<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, 1999
------------------
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, 1999
10,766,648 Common Shares
<PAGE> 2
UNB CORP.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
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 6-12
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-25
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 26-29
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders 30
Item 5 - Other Information 30
Item 6 - Exhibits and Reports on Form 8-K 30
Signatures 30
<PAGE> 3
U N B C O R P.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except per share data) JUNE 30, December 31,
1999 1998
----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 28,844 $ 28,195
Federal funds sold 13,000 12,300
Interest bearing deposits with banks 26,947 554
Securities, net (Fair value:
$66,434 and $52,950, respectively)(Note 2) 66,434 52,945
Mortgage-backed securities (Fair value:
$82,646 and $81,529, respectively)(Note 2) 82,631 81,504
Loans originated and held for sale 1,331 6,772
Loans:
Total loans (Notes 3 and 6) 705,857 671,433
Less allowance for loan losses (Note 4) (12,317) (11,172)
- ----------------------------------------------------------------------------------------------
Net loans 693,540 660,261
Premises and equipment, net 10,813 11,152
Intangible assets 3,834 4,333
Accrued interest receivable and other assets 10,105 10,727
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $ 937,479 $ 868,743
==============================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $ 93,285 $ 102,101
Interest bearing deposits 662,603 583,393
- ----------------------------------------------------------------------------------------------
Total deposits 755,888 685,494
Fed funds purchased and short-term borrowings 62,725 61,311
Federal Home Loan Bank advances and capital lease (Note 6) 42,922 41,571
Accrued taxes, expenses and other liabilities 8,044 8,665
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 869,579 797,041
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 50,000,000 shares authorized;
11,646,318 and 11,646,362 issued and outstanding, respectively) 11,646 11,646
Paid-in capital 29,075 30,872
Retained earnings 43,284 38,049
Treasury stock, 877,679 and 547,446 shares at cost (17,752) (11,149)
Unrealized gain on securities available for sale, net of tax 1,647 2,284
- ----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 67,900 71,702
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 937,479 $ 868,743
==============================================================================================
</TABLE>
See Notes to the Consolidated Financial Statements
1
<PAGE> 4
UNB CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except per share data) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 14,593 $ 13,819 $ 28,758 $ 27,494
Tax exempt 34 37 61 74
Interest and dividends on investments
& mortgage-backed securities:
Taxable 1,878 2,262 3,842 4,373
Tax exempt 0 10 0 20
Interest on bank deposits and federal funds sold 181 243 305 462
- -------------------------------------------------------------------------------------------------------------------
Total interest income 16,686 16,371 32,966 32,423
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,079 6,273 11,943 12,484
Interest on short-term borrowings 670 784 1,348 1,485
Interest on FHLB advances 602 537 1,209 1,002
- -------------------------------------------------------------------------------------------------------------------
Total interest expense 7,351 7,594 14,500 14,971
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 9,335 8,777 18,466 17,452
PROVISION FOR LOAN LOSSES (NOTE 4) 558 445 1,288 1,136
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,777 8,332 17,178 16,316
OTHER INCOME:
Service charges on deposits 688 756 1,348 1,458
Trust Department income 1,400 1,164 2,499 2,156
Other operating income 530 358 985 747
Securities gains/(losses), net (50) (6) 4,127 780
Gains on loans originated for resale and sold 140 289 431 538
- -------------------------------------------------------------------------------------------------------------------
Total other income 2,708 2,561 9,390 5,679
- -------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 3,283 3,142 6,852 6,393
Occupancy 441 379 858 712
Equipment 969 900 1,888 1,768
Other operating expense 1,661 1,966 4,969 4,683
- -------------------------------------------------------------------------------------------------------------------
Total other expenses 6,354 6,387 14,567 13,556
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,131 4,506 12,001 8,439
PROVISION FOR INCOME TAXES 1,804 1,547 4,152 2,899
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,327 $ 2,959 $ 7,849 $ 5,540
===================================================================================================================
EARNINGS PER SHARE (NOTE 1):
Basic $ 0.31 $ 0.26 $ 0.72 $ 0.48
Diluted $ 0.30 $ 0.25 $ 0.71 $ 0.47
===================================================================================================================
DIVIDENDS PER SHARE (NOTE 1) $ 0.140 $ 0.090 $ 0.240 $ 0.175
===================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Basic 10,847,557 11,499,242 10,937,339 11,533,634
Diluted 10,999,219 11,731,552 11,087,862 11,763,856
===================================================================================================================
</TABLE>
See Notes to the Consolidated Financial Statements
2
<PAGE> 5
UNB CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
<TABLE>
<CAPTION>
(In thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 3,327 $ 2,959 $ 7,849 $ 5,540
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period (447) 307 2,047 343
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income (33) (4) 2,683 507
------- ------- ------- -------
Unrealized gains/(losses) on securities (414) 311 (636) (164)
------- ------- ------- -------
Comprehensive income $ 2,913 $ 3,270 $ 7,213 $ 5,376
======= ======= ======= =======
</TABLE>
See the Notes to the Consolidated Financial Statements
3
<PAGE> 6
U N B CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(In thousands except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
6/30/99 6/30/98
-------- --------
<S> <C> <C>
Balance at beginning of period $ 71,702 $ 76,520
Net Income 7,849 5,540
Common stock issued 0 66
Cash dividends $0.240 and $0.175 per share, respectively (2,614) (2,015)
Treasury stock purchases (14,365) (3,362)
Treasury stock sales 5,964 983
Change in market value on investment securities
available for sale, net of deferred taxes (636) (164)
-------- --------
Balance at end of period $ 67,900 $ 77,568
======== ========
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE> 7
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
(In thousands) JUNE 30
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,849 $ 5,540
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 737 668
Provision for loan losses 1,288 1,136
Net securities gains (4,127) (780)
Net accretion on securities (51) (5)
Amortization of intangible assets 499 503
Loans originated for resale (21,076) (36,962)
Proceeds from sale of loan originations 26,949 34,981
Changes in:
Interest receivable (169) (207)
Interest payable 74 (68)
Other assets and liabilities, net 442 (1,773)
Deferred income (3) 4
- --------------------------------------------------------------------------------------------------------------
Net cash from operating activities 12,412 3,037
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks (26,393) 696
Net (increase)/decrease in funds sold (700) 6,200
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale 9,301 9,762
Proceeds from maturities of securities held to maturity 500 110
Proceeds from maturities of securities available for sale 60,701 74,458
Purchases of securities held to maturity (253) (354)
Purchases of securities available for sale (79,868) (72,546)
Purchases of mortgage-backed securities available for sale (29,333) (30,111)
Principal payments received on mortgage-backed securities held to maturity 976 3,451
Principal payments received on mortgage-backed securities available for sale 26,559 9,127
Net (increase)/decrease in loans made to customers (35,022) 4,605
Loans purchased 0 (35,374)
Purchases of premises and equipment, net (398) (408)
Principal payments received under leases 23 122
- --------------------------------------------------------------------------------------------------------------
Net cash from investing activities (73,907) (30,262)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 70,394 19,679
Cash dividends paid, net of shares issued through dividend reinvestment (2,614) (2,015)
Purchase of treasury stock (14,365) (3,362)
Sales of treasury stock 5,964 983
Proceeds from issuance of stock 0 66
Net increase in short-term borrowings 1,414 10,309
Proceeds from FHLB advances 2,900 50,000
Repayments of FHLB advances (1,525) (32,570)
Repayments on capital lease (24) (22)
- --------------------------------------------------------------------------------------------------------------
Net cash from financing activities 62,144 43,068
- --------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 649 15,843
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,195 28,998
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,844 $ 44,841
==============================================================================================================
</TABLE>
See the Notes to the Consolidated Financial Statements
5
<PAGE> 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, 1999, 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, 1998, 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, 1999, and June
30, 1998, UNB Corp. paid interest in the amount of $14,426 and $15,040,
respectively. For the same six month periods federal income taxes paid totaled
$2,785 and $3,139, 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
<PAGE> 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.
The Corporation declared a 100% stock dividend to shareholders of record on
October 1, 1998, payable on October 15, 1998. 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.
Basic and diluted earnings per share are computed under the provisions of SFAS
No. 128, "Earnings Per Share." Basic earnings per share are based on net income
divided by the weighted average number of shares outstanding during the period.
Diluted earnings per share show 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.
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, 1999, and December 31,
1998, are as follows:
7
<PAGE> 10
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
-------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities $ 6,023 $ 5 $ (7) $ 6,021
Obligations of U.S. government
agencies and corporations 23,874 8 (99) 23,783
Corporate bonds and other debt
securities 20,000 -- -- 20,000
Securities held to maturity:
Corporate bonds and other debt
securities 250 -- -- 250
-------- -------- -------- --------
Total debt securities 50,147 13 (106) 50,054
Equity securities available for sale 12,055 3,345 -- 15,400
Asset-backed securities available
for sale 999 -- (19) 980
-------- -------- -------- --------
Total investment securities 63,201 3,358 (125) 66,434
Mortgage-backed securities
available for sale 82,465 230 (929) 81,766
Mortgage-backed securities
held to maturity 865 15 -- 880
-------- -------- -------- --------
Total mortgage-backed securities 83,330 245 (929) 82,646
-------- -------- -------- --------
Total investment and mortgage-
backed securities $146,531 $ 3,603 $ (1,054) $149,080
======== ======== ======== ========
December 31, 1998
--------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities $ 9,058 $ 59 $ (14) $ 9,103
Obligations of U.S. government
agencies and corporations 25,009 200 (3) 25,206
Securities held to maturity:
Corporate bonds and other debt
securities 749 5 -- 754
-------- -------- -------- --------
Total debt securities 34,816 264 (17) 35,063
Equity securities available for sale 13,550 3,325 -- 16,875
Asset-backed securities available
for sale 999 13 -- 1,012
-------- -------- -------- --------
Total investment securities 49,365 3,602 (17) 52,950
Mortgage-backed securities
available for sale 79,731 311 (378) 79,664
Mortgage-backed securities
held to maturity 1,840 26 (1) 1,865
-------- -------- -------- --------
Total mortgage-backed securities 81,571 337 (379) 81,529
-------- -------- -------- --------
Total investment and mortgage-
backed securities $130,936 $ 3,939 $ (396) $134,479
======== ======== ======== ========
</TABLE>
8
<PAGE> 11
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
During the six month periods ended June 30, 1999 and 1998, the proceeds from
sales of securities available for sale were $9,301 and $9,762, respectively. Net
gains of $4,127 and $780 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, 1999,
by contractual maturity, are shown below. 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.
<TABLE>
<CAPTION>
June 30, 1999
Estimated Weighted
Amortized Fair Average
Cost Value Yield
--------- --------- --------
<S> <C> <C> <C>
Securities available for sale:
U.S. Treasuries
Due in one year or less $ 4,020 $ 4,023 5.47%
Due after one year through five years 2,003 1,998 5.49
------- ------- ----
Total 6,023 6,021 5.48
------- ------- ----
U.S. Government agencies and corporations
Due in one year or less 10,999 10,990 6.16
Due after one year through five years 12,875 12,793 5.96
------- ------- ----
Total 23,874 23,783 6.06
------- ------- ----
Corporate bonds and other debt securities
Due in one year or less 20,000 20,000 5.63
------- ------- ----
Total 20,000 20,000 5.63
------- ------- ----
$49,897 $49,804 5.81%
======= ======= ====
Securities held to maturity:
Corp bonds and other debt securities
Due after one year through five years 250 250 8.00
------- ------- ----
Total $ 250 $ 250 8.00%
======= ======= ====
Asset-backed securities available for sale $ 999 $ 980 7.00%
======= ======= ====
Mortgage-backed and collateralized
mortgage obligations available for sale $82,465 $81,766 6.33%
Mortgage-backed and collateralized
mortgage obligations held to maturity 865 880 7.59
------- ------- ----
$83,330 $82,646 6.34%
======= ======= ====
</TABLE>
At June 30, 1999, there were two holdings of securities from issuers, other than
the U.S. government and its agencies and corporations, with aggregate book
values in excess of 10% of shareholders' equity. These two securities consisted
of commercial paper with overnight maturities from the following issuers:
Estimated
Amortized Fair
Cost Value
--------- ---------
Equilon Enterprises (A-1+, P-1) $10,000 $10,000
Republic Industries Funding(A-1+, P-1) 10,000 10,000
9
<PAGE> 12
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------
Note 3 - Loans
- --------------
Total loans as presented on the balance sheet are comprised of the following
classifications:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Commercial, financial and agricultural $ 86,883 $ 80,618
Commercial real estate 87,321 83,036
Aircraft 90,370 65,530
Residential real estate 223,226 234,696
Consumer 218,057 207,553
-------- --------
Total loans $705,857 $671,433
======== ========
</TABLE>
<TABLE>
<CAPTION>
Impaired loans are as follows:
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Loans with no allowance for loan
losses allocated $310 $660
Loans with allowance for loan
losses allocated 840 --
Amount of allowance allocated 595 --
Average of impaired loans,
year-to-date $633 $335
Interest income recognized during
impairment 25 33
Cash-basis interest income
recognized year-to-date 26 32
</TABLE>
At June 30, 1999 and December 31, 1998, loans on non-accrual status and/or past
due more than 90 days approximated $1,436 and $1,487, respectively. The Other
Real Estate Owned balance, net of allowance, was $325 and $449 at June 30, 1999
and December 31, 1998, respectively.
Note 4 - Allowance for Loan Losses
- ----------------------------------
A summary of activity in the allowance for loan losses for the six months ended
June 30, 1999, and June 30, 1998, are as follows:
1999 1998
---- ----
Balance - January 1 $11,172 $ 9,650
Provision charged to operating expense 1,288 1,136
Loans charged off, net of recoveries (143) (626)
------- -------
Balance - June 30 $12,317 $10,160
======= =======
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, aircraft loans, residential mortgage loans and consumer loans comprising
12.3%, 12.4%, 12.8%, 31.6% and 30.9%, respectively, at June 30, 1999. Indirect
loans accounted for 63.5% of all consumer loans and 19.6% of total loans at June
30, 1999. The
10
<PAGE> 13
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(continued)
------------------------------------------------------
dealer network from which the indirect new and used automobile, marine and RV
loans were purchased includes 103 relationships thus far in 1999, the largest of
which was responsible for 11.3% of the total indirect dollar volume for the
year-to-date 1999.
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, 1999, 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 $238,156.
At June 30, 1999, the Corporation held two interest rate swap agreements with
notional amounts of $1.8 million and $16.8 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 $1,800 $16,816
Final expiration November 20, 2000 June 18, 2003
Variable rate in effect
June 30, 1999 5.05% 5.18%
Fixed rate 2.88% 5.86%
Market value, June 30, 1999 $41 $92
Variable interest payments received are based on the three month LIBOR rate
which is adjusted on a quarterly basis. The net expense from these agreements
for the six month period ended June 30, 1999 was $39. For the six month period
ended June 30, 1998 net income of $48 was recorded. Under the terms of these
contracts, future changes in LIBOR will affect the payments received, the income
or expense generated by each swap and their market value.
Note 6 - FHLB Advances and Capital Lease
- ----------------------------------------
The majority of long-term debt at June 30, 1999 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.
A summary of FHLB advances outstanding is as follows:
Maturity Interest Rate Amount
-----------------------------------------
1999 5.50%-6.28% $ 4,066
2000 6.00%-6.28% 4,117
2001 6.10%-6.28% 2,305
2002 5.95%-6.28% 30,923
2003 6.25%-6.28% 981
2004 6.28% 387
-----------------------------------------
Total $42,779
=========================================
11
<PAGE> 14
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
------------------------------------------------------------------
Based on the Bank's investment in FHLB stock, the maximum dollar amount of FHLB
advance borrowings available to the Bank is $149,590.
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, 1999 was $143.
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, 1999, compared to December 31, 1998, and the
results of operations for the quarter and year-to-date periods ending June 30,
1999, compared to the same periods in 1998. 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.
During the second quarter of 1999, the State of Ohio granted a license to UNB
Corp.'s affiliate United Insurance Agency, Inc., effective July 20, 1999. The
license allows the affiliate to engage in the issuance of life, accident &
health, mortgage loan, property & casualty, surety, marine insurances and
variable annuities. It is not anticipated that the results of operations of this
affiliate will have a material impact on the earnings of UNB Corp. in 1999.
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, 1999 were $937,479, a increase of $68,736, or 7.9%,
from year-end 1998. Total earning assets at June 30, 1999 of $896,200 were an
increase of $70,692, or 8.6%, from 1998 year-end levels. The ratio of earning
assets to total assets has increased from 95.0% at December 31, 1998 to 95.6% at
June 30, 1999. Highly liquid balances, comprised of cash and cash equivalents,
federal funds sold and interest bearing deposits with banks, increased by
$27,742, or 67.6%, from year-end 1998. The significant factor causing this
increase was the short-term investment in a money market fund of $25 million,
the partial proceeds of a temporary increase in interest bearing demand deposits
of $40 million from a single deposit customer.
Balances in the investment and mortgage-backed securities portfolios increased
by $14,616, or 10.9%, from 1998 year-end balances, primarily the result of $20
million of the previously mentioned $40 million short-term deposit which was
used to purchase overnight commercial paper. Excluding this purchase, the
Corporation experienced a net runoff in mortgage-backed and investment
securities of $5,384. Cash flows from maturing securities were reinvested in
government and agency securities eligible as collateral to pledge against
borrowings and in mortgage backed securities with durations of two years for
portfolio yield enhancement. Proceeds from the sale of equity securities in the
Corporation's holding company during the first quarter of 1999 were used in the
Corporation's stock buyback program. Remaining liquidity from the securities
portfolio was used to fund loan growth.
For the first half of 1999, total loans grew by $34,424, or 5.1%. Management's
efforts to grow selected segments of the loan portfolio have been successful so
far in 1999. Management's strategies have been to take advantage of the Bank's
lending resources and expertise, while reducing the effects of interest rate
risk found in longer term, fixed rate loans. Other considerations in the size
and composition of the loan portfolio include maintaining the residential
mortgage and installment loan portfolios at adequate levels to pledge as
collateral against borrowing
13
<PAGE> 16
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
facilities at the Federal Reserve Bank and Federal Home Loan Bank as part of
Year 2000 liquidity contingency plans.
The segment of the portfolio with the most significant growth during the year
was aircraft lending, with an increase in outstandings of $24,840, or 37.9% from
year-end levels. This growth is the result several strategies undertaken since
the acquistion of the aircraft group in June, 1998. These include several direct
mail marketing campaigns and the development of referral relationships with
aircraft dealers and brokers. In addition, a significant portion of new volume
is related to refinancing activity for aircraft upgrades which enhance
collateral values. The loans are a blended rate product, which are fixed for a
term of one to two years after which they become a prime plus variable rate
loan, thus aiding in interest rate risk mitigation.
The commercial lending area also experienced growth of $6,265, or 7.8%, from
year-end 1998 levels, mostly through advances on existing lines of credit.
Commercial real estate balances have increased by $4,285, or 5.2%, from year end
balances, with all of the growth taking place in the second quarter. Highly
competitive pricing for new loans in these two segments of the portfolio has
limited the opportunities for new loan growth without significant impact to
profit margins. However, management continues to stress their growth with a
strategy for geographic expansion into southern Summit and Wayne counties to
build volumes with acceptable profit margins.
Residential real estate balances declined by $11,470, or 4.9%, for the first
half of 1999. The majority of this reduction was experienced in the first
quarter of 1999, the result of high levels of refinancings brought on by market
rates, coupled with the Bank's aversion to the interest rate risk associated
with fixed rate mortgage loans. During the second quarter, refinancings had
slowed while volume in construction and a new 5/1 adjustable rate mortgage
product caused mortgage balances to remain constant. The new ARM product was
begun because experience on current ARM loans suggests that borrowers will
refinance to a fixed rate loan in less than five years, thus yielding an asset
with a much shorter duration than that of a fixed rate mortgage with the
potential for additional fee income at the time of refinancing. This product is
being used to slow the decline in the residential mortgage portfolio balance to
levels which would limit its effectiveness for use as collateral on borrowing
facilities at the Federal Reserve Bank and Federal Home Loan Bank as part of
Year 2000 liquidity contingency plan. Most of the Bank's production of fixed
rate mortgages continues to be sold in the secondary market.
Consumer loans increased by $10,504, or 5.1%, from year-end 1998, the results of
the combination of two strategies to limit interest rate and credit risk.
Through a new strategy put in place in the second quarter of 1999, management
intends to exit the indirect boat and recreational vehicle markets, deemphasize
indirect auto originations and emphasize direct installment lending through
competitive rates and marketing promotion, thus shrinking the consumer
installment loan portfolio. Due to the implementation of this strategy,
installment loan balances declined by $2,989 from year-end 1998. The decline in
installment loans was offset by strategies to promote home equity products
implemented in 1998 which caused home equity commitments and outstanding
balances to grow by 27.8% and 34.4%, respectivly, for the first half of 1999.
New product features on the Equity100 product include competitive introductory
rate incentives and Equi-lock which allows customers to lock in a rate and fixed
term on all or a portion of their outstanding balance while the remaining unused
commitment can continue to be used like a regular line of credit. Card access
was also added to a customer's line of credit through the Equity100 MasterMoney
card, which is used like a regular credit card and is accepted everywhere
MasterCard is accepted. Card access gives customers credit card convenience and
all benefits of home equity loans such as low rates and tax deductible interest.
14
<PAGE> 17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
Management is targeting a goal of approximately 8% loan growth in 1999, focusing
on the aircraft, commercial and commercial real estate products, based on their
relatively attractive yields and repricing features. Its goal is to continue to
realign its loan portfolio mix to more reflect those of the Bank's high
performing peers, leading to reduced interest rate risk, increased net interest
margin and overall improved profitability.
Total liabilities increased by $72,538, or 9.1%, from year-end 1998 levels with
growth in deposits comprising $70,394 of the increase. Non-interest bearing
demand deposits at June 30, 1999 were $8,816, or 8.6%, below 1998 year-end
levels while interest bearing demand balances increased $34,193, or 40.2%, for
the same period. The growth in interest bearing demand is attributable to $40
million in deposits from one customer which were withdrawn early in the third
quarter. Without this deposit, interest bearing demand declined by approximately
$11 million from year-end 1998 levels, with the majority of the decline in
personal accounts. Savings balances increased $10,892, or 5.2%, from year-end
levels, with the Money Market Access product responsible for an increase of
$24,972, or 25.6%, over 1998 year-end balances. This product continues to
attract customers due to the higher returns than those available in traditional
savings and money market products and the liquidity unavailable in certificates
of deposit. Balances in traditional savings and money market products continued
to decline, $14,080 or 12.6%, from year-end 1998, the result of transfers to the
Money Market Access product as well as alternative investments outside the
banking industry, both of which currently offer higher rates of return to the
consumer. Certificate of deposit balances grew by $34,105, or 12.0%, and were
influenced by a net increase in brokered deposits of $10,000. Brokered CD's of
$15,000 were issued in February, 1999, with equal amounts in maturities of two,
three and four years and an average all-in cost of 5.55%. In addition, the Bank
offered several local CD specials late in the first quarter and throughout the
second quarter on certificates in the maturity ranges of 12 through 23 months.
These promotions were in anticipation of Year 2000 liquidity needs which
management felt would be more successful earlier in the year with regards to
availability of funds and cost.
Short term borrowings, including repurchase agreements,increased $1,414, or
2.3%, from year-end levels while Federal Home Loan Bank (FHLB) advances and
capital lease borrowings increased by $1,351, or 3.2%, with new advances used to
match fund jumbo loans in the residential mortgage porfoliio.
The ratio of gross loans to deposits and FHLB advance borrowings was 88.4% at
June 30, 1999 compared to 92.4% at year-end 1998. This ratio was mainly impacted
by the short term deposit in interest bearing demand of $40 million. Excluding
that deposit, the ratio was 93.7%, an increase of 130 basis points from year end
1998. This is largely the result of loan growth being partially funded from
liquidity in the securities portfolios and from the reduction of loans held for
sale.
Total shareholders' equity at June 30, 1999 was $67,900, a decrease of $3,802,
or 5.3%, from year-end 1998. The reductions in shareholders' equity were the
result of cash dividends paid of $2,614 and net changes in treasury stock of
$8,401. Shareholders' equity also decreased for a reduction in unrealized gains,
net of deferred tax, on available for sale securities for the quarter of $636.
These were partially offset by year-to-date net income of $7,849. During the
first quarter, the Board of Directors authorized the purchase of an additional
3% of corporate stock outstanding in the stock repurchase program which
translated to a total commitment of approximately 915,000 shares in treasury
stock purchases. The stock buy-back program was discontinued by the Board of
Directors late in the second quarter of 1999 at which time it was determined
that capital had reached acceptable levels. The Board of Directors has given
management the discretion to repurchase shares as it deems necessary in the
future. The Board has authorized up to $5
15
<PAGE> 18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
million in treasury stock to be held temporarily for use in funding various
plans of the Corporation which require the issuance of its stock. These plans
include the UNB Corp. Dividend Reinvestment Plan which will again be offered to
shareholders in the third quarter of 1999 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 many computer programs being written using
two digits rather than four to define an applicable year. The Corporation's
hardware, date-driven automated equipment, or computer programs that have date
sensitive software, may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
UNB Corp. and its subsidiaries have conducted a comprehensive review of all
information and non information technology systems to identify and correct
potential Year 2000 problems and to test 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 the
Corporation's progress to its primary regulator, the Office of the Comptroller
of the Currency.
The Corporation has successfully completed testing of all mission critical and
high priority systems. All compliant systems are fully implemented into our
production operations. Testing of selected medium and low priority systems is
scheduled for the third quarter.
The Committee is addressing Year 2000 compliance in the area of fiduciary
(trust) activities. Systems, software and product vendors have been contacted
regarding their Year 2000 status. Vendor compliance is being tracked and
monitored on an ongoing basis. Test plans have been developed for the software
systems, and implementation of the testing process is following a scheduled
timeline geared to the priority status of each product. The project to research
and confirm the Year 2000 compliance status of the Trust Department's managed
asset holdings has been under way since first quarter, 1998, with the compliance
status requests initiated for the following asset categories; equities,
corporate bonds, municipal bonds, limited partnerships, closely-held securities,
mutual funds, agency bonds, certificates of deposit and real estate.
The Trust Investment Selection Committee has completed several reviews of the
information received on these asset categories, and has scheduled further
reviews throughout the third quarter of 1999, to assess the risk of holding
individual issues. Follow-up research is being conducted on any issues where
compliance status could not be determined. A program to provide customer
awareness information has been developed, with client mailings beginning in
January, 1999, and with scheduled subsequent mailings each quarter during the
remainder of 1999. For employee benefit accounts, a project has been developed
to contact plan sponsors to determine the Year 2000 status of the company in
their capacity as plan administrator.
The Committee continues to address the Year 2000 compliance status of the
Corportion's vendors, suppliers, and other third parties to assess their
readiness and is reviewing these contacts and their results. This has been and
will continue to be an on-going process, until all parties can fully declare
their compliance.
16
<PAGE> 19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
In the area of Customer Risk Mitigation, the Committee has presented the Year
2000 issue to its commercial loan customers as a management issue of significant
concern to their businesses. The Committee has completed the initial assessment
of Year 2000 risk in the commercial loan portfolio through a questionnaire
directed to major borrowers which had an 85% response rate, representing 67% of
the commercial loans and commitments. The questionnaires were reviewed and
integrated with other risk components to assign Year 2000 risk ratings within
the commercial loan portfolio. The ratings are being used in a risk-based
monitoring effort which will continue throughout 1999. The information obtained
through the monitoring activities is used to assess the impact of our customers'
Year 2000 preparedness on the Bank's asset quality and to make appropriate
adjustments to the Loan Loss Provision.
The Committee oversees the development and implementation of a corporate wide
contingency plan encompassing all core business processes. The development and
validation of this plan have been completed. The plan will be subject to further
review during the third and fourth quarters of 1999.
At this time, it is management's opinion that the most reasonably likely worse
case scenario is one in which the Corporation experiences very short term and
very insignificant interruptions in its primary software and hardware systems,
which will have little or no impact on customer service or the on-going
operations of the Corporation. As mentioned above, the Corporation has developed
contingency plans to deal with this scenario and with even more severe
circumstances of loss of software and hardware systems, but we have no reason to
believe, at this time, that these scenarios are reasonably likely to occur. The
management of UNB Corp. is not currently aware that a material disruption in the
infrastructure of its market area is reasonably likely to occur. While the
Corporation has developed contingency plans for the loss of electricity,
telecommunications and other basic services, it does not believe that the total
loss of these services is a reasonably likely worst case scenario.
The continued focus for the Committee is to execute the proactive communications
program which updates employees and customers about the implementation progress
of our corporate Y2K plan. The communications strategic plan and time line have
been revised in response to media coverage and local community inquiries.
The Corporation continues to communicate its Y2K readiness message to all
customers through Readiness Brochures, targeted letters to specific customer
segments, and a web page. In addition, we have participated in and plan to
conduct specific Y2K Community Forums. General Y2K customer information and
targeted communications will continue throughout the year in an effort to
provide our customers with information on an on-going basis regarding the
Corporation's Year 2000 readiness.
Internally, UNB Corp.'s focus is to continue to update all employees on
customers' current Y2K questions and concerns and to educate them on how to
respond to similar inquiries. In addition, new employees receive an overview of
Y2K issues, the organization's efforts toward readiness, and information on how
to respond to common Y2K questions and concerns. Since the Corporation
anticipates a higher than normal volume of customer interaction in December, the
Committee has developed some strategies for meeting that demand through
increased staffing and additional customer communication channels.
Although the Corporation intends to conduct normal operations during the entire
period before and after the date changeover, the Committee has developed a
liquidity contingency plan to minimize any potential disruption to the
Corporation's business activities. During the first half of the year, the
Corporation increased the volume and extended the maturities of several
categories
17
<PAGE> 20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
of certificates of deposit. The Corporation established contingent lines of
credit with both the Federal Home Loan Bank and the Federal Reserve Bank and has
pledged the required collateral that will provide immediate and ongoing access
to funding should it be necessary during the last few months of the year. The
Federal Reserve Bank is expected to issue its procedures for emergency access to
currency and funding in August, 1999. Those procedures will be incorporated into
the Corporation's existing contingency plan as needed prior to the scheduled
implementation of the plan in the fourth quarter. In addition to reviewing
significant customer relationships monthly, the Corporation continues to monitor
overall levels of currency, deposits and loans daily to identify any developing
trends that might affect the liquidity position.
Based on current information, the Corporation believes that all internal systems
will be Year 2000 compliant before January 1, 2000, through either the
modification of existing hardware and software, or through the purchase and
installation of new hardware and software. The Committee currently anticipates
that the Corporation will spend approximately $400,000 on the Year 2000 project.
At this time, management does not believe that there will be a significant
negative impact on 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
to its customers, or on its operations.
RESULTS OF OPERATIONS
- ---------------------
UNB Corp.'s net income for the second quarter of 1999 was $3,327 or $0.30 per
diluted share, compared with $2,959, or $0.25 per diluted share for the second
quarter of 1998. This represents an increase in earnings of 12.4% and an
increase in diluted earnings per share of 20.0%. Year-to-date net income of
$7,849 was $2,309, or 41.7%, greater than the same period in 1998. Year-to-date
diluted earnings per share for 1999 were $0.71, or 51.1%, greater than 1998.
Significant factors affecting net income and earnings per share on a
year-to-date basis were the gain of $4,177 recognized on the sale of equity
securities from marketable equities security portfolio of UNB Corp.'s Parent
Company and the reduction in shares outstanding from the Corporation's stock
buyback program.
The largest component of net income, net interest income, increased by $558 and
$1,014, for the second quarter and year-to-date periods, increases of 6.4% and
5.8% over the same periods in 1998, respectively. Total interest income
increased by 1.9% and 1.7% for the quarter and year-to-date, respectively, while
interest expense declined by 3.2% and 3.1%, respectively, for the same periods.
The growth in net interest income was primarily the result of overall growth in
balance sheet levels from 1998, especially impacted by the purchase and
subsequent growth of the $35.4 million aircraft loan portfolio late in the
second quarter of 1998. A change in the mix of the loan portfolio with the
continued growth of relatively higher yielding aircraft and commercial real
estate loans funded by a decline in lower yielding consumer installment and
residential mortgage portfolios also led to the improvement. A change in asset
mix from relatively lower yielding investments to higher yielding loans also
improved net interest income. These positive results were partially offset by a
4.0% reduction in fees on loans on a year-to-date basis between the two periods.
Interest expense was reduced between the two periods through funding of balance
sheet growth with lower cost deposits such as money market access and
certificates of deposit and the prepayment of relatively more expensive FHLB
advances. These prepayments were partially offset by the use FHLB
18
<PAGE> 21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
advances for the funding of the aircraft portfolio purchase.
The net interest margin for the first half of 1999 was 4.47%, versus 4.46% for
the same period in 1998, an increase of one basis point. Yields on earning
assets declined by 32 basis points, due to the impact of declining market rates
until later in the second quarter 1999 on new volumes in the securities and loan
portfolios as well as increased competitive pressures pushing down yields in the
commercial and commercial real estate loan portfolios. These were partially
offset by the change in mix from consumer installment and residential mortgages
to the higher yielding aircraft loans. Also within the Bank, the cost of
interest bearing liabilities declined by 38 basis points. With declining market
rates throughout 1998 and early 1999, discretionary rates paid on interest
bearing checking, passbook and statement savings, and certificates of deposit
were reduced several times in the periods following the second quarter of 1998.
The cost of Money Market Access, which is tied to the 13-week Treasury Bill,
declined 57 basis points between the two periods.
Rate reductions through the second half of 1998 and first quarter 1999 impacted
the relative cost of short term borrowings, as well as the FHLB borrowings used
to fund the initial purchase of the aircraft portfolio. The cost of FHLB
advances also declined due to the prepayment of $11,538 in relatively higher
cost FHLB advances in December, 1998.
Non-interest income for the second quarter of 1999 was $2,708, an increase of
5.7% from the second quarter of 1998. For the six months ended June 30, 1999,
non-interest income was $9,390, an increase of $3,711, or 65.3% over the same
period in 1998. The most significant factor contributing to other income results
was the $4,177 gain on sale of available for sale equity securities found in the
Parent Company's securities portfolio in the first quarter of 1999. Total
year-to-date gains on sales of available for sale securities were $4,127, an
increase of $3,347, or 429.1%, over the same period in 1998. Other categories
with improvements over the same period in 1998 were Trust department earnings
and other operating income. The Trust department recorded fee income of $2,499,
an increase of $343, or 15.9%, and is the result of an increase in managed
assets of 9.1% at June 30, 1999 over those of June 30, 1998. Other operating
income increased by $238, or 31.9%, with an increase in loan brokerage income on
non-conforming consumer, mortgage and aircraft loans of $298 leading the
positive results. Management expects this trend of increased brokerage fees to
continue, through the efforts of the staff of United Banc Financial Services'
Mortgage Lending Division and through continued loan referrals to the aircraft
finance group. Actual results, however, will be effected by the seasonality of
mortgage loan originations and prevailing mortgage interest rates. Loan
brokerage income results were partially offset by reductions in fee income from
the sale of alternative investments and interchange fee income on the Bank's
Mastermoney Card. Disappointed with the financial results of the Bank's
relationship with American Express Financial Services, management has decided to
terminate the arrangement and begin offering alternative investment services to
customers through an in-house brokerage service developed in the Trust
department. Management expects results from this internal arrangement to exceed
prior income levels achieved through the use of external vendors. Categories
with reductions in other income for the six month period were gains on sales of
residential mortgage loans and service charges on deposits. Gains on loan sales
declined by $107, or 19.9%, due to the reduced levels of refinancing activity as
mortgage rates increased during the second quarter of 1999. Service charges on
deposits declined by $110, or 7.5%, from the same period in 1998 due to greater
uncollectible NSF charges and the Bank's service charge structure which has
caused low balance accounts to close
19
<PAGE> 22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
while retained accounts have higher minimum balances and multiple account
relationships qualifying them for waived service charges.
Non-interest expense for the second quarter was $6,354, a decrease of $33, or
0.5%, from the same period in 1998. On a year-to-date basis, non-interest
expense was $14,567, an increase of $1,011, or 7.5%, over the same period in
1998. Salary, wages and benefits increased by $459, or 7.2%, over the same six
month period in 1998. Increases were due to annual merit increases for 1999;
additions to staff in Trust, aircraft lending, new staff for two Wooster
offices, the Wal*mart branch facility opened in July, 1998 and a new loan
production office opened in April, 1999, and a new loan brokerage office of
United Banc Financial Services opened in the first quarter of 1999; increased
health care costs, post-retirement health care and 401K plan contributions.
These were partially offset by a reduction in expenses for the Corporation's ROE
incentive model and other employee benefits. Occupancy expenses for the first
six months ended June 30, 1999 increased by $146, or 20.5%, due to rent and
leasehold improvements on new facilities for the two new Wooster locations and
the Whipple and Green loan brokerage offices of United Banc Financial Services.
Also impacting occupancy was an increase in real estate taxes, snow removal
expenses and the buyout of the remaining lease term of the Manchester branch
which was closed in the second quarter of 1999. These were partially offset by
the reduction in depreciation expense for the donation of two closed branch
facilities to the respective municipalities in which they were located.
Equipment expenses for the first six months ended June 30, 1999 increased by
$120, or 6.8%, from the same period of 1998, the result of increased
depreciation on office furniture and equipment for the new facilities, increased
costs of mainframe and outside computer software services and equipment
purchases expensed to replace non Y2K compliant equipment. Other operating
expenses increased by $286, or 6.1% from the first half of 1998. With the
previously mentioned gain on sale of equity securities, the Corporation was
afforded the opportunity to take advantage of one time other operating
expenditures in the areas of Year 2000 compliance, donations, asset & liability
management consulting, sales training for retail personnel and other efficiency
and productivity enhancements.
Return on assets and return on equity for the second quarter of 1999 were 1.51%
and 19.21%, respectively, compared to 1.40% and 15.29%, respectively, for the
same period in 1998. On a year-to-date basis, return on assets and return on
equity for 1999 was 1.81% and 22.39%, respectively, compared to 1.33% and 14.36%
for the year-to-date 1998. The ability to improve net interest margin has proven
difficult given the current levels of market rates, increased competition for
loans which squeeze interest margins and limit opportunity for fees, and
investment returns in national equity markets which draw balances from deposit
accounts. Management continues to develop and implement new sources of
non-interest income to improve profitability. One such action is the development
of an in-house brokerage service group which will enhance other income through
the sale of alternative investments. Through the recently concluded stock
buyback program, management has been able to leverage capital and maintain
performance at acceptable profitability levels as measured by its return on
assets and equity.
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 by the Bank and the petroleum company which
20
<PAGE> 23
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS(continued)
-------------------------
were filed with BUSTER, the agency agreed with the petroleum company's findings
which indicated that the levels of contaminants were such that immediate
remediation was not required. BUSTER determined that the findings indicated the
contamination will remediate itself over time and issued a one year extension on
any formal remediation plan. That extension expired in the third quarter of
1998. To date, there has been no resolution with the State as the agency has
experience staff cutbacks which has limited communications. The tenative sales
contract, which was executed in November of 1998 and subject to environmental
issues being resolved, expired. Without a clear timetable for resolution of the
environmental issues, there is little urgency for the interested party to renew
negotiations. Estimated cleanup costs, should they become the responsibility of
the Bank, are not material to the business or financial condition of the Bank
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 1999 was $558, an
increase of $113, or 25.4%, from the same period in 1998. On a year-to-date
basis, the provision for loan losses was $1,288, or $152 more than the same
period in 1998. The increase was due to the growth in aircraft loan portfolio
balances from the initial $35.4 million purchased in June, 1998 to $90.4 million
at June 30, 1999, an increase of 155.4%. Although the Corporation continues to
experience a declining trend in charge-offs overall, with no historical loss
experience on this relatively new portfolio of loans, management feels it is
appropriate to maintain the Corporation's reserve-to-loans ratio at 1.74%
compared to 1.66% at December 31, 1998, due to the increased risk profile of the
loan portfolio. The Bank is also seeing trends in delinquencies in the indirect
boat and recreational vehicle portfolio which could signal increased future
chargeoffs. Of the total year-to-date increase in provision, $24 is related to
growth in the loan portfolio of United Banc Financial Services. Management
reviews the amounts of provision for loan losses charged to operating expense on
a regular basis, 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.
Net charge-offs, as a percentage of average loans outstanding for the second
quarter of 1999, were 0.02% versus 0.10% for the same quarter in 1998. Although
the Corporation's experience in net charge-offs has improved over the last year,
continued record levels of consumer debt and record bankruptcy filings
experienced nationally causes management to remain cautious in its expectations
for future net-charge offs in its consumer installment portfolio. In addition,
national trends indicate increases in delinquencies in home equity products,
whose popularity and features have made them alternate sources of financing of
consumer purchases. Another factor which remains a concern of management is the
Year 2000 readiness of commercial customers and what impact that may have on
their ability to conduct business and in turn service their debt requirements.
Based on the above concerns, management expects to fund the provision at
budgeted levels of approximately $1.0 million through the remainder of 1999.
At June 30, 1999, impaired loans were $1,151, an increase of $491 from December
31, 1998. Non-performing loans, which include non-accrual loans and loans past
due 90 days or more, were $1,436 at June 30, 1999 compared to $1,487 at December
31, 1998, an reduction of $51, or 3.4%. The ratio of non-performing loans to
total loans outstanding at June 30, 1999 was 0.20%, compared to 0.22% recorded
at
21
<PAGE> 24
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
year-end 1998. The ratio compares favorably to the ratio for the Corporation's
peers, all bank holding companies with consolidated assets between $500 million
and $1 billion, which stands at 0.78% at March 31, 1999, the most current data
available.
CAPITAL RESOURCES
- -----------------
At June 30, 1999 shareholders' equity was $67,900, a reduction of $3,802, or
5.3%, from the balance at December 31, 1998. The ratio of equity-to-assets at
June 30, 1999 was 7.24% versus 8.25% at December 31, 1998. The factors
responsible for the reduction in shareholders' equity were cash dividends of
$2,614 and net increases in treasury stock of $8,401. Also responsible, to a
smaller degree was the reduction in market value on investment securities
available for sale, net of deferred taxes, of $636, brought about to a great
extent, by the sale in the first quarter of 1999 of equity securities with
significant market appreciation over cost. Reductions in shareholders' equity
were also aided by the use of treasury stock to fund the exercise of stock
options and the purchase of shares through the employee stock purchase plan,
plans which require the issuance of stock. These reductions were partially
offset by net income for the year-to-date of $7,849.
On June 17, 1999 Board of Directors voted to reinstate the UNB Corp. Dividend
Reinvestment Plan (DRP), effective with the third quarter 1999 dividend. The
Board also directed that the stock buy-back be discontinued. Temporary
suspension of the DRP was undertaken by the Board on August 13, 1998 effective
September 16, 1998. At the time, the Board felt that capital was growing at a
rate faster than could be utilized efficiently to maximize future shareholder
value. The suspension of the plan and the stock buy-back helped return capital
to an acceptable level targeted by management.
Also on August 13, 1998, the Board of Directors approved the payment of a 2 for
1 stock split payable on October 15, 1998 to shareholders of record on October
1, 1998. The Board felt a split was advantageous at this time to provide the
stock with additional liquidity and to help sustain its past performance levels.
On October 1, 1998, the Corporation held a special shareholders' meeting to have
shareholders vote on a proposed amendment to the Corporation's articles of
incorporation to increase the number of authorized shares of UNB Corp. common
stock. The additional authorized shares would be used for future stock splits,
stock dividends, possible acquisitions and other corporate purposes. The
adoption required the affirmative vote of the holders of 66-2/3% of the
outstanding shares of the Corporation. The proposed amendment was approved.
On October 15, 1998, the Board of Directors of UNB Corp. approved a shareholder
rights plan. Under the plan, a dividend of one common share purchase right for
each outstanding common share was declared. The dividend was payable on October
26, 1998 to the shareholders of record on that date. The shareholder rights
plan, allows UNB Corp. to issue "rights" to its shareholders (one right per
share) to purchase shares under certain circumstances. The plan is designed to
prevent an unwanted acquirer from exceeding a prescribed ownership level in the
Corporation. If the prescribed level is exceeded, the rights that were
previously issued to all shareholders to buy corporate shares at a specified
price become exercisable (that is, are triggered) and allow shareholders other
than the party that triggered the rights to purchase corporate shares at 50% of
market value. This dramatically dilutes the acquirer's ownership level and
voting power and makes it prohibitively expensive for the unwanted acquirer to
complete its acquisition of the
22
<PAGE> 25
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
Corporation. The description and terms of the Rights are set forth in a Rights
Agreement dated as of October 15, 1998 between UNB Corp. and United National
Bank & Trust Company, as Rights Agent.
At June 30, 1999, the rate of primary capital (shareholders' equity plus the
allowance for loan losses less intangible assets) to total adjusted assets was
11.25%. The risk-based capital ratio was 10.12%, while the Tier 1 capital and
core leverage ratios reached 8.86% and 7.12%, respectively, at June 30, 1999.
The levels achieved in all 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 $0.14 per share for the second quarter included a special cash
dividend of $0.03 and was a 55.6% increase over the dividend paid in the second
quarter, 1998. Total cash dividends year-to-date represent 33.3% of year-to-date
earnings.
Management and the Board of Directors feel that the economic climate and market
conditions are conducive to listing UNB Corp.'s stock on the NASDAQ National
Market. Management feels the improved earnings performance in 1998 and 1999
makes UNB Corp. compare favorably with other financial institutions listed on
NASDAQ. In addition, moving to a national listing will provide greater
efficiency and liquidity to the trading of the corporation's stock with the
potential to attract new investors. Management plans for the stock to be listed
on NASDAQ before the end of 1999.
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,
money market funds, investment and mortgage-backed securities available for sale
of $216,741 represent 23.1% of total assets at June 30, 1999. Of the investments
available for sale, $29,804 are held in U.S. Treasury and Agency securities,
50.4% of which mature within one year. Approximately $108,232 of total Corporate
securities are pledged as collateral to secure public fund deposits, sweep or
term repurchase agreements or other obligations. The Corporation's ability to
raise funds in the market place is provided by the Bank's branch network, in
addition to the availability of Federal Home Loan Bank (FHLB) advance
borrowings, brokered deposits, Federal funds purchased and securities sold under
agreement to repurchase. In addition, for Year 2000 liquidity plans, contingency
borrowing facilities have been established at the Federal Reserve Bank and the
FHLB using consumer installment and residential mortgage loans as collateral.
Management focuses on the ratio of gross loans to deposits and FHLB Advance
borrowings in measuring and managing Corporate liquidity. This ratio was 88.4%
at June 30, 1999 compared to 92.4% at year-end 1998. The reduction at the end of
the second quarter was the result of the short term deposit in interest bearing
demand of $40 million. Excluding that deposit, the ratio was 93.7%, an increase
of 130 basis points. This is largely the result of loan growth being partially
funded from liquidity in the securities portfolios.
The liquidity needs of the Holding Company, primarily cash dividends, security
purchases and vendor payments, are met through cash, short term investments and
23
<PAGE> 26
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
-------------------------
dividends from the Bank.
INTEREST RATE SENSITIVITY
- -------------------------
A discussion of interest rate sensitivity is included in Item 3, 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, home equity and residential
mortgage loans comprising 62.5% of total loans outstanding at June 30, 1999.
Residential mortgages, automobile, recreational vehicle and boat loans were the
four largest concentrations in the loan portfolio by loan type. Commercial,
aircraft and commercial real estate loans comprise the remaining 12.3%, 12.8%
and 12.4% of loans outstanding, respectively. The three largest industry
concentrations identified within the Bank's loan portfolio are offices and
clinics of medical doctors, non-residential building operators and colleges and
universities. 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.
24
<PAGE> 27
UNB CORP.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(VALUATION RESERVES)
JUNE 30, 1999
(000's omitted)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Balance at January 1, $11,172 $ 9,650
Charge-Offs (Domestic):
Commercial, Financial, Agricultural 20 39
Real Estate - Commercial -- --
Real Estate - Residential -- 134
Aircraft -- N/A
Consumer Loans 618 1,081
------- -------
Total Charge-Offs 638 1,254
------- -------
Recoveries (Domestic):
Commercial, Financial, Agricultural 26 26
Real Estate - Commercial -- --
Real Estate - Residential 33 48
Aircraft -- N/A
Consumer Loans 436 554
------- -------
Total Recoveries 495 628
------- -------
Net Charge-Offs 143 626
------- -------
Provision for loan losses 1,288 1,136
Balance at June 30, $12,317 $10,160
======= =======
Ratio of net charge-offs during this
quarter to average loans outstanding this quarter 0.02% 0.10%
======= =======
Allowance as a percentage of total loans 1.74% 1.54%
======= =======
</TABLE>
25
<PAGE> 28
UNB CORP.
---------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Corporation'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 differences in the cash flows and repricing characteristics
that occur in various assets and liabilities that are available in the banking
industry 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. The Asset and Liability Management Committee meets regularly
to monitor the Corporation's exposure to interest rate risk and to assess
strategies to manage that risk.
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 require reinvestment at lower interest rates.
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.
The Corporation 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, 1999, the
Corporation's modified twelve month cumulative gap was at 8.01% compared to
5.69% in the previous period, indicating a moderately asset sensitive position.
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. During June, the Corporation received temporary deposits
totaling nearly $40 million to an interest bearing demand deposit account. The
funds were used to purchase short-term investments, including overnight
commercial paper and money market funds. Since the deposit stratification
convention used in the analysis allocates balances to each gap time frame
according to a predetermined percentage, overall asset sensitivity is
overstated. Readjusting those balances into the first gap bucket would result in
a cumulative gap position of 3.60%.
Simulation analysis provides a more dynamic interpretation of the impact of
rates on the Corporation's forecasted income and net present value of assets,
26
<PAGE> 29
UNB CORP.
---------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
----------------------------------------------------------------------
liabilities and capital. The Corporation makes certain assumptions regarding the
level of interest rates, prepayments on assets with imbedded options including
loans and asset backed securities, and the behavior of deposits without
contractual maturity dates. These assumptions, in addition to actual rates and
maturity and repricing dates on loans, investments and deposits, are
incorporated into a computer model which calculates forecasted net income and
discounts the projected cash flows of rate sensitive assets and liabilities to
determine the present value of the Corporation's capital. The model then applies
a predetermined immediate parallel increase or decrease in the 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. The behavior of depositors is based on an analysis of
historical changes in balances and might not fully reflect current attitudes
toward other investment alternatives. Moreover, the model does not include any
interim changes in strategy the Corporation might instate in response to shifts
in interest rates.
At June 30, 1999, the Corporation's interest rate shock analysis forecasted a
decrease in net interest income of 1.12% in response to a decrease of 200 basis
points in market rates and an increase in net interest income of 1.18% based on
a corresponding increase in market rates. The forecasted changes in the market
value of equity were an increase of 6.05% and a decrease of 3.11% for the same
period. The model results indicate that the Corporation would benefit from a
increase in rates, subject to the limitations and assumptions previously
discussed.
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 the Corporation'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. The net cash flows and market values of the swaps move
inversely with those of the fixed rate loans in the portfolio, which reduces the
Corporation's exposure to changing interest rates. If rates rise, the
Corporation receives net cash flows from the swaps which compensates for the
opportunity loss of holding an asset with a below market yield. Alternatively,
the increase in the market value of the swaps would balance the loss on the
mortgage loans if the loans were sold. If rates fall, the net cash flows given
27
<PAGE> 30
UNB CORP.
---------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
----------------------------------------------------------------------
up are offset by the increased value of assets with an above market yield. The
gain that would be realized on the sale of the loans would counteract the loss
on the termination of the interest rate swaps. At the end of June, the swaps had
a combined net gain of $133 on outstanding notional amount of $18,616.
The following table provides information about the Company'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.
28
<PAGE> 31
UNB CORP.
QUANTITATIVE DISCLOSURE OF MARKET RISK
AS OF JUNE 30, 1999
<TABLE>
<CAPTION>
ONE YEAR TWO YEARS THREE YEARS FOUR YEARS
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short Term Investments 39,947 5.09%
Securities 37,172 6.20% 8,576 5.84% 4,339 5.96% 1,117 6.64%
Collateralized Mortgage Obligations 34,695 6.40% 21,457 6.28% 12,881 6.19% 5,405 6.14%
and Mortgage Backed Securities (1)
Fixed Rate Loans (2)(3) 87,054 8.47% 59,190 8.56% 43,764 8.45% 36,999 8.20%
Variable Rate Loans (4)(5)(6) 48,560 8.37% 56,564 8.62% 29,232 8.34% 23,164 8.34%
LIABILITIES
Interest Bearing Demand & Savings (7) 47,610 2.91% 39,461 3.25% 33,376 3.62% 37,738 3.56%
Time Deposits 184,590 5.05% 106,426 5.33% 13,570 5.65% 11,984 5.68%
Repurchase Agreements 61,808 4.01%
Short Term Borrowings 917 5.50%
FHLB Advances 5,208 5.88% 3,408 6.14% 583 6.14% 30,330 5.95%
Capital Leases 45 8.15% 45 8.15% 45 8.15% 8 8.15%
OFF-BALANCE SHEET
Interest Rate Swap (8) 1,200 600
Average Pay Rate (Fixed) 2.88% 2.88%
Average Receive Rate (Variable) 5.05% 5.05%
Interest Rate Swap (9) 2,784 2,431 2,120 9,481
Average Pay Rate (Fixed) 5.86% 5.86% 5.86% 5.86%
Average Receive Rate (Variable) 5.18% 5.18% 5.18% 5.18%
</TABLE>
<TABLE>
<CAPTION>
FIVE YEARS MORE THAN 5 YEARS TOTAL FAIR
BALANCE RATE BALANCE RATE BALANCE RATE VALUE
==================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short Term Investments 39,947 5.09% 39,947
Securities 707 6.62% 14,523 5.79% 66,434 6.06% 66,434
Collateralized Mortgage Obligations 2,681 6.05% 5,512 6.02% 82,631 6.63% 82,646
and Mortgage Backed Securities (1)
Fixed Rate Loans (2)(3) 25,267 8.11% 137,032 8.52% 389,306 8.58% 377,699
Variable Rate Loans (4)(5)(6) 22,258 7.97% 138,104 8.33% 317,882 8.33% 308,524
LIABILITIES
Interest Bearing Demand & Savings (7) 55,838 2.90% 125,165 1.73% 339,188 2.70% 297,142
Time Deposits 3,703 5.57% 3,142 5.28% 323,415 5.30% 323,454
Repurchase Agreements 61,808 4.01% 61,794
Short Term Borrowings 917 5.50% 917
FHLB Advances 350 6.25% 2,900 6.28% 42,779 5.97% 43,128
Capital Leases 0 0.00% 0 0.00% 143 8.15% 162
OFF-BALANCE SHEET
Interest Rate Swap (8) 1,800 41
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
Interest Rate Swap (9) 16,816 92
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
</TABLE>
(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, 1999, the notional principal amount of the interest
rate swap was $1,800 and the market value was $41. 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 5.0475%.
(9) At quarter-end June, 1999, the notional principal amount of the interest
rate swap was $16,816 and the market value was $92. 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 5.17625%.
29
<PAGE> 32
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 20, 1999, for the
purpose of electing four 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
E. Lang D'Atri Robert L. Mang
-------------- --------------
For 9,457,083 9,450,571
Abstain 14,147 14,147
Against 64,887 71,398
Shares not
voted by Brokers -- --
Roger L. Mann Marc L. Schneider
------------- -----------------
For 9,461,483 9,458,761
Abstain 14,147 14,147
Against 60,487 63,208
Shares not
voted by Brokers -- --
Item 5 - Other Information
- --------------------------
N/A
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule for the six months ended June 30, 1999(1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the first half of 1999.
(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 8/11/99 /s/ JAMES J. PENNETTI
------- --------------------------
James J. Pennetti
(Duly authorized officer and
Treasurer, UNB Corp.)
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 28,844
<INT-BEARING-DEPOSITS> 26,947
<FED-FUNDS-SOLD> 13,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 147,950
<INVESTMENTS-CARRYING> 1,115
<INVESTMENTS-MARKET> 1,130
<LOANS> 705,857
<ALLOWANCE> 12,317
<TOTAL-ASSETS> 937,479
<DEPOSITS> 755,888
<SHORT-TERM> 62,725
<LIABILITIES-OTHER> 8,044
<LONG-TERM> 42,922
0
0
<COMMON> 11,646
<OTHER-SE> 56,254
<TOTAL-LIABILITIES-AND-EQUITY> 937,479
<INTEREST-LOAN> 28,819
<INTEREST-INVEST> 3,842
<INTEREST-OTHER> 305
<INTEREST-TOTAL> 32,966
<INTEREST-DEPOSIT> 11,943
<INTEREST-EXPENSE> 14,500
<INTEREST-INCOME-NET> 18,466
<LOAN-LOSSES> 1,288
<SECURITIES-GAINS> 4,127
<EXPENSE-OTHER> 14,567
<INCOME-PRETAX> 12,001
<INCOME-PRE-EXTRAORDINARY> 12,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,849
<EPS-BASIC> .72
<EPS-DILUTED> .71
<YIELD-ACTUAL> 4.47
<LOANS-NON> 1,267
<LOANS-PAST> 169
<LOANS-TROUBLED> 190
<LOANS-PROBLEM> 2,488
<ALLOWANCE-OPEN> 11,172
<CHARGE-OFFS> 638
<RECOVERIES> 495
<ALLOWANCE-CLOSE> 12,317
<ALLOWANCE-DOMESTIC> 10,696
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,621
</TABLE>
