-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H5XcGYemkiP3iggzkilIptn14tT0ZRO73KvW/YEDR44ECc9eBvUXexyUueJFIa+z g5MV8S6iqz4yH3239zO3cQ== 0000950117-03-004833.txt : 20031113 0000950117-03-004833.hdr.sgml : 20031113 20031113154022 ACCESSION NUMBER: 0000950117-03-004833 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED NATIONAL BANCORP CENTRAL INDEX KEY: 0000831959 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 222894827 STATE OF INCORPORATION: NJ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16759 FILM NUMBER: 03997947 BUSINESS ADDRESS: STREET 1: 1130 ROUTE 22 EAST CITY: BRIDGEWATER STATE: NJ ZIP: 08807 BUSINESS PHONE: 9084292200 MAIL ADDRESS: STREET 1: 1130 ROUTE 22 EAST CITY: BRIDGEWATER STATE: NJ ZIP: 08807 10-Q 1 a36494.txt UNITED NATIONAL BANCORP ================================================================================ 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, 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 (Exact name of registrant as specified in its charter) New Jersey 22-2894827 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 1130 Route 22 East, Bridgewater, New Jersey 08807-0010 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (908) 429-2200 ---------------------------------------------------- (Registrant's telephone number, including area code) N/A ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). [X] Yes [ ] No As of November 1, 2003, there were 18,858,821 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 ....... 10-30 ITEM 3 Quantitative and Qualitative Disclosure About Market Risk.................................... 31 ITEM 4 Controls and Procedures...................................................................... 31 PART II - OTHER INFORMATION ITEM 6 Exhibits and Reports on Form 8-K............................................................. 32 SIGNATURES............................................................................................. 33
Part I - Financial Information Item 1 - Financial Statements UNITED NATIONAL BANCORP AND SUBSIDIARIES Consolidated Balance Sheet (In thousands, except share data) (unaudited)
September 30, December 31, 2003 2002 ------------- ------------ Assets Cash and due from banks $ 61,437 $ 68,759 Short-term investments -- 40,826 Securities available for sale, at market value 820,118 827,976 Securities held to maturity (market value of $59,096 and $45,829 for 2003 and 2002, respectively) 58,769 45,260 Loans, net of unearned income 1,985,431 1,665,069 Less: allowance for loan losses 22,981 20,407 ---------- ---------- Loans, net 1,962,450 1,644,662 Premises and equipment, net 32,510 35,673 Other real estate, net 1,463 570 Goodwill 79,663 79,663 Other intangible assets 16,354 18,713 Cash surrender value of life insurance policies 79,516 76,649 Other assets 37,248 28,948 ---------- ---------- Total assets 3,149,528 2,867,699 ========== ========== Liabilities and stockholders' equity Liabilities Deposits Demand 373,636 361,816 NOW Accounts 272,717 267,668 Money Market Accounts 327,162 172,103 Savings 501,989 498,417 Time 745,731 853,404 ---------- ---------- Total deposits 2,221,235 2,153,408 Short-term borrowings 206,583 38,787 Other borrowings 431,631 376,565 Other liabilities 28,075 34,259 ---------- ---------- Total liabilities 2,887,524 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 - 21,035,830 in 2003 and 20,937,783 in 2002 Outstanding shares - 18,855,607 in 2003 and 18,999,035 in 2002 26,295 26,172 Additional paid-in capital 239,175 237,002 Retained earnings 43,457 36,430 Treasury stock, at cost - 2,180,223 shares in 2003 and 1,938,223 shares in 2002 (46,023) (39,655) Accumulated other comprehensive (loss) income (900) 4,731 ---------- ---------- Total stockholders' equity 262,004 264,680 ---------- ---------- Total liabilities and stockholders' equity $3,149,528 $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 Nine Months Ended September 30, September 30, ------------------ ------------------ 2003 2002 2003 2002 ------- ------- -------- ------- Interest income Interest and fees on loans $27,777 $23,556 $ 81,870 $65,147 Interest and dividends on securities available for sale: Taxable 6,909 8,223 23,983 23,113 Tax-exempt 1,377 1,244 4,036 3,459 Interest and dividends on securities held to maturity: Taxable 338 78 569 206 Tax-exempt 251 351 833 1,037 Interest on short-term investments 3 173 159 183 ------- ------- -------- ------- Total interest income 36,655 33,625 111,450 93,145 ------- ------- -------- ------- Interest expense Interest on NOW accounts 201 366 826 942 Interest on money market accounts 689 415 1,740 785 Interest on savings deposits 732 1,699 2,962 3,825 Interest on time deposits 5,060 6,012 18,016 16,900 Interest on short-term borrowings 538 277 1,116 1,275 Interest on other borrowings 4,051 4,423 12,604 13,117 ------- ------- -------- ------- Total interest expense 11,271 13,192 37,264 36,844 ------- ------- -------- ------- Net interest income 25,384 20,433 74,186 56,301 Provision for loan losses 1,680 1,000 4,755 9,950 ------- ------- -------- ------- Net interest income after provision for loan losses 23,704 19,433 69,431 46,351 ------- ------- -------- ------- Non-interest income Trust income 1,398 1,362 4,525 4,332 Service charges on deposit accounts 2,109 1,183 5,474 3,143 Other service charges, commissions and fees 1,009 763 3,203 2,542 Net gains from securities transactions 1,106 134 5,252 154 Income on corporate owned life insurance 948 1,150 2,867 2,809 Dissolution of joint venture -- -- -- 1,171 Gain on the disposition of credit card portfolio -- -- -- 920 Other income 1,463 732 2,777 1,929 ------- ------- -------- ------- Total non-interest income 8,033 5,324 24,098 17,000 ------- ------- -------- ------- Non-interest expense Salaries, wages and employee benefits 10,298 8,493 31,642 23,679 Occupancy expense, net 2,148 1,598 7,051 4,441 Furniture and equipment expense 1,284 1,232 4,004 3,378 Data processing expense 1,066 1,310 2,992 3,889 Amortization of intangible assets 778 494 2,359 1,235 Merger related charges 6,824 1,068 6,824 1,847 Other expenses 5,615 3,455 15,236 10,409 ------- ------- -------- ------- Total non-interest expense 28,013 17,650 70,108 48,878 ------- ------- -------- ------- Income before provision for income taxes 3,724 7,107 23,421 14,473 Provision for income taxes 508 1,406 5,019 1,794 ------- ------- -------- ------- Net income $ 3,216 $ 5,701 $ 18,402 $12,679 ======= ======= ======== ======= Net income per common share: Basic $ 0.17 $ 0.34 $ 0.97 $ 0.83 ======= ======= ======== ======= Diluted $ 0.17 $ 0.34 $ 0.96 $ 0.82 ======= ======= ======== ======= Weighted Average Shares Outstanding: Basic 18,824 16,665 18,888 15,343 ======= ======= ======== ======= Diluted 19,085 16,786 19,091 15,476 ======= ======= ======== =======
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 -- -- 18,402 -- -- 18,402 Unrealized holding gains (losses) on securities available for sale arising during the period, net of tax of $(1,743) -- -- -- -- (2,524) (2,524) Less: reclassification adjustment for gains included in net income, net of tax of $(2,145) -- -- -- -- (3,107) (3,107) -------- Total comprehensive income 12,771 Cash dividend declared (0.60 per share) -- -- (11,286) -- -- (11,286) Stock activity: Exercise of stock options - 94,547 shares 119 1,731 -- -- -- 1,850 Treasury stock purchased - 242,000 -- -- -- (6,368) -- (6,368) shares Restricted - 3,500 shares 4 87 (89) 2 Stock-based compensation -- 355 -- -- -- 355 ------- -------- -------- -------- ------- -------- Balance - September 30, 2003 26,295 239,175 43,457 (46,023) (900) 262,004 ======= ======== ======== ======== ======= ========
See accompanying Notes to Consolidated Financial Statements. 3 UNITED NATIONAL BANCORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) (unaudited)
Nine Months Ended September 30, --------------------- 2003 2002 --------- --------- Operating activities Net income $ 18,402 $ 12,679 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,736 3,770 Amortization of securities premiums, net 715 219 Provision for loan losses 4,755 9,950 Benefit for deferred income taxes (458) 2,461 Gain on disposition of premises and equipment (87) (1) Impairment on securities -- 105 Gain from securities transactions (5,252) (154) Net gain on the sale of loans (696) -- Net gain on the sale of credit cards -- (920) Increase in life insurance (2,867) (2,809) Increase in other assets (4,473) (7,568) Decrease in other liabilities (5,639) (2,363) Stock-based compensation 355 320 Restricted stock activity, net 2 24 --------- --------- Net cash provided by operating activities 10,493 15,713 --------- --------- Investing activities Securities available for sale: Proceeds from sales of securities 178,251 33,027 Proceeds from maturities of securities 357,400 112,939 Purchases of securities (532,626) (199,925) Securities held to maturity: Proceeds from maturities of securities 28,241 10,366 Purchases of securities (41,838) (14,934) Purchase of corporate owned life insurance -- (1,728) Redemption of corporate owned life insurance -- 138 Net increase in loans (364,503) (21,639) Proceeds from the sale of loans 42,656 -- Proceeds from the sale of credit card business, net -- 14,495 Expenditures for premises and equipment (1,409) (2,461) Proceeds from the sale of premises and equipment 1,195 2 Increase in other real estate, net (893) (419) Cash and cash equivalents acquired in excess of cash paid from acquisition of Vista -- 71,591 --------- --------- Net cash (used in) provided by investing activities (333,526) 1,452 --------- --------- Financing activities Net increase in demand and savings deposits 175,500 101,887 Net (decrease) increase in time deposits (107,673) 53,637 Net increase (decrease) in short-term borrowings 167,796 (116,738) Advances on other borrowed funds 139,000 138,235 Repayments in other borrowed funds (83,934) (46,132) Cash dividends on common stock (11,286) (9,683) Proceeds from exercise of stock options 1,850 364 Treasury stock acquired, at cost (6,368) (7,480) --------- --------- Net cash provided by financing activities 274,885 114,090 --------- --------- Net (decrease) increase in cash and cash equivalents (48,148) 131,255 Cash and cash equivalents at beginning of period 109,585 55,764 --------- --------- Cash and cash equivalents at end of period $ 61,437 $ 187,019 ========= ========= Supplemental disclosures of cash flow information Cash paid during the period: Interest $ 39,736 $ 38,802 Taxes paid 10,515 5,147 Transfer of loans to other real estate 1,024 148 Issuance of common stock for purchase accounting merger -- 109,685 ========= =========
See accompanying Notes to Consolidated Financial Statements. 4 UNITED NATIONAL BANCORP AND SUBSIDIARIES 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. Pending Acquisition In August 2003, The PNC Financial Services Group, Inc. (PNC) and United National Bancorp signed a definitive agreement for PNC to acquire United National Bancorp for approximately $638 million in stock and cash. The transaction, which is expected to close in January 2004, is subject to customary closing conditions, including regulatory approvals and the approval of United National Bancorp shareholders. Note 3. 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 4. Comprehensive Income Total comprehensive income amounted to the following for the periods indicated (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2003 2002 2003 2002 ------- ------ ------- ------- Net income $ 3,216 $5,701 $18,402 $12,679 Unrealized holding (losses) gains on securities available for sale arising during the period, net of tax (benefit) expense of $(3,307) and $3,003 in three months ended September 30, 2003 and 2002, respectively, and tax (benefit) expense of $(1,743) and $7,931 in the nine months ended September30, 2003 and 2002, respectively (4,789) 4,349 (2,524) 11,484 Less: reclassification adjustment for gains included in net income, net of tax (654) (79) (3,107) (91) ------- ------ ------- ------- Total comprehensive (loss) income $(2,227) $9,971 $12,771 $24,072 ======= ====== ======= =======
5 Note 5. Net Income per Share Basic net 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.
Three Months Ended Nine Months Ended September 30, September 30, (In thousands, except per share data) ------------------ ----------------- 2003 2002 2003 2002 ------- ------- ------- ------- Net income $ 3,216 $ 5,701 $18,402 $12,679 ======= ======= ======= ======= Basic weighted average common shares outstanding 18,824 16,665 18,888 15,343 Plus: dilutive stock options and awards 261 121 203 133 ------- ------- ------- ------- Diluted weighted average common shares outstanding 19,085 16,786 19,091 15,476 ======= ======= ======= ======= Net income per common share: Basic $ 0.17 $ 0.34 $ 0.97 $ 0.83 Diluted $ 0.17 $ 0.34 $ 0.96 $ 0.82 ======= ======= ======= =======
Note 6. 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 be 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 during the three- and nine-months ended September 30, 2003, the Company amortized $370,000 and $1,112,000, respectively. 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 is tested for impairment at least annually in accordance with the provisions of SFAS No. 142. As of September 30, 2003, the Company tested the goodwill associated with the Vista Merger and based on these assessments, Management concluded that such asset did not require an impairment charge. During the three- and nine-months ended September 30, 2003, the Company recorded amortization of intangible assets acquired before July 1, 2001 of approximately $411,000 and $1,250,000, respectively which primarily represented core deposit intangibles. The remaining amortization period of these core deposit intangibles is approximately 1.8 years. Note 7. Recent Accounting Pronouncements FASB Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") was issued in January 2003. FIN 46 applies immediately to enterprises that hold a variable interest in variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003 to enterprises that hold a variable interest in variable interest entities created before February 1, 2003. FIN 46 applies to public enterprises as of the beginning of the applicable interim or annual period, and it applies to nonpublic enterprises no later than the end of the applicable annual period. FIN 46 may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. FIN 46 provides guidance on the identification of entities controlled through means other than voting rights. FIN 46 specifies how a business enterprise should evaluate its interest in a variable interest entity to determine whether to consolidate that entity. A variable interest entity must be consolidated by its primary beneficiary if the entity does not effectively disperse risks among the parties involved. 6 In its current form, FIN 46 may require the Company to de-consolidate its investment in Mandatorily Redeemable Trust Preferred Securities of Subsidiary Trusts in future financial statements. The potential de-consolidation of subsidiary trusts of bank holding companies formed in connection with the issuance of trust preferred securities appears to be an unintended consequence of FIN 46. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the trust preferred securities in their Tier I capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier I capital for regulatory capital purposes. As of September 30, 2003, assuming the Company was not allowed to include the $30.0 million in trust preferred securities issued by subsidiary trusts in Tier I capital due to the call provisions, the Company would remain "well capitalized." On October 9, 2003, the effective date was deferred until the end of the first interim or annual period ending after December 15, 2003, for certain interests held by a public entity in certain variable interest entities or potential variable interest entities created before February 1, 2003. The adoption of FIN 46 did not have a significant effect on the Company's consolidated financial statements. Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity," was issued in May 2003. Statement 150 requires instruments within its scope to be classified as a liability (or, in some cases, as an asset). Statement 150 is generally effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003 (i.e., July 1, 2003 for calendar year entities). For financial instruments created before June 1, 2003 and still existing at the beginning of the interim period of adoption, transition generally should be applied by reporting the cumulative effect of a change in an accounting principle by initially measuring the financial instruments at fair value or other measurement attributes of the Statement. The adoption of Statement 150 did not have a significant effect on the Company's consolidated financial statements. Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," was issued on April 30, 2003. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement 133. This Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement did not have a significant effect on the Company's consolidated financial statements. 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 8. Lines of Business - Segment Reporting For management purposes, the Company 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. Net 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 7 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, using a 35% Federal tax rate, and average balances by reportable segment for the periods presented below (in thousands).
Trust and Results of Operations for the Three Retail Commercial Investment Months Ended September 30, 2003 Banking Banking Investments Services All Other Consolidated ---------- ---------- ----------- ---------- --------- ------------ Interest income (tax-equivalent basis) $ 15,631 $ 12,197 $ 9,911 $ -- $ -- $ 37,739 Interest expense 6,648 -- 4,623 -- -- 11,271 Funds transfer pricing allocation 12,258 (7,947) (3,954) -- (357) -- ---------- --------- --------- ------ -------- ---------- Net interest income (loss) 21,241 4,250 1,334 -- (357) 26,468 Provision for loan losses 1,692 (12) -- -- -- 1,680 ---------- --------- --------- ------ -------- ---------- Net interest income (loss) after provision for loan losses 19,549 4,262 1,334 -- (357) 24,788 Non-interest income 3,403 646 2,205 1,759 20 8,033 Non-interest expense 15,175 2,916 1,705 1,319 6,898 28,013 ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes (tax- equivalent basis) 7,777 1,992 1,834 440 (7,235) 4,808 Tax-equivalent adjustment -- (51) (1,033) -- -- (1,084) ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes $ 7,777 $ 1,941 $ 801 $ 440 $ (7,235) $ 3,724 ---------- --------- --------- ------ -------- ---------- Average balances: Gross funds provided $2,173,655 $ -- $ 609,450 $ -- $309,081 $3,092,186 Funds used: Interest-earning assets 1,110,300 832,525 838,022 -- -- 2,780,847 Non-interest-earning assets 85,610 13,509 78,974 500 132,746 311,339 ---------- --------- --------- ------ -------- ---------- Net funds provided (used) $ 977,745 $(846,034) $(307,546) $ (500) $176,335 $ -- ---------- --------- --------- ------ -------- ----------
Trust and Results of Operations for the Three Retail Commercial Investment Months Ended September 30, 2002 Banking Banking Investments Services All Other Consolidated ---------- ---------- ----------- ---------- --------- ------------ Interest income (tax-equivalent basis) $ 11,689 $ 11,900 $ 10,927 $ -- $ -- $ 34,516 Interest expense 8,461 -- 4,731 -- -- 13,192 Funds transfer pricing allocation 12,142 (7,947) (4,180) -- (15) -- ---------- --------- --------- ------ -------- ---------- Net interest income (loss) 15,370 3,953 2,016 -- (15) 21,324 Provision for loan losses 318 682 -- -- -- 1,000 ---------- --------- --------- ------ -------- ---------- Net interest income (loss) after provision for loan losses 15,052 3,271 2,016 -- (15) 20,324 Non-interest income 1,733 477 1,394 1,625 95 5,324 Non-interest expense 11,472 2,322 1,368 1,303 1,185 17,650 ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes (tax- equivalent basis) 5,313 1,426 2,042 322 (1,105) 7,998 Tax-equivalent adjustment -- (32) (859) -- -- (891) ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes $ 5,313 $ 1,394 $ 1,183 $ 322 $ (1,105) $ 7,107 ---------- --------- --------- ------ -------- ---------- Average balances: Gross funds provided $1,713,203 $ -- $ 383,107 $ -- $262,087 $2,358,397 Funds used: Interest-earning assets 687,974 716,234 738,465 -- -- 2,142,673 Non-interest-earning assets 13,572 4,098 67,215 -- 130,839 215,724 ---------- --------- --------- ------ -------- ---------- Net funds provided (used) $1,011,657 $(720,332) $(422,573) $ -- $131,248 $ -- ---------- --------- --------- ------ -------- ----------
8
Trust and Results of Operations for the Nine Retail Commercial Investment Months Ended September 30, 2003 Banking Banking Investments Services All Other Consolidated ---------- ---------- ----------- ---------- --------- ------------ Interest income (tax-equivalent basis) $ 45,677 $ 36,334 $ 32,694 $ -- $ -- $ 114,705 Interest expense 23,464 -- 13,800 -- -- 37,264 Funds transfer pricing allocation 38,120 (23,665) (13,610) -- (845) -- ---------- --------- --------- ------ -------- ---------- Net interest income (loss) 60,333 12,669 5,284 -- (845) 77,441 Provision for loan losses 2,948 1,807 -- -- -- 4,755 ---------- --------- --------- ------ -------- ---------- Net interest income (loss) after Provision for loan losses 57,385 10,862 5,284 -- (845) 72,686 Non-interest income 8,225 1,576 8,556 5,616 125 24,098 Non-interest expense 44,417 7,850 6,635 4,205 7,001 70,108 ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes (tax- equivalent basis) 21,193 4,588 7,205 1,411 (7,721) 26,676 Tax-equivalent adjustment -- (141) (3,114) -- -- (3,255) ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes $ 21,193 $ 4,447 $ 4,091 $1,411 $ (7,721) $ 23,421 ---------- --------- --------- ------ -------- ---------- Average balances: Gross funds provided $2,163,325 $ -- $ 514,869 $ -- $315,623 $2,993,817 Funds used: Interest-earning assets 1,024,383 794,207 856,542 -- -- 2,675,132 Non-interest-earning assets 84,196 13,509 78,008 500 142,472 318,685 ---------- --------- --------- ------ -------- ---------- Net funds provided (used) $1,054,746 $(807,716) $(419,681) $ (500) $173,151 $ -- ---------- --------- --------- ------ -------- ----------
Trust and Results of Operations for the Nine Retail Commercial Investment Months Ended September 30, 2002 Banking Banking Investments Services All Other Consolidated ---------- ---------- ----------- ---------- --------- ------------ Interest income (tax-equivalent basis) $ 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 33,150 6,035 3,576 3,933 2,184 48,878 ---------- --------- --------- ------ -------- ---------- Net income before taxes (tax- equivalent basis) 9,248 (2,983) 4,489 1,125 5,096 16,975 Tax-equivalent adjustment -- (81) (2,421) -- -- (2,502) ---------- --------- --------- ------ -------- ---------- Net income (loss) before taxes $ 9,248 $ (3,064) $ 2,068 $1,125 $ 5,096 $ 14,473 ---------- --------- --------- ------ -------- ---------- Average balances: Gross funds provided $1,505,437 $ -- $ 405,301 $ -- $215,361 $2,126,099 Funds used: Interest-earning assets 625,874 673,012 646,633 -- -- 1,945,519 Non-interest-earning assets 12,638 3,190 61,261 -- 103,491 180,580 ---------- --------- --------- ------ -------- ---------- Net funds provided (used) $ 866,925 $(676,202) $(302,593) $ -- $111,870 $ -- ---------- --------- --------- ------ -------- ----------
9 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- and nine-months ended September 30, 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- and nine-month periods ended September 30, 2003 are not necessarily indicative of results to be attained for any other period. FORWARD-LOOKING STATEMENTS The discussion 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. These include, but are not limited to, expected benefits, cost savings and other benefits from the Vista acquisition or other planned programs not being realized or not being realized within the expected time frame; income or revenues from the Vista acquisition or other planned programs being lower than expected or operating costs higher; efficiencies of our operations not improving as a result of certain cost cutting measures, 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. Actual results may differ materially from such forward-looking statements. The Company does not assume any obligation for updating any such forward-looking statements at any time. PENDING MERGER In August 2003, The PNC Financial Services Group, Inc. (PNC) and United National Bancorp signed a definitive agreement for PNC to acquire United National Bancorp for approximately $638 million in stock and cash. The transaction, which is expected to close in January 2004, is subject to customary closing conditions, including regulatory approvals and the approval of United National Bancorp shareholders. Under the definitive agreement, the Company has agreed among other things, to refrain from taking certain actions pending the completion of the merger and subject to certain exceptions, including the reasonable consent of PNC. 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. 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. Certain information and note disclosures usually included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for the preparation of the Form 10-Q. 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. 10 RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 Earnings Summary Basic and diluted net income per common share were both negatively impacted by the recognition of merger related charges in all periods presented. In 2003, the Company recognized merger related charges associated with the pending merger with PNC, while in 2002 the merger related charges were associated with the Vista acquisition.
Three Months Ended September 30, (In thousands, except per share data) ------------------ 2003 2002 ------- ------- Net income, GAAP basis $ 3,216 $ 5,701 Adjustment for merger charges, net of tax 4,612 632 ------- ------- Net income, adjusted $ 7,828 $ 6,333 ======= ======= Basic weighted average common shares outstanding 18,824 16,665 Plus: dilutive stock options and awards 261 121 ------- ------- Diluted weighted average common shares outstanding 19,085 16,786 ======= ======= Net income per common share, adjusted (non-GAAP basis): Basic $ 0.42 $ 0.38 Diluted $ 0.41 $ 0.38 ======= =======
The above adjustments to net income were made to reflect core operating earnings, in an effort to present a better picture of the Company's continuing operations. The Company reported net income for the third quarter of 2003 of $3.2 million or $0.17 per diluted share after the recognition of $4.6 million, or $0.24 per diluted share, in after-tax merger charges incurred during this quarter. Net income for the third quarter of 2003 declined 44% from the $5.7 million reported in the third quarter of 2002, while net income per diluted share fell 50% from the $0.34 for the same comparison. The decrease in earnings per share from the prior year period resulted primarily from the recognition of $6.8 million in merger related charges offset in part by increased gains on securities sold. Adjusting third quarter net income in both 2003 and 2002 for after-tax merger charges, net income amounted to $7.8 million for the third quarter of 2003, an increase of 24% from the adjusted net income of $6.3 million in the third quarter of 2002. Adjusted net income per diluted share was $0.41 in the third quarter of 2003 compared to $0.38 in the same quarter of last year, representing an 8% increase. The return on average assets was 0.41% and 0.96% for the third quarter of 2003 and 2002, respectively, while the return on average stockholders' equity was 4.85% and 10.95% for the third quarter of 2003 and 2002, respectively. The higher merger related charges recorded in the third quarter of 2003 adversely affected the return on average assets and the return on average stockholders' equity for this period. The adjusted return on average assets was 1.00% and 1.07% for the third quarter of 2003 and 2002, respectively, while the adjusted return on average stockholders' equity was 11.80% and 12.16% for the third quarter of 2003 and 2002, respectively. 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 adjusted to a fully tax-equivalent basis assuming a statutory tax rate of 35% for both the third 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. 11 A summary of net interest income on a tax-equivalent basis for the third quarter of 2003 and 2002 is presented in the following table (in thousands):
Three Months Ended September 30, 2003 Over (Under) 2002 ------------------ ---------------------- 2003 2002 Amount Percent ------- ------- ------- ------- Interest income (tax-equivalent basis) $37,739 $34,516 $ 3,223 9.3% Interest expense 11,271 13,192 (1,921) (14.6) ------- ------- ------- Net interest income (tax-equivalent basis) 26,468 21,324 5,144 24.1 Tax-equivalent adjustment (1,084) (891) (193) 21.7 ------- ------- ------- Net interest income $25,384 $20,433 $ 4,951 24.2% ======= ======= ======= =====
For the third quarter of 2003, tax-equivalent net interest income increased 24% to $26.5 million from $21.3 million in the third quarter of 2002. This growth resulted from an increase of $638.2 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. The remainder of the increase in average earnings assets was due to growth in residential mortgage and consumer loans and investment securities. A 17 basis-point narrowing in the net interest margin in the third quarter of 2003 from the same quarter of 2002 served to limit the growth in net interest income. The net interest margin for the third quarter of 2003 declined to 3.80% from 3.97% in the third quarter of 2002, despite a five basis-point widening in the net interest spread. This 17 basis point narrowing was adversely affected by the elimination of the third quarter dividend on the Federal Home Loan Bank of New York (the "FHLBNY") stock held by the Bank, which reduced net interest income by $221,000 and effected the quarterly net interest margin by three basis points. Additionally, a reduced contribution of net non-interest-bearing funds resulting from the lower 2003 interest rate environment as well as a decline in the proportion of net non-interest-bearing funds to total sources of funds principally due to the Vista Merger contributed to the reduction in the net interest margin. Average interest-earning assets grew $638.2 million or 30% in the third quarter of 2003 from the same quarter in 2002 as average loans and securities increased, offset by a reduction in short-term investments. Average loans increased $534.8 million or 38% during the third quarter of 2003 compared to the same quarter in 2002, primarily from loans added in the Vista Merger. Average securities rose $139.0 million or 20% in the third quarter of 2003 from the prior year, also due to the Vista Merger. Average short-term investments decreased $35.6 million to $1.2 million in the third quarter of 2003 from the prior year quarter. Excluding the impact of the Vista Merger, average loans increased $283.0 million or 23% and average securities increased $27.8 million or 4%. Average deposits grew $473.3 million or 27% in the third quarter of 2003 from the same quarter last year. Excluding the effect of the Vista Merger, average total deposits for the third quarter of 2003 increased $98.2 million or 7% from the third quarter of 2002. The increase in average deposits in the third quarter of 2003 over the same quarter of 2002 excluding the impact of the Vista Merger was largely attributable to a $32.5 million or 12% growth in average demand deposits and a $121.9 million or 19% growth in average savings deposits, which includes NOW and money market accounts. Time deposits, excluding the impact of the Vista Merger, decreased $56.2 million or 10%. The Company increased its short-term borrowings by $129.6 million due to the aforementioned growth in average loans. Average other borrowings, which consist of debt having an original maturity of one year or more, increased $86.7 million or 27% during the third quarter of 2003 from the prior year quarter. The increase in average other borrowings was principally due to the impact of Vista Merger and 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. 12 Average Consolidated Balance Sheet, Net Interest Income and Net Interest Margin (Tax-Equivalent Basis)
Three Months Ended ----------------------------------------------------------------- September 30, 2003 September 30, 2002 ------------------------------- ------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in Thousands) Balance Expense Rate Balance Expense Rate ---------- -------- ------- ---------- -------- ------- Assets: Short-term investments $ 1,249 $ 3 0.92% $ 36,871 $ 173 1.84% Securities available for sale: (1)(2) Taxable 644,283 7,093 4.40 534,264 8,223 6.16 Non-taxable 131,823 2,091 6.34 116,306 1,914 6.58 Securities held to maturity: (2) Taxable 35,452 338 3.81 7,964 78 3.91 Non-taxable 25,215 386 6.12 39,274 540 5.50 ---------- ------- ---- ---------- ------- ---- Total securities 836,773 9,908 4.74 697,808 10,755 6.16 ---------- ------- ---- ---------- ------- ---- Loans: (2)(3) Commercial 427,171 5,453 5.07 338,354 4,725 5.54 Real estate - commercial 465,743 7,746 6.60 418,455 7,845 7.34 Real estate - residential 586,086 7,740 5.28 310,881 5,086 6.54 Consumer 463,825 6,889 5.89 340,304 5,932 6.92 ---------- ------- ---- ---------- ------- ---- Total loans 1,942,825 27,828 5.69 1,407,994 23,588 6.63 ---------- ------- ---- ---------- ------- ---- Total interest-earning assets 2,780,847 37,739 5.40 2,142,673 34,516 6.40 ---------- ------- ---- ---------- ------- ---- Allowance for loan losses (22,534) (18,091) Cash and due from banks 64,109 56,341 Intangible assets 96,465 41,902 Net unrealized gain - AFS 4,893 13,891 ---------- ---------- Other assets 168,406 121,681 ---------- ---------- Total assets $3,092,186 $2,358,397 ========== ========== Liabilities and stockholders' equity: Now accounts $ 283,930 201 0.28 $ 198,720 366 0.73 Money market accounts 253,273 689 1.08 113,383 415 1.45 Savings deposits 507,348 732 0.57 443,833 1,699 1.52 Time deposits 767,184 5,060 2.62 659,897 6,012 3.61 ---------- ------- ---- ---------- ------- ---- Total interest-bearing deposits 1,811,735 6,682 1.46 1,415,833 8,492 2.38 Short-term borrowings 192,925 538 1.11 63,302 277 1.74 Other borrowed funds 411,525 4,051 3.92 324,789 4,423 5.42 ---------- ------- ---- ---------- ------- ---- Total interest-bearing liabilities 2,416,185 11,271 1.85 1,803,924 13,192 2.90 ---------- ------- ---- ---------- ------- ---- Non-interest-bearing liabilities 386,886 309,464 Other liabilities 25,970 38,446 Stockholders' equity 263,145 206,563 ---------- ---------- Total liabilities and stockholders' equity $3,092,186 $2,358,397 ========== ========== Net interest income (tax-equivalent basis) 26,468 21,324 Less: Tax-equivalent adjustment 1,084 891 ------- ------- Net interest income $25,384 $20,433 ======= ======= Net interest spread 3.55 3.50 Effect of net non-interest-bearing funds 0.25 0.47 ---- ---- Net interest margin (4) 3.80% 3.97% ==== ====
- ---------- (1) Securities available for sale are stated at amortized cost. (2) Interest income is presented on a tax-equivalent basis using a 35% Federal tax rate. (3) Average loan balances and yields include non-accruing loans. Loan fees are included in the interest amounts and are not material. (4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets. 13 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 $1.7 million in the third quarter of 2003, representing a $0.7 million increase from the same quarter of 2002 provision of $1.0 million. This increase was due primarily to the growth experienced in residential, commercial and consumer loans. 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 September 30, 2003 Over (Under) 2002 ------------------ ---------------------- 2003 2002 Amount Percent ------ ------ ------ ------- Trust income $1,398 $1,362 $ 36 2.6% Service charges on deposit accounts 2,109 1,183 926 78.3 Other service charges, commissions and fees 1,009 763 246 32.2 Net gains from securities transactions 1,106 134 972 725.4 Income on life insurance 948 1,150 (202) (17.6) Other income 1,463 732 731 99.9 ------ ------ ------ Total non-interest income $8,033 $5,324 $2,709 50.9% ====== ====== ====== =====
Non-interest income amounted to $8.0 million in the third quarter of 2003, an increase of 51% from the $5.3 million earned in the prior year quarter. This increase was due primarily to the realization of $1.1 million in gains on securities transactions in the third quarter of 2003 resulting from the sale of certain equity securities. Additionally, increased deposit services fee income, higher gains on the sale of residential mortgage and SBA loans and the effect of the Vista Merger also helped contribute to the rise in non-interest income. 14 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 September 30, 2003 Over (Under) 2002 ------------------ ---------------------- 2003 2002 Amount Percent ------- ------- ------- ------- Salaries, wages and employee benefits $10,298 $ 8,493 $ 1,805 21.3% Occupancy expense, net 2,148 1,598 550 34.4 Furniture and equipment expense 1,284 1,232 52 4.2 Data processing expense 1,066 1,310 (244) (18.6) Amortization of intangible assets 778 494 284 57.5 Merger related charges 6,824 1,068 5,756 539.0 Other expenses: Legal and other professional service expense 1,003 799 204 25.5 Marketing and shareholder communications expense 893 629 264 42.0 Telecommunication expense 389 414 (25) (6.0) Loan origination/collection expense 581 366 215 58.7 Credit card expense -- 29 (29) (100.0) All other 2,749 1,218 1,531 125.7 ------- ------- ------- Total other expenses 5,615 3,455 2,160 62.5 ------- ------- ------- Total non-interest expense $28,013 $17,650 $10,363 58.7% ======= ======= ======= ======
Non-interest expense amounted to $28 million in the third quarter of 2003, an increase of $10.4 million or 59% over the $17.7 million incurred in the same quarter of 2002. The increase over the third quarter of 2002 was primarily due to the recognition of $6.8 million in merger related expenses incurred in connection with the pending merger with PNC, the impact of the Vista Merger, higher pension and healthcare costs and the recognition of $0.9 million in interest penalties on the prepayment of certain long-term FHLB borrowings. 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. In addition, the Company incurred $1.1 million in integration costs in the third quarter of 2002 related to the Vista Merger. 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 $0.5 million in the third quarter of 2003 compared to $1.4 million recognized in the third quarter of 2002. The decrease in the income tax provision was due to a reduction in income before provision for income taxes. The decline in the effective tax rate from 20% in 2002 to 14% in 2003 was largely due to an increase in the proportion of tax-exempt income to income before provision for income taxes. LINES OF BUSINESS - SEGMENT REPORTING For management purposes, the Company 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 for the lines of business is presented in "Note 8. 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. 15 Net income (loss) before taxes 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 assign an earnings credit 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 third quarter of 2003, increased $2.5 million from the third quarter of 2002 due to increases of $5.9 million in net interest income and $1.7 million in non-interest income. This was offset by increases in non-interest expense of $3.7 million and the allocation of the provision for loan losses of $1.4 million. The higher net interest income was primarily related to increased average residential mortgage and consumer loans and wider-spread average core deposits when compared to the third quarter of 2002. Increased deposit services fee income and the effect of the Vista Merger contributed to the rise in non-interest income. The increase in non-interest expense was 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 for the third quarter of 2003 increased $0.5 million from the third quarter of 2002 primarily due to an increase in tax-equivalent net interest income of $0.3 million and a $0.7 million decrease in the loan loss provision allocation. The increase in tax-equivalent net interest income in the third quarter of 2003 was due to increased average commercial and real estate construction loans, and the decrease in the loan loss provision for the current quarter was related primarily to the continued improvement in asset quality. In addition, non-interest expense increased $0.6 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 third quarter of 2003 decreased $0.4 million from the third quarter of 2002 due to a $0.7 million decrease in tax-equivalent net interest income and an increase in non-interest expense of $0.3 million. This was offset by a $0.8 million increase in non-interest income due to securities gains. The decrease in tax-equivalent net interest income was largely due to narrower spreads on mortgage-backed securities, and the increase in non-interest expense was due to a larger allocation of corporate overhead. 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 advice and employee benefits plans. 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 third quarter of 2003, income before taxes for this segment increased $0.1 million from the third quarter of 2002 due to an increase in fees for trust services. 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 third quarter of 2003 for this segment increased $6.1 million when compared to the third quarter of 2002. This was due primarily to the recognition of $6.8 million in merger related expenses incurred in connection with the pending merger with PNC. 16 The following table shows the percentage contribution of the various lines of business to consolidated income before taxes:
Three Months Ended September 30, ------------------ 2003 2002 ------ ------ Retail banking 208.8% 74.8% Commercial banking 52.1 19.6 Investments 21.5 16.7 Trust and investment services 11.8 4.5 All other (194.2) (15.6) ------ ----- Total consolidated 100.0% 100.0% ====== =====
17 RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 Earnings Summary Basic and diluted net income per common share were both negatively impacted by the recognition of merger related charges in all periods presented. In 2003, the Company recognized merger related charges associated with the pending merger with PNC, while in 2002 the merger related charges were associated with the Vista acquisition.
Nine Months Ended September 30, (In thousands, except per share data) ----------------- 2003 2002 ------- ------- Net income, GAAP basis $18,402 $12,679 Adjustment for merger charges, net of tax 4,612 1,093 ------- ------- Net income, adjusted $23,014 $13,772 ======= ======= Basic weighted average common shares outstanding 18,888 15,343 Plus: dilutive stock options and awards 203 133 ------- ------- Diluted weighted average common shares outstanding 19,091 15,476 ======= ======= Net income per common share, adjusted (non-GAAP basis): Basic $ 1.22 $ 0.90 Diluted $ 1.21 $ 0.89 ======= =======
The above adjustments to net income were made to reflect core operating earnings, in an effort to present a better picture of the Company's continuing operations. The Company reported net income for the nine months ended September 30, 2003 of $18.4 million, up 45% from the $12.7 million earned in the same period of the prior year. Diluted per share earnings were $0.96 in the nine months ended September 30, 2003, up 17% over the $0.82 recorded for the nine months ended September 30, 2002. The increase in earnings per share over the prior year period resulted primarily from a decreased loan loss provision compared to the prior year period, an increase in gains on securities transactions and the impact of the Vista Merger partially offset by an increase in merger related charges. The substantial decrease in the loan loss provision for the current year period was related primarily to one large credit that was placed on non-accrual in the second quarter of 2002 and the continued improvement in asset quality. In the second quarter of 2002, the Company 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 of 2002, 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 of 2002. 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. During September 2003, the Company incurred $6.8 million in merger related charges in connection with the pending PNC merger as compared to $1.8 million in merger charges associated with the Vista acquisition incurred in 2002. Adjusting the nine months net income in both 2003 and 2002 for after-tax merger charges, net income amounted to $23.0 million for the nine months ended September 30, 2003, an increase of $9.2 million or 67% from the adjusted net income of $13.7 million in same period of 2002. Adjusted net income per diluted share was $1.21 in the nine months ended September 30, 2003 compared to $0.89 in the same period of the prior year, representing a 36% increase. The return on average assets was 0.82% and 0.80% for the nine months ended September 30, 2003 and 2002, respectively, while the return on average stockholders' equity was 9.24% and 9.76% for the nine months ended September 30, 2003 and 2002, respectively. Both the returns on average assets and on average stockholders' equity were adversely affected by the recognition of $4.6 million in after-tax merger charges in the third quarter of 2003 and $0.6 million in after-tax merger charges in the third quarter of 2002. If the effect of these merger charges after taxes is excluded, the adjusted return on average assets would be 1.03% and 0.87% for the nine months ended September 30, 2003 and 2002, respectively, while the return on average stockholders' equity would be 11.55% and 10.61% for the nine months ended September 30, 2003 and 2002, respectively. 18 Net Interest Income A summary of net interest income on a tax-equivalent basis for the nine months ended September 30, 2003 and 2002 is presented in the following table (in thousands):
Nine Months Ended September 30, 2003 Over (Under) 2002 ------------------ ---------------------- 2003 2002 Amount Percent -------- ------- ------- ------- Interest income (tax-equivalent basis) $114,705 $95,647 $19,058 19.93% Interest expense 37,264 36,844 420 1.14 -------- ------- ------- Net interest income 77,441 58,803 18,638 31.70 Tax-equivalent adjustment (3,255) (2,502) (753) 30.10 -------- ------- ------- Net interest income $ 74,186 $56,301 $17,885 31.77% ======== ======= ======= =====
For the 2003 period, tax-equivalent net interest income increased 32% to $77.4 million from $58.8 million in the prior year period. This growth was primarily due to the impact of the Vista Merger, growth in residential mortgage and consumer loans and investment securities. A 17 basis-point narrowing in the net interest margin during the first nine months of this year from the same period of last year partially offset the favorable effect of the increase in average interest-earning assets. The net interest margin narrowed by 17 basis points for the nine months ended September 30, 2003 to 3.86% from 4.03% in the prior year period, despite a five basis-point widening in the net interest spread during these periods. The favorable effect of the improvement in spread was offset by a reduced contribution of net non-interest-bearing funds resulting from the lower 2003 interest rate environment and a decline in the proportion of net non-interest-bearing funds to total sources of funds resulting from the Vista Merger. The average rate earned on interest-earning assets declined 82 basis-points to 5.72% while the average rate paid on interest-bearing liabilities declined 87 basis points to 2.14%. Average interest-earning assets grew $729.6 million or 38% in the nine months ended September 30, 2003 compared to the same period of the prior year, as average loans, securities and short-term investments all increased. The decline in the average rate on interest-earning assets of 82 basis points was largely attributable to a sharp rise in prepayments on mortgage-related assets due to a 75 basis-point decline in the prime rate and in other short-term interest rates. Average loans increased $516.6 million or 40% during the nine months ended September 30, 2003 compared to the same period in 2002 primarily due to the Vista Merger coupled with strong loan growth experienced during the second and third quarters of 2003. Average securities rose $209.0 million or 33% in the first nine months of 2003 from the same period of the prior year, which was also due to the Vista Merger. Average short-term investments increased $4.0 million to $17.2 million in the nine months ended September 30, 2003 from $13.1 million in the same period of 2002. Excluding the impact of the Vista Merger, average loans increased $157.4 million or 13% and average securities increased $50.4 million or 8%. Average deposits grew $665.7 million or 44% in the nine months ended September 30, 2003 from the same period 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 current period of 2003 increased $130.7 million or 9% from the same period of 2002. The increase in average deposits in the nine month period of 2003 over the prior year period excluding the impact of the Vista Merger was largely attributable to an $25.0 million or 9% growth in average demand deposits and a $123.6 million or 21% growth in average savings deposits, which includes NOW and money market accounts. Time deposits, excluding the impact of the Vista Merger, decreased $17.9 million or 3%. The Company increased its short-term borrowings by $39.1 million or 45% due to the effect of the Vista Merger as well as to the aforementioned growth in average loans and securities. Average other borrowings, which consist of debt having an original maturity of one year or more, increased $69.5 million or 22% during the nine months of 2003 from the same period last year. The increase in average other borrowings was principally due to the impact of the Vista Merger and 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. 19 Average Consolidated Balance Sheet, Net Interest Income and Net Interest Margin (Tax-Equivalent Basis)
Nine Months Ended ----------------------------------------------------------------- September 30, 2003 September 30, 2002 ------------------------------- ------------------------------- Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ (Dollars in Thousands) Balance Expense Rate Balance Expense Rate ---------- -------- ------- ---------- -------- ------- Assets: Short-term investments $ 17,178 $ 159 1.24% $ 13,125 $ 183 1.84% Securities available for sale: (1)(2) Taxable 661,668 24,527 4.94 480,770 23,113 6.41 Non-taxable 129,613 6,158 6.33 105,605 5,322 6.72 Securities held to maturity: (2) Taxable 19,929 569 3.81 6,831 206 4.03 Non-taxable 28,154 1,281 6.07 37,176 1,595 5.72 ---------- -------- ---- ---------- -------- ---- Total securities 839,364 32,535 5.17 630,382 30,236 6.40 ---------- -------- ---- ---------- -------- ---- Loans: (2)(3) Commercial 390,613 15,470 5.29 325,626 13,469 5.53 Real estate - commercial 466,781 23,995 6.87 378,441 21,074 7.34 Real estate - residential 532,046 22,420 5.62 282,827 13,912 6.56 Consumer 429,150 20,126 6.27 315,118 16,773 7.12 ---------- -------- ---- ---------- -------- ---- Total loans 1,818,590 82,011 6.02 1,302,012 65,228 6.66 ---------- -------- ---- ---------- -------- ---- Total interest-earning assets 2,675,132 114,705 5.72 1,945,519 95,647 6.54 ---------- -------- ---- ---------- -------- ---- Allowance for loan losses (21,771) (15,741) Cash and due from banks 65,402 48,693 Intangible assets 97,260 17,345 Net unrealized gain - AFS 13,078 7,375 ---------- ---------- Other assets 164,716 122,908 ---------- ---------- Total assets $2,993,817 $2,126,099 ========== ========== Liabilities and stockholders' equity: Now accounts $ 282,221 826 0.39 $ 170,842 942 0.74 Money market accounts 204,996 1,740 1.13 89,140 785 1.18 Savings deposits 507,554 2,962 0.78 373,502 3,825 1.37 Time deposits 818,057 18,016 2.94 602,710 16,900 3.75 ---------- -------- ---- ---------- -------- ---- Total interest-bearing deposits 1,812,828 23,544 1.73 1,236,194 22,452 2.43 Short-term borrowings 126,898 1,116 1.18 87,815 1,275 1.94 Other borrowed funds 382,028 12,604 4.40 312,525 13,117 5.61 ---------- -------- ---- ---------- -------- ---- Total interest-bearing liabilities 2,321,754 37,264 2.14 1,636,534 36,844 3.01 ---------- -------- ---- ---------- -------- ---- Non-interest-bearing liabilities 375,626 286,567 Other liabilities 30,132 29,397 Stockholders' equity 266,305 173,601 ---------- ---------- Total liabilities and stockholders' equity $2,993,817 $2,126,099 ========== ========== Net interest income (tax-equivalent basis) 77,441 58,803 Tax-equivalent adjustment (3,255) (2,502) -------- -------- Net interest income $ 74,186 $ 56,301 ======== ======== Net interest spread 3.58 3.53 Effect of net non-interest-bearing funds 0.28 0.50 ---- ---- Net interest margin (4) 3.86% 4.03% ==== ====
- ---------- (1) Securities available for sale are stated at amortized cost. (2) Interest income is presented on a tax-equivalent basis using a 35% Federal tax rate. (3) Average loan balances and yields include non-accruing loans. Loan fees are included in the interest amounts and are not material. (4) Net interest income on a tax-equivalent basis as a percentage of total average interest-earning assets. 20 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 $4.8 million in the nine months ended September 30, 2003, representing a $5.2 million decrease from the same period of 2002. The substantial decrease in the loan loss provision for the nine months was related primarily to two credits that were placed on non-accrual in the first and second quarters 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).
Nine Months Ended September 30, 2003 Over (Under) 2002 ----------------- ---------------------- 2003 2002 Amount Percent ------- ------- ------ ------- Trust income $ 4,525 $ 4,332 $ 193 4.5% Service charges on deposit accounts 5,474 3,143 2,331 74.2 Other service charges, commissions and fees 3,203 2,542 661 26.0 Net gains from securities transactions 5,252 154 5,098 NM Income on life insurance 2,867 2,809 58 2.1 Dissolution of joint venture -- 1,171 (1,171) (100.0) Gain on the disposition of credit card portfolio -- 920 (920) (100.0) Other income 2,777 1,929 848 44.0 ------- ------- ------ Total non-interest income $24,098 $17,000 $7,098 41.8% ======= ======= ====== ======
- ---------- NM - Not meaningful. Non-interest income increased 42% to $24.1 million for the nine months ended September 30, 2003 from the $17.0 million earned in the same period of 2002. The increase from the prior year period was attributable to the realization of $5.3 million in gains on securities transactions during the nine months ended September 30, 2003, higher service charges on deposit accounts, higher gains on the sale of residential mortgages and SBA loans 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 and the aforementioned gain recognized from the sale of the credit card portfolio in the second quarter of 2002. The Company sold $152 million in available for sale mortgage-backed securities during the nine months ended September 30, 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. 21 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):
Nine Months Ended September 30, 2003 Over (Under) 2002 ----------------- ---------------------- 2003 2002 Amount Percent ------- ------- ------- ------- Salaries, wages and employee benefits $31,642 $23,679 $ 7,963 33.6% Occupancy expense, net 7,051 4,441 2,610 58.8 Furniture and equipment expense 4,004 3,378 626 18.5 Data processing expense 2,992 3,889 (897) (23.1) Amortization of intangible assets 2,359 1,235 1,124 91.0 Merger related charges 6,824 1,847 4,977 269.5 Other expenses: Legal and other professional service expense 3,042 2,502 540 21.6 Marketing and shareholder communications expense 3,329 2,057 1,272 61.8 Telecommunication expense 1,300 1,062 238 22.4 Loan origination/collection expense 1,344 822 522 63.5 Credit card expense -- 601 (601) (100.0) All other 6,221 3,365 2,856 84.9 ------- ------- ------- Total other expenses 15,236 10,409 4,827 46.4 ------- ------- ------- Total non-interest expense $70,108 $48,878 $21,230 43.4% ======= ======= ======= ======
Non-interest expense increased 43% to $70.1 million in the nine months ended September 30, 2003 over the $48.9 million incurred in the same period of 2002. The same factors noted in the comparison of the third quarter 2003 expenses to those of the same period in 2002 also contributed to the nine months expense variance, as well as increased snow removal/parking lot maintenance costs of $0.7 million, higher proxy solicitation expenses and costs relating to the settlement of a lawsuit, which amounted to $0.5 million. 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 $5.0 million in the nine months ended September 30, 2003 from the $1.8 million incurred in the same period of the prior year. The increase in the income tax provision was due to a 62% increase in income before provision for income taxes. The increase in the effective tax rate from 12% in 2002 to 21% in 2003 was largely due to a decline in the proportion of tax-exempt income to income before provision for income taxes. LINES OF BUSINESS - SEGMENT REPORTING For management purposes, the Company 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 for the lines of business is presented in "Note 8. 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. Net income (loss) before taxes 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 22 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 Net income before taxes for this segment in the nine months ended September 30, 2003 increased $11.9 million from the same period in 2002 due to increases of $23.5 million in net interest income and $2.1 million in non-interest income. This was offset by increases in non-interest expense of $11.3 million and an increase in the allocation of the provision for loan losses of $2.4 million. The higher net interest income was primarily related to increased average residential mortgage and consumer loans and wider-spread average core deposits when compared to the first nine months of 2002. The increase in non-interest income was due to higher service charges on deposit accounts and the Vista Merger, and the increase in non-interest expense was mainly due to the Vista Merger. The increase in the loan loss provision was due primarily to the Vista Merger and increased loan volume. Commercial Banking Pretax results for the nine months ended September 30, 2003 increased $7.5 million from the same period in 2002 primarily due to a $7.6 million decrease in the loan loss provision allocation. The substantial decrease in the loan loss provision for the current year was related primarily to two credits that were placed on non-accrual in the first and second quarters of 2002 and the continued improvement in asset quality. Tax-equivalent net interest income increased $1.5 million in the nine months ended September 30, 2003 due to increased average commercial and real estate construction loans. In addition, non-interest expense increased $1.8 million due primarily to the Vista Merger. Investments Pretax income for the nine months ended September 30, 2003 increased $2.0 million over the same period in 2002 due to a $0.5 million increase in tax-equivalent net interest income and a $5.3 million increase in non-interest income, offset by a $3.1 million increase in non-interest expense. The increase in tax-equivalent net interest income was largely due to a 32% growth in average investment securities partially offset by a narrower spread, while the increase in non-interest income was due to the realization of $5.3 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 In the nine months ended September 30, 2003, income before taxes for this segment increased $0.3 million from the same period in 2002. Fees for trust services increased $0.6 million, which was offset by a $0.3 million increase in non-interest expense. All Other Net loss before taxes in the nine months ended September 30, 2003 for this segment was $7.7 million as compared to net income before taxes of $5.1 million for the same period in 2002. This was due primarily to a $6.8 million decline in net interest income related to a higher funds credit assigned to non-maturity core deposits in Retail Banking in the first nine months of 2003 due to longer expected life of these deposits and lower relative funding costs charged on mortgage-related assets in the Retail Banking and Investments segments. In addition, non-interest income decreased $1.2 million from the first nine months of 2002 due to a $1.2 million recovery from the dissolution of the UFS joint venture recorded in 2002. Also, non-interest expense was $4.8 million higher in the nine months ended September 30, 2003 compared to the same period of 2002 due primarily to the recognition of $6.8 million in merger related expenses incurred in connection with the pending merger with PNC. 23 The following table shows the percentage contribution of the various lines of business to consolidated income before taxes:
Nine Months Ended September 30, ----------------- 2003 2002 ------- ------- Retail banking 90.5% 63.9% Commercial banking 19.0 (21.2) Investments 17.5 14.3 Trust and investment services 6.0 7.8 All other (33.0) 35.2 ----- ----- Total consolidated 100.0% 100.0% ===== =====
24 FINANCIAL CONDITION Loan Portfolio An analysis of loans outstanding, net of unearned income, is presented in the following table (in thousands):
September 30, December 31, 2003 2002 ------------- ------------ Commercial mortgage $ 370,474 $ 399,826 Residential mortgage 610,375 447,940 Construction 75,080 81,808 Commercial 434,259 339,635 Consumer 495,243 395,860 ---------- ---------- Total $1,985,431 $1,665,069 ========== ==========
At September 30, 2003, total loans increased $320.4 million or 19% from year-end 2002, which represents an annual growth rate of 26%, despite the sale of $42.0 million in residential loans. The Company achieved strong growth in residential, commercial and consumer loans, which increased $162.4 million, $94.6 million and $99.4 million, respectively. On an annualized basis, this represents growth of 48%, 37% and 33%, respectively. Activity in the commercial mortgage portfolio, which declined $29.2 million from year-end 2002, had been affected in part by the economic conditions in the New Jersey and Pennsylvania markets. 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 $1.5 million and $15 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, the Senior Credit Officer and on a revolving basis one of the three Commercial Loan Department Heads, as appropriate. Additionally, the Executive Committee of the Board of Directors of the Company and the Bank approve credit extensions exceeding $15 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. 25 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 September 30, 2003, non-performing assets totaled $18.4 million or 0.58% of total assets compared to $16.3 million or 0.57% of total assets at December 31, 2002. Non-performing loans at September 30, 2003 were $16.9 million or 0.85% of total loans, compared to $15.7 million or 0.95% of total loans at December 31, 2002. At September 30, 2003, the Company's holdings in other real estate owned amounted to $1.5 million 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 nine months ended September 30, 2003, the Company recognized $52,000 in net recoveries relating to these properties compared to $62,000 in net costs during the same period of 2002. Other assets owned amounted to $56,000 at September 30, 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, September 30, ---------------------------------- 2003 2002 2001 2000 1999 ------------- ------- ------ ------ ------ Non-accrual loans (1) $11,983 $14,029 $4,373 $5,619 $4,382 Loans past due 90 days or more (2) 4,874 1,720 2,064 1,118 3,732 ------- ------- ------ ------ ------ Total non-performing loans 16,857 15,749 6,437 6,737 8,114 Other real estate owned (OREO)(3) 1,463 570 127 165 56 Other assets owned (OAO)(4) 56 30 64 28 53 ------- ------- ------ ------ ------ Non-performing assets $18,376 $16,349 $6,628 $6,930 $8,223 ======= ======= ====== ====== ====== Troubled debt restructurings $ -- $ 12 $ -- $ 14 $ 28 ======= ======= ====== ====== ====== Non-performing loans as a % of: Loans 0.85% 0.95% 0.52% 0.52% 0.64% Total assets 0.54 0.55 0.33 0.32 0.39 Non-performing assets as a % of: Loans, OREO and OAO 0.92 0.98 0.54 0.54 0.65 Total assets 0.58 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. 26 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, September 30, ------------------------------------- 2003 2002 2001 2000 1999 ------------- ------- ------- ------- ------- Beginning balance $20,407 $12,478 $12,419 $10,386 $11,174 Charge-offs (2,565) (9,985) (3,770) (3,745) (4,787) Recoveries 384 640 1,068 1,048 967 ------- ------- ------- ------- ------- Net charge-offs (2,181) (9,345) (2,702) (2,697) (3,820) Provision for loan losses 4,755 11,150 2,761 4,730 3,825 Addition related to vista merger -- 6,124 -- -- -- Reduction related to loan sale -- -- -- -- (793) ------- ------- ------- ------- ------- Ending balance $22,981 $20,407 $12,478 $12,419 $10,386 ======= ======= ======= ======= ======= Net charge-offs as a % of Average loans 0.16%(1) 0.67% 0.22% 0.21% 0.34% Allowance for loans losses as a % of: Loans 1.16 1.23 1.01 0.96 0.82 Non-performing loans 136.33 129.58 193.85 184.34 128.00
- ---------- (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. 27 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 September 30, 2003, the Company's income simulation model indicates an acceptable level of interest rate risk and is materially consistent with the year-end disclosure. 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 large-denomination municipal certificates of deposit and average short-term borrowings for the nine months ended September 30, 2003 was $143.9 million or only 6.8% of average total assets. Additionally, asset liquidity is provided by short-term investments and the marketability of securities available for sale. Short-term investments averaged $17.2 million in the nine months ended September 30, 2003 while securities available for sale at market value averaged $804.4 million in the same period of 2003. The Company did not maintain any short-term investments at September 30, 2003, while securities available for sale at market value amounted to $820.1 million at September 30, 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. 28 The following table sets forth the market value of securities available for sale at September 30, 2003 and at December 31, 2002 (in thousands)
September 30, December 31, 2003 2002 ------------- ------------ Debt Securities: U.S. Treasury securities $ 8,034 $ 3,174 Federal agency obligations 11,600 13,561 State and municipal securities 136,210 134,629 Mortgage-backed securities 523,486 546,733 Corporate debt securities 110,204 106,603 -------- -------- Total debt securities 789,534 804,700 -------- -------- Equity securities: Marketable equity securities 1,816 4,259 Federal Reserve Bank and Federal Home Loan Bank Stock 28,768 19,017 -------- -------- Total equity securities 30,584 23,276 -------- -------- Total securities available for sale $820,118 $827,976 ======== ========
The following table sets forth the amortized costs of securities held to maturity at September 30, 2003 and at December 31, 2002.
September 30, December 31, 2003 2002 ------------- ------------ Debt Securities: U.S. Treasury securities $ 999 $ 3,048 State and municipal securities 25,796 39,134 Mortgage-backed securities 31,749 831 Corporate debt securities -- 1,997 Foreign government securities 225 250 ------- ------- Total securities held to maturity $58,769 $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 $294.3 million at September 30, 2003. Included within this figure are marketable equity securities amounting to $1.0 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 believed to be readily marketable. As of September 30, 2003, debt securities scheduled to mature within one year based upon estimated cash flows, amounted to $293.3 million and represented 37% of the total debt securities portfolio. Approximately 82% 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 September 30, 2003, total stockholders' equity was $262.0 million, a decrease of $2.7 million from year-end 2002. During the nine months ended September 30, 2003, the Company generated net retained earnings of $7.1 million. These increases were partially offset by a reduction of $6.4 million resulting from the Company's purchases under its stock repurchase program of 242,000 shares to be held in Treasury at an average price of $26.31 29 per share and a decline of $5.6 million in the market value of the Company's available for sale securities portfolio from December 31, 2002 to September 30, 2003. The following reflects the Company's capital ratios as of September 30, 2003 and December 31, 2002 in accordance with current regulatory guidelines (dollars in thousands):
September 30, 2003 December 31, 2002 ------------------ ----------------- Amount Ratio Amount Ratio -------- ----- -------- ----- Risk-Based Capital Ratios: Tier I Capital Actual $212,981 9.54% $208,429 10.34% Regulatory Minimum Requirement 89,307 4.00 80,602 4.00 For Classification as Well Capitalized 133,960 6.00 120,903 6.00 Combined Tier I and Tier II Capital Actual 235,962 10.57 228,836 11.36 Regulatory Minimum Requirement 178,614 8.00 161,204 8.00 For Classification as Well Capitalized 223,267 10.00 201,505 10.00 Leverage Ratio: Actual 212,981 7.07 208,429 7.40 Regulatory Minimum Requirement 120,512 4.00 112,603 4.00 For Classification as Well Capitalized 150,640 5.00 140,754 5.00
The Company's risk based capital ratios (Tier I Capital 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 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 nine months ended September 30, 2003 reaching a high of $33.77 near the end of the third quarter. The Company's Common Stock price was $33.21 at September 30, 2003, compared to $23.05 at December 31, 2002. Book value per common share was $13.90 per share at September 30, 2003. The Company's per share market price to book value was 239% from 165% at the end of 2002. The Company has paid cash dividends for 61 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. Pending completion of the merger with PNC and subject to certain exceptions, including the reasonable consent of PNC, the Company agreed, and agreed to cause any of its subsidiaries, to refrain from declaring or paying any dividends or distributing on any shares of its stock, except for cash dividends on (1) the Company's Common Stock at a regular quarterly rate not to exceed $0.20 per share and (2) certain other Company securities. 30 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 The Company's Chief Executive Officer and Chief Financial Officer, with the assistance of other members of the Company's management, have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. The Company's Chief Executive Officer and Chief Financial Officer have also concluded that there have not been any changes in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 31 Part II - Other Information Item 6 - Exhibits and Reports on Form 8-K Exhibit List (1(b)) Agreement and Plan of Merger dated August 21, 2003 among the Registrant, the PNC Financial Services Group, Inc. and PNC Bancorp Inc.* (3) By-laws of the Company, as amended through August 21, 2003. (31.1) Certification of Chairman of the Board, President and Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (31.2) Certification of Vice President and Treasurer (Principal Financial Officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (32) Certification of the Chairman of the Board, President and CEO and certification of the Vice President and Treasurer pursuant to Section 302 of Sarbanes-Oxley Act of 2002. - ---------- * Incorporated by Reference to the Registrant's Current Report on Form 8-K filed September 4, 2003 Reports on Form 8-K A Form 8-K was filed on July 16, 2003, under Item 7 "Financial Statements and Exhibits" and Item 9 "Regulation FD Disclosure." The Company's press release dated July 16, 2003, United National Bancorp Reports Increased Second Quarter Earnings. A Form 8-K was filed on September 4, 2003, under Item 1(b) "Changes of Control of Registrant", Item 7 "Financial Statements and Exhibits" and Item 9 "Regulation FD Disclosure." The Company's press release dated August 21, 2003, PNC Financial Services Group and United National Bancorp Announces the Definitive Agreement for PNC Financial Services Group to Acquire United National Bancorp. A Form 8-K was filed on September 18, 2003, under Item 5 "Other Information." The Company's press release dated September 17, 2003, United National Bancorp Declares Cash Dividend. 32 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 hereunto duly authorized. UNITED NATIONAL BANCORP (Registrant) Dated: November 13, 2003 By: /s/ Thomas C. Gregor ------------------------------------------- Thomas C. Gregor Chairman, President and CEO Dated: November 13, 2003 By: /s/ Alfred J. Soles ------------------------------------------- Alfred J. Soles Senior Vice President & Chief Financial Officer (Principal Financial Officer) 33 EX-3 3 ex3.txt EXHIBIT 3 BY-LAWS UNITED NATIONAL BANCORP ARTICLE I MEETING OF SHAREHOLDERS SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of United National Bancorp (the "Corporation") for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held at such time and place as determined by the Board of Directors of the Corporation (the "Board"), on the third Tuesday in April of each year or such other date as determined by the Board. Written notice of the time, place and purpose of such meeting shall be given at least ten (10) business days, and not more than sixty days, prior to the date of such meeting to each shareholder entitled to vote at such meeting, either by personal delivery to or by mailing such notice to each shareholder, postage prepaid, at that shareholder's address as it appears on the books of the Corporation. SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders may be called for any purpose, at any time, by the chairman, president, or the majority of the Board. Special meetings of the shareholders shall be held at such time and place as determined by the chairman, president or the majority of the Board, and notice of the time, place and purpose of each special meeting shall be given in the same manner as herein provided for the annual meeting of the shareholders. SECTION 3. QUORUM AND VOTING. At all shareholder meetings, shareholders owning a majority of the outstanding shares of capital stock of the Corporation eligible to vote at such meeting shall constitute a quorum. If there is not a quorum present, those in attendance shall have the power to recess the meeting. An annual or special meeting may be recessed to such time and place as shareholders holding a majority of the shares of capital stock present and eligible to vote at the meeting shall determine, and no further notice of a recessed meeting need be given. Unless otherwise required by law, these By-Laws or the Certificate of Incorporation of the Corporation, the vote of a majority of the votes cast at a meeting by the holders of shares entitled to vote thereon shall be the act of the shareholders. A shareholder may vote at any meeting in person or by written proxy and a shareholder may also be represented at any meeting by such written proxy. Except as otherwise provided by statute or in the Certificate of Incorporation of the Corporation or as otherwise determined by the Board in the issuance of capital stock, each shareholder will be entitled to one vote for each share of capital stock held by him/her with respect to each matter submitted to the shareholders for action. SECTION 4. RECORD DATE. The Board may fix in advance a date not more than 60 days (nor less than 20 business days) preceding the date of any meeting of shareholders or other corporate action or event to which it relates as a record date for the determination of the shareholders entitled to notice of any right to vote at any such meeting, or the shareholders entitled to the allotment or exercise of rights for such other action as the case may be. In such case, only shareholders of record on the date so fixed shall be entitled to notice of, and to 2 vote at such meeting, or to be entitled to the allotment or exercise of such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. If no such record date has been fixed by the Board, no share of stock which has been transferred within ten days prior to any election or meeting shall be voted at any election of Directors. SECTION 5. NOTIFICATION OF NOMINATIONS. Nominations for the election of directors may be made by the Board of Directors and by any committee to which the Board delegates this responsibility, or by any shareholder entitled to vote in the election of directors generally. However, any such shareholder may nominate one or more persons for election as directors at a meeting only if such shareholder has given timely notice in proper written form of his intent to make such nomination or nominations. To be timely, a shareholder's notice must be delivered to or mailed and received by the Secretary of the Corporation not later than 150 days prior to the anniversary date of the last annual meeting of shareholders of the Corporation. To be in proper written form, a shareholder's notice to the Secretary shall set forth: 1. The name and address of the shareholder who intends to make the nomination or nominations, and the name, address and principal occupation of the person or persons to be nominated. The nominee is required to sign a Nominee Statement certifying that he/she is in conformance with all requirements set forth in the Bylaws; 3 2. A representation that the shareholder is and will be a holder of record of stock of the Corporation entitled to vote at the meeting at which the shareholder's nominee or nominees will stand for election and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; 3. A description of all arrangements or understandings between or among such shareholder, any such nominee, and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder, or a statement that no such arrangements or understandings exist; 4. The other information regarding each nominee to be proposed by such shareholder as would be required to be disclosed by the Corporation in its proxy statement under Item 401, Item 403(a), (b) and (c), and Instruction 4 to Item 103 of Regulation S-K promulgated under the Securities and Exchange Act of 1934, as amended, were the person to be nominated for director by the Board of Directors; and 5. The signed consent of each nominee to serve as director of the Corporation if so elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Article I, Section 5. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the 4 meeting that the nomination was defective and such defective nomination shall be disregarded. ARTICLE II THE BOARD OF DIRECTORS SECTION 1. NUMBER AND FUNCTION. The property, affairs and business of the Corporation shall be managed by the Board. The number of directors, which shall constitute the entire Board, shall not be less than five (5) nor more than twenty-five (25) and the exact number of directors shall be fixed within said limits from time to time by resolution of the Board adopted by the affirmative vote of at least two-thirds of the entire Board. The total number of directors may not be increased by more than two (2) from the number determined by the Board in connection with the last annual election of directors. The Board of Directors shall be divided in three classes as nearly equal in number as practicable, and designated as Class A, Class B, and Class C. The term of Office of each class shall be as follows: a) For Class A, one year from the first election of Class A, and then for renewal terms of three years each; b) for Class B, two years from the first election of Class B, and then for renewal terms of three years each; c) for Class C, three years from the first election of Class C, and for renewal terms of three years each, so that the term of office of one class shall expire each year. At each annual meeting of directors subsequent to the initial adoption of this By-Law provision, the successors to the class of directors whose terms shall then expire will be elected to hold office for a three-year term and until their successors shall have been elected and qualify, except as herein otherwise 5 provided. No person who has attained the age of 72 shall be nominated for election as a Director. SECTION 2. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. The directors remaining in office, acting by at least a two-thirds affirmative vote, may fill any vacancies or newly created directorships in the Board, however occurring. All appointments will assume the class in which the vacancy occurs if the new director is filling a vacancy in a previously existing directorship. Any director so chosen shall hold office until the next election of the class for which such director shall have been chosen and until a successor shall have been elected and qualified or until earlier resignation, removal from office, retirement, death or incapacity. No individual shall be eligible for election or re-election as a director of this Corporation if he or she has been found to be in violation of any criminal (other than traffic, petty or misdemeanor offenses) or banking statute, regulation, rule or directive of the United States, the State of New Jersey, or any State of the United States, or any agency, administrative body or judicial tribunal thereof, or is, or has been subject to, any cease and desist or similar order issued by any federal or state agency having jurisdiction over banking or financial service institutions. SECTION 3. ATTENDANCE BY DIRECTORS. In the event a director fails to attend at least seventy-five percent (75%) of all meetings combined of the board of this corporation and of the board of any affiliate or subsidiary of this corporation of which such individual is also a director and of any committee of any such board in any fiscal year, such absenteeism shall constitute cause for 6 removal and such director may be removed from his or her position as a director upon the vote of a majority of all the remaining directors. In the event of any such removal, the vacancy caused thereby may also be filled by a vote of a majority of the remaining directors. SECTION 4. PLACE OF MEETING. The Board may hold its meeting at such place or places within or without the State of New Jersey as it may, from time to time, determine. SECTION 5. QUORUM AND VOTING. The presence at any meeting of a majority of the entire Board shall constitute a quorum for the transaction of business. If at any meeting of the Board there shall be less than a quorum present, a majority of those present may adjourn the meeting from time to time until a quorum shall have been obtained. All questions coming before the Board shall be determined by a majority vote of the members present, except as otherwise provided in these By-Laws or in the Certificate of Incorporation or applicable law. SECTION 6. REGULAR MEETINGS. A regular meeting of the Board shall be held immediately following the adjournment of each annual meeting of shareholders. Other meetings of the Board may be held at such place and at such times as may, from time to time, be fixed by it. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board shall be held whenever called by the chairman, president, or by the secretary at the request of a majority of the entire Board. 7 SECTION 8. NOTICE OF MEETINGS; WAIVER OF NOTICE. Subject to waiver, written notice of the time and place of each meeting of the Board shall be given to each director at least three days prior to the date of each regular meeting or one day prior to each special meeting. Notice of all meetings shall be given by personal delivery, facsimile or e-mail, or by first-class mail addressed to each director, postage prepaid, at his/her residence or usual place of business, or, in the case of special meetings, by any practicable method. A director may waive notice of any meeting of the Board either before or after the meeting, and such waiver shall be deemed to be the equivalent of the director having been given notice hereunder. Attendance or participation of a director at a meeting shall constitute waiver of notice of that meeting unless said director attends or participates for the express purpose of objecting to the transaction of business because the meeting has not been lawfully called or convened. All other waivers of notice must be in writing. SECTION 9. CONSENT OF DIRECTORS IN LIEU OF MEETING. Any action required or permitted to be taken at any meeting of directors, or any Committee of the Board, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken shall be signed in person by all members of the Board, or such Committee, as the case may be. SECTION 10. COMPENSATION. Members of the Board shall be entitled to receive compensation for their services as the Board shall, from time to time, prescribe. 8 SECTION 11. COMMITTEES. A. The Board of Directors by resolution adopted by a majority of the entire Board may appoint an Audit Committee, Bylaws Committee, Committee on Director Nominations, Committee on Director-Officer Compensation, Committee for the Administration of the Equity Plans, Executive Committee, and Strategic Planning Committee, and one or more other Committees, each of which shall consist of three or more members who are members of the Board provided that if any director, or directors, shall resign from a Committee during the course of his or her term, a Committee may consist of not less than two members. If there are less than two members, the Board shall appoint from among its members who qualify for membership on the particular Committee one or more additional members so that each Committee shall have at least two such members. The Committee for the Administration of the Equity Plans shall consist of those members of the Compensation Committee of the Board who are "Non-employee Directors" as the term is defined in Rule 16b-3 promulgated under the Securities and Exchange Act, provided that if there are less than two members of the Compensation Committee of the Board who so qualify, the Board shall appoint from among its members who do so qualify one or more additional members of the Committee so that at all times the Committee shall have at least two such members. For each Committee, the Board shall select one of its members to act as the Chairman of the Committee, and the Committee shall make such rules and regulations for its operation as it deems appropriate. A majority of the Committee shall constitute a quorum, and the act of a majority of the members of 9 the Committee present at a meeting at which a quorum is present shall be the act of the Committee. Each member shall be entitled to one vote (except that, if the other director is an inside director, the COB and that inside director shall collectively have only one vote which shall not be counted in the event of a tie, or if they cannot agree). In the absence of one, the other attending may vote. Each member of the Audit Committee, the Committee on Director-Officer Compensation and the Committee on Director Nominations shall be an "independent director" as that term is defined in applicable federal and state laws, rules and regulations and any applicable regulations of a stock exchange of which the Corporation is a member. No person who is then serving on the Directors Trust Committee of UnitedTrust Bank may also serve as a member of the Audit Committee. B. To the extent provided in Board resolution or in the By-Laws or Certificate of Incorporation, each Committee shall have and may exercise all of the authority of the Board, except that no Committee shall a) make, alter or repeal any By-Laws of the Corporation: b) appoint any director, or remove any officer or director; c) submit to shareholders any action that requires shareholders approval, or d) amend or repeal any resolution theretofore adopted by the Board. All Committees, except the Executive Committee, are authorized only to make recommendations to the Board, unless specifically empowered by statute, regulation, or resolution of the Board or Executive Committee to accomplish a particular non-discretionary task. C. Definition of Inside Directors: a) An Inside Director is one who is an employee of the Corporation or subsidiary, is a retired employee of the 10 Corporation or subsidiary, is a supplier or user of business or professional services to or from the Corporation or any subsidiary, or owns or controls 5% or more of the outstanding shares of common stock of the Corporation, or who is deemed not to be an "independent director" as defined by applicable federal and state law, rules and regulations or the rules and regulations of any stock exchange of which the Corporation is a member. D. The Board Alone is Empowered to: a) fill any vacancy on a Committee; b) appoint one or more directors to serve as alternate members of a Committee, to act in the absence or disability of members of a Committee with all the powers of such absent or disabled members; c) abolish a Committee at its pleasure; and d) remove any director from membership on a Committee at any time, with or without cause. E. Committee Action Must be Reported to the Board by written report. Actions and recommendations taken at a meeting of any Committee shall be reported to the Board by a written report at its next meeting following Committee meeting; except that, when the meeting of the Board is held within two days after the Committee meeting, such report shall, if not made at the first meeting, be made to the Board at its second meeting following such Committee meeting. SECTION 12. EXECUTIVE COMMITTEE. The Board shall annually appoint, from its members, an Executive Committee. Between meetings of the Board, it shall exercise all of the powers of the Board with respect to the affairs of the Corporation, except those powers which are specifically denied to the Committee 11 or reserved to at least a majority of the entire Board by the New Jersey Business Corporation Law, these By-Laws, the Certificate of Incorporation, or a resolution of the Board. SECTION 13. COMMITTEE ON DIRECTOR NOMINATIONS. The Board shall annually appoint from among its members a Committee on Director Nominations. This Committee shall be charged with: a) to investigate and recommend candidates for the directorships for determination by the full Board of the formal slate to be presented to the shareholders for election; b) to investigate and recommend candidates for Board Committees and directorships, and officerships to fill vacancies occurring between shareholders meetings; c) to investigate and recommend candidates for additional directorships (not exceeding two in number) between shareholders meetings held for the election of directors; d) to investigate and recommend candidates to the Board for election and re-election to directorships for any corporation or association which is a subsidiary of this Holding Corporation. On renomination of directors, criteria such as the attendance at Board meetings and participation on committees and Board meetings shall be considered; and e) such other responsibilities as the Board from time to time by resolution, may delegate to the Committee. SECTION 14. COMMITTEE ON DIRECTOR-OFFICER COMPENSATION. The Board shall annually appoint from among its members a Committee on Director-Officer Compensation which shall consist of four outside directors subject to the provisions of Article II, Section 11.A. above. This Committee shall 12 be charged with the following responsibilities: a) fixing of officers' salaries, financial incentives (if any), and such perquisites as may be deemed appropriate, subject to the approval of the full Board of Directors; b) fixing of directors' fees, including fixing of Committee Chairmen's fees where deemed appropriate, subject to the approval of the full Board of Directors; and c) such other responsibilities as the Board from time to time by resolution, may delegate to the Committee. SECTION 15. AUDIT COMMITTEE. The Board shall annually appoint from among its members an Audit Committee The powers and responsibilities shall be set forth in the Audit Committee Charter, which has been adopted by the Committee and approved by the full Board and may be amended from time to time by the full Board. SECTION 16. COMMITTEE FOR THE ADMINISTRATION OF THE EQUITY PLANS. The Board shall annually appoint from among its members a Committee for the Administration of the Equity Plans. The Committee shall have exclusive power to: A. Designate, from time to time, the directors and officers of the Corporation, to whom stock options or Restricted Stock will be granted; B. Designate the time or times when Stock Options or Restricted Stock will be granted; C. Determine the number of Shares of Common Stock subject to issuance pursuant to any Stock Option or Restricted Stock award, and all of the terms, conditions, restriction limitations, if any, of an award of Stock Options or Restricted Stock, including the time and conditions of exercise 13 or vesting; D. Accelerate the vesting of any Stock Options or Restricted Stock or exercise of any Stock Options when such actions would be in the best interests of the Corporation; E. Interpret the Plans, prescribe, amend, and rescind any rules and regulations necessary or appropriate for the administration of the Plans or either of them; and F. Make such other determinations and take such other action as it deems necessary or advisable in connection with the foregoing. The Committee shall have full authority and responsibility to administer the Plans, including authority to interpret and construe any provision of the Plans or either of them, and the terms of any Stock Options or Restricted Stock issued under it and to adopt such rules and regulations for administering each of the Plans as it may deem necessary. SECTION 17. STRATEGIC PLANNING COMMITTEE. The Board shall annually appoint from among its members a Strategic Planning Committee. The COB shall always be a member of this Committee. The Committee shall develop a Strategic Plan that contains a statement of the Board's vision of the Corporation's future. Said plan shall be assessed periodically to take into account new opportunities or unanticipated external developments. The Committee shall consider whether or not the Corporation's capital and other resources are adequate to achieve its goals and whether management has realistically assessed staff expertise and systems adequately. The Committee shall stay apprised of the current status of staffing and succession. The Committee shall plan for major operational contingencies 14 such as the loss of physical plants or automated systems caused by fire, flood, or other disasters. SECTION 18. BYLAWS COMMITTEE. The Board shall annually appoint from among its members a Bylaws Committee. The COB shall always be a member of this Committee. This Committee shall review and consider from time to time necessary changes to the Bylaws resulting from changes in applicable law, regulations or guidelines or the circumstances of the Corporation, and shall review any questions of interpretation regarding the Bylaws. SECTION 19. OTHER COMMITTEES. Subject to Article II, Section 10, the Board, by resolution passed by the majority of the members in attendance, making a quorum, may designate members to constitute one or more other committees which shall have and may have and may exercise such powers as the Board of Directors may, by resolution, determine and specify in the resolution appointing them. SECTION 20. ADDITIONAL REQUIREMENTS OF MEMBERS OF THE BOARD OF DIRECTORS. The following requirements shall apply with respect to each member of the Board of Directors and shall be taken into consideration by the Committee on Director Nominations in recommending nominees for election and reelection to the Board of Directors: a) no member of the Board of Directors may serve on more than two other for-profit boards, which service in each case shall be subject to prior approval of the Board of Directors; and b) no 15 member of the Board of Directors shall be eligible to stand for re-election after having served for five consecutive 3-year terms as a director; provided, however, that any director who is a member of the Board at the time of adoption of this provision, shall be entitled to stand for at least one more term after expiration of his or her present term notwithstanding the limitation of this provision. ARTICLE III OFFICERS SECTION 1. DESIGNATION. The officers of the Corporation may include a president, one or more executive vice presidents, senior vice presidents, vice presidents, and assistant vice presidents, a secretary, a treasurer and such additional officers, including a chairman, as the Board may from time to time deem advisable. Any number of offices may be held by the same person. SECTION 2. TERM OF OFFICE. The officers shall be elected by a majority vote of the Board annually at the first regular meeting after the annual meeting of shareholders, and they shall hold office until their respective successors are elected and qualify or until their death, resignation, retirement or removal. SECTION 3. CHIEF EXECUTIVE OFFICER. The chairman, shall be the chief executive officer of the Corporation and shall preside at all meetings of the Board and of the shareholders. The Chief Executive Officer shall exercise the powers and perform the duties usual to the chief executive officer and, subject to the control of the Board of Directors, shall have general management and control of the affairs and business of the Corporation. 16 SECTION 4. THE PRESIDENT AND VICE PRESIDENTS. The president and each executive vice president, senior vice president and vice president shall perform such duties and have such authority as, from time to time, may be delegated by the chief executive officer and the Board. The Board shall determine the order of succession to the duties of the chief executive officer. In the absence of such a determination, and in the event of death, inability, or a refusal to act, of the chief executive officer, the president or, if none, the executive vice president or, if none, the senior vice president, or, if none, the vice presidents of the Corporation shall, in order of their election, perform the duties and be vested with the authority of the chief executive officer. SECTION 5. SECRETARY. The secretary shall cause notices of all meetings to be served as prescribed in these By-Laws; shall keep the minutes of all meetings of the shareholders, and the Board, and all Committees of the Board, shall have charge of the seal of the Corporation and the corporate records, and shall be responsible for the transfer and registration of the capital stock of the Corporation. The secretary, or any assistant secretary may attest the execution of contracts and other instruments signed in the conduct of its business and may affix the corporate seal thereto. The secretary shall perform such other duties and have such other authority as may, from time to time, be delegated by the president or by the Board. SECTION 6. TREASURER. The Treasurer shall have the custody of the funds and securities of the Corporation and shall keep or cause to be kept regular books of account for the Corporation. The treasurer shall account to the 17 president and the Board, whenever they may require, concerning all transactions as treasurer and concerning the financial condition of the Corporation. SECTION 7. REMOVAL OR SUSPENSION. Any officer may be removed or suspended, with or without cause by the Chief Executive Officer or in the case of the CEO, by the affirmative vote of a majority of the Board. ARTICLE IV SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES. The certificates representing shares of capital stock of the Corporation shall be in such form as required by the New Jersey Business Corporation Act. SECTION 2. REGULATIONS. The Board may make such regulations concerning the issue, transfer and resignation of certificates for capital stock of the Corporation as it may deem desirable. The person in whose name shares of capital stock stand on the stock ledger of the Corporation shall be deemed the owner thereof for all corporate purposes. SECTION 3. LOST, STOLEN AND DESTROYED CERTIFICATES. In the event of the loss or destruction of certificates, new certificates may be issued to take the place thereof upon receipt by the Corporation of such bond of indemnity, or under such regulations as may be prescribed by the Board. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. SECTION 1. EXECUTION OF DOCUMENTS. Except as otherwise specifically designated by the Board, the Corporation may execute and deliver deeds, 18 contracts, mortgages, bonds, debentures, checks, drafts and other orders for the payment of money, and other documents, by any one officer after written approval of another officer. SECTION 2. PROXIES IN RESPECT OF SECURITIES OF OTHER CORPORATIONS. Any one of the chairman, chief executive officer, president, executive vice president, or other officer designated by the Board, shall have authority to exercise, in the name and on behalf of the Corporation, the powers and rights, which the Corporation may have as the holder of securities or to appoint agents or an agent to exercise those powers and rights; such designated officers may instruct the person or persons so appointed as to the manner of exercising such powers and rights; and such designated officers may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal, or otherwise, such written proxies, powers of attorney or other instruments as they may deem necessary or proper in order that the Corporation may exercise its said powers and rights. ARTICLE VI BOOKS AND RECORDS The books and records of the Corporation may be kept at such place or places within or without the State of New Jersey as the Board may, from time to time, determine. 19 ARTICLE VII CORPORATE SEAL The Corporate Seal shall have inscribed thereon the name of the Corporation, the year of its incorporation and the words, "Incorporated New Jersey". The Seal may be used by causing it or a facsimile thereof to be impressed or reproduced on a document or instrument, or affixed thereto. ARTICLE VIII FISCAL YEAR The fiscal year of the Corporation shall be as selected by the Board, from time to time. ARTICLE IX AMENDMENTS SECTION 1. AMENDMENTS BY THE BOARD OF DIRECTORS. These By-Laws may be altered or amended by an affirmative vote of at least two-thirds of the Board at any regular or special meeting of the Board. SECTION 2. AMENDMENTS BY THE STOCKHOLDERS. By-Laws adopted or amended by the Board shall be subject to repeal or alteration by shareholders. ARTICLE X ACTION BY CONSENT Any action required or permitted to be taken pursuant to authorization voted at a meeting of the Board or any Committee thereof, may be taken without a meeting if, prior or subsequent to the action, all members of the Board or of such 20 Committee, as the case may be, consent thereto in writing and the written consents are filed with the minutes of the proceedings of the Board or Committee. Such consent shall have the same effect as a unanimous vote of the Board or Committee for all purposes, and may be stated as a unanimous vote in any certificate or other document filed with the Secretary of State. ARTICLE XI INDEMNIFICATION SECTION 1. INDEMNIFICATION. The Corporation shall indemnify and hold harmless, to the fullest extent permitted by law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any action or suit, whether or not by or in the right of the Corporation, or proceeding, whether civil, criminal, administrative, or investigative (collectively a "proceeding") by reason of the fact that he, or a person for whom he is legal representative, is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss, including judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement, incurred, suffered or paid by or on behalf of such person, expenses (including attorneys' fees) reasonably incurred by such person. The Corporation may provide indemnification to other employees or agents of the Corporation to the same extent. 21 SECTION 2. ADVANCE OF EXPENSES. The Corporation shall pay the expenses (including attorney's fees) incurred in defending any proceeding in advance of its final disposition, provided, however, that the payment of expense incurred by a director or officer in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should be ultimately determined that the director or officer is not entitled to be indemnified under this Article XI or otherwise. SECTION 3. NON-EXCLUSIVITY. The rights conferred on any person by this Article XI shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the certificate of incorporation, as amended, of the Corporation, these bylaws, any agreement, vote of shareholders or otherwise. 22 CERTIFICATION At a meeting of the Board of Directors of United National Bancorp, Bridgewater, New Jersey, held on the 21st day of August 2003, the foregoing By-Laws were adopted. IN TESTIMONY WHEREOF, we, the members of the Board of Directors of this Corporation, who were present at said meeting, have hereunto subscribed our names. /s/ George W. Blank /s/ Charles N. Pond Jr. - --------------------------------- --------------------------------- George W. Blank Charles N. Pond Jr. /s/ C. Douglas Cherry /s/ Paul K. Ross - --------------------------------- --------------------------------- C. Douglas Cherry Paul K. Ross /s/ Thomas C. Gregor /s/ Arlyn D. Rus - --------------------------------- --------------------------------- Thomas C. Gregor Arlyn D. Rus /s/ Barbara Harding /s/ David R. Walker - --------------------------------- --------------------------------- Barbara Harding David R. Walker /s/ William T. Kelleher, Jr. /s/ Ronald E. West - --------------------------------- --------------------------------- William T. Kelleher, Jr. Ronald E. West /s/ John R. Kopicki /s/ George J. Wickard - --------------------------------- --------------------------------- John R. Kopicki George J. Wickard /s/ Patricia A. McKiernan /s/ J. Marshall Wolff - --------------------------------- --------------------------------- Patricia A. McKiernan J. Marshall Wolff /s/ John W. McGowan, III - --------------------------------- John W. McGowan, III 23 EX-31 4 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ Thomas C. Gregor - ------------------------------------- Thomas C. Gregor Chairman of the Board, President and Chief Executive Officer EX-31 5 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATIONS 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 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonable likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/ Alfred J. Soles - ----------------------------- Alfred J. Soles Vice President and Treasurer (Principal Financial Officer) EX-32 6 ex32.txt EXHIBIT 32 Exhibit 32 UNITED NATIONAL BANCORP CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of United National Bancorp (the "Company") for the quarter ended September 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Thomas C. Gregor, as Chairman, President and Chief Executive Officer of the Company, and Alfred J. Soles, as Senior Vice President and Chief Financial Officer (Principal Financial Officer), each hereby certifies, pursuant to 18 U.S.C. (section) 1350, as adopted pursuant to (section) 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 13, 2003 /s/ Thomas C. Gregor ------------------------------------ Thomas C. Gregor Chairman of the Board, President and Chief Executive Officer November 13, 2003 /s/ Alfred J. Soles ------------------------------------ Alfred J. Soles Senior Vice President and Chief Financial Officer (Principal Financial Officer) -----END PRIVACY-ENHANCED MESSAGE-----