1
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, 1996
Commission file number 0-13270
UNB CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1442295
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
220 Market Avenue, South
Canton, Ohio 44702
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 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, 1996
5,772,500 Common Shares
2
UNB CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10Q as referenced below:
Page
Number(s)
---------
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Condensed Consolidated Statements
of Changes in Shareholders' Equity 3
Consolidated Statements
of Cash Flows 4
Notes to the Consolidated Financial Statements 5-11
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-23
PART II - OTHER INFORMATION
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 24
3
U N B C O R P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands) SEPTEMBER 30, December 31,
1996 1995
--------- ---------
ASSETS
Cash and cash equivalents $ 33,947 $ 31,735
Federal funds sold 11,750 4,300
Interest bearing deposits with banks 8,274 515
Securities, net (Fair value:
$71,392 and $65,116, respectively)(Note 2) 71,355 65,129
Mortgage-backed securities (Fair value:
$44,578 and $63,399, respectively)(Note 2) 44,433 63,087
Loans:
Total loans (Notes 3 and 6) 606,605 518,730
Allowance for loan losses (Note 4) (8,286) (7,242)
- ----------------------------------------------------------------------------------------------------------
Net loans 598,319 511,488
Premises and equipment, net 9,362 8,811
Intangible assets 6,609 7,376
Accrued interest receivable and other assets 9,100 7,203
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 793,149 $ 699,644
==========================================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $ 75,236 $ 73,708
Interest bearing deposits 509,031 473,479
- ----------------------------------------------------------------------------------------------------------
Total deposits 584,267 547,187
Fed funds purchased and short-term borrowings 63,503 49,659
Federal Home Loan Bank advances (Note 6) 68,636 31,360
Accrued taxes, expenses and other liabilities 7,185 6,111
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 723,591 634,317
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 15,000,000 shares authorized;
5,772,500 and 2,873,977 issued and outstanding, respectively) 5,772 2,874
Paid-in capital 32,137 31,603
Retained earnings 30,700 30,005
Unrealized gain on securities available for sale, net of tax 949 845
- ----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 69,558 65,327
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 793,149 $ 699,644
==========================================================================================================
See Notes to the Consolidated Financial Statements
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4
U N B C O R P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 13,026 $ 10,799 $ 37,547 $ 29,891
Tax exempt 56 70 174 207
Interest and dividends on investments & mortgage-backed securities:
Taxable 1,723 1,693 5,364 5,661
Tax exempt 13 36 44 123
Interest on bank deposits and federal funds sold 172 150 435 468
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income 14,990 12,748 43,564 36,350
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 5,479 4,690 15,801 12,557
Interest on short-term borrowings 686 517 2,046 1,626
Interest on FHLB advances 910 538 2,217 1,500
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,075 5,745 20,064 15,683
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 7,915 7,003 23,500 20,667
PROVISION FOR LOAN LOSSES (NOTE 4) 920 480 2,350 1,220
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,995 6,523 21,150 19,447
OTHER INCOME:
Service charges on deposits 599 596 1,770 1,795
Trust Department income 659 582 1,971 1,805
Other operating income 219 145 607 524
Securities gains, net 0 1 1 7
Gains on loans originated for resale and sold 0 16 0 67
- ----------------------------------------------------------------------------------------------------------------------------
Total other income 1,477 1,340 4,349 4,198
- ----------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 2,577 2,581 8,089 7,582
Occupancy 305 309 862 913
Equipment 711 489 1,856 1,570
Other operating expense 2,190 1,527 5,649 5,526
- ----------------------------------------------------------------------------------------------------------------------------
Total other expenses 5,783 4,906 16,456 15,591
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,689 2,957 9,043 8,054
PROVISION FOR INCOME TAXES 935 993 3,077 2,697
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,754 $ 1,964 $ 5,966 $ 5,357
============================================================================================================================
EARNINGS PER SHARE (NOTE 1):
Primary $ 0.30 $ 0.34 $ 1.01 $ 0.91
Fully diluted $ 0.30 $ 0.34 $ 1.01 $ 0.91
============================================================================================================================
DIVIDENDS PER SHARE (NOTE 1) $ 0.14 $ 0.13 $ 0.42 $ 0.37
============================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Primary 5,919,728 5,861,019 5,901,524 5,856,328
Fully diluted 5,921,850 5,862,368 5,916,753 5,860,192
============================================================================================================================
NOTE: Per share data is based on the average number of shares outstanding
adjusted for all stock dividends and splits.
See Notes to the Consolidated Financial Statements
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5
U N B CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
NINE MONTHS ENDED
9/30/96 9/30/95
-------- --------
Balance at beginning of period $ 65,327 $ 58,640
Net Income 5,966 5,357
Shares issued through dividend reinvestment 527 0
Stock options exercised 24 28
Cash dividends $0.42 and $0.37 per share, respectively* (2,390) (2,125)
Change in market value on investment securities
available for sale, net of deferred taxes 104 1,681
-------- --------
Balance at end of period $ 69,558 $ 63,581
======== ========
*Dividends per share data adjusted for April, 1996 100% stock dividend.
See Notes to the Consolidated Financial Statements
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6
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,966 $ 5,357
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 568 580
Provision for loan losses 2,350 1,220
Net securities gains (1) (7)
Net accretion on securities (105) (401)
Amortization of intangible assets 767 833
Loans originated for resale 0 (4,505)
Proceeds from sale of loan originations 0 4,716
Changes in:
Interest receivable (354) (230)
Interest payable (303) 405
Other assets and liabilities, net (217) (535)
Deferred income (3) (4)
- ---------------------------------------------------------------------------------------------------------------
Net cash from operating activities 8,668 7,429
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks (7,759) (75)
Net increase in funds sold (7,450) (9,725)
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 2,001 3,124
Proceeds from maturities of securities held to maturity 17,329 28,178
Proceeds from maturities of securities available for sale 18,970 24,134
Purchases of securities held to maturity (16,958) (27,698)
Purchases of securities available for sale (30,722) (8,415)
Principal payments received on mortgage-backed securities held to maturity 7,555 5,849
Principal payments received on mortgage-backed securities available for sale 14,517 2,183
Net increase in loans made to customers (87,541) (84,050)
Loans purchased (1,761) (3,296)
Purchases of premises and equipment, net (1,119) (773)
Principal payments received under leases 121 103
- ---------------------------------------------------------------------------------------------------------------
Net cash from investing activities (92,817) (70,461)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 37,080 36,866
Cash dividends paid, net of shares issued through dividend reinvestment (1,863) (2,125)
Proceeds from issuance of stock 24 28
Net increase in short-term borrowings 13,844 10,187
Proceeds from FHLB advances 47,000 25,000
Repayments of FHLB advances (9,724) (10,065)
- ---------------------------------------------------------------------------------------------------------------
Net cash from financing activities 86,361 59,891
- ---------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,212 (3,141)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,735 30,211
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 33,947 $ 27,070
===============================================================================================================
See the Notes to the Consolidated Financial Statements
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UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of UNB
Corp. and its wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and 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, 1996, 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
generally accepted accounting principles that might otherwise be necessary in
the circumstances. The Annual Report for UNB Corp. for the year ended December
31, 1995, 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 nine months ended September 30, 1996, and
September 30, 1995, UNB Corp. paid interest in the amount of $20.4 million and
$15.3 million, respectively. For the same nine month period, federal income
taxes paid totaled $3,990,000 and $3,090,000, respectively.
The Corporation accounts for its investment portfolio under the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115),
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No.
115 requires the Corporation to classify debt and equity securities as held to
maturity, trading or available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities classified as
available for sale are those that 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 gains and losses included as a separate component
of shareholders' equity, net of tax. Gains or losses on dispositions are based
on net proceeds and the adjusted carrying amount of securities sold, using the
specific identification method.
On January 1, 1995, the Corporation adopted Financial Accounting Standards
Board Statements No. 114, "Accounting by Creditors for Impairment of a Loan",
and No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." SFAS No. 114 specifies that the allowances for
loan losses on impaired loans be measured at the present value of expected
future cash flows, discounted at the loan's original effective interest rate
or, as a practical expedient, at the loan's observable market price or the fair
value of the collateral, if the loan is collateral dependent. SFAS No. 118
allows a creditor to use existing methods for income
5
8
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
recognition on an impaired loan.
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. Such loans include residential first
mortgage loans secured by one-to-four family residences, residential
construction loans and consumer automobile, boat, RV, home equity and credit
card loans with balances less than $300,000. In addition, loans held for sale
and leases are excluded from consideration as impaired.
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.
SFAS No. 118 allows a creditor to use existing methods for income recognition
on an impaired loan. All impaired loans for purposes of SFAS No. 114 are
placed on non-accrual status. However, all non-accrual loans are not
considered impaired because non-accrual loans which have been brought current
are included on non-accrual status for six months and would not be considered
impaired.
Under this standard, 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.
Primary and fully diluted earnings per share at September 30, 1996 and 1995 are
computed based on the weighted average shares outstanding during the period.
Primary earnings per common share has been computed 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. Fully diluted earnings per common share represents the additional
dilution related to the stock options due to the use of the market price as of
the period end.
The Corporation declared a 100% stock dividend to shareholders of record on
April 16, 1996, payable on April 30, 1996. This was recorded by a transfer
from retained earnings to common stock at stated value. All earnings per share
and cash dividends per share have been adjusted for this stock dividend.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The
standard provides that, following a transfer of financial assets, an entity is
to recognize the financial and servicing assets it controls and the liabilities
it has incurred, derecognize financial assets when control has been surrendered
and derecognize liabilities when extinguished. SFAS NO. 125 is effective for
transactions occurring after
6
9
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
December 31, 1996. Management has not yet determined the impact of adoption of
SFAS No. 125 on the Corporation's consolidated financial statements.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of the investment and
mortgage-backed securities, available for sale and held to maturity, as
presented on the consolidated balance sheet at September 30, 1996, and December
31, 1995, are as follows:
September 30, 1996
----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
--------- ---------- ---------- --------
Securities available for sale:
U.S. Treasury securities $ 25,080 $ 33 ($55) $ 25,058
Obligations of U.S. government
agencies and corporations 32,250 29 (157) 32,122
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 356 4 -- 360
Obligations of state and political
subdivision 1,251 14 -- 1,265
Corporate bonds and other debt
securities 822 24 -- 846
-------- ------ ------- --------
Total debt securities 59,759 104 (212) 59,651
Equity securities available for sale 10,011 1,737 (2) 11,746
-------- ------ ------- --------
Total investment securities 69,770 1,841 (214) 71,397
Mortgage-backed securities
available for sale 29,389 82 (228) 29,243
Mortgage-backed securities
held to maturity 15,190 145 -- 15,335
-------- ------ ------- --------
Total mortgage-backed securities 44,579 227 (228) 44,578
-------- ------ ------- --------
Total investment and mortgage-
backed securities $114,349 $2,068 ($442) $115,975
======== ====== ======= ========
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10
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
December 31, 1995
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
Securities available for sale
U.S. Treasury securities $ 22,093 $ 111 ($33) $ 22,171
Obligations of U.S. government
agencies and corporations 28,966 72 (226) 28,812
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 3,007 -- (3) 3,004
Obligations of state and
political subdivisions 1,238 6 -- 1,244
Corporate bonds and other debt
securities 2,131 10 (26) 2,115
-------- ------ ------ --------
Total debt securities 57,435 199 (288) 57,346
Equity securities available for sale 6,275 1,495 -- 7,770
-------- ------ ------ --------
Total investment securities 63,710 1,694 (288) 65,116
Mortgage-backed securities
available for sale 40,497 139 (278) 40,358
Mortgage-backed securities
held to maturity 22,729 319 (7) 23,041
-------- ------ ------ --------
Total mortgage-backed securities 63,226 458 (285) 63,399
-------- ------ ------ --------
Total investment and mortgage-
backed securities $126,936 $2,152 ($573) $128,515
======== ====== ====== ========
During the nine month periods ended September 30, 1996 and September 30, 1995,
the proceeds from sales of securities available for sale were $2,000,625 and
$3,123,963, respectively. Gross gains of $925 and $7,007 were recognized in
those sales, respectively. For the first nine months of 1996, the net
unrealized increase in market value on available for sale securities was
approximately $159,000. There were no sales or transfers of securities
classified as held to maturity.
The amortized cost and estimated fair value of mortgage-backed and debt
securities at September 30, 1996, by contractual maturity, are shown on page 9.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
8
11
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
September 30, 1996
Estimated Weighted
Amortized Fair Average
(in thousands of dollars) Cost Value Yield
--------- ------- -------
Securities available for sale:
U.S. Treasuries
Due in one year or less $ 8,011 $ 8,016 5.80%
Due after one year through five years 17,069 17,042 5.85
------- ------- ----
Total 25,080 25,058 5.84
U.S. Government agencies and corporations
Due in one year or less 26,230 26,116 5.62
Due after one year through five years 6,020 6,006 6.22
------- ------- ----
Total 32,250 32,122 5.73
Total debt securities available for sale $57,330 $57,180 5.78%
======= ======= ====
Securities held to maturity:
U.S. Treasuries
Due in one year or less $ 356 $ 360 5.07%
------- ------- ----
Total 356 360 5.07
Obligations of state and political subdivisions
Due in one year or less 946 957 5.12
Due after one year through five years 305 308 4.65
------- ------- ----
Total 1,251 1,265 5.00
Corp bonds and other debt securities
Due in one year or less 79 79 ---
Due after one year through five years 743 767 8.44
------- ------- ----
Total 822 846 7.63
------- ------- ----
Total securities held to maturity $ 2,429 $ 2,471 5.16%
======= ======= ====
Mortgage-backed and collateralized
mortgage obligations available for sale $29,389 $29,243 5.51%
Mortgage-backed and collateralized
mortgage obligations held to maturity 15,190 15,335 7.46
------- ------- ----
Total mortgage-backed and debt securities $44,579 $44,578 6.17%
======= ======= ====
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12
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
At September 30, 1996 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 which exceeds 10% of shareholders' equity.
NOTE 3 - LOANS
Total loans as presented on the balance sheet are comprised of the following
classifications:
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands of dollars)
Commercial, financial and agricultural $ 73,350 $ 59,638
Commercial, tax exempt 4,719 5,173
Commercial real estate 63,357 60,478
Residential real estate 227,256 172,283
Consumer loans 237,923 221,158
------- -------
Total loans $606,605 $518,730
======== ========
There were no loans determined to be impaired at September 30, 1996.
At September 30, 1996 and December 31, 1995, loans on non-accrual status and/or
past due more than 90 days approximated $1,536,000 and $1,320,000,
respectively. The Other Real Estate Owned balance, net of allowance, at
September 30, 1996, is $335,000.
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
A summary of activity in the allowance for loan losses for the nine months
ended September 30, 1996, and September 30, 1995, are as follows:
(in thousands of dollars) 1996 1995
------ ------
Balance - January 1 $7,242 $6,348
Provision charged to operating expense 2,350 1,220
Loans charged off, net of recoveries (1,306) (518)
------ ------
Balance - September 30 $8,286 $7,050
====== ======
NOTE 5 - CONCENTRATIONS OF CREDIT RISK AND
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Corporation offers commercial and consumer credit products to customers
within Stark and surrounding counties. The Corporation maintains a diversified
credit portfolio, with residential and commercial real estate and consumer loans
comprising approximately 87.1% of the portfolio. Indirect loans accounted for
88.6% of installment loans and 79.6% of all consumer loans at September 30,
1996. The dealer network from which the indirect loans are generated includes
140 active relationships, the largest of which was responsible for 6.2% of total
indirect dollar volume for the year-to-date 1996.
10
13
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
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, 1996, 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 $158,625,000.
At September 30, 1996, the Corporation held one interest rate swap agreement
with a notional amount of $5.5 million. 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 interest rate swap. The agreement calls for quarterly
reductions in the notional amount with a final expiration of November 27, 2000.
Variable interest payments received are based on the three month LIBOR rate
which is adjusted on a quarterly basis. The LIBOR rate in effect at September
30, 1996 was 5.49% while the fixed rate to be paid through the remainder of the
contract is 2.88%. The income from this agreement for the nine months ended
September 30, 1996 was $122,100. For the nine months ended September 30, 1995
the income was $168,200. The market value of this swap at September 30, 1996
was a positive $356,300. Under the terms of this contract, future changes in
LIBOR will affect the payments received, the income or expense generated by the
swap and its market value.
NOTE 6 - FHLB ADVANCES
Long-term debt at September 30, 1996 is comprised of advances from the Federal
Home Loan Bank (FHLB). Pursuant to collateral agreements with the FHLB,
advances are secured by all FHLB stock and qualifying first mortgage loans.
Interest expense on FHLB advances for the nine months ending September 30, 1996
was approximately $2,217,000.
A summary of FHLB advances outstanding follows (in thousands):
Maturity Interest Rate Amount
--------------------------------------------------------------
1996 4.90%-6.70% $ 1,429
1997 5.15%-6.70% 7,189
1998 5.35%-7.85% 10,025
1999 5.50%-7.95% 30,378
2000 6.00%-8.00% 16,257
2001 6.10%-6.70% 2,678
2002 6.25% 330
2003 6.25% 350
--------------------------------------------------------------
Total $68,636
==============================================================
11
14
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, 1996, compared to December 31, 1995,
and the results of operations for the three months and year-to-date periods
ending September 30, 1996, compared to the same periods in 1995. 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.
FINANCIAL CONDITION
Total assets at September 30, 1996 were $793,149,000, an increase of
$93,505,000, or 13.4%, over year-end 1995. Increases in cash and cash
equivalents, federal funds sold and interest bearing deposits with banks of
$2,212,000, $7,450,000 and $7,759,000, respectively, combined for a total
increase of $17,421,000 in highly liquid balances which are available to fund
existing loan commitments and anticipated loan growth for the fourth quarter of
1996 and early into 1997. Net runoff of $12,428,000 in the investment and
mortgage-backed securities portfolios was used to fund a portion of the loan
portfolio growth of $87,875,000, a 16.9% increase since year-end 1995.
All of the loan categories experienced continued loan growth for the first nine
months of the year. The residential mortgage loan portfolio increased by
$54,973,000, or 31.9%, over year-end 1995 levels. The consumer loan portfolio
increased by $23,966,000, or 10.8%, over year-end 1995 levels, excluding a
one-time reclassification of approximately $7.2 million in business installment
loans from the consumer loan portfolio to the commercial loan portfolio during
the first quarter of 1996. Commercial loans experienced a 9.3%, or $6,058,000,
increase from year-end 1995, excluding the one-time reclassification from the
consumer portfolio. Earning assets at September 30, 1996 increased to
$742,417,000 from $651,761,000 at December 31, 1995, an increase of $90,656,000
or 13.9%. The ratio of earning assets to total assets increased slightly from
93.2% at year-end 1995 to 93.6% at September 30, 1996.
Total deposits at September 30, 1996 increased by $37,080,000, or 6.8%, from
year-end 1995. Non-interest bearing deposits have increased by $1,528,000 over
1995 year-end levels, showing recovery and growth from the normal seasonal
declines experienced after year-end. Interest bearing demand balances declined
2.9%, while savings balances increased by $8,546,000, or 5.5%, from year-end
levels, influenced to a great extent by the popularity of the new Money Market
Access account which is a variable rate savings product whose tiered rate
structure fluctuates weekly with the 13 Week U.S. Treasury Bill rate.
Marketing efforts aimed at non-bank customers to raise balances in this new
product have been very successful. Balances raised
12
15
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
through Money Market Access were partially offset by transfers from passbook
and statement savings accounts to higher earning certificates of deposit and
alternative investments found outside the banking industry.
Certificate of Deposit balances grew by $29,175,000, or 12.0%. The majority of
this growth, $14,960,000, came from the issuance of brokered certificates of
deposit through Merrill Lynch. Another significant factor was the 24 and 36
month Anniversary CD products introduced in the first quarter of 1996 and
offered through May, which allow customers to raise their interest rate on the
anniversary of the certificate to the current rate in effect on certificates
with the same original maturity term. A special 24 month certificate offered
in the third quarter with a 6.25% annual percentage yield was also successful
in raising deposit balances.
Other significant sources of funding for balance sheet growth were term and
sweep repurchase agreements. The majority of growth in these balances occurred
in the first quarter of 1996. Since year-end 1995 both have grown a combined
$13,874,000, a 30.0% increase. Federal Home Loan Bank advances have been
relied upon as a source of funding during the second and third quarter of 1996,
with growth in borrowings of $37,276,000, or 118.9% from year-end 1995. More
than half of the advances drawn have been five year, amortizing instruments,
whose cash flows more match those of the assets they are funding and whose
rates are lower than single maturity advances due to their amortizing feature.
The remaining advances were taken at fixed rates with three year maturities.
In March of 1996, Management recommended and the Board approved an amendment to
the loan policy, for the calculation of the loan-to-deposit ratio. The ratio
was redefined as gross loans divided by total deposits plus Federal Home Loan
Bank advances. The limit was set at 95%, with a provision that allows
Management to exceed the limit for 30 consecutive days without being in
violation of the policy. This was done to reflect what is becoming an industry
norm, dependence on these borrowings as a source of balance sheet funding
considered to be less volatile than deposits. Advances with varying maturities
and flexible repayment options are considered more stable than the most stable
of bank deposits, certificates of deposit, which are liable to early withdrawal
and are difficult to attract in longer maturity ranges even at rates
competitive to other market instruments. The Board agreed that the changes in
funding alternatives experienced by the Bank make the new measure a more
accurate indication of actual liquidity risk.
The loan-to-deposit ratio at September 30, 1996 was 92.9% compared to 89.7% at
December 31, 1995. The growth in this ratio for 1996 reflects continued strong
loan demand and dependence on short-term borrowings and cash flows from the
investment portfolio to fund that growth. The Bank continues to face the
difficulty of raising local deposits due to strong local market competition and
the attractive returns depositors find on alternative forms of investment
offered outside the banking industry, especially mutual funds. Depositors'
aversion to extending maturities on deposits as well as the ability to raise
deposits at relatively attractive rates with longer maturities in the national
market will encourage the future use of brokered deposits to fund balance sheet
growth. Current rates on brokered certificates and single maturity advances
for various maturities are very comparable.
13
16
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Balances in net premises and equipment for the Corporation increased by
$551,000, or 6.3%, from year-end 1995, primarily the result of completion in
renovations to the United Bank Operations Center, construction of a new
Hartville Branch to consolidate two existing branch facilities, one of which
was leased, into one location, and purchases of computer equipment and software
to enable the Bank to begin offering new electronic and upgraded telephone
banking services to its customer base.
Total shareholders' equity at September 30, 1996 was $69,558,000, an increase
of $4,231,000, or 6.5%, from year-end 1995. The major contributor to this
increase was year-to-date net income for 1996 of $5,966,000. Additional
increases to capital were the result of shares issued through the dividend
reinvestment program and the exercise of executive stock options as well as the
net increase in market value, net of deferred taxes, of investment securities
available for sale of $104,000. These increases were partially offset by the
payment of $2,390,000 in quarterly cash dividends.
RESULTS OF OPERATIONS
UNB Corp.'s net income for the third quarter of 1996 was $1,754,000, or $0.30
per share, compared with $1,964,000, or $0.34 per share for the third quarter
of 1995, a decrease of 10.7%. The decrease in profitability for the third
quarter was the result of the one-time assessment from the FDIC to recapitalize
the Savings Association Insurance Fund (SAIF) of $593,000, or $391,000 on an
after tax basis, SAIF insures approximately $127,000,000 in deposits which the
Bank acquired in "Oakar transactions" from the Resolution Trust Company (RTC)
in the First Savings and Loan Company, F.A. of Massillon and the Transohio
Federal Savings Bank acquisitions. Excluding the assessment, net income for
the third quarter would have been $2,145,000, which is $181,000 or 9.2% greater
than the same period in 1995. Earnings per share for the quarter would have
been $0.36 or an increase of 5.9% over the same period in 1995. On a
year-to-date basis, net income of $5,966,000 was $609,000, or 11.4%, greater
than the same period last year. Excluding the SAIF assessment, net income
would have been $1,000,000 greater than prior year and year-to-date earnings
per share would have been $1.08, both representing an 18.7% increase over 1995.
All earnings per share have been adjusted for the April, 1996 100% stock
dividend.
Net interest income for the quarter and year-to-date continued to be the major
cause of this positive earnings performance, a result of balance sheet growth
and shift in asset mix from lower yielding investment securities to higher
yielding loans. Net interest income grew from $20,667,000 for the first nine
months of 1995 to $23,500,000 for the same period in 1996, an increase of
13.7%. For the third quarter of 1996, net interest income was $912,000, or
13.0%, over the same period in 1995.
Total interest income for the third quarter and year-to-date was $14,990,000
and $43,564,000, increases of 17.6% and 19.8%, respectively, from the same
periods of 1995. Total interest expense for third quarter and year-to-date was
$7,075,000 and $20,064,000, increases of 23.2% and 27.9%, respectively, over
the same periods last year.
The net interest margin for the first nine months of 1996 was 4.48%, a decrease
from 4.71%, or 23 basis points, from the same period of 1995. At the Bank
level, several areas contributed to the decline in margin. The most
significant impact on the net
14
17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
interest margin has been in the Bank's cost of funds. The overall rate paid on
interest bearing liabilities increased 30 basis points for the first nine
months of 1996 versus the same period in 1995. The new Money Market Access
product, paying a tiered rate based on the 13 Week U.S. Treasury Bills has
attracted some funds out of the lower rate money market account as well as
regular savings products. Rates offered on certificates of deposit throughout
1995 and into 1996 were kept at very competitive levels within the local market
to attract funding for strong loan demand. These rates, coupled with a
decrease of 10 basis points on savings rates early in 1996, caused some savings
balances to switch into certificates of deposit, thus increasing their cost.
Due to depositors' aversion to extend maturities in the deposit markets, the
Bank turned to brokered certificates of deposit and Federal Home Loan Bank
advances to lengthen liability maturities and lock in spreads on the loans
being funded.
While the cost of funds increased, the overall yield on earning assets between
the two periods remained flat. Returns on the investment portfolio decreased
17 basis points, the result of repricing of variable rate mortgage-backed
securities and the rollover of maturities at lower market rates. Overall
yields in the loan portfolio decreased by four basis points, led by the
repricing of commercial, commercial real estate and home equity loans which are
tied to the Prime rate. This was partially offset by an increase in yields in
the installment loan portfolio due to the runoff of lower yielding older loans.
The yield on earning assets held constant over the two periods despite the 17
basis point decline in investment yields due to the change in earning asset mix
from the investment portfolio to higher yielding loans and the differential in
yields earned on the respective portfolios.
Aggressive growth in balance sheet size and the resulting decrease in the net
interest margin has been as Asset/Liability management strategy over the past
several years. The resulting increase in overall revenue has enabled the
Corporation to leverage capital and increase its return on equity. Return on
equity for the first nine months of 1996 was 11.75% compared to 11.79% for the
same period last year, a decrease of less than 1.0%. However, return on equity
adjusted for the after-tax effect of the SAIF assessment yields 12.52%, an
increase of 6.2%. Year-to-date return on assets for 1996 was 1.07% versus
1.13% for 1995. With the adjustment for the SAIF assessment, return on assets
was 1.14%, a slight increase over the same period in 1995.
Non-interest income for the third quarter of 1996 shows a 10.2% increase from
the same period last year while posting a 3.6% gain on a year-to-date basis.
The most significant factors for the increase in non-interest income for the
third quarter were increases in Trust fee income and other operating income,
partially a result of increased revenues from the sales of annuities, mutual
fund investments and other financial services. During the second quarter of
1996, the Bank finalized an agreement with a new vendor, American Express
Financial Advisors, to provide a full range of financial products and financial
planning services through a staff of financial advisors, dedicated exclusively
to servicing Bank customers. Management expects this source of fee income to
reach beyond levels achieved in the past due to this vendor's experience and
reputation in the market. No gains on sales of mortgage loans in the secondary
market were recorded for 1996 primarily due to the mix of mortgage loan
products generated during the year. In the future, as the interest rate
environment creates opportunities for gains on the sales of mortgages,
15
18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Management intends to resume originating loans with the intention of selling
them in the secondary market.
Non-interest expense for the third quarter and year-to-date increased by
$877,000 and $865,000, respectively, from the same periods in 1995. The most
significant reason for the increase in other expense, both for the quarter and
year-to-date, was the one-time SAIF assessment of $593,000. Also in the third
quarter, increases in equipment expense of $222,000 represent lease payments on
a new computer mainframe, a wide area network (WAN), teller and platform
computer systems and related software which will improve operating efficiencies
and position the bank to take advantage of advances in technology through the
end of the decade, in addition to offering new products to its customers
through high tech and traditional telephone delivery systems. Additional
increases for the quarter were recorded in franchise taxes and Mastercard
processing expenses. These were partially offset by reductions in office
supplies and pension expense.
Management expects the trend in increased equipment expense to continue into
1997 with a full year of expenses on the new mainframe, expanded WAN and teller
and platform equipment. Management also anticipates increases in occupancy
expenses in 1997 with a full year's impact of depreciation on the renovations
of United Bank Center and the new Hartville Branch, in addition to two planned
in-store branch facilities in the Green and Alliance communities as well as a
new branch to be located in the Portage-Frank area of northern Stark county,
all to be completed in 1997.
It is expected now that the SAIF assessment has been accounted for, the Bank's
regular assessment on SAIF insured deposits will be similar to the current
premiums being paid on deposits insured under the Bank Insurance Fund (BIF) of
the FDIC which are determined on the basis of capital adequacy and other
regulatory risk assessments. Additionally, in 1997 the Bank will be subject to
FICO assessments for the payment of interest on bonds issued to finance the
takeover of unsafe thrift institutions by the Resolution Trust Company. These
annual assessments will be approximately 1.29 cents per $100 of deposits
insured under BIF and 6.44 cents per $100 of deposits insured by SAIF.
Management estimates this expense to be approximately $150,000 in 1997.
The Bank has continued involvement in legal proceedings concerning a seven and
one half acre parcel of OREO property located in the northwest quadrant of
Stark County. Negotiations continue with a large national petroleum company,
owner of the facility at the date it was taken out of service and also the
party responsible for the cleanup according to the State of Ohio's Bureau of
Underground Storage Tanks (BUSTER) regulations. Several environmental
assessments by the Bank and the petroleum company have been filed with the
State agency. A decision by the agency was anticipated in the third quarter,
however cutbacks in BUSTER staffing levels have delayed resolution of this
matter. The Bank, through legal counsel is attempting to get the project
prioritized with the agency. Discussions with the petroleum company's
engineering consultants indicate they are submitting a remediation plan to
BUSTER which indicates acknowledgment of some level of responsibility for the
clean-up. Because the issue has not been resolved with the State, the Bank is
prohibited from actively marketing the property. The estimated costs, should
they become the responsibility of the Bank, are not material to the business or
financial condition of the Registrant and
16
19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
have been set up as an allowance against the property's value on the Bank's
Consolidated Balance Sheet.
The Bank is also party to a legal proceeding in which the Bank has been issued
an injunction to permit the continued use of an easement on a piece of property
used as a driveway allowing access into the Bank's Lake Cable branch property.
The driveway owner has filed a counterclaim for $2,000,000 alleging trespass
and claims the driveway has been subject to wear and tear as a result of its
use by the Bank and its customers. During the third quarter of 1996, the Stark
County Court of Common Pleas ordered the case to mediation which was
unsuccessful and a hearing regarding the injunction is scheduled in November,
1996. A trial date has been set for mid-1997.
ALLOWANCE FOR LOAN LOSSES
The provision for loan losses for the year-to-date ended September 30, 1996 of
$2,350,000 was an increase of $1,130,000 over the same period in 1995. The
Bank's reserve-to-loan ratio of 1.37% is an increase from 1.35% at June 30,
1996 and is three basis points below the ratio at December 31, 1995. The
increase in provision was made primarily due to the 16.9% increase in the loan
portfolio since year-end 1995 as well as to cover increased current net
charge-offs in the consumer loan portfolio. The provision for loan losses
charged to operating expense was based on management's evaluation of the loan
portfolio, the adequacy of the allowance for loan losses under current economic
conditions and current and anticipated loan growth. An analyses of the
allowance for loan losses is provided on page 22. During the third quarter of
1995, a change in methodology used to determine the allocation of the allowance
for loan losses among the various loan categories was approved by the Executive
Committee of the Board of Directors and instituted by Management. Management
continues to use the same three methodologies it has historically used to
determine the allocation of the allowance, however, it now selects the single
methodology that results in the highest aggregate calculation for allocation of
the allowance among the various loan categories, and not the highest specific
allocation for each loan category from among the three methodologies.
Management believes this change reflects a more reliable analysis of the Bank's
risk of loan loss. An analysis of the allocation of the allowance for loan
losses is found on page 23.
The Bank held no impaired loans at September 30, 1996, a reduction of $566,269
from the impaired loan balance at December 31, 1995. Non-performing loans,
which include non-accrual loans and loans past due 90 days or more, were
$1,536,000 at September 30, 1996 compared to $1,320,000 at December 31, 1995.
The ratio of non-performing loans to total loans outstanding at September 30,
1996, was 0.25%. This is unchanged from year-end 1995 and compared favorably
to the ratio of 0.78% for the Bank's peer group, all insured commercial banks
having assets between $500 million and $1 billion. For the third quarter of
1996, net-chargeoffs as a percentage of average loans outstanding were 0.10%
versus 0.05% for the same period in 1995, primarily the result of increased net
chargeoffs in the installment loan portfolio. Due to the record levels of
consumer debt currently outstanding nationally, and the trend experienced
throughout the financial services industry of increased consumer loan
delinquencies and losses, Management anticipates the trend the Bank experienced
in the third quarter of 1996 of increased net charge-offs in the consumer,
Mastercard and residential mortgage loan portfolios to continue through the
remainder of 1996 and into the first half of 1997.
17
20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
CAPITAL RESOURCES
Shareholders' equity totaled $69,558,000 at September 30, 1996, an increase of
$4,231,000, or 6.5%, compared to $65,327,000 at December 31, 1995. The ratio
of equity-to-assets at September 30, 1996 was 8.77% versus 9.34% at December
31, 1995, with the decrease of 57 basis points reflecting the impact of
continued balance sheet growth in the loan portfolio. The rate of primary
capital (shareholders' equity plus the allowance for loan losses less
intangible assets) to total adjusted assets was 13.41%. The risk-based capital
ratio was 12.83% while the Tier 1 and core leverage ratios reached 11.58% and
7.90%, respectively. The levels achieved in these ratios are above required
regulatory minimums and maintain the Corporation in the "well capitalized"
category under the guidelines of the Federal Deposit Insurance Corporation Act
of 1991 (FDICIA).
The cash dividend of $0.42 per share (adjusted for the April, 1996 100% stock
dividend) for the first nine months of 1996 was 13.5% above the $0.37 dividend
paid for the same period in 1995. Dividends, representing 40.1% of
year-to-date earnings, fall within the Corporation's dividend policy which
provides for cash dividend payouts within a range of 35% to 45% of earnings.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires that securities which the Bank has classified as
"Available-for-Sale" are recorded at market value with any adjustments recorded
to equity. At September 30, 1996, an unrealized gain in securities available
for sale, net of deferred taxes of $489,000, reflects an increase in
shareholders' equity of $104,000 since year-end 1995 and $261,000 from June 30,
1996. The unrealized gain in market value of the Available-for-Sale securities
has increased due to several factors. A change in portfolio mix occurred from
longer term, relatively lower yielding mortgage-backed securities to shorter
term treasuries and agencies whose rate are closer market rates. There was
growth in the equity securities portfolio whose market value is approximately
17.3% over book value. In addition, during the third quarter of 1996 a
decrease in market rates has caused the value of all fixed rate securities to
rise.
On April 16, 1996, the Corporation's Board of Directors declared a 100% stock
dividend on the Corporation's common stock, payable to shareholders of record
as of April 30, 1996.
LIQUIDITY
Liquidity measures the Corporation's ability to meet the cash demands and
credit needs of its customers and is provided by the ability to readily convert
assets to cash and raise funds in the market place. Total cash, federal funds
sold and investments available for sale (including money market investments) of
$152,140,000 represent 19.2% of total assets at September 30, 1996. Of the
investments available for sale, $57,180,000 are held in U.S. Treasury and
Agency securities, 59.7% of which mature within one year. Approximately
$86,700,000 of total Corporate securities is pledged as collateral to secure
public funds 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
18
21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
repurchase. The strong loan demand experienced throughout 1996, coupled with
the funding of a significant portion of that growth with maturities and cash
flows from the investment portfolio and short-term borrowings in the form of
sweep and term repurchase agreements, have resulted in a loan-to-deposit ratio
of 92.9%, up from the 1995 year-end ratio of 89.7%.
The liquidity needs of the Holding Company, primarily cash dividends and other
corporate purposes, are met through cash, short term investments and dividends
from the Bank.
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential effects on earnings and
capital to changes in market interest rates. The objective of the
Corporation's Asset and Liability Management Policy is to help Management
establish a profit plan for the Corporation through the coordination of asset
mix and volume controls, liquidity, capital and dividend policies, interest
margin management, sound investment and loan portfolio management, loan pricing
policies, purchased funds policies and cash management techniques. This profit
plan seeks to maximize profitability while minimizing the adverse effects on
net interest margin and capital resulting from fluctuations in interest rates.
All assets and liabilities are designated as being either rate sensitive or
non-rate sensitive during some assigned time period such as one month or one
year. Interest rate sensitivity relates to that time period when assets and
liabilities can be repriced. Management attempts to match rate sensitive
assets and rate sensitive liabilities in an effort to maintain an acceptable
net interest margin regardless of the level or direction of interest rates for
both assets and liabilities. The GAP measures the variance in this matching
process and is defined as the difference between rate sensitive assets and rate
sensitive liabilities within an assigned time frame. The Bank uses a modified
GAP position in which the majority of traditional savings and NOW account
balances are placed in the five year time frame which considers this portion of
these deposits to be rate insensitive. The remainder are placed in the one
month time frame reflecting the assumption that they are sensitive to changing
interest rates and will reprice into certificates of deposits with rising
interest rates. The Bank periodically analyzes the historical sensitivity of
these liability products to validate its modified GAP assumptions and will
redefine its modified GAP position should it be warranted.
The GAP position can be either positive or negative, and is viewed as the
dollar measure of the Bank's exposure to changes in interest rates over a
certain time frame. A negative GAP benefits net interest income when rates are
decreasing, while a positive GAP benefits net interest income in a rising rate
environment. The reverse is also true for each of these.
The Bank's cumulative GAP position at September 30, 1996 reflects a 6.09%
liability sensitive position in the time frame of less than one year. In its
Asset and Liability Policy, the Bank has set limits of +/- 10% for the one year
time frame and attempts to manage its portfolio of rate sensitive assets and
liabilities to remain within those limits. It is unclear what impact this
negative GAP position will have
19
22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
on the Bank's net interest margin with the uncertainty in the direction of
future interest rates due the financial market's reaction to the results of the
Presidential elections and the mixed signals of various recently reported
economic indicators. See the GAP table on page 21 for more detailed data on
the Bank's GAP position.
CONCENTRATION OF CREDIT RISK
The Corporation maintains a diversified credit portfolio, with relatively
smaller balance, homogeneous consumer installment, credit card and residential
mortgage loans comprising 76.7% of total loans outstanding at September 30,
1996. Commercial and commercial real estate loans comprise the remaining 12.9%
and 10.4% of loans outstanding, respectively. The largest industry
concentration identified within the total portfolio is the medical industry.
The total commitment to this industry represents 24.4% of total corporate
capital. 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.
IMPACT OF FDICIA
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) applies to
banks with total assets in excess of $500 million. Management has spent
considerable time ensuring compliance with requirements for documenting
internal control reporting. The 1995 Annual Report contained a statement from
Management attesting to the internal control structure of the Corporation,
including policies, procedures and compliance with laws and regulations within
the Banking industry. In addition, the Bank's independent external auditor
attested to the accuracy of Management's assertions regarding internal control
systems over financial reporting.
20
23
UNITED NATIONAL BANK & TRUST
12 MO CUM ADJ GAP TREND
[GRAPHIC]
GAP Analysis Ratios:
9/95 10/95 11/95 12/95 1/96 2/96 3/96 4/96 5/96 6/96 7/96 8/96 9/96
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Cumulative Bank GAP 74,051 71,341 71,805 73,340 77,756 77,688 76,731 79,155 80,719 81,104 85,993 80,766 78,146
Rate Sensitive Asset
to Rate
Sensitive
Liability (%) 114.01% 113.20% 113.11% 113.24% 113.95% 113.52% 113.09% 113.12% 113.20% 113.23% 114.15% 113.14% 112.20%
Adjusted GAP
Percentage:
3 Months Cum GAP % -4.55% -4.17% -4.38% -5.20% -9.07% -9.17% -11.38% -11.06% -10.70% -10.32% -8.86% -10.22% -8.08%
6 Months Cum GAP % -6.25% -4.33% -5.98% -7.15% -12.27% -13.34% -13.60% -12.06% -11.76% -12.04% -10.35% -9.79% -7.98%
12 Months Cum GAP % -5.95% -4.18% -3.28% -5.52% -7.77% -5.50% -6.98% -6.82% -6.19% -7.17% -6.17% -8.58% -6.09%
United Bank policy/guideline limits: +/- 10%
21
24
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
SEPTEMBER 30, 1996
(000'S omitted)
Balance at December 31, 1995 $ 7,242
Charge-Offs (Domestic):
Commercial, Financial, Agricultural $ 53
Real Estate - Commercial 0
Real Estate - Residential 58
Consumer Loans 1,970
-------
Total Charge-Offs $ 2,081
-------
Recoveries (Domestic):
Commercial, Financial, Agricultural $ 3
Real Estate - Commercial 39
Real Estate - Residential 55
Consumer Loans 678
-------
Total Recoveries $ 775
-------
Net Charge-Offs $ 1,306
-------
Additions Charged to Operations $ 2,350
Balance at September 30, 1996 $ 8,286
=======
Ratio of net charge-offs during this
quarter to average loans outstanding .10%
====
Allowance as a percentage of total loans 1.37%
====
22
25
UNB CORP.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, 1996
(000'S omitted)
Percent of
loans
in each category
Amount to total loans
------- ----------------
Commercial, Financial, Agricultural $ 2,720 12.87%
Real Estate - Commercial 663 10.45%
Real Estate - Residential 207 37.46%
Consumer Loans 2,688 39.22%
Unallocated: 2,008 N/A
------- ------
Valuation Reserve on September 30, 1996 $ 8,286 100.00%
======= ======
23
26
UNB CORP.
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
UNB Corp. held its Annual Meeting of Shareholders on April 16, 1996, for the
purpose of electing directors and to adopt a proposed amendment to the Articles
of Incorporation to increase the number of no par value Common Shares from the
5,000,000 currently authorized to 15,000,000 shares. The purposes for
increasing the number of authorized Common Shares are to have additional shares
available for issuance in the future for stock splits, stock dividends,
acquisitions, and other corporate purposes. These additional shares may be
issued on authorization of the Board of Directors without further approval of
Shareholders, except as may be required by law. The adoption of the proposed
amendment required the affirmative vote of the holders of 66-2/3% of the
outstanding shares of the Corporation. Shareholders received proxy materials
containing the information required by this item. Results of shareholder
voting on these issues were as follows:
Election of Directors Proposed Amendment to
E. Lang D'Atri Robert L. Mang Articles of Incorporation
-------------- -------------- -------------------------
For 2,514,690 2,514,690 2,512,615
Against 9,896 9,896 61,724
Abstain 31,449
Shares not
voted by Brokers 85,375 85,375 85,375
ITEM 5 - OTHER INFORMATION
N/A
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit
Number Exhibit
------- -------
27 Financial Data Schedule (1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the first nine months of 1996.
(1) Filed only in electronic format pursuant to Item 601(b)(27) of Regulation
S-K.
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 _________________________ ___________________________________
James J. Pennetti
(Duly authorized officer and
Treasurer, UNB Corp.)
24