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 June 30, 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 July 31, 1998
5,707,630 Common Shares
2
UNB CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 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 10Q as referenced below:
Page
Number(s)
---------
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Consolidated Statements of Comprehensive Income 3
Condensed Consolidated Statements of Changes in
Shareholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to the Consolidated Financial Statements 6-13
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 25-27
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 28
Item 5 - Other Information 28
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 28
3
UNB CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands) JUNE 30, December 31,
1998 1997
-------------- ------------
ASSETS
Cash and cash equivalents $ 44,841 $ 28,998
Federal funds sold 1,300 7,500
Interest bearing deposits with banks 446 1,142
Securities, net (Fair value:
$66,272 and $72,999, respectively)(Note 2) 66,267 72,993
Mortgage-backed securities (Fair value:
$81,249 and $67,222, respectively)(Note 2) 81,210 67,845
Loans originated and held for sale 4,709 2,190
Loans:
Total loans (Notes 3 and 6) 659,901 630,418
Less allowance for loan losses (Note 4) (10,160) (9,650)
- ------------------------------------------------------------------------------------------------------
Net loans 649,741 620,768
Premises and equipment, net 11,467 11,727
Intangible assets 4,836 5,339
Accrued interest receivable and other assets 9,831 7,811
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 874,648 $ 826,313
======================================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $ 93,169 $ 82,173
Interest bearing deposits 575,991 567,308
- ------------------------------------------------------------------------------------------------------
Total deposits 669,160 649,481
Fed funds purchased and short-term borrowings 66,820 56,511
Federal Home Loan Bank advances and capital lease (Note 6) 53,058 35,650
Accrued taxes, expenses and other liabilities 8,042 8,151
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 797,080 749,793
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 15,000,000 shares authorized;
5,823,206 and 5,821,369 issued and outstanding, respectively) 5,823 5,821
Paid-in capital 30,923 31,277
Retained earnings 40,647 37,123
Unrealized gain on securities available for sale, net of tax 3,575 3,739
Treasury stock, 85,404 and 37,154 shares at cost (3,400) (1,440)
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 77,568 76,520
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 874,648 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
------------- ------------ ----------- -------------
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 13,819 $ 13,570 $ 27,494 $ 26,855
Tax exempt 37 48 74 96
Interest and dividends on investments
& mortgage-backed securities:
Taxable 2,262 1,794 4,373 3,659
Tax exempt 10 14 20 26
Interest on bank deposits and federal funds sold 243 223 462 391
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 16,371 15,649 32,423 31,027
- ----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,273 5,563 12,484 11,026
Interest on short-term borrowings 784 713 1,485 1,480
Interest on FHLB advances 537 1,081 1,002 2,095
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 7,594 7,357 14,971 14,601
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 8,777 8,292 17,452 16,426
PROVISION FOR LOAN LOSSES (NOTE 4) 445 675 1,136 1,350
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,332 7,617 16,316 15,076
OTHER INCOME:
Service charges on deposits 756 627 1,458 1,225
Trust Department income 1,164 941 2,156 1,628
Other operating income 358 355 747 604
Securities gains, net (6) 28 780 28
Gains on loans originated for resale and sold 289 33 538 55
- ----------------------------------------------------------------------------------------------------------------------
Total other income 2,561 1,984 5,679 3,540
- ----------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 3,142 2,826 6,393 5,436
Occupancy 379 322 712 628
Equipment 900 739 1,768 1,471
Other operating expense 1,966 2,091 4,683 4,073
- ----------------------------------------------------------------------------------------------------------------------
Total other expenses 6,387 5,978 13,556 11,608
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,506 3,623 8,439 7,008
PROVISION FOR INCOME TAXES 1,547 1,215 2,899 2,367
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,959 $ 2,408 $ 5,540 $ 4,641
======================================================================================================================
EARNINGS PER SHARE (NOTE 1):
Basic $ 0.51 $ 0.42 $ 0.96 $ 0.80
Diluted $ 0.50 $ 0.41 $ 0.94 $ 0.78
======================================================================================================================
DIVIDENDS PER SHARE (NOTE 1) $ 0.18 $ 0.16 $ 0.35 $ 0.31
======================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Basic 5,749,621 5,775,869 5,766,817 5,783,768
Diluted 5,865,776 5,937,557 5,881,928 5,939,431
======================================================================================================================
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
Net Income $ 2,959 $ 2,408 $ 5,540 $ 4,641
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized gains/(losses) arising
during the period 307 628 343 432
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income (4) 18 507 18
------- ------- ------- -------
Unrealized gains on securities 311 610 (164) 414
------- ------- ------- -------
Comprehensive income $ 3,270 $ 3,018 $ 5,376 $ 5,055
======= ======= ======= =======
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)
SIX MONTHS ENDED
6/30/98 6/30/97
-------------- -------------
Balance at beginning of period $ 76,520 $ 71,334
Net Income 5,540 4,641
Shares issued through dividend reinvestment 0 134
Stock options exercised 0 85
Common stock issued 66 0
Cash dividends $0.35 and $0.31 per share, respectively (2,015) (1,793)
Treasury stock purchases (3,362) (1,747)
Treasury stock sales 983 651
Change in market value on investment securities
available for sale, net of deferred taxes (164) 414
-------- --------
Balance at end of period $ 77,568 $ 73,719
======== ========
See Notes to the Consolidated Financial Statements
4
7
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
(In thousands) JUNE 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,540 $ 4,641
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 668 458
Provision for loan losses 1,136 1,350
Net securities gains (780) (28)
Net accretion on securities (5) (429)
Amortization of intangible assets 503 507
Loans originated for resale (36,962) (4,812)
Proceeds from sale of loan originations 34,981 4,691
Changes in:
Interest receivable (207) (230)
Interest payable (68) (347)
Other assets and liabilities, net (1,773) 785
Deferred income 4 (4)
- -------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 3,037 6,582
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks 696 (296)
Net decrease (increase) in funds sold 6,200 (4,500)
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 9,762 2,210
Proceeds from maturities of securities held to maturity 110 4,117
Proceeds from maturities of securities available for sale 74,458 95,000
Purchases of securities held to maturity (354) (3,613)
Purchases of securities available for sale (72,546) (73,933)
Purchases of mortgage-backed securities available for sale (30,111) (22,760)
Principal payments received on mortgage-backed securities held to maturity 3,451 3,263
Principal payments received on mortgage-backed securities available for sale 9,127 10,895
Net increase in loans made to customers 4,605 (14,701)
Loans purchased (35,374) (1,375)
Purchases of premises and equipment, net (408) (1,745)
Principal payments received under leases 122 109
Leased assets purchased 0 (617)
- -------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (30,262) (7,946)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,679 11,760
Cash dividends paid, net of shares issued through dividend reinvestment (2,015) (1,659)
Purchase of treasury stock (3,362) (1,747)
Sales of treasury stock 983 651
Proceeds from issuance of stock 66 85
Net increase (decrease) in short-term borrowings 10,309 (17,965)
Proceeds from FHLB advances 50,000 10,000
Repayments of FHLB advances (32,570) (2,412)
Proceeds from capital lease 0 248
Repayments on capital lease (22) (17)
- -------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 43,068 (1,056)
- -------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 15,843 (2,420)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,998 34,762
- -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 44,841 $ 32,342
===================================================================================================================
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 June 30, 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 six months ended June 30, 1998, and June
30, 1997, UNB Corp. paid interest in the amount of $15,040 and $14,948,
respectively. For the same six month periods federal income taxes paid totaled
$3,193 and $2,345, respectively.
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.
Impaired loans are fully or partially charged off when in management's opinion
an
6
9
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
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 June 30, 1998, and December 31,
1997, are as follows:
June 30, 1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
---- ----- ------ -----
Securities available for sale:
U.S. Treasury securities $ 14,083 $ 20 $ (5) $ 14,098
Obligations of U.S. government
agencies and corporations 31,484 121 (3) 31,602
Securities held to maturity:
Obligations of state and
political subdivisions 950 1 -- 951
Corporate bonds and other debt
securities 748 4 -- 752
------- ------ ------- --------
Total debt securities 47,265 146 (8) 47,403
Equity securities available for sale 12,797 5,061 -- 17,858
Asset-backed securities available
for sale 999 12 -- 1,011
------- ------ ------- --------
Total investment securities 61,061 5,219 (8) 66,272
Mortgage-backed securities
available for sale 77,310 450 (240) 77,520
Mortgage-backed securities
held to maturity 3,690 40 (1) 3,729
------- ------ ------- --------
Total mortgage-backed securities 81,000 490 (241) 81,249
------- ------ ------- --------
Total investment and mortgage-
backed securities $142,061 $5,709 $ (249) $147,521
======== ====== ======= ========
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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 six month periods ended June 30, 1998 and 1997, the proceeds from
sales of securities available for sale were $9,762 and $2,210, respectively. Net
gains of $780 and $28 were recognized in those sales, respectively. There were
no sales or transfers of securities classified as held to maturity.
The amortized cost and estimated fair value of debt securities at June 30, 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)
------------------------------------------------------------------
June 30, 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 $ 6,998 $ 7,015 6.17%
Due after one year through five years 7,085 7,083 5.49
------- ------- ----
Total 14,083 14,098 5.83
------- ------- ----
U.S. Government agencies and corporations
Due in one year or less 11,489 11,521 6.16
Due after one year through five years 19,995 20,081 6.38
------- ------- ----
Total 31,484 31,602 6.30
------- ------- ----
$45,567 $45,700 6.15%
======= ======= ====
Securities held to maturity:
Obligations of state and political subdivisions
Due in one year or less $ 950 951 4.25%
------- ------- ----
Total 950 951 4.25
------- ------- ----
Corp bonds and other debt securities
Due after one year through five years 748 752 8.53
------- ------- ----
Total 748 752 8.53
------- ------- ----
$ 1,698 $ 1,703 6.13%
======= ======= ====
Asset-backed securities available for sale $ 999 $ 1,011 7.00%
------- ------- ----
Mortgage-backed and collateralized
mortgage obligations available for sale 77,310 77,520 6.47
------- ------- ----
Mortgage-backed and collateralized
mortgage obligations held to maturity 3,690 3,729 7.57
------- ------- ----
$81,000 $81,249 6.52%
======= ======= ====
At June 30, 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:
June 30, 1998 December 31, 1997
------------- -----------------
Commercial, financial and agricultural $122,849 $ 81,960
Commercial, tax exempt 2,927 3,142
Commercial real estate 74,002 70,896
Residential real estate 247,058 260,190
Consumer loans 213,065 214,230
------- -------
Total loans $659,901 $630,418
======== ========
Impaired loans are as follows:
June 30, 1998 December 31, 1997
------------- -----------------
Loans with no allowance for loan
losses allocated $347 $281
Loans with allowance for loan
losses allocated -- --
Amount of allowance allocated -- --
Average of impaired loans,
year-to-date $361 $335
Interest income recognized during
impairment 77 33
Cash-basis interest income
recognized year-to-date 5 32
At June 30, 1998 and December 31, 1997, loans on non-accrual status and/or past
due more than 90 days approximated $792 and $945, respectively. The Other Real
Estate Owned balance, net of allowance, at June 30, 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 six months ended
June 30, 1998, and June 30, 1997, are as follows:
(in thousands of dollars) 1998 1997
---- ----
Balance - January 1 $ 9,650 $8,335
Provision charged to operating expense 1,136 1,350
Loans charged off, net of recoveries (626) (938)
-------- --------
Balance - June 30 $10,160 $8,747
-------- --------
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 19.1%, 11.2%,
37.4% and 32.3%, respectively, at June 30, 1998. Indirect loans accounted for
72.1% of all consumer loans at June 30, 1998. The dealer network from which the
indirect new and used automobile, marine and RV loans were purchased includes
121 relationships thus far in 1998, the largest of which was responsible for
8.1% 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 June
30, 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 $238,824.
At June 30, 1998, the Corporation held two interest rate swap agreements with
notional amounts of $3.1 million and $20.0 million. The notional amount of an
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 following table summarizes the terms
of each of the swaps in effect:
Swap #1 Swap #2
------- -------
Notional amount $3.1 million $20.0 million
Final expiration November 20, 2000 June 13, 2003
Variable rate in effect
June 30, 1998 5.70% 5.6875%
Fixed rate 2.88% 5.86%
Market value, June 30, 1998 $115 thousand $(29) thousand
Variable interest payments received are based on the three month LIBOR rate
which is adjusted on a quarterly basis. The income from these agreements for the
six months ended June 30, 1998 and June 30, 1997 was $48 and $65, respectively.
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 June 30, 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 5.56%-6.70% $29,927
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 $52,869
====================================================================
Based on the Bank's investment in FHLB stock, the maximum dollar amount of FHLB
advance borrowings available to the Bank is $139,480.
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 June 30, 1998 was $189.
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 June 30, 1998, compared to December 31, 1997, and the
results of operations for the quarter and year-to-date periods ending June 30,
1998, compared to the same periods 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 licensed to issue life, accident and health, and variable life
annuity insurance. UNB Corp. is still awaiting confirmation from the State of
Ohio on its filing for an amendment to the charter of United Insurance Agency,
Inc. to permit it to issue property and casualty insurance. It is not
anticipated that the results of operations of this 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 through
the origination and sale of B and C quality consumer paper.
FINANCIAL CONDITION
- -------------------
Total assets at June 30, 1998 were $874,648, an increase of $48,335, or 5.8%,
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 $8,947, with the majority of the increase in cash and cash
equivalents of $15,843. The investment and mortgage-backed securities portfolios
increased by $6,639, an increase of 4.7% from 1997 year-end balances.
Growth in the securities portfolios took place in the first quarter of 1998 with
the majority of the growth coming from liquidity created by a net reduction in
the loan portfolio of $5,242. Due to the interest rate environment experienced
in late 1997 which continued into 1998 and management's expectations for flat to
declining rates in 1998, balance sheet strategy for the first quarter of 1998
was to mitigate the Corporation's interest rate risk inherent in funding longer
term, fixed rate
14
17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
mortgages and indirect installment loans by diverting the funds to the
investment portfolio into securities with durations of approximately two years.
During the second quarter as the yield curve declined in targeted maturity
ranges, the mix in the investment portfolio was shifted from U.S. Treasury and
agency securities to mortgage-backed securities in order to maintain the overall
yield in the portfolio.
During the second quarter of 1998, the loan portfolio experienced net growth of
$34,520, due to a great extent, to the acquisition of the aircraft financing
line of business from a large financial institution headquartered in Ohio. This
business segment, now known as the United Bank Aircraft Financing Group, is
headquartered in offices at the Akron/Canton airport and includes three regional
sales offices located in Wichita, Kansas; Sacramento, California; and Orlando,
Florida. The sales staff possesses more than 130 years of combined aircraft
finance experience. The target market for this business segment consists of high
income/net worth individuals (pleasure and business use) and corporations who
use aircraft day-to-day to support transportation needs or provide a service.
Management feels that the acquisition of this specialized line of business fits
perfectly with the Bank's expertise in fulfilling the financial needs of
closely-held and family-owned businesses and high net worth individuals. The
loans acquired were both fixed rate(11% of portfolio) and fixed rate with
floating rate conversion features (89% of portfolio) which provide a lending
alternative which reduces interest rate risk. The aircraft balances are reported
under the commercial loan category.
Within the other segments of the loan portfolio, reductions were experienced in
residential real estate which declined by $13,132, or 5.1%, 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 declined by
$1,165, or less than 0.5%, from year-end 1997, which is the result of the
combination of two strategies to limit interest rate risk. By increasing rates,
shortening terms, lowering dealer reserves and raising minimum credit scores on
selected credit quality tiers, management has accomplished the goal of reducing
new volume and shrinking the indirect consumer loan portfolio. Also during the
quarter, actions were taken to promote the Bank's redesigned variable rate home
equity products with mailings to existing deposit customers and the addition of
a dedicated sales staff to generate new lines and encourage existing line usage.
Commercial real estate loans grew by $3,106, or 4.4% from December, 1997
year-end, while balances in the commercial portfolio (excluding aircraft
financing)remained fairly constant. Management continues to focus its efforts on
growth in these areas.
With the strategy to avoid placing all longer-term, fixed rate originations 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. 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. In addition, United Banc Financial Services recently opened a
new office with a sales staff which provides credit availability for sub-prime
residential mortgage customers. These loans are also sold to investors in
sub-prime paper. For its role in all of these types of transactions, the
Corporation is receiving fee
15
18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
income.
Total earning assets at June 30, 1998 increased to $813,833 from $782,088 at
December 31, 1997, an increase of $31,745, or 4.1%. The ratio of earning assets
to total assets declined slightly from 94.6% at year-end 1997 to 93.0% at June
30, 1998, the result of increases in cash and cash equivalents from year-end.
Total liabilities increased by $47,287 from year-end 1997 levels. Total deposits
at June 30, 1998 increased by $19,679, or 3.0%, from year-end 1997. Non-interest
bearing deposits are 13.4% above 1997 year-end levels. Interest bearing demand
balances increased 8.1%. 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 $15,774, or 8.4%, from year-end levels, with the popular
Money Market Access product responsible for an increase of $20,829, or 31.9%,
over 1997 year-end balances. The Bank does ongoing rate promotions and mailings
to non-customers to encourage new account growth. The 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 transfers to the Money Market Access product as well as
alternative investments outside the banking industry, both of which currently
offer a higher rates of return to the consumer. Certificate of deposit balances
declined by $13,356, or 4.4%, and were influenced by the Bank's lack of
marketing promotions and its 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 $10,309, or 18.2%, from year-end levels spurred on by the
increased calling efforts of the Bank's business development officers to
commercial customers. Federal Home Loan Bank (FHLB) advance borrowings increased
by $17,430, or 49.2%. The aircraft loan portfolio purchase was partially funded
with two successive thirty day advance borrowings of $25 million. The term of
the advance will be extended at the next maturity, upon further analysis of the
loan terms found in the new portfolio. Advances outstanding were reduced in
January with the prepayment of a $5 million advance with a coupon of 6.60%. The
transaction included a $41 prepayment penalty, however, this action has helped
stabilize the overall cost of funds going forward.
The ratio of gross loans to deposits and FHLB advance borrowings was 91.4% at
June 30, 1998 compared to 92.0% at year-end 1997. The reduction in this ratio
from year-end 1997 reflects the partial funding of the aircraft loan purchase
with excess bank liquidity of approximately $10 million and the growth
experienced in core deposits.
Total shareholders' equity at June 30, 1998 was $77,568, an increase of $1,048,
or 1.4%, from year-end 1997. The major contributor to this increase was
year-to-date net income of $5,540. Additional increases in capital of $983 and
$66 were the result of sales of treasury stock and the issuance of stock for
executive compensation and stock options exercises, respectively. These
increases were partially offset by the payment of $2,015 in quarterly cash
dividends and purchases
16
19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
of treasury stock of $3,362. Recently the Board of Directors reaffirmed the
Corporation's commitment to repurchasing up to $5 million of its stock because
it feels that the stock is an excellent value compared to other market
opportunities and the positive impact it has on return on equity. Treasury stock
will continue to be used 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, and 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 information and non information technology systems 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.
The Committee is well into the testing phase of the project for both information
technology and non information technology systems. It anticipates that all
testing will be completed by mid-year of 1999. Further, the Committee is well
along in its efforts at remediation of non-compliant systems either through the
replacement or upgrading of these systems. The Committee anticipates that all
systems will be Year 2000 compliant by mid year 1999.
The Committee is addressing Year 2000 compliance with its vendors, suppliers,
and other third parties to assess their readiness. The Committee's goal is to
have this evaluation completed before the end of 1998.
The Committee is addressing the potential impact on the Corporation of its
customers' Year 2000 compliance and plans to become compliant with Year 2000
requirements. All commercial loan customers have been contacted regarding the
Year 2000 issue. Their progress in addressing this issue will be evaluated by
the Corporation. Presently, management cannot accurately assess the impact of
Year 2000 on its commercial customers, but has established a schedule to do such
an evaluation by September 30, 1998.
This Committee also oversees the development and implementation of contingency
plans for information technology and non information technology systems. The
Committee is currently developing contingency plans and anticipates completion
by June 30, 1999.
17
20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
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 $250 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 second quarter of 1998 was $2,959, or $0.50 per
diluted share, compared with $2,408, or $0.41 per diluted share for the second
quarter of 1997. This represents an increase in earnings of 22.9% and an
increase in diluted earnings per share of 22.0%. Year-to-date net income of
$5,540 was $899, or 19.4%, greater than the same period in 1997. Year-to-date
diluted earnings per share for 1998 of $0.94 are 20.5% greater than 1997. The
largest component of net income, net interest income increased by $485 and
$1,026 for the second quarter and year-to-date periods, increases of 5.8% and
6.2% over the same periods in 1997, respectively. Total interest income for the
year-to-date was $32,423, an increase of 4.5%, over the same period in 1997,
while interest expense was $14,971, an increase of $370, or 2.5%, over the same
period in 1997. The growth in net interest income was primarily the result of
overall balance sheet growth, a change in the mix of the loan portfolio with the
growth concentrated in relative higher yielding commercial and commercial real
estate loans versus consumer installment and residential mortgage loans. An
increase in loan fees and the spread between the purchased aircraft loans and
the combination of liquidity and short term advances used to fund them from
their purchase date through the end of the period also contributed to the
positive results.
The net interest margin for the first half of 1998 was 4.46%, versus 4.37% for
the same period in 1997, an increase of nine basis points. At the Bank level,
yields on earning assets and the cost of interest bearing liabilities remained
fairly constant between the two periods. The yield on loans held by United Bank
Financial Services impacted the margin rate, although to a small degree because
of its relative size. For the half of 1998, yields earned on loans were in
excess of 20.0%, while net interest margin was in excess of 11.5%. As the size
of this affiliate grows, its impact on net interest income and 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 assets and return on equity for the second quarter of 1998 were 1.40%
and 15.29%, respectively, compared to 1.20% and 13.24%, respectively, for the
same period in 1997. Return on assets and return on equity for the year-to-date
ended June 30, 1998 were 1.33% and 14.36%, respectively, compared to 1.17% and
12.87%, respectively, for the same period in 1997. As competition for loans and
deposits continues with resulting pressure on interest margin, management's
focus on growing fee income from
18
21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
new and existing sources, coupled with more selective balance sheet growth has
aided its performance as measured by its return on assets and equity. Cost
containment measures to be put in place later in 1998 as well as actions to
leverage equity through the purchases of treasury stock should reflect in even
greater improvements in these two performance measures in the future.
Non-interest income for the second quarter of 1998 was $2,561, a 29.1% increase
from the same period in 1997. On a year-to-date basis, non-interest income
reached $5,679, an increase of $2,139, or 60.4%, from the same period in 1997.
For the second quarter, all categories of non-interest income except securities
gains showed improvement from the same period in 1997. Gains on sales of
residential mortgage loans of $289 versus $33 in 1997, were the result of
increased refinancing activity due to the level of 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. The Trust Department recorded fee
income of $1,164, an increase of $223, or 23.7%, from the same period in 1997,
and was the result of an increase of 20.7% in the value of managed assets from
$744 million at December 31, 1997 to $898 million at June 30, 1998. Service
charges on deposits increased by $129, or 20.6%, due to the restructuring of
fees related to interest and non-interest bearing checking and savings products
and the growth in new accounts due to the Club Account promotions. On a
year-to-date basis, the category showing the greatest impact on other income
growth was security gains which reflected $786 in gains taken on the portfolio
of available for sale equity securities held in UNB Corp.'s parent company
during the first quarter, 1998.
Non-interest expense for the second quarter was $6,387, an increase of 6.8% over
the same period in 1997. On a year-to-date basis, non-interest expense reached
$13,556, an increase of $1,948, or 16.8%, from the same period in 1997. On a
year-to-date basis, salary, wages and benefits increased by 17.6% 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 13.4%, 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,
most of which were completed in the third and fourth quarters of 1997. Also
impacting second quarter 1998 occupancy was an additional office opened for the
sub-prime loan originators for United Banc Financial Services. Year-to-date
equipment expenses increased by $297, or 20.2%, from the same period of 1997,
the result of increased depreciation on office furniture and equipment for the
new facilities, new computer output to laser disk technology (COLD) put in place
in the second quarter of 1997 and increased costs of mainframe and outside
computer software services. Other operating expenses for the second quarter
declined from the same period in 1997 by $125 or 6.0%. On a year-to-date basis
other operating expenses increased from prior year by 15.0%. 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.
Initial changes were announced in the second quarter of 1998 and include the
consolidation of the Beach City branch into the Brewster branch and the
consolidation of the Uniontown branch into the Hartville branch coupled with
their planned closing in October, 1998. This is being done because of a
declining customer base, lack of population growth in the respective areas and
19
22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
the proximity of other branch offices. These steps are designed to reduce
expenses, increase efficiency and allow the Corporation to continue to service
its customers. Bank management is evaluating all the Bank's offices looking for
ways to reduce operating costs while keeping customer service at a level its
customers expect.
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 review of several
environmental assessments filed with the agency by the Bank and the petroleum
company, BUSTER is 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. Due to the availability of
other commercial properties in the vicinity, no interest has been generated to
date. However, due to the growth experienced in this area of the county, as land
available for development disappears, management anticipates interest in this
property will increase. 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 Corporation's Consolidated Balance Sheet.
ALLOWANCE FOR LOAN LOSSES
- -------------------------
The provision for loan losses for the second quarter of 1998 was $445, a
reduction of $230, or 34.1% from second quarter, 1997. On a year-to-date basis,
the provision for loan losses was $1,136, or $214 less than the same period in
1997. Management's decision to reduce the provision was based on the Bank's
declining trend in charge-offs and the level of the unallocated balance within
the loan loss allowance. On a regular basis, management reviews 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-loans ratio at June 30, 1998 was 1.54%
compared to 1.53% at December 31, 1997. Net charge-offs, as a percentage of
average loans outstanding for the first quarter of 1998, were .04% versus .18%
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 current loss 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 can be
maintained at current levels to provide an adequate level of reserves to cover
anticipated loan losses.
20
23
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Impaired loans at June 30, 1998 were $347, an increase of $66 from December 31,
1997. Non-performing loans, which include non-accrual loans and loans past due
90 days or more, were $795 at June 30, 1998 compared to $945 at December 31,
1997, a reduction of $150, or 15.9%. The ratio of non-performing loans to total
loans outstanding at June 30, 1998 was 0.12%, a slight decrease from the 0.15%
recorded at year-end 1997. The ratio of non-performing assets which include
other real estate owned was 0.17% , while the ratio for the Corporation's peers,
all bank holding companies with consolidated assets between $500 million and $1
billion, stands at 0.71%.
CAPITAL RESOURCES
- -----------------
Shareholders' equity totaled $77,568 at June 30, 1998, an increase of $1,048, or
1.4%, compared to the balance at December 31, 1997. The ratio of
equity-to-assets at June 30, 1998 was 8.90% versus 9.26% at December 31, 1996.
The decrease of 36 basis points reflects faster growth in assets than in
shareholders' equity. The two factors most responsible for the slower growth in
shareholders' equity were cash dividends of $2,015 and net purchases of treasury
stock of $2,379. Also responsible, to a smaller degree was the reduction in
market value on investment securities available for sale, net of deferred taxes
of $164, brought about to a great extent, by the sale of equity securities with
significant market appreciation over cost in the first quarter. Growth in equity
has also slowed 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 13.52% at June 30, 1998. The risk-based
capital ratio was 12.66%, while the Tier 1 capital and core leverage ratios
reached 11.41% and 8.21%, respectively, at June 30, 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 $0.18 per share for the quarter was a 12.5% increase over the
dividend paid in the second quarter, 1997. The year-to-date dividend of $0.35,
which represents 36.4% 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 $188,230
represent 21.5% of total assets at June 30, 1998. Of the investments available
for sale, $45,700 are held in U.S. Treasury and Agency securities, 40.6% of
which mature within one year. Approximately $105,906 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
21
24
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
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 91.4% at
June 30, 1998 compared to 92.0% at year-end 1997, reflecting somewhat slower
growth in loans than in deposits as management pursues its efforts to focus
growth in selected loan portfolios.
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.
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 June 30, 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 -4.78% for a 200 basis point increase, and +4.44% 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
of portfolio equity was projected to decline by 1.42% and increase by 2.81%,
respectively. The duration of total assets is greater than the duration of total
liabilities by 2.8 months, indicating that liabilities will reprice slightly
quicker than assets. The duration of assets has increased since the end of 1997,
with the greatest impact in the lengthening coming from the addition of the
aircraft portfolio. Duration on liabilities has declined since year-end 1997
with the most significant impact coming from the short term FHLB advances used
to temporarily fund the aircraft loan purchase until longer term advances were
obtained after the quarter's end.
A further discussion of interest rate sensitivity is included in Item 3,
22
25
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------------------
Quantitative and Qualitative Disclosures About Market Risk, found on page 25.
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 75.2% of total loans outstanding at June 30, 1998.
Residential mortgages, automobile, recreational vehicle and boat loans were the
four largest concentrations in the loan portfolio by loan type. Commercial
(including aircraft) and commercial real estate loans comprise the remaining
13.5% 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
37.2% and 65.5%, 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.
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements contained in this report that are not historical facts are
forward looking statements that are subject to certain risks and uncertainties.
When used herein, the terms "anticipates," "plans," "expects," "believes," and
similar expressions as they relate to UNB Corp. or its management are intended
to identify such forward looking statements. UNB Corp.'s actual results,
performance or achievements may materially differ from those expressed or
implied in the forward looking statements. Risks and uncertainties that could
cause or contribute to such material differences include, but are not limited
to, general economic conditions, interest rate environment, competitive
conditions in the financial services industry, changes in law, governmental
policies and regulations, and rapidly changing technology affecting financial
services.
23
26
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
JUNE 30, 1998
(000'S omitted)
1998 1997
------- -----
Balance at January 1, $ 9,650 $ 8,335
Charge-Offs (Domestic):
Commercial, Financial, Agricultural 39 213
Real Estate - Commercial 0 0
Real Estate - Residential 134 20
Consumer Loans 1,081 1,284
-------- -------
Total Charge-Offs 1,254 1,517
------- -------
Recoveries (Domestic):
Commercial, Financial, Agricultural 26 4
Real Estate - Commercial 0 0
Real Estate - Residential 48 74
Consumer Loans 554 501
------- -------
Total Recoveries 628 579
------- -------
Net Charge-Offs 626 938
------- -------
Additions Charged to Operations 1,136 1,350
Balance at June 30, $ 10,160 $ 8,747
======= =======
Ratio of net charge-offs during this
quarter to average loans outstanding this quarter 0.04% .18%
====== ======
Allowance as a percentage of total loans 1.54% 1.38%
====== ======
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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 June 30, the Corporation's
modified twelve month cumulative gap was -6.36%, indicating an increase in
liability sensitivity from the first quarter. The change was primarily the
result of the purchase of a pool of loans that was funded by reducing federal
funds sold and increasing short term Federal Home Loan Bank advances. The short
term borrowing will be replaced by longer term funding, which will reduce the
liability sensitivity in future periods. As illustrated here, 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
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28
UNB CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
----------------------------------------------------------------------
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 level of interest rates to forecast the impact on
both net interest income and capital one year forward. 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.
At quarter end, the Corporation's interest rate shock forecasted a change in net
interest income of +4.44% to -4.78% based on a 200 basis point change in rates.
The forecasted change in the market value of equity was -1.42% to +2.81% for the
same period. During the second quarter, the Corporation executed a $20 million
interest rate swap to reduce interest rate risk caused by an increase in
non-conforming, fixed rate mortgage loans.
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 two pay-fixed amortizing interest rate swaps
executed as hedges against fixed rate mortgages held in the portfolio, one
executed in 1993 and the other in 1998.
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29
UNB CORP.
QUANTITATIVE DISCLOSURE OF MARKET RISK
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
===================================================================================
ASSETS
Short Term Investments 1,746 5.40%
Securities 21,562 6.25% 11,881 6.28% 5,115 6.31% 5,474 6.35%
Collateralized Mortgage Obligations 22,989 6.77% 21,878 6.66% 13,736 6.62% 8,195 6.61%
and Mortgage Backed Securities (1)
Fixed Rate Loans (2) (3) 114,775 8.22% 60,246 9.22% 43,126 9.03% 31,227 8.63%
Variable Rate Loans (4) (5) (6) 45,165 9.18% 32,990 9.03% 47,580 9.42% 22,597 8.72%
LIABILITIES
Interest Bearing Demand & Savings (7) 29,690 4.01% 30,082 4.15% 35,391 3.67% 28,153 4.21%
Time Deposits 208,372 5.54% 44,897 5.95% 24,973 6.08% 7,112 6.14%
Repurchase Agreements 62,067 4.69%
Short Term Borrowings 4,753 5.50%
FHLB Advances 32,837 5.68% 13,209 6.29% 5,728 6.32% 415 6.23%
Capital Leases 55 8.15% 55 8.15% 55 8.15% 24 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) 5.70% 5.70% 5.70%
Interest Rate Swap (9) 3,184 2,784 2,431 2,120
Average Pay Rate (Fixed) 5.86% 5.86% 5.86% 5.86%
Average Receive Rate (Variable) 5.69% 5.69% 5.69% 5.69%
FIVE YEARS MORE THAN 5 YEARS TOTAL FAIR
BALANCE RATE BALANCE RATE BALANCE RATE VALUE
===================================================================
ASSETS
Short Term Investments 1,746 5.40% 1,746
Securities 4,271 6.52% 17,964 5.42% 66,267 6.06% 66,272
Collateralized Mortgage Obligations 3,511 6.64% 10,901 5.86% 81,210 6.63% 81,249
and Mortgage Backed Securities (1)
Fixed Rate Loans (2) (3) 12,960 9.08% 91,558 9.11% 353,893 8.58% 344,825
Variable Rate Loans (4) (5) (6) 19,122 8.53% 143,263 8.29% 310,717 6.59% 312,052
LIABILITIES
Interest Bearing Demand & Savings (7) 45,741 3.50% 114,059 2.21% 283,116 2.98% 255,557
Time Deposits 6,530 6.06% 991 6.03% 292,875 5.60% 294,187
Repurchase Agreements 62,067 4.69% 62,073
Short Term Borrowings 4,753 5.50% 4,753
FHLB Advances 330 6.25% 350 6.25% 52,869 5.91% 53,173
Capital Leases 0 0.00% 0 0.00% 189 8.15% 216
OFF-BALANCE SHEET
Interest Rate Swap (8) 115
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
Interest Rate Swap (9) 1,846 (29)
Average Pay Rate (Fixed) 5.86%
Average Receive Rate (Variable) 5.69%
(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 June, 1998, the notional principal amount of the interest
rate swap was $3,100 and the market value was $115. 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 5.70%.
(9) At quarter-end June, 1998, the notional principal amount of the interest
rate swap was $20,000 and the market value was $(29). The notional amount
will amortize quarterly according to a predetermined schedule until its
maturity on 6/18/03. The Company pays a fixed rate of 5.86% and receives a
variable rate of three month LIBOR reset quarterly, which at quarter-end
was 5.6875%.
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30
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 June 30, 1998(1)
27.197 Financial Data Schedule for quarter ended June 30, 1997(1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the second quarter of 1998.
(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 August 13, 1998 James J. Pennetti
--------------------------- -----------------------------------
James J. Pennetti
(Duly authorized officer and
Treasurer, UNB Corp.)
28