1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
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 April 30, 1998
5,782,856 Common Shares
2
UNB CORP.
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Interim financial information required by Rule 10-01 of Regulation S-X
(17 CFR Part 210) is included in this Form 10-Q as referenced below:
Page
Number(s)
---------
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Condensed Consolidated Statements
of Changes in Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-13
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 23-25
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 26
Signatures 27
3
UNB CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands) MARCH 31, December 31,
1998 1997
----------------------------------
ASSETS
Cash and cash equivalents $31,721 $28,998
Federal funds sold 17,925 7,500
Interest bearing deposits with banks 129 1,142
Securities, net (Fair value:
$75,447 and $72,999, respectively)(Note 2) 75,433 72,993
Mortgage-backed securities (Fair value:
$72,883 and $67,222, respectively)(Note 2) 72,826 67,845
Loans originated and held for sale 3,679 2,190
Loans:
Total loans (Notes 3 and 6) 625,176 630,418
Less allowance for loan losses (Note 4) (9,955) (9,650)
- ---------------------------------------------------------------------------------------------------------
Net loans 615,221 620,768
Premises and equipment, net 11,573 11,727
Intangible assets 5,087 5,339
Accrued interest receivable and other assets 8,556 7,811
- ---------------------------------------------------------------------------------------------------------
TOTAL ASSETS $842,150 $826,313
- ---------------------------------------------------------------------------------------------------------
*
LIABILITIES
Deposits:
Noninterest bearing deposits $87,936 $82,173
Interest bearing deposits 574,772 567,308
- ---------------------------------------------------------------------------------------------------------
Total deposits 662,708 649,481
Fed funds purchased and short-term borrowings 65,227 56,511
Federal Home Loan Bank advances and capital lease (Note 6) 29,365 35,650
Accrued taxes, expenses and other liabilities 7,330 8,151
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 764,630 749,793
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 15,000,000 shares authorized;
5,823,212 and 5,821,369 issued and outstanding, respectively) 5,823 5,821
Paid-in capital 31,285 31,277
Retained earnings 38,720 37,123
Unrealized gain on securities available for sale, net of tax 3,264 3,739
Treasury stock, 40,356 and 37,154 shares at cost (1,572) (1,440)
- ---------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,520 76,520
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $842,150 $826,313
=========================================================================================================
See Notes to the Consolidated Financial Statements
1
4
UNB CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except per share data) THREE MONTHS ENDED
MARCH 31,
---------------------------
1998 1997
------- -------
INTEREST INCOME:
Interest and fees on loans:
Taxable $13,675 $13,285
Tax exempt 37 48
Interest and dividends on investments
& mortgage-backed securities:
Taxable 2,092 1,853
Tax exempt 10 12
Interest on bank deposits and federal funds sold 238 180
- ---------------------------------------------------------------------------------------------
Total interest income 16,052 15,378
- ---------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,211 5,463
Interest on short-term borrowings 701 767
Interest on FHLB advances 465 1,014
- ---------------------------------------------------------------------------------------------
Total interest expense 7,377 7,244
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,675 8,134
PROVISION FOR LOAN LOSSES (NOTE 4) 691 675
- ---------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,984 7,459
OTHER INCOME:
Service charges on deposits 702 598
Trust Department income 992 687
Other operating income 389 249
Securities gains, net 786 0
Gains on loans originated for resale and sold 249 22
- ---------------------------------------------------------------------------------------------
Total other income 3,118 1,556
- ---------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 3,251 2,610
Occupancy 333 306
Equipment 868 732
Other operating expense 2,717 1,982
- ---------------------------------------------------------------------------------------------
Total other expenses 7,169 5,630
- ---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,933 3,385
PROVISION FOR INCOME TAXES 1,352 1,152
- ---------------------------------------------------------------------------------------------
NET INCOME $2,581 $2,233
=============================================================================================
EARNINGS PER SHARE (NOTE 1):
Basic $0.45 $0.39
Diluted $0.44 $0.38
=============================================================================================
DIVIDENDS PER SHARE (NOTE 1) $0.17 $0.15
=============================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Basic 5,784,204 5,791,754
Diluted 5,908,268 5,944,309
=============================================================================================
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
UNB CORP.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
UNAUDITED
(In thousands) THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
---------- ----------
Net Income $2,581 $2,233
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized gains/(loss) arising
during the period 36 (196)
Less: Reclassified adjustment for
accumulated gains included in
net income (511) 0
---------- ----------
Unrealized gains on securities (475) (196)
---------- ----------
Comprehensive income $2,106 $2,037
========== ==========
See the Notes to the Consolidated Financial Statements
3
6
UNB CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands except per share data)
THREE MONTHS ENDED
3/31/98 3/31/97
---------------- ---------------
Balance at beginning of period $76,520 $71,334
Net Income 2,581 2,233
Shares issued through dividend reinvestment 0 139
Stock options exercised 0 80
Common stock issued 64 0
Cash dividends $0.17 and $0.15 per share, respectively (983) (870)
Treasury stock purchases (463) (587)
Treasury stock sales 276 261
Change in market value on investment securities
available for sale, net of deferred taxes (475) (196)
---------------- ---------------
Balance at end of period $77,520 $72,394
================ ===============
See Notes to the Consolidated Financial Statements
4
7
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
(In thousands) MARCH 31,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,581 $2,233
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 327 212
Provision for loan losses 691 675
Net securities gains (786) 0
Net accretion on securities (43) (245)
Amortization of intangible assets 252 253
Loans originated for resale (14,684) (2,059)
Proceeds from sale of loan originations 13,403 701
Changes in:
Interest receivable (130) (47)
Interest payable (215) (284)
Other assets and liabilities, net (979) 1,026
Deferred income 2 (2)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 419 2,463
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks 1,013 (90)
Net increase in funds sold (10,425) 1,800
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 1,843 0
Proceeds from maturities of securities held to maturity 0 1,470
Proceeds from maturities of securities available for sale 21,300 47,000
Purchases of securities held to maturity (120) (1,397)
Purchases of securities available for sale (25,108) (31,121)
Purchases of mortgage-backed securities available for sale (9,537) (13,525)
Principal payments received on mortgage-backed securities held to maturity 1,589 1,660
Principal payments received on mortgage-backed securities available for sale 2,722 5,654
Net increase in loans made to customers 4,576 (7,528)
Loans purchased 0 (454)
Purchases of premises and equipment, net (173) (879)
Principal payments received under leases 72 29
- ---------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (12,248) 2,619
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase(decrease) in deposits 13,227 (7,813)
Cash dividends paid, net of shares issued through dividend reinvestment (983) (731)
Purchase of treasury stock (463) (586)
Sales of treasury stock 276 266
Proceeds from issuance of stock 64 80
Net increase (decrease) in short-term borrowings 8,716 (2,061)
Repayments of FHLB advances (6,275) (1,197)
Repayments on capital lease (10) 0
- ---------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 14,552 (12,042)
- ---------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,723 (6,960)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,998 34,762
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,721 $27,802
===========================================================================================================================
See the Notes to the Consolidated Financial Statements
5
8
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
- ---------------------------------------------------
Unless otherwise indicated, amounts are in thousands, except per share data.
The accompanying consolidated financial statements include the accounts of UNB
Corp. and its wholly owned subsidiaries. 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 March 31, 1998, 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, 1997, 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 three months ended March 31, 1998, and
March 31, 1997, UNB Corp. paid interest in the amount of $7,592 and $7,481,
respectively. For the three month period ended March 31, 1998, federal income
taxes paid totaled $70. There were no federal income taxes paid for the three
month period ended March 31, 1997.
The Corporation classifies securities as held to maturity, available for sale,
or trading. 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 amortized cost of securities sold, using the specific
identification method.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller-balance homogeneous loans are evaluated for
impairment in total and are excluded from reported impaired loans. Such loans
include residential first mortgage loans secured by one-to-four family
residences, residential construction loans and consumer automobile, boat, RV,
home equity and credit card loans with balances less than $300. In addition,
loans held for sale and leases are excluded from consideration as impaired.
6
9
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.
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.
Basic and diluted earnings per share are computed under the provisions of SFAS
No. 128, "Earnings Per Share," which was adopted retroactively by the
Corporation on December 31, 1997. All prior amounts have been restated to be
comparable. Basic earnings per share is based on net income divided by the
weighted average number of shares outstanding during the period. Diluted
earnings per share shows the dilutive effect of additional common shares
issuable under stock options assuming the exercise of stock options less the
treasury shares assumed to be purchased from the proceeds using the average
market price of UNB Corp.'s stock for the periods presented.
On January 1, 1998, the Corporation adopted Financial Accounting Standard No.
130, "Reporting Comprehensive Income". This Statement establishes standards for
reporting of comprehensive income and its components for all periods reported.
Comprehensive income includes both net income and other comprehensive income.
Other comprehensive income includes the change in unrealized gains and losses on
securities available for sale and additional minimum pension liability
adjustments.
7
10
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 March 31, 1998, and December 31,
1997, are as follows:
March 31, 1998
---------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
- ------------------------- ---- ----- ------ -----
Securities available for sale:
U.S. Treasury securities $17,077 $32 $(17) $17,092
Obligations of U.S. government
agencies and corporations 38,970 140 (6) 39,104
Securities held to maturity:
Obligations of state and
political subdivisions 950 1 -- 951
Corporate bonds and other debt
securities 747 13 -- 760
------- ------ ------- --------
Total debt securities 57,744 186 (23) 57,907
Equity securities available for sale 11,934 4,609 -- 16,543
Asset-backed securities available
for sale 999 -- (2) 997
------- ------ ------- --------
Total investment securities 70,677 4,795 (25) 75,447
Mortgage-backed securities
available for sale 67,088 359 (170) 67,277
Mortgage-backed securities
held to maturity 5,549 58 (1) 5,606
------- ------ ------- --------
Total mortgage-backed securities 72,637 417 (171) 72,883
------- ------ ------- --------
Total investment and mortgage-
backed securities $143,314 $5,212 $(196) $148,330
======== ====== ======= ========
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11
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
December 31, 1997
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
U.S. Treasury securities $17,005 $42 $(1) $17,046
Obligations of U.S. government
agencies and corporations 36,476 119 (4) 36,591
Securities held to maturity:
Obligations of state and
political subdivisions 951 2 (1) 952
Corporate bonds and other debt
securities 746 5 -- 751
------- ------ ------- -------
Total debt securities 55,178 168 (6) 55,340
Equity securities available for sale 11,581 5,081 -- 16,662
Asset-backed securities available
for sale 999 -- (2) 997
------- ------ ------- -------
Total investment securities 67,758 5,249 (8) 72,999
Mortgage-backed securities
available for sale 60,281 527 (97) 60,711
Mortgage-backed securities
held to maturity 7,134 79 (2) 7,211
------- ------ ------- -------
Total mortgage-backed securities 67,415 606 (99) 67,922
------- ------ ------- -------
Total investment and mortgage-
backed securities $135,173 $5,855 $(107) $140,921
======== ====== ======= ========
During the three month period ended March 31, 1998 the proceeds from sales of
securities available for sale were $1,843. There were no sales recorded for the
three months ended March 31, 1997. Net gains of $786 were recognized on the
sales of securities in 1998. There were no sales or transfers of securities
classified as held to maturity.
The amortized cost and estimated fair value of debt securities at March 31,
1998, by contractual maturity, are shown on page 10. Actual maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
9
12
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
March 31, 1998
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 $12,998 $13,030 6.05%
Due after one year through five years 4,079 4,062 5.43
------- ------- ------
Total 17,077 17,092 5.90
------- ------- ------
U.S. Government agencies and corporations
Due in one year or less 18,968 19,001 5.93
Due after one year through five years 20,002 20,103 6.44
------- ------- ------
Total 38,970 39,104 6.19
------- ------- ------
$56,047 $56,196 6.10%
======= ======= ======
Securities held to maturity:
Obligations of state and political subdivisions
Due in one year or less $ 950 951 4.27%
------- ------- ------
Total 950 951 4.27
------- ------- ------
Corp bonds and other debt securities
Due after one year through five years 747 760 8.53
------- ------- ------
Total 747 760 8.53
------- ------- ------
$ 1,697 $ 1,711 6.14%
======= ======= ======
Asset-backed securities available for sale $ 999 $ 997 7.00%
------- ------- ------
Mortgage-backed and collateralized
mortgage obligations available for sale 67,088 67,277 6.53
------- ------- ------
Mortgage-backed and collateralized
mortgage obligations held to maturity 5,549 5,606 7.78
------- ------- ------
$73,636 $73,880 6.63%
======= ======= ======
At March 31, 1998, 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.
10
13
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:
March 31, 1998 December 31, 1997
-------------- -----------------
Commercial, financial and agricultural $ 83,246 $ 81,960
Commercial, tax exempt 3,106 3,142
Commercial real estate 70,900 70,896
Residential real estate 252,335 260,190
Consumer loans 215,589 214,230
------- -------
Total loans $625,176 $630,418
======== ========
Impaired loans are as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Loans with no allowance for loan
losses allocated $138 $281
Loans with allowance for loan
losses allocated -- --
Amount of allowance allocated -- --
Average of impaired loans,
year-to-date $138 $335
Interest income recognized during
impairment 72 33
Cash-basis interest income
recognized year-to-date 3 32
At March 31, 1998 and December 31, 1997, loans on non-accrual status and/or past
due more than 90 days approximated $853 and $945, respectively. The Other Real
Estate Owned balance, net of allowance, at March 31, 1998 and December 31, 1997
was $325.
Note 4 - Allowance for Loan Losses
- ----------------------------------
A summary of activity in the allowance for loan losses for the three months
ended March 31, 1998, and March 31, 1997, are as follows:
(in thousands of dollars) 1998 1997
---- ----
Balance - January 1 $ 9,650 $8,335
Provision charged to operating expense 691 675
Loans charged off, net of recoveries (386) (654)
-------- --------
Balance - March 31 $ 9,955 $8,356
======== ========
11
14
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 13.8%, 11.3%,
40.4% and 34.5%, respectively, at March 31, 1998. Indirect loans accounted for
73.2% of all consumer loans at March 31, 1998. The dealer network from which the
indirect automobile, marine and RV loans were purchased includes 97
relationships thus far in 1998, the largest of which was responsible for 7.6% of
the total indirect dollar volume for the year-to-date 1998.
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 March
31, 1998, 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 $201,865.
At March 31, 1998, the Corporation held one interest rate swap agreement with a
notional amount of $3.4 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 March 31, 1998 was 5.64% while the
fixed rate to be paid through the remainder of the contract is 2.88%. The income
from this agreement for the three months ended March 31, 1998 and March 31, 1997
was $26 and $33, respectively. The market value of this swap at March 31, 1998
was a positive $141. 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 March 31, 1998 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.
12
15
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
A summary of FHLB advances outstanding is as follows:
Maturity Interest Rate Amount
--------------------------------------------
1998 6.15%-6.70% $6,223
1999 5.35%-6.70% 12,848
2000 5.50%-6.85% 6,226
2001 6.00%-6.70% 3,188
2002 6.25% 330
2003 6.25% 350
--------------------------------------------
Total $29,165
============================================
Based on the Bank's investment in FHLB stock, the maximum dollar amount of FHLB
advance borrowings available to the Bank is $137,004.
In the second quarter of 1997, the Bank entered into capital lease arrangement
in order to finance the acquisition of computer hardware and related software in
the amount of $252. The lease terms call for sixty monthly payments of
approximately $5 with the last payment due in March, 2002. The balance
outstanding at March 31, 1998 was $200.
13
16
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 March 31, 1998, compared to December 31, 1997, and
the results of operations for the year-to-date periods ending March 31, 1998,
compared to the same period in 1997. 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 quarter of 1998, operations began for UNB Corp.'s affiliate,
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. UNB Corp. has also filed with the State of Ohio to
obtain an 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 1998.
During the first quarter of 1998, management decided not to activate United
Mortgage Corporation, an affiliate of UNB Corp., which was scheduled to begin
operations in the third quarter of 1998. The mortgage function will remain a
department of the Bank while several of the department's personnel will become
employees of United Banc Financial Services, the finance company affiliate of
the Corporation which is, along with the mortgage function, under the same
manager. These employees will complement the finance company with greater
opportunities for expansion of its product line and growth in fee income.
FINANCIAL CONDITION
- -------------------
Total assets at March 31, 1998 were $842,150, an increase of $15,837, or 1.9%,
from year-end 1997. Highly liquid balances, comprised of cash and cash
equivalents, federal funds sold and interest bearing deposits with banks, showed
a net increase of $12,135, with the majority of the increase in the federal
funds sold category of $10,425. The investment and mortgage-backed securities
portfolios increased by $2,440 and $4,981, respectively, increases of 3.3% and
7.3%, respectively, from balances at 1997 year-end.
Growth in the securities portfolios was for the most part funded by a net
reduction in the loan portfolio of $5,242, or less than 1.0%, from 1997 year-end
balances. Due to the declining interest rate environment experienced in late
1997 which continued into 1998 and expectations for flat to declining rates in
1998, management decided to mitigate the Corporation's interest rate risk
inherent in funding longer term, fixed rate mortgages and indirect installment
loans by diverting the funds to the investment portfolio into securities with
durations of
14
17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
approximately two years.
Within the loan portfolio, reductions were experienced in residential real
estate which declined by $7,855, or 3.0%, from December, 1997 balances. This was
primarily due to extremely high levels of refinancing brought on by the relative
levels of current mortgage rates. Consumer loans increased by $1,359, or less
than 1.0%, from year-end 1997, as the implementation of the new strategy to
limit interest rate risk took time to work through the pipeline of indirect
installment loans already approved early in the first quarter. Holding current
rates constant while competition has lowered its rates, along with limiting
dealer reserves and increasing rates for loans with lower credit quality are
components of the new strategy. For the quarter, Commercial loans grew by
$1,250, or 1.5%, over December, 1997 while Commercial Real Estate loans remained
flat for the same period. While activity in the commercial and commercial real
estate portfolios has remained quiet, management continues to focus its efforts
on growth in these areas.
With this strategy to avoid putting longer-term, fixed rate assets into the loan
portfolios, the Bank continues to meet the needs of mortgage loan customers by
providing financing alternatives which are being sold to a network of secondary
market buyers. In addition, the Bank continues to benefit from its extensive
network of relationships with car, marine and recreational vehicle dealers by
serving as a conduit to investors in sub-prime (B and C quality)indirect
installment paper. For its role in both of these transactions types, the Bank is
receiving fee income.
Total earning assets at March 31, 1998 increased to $795,168 from $782,088 at
December 31, 1997, an increase of $13,080, or 1.7%. The ratio of earning assets
to total assets declined slightly from 94.6% at year-end 1997 to 94.4% at March
31, 1997, the result of increases in cash and cash equivalents from year-end.
Total liabilities increased by $14,837 from year-end 1997 levels. Total deposits
at March 31, 1998 increased by $13,227, or 2.0%, from year-end 1997.
Non-interest bearing deposits are 7.0% above 1997 year-end levels. Interest
bearing demand balances increased 9.2%. Increases in both categories were the
result of extensive marketing efforts to repackage and promote the Bank's
checking with interest products under the new name of United Bank Club Accounts.
Savings balances increased $4,176, or 2.2%, from year-end levels, with the
popular Money Market Access product responsible for an increase of $6,922, or
10.6%, over 1997 year-end balances. This product continues to attract the
balances of sophisticated savers who demand returns higher than those available
in traditional savings products and the liquidity unavailable 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 declined by $3,849, or 1.3%, and were influenced by the Bank's
current pricing strategy which positions the Bank's interest rates close to the
average of rates offered by the Bank's local market competition.
Other significant sources of balance sheet funding, term and sweep repurchase
agreements increased $10,624, or 20.7%, from year-end levels spurred on by the
15
18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
increased calling efforts of the Bank's business development officers to
commercial customers. Federal Home Loan Bank (FHLB) advance borrowings decreased
by $6,275, with the majority of the reduction in January, with the prepayment of
$5,000 in advances with a coupon of 6.60%. The transaction included a $41
prepayment penalty, however, this action has helped decrease the overall cost of
funds going forward.
The ratio of gross loans to deposits and FHLB Advance borrowings was 90.4% at
March 31, 1998 compared to 92.0% at year-end 1997. The reduction in this ratio
from year-end 1997 reflects the decline in loans outstanding due to the
management strategy to limit the amount of new fixed rate loans and the growth
experienced in core deposits.
Total shareholders' equity at March 31, 1998 was $77,520, an increase of $1,000,
or 1.3%, from year-end 1997. The major contributor to this increase was net
income for the period of $2,581. Additional increases in capital of $276 and $64
were the result of sales of treasury stock and the issuance of stock as a
portion of executive compensation, respectively. These increases were partially
offset by the payment of $983 in quarterly cash dividends and purchases of
treasury stock of $463. 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. These plans include the dividend reinvestment plan and internal benefit
plans of the Corporation which include the employee stock purchase plan, the
401-K plan, and the stock option plans of 1987 and 1997.
Year 2000 Compliance
- --------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define an applicable year. The Corporation's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
UNB Corp. and its subsidiaries are in the process of conducting a comprehensive
review of all of its hardware, software and any ancillary systems which may have
any type of computer chip in their configuration, to identify potential Year
2000 compliance problems and to test such hardware and software for compliance.
This effort is led by a Year 2000 Compliance Committee which reports directly to
the Board of Directors on a monthly basis. The Committee also reports its
progress to its primary regulator, the Office of the Comptroller of the
Currency.
This Committee oversees the development and implementation of contingency plans
for any systems that may not currently be Year 2000 compliant or which may not
be ready for testing until after December 31, 1998. The Committee is also
addressing the potential impact on the Corporation of its customers' Year 2000
compliance and contingency plans to become compliant with Year 2000
requirements. All commercial loan customers will be contacted regarding the Year
2000 issue and their progress in addressing it will be evaluated by the
Corporation. Presently, management cannot accurately assess the impact of Year
2000 on its commercial customers, but
16
19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
has established a schedule to do such an evaluation by September 30, 1998.
Based on current information, the Corporation believes that all systems will be
Year 2000 compliant before January 1, 2000, either through the modification of
existing hardware and software or through the purchase of new hardware and
software. The Committee currently anticipates that the Corporation will spend
approximately $200 to rectify this problem. At this time, management does not
believe that there will be significant impact to earnings due to this issue. The
Year 2000 problem could have a material impact on the operation of the
Corporation if not properly addressed, but management anticipates that the
problem will be resolved and thus will not have a significant impact on the
Corporation's delivery of products and services, or its operations.
RESULTS OF OPERATIONS
- ---------------------
UNB Corp.'s net income for the first quarter of 1998 was $2,581, or $0.44 per
diluted share, compared with $2,233, or $0.38 per diluted share for the first
quarter of 1997. This represents an increase in earnings of 15.6% and an
increase in diluted earnings per share of 15.8%. The largest component of net
income, net interest income increased by $541 for the first quarter, an increase
of 6.7% over the same period in 1997. Total interest income for quarter was
$16,052, or 4.4%, over the same period in 1997, while interest expense was
$7,377, an increase of $133, or 1.8%, over the same period in 1997. The growth
in net interest income was primarily the result of overall growth in earning
assets, an increase in fees on loans outstanding and a change in the mix of
liabilities used to fund earning assets from more expensive FHLB advances to
lower cost deposits.
The net interest margin for the first quarter of 1998 was 4.50%, versus 4.37%
for the same period in 1997, an increase of 13 basis points. At the Bank level,
the most significant factor impacting the net interest margin between the two
periods was an increase in the yield on earning assets. The yield on total
securities increased 18 basis points led by an increase in the balances of
relatively higher yielding CMOs. The yield on total loans and leases increased
six basis points between periods, the result of a 25 basis point increase in the
Prime rate at the end of the first quarter of 1997 and an increase in loan fees
recorded in the first quarter of 1998 over the first quarter of 1997. The yield
on loans held by United Bank Financial Services also impacted the yields on
consolidated loans, although to a much smaller degree because of its relative
size. For the first quarter of 1998, yields earned on loans were in excess of
21.0%, while net interest margin was in excess of 12.0%. As the size of this
affiliate grows, its impact on net interest income and net interest margin will
become more significant.
The overall cost of interest bearing liabilities remained constant with
reductions in the cost of interest bearing transaction and savings balances
coupled with the prepayment of relatively higher cost FHLB advances throughout
1997 and early in 1998 offset by increases in the cost of money market savings
and Money Market Access accounts.
Return on equity for the quarter ended March 31, 1998 was 13.44% compared to
12.51% for the same period in 1997, an increase of 7.4%. Return on assets has
17
20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
increased from 1.14% for the first quarter of 1997 to 1.27% for the first
quarter of 1998, an increase of 13 basis points, or 11.4%. As competition for
loans and deposits grows with narrowing in interest margins, management's focus
on growing fee income from new and existing sources coupled with more selective
balance sheet growth has aided its performance as measured by its return on
assets and equity.
Non-interest income for the first quarter of 1998 was $3,118, a 100.4% increase
from the first quarter of 1997. All categories of non-interest income showed
improvement. The category showing the greatest impact on fee income was security
gains taken on the portfolio of available for sale equity securities held in UNB
Corp.'s parent company. The Trust Department recorded fee income of $992, an
increase of $305, or 44.4%, from the same period in 1997. This increase was due
to an increase in the value of managed assets brought on by the addition of new
Trust customers, record stock market levels and moderate to declining interest
rates. Another factor contributing to the positive results were gains on sales
of residential mortgage loans of $249 versus $22 in 1997, the result of
increased refinancing activity due to current mortgage rates and the Bank's
aversion to the interest rate risk associated with putting fixed rate, long-term
assets on the balance sheet. Service charges on deposits increased by $104, or
17.4%, due to the restructuring of fees related to interest and non-interest
bearing checking and savings products. Other operating income for the quarter
increased by 56.2%, with increases recorded in fees from the sale of alternative
investments by the Bank's American Express Financial Advisors and surcharges and
fees related to the use of the Bank's ATM network by non-bank customers and
interchange fees earned on the Bank's ATM/debit card.
Non-interest expense for the first quarter was $7,169, an increase of 27.3% over
the same period in 1997. Salary, wages and benefits for the quarter increased by
24.6% due to annual merit increases, additions to staff in the Trust Department,
three new branch facilities and United Banc Financial Services, anticipated
increases in incentive payouts, and increased pension expenses. Occupancy
expenses increased by 8.8%, the result of the opening of the new Portage & Frank
branch and two in-store branches as well as office space for United Banc
Financial Services, all of which were completed after the first quarter of 1997.
Equipment expenses increased by $136, or 18.6%, from the first quarter of 1997,
the result of increased depreciation on office equipment for the new facilities,
new computer output to laser disk technology (COLD) put in place in the second
quarter of 1997 and increased outside computer software services. Other
operating expenses for the quarter were $2,717, an increase of $735, or 37.1%
over first quarter, 1997. Included in this increase was an accrual taken for
anticipated expenses related to the Corporation taking the necessary steps to
becoming Year 2000 compliant. In addition, accruals were taken in anticipation
of the costs related to the implementation of strategic changes in the Bank's
retail delivery systems which will be implemented in 1998.
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
18
21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
now in agreement with the petroleum company's findings, that the levels of
contaminants are such that immediate remediation is not required. Because the
findings indicate the contamination will remediate itself over time, the State
has issued a one year extension on any formal remediation plan. The extension
expires in the third quarter of 1998, after which the petroleum company has
another 90 days to file its remediation plan. Any formal remediation steps may
not be likely until the first quarter of 1999. The Bank has entered into a
verbal option with a developer who is preparing a site development plan and is
advertising to solicit potential tenants. Should there be sufficient interest,
the option to purchase would be exercised. 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 first quarter of 1998 was $691, an
increase of $16 above the same period in 1997. The increase is attributable to
the amount of provision recorded for United Banc Financial Services. Management
determines the amounts of provision for loan losses charged to operating expense
based on its evaluation of the loan portfolio's credit quality, the adequacy of
the allowance for loan losses under current economic conditions and current and
anticipated loan growth. The Corporation's reserve-to-loan ratio of 1.59% was
six basis points above the ratio at December 31, 1997. Net charge-offs, as a
percentage of average loans outstanding for the first quarter of 1998, were .06%
versus .11% for the same quarter in 1997. Continued record levels of consumer
debt outstanding and record bankruptcy filings experienced nationally causes
management to remain cautious in its expectations for future net-charge offs.
However, based on the last few quarter's experience, the current level of the
allowance compared to its historical levels and prospects for future loan
growth, management anticipates that the monthly loan loss provision may be cut
back from current levels in the coming months.
Impaired loans at March 31, 1998 were $138, a reduction of $143 from December
31, 1997. Non-performing loans, which include non-accrual loans and loans past
due 90 days or more, were $853 at March 31, 1998 compared to $945 at December
31, 1997, a reduction of $92, or 9.7%. The ratio of non-performing loans to
total loans outstanding at March 31, 1998 was .14%, a slight decrease from the
.15% recorded at year-end 1997, while the ratio for the Corporation's peers, all
bank holding companies with consolidated assets between $500 million and $1
billion, stands at .81%.
CAPITAL RESOURCES
- -----------------
Shareholders' equity totaled $77,520 at March 31, 1998, an increase of $1,000,
or 1.3%, compared to the balance at December 31, 1997. The ratio of
equity-to-assets at March 31, 1998 was 9.21% versus 9.26% at December 31, 1996.
The decrease of five basis points reflects faster growth in assets than in
shareholders' equity. The factor most responsible for the slower growth in
shareholders' equity was the reduction in market value on investment securities
available for sale, net of deferred taxes of $475, brought about to a great
extent, by the sale of equity securities with significant market appreciation
over cost. Growth has also slowed
19
22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
due to the use of treasury stock to fund the dividend reinvestment plan and
other plans of the Corporation which require the issuance of stock while also
supporting growth in earnings per share. The rate of primary capital
(shareholders' equity plus the allowance for loan losses less intangible assets)
to total adjusted assets was 14.42% at March 31, 1998. The risk-based capital
ratio was 13.49%, while the Tier 1 capital and core leverage ratios reached
12.23% and 8.46%, respectively, at March 31, 1998. 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 quarter was a 13.3% increase over the
dividend paid for the same period in 1997. The dividend, which represents 38.9%
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.
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 of $190,659
represent 22.6% of total assets at March 31, 1998. Of the investments available
for sale, $56,196 are held in U.S. Treasury and Agency securities, 57.0% of
which mature within one year. Approximately $101,835 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.
Management focuses on the ratio of gross loans to deposits and FHLB Advance
borrowings in measuring and managing Bank liquidity. This ratio was 90.4% at
March 31, 1998 compared to 92.0% at year-end 1997, reflecting a slight decline
in loans outstanding due to the efforts to focus growth in selected loan
portfolios as well as an increase in deposits, specifically interest and
non-interest bearing checking and Money Market Access accounts.
The liquidity needs of the Holding Company, primarily cash dividends, security
purchases and vendor payments, are met through cash, short term investments and
dividends from the Bank.
INTEREST RATE SENSITIVITY
- -------------------------
In the normal course of business, the Corporation is exposed to interest rate
risk caused by the differences in cash flows and repricing characteristics that
occur in various assets and liabilities as a result of changes in interest
rates. The asset and liability management process is designed to measure and
manage that risk to maintain consistent levels of net interest income and net
present value of equity under any interest rate scenario.
20
23
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
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 March 31, 1998, 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 +7.23% for a 200 basis point increase, and -7.39% for
a 200 basis point decrease, denoting a positive income sensitivity to rising
interest rates. For the same two interest rate scenarios, the net present value
of portfolio equity was projected to decline by 0.92% and increase by 2.46%,
respectively. The duration of total assets is less than the duration of total
liabilities by 1.9 months, indicating that assets will reprice slightly quicker
than liabilities, however the difference indicates a neutral interest rate
sensitivity. The duration of assets and liabilities has declined since year-end
1997. The decline in assets reflects management's strategy to shift from longer
term fixed rate loans to investments in mortgage backed securities with an
average duration of two years. The decline in liabilities is a result of the
impact of shortening durations in certificates of deposit by 1.1 months.
A further discussion of interest rate sensitivity is included in Item 3,
Quantitative and Qualitative Disclosures About Market Risk, found on page 22.
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 74.9% of total loans outstanding at March 31, 1998.
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 13.8% and 11.3% of loans
outstanding, respectively. The two largest industry concentrations identified
within the loan portfolio, manufacturers and suppliers of structural wood
components for the construction industry and offices and clinics of medical
professionals, have commitments outstanding which represent 39.4% and 69.5%,
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.
21
24
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
MARCH 31, 1998
(000'S omitted)
1998 1997
------- -----
Balance at January 1, $ 9,650 $ 8,335
Charge-Offs (Domestic):
Commercial, Financial, Agricultural 39 206
Real Estate - Commercial 0 0
Real Estate - Residential 133 20
Consumer Loans 559 684
------ ------
Total Charge-Offs 731 910
------ ------
Recoveries (Domestic):
Commercial, Financial, Agricultural 23 2
Real Estate - Commercial 0 0
Real Estate - Residential 48 9
Consumer Loans 274 245
------ ------
Total Recoveries 345 256
------ ------
Net Charge-Offs 386 654
------ ------
Additions Charged to Operations 691 675
Balance at March 31, $ 9,955 $ 8,356
====== ======
Ratio of net charge-offs during this
quarter to average loans outstanding this quarter .06% .11%
====== ======
Allowance as a percentage of total loans 1.59% 1.34%
====== ======
22
25
UNB CORP.
---------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
UNB Corp.'s primary market risk exposure is interest rate risk, which is defined
as the potential loss of income or capital as a result of changes in interest
rates. The nature of the banking business means that some level of interest rate
risk will always be present, but the Corporation has the responsibility to
manage that risk to minimize the negative impact on both the earnings and
capital. Evaluating the Corporation's exposure to changes in interest rates
includes assessing both the management process used to control interest rate
risk and the calculated level of risk. The Corporation maintains the appropriate
policies, procedures, management information systems and internal controls as
required by the Joint Agency Policy Statement on Risk. Exposure to interest rate
risk is calculated on a monthly basis and reviewed by senior management and the
Board of Directors.
The Corporation uses a number of methods to calculate and measure interest rate
risk. The asset/liability gap compares the dollar amounts of assets and
liabilities that will mature or reprice in a given time period to determine the
level and direction of interest rate sensitivity. The Corporation is considered
asset sensitive if more assets than liabilities mature or reprice in the
specified time frame and liability sensitive if more liabilities than assets
mature or reprice in that same period. Asset sensitivity, or a positive gap,
indicates that the Corporation's exposure is to falling rates, since more assets
than liabilities could reprice or be reinvested at lower levels. Liability
sensitivity, or a negative gap, means that the Corporation's exposure is to
rising rates since more liabilities than assets could reprice at higher rates.
UNB Corp. makes a number of assumptions when calculating its gap position. The
most significant assumption is the assignment of deposit balances without a
stated maturity date to specific time frames. Since these deposits are subject
to withdrawal on demand, and have rates that can be changed at any time, they
could be considered immediately repriceable and assigned to the shortest
maturity, resulting in a significant level of liability sensitivity. However,
actual practice indicates that balances are withdrawn and replaced over a much
longer time frame, and rates are modified less frequently and in smaller
increments than changes which occur in financial market rates. To compensate for
these extremes, the Corporation uses multiple deposit distribution assumptions
to provide a range of interest rate risk measurements that it uses as a guide
for managing various assets and liabilities. As of March 31, the Corporation's
modified twelve month cumulative gap was -.50%, indicating slight liability
sensitivity. One of the shortcomings of the gap analysis is that the use of a
static balance sheet results in a measure of interest rate risk at one specific
point in time. Another limitation is the implied assumption that assets and
liabilities in the same time period will reprice by the same magnitude.
Simulation analysis provides a more dynamic interpretation of the impact of
rates on the Corporation's forecasted income and net present value of assets,
liabilities and capital. The Corporation makes certain assumptions regarding the
level of interest rates, prepayments on assets with imbedded options including
loans and asset backed securities, and the behavior of deposits without
contractual maturity dates. These assumptions, in addition to actual rates and
maturity and repricing dates on loans, investments and deposits, are
incorporated into a computer model which calculates forecasted net income and
discounts the projected cash flows of rate sensitive assets and liabilities to
determine the present value of the Corporation's capital. The model then applies
a predetermined immediate parallel increase or decrease in the
23
26
UNB CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
----------------------------------------------------------
level of interest rates to forecast the impact on both net interest income and
capital one year forward. At quarter end, the Corporation's interest rate shock
forecasted a change in net interest income of +7.23% to -7.39% based on a 200
basis point change in rates. The forecasted change in the market value of equity
was -.92% to 2.46% for the same period. While this methodology provides a more
comprehensive appraisal of interest rate risk, it is not necessarily indicative
of actual or expected financial performance. Changes in interest rates that
affect the entire yield curve equally at a single point in time are not typical.
The residential mortgage prepayment assumptions are based on industry medians
and could differ from the Corporation's actual results due to non-financial
prepayment incentives and other local factors. Moreover, the model does not
include any interim changes in strategy the Corporation might instate in
response to shifts in interest rates.
Interest rate risk can be managed by using a variety of techniques, including
selling existing assets or repaying liabilities, pricing loans and deposits to
attract preferred maturities, developing alternative sources of funding or
structuring new products to hedge existing exposures. In addition to these
balance sheet strategies, the Corporation can also use derivative financial
instruments such as interest rate swaps, caps, and floors to minimize the
potential impact of adverse changes in interest rates.
The following table provides information about UNB Corp's financial instruments
that are sensitive to changes in interest rates. The expected maturity dates for
residential mortgage loans and securities backed by or indexed to residential
mortgage loans were calculated by adjusting the contractual maturity for
prepayments corresponding to median industry data. Installment loan prepayment
speeds were based on historical experience. Deposit accounts without contractual
maturity dates were stratified by expected decay rates according to historical
analysis. The Corporation has one pay fixed amortizing interest rate swap that
was executed in 1993 as hedge against fixed rate mortgages held in the
portfolio.
24
27
UNB Corp.
Quantitative Disclosure of Market Risk
March 31, 1998
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS
Balance Rate Balance Rate Balance Rate Balance Rate
===========================================================================================
ASSETS
- ------
Short Term Investments 18,054 5.42%
Securities 36,611 6.10% 12,797 6.53% 4,135 6.63% 1,659 6.63%
Collateralized Mortgage Obligations 16,783 6.85% 15,912 6.74% 13,021 6.71% 8,916 6.74%
and Mortgage Backed Securities(1)
Fixed Rate Loans(2)(3) 95,988 8.99% 62,127 9.27% 44,383 9.12% 32,530 8.57%
Variable Rate Loans(4)(5)(6) 45,131 8.48% 33,024 8.48% 49,669 8.67% 21,103 8.29%
LIABILITIES
- -----------
Interest Bearing Demand & Savings(7) 26,786 3.34% 27,237 3.46% 33,005 3.05% 25,813 3.47%
Time Deposits 192,578 5.52% 65,636 6.04% 28,285 6.15% 7,868 6.30%
Repurchase Agreements 61,912 4.81%
Short Term Borrowings 3,315 5.50%
FHLB Advances 7,738 6.05% 13,103 6.29% 6,497 6.31% 1,147 6.35%
Capital Leases 57 8.15% 57 8.15% 57 8.15% 29 8.15%
OFF-BALANCE SHEET
- -----------------
Interest Rate Swap(8) 1,300 1,225 900
Average Pay Rate (Fixed) 2.88% 2.88% 2.88%
Average Receive Rate (Variable) 5.75% 5.75% 5.75%
FIVE YEARS MORE THAN 5 YEARS TOTAL FAIR
Balance Rate Balance Rate Balance Rate VALUE
========================================================================================
ASSETS
- ------
Short Term Investments 18,054 5.42% 18,054
Securities 1,272 6.71% 18,959 5.90% 75,433 6.21% 75,447
Collateralized Mortgage Obligations 4,190 6.86% 14,004 6.16% 72,826 6.63% 72,883
and Mortgage Backed Securities(1)
Fixed Rate Loans(2)(3) 20,354 8.50% 81,171 9.34% 336,553 8.75% 337,403
Variable Rate Loans(4)(5)(6) 18,547 8.21% 124,673 8.03% 292,147 8.28% 292,511
LIABILITIES
- -----------
Interest Bearing Demand & Savings(7) 43,468 3.02% 116,069 2.20% 272,378 2.87% 272,131
Time Deposits 6,682 6.12% 1,345 6.15% 302,394 5.73% 303,867
Repurchase Agreements 61,912 4.81% 61,906
Short Term Borrowings 3,315 5.50% 3,315
FHLB Advances 330 6.25% 350 6.25% 29,165 6.23% 29,495
Capital Leases 0 0.00% 0 0.00% 200 8.15% 229
OFF-BALANCE SHEET
- -----------------
Interest Rate Swap(8) 141
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
<FN>
(1) Expected cash flows on Collateralized Mortgage Obligations and Mortgage Backed Securities are revised monthly based on median
estimates of prepayment speeds developed by major broker dealers as published by Bloomberg Financial Markets.
(2) For residential mortgage loans, prepayments are revised monthly based on the median prepayment speeds developed by major
broker dealers as published by Bloomberg Financial Markets. The prepayment rates are assigned based on the interest rate on
the loan and the number of months elapsed since the loan was originated.
(3) For installment loans, prepayments are revised monthly based on actual historical cash flow and equate to approximately 12% to
24%.
(4) Substantially all of the variable rate commercial loans are repriced based on the prime rate.
(5) Variable rate commercial real estate loans are based on prime or the three year constant maturity treasury rate.
(6) Substantially all the variable rate residential mortgage loans reprice based on the one year or three year constant maturity
treasury rate subject to various periodic and lifetime caps and floors.
(7) For deposits without contractual maturity dates, decay rates are calculated annually by individual product type based on the
current age of the accounts.
(8) At quarter-end March, 1998, the notional principal amount of the interest rate swap was $3,425 and the market value was $141.
The notional amount will amortize quarterly according to a predetermined schedule until its maturity on 11/26/00. The Company
pays a fixed rate of 2.88% and receives a variable rate of three month LIBOR reset quarterly, which at quarter-end was 5.641%.
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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 21, 1998, for the
purpose of electing three directors and to transact such other business as would
properly come before the meeting. Results of shareholder voting on these
individuals were as follows:
ELECTION OF DIRECTORS
Edgar W. Jones, Jr. James A. O'Donnell Donald W. Schneider
For 4,930,378 4,961,623 4,962,223
Against 31,845 600 ---
Abstain --- --- ---
Shares not
voted by Brokers 137,965 137,965 137,965
Item 5 - Other Information
- --------------------------
N/A
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit
Number Exhibit
------ -------
27.198 Financial Data Schedule for quarter ended March 31, 1998(1)
27.197 Financial Data Schedule for quarter ended March 31, 1997(1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the first quarter of 1998.
(1)Filed only in electronic format pursuant to Item 601(b)(27) of Regulation
S-K.
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29
UNB CORP.
PART II - OTHER INFORMATION (continued)
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)
James J. Pennetti
Date 5/15/98 ---------------------------------
---------------------- James J. Pennetti
(Duly authorized officer and
Treasurer, UNB Corp.)
27