<PAGE>
FORM 10-Q
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER: 000-22523
UNION NATIONAL BANCORP, INC. (Exact name of registrant as specified in its
charter)
Maryland 52-0514247
(State of incorporation) (I.R.S. identification number)
117 East Main Street, Westminster, MD 21157 (410) 848-7200
(Address of principal executive offices) (Telephone number)
Indicated by check mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to filing
requirements for the past 90 days.
YES / X / NO / /
The number of shares of common stock outstanding as of October 16,1998
is 1,849,528 shares.
<PAGE>
Table Of Contents
Union National Bancorp, Inc.
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheet 2
Consolidated Statement of Income 3
Consolidated Comprehensive Statement of Income 3
Consolidated Statement of Cash Flows 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis 5-10
PART II - OTHER INFORMATION 10
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
<PAGE>
Part 1 Financial Information Item 1 Financial Statements
Union National Bancorp, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS (Unaudited)
Cash and due from banks $8,194,097 $7,870,449
Interest bearing deposits in other banks 21,005 25,108
Federal funds sold 17,212,898 6,072,396
Investment securities available for sale-at fair value 63,802,018 58,770,760
Investment securities held to maturity-at amortized cost - fair value of
$ 21,679,510 (1998) and $13,647,089 (1997) 21,890,789 13,419,839
Loans 162,121,655 158,347,687
Less: allowance for credit losses (1,772,536) (1,793,112)
------------------ ------------------
Loans - net 160,349,119 156,554,575
Premises and equipment 4,150,917 4,205,824
Foreclosed real estate 210,000 215,000
Accrued interest receivable 1,825,366 1,708,814
Other assets 1,564,579 1,938,115
------------------ ------------------
TOTAL ASSETS $279,220,788 $250,780,880
------------------ ------------------
------------------ ------------------
LIABILITIES
Deposits:
Non-interest bearing deposits $24,322,809 $26,096,600
Interest bearing deposits 189,196,801 179,542,196
------------------ ------------------
Total deposits 213,519,610 205,638,796
Short-term borrowings 22,555,966 13,776,373
Other bank borrowing 20,000,000 10,000,000
Accrued expenses and other liabilities 1,331,039 1,301,385
------------------ ------------------
Total liabilities 257,406,615 230,716,554
------------------ ------------------
STOCKHOLDERS' EQUITY
Common stock - $.01 par; 10,000,000 shares authorized; 1,849,528 shares
in September 1998 1,674,800 shares in 1997 issued and outstanding 18,495 16,748
Capital surplus 13,570,913 8,469,115
Accumulated other comprehensive income 268,038 149,136
Retained earnings 7,956,727 11,429,327
------------------ ------------------
Total stockholders' equity 21,814,173 20,064,326
------------------ ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $279,220,788 $250,780,880
------------------ ------------------
------------------ ------------------
</TABLE>
2
<PAGE>
Union National Bancorp, Inc.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
-------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 3,698,091 $ 3,395,098 $ 10,935,310 $ 10,129,567
Interest and dividends on investment securities:
Taxable interest on mortgage backed securities 691,000 314,961 1,915,811 961,921
Other taxable interest & dividends 507,294 639,220 1,484,964 1,779,464
Nontaxable interest 192,550 75,248 374,014 228,180
Interest on deposits in other banks 1,879 740 3,055 3,496
Interest on federal funds sold 172,480 86,452 525,561 286,349
-------------- ------------- -------------- ------------
Total interest income 5,263,294 4,511,719 15,238,715 13,388,977
-------------- ------------- -------------- ------------
INTEREST EXPENSE:
Interest on deposits:
Time certificates of deposit of $100,000 and more 351,764 233,588 887,610 809,156
Other deposits 1,738,880 1,706,128 5,251,711 4,944,411
-------------- ------------- -------------- ------------
Total interest on deposits 2,090,644 1,939,716 6,139,321 5,753,568
Interest on short-term borrowings 267,901 138,469 598,708 370,175
Interest on Federal Home Loan Bank borrowings 281,583 1,228 571,275 1,228
-------------- ------------- -------------- ------------
Total interest expense 2,640,128 2,079,413 7,309,304 6,124,971
-------------- ------------- -------------- ------------
NET INTEREST INCOME 2,623,166 2,432,306 7,929,411 7,264,006
PROVISION FOR CREDIT LOSSES 60,000 30,000 186,000 145,000
-------------- ------------- -------------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR CREDIT LOSSES 2,563,166 2,402,306 7,743,411 7,119,006
-------------- ------------- -------------- ------------
NONINTEREST INCOME:
Service charges on deposit accounts 280,999 264,334 806,344 725,186
Other service charges 41,799 36,118 209,480 125,251
Gain (loss) on securities -- -- 21,281 --
Other operating income 14,002 8,885 49,797 95,255
-------------- ------------- -------------- ------------
Total noninterest income 336,800 309,337 1,086,902 945,692
-------------- ------------- -------------- ------------
NONINTEREST EXPENSES:
Salaries and employee benefits 1,174,636 1,102,150 3,449,227 3,166,820
Occupancy expense of bank premises 236,878 183,466 651,244 542,051
Equipment expenses 112,277 117,311 304,662 314,319
Other operating expenses 572,916 390,190 1,734,434 1,373,062
-------------- ------------- -------------- ------------
Total noninterest expenses 2,096,707 1,793,117 6,139,567 5,396,252
-------------- ------------- -------------- ------------
INCOME BEFORE INCOME TAXES 803,259 918,526 2,690,746 2,668,447
PROVISION FOR INCOME TAXES 172,042 297,589 743,275 872,784
-------------- ------------- -------------- ------------
NET INCOME $ 631,217 $ 620,937 $ 1,947,471 $ 1,795,662
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 0.34 $ 0.37 $ 1.05 $ 1.06
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
Comprehensive Statements of Income
(Unaudited)
Net Income $ 631,217 $ 620,937 $ 1,947,471 $ 1,795,662
Other comprehensive income, before tax:
Unrealized holding gains arising during period 175,520 60,661 158,873 205,036
Gain on the sale of securities -- -- 21,281 --
-------------- ------------- -------------- ------------
Other comprehensive income, before tax 175,520 60,661 180,154 205,036
Income tax (expense) benefit related to items of other
comprehensive income (59,677) (20,625) (61,252) (69,712)
-------------- ------------- -------------- ------------
Other comprehensive income, net of taxes 115,843 40,036 118,902 135,324
-------------- ------------- -------------- ------------
COMPREHENSIVE INCOME $ 747,060 $ 660,973 $ 2,066,373 $ 1,930,986
-------------- ------------- -------------- ------------
-------------- ------------- -------------- ------------
</TABLE>
3
<PAGE>
Union National Bancorp
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ending
September 30,
1998 1997
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,947,471 $ 1,795,662
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for credit losses 186,000 145,000
Depreciation and amortization 513,551 475,694
Gain on sales of other real estate and other assets 5,000 (21,357)
Deferred income taxes (132,301) 342,583
Net decrease (increase) in accrued interest receivable (116,552) (169,616)
Net increase (decrease) in accrued expenses & other liabilities 29,654 139,307
Other - net 432,561 (18,226)
------------------ -------------------
Net cash provided by operating activities 2,865,384 2,689,047
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities (44,853,695) (22,878,503)
Purchases of held to maturity securities (11,743,300) 10,849,120
Proceeds from maturities of available for sale securities 35,381,100 -
Proceeds from maturities of held to maturity securities 3,357,879 3,308,122
Proceeds from sales of available for sale securities 4,547,969 -
Proceeds from sales of other real estate and other assets - 306,066
Net increase in loans (3,980,544) (1,544,634)
Bank premises and equipment acquired (458,644) (577,771)
------------------ -------------------
Net cash used in investing activities (17,749,235) (10,537,600)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,880,814 9,597,654
Proceeds from dividend reinvestment plan 220,660 0
Net increase (decrease) in short-term borrowings 18,779,593 14,155,322
Cash dividends paid (537,169) (408,660)
------------------ -------------------
------------------ -------------------
Net cash provided by financing activities 26,343,898 23,344,316
------------------ -------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,460,047 15,495,763
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,967,953 15,953,932
------------------ -------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $25,428,000 $31,449,695
------------------ -------------------
------------------ -------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $7,288,581 $6,124,970
------------------ -------------------
------------------ -------------------
Income taxes paid 797,000 771,000
------------------ -------------------
------------------ -------------------
NON-CASH INVESTING ACTIVITIES
Transfer from loans to forclosed real estate
- 375,000
------------------ -------------------
------------------ -------------------
</TABLE>
4
<PAGE>
Union National Bancorp, Inc.
Notes 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.
Note 2 - Recent accounting pronouncements: The FASB has issued Statements of
Financial Accounting Standards No. 128 "Earning Per Share" in February 1997 for
the year ending on or after December 15, 1997, and No. 130 "Reporting
Comprehensive Income" in June 1997, with an effective date for years beginning
after December 15, 1997. The Company has adopted both of these standards as
required.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
This section of the report contains forward looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, including
statements relating to the Company's beliefs, expectations, anticipations and
plans regarding, among other things, general economic trends. interest rates,
product expansions and other matters. Such statements are subject to numerous
uncertainties, such as federal monetary policy, inflation, employment,
profitability and consumer confidence levels, the health of the real estate and
construction market in the Company's market area, the Company's ability to
develop and market new products and to enter new markets, and other factors, and
as such, there can be no assurance that future events will develop in accordance
with the forward looking statements contained herein.
In 1994, Union National Bancorp, Inc. commenced operations as the
parent company of its sole subsidiary, The Union National Bank of Westminster,
("Bank") which has conducted the business of banking since 1816. Since the Bank
is the primary possession of the holding company, the assets and liabilities of
the holding company are made up almost entirely of its investment in the Bank.
The Company's principal source of income is from dividends received from the
bank.
Total assets were $279.2 million at September 30, 1998, an increase of
$28.8 million or 11.5% over one year earlier. The primary funding source for the
asset growth is strong growth in investments from our customers in sweep
accounts and certificates of deposit. Loan volume has continued to increase
throughout 1998. As demand increases other funding sources are being explored to
sustain this growth. For example, the Bank has taken advantage of competitive
rates on borrowings from the Federal Home Loan Bank.
Net income rose $151,808 or 8.45% in the first nine months of 1998 to
$1,947,471 from net income of $1,795,663 in the same period of 1997. The
annualized return on average assets for the nine month period ended September
30, 1998 and 1997 was .99% and 1.05%, respectively. The annualized return on
average equity was 12.51% for the nine months ended September 30, 1998 and was
12.97% for the nine months ended September 30, 1997.
Securities Portfolio
Total holdings in the investment portfolio at September 30, 1998 were
$85,692,807 and at year-end were $72,190,599 in 1997. In aggregate, investment
securities increased $13,502,208 or 18.70% in the first nine months of 1998. The
substantial increase in the security portfolio is due to management's decision
to utilize borrowed funds from the Federal Home Loan Bank. The Bank leveraged
its equity by putting on the books a matched position of $10,000,000 with an
after tax spread of 1%. The total portfolio has a duration of 3.09 years on
September 30, 1998. These maturities represent estimates of the actual life on
instruments considering mortgaged-backed paydowns and puts for tax free
securities.
Union National Bank has formed a new passive investment company, Union
National Delaware Holding, Inc., (UNDH). First Union is administering general
services for UNDH. The Bank has dividended $41,207,245 in various securities to
UNDH in June of 1998. The passive investment company will reduce cost, producing
a benefit to the Bank's net income.
5
<PAGE>
The table below presents the securities portfolios mix as of September 30,
1998 when compared to year-end 1997.
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
September 30,1998 December 31,1997 September 30,1997 December 31,1997
------------------ ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
U.S. government securities and agencies $25,065,894 $37,011,558 $ 729,123 $ 879,382
State & county municipals 572,100 577,400 16,461,845 5,233,663
Government mortgaged-backed 36,802,083 19,786,641 4,699,821 7,306,794
Other securities 1,361,941 1,395,161 -- --
------------------ ------------------ ----------------- ------------------
Total Investment Securities $63,802,018 $58,770,760 $21,890,789 $13,419,839
------------------ ------------------ ----------------- ------------------
------------------ ------------------ ----------------- ------------------
</TABLE>
Loan Portfolio
Total loans outstanding on September 30, 1998 were $162,121,655 and on
December 31,1997 were $158,347,687. The loan portfolio increased $3,773,968 in
the first nine months of the year. The loan portfolio represented 58.1% of total
assets on September 30, 1998 and 63.1% of total assets on December 31,1997. The
table below presents the loan portfolio mix as of September 30, 1998 compared to
year ended 1997.
<TABLE>
<CAPTION>
September 30,1998 December 31,1997
----------------- ----------------
<S> <C> <C>
Construction and land development $7,362,613 $5,893,105
Residential real estate - mortgages 42,383,226 43,761,573
Commercial real estate - mortgages 64,424,273 57,485,007
Commercial 29,517,949 29,034,766
Consumer 18,789,294 22,609,757
----------------- ----------------
Gross Loans 162,477,355 158,784,208
Net deferred loan fees and costs (355,700) (436,521)
----------------- ----------------
Total Loans 162,121,655 158,347,687
----------------- ----------------
----------------- ----------------
</TABLE>
The Company's loan portfolio is composed of commercial and residential real
estate secured loans, commercial loans, and consumer installment loans. Most
residential mortgages are held for investment purposes and the majority have a
loan to value ratio of less than 80%. For those having a loan to value ratio
greater than 80%, Private Mortgage Insurance is required to reduce risk. The
Company is involved in selling mortgages on the secondary market. Commercial
real estate-secured, lines of credit, tax-exempt loans through local
municipalities, and demand notes consist of well-seasoned credits and new
ventures that are well collaterlized. The consumer portfolio is comprised of
installment loans for purposes such as vehicle purchases, debt consolidation,
home improvement, and indirect auto loans purchased from approximately seven
dealerships. In 1997, indirect lending decreased significantly as a percentage
of the total consumer portfolio. Continued emphasis during the first nine months
of 1998 has been in home equity loans (fixed term and variable rate lines of
credit) which are secured by the borrower's residence. Use of debt to income
ratios and recent Credit Bureau scores assist to minimize losses in the consumer
portfolio. The Company does not engage in foreign lending, and involvement with
speculative real estate and land development is minimal. The Company strives to
meet the needs of the community by lending in the Carroll County market area.
The Carroll County market area is Carroll County and ten miles into neighboring
counties, including Pennsylvania. Management continues to review rates, terms,
and alternative opportunities to remain competitive in our market, while
continuing to assess credit worthiness and risk.
6
<PAGE>
Allowance for Credit Losses
The allowance for credit losses on September 30,1998 was $1,772,536 and on
December 31,1997 was $1,793,112. The ratio of allowance to total loans was 1.09%
for the first nine months of 1998 and 1.13% for the year-ended 1997.
Analysis of the Allowance for Credit Losses
<TABLE>
<CAPTION>
Description Amount
<S> <C> <C>
Balance at beginning of period 1/1/98 $1,793,112
----------
Loans charged off (307,920)
Recoveries 101,344
Provision charged to operating expenses 186,000
Balance at end of period 9/30/98 $1,772,536
----------
----------
Net Charge-offs as a percentage of average total loans First nine months 1.12%
</TABLE>
The methodology used in determining the allowance is calculated quarterly
and is applied in accordance with Banking Circular 201. Its assesses risk based
on the following categories: (1) levels of and trends in delinquencies and
nonaccruals, (2) trends in volume and terms of loans, (3) effects of any change
in lending policies and procedures, (4) experience, ability, and depth of
lending management and staff, (5) national and local economic trends and
conditions, and (6) concentrations of credit that may effect loss experience. In
addition, historical loss data is also considered. A "reserve range" is
determined from this process. A comparison is then made of the actual allowance
balance to the estimated potential loss in the entire portfolio to determine the
adequacy of the current reserve as well as a current period provision for credit
losses.
Deposits
The Company uses deposits as the primary source for funding asset growth.
The Company has experienced continuous growth of deposits, especially in
certificates of deposit. The Company offers individuals, businesses and
non-profit organizations a variety of accounts. These accounts, including
checking, savings, money market, and certificates of deposits, are obtained
primarily from the communities that the Company serves.
Total deposits were $213,519,610 on September 30, 1998 and $205,638,796 on
December 31, 1997. Certificates of deposits, which grew $8.1 million or 7.6%,
represents 54.2% of the total deposit portfolio as of September 30, 1998. In
addition, checking accounts, money market, regular savings, and public fund
accounts maintained steady growth of $8.5 million or 7.6%. Management continues
to develop competitive products and rates to spur continuous growth in core
deposits.
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.
Securities sold under agreement to repurchase have averaged $16,297,784
during the first nine months of 1998 compared to $11,771,647 at the year-ended
1997. At September 30, 1998 they totaled $22,555,966, and at year-end 1997, they
totaled $13,776,373.
The Bank borrowed $10,000,000 from the Federal Home Loan Bank in the second
quarter of 1998. These funds were obtained to promote further growth in the loan
and security portfolios. Management believes the spread between the cost of
funds on these borrowing and investment return in the loan and securities
portfolios will increase the Bank's net interest margin.
Liquidity
Traditionally, the Bank has maintained a strong liquidity position due to
its concentration of core deposits such as regular savings and checking
accounts. The Bank considers a high percentage of its money market accounts and
certificates of deposit as core deposits. Federal funds sold are the Bank's most
liquid earning asset. Other sources include securities classified as available
for sale. In addition to these sources, the Bank has lines of credit totaling
$33 million available from correspondent banks as of September 30, 1998.
On September 30, 1998 securities available for sale and federal funds sold
totaled $81,014,916 compared with 64,843,156 on December 31, 1997. These funds
averaged $75,999,992 during the nine months ended September 30, 1998 and
$58,427,657 for the
7
<PAGE>
year ended December 31, 1997. Liquidity is also provided by managing the
maturities of loans, securities, and certificates of deposit.
Capital Management
The Company's capital position is presented in the following table:
<TABLE>
<CAPTION>
September 30, December 31 For Capital
1998 1997 Adequacy Purposes
-------------- ------------- -----------------
<S> <C> <C> <C>
Tier 1 capital to risk weighted assets 12.0% 11.7% 4.0%
Total capital to risk weighted assets 13.1% 12.8% 8.0%
Capital leverage ratio 8.2% 8.0% 4.0%
</TABLE>
Net Interest Income
Net interest income is the major component of the Bank'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 based on tax-equivalent net interest income (income plus
the tax savings from tax-exempt loans and investments) divided by average
earning assets and represents the Bank's net yield on its earning assets.
For the first nine months, net interest income before provision for loan
losses was $7,929,411 in 1998 and $7,264,007 in 1997. This represents an
increase of $ 665,404 or 9.2% for 1998. For the second quarter of 1998 net
interest income before provision for loan losses was $2,623,167 up $190,861 or
7.8% from $2,432,306 for the second quarter 1997. Managing the net interest
margin is one of the primary focuses of the Asset / Liability Committee.
Monthly, the committee examines the "gap" and it's assumptions for their
validity, and assesses the margins movement relative to these factors. The net
interest spread represents the different between the yield on earning assets and
the cost of interest bearing liabilities, which declined to 3.55% in the first
nine months of 1998 from 3.92% at December 31, 1997.
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS (Unaudited)
Cash and due from banks $ 6,467,091 $ 5,849,500
Investments 79,921,829 65,083,925
Federal funds sold 12,567,830 8,603,533
Net loans 158,058,227 146,754,495
Other assets 7,752,837 7,915,022
------------- -------------
TOTAL ASSETS $ 264,767,814 $ 234,206,475
------------- -------------
------------- -------------
LIABILITIES
Deposits 212,513,970 199,434,803
Other borrowings 29,924,157 14,505,347
Other liabilities 1,444,240 1,381,852
------------- -------------
TOTAL LIABILITIES $ 243,882,367 $ 215,322,002
------------- -------------
------------- -------------
Common stock 16,788 9,041
Capital surplus 8,570,716 8,352,643
Retained earnings 12,111,622 10,536,738
Accumulated other comprehensive income 186,321 (13,949)
------------- -------------
TOTAL CAPITAL $ 20,885,447 $ 18,884,473
TOTAL LIABILITIES & CAPITAL $ 264,767,814 $ 234,206,475
------------- -------------
------------- -------------
</TABLE>
8
<PAGE>
Noninterest income
Total non-interest income for the first nine months of 1998 was $1,086,902
up $141,210 or 14.9% from $945,692 for the first nine months in 1997. Total
non-interest income for the three months ended September 30, 1998 and 1997
respectfully were $336,729 and $309,337 an increase of $27,392 or 8.9%. In
comparison to 1997 figures, service charges on deposit accounts increases
$81,158 in for the nine months ended September 30, 1998 and $16,665 for the
three months ended September 1998. This increase is as a result of the Bank
beginning to charge foreign ATM activity, a practice all other local competitors
have been practicing. Additional off sight ATM's further increase non-interest
income. A strong emphasis on increasing debit card services will help to
continue to increase non-interest income in the fourth quarters of 1998. Early
in 1998, management decided to concentrate on originating mortgages for sale on
the secondary market. In the first nine months of 1998, commissions from
non-funded loans were $63,929 an increase from $10,392 for the first nine month
of 1997. Plans are to continue to in the secondary market to further other
operating income. The Bank has repositioned various securities in it's
investments portfolio, selling mortgaged-backed securities that have high
premiums and reinvested in mortgage-backed securities that are closer to par.
For the three months ended September 30, 1998, gains on the sale of securities
were $21,281, a 100% increase over the same period in 1997.
Noninterest Expense
Noninterest expense for the first nine months of 1998 was $6,139,567 an
increase of $743,315 or 13.8% from $5,396,252 in 1997. Non-interest expense for
the three months ended September 30, 1998 was $2,096,709 an increase of $303,592
or 16.9% from $1,793,117 for the same time period of 1997. Three major areas
that make up noninterest expense are salaries and benefits, occupancy and
equipment, and other operating expense.
Salaries and benefits for the first nine months of 1998 totaled
$3,449,227, up $282.407 or 8.9% from $3,166,820 in the first nine months of
1997. For the three months ended September 30, 1998, salaries and benefits were
$1,174,635, up $72,485 or 6.6% from $1,102,150 for the three months ended
September 30,1997. Personnel expense is the largest segment of noninterest
expense. It represented 56.2% of the total for the nine-month ended September
30, 1998. Management increased personnel in both the Investment Service area and
the Lending area. It is believed that the increase in personnel expense will be
offset by the revenues generated.
Occupancy and equipment expenses for the first nine months totaled $955,906
in 1998, an increase of $99,536 or 11.6% from $856,370 for the first nine months
of 1997. For the three months ended September 30, 1998, occupancy and equipment
was $349,157 up $48,380 or 16.1% from $300,777 for the three months ended
September 30, 1997. Rent expense and depreciation of fixed assets are the
largest segments of occupancy and equipment. The increase is primarily due to
expanding our branch network into the Mount Airy area, which increases rent
expense. Rent increased for the first nine months $43,109 or 22.8% from $189,260
in 1997 to $232,369 in 1998.
Other operating expense totaled $1,734,434 for the first nine months of
1998, an increase of $361,372 or 26.3% from $1,373,062 for the first nine months
of 1997. For the three months ended September 30, 1998, other operating was
$572,916, up $182,726 or 46.8% from $390,190 for the three months ended
September 30,1997. Advertising and computer service fees are the two largest
components of other operating expense. Various advertising campaigns such as the
Mount Airy branch opening, check card promotions, and year 2000 issues have
increased advertising expense for the first nine months from $59,106 in 1997 to
$112,338 in 1998. It is felt that each of these campaigns will add value in
asset growth, growth of income, and customer relations.
Year 2000
Union National Bank continues to address the many aspects of Year 2000
as they relate to the Company. The initial assessments of risks associated with
suppliers, service providers, third parties and material commercial customers
have been completed. Plans call for ongoing communications with these providers
and customers over the course of the project to monitor their Year 2000
progress.
Testing of the company's mission critical vendors and systems has commenced and
is on target to be substantially completed by December 31, 1998. Fiserv,
Incorporated and Information Technology, Incorporated provide the core account
software and processing environment that are used to calculate and process
customer transactions. Phase one of testing at the Fiserv data center has
demonstrated that this core software successfully processes dates in and beyond
the Year 2000. An evaluation of hardware and software components located in our
facilities has determined that all of the remaining production systems utilize
"off the shelf" software products with limited customization. Systems utilizing
embedded microprocessors, such as elevators and security systems have been
evaluated and will not be impacted by the Year 2000. The project costs are
anticipated to be $85,000 and as such are not
9
<PAGE>
expected to have a material impact on future operating results or the financial
condition of the Company. As the evaluation is ongoing, actual results could
differ from what has been anticipated.
One of the most significant risks the Company faces is the potential for
liquidity issues resulting from public panic or Year 2000 related financial
difficulties of commercial customers. In anticipation of this possibility, the
Company has developed and implemented a comprehensive consumer awareness program
that includes customer educational seminars, brochures, posters, direct mail
pieces and statement inserts. Relationship managers have been meeting with
material commercial customers to raise awareness, to evaluate the progress of
their project and to provide status reports of the Company's Year 2000 project.
The financial manager has addressed the potential increase on liquidity demands
in the Company's contingency plans.
Union National Bank is developing contingency plans that outline back up
arrangements for all major functions of the Company. Once formalized,
contingencies will be tested to verify they provide satisfactory results and
maintain adequate service levels. In addition, the Company has established
target dates for its mission critical service providers to certify their
systems. The Company will secure alternate providers if current vendors do not
adequately meet the target dates.
The Company's Year 2000 project is on schedule to conclude by July 1, 1999.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(10) Material Contracts
Employment agreement between the Union National Bank of
Westminster and Virginia W. Smith, President, is incorporated by reference form
Union National's Form 8-K, filed with the Commission on October 26, 1998
(Registration No. 0-22523)
(20)Other Documents or Statements to Security-holders
Press release announcing stock action approved by the Board of
Directors is incorporated by reference form Union National's Form 8-K, filed
with the Commission on October 26, 1998 (Registration No. 0-22523)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Union National Bancorp, Inc. (Registrant)
November 5, 1998 By: /s/ Virginia W. Smith
-------------------------
Virginia W. Smith
President and Chief Executive Officer
November 5, 1998 By: /s/ Gabrielle M. Peregoy
----------------------------
Gabrielle M. Peregoy
Vice President
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FOR UNION
NATIONAL BANCORP'S FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000919871
<NAME> UNION NATIONAL BANCORP
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<PERIOD-START> JAN-01-1998
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