UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2002
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-13270
Unizan Financial Corp.
(Exact name of registrant as specified in its charter)
| Ohio | 34-1442295 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
220 Market Avenue South, Canton, Ohio 44702
(Address of principal executive offices)
(Zip Code)
(330) 438-1118
(Registrant’s telephone number, including area code)
UNB Corp.
(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.
Yes X No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
| Class | Outstanding as of April 30, 2002 | |||
| Common Stock, $1.00 Stated Value | 22,043,533 | |||
| Part 1. Financial Information | ||||||||
| ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||||||
| PART II — OTHER INFORMATION | ||||||||
INDEX
UNIZAN FINANCIAL CORP.
| PART I. FINANCIAL INFORMATION | PAGE NO. | |||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 1 | |||
| PART II. OTHER INFORMATION | ||||
| Signatures | 3 | |||
UNIZAN FINANCIAL CORP.
ITEM 3:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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. Although the Corporation prefers to use a statistical analysis of historical deposit behavior to derive appropriate distributions of deposit balances over the simulation time horizon, in the current data non-maturity deposits are assigned a one-month maturity. The combined deposits of the merged company will be reanalyzed to provide a more accurate depiction of interest rate risk.
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 March 31, 2002, 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 decrease by approximately 2.56% if rates fell and decrease by 4.31% if rates rose. Since interest rates on deposit products are very low, the Corporation would not realize any significant future benefit from lower rates, but could see a continuing decrease in earning asset rates. 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 25.17% in a rising rate environment and to rise by 24.79% in a falling rate scenario. The duration of total assets was 33.6 months, compared to duration of total liabilities of 9 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 second quarter, the Corporation will continue to lengthen the duration of its liabilities by extending the term of maturing borrowings to minimize the effect of rising rates on future net interest income.
The Corporation has four interest rate swaps on which it pays a fixed rate and receives a variable rate. One swap was executed as a hedge against fixed rate mortgages, which are held in the Corporation’s portfolio. The net cash flows and market value of the swaps move inversely with those of the fixed rate loans in the portfolio, which reduces the
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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 swap 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. Three other swaps were executed to convert variable rate borrowings to a fixed rate, which reduces the risk of increased interest expense in a rising rate environment. The Corporation also maintains a portfolio of options on the S & P 500 to offset five-year certificate of deposit liabilities that are contractually linked to the index. At the end of March, the derivatives portfolio had a net loss of $1,816 on outstanding notional principal of $62,983.
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PART II — OTHER INFORMATION
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.
| Unizan Financial Corp. (Registrant) | ||||
| Date | June 7, 2002 | (Signed) /s/ Roger L. Mann Roger L. Mann President and Chief Executive Officer | ||
| Date | June 7, 2002 | (Signed) /s/ James J. Pennetti James J. Pennetti Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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