SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-16931
United National Bancorp
(Exact name of registrant as specified in its charter)
New Jersey 22-2894827
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
1130 Route 22 East, Bridgewater, New Jersey 08807-0010
(Address of principal executive offices) (Zip Code)
(908)429-2200
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of April 30, 1999, there were 15,116,290 shares of common stock, $1.25 par
value, outstanding.
UNITED NATIONAL BANCORP
FORM 10-Q/A
United National Bancorp files this Form 10-Q/A to reflect an $872,000 increase
in our first quarter 1999 provision for income taxes. This change relates to
charges in connection with the Raritan merger. This change increased United's
first quarter one-time merger-related charge, net of taxes, from $7,256,000
to $8,128,000, and increased our first quarter net loss to $3,446,000. The
change had no effect on United's core operating earnings.
INDEX
PART I - FINANCIAL INFORMATION PAGE(S)
ITEM 1 Consolidated Financial Statements and Notes to
Consolidated Financial Statements 1-9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders 22
ITEM 6 Exhibits and Reports on Form 8-K 23
SIGNATURES 24
Part I - Financial Information
Item 1 - Financial Statements
United National Bancorp
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
March 31, December 31,
1999 1998
----------------- ----------------
ASSETS
Cash and Due from Banks $ 54,843 $ 52,867
Federal Funds Sold 22,000 50,100
Securities Available for Sale, at Market Value 664,607 609,262
Securities Held to Maturity 54,162 63,374
Trading Account Securities, at Market Value 1,195 1,239
Loans, Net of Unearned Income 1,077,710 1,056,953
Less: Allowance for Possible Loan Losses 10,820 11,174
----------------- ----------------
Loans, Net 1,066,890 1,045,779
Mortgage Loans Held for Sale - 128
Premises and Equipment, Net 29,038 29,248
Investment in Joint Venture 2,704 2,931
Other Real Estate, Net 150 507
Intangible Assets, Primarily Core Deposit Premiums 8,686 9,288
Other Assets 57,341 52,471
----------------- ----------------
Total Assets $1,961,616 $1,917,194
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Demand $ 242,668 $ 263,700
Savings 570,935 549,095
Time 603,900 590,618
----------------- ----------------
Total Deposits 1,417,503 1,403,413
Short-Term Borrowings 161,323 154,635
Other Borrowings 188,237 154,942
Other Liabilities 26,303 25,962
----------------- ----------------
Total Liabilities 1,793,366 1,738,952
Company-Obligated Mandatorily Redeemable
Preferred Series B Capital Securities of a
Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Company 20,000 20,000
----------------- ----------------
STOCKHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares,
none issued and outstanding - -
Common Stock, $1.25 Par Value, Authorized
Shares 16,000,000, Issued Shares 15,219,201 in
1999 and 15,318,038 in 1998, Outstanding
Shares 15,115,467 in 1999 and 15,021,180 in 1998 19,024 19,148
Additional Paid-in Capital 110,961 112,015
Retained Earnings 18,680 25,921
Treasury Stock, at Cost - 103,734 shares in 1999 and
296,858 shares in 1998 (1,352) (4,660)
Restricted Stock (97) (248)
Accumulated Other Comprehensive Income 1,034 6,066
----------------- ----------------
----------------- ----------------
Total Stockholders' Equity 148,250 158,242
----------------- ----------------
Total Liabilities and Stockholders' Equity $1,961,616 $1,917,194
================= ================
See Accompanying Notes to Consolidated Financial Statements.
1
United National Bancorp
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
---------------- ----------------
1999 1998
---------------- ----------------
INTEREST INCOME
Interest and Fees on Loans $ 21,712 $21,129
Interest and Dividends on Securities Available for Sale:
Taxable 8,565 8,932
Tax-Exempt 1,105 708
Interest and Dividends on Securities Held to Maturity:
Taxable 498 1,023
Tax-Exempt 255 193
Dividends on Trading Accounts Securities 8 6
Interest on Federal Funds Sold and
Deposits with Federal Home Loan Bank 397 740
---------------- ----------------
---------------- ----------------
TOTAL INTEREST INCOME 32,540 32,731
---------------- ----------------
---------------- ----------------
INTEREST EXPENSE
Interest on Savings Deposits 2,789 3,012
Interest on Time Deposits 7,656 8,878
Interest on Short-Term Borrowings 1,719 933
Interest on Other Borrowings 2,557 2,148
---------------- ----------------
---------------- ----------------
Total Interest Expense 14,721 14,971
---------------- ----------------
---------------- ----------------
Net Interest Income 17,819 17,760
Provision for Possible Loan Losses 975 1,098
---------------- ----------------
---------------- ----------------
Net Interest Income After
Provision for Possible Loan Losses 16,844 16,662
---------------- ----------------
---------------- ----------------
NON-INTEREST INCOME
Trust Income 1,566 1,437
Service Charges on Deposit Accounts 1,151 1,320
Other Service Charges, Commissions and Fees 1,475 1,613
Net Gains from Securities Transactions 675 156
Other Income 789 831
---------------- ----------------
---------------- ----------------
TOTAL NON-INTEREST INCOME 5,656 5,357
---------------- ----------------
---------------- ----------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 6,544 6,508
Occupancy Expense, Net 1,283 1,215
Furniture and Equipment Expense 1,078 1,028
Data Processing Expense 1,502 1,915
Distributions of Series B Capital Securities 501 501
Amortization of Intangible Assets 603 430
Merger Related Charge & Loss on Sale of Assets 11,073 -
Other Expenses 3,476 3,705
---------------- ----------------
---------------- ----------------
TOTAL NON-INTEREST EXPENSE 26,060 15,302
---------------- ----------------
---------------- ----------------
(Loss) Income Before Provision for Income Taxes (3,560) 6,717
(Benefit) Provision for Income Taxes (114) 1,887
---------------- ----------------
NET (LOSS) INCOME $( 3,446) $ 4,830
================ ================
NET (LOSS) INCOME PER COMMON SHARE:
Basic $ (0.23) $ 0.33
================ ================
Diluted $ (0.23) $ 0.32
================ ================
Weighted Average Shares Outstanding:
Basic 14,891 14,719
Diluted 14,891 15,155
See Accompanying Notes to Consolidated Financial Statements.
2
United National Bancorp
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
(Unaudited)
CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Restricted Comprehensive Stockholders'
Stock Capital Earnings Stock Stock Income Equity
---------- ------------ ------------ ------------- ------------ -------------- ----------
Balance December 31, 1998 $19,148 $112,015 $25,921 $(4,660) $(248) $ 6,066 $158,242
Net Loss - - (3,446) - - - (3,446)
Cash Dividends Declared
$0.20 Per Share - - (3,311) - - - (3,311)
Exercise of Stock Options
(226,711 Shares) 41 431 (484) 1,610 - - 1,598
Change in Unrealized Gain on
Securities Available for Sale,
Net of Tax - - - - - (5,032) (5,032)
Retirement of Treasury Stock (168) (1,530) - 1,698 - - -
Restricted Stock Activity, Net 3 45 - - 151 - 199
---------- ------------ ------------ ----------- ------------ -------------- ------------
Balance March 31, 1999 $19,024 $110,961 $18,680 $(1,352) $ (97) $ 1,034 $148,250
========== ============ ============ =========== ============ ============== ============
See Accompanying Notes to Consolidated Financial Statements.
3
United National Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
1999 1998
---------------- ----------------
OPERATING ACTIVITIES
Net (Loss) Income $ (3,446) $ 4,830
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 1,325 1,143
Amortization of Securities, Net 230 284
Provision for Possible Loan Losses 975 1,098
Provision for Deferred Income Taxes (752) 51
Net (Gain) Loss on Disposition
Of Premises and Equipment (6) 22
Net Gains from Securities Transactions (675) (156)
Trading Account Securities Activity, Net 56 (110)
Increase in Other Assets (5,834) (4,681)
Decrease in Other Liabilities 341 (2,151)
Restricted Stock Activity 199 74
----------------- -----------------
Net Cash (Used in) Provided by Operating Activities (7,587) 404
----------------- -----------------
INVESTING ACTIVITIES Securities Available for Sale:
Proceeds from Sales of Securities 104,326 105,655
Proceeds from Maturities of Securities 34,641 18,011
Purchases of Securities (194,229) (143,141)
Securities Held to Maturity:
Proceeds from Maturities of Securities 12,005 19,412
Purchases of Securities (5,533) (21,847)
Net Increase in Loans (21,958) (11,337)
Expenditures for Premises and Equipment (544) (946)
Proceeds from Disposal of Premises and Equipment 38 349
(Increase) Decrease in Other Real Estate 357 (75)
----------------- -----------------
Net Cash Used in Investing Activities (70,897) (33,919)
----------------- -----------------
FINANCING ACTIVITIES
Net Increase in Demand and Savings Deposits 808 19,531
Net Increase (Decrease) in Certificates of Deposit 13,282 (6,075)
Net Increase (Decrease) in Short-Term Borrowings 6,688 (14,612)
Net Increase in Other Borrowed Funds 33,295 46,953
Cash Dividends on Common Stock (3,311) (1,821)
Proceeds from Exercise of Stock Options 1,598 190
Purchase of Treasury Stock - (23)
----------------- -----------------
Net Cash Provided by Financing Activities 52,360 44,143
----------------- -----------------
Net (Decrease) Increase in Cash and Cash Equivalents (26,124) 10,628
Cash and Cash Equivalents at Beginning of Period 102,967 85,148
================= =================
Cash and Cash Equivalents at End of Period $ 76,843 $ 95,776
================= =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Paid During the Period:
Interest $ 14,359 $ 15,486
Income Taxes 4,200 3,411
See Accompanying Notes to Consolidated Financial Statements.
4
UNITED NATIONAL BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements included herein
have been prepared by United National Bancorp (the "Company"), in accordance
with generally accepted accounting principles and pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest annual report on Form
10-K.
In the opinion of the Company, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the operating
results for the interim periods have been included. The results of operations
for periods of less than a year are not necessarily indicative of results for
the full year.
Effective March 31, 1999, the Company acquired Raritan Bancorp Inc. ("Raritan").
The acquisition has been accounted for as a pooling-of-interests and,
accordingly, the financial statements include the accounts and activities of
Raritan for all periods presented. The transaction resulted in the issuance of
4,023,624 shares of the Company's common stock.
In connection with the Raritan acquisition, on March 31, 1999 the Company
recorded a pre-tax merger charge of $9,940,000 which primarily consists of
estimated severance and outplacement costs of $6,705,000, investment banker and
other professional fees of $2,270,000, expenses related to facilities closures
and fixed asset disposals of $670,000 and consolidation costs directly
attributable to the merger of $295,000. At March 31, 1999, $8,136,000 of the
total merger charge was realized.
Separate results of the combined entities for the three months ended March 31,
are as follows (in thousands):
Net Interest Income After Provision for
Possible Loan Losses 1999 1998
------------ ------------
The Company $ 13,346 $ 13,437
Raritan 3,498 3,225
------------ ------------
Total 16,844 16,662
============ ============
Net (Loss) Income
The Company (4,619) 3,827
Raritan 1,173 1,003
------------ ------------
Total $ (3,446) $ 4,830
============ ============
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." This Statement amends SFAS No. 65, "Accounting
for Certain Mortgage Banking Activities", to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. The Company adopted SFAS No. 134 effective January 1, 1999. The
adoption of this Statement did not have a material impact on the financial
position or results of operations of the Company.
5
(2) Comprehensive (Loss) Income
Total comprehensive (loss) income amounted to the following for the three month
periods ended March 31 (in thousands):
1999 1998
-------------------- -----------------
Net (Loss) Income $(3,446) $4,830
Change in Unrealized Gain
on Securities Available for Sale (5,032) 447
-------------------- -----------------
Comprehensive (Loss) Income $(8,478) $5,277
==================== =================
(3) Net (Loss) Income Per Common Share
Basic (loss) income per common share is computed by dividing net (loss) income
by the weighted average number of shares outstanding during each period.
Diluted net (loss) income per common share is computed by dividing net (loss)
income by the weighted average number of shares outstanding, as adjusted for the
assumed exercise of options for common stock, using the treasury stock method.
Potential shares of common stock resulting from stock option agreements totaled
zero and 436,000 for the quarter ended March 31, 1999 and 1998, respectively.
Options to purchase 541,633 shares of common stock were excluded from the
calculation of net loss per common share in 1999 as they were anti-dilutive.
(4) Pending Dissolution of Joint Venture
In the latter part of 1998, the Company decided to terminate its interest in
United Financial Services, Inc. ("UFS"), its joint venture data service
provider. At that time, the Company anticipated that its joint venture partner
would continue to operate UFS. In connection with its decision to exit the joint
venture, the Company evaluated the estimated lives and salvage values of
equipment, software and leases held by UFS, as well as related goodwill. Based
upon this evaluation, the Company accelerated depreciation and amortization
charges totaling approximately $1,200,000 in the fourth quarter of 1998 and the
first quarter of 1999, and the Company anticipated taking additional accelerated
charges of approximately $600,000 in the second quarter of 1999. In April 1999,
the Company completed the conversion of its own data processing operations to an
independent third-party provider.
In April 1999, the Company was advised that its joint venture partner intended
to take its data processing operations out of UFS as well. In light of that
development, the Company expects that UFS will cease operations, that the value
of the Company's interest in UFS (carried on the Company's balance sheet at
$2,704,000 at March 31, 1999) may be substantially less than it would have been
had UFS continued in operation, and that the Company may incur substantial
liabilities in connection with the obligations of UFS under operating leases
which remain in effect.
At March 31, 1999, UFS was the lessee under certain leases which had aggregate
current remaining lease payment obligations of just under $8,000,000. Of these
obligations, for which the Company may have liability for up to 50% of the
total, approximately $7,400,000 was for equipment leased from third-party
vendors and approximately $600,000 was for facilities leased from the Company's
joint venture partner. Aggregate monthly payment obligations under the equipment
leases are approximately $290,000 and under the facility leases are
approximately $25,000. Thus, the Company's exposure on these leases decreases as
monthly lease payments are made by UFS.
Ultimately, the Company's potential loss on investment in UFS and liability for
50% of UFS' obligations to lessors could be reduced based upon, among other
things, the amount of time the Company's joint venture partner continues to run
the operations of UFS during the dissolution process, the ability (if any) of
UFS to negotiate discounts with lessors, and the Company's ability to obtain
compensation for the use of the equipment and leases of UFS by a third party
subsequent to dissolution. The Company's joint venture partner has informed the
Company that it anticipates operating UFS through October 1999, and that the
third-party that will undertake its data processing functions thereafter will
require use of some of the equipment and facilities through April 2000.
6
Management is in the process of evaluating the impact of the dissolution of UFS
on the Company in light of these developments. Management anticipates that this
evaluation will be completed and an estimated loss will be recognized during the
second quarter of 1999.
7
(5) Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. Summary financial information on a fully taxable equivalent basis for
the lines of business is presented below (in thousands).
Results of Operations for
The Three Months Ended March 31, 1999 Retail Commercial Investments Trust Corporate Raritan Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 8,303 $ 7,722 $ 10,100 $ - $ - $ 7,128 $ 33,253
Interest Expense 7,540 268 3,358 - - 3,555 14,721
Funds Transfer Pricing Allocation 8,319 (4,633) (5,847) (3) 2,164 - -
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income 9,082 2,821 895 (3) 2,164 3,573 18,532
Provision for Loan Losses 518 382 - - - 75 975
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 8,564 2,439 895 (3) 2,164 3,498 17,557
Non-Interest Income 2,379 235 793 1,568 389 292 5,656
Non-Interest Expense 10,391 1,526 54 1,275 54 1,995 15,295
Merger & Other Unallocated Expenses - - - - 10,765 - 10,765
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 552 $ 1,148 $ 1,634 $ 290 $ (8,266) $ 1,795 $ (2,847)
- -----------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,102,045 $ 13,937 $ 243,379 $ (271) $159,373 $422,223 $1,940,686
Funds Used: Interest-Earning Assets 418,818 365,393 611,837 - - 399,173 1,795,221
Non-Interest-Earning Assets 7,094 - - - 115,321 23,050 145,465
- -----------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 676,133 $(351,456) $(368,458) $ (271) $ 44,052 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
8
Results of Operations for
The Three Months Ended March 31, 1998 Retail Commercial Investments Trust Corporate Raritan Consolidated
Interest Income $ 9,815 $ 6,074 $ 10,071 $ - $ - $ 7,248 $ 33,208
Interest Expense 8,469 49 2,505 - - 3,948 14,971
Funds Transfer Pricing Allocation 8,881 (3,504) (6,512) (1) 1,136 - -
Net Interest Income 10,227 2,521 1,054 (1) 1,136 3,300 18,237
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for Loan Losses 674 349 - - - 75 1,098
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Loan Losses 9,553 2,172 1,054 (1) 1,136 3,225 17,139
Non-Interest Income 2,839 282 136 1,439 366 295 5,357
Non-Interest Expense 10,698 917 50 907 - 2,101 14,673
Unallocated Expenses - - - - 629 - 629
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 1,694 $ 1,537 $ 1,140 $ 531 $ 873 $ 1,419 $ 7,194
- -----------------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,079,027 $ 2,219 $ 192,074 $ (81) $116,604 $407,409 $1,797,252
Funds Used: Interest-Earning Assets 441,059 242,090 592,388 - 50 387,605 1,663,192
Non-Interest-Earning Assets 16,100 - - - 98,156 19,804 134,060
- -----------------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 621,868 $(239,871) $(400,314) $ (81) $ 18,398 $ - $ -
- -----------------------------------------------------------------------------------------------------------------------------------
9
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF 0PERATIONS.
The following discussion of the operating results and financial condition at
March 31, 1999 is intended to help readers analyze the accompanying financial
statements, notes and other supplemental information contained in this document.
Results of operations for the three months ended March 31, 1999 are not
necessarily indicative of results to be attained for any other period.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of The
Private Securities Litigation Reform Act of 1995. Such statements are not
historical facts and include expressions about our confidence and strategies and
our expectations about new and existing programs and products, relationships,
opportunities, technology and market conditions. These statements may be
identified by an "asterisk" ("*") or such forward-looking terminology as
"expect", "believe", "anticipate", or by expressions of confidence such as
"continuing" or "strong" or similar statements or variations of such terms. Such
forward-looking statements involve certain risks and uncertainties. These
include, but are not limited to, expected cost savings not being realized or not
being realized within the expected time frame; income or revenues being lower
than expected or operating costs higher; competitive pressures in the banking or
financial services industries increasing significantly; business disruption
related to program implementation or methodologies; Year 2000 compliance
programs not addressing Year 2000 computer problems effectively; weakening of
general economic conditions nationally or in New Jersey; changes in legal and
regulatory barriers and structures; and unanticipated occurrences delaying
planned programs or initiatives or increasing their costs or decreasing their
benefits. Actual results may differ materially from such forward-looking
statements. The Company assumes no obligation for updating any such
forward-looking statements at any time.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 and March 31, 1998:
OVERVIEW
The Company realized a net loss of $3,446,000 for the first quarter of 1999, as
compared to net income of $4,830,000 reported for the same period in 1998. The
first quarter of 1999 included one-time charges, net of taxes, totaling
$8,864,000 or $0.59 per diluted share. One-time charges consisted of $8,128,000
related to the acquisition of Raritan and $736,000 pertaining to the sale of
$4,465,000 of non-performing assets. (Loss) earnings per diluted share were
$(0.23) for the first quarter of 1999 as compared to $0.32 for the prior year.
First quarter 1999 operating earnings, net of taxes, totaled $5,418,000 or $0.36
per diluted share before one-time charges. This represents an increase of
$588,000 or 12.2% from operating earnings of $4,830,000 for the three months
ended March 31, 1998.
The increase in earnings before one-time charges for the three months ended
March 31, 1999 compared to 1998 was primarily the result of an increase in
non-interest income combined with a reduction in non-interest expense.
10
EARNINGS ANALYSIS
Interest Income
Interest income for the quarter ended March 31, 1999 was $32,540,000, a decrease
of $191,000 or 0.6% from the $32,731,000 reported for the same period in 1998.
The yield on average interest earning assets on a fully taxable equivalent basis
decreased 58 basis points to 7.44% for the first quarter of 1999 from 8.02% for
the first quarter of 1998. Average interest earning assets were up $128,000,000
or 7.7%, with most of the growth experienced in the real estate and commercial
loan categories.
Interest Expense
The Company's interest expense for the first quarter of 1999 decreased $250,000,
or 1.7%, to $14,721,000 from $14,971,000 for the same period last year.
Specifically, interest on savings and time deposits fell $1,445,000 as average
rates decreased 47 basis points, while interest on short-term and other
borrowings increased $1,195,000 despite declining interest rates as a result of
an increase in borrowings in order to fund loan and investment growth. The
Company's average cost of interest bearing liabilities decreased to 4.01% for
the first quarter of 1999 from 4.35% for the first quarter of 1998. Average
interest bearing liabilities increased by $94,156,000 for the first quarter of
1999 compared to the same period in 1998, while non-interest bearing deposits
increased by $29,108,000.
Net Interest Income
The net effect of the changes in interest income and interest expense for the
first quarter of 1999 was an increase of $59,000 or 0.3% in net interest income
as compared to the first quarter of 1998. The net interest margin and net
interest spread, on a fully taxable equivalent basis, decreased 26 basis points
and 24 basis points, respectively, from the same period last year.
Provision for Possible Loan Losses
For the three months ended March 31, 1999, the provision for possible loan
losses was $975,000, compared to $1,098,000 for the same period last year. The
amount of the loan loss provision and the level of the allowance for possible
loan losses are based upon a number of factors including Management's evaluation
of potential losses in the portfolio, after consideration of appraised
collateral values, financial condition and past credit history of the borrowers
as well as prevailing and anticipated economic conditions.
11
Non-Interest Income
For the first quarter of 1999, compared to the first quarter of 1998, total
non-interest income increased $299,000 or 5.6%, due primarily to increases of
$129,000 in trust income and $519,000 in net securities gains, partially offset
by reductions in service charges and fees and other income.
Non-Interest Expense
For the quarter ended March 31, 1999, non-interest expense increased $10,758,000
from the same period last year. Included in the first quarter of 1999 were
one-time charges related to the Raritan acquisition and the sale non-performing
assets totaling $11,073,000, pre-tax. Excluding these charges, non-interest
expense decreased by $315,000 or 2.1% from 1998. Data processing expense
declined by $413,000, or 21.6% due to reductions in fees charged by UFS. UFS, a
data processing joint venture, is 50% owned by the Company. As described in Note
4, the Company has decided to terminate its joint venture in UFS. See note 4 for
a discussion of the potential impact on future results of operations.
Amortization of intangible assets increased by $173,000 or 40.2% during the
first quarter 1999 compared with 1998 as a result of accelerated amortization
charges related to the pending termination of the Company's joint venture in
UFS.
Income Taxes
Income tax benefit of $114,000 was recognized for the first quarter of 1999 as
compared to expense of $1,887,000 for the same period in 1998. The effective tax
rate for the quarters ended March 31, 1999 and 1998 was 3% and 28%,
respectively.
Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, Trust and Investment
Services, and Raritan. Activities not included in these lines are reflected in
Corporate. Summary financial information on a fully taxable equivalent basis for
the lines of business is presented in Note 5.
12
The Corporate segment accounted for $8,266,000 of the pre-tax loss for the
quarter ended March 31, 1999, down from pre-tax income of $873,000 for the same
period a year ago. The decrease in net income before taxes is primarily
attributable to merger related charges totaling $9,940,000 in 1999 and an
increase in amortization of intangibles related to the pending termination of
the Company's joint venture in UFS.
The Retail segment's contribution to net income before taxes declined to
$552,000 for the three months ended March 31, 1999, down from $1,694,000 for the
first quarter 1998. This decrease was due to a reduction in net interest income
resulting from a decline in average earning assets coupled with a decrease in
earning asset yields.
The Commercial segment produced net income before taxes of $1,148,000 in the
first quarter of 1999, down from $1,537,000 for the same period in 1998. This
decline is attributable to lower earning asset yields and losses incurred on the
sale of non-performing assets in 1999.
Investment segment net income before taxes totaled $1,634,000 for the first
three months of 1999, up from $1,140,000 in 1998 as a result of an increase in
net securities gains.
The Raritan segment's contribution to net income before taxes grew by $376,000
as a result of an increase in earning asset volume and a lower cost of funds,
while pre-tax net income from the Trust division fell $241,000 due to an
increase in non-interest expense.
13
FINANCIAL CONDITION
March 31, 1999 as compared to December 31, 1998:
Total assets increased $44,422,000 or 2.3% from December 31, 1998. Securities
increased by $46,089,000, loans increased by $20,983,000, net of allowance,
other assets increased by $4,870,000, and cash and due from banks increased by
$1,976,000. Conversely, there were decreases of $28,100,000 in Federal funds
sold, $602,000 in intangible assets, $357,000 in other real estate owned,
$227,000 in investment in joint venture and $210,000 in premises and equipment.
Total loans at March 31, 1999 increased $20,629,000 to $1,077,710,000 from
year-end 1998. Loan growth was exhibited in the real estate portfolio which grew
by $24,014,000 or 3.7% from December 31, 1998 to $676,253,000 at March 31, 1999.
Commercial loans contributed $2,448,000 to the first quarter loan growth, an
increase of 1.1% over December 31, 1998. Offsetting these increases, installment
loans decreased $7,100,000 or 3.9% from December 31, 1998 to $174,422,000 at
March 31, 1999, as a result of loan payments on the indirect automobile loan
portfolio exceeding new loan growth.
The following schedule presents the components of gross loans, by type, for each
period presented.
March 31, December 31,
(In Thousands) 1999 1998
----------------- ---------------
Commercial $221,377 $218,929
Real Estate 676,253 652,239
Lease Financing 11,448 11,022
Installment 174,422 181,522
----------------- ---------------
----------------- ---------------
Total Loans Outstanding 1,083,500 1,063,712
Less: Unearned Income 5,790 6,631
----------------- ---------------
Loans, Net of Unearned Income $1,077,710 $1,057,081
================= ===============
14
Within the securities portfolio, the majority of the increase was due to
purchases of tax exempt municipal securities and U.S. Government Agency issues,
partially offset by paydowns on mortgage-backed securities.
The amortized cost and approximate market value of securities are summarized as
follows (in thousands):
March 31, 1999 December 31, 1998
------------------------------ -----------------------------
Amortized Market Amortized Market
Securities Available for Sale Cost Value Cost Value
- - ---------------------------------------------- ------------ ------------- ------------ ------------
U.S. Treasury Securities $ 1,000 $ 1,007 $ 2,502 $ 2,514
Obligations of U.S. Government
Agencies and Corporations 98,557 96,503 66,872 66,933
Obligations of States and
Political Subdivisions 107,201 109,358 76,930 79,484
Mortgage-Backed Securities 379,294 377,745 388,564 391,123
Corporate Debt Securities 26,942 26,336 23,343 24,000
Other Securities 50,425 53,658 41,830 45,208
------------ ------------- ------------ ------------
Total Securities Available For Sale 663,419 664,607 600,041 609,262
------------ ------------- ------------ ------------
Securities Held to Maturity
- - ----------------------------------------------
U.S. Treasury Securities 5,000 5,010 2,000 2,020
Obligations of U.S. Government
Agencies and Corporations 4,995 4,947 14,994 15,010
Obligations of States and
Political Subdivisions 22,625 22,880 22,141 22,445
Mortgage-Backed Securities 21,392 21,396 24,089 24,045
Other Securities 150 156 150 155
------------ ------------- ------------ ------------
Total Securities Held to Maturity 54,162 54,389 63,374 63,675
------------ ------------- ------------ ------------
Trading Securities 731 1,195 675 1,239
- - ---------------------------------------------- ------------ ------------- ------------ ------------
Total Securities $718,312 $720,191 $664,090 $674,176
============ ============= ============ ============
15
Total deposits increased $14,090,000 or 1.0%. Time deposits increased by
$13,282,000, while savings deposits increased $21,840,000. Demand deposits
decreased by $21,032,000. Short-term borrowings increased by $6,688,000 and
other borrowings increased by $33,295,000, as the Bank continued to utilize
Growth Strategies to increase the loan and investment portfolios. Management
continues to monitor the shift of deposits and level of borrowings through its
Asset/Liability Management Committee.
Asset Quality
During the first quarter of 1999, the Company sold non-performing assets having
a carrying value of $4,465,000, resulting in a one-time charge of $736,000, net
of tax. The following table provides an analysis of non-performing assets as of
March 31, 1999 and December 31, 1998, 1997, 1996, and 1995:
March 31, December 31, December 31, December 31, December 31,
(Dollars in Thousands) 1999 1998 1997 1996 1995
--------------- ----------------- ----------------- ----------------- -------------
Total Assets $1,961,616 $1,917,194 $1,789,426 $1,550,129 $1,489,773
Total Loans (Net of Unearned Income) $1,077,710 $1,057,081 $ 931,266 $ 898,788 $ 812,985
Allowance for Possible Loan Losses $ 10,820 $ 11,174 $ 11,739 $ 11,874 $ 11,440
% of Total Loans 1.00 % 1.06 % 1.26 % 1.32 % 1.41 %
Total Non-Performing Loans (1) $ 6,296 $ 8,612 $ 9,973 $ 13,018 $ 10,314
% of Total Assets 0.32 % 0.45 % 0.56 % 0.84 % 0.69 %
% of Total Loans .058 % 0.81 % 1.07 % 1.45 % 1.27 %
Allowance for Possible Loan Losses
to Non-Performing Loans 171.86 % 129.75 % 117.71 % 91.21 % 110.92 %
Total of Non-Performing Assets $ 6,494 $ 9,170 $ 11,650 $ 15,163 $ 13,609
% of Total Assets 0.33 % 0.48 % 0.65 % 0.98 % 0.91 %
(1) Non-performing loans consist of:
(a) impaired loans, which includes non-accrual and renegotiated loans, and
(b) loans which are contractually past due 90 days or more as to principal
or interest,
but are still accruing interest at previously negotiated rates to the
extent that such loans are both well secured and in the process of
collection.
At March 31, 1999, there were $4,177,000 of loans that are considered to be
impaired under SFAS No. 114. There was one troubled debt restructuring of
$38,000, which is performing in accordance with the restructured agreement.
For the quarter ended March 31, 1999, the Company recognized no interest income
on impaired loans.
Allowance for Possible Loan Losses
The allowance is increased by provisions charged to expense and reduced by
charge-offs, net of recoveries. At March 31, 1999, the allowance for possible
loan losses was $10,820,000, down from $11,174,000 at year-end 1998. Net
charge-offs for the three months ended March 31, 1999 were $536,000. In
addition, the allowance was reduced by $793,000 in connection with the sale of
non-performing loans.
16
The level of the allowance for possible loan losses is based upon a number of
factors including Management's evaluation of potential losses in the portfolio,
after consideration of appraised collateral values, financial condition and past
credit history of the borrowers as well as prevailing and anticipated economic
conditions.
The allowance for possible loan losses declined from December 31, 1998 despite
overall growth in the loan portfolio, primarily as a result of management's
assessment of improvements in credit quality attributable to the sale of
$3,859,000 in non performing loans and a continued shift in portfolio
composition out of indirect automobile loans and into loans secured by real
estate. At March 31, 1999, the ratio of the allowance for possible loan losses
to non-performing loans was 171.86% as compared to 129.75% at December 31, 1998.
In the opinion of Management, the allowance for possible loan losses at March
31, 1999 was adequate to absorb possible future losses on existing loans and
commitments based upon currently available information.*
Liquidity Management
At March 31, 1999, the amount of liquid assets remained at a level Management
deemed adequate to ensure that contractual liabilities, depositors' withdrawal
requirements, and other operational and customer credit needs could be
satisfied.* This liquidity was maintained at the same time the Company was
managing the interest rate sensitivity of interest earning assets and interest
bearing liabilities so as to improve profitability.
At March 31, 1999, liquid investments, comprised of Federal funds sold and money
market mutual fund instruments, totaled $54,639,000. Additional liquidity is
generated from maturities and principal payments in the investment portfolio.
Scheduled maturities and anticipated principal payments of the investment
portfolio will approximate $128,169,000 throughout the next twelve months.* In
addition, all or part of the investment securities available for sale could be
sold to provide liquidity. These sources can be used to meet the funding needs
during periods of loan growth. Liquidity is also available through additional
lines of credit and the ability to incur additional debt. At March 31, 1999, the
Company had lines of credit totaling $529,580,000 under which $180,020,000 was
available.
Capital
Total stockholders' equity decreased $9,992,000 to $148,250,000 at March 31,
1999 from the $158,242,000 recorded at the end of 1998. The decrease was due to
cash dividends declared totaling $3,311,000, the net loss of $3,446,000, and a
decrease in net unrealized gains on securities available for sale of $5,032,000,
partially offset by exercises of stock options of $1,598,000 and restricted
stock activity of $199,000.
17
The following table reflects the Company's capital ratios, as of March 31, 1999
and December 31, 1998 in accordance with current regulatory guidelines.
(Dollars in Thousands) March 31, 1999 December 31, 1998
-------------------------- -----------------------------
Amount Ratio Amount Ratio
--------------- --------- ------------------ ---------
Risk-Based Capital
Tier I Capital
Actual $160,607 12.56 % $163,304 13.53 %
Regulatory Minimum Requirements 51,160 4.00 48,276 4.00
For Classification as Well Capitalized 76,740 6.00 72,414 6.00
Combined Tier I and Tier II Capital
Actual 171,427 13.40 174,139 14.43
Regulatory Minimum Requirements 102,320 8.00 96,552 8.00
For Classification as Well Capitalized 127,900 10.00 120,690 10.00
Leverage
Actual 160,607 8.32 163,304 8.51
Regulatory Minimum Requirements 77,226 4.00 76,777 4.00
For Classification as Well Capitalized 96,533 5.00 95,971 5.00
The Company's risk-based capital ratios (Tier I and Combined Tier I and Tier II
Capital) and Tier I leverage ratio continue to exceed the minimum requirements
set forth by the Company's regulators.
Year 2000 Issue
The Year 2000 issue involves preparing computer systems and programs to identify
the arrival of January 1, 2000. In the past, many computer programs allocated
only two digits to a year, (i.e., 1998 was represented as 98). Given this
programming, the year 2000 could be confused with that of 1900. The Year 2000
issue not only impacts computer hardware and software, but all equipment that
utilizes processors or computer microchips.
Management has formed a Year 2000 Committee with members from all significant
areas of the Company, which has conducted a complete review of its operations to
identify systems, computer hardware, software applications, vendors and
customers that could be affected by the Year 2000 issue. The committee has
developed an implementation plan (the "Plan") to rectify any issues related to
processing of transactions in the Year 2000 and beyond. Progress versus the Plan
is subject to periodic examination by the Office of the Comptroller of the
Currency ("OCC") regulators. As recommended by the Federal Financial
Institutions Examination Council, the Plan encompasses the following phases:
awareness, assessment, renovation, validation and implementation. These phases
are designed to enable the Company to identify risks, develop an action plan,
and perform adequate testing and complete certification that all systems will be
Year 2000 ready. Execution of the Plan is currently on target.
18
As of March 31, 1999, the Company is in the validation and implementation
phases. This effort includes hardware and software upgrades and systems
replacements, as necessary. The primary operating software systems for the
Company are obtained from and maintained by multiple external providers. The
Company maintains ongoing contact with these vendors who have provided written
assurances that where necessary, their software has been remediated and is now
Year 2000 compliant. As part of the validation phase, the Company is working to
test these systems for Year 2000 compliance.
The Company is also in the process of obtaining certifications of Year 2000
compliance from all other vendors, while also defining contingencies for these
vendors. In the event the Company is unable to obtain such certifications, the
Company will either obtain Year 2000 compliant software, hardware and support
services, or utilize the respective contingency, as appropriate. Each of the
vendors, whose products or services are believed by management to be material to
the Company, has either provided written assurance that it is Year 2000
compliant or has provided written assurance that it expects to be Year 2000
compliant prior to the Year 2000. The Company believes that the risk associated
with the possibility of a processing failure being experienced by any of these
vendors is minimal. This assessment is based on a number of factors. Extensive
documentation has been provided throughout the progress of each vendor's Year
2000 project. Each vendor asserts that it completed its remediation efforts
prior to December 31, 1998. Each vendor asserts that it completed its internal
testing as of December 31, 1998, and the Company has been involved in extensive
user testing of each of these applications.
In addition, the Company is in the process of contacting all non-information
technology suppliers (i.e., utility systems, telephone systems and security
systems) regarding the Year 2000 state of readiness. The renovation phase
involves testing of changes to hardware and software, accompanied by monitoring
and testing with vendors. The validation phase is targeted for completion by
June 30, 1999*. The implementation phase's purpose is to certify that systems
are compliant on a going-forward basis. This phase is targeted for completion by
June 30, 1999*.
The Company is also working with its significant borrowers and depositors to
ensure they are taking appropriate steps to become Year 2000 compliant. The
Company has received information from 100% of significant borrowers and 89% of
significant depositors on the status of their Year 2000 readiness. There have
been no downgrades of risk ratings in the loan portfolio. Early in 1997, the
Loan Division of UNB commenced an initiative to familiarize the Bank's borrowing
customer base with the Year 2000 issue. The original action was to discuss the
issue with our borrowers and to identify where they were in relationship to Year
2000 remediation. The next step was to include a synopsis of each borrower's
status in their Credit Assessment. An unsatisfactory response would then affect
overall risk rating assessment of the credit.
The Company, however, continues to bear some risk related to the Year 2000 issue
and could be adversely affected if other entities (e.g., vendors) do not
appropriately address their own compliance issues. If during the validation
phase an external provider's software is determined to have potential problems
which it is not able to resolve in time, the Company would likely experience
significant processing delays, mistakes or failures. These delays, mistakes or
failures could have a significant adverse impact on the financial statements of
the Company. In addition, if any of the Bank's borrowers' experiences
significant problems due to Year 2000 issues, the credit risk inherent in loans
to such borrowers would increase.
The Company continues to evaluate the estimated costs associated with attaining
Year 2000 readiness. Additional costs, such as testing, software purchases and
marketing, are not anticipated to be material to the Company in any one year*.
In total the Company estimates that its costs for compliance will amount to
approximately $750,000 over the two-year period from 1998-1999, of which
approximately $500,000 has been incurred to date. The Company expects to fund
these costs out of normal operating cash. While additional costs will be
incurred, the Company believes, based upon available information, that it will
be able to manage its Year 2000 transition without any significant adverse
effect on business operations or financial condition.*
The Company has completed a remediation contingency plan for Year 2000
compliance for its mission critical applications. The remediation contingency
plan outlines the actions to be taken if the current approach to remediating
mission critical applications does not appear to be able to deliver a Year 2000
compliant system when required. Predetermined target dates have been established
for all mission critical applications. If testing of the mission critical
application is not completed by the target date, then alternative actions would
be taken
19
as outlined in the remediation contingency plan. In addition, the
Company also has a comprehensive business resumption plan to facilitate timely
restoration of services in the event of business disruption. The Company's
remediation contingency plan and business resumption plan will be reviewed and
updated as needed throughout 1999. The Company is in the process of preparing a
contingency plan for all other hardware, software and vendors which is targeted
for completion by June 30, 1999.*
20
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary market risk faced by the Company is interest rate risk. The
Company's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest income in alternative interest rate scenarios. Management
reviews and refines its interest rate risk management process in response to the
changing economic climate. Currently, the Company's model projects a 200 basis
point change in rates during the first year, in even monthly increments, with
rates held constant in the second year. The Company's ALCO has established that
interest income sensitivity will be considered acceptable if net interest income
in the above interest rate scenario is within 10% of net interest income in the
flat rate scenario in the first year and within 20% over the two-year time
frame. At March 31, 1999, the Company's income simulation model indicates an
acceptable level of interest rate risk, with no significant change from December
31, 1998.*
Management also monitors interest rate risk by utilizing a market value of
equity model. The model computes estimated changes in net portfolio value
("NPV") of its cash flows from the Company's assets and liabilities in the event
of a change in market interest rates. NPV represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities. This analysis assesses the risk of gain or loss in market
risk sensitive instruments in the event of an immediate and sustained 200 basis
point increase or decrease in market interest rates. The Company's ALCO policy
indicates that the level of interest rate risk is acceptable if the immediate
200 basis point change in interest rates would not result in the loss of more
than 25% from the base market value of equity. At March 31, 1999, the market
value of equity indicates an acceptable level of interest rate risk, with no
significant change since December 31, 1998.*
Computation of prospective effects of hypothetical interest rates changes are
based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and duration of deposits, and should not be relied upon
as indicative of actual results. Further, the computations do not contemplate
any actions the ALCO could undertake in response to changes in interest rates.
21
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders
On February 26, 1999, the Company mailed to its shareholders a proxy statement
("Proxy Statement") for the purpose of soliproxies for use in a Special Meeting
pertaining to the merger of Raritan into the Company.
At the Special Meeting, held on March 30, 1999, the shareholders approved the
merger of Raritan into the Company as set forth in the Proxy Statement with
7,308,287 shares voted in favor of the merger; 389,967 shares voted against and
41,608 shares abstaining.
22
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(3)(a) Certificate of Incorporation of the Company as in
effect on the date of this filing. (Incorporated by
reference in the Company's Report on Form 10-Q for
the quarter ended June 30, 1997 filed with the
Securities and Exchange Commission.)
(3)(b) By-laws of the Company (Incorporated by reference in
the Company's Report on Form 10-K for the year ended
December 31, 1994 filed with the Securities and
Exchange Commission.)
(27) Financial Data Schedule
(b) Reports on Form 8-K
On January 20, 1999 the Company reported on Form 8-K
its results of operations for the fourth quarter and
full year ended December 31, 1998.
On February 18, 1999 the Company reported on Form 8-K
entering into an agreement with The BISYS Group, Inc.
whereby BISYS will provide integrated information
processing services as well as item processing and
deposit services for the Company.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATIONAL BANCORP
(Registrant)
Dated: January 21, 2000 By: /s/ THOMAS C. GREGOR
Thomas C. Gregor
Chairman, President and CEO
Dated: January 21, 2000 By: /s/ DONALD W. MALWITZ
Donald W. Malwitz
Vice President & Treasurer
24