Unizan Financial (UNIZ) 10-Q 2001 Q3 Quarterly report

TABLE OF CONTENTS

CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF INCOME
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Condensed Consolidated Statements of Changes in Shareholders’ Equity
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CONSOLIDATED AVERAGE BALANCE SHEETS
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Part II OTHER INFORMATION
	Item 1 -- Legal Proceedings
	Item 2 -- Changes in Securities and Use of Proceeds
	Item 3 -- Defaults Upon Senior Securities
	Item 4 -- Submission of Matters to a Vote of Security Holders
	Item 5 -- Other Information
	Item 6 -- Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBTI 10.Y
EXHIBIT 10.Z
EXHIBIT 10.AA

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

Commission file number 0-13270

UNB CORP.

(Exact name of Registrant as specified in its charter)

Ohio (State or other jurisdiction of incorporation or organization)	34-1442295 (I.R.S. Employer Identification Number)
220 Market Avenue, South Canton, Ohio (Address of principal executive offices)	44702 (Zip Code)

Registrant’s telephone number, including area code                    (330) 454-5821

     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 report), and (2) has been subject to such filing requirements for the past 90 days.

Yes     X                         No                

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common Stock, $1.00 Stated Value Outstanding at October 31, 2001
10,459,050 Common Shares

UNB CORP.

FORM 10-Q

QUARTER ENDED September 30, 2001

Part I — Financial Information

Item 1 — Financial Statements

Interim financial information required by Rule 10-01 of Regulation S-X (17 CFR Part 210) is included in this Form 10Q as referenced below:

		Page
		Number(s)
	Consolidated Balance Sheets		1
	Consolidated Statements of Income		2
	Consolidated Statements of Comprehensive Income		3
	Condensed Consolidated Statements of Changes in Shareholders’ Equity		4
	Consolidated Statements of Cash Flows		5
	Notes to the Consolidated Financial Statements		6-13
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-20
	Consolidated Average Balance Sheets		21
Item 3 —	Quantitative and Qualitative Disclosures About Market Risk		22-23
Part II —	Other Information
Item 1 —	Legal Proceedings		24
Item 2 —	Changes in Securities		24
Item 3 —	Defaults Upon Senior Securities		24
Item 4 —	Submission of Matters to a Vote of Security Holders		24
Item 5 —	Other Information		24
Item 6 —	Exhibits and Reports on Form 8-K		24
Signatures			25

UNB CORP.

CONSOLIDATED BALANCE SHEETS

					September 30,			December 31,
(In thousands except per share data)					2001			2000
ASSETS
Cash and cash equivalents					$	33,227		$	32,155
Interest bearing deposits with banks						227			—
Securities, net (Fair value:
	$36,544 and $52,179, respectively)					36,513			52,170
Mortgage-backed securities (Fair value:
	$97,108 and $78,728, respectively)					97,096			78,721
Loans originated and held for sale						3,203			3,433
Loans:
	Commercial, financial and agricultural					116,477			112,263
	Aircraft					144,405			138,696
	Commercial real estate					140,958			121,677
	Residential real estate					245,775			260,088
	Consumer					258,929			239,291
		Total loans				906,544			872,015
		Less allowance for loan losses				(13,100	)		(12,760	)
			Net loans			893,444			859,255
Premises and equipment, net						10,749			11,026
Intangible assets						2,231			2,432
Accrued interest receivable and other assets						33,160			14,755
				Total Assets	$	1,109,850		$	1,053,947
LIABILITIES
Deposits:
		Noninterest bearing deposits			$	97,634		$	108,351
		Interest bearing deposits				726,300			719,290
			Total deposits			823,934			827,641
Short-term borrowings						80,938			81,979
Other borrowings						111,638			61,188
Accrued taxes, expenses and other liabilities						9,746			7,211
				Total Liabilities		1,026,256			978,019
SHAREHOLDERS’ EQUITY
Common stock ($1.00 stated value, 50,000,000 shares authorized; 11,646,254 and 11,646,274 issued, respectively)						11,646			11,646
Paid-in capital						28,939			28,949
Retained earnings						63,868			56,233
Treasury stock, 1,184,522 and 1,209,382 shares at cost						(21,800	)		(22,004	)
Accumulated other comprehensive income						941			1,104
				Total Shareholders’ Equity		83,594			75,928
				Total Liabilities and Shareholders’ Equity	$	1,109,850		$	1,053,947

See Notes to the Consolidated Financial Statements

1

UNB CORP.

CONSOLIDATED STATEMENTS OF INCOME

				Three Months Ended					Nine Months Ended
				September 30,					September 30,
(In thousands except per share data)				2001			2000		2001		2000
Interest income:
	Interest and fees on loans:
		Taxable		$	18,276		$	18,498	$	55,545	$	52,813
		Tax exempt			55			58		173		129
	Interest and dividends on securities & mortgage-backed securities:
		Taxable			1,861			1,883		5,572		5,806
		Tax exempt			30			40		117		91
	Interest on bank deposits and federal funds sold				25			174		136		542
			Total interest income		20,247			20,653		61,543		59,381
Interest expense:
	Interest on deposits				7,490			9,292		24,189		25,952
	Interest on short-term borrowings				548			988		2,048		2,780
	Interest on other borrowings				1,491			850		3,932		2,439
			Total interest expense		9,529			11,130		30,169		31,171
Net interest income					10,718			9,523		31,374		28,210
Provision for loan losses					590			128		1,563		498
Net interest income after provision for loan losses					10,128			9,395		29,811		27,712
Other income:
	Service charges on deposits				777			704		2,251		2,041
	Trust Department income				1,230			1,375		3,915		4,162
	Gains on loans originated for resale and sold				256			77		754		160
	Securities gains, net				(139	)		—		1,182		1,008
	Other operating income				1,713			689		3,638		2,371
		Total other income			3,837			2,845		11,740		9,742
Other expenses:
	Salary, wages and benefits				4,239			3,117		12,020		9,725
	Occupancy expense				470			467		1,381		1,317
	Equipment expense				884			1,004		2,844		2,944
	Derivative instruments and hedging activity expense				223			—		427		—
	Other operating expense				2,762			2,101		7,335		6,591
		Total other expenses			8,578			6,689		24,007		20,577
Income before income taxes					5,387			5,551		17,544		16,877
Provision for income taxes					1,829			1,944		5,968		5,834
	Income before accounting method changes				3,558			3,607		11,576		11,043
Accounting method change — adoption of FAS 133					—			—		14		—
	Net Income			$	3,558		$	3,607	$	11,562	$	11,043
Earnings per share:
	Basic			$	0.34		$	0.35	$	1.11	$	1.05
	Diluted			$	0.33		$	0.34	$	1.09	$	1.04
Dividends per share				$	0.13		$	0.12	$	0.38	$	0.36
Weighted average shares outstanding:
	Basic				10,481,614			10,453,348		10,458,810		10,557,570
	Diluted				10,691,733			10,528,333		10,604,526		10,640,636

See Notes to the Consolidated Financial Statements

2

UNB CORP.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

				Three Months
				Ended					Nine Months Ended
				September 30,					September 30,
(In thousands)				2001			2000		2001			2000
Net Income				$	3,558		$	3,607	$	11,562		$	11,043
Other comprehensive income, net of tax
	Unrealized gains/(losses) on securities:
		Unrealized gains/(losses) arising during the period			300			650		605			(6	)
		Less: Reclassified adjustment for accumulated gains/(losses) included in net income			(90	)		0		768			655
			Unrealized gains/(losses) on securities		390			650		(163	)		(661	)
Comprehensive income				$	3,948		$	4,257	$	11,399		$	10,382

See Notes to the Consolidated Financial Statements

3

UNB CORP.

Condensed Consolidated Statements of Changes in Shareholders’ Equity

	Nine Months Ended
(In thousands except per share data)	9/30/01			9/30/00
Balance at beginning of period	$	75,928		$	70,674
Net Income		11,562			11,043
Cash dividends $0.38 and $0.36 per share, respectively		(3,927	)		(3,796	)
Treasury stock purchases		(491	)		(4,050	)
Treasury stock sold and issued for stock options		679			16
Tax benefit from non-qualified stock option exercise		6			—
Change in market value on securities available for sale, net of deferred taxes		(163	)		(661	)
Balance at end of period	$	83,594		$	73,226

See Notes to the Consolidated Financial Statements

4

UNB CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

				Nine months ended
				September 30,
(In thousands)				2001			2000
Cash flows from operating activities:
	Net income			$	11,562		$	11,043
	Adjustments to reconcile net income to net cash from operating activities:
		Depreciation and amortization			1,026			1,052
		Provision for loan losses			1,563			498
		Net securities gains			(1,182	)		(1,008	)
		Net amortization/(accretion) on securities			(464	)		(25	)
		Amortization of intangible assets			564			689
		Loans originated for resale			(55,400	)		(8,026	)
		Proceeds from sale of loan originations			56,384			7,214
	Changes in:
		Interest receivable			575			(826	)
		Interest payable			(139	)		(182	)
		Other assets and liabilities, net			4,627			(941	)
		Deferred income			(4	)		(8	)
			Net cash from operating activities		19,112			9,480
Cash flows from investing activities:
	Net change in interest bearing deposits with banks				(227	)		(2,665	)
	Net increase in funds sold				—			(500	)
	Investment and mortgage-backed securities:
		Proceeds from sales of securities available for sale			4,082			1,527
		Proceeds from maturities of securities held to maturity			2,535			2,155
		Proceeds from maturities of securities available for sale			122,065			43,967
		Purchases of securities held to maturity			(1,080	)		(3,461	)
		Purchases of securities available for sale			(112,765	)		(32,867	)
		Purchases of mortgage-backed securities available for sale			(47,236	)		(12,604	)
		Principal payments received on mortgage-backed securities held to maturity			104			115
		Principal payments received on mortgage-backed securities available for sale			30,972			15,824
	Net (increase)/decrease in loans made to customers				(36,506	)		(84,881	)
	Purchase in bank owned life insurance				(20,711	)		—
	Net increase in bank owned life insurance				(493	)		—
	Purchases of premises and equipment, net				(749	)		(1,332	)
			Net cash from investing activities		(60,009	)		(74,722	)
Cash flows from financing activities:
	Net increase/(decrease) in deposits				(3,707	)		62,765
	Cash dividends paid, net of shares issued through dividend reinvestment				(3,927	)		(3,796	)
	Purchase of treasury stock				(491	)		(4,050	)
	Sales of treasury stock				679			16
	Tax benefit from non-qualified stock option exercise				6			—
	Net increase/(decrease) in short-term borrowings				(1,041	)		(5,563	)
	Proceeds from FHLB advances				93,400			1,200
	Repayments of FHLB advances				(45,410	)		(7,959	)
	Proceeds from bank borrowings				2,502			4,500
	Repayments on capital lease				(42	)		(39	)
			Net cash from financing activities		41,969			47,074
Net change in cash and cash equivalents					1,072			(18,168	)
Cash and cash equivalents at beginning of year					32,155			48,354
Cash and cash equivalents at end of period				$	33,227		$	30,186
Non cash activities:
Merger with Rownd’s for stock					(255	)		—

See the Notes to the Consolidated Financial Statements

5

UNB CORP.

Notes to Consolidated Financial Statements

Note 1 — Summary of Significant Accounting Policies

Unless otherwise indicated, amounts are in thousands, except per share data.

The accompanying consolidated financial statements include the accounts of UNB Corp. and its wholly owned subsidiaries United National Bank & Trust Co., United Banc Financial Services, Inc. and United Financial Advisors, Inc. All material intercompany accounts and transactions have been eliminated in consolidation.

These interim financial statements reflect all adjustments of a normal recurring nature which, in the opinion of management, are necessary to present fairly the consolidated financial position of UNB Corp. at September 30, 2001, and its results of operations and cash flows for the periods presented. The accompanying consolidated financial statements do not purport to contain all the necessary financial disclosures required by accounting principles generally accepted in the United State of America that might otherwise be necessary in the circumstances and are not necessarily indicative of the results to be expected for the full year. The Annual Report for UNB Corp. for the year ended December 31, 2000, contains consolidated financial statements and related notes, which should be read in conjunction with the accompanying consolidated financial statements.

For consolidated financial statement classification and cash flow reporting purposes, cash and cash equivalents include currency on hand and non-interest bearing deposits with banks. For the quarters ended September 30, 2001 and September 30, 2000, UNB Corp. paid interest in the amount of $30,308 and $31,355, respectively. For the same nine month periods federal income taxes paid totaled $4,000 and $5,260, respectively.

The Corporation classifies debt and equity securities as held to maturity, available for sale, or trading. Securities classified as held to maturity are those management has the positive intent and ability to hold to maturity. Securities classified as available for sale are those management intends to sell or that could be sold for liquidity, investment management, or similar reasons, even if there is not a present intention for such a sale. Trading securities are purchased principally for sale in the near term and are reported at fair value with unrealized gains and losses included in earnings. The Corporation held no trading securities during the periods reported.

Securities held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are carried at fair value, with unrealized holding gains and losses included in other comprehensive income. Gains or losses on dispositions are based on net proceeds and the amortized cost of securities sold, using the specific identification method.

Management analyzes loans on an individual basis and classifies a loan as impaired when an analysis of the borrower’s operating results and financial condition indicates that underlying cash flows are not adequate to meet its debt service requirements. Often this is associated with a delay or shortfall in payments of 30 days or more. Smaller-balance homogeneous loans are evaluated for impairment in total and are excluded from reported impaired loans. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans and consumer automobile, boat, RV, and home equity loans. In addition, loans held for sale and leases are excluded from consideration as impaired.

6

UNB CORP.

Notes to Consolidated Financial Statements (continued)

     Impaired loans are fully or partially charged off when in management’s opinion an event or events have occurred which provide reasonable certainty that a loss is probable. When management determines that a loss is probable, a full or partial charge off is recorded for the amount the book value of the impaired loan exceeds the present value of the cash flows or the fair value of the collateral, for collateral dependent loans.

     Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral by allocating a portion of the allowance for loan losses to such loans. Any reduction in carrying value through impairment or any change in impairment based on cash payments received or revised cash flow estimates as determined on a quarterly basis would be applied against the unallocated portion of the allowance for loan losses and become a specific allocation of the allowance or as an addition to the provision for loan losses if the unallocated portion of the allowance was insufficient to cover the impairment.

     Basic and diluted earnings per share are computed under the provisions of SFAS No. 128, “Earnings Per Share.” Basic earnings per share is net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional common shares issued under stock options assuming the exercise of stock options less the treasury shares assumed to be purchased from the proceeds using the average market price of UNB Corp.’s stock for the periods presented.

     In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141. “Business Combinations.” SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001.

     Also in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. The Company is required to adopt this Statement on January 1, 2002 and early adoption is not permitted. The Company has not determined the impact of this statement on its financial statements.

     Certain 2000 amounts may have been reclassified to conform to the 2001 presentation.

Note 2 — Securities

     The amortized cost and estimated fair value of securities and mortgage-backed securities, available for sale and held to maturity, as presented on the consolidated balance sheet at September 30, 2001 and December 31, 2000, follows:

7

UNB CORP.

Notes to Consolidated Financial Statements (continued)

				September 30, 2001
						Gross		Gross
				Amortized		Unrealized		Unrealized
				Cost		Gains		Losses			Fair Value
Securities available for sale:
	Obligations of U.S. government agencies and corporations			$	20,095	$	292	$	—		$	20,387
Securities held to maturity:
	Obligations of state and political subdivisions				2,309		31		—			2,340
	Corporate bonds and other debt securities				500		—		—			500
			Total debt securities		22,904		323		—			23,227
Equity securities available for sale					12,721		—		(451	)		12,270
Asset-backed securities available for sale					999		48		—			1,047
			Total securities		36,624		371		(451	)		36,544
Mortgage-backed securities available for sale					95,211		1,586		(29	)		96,768
Mortgage-backed securities held to maturity					328		12		—			340
		Total mortgage-backed securities			95,539		1,598		(29	)		97,108
		Total securities and mortgage-backed securities		$	132,163	$	1,969	$	(480	)	$	133,652

			December 31, 2000
					Gross		Gross
			Amortized		Unrealized		Unrealized
			Cost		Gains		Losses			Fair Value
Securities available for sale:
	U.S. Treasury securities		$	999	$	—	$	(1	)	$	998
	Obligations of U.S. government agencies and corporations			31,473		146		(15	)		31,604
Securities held to maturity:
	Obligations of state and political subdivisions			4,265		10		(1	)		4,274
		Total debt securities		36,737		156		(17	)		36,876
Equity securities available for sale				12,518		2,518		(728	)		14,308
Asset-backed securities available for sale				999		—		(4	)		995
		Total securities		50,254		2,674		(749	)		52,179
Mortgage-backed securities available for sale				78,506		268		(484	)		78,290
Mortgage-backed securities held to maturity				431		7		—			438
		Total mortgage-backed securities		78,937		275		(484	)		78,728
		Total securities and mortgage-backed securities	$	129,191	$	2,949	$	(1,233	)	$	130,907

During the periods ended September 30, 2001 and 2000, the proceeds from sales of securities available for sale were $4,082 and $1,527, respectively. On those sales, gross gains of $4,110 and gross losses of $2,928 were recognized for the period ending September 30, 2001 and gross gains of $1,008 were recognized for the period ending September 30, 2000. There were no

8

UNB CORP.

Notes to Consolidated Financial Statements (continued)

sales or transfers of securities classified as held to maturity.

The amortized cost and estimated fair value of debt securities at September 30, 2001, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

			September 30, 2001
					Estimated		Weighted
			Amortized		Fair		Average
			Cost		Value		Yield
Securities available for sale:
U.S. Government agencies and corporations  Due in one year or less			$	8,095	$	8,271		6.68	%
	Due after one year through five years			12,000		12,116		4.24
		Total	$	20,095	$	20,387		5.22	%
Securities held to maturity:
Obligations of state and political subdivisions  Due in one year or less			$	1,276	$	1,284		4.79	%
	Due after one year through five years			1,033		1,056		4.37
		Total		2,309		2,340		4.60	%
Corporate bonds and other debt securities  Due after ten years				500		500		7.75	%
Total securities held to maturity			$	2,809	$	2,840		5.16	%
Asset-backed securities available for sale			$	999	$	1,047		6.85	%
Mortgage-backed and collateralized mortgage obligations available for sale			$	95,211	$	96,768		6.26	%
Mortgage-backed and collateralized mortgage obligations held to maturity				328		340		7.82
			$	95,539	$	97,108		6.27	%

At September 30, 2001, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies and corporations, with an aggregate book value in excess of 10% of shareholders’ equity. Securities with a carrying value of approximately $112,368 at September 30, 2001 were pledged to secure public funds and other obligations.

Note 3 — Allowance for Loan Losses

A summary of activity in the allowance for loan losses for the nine months ended September 30, 2001 and September 30, 2000, follows:

	2001			2000
Balance — January 1	$	12,760		$	13,174
Provision charged to operating expense		1,563			498
Loans charged off		(2,015	)		(1,689	)
Recoveries on loans previously charged off		792			636
Balance — September 30	$	13,100		$	12,619

9

UNB CORP.

Notes to Consolidated Financial Statements (continued)

At September 30, 2001 and December 31, 2000, impaired loans were as follows:

	September 30, 2001		December 31, 2000
Loans with no allowance for loan losses allocated	$	126	$	1,343
Loans with allowance for loan losses allocated		4,916		2,516
Amount of allowance allocated		1,264		909
Average of impaired loans, year-to-date		3,679		3,093
Interest income recognized during impairment		240		210
Cash-basis interest income recognized year-to-date		272		206

At September 30, 2001 and December 31, 2000, loans on non-accrual status and/or past due 90 days or more approximated $4,929 and $3,141, respectively. The Other Assets Owned balance, net of allowance, was $40 and $394 at September 30, 2001 and December 31, 2000, respectively.

Note 4 — Concentrations of Credit Risk and Financial Instruments With Off-Balance Sheet Risk

The Corporation offers commercial, residential mortgage and consumer credit products to customers within Stark and its contiguous counties with the exception of the Aircraft Finance Group which serves a national market. The Corporation maintains a diversified loan portfolio, with commercial loans and leases, commercial real estate loans, aircraft loans, residential mortgage loans and consumer loans comprising 12.8%, 15.6%, 15.9%, 27.1% and 28.6%, respectively, at September 30, 2001. Within the consumer loan portfolio, indirect loans accounted for 54.1% of all consumer loans and 15.4% of total loans at September 30, 2001. The dealer network from which indirect loans were purchased included 116 relationships thus far in 2001, the largest of which was responsible for 4.8% of the total indirect dollar volume for the first nine months of 2001.

Within the commercial real estate portfolio, real estate is mainly held as collateral while the cash flows of the business are considered the primary source of repayment on the loans. With all loan types, management attempts to balance credit risk versus return by employing conservative credit standards and comprehensive underwriting guidelines in addition to the loan review function which monitors credits during and after the approval process.

The Corporation is a party to financial instruments with off-balance sheet risk. These instruments are required in the normal course of business to meet the financial needs of its customers. The contract or notional amounts of these instruments are not included in the consolidated financial statements. At September 30, 2001, the contract or notional amounts of these instruments, which primarily include commitments to extend credit, standby letters of credit and financial guarantees, and interest rate swaps totaled $240,341.

At September 30, 2001, the Corporation held an interest rate swap agreement with a notional amount of $11,043. The notional amount of the interest rate swap does not represent an amount exchanged by the parties and is not a measure of the Corporation’s exposure through its use of derivatives. The amounts exchanged are determined by reference to the notional amount and the other terms of the

10

UNB CORP.

Notes to Consolidated Financial Statements (continued)

interest rate swap. The following table summarizes the terms of the swap in effect:

Notional amount	$11,043
Final expiration	June 18, 2003
Variable rate in effect, September 30, 2001	3.15%
Fixed rate	5.86%
Market value, September 30, 2001	($448)

Variable interest payments received are based on the three month LIBOR rate that is adjusted on a quarterly basis. For the nine month periods ended September 30, 2001 and September 30, 2000, expense of $79 and income of $79, respectively, was recorded in interest income. Under the terms of the contract, future changes in LIBOR will affect the payments received, the income or expense generated by the swap and the market value of the swap.

Note 5 — Other Borrowings

Other borrowings consist of Federal Home Loan Bank borrowings, two line of credit borrowing arrangements and a capital lease. The majority of the other borrowings at September 30, 2001 were comprised of advances from the Federal Home Loan Bank (FHLB) of Cincinnati. Pursuant to collateral agreements with the FHLB, advances are secured by FHLB stock and qualifying first mortgage loans.

At September 30, 2001, FHLB advances outstanding were comprised of the following:

Maturity	Interest Rate		Amount
2001		6.10%-7.32%	$	2,514
2002		5.95%-7.32%		31,158
2003		6.25%-7.32%		1,235
2004		5.20%-7.32%		10,660
2005		3.64%-7.32%		20,547
2006		5.21%-5.59%		20,000
2011		4.70%		10,000
Total			$	96,114

Based on the Bank’s investment in FHLB stock, the maximum dollar amount of FHLB advance borrowings available to the Bank is $172,750.

The Corporation has maximum borrowing arrangements of $20,000 with a national financial institution consisting of two lines of credit. The total outstanding balance at September 30, 2001 was $15,500. United Banc Financial Services, Inc. (UBFS) arranged a $10 million line of credit to fund loan growth. The interest on each draw is variable and is priced off an index plus a spread. The loan agreement calls for quarterly interest payments and is secured by a first security agreement on UBFS receivables, the unconditional guarantee of UNB Corp., and an intercreditor agreement with United National Bank & Trust Co. The outstanding balance on this facility consists of the following draws:

11

UNB CORP.

Notes to Consolidated Financial Statements (continued)

Interest Rate			Amount
	4.92	%	$	3,500
	4.83			1,000
	4.74			500
	3.55			1,000
	4.90			500
	4.51			500
	3.74			500
	3.54			500
	3.36			500

The Parent Company arranged an unsecured $10 million line of credit for liquidity purposes and to facilitate additional investment in subsidiaries. At September 30, 2001, the outstanding balance was $7 million with an interest rate of 3.07%. The interest is priced off the Federal Funds Rate plus 0.85% per annum and is paid quarterly.

United Financial Advisors, Inc. had an unsecured $50 line of credit with an interest rate of prime rate plus one percent that was used for liquidity purposes. As of September 30, 2001, the line of credit was paid off.

In 1997, the Bank entered into a capital lease to finance the acquisition of computer hardware and related software with an original amount of $252. The lease terms call for sixty monthly payments of approximately $5 with the last payment due in March, 2002. The balance outstanding at September 30, 2001 was $24.

Note 6 — Derivative Instruments and Hedging Activities

Effective January 1, 2001, the Corporation adopted the Financial Accounting Standards Board’s Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133). FAS 133 requires all derivative instruments be recorded at their fair values. If the derivative instruments are designated as fair value hedges, changes in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in income currently.

UNB Corp. holds a derivative instrument in the form of an interest rate swap hedging fixed rate mortgage loans (see Note 4). The interest rate swap was recorded at fair value on the financial statements of the Corporation at the adoption of FAS 133. For the period ended September 30, 2001, $14, net of taxes, was recognized in expense for the adoption of FAS 133 on January 1, 2001 and $427 in expense was recognized for the change in the fair value of the swap since adoption.

Note 7 — Pending Merger

On September 6, 2001, BancFirst Ohio Corp. and UNB Corp., announced that a definitive merger agreement had been signed and structured as a merger of equals.

BancFirst Ohio Corp. and UNB Corp. will be merged into one holding company. The name of the company will be determined in the fourth quarter of 2001. Additionally, The First National Bank of Zanesville and United National Bank & Trust Co. will merge under a common charter with a new name being announced in the fourth quarter of 2001. The new corporation will offer its combined client base a broad array of corporate banking, retail banking, government guaranteed loan programs, aircraft lending, and wealth management products and services. The combined strengths of these two organizations will provide a high level of

12

UNB CORP.

Notes to Consolidated Financial Statements (continued)

professionalism, financial services expertise and commitment to the communities it will serve.

The new corporation will have a combined market value of approximately $415 million, total assets of $2.7 billion, with an additional $1.4 billion of combined trust assets under management. The company will be headquartered in Canton, Ohio with its operations center based in Zanesville, Ohio.

The purchase accounting transaction will be immediately accretive to the diluted earnings per share of the combined company upon closing. The shareholder meeting to vote on the merger of equals will take place in early February 2002. The transaction, scheduled to close in March 2002, has been approved by the boards of directors of both companies and is subject to regulatory and shareholder approvals. The terms of the agreement call for BancFirst Ohio Corp. shareholders to receive, for each BancFirst Ohio Corp. share, 1.325 shares of UNB Corp. common stock. BancFirst Ohio Corp. shareholders will own approximately 52 percent of the combined company and UNB Corp. shareholders will own approximately 48 percent.

The companies expect the merger to generate $4.3 million in annual expense reductions, with most of the savings being realized in the first full-year from the date of closing. This savings level is approximately 6.6 percent of the companies’ current combined expense base. The companies expect one-time, merger-related, charges of $6.4 million (after-tax) related to staff training, retention and severance; systems integration; professional fees and other miscellaneous expenses.

13

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INTRODUCTION

The following areas of discussion pertain to the consolidated financial statements of UNB Corp. at September 30, 2001, compared to December 31, 2000, and the results of operations for the quarter and year-to-date periods ending September 30, 2001, compared to the same periods in 2000. It is the intent of this discussion to provide the reader with a more thorough understanding of the consolidated financial statements and supporting schedules, and should be read in conjunction with those consolidated financial statements and schedules.

UNB Corp. is not aware of any trends, events, or uncertainties that might have a material effect on the soundness of operations; neither is UNB Corp. aware of any proposed recommendations by regulatory authorities which would have a similar effect if implemented.

FORWARD LOOKING STATEMENTS

Certain statements contained in this report that are not historical facts are forward looking statements that are subject to certain risks and uncertainties. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to UNB Corp. or its management are intended to identify such forward looking statements. UNB Corp.’s actual results, performance or achievements may materially differ from those expressed or implied in the forward looking statements. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services.

FINANCIAL CONDITION

Total assets at September 30, 2001 were $1,109,850, an increase of $55,903, or 5.3%, from year-end 2000. Total interest earning assets at September 30, 2001 of $1,043,583 increased from year-end 2000 by $37,244, or 3.7%. Highly liquid balances, comprised of cash and cash equivalents, federal funds sold and interest bearing deposits with banks, increased by $1,299, or 4.0%, from year-end 2000.

SECURITIES

Balances in the securities and mortgage-backed securities portfolio increased from 2000 year-end balances by $2,718, or 2.1%. Within the portfolio, as obligations of U.S. government agency securities matured they were replaced with mortgage-backed securities. During the first nine months of 2001, the equity securities in the Parent Company, which were invested in various bank stocks, were sold and a majority of the proceeds were reinvested in various equity securities to provide more diversification within the portfolio.

LOANS

For the first nine months of 2001, total loans outstanding increased by $34,529, or 4.0%, from year-end 2000. The aircraft lending area experienced growth of $5,709, or 4.1%, from 2000 year-end levels. Growth remained slower for the first nine months of 2001 due to current economic conditions and lower interest rates causing an increase in refinances. Growth should remain flat for the remainder of the year due to the slower economy.

Commercial loan balances increased by $4,214, or 3.8%, from year-end 2000 levels.

14

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

The increase was attributed to increased line of credit usage. Commercial real estate balances increased by $19,281, or 15.8%, from year-end balances due to continued growth in permanent financing opportunities.

Residential real estate balances decreased by $14,313, or 5.5%, for the nine months ended September 30, 2001. The decrease was the result of lower market rates increasing the volume of payoffs and refinancings in the existing portfolio.

Consumer loans increased by $19,638, or 8.2%, from year-end 2000, with the majority of the increase, $15,508, within the home equity product, which is being promoted with lower introductory rates. Direct and indirect installment lending increased by $4,088, or 2.6%, from year-end 2000 with the Bank continuing to focus on indirect automobile lending and not on longer-term fixed rate loans such as boat and recreational vehicles. Loan activity has been concentrated in high-end used automobiles, as leasing and manufacturers’ financing alternatives have dominated new automobile financing.

OTHER ASSETS

Accrued interest receivable and other assets increased by $18,405, or 124.7%, from December 31, 2000. The increase was due to the Bank purchase of $20 million of bank owned life insurance (BOLI).

LIABILITIES

Total liabilities increased by $48,237, or 4.9%, from year-end 2000 levels. Deposits, the main component of liabilities, decreased by $3,707, or 0.4%, from December 31, 2000. The following table shows deposit composition and deposit mix between the periods ended September 30, 2001 and December 31, 2000:

	September 30, 2001		December 31, 2000
Non-interest bearing deposits	$	97,634	$	108,351
Interest bearing checking		80,840		79,894
Savings		267,392		267,486
Certificates of deposit and other time		378,068		371,910
Total deposits	$	823,934	$	827,641

Non-interest bearing deposits at September 30, 2001 were $10,717, or 9.9% below 2000 year-end levels and interest bearing checking increased by $946, or 1.2%, from year-end 2000. The reduction in non-interest bearing deposits was partially regarded as a seasonal trend, the result of artificially high year-end balances of commercial customers. Certificates of deposit generated through the branch network increased by $6,248, or 1.8%, during the first nine months of 2001. Short-term borrowings, which are comprised of federal funds purchased and repurchase agreements, declined by $1,041 from December 31, 2000 due to a reduction in federal funds purchased. Other borrowings increased by $50,450, or 82.5%, primarily due to new Federal Home Loan Bank advances that were obtained to take advantage of lower interest rates.

CAPITAL RESOURCES

Total shareholders’ equity at September 30, 2001 was $83,594, an increase of $7,666, or 10.1%, from year-end 2000. The increase in shareholders’ equity was the result of year-to-date net income of $11,562, with this increase being partially offset by a reduction of $3,927 for cash dividends paid.

UNB Corp.’s capital ratios at September 30, 2001 and December 31, 2000 along with the ratios required for the Corporation to be adequately and well capitalized under regulatory guidelines were as follows:

15

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

							Minimum regula-
							tory requirements
	September 30,			December 31,			for adequately/
	2001			2000			well capitalized
Total capital to risk weighted assets		10.12	%		9.99	%		8.0%/10.0%
Tier 1 capital to risk weighted assets		8.88	%		8.64	%		4.0%/ 6.0%
Tier 1 capital to average assets		7.39	%		6.97	%		4.0%/ 5.0%

All ratios as of September 30, 2001 exceeded the requirements for a well capitalized financial institution. At December 31, 2000 all ratios exceeded the requirements for an adequately capitalized financial institution. The ratio of equity-to-assets at September 30, 2001 was 7.53% versus 7.20% at December 31, 2000.

For the first nine months of 2001 and 2000, cash dividends were $0.38 and $0.36 per share, respectively. Cash dividends paid for the period ended September 30, 2001 represents 34.0% of year-to-date net income.

RESULTS OF OPERATIONS

UNB Corp.’s third quarter 2001 net income was $3,558, or $0.33 per diluted share, compared with $3,607, or $0.34 per diluted share, for the third quarter of 2000. Excluding securities losses and merger related expenses, third quarter 2001 net income was $3,803, or $0.36 per diluted share. On an operating basis, this represents an increase in earnings of 5.4% and an increase in diluted earnings per share of 5.9%. Year-to-date net income of $11,562 was $519, or 4.7%, higher than the same period in 2000. Excluding securities gains in both years and merger related expenses in 2001, September 30, 2001 year-to-date net income was $10,949, or $1.03 per diluted share, compared with $10,388, or $0.98 per diluted share, for the same period in 2000. This represents an increase in earnings of 5.4% and an increase in diluted earnings per share of 5.1%. For the first nine months of 2001 and 2000 pre-tax gains of $1,182 and $1,008, respectively, were recognized on the sale of equity securities from the Parent Company portfolio.

Adjusted for the impact of securities losses and merger related expenses in 2001, return on average assets and return on average equity for the third quarter of 2001 were 1.38% and 18.09%, respectively, compared with 1.41% and 19.82%, respectively, for the same period in 2000. On a year-to-date basis, return on average assets and return on average equity for 2001 were 1.44% and 19.20%, respectively, compared with 1.48% and 20.68%, respectively, for the same period in 2000. Adjusted for the impact of securities gains in both years and merger related expenses in 2001, return on average assets was 1.37% for 2001 versus 1.39% for 2000. Return on average equity was 18.18% for 2001 compared to 19.45% for 2000.

NET INTEREST INCOME

Net interest income, the Corporation’s most significant source of earnings, is the difference between interest income and related loan fees earned on interest earning assets and interest expense incurred on interest bearing liabilities. For this discussion, net interest income is presented on a fully-taxable equivalent (FTE) basis. Interest on tax exempt securities and loans is restated on a fully taxable basis using the tax rate of 35% adjusted for non-deductible interest expense incurred in the acquisition of tax-free assets.

For the third quarter and year-to-date periods of 2001, net interest income

16

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

increased by $1,211 and $3,209, or 12.7% and 11.4%, respectively, over the same periods in 2000. For the third quarter of 2001, total interest income decreased by 1.9%, while interest expense decreased by 14.4% from the same period in 2000. On a year-to-date basis, total interest income increased by 3.7% and interest expense decreased by 3.2% from the same period in 2000. The increase in net interest income was the result of growth in average interest earning assets of 6.1% from September 30, 2000 to September 30, 2001 and the result of the 350 basis point reduction in rates that occurred in 2001.

NET INTEREST MARGIN

The net interest margin is net interest income (FTE) divided by average interest earning assets. For the nine months ended September 30, 2001, the net interest margin was 4.14%, versus 3.94% for the same period in 2000, an increase of 20 basis points. Yields on interest earning assets decreased by 18 basis points, while the cost of interest bearing liabilities decreased by 49 basis points. Asset yields were impacted by a decrease in yields in the commercial and aircraft portfolios. The cost of interest bearing liabilities were favorably impacted by the 350 basis point reduction in rates that occurred in 2001. The cost of the Money Market Access product, which is tied to the three month Treasury rate, declined 189 basis points and the cost of FHLB advances declined by 55 basis points. This was partially offset by an increase in the cost of certificate of deposits due to the rate increases that occurred throughout 2000.

OTHER INCOME

Other income for the third quarter of 2001 was $3,837, an increase of 34.9% from the third quarter of 2000. Excluding securities losses taken in the third quarter of 2001, other income in the third quarter of 2001 increased from the same period in 2000 by $1,131, or 39.8%. On a year-to-date basis, other income as of September 30, 2001 was $11,740, an increase of 20.5% from the same period in 2000. Excluding securities gains of $1,182 and $1,008 taken in 2001 and 2000, respectively, other income increased by $1,824, or 20.9%, from the same period in 2000.

Service charges on deposits increased by $73, or 10.4%, during the third quarter of 2001 and by $210, or 10.3%, during the nine month period ended September 30, 2001 from the same periods in 2000. The increase was mainly attributed to an increase in service charges that was effective February 1, 2001. On a year-to-date basis, Trust Department earnings were $3,915, a decrease of $247, or 5.9%, from the same period in 2000, due to the decline in the stock market since fees are tied to asset value. Gains on loans sold in the secondary market increased by $179, or 232.5%, during the third quarter of 2001 and by $594, or 371.3%, during the nine month period ended September 30, 2001 from the same periods in 2000. The increase was due to declining interest rates increasing the volume of fixed rate mortgage loans originated and sold in 2001 compared to 2000. For the third quarter 2001, other operating income increased by $1,024, or 148.6%, from the same period in 2000. On a year-to-date basis, other operating income increased by $1,267, or 53.4%, from the same period in 2000. Within other operating income, a gain of $490 was recognized on the sale of other real estate owned that had been acquired through foreclosure. Also, within other operating income, income from bank owned life insurance increased by $537, letter of credit commitment fees increased by $206, and financial planning fees increased by $113, while loan brokerage income on non-conforming mortgage and aircraft loans declined by $222. The increase in letter of credit commitment fees was mainly attributed to a fee received on a purchased participation for a commercial letter of credit. The decline in brokerage income was mainly due to loans that were previously considered non-conforming and which generated the brokerage income are now being sold to FNMA and FHLMC as conforming which is reflected as gain on sale of loans and due to a decline in aircraft loans sold.

17

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

OTHER EXPENSES

Other expenses for the third quarter were $8,578, an increase of $1,889, or 28.2%, from the same period in 2000. On a year-to-date basis, other expenses were $24,007, an increase of $3,430, or 16.7%, from the same period in 2000. Salary, wages and benefits increased by $1,122, or 36.0%, during the third quarter of 2001 and by $2,295, or 23.6%, during the nine month period ended September 30, 2001 from the same periods in 2000. The increase was due to annual merit increases, increased pension and incentive compensation expense accruals and increased expenses related to recognition of previously deferred loan origination costs. The increase in deferred FASB91 costs is due to lower interest rates increasing payoffs within the aircraft portfolio.

Occupancy expense for the nine months ended September 30, 2001 increased by $64, or 4.9% from the same period in 2000. The increase is mainly due to an increase in rent expense from the opening of two new branches.

Derivative instruments and hedging activity expense of $427 was recognized for the nine month period ended September 30, 2001, for the change in the fair value of the swap since adoption of FAS 133 on January 1, 2001.

Other operating expenses for the nine month period ended September 30, 2001 was $7,335, an increase of $744, or 11.3%, from the same period in 2000. Excluding merger related expenses of $156, other operating expenses increased by $588, or 8.9%, from the same period in 2000. During the third quarter of 2001, $240 was accrued for impairment of assets based on the decision to consolidate three in-store branches in late 2001 and $200 was contributed to the Charitable Trust for future obligations arising from donations. Other categories with increases included investor relations expense, legal and consulting expense. Investor relations expense reflects an increase resulting from the Corporation promoting the awareness of its stock. Legal and consulting expenses increased mainly due to the non-recurring expenses related to the establishment of United Portfolio Management, Inc. and the bank owned life insurance policies. These increases were partially offset by reductions in Ohio Franchise tax expense and marketing expenses. Marketing expenses were lower in 2001 since there were increased expenses in 2000 due to special promotions for the grand opening of two new branches.

The Bank resolved the legal proceedings and disposed of the environmentally contaminated seven and one half acre parcel of real estate acquired through foreclosure. The property is located in the northwest quadrant of Stark County. On July 31, 2001, the property was sold resulting in a gain of $490 that was recognized in the third quarter 2001.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan loss is maintained at levels considered sufficient to absorb probable losses in the loan portfolio. The amount of the provision for loan losses charged to expense is the amount necessary, in the opinion of management, to maintain the balance in the allowance for loan losses at an adequate level. Management reviews the amount of provision for loan losses charged to earnings based on its evaluation of the loan portfolio’s credit quality, the adequacy of the allowance for loan losses under current economic conditions and current and anticipated loan growth. Due to improved underwriting, early detection systems and increased collection efforts, the ratio of net charge-offs to average loans outstanding for September 30, 2001 remained at a very low level of 0.14%.

The provision for loan losses for the first nine months of 2001 was $1,563, an increase of $1,065 from the same period in 2000. The increase in the provision

18

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

for loan losses was due to an increase in net charge-offs of 16.1% from September 30, 2000 to September 30, 2001. In addition, management remains concerned due to the expectations of a slower economy and of the national trends indicating increased consumer bankruptcies and foreclosures. At September 30, 2001, the allowance for loan losses as a percentage of loans outstanding was 1.45% compared to 1.46% at December 31, 2000.

Net charge-offs for the period ending September 30, 2001 were 0.14% compared to 0.13% for the same period in 2000. A detailed analysis of the allowance for loan losses for the nine months ended September 30, 2001 and September 30, 2000, follows:

				2001			2000
Balance at January 1,				$	12,760		$	13,174
	Charge-Offs (Domestic):
		Commercial, Financial, Agricultural			366			466
		Real Estate — Commercial			—			—
		Real Estate — Residential			20			8
		Aircraft			—			—
		Consumer Loans			1,629			1,215
			Total Charge-Offs		2,015			1,689
	Recoveries (Domestic):
		Commercial, Financial, Agricultural			85			126
		Real Estate — Commercial			—			—
		Real Estate — Residential			1			—
		Aircraft			—			—
		Consumer Loans			706			510
			Total Recoveries		792			636
Net Charge-Offs					1,223			1,053
Provision for loan losses					1,563			498
Balance at September 30,					$13,100			$12,619
Ratio of year-to-date net charge-offs to year-to-date average loans outstanding					0.14	%		0.13	%
Allowance as a percentage of total loans					1.45	%		1.47	%

ASSET QUALITY

At September 30, 2001, impaired loans were $5,042, an increase of $1,183 from December 31, 2000. The increase in impaired loans was mainly due to the downgrading of an aircraft borrower, which represents 53.5% of the total impaired loans. The amount of allowance allocated to impaired loans increased from $909 at December 31, 2000 to $1,264 at September 30, 2001. Nonperforming assets, which include non-accrual loans, accruing loans past due 90 days or more, restructured loans and other assets owned were $4,969 at September 30, 2001 compared to $3,538 at December 31, 2000, an increase of $1,431. The following table presents the amounts of nonperforming assets and pertinent ratios as of the dates indicated:

19

UNB CORP.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations (continued)

	September 30,			December 31,			September 30,
	2001			2000			2000
Non-accrual loans	$	4,756		$	2,945		$	1,419
Accruing loans past due 90 days or more		173			196			144
Restructured loans		—			3			8
Other assets owned		40			394			360
Total nonperforming assets	$	4,969		$	3,538		$	1,931
Total nonperforming assets as a percentage of total loans and other assets owned		0.55	%		0.41	%		0.22	%

The ratio of nonperforming loans to total loans outstanding at September 30, 2001 of 0.55% is a fourteen basis point increase from year-end 2000. This ratio compares favorably to the ratio for the Corporation’s peers, all bank holding companies with consolidated assets between $1 billion and $3 billion, which stands at 0.72% at June 30, 2001, the most current data available.

LIQUIDITY

Management ensures the liquidity position of the Corporation is adequate to meet the credit needs and cash demands of its borrowers and depositors in a timely and cost-effective manner. Principal sources of liquidity for the Corporation are cash and cash equivalents, federal funds sold and the cash flows provided by maturities and amortizations in the loan and securities portfolios. Total cash, federal funds sold, interest bearing deposits with banks and securities available for sale of $163,926 represented 14.8% of total assets at September 30, 2001. Of the securities available for sale, $20,387 were held in U.S. Treasury and Agency securities, 40.6% of which mature within one year. Approximately $112,368 of total Corporate securities were pledged as collateral to secure public fund deposits, sweep or term repurchase agreements or other obligations. The Corporation’s ability to raise funds in the market place is provided by the Bank’s branch network, in addition to the availability of Federal Home Loan Bank (FHLB) advance borrowings, brokered deposits, Federal funds purchased and securities sold under agreement to repurchase.

The liquidity needs of the Parent Company, primarily cash dividends, treasury stock purchases and vendor and tax payments, are met through cash, securities in the Parent Company, dividends from the Bank and borrowings from a third party financial institution.

20

UNB CORP.

CONSOLIDATED AVERAGE BALANCE SHEETS

					3rd Qtr			3rd Qtr			3rd Qtr YTD			3rd Qtr YTD
(In thousands)					2001			2000			2001			2000
ASSETS
Cash and cash equivalents					$	28,216		$	25,375		$	28,265		$	26,888
Federal funds sold						2,738			8,782			2,698			11,144
Interest bearing deposits with banks						292			2,145			836			754
Securities, net						31,577			41,303			39,166			43,601
Mortgage-backed securities						96,131			79,324			86,705			80,770
Loans originated and held for sale						3,432			1,664			3,577			1,033
Loans:
	Commercial, financial and agricultural					112,901			113,136			112,335			110,027
	Aircraft					141,674			132,867			142,046			129,172
	Commercial real estate					138,415			109,224			129,980			104,940
	Residential real estate					245,432			252,752			251,272			244,594
	Consumer					256,441			236,634			248,049			232,020
		Total loans				894,863			844,613			883,682			820,753
		Less allowance for loan losses				(12,965	)		(12,764	)		(12,932	)		10,897
			Net loans			881,898			831,849			870,750			807,857
Premises and equipment, net						10,955			11,055			10,994			10,897
Intangible assets						2,290			2,752			2,268			2,976
Accrued interest receivable and other assets						32,987			12,224			25,314			11,888
			Total Assets		$	1,090,516		$	1,016,473		$	1,070,573		$	997,808
LIABILITIES
Deposits:
		Noninterest bearing deposits			$	98,771		$	96,566		$	99,375		$	95,935
		Interest bearing deposits				711,963			719,596			715,022			703,033
			Total deposits			810,734			816,162			814,397			798,968
Short-term borrowings						75,536			68,598			73,091			68,825
Other borrowings						111,910			52,047			94,143			51,284
Accrued taxes, expenses and other liabilities						8,938			7,466			8,439			7,404
			Total Liabilities			1,007,118			944,273			990,070			926,481
SHAREHOLDERS’ EQUITY
Common stock						11,646			11,646			11,646			11,646
Paid-in capital						28,967			29,002			28,945			29,006
Retained earnings						63,826			53,630			61,366			51,066
Treasury stock						(21,510	)		(21,771	)		(21,750	)		(20,462	)
Accumulated other comprehensive income						469			(307	)		296			71
			Total Shareholders’ Equity			83,398			72,200			80,503			71,327
				Total Liabilities and Shareholders’ Equity	$	1,090,516		$	1,016,473		$	1,070,573		$	997,808

See Notes to the Consolidated Financial Statements

21

UNB CORP.

Quantitative and Qualitative Disclosures About Market Risk

Item 3. Quantitative and Qualitative Disclosures About Market Risk

MARKET RISK

In the normal course of business, the Corporation is exposed to interest rate risk caused by the differences in cash flows and repricing characteristics that occur in various assets and liabilities as a result of changes in interest rates. The asset and liability management process is designed to measure and manage that risk to maintain consistent levels of net interest income and net present value of equity under any interest rate scenario.

The Corporation uses a dynamic computer model to generate earnings simulations, duration and net present value forecasts and gap analyses, each of which measures interest rate risk from a different perspective. The model incorporates a large number of assumptions, including the absolute level of future interest rates, the slope of the yield curve, various spread relationships, prepayment speeds, repricing opportunities, cash flow characteristics of instruments without contractual maturity dates and changes in the volumes of multiple loan, investment and deposit categories. Management believes that individually and in the aggregate these assumptions are reasonable, but the complexity of the simulation modeling process results in a sophisticated estimate, not a precise calculation of exposure.

One of the most significant assumptions is the assignment of deposit balances without a stated maturity date to specific time frames. Since these deposits are subject to withdrawal on demand, and have rates that can be changed at any time, they could be considered immediately repriceable and assigned to the shortest maturity, resulting in a significant level of liability sensitivity. However, actual practice indicates that balances are withdrawn and replaced over a much longer time frame, and rates are modified less frequently and in smaller increments than changes which occur in financial market rates. The Corporation uses a statistical analysis of historical deposit behavior to derive appropriate distributions of deposit balances over the simulation time horizon.

The model then applies a predetermined immediate parallel increase or decrease in the level of interest rates to forecast the impact on both net interest income and capital one year forward. While this methodology provides a comprehensive appraisal of interest rate risk, it is not necessarily indicative of actual or expected financial performance. Changes in interest rates that affect the entire yield curve equally at a single point in time are not typical. The residential mortgage prepayment assumptions are based on industry medians and could differ from the Corporation’s actual results due to non-financial prepayment incentives and other local factors. The behavior of depositors is based on an analysis of historical changes in balances and might not fully reflect current attitudes toward other investment alternatives. Moreover, the model does not include any interim changes in strategy the Corporation might instate in response to shifts in interest rates.

At September 30, 2001, assuming an immediate, parallel 200 basis point shift in market yields, the Corporation’s net interest income for the next twelve months was calculated to increase by approximately 11.45% if rates fell and decrease by 11.97% if rates rose. The net present value of equity is defined as the difference between the present value of the Corporation’s assets and liabilities. In general, the present value of fixed rate financial instruments declines as market rate increase and increases as rates fall. Using the yield scenario defined above, the net present value of equity was forecasted to decline by 19.98% in a rising rate environment and to rise by 25.96% in a falling rate scenario. Both the forecasted change in net interest income and the present value of equity increased significantly from the previous quarter as the overall level

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UNB CORP.

Quantitative and Qualitative Disclosures About Market Risk (continued)

of rates has decreased. In several categories of liabilities, a rate decrease of 200 basis points resulted in a discount rate of 0% or less, so artificial floors of .1% were established. The duration of total assets was 61 months, compared to a duration of total liabilities of 30 months, indicating that liabilities will both reprice faster than assets and change in value by a smaller amount than the assets over a similar time frame.

Interest rate risk can be managed by using a variety of techniques, including selling existing assets or repaying liabilities, pricing loans and deposits to attract preferred maturities and developing alternative sources of funding or structuring new products to hedge existing exposures. In addition to these balance sheet strategies, the Corporation can also use derivative financial instruments such as interest rate swaps, caps, and floors to minimize the potential impact of adverse changes in interest rates. During the third quarter, the Corporation renewed $15,000 in advances from the Federal Home Loan Bank, and extended the maturity from four months to an average of 54 months, and issued $10,000 in national market certificates of deposits with a maturity of three years. During the fourth quarter, the Corporation will continue to lengthen the duration of its liabilities to minimize the effect of rising rates on future net interest income.

The Corporation has a pay-fixed amortizing interest rate swap executed in 1998 as a hedge against fixed rate mortgages held in the portfolio. The net cash flows and market value of the swap move inversely with those of the fixed rate loans in the portfolio, which reduces the Corporation’s exposure to changing interest rates. If rates rise, the Corporation receives net cash flows from the swap which compensates for the opportunity loss of holding an asset with a below market yield. Alternatively, the increase in the market value of the swaps would balance the loss on the mortgage loans if the loans were sold. If rates fall, the net cash flows given up are offset by the increased value of assets with an above market yield. The gain that would be realized on the sale of the loans would counteract the loss on the termination of the interest rate swap. At the end of September, the swap had a net loss of $448 on outstanding notional principal of $11,043.

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UNB CORP.

Part II OTHER INFORMATION

Item 1 — Legal Proceedings

The nature of UNB Corp.’s business results in a certain amount of litigation. Accordingly, the Corporation and its subsidiaries are subject to various pending and threatened lawsuits in which claims for monetary damages are asserted in the ordinary course of business. While any litigation involves an element of uncertainty, in the opinion of management, liabilities, if any, arising from such litigation or threat thereof will not have a material effect on the Corporation.

Item 2 — Changes in Securities and Use of Proceeds

Not applicable.

Item 3 — Defaults Upon Senior Securities

Not applicable.

Item 4 — Submission of Matters to a Vote of Security Holders

During the quarter ended September 30, 2001, there were no matters submitted to a vote of shareholders.

Item 5 — Other Information

Not applicable.

Item 6 — Exhibits and Reports on Form 8-K

A. Exhibit
Number		Exhibit
	10.t	Schedule of Certain Officers who are parties to the United National Bank & Trust Co. Salary Continuation Agreement entered into as of May 1, 2001– incorporated herein by reference to Exhibit 10.5 to Form S-4 filed with the Securities and Exchange Commission on October 15, 2001
	10.u	United National Bank & Trust Co. Salary Continuation Agreement Schedule A for Roger L. Mann entered into as of May 1, 2001 – incorporated herein by reference to Exhibit  10.6 to Form S-4 filed with the Securities and Exchange Commission on October 15, 2001
	10.v	United National Bank & Trust Co. Salary Continuation Agreement Schedule A for James J. Pennetti entered into as of May 1, 2001– incorporated herein by reference to Exhibit 10.7 to Form S-4 filed with the Securities and Exchange Commission on October 15, 2001
	10.w	United National Bank & Trust Co. Salary Continuation Agreement Schedule A for Leo E. Doyle entered into as of May 1, 2001– incorporated herein by reference to Exhibit  10.8 to Form S-4 filed with the Securities and Exchange Commission on October 15, 2001
	10.x	United National Bank & Trust Co. Salary Continuation Agreement Schedule A for Scott E. Dodds entered into as of May 1, 2001– incorporated herein by reference to Exhibit  10.9 to Form S-4 filed with the Securities and Exchange Commission on October 15, 2001

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UNB CORP.

Part II OTHER INFORMATION (continued)

A. Exhibit
Number		Exhibit
	10.y	Schedule of Certain Officers who are parties to the United National Bank & Trust Co. Split Dollar Agreement for Salary Continuation Agreement entered into as of May 1, 2001
	10.z	Key Man Split Dollar Agreement with Roger L. Mann, Chief Executive Officer, dated July 18, 2001
	10.aa	United National Bank & Trust Co. Group Term Carve Out Plan, dated as of May 1, 2001

B.  Reports — Form 8-K – During the third quarter of 2001 the Registrant filed one report on Form 8-K. This report, filed September 5, 2001, disclosed the transaction in which UNB Corp. and BancFirst Ohio Corp., entered into an Agreement of Merger and Plan of Reorganization, pursuant to which BancFirst will be merged with and into UNB Corp. as the surviving corporation. Additionally, BancFirst’s banking subsidiary, The First National Bank of Zanesville, will be merged with and into UNB Corp.’s banking subsidiary, The United National Bank & Trust Co.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	UNB CORP. (Registrant)
Date November 1, 2001	/s/ James J. Pennetti
	James J. Pennetti (Duly authorized officer and Chief Financial Officer, UNB Corp.)

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