Filed Pursuant to Rule 424(b)(1)
Registration No. 333-36767
Prospectus
Union National Bancorp, Inc.
1997 Dividend Reinvestment and Stock Purchase Plan
150,000 Shares of Common Stock
This Prospectus relates to 150,000 shares of common stock, par value $.01
per share (the "Common Stock") of Union National Bancorp, Inc. ("Union
National"), a Maryland corporation, which may be issued from time to time
pursuant to Union National's Dividend Reinvestment and Stock Purchase Plan (the
"Plan"). The Plan offers holders of shares of Common Stock of Union National an
opportunity to automatically reinvest their cash dividends in shares of Common
Stock. The Plan also provides participating shareholders with a convenient and
economical way to voluntarily purchase additional shares of Common Stock through
voluntary cash payments of not less than $100 nor more than $10,000 per calendar
quarter.
Pursuant to the Plan, cash dividends on all shares which are registered
in a participant's name or which are kept in a participant's account under the
Plan are automatically reinvested in additional shares of Common Stock. Shares
acquired for the Plan will be purchased directly from Union National, in the
open market, or in negotiated transactions. The purchase price of shares
purchased from Union National will be the fair market value per share, as
defined in the Plan, on the date of purchase. Participating shareholders will
receive a 3% discount for shares purchased through the Plan. The purchase price
of shares purchased in the open market or in negotiated transactions will be the
weighted average of the prices actually paid for the shares, excluding all fees,
brokerage commission and expenses, less the 3% discount. Shareholders who do not
elect to participate in the Plan will receive dividends, as declared and paid,
by check or advice of credit to their account.
The Plan does not represent a change in Union National's dividend
policy or a guarantee of future dividends. The declaration of dividends will
continue to depend on earnings, financial requirements and other factors.
Any holder of record of Common Stock is eligible to participate in the
Plan. Beneficial owners interested in participating in the Plan indirectly
through brokers or nominee shareholders should contact their brokers or nominee
holders to determine whether and to what extent such indirect participation is
available to them.
An investment in Common Stock held in the Plan account has the same
market risks as an investment in Common Stock held in certificate form.
Participants bear the risk of loss (and receive benefit of gain) occurring by
reason of fluctuations in the market price of the Common Stock held in the Plan
account.
It is recommended that this Prospectus be retained for future
reference.
--------------------------
See "Risk Factors" beginning on page 6 for factors to be
considered by prospective investors.
--------------------------
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS
AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
The date of this Prospectus is October 22, 1997
<PAGE>
AVAILABLE INFORMATION
Union National is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by Union National can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048,
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may
be obtained at the prescribed rates from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Commission also maintains a web site that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission. The address of such site is http:\\www.sec.gov.
Union National has filed with the Commission a Registration Statement
(the "Registration Statement") on Form S-1 under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities offered by this
Prospectus. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement and the exhibits thereto on file with the Commission pursuant to the
Securities Act and the rules and regulations of the Commission thereunder. For
further information with respect to Union National and the offered securities,
reference is made to the Registration Statement. The material provisions of any
contract or other document referred to herein are described in this Prospectus;
statements concerning the contents of such contracts and documents, however, are
not necessarily complete, and in each such instance reference is made to the
copy of such contract or other document filed as an exhibit to such Registration
Statement, each such statement being qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by Union National with the
Commission (File No. 0- 22523) are incorporated herein by reference:
(a) Registration Statement on Form 10 dated May 5, 1997, as amended
on August 5, 1997; and
(b) Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
All documents filed by Union National pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be part hereof from the
date of filing such documents. Any statement contained in a document all or a
portion of which is incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of the
Registration Statement and this Prospectus to the extent that a statement
contained in the Registration Statement, this Prospectus, or any other
subsequently filed document that is also incorporated by reference herein
modifies or supersedes that statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
Union National hereby undertakes to provide without charge to each
person, including any beneficial owner, to whom a Prospectus is delivered, upon
written or oral request of that person, a copy of any document incorporated
herein by reference (other than exhibits to those documents unless the exhibits
are specifically incorporated by reference into the documents that this
Prospectus incorporates by reference). Requests should be directed to the
Secretary, 117 East Main Street, Westminster, Maryland 21157, telephone number
(410) 848-7200.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and subject to,
the more detailed information and financial statements and notes thereto
included in this Prospectus. Each investor is encouraged to read this Prospectus
in its entirety. Investors should carefully consider the information set forth
under the caption "Risk Factors."
The Company
Union National is a one-bank holding company headquartered in
Westminster, Maryland. Through its sole, wholly-owned subsidiary, Union National
Bank ("UNB"), Union National is primarily engaged in commercial and retail
banking services and in related businesses. UNB was founded in Westminster in
1816 under the name 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 181st year of operation.
UNB converted to a bank holding company structure on January 19, 1994,
when it formed Union National, a Maryland corporation, to serve as the holding
company. The principal executive office of Union National is located at 117 East
Main Street, Westminster, Maryland 21157, and its telephone number is (410)
848-7200.
Dividend Reinvestment and Stock Purchase Plan
Purpose The purpose of the Dividend Reinvestment and Stock Purchase
Plan (the "Plan") of Union National Bancorp, Inc. ("Union
National") is designed to provide the holders of Union
National's Common Stock with a convenient and economical way
to voluntarily purchase additional shares of Common Stock.
Under the Plan, cash dividends on all shares which are
registered in a participant's name or which are held in a
participant's Plan account are automatically reinvested in
additional shares of Common Stock. Participants will pay no
brokerage commission or service charges in acquiring
additional shares of Common Stock under the Plan, and will
receive a 3% discount for shares purchased through the Plan.
Administration The Plan will be administered by American Stock Transfer and
Trust Company (the "Plan Administrator"), which is also the
stock transfer agent for Union National's Common Stock. The
Plan Administrator, among other things, keeps the records
and sends detailed statements of account to participants.
Eligibility Generally, all record and beneficial owners are eligible to
participate in the Plan. An eligible shareholder may join
the Plan by completing and signing an authorization form
appointing the Plan Administrator as his or her agent to
reinvest dividends paid on some or all of his or her shares
in the Common Stock of Union National.
Purchases The number of shares to be purchased under the Plan will
depend on the amount of dividends and voluntary cash
investments to be reinvested and the applicable purchase
price of the Common Stock. Common Stock will be purchased by
the Plan Administrator not later than five business days
after the Investment Date, as that term is defined in the
Plan, at the fair market value of the Common Stock less a 3%
discount on such purchases. The fair market value is
determined by averaging the "daily average trades" for the
ten (10) trading days preceding the relevant Investment
Date, as reported by one or more brokerage firms selected by
Union National. Shareholders who do not wish to participate
in the Plan will receive cash dividends, as and if declared,
by check or advice of credit to their account.
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Voluntary
Cash Purchases Voluntary cash payments may be made by participants to
purchase additional shares in amounts of not less than $100
nor more than $10,000 per calendar quarter.
Reports Each participant will receive a statement of account after
each dividend payment date describing cash dividends and
voluntary cash investments received, the number of shares
purchased, the price per share and the total number of
shares accumulated under the Plan.
Withdrawal of
Participation A participant may withdraw his or her participation under
the Plan by sending written notice to the Plan
Administrator. The Plan Administrator will issue a
certificate for whole shares credited to the participant's
account and a check representing the value of any fractional
shares based on the then current market value per share of
Union National's Common Stock.
Withdrawal of
Shares A participant can withdraw some or all of the shares of
Common Stock credited to his or her account by completing a
withdrawal notification specifying the number of shares to
be withdrawn. Participants may also request that the Plan
Administrator sell the shares being withdrawn from his or
her account under the Plan. In such case, participants are
responsible for fees, brokerage commission, and service
charges incurred in connection with such sales.
<TABLE>
<CAPTION>
The Offering
<S> <C>
Common Stock to be Issued............................ Up to 150,000 shares
Common Stock Outstanding............................. 834,000 shares
Proposed Use of Proceeds............................. The proceeds from the sale of shares to the Plan will be
used for working capital and general corporate
purposes. See "Use of Proceeds."
No Market for the Shares............................. The Common Stock is not listed on any stock exchange
or quoted on an automated national quotation system,
and no application is being made at this time to so list
or quote the Common Stock. The bid and asked prices
of the Common Stock are reported on the pink sheets
and on various bulletin boards under the symbol
"UNNL".
</TABLE>
Risk Factors
Prospective investors in the Common Stock should carefully consider the
factors set forth under the caption "Risk Factors" beginning on page 6.
4
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
(In Thousands of Dollars Except Per Share Data) Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESULTS FROM OPERATIONS
Interest Income $8,877 $8,665 $17,361 $17,091 $15,109 $14,789 $ 14,804
Interest Expense 4,046 4,042 8,099 8,092 6,289 6,170 6,967
------ ------ ------- ------- ------- ------- ---------
Net Interest Income 4,831 4,623 9,262 8,999 8,820 8,619 7,837
Provision for Credit Losses 116 191 329 212 342 425 470
------ ------ ------- ------- ------- ------- ---------
Net Interest Income after Provision for
Credit Losses 4,715 4,432 8,933 8,787 8,478 8,194 7,367
Non-Interest Income 636 497 1,086 978 1,315 1,029 874
Non-Interest Expense 3,601 3,411 7,200 7,058 6,800 6,179 5,595
------ ------ ------- ------- ------- ------- ---------
Income Before Income Taxes 1,750 1,518 2,819 2,707 2,993 3,044 2,646
Applicable Income Taxes 575 527 955 912 990 1,009 867
------ ------ ------- ------- ------- ------- ---------
Net Income before effect of accounting change 1,175 991 1,864 1,795 2,003 2,034 1,780
Effect of accounting change 0 0 0 0 0 0 248
------ ------ ------- ------- ------- ------- ---------
Net Income $1,175 $ 991 $ 1,864 $ 1,795 $ 2,003 $ 2,034 $ 2,028
====== ====== ======= ======= ======= ======= =========
FINANCIAL CONDITION
Total assets $235,565 $219,801 $225,036 $218,816 $207,226 $192,290 $175,511
Investment securities (including available for sale) 63,445 53,264 55,940 52,421 54,938 48,724 38,659
Loans, net of unearned income 148,093 147,349 147,351 146,822 139,730 128,498 127,652
Allowance for loan losses 1,848 1,796 1,772 1,769 1,671 1,503 1,365
Deposits 205,596 197,390 199,291 193,462 182,533 172,816 160,367
Shareholders' equity 19,064 17,045 18,053 16,540 13,948 14,061 12,125
PER SHARE DATA
Net income $ 1.41 $ 1.29 $ 2.23 $ 2.15 $ 2.40 $ 2.44 $ 2.43
Dividends 0.31 0.29 0.57 0.52 0.50 0.46 0.38
Shareholders' equity 22.85 20.44 21.65 19.83 16.72 16.86 14.54
PERFORMANCE RATIOS
Return on average assets 1.09% 0.85% 0.84% 0.84% 1.00% 1.10% 1.06%
Return on average equity 12.55 10.83 10.80 11.55 14.34 15.63 15.77
Net interest margin on average earning assets 4.51 4.48 4.53 4.56 4.83 5.12 5.13
Efficiency (non-interest expense / (net interest
income + non-interest income)) 65.87 66.62 69.58 70.75 67.09 64.04 64.22
LIQUIDITY AND CAPITAL RATIOS
Shareholders' equity (% assets) 8.09% 7.75% 8.02% 7.56% 6.73% 7.31% 6.91%
Risk-based:
Tier 1 Capital 11.91 10.98 11.72 10.86 10.42 10.62 9.83
Total Capital 13.07 12.12 12.87 12.01 11.77 10.94 10.75
Dividends (% net income) 22.01 23.56 25.51 24.16 20.82 18.86 17.80
Loans to deposits 72.03 74.65 73.94 75.89 76.55 74.36 79.60
ASSET QUALITY RATIOS
Allowance for credit losses to total loans 1.25% 1.22% 1.20% 1.20% 1.20% 1.17% 1.07%
Allowance for credit losses to non-performing loans 262.50 217.96 136.34 322.24 717.14 167.23 201.99
Net loan charge-offs to average total loans 0.07 0.03 0.22 0.08 0.13 0.22 0.16
</TABLE>
5
<PAGE>
RISK FACTORS
In addition to the historical information contained herein, the
discussion in this Prospectus contains certain forward-looking statements that
involve risks and uncertainties, such as statements of Union National's plans,
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. Union National's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include those discussed below, as well
as herein. The following risk factors should be considered carefully in addition
to the other information in this Prospectus before purchasing the shares of
Common Stock offered hereby.
Limited History of Profitability; Dependence on Subsidiary Bank
Union National's sole business activity for the foreseeable future will
be to act as the holding company of UNB; therefore, the profitability of Union
National will be dependent on the results of the operations of UNB. Adverse
results or events at UNB would have a significant impact on Union National's
results of operations and financial condition. Although Union National's
operations have been profitable, there can be no assurance that it will be as
profitable or profitable at all in the future. Among many factors which could
adversely affect Union National's financial performance are government
regulation, increased competition, and unfavorable economic conditions. See
"--Impact of Government Regulation on Operating Results, --Highly Competitive
Market and --Impact on Economic Conditions and Monetary Policy on Operating
Results."
Concentrations in Real Estate Lending and Related Risks
UNB is currently dependent on real estate lending activities, which on
June 30, 1997, had produced real estate loans totaling approximately 64% of
Union National's loan portfolio. Real estate loan origination activity,
including refinancings, generally is greater during periods of declining
interest rates and favorable economic conditions, and has been favorably
affected by relatively lower market interest rates during the past several
years. There is no assurance that such favorable conditions will continue.
Real estate loans are subject to the risk that real estate values in a
geographical area or for a particular type of real estate will decrease, and to
the risk that borrowers will be unable to meet their loan obligations. Union
National attempts to minimize these risks by making real estate loans that are
secured by a variety of different types of real estate, adhering to standard
debt to income ratios and requiring Private Mortgage Insurance for loans where
the loan to value ratio is greater than 80%. In addition, Union National reviews
the potential borrower's ability to meet debt service obligations. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."
Risk of Loan Losses
The risk of credit losses on loans varies with, among other things,
general economic conditions, the type of loan being made, the creditworthiness
of the borrower over the term of the loan and, in the case of a collateralized
loan being made, the value and marketability of the collateral for the loan.
Management maintains an allowance for loan losses based upon, among other
things, historical experience, an evaluation of economic conditions and regular
reviews of delinquencies and loan portfolio quality. Based upon such factors,
management makes various assumptions and judgments about the ultimate
collectability of the loan portfolio and provides an allowance for loan losses
based upon a percentage of the outstanding balances and for specific loans when
their ultimate collectability is considered questionable. If management's
assumptions and judgments prove to be incorrect and the allowance for loan
losses is inadequate to absorb future losses, or if the bank regulatory
authorities require UNB to increase the allowance for loan losses as a part of
their examination process, UNB's earnings could be significantly and adversely
affected. Although UNB's loans are typically secured, certain lending activities
may involve greater risks and the percentage applied to specific loan types may
vary.
6
<PAGE>
As of June 30, 1997, the allowance for loan losses was $1,848,176,
which represented 1.25% of outstanding loans, net of unearned income. At such
date, Union National had non-accrual loans totalling approximately $824,317. UNB
actively manages its non-performing loans in an effort to minimize credit losses
and monitors its asset quality to maintain an adequate allowance for credit
losses. Although management believes that its allowance for loan losses is
adequate, there can be no assurance that the allowance will prove sufficient to
cover future loan losses. Further, although management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or adverse developments arise with respect to UNB's
non-performing or performing loans. Material additions to UNB's allowance for
loan losses would result in a decrease in UNB's net income and capital, and
could have a material adverse effect on Union National. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Impact of Economic Conditions and Monetary Policy on Operating Results
The operating results of Union National will depend to a great extent
upon the rate differentials which result from the difference between the income
it receives from its loans, securities and other earning assets and the interest
expense it pays on its deposits and other interest-bearing liabilities. These
rate differentials are highly sensitive to many factors beyond the control of
Union National, including general economic conditions and the policies of
various governmental and regulatory authorities, in particular the Board of
Governors of the Federal Reserve System (the "FRB"). Also, adverse changes in
general economic conditions could impair borrowers' ability to repay loans as
they mature, thus reducing the income Union National receives from loans and
reducing the amount of rate differentials.
Like other depositary institutions, Union National is affected by the
monetary policies implemented by the FRB and other federal instrumentalities. A
primary instrument of monetary policy employed by the FRB is the restriction or
expansion of the money supply through open market operations including the
purchase and sale of government securities and the adjustment of reserve
requirements. These actions may at times result in significant fluctuations in
interest rates, which could have adverse effects on the operations of Union
National. In particular, Union National's ability to make loans and attract
deposits, as well as public demand for loans, could be adversely affected. See
"Supervision and Regulation--Monetary Policy."
Impact of Government Regulation on Operating Results
The operations of Union National and UNB are and will be affected by
current and future legislation and by the policies established from time to time
by various federal and state regulatory authorities. UNB is subject to
supervision and periodic examination by the Office of the Comptroller of the
Currency ("OCC"). Union National is also subject to supervision by the FRB and
the Maryland Commissioner of Financial Regulation ("Commissioner"). Banking
regulations, designed primarily for the safety of depositors, may limit a
financial institution's growth and the return to its investors by restricting
such activities as the payment of dividends, mergers with or acquisitions by
other institutions, investments, loans and interest rates, interest rates paid
on deposits, expansion of branch offices, and the provision of securities or
trust services. UNB also is subject to capitalization guidelines set forth in
federal legislation, and could be subject to enforcement actions to the extent
that UNB is found by regulatory examiners to be undercapitalized. It is not
possible to predict what changes, if any, will be made to existing federal and
state legislation and regulations or the effect that such changes may have on
the future business and earnings prospects of Union National and UNB. The cost
of compliance with regulatory requirements may adversely affect Union National's
ability to operate profitably. See "Supervision and Regulation."
Highly Competitive Market
Union National and UNB operate in a competitive market, competing for
deposits and loans with commercial banks, thrifts and other financial entities.
Numerous mergers and consolidations involving banks in the market in which UNB
operates have occurred recently, resulting in an intensification of
7
<PAGE>
competition in the banking industry in Union National's geographical market.
Competition for deposits comes primarily from other commercial banks, savings
associations, credit unions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial banks,
savings associations, mortgage banking firms, credit unions and other financial
intermediaries. Many of the financial intermediaries operating in Union
National's market area offer certain services, such as trust and international
banking services, which Union National does not offer. In addition, banks with a
larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
Recent changes in federal banking laws facilitate interstate branching
and merger activity among banks. Since September, 1995, certain banking holding
companies are authorized to acquire banks throughout the United States. In
addition, on and after June 1, 1997, certain banks will be permit to merge with
banks organized under the laws of different states. Such changes may result in
an even greater degree of competition in the banking industry and Union National
may be brought into competition with institutions with which it does not
presently compete. There can be no assurance that the profitability of Union
National will not be adversely affected by the increased competition which may
characterize the banking industry in the future. See "Supervision and Regulation
- -- Interstate Banking Legislation."
Lack of Trading Market
There is a very limited public market for the Common Stock of Union
National, and there can be no assurance that a more active trading market will
develop.
Limitations on Payment of Dividends
Union National's principal business operations are conducted through
UNB and therefore, cash available to pay dividends or dividends eligible for
reinvestment pursuant to the Plan would be derived from dividends paid to it by
UNB. UNB's ability to pay dividends to Union National and Union National's
ability to pay dividends to shareholders on the Common Stock are also subject to
and limited by certain legal and regulatory restrictions. See "Supervision and
Regulation --Limits on Dividends and Other Payments" and "Dividend Policy."
Anti-Takeover Measures
The Articles of Incorporation (the "Articles") and Bylaws of Union
National contain certain provisions designed to enhance the ability of the Board
of Directors to deal with attempts to acquire control of Union National. These
provisions provide for the classification of Union National's Board of Directors
into three classes; directors of each class will serve for staggered three year
periods and 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 shareholder
votes. In addition, the Maryland General Corporation Law contains certain
anti-takeover provisions that apply to Union National. While these provisions
may provide flexibility in connection with acquisitions and other corporate
purposes, they could discourage or make more difficult a merger, tender offer or
proxy contest, even though certain shareholders may wish to participate in such
a transaction. Further, such provisions could potentially adversely affect the
market price of the Common Stock. See "Description of Common Stock."
8
<PAGE>
THE COMPANY
Union National is a one-bank holding company headquartered in
Westminster, Maryland. Through its sole, wholly-owned subsidiary, UNB, Union
National is primarily engaged in commercial and retail banking services and in
related businesses. UNB was founded in Westminster in 1816 under the name 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 181st year
of operation.
UNB converted to a bank holding company structure on January 19, 1994,
when it formed Union National, a Maryland corporation, to serve as the holding
company. The principal executive office of Union National is located at 117 East
Main Street, Westminster, Maryland 21157, and its telephone number is (410)
848-7200.
1997 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
The following, in a question and answer format, is Union National's
1997 Dividend Reinvestment and Stock Purchase Plan (the "Plan"). Those holders
of the Common Stock who do not participate in the Plan will continue to receive
cash dividend payments if and when dividends are declared and paid.
Purpose
1. What is the purpose of the Plan?
The purpose of the Plan is to provide holders of Union National's
Common Stock with a convenient and economical method of investing cash dividends
and voluntary cash payments to purchase additional shares of Common Stock of
Union National.
The Plan allows participants to increase their ownership interest in
Union National through the receipt of Common Stock in lieu of cash dividends,
without requiring participants to purchase Common Stock in the open market.
Accordingly, participants will pay no brokerage commissions or service charges
in acquiring additional shares of Common Stock through the Plan. To the extent
that the additional shares are purchased directly from Union National, the
proceeds will be used by Union National for its general corporate purposes. See
"Use of Proceeds."
Neither Union National nor the Plan Administrator (as defined in No. 3
below) provide any assurance that shares purchased under the Plan will, at any
particular time, be worth more or less than their purchase price.
Advantages
2. What are the advantages of the Plan?
o Reinvest cash dividends and invest voluntary cash payments
(within specified limits) in additional shares of Common Stock
at a 3% discount, without payment of any service charges or
brokerage commissions (see No. 13 below).
o Invest the full amount of all dividends in shares of Common
Stock including fractional shares, which also earn dividends
under the Plan (see No. 11 below).
o Avoid safekeeping and record keeping costs through the free
custodial and reporting services furnished by the Plan (see
No. 18 below).
o Regularly receive a detailed statement, in book entry form, of
account transactions (see No. 17 below).
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<PAGE>
Administration
3. Who administers the Plan for participants?
American Stock Transfer and Trust Company (the "Plan Administrator")
will administer the Plan as the agent for the participants, and in such capacity
will hold shares in the name of its nominee as agent for Plan participants, the
Plan Administrator will keep and maintain records, provide detailed statements
of account to participants, and perform other duties related to the Plan. Any
notices, questions, or other communications relating to the Plan should include
the participant's account number and tax identification number and should be
addressed to:
Plan Administrator
American Stock Transfer and Trust Company
40 Wall Street
New York, New York 10005
(800) 278-4353
In the event that the Plan Administrator should resign or otherwise
cease to act as the agent, Union National will make such other arrangements as
it deems appropriate for the administration of the Plan. In addition, Union
National may replace the Plan Administrator as the agent at any time.
Participation
4. Who is eligible to participate?
All holders of Common Stock are eligible to participate in the Plan.
Holders may participate in the Plan with respect to all or any portion of their
shares. Record holders of Common Stock are eligible to participate in the Plan
directly. Beneficial owners of the Common Stock whose shares are registered in
names other than their own (e.g., in the name of a broker, bank nominee or
trustee) must either become shareholders of record by having all or portion of
their shares transferred into their own names or make appropriate arrangements
for their broker or nominee to participate on their behalf. Shareholders will
not be eligible to participate in the Plan if they reside in a jurisdiction in
which it is unlawful under state or local securities or "blue sky" laws for
Union National to permit their participation.
5. How does an eligible shareholder become a participant?
All eligible shareholders may join the Plan at any time by completing
and signing the accompanying authorization form ("Authorization Form") and
returning it to the Plan Administrator.
Additional Authorization Forms may be obtained from Union National.
6. What does the Authorization Form provide?
The Authorization Form appoints the Plan Administrator as the agent to
reinvest dividends on some or all shares registered under the Plan, and to
purchase additional shares with voluntary cash investments.
7. When may a shareholder join the Plan?
A shareholder may join the Plan at any time if a properly completed
Authorization Form is received by the Plan Administrator at least five (5)
business days before a dividend record date, the dividends then payable will be
reinvested in Union National's Common Stock under the Plan. Historically,
dividends declared on the Common Stock have been declared and paid on a
quarterly basis. Union National's Board of Directors reserves the right to
change the dividend record and payment dates, if and when dividends are
declared.
10
<PAGE>
8. Is partial participation possible under the Plan?
Yes. A record holder may register all or any portion of his or her
shares in the Plan. However, dividends will be reinvested as to all shares
registered under the Plan in the holder's name.
9. Is the right to participate in the Plan transferable?
No. The right to participate in the Plan is not transferable. A
shareholder participating in the Plan will continue to be a participant until
the Plan is terminated or until such shareholder gives notice to the Plan
Administrator withdrawing from or terminating his or her participation in the
Plan.
Purchases
10. What is the source for shares of Common Stock purchased under the Plan?
Plan shares will be purchased by the Plan Administrator, at Union
National's discretion, directly from Union National, on the open market or in
negotiated transactions, or a combination of the foregoing.
11. How many shares of Common Stock will be purchased for a participant
under the Plan?
The number of shares to be purchased for each participant will depend
on the amount of a participant's dividends that are to be reinvested, the amount
of voluntary cash investment, and the applicable purchase price of the Common
Stock. Each participant's account will be credited with that number of shares,
including any fractional shares computed to three decimal places, equal to the
total amount to be invested divided by the applicable purchase price. All
dividends on shares held in a participant's account, whether purchased through
dividend reinvestment or voluntary cash investment, will be automatically
reinvested in additional shares of Common Stock.
12. When will shares of Common Stock be purchased for a participant under
the Plan?
Cash dividends and voluntary cash investments will be used to purchase
Common Stock as soon as reasonably possible after the applicable dividend
payment date, but not more than five business days after such date. The date on
which dividends and voluntary cash investments are reinvested is hereinafter
referred to as the "Investment Date."
13. At what price will shares of Common Stock be purchased under the Plan?
In the case of purchase of shares of Common Stock from Union National,
the purchase price will be the fair market value of the Common Stock as of the
relevant Investment Date, less a 3% discount. The fair market value of the
Common Stock will be determined by averaging the "daily average trades" for the
10 trading days preceding the relevant Investment Date, as reported by one or
more brokerage firms selected by Union National that make a market in Union
National's Common Stock.
In the event that there were no trades, or an insufficient number of
trades (generally less than 500 shares) upon which to form a basis to determine
fair market value within the 10 trading days prior to the relevant Investment
Date, then the fair market value of the Common Stock may be determined by
reference to other factors deemed by Union National to be appropriate. Such
other factors may include, but are not limited to, in Union National's sole
discretion: (a) average trades reported by market makers on dates that are
recent but are prior to the 10 trading day period immediately preceding the
Investment Date; (b) prices at which the stock is known to have been traded in
recent transactions; (c) a multiple of Union National's book value per share
which Union National believes is consistent with the multiple of trading prices
of companies similar to Union National but whose stock is more readily traded
and quoted in the public markets; and (d) a multiple of Union National's
annualized earnings per share. In the case of purchases of shares of Common
Stock on the open market or in negotiated transactions, the purchase price will
be the weighted average of the prices actually paid for shares purchased for the
relevant Investment Date (excluding all fees, brokerage commissions and
expenses), less a 3% discount.
11
<PAGE>
Voluntary Cash Payments
14. Who will be eligible to make voluntary cash investments?
All holders of shares of Common Stock who elect to have dividends
reinvested in accordance with provisions of the Plan may also elect to make
voluntary cash payments.
15. What are the timing requirements and other limitations on voluntary
cash payments?
Voluntary cash payments to be applied to the purchase of shares on any
given Investment Date must be received by the Plan Administrator not more than
30 calendar days prior to the Investment Date nor less then five business days
prior to the Investment Date. Voluntary cash payments received too early or too
late will be returned to the participant. Voluntary cash payments may not be
less than $100 per calendar quarter or total more than $10,000 in any calendar
quarter. Union National reserves the right in its sole discretion to determine
whether voluntary cash payments are made on behalf of an eligible participant.
16. How does the voluntary cash payment option work?
Voluntary cash payments may be made by new participants by enclosing a
check or money order with the Authorization Form, and by existing participants
by forwarding a check or money order to the Plan Administrator with a Payment
Form which will be sent to participants with each statement of account. Checks
and money orders should be made payable to "American Stock Transfer and Trust
Company, Plan Administrator" and should include the participant's social
security number or taxpayer identification number, and his or her account number
under the Plan.
Any voluntary cash payment received by the Plan Administrator within
the period described above (see no. 12) will be applied to the purchase of
shares of Common Stock on the upcoming Investment Date at a price determined in
accordance with provisions of the Plan (see No. 13 above). Voluntary cash
payments made by check or other draft will not be applied to the purchase of
shares of Common Stock on or for such Investment Date unless such check or draft
has cleared prior to such Investment Date. The Plan Administrator will promptly
send an acknowledgement to participants confirming that his or her funds had
been received and posted in time for investment on a particular Investment Date.
A participant may obtain the return of any voluntary cash payment upon request
received by the Plan Administrator on or before the second business day prior to
the Investment Date on which it is to be invested. Interest will not be paid on
voluntary cash payments.
Reports to Participants
17. What kind of reports will be sent to participants in the Plan?
Each participant in the Plan will receive a statement of account
subsequent to each dividend payment date describing cash dividends and voluntary
cash investments received, the number of shares purchased, the price per share
and total shares accumulated under the Plan. These statements will provide a
record of the dates and costs of purchases on a quarterly basis and should be
retained for income tax purposes. Participants will also receive Union
National's annual and quarterly reports to shareholders, notices of shareholder
meetings, proxy statements, and Internal Revenue Service information for
reporting dividends received and commission expenses paid on their behalf.
Share Certificates; Safekeeping
18. Will certificates be issued for shares of Common Stock purchased?
Unless requested in writing by a participant, certificates for shares
of Common Stock purchased under the Plan will not be issued. The number of
shares credited to a participant's account under the Plan will be shown on the
participant's periodic statements of account. This safekeeping feature protects
12
<PAGE>
against loss, theft or destruction of stock certificates. Certificates will be
issued for whole shares withdrawn from the Plan. All certificates delivered for
safekeeping must be enrolled in the Plan. Certificates will be cancelled and new
certificates will be issued in the name of the Plan Administrator; upon
withdrawal, those certificates will be cancelled and new certificates will be
reissued in the name of the participant.
19. In whose name will certificates be registered when issued to partici-
pants?
Unless the participant otherwise directs, upon withdrawals from the
Plan certificates will be issued in the name in which the participant's dividend
reinvestment account is maintained. If a participant requests a certificate to
be issued in a name other than that of the account registration, the request
must bear his or her own signature. If the account is registered in multiple
names, all signatures must appear on the request. In both cases, the
signature(s) must be guaranteed by a financial institution or broker or dealer
that is a member of the Securities Transfer Agents Medallion Program. Upon a
participant's death, the Plan Administrator will follow the instructions of the
decedent's personal representative upon submission of appropriate proof of
authority.
Withdrawal of Shares in Plan Accounts
20. How may a participant withdraw shares purchased under the Plan?
A participant may withdraw all or any portion of the shares of Common
Stock credited to his or her account by completing the withdrawal notification
information set forth on the reverse side of the account statement and
specifying the number of shares to be withdrawn. This request for withdrawal
should be mailed to the Plan Administrator at the address provided on the
account statement. Certificates for whole shares of Common Stock so withdrawn
will be registered in the name of and issued to the participant (see No. 18
above). Any request for withdrawal of shares of Common Stock credited to a
participant's account received less than five business days before an Investment
Date will not be effective until after the dividends are reinvested and the
shares are credited to the participant's account. Any other request for
withdrawal of a portion of the shares of Common Stock credited to a
participant's account will be effective upon receipt of such request by the Plan
Administrator. Dividends will continue to be reinvested on shares remaining in a
participant's account unless the participant withdraws all of the whole and
fractional shares from his or her account, which will be treated as a
termination of participation in the Plan (see No. 22 below).
21. May a participant elect to have the withdrawn shares sold?
Yes. Participants may request the Plan Administrator to sell the shares
being withdrawn from their account under the Plan. A request to sell all shares
of Common Stock credited to a participant's account received from a participant
after the ex-dividend date for a dividend will not be effective until the
participant's dividends for the applicable record date have been reinvested and
the shares credited to the participant's account. A request to sell a portion of
the shares of Common Stock credited to a participant's account will be declared
effective upon receipt by the Plan Administrator. Participants should specify in
their request for withdrawal the number of shares to be sold.
The Plan Administrator will arrange for the sale of such shares within
20 business days after receipt of the notice, and deliver to the participant a
check for the net proceeds of the sale. The proceeds of the sale will be applied
first to pay fees, brokerage commissions, applicable withholding taxes and
transfer taxes (if any) incurred in connection with the sale. A fee of $10 (but
not more than the proceeds of the sale of a fractional share) is charged by the
Plan Administrator for the sale of shares held under the Plan. A request for
shares to be sold must be signed by all persons in whose names the account
appears, with signatures guaranteed, as specified in No. 19 above.
13
<PAGE>
Termination of Participation in Dividend Reinvestment
22. How does a participant withdraw from the Plan?
Participation in the Plan is entirely voluntary and participants may
terminate their participation at any time by sending written notice to the Plan
Administrator. When a participant terminates from the Plan or upon termination
of the Plan by Union National, the Plan Administrator will deliver to the
participant a certificate for the number of whole shares credited to the
participant's account, and a check representing the value of any fractional
shares (less the applicable fee for the sale of the fractional share) based on
the then current market value per share. Thereafter, all dividends will be paid
in cash (or in stock dividends, if so declared by the Board of Directors on all
Common Stock) to the shareholder who withdraws from the Plan. Any participant
who elects to discontinue participation shall not be eligible to make voluntary
cash payments.
Any notice of termination received less than five business days prior
to an Investment Date will not be effective until the dividends have been
reinvested and the shares have been credited to the participant's account. A
shareholder may elect to re-enroll in the Plan at any time.
Federal Tax Information
23. What are the federal income tax consequences of participation in the
Plan?
Reinvestment Dividends. A shareholder who participates in the plan will
be treated as having received, with respect to the cash dividend and
reinvestment, a distribution to which Section 301 of the Internal Revenue Code
of 1984, as amended (the "Code"), applies. The amount of the distribution will
be the fair market value of the stock received on the date the stock is
purchased. The amount of the distribution that will be includible in income as a
dividend will be that amount that is paid out of Union National's current and/or
accumulated earnings and profits. The distribution, to the extent it exceeds
such earnings and profits, will be a return of capital and reduce the adjusted
basis of the stock. The portion of the distribution that exceeds such earnings
and profits and the adjusted basis of the stock will be treated as gain from the
sale or exchange of property.
Voluntary Cash Payments. A shareholder who makes a voluntary cash
payment for the purchase of stock under the plan will be treated as having
received a distribution to which Section 301 of the Code applies in an amount
equal to the excess of the fair market value of the stock received on the date
of the purchase over the amount of the voluntary cash payment made by the
shareholder. The federal income tax treatment of the distribution would depend
upon the amount of Union National's current and/or accumulated earnings and
profits as discussed above.
Brokerage Commissions. Each shareholder receiving a distribution, as
discussed above, will also be treated as receiving a distribution to which
Section 301 of the Code applies in an amount equal to a pro rata share of any
brokerage commission or other related charges paid by Union National in
connection with the purchase of stock on behalf of the shareholder. The federal
income tax treatment of any such distribution would depend upon the amount of
Union National's current and/or accumulated earnings and profits as discussed
above.
Additional Information. A shareholder's tax basis in the stock acquired
under the plan will generally equal the total amount of the distribution that
the shareholder is treated as receiving, as discussed above, plus, in the case
of a shareholder who makes a voluntary cash payment, the amount of such payment.
A shareholder's holding period in such stock generally begins on the date
following the date on which the stock is credited to the shareholder's plan
account. In the case of any shareholder as to whom federal income tax
withholding on distributions is required, and in the case of any foreign
shareholder whose taxable income under the Plan is subject to federal income tax
withholding, dividends will be reinvested net of the required amount of tax
withheld.
THE FOREGOING SUMMARY IS BASED UPON AN INTERPRETATION OF CURRENT
FEDERAL INCOME TAX LAWS. PARTICIPANTS SHOULD CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX CONSEQUENCES OF PARTICULAR ACCOUNT TRANSACTIONS INCLUDING STATE
CONSEQUENCES. CERTAIN TAX INFORMATION WILL BE PROVIDED TO PARTICIPANTS BY THE
PLAN ADMINISTRATOR.
14
<PAGE>
Other Information
24. What happens if Union National declares a stock dividend or effects a
stock split?
Any shares of Common Stock issued in connection with a stock split or
stock dividend on Common Stock held under the Plan will be added to the
participant's account under the Plan. Stock dividends or split shares
distributed on shares held directly by a participant will be mailed to the
participant in the same manner as to shareholders who do not participate in the
Plan.
25. If Union National has a rights offering, how will a participant's
entitlement be computed?
A participant's entitlement in a rights offering will be based upon his
or her total holdings in the same manner as dividends are computed currently.
Rights certificates will be issued for the number of whole shares only, however,
and rights based on a fraction of a share held in a participant's account will
be sold for his or her account and the proceeds, less commissions and taxes, if
any, will be mailed directly to the participant.
26. How will shares credited to a participant's account be voted at a
meeting of the shareholders?
If on a record date for a meeting of shareholders there are shares
credited to a participant's account under the Plan, the participant will be sent
proxy materials for the meeting. A participant will be entitled to vote all
shares of Common Stock credited to his or her account. The participant may also
vote his or her shares at the meeting in person or by proxy.
27. What are the responsibilities and liabilities of Union National and the
Plan Administrator?
Union National and the Plan Administrator shall not be liable for any
act taken in good faith or for any good faith omission to act, including without
limitation, any claims of liability: (a) arising out of a failure to terminate a
participant's account upon his or her death; (b) with respect to the prices at
which shares of Union National's Common Stock are purchased or sold, the times
when or the manner in which such purchases or sales are made, the decision
whether to purchase such shares of Common Stock on the open market, from Union
National or in private transactions, or fluctuations in the market value of the
Common Stock; and (c) any matters relating to the operation or management of the
Plan.
Participants should recognize that Union National can make no assurance
of any profit on, or protect against a loss from, the Common Stock purchased by
or for participants under the Plan.
All transactions in connection with the Plan will be governed by the
laws of the State of Maryland, and are subject to all applicable federal tax or
securities laws.
28. May the Plan be amended, modified or discontinued?
Yes. The Board of Directors of Union National, at its discretion, may
amend, modify, suspend or terminate the Plan and will endeavor to notify
participants of any such amendment, modification, suspension or termination. The
Board of Directors may, for whatever reason at any time as it may determine in
its sole discretion, terminate a participant's participation in the Plan after
mailing a notice of intention to terminate to the participant at the address as
it appears on the records of the Plan Administrator. In addition, the Board of
Directors of Union National and the Plan Administrator may each adopt reasonable
procedures for the administration of the Plan. The Board of Directors has the
sole authority to interpret the Plan in the manner that it deems appropriate in
its absolute discretion.
29. Who will bear the costs of the purchases made under the Plan?
All costs of administration of the Plan will be paid by Union National.
Participants will incur no brokerage commissions or other charges for purchases
made under the Plan.
15
<PAGE>
A participant who requests that the Plan Administrator sell shares of
Common Stock held in his or her account will incur any brokerage fees incurred
in connection with such sale.
30. May a participant pledge shares purchased under the Plan?
No. A participant who wishes to pledge shares credited to his account
must request the withdrawal of such shares in accordance with the procedures
outlined in response to Question No. 20 above.
31. Can adjustments be made in the number of shares subject to the Plan?
This Plan pertains to an aggregate of 150,000 shares of Common Stock of
Union National registered with the Commission for purposes of the Plan, subject
to adjustment as follows:
(a) In the event that a dividend shall be declared upon the
Common Stock payable in shares of Common Stock, the number of shares of
Common Stock available for issuance pursuant to the Plan shall be
adjusted by adding thereto the number of shares which would have been
distributable thereon if such shares had been outstanding on the date
fixed for determining the shareholders entitled to receive such stock
dividend.
(b) In the event that the outstanding shares of Common Stock
shall be changed into or exchanged for a different number or kind of
shares of stock or other securities of Union National or of another
corporation, whether through reorganization, recapitalization, stock
split-up, combination of shares, merger, or consolidation, then there
shall be substituted for the shares available for issuance pursuant to
the Plan, the number and kind of shares of stock or other securities
which would have been substituted therefor if such shares of stock or
other securities had been outstanding on the date fixed for determining
the shareholders entitled to receive such changed or substituted stock
or other securities.
(c) In the event there shall be any change, other than
specified above, in the number or kind of outstanding shares of Common
Stock of Union National or of any stock or other securities into which
such Common Stock shall be changed or for which it shall have been
exchanged, then if the Board of Directors of Union National shall
determine, in it discretion, that such change equitably requires an
adjustment in the number or kind of shares which are available for
issuance pursuant to the Plan, such adjustment shall be made by the
Board of Directors and shall be effective and binding for all purposes
of the Plan.
(d) No adjustment or substitution provided for herein shall
require Union National to issue or to sell a fractional share of Common
Stock under the Plan and the total adjustment or substitution may be
limited accordingly.
In addition, the Board of Directors may at any time and from time to
time increase the number of shares of Common Stock that may be issued pursuant
to the Plan. The number of shares so made available will be reserved by the
Board of Directors for issuance under the Plan.
[The Authorization Form may be found at the end of this Prospectus]
16
<PAGE>
MARKET PRICES AND DIVIDENDS
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
Common Stock to the extent such information is available, and the dividends
declared with respect thereto during the preceding two years and the first three
quarters of 1997:
1995
----
Price Range
Low High Dividends
--- ---- ---------
1st Quarter $26.00 $27.00 $0.13
2nd Quarter 26.50 27.00 0.13
3rd Quarter 29.00 30.25 0.13
4th Quarter 30.00 30.00 0.13
1996
----
Price Range
Low High Dividends
--- ---- ---------
1st Quarter $28.00 $28.00 $0.14
2nd Quarter 31.00 32.00 0.14
3rd Quarter 30.00 33.75 0.14
4th Quarter 32.00 35.88 0.15
1997
----
Price Range
Low High Dividends
--- ---- ---------
1st Quarter $32.00 $37.00 $0.15
2nd Quarter 33.00 37.25 0.16
3rd Quarter 33.25 37.00 0.18
As of July 31, 1997, the approximate number of holders of record of
Union National's Common Stock was 143. At such date, 834,000 shares of Common
Stock 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 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 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 of 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."
17
<PAGE>
USE OF PROCEEDS
Union National knows neither the number of shares that will ultimately
be purchased under the Plan nor the prices at which such shares will be
purchased. Union National intends to use the proceeds from such purchases, when
and as received, for working capital and general corporate purposes, which may
include contributions to UNB to increase UNB's capital and to permit additional
growth in UNB's assets. A change in the use of proceeds or timing of such use
will be at Union National's discretion.
CAPITALIZATION
The following table sets forth the consolidated historical capitalization,
including deposits, of Union National at June 30, 1997. The information set
forth below should be read in conjunction with the Consolidated Financial
Statements of Union National included elsewhere in this prospectus.
June 30, 1997
-------------
Deposits:
Total deposits 205,595,805
Securities sold under agreements to repurchase 10,012,991
Federal Home Loan Bank Borrowing
STOCKHOLDERS' EQUITY
Common stock - $.01 par; 10,000,000 shares authorized;
834,000 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
18
<PAGE>
SELECTED 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) Six Months Ended June 30, Year Ended December 31,
------------------------- -----------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RESULTS FROM OPERATIONS
Interest Income $ 8,877 $ 8,665 $ 17,361 $ 17,091 $ 15,109 $ 14,789 $ 14,804
Interest Expense 4,046 4,042 8,099 8,092 6,289 6,170 6,967
----- ----- ----- ----- ----- ----- -----
Net Interest Income 4,831 4,623 9,262 8,999 8,820 8,619 7,837
Provision for Credit Losses 116 191 329 212 342 425 470
--- --- --- --- --- --- ---
Net Interest Income after Provision for
Credit Losses 4,715 4,432 8,933 8,787 8,478 8,194 7,367
Non-Interest Income 636 497 1,086 978 1,315 1,029 874
Non-Interest Expense 3,601 3,411 7,200 7,058 6,800 6,179 5,595
----- ----- ----- ----- ----- ----- -----
Income Before Income Taxes 1,750 1,518 2,819 2,707 2,993 3,044 2,646
Applicable Income Taxes 575 527 955 912 990 1,009 867
--- --- --- --- --- ----- ---
Net Income before effect of accounting change 1,175 991 1,864 1,795 2,003 2,034 1,780
Effect of accounting change 0 0 0 0 0 0 248
-------- -------- -------- -------- -------- -------- --------
Net Income $ 1,175 $ 991 $ 1,864 $ 1,795 $ 2,003 $ 2,034 $ 2,028
======== ======== ======== ======== ======== ======== ========
FINANCIAL CONDITION
Total assets $235,565 $219,801 $225,036 $218,816 $207,226 $192,290 $175,511
Investment securities (including available for sale) 63,445 53,264 55,940 52,421 54,938 48,724 38,659
Loans, net of unearned income 148,093 147,349 147,351 146,822 139,730 128,498 127,652
Allowance for loan losses 1,848 1,796 1,772 1,769 1,671 1,503 1,365
Deposits 205,596 197,390 199,291 193,462 182,533 172,816 160,367
Shareholders' equity 19,064 17,045 18,053 16,540 13,948 14,061 12,125
PER SHARE DATA
Net income $ 1.41 $ 1.29 $ 2.23 $ 2.15 $ 2.40 $ 2.44 $ 2.43
Dividends 0.31 0.29 0.57 0.52 0.50 0.46 0.38
Shareholders' equity 22.85 20.44 21.65 19.83 16.72 16.86 14.54
PERFORMANCE RATIOS
Return on average assets 1.09% 0.85% 0.84% 0.84% 1.00% 1.10% 1.06%
Return on average equity 12.55 10.83 10.80 11.55 14.34 15.63 15.77
Net interest margin on average earning assets 4.51 4.48 4.53 4.56 4.83 5.12 5.13
Efficiency (non-interest expense / (net interest
income + non-interest income)) 65.87 66.62 69.58 70.75 67.09 64.04 64.22
LIQUIDITY AND CAPITAL RATIOS
Shareholders' equity (% assets) 8.09% 7.75% 8.02% 7.56% 6.73% 7.31% 6.91%
Risk-based:
Tier 1 Capital 11.91 10.98 11.72 10.86 10.42 10.62 9.83
Total Capital 13.07 12.12 12.87 12.01 11.77 10.94 10.75
Dividends (% net income) 22.01 23.56 25.51 24.16 20.82 18.86 17.80
Loans to deposits 72.03 74.65 73.94 75.89 76.55 74.36 79.60
ASSET QUALITY RATIOS
Allowance for credit losses to total loans 1.25% 1.22% 1.20% 1.20% 1.20% 1.17% 1.07%
Allowance for credit losses to non-performing loans 262.50 217.96 136.34 322.24 717.14 167.23 201.99
Net loan charge-offs to average total loans 0.07 0.03 0.22 0.08 0.13 0.22 0.16
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is qualified in its entirety by the more
detailed information and the financial statements and notes thereto appearing
elsewhere in this Prospectus. In addition to the historical information
contained herein, the discussion in this Prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of Union National's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. Union National's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section and
in "Risk Factors."
FISCAL YEARS 1996 AND 1995
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 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
1995, 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 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.
20
<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 net yield on 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 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 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.
21
<PAGE>
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>
22
<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%
==== ==== ====
- --------------------------
<FN>
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%.
</FN>
</TABLE>
23
<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
========= ======= ====== ========= ======== =========
- -----------------------------
<FN>
(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%.
</FN>
</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.
24
<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 $135,537 or 5.5% under 1994. In 1996 and 1995,
156.2% and 120.6%, respectively, of the decline in other operating expenses was
due to reduced Federal Deposit Insurance Corporation ("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.
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 78.6% 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.
25
<PAGE>
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>
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 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.
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
26
<PAGE>
Federal Home Loan Mortgage Corporation. Securities issued by these agencies are
secured by the residential mortgages.
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%.
MATURITY OF THE INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
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>
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
27
<PAGE>
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:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <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)
------------ ------------ ------------ ------------ ------------
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:
MATURITY SCHEDULE OF LOANS
<TABLE>
<CAPTION>
One Year Over One within Over Five Total
or Less Five Years Years Loans
------- ---------- ----- -----
<S> <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>
28
<PAGE>
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:
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <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>
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 change significantly. Management believes that this new process will
provide a consistent method of allocation in future years.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES IN DOLLARS
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <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>
29
<PAGE>
The following table breaks down the loan portfolio by category as a
percentage of the whole:
LOAN CATEGORIES BY PERCENTAGES
<TABLE>
<CAPTION>
June, 30, December 31,
--------- ------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
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%
=== === === === === ===
</TABLE>
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.
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 UNB'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.
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <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
30
<PAGE>
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:
AVERAGE DEPOSIT COMPOSITION AND COST
(In thousands of dollars)
<TABLE>
<CAPTION>
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%
======== ======
31
<PAGE>
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.
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's 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
$44 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.
32
<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.
INTEREST RATE SENSITIVITY ANALYSIS (1)
<TABLE>
<CAPTION>
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%
</TABLE>
- -----------------------------
(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.
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 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:
33
<PAGE>
(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%
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.
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")
34
<PAGE>
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.
In February 1997, Statement of Financial Accounting Standards Board No.
128, Earnings per Share ("SFAS 128"), was issued and establishes new standards
for computing and presenting earnings per share. SFAS 128 is effective for the
Union National's December 31, 1997, financial statements, including restatements
of interim periods; earlier application is not permitted. The effect of the new
standard will not be material.
In June 1997, Statement of Financial Accounting Standards Board No.
130, Reporting Comprehensive Income ("SFAS 130"), was issued and establishes
standards for reporting and displaying comprehensive income and its components.
SFAS 130 requires comprehensive income and its components, as recognized under
the accounting standards, to be displayed in a financial statement with the same
prominence as other financial statements. Union National plans to adopt the
standard, as required, beginning in 1998; adoption is not expected to have a
material impact on Union National.
Statement of Financial Accounting Standards Board No. 131, Disclosures
about Segments of an Enterprise and Related Information ("SFAS 131"), also
issued in June 1997, establishes new standards for reporting information about
operating segments in annual and interim financial statements. The standard also
requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments and the nature of
differences between reportable segment measurements and those used for the
consolidated enterprise. This standard is effective for years beginning after
December 15, 1997. Adoption in interim financial statements is not required
until the year after initial adoption, however comparative prior period
information is required. Adoption of this standard is not expected to have a
significant financial impact on Union National.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Overview
Total assets were $235.6 million at June 30, 1997, an increase of $15.8
million or 6.7% 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. Loan
growth slowed during the second half of 1996 and remained sluggish throughout
1997. Other investments have increased as loan growth has declined.
Net income rose 18.5% in the first half of 1997 to $1,174,725 from net
income of $991,339 in the same period of 1996. The return on average assets for
the six months ended June 30, 1997 was 1.04% and .91% for the same period in
1996. The return on average equity was 12.84% for the six months ended June
30, 1997 and 11.68% for the six months ended June 30, 1996.
35
<PAGE>
Net Interest Income
Net interest income is the major component of the UNB'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 UNB's net yield on its earning assets.
First half net interest income before provision for loan losses was
$4,831,700 in 1997, $4,623,010 in 1996. These levels represent increases of
$208,690 (4.5%) for 1997. On a tax-equivalent basis, the respective net interest
incomes for the first half 1997 and 1996, respectively, were $4,913,508 and
$4,701,286. In 1996, 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 1997. The
net interest spread rose to 4.03% in the first half of 1997 from 4.01% in the
same period of 1996. The net interest margin as a percentage of earning assets
was 4.62% for the first half, up slightly from 4.59% in 1996.
Non-Interest Income
Total non-interest income for the first six months of 1997 was $636,355
up $139,324 or 28.0% from $497,031 for the first six months in 1996. This
increase is principally attributed to a $128,747 increase in service charge
fees. In addition, recoveries of prior expenses or losses totaled $9,444, and an
increase of $17,431 was realized for other servicing commissions.
For the second quarter of 1997 total non-interest income was $315,653,
up $78,838 or 33.3% from $236,815 for the second quarter of 1996. This increase
is due to the same factors described above; increased servicing fees contributed
$60,189 and recoveries contributed $39,805 to these results.
Non-Interest Expense
Non-interest expense for the first six months of 1997 was $3,603,135,
an increase of $192,000 or 5.6% from $3,411,135 in 1996. These increases are
generally direct reflections of the growth in assets as well as the related
investment in services, branches, and facilities.
In the first half 1997 salaries and benefits totaled $2,064,670, up
$173,805 or 9.2% from $1,890,865 in the second quarter of 1996. Personnel
expense represented 57.3% of total non-interest expense in the second quarter of
1997 compared to 55.6% in the same period of 1996. The average assets per
employee increased for the first six months from $1.87 million in 1996 to $1.97
million in 1997. This is due to increased automation of functions as well as a
general improvement in the efficient allocation of resources.
Occupancy expense for the first half was $358,585 in 1997, down $28,685
or 7.4% from $387,270 of the first half of 1996. The primary source of this
decrease is due to a 70.4% increase in rental income associated with an increase
in activity in non-traditional products. Rental expenses for the first half was
$126,266 in 1997, up $25,209 or 24.9% from $101,057 of the first half of 1996.
This increase in expense was due to expansion of branch locations.
Other operating expense was $1,179,880 for the first half of 1997, up
$46,880 or 4.1% from $1,133,000 for the first half of 1996. An increase in
checks, account and cash loss of $58,973 or 87.1% in the first half was offset
by a reduction of computer service expense of $39,433 or 14.1%.
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Income Taxes
Income tax expense for the first half of 1997 and 1996 were $575,195
and $526,567, respectively. Income taxes were 32.9% of net income before taxes
for the first half of 1997 and 34.7% for the first half of 1996. Federal income
tax accounted for 84.3% of total tax for the first half of 1997 compared to
76.0% for the first half of 1996. As non-taxable income declines tax expense
becomes a larger portion of total expenses.
Securities Portfolio
Total holdings in the investment portfolio at June 30, 1997 were
$63,445,148 and at year-end 1996 were $55,939,772. In aggregate, investment
securities increased $7,505,377 or 13.4% in the first half of the year. During
1996 and 1997, the portfolio was increased as the spread of longer term
investments to overnight funds widened, and further additions settled early in
1997. The total portfolio had an average maturity of 2.9 years on June 30, 1997
compared with 3.8 years on June 30, 1996. These maturities represent estimates
of the actual life of the instruments, considering pay downs on the
mortgage-backed securities and puts of tax-free securities
Loan Portfolio
Total loans outstanding on June 30, 1997 were $148,093,329 and on
December 31, 1996 were $147,350,540. The loan portfolio increased $742,789 or
.51% in the first half of the year. The portfolio represented 62.9% of total
assets on June 30, 1997 and 65.5% of total assets on December 31, 1996.
UNB's loan portfolio is composed of commercial loans (including
commercial real estate), residential loans, and consumer installment loans. The
commercial portfolio represents 57% of the total portfolio. The greatest
majority of commercial loans, approximately 70%, are well collateralized by some
form of real estate. The residential portfolio represents 21% of the overall
loan portfolio. Most residential mortgages are kept "in house" and the majority
have a loan to value ratio of less than 80%. For those residential mortgages
with loan to value ratio greater than 80%, private mortgage insurance is
required to reduce risk. The consumer portfolio makes up the remaining 22% of
the loan portfolio. The consumer portfolio consists of installment loans made
for such purposes as vehicle purchases, debt consolidation, and home
improvement, and also contains indirect auto loans (both new and used) purchased
from approximately six dealerships. The main emphasis of the first half of 1997
has been in home equity loans (fixed term), which are also part of the consumer
portfolio. Use of debt to income ratios and recent credit bureau scores help
minimize losses in the consumer portfolio.
UNB does not engage in foreign lending, and involvement in speculative
real estate and land development are minimal. It is UNB's practice to lend in
the Carroll County market area and to meet the needs of the community.
In the first half of 1997 the commercial loan portfolio decreased
$3,617,343 or 15.1% although commercial mortgages increased $5,788,618 or 10.5%.
Residential real estate declined $1,574,560 or 5.1%. The installment portfolio
increased $288,912 or .8%. The home equity portfolio increased $2,513,293 or
47.3% while the direct and indirect portfolio decreased $2,033,112 or 8.1%.
Non-accrual loans represent .6% of the total loan portfolio or $824,317. Of the
total non-accrual 92% or $757,129 are secured by real estate. The largest
portion of the non-accruals are in the commercial portfolio.
Allowance for Credit Losses
The allowance for loan losses on June 30, 1997, was $1,848,177 and on
December 31, 1996, was $1,772,433. This is an increase of $75,743 or 4.3%. The
ratio of allowance to total loans was 1.20% at year end 1996 and 1.25% at the
end of the first half of 1997.
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An analysis of the allowance and the changes over the first half of
1997 follows:
Analysis of the Allowance for Credit Losses
<TABLE>
<CAPTION>
Description Amount
----------- ------
<S> <C> <C> <C>
Balance at beginning of period (1/1/97) $ 1,772,433
Charge-offs first quarter 1997 $ 48,024
Charge-offs second quarter 1997 $ 15,338
--------
Gross Charge-offs for first half of 1997 $ 63,362
Recoveries first quarter 1997 $ 20,267
Recoveries second quarter 1997 $ 3,838
Provision first quarter 1997 $ 60,000
Provision second quarter 1997 $ 55,000
--------
Gross Recoveries and Allocations $ 139,105
Net Change since end of 1996 $ 75,743
---- ------------
Balance at end of period (6/30/97) $ 1,848,176
== == == ============
Net Charge-offs as a percentage of average total loans: Midyear: 0.0267%
Annualized: 0.0534%
</TABLE>
The methodology used in determining the allowance is calculated
quarterly. The methodology is performed in accordance with Banking Circular 201
and assesses risk based on the following categories: levels of, and trends in,
delinquencies and nonaccruals; trends in volume and terms of loans; effects of
any changes in lending policies and procedures; experience, ability, and depth
of lending management and staff; national and local economic trends and
conditions; and concentrations of credit that may affect loss experience. In
addition, historical loss data for both our bank and peers are considered. A
"reserve range" is then determined and a comparison made of the actual allowance
to the estimated potential loss of the entire loan portfolio.
Current level of charge-offs is low, however personal bankruptcies
continue at a high level. Several commercial loans currently classified as
substandard could become partial charge-offs by the end of the year. The
allowance, however, as presented above, is believed to be adequate given current
trends.
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.
Total deposits were $205,595,805 on June 30, 1997, and $199,291,435 on
December 31, 1996. The main source area in both 1997 and 1996 was certificates
of deposits which grew $3.4 million or 3.1%. In addition, checking accounts rose
$2.3 million or 5.1%. Both regular savings and money market remained
approximately the same, $257,820 or .81% and $112,211 or .64% increases
respectively.
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 and correspondent bank lines.
Repurchase agreements averaged $10,513,697 during 1997 compared to
$8,555,503 in 1996. At June 30, 1997, there were $10,012,991 and at year-end
1996, they were $6,808,596. These funds included customer repurchase agreements
in addition to those funds which were obtained solely to provide liquidity.
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Liquidity
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's 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 $44 million available from correspondent banks as of June 30,
1997.
On June 30, 1997, securities available for sale and federal funds sold
totaled $59,689,437 compared with $47,749,311 for the year ended December 31,
1996. These funds averaged $53,631,971 for the six months ended June 30, 1997,
and $40,304,499 for the year ended December 31, 1996. (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.
Capital Management
Union National's capital position is presented in the following table:
<TABLE>
<CAPTION>
June 30, December 31, Regulatory
1997 1996 Requirement
---- ---- -----------
<S> <C> <C> <C> <C>
Tier 1 capital to risk weighted assets 11.9% 11.7% 4.0%
Total capital to risk weighted assets 13.0% 12.9% 8.0%
Capital leverage ratio 8.1% 8.0% 3.0%
</TABLE>
39
<PAGE>
BUSINESS
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.
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
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<PAGE>
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 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 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
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<PAGE>
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.
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
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<PAGE>
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 shareholders. 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.
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
43
<PAGE>
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 shareholders
due solely to their status as shareholders 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 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 any Maryland state-chartered bank or trust company it
controls 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 shareholders 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.
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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 dividends only out of prior operating earnings. Under
the National Bank Act, UNB may pay dividends only out of retained earnings as
defined in the statute. The approval of the OCC is required if the dividends for
any year exceed 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. 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.
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
45
<PAGE>
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 Union National.
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 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.
46
<PAGE>
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 July 31, 1997, UNB had the equivalent of 124 full-time employees.
None of its employees is represented by a collective bargaining unit. UNB
considers relations with its employees to be good.
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.
Legal Proceedings
Neither Union National nor UNB is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of Union National other than those arising in the ordinary course
of business. In the opinion of management, no such proceeding will have a
material adverse effect on the financial position or results of Union National.
MANAGEMENT
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.
47
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Principal Occupations Director or Year Term as
Position with Company During Past Five Years Officer Since Director Expires
- --------------------- ---------------------- ------------- ----------------
<S> <C> <C> <C>
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 Retired in August 1997; formerly Treasurer of 1979 ---
Former Treasurer Union National (1994 to August 20, 1997);
Senior Vice President and Chief Financial
Officer of UNB (1979 to August 20, 1997)
Gabrielle M. Peregoy, 40 Treasurer of Union National (August 1997 to 1997 ---
Treasurer present); Vice President of Finance of UNB
(April 1997 - August 1997); Investment Officer
of UNB (1993 - April 1997)
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., 55 Senior engineer/systems technologist for Vitro 1991 2000
Director Corporation; President of HOPE, Inc. a local
developer of low cost housing
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Name, Age and Principal Occupations Director or Year Term as
Position with Company During Past Five Years Officer Since Director Expires
- --------------------- ---------------------- ------------- ----------------
<S> <C> <C> <C>
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 Westminster
Coca-Cola Bottling Company (1984 to 1991)
Robert T. Scott, 53 Orthodontist 1990 1998
Director
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
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, benefits, and personnel
policies, 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 Gabrielle M. Peregoy. 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.
49
<PAGE>
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. This committee meets monthly.
The Community Banking Development Committee consists of Ms. Ellen
Willis, Mr. Donald Essich, and Mr. Wesley Blakeslee. 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.
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.
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.
Summary Compensation Table
<TABLE>
<CAPTION>
Other Annual All Other
Name Year Salary Bonus Compensation Compensation
- ---- ---- ------ ----- ------------ ------------
<S> <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>
50
<PAGE>
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 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.
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 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 will 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
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 is administered by the 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 three 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 one 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.
51
<PAGE>
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 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 Common Stock, 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 Common Stock is 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 Common Stock, 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 Common Stock, securities or other assets as were
issuable upon the Extraordinary Event in respect of, or in exchange for, such
shares of Common Stock.
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>
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>
52
<PAGE>
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 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 pre-determined 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.
53
<PAGE>
COMPENSATION COMMITTEE 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 shareholder 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
Performance Graph
Set forth below is a line graph comparing cumulative shareholder
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 which Union National's returns can be compared.
54
<PAGE>
Performance Graph
55
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
The following table reflects the beneficial ownership of the Common
Stock as of July 31, 1997, held by directors, executive officers, each person
known to management to own beneficially, directly or indirectly, more than 5% of
the Common Stock, 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 (1) ................... 62,076 7.4%
6 Ridge Road
Westminster, MD 21157
Virginia C. Wantz (2)..................... 63,816 7.7%
205 St. Mark Way
Westminster, MD 21157
Union National Bank 401(k) Plan (3) 63,444 7.6%
117 East Main Street
Westminster, MD 21158
Executive Officers and Directors:
Virginia W. Smith (4)..................... 3,557 *
Denise L. Owings (5)...................... 3,746 *
K. Wayne Lockard (6)...................... 4,842 *
Donald C. Essich.......................... 2,460 *
Joseph H. Beaver, Jr. (7)................. 23,584 2.8%
Wesley D. Blakeslee (8)................... 1,970 *
David L. Brauning (9)..................... 13,216 1.6%
Robert L. Bullock......................... 6,878 *
Dean H. Griffin (10)...................... 5,750 *
Bernard Larry Jones, Sr................... 300 *
William R. Klinger........................ 378 *
Gabby Peregoy (11)........................ 939 *
Robert T. Scott (12)...................... 1,160 *
Ethan A. Seidel........................... 300 *
Steven Wantz (13)......................... 5,478
Ellen Willis.............................. 100 *
Kenneth B. Wright (14).................... 1,400 *
Thomas F. See (15)........................ 17,403 2.1%
All directors and executive officers
as a group (18 persons)................. 93,461 11.2
------ ---
*Less than 1%
- --------------------------
<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 .08% 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 shareholder.
(4) Includes 7 shares held in the Union National 401(k) plan.
(5) Includes 3,648 shares held in the Union National 401(k) plan.
(6) Includes 1,195 shares owned by his wife, Bonnie M. Lockard, as to which
Mr. Lockard disclaims beneficial ownership.
</FN>
</TABLE>
56
<PAGE>
(7) Includes 550 shares owned by his wife, Katherine G. 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) Includes 1,620 shares held jointly with his wife, A. Elizabeth
Brauning, 4232 shares held by Mr. Brauning and Horace S. Brauning, Sr.,
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 and 2,242 shares held
in A. Elizabeth Brauning's 401(k) plan.
(10) Includes 300 shares jointly held with his son, John W. Griffin, and 410
shares jointly held with his wife, Etta Ray Griffin. Also includes 190
shares owned by his wife, Etta Ray Griffin, as to which Mr. Griffin
disclaims beneficial ownership.
(11) Includes 74 shares held jointly with her husband, Mark Peregoy, and 865
shares held in the Union
National 401(k) plan.
(12) Includes 160 shares held jointly with his wife, Carolyn L. Scott and
400 shares held in a pension plan.
(13) Includes 224 shares held jointly with his wife, Renee L. Wantz, and
5,014 shares held in the Union National 401(k) plan.
(14) Includes 350 shares held jointly with his wife, Donna K. Wright.
(15) Includes 600 shares owned by his wife, Katherine K. See, as to which
Mr. See disclaims beneficial ownership. Also includes 12,957 shares
held in Union National 401(k) plan.
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
shareholders 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.
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.
57
<PAGE>
DESCRIPTION OF SECURITIES
General
Union National is authorized to issue 10,000,000 shares of Common
Stock. As of July 31, 1997, Union National had outstanding 834,000 shares of
Common Stock.
Common Stock
Dividends
Holders of the Common Stock 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." 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 the Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities.
Voting
Holders of the Common Stock are entitled to one vote for each share
held by them at all meetings of the shareholders.
Preemptive Rights
No holder of the Common Stock has preemptive rights to purchase
additional shares.
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 shareholder votes. The Bylaws of Union National
require that directors retire from the Board on the date of the annual meeting
of shareholder 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 substantially all of its assets, in
connection with the exercise of its judgment in determining the best interests
of Union National and its shareholders, 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.
58
<PAGE>
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 Shareholder") 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 Shareholder with whom the business
combination is to be effected, unless, among other things, the corporation's
common shareholders 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 Shareholder for his shares. In addition, an
Interested Shareholder 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 Shareholder. 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 Shareholder becomes an Interested Shareholder. 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.
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 shareholders, 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 shareholder 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 shareholders 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 shareholders' 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 shareholders at which the voting rights of such shares are considered
and not approved. If voting rights for control shares are approved at a
shareholders' meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other shareholders 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."
59
<PAGE>
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."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
Union National by Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC,
Baltimore, Maryland.
EXPERTS
The consolidated financial statements of Union National as of December
31, 1996 and 1995, and for each of the years in the three-year period ending
December 31, 1996, included herein have been included in reliance upon the
report Stegman & Company, independent certified public accountants, with respect
thereto, and upon the authority of said firm as experts in accounting and
auditing.
60
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS
Consolidated Financial Statements
Unaudited Consolidated Financial Statements for Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Audited Consolidated Financial Statements for Fiscal Years Ended December 31, 1996, 1995 and 1994
Report of Independent Auditors F-7
Consolidated Balance Sheets F-8
Consolidated Statements of Income F-9
Consolidated Statements of Stockholders' Equity F-10
Consolidated Statements of Cash Flows F-11
Notes to Consolidated Financial Statements F-12
</TABLE>
F-1
<PAGE>
Union National Bancorp, Inc.
Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Cash and due from banks $6,471,761 $6,910,561
Interest bearing deposits with banks 43,627 160,821
Federal funds sold 11,081,530 8,882,550
Investment securities available for sale-at fair value 48,607,907 38,866,761
Investment securities held to maturity - at amortized
cost - fair value of $15,026,157 (1997) and $17,304,150 (1996) 14,837,241 17,073,011
Loans 148,093,329 147,350,540
Less: allowance for credit losses (1,848,177) (1,772,433)
------------ ------------
Loans - net 146,245,152 145,578,107
Bank premises and equipment 3,903,890 3,928,561
Foreclosed real estate 646,528 391,236
Accrued interest receivable 1,837,098 1,292,194
Other assets 1,890,061 1,951,826
------------ ------------
TOTAL ASSETS $235,564,796 $225,035,628
============ ============
LIABILITIES
Deposits:
Non-interest bearing deposits $ 24,618,474 $ 23,694,607
Interest bearing deposits 180,977,331 175,596,828
------------ ------------
Total deposits 205,595,805 199,291,435
Short-term borrowings 10,012,991 6,808,596
Federal Home Loan Bank Borrowing -- --
Accrued expenses and other liabilities 891,860 882,930
------------ ------------
Total liabilities 216,500,656 206,982,961
------------ ------------
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 appreciation (depreciation) on investment
securities available for sale (net of related tax effect) 36,702 (58,586)
Retained earnings 10,677,043 9,760,858
------------ ------------
Total stockholders' equity 19,064,140 18,052,667
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $235,564,796 $225,035,628
============ ============
</TABLE>
F-2
<PAGE>
Union National Bancorp, Inc.
Consolidated Statements of Income (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,387,604 $ 3,475,763 $ 6,734,470 $ 6,936,787
Interest and dividends on investment securities:
Taxable interest on mortgage backed securities 316,979 370,890 646,958 756,777
Other taxable interest & dividends 605,831 290,311 1,140,245 566,035
Nontaxable interest 75,353 94,713 152,931 191,561
Interest on deposits at other banks 515 36,724 2,756 57,396
Interest on federal funds sold 109,423 87,179 199,897 156,087
----------- ----------- ---------- -----------
Total interest income 4,495,705 4,355,580 8,877,257 8,664,643
----------- ----------- ----------- -----------
INTEREST EXPENSE:
Interest on deposits:
Time certificates of deposit of $100,000 and more 270,731 410,079 575,569 642,778
Other deposits 1,687,560 1,512,880 3,238,282 3,216,516
---------- ---------- ---------- ----------
Total interest on deposits 1,958,291 1,922,959 3,813,851 3,859,294
Interest on short-term borrowings 99,248 84,716 231,706 156,039
Interest on Federal Home Loan Bank borrowings 0 0 0 26,300
---------- ---------- ---------- ----------
Total interest expense 2,057,539 2,007,675 4,045,557 4,041,633
---------- ---------- ---------- ----------
NET INTEREST INCOME 2,438,166 2,347,905 4,831,700 4,623,010
PROVISION FOR CREDIT LOSSES 55,000 122,000 115,000 191,000
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 2,383,166 2,225,905 4,716,700 4,432,010
---------- ---------- ---------- ----------
NON-INTEREST INCOME:
Service charges on deposit accounts 234,512 174,323 460,852 332,105
Other service charges 66,334 26,529 91,333 56,456
Gains on sales of loans - - - 13,668
Other income 14,807 35,963 84,170 94,802
---------- ---------- ---------- ----------
Total other operating income 315,653 236,815 636,355 497,031
---------- ---------- ---------- ----------
NON-INTEREST EXPENSES:
Salaries and employee benefits 1,041,316 902,512 2,064,670 1,890,865
Occupancy expense of bank premises 182,584 190,772 358,585 387,270
Equipment expenses 105,849 82,237 197,008 179,757
Other expenses 489,351 472,735 982,872 953,243
---------- ---------- ---------- ----------
Total other operating expenses 1,819,100 1,648,256 3,603,135 3,411,135
---------- ---------- ---------- ----------
----------- ----------- ----------- ------------
INCOME BEFORE INCOME TAXES 879,719 814,464 1,749,920 1,517,906
APPLICABLE INCOME TAXES 289,081 291,453 575,195 526,567
----------- ----------- ----------- ------------
NET INCOME $ 590,638 $ 523,011 $ 1,174,725 $ 991,339
=========== =========== =========== ============
EARNINGS PER COMMON SHARE $0.71 $0.63 $1.41 $1.19
===== ===== ===== =====
</TABLE>
F-3
<PAGE>
Union National Bancorp, Inc.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Unrealized
Appreciation
(Depreciation)
Common on Investment 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 ($.28 per share) - - - (233,520) (233,520)
Unrealized depreciation on securities
available for sale (net of tax) - - (252,551) - (252,551)
-------- ------------ --------- -------------- -------------
Balance at June 30, 1996 8,340 8,342,055 (435,626) 9,130,535 17,045,304
Net income - - - 872,183 872,183
Cash dividends ($.29 per share) - - - (241,860) (241,860)
Unrealized appreciation 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 ($.31 per share) - - - (258,540) (258,540)
Unrealized appreciation 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>
F-4
<PAGE>
Union National Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1997 1996
---- ----
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,174,725 $ 991,339
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses 115,000 191,000
Depreciation and amortization 309,900 291,050
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 (544,904) 76,890
Net increase (decrease) in accrued expenses & other liabilities 8,930 43,572
Other - net 56,276 150,711
------------- ------------
Net cash provided by operating activities 1,082,580 1,706,606
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (10,930,000) (8,000,000)
Proceeds from maturities of available for sale securities 1,241,584 3,580,793
Purchase of held to maturity securities - (445,000)
Proceeds from maturities of held to maturity securities 2,327,466 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 - (239,773)
Foreclosed real estate acquired (285,229) (124,451)
------------ -----------
Net cash used in investing activities (8,689,818) (2,157,914)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,304,370 3,841,476
Net increase (decrease) in short-term borrowings 3,204,395 1,595,043
Repayments of Federal Home Loan Bank borrowings - (5,000,000)
Cash dividends paid (258,540) (233,520)
------------ -----------
Net cash provided by financing activities 9,250,225 202,999
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,642,986 (248,309)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,953,932 13,641,267
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,596,918 $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>
F-5
<PAGE>
Union National Bancorp, Inc.
Note to Consolidated Financial Statements (Unaudited)
Note 1: The accompanying unaudited consolidated financial statements for
Union National Bancorp, Inc. ("Company") have been prepared in
accordance with the instructions for Form 10-Q and, therefore do not
include all information and footnotes required by generally accepted
accounting principles for complete financial statements. The interim
financial statements have been prepared utilizing the interim basis of
reporting and, as such, reflect all adjustments which are normal and
recurring in nature and are, in the opinion of management, necessary
for fair presentation of the results for the periods presented. The
results of operations for the interim periods are not necessarily
indicative of the results for the full year.
F-6
<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-7
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
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 depreciation 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-8
<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-9
<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 depreciation 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 appreciation 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 appreciation 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-10
<PAGE>
CONSOLIDATED 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-11
<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.
F-12
<PAGE>
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.
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
F-13
<PAGE>
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.
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.
F-14
<PAGE>
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.
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>
F-15
<PAGE>
<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>
<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
=========== =========== =========== ===========
</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 .......................... $ 9,076,189 482 $ 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:
1996 1995 1994
---- ---- ----
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
===== ======= =======
The scheduled maturities of securities held to maturity and securities
available for sale at December 31, 1996, were as follows:
F-16
<PAGE>
<TABLE>
<CAPTION>
Held to maturity securities Available for sale securities
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <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 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
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 ................................ (537,23) (679,793)
------- --------
Total loans ................................................... $ 147,350,540 $ 146,821,594
============= =============
</TABLE>
Changes in the allowance for credit losses were as follows:
F-17
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
Information regarding impaired loans for the years ending December 31, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <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>
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.
F-18
<PAGE>
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.
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:
1996 1995 1994
---- ---- ----
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
========== ========== ==========
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:
F-19
<PAGE>
1996 1995
---- ----
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
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.
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. Net pension cost for 1996, 1995 and 1994 includes the following
components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <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:
F-20
<PAGE>
<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.
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:
F-21
<PAGE>
1996 1995 1994
---- ---- ----
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)
======== ======== ========
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:
1996 1995
---- ----
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
=========== ===========
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.
F-22
<PAGE>
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
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.
F-23
<PAGE>
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.
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.
F-24
<PAGE>
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-term borrowings: The carrying amounts of short-term borrowings
approximate their fair values.
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>
F-25
<PAGE>
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
=========== ===========
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
============ ============
Statement of Cash Flows, Year Ended December 31, 1996 1995
---- ----
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)
------------ ------------
F-26
<PAGE>
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-27
<PAGE>
THIS IS NOT A PROXY
Union National Bancorp, Inc.
1997 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Authorization Form
TO: American Stock Transfer and Trust Company, as Agent for Union National
Bancorp, Inc. (the "Company"):
The undersigned desires to participate in the 1997 Dividend
Reinvestment and Stock Purchase Plan ("Plan"), receipt of a copy of which is
hereby acknowledged, to purchase full and fractional shares of common stock, par
value $.01 per share (the "Common Stock") of the Company as specified below:
(Check one)
- ---
- --- FULL DIVIDEND REINVESTMENT - ALL SHARES AND OPTIONAL CASH PAYMENTS.
I hereby authorize you to apply all dividends on all shares registered
in my name, and any optional cash payments I make by check or money
order, toward the purchase of shares of Common Stock.
- ---
- --- PARTIAL DIVIDEND REINVESTMENT - LESS THAN ALL SHARES, OPTIONAL CASH
PAYMENTS. Apply cash dividends on ____________ shares and any optional
cash payments I make by check or money order toward the purchase of
shares of Common Stock, and return the remaining shares to me.
NOTE: Cash dividends on shares of Common Stock credited to the
participant's account under the Plan are automatically reinvested in additional
shares. Participants will continue to receive cash dividends on those shares not
in an account under the Plan.
I understand that I may withdraw from the Plan by giving written notice
thereof to the Agent designated in the brochure or its duly designated
successor, in accordance with the terms of the Plan.
PLEASE FILL IN NAME AND ADDRESS EXACTLY THIS IS NOT A PROXY
AS IT APPEARS ON YOUR STOCK CERTIFICATE:
- --------------------------------------------- -----------------------------
Signature
- --------------------------------------------- -----------------------------
Signature
- ---------------------------------------------
All persons whose names appear
- --------------------------------------------- on the stock certificate
must sign.
Date:________________________
<PAGE>
SHARE TRANSMITTAL FORM
(For Deposit of Shares Only)
TO: American Stock Transfer and Trust Company, Agent for Union National
Bancorp, Inc. (the "Company"):
The undersigned desires to participate in the 1997 Dividend Reinvestment and
Stock Purchase Plan ("Plan"), receipt of a copy of which is hereby acknowledged,
to purchase full and fractional shares of common stock, par value $.01 per share
(the "Common Stock") of the Company. In accordance therewith, the undersigned
hereby deposits with you the following certificate(s) representing shares of
Common Stock. The undersigned acknowledges that the method of transmitting
certificates is at the option and risk of the undersigned, and if sent by mail,
registered mail with return receipt requested, properly insured, is recommended.
Delivery shall be effected and risk of loss and title to the transmitted
certificate(s) shall pass only upon proper delivery of such certificate(s) to
the Agent.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
===================================================================================================================================
Name and Address of Registered Owner
(Please Print) Certificate(s)
- -----------------------------------------------------------------------------------------------------------------------------------
Certificate Number of Shares
Number Represented by Certificate
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
TOTAL No. of Shares
===================================================================================================================================
If additional space is needed, attach a signed
schedule.
NOTE: (1) All certificates delivered for safekeeping must be enrolled in the Plan. The certificates will be cancelled and
reissued in the name of the Agent; upon withdrawal, new certificates will be issued in the name of the participant.
(2) Cash dividends on shares of Common Stock credited to the participant's
account under the Plan are automatically reinvested in additional shares.
Participants will continue to receive cash dividends on those shares not in an
account under the Plan.
I understand that I may withdraw from the Plan by giving written notice thereof
to the Agent designated in the brochure or its duly designated successor, in
accordance with the terms of the Plan.
</TABLE>
PLEASE FILL IN NAME AND ADDRESS EXACTLY AS THIS IS NOT A PROXY
IT APPEARS ON YOUR STOCK CERTIFICATE:
- --------------------------------------------- -----------------------------
Signature
- --------------------------------------------- -----------------------------
Signature
- ---------------------------------------------
All persons whose names appear
- --------------------------------------------- on the stock certificate
must sign.
Date:________________________
<PAGE>
No dealer, salesperson or any other person
has been authorized to give any information
or to make any representation in connection
with this offering other than those contained
or incorporated by reference in this Prospectus, 150,000 Shares
and if given or made, such information or
representation must not be relied upon as hav- UNION NATIONAL
ing been so authorized by Union National. BANCORP, INC.
This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy, any of
these securities in any jurisdiction to any person
to whom it is unlawful to make such offer or
solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder Common Stock
shall, under any circumstances, create any impli-
cation that there has been no change in the affairs
of Union National since the date hereof or that the
information contained herein is correct as of any
time subsequent to its date.
TABLE OF CONTENTS
Page ------------------------
----
Prospectus
Prospectus Summary 3
Risk Factors 6 -----------------------
The Company 9
1997 Dividend Reinvestment and Stock
Purchase Plan 9
Market Prices and Dividends 17
Use of Proceeds 18 1997 Dividend Reinvestment
Capitalization 18
Selected Financial Information 19 and Stock Purchase Plan
Management's Discussion and Analysis of
Consolidated Financial Condition
and Results of Operations 20
Business 40
Supervision and Regulation 43
Management 47
Beneficial Ownership of Shares 56
Certain Relationships and Related
Transactions 57 October 22 , 1997
Description of Securities 58
Legal Matters 60
Experts 60
Until January 20, 1998, all dealers
effecting transactions in the registered
securities, whether or not participating in this
distribution may be required to deliver a
prospectus. This is in addition to the obliga-
tion of dealers to deliver a prospectus when
acting as underwriters.
<PAGE>
