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, 1997
----------------------------
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 (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, 1997
5,821,372 Common Shares
2
UNB CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
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 5-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-25
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders 26
Item 5 - Other Information 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 27
3
U N B C O R P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands) SEPTEMBER 30, December 31,
1997 1996
------------------------------------
ASSETS
Cash and cash equivalents $28,774 $34,762
Federal funds sold 11,200 6,800
Interest bearing deposits with banks 765 157
Securities, net (Fair value:
$62,384 and $89,995, respectively)(Note 2) 62,364 89,979
Mortgage-backed securities (Fair value:
$59,919 and $43,058, respectively)(Note 2) 59,812 42,907
Loans originated and held for sale 1,865 0
Loans:
Total loans (Notes 3 and 6) 635,857 617,602
Allowance for loan losses (Note 4) (9,552) (8,335)
- -------------------------------------------------------------------------------------------------------------------------------
Net loans 626,305 609,267
Premises and equipment, net 11,531 10,044
Intangible assets 5,592 6,353
Accrued interest receivable and other assets 9,085 9,710
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $817,293 $809,979
===============================================================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $78,721 $81,554
Interest bearing deposits 551,284 519,110
- -------------------------------------------------------------------------------------------------------------------------------
Total deposits 630,005 600,664
Fed funds purchased and short-term borrowings 55,165 68,408
Federal Home Loan Bank advances and capital lease (Note 6) 49,176 62,603
Accrued taxes, expenses and other liabilities 7,531 6,970
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 741,877 738,645
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 15,000,000 shares authorized;
5,821,373 and 5,785,605 issued and outstanding, respectively) 5,821 5,786
Paid-in capital 31,512 32,497
Retained earnings 35,841 31,879
Unrealized gain on securities available for sale, net of tax 2,715 1,172
Treasury stock, 12,256 shares at cost (473) 0
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 75,416 71,334
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $817,293 $809,979
===============================================================================================================================
See Notes to the Consolidated Financial Statements
1
4
U N B C O R P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share data) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1997 1996 1997 1996
------------- ------------ ------------ -----------
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 13,727 $ 13,026 $ 40,582 $ 37,547
Tax exempt 46 56 142 174
Interest and dividends on investments
& mortgage-backed securities:
Taxable 1,915 1,723 5,548 5,364
Tax exempt 13 13 39 44
Interest on bank deposits and federal funds sold 247 172 664 435
- ------------------------------------------------------------------------------------------------------------------
Total interest income 15,948 14,990 46,975 43,564
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,066 5,479 17,092 15,801
Interest on short-term borrowings 618 686 2,098 2,046
Interest on FHLB advances 1,200 910 3,295 2,217
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 7,884 7,075 22,485 20,064
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,064 7,915 24,490 23,500
PROVISION FOR LOAN LOSSES (NOTE 4) 887 920 2,237 2,350
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,177 6,995 22,253 21,150
OTHER INCOME:
Service charges on deposits 635 599 1,860 1,770
Trust Department income 766 659 2,394 1,971
Other operating income 252 219 856 607
Securities gains, net 8 0 36 1
Gains on loans originated for resale and sold 57 0 112 0
- ------------------------------------------------------------------------------------------------------------------
Total other income 1,718 1,477 5,258 4,349
- ------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 2,789 2,577 8,225 8,089
Occupancy 343 305 971 862
Equipment 830 711 2,301 1,856
Other operating expense 1,718 2,190 5,791 5,649
- ------------------------------------------------------------------------------------------------------------------
Total other expenses 5,680 5,783 17,288 16,456
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,215 2,689 10,223 9,043
PROVISION FOR INCOME TAXES 1,114 935 3,481 3,077
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,101 $ 1,754 $ 6,742 $ 5,966
==================================================================================================================
EARNINGS PER SHARE (NOTE 1):
Primary $ 0.36 $ 0.30 $ 1.14 $ 1.01
Fully diluted $ 0.36 $ 0.30 $ 1.14 $ 1.01
==================================================================================================================
DIVIDENDS PER SHARE (NOTE 1) $ 0.17 $ 0.14 $ 0.48 $ 0.42
==================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Primary 5,911,299 5,919,728 5,899,711 5,901,524
Fully diluted 5,913,524 5,921,850 5,912,765 5,916,753
==================================================================================================================
Note: Per share data is based on the average number of shares outstanding
adjusted for stock dividends and splits.
See Notes to the Consolidated Financial Statements
2
5
U N B CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands except per share data)
NINE MONTHS ENDED
9/30/97 9/30/96
---------------- ---------------
Balance at beginning of period $71,334 $65,327
Net Income 6,742 5,966
Shares issued through dividend reinvestment 133 527
Stock options exercised 187 24
Cash dividends $0.480 and $0.415 per share, respectively (2,780) (2,390)
Treasury stock purchases (3,217) 0
Treasury stock sales 1,474 0
Change in market value on investment securities
available for sale, net of deferred taxes 1,543 104
---------------- ---------------
Balance at end of period $75,416 $69,558
================ ===============
See Notes to the Consolidated Financial Statements
3
6
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30,
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,742 $ 5,966
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 741 568
Provision for loan losses 2,237 2,350
Net securities gains (36) 1
Net accretion on securities (603) (105)
Amortization of intangible assets 761 767
Loans originated for resale (11,227) 0
Proceeds from sale of loan originations 9,474 0
Changes in:
Interest receivable (219) (354)
Interest payable (534) (303)
Other assets and liabilities, net 1,842 (217)
Deferred income (2) (3)
- -----------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 9,176 8,670
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks (608) (7,759)
Net increase in funds sold (4,400) (7,450)
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 3,221 1,999
Proceeds from maturities of securities held to maturity 6,688 17,329
Proceeds from maturities of securities available for sale 136,000 18,970
Purchases of securities held to maturity (4,883) (16,958)
Purchases of securities available for sale (110,062) (27,333)
Purchases of mortgage-backed securities available for sale (37,672) (3,389)
Principal payments received on mortgage-backed securities held to maturity 4,835 7,555
Principal payments received on mortgage-backed securities available for sale 14,864 14,517
Net increase in loans made to customers (17,285) (87,541)
Loans purchased (1,637) (1,761)
Purchases of premises and equipment, net (2,228) (1,119)
Principal payments received under leases 152 121
Leased assets purchased (617) 0
- -----------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (13,632) (92,819)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 29,341 37,080
Cash dividends paid, net of shares issued through dividend reinvestment (2,647) (1,863)
Purchase of treasury stock 1,090 0
Sales of treasury stock (3,217) 0
Proceeds from issuance of stock 571 24
Net increase (decrease) in short-term borrowings (13,243) 13,844
Proceeds from FHLB advances 10,000 47,000
Repayments of FHLB advances (23,647) (9,724)
Proceeds from capital lease 248 0
Repayments on capital lease (28) 0
- -----------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (1,532) 86,361
- -----------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (5,988) 2,212
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 34,762 31,735
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,774 $ 33,947
=======================================================================================================================
See the Notes to the Consolidated Financial Statements
4
7
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, 1997, 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,
1996, 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, 1997, and
September 30, 1996, UNB Corp. paid interest in the amount of $23.0 million and
$20.4 million, respectively. For the same nine month periods, federal income
taxes totaled $3,525,000 and $3,990,000, 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.
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.
5
8
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (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.
All impaired loans 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.
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, 1997 and 1996 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.
On January 1, 1997, the Corporation adopted Financial Accounting Standard No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The standard revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The adoption of SFAS No. 125 has not
had a material impact on the Corporation's consolidated financial statements.
6
9
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
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, 1997, and December
31, 1996, are as follows:
September 30, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
- ------------------------- ---- ----- ------ -----
Securities available for sale:
U.S. Treasury securities $ 20,017 $ 55 ($ 3) $ 20,069
Obligations of U.S. government
agencies and corporations 25,958 80 (46) 25,992
Securities held to maturity:
Obligations of state and political
subdivisions 876 1 (1) 876
Corporate bonds and other debt
securities 746 20 -- 766
-------- ------ ----- --------
Total debt securities 47,597 156 (50) 47,703
Equity securities available for sale 11,429 3,252 -- 14,681
-------- ------ ----- --------
Total investment securities 59,026 3,408 (50) 62,384
Mortgage-backed securities
available for sale 51,053 287 (206) 51,134
Mortgage-backed securities
held to maturity 8,678 107 -- 8,785
-------- ------ ----- --------
Total mortgage-backed securities 59,731 394 (206) 59,919
-------- ------ ----- --------
Total investment and mortgage-
backed securities $118,757 $3,802 ($256) $122,303
======== ====== ===== ========
7
10
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
December 31, 1996
----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale
U.S. Treasury securities $23,062 $ 65 ($41) $23,086
Obligations of U.S. government
agencies and corporations 52,366 50 (45) 52,371
Securities held to maturity:
U.S. Treasury securities 360 5 0 365
Obligations of state and
political subdivisions 1,051 4 0 1,055
Corporate bonds and other debt
securities 826 7 0 833
------- ------- ------- -------
Total debt securities 77,665 131 (86) 77,710
Equity securities available for sale 10,514 1,771 0 12,285
------- ------- ------- -------
Total investment securities 88,179 1,902 (86) 89,995
Mortgage-backed securities
available for sale 29,431 89 (113) 29,407
Mortgage-backed securities
held to maturity 13,500 151 0 13,651
------- ------- ------- -------
Total mortgage-backed securities 42,931 240 (113) 43,058
------- ------- ------- -------
Total investment and mortgage-
backed securities $131,110 $2,142 ($199) $133,053
======== ======= ======= ========
During the nine month periods ended September 30, 1997 and 1996, the proceeds
from sales of securities available for sale were $3,221,229 and $1,998,773,
respectively. Net gains of $35,828 were recognized on the sales of securities in
1997 while net losses of $925 were recognized on sales in 1996. 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, 1997, 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, 1997
Estimated Weighted
Amortized Fair Average
(in thousands of dollars) Cost Value Yield
--------- --------- --------
p
Securities available for sale:
U.S. Treasuries
Due in one year or less $15,023 $15,052 5.82%
Due after one year through five years 4,994 5,017 6.12
------- ------- ----
Total 20,017 20,069 5.89
U.S. Government agencies and corporations
Due in one year or less 11,978 11,992 5.91
Due after one year through five years 13,980 14,000 6.63
------- ------- ----
Total 25,958 25,992 6.30
------- ------- ----
Total debt securities available for sale $45,975 $46,061 6.12%
======= ======= ====
Securities held to maturity:
Obligations of state and political subdivisions
Due in one year or less 876 876 4.41
------- ------- ----
Total 876 876 4.41
Corp bonds and other debt securities
Due after one year through five years 746 766 8.44
------- ------- ----
Total 746 766 8.44
------- ------- ----
Total securities held to maturity $ 1,622 $ 1,642 6.26%
======= ======= ====
Mortgage-backed and collateralized
mortgage obligations available for sale $51,053 $51,134 6.56%
Mortgage-backed and collateralized
mortgage obligations held to maturity 8,678 8,785 4.90
------- ------- ----
Total mortgage-backed and debt securities $59,731 $59,919 6.32%
======= ======= ====
At September 30, 1997 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.
9
12
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
Note 3 - Loans
- --------------
Total loans as presented on the balance sheet are comprised of the following
classifications:
September 30, 1997 December 31, 1996
------------------ -----------------
(in thousands of dollars)
Commercial, financial and agricultural $ 79,324 $ 74,186
Commercial, tax exempt 3,869 4,107
Commercial real estate 68,064 65,875
Residential real estate 264,891 242,652
Consumer loans 219,709 230,782
------- -------
Total loans $635,857 $617,602
======== ========
Impaired loans are as follows:
September 30, 1997 December 31, 1996
------------------ -----------------
(in thousands of dollars)
Loans with no allowance for loan
losses allocated $238 $ 63
Loans with allowance for loan
losses allocated 158 205
Amount of allowance allocated 135 135
Average of impaired loans,
year-to-date $294 $309
Interest income recognized during
impairment 18 28
Cash-basis interest income
recognized year-to-date 20 28
At September 30, 1997 and December 31, 1996, loans on non-accrual status and/or
past due more than 90 days approximated $1,091,200 and $838,000, respectively.
The Other Real Estate Owned balance, net of allowance, at September 30, 1997 and
December 31, 1996 was $325,000 and $529,800.
Note 4 - Allowance for Loan Losses
- ----------------------------------
A summary of activity in the allowance for loan losses for the nine months ended
September 30, 1997, and September 30, 1996, are as follows:
(in thousands of dollars) 1997 1996
---- ----
Balance - January 1 $8,335 $7,242
Provision charged to operating expense 2,237 2,350
Loans charged off, net of recoveries (1,020) (1,306)
-------- --------
Balance - September 30 $9,552 $8,286
======== ========
10
13
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
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 commercial loans and leases, commercial real estate
loans, residential mortgage loans and consumer loans comprising 13.1%, 10.7%,
41.7% and 34.5%, respectively, at September 30, 1997. Indirect loans accounted
for 75.6% of all consumer loans at September 30, 1997. The dealer network from
which the indirect automobile, marine and RV loans were purchased includes 129
relationships thus far in 1997, the largest of which was responsible for 10.7%
of the total indirect dollar volume for the year-to-date 1997.
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, 1997, 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 $177,268,000.
At September 30, 1997, the Corporation held one interest rate swap agreement
with a notional amount of $4.1 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, 1997 was 5.72% 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, 1997 and
September 30, 1996 was $96,800 and $122,100, respectively. The market value of
this swap at September 30, 1997 was a positive $207,900. 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 and Capital Lease
- ----------------------------------------
The majority of long-term debt at September 30, 1997 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.
11
14
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
A summary of FHLB advances outstanding follows (in thousands):
Maturity Interest Rate Amount
--------------------------------------------------------------
1997 5.15%-6.70% $3,515
1998 5.35%-6.70% 7,498
1999 5.50%-6.85% 27,848
2000 6.00%-6.70% 6,226
2001 6.10%-6.70% 3,188
2002 6.25% 330
2003 6.25% 350
--------------------------------------------------------------
Total $48,955
==============================================================
During the second quarter of 1997, the Bank entered into capital lease
arrangement in order to finance the acquisition of its computer output to laser
disk technology (COLD) which includes computer hardware and related software in
the amount of $251,655. The lease terms call for sixty monthly payments of
$4,990.69 with the last payment due in March, 2002. The balance outstanding at
September 30, 1997 was $220,920.
12
15
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, 1997, compared to December 31, 1996,
and the results of operations for the quarter and year-to-date periods ending
September 30, 1997, compared to the same periods in 1996. 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.
During the first half of 1997, UNB Corp. applied for and received permission
from State of Ohio Department of Commerce, Division of Consumer Finance for a
license to establish and operate a consumer finance company as a wholly owned
subsidiary of the Corporation. The Loan Place, Inc. was capitalized with a
$500,000 investment by UNB Corp. in June, 1997. The Loan Place is providing
financing options to loan applicants with special borrowing needs. The
operations of The Loan Place began July 1, 1997 and at September 30, 1997 had
$357,000 in gross loans outstanding. It is not anticipated that the results of
operations of this subsidiary will have a material impact on earnings of UNB
Corp. in 1997.
During the second quarter of 1997, Robert L. Mang retired as President/Chief
Executive Officer of UNB Corp., and President/Chief Executive Officer of United
National Bank & Trust Co. In June, 1997, Roger L. Mann assumed the positions of
President/Chief Executive Officer of UNB Corp. and Chief Executive Officer of
United National Bank & Trust Co. Prior to this appointment, Mr. Mann served six
years as Chairman/Chief Executive Officer of four Banc One community Banks in
Fremont, Mansfield, Marion and Sidney, Ohio. Total assets of these banks are
approximately $1.2 billion with 35 branch offices. Mr. Mann's 27 year banking
career includes senior management positions in four independent community banks
located in San Diego and La Jolla, California.
During the fourth quarter of 1997 UNB Corp. plans to liquidate its affiliate,
the United Credit Life Insurance Company. United Credit Life was organized and
incorporated as a domestic life and disability reinsurer under the laws of the
State of Arizona on December 15, 1985 and received its Certificate of Authority
to transact business on May 29, 1986. The underwriting of credit life and
credit accident and health insurance was directly related to the extension of
credit by the Bank to its customers. Liquidation gains or losses will have no
material effect on current or future earnings of the Corporation.
Also in the fourth quarter of 1997 UNB Corp. plans to activate its affiliate,
the United Insurance Agency, Inc., which was chartered on August 23, 1990. This
affiliate is currently licensed to issue life, accident and health, and variable
life annuity insurance. It has also filed with the State of Ohio to obtain an
13
16
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
amendment to its charter to be licensed to issue property and casualty
insurance. It is not anticipated that the results of operations of this new
subsidiary will have a material impact on earnings of UNB Corp. in 1997.
FINANCIAL CONDITION
- -------------------
Total assets at September 30, 1997 were $817,293,000, an increase of $7,314,000,
or less than 1.0%, from year-end 1996. Decreases in cash and cash equivalents of
$5,988,000, were offset by increases in federal funds sold and interest bearing
deposits with banks of $4,400,000 and $608,000, respectively, combined for a
total decrease of $980,000 in highly liquid balances. Net runoff of the
investment and mortgage-backed securities portfolios was $10,710,000, or 8.1%
from year-end 1996 levels. Maturities and cash flows from the investment and
mortgage-backed securities portfolios were reinvested in relatively higher
yielding mortgage-backed securities as well as used to fund growth in the loan
portfolio which experienced an increase of $18,255,000, or 3.0%, since year-end
1996.
Loan growth for the first three quarters of 1997 was focused in the residential
and commercial portfolios which experienced growth rates of 9.2% and 6.3%,
respectively, from balances at December 31, 1996. Balances in commercial loans
rebounded in the third quarter after remaining flat in the first half of the
year due to less than anticipated seasonal line of credit usage and unusually
high payoffs. The consumer loan portfolio has experienced a 4.8% decline since
year-end 1996, a direct result of Management's decision to reduce volume in
indirect installment lending. This was accomplished through higher loan rates
and tightened credit standards due to national trends and the Bank's experience
in the second half of 1996 and into 1997 of increased delinquencies and loan
losses in consumer loans. The home equity line of credit product contained
within the consumer loan category experienced a $4.4 million, or 20.1%, increase
since year-end 1996. Promotions with rate incentives to encourage line usage
which were run in late 1996 and early 1997 were partially responsible for the
increase in outstandings. While management anticipates sluggish loan growth for
the remainder of 1997, its emphasis will continue to be focused in the
commercial and commercial real estate portfolios, where the Bank's highest
yielding assets are concentrated. Efforts continue in the development of
networks of buyers for new residential mortgage loan production. Through
September, 1997, $9.5 million in new mortgage loan production has been sold. The
Bank is also working to develop conduit relationships with investors in
sub-prime (B and C quality)indirect installment paper generated from the Bank's
extensive network of relationships with car, marine and recreational vehicle
dealers. For its role in these transactions the Bank will receive fee income.
Total earning assets at September 30, 1997 increased to $771,863,000 from
$757,445,000 at December 31, 1996, an increase of $14,418,000, or 1.9%. The
ratio of earning assets to total assets increased from 93.5% at year-end 1996 to
94.4% at September 30, 1997, a direct result of decreases in cash and cash
equivalents from year-end.
Total liabilities increased by $3,232,000 from year-end 1996 levels. Total
deposits at September 30, 1997 increased by $29,341,000, or 4.9%, from year-end
14
17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
1996. Non-interest bearing deposits are 3.5% below 1996 year-end levels.
Interest bearing demand balances decreased 2.3%, while savings balances
increased 1.7%, from year-end levels. Savings continue to be influenced by the
popularity of the Money Market Access product, the Bank's tiered variable rate
savings product tied to the 13 Week U.S. Treasury Bill rate. Balances in this
product have increased by $16,388,000 since year-end 1996. The Bank has recently
begun to advertise this product to compete with money managers and attract the
balances of sophisticated savers who demand returns higher than those available
in traditional savings products and the liquidity not available in certificates
of deposit. Balances in traditional savings products continue to decline, the
result of some transfers to the Money Market Access product and certificates of
deposit as well as alternative investments outside the banking industry, all of
which currently offer a higher rate of return to the consumer. Certificate of
deposit balances increased by $30,941,000, or 11.2%, and were influenced to a
great extent in the second and third quarters by the Bank's interest rates
offered relative to local market competition as well as the continued offering
through July of a special 21 month certificate of deposit which paid a return in
excess of local competition.
Other significant sources of balance sheet funding, term and sweep repurchase
agreements declined $11,544,000 from year-end levels. Federal Home Loan Bank
(FHLB) advance borrowings decreased by $13,648,000, or 21.8%, with the majority
of the reduction coming in August with the prepayment of $10,000,000 in advances
with an average coupon of 7.95%. The transaction included a $291,000 prepayment
penalty, however, management anticipates this action will decrease the overall
cost of funds going forward. During the second quarter of 1997, the Bank entered
into a capital lease as a financing arrangement for the acquisition of computer
output to laser disk technology. The balance outstanding at September 30, 1997
was $221,000.
The ratio of gross loans to deposits and FHLB Advance borrowings was 93.6% at
September 30, 1997 compared to 93.1% at year-end 1996. The increase in this
ratio reflects a slightly faster growth in loans outstanding over growth in
deposits and borrowings. This was especially true because of the $10,000,000
advance prepayment.
Total shareholders' equity at September 30, 1997 was $75,416,000, an increase of
$4,082,000, or 5.7%, from year-end 1996. The major contributor to this increase
was net income for the period of $6,742,000. Additional increases to capital of
$1,474,000 were the result of sales of treasury stock. During the third quarter
of 1997 approximately $1,692,000 of treasury stock was sold to fund the exercise
of 49,000 shares under the Stock Option Plan of 1987. As the average exercise
price of the stock options was substantially below the purchase price of the
treasury stock, $1,308,000 was recorded as a reduction to paid in capital as a
result of the transaction. Capital was also increased from the issuance of
shares through the dividend reinvestment program and the exercise of executive
stock options of $133,000 and $187,000, respectively, as well as the net
increase in market value, net of deferred taxes, of investment securities
available for sale of $1,543,000. These increases were partially offset by the
payment of $2,780,000 in quarterly cash dividends and purchases of treasury
stock of $3,217,000. Treasury stock will continue to be purchased and sold in
order to fund various plans of the Corporation which require the issuance of its
stock which include the dividend reinvestment plan and internal benefit plans of
the Corporation which include the employee stock
15
18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
purchase plan, the 401-K plan, and the stock option plans of 1987 and 1997.
RESULTS OF OPERATIONS
- ---------------------
UNB Corp.'s net income for the third quarter of 1997 was $2,101,000, or $0.36
per share, compared with $1,754,000, or $0.30 per share for the third quarter of
1996. This represents an increase in earnings of 19.8% and an increase in
earnings per share of 20.0%. Year-to-date net income of $6,742,000 was $776,000,
or 13.0%, greater than the same period last year. The largest component of net
income, net interest income increased by $149,000 and $990,000 for the third
quarter and year-to-date periods, increases of 1.9% and 4.2%, respectively, from
the same periods in 1996. Total interest income for the nine months ended was
$46,975,000, or 7.8%, over the same period ended September 30, 1996, while
interest expense for the nine months ended September 30, 1997 was $22,485,000,
an increase of $2,421,000, or 12.1%, over the same period in 1996. The growth in
net interest income was primarily the result of overall growth in loans
outstanding, the reinvestment of investment portfolio cash flows into higher
yielding securities as well as a shift in earning asset mix from the investment
portfolio to higher yielding loans.
The net interest margin for 1997 year-to-date was 4.30%, a decrease of 18 basis
points, from the same period of 1996. At the Bank level, several areas have
contributed to the decline in margin. The two most significant factors impacting
the net interest margin rate between the two periods are the cost of funds and
the yield on the loan portfolio. The overall rate paid on interest bearing
liabilities increased 16 basis points with the Money Market Savings and Money
Market Access products having the greatest impact on the upward pressure. The
impact of these products on the cost of funds was partially offset by several
rate reductions in passbook and statement savings and interest bearing checking
products, as well as the prepayments of relatively higher cost FHLB advances of
$5,000,000 in December, 1996 and $10,000,000 in August, 1997.
While the cost of funds increased, the rate earned on the loan portfolio
declined by two basis points between the two nine month periods ended September
30, 1997 and 1996 with a declining yield in the home equity portfolio having the
most significant impact on overall loan yield. The home equity portfolio has
been promoted using lower rates to encourage customers' use of their existing
lines of credit. The impact of the decline in the yield in this portfolio was
partially offset by small increases in yields in the commercial loan, commercial
real estate and installment loan portfolios, brought on, in part by a 25 basis
point increase in prime rate at the end of the first quarter of 1997. Yields in
the mortgage loan portfolio which had declined earlier this year compared to
prior year due to the volume of new loans at relatively low rates, have come
back to match the year-to-date results of last year. This is due to increased
sales of lower yielding new loans and the repricing of three year ARM loans from
their low introductory rates when the loans were originated. The negative
impacts of the increased cost of funds and the small reduction in loan yields
were partially offset by an increase in the overall yield of the investment
portfolio of 31 basis points. The favorable performance of the investment
portfolio is the direct result of the sale of $12,009,000 in available for sale
securities at year-end 1996 and the reinvestment of the proceeds into higher
yielding mortgage-backed securities. Growth in earning assets has moderated over
the first three quarters of 1997
16
19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
compared to the pace of growth experienced in 1995 and 1996. Aggressive growth
in balance sheet size and the resulting decrease in the net interest margin was
an 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 three
quarters ended September 30, 1997 was 12.29% compared to 11.75% for the same
period in 1996. Return on assets for the same periods has increased slightly to
1.12% for 1997 year-to-date, versus 1.07% for the same period one year ago. For
the remainder of 1997, Management will focus on earning asset growth in selected
loan products, to be funded with a combination of deposit products and/or match
funding with FHLB advances having similar maturity and cash flow characteristics
to lock in interest spreads and manage net interest margin more effectively.
Non-interest income for the third quarter of 1997 shows a 16.3% increase from
the same period last year. On a year-to-date basis, non-interest income reached
$5,258,000, an increase of $909,000, or 20.9%, from the same period in 1996. All
categories of non-interest income show improvement over last year. The category
showing the greatest increase was Trust fee income due to an increase in the
value of managed assets brought on by record stock market levels and moderate to
declining interest rates. Other factors contributing to the positive results
were increased service charges on deposits, increased fees from the sale of
alternative investments by the Bank's dedicated American Express Financial
Advisors, gains generated on the sale of new mortgage loan production and
$191,000 in surcharge fees to non-bank customers using the Bank's ATM network.
This surcharge, initiated in January of 1997, is intended to compensate the Bank
for a portion of the costs incurred in maintaining its ATM network.
Non-interest expense for the third quarter declined by $103,000, or 1.8%, from
the same period in 1996. On a year-to-date basis, non-interest expense has
increased by $832,000, or 5.1%, from 1996. Salary, wages and benefits for the
quarter increased by 8.2% from the same period in 1996 due to annual increases
in salary and anticipated increases in incentive compensation payouts, partially
offset by reductions in pension expense. Increases in occupancy of 12.6% for the
year-to-date were due to the consolidation of the two Hartville branches into
one new facility, the relocations of the Amherst branch, the mortgage loan
department and The Loan Place to new rented office space and the opening of the
new Portage & Frank branch. Increases in equipment expense of 24.0% year-to-date
represent lease payments on a new computer mainframe, a wide area network (WAN),
teller and platform computer systems put in place in the third quarter of 1996
as well as related software and outside technical and software support. Other
expenses increased by 2.5% on a year-to-date basis as a result of increased
office supplies, telephone, legal, loan and miscellaneous expenses. These
increases were partially offset by a reduction in FDIC expense of $715,000 after
the one time assessment of $593,000 to recapitalize the Savings Association
Insurance Fund (SAIF) which was recognized in September, 1996.
Management expects the trend in increased equipment expense will continue
throughout the remainder of 1997 with a full year of expenses on the new
mainframe, expanded WAN and teller and platform equipment as well as the
installation of new computer output to laser disk technology (COLD) which
occurred in the second quarter of 1997. Management also anticipates occupancy
expenses to
17
20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
remain above those recorded in 1996 due to a full year's impact of depreciation
on the renovations of United Bank Center and the new Hartville branch, the
completion of the new Portage & Frank branch, mortgage loan and The Loan Place
offices and the addition of two in-store branch facilities in the Green and
Alliance communities early in the fourth quarter of 1997.
In 1997, the Bank is 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 are approximately 1.3 cents
per $100 of deposits insured under BIF and 6.5 cents per $100 of deposits
insured by SAIF. Management estimates the annual expense related to the FICO
assessment will be approximately $130,000 in 1997, $680,000 less than FDIC
premiums paid in 1996.
The Bank has continued involvement in legal proceedings concerning a seven and
one half acre parcel of property acquired through foreclosure and located in the
northwest quadrant of Stark County. A large national petroleum company, owner of
the facility at the date it was taken out of service, is the party responsible
for the contamination cleanup according to the State of Ohio's Bureau of
Underground Storage Tanks (BUSTER) regulations. After several environmental
assessments by the Bank and the petroleum company were filed with the State
agency, the State is now in agreement with the petroleum company's findings,
that the levels of contaminants are such that immediate remediation is not
required. The contamination will remediate itself over time which is the method
the petroleum company wishes to pursue. The state will allow the site to sit for
another year and to re-measure the contamination level at that time in the hope
it will drop below state standards which require any remediation activity.
Counsel for the Bank is working with the petroleum company to obtain a hold
harmless agreement to help assist the Bank in the sale of the property. The Bank
continues to list the property for sale and follows up on all inquiries which
are made. Estimated cleanup costs, should they become the responsibility of the
Bank, are not material to the business or financial condition of the Registrant
and have been set up as an allowance against the property's value on the Corp.'s
Consolidated Balance Sheet.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the third quarter of 1997 was $887,000, or
$33,000 below the same period in 1996. Included in the charge for this quarter
was $62,000 in provision for The Loan Place, as an initial funding of its loan
loss allowance. On a year-to-date basis, the provision for loan losses was
$2,237,000, or $113,000 less than the same period in 1996. The Corporation's
reserve-to-loan ratio of 1.50% was 15 basis points above the ratio at December
31, 1996. The reduction in provision from 1996 was possible due to slower loan
growth experienced so far in 1997. The provision for loan losses charged to
operating expense is 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. Net charge-offs as a percentage of average
loans outstanding for the third quarter of 1997 were .05% versus .10% for the
same period in 1996. The Corporation's year-to-date net charge-offs of
$1,020,000 for 1997 are $286,000 below the levels recorded for the same period
in 1996. However, due to the record levels of consumer debt outstanding
nationally, and the trend
18
21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
experienced throughout the financial services industry of increased consumer
loan delinquencies and losses, management remains cautious in its expectations
for net charge-offs for the remainder of the year especially in the consumer and
MasterCard loan portfolios. In addition, during the winter months there is a
greater awareness of the potential for increased delinquencies, repossessions
and charge-offs on the large volume of recreational vehicle and marine loans
carried in the consumer loan portfolio. Given the reduced charge-offs, it
appears that implementation of stricter consumer loan underwriting guidelines
put in place in mid-1996 as well as better trend analyses resulting in earlier
detection of delinquent accounts and more proactive collection efforts on
potential problem credits have had a positive impact as this year has
progressed.
Impaired loans at September 30, 1997 were $396,000, an increase of $128,000 from
December 31, 1996. Non-performing loans, which include non-accrual loans and
loans past due 90 days or more, were $1,091,000 at September 30, 1997 compared
to $838,000 at December 31, 1996, an increase of $253,000. The ratio of
non-performing loans to total loans outstanding at September 30, 1997 was .17%,
a slight increase from the .14% recorded at year-end 1996, while the ratio for
the Bank's peers, all commercial banks having assets between $500 million and $1
billion, stands at .74%.
CAPITAL RESOURCES
- -----------------
Shareholders' equity totaled $75,416,000 at September 30, 1997, an increase of
$4,082,000, or 5.7%, compared to the $71,334,000 balance at December 31, 1996.
The ratio of equity-to-assets at September 30, 1997 was 9.23% versus 8.80% at
December 31, 1996, with the increase of 43 basis points reflecting more
restrained growth in earning assets coupled with continued growth of
shareholders' equity primarily due to year-to-date net income. The rate of
primary capital (shareholders' equity plus the allowance for loan losses less
intangible assets) to total adjusted assets was 14.18% at September 30, 1997.
The risk-based capital ratio was 13.33% while the Tier 1 capital and core
leverage ratios reached 12.08% and 8.35%, respectively at September 30, 1997.
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 dividend of $0.17 per share for the third quarter of 1997 was a 21.4%
increase over the dividend paid for the same period in 1996 and a $0.01 increase
over the dividend paid in the second quarter of 1997. The year-to-date dividend
of $0.48, representing 41.2% of year-to-date earnings, falls within the
Corporation's dividend policy which provides for cash dividend payouts within a
range of 35% to 50% of earnings.
At September 30, 1997, the unrealized gain in securities available for sale, net
of deferred taxes of $2,715,000, reflects an increase in shareholders' equity of
$1,543,000 since year-end 1996. The unrealized gain in market value of the
available for sale securities has increased primarily due to the relatively low
level of market interest rates at September 30, 1997 as well as continued price
appreciation experienced in the Corporation's equity portfolio.
19
22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
LIQUIDITY
- ---------
Management ensures that the liquidity position of the Corporation is adequate to
meet the credit needs and cash demands of its borrowers and depositors through
the ability to readily convert assets to cash and raise funds in the market
place in a timely and cost effective manner. Total cash, federal funds sold,
investment and mortgage-backed securities available for sale (including money
market investments) of $151,850,000 represent 18.6% of total assets at September
30, 1997. Of the investments available for sale, $46,061,000 are held in U.S.
Treasury and Agency securities, 58.7% of which mature within one year.
Approximately $91,109,000 of total Corporate securities are 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 increase
in the ratio of gross loans to deposit and FHLB advance borrowings from 93.1% at
year-end 1996 to 93.6% at September 30, 1997 reflects the prepayment of
$10,000,000 in FHLB advances in August of this year.
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
- -------------------------
In the normal course of business, the Bank 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 Bank 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 rate spread relationships,
prepayment speeds, repricing opportunities and changes in the volume 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 and the inherent limitations of the various
methodologies results in a sophisticated estimate, not a precise calculation of
exposure. The Asset and Liability Management Committee reviews updated interest
rate risk position information monthly in addition to regular weekly monitoring
of changes in balance sheet volume, pricing and mix.
At September 30, 1997, assuming an immediate, parallel 200 basis point shift in
market yields, the Bank's net interest income for the next twelve months was
calculated to vary between -2.79% for a 200 basis point increase, and +1.28% for
a 200 basis point decrease, denoting a negative income sensitivity to rising
interest rates. For the same two interest rate scenarios, the net present value
20
23
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
of portfolio equity was projected to decline by 20.6% and increase by 24.2%,
respectively. The duration of total assets exceeded the duration of total
liabilities by 11.8 months, indicating that liabilities will reprice sooner than
assets, consistent with a bias toward negative interest rate sensitivity. This
increase in duration of 2.9 months from June, 1997, is a result, for the most
part, of the lengthening of maturities in the investment portfolio in order to
improve yield.
The modified twelve month cumulative gap was -11.85% of total assets, indicating
a higher degree of rate sensitive liabilities than rate sensitive assets and an
exposure to rising interest rates. For the majority of 1997, the gap results
have been outside the established Asset and Liability Policy limits of +/-10%
for the one year time frame. Management is reevaluating the usefulness of the
gap, a static measure of interest rate sensitivity, which is limited in its
ability to yield quantitative information to analyze the impact of balance sheet
strategies on future profitability. Management recognizes that the strategies
available to bring the gap into compliance on the liability side of the balance
sheet would require growing targeted deposit products and other borrowings at an
unreasonable cost. One strategy pursued to improve the margin, the early payoff
of FHLB advances, has caused the negative gap position to worsen. In addition,
management is comfortable with the knowledge that the Bank's cost of funds and
its percentage of core to total deposits are in line with those of its peers
and, therefore, is willing to tolerate the levels of interest rate risk inherent
in its liability mix and maturity distribution. Management recognizes that its
emphasis must be on the Bank's assets, changing earning asset mix and improving
yields to limit interest rate sensitivity and improve net interest margin. To
achieve that goal, management continues to stress the importance of growth in
variable rate commercial, commercial real estate and consumer loan products.
Other strategies which are always available to manage interest rate risk include
the use of brokered deposits and derivative products such as interest rate
swaps, caps and floors, in addition to changes in pricing, maturity and mix of
the Bank's other balance sheet categories of loans, securities and deposits. Any
strategy chosen to counteract an undesirable level of interest rate risk is
evaluated in terms of its effectiveness and cost and presented to the Asset and
Liability Management Committee for its approval prior to implementation. In
general, the Bank uses wholesale funding as a cost effective method of extending
deposit maturities beyond the terms preferred by the majority of customers,
while derivative products are typically used to offset existing balance sheet
positions that exhibit higher than acceptable risk. These strategies supplement
the ongoing changes in pricing on deposits and loans that form the basis of the
Bank's risk reduction efforts.
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 76.2% of total loans outstanding at September 30,
1997. Residential mortgages, automobile, recreational vehicle and boat loans
were the four largest concentrations in the loan portfolio by loan type.
Commercial and commercial real estate loans comprise the remaining 13.1% and
10.7% of loans outstanding, respectively. The two largest industry
concentrations identified within the loan
21
24
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
portfolio, manufacturers and suppliers of structural wood components for the
construction industry and offices and clinics of medical doctors, have
commitments outstanding which represent 28.5% and 27.9%, respectively, of total
Bank 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.
22
25
UNITED NATIONAL BANK & TRUST
12 MO CUM ADJ GAP TREND
[GRAPHIC]
GAP Analysis Ratios:
9/96 10/96 11/96 12/96 1/97 2/97 3/97 4/97
---- ----- ----- ----- ---- ---- ---- ----
Cumulative Bank GAP 78,146 87,608 91,399 69,273 72,303 71,726 71,363 73,356
Rate Sensitive Asset to Rate
Sensitive Liability (%) 112.20% 113.51% 114.16% 110.40% 110.99% 110.92% 110.80% 111.25%
Adjusted GAP Percentage:
3 Months Cum GAP % -8.08% -7.02% -6.77% -7.99% -10.63% -12.09% -11.96% -12.77%
6 Months Cum GAP % -7.98% -6.07% -8.03% -9.29% -12.19% -14.94% -15.15% -14.96%
12 Months Cum GAP % -6.09% -4.70% -6.51% -8.64% -9.24% -10.61% -12.01% -11.12%
United Bank policy/guideline limits: +/- 10%
5/97 6/97 7/97 8/97 9/97
---- ---- ---- ---- ----
Cumulative Bank GAP 80,256 75,448 82,700 78,551 81,637
Rate Sensitive Asset to Rate
Sensitive Liability (%) 112.05% 111.33% 112.38% 111.84% 112.21%
Adjusted GAP Percentage:
3 Months Cum GAP % -12.62% -11.25% -10.27% -13.59% -12.97%
6 Months Cum GAP % -15.49% -14.53% -12.29% -13.29% -13.07%
12 Months Cum GAP % -11.58% -11.20% -9.44% -12.04% -11.85%
United Bank policy/guideline limits: +/- 10%
23
26
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
SEPTEMBER 30, 1997
(000'S omitted)
1997 1996
------ ------
Balance at January 1, $8,335 $7,242
Charge-Offs (Domestic):
Commercial, Financial, Agricultural 243 53
Real Estate - Commercial 0 0
Real Estate - Residential 20 58
Consumer Loans 1,776 1,970
------ ------
Total Charge-Offs 2,039 2,081
------ ------
Recoveries (Domestic):
Commercial, Financial, Agricultural 165 3
Real Estate - Commercial 8 39
Real Estate - Residential 74 55
Consumer Loans 772 678
------ ------
Total Recoveries 1,019 775
------ ------
Net Charge-Offs 1,020 1,306
------ ------
Additions Charged to Operations 2,237 2,350
Balance at September 30, $9,552 $8,286
====== ======
Ratio of net charge-offs during this
quarter to average loans outstanding this quarter .05% .10%
====== ======
Allowance as a percentage of total loans 1.50% 1.37%
====== ======
24
27
UNB CORP.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, 1997
(000'S omitted)
Percent of
loans
in each category
Amount to total loans
--------- ----------------
Commercial, Financial, Agricultural $ 3,294 13.1%
Real Estate - Commercial 762 10.7%
Real Estate - Residential 266 41.7%
Consumer Loans 2,344 34.5%
Unallocated: 2,886 N/A
------ -------
Valuation Reserve on September 30, 1997 $ 9,552 100.00%
====== =======
25
28
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 15, 1997, for the
purpose of electing five directors and to approve the UNB Corp. 1997 Stock
Option Plan. Under this Plan certain key employees and directors of the
Corporation or the Bank would be eligible to receive Options to purchase a
certain number of the shares of the Corporation's common stock subject to
certain conditions. The adoption of the Stock Option Plan 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
Louis V. Bockius III Abner A. Yoder Joseph J. Sommer
-------------------- -------------- ----------------
For 4,490,420 4,494,242 4,491,365
Against 6,068 2,245 5,122
Abstain --- --- ---
Shares not
voted by Brokers 528,488 528,488 528,488
Russell W. Maier Harold M. Kolenbrander
---------------- ----------------------
For 4,468,295 4,494,356
Against 28,193 2,131
Abstain --- ---
Shares not
voted by Brokers 528,488 528,488
Proposed UNB Corp.
1997 Stock Option Plan
----------------------
For 3,699,780
Against 462,935
Abstain 76,578
Shares not
voted by Brokers 800,446
Item 5 - Other Information
- --------------------------
N/A
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule (1)
26
29
UNB CORP.
PART II - OTHER INFORMATION (continued)
B. Reports - Form 8-K - During the third quarter of 1997 one report on Form
8-K was filed by the Registrant. This report, filed July 1, 1997,
disclosed the formation of a subsidiary corporation of UNB Corp. known as
The Loan Place, Inc. which is to engage in the business of making secured
and unsecured consumer finance loans pursuant to a license issued by the
Ohio Department of Commerce, Division of Financial Institutions. No
financial statements were filed in conjunction with this report.
(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.)
27