan, 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. This amount
consisted primarily of merger related charges related to the acquisition of
Raritan of $9,940,000 and the dissolution of the Bank's joint venture, which
amounted to $5,084,000. The merger related charges primarily represented payouts
on existing employment contracts, a penalty on termination of Raritan's data
processing service, the write-off of unusable fixed assets and
5
<PAGE>
supplies, professional services directly attributable to the acquisition, and
severance costs. Substantially all amounts were paid by December 31, 1999.
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, excluding the one-time charges, amounted to $13,882,000 in 1999,
a decrease of $437,000 or 3.1% compared to the prior year while 1998's expense
was $1,151,000 or 8.7% higher than that of 1997. The decrease in 1999 was due to
fewer branch start-up costs. The increase in 1998 was 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 $2,885,000 in 1999 to $5,483,000
compared to a decrease of $667,000 in 1998 from 1997. The decrease in 1999 in
income taxes resulted from the one-time charges in 1999. 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. For further information regarding the
provision for income taxes, see Note 14 to the Consolidated Financial
Statements.
FINANCIAL CONDITION
Total average assets increased $124,483,000 or 6.6% to $1,997,873,000 in 1999,
while total assets reached $2,090,383,000 at year-end, an increase of 9.1% from
the December 31, 1998 balance. Average interest- earning assets, which
represents 93.6% of total average assets, increased $138,993,000 or 8.0% from
1998 to $1,869,484,000 in 1999. Specifically, average loans increased
$158,208,000 or 16.1% in 1999 to $1,138,080,000, while average total securities
increased $29,291,000 or 4.2% from 1998 and short-term investments decreased
$48,506,000 or 83.7%.
Securities
Total securities, which include securities held to maturity, securities
available for sale and trading account securities, averaged $721,986,000 in
1999, an increase of $29,291,000 or 4.2% from 1998. The portfolio represented
38.6% of average earning assets for 1999 and 40.0% for 1998. The yield on the
total portfolio (on a tax-equivalent basis) increased two basis points to 6.59%.
The increase in average balances in the security portfolio was primarily the
result of an increase of $40,209,000 in the average balance of non-taxable
securities primarily from the full year effect of the additional $70 million of
securities purchased under the Growth Strategy implemented during 1998. 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. For purposes of this review,
unrealized gains and losses have been excluded.
U.S. Treasury and government agency securities declined $2,535,000 to average
$110,447,000 in 1999. The yield on this portfolio decreased 30 basis points to
6.35% from the reported yield of 6.65% in 1998. 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 $120,128,000 in 1999, an increase of
$40,209,000 from 1998. As a part of its tax planning strategy, the Company
continues to invest in these securities. At year-end, tax-exempt securities were
$106,102,000, up $6,963,000 from December 31, 1998. The average tax-equivalent
yield on these securities decreased 14 basis points to 7.26% in 1999 from 7.40%
in 1998.
Mortgage-backed securities averaged $401,833,000 in 1999, a decrease of
$26,831,000 from 1998. These securities provide liquidity through periodic
principal and interest repayments. The yield on mortgage-backed securities was
6.44% in 1999 compared to 6.39% in 1998.
Corporate debt securities averaged $33,944,000 during 1999. At December 31,
1999, the investment in corporate debt securities was $44,021,000, and
represented the Company's purchase of trust capital securities of other banks.
The average yield on trust capital securities was 8.95% in 1999 and 9.39% in
1998. Securities issued by a foreign government averaged $167,000 in 1999
compared to $142,000 in the prior year. The year-end 1999 balance was $175,000
as compared to $150,000 a year earlier.
Average equity securities increased $3,358,000 during 1999 to $55,448,000.
Equity securities consisted primarily of money market mutual funds averaging
$35,305,000 in 1999 compared to $37,763,000 in 1998. This was more than off-
6
<PAGE>
set by an increase in Federal Home Loan Bank of New York (the "FHLB") stock
purchases. The average yield on equity securities decreased 44 basis points to
5.18% from 5.62% in 1998. Short-term investments, which included Federal funds
sold and FHLB deposits, averaged $9,418,000 in 1999 compared to $57,924,000 in
1998, a decrease of 83.7%. For 1999, the yield on short-term investments
averaged 4.68%, down from 4.88% in 1998.
Loans
Total loans averaged $1,138,080,000 during 1999, an increase of $158,208,000 or
16.1% compared with the prior year. The yield on the portfolio declined 52 basis
points from 8.78% in 1998 to 8.26% in 1999. At year-end, total loans, net of
unearned income, amounted to $1,261,343,000, up $204,262,000 or 19.3% compared
to 1998. 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 from
late 1998 through the early part of 1999 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
$752,518,000 at December 31, 1999 and represented 59.7% of total loans, net of
unearned income. Excluded from this figure were $23,807,000 of one to four
family residential mortgage loans classified as held for sale. Real estate
mortgage loans included residential and commercial mortgages, construction loans
and first-time homebuyer mortgages. Installment loans amounted to $199,577,000,
representing 15.8% of loans, net of unearned income. Major loan types within
this category are indirect automobile loans of $59,002,000, direct personal
loans of $86,150,000 and advances on home equity lines of $27,748,000.
The Company's commercial loan portfolio amounted to $233,956,000 at December 31,
1999, up 6.9% from the prior year-end. Average commercial loans increased 41.6%
to $288,802,000 from $203,989,000 in 1998 and represented 25.4% of the total
average loan portfolio as compared to 20.8% in 1998. The tax-equivalent yield on
the commercial loan portfolio was 8.54% in 1999, compared to 9.24% in 1998. The
yield on this portfolio decreased as a result of lower rates on loan
originations and repricings.
Real estate mortgage loans averaged $633,514,000, an increase of 8.1% from 1998
and represented 55.7% 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 46 basis points to 7.71% from 8.17% 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
$39,294,000 in 1999, an increase of $4,398,000 or 12.6% from 1998. At year-end
1999, credit card balances were $43,916,000, as compared to $38,511,000 at
year-end 1998. The increase during 1999 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 1999 on credit cards was 17.59%, down 126 basis points from 18.85% in 1998.
Installment loans, including lease financing, averaged $175,298,000 from
$149,469,000 in 1998 and represented 15.4% of the total average loan portfolio.
Originations of personal loans have increased from the levels seen in 1998 and
1997. As a result, the average installment loan portfolio increased by 17.3% in
1999 from 1998. At year-end 1999, installment loans amounted to $199,577,000, up
$56,566,000 or 39.6% from the same period in 1998. 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 7.76% in
1999 compared with 8.37% in 1998.
Impaired loans averaged $1,172,000, down $4,127,000 or 77.9% 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 outstandings in 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, 1999, other assets totaled $79,103,000, an increase of
$23,701,000 from the prior year-end. The largest components of other assets are
the investment in corporate-owned life insurance of $35,253,000 and the deferred
tax assets of $21,844,000, of which both increased $6,067,000 and $21,987,000,
respectively. The increase in the deferred taxes is due primarily to the
deferred tax benefit relating to the change in the unrealized loss on securities
available for sale.
7
<PAGE>
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 $1,457,443,000 in
1999, up $37,003,000 or 2.6% from $1,420,440,000 in 1998. At year-end, total
deposits amounted to $1,481,209,000, up 5.5% from the $1,403,413,000 reported
last year.
For 1999, time deposits comprised 44.7% of total average deposits as compared to
42.7% in 1998. These deposits, which consist primarily of retail certificates of
deposit and individual retirement accounts, increased $44,157,000 or 7.3% to
average $650,791,000 during 1999. At December 31, 1999, time deposits increased
by $92,532,000 or 15.7% from year-end 1998. The cost of time deposits decreased
66 basis points to 4.98% in 1999. During 1999, certificates of deposit $100,000
and over were $170,868,000, an increase of 55.8% over last year.
Savings deposits, which include savings accounts, money market accounts and
interest-bearing transaction accounts, averaged $553,614,000, a decrease of
$5,627,000 or 1.0% from 1998. The cost of savings deposits decreased 21 basis
points to 2.00% in 1999.
Demand deposits and non-interest-bearing savings deposits averaged $253,038,000,
down 0.6% from the 1998 average of $254,565,000. Demand deposits at year-end
were $235,386,000, up 0.3% from the prior year. Non-interest-bearing secured
credit card deposits averaged $11,304,000 in 1999, down 3.9% from the 1998
average of $11,766,000. Non-interest-bearing secured credit card deposits at
year-end 1999 amounted to $11,579,000, as compared to $11,217,000 at December
31, 1998.
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 $49,201,000 or 44.3% to average $160,381,000. The cost of
short-term borrowings increased 43 basis points from 4.97% in 1998 to 5.40% in
1999 due to the higher short-term interest rate environment during 1999 as
compared to 1998. Average other borrowings for 1999 increased $50,785,000 as a
result of borrowings used to fund loan growth. Other borrowings had an average
cost of 6.06% in 1999 compared to 6.81% in 1998.
The Bank is a member of 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, 1999, there was
$116,000,000 outstanding from the FHLB on the $150,000,000 Blanket Advance line.
At December 31, 1998, there was $37,000,000 outstanding from the FHLB on the
$90,700,000 Blanket Advance line. The Company also has access to financing from
the FHLB through advances collateralized by specific securities ("Specific
Advances"). At December 31, 1999, the Company had Specific Advances outstanding
from the FHLB of $114,000,000 with maturities ranging from 90 days to 5 years.
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, 1999, total stockholders' equity was $118,465,000, a decrease of
$39,777,000 or 25.1% from year-end 1998. The decrease was primarily due to a
decline of $32,921,000, net of tax, in the December 31, 1999 market value of the
Company's available for sale securities portfolio from the evaluation at
December 31, 1998. Under the Financial Accounting Standards Board ("FASB")
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company is required to mark to market its investment securities
which are classified as available for sale and record any unrealized gains or
losses, net of taxes, in stockholders' equity. As market rates have increased
considerably throughout 1999, this has had the effect of reducing the market
value of the available for sale portfolio, which consists primarily of
mortgage-backed securities. As such, the Company had a mark to market unrealized
loss adjustment of $26,855,000 at December 31, 1999 as compared to an unrealized
gain of $6,066,000 at December 31, 1998. This adjustment has no substantial
impact on the Company's regulatory capital ratios, as unrealized adjustments,
with the exception of unrealized losses relating to equity securities with
readily determinable fair values, are excluded from such calculations.
Additionally, there were cash dividends declared in 1999 totaling $12,507,000
and, through its stock repurchase program, the Company purchased Treasury shares
amounting to $8,465,000 during 1999. Partially offsetting these decreases were
net income of $12,140,000 and the exercise of stock options and restricted stock
activity. As detailed in Note 13 to the Consolidated Financial Statements, the
Company and the Bank currently exceed all minimum capital requirements.
8
<PAGE>
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, 1999, total
non-performing assets totaled $8,251,000 or 0.4% of total assets, down $919,000
from the $9,170,000 or 0.5% of total assets at December 31, 1998.
During the first quarter of 1999, the Company sold non-performing assets having
a carrying value of $4,465,000, of which $3,859,000 related to non-performing
loans and $606,000 related to holdings in other real estate owned. This resulted
in a one-time charge of $736,000, net of tax.
Non-performing loans at December 31, 1999 were $8,142,000 or 0.6% of total
loans, as compared to $8,612,000 or 0.8% of total loans at December 31, 1998.
The $470,000 decrease from 1998 resulted from loans secured by real estate,
which decreased by $1,326,000 and a decline of $139,000 in loans to individuals
for household, family and other personal expenditures. This was offset in part
by an increase in commercial and industrial loans of $1,009,000. Troubled debt
restructures declined by $14,000.
At December 31, 1999, the Company's holdings in other real estate owned amounted
to $56,000 as compared to $507,000 at December 31, 1998. 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 1999, the Company incurred $140,000 of costs relating to
these properties as compared to $216,000 in 1998. Other assets owned amounted to
$53,000 at year-end, an increase of $2,000 from 1998.
Allowance for Possible Loan Losses
The Company's year-end 1999 allowance for possible loan losses (the "Allowance")
totaled $10,386,000 and represented 0.82% of total loans. This compared with a
loan loss allowance at year-end 1998 of $11,174,000 and a ratio to total loans
of 1.06%. Loan loss provisions amounted to $3,825,000 in 1999, up from the
$3,444,000 in 1998 and down from $4,432,000 in 1997. The Allowance 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, which resulted in a $793,000
reduction in the Allowance. Additionally, there has been a continued shift in
portfolio composition out of indirect automobile loans and into loans secured by
real estate. At December 31, 1999, the ratio of the allowance for possible loan
losses to non-performing loans was 127.56% as compared to 129.75% at December
31, 1998.
The determination of an appropriate level of the Allowance is based upon an
analysis of the risks inherent in the Bank's loan portfolio. The analysis is
performed on a continuous basis by account officers and various loan committees.
In addition, the Bank has an external loan review service provider.
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) loan
documentation; 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.
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Net charge-offs in 1999 were $4,613,000, including $793,000 which was
attributable to the sale of non-performing loans. Net charge-offs in 1999,
exclusive of the loan sale charge-offs, were $3,820,000 or 0.34% of average
loans outstanding compared with $4,009,000 or 0.41% in 1998. Net charge-offs in
the credit card portfolio were $1,575,000 in 1999, compared to $1,524,000 in
1998. Net charge-offs in installment lending and lease financing receivables
decreased to $1,022,000 in 1999, compared with $1,083,000 in 1998. 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 decreased to $6,000 in 1999 from
$1,160,000 in 1998 while commercial loans incurred net charge-offs of $1,217,000
in 1999 compared to $242,000 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.
ALCO monitors and manages interest rate sensitivity through simulation and
market value of equity analyses in order to avoid unacceptable earnings
fluctuations due to interest rate changes. 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, 1999, utilizing the above assumptions results in
a cumulative interest rate sensitive assets to interest rate sensitive
liabilities of 0.86% and 0.69% 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 and dynamic 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. The model incorporates management assumptions
regarding the level of interest rate or balance changes on non-maturity deposit
products, such as NOW, savings, money market and demand deposits, for a given
level of market rate changes. These assumptions incorporate historical analysis
and future expected customer behavior patterns. Interest rate caps and floors
are included, if applicable. Changes in prepayment behaviors of mortgage based
products for both loans and securities in each rate environment are also
captured. Additionally, the impact of planned growth and anticipated new
business activities are factored into the model.
Mortgage loans are projected to prepay between 5% and 40% annually.
Mortgage-backed securities are projected to prepay between 6% and 35%.
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 3.4 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.
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Currently, the Company's earnings simulation 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 policy has established that
interest income sensitivity will be considered acceptable if the change in net
interest income in the above interest rate scenario is within 10% of net
interest income from the flat rate scenario in the first year. Additionally, the
Company's ALCO policy states that interest income sensitivity will be considered
acceptable if the change in net income in the above interest rate scenario is
within 20% of net income from the flat rate scenario in the first year.
At December 31, 1999 and 1998, the Company's income simulation model indicates
an acceptable level of interest rate risk, as presented below.
<TABLE>
<CAPTION>
Gradual Change in Rate
--------------------------------------------
(Dollars In Thousands) +200 Basis Points -200 Basis Points
----------------- ------------------
Twelve Month Horizon
- --------------------
<S> <C> <C>
1999:
Net Interest Income $(2,010) or (2.6)% $+609 or +0.8%
Net Income (1,269) or (5.0)% +445 or +1.8%
1998:
Net Interest Income (870) or (1.1)% (2,512) or (3.3)%
Net Income (549) or (2.2)% (1,538) or (6.2)%
</TABLE>
The increase in interest rate risk from 1998 to 1999 was due primarily to a
reduction in the prepayment speed assumptions for most mortgage based products
as well as an increase in the repricing of certain callable liabilities. These
changes in the assumptions were due to the change in the interest rate
environment in 1999 compared to 1998, as rates have risen considerably
throughout the past year.
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 marketable equity securities and debt
securities with maturity dates, assuming prepayments, of one year or less, which
totaled $86,093,000 at year-end 1999. Marketable equity securities and trading
account securities amounted to $33,226,000 at the end of 1999. Debt securities
consist primarily of U.S. Treasury notes and bonds, obligations of U.S.
Government agencies, mortgage-backed securities and obligations of states and
political subdivisions. All securities held by the Company are readily
marketable. As of December 31, 1999, debt securities scheduled to mature within
one year based upon estimated cash flows, amounted to $52,867,000 and
represented 8.6% of the total debt securities portfolio. Approximately 20.7% 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 $1,389,618,000
at December 31, 1999 and represented 71.9% 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
$291,522,000 at December 31, 1999.
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 1999, the Company had a $150,000,000 advance line with
the FHLB, $34,000,000 of which was available if additional FHLB stock is
purchased. Additionally, the Company has federal funds lines with correspondent
banks totaling $35,000,000, of which $20,000,000 was available at December 31,
1999.
11
<PAGE>
YEAR 2000 ISSUE
The Year 2000 issue involved preparing computer systems and programs to identify
the century date change on January 1, 2000. In the past, many computer programs
allocated only two digits for the year portion of a date (i.e., 1999 was
represented as 99). The Company reviewed all of its automated systems, as well
as all equipment that utilizes processors or computer chips.
Management formed a Year 2000 Committee with members from all significant areas
of the Company, which 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 developed a project plan
to address all issues relevant to Year 2000 and associated date issues. Progress
versus the plan was subject to periodic examination by the Office of the
Comptroller of the Currency (OCC). As recommended by the Federal Financial
Institutions Examination Counsel, the plan encompassed the following phases:
awareness, assessment, renovation, validation and implementation. The project
plan was completed prior to December 31, 1999.
The Company obtained certifications of Year 2000 compliance from all vendors,
while also defining contingencies for these vendors. Each vendor, whose products
or services were believed by management to be material to the Company, provided
written assurance of its Year 2000 compliance. The Company conducted extensive
user testing of these applications.
To date, no Year 2000 related problems have been experienced by the Company. In
addition, the Company has no knowledge of any borrower that is unable to meet
their obligations to the Company because of a Year 2000 issue. The Company will
continue to monitor for Year 2000 issues throughout the year 2000. The Company
has incurred costs of approximately $550,000 to date related to Year 2000
readiness.
The following table sets forth certain unaudited quarterly financial data for
the periods presented:
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) First Second Third Fourth
Quarter(1) Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Interest Income $32,540 $33,479 $34,882 $38,027
Interest Expense 14,721 15,118 16,094 18,077
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 17,819 18,361 18,788 19,950
Provision for Possible Loan Losses 975 900 900 1,050
Non-Interest Income, excluding
Securities Transactions 4,981 5,194 5,004 5,062
Net Gains (Losses) from
Securities Transactions 675 639 (196) (169)
Non-Interest Expense 26,060 19,626 14,145 14,829
(Benefit) Provision for Income Taxes (114) 945 2,306 2,346
- --------------------------------------------------------------------------------------------------------------------
Net (Loss) Income $(3,446) $ 2,723 $ 6,245 $ 6,618
====================================================================================================================
Net (Loss) Income Per Share - Basic (2) $ (0.22) $ 0.17 $ 0.39 $ 0.42
Net (Loss) Income Per Share - Diluted (2) $ (0.22) $ 0.17 $ 0.39 $ 0.41
====================================================================================================================
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 (2) $ 0.31 $ 0.32 $ 0.24 $ 0.39
Net Income Per Share - Diluted (2) $ 0.30 $ 0.31 $ 0.23 $ 0.38
====================================================================================================================
</TABLE>
(1) First quarter 1999 results reflect an $872,000 increase in the Company's
previously reported first quarter provision for income taxes, relating to
charges in connection with the Raritan merger.
(2) Amounts have been adjusted for the 6% stock dividend paid in 1999.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (Unaudited)
The following selected financial data should be read in conjunction with the
consolidated financial statements and related notes thereto included elsewhere
in this Annual Report and "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Income Data:
Interest Income $138,928 $132,349 $121,415 $108,982 $105,435
Interest Expense 64,010 61,927 53,465 45,038 45,123
------------------------------------------------------------------
Net Interest Income 74,918 70,422 67,950 63,944 60,312
Provision for Possible Loan Losses 3,825 3,444 4,432 3,691 1,398
------------------------------------------------------------------
Net Interest Income after Provision
For Possible Loan Losses 71,093 66,978 63,518 60,253 58,914
Non-Interest Income 21,190 24,215 20,979 16,806 15,816
Non-Interest Expense 74,660 62,967 57,015 52,474 55,964
------------------------------------------------------------------
Income Before Provision for Income Taxes 17,623 28,226 27,482 24,585 18,766
Provision for Income Taxes 5,483 8,368 9,035 8,409 5,837
------------------------------------------------------------------
Net Income $12,140 $19,858 $18,447 $16,176 $12,929
==================================================================
Income Before Merger-Related and Restructuring Charges,
And SAIF Assessment $25,024 $21,552 $19,845 $16,762 $15,018
==================================================================
Balance Sheet Data (at year-end):
Total Assets $2,090,383 $1,916,809 $1,789,426 $1,550,129 $1,489,773
Securities 670,498 673,875 690,201 483,345 503,002
Federal Funds Sold - 50,100 34,025 44,672 53,744
Loans (Net of Unearned Income) 1,261,343 1,057,081 931,266 898,788 812,985
Allowance for Possible Loan Losses 10,386 11,174 11,739 11,874 11,440
Deposits 1,481,209 1,403,413 1,392,703 1,334,528 1,279,636
Short-Term Borrowings (1) 199,931 154,635 99,546 56,328 53,347
Other Borrowings (2) 236,397 154,942 107,809 9,693 19,680
Stockholders' Equity 118,465 158,242 145,466 129,466 120,092
Adjusted Financial Ratios: (3)
Return on Average Assets 1.25% 1.15% 1.21% 1.13% 1.05%
Return on Average Stockholders' Equity 17.30% 13.92% 14.38% 13.52% 13.44%
Financial Ratios:
Return on Average Assets 0.61% 1.06% 1.12% 1.09% 0.91%
Return on Average Stockholders' Equity 8.43% 12.83% 13.37% 13.05% 11.57%
Net Interest Margin 4.17% 4.19% 4.56% 4.76% 4.65%
Efficiency Ratio (4) 56.07% 62.34% 58.77% 61.19% 66.63%
Average Stockholders' Equity to Average Assets 7.24% 8.26% 8.39% 8.35% 7.83%
Leverage Ratio (year-end) 7.46% 8.51% 8.56% 7.85% 7.20%
Tier I Capital to Risk-Weighted Assets (year-end) 10.93% 13.53% 14.04% 11.85% 11.52%
Combined Tier I and Tier II Capital to Risk-Weighted
Assets (year-end) 11.65% 14.43% 15.10% 13.00% 12.75%
Loans to Deposits (year-end) 85.16% 75.32% 66.87% 67.35% 63.53%
Non-Performing Loans to Loans (year-end) (5) 0.65% 0.81% 1.07% 1.45% 1.27%
Non-Performing Assets as a Percentage of Loans, Other
Real Estate Owned and Other Assets Owned (year-end) 0.65% 0.87% 1.25% 1.68% 1.67%
Non-Performing Assets to Total Assets 0.39% 0.48% 0.65% 0.98% 0.91%
Allowance for Possible Loan Losses to Loans (year-end) 0.82% 1.06% 1.26% 1.32% 1.41%
Dividend Payout Ratio 101% 49% 42% 41% 47%
Common Share Data: (6)
Net Income Per Diluted Share $0.75 $1.22 $1.14 $1.02 $0.82
Net Income Per Diluted Share Before Merger-Related
and Restructuring Charges and SAIF Assessment $1.55 $1.33 $1.23 $1.06 $0.95
Cash Dividends Declared Per Share $0.77 $0.61 $0.49 $0.42 $0.39
Book Value Per Share (year-end) $7.57 $9.94 $10.00 $9.03 $8.39
Average Diluted Shares Outstanding (in thousands) 16,177 16,225 16,128 15,851 15,807
Other Data:
Number of Employees (full-time equivalent) 565 542 585 572 583
Number of Stockholders 2,277 2,880 2,762 2,897 3,060
</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
net-interest income is net-interest income less distributions on Series B
Capital Securities and adjusted non-interest income is non-interest income
less 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 6% stock dividend paid in 1999.
13
<PAGE>
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
(In Thousands, Except Share Data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 53,490 $ 52,867
Federal Funds Sold - 50,100
Securities Available for Sale, at Market Value 631,661 609,262
Securities Held to Maturity (Market Value of $36,918 and $63,675
for 1999 and 1998, respectively) 37,908 63,374
Trading Account Securities, at Market Value 929 1,239
Loans, Net of Unearned Income 1,237,536 1,056,953
Less: Allowance for Possible Loan Losses 10,386 11,174
- -------------------------------------------------------------------------------------------------------------------
Loans, Net 1,227,150 1,045,779
Mortgage Loans Held for Sale 23,807 128
Premises and Equipment, Net 29,024 29,248
Other Real Estate, Net 56 507
Intangible Assets, Primarily Core Deposit Premiums 7,202 8,903
Other Assets 79,156 55,402
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,090,383 $1,916,809
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Demand $ 235,386 $ 234,621
Savings 562,673 578,174
Time 683,150 590,618
- -------------------------------------------------------------------------------------------------------------------
Total Deposits 1,481,209 1,403,413
Short-Term Borrowings 199,931 154,635
Other Borrowings 236,397 154,942
Other Liabilities 34,381 25,577
- -------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,951,918 1,738,567
- -------------------------------------------------------------------------------------------------------------------
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 1999 and 1998
None issued and outstanding - -
Common Stock ($1.25 Par Value Per Share)
Authorized Shares - 25,000,000 in 1999 and 16,000,000 in 1998
Issued shares - 16,145,931 in 1999 and 15,318,038 in 1998
Outstanding shares - 15,646,073 in 1999 and 15,021,180 in 1998 20,182 19,148
Additional Paid-In Capital 129,460 112,015
Retained Earnings 5,592 25,921
Treasury Stock, at Cost - 499,858 shares in 1999
and 296,858 shares in 1998 (9,817) (4,660)
Restricted Stock (97) (248)
Accumulated Other Comprehensive (Loss) Income (26,855) 6,066
- -------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 118,465 158,242
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,090,383 $1,916,809
===================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
14
<PAGE>
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------------
(In Thousands, Except Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 93,998 $ 86,026 $ 81,639
Interest and Dividends on Securities Available for Sale:
Taxable Income 37,917 36,191 28,586
Tax-Exempt Income 4,593 3,024 2,458
Interest and Dividends on Securities Held to Maturity:
Taxable Income 870 3,373 5,754
Tax-Exempt Income 1,074 880 594
Dividends on Trading Account Securities 35 26 18
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 441 2,829 2,366
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 138,928 132,349 121,415
- --------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 11,097 12,341 12,191
Interest on Time Certificates of Deposit $100,000 or More 7,885 5,623 6,300
Interest on Other Time Deposits 24,522 28,591 26,992
Interest on Short-Term Borrowings 8,668 5,522 4,357
Interest on Other Borrowings 11,838 9,850 3,625
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense 64,010 61,927 53,465
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 74,918 70,422 67,950
Provision for Possible Loan Losses 3,825 3,444 4,432
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Possible Loan Losses 71,093 66,978 63,518
- --------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income 5,585 5,454 4,976
Service Charges on Deposit Accounts 4,607 5,025 5,073
Other Service Charges, Commissions and Fees 6,451 7,029 6,498
Net Gains from Securities Transactions 949 3,891 1,914
Other Income 3,598 2,816 2,518
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Income 21,190 24,215 20,979
- --------------------------------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 24,746 25,554 24,832
Occupancy Expense, Net 5,093 5,001 4,155
Furniture and Equipment Expense 4,261 4,165 3,494
Data Processing Expense 5,985 7,570 5,597
Distributions on Series B Capital Securities 2,002 2,002 1,557
Amortization of Intangible Assets 1,293 1,961 1,728
Net Cost to Operate Other Real Estate 140 216 276
Merger Related and Restructuring Charges 17,258 2,179 2,208
Other Expenses 13,882 14,319 13,168
- --------------------------------------------------------------------------------------------------------------------
Total Non-Interest Expense 74,660 62,967 57,015
- --------------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 17,623 28,226 27,482
Provision for Income Taxes 5,483 8,368 9,035
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 12,140 $ 19,858 $ 18,447
====================================================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.76 $ 1.26 $ 1.17
====================================================================================================================
Diluted $ 0.75 $ 1.22 $ 1.14
====================================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
15
<PAGE>
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the Years Ended Additional
December 31, 1997, 1998, and 1999 Common Paid-In Retained Treasury Restricted
(In Thousands, Except Share Data) Stock Capital Earnings Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance-January 1, 1997 $17,068 $ 74,932 $ 41,849 $(4,955) $(176)
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 ESOP - - - - -
Restricted Stock Activity, Net - 110 - 158 (127)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1997 17,862 90,249 37,740 (5,550) (303)
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 - - - - -
Restricted Stock Activity, Net 2 275 - - 55
- ------------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1998 19,148 112,015 25,921 (4,660) (248)
Comprehensive Income:
Net Income-1999 - - 12,140 - -
Unrealized Holding Losses on Securities
Available for Sale Arising During the
Period, Net of Tax Benefit of $17,259 - - - - -
Less: Reclassification Adjustment for Gains
Included In Net Income, Net of Tax of $357 - - - - -
Total Comprehensive Income
Cash Dividends Declared ($0.77 per share) - - (12,507) - -
Stock Issued in Payment of
Stock Dividend - 913,921 Shares 1,142 18,336 (19,478) - -
Exercise of Stock Options - 261,689 Shares 57 594 (484) 1,610 -
Treasury Stock Purchased - 389,900 Shares - - - (8,465) -
Retirement of Treasury Stock (168) (1,530) - 1,698 -
Restricted Stock Activity, Net 3 45 - - 151
- ------------------------------------------------------------------------------------------------------------------------------------
Balance-December 31, 1999 $20,182 $129,460 $ 5,592 $(9,817) $ (97)
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Unallocated Accumulated
For the Years Ended Common Stock Other Total
December 31, 1997, 1998, and 1999 Acquired by Comprehensive Stockholders'
(In Thousands, Except Share Data) the ESOP Income (Loss) Equity
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance-January 1, 1997 $(154) $ 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 ESOP 51 - 51
Restricted Stock Activity, Net - - 141
- --------------------------------------------------------------------------------------------------
Balance-December 31, 1997 (103) 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 $1,331 - (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 - 103
Restricted Stock Activity, Net - - 332
- --------------------------------------------------------------------------------------------------
Balance-December 31, 1998 - 6,066 158,242
Comprehensive Income:
Net Income-1999 - - 12,140
Unrealized Holding Losses on Securities
Available for Sale Arising During the
Period, Net of Tax Benefit of $17,259 - (32,257) (32,257)
Less: Reclassification Adjustment for Gains
Included In Net Income, Net of Tax of $357 - (664) (664)
---------
Total Comprehensive Income (20,781)
=========
Cash Dividends Declared ($0.77 per share) - - (12,507)
Stock Issued in Payment of
Stock Dividend - 913,921 Shares - - -
Exercise of Stock Options - 261,689 Shares - - 1,777
Treasury Stock Purchased - 389,900 Shares - - (8,465)
Retirement of Treasury Stock - - -
Restricted Stock Activity, Net - - 199
- --------------------------------------------------------------------------------------------------
Balance-December 31, 1999 $ - $(26,855) $118,465
==================================================================================================
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
16
<PAGE>
<TABLE>
<CAPTION>
UNITED NATIONAL BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
------------------------------------------------
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $ 12,140 $ 19,858 $ 18,447
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 4,163 4,931 4,157
Amortization Related to the Dissolution of UFS 485 - -
Amortization of Securities Premiums, Net 1,207 1,210 495
Provision for Possible Loan Losses 3,825 3,444 4,432
(Benefit) Provision for Deferred Income Taxes (4,431) 44 254
Net (Gain) Loss on Disposition of Premises and Equipment (118) 5 545
Net Gains from Securities Transactions (949) (3,891) (1,914)
Writedown of Investment in Joint Venture - 220 -
Trading Account Securities Activity, Net 238 (94) (200)
Increase in Other Assets (6,258) (3,314) (1,846)
Increase in Other Liabilities 8,804 1,753 4,658
Reduction of Debt Relating to ESOP - 103 51
Restricted Stock Activity, Net 199 332 141
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 19,305 24,601 29,220
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Securities Available for Sale:
Proceeds from Sales of Securities 293,933 696,694 126,663
Proceeds from Maturities of Securities 105,861 114,273 76,786
Purchases of Securities (472,906) (814,248) (429,528)
Securities Held to Maturity:
Proceeds from Maturities of Securities 38,140 53,137 41,076
Purchases of Securities (12,684) (29,997) (11,448)
Maturity of Term Certificate of Deposit - - 500
Purchase of Corporate-Owned Life Insurance 4,527 - (27,370)
Net Increase in Loans (209,131) (129,696) (37,045)
Deposit Premium from Branch Acquisition - - (1,400)
Expenditures for Premises and Equipment (2,689) (3,550) (5,824)
Proceeds from Sale of Premises and Equipment 161 689 1,113
Decrease in Other Real Estate, Net 654 996 464
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities (254,134) (111,702) (266,013)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net (Decrease) Increase in Demand and Savings Deposits (14,736) 59,824 11,936
Net Increase (Decrease) in Time Deposits 92,532 (49,114) 46,239
Net Increase in Short-Term Borrowings 45,296 55,089 43,218
Net Increase in Other Borrowings 81,455 47,133 98,116
Cash Dividends on Common Stock (12,507) (8,480) (6,458)
Proceeds from Exercise of Stock Options 1,777 1,021 1,175
Treasury Stock Acquired, at Cost (8,465) (553) (2,025)
Proceeds from Series B Capital Securities - - 20,000
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Financing Activities 185,352 104,920 212,201
- --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (49,477) 17,819 (24,592)
Cash and Cash Equivalents at Beginning of Year 102,967 85,148 109,740
- --------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 53,490 $ 102,967 $ 85,148
====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Year for:
Interest $ 60,954 $ 62,510 $ 51,198
Income Taxes 7,266 7,421 6,659
Reclass to Securities Available for Sale from Held to Maturity 15,291 - 3,160
Transfer of Loans to Other Real Estate 256 235 490
Cash Received from Deposit Acquisition - - 18,244
Transfer of Loans to be Held for Sale 23,807 128 -
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
17
<PAGE>
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. 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
18
<PAGE>
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.
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.
e. Allowance for Possible Loan Losses
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
allowance is based on Management's evaluation of potential losses in the
portfolio, after consideration of appraised collateral values, financial
condition of the borrower, delinquency and 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.
f. Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to forty years.
Leasehold improvements are amortized on a straight-line basis over the lives of
the related leases, or the life of the improvement, whichever is shorter.
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.
g. 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.
h. Intangible Assets
Intangible assets include 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 goodwill resulting from 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.
i. Trust Assets
Assets held in fiduciary or agency capacities for customers are not included in
the consolidated balance sheets since such items are not assets of the Company.
j. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
19
<PAGE>
k. 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.
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.
<TABLE>
<CAPTION>
Calculation of Basic and Diluted Earnings Per Share:
(In Thousands, Except Per Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $12,140 $19,858 $18,447
====================================================================================================================
Basic Weighted Average Common Shares Outstanding 16,002 15,787 15,705
Plus: Dilutive Stock Options and Awards 175 438 423
- --------------------------------------------------------------------------------------------------------------------
Diluted Weighted-Average Common Shares Outstanding 16,177 16,225 16,128
====================================================================================================================
Net Income Per Common Share:
Basic $0.76 $1.26 $1.17
- --------------------------------------------------------------------------------------------------------------------
Diluted $0.75 $1.22 $1.14
====================================================================================================================
</TABLE>
Share amounts for all periods presented have been adjusted for the 6% stock
dividend declared in September, 1999.
l. Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and Federal funds sold. Generally, Federal funds are sold for
a one-day period.
m. 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.
n. Retirement Benefits
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. The Company recognizes the cost of these plans over the
estimated period of service provided by covered employees.
o. Recent Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133." This statement amends FASB Statement No. 133 by delaying the
effective date one year. SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It requires recognition of all
derivative instruments as either assets or liabilities in the statement of
financial position and measurement of those instruments at fair value. This
statement is now effective for all fiscal quarters of fiscal years beginning
after June 15, 2000, on a prospective basis. The adoption of SFAS No. 133 is not
expected to have a material impact on the financial position or results of
operations of the Company.
p. Reclassifications
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 1999. As discussed
further in Note 2, during 1999, the Company completed its acquisition of Raritan
Bancorp Inc., merging its operations into that of the Company's. Such operations
were previously reported as a separate operating segment of the Company. In
addition, the Company completed the conversion of its own data processing
operations to an independent third-party provider and did not produce any
meaningful segment reporting information during 1999.
Based upon the above, no segment reporting information is provided as such
information was not deemed meaningful.
NOTE 2 - ACQUISITIONS AND DISSOLUTION OF JOINT VENTURE
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, not adjusted for subsequent stock
dividends. At December 31, 1998, Raritan had
20
<PAGE>
approximately $432 million in assets. The acquisition was accounted for as a
pooling-of-interests, and accordingly, the Company's 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 $9,940,000
which primarily consists of the payout of existing employment contracts of
$6,774,000, investment banker and other professional fees of $2,181,000,
expenses related to a completed branch closure and fixed asset disposals of
$401,000 and consolidation costs directly attributable to the merger of
$584,000. Subsequent to March 31, 1999, there were no significant changes in the
above estimates. Approximately $53,000 was reversed against merger related
charges eliminating the remaining outstanding accrual.
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 $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. All of the
merger charge has been realized at December 31, 1998 with no significant
adjustment to the original accrual. Separate results of the combined entities
for the years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(In Thousands, Unaudited) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Interest Income after Provision
For Possible Loan Losses
The Company $53,920 $48,277
SBSO - 2,719
Raritan 13,058 12,522
- --------------------------------------------------------------------------------------------------------------------
Total $66,978 $63,518
====================================================================================================================
Net Income
The Company $15,600 $13,880
SBSO - 659
Raritan 4,258 3,908
- --------------------------------------------------------------------------------------------------------------------
Total $19,858 $18,447
====================================================================================================================
</TABLE>
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.
d. 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. UFS subsequently ceased
operations in the fourth quarter 1999. In light of that development, the Company
expects that the value of its 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 was dissolved, to the extent such
liabilities are not assumed by the joint venture partner's servicer. UFS is
currently negotiating the termination of its lease obligations.
21
<PAGE>
The Company reevaluated the potential losses associated with UFS based upon its
joint venture partner's decision to exit the operations of UFS. Based upon this
reevaluation, the Company recognized an additional charge of $4,500,000,
pre-tax, during the second quarter of 1999 relating to the pending dissolution
of UFS. The additional charge related primarily to write-offs of leasehold
improvements of $500,000, equipment and software of $900,000 and accrual for
lease buyouts of $2,900,000 and severance payments of $200,000.
Ultimately, the Company's potential loss on its investment in UFS and liability
for 50% of UFS' obligations to lessors could be reduced based upon, among other
things, the 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. A third-party, that will
undertake data processing functions for the Company's joint venture partner,
will require use of some of the equipment and facilities through at least April
2000. Changes from this date could impact the Company's estimated loss related
to UFS. No charges against the reserve have occurred through December 31, 1999.
It is anticipated that the above charges will be realized during the first half
of 2000.
NOTE 3 - CASH AND DUE FROM BANKS
Balances reserved to meet regulatory requirements amounted to $1,200,000 at
December 31, 1999.
NOTE 4 - SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated market value of securities for sale at December
31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
Obligations of U.S. Government
Agencies and Corporations $ 97,738 $ - $ (9,055) $ 88,683
Obligations of States and
Political Subdivisions 80,520 7 (5,304) 75,223
Mortgage-Backed Securities 398,106 12 (27,324) 370,794
Corporate Debt Securities 47,908 - (3,887) 44,021
- --------------------------------------------------------------------------------------------------------------------
Total Debt Securities 624,272 19 (45,570) 578,721
- --------------------------------------------------------------------------------------------------------------------
Equity Securities:
Marketable Equity Securities 28,062 4,823 (588) 32,297
Federal Reserve Bank and
Federal Home Loan Bank Stock 20,643 - - 20,643
- --------------------------------------------------------------------------------------------------------------------
Total Equity Securities 48,705 4,823 (588) 52,940
- --------------------------------------------------------------------------------------------------------------------
Total Securities Available for Sale $672,977 $4,842 $(46,158) $631,661
====================================================================================================================
<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
====================================================================================================================
</TABLE>
22
<PAGE>
The amortized cost and estimated market value of debt securities available for
sale at December 31, 1999, 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.
<TABLE>
<CAPTION>
Amortized Estimated
(In Thousands) Cost Market Value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $ 2,250 $ 2,205
Due After One Year Through Five Years 8,563 8,197
Due After Five Years Through Ten Years 42,041 39,489
Due After Ten Years 173,312 158,036
Mortgage-Backed Securities 398,106 370,794
- --------------------------------------------------------------------------------------------------------------------
Total Debt Securities Available for Sale $624,272 $578,721
====================================================================================================================
</TABLE>
Gross gains and gross losses realized during 1999, 1998 and 1997 relating to
securities available for sale were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Gains $1,551 $4,107 $1,787
Gross Losses 530 192 382
- --------------------------------------------------------------------------------------------------------------------
Total Net Gains $1,021 $3,915 $1,405
====================================================================================================================
</TABLE>
In conjunction with the Raritan acquisition, the Company reclassified
$15,291,000 of securities with a market value of $15,105,000 which were
previously classified as held to maturity to available for sale. The securities
were transferred to conform to the Company's existing interest rate risk
position and credit policies.
NOTE 5 - SECURITIES HELD TO MATURITY
The amortized cost and estimated market value of securities held to
maturity at December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(In Thousands) Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 5,000 $ - $ (39) $ 4,961
Obligations of U.S. Government
Agencies and Corporations 4,997 - (334) 4,663
Obligation of States and
Political Subdivisions 25,515 - (537) 24,978
Mortgage-Backed Securities 2,221 - (78) 2,143
Securities Issued by Foreign
Governments 175 - (2) 173
- --------------------------------------------------------------------------------------------------------------------
Total Securities Held to Maturity $37,908 $ - $(990) $36,918
====================================================================================================================
</TABLE>
<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
Obligations 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
====================================================================================================================
</TABLE>
The amortized cost and estimated market value of securities held to maturity at
December 31, 1999, by expected maturity, are shown in the following table.
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.
23
<PAGE>
<TABLE>
<CAPTION>
Amortized Estimated
(In Thousands) Cost Market Value
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in One Year or Less $10,259 $10,239
Due After One Year Through Five Years 4,089 4,044
Due After Five Years Through Ten Years 3,695 3,668
Due After Ten Years 17,644 16,824
Mortgage-Backed Securities 2,221 2,143
- ---------------------------------------------------------------------------------------------------------------------
Total Debt Securities Held to Maturity $37,908 $36,918
=====================================================================================================================
</TABLE>
There were no sales of securities held to maturity during 1999, 1998 and 1997.
Securities held to maturity and available for sale with amortized costs totaling
$550,000 and $26,825,000, respectively, on December 31, 1999, were pledged to
secure U.S. Government and other deposits and for other purposes as required and
permitted by law. In addition, securities held to maturity and available for
sale having amortized costs aggregating $7,221,000 and $643,282,000,
respectively, on December 31, 1999, were pledged to secure advances and
securities sold under agreements to repurchase. Securities totaling $18,004,000
remain under the custodial responsibility of the Company during the period of
the applicable agreements. Such agreements require that the counter party
deliver substantially the same security at the expiration of the repurchase
agreements.
NOTE 6 - LOANS
Loans outstanding by classification at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate:
Commercial and Residential Mortgage $ 696,945 $ 611,676
Construction 55,573 40,435
Commercial Loans 233,956 218,929
Lease Financing 18,462 11,022
Installment Loans 199,577 143,011
Retail Credit Card Plan 43,916 38,511
- --------------------------------------------------------------------------------------------------------------------
Total Loans Outstanding 1,248,429 1,063,584
Less: Unearned Income 10,893 6,631
Allowances for Loan Losses 10,386 11,174
- --------------------------------------------------------------------------------------------------------------------
Loans, Net $1,227,150 $1,045,779
====================================================================================================================
Mortgage Loans Held for Sale $ 23,807 $ 128
====================================================================================================================
</TABLE>
The Company extends credit in the normal course of business to its customers,
the majority of whom operate or reside within New Jersey. The ability of its
customers to meet contractual obligations is, to a certain extent, dependent
upon the economic conditions existing in the state.
As of December 31, 1999 and 1998, the Company's non-accrual loans were
$4,382,000 and $7,281,000, respectively. Of these, the loans considered to be
impaired were $669,000 and $5,365,000 respectively, with related valuation
allowances of $167,000 and $1,300,000, 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 1999, 1998 and 1997
were $1,172,000, $5,299,000 and $7,975,000, respectively. During 1999, the
Company sold $3,859,000 in non-performing loans, which resulted in a $793,000
reduction in the allowance for possible loan losses
The following information is presented for those loans classified as
non-accrual, and considered impaired, at December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income that Would have Been Recorded Under
Original Contract Terms $300 $665 $744
Interest Income Received and Recorded 30 73 91
- --------------------------------------------------------------------------------------------------------------------
Lost Income on Non-Accrual Loans at Year-End $270 $592 $653
====================================================================================================================
</TABLE>
24
<PAGE>
Loans to directors, executive officers, and/or their affiliated interests
amounted to approximately $12,079,000 and $12,083,000 at December 31, 1999 and
1998, 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 1999 activity in these loans
is as follows (in thousands):
<TABLE>
<S> <C>
Balance Outstanding, Beginning of Year $12,083
New Loans 1,040
Repayments (1,044)
- -------------------------------------------------------------------
Balance Outstanding, End of Year $12,079
===================================================================
</TABLE>
NOTE 7 - ALLOWANCE FOR POSSIBLE LOAN LOSSES
A summary of the allowance for possible loan losses activity for the years ended
December 31, 1999, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, Beginning of Year $ 11,174 $ 11,739 $ 11,874
Provision Charged to Expense 3,825 3,444 4,432
Recoveries 967 1,225 984
Losses Charged to Allowance (4,787) (5,234) (5,551)
Losses Charged to Allowance for Non-Performing Asset Sale (793) -- --
- --------------------------------------------------------------------------------------------------
Balance, End of Year $ 10,386 $ 11,174 $ 11,739
==================================================================================================
</TABLE>
NOTE 8 - PREMISES AND EQUIPMENT
The detail of premises and equipment at December 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Premises (includes land of $3,339 and $3,347
in 1999 and 1998, respectively) $17,853 $17,636
Property Under Capital Lease 9,750 9,750
Equipment 16,773 15,764
Leasehold Improvements 4,332 4,324
Projects in Progress 644 12
- --------------------------------------------------------------------------------
Total 49,352 47,486
Less: Accumulated Depreciation and Amortization 20,328 18,238
- --------------------------------------------------------------------------------
Premises and Equipment, Net $29,024 $29,248
================================================================================
</TABLE>
Depreciation expense amounted to $2,870,000, $2,970,000 and $2,429,000 in 1999,
1998 and 1997, respectively
NOTE 9 - DEPOSITS
Time certificates of deposit of $100,000 or more totaled $170,868,000 on
December 31, 1999 and $109,667,000 on December 31, 1998.
Time deposits, with remaining maturities greater than one year, mature as
follows (in thousands):
<TABLE>
<S> <C>
2001 $61,559
2002 23,005
2003 10,912
2004 7,953
Thereafter 6,481
- -----------------------------------------------------------------------------
Total $109,910
=============================================================================
</TABLE>
Interest-bearing deposits amounted to $1,234,226,000 and $1,157,575,000 at
December 31, 1999 and 1998, respectively. Non-interest bearing deposits amounted
to $246,983,000 and $245,838,000 at December 31, 1999 and 1998, respectively.
25
<PAGE>
NOTE 10 - SHORT-TERM BORROWINGS
Selected data relating to short-term borrowings for the years ended December 31,
1999 and 1998, are as follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
At Year-End:
Borrowed Funds $ 69,607 $ 75,385
Securities Sold Under Agreements to Repurchase 40,000 39,475
Federal Home Loan Bank Advances 71,000 37,000
Federal Funds Purchased 15,000 --
Demand Notes U.S. Treasury 4,324 2,775
- -------------------------------------------------------------------------------
Total Short-Term Borrowings $199,931 $154,635
===============================================================================
Weighted Average Interest Rate 5.40% 4.97%
===============================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $ 36,347 $ 15,385
Weighted Average Interest Rate 5.65% 5.64%
Highest Month-End Balance $ 54,475 $ 81,864
- -------------------------------------------------------------------------------
</TABLE>
NOTE 11 - OTHER BORROWINGS
Other borrowings consisted of the following at December 31:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998
- ------------------------------------------------------------------------------------
<S> <C> <C>
Other Borrowed Funds $96,269 $87,277
Securities Sold Under Agreements to Repurchase 130,539 58,000
Obligation Under Capital Lease 9,589 9,665
- ------------------------------------------------------------------------------------
Total Other Borrowings $236,397 $154,942
====================================================================================
Weighted Average Interest Rate 5.96% 6.21%
====================================================================================
For the Year Ended December 31:
Securities Sold Under Agreements to Repurchase:
Average Balance Outstanding $100,074 $53,951
Weighted Average Interest Rate 5.58% 5.80%
Highest Month-End Balance $130,539 $58,000
- ------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999, other borrowed funds and securities sold under agreements
to repurchase mature as follows: 2000-$142,808,000, 2001-$69,000,000 and
2002-$15,000,000.
The Company has a lease agreement on its headquarters building. The lease, which
has been accounted for as a capital lease, expires in 2015. Lease commitments
under this agreement are as follows (in thousands):
<TABLE>
<S> <C>
2000 $ 999
2001 1,059
2002 1,089
2003 1,089
2004 1,154
Thereafter 13,954
- ---------------------------------------------------------------------
Total 19,344
Less: Amount Representing Interest (9,755)
- ---------------------------------------------------------------------
Total Obligation Under Capital Lease $ 9,589
=====================================================================
</TABLE>
26
<PAGE>
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, 1999 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, 1999.
The following is a summary of the Company's and the Bank's actual capital
amounts and ratios as of December 31, 1999 and 1998, compared to the regulatory
authorities minimum capital adequacy requirements and requirements for
classification as a well capitalized institution:
<TABLE>
<CAPTION>
December 31, 1999 December 31,1998
------------------------------------------- -----------------------------------------
(Dollars In Thousands) Company Bank Company Bank
- ---------------------- ------------------- ---------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RISK-BASED CAPITAL RATIOS:
Tier I Capital
Actual $158,123 10.93% $146,776 10.16% $163,304 13.53% $154,267 12.95%
Regulatory Minimum Requirement 57,874 4.00 57,766 4.00 48,276 4.00 47,654 4.00
For Classification as Well 86,811 6.00 86,649 6.00 72,414 6.00 71,481 6.00
Capitalized
Combined Tier I and Tier II Capital
Actual 168,509 11.65 157,162 10.88 174,139 14.43 165,102 13.86
Regulatory Minimum Requirement 115,748 8.00 115,532 8.00 96,552 8.00 95,307 8.00
For Classification as Well 144,685 10.00 144,415 10.00 120,690 10.00 119,134 10.00
Capitalized
LEVERAGE RATIO:
Actual 158,123 7.46 146,776 6.95 163,304 8.51 154,267 8.20
Regulatory Minimum Requirement 84,744 4.00 84,468 4.00 76,777 4.00 75,276 4.00
For Classification as Well 105,930 5.00 105,586 5.00 95,971 5.00 94,094 5.00
Capitalized
</TABLE>
27
<PAGE>
NOTE 14 - INCOME TAXES
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $9,501 $7,702 $7,916
Deferred (Benefit) Provision (4,431) 44 254
- ---------------------------------------------------------------------------------
Total Federal 5,070 7,746 8,170
State 413 622 865
- ---------------------------------------------------------------------------------
Total Provision for Income Taxes $5,483 $8,368 $9,035
=================================================================================
</TABLE>
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying income before taxes by the statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
(Dollars In Thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income Before Provision for Income Taxes $17,623 $28,226 $27,482
- ------------------------------------------------------------------------------------
Tax Calculated at 35% $6,168 $9,879 $9,619
Increase (Decrease) in Tax Resulting from:
Tax-Exempt Income (1,998) (1,516) (1,037)
State Taxes-Net of Federal Tax Benefit 269 404 562
Decrease in Valuation Allowance (344) (240) --
Non-Deductible Merger Expenses 2,464 --
Other-Net (1,076) (159) (109)
- ------------------------------------------------------------------------------------
Provision for Income Taxes $5,483 $8,368 $9,035
====================================================================================
Effective Tax Rate 31% 30% 33%
====================================================================================
</TABLE>
The components of the net deferred tax asset as of December 31, 1999 and 1998
are as follows:
<TABLE>
<CAPTION>
(In Thousands) 1999 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Allowance for Possible Loan Losses $ 3,533 $ 2,894
Post Retirement Benefits 1,694 1,317
Deferred Directors Fees 845 129
Capital Lease 767 624
Intangible Assets 686 659
Reserve for Accrued Expenses 1,779 --
Net Unrealized Loss on Securities Available for Sale 14,461 --
Other 404 1,341
- -------------------------------------------------------------------------------
Total Gross Deferred Tax Assets 24,169 6,964
Valuation Allowance -- (344)
- -------------------------------------------------------------------------------
Deferred Tax Assets, Net 24,169 6,620
- -------------------------------------------------------------------------------
Deferred Tax Liabilities:
Net Unrealized Gain on Securities Available for Sale -- (3,155)
Depreciation (1,028) (1,046)
Pension Plan (913) (490)
Accretion of Discount (149) (564)
Other (235) (1,508)
- -------------------------------------------------------------------------------
Total (2,325) (6,763)
- -------------------------------------------------------------------------------
Net Deferred Tax Asset (Liability) $ 21,844 $ (143)
===============================================================================
</TABLE>
Management believes the existing net deductible temporary differences will
reverse during periods in which the Company generates sufficient net taxable
income. 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 $(17,616,000), $263,000 and $2,427,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
28
<PAGE>
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, 1999 and 1998:
<TABLE>
<CAPTION>
Pension Benefits Post Retirement Benefits
- --------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Projected Benefit Obligation at Beginning of Year $ 23,055 $ 21,590 $ 8,514 $ 7,387
Service Cost 834 860 387 336
Interest Cost 1,315 1,454 542 542
Actuarial (Loss) Gain (3,921) 430 (924) 793
Benefits Paid 1,326 (1,279) (661) (544)
- --------------------------------------------------------------------------------------------------------
Projected Benefit Obligation at End of Year 22,609 23,055 7,858 8,514
- --------------------------------------------------------------------------------------------------------
Plan Assets Fair Value at Beginning of Year 35,421 28,299 -- --
Actual Return on Plan Assets 10,572 8,358 -- --
Employer Contribution 43 43 661 544
Benefits Paid (1,326) (1,279) (661) (544)
- --------------------------------------------------------------------------------------------------------
Plan Assets Value at End of Year 44,710 35,421 -- --
- --------------------------------------------------------------------------------------------------------
Funded Status 22,101 12,366 (7,858) (8,514)
Unrecognized Transition (Asset) Obligation -- (2) 3,766 4,055
Unrecognized Prior Service Cost 290 387 -- 9
Unrecognized (Gain) Loss (19,438) (11,497) (348) 442
- --------------------------------------------------------------------------------------------------------
Prepaid (Accrued) Cost $ 2,953 $ 1,254 $ (4,440) $ (4,008)
- --------------------------------------------------------------------------------------------------------
Discount Rate 7.50% 6.75% 7.50% 6.74%
Expected Return on Plan Assets 9.00% 8.91% -- --
Rate of Compensation Increase 4.50% 4.50% -- --
- --------------------------------------------------------------------------------------------------------
</TABLE>
The Company maintains 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 connection with the SERP,
the Company has purchased approximately $31.9 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 $198,000 and $215,000 in 1999 and 1998, respectively. The
Supplemental Plans have no assets as of December 31, 1999 and 1998.
29
<PAGE>
Net periodic (benefit) expense for 1999, 1998 and 1997 includes the following:
<TABLE>
<CAPTION>
Pension Benefits Post Retirement Benefits
- --------------------------------------------------------------------------------------------------------------------
(In Thousands) 1999 1998 1997 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Periodic (Benefit) Expense Components:
Service Cost $ 834 $ 860 $ 847 $ 387 $ 336 $ 319
Interest Cost 1,315 1,454 1,408 542 542 485
Expected Return on Plan Assets (2,854) (2,462) (2,054) - - -
Net Deferral and Amortization (564) (404) (158) 291 282 284
The Effect of Raritan Merger 107 - - 28 - -
- --------------------------------------------------------------------------------------------------------------------
Net Periodic (Benefit) Expense $(1,162) $ (552) $ 43 $1,248 $1,160 $1,088
- --------------------------------------------------------------------------------------------------------------------
Weighted Average Assumptions:
Discount Rate 6.75% 7.04% 7.32% 6.75% 6.77% 7.03%
Expected Return on Plan Assets 9.00% 8.91% 8.89% - - -
Rate of Compensation Increase 4.50% 5.00% 5.93% - - -
- --------------------------------------------------------------------------------------------------------------------
</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 2004.
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) $143 $(114)
Effect on the Post Retirement Benefits (Projected Benefit Obligation) 959 (787)
- --------------------------------------------------------------------------------------------------------------------
</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 $508,000, $556,000 and $550,000
in 1999, 1998 and 1997, 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 Plan. 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(m) the Company's net
income and diluted net income per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
(In Thousands, Except Per Share Data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $12,140 $19,858 $18,447
Pro forma 11,863 19,550 18,140
Basic Net Income Per Share:
As Reported $ 0.76 $ 1.26 $ 1.18
Pro forma 0.74 1.24 1.16
Diluted Net Income Per Share:
As Reported $ 0.75 $ 1.22 $ 1.14
Pro forma 0.73 1.20 1.12
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
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 1999, 1998 and 1997, respectively; dividend yield
of 3.6%, 3.5% and 2.3% for 1999, 1998 and 1997, respectively; expected
volatility of 19%, 17% and 22% for 1999, 1998 and 1997, respectively; risk-free
interest rates of 5.2%, 5.6% and 6.7% for 1999, 1998 and 1997, 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, 1999, 1998 and
1997 and changes during the years ended on those dates, adjusted for subsequent
stock dividends and splits, is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- --------------------------- -----------------------------
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 752,791 $11.74 871,944 $ 9.07 1,033,204 $ 6.39
Granted 93,613 21.64 81,737 24.21 208,179 14.21
Exercised (261,688) 6.64 (200,574) 5.21 (352,701) 4.10
Forfeited (13,764) 19.09 (316) 11.70 (16,738) 12.04
- --------------------------------------------------------------------------------------------------------------------
Outstanding at
End of Year 570,952 $15.52 752,791 $11.74 871,944 $ 9.07
====================================================================================================================
Options Exercisable
At Year-End 347,356 469,629 534,326
====================================================================================================================
Weighted Average
Fair Value of
Options Granted
During the Year $3.65 $3.92 $3.44
====================================================================================================================
</TABLE>
The following table summarizes information about the stock options outstanding
at December 31, 1999, 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>
$ 3.68 26,630 3.0 $ 3.68 26,630 $ 3.68
9.07-10.74 76,305 4.3 10.58 76,305 10.58
11.52-11.70 102,822 5.1 11.66 102,822 11.66
11.93-12.26 90,852 6.5 12.22 70,353 12.21
15.32-17.62 105,451 7.3 16.94 61,916 16.75
21.58-21.82 90,406 9.3 21.64 - -
23.37-25.81 78,486 8.2 24.24 9,330 25.81
- ------------------------------------------------------------------------------------------------------------------
$3.68-$25.81 570,952 6.6 $15.52 347,356 $12.21
==================================================================================================================
</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:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Restricted Stock Awards:
Outstanding - January 1, 21,840 28,485 10,996
Granted 2,100 1,800 28,710
Canceled - - (918)
Vested (20,040) (8,445) (10,303)
- ----------------------------------------------------------------------------------------------
Outstanding - December 31, 3,900 21,840 28,485
==============================================================================================
</TABLE>
Compensation expense recognized related to the restricted stock awards was
$15,000, $332,000 and $141,000 for the years ended December 31, 1999, 1998 and
1997, respectively.
31
<PAGE>
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 $1,417,000, $1,405,000 and
$1,049,000 for the years ended December 31, 1999, 1998 and 1997, 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, 1999, were as follows (in thousands):
<TABLE>
<S> <C>
2000 $1,404
2001 1,223
2002 899
2003 794
2004 791
Thereafter 2,558
</TABLE>
The above represents minimum rentals, not adjusted for possible future increases
due to property taxes and cost of living escalation provisions.
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 Credit Risk Contract or Notional Amount
(In Thousands) At December 31, 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Commitments for Commercial and Construction Loans Secured by Real Estate $ 42,070
Unused Portion of Credit Card Lines of Credit 62,051
Unused Portion of Home Equity Lines of Credit 62,788
Used Portion of Commercial Lines of Credit 160,689
Standby Letters of Credit 4,765
</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. If any
of the compensation or other benefits payable to an officer under his or her
agreement results in additional taxes because the amounts are deemed to
constitute excess parachute payments within the meaning of Section 280G of the
Internal Revenue Code, the Company will make an additional payment so as to
provide the officer with the compensation and benefits he or she would have
received in the absence of such additional taxes.
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 mar-
32
<PAGE>
ket 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Carrying Fair Carrying Fair
(In Thousands) Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets
Cash and Short-Term Investments $ 53,490 $ 53,490 $ 102,967 $ 102,967
Securities Available for Sale 631,661 631,661 609,262 609,262
Securities Held to Maturity 37,908 36,918 63,374 63,675
Trading Account Securities 929 929 1,239 1,239
Loans, Net of Allowance for Possible Loan Losses 1,227,150 1,217,295 1,045,779 1,055,502
Mortgage Loans Held for Sale 23,807 23,929 128 129
- -----------------------------------------------------------------------------------------------------------------
Financial Liabilities
Deposits
Demand 235,386 235,386 234,621 234,621
Savings 562,673 562,673 578,174 578,174
Time 683,150 683,724 590,618 594,358
- -----------------------------------------------------------------------------------------------------------------
Total Deposits 1,481,209 1,481,783 1,403,413 1,407,153
Short-Term Borrowings 199,931 199,931 154,635 154,635
Other Borrowings 236,397 234,252 154,942 155,240
- -----------------------------------------------------------------------------------------------------------------
Off-Balance Sheet Financial Instruments
Standby Letters of Credit - 52 - 27
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
33
<PAGE>
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 and $129,000 in
1998 and 1997, respectively, is included in salaries, wages and employee
benefits in the accompanying consolidated statements of income.
NOTE 20 - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY
The condensed financial statements of United National Bancorp (parent company
only) are presented below:
<TABLE>
<CAPTION>
December 31,
CONDENSED BALANCE SHEETS --------------------------
(In Thousands) 1999 1998
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and Due from Banks $ 26 $ 3,375
Securities Available for Sale 8,125 2,309
Trading Account Securities 929 1,239
Investment in Subsidiaries 128,381 170,921
Other Assets 4,477 4,136
------------------------------------------------------------------------------------------------------
Total Assets $141,938 $181,980
======================================================================================================
Liabilities and Stockholders' Equity
Junior Subordinated Debentures $ 20,619 $ 20,619
Loan from Subsidiary - 750
Other Liabilities 2,854 2,369
Stockholders' Equity 118,465 158,242
------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $141,938 $181,980
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
For The Years Ended December 31,
CONDENSED STATEMENTS OF INCOME -----------------------------------------
(In Thousands) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiary $24,276 $10,590 $8,735
Interest and Dividends on Securities 221 228 221
Net (Loss) Gain from Securities Transactions (353) 1,794 508
- -------------------------------------------------------------------------------------------------------
Total Income 24,144 12,612 9,464
- -------------------------------------------------------------------------------------------------------
Expense
Interest Expense on Junior Subordinated Debentures 2,064 2,064 1,605
Interest Expense on Loan from Subsidiary 85 50 -
Other Expenses 438 367 363
- -------------------------------------------------------------------------------------------------------
Total Expense 2,587 2,481 1,968
- -------------------------------------------------------------------------------------------------------
Income Before Income Tax Benefit 21,557 10,131 7,496
Income Tax Benefit 943 170 429
- -------------------------------------------------------------------------------------------------------
Income Before (Distributions in Excess of) Equity in
Undistributed Income of Subsidiary 22,500 10,301 7,925
(Distributions in Excess of) Equity in Undistributed
Income of Subsidiary (10,360) 9,557 10,552
- -------------------------------------------------------------------------------------------------------
Net Income $12,140 $19,858 $18,447
=======================================================================================================
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS For the Years Ended December 31,
-----------------------------------------------------
(In Thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income $12,140 $19,858 $18,447
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Loss (Gain) from Securities Transactions 353 (1,794) (508)
Trading Account Securities Activity, Net 310 (94) (200)
Increase in Other Assets (986) (1,011) (1,211)
Increase (Decrease) in Other Liabilities 485 (175) 42
Restricted Stock Activity, Net 199 332 141
Distributions in Excess of (Equity in Undistributed)
Income of Subsidiary 10,360 (9,557) (10,522)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 22,861 7,559 6,189
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available
For Sale 7,328 6,079 2,800
Purchase of Securities Available for Sale (13,593) (3,969) (2,400)
- --------------------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided by
Investing Activities (6,265) 2,110 400
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Cash Dividends on Common Stock (12,507) (8,480) (6,458)
Proceeds from Exercise of Stock Options 1,777 1,021 1,175
Loan from Subsidiary (750) 750 -
Purchase of Treasury Stock (8,465) (553) (2,025)
Sale of Treasury Stock - - -
Stock Issued from Equity Contracts - 875 613
Proceeds from Issuance of Junior Subordinated Debentures - - 20,619
Capital Contributed to Subsidiary - - (20,458)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used in Financing Activities 19,945 (6,387) (6,534)
- --------------------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash (3,349) 3,282 55
Cash at Beginning of Year 3,375 93 38
- --------------------------------------------------------------------------------------------------------------------
Cash at End of Year $ 26 $ 3,375 $ 93
====================================================================================================================
</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 $33,984,000 for the
payment of cash dividends at December 31, 1999.
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
United National Bancorp:
We have audited the accompanying consolidated balance sheets of United National
Bancorp and subsidiaries as of December 31, 1999 and 1998, 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, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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.
In our opinion, the 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Short Hills, New Jersey
January 24, 2000.
36
<PAGE>
(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.)
<PAGE>
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
United National Bancorp:
We consent to incorporation by reference in the following Registration
Statements filed on Form S-8: the United National Bancorp Stock Based Incentive
Plan, dated May 19, 1993; the United National Bank Profit Sharing and 401(k)
Plan dated March 16, 1994; and the United National Bank 1995 Stock Option Plan
for Non-Employee Directors, dated June 28, 1995, of our report dated January 24,
2000, relating to the consolidated balance sheets of United National Bancorp and
subsidiaries as of December 31, 1999 and 1998 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, 1999, which report is
incorporated by reference in the December 31, 1999 Annual Report on Form 10-K of
United National Bancorp.
/s/ KPMG LLP
Short Hills, New Jersey
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from SEC Form
10-K and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 53,490
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 929
<INVESTMENTS-HELD-FOR-SALE> 631,661
<INVESTMENTS-CARRYING> 37,908
<INVESTMENTS-MARKET> 36,918
<LOANS> 1,261,343
<ALLOWANCE> 10,386
<TOTAL-ASSETS> 2,090,383
<DEPOSITS> 1,481,209
<SHORT-TERM> 199,931
<LIABILITIES-OTHER> 34,381
<LONG-TERM> 236,397
0
0
<COMMON> 20,182
<OTHER-SE> 98,283
<TOTAL-LIABILITIES-AND-EQUITY> 2,090,383
<INTEREST-LOAN> 93,998
<INTEREST-INVEST> 44,489
<INTEREST-OTHER> 441
<INTEREST-TOTAL> 138,928
<INTEREST-DEPOSIT> 43,504
<INTEREST-EXPENSE> 64,010
<INTEREST-INCOME-NET> 74,918
<LOAN-LOSSES> 3,825
<SECURITIES-GAINS> 949
<EXPENSE-OTHER> 74,660
<INCOME-PRETAX> 17,623
<INCOME-PRE-EXTRAORDINARY> 17,623
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,140
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.75
<YIELD-ACTUAL> 4.17
<LOANS-NON> 4,382
<LOANS-PAST> 3,732
<LOANS-TROUBLED> 28
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 11,174
<CHARGE-OFFS> 4,787
<RECOVERIES> 967
<ALLOWANCE-CLOSE> 10,386
<ALLOWANCE-DOMESTIC> 10,386
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
