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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: March 31, 2003
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
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(Exact name of registrant as specified in its charter)
New Jersey 22-2894827
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(State or other jurisdiction of (I.R.S. Employer
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
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(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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
[X] Yes [ ] No
As of May 1, 2003, there were 18,941,309 shares of common stock, $1.25 par
value, outstanding.
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UNITED NATIONAL BANCORP
FORM 10-Q
INDEX
PAGE (S)
--------
PART I - FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements and Notes to Consolidated Financial Statements ........... 1-7
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ...... 8-21
ITEM 3 Quantitative and Qualitative Disclosure About Market Risk .................................. 22
ITEM 4 Controls and Procedures .................................................................... 22
PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K ........................................................... 23
SIGNATURES ........................................................................................ 24
Certifications .................................................................................... 25-26
Part I - Financial Information
Item 1 - Financial Statements
UNITED NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Balance Sheet
(In thousands, except per share data)
(unaudited)
March 31, December 31,
2003 2002
---------- ------------
Assets
Cash and due from banks $ 71,257 $ 68,759
Short-term investments -- 40,826
Securities available for sale, at market value 913,000 827,976
Securities held to maturity (market value of $35,608 and $45,829 for 2003 and
2002, respectively) 35,098 45,260
Loans, net of unearned income 1,740,818 1,665,069
Less: allowance for loan losses 21,484 20,407
---------- ----------
Loans, net 1,719,334 1,644,662
Premises and equipment, net 35,199 35,673
Other real estate, net 919 570
Goodwill 79,663 79,663
Other intangible assets 17,922 18,713
Cash surrender value of life insurance policies 77,620 76,649
Other assets 27,133 28,948
---------- ----------
Total assets 2,977,145 2,867,699
========== ==========
Liabilities and stockholders' equity
Liabilities
Deposits
Demand 384,507 361,816
Savings 957,643 938,188
Time 837,566 853,404
---------- ----------
Total deposits 2,179,716 2,153,408
Short-term borrowings 123,595 38,787
Other borrowings 375,930 376,565
Other liabilities 32,060 34,259
---------- ----------
Total liabilities 2,711,301 2,603,019
---------- ----------
Stockholders' equity
Preferred stock, authorized 1,000,000 shares in 2003 and 2002
None issued and outstanding -- --
Common stock, $1.25 par value,
Authorized shares - 25,000,000 in 2003 and 2002
Issued shares - 20,947,057 in 2003 and 20,937,783 in 2002
Outstanding shares - 18,941,309 in 2003 and 18,999,035 in 2002 26,184 26,172
Additional paid-in capital 237,297 237,002
Retained earnings 40,240 36,430
Treasury stock, at cost - 2,005,223 shares in 2003 and 1,938,223 shares in 2002 (41,259) (39,655)
Accumulated other comprehensive income 3,382 4,731
---------- ----------
Total stockholders' equity 265,844 264,680
---------- ----------
Total liabilities and stockholders' equity $2,977,145 $2,867,699
========== ==========
See accompanying Notes to Consolidated Financial Statements.
1
UNITED NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
(unaudited)
Three Months Ended
March 31,
------------------
2003 2002
------- --------
Interest income
Interest and fees on loans $26,731 $21,039
Interest and dividends on securities available for sale:
Taxable 8,618 7,333
Tax-exempt 1,368 1,090
Interest and dividends on securities held to maturity:
Taxable 52 73
Tax-exempt 311 335
Interest on short-term investments 154 3
------- -------
Total interest income 37,234 29,873
------- -------
Interest expense
Interest on NOW accounts 315 282
Interest on money market accounts 541 188
Interest on savings deposits 1,151 958
Interest on time deposits 6,935 5,549
Interest on short-term borrowings 127 536
Interest on other borrowings 4,538 4,198
------- -------
Total interest expense 13,607 11,711
------- -------
Net interest income 23,627 18,162
Provision for loan losses 1,470 4,625
------- -------
Net interest income after provision for loan losses 22,157 13,537
------- -------
Non-interest income
Trust income 1,558 1,537
Service charges on deposit accounts 1,497 954
Other service charges, commissions and fees 1,054 871
Net gains from securities transactions 2,849 --
Income on corporate owned life insurance 971 829
Dissolution of joint venture -- 1,171
Other income 609 546
------- -------
Total non-interest income 8,538 5,908
------- -------
Non-interest expense
Salaries, wages and employee benefits 10,248 7,568
Occupancy expense, net 2,791 1,429
Furniture and equipment expense 1,351 1,055
Data processing expense 977 1,130
Amortization of intangible assets 791 371
Other expenses 4,916 3,136
------- -------
Total non-interest expense 21,074 14,689
------- -------
Income before provision for income taxes 9,621 4,756
Provision for income taxes 2,054 803
------- -------
Net income $ 7,567 $ 3,953
======= =======
Net income per common share:
Basic $ 0.40 $ 0.27
======= =======
Diluted $ 0.40 $ 0.27
======= =======
Weighted Average Shares Outstanding:
Basic 18,981 14,736
======= =======
Diluted 19,141 14,869
======= =======
See accompanying Notes to Consolidated Financial Statements.
2
UNITED NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except per share data)
(unaudited)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Stockholders'
Stock Capital Earnings Stock Income (Loss) Equity
------- ---------- -------- -------- ------------- -------------
Balance - December 31, 2002 $26,172 $237,002 $36,430 $(39,655) $ 4,731 $264,680
Comprehensive income:
Net income -- -- 7,567 -- -- 7,567
Unrealized holding gains on
securities available for sale
arising during the period, net of -- -- -- -- 336 336
tax of $232
Less: reclassification adjustment
for gains included in net income,
net of tax of $(1,164) -- -- -- -- (1,685) (1,685)
--------
Total comprehensive income 6,218
Cash dividend declared (0.20 per share) -- -- (3,757) -- -- (3,757)
Stock activity:
Exercise of stock options - 9,274
shares 12 173 -- -- -- 185
Treasury stock purchased - 67,000
shares -- -- -- (1,604) -- (1,604)
Stock-based compensation -- 122 -- -- -- 122
------- -------- ------- -------- ------- --------
Balance - March 31, 2003 26,184 237,297 40,240 (41,259) 3,382 265,844
======= ======== ======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
3
UNITED NATIONAL BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)
Three Months Ended
March 31,
--------------------
2003 2002
--------- --------
Operating activities
Net income $ 7,567 $ 3,953
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,921 1,215
Amortization (accretion) of securities premiums, net 448 (27)
Provision for loan losses 1,470 4,625
Benefit for deferred income taxes (135) (203)
Gain from securities transactions (2,849) --
Gain on disposition of premises and equipment -- (1)
Increase in life insurance (971) (829)
Decrease in other assets 2,796 4,849
Decrease in other liabilities (2,064) (6,857)
Stock-based compensation 122 83
Restricted stock activity, net -- 12
--------- --------
Net cash provided by operating activities 8,305 6,820
--------- --------
Investing activities
Securities available for sale:
Proceeds from sales of securities 61,114 5,660
Proceeds from maturities of securities 132,157 36,292
Purchases of securities (278,209) (83,131)
Securities held to maturity:
Proceeds from maturities of securities 10,147 2,419
Purchases of securities -- (6,130)
Net increase in loans (76,142) (21,238)
Expenditures for premises and equipment (656) (361)
Proceeds from the sale of premises and equipment -- 2
(Increase) decrease in other real estate, net (349) 66
--------- --------
Net cash used in investing activities (151,938) (66,421)
--------- --------
Financing activities
Net increase (decrease) in demand and savings deposits 42,146 (21,603)
Net (decrease) increase in time deposits (15,838) 24,466
Net increase (decrease) in short-term borrowings 84,808 (50,287)
Advances on other borrowed funds 17,000 95,767
Repayments in other borrowed funds (17,635) (232)
Cash dividends on common stock (3,757) (2,930)
Proceeds from exercise of stock options 185 203
Treasury stock acquired, at cost (1,604) (5,792)
--------- --------
Net cash provided by financing activities 105,305 39,592
--------- --------
Net decrease in cash and cash equivalents (38,328) (20,009)
Cash and cash equivalents at beginning of period 109,585 55,764
--------- --------
Cash and cash equivalents at end of period $ 71,257 $ 35,755
========= ========
Supplemental disclosures of cash flow information
Cash paid during the period:
Interest 14,118 12,224
Taxes paid 197 --
Transfer of loans to other real estate 374 --
========= ========
See accompanying Notes to Consolidated Financial Statements.
4
UNITED NATIONAL BANCORP
Notes to Consolidated Financial Statements
(Unaudited)
Note 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 2003.
Note 2. Acquisition
On August 21, 2002, Vista Bancorp, Inc. ("Vista") was merged with and into
the Company with the Company being the surviving corporation (the "Vista
Merger") in a transaction accounted for under the purchase method of accounting.
Under the terms of the Vista Merger, the Company acquired all 5,350,637
outstanding shares of Vista in exchange for 4,695,184 shares of the Company's
Common Stock and $37,943,095 in cash.
Note 3. Comprehensive Income
Total comprehensive income amounted to the following for the periods
indicated (in thousands):
Three Months Ended
March 31,
------------------
2003 2002
------- -------
Net income $ 7,567 $ 3,953
Unrealized holding gains on securities available for sale arising during the
period, net of tax of $232 and $(1,832) in 2003 and 2002, respectively 336 (2,652)
Less: reclassification adjustment for gains included in net income, net of tax
of $(1,164) in 2003 (1,685) --
------- -------
Total comprehensive income $ 6,218 $ 1,301
======= =======
Note 4. Net Income per Share
Basic income per common share is computed by dividing net income available
to common stockholders by the weighted average number of shares outstanding
during each year.
Diluted net income per common share is computed by dividing net income
available to common stockholders by the weighted average number of shares
outstanding, as adjusted for the assumed exercise of common stock options, using
the treasury stock method.
5
Three Months Ended
March 31,
------------------
(In Thousands, Except Per Share Data) 2003 2002
------- -------
Net Income $ 7,567 $ 3,953
======= =======
Basic weighted average common shares outstanding 18,981 14,736
Plus: dilutive stock options and awards 160 133
------- -------
Diluted weighted average common shares outstanding 19,141 14,869
======= =======
Net income per common share:
Basic $ 0.40 $ 0.27
Diluted $ 0.40 $ 0.27
======= =======
Note 5. Goodwill and Other Intangibles
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 Company recorded a core deposit intangible of $14.8 million in
connection with the Vista Merger during the third quarter of 2002. The core
deposit intangible has an estimated life of 10 years and the Company amortized
$370,000 during the first quarter of 2003. The core deposit intangible will be
periodically reviewed for impairment. In addition, the Company recorded goodwill
of $79.5 million in connection with the Vista Merger. The goodwill will be
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142.
During the first quarter of 2003, the Company recorded amortization of
intangible assets acquired before July 1, 2001 of approximately $421,000, which
primarily represented core deposit intangibles. The remaining amortization
period of these core deposit intangibles is approximately 2.2 years.
Note 6. Recent Accounting Pronouncements
In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment to FASB
Statement No. 123". SFAS No. 148 provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both interim
and annual financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
interim reporting requirements of SFAS No. 148 are effective for interim periods
beginning after December 31, 2002. In April 2003, the FASB announced that they
will propose an accounting standard requiring all companies to expense the value
of employee stock options based upon the fair value of options.
Effective December 31, 2002, the Company elected to adopt the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", for stock-based employee compensation. All prior periods
presented have been restated to reflect the compensation cost that would have
been recognized had the recognition provisions of Statement 123 been applied to
all awards granted to employees after January 1, 1995.
Note 7. Lines of Business - Segment Reporting
The Company, for management purposes, is divided 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.
Line of business information is based on accounting practices that conform
to and support the current management structure, and is not necessarily
comparable with similar information for any other financial institution.
6
Income before taxes on a fully tax-equivalent basis includes revenues and
expenses directly associated with each line, plus allocations of certain
indirect revenues and expenses. Centrally provided corporate services and
general overhead are allocated in proportion to the contribution of each
business line to consolidated pretax income prior to the inclusion of these
costs. A matched maturity funds transfer method is employed to assign a cost of
funds to the earning assets of each business line, as well as to a value of
funds to the liabilities of each business line. The provision for loan losses is
allocated based on the historical net charge-off ratio for each line of
business.
The following tables present the results of operations on a tax-equivalent
basis and average balances by reportable segment for the periods presented below
(in thousands).
Trust and
Results of operation for the Retail Commercial Investment
period ending March 31, 2003 Banking Banking Investments Services All Other Consolidated
- --------------------------------- ---------- ---------- ----------- ---------- --------- ------------
Interest income $ 14,910 $ 11,865 $ 11,584 $ -- $ -- $ 38,359
Interest expense 8,936 -- 4,671 -- -- 13,607
Funds transfer pricing allocation 13,296 (7,818) (2,957) -- (2,521) --
---------- --------- --------- ------ -------- ----------
Net interest income (loss) 19,270 4,047 3,956 -- (2,521) 24,752
Provision for loan losses 871 599 -- -- -- 1,470
---------- --------- --------- ------ -------- ----------
Net interest income (loss) after
provision for loan losses 18,399 3,448 3,956 -- (2,521) 23,282
Non-interest income 2,255 463 3,962 1,858 -- 8,538
Non-interest expense 14,754 2,416 2,496 1,408 -- 21,074
---------- --------- --------- ------ -------- ----------
Net income (loss) before taxes $ 5,900 $ 1,495 $ 5,422 $ 450 $ (2,521) $ 10,746
---------- --------- --------- ------ -------- ----------
Average balances:
Gross funds provided $2,143,749 $ -- $ 426,405 $ -- $319,445 $2,889,599
Funds used:
Interest-earning assets 945,216 754,381 863,242 -- -- 2,562,839
Non-interest-earning assets 82,465 13,509 77,013 500 153,273 326,760
---------- --------- --------- ------ -------- ----------
Net funds provided (used) $1,116,068 $(767,890) $(513,850) $ (500) $166,172 $ --
========== ========= ========= ====== ======== ==========
Trust and
Results of operation for the Retail Commercial Investment
period ending March 31, 2002 Banking Banking Investments Services All Other Consolidated
- --------------------------------- ---------- ---------- ----------- ---------- --------- ------------
Interest income $ 10,304 $ 10,760 $ 9,601 $ -- $ -- $ 30,665
Interest expense 6,892 -- 4,819 -- -- 11,711
Funds transfer pricing allocation 6,183 (6,745) (3,716) -- 4,278 --
---------- --------- --------- ------ -------- ----------
Net interest income 9,595 4,015 1,066 -- 4,278 18,954
Provision for loan losses 367 4,258 -- -- -- 4,625
---------- --------- --------- ------ -------- ----------
Net interest income (loss) after
provision for loan losses 9,228 (243) 1,066 -- 4,278 14,329
Non-interest income 1,717 292 937 1,721 1,241 5,908
Non-interest expense 10,423 1,911 924 1,299 132 14,689
---------- --------- --------- ------ -------- ----------
Net income (loss) before taxes $ 522 $ (1,862) $ 1,079 $ 422 $ 5,387 $ 5,548
---------- --------- --------- ------ -------- ----------
Average balances:
Gross funds provided $1,385,269 $ -- $ 403,711 $ -- $195,369 $1,984,349
Funds used:
Interest-earning assets 592,133 647,936 575,550 -- -- 1,815,619
Non-interest-earning assets 12,212 2,598 57,236 -- 96,684 168,730
---------- --------- --------- ------ -------- ----------
Net funds provided (used) $ 780,924 $(650,534) $(229,075) $ -- $ 98,685 $ --
========== ========= ========= ====== ======== ==========
7
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is an analysis of the financial condition and
results of operations of the Company for the three months ended March 31, 2003,
and 2002 and should be read in conjunction with the related financial statements
and accompanying notes presented elsewhere herein. Results of operations for the
three-month period ended March 31, 2003 are not necessarily indicative of
results to be attained for any other period.
VISTA MERGER
On August 21, 2002, the Company acquired Vista Bancorp, Inc. ("Vista") in a
transaction accounted for under the purchase method of accounting (the "Vista
Merger"). Under the terms of the Vista Merger, the Company acquired all
5,350,637 outstanding shares of Vista in exchange for 4,695,184 shares of the
Company's Common Stock and $37,943,095 in cash.
Based on its unaudited financial statement at June 30, 2002, Vista had
total assets of $713 million, deposits of $600 million and stockholders' equity
of $66 million. Vista was headquartered in Phillipsburg, New Jersey and operated
16 banking offices in western New Jersey and eastern Pennsylvania.
The Company and Vista entered into this merger to enhance stockholder value
by building a community banking company able to provide more products and
services for its customers, more investment opportunities for clients and added
capital to deploy in the future. The Vista Merger enhances the combined
Company's range of products and services and increases the distribution channels
available to customers. The acquisition of Vista has strengthened the Company's
market share position in the western New Jersey marketplace and has provided an
entry into Pennsylvania.
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 earnings, opportunities, and market conditions. These
statements may be identified by such forward-looking terminology as "expect",
"believe", "anticipate", "optimistic", or by expressions of confidence such as
"for the coming months", "consistent", "continue", "strong", "superior" or
similar statements or variations of such terms. Such forward-looking statements
involve certain risks and uncertainties. Actual results may differ materially
from such forward-looking statements. Factors that may cause actual results to
differ materially from those contemplated by such forward-looking statements
include, but are not limited to, expected cost savings from the Vista Merger or
other planned programs not being realized or not being realized within the
expected time frame; income or revenues from the Vista Merger or other planned
programs 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 economic conditions in New Jersey or Pennsylvania;
changes in legal, regulatory and tax structures; and unanticipated occurrences
delaying planned programs or initiatives or increasing their costs or decreasing
their benefits. The Company does not assume any obligation for updating any such
forward-looking statements at any time.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is based upon the Company's Consolidated Financial Statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. Some accounting policies
have a significant impact on amounts reported in these financial statements. A
summary of significant accounting policies and a description of accounting
policies that are considered critical may be found in the Company's Annual
Report on Form 10-K, filed on March 20, 2003, in the Notes to the Consolidated
Financial Statements and the Critical Accounting Policies and Estimates section.
8
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Earnings Summary
The Company reported net income for the first quarter of 2003 of $7.6
million, up 91% from the $4.0 million earned in the three months ended March 31,
2002. Diluted per share earnings were $0.40 in the first quarter of 2003, up 48%
over the $0.27 recorded for the first quarter of 2002. The increase in earnings
over the prior year period resulted from a decreased loan loss provision
compared to the first quarter of 2002 as well as gains on securities
transactions. The substantial decrease in the loan loss provision for the
current quarter was related primarily to one large credit that was placed on
non-accrual in the first quarter of 2002 and the continued improvement in asset
quality. The gains on securities transactions largely resulted from the sale of
mortgage-backed securities to take advantage of current market conditions and
the opportunity to reinvest the proceeds, expecting that otherwise these
securities would have been prepaid in the near term at par value.
The return on average assets was 1.06% and 0.81% for the first quarter of
2003 and 2002, respectively while the return on average stockholders' equity was
11.46% and 10.13% for the first quarter of 2003 and 2002, respectively. The
higher loan loss provision recorded in the first quarter of 2002 adversely
affected the return on average assets and the return on average stockholders'
equity for that period. The return on average assets and return on average
equity for the first quarter of 2003 were both adversely impacted by the Vista
merger and the required application of the purchase method of accounting, which
resulted in a greater increase in stockholders' equity than would have occurred
had the transaction been structured under the pooling of interests method of
accounting, which is currently not permitted.
Net Interest Income
The Company's most significant revenue source is net interest income, which
represents the difference between interest earned on assets and interest paid to
depositors and other creditors. A portion of the Company's total interest income
is derived from investments that are exempt from Federal taxation. Due to the
"tax-free" nature of these investments, the amount of pretax income realized
from them is less than the amount of pretax income realizable from comparable
investments subject to Federal taxation. For purposes of the following
discussion, interest exempt from Federal taxation has been restated to a fully
tax-equivalent basis assuming a statutory tax rate of 35% for both the first
quarter of 2003 and 2002. This was accomplished by adjusting this income upward
to make it equivalent to the level of taxable income required to earn the same
amount after taxes.
A summary of net interest income on a tax-equivalent basis for the first
quarter of 2003 and 2002 is presented in the following table (in thousands):
Three Months Ended
March 31, 2003 Over (Under) 2002
------------------ ----------------------
2003 2002 Amount Percent
------- ------- ------ -------
Interest income $38,359 $30,665 $7,694 25.1%
Interest expense 13,607 11,711 1,896 16.2
------- ------- ------
Net interest income $24,752 $18,954 $5,798 30.6%
======= ======= ====== ====
For the first quarter of 2003, tax-equivalent net interest income increased
31% to $24.8 million from $19.0 million in the first quarter of 2002. This
growth resulted from an increase of $747 million in average interest earning
assets primarily related to the acquisition of Vista during the third quarter of
2002, which was accounted for using the purchase method of accounting, partially
offset by a 31 basis-point narrowing in the net interest margin.
The net interest margin for the first quarter of 2003 was 3.88% as compared
to 4.19% in the first quarter of 2002. This 31 basis point narrowing was
partially attributable to a reduction in the net interest spread from 3.68% to
3.55%, the result of a more rapid fall in rates on earning assets than on
interest bearing funds. The decline in the average rate on interest earning
assets was largely due to a sharp rise in prepayments on mortgage-related
assets, a 50 basis-point decline in the prime rate and in other short-term
interest rates, and a higher level of average short-term investments. The
remaining 18 basis-point decline in the net interest margin was attributable to
a decline in the proportion of net non-interest bearing funds to total sources
of funds primarily as a result of the Vista Merger and also as a result of the
lower interest rate environment in 2003.
9
Average interest earning assets grew $747.2 million or 41% in the first
quarter of 2003 from the same quarter in 2002 as average loans, securities and
short-term investments all increased. Average loans increased $456.5 million or
37% during the current quarter compared to the same quarter in 2002, primarily
from loans added in the Vista Merger. Average securities rose $241.1 million or
42% in the first quarter of 2003 from the prior year, also due to the Vista
Merger. Average short-term investments increased $49.6 million to $50.2 million
in the first quarter of 2003 from $0.6 million in the first quarter of 2002, due
to a sharp rise in prepayments on mortgage-related assets. Excluding the impact
of the Vista Merger, average loans increased $42.7 million or 3% and average
securities increased $58.6 million or 10%.
Average deposits grew $764.5 million or 54% in the first quarter of 2003
from the same quarter last year. Average deposits for 2003 contained
approximately $616.2 million in deposits resulting from the Vista Merger.
Excluding the effect of the Vista Merger, average total deposits for the first
quarter of 2003 increased $148.3 million or 11% from the first quarter of 2002.
The increase in average deposits in the first quarter of 2003 over the first
quarter of 2002 excluding the impact of the Vista Merger was largely
attributable to an $18.0 million or 7% growth in average demand deposits and a
$129.3 million or 23% growth in average savings deposits, which includes NOW and
money market accounts. Time deposits, excluding the impact of the Vista Merger,
increased a modest $1.0 million. The Company reduced its short-term borrowings
by $60.8 million or 59% due to the effect of the Vista Merger as well as to the
aforementioned growth in average deposits. Average other borrowings, which
consist of debt having an original maturity of one year or more, increased $86.4
million or 30% during the first quarter of 2003 from the prior year quarter. The
increase in average other borrowings was principally due to liability extensions
made to reduce the liability sensitivity of the Bank and higher amortizing
advances from the Federal Home Loan Bank of New York that were used to match
fund certain fixed-rate loans.
10
Average Consolidated Balance Sheet, Net Interest Income and Net Interest
Margin (Tax-Equivalent Basis)
Three Months Ended
-----------------------------------------------------------------
March 31, 2003 March 31, 2002
------------------------------- -------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(Dollars in Thousands) Balance Expense Rate Balance Expense Rate
- ---------------------- ---------- -------- ------- ---------- -------- -------
Assets:
Short-term investments $ 50,190 $ 154 1.25% $ 601 $ 3 1.86%
Securities available for sale: (1)
Taxable 645,187 8,795 5.45 433,711 7,333 6.76
Non-taxable 129,972 2,105 6.48 97,439 1,677 6.89
Securities held to maturity:
Taxable 4,798 52 4.36 6,621 73 4.43
Non-taxable 33,095 478 5.78 34,122 515 6.04
---------- ------- ---- ---------- ------- -----
Total securities 813,052 11,430 5.62 571,893 9,598 6.71
---------- ------- ---- ---------- ------- -----
Loans: (2)
Commercial 349,555 4,800 5.57 316,931 4,660 5.96
Real estate - commercial 471,283 8,151 7.01 356,638 6,520 7.31
Real estate - residential 478,215 7,187 6.01 272,489 4,474 6.57
Consumer 400,544 6,637 6.72 281,691 4,986 7.18
Credit card -- -- -- 15,376 424 11.17
---------- ------- ---- ---------- ------- -----
Total loans 1,699,597 26,775 6.36 1,243,125 21,064 6.82
---------- ------- ---- ---------- ------- -----
Total interest-earning assets 2,562,839 38,359 6.03 1,815,619 30,665 6.79
---------- ------- ---- ---------- ------- -----
Allowance for loan losses (20,869) (12,479)
Cash and due from banks 68,775 46,887
Intangible assets 98,080 5,060
Other assets 180,774 129,262
---------- ----------
Total assets $2,889,599 $1,984,349
========== ==========
Liabilities and stockholders' equity:
Now accounts $ 275,100 315 0.46 $ 154,087 282 0.74
Money market accounts 182,085 541 1.21 77,417 188 0.99
Savings deposits 504,040 1,151 0.93 326,643 958 1.19
Time deposits 847,145 6,935 3.32 577,443 5,549 3.90
---------- ------- ---- ---------- ------- -----
Total interest-bearing deposits 1,808,370 8,942 2.01 1,135,590 6,977 2.49
Short-term borrowings 42,149 127 1.22 102,970 536 2.11
Other borrowed funds 375,295 4,538 4.88 288,885 4,198 5.87
---------- ------- ---- ---------- ------- -----
Total interest-bearing liabilities 2,225,814 13,607 2.48 1,527,445 11,711 3.11
---------- ------- ---- ---------- ------- -----
Non-interest-bearing liabilities 362,403 270,636
Other liabilities 33,547 28,004
Stockholders' equity 267,835 158,264
---------- ----------
Total liabilities and stockholders' equity $2,889,599 $1,984,349
========== ==========
Net interest spread 3.55 3.68
Effect of net non-interest-bearing funds 0.33 0.51
---- -----
Net interest income $24,752 $18,954
======= =======
Net interest margin 3.88% 4.19%
==== =====
The tax-equivalent adjustment was $1,125 and $792 for the first quarter of 2003
and the first quarter of 2002, respectively.
- ----------
(1) Securities available for sale are stated at amortized cost.
(2) Average loan balances and yields include non-accruing loans. Loan fees are
included in the interest amounts and are not material.
11
Provision for Loan Losses
The provision for loan losses represents Management's estimate of the
amount necessary to be charged to operations to bring the allowance for loan
losses to a level that is considered adequate in relation to the risk of losses
inherent in the loan portfolio. Actual loan losses, net of recoveries, serve to
reduce the allowance.
The loan loss provision amounted to $1.5 million in the first quarter of
2003, representing a $3.1 million decrease from the first quarter of 2002
provision of $4.6 million. The substantial decrease in the loan loss provision
for the current quarter was related primarily to one large credit that was
placed on non-accrual in the first quarter of 2002 and the continued improvement
in asset quality.
Non-Interest Income
Non-interest income has become an increasingly important source of revenue
for the Company. The major components of non-interest income are presented below
(in thousands).
Three Months Ended
March 31, 2003 Over (Under) 2002
------------------ ----------------------
2003 2002 Amount Percent
------ ------ ------- -------
Trust income $1,558 $1,537 $ 21 1.4%
Service charges on deposit accounts 1,497 954 543 56.9
Other service charges, commissions and fees 1,054 871 183 21.0
Net gains from securities transactions 2,849 -- 2,849 NM
Income on life insurance 971 829 142 17.1
Dissolution of joint venture -- 1,171 (1,171) NM
Other income 609 546 63 11.5
------ ------ -------
Total non-interest income $8,538 $5,908 $ 2,630 44.5%
====== ====== ======= ====
- ----------
NM - Not meaningful.
Non-interest income amounted to $8.5 million in the first quarter of 2003,
an increase of 45% from the $5.9 million earned in the first quarter of 2002.
The increase from the first quarter of 2002 was attributable to the realization
of $2.8 million in gains on securities transactions in the first quarter of 2003
and the impact of the Vista Merger, partly offset by a $1.2 million recovery on
the dissolution of a joint venture in the first quarter of 2002. The Company
sold $47 million in available for sale mortgage-backed securities during the
first quarter of 2003 in an effort to realize gains and reinvest the proceeds,
expecting that otherwise these securities would be prepaid in the near term at
par value. Typically, such prepayments have an adverse effect on the yields on
average loans and securities and, accordingly, on net interest income.
12
Non-Interest Expense
The Company closely monitors non-interest expense growth. The following
table presents an analysis of the major categories of non-interest expenses (in
thousands):
Three Months Ended
March 31, 2003 Over (Under) 2002
------------------ ----------------------
2003 2002 Amount Percent
-------- ------- ------ -------
Salaries, wages and employee benefits $10,248 $ 7,568 $2,680 35.4%
Occupancy expense, net 2,791 1,429 1,362 95.3
Furniture and equipment expense 1,351 1,055 296 28.1
Data processing expense 977 1,130 (153) (13.5)
Amortization of intangible assets 791 371 420 113.2
Other expenses:
Legal and other professional service expense 988 791 197 24.9
Marketing and shareholder communications expense 1,063 698 365 52.3
Telecommunication expense 497 323 174 53.9
Loan origination/collection expense 376 226 150 66.4
Credit card expense -- 289 (289) NM
All other 1,992 809 1,183 146.2
------- ------- ------
Total other expenses 4,916 3,136 1,780 56.8
------- ------- ------
Total non-interest expense $21,074 $14,689 $6,385 43.5%
======= ======= ====== =====
- ----------
NM - Not meaningful.
Non-interest expense increased 44% to $21.1 million in the first quarter of
2003 over the $14.7 million incurred in the same quarter of 2002. The increase
over the first quarter of 2002 was primarily due to the impact of the Vista
Merger of approximately $3.4 million, higher pension and healthcare costs, a
substantial increase in snow removal/parking lot maintenance costs, increased
intangible asset amortization related to the Vista Merger, and a $500,000 charge
incurred on the settlement of a lawsuit with a vendor used in the divested
credit card business. The increase in snow removal/parking lot maintenance costs
amounted to $659,000. Partly offsetting these expense increases were declines in
data processing expense related to the in-house processing of checks and lower
credit card expense resulting from the sale of this portfolio.
The Company adopted the fair value based method to recognize compensation
expense on all of its outstanding stock option awards in the fourth quarter of
2002, in accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, which permits retroactive
restatement. Accordingly, the Company increased its employee benefit expense in
its prior period.
Income Taxes
The provision for income taxes amounted to $2.1 million in the first
quarter of 2003 from the $0.8 million incurred in the first quarter of 2002. The
increase in the income tax provision was due to a 102% increase in income before
provision for income taxes and a higher effective tax rate. The effective tax
rate was 21% for the first quarter of 2003 and 17% for the first quarter of
2002. The increase in the effective tax rate was largely due to an increase in
the proportion of taxable income to income before provision for income taxes
compared to the prior year.
LINES OF BUSINESS - 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 tax-equivalent basis for the
lines of business is presented in "Note 7. Lines of Business - Segment
Reporting" of this report.
Line of business information is based on accounting practices that conform
to and support the current management structure, and is not necessarily
comparable with similar information for any other financial institution.
13
Income before taxes on a fully tax-equivalent basis includes revenues and
expenses directly associated with each line, plus allocations of certain
indirect revenues and expenses. Centrally provided corporate services and
general overhead are allocated in proportion to the contribution of each
business line to consolidated pretax income prior to the inclusion of these
costs. A matched maturity funds transfer method is employed to assign a cost of
funds to the earning assets of each business line, as well as to a value of
funds to the liabilities of each business line. The provision for loan losses is
allocated based on the historical net charge-off ratio for each line of
business.
Retail Banking
Retail Banking meets the needs of individuals and small businesses. This
segment includes loans secured by one-to-four family residential properties,
construction financing, loans to individuals for household, family and other
personal expenditures, and lease financing. In addition, this segment includes
the branch network. Income before taxes for this segment in the first quarter of
2003, increased $5.4 million from the first quarter of 2002 due to increases of
$9.7 million in net interest income and $0.5 million in non-interest income.
This was offset by increases in non-interest expense of $4.3 million and an
increase in the allocation of the provision for loan losses of $0.5 million. The
higher net interest income was primarily related to increased average
residential mortgage loans and wider-spread average core deposits when compared
to the first quarter of 2002. The increases in non-interest income and
non-interest expense were mainly due to the Vista Merger, and the increase in
the loan loss provision was due primarily to the Vista Merger and increased loan
volume.
Commercial Banking
Commercial Banking provides term loans, demand secured loans, Small
Business Administration ("SBA") financing, floor plan loans and financing for
commercial and construction lending and commercial credit to middle-market
businesses. It also includes the operations of United Commercial Capital Group,
which provides non-traditional real estate and commercial financings. Pretax
results in the first quarter of 2003 increased $3.4 million from the first
quarter of 2002 primarily due to a $3.7 million decrease in the loan loss
provision allocation. In the first quarter of 2002, a $3.7 million provision was
made related to the Suprema Specialties credit facility. In addition,
non-interest expense increased $0.5 million due to the Vista Merger.
Investments
The Investments segment is comprised of the Company's securities portfolio,
which includes U.S. Treasury and Federal Agency securities, tax-exempt
securities, mortgage-backed securities, corporate debt securities, equity
securities and short-term investments. Pretax income for the first quarter of
2003 increased $4.3 million over the first quarter of 2002 due to a $2.9 million
increase in net interest income and a $3.0 million increase in non-interest
income, partially offset by a $1.6 million increase in non-interest expense. The
increase in net interest income was largely due to a 50% growth in average
investment securities and wider spreads on mortgage-backed securities purchased
during the past six months, while the increase in non-interest income was due to
the realization of $2.8 million of investment securities gains. The increase in
non-interest expense was due to a larger allocation of corporate overhead due to
the increased pretax income.
Trust and Investment Services
The Trust and Investment Services segment derives revenue in the form of
fees generated for the services provided. The major sources of fee income are
generated from a full range of fiduciary services, ranging from mutual funds to
personal trust, investment advisory and employee benefits. Also included are
fees generated from the financial services area, which provides uninsured
financial products, including the sale of annuities, insurance and mutual funds.
In the first quarter of 2003, income before taxes for this segment was virtually
unchanged from the first quarter of 2002. Fees for trust services increased $0.1
million, which was offset by a similar increase in non-interest expense.
All Other
The All Other segment primarily includes the impact of stockholders' equity
and the allowance for loan losses, as well as funds transfer-pricing offsets.
Additionally, certain revenues and expenses that are not considered allocable to
a line of business are reflected in this segment. Net loss before taxes in the
first quarter of 2003 for this segment was $2.5 million as compared to net
income before taxes of $5.4 million in the first quarter of 2002. This was due
primarily to a $6.8 million decline in net interest income related to both the
Vista Merger as well as a higher funds credit assigned to non-maturity core
deposits in Retail Banking in the first quarter of 2003. Non-interest
14
income decreased $1.2 million from the first quarter of 2002 due to a $1.2
million recovery from the dissolution of the UFS joint venture recorded in 2002.
The following table shows the percentage contribution of the various lines
of business to consolidated income before taxes on a fully tax-equivalent basis:
Three Months Ended
March 31,
------------------
2003 2002
----- -----
Retail banking 54.9% 9.4%
Commercial banking 13.9 (33.5)
Investments 50.5 19.4
Trust and investment services 4.2 7.6
All other (23.5) 97.1
----- -----
Total consolidated 100.0% 100.0%
===== =====
15
FINANCIAL CONDITION
Loan Portfolio
An analysis of loans outstanding, net of unearned income, is presented in
the following table (in thousands):
March 31, December 31,
2003 2002
--------- ------------
Commercial mortgage $ 391,872 $ 399,826
Residential mortgage 494,067 447,940
Construction 80,418 81,808
Commercial 369,421 339,635
Consumer 405,040 395,860
---------- ----------
Total $1,740,818 $1,665,069
========== ==========
At March 31, 2003, total loans increased $75.7 million or 5% from year-end
2002, which represents an annual growth rate of 18%. The Company achieved strong
growth in residential, commercial and consumer loans, which increased $46.1
million, $29.8 million and $9.2 million, respectively. On an annualized basis,
this represents growth of 41%, 35% and 9%, respectively. Activity in the
commercial mortgage portfolio, which declined $8.0 million from year-end 2002,
has been impacted by the adverse weather conditions this past winter.
Asset Quality
Lending policies are formulated by the Company's Senior Lending Officer and
reviewed and approved by the Board of Directors of the Company and the Bank.
Loan approval requirements are dictated by the policies for the respective loan
areas of the Bank, which are based on, but not limited to, reputation of the
customer, collateral securing the loan, capital, ability to repay, and current
economic conditions. Individual approval limits for each of the Bank's loan
officers have been reviewed and reset, as appropriate. However, authority for
approval of credits between $1 million and $5 million, is still retained by the
Bank's Management Loan Committee, consisting of the Bank's Chief Executive
Officer, President, Chief Operating Officer and Senior Lending Officer,
Executive Vice President Commercial and Consumer Lending, Executive Vice
President Real Estate Lending, Senior Vice President and Commercial Real Estate
Department Head, Vice President and Commercial Loan Department Head and the
Senior Credit Officer, as appropriate. Additionally, the Executive Committee of
the Board of Directors of the Company and the Bank approve credit extensions
exceeding $5 million.
Loan officers are required to identify potentially deteriorating loan
situations through a self-reporting system. The Bank maintains a risk rating
system for all commercial, construction and commercial real estate loans. Each
of these loans is evaluated and given a rating upon origination. Subsequently,
these loans are monitored on a regular basis and rating revisions are made, as
appropriate. Each month, the Bank's lending staff reviews delinquent loans for
all loan portfolios with the Credit Quality Committee of the Bank, consisting of
the same management group as the Bank's Management Loan Committee as well as
other lending department heads, and the Executive Committee of the Board of
Directors of the Company and the Bank. These processes allow for implementation
of a strategy to react in the early stage of a potential credit concern.
The Company's independent loan review function is an integral part of its
overall loan administration. The Bank has engaged an independent consultant to
perform the loan review function. The independent consultant is responsible for
the evaluation of credit extensions with respect to quality, documentation and
risk criteria. The consultant's direct reporting line to the Audit Committee of
the Board of Directors of the Bank is intended to maintain its independence and
to provide assurance that troubled loan situations will be identified and proper
procedures followed to establish corrective measures. The loan review and the
self-reporting and risk rating systems are designed to provide the Company with
an early warning mechanism to detect loans to customers with deteriorating
financial conditions or loans that may represent potentially troubled
situations. In addition, the Company's internal audit department reviews loan
documentation and collateral as part of its regular audit procedures.
16
Non-Performing Assets
The Company defines non-performing assets as non-accrual loans, impaired
loans, loans past due 90 days or more and still accruing, other real estate
owned and other assets owned. At March 31, 2003, non-performing assets totaled
$16.8 million or 0.56% of total assets compared to $16.3 million or 0.57% of
total assets at December 31, 2002.
Non-performing loans at March 31, 2003 were $15.8 million or 0.91% of total
loans, compared to $15.7 million or 0.95% of total loans at December 31, 2002.
At March 31, 2003, the Company's holdings in other real estate owned
amounted to $919,000 compared to $570,000 at December 31, 2002. Foreclosures
will continue to result in assets migrating from non-performing loans to other
real estate owned. It is the Company's intent to actively negotiate and dispose
of these properties at fair market values, which are considered reasonable under
the circumstances. In the first quarter of 2003, the Company recognized $68,000
in net recoveries relating to these properties compared to $7,000 in net costs
during the first quarter of 2002. Other assets owned amounted to $66,000 at
March 31, 2003 compared to $30,000 at December 31, 2002.
The following table provides an analysis of non-performing assets as of the
periods indicated (in thousands):
December 31,
March 31, ----------------------------------
2003 2002 2001 2000 1999
--------- ------- ------ ------ ------
Non-accrual loans (1) $13,957 $14,029 $4,373 $5,619 $4,382
Loans past due 90 days or more (2) 1,868 1,720 2,064 1,118 3,732
------- ------- ------ ------ ------
Total non-performing loans 15,825 15,749 6,437 6,737 8,114
Other real estate owned (OREO) (3) 919 570 127 165 56
Other assets owned (OAO) (4) 66 30 64 28 53
------- ------- ------ ------ ------
Non-performing assets $16,810 $16,349 $6,628 $6,930 $8,223
======= ======= ====== ====== ======
Troubled debt restructurings $ 4 $ 12 $ -- $ 14 $ 28
======= ======= ====== ====== ======
Non-performing loans as a % of:
Loans 0.91% 0.95% 0.52% 0.52% 0.64%
Total assets 0.53 0.55 0.33 0.32 0.39
Non-performing assets as a % of:
Loans, OREO and OAO 0.97 0.98 0.54 0.54 0.65
Total assets 0.56 0.57 0.34 0.33 0.39
- ----------
(1) Generally represents those loans on which Management has determined that
borrowers may be unable to meet contractual principal and/or interest
obligations or where interest or principal is past due for a period of 90
days or more (except when such loans are both well-secured and in the
process of collection). When loans are placed on non-accrual status, all
accrued but unpaid interest is reversed.
(2) Represents loans on which payments of interest and/or principal are
contractually past due 90 days or more, but are currently accruing interest
at the previously negotiated rates, based on a determination that such
loans are both well-secured and in the process of collection.
(3) Consists of real estate acquired through foreclosure.
(4) Consists of assets, other than real estate, acquired through repossession,
forfeiture or abandonment.
17
Loan Loss Experience
The following table presents an analysis of the allowance for loan losses,
including charge-offs and recoveries for the periods indicated.
December 31,
March 31, -------------------------------------
2003 2002 2001 2000 1999
--------- ------- ------- ------- -------
Beginning balance $20,407 $12,478 $12,419 $10,386 $11,174
Charge-offs (480) (9,985) (3,770) (3,745) (4,787)
Recoveries 87 640 1,068 1,048 967
------- ------- ------- ------- -------
Net charge-offs (393) (9,345) (2,702) (2,697) (3,820)
Provision for loan losses 1,470 11,150 2,761 4,730 3,825
Addition related to vista merger -- 6,124 -- -- --
Reduction related to loan sale -- -- -- -- (793)
------- ------- ------- ------- -------
Ending balance $21,484 $20,407 $12,478 $12,419 $10,386
======= ======= ======= ======= =======
Net charge-offs as a % of
Average loans 0.09%(1) 0.67% 0.22% 0.21% 0.34%
Allowance for loans losses as a % of:
Loans 1.23 1.23 1.01 0.96 0.82
Non-performing loans 135.76 129.58 193.85 184.34 128.00
- ----------
(1) Annualized basis.
Asset/Liability Management
The Company's asset/liability management activities are intended to ensure
adequate liquidity and to protect net interest revenue from the effect of
adverse movements in the level of interest rates and the shape of the interest
rate yield curve. The Asset/Liability Management Committee (the "ALCO") is
responsible for monitoring the Company's liquidity and interest rate risk
positions. The ALCO meets regularly to assess the Company's current and
prospective risk exposure and to establish strategies to achieve net interest
margin objectives. Both on-balance sheet and off-balance sheet (e.g., interest
rate swap agreements) techniques are used to implement ALCO strategies.
ALCO monitors and manages interest rate sensitivity through simulation and
market value of equity analyses in order to avoid unacceptable earnings
fluctuations due to interest rate changes. The Company's simulation model
includes certain management assumptions based upon past experience and the
expected behavior of customers during various interest rate scenarios. The
assumptions include principal prepayments for various loan and security products
and classifying the non-maturity deposit balances by degree of interest rate
sensitivity.
Management believes that the simulation of net interest income in different
interest rate environments provides a meaningful and dynamic measure of interest
rate risk. Income simulation analysis captures not only the potential of all
assets and liabilities to mature or reprice, but the probability that such would
occur. Income simulation also permits management to assess the probable effects
on the balance sheet not only of changes in interest rates, but also of proposed
strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 24 months in a flat rate scenario
versus net interest income in alternative interest rate scenarios. Management
reviews and refines its interest rate risk management process in response to the
changing economic climate. The model incorporates management assumptions
regarding the level of interest rate or balance changes on non-maturity deposit
products, such as NOW, savings, money market and demand 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.
18
Currently, the Company's earnings simulation model employs a 400 basis
point differential in rates (i.e., the difference between a rising rate
projection and a declining rate projection) during the first year, in even
monthly increments, with rates held constant in the second year. The Company's
ALCO policy has established that interest income sensitivity will be considered
acceptable if the change in net interest income in the above interest rate
scenario is within 10% of net interest income from the flat rate scenario in the
first year and over a two-year timeframe. At March 31, 2003, the Company's
income simulation model indicates an acceptable level of interest rate risk and
is materially consistent with the year-end disclosure.
In light of significant changes occurring in market interest rates, the
Company will continue to evaluate its sensitivity to interest rates.
Liquidity and Funding
Liquidity management involves the Company's ability to maintain prudent
amounts of liquid assets in its portfolio in order to meet the borrowing needs
and deposit withdrawal requirements of customers and to support asset growth.
Current and future liquidity needs are reviewed by ALCO to determine the
appropriate asset/liability mix.
The ALCO analysis includes an examination of the maturity and potential
volatility characteristics of the Company's liabilities. Funding sources
available to the Company include retail and commercial deposits, purchased
liabilities and stockholders' equity. During 2002 and into 2003, the Company was
able to reduce its reliance on short-term borrowings or other "purchased" funds
to satisfy liquidity requirements through the growth in core deposits and the
impact of the Vista Merger. Consequently, the sum of average time deposits of
$100,000 and over and average short-term borrowings was $189 million or only 7%
of average total assets at March 31, 2003.
Additionally, asset liquidity is provided by short-term investments and the
marketability of securities available for sale. Short-term investments averaged
$50.1 million in the first quarter of 2003 while securities available for sale
at market value averaged $792.9 million in the first quarter of 2003. The
Company did not maintain any short-term investments at March 31, 2003, while
securities available for sale at market value amounted to $913.0 million at
March 31, 2003.
The Company intends to hold its investment securities for the foreseeable
future. However, the level and composition of the portfolio may change as a
result of maturities and purchases undertaken as part of the asset/liability
management process. Unexpected changes in the financial environment are likely
to affect the Company's interest rate risk, liquidity position and the potential
return on the portfolio. Additionally, the Company may also purchase and sell
those securities that are available for sale in order to address these changes.
Overall balance sheet size and capital adequacy are considered in determining
the appropriate level for the portfolio. When economic factors cause changes in
the balance sheet or when the Company reassesses its interest rate risk,
liquidity or capital position, strategic changes may be made in both the
securities held to maturity and securities available for sale portfolios based
on opportunities to enhance the ongoing total return of the balance sheet.
The following table sets forth the market value of securities available for
sale at March 31, 2003 and at December 31, 2002 (in thousands)
March 31, December 31,
2003 2002
--------- ------------
Debt Securities:
U.S. Treasury securities $ 3,144 $ 3,174
Federal agency obligations 20,070 13,561
State and municipal securities 131,419 134,629
Mortgage-backed securities 618,459 546,733
Corporate debt securities 112,816 106,603
-------- --------
Total debt securities 885,908 804,700
-------- --------
Equity securities:
Marketable equity securities 4,790 4,259
Federal Reserve Bank and Federal Home Loan Bank Stock 22,302 19,017
-------- --------
Total equity securities 27,092 23,276
-------- --------
Total securities available for sale $913,000 $827,976
======== ========
19
The following table sets forth the amortized costs of securities held to
maturity at March 31, 2003 and at December 31, 2002.
March 31, December 31,
2003 2002
--------- ------------
Debt Securities:
U.S. Treasury securities $ 3,027 $ 3,048
State and municipal securities 31,344 39,134
Mortgage-backed securities -- 831
Corporate debt securities 502 1,997
Foreign government securities 225 250
------- -------
Total securities held to maturity $35,098 $45,260
======= =======
Asset liquidity is represented by the ease with which assets can be
converted into cash. This liquidity is provided by marketable equity securities
and debt securities with maturity dates, assuming prepayments, of one year or
less, which totaled $417.4 million at March 31, 2003. Included within this
figure are marketable equity securities amounting to $4.8 million. Debt
securities consist primarily of U.S. Treasury securities, Federal agency
obligations, mortgage-backed securities and state and municipal securities. All
securities held by the Company are readily marketable. As of March 31, 2003,
debt securities scheduled to mature within one year based upon estimated cash
flows, amounted to $413.8 million and represented 47% of the total debt
securities portfolio. Approximately 89% of the entire debt portfolio is
projected to mature or reprice within five years, based upon estimated cash
flows. There was no security issue held which represented more than 10% of the
Company's stockholders' equity. Additional liquidity is derived from scheduled
loan and investment payments of principal and interest, as well as prepayments
received.
Capital Adequacy
The Company strives to maintain a strong capital position. Capital adequacy
is monitored in relation to the size, composition and quality of its asset base
and with consideration given to regulatory guidelines and requirements, as well
as industry standards. Management seeks to maintain a capital structure that
will support anticipated asset growth and provide for favorable access to the
capital markets.
At March 31, 2003, total stockholders' equity was $265.8 million, an
increase of $1.2 million from year-end 2002. During the first quarter of 2003,
the Company generated net retained earnings of $3.8 million. These increases
were partially offset by a reduction of $1.6 million resulting from the
Company's purchases under its stock repurchase program of 67,000 shares to be
held in Treasury at an average price of $23.95 per share and a decline of $1.3
million in the market value of the Company's available for sale securities
portfolio from December 31, 2002 to March 31, 2003.
20
The following reflects the Company's capital ratios as of March 31, 2003
and December 31, 2002 in accordance with current regulatory guidelines (dollars
in thousands):
March 31, 2003 December 31, 2002
---------------- -----------------
Amount Ratio Amount Ratio
-------- ----- -------- ------
Risk-Based Capital Ratios:
Tier I Capital
Actual $211,346 10.21% $208,429 10.34%
Regulatory Minimum Requirement 82,763 4.00 80,602 4.00
For Classification as Well Capitalized 124,144 6.00 120,903 6.00
Combined Tier I and Tier II Capital
Actual 232,830 11.25 228,836 11.36
Regulatory Minimum Requirement 165,525 8.00 161,204 8.00
For Classification as Well Capitalized 206,907 10.00 201,505 10.00
Leverage Ratio:
Actual 211,346 7.55 208,429 7.40
Regulatory Minimum Requirement 112,041 4.00 112,603 4.00
For Classification as Well Capitalized 140,052 5.00 140,754 5.00
The Company's risk based capital ratios (Tier I Capital and Combines Tier I
and Tier II Capital) and Tier I leverage ratio continue to exceed the minimum
requirements set forth by the Company's regulators to be considered well
capitalized.
Common Stock and Dividends
The Company's Common Stock is traded in the over-the-counter market on the
NASDAQ Stock Market. The market price of its common shares increased during the
first three months of 2003 reaching a high of $24.31 near the end of the
quarter. The Company's Common Stock price was $23.51 at March 31, 2003 compared
to $23.05 at December 31, 2002. Book value per common share increased 0.8%
during the first quarter of 2003 and amounted to $14.04 per share at March 31,
2003. This resulted in the Company's per share market price to book value rising
to 167% from 165% at the end of 2002.
The Company has paid cash dividends for 59 consecutive quarters since it
commenced operations in 1988. While the Company presently expects to continue to
pay dividends, no assurance can be given that dividends will be paid in the
future since the declaration and payment of such dividends will be based on a
number of factors considered by the Board of Directors, including current and
prospective earnings, anticipated asset growth, the Company's capital position
and the economic outlook. Future dividends will also depend on, among other
things, the earnings and financial condition of the Bank, its need for funds and
applicable governmental policies and regulations. Any deferral of payments due
to the trust preferred securities would prevent the Company from paying
dividends until the deferred amounts are paid.
21
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
Information pertaining to this item can be found in the section
"Asset/Liability Management" in Item 2 of this report.
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.
The Company's management, including the CEO and the Treasurer, does not
expect that our disclosure controls or our internal controls will prevent all
error and all fraud. A control system, no matter how well conceived and
operated, provides reasonable, not absolute, assurance that the objectives of
the control system are met. The design of a control system reflects resource
constraints; the benefits of controls must be considered relative to their
costs. Because there are inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been or will be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns occur because of simple error
or mistake. Controls can be circumvented by the individual acts of some persons,
by collusion of two or more people, or by management override of the control.
The design of any system of controls is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design
will succeed in achieving its stated goals under all future conditions; over
time, control may become inadequate because of changes in conditions or
deterioration in the degree of compliance with the policies or procedures.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
22
Part II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
List of Exhibits
(3)(a) Certificate of Incorporation of the Company, as in effect on
the date of this filing (incorporated by reference to the
Company's Annual Report on Form 10-K for the Year Ended
December 31, 2002 filed with the Securities and Exchange
Commission on March 20, 2003 (Exhibit 3(a)).
(b) By-laws of the Company, as in effect on the date of this
filing (incorporated by reference to the Company's Current
Report on Form 8-K filed with the Securities and Exchange
Commission on April 21, 2003 (Exhibit 3(ii)).
(10) Material Contracts
(a) Change of Control Agreement for H. Richard Minette effective
January 21, 2003
(99) Additional Exhibits
(a) Certification of Chairman of the Board, President and Chief
Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Certification of Vice President and Treasurer (Principal
Financial Officer) Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Reports on Form 8-K
None
23
SIGNATURES
Pursuant to the requirements of the Securities and 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: May 13, 2003 By: /s/ Thomas C. Gregor
-------------------------
Thomas C. Gregor
Chairman, President and CEO
Dated: May 13, 2003 By: /s/ Alfred J. Soles
-------------------------
Alfred J. Soles
Vice President & Treasurer
(Principal Financial Officer)
24
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: May 13, 2003
/s/ Thomas C. Gregor
- ------------------------------------
Thomas C. Gregor
Chairman of the Board, President and
Chief Executive Officer
25
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: May 13, 2003
/s/ Alfred J. Soles
- ------------------------------------
Alfred J. Soles
Vice President and Treasurer (Principal Financial Officer)
26