August 5, 1997
VIA EDGAR
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Union National Bancorp, Form 10/A Registration Statement
Registration No. 0-22523
Ladies and Gentlemen:
On behalf of Union National Bancorp (the "Company"), we hereby transmit
for filing the Company's Registration Statement on Form 10/A, which responds
to your comment letter dated June 26, 1997. We believe that Form 10/A
complies with all of the staff's comments.
The following describes the manner and location of our responses to the
staff's comments. Paragraph numbers refer to the numbered paragraphs in the
staff's comment letter, and page references are to the page numbers in the EDGAR
version transmitted herewith.
Net Interest Income
1. Complied with. See pages 13-14. Please note that the Company's previous
filing on Form 10 inadvertently left out the word "not" when referencing
the impact that the Interim Development Control Ordinance would have on business
in Carroll County.
Average Balance Sheets and Yield Analysis
2. Complied with. See page 14. See also Response No. 6.
Non-Interest Expense
3. Complied with. See page 17.
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Securities and Exchange Commission
August 5, 1997
Page 2
Securities Portfolio
4. Complied with. See page 19.
Allowance for Credit Losses and Management of Credit Risk
5. Complied with. See page 22.
Loan Categories by Percentages
6. Complied with. See page 22. The percentages on this table have changed due to
the fact that the original table, which was calculated from Union National
Bank's ("UNB") internal classifications, was changed to remain consistent with
page 20 and Note 6 to the Consolidated Financial Statement which calculated such
loan percentages under the classification guidelines set forth by the Federal
Call Report. UNB's internal classification reported all loans by the department
responsible for that loan type. Commercial construction loans were originally
reported in "Commercial", whereas the Consolidated Financial Statements placed
such loans in the "Real Estate Mortgage" category. Similarly, UNB's
classification for both junior lien mortgages and home equity lines of credit
were included in the "Installment" category, whereas the Consolidated Financial
Statements report these types of loans under the "Real Estate- Mortgage"
category.
Non-Performing Assets
7. Complied with. See page 23.
8. As reflected in the table detailing non-performing assets, Management
does not believe that any of the potentially uncollectable loans are material.
Interest Rate Sensitivity Table
9. Complied with. See page 26.
10. Complied with. See page 26.
11. Complied with. See page 26.
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Securities and Exchange Commission
August 5, 1997
Page 3
Consolidated Financial Statements - General
12. Complied with. See pages 12 and i-iv.
Independent Auditor's Report - Page F-1
13. Complied with. See page F-1.
Consolidated Balance Sheets - Page F-2
Consolidated Statements of Changes in . . . - Page F-4
14. Complied with. See pages F-2 and F-4.
Consolidated Statements of Cash Flows - Page F-5
15. Cash outflows related to acquisition of real estate through foreclosure
occur as a result of foreclosure under a note in which the bank holds a second
or lower position. The buyout of the party in the first position results in a
cash outflow.
Notes to the Consolidated Financial Statements
16. Complied with. See page F-11.
17. Complied with. See pages 19 and F-11.
18. Complied with. See page F-14.
19. The agreements referenced in Note 11 with respect to retirement benefits
provided to members of the Board of Directors are intended to be considered
defined contribution plans whereby the fees earned are deferred and the interest
is credited until retirement. Accordingly, the disclosures required by Paragraph
74 of SFAS No. 106 are not applicable.
As of December 31, 1996, the Company's Supplemental Executive
Retirement Plan ("SERP") covers three executives. The Company is accruing the
present value of these benefits in a systematic and consistent manner over the
remaining number of years to the participants retirement date as provided in APB
12. Accordingly, the disclosures required by Paragraph 74 of FASB 106 are not
applicable.
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Securities and Exchange Commission
August 5, 1997
Page 4
20. Complied with. See page F-16.
21. Complied with. See page F-18.
General
22. Complied with. See page 10. Management believes that the Company does
not have any material environmental liabilities.
23. The Company's Registration Statement on Form S-4 was withdrawn from filing
pursuant to Rule 477 of the Securities Act on December 2, 1996.
We understand that the Company's Registration Statement on Form 10 as
filed with the SEC via EDGAR on May 5, 1997 became automatically effective on
July 5, 1997, notwithstanding the fact that the Registration Statement was
considered deficient by the SEC. We trust that the foregoing responses fully
responds to all of the staff's comments, and that the Registration Statement of
Form 10/A will eliminate any deficiencies in the original filing.
If you have any questions, please contact the undersigned.
Very truly yours,
/s/Edward Obstler
---------------------------------
Edward Obstler
Enclosures
cc: Virginia Smith
Brenda Boudreau
Bill Williams
Abba David Poliakoff
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
UNION NATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1862338
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
117 East Main Street, Westminster, Maryland 21157
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (410) 848-7200
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
None None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of Class)
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ITEM 1. BUSINESS
General
Union National Bancorp, Inc. ("Union National") was incorporated under
the laws of the State of Maryland on January 19, 1994, and is a one-bank holding
company headquartered in Westminster, Maryland.
Union National is primarily engaged in commercial and retail banking
services and in businesses related to banking services through its sole
subsidiary, Union National Bank ("UNB"). UNB was founded in Westminster in 1816
under the name of Bank of Westminster, and was briefly known during the period
of 1821 to 1830 as a branch of the Farmers & Mechanics Bank of Frederick. In
1865, UNB became known as "The Union National Bank of Westminster". UNB is
currently in its 180th year of operation.
Market Areas
The primary service area of UNB consists of all of Carroll County,
Maryland, the western portion of Baltimore County, Maryland, and the very
northern edge of Howard County, Maryland.
Union National does not maintain data on specific characteristics of
its market area. The geographic market information concerning Carroll County is
taken from "Demographic & Development Data Manual" published by the Carroll
County Department of Planning (July 1995) and "Brief Economic Facts of Carroll
County, Maryland" published by the Carroll County Department Economic
Development (1995-1996).
Carroll County (the "County"), one of seven jurisdictions of the
Baltimore metropolitan area, lies 31 miles northwest of Baltimore and 56 miles
north of Washington, D.C. The County seat is Westminster, and it includes seven
other incorporated towns. While farming and agri-business remain an important
and vital part of Carroll County's economy, commercial and industrial activities
have gained in economic importance. The largest business clusters are located in
the central, western and southern portions of the County.
Carroll County has experienced a growth in population of approximately
13% overall during the past five years. Approximately 54% of the County's
population commutes to work to areas outside of Carroll County. The County labor
force is highly independent and rooted in strong, rural, work ethic tradition.
Manufacturing accounts for over 14% of total employment. During 1995, Carroll
County experienced an unemployment rate of 4.5%, up just slightly from 4.4% in
1994. No significant change is expected in the unemployment rate as industry and
business continues to grow in Carroll County.
Based on UNB's experience in real estate lending transactions and the
appraisals obtained for such transactions, real estate values in Carroll County
remained relatively flat for the past five years, with a mild decline in values
over the past two years.
UNB has eight full service banking offices in Carroll County, four of
which are located in Westminster, one in Finksburg, one in Hampstead, one in
Eldersburg, and one in Sykesville. UNB also has one loan production office,
which is located in the same building as Union National's office headquarters in
Westminster, Maryland.
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Lending and Deposit Activities
Lending Activities
UNB provides a full range of retail and commercial banking services
designed to meet the borrowing and depository needs of small and medium sized
businesses and consumers in local areas. Substantially all of UNB's loans are to
customers located within its service area. UNB has no foreign loans or highly
leveraged transaction loans, as defined by the Federal Reserve Board ("FRB").
All of the loans in UNB's loan portfolio have been originated by UNB. UNB
conducts its lending activities pursuant to the loan policies adopted by its
Board of Directors. These loan policies grant individual loan officers authority
to make secured and unsecured loans in specific dollar amounts; larger loans
must be approved by senior officers or various loan committees. UNB's management
information systems and loan review policies are designed to monitor lending
sufficiently to ensure adherence to UNB's loan policies.
The commercial loans offered by UNB include (i) commercial real estate
loans, (ii) working capital and other commercial loans, (iii) construction
loans, (iv) SBA-guaranteed loans, and (v) agricultural loans. UNB's commercial
real estate loans are used to provide permanent financing for retail and office
buildings, multiple-family buildings and churches. Commercial real estate
secured loans are generally written for a fifteen year term or amortized over a
longer period with balloon payment by the fifteenth year. Personal guarantees
are obtained on nearly all commercial loans. Credit analyses, loan review and an
effective collections process are also used to minimize any potential losses.
UNB employs five full-time commercial loan officers.
Consumer loans offered by UNB include (i) residential real estate
loans, (ii) personal unsecured lines of credit, (iii) personal installment loans
(including indirect lending through auto sales companies), and (iv) home equity
loans (fixed-rate term and open ended revolving lines of credits).
Residential mortgage products include adjustable rate as well as
conventional, fixed-rate loans. Terms vary from a five-year balloon to a 30-year
fully amortized loan. UNB does not purchase loans but is active in secondary
market lending and is also a member of the Federal Home Loan Bank of Atlanta.
Personal unsecured revolving lines of credit with variable interest rates and
principal amounts ranging from $1,000 to $10,000 are offered to credit-worthy
bank customers. The largest segment of UNB's installment loan portfolio is
secured by motor vehicles and are fixed-rate loans. "Indirect dealer paper"
accounts for most of the loans, although direct auto loans are also available
with terms of 30 to 48 months for used cars and up to 60 months for new cars.
Credit checks, credit scoring and debt to income ratios of 40% or less are used
to qualify borrowers. Home equity products include both a fixed-rate term
product and an open-end revolving line of credit with maximum loan to value
ratios of 85% of current appraisal or 80% of current tax assessment.
Lending in the residential area remained constant in 1996 while the
installment area saw growth of 3.2%. Industry standard debt to income ratios are
used to qualify borrowers on all consumer loans. Managers and assistant managers
have retail lending authorities at each of the branch locations. In addition,
UNB employs two full-time retail lenders and one mortgage lender in the central
loan production office in Westminster, Maryland.
Loan Approval
Individual loan authorities are established by UNB's Board of Directors
upon recommendation by the Senior Credit Officer. In establishing individual
loan authority the experience of the lender is taken
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into consideration, as well as the type of lending in which the officer is
involved. The Officer's Loan Committee consists of the President of UNB, the
Senior Credit Officer, Senior Commercial Loan Officer and at least one other
Commercial Loan Officer and the Credit Analyst. The Officer's Loan Committee has
the authority to approve and consummate loans up to $1,600,000. The full Board
of Directors reviews on a monthly basis all commercial and residential loans
approved by individual officers and the Officer's Loan Committee. All loan
requests exceeding $1,600,000 must be approved by the Management Oversight
Committee. These requests come to the Committee with a review, analysis and
recommendation by the lender and the Officer's Loan Committee.
UNB generally requires that loans secured by first mortgages on real
estate have loan to value ratios within specified limits, ranging from 65% for
loans secured by raw land to 80% for improved property, with the exception of
secondary market programs which allow loan to value ratios as high as 97%. UNB
also makes loans secured by second mortgages on real estate. UNB offers
Adjustable Rate Mortgage products, as well as conventional fixed rate products.
UNB participates in various community development programs in an effort
to meet its responsibilities under the Community Reinvestment Act ("CRA"). UNB
has consistently rated a "Satisfactory" record in meeting its obligations under
the CRA.
Deposit Activities
UNB also offers a full range of deposit and personal banking services
insured by the Federal Deposit Insurance Corporation ("FDIC"), including (i)
commercial checking and small business checking products, (ii) trust and cash
management services, (iii) retirement accounts such as Individual Retirement
Accounts ("IRA") and Simplified Employee Pension accounts, retail deposit
services such as certificates of deposit, money market accounts, savings
accounts, checking account products and Automated Teller Machines ("ATMs"),
Point of Sale and other electronic services, and (iv) other personal
miscellaneous services such as safe deposit boxes, foreign draft, foreign
currency exchanges, night depository services, travelers checks, merchant credit
cards, direct deposit of payroll, U.S. savings bonds, official bank checks and
money orders. UNB offers credit cards and a full range of trust services through
one of its correspondent banking relationships.
The principal sources of funds for UNB are core deposits (demand
deposits, interest-bearing transaction accounts, money market accounts, savings
deposits and certificates of deposit). UNB solicits these deposits from
individuals, businesses, foundations and governmental authorities. Substantially
all of UNB's deposits are from the local market areas surrounding each of its
offices.
Investment Portfolio and Activities
UNB's investment portfolio has several objectives. A key objective is
to provide a balance in UNB's asset mix of loans and investments consistent with
its liability structure, and to assist in management of interest rate risk. The
investments augment UNB's capital position in the risk based capital formula,
providing the necessary liquidity to meet fluctuations in credit demands of the
community and fluctuations in deposit levels. In addition, the portfolio
provides collateral for pledging against public funds, and a reasonable
allowance for control of tax liabilities. Finally, the investment portfolio is
designed to provide income for UNB. In view of the above objectives, the
portfolio is treated conservatively by management, and only securities that pass
conservative investment criteria are purchased. UNB does not engage in any
derivatives trading. The portfolio will commonly fluctuate between 20% and 30%
of UNB's assets.
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Additional Activities
UNB provides its customers with access to investment products through a
third party vendor, Primevest Financial Services, Inc., which offers annuities
and mutual fund products and is based in Minnesota.
Competition
UNB operates in a highly competitive environment, competing for
deposits and loans with commercial banks, savings banks, thrift institutions,
credit unions, and finance and mortgage companies. Some of these competitors
possess substantially greater financial resources than those available to UNB.
Also, certain of these institutions have significantly higher lending limits
than UNB and may provide various services for their customers, such as trust
services, which UNB does not offer directly to its customers.
UNB does not maintain data concerning its competitive position within
its market area. Occasionally, limited market share data is produced by third
parties. According to a 1996 publication by the FDIC, at June 30, 1996 UNB had a
13.7% market share of deposits held by the Carroll County branches of banks,
savings associations and credit unions. Two other institutions had larger
deposit market shares (28.8% and 14.2%) for their Carroll County branches.
Financial institutions compete generally on the basis of rates and
service. In its lending business, UNB is subject to increasing competition from
consumer finance companies and mortgage companies which are not subject to the
same kind of regulatory restrictions as banks. Union National anticipates that
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, will
increase competitive pressures in UNB's market by permitting entry of additional
competitors.
While UNB will seek to remain competitive with the interest rates that
it charges on loans and offers on deposits, UNB believes that its success has
been and will continue to be due to its emphasis on its community banking,
customer service and relationships. With the continuing consolidation in the
banking industry, particularly in UNB's markets, smaller profitable banks are
gaining opportunities where larger institutions exit markets that are only
marginally profitable for them. Management of Union National believes it can
profitably utilize such opportunities by establishing a local presence in these
areas to provide community banking services.
Seasonality
Management does not believe that the deposits or the business of UNB in
general are seasonal in nature. The deposits may, however, vary with local and
national economic conditions but should not have a material effect on planning
and policy making.
Supervision and Regulation
General. Union National and UNB are extensively regulated under federal
and state law. Generally, these laws and regulations are intended to protect
depositors, not stockholders. The following is a summary description of certain
provisions of certain laws which affect the regulation of bank holding companies
and banks. The discussion is qualified in its entirety by reference to
applicable laws and regulations. Changes in such laws and regulations may have a
material effect on the business and prospects of the Union National and UNB.
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Federal Bank Holding Company Regulation and Structure. Union National
is a bank holding company within the meaning of the Bank Holding Company Act of
1956, as amended, and as such, it is subject to regulation, supervision, and
examination by the FRB. Union National is required to file annual and quarterly
reports with the FRB and to provide the FRB with such additional information as
the FRB may require. The FRB may conduct examinations of Union National and its
subsidiaries.
With certain limited exceptions, Union National is required to obtain
prior approval from the FRB before acquiring direct or indirect ownership or
control of more than 5% of any voting securities or substantially all of the
assets of a bank or bank holding company, or before merging or consolidating
with another bank holding company. Additionally, with certain exceptions, any
person proposing to acquire control through direct or indirect ownership of 25%
or more of any voting securities of Union National is required to give 60 days
written notice of the acquisition to the FRB, which may prohibit the
transaction, and to publish notice to the public.
Generally, a bank holding company may not engage in any activities
other than banking, managing or controlling its bank and other authorized
subsidiaries, and providing services to these subsidiaries. With prior approval
of the FRB, Union National may acquire more than 5% of the assets or outstanding
shares of a company engaging in non-bank activities determined by the FRB to be
closely related to the business of banking or of managing or controlling banks.
The FRB provides expedited procedures for expansion into approved categories of
non-bank activities.
Subsidiary banks of a bank holding company are subject to certain
quantitative and qualitative restrictions on extensions of credit to the bank
holding company or its subsidiaries, on investments in their securities and on
the use of their securities as collateral for loans to any borrower. These
regulations and restrictions may limit Union National's ability to obtain funds
from UNB for its cash needs, including funds for the payment of dividends,
interest and operating expenses. Further, subject to certain exceptions, a bank
holding company and its subsidiaries are prohibited from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. For example, UNB may not generally require a
customer to obtain other services from itself or Union National, and may not
require that a customer promise not to obtain other services from a competitor
as a condition to and extension of credit to the customer.
Under FRB policy, a bank holding company is expected to act as a source
of financial strength to its subsidiary banks and to make capital injections
into a troubled subsidiary bank, and the FRB may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
a subsidiary bank when required. A required capital injection may be called for
at a time when the holding company does not have the resources to provide it. In
addition, depository institutions insured by the FDIC can be held liable for any
losses incurred by, or reasonably anticipated to be incurred by, the FDIC in
connection with the default of, or assistance provided to, a commonly controlled
FDIC-insured depository institution. Accordingly, in the event that any insured
subsidiary of Union National causes a loss to the FDIC, other insured
subsidiaries of Union National could be required to compensate the FDIC by
reimbursing it for the estimated amount of such loss. Such cross guaranty
liabilities generally are superior in priority to the obligations of the
depository institution to its stockholders due solely to their status as
stockholders and obligations to other affiliates.
State Bank Holding Company Regulation. As a Maryland bank holding
company, Union National is subject to various restrictions on its activities as
set forth in Maryland law, in addition to those restrictions set forth in
federal law. See "Supervision and Regulation--Federal Bank Holding Company
Regulation and Structure." Under Maryland law, a bank holding company that
desires to acquire a bank
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or bank holding company that has its principal place of business in Maryland
must obtain approval from the Commissioner. Also, a bank holding company and its
Maryland state-chartered bank or trust company cannot directly or indirectly
acquire banking or non-banking subsidiaries or affiliates until the bank or
trust company receives the approval of the Commissioner.
Federal Bank Regulation. Union National's banking subsidiary is a
federally-chartered national bank regulated by the Office of Comptroller of the
Currency ("OCC"). The OCC may prohibit the institutions over which it has
supervisory authority from engaging in activities or investments that the agency
believes constitutes unsafe or unsound banking practices. Federal banking
regulators have extensive enforcement authority over the institutions they
regulate to prohibit or correct activities which violate law, regulation or a
regulatory agreement or which are deemed to constitute unsafe or unsound
practices. Enforcement actions may include the appointment of a conservator or
receiver, the issuance of a cease and desist order, the termination of deposit
insurance, the imposition of civil money penalties on the institution, its
directors, officers, employees and institution-affiliated parties, the issuance
of directives to increase capital, the issuance of formal and informal
agreements, the removal of or restrictions on directors, officers, employees and
institution-affiliated parties, and the enforcement of any such mechanisms
through restraining orders or other court actions.
UNB is subject to certain restrictions on extensions of credit to
executive officers, directors, principal stockholders or any related interest of
such persons which generally require that such credit extensions be made on
substantially the same terms as are available to third persons dealing with UNB
and not involve more than the normal risk of repayment. Other laws tie the
maximum amount which may be loaned to any one customer and its related interests
to capital levels.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), each federal banking agency is required to prescribe, by regulation,
non-capital safety and soundness standards for institutions under its authority.
The federal banking agencies, including the OCC, have adopted standards covering
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, and
compensation, fees and benefits. An institution which fails to meet those
standards may be required by the agency to develop a plan acceptable to the
agency, specifying the steps that the institution will take to meet the
standards. Failure to submit or implement such a plan may subject the
institution to regulatory sanctions. Union National, on behalf of UNB, believes
that it meets substantially all standards which have been adopted. FDICIA also
imposed new capital standards on insured depository institutions. See
"Supervision and Regulation--Capital Requirements."
Before establishing new branch offices, UNB must meet certain minimum
capital stock and surplus requirements and the Bank must obtain OCC approval.
Deposit Insurance. As a FDIC member institution, UNB's deposits are
insured to a maximum of $100,000 per depositor through the Bank Insurance Fund
("BIF"), administered by the FDIC, and each institution is required to pay
semi-annual deposit insurance premium assessments to the FDIC. The BIF
assessment rates have a range of 0 cents to 27 cents for every $100 in
assessable deposits. Banks with no premium are subject to an annual statutory
minimum assessment.
Limits on Dividends and Other Payments. Union National's current
ability to pay dividends is largely dependent upon the receipt of dividends from
its banking subsidiary, UNB. Both federal and state laws impose restrictions on
the ability of Union National to pay dividends. The FRB has issued a policy
statement which provides that, as a general matter, insured banks and bank
holding companies may pay
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dividends only out of prior operating earnings. For a Maryland state-chartered
bank or trust company, dividends may be paid out of undivided profits or, with
the prior approval of the Commissioner, from surplus in excess of 100% of
required capital stock. If, however, the surplus of a Maryland bank is less than
100% of its required capital stock, cash dividends may not be paid in excess of
90% of net earnings. In addition to these specific restrictions, bank regulatory
agencies, in general, also have the ability to prohibit proposed dividends by a
financial institution which would otherwise be permitted under applicable
regulations if the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
Capital Requirements. The federal banking regulators have adopted
certain risk-based capital guidelines to assist in the assessment of the capital
adequacy of a banking organization's operations for both transactions reported
on the balance sheet as assets and transactions, such as letters of credit, and
recourse arrangements, which are recorded as off balance sheet items. Under
these guidelines, nominal dollar amounts of assets and credit equivalent amounts
of off balance sheet items are multiplied by one of several risk adjustment
percentages, which range from 0% for assets with low credit risk, such as
certain U.S. Treasury securities, to 100% for assets with relatively high credit
risk, such as business loans. For bank holding companies with less than
$150,000,000 in consolidated assets, the guidelines are applied on a bank-only
basis.
A banking organization's risk-based capital ratios are obtained by
dividing its qualifying capital by its total risk adjusted assets. The
regulators measure risk-adjusted assets, which include off balance sheet items,
against both total qualifying capital (the sum of Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1," or core capital,
includes common equity, perpetual preferred stock (excluding auction rate
issues) and minority interest in equity accounts of consolidated subsidiaries,
less goodwill and other intangibles, subject to certain exceptions. "Tier 2," or
supplementary capital, includes, among other things, limited-life preferred
stock, hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan and lease losses, subject to
certain limitations and less required deductions. The inclusion of elements of
Tier 2 capital is subject to certain other requirements and limitations of the
federal banking agencies. Banks and bank holding companies subject to the
risk-based capital guidelines are required to maintain a ratio of Tier 1 capital
to risk- weighted assets of at least 4% and a ratio of total capital to
risk-weighted assets of at least 8%. The appropriate regulatory authority may
set higher capital requirements when particular circumstances warrant. As of
December 31, 1996, UNB's ratio of Tier 1 to risk-weighted assets stood at 11.7%
and its ratio of total capital to risk-weighted assets stood at 12.9%. In
addition to risk-based capital, banks and bank holding companies are required to
maintain a minimum amount of Tier 1 capital to total assets, referred to as the
leverage capital ratio, of at least 3%. As of December 31, 1996, UNB's leverage
capital ratio was 8.0%.
In August, 1995 and May, 1996, the federal banking agencies adopted
final regulations specifying that the agencies will include, in their
evaluations of a bank's capital adequacy, an assessment of the UNB's interest
rate risk ("IRR") exposure. The standards for measuring the adequacy and
effectiveness of a banking organization's interest rate risk management includes
a measurement of board of director and senior management oversight, and a
determination of whether a banking organization's procedures for comprehensive
risk management are appropriate to the circumstances of the specific banking
organization. UNB has internal IRR models that are used to measure and monitor
IRR. Additionally, the regulatory agencies have been assessing IRR on an
informal basis for several years. For these reasons, Union National does not
expect the addition of IRR evaluation to the agencies' capital guidelines to
result in significant changes in capital requirements for UNB.
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Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of deposit insurance by the FDIC, as well as to
the measures described under "--Federal Deposit Insurance Corporation
Improvement Act of 1991" below, as applicable to undercapitalized institutions.
In addition, future changes in regulations or practices could further reduce the
amount of capital recognized for purposes of capital adequacy. Such a change
could affect the ability of UNB to grow and could restrict the amount of
profits, if any, available for the payment of dividends to the Company.
Federal Deposit Insurance Corporation Improvement Act of 1991. In
December, 1991, Congress enacted FDICIA, which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, (ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels, with
more scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risked-based premiums. See "- Deposit
Insurance."
A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." UNB is currently classified as
"well-capitalized." An institution may be deemed by the regulators to be in a
capitalization category that is lower than is indicated by its actual capital
position if, among other things, it receives an unsatisfactory examination
rating with respect to asset quality, management, earnings or liquidity.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to growth limitations and are required to submit capital restoration
plans. If a depository institution fails to submit an acceptable plan, it is
treated as if it is significantly undercapitalized. Significantly undercapital-
ized depository institutions may be subject to a number of other requirements
and restrictions, including orders to sell sufficient voting stock to become
adequately capitalized, requirements to reduce total assets and stop accepting
deposits from correspondent banks. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator, generally within 90
days of the date such institution is determined to be critically
undercapitalized.
FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or
9
<PAGE>
conservator for the institution. FDICIA also limits the circumstances under
which the FDIC is permitted to provide financial assistance to an insured
institution before appointment of a conservator or receiver.
Interstate Banking Legislation. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 was enacted into law on September 29, 1994. The
law provides that, among other things, substantially all state law barriers to
the acquisition of banks by out-of-state bank holding companies were eliminated
effective on September 29, 1995. The law also permits interstate branching by
banks effective as of June 1, 1997, subject to the ability of states to opt-out
completely or to set an earlier effective date. Maryland generally established
an earlier effective date of September 29, 1995.
Monetary Policy. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the FRB, in connection with
the FRB's regulation of the money supply. Various methods employed by the FRB
are open market operations in United States Government securities, changes in
the discount rate on member bank borrowing and changes in reserve requirements
against member bank deposits. These methods are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits. The monetary policies of the FRB have had a significant effect on
the operating results of commercial banks in the past and are expected to
continue to do so in the future.
Employees
As of March 17, 1997, UNB had the equivalent of 114 full-time
employees. None of its employees is represented by a collective bargaining unit.
UNB considers relations with its employees to be good.
10
<PAGE>
ITEM 2. FINANCIAL INFORMATION
The following selected financial data should be read in conjunction
with Union National's consolidated financial statements, related notes and other
financial information included herein and Management's Discussion and Analysis
of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
(In Thousands of Dollars Except Per Share Data) Year Ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESULTS FROM OPERATIONS
Interest Income $ 17,361 $ 17,091 $ 15,109 $ 14,789 $ 14,804
Interest Expense 8,099 8,092 6,289 6,170 6,967
--------- --------- ---------- --------- ---------
Net Interest Income 9,262 8,999 8,820 8,619 7,837
Provision for Credit Losses 329 212 342 425 470
--------- --------- ---------- --------- ---------
Net Interest Income after Provision for Credit Losses 8,933 8,787 8,478 8,194 7,367
Non-Interest Income 1,086 978 1,315 1,029 874
Non-Interest Expense 7,200 7,058 6,800 6,179 5,595
--------- --------- ---------- --------- ---------
Income Before Income Taxes 2,819 2,707 2,993 3,044 2,646
Applicable Income Taxes 955 912 990 1,009 867
--------- --------- ---------- --------- ---------
Net Income before effect of accounting change 1,864 1,795 2,003 2,034 1,780
Effect of accounting change 0 0 0 0 248
--------- --------- ---------- --------- ---------
Net Income $ 1,864 $ 1,795 $ 2,003 $ 2,034 $ 2,028
========= ========= ========== ========= =========
FINANCIAL CONDITION
Total assets $225,036 $218,816 $207,226 $192,290 $175,511
Investment securities (including available for sale) 55,940 52,421 54,938 48,724 38,659
Loans, net of unearned income 147,351 146,822 139,730 128,498 127,652
Allowance for loan losses 1,772 1,769 1,671 1,503 1,365
Deposits 199,291 193,462 182,533 172,816 160,367
Stockholders' equity 18,053 16,540 13,948 14,061 12,125
PER SHARE DATA
Net income $ 2.23 $ 2.15 $ 2.40 $ 2.44 $ 2.43
Dividends 0.57 0.52 0.50 0.46 0.38
Stockholders' equity 21.65 19.83 16.72 16.86 14.54
PERFORMANCE RATIOS
Return on average assets 0.84% 0.84% 1.00% 1.10% 1.06%
Return on average equity 10.80 11.55 14.34 15.63 15.77
Net interest margin on average earning assets 4.53 4.56 4.83 5.12 5.13
Efficiency (non-interest expense / (net interest income +
non-interest income)) 69.58 70.75 67.09 64.04 64.22
LIQUIDITY AND CAPITAL RATIOS
Stockholders' equity (% assets) 8.02% 7.56% 6.73% 7.31% 6.91%
Risk-based:
Tier 1 Capital 11.72 10.86 10.42 10.62 9.83
Total Capital 12.87 12.01 11.77 10.94 10.75
Dividends (% net income) 25.51 24.16 20.82 18.86 17.80
Loans to deposits 73.94 75.89 76.55 74.36 79.60
ASSET QUALITY RATIOS
Allowance for credit losses to total loans 1.20% 1.20% 1.20% 1.17% 1 .07%
Allowance for credit losses to non-performing loans 136.34 322.24 717.14 167.23 201.99
Net loan charge-offs to average total loans 0.22 0.08 0.13 0.22 0.16
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is designed to provide a better understanding
of the financial position of Union National and it should be read in conjunction
with the consolidated financial statements and notes included herein.
OVERVIEW
On June 30, 1994, Union National commenced operations as the parent
company of its sole subsidiary, UNB, which has conducted the business of banking
since 1816. Since UNB is the primary possession of the holding company, the
assets and liabilities of the holding company are made up almost entirely of the
assets and liabilities of UNB. The same is true for the income and expense of
Union National with the exception of activities conducted at the holding company
level only, such as mergers and acquisitions. All data for 1996, 1995, and 1994
is presented in this analysis in consolidated form and is compared to like data
for UNB for prior years.
Union National has increased in asset size by 44% since 1991. This
growth generally exceeded that of our peers, both locally and nationally, and it
was achieved internally without the benefit of geographical expansion or
acquisition. Over that period UNB faced drastic changes in the structure of the
financial services industry, ever stronger competition for both deposits and
loans, rapidly changing technology, both an economic recession and a strong
expansion with low levels of inflation, a return to low interest rates
interrupted by a sudden increase in rates, and continued changes in law and
regulation.
Total assets were $225.0 million at December 31, 1996, an increase of
$6.2 million or 2.8% over one year earlier. The primary source of these funds
was certificates of deposit. Growth in deposits has declined in recent years as
depositors have sought other avenues of investment to enhance their yields. In
1994, total assets increased $11.6 million or 5.6%. Loan growth slowed during
the second half of 1995 and remained sluggish throughout 1996. Other investments
have increased as loan growth has declined.
Net income rose 3.9% in 1996 to $1,863,522 from net income of
$1,794,228 in 1995 after a 10.5% decline from $2,003,837 in 1994. The return on
average assets was .84% in 1996 and 1995, and 1.0% in 1994. The return on
average equity was 10.80% in 1996, 11.55% in 1995, and 14.34% in 1994.
Dividends on common stock rose to $.57 in 1996 from $.52 in 1995, a
9.6% increase. In 1995, dividends were increased 4.0% from $.50 in 1994. As a
percent of income, dividends rose to 25.51% in 1996 from 24.16% in 1995 which
had risen from 20.82% in 1994. As of December 31, 1993, UNB adopted a change in
accounting method, "Accounting for Investment Securities" whereby certain
securities must be designated "available for sale". Any gain or loss in fair
value must be shown as an adjustment to equity, net of taxes. Initially, capital
rose as a result of this change, but the effect quickly turned negative in 1994
as interest rates rose and the fair value of available-for-sale securities
declined. During 1995, that process was reversed and continued throughout 1996
as interest rates declined and fair value for those securities increased. Except
for this equity adjustment, retained earnings continue to be the chief source of
increases in stockholders' equity.
Union National has not experienced material changes in its financial
condition or results of operations from December 31, 1996 to the six months
ended June 30, 1997. Additionally, there have been no material changes for the
six months ended June 30, 1996 compared to the six months ended June 30, 1997.
12
<PAGE>
NET INTEREST INCOME
Net interest income is the major component of Union National's
earnings, and it consists of the excess of interest income from earning assets
less the expense of interest bearing liabilities. Earning assets are composed
primarily of loans and securities, while deposits and short-term borrowings
represent the major portion of interest bearing liabilities. Changes in the
volume and mix of these assets and liabilities, as well as changes in the yields
earned and rates paid, are determinants of the changes in net interest income.
The net interest margin is calculated as tax-equivalent net interest income
(income plus the tax savings from tax-exempt loans and investments) divided by
average earning assets and represents the company's net yield on its earning
assets.
Net interest income was $9,262,338 in 1996, $8,999,263 in 1995, and
$8,819,983 in 1994. These levels represent increases of $263,075 (2.9%) for 1996
and $179,280 (2.0%) for 1995. On a tax-equivalent basis, the respective net
interest incomes for 1996, 1995, and 1994, respectively, were $9,502,375,
$9,240,655, and $9,097,956. In 1994, the growth in net interest income slowed
because the growth of earning assets as well as the spread between the rate of
interest earned and that paid were declining. This trend has continued, but it
improved in 1996. The net interest spread dropped to 3.95% in 1996 from 4.01% in
1995, which was down from 4.38% in 1994. The net interest margin as a percentage
of earning assets was 4.53%, down slightly from 4.56% in 1995, which was down
significantly from 4.83% in 1994.
Average earning assets were $209,432,784 in 1996, up 3.4% from
$202,610,060 in 1995 which were 7.5% more than the $188,516,880 in 1994. Total
interest income, on a tax-equivalent basis, was $17,600,904 in 1996, up $269,145
or 1.6% from $17,331,759 in 1995 which was up $1,934,937 or 12.5% from the 1994
level. The tax equivalent yield on earning assets during 1996 fell to 8.40% from
8.55% in 1995 which was up from 8.16% in 1994.
Average interest bearing liabilities were $181,883,747 in 1996, up 2.1%
from $178,138,810 in 1995 which were up 7.2% from $166,247,829 in 1994. These
funds made up 82.24% of average assets in 1996 compared to 83.01% in 1995 and
83.08% in 1994. Total interest expense was $8,098,529 in 1996, up $6,425 or .1%
from $8,092,104 in 1995 which was 28.7% higher than the 1994 level.
During both 1995 and 1996, certificates of deposit were the primary
source of funds as customers were seeking a higher return. In addition, some
deposits were lost to investment markets, thus contributing to a lower growth in
the deposit base than in previous years. For several years prior to 1995, the
weighted interest rate of Union National's funds cost had declined. This trend
was reversed in late 1994 because money rates had increased, and Union National
increased its rates to attract the funds, resulting in a significant increase in
the cost of funds and a lower net interest margin in 1995. Yields on loans and
securities could not be raised enough to offset the cost. The margin bottomed
out in late 1995. The cost of funds declined throughout 1996, as Union National
reduced interest rates in an effort to manage the level of the net interest
margin.
In 1996 interest income from loans increased only slightly because of
both lower yields and low volume growth. Commercial loan volume, which is the
largest sector of the portfolio, declined during much of the year primarily
because of competition, and rates were reduced in an effort to compete. The
situation was similar in other sectors. In addition, a growth control measure,
the Interim Development Control Ordinance ("IDCO"), was passed by the Carroll
County Commissioners in an effort to balance the growth in needs of the
population for services with the ability to provide them. This move is not
expected to have an extended impact on business within the county in the future.
The impact of this
13
<PAGE>
ordinance on future loan growth is not expected to be material, since the new
construction segment of the portfolio represents only a small portion of the
anticipated growth. In 1995, the commercial sector reflected growth in volume as
well as higher yields which were brought about by increases in the prime rate in
1994. Real estate lending declined in 1995 due to increased competition.
The following table illustrates average balances of assets,
liabilities, and stockholders' equity as well as the related income and expense
for each item and the average yields and cost for the years of 1994 through
1996:
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEETS AND YIELD ANALYSIS
(In thousands-tax equivalent basis)
1996 1995 1994
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans:
Real estate
Mortgage $ 90,443 $ 8,728 9.65% $ 86,718 $ 8,412 9.70% $83,808 $ 7,970 9.51%
Construction 1,843 184 9.98% 3,527 351 9.95% 4,147 403 9.72%
Installment 22,039 1,903 8.64% 23,147 2,025 8.75% 16,189 1,331 8.22%
Commercial 30,482 2,783 9.13% 30,055 2,800 9.32% 25,549 2,149 8.41%
Tax-exempt 1,672 164 9.79% 1,195 112 9.38% 1,228 127 10.36%
Other Loans 0 0 0.00% 0 0 0.00% 0 0 0.00%
--------- ------ ---- -------- -------- ---- -------- ------- -----
Total Loans 146,479 13,762 9.39% 144,642 13,700 9.47% 130,921 11,980 9.15%
--------- ------ -------- -------- -------- -------
Investment securities available
for sale:
Taxable 31,609 1,942 6.14% 27,342 1,698 6.21% 34,781 1,924 5.53%
Non-taxable 598 65 10.89% 3,729 327 8.78% 4,557 429 9.41%
--------- ------ -------- -------- -------- -------
Total securities available
for sale 32,207 2,007 6.23% 31,071 2,025 6.52% 39,338 2,353 5.98%
--------- ------ -------- -------- -------- -------
Investment securities held to
maturity:
Taxable 15,198 859 5.65% 20,819 1,164 5.59% 13,423 718 5.35%
Non-taxable 6,350 482 7.59% 3,222 270 8.37% 2,862 262 9.16%
--------- ----- -------- -------- -------- ------
Total securities held
to maturity 21,548 1,341 6.22% 24,041 1,434 5.96% 16,285 980 6.02%
--------- ------ -------- -------- -------- ------
Time deposits with other banks 1,101 61 5.54% 328 20 6.10% 0 0 0.00%
Federal funds sold 8,098 430 5.31% 2,528 153 6.05% 1,973 73 3.70%
--------- ------ -------- -------- -------- ------
Total Earning Assets 209,433 17,601 8.40% 202,610 17,332 8.55% 188,517 15,386 8.16%
------ -------- ------
Less: allowance for credit (1,768) (1,759) (1,621)
losses
Cash and due from banks 5,838 6,034 6,164
UNB premises and equipment, 3,854 3,596 3,304
net
Other Assets 3,779 4,128 3,740
--------- -------- --------
Total Assets $ 221,136 $214,609 $200,104
========= ======== ========
</TABLE>
14
<PAGE>
AVERAGE BALANCE SHEETS AND YIELD ANALYSIS (Continued)
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------- --------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- ------- -------- ------ -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing demand $ 18,462 379 2.05% $ 16,357 373 2.28% $ 16,463 403 2.45%
deposits
Regular savings deposits 33,190 909 2.74% 38,182 1,177 3.08% 47,675 1,543 3.24%
Money market savings deposits 18,528 586 3.16% 18,357 586 3.19% 20,349 618 3.04%
Time deposits 102,739 5,829 5.67% 89,308 5,056 5.66% 72,213 3,351 4.64%
--------- ------- --------- ------- --------- -------
Total Interest-Bearing
Deposits 172,919 7,703 4.45% 162,204 7,192 4.43% 156,700 5,915 3.77%
Other borrowings 8,965 396 4.42% 15,935 900 5.65% 9,548 374 3.92%
--------- ------- --------- ------- --------- -------
Total Interest-Bearing 181,884 8,099 4.45% 178,139 8,092 4.54% 166,248 6,289 3.78%
------- ------- -------
Liabilities
Net interest spread 9,502 3.95% 9,240 4.01% 9,097 4.38%
===== ==== ===== ==== ===== ====
Non-interest bearing demand
deposits 20,976 19,997 19,194
Accrued expenses and other
liabilities 1,017 943 688
Stockholders' equity 17,259 15,530 13,974
------ ------ ------
Total Liabilities and
Stockholders' Equity $ 221,136 $ 214,609 $ 200,104
========= ========= =========
Net interest income/earning 8.40% 8.55% 8.16%
assets
Net interest expense/earning 3.87% 3.99% 3.33%
---- ---- ----
assets
Net interest margin 4.53% 4.56% 4.83%
==== ==== ====
- --------------------------
1. Loan fee income is included in interest income for each loan category and yields are stated to include all income earned.
2. Balances of non-accrual loans and related income have been included for computational purposes.
3. Tax-exempt income has been converted to a tax-equivalent basis using an incremental rate of 34%.
</TABLE>
15
<PAGE>
The following table describes the impact comparison on net interest
income resulting from changes in average balances and rates. The change in
interest due to both volume and rate has been allocated to volume and rate
changes in the proportion to the relationship of the absolute dollar amounts of
the change in each.
RATE AND VOLUME ANALYSIS
(In thousands-tax equivalent basis)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1996 Compared to 1995 1995 Compared to 1994
----------------------------------- ----------------------------
Increase Change Due to Increase Change Due to
(Decrease) Rate Volume (Decrease) Rate Volume
---------- ---- ------ ---------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Loans:
Real estate $ (17) $ 7 $ (24) $ (264) $ (138) $ (126)
Consumer 5 (24) 29 605 3 602
Commercial 22 (106) 128 1,394 609 785
Tax-exempt 52 6 46 (15) (12) (3)
--------- ------- ------ --------- -------- -------
Other Loans -- -- -- -- -- --
Total Loans 62 (118) 179 1,720 462 1,258
--------- ------- ------ --------- -------- -------
Investment securities available for sale:
Taxable 244 (20) 264 (226) 211 (437)
Non-taxable (262) 46 (308) (102) (27) (75)
--------- ------- ------ --------- -------- -------
Total securities available for sale (18) 26 (44) (328) 184 (512)
--------- ------- ------ --------- -------- -------
Investment securities held to maturity:
Taxable (305) 11 (316) 446 41 405
Non-taxable 212 (37) 250 8 (24) 32
--------- ------- ------ --------- -------- -------
Total securities held to maturity (93) (26) (66) 454 17 437
Time deposits with other banks 41 (2) 43 20 -- 20
Federal funds sold 277 (39) 316 80 53 27
--------- ------- ------ --------- -------- -------
Total Interest Income 269 (159) 428 1,946 716 1,230
--------- ------- ------ --------- -------- -------
INTEREST EXPENSE:
Interest-bearing demand deposits 6 (40) 46 (30) (27) (3)
Regular savings deposits (268) (123) (145) (366) (66) (300)
Money market savings deposits -- (5) 5 (32) 30 (62)
Time deposits 773 12 761 1,705 824 881
--------- ------- ------ --------- -------- -------
Total Interest-Bearing Deposits 511 (156) 667 1,277 761 516
Other borrowings (504) (153) (351) 526 221 305
--------- ------- ------ --------- -------- -------
Total Interest Expense 7 (309) 316 1,803 982 821
--------- ------- ------ --------- -------- -------
Net Interest Income $ 262 $ 150 $ 112 $ 143 $ (266) $ 409
========= ======= ====== ========= ======== =======
- -----------------------------
(1) The change in interest due to both volume and rate has been allocated to change due to volume and change to rate in
proportion to the absolute volume of each.
(2) Balances of non-accrual loans and related income have been included for computational purposes.
(3) Tax-exempt income has been converted to a tax-equivalent basis using an incremental rate of 34%.
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $1,085,800 in 1996, up $108,250 or 11.1%
from $977,550 in 1995 which was $337,782 or 25.7% lower than in 1994.
16
<PAGE>
Service charge income on deposit accounts was $796,490 in 1996, up
$73,469 or 10.2% from $723,021 in 1995 which was $467,558 or 39.2% below the
$1,190,579 in 1994. In 1996, fees were increased. In 1995, high volume check
processing for a group of related accounts was largely curtailed, resulting in
lower fee income and a return to historical levels. Other service charge income
was $152,765 in 1996, down $5,581 or 3.5% from $158,346 in 1995 which was up
$30,593 or 23.9% from $127,753 in 1994. Other income was $116,754 in 1996, up
$23,806 or 25.6% from $92,948 in 1995 which was up $44,696 or 92.6% from 48,252
in 1994. In 1996, recoveries of prior expenses or losses occurred which totaled
$44,486. In 1995 two recoveries of prior losses occurred which totaled $58,205.
Gains on the sales of loans were $19,791 in 1996, $4,300 in 1995 and $39,453 in
1994. There were no securities gains or losses in 1996 compared to losses of
$1,065 in 1995 and losses of $90,705 in 1994.
NON-INTEREST EXPENSE
Non-interest expense in 1996 was $7,200,410, an increase of $141,773 or
2.0% from $7,058,637 in 1995 which was $259,103 or 3.8% over $6,799,534 in 1994.
These increases are generally direct reflections of the growth in assets as well
as the related investment in services, branches, and facilities. However, in
1996, overall operating expenses declined, and the expenses related to the
termination of the acquisition of Maryland Permanent Bank resulted in the
increase over 1995.
Salaries and benefits totaled $3,879,323 in 1996, up $157,893 or 4.2%
from $3,721,430 in 1995 which was $328,145 or 9.7% over 1994. Personnel expense
represented 53.9% of total non-interest expense in 1996 compared to 52.7% in
1995 and 49.9% in 1994. Full-time equivalent employees at year end were 114 in
1996, 113 in 1995, and 109 in 1994. The expense increase was due mainly to
normal increases and pension plan expenses partially offset by decreases in
health insurance and other benefits in 1996, loan department expansion and
pension plan expenses in 1995 and salary increases and pension plan expenses
offset by outsourcing the proof function in 1994. While the total staff has
generally grown, the average assets per employee have increased from $1.80
million in 1994 to $1.92 million in 1995 and $1.93 million in 1996. This shows
increased automation of functions as well as a general improvement in the
efficient allocation of resources since assets have grown more rapidly than the
size of the staff to support the business. This effect slowed in 1996 as asset
growth slowed.
Occupancy expense was $802,443 in 1996, up $136,373 or 20.5% from the
$666,070 of 1995 which was $54,844 or 9.0% above 1994. Equipment expense was
$335,136 in 1995, down $6,595 or 1.9% from $341,731 in 1995 which was up $11,651
or 3.5% from 1994.
Other operating expense was $2,183,508 in 1996, down $145,898 or 6.3%
from $2,329,406 in 1995 which was $148,957 or 6.0% under 1994. In 1996 and 1995,
156.2% and 120.6%, respectively, of the decline in other operating expenses was
due to reduced FDIC premiums. In addition, significant reductions occurred in
1996 in marketing expenses, and check processing fees. These reductions were
partially offset by the one-time write-off of expenses related to the aborted
acquisition of Maryland Permanent Bank. In 1995, check processing fees fell
significantly due to the processing reduction discussed in the non-interest
income section. These reductions were partially offset by abnormally high legal
and professional fees and increases in other expenses. The high legal fees were
incurred by UNB in successfully defending a lawsuit in which UNB and one of its
customers were named as defendants. The higher professional fees were for
consulting services provided by third party vendors for internal bank-wide
training, strategic planning services and assistance in hiring a new chief
executive officer.
17
<PAGE>
INCOME TAXES
Income tax expense was $955,206 in 1996, $911,948 in 1995, and $989,944
in 1994. The 1996 expense was 4.7% over 1995 which was down 7.9% from the year
before. Income taxes were 33.9% of net income before taxes in 1996, 33.7% in
1995, and 33.1% in 1994. Federal income tax accounted for 81.8% of total tax in
1996 compared to 79.6% in 1995 and 80.6% in 1994. As non-taxable income declines
as a result of the 1986 Tax Reform Act, tax expense rises faster than net
income, and federal tax is making up an increasing portion of the total.
SECURITIES PORTFOLIO
The following table presents the composition of the securities
portfolio for the periods indicated:
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government Treasury and Agency securities $ 26,115,700 $ 18,082,210 $ 22,449,299
State and Municipal Obligations 6,250,734 7,362,851 7,356,224
Mortgage-backed Securities 22,368,159 25,791,958 24,124,429
Other Securities 1,205,179 1,183,512 1,007,775
------------- ------------ ------------
Total Investment Securities $ 55,939,772 $ 52,420,531 $ 54,937,727
============= ============ ============
Available for Sale (Fair Value) $ 38,866,761 $ 27,040,617 $ 31,079,845
Held to Maturity (Amortized Cost) 17,073,011 25,379,914 23,857,882
------------- ------------ ------------
Total Investment Securities $ 55,939,772 $ 52,420,531 $ 54,937,727
============= ============ ============
</TABLE>
Total holdings in the investment portfolio at year-end were $55,939,772
in 1996, $52,420,531 in 1995, and $54,937,727 in 1994. The portfolio was
expanded during 1994 as short term borrowings were used to take advantage of the
rising interest rates of investment instruments. Liquidity declined as loans
grew sharply in late 1994 and early 1995 and as deposit growth declined. As a
result, the portfolio declined during 1995. Even though liquidity improved in
the second half of 1995, the portfolio was not increased since the rates on
overnight funds were as high as longer term rates, thereby curtailing the
incentive to extend maturities. During 1996, the portfolio was increased as the
spread of longer term investments to overnight funds widened, and further
additions will settle early in 1997. Holdings of tax-free securities fell 15.1%
after a .1% rise in 1995 and a .5% decline in 1994. The total portfolio had an
average maturity of 2.9 years on December 31, 1996 compared with 3.8 years in
1995 and 2.9 years in 1994. These maturities represent estimates of the actual
life of instruments considering mortgage-back pay downs and puts for tax-free
securities.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") in 1993, requiring securities to be classified
according to the bank's ability and intent to hold securities until maturity.
Any instruments for which Union National wishes to reserve the right to sell
prior to maturity must be classified as available for sale, and their carrying
values must regularly be adjusted to fair value with an offsetting adjustment,
net of taxes, to the bank's stockholders' equity. This change was implemented as
of December 31, 1993. In 1996, there were $38,866,761 classified as available
for sale and $17,073,011 as held to maturity compared with $27,040,617 and
$25,379,914, respectively, in 1995 and $31,079,845 and $23,857,882,
respectively, in 1994. The change resulted in an initial increase in
18
<PAGE>
carrying value of $464,591 in 1993, but an increase in interest rates caused the
carrying value to decline by $2,768,472 in 1994 because of this change. In 1995,
this increase in rates was reversed, and the fair value of available for sale
securities exceeded amortized cost by $197,175 at year-end. In 1996, declines in
some rates caused a small increase in values, and the fair value was $207,716
above amortized cost by year-end. In September, 1994, $10,000,000 of available
for sale securities were transferred to held to maturity. In December, 1995,
$6,300,000 of available for sale securities were transferred to held to
maturity, and $1,500,000 were transferred from held to maturity to available for
sale. The remaining securities now classified held to maturity that were
originally available for sale currently have a fair value that is $303,162 under
the amortized cost. For 1996, the equity adjustment for the reclassified
securities from available-for-sale to held-to-maturity was an unrealized loss of
$186,080.95.
In recent years mortgage-backed securities ("MBS") have become an
important source of investment securities for financial institutions. The degree
of risk inherent in each of these products varies significantly by product type.
UNB purchases only MBS that are backed by the following federal agencies:
Government National Mortgage Association, Federal National Mortgage Association,
and Federal Home Loan Mortgage Corporation. Securities issued by these agencies
are secured by the
residential mortages.
For the type of MBS that UNB purchases, interest rate risk is moderate
and price fluctuations are comparable to Treasury securities with a similar
weighted average life. Most federally backed MBS are liquid investments because
there is an active and well-established secondary market. Each month management
reviews an MBS performance analysis to insure that the portfolio is within the
target ranges for duration, prepayment assumptions, and a rate shock test to
quantify the impact of changing interest rates on the value. As of March 1997,
the average duration on UNB's MBS portfolio was 3.42 years.
The following table sets forth the maturity distribution and weighted
average yields of the securities portfolio as of December 31, 1996. The weighted
average yields are calculated on the basis of the carrying value of the
securities and their related interest income adjusted for the amortization of
premium and accretion of discount. Yields on tax-exempt securities have been
computed on a tax-equivalent basis, assuming a federal tax rate of 34%.
<TABLE>
<CAPTION>
MATURITY OF THE INVESTMENT SECURITIES PORTFOLIO
1 Year or Less 1-5 Years 5-10 Years Over 10 Years Totals
-------------- --------- ---------- ------------- ------
Book Average Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield Value Yield
-------- ------- ------ ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
HELD TO MATURITY
U.S.Government Treasury & Agency
Securities $ 0 $2,550,751 5.78% $ 0 $ 0 $2,550,751 5.78%
State, County, & Municipal
Obligations 400,040 11.59% 1,729,985 7.09% 3,518,208 7.20% 0 5,648,233 7.46%
Mortgage-backed Securities 0 4,345,009 7.30% 4,529,018 7.58% 0 8,874,027 7.45%
--------- --------- ---------- --------- ----------
Total Held to Maturity 400,040 11.59% 8,625,745 6.81% 8,047,226 7.41% 0 17,073,011 7.20%
--------- --------- ---------- --------- -----------
AVAILABLE FOR SALE
U.S. Government Treasury & Agency
Securities 2,505,450 5.65% 19,059,500 6.57% 2,000,000 7.07% 0 23,564,950 6.50%
State, County, & Municipal
Obligations 0 0 602,500 14.10% 0 602,500 14.11%
Mortgage-backed Securities 0 1,952,837 5.97% 2,801,035 6.24% 8,740,260 6.42% 13,494,132 6.32%
Equity Securities 0 0 0 1,205,179 6.67% 1,205,179 6.67%
--------- ---------- ---------- ---------- ----------
Total Available for Sale 2,505,450 5.65% 21,012,337 6.51% 5,403,535 7.28% 9,945,439 6.53% 38,866,761 6.56%
---------- ---------- ---------- ---------- ----------
Total Securities $ 2,905,490 6.47% $29,638,082 6.60% $13,450,761 7.36% $9,945,439 6.53% $55,939,772 6.73%
=========== =========== ========== ========== ===========
</TABLE>
19
<PAGE>
LOAN PORTFOLIO
Total loans outstanding on December 31, 1996 were $147,350,540 compared
with $146,821,594 in 1995 and $139,729,907 in 1994. The portfolio represented
65.5% of total assets on December 31,1996 compared with 67.1% and 67.4% in 1995
and 1994, respectively.
UNB's loan portfolio is composed of commercial loans (including
commercial real estate), residential loans, and consumer installment loans
(including indirect auto). The commercial portfolio represents 57% of the total
portfolio and is comprised of commercial real estate mortgages, lines of credit,
tax-exempt loans through local municipalities, lines of credit, and demand notes
for various purposes, including but not limited to, working capital and
equipment purchases. The greatest majority of commercial loans are
collateralized by some form of real estate. The residential portfolio represents
22% of the overall loan portfolio and is a mix of well-seasoned mortgages along
with more recent loans. Only a minimal number of these mortgages have a loan to
value greater than 80%. Most residential mortgages are kept "in house", however
UNB is involved in selling mortgages on the secondary market. The consumer
portfolio makes up the remaining 21% of the loan portfolio. Included in the
consumer portfolio are direct installment loans for purposes such as vehicle
purchases, debt consolidation, home improvements, and indirect installment loans
purchased from approximately six auto dealerships, both new and used, and one
farm equipment dealer. Home equity loans (fixed term and variable rate lines of
credit) are also part of the consumer portfolio. Unsecured personal lines of
credit and personal time and demand loans comprise the remainder of the
portfolio. UNB does not engage in foreign lending, and involvement in
speculative real estate and land development is minimal. It is UNB's practice to
lend primarily in the Carroll County market area and to meet the needs of the
community.
Some risk is involved in all types of lending. UNB, however, attempts
to manage that risk to minimize potential losses in all portfolios.
Concentrations in commercial loans continue to be minimal except in the general
area of real estate secured loans. Despite some recent devaluation in property
values, the portion of such loans at risk is not large barring any future major
economic crises. Additionally, financial analysis has become a helpful tool to
identify potential risk in the commercial portfolio. Residential loans are
generally well secured. Standard debt to income ratios are adhered to, and loan
to value ratios greater than 80% require Private Mortgage Insurance, again
reducing risk. The largest segment of the consumer portfolio is secured by motor
vehicles. Use of debt to income ratios and recent Credit Bureau scores have
assisted in the approval process. The collection department works delinquent
accounts quickly and attempts to minimize losses in the consumer portfolio.
The following table summarizes the composition of the loan portfolio at
the periods indicated:
<TABLE>
<CAPTION>
LOAN PORTFOLIO
December 31,
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 27,563,398 $28,929,165 $28,265,832 $ 26,132,068 $ 23,824,480
Real Estate--Construction 1,842,538 2,494,150 4,147,476 4,147,986 6,901,377
Real Estate--Mortgage 91,262,059 89,709,340 85,709,692 84,728,316 86,999,214
Installment 27,219,780 26,368,732 22,313,141 14,259,506 10,863,282
------------ ------------ ------------ ------------ -------------
Total Loans 147,887,775 147,501,387 140,436,141 129,267,876 128,588,353
Deferred Loan Fees (537,235) (679,793) (706,234) (769,906) (936,142)
------------ ------------ ------------ ------------ -------------
Total Loans (net of deferred fees) 147,350,540 146,821,594 139,729,907 128,497,970 127,652,211
Allowance for Loan Losses (1,772,433) (1,769,077) (1,670,940) (1,503,371) (1,365,464)
------------ ------------ ------------ ------------ -------------
20
<PAGE>
Net Loans $145,578,107 $145,052,517 $138,058,967 $126,994,599 $ 126,286,747
============ ============ ============ ============ =============
</TABLE>
The table below details the maturity distribution as well as the fixed
and variable rate distribution of the loan portfolio as of December 31, 1996:
<TABLE>
<CAPTION>
MATURITY SCHEDULE OF LOANS
One Year Over One within Over Five Total
or Less Five Years Years Loans
------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 19,010,868 $ 5,238,564 $ 3,527,252 $ 27,776,684
Real Estate--Construction 973,675 167,661 600,764 1,742,100
Real Estate--Mortgage 44,291,334 20,830,557 26,036,438 91,158,329
Installment 7,087,545 19,753,423 369,694 27,210,662
------------ ------------- ----------- ------------
Total $ 71,363,422 $ 45,990,205 $30,534,148 $147,887,775
============ ============ =========== ============
Total Loans w/Predetermined Rates 2,426,236 32,601,535 30,403,842 65,431,613
Total Loans w/Variable Rates 68,937,186 13,388,670 130,306 82,456,162
------------ ------------ ----------- ------------
Total $ 71,363,422 $ 45,990,205 $30,534,148 $147,887,775
============ ============ =========== ============
</TABLE>
ALLOWANCE FOR CREDIT LOSSES AND MANAGEMENT OF CREDIT RISK
A comparative analysis of the allowance for credit losses, including
charge-off activity, is presented below:
<TABLE>
<CAPTION>
ALLOWANCE FOR CREDIT LOSSES
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Average Total Loans $146,478,690 $144,641,805 $130,920,960 $130,726,190 $116,005,632
============ ============ ============ ============ ============
Balance, beginning of period 1,769,077 1,670,940 1,503,371 1,365,464 1,080,735
------------- ------------- ------------- ------------- -------------
Less Charge-offs:
Commercial 263,682 84,063 87,845 26,429 96,153
Installment 123,050 122,824 116,007 236,044 128,888
Residential Real Estate -- -- 32,483 69,247 --
------------- ------------- ------------- ------------- -------------
Total Charge-offs 386,732 206,887 236,335 331,720 225,041
------------- ------------- ------------- ------------- -------------
Plus Recoveries:
Commercial 17,051 2,668 1,249 12,359 6,954
Installment 44,037 37,356 60,655 32,268 32,816
Residential Real Estate -- 53,000 -- -- --
------------- ------------- ------------- ------------- -------------
Total Recoveries 61,088 93,024 61,904 44,627 39,770
------------- ------------- ------------- ------------- -------------
Net Charge-offs 325,644 113,863 174,431 287,093 185,271
------------- ------------- ------------- ------------- -------------
Provision for Loan Losses 329,000 212,000 342,000 425,000 470,000
------------- ------------- ------------- ------------- -------------
Balance, end of period $ 1,772,433 $ 1,769,077 $ 1,670,940 $ 1,503,371 $ 1,365,464
============= ============= ============= ============= =============
Allowance for credit losses to period--
end total loans 1.20% 1.21% 1.20% 1.17% 1.07%
Allowance for credit losses to
nonaccrual loans 140.72 322.48 716.00 478.92 398.65
Net charge-offs to average loans
(annualized) 0.22 0.08 0.13 0.22 0.16
</TABLE>
21
<PAGE>
The following table reflects the allocation of the allowance for credit
losses by loan type. The allowance has been allocated to the various categories
of loans. For 1996, a more structured and defined process was implemented to
provide a more focused analysis of the allocation of the reserve. This new
process considers all "problem loans," including classified, criticized, and
monitored loans, and allocates a portion of the reserve to each of these
categories. The excess allowance is then considered the unallocated portion.
Prior to 1996, monitored and special mention loans were included in the
unallocated portion. This allocation method is not intended to limit the amount
of the allowance available to absorb losses from any specific type of loan and
should not be viewed as an indicator of the specific amount or specific
categories in which future charge-offs may ultimately occur. Although utilizing
this new allocation process resulted in a 64% decrease in the unallocated
portion of the allowance when compared to 1995, the total amount of the reserve
did not charge significantly. Management believes that this new process will
provide a consistent method of allocation in future years.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES IN DOLLARS
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 853,418 $ 455,916 $ 572,029 $ 255,993 $ 475,995
Real Estate Construction -- 4,095 -- -- --
Real Estate Mortgage 302,760 110,694 163,717 156,327 201,901
Installment 309,883 355,320 467,891 245,136 327,243
Unallocated Portion 306,372 843,052 467,303 845,915 360,325
----------- ----------- ----------- ----------- ------------
Total Allowance for Credit Losses $ 1,772,433 $ 1,769,077 $ 1,670,940 $ 1,503,371 $ 1,365,464
=========== =========== =========== =========== ============
</TABLE>
The following table breaks down the loan portfolio by category as a
percentage of the whole:
LOAN CATEGORIES BY PERCENTAGES
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
Commercial 19% 19% 20% 20% 20% 19%
Real Estate-Construction 1% 1% 2% 3% 3% 5%
Real Estate-Mortgage 63% 62% 61% 61% 66% 68%
Installment 18% 18% 18% 16% 11% 8%
-- -- -- -- -- --
Total 100% 100% 100% 100% 100% 100%
=== === === === === ===
Any increase in the level of the allowance is warranted because of the
increase in the size of the loan portfolio and the risk factors of the loans.
Management uses a detailed analyses of the portfolio to determine the adequacy
of the allowance for credit losses. Prior loss history along with current
trends, both nationally and locally, are taken into consideration: (i) Specific
reserves are established on all classified loans where a loss seems imminent;
(ii) A general reserve is established on identified problem loans where specific
potential losses are not yet determined, but likely; (iii) Smaller reserves are
also established on criticized loans that have identifiable weaknesses but are
not yet classified; and (iv) A general overall reserve is calculated on the
entire remainder of the portfolio by loan type and included as an unallocated
reserve allowance. In addition, it is UNB's practice to manage the risk elements
of lending through rigorous credit evaluation of prospective borrowers,
continuous review of the portfolio, diversification of the types of borrowers,
and by maintaining a well collateralized portfolio.
22
<PAGE>
The following table details information concerning non-accrual,
restructured, and past due loans, as well as foreclosed assets. It is the policy
of UNB to consider a loan not in process of collection when there is doubt to
the full repayment of the principal and interest or when the loan is 90 days
past due. When either event occurs, the loan is placed on non-accrual status,
any previously accrued income is charged against income, and no future income is
accrued until performance is restored. The increase in non-accrual loans in 1996
compared to 1995 is attributable to two loans classified as non-performing.
These loans are primarily fully secured real estate loans; consequently
management believes that the Bank's exposure may be limited to the opportunity
costs of the interest not being earned. Management believes that its current
level of reserve is sufficient to cover non-performing loans.
<TABLE>
<CAPTION>
NON-PERFORMING ASSETS
December 31,
1996 1995 1994 1993 1992
----------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans $1,259,558 $ 548,578 $ 233,373 $ 313,911 $ 342,521
Restructured loans -- -- -- -- --
Loans Past Due 90 or more days
accruing interest 40,192 -- -- 585,044 333,745
---------- --------- --------- ---------- ---------
Total Non-performing loans 1,299,750 548,578 233,373 898,955 676,266
Foreclosed Assets 391,236 183,067 288,960 159,844 --
---------- --------- --------- ---------- ---------
Total Non-performing assets $1,690,986 $ 731,645 $ 522,333 $1,058,799 676,266
========== ========= ========= ========== =========
Non-performing loans to total loans at period end 0.88% 0.37% 0.17% 0.70% 0.53%
Non-performing assets to period-end total loans plus
foreclosed assets 1.14% 0.50% 0.37% 0.82% 0.53%
</TABLE>
The loans listed above as not accruing are significantly past due and
are not considered to be in the process of collection. Income was recorded on
these loans in 1996 in the amount of $41,050 compared to income anticipated
under the original loan agreements of $136,213. In 1995, those amounts were
$24,774 and $66,798, respectively. Once the collection is deemed to be unlikely
over the foreseeable future, a loan is charged off. Even though a loan is
charged off, UNB continues to work with a borrower to collect that loan wherever
possible. In addition to the above loans, certain other loans, estimated to
aggregate $3,921,754 at December 31, 1996, are currently being paid out in
accordance with their terms but, in the opinion of management, there is doubt as
to the ability of the borrowers to comply with the repayment terms in the
future. While management does not anticipate any loss not previously provided
for these loans, economic conditions may be such as to necessitate future
modifications in the repayment terms.
DEPOSITS
UNB uses deposits as the primary source of funding of its assets. UNB
has experienced continuous growth of deposits, especially in certificates of
deposit. UNB offers individuals, businesses and non-profit organizations a
variety of accounts. These accounts, including checking, savings, money market,
and CD's, are obtained primarily from the communities which UNB services. The
following table details the average amount, the average rate paid on, and the
percent of the total of, the following primary deposit categories for the past
three years:
23
<PAGE>
<TABLE>
<CAPTION>
AVERAGE DEPOSIT COMPOSITION AND COST
(In thousands of dollars)
1996 1995 1994
-------------------------- -------------------------- ----------------------------
Average % of Average % of Average % of
Balance Rate Total Balance Rate Total Balance Rate Total
-------- ------ -------- --------- ------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 20,986 10.82% $ 19,997 10.98% $ 19,194 10.91%
-------- ----- -------- ------ -------- ------
Interest-bearing demand deposits 18,462 2.05% 9.52% 16,357 2.28% 8.98% 16,463 2.45% 9.36%
Regular savings deposits 33,190 2.74% 17.12% 38,182 3.08% 20.96% 47,675 3.24% 27.10%
Money market savings deposits 18,528 3.16% 9.56% 18,357 3.19% 10.08% 20,349 3.04% 11.57%
Time deposits 102,739 5.67% 52.98% 89,308 5.66% 49.02% 72,213 4.64% 41.05%
-------- ---- ----- -------- ---- ------ -------- ----- ------
Total Interest-Bearing Deposits 172,919 4.45% 89.18% 162,204 4.43% 89.02% 156,700 3.77% 89.09%
-------- ------ ----- -------- ---- ------ -------- ---- ------
Total Deposits $193,905 3.97% 100.00% $182,201 3.95% 100.00% $175,894 3.36% 100.00%
======== ==== ====== ======== ==== ====== ======== ==== ======
</TABLE>
Total deposits were $199,291,435 on December 31, 1996 as compared to
$193,461,842 and $182,533,052 one and two years earlier, respectively. The main
source area in 1996 was certificates of deposits which grew $5.6 million or
5.6%. In addition, checking accounts rose $4.5 million or 11.2%. This growth was
partially offset by declines in regular savings of $2.2 million or 6.6%, and
$2.0 million or 10.4% in money market accounts. The main source area in 1995 was
certificates of deposits which grew $22.9 million or 29.9%. This growth was
partially offset by declines in checking accounts of $1.1 million or 4.7%, and
$10.8 million or 24.1% in regular savings.
The following is a summary of the maturity distribution of certificates
of deposit in the amounts of $100,000 or more as of December 31, 1996:
MATURITIES OR REPRICING OF CD'S OF $100,000 OR MORE ON DECEMBER 31, 1996
(In thousands of dollars)
Amount Percent
Three months or less $ 3,176 13.56%
Over three months through six months 4,983 21.29%
Over six months through twelve months 11,195 47.83%
Over twelve months 4,053 17.32%
-------- ------
$ 23,407 100.00%
======== ======
SHORT-TERM BORROWINGS
Short-term borrowings consist of federal funds purchased, repurchase
agreements, and borrowings from the Federal Reserve Bank or the Federal Home
Loan Bank. Because deposit and loan growth occurred at different times, borrowed
funds were utilized increasingly during 1994 and 1995, until curtailed in 1996,
to fund loan growth and securities purchases. Management drew on lines of credit
with the Federal Home Loan Bank and a correspondent bank.
Repurchase agreements averaged $8,555,503 during 1996 compared to
$9,827,234 in 1995 and $9,548,185 in 1994. At year end, they were $6,808,596 in
1996, $3,140,710 in 1995, and $9,877,312 in 1994. These funds included customer
repurchase agreements in addition to those funds which were obtained solely to
provide liquidity. Borrowings from the Federal Home Loan Bank averaged $409,651
during 1996 and $6,107,439 during 1995. This source was not utilized during
1994. At year end, they totaled $5,000,000 in 1995 only.
24
<PAGE>
LIQUIDITY
Assuring adequate liquidity involves meeting future cash flow needs.
This liquidity can be provided by reducing asset balances and increasing
deposits and short term borrowing, or a combination of both may be employed.
Traditionally, UNB has maintained a strong liquidity position because of a
concentration of core deposits such as regular savings and checking accounts. A
high percentage of money market accounts and certificates of deposit can also be
considered core deposits. Federal funds sold is UNB most liquid earning asset.
Other sources include money market instruments and securities classified
available for sale. In addition to these sources, UNB has total credit lines of
$43 million available from correspondent banks.
On December 31, 1996 securities available for sale and federal funds
sold totaled $47,749,311 compared with $30,090,617 in 1995 and $31,079,844 in
1994. These funds averaged $40,304,499 in 1996, $33,599,064 in 1995, and
$41,311,299 in 1994. (No securities were classified available for sale until
December 31, 1993. Asset liquidity is also provided by managing the maturities
of loans, securities, and certificates of deposit.
INTEREST RATE SENSITIVITY
An important element of both earnings performance and the maintenance
of sufficient liquidity is maintaining an appropriate balance between
rate-sensitive assets and rate-sensitive liabilities. Interest rate sensitivity
analysis is the measure of the vulnerability of net interest income to changes
in the level of rates. An interest rate sensitivity gap results when assets and
liabilities reprice at different intervals. If the gap is negative or liability
sensitive, the impact on earnings is negative if rates rise. A positive or asset
sensitive gap implies the risk of lower earnings if rates decline. To offset
this risk, UNB regularly forecasts its exposure to rate changes and monitors its
performance. In addition, the net interest margin is calculated weekly so that
interest rate changes and asset restructuring may be made as needed.
UNB's rate-sensitivity position reflects a small liability sensitive
position on a cumulative basis through one year and a decidedly cumulative asset
sensitive position in later periods. This analysis makes several assumptions.
First, both non-interest bearing and regular savings accounts are not rate
sensitive. Second, mortgage-backed securities are projected at the average
levels experienced over the most recent three months. Finally, repayment of loan
principal is projected at the most recent level.
25
<PAGE>
The following table illustrates the interest rate sensitivity gap of
Union National as of December 31, 1996. This table presents a position that
existed at a particular point in time. Although that position can change
continually, this position is also similar to other times as well.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS (1)
December 31, 1996
Maturing or repricing in:
1-90 91-180 181-365 1-5 Over 5
Days Days Days Years Years
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS
Loans $ 67,554 $ 8,529 $ 8,875 $ 43,305 $18,558
Securities 12,659 3,997 4,022 30,089 6,654
Federal funds sold 3,050 0 0 0 0
-------- ------- ------- -------- -------
Total rate sensitive assets 83,263 12,526 12,897 73,394 25,212
-------- ------- ------- -------- -------
Cumulative rate sensitive assets 83,263 95,789 108,686 182,080 207,292
-------- ------- ------- -------- -------
RATE SENSITIVE LIABILITIES
Interest bearing checking 8,411 0 0 0 8,411
Money market deposits 9,801 0 0 0 9,801
Regular savings 17,052 0 0 0 17,052
Certificates of deposits 46,901 8,505 12,751 30,583 1,102
Short-term borrowings 8,141 0 0 0 0
-------- ------- ------- -------- --------
Total rate sensitive liabilities 90,306 8,505 12,751 30,583 36,366
-------- ------- -------- -------- --------
Cumulative rate sensitive liabilities $ 90,306 $98,811 $111,562 $142,145 $178,511
-------- ------- --------- -------- --------
Period gap (7,043) 4,021 146 42,811 (11,154)
Cumulative gap (7,043) (3,022) (2,876) 39,935 28,781
Cumulative rate sensitive assets to rate sensitive liabilities 92.20% 96.94% 97.42% 128.09% 116.12%
Cumulative gap to total assets (3.13)% (1.38)% (1.39)% 20.77% 16.40%
- -----------------------------
<FN>
(1) The following are assumptions that have been made in our model. Non-Interest
bearing categories are shown in the last period. Savings and NOW Accounts are
shown in the last period, management can change these rates, but such changes
are infrequent and incrementally small. History has shown little to no run-off
if rates change in this product. Repayment of principal for Mortgage Backed
Securities are projected at the average rate actually experienced for the most
recent three months. Repayment of principal for Loan Categories are projected at
various rates based on recent experience.
</FN>
</TABLE>
Our GAP guidelines are +10% of assets for the three month GAP, +15% of
assets for the one year GAP, and +20% of assets for the three year GAP. The
Asset/Liability Committee (ALCO) and the Board review these guidelines monthly
to insure compliance. ALCO reviews their assumptions monthly and reviews if the
GAP is correctly predicting the net interest margin. In determining risk
exposure limits, ALCO considers the nature of UNB's strategies and activities,
its past performance, the level of earnings and capital available to absorb
potential losses. Historically, UNB's performance has been within the guidelines
set for GAP. If, in the future, it appears the guidelines may be breached, ALCO
would implement actions to be taken to prevent a breach of the guidelines. Some
of the strategies used by banks to assure compliance with GAP guidelines are
controlling its interest rates, increasing or decreasing the duration of the
portfolio, raising additional capital, selling assets to enhance liquidity,
hedging and interest rate swaps.
OFF-BALANCE SHEET RISK
In the normal course of business, the company enters into financial
commitments with off-balance sheet risk. The company's maximum exposure to
accounting loss, based upon the credit risk associated
26
<PAGE>
with unfunded loan commitments and letters of credit outstanding, is represented
by the contract amount of these items as of the dates indicated in the following
table:
(In thousands of dollars)
December 31,
1996 1995 1994
--------- --------- ------
Commitments to extend credit $ 17,438 $ 16,947 $ 18,080
Standby letters of credit $ 2,308 $ 1,688 $ 1,712
Many of such commitments to extend credit may expire without being
drawn upon and, therefore, the total commitment amounts do not necessarily
represent future cash flow requirements. In making the commitments, the company
applies the same credit standards used in its lending process, and it
periodically reassesses the customer's credit worthiness through ongoing credit
reviews. The risks associated with making these commitments are also included in
the overall credit risk in determining the allowance for possible loan losses.
CAPITAL MANAGEMENT
Banking regulatory authorities have implemented strict capital
guidelines directly related to the credit risk associated with an institution's
assets. Banks and bank holding companies are required to maintain capital levels
based on their "risk-adjusted" assets so that categories of assets with higher
"defined credit risks will require more capital support than assets with lower
risk. Additionally, capital must be maintained to support certain off-balance
sheet instruments.
Capital is classified Tier I common stockholders' equity less certain
intangible assets) and Total capital (Tier I plus the allowance for credit
losses). Minimum required levels must at least equal 4% for Tier I capital and
8% for Total capital. In addition, institutions must maintain a minimum of a 3%
leverage capital ratio (Tier I capital to average total assets).
Union National's capital position is presented in the following table:
December 31, Regulatory
1996 1995 Requirement
---- ---- -----------
Tier 1 capital to risk weighted assets ........ 11.7% 10.9% 4.0%
Total capital to risk weighted assets ......... 12.9% 12.0% 8.0%
Capital leverage ratio......................... 8.0% 7.6% 3.0%
27
<PAGE>
RECENT STOCK PRICE RANGES AND DIVIDENDS
Union National's stock is sold and exchanged principally among area
residents. There were approximately 445 stockholders of record as of December
31, 1996. The table below shows the range from the lowest price paid to the
highest along with dividend payments each quarter:
1996 1995
----------------------------- ------------------------------
Price Range Dividends Price Range Dividends
Low High Declared Low High Declared
1st Quarter $28.00 $28.00 $0.14 $26.00 $27.00 $0.13
2nd Quarter $31.00 $32.00 $0.14 $26.50 $27.00 $0.13
3rd Quarter $30.00 $33.75 $0.14 $29.00 $30.25 $0.13
4th Quarter $32.00 $35.88 $0.15 $30.00 $30.00 $0.13
FAIR MARKET VALUE
The Financial Accounting Standards Board, through its Statement No. 107
("FASB 107"), and the FDIC Improvement Act of 1991 require banks to disclose the
fair value of all financial instruments. Approximately 90% of total assets, 95%
of total liabilities, and almost all off-balance sheet financial contracts in a
depository institution come under the definition. This disclosure is required
for banks with assets in excess of $150 million beginning with the 1992 annual
report.
28
<PAGE>
The fair market values of all financial instruments held by Union
National are disclosed in the independent auditor's report. For those financial
instruments which are traded in active financial markets, the fair value is the
market price. For loans and deposits with no quoted prices, FASB 107 provides
that the value be determined by means of discounted present value models or
option pricing models. The valuing technique employed for each group of
instruments is based upon the characteristics of each instrument.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1995, Union National adopted the provisions of the
Statement of Financial Accounting Standards Board No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") and No. 118, "Accounting by
Creditors for Impairment of a Loan--Income Recognition and Disclosures" ("SFAS
118"). The new statements require impaired loans to be measured at the present
value of expected cash flows by discounting those cash flows generally at the
effective interest rate or, a practical expedient, at the loan's observable
market price or fair value of the collateral if the loan is collateral
dependent. The new statements also require troubled debt restructuring involving
a modification of terms to be remeasured on a discounted basis. This information
is included in the independent auditor's report under the footnote for loans.
Effective January 1, 1996, Union National adopted the provisions of the
Statement of Financial Accounting Standards Board No. 121, "Accounting of
Long-Lived Assets and for Long -Lived Assets to be Disposed of" ("SFAS 121").
This standard requires that long-lived assets be evaluated regularly for other
than temporary impairment. If circumstances suggest that their value may be
impaired, an assessment of recoverability is performed prior to any write-down
of the asset.
Effective January 1, 1997, Union National adopted the provisions of the
Statement of Financial Accounting Standards Board No. 125, "Accounting of
Long-Lived Assets and for Long -Lived Assets to be Disposed of" ("SFAS 121").
This standard provides for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.
ITEM 3. PROPERTIES
Union National's principal office is located at 117 East Main Street in
Westminster, Maryland in a renovated turn-of-the century building. UNB's
commercial, mortgage and consumer lending operations, as well as its executive
offices, marketing department, human resources offices, deposit account support
services and offices for non-deposit investment products are housed here. UNB
owns this building and a 17,325 square feet storage facility and parking lot
directly across the street at 118 East Main Street.
Directly next door to the principal office is the main branch banking
facility for UNB with drive-up services located at 111 East Main Street,
Westminster, Maryland. This branch facility employs seven full time and two part
time employees and is also owned by UNB.
The two story branch office located at 7564 Main Street, Sykesville,
Maryland has 2,490 square feet dedicated to providing full banking services and
ATM access. This branch employs three full time and two part time employees. UNB
owns this facility and rents the upper floor to a local small business. UNB's
other six locations, all of which provide ATM services and five of which provide
drive-up services, are leased with terms currently ranging from five to fifteen
years and with annual rent payments currently ranging from $21,532 to $46,371.
29
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table reflects the beneficial ownership of Union
National's common stock, par value $.01 per share (the "Shares") as of March 17,
1997 held by directors, executive officers, each person known to Management to
own beneficially, directly or indirectly, more than 5% of Union National's
Shares, and all directors and executive officers as a group. Except as otherwise
indicated, the persons or entities listed below have sole voting and investment
power with respect to all Shares shown as beneficially owned by them. Unless
otherwise indicated, the address of all executive officers and directors is the
principal office of Union National.
<TABLE>
<CAPTION>
Beneficial Owners and Management Number of Shares Percent of Class
- -------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
5% Beneficial Owners:
Caroline R. Taylor ....................... 62,076 7.4%(1)
6 Ridge Road
Westminster, MD 21157
Virginia C. Wantz ........................ 63,816 7.6%(2)
205 St. Mark Way
Westminster, MD 21157
Union National Bank 401(k) Plan 63,444 7.6%(3)
117 East Main Street
Westminster, MD 21158
Executive Officers and Directors:
Virginia W. Smith......................... 2,882 *
Thomas F. See ............................ 17,321 2.1%(4)
Denise L. Owings.......................... 3,720 *(5)
K. Wayne Lockard.......................... 4,552 *(6)
Donald C. Essich.......................... 2,460 *
Joseph H. Beaver, Jr...................... 24,224 2.9%(7)
Wesley D. Blakeslee....................... 1,970 *(8)
David L. Brauning......................... 10,974 1.3%(9)
Robert L. Bullock......................... 6,878 *
Dean H. Griffin .......................... 5,700 *(10)
Bernard Larry Jones, Sr................... 200 *
William R. Klinger........................ 378 *
Robert T. Scott........................... 760 *
Ethan A. Seidel........................... 300 *
Ellen Willis.............................. 100 *
Kenneth B. Wright......................... 1,150 *
All directors and executive officers
as a group (16 persons)................. 83,569 10.02%
*Less than 1%
- --------------------------
30
<PAGE>
<FN>
(1) Includes 23,184 shares held by trustees for the benefit of Caroline R. Taylor.
(2) Includes 32,136 shares held by trustees for the benefit of Virginia C. Wantz.
(3) The Union National 401(k) plan, while owning 10.15% of the outstanding stock of Union
National, does not control the voting of those shares. Each participant
is forwarded a proxy statement and casts his vote according to the same
rules as any other stockholder.
(4) Includes 12,875 shares in the Union National 401(k) plan. Also includes 600 shares owned by
his wife, Katherine K. See, as to which Mr. See disclaims beneficial ownership.
(5) Includes 3,620 shares in the Union National 401(k) plan.
(6) Includes 1,050 shares owned by his wife, Bonnie M. Lockard, as to which Mr. Lockard disclaims
beneficial ownership.
(7) Includes 550 shares owned by his wife, Katherine G. Beaver, 540 shares
owned by his daughter, Katherine Elizabeth Beaver, and 615 shares owned
by his son, Sean Beaver, all of which Mr.
Beaver disclaims beneficial ownership.
(8) Includes 1,570 shares held in an individual retirement account.
(9) Include 4,596 shares held by Mr. Brauning and Horace S. Brauning, Jr., as trustees under the Last
Will and Testament of Anna M. Brauning, as to which Mr. Brauning disclaims beneficial
ownership.
(10) Includes 300 shares owned by his son, John W. Griffin, and 140 shares
owned by his wife, Etta Ray Griffin, all of which Mr. Griffin disclaims
beneficial ownership.
</FN>
</TABLE>
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
Union National's Board of Directors presently consists of 14 members,
one-third (as nearly equal in number as possible) of whom are to be elected
annually to serve for a term of three years.
The following table sets forth the name, age and term of office of each
executive officer and director of Union National and the principal occupations
of these individuals during the past five years. The executive officers are
appointed to their respective offices annually. All directors of Union National
also serve as directors of UNB and the terms for both expire at the same time.
Unless otherwise indicated, the principal occupation listed for a person has
been that person's occupation for at least the past five years. Because a
majority of persons listed served as officers or directors of UNB before Union
National was formed as its holding company in 1994, the table indicates the
earliest year a person became an officer or director for UNB or Union National.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Name, Age and Principal Occupations Director or Year Term as
Position with Company During Past Five Years Officer Since Director Expires
- --------------------- ---------------------- ------------- ----------------
Virginia W. Smith, 47 President and Chief Executive Officer of 1995 1998
President and Chief Union National and UNB (January 1996 to
Executive Officer, present); Executive Vice President of UNB
Director (August 1995 to January 1996); Senior Vice
President of First Fidelity Bank (formerly
Bank of Baltimore) (1992 to 1995); Executive
Vice President of Signet Banking Corporation
(1992); President of Signet Mortgage
Corporation (1987 to 1992)
Thomas F. See, 50 Treasurer of Union National (1994 to 1979 ----
Treasurer present); Sr. Vice President and Chief
Financial Officer of UNB (1979 to present)
31
<PAGE>
Name, Age and Principal Occupations Director or Year Term as
Position with Company During Past Five Years Officer Since Director Expires
- --------------------- ---------------------- ------------- ----------------
Denise L. Owings, 43 Corporate Secretary of Union National (1994 1989 ----
Corporate Secretary to present); Corporate Secretary to the Board
of Directors of UNB (1989 to present)
K. Wayne Lockard, 63 Self-employed real estate consultant and 1973 1998
Chairman of the Board partner in "Lockard Properties", developers
and investors of commercial and residential
real estate
Donald C. Essich, 64 Retired in January 1995; formerly self- 1983 1998
Director, Vice Chairman employed farmer and President of the local
of the Board and statewide Farm Bureau
Joseph H. Beaver, Jr., 63 Retired in January 1996; formerly President 1965 1999
Director and Chief Executive Officer of Union
National (1994 to January 1996); President
and Chief Executive Officer of UNB (1971 to
January 1996)
Wesley D. Blakeslee, 49 Attorney, private practice; President of Will 1988 1999
Director Plan Corp.
David L. Brauning, Sr., 59 Insurance Agent for Nationwide Insurance; 1988 2000
Director Farmer
Robert L. Bullock, 60 Owner of Bullock's Country Meats; Farmer 1983 2000
Director
Dean H. Griffin, 62 Physician, private practice 1984 1999
Director
Bernard L. Jones, Sr., 54 Senior engineer/systemstechnologist for Vitro 1991 2000
Director Corporation; President of HOPE, Inc. a local
developer of low cost housing
William R. Klinger, 41 Owner and General Manager of Star Vending 1988 2000
Director Service Company (1993 to present); Sales
Manager of Mid-Atlantic Coca-Cola Company
(1991 to 1993); Vice President of West-
minster Coca-Cola Bottling Company (1984
to 1991)
Robert T. Scott, 53 Orthodontist practicing as Senior Partner of 1990 1998
Director Scott-Stetz Partnership
Ethan A. Seidel, 54 Vice President of Administration and Finance 1995 1999
Director of Western Maryland College (1993 to
present); Professor of Economics at Western
Maryland College; Assistant to the President
of Western Maryland College (1990 to 1993)
Ellen L. Willis, 49 Director of Business and Industry Training of 1995 1999
Director Carroll Community College; Previously
owned and operated a small business
32
<PAGE>
Name, Age and Principal Occupations Director or Year Term as
Position with Company During Past Five Years Officer Since Director Expires
- --------------------- ---------------------- ------------- ----------------
Kenneth B. Wright, 54 Owner and President of Towne Pride Interiors 1986 1998
Director
</TABLE>
There are no family relationships among any of the executive officers
or directors of Union National or UNB. Executive officers of Union National are
elected by the Board of Directors on an annual basis and serve at the discretion
of the Board of Directors.
Committees of the Board of Directors
UNB has a Management Oversight Committee, a Finance and Control
Committee, a Lending Oversight Committee, a Technology and Support Services
Committee and a Community Banking Development Committee.
The Management Oversight Committee consists of Ms. Virginia Smith, Mr.
Donald Essich, Mr. K. Wayne Lockard, Mr. Joseph Beaver, Mr. Robert Bullock, Mr.
William Klinger and Mr. Kenneth Wright. This committee oversees and evaluates
the Chief Executive Officer ("CEO"), develops new initiatives for presentation
to the Board of Directors, establishes compensation and benefits, recommends the
structure of the board and committees of the board, acts as a strategic planning
committee, and functions as a full board when the full board of directors cannot
meet and a timely response to an issue, such as loan requests, is needed. The
CEO does not vote on his or her own compensation issues. This committee meets
two times a month.
The Finance and Control Committee consists of Mr. William Klinger, Mr.
Ethan Seidel, Mr. Bernard Jones and Mr. Thomas See. This committee's primary
objective is to provide risk and control oversight of UNB's audit and internal
audit control structure, and financial management oversight. The committee
reviews and recommends policies on risk, audit, security, compliance, and
financial management. This committee meets monthly.
The Lending Oversight Committee consists of Mr. Robert Bullock, Mr.
Dean Griffin and Mr. Joseph Beaver. The primary objectives of this committee
include reviewing and making recommendations concerning UNB's credit policy, to
review each segment of the loan portfolio on a quarterly and annual basis,
review delinquent loan repayments on a monthly basis, monitor UNB's reserve for
loan losses, provide an annual strategic analysis and business plan for lending.
This committee meets monthly.
The Technology and Support Services Committee consists of Mr. Robert
Scott, Mr. David Brauning and Mr. Kenneth Wright. The primary objective of this
committee is to recommend policy and provide oversight and guidance of
management in operations, technology, alternative delivery, employee training,
management development and personnel policy. This committee meets monthly.
The Community Banking Development Committee consists of Ms. Ellen
Willis, Mr. Donald Essich, Mr. Wesley Blakeslee and Mr. Harry Colson. The
primary objectives of this committee includes recommending policy and providing
oversight and guidance in marketing, products, services, locations, service
quality, investment products and services, and oversight of UNB's CRA
activities. This committee meets monthly.
33
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Union National
and UNB for the last three fiscal years to the CEO of Union National and UNB.
There were no other officers of Union National or UNB who received compensation
in excess of $100,000 during any of those fiscal years.
<TABLE>
Summary Compensation Table
<CAPTION>
Other Annual All Other
Name Year Salary Bonus Compensation Compensation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Virginia W. Smith 1996 $129,000 --- $7,830(2) $6,000 (3)
President, Chief
Executive Officer
Joseph H. Beaver Jr., (1) 1996 $6,923 --- $4,280(7) $43,758 (4)
Former President, 1995 $120,000 $1,500 $7,444(5) $20,588 (6)
Chief Executive Officer 1994 $114,174 $5,709 $1,014(7) $70,783 (8)
and Director
- -------------------------------
<FN>
(1) Mr. Beaver retired from his position as President and CEO of Union National on January 12, 1996.
(2) Includes the allowance for use of personal automobile for business in the amount of $6,923, and the value
of unused sick pay in the amount of $908.
(3) Director's fee.
(4) Includes Union National's contributions to 401(k) plan in the amount of
$138 and contributions made to the Senior Employee's Retirement Plan
("SERP") in the amount of $36,920. Also includes $6,700 for Director's
fees and special committee meetings.
(5) Includes the value of the use of a company automobile in the amount of $5,136, and the value of unused
sick pay in the amount of $2,308.
(6) Includes Union National's contributions to 401(k) plan in the amount of
$3,601, contributions to the SERP in the amount of $10,987, and
Director's fees in the amount of $6,000.
(7) Represents value of the use of a company automobile.
(8) Includes Union National's contributions to 401(k) plan in the amount of
$3,493, and contributions made to the SERP in the amount of $62,290.
Also includes $5,000 for Director's fees.
</FN>
</TABLE>
Compensation of Directors
Directors of Union National do not receive compensation in that
capacity. However, as directors of UNB, they receive compensation for serving on
the Board of Directors in the following amounts: (i) $1,000 per month for the
Chairman of the Board, (ii) $550 per month for the Vice-Chairman of the Board,
and (iii) $500 per month for all other directors. In addition, all directors of
UNB receive $100 for each committee meeting and special meeting of the Board of
Directors of UNB in which they are in attendance.
Compensation Committee Interlocks and Insider Participation
The Management Oversight Committee of the Board of Directors serves as
compensation committee of Union National and UNB. The members of the Management
Oversight Committee are Ms. Virginia W. Smith, Mr. Donald C. Essich, Mr. K.
Wayne Lockard, Mr. Joseph H. Beaver, Jr., Mr. Robert L. Bullock, Mr. Kenneth
Wright, and Mr. William R. Klinger. Ms. Smith is the current CEO and
34
<PAGE>
President of Union National, and Mr. Beaver is the former CEO and President of
Union National. While Ms. Smith and Mr. Beaver were specifically excluded from
any Committee discussion concerning their own compensation, they did participate
in the Committee's discussion concerning other key executives compensation.
Management Committee Compensation Report
The compensation of the CEO and other executive officers of Union
National and UNB is determined by the Management Oversight Committee of the
Board of Directors. This Committee sets compensation guidelines intended to
provide suitable rewards for individual performance and to tie such performance
to increased stockholder value. The compensation paid is designed to attract,
retain and reward executive officers who are capable of leading Union National
and UNB in achieving its business objectives in an industry characterized by
complexity, competitiveness and constant change. The compensation of Union
National's key executives is reviewed and approved by the Board of Directors
upon recommendation of Union National's Management Oversight Committee.
Total compensation for Union National's CEO and other key executive
officers consists of base salary, benefits, short and long term incentives and
perquisites.
The guidelines and factors considered by the Committee in determining
compensation include corporate profitability measured by return on assets, stock
price, asset quality, loss reserve levels, market- share, regulatory capital
strength, cost control, and regulatory examination.
Annually, at year end, the Committee reviews the base compensation and
benefit levels of the CEO and other executive officers. Each officer's
compensation is based on their individual contribution to Union National and
UNB, and their meeting of the goals and objectives as set forth in the strategic
plan of Union National and UNB. To ensure that the compensation and benefits are
reasonable and competitive, the Committee compares the compensation awarded to
Union National and UNB executive officers with those of executive officers of
similarly sized and situated banks and thrift institutions in the Mid-Atlantic
region.
MANAGEMENT OVERSIGHT COMMITTEE:
Virginia W. Smith
Donald C. Essich
K. Wayne Lockard
Joseph H. Beaver, Jr.
Robert L. Bullock
William R. Klinger
Kenneth B. Wright
Employment Contracts
Virginia W. Smith entered into an employment contract with UNB
effective August 9, 1995 ("Employment Contract") by which she was made Executive
Vice President of UNB at an annual salary of $118,000 until such time as the
then-President of UNB retired, whereupon she would be named as President of UNB
at an annual salary of $129,000. Ms. Smith became President of UNB on January
12, 1996. Under the Employment Contract, her term as President is for one year,
which term and the Employment Contract are automatically renewed each year
unless either party provides 120 days' advance
35
<PAGE>
notice to the contrary. The Employment Contract further provides that if Ms.
Smith's employment is terminated by UNB for a reason other than for cause, she
will be paid her then-current salary and benefits for 12 months thereafter
("Severance Pay"). In addition, if following a merger or other corporate
reorganization in which UNB is not the survivor Ms. Smith's duties and
authorities are diminished or her salary is decreased or she is forced to
relocate, Ms. Smith can make a claim with UNB for Severance Pay. If UNB
disagrees that Severance Pay is owing, the dispute is subject to binding
arbitration.
1997 Stock Option Plan
General
On April 15, 1997, Union National's Board of Directors approved the
Union National Bancorp, Inc. 1997 Stock Option Plan (the "Plan"). Unless
extended or earlier terminated by the Board, the Plan will continue in effect
until, and shall terminate on, April 15, 2007. The purpose of the plan is to
provide incentives and an additional means of attracting and retaining competent
personnel for the executive officers and key employees of Union National, UNB
and their subsidiaries.
The Plan provides for the reservation of 30,000 shares of common
stock, par value $.01 of Union National (the "Shares") for issuance upon the
exercise of options granted under the Plan. Unless otherwise authorized by the
Board, options to purchase no more than 10,000 Shares may be granted under the
Plan in any calendar year. The number of Shares reserved for the grant of
options and the number of Shares which are subject to outstanding options under
the Plan are subject to adjustment in the event of any stock split, stock
dividend or other relevant changes in the capitalization of Union National.
Administration of the Plan
The Plan will be administered by Board. The Board is authorized to
determine and designate from time to time those executive officers and key
employees to whom options are to be granted. Unless an earlier expiration is
specified by the Board in the option agreement containing the terms and
conditions of the option, each option granted under the Plan will expire on the
10th anniversary of the date the option was granted. In the event of termination
of employment of an optionee other than for cause, all unexercised options will
terminate unless such options are exercised by the employee within 3 months
after the termination of employment. In the event of death of an optionee or
termination of employment due to permanent or total disability, the option may
be exercised by the personal representative, administrator, or bequestee, or by
the disabled optionee, as the case may be, within 1 year after the death or
termination of employment, to purchase that number of shares that were
purchasable by the optionee at the time of his or her death or disability.
Terms of Options
The exercise price for Shares being purchased upon the exercise of
options may be paid (i) in cash or by check; (ii) with shares of Union National,
to the extent the fair market value of such shares on the date of exercise
equals the exercise price of the Shares being purchased; (iii) by surrender to
Union National of options to purchase Shares, to the extent of the difference
between the exercise price of such options and the fair market value of the
Shares subject to such options on the date of such surrender; or (iv) a
combination of (i), (ii) or (iii) above. Union National has the right, and the
optionee may require Union National, to withhold and deduct from the number of
Shares deliverable upon the exercise of any options under the Plan a number of
Shares having an aggregate fair market value equal to the amount of
36
<PAGE>
any taxes and other charges that Union National is obligated to withhold or
deduct from amounts payable to the optionee.
No option may be transferred by an optionee other than by will and the
laws of descent and distribution, or pursuant to a qualified domestic relations
order. Options are exercisable only by the optionee during his or her lifetime
and only as described in the Plan. Options may not be assigned, pledged or
hypothecated, and are not subject to execution, attachment or similar process.
Upon any attempt to transfer an option, or to assign, pledge, hypothecate or
otherwise dispose of an option in violation of the Plan, or upon the levy of any
attachment or similar process upon such option or such rights, the option
immediately becomes null and void.
Exercise Periods
Generally, 20% of the Shares subject to the option will become
exercisable on each anniversary date of the grant of the option, so that the
option shall become fully exercisable on the fifth anniversary of the date the
option was granted. However, upon the occurrence of certain "Extraordinary
Events" all options under the Plan will become fully exercisable for the full
number of Shares subject to any such option. An "Extraordinary Event" is defined
as the commencement of a tender offer (other than by Union National) for any
Shares of Union National, or a sale or transfer, in one or a series of
transactions, of assets having a fair market value of 50% or more of the fair
market value of all assets of Union National, or a merger, consolidation or
share exchange pursuant to which the Shares of Union National are or may be
exchanged for or converted into cash, property or securities of another issuer,
or the liquidation of Union National. If an optionee fails to exercise his or
her option upon an Extraordinary Event, or if there is a capital reorganization
or reclassification of the Shares, Union National must take action as may be
necessary to enable each optionee to receive upon any subsequent exercise of his
or her options, in lieu of Shares, securities or other assets as were issuable
upon the Extraordinary Event in respect of, or in exchange for, such Shares.
Pension Plan and Thrift Plan
Pension Plan. UNB sponsors a defined benefit pension plan covering
substantially all employees. Benefits are calculated based on the number of
years of service and the employee's compensation. UNB's funding policy is to
contribute the maximum amount deductible for income tax purposes. Contributions
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. Net pension cost for 1996, 1995 and 1994
include the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Service cost-benefits earned during the year $ 86,195 $71,154 $ 88,237
Interest cost on projected benefit obligation 84,964 88,382 84,508
Actual return on plan assets (103,395 (139,897 14,630
Net amortization and deferral 54,406 76,498 (59,968)
-------- -------- --------
$122,170 $96,137 $128,407
Additional expense related to settlement
of pension obligations 155,612 -- --
-------- -------- ---------
$277,782 $96,137 $128,407
======== ======== =========
</TABLE>
During 1996, UNB's pension plan made lump sum payments to plan
participants which met the criteria for a settlement of pension obligations as
defined in Statement of Financial Accounting Standards
37
<PAGE>
No. 88, "Employers Accounting for Settlements and Curtailments of Defined
Benefit Plans and for Termination Benefit." This settlement resulted in
additional pension expense of $155,612 for the year ended December 31, 1996.
The weighted-average discount rate used in determining the actuarial
present value of the project benefit obligation was 7.50% for 1996, 1995, and
1994. The expected long-term rate of return on assets was 7.50% for those years.
Employee Savings and Investment Plan. UNB has an Employee Savings and
Investment Plan in which substantially all employees are eligible to
participate. Under the terms of the plan, UNB may match employee contributions
up to 6% of compensation. UNB's contributions to this plan were $56,314 for
1996, $56,978 for 1995 and $49,743 for 1994.
During 1992 UNB entered into an agreement with members of its Board of
Directors to allow Director's Fees to be deferred until retirement. A director
may defer a portion or all of his fee until retirement. Fees deferred will be
paid over a fifteen year period at retirement. This is an insured program that
will provide full recovery of cost to UNB.
UNB has also made arrangements with certain officers to provide
additional retirement benefits under a Senior Employee Retirement Plan ("SERP").
This program is designed to, when combined with Social Security and the Defined
Pension Plan, give those officers covered approximately 60% of final salary. It
is also a cost recovery program. The SERP is unfunded so that amounts payable
represent unsecured liabilities of UNB; thereby potentially subject to claims of
secured creditors. The amount included in operating expenses was $61,561 for
1996, $52,108 for 1995 and $106,242 for 1994.
Performance Graph
Set forth below is a line graph comparing cumulative stockholder
returns as of December 31 for each of the last five years among the Common
Stock, a broad market index and either a nationally recognized industry standard
or an index of peer companies selected by Union National, assuming in each case
both an initial investment of $100 and reinvestment of dividends. Union National
has chosen the Nasdaq Market Index as the relevant broad market index. This more
closely reflects the market where Union National would be listed if it were
eligible. Additionally, Union National has selected the Nasdaq Bank Index since
it reflects a large group of banks across the country, both large and small,
against Union National's returns can be compared.
38
<PAGE>
GRAPH
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Indebtedness of Management
During the past year UNB has had, and expects to have in the future,
banking transactions in the ordinary course of business with Union National and
UNB directors and executive officers and their associates. Such transactions are
made on substantially the same terms, including interest rates, collateral and
repayment terms on extensions of credit, as those prevailing at the same time
for comparable transactions with other persons. The extensions of credit by UNB
to these persons have not, and do not currently, involve more than the normal
risk of collectability or present other unfavorable features. At December 31,
1996, the outstanding principal amount of indebtedness to UNB owed by directors
and executive officers and their associates, who were indebted to UNB on that
date, aggregated $4,644,364 which represented approximately 25.9% of UNB's
equity capital accounts.
Lease Agreements
In 1986, UNB entered into a lease involving 2,400 square feet of
office space in Hampstead, Maryland, at a monthly rental of $3,150, which UNB
uses as its Hampstead branch office. The lessor of the property is K. Wayne
Lockard, Chairman of the Board, and his wife, Bonnie M. Lockard, both of whom
are stockholders of Union National. The lease was negotiated on an arm's-length
basis, and is subject to terms that are generally prevailing in the area for
comparable properties. In the opinion of the Union National Board, the terms of
the lease are at least as favorable to UNB as could have been obtained from
unaffiliated third parties and the lease is fair and reasonable to UNB.
39
<PAGE>
Certain Business Relationships
UNB has retained, among others, Wesley D. Blakeslee, P.C., the law
firm of Director Wesley D. Blakeslee, on an at-will basis to perform collection
work. Fees for collection work are assessed on an hourly basis for consumer
loans and on a percentage of the amount collected for residential mortgage and
commercial loans. UNB paid $15,570.54 in 1996 for these services. The retention
of Mr. Blakeslee's firm was negotiated on an arm's-length basis, and is subject
to terms that are within the range generally prevailing in this area for
collection work. In the opinion of the Union National Board of Directors, the
terms are at least as favorable to UNB as could have been obtained from
unaffiliated third parties and are fair and reasonable to UNB.
ITEM 8. LEGAL PROCEEDINGS
None.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for Union National's
Shares. Accordingly, there is no comprehensive record of trades or the prices of
any such trades. The following table reflects stock prices for Union National's
Shares to the extent such information is available, and the dividends declared
with respect thereto during the preceding two years.
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ---------------------
Price Range Price Range
----------- -----------
Low High Dividends Low High Dividends
--- ---- --------- --- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter $28.00 $28.00 $0.14 $26.00 $27.00 $0.13
2nd Quarter 31.00 32.00 0.14 26.50 27.00 0.13
3rd Quarter 30.00 33.75 0.14 29.00 30.25 0.13
4th Quarter 32.00 35.88 0.15 30.00 30.00 0.13
</TABLE>
None of Union National's Shares (i) is subject to outstanding options
or warrants to purchase nor are there any securities convertible into Union
National's Common Stock, (ii) is subject to sale pursuant to Rule 144 under the
Securities Act nor has Union National agreed to register any Shares under the
Securities Act for sale by its stockholders, (iii) is being or is proposed to be
publicly offered by Union National.
As of March 17, 1997, the approximate number of holders of record of
Union National's Shares was 445. At such date, 834,000 Shares were outstanding.
The Union National Board of Directors reviews its dividend policy at
least annually. The amount of the dividend, while in its sole discretion of the
Board, depends in part upon the performance of UNB. Union National's ability to
pay dividends is also subject to the restrictions imposed by Maryland law.
Generally, Maryland law prohibits corporations from paying dividends if the
corporation is insolvent or if the dividend would cause a corporation to be
unable to pay indebtedness of the corporation as the indebtedness becomes due in
the usual course of business or the corporations's total assets would be less
than the sum of its total liabilities plus the amount that would be needed if
the corporation were to be dissolved at the time of the distribution to satisfy
the preferential rights upon dissolution of shareholders
40
<PAGE>
whose preferential rights are superior to those receiving the distribution.
There can be no assurance that dividends will be declared in the future or the
rate that such dividends, if any, will be paid.
Union National is also subject to the dividend restrictions applicable
to national banks because its only source of income is from the dividends paid
by UNB to Union National. Under the National Bank Act, dividends may be paid
only out retained earnings as defined in the statute. The approval of the OCC is
required if the dividends for any year exceed the net profits, as defined, for
that year plus the retained net profits for the preceding two years. In
addition, unless a national bank's capital surplus equals or exceeds the stated
capital for its common stock, no dividends may be declared unless the bank makes
transfers from retained earnings to capital surplus. See "Supervision and
Regulation" under Item 1 of this Form 10.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
General
Union National is authorized to issue 10,000,000 Shares. As of March
17, 1997, Union National had outstanding 834,000 Shares.
Common Stock
Dividends
Holders of Union National Shares are entitled to receive dividends
when, as and if declared by its Board out of funds legally available therefor.
Since Union National is a holding company, the funds required by it to enable it
to pay dividends are derived predominantly from the dividends paid to Union
National by its subsidiary, UNB. Union National's ability to pay dividends,
therefore, is dependent upon the earnings, financial condition and ability to
pay dividends of its subsidiary. Payment of dividends by Union National's
subsidiary is subject to a number of regulatory restrictions. See "Supervision
and Regulation-Limits on Dividends and Other Payments" under Item 1 of this Form
10. UNB is presently permitted to pay dividends without prior approval under
such regulatory requirements. At December 31, 1996, an aggregate of
approximately $4,445,000 was available for the payment of quarterly dividends to
Union National for the last quarter of 1996.
Liquidation
In the event of liquidation, dissolution or winding up of Union
National, holders of Union National Shares are entitled to share ratably in all
assets remaining after payment of liabilities.
Voting
Holders of Union National Shares are entitled to one vote for each
share held by them at all meetings of the stockholders.
41
<PAGE>
Preemptive Rights
No holder of Union National Shares has any preemptive rights to
purchase any additional shares of stock.
Changes in Control
The Articles of Incorporation of Union National provide for the
division of its Board of Directors into three classes, as nearly as equal in
number as possible, with the term of three years each, and the term of office of
one class expiring each year. The Articles of Incorporation provide that the
number of directors shall be thirteen and may be increased or decreased as
provided in Union National's Bylaws, which permit the Board to increase the
number to a maximum of 25 and to decrease the number to the minimum required by
Maryland law. The Articles of Incorporation also provide that no director may be
removed except for cause and then only by the affirmative vote of at least
two-thirds of the total eligible stockholder votes. The Bylaws of Union National
require that directors retire from the Board on the date of the annual meeting
of stockholder next occurring after a director reaches the age of 70.
The Articles of Incorporation of Union National authorizes the Board
of Directors, when evaluating any offer to (i) make a tender or exchange offer
for its common stock, (ii) merge or consolidate with another institution, or
(iii) purchase or otherwise acquire all or substantial all of its assets, in
connection with the exercise of its judgment in determining the best interests
of Union National and its stockholders, to give due consideration to all
relevant factors, including without limitation the economic effects of
acceptance of such offer on (a) depositors, borrowers, employees and the
communities involved, and (b) the ability of the successor to fulfill the
objectives of an insured institution under applicable federal and state statutes
and regulations.
Business Combinations
Under the Maryland General Corporation Law, certain "business
combinations" (including a merger, consolidation, share exchange, or, in certain
circumstances, an asset transfer or issuance or reclassification of equity
securities) between a Maryland corporation and any person who beneficially owns
10% or more of the corporation's stock (an "Interested Stockholder") must be:
(a) recommended by the corporation's board of directors; and (b) approved by the
affirmative vote of at least (i) 80% of the corporation's outstanding shares
entitled to vote and (ii) two-thirds of the outstanding shares entitled to vote
which are not held by the Interested Stockholder with whom the business
combination is to be effected, unless, among other things, the corporation's
common stockholders receive a minimum price (as defined in the statute) for
their shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for his shares. In addition, an
Interested Stockholder or any affiliate may not engage in a "business
combination" with the corporation for a period of five years following the date
he becomes an Interested Stockholder. These provisions of Maryland law do not
apply, however, to certain business combinations that are specifically exempted
by resolution of the board of directors of a Maryland corporation prior to the
time that an Interested Stockholder becomes an Interested Stockholder. National
banking associations are required to obtain prior written approval to merge or
consolidate with any insured or non-insured bank or institution, to assume
liability to pay any deposits, or to transfer assets to any insured or
non-insured bank or institution.
42
<PAGE>
Control Shares Acquisitions
The Maryland General Corporation Law provides that "control shares" of
a Maryland corporation acquired in a "control share acquisition" have no voting
rights except to the extent approved by a vote of two-thirds of the votes
entitled to be cast by stockholders, excluding shares owned by the acquiror or
by officers or directors who are employees of the corporation. "Control shares"
are voting shares which, if aggregated with all other shares previously acquired
by such person, would entitle the acquiror to vote 20% or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the corporation's board of directors to call a special
meeting of stockholders to be held within 50 days of demand to consider the
voting rights of the shares. If no request for a meeting is made, the
corporation may itself present the question at any stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares, except those for which voting
rights have previously been approved, for fair value determined, without regard
to voting rights, as of the date of the last control share acquisition or of any
meeting of stockholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a
stockholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context of
a control share acquisition.
The control share acquisition statute does not apply to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or to acquisitions approved or excepted by the articles
of incorporation or bylaws of the corporation. Any change in control also
triggers certain regulatory requirements. See "Supervision and Regulation" under
Item 1 of this Form 10.
Federal and State Regulations
Union National and UNB are subject to a variety of Federal statutes
and regulations applicable to national banking associations, including the
National Bank Act, all of which impact the operations of UNB. See "Supervision
and Regulation" under Item 1 of this Form 10.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Maryland law, a corporation is permitted to limit, by provision
in its Articles of Incorporation, the liability of directors and officers so
that no director or officer shall be liable to the corporation or to any
shareholder for money damages except (i) for and to the extent of actual receipt
of an improper personal benefit in money, property or services, or (ii) for
active and deliberate dishonesty established by a final judgment as being
material to the cause of action. Union National's Articles of Incorporation
incorporated these provisions.
43
<PAGE>
Union National's Articles of Incorporation and Bylaws require Union
National to indemnify its directors and officers to the maximum extent permitted
under Maryland law. As a result, Union National is required to indemnify any
present or former director or officer against any claim or liability, including
all judgments, penalties, fines, settlements and expenses, unless it is
established that (i) his act or omission was committed in bad faith or was the
result of active and deliberate dishonesty, (ii) he actually received an
improper personal benefit in money, property or services or (iii) in the case of
a criminal proceeding, he had reasonable cause to believe that his act or
omission was unlawful. In addition, Union National is required to pay or
reimburse, in advance of final disposition of a proceeding, reasonable expenses
incurred by such a person provided that Union National shall have received (i) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by Union National,
and (ii) a written undertaking by or on his behalf to repay the amount paid or
reimbursed by Union National if it shall ultimately be determined that the
standard of conduct was not met. Union National's Articles of Incorporation and
Bylaws also require Union National to provide indemnification, payment or
reimbursement of expenses to a present or former director or officer who served
a predecessor of Union National in such capacity, and to any employee or agent
of Union National or a predecessor of Union National.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted of directors and officers of Union
National pursuant to the foregoing provisions or otherwise, Union National has
been advised that, although the validity and scope of the governing statute has
not been tested in court, in the opinion of the SEC, such indemnification is
against public policy as expressed in such Act and is, therefore, unenforceable.
In addition, indemnification may be limited by state securities laws.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, the report thereon, the
notes thereto and supplementary data commencing at page F-1 of this Form 10,
which financial statements, report, notes and data are incorporated herein by
reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
44
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
Consolidated Financial Statements
Unaudited Financial Statements
Page
Consolidated Balance Sheet i
Consolidated Statements of Income ii
Consolidated Statements of Stockholders' Equity iii
Consolidated Statements of Cash Flows iv
Report of Independent Auditors Page
F-1
Audited Financial Statements
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
Exhibits
Exhibit
Number
- ------
3.1 Articles of Incorporation of Union National
3.2 Bylaws of Union National
10.1 Employment Agreement between The Union National Bank of Westminster and
Virginia W. Smith
10.2 1997 Stock Option Plan
10.3 Lease dated October 1, 1997, between Union National Bank and K. Wayne
Lockard
21.1 Subsidiary of Union National
23.2 Consent of Stegman & Company
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
UNION NATIONAL BANCORP, INC.
/s/ Virginia W. Smith
---------------------
Virginia W. Smith
President and Chief Executive Officer
Dated: August 5, 1997
45
<PAGE>
United National Bancorp
Consolidated Financial Statements
(Unaudited)
Union National Bancorp
Consolidated Balance Sheet
(Unaudited)
June 30,
1997
(Unaudited)
ASSETS
Cash and due from banks $ 6,471,761
Interest bearing deposits with banks 43,627
Federal funds sold 11,081,530
Investment securities available for sale-at fair value 48,607,907
nvestment securities held to maturity-at amortized cost -
fair value of $ (1997) and $17,304,150 (1996) 14,837,241
Loans 148,093,328
Less: allowance for credit losses (1,848,177)
----------
Loans - net 146,245,152
Bank premises and equipment 3,903,890
Foreclosed real estate 646,528
Accrued interest receivable 1,837,098
Other assets 1,890,061
---------
TOTAL ASSETS $ 235,564,796
=============
LIABILITIES
Deposits:
Non-interest bearing deposits $ 24,618,474
Interest bearing deposits 180,977,331
-----------
Total deposits 205,595,805
Short-term borrowings 10,012,991
Federal Home Loan Bank Borrowing -
Accrued expenses and other liabilities 891,860
-------
Total liabilities 216,500,656
===========
STOCKHOLDERS' EQUITY
Common stock - $.01 par; 10,000,000 shares authorized;
824,000 shares issued and outstanding 8,340
Surplus 8,342,055
Unrealized appreciation (depreciation) on securities available
for sale (net of related tax effects) 36,702
Retained earnings 10,677,043
----------
Total stockholders' equity 19,064,140
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,564,796
==============
i
<PAGE>
<TABLE>
Union National Bancorp
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Six Months Six Months
Ended Ended
6/30/97 6/30/96
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 6,734,470 $ 6,936,787
Interest and dividends on investment securities:
Taxable interest on mortgage backed securities 646,958 756,777
Other taxable interest & dividends 1,140,245 566,035
Nontaxable interest 152,931 191,561
Interest on deposits at other banks 2,756 57,396
Interest on federal funds sold 199,897 156,087
------- -------
Total interest income 8,877,257 8,664,643
========= =========
INTEREST EXPENSE:
Interest on deposits:
Time certificates of deposit of $100,000 and more 575,569 642,778
Other deposits 3,238,282 3,216,516
--------- ---------
Total interest on deposits 3,813,851 3,859,294
Interest on short-term borrowings 231,706 156,039
Interest on Federal Home Loan Bank borrowings 0 26,300
--------- ---------
Total interest expense 4,045,557 4,041,633
========= =========
NET INTEREST INCOME 4,831,700 4,623,010
PROVISION FOR CREDIT LOSSES 115,000 191,000
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 4,716,700 4,432,010
========= =========
NON-INTEREST INCOME:
Service charges on deposit accounts 460,852 332,105
Other services charges 91,333 56,456
Gains on sales of loans - 13,668
Other income 84,170 94,802
------ ------
Total other operating income 636,355 497,031
======= =======
NON-INTEREST EXPENSES:
Salaries and employee benefits 2,064,670 1,890,865
Occupancy expense of bank premises 358,585 387,270
Equipment expenses 197,008 179,757
Other expenses 982,872 953,243
------- -------
Total other operating expenses 3,603,135 3,411,135
--------- ---------
INCOME BEFORE INCOME TAXES 1,749,920 1,517,906
APPLICABLE INCOME TAXES 575,195 526,567
------- -------
$ 1,174,725 $ 991,339
============ ==========
EARNINGS PER COMMON SHARE $1.41
===== ==========
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Union National Bancorp
Consolidated Statements of Changes
in Stockholders' Equity
(Unaudited)
Unrealized
Gains/
Losses
Common on Undivided
Stock Surplus Securities Profits Total
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 $ 8,340 $ 8,342,055 $ (183,075) $8,372,716 $16,540,036
Net income -- -- -- 991,339 991,339
Cash dividends ($.28 per share) -- -- -- (233,520) (233,520)
Unrealized gains on securities
available for sale (net of tax) -- -- (252,551) -- (252,551)
----- -------- -------- --------- --------
BALANCE AT JUNE 30, 1996 $ 8,340 $ 8,342,055 $ (435,626) $9,130,535 $17,045,304
Net income -- -- -- 872,183 872,183
Cash dividends ($.29 per share) -- -- -- (241,860) (241,860)
Unrealized gains on securities
available for sale (net of tax) -- -- 377,040 -- 377,040
----- -------- ------- -------- -------
BALANCE AT DECEMBER 31, 1996 $ 8,340 $ 8,342,055 $ (58,586) $9,760,858 $18,052,667
Net income -- -- -- 1,174,725 1,174,725
Cash dividends ($.57 per share) -- -- -- (258,540) (2,58,540)
Unrealized losses on securities
available for sale (net of tax) -- -- 95,288 -- 95,288
----- --------- ------ -------- ------
BALANCE AT JUNE 30, 1997 $ 8,340 $ 8,342,055 $ 36,702 $10,677,043 $19,064,140
=== ==== ======== =========== ========= =========== ===========
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Union National Bancorp
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Six Months
Ended Ended
6/30/97 6/30/96
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 1,178,231 $ 991,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 115,000 191,000
Depreciation and amortization 319,187 291,050
Net losses on available for sale securities -
Gain on sales of other real estate and other assets (19,157) (35,941)
Deferred income taxes (18,190) (2,015)
Net decrease (increase) in accrued interest receivable (544,903) 76,890
Net increase (decrease) in accrued expenses & other liabilities 8,930 43,572
Other - net (2,433,311) 150,651
---------- -------
Net cash provided by operating activities (1,394,213) 1,706,606
========== =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (10,930,000) (8,000,000)
Proceeds from sale of available for sale securities -
Proceeds from maturities for available for sale securities 2,241,584 3,580,793
Purchase of held to maturity securities - (445,000)
Proceeds from maturities of held to maturity securities 3,327,466 3,782,150
Proceeds from sale of other real estate and other assets 137,510 301,182
Net increase in loans (1,181,149) (1,012,815)
Bank premises and equipment acquired (343,858) (239,773)
Foreclosed real estate acquired - (124,451)
--------- --------
Net cash used in investing activities (6,748,447) (2,157,914)
========== ==========
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,339,086 3,841,476
Net increase (decrease) in short-term borrowings 3,705,101 1,595,043
Proceeds from Federal Home Loan Bank borrowings -
Repayments of Federal Home Loan Bank borrowings - (5,000,000)
Cash dividends paid (258,540) (233,520)
-------- --------
Net cash provided by financing activities 9,785,647 202,999
========= =======
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENT 1,642,987 (248,309)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,953,932 13,641,267
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,596,919 $13,392,958
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 684,103 $ 660,179
============ =========
Income taxes paid 515,000 520,000
======= =======
NON-CASH INVESTING ACTIVITIES
Transfer from loans to foreclosed real estate $ 375,000 $ 319,708
------------ ---------
Transfer from available for sale securities
to held to maturity securities $ -
============ =========
</TABLE>
iv
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Board of Directors
Union National Bancorp, Inc.
Westminster, Maryland
We have audited the accompanying consolidated balance sheets of Union
National Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of Union National'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
misstatements. 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 referred to
above present fairly, in all material respects, the consolidated financial
position of Union National Bancorp, Inc. and Subsidiary as of December 31, 1996
and 1995, and the consolidated results of their operations and cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Stegman & Company
Towson, Maryland
January 8, 1997
F-1
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 6,910,561 $ 5,591,267
Interest bearing deposits with banks 160,821 5,000,000
Federal funds sold 8,882,550 3,050,000
Investment securities available for sale-at fair value 38,866,761 27,040,617
Investment securities held to maturity-at amortized cost -- fair value of
$17,304,150 (1996) and $25,735,869 (1995) 17,073,011 25,379,914
Loans 147,350,540 146,821,594
Less: allowance for credit losses (1,772,433) (1,769,077)
------------- ------------
Loans -- net 145,578,107 145,052,517
UNB premises and equipment 3,928,561 3,850,858
Foreclosed real estate 391,236 183,067
Accrued interest receivable 1,292,194 1,401,190
Other assets 1,951,826 2,266,677
------------ ------------
TOTAL ASSETS $225,035,628 $218,816,107
============ ============
LIABILITIES
Deposits:
Non-interest bearing deposits $ 23,694,607 $ 23,092,758
Interest bearing deposits 175,596,828 170,369,084
------------ ------------
Total deposits 199,291,435 193,461,842
Short-term borrowings 6,808,596 3,140,710
Federal Home Loan Bank Borrowing -- 5,000,000
Accrued expenses and other liabilities 882,930 673,519
------------ ------------
Total liabilities 206,982,961 $202,276,071
------------ ------------
STOCKHOLDERS' EQUITY
Common stock--$.01 par; 10,000,000 shares authorized;
834,000 shares issued and outstanding 8,340 8,340
Surplus 8,342,055 8,342,055
Unrealized losses on securities available for sale
(net of related tax benefit) (58,586) (183,075)
Retained earnings 9,760,858 8,372,716
------------ -----------
Total stockholders' equity 18,052,667 16,540,036
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $225,035,628 $218,816,107
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The Years Ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 13,707,367 $ 13,661,957 $ 11,937,587
Interest and dividends on investment securities:
Taxable interest on mortgage backed securities 1,453,544 1,530,218 1,480,427
Other taxable interest and dividends 1,346,903 1,330,984 1,161,664
Nontaxable interest 361,482 394,366 455,880
Interest on deposits at other banks 61,229 20,400 --
Interest on federal funds sold 430,342 153,442 73,291
-------------- ------------- ------------
Total interest income 17,360,867 17,091,367 15,108,849
INTEREST EXPENSE
Interest on deposits:
Time certificates of deposit of $100,000 and more 1,097,504 959,967 470,670
Other deposits 6,604,581 6,232,214 5,444,471
-------------- ------------- -----------
Total interest on deposits 7,702,085 7,192,181 5,915,141
Interest on short-term borrowings 370,144 513,642 373,725
Interest on Federal Home Loan Bank borrowings 26,300 386,281 --
-------------- ------- ------------
Total Interest Expense 8,098,529 8,092,104 6,288,866
-------------- ------------- -----------
Net interest income 9,262,338 8,999,263 8,819,983
Provision for credit losses 329,000 212,000 342,000
-------------- ------------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR CREDIT LOSSES 8,933,338 8,787,263 8,477,983
-------------- ------------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 796,490 723,021 1,190,579
Other service charges 152,765 158,346 127,753
Gains on sales of loans 19,791 4,300 39,453
Loss on securities -- (1,065) (90,705)
Other income 116,754 92,948 48,252
-------------- ------------- ------------
Total other operating income 1,085,800 977,550 1,315,332
-------------- ------------- ------------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,879,323 3,721,430 3,393,285
Occupancy expense of bank premises 802,443 666,070 611,226
Equipment expenses 335,136 341,731 330,080
Computer service fees 598,147 597,656 590,971
FDIC assessment 2,000 208,912 388,618
Legal and professional 199,965 290,716 207,290
Check clearing fees 40,784 103,913 229,039
Expenses related to terminated merger activities 287,824 -- --
Other expenses 1,054,788 1,128,209 1,049,025
-------------- ------------- -------------
Total other operating expenses 7,200,410 7,058,637 6,799,534
-------------- ------------- -------------
INCOME BEFORE INCOME TAXES 2,818,728 2,706,176 2,993,781
APPLICABLE INCOME TAXES 955,206 911,948 989,944
-------------- ------------- -------------
NET INCOME $ 1,863,522 $ 1,794,228 $ 2,003,837
============== ============= =============
EARNINGS PER COMMON SHARE $ 2.23 $ 2.15 $ 2.40
============== ============= ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994
Unrealized
Gains/
Losses
Common on Undivided
Stock Surplus Securities Profits Total
----- ------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,1994 $8,340 $8,342,055 $ 285,166 $5,425,332 $14,060,893
Net income -- -- -- 2,003,837 2,003,837
Cash dividends ($.50 per share) -- -- -- (417,000) (417,000)
Unrealized losses on securities
available for sale (net of tax) -- -- (1,699,288) -- (1,699,288)
------ --------- ----------- --------- -----------
BALANCE AT DECEMBER 31, 1994 8,340 8,342,055 (1,414,122) 7,012,169 13,948,442
Net income -- -- -- 1,794,228 1,794,228
Cash dividends ($.52 per share) -- -- -- (433,681) (433,681)
Unrealized gains on securities
available for sale (net of tax) -- -- 1,231,047 -- 1,231,047
------ --------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 $8,340 $8,342,055 $ (183,075) $8,372,716 $16,540,036
Net income -- -- -- 1,863,522 1,863,522
Cash dividends ($.57 per share) -- -- -- (475,380) (475,380)
Unrealized gains on securities
available for sale (net of tax) -- -- 124,489 -- 124,489
------ ---------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 $8,340 $8,342,055 $ (58,586) $9,760,858 $18,052,667
====== ========== ============ ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,863,522 $ 1,794,228 $ 2,003,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 329,000 212,000 342,000
Depreciation and amortization 565,016 470,925 448,751
Net losses on available for sale securities -- 1,065 90,706
Gain on sales of other real estate and other assets (50,227) (39,507) (31,808)
Deferred income taxes (8,359) (83,152) (97,085)
Net decrease (increase) in accrued interest receivable 108,996 (52,032) (179,584)
Net increase (decrease) in accrued expenses and
other liabilities 209,411 (193,906) 455,782
Other -- net 201,992 507,482 378,376
------------ ----------- -----------
Net cash provided by operating activities 3,219,351 2,617,103 3,410,975
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities (18,009,500) (6,373,418) (16,984,532)
Proceeds from sale of available for sale securities -- 2,856,390 4,152,742
Proceeds from maturities of available for sale securities 6,176,022 4,119,062 5,799,107
Purchase of held to maturity securities (650,000) (3,492,632) (4,584,791)
Proceeds from maturities of held to maturity securities 9,272,045 6,854,751 2,431,063
Proceeds from sale of other real estate and other assets 351,413 265,940 57,115
Net increase in loans (1,301,595) (7,410,114) (11,652,288)
UNB premises and equipment acquired (642,719) (1,040,722) (374,830)
Foreclosed real estate acquired (124,451) (111,540) (184,016)
------------ ----------- ------------
Net cash used in investing activities (4,928,785) (4,332,283) (21,340,430)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 5,829,593 10,928,790 9,716,626
Net increase (decrease) in short-term borrowings 3,667,886 (6,736,602) 4,932,805
Proceeds from Federal Home Loan Bank borrowings -- 18,000,000
Repayments of Federal Home Loan Bank borrowings (5,000,000) (13,000,000)
Cash dividends paid (475,380) (433,681) (417,000)
------------ ----------- ------------
Net cash provided by financing activities 4,022,099 8,758,507 14,232,431
Net increase (decrease) in cash and cash equivalents 2,312,665 7,043,327 (3,697,024)
Cash and cash equivalents at beginning of year 13,641,267 6,597,940 10,294,964
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $15,953,932 $13,641,267 $ 6,597,940
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid $ 8,112,787 $ 8,291,567 $ 6,003,450
=========== =========== ============
Income taxes paid $ 922,000 $ 1,076,040 $ 1,005,500
Non-cash investing activities
Transfer from loans to foreclosed real estate $ 384,904 $ -- $ --
Transfer from available for sale securities to held to maturity
securities $ -- $ 6,300,000 $ 10,000,000
=========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National Bancorp, Inc.
and subsidiary conform to generally accepted accounting principles and to
general practices in the banking industry. Certain reclassifications have been
made to amounts previously reported to conform with the classifications made in
1996.
Principles of Consolidation
The consolidated financial statements include the accounts of Union
National Bancorp, Inc. (Union National) and its wholly owned subsidiary, Union
National Bank (the Bank). All significant intercompany transactions and balances
have been eliminated in consolidation. The financial statements of Union
National Bancorp, Inc. (parent only) include the Bank under the equity method of
accounting.
Nature of Operations
UNB provides a full range of banking services to individuals and
businesses through its main office and seven branches in Carroll County,
Maryland. Its primary deposit products are certificates of deposit and demand,
savings, NOW and money market accounts. Its primary lending products are
commercial and consumer loans and real estate mortgages.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for credit losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
credit losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
While management uses available information to recognize losses on
loans and foreclosed real estate, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
UNB's allowances for credit losses and foreclosed real estate. Such agencies may
require UNB to recognize additions to the allowances based on their judgments
about information available to them at the time of their examination.
Investment Securities Available for Sale
Investment securities designated as available for sale are stated at
fair value based on quoted market prices. Securities available for sale
represent those securities which management may sell as part of its
asset/liability strategy or that may be sold in response to changing interest
rates or liquidity needs. Unrealized gains and losses are recognized as direct
increases or decreases, net of related income tax, to stockholders' equity. The
cost of securities sold is recognized using the specific identification method.
Investment Securities Held to Maturity
Investment securities held to maturity are stated at cost adjusted for
amortization of premiums and accretion of discounts. UNB has the ability and
intent to hold these securities until maturity.
F-6
<PAGE>
Interest on Loans
Loans are stated at their current unpaid balance. Interest income on
loans is accrued at the contractual rate on the principal amount outstanding.
Loan origination and commitment fees and certain direct loan origination costs
are being deferred and the net amount amortized over the contractual life of the
loan as an adjustment of the loan's yield.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
Loans are considered impaired when, based on current information, it is
probable that UNB will not collect all principal and interest payments according
to the loans' contractual terms. Generally, loans are considered impaired once
principal or interest payments become 90 days or more past due and they are
placed on nonaccrual. Management also considers the financial condition of the
borrower, cash flows of the loan and the value of the related collateral.
Impaired loans do not include large groups of smaller balance homogeneous loans
such as residential real estate and consumer installment loans which are
evaluated collectively for impairment. Loans specifically reviewed for
impairment are not considered impaired during periods of "minimum delay" in
payment (90 days or less) provided eventual collection of all amounts due is
expected. The impairment of the loan is measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate, or
the fair value of the collateral if repayment is expected to be provided by the
collateral. The majority of UNB's impaired loans are measured by reference to
the fair value of the collateral. Interest income on impaired loans is
recognized on the cash basis.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectability of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of physical
properties are computed using the straight-line method over the estimated useful
lives of the properties. Expenditures for maintenance, repairs and minor
renewals are charged to operations; expenditures for betterment's are charged to
the property accounts. Upon retirement or other disposition of properties, the
carrying value and the related accumulated depreciation are removed from the
accounts.
Foreclosed Real Estate
Real estate acquired through foreclosure of loans is carried at cost or
fair market value minus estimated cost of disposal, whichever is lower. Fair
market value is based on independent appraisals and other relevant factors. At
the time of acquisition, any excess of the loan balance over fair market value
is charged to the allowance for credit losses. Gains and losses on sales of
foreclosed real estate are included in other operating income.
F-7
<PAGE>
Income Taxes
Deferred income taxes are provided for differences between financial
statement and tax bases of assets and liabilities and are measured at current
tax rates. The deferred tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
Earnings Per Common Share
Earnings per common share are based on the weighted average number of
shares outstanding of 834,000 for 1996, 1995 and 1994.
Cash Flows
Union National has defined cash and cash equivalents as those amounts
included in the balance sheet captions "Cash and due from banks", "Interest
bearing deposits with banks" and "Federal funds sold".
2. FORMATION OF HOLDING COMPANY
Union National Bancorp, Inc., a one-bank holding company, began
operations on June 30, 1994 pursuant to an Agreement and Plan of Consolidation
proposed by management and approved by the shareholders of UNB on April 19,
1994. UNB continues its banking business under the same name as a wholly owned
subsidiary of the holding company. Under the Plan of Consolidation, each
outstanding share of Bank common stock was exchanged for two shares of Union
National's common stock.
3. ACCOUNTING CHANGES
Impaired Loans
Effective January 1, 1995 Union National adopted Statement of Financial
Accounting Standards ("SFAS") Nos. 114 and 118 "Accounting by Creditors for
Impairment of a Loan" and "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures", respectively. These statements define
a loan as impaired when, based on current information and events, it is probable
that a creditor will be unable to collect all amounts due according to the
contractual terms of a loan. If the value of the impaired loan is less than the
recorded investment in the loan, the creditor shall recognize the impairment by
creating a valuation allowance for the difference. See Note 6 for a discussion
of Union National's impaired loans at December 31,1996 and 1995, respectively.
Long-Lived Assets
Effective January 1, 1996 Union National adopted SFAS No. 121
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of". This standard requires that long-lived assets be evaluated
regularly for other-than-temporary impairment. If circumstances suggest that
their value may be impaired, an assessment of recoverability is performed prior
to any write-down of the asset. Implementation of this standard did not have a
significant impact on Union National's financial condition or results of
operations.
Financial Assets and Liabilities
On January 1, 1997 Union National adopted the provisions of SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The adoption of this statement is not expected to
have a material impact on Union National's financial position or results of
operations.
F-8
<PAGE>
4. CASH AND DUE FROM BANKS
The Federal Reserve requires banks to maintain certain minimum cash
balances consisting of vault cash and deposits in the Federal Reserve Bank or in
other commercial banks. The amounts of such reserves are based on percentages of
certain deposit types and totaled $1,035,000 and $755,000 at December 31, 1996
and 1995, respectively. The average daily reserve balance maintained during 1996
and 1995 was $1,769,656 and $1,653,911 respectively.
5. INVESTMENT SECURITIES
Debt and equity securities have been classified in the consolidated
statement of financial condition according to management's intent. The carrying
amount of securities and their approximate fair values at December 31 were as
follows:
<TABLE>
<CAPTION>
Available For Sale: 1996
- ------------------- ----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government agencies $ 23,498,767 $ 104,588 $ 38,405 $ 23,564,950
Obligations of states and political subdivisions 496,150 106,350 -- 602,500
Mortgage-backed securities 13,570,900 75,132 151,902 13,494,132
------------------ ------------- ----------- -----------------
Total debt securities 37,565,817 286,070 190,307 37,661,582
Equity securities 1,093,227 111,952 -- 1,205,179
------------------ ------------- ----------- -----------------
Total securities available for sale $ 38,659,044 $ 398,022 $ 190,307 $ 38,866,761
================== ============= =========== =================
</TABLE>
<TABLE>
<CAPTION>
1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government agencies $ 9,001,294 $ 35,198 $ 30,471 $ 9,006,021
Obligations of states and political subdivisions 453,105 146,895 -- 600,000
Mortgage-backed securities 16,294,444 114,917 158,277 16,251,084
---------------- ----------- ------------- ---------------
Total debt securities 25,748,843 297,010 188,748 25,857,105
Equity securities 1,094,600 88,912 -- 1,183,512
---------------- ----------- ------------- ---------------
Total securities available for sale $ 26,843,443 $ 385,922 $ 188,748 $ 27,040,617
================ =========== ============= ================
</TABLE>
F-9
<PAGE>
<TABLE>
<CAPTION>
Held To Maturity: 1996
- ----------------- ----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government agencies $ 2,550,750 $ 4,908 $ 5,770 $ 2,549,888
Obligations of states and political subdivisions 5,648,234 46,370 2,455 5,692,149
Mortgage-backed securities 8,874,027 188,086 -- 9,062,113
----------------- ------------- ---------- ----------------
Total securities held to maturity $ 17,073,011 $ 239,364 $ 8,225 $ 17,304,150
================= ============= ========== ================
1995
----
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Treasury securities and obligations of U.S.
government agencies $ 9,076,189 482 $ 34,666 $ 9,042,005
Obligations of states and political subdivisions 6,762,851 52,319 996 6,814,174
Mortgage-backed securities 9,540,874 338,816 -- 9,879,690
----------------- ------------- --------- ---------------
Total securities held to maturity $ 25,379,914 $ 391,617 $ 35,662 $ 25,735,869
================== ============= ========== ===============
</TABLE>
Gross realized gains and gross realized losses on sales of available
for sale were:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Gross realized gains:
U.S. Government and agency securities $ -- $ 10,041 $ --
State and municipal securities -- 2,000 --
Mortgage-backed securities -- 11,899 --
---------- ------------- ---------
$ -- $ 23,940 $ --
========== ============= =========
Gross realized losses:
U.S. Government and agency securities $ -- $ 10,554 $ 12,771
State and municipal securities -- -- --
Mortgage-backed securities -- 14,451 77,934
---------- ------------- ----------
$ -- $ 25,005 $ 90,705
========== ============= ==========
</TABLE>
The scheduled maturities of securities held to maturity and securities
available for sale at December 31,1996, were as follows:
<TABLE>
<CAPTION>
Held to maturity securities Available for sale securities
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 2,648,096 $ 2,653,065 $ 2,502,992 $ 2,505,450
Due from one year to five year 3,103,175 3,112,200 20,974,517 21,012,337
Due from five to ten years 6,792,722 6,895,788 5,319,779 5,403,535
Due after ten years 4,529,018 4,643,097 8,768,529 8,740,260
--------------- --------------- ----------------- -------------
Total debt securities $ $17,073,011 $ 17,304,150 $ 37,565,817 $ 37,661,582
=============== =============== ================= =============
</TABLE>
For the purposes of the maturity table, mortgage-backed securities,
which are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted average
F-10
<PAGE>
contractual maturities of underlying collateral. The mortgage-backed securities
may mature earlier than their weighted average contractual maturities because of
principal prepayments.
Securities with a book value of $22,241,003 at December 31, 1996 and
$21,010,118 at December 31, 1995 were pledged as collateral for certain deposits
and repurchase agreements as required or permitted by law.
There were no state, county and municipal securities whose book value,
as to any issuer, exceeded ten percent of stockholders' equity at December 31,
1996 or 1995.
During December 1995, UNB reclassified securities with an amortized
cost of $6,300,000 from available-for-sale to held-to-maturity. The
reclassification was made pursuant to a reassessment of the investment
securities portfolio based on the issuance of a special report by the Financial
Accounting Standards Board "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." In accordance
with this report, business entities were allowed a one time reclassification of
the investment securities portfolio between November 15, 1995 and December 31,
1995. There were no transfers of securities during 1996. For 1996, the equity
adjustment for the reclassified securities from available-for-sale to held-
to-maturity was an unrealized loss of $186,080.95.
6. LOANS AND ALLOWANCE FOR CREDIT LOSSES
At December 31 loans were as follows:
1996 1995
---- ----
Real estate:
Construction $ 1,842,538 $ 2,494,150
Conventional 91,262,210 89,709,340
Loans to farmers 1,638,900 1,506,172
Commercial and industrial loans 22,551,859 26,247,024
Loans to individuals 27,111,321 26,191,418
Tax exempt loans to political subdivisions 3,372,488 1,175,969
All other loans 108,459 177,314
------------- -------------
Gross loans 147,887,775 147,501,387
Net deferred loan fees and costs (537,235) (679,793)
------------- -------------
Total loans $ 147,350,540 $ 146,821,594
============= =============
Changes in the allowance for credit losses were as follows:
1996 1995 1994
---------- ----------- --------
Balance at January 1 $1,769,077 $1,670,940 $1,503,371
Provision charged to operating expenses 329,000 212,000 342,000
Recoveries 61,088 93,024 61,904
Loans charged off (386,732) (206,887) (236,335)
-------- -------- --------
Balance at December 31 $1,772,433 $1,769,077 $1,670,940
========== ========== ==========
Information regarding impaired loans for the years ending December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
Impaired loans with a valuation allowance $ 109,495 $ 73,043
Impaired loans without a valuation allowance 1,150,063 475,535
----------- ----------
Total Impaired Loans $ 1,259,558 $ 548,578
=========== ==========
Allowance for credit losses related to impaired loans $ 96,314 $ 52,748
Allowance for credit losses related to other than impaired loans 1,696,119 1,716,329
----------- ----------
Total allowance for credit losses $ 1,772,433 $1,769,077
=========== ==========
Average impaired loans for the year $ 965,871 $ 437,223
=========== ==========
Interest income on impaired loans recognized on a cash basis $ -- $ 24,774
========== ==========
</TABLE>
F-11
<PAGE>
UNB's loans are widely dispersed among individuals and industries. On
December 31, 1996, there was no concentration of loans in any single industry
that exceeded 5% of total loans.
UNB is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit.
UNB's exposure to credit loss in the event of nonperformance by the
other party to these financial instruments is represented by the contractual
amount of the instruments. UNB uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
UNB generally requires collateral or other security to support
financial instruments with credit risk. The amount of collateral or other
security is determined based on management's credit evaluation of the
counterparty.
Contract amount of financial instruments which represent credit risk at
December 31, 1996 and 1995:
1996 1995
----------- -----------
Commitments to extend credit $17,438,032 $16,947,043
Standby letters of credit 2,308,082 1,687,540
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. UNB evaluates each customer's
creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by UNB to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
7. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following at December 31,
1996 and 1995:
1996 1995
------------ --------
Land $ 204,756 $ 204,755
Buildings and leasehold improvements 4,827,439 4,607,811
Equipment 2,605,618 2,922,375
------------- --------------
7,637,813 7,734,941
Accumulated depreciation and amortization 3,709,252 3,884,083
------------- ---------------
$ 3,928,561 $ 3,850,858
============= ===============
8. DEPOSITS
Included in time deposits are certificates of deposit issued in
denominations of $100,000 or more which totaled $23,406,549 and $21,776,513 at
December 31,1996 and 1995 respectively.
F-12
<PAGE>
At December 31,1996, the amount outstanding and maturity distribution
of time certificates of deposit issued in amounts of $100,000 or more are in the
following table: (in thousands)
<TABLE>
<CAPTION>
Maturing
Over 3 Over 6
3 months through through Over 12
Total or less 6 months 12 months months
-------- ---------- -------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Time certificates of deposit $100,000 or more $23,407 $3,176 $4,983 $11,195 $4,053
======= ====== ====== ======= ======
</TABLE>
Interest on deposits for the years ended December 31, 1996, 1995 and
1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Saving deposits $1,873,911 $2,136,685 $2,563,748
Certificates of deposit ($100,000 or more) 626,639 484,109 320,407
Other time deposits 5,201,535 4,571,387 3,030,986
------------ ------------ ------------
Total at December 31 $7,702,085 $7,192,181 $5,915,141
============ ============ =============
</TABLE>
9. SHORT-TERM BORROWINGS
Short-term borrowings which consist primarily of federal funds
purchased and securities sold under agreements to repurchase borrowings were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Average amount outstanding during year $ 8,555,503 $ 9,827,234
Weighted average interest rate during year 4.3% 6.3%
Amount outstanding at year end $ 6,808,596 $ 3,140,710
Weighted average interest rate at year-end 4.5% 5.2%
Highest amount during year $ 17,802,839 $ 17,721,803
</TABLE>
The bank has obtained two 10,000,000 lines of credit from correspondent
banks to be used for securities repurchase agreements.
10. FEDERAL HOME LOAN BANK BORROWINGS
At December 31,1995, UNB had received an advance from the Federal Home
Loan Bank in the amount of $5,000,000 which was due and paid January 31,1996
with interest at 5.7%. UNB has pledged $23,000,000 of mortgage loans as
collateral on advances from this source.
F-13
<PAGE>
11. PENSION PLAN AND THRIFT PLAN
UNB sponsors a defined benefit pension plan covering substantially all
employees. Benefits are based on years of service and the employee's
compensation. UNB's funding policy is to contribute the maximum amount
deductible for income tax purposes. Contributions provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future (calculated at a 6% annual increase). Net pension cost for 1996, 1995 and
1994 includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Service cost--benefits earned during the year $ 86,195 $ 71,154 $ 88,237
Interest cost on projected benefit obligation 84,964 88,382 84,508
Actual return on plan assets (103,395) (139,897) 14,630
Net amortization and deferral 54,406 76,498 (58,968)
--------- -------- --------
$122,170 $ 96,137 $128,407
Additional expense related to settlement of person obligations 155,612 -- --
--------- -------- --------
$277,782 $ 96,137 $128,407
======== ======== ========
</TABLE>
During 1996, UNB's defined benefit pension plan made lump sum payments
to plan participants which met the criteria for a settlement of pension
obligations as defined in SFAS No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Plans and for Termination Benefits". This
settlement resulted in additional pension expense of $155,612 for the year ended
December 31,1996.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.50% for 1996 , 1995 and
1994.
The expected long-term rate of return on assets was 7.50% for 1996,
1995 and 1994.
The following table sets forth the plan's funded status and amounts
recognized in UNB's financial position at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $779,681
in 1996 and $1,044,891 in 1995 $ 786,243 $ 1,051,633
------------ ------------
Plan assets at fair value, primarily in debt and equity securities 832,418 1,201,196
Projected benefit obligation for service rendered to date (1,160,553) (1,402,453)
------------ ------------
Projected benefit obligation in excess of plan assets (328,135) (201,257)
Unrecognized net gain from past experience different from that assumed
and effects of changes in assumptions 252,538 327,953
Prior service cost not yet recognized in net periodic pension cost (616) (954)
Unrecognized net obligation at December 15, 1988 being recognized
over 15 years 29,136 34,963
------------ ------------
Accrued (prepaid) pension liability $ (47,077) $ 160,705
============ ============
</TABLE>
UNB has an Employee Savings and Investment Plan in which substantially
all employees are eligible to participate. Under the terms of the Plan, UNB will
match 50% of the employee contributions up to 6% of compensation. UNB's
contributions to the Plan were $56,314 for 1996, $56,978 for 1995, and $49,743
for 1994.
UNB has entered into agreements with certain executive officers and
members of its Board of Directors to provide retirement benefits. The present
value of the benefits to be paid by UNB upon retirement is being accrued over
the number of years remaining to the retirement date of these individuals. The
amount included in operating expenses was $61,561 for 1996, $52,108 for 1995,
and $106,242 for 1994.
F-14
<PAGE>
12. INCOME TAXES
Applicable income taxes for 1996, 1995 and 1994 consist of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------- ------------------------------ -----------------
Federal State Total Federal State Total Federal State Total
------- ----- ----- ------- ----- ----- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Current $788,837 $174,728 $963,565 $788,575 $ 206,525 $995,100 $857,790 $229,239 $1,087,029
Deferred (6,844) (1,515) (8,359) (68,080) (15,072) (83,152) (79,479) (17,606) (97,085)
-------- -------- -------- -------- -------- -------- -------- -------- ----------
Total $781,993 $173,213 $955,206 $720,495 $191,453 $911,948 $778,311 $211,633 $ 989,944
======== ======== ======== ======== ======== ======== ======== ======== ==========
</TABLE>
Deferred tax expense resulting from timing differences in the tax bases
of assets and liabilities for tax and financial statement purposes is
attributable to:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- --------
<S> <C> <C> <C>
Provision for credit losses $ 5,647 $ (37,880) $ (64,681)
Deferred loan fees 89,941 25,480 21,888
Depreciation and amortization (49,801) (30,550) (26,463)
Pension expense (22,933) (4,704) 10,011
Deferred compensation (19,074) (20,113) (41,010)
Loan income (23,905) (16,008) 3,345
Health insurance 23,638 -- (386)
Other (11,872) 623 211
---------- ---------- -----------
Total deferred income tax (benefit) $ (8,359) $ (83,152) $ (97,085)
========== ========== ===========
</TABLE>
Accumulated deferred income tax benefits of $1,138,810 at December 31,
1996 and $1,213,644 at December 31, 1995 are included in other assets and
consist of the following:
<TABLE>
<CAPTION>
1996 1995
------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Provision for credit losses $ 541,189 $ 539,893
Deferred loan fees 177,532 267,426
Unrealized depreciation of investment securities 36,924 115,191
Depreciation and amortization 205,602 155,364
Deferred compensation 148,558 130,124
Pension expense (16,699) (39,621)
Loan income 45,880 21,987
Health insurance -- 23,628
Other (176) (328)
------------ -------------
Net deferred tax asset $ 1,138,810 $ 1,213,664
============ ==============
</TABLE>
F-15
<PAGE>
Income tax expense of $955,206, $911,948 and $989,944 for 1996, 1995
and 1994 was 33.9%, 33.7% and 33.1%, respectively, of income before taxes and
cumulative effect of accounting change as compared to the maximum statutory rate
for federal income taxes, reconciled as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory rate $ 958,368 34.0% $ 920,100 34.0% $1,017,886 34.0%
Increases (decreases) in taxes resulting from:
Tax exempt interest income (159,792) (5.7) (163,881) (6.1) (183,516) (6.1)
State income taxes, net of federal income
tax benefit 114,321 4.1 126,359 4.7 139,678 4.7
Nondeductible interest expense 26,271 .9 22,919 .8 19,901 .7
Officers and directors life insurance 7,306 .3 1,452 -- 3,605 .1
Other 8,732 .3 4,999 .3 (7,610) (.3)
--------- ---- --------- ---- ----------- ----
$ 955,206 33.9% $ 911,948 33.7% $ 989,944 33.1%
========= ==== ========= ==== =========== ====
</TABLE>
13. LEASES
UNB is obligated under noncancelable lease agreements for certain bank
premises. The leases generally contain renewal options and provide that UNB pay
property taxes, insurance and maintenance costs.
Future minimum lease payments under leases having initial or remaining
noncancelable lease terms in excess of one year are as follows:
Operating
Leases
------
1997 $ 249,850
1998 202,276
1999 192,758
2000 159,331
2001 91,882
Thereafter 250,738
UNB has entered into an agreement to lease a branch banking facility
from a director through 2001 at a minimum annual rental of $37,800. The lease
also contains one five-year renewal option. UNB also has an agreement with an
advisory board member to lease a branch facility through November, 2002 at
minimum annual rental of $21,532.
14. RESTRICTION ON SURPLUS AND UNDIVIDED PROFITS
Under the provisions of the National Bank Act, the approval of the
Comptroller of the Currency is required if dividends declared by UNB in any year
exceed the total of its net profits (as defined) of that year combined with its
retained net profits for the preceding two years, maximum allowable declaration
in 1997 without approval is projected at $4,567,520. Additionally, when surplus
is less than the par value of common stock, an amount of not less than 10% of
net profits of the preceding half-year period must be transferred from undivided
profits to surplus before a dividend may be declared.
15. REGULATORY MATTERS
Union National and UNB are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
F-16
<PAGE>
minimum capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken, could have
a direct material effect on Union National's and UNB's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, UNB must meet specific capital guidelines that involve
quantitative measures of UNB's assets, liabilities, and certain off-balance
sheet items as calculated under regulatory accounting practices. The bank's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Union National and UNB to maintain amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31 1996, that Union
National and UNB meet all capital adequacy requirements to which they are
subject.
As of December 31, 1996, the most recent notification from the Office
of the Comptroller of the Currency categorized UNB as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, UNB must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed UNB's
category.
Union National's and UNB's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
To be Well
For Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31,1996:
Total Capital (to risk weighted assets)
Consolidated $19,883,686 12.9% $12,362,572 8.0% $15,453,214 10.0%
Union National Bank $19,743,016 12.8% $12,352,038 8.0% $15,440,048 10.0%
Tier 1 Capital (to risk weighted assets)
Consolidated $18,111,253 11.7% $ 6,181,286 4.0% $ 9,271,929 6.0%
Union National Bank $17,970,583 11.6% $ 6,176,019 4.0% $ 9,264,029 6.0%
Tier 1 Capital (average assets)
Consolidated $18,111,253 8.2% $ 8,845,453 4.0% $11,056,816 5.0%
Union National Bank $17,970,583 8.1% $ 8,839,453 4.0% $11,049,316 5.0%
As of December 31,1995:
Total Capital (to risk weighted assets)
Consolidated $18,492,189 12.1% $12,228,140 8.0% $15,285,175 10.0%
Union National Bank $18,346,554 12.0% $12,217,311 8.0% $15,271,638 10.0%
Tier 1 Capital (to risk weighted assets)
Consolidated $16,723,112 10.9% $ 6,114,070 4.0% $ 9,171,105 6.0%
Union National Bank $16,577,477 10.9% $ 6,108,655 4.0% $ 9,162,983 6.0%
Tier 1 Capital (average assets)
Consolidated $16,723,112 7.8% $ 8,584,363 4.0% $10,730,454 5.0%
Union National Bank $16,577,477 7.7% $ 8,578,363 4.0% $10,722,954 5.0%
</TABLE>
16. RELATED PARTY TRANSACTIONS
Certain members of the Board of Directors and senior officers had loan
transactions with UNB. Such loans were made in the ordinary course of business
on substantially the same terms as those prevailing at the time for comparable
transactions with outsiders. Loans outstanding to directors and senior officers
totaled $4,644,364 at December 31, 1996 and $2,979,920 at December 31, 1995.
F-17
<PAGE>
The following schedule summarizes changes in amounts of loans
outstanding, both direct and indirect, to these persons during 1996.
Balance at January 1, 1996 $2,979,920
Additions 2,150,592
Repayments (486,148)
----------
Balance at December 31,1996 $4,644,364
==========
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" requires disclosure of fair value
information about financial instruments, whether or not recognized in the
statement of financial condition. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. This standard excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amount presented does not
represent the underlying value of Union National.
Cash and due from banks: The carrying amounts reported in the balance
sheet for cash and due from banks approximate those assets' fair values.
Investment securities: Fair values for investment securities are based
on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on carrying
values. The fair values for other loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. The carrying amount of accrued
interest approximates its fair value.
Off-balance sheet instruments: UNB's off- balance sheet instruments
consists entirely of letters of credit ($2,306,082) and lending commitments
($3,873,000) of which fair value is based on fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value of the
off-balance sheet financial instruments is immaterial.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, savings, and certain types of money
market accounts) are, by definition, equal to the amount payable on demand at
the reporting date (i.e., their carrying amounts). The carrying amounts for
variable-rate, fixed-term money market accounts and certificates of deposits
approximate their fair values at the reporting date. Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Short-tern borrowings: The carrying amounts of short-term borrowings
approximate their fair values.
F-18
<PAGE>
The estimated fair value of UNB's financial instruments were as follows
at:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
---------------------------- -----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Financial assets:
Cash and due from banks, interest-bearing
deposits with banks, and federal funds sold$ 15,953,932 $ 15,953,932 $ 13,641,267 $ 13,641,267
Investment securities available for sale 38,866,761 38,866,761 27,040,617 27,040,617
Investment securities held to maturity 17,073,011 17,304,150 25,379,914 25,735,869
Loans receivable 147,350,540 145,814,000 146,821,594
147,433,000
Accrued interest receivable 1,292,194 1,292,194 1,401,190 1,401,190
Financial Liabilities
Deposit liabilities 199,291,435 199,964,000 193,461,842 194,508,000
Short-term borrowings 6,808,596 6,808,596 3,140,710 3,140,710
Federal Home Loan Bank borrowing -- -- 5,000,000 5,000,000
</TABLE>
18. PARENT COMPANY FINANCIAL INFORMATION
The Condensed financial statement for Union National Bancorp,
Inc. (Parent Only) pertaining to the periods covered by Union National's
consolidated financial statement are presented below
<TABLE>
<CAPTION>
Balance Sheets, December 31, 1996 1995
------------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash and due from banks $ 9,007 $ 10,265
Investment in subsidiary 17,911,997 16,394,401
Other assets 23,220 124,787
Due from Union National Bank 108,443 10,583
------------ ------------
Total Assets $18,052,667 $16,540,036
=========== ===========
LIABILITIES $ -- $ --
STOCKHOLDERS' EQUITY
Common stock 8,340 8,340
Surplus 8,342,055 8,342,055
Unrealized depreciation on investment securities available for sale (58,586) (183,075)
Retained earnings 9,760,858 8,372,716
------------ ------------
Total Stockholders' Equity 18,052,667 16,540,036
------------ ------------
Total Liabilities and Stockholders' Equity $18,052,667 $16,540,036
============ ============
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
Statements of Income, Years Ended December 31, 1996 1995
------------- --------
Income
Cash dividend from subsidiary $ 660,380 $ 525,260
Interest and other expenses 287,824 13,420
------------ ------------
Income before income taxes and equity in undistributed income
of subsidiary 372,556 511,840
Income tax expense (benefit) (97,860) (4,563)
Income before equity in undistributed income of subsidiary 470,416 516,403
Equity in undistributed income of subsidiary 1,393,106 1,277,825
------------ ------------
NET INCOME $ 1,863,522 $ 1,794,228
============ ============
<CAPTION>
Statement of Cash Flows, Year Ended December 31, 1996 1995
------------- --------
<S> <C> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 1,863,522 $ 1,794,228
Equity in undistributed income of subsidiary (1,393,106) (1,277,825)
Amortization of organization cost 13,181 10,420
Increase in amount due from Union National Bank (97,860) --
Decrease in other assets 88,385 --
------------ ------
Net cash provided by operating activities 474,122 526,823
------------ ------------
Cash Flows from Investing Activities:
Expenditures related to proposed acquisition -- (92,878)
------------ ------------
Net cash used by investing activities -- (92,878)
------------ ------------
Cash Flows from Financing Activities:
Dividends paid (475,380) (433,680)
------------ ------------
Net cash used by financing activities (475,380) (433,680)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,258) 265
Cash and Cash Equivalents at Beginning of Year 10,265 10,000
------------ ------------
Cash and Cash Equivalents at End Of Year $ 9,007 $ 10,265
============ ============
</TABLE>
19. TERMINATION OF PROPOSED ACQUISITION
On October 25, 1995, Union National entered into a definitive agreement
to acquire Maryland Permanent Bank & Trust Company ("Maryland Permanent") of
Owings Mills, Maryland. On July 26, 1996, prior to the consummation of the
merger Union National, as provided in the definitive agreement, terminated
negotiations with Maryland Permanent. Costs associated with the proposed
affiliation, consisting primarily of professional fees of $287,824, were
expensed in 1996.
F-20
<PAGE>
EXHIBIT LIST
Number
3.1 Articles of Incorporation of Union National*
3.2 Bylaws of Union National*
10.1 Employment Agreement between The Union National Bank of
Westminster and Virginia W. Smith*
10.2 1997 Stock Option Plan*
10.3 Lease dated October 1, 1997 between Union National Bank and
K. Wayne Lockard*
21.1 Subsidiary of Union National*
23.2 Consent of Stegman & Company
- -----------------------------
*Previously Filed
<PAGE>
EXHIBIT 23.2
Consent of Stegman & Company
<PAGE>
STEGMAN & COMPANY
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in this Form 10/A
of Union National Bancorp, Inc. of our report dated January 8, 1997 relating to
the consolidated balance sheets as of December 31, 1996 and 1995 and
consolidated statements of income, stockholders' equity and cash flows for the
years ended December 31, 1996, 1995, and 1994.
/s/ Stegman & Company
Stegman & Company
Baltimore, Maryland
August 1, 1997
