<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 September 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 October 31, 1999
10,769,991 Common Shares
<PAGE> 2
UNB CORP.
FORM 10-Q
QUARTER ENDED SEPTEMBER 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
UNB CORP.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except per share data) SEPTEMBER 30, December 31,
1999 1998
-------------------------------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 25,759 $ 28,195
Federal funds sold 8,200 12,300
Interest bearing deposits with banks 25 554
Securities, net (Fair value:
$54,603 and $52,950, respectively)(Note 2) 54,604 52,945
Mortgage-backed securities (Fair value:
$79,661 and $81,529, respectively)(Note 2) 79,652 81,504
Loans originated and held for sale 565 6,772
Loans:
Total loans (Notes 3 and 6) 747,538 671,433
Less allowance for loan losses (Note 4) (12,765) (11,172)
- ------------------------------------------------------------------------------------------------------
Net loans 734,773 660,261
Premises and equipment, net 10,636 11,152
Intangible assets 3,585 4,333
Accrued interest receivable and other assets 10,718 10,727
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 928,517 $ 868,743
======================================================================================================
LIABILITIES
Deposits:
Noninterest bearing deposits $ 90,298 $ 102,101
Interest bearing deposits 628,693 583,393
- ------------------------------------------------------------------------------------------------------
Total deposits 718,991 685,494
Fed funds purchased and short-term borrowings 62,631 61,311
FHLB advances, bank loan and capital lease (Note 6) 70,547 41,571
Accrued taxes, expenses and other liabilities 6,759 8,665
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 858,928 797,041
SHAREHOLDERS' EQUITY
Common stock ($1.00 stated value, 50,000,000 shares authorized;
11,646,312 and 11,646,362 issued, respectively) 11,646 11,646
Paid-in capital 29,009 30,872
Retained earnings 45,441 38,049
Treasury stock, 876,155 and 547,446 shares at cost (17,711) (11,149)
Unrealized gain on securities available for sale, net of tax 1,204 2,284
- ------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 69,589 71,702
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 928,517 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable $ 15,299 $ 14,529 $ 44,057 $ 42,023
Tax exempt 35 34 96 108
Interest and dividends on investments & mortgage-backed
securities:
Taxable 1,960 2,168 5,802 6,541
Tax exempt 2 8 2 28
Interest on bank deposits and federal funds sold 167 168 472 630
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest income 17,463 16,907 50,429 49,330
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Interest on deposits 6,586 6,255 18,529 18,739
Interest on short-term borrowings 739 757 2,087 2,242
Interest on FHLB advances 664 852 1,873 1,854
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest expense 7,989 7,864 22,489 22,835
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 9,474 9,043 27,940 26,495
PROVISION FOR LOAN LOSSES (NOTE 4) 561 325 1,849 1,461
- ----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,913 8,718 26,091 25,034
OTHER INCOME:
Service charges on deposits 715 710 2,063 2,168
Trust Department income 1,117 1,001 3,616 3,157
Other operating income 431 752 1,416 1,499
Securities gains/(losses), net 0 0 4,127 780
Gains on loans originated for resale and sold 54 238 485 776
- ----------------------------------------------------------------------------------------------------------------------------------
Total other income 2,317 2,701 11,707 8,380
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salary, wages and benefits 3,259 3,338 10,111 9,731
Occupancy 416 414 1,274 1,126
Equipment 945 915 2,833 2,683
Other operating expense 1,382 2,069 6,351 6,752
- ----------------------------------------------------------------------------------------------------------------------------------
Total other expenses 6,002 6,736 20,569 20,292
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 5,228 4,683 17,229 13,122
PROVISION FOR INCOME TAXES 1,831 1,597 5,983 4,496
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,397 $ 3,086 $ 11,246 $ 8,626
==================================================================================================================================
EARNINGS PER SHARE (NOTE 1):
Basic $ 0.32 $ 0.27 $ 1.03 $ 0.75
Diluted $ 0.31 $ 0.27 $ 1.02 $ 0.74
==================================================================================================================================
DIVIDENDS PER SHARE (NOTE 1) $ 0.115 $ 0.090 $ 0.355 $ 0.265
==================================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING (NOTE 1):
Basic 10,767,419 11,394,980 10,880,076 11,486,908
Diluted 10,884,295 11,627,734 11,020,787 11,716,514
==================================================================================================================================
</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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1999 1998 1999 1998
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net Income $3,397 $3,086 $11,246 $8,626
Other comprehensive income, net of tax
Unrealized gains/(losses) on securities:
Unrealized gains/(losses) arising
during the period (443) (614) 1,603 (272)
Less: Reclassified adjustment for
accumulated gains/(losses)
included in net income 0 0 2,683 507
------ ------ ------- ------
Unrealized gains/(losses) on securities (443) (614) (1,080) (779)
------ ------ ------- ------
Comprehensive income $2,954 $2,472 $10,166 $7,847
====== ====== ======= ======
</TABLE>
See the notes to the Consolidated Financial Statements
3
<PAGE> 6
UNB CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except per share data) NINE MONTHS ENDED
9/30/99 9/30/98
------- -------
<S> <C> <C>
Balance at beginning of period $71,702 $76,520
Net Income 11,246 8,626
Common stock issued 0 66
Cash dividends $0.355 and $0.265 per share, respectively (3,854) (3,039)
Treasury stock purchases (14,447) (5,961)
Treasury stock sales 6,022 1,360
Change in market value on investment securities
available for sale, net of deferred taxes (1,080) (779)
------- -------
Balance at end of period $69,589 $76,793
======= =======
</TABLE>
See Notes to the Consolidated Financial Statements
4
<PAGE> 7
UNB CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(In thousands) SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,246 $ 8,626
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 1,109 1,022
Provision for loan losses 1,849 1,461
Net securities gains (4,127) (780)
Net amortization/(accretion) on securities 74 (6)
Amortization of intangible assets 748 754
Loans originated for resale (24,379) (55,878)
Proceeds from sale of loan originations 31,071 55,783
Changes in:
Interest receivable (177) (570)
Interest payable (343) (224)
Other assets and liabilities, net (790) (1,097)
Deferred income (6) (4)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from operating activities 16,275 9,087
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks 529 712
Net (increase)/decrease in funds sold 4,100 (9,200)
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 500 570
Proceeds from maturities of securities available for sale 135,051 100,219
Purchases of securities held to maturity (1,295) (354)
Purchases of securities available for sale (141,956) (91,271)
Purchases of mortgage-backed securities available for sale (35,029) (33,104)
Principal payments received on mortgage-backed securities held to maturity 1,148 4,503
Principal payments received on mortgage-backed securities available for sale 34,865 16,455
Net increase in loans made to customers (77,002) (10,632)
Loans purchased 0 (35,374)
Purchases of premises and equipment, net (593) (807)
Principal payments received under leases 156 163
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities (70,225) (48,358)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 33,497 21,209
Cash dividends paid, net of shares issued through dividend reinvestment (3,854) (3,039)
Purchase of treasury stock (14,447) (5,961)
Sales of treasury stock 6,022 1,360
Proceeds from issuance of stock 0 66
Net increase in short-term borrowings 1,320 6,766
Proceeds from FHLB advances 27,900 105,000
Repayments of FHLB advances (2,388) (83,886)
Proceeds from bank loans 3,500 0
Repayments on capital lease (36) (33)
- -----------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 51,514 41,482
- -----------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,436) 2,211
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 28,195 28,998
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,759 $ 31,209
=============================================================================================================================
</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 September 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 and are not necessarily indicative of the results to be expected
for the full year. 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 nine months ended September 30, 1999, and
September 30, 1998, UNB Corp. paid interest in the amount of $22,833 and
$23,060, respectively. For the same nine month period federal income taxes paid
totaled $5,605 and $4,639, 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.
6
<PAGE> 9
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
Impaired loans are fully or partially charged off when in management's opinion
an event or events have occurred which provide reasonable certainty that a loss
is probable. When management determines that a loss is probable, a full or
partial charge off is recorded for the amount the book value of the impaired
loan exceeds the present value of the cash flows or the fair value of the
collateral, for collateral dependent loans.
All impaired loans are placed on non-accrual status. However, all non-accrual
loans are not considered impaired because non-accrual loans which have been
brought current are included on non-accrual status for six months and would not
be considered impaired.
Loans considered to be impaired are reduced to the present value of expected
future cash flows or to the fair value of collateral by allocating a portion of
the allowance for loan losses to such loans. Any reduction in carrying value
through impairment or any change in impairment based on cash payments received
or revised cash flow estimates as determined on a quarterly basis would be
applied against the unallocated portion of the allowance for loan losses and
become a specific allocation of the allowance or as an addition to the provision
for loan losses if the unallocated portion of the allowance was insufficient to
cover the impairment.
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 September 30, 1999, and December
31, 1998, are as follows:
7
<PAGE> 10
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
<TABLE>
<CAPTION>
September 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 $ 11,008 $ 6 $ (5) $ 11,009
Obligations of U.S. government
agencies and corporations 26,538 1 (181) 26,358
Securities held to maturity:
Obligations of state and
subdivisions 905 -- (1) 904
Corporate bonds and other debt
securities 250 -- -- 250
-------- ------ ------- --------
Total debt securities 38,701 7 (187) 38,521
Equity securities available for sale 12,192 3,461 (551) 15,102
Asset-backed securities available
for sale 999 -- (19) 980
-------- ------ ------- --------
Total investment securities 51,892 3,468 (757) 54,603
Mortgage-backed securities
available for sale 79,817 43 (901) 78,959
Mortgage-backed securities
held to maturity 693 9 -- 702
-------- ------ ------- --------
Total mortgage-backed securities 80,510 52 (901) 79,661
-------- ------ ------- --------
Total investment and mortgage-
backed securities $132,402 $3,520 $(1,658) $134,264
======== ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
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 nine month period ended September 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 September 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>
September 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 $11,008 11,009 4.96%
------- ------- ----
Total 11,008 11,009 4.96
------- ------- ----
U.S. Government agencies and corporations
Due in one year or less 13,191 13,145 5.72
Due after one year through five years 13,347 13,213 6.02
------- ------- ----
Total 26,538 26,358 5.87
------- ------- ----
$37,546 $37,367 5.60%
======= ======= ====
Securities held to maturity:
Obligations of state and political subdivisions
Due in one year or less 905 904 3.80
------- ------- ----
Total 905 904 3.80
------- ------- ----
Corp bonds and other debt securities
Due after one year through five years 250 250 8.00
------- ------- ----
Total 250 250 8.00%
------- ------- ----
$ 1,155 1,154 4.71%
======= ======= ====
Asset-backed securities available for sale $ 999 $ 980 7.00%
======= ======= ====
Mortgage-backed and collateralized
mortgage obligations available for sale $79,817 $78,959 6.36%
Mortgage-backed and collateralized
mortgage obligations held to maturity 693 702 7.06
------- ------- ----
$80,510 $79,661 6.36%
======= ======= ====
</TABLE>
At September 30, 1999, there were no holdings of securities of any one issuer,
other than the U.S. government and its agencies and corporations, with an
aggregate book value in excess of 10% of shareholders' equity.
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>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Commercial, financial and agricultural $ 95,405 $ 80,618
Commercial real estate 94,613 83,036
Aircraft 108,122 65,530
Residential real estate 227,292 234,696
Consumer 222,106 207,553
-------- -------
Total loans $747,538 $671,433
======== ========
</TABLE>
Impaired loans are as follows:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Loans with no allowance for loan
losses allocated $285 $660
Loans with allowance for loan
losses allocated 842 --
Amount of allowance allocated 669 --
Average of impaired loans,
year-to-date $669 $335
Interest income recognized during
impairment 33 33
Cash-basis interest income
recognized year-to-date 31 32
</TABLE>
At September 30, 1999 and December 31, 1998, loans on non-accrual status and/or
past due more than 90 days approximated $1,742 and $1,487, respectively. The
Other Real Estate Owned balance, net of allowance, was $325 and $449 at
September 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 nine months ended
September 30, 1999, and September 30, 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance - January 1 $11,172 $ 9,650
Provision charged to operating expense 1,849 1,461
Loans charged off, net of recoveries (256) (773)
------- -------
Balance - September 30 $12,765 $10,338
======= =======
</TABLE>
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
loan portfolio, with commercial loans and leases, commercial real estate loans,
aircraft loans, residential mortgage loans and consumer loans comprising 12.8%,
12.7%,
10
<PAGE> 13
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)(continued)
14.4%, 30.4% and 29.7%, respectively, at September 30, 1999. Residential
mortgages, automobile, recreational vehicle and boat loans were the four largest
concentrations in the loan portfolio by loan type. Indirect loans accounted for
62.8% of all consumer loans and 18.6% of total loans at September 30, 1999. The
dealer network from which the indirect new and used automobile, marine and RV
loans were purchased includes 124 relationships thus far in 1999, the largest of
which was responsible for 8.8% of the total indirect dollar volume for the
year-to-date 1999.
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.
The Corporation is a party to financial instruments with off-balance sheet risk.
These instruments are required in the normal course of business to meet the
financial needs of its customers. The contract or notional amounts of these
instruments are not included in the consolidated financial statements. At
September 30, 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 $250,585.
At September 30, 1999, the Corporation held two interest rate swap agreements
with notional amounts of $1.5 million and $16.1 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:
<TABLE>
<CAPTION>
Swap #1 Swap #2
------- -------
<S> <C> <C>
Notional amount $1,500 $16,084
Final expiration November 20, 2000 June 18, 2003
Variable rate in effect,
September 30, 1999 5.49% 5.51%
Fixed rate 2.88% 5.86%
Market value, $33 $145
September 30, 1999
</TABLE>
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 nine month period ended September 30, 1999 was $61. For the nine month
period ended September 30, 1998, net income of $62 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 - Long Term Debt
- -----------------------
The majority of long-term debt at September 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.
11
<PAGE> 14
UNB CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued)
A summary of FHLB advances outstanding is as follows:
<TABLE>
<CAPTION>
Maturity Interest Rate Amount
--------------------------------------------------------------------
<S> <C> <C>
1999 5.46%-6.28% $28,203
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 $66,916
====================================================================
</TABLE>
Based on the Bank's investment in FHLB stock, the maximum dollar amount of FHLB
advance borrowings available to the Bank is $152,322.
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 September 30, 1999 was $131.
During the third quarter of 1999, United Banc Financial Services, Inc.(UBFS)
negotiated and began drawing on a $5 million line of credit with Bank One
Michigan to partially pay off its line of credit with United National Bank and
Trust Co. and fund its loan portfolio growth. The interest on each draw is
variable and is priced off one of several indexes plus a spread, at the option
of UBFS. The loan agreement calls for quarterly interest payments and is secured
by a first security agreement on UBFS receivables, pledged equity securities
held by the Parent Company of UNB Corp., the unconditional guarantee of UNB
Corp., and an intercreditor agreement with United National Bank and Trust Co.
The initial draw of $3.5 million is priced at six month LIBOR plus 1%, or 6.95%.
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 September 30, 1999, compared to December 31, 1998,
and the results of operations for the quarter and year-to-date periods ending
September 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 third quarter of 1999, United Banc Financial Services(UBFS) entered
into joint venture with a local title company. The objectives are to share in
fee income from mortgage closing activities of both the mortgage division of
UBFS as well as those of other financial institutions and to gain more control
over the mortgage closing process of UBFS' customers. During the fourth quarter
another joint venture between the title company and United National Bank and
Trust Co. will be pursued to bring the closing activities of the Bank's mortgage
area into the relationship. It is not anticipated that the results of operations
of this joint venture will have a material impact on the earnings of UNB Corp.
in 1999.
Effective July 20, 1999, the State of Ohio granted a license to UNB Corp.'s
affiliate United Insurance Agency, Inc. 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 September 30, 1999 were $928,517, a increase of $59,774, or
6.9%, from year-end 1998. Total earning assets at September 30, 1999 of $890,584
were an increase of $65,076, or 7.9%, from 1998 year-end levels. The ratio of
earning assets to total assets has increased from 95.0% at December 31, 1998 to
95.9% at September 30, 1999. Both total and earning assets have declined
slightly from June 30, 1999 levels due to the loss of a temporary increase in
interest bearing deposits of $40 million from a single customer in June which
was invested in interest bearing deposits with banks and securities until very
early in the third quarter of 1999. Highly liquid balances, comprised of cash
and cash equivalents, federal funds sold and interest bearing deposits with
banks, decreased by $7,065, or 17.2%, from year-end 1998.
INVESTMENTS
Balances in the investment and mortgage-backed securities portfolios remained
relatively constant at $134,256, from 1998 year-end balances with a small change
in mix from mortgage backed securities to investment securities. Cash flows from
maturing securities were reinvested in government and agency securities eligible
as collateral to pledge against borrowings and for potential liquidity sources
at year-end for Year 2000 considerations, and in mortgage backed securities with
expected durations of two years for portfolio yield enhancement. Proceeds from
the sale of equity securities in the Corporation's holding company during the
first
13
<PAGE> 16
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
quarter of 1999 were used in the Corporation's stock buyback program.
LOANS
For the nine months of 1999, total loans grew by $76,105, or 11.3%. Management's
efforts to grow selected segments of the loan portfolio have been successful in
1999 and especially in the third quarter which saw an increase in loan balances
of $41,681 or 45% of the year's growth. 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 facilities at the Federal
Reserve Bank and Federal Home Loan Bank as part of Year 2000 liquidity
contingency plans.
The segment with the most significant growth in 1999 is aircraft lending, with
an increase in outstandings of $42,591, or 65.0% from prior year-end levels.
This growth is the result of 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. Many of the loans originated after the business was
purchased in June, 1998 will begin repricing in the coming months. Management
expects this portfolio to continue to grow with outstandings in the year 2000
budgeted to grow in excess of $150 million.
The commercial lending area also experienced growth of $14,787, or 18.3%, from
year-end 1998 levels, through advances on existing lines of credit and term
loans. Commercial real estate balances have increased by $11,577, or 13.9%, from
year end balances, with significant growth taking place in the third 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 $7,404, or 3.2%, for the nine
months 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. Due to the Bank's aversion to the interest rate risk associated with
long-term, fixed rate mortgages and the relative yields on new loan volume, the
majority of loans originated were sold in the secondary market. During the
second quarter, refinancings 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 initiated to take advantage of the Bank's experience on
current ARM loans which 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. During the third quarter new volumes
continued to decline. With the recent increase in yields on fixed 30 year
mortgages to over 8%, management decided to retain an increased amount of loans
generated through year-end. These actions will enhance the effectiveness of the
residential mortgage portfolio 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.
Consumer loans increased by $14,554, or 7.0%, from year-end 1998, the results of
the combination of two strategies to limit interest rate and credit risk.
Through
14
<PAGE> 17
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
a new strategy implemented in the second and third quarters of 1999, the Bank
exited the indirect boat and recreational vehicle markets and began
reestablishing its inactive relationships with automobile dealers to increase
indirect automobile volumes. The Bank is also emphasizing direct installment
lending through competitive rates, marketing promotions and employee incentives.
Installment loan balances have declined by $5,885, or 3.5%, from year-end 1998.
This decline was offset by strategies to promote home equity products
implemented in 1998 which caused home equity commitments and outstanding
balances to grow by 38.2% and 48.3%, respectivly, for the year-to-date, 1999.
New Equity100 product features 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 added to a
customer's line of credit through the Equity100 MasterMoney card, which is
accepted and used like a Mastercard credit card. Card access gives customers
credit card convenience and all benefits of home equity loans such as low rates
and tax deductible interest.
Management's loan growth target is approximately 8% for 1999, focusing on the
aircraft, commercial and commercial real estate products, based on their
relatively attractive yields and repricing features. Its goal is continued
realignment of the 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.
DEPOSITS
Total liabilities increased by $61,887 or 7.8%, from year-end 1998 levels with
growth in deposits comprising $33,497 of the increase. Non-interest bearing
demand deposits at September 30, 1999 were $11,803, or 11.6%, below 1998
year-end levels while interest bearing demand balances decreased $13,548, or
15.9%, for the same period, with the majority of the decline in personal
accounts. Savings balances increased $7,181, or 3.4%, from year-end levels, with
the Money Market Access product responsible for an increase of $26,122, or
26.8%, over 1998 year-end balances. Balances in traditional savings and money
market products continued to decline, $18,941 or 17.0%, 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
$51,839, or 18.2%, and were influenced by a net increase in brokered deposits of
$15,000. 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%. Another $5 million in brokered deposits were issued in the third quarter
with one year maturities at an all-in cost of 6.10%. In addition, the Bank
offered several local CD specials starting late in the first through the second
quarter on certificates in the maturity ranges of 12 through 23 months. During
the third quarter these promotional rates were extended to maturities of 6
through 60 months. These promotions are in anticipation of Year 2000 liquidity
needs as well as to raise funding for the significant loan growth experienced in
the third quarter of 1999.
SHORT AND LONG TERM BORROWINGS
Short term borrowings, including repurchase agreements, increased $1,320, or
2.2%, from year-end levels while long term borrowings increased by $28,976, or
69.7% from year-end levels. Federal Home Loan Bank (FHLB) advances increased by
$25,512, or 61.6%, with new advances used to match fund jumbo loans in the
residential mortgage porfolio and to fund growth in other loan categories,
especially aircraft and commercial loans. The remaining increase in long term
borrowings is a bank borrowing facility obtained by United Banc Financial
Services to fund its loan portfolio.
15
<PAGE> 18
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
SHAREHOLDERS' EQUITY
Total shareholders' equity at September 30, 1999 was $69,589, an decrease of
$2,113, or 3.0%, from year-end 1998. The reductions in shareholders' equity were
the result of cash dividends paid of $3,854 and net increase in treasury stock
of $8,425. Shareholders' equity also decreased due to a reduction in unrealized
gains, net of deferred tax, on available for sale securities of $1,080. These
were partially offset by year-to-date net income of $11,246. 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 million in treasury stock to be held temporarily for use
in funding various plans of the Corporation which require stock issuance. These
plans include the UNB Corp. Dividend Reinvestment Plan reinstated in the third
quarter of 1999 and internal benefit plans of the Corporation which include the
UNB Corp. Employee Stock Purchase Payroll Deduction 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, and computer programs that have date
sensitive software, may recognize a date using "00" as the year 1900 rather than
the year 2000. This faulty recognition could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions or engage in normal
business activities.
UNB Corp. and its subsidiaries have completed comprehensive reviews 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 critical and high priority systems are
fully implemented into our production operations. Currently, 65% of selected
medium and low priority systems have been tested and put into production. The
remaining 35% of selected medium and low systems are scheduled for testing in
the fourth quarter.
The Committee is addressing Year 2000 compliance in the area of fiduciary
(trust) activities. Systems, software, and product vendors have been contacted
and their Year 2000 status verified. Vendor compliance is being tracked and
monitored on an ongoing basis. Test plans have been developed for the software
systems (geared to the priority status of each product) and implementation of
the testing process has been completed. The project to research and confirm the
Year 2000 compliance status of the Trust Department's managed asset holdings has
been under way since the first quarter, 1998, with the compliance status
verified 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 final reviews in the fourth quarter of
1999, to assess the risk of holding
16
<PAGE> 19
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
individual issues. A program to provide customer awareness information was
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 was implemented to contact plan sponsors to
determine the Year 2000 status of the company in their capacity as plan
administrator.
Hard copy back-up reports for account master, asset master, asset detail and
name and address files, as well as upcoming income, disbursement and statement
reports have been scheduled for production in late December. Validation crews
have been identified and scheduled for January 1, 2000, to verify all systems
and software are operational. Contingency plans have been developed, should any
problems develop.
The Committee continues to address the Year 2000 compliance status of the
Corporation'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.
In the area of Customer Risk Mitigation, the Committee presented the Year 2000
issue to its commercial loan customers as a management issue of significant
concern to their business. A risk-based monitoring program was developed for the
commercial loan and commercial real estate portfolios and tracked through the
Loan Loss Provision. Commercial borrowers representing 77% of all commitments
and outstandings were reviewed and rated for Y2K risk. Monthly updates have
followed the borrowers' efforts to prepare for the century date change,
resulting in considerable awareness and positive activity. Monitoring activities
will continue through the next year in an ongoing effort to measure the impact
of the borrowers' Year 2000 readiness. This monitoring will assure stability for
the Bank's asset quality.
The Committee oversees the development and implementation of a corporate wide
contingency plan encompassing all core business processes. Development and
validation of this plan are completed. The plan will be subject to further
review during the fourth quarter 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. We have no reason to
believe, at this time, that these scenarios are reasonably likely to occur. The
management of UNB Corp. does not currently believe that material disruptions in
the infrastructure of its market area are 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 inquires.
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
17
<PAGE> 20
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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. The plan includes mandatory preparations that
have been or will be implemented throughout the year as well as optional
emergency procedures that may be activated at any time during the last quarter
or in the first several weeks of January. As part of the required preparations,
the Corporation increased the volume and extended the maturities of several
categories of certificates of deposit during the first half of the year. The
Corporation also established contingent lines of credit with both the Federal
Home Loan Bank and the Federal Reserve Bank and pledged the required collateral
that will provide immediate and ongoing access to funding should it be necessary
during the last few months of 1999 and into the first several months of 2000. In
addition to reviewing significant customer relationships monthly, the
Corporation is monitoring overall levels of currency, deposits, and loans daily
to identify any developing trends that might affect the liquidity position. As
part of final preparations in the fourth quarter, the Corporation will gradually
accumulate extra currency and hire emergency cash delivery personnel.
Based on current information, the Corporation believes that all internal systems
are now Year 2000 compliant. The Year 2000 Project and the purchase,
installation, or modification of existing hardware and software, have cost the
Corporation approximately $200,000. 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 believes that all Year
2000 issues have been identified and resolved. Management does not anticipate
any significant impact on the Corporation's delivery of products and services to
its customers, or on its operations, as a result of Year 2000 issues.
RESULTS OF OPERATIONS
UNB Corp.'s net income for the third quarter of 1999 was $3,397 or $0.31 per
diluted share, compared with $3,086, or $0.27 per diluted share for the third
quarter of 1998. This represents an increase in earnings of 10.1% and an
increase in diluted earnings per share of 14.8%. Year-to-date net income of
$11,246 was $2,620, or 30.4%, greater than the same period in 1998. Year-to-date
diluted earnings per share for 1999 were $1.02, or 37.8%, 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 the marketable equities security portfolio of UNB Corp.'s Parent
Company and the reduction in shares outstanding from the Corporation's stock
buyback program.
Return on assets and return on equity for the third quarter of 1999 were 1.49%
and
18
<PAGE> 21
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
19.40%, respectively, compared to 1.40% and 15.77%, respectively, for the third
quarter of 1998. On a year-to-date basis, return on assets and return on equity
for 1999 was 1.70% and 21.39%, respectively, compared to 1.36% and 14.84% for
the year-to-date 1998. 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.
NET INTEREST INCOME
Net interest income, increased by $431 and $1,445, for the third quarter and
year-to-date periods, increases of 4.8% and 5.5% over the same periods in 1998,
respectively. Interest income increased by 3.3% and 2.2% for the quarter and
year-to-date, respectively. Interest expense increased by 1.6% over the third
quarter of 1998. On a year-to-date basis, interest expense is $346, or 1.5%,
below the same period in 1998. The growth in net interest income was primarily
the result of growth in year-to-date average earning assets of 5.5% from
September 1998 to September 1999.
NET INTEREST MARGIN
The net interest margin for the year-to-date 1999 was 4.42%, unchanged from the
same period in 1998. Net interest margin for the third quarter of 1999 was
4.33%, a one basis point reduction from the third quarter of 1998. On a
year-to-date basis, yields on earning assets declined by 22 basis points, while
the cost of interest bearing liabilities declined by 31 basis points. Asset
yields declined due to declining market rates until late in the second quarter
1999 and their impact 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 loan mix from consumer installment and residential mortgages to the
relatively higher yielding aircraft loans. The cost of interest bearing
liabilities declined due to several reductions in discretionary rates paid on
interest bearing checking, passbook and statement savings, and certificates of
deposit during the fourth quarter of 1998 and in early 1999. While management
has recently raised the rates paid on certificates of deposit in order to raise
funds for loan growth and provide additional liquidity for Year 2000
contingencies, these increases have not yet impacted year-to-date cost of funds.
The cost of Money Market Access, which is tied to the 13-week Treasury Bill,
declined 43 basis points between the two year-to-date periods. Market rate
reductions through the second half of 1998 and first quarter 1999 impacted the
relative cost of short term borrowings. The cost of FHLB advances also declined
due to the prepayment of $11,538 in relatively higher cost FHLB advances in
December, 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 relatively lower cost
deposit accounts.
OTHER INCOME
Other income for the quarter ended September 30, 1999 was $2,317, a decrease of
14.2% from the third quarter of 1998. For the year-to-date ended September 30,
1999, other income was $11,707, an increase of $3,327, or 39.7%, over the same
period in 1998. The most significant factor contributing to other income results
was the $4,177 first quarter gain on sale of available for sale equity
securities held in the Parent Company's securities portfolio. Total year-to-date
net 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.
The Trust Department recorded earnings for the quarter and year-to-date ended
19
<PAGE> 22
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
September 30, 1999 of $1,117 and $3,616, increases of 11.6% and 14.5%,
respectively, the result of 14.4% growth in managed assets since September 30,
1998. For the quarter, other operating income decreased by $321, or 42.9%,
mainly the result of the gain of $271 on the sale of the MasterCard portfolio
included in third quarter 1998 income. Year-to-date results show a shortfall of
$83, or 5.5%, from 1998. Excluding this one time gain on sale, year-to-date
other income increased by $188, or 15.3%, due to increases in loan brokerage
income on non-conforming consumer, mortgage and aircraft loans generated through
the efforts of the staff of United Banc Financial Services' Mortgage Lending
Division and through loan referrals by the aircraft finance group. Future levels
of income in this category will be effected by the seasonality of mortgage loan
originations and prevailing mortgage interest rates.
Categories with reductions in other income for the year-to-date were gains on
sales of residential mortgage loans and service charges on deposits. Gains on
loan sales declined by $291, or 37.5%, due to the reduced levels of refinancing
activity as mortgage rates increased during the second and third quarters of
1999. Service charges on deposits declined by $105, or 4.8%, from the same
period in 1998 due to the elimination of lower balance deposit accounts which
generated service charges while deposit accounts retained have higher minimum
balances and multiple account relationships which qualify them for waived
service charges.
Management has terminated the Bank's relationship with American Express
Financial Advisors and will begin offering alternative investment products to
customers beginning November 15, through a new program developed in the Trust
Department. Management anticipates results from this project to exceed prior
income levels achieved through the use of external vendors.
OTHER EXPENSES
Other expenses were $6,002 for the third quarter, a decrease of $734, or 10.9%,
from the same period in 1998. On a year-to-date basis, other expenses were
$20,569, an increase of $277, or 1.4%, over the same period in 1998. For the
third quarter, salary, wages and benefits declined by $79, or 2.4%. On a
year-to-date basis, this category increased by $380, or 3.9%, over the same
period in 1998. Increases were due to annual merit increases for 1999, additions
to staff and 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.
Third quarter occupancy expenses increased by less than 1% from the same quarter
in 1998 while on a year-to-date basis occupancy increased by $148, or 13.1%, due
to rent and leasehold improvements on the new Wooster loan production office,
Wooster Wal*Mart in-store office, the four aircraft finance offices and the
Green loan brokerage office of United Banc Financial Services. Also impacting
occupancy were increased real estate taxes; the buyout of the remaining lease
term of the Manchester branch, closed in the second quarter of 1999; and reduced
rental income from the loss of the United Bank Center tenant. These were
partially offset by the reduction in building depreciation for the 1998
donations of two closed branch facilities to the respective municipalities in
which they were located.
Equipment expenses increased by 3.3% and 5.6% for the third quarter and
year-to-date, respectively, compared to the same periods in 1998. These
increases were the result of increased depreciation on office furniture and
equipment for new facilities, increased costs of mainframe and outside computer
software services and equipment purchases expensed to replace non Y2K compliant
equipment.
20
<PAGE> 23
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Other operating expenses were reduced by 33.2% and 5.9%, for the third quarter
and year-to-date periods, respectively, compared to the same periods in 1998.
Reduction in expenses during the quarter were the result of several adjustments.
During the quarter the accrual for direct expenses related to Year 2000
compliance was reevaluated and reduced. Marketing expenses which are accrued
according to budget throughout the year as well as accruals for anticipated
projects were reversed in the third quarter based on actual expenditures and
elimination of several projects under consideration. Accruals in anticipation of
paying several sizable charitable contributions were reversed and paid from the
Bank's charitable trust based on its successful investment experience in 1998
and 1999. In addition, several anticipated consulting projects for which accrued
expenses were set aside earlier in the year were reconsidered and eliminated.
During the quarter there was no progress made in the legal proceedings or the
disposition of the enviromentally contaminated seven and one half acre parcel of
real estate acquired through foreclosure and located in the northwest quadrant
of Stark County. The State of Ohio's Bureau of Underground Storage Tanks
(BUSTER)determined that the large national petroleum company which owned the
facility at the date it was taken out of service, is the party responsible for
the contamination cleanup according to its regulations. During the quarter there
was no progress on resolution of the environmental issues with the State or the
petroleum company and no serious interest on the part of any potential buyers
until a clear timetable for resolution is assured. Estimated cleanup costs,
should they become the responsibility of United 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 third quarter of 1999 was $561, an
increase of $236, or 72.6%, from the same period in 1998. On a year-to-date
basis, the provision for loan losses was $1,849, an increase of $388, or 26.6%,
over the same period in 1998. The increase was due in major part to the 65.0%
growth in aircraft loan balances from $65.5 million at December 31, 1998 to
$108.1 million at September 30, 1999. Although the Corporation has experienced 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 reserve-to- loans ratio at 1.71% compared to 1.66% at December 31,
1998, due to the risk profile of this segment of the loan portfolio. Over the
last six months the Bank has experienced increasing delinquencies in the
indirect boat and recreational vehicle portfolio, in addition to the normal
seasonal increase in these delinquencies during the colder months of the year.
Increasing delinquencies could signal increased future chargeoffs. Management
reviews the amounts of provision for loan losses charged to earnings 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 third
quarter of 1999, remained at 0.02%, the same as the third 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
21
<PAGE> 24
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 $0.5 million through the remainder of 1999.
At September 30, 1999, impaired loans were $1,127, an increase of $467 from
December 31, 1998. Non-performing loans, which include non-accrual loans and
loans past due 90 days or more, were $1,742 at September 30, 1999 compared to
$1,487 at December 31, 1998, an increase of $255, or 17.1%. The ratio of
non-performing loans to total loans outstanding at September 30, 1999 was 0.23%,
compared to 0.22% recorded at 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 0.80% at June 30,
1999, the most current data available.
CAPITAL RESOURCES
At September 30, 1999 shareholders' equity was $69,589, a reduction of $2,113,
or 3.0%, from the balance at December 31, 1998. The ratio of equity-to-assets at
September 30, 1999 was 7.49% versus 8.25% at December 31, 1998. The factors
responsible for the reduction in shareholders' equity were cash dividends of
$3,854 and net increases in treasury stock of $8,425. Also responsible, to a
smaller degree was the reduction in market value on investment securities
available for sale, net of deferred taxes, of $1,080, 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 accompanied 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 $11,246.
On June 17, 1999 Board of Directors voted to reinstate the UNB Corp. Dividend
Reinvestment and Stock Purchase Plan, effective with the third quarter 1999
dividend. The stock purchase component of the Plan is new and affords plan
participants the ability to purchase additional shares of UNB Corp. stock
directly from the company. The Board also directed that the stock buy-back be
discontinued. Temporary suspension of the dividend reinvestment plan was
undertaken by the Board on August 13, 1998, effective September 16, 1998. At the
time, the Board felt capital was growing at a rate faster than could be
efficiently utilized to maximize shareholder value. The suspension of the plan
and the stock buy-back helped return capital to an acceptable level targeted by
management.
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 the 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
22
<PAGE> 25
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 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 September 30, 1999, the rate of primary capital (shareholders' equity plus
the allowance for loan losses less intangible assets) to total adjusted assets
was 11.66%. The risk-based capital ratio was 10.44%, while the Tier 1 capital
and core leverage ratios reached 9.01% and 7.19%, respectively, at September 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 $0.115 per share for the third quarter was a 27.8% increase over
the dividend paid in the third quarter, 1998. Year-to-date dividends repreent an
increase of 34.0% over the same period in 1998. Total cash dividends
year-to-date represent 34.3% of year-to-date earnings.
During the third quarter the Corporation's stock was listed on the NASDAQ
National Market. Management felt the improved earnings performance in 1998 and
1999 made 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.
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 as well
as maintain reserve requirements. This is accomplished through the Corporation's
ability to readily convert assets to cash and raise funds in the market place in
a timely and cost effective manner. Total cash, federal funds sold, investment
and mortgage-backed securities available for sale of $166,366 represent 17.9% of
total assets at September 30, 1999. Of the investments available for sale,
$37,367 are held in U.S. Treasury and Agency securities, 64.6% of which mature
within one year. Approximately $108,744 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
23
<PAGE> 26
UNB CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 95.1%
at September 30, 1999 compared to 92.4% at year-end 1998, an increase of 274
basis points. This increase was the result of loan growth being partially funded
from liquidity in the securities portfolios and loans held for sale as well as
the partial funding of United Banc Financial Services loan portfolio with
outside bank borrowings used as a supplement to borrowings from United Bank.
The liquidity needs of the Holding Company, primarily cash dividends, security
purchases and vendor payments, are met through cash, short-term investments and
dividends from the Bank.
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)
SEPTEMBER 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 34 49
Real Estate - Commercial -- --
Real Estate - Residential -- 135
Aircraft -- N/A
Consumer Loans 955 1,534
------- -------
Total Charge-Offs 989 1,718
------- -------
Recoveries (Domestic):
Commercial, Financial, Agricultural 37 33
Real Estate - Commercial -- --
Real Estate - Residential 33 134
Aircraft -- N/A
Consumer Loans 663 778
------- -------
Total Recoveries 733 945
------- -------
Net Charge-Offs 256 773
------- -------
Provision for loan losses 1,849 1,461
Balance at September 30, $12,765 $10,338
======= =======
Ratio of net charge-offs during this
quarter to average loans outstanding this quarter 0.02% 0.02%
======= =======
Allowance as a percentage of total loans 1.71% 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 September 30, the
Corporation's modified twelve month cumulative gap was at -0.54% compared to
8.01% in the previous period, indicating a slightly liability 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. At the end of September, the Corporation
obtained a $20,000 short-term advance from the Federal Home Loan Bank to
temporarily fund loan growth, and the combination of the large dollar amount and
the short maturity caused a significant shift to a negative gap on that date. As
the borrowing is replaced by longer, less rate sensitive certificates of deposit
in October, the overall gap will return to a positive position.
Simulation analysis provides a more dynamic interpretation of the impact of
rates on the Corporation's forecasted income and net present value of assets,
liabilities and capital. The Corporation makes certain assumptions regarding the
26
<PAGE> 29
UNB CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
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 September 30, 1999, the Corporation's interest rate shock analysis forecasted
an increase in net interest income of 1.83% in response to a decrease of 200
basis points in market rates and a decrease in net interest income of 1.78%
based on a corresponding increase in market rates. The forecasted changes in the
market value of equity were an increase of 13.72% and a decrease of 9.54% for
the same period. The model results indicate that the Corporation would benefit
from a decrease 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 initiated 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
up are offset by the increased value of assets with an above market yield. The
gain that would be
27
<PAGE> 30
UNB CORP.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
realized on the sale of the loans would counteract the loss on the termination
of the interest rate swaps. At the end of September, the swaps had a combined
net gain of $178 on outstanding notional principal of $17,584.
28
<PAGE> 31
UNB CORP.
QUANTITATIVE DISCLOSURE OF MARKET RISK
AS OF SEPTEMBER 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 8,225 5.45%
Securities 26,835 5.58% 7,771 5.86% 4,879 5.96% 814 6.68%
Collateralized Mortgage Obligations 30,637 6.38% 21,479 6.26% 12,523 6.24% 5,573 6.23%
and Mortgage Backed Securities (1)
Fixed Rate Loans (2) (3) 88,834 8.56% 59,969 8.54% 45,538 8.43% 39,102 8.17%
Variable Rate Loans (4) (5) (6) 53,164 8.38% 59,258 8.63% 33,727 8.43% 23,268 8.35%
LIABILITIES
Interest Bearing Demand & Savings (7) 38,403 3.34% 34,966 3.54% 31,818 3.76% 35,010 3.74%
Time Deposits 223,533 5.19% 87,450 5.44% 13,189 5.68% 11,974 5.60%
Repurchase Agreements 61,729 4.01%
Short Term Borrowings 902 5.50%
FHLB Advances 30,598 5.88% 3,569 6.14% 30,899 6.14% 951 5.95%
Capital Leases 41 8.15% 41 8.15% 42 8.15% 7 8.15%
Line of Credit Borrowing 3,500 6.95%
OFF-BALANCE SHEET
Interest Rate Swap (8) 1,200 300
Average Pay Rate (Fixed) 2.88% 2.88%
Average Receive Rate (Variable) 5.49% 5.49%
Interest Rate Swap (9) 2,692 2,349 2,048 8,995
Average Pay Rate (Fixed) 5.86% 5.86% 5.86% 5.86%
Average Receive Rate (Variable) 5.51% 5.51% 5.51% 5.51%
</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 8,225 5.45% 8,225
Securities 487 6.67% 13,818 5.96% 54,604 6.09% 54,604
Collateralized Mortgage Obligations 2,674 6.22% 6,766 6.07% 79,652 6.63% 79,661
and Mortgage Backed Securities (1)
Fixed Rate Loans (2) (3) 27,027 8.10% 144,909 8.55% 405,380 8.53% 393,495
Variable Rate Loans (4) (5) (6) 22,191 8.04% 151,116 8.35% 342,723 8.35% 333,047
LIABILITIES
Interest Bearing Demand & Savings (7) 49,322 3.15% 98,218 1.90% 287,737 2.98% 254,583
Time Deposits 1,873 5.27% 2,937 5.28% 340,956 5.30% 340,965
Repurchase Agreements 61,729 4.01% 21,731
Short Term Borrowings 902 5.50% 902
FHLB Advances 899 6.25% 0 6.28% 66,916 5.97% 67,124
Capital Leases 0 0.00% 0 0.00% 131 8.15% 148
Line of Credit Borrowing 3,500 0.00% 3,500
OFF-BALANCE SHEET
Interest Rate Swap (8) 1,500 41
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
Interest Rate Swap (9) 16,084 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 September, 1999, the notional principal amount of the
interest rate swap was $1,500 and the market value was $33. 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 5.49313%.
(9) At quarter-end September, 1999, the notional principal amount of the
interest rate swap was $16,084 and the market value was $145. 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 5.5125%.
29
<PAGE> 32
UNB CORP.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
During the quarter ended September 30, 1999, there were no matters submitted to
a vote of shareholders.
Item 5 - Other Information
- --------------------------
On October 21, 1999 UNB Corp. filed a Form S-8 registration statement
under the requirements of the Securities Act of 1933 for securities to be issued
and sold pursuant to the UNB Corp. Employee Stock Purchase Payroll Deduction
Plan. This plan replaced the UNB Corp. Payroll Deduction Plan, which was
terminated effective October 14, 1999.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibit
Number Exhibit
------ -------
27 Financial Data Schedule for the nine months ended
September 30, 1999(1)
B. Reports - Form 8-K - No reports on Form 8-K were filed by the Registrant
during the first nine months 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 November 12, 1999 /s/ James J. Pennetti
----------------------- -------------------------------------
James J. Pennetti (Duly authorized
officer and Treasurer, UNB Corp.)
30
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 25,759
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 8,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 132,408
<INVESTMENTS-CARRYING> 1,848
<INVESTMENTS-MARKET> 1,856
<LOANS> 747,538
<ALLOWANCE> 12,765
<TOTAL-ASSETS> 928,517
<DEPOSITS> 718,991
<SHORT-TERM> 62,631
<LIABILITIES-OTHER> 6,759
<LONG-TERM> 70,547
0
0
<COMMON> 11,646
<OTHER-SE> 57,943
<TOTAL-LIABILITIES-AND-EQUITY> 928,517
<INTEREST-LOAN> 44,153
<INTEREST-INVEST> 5,804
<INTEREST-OTHER> 472
<INTEREST-TOTAL> 50,429
<INTEREST-DEPOSIT> 18,529
<INTEREST-EXPENSE> 22,489
<INTEREST-INCOME-NET> 27,940
<LOAN-LOSSES> 1,849
<SECURITIES-GAINS> 4,127
<EXPENSE-OTHER> 20,569
<INCOME-PRETAX> 17,229
<INCOME-PRE-EXTRAORDINARY> 17,229
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,246
<EPS-BASIC> 1.03
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 4.42
<LOANS-NON> 1,595
<LOANS-PAST> 147
<LOANS-TROUBLED> 183
<LOANS-PROBLEM> 3,359
<ALLOWANCE-OPEN> 11,172
<CHARGE-OFFS> 989
<RECOVERIES> 733
<ALLOWANCE-CLOSE> 12,765
<ALLOWANCE-DOMESTIC> 10,864
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,901
</TABLE>
