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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-13270
UNB CORP.
(Exact name of Registrant as specified in its charter)
Ohio 34-1442295
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State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
220 Market Avenue South, Canton, Ohio 44702
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 454-5821
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Stated Value
--------------------------------
(Title of Class)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of February 28, 1999: $222,611,867.
The number of shares outstanding of each of the Registrant's common stock, as of
February 28, 1999: 10,993,179 shares of $1.00 per share stated value common
stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1998 UNB Corp. Annual Report to Shareholders (Exhibit 13) are
incorporated into Part I, Item 1(c), 1(e), Item 2, and Part II, Items 5, 6, 7,
7a and 8.
Portions of the Definitive Proxy Statement of UNB Corp.(Form DEF 14-A) dated
February 19, 1999 and Notice of Annual Meeting of Shareholders to be held on
April 20, 1999, are incorporated into Part III, Items 10, 11, 12, and 13.
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UNB CORP.
FORM 10-K
1998
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PART I
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Item 1 Business 3
Item 2 Properties 18
Item 3 Legal Proceedings 19
Item 4 Submission of Matters to a Vote of Security Holders 19
PART II
Item 5 Market for Registrant's Common Equity and Related Shareholder
Matters 20
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations 20
Item 7A Quantitative and Qualitative Disclosures About Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 21
PART III
Item 10 Directors and Executive Officers of the Registrant 21
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners and Management 21
Item 13 Certain Relationships and Related Transactions 21
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 21
Signatures 25
Exhibit Index 27
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PART I
ITEM 1 - BUSINESS
a. GENERAL DEVELOPMENT OF BUSINESS
UNB Corp. (Registrant) was incorporated under the laws of the State of
Ohio during 1983. Its principal business is to act as a bank holding
company for the United National Bank & Trust Company (Bank). Effective
October 1, 1984, in a transaction accounted for as an internal
reorganization, the Registrant acquired all of the outstanding stock of
the United National Bank & Trust Company. The Corporation exchanged two
shares of common stock for each previously outstanding share of the
United National Bank & Trust Company. The Registrant did not have any
operations prior to the business combination. UNB Corp. is registered
under the Bank Holding Company Act of 1956, as amended. A substantial
portion of UNB Corp.'s revenue is derived from cash dividends paid by
the Bank. At December 31, 1998, UNB Corp. and its affiliates had total
consolidated assets of $868.7 million and total consolidated
shareholders' equity of $71.7 million.
b. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Registrant and its subsidiary bank are engaged in commercial and
retail banking. Reference is hereby made to Item 1(e), "Statistical
Disclosure", and Item 8 of this Form 10-K for financial information
pertaining to the Registrant's banking business.
c. DESCRIPTION OF UNB CORP.'S BUSINESS
UNB Corp.'s main affiliate, the United National Bank & Trust Company, is
a full-service banking organization with 21 banking offices offering a
wide range of commercial and retail and fiduciary banking services
primarily to customers in northern Stark, southern Summit and western
Wayne Counties of Ohio. These services include a broad range of loan,
deposit and trust products and various miscellaneous services. Loan
products include commercial and commercial real estate loans, a variety
of residential mortgage and construction loan products, direct and
indirect consumer installment loans, home equity lines of credit,
aircraft financing, VISA business lines of credit, small business
leases, dealer floor plans and accounts receivable financing. Deposit
products include interest and non-interest bearing checking products,
various savings and money market products, certificates of deposit and
IRAs. The Trust Department provides fiduciary services in the areas of
employee benefit trusts, personal trusts and investment management
services. Miscellaneous services offered include safe deposit boxes,
night depository, United States savings bonds, traveler's checks, money
orders and cashier checks, bank-by-mail, bank-by-phone and electronic
banking services, wire transfer service, selected utility bill payments,
collections and notary services. Services provided for Bank customers
through third party vendors include those of discount brokerage and the
sale of mutual funds, annuities and life insurance. In addition, the
Bank has correspondent relationships with major banks in New York,
Pittsburgh and Detroit pursuant to which the Bank receives and provides
to its customers various financial services.
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The Bank's primary lending area consists of Stark County, Ohio, and its
contiguous counties, with the exception of aircraft financing which
encompasses a national market. Loans (excluding aircraft
financing)outside the primary lending area are considered for
creditworthy applicants. Lending decisions are made in accordance with
written loan policies designed to maintain loan quality.
Retail lending products are comprised of demand deposit lines of credit
(overdraft protection), personal lines of credit and installment loans.
Demand deposit lines of credit are lines attached to interest and
non-interest bearing checking accounts to cover overdrafts and/or allow
customers to write themselves a loan within an approved credit limit.
Credit limits are based on a percentage of gross income and average
deposits.
Personal lines of credit include lines secured by junior mortgages (home
equity) and Private Banking lines which are generally secured by junior
mortgages but may be unsecured or secured by other collateral. The
pricing on these lines is indexed to prime rate. These loans also have a
rate lock feature which allows a borrower to convert a portion of the
outstanding balance (minimum of $5,000) to a fixed rate term loan. A
maximum of three rate locks per home equity line is available with the
term of each determined by the amount being locked in. The maximum term
is 15 years, which is subject to rate adjustment every five years.
Credit limits are determined by comparing three criteria, appraised
value, debt service and gross income. Criteria for determining credit
limits on private banking products also consider the applicant's annual
income, net worth and average deposits.
Installment loans include both direct and indirect loans. Indirect
installment loan terms can range from 12 to 180 months, depending upon
the collateral which includes new and used automobiles, boats and
recreational vehicles as well as unsecured home improvement loans.
Direct installment loan terms can range from three months to 180 months
and includes the same collateral as indirect lending plus junior
mortgages, unsecured personal loans and unsecured demand notes. Retail
lending underwriting guidelines include evaluating the entire credit
using the Five C's of Credit,character, capacity, capital, condition and
collateral. Credit scoring, analysis of credit bureau ratings and debt
to income ratios are used by the lender in the underwriting process.
The Bank offers a wide variety of mortgage loan products and services,
including a variety of fixed and adjustable rate mortgages with
maturities ranging from 120 to 360 months. The Bank also offers some
specialty products such as jumbo mortgages, Mortgage Assistance Programs
for low income individuals, construction and bridge loans. The
underwriting guidelines include those for consumer loans and those
necessary to meet secondary market guidelines. The Bank originates loans
for sale to the secondary market when it deems it profitable and
desirable to do so. Residential real estate decisions focus on loan to
value limits, debt to income ratio, housing to income ratio, credit
history, and in some cases, whether private mortgage insurance is
obtained.
Business credit products include commercial loans and commercial real
estate loans, Business Manager, VISA cards to business and lease
financing. Commercial loans include lines and letters of credit, fixed
and adjustable rate term loans, demand and time notes. Commercial real
estate loans include
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fixed and adjustable rate mortgages. Loans are generally to owner
occupied businesses. The portfolio also includes loans to churches,
residential rental property, shopping plazas and residential development
loans. Loans to businesses often entail greater risk because the primary
source of repayment is typically dependent upon adequate cash flow. Cash
flow of a business can be subject to adverse conditions in the economy
or a specific industry. Should cash flow fail, the lender looks to the
assets of the business and/or the ability of the comakers to support the
debt. Commercial lenders consider the Five C's of Credit, character,
capacity, capital, condition and collateral in making commercial credit
decisions. Business Manager is a system which the Bank uses to assist
creditworthy businesses with accounts receivable management. It is a
hybrid program combining funding and billing with cash management,
monitoring and reporting functions. The Bank purchases creditworthy
receivables at full recourse with a flexible reserve. The Bank may earn
a discount, interest and/or fees. The Bank has provided both direct and
indirect leasing on a limited basis, both on a pass through fee basis as
well as with the option to purchase and fund. The direct leases are for
specific equipment and may be open-end or closed-end. Indirect leases
are established by granting a lease line to a dealer, while the Bank
holds title and files a UCC lien for an assignment of the lease. Each
vehicle has its own amortization schedule.
During the second quarter of 1998, the Bank acquired the aircraft
financing line of business and $35.4 million in loan balances from Bank
One. The acquisition of this specialized line of business fits with the
Bank's expertise in fulfilling the financial needs of businesses and
high net-worth individuals. It also allows the Corporation to take
advantage of opportunities outside its traditional geographic market.
This division of the lending function known as United Bank Aircraft
Financing Group is headquartered in offices at the Akron/Canton Airport
and includes three regional offices located in Wichita, Kansas;
Sacramento, California; and Orlando, Florida. The sales staff possesses
significant experience in aircraft financing and the target market
consists of high income/net worth individuals for pleasure and business
use and operators using general aviation aircraft for freight and cargo
hauling, flight training, charter and rental services. Loans acquired
were both fixed and fixed rate with floating rate conversion features.
Underwriting guidelines for financing of aircraft for personal use
include the use of credit scoring and analysis of the individual's net
worth. Underwriting criteria for business operators is the same as that
used in commercial and commercial real estate lending.
In addition to the underwriting guidelines followed for specific loan
types, the Bank has underwriting guidelines common to all loan types.
With regard to collateral, the Bank follows supervisory limits set forth
in Regulation H for transactions secured by real estate. Loans in excess
of these guidelines are reported to the Board of Directors on a monthly
basis. Loans not secured by real estate are analyzed on a loan by loan
basis, based on collateral type guidelines set forth in the loan policy.
Appraisal policies follow and comply with provisions outlined under
Title XI of FIRREA. All appraisals are done by outside independent
appraisers approved by the Board of Directors. Senior Loan Committee has
the option of requiring equipment appraisals. Approval procedures
include loan authorities approved by the Board of Directors for
individual lenders and loan committees. Retail and residential loans are
centrally underwritten by their respective departments. Business credits
can be approved by the individual commercial lender or taken to Loan
Committee if
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it exceeds individual approval limits. Senior Loan Committee approves
aggregate loan commitments in excess of the lender's authority up to
$3.0 million. Executive Loan Committee approves aggregate loan
commitments in excess of $3.0 million up to the Bank's legal lending
limit. Loans to Directors and Executive Officers are approved by the
Board of Directors. All loans are reported in the Senior Loan Committee
minutes and the Board Report. Retail and residential real estate loan
transactions are also reported to Senior Loan Committee at certain
dollar limits. Exceptions and/or overrides are tracked and reported to
Loan Quality Review Committee.
The Loan Quality Review Committee meets as a subcommittee of the Senior
Loan Committee on a quarterly basis. The Committee reviews Bank lending
trends, the Past Due Report, the Watch List and various other reports in
order to monitor and maintain credit quality. The Committee also reviews
on a relationship basis, customers on the Bank's Watch List and credits
with aggregate commitments in excess of $1 million. All past due loans
are collected in a centralized collections department which is
independent of the lending functions.
In the first half of 1997, UNB Corp. received permission from the State
of Ohio Department of Commerce, Division of Consumer Finance, for a
license to establish and operate a consumer finance company, regulated
under the Ohio Mortgage Loan Act, as a wholly owned subsidiary of the
Corporation. United Banc Financial Services, Inc. was capitalized with a
$500,000 investment in June, 1997 and began operations on July 1, 1997.
Its products include real estate and non-real estate secured loans, as
well as personal note loans and indirect, retail loans. Underwriting and
pricing standards are determined by credit risk scores, credit bureau
ratings, debt to income ratios and assets of the consumer. Minimum
credit risk scores and maximum debt to income ratios have been
established for all products. Loan to value ratios for real estate
secured loans are determined by amount financed and credit risk scores.
Generally, a higher risk loan will reflect a higher interest rate, lower
loan to value ratio and greater required equity investment on the part
of the borrower. Amortization terms on real estate secured loans may
extend up to 360 months. Personal, unsecured, non-real estate and
indirect, retail loans may amortize up to 60 months. All real estate
secured loans are interest bearing while non-real estate loans have
interest calculated under the Rule of 78s. Total loans outstanding, net
of unearned income, at December 31, 1998 is $3,327,000. Real estate lien
products accounted for 79.4% of outstandings while the remaining 20.6%
is derived from non-real estate loans. In additions to the extension of
credit, United Banc Financial Services also earns fee income through the
brokering of non-conforming consumer paper and FHA/VA Government loans.
The results of operations for United Banc Financial Services for 1998
did not have a material impact on the earnings of UNB Corp. in 1998.
Revenues from loans accounted for 73% of consolidated revenues in 1998,
and 78% in 1997 and 1996. Revenues from interest and dividends on
investment and mortgage-backed securities accounted for 11% of
consolidated revenues in 1998, 1997 and 1996.
During 1998, UNB Corp. took steps to activate its affiliate, the United
Insurance Agency, Inc., which was chartered on August 23, 1990. During
the first quarter of 1999, UNB Corp. is reapplying for an insurance
license with the State of Ohio and is awaiting approval to be licensed
to sell life,
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property and casualty insurance. Approval is expected in the second
quarter of 1999 with operations expected to begin shortly afterwards.
The addition of this affiliate is anticipated to aid UNB Corp. in its
ability to compete with other providers of financial services in
offering its customers a more complete line of financial products to
satisfy their financial needs. The results of operations for United
Insurance Agency, Inc. is not expected to have to have a material impact
on the earnings of UNB Corp. in 1999.
The business of the UNB Corp. is not seasonal to any material degree,
nor is it dependent upon a single or small group of customers whose loss
would result in a material adverse effect on the Registrant or its
subsidiaries.
REGULATION AND SUPERVISION
UNB Corp. is a bank holding company under the Bank Holding Company Act
of 1956, as amended, which restricts the activities of the Corporation
and the acquisition by the Corporation of voting stock or assets of any
bank, savings association or other company. The Corporation is also
subject to the reporting requirements of, and examination and regulation
by, the Board of Governors of the Federal Reserve system (Federal
Reserve Board). Subsidiary banks of a bank holding company are subject
to certain restrictions imposed by the Federal Reserve Act on
transactions with affiliates, including any loans or extensions of
credit to the bank holding company or any of its subsidiaries,
investments in the stock or other securities thereof and the taking of
such stock or securities as collateral for loans to any borrower; the
issuance of guarantees, acceptances or letters of credit on behalf of
the bank holding company and its subsidiaries; purchases or sales of
securities or other assets; and the payment of money or furnishing of
services to the bank holding company and other subsidiaries. Banks and
bank holding companies are prohibited from engaging in certain tie-in
arrangements in connection with extensions of credit or provision of
property or services.
Bank holding companies are prohibited from acquiring direct or indirect
control of more than five percent of any class of voting stock or
substantially all of the assets of any bank holding company without the
prior approval of the Federal Reserve. The Federal Reserve is authorized
to approve the ownership of shares by a bank holding company in any
company the activities of which the Federal Reserve has determined to be
so closely related to banking or to managing or controlling banks as to
be a proper incident thereto. The Federal Reserve has by regulation
determined that certain activities are closely related to banking within
the meaning of the Bank Holding Company Act. These activities include
among others, operating a mortgage company or finance company;
performing certain data processing operations; providing investment and
financial advice and acting as an insurance agent for certain types of
credit-related insurance.
UNB Corp. is under the jurisdiction of the Securities and Exchange
Commission for matters relating to its securities and is subject to the
disclosure and regulatory requirements of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as
administered by the Commission regulation.
As a national bank, United National Bank & Trust Co. is supervised and
regulated by the Comptroller of the Currency (Comptroller). The deposits
of the Bank are insured by the Bank Insurance Fund (BIF) while deposits
purchased
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from savings and loans in 1994 and 1991 are insured by the Savings
Association Insurance Fund (SAIF) of the Federal Deposit Insurance
Corporation (FDIC). The Bank is subject to the applicable provisions of
the Federal Deposit Insurance Act. Various requirements and restrictions
under the laws of the United States and the State of Ohio affect the
operations of the Bank, including requirements to maintain reserves
against deposits, restrictions on the nature and amount of loans which
may be made and the interest which may be charged thereon, restrictions
relating to investments and other activities, limitations on credit
exposure to correspondent banks, limitations on activities based on
capital and surplus, limitations on payment of dividends, and
limitations on branching. Under current laws, the Bank may establish
branch offices throughout the State of Ohio. Pursuant to recent federal
legislation, the Bank may branch across state lines, if permitted by the
law of the other state. In addition, effective June 1997, such
interstate branching by the Bank is authorized, unless the law of the
other state specifically prohibits the interstate branching authority
granted by federal law.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-based assets
by assigning assets and off-balance sheet items to broad risk
categories. The required minimum ratio of capital to risk-weighted
assets (including certain off-balance sheet items, such as standby
letters of credit) was 8.00% at December 31, 1998 as disclosed in Note
14 of UNB Corp.'s 1998 Annual Report (See Exhibit 13). At least half of
the total regulatory capital is to be comprised of common stockholders'
equity, including retained earnings, noncumulative perpetual preferred
stock, a limited amount of cumulative perpetual preferred stock, and
minority interests in equity accounts of consolidated subsidiaries less
goodwill (Tier 1 capital). The remainder (Tier 2 capital) may consist
of, among other things, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock and a limited amount
of allowance for loan and lease losses. The Federal Reserve Board has
also imposed a minimum leverage ratio (Tier 1 capital to total assets)
of 4% for bank holding companies that meet certain specified conditions,
including no operational, financial or supervisory deficiencies, and
including those having the highest regulatory (CAMEL) rating. The
minimum leverage ratio is 1.0-2.0% higher for other holding companies
based on their particular circumstances and risk profiles and those
experiencing or anticipating significant growth. National banks are
subject to similar capital requirements adopted by the Comptroller.
UNB Corp. and its subsidiaries currently satisfy all regulatory capital
requirements. Failure to meet the capital guidelines could subject a
banking institution to a variety of enforcement remedies available to
federal regulatory authorities, including dividend restrictions and the
termination of deposit insurance by the FDIC.
Under an outstanding proposal of the Comptroller and the FDIC, the Bank
may be required to have additional capital if its interest rate risk
exposure exceeds acceptable levels provided for in the regulation. In
addition, those regulators have established regulations governing prompt
corrective action to resolve capital deficient banks. Under these
regulations, banks which become undercapitalized become subject to
mandatory regulatory scrutiny and limitations, which increase as capital
continues to decrease. Such banks are also required to file capital
plans with their primary federal regulator, and
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their holding companies must guarantee the capital shortfall up to 5% of
the assets of the capital deficient bank at the time it becomes
undercapitalized.
The ability of UNB Corp. to obtain funds for the payment of dividends
and for other cash requirements is largely dependent on the amount of
dividends which may be declared by the Bank. However, the Federal
Reserve expects UNB Corp. to serve as a source of strength to its
subsidiaries, which may require it to retain capital for further
investment in the subsidiaries, rather than for dividends for
shareholders of the Corporation. Generally, United National Bank & Trust
Co. must have the approval of its regulatory authority if a dividend in
any year would cause the total dividends for that year to exceed the sum
of current year's net profits and retained net profits for the preceding
two years, less required transfers to surplus. The Bank may not pay
dividends to the Corporation if, after such payment, it would fail to
meet the required minimum levels under the risk-based capital guidelines
and the minimum leverage ratio requirements. Payment of dividends by the
Bank may be restricted at any time at the discretion of the regulatory
authorities, if they deem such dividends to constitute an unsafe and/or
unsound banking practice or if necessary to maintain adequate capital
for the bank. These provisions could have the effect of limiting the
Corporation's ability to pay dividends on its outstanding common shares.
Management is not aware of any recommendations by regulatory authorities
which, if they were to be implemented, would have a material effect on
UNB Corp.
GOVERNMENT MONETARY POLICIES
The earnings and growth of UNB Corp. are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the
federal government and its agencies and regulatory authorities,
particularly the Federal Reserve Board. Its policies influence the
growth and mix of bank loans, investments and deposits and the interest
rates earned and paid thereon, and thus effecting the earnings of the
Corporation.
Due to the changing conditions in the economy and the activities of
monetary and fiscal authorities, no predictions can be made regarding
future changes in interest rates, credit availability or deposit levels.
COMPETITION
UNB Corp. and its affiliates compete with other state, regional and
national banks which do business within Stark, Summit and Wayne Counties
of Ohio. UNB Corp. and its affiliates also compete with a large number
of other financial institutions, such as savings and loan associations,
savings banks, insurance companies, consumer finance companies, credit
unions, mortgage banking companies, and commercial finance and leasing
companies, for deposits, loans and financial services business. Mergers
between financial institutions have added to the competitive pressure.
In addition, money market mutual funds, brokerage houses, and similar
organizations provide many of the financial services offered by UNB
Corp.'s affiliates. Many competitors have substantially greater
resources than UNB Corp. In the opinion of management, the principal
methods by which UNB Corp. and its affiliates compete with other
financial services providers are through the rates of interest charged
for loans, the rates of interest paid for deposits and borrowings, the
competitive
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prices charged for and the availability and quality of products and
services provided and the convenience of its branch locations.
EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
Compliance with Federal, State and local provisions regulating the
discharge of materials into the environment, or otherwise relating to
the protection of the environment has not had a material effect upon the
capital expenditures, earnings or competitive position of the UNB Corp.
or its subsidiaries. UNB Corp. anticipates, based on the nature of its
business, that it will have no material capital expenditures for the
purpose of protecting the environment in the foreseeable future. From
time to time the Bank may be required to make capital expenditures for
environmental control facilities related to properties acquired through
foreclosure proceedings.
The Bank has continued involvement in legal proceedings concerning a
seven and one half acre parcel of property acquired through foreclosure
and located in the northwest quadrant of Stark County. A large national
petroleum company, owner of the facility at the date it was taken out of
service, is the party responsible for the contamination cleanup
according to the State of Ohio's Bureau of Underground Storage Tanks
(BUSTER) regulations. After review of several environmental assessments
by the Bank and the petroleum company which were filed with BUSTER, the
agency agreed with the petroleum company's findings which indicated that
the levels of contaminants were such that immediate remediation was not
required. BUSTER determined that the findings indicated the
contamination will remediate itself over time and issued a one year
extension on any formal remediation plan. That extension expired in the
third quarter of 1998. After the extension expired, the petroleum
company had another 90 days to file its remediation plan. In November,
1998, the Bank executed a purchase agreement for the sale of the
property. The contract outlined a due diligence clause on behalf of the
buyers to investigate the EPA, wetland and flood plane analysis. The
results of these studies would be made available to the Bank and based
on their outcome, the developer would have the opportunity to negate the
purchase contract. The analyses have been delayed by the petroleum
company, with no further progress by the end of 1998. Should the
contract expire before the analyses are reviewed, the Bank will work to
execute an extension of the agreement. Estimated cleanup costs, should
they become the responsibility of the Bank, are not material to the
business or financial condition of the Bank and have been set up as an
allowance against the property's value on the Corporation's consolidated
balance sheet.
EMPLOYEES
As of December 31, 1998, UNB Corp. and its subsidiaries had 298
full-time employees and 50 part-time employees. UNB Corp. and its
subsidiaries are not a party to any collective bargaining agreement and
management considers its relationship with its employees to be good.
d. FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
UNB Corp. and its subsidiaries do not have any offices located in
foreign countries and they have no foreign assets, liabilities, or
related income and expense for the years presented.
e. STATISTICAL DISCLOSURE
The following section contains certain financial disclosures related to
the
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Registrant as required under the Securities and Exchange Commission's
Industry Guide 3, "Statistical Disclosures by Bank Holding Companies",
or a specific reference as to the location of the required disclosures
in the Registrant's 1998 Annual Report to Shareholders, portions of
which are incorporated in this Form 10-K by reference.
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UNB CORP.'S STATISTICAL INFORMATION
I. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
A. The average balance sheet information and the related analysis of net
& interest earnings for the years ending December 31, 1998, 1997 and 1996
B. are included in Table 4 - "Average Balance Sheet and Related Yields",
within Management's Discussion and Analysis of Financial Condition and
Results of Operations found on page 40 of the Registrant's 1998 Annual
Report to Shareholders and is incorporated into this Item I by
reference.
All interest is reported on a fully taxable equivalent basis using a
marginal tax rate of 35%. Nonaccruing loans, for the purpose of the
computations, are included in the daily average loan amounts
outstanding. Loan fees in the amount of $3,025,000, $3,108,000 and
$3,478,000 are included in interest on loans for the years ended
December 31, 1998, 1997, and 1996.
C. Tables setting forth the effect of volume and rate changes on interest
income and expense for the years ended December 31, 1998 and 1997 are
included in Table 2 - "Changes in Net Interest Differential -
Rate/Volume Analysis", within Management's Discussion and Analysis of
Financial Condition and Results of Operations found on Page 38 of UNB
Corp.'s 1998 Annual Report to Shareholders and is incorporated into this
Item I by reference. For purposes of these tables, changes in interest
due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's
rate.
Rate Variance - change in rate multiplied by the previous year's
volume.
Rate/Volume Variance - change in volume multiplied by the change in
rate.
The rate/volume variance was allocated to volume variance and rate
variance in proportion to the relationship of the absolute dollar amount
of the change in each.
II. INVESTMENT PORTFOLIO
A. Investment Securities
The carrying value of investment and mortgage-backed securities at the
dates indicated are summarized below:
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December 31,
(Dollars in thousands) 1998 1997 1996
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U.S. Treasury securities and securities
of U.S. government agencies and corporations $ 34,309 $ 53,637 $ 75,817
Obligations of states and political subdivisions -- 951 1,051
Mortgage-backed securities 81,504 67,845 42,907
Other securities 18,636 18,405 13,111
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Total investment and mortgage-backed securities $134,449 $140,838 $132,886
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B. The carrying value and weighted average interest yield for each
investment category listed in Part A at December 31, 1998 which are due
(1) in one year or less, (2) after one year through five years, (3)
after five years through ten years, and (4) after ten years are
presented in Note 3 - Securities, found on page 25 in the Notes to
Consolidated Financial Statements in UNB Corp.'s 1998 Annual Report to
Shareholders and is incorporated herein by reference. The weighted
average yields have been computed by dividing the total interest income
adjusted for amortization of premiums or accretion of discount over the
life of the security by the par value of the securities outstanding. The
weighted average yields of tax exempt obligations are presented on a
non- taxable basis, prior to adjustment to a fully taxable equivalent
basis or consideration of related non-deductible interest expense.
C. Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. government,
there were no investments in securities of any one issuer which exceeded
10% of the consolidated shareholder's equity of the Registrant at
December 31, 1998.
III. LOAN PORTFOLIO
A. Types of Loans - Total loans on the balance sheet are comprised of the
following classifications at December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial $ 80,618 $ 84,737 $ 78,563 $ 64,811 $ 61,094
Commercial real estate 83,036 70,896 65,875 60,478 53,252
Aircraft 65,530 - - - -
Residential real estate 234,696 260,190 242,652 172,283 115,354
Consumer loans 207,553 214,595 230,512 221,158 182,822
--------- --------- --------- --------- ---------
Total loans $671,433 $630,418 $617,602 $518,730 $412,522
======== ======== ======== ======== ========
</TABLE>
B. Maturities and Sensitivities of Loans to Changes in Interest Rates - The
following is a schedule of contractual maturities and repayments
excluding residential real estate mortgage, aircraft loans to
individuals and consumer loans, as of December 31, 1998:
(Dollars in thousands)
<TABLE>
<CAPTION>
Commercial, Commercial Real
Estate and Commercial Aircraft
------------------------------
<S> <C>
Due in one year or less $ 54,316
Due after one year, but within five years 26,559
Due after five years 137,674
---------
Total $218,549
========
</TABLE>
The following is a schedule of fixed and variable rate commercial,
commercial real estate and commercial related aircraft loans due after
one year (variable rate loans are those loans with floating or
adjustable interest rates):
13
<PAGE> 14
(Dollars in thousands)
<TABLE>
<CAPTION>
Fixed Variable
----- --------
Interest Rates Interest Rates
-------- ----- --------------
<S> <C> <C>
Total commercial, commercial real estate and
commercial aircraft loans due after one year $49,601 $114,632
</TABLE>
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The following
schedule summarizes nonaccrual, past due, and restructured loans:
<TABLE>
<CAPTION>
(Dollars in thousands) 1998 1997 1996 1995 1994
----- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,300 $ 854 $ 708 $1,066 $1,039
Accrual loans past due 90 days 187 91 130 254 19
Restructured loans 203 424 237 212 375
------ ------ ------ ------ ------
Total 1,690 1,369 1,075 1,532 1,433
Potential problem loans 2,147 1,722 1,699 1,075 5,386
------ ------ ------ ------ ------
Total $3,837 $3,091 $2,774 $2,607 $6,819
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1998, $23,000 of interest income
would have been earned under the original terms of those loans
classified as nonaccrual. The policy for placing loans on
nonaccrual status is to cease accruing interest on loans when
management believes that the collection of interest is doubtful,
or when loans are past due as to principal or interest 90 days or
more. Consumer installment loans not secured by real estate are
kept on accrual status until they become 120 days past due at
which time they are charged off. The loans must be brought current
and kept current for six consecutive months before being removed
from nonaccrual status. When loans are charged-off, any accrued
interest recorded in the current fiscal year is charged against
interest income. The remaining balance is treated as a loan
charge-off.
At December 31, 1998, loans totaling $660 thousand were classified
as impaired. All loans classified as impaired at December 31, 1998
were also classified as nonaccrual loans, and therefore the
adoption of SFAS No. 114 and SFAS NO. 118 had no effect on the
comparability of non-performing assets at December 31, 1998 to
prior periods.
2. Potential Problem Loans - As shown in the table above, at
December 31, 1998, there are approximately $2.1 million of loans
not otherwise identified which are included on management's
watch list. Management's watch list includes both loans which
management has some doubt as to the borrowers' ability to comply
with the present repayment terms and loans which management is
actively monitoring due to changes in the borrowers financial
condition. These loans and their potential loss exposure have
been considered in management's analysis of the adequacy of the
allowance for loan losses.
3. Foreign Outstandings - There were no foreign outstandings at
December 31, 1998, 1997, or 1996.
4. Loan Concentrations - As of December 31, 1998, indirect
installment loans comprise 21.1% of total loans outstanding. The
dealer network from which indirect consumer paper was purchased in
1998 included 131 dealers, the
14
<PAGE> 15
largest of which was responsible for 9.6% of paper bought in 1998.
There are no additional concentrations of loans greater than 10%
of total loans which are not otherwise disclosed as a category of
loans pursuant to Item III. A. above. Also refer to the Note 1,
Concentrations of Credit Risk, found on Page 23 of the 1998 Annual
Report incorporated herein by reference.
5. No material amount of loans that have been classified by
regulatory examiners as loss, substandard, doubtful, or special
mention have been excluded from the amounts disclosed as
nonaccrual, past due 90 days or more, restructured, or potential
problem loans.
D. Other Interest Bearing Assets - As of December 31, 1998, there are no
other interest bearing assets that would be required to be disclosed
under Item III C.1 or 2 if such assets were loans. UNB Corp. had Other
Real Estate Owned at December 31, 1998, in the amount of $449,000.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
A. The following schedule presents an analysis of the allowance for loan
losses, average loan data, and related ratios for the years ended
December 31,
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding during the
period (net of unearned income) $651,320 $629,514 $582,418 $464,314 $385,618
======== ======== ======== ======== ========
Allowance for loan losses
at beginning of year $ 9,650 $ 8,335 $ 7,242 $ 6,348 $ 6,056
Loans charged off:
Commercial 125 258 106 26 13
Commercial real estate -- -- -- 20 52
Aviation -- -- -- -- --
Residential real estate 135 15 156 71 3
Consumer loans 2,137 2,638 2,900 1,441 1,095
-------- -------- -------- -------- --------
Total charge-offs 2,397 2,911 3,162 1,558 1,163
Recoveries:
Commercial 46 190 5 29 52
Commercial real estate -- 8 39 26 7
Aviation -- -- -- -- --
Residential real estate 135 86 71 71 11
Consumer loans 990 1,013 1,000 576 365
-------- -------- -------- -------- --------
Total recoveries 1,171 1,297 1,115 702 435
-------- -------- -------- -------- --------
Net charge-offs 1,226 1,614 2,047 856 728
Provision for loan loss
charged to operations 2,748 2,929 3,140 1,750 1,020
-------- -------- -------- -------- --------
Allowance for loan losses at end of year $ 11,172 $ 9,650 $ 8,335 $ 7,242 $ 6,348
======== ======== ======== ======== ========
Ratio of net charge-offs to average
loans, net of unearned income 0.19% 0.26% 0.35% 0.18% 0.19%
======== ======== ======== ======== ========
</TABLE>
The allowance for loan losses balance and the provision charged to
expense are judgmentally determined by Management based upon the
periodic review of the loan portfolio, an analysis of impaired loans,
past loan loss experience, economic conditions, anticipated loan
portfolio growth, and various other circumstances which are subject to
change over time. In making this judgment, Management reviews selected
large loans as well as delinquent loans, nonaccrual
15
<PAGE> 16
loans, problem loans, and loans to industries experiencing economic
difficulties. The collectibility of these loans is evaluated after
considering the current financial position of the borrower, the
estimated market value of the collateral, guarantees, and the Company's
collateral position versus other creditors. Judgments, which are
necessarily subjective, as to the probability of loss and the amount of
such loss, are formed on these loans, as well as other loans in the
aggregate. The reduction in provision from 1997 to 1998 was a result of
slower, more selective loan growth in 1998 coupled with the decrease in
net charge-offs.
B. The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios:
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
-------------------------------------------
Percentage Percentage
of Loans of Loans
in Each in Each
Allowance Category to Allowance Category to
Amount Total Loans Amount Total Loans
------- ----------- --------- ------------
(Dollars in thousands)
December 31, 1998 December 31, 1997
-------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial $ 4,899 12.0% $ 3,344 13.5%
Commercial real estate 1,921 12.4 781 11.2
Aviation 611 9.8 -- --
Residential real estate 235 34.9 261 41.3
Consumer 2,082 30.9 2,316 34.0
Unallocated 1,424 -- 2,948 --
------- ------- ------- -------
Total $11,172 100.0% $ 9,650 100.0%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
Commercial $ 2,064 12.7% $ 2,160 12.5%
Commercial real estate 663 10.7 782 11.7
Aviation -- -- -- --
Residential real estate 244 39.3 129 33.2
Consumer 4,420 37.3 2,174 42.6
Unallocated 944 -- 1,997 --
------- ------- ------- -------
Total $ 8,335 100.0% $ 7,242 100.0%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
-----------------
<S> <C> <C>
Commercial $ 1,660 14.9%
Commercial real estate 840 13.0
Aviation -- --
Residential real estate 1,257 28.2
Consumer 2,129 43.9
Unallocated 462 --
------- -------
Total $ 6,348 100.0%
======= =======
</TABLE>
16
<PAGE> 17
A comparison of allocations of the allowance for loan losses between
the five years presented shows a significant shift in the dollars
allocated to each of the four loan categories. During the third quarter
of 1995, a change in the methodology used to determine the allocation
of the allowance for loan losses among the various loan categories was
approved by the Executive Committee of the Board of Directors and
instituted by management. Management will continue to use the same
three methodologies it has historically used to determine the
allocation of the allowance, however, it will select the single
methodology that results in the highest aggregate calculation for
allocation of the allowance among the various loan categories, and not
the highest specific allocation for each loan category from among the
three methodologies. Management believes this change reflects a more
reliable analysis of the Bank's risk of loan loss.
At December 31, 1998 and 1997 there was no specific allocation to any
loan category in connection with the adoption of SFAS No. 114 due to
the adequacy of the collateral values relative to the balance of
impaired loans outstanding at year-end 1998 and 1997. At December 31,
1996, $135,000 was specifically allocated to commercial loans in
connection with the adoption of SFAS No. 114.
While management's periodic analysis of the adequacy of the allowance
for loan loss may allocate portions of the allowance for specific
problem loan situations, the entire allowance is available for any loan
charge-offs that occur.
V. DEPOSITS
The following is a schedule of average deposit amounts and average
rates paid on each category for the periods included:
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
----------------------------------------------------
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing
demand deposits $ 89,305 - $ 76,523 - $ 71,263 -
Interest bearing
demand deposits 79,669 1.58% 72,770 1.68% 71,078 1.98%
Savings 197,971 3.42 174,789 3.14 157,662 2.85
Certificates and other
time deposits 295,555 5.67 290,854 5.76 271,351 5.73
-------- -------- --------
$662,500 $614,936 $571,354
======== ======== ========
</TABLE>
The following table summarizes time deposits issued in amounts of
$100,000 or more as of December 31, 1998 by time remaining until
maturity:
(Dollars in thousands)
Maturing in:
<TABLE>
<S> <C>
Under 3 months $ 15,461
Over 3 to 6 months 13,719
Over 6 to 12 months 12,940
Over 12 months 7,804
--------
$ 49,924
========
</TABLE>
17
<PAGE> 18
VI. RETURN ON EQUITY AND ASSETS
Information required by this section is incorporated by reference to
the information appearing in the table under the caption "Five-Year
Summary of Selected Data" located on Page 51 of UNB Corp's 1998 Annual
Report to Shareholders.
VII. SHORT-TERM BORROWING
Information required by this section is found in Note 7 - "Short-term
Borrowings" on Page 27 of UNB Corp.'s 1998 Annual Report to
Shareholders, incorporated herein by reference.
ITEM 2 - PROPERTIES
UNB CORP.
UNB Corp.'s executive offices are located on the second floor of the
United Bank Plaza, at 220 Market Avenue, South, Canton, Ohio which is
leased from 220 Market Avenue Tenancy (Market Avenue, LLC).
UNITED NATIONAL BANK & TRUST CO.
The executive offices, various administrative offices and the main
branch of United National Bank & Trust Co. are located in 21,800 square
feet of the United Bank Building at 220 Market Avenue, S., Canton,
Ohio. This property is leased from 220 Market Avenue Tenancy (Market
Avenue, LLC) through 2003 with five three-year options extending
through the year 2018. The properties occupied by eleven of the Bank's
branches are owned by the Bank, while properties occupied by its
remaining nine branches are leased with various expiration dates
running through the year 2021 with renewal options. The Bank owned
location of the Uniontown branch which closed in October, 1998, is
currently unoccupied and available for sale. In addition to the leased
branch locations, the Bank also leases the office space occupied by the
Mortgage Loan Department at 4895 Portage Street, N.W. in North Canton,
Ohio. The term of this lease runs through March, 2007.
United Bank Center, at 624 Market Avenue, N., Canton, Ohio, is owned by
the Bank and houses various administrative and operational departments
of the Bank. The second floor of this building which was previously
leased, is now vacant and will be renovated in the second quarter of
1999 to become the location of several administrative departments of
the Bank now located in the United Bank Building at 153 Lincoln Way,
Massillon, Ohio. This building, previously owned by the Bank, was
donated to the City of Massillon in 1998 with a lease back arrangement
for the branch facility located there. There is no mortgage debt owing
on any of the above property owned by the Bank.
The Aircraft Finance Group has four office locations, all of which are
leased with various expiration dates in 1999 and 2000. This group is
headquartered in offices at the Akron/Canton Airport and includes three
regional offices located in Wichita, Kansas; Sacramento, California;
and Orlando, Florida.
UNITED BANC FINANCIAL SERVICES, INC.
United Banc Financial Services, Inc. has two office locations, one in
the Portage and Frank area of North Canton, Ohio and the other on
Whipple Avenue in the Belden Village area of Canton, Ohio. Both
locations are leased, with expiration dates of 2002 and 2003,
respectively. In addition, a third office
18
<PAGE> 19
will be opening in the first quarter of 1999 in the City of Green in
southern Summit County.
A listing of all corporate locations is found under the caption
"Locations" found on page 14 of UNB Corp.'s 1998 Annual Report to
Shareholders, and is incorporated herein by reference. The facilities
owned or leased by UNB Corp. and its subsidiaries are considered by
management to be satisfactory for its current operations.
ITEM 3 - LEGAL PROCEEDINGS
The nature of UNB Corp.'s business results in a certain amount of
litigation. Accordingly, the Corporation and its subsidiaries are
subject to various pending and threatened lawsuits in which claims for
monetary damages are asserted in the ordinary course of business. While
any litigation involves an element of uncertainty, in the opinion of
Management, liabilities, if any, arising from such litigation or threat
thereof will not have a material effect on the Corporation.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998, one
matter was submitted to a vote of security holders at a Special Meeting
of Shareholders held on October 1, 1998 for the purpose of amending the
Articles of Incorporation to increase the number of no par value Common
Shares that the Corporation is authorized to issue from 15,000,000 to
50,000,000. The purposes for increasing the number of authorized Common
Shares were to have additional shares available for issuance in the
future for stock splits, stock dividends, acquisitions, shareholders'
rights plans, and other corporate purposes. The additional shares may
be issued on authorization of the Board of Directors without further
approval of Shareholders, except as may be required by law. The Board
of Directors had no present agreements, commitments, or understandings
for the issuance of any such shares, with the exception of shares which
may be issued pursuant to the 1987 Stock Option and Performance Unit
Plan, the UNB Corp. 1997 Stock Option Plan, or the 1989 Dividend
Reinvestment Plan. The adoption of the proposed amendment required the
affirmative vote of the holders of 66-2/3% of the outstanding shares of
the Corporation. Shareholders of record at the close of business July
30, 1998, were entitled to notice of and to vote at the meeting. Total
outstanding shares as of close of business July 30, 1998 were
5,732,435. Affirmative shares required for passage were 3,821,623.
Shareholders approved the amendment. The results of the voting were as
follows:
<TABLE>
<CAPTION>
For Against Abstain Total
--- ------- ------- -----
<S> <C> <C> <C> <C>
5,024,843 99,739 10,920 5,135,502
(87.66%) (1.74%) (0.19%) (89.59%)
</TABLE>
Percentages indicate the shares voted as a percentage of shares
outstanding. Based on the results of the vote, a Certificate of
Amendment to the Corporation's Articles of Incorporation was filed with
the Secretary of the State of Ohio.
19
<PAGE> 20
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
Shares of the Common Stock of UNB Corp. are traded on the
over-the-counter market primarily with brokers in the Corporation's
service area. The information required under this item is incorporated
by reference to the information appearing under the caption "Market
Price Ranges for Common Shares" located on Page 15 of the UNB Corp.
1998 Annual Report to Shareholders. In addition, attention is directed
to the caption "Capital Resources" within Management's Discussion and
Analysis located on page 46 of UNB Corp.'s 1998 Annual Report to
Shareholders and to Note 14 - "Dividend and Regulatory Capital
Requirements" located on page 31 therein. Such information is
incorporated herein by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information required under this item is incorporated by reference
to the information appearing under the caption "Five Year Summary of
Selected Data" located on page 51 of the 1998 Annual Report to
Shareholders. See the Consolidated Statement of Changes in
Shareholders' Equity on page 20 of the 1998 Annual Report to
Shareholders for the reporting requirements of adoption of SFAS No.
130, "Reporting of Comprehensive Income." See Note 9 - Retirement
Plans, found on page 27 of the 1998 Annual Report to Shareholders for
the revised disclosures included in the financial statements required
under the adoption of SFAS No. 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which was issued in
February, 1998. These items are incorporated by reference to Exhibit
13.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appears on pages 36 through 50 of UNB Corp.'s
1998 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 7A.- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures About Market Risk specified by
Item 305 of Regulations S-K are incorporated herein by reference to UNB
Corp.'s 1998 Annual Report to Shareholders (Exhibit 13, pages 47
through 49.)
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
UNB Corp.'s Report of Independent Auditors and Consolidated Financial
Statements and accompanying notes are listed below and are incorporated
herein by reference to UNB Corp.'s 1998 Annual Report to Shareholders
(Exhibit 13, pages 17 through 35). The supplementary financial
information specified by Item 302 of Regulation S-K, selected quarterly
financial data, is included in Note 19 - "Quarterly Financial Data
(Unaudited)" to the consolidated financial statements found on page 35.
20
<PAGE> 21
Report of Independent Auditors
Consolidated Balance Sheets
December 31, 1998 and 1997
Consolidated Statements of Income
For the three years ended December 31, 1998
Consolidated Statements of Changes in
Shareholders' Equity For the three
years ended December 31, 1998
Consolidated Statements of Cash Flows
For the three years ended December 31, 1998
Notes to Consolidated Financial Statements
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Crowe, Chizek and Company LLP, served as independent auditors for the
purpose of auditing the Corporation's Annual Consolidated Financial
Statements and for the preparation of consolidated tax returns for the
fiscal years ending December 31, 1998, 1997, and 1996. The appointment
of independent auditors is approved annually by the Board of Directors.
For the year 1999, the Board of Directors has again authorized the
engagement of Crowe, Chizek and Company LLP, as independent auditors.
PART III
Information relating to the following items is included in UNB Corp.'s Proxy
statement and Notice of Annual Meeting of Shareholders to be held Tuesday, April
20, 1999, ("1998 Proxy Statement") dated February 19,1999, filed with the
Commission on Form DEF 14-A, pursuant to Section 14(A) of the Securities
Exchange Act of 1934 and is incorporated by reference into this Form 10-K Annual
Report (Exhibit 22).
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. FINANCIAL STATEMENT SCHEDULES
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Registrant
appear in
21
<PAGE> 22
the 1998 Annual Report to Shareholders (Exhibit 13) on the pages
referenced and are specifically incorporated by reference under
Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
Annual Report
Page Numbers
------------
<S> <C>
Report of Independent Auditors 17
Report of Management 17
Consolidated Balance Sheets, December 31, 1998 and 1997 18
Consolidated Statements of Income,
For the three years ended December 31, 1998 19
Consolidated Statements of Changes in Shareholders' Equity,
For the three years ended December 31, 1998 20
Consolidated Statements of Cash Flows,
For the three years ended December 31, 1998 21
Notes to Consolidated Financial Statements 22-35
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
Financial statement schedules are omitted as they are not
required or are not applicable, or the required information is
included in the financial statements found in UNB Corp.'s 1998
Annual Report to Shareholders.
3. EXHIBITS
Management Contracts or Arrangements (for remaining Exhibits,
reference is made to the Exhibit Index which is found on Page 27
of this Form 10-K).
<TABLE>
<CAPTION>
Contract or Arrangement Reference Location
----------------------- ------------------
<S> <C>
Change of Control Agreement of Form 10-K for fiscal year ended
of Leo E. Doyle, dated December 31, 1997, Exhibit 10.a
November 16, 1995
Change of Control Agreement of Form 10-K for fiscal year ended
James J. Pennetti, dated December 31, 1997, Exhibit 10.c
November 16, 1995
Change of Control Agreement of Form 10-K for fiscal year ended
Robert M. Sweeney, dated December 31, 1997, Exhibit 10.d
November 16, 1995
UNB Corp. 1997 Stock Option Plan Form DEF 14-A, dated April 15, 1997,
Appendix A
Amendment to the Change of Control Form 10-K for fiscal year ended
Agreement of Leo E. Doyle, December 31, 1997, Exhibit 10.f
dated January 16, 1997
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of December 31, 1997, Exhibit 10.h
James J. Pennetti,
dated January 16, 1997
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Contract or Arrangement Reference Location
----------------------- ------------------
<S> <C>
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of December 31, 1997, Exhibit 10.i
Robert M. Sweeney,
dated January 16, 1997
Employment Contract by and Form 10-K for fiscal year ended
between Roger L. Mann and December 31, 1997, Exhibit 10.k
UNB Corp. and United National
Bank and Trust Co., dated
April 17, 1997
Change of Control Agreement of Form 10-K for fiscal year ended
Charles J. Berry, dated December 31, 1997, Exhibit 10.l
May 15, 1997
Change of Control Agreement of Form 10-K for fiscal year ended
Roger L. Mann, dated December 31, 1997, Exhibit 10.m
June 1, 1997
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of Roger L. December 31, 1997, Exhibit 10.n
Mann, dated December 10, 1997
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of Leo E. December 31, 1997, Exhibit 10.o
Doyle, dated December 10, 1997
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of James J. December 31, 1997, Exhibit 10.p
Pennetti, dated December 10, 1997
Amendment to the Change of Form 10-K for fiscal year ended
Control Agreement of Robert December 31, 1997, Exhibit 10.q
M. Sweeney, dated
December 10, 1997
</TABLE>
b. REPORTS ON FORM 8-K
One report on Form 8-K was filed during the last quarter of the year
ending December 31, 1998. The report, filed October 15, 1998, reported
the declaration by the Board of Directors of UNB Corp. of a dividend
of one common share purchase right for each outstanding common share,
no par value. The dividend was payable on October 26, 1998 to
shareholders of record on that date. Each Right entitles the
registered holder to purchase from the Corporation one common share,
without par value, of the Corporation at a price of $60.00, subject to
adjustment. The description and terms of the Rights are set forth in a
Rights Agreement dated as of October 15, 1998, between the Corporation
and United National Bank & Trust Company, as Rights Agent. The Rights
Agreement sets forth the circumstances under which the Rights
certificates will be distributed. A copy of the Rights Agreement was
filed with the Form 8-K as Exhibit 99.1.
23
<PAGE> 24
c) Exhibits
See the Exhibit Index which appears following the Signatures section
of this report.
d) Financial Statements
See subparagraph (a)(1) above.
24
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Roger L. Mann
---------------------------------------
Roger L. Mann, President and Chief
Executive Officer
Date 3/11/99
-----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Roger L. Mann President, Chief 3/11/99
- -------------------------- Executive Officer -----------------------
Roger L. Mann (Principal Executive
Officer) and Director
/s/ James J. Pennetti Vice President 3/11/99
- -------------------------- and Treasurer -----------------------
James J. Pennetti (Principal Financial
and Accounting Officer)
/s/ Donald W. Schneider Chairman of 3/11/99
- -------------------------- the Board and -----------------------
Donald W. Schneider Director
absent Director
- --------------------------- -----------------------
Louis V. Bockius III
/s/ E. Lang D'Atri Director 3/11/99
- --------------------------- -----------------------
E. Lang D'Atri
/s/ Robert J. Gasser Director 3/11/99
- --------------------------- -----------------------
Robert J. Gasser
23
<PAGE> 26
SIGNATURES(continued)
/s/ Nan Johnston Director 3/11/99
- --------------------------- -----------------------
Nan Johnston
/s/ Edgar W. Jones, Jr Director 3/11/99
- --------------------------- -----------------------
Edgar W. Jones, Jr.
absent Director
- --------------------------- -----------------------
Harold M. Kolenbrander, Ph.D.
/s/ Russell W. Maier Director 3/11/99
- --------------------------- -----------------------
Russell W. Maier
/s/ Robert L. Mang Director 3/11/99
- --------------------------- -----------------------
Robert L. Mang
absent Director
- --------------------------- -----------------------
James A. O'Donnell
absent Director
- --------------------------- -----------------------
E. Scott Robertson
/s/ Marc L. Schneider Director 3/11/99
- --------------------------- -----------------------
Marc L. Schneider
/s/ Abner A. Yoder Director 3/11/99
- --------------------------- -----------------------
Abner A. Yoder
26
<PAGE> 27
EXHIBIT INDEX
-------------
Regulation S-K
Exhibit Number Exhibit Description
- -------------- -----------------------------------
11 Statement regarding Computation of Per Share
Earnings (included in Note 1 to the Consolidated
Financial Statements, 1998 Annual Report to
Shareholders under the caption "Earnings and
Dividends Declared Per Share").
13 UNB Corp. Annual Report to Shareholders for the
Fiscal Year Ended December 31, 1998.
21 Subsidiaries of the Registrant (exhibit is filed
herewith).
22.a Proxy Statement of UNB Corp. and Notice
for the Annual Meeting of Shareholders on
April 20, 1999, dated February 19, 1999.
(Incorporated by reference to Form DEF
14.A filed by UNB Corp., dated February
19, 1999).
22.b Proxy Statement of UNB Corp. and Notice
of Special Meeting of Shareholders on
October 1, 1998 dated August 17, 1998.
(Incorporated by reference to Form DEF
14.A filed by UNB Corp., dated August
17, 1998).
27 Financial Data Schedule for 1998(submitted as part
of electronic filing only)
27
<PAGE> 1
A Family of Financial Services
UNITED
MORTGAGE LENDING
UNITEDBANK
AIRCRAFT FINANCE GROUP
UNITED
BUSINESS LEASING
UNITEDBANC
FINANCIAL SERVICES
UNITED
PRIVATE INVESTORS GROUP
UNITEDBANK
A SUBSIDIARY OF UNB CORP.
UNITED
INSURANCE AGENCY
UNB CORP LOGO
ANNUAL REPORT
1998
<PAGE> 2
NET GAIN
UNB CORP
A TRADITION OF CONTINUOUS GROWTH
ANNUAL REPORT 1998
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS 1
<S> <C>
President's Message ......................... 2
Chairman's Message........................... 5
Management Teams............................. 6
Board of Directors........................... 10
Community Advisory Boards.................... 11
Management................................... 12
Locations.................................... 14
Corporate Information........................ 15
Report of Management......................... 17
Report of Independent Auditors............... 17
Consolidated Financial Statements............ 18
Notes to Consolidated Financial Statements... 22
Management's Discussion and Analysis......... 36
Five Year Summary of Selected Data........... 51
</TABLE>
SUMMARY OF SELECTED DATA
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For The Year 1998 1997 % of Change
................................................................................
<S> <C> <C> <C>
Total Interest Income $66,005 $63,362 4.17%
Total Interest Expense 30,583 30,322 0.86%
Net Income 10,900 9,006 21.03%
AT YEAR END
................................................................................
Assets $868,743 $826,313 5.13%
Deposits 685,494 649,481 5.54%
Total Net Loans 660,261 620,768 6.36%
Investment Securities 134,449 140,838 -4.54%
Shareholders' Equity 71,702 76,520 -6.30%
PER COMMON SHARE*
................................................................................
Net Income $0.96 $0.78 23.08%
Cash Dividends Paid 0.365 0.325 12.31%
Book Value 6.46 6.62 -2.42%
PERFORMANCE RATIOS
................................................................................
Return on Assets 1.27% 1.11% 14.41%
Total Risk-Based Capital 11.46% 13.28% -13.70%
Capital Leverage 7.41% 8.24% -10.07%
Allowance for Loan
Losses/Total Loans 1.66% 1.53% 8.50%
*Per share data has been adjusted for any stock dividends and splits.
UNB CORP. COMMON STOCK
At Year End 1998 1997 1996 1995
................................................................................
Market Value - Bid $20.00 $19.63 $15.00 $11.00
Market-to-Book Premium 309.6% 296.7% 243.3% 193.6%
</TABLE>
<PAGE> 4
2
[PHOTO] "EXCELLENT RESULTS WERE THROUGH THE EFFORTS OF THE MANY FINE
PROFESSIONALS"
To our shareholders,
We are pleased to report that 1998 was a year of excellent growth and
profitability for UNB Corp. After tax profits increased 21% from $9.0 million,
or $0.78 per share in 1997, to $10.9 million, or $0.96 per share in 1998. Assets
increased 5.1% from $826.3 million as of December 31, 1997, to $868.7 million as
of December 31, 1998. The above-mentioned results represent historic returns for
your corporation.
Recently a dear friend lent me his book entitled You Win With People
written by one Woodrow "Woody" Hayes, the great coach from Ohio State. I believe
strongly that you also create superior corporate performance through people and
much of UNB Corp.'s excellent year is a direct result of our personnel elevating
their performance in 1998. This drive for excellence will continue to be
necessary for success in our turbulent business environment. I believe the
quality of our people allows us the ability to move quickly in the marketplace
and to out perform our competition in the delivery of products and services.
UNB Corp. employed a multifaceted approach toward increasing profitability
last year by concentrating on expansion, fee income, and consolidation.
We expanded our market position by the acquisition of our aviation group
from Bank One last June. The acquisition of this specialized line of business
fits in perfectly with our expertise in fulfilling the financial needs of
businesses and high net-worth individuals. With offices in Ohio, California,
Florida, and Kansas, the United Aircraft Finance Group enables us to take
advantage of opportunities outside our traditional market. We also created a new
sub-prime mortgage group which permits us access to new mortgage markets. Both
of these activities were very successful in 1998. We also opened our third
Financial MarketPlace in-store office in the Wooster Wal*Mart Supercenter. This
is our first venture into Wayne County and we are optimistic about our
opportunities there, as we have been able to recruit several outstanding people
from the Wooster area. We will also announce shortly the opening of a full
service banking operation in Green, which we believe will be very successful.
Fee income was substantially enhanced through our trust group and our
mortgage group. Our trust group experienced solid growth with assets under
management increasing 24.6% over 1997 to $926.6 million as of December 31, 1998.
Within the trust group we also had a superior performance by our investment
management group as their returns far exceeded the performance of the Standard &
Poor's 500 Index. Our mortgage group continued its dramatic growth by ranking
first in Stark County in 1998 for mortgage originations. Again, I believe these
excellent results were through the efforts of the many fine professionals we
have in these two areas of the corporation.
A financial services corporation has the responsibility to deliver quality
service as efficiently as possible. The increase in product delivery through our
telephone banking call center and computer access creates the opportunity to
consolidate branches, thus lowering expenses by eliminating overlapping
resources. During 1998 we consolidated our Beach
<PAGE> 5
we are
pleased
to report
3
City and Brewster offices as well as the Uniontown and Hartville offices. We
must continue to look for additional opportunities to combine operations that
will offer greater efficiencies without diminishing customer service.
As we move closer to the new millennium, you can be assured your
corporation is taking significant pro-active steps to prepare for the Year 2000
(Y2K). We have dedicated substantial human capital and financial resources to
test, validate, and certify that our systems will be prepared for the required
changes to be successful in the new century. During 1998 and throughout the
balance of 1999 we will continue testing our systems and those of our
third-party vendor alliances while developing contingency plans to comply with
the requirements of bank regulators. We are aware that many of our key vendor
systems are already Y2K compliant. As we move forward, we will continue to
contact our customers to keep them informed of our progress and to determine
their level of readiness as well. I feel confident that our efforts with this
project will be successful and we will move into the next century in a very
positive fashion.
As you can see, UNB Corp. has made significant strides in developing a
"family of financial services." It is our intention, through superior execution,
to build a premier financial service organization to serve our customers and
marketplace well into the future. Our family of providers include: United
National Bank & Trust Co., United Banc Financial Services, Inc., United Mortgage
Lending Group, and United Insurance Agency. We also added three new areas in
1998: United Private Investors Group, United Bank Aircraft Finance Group, and
United Business Leasing Group. By continuing to add new lines of business,
either through product development, acquisitions or third-party alliances, we
can continue to further fulfill our customer's financial and investment needs.
We continue to be very optimistic about the future growth of UNB Corp. and
its family of products and services. As we expand our product offerings, improve
the efficiency and capacity of our delivery channels, and differentiate
ourselves from our competition through superior execution, we believe we can
continue to profitably grow market share. We further believe that in the
continuing atmosphere of mergers and acquisitions, UNB Corp. and its family of
financial services will strive to remain independent and thrive through the
efforts of our personnel who continue to be the most important resource of UNB
Corp. Even in the technological world of today we continue to believe that
excellence in business is achieved primarily through superior performance by a
corporation's human capital. We therefore continue to believe that "you win with
people."
THE
PRESIDENT'S
MESSAGE
1998
Thank you for your continual support.
Respectfully,
/s/ Roger L. Mann
Roger L. Mann, President, Chief Executive Officer, UNB Corp.
<PAGE> 6
4
<TABLE>
<CAPTION>
NET INCOME
millions of dollars
[BAR CHART]
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
$6.628 $7.379 $8.155 $9.006 $10.900
1994 1995 1996 1997 1998
-----------------------------------------------
</TABLE>
The increase in net income equates to an annualized growth
rate of 11.5% over the last five years.
[PHOTO]
"Our stock
has proved to
be an outstanding
investment"
<TABLE>
<CAPTION>
CASH DIVIDENDS PER SHARE*
dollars
[BAR CHART]
------------------------------------------------
<S> <C> <C> <C> <C> <C>
$.240 $.265 $.295 $.325 $.365
1994 1995 1996 1997 1998
-----------------------------------------------
The increase in dividends per share equates to an annualized
growth rate of 11.0% over the last five years.
*Adjusted for any stock dividends and splits
</TABLE>
<TABLE>
<CAPTION>
UNB CORP. STOCK MARKET
VALUE-BID*
[BAR CHART]
-----------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.63 $11.00 $15.00 $19.63 $20.00
1994 1995 1996 1997 1998
-----------------------------------------------
</TABLE>
The increase in the stock price equates to an annualized
growth rate of 22.5% over the last five years.
*Adjusted for any stock dividends and splits
<PAGE> 7
5
to our
shareholders
As your Chairman, I am pleased to report that by all economic measures,
1998 was another excellent year for UNB Corp. and its shareholders. UNB Corp.
has experienced 37 years of consistent profitability, a tradition of continuous
growth of which we can all be very proud. In 1998, UNB Corp. once again
increased the amount it earned for shareholders. Earnings per share grew 23%
from $0.78 per share in 1997 to $0.96 per share in 1998. I'm sure that this
consistent solid growth of the investment you made in your Company is very
reassuring, especially in light of the tumultuous swings in the stock market we
all witnessed last year.
UNB Corp. maintained the efficient use of capital resources in 1998. The
return on equity rose from 12.20% at year-end 1997 to 14.19% at year-end 1998,
an increase of 16.3%. We believe it is vital to maintain a balance of the equity
return with the return on assets. The Management team has again maintained this
balance by growing the ROA from 1.11% in 1997 to 1.27% in 1998, an increase of
14.4%.
As you are all aware, this past year has been one of serious review for all
financial institutions, and the international banks involved in loans to Asian,
Russian, and South American countries have been severely punished by the
investment community. This, to a lesser extent, has carried over to the large
domestic, regional, and independent financial institutions. Our stock price has
remained rock solid. While experiencing little advancement, it did not surrender
any value. Quite an achievement!
On October 15, 1998, UNB Corp. executed the third 2-for-1 stock split since
1993. The stock split at $40 per share and ended 1998 at $20 per share. Cash
dividends per share grew 12.3% from $0.325 in 1997 to $0.365 in 1998, after
adjusting for the stock split. UNB Corp.'s cash dividends as a percentage of
income continued to outperform banks in our peer group in 1998.
Another subject which could have a direct effect on all of us is the ever
increasing drum beat from the Media that the computer millennium problem (Y2K)
will bring the economic community to its knees. It is vital that the Company be
very well prepared for this eventuality. We have dedicated substantial resources
to preparedness and are treating this issue with the serious attention it
deserves. I know we will be ready! We need your help in allaying any concerns
you or your friends might have about our ability to continue to serve your needs
or the needs of the depositors and customers without interruption into the year
2000 and beyond.
THE
CHAIRMAN'S
MESSAGE
1998
I am optimistic and excited about the continued growth and profitability of
UNB Corp. and its family of financial services in 1999. As Chairman of the
Board, and a shareholder, I believe our stock has proved to be an outstanding
investment. As an update to a review we did last year, $100 worth of stock
bought 15 years ago would now have grown into an investment of $1,640, a
handsome return for the confidence you have placed in us over the years.
Given our outstanding performance in 1998 and the skill demonstrated by our
Management team, and with the knowledge of our coming plans, I believe 1999 will
be another outstanding year which will sweep us into the next century.
Sincerely,
/s/ Donald W. Schneider
Donald W. Schneider, Chairman of the Board, UNB Corp.
<PAGE> 8
6
[PHOTO]
Scott E. Dodds, Executive Vice President
Jeffrey H. McHenry, Sales Officer
Michele R. Harris, Operations Officer
United Bank Mortgage Group finished 1998 as Stark County's #1 mortgage
lender once again.* Our philosophy of providing the best service in the mortgage
industry enabled us to continue our tradition of growth for yet another year. By
delivering quick responses to customers and fast turnaround time on loan
approvals, United Bank Mortgage kept customers satisfied and solidified our
valuable Realtor referral source. And, through United Banc Financial Services,
Inc., we became even more flexible in our lending capabilities. By providing
alternative financing options, we are now able to serve a broader segment of our
market than ever before.
United Bank
Mortgage Group
United Banc
Financial Services,
Inc.
*As reported by the Credit Bureau of Columbus Companies.
<PAGE> 9
Stephen C. Asper, Vice President
Leo E. Doyle, Executive Vice President 7
[PHOTO]
The United Bank Commercial Group pursued its tradition of continuous growth
in 1998 by following new paths, including the airways. In June, United Bank
acquired the Aircraft Finance Group, a line of business that fits in well with
our closely-held business and high-net worth individual customer base. The
Aircraft Finance Group contributed substantially to commercial loan growth in
1998. The Commercial Group also added business leasing to its repertoire of
services through a new third-party alliance. United Bank can now offer its
business customers leases of virtually any amount for computers, telephone
systems, machinery, and more.
United Bank
Commercial
Group
United Bank
Aircraft Finance
Group
<PAGE> 10
8
[PHOTO]
James J. Pennetti, Executive Vice President
Derek G. WIlliams, Vice President
United Bank's Retail Group expanded into Wayne County in 1998 when we
opened a Financial MarketPlace office inside the Wooster Wal-Mart Supercenter.
The third of our in-store facilities, the Wooster Financial MarketPlace gave our
sales staff access to thousands of Wal-Mart shoppers every week, and established
our presence in Wayne County. Exceptional growth in sales resulted from our
Telephone Banking Center last year. Customers are quickly adapting to banking
over the phone and applying for loans, home equity lines of credit, and opening
deposit accounts. The Retail Group continuously explores new delivery methods to
make banking more convenient for customers.
United Bank
Retail
Group
<PAGE> 11
9
[PHOTO]
James H. Rutledge, Vice President
Robert J. Barnes, Vice President
Robert M. Sweeney, Executive Vice President
Linda M. Zaleski, Vice President
The United Bank Trust Group carried on its tradition of outstanding
growth in 1998. Our success is due in part to our investment philosophy, which
is to manage each portfolio individually to satisfy each customer's unique
needs. We offer a wide variety of trust services with expertise in all aspects
of individual and corporate trust services, including personal trust management,
employee benefit plan administration, investment services, and tax consulting. A
great factor in our equation for success is the team of individuals we have
assembled who provide the knowledge, expertise and personal attention that our
customers have come to expect from United Bank.
United Bank
Trust
Group
<PAGE> 12
10
[PHOTO]
UNB Corp.
Board of Directors
1998
1. Roger L. Mann, President and CEO, UNB Corp. CEO, United National Bank &
Trust Co.
2. Donald W. Schneider, Chairman of the Board, President, Schneider Lumber Co.
3. Louis V. Bockius III, Chairman, Bocko, Inc.
4. Robert J. Gasser, Consultant, John Gasser & Son Jewelers
5. Edgar W. Jones, Jr., President, Hal Jones Construction Co.
6. Nan B. Johnston, Director, Stark County District Library
7. E. Lang D'Atri Vice Chairman of the Board, Attorney at Law, Zollinger,
D'Atri, Gruber, Thomas & Co.
8. Harold M. Kolenbrander, Ph.D., President, Mount Union College
9. James A. O'Donnell, Retired President, United National Bank & Trust Co.
10. Russel W. Maier, Vice Chairman, Board of Republic Technology International
11. Robert L. Mang, Retired President and CEO, UNB Corp. & United National Bank
& Trust Co.
12. E. Scott Robertson, President, Robertson Heating Supply Co.
13. Abner A. Yoder, President, Stark Truss Co.
14. Marc L. Schneider, Treasurer, Schneider Lumber Co.
HONORARY DIRECTORS EMERITI
Robert L. Hammond
F.E. Henry III
Thomas C. Lavery
David W. Reed, Jr.
John D. Regula
James P. Rodman
W.W. Steele, Jr.
George N. Swallow
Leroy L. Zang
<PAGE> 13
11
ALLIANCE
Carol A. Barnett, Chair
Carol L. Cardinal
W. Jeffrey Egli
Richard L. Elliott
Bradley Goris
Mark M. Henschen
Thomas C. Lavery
David C. McAlister
Richard C. Sherer
George K. Weimer, Jr.
BEACH CITY/BREWSTER
Robert W. Andrews, Chair
Thomas J. Andrews
Dorothy G. Beals
Marion Belloni
Priscilla J. Cunningham
Lee W. Foster, Jr.
Luke W. Grabill
Charles B. Hawk
Milo J. Miller
John D. Regula
Thomas Riegler
C. Waid Spidell
George F. Stertzbach
David E. Stucki
John A. Yoder
CANAL FULTON
George C. Mizarek, Chair
Corita C. Childs
Louis A. DiStefano
Benjamin R. Easterling
David C. Ewing
James E. Kunkle
Gary D. Radabaugh
Sherry L. Ringler
Charles M. Schwendiman
Glen E. Swigart
John H. Workman
LAKE TOWNSHIP
E. Lang D'Atri, Chair
Edmond J. DiGiacomo
Rosalee Haines
Daniel K. Hanlon
Edward W. Heisler
Hall B. Miles, III
Howard Miller, Jr.
Christian D. Ramsburg
Lynn E. Stuhldreher
George N. Swallow
David A. Vanderkaay
Barbara K. Wentz
Jeffrey W. Zellers
MASSILLON
Randall A. Hutsell, Chair
Deborah J. Bachtel
Marilyn L. Fogle
Robert J. Groenke, Jr.
Nancy A. Johnson
Jacque E. Jones
Richard G. Leffler, Jr.
Mark R. Percival
James D. Snively
Walter J. Telesz, M.D.
Robert K. Yund
Community
Advisory Boards
1998
<PAGE> 14
A Tradition
of
Continuous
Growth
The Management
1998
12
UNB CORP.
Roger L. Mann
President
Chief Executive Officer
James J. Pennetti
Vice President
Corporate Treasurer
Robert M. Sweeney
Corporate Secretary
CORPORATE AUDIT
Robert L. Young
Vice President
Chief Internal Auditor
UNITED BANC
FINANCIAL SERVICES, INC.
Roger L. Mann
President
Chief Executive Officer
Charles J. Berry
Treasurer
James J. Pennetti
Secretary
Scott E. Dodds
Executive Vice President
Jeffrey H. McHenry
Sales Officer
UNITED INSURANCE
AGENCY,INC.
Roger L. Mann
President
Chief Executive Officer
Charles J. Berry
Treasurer
James J. Pennetti
Secretary
UNITED NATIONAL BANK
& TRUST CO.
Roger L. Mann
Chief Executive Officer
COMMERCIAL GROUP
Leo E. Doyle
Executive Vice President
AIRCRAFT FINANCE GROUP
Stephan C. Asper
Vice President
COMMERCIAL LENDING
Richard F. Kress
Vice President
Ronald P. Dezenzo
Vice President
Jeffrey A. Ferry
Vice President
Robert P. Nelson
Vice President
William F. Schumacher
Vice President
Edward C. Koch
Assistant Vice President
Randall W. Geis
Business Manager Officer
PRIVATE BANKING
David M. Roberts
Vice President
CREDIT AND LOAN
ADMINISTRATION GROUP
CREDIT ADMINISTRATION
Vicki L. Williamson
Credit Officer
LOAN REVIEW
Paul J. Durbak, Jr.
Assistant Vice President
FINANCIAL GROUP
Charles J. Berry
Senior Vice President
Chief Financial Officer
ACCOUNTING
Loretta M. Higgins
Vice President
Renee K. Wood
Accounting Officer
<PAGE> 15
13
ASSET & LIABILITY
MANAGEMENT
Vanessa M. Richards
Vice President
Raymond Hannan
Investment Operations Officer
METHOD ANALYST
Sheldon F. Everhart
Vice President
HUMAN RESOURCES GROUP
Jerilynn Ferguson
Vice President
Barbara M. Heinricher
Assistant Vice President
MARKETING GROUP
Stephen J. Badman
Vice President
Sarah H. McIntosh
Marketing Officer
MORTGAGE GROUP
Scott E. Dodds
Executive Vice President
Michele R. Harris
Operations Officer
DIRECT LENDING
Arthur S. Marangi
Retail Lending Officer
INDIRECT LENDING
Daryl L. Marshall
Vice President
RETAIL UNDERWRITING
Paul E. Ibsen
Consumer Loan Officer
RETAIL GROUP
James J. Pennetti
Executive Vice President
ADMINISTRATIVE SERVICES
John J. Kennedy
Vice President
DEPOSIT OPERATIONS
Rebecca A. Geis
Vice President
Betsy J. Cinson
Operations Officer
INFORMATION SYSTEMS
Robert J. Blackburn
Vice President
Richard D. Gamary
Assistant Vice President
Eileen G. Halter
Assistant Vice President
William J. Holland
Data Processing Officer
LOAN OPERATIONS
Paula J. Lightbody
Vice President
RETAIL SALES & SERVICE
Derek G. Williams
Vice President
Cynthia S. Griffith
Assistant Vice President
BUSINESS BANKING
Charleen A. Davidson
Assistant Vice President
Dan M. Friedman
Assistant Vice President
Catherine Dluzyn-Hegarty
Electronic Banking Officer
Kathleen J. Tripp
Personal Banking Officer
SECURITY/COMPLIANCE
Duane J. Shamp
Vice President
Monica J. Graves
CRA Officer
TRUST SERVICES GROUP
Robert M. Sweeney
Executive Vice President
Robert J. Barnes
Vice President
Managing Officer,
Trust Investments
Philip L. Francis
Vice President
Managing Officer,
Alliance
Samuel M. Lincoln
Vice President
Managing Officer,
Employee Benefits
James H. Rutledge
Vice President
Managing Officer,
Personal Trusts
Linda M. Zaleski
Vice President
Administration
J. Michelle Leasure
Assistant Vice President
Personal Trust Officer
Richard J. Reiland, Jr.
Assistant Vice President
Employee Benefits Trust Officer
Connie S. Brodzinski
Personal Trust Officer
Rebecca S. Eberle
Personal Trust Officer
Paul D. Guerra
Business Development Officer
Robert L. Hammond
Trust Investment Officer
Jeffrey D. Roberts
Trust Tax Officer
Kevin E. Sembach
Trust Investment Officer
<PAGE> 16
14
UNITED BANK
FINANCIAL CENTERS
ALLIANCE
Mount Union Office
Velma A. Traphagen
Assistant Vice President
Sales and Service Officer
BREWSTER
Brewster Office
Ruth M. Wisselgren
Assistant Vice President
Sales and Service Officer
CANAL FULTON
Canal Fulton Office
Tracy A. Murray
Sales and Service Officer
CANTON
34th & Cleveland Office
Scott H. Berkeley
Sales and Service Officer
Hillsdale Office
Terri L. King
Sales and Service Officer
Lake Cable Office
Patricia A. Hoopes
Assistant Vice President
Sales and Service Officer
NewMarket Office
Karen J. Mathes
Sales and Service Officer
Raff/West Tusc. Office
Deborah J. Miller
Assistant Vice President
Sales and Service Officer
Joyce A. Midkiff
Operations Officer
Rotunda Office
Regina L. Kinlow-Thompson
Sales and Service Officer
HARTVILLE
Hartville Office
Julie Schlemmer
Sales and Service Officer
MANCHESTER
Manchester Office
Tracy A. Murray
Sales and Service Officer
MASSILLON
Amherst Office
Michelle L. Del Rio
Sales and Service Officer
Downtown Office
Jayne A. Ferrero
Sales and Service Officer
Perry Office
Ruth A. Patterson
Sales and Service Officer
NORTH CANTON
North Canton Office
Dan E. Young
Sales and Service Officer
Portage and Frank Office
Dan E. Young
Sales and Service Officer
UNITED BANK
FINANCIAL
MARKETPLACES
ALLIANCE
Alliance Wal*Mart Office
Toni L. Carpenter
Sales and Service Officer
GREEN
Green Giant Eagle Office
Melissa M. Way
Sales and Service Officer
WOOSTER
Wooster Wal*Mart Office
Stacy S. Radabaugh
Sales and Service Officer
UNITED BANK DRIVE-UP BANKING CENTERS
MASSILLON
Wales Square Office
Michelle L. Del Rio
Sales and Service Officer
NORTH CANTON
Belden Village Office
Dan E. Young
Sales and Service Officer
UNITED BANK TELEPHONE BANKING CENTER
Elizabeth M. Carr
Telephone Banking
Center Manager
UNITED BANK AIRCRAFT FINANCE OFFICES
AKRON/CANTON AIRPORT
Stephan C. Asper
Vice President
SACRAMENTO, CA
Craig A. Richardson
Regional Sales Representative
ORLANDO, FL
David R. Madden
Regional Sales Representative
WICHITA, KS
Lisa J. Stroud
Administrative Assistant
UNITED BANC
FINANCIAL SERVICES
NORTH CANTON
Portage and Frank Office
Todd R. Turner
Branch Manager
CANTON
Whipple Avenue Office
Jeffrey H. McHenry
Sales Officer
GREEN
Green Office
Jeffrey H. McHenry
Sales Officer
Locations
1998
<PAGE> 17
15
CORPORATE HEADQUARTERS
220 Market Avenue South
Canton, Ohio 44702
(330) 438-1200 or (800) 773-4862
STOCK SYMBOL
UNBO
INTERNET HOME PAGE
UNB Corp
www.unbcorp.com
United National Bank & Trust Co.
www.united-bank.com
COMPANY NEWS
You can get news about UNB Corp. and its subsidiaries by clicking on PRESS
RELEASES under COMPANY NEWS on our home page. You will be connected to
PRNewswire where you can search through press releases that have been issued
since the beginning of the year. If you do not have internet access, you can
call 1-800-758-5804 toll-free and request a fax of a press release. When you
call, you will need the Company's six digit extension number which is 127633.
STOCK TRANSFER AGENT
United National Bank & Trust Co.
Attn: Investment Dept.
P.O. Box 24190
Canton, Ohio 44701
For change of name, address or to replace lost stock certificates, write to
United National Bank & Trust Co. at the above address or phone (330) 438-1206 or
(800) 773-4862.
SEC FORM 10-K
Shareholders may receive a copy of
the Corporation's Form 10-K by
visiting the Securities and Exchange
Commission's (SEC) website at
www.sec.gov and choose `Search The
Edgar Database.'
ANNUAL MEETING
The Annual Shareholders Meeting will be held on Tuesday, April 20, 1999, at
11:30 a.m. at the Canton Hilton, 320 Market Avenue South, Canton, Ohio.
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
Cleveland, Ohio
UNB CORP. SHAREHOLDER RELATIONS
(330) 438-1206 or
toll-free (800) 773-4862
MARKET PRICE RANGE OF COMMON SHARES
The Corporation's common stock trades on the Over-The-Counter Bulletin Board
(OTCBB) under the symbol UNBO. The following table sets forth the high and low
bid prices for the Corporation's common stock during the periods indicated:
<TABLE>
<CAPTION>
1998 Bid 1997 Bid
High Low High Low
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
1st Quarter $19.69 $19.63 $16.00 $15.00
2nd Quarter 20.00 19.69 18.00 16.00
3rd Quarter 20.19 20.00 19.00 18.00
4th Quarter 20.38 20.00 19.62 19.00
</TABLE>
The shares of Common Stock, stated value $1.00 per share, of UNB Corp. are
traded on the over-the-counter market primarily with brokers in the
Corporation's service area.
The above quoted market prices reflect inter-dealer prices, without adjustments
for retail markups, markdowns, or commissions and may not represent actual
transactions.
SHAREHOLDERS
As of January 31, 1999, the Corporation had 1,491 shareholders of record
and an estimated 1,200 additional beneficial holders whose stock was held in
street name by brokerage houses.
Corporate
Information
1998
<PAGE> 18
CONSOLIDATED FINANCIAL
STATEMENTS
1998
<PAGE> 19
17
REPORT OF MANAGEMENT
The management of UNB Corp. is responsible for preparing financial statements
and establishing and maintaining effective internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and the Federal Financial Institutions Examination Council
instructions for Consolidated Reports of Condition and Income (call report
instructions). The internal control system contains monitoring mechanisms, and
actions are taken to correct deficiencies and safeguard assets.
The objective of an internal control structure is to provide reasonable, but
not absolute, assurance as to the integrity and reliability of financial
statements. There are inherent limitations in the effectiveness of any system of
internal control, including the possibility of human error and the circumvention
or overriding of controls; therefore, the effectiveness of an internal control
system may vary over time.
Management assessed the Corporation's internal controls over financial
reporting presented in conformity with both generally accepted accounting
principles and call report instructions as of December 31, 1998. This assessment
was based on criteria for effective internal control over financial reporting
described in Statement on Auditing Standards No. 78 "Internal Control in a
Financial Statement Audit" issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants. Based on this assessment,
management believes that as of December 31, 1998, UNB Corp. maintained effective
internal controls over financial reporting presented in conformity with both
generally accepted accounting principles and call report instructions.
/s/ Roger L. Mann
Roger L. Mann
President and Chief Executive Officer,
UNB Corp. Chief Executive Officer,
United National Bank & Trust Co.
/s/ Charles J. Berry
Charles J. Berry
Senior Vice President and Chief Financial Officer
United National Bank & Trust Co.
- --------------------------------------------------------------------------------
Report of Independent Auditors [CROWE CHIZEK LOGO]
Board of Directors and Shareholders
UNB Corp., Canton, Ohio
We have audited the accompanying consolidated balance sheets of UNB Corp. as
of December 31, 1998 and 1997, and the related consolidated statements of
income, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements present fairly, in all
material respects, the financial position of UNB Corp. as of December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Cleveland, Ohio,
January 21, 1999
<PAGE> 20
<TABLE>
<CAPTION>
18
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
DECEMBER 31, 1998 AND 1997
(in thousands of dollars, except per share data) 1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 13) .................................................. $ 28,195 $ 28,998
Federal funds sold ................................................................... 12,300 7,500
Interest bearing deposits with banks ................................................. 554 1,142
Securities, net (Fair value:
1998-$52,950; 1997-$72,999) (Note 2) ............................................ 52,945 72,993
Mortgage-backed securities (Fair value:
1998-$81,529; 1997-$67,922) (Note 2) ............................................ 81,504 67,845
Loans held for sale .................................................................. 6,772 2,190
Loans:
Total loans (Notes 3 and 8) ..................................................... 671,433 630,418
Less allowance for loan losses (Note 4) ......................................... (11,172) (9,650)
--------- ---------
Net loans ................................................................... 660,261 620,768
Premises and equipment, net (Note 5) ................................................. 11,152 11,727
Intangible assets .................................................................... 4,333 5,339
Accrued interest receivable and other assets ......................................... 10,727 7,811
--------- ---------
TOTAL ASSETS ........................................................... $ 868,743 $ 826,313
========= =========
LIABILITIES
Deposits:
Noninterest bearing demand deposits ............................................. $ 102,101 $ 82,173
Interest bearing deposits (Note 6) .............................................. 583,393 567,308
--------- ---------
Total deposits .............................................................. 685,494 649,481
Short-term borrowings (Note 7) ....................................................... 61,311 56,511
FHLB advances and capital lease (Note 8) ............................................ 41,571 35,650
Accrued taxes, expenses, and other liabilities ....................................... 8,665 8,151
--------- ---------
Total liabilities ...................................................... 797,041 749,793
--------- ---------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY (Note 1)
Common stock - $1.00 stated value, 50,000,000 shares
authorized; 11,646,362 and 5,821,369 shares issued
at December 31, 1998 and 1997, respectively ........................................ 11,646 5,821
Paid-in capital ...................................................................... 30,872 31,277
Retained earnings .................................................................... 38,049 37,123
Treasury stock, 547,446 and 37,154 shares at cost .................................... (11,149) (1,440)
Unrealized gain on securities available for sale, net ................................ 2,284 3,739
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................................. 71,702 76,520
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ......................... $ 868,743 $ 826,313
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 21
<TABLE>
<CAPTION>
19
CONSOLIDATED STATEMENTS OF INCOME
For the three years ended December 31, 1998
(in thousands of dollars, except per share data) 1998 1997 1996
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans:
Taxable ..................................................... $56,358 $54,549 $50,951
Tax-exempt .................................................. 140 185 226
Interest and dividends on investments
and mortgage-backed securities:
Taxable ..................................................... 8,608 7,746 7,341
Tax-exempt .................................................. 29 52 58
Interest on deposits with banks ...................................... 23 34 110
Interest on federal funds sold ....................................... 847 796 503
------- ------- -------
Total interest income ....................................... 66,005 63,362 59,189
------- ------- -------
INTEREST EXPENSE:
Interest on deposits (Note 6) ........................................ 24,791 23,470 21,438
Interest on short-term borrowings .................................... 2,954 2,767 2,784
Interest on FHLB advances and capital leases ......................... 2,838 4,085 3,604
------- ------- -------
Total interest expense ...................................... 30,583 30,322 27,826
------- ------- -------
NET INTEREST INCOME ....................................................... 35,422 33,040 31,363
PROVISION FOR LOAN LOSSES (Note 4) ........................................ 2,748 2,929 3,140
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....................... 32,674 30,111 28,223
OTHER INCOME:
Service charges on deposits .......................................... 2,869 2,493 2,378
Trust Department income .............................................. 4,316 3,307 2,714
Other operating income ............................................... 1,900 1,114 897
Gains on loans originated for sale ................................... 1,056 261 --
Investment securities gains, net ..................................... 793 22 369
------- ------- -------
Total other income .......................................... 10,934 7,197 6,358
------- ------- -------
OTHER EXPENSES:
Salaries, wages and benefits (Note 9) ................................ 13,205 11,361 10,806
Occupancy expense .................................................... 1,525 1,322 1,170
Equipment expense .................................................... 3,746 3,145 2,595
Other operating expenses (Note 11) ................................... 8,542 7,677 7,582
------- ------- -------
Total other expenses ........................................ 27,018 23,505 22,153
------- ------- -------
INCOME BEFORE INCOME TAXES ................................................ 16,590 13,803 12,428
PROVISION FOR INCOME TAXES (Note 12) ...................................... 5,690 4,797 4,273
------- ------- -------
NET INCOME ................................................................ $10,900 $ 9,006 $ 8,155
======= ======= =======
EARNINGS PER SHARE (Note 1):
Basic ................................................................ $ 0.96 $ 0.78 $ 0.71
Diluted .............................................................. $ 0.94 $ 0.76 $ 0.69
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 22
20
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the three years ended December 31, 1998
(in thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Accumulated
Compre- Other Total
Common Paid-In Retained Treasury hensive Comprehensive Shareholders'
Stock Capital Earnings Stock Income Income Equity
----- ------- -------- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 .................. $ 2,874 $ 31,603 $ 30,005 $ 845 $ 65,327
Net income for year .................... 8,155 $ 8,155 8,155
Other comprehensive income:
Unrealized gain(loss) on securities
available for sale, net of tax ... 328 328 328
--------
Comprehensive income ................... $ 8,483
========
Cash dividends ($0.295 per share) ...... (3,400) (3,400)
100% stock dividend .................... 2,881 (2,881)
Shares issued through dividend
reinvestment plan ................... 28 870 898
Stock options exercised ................ 3 24 27
-------- -------- ------- -------- --------
BALANCE, DECEMBER 31, 1996 ................ 5,786 32,497 31,879 1,173 71,335
Net income for year .................... 9,006 $ 9,006 9,006
Other comprehensive income:
Unrealized gain(loss) on securities
available for sale, net of tax ... 2,566 2,566 2,566
--------
Comprehensive income ................... $ 11,572
========
Cash dividends ($0.325 per share) ...... (3,762) (3,762)
Shares issued through dividend
reinvestment plan ................... 4 129 133
Stock options exercised ................ 31 158 189
Treasury stock purchases ............... $ (4,873) (4,873)
Treasury stock sold and issued
for stock options ................... (1,507) 3,433 1,926
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 ................ 5,821 31,277 37,123 (1,440) 3,739 76,520
Net income for year .................... 10,900 $ 10,900 10,900
Other comprehensive income:
Unrealized gain(loss) on securities
available for sale, net of tax ... (1,455) (1,455) (1,455)
--------
Comprehensive income ................... $ 9,445
========
Cash dividends ($0.365 per share) ...... (4,151) (4,151)
100% stock dividend .................... 5,823 (5,823)
Stock award ............................ 2 64 66
Treasury stock purchases ............... (11,582) (11,582)
Treasury stock sold and issued
for stock options ................... (469) 1,873 1,404
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 ................ $ 11,646 $ 30,872 $ 38,049 $(11,149) $ 2,284 $ 71,702
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 23
21
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three years ended December 31, 1998
(in thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................. $ 10,900 $ 9,006 $ 8,155
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization .......................................... 1,373 1,046 780
Provision for loan losses .............................................. 2,748 2,929 3,140
Net securities gains ....................................................... (793) (22) (369)
Net accretion on securities ............................................ (4) (797) (290)
Amortization of intangible assets ...................................... 1,006 1,014 1,023
Loans originated for sale .............................................. (67,272) (18,099) --
Proceeds from sale of loan originations ................................ 75,175 16,125 --
Changes in:
Interest receivable .................................................... (31) (249) (59)
Interest payable ....................................................... (269) (459) 414
Other assets and liabilities, net ...................................... (811) 3,113 (1,381)
Deferred income tax benefit ............................................ (588) (644) (785)
Deferred income ........................................................ (7) (3) (5)
--------- --------- ---------
Net cash from operating activities ................................ 21,427 12,960 10,623
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in interest bearing deposits with banks ......................... 588 (985) 358
Net change in federal funds sold ........................................... (4,800) (700) (2,500)
Investment and mortgage-backed securities:
Proceeds from sales of securities available for sale ................... 22,132 14,113 14,009
Proceeds from maturities of securities held to maturity ................ 1,060 6,993 22,035
Proceeds from maturities of securities available for sale .............. 103,851 169,015 32,978
Purchases of securities held to maturity ............................... (607) (6,878) (20,903)
Purchases of securities available for sale ............................. (103,255) (159,914) (68,659)
Purchases of mortgage-backed securities
available for sale ................................................... (49,256) (49,293) (12,638)
Principal payments received on
mortgage-backed securities held to maturity .......................... 5,302 6,383 9,250
Principal payments received on
mortgage-backed securities available for sale ........................ 25,808 16,336 20,413
Net increase in loans made to customers .................................... (19,940) (12,730) (98,817)
Loans purchased ............................................................ (35,374) (1,494) (2,251)
Purchases of premises and equipment, net ................................... (798) (2,729) (2,013)
Principal payments received under leases ................................... 588 236 149
Purchases of assets to be leased ........................................... -- (658) --
--------- --------- ---------
Net cash from investing activities ................................ (54,701) (22,305) (108,589)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................... 36,013 48,817 53,477
Cash dividends paid, net of shares issued
through dividend reinvestment ............................................ (4,151) (3,629) (2,502)
Purchase of treasury stock ................................................. (11,582) (4,873)
Sales of treasury stock .................................................... 1,404 1,926
Proceeds from issuance of stock ............................................ 66 189 26
Net increase/(decrease) in short-term borrowings ........................... 4,800 (11,897) 18,749
Proceeds from FHLB advances ................................................ 105,000 10,000 47,000
Repayments of FHLB advances ................................................ (99,035) (37,163) (15,757)
Proceeds from capital lease ................................................ -- 248 --
Repayments on capital lease ................................................ (44) (37) --
--------- --------- ---------
Net cash from financing activities ................................ 32,471 3,581 100,993
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS ......................................... (803) (5,764) 3,027
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................. 28,998 34,762 31,735
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................................... $ 28,195 $ 28,998 $ 34,762
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless otherwise indicated, amounts are in thousands, except per share data.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of UNB Corp. (Corporation) and its wholly owned subsidiaries, the
United National Bank & Trust Company (Bank), United Banc Financial Services,
Inc., 620 Market Community Urban Development Corp. and United Insurance Agency,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.
INDUSTRY SEGMENT INFORMATION: UNB Corp. is a bank holding company engaged in
the business of commercial and retail banking, trust and investment services,
and consumer finance, with operations conducted through its main office and
branches located throughout Stark, southern Summit and Wayne Counties of Ohio.
The majority of the Corporation's income is derived from commercial and retail
business lending activities and investments.
CASH AND CASH EQUIVALENTS: Cash equivalents include cash and noninterest
bearing deposits with banks. UNB Corp. reports net cash flows for interest
bearing deposits with banks, federal funds sold, customer loan transactions,
deposit transactions and short-term borrowings.
For the years ended December 31, 1998, 1997 and 1996, the Corporation paid
interest of $30,852, $30,781 and $27,412, respectively, and income taxes of
$6,543, $5,005 and $5,110, respectively.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: The Corporation classifies debt
and equity 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. During 1998 and 1997, the
Corporation held no trading securities.
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.
LOANS HELD FOR SALE: Residential mortgage loans originated by the Bank and
intended for sale in the secondary market are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized in
a valuation allowance by charges to income. To mitigate interest rate risk, the
Bank generally obtains fixed price commitments on loans held for sale. The Bank
sells the servicing rights on loans sold and incurs no recourse obligation in
connection with loan sales or servicing activities.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full,
an allowance for loan losses is recorded. This allowance is increased by
provisions charged to earnings and is reduced by loan charge-offs, net of
recoveries. Estimating the risk of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on
management's evaluation of several key factors including information about
specific borrower situations, their financial position and collateral values,
current economic conditions, changes in the mix and levels of the various types
of loans, past charge-off experience and other pertinent information. While
management may periodically allocate portions of the allowance for specific
problem situations, the entire allowance is available for any charge-offs that
occur. Charge-offs are made against the allowance for loan losses when
management concludes that loan amounts are likely to be uncollectible. After a
loan is charged-off, collection efforts continue and future recoveries may
occur.
Loans are considered impaired if full principal or interest payments are
not anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair
value of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans. The effect of changes
in impaired loans is included in the 1998, 1997 and 1996 provision for loan
losses, and was not material.
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, 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. Loans are
generally moved to nonaccrual status when 90 days or more past due. These loans
are often also considered impaired. Impaired loans, or portions thereof, are
charged off when deemed uncollectible. Management has classified all impaired
loans as nonaccrual loans. Loans which were classified as nonaccrual and have
been brought current must remain current for six months before removal from
nonaccrual status and are not considered impaired for purposes of these
statements. The nature of disclosures for impaired loans is considered generally
comparable to prior nonaccrual and renegotiated loans and non-performing and
past-due asset disclosures.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization are
calculated over the estimated useful lives of the assets, limited in the case
of leasehold improvements to the lease terms, or useful lives, whichever is
less, using primarily the straight-line method. Maintenance and repairs are
charged to expense as incurred and major improvements are capitalized.
OTHER REAL ESTATE: Other real estate owned is included in other assets on the
consolidated balance sheets at the lower of cost or fair value, less estimated
costs to sell. Any reduction in fair value is reflected in a valuation allowance
account established by a charge to income. Costs incurred to carry the real
estate are charged to expense. Other real estate, net of the valuation reserve
totaled $449 and $325 at December 31, 1998 and 1997, respectively.
<PAGE> 25
23
GOODWILL AND IDENTIFIED INTANGIBLES: Goodwill is the excess of purchase price
over identified net assets in business acquisitions. Goodwill is expensed on the
straight-line method over no more than 10 years. Identified intangibles
represent the value of depositor relationships purchased and are expensed on
accelerated methods over 8 to 10 years. Goodwill and identified intangibles are
assessed for impairment based on estimated undiscounted cash flows, and written
down if necessary.
INTEREST AND FEES ON LOANS: Interest income on loans is accrued primarily
over the term of the loans based on the principal balances of loans outstanding.
Loan origination fees and certain direct origination costs are deferred and
amortized over the contractual life of the related loan using the level yield
method. The net amount of fees and costs deferred is reported in the
consolidated balance sheets as a part of loans.
The accrual of interest on loans is suspended when, in management's opinion,
the collection of all or a portion of the loan principal has become doubtful.
When a loan is placed on non- accrual status, accrued and unpaid interest at
risk is charged against income. Payments received on non-accrual loans are
applied against principal until recovery of the remaining balance is reasonably
assured. The carrying value of loans classified as impaired is periodically
adjusted to reflect cash payments, revised estimates of future cash flows and
increases in the present value of expected cash flows due to the passage of
time. Cash payments representing interest income are reported as such and other
cash payments are reported as reductions in carrying value. Increases or
decreases in carrying value due to changes in estimates of future payments or
the passage of time are reported as reductions or increases in the provision for
loan losses.
FEDERAL INCOME TAXES: Income tax expense is the sum of the current year
income tax due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected future tax
consequences of temporary differences between the carrying amounts and tax bases
of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be
realized.
CONCENTRATIONS OF CREDIT RISK: The Corporation, through its subsidiary Bank,
grants residential, consumer, and commercial financing to customers located
primarily in Stark County. Commercial loans, commercial real estate loans,
aviation loans, mortgage loans and consumer loans comprise 12.0%, 12.4%, 9.8%,
34.9% and 30.9% of total loans, respectively at December 31, 1998. Indirect
loans accounted for 68.4% of consumer loans at December 31, 1998.
EARNINGS AND DIVIDENDS PER SHARE: Basic and diluted earnings per share are
computed under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," which was adopted retroactively by the
Corporation at the beginning of the fourth quarter of 1997. All prior amounts
have been restated to be comparable. Basic earnings per share is based on net
income divided by the weighted average number of shares outstanding during the
period. Diluted earnings per share shows the dilutive effect of additional
common shares issuable under stock options assuming the exercise of stock
options less the treasury shares assumed to be purchased from the proceeds using
the average market price of UNB Corp.'s stock for the years presented.
The basic weighted average shares were 11,409,269, 11,563,136 and 11,525,882
for 1998, 1997 and 1996, respectively. Diluted weighted average shares were
11,638,692, 11,785,936 and 11,814,282 for 1998, 1997 and 1996, respectively.
The Corporation declared a 100% stock split in the form of a dividend in 1998
which was recorded by a transfer, equal to the stated value of the shares
issued, from retained earnings to common stock. All per share data has been
adjusted for the stock dividend.
STOCK OPTIONS: The excess of the option price over the par value of the
shares issued is added to paid-in capital when exercised. Any tax benefit
realized by the Corporation from the exercise of non-qualified stock options is
added to paid-in capital.
Expense for employee compensation under stock option plans is based on
Accounting Principles Board (APB) Opinion No. 25, with expense reported only if
options are granted below market price at grant date. Pro forma disclosures of
net income and earnings per share are provided as if the fair value method of
SFAS No. 123 were used for stock-based compensation.
DIVIDEND REINVESTMENT PLAN: The dividend reinvestment plan, effective March
30, 1989, authorized the sale of 1,157,624 shares of the Corporation's
authorized but previously unissued common shares to shareholders who chose to
invest all or a portion of their cash dividends. New shares totalling 8,448 were
issued pursuant to the plan in 1997, after giving effect to the 1998 stock
dividend. In addition, in 1998 and 1997, 51,474 and 66,050 treasury shares were
purchased to fund dividend reinvestment, respectively. The shares issued were
purchased from the Corporation with reinvested dividends at the current market
price, which was the average of the closing bid and asked prices for the last
business day immediately preceding the purchase date. The number of shares has
been adjusted to reflect the 1998 stock dividend. On August 13, 1998, the Board
of Directors voted to temporarily suspend the Dividend Reinvestment Plan,
effective September 16, 1998.
TRUST DEPARTMENT ASSETS AND INCOME: Property held by the Corporation in a
fiduciary or other capacity for its trust customers is not included in the
accompanying consolidated financial statements since such items are not assets
of the Corporation. Income from the Trust Department is reported on the accrual
basis of accounting.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS: Management must make
estimates and assumptions in preparing the consolidated financial statements
that affect the amounts reported and the disclosures provided. These estimates
and assumptions may change in the future and future results could differ.
Areas involving the use of management's estimates and assumptions include the
allowance for loan losses, the realization of deferred tax assets, fair value of
certain securities, the determination and carrying value of impaired loans, the
post retirement benefit obligation, the determination of other-than-temporary
reductions in the fair value of securities, depreciation of premises and
equipment, the carrying value and amortization of intangibles, the fair value of
financial instruments, the actuarial present value of pension benefit
obligations and the net periodic pension expense and prepaid pension costs
recognized in the Corporation's consolidated financial statements. Estimates
that are more susceptible to change in the near term include the allowance for
loan losses and the fair value of certain securities.
<PAGE> 26
24
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance sheet financial instruments do not include the value of anticipated
future business or the values of assets and liabilities not considered financial
instruments.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale which are also recognized as separate
components of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior information restated to
be comparable.
FINANCIAL STATEMENT PRESENTATION: Certain previously reported consolidated
financial statement amounts have been reclassified to conform to the 1998
presentation.
NOTE 2 - SECURITIES
The amortized cost and estimated fair value of investment and mortgage-backed
securities available for sale and held to maturity, as presented in the
consolidated balance sheets are as follows:
<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>
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Securities available for sale:
U.S. Treasury securities ......................... $ 17,005 $ 42 $ (1) $ 17,046
Obligations of U.S. government
agencies and corporations ....................... 36,476 119 (4) 36,591
Securities held to maturity:
Obligations of state and political subdivisions .. 951 2 (1) 952
Corporate bonds and other debt securities ........ 746 5 -- 751
---------- ---------- ---------- ----------
Total debt securities ......................... 55,178 168 (6) 55,340
Equity securities available for sale ................ 11,581 5,081 -- 16,662
Asset-backed securities available for sale .......... 999 -- (2) 997
---------- ---------- ---------- ----------
Total investment securities ................... 67,758 5,249 (8) 72,999
Mortgage-backed securities available for sale ....... 60,281 527 (97) 60,711
Mortgage-backed securities held to maturity ......... 7,134 79 (2) 7,211
---------- ---------- ---------- ----------
Total mortgage-backed securities .............. 67,415 606 (99) 67,922
---------- ---------- ---------- ----------
Total investment and mortgage-backed securities $ 135,173 $ 5,855 $ (107) $ 140,921
========== ========== ========== ==========
</TABLE>
<PAGE> 27
25
Mortgage-backed securities consist of fixed and variable rate CMOs and
government guaranteed mortgage-backed securities issued by FHLMC, FNMA, and
GNMA. CMOs totaled $59,354 and $49,452 and government guaranteed mortgage-backed
securities totaled $22,150 and $18,393 at December 31, 1998 and 1997,
respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1998, 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>
December 31, 1998
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 ... $ 5,020 $ 5,025 5.76%
Due after one year
through five years ....... 4,038 4,078 5.49%
---------- ---------- -----------
Total ..................... 9,058 9,103 5.64%
---------- ---------- -----------
U.S. government agencies
and corporations
Due in one year or less ... 12,014 12,083 5.25%
Due after one year
through five years ....... 12,995 13,123 6.37%
---------- ---------- -----------
Total ..................... 25,009 25,206 5.83%
---------- ---------- -----------
$ 34,067 $ 34,309 5.78%
========== ========== ===========
Securities held to maturity:
Corporate bonds and other
debt securities
Due after one year
through five years ....... $ 749 $ 754 8.53%
---------- ---------- -----------
Total ..................... $ 749 $ 754 8.53%
========== ========== ===========
Asset-backed securities
available for sale .......... $ 999 $ 1,012 7.00%
========== ========== ===========
Mortgage-backed
and collateralized
mortgage obligations
available for sale .......... $ 79,731 $ 79,664 6.30%
Mortgage-backed and
collateralized mortgage
obligations held
to maturity ................. 1,840 1,865 7.45%
---------- ---------- -----------
$ 81,571 $ 81,529 6.33%
========== ========== ===========
</TABLE>
Sales of available for sale securities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Debt and mortgage-
backed securities:
<S> <C> <C> <C>
Proceeds................... $21,283 $14,113 $13,239
Gross gains................ 20 39 2
Gross losses............... 12 17 95
Equity Securities:
Proceeds................... $ 849 -- $ 770
Gross gains................ 785 -- 462
</TABLE>
At December 31, 1998, there are no holdings of securities of any one issuer,
other than the U.S. government and its agencies and corporations, in an amount
greater than 10% of shareholders' equity.
Investments with a carrying value of approximately $102,800 and $103,000 as
of December 31, 1998 and 1997, respectively, were pledged to secure public funds
or other obligations.
NOTE 3 - LOANS
Loans are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Commercial, financial
and agricultural .... $ 80,618 $ 84,737
Commercial real estate 83,036 70,896
Aviation ............. 65,530 --
Real estate .......... 234,696 260,190
Consumer ............. 207,553 214,595
-------- --------
Total loans ....... $671,433 $630,418
======== ========
</TABLE>
<TABLE>
<CAPTION>
Impaired loans are as follows:
1998 1997 1996
<S> <C> <C> <C>
Loans with no
allowance for loan losses
allocated ............... $660 $281 $ 63
Loans with allowance
for loan losses allocated -- -- 205
Amount of allowance
allocated ............... -- -- 135
Average of impaired loans
year-to-date ............ $829 $335 $309
Interest income recognized
during impairment ....... 55 33 28
Cash-basis interest income
recognized year-to-date 54 32 28
</TABLE>
Loans with carrying values of $161 and $191 were transferred to foreclosed
real estate in 1998 and 1997, respectively.
<PAGE> 28
26
Certain directors, executive officers and principal shareholders of UNB Corp.
and its subsidiaries are loan customers of the subsidiary bank. A summary of
aggregate related party loan activity, for loans aggregating $60 or more to any
one related party, is as follows for the year ended December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C> <C>
Balance, January 1, . $ 9,156 $ 14,135
New loans ........... 4,751 3,533
Repayments .......... (4,958) (6,895)
Other Changes ....... 2,884 (1,617)
-------- --------
Balance, December 31, $ 11,833 $ 9,156
======== ========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December
31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at January 1, . $ 9,650 $ 8,335 $ 7,242
Provision charged
to expense ........... 2,748 2,929 3,140
Loans charged off ..... (2,397) (2,911) (3,162)
Recoveries on loans
previously charged off 1,171 1,297 1,115
-------- -------- --------
Balance at end of year $ 11,172 $ 9,650 $ 8,335
======== ======== ========
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
The components of premises and equipment at December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land ................... $ 1,642 $ 1,742
Buildings .............. 6,179 6,419
Furniture and fixtures . 9,945 9,696
Leasehold improvements . 2,179 1,710
-------- --------
Total premises and
equipment .......... 19,945 19,567
Accumulated depreciation
and amortization ... (8,793) (7,840)
-------- --------
Premises and
equipment, net .. $ 11,152 $ 11,727
======== ========
</TABLE>
At December 31, 1998, the Corporation is obligated for the next five years
for rental commitments under non-cancelable operating leases on the main and
branch offices and equipment as follows:
<TABLE>
<S> <C>
1999 ............................... $1,857
2000 ............................... 1,362
2001 ............................... 767
2002 ............................... 676
2003 ............................... 392
------
Total ............................ $5,054
======
</TABLE>
Rental expense amounted to approximately $1,922, $1,755 and $1,465 in 1998,
1997 and 1996, respectively.
NOTE 6 - INTEREST BEARING DEPOSITS
Total interest bearing deposits as presented on the consolidated balance
sheets are comprised of the following classifications:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Interest bearing demand .... $ 85,128 $ 77,361
Savings .................... 208,976 183,646
Time:
In denominations
under $100,000 ......... 239,365 257,833
In denominations of
$100,000 or more ....... 49,924 48,468
-------- --------
Total interest bearing
deposits ............ $583,393 $567,308
======== ========
</TABLE>
At year-end 1998, stated maturities of time deposits are as follows:
<TABLE>
<S> <C>
1999 ................................... $207,061
2000 ................................... 47,470
2001 ................................... 20,829
2002 ................................... 6,719
2003 ................................... 5,984
Thereafter ............................. 1,226
--------
Total ............................... $289,289
========
</TABLE>
Related party deposits total $7,253 and $8,003 at year-end 1998 and 1997,
respectively.
Interest expense on deposits is summarized below:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Interest bearing demand $ 1,256 $ 1,226 $ 1,409
Savings ............... 6,763 5,496 4,488
Time:
In denominations
under $100,000 .... 13,950 14,270 13,266
In denominations of
$100,000 or more .. 2,822 2,478 2,275
-------- -------- --------
Total interest
on deposits .... $ 24,791 $ 23,470 $ 21,438
======== ======== ========
</TABLE>
<PAGE> 29
27
NOTE 7 - SHORT-TERM BORROWINGS
Federal funds purchased, securities sold under agreements to
repurchase, and treasury tax and loan deposits are financing arrangements.
Physical control is maintained for securities sold under repurchase agreements.
Information concerning all short-term borrowings is summarized as follows, at
December 31:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Securities sold under
repurchase agreements ......... $59,156 $51,289
Federal funds purchased ........ 1,850 100
U.S. Treasury tax and loan notes 305 5,122
------- -------
Total short-term borrowings . $61,311 $56,511
======= =======
Weighted average interest
rate at period end ............ 4.3% 4.8%
------- -------
Average amount outstanding
during year ................... $64,281 $58,731
======= =======
Approximate weighted average
interest rate during the year . 4.6% 4.7%
------- -------
Maximum amount outstanding
as of any month-end ........... $67,251 $68,471
======= =======
</TABLE>
NOTE 8 - FHLB ADVANCES AND CAPITAL LEASE
The Bank has entered into various borrowing agreements with the Federal
Home Loan Bank (FHLB) of Cincinnati. Pursuant to collateral agreements with the
FHLB, advances are secured by all stock invested in the FHLB and by qualifying
first mortgage loans. Scheduled principal payments on amortizing advances are
shown in the year they are due. At December 31, 1998, FHLB advances are
comprised of the following:
<TABLE>
<CAPTION>
Maturity Interest Rate Amount
- -------- ------------- -------
<S> <C> <C>
1999 5.50% - 6.15% $ 5,383
2000 6.00% - 6.15% 3,593
2001 6.10% - 6.15% 1,748
2002 5.95% - 6.25% 30,330
2003 6.25% 350
-------
Total $41,404
=======
</TABLE>
Based on the Bank's investment in FHLB stock at December 31, 1998, the
maximum dollar amount of FHLB advance borrowings available to the Bank is
$144,532.
During the second quarter of 1997, the Bank entered into capital lease
arrangements in order to finance the acquisition of its computer output to
laser disk technology (COLD) which includes computer hardware and related
software in the amount of $252. The lease terms call for sixty monthly
payments of $5 with the last payment due in March, 2002. The balances
outstanding at December 31, 1998 and 1997 were $167 and $210, respectively.
NOTE 9 - RETIREMENT PLANS
PENSION PLAN -- The Corporation has a noncontributory defined benefit pension
plan covering substantially all of its employees. In general, benefits are based
on years of service and the employee's compensation. The Corporation's policy is
to fund the plan sufficiently to meet the minimum funding requirement set forth
in the Employee Retirement Income Security Act of 1974, plus such additional
amounts as the Corporation may determine to be appropriate up to the maximum
amount that can be deducted for federal tax purposes. Contributions are intended
to provide not only for benefits attributed to service date but also for those
expected to be earned in the future. For financial reporting purposes, pension
expense is calculated using the projected unit cost method. Information about
the pension plan was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation ...... $ 5,358 $ 6,281
Service cost ...................... 392 433
Interest cost ..................... 394 464
Actuarial loss (gain) ............. 1,100 (396)
Benefits paid ..................... (839) (1,424)
------- -------
Ending benefit obligation ......... 6,405 5,358
Change in plan assets, at fair value:
Beginning plan assets ............. 6,881 6,260
Actual return ..................... 1,555 1,459
Employer contributions ............ -- 586
Benefits paid ..................... (839) (1,424)
------- -------
Ending plan assets ................ 7,597 6,881
Funded status ........................ 1,192 1,523
Unrecognized net actuarial (gain) loss (778) (840)
Unrecognized transition amount ....... (15) (47)
Unrecognized prior service cost ...... 77 84
------- -------
Prepaid benefit cost ................. $ 476 $ 720
======= =======
</TABLE>
<PAGE> 30
28
The components of pension expense and the related actuarial assumptions were as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost .............. $ 392 $ 433 $ 415
Interest costs ............ 394 464 399
Expected return on
plan assets ............ (507) (506) (424)
Amortization of
prior service cost ..... (25) (25) (25)
Recognized net actuarial
(gain) loss ............ (10) -- --
----- ----- -----
$ 244 $ 366 $ 365
===== ===== =====
Discount rate on
benefit obligation ..... 7.50% 7.50% 7.50%
Long-term expected rate
of return on plan assets 7.50% 7.50% 7.50%
Rate of compensation
increase ............... 5.00% 5.00% 5.00%
</TABLE>
PROFIT SHARING PLAN -- The UNB Tax-Deferred Savings Plan covers all qualified
employees. The annual plan expense is based upon discretionary matching of
employees' voluntary pre-tax contributions. The Corporation's contributions are
invested in UNB Corp. common stock, and become vested after three years of
service. Employee voluntary contributions are fully vested at all times.
Employee contributions are invested in a money market fund, a balanced stock or
bond fund, or in UNB Corp. common stock based on employee investment elections.
The expense related to this plan totaled $239, $264 and $225 in 1998, 1997 and
1996, respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS -- The Corporation sponsors a
defined benefit postretirement medical plan. Employees who retire on or after
completion of 10 years of service and attainment of age 55 are eligible to
receive postretirement medical benefits. The retiree may also receive coverage
for dependents. Prior to the attainment of age 65, coverage is provided under
the Corporation's group major medical insurance plan. At age 65, coverage is
provided under a Medicare supplement plan.
The Corporation's plan is contributory. Retirees under age 65 pay a lower
premium than retirees who have attained age 65.
Information about the postretirement benefit plan was as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation:
Beginning benefit obligation ...... $ 851 $ 1,736
Interest cost ..................... 60 122
Plan amendment .................... -- (1,064)
Actuarial gain .................... 50 119
Benefits paid ..................... (15) (62)
------- -------
Ending benefit obligation ......... 946 851
Change in plan assets, at fair value:
Beginning plan assets ............. -- --
Employer contributions ............ 15 62
Benefits paid ..................... (15) (62)
------- -------
Ending plan assets ................ -- --
Funded status ........................ (946) (851)
Unrecognized net actuarial (gain) loss (378) (436)
Unrecognized transition obligation ... 5 5
------- -------
Accrued benefit cost ................. $(1,319) $(1,282)
======= =======
</TABLE>
The components of postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest costs ........... $ 59 $ 122 $ 110
Amortization of transition
obligation ............ (53) 25 76
Service cost ............. 51 119 106
----- ----- -----
$ 57 $ 266 $ 292
===== ===== =====
Discount rate on
benefit obligation .... 7.00% 7.00% 7.00%
</TABLE>
Assumed health care costs trend rates may have a significant effect on the
amounts reported for the health care plan. A one-percentage-point change in
assumed health care cost trend rates would not have had a material effect
at December 31, 1998.
NOTE 10 - STOCK OPTION AND PERFORMANCE UNIT PLAN
In 1987, the shareholders approved a Stock Option and Performance Unit Plan
reserving 764,040 shares of common stock, adjusted for stock dividends and
splits, for the granting of options to executive officers and other senior
Management personnel. Options are not exercisable for at least four years from
the date of grant and are not fully exercisable until six years from the date of
grant. The duration of the exercise period is ten years. In 1997, the
shareholders approved a Stock Option Plan reserving 1,000,000 shares of common
stock, adjusted for stock dividends and splits, for the granting of options to
directors and officers of the Corporation and its affiliates. Non-qualified
stock options are immediately exercisable. Qualified stock options are partially
exercisable one year from the date of grant and become fully exercisable five
years from the date of grant. The duration of the exercise period is ten years.
As such options are exercised, shareholders' equity will be credited with the
proceeds.
SFAS No. 123, which became effective for 1996, requires pro forma disclosures
for companies that do not adopt its fair value accounting method for stock-based
employee compensation. Accordingly, the following pro forma information presents
net income and earnings per share had the Standard's fair value method been used
to measure compensation cost for stock option plans. Compensation cost actually
recognized for stock options was $0 for 1998, 1997 and 1996.
<PAGE> 31
29
<TABLE>
<CAPTION>
Stock Options and Performance Unit Plan
1987 Plan Number of Shares
----------------------------------------
Available Weighted-average Range of Option
for Grant Exercised Outstanding exercise price Price per Share
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 118,488 95,136 550,416 5.47 3.51 9.63
Granted (55,364) -- 55,364 11.00 11.00 11.00
Forfeited 1,600 -- (1,600) 11.00 11.00 11.00
Exercised -- 9,400 (9,400) 3.88 3.51 6.00
------- ------- -------
Balance, December 31, 1996 64,724 104,536 594,780 5.99 3.51 11.00
Granted (65,600) -- 65,600 15.00 15.00 15.00
Forfeited 2,000 -- (2,000) 15.00 15.00 15.00
Exercised -- 185,168 (185,168) 4.16 3.51 9.63
------- ------- -------
Balance, December 31, 1997 1,124 289,704 473,212 7.92 3.62 15.00
Expired (1,124) -- 1,124 0.00
Exercised -- 42,380 (42,380) 8.00 3.62 15.00
------- ------- -------
Balance, December 31, 1998 0 332,084 431,956 7.91 3.89 15.00
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 Plan Number of Shares
-----------------------------------------
Available Weighted-average Range of Option
for Grant Exercised Outstanding exercise price Price per Share
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1998 1,000,000 -- --
Granted (17,000) -- 17,000 15.69 15.69 15.69
Exercised -- 1,400 (1,400) 15.69 15.69 15.69
--------- --------- ---------
Balance, December 31, 1998 983,000 1,400 15,600 15.69 15.69 15.69
Granted (101,244) -- 101,244 19.63 19.63 19.63
Exercised -- 2,400 (2,400) 17.33 15.69 19.63
--------- --------- ---------
Balance, December 31, 1998 881,756 3,800 114,444 19.14 15.69 19.63
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income as reported $ 10,900 $ 9,006 $ 8,155
Pro forma net income . 10,808 8,946 8,130
Basic earnings per
share as reported ... $ .96 $ .78 $ .71
Pro forma basic
earnings per share .. .95 .77 .71
Diluted earnings
per share as reported .94 .76 .69
Pro forma diluted
earnings per share .. .93 .76 .69
</TABLE>
In future years, the pro forma effect of not applying this Standard is
expected to increase as additional options are granted.
Options exerciseable at year-end are as follows:
<TABLE>
<CAPTION>
Number Weighted-average
of options exercise price
---------- --------------
<S> <C> <C>
1996 ...................... 274,313 $ 4.33
1997 ...................... 296,618 6.42
1998 ...................... 304,467 6.85
</TABLE>
The weighted average remaining option life for outstanding options issued
under the 1987 Stock Option Plan at year-end 1998 is 4.8 years. The weighted
average remaining option life for outstanding options issued under the 1997
Stock Option Plan is 9.0 years at year-end 1998.
For options granted during 1998 and 1997, the weighted-average fair values at
grant date are as follows:
<TABLE>
<CAPTION>
Options granted
at market price 1998 1997
<S> <C> <C>
1987 Plan
Exercise price ................. -- $15.00
Fair value ..................... -- 2.29
1997 Plan
Nonqualified Stock Options
Exercise price ................. $19.63 $15.69
Fair value ..................... 1.78 1.54
Incentive Stock Options
Exercise price ................. $19.63 --
Fair value ..................... 2.86 --
</TABLE>
<PAGE> 32
30
The fair value of options granted during 1998, 1997 and 1996 is estimated
using the following information:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
1987 Plan
Risk free interest rate... -- 6.32% 5.60%
Expected life............. -- 6 years 7 years
Expected volatility of
stock price.............. -- 6.32% 7.80%
Expected dividends........ -- 2.98% 3.09%
1997 Plan
Nonqualified Stock Options
Risk free interest rate... 5.61% 6.34% --
Expected life............. 3 years 3 years --
Expected volatility of
stock price.............. 7.17% 5.89% --
Expected dividends........ 2.25% 2.61% --
Incentive Stock Options
Risk free interest rate... 5.82% -- --
Expected life............. 6 years -- --
Expected volatility of
stock price.............. 6.92% -- --
Expected dividends........ 2.69% -- --
</TABLE>
NOTE 11 - OTHER OPERATING EXPENSES
Other operating expenses are summarized as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
FDIC deposit insurance ....... $ 137 $ 132 $ 812
Ohio franchise and
other taxes ................. 773 721 807
Stationery, supplies
and postage ................. 1,044 1,042 892
Marketing expense ............ 824 611 579
Contributions ................ 480 198 50
Professional fees ............ 761 888 727
Intangible amortization ...... 1,006 1,014 1,023
Other expenses ............... 3,517 3,071 2,692
------ ------ ------
Total other
operating expenses ....... $8,542 $7,677 $7,582
====== ====== ======
</TABLE>
NOTE 12 - INCOME TAXES
Income taxes consist of the following:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Current tax expense .......... $6,278 $5,441 $5,058
Deferred tax benefit ......... (588) (644) (785)
------ ------ ------
Total income taxes ........ $5,690 $4,797 $4,273
====== ====== ======
</TABLE>
The sources of gross deferred tax assets and gross deferred tax liabilities
are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Items giving rise to deferred
tax assets:
Allowance for loan losses in
excess of tax reserve ...... $ 3,951 $ 3,281 $ 2,675
Postretirement benefits ..... 532 502 415
OREO writedown .............. 97 94 94
Deferred compensation ....... 252 421 236
Intangible amortization ..... 364 270 189
Other ....................... 92 186 54
Items giving rise to deferred
tax liabilities:
Depreciation ................ (880) (870) (805)
Deferred loan fees and costs (178) (278) (208)
Loan basis from acquisition . (202) (263) (341)
FHLB stock .................. (630) (443) (286)
Pension ..................... (149) (231) --
Unrealized gain on securities
available for sale ......... (1,230) (1,926) (604)
Other ....................... (87) (95) (93)
------- ------- -------
Net deferred tax asset ......... $ 1,932 $ 648 $ 1,326
======= ======= =======
</TABLE>
Based on prior taxes paid, the deferred tax asset is more likely than not to
be realized.
The difference between the provision for income taxes and amounts computed by
applying the statutory income tax rate of 35% for 1998 and 34% for 1997 and 1996
to income before taxes is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Income taxes computed
at the statutory tax rate
on pretax income ............. $5,807 $4,693 $4,225
Add tax effect of:
Tax exempt income .......... (50) (80) (82)
Other ...................... (67) 184 130
------ ------ ------
Total income taxes ...... $5,690 $4,797 $4,273
====== ====== ======
</TABLE>
Taxes attributable to net securities gains approximated $278 in 1998, $7 in
1997 and $125 in 1996.
NOTE 13 - COMMITMENTS AND CONTINGENCIES
RESERVE REQUIREMENTS: The Corporation's subsidiary bank is required to
maintain approximately $5,851 of cash on hand or on deposit with the Federal
Reserve Bank to meet regulatory reserve requirements at December 31, 1998. These
funds do not earn interest.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Corporation is a party
to financial instruments 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. The exposure to
credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to make loans is represented by the contractual
amounts of these instruments. The Corporation does not
<PAGE> 33
31
anticipate any material losses from these transactions. The contract or notional
amounts of these instruments on December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Fixed rate commitments to
extend credit .................... $ 49,318 $ 47,166
Variable rate commitments
to extend credit ................. 135,342 118,086
Variable rate standby letters
of credit and financial guarantees 16,272 7,778
Interest rate swaps --
notional amount .................. 20,805 3,750
</TABLE>
The amounts above represent contracts entered into by the Corporation, net of
amounts participated to other financial institutions.
The Corporation uses the same credit policies in extending commitments and
letters of credit and financial guarantees as it does for on-balance-sheet
financial instruments. The Corporation controls its exposure to loss from these
agreements through credit approval processes and monitoring procedures. Letters
of credit and commitments to extend credit are generally issued for one year or
less. The total commitment amounts do not necessarily represent future cash
disbursements, as many of the commitments expire without being drawn upon. The
Corporation may require collateral in extending commitments, which may include
cash, accounts receivable, securities, and real or personal property.
INTEREST RATE SWAP: The Corporation has entered into two agreements to assume
variable interest payments in exchange for fixed interest payments (interest
rate swaps). The notional amounts of the interest rate swaps do not represent
amounts exchanged by the parties. The amounts exchanged are determined by
reference to the notional amounts and the other terms of the interest rate
swaps. The following table summarizes the terms of each swap in effect at
December 31, 1998:
<TABLE>
<CAPTION>
Swap #1 Swap #2
<S> <C> <C>
Notional amount ......... $ 2.4 million $18.4 million
Final expiration ........ Nov. 20, 2000 June 18, 2003
Variable rate in effect
December 31, 1998 .... 5.25% 5.23%
Fixed rate............... 2.88% 5.86%
Market Value,
December 31, 1998 .... $58 $(380)
</TABLE>
Variable interest payments received are based on the 3 month
LIBOR rate which is adjusted on a quarterly basis. The income from these
agreements for 1998, 1997 and 1996, was approximately $58, $126 and $158,
respectively, which was included in interest income.
CONTINGENCIES: The nature of the Corporation's business results in a certain
amount of litigation. Management, after reviewing with counsel all actions and
proceedings pending against or involving UNB Corp. and its subsidiaries,
considers that the aggregate liability or loss, if any, resulting from them will
not be material to the Corporation's consolidated financial position.
NOTE 14 - DIVIDEND AND REGULATORY CAPITAL REQUIREMENTS
Dividends paid by the Bank are the primary source of funds available to the
Corporation for payment of dividends to shareholders and for other working
capital needs. The payment of dividends by the subsidiary Bank to the
Corporation is subject to restrictions by regulatory authorities. These
restrictions generally limit dividends to the current and prior two year's
retained earnings. At December 31, 1998, approximately $624 of the Bank's
retained earnings were available for dividends to the Corporation under these
guidelines. In addition to these restrictions, as a practical matter, dividend
payments cannot reduce regulatory capital levels below the Corporation's
regulatory capital requirements and minimum regulatory guidelines. These
restrictions do not presently limit the Corporation from paying normal
dividends.
The Corporation and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the consolidated financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, under capitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
Tier 1
Capital to risk- capital to
weighted assets average
Total Tier 1 assets
<S> <C> <C> <C>
Well capitalized ........... 10% 6% 5%
Adequately capitalized ..... 8% 4% 4%
Undercapitalized ........... 6% 3% 3%
</TABLE>
<PAGE> 34
32
At year-end, actual capital levels (in millions) and minimum required levels
are:
<TABLE>
<CAPTION>
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
1998
Total capital (to risk weighted assets)
Consolidated .......................... $73.4 11.5% $51.2 8.0% $64.0 10.0%
Bank .................................. $64.2 10.1% $50.8 8.0% $63.4 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated .......................... $65.4 10.2% $25.6 4.0% $38.4 6.0%
Bank .................................. $49.2 7.8% $25.4 4.0% $38.1 6.0%
Tier 1 capital (to average assets)
Consolidated .......................... $65.4 7.4% $35.3 4.0% $44.1 5.0%
Bank .................................. $49.2 5.7% $34.6 4.0% $43.3 5.0%
1997
Total capital (to risk weighted assets)
Consolidated .......................... $75.0 13.3% $45.2 8.0% $56.4 10.0%
Bank .................................. $62.7 11.3% $44.5 8.0% $55.6 10.0%
Tier 1 capital (to risk weighted assets)
Consolidated .......................... $67.9 12.0% $22.6 4.0% $33.9 6.0%
Bank .................................. $42.7 7.7% $22.2 4.0% $33.4 6.0%
Tier 1 capital (to average assets)
Consolidated .......................... $67.9 8.2% $33.0 4.0% $41.2 5.0%
Bank .................................. $42.7 5.2% $32.6 4.0% $40.7 5.0%
</TABLE>
The Corporation and Bank at year-end 1998 and 1997 were categorized as well
capitalized.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM INVESTMENTS -- For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES -- For investment securities and mortgage backed
securities, fair values are based on quoted market prices or dealer quotes.
LOANS -- The fair value of loans is estimated by discounting
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES -- The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting future cash flows using the rates currently offered
for deposits of similar remaining maturities.
INTEREST RATE SWAPS -- The fair value of the interest rate swap reflects the
amount that the Corporation would receive or pay to terminate the swap at the
reporting date based on a dealer quote.
<PAGE> 35
33
The estimated fair values of the Corporation's financial instruments at
December 31, 1998 and 1997, respectively, are:
<TABLE>
<CAPTION>
1998 Estimated 1997 Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- --------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Cash equivalents $ 28,195 $ 28,195 $ 28,998 $ 28,998
Short-term investments 12,854 12,854 8,642 8,642
Securities 134,449 134,479 140,838 140,921
Loans, net 667,033 697,982 622,958 618,800
Accrued interest receivable 4,510 4,510 4,479 4,479
Financial liabilities:
Demand and savings deposits (396,205) (396,205) (343,180) (343,180)
Time deposits (289,289) (292,134) (306,301) (303,710)
Repurchase agreements (59,156) (59,156) (51,288) (51,288)
Other short-term borrowings (2,155) (2,155) (5,222) (5,222)
FHLB advances (41,404) (43,091) (35,440) (35,736)
Accrued interest payable (3,020) (3,020) (3,289) (3,289)
Off-balance-sheet instruments:
Commitments to extend credit 184,660 184,660 165,252 165,252
Standby letters of credit 16,272 16,272 7,778 7,778
Interest rate swaps -- (322) -- 171
</TABLE>
NOTE 16 - PARENT COMPANY
Condensed financial information of UNB Corp. (parent company only) follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(in thousands of dollars) 1998 1997
<S> <C> <C>
ASSETS
Cash and cash equivalents ....................................... $ 5,162 $ 731
Interest bearing deposits in subsidiary bank .................... 45 437
Other securities ................................................ -- 8,111
Marketable equity securities .................................... 7,080 7,365
Investment in subsidiaries, at equity in underlying
value of net assets ........................................... 54,031 48,801
Other assets .................................................... 5,411 11,075
------- -------
Total assets ................................................ $71,729 $76,520
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Total liabilities ............................................... $ 27 --
Shareholders' equity ............................................ 71,702 $76,520
------- -------
Total Liabilities and Shareholders' Equity .................. $71,729 $76,520
======= =======
</TABLE>
<PAGE> 36
34
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(in thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
INCOME
Cash dividends from subsidiary .......................... $ 4,500 $ 7,000 $ 14,010
Interest on deposits in subsidiary bank ................. 2 6 2
Dividends on marketable equity securities ............... 147 106 100
Interest on securities and mortgage-backed securities ... 253 222 406
Income on subordinated debt ............................. 707 780 --
Other interest income ................................... -- 5 75
Investment securities gains ............................. 789 5 461
-------- -------- --------
Total income ........................................ 6,398 8,124 15,054
-------- -------- --------
EXPENSES
Other expenses .......................................... 406 278 283
-------- -------- --------
Total expenses ...................................... 406 278 283
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES AND EQUITY IN
UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ................... 5,992 7,846 14,771
FEDERAL INCOME TAX EXPENSE ................................... 482 258 230
-------- -------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES ............................................. 5,510 7,588 14,541
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES ........... 5,390 1,418 (6,386)
-------- -------- --------
NET INCOME ................................................... $ 10,900 $ 9,006 $ 8,155
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(in thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................. $ 10,900 $ 9,006 $ 8,155
Equity in undistributed net income of subsidiaries ...... (5,390) (1,418) 6,386
Net securities gains .................................... (789) -- (461)
Other, net .............................................. 206 280 (465)
-------- -------- --------
Net cash from operating activities .................. 4,927 7,868 13,615
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) / decrease in interest bearing deposits
in subsidiary bank .................................... 392 (399) (1)
Proceeds from sale and maturities of securities ......... 23,400 10,095 23,931
Investment in subsidiary bank subordinated note ......... 6,000 -- (13,000)
Capitalization of United Insurance Agency, Inc. ......... (100) -- --
Capitalization of United Banc Financial Services, Inc. .. -- (500) --
Liquidation of United Credit Life Insurance Company ..... -- 457 --
Purchase of securities .................................. (15,925) (13,709) (19,402)
-------- -------- --------
Net cash from investing activities .................. 13,767 (4,056 (8,472)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends .......................................... (4,151) (3,762) (3,400)
Proceeds from shares issued through dividend reinvestment -- 133 898
Treasury stock purchased ................................ (11,582) (4,873) --
Treasury stock sales .................................... 1,404 1,926 --
Proceeds from issuance of stock ......................... 66 189 26
-------- -------- --------
Net cash from financing activities .................. (14,263) (6,387) (2,476)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS ...................... 4,431 (2,575) 2,667
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 731 3,306 639
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 5,162 $ 731 $ 3,306
======== ======== ========
</TABLE>
<PAGE> 37
35
NOTE 17 - OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains (losses) on available for sale securities $(1,445) $ 3,910 $ 866
Less reclassification adjustment for gains (losses)
later recognized in income .................................. 793 22 369
------- ------- -------
Net unrealized gains (losses) .................................... (2,238) 3,888 497
Tax effect ....................................................... (783) 1,322 169
------- ------- -------
Other comprehensive income ....................................... $(1,455) $ 2,566 $ 328
======= ======= =======
</TABLE>
NOTE 18 - PENDING ACCOUNTING CHANGES
Recent pronouncements by the Financial Accounting Standards Board ("FASB")
will have an impact on financial statements issued in current or subsequent
periods. Set forth below are summaries of such pronouncements.
In February 1998, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132 increased and revised pension plan disclosures for
public companies. The Corporation revised its disclosures included in the
financial statements based on the standard.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 addresses the accounting for
derivative instruments and certain derivative instruments embedded in other
contracts, and hedging activities. The statement standardizes the accounting for
derivative instruments by requiring that an entity recognize those items as
assets or liabilities in the statement of financial position and measure them at
fair value. This statement is effective for all fiscal years beginning after
June 15, 1999.
In October 1998, the FASB issued SFAS No. 134 "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise." SFAS No. 134 will, in 1999, allow mortgage loans
that are securitized to be classified as trading, available for sale, or in
certain circumstances held to maturity. Currently these must be classified as
trading.
These statements are not expected to have a material effect on the
Corporation's consolidation financial position or results of operation.
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a consolidated summary of quarterly information:
<TABLE>
<CAPTION>
In thousands (except for per share data)
Quarters Ended
March 31 June 30 September 30 December 31
1998
<S> <C> <C> <C> <C>
Interest income .................................. $ 16,052 $ 16,371 $ 16,907 $ 16,675
Net interest income .............................. 8,675 8,777 9,043 8,927
Provision for loan losses ........................ 691 445 325 1,287
Net income ....................................... 2,581 2,959 3,086 2,274
Earnings per common share:
Basic ......................................... 0.23 0.26 0.27 0.20
Diluted ....................................... 0.22 0.25 0.27 0.20
1997
Interest income .................................. $ 15,378 $ 15,649 $ 15,948 $ 16,387
Net interest income .............................. 8,134 8,292 8,064 8,550
Provision for loan losses ........................ 675 675 887 692
Net income ....................................... 2,233 2,408 2,101 2,264
Earnings per common share:
Basic ......................................... 0.19 0.21 0.18 0.20
Diluted ....................................... 0.19 0.20 0.18 0.19
1996
Interest income .................................. $ 13,925 $ 14,649 $ 14,990 $ 15,625
Net interest income .............................. 7,681 7,904 7,915 7,863
Provision for loan losses ........................ 630 800 920 790
Net income ....................................... 2,022 2,190 1,754 2,189
Earnings per common share:
Basic ......................................... 0.18 0.19 0.15 0.19
Diluted ....................................... 0.17 0.19 0.15 0.18
</TABLE>
<PAGE> 38
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
INTRODUCTION
The following is management's discussion and analysis of the financial
condition and results of the operations of UNB Corp. (the Corporation). It is
intended to explain certain financial information regarding UNB Corp. and should
be read in conjunction with the Consolidated Financial Statements, related
Notes, and the Five Year Summary of Selected Data included in this report.
UNB Corp. of Canton, Ohio is a locally owned and operated one-bank holding
company whose principal subsidiary is the United National Bank and Trust Company
(the Bank). The Bank is a full service commercial bank offering a complete range
of personal, trust, and business financial products and services through its
twenty-one branch network located in Stark, Wayne and southern Summit Counties.
In 1998, UNB Corp. took measures to activate its affiliate, the United
Insurance Agency, Inc. which was chartered on August 23, 1990. During the first
quarter of 1999, UNB Corp. will reapply for an insurance license with the State
of Ohio and will await approval to be licensed to sell life and property and
casualty insurance. Once approval is received, it is not anticipated that the
results of operations of this new subsidiary will have a material impact on the
earnings of UNB Corp. in 1999.
During the first quarter of 1998, management decided to not activate United
Mortgage Corporation, an affiliate of UNB Corp., which was scheduled to begin
operations in the third quarter of 1998. The mortgage function remains in a
department of the Bank while several of the department's personnel became
employees of United Banc Financial Services, Inc., the finance company affiliate
of the Corporation which is, along with the mortgage and indirect consumer
lending functions, under the same manager. These employees complement the
finance company with greater opportunities for expansion of its product line and
growth in fee income through the brokering of non-conforming consumer paper and
FHA/VA Government loans.
During the second quarter of 1998, the Bank made an acquisition of the
aircraft financing line of business and $35.4 million in loan balances from a
large financial institution headquartered in Ohio. This business unit, now known
as the United Bank Aircraft Finance Group, is headquartered in offices at the
Akron/Canton Airport of Ohio and includes three regional sales offices located
in Wichita, Kansas, the home of many of the country's aircraft manufacturers;
Sacramento, California; and Orlando, Florida. This group provides competitive
general aviation financing services for high income/net worth individuals and
corporations nationwide, including financing and refinancing of new and used
aircraft, upgrades, refurbishing and retrofitting. Management feels that the
acquisition of this specialized line of business fits well with the Bank's
expertise in fulfilling the financial needs of closely-held and family-owned
businesses and high net worth individuals.
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,"
"estimate" or "projected" 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.
RESULTS OF OPERATIONS
UNB Corp.'s consolidated net income for 1998 was $10,900, which represents a
21.0% increase over 1997 net income of $9,006, which in turn represented a 10.4%
increase over 1996 net income of $8,155. Return on average assets was 1.27%,
1.11%, and 1.08% for 1998, 1997 and 1996, respectively. The Corporation's return
on average equity, improved to 14.19% in 1998 from 12.20% in 1997 and 11.89% in
1996 brought on by the exceptional growth in net earnings as well as
management's strategy to reduce shareholders' equity through the purchase of
treasury stock.
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
NET INCOME
millions of dollars $6.628 $7.379 $8.155 $9.006 $10.900
</TABLE>
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
</TABLE>
RETURN ON EQUITY
percent 11.45% 11.98% 11.89% 12.20% 14.19%
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
dollars $0.58 $0.64 $0.71 $0.78 $0.96
</TABLE>
<PAGE> 39
37
TABLE 1
NET INTEREST INCOME
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Interest income ................................................. $66,005 $63,362 $59,189
Interest expense ................................................ 30,583 30,322 27,826
------- ------- -------
Net interest income ............................................. 35,422 33,040 31,363
Tax equivalent adjustments* ..................................... 50 69 87
------- ------- -------
Net interest income (fully taxable equivalent basis) ............ $35,472 $33,109 $31,450
======= ======= =======
Net interest income (F.T.E.) as percent of average earning assets 4.38% 4.30% 4.38
</TABLE>
* The tax equivalent adjustment is computed by stating non-taxable income on a
tax equivalent basis using the statutory tax rate of 35% and adjusted for
non-deductible interest expense for 1998, 1997 and 1996.
Basic earnings per share for 1998 were $0.96, an increase of 23.1%, or $0.18
per share, from 1997, whereas 1997 basic earnings per share of $0.78 represented
a 9.9%, or $.07 per share, increase from 1996. On a diluted basis, earnings per
share for 1998 were $0.94, compared to $0.76 for 1997, and $0.69 for 1996,
respectively. The Corporation's stock performance has remained stable amid the
turbulence experienced throughout the financial markets in 1998. UNB Corp.'s
stock rose from $19.62 at year end 1997 to $20.00 per share at December 31,
1998, an increase of 1.9%. These market prices translate into an increase in
market-to-book premium from 296.7% at December 31, 1997 to 309.6% at December
31, 1998, an increase of 4.3% since year end 1997. All per share information has
been adjusted for the October 15, 1998, 100% stock split in the form of a
dividend.
NET INTEREST INCOME
Net interest income, the primary source of earnings for the
Corporation, is the difference between interest and loan fee income generated on
earning assets and the interest expense paid on deposits and borrowed funds
(Table 1). For this discussion, net interest income is presented on a fully tax
equivalent (FTE) basis which restates interest on tax-exempt securities and
loans as if such interest was subject to federal income tax at the statutory
rate. For 1998, net interest income (FTE) increased to $35,472 from $33,109 in
1997, an increase of 7.1%. For 1997, net interest income (FTE) increased by
$1,659 from $31,450 in 1996, an increase of 5.3%. These annual increases are
primarily attributable to the growth in average earning assets of 5.3% and 7.2%
for 1997 and 1996, respectively. See Table 2 for a summary of the impact on net
interest income (FTE) due to changes in the levels of interest earning assets
and interest bearing liabilities and interest rates.
Net interest margin is the measure of the net yield on average earning assets
on a fully taxable basis and is calculated by dividing net interest income on a
fully taxable basis by average earning assets. The net interest margin is
affected by the level and mix of earning assets and supporting deposits and
borrowings and the interest rate spread between them. The Bank's net interest
margin increased to 4.38% in 1998 from 4.30% in 1997 while returning to the same
net interest margin levels as 1996 (Tables 1 and 4).
The two most significant impacts on the net interest margin in 1998 have been
the change in loan portfolio mix to mitigate the impact of declining interest
rates on loan yields and the reduction in the Corporation's cost of funds.
Despite the impact of falling treasury rates throughout 1998 and two prime rate
reductions totalling 50 basis points in the fourth quarter of the year, the
yield on loans declined by only two basis points. This is the result of
management's decision to shift the focus of growth from consumer indirect
installment and mortgage loans to relatively higher yielding aviation,
commercial real estate and variable rate home equity loans. Also impacting net
interest margin is the 15 basis point reduction in the cost of interest bearing
liabilities from 4.64% in 1997 to 4.49% in 1998. In 1997, the cost of interest
interest bearing liabilities increased seven basis points over 1996 levels
(Tables 2 and 4).
While the yield on loans in 1998 declined by only two basis points from 1997
levels, the overall yield on interest earning assets declined by nine basis
points between the same periods. Yields on various components of the investment
and mortgage-backed securities portfolio declined from 1997 levels, the result
of maturities and paydowns rolling off the balance sheet at higher rates than
the funds could be reinvested given the decline in market rates experienced
throughout 1998.
During 1998, the Corporation's cost of funds declined 15 basis points, also
the result of declining market rates. The cost of every category of interest
bearing liabilities declined except for savings deposits which were affected by
a change in balance mix from lower cost passbook, statement and money market
savings products to the Money Market Access product with its tiered rates pegged
to 13 Week U.S. Treasury Bills. This product continued to draw significant new
money to the Bank as well as attracting some funds out of the Bank's more
traditional savings products, causing the overall cost of savings deposits to
increase. Interest rates paid on savings, interest bearing demand accounts and
certificates of deposit were reduced several times in early 1998 and again
several times in the last quarter of the year, resulting in ten and nine basis
point declines, respectively, in the cost of interest bearing transaction and
time deposits from 1997 to 1998. The cost of short and long term debt also
declined by 11 and 75 basis points, respectively, from 1997 to 1998, the results
of reductions in the market rates to which they are tied, as well as the early
payoff of several FHLB higher cost advance borrowings in late 1997. Additional
FHLB advances of $5,000 and $11,500 were paid off in January and December of
1998, respectively, in order to decrease the cost of long term debt and yield a
positive effect on net interest margin in both 1998 and 1999.
The most significant impact on the decline in net interest margin of eight
basis points between 1997 and 1996 was the Corporation's cost of funds which
increased seven basis points while the yield on earning assets remained
relatively flat. Deposits raised to fund loan
<PAGE> 40
38
growth through the active marketing of Money Market Access and competitive
certificate of deposit rates increased their cost over 1996 while the cost of
FHLB advances increased due to a $426 prepayment penalty incurred in the early
termination of $20,000 in FHLB advances. These prepayments led the way to
reduced cost of FHLB borrowings in 1998. These increases in the cost of funds
were partially offset by several rate reductions in interest bearing transaction
and traditional savings products. See Table 4 for a more detailed analysis on
net interest margin including average balances and associated yields.
OTHER INCOME
Other income for 1998 totaled $10,934, an increase of $3,737 or 51.9%, from
1997. This compares to an increase of $839, or 13.2%, from 1997 to 1996 (Table
3). As competition for loans and deposits has grown with fewer opportunities to
increase net interest margin, management has focused on growing fee income from
new and existing sources to improve profitability. In 1998, all categories of
other income increased over levels achieved in 1997. Service charges on deposits
increased $376, or 15.1%, from 1997, brought on by the introduction of three new
personal checking package accounts introduced in early 1998. The new accounts
offered a variety of financial and travel incentives targeted to customers who
prefer a banking relationship full of value and customer service over a
no-frills free checking account. Included in the new accounts were new fee
schedules and revised interest rate tiers based on account balances. The Gold
Club, designed for customers age 50 or better which includes a personal banking
officer who arranges and conducts special events and travel trips, was
especially successful in attracting new deposit relationships. From 1996 to
1997, service charges increased $115, or 4.8%, brought on by product pricing and
fee increases put in place in early 1997.
In 1998, the Trust Department generated fee income of $4,316, an increase of
$1,009, or 30.5%, from 1997. Trust revenues in 1997 increased 21.9% over those
of 1996. The performance of the Trust Department was driven by the increase of
24.6% in assets managed to $926,563 at year end 1998, a significant milestone as
the Trust Department now manages an asset base greater than that of the
Corporation. Growth in managed assets was a result of new customer
relationships, the impact of declining interest rates on the market values of
debt obligations and record stock market levels. The value of assets managed
increased from 1996 to 1997 by 27.9%.
Other operating income for 1998 was $1,900, an increase of $786, or 70.6%,
from 1997. These results show the success of management's strategy to focus its
efforts to increase fees as a means of improving profitability. Factors leading
to these improved results include a one time gain of $271 recognized on the sale
of the MasterCard portfolio and servicing to a national credit card servicer.
Through this sale and arrangement, the Bank can now offer its customers
MasterCard and Visa cards with lower rates and annual fees without assuming the
credit risks inherent in an unsecured credit card portfolio. New sources of
other operating income in 1998 included brokerage fees of $336 generated in both
the Bank and United Banc Financial Services from the origination and sale of
non-conforming consumer and mortgage products and interchange fee income of $220
generated from the Bank's Mastermoney debit card program. These favorable
results were partially offset by a decline in fee income of $34 from sales of
financial, insurance
TABLE 2
CHANGES IN NET INTEREST DIFFERENTIAL -- RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
December 31, 1998, 1997 and 1996
(In thousands of dollars) 1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due To Change In Due To Change In
Volume Rate Total Volume Rate Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Interest bearing deposits with other banks $ (11) $ 0 $ (11) $ (66) $ (10) $ (76)
Federal funds sold ....................... 69 (18) 51 270 23 293
Investment securities:
Taxable ............................... (554) 115 (439) (116) 134 18
Tax exempt ............................ (26) (3) (29) 1 (10) (9)
Other investments ........................ 223 (91) 132 65 (64) 1
Mortgage-backed securities ............... 1,483 (314) 1,169 142 244 386
Loans .................................... 1,893 (142) 1,751 4,104 (562) 3,542
-------- -------- -------- -------- -------- --------
Total interest income ................. 3,077 (453) 2,624 4,400 (245) 4,155
Interest expense:
Interest bearing demand deposits ......... 112 (81) 31 33 (216) (183)
Savings .................................. 767 499 1,266 514 494 1,008
Certificates and other time deposits ..... 269 (245) 24 1,123 84 1,207
Short-term borrowings .................... 256 (69) 187 (17) -- (17)
Long-term borrowings ..................... (852) (395) (1,247) 445 36 481
-------- -------- -------- -------- -------- --------
Total interest expense ................ 552 (291) 261 2,098 398 2,496
-------- -------- -------- -------- -------- --------
Net interest income ................ $ 2,525 $ (162) $ 2,363 $ 2,302 $ (643) $ 1,659
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 41
39
TABLE 3
OTHER INCOME AND OTHER EXPENSE
<TABLE>
<CAPTION>
(In thousands of dollars) Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
OTHER INCOME:
Service charges on deposits ........ $ 2,869 $ 2,493 $ 2,378
Trust department income ............ 4,316 3,307 2,714
Other operating income ............. 1,900 1,114 897
Gains on loans originated for resale 1,056 261 --
Investment securities gains, net ... 793 22 369
------- ------- -------
Total other income ............. $10,934 $ 7,197 $ 6,358
======= ======= =======
OTHER EXPENSE:
Salaries, wages and benefits ....... $13,205 $11,361 $10,806
Occupancy expense .................. 1,525 1,322 1,170
Equipment expense .................. 3,746 3,145 2,595
Other operating expenses ........... 8,542 7,677 7,582
------- ------- -------
Total other expenses ........... $27,018 $23,505 $22,153
======= ======= =======
</TABLE>
products and financial planning services through American Express Financial
Advisors, Inc. Other operating income in 1997 showed an increase over 1996 of
$217, or 24.2%, with increases in fees of $81 from American Express and $266 in
surcharge fees to non-bank ATM customers being the largest contributors to the
improved results. These were partially offset by a decrease in insurance premium
income of $92 for the unwinding of insurance production in the United Credit
Life Company affiliate.
Two other significant sources of operating income in 1998 were greatly
influenced by conditions in the nation's financial markets. Due to the further
decline in market interest rates and the overwhelming demand for mortgage
refinancings, management's strategy was to sell a majority of the fixed rate
long term mortgage loan production in the secondary market on a service released
basis to increase other income and reduce the level of fixed rate mortgages and
their associated interest rate risk held in the loan portfolio. These gains on
sales generated income of $1,056, an increase of $795, or 304.6%, over 1997
results. No gains from the sale of loans in the secondary market were recorded
in 1996, due to management's decision to retain originations, which were for the
most part adjustable rate or non-conforming fixed rate loans. Also, the
substantial price appreciation experienced in the nation's equity markets led
management to recognize a portion of the appreciation experienced in the
available for sale securities portfolio with the majority of the $793 gain in
1998 coming from UNB Corp.'s parent company's available for sale equity
portfolio.
OTHER EXPENSE
Total other expense of $27,018 in 1998 was an increase over 1997 of $3,513,
or 14.9%. From 1996 to 1997, other expenses increased by $1,352, or 6.1% (Table
3).
Total employee compensation, including salaries, wages and benefits, grew
$1,844, or 16.2%, from 1997. From 1996 to 1997, the increase was 5.1%. The major
reasons for this increase in 1998 were increased salary expense, related payroll
taxes and group insurance primarily due to annual merit increases and a full
year's impact of additional personnel costs for the addition in 1997 of three
new branches and United Banc Financial Services, Inc. During 1998, staffing
additions were made in the Trust Department, the Home Equity Department, in the
new in-store branch facility in Wooster, through the acquisition of the United
Bank Aircraft Finance Group and for the new office of United Banc Financial
Services which is dedicated to generating brokerage income through the
origination and sale of non-conforming loans. During 1998, the expense related
to the Corporation's ROE incentive model and associated payroll taxes increased
by $456, or 38.4% from 1997, a result of the excellent earnings performance
achieved in 1998. In addition to salary related increases, pension expense for
1998 increased by $178, or 183.6% over 1997. These were partially offset by a
reduction in post-retirement benefit expenses of $215 from 1997.
Occupancy expenses increased by $203, or 15.4%, from 1997 to 1998. From 1996
to 1997, they increased by $152, or 13.0%. The increase in 1998 was primarily
due to a full year's impact of the opening of three new branch facilities, new
offices for the mortgage loan department and the new office of United Banc
Financial Services in 1997. In 1998 new facilities were added for an in-store
branch in the Wooster Wal*Mart, a brokerage office for United Banc Financial
Services and four regional facilities for the United Bank Aircraft Finance
Group.
Equipment expense increased $601, or 19.1%, for 1998, compared to 1997, the
result of $213 in increased depreciation on furniture, fixtures and equipment
for the new facilities opened in 1998. In addition, increases in automated
services and equipment expense were the result of additional outside technical
and software support as well $130 in expenses related to remediation efforts for
Year 2000 compliance. Equipment expenses in 1997 increased by $550, or 21.2%,
from 1996, the result of a full year's impact of the costs of new technology
including mainframe and wide area network equipment, teller and platform systems
and related software and computer to laser disk technology installed in 1997.
Other operating expense increased $865 from 1997 to 1998, an increase of
11.3%. The major categories comprising other operating expense are found in Note
11. In 1998, marketing expenses increased for marketing efforts related to the
new Gold, Blue and Silver Club Checking products, rollout of the new Equity 100
home equity product, continued promotion of the Money Market Access
<PAGE> 42
40
account to nonbank customers, national promotion of the United Bank Aircraft
Finance Group, the opening and continued promotion of in-store branch facilities
and new commercial loan programs including a new leasing product and commercial
courier services. Other significant increases were found in contributions which
increased $282, or 142.4% from 1997, with $245 of the increase the result of
donations of bank facilities, specifically the closed Beach City branch and the
Massillon facility acquired in the purchase from the Resolution Trust
Corporation of First Savings and Loan Company, F.A. in 1991, to the respective
municipalities in which they are located. Other expenses increased by $446, or
14.5%, from 1997 to 1998, with the majority of the increases found in loan
related expenses and miscellaneous expenses related to the change in the
articles of incorporation to increase the number of authorized shares from 15
million to 50 million which was presented to shareholders for a vote and
approved in October, 1998. From 1996 to 1997, other operating expense increased
$95, or 1.3%. In 1997, FDIC premiums decreased $680 due to the special
assessment paid in 1996 to the Federal Deposit Insurance Corporation (FDIC) of
$593 to recapitalize the Savings Association Insurance Fund (SAIF) which insures
approximately $116 million in deposits which the Bank acquired in "Oakar
transactions" from the Resolution Trust Company (RTC) in the First Savings and
Loan Company, F.A. of Massillon and the Transohio Federal Savings Bank
acquisitions. Contributions increased by $148 from 1996 to 1997 for a funding of
the United National Bank & Trust Co. charitable trust account, the balance of
which will be used to fund future charitable obligations of the Bank. The
increases of $150 in stationery, supplies and postage from 1996 to 1997 are
attributable to the new branches opened in 1997.
TABLE 4
AVERAGE BALANCE SHEET AND RELATED YIELDS
<TABLE>
<CAPTION>
Years ended December 31, 1998, 1997 and 1996
(In thousands of dollars) 1998 1997 1996
Average Average Average
Balance Interest *Rate* Balance Interest *Rate* Balance Interest *Rate*
------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Interest bearing deposits ....... $ 507 $ 23 4.54% $ 755 $ 34 4.50% $ 2,204 $ 110 4.99%
Federal funds sold .............. 15,832 847 5.35% 14,550 796 5.47% 9,592 503 5.24%
Investment securities:
Taxable ...................... 44,828 2,751 6.14% 53,909 3,190 5.92% 55,923 3,172 5.67%
Tax-exempt ................... 708 38 5.37% 1,186 67 5.65% 1,166 76 6.52%
Other securities ............. 18,936 934 4.93% 14,554 802 5.51% 13,424 801 5.97%
Mortgage-backed securities ...... 77,808 4,923 6.33% 54,676 3,754 6.87% 52,521 3,368 6.41%
Loans (net of unearned
interest) ..................... 651,320 56,539 8.68% 629,514 54,788 8.70% 582,418 51,246 8.80%
-------- ------- ----- -------- -------- ----- -------- ------- -----
Total interest earning
assets ........................ 809,939 66,055 8.16% 769,144 63,431 8.25% 717,248 59,276 8.26%
-------- ------- ----- -------- -------- ----- -------- ------- -----
NONEARNING ASSETS:
Cash and due from banks ......... 30,745 25,668 23,427
Other nonearning assets ......... 24,702 25,212 23,542
Allowance for loan losses ....... (10,270) (9,025) (7,923)
-------- -------- --------
Total assets ................. $855,116 $810,999 $756,294
======== ======== ========
INTEREST BEARING LIABILITIES:
Demand deposits ................. $ 79,669 $ 1,257 1.58% $ 72,770 $ 1,226 1.68% $ 71,078 $ 1,409 1.98%
Savings deposits ................ 197,971 6,762 3.42% 174,789 5,496 3.14% 157,662 4,488 2.85%
Time deposits ................... 295,555 16,772 5.67% 290,854 16,748 5.76% 271,351 15,541 5.73%
Short-term debt ................. 64,281 2,954 4.60% 58,731 2,767 4.71% 59,097 2,784 4.71%
Long-term debt .................. 43,676 2,838 6.50% 56,317 4,085 7.25% 50,183 3,604 7.18%
-------- ------- ----- -------- -------- ----- -------- ------- -----
Total interest bearing
liabilities ................ 681,152 30,583 4.49% 653,461 30,322 4.64% 609,371 27,826 4.57%
-------- ------- ----- -------- -------- ----- -------- ------- -----
NONINTEREST BEARING LIABILITIES:
Demand deposits ................. 89,305 76,523 71,263
Other liabilities ............... 7,822 7,224 7,069
Shareholders' equity ............ 76,837 73,791 68,591
-------- -------- --------
Total liabilities and equity . $855,116 $810,999 $756,294
======== ======== ========
Net interest income ................ $35,472 $ 33,109 $31,450
======= ======== =======
Net yield on earning assets ........ 4.38% 4.30% 4.38%
===== ===== =====
</TABLE>
* Average rates of all categories including tax-free income are stated on a
fully taxable equivalent basis.
<PAGE> 43
41
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained by management at a level
considered adequate to cover possible future losses. The amount of the provision
for loan losses charged to operating expense is the amount necessary, in the
opinion of management, to maintain the balance in the allowance for loan losses
at an adequate level. Adequacy of the allowance is assessed based on historical
experience, changes in portfolio size and mix, the relative quality of the loan
portfolio and current and expected rates of loan growth. Information about
specific borrower situations, including their financial position and collateral
values, are also important as well as assessments of current and future economic
conditions, and other factors and estimates, which are subject to change over
time. While management's periodic analysis of the allowance for loan losses may
dictate portions of the allowance be allocated to specific problem loans, the
entire amount is available for any loan charge-offs that may occur.
The allowance for loan losses on December 31, 1998, was $11,172 or 1.66%, of
outstanding loans, compared to $9,650, or 1.53%, at year end 1997. The provision
for loan losses charged to operating expense was $2,748 in 1998, compared to
$2,929 in 1997, and $3,140 in 1996. The reduction in expense for 1998 was a
result of slower, more selective loan growth in 1998, specifically in the
consumer installment area, coupled with a decrease in net charge-offs. Net
charge-offs for 1998 were $1,226, a decrease of $388, or 24.0%, from 1997 levels
of $1,614. Net charge-offs for 1997 decreased $433, or 21.2%, from 1996. Net
charge-offs as a percentage of average loans outstanding for 1998 was 0.19%
compared to 0.26% in 1997 and 0.35% for 1996. The consumer loan portfolio
experienced the greatest reduction in net charge-offs with a decrease of $476,
or 29.3%, from 1997. This portfolio also experienced a significant reduction in
net charge-offs in 1997 of $314, or 17.3%, from 1996. These reductions in losses
in 1998 and 1997 are the result of adherence to stricter underwriting guidelines
put in place in mid-1996 as well as better trend analyses resulting in earlier
detection of delinquent accounts and more proactive collection efforts on
potential problem credits and more selective loan growth in the consumer
portfolio. Although net charge-offs have improved over the last two years,
management remains cautious in its expectations for consumer net charge-offs in
1999 due to the continued record levels of consumer debt outstanding and
bankruptcy filings and significant levels of consumer loan delinquencies and
losses experienced throughout the financial services industry. Management is
also cautious regarding commercial loan customer Year 2000 readiness as well as
a lack of history on the performance of the new aviation loan portfolio.
Impaired loans totaled $660 at December 31, 1998, compared to $281 at year
end 1997, an increase of $379. There were no allowances for loan losses
allocated to impaired loans at year end 1998 or 1997, as all had sufficient
collateral to cover their impaired balances. Non-performing loans consist of
loans past due 90 days or more and loans which have been placed on nonaccrual
status. Non-performing loans at year end 1998 were $1,487 compared to
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
TOTAL ASSETS
millions of dollars $601.1 $699.6 $810.0 $826.3 $868.7
</TABLE>
$945 at year end 1997, and $838 at year end 1996. The increase in non-performing
loans between year end 1998 and 1997 was 57.4%, with the two most significant
categories of non-performing loans being mortgage loans and commercial loans at
52.5% and 25.0% of total non-performing loans, respectively. The ratio of
non-performing loans to total loans was 0.22% for 1998 versus 0.15% for 1997,
and 0.14% for 1996. This ratio, while increased by 46.7% from 1997 year end,
still compares very favorably to that of the Corporation's peer group at 0.85%
at September 30, 1998.
The 1999 Profit Plan assumes aggressive loan growth in the commercial loan
and aviation loan portfolios. The loan loss provision for 1999 should cover the
growth in these portfolios, anticipated declines in net chargeoffs from 1998
levels and a sufficient allocation to alleviate concerns over commercial loan
customers' year 2000 preparedeness. Management believes the provision for 1999
will decline from 1998 levels, yet be sufficient to maintain the current level
of the reserve to loan ratio throughout 1999.
INCOME TAXES
The provision for income taxes for 1999 was $5,690, an increase from $4,797
and $4,273 in 1997 and 1996, respectively. The Corporation's effective tax rates
were 34.3%, 34.8% and 34.4% for the years of 1998, 1997 and 1996, respectively.
The reduction in effective tax rate between 1997 and 1998 is mainly the result
of the tax effect of the donations of two buildings made in 1998. This effect
was partially offset by a greater percentage of earnings taxed at the marginal
tax rate of 35% as well as lower tax-exempt income generated from the loan and
investments portfolios in 1998 as well as in 1997.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of many computer programs being written
using two digits rather than four to define an applicable year. The
Corporation's hardware, date-driven automated equipment, or computer programs
that have date sensitive software, may recognize a date using "00" as the year
1900 rather than the year 2000. This faulty recognition could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities.
UNB Corp. and its subsidiaries have conducted a comprehensive review of all
information and non-information technology systems to identify potential Year
2000 compliance 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 is currently in the testing phase of the project for both
information and non-information technology systems. The Committee is monitoring
this phase closely and it anticipates that testing will be completed by mid-year
1999. Further, the Corporation is progressing in its efforts at remediation of
non-compliant systems either through the replacement or upgrading of these
systems.
<PAGE> 44
42
The Committee believes that all internal systems will be Year 2000 compliant by
mid-year 1999.
The Committee is addressing Year 2000 compliance in the area of fiduciary
(trust) activities. Systems, software, and product vendors have been contacted
regarding their Year 2000 status. They have either reported a status of
compliant, or have scheduled a release update within the first quarter of 1999,
which will be compliant or, in instances where these vendors are not yet
compliant, their progress is being monitored regularly. Test plans are being
developed for the software systems, and will be implemented on a timeline geared
to the priority status of each product. Analysis of the issuing entities for the
Trust Department's managed asset holdings is well under way, with the compliance
status requests for equities, corporate and municipal bonds, limited
partnerships and closely-held securities made by December 31, 1998. The Trust
Investment Selection Committee has completed an initial review of both the
approved equities and corporate bond holdings, and has scheduled further reviews
throughout the first and second quarters of 1999, to assess the risk of holding
individual issues. Customer awareness information was developed and sent to
clients beginning in 1998 and will continue throughout 1999.
The Committee continues to address Year 2000 compliance with its 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 has presented the Year
2000 issue to its commercial loan customers through an informational letter. The
letter was intended to bring the customers' focus to the Year 2000 topic as a
management issue of significant concern to their businesses. The Committee has
completed its initial assessment of Year 2000 risk in the commercial loan
portfolio through a questionnaire directed to major borrowers. The questionnaire
had an 85% response rate, representing 67% of the commercial loans and
commitments. The questionnaires are being certified and integrated with other
risk components to assign Year 2000 risk ratings within the existing loan
portfolio. The ratings will be used in a risk-based monitoring effort to measure
the impact of the borrowers' Year 2000 readiness on the Bank's asset quality and
to make appropriate adjustments to the Loan Loss Reserve throughout 1999.
The Committee oversees the development and implementation of a corporate wide
contingency plan encompassing all core business processes. Completion and
validation of this plan are scheduled for June 30, 1999. The plan will be
subject to further review during the third and fourth quarters of 1999.
The Committee has formulated a comprehensive internal and external
communications plan to educate and to inform employees and customers on the Year
2000 challenge. The external strategy is to provide customers with information
on a continuous basis regarding the Year 2000 Readiness Plan through brochures,
quarterly statement stuffers, our web site, a telephone hotline and seminars.
To date, a quarterly Year 2000 Readiness Statement Brochure has been
developed and is available in all branches. It will also be mailed to all
customers in their checking and savings account statements. We have established
a Y2K telephone hotline to aid in answering customer or employee questions. A
Y2K page has been added to our web site to provide the public with information
designed to educate them, or their businesses, on Year 2000 readiness issues and
concerns.
Internally management's plan is to educate and inform employees about Year
2000 issues and concerns by providing at least monthly updates on the
Corporation's readiness plan, and preparing question and answer materials to
address customer concerns and questions regarding the Corporation's preparedness
for the Year 2000. Management's objective internally will be to train employees
to be able to address most Y2K questions and concerns directly.
Although the Corporation intends to conduct normal operations during the
entire period before and after the date changeover, the Committee is developing
a liquidity contingency plan to minimize any disruption to the Corporation's
business caused by potential customer behavior, such as excessive deposit
withdrawals, business failures by commercial customers or similar events. The
plan identifies a range of possible occurrences, and establishes responses and
solutions that can be implemented by the Committee.
The first phase of the liquidity contingency plan, which is the monitoring of
levels of currency, deposits, and loans, commenced as of the first business day
of 1999 and will continue throughout the year. The next phase will include
updating borrowing agreements and pledging collateral with the Corporation's
primary lenders to allow immediate access to funding if it becomes necessary.
The final phase will include executing a number of predetermined strategies for
staffing and supplying additional cash to the Corporation's branches during the
weeks immediately before the date changeover.
Based on current information, the Corporation believes that internal systems
will be Year 2000 compliant before January 1, 2000, through either the
modification of existing hardware and software, or through the purchase and
installation of new hardware and software. The Committee currently anticipates
that the Corporation will spend approximately $500 to $750 on the Year 2000
project. At this time, management does not believe that there will be a
significant negative impact on earnings due to this issue. The Year 2000
problem could have a material impact on the operation of the Corporation if not
properly addressed, but management anticipates that the problem will be
resolved and thus will not have a significant impact on the Corporation's
delivery of products and services to its customers, or on its operations.
FINANCIAL CONDITION
Total assets were $868,743 at December 31, 1998, compared to $826,313 at
December 31, 1997, an increase of $42,430, or 5.1%, over 1997. At December 31,
1998, earning assets were $825,508, an increase of $43,420, or 5.6%, over 1997
year end and were 95.0% of total assets at year end for 1998, compared to 94.6%
at year end 1997. The composition of earning assets changed slightly from 1997
to 1998, with securities and loans comprising 16.3% and 82.2 % of earning
assets, respectively, in 1998 compared to 18.0% and 80.9%, respectively, at year
end 1997.
At December 31, 1998, federal funds sold were $12,300, an increase of $4,800
from December 31, 1997. Total securities decreased by $6,389, or 4.5%, from
1997. Total loans, including loans held for sale, increased $45,597, or 7.2%,
over 1997 with growth concentrated in aviation and commercial real estate loans
and the home equity segment of consumer loans.
Earning asset growth was funded mainly through growth in deposits of $36,013,
or 5.5%, from year end 1997. Short-term borrowings, including securities sold
under agreement to repurchase, increased $4,800, or 8.5%, from year-end 1997.
FHLB advances increased by $5,965 or 16.8% from 1997 year end.
<PAGE> 45
43
Advances of $25,000 were used as the major source of funding for the aircraft
loan purchase, however outstanding balances at year end do not reflect these
additions because liquidity raised through deposits in excess of loan growth was
used to prepay relatively higher rate Federal Home Loan Bank advances of $5,000
in January, 1998, and $11,538 in December, 1998.
LOANS
At December 31, 1998, total loans outstanding were $671,433, an increase of
$41,015, or 6.5%, over year end 1997. This compares with a growth in total loans
of $12,816, or 2.1%, in 1997 over 1996. The product mix in the loan portfolio
shows consumer loans, mortgage loans, commercial loans, aviation loans and
commercial real estate loans comprising, 30.9%, 34.9%, 12.0%, 9.8% and 12.4%,
respectively, at December 31, 1998, compared with 34.0%, 41.3%, 13.5%, 0.0% and
11.2%, respectively, at December 31, 1997.
The focus of loan growth shifted significantly in 1998. Past strengths in
various market niches were taken advantage of in new ways with the focus of
growth in outstanding balances shifting away from areas with inherent interest
rate and credit risk to take advantage of opportunities to enter new markets and
re-emphasize old ones. The most significant event was the purchase of the
aircraft financing line of business and $35.4 million in outstanding loan
balances. This area, now known as the United Bank Aircraft Finance Group, has
taken off with growth in loans outstanding to $65,530, an increase of 85.1% from
the balances purchased in June. The loans purchased and new volume are both
fixed rate and fixed rate with floating rate conversion features which provide
lending alternatives which reduce interest rate risk and provide a relatively
attractive rate of return to other lending alternatives.
The commercial real estate portfolio also experienced significant growth in
1998 to $83,036, or a 17.1% increase, from year end 1997. Within this portfolio,
risk is managed by stressing credit quality, securing adequate loan-to-value
ratios and targeting owner occupied real estate transactions. Growth in
commercial loans was also stressed in 1998, however competition for loan
balances and pressure on yields in the Bank's geographic market have led to a
decline in balances of $4,119, or 4.9%, from 1997 levels. For 1999, although the
economy is expected to grow at a nominal rate, aggressive growth has been
targeted for both loan categories to be achieved through increased calling
efforts to increase market share, without sacrificing credit quality. Through
the new commercial courier services begun in 1998, it is anticipated that the
Bank will be able to expand commercial business into new geographic markets
where traditional branch facilities do not exist. Additional loan fee income is
anticipated through a new leasing product begun in 1998, which is offered
through BankVest, a third-party vendor, which enables the Bank to offer small to
medium-size leases to business customers taking advantage of the tax benefits
leasing products provide.
Within the consumer loan portfolio, management continued to stress growth in
the direct installment and home equity products while de-emphasizing indirect
lending. As a result, consumer balances declined by $7,042, or 3.3%, from year
end 1997. Within the category, renewed marketing efforts and a new, dedicated
sales staff were successful in promoting the home equity line of credit known as
Equity100 which grew by $11,692, or 42.6%, from year end 1997. New product
features include Equity100 with Equi-lock which allows customers to lock in a
rate and fixed term on all or a portion of their outstanding balance while the
remaining unused commitment can continue to be used like a regular line of
credit. Card access was also added to a customer's line of credit through the
Equity100 MasterMoney card, which is used like a regular credit card and is
accepted everywhere MasterCard is accepted. Card access gives customers credit
card convenience and all benefits of home equity loans such as low rates and tax
deductible interest. Also impacting the consumer loan category was the sale of
$1,995 in MasterCard balances to MBNA America, Inc., a national credit card
processor. Through MBNA, the Bank can offer its customers expanded credit card
products without incurring the credit risk of unsecured credit card loans. While
management has reduced the amount of indirect paper acquired, the Bank continues
to benefit from its vast dealer network which has provided the Bank with loan
volume which it is processing on a pass through basis to national sub-prime
lenders. This allows the Bank to earn fee income without credit risk, while
maintaining Bank liquidity. Included in the consumer loan portfolio are $3,327
in loans outstanding, net of unearned income, for United Banc Financial
Services. These loans include consumer loans, retail contracts, and home equity
and personal home owner loans secured by real estate.
Due to the significant decline in mortgage rates throughout 1998, the Bank
experienced overwhelming demand for new and refinanced mortgage loans. One of
the main tenets of management's asset and liability policy is to limit exposure
to interest rate risk inherent in long-term, relatively lower yielding, fixed
rate loans. This translated to management's strategy of selling a majority of
eligible mortgage loan originations into the secondary market on a servicing
released basis. For this reason, the residential mortgage loan portfolio
decreased to $234,696 at December 31, 1998, an decrease of $25,494, or 9.8%,
from year end 1997. In addition to the mortgage products offered in the Bank, a
special department of United Banc Financial Services is offering alternative
mortgage financing for borrowers with special needs which do not meet the
requirements of the conforming secondary market. Beginning in 1999, these
products will include FHA/VA mortgage loans. These loans are being sold to
TABLE 5
TOTAL LOANS
<TABLE>
<CAPTION>
Years ended December 31, Increase or (Decrease)
(In thousands of dollars) 1998 1997 Dollars Percentage
<S> <C> <C> <C> <C>
Commercial ....................................... $ 80,618 $ 84,737 $ (4,119) -4.9%
Commercial Real Estate ........................... 83,036 70,896 12,140 17.1%
Aviation ......................................... 65,530 -- 65,530 100.0%
Real Estate ...................................... 234,696 260,190 (25,494) -9.8%
Consumer ......................................... 207,553 214,595 (7,042) -3.3%
-------- -------- -------- ------
Total loans and leases ...................... $671,433 $630,418 $ 41,015 6.5%
======== ======== ======== ======
</TABLE>
<PAGE> 46
44
specialized investors on a pass through basis, thus allowing the Corporation to
provide mortgage products to a new customer base without adding additional
credit risk.
Management has set aggressive goals for loan growth in 1999, continuing its
focus on the aviation, commercial and commercial real estate products, based on
their relative yields and repricing features versus the overall loan portfolio.
In consumer loans, resources will continue to be directed toward growth in
direct consumer and home equity products. Due to relatively low residential
mortgage rates, emphasis will continue on sales of originations in the secondary
market, enhancing non-interest income through gains on sales and limiting
exposure to interest rate risk.
SECURITIES
The investment portfolio serves a primary role in the overall context of
balance sheet management by the Corporation. The decision to purchase or sell
securities is based upon the current assessment of economic and financial
conditions, including the interest rate environment and other on- and
off-balance sheet positions. The portfolio's scheduled maturities and the
expected cash flows from the mortgage-backed securities represent a significant
source of liquidity for the Corporation.
The Corporation's investment portfolios consist primarily of U.S. Treasury
and Agency Securities, corporate bonds and other debt securities, various types
of Mortgage-Backed Securities and Collateralized Mortgage Obligations, common
stocks and short-term money market instruments. At December 31, 1998, the
Corporation's investment portfolio was $134,449 versus $140,838 at December 31,
1997, a 4.5% decrease.
The Bank purchases securities which are eligible to be pledged against the
deposited funds of public entities and for use as collateral for repurchase
agreements. At year end 1998, there were $102,800 of securities pledged for
these purposes compared to $103,000 at year end 1997.
During the first and second quarters of 1998, the Bank followed a strategy to
reduce originations in the indirect installment loan and fixed rate mortgage
loan portfolios and invest those funds in shorter duration securities. After the
Bank acquired the aircraft lending unit late in the second quarter, excess
liquidity was used to support growth in this product line and the investment
portfolio remained flat through the end of the year.
In the first quarter, the Corporation realized a gain of $785 on the sale of
$1,931 in securities held in its portfolio. The parent company also liquidated
$7,051 in securities at a gain of $2 in the second quarter as part of a strategy
approved by the Board of Directors to provide ongoing funding for the repurchase
of outstanding UNB Corp. common stock.
In 1999, under the terms of its Year 2000 Liquidity Contingency Plan, the
Bank expects that a significant portion of purchases will be concentrated in
very short term securities. Changes in tax laws affecting the parent company's
portfolio, and continuation of the Corporation's share repurchase plan, will
limit purchases in that portfolio for the year.
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
NET LOANS
<S> <C> <C> <C> <C> <C>
million of dollars $403.3 $511.5 $609.3 $620.8 $660.3
</TABLE>
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
TOTAL DEPOSITS
<S> <C> <C> <C> <C> <C>
million of dollars $486.8 $547.2 $600.7 $649.5 $658.5
</TABLE>
TABLE 6
SECURITIES
<TABLE>
<CAPTION>
Years ended December 31, Increase or (Decrease)
(In thousands of dollars) 1998 1997 Dollars Percentage
<S> <C> <C> <C> <C>
U.S. Treasury ................................................. $ 9,103 $ 17,046 $ (7,943) -46.6%
U.S. Government agencies and corporations ..................... 25,206 36,591 (11,385) -31.1%
Mortgage-backed securities .................................... 81,504 67,845 13,659 20.1%
Obligations of state and political subdivisions ............... -- 951 (951) -100.0%
Corporate bonds and other securities .......................... 18,636 18,405 231 1.3%
---------- ----------- ---------- ------
Total securities $ 134,449 $ 140,838 $ (6,389) -4.5%
========== =========== ========== ======
</TABLE>
<PAGE> 47
45
DEPOSITS
Growth of the Corporation's core deposits, as a primary source of funding of
earning asset growth, is a key management strategy. This is the reason
management has devoted significant resources to develop and promote its deposit
products through the value added in their many features and benefits, through
exceptional service to deposit customers, and through various alternative
methods of delivery which differentiate them from those of the competition. To
this end, the Corporation has been very successful, as demonstrated by the
growth in deposits in 1998. Total deposits at December 31, 1998, were $685,494,
an increase of $36,013, or 5.5% from year end 1997.
Noninterest bearing checking account balances increased to $102,101 at
December 31, 1998, an increase of 24.3% over year end 1997, led by growth in
business checking balances. Interest bearing checking accounts increased by
$7,767, or 10.0%, from year end 1997 spurred on by aggressive marketing and
promotional efforts in the introduction of three new personal checking package
accounts in early 1998. The new accounts, Gold Club, Blue Club and Silver Club
checking offer customers a variety of financial and travel services and
discounts. Savings balances which include passbook, statement, money market
savings and Money Market Access accounts grew to $208,976, an increase of 13.8%
from year end 1997. Balances in Money Market Access, the variable rate account
with tiered balances tied to the 13-week Treasury Bill rate, grew by $32,434, or
49.7%, for the year. This growth was partially offset by a decline in passbook
and statement savings accounts of $8,626, or 9.2%, from year end 1997.
Certificates of Deposit declined in 1998 to $289,289, a decrease of 5.6% over
year end 1997. The decline in certificate balances was due to reduced marketing
efforts and a pricing strategy which placed rates close to the average of local
market competition. Included in these balances are approximately $14,921 in
brokered certificates with remaining maturities of less than one year, one and
two years issued through Merrill Lynch. Depositors aversion to extending
maturities on deposits as well as the ability to raise deposits at relatively
attractive rates with longer maturities in the national markets will influence
the Bank's decisions regarding the future use of brokered deposits to fund
balance sheet growth.
Core deposit growth remains a primary objective of the Bank's deposit
strategy for 1999. Changes in the Corporation's retail delivery systems are
directed toward improving the availability and convenience of the deposit
products and services offered. During 1998, the Bank opened its third Financial
MarketPlace inside the Wooster Wal*Mart Supercenter to give the Bank its first
presence in Wayne County. To date it has shown strong results in new deposits
and loans. The Bank's strategic plan for optimization of the retail delivery
network has proceeded in 1998. This plan has included two branch consolidations
and the conversion of two branch offices to drive-up and ATM facilities only. In
addition several other branch transformations will occur to accommodate a more
customer-friendly sales and service environment. The Bank's telephone banking
center handles hundreds of customer calls to open new deposit accounts as well
as to take applications for personal loans and home equity lines of credit. The
center has been so successful that plans are being developed to expand and
enhance telephone banking operations in 1999 to provide enhanced customer
service as well as to increase customer relationships. In addition to
enhancements to the retail delivery network, a new asset management account will
be introduced in 1999 which will provide services similar to asset management
accounts offered by full service brokerage companies. Features will include
premium interest rates, an ability to deposit dividends, transfer money between
other bank accounts, write checks and make payments for brokerage transactions.
As always, the level and direction of interest rates, as well
as competitive pressure from the local market and national non-bank financial
institutions offering non-traditional alternative forms of investments, will
play a key role in the levels of growth and deposit mix in 1999.
TABLE 7
DEPOSITS
<TABLE>
<CAPTION>
Years ended December 31, Increase or (Decrease)
(In thousands of dollars) 1998 1997 Dollars Percentage
<S> <C> <C> <C> <C>
Noninterest bearing ......................................... $ 102,101 $ 82,173 $ 19,928 24.3%
Interest bearing
Demand ................................................. 85,128 77,361 7,767 10.0%
Savings ................................................ 208,976 183,646 25,330 13.8%
Time ................................................... 289,289 306,301 (17,012) -5.6%
---------- ----------- --------- ------
Total deposits ..................................... $ 685,494 $ 649,481 $ 36,013 5.5%
========== =========== ========= ======
</TABLE>
<PAGE> 48
46
CAPITAL RESOURCES
Total shareholders' equity was $71,702 at December 31, 1998, compared to
$76,520 at December 31, 1997, a reduction of $4,818, or 6.3%. This decrease was
primarily the result of net treasury stock purchases of $10,178. Other
reductions to shareholders' equity were from dividends paid to shareholders of
$4,151 and reductions in unrealized gains, net of deferred tax, on available for
sale securities from year end 1997 to year end 1998 of $1,455. These reductions
were partially offset by net income for the period of $10,900 and $66 in new
stock issued for executive compensation. The book value per share of stock was
$6.46 at year end 1998, compared to $6.62 at year end 1997, a 2.4% reduction.
The treasury stock transactions reflect the reaffirmation of the commitment
by the Board of Directors of the Corporation to repurchase up to $16.4 million
of its stock. The Board feels that the stock is an excellent value compared to
other market opportunities, and acknowledges the positive impact it has on
return on equity. 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 the issuance of its stock. These plans include the internal benefit
plans of the Corporation which include the employee stock purchase plan, the
401-K plan, and the stock option plans of 1987 and 1997.
Cash dividends paid to shareholders of UNB Corp. during the year ended
December 31, 1998 totaled $4,151 or $0.37 per share. This compared to $3,762, or
$0.33 per share, for the year ended December 31, 1997. The 1998 dividends per
share represent an increase of 12.1% over 1997. Dividends paid in 1998
represented a payout ratio of 38.1% of net income compared to 41.8% in 1997.
Both ratios are within the guidelines established by UNB Corp.'s Board of
Directors for a dividend payout ratio of 35% to 50% of net income. For 1998, in
addition to cash dividends paid, the Board of Directors approved a 100% stock
split in the form of a dividend to shareholders which was paid on October 15,
1998 to shareholders of record on October 1, 1998. The Board felt a split was
advantageous at that time to provide the stock with additional liquidity and to
help sustain its past performance levels. Including dividends and appreciation,
the stock returned 3.79% to shareholders in 1998. At year end 1998, the market
value of the stock was 309.6% of the year end book value compared to 296.7% at
year end 1997.
As discussed in Note 14 to the Consolidated Financial Statements, the
Corporation's primary source of funds for the payment of dividends is its Bank
subsidiary. In 1998, the Bank paid $4,500 in dividends to the Corporation. In
1997, the Bank paid $8,000 in dividends to the Corporation. The Bank, which is
limited by regulation as to the amount of dividend it can pay, remains within
these regulatory guidelines. Currently this restriction will not preclude the
Bank from paying sufficient dividends to fund, as needed, the usual quarterly
dividends paid to the Corporation's shareholders.
Under regulations issued by the Federal Reserve and Comptroller of the
Currency, banks and bank holding companies are required to maintain certain
minimum capital ratios in order to be considered "well capitalized." These
guidelines require a minimum total risk-based capital ratio of 10%, a Tier 1
capital ratio of 6% and leverage ratio of 5%. All of the Corporation's assets,
which include various risk-weighted percentages of assets on the balance sheet,
as well as off-balance sheet exposures, are expressed as a percentage of
risk-adjusted assets and compared to its capital. Tier 1 capital consists of
shareholders' equity and other items such as mandatory convertible debt and the
allowance for loan losses. As of December 31, 1998, UNB Corp. had a total
risk-based capital ratio of 11.46%, with a Tier 1 capital ratio of 10.21%,
compared to 13.28% and 12.02%, respectively, at December 31, 1997. Both of these
risk-based capital ratios are well above minimum regulatory requirements. In
addition to risk-based capital, a leverage ratio test must also be met. This
ratio evaluates capital adequacy on the basis of Tier 1 capital-to-total assets
(unadjusted for risk). On December 31, 1998, UNB Corp.'s leverage ratio was
7.41%, which substantially exceeds the Corporation's minimum regulatory
requirement. For additional information on the Corporation and Bank's capital
ratios, refer to Note 14 - Dividend and Regulatory Capital Requirements.
On August 13, 1998, the Board of Directors voted to temporarily suspend the
Dividend Reinvestment Plan, effective September 16, 1998. The Board felt that
capital was growing at a rate faster than could be utilized efficiently to
maximize future shareholder value. The Board of Directors has the option to
reinstate the plan should opportunities arise to efficiently use the capital
generated. As an alternative investment for shareholders' dividends,
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
SHAREHOLDER'S EQUITY
<S> <C> <C> <C> <C> <C>
PER SHARE dollars $5.11 $5.68 $6.17 $6.62 $6.46
* Adjusted for any stock dividends and splits
</TABLE>
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
CASH DIVIDENDS PER SHARE*
<S> <C> <C> <C> <C> <C>
dollars $.24 $.265 $.295 $.325 $.365
</TABLE>
* Adjusted for any stock dividends and splits
<TABLE>
<CAPTION>
[BAR GRAPH]
1994 1995 1996 1997 1998
MARKET VS. BOOK VALUE
PER SHARE dollars
<S> <C> <C> <C> <C> <C>
Market $9.63 $11.00 $15.00 $19.63 $20.00
Book Value $5.11 $ 5.68 $ 6.17 $ 6.62 $ 6.46
</TABLE>
* Adjusted for any stock dividends and splits
<PAGE> 49
47
a money market account called the Shareholder Preferred Account was offered to
shareholders which pays a rate of interest indexed to the average 13-week
Treasury Bill discount rate.
On October 1, 1998, the Corporation held a special shareholders' meeting to
have shareholders vote on a proposed amendment to the Corporation's articles of
incorporation to increase the number of authorized shares of UNB Corp. common
stock. The additional authorized shares would be used for future stock splits,
stock dividends, possible acquisitions and other corporate purposes. The
adoption required the affirmative vote of the holders of 66-2/3% of the
outstanding shares of the Corporation. The proposed amendment was approved.
On October 15, 1998, the Board of Directors of UNB Corp. approved a
shareholder rights plan. Under the plan, a dividend of one common share purchase
right for each outstanding common share was declared. The dividend was payable
on October 26, 1998, to the shareholders of record on that date. The shareholder
rights plan allows UNB Corp. to issue "rights" to its shareholders (one right
per share) to purchase shares under certain circumstances. The plan is designed
to prevent an 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 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.
QUANTATIVE 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 mean 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 new
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 be reinvested at lower levels. Liability
sensitivity, or a negative gap, means that the Corporation's exposure is to
rising rates since more liabilities than assets could reprice at higher rates.
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 December 31, 1998, the
Corporation's modified twelve month cumulative gap indicated 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. Another limitation is the
implied assumption that assets and liabilities in the same time period will
reprice by the same magnitude.
Simulation analysis provides a more dynamic interpretation of the impact of
rates on the Corporation's forecasted income and net present value of assets,
liabilities and capital. The Corporation makes certain assumptions regarding the
level of interest rates, prepayments on assets with imbedded options including
loans and asset backed securities, and the behavior of deposits without
contractual maturity dates. These assumptions, in addition to actual rates and
maturity and repricing dates on loans, investments and deposits, are
incorporated into a computer model which calculates forecasted net income and
discounts the projected cash flows of rate sensitive assets and liabilities to
determine the present value of the Corporation's capital. The model then applies
a predetermined immediate parallel increase or decrease in the level of interest
rates to forecast the impact on both net interest income and capital one year
forward. While this methodology provides a more comprehensive appraisal of
interest rate risk, it is not necessarily indicative of actual or expected
financial performance. Changes in interest rates that affect the entire yield
curve equally at a single point in time are not typical. The residential
mortgage prepayment assumptions are based on industry medians and could differ
from the Corporation's actual results due to non-financial prepayment incentives
and other local factors. Moreover, the model does not include any interim
changes in strategy the Corporation might instate in response to shifts in
interest rates.
At December 31, 1998, the Corporation's interest rate shock analysis
forecasted an increase in net interest income 2.05% in response to a decrease of
200 basis points in market rates and a decrease in net interest income of 2.36%
based on a corresponding 200 basis point increase in market rates. The
forecasted changes in the market value of equity were 3.47% and -0.56% for the
same period. Although the model results indicate that the Corporation would
benefit from a decrease in rates, it may not fully predict the potential for
residential mortgage loans to refinance in the current volatile interest rate
environment. The resulting decrease in income would offset some portion of the
projected reduction in interest expense.
<PAGE> 50
48
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. In general, the
Corporation views wholesale funding as a cost effective method of extending
deposit maturities beyond the terms preferred by the majority of customers, loan
sales or securitizations as a method of reducing the duration of specific asset
categories, and derivative products as a means to offset existing balance sheet
positions that exhibit higher than acceptable risk.
The table on Quantitative Disclosure of Market Risk 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.
During 1998, the Corporation continued its strategy to gradually restructure
the balance sheet by shifting funds from indirect installment loans to variable
rate loans. Late in the second quarter, the Corporation purchased a $35,400 pool
of primarily variable rate aircraft loans, and continued to increase that
portfolio with new originations throughout the third and fourth quarters. As
rates declined throughout the year, mortgage loan customers refinanced existing
variable rate loans into fixed rate products that were sold in the secondary
market, limiting the overall growth potential of this portfolio.
UNB CORP.
QUANTITIVE DISCLOSURE OF MARKET RISK
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
One Year Two Years Three Years
Balance Rate Balance Rate Balance Rate
====================================================================================
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Short Term Investments $ 12,854 5.42%
Securities 21,123 6.44% $ 9,112 6.26% $ 3,816 6.29%
Collateralized Mortgage Obligations
and Mortgage Backed Securities(1) 31,532 6.77% 23,771 6.67% 10,850 6.69%
Fixed Rate Loans (2) (3) 102,534 8.13% 60,987 9.03% 43,583 8.81%
Variable Rate Loans (4) (5) (6) 55,634 8.42% 38,194 8.43% 53,868 8.43%
LIABILITIES
Interest Bearing Demand & Savings (7) 31,544 3.13% 32,293 3.23% 37,488 2.86%
Time Deposits 207,068 5.36% 47,470 5.74% 20,830 5.89%
Repurchase Agreements 59,156 4.11%
Short Term Borrowings 2,155 5.50%
FHLB Advances 5,502 5.90% 3,720 6.14% 1,502 6.14%
Capital Leases 53 8.15% 53 8.15% 53 8.15%
OFF-BALANCE SHEET
Interest Rate Swap (8) 1,250 1,200
Average Pay Rate (Fixed) 2.88% 2.88%
Average Receive Rate (Variable) 5.57% 5.57%
Interest Rate Swap (9) 2,978 2,602 2,271
Average Pay Rate (Fixed) 5.86% 5.86% 5.86%
Average Receive Rate (Variable) 5.47% 5.47% 5.47%
</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 flows 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.
<PAGE> 51
49
The Corporation has two pay-fixed amortizing interest rate swaps executed as
hedges against fixed rate mortgages held in the portfolio, one executed in 1993
and the other in the second quarter of 1998. The net cash flow and market value
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 flow 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 swap would somewhat
balance the loss on the mortgage loans if the loans were sold. If rates fall,
the net cash flow given up is offset by the increased value of assets with an
above market yield. The gain that would be realized on the sale of the loans
would counteract the loss on the termination of the interest rate swap.
The Corporation entered into the second swap in response to the investment in
long term fixed rate mortgages which were retained in the portfolio. The swap,
which has a fixed rate of 5.86% and a variable rate of 3 month LIBOR, will
amortize and reprice quarterly over a five year period. Short- and
intermediate-term Treasury rates on which the swap yield curve is based have
declined approximately 65 basis points since the swap was executed, resulting in
a negative market value at December 31, 1998 of $380. The first swap had a
market value of $58 at year end.
The Corporation is evaluating the potential impact of the issuance of SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities" on both
existing and future interest rate swap transactions. Since the gain or loss on
the underlying assets may not be recognized as an offset to the gain or loss on
the interest rate swap, the volatility of reported income could increase.
For 1999, the Corporation anticipates continued growth in the variable rate
commercial loan categories, and plans to maintain mortgage and consumer loan
portfolios at their existing levels. Funding for this increase is expected to
come from a combination of wholesale and retail sources, although the
Corporation recognizes that customer uncertainty about the impact of the Year
2000 may limit deposit growth later in 1999.
UNB CORP.
QUANTITIVE DISCLOSURE OF MARKET RISK
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Four Years Five Years
Balance Rate Balance Rate
=================================================
<S> <C> <C> <C> <C>
ASSETS
Short Term Investments
Securities $ 1,363 6.69% $ 1,118 6.72%
Collateralized Mortgage Obligations
and Mortgage Backed Securities(1) 4,735 6.69% 1,815 6.79%
Fixed Rate Loans (2) (3) 24,892 8.81% 23,584 8.38%
Variable Rate Loans (4) (5) (6) 24,072 8.27% 22,037 8.31%
LIABILITIES
Interest Bearing Demand & Savings (7) 30,223 3.25% 48,154 2.84%
Time Deposits 6,719 6.06% 5,984 5.80%
Repurchase Agreements
Short Term Borrowings
FHLB Advances 30,330 5.95% 350 6.25%
Capital Leases 8 8.15% 0 0.00%
OFF-BALANCE SHEET
Interest Rate Swap (8)
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
Interest Rate Swap (9) 1,978 8,526
Average Pay Rate (Fixed) 5.86% 5.86%
Average Receive Rate (Variable) 5.47% 5.47%
</TABLE>
<TABLE>
<CAPTION>
More than 5 Years Total Fair
Balance Rate Balance Rate Value
=====================================================================
<S> <C> <C> <C> <C> <C>
ASSETS
Short Term Investments $ 12,854 5.42% $ 12,854
Securities $ 16,413 5.44% 52,945 6.11% 52,950
Collateralized Mortgage Obligations
and Mortgage Backed Securities(1) 8,801 5.77% 81,504 6.63% 81,529
Fixed Rate Loans (2) (3) 111,356 8.60% 366,935 8.61% 368,902
Variable Rate Loans (4) (5) (6) 117,464 8.19% 311,270 8.26% 324,667
LIABILITIES
Interest Bearing Demand & Savings (7) 114,393 2.00% 294,095 2.82% 270,248
Time Deposits 1,227 5.44% 289,298 5.66% 292,134
Repurchase Agreements 59,156 4.11% 59,156
Short Term Borrowings 2,155 5.50% 2,155
FHLB Advances 0 0.00% 41,404 5.97% 43,091
Capital Leases 0 0.00% 167 8.15% 189
OFF-BALANCE SHEET
Interest Rate Swap (8) 2,450 58
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
Interest Rate Swap (9) 18,355 (380)
Average Pay Rate (Fixed)
Average Receive Rate (Variable)
</TABLE>
(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 December, 1998, the notional principal amount of the interest
rate swap was $2,450 and the market value was $58. 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 5.25%
(9) At quarter-end December, 1998, the notional principal amount of the interest
rate swap was $18,355 and the market value was $(380). 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
5.22609%.
<PAGE> 52
50
LIQUIDITY MANAGEMENT
Management ensures that the liquidity position of the Corporation is adequate
to meet the credit needs and cash demands of its borrowers and depositors in a
timely and cost-effective manner. Through the Bank's Asset and Liability
Management Committee, management actively analyzes and manages the Corporation's
liquidity. Principal sources of liquidity for the Corporation and the Bank are
cash and cash equivalents, federal funds sold, short-term money market
investments and the cash flows provided by maturities and amortizations in the
loan and investment portfolios. The ability to raise funds in the market place
is provided by the Bank's branch network, in addition to the availability of
Federal Home Loan Bank (FHLB) advance borrowings, brokered deposits, Federal
Funds purchased and securities sold under agreement to repurchase.
Management's internal guideline for measuring the Bank's overall liquidity
level includes all deposits and FHLB advance borrowings. In this way, management
acknowledges what has become an industry norm, dependence on advance borrowings
as a source of balance sheet funding considered less volatile than deposits.
Advances with varying maturities and flexible repayment options are considered
more stable than the most stable of bank deposits, certificates of deposit,
which are liable to early withdrawal and are difficult to attract in longer
maturity ranges even at rates competitive to other market instruments. The
Corporation's gross loan to deposit (including FHLB advances) ratio at December
31, 1998 was 92.4%, a slight increase from 92.0% at 1997 year end.
At December 31, 1998, cash and cash equivalents equaled $28,195, or 3.2%, of
total assets. The change in cash and cash equivalents is shown in the
Consolidated Statement of Cash Flows and arises from operating, investing and
financing activities. These activities are summarized for the three years ended
December 31, 1998 in Table 8. During 1998, the Corporation generated net cash
flows from operating activities of $21,427, including $10,900 in net profits.
The major portion of cash flows from investing activities were concentrated in a
net use of cash of $55,314 to fund purchases and additions to the loan
portfolio. Cash provided by net reductions in the investment and mortgage-backed
portfolio was $5,035. Sources of cash inflows from financing activities were a
net increase in deposits of $36,013, net proceeds from FHLB advances of $5,965
and a net increase in short-term borrowings of $4,800. This was offset by cash
outflows for the payment of $4,151 in net cash dividends and net purchases of
treasury stock of $10,178. The net result of these cash flows was a decrease of
cash and cash equivalents from year end 1997 to 1998 of $803.
The liquidity needs of the Holding Company, primarily cash dividends, are met
through cash, short term investments and dividends from the Bank. Management is
not aware of any trend or event which will result in or that is reasonably
likely to occur that would result in the Corporation being unable to meet all
current and projected cash needs.
IMPACT OF INFLATION
Consolidated financial data included herein has been prepared in accordance
with generally accepted accounting principles (GAAP). Presently, GAAP requires
UNB Corp. to measure financial position and operating results in terms of
historical dollars, except for securities available for sale which are carried
at fair value. Changes in the relative value of money due to inflation or
recession are generally not considered.
In management's opinion, changes in interest rates affect the financial
condition of UNB Corp. to a far greater degree than changes in the inflation
rate. While interest rates are greatly influenced by changes in the inflation
rate, they do not move concurrently. Rather, interest rate volatility is based
on changes in the expected rate of inflation, as well as changes in monetary and
fiscal policy. A financial institution's ability to be relatively unaffected by
changes in interest rates is a good indicator of its capability to perform in
today's volatile economic environment. In an effort to protect itself from the
effects of interest rate volatility, UNB Corp. reviews its interest rate risk
position frequently, monitoring its exposure and taking necessary steps to
minimize any detrimental effects on the Corporation's profitability.
TABLE 8
LIQUIDITY MANAGEMENT
<TABLE>
<CAPTION>
(In thousands of dollars) 1998 1997 1996
<S> <C> <C> <C>
Net income ............................................................... $ 10,900 $ 9,006 $ 8,155
Adjustments to reconcile net income to net cash from
operating activities ................................................... 10,527 3,954 2,468
---------- ---------- ----------
Net cash from operating activities .................................. 21,427 12,960 10,623
Net cash used in investing activities .................................... (54,701) (22,305) (108,589)
Net cash from financing activities ....................................... 32,471 3,581 100,993
---------- ---------- ----------
Net change in cash and cash equivalents ............................. (803) (5,764) 3,027
Cash and cash equivalents at beginning of year ........................... 28,998 34,762 31,735
---------- ---------- ----------
Cash and cash equivalents at end of year ............................ $ 28,195 $ 28,998 $ 34,762
========== ========== ==========
</TABLE>
<PAGE> 53
51
FIVE YEAR SUMMARY OF SELECTED DATA
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
EARNINGS:
Net interest income .................. $ 35,422 $ 33,040 $ 31,363 $ 27,953 $ 24,191
Provision for possible loan losses ... 2,748 2,929 3,140 1,750 1,020
Income before federal
income taxes ....................... 16,590 13,803 12,428 11,165 10,005
Federal income taxes ................. 5,690 4,797 4,273 3,786 3,377
Net income ........................... 10,900 9,006 8,155 7,379 6,628
Cash dividends declared .............. 4,151 3,762 3,400 3,016 2,742
PER SHARE DATA:*
Basic ................................ $ 0.96 $ 0.78 $ 0.71 $ 0.64 $ 0.58
Net income fully diluted ............. 0.94 0.77 0.69 0.63 0.56
Cash dividends ....................... 0.365 0.325 0.295 0.265 0.240
Book value per share ................. 6.46 6.62 6.17 5.68 5.11
AVERAGE BALANCES:
Total assets ......................... $ 855,116 $ 810,999 $ 756,294 $ 644,861 $ 534,423
Total earning assets ................. 809,939 769,144 717,248 600,130 495,710
Total deposits ....................... 662,500 614,936 500,091 435,777 426,994
Net loans ............................ 641,050 620,489 574,495 457,485 385,618
Shareholders' equity ................. 76,837 73,791 68,591 61,617 57,894
Financial ratios:
Net income as a percentage of:
Average assets ................... 1.27% 1.11% 1.08% 1.14% 1.24%
Average shareholders' equity ..... 14.19 12.20 11.89 11.98 11.45
Cash dividends as a percentage
of net income ...................... 38.08 41.77 41.69 40.88 41.37
Average shareholders' equity as
a percentage of average assets ..... 8.99 9.10 9.07 9.56 10.83
Net loans/assets ..................... 76.00 75.13 75.22 72.51 67.57
Gross loans/deposits** ............... 92.37 92.04 98.57 93.48 81.94
Allowance for loan losses/
total loans ........................ 1.66 1.53 1.35 1.40 1.54
Net loans/equity ..................... 9.21x 8.11x 8.54x 7.83x 6.93%
Deposits/equity ...................... 9.56x 8.49x 8.42x 8.38x 8.30x
Year end balances:
Total assets ......................... $ 868,743 $ 826,313 $ 809,979 $ 699,644 $ 601,084
Long-term debt ....................... 41,571 35,650 62,603 31,360 16,660
Total shareholders' equity ........... 71,702 76,520 71,334 65,327 58,640
</TABLE>
Note: This summary should be read in conjunction with the related consolidated
financial statements and notes included herein.
* Per share data has been adjusted for any stock dividends and splits.
** Deposits include FHLB advances.
<PAGE> 54
ANNUAL
REPORT
1998
UNB CORP
TRADITION OF
CONTINUOUS
GROWTH
<PAGE> 1
Exhibit 21
Subsidiaries of UNB Corp.
Registrant Percent of Ownership
I. UNB Corp.
A. United National Bank & Trust Company 100%
(National Banking Association)
1. 620 Market Community Redevelopment Corporation 100%
B. United Banc Financial Services, Inc. 100%
C. United Insurance Agency, Inc. 100%
D. United Mortgage Corporation 100%
28
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 28,195
<INT-BEARING-DEPOSITS> 554
<FED-FUNDS-SOLD> 12,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,860
<INVESTMENTS-CARRYING> 2,589
<INVESTMENTS-MARKET> 2,619
<LOANS> 671,433
<ALLOWANCE> 11,172
<TOTAL-ASSETS> 868,743
<DEPOSITS> 685,494
<SHORT-TERM> 61,311
<LIABILITIES-OTHER> 8,665
<LONG-TERM> 41,571
0
0
<COMMON> 11,646
<OTHER-SE> 60,056
<TOTAL-LIABILITIES-AND-EQUITY> 868,743
<INTEREST-LOAN> 56,498
<INTEREST-INVEST> 8,637
<INTEREST-OTHER> 870
<INTEREST-TOTAL> 66,005
<INTEREST-DEPOSIT> 24,791
<INTEREST-EXPENSE> 30,583
<INTEREST-INCOME-NET> 35,422
<LOAN-LOSSES> 2,748
<SECURITIES-GAINS> 793
<EXPENSE-OTHER> 27,018
<INCOME-PRETAX> 16,590
<INCOME-PRE-EXTRAORDINARY> 16,590
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,900
<EPS-PRIMARY> .96<F1>
<EPS-DILUTED> .94<F1>
<YIELD-ACTUAL> 8.16
<LOANS-NON> 1,301
<LOANS-PAST> 187
<LOANS-TROUBLED> 203
<LOANS-PROBLEM> 2,147
<ALLOWANCE-OPEN> 9,650
<CHARGE-OFFS> 2,397
<RECOVERIES> 1,171
<ALLOWANCE-CLOSE> 11,172
<ALLOWANCE-DOMESTIC> 9,748
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,424
<FN>
<F1>A 100% stock split in the form of a dividend was paid to shareholders on
October 15, 1998. Prior financial data schedules have not been restated for the
transaction.
</FN>
</TABLE>
