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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 (I.R.S.Employer
incorporation or organization) identification No.)
1130 Route 22 East, Bridgewater, New Jersey 08807-0010
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(Address of principal executive offices) (Zip Code)
(908) 429-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
As of November 1, 2002, there were 19,263,725 shares of common stock, $1.25 par
value, outstanding.
UNITED NATIONAL BANCORP
FORM 10-Q
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
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 10-25
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk 26
ITEM 4 Controls and Procedures 26
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 27
SIGNATURES 28
Certifications 29-30
Part I - Financial Information
Item 1 - Financial Statements
United National Bancorp
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
September 30, December 31,
2002 2001
------------- ------------
ASSETS
Cash and Due from Banks $ 75,219 $ 55,764
Short-Term Investments 111,800 --
Securities Available for Sale, at Market Value 770,100 519,993
Securities Held to Maturity 50,698 37,656
Loans, Net of Unearned Income 1,649,966 1,235,925
Less: Allowance for Loan Losses 20,765 12,478
- -----------------------------------------------------------------------------------------------------
Loans, Net 1,629,201 1,223,447
Premises and Equipment, Net 33,660 26,397
Other Real Estate, Net 546 127
Goodwill and Other Intangible Assets 98,458 5,219
Cash Surrender Value of Life Insurance Policies 75,605 56,881
Other Assets 43,710 36,966
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,888,997 $1,962,450
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits
Demand $ 351,516 $ 272,283
Savings 943,985 573,734
Time 876,977 554,687
- -----------------------------------------------------------------------------------------------------
Total Deposits 2,172,478 1,400,704
Short-Term Borrowings 38,242 121,955
Other Borrowings 363,489 255,269
Other Liabilities 41,865 28,771
- -----------------------------------------------------------------------------------------------------
Total Liabilities 2,616,074 1,806,699
- -----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred Stock, authorized 1,000,000 shares in 2002 and 2001
None issued and outstanding -- --
Common Stock, $1.25 Par Value, Authorized Shares 25,000,000 in 2002 and
2001 Issued Shares 20,929,448 in 2002 and 16,208,434 in 2001
Outstanding Shares 19,263,725 in 2002 and 14,876,211 in 2001 26,162 20,261
Additional Paid-in Capital 234,286 130,138
Retained Earnings 33,979 30,793
Treasury Stock, at Cost - 1,665,723 shares in 2002 and 1,332,223 shares
in 2001 (33,409) (25,929)
Restricted Stock (12) (36)
Accumulated Other Comprehensive Income 11,917 524
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 272,923 155,751
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,888,997 $1,962,450
=====================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
1
United National Bancorp
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- --------
INTEREST INCOME
Interest and Fees on Loans $23,556 $23,668 $65,147 $ 74,858
Interest and Dividends on Securities Available for
Sale:
Taxable 8,223 8,438 23,113 26,614
Tax-Exempt 1,244 1,055 3,459 3,107
Interest and Dividends on Securities Held to
Maturity:
Taxable 78 166 206 685
Tax-Exempt 351 274 1,037 818
Interest on Short-Term Investments 173 15 183 67
- ---------------------------------------------------------------------------------------------
Total Interest Income 33,625 33,616 93,145 106,149
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Savings Deposits 2,480 2,582 5,552 9,042
Interest on Time Deposits 6,012 7,111 16,900 26,199
Interest on Short-Term Borrowings 277 2,023 1,275 8,323
Interest on Other Borrowings 4,423 3,536 13,117 9,215
- ---------------------------------------------------------------------------------------------
Total Interest Expense 13,192 15,252 36,844 52,779
- ---------------------------------------------------------------------------------------------
Net Interest Income 20,433 18,364 56,301 53,370
Provision for Loan Losses 1,000 721 9,950 2,083
- ---------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 19,433 17,643 46,351 51,287
- ---------------------------------------------------------------------------------------------
NON-INTEREST INCOME
Trust Income 1,362 1,487 4,332 5,256
Service Charges on Deposit Accounts 1,183 1,099 3,143 2,948
Other Service Charges, Commissions and Fees 763 1,050 2,542 4,055
Net Gains from Securities Transactions 134 10 154 185
Income on Corporate Owned Life Insurance 1,150 781 2,809 2,344
Dissolution of Joint Venture -- -- 1,171 --
Gain on the Disposition of Credit Card Portfolios -- -- 920 542
Other Income 732 1,311 1,929 2,452
- ---------------------------------------------------------------------------------------------
Total Non-Interest Income 5,324 5,738 17,000 17,782
- ---------------------------------------------------------------------------------------------
NON-INTEREST EXPENSE
Salaries, Wages and Employee Benefits 8,022 6,181 22,300 18,711
Occupancy Expense, Net 1,598 1,330 4,441 4,300
Furniture and Equipment Expense 1,232 1,068 3,378 3,150
Data Processing Expense 1,310 1,545 3,889 5,058
Amortization of Intangible Assets 494 370 1,236 1,088
Non-Recurring Charges 1,068 -- 1,847 792
Other Expenses 3,455 3,429 10,408 10,425
- ---------------------------------------------------------------------------------------------
Total Non-Interest Expense 17,179 13,923 47,499 43,524
- ---------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 7,578 9,458 15,852 25,545
Provision for Income Taxes 1,806 2,758 2,983 7,064
- ---------------------------------------------------------------------------------------------
NET INCOME $ 5,772 $ 6,700 $12,869 $ 18,481
=============================================================================================
NET INCOME PER COMMON SHARE:
Basic $ 0.35 $ 0.44 $ 0.84 $ 1.22
=============================================================================================
Diluted $ 0.34 $ 0.44 $ 0.83 $ 1.22
=============================================================================================
Weighted Average Shares Outstanding:
Basic 16,665 15,075 15,343 15,087
=============================================================================================
Diluted 16,786 15,241 15,476 15,214
=============================================================================================
See Accompanying Notes to Consolidated Financial Statements.
2
United National Bancorp
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
(Unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Restricted Comprehensive Stockholders'
Stock Capital Earnings Stock Stock Income Equity
---------------------------------------------------------------------------------------
Balance-December 31, 2001 $20,261 $130,138 $30,793 $(25,929) $(36) $ 524 $155,751
Net Income -- -- 12,869 -- -- -- 12,869
Cash Dividends Declared
($0.60 Per Share) -- -- (9,683) -- -- -- (9,683)
Stock Issued - Vista
Acquisition
(4,695,184 shares) 5,869 103,816 -- -- -- -- 109,685
Exercise of Stock Options
(25,830 Shares) 32 332 -- -- -- -- 364
Change in Unrealized Gain on
Securities Available for
Sale, Net of Tax -- -- -- -- -- 11,393 11,393
Purchase of Treasury Stock
(333,500 shares) -- -- -- (7,480) -- -- (7,480)
Restricted Stock Activity,
Net -- -- -- -- 24 -- 24
- -------------------------------------------------------------------------------------------------------------------
Balance-September 30, 2002 $26,162 $234,286 $33,979 $(33,409) $(12) $11,917 $272,923
===================================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
3
United National Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
September 30,
---------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES
Net Income $ 12,869 $ 18,481
Adjustments to Reconcile Net Income to Net Cash Provided
By Operating Activities:
Depreciation and Amortization 3,770 3,591
Amortization (Accretion) of Securities Premiums, Net 219 (212)
Provision for Loan Losses 9,950 2,083
(Benefit) Provision for Deferred Income Taxes 2,591 680
(Gain) Loss on Disposition of Premises and Equipment (1) 3
Impairment on Securities 105 --
Net Gains from Securities Transactions (154) (185)
Net Gain on the Sale of Loans -- (968)
Net Gain on the Sale of Credit Cards (920) (542)
Increase in Life Insurance (2,809) (2,344)
(Increase) Decrease in Other Assets (7,568) 1,320
Increase in Core Deposit and Other Intangibles -- (278)
Decrease in Other Liabilities (2,363) (3,614)
Restricted Stock Activity, Net 24 13
- ---------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 15,713 18,028
- ---------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Securities Available for Sale:
Proceeds from Sales of Securities 33,027 22,537
Proceeds from Maturities of Securities 112,939 49,408
Purchases of Securities (198,925) (25,231)
Securities Held to Maturity:
Proceeds from Maturities of Securities 10,366 29,884
Purchases of Securities (14,934) (17,466)
Purchase of Corporate Owned Life Insurance (1,728) --
Redemption of Corporate Owned Life Insurance 138 --
Net (Increase) Decrease in Loans (21,639) 8,245
Proceeds from the Sale of Loans -- 82,204
Proceeds from the Sale of Credit Card Business, net 14,495 1,798
Expenditures for Premises and Equipment (2,461) (1,382)
Proceeds from the Sale of Premises and Equipment 2 --
(Increase) Decrease in Other Real Estate, Net (419) 38
Net Cash Proceeds from Acquisition of Vista 71,591 --
- ---------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 2,452 150,035
- ---------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net Increase (Decrease) in Demand and Savings Deposits 101,887 (10,076)
Net Increase (Decrease) in Time Deposits 53,637 (61,442)
Net Decrease in Short-Term Borrowings (116,738) (168,014)
Advances on Other Borrowed Funds 138,235 137,300
Repayments in Other Borrowed Funds (47,132) (62,177)
Cash Dividends on Common Stock (9,683) (9,024)
Proceeds from Exercise of Stock Options 364 330
Treasury Stock Acquired, at Cost (7,480) (4,795)
- ---------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 113,090 (177,898)
- ---------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 131,255 (9,835)
Cash and Cash Equivalents at Beginning of Period 55,764 50,414
- ---------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 187,019 $ 40,579
=======================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Period:
Interest $ 38,802 $ 56,873
Taxes Paid 5,147 3,778
Issuance of Common Stock for Purchase Accounting Merger 109,685 --
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 accounting principles generally accepted in the United States of America
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.
Certain reclassifications have been made to the prior years' financial
statements to conform with the classifications used in 2002.
(2) Acquisition
On August 21, 2002, Vista Bancorp, Inc. ("Vista") was merged with and into
United National Bancorp ("United") with United being the surviving corporation
(the "Merger") in a transaction accounted for under the purchase method of
accounting. Pursuant to the terms of the definitive agreement, the Company paid
$147.6 million to Vista shareholders comprised of approximately $37.9 million in
cash and issued 4,695,184 shares of its common stock. The value of the merger
consideration per Vista share that a Vista shareholder received was the sum of
0.8775 times the average of the closing prices for the Company's common stock
during the 10 consecutive full trading days ending on August 6, 2002 and $7.09.
The acquisition was accounted for under the purchase method of accounting. Vista
was headquartered in Phillipsburg, New Jersey and operated 16 branches in
western New Jersey and eastern Pennsylvania. During the second and third
quarters of 2002, the Company recorded $779,000 and $1,068,000, respectively, in
integration expenses related to its acquisition of Vista. Information related
to the merger with Vista is included in Exhibit (99).
Pursuant to a separate merger agreement, Vista Bank, N.A., a wholly owned
subsidiary of Vista, was merged with and into UnitedTrust Bank following
consummation of the Merger.
(3) Comprehensive Income
Total comprehensive income amounted to the following for the periods indicated
(amounts in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
Net Income $ 5,772 $ 6,700 $12,869 $18,481
Change In Market Value on Securities
Available for Sale, Net of Taxes 4,270 11,005 11,393 15,016
- --------------------------------------------------------------------------------
Comprehensive Income $10,042 $17,705 $24,262 $33,497
================================================================================
5
(4) Net Income Per Common Share
Basic net income per common share is computed by dividing net income by the
weighted average number of shares outstanding during each period.
Diluted net income per common share is computed by dividing net income by the
weighted average number of shares outstanding, as adjusted for the assumed
exercise of potential common stock options, using the treasury stock method.
Potential shares of common stock resulting from stock option agreements totaled
121,000 and 166,000 for the three months ended September 30, 2002 and September
30, 2001, respectively. Potential shares of common stock resulting from stock
option agreements totaled 133,000 and 127,000 for the nine months ended
September 30, 2002 and September 30, 2001, respectively.
(5) Amortization of Intangible Assets
On July 20, 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets". SFAS No.142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and periodically reviewed for impairment.
The Company adopted SFAS No. 142 on January 1, 2002. The adoption of SFAS No.
142 had no significant impact on the Company's accounting for currently recorded
intangible assets, primarily core deposit intangibles.
The Company recorded a core deposit intangible of $14.8 million in connection
with the Vista transaction during the current quarter, of which $123,000 was
amortized during the quarter. The core deposit intangible has an estimated life
of 10 years and will be periodically reviewed for impairment. In addition, the
Company recorded goodwill of $79.5 million in connection with the Vista
transaction. The goodwill will be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142.
During the three months and nine months ended September 30, 2002, the Company
recorded amortization of intangible assets acquired before July 1, 2001 of
approximately $371,000 and $1,113,000, which primarily represented core deposit
intangibles. The remaining amortization period of these core deposit intangibles
is approximately 2.5 years.
(6) Recent Accounting Pronouncements
In October 2002, the FASB issued SFAS No. 147, Acquisition of Certain Financial
Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9. FAS No. 147 removes acquisitions of financial
institutions, except for transactions between two or more mutual enterprises,
from the scope of both FASB Statement 72 and Interpretation 9 and requires that
those transactions be accounted for in accordance with FASB Statements No. 141
and No. 142. As a result, the requirement in FASB Statement 72 to recognize, and
subsequently amortize, any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable assets acquired as an unidentifiable
asset no longer applies to acquisitions within the scope of this statement. In
addition, this statement amends FASB Statement No. 144 to include in its scope
long-term customer relationship intangible assets of financial institutions such
as depositor and borrower-relationship intangible assets and credit cardholder
assets. Consequently, those intangible assets are subject to the same
undiscounted cash flow recoverability test and impairment loss recognition and
measurement provisions that FASB Statement 144 requires for other long-lived
assets that are held and used. The provisions of FAS No. 147 were effective for
acquisitions effective on or after October 1, 2002. Management does not
anticipate that the adoption of SFAS No. 147 will have a significant impact
on the Company's consolidated financial statements.*
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
6
In April 2002, the FASB issued SFAS No. 145, which among other things, rescinds
SFAS No. 4, Reporting Gains and Losses from Extinguishments of Debt. Under SFAS
No. 4, gains and losses from the extinguishment of debt were required to be
classified as an extraordinary item, if material. Under SFAS No. 145, gains or
losses from the extinguishment of debt are to be classified as a component of
operating income, rather than an extraordinary item. SFAS No. 145 is effective
for fiscal years beginning after May 15, 2002, with early adoption of the
provisions related to the rescission of SFAS No. 4 encouraged. Upon adoption,
companies must reclassify prior-period amounts previously classified as an
extraordinary item. Management does not anticipate that the adoption of SFAS No.
145 will have a significant impact on the Company's consolidated financial
statements.*
7
(7) Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, and Trust and
Investment Services. Activities not included in these lines are reflected in All
Other. Summary financial information, which presents interest income on a fully
taxable equivalent basis for the lines of business, is presented below.
Trust and
Results of Operations for Retail Commercial Investment
The Three Months Ended September 30, 2002 Banking Banking Investments Services All Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest Income $ 11,689 $ 11,900 $ 10,928 $ -- $ -- $ 34,517
Interest Expense 8,461 -- 4,731 -- -- 13,192
Funds Transfer Pricing Allocation 12,142 (7,947) (4,180) -- (15) --
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 15,370 3,953 2,017 -- (15) 21,325
Provision for Loan Losses 318 682 -- -- -- 1,000
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 15,052 3,271 2,017 -- (15) 20,325
Non-Interest Income 1,733 477 1,394 1,625 95 5,324
Non-Interest Expense 11,134 2,263 1,304 1,299 1,179 17,179
- -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Taxes $ 5,651 $ 1,485 $ 2,107 $ 326 $ (1,099) $ 8,470
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,713,203 $ -- $ 383,107 $ -- $270,830 $2,367,140
Funds Used: Interest-Earning Assets 687,974 716,234 745,425 -- -- 2,149,633
Non-Interest-Earning Assets 13,572 4,098 67,215 -- 132,622 217,507
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $1,011,657 $(720,332) $(429,533) $ -- $138,208 $ --
- -------------------------------------------------------------------------------------------------------------------------
Trust and
Results of Operations for Retail Commercial Investment
The Three Months Ended September 30, 2001 Banking Banking Investments Services All Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest Income $ 12,001 $ 11,683 $ 10,664 $ -- $ -- $ 34,348
Interest Expense 9,487 -- 5,765 -- -- 15,252
Funds Transfer Pricing Allocation 8,187 (6,157) (3,761) -- 1,731 --
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 10,701 5,526 1,138 -- 1,731 19,096
Provision for Loan Losses 1,057 (336) -- -- -- 721
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 9,644 5,862 1,138 -- 1,731 18,375
Non-Interest Income 2,782 219 946 1,699 92 5,738
Non-Interest Expense 10,093 1,689 1,016 1,032 93 13,923
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 2,333 $ 4,392 $ 1,068 $ 667 $ 1,730 $ 10,190
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,381,348 $ -- $ 436,288 $ -- $193,063 $2,010,699
Funds Used: Interest-Earning Assets 638,976 583,664 625,152 -- -- 1,847,792
Non-Interest-Earning Assets 11,890 3,953 55,703 -- 91,361 162,907
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 730,482 $(587,617) $(244,567) $ -- $101,702 $ --
- -------------------------------------------------------------------------------------------------------------------------
8
Trust and
Results of Operations for Retail Commercial Investment
The Nine Months Ended September 30, 2002 Banking Banking Investments Services All Other Consolidated
- ------------------------------------------------------------------------------------------------------------------------
Interest Income $ 32,222 $ 33,006 $ 30,419 $ -- $ -- $ 95,647
Interest Expense 22,270 -- 14,574 -- -- 36,844
Funds Transfer Pricing Allocation 26,915 (21,812) (11,061) -- 5,958 --
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 36,867 11,194 4,784 -- 5,958 58,803
Provision for Loan Losses 565 9,385 -- -- -- 9,950
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 36,302 1,809 4,784 -- 5,958 48,853
Non-Interest Income 6,096 1,243 3,281 5,058 1,322 17,000
Non-Interest Expense 32,424 6,143 2,692 4,199 2,041 47,499
- -------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) Before Taxes $ 9,974 $ (3,091) $ 5,373 $ 859 $ 5,239 $ 18,354
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,502,507 $ -- $ 405,301 $ -- $218,308 $2,126,116
Funds Used: Interest-Earning Assets 623,528 673,012 648,979 -- -- 1,945,519
Non-Interest-Earning Assets 12,054 3,190 61,261 -- 104,092 180,597
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 866,925 $(676,202) $(304,939) $ -- $114,216 $ --
- -------------------------------------------------------------------------------------------------------------------------
Trust and
Results of Operations for Retail Commercial Investment
The Nine Months Ended September 30, 2001 Banking Banking Investments Services All Other Consolidated
- -------------------------------------------------------------------------------------------------------------------------
Interest Income $ 39,108 $ 35,827 $ 33,405 $ -- $ -- $ 108,340
Interest Expense 34,275 -- 18,504 -- -- 52,779
Funds Transfer Pricing Allocation 28,986 (21,516) (10,802) -- 3,332 --
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income 33,819 14,311 4,099 -- 3,332 55,561
Provision for Loan Losses 1,502 581 -- -- -- 2,083
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income
After Provision for Loan Losses 32,317 13,730 4,099 -- 3,332 53,478
Non-Interest Income 8,182 532 3,049 5,854 165 17,782
Non-Interest Expense 32,906 4,911 2,171 3,364 172 43,524
- -------------------------------------------------------------------------------------------------------------------------
Net Income Before Taxes $ 7,593 $ 9,351 $ 4,977 $2,490 $ 3,325 $ 27,736
- -------------------------------------------------------------------------------------------------------------------------
Average Balances:
Gross Funds Provided $1,435,649 $ -- $ 426,790 $ -- $187,695 $2,050,134
Funds Used: Interest-Earning Assets 675,774 570,211 647,751 -- -- 1,893,736
Non-Interest-Earning Assets 11,953 2,885 54,920 -- 86,640 156,398
- -------------------------------------------------------------------------------------------------------------------------
Net Funds Provided (Used) $ 747,922 $(573,096) $(275,881) $ -- $101,055 $ --
- -------------------------------------------------------------------------------------------------------------------------
9
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the operating results and financial condition at
September 30, 2002 is intended to help readers analyze the accompanying
financial statements, notes and other supplemental information contained in this
document. Results of operations for the three-and nine-month period ended
September 30, 2002 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; weakening of general
economic conditions nationally or in New Jersey and Pennsylvania; changes in
legal or 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 September 30, 2002 and September 30, 2001:
OVERVIEW
The Company reported net income of $5.8 million for the third quarter ended
September 30, 2002, as compared to $6.7 million reported for the same period in
2001. Net income per diluted share was $0.34 for the third quarter ended
September 30, 2002 compared to $0.44 per diluted share for the prior-year
period.
The Vista transaction closed on August 21, 2002 and was accounted for under the
purchase method of accounting. Accordingly, the results of operations for the
third quarter ended September 30, 2002 include the results of operations of
Vista from the date of acquisition.
EARNINGS ANALYSIS
Operating Revenue
The Company's earnings have two major revenue components: net interest income
and non-interest income, which includes net gains from securities transactions.
Operating revenues increased $1.7 million to $25.8 million, primarily from the
increase in net interest income of $2.1 million. The increase in net interest
income was offset in part by a reduction in trust income and other service
charges, commissions and fees.
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 the 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. In calculating loan yields, the applicable loan fees have
been included in interest income and the non-performing loans are included in
the average loan balances.
10
The following table reflects the components of net interest income, setting
forth, for the periods 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., annualized net interest income divided by average earning assets).
Dollar amounts are presented on a tax-equivalent basis assuming a tax rate of
35% in 2002 and 2001. Average balances have been derived from daily balances.
Three Months Ended
-----------------------------------------------------------------
September 30, 2002 September 30, 2001
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Interest-Earning Assets:
Securities Available for Sale:
Taxable $ 535,559 $ 8,223 6.14% $ 491,828 $ 8,438 6.86%
Non-Taxable 116,609 1,914 6.57 90,898 1,623 7.14
Securities Held to Maturity:
Taxable 8,017 78 2.82 11,391 167 5.83
Non-Taxable 39,310 540 5.49 24,287 420 6.92
----------------------------------------------------------------
Total Securities 699,495 10,755 6.14 618,404 10,648 6.89
----------------------------------------------------------------
Short-Term Investments 37,846 173 1.79 2,092 15 2.81
Loans (Net of Unearned Income):
Commercial 338,689 4,724 5.54 275,775 5,292 7.61
Real Estate - Commercial 421,562 7,847 7.29 321,618 6,676 8.12
Real Estate - Residential 310,577 5,086 6.55 355,400 5,958 6.71
Consumer 341,464 5,932 6.89 257,163 5,178 7.99
Credit Card -- -- -- 17,340 581 13.29
----------------------------------------------------------------
Total Loans 1,412,292 23,589 6.61 1,227,296 23,685 7.65
----------------------------------------------------------------
Total Interest-Earning Assets 2,149,633 34,517 6.37 1,847,792 34,348 7.39
----------------------------------------------------------------
Non-Interest-Earning Assets 217,507 162,907
---------- ----------
Total Assets $2,367,140 $2,010,699
========== ==========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Savings Deposits $ 759,380 2,480 1.30 $ 546,973 2,582 1.87
Time Deposits 663,236 6,012 3.60 607,545 7,111 4.64
----------------------------------------------------------------
Total Savings and Time Deposits 1,422,616 8,492 2.37 1,154,518 9,693 3.33
Short-Term Borrowings 62,686 277 1.75 190,291 2,023 4.22
Other Borrowed Funds 325,135 4,423 5.41 230,438 3,536 6.10
----------------------------------------------------------------
Total Interest-Bearing Liabilities 1,810,437 13,192 2.89 1,575,247 15,252 3.84
----------------------------------------------------------------
Non-Interest-Bearing Liabilities:
Demand Deposits and Non-Interest Bearing Savings 310,139 252,843
Other Liabilities 39,613 28,007
---------- ----------
Total Non-Interest Bearing Liabilities 349,752 280,850
---------- ----------
Stockholders' Equity 206,951 154,602
---------- ----------
Total Liabilities and Stockholders' Equity $2,367,140 $2,010,699
========== ==========
Net Interest Income (Tax-Equivalent Basis) $21,325 $19,096
======= =======
Interest Rate Spread 3.48 3.55
==== =====
Net Interest Margin 3.96% 4.13%
==== =====
Net interest income for the third quarter ended September 30, 2002 increased
$2.2 million to $21.3 million compared to the same period last year. The
increase in net interest income resulted from a higher level of average earning
assets, primarily related to the acquisition of Vista and was partially offset
by a 17 basis-point narrowing in the net interest margin. Average
interest-earning assets increased $301.8 million to $2,149.6 million for the
third quarter ended September 30, 2002 compared to the prior year period, while
the average yield on those assets dropped 102 basis points to 6.37%. Average
interest-bearing liabilities increased $235.2 million to $1,810.4 million for
the third quarter ended September 30, 2002 compared to the same period in
11
2001. As rates declined throughout 2001, the Company's interest-bearing
liabilities repriced at a faster rate than its interest-earning assets. The
average yield on those liabilities dropped 95 basis points to 2.89%.
Average securities, excluding any unrealized gains or losses, increased $81.1
million to $699.5 million, while the yield earned on the portfolio declined 75
basis points to 6.14%. The Vista acquisition contributed approximately $71
million in average security balances. Average loans increased $185.0 million to
$1,412.3 million, while the yield earned on the portfolio declined to 6.61% from
7.65% in the same period last year. The Vista acquisition contributed
approximately $162 million in average loans during the current quarter. During
2001, the Company sold $103 million in loans, of which $81.0 million were
related to the sale of residential mortgage loans, as part of its
Asset/Liability Management strategy to reposition its balance sheet. Average
short-term investments increased $35.7 million to $37.8 million. The Vista
acquisition contributed approximately $36.7 million in average short-term
investments. These changes resulted in an increase in interest income of $0.2
million to $34.5 million for the quarter ended September 30, 2002. The average
yield on interest-earning assets declined 102 basis points to 6.37%, reflecting
the current lower interest rate environment.
Average interest-bearing deposits increased $268.1 million to $1,422.6 million
in the current quarter of 2002, while the yield paid declined to 2.37% from
3.33%. The Vista acquisition contributed approximately $212 million in average
interest-bearing deposits. Within interest-bearing deposits, average savings
deposits increased $212.4 million from the prior year to $759.4 million, while
average time deposits increased $55.7 million to $663.2 million during the
current quarter. The increase in average time deposits was partially offset by a
decrease in large-denomination municipal certificates of deposit, which declined
$51.1 million on average from the third quarter of 2001. The average yield paid
on savings deposits declined 57 basis points to 1.30% while the average yield
paid on time deposits declined 104 basis points to 3.60%. Throughout 2001, as
market rates steadily declined, the Company accordingly adjusted rates paid on
its deposits and introduced competitive rates on selected deposits products in
an effort to retain deposits. The Company also utilizes short-term and other
borrowings as additional funding sources. Average short-term borrowings declined
$127.6 million during the quarter ended September 30, 2002 to $62.7 million,
while the yield paid declined 247 basis points to 1.75%. Average other
borrowings increased $94.7 million during the current quarter to $325.1 million,
while the yield declined 69 basis points to 5.41%. During 2001 and into 2002,
the Company extended a portion of its short-term borrowings. The Company's
strategy in extending its borrowings during a time of low interest rates is to
stabilize the Company's interest costs if and when market rates begin to rise.
These changes resulted in a decrease in interest expense of $2.1 million to
$13.2 million for the quarter ended September 30, 2002. The average yield on
interest-bearing liabilities declined 95 basis points to 2.89%, reflecting the
current lower interest rate environment. Higher demand deposit balances, which
increased $57.3 million from the same period last year, helped contribute to the
decline in the Company's interest expense and the average yield on interest
bearing liabilities, as this source of funds pays no interest.
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 the current quarter of
2002 to 3.96% compared with 4.13% in the prior year quarter and was unchanged
compared to the second quarter of 2002. The narrowing in the interest margin
during the third quarter of 2002 from the same quarter of a year ago resulted
from a higher level of non-accrual loans, the impact of the sale of the
unsecured credit card portfolio during the second quarter of 2002, and the
amortization of the purchase accounting adjustments on Vista's investment
securities portfolio. The Company's stock repurchase program and its investment
in cash surrender value of life insurance policies also had the effect of
reducing the net interest margin, as these investments reduced investable
interest-earning funds. The increase in cash surrender value of life insurance
policies had a positive impact on non-interest income, generating $1.1 million
of income in the current quarter of 2002 compared to $0.8 million for the third
quarter of 2001.
Provision for Loan Losses
For the quarter ended September 30, 2002, the provision for loan losses was $1.0
million compared to $0.7 million for the same period last year. This higher
provision was attributable in part to the increase in loan balances.
12
For additional information, see "Allowance for Loan Losses" under Financial
Condition.
Non-Interest Income
Non-interest income for the quarter ended September 30, 2002 decreased $0.4
million to $5.3 million from the same period of the prior year. During the
current quarter, trust income declined $0.1 million, other service charges,
commission and fees declined $0.3 million and other income declined $0.6
million. Other service charges, commissions and fees were down primarily due to
lower credit card fees resulting from the 2001 and 2002 credit card portfolio
sales. Partially offsetting these declines were increases in income on life
insurance of $0.4 million and gains from security transactions of $0.1 million.
The increase in income on life insurance was a result of additional earnings
received on policies transferred as a result of the Vista acquisition and $0.1
million in benefits received in excess of the contract value on cash surrender
value of life insurance policies due to the death of one insured participant.
For additional information see "Cash Surrender Value on Life Insurance" under
"Financial Condition."
Non-Interest Expense
For the quarter ended September 30, 2002, non-interest expense increased $3.3
million to $17.2 million compared to $13.9 million for the same period last
year. The Vista transaction resulted in additional operating expenses. Salaries,
wages and benefits increased $1.8 million to $8.0 million in 2002 from the same
period last year. The increase in salary, wages and employee benefits were
attributable to normal salary adjustments, higher healthcare expenses, increased
pension and other post-retirement costs and additional staffing as a result of
the Vista transaction. Occupancy costs increased $0.3 million, furniture and
equipment expense increased $0.2 million and amortization of intangible assets
increased $0.1 million. During the third quarter of 2002, the Company recorded
$1.1 million in integration expenses relating to its merger with Vista,
primarily related to consulting fees, mailing charges, supplies and forms and
other expenses relating to the transaction. Partially offsetting these
increases was a decline in data processing expense, which decreased $0.2
million from the same quarter last year due primarily to lower transaction
volumes resulting from the sale of the credit card portfolios.
Income Taxes
The Company recorded a provision for income taxes of $1.8 million for the third
quarter of 2002 as compared to $2.8 million in the same period of the prior
year. This was due primarily to a decrease in the level of pre-tax income and
lower state income taxes.
On July 2, 2002, the State of New Jersey passed the New Jersey Business Tax
Reform Act. The legislation is not expected to have a material effect on
the Company.
Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, and Trust and
Investment Services. Activities not included in these lines are reflected in All
Other.
Summary financial information on a fully taxable equivalent basis for each line
of business is presented in Note 7.
13
The following table shows the percentage contribution of the reportable segments
to consolidated net income before taxes on a fully taxable equivalent basis:
Trust and
Retail Commercial Investment All
Banking Banking Investments Services Other Consolidated
------- ---------- ----------- ---------- ----- ------------
Three Months Ended September 30, 2002 66.7% 17.5% 24.9% 3.9% (13.0)% 100.0%
Three Months Ended September 30, 2001 22.9% 43.1% 10.5% 6.5% 17.0% 100.0%
Income before taxes for the Retail Banking segment was $3.3 million higher than
the third quarter of 2001 due to a $4.7 million increase in net interest income
and a decrease of $0.7 million in the loan loss provision. This was offset by a
decrease of $1.1 million in non-interest income and an increase of $1.0 million
in non-interest expense. The higher net interest income was primarily related to
increases in average consumer loans and in wider-spread average core deposits
when compared to 2001. The decrease in the loan loss provision was due to a
reduction related to the sale of the unsecured credit card portfolio in 2002.
The decrease in non-interest income was primarily due to the loss of credit card
fees related to the sale of the unsecured credit card portfolio in 2002, and the
increase in non-interest expense was mainly due to the Vista transaction.
Commercial Banking pretax income decreased $2.9 million primarily due to a
decrease of $1.6 million in net interest income and increases of $1.0 million in
the loan loss provision and $0.6 million in non-interest expense. The decrease
in net interest income was due primarily to narrower spreads on new loans and a
decline in interest rates on prime based lending from the prior year. The
increase in the loan loss provision was attributable to increased loan balances
and the increase in non-interest expense was related to the Vista transaction.
Pretax income for the Investments segment was $1.0 million higher than the third
quarter of 2001 due to increases in net interest income of $0.9 million and $0.4
million in non-interest income, offset by an increase of $0.3 million in
non-interest expense. The increase in net interest income was primarily due to a
decrease in interest expense on borrowings, and non-interest income was higher
due to additional earnings received on life insurance policies transferred as a
result of the Vista acquisition. Income before taxes for the Trust and
Investment Services segment decreased $0.3 million primarily due to a higher
occupancy expense allocation and increased commissions on alternative investment
products. Income before taxes for the All Other segment decreased $2.8 million
from the third quarter of 2001 due to $1.1 million in integration expenses
relating to the Vista acquisition and an increase in the credit assigned to
non-maturity deposits in the Retail Banking segment as the result of increased
balances related to the Vista acquisition.
14
Nine Months Ended September 30, 2002 and September 30, 2001:
OVERVIEW
The Company reported net income of $12.9 million for the nine months ended
September 30, 2002, as compared to $18.5 million reported for the same period in
2001. Net income per diluted share was $0.83 for the nine months ended September
30, 2002 compared to $1.22 per diluted share for the prior-year period.
The Vista transaction closed on August 21, 2002 and was accounted for under the
purchase method of accounting. Accordingly, the results of operations for the
nine months ended September 30, 2002 include the results of operations of Vista
from the date of acquisition.
During the first nine months of 2002, the Company increased its loan loss
provision and recorded a $2.8 million charge-off on a $5.3 million loan
participation to Suprema Specialties, a company that declared bankruptcy during
the first quarter, and recorded a $2.4 million charge-off related to a loan to
an insurance premium financing company that was placed on non-accrual during the
second quarter. The placement of the loan on non-accrual resulted in interest
reversals of $0.6 million ($0.3 million net of tax). During the third quarter of
2002, the Company received payment of $18.4 million in settlement of the loan to
an insurance premium financing company. Additionally, the Company recorded $1.8
million ($1.1 million net of tax) in integration expenses related to its merger
with Vista Bancorp. These charges were partially offset by a $0.9 million ($0.5
million net of tax) gain on the sale of the Company's $14 million unsecured
credit card portfolio and a gain of $1.2 million ($0.7 million net of tax) from
the dissolution of its joint venture in United Financial Services, Inc. ("UFS").
During the first nine months of 2001, the Company recorded a non-recurring
charge of $0.8 million ($0.5 million net of tax) representing expenses
associated with the conversion of United National Bank to a state-chartered bank
and its name change to UnitedTrust Bank. This charge was partially offset by a
$0.5 million ($0.3 million net of tax) gain on the sale of the Company's secured
credit card portfolio.
EARNINGS ANALYSIS
Operating Revenue
The Company's earnings have two major revenue components: net interest income
and non-interest income, which includes net gains from security transactions.
Operating revenues increased $2.1 million to $73.3 million, despite the reversal
of $0.6 million in interest income related to the placing of a $21 million loan
to an insurance premium financing company on non-accrual during the second
quarter. Included in the nine months ended September 30, 2002, were gains
associated with the sale of the unsecured credit card portfolio of $0.9 million
and the dissolution of joint venture in UFS of $1.2 million. Included in the
corresponding period in 2001 was the gain associated with the sale of the
secured credit card business of $0.5 million. Excluding these items and the
gains from security transactions, operating revenues increased $0.6 million to
$71.0 million. The majority of this increase was in net interest income.
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 the 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. In calculating loan yields, the applicable loan fees have
been included in interest income and the non-performing loans are included in
the average loan balances.
15
The following table reflects the components of net interest income, setting
forth, for the periods 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., annualized net interest income divided by average earning assets).
Dollar amounts are presented on a tax-equivalent basis assuming a tax rate of
35% in 2002 and 2001. Average balances have been derived from daily balances.
Nine Months Ended
-----------------------------------------------------------------
September 30, 2002 September 30, 2001
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------
Assets:
Interest-Earning Assets:
Securities:
Taxable $ 480,770 $23,113 6.41% $ 516,478 $ 26,614 6.87%
Non-Taxable 105,605 5,322 6.72 88,650 4,780 7.19
Securities Held to Maturity:
Taxable 6,831 206 4.04 14,560 685 6.27
Non-Taxable 37,176 1,595 5.72 23,245 1,258 7.22
----------------------------------------------------------------
Total Securities 630,382 30,236 6.40 642,933 33,337 6.91
----------------------------------------------------------------
Short-Term Investments 13,125 183 1.84 2,025 67 4.36
Loans (Net of Unearned Income):
Commercial 325,626 13,469 5.53 280,068 17,386 8.29
Real Estate - Commercial 379,596 21,074 7.32 302,873 19,198 8.45
Real Estate - Residential 281,672 13,912 6.59 385,826 19,629 6.78
Consumer 304,968 15,945 6.99 251,959 15,312 8.13
Credit Card 10,150 828 10.91 28,052 3,411 16.26
----------------------------------------------------------------
Total Loans 1,302,012 65,228 6.66 1,248,778 74,936 8.01
----------------------------------------------------------------
Total Interest-Earning Assets 1,945,519 95,647 6.54 1,893,736 108,340 7.63
----------------------------------------------------------------
Non-Interest-Earning Assets 180,597 156,398
---------- ----------
Total Assets $2,126,116 $2,050,134
========== ==========
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Savings Deposits $ 633,485 5,552 1.17 $ 552,312 9,042 2.19
Time Deposits 602,710 16,900 3.75 660,800 26,199 5.30
----------------------------------------------------------------
Total Savings and Time Deposits 1,236,195 22,452 2.43 1,213,112 35,241 3.88
Short-Term Borrowings 87,815 1,275 1.94 212,814 8,323 5.23
Other Borrowed Funds 312,525 13,117 5.61 194,033 9,215 6.34
----------------------------------------------------------------
Total Interest-Bearing Liabilities 1,636,535 36,844 3.01 1,619,959 52,779 4.35
----------------------------------------------------------------
Non-Interest-Bearing Liabilities:
Demand Deposits and Non-Interest Bearing Savings 286,567 252,257
Other Liabilities 30,319 29,731
---------- ----------
Total Non-Interest Bearing Liabilities 316,886 281,988
---------- ----------
Stockholders' Equity 172,695 148,187
---------- ----------
Total Liabilities and Stockholders' Equity $2,126,116 $2,050,134
========== ==========
Net Interest Income (Tax-Equivalent Basis) $58,803 $ 55,561
======= ========
Interest Rate Spread 3.53 3.28
===== =====
Net Interest Margin 4.03% 3.91%
===== =====
Net interest income for the nine months ended September 30, 2002 increased $3.2
million to $58.8 million compared to the same period last year, despite the
reversal of $0.6 million in interest income related to the placement of a $21
million loan to an insurance premium financing company on non-accrual during the
second quarter of 2002. The increase in net interest income resulted from a
higher level of average earning assets, primarily related to the acquisition of
Vista as well as a 12 basis-point widening in the net interest margin. Average
interest-earning assets increased $51.8 million to $1,945.5 million for the nine
months ended September 30, 2002 compared to the prior year period, while the
average yield on those assets dropped 109 basis points to 6.54%. Average
interest-bearing liabilities increased $16.6 million to $1,636.5 million for the
16
nine months ended September 30, 2002 compared to the same period in 2001. As
rates declined throughout 2001, the Company's interest-bearing liabilities
repriced at a faster rate than its interest-earning assets. The average yield on
those liabilities dropped 134 basis points to 3.01%.
Average securities, excluding any unrealized gains or losses, declined $12.6
million to $630.4 million, while the yield earned on the portfolio declined 51
basis points to 6.40%. Average loans increased $53.2 million to $1,302.0
million, while the yield earned on the portfolio declined 135 basis points to
6.66%. The decline in the average loan portfolio yield was due to the lower
interest rate environment, a rise in non-accrual loans and the sale of the
secured credit card portfolio. During 2001, the Company sold $103 million in
loans, predominantly residential mortgage loans, as part of its Asset/Liability
Management strategy to reposition its balance sheet. Average short-term
investments rose $11.1 million to $13.1 million. These changes resulted in a
decrease in interest income of $12.7 million to $95.6 million for the nine
months ended September 30, 2002. The average yield on interest-earning assets
declined 109 basis points to 6.54%, reflecting the current lower interest rate
environment. The Vista transaction contributed approximately $24 million, $54
million and $12 million in average balances for securities, loans and short-term
investments, respectively.
Average interest-bearing deposits increased $23.1 million to $1,236.2 million in
the nine months ended September 30, 2002, while the yield paid declined to 2.43%
from 3.88%. The Vista acquisition contributed approximately $71 million in
average interest-bearing deposits. Within interest bearing deposits, average
savings deposits increased $81.2 million from the prior year to $633.5 million,
while average time deposits decreased $58.1 million to $602.7 million during the
nine months ended September 30, 2002. Average time deposits decreased primarily
from a reduction in large-denomination municipal certificates of deposit, which
had declined $84.1 million in the first nine months of 2002 from the first nine
months of 2001. The average yield paid on savings deposits declined 102 basis
points to 1.17%, while the average yield paid on time deposits declined 155
basis points to 3.75%. Throughout 2001, as market rates steadily declined, the
Company accordingly adjusted rates paid on its deposits and introduced
competitive rates on selected deposits products in an effort to retain deposits.
The Company also utilizes short-term and other borrowings as additional funding
sources. Average short-term borrowings declined $125.0 million or 58.7% during
the nine months ended September 30, 2002 to $87.8 million, while the yield paid
declined 329 basis points to 1.94%. Average other borrowings were $312.5 million
during the nine months ended September 30, 2002 compared to $194.1 million,
while the yield declined 73 basis points to 5.61%. These changes resulted in a
decrease in interest expense of $15.9 million to $36.8 million for the nine
months ended September 30, 2002. The average yield on interest-bearing
liabilities declined 134 basis points to 3.01%, reflecting the lower interest
rate environment. Higher demand deposit balances, which increased $34.3 million
from the same period last year, helped contribute to the decline in the
Company's interest expense and the average yield on interest bearing
liabilities, as this source of funds pays no interest.
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 increased during the first nine months of
2002 to 4.03% compared with 3.91% for the same period of the prior year. The
narrowing in the interest margin during the third quarter of 2002 from the same
quarter of a year ago resulted from a higher level of non-accrual loans, the
impact of the sale of the unsecured credit card portfolio during the second
quarter of 2002, and the amortization of the purchase accounting adjustments on
Vista's investment portfolio. The Company's stock repurchase program and its
investment in cash surrender value of life insurance policies also had the
effect of reducing the net interest margin, as these investments reduce
investable interest-earning funds. The increase in cash surrender value of life
insurance policies has positively impacted non-interest income, generating $2.8
million of income in the nine months ended September 30, 2002 compared to $2.3
million in the same period of 2001.
17
Provision for Loan Losses
For the nine months ended September 30, 2002, the provision for loan losses was
$10.0 million compared to $2.1 million for the same period last year. The
increase reflects a specific provision of $3.7 million charged to operations
during the first quarter of 2002 related to the Suprema Specialties credit
facility, a company that declared bankruptcy during the first quarter.
Additionally, a higher loan loss provision was provided during the second
quarter due in part to the $2.4 million charge-off relating to a loan to an
insurance premium financing company that was placed on non-accrual during the
second quarter.
For additional information, see "Allowance for Loan Losses" under Financial
Condition.
Non-Interest Income
Non-interest income for the nine months ended September 30, 2002 was $17.0
million, down $0.8 million from the same period of the prior year. Non-interest
income for 2002 included a $0.9 million gain on the sale of the Company's $14
million unsecured credit card portfolio in the second quarter and a gain of $1.2
million from the dissolution of its joint venture in United Financial Services,
Inc. ("UFS") during the first quarter. During the second quarter of 2001, a $0.5
million gain on the sale of the Company's $22 million secured credit card
portfolio was recognized. Excluding these non-recurring items, non-interest
income for the nine months ended September 30, 2002 declined $2.3 million to
$14.9 million. Trust income declined $0.9 million from the prior year period
reflecting lower managed asset values. Other service charges, commissions and
fees were down $1.5 million due to lower credit card fees resulting from the
2001 and 2002 credit card portfolio sales and other income was down $0.5
million. Offsetting these declines were increases of $0.2 million in service
charges on deposit accounts and $0.5 million in income on life insurance. The
increase in income on life insurance was a result of additional earnings
received on policies transferred as a result of the Vista acquisition and $0.1
million in benefits received in excess of contract value on cash surrender value
of life insurance policies due to the death of one insured participant. For
additional information see "Cash Surrender Value on Life Insurance" under
"Financial Condition".
Non-Interest Expense
For the nine months ended September 30, 2002, non-interest expense increased
$4.0 million to $47.5 million compared to $43.5 million for the same period last
year. The Vista transaction resulted in additional operating expenses. Salaries,
wages and benefits increased $3.6 million to $22.3 million in 2002 from the same
period last year. The increase in salary, wages and employee benefits were
attributable to normal salary adjustments, higher healthcare expenses, increased
pension and other post-retirement costs and additional staffing as a result of
the Vista transaction. During the nine-month period ending September 30, 2002,
the Company recorded $1.8 million in integration expenses relating to its merger
with Vista Bancorp, while in the second quarter of 2001 the Company recorded
$0.8 million in expenses associated with the conversion of United National Bank
to a state-chartered bank and its name change to UnitedTrust. Partially
offsetting the increase in salaries, wages and benefits was a decline in data
processing expense, which decreased $1.2 million from the same period last year
due primarily to lower transaction volumes resulting from the sale of the credit
card portfolios.
Income Taxes
The provision for income taxes decreased by $4.1 million to $3.0 million for the
nine months ended September 30, 2002 from $7.1 million for the same period in
2001 due primarily to the decrease in pre-tax income, an increase in tax-exempt
interest income and lower state income taxes during 2002 as compared to the same
period in 2001.
18
Segment Reporting
The Company, for management purposes, is segmented into the following lines of
business: Retail Banking, Commercial Banking, Investments, and Trust and
Investment Services. Activities not included in these lines are reflected in All
Other.
Summary financial information on a fully taxable equivalent basis for each line
of business is presented in Note 7.
The following table shows the percentage contribution of the reportable segments
to consolidated net income before taxes on a fully taxable equivalent basis:
Trust and
Retail Commercial Investment All
Banking Banking Investments Services Other Consolidated
----------------------------------------------------------------------
Nine Months Ended September 30, 2002 54.3% (16.8%) 29.3% 4.7% 28.5% 100.0%
Nine Months Ended September 30, 2001 27.4% 33.7% 17.9% 9.0% 12.0% 100.0%
Income before taxes for the Retail Banking segment increased $2.4 million from
the nine months of 2001 due to a $3.0 million increase in net interest income,
and decreases of $0.9 million in the loan loss provision allocation and $0.5
million in non-interest expense. This was offset by a decrease in non-interest
income of $2.0 million. The increase in net interest income was primarily
related to higher average deposits and lower interest rates paid on those
deposits. The decrease in the loan loss provision was due to the sale of the
secured and unsecured credit card portfolios. The decrease in non-interest
income and non-interest expense was due to lower credit card fees and a decline
in data processing expense due to lower transaction volumes, respectively,
resulting from the sale of the secured credit card portfolio in 2001. Commercial
Banking pretax income decreased $12.4 million primarily due to an $8.8 million
increase in the loan loss provision allocation. Of this amount, $3.7 million was
related to the Suprema Specialties credit facility, and $2.4 million was due to
a charge-off relating to a loan to an insurance premium financing company during
the second quarter. The remaining allocation was due to increased loan volume.
In addition, net interest income decreased $3.1 million from 2001 due to a
narrowing in the spread earned on the commercial portfolio, and non-interest
expense increased $1.2 million due to the Vista transaction. Pretax income for
the Investments segment increased $0.4 million due to an increase in net
interest income of $0.7 million, an increase in non-interest income of $0.2
million offset by an increase of $0.5 million in non-interest expense. Income
before taxes for the Trust and Investment Services segment decreased $1.6
million due to a 13.6% decline in revenue resulting from lower market value of
trust assets and a 24.8% increase in expenses, which was primarily due to a
higher occupancy expense allocation and increased commissions on alternative
investment products. Income before taxes for the All Other segment increased
$1.9 million from 2001 due to a decline in the credit assigned to non-maturity
deposits in the Retail Banking segment and a $1.2 million recovery related to
the settlement of the Company's joint venture data-servicing provider, United
Financial Services, Inc. This was offset by $1.8 million in integration expenses
related to the merger with Vista.
19
FINANCIAL CONDITION
September 30, 2002 as compared to December 31, 2001:
The consolidated balance sheet as of September 30, 2002 includes the assets and
liabilities of the former Vista, which were recorded at their respective fair
values as of August 21, 2002. Based on the fair values, the Company recorded
purchase accounting adjustments of $5.7 million related to securities, $0.9
million related to other borrowings, $2.0 million related to Vista's benefit
plans, $3.2 million in other liabilities, primarily transaction costs, $14.8
million in core deposit intangibles and $79.5 in goodwill.
Total assets increased $926.5 million, or 47.2% from December 31, 2001,
primarily from the acquisition of Vista. The increases in assets were $19.4
million in cash and due from banks, $111.8 million in short-term investments,
$250.1 million in securities available for sale, $13.0 million in securities
held to maturity, $405.8 million in loans, net of allowance, $7.3 million in
premises and equipment, $93.2 million in goodwill and other intangible assets,
$18.7 million in the cash surrender value of life insurance policies and $7.2
million in other assets, including other real estate.
Securities
The amortized cost and approximate market value of securities are summarized as
follows:
(in thousands) September 30, 2002 December 31, 2001
-------------------- --------------------
Amortized Market Amortized Market
Securities Available for Sale Costs Value Costs Value
- ----------------------------- --------- -------- --------- --------
U.S. Treasury Securities $ 3,087 $ 3,190 $ 1,993 $ 2,065
Obligations of U.S. Government
Agencies and Corporations 5,013 5,033 15,685 15,646
Obligations of States and
Political Subdivisions 130,226 137,008 95,979 96,502
Mortgage-Backed Securities 516,048 526,840 328,475 331,279
Corporate Debt Securities 72,134 72,160 45,039 42,424
Equity Securities 25,259 25,869 32,015 32,077
- ---------------------------------------------------------------------------------
Total Securities Available for Sale 751,767 770,100 519,186 519,993
- ---------------------------------------------------------------------------------
Securities Held to Maturity
- ---------------------------
U.S. Treasury Securities 3,068 3,118 996 1,033
Obligations of States and
Political Subdivisions 40,480 41,036 30,579 30,756
Mortgage-Backed Securities 2,868 2,906 5,856 5,861
Corporate Debt Securities 4,032 4,038 -- --
Other Securities 250 250 225 225
- ---------------------------------------------------------------------------------
Total Securities Held to Maturity 50,698 51,348 37,656 37,875
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
Total Securities $802,465 $821,448 $556,842 $557,868
- ---------------------------------------------------------------------------------
20
Loans
The following schedule presents the components of loans outstanding by type, for
each period presented.
(In Thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Real Estate:
Commercial $ 418,680 $ 281,607
Residential Mortgage 379,463 280,416
Construction 87,410 68,838
Commercial Loans 360,725 312,491
Lease Financing 10,333 21,186
Installment Loans 393,355 255,345
Retail Credit Card -- 16,042
- ------------------------------------------------------------------------------------
Total Loans Outstanding, Net of Unearned Income 1,649,966 1,235,925
Less: Allowance for Loan Losses 20,765 12,478
- ------------------------------------------------------------------------------------
Loans, Net $1,629,201 $1,223,447
====================================================================================
Total loans at September 30, 2002, net of unearned income, increased $414.0
million, or 33.5% to $1,650.0 million from year-end 2001. The Vista acquisition
contributed to increases in the majority of the loan categories from December
31, 2001 as well as loan growth.
Asset Quality
The following table provides an analysis of non-performing assets as of the
periods indicated:
September 30, December 31, December 31, December 31, December 31,
(Dollars in thousands) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Total Assets $2,888,997 $1,962,450 $2,112,181 $2,090,383 $1,916,809
Total Loans (Net of Unearned Income) $1,649,966 $1,235,925 $1,287,417 $1,261,343 $1,057,081
Allowance for Loan Losses $ 20,765 $ 12,478 $ 12,419 $ 10,386 $ 11,174
Percent of Total Loans 1.26% 1.01% 0.96% 0.82% 1.06%
Total Non-Performing Loans (1) $ 17,025 $ 6,437 $ 6,751 $ 8,142 $ 8,615
Percent of Total Assets 0.59% 0.33% 0.32% 0.39% 0.45%
Percent of Total Loans 1.03% 0.52% 0.52% 0.65% 0.81%
Allowance for Loan Losses to
Non-Performing Loans 121.97% 193.85% 183.96% 127.56% 129.70%
Total Non-Performing Assets $ 17,655 $ 6,628 $ 6,944 $ 8,251 $ 9,170
Percent of Total Assets 0.61% 0.34% 0.33% 0.39% 0.48%
(1) Non-performing loans consist of impaired loans, non-accrual loans and
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.
Allowance for Loan Losses
The determination of the adequacy of the allowance for loan losses is a critical
accounting policy of the Company and is maintained at a level considered
adequate to provide for inherent and reasonably estimable loan losses. The level
of the allowance is based on Management's evaluation of inherent and estimable
losses in the portfolio, after consideration of appraised collateral values,
financial condition of the borrower, delinquency and charge-off trends,
portfolio growth trends, as well as prevailing economic conditions. Management
evaluates the adequacy of the allowance for loan losses on a regular basis
throughout the year. Management believes that the allowance for loan losses is
adequate. While Management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based upon
21
adverse changes in economic conditions and specific elements underlying the
Company's ability to collect upon a loan including significant changes in
collateral value and the deterioration in the financial condition of borrowers.
In addition, various regulatory agencies periodically review the Company's
allowance for 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.
The Company's September 30, 2002 allowance for loan losses (the "Allowance")
totaled $20.8 million and represented 1.26% of total loans. The Allowance was
$12.5 million at year-end 2001, or 1.01% of total loans, and $12.3 million at
September 30, 2001 or 1.05% of total loans. The increase in the Allowance was
due primarily to additional provisions during the first and second quarter of
2002 and the allowance for loan losses of $6.1 million that existed on Vista's
financial statements at the date of acquisition. The total loan loss provision
of $4.6 million during the first quarter of 2002 included an additional loan
loss provision of $3.7 million primarily due to the aforementioned Suprema
Specialties loan participation. During the second quarter of 2002, the
Company made a $4.3 million provision for loan losses and recorded a $2.8
million charge-off on the Suprema Specialties loan and a $2.4 million charge-off
on the loan to the insurance premium financing company to reduce these exposures
to their expected realizable values. During the third quarter of 2002, the
Company received payment of $18.4 million in settlement of a loan to the
insurance premium financing company. For the nine months ended September 30,
2002, loan loss provisions amounted to $10.0 million, up from the $2.1 million
in the nine months ended September 30, 2001. Net charge-offs in the first nine
months of 2002 amounted to $7.8 million as compared to $2.2 million for the same
period last year. At September 30, 2002, the ratio of the allowance for loan
losses to non-performing loans was 121.97% compared to 193.85% at December 31,
2001 and 242.67% at September 30, 2001.
The determination of an appropriate level of the Allowance is based upon an
analysis of the risks inherent in the Bank's loan portfolio. One tool used in
identifying these risks is a risk rating system for commercial and commercial
real estate loans, consisting of ten 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) strength of
management; (c) loan structure; (d) available collateral, and its valuation; (e)
loan documentation; and (f) concentrations within industries and economic
environments. Account officers and various loan committees perform the analysis
on a continuous basis. In addition, the Bank has an external loan review service
provider. The loan review service provider also performs a quarterly review of
the adequacy of the Allowance calculation.
In conjunction with the review of the loan portfolio, the adequacy of the
Allowance is monitored on an ongoing basis and a quarterly analysis is
performed. The purpose of the analysis is to estimate the inherent risk of loss
on all loans, as of the evaluation date, in order to ensure that an adequate
Allowance level is maintained. The methodology for determining the adequacy for
the Allowance utilizes guidelines established by various regulatory agencies.
This analysis is based on the historical loss experience associated with the
various loan portfolios. Loss factors are developed for the respective loan
portfolios and are adjusted to reflect the impact of a variety of conditions
which include: delinquency trends; changes in lending policies; experience,
ability and depth of management; national and local economic trends.
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 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.
During 2002, Management continued its assessment of risk factors utilized in the
calculation of the Allowance, and in consideration of, among other factors,
slowing economic trends, the shift of the portfolio into commercial, commercial
real estate and installment loans, and charge-off history, Management adjusted
the general factors utilized in the calculation. While management uses available
information to estimate probable loan losses, future additions to the Allowance
may be necessary due to adverse economic conditions or other currently
unforeseen events.
22
Net charge-offs in the nine months ended September 30, 2002 were $7.8 million or
0.80% of average loans outstanding on an annualized basis as compared to net
charge-offs in the nine months ended September 30, 2001, which were $2.2 million
or 0.23% of average loans on an annualized basis.
Net charge-offs in the credit card portfolio and related products decreased to
$538,000 in the nine months ended September 30, 2002, compared to $1,600,000 in
same period of the prior year, primarily due to the sale of the secured credit
card portfolio in 2001 and the remainder of the portfolio in June, 2002. Net
charge-offs in installment lending and lease financing receivables increased
to $489,000 in the nine months ended September 30, 2002, compared with
$330,000 in same period of the prior year. Net charge-offs of real estate
secured loans, consisting predominantly of commercial real estate, were
$229,000 in nine months ended September 30, 2002 compared to $60,000 in the
prior year, while net charge-offs of commercial and industrial loans were
$6,531,000 during the nine months ended September 30, 2002 compared to
$187,000 in prior year period. The increase in the commercial loan charge-offs
relates primarily to the previously mentioned charge-offs relating to Suprema
Specialties and the insurance premium financing company. The charged-off loans
are in various stages of collection and litigation. During the third quarter
of 2002, the Company received payment of $18.4 million in settlement of the
loan to an insurance premium financing company.
Cash Surrender Value on Life Insurance
The Company maintains the life insurance policies on a chosen group of
employees, where the Company pays all premiums and is the owner and beneficiary
of the policies. This pool of insurance is used to offset or finance all or a
portion of future benefit cost increases. The Company records non-interest
income equal to the appreciation in the cash surrender value. For the quarter
ended September 30, 2002, the Company recognized $1.2 million in earnings from
the appreciation in the cash surrender value of the investment and $2.8 million
for the nine months ended September 30, 2002 compared to $0.8 million and $2.3
million, respectively, for the prior year period.
The Company purchased an additional $1.7 million of policies during the second
quarter of 2002 and added an additional cash surrender value of $14.3 million as
a result of the Vista acquisition during the current quarter. The Company did
not make any additional purchases during the prior year.
In the event of death of any insured participants, a notice of death claim will
be filed with policy issuers. Upon receipt of insurance proceeds, cash surrender
value on life insurance assets will be reduced by the amount of the contract
value of the insured immediately prior to death and any excess benefit over the
cash surrender value is credited to income in the period received. Generally,
for tax purposes all amounts represent the return of premiums paid, the
increased value of the policy due to investment returns or the death benefit
feature. During the current quarter of 2002, the Company recognized $0.1 million
in benefits in excess of contract value.
Deposits and Borrowings
Total deposits increased $771.7 million or 55.1% to $2,172.4 million at
September 30, 2002 from $1,400.7 million at December 31, 2001. Core deposits,
which exclude large-denomination municipal certificates of deposit, amounted to
$2,134.2 million at September 30, 2002 as compared to $1,358.4 million at
year-end 2001, an increase of 57.1%. Savings deposits increased $370.2 million
or 64.5%, while demand deposits increased $79.2 million or 29.1%. Time deposits
increased $322.3 million or 58.1%. Excluding large-denomination municipal
certificates of deposit, time deposits increased 63.7%. The Vista transaction
contributed approximately $74 million, $274 million and $269 million in balances
for demand deposits, savings deposits and time deposits, respectively.
Short-term borrowings decreased by $83.7 million, or 68.6%, while other
borrowings increased by $108.2 million, or 42.4%. In an effort to help minimize
interest rate risk, the Company continues to look for opportunities to extend
the maturities of both its deposits and borrowings. Management continues to
monitor the shift of deposits and level of borrowings through its
Asset/Liability Management Committee.
23
Capital
Total stockholders' equity increased $117.2 million to $272.9 million at
September 30, 2002 from $155.7 million at December 31, 2001. The increase during
the nine-month period was due to net income of $12.9 million, an increase of
$11.4 million (net of tax) in the market value of Company's available for sale
securities portfolio from December 31, 2001 to September 30, 2002, the exercise
of stock options of $0.4 million and the issuance of 4,695,184 shares as a
result of the Vista transaction, which amounted to $109.7 million. Partially
offsetting these increases were the repurchase of 333,500 shares of the
Company's common stock, which amounted to $7.5 million, and the three quarterly
cash dividends totaling $9.7 million.
The following table reflects the Company's capital ratios, as of September 30,
2002 and December 31, 2001 in accordance with current regulatory guidelines.
(Dollars in Thousands) September 30, 2002 December 31, 2001
------------------ -----------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
Risk-Based Capital
Tier I Capital
Actual $215,414 10.37% $197,944 12.90%
Regulatory Minimum Requirements 83,117 4.00 61,363 4.00
For Classification as Well Capitalized 124,675 6.00 92,044 6.00
Combined Tier I and Tier II Capital
Actual 236,179 11.37% 210,422 13.72%
Regulatory Minimum Requirements 166,233 8.00 122,725 8.00
For Classification as Well Capitalized 207,792 10.00 153,406 10.00
Leverage
Actual 215,414 7.69% 197,944 10.29%
Regulatory Minimum Requirements 111,981 4.00 76,957 4.00
For Classification as Well Capitalized 139,977 5.00 96,196 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.
Liquidity Management
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 the Company's Asset/Liability
Committee ("ALCO") to determine the appropriate asset/liability mix.
At September 30, 2002, the amount of liquid assets remained at a level
Management believed 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.
Asset liquidity is represented by the ease with which assets can be converted
into cash. This liquidity is provided by federal funds sold, marketable equity
securities and debt securities with maturity dates of one year or less, which
totaled $154.5 million at September 30, 2002. Included within this figure are
marketable equity securities amounting to $4.0 million. Debt securities consist
primarily of U.S. Treasury notes and bonds, obligations of U.S. Government
agencies, mortgage-backed securities, obligations of states and political
subdivisions and corporate bonds. 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. Additional
liquidity is derived from scheduled payments of interest on loans and
securities, scheduled loan payments of principal, as well as prepayments of
loans and securities.
24
Liquidity is also available through additional lines of credit and the ability
to incur additional debt. At September 30, 2002, the Company had $363.5 million
of lines of credit with the Federal Home Loan Bank and correspondent banks under
which $123.1 million was readily available. Additionally, at September 30, 2002,
the Company had $650.0 million of repurchase lines with investment brokers and
FHLB, of which $573.5 million was available contingent upon available
collateral.
25
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MARKET RISK - ASSET/LIABILITY MANAGEMENT.
The primary market risk faced by the Company is interest rate risk. The
Company's Asset/Liability Committee ("ALCO") monitors the changes in the
movement of funds and rate and volume trends to enable appropriate management
response to changing market and rate conditions.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest income in alternative interest rate scenarios. Management
reviews and refines its interest rate risk management process in response to the
changing economic climate. 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 deposit accounts, 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.
As of September 30, 2002, the Company's earnings simulation model projects a 300
basis point upward change in rates during the first year and a 100 basis point
downward change in rates during the first year, both 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 scenarios is within
10% of net interest income from the flat rate scenario in the first year. At
September 30, 2002, the Company's income simulation model indicates an
acceptable level of interest rate risk and is materially consistent with the
year-end disclosure.*
Computation of prospective effects of hypothetical interest rate 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.
Item 4 - Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures in
the 90 days prior to the date hereof, the Company's principal executive officer
and principal financial officer have determined that such controls and
procedures are effective. No significant change has occurred in the Company's
internal controls since the date of the evaluation that could significantly
affect these controls subsequent to the date of the evaluation.
26
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
4(a) Indenture dated as of March 21, 1997 between United National Bancorp
and The Bank of New York.
4(b) Indenture dated as of December 18, 2001 between United National
Bancorp and State Street Bank & Trust Company.
4(c) Amended/Restated Declaration of Trust of UNB Capital Trust I, dated
March 21, 1997.
4(d) Amended/Restated Declaration of Trust of UNB Capital Trust II, dated
December 18, 2001.
10(a) Common Securities Guarantee dated March 21, 1997.
10(b) Capital Securities Guarantee dated March 21, 1997.
10(c) Capital Securities Guarantee dated December 18, 2001.
99 United National Bancorp and Former Vista - Unaudited Statement of Net
Assets Acquired and Unaudited Pro Forma Consolidated Condensed
Statements Of Income (Loss).
(b) Reports on Form 8-K
A Form 8-K was filed on July 23, 2002, under Item 5 "Other Events".
United's press release dated July 22, 2002, United National Bancorp statement
that United National Bancorp Receives Approval For Vista Acquisition.
A Form 8-K was filed on August 12, 2002, under Item 5 "Other Events".
United's press release dated August 9, 2002, United National Bancorp statement
that United National Bancorp Schedules Date For Completion of Vista Acquisition.
A Form 8-K was filed on August 21, 2002, under Item 5 "Other Events".
United's press release dated August 21, 2002, United National Bancorp statement
that United National Bancorp Completes Acquisition of Vista Bancorp.
A Form 8-K was filed on August 27, 2002, under Item 5 "Other Events".
United's press release dated August 27, 2002, United National Bancorp statement
that UnitedTrust Receives Payment On Loan.
A Form 8-K was filed on September 4, 2002, under Item 2 " Acquisition or
Disposition of Assets" and Item 7 "Financial Statements, Pro Forma Financial
Information and Exhibits". United National Bancorp disclosed under Item 2 that
effective on August 21, 2002 (the "Effective Time"), subject to the terms and
conditions of the Agreement and Plan of Merger (the "Merger Agreement") dated as
of November 19, 2001, among United National Bancorp ("United"), UnitedTrust Bank
("UTB"), Vista Bancorp, Inc. ("Vista"), and Vista Bank, N.A. (the "Bank"), Vista
was merged with and into United, with United being the surviving corporation
(the "Merger"). Pursuant to a separate merger agreement, the Bank was merged
with and into UTB following consummation of the Merger.
A Form 8-K was filed on September 9, 2002, under Item 5 "Other Events".
United's press release dated September 6, 2002, United National Bancorp
statement that United National Bancorp Announces Vista Merger Consideration
Results, was included as an exhibit.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED NATIONAL BANCORP
-----------------------
(Registrant)
Dated: November 14, 2002 By: /s/ THOMAS C. GREGOR
-------------------------------
Thomas C. Gregor
Chairman, President and CEO
Dated: November 14, 2002 By: /s/ ALFRED J. SOLES
-------------------------------
Alfred J. Soles
Vice President & Treasurer
(Principal Financial Officer)
28
CERTIFICATIONS
I, Thomas C. Gregor, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United National
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Thomas C. Gregor
- -------------------------------------------
Thomas C. Gregor
Chairman of the Board, President and
Chief Executive Officer
29
I, Alfred J. Soles, certify that:
1. I have reviewed this quarterly report on Form 10-Q of United National
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Alfred J. Soles
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Alfred J. Soles
Vice President and Treasurer (Principal Financial Officer)
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