<PAGE> 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, 1996
-----------------
Commission file number 0-13270
UNB CORP.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Ohio 34-1442295
- - ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
220 Market Avenue, South
Canton, Ohio 44702
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 454-5821
--------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date.
Common Stock, $1.00 Stated Value Outstanding at July 31, 1996
5,762,291 Common Shares
<PAGE> 2
UNB CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Interim financial information required by Regulation 210.10-01 of
Regulation S-X is included in this Form 10Q as referenced below:
Page
Number(s)
---------
Consolidated Balance Sheets 1
Consolidated Statements of Income 2
Condensed Consolidated Statements
of Changes in Shareholders' Equity 3
Consolidated Statements
of Cash Flows 4
Notes to the Consolidated Financial Statements 5-12
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-23
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of
Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 24
<PAGE> 3
U N B C O R P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) JUNE 30, December 31,
1996 1995
-------------------- -------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $23,825 $31,735
Federal funds sold 4,450 4,300
Interest bearing deposits with banks 337 515
Securities, net (Fair value:
$71,642 and $65,116, respectively)(Note 2) 71,627 65,129
Mortgage-backed securities (Fair value:
$50,052 and $63,399, respectively)(Note 2) 49,963 63,087
Loans:
Total loans (Notes 3 and 6) 591,534 518,730
Allowance for loan losses (Note 4) (7,988) (7,242)
- - --------------------------------------------------------------------------------------------------------------------------
Net loans 583,546 511,488
Premises and equipment, net 8,905 8,811
Intangible assets 6,865 7,376
Accrued interest receivable and other assets 9,292 7,203
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $758,810 $699,644
==========================================================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $72,617 $73,708
Interest bearing deposits 502,719 473,479
- - --------------------------------------------------------------------------------------------------------------------------
Total deposits 575,336 547,187
Fed funds purchased and short-term borrowings 59,301 49,659
Federal Home Loan Bank advances (Note 6) 49,732 31,360
Accrued taxes, expenses and other liabilities 6,366 6,111
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 690,735 634,317
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 15,000,000 shares authorized;
5,762,291 and 2,873,977 issued and outstanding, respectively) 5,762 2,874
Paid-in capital 31,871 31,603
Retained earnings 29,754 30,005
Unrealized gain on securities available for sale 688 845
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 68,075 65,327
- - --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $758,810 $699,644
==========================================================================================================================
</TABLE>
See Notes to the Consolidated Financial Statements
1
<PAGE> 4
U N B C O R P.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ----------------------------------
1996 1995 1996 1995
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $12,602 $10,053 $24,521 $19,092
Tax exempt 58 68 118 137
Interest and dividends on investments
& mortgage-backed securities:
Taxable 1,804 1,916 3,641 3,968
Tax exempt 16 39 31 87
Interest on bank deposits and federal funds sold 169 205 263 318
- - ----------------------------------------------------------------------------------------- ----------------------------------
Total interest income 14,649 12,281 28,574 23,602
- - ----------------------------------------------------------------------------------------- ----------------------------------
INTEREST EXPENSE:
Interest on deposits 5,273 4,202 10,322 7,867
Interest on short-term borrowings 678 620 1,360 1,109
Interest on FHLB advances 794 526 1,307 962
- - ----------------------------------------------------------------------------------------- ----------------------------------
Total interest expense 6,745 5,348 12,989 9,938
- - ----------------------------------------------------------------------------------------- ----------------------------------
NET INTEREST INCOME 7,904 6,933 15,585 13,664
PROVISION FOR LOAN LOSSES (NOTE 4) 800 380 1,430 740
- - ----------------------------------------------------------------------------------------- ----------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,104 6,553 14,155 12,924
OTHER INCOME:
Service charges on deposits 586 613 1,171 1,199
Trust Department income 739 677 1,312 1,223
Other operating income 110 171 388 379
Securities gains, net 1 0 1 6
Gains on loans originated for resale and sold 0 40 0 51
- - ----------------------------------------------------------------------------------------- ----------------------------------
Total other income 1,436 1,501 2,872 2,858
- - ----------------------------------------------------------------------------------------- ----------------------------------
OTHER EXPENSES:
Salary, wages and benefits 2,635 2,562 5,512 5,001
Occupancy 296 299 557 604
Equipment 612 577 1,145 1,081
Other operating expense 1,696 1,926 3,459 3,999
- - ----------------------------------------------------------------------------------------- ----------------------------------
Total other expenses 5,239 5,364 10,673 10,685
- - ----------------------------------------------------------------------------------------- ----------------------------------
INCOME BEFORE INCOME TAXES 3,301 2,690 6,354 5,097
PROVISION FOR INCOME TAXES 1,111 899 2,142 1,704
- - ----------------------------------------------------------------------------------------- ----------------------------------
NET INCOME $2,190 $1,791 $4,212 $3,393
========================================================================================= ==================================
EARNINGS PER SHARE (NOTE 1):
Primary $0.37 $0.31 $0.71 $0.58
Fully diluted $0.37 $0.31 $0.71 $0.58
========================================================================================= ==================================
DIVIDENDS PER SHARE (NOTE 1) $0.14 $0.13 $0.28 $0.25
========================================================================================= ==================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Primary 5,905,666 5,857,399 5,893,267 5,855,710
Fully diluted 5,913,620 5,857,399 5,908,057 5,856,767
========================================================================================= ==================================
<FN>
NOTE: Per share data is based on the average number of shares outstanding
adjusted for all stock dividends and splits.
</TABLE>
See Notes to the Consolidated Financial Statements
2
<PAGE> 5
U N B CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
6/30/96 6/30/95
---------------- ---------------
<S> <C> <C>
Balance at beginning of period $65,327 $58,640
Net Income 4,212 3,393
Shares issued through dividend reinvestment 255 0
Stock options exercised 20 20
Cash dividends $0.28 and $0.25 per share, respectively* (1,582) (1,407)
Change in market value on investment securities
available for sale, net of deferred taxes (157) 1,258
--------------- --------------
Balance at end of period $68,075 $61,904
================ ===============
<FN>
*Dividends per share data adjusted for April, 1996 100% stock dividend.
</TABLE>
See Notes to the Consolidated Financial Statements
3
<PAGE> 6
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) SIX MONTHS ENDED JUNE 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $4,212 $3,393
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 373 372
Provision for loan losses 1,430 740
Net securities gains (1) (6)
Net accretion on securities (80) (317)
Amortization of intangible assets 511 555
Loans originated for resale 0 (5,017)
Proceeds from sale of loan originations 0 4,119
Changes in:
Interest receivable (453) (165)
Interest payable (242) 315
Other assets and liabilities, net (1,054) 3,108
Deferred income (5) (7)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 4,691 7,090
- - ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks 178 (279)
Net increase in funds sold (150) (2,400)
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 2,001 3,123
Proceeds from maturities of securities held to maturity 12,928 8,793
Proceeds from maturities of securities available for sale 11,970 14,133
Purchases of securities held to maturity (11,218) (9,091)
Purchases of securities available for sale (23,655) (4,135)
Principal payments received on mortgage-backed securities held to maturity 5,564 3,071
Principal payments received on mortgage-backed securities available for sale 8,880 1,497
Net increase in loans made to customers (71,967) (62,831)
Loans purchased (1,613) (2,444)
Purchases of premises and equipment, net (467) (387)
Principal payments received under leases 92 76
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (67,457) (50,874)
- - ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 28,149 30,805
Cash dividends paid, net of shares issued through dividend reinvestment (1,327) (1,407)
Proceeds from issuance of stock 20 20
Net increase in short-term borrowings 9,642 6,690
Proceeds from FHLB advances 22,000 25,000
Repayments of FHLB advances (3,628) (10,065)
- - ---------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 54,856 51,043
- - ---------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (7,910) 7,259
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 31,735 30,211
- - ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $23,825 $37,470
=================================================================================================================================
</TABLE>
See the Notes to the Consolidated Financial Statements
4
<PAGE> 7
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
Note 1 - Summary of Significant Accounting Policies
- - ---------------------------------------------------
The accompanying consolidated financial statements include the accounts of UNB
Corp. and its wholly owned subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
These interim financial statements are prepared without audit and reflect all
adjustments of a normal recurring nature which, in the opinion of Management,
are necessary to present fairly the consolidated financial position of UNB Corp.
at June 30, 1996, and its results of operations and cash flows for the periods
presented. The accompanying consolidated financial statements do not purport to
contain all the necessary financial disclosures required by generally accepted
accounting principles that might otherwise be necessary in the circumstances.
The Annual Report for UNB Corp. for the year ended December 31, 1995, contains
consolidated financial statements and related notes which should be read in
conjunction with the accompanying consolidated financial statements.
For consolidated financial statement classification and cash flow reporting
purposes, cash and cash equivalents include currency on hand and non-interest
bearing deposits with banks. For the six months ended June 30, 1996, and June
30, 1995, UNB Corp. paid interest in the amount of $13.2 million and $9.6
million, respectively. For the same six month period, federal income taxes paid
totaled $2,605,000 and $2,040,000, respectively.
The Corporation accounts for its investment portfolio under the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS No. 115), "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
the Corporation to classify debt and equity securities as held to maturity,
trading or available for sale.
Securities classified as held to maturity are those that management has the
positive intent and ability to hold to maturity. Securities classified as
available for sale are those that management intends to sell or that could be
sold for liquidity, investment management, or similar reasons, even if there is
not a present intention for such a sale. Trading securities are purchased
principally for sale in the near term and are reported at fair value with
unrealized gains and losses included in earnings. The Corporation held no
trading securities during the periods reported.
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts. Securities available for sale are carried
at fair value with unrealized gains and losses included as a separate component
of shareholders' equity, net of tax. Gains or losses on dispositions are based
on net proceeds and the adjusted carrying amount of securities sold, using the
specific identification method.
On January 1, 1995, the Corporation adopted Financial Accounting Standards Board
Statements No. 114, "Accounting by Creditors for Impairment of a Loan", and No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures." SFAS No. 114 specifies that the allowances for loan losses on
impaired loans be measured at the present value of expected future cash flows,
discounted at the loan's original effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of the
collateral, if the loan is collateral dependent. SFAS No. 118 allows a creditor
to use existing methods for income
5
<PAGE> 8
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------------------
recognition on an impaired loan.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet its debt
service requirements. Often this is associated with a delay or shortfall in
payments of 30 days or more. Smaller-balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first mortgage loans secured
by one-to-four family residences, residential construction loans and consumer
automobile, boat, home equity and credit card loans with balances less than
$300,000. In addition, loans held for sale and leases are excluded from
consideration as impaired.
Impaired loans are fully or partially charged off when in Management's opinion
an event or events have occurred which provide reasonable certainty that a loss
is probable. When Management determines that a loss is probable, a full or
partial charge off is recorded for the amount the book value of the impaired
loan exceeds the present value of the cash flows or the fair value of the
collateral, for collateral dependent loans.
SFAS No. 118 allows a creditor to use existing methods for income recognition on
an impaired loan. All impaired loans for purposes of SFAS No. 114 are placed on
non-accrual status. However, all non-accrual loans are not considered impaired
because non-accrual loans which have been brought current are included on
non-accrual status for six months and would not be considered impaired.
Under this standard, loans considered to be impaired are reduced to the present
value of expected future cash flows or to the fair value of collateral by
allocating a portion of the allowance for loan losses to such loans. Any
reduction in carrying value through impairment or any change in impairment based
on cash payments received or revised cash flow estimates as determined on a
quarterly basis would be applied against the unallocated portion of the
allowance for loan losses and become a specific allocation of the allowance or
as an addition to the provision for loan losses if the unallocated portion of
the allowance was insufficient to cover the impairment.
Primary and fully diluted earnings per share at June 30, 1996 and 1995 are
computed based on the weighted average shares outstanding during the period.
Primary earnings per common share has been computed assuming the exercise of
stock options less the treasury shares assumed to be purchased from the proceeds
using the average market price of UNB Corp.'s stock for the periods presented.
Fully diluted earnings per common share represents the additional dilution
related to the stock options due to the use of the market price as of the period
end.
The Corporation declared a 100% stock dividend to shareholders of record on
April 16, 1996, payable on April 30, 1996. This was recorded by a transfer from
retained earnings to common stock at stated value. All earnings per share and
cash dividends per share have been adjusted for this stock dividend.
6
<PAGE> 9
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
Note 2 - Investment Securities
- - ------------------------------
The amortized cost and estimated fair value of the investment and
mortgage-backed securities, available for sale and held to maturity, as
presented on the consolidated balance sheet at June 30, 1996, and December 31,
1995, are as follows:
<TABLE>
<CAPTION>
June 30, 1996
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities $26,107 $15 ($146) $25,976
Obligations of U.S. government
agencies and corporations 31,012 20 (237) 30,795
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 2,225 -- -- 2,225
Obligations of state and political
subdivision 1,236 6 -- 1,242
Corporate bonds and other debt
securities 1,121 9 -- 1,130
------ ----- ------ ------
Total debt securities 61,701 50 (383) 61,368
Equity securities available for sale 8,636 1,653 (15) 10,274
------ ----- -------- -------
Total investment securities 70,337 1,703 (398) 71,642
Mortgage-backed securities
available for sale 33,035 86 (333) 32,788
Mortgage-backed securities
held to maturity 17,175 98 (9) 17,264
------- ---- ----- -------
Total mortgage-backed securities 50,210 184 (342) 50,052
------- ----- ------- -------
Total investment and mortgage-
backed securities $120,547 $1,887 ($740) $121,694
======== ====== ======= ========
</TABLE>
7
<PAGE> 10
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
(in thousands of dollars) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale
U.S. Treasury securities $22,093 $111 ($33) $22,171
Obligations of U.S. government
agencies and corporations 28,966 72 (226) 28,812
Securities held to maturity:
Obligations of U.S. government
agencies and corporations 3,007 -- (3) 3,004
Obligations of state and
political subdivisions 1,238 6 -- 1,244
Corporate bonds and other debt
securities 2,131 10 (26) 2,115
------ ---- ---- ------
Total debt securities 57,435 199 (288) 57,346
Equity securities available for sale 6,275 1,495 -- 7,770
------ -------- ------- ------
Total investment securities 63,710 1,694 (288) 65,116
Mortgage-backed securities
available for sale 40,497 139 (278) 40,358
Mortgage-backed securities
held to maturity 22,729 319 (7) 23,041
------- ------ ----- -------
Total mortgage-backed securities 63,226 458 (285) 63,399
------- ------ ----- -------
Total investment and mortgage-
backed securities $126,936 $2,152 ($573) $128,515
======== ====== ====== ========
</TABLE>
During the six month periods ended June 30, 1996 and June 30, 1995, the proceeds
from sales of securities available for sale were $2,000,625 and $3,123,166,
respectively. Gross gains of $925 and $6,210 were recognized in those sales,
respectively. For the first six months of 1996, the net unrealized decrease in
market value on available for sale securities was approximately $237,000. There
were no sales or transfers of securities classified as held to maturity.
The amortized cost and estimated fair value of mortgage-backed and debt
securities at June 30, 1996, by contractual maturity, are shown on page 9.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
8
<PAGE> 11
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1996
Estimated Weighted
Amortized Fair Average
(in thousands of dollars) Cost Value Yield
--------- --------- --------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries
Due in one year or less $ 8,017 $ 8,028 5.81%
Due after one year through five years 18,090 17,948 5.76
------- ------- ------
Total 26,107 25,976 5.78
U.S. Government agencies and corporations
Due in one year or less 12,002 11,989 5.16
Due after one year through five years 19,010 18,806 5.78
------- ------- ------
Total 31,012 30,795 5.54
Total debt securities available for sale $57,119 $56,771 5.65%
======= ======= ======
Securities held to maturity:
U.S. Government agencies and corporations
Due in one year or less $ 2,225 $ 2,225 5.23%
------ ------ ------
Total 2,225 2,225 5.23
Obligations of state and political subdivisions
Due in one year or less 931 934 5.07
Due after one year through five years 305 308 4.65
------ ------ ------
Total 1,236 1,242 4.96
Corp bonds and other debt securities
Due in one year or less 378 378 --
Due after one year through five years 743 752 8.69
------- ------- ------
Total 1,121 1,130 5.76
------- ------- ------
Total securities held to maturity $ 4,582 $ 4,597 5.29%
======= ======= ======
Mortgage-backed and collateralized
mortgage obligations available for sale $33,035 $32,788 5.47%
Mortgage-backed and collateralized
mortgage obligations held to maturity 17.175 17.264 7.39
------- ------- ------
Total mortgage-backed and debt securities $50,210 $50,052 6.13%
======= ======= ======
</TABLE>
9
<PAGE> 12
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
At June 30, 1996 there were no holdings of securities of any one issuer, other
than the U.S. government and its agencies and corporations with an aggregate
book value which exceeds 10% of stockholders' equity.
Note 3 - Loans
- - --------------
Total loans as presented on the balance sheet are comprised of the following
classifications:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
<S> <C> <C>
(in thousands of dollars)
Commercial, financial and agricultural $ 73,659 $ 59,638
Commercial, tax exempt 4,902 5,173
Commercial real estate 62,573 60,478
Residential real estate 208,677 172,283
Consumer loans 241,723 221,158
------- -------
Total loans $591,534 $518,730
======== ========
</TABLE>
The balance of impaired loans at June 30, 1996 was $242,425. None of this amount
required an allocation of the allowance for loan losses. The average balance of
impaired loans for the year-to-date, 1996 was $404,797. Year-to-date interest
income recognized on impaired loans at June 30, 1996 was $11,853, while $12,096
of interest income was recognized on a cash basis. There were no loans
identified as impaired at June 30, 1995.
At June 30, 1996 and December 31, 1995, loans on non-accrual status and/or past
due more than 90 days approximated $1,586,000 and $848,000, respectively. The
Other Real Estate Owned balance, net of allowance, at June 30, 1996, is
$325,000.
Note 4 - Allowance for Loan Losses
- - ----------------------------------
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1996, and June 30, 1995, are as follows:
<TABLE>
<CAPTION>
(in thousands of dollars) 1996 1995
------- -------
<S> <C> <C>
Balance - January 1 $7,242 $6,348
Provision charged to operating expense 1,430 740
Loans charged off, net of recoveries (684) (287)
------- -------
Balance - June 30 $7,988 $6,801
======= =======
</TABLE>
10
<PAGE> 13
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
Note 5 - Concentrations of Credit Risk and
- - ------------------------------------------
Financial Instruments With Off-Balance Sheet Risk
-------------------------------------------------
The Corporation offers commercial and consumer credit products to customers
within Stark and surrounding counties. The Corporation maintains a diversified
credit portfolio, with residential and commercial real estate and consumer loans
comprising approximately 86.7% of the portfolio. Indirect loans accounted for
88.3% of installment loans and 79.7% of all consumer loans at June 30, 1996. The
dealer network from which the indirect loans are generated includes 137 active
relationships, the largest of which was responsible for 7.7% of total indirect
dollar volume for the year-to-date 1996.
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, 1996, the contract or notional amounts of these instruments, which primarily
include commitments to extend credit, standby letters of credit and financial
guarantees, and interest rate swaps totaled $164,423,000.
At June 30, 1996, the Corporation held one interest rate swap agreement with a
notional amount of $5.9 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 June 30, 1996 was 5.49% while the
fixed rate to be paid through the remainder of the contract is 2.88%. The income
from this agreement for the six months ended June 30, 1996 was $83,700. For the
six months ended June 30, 1995 the income was $107,000. The market value of this
swap at June 30, 1996 was a positive $405,000. 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.
11
<PAGE> 14
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
Note 6 - FHLB Advances
- - ----------------------
Long-term debt at June 30, 1996 is comprised of advances from the Federal Home
Loan Bank (FHLB). Pursuant to collateral agreements with the FHLB, advances are
secured by all FHLB stock and qualifying first mortgage loans. Advances at June
30, 1996 have original principal balances totaling $49,732,000. Interest expense
on FHLB advances for the six months ending June 30, 1996 was approximately
$1,307,000.
A summary of FHLB advances outstanding follows (in thousands):
<TABLE>
<CAPTION>
Maturity Interest Rate Amount
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 4.90%-6.50% $ 7,170
1997 5.15%-6.45% 6,294
1998 5.35%-7.85% 9,068
1999 5.50%-7.95% 9,354
2000 6.00%-8.00% 15,162
2001 6.10%-6.45% 2,004
2002 6.25% 330
2003 6.25% 350
-------------------------------------------------------------------
Total $49,732
===================================================================
</TABLE>
12
<PAGE> 15
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
INTRODUCTION
- - ------------
The following areas of discussion pertain to the consolidated financial
statements of UNB Corp. at June 30, 1996, compared to December 31, 1995, and the
results of operations for the three months and year-to-date periods ending June
30, 1996, compared to the same periods in 1995. It is the intent of this
discussion to provide the reader with a more thorough understanding of the
consolidated financial statements and supporting schedules, and should be read
in conjunction with those consolidated financial statements and schedules.
UNB Corp. is not aware of any trends, events, or uncertainties that might have a
material effect on the soundness of operations; neither is UNB Corp. aware of
any proposed recommendations by regulatory authorities which would have a
similar effect if implemented.
FINANCIAL CONDITION
- - -------------------
Total assets at June 30, 1996 were $758,810,000, an increase of $59,166,000, or
8.5%, over year-end 1995. Decreases in cash and cash equivalents and interest
bearing deposits with banks of $7,910,000 and $178,000, respectively, net of an
increase in federal funds sold of $150,000, combined for a total decrease of
$7,938,000 in highly liquid balances. A net reduction of $6,626,000 in the
investment and mortgage-backed securities portfolios combined with the reduction
of liquid balances was used to fund a portion of the loan portfolio growth of
$72,804,000 since year-end 1995, an increase of 14.0%.
All of the loan categories experienced continued growth for the first six months
of the year. The residential mortgage loan portfolio increased by $36,394,000,
or 21.1%, over year-end 1995 levels. The consumer loan portfolio increased by
$27,765,000, or 12.6%, over year-end 1995 levels, excluding a one-time
reclassification of approximately $7.2 million in business installment loans
from the consumer loan portfolio to the commercial loan portfolio during the
first quarter of 1996. Earning assets at June 30, 1996 increased to $717,911,000
from $651,761,000 at December 31, 1995, an increase of $66,150,000 or 10.1%. The
ratio of earning assets to total assets increased slightly from 93.2% at
year-end 1995 to 94.6% at June 30, 1996.
Total deposits at June 30, 1996 increased by $28,149,000, or 5.1%, from year-end
1995. Non-interest bearing deposits have almost returned to 1995 year-end
levels, recovering from the normal seasonal declines always experienced after
year-end. Interest bearing demand balances declined 4.7%, while savings balances
increased by $6,314,000, or 4.0%, from year-end levels, influenced to a great
extent by the popularity of the new Money Market Access Account which is a
variable rate savings product whose tiered rate structure fluctuates weekly with
the 13 Week U.S. Treasury Bill rate. Marketing efforts aimed at non-bank
customers to raise balances in this new product were very successful. Balances
raised through Money Market Access were partially offset by transfers from
passbook and statement savings accounts to higher earning certificates of
deposit and alternative investments found outside the banking industry.
13
<PAGE> 16
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
Certificate of Deposit balances grew by $26,453,000, or 10.9%. The majority of
this growth, $15,000,000, came from the issuance of brokered certificates of
deposit through Merrill Lynch. Another significant factor was the 24 and 36
month Anniversary CD product introduced in the first quarter of 1996 and offered
through May, which allows customers to raise their interest rate on the
anniversary of the certificate to the current rate in effect on certificates
with the same original maturity term.
Other significant sources of funding for balance sheet growth during the first
quarter of 1996 were term and sweep repurchase agreements and Federal Home Loan
Bank advances. The majority of growth in term and sweep repurchase agreements
occurred in the first quarter of 1996. Since year-end 1995, repurchase
agreements have grown a combined $9,642,000, a 19.4% increase. Advances have
been the most relied upon source of funding during the second quarter of 1996,
with growth in outstanding balances of $18,372,000, or 58.6% from year-end 1995.
The majority of advances drawn have been five year, amortizing instruments,
whose cash flows more match those of the assets they are funding and whose rates
are lower than single maturity advances due to their amortizing feature.
In March of 1996, Management recommended and the Board approved an amendment to
the loan policy, for the calculation of the loan-to-deposit ratio. The ratio was
redefined as gross loans divided by total deposits plus Federal Home Loan Bank
borrowings. The limit was set at 95%, with a provision that allows Management to
exceed the limit for 30 consecutive days without being in violation of the
policy. This was done to reflect what is becoming an industry norm, dependence
on these borrowings as a source of balance sheet funding considered to be less
volatile than deposits. Advances with varying maturities and flexible repayment
options are considered more stable than the most stable of bank deposits,
certificates of deposit, which are liable to early withdrawal and are difficult
to attract in longer maturity ranges even at rates competitive to other market
instruments. The Board agreed that the changes in funding alternatives
experienced by the Bank made the new measure a more accurate indication of
actual liquidity risk.
The loan-to-deposit ratio at June 30, 1996 was 94.6% compared to 89.7% at
December 31, 1995. The growth in this ratio for the first half of 1996 reflects
continued strong loan demand and dependence on short-term borrowings and cash
flows from the investment portfolio to fund that growth. The Bank continues to
face the difficulty of raising local deposits due to strong local market
competition and the attractive returns depositors find on alternative forms of
investment offered outside the banking industry, especially mutual funds.
Depositors' aversion to extending maturities on deposits as well as the ability
to raise deposits at relatively attractive rates with longer maturities in the
national market will encourage the future use of brokered deposits to fund
balance sheet growth. Current rates on brokered certificates and single maturity
FHLB advances for various maturities are comparably priced to within five basis
points of each other.
Total shareholders' equity at June 30, 1996 was $68,075,000, an increase of
$2,748,000, or 4.2%, from year-end 1995. The major contributor to this increase
was net income for the first half of 1996 of $4,212,000. Additional increases to
capital were the result of shares issued through the dividend reinvestment
program and the exercise of executive stock options. These increases were
partially offset by the
14
<PAGE> 17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
payment of $1,582,000 in quarterly cash dividends and the net decrease in market
value, net of deferred taxes, of investment securities available for sale of
$157,000.
RESULTS OF OPERATIONS
- - ---------------------
UNB Corp.'s net income for the second quarter of 1996 was $2,190,000, or $0.37
per share, compared with $1,791,000, or $0.31 per share for the second quarter
of 1995. This is an increase of 22.3%. Year-to-date net income of $4,212,000 was
$819,000, or 24.1%, greater than the same period last year. Net interest income
for the quarter and year-to-date continues to be the major contributor to
increased earnings, a result of the growth in balance sheet size and shift in
asset mix to high yielding loans from non-earning cash, cash equivalents and
lower yielding investment securities. Net interest income grew from $13,664,000
for the first half of 1995 to $15,585,000 for the first half of 1996, an
increase of 14.1%. For the second quarter of 1996, net interest income was
$971,000, or 14.0%, over the same period in 1995.
Total interest income for the second quarter and year-to-date was $14,649,000
and $28,574,000, increases of 19.3% and 21.1%, respectively, from the same
periods of 1995. Total interest expense for second quarter and year-to-date was
$6,745,000 and $12,989,000, increases of 26.1% and 30.7%, respectively, over the
same periods last year.
The net interest margin for the first half of 1996 was 4.56%, a decrease from
4.79%, or 23 basis points, from the first half of 1995. At the Bank level,
several areas contributed to the decline in margin. The most significant impact
on the net interest margin has been in the Bank's cost of funds. The overall
rate paid on interest bearing liabilities increased 37 basis points on a
year-to-date basis for the first half of 1995 and 1996. The new Money Market
Access product, paying a tiered rate based on the 13 Week U.S. Treasury Bills
has attracted some funds out of the lower rate money market account as well as
regular savings products. Rates offered on certificates of deposit throughout
1995 and into 1996 were kept at very competitive levels within the local market
to attract funding for strong loan demand. These rates, coupled with a decrease
of 10 basis points on savings rates early in 1996, caused some savings balances
to switch into certificates of deposit, thus increasing their cost. Due to
depositors' aversion to extend maturities in the deposit markets, the Bank
turned to brokered certificates of deposit and Federal Home Loan Bank advances
to lengthen liability maturities and lock in spreads on the loans being funded.
While the margin decreased, an increase in the overall yield on earning assets
of five basis points between the two periods helped reduce the adverse impact of
the higher cost of funds. Returns on the investment portfolio decreased 27 basis
points, the result of repricing of variable rate mortgage-backed securities and
the rollover of maturities at lower market rates. Overall yields in the loan
portfolio increased two basis points, led by increases in the installment loan
portfolio due to a shift in product mix from new to used vehicles. This was
partially offset by the repricing of commercial and home equity loans tied to
the Prime rate. The two percent increase in loan yields more than offset the 27
basis point decline in investment yields, as well as the change in earning asset
mix from the investment portfolio to higher yielding loans due to the
differential in yields earned on the respective portfolios.
15
<PAGE> 18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
The aggressive growth in balance sheet size and the resulting decrease in the
net interest margin has been an Asset/Liability management strategy over the
past eighteen months. The resulting increase in overall revenue has enabled the
Corporation to leverage capital and increase its return on equity. Return on
equity for the first half of 1996 was 12.62% compared to 11.43% for the same
period last year, an increase of 10.4%. Return on assets, meanwhile has
increased slightly from 1.10% for the first half of 1995 to 1.16% for the first
half of 1996.
Non-interest income for the second quarter of 1996 shows a 4.3% decrease from
the same period last year while remaining constant to last year on a
year-to-date basis. The most significant factors for the reduction in
non-interest income for the second quarter were reductions in service charges on
deposits, a shortfall in fee income generated from the sales of annuities and
mutual fund investments and the lack of opportunities for gains on the sales of
mortgage loans in the secondary market. Service charges on deposits were below
the same period of 1995 due to the elimination of the pass through of FDIC
insurance premiums to business demand deposit customers which accounted for
$23,200 in deposit service charge income for the first half of 1995. During the
second quarter of 1996, the Bank finalized an agreement with a new vendor,
American Express Financial Advisors, to provide a full range of financial
products and financial planning services through a staff of financial advisors,
dedicated exclusively to servicing Bank customers. Advisors were assigned to the
branch network late in the quarter. Management expects this source of fee income
to reach beyond levels achieved in the past due to this vendor's experience and
reputation in the market. No gains on sales of loans in the secondary market
were recorded for the first half of 1996 due to an unfavorable interest rate
environment and the mix of mortgage loan products generated in the first half.
In the future, as the interest rate environment creates opportunities for gains
on the sales of mortgages, management intends to resume originating loans with
the intention of selling the loans in the secondary market. Shortfalls in these
areas were partially offset by a 7.3% increase in Trust fee income for the first
half of the year over the same period last year.
Non-interest expense for the second quarter and year-to-date decreased by
$125,000 and $12,000, respectively, from the same periods in 1995. Increases in
salaries, benefits, equipment expenses and MasterCard processing costs were
partially offset by reductions in occupancy and other operating expenses such as
FDIC premiums, marketing expenses and office supplies. Increases in salary and
benefits were attributed to normal compensation increases and increases in
Stakeholder incentive expense due to increased Bank profitability and asset
growth. During the first half of 1996 the Bank recognized a gain of $42,000 on
the sale of its Edison Park Branch building which was sold in anticipation of
the consolidation of its two Hartville locations into one new branch building
currently under construction.
The Corporation anticipates that during 1996 it will be affected by a plan
adopted by the Federal Deposit Insurance Corporation (FDIC) for a one time
assessment to recapitalize the Savings Association Insurance Fund (SAIF) which
insures approximately $127,000,000 in deposits which the Bank acquired in "Oakar
transactions" from the Resolution Trust Company (RTC) in the First Savings and
Loan Company, F.A. of Massillon and the Transohio Federal Savings Bank branch
acquisitions. The proposed assessment rate and percentage exclusion for deposits
acquired through Oakar transactions are currently undetermined. They were part
of the negotiations between
16
<PAGE> 19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
Congress and the President to finalize a national budget bill but were dropped
in the final version of the bill. The Corporation estimates its share of the
assessment to be approximately $700,000 based on the rates reported in previous
drafts of the proposed legislation. It is anticipated that once the assessment
is paid, the Bank's regular assessment on SAIF insured deposits would decrease
to possibly $0.04 per $100 of deposits or lower from the current rate of $0.23
per $100 of deposits. This would be based on the current premiums being paid on
deposits insured under the Bank Insurance Fund (BIF) of the FDIC which are
determined on the basis of capital adequacy and other regulatory risk
assessments.
Primary and fully diluted earnings per share for the second quarter of 1996
increased $0.06, or 19.4% from the same period in 1995. On a year-to-date basis,
primary and fully diluted earnings per share increased $0.13, or 22.4%, from the
same period in 1995. All earnings per share data are adjusted for the April,
1996 100% stock dividend.
The Bank has continued involvement in legal proceedings concerning a parcel of
OREO property located in the northwest quadrant of Stark County. Negotiations
continue with a large national petroleum company, owner of the facility at the
date it was taken out of service and also the party responsible for the cleanup
according to the State of Ohio's Bureau of Underground Storage Tanks (BUSTER)
regulations. Environmental assessments by the Bank and the petroleum company
have been filed with the State agency, which has requested further validation of
the Bank's assessment. An additional sight assessment completed and filed in the
second quarter of 1996 by the engineering firm contracted by the responsible
party was misplaced by the state agency. A new copy has been submitted and will
be reviewed with a report issued by the agent in charge by mid third quarter
1996. Once this report has been received from the State, the Bank will make
efforts to speed the resolution of the situation through legal council. The
outcome will determine whether the Bank can proceed with the marketing of the
property for sale and/or any legal action against the national oil company to
remediate the contamination of the property. The estimated costs, should they
become the responsibility of the Bank, are not material to the business or
financial condition of the Registrant and have been set up as an allowance
against the property's value on the Bank's Balance Sheet.
ALLOWANCE FOR LOAN LOSSES
- - -------------------------
The provision for loan losses for the year-to-date ended June 30, 1996 of
$1,430,000 was an increase of $690,000 over the same period in 1995. The Bank's
reserve-to-loan ratio of 1.35% is an increase from 1.33% at March 31, 1996 but
is five basis points below the ratio at December 31, 1995. The increase in
provision was due to the 14.0% increase in loan portfolio since year-end 1995.
The provision for loan losses charged to operating expense was based on
Management's evaluation of the loan portfolio, the adequacy of the allowance for
loan losses under current economic conditions and current and anticipated loan
growth. An analyses of the allowance for loan losses is provided on page 22.
During the third quarter of 1995, a change in the methodology used to determine
the allocation of the allowance for loan losses among the various loan
categories was approved by the Executive Committee of the Board of Directors and
instituted by Management. Management continues to use the same three
methodologies it has historically used to determine the allocation of the
17
<PAGE> 20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
allowance, however, it now selects the single methodology that results in the
highest aggregate calculation for allocation of the allowance among the various
loan categories, and not the highest specific allocation for each loan category
from among the three methodologies. Management believes this change reflects a
more reliable analysis of the Bank's risk of loan loss. An analysis of the
allocation of the allowance for loan losses is found on page 23.
The balance of impaired loans at June 30, 1996 was $242,425, a reduction of
$323,844 from the impaired loan balance at December 31, 1995. Non-performing
loans, which include non-accrual loans and loans past due 90 days or more, were
$1,586,000 at June 30, 1996 compared to $1,320,000 at December 31, 1995. The
ratio of non-performing loans to total loans outstanding at June 30, 1996, was
0.27%. This was a small increase from year-end 1995 at 0.25%, and compared
favorably to the ratio of 0.80% for the Bank's peer group, all insured
commercial banks having assets between $500 million and $1 billion. For the
second quarter of 1996, net-chargeoffs as a percentage of average loans
outstanding was 0.06% versus 0.03% for the same period in 1995, a result of
increased net chargeoffs in the commercial, mortgage and installment loan
portfolios.
CAPITAL RESOURCES
- - -----------------
Shareholders' equity totaled $68,075,000 at June 30, 1996, an increase of
$2,748,000, or 4.2%, compared to $65,327,000 at December 31, 1995. The ratio of
equity-to-assets at June 30, 1996 was 8.97% versus 9.34% at December 31, 1995,
with the decrease of 37 basis points reflecting the impact of continued balance
sheet growth through growth of the loan portfolio. The rate of primary capital
(shareholders' equity plus the allowance for loan losses less intangible assets)
to total adjusted assets was 13.19%. The risk-based capital ratio was 11.83%
while the Tier 1 and core leverage ratios reached 10.58% and 8.05%,
respectively. The levels achieved in these ratios are above required regulatory
minimums and maintain the Corporation in the "well capitalized" category under
the guidelines of the Federal Deposit Insurance Corporation Act of 1991
(FDICIA).
The dividends of $0.28 per share (adjusted for the April, 1996 100% stock
dividend) for the first half of 1996 were a 12.0% increase over the $0.25
dividend paid for the same period in 1995. Dividends, representing 37.6% of the
first half's earnings, fall within the Corporation's dividend policy which
provides for cash dividend payouts within a range of 35% to 45% of earnings.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires that securities which the Bank has classified as
"Available-for-Sale" are recorded at market value with any adjustments recorded
to equity. The reduction in the investment balances of the Available for Sale
portfolio along with the rise in interest rates over the first half of 1996 has
reduced the unrealized gain in market value of these securities. At June 30,
1996, an unrealized gain in securities available for sale, net of deferred taxes
of $688,000, reflects a decrease in shareholders' equity of $157,000 since
year-end 1995.
On April 16, 1996, the Corporation's Board of Directors declared a 100% stock
dividend on the Corporation's common stock, payable to shareholders of record as
of April 30, 1996.
18
<PAGE> 21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
LIQUIDITY
- - ---------
Liquidity measures the Corporation's ability to meet the cash demands and credit
needs of its customers and is provided by the ability to readily convert assets
to cash and raise funds in the market place. Total cash, federal funds sold and
investments available for sale (including money market investments) of
$128,445,000 represent 16.9% of total assets at June 30, 1996. Of the
investments available for sale, $56,771,000 are held in U.S. Treasury and Agency
securities, 35.3% of which mature within one year. Approximately $84,609,000 of
total Corporate securities is pledged as collateral to secure public funds or
other obligations. The Corporation's ability to raise funds in the market place
is provided by the Bank's branch network which services its strong deposit base,
in addition to the availability of Federal Home Loan Bank (FHLB) advance
borrowing, brokered deposits, Federal Funds purchased and securities sold under
agreement to repurchase. The strong loan demand experienced throughout the first
half of 1996 coupled with the funding of a significant portion of that growth
with maturities and cash flows from the investment portfolio and short-term
borrowings in the form of sweep and term repurchase agreements have resulted in
a loan-to-deposit ratio of 94.6%, up from the 1995 year-end ratio of 89.7%.
For the near future, FHLB advances will be the preferred means to fund balance
sheet growth over brokered deposits until the SAIF issue is decided in Congress.
This is because brokered deposits are included in the Bank's total deposit base.
The growth of the deposit base is used to determine a growth factor to be
applied to the SAIF deposit base which is assessed SAIF FDIC premiums and the
special one-time assessment to recapitalize the SAIF insurance fund. In this way
the Bank is attempting to limit its exposure to the expense related to the
recapitalization of the SAIF fund.
The liquidity needs of the Holding Company, primarily cash dividends and other
corporate purposes, are met through cash, short term investments and dividends
from the Bank.
INTEREST RATE SENSITIVITY
- - -------------------------
Interest rate sensitivity measures the potential effects on earnings and capital
to changes in market interest rates. The objective of the Corporation's Asset
and Liability Management Policy is to help Management establish a profit plan
for the Corporation through the coordination of asset mix and volume controls,
liquidity, capital and dividend policies, interest margin management, sound
investment and loan portfolio management, loan pricing policies, purchased funds
policies and cash management techniques. This profit plan seeks to maximize
profitability while minimizing the adverse effects on net interest margin and
capital resulting from fluctuations in interest rates.
All assets and liabilities are designated as being either rate sensitive or
non-rate sensitive during some assigned time period such as one month or one
year. Interest rate sensitivity relates to that time period when assets and
liabilities can be repriced. Management attempts to match rate sensitive assets
and rate sensitive liabilities in an effort to maintain an acceptable net
interest margin regardless of the level or direction of interest rates for both
assets and liabilities. The GAP measures the variance in this matching process
and is defined as the difference
19
<PAGE> 22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
between rate sensitive assets and rate sensitive liabilities within an assigned
time frame. The Bank uses a modified GAP position in which the majority of
traditional savings and NOW account balances are placed in the five year time
frame which considers this portion of these deposits to be rate insensitive. The
remainder are placed in the one month time frame reflecting the assumption that
they are sensitive to changing interest rates and will reprice into certificates
of deposits with rising interest rates. The Bank periodically analyzes the
historical sensitivity of these liability products to validate its modified GAP
assumptions and will redefine its modified GAP position should it be warranted.
The GAP position can be either positive or negative, and is viewed as the dollar
measure of the Bank's exposure to changes in interest rates over a certain time
frame. A negative GAP benefits net interest income when rates are decreasing,
while a positive GAP benefits net interest income in a rising rate environment.
The reverse is also true for each of these.
The Bank's cumulative GAP position at June 30, 1996 reflects a 7.17% liability
sensitive position in the time frame of less than one year. In its Asset and
Liability Policy, the Bank has set limits of +/10% for the one year time frame
and attempts to manage its portfolio of rate sensitive assets and liabilities to
remain within those limits. It is unclear what impact this negative GAP position
will have on the Bank's net interest margin in the near future given the mixed
signals of various recently reported economic indicators and the uncertainty
they have created in financial markets as to the future direction of interest
rates. See the GAP table on page 21 for more detailed data on the Bank's GAP
position.
CONCENTRATION OF CREDIT RISK
- - ----------------------------
The Corporation maintains a diversified credit portfolio, with relatively
smaller balance, homogeneous consumer installment, credit card and residential
mortgage loans comprising 76.1% of total loans outstanding at June 30, 1996.
Commercial and commercial real estate loans comprise the remaining 13.3% and
10.6% of loans outstanding, respectively. The largest industry concentration
identified within the total portfolio is the medical industry at 2.1% of total
loans outstanding. Within the commercial real estate portfolio, real estate is
mainly held as collateral while the cash flows of the business are considered
the primary source of repayment on the loans. With all loan types, Management
attempts to balance credit risk versus return by employing conservative credit
standards and comprehensive underwriting guidelines in addition to the loan
review function which monitors credits during and after the approval process.
IMPACT OF FDICIA
- - ----------------
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) applies to
banks with total assets in excess of $500 million. Management has spent
considerable time ensuring compliance with requirements for documenting internal
control reporting. The 1995 Annual Report contained a statement from Management
attesting to the internal control structure of the Corporation, including
policies, procedures and compliance with laws and regulations within the Banking
industry. In addition, the Bank's independent external auditor attested to the
accuracy of Management's assertions regarding internal control systems over
financial reporting.
20
<PAGE> 23
UNITED NATIONAL BANK & TRUST
12 MO CUM ADJ GAP TREND
GAP Analysis Ratios:
<TABLE>
<CAPTION>
6/95 7/95 8/95 9/95 10/95 11/95
---- ---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Cumulative Bank GAP 66,272 70,254 71,293 74,051 71,341 71,805
Rate Sensitive Asset to Rate
Sensitive Liability (%) 112.90% 113.74% 113.74% 114.01% 113.20% 113.11%
Adjusted GAP Percentage:
- - ------------------------
3 Months Cum GAP % -3.13% -4.10% -4.79% -4.55% -4.17% -4.38%
6 Months Cum GAP % -3.38% -5.71% -5.43% -6.25% -4.33% -5.98%
12 Months Cum GAP % -2.44% -7.48% -6.14% -5.95% -4.18% -3.28%
<CAPTION>
12/95 1/96 2/96 3/96 4/96 5/96
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Cumulative Bank GAP 73,340 77,756 77,688 76,731 79,155 80,719
Rate Sensitive Asset to Rate
Sensitive Liability (%) 113.24% 113.95% 113.52% 113.09% 113.12% 113.20%
Adjusted GAP Percentage:
- - ------------------------
3 Months Cum GAP % -5.20% -9.07% -9.17% -11.38% -11.06% -10.70%
6 Months Cum GAP % -7.15% -12.27% -13.34% -13.60% -12.06% -11.76%
12 Months Cum GAP % -5.52% -7.77% -5.50% -6.98% -6.82% -6.19%
6/96
----
Cumulative Bank GAP 81,104
Rate Sensitive Asset to Rate
Sensitive Liability (%) 113.20%
Adjusted GAP Percentage:
- - ------------------------
3 Months Cum GAP % -10.32%
6 Months Cum GAP % -12.04%
12 Months Cum GAP % -7.17%
</TABLE>
United Bank policy/guideline limits: +/- 10%
21
<PAGE> 24
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
JUNE 30, 1996
(000'S omitted)
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1995 $ 7,242
Charge-Offs (Domestic):
Commercial, Financial, Agricultural $ 53
Real Estate - Commercial 0
Real Estate - Residential 68
Consumer Loans 1,014
--------
Total Charge-Offs $ 1,135
========
Recoveries (Domestic):
Commercial, Financial, Agricultural $ 1
Real Estate - Commercial 31
Real Estate - Residential 21
Consumer Loans 398
------
Total Recoveries $ 451
======
Net Charge-Offs $ 684
======
Additions Charged to Operations $ 1,430
Balance at June 30, 1996 $ 7,988
======
Ratio of net charge-offs during this
quarter to average loans outstanding .06%
=====
Allowance as a percentage of total loans 1.35%
=====
</TABLE>
22
<PAGE> 25
UNB CORP.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
JUNE 30, 1996
(000'S omitted)
<TABLE>
<CAPTION>
Percent of
loans
in each category
Amount to total loans
------ ----------------
<S> <C> <C>
Domestic:
Commercial, Financial, Agricultural $ 2,574 13.28%
Real Estate - Commercial 649 10.58%
Real Estate - Residential 195 35.28%
Consumer Loans 2,735 40.86%
Foreign: -0- N/A
Unallocated: 1,835 N/A
------- -------
Valuation Reserve on June 30, 1996 $ 7,988 100.00%
======= =======
</TABLE>
23
<PAGE> 26
UNB CORP.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
- - ------------------------------------------------------------
UNB Corp. held its Annual Meeting of Shareholders on April 16, 1996, for the
purpose of electing directors and to adopt a proposed amendment to the Articles
of Incorporation to increase the number of no par value Common Shares from the
5,000,000 currently authorized to 15,000,000 shares. The purposes for increasing
the number of authorized Common Shares are to have additional shares available
for issuance in the future for stock splits, stock dividends, acquisitions, and
other corporate purposes. These additional shares may be issued on authorization
of the Board of Directors without further approval of Shareholders, except as
may be required by law. The adoption of the proposed amendment required the
affirmative vote of the holders of 66-2/3% of the outstanding shares of the
Corporation. Shareholders received proxy materials containing the information
required by this item. Results of shareholder voting on these issues were as
follows:
<TABLE>
<CAPTION>
Election of Directors Proposed Amendment to
E. Lang D'Atri Robert L. Mang Articles of Incorporation
-------------- -------------- -------------------------
<S> <C> <C> <C>
For 2,514,690 2,514,690 2,512,615
Against 9,896 9,896 61,724
Abstain 31,449
Shares not
voted by Brokers 85,375 85,375 85,375
</TABLE>
Item 5 - Other Information
- - --------------------------
N/A
Item 6 - Exhibits and Reports on Form 8-K
- - -----------------------------------------
A. Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule (1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the first six months of 1996.
(1) Filed only in electronic format pursuant to Item 601(b)(27) of Regulation
S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNB CORP.
(Registrant)
Date
------------------------- -------------------------
James J. Pennetti
(Duly authorized officer and
Treasurer, UNB Corp.)
24
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,825
<INT-BEARING-DEPOSITS> 337
<FED-FUNDS-SOLD> 4,450
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,833
<INVESTMENTS-CARRYING> 21,757
<INVESTMENTS-MARKET> 21,861
<LOANS> 591,534
<ALLOWANCE> 7,988
<TOTAL-ASSETS> 758,810
<DEPOSITS> 575,336
<SHORT-TERM> 59,301
<LIABILITIES-OTHER> 6,366
<LONG-TERM> 49,732
<COMMON> 5,762
0
0
<OTHER-SE> 62,313
<TOTAL-LIABILITIES-AND-EQUITY> 758,810
<INTEREST-LOAN> 24,639
<INTEREST-INVEST> 3,672
<INTEREST-OTHER> 263
<INTEREST-TOTAL> 28,574
<INTEREST-DEPOSIT> 10,322
<INTEREST-EXPENSE> 12,989
<INTEREST-INCOME-NET> 15,585
<LOAN-LOSSES> 1,430
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 10,673
<INCOME-PRETAX> 6,354
<INCOME-PRE-EXTRAORDINARY> 4,212
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,212
<EPS-PRIMARY> .71
<EPS-DILUTED> .71
<YIELD-ACTUAL> 4.56
<LOANS-NON> 1,166
<LOANS-PAST> 420
<LOANS-TROUBLED> 455
<LOANS-PROBLEM> 1,563
<ALLOWANCE-OPEN> 7,242
<CHARGE-OFFS> 1,135
<RECOVERIES> 451
<ALLOWANCE-CLOSE> 7,988
<ALLOWANCE-DOMESTIC> 6,153
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,835
</TABLE>
