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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 31, 1998
Commission File Number 000-22523
UNION NATIONAL BANCORP, INC.
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<S> <C>
Maryland 52-1862338
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
117 East Main Street, Westminster, MD 21157 (410) 848-7200
(Address of principal executive offices) (Telephone number)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
YES {X} NO { }
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy of information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K { }
As of February 14, 1999, Union National Bancorp had 1,853,748 shares of
common stock outstanding, par value $.01.
Documents Incorporated by Reference
Portions of the Union National Bancorp. Inc. 1998 Annual Stockholders
Report for the year ended December 31, 1998 , Parts I,II, IV
Portions of Union National Bancorp Inc. Proxy Statement dated March 20,
1999, Part III
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PART I
ITEM 1. BUSINESS
General
Union National Bancorp, Inc. was incorporated under the law of the
State of Maryland on January 19, 1994, and is a one-bank holding company
headquartered in Westminster, Maryland.
Union National Bancorp is primarily engaged in commercial and retail
banking services and in business related to banking services through its
subsidiary, The Union National Bank of Westminster. Union National Bank was
founded in Westminster in 1816 under the name of Bank of Westminster, and was
briefly known during the period of 1821 to 1830 as a branch of the Farmers &
Mechanics of Frederick. In 1865, Union National bank became known as "The Union
National Bank of Westminster". Union National Bank is currently in its 183rd
year of operation.
Union National Bank has nine full service banking offices in Carroll
County, four of which are located in Westminster, one in Finksburg, one in
Hampstead, one in Eldersburg, one in Sykesville, and as of January 15, 1998, one
in Mount Airy. Union National Bank also has one loan production office, which is
located in the same building as Union National Bank's office headquarters in
Westminster, Maryland.
Lending, Deposit and Investment Activities
Lending Activities:
Union National Bank provides a full range of commercial and retail
banking services designed to meet the borrowing and depository needs of small
and medium size businesses and consumers in local areas. Substantially all of
Union National Bank's loans are to customers located within its service area.
Union National Bank has no foreign loans or highly leveraged transaction loans,
as defined by the Federal Reserve Board ("FRB"). All of the loans in Union
National Bancorp's loan portfolio have been originated by Union National Bank.
Union National Bank 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; senior officers or various loan committees must approve large loans.
Union National Bank's management information systems and loan review policies
are designed to monitor lending sufficiently to ensure adherence to Union
National Bank's loan policies.
The commercial loans offered by Union National Bank include (i)
commercial real estate loans, (ii) working capital and other commercial loans,
(iii) construction loans, (iv) SBA-guaranteed loans, and (v) agricultural loans.
Union National Bank'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 a balloon payment by
the fifteenth year. Personal guarantees are obtained on nearly all commercial
loans. Credit analyses, loan review and an effective collection process is also
used to minimize any potential losses. Union National Bank employs four
full-time commercial loan officers.
Consumer loans offered by Union National Bank 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
credit).
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. Union National Bank 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 Union National Bank's
installment
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loan portfolio is secured by motor vehicles and are fixed-rate loans. Credit
checks, credit scoring and debt to income ratios of 40% or less are used to
qualify borrowers. Home equity products include both fixed-rate term products
and open-end revolving lines of credit with maximum loan to value ratios of 85%
of current appraisal to 80% of current tax assessment.
Deposit Activities
Union National Bank also offers a full range of deposit and personal
banking services insured by the Federal Deposit Insurance Corporation ("FDIC"),
including (i) commercial checking and small business checking products, (ii)
trust and cash management services, (iii) retirement accounts such as Individual
Retirement Accounts ("IRA") and Simplified Employee Pension accounts, retail
deposit services such as certificates of deposit, money market, savings
accounts, checking account products and Automated Teller Machines ("ATM"), Point
of Sale and other electronic services, and (iv) other personal miscellaneous
services such as safe deposit boxes, foreign draft, foreign currency exchanges,
night depository services, travelers checks, merchant credit cards, debit card
services, direct deposit of payroll, U.S. savings bonds, official bank checks
and money orders. Union National Bank now provides 24-hour access to customer
information through its automated voice response system. This system provides
customers with balances, recent transactions, pending transactions, the ability
to transfer funds between accounts, and receive facsimile statements. Union
National Bank offers credit cards and a full range of trust services through one
of its correspondent banking relationships.
The principal sources of funds for Union National Bank are core
deposits (demand deposits, interest-bearing transaction accounts, money market
accounts, savings accounts and certificates of deposits). Union National Bank
solicits these deposits from individuals, businesses, foundations and government
authorities. Substantially all of Union National Bank's deposits are from the
local market areas surrounding each of its offices.
Investment Portfolio Activities
Union National Bank's investment portfolio has several objectives. A
key objective is to provide a balance in Union National Bank's asset mix of
loans and investments that is consistent with its liability structure, and to
assist in management of interest rate risk. The investments augment Union
National Bank'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 view of the above objectives, the
portfolio is treated conservatively by management, and only securities that pass
conservative investment criteria are purchased. Union National Bank does not
engage in any derivatives trading. The portfolio will commonly fluctuate between
30% and 40% of Union National Bank's assets. In May of 1998 Union National Bank
formed a Passive Investment Company in Wilmington Delaware, Union National
Delaware Holding Inc. Union National Delaware Holding is administered by
Delaware Trust Capital Management a subsidiary of First Union. As of December
31,1998 63% of the total security portfolio was at Union National Delaware
Holding.
Additional Activities
Union National Bank 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
Union National Bank 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 Union National Bank. Also, certain of these institutions have
significantly higher lending limits than Union National Bank, and may provide
various services for their customers, such as trust services, which Union
National Bank does offer directly to its customers.
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Union National Bank 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 1998 publication by the Federal
Deposit Insurance Corp., at June 30, 1998 Union National Bank had 13.19% market
share of deposits held by the Carroll County branches of banks, savings
associations, and credit unions. Only one other institution had larger deposit
market share (26.53%) for their Carroll County branches.
Financial institutions compete generally on the basis of rate and
service. In its lending business, Union National Bank is subject to increasing
competition from consumer finance companies.
While Union National Bank will seek to remain competitive with the
interest rate that it charges on loans and offers on deposits, Union National
Bank 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 Union National
Bank's markets, smaller profitable banks are gaining opportunities where larger
institutions exit markets that are only marginally profitable for them.
Management of Union National Bank believes it can profitably utilize such
opportunities by establishing a local presence in these areas to provide
community-banking services.
Supervision and Regulation
GENERAL. Union National Bancorp and Union National Bank are extensively
regulated under federal and state law. Generally, these laws and regulations are
intended to protect depositors, not stockholders. The following is a summary
description of certain provisions of certain laws that affect the regulation of
banks and bank holding companies. 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 Bancorp and Union National Bank.
FEDERAL BANK HOLDING COMPANY REGULATION AND STRUCTURE. Union National
Bancorp 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 Federal Reserve Board. Union National is required to file
annual and quarterly reports with Federal Reserve Board and to provide the
Federal Reserve Board with such additional information as the Federal Reserve
Board may require. The Federal Reserve Board may conduct examinations of Union
National Bancorp and its subsidiaries.
With certain limited exceptions, Union National Bancorp is required to
obtain prior approval from the Federal reserve Board 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
Bancorp is required to give 60 day written notice of the acquisition to Federal
Reserve Board, 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 Federal Reserve Board, Union National Bancorp may acquire more than 5% of
the assets or outstanding shares of a company engaging in non-bank activities
determined by the Federal Reserve Board to be closely related to the business of
banking or of managing or controlling banks. The Federal Reserve Board 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 Bancorp's ability to
obtain funds from Union National Bank for its cash needs, including funds for
the payment of dividends, interest and operating expenses. Further, subject to
certain
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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 or property of furnishing of services. For example, Union
National Bank may not generally require a customer to obtain other services from
itself or Union National Bancorp, 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 Federal Reserve Board 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 Federal Reserve Board
may charge the bank holding company with engaging in unsafe and unsound
practices for failure to commit resources to a subsidiary bank when required. A
required capital injection may be called for at a time when the holding company
does not have the resources to provide it. In addition, depository institutions
insured by the Federal Deposit Insurance Corp. can be held liable for any losses
incurred by, or reasonably anticipated to be incurred by, the Federal Deposit
Insurance Corp. in connection with the default of, or assistance provided to, a
commonly controlled Federal Deposit Insurance Corp.-insured depository
institution. Accordingly, in the event that any insured subsidiary of Union
National Bancorp causes a loss to Federal Deposit Insurance Corp., other insured
subsidiaries of Union National Bancorp could be required to compensate Federal
Deposit Insurance Corp. by reimbursing it for the estimated amount of such loss.
Such cross guaranty liabilities generally are superior in priority to the
obligations of the depository institution to its stockholders due solely to
their status as stockholders and obligations to other affiliates.
STATE BANKING HOLDING COMPANY REGULATIONS. As a Maryland bank holding
company, Union National Bancorp 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 its Maryland State chartered bank or trust company
cannot directly or indirectly acquire banking or non-banking subsidiaries or
affiliates until the bank or trust company receives the approval of the
Commissioner.
FEDERAL BANK REGULATION. Union National Bancorp's banking subsidiary is
a federally-chartered national bank regulated by the Office of Comptroller of
the Currency ("OCC"). The Office of Comptroller of the Currency may prohibit the
institution 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 institution they regulate to prohibit or correct activities that 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, and the enforcement of any such mechanisms through restraining orders
or other court actions.
Union National Bank is subject to certain restrictions on extensions of
credit to executive officers, directors, principal stockholders or any related
interest of such persons which generally require that such credit extensions be
made on substantially the same terms as are available to third persons dealing
with Union National Bank and not involve more than the normal risk of repayment.
Other laws tie maximum amount that 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 Office of Comptroller of the
Currency, have adopted standards covering internal controls, information systems
and internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, 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 be
subject to institution to regulatory sanctions. Union National Bancorp, on
behalf of Union National Bank,
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believes that it meets substantially all standards that have been adopted.
FDICIA also imposed new capital standards on insured depository institutions.
See "Supervision and Regulation-Capital Requirements."
Before establishing new branch offices, Union National Bank must meet
certain minimum capital stock and surplus requirements and the Bank must obtain
Office of Comptroller of the Currency approval.
DEPOSIT INSURANCE. As a Federal Deposit Insurance Corp. member
institution, Union National Bank's deposits are insured to a maximum of $100,000
per depositor through the Bank Insurance Fund ("BIF"), administered by the
Federal Deposit Insurance Corp., and each institution is required to pay
semi-annual deposit insurance premium assessments to the Federal Deposit
Insurance Corp.. The BIF assessment rates have a range of zero to 27 cents for
every $100 in assessable deposits. Banks with no premium are subject to an
annual statutory minimum assessment.
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 agreements, which are recorded as off balance sheet items. Under these
guidelines, nominal dollar amounts of asset 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 to Tier 1 capital and limited
amounts of Tier 2 capital) and Tier 1 capital. "Tier 1", or core capital,
include, 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
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 31,1998 Union National Bank's ratio of Tier 1 to risk-weighted assets
stood at 12.1% and its ratio of total capital to risk-weighted assets stood at
13.1%. 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,
1998, Union National Bank's leverage capital ratio was 8.2%
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 Union National
Bank's interest rate risk ("IRR") exposure. The standards for measuring the
adequacy and effectiveness of a banking organization's interest rate risk
management included 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. Union National Bank has internal interest rate
risk models that are used to measure and monitor interest rate risk.
Additionally, the regulatory agencies have been assessing interest rate risk on
an informal basis for several years. For these reasons, Union National Bancorp
does not expect the addition of interest rate risk evaluation to the agencies'
capital guidelines to result in significant changes in capital requirements for
Union National Bank.
Failure to meet applicable capital guidelines could subject a banking
organization to a variety of enforcement actions, including limitations on its
ability to pay dividends, the issuance by the applicable regulatory authority of
a capital directive to increase capital and, in the case of depository
institutions, the termination of
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deposit insurance by the Federal Deposit Insurance Corp., 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 Union National Bank to grow and could restrict the amount of
profits, if any, available for payment of dividends to the Company.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In
December, 1991, Congress enacted FDICIA, which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA provides
for, among other things, (i) publicly available annual financial condition and
management reports for financial institutions, including audits by independent
accountants, (ii) the establishment of uniform accounting standards by federal
banking agencies, (iii) the establishment of a "prompt corrective action" system
of regulatory supervision 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 Federal Deposit
Insurance Corp. insurance funds and the implementation of risk-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 six-tiered
system for measuring the capital adequacy of the depository institution 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." Union National Bank is currently classified as
"well-capitalized." An institution may be deemed by 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 cash dividend) or paying any
management fees to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subjected 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
undercapitalized 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 that fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the Federal Deposit Insurance Corp. or the appointment
of a receiver or conservator for the institution. FDICIA also limits the
circumstances under which Federal Deposit Insurance Corp. 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 the state to
opt-out completely or to set an earlier effective date. Maryland generally
established an earlier effective date of September 29,1995.
NASDAQ SMALLCAP MARKET REQUIREMENTS. "The Nasdaq Stock Market" or
"Nasdaq" is a highly-regulated electronic securities market comprised of
competing Market Makers whose trading is supported by a
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communications network linking them to quotation dissemination, trade reporting,
and order execution systems. The Nasdaq Stock Market consists of two distinct
market tiers: the Nasdaq national Market and The SmallCap Market. The Nasdaq
stock market is operated by The Nasdaq Stock Market, Inc., a wholly-owned
subsidiary of the National Association of Securities Dealers, Inc. Companies who
publicly trade stock on the Nasdaq SmallCap market are required to submit
certain financial documents, in conjunction with forms required by regulatory
authorities. All reports and other documents must be provided to Nasdaq on or
before the date they are required to be filed with the Securities Exchange
Commission or another regulatory authority. Any company listing on Nasdaq
SmallCap Market must meet minimum financial qualification and must continue to
meet financial qualifications to maintain it's listing. The Nasdaq Stock Market
also requires listing companies meet certain standards of corporate governance.
MONETARY POLICY. The earnings of a bank holding company are affected by
the policies of regulatory authorities, including the Federal Reserve Board, in
connection with the Federal Reserve Board's regulation of the money supply.
Various methods employed by the Federal Reserve Board are open market operations
in United States Government securities, changes in the discount rate on member
bank borrowings 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 Federal Reserve Board 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 December 31,1998, Union National Bank had the equivalent of 125
full-time employees. A collective bargaining unit represents none of its
employees. Union National Bank considers relations with its employees to be
good.
ITEM 2. PROPERTIES
Union National bank owns the following properties:
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Offices Location Additional Services
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Corporate Headquarters 117 East Main Street
Westminster, MD 21157
Loan Operations 118 East Main Street
Westminster, MD 21157
East Main Street 111 East Main Street Drive-Up Window
Westminster, MD 21157
Sykesville 7564 Main Street Automatic Teller Machine
Sykesville, MD 21784
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Union National bank leases the following properties:
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Branch Location Additional Services
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West Main Street 132 West Main Street Drive-Up Window
Westminster, MD 21157 Automatic Teller Machine
Finksburg 2926 Baltimore, Blvd. Drive-Up Window
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Finksburg, MD 21048 Automatic Teller Machine
140 Village 588 Baltimore, Blvd. Drive-Up Window
140 Village Shopping Center Automatic Teller Machine
Westminster, MD 21157
Eldersburg 5420 Klee Mill Road Drive-Up Window
Eldersburg, MD 21784 Automatic Teller Machine
Hampstead 1631 North Main Street Drive-Up Window
Hampstead, MD 21102 Automatic Teller Machine
Cranberry 400 North Center Street
Westminster, MD 21157 Automatic Teller Machine
(within shopping mall)
Mount Airy 400 E. Ridgeville Blvd. Drive-Up Window
Mt. Airy, MD 21771 Automatic Teller Machine
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Remote ATM Location
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Tevis Oil 74 West Main Street
Westminster Shell Westminster, MD 21157
Eagle Oil 8 Sullivan Rd.
Westminster Exxon Westminster, MD 21157
Eagle Oil 822 South Main St.
Hampstead Exxon Hampstead, MD 21074
Tevis Oil 1155 South Main St.
Hampstead Shell Hampstead, MD 21074
Eagle Oil 251 E. Baltimore Ave.
Taneytown Exxon Taneytown, MD 21787
Carroll Community College 1601 Washington Rd.
Westminster, MD 21157
Emmitsburg Exxon 110 Silo Hill Rd.
Emmitsburg, MD
Cranberry Food Court 400 North Center Street
Westminster, MD 21157
(within shopping mall)
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ITEM 3. LEGAL PROCEEDINGS
Union National Bancorp and Union National Bank are subject to various
legal proceedings which are incidental to their business. In the opinion of
management, the liabilities (if any) resulting from such legal proceedings will
not have a material effect on the consolidated financial statements or
consolidated ratios of Union National Bancorp and Union National Bank.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no matters that were submitted to a vote of the security
holders during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDERS
MATTERS
Union National Bancorp has been traded publicly on the Nasdaq Small Cap
Market as of April 1998. It is listed under the trading symbol UNNL. The low and
high ranges presented in the table below prior to this date are based on trades
reported through the over the counter bulletin board. Since this date price
information is reflected of actual sale price quoted on the Nasdaq SmallCap
Market. On January 27, 1998, Union National Bancorp's Board of Directors
authorized a two-for-one stock split, effected in the form of a 100% stock
dividend, thereby increasing the number of shares authorized on that date to
1,674,870, and in September 1998 authorized a 10% stock dividend. The following
table reflects stock prices for Union National Bancorp's shares to the extent
such information is available, and dividends declared with respect thereto
during the preceding two years. The number of common shares and per share
amounts have been restated to reflect the stock split and 10% stock dividend.
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1998 1997 1996
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Price Range Dividends Price Range Dividends Price Range Dividends
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Low High Declared Low High Declared Low High Declared
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1st Quarter $16.82 $22.75 $0.091 $14.55 $16.82 $0.068 $12.73 $12.73 $0.064
2nd Quarter 19.09 30.45 0.095 15.00 16.93 0.073 14.09 14.55 0.064
3rd Quarter 25.45 28.18 0.100 15.11 16.82 0.082 13.64 15.34 0.064
4th Quarter 29.00 32.00 0.110 15.11 17.27 0.086 14.55 16.31 0.068
</TABLE>
As of February 4, 1999, the approximate number of holders of record of
Union National Bancorp's shares was 473. At such date, 1,853,748 shares were
outstanding. Dividends are paid quarterly.
LIMITS ON DIVIDENDS AND OTHER PAYMENTS. Union National Bancorp's
current ability to pay dividends is largely dependent upon the receipt of
dividends from its banking subsidiary, Union National Bank. Both federal and
state laws impose restrictions on the ability of Union National Bancorp to pay
dividends. Federal Reserve Board has issued a policy statement that provides
that, as a general matter, insured banks and bank holding companies may pay
dividends only out of prior operating earnings. For Maryland state-chartered
bank or trust company, dividends may be paid out of undivided profits or, with
the prior approval of the Commissioner, from surplus in excess of 100% of
required capital stock. If, however, the surplus of a Maryland bank is less than
100% of its required capital stock, cash dividends may not be paid in excess of
90% of net earnings. In addition to these specific restrictions, bank regulatory
agencies, in general, also have the ability to prohibit proposed dividends by a
financial institution which would otherwise be permitted under applicable
regulations of the regulatory body determines that such distribution would
constitute an unsafe or unsound practice.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
Select Financial Data - Union National Bancorp's 1998 Annual
Stockholders Report, Page 24 incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.
Union National Bancorp's 1998 Annual Stockholders Report, pages 9
through 23, incorporated herein by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
PRINCIPAL AMOUNTS MATURING IN:
<TABLE>
<CAPTION>
Fair Value
(IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter 12/31/98
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RATE-SENSITIVE ASSETS:
Fixed interest rate loans $4,308 $4,509 $8,520 $14,700 $8,542 $32,805 $70,951
Average interest rate 8.35% 9.29% 8.95% 8.70% 8.53% 8.04%
Variable interest rate loans $10,982 $8,243 $3,793 $1,466 $977 $64,940 $88,928
Average interest rate 8.80% 8.42% 9.61% 9.57% 9.46% 8.55%
Fixed interest rate securities $4,271 $977 $6,136 $4,320 $9,564 $71,816 $97,460
Average interest rate 4.89% 5.87% 5.75% 4.58% 5.99% 5.68%
Variable interest rate securities $ - $ - $ - $ - $ - $7,716 $1,726
Average interest rate - - - - - 5.91%
Other interest-bearing assets
$7,716 $ - $ - $ - $ - $ - $1,726
Average interest rate 4.75% - - - - -
</TABLE>
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter
- -------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE LIABILITIES:
<S> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing checking $28,247 $28,247
Average interest rate - - - - - -
Savings and interest-bearing checking $ - $ - $ - $ - $ - $81,198 $72,233
Average interest rate - - - - - 2.11%
Time deposits $59,340 $40,024 $13,787 $1,967 $1,584 $190 $105,261
Average interest rate 5.08% 5.92% 4.67% 5.67% 5.23% 5.30%
Fixed interest rate borrowings $ - $ - $ - $10,000 $ - $10,000 $20,933
Average interest rate - - - 5.66% - 5.51%
Variable interest rate borrowings $13,578 $ - $ - $ - $ - $ - $13,578
Average interest rate 3.93% - - - - -
</TABLE>
The above table provides information about Union National Bank's
financial instruments that are sensitive to changes in interest rates. For
loans, securities, and liabilities with contractual maturities, the table
presents principal cash flows and related weighted-average interest rates by
contractual maturities, as well as Union National Bank's historical experience
of the impact of interest rate fluctuations on the prepayment of various
instruments. For core deposits (e.g., interest checking, savings, and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates based
Union National Bank's historical experience, management's judgment, and
statistical analysis, as applicable, concerning their most likely withdrawal
behaviors.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial Statements and related notes - Union National Bancorp's 1998
Annual Stockholders Report, Page 26 through 50, incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On October 1, 1997. Union National Bancorp engaged the accounting firm
of Keller Bruner & Co., L.L.P. ("Keller Bruner) in place of it's independent
accounting firm, Stegman & Company, P.A. on the recommendation and approval of
the Finance and Control Committee, which action was ratified by the full Board
of Directors, after an extensive review and analysis of proposals submitted by
three accounting firms. Keller Bruner has acted as Union National Bancorp's
independent accounting firm for the years ended December 31, 1998 and 1997.
Stegman & Company, P.A. was not dismissed as a result of any disagreement. The
reports of Stegman & Company, P.A. on the financial statement of Union National
Bancorp for the fiscal year ended December 31, 1996 did not contain any adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, auditing scope or accounting principles.
Union National Bancorp has had no disagreements on accounting and
financial disclosure with Keller Bruner.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Proxy Statement, dated March 20, 1999, pages 2 through 4, incorporated
herein by reference.
Section 16(a) Beneficial Ownership Reporting Compliance, Proxy
Statement, dated March 20, 1999, page 12, incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Proxy Statement, dated March 20, 1999, pages 5 through 11, incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Proxy Statement, dated March 20, 1999, pages 6 through 7, incorporated
herein by reference
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Proxy Statement, dated March 20, 1999, pages 5, incorporated herein by
reference
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTED OF FORM 8-K
(A) Documents filed as part of this report:
(1), (2)The following financial statements are included on
pages 28 through 46 of the Union National's 1998 Annual report to Stockholders:
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITOR'S REPORT........................................17
CONSOLIDATED BALANCE SHEETS.........................................18
CONSOLIDATED STATEMENTS OF INCOME ..................................19
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ....................20
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY .........................................21
CONSLIDATED STATEMENTS OF CASH FLOWS ...... ......................22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .........................23-46
</TABLE>
(3) Exhibits filed herewith or incorporated by reference
herein as set forth in the following table prepared in accordance with Item 601
of Regulation S-K.
EXHIBIT INDEX
(3). CHARTER AND BYLAWS
(3a.) Articles of Incorporation of Union National Bancorp is
incorporated by reference from Union National Bancorp's Form 10, filed with the
Commission of May 5, 1997, and Form 10/A, filed with the Commission on August
21,1997 (Registration No. 0-22523)
(3b.) Bylaws of Union National Bancorp is incorporated by
reference from Union National Bancorp's Form 10, filed with the Commission of
May 5, 1997, and Form 10/A, filed with the Commission on August 21,1997
(Registration No. 0-22523)
(10) MATERIAL CONTRACTS
(10a.) Employment Agreement between the Union National Bank of
Westminster and Virginia W. Smith, President, is incorporated by reference from
Union National Bancorp's Form 10, filed with the Commission of May 5, 1997, and
Form 10/A, filed with the Commission on August 21,1997 (Registration No.
0-22523)
(10b.) 1997 Stock Option Plan is incorporated by reference
from Union National Bancorp's Form 10, filed with the Commission of May 5, 1997,
and Form 10/A, filed with the Commission on August 21,1997 (Registration No.
0-22523)
(10c.) Leases between The Union National Bank of Westminster
and K. Wayne Lockard, Director, dated October 1, 1997, is incorporated by
reference form Union National's Form 10, filed with the Commission of May 5,
1997, and Form 10/A, file with the Commission on August 21,1997 (Registration
No. 0-22523)
(10d.) Amendment to employment agreement between the Union
National Bank of Westminster and Virginia W. Smith, President, is incorporated
by reference from Union National Bancorp's Form 8-K, filed with the Commission
of October 26, 1998
(10e.) Key employee retention plan
Union National Bank
Key Employee Retention Plan
1. PURPOSE. The purpose of this Key Employee Retention Plan ("Plan") is
to further the interests of Union National Bank ("Bank") by providing incentives
to attract and retain key employees.
2. ADMINISTRATION. The Plan shall be administered by the Board of
Directors of the Bank or a committee designated by the Board (the
"Administrator"). Subject to the provisions of the Plan and applicable law, the
Board is authorized to interpret the Plan, to adopt, amend and rescind rules and
regulations relating to the Plan, and to make all other determinations necessary
or advisable for the administration of the Plan (except such determinations
which conflict with the authority or power of the Board). No Director or member
of any committee administering the Plan shall vote upon or decide any matter
relating solely to himself/herself (or member of his/her immediate family), or
solely to any of his/her rights or benefits (or rights or benefits of a member
of his/her immediate family) under the Plan.
3. PLAN PARTICIPATION. The Board shall determine and designate from
time to time those employees of the Bank who shall be eligible to participate in
the Plan (each a "Participant") and the category of separation
<PAGE>
payments for which each Participant will be eligible. Participation in the Plan
shall not confer upon any Participant any right of continuation of service as an
employee or officer of the Bank or other rights of employment except as
expressly stated herein.
4. DEFINED TERMS. The following terms used in the plan shall have the
following meanings:
(a) "CHANGE IN CONTROL" means the occurrence of any one or
more of the following events: (i) the acquisition of "beneficial ownership" by a
person or entity, including any "group" (as such terms are defined under Section
13(d) of the Securities Exchange Act of 1934), of 50% or more of the outstanding
shares of common stock of the Bank or of its parent company (the "Parent"); (ii)
the sale or other disposition of all or substantially all of the assets of the
Bank or the Parent in one transaction or a series of transactions; (iii) a
merger, consolidation or share exchange involving the Bank or the Parent and any
other person or entity, in which the Bank or the Parent is not the surviving
entity or in which the outstanding shares of capital stock of the Bank or the
parent do not continue to be outstanding; and (iv) any other "business
combination" (as defined in Section 3-601(e) of the Maryland General Corporation
Law) involving the Bank or the parent and any person or entity, whether or not
such person or entity is an "interested stockholder" under that statute.
(b) "QUALIFYING TERMINATION" means:
(i) the termination of employment of a Participant by
the Bank in anticipation of or within 18 months after
a Change in Control, or
(ii) the resignation of a Participant within 18
months after a Change in Control as a direct result
of any of the following action taken by the Bank with
respect to a Participant in anticipation of or after
a Change in Control:
(A) the demotion of a Participant or the reduction of
a Participant's regular base salary below the amount
in effect immediately prior to the Change in Control;
(B) the substantial curtailment of the rights, duties
and responsibilities of a Participant as compared to
those possessed by the Participant prior to the
Change in Control; or
(C) the reassignment of a Participant, or relocation
of the office or facility to which he/she shall
report, to a location that is more than 25 miles from
the Participant's place of employment prior to the
Change in Control.
(c) A Qualifying Termination shall not include the
following:
(i) Termination of the Participant for cause.
"Cause" includes an action or failure to act by the
Participant constituting:
(A) fraud, misappropriation or intentional material
damage to the property or business of the Bank, the
commission of an act of deliberate and material
dishonesty, a material breach of the Bank's corporate
code of ethics, commission of a crime, or causing the
Bank to commit a crime; or
(B) continued failure by the participant to
satisfactorily perform his/her duties or job
functions after written notice to the Participant by
the Board of Directors specifying such failure;
provided that such "cause" shall have been found by a
majority vote of the Board of Directors after notice
to the Participant specifying the cause and an
opportunity for the Participant to be heard by the
Board of Directors; or
<PAGE>
(ii) A transfer of employment of the Participant to
the parent or a subsidiary of the Parent or of the
Bank (collectively, a "Related Entity") in
anticipation of or after a Change in Control, in
which case the Participant shall continue to be a
Participant under the Plan.
5. PLAN BENEFITS. Subject to the compliance by the Participant with the
conditions specified in Paragraph 6, in the event of a Qualifying Termination of
the Participant, the Participant shall be entitled to the following benefits
("Plan Benefits"):
(a) SEPARATION PAYMENTS. A Participant will be entitled to receive
an amount equal to his/her base salary (at the amount in effect at the time of
the Qualifying Termination) for the applicable number of weeks set forth below.
Separation payments will be paid on the Bank's regular paydays and will be
subject to standard withholdings and deductions. For purposes of determining the
number of full years of service under this Plan, a Participant shall be credited
with all time that he/she was continuously employed by the Bank or any Related
Entity regardless of any transfers of employment among them.
CATEGORY I. Participants in this category will be entitled to
receive separation payments for 78 weeks (18 months) plus one
additional week for each full year of service he/she has completed with
the Bank, up to a maximum of 130 weeks (30 months).
A Participant under CATEGORY I shall be obligated to seek
employment. The first 52 weeks (12 months) of the Participants
separation payments will be guaranteed and the remaining weeks will be
reduced by 50% if the Participant receives or is entitled to receive
any amount from other employment, including self-employment, during or
in respect of such weeks.
CATEGORY II. Participants in this category will be entitled to
receive separation payments for 52 weeks (12 months) plus one
additional week for each full year of service he/she has completed with
the Bank, up to a maximum of 104 weeks (24 months).
A Participant under CATEGORY II shall be obligated to seek
employment. The first 52 weeks (12 months) of the Participants
separation payments will be guaranteed and the remaining weeks will be
reduced by 50% if the Participant receives or is entitled to receive
any amount from other employment, including self-employment, during or
in respect of such weeks.
CATEGORY III. Participants in this category will be entitled to
receive separation payments for 26 weeks (6 months) plus one additional
week for each full year of service he/she has completed with the Bank,
up to a maximum of 78 weeks (18 months).
A Participant under CATEGORY III shall be obligated to seek
employment. The first 26 weeks (6 months) of the Participants
separation payments will be guaranteed and the remaining weeks will be
reduced by 50% if the Participant receives or is entitled to receive
any amount from other employment, including self-employment, during or
in respect of such weeks.
CATEGORY IV. Participants in this category will be entitled to
receive separation payments for 13 weeks (3 months) plus one additional
week for each full year of service he/she has completed with the Bank,
up to a maximum of 52 weeks (12 months).
A Participant under CATEGORY IV shall be obligated to seek
employment. The first 26 weeks (6 months) of the Participants
separation payments will be guaranteed and the remaining weeks will be
reduced by 50% if the Participant receives or is entitled to receive
any amount from other employment, including self-employment, during or
in respect of such weeks.
(b) HEALTH INSURANCE. A Participant will be entitled to continue to
receive health insurance benefits from the Bank on the same basis, as if he/she
were actively employed, for a period of six months. Months of continued coverage
hereunder will not be counted towards the number of months of continued coverage
to which the Participant (and any of his/her covered dependents) is entitled
pursuant to COBRA or any similar law.
<PAGE>
(c) Notwithstanding anything to the contrary, the Plan Benefits
shall be reduced by any other severance type or other benefits which the
Participant receives or is entitled to receive from the Bank or a Related Entity
pursuant to any other plan, a contract, or otherwise.
6. CONDITIONS TO PLAN BENEFITS. All Plan Benefits provided or to be
provided under this Plan are subject to the continued compliance of the
Participant with the following conditions:
(a) RELEASE OF CLAIMS. The Participant will release the Bank and its
Related Entities (and their officers, directors, employees and agents) from and
against all claims that he/she may have against them and will convenant not to
bring, and shall not bring, any action in respect of any claim so released.
(b) NON-COMPETITION. For a period of one year following a Qualifying
Termination, the Participant will not directly or indirectly, either
individually or as owner, partner, agent, employee, consultant or otherwise, for
himself or any other person or entity, solicit, enter into or attempt to
establish any business relationship, competitive with the business of the Bank
or any Related Entity, with any person or entity that was a customer of the Bank
or any Related Entity within 12 months of the date of the Qualifying
Termination.
(c) CONFIDENTIAL INFORMATION. The Participant will not, either
directly or indirectly, use, disclose or communicate to any person or entity any
trade secret or confidential or proprietary information of the Bank or any
Related Entity. For purposes of this Agreement, "trade secret or confidential or
proprietary information" means any information concerning the Bank or any
Related Entity which he/she learned during his/her employment and which is not
generally known or available to sources outside the Bank and Related Entities;
such information shall include (without limitation) information, whether written
or otherwise, regarding earnings, expenses, plans, strategies, prospective and
executed contracts, and other business arrangements.
(d) RETURN OF PROPERTY/AMOUNTS OWED. The Participant will promptly
return all property of the Bank and Related Entities. The Participant promptly
will reimburse the Bank and Related Entities for any personal telephone calls,
credit card charges, and other expenses and pay all amounts due to such entity.
(e) BREACH BY PARTICIPANT. In the event the Participant breaches any
of the conditions set forth in this Section, in addition to any other remedies
it may have, the Bank shall not be required to provide any of the Plan Benefits,
and the Participant shall be obligated to return to the Bank, upon demand, an
amount equal to all Plan Benefits that he/she received under this Plan.
(f) AGREEMENT. The Participant will, upon request, sign an agreement
satisfactory to the Bank that includes the conditions set forth in this Section
6.
7. DEATH OF PARTICIPANT. Upon the death of a Participant receiving Plan
Benefits, the beneficiary(ies) of the Participant (whom he/she designated for
purposes of group life insurance benefits) shall be entitled to receive the Plan
Benefits through the end of the month in which the Participant's death occurred.
8. ADMINISTRATION OF THE PLAN.
(a) ADMINISTRATOR. The Administrator shall have full power to
administer the Plan. The Plan shall be administered in accordance with its
terms, for the exclusive benefit of Participants. The Administrator shall be
entitled to appoint persons to assist it in administering the Plan, and shall be
entitled to delegate, in writing, its responsibilities to other persons. The
Administrator shall have full discretionary authority to interpret the Plan and
to decide all questions concerning the Plan. Its interpretation shall be binding
on all concerned.
(b) INDEMNIFICATION. The Bank agrees to indemnify and to defend to
the fullest extent permitted by law any person who performs or has performed
administrative functions for the Administrator against any liabilities and
expenses (including attorneys' fees and amounts paid in settlement of any claims
<PAGE>
approved by the Bank) occasioned by any act or omission in connection with the
Plan which occurred in good faith.
(c) APPEAL OF A DENIED CLAIM.
(i) If a Participant believes that he/she is
entitled to benefits under the Plan, the Participant may submit a claim to the
administrator within 2 months after the date of the event that he/she believes
is a Qualifying Termination. The Administrator will either grant the claim, deny
it, or extend the time for processing it. Any extension will not be longer than
180 days from the date the claim was submitted.
(ii) If a claim arising under this Plan is wholly
or partially denied, the Administrator shall furnish notice of the decision to
the Participant within 90 days after receipt of the claim. If special
circumstances require an extension of time for processing the claim, written
notice of the extension shall be furnished to the Participant prior to the end
of the initial 90-day period. In no event shall such extension exceed a period
of 90 days from the end of such initial period. The extension notice shall
indicate the special circumstances requiring an extension of time and the date
by which the Administrator expects to render the final decision. The written
notice to the Participant regarding a denied claim for benefits shall include
(A) the specific reason(s) for the denial; (B) specific reference to pertinent
Plan provisions which the denial is based; (C) a description of any additional
material or information necessary for the Participant to perfect the claim and
an explanation of why such material or information is necessary; (D) that the
Participant or his/her duly authorized representative has a reasonable
opportunity to appeal the denial of the claim, including but not limited to:
requesting a review upon written application to the Plan; reviewing pertinent
documents; and submitting issues and comments in writing; and (E) appropriate
information as to the steps to be taken if the Participant wishes to appeal the
denial of the claim.
(iii) The Administrator's decision regarding the
appeal shall be made not later than 60 days after the receipt of the appeal,
unless special circumstances require an extension of time, in which case the
Participant shall be notified of the extension and a decision shall be rendered
as soon as possible, but not later than 120 days after receipt of the appeal.
The decision regarding the appeal shall be in writing and shall include specific
reasons for the decision, written in a manner calculated to be understood by the
Participant, as well as specific references to the pertinent Plan provisions on
which the decision is based. The Administrator's decision regarding the appeal
will be final and binding on all concerned.
9. AMENDMENTS AND TERMINATION. The Board of Directors may amend,
suspend, discontinue or terminate the plan, but no such action shall, without
the consent of each Participant, alter or impair the Plan benefits to be
provided to such Participant under the Plan.
10. BINDING EFFECT.
(a) This Plan shall inure to the benefit of each Participant.
This Plan shall be binding upon the Bank, its successors and assigns, including
any person or entity that acquires the business or assets of the Bank pursuant
to a Change in Control (a "transferee"); PROVIDED, HOWEVER, that no such
transfer or assignment shall relieve the Bank from its obligations hereunder.
(b) All obligations of the Bank under this Plan are subject to
applicable statutes and regulations. The Bank shall use its reasonable best
efforts to obtain all consents and approvals necessary to comply with the
provisions of this Plan.
Adopted by Union National Bank on January 13, 1998.
(11) STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
a. The basic per share earning is calculated by dividing net
income for 1998 of $2,637,824, by the number of shares
outstanding for 1998 1,853,663. For 1997 by dividing net
income for 1997 of $2,400,102, by the number of shares
outstanding for 1997 1,834,819.
<PAGE>
b. The diluted per share earning is calculated by dividing
net income for 1998 of $2,637,824, by the number of shares
outstanding for 1998 1,853,356. For 1997 by dividing net
income for 1997 of $2,400,102, by the number of shares
outstanding for 1997 1,834,819.
(12) STATEMENTS RE COMPUTATION OF RATIOS
a. The percentage ratio of net income to average total assets
is calculated by dividing net income for 1998 of $2,637,824 , by the average
totals assets for 1998 of 268,614,000. For 1997 by dividing net income of
$2,400,102, by the average totals assets for 1997 of $234,206,000
b. The percentage ratio of net income to average shareholders'
equity is calculated by dividing net income for 1998 of $2,637,824, , by the
average shareholders' equity for 1998 of $21,165,000. For 1997 by dividing net
income for 1997 of $2,400,102, , by the average shareholders' equity for 1997 of
$18,884,000.
c. The percentage ratio of shareholders' equity to total
assets is calculated by dividing shareholders' equity for 1998 of $22,236,679,
by the total assets for 1998 of $283,913,435. For 1997 by dividing shareholders'
equity for 1997 of $20,064,326, by the total assets for 1997 of $250,780,880. d.
The percentage ratio of cash dividends declared to net income on a per share
basis is calculated by dividing the cash dividend per share for 1998 of $0.40,
by net earnings per share for 1998 of $1.43. For 1997 by dividing the cash
dividend per share for 1997 of $0.31, by net earnings per share for 1998 of
$1.30.
(13) ANNUAL REPORT TO STOCKHOLDERS
Filed herewith
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANTS
Is incorporated by reference from Union National Bancorp's 8-K
file with the Commission on October 6, 1997.
(20) OTHER DOCUMENTS OR STATEMENT TO SECURITY-HOLDERS
Press release approved stock action is incorporated by
reference from Union National Bancorp's Form 8-K, filed with the Commission of
October 26, 1998 (Registration No. 0-22523)
(21) SUBSIDIARIES OF THE REGISTRANT
Is incorporated by reference from Union National Bancorp's
Form 10, filed with the Commission of May 5, 1997, and Form 10/A, filedwith the
Commission on August 21,1997 (Registration No. 0-22523)
(23) CONSENTS OF EXPERTS & COUNSEL
(23a.) Keller Bruner & Co. L.L.P.
The Board of Directors
<PAGE>
Union National Bancorp, Inc.
We consent to incorporation by reference of our report dated January 15 1999
relating to the consolidated balance sheets of Union National Bancorp, Inc. and
its subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in stockholders' equity and
cash flows for the years then ended, which report appears on page 25 of the 1998
Union National Bancorp, Inc. Annual Report to Stockholders, in this annual
report on Form 10-K, and in the following Registration Statement of Union
National Bancorp, Inc.: Number 333-36767 on Form S-3 and Number 333-58673 on
Form S-8.
/s/ Keller Bruner & Company, L.L.P.
Frederick Maryland
March 19,1999
(23b.) Stegman & Co.
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference of our report dated
January 8, relating to the consolidated statements of income, comprehensive
income, changes in stockholders' equity and cash flows of Union National Bancorp
and Subsidiary for the year ended December 31, 1996, which report appears on
page 25 of the 1998 Union National Bancorp Annual Report, into the Form 10-K.
/s/ Stegman & Company
Baltimore, Maryland
March 18,1999
(27) FINANCIAL DATA SCHEDULE
Is filed electronically herewith via EDGAR.
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, hereunto duly authorized.
Union National Bancorp, Inc.
Date: March 20, 1999 by: /s/ Virginia W. Smith
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: March 20, 1999 by: /s/ K. Wayne Lockard
Director & Chairman of the Board
<PAGE>
Date: March 20, 1999 by: /s/ Donald C. Essich
Director & Vice Chairman
Date: March 20, 1999 by: /s/ Kenneth B. Wright
Director
Date: March 20, 1999 by: /s/ Robert T. Scott
Director
Date: March 20, 1999 by: /s/ Larry A. Van Sant, Sr.
Director
Date: March 20, 1999 by: /s/ Joseph H. Beaver, Jr.
Director
Date: March 20, 1999 by: /s/ Wesley D. Blakeslee
Director
Date: March 20, 1999 by: /s/ Dean H. Griffin
Director
Date: March 20, 1999 by: /s/ Ethan A. Seidel
Director
Date: March 20, 1999 by: /s/ Ellen Miller
Director
Date: March 20, 1999 by: /s/ William R. Klinger
Director
Date: March 20, 1999 by: /s/ Bernard L. Jones, Sr.
Director
Date: March 20, 1999 by: /s/ Robert L. Bullock
Director
Date: March 20, 1999 by: /s/ David L. Brauning
Director
Date: March 20, 1999 by: /s/ Gabrielle M. Peregoy
Vice President & Controller
<PAGE>
1998 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Union National Bancorp earnings for 1998 were $2,637,824 or 9.9% over 1997. Net
interest income was up $719,934 or 7.3% due to strong performance in investments
and loans. Much of this growth came from the opening of our new branch in Mount
Airy. Noninterest income was up $227,754 or 17.1% over 1997 while noninterest
expense was up 11.6% over last year. Professional services increased
significantly due to the initial start-up cost for joining NASDAQ, as well as
additional cost relating to becoming a Securities and Exchange Commission
registrant.
Total assets were $283.9 million at December 31, 1998, an increase of $33.1
million or 13.2% over the previous year. We experienced strong growth in
investments from our customers in Sweep accounts, Savings, Super NOW's, and
CD's.
Return on average assets in 1998 was .98% as compared to 1.02% in 1997, and .83%
in 1996. The return on average equity was 12.46% in 1998 as compared to 12.71%
in 1997 and 10.61% in 1996.
Dividends on common stock rose to $.40 in 1998 from $.31 in 1997 and from $.26
in 1996. This represents a 29.4% rise over 1997.
NET INTEREST INCOME
Net interest income is the major component of the Company's earnings, and
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.
Net interest income was $10,541,278 in 1998, $9,821,344 in 1997, and $9,262,338
in 1996. The trend has shown continual improvement due to loan and investment
growth. Net interest income on a tax-equivalent basis was $10,965,000 in 1998,
$10,080,000 in 1997, $9,502,000 in 1996. The net interest spread dropped to
3.69% in 1998, from 3.92% in 1997 and from 3.95% in 1996. The net interest
margin as a percentage of earning assets was 4.29% in 1998, compared to 4.53% in
1997 and 1996.
Average earning assets were $255,842,000 in 1998 up 15.1%, from $222,332,000 in
1997, up 6.2% from $209,433,000 in 1996. Total interest income on a
tax-equivalent basis was up 12.6% to $20,801,000 in 1998 over $18,473,000 in
1997, which had moved up 4.9% from 1996 at $17,601,000. Tax-equivalent yield on
earning assets fell, in 1998, to 8.13% from 8.31% in 1997 and 8.40% in 1996.
Non-performing assets were down to $1,233,752 by year-end and several are in the
process of resolution and are well secured.
Average interest-bearing liabilities were $221,609,000 in 1998 up 16.0%, from
$191,091,000 in 1997 up 5.1% from $181,884,000 in 1996. These funds made up
82.5% of average assets in 1998 compared to 81.6% in 1997, and 82.3% in 1996.
Total interest expense was $9,835,888 in 1998, up $1,443,101 or 17.2%, from
$8,392,787 in 1997, up $294,258 or 3.6% from $8,098,529 in 1996.
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 1996 through 1998:
9
<PAGE>
UNION NATIONAL BANCORP, INC.
AVERAGE BALANCE SHEETS AND YIELD ANALYSIS
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Yield/ Average Yield/ Average
(IN THOUSANDS-TAX EQUIVALENT BASIS) Balance Interest(3) Rate Balance Interest(3) Rate Balance
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans(1,2):
Real estate:
Construction $ 5,802 $ 543 9.36% $ 3,653 $ 351 9.60% $ 1,843
Mortgage 103,520 9,622 9.29 94,804 8,997 9.49 90,443
Installment 21,872 1,901 8.69 24,190 2,039 8.43 22,039
Commercial 25,100 2,257 8.99 22,718 2,063 9.08 30,482
Tax-exempt 3,874 356 9.19 3,221 306 9.50 1,672
--------- ----------- --------- ----------- ---------
TOTAL LOANS 160,168 14,679 9.16 148,586 13,756 9.26 146,479
--------- ----------- --------- ----------- ---------
Investment securities available for sale:
Taxable 63,668 4,106 6.45 49,233 3,235 6.57 31,609
Non-taxable 593 73 12.31 591 73 12.35 598
--------- ----------- --------- ----------- ---------
TOTAL SECURITIES AVAILABLE FOR SALE 64,261 4,179 6.50 49,824 3,308 6.64 32,207
--------- ----------- --------- ----------- ---------
Investment securities held to maturity:
Taxable 6,438 388 6.03 9,985 559 5.60 15,198
Non-taxable 11,542 817 7.08 5,275 387 7.34 6,350
--------- ----------- --------- ----------- ---------
TOTAL SECURITIES HELD TO MATURITY 17,980 1,205 6.70 15,260 946 6.20 21,548
--------- ----------- --------- ----------- ---------
Interest-bearing deposits in other banks 41 4 9.76 58 4 6.90 1,101
Federal funds sold 13,393 734 5.48 8,604 459 5.33 8,098
--------- ----------- --------- ----------- ---------
TOTAL EARNING ASSETS 255,843 20,801 8.13% 222,332 18,473 8.31% 209,433
--------- ----------- --------- ----------- ---------
Less: allowance for credit losses (1,784) (1,832) (1,768)
Cash and due from banks 6,857 5,850 5,838
Bank premises and equipment, net 4,226 3,980 3,854
Other Assets 3,472 3,876 3,789
--------- --------- ---------
TOTAL ASSETS $ 268,614 $ 234,206 $ 221,146
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 25,107 $ 491 1.96% $ 19,787 $ 403 2.04% $ 18,462
Regular savings deposits 33,274 904 2.72 31,470 859 2.73 33,190
Money market savings deposits 18,075 553 3.06 17,919 566 3.16 18,528
Time deposits 113,554 6,264 5.52 107,410 5,872 5.47 102,739
--------- ----------- --------- ----------- ---------
TOTAL INTEREST-BEARING DEPOSITS 190,010 8,212 4.32 176,586 7,700 4.36 172,919
Other borrowings 31,599 1,624 5.14 14,505 693 4.78 8,965
--------- ----------- --------- ----------- ---------
TOTAL INTEREST-BEARING LIABILITIES 221,609 9,836 4.44 191,091 8,393 4.39 181,884
----------- -----------
NET INTEREST SPREAD $ 10,965 3.69% $ 10,080 3.92%
----------- --------- ----------- ---------
----------- --------- ----------- ---------
Noninterest-bearing demand deposits 24,370 22,849 20,976
Accrued expenses and other liabilities 1,470 1,382 1,044
Stockholders' equity 21,165 18,884 17,242
--------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 268,614 $ 234,206 $ 221,146
--------- --------- ---------
--------- --------- ---------
Net interest income / earning assets 8.13% 8.31%
Net interest expense / earning assets 3.84 3.78
--------- ---------
NET INTEREST MARGIN 4.29% 4.53%
--------- ---------
--------- ---------
<CAPTION>
<S> <C> <C>
Yield/
(IN THOUSANDS-TAX EQUIVALENT BASIS) Interest(3) Rate
- -------------------------------------------
<S> <C> <C>
ASSETS
Loans(1,2):
Real estate:
Construction $ 184 9.98%
Mortgage 8,728 9.65
Installment 1,903 8.64
Commercial 2,783 9.13
Tax-exempt 164 9.79
-----------
TOTAL LOANS 13,762 9.39
-----------
Investment securities available for sale:
Taxable 1,942 6.14
Non-taxable 65 10.89
-----------
TOTAL SECURITIES AVAILABLE FOR SALE 2,007 6.23
-----------
Investment securities held to maturity:
Taxable 859 5.65
Non-taxable 482 7.59
-----------
TOTAL SECURITIES HELD TO MATURITY 1,341 6.22
-----------
Interest-bearing deposits in other banks 61 5.54
Federal funds sold 430 5.31
-----------
TOTAL EARNING ASSETS 17,601 8.40%
-----------
Less: allowance for credit losses
Cash and due from banks
Bank premises and equipment, net
Other Assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing demand deposits $ 379 2.05%
Regular savings deposits 909 2.74
Money market savings deposits 586 3.16
Time deposits 5,829 5.67
-----------
TOTAL INTEREST-BEARING DEPOSITS 7,703 4.45
Other borrowings 396 4.42
-----------
TOTAL INTEREST-BEARING LIABILITIES 8,099 4.45
-----------
NET INTEREST SPREAD $ 9,502 3.95%
----------- ---------
----------- ---------
Noninterest-bearing demand deposits
Accrued expenses and other liabilities
Stockholders' equity
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY
Net interest income / earning assets 8.40%
Net interest expense / earning assets 3.87
---------
NET INTEREST MARGIN 4.53%
---------
---------
</TABLE>
1. LOAN FEE INCOME OF $449,000, $410,000 AND $483,000 IN 1998, 1997 AND 1996,
RESPECTIVELY, HAS BEEN INCLUDED IN INTEREST INCOME, AND YIELDS.
2. BALANCES OF NONACCRUAL 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%.
10
<PAGE>
1998 ANNUAL REPORT
RATE AND VOLUME ANALYSIS
The following table reflects the impact on net interest income caused by changes
in average balances and rates.
<TABLE>
<CAPTION>
1996 compared
1998 compared to 1997 1997 compared to 1996 to 1995
------------------------------------- ------------------------------------- -------------
Change Due to(1) Change Due to(1)
(IN THOUSANDS-TAX EQUIVALENT Increase ---------------------- Increase ---------------------- Increase
BASIS) (Decrease) Rate Volume (Decrease) Rate Volume (Decrease)
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Interest Income:
Loans:
Real estate:
Construction $ 192 $ (14) $ 206 $ 167 $ (14) $ 181 $ (167)
Mortgage 625 (202) 827 269 (152) 421 316
Installment (138) 57 (195) 136 (50) 186 (122)
Commercial 194 (22) 216 (720) (11) (709) (17)
Tax-exempt(2,4) 50 (12) 62 142 (10) 152 52
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL LOANS 923 (193) 1,116 (6) (237) 231 62
------------- --------- ----------- ------------- --------- ----------- ------
Investment securities available
for sale:
Taxable 871 (77) 948 1,293 210 1,083 244
Non-taxable(2,3) -- -- -- 8 9 (1) (262)
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL SECURITIES AVAILABLE
FOR SALE 871 (77) 948 1,301 219 1,082 (18)
------------- --------- ----------- ------------- --------- ----------- ------
Investment securities held to
maturity:
Taxable (171) 28 (199) (300) (5) (295) (305)
Non-taxable(2,3) 430 (30) 460 (95) (13) (82) 212
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL SECURITIES HELD TO
MATURITY 259 (2) 261 (395) (18) (377) (93)
------------- --------- ----------- ------------- --------- ----------- ------
Interest-bearing deposits in
other banks -- 1 (1) (57) 1 (58) 41
Federal funds sold 275 20 255 29 2 27 277
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL INTEREST INCOME 2,328 (251) 2,579 872 (33) 905 269
------------- --------- ----------- ------------- --------- ----------- ------
Interest Expense:
Interest-bearing demand
deposits 88 (20) 108 24 (3) 27 6
Regular savings deposits 45 (4) 49 (50) (3) (47) (268)
Money market savings deposits (13) (18) 5 (20) (1) (19) --
Time deposits 392 56 336 43 (222) 265 773
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL INTEREST-BEARING
DEPOSITS 512 14 498 (3) (229) 226 511
Other borrowings 931 114 817 297 52 245 (504)
------------- --------- ----------- ------------- --------- ----------- ------
TOTAL INTEREST EXPENSE 1,443 128 1,315 294 (177) 471 7
------------- --------- ----------- ------------- --------- ----------- ------
NET INTEREST INCOME $ 885 $ (379) $ 1,264 $ 578 $ 144 $ 434 $ 262
------------- --------- ----------- ------------- --------- ----------- ------
------------- --------- ----------- ------------- --------- ----------- ------
<CAPTION>
Change Due to(1)
(IN THOUSANDS-TAX EQUIVALENT ----------------------
BASIS) Rate Volume
<S> <C> <C>
- ---------------------------------
Interest Income:
Loans:
Real estate:
Construction $ 1 $ (168)
Mortgage (45) 361
Installment (25) (97)
Commercial (57) 40
Tax-exempt(2,4) 7 45
--------- -----------
TOTAL LOANS (119) 181
--------- -----------
Investment securities available
for sale:
Taxable (21) 265
Non-taxable(2,3) 13 (275)
--------- -----------
TOTAL SECURITIES AVAILABLE
FOR SALE (8) (10)
--------- -----------
Investment securities held to
maturity:
Taxable 9 (314)
Non-taxable(2,3) (50) 262
--------- -----------
TOTAL SECURITIES HELD TO
MATURITY (41) (52)
--------- -----------
Interest-bearing deposits in
other banks (6) 47
Federal funds sold (60) 337
--------- -----------
TOTAL INTEREST INCOME (234) 503
--------- -----------
Interest Expense:
Interest-bearing demand
deposits (42) 48
Regular savings deposits (114) (154)
Money market savings deposits (5) 5
Time deposits 13 760
--------- -----------
TOTAL INTEREST-BEARING
DEPOSITS (148) 659
Other borrowings (110) (394)
--------- -----------
TOTAL INTEREST EXPENSE (258) 265
--------- -----------
NET INTEREST INCOME $ 24 $ 238
--------- -----------
--------- -----------
</TABLE>
1. THE CHANGE IN INTEREST DUE TO BOTH VOLUME AND RATE HAS BEEN ALLOCATED TO
VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE ABSOLUTE
DOLLAR AMOUNTS OF THE CHANGE IN EACH.
2. TAX-EXEMPT INCOME HAS BEEN CONVERTED TO A TAX-EQUIVALENT BASIS USING AN
INCREMENTAL RATE OF 34%.
3. TAX-EQUIVALENT ADJUSTMENTS OF $303,000 FOR 1998, $157,000 FOR 1997 AND
$186,000 FOR 1996 ARE INCLUDED IN THE CALCULATION OF TAX-EXEMPT INVESTMENT
SECURITIES RATE VARIANCES.
4. TAX-EQUIVALENT ADJUSTMENTS OF $121,000 FOR 1998, $103,000 FOR 1997 AND
$55,000 FOR 1996 ARE INCLUDED IN THE CALCULATION OF TAX-EXEMPT LOAN RATE
VARIANCES.
11
<PAGE>
UNION NATIONAL BANCORP, INC.
NONINTEREST INCOME
Noninterest income is derived from service charges and service fees. Service
charge income includes account charges and automatic teller machine income.
Service fee income is mostly made up of commissions and gains.
For the year ended December 31, 1998, noninterest income was $1,554,454. This is
an increase of $227,754 or 17.2% from $1,326,700 at December 31, 1997. The
increase is due to a full year of revenue from five new automatic teller
machines, increased activity on the secondary mortgage market, and security
gains. Automatic teller machine income increased to $262,588 in 1998. This is up
$129,855 or 97.8% from $132,733 in 1997. Commission from the sales of loans in
1998 was $93,235 compared to $17,118 in 1997. This increase of $76,117, or
444.7%, is the result of a $7.6 million increase in loan sales. The Bank took
advantage of market conditions and repositioned a portion of its securities
portfolio by selling available for sale securities. The proceeds were then
reinvested in securities at prices closer to par while generating $107,111 gain
on the sales.
For the year ended December 31, 1997, noninterest income increased $240,900 or
22.2% as compared to the previous year. The increase was primarily due to a
change in the order of posting and processing items, and additional automatic
teller machines. These changes resulted in additional income of $216,546 in
1997.
NONINTEREST EXPENSE
For the year ended December 31, 1998, noninterest expense was $8,156,501. This
is an increase of $847,457 or 11.6% from $7,309,044 the previous year which had
risen only 0.7% from 1996. This increase is a result of growth, additional
expansion of facilities, and one-time expenses of becoming a public company.
Noninterest expense is composed of salaries and benefits, occupancy and
equipment, and other operating expenses. Salaries and benefits represent the
largest portion of total noninterest expense at 55.5%. Full time equivalent
employees increased to 125 in 1998 from 118 in 1997 and 114 in 1996. Salaries
and benefits totaled $4,522,630 in 1998, up $465,625 or 11.5% from $4,057,005 in
1997, which was 4.6% higher than $3,879,323 the previous year. Branch expansion
into the Mount Airy region and mortgage lenders have increased personnel
expense, but have enabled the Company to grow average assets per average full
time equivalent employee to $2.27 million in 1998, from $2.13 million in 1997.
Occupancy and equipment expense totaled $1,284,356 in 1998, up $97,487 from
$1,186,869 in 1997 and $1,137,579 in 1996. Additional fixed assets needed for
expansion and the implementation of year 2000 technologies contribute largely to
the increase. Depreciation and maintenance expenses represent 69.6% of occupancy
and equipment.
Other operating expense totaled $2,349,515 in 1998, up $284,345 from $2,065,170
in 1997, which had decreased from $2,238,076 the previous year. Much of the 1998
increase is related to the professional services and initial start-up cost
relating to NASDAQ, as well as additional costs of becoming registered with the
Securities and Exchange Commission. The Company began publicly trading stock on
the NASDAQ Small Cap market in April 1998. Professional services increased
$133,069 or 132.3% to $233,626 in 1998, from $100,557 in 1997.
INCOME TAXES
Income tax expenses decreased in 1998 as the creation of a passive investment
company in Delaware had a positive impact on state income tax expense. See note
10 to the consolidated financial statements for a reconciliation of expected
income taxes at stationary rates to actual income taxes and effective tax rates
for the past three years.
<TABLE>
<CAPTION>
Effective tax rate
of Federal income
Income tax income before tax
expenses taxes as % of total tax
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998 $1,055,407 28.6% 101.1%
1997 $1,163,898 32.7% 89.0%
1996 $ 934,132 33.8% 81.9%
</TABLE>
12
<PAGE>
1998 ANNUAL REPORT
INVESTMENT SECURITIES PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S. government agencies $28,437,893 $37,890,940 $26,115,700
Obligations of states and political subdivisions 18,431,799 5,811,063 6,250,734
Mortgage-backed securities 48,003,701 27,093,435 22,368,159
Other securities 3,937,264 1,395,161 1,205,179
---------- ---------- ----------
TOTAL INVESTMENT SECURITIES $98,810,657 $72,190,599 $55,939,772
---------- ---------- ----------
---------- ---------- ----------
Available for Sale (Fair Value) $76,804,462 $58,770,760 $38,866,761
Held to Maturity (Amortized Cost) 22,006,195 13,419,839 17,073,011
---------- ---------- ----------
TOTAL INVESTMENT SECURITIES $98,810,657 $72,190,599 $55,939,772
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SECURITIES PORTFOLIO
Total holdings in the investment portfolio at year-end were $98,810,657 in 1998
and $72,190,599 in 1997. During 1997 the investment portfolio increased due to
lack of growth in the loan portfolio in the first three quarters. The spread
between overnight funds and the treasury curve widened and it was advantageous
to invest longer term. In 1998 the investment portfolio growth was due to
increases in deposits, slower loan demand and borrowings from the Federal Home
Loan Bank. The total portfolio had a duration of 3.7 years on December 31, 1998
compared to 2.1 years on December 31, 1997. These maturities represent estimates
of the actual life of the instruments considering mortgage-back pay downs and
calls for tax-free securities.
In 1998 there were $76,804,462 classified as available for sale and $22,006,195
as held to maturity, compared with $58,770,760 available for sale and
$13,419,839 held to maturity in 1997. In 1997, declining rates caused an
increase in values, and the fair value was $639,723 above amortized cost by
year-end. In 1998 further declines in rates caused additional increases in
values, and the fair value was $786,980 above amortized cost by year-end.
The Bank took advantage of the declining rates in 1998 by repositioning the
portfolio. With the rates dropping there was concern that prepayment speeds on
the mortgage-backed securities would increase. By selling securities with large
premiums and high coupons and reinvesting in securities with small premiums and
lower coupons the Bank was able to lessen the probability of prepayments and
recognize an overall gain on the sale of $107,111.
13
<PAGE>
UNION NATIONAL BANCORP, INC.
MATURITY OF THE INVESTMENT SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
1 Year or Less 1-5 Years 5-10 Years Over 10 Years
---------------------- ----------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Book Average Book Average Book Average Book Average
Value Yield Value Yield Value Yield Value Yield
- -----------------------------------------------------------------------------------------------------------------------------------
Held to Maturity:
U.S.Treasury securities and
obligations of U.S. government
agencies $ 173,606 5.37% $ - - $ - $ -
Obligations of states and
political subdivisions (1) - - 2,771,059 6.90% 2,364,325 7.25% 12,740,151 6.81%
Mortgage-backed Securities - - - - 2,214,808 7.42 1,742,246 7.43
--------- ---------- ---------- ----------
TOTAL HELD TO MATURITY 173,606 5.37% 2,771,059 6.90% 4,579,133 7.33% 14,482,397 6.88%
--------- ---------- ---------- ----------
Available for Sale:
U.S.Treasury securities and
obligations of U.S. government
agencies 4,103,023 4.98% 16,008,306 6.15% 7,992,525 6.54% -
Obligations of states and
political subdivisions (1) - - - - 500,000 14.57 -
Mortgage-backed Securities - - 2,180,672 5.94 2,299,696 6.16 39,502,171 6.60%
Equity Securities - - - - 2,551,062 5.95 1,256,070 7.00
--------- ---------- ---------- ----------
TOTAL AVAILABLE FOR SALE 4,103,023 4.98% 18,188,978 6.12% 13,343,283 6.66% 40,758,241 6.61%
--------- ---------- ---------- ----------
TOTAL SECURITIES $4,276,629 5.00% $20,960,037 6.23% $17,922,416 6.83% $55,240,638 6.68%
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
<CAPTION>
Totals
---------------------
<S> <C> <C>
Book Average
Value Yield
- ----------------------------------
Held to Maturity:
U.S.Treasury securities and
obligations of U.S. government
agencies $ 173,606 5.37%
Obligations of states and
political subdivisions (1) 17,875,535 6.87
Mortgage-backed Securities 3,957,054 7.42
----------
TOTAL HELD TO MATURITY 22,006,195 6.96%
----------
Available for Sale:
U.S.Treasury securities and
obligations of U.S. government
agencies 28,103,854 6.07%
Obligations of states and
political subdivisions (1) 500,000 14.57
Mortgage-backed Securities 43,982,539 6.48
Equity Securities 3,807,132 6.27
----------
TOTAL AVAILABLE FOR SALE 76,393,525 6.37%
----------
TOTAL SECURITIES $98,399,720 6.50%
----------
----------
</TABLE>
1. YIELDS, CALCULATED USING AMORTIZED COST BOOK VALUES, ARE PRESENTED ON A FULLY
TAXABLE EQUIVALENT BASIS USING THE FEDERAL STATUTORY RATE OF 34%.
LOAN PORTFOLIO
Total loans outstanding on December 31, 1998 were $163,464,538 compared with
$158,347,687 in 1997. This increase of $5,116,851 from the previous year is
primarily in the commercial and real estate secured portfolios. The portfolio
represented 57.6% of total assets on December 31, 1998 compared with 63.2% in
1997.
The Company's loan portfolio mix has remained relatively constant over the years
and is composed of commercial loans, residential loans and consumer installment
loans (including indirect auto). At December 31, 1998, the commercial portfolio
(including commercial real estate) represents 65.4% of the total portfolio and
is comprised of commercial real estate mortgages, lines of credit, tax-exempt
loans through local municipalities, and demand notes for various purposes,
including but not limited to, working capital and equipment purchases. Some form
of real estate collateralizes the great majority of commercial loans. The
residential portfolio at December 31, 1998 represents 16.5% of the overall loan
portfolio and is a mix of well-seasoned mortgages along with more recent loans.
Only a minimal number of these loans have a loan to value greater than 80%. Most
residential mortgages are kept "in house", however the Company is involved in
selling mortgages on the secondary market. The consumer portfolio at December
31, 1998 makes up the remaining 18.1%. 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, and one farm equipment dealer. Since 1997,
home equity loans (fixed term and variable rate lines of credit) continue to
increase as a percentage of the consumer portfolio as indirect lending
decreases. Unsecured personal lines of credit and personal time and demand loans
comprise the remainder of the portfolio. The Company does not engage in foreign
lending, and involvement in speculative real estate and land development is
minimal. It is the Company'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. The Company, however, attempts 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.
Although some losses have resulted from recent devaluation of property values,
the remaining portion of such loans at risk is not large, barring any future
major economic crisis. Additionally, the Company continues to expand the
financial analysis and credit functions to enhance its capability of identifying
potential risk in the commercial portfolio.
14
<PAGE>
1998 ANNUAL REPORT
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 to reduce 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. Net Charge-offs as a percentage of total loans were reduced in 1997
and held at that level in 1998 as a result of these efforts.
The following table summarizes the composition of the loan portfolio at the
periods indicated:
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Commercial $31,170,049 $27,239,983 $27,563,398 $28,929,165 $28,265,832
Real Estate-Construction 4,646,007 5,893,105 1,842,538 2,494,150 4,147,476
Real Estate-Mortgage 109,948,918 103,041,363 91,262,059 89,709,340 85,709,692
Installment 18,020,174 22,609,757 27,219,780 26,368,732 22,313,141
----------- ----------- ----------- ----------- -----------
GROSS LOANS 163,785,148 158,784,208 147,887,775 147,501,387 140,436,141
Net deferred loan fees and costs (320,610) (436,521) (537,235) (679,793) (706,234)
----------- ----------- ----------- ----------- -----------
GROSS LOANS (NET OF DEFERRED FEES AND
COSTS) 163,464,538 158,347,687 147,350,540 146,821,594 139,729,907
Allowance for loan losses (1,772,895) (1,793,112) (1,772,433) (1,769,077) (1,670,940)
----------- ----------- ----------- ----------- -----------
NET LOANS $161,691,643 $156,554,575 $145,578,107 $145,052,517 $138,058,967
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
MATURITY SCHEDULE OF LOANS
<TABLE>
<CAPTION>
Over One
Within Five
One year or less years Over Five years Total
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Commercial $ 3,627,861 $24,906,777 $ 2,635,411 $31,170,049
Real Estate-Construction 991,714 2,243,268 1,411,024 4,646,006
Real Estate-Mortgage 7,601,357 10,547,381 91,800,181 109,948,919
Installment 3,069,300 13,052,989 1,897,885 18,020,174
---------------- ---------------- ---------------- ----------------
TOTAL $15,290,232 $50,750,415 $97,744,501 $163,785,148
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Total Loans with Predetermined
Rates $4,307,684 $36,271,144 $32,804,989 $73,383,817
Total Loans with Variable rates 10,982,548 14,479,271 64,939,512 90,401,331
---------------- ---------------- ---------------- ----------------
TOTAL $15,290,232 $50,750,415 $97,744,501 $163,785,148
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
</TABLE>
15
<PAGE>
UNION NATIONAL BANCORP, INC.
ALLOWANCE FOR CREDIT LOSSES AND MANAGEMENT OF CREDIT RISK
A comparative analysis for the allowance for credit losses, including charge-off
activity, is presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Average total loans $160,168,014 $148,586,476 $146,478,690 $144,641,805 $130,920,960
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Balance, beginning of period $ 1,793,112 $ 1,772,433 $ 1,769,077 $ 1,670,940 $ 1,503,371
----------- ----------- ----------- ----------- -----------
Less charge-offs:
Commercial 265,953 174,899 263,682 84,063 87,845
Installment 90,772 127,434 123,050 122,824 116,007
Residential real estate 15,000 9,047 - - 32,483
----------- ----------- ----------- ----------- -----------
TOTAL CHARGE-OFFS 371,725 311,380 386,732 206,887 236,335
----------- ----------- ----------- ----------- -----------
Plus recoveries:
Commercial 17,225 21,891 17,051 2,668 1,249
Installment 83,850 35,160 44,037 37,356 60,655
Residential real estate 4,433 8 - 53,000 -
----------- ----------- ----------- ----------- -----------
TOTAL RECOVERIES 105,508 57,059 61,088 93,024 61,904
----------- ----------- ----------- ----------- -----------
Net charge-offs 266,217 254,321 325,644 113,863 174,431
----------- ----------- ----------- ----------- -----------
Provision for credit losses 246,000 275,000 329,000 212,000 342,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Balance, end of period $ 1,772,895 $ 1,793,112 $ 1,772,433 $ 1,769,077 $ 1,670,940
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Allowance for credit losses to
period-end gross loans-net 1.08% 1.13% 1.20% 1.21% 1.20%
Allowance for credit losses to
nonaccrual loans 349.61 252.78 140.72 322.48 716.00
Net charge-offs to average total loans 0.17 0.17 0.22 0.08 0.13
</TABLE>
The following table allocates the allowance for credit losses by loan type. This
allocation does not limit the amount of the allowance available to absorb losses
from any 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.
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Commercial $1,016,957 $1,140,580 $ 853,418 $ 455,916 $ 572,029
Real Estate-mortgage 163,516 160,978 302,760 110,694 163,717
Real Estate-construction 102,515 - - 4,095 -
Installment 312,936 271,757 309,883 355,320 467,891
Unallocated portion 176,971 219,797 306,372 843,052 467,303
--------- --------- --------- --------- ---------
TOTAL ALLOWANCE FOR CREDIT LOSSES $1,772,895 $1,793,112 $1,772,433 $1,769,077 $1,670,940
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
16
<PAGE>
1998 ANNUAL REPORT
LOAN CATAGORIES BY PERCENTAGES
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Commercial 65% 60% 57% 57% 56%
Residential Real Estate 17 19 22 22 23
Installment 18 21 21 21 21
--- --- --- --- ---
TOTAL 100% 100% 100% 100% 100%
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
A decrease in the level of the allowance, both in dollars and as a percentage of
total loans, is warranted because of improvement in the quality of the loan
portfolio and the reduced risk factors of the loans. Management uses a detailed
analysis of the portfolio to determine the adequacy of the allowance for credit
losses. Prior loss history along with current trends, both nationally and
locally, is taken into consideration. Additionally: (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. It is the Company'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 nonaccrual, restructured, and
past due loans, as well as foreclosed assets. It is the policy of the Company to
consider a loan not in the process of collection when there is doubt of 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 nonaccrual status, any
previously accrued income is charged against income, and no future income is
accrued until performance is restored.
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 507,105 $ 709,348 $1,259,558 $ 548,578 $ 233,373
Restructured loans - - - - -
Loans past due 90 or more days accruing interest 726,647 545,854 40,192 - -
--------- --------- --------- --------- ---------
TOTAL NONPERFORMING LOANS 1,233,752 1,255,202 1,299,750 548,578 233,373
Foreclosed assets - 215,000 391,236 183,067 288,960
--------- --------- --------- --------- ---------
TOTAL NONPERFORMING ASSETS $1,233,752 $1,470,202 $1,690,986 $ 731,645 $ 522,333
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Nonperforming loans to gross loans at period-end 0.76% 0.79% 0.88% 0.37% 0.17%
Nonperforming assets to period-end gross loans plus
foreclosed assets 0.76% 0.93% 1.14% 0.50% 0.37%
</TABLE>
The loans listed above as nonaccrual are significantly past due and not
considered to be in the process of collection. Income recorded on these loans as
compared to income expected under the original loan agreements for the years
ended December 31, 1998, 1997 and 1996 is detailed in the following table.
<TABLE>
<CAPTION>
Income recorded Income expected
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
1998 $29,598 $ 43,440
1997 38,709 132,144
1996 41,050 136,213
</TABLE>
Once the collection is deemed to be unlikely over the foreseeable future, a loan
is charged-off. Even though a loan is charged-off, the Company continues to work
with a borrower to collect the entire balance whenever possible. In addition
17
<PAGE>
UNION NATIONAL BANCORP, INC.
to the above loans, certain other loans, estimated to aggregate $2,600,755 at
December 31, 1998, 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. As evidenced by the
1998 figures, much of management's effort in 1998 was focussed on improving the
quality of the loan portfolio by working on problem loans that have existed for
several years. While management does not anticipate any loss not previously
provided for on these loans, changes in the financial condition of these
borrowers may necessitate future modifications in the repayment terms.
DEPOSITS
The Company uses deposits as the primary source of funding of its assets. 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 deposit, are obtained
primarily from the communities that the Company serves. 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
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Average % of Average % of Average
(IN THOUSANDS) Balance Rate Total Balance Rate Total Balance Rate
- --------------------------------------------------------------------------------------------------------------------------------
NONINTEREST-BEARING DEMAND DEPOSITS $ 24,370 - 11.37% $ 22,849 - 11.46% $ 20,976 -
--------- --------- --------- --------- ---------
Interest-bearing demand deposits 25,107 1.96% 11.71 19,787 2.04% 9.92 18,462 2.05%
Regular savings deposits 33,274 2.72 15.52 31,470 2.73 15.78 33,190 2.74
Money market savings deposits 18,075 3.05 8.43 17,919 3.16 8.98 18,528 3.16
Time deposits 113,554 5.52 52.97 107,410 5.47 53.86 102,739 5.67
--------- --------- --------- --------- ---------
TOTAL INTEREST-BEARING DEPOSITS $ 190,010 4.32 88.63 $ 176,586 4.36 88.54 $ 172,919 4.45
--------- --------- --------- --------- ---------
TOTAL DEPOSITS $ 214,380 3.83% 100.00% $ 199,435 3.86% 100.00% $ 193,895 3.97%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
<S> <C>
% of
(IN THOUSANDS) Total
- ----------------------------------------
NONINTEREST-BEARING DEMAND DEPOSITS 10.82%
---------
Interest-bearing demand deposits 9.52
Regular savings deposits 17.12
Money market savings deposits 9.56
Time deposits 52.98
---------
TOTAL INTEREST-BEARING DEPOSITS 89.18
---------
TOTAL DEPOSITS 100.00%
---------
---------
</TABLE>
Total deposits were $226,337,379 on December 31, 1998 as compared to
$205,638,796 on December 31, 1997. The main source of deposits in 1998 was time
deposits, which grew $8.3 million or 7.7% to $116,891,963. In addition, checking
accounts, regular savings and money market accounts rose $12.6 million or 13.1%
to $109,445,416 driven by strong growth in interest-bearing demand deposits.
The following is a summary of the maturity distribution of certificates of
deposit in the amount of $100,000 or more as of December 31, 1998:
MATURITIES OR REPRICING OF CD'S OF $100,000 OR MORE ON DECEMBER 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------------------------------------------------------
Maturing in:
Three months or less $ 4,250 18.77% $ 4,689 23.42% $ 3,176 13.56%
Over three months through six months 3,406 15.04 2,559 12.78 4,983 21.29
Over six months through twelve months 5,376 23.74 3,692 18.44 11,195 47.83
Over twelve months 9,615 42.45 9,084 45.36 4,053 17.32
----------- ----------- ----------- ----------- ----------- -----------
$ 22,647 100.00% $ 20,024 100.00% $ 23,407 100.00%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
18
<PAGE>
1998 ANNUAL REPORT
OTHER BORROWINGS
Short-term borrowings consist of Federal Funds purchased, repurchase agreements,
and borrowings from the Federal Reserve Bank or the Federal Home Loan Bank. In
June of 1998 Management drew on $10,000,000 of its line of credit with the
Federal Home Loan Bank to fund securities purchases. In September of 1997
$10,000,000 of the line of credit with the Federal Home Loan Bank was used to
fund increased loan growth and securities purchases. Borrowings from the Federal
Home Loan Bank averaged $15,000,000 during 1998 and $2,684,931 during 1997.
Repurchase agreements averaged $16,362,656 during 1998 compared to $11,771,647
during 1997. At year-end, they were $13,577,689 in 1998 and $13,776,373 in 1997.
These funds included customer repurchase agreements in addition to those funds
that were obtained solely to provide liquidity.
FED FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Total outstanding at year end $13,577,689 $13,776,373 $6,808,596
Average amount outstanding during the year 16,362,656 11,771,647 8,555,503
Maximum outstanding at any month-end 30,005,162 21,670,304 17,802,839
Weighted-average interest rate at year-end 3.92% 5.02% 4.50%
Weighted-average interest rate during the year 4.71% 4.56% 4.30%
</TABLE>
LIQUIDITY
Assuring adequate liquidity involves meeting future cash flow needs. Reducing
asset balances, increasing deposits and short term borrowings can provide this
liquidity, or a combination of both may be employed. Traditionally, the Company
has maintained a strong liquidity position because core deposit growth has been
able to match loan growth. Federal Funds sold is the Bank's most liquid earning
asset. Other sources include money market instruments and securities classified
as available for sale. In addition to these sources, the Bank has total credit
lines of $47.5 million available from correspondent banks of which $20 million
were in use at year-end.
On December 31, 1998 securities available for sale and federal funds sold
totaled $84,520,602, compared with $64,843,156 in 1997. These funds averaged
$77,653,773 in 1998 and $58,427,657 in 1997. Managing the maturities of loans,
securities, and certificates of deposit also provides asset liquidity.
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 a 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, the Company 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.
The Company's rate-sensitivity position reflected in the following table,
"Interest Rate Sensitivity Analysis," shows an asset sensitive gap. This
analysis makes several assumptions. First, both noninterest-bearing and savings
accounts are not rate sensitive. However, management projects a potential 10%
run-off in savings accounts over a three month period, for money market they
project a potential 30% of balances over a three month period, and for
interest-bearing deposits they project a potential 50% of balances over a three
month period. Convertible CD's are shown by their maturity dates and in a
rapidly rising rate environment, this category would exhibit additional
sensitivity. 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.
19
<PAGE>
UNION NATIONAL BANCORP, INC.
INTEREST RATE SENSITIVITY ANALYSIS-DECEMBER 31, 1998
<TABLE>
<CAPTION>
Maturing or repricing in:
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1-90 91-180 181-365 1-5 Over 5
(IN THOUSANDS) Days Days Days Years Years
- -----------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS
Loans $ 40,243 $ 7,614 $ 12,852 $ 18,304 $ 84,451
Securities 15,092 9,747 14,366 34,019 25,586
Federal funds sold 7,716 - - - -
--------- --------- --------- --------- ---------
TOTAL RATE-SENSITIVE ASSETS $ 63,051 $ 17,361 $ 27,218 $ 52,323 $ 110,037
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative rate-sensitive assets $ 63,051 $ 80,412 $ 107,630 $ 159,953 $ 269,990
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
RATE-SENSITIVE LIABILITIES
Interest bearing checking $ 14,118 $ - $ - $ - $ 14,118
Money market deposits 5,688 - - - 13,277
Regular savings 3,399 - - - 30,599
Certificates of deposits 15,492 14,516 29,291 57,402 190
Other borrowings 13,578 - - 20,000 -
--------- --------- --------- --------- ---------
TOTAL RATE-SENSITIVE LIABILITIES $ 52,275 $ 14,516 $ 29,291 $ 77,402 $ 58,184
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Cumulative rate-sensitive liabilities $ 52,275 $ 66,791 $ 96,082 $ 173,484 $ 231,668
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Period gap $ 10,776 $ 2,845 $ (2,073) $ (25,079) $ 51,853
Cumulative gap $ 10,776 $ 13,621 $ 11,548 $ (13,531) $ 38,322
Cumulative rate-sensitive assets to rate-sensitive
liabilities 120.61% 120.39% 112.02% 92.20% 116.54%
Cumulative gap to total assets 3.80% 4.80% 4.07% (4.77)% 13.50%
</TABLE>
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For loans,
securities, and liabilities with contractual maturities, the table presents
principal cash flows and related weighted-average interest rates by contractual
maturities. For core deposits (e.g. DDA, interest checking, savings and money
market deposits) that have no contractual maturity, the table presents principal
cash flows and, as applicable, related weighted-average interest rates in the
longest designated maturity classification.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNTS MATURING IN:
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter
- ----------------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE ASSETS:
Fixed interest rate loans $ 4,308 $ 4,509 $ 8,520 $ 14,700 $ 8,542 $ 32,805
Average interest rate 8.35% 9.29% 8.95% 8.70% 8.53% 8.04%
Variable interest rate loans $ 10,982 $ 8,243 $ 3,793 $ 1,466 $ 977 $ 64,940
Average interest rate 8.80% 8.42% 9.61% 9.57% 9.46% 8.55%
Fixed interest rate securities $ 4,271 $ 977 $ 6,136 $ 4,320 $ 9,564 $ 71,816
Average interest rate 4.89% 5.87% 5.75% 4.58% 5.99% 5.68%
Variable interest rate securities $ - $ - $ - $ - $ - $ 1,726
Average interest rate - - - - - 5.91%
Other interest-bearing assets $ 7,716 $ - $ - $ - $ - $ -
Average interest rate 4.75% - - - - -
</TABLE>
20
<PAGE>
1998 ANNUAL REPORT
<TABLE>
<CAPTION>
PRINCIPAL AMOUNTS MATURING IN:
(IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE LIABILITIES:
Noninterest-bearing checking $ - $ - $ - $ - $ - $ 28,247
Average interest rate - - - - - -
Savings and interest-bearing checking $ - $ - $ - $ - $ - $ 81,198
Average interest rate - - - - - 2.11%
Time deposits $ 59,340 $ 40,024 $ 13,787 $ 1,967 $ 1,584 $ 190
Average interest rate 5.08% 5.92% 4.67% 5.67% 5.23% 5.30%
Fixed interest rate borrowings $ - $ - $ - $ 10,000 $ - $ 10,000
Average interest rate - - - 5.66% - 5.51%
Variable interest rate borrowings $ 13,578 $ - $ - $ - $ - $ -
Average interest rate 3.93% - - - - -
</TABLE>
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 as Tier I (common stockholders' equity less certain
intangible assets as defined in the regulations) 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 4% leverage capital ratio (Tier I capital to average
total assets).
The Company's capital position is presented in the following table:
CAPITAL MANAGEMENT
<TABLE>
<CAPTION>
December 31,
-------------------- Regulatory
1998 1997 Requirement
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Tier 1 capital to risk-weighted assets 12.1% 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>
RECENT STOCK PRICE RANGES AND DIVIDENDS
The Company's stock, although now publicly traded, is sold and exchanged
principally among area residents. There were 473 stockholders of record as of
December 31, 1998. The table below shows the range from the lowest price paid to
the highest along with dividend payments each quarter.
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------- --------------------------------- --------------------
Price Range Price Range Price Range
-------------------- Dividends -------------------- Dividends --------------------
Low High Declared Low High Declared Low High
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
1st Quarter(1) $ 16.82 $ 22.75 $ 0.091 $ 14.55 $ 16.82 $ 0.068 $ 12.73 $ 12.73
2nd Quarter(1) 19.09 30.45 0.095 15.00 16.93 0.073 14.09 14.55
3rd Quarter(1) 25.45 28.18 0.100 15.11 16.82 0.082 13.64 15.34
4th Quarter(1) 29.00 32.00 0.110 15.11 17.27 0.086 14.55 16.31
<CAPTION>
Dividends
Declared
<S> <C>
- ------------------------------------
1st Quarter(1) $ 0.064
2nd Quarter(1) 0.064
3rd Quarter(1) 0.064
4th Quarter(1) 0.068
</TABLE>
(1) THE QUARTERLY STOCK PRICES AND DIVIDENDS HAVE BEEN RESTATED FOR THE EFFECTS
OF A 10% STOCK DIVIDEND THAT WAS DISTRIBUTED ON OCTOBER 22, 1998.
21
<PAGE>
UNION NATIONAL BANCORP, INC.
INFLATION
The effect of changing prices on financial institutions is typically different
than on non-banking companies since virtually all of a bank's assets and
liabilities are monetary in nature. In particular, interest rates are
significantly affected by inflation, but neither the timing nor magnitude of the
changes are directly related to price level indices; therefore, the Company can
best counter inflation over the long term by managing net interest income and
controlling net increases in noninterest income and expenses.
YEAR 2000 CONVERSION AND COMPLIANCE
The Year 2000 brings a potentially critical problem to all computers, software
and microchip dependent systems. Many computer programs use only a two digit
character for the year ("1998" would appear as "98"). Computers that use these
programs are not able to distinguish between the years 1900 and 2000. Left
uncorrected, this situation will result in incorrect calculations, data and
reports, inability to carry out electronic funds transfers and the shut down of
entire systems. Additionally, some computer systems may have trouble with the
fact that the Year 2000 is a leap year.
In November 1997, we formed the Year 2000 Committee to develop and execute plans
to address our Year 2000 issues. Members include employees from all areas of the
bank. Management assigned a full time senior level manager to lead these
efforts. The Board of Directors approved a plan, using the five-phase approach
recommended by the Federal Financial Institution Examination Council. These five
phases include:
- Awareness
- Assessment
- Renovation
- Validation
- Implementation
We completed the initial assessments of risk associated with service providers
and material customers. We will continue to monitor the Year 2000 progress of
these parties.
Mission critical system tests are nearly completed. Fiserv, Incorporated and
Information Technology, Incorporated provide the core accounting software and
processing environment used to calculate and process customer transactions.
Phases one and two of testing at the Fiserv data center prove that this core
software processes dates in and beyond the Year 2000. Phase three tested the
systems that allow us to communicate with the Fiserv data center. These systems
are compliant. We use off-the-shelf software for spreadsheets, word processing
and forms generation. We have and will continue to rely on the manufacturers'
recommendations for upgrades and our test results to verify this software is
compliant. The elevators and security systems in our facilities are not impacted
by the Year 2000.
Management estimates the total project cost to be $85,373. This expense will not
have a material impact on future operating results or our financial condition.
As of December 31, 1998, we spent $42,817 to evaluate, upgrade and test our
systems and to communicate Year 2000 progress to our customers. The project is
ongoing and actual costs could differ from what has been anticipated.
One of the most significant risks that we face is the potential for liquidity
issues resulting from public panic or Year 2000 related financial difficulties
of our customers. In anticipation of this possibility, we developed and
implemented a consumer awareness program that includes:
- Educational seminars
- Brochures
- Posters
- Direct mail pieces
- Statement inserts
22
<PAGE>
1998 ANNUAL REPORT
We issue a quarterly "Year 2000 Readiness Disclosure" to report our progress to
our customers. The Year 2000 Readiness Disclosure is available at all of our
branch locations. Customers can request the report through our call center and
on our web page. Relationship managers meet with material commercial customers
to raise awareness and to evaluate the progress of their project. The Financial
Manager and the Chief Operating Officer are addressing the potential increase on
liquidity demands in the Company's contingency plans.
The Company is completing contingency plans that outline the steps we will take
to restore major bank functions in the event there are any system failures as
the century date changes. These plans will be tested to verify they provide
satisfactory results and maintain adequate service levels. In addition, we
established target dates for mission critical service providers to certify their
systems as Year 2000 ready. We will secure alternate providers if current
vendors do not adequately meet the target dates.
The Company's Year 2000 Program is currently on schedule to conclude by July 1,
1999.
SECURITIES AND EXCHANGE COMMISSION WEB SITE INFORMATION
The Securities and Exchange Commission maintains a web site that contains
reports, proxy and information statements, and other information regarding
registrants that file electronically with the Commission, including the Company;
that address is: HTTP:\\WWW.SEC.GOV.
23
<PAGE>
UNION NATIONAL BANCORP, INC.
SELECTED FINANCIAL DATA 1994 - 1998
<TABLE>
<CAPTION>
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
RESULTS FROM OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Interest Income $ 20,377 $ 18,214 $ 17,361 $ 17,091 $ 15,109
Interest Expense 9,836 8,393 8,099 8,092 6,289
--------- --------- --------- --------- ---------
Net Interest Income 10,541 9,821 9,262 8,999 8,820
Provision for Credit Losses 246 275 329 212 342
--------- --------- --------- --------- ---------
Net Interest Income after Provision for Credit Losses 10,295 9,546 8,933 8,787 8,478
Noninterest Income 1,554 1,327 1,086 977 1,314
Noninterest Expense 8,156 7,309 7,255 7,114 6,849
--------- --------- --------- --------- ---------
Income Before Income Taxes 3,693 3,564 2,764 2,650 2,943
Provision for Income Taxes 1,055 1,164 934 890 970
--------- --------- --------- --------- ---------
NET INCOME $ 2,638 $ 2,400 $ 1,830 $ 1,760 $ 1,973
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------
Total assets $ 283,913 $ 250,781 $ 225,131 $ 218,891 $ 207,281
Investment securities (including available for sale) 98,811 72,191 55,940 52,421 54,938
Loans, net of unearned income 163,465 158,348 147,351 146,822 139,730
Allowance for loan losses 1,773 1,793 1,772 1,769 1,671
Deposits 226,337 205,639 199,291 193,462 182,533
Stockholders' Equity 22,237 20,064 17,900 16,421 13,858
PER SHARE DATA
- ---------------------------------------------------------------------------------------------------------------
Net income (basic and diluted) $ 1.43 $ 1.30 $ 1.00 $ 0.96 $ 1.07
Dividends 0.40 0.31 0.26 0.24 0.23
Stockholders' equity 12.01 10.89 9.75 8.95 7.55
PERFORMANCE RATIOS
- ---------------------------------------------------------------------------------------------------------------
Return on average assets 0.98% 1.02% 0.83% 0.82% 0.99%
Return on average equity 12.46 12.71 10.61 11.34 14.22
Net interest margin on average earning assets 4.29 4.53 4.53 4.56 4.83
Efficiency (noninterest expense / (net interest income +
noninterest income)) 67.43 65.56 70.11 71.3 67.58
LIQUIDITY AND CAPITAL RATIOS
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity (% assets) 7.83% 8.00% 7.95% 7.50% 6.69%
Risk-based:
Tier 1 Capital 12.14 11.73 11.60 10.78 10.35
Total Capital 13.12 12.78 12.80 11.92 11.69
Dividends (% net income) 27.97 23.84 26.00 25.00 21.50
Loans to deposits 72.22 77.00 73.94 75.89 76.55
ASSET QUALITY RATIOS
- ---------------------------------------------------------------------------------------------------------------
Allowance for credit losses to total loans 1.08% 1.13% 1.20% 1.20% 1.20%
Allowance for credit losses to non-performing loans 143.70 142.85 136.34 322.24 717.14
Net loan charge-offs to average total loans 0.17 0.17 0.22 0.08 0.13
</TABLE>
24
<PAGE>
1998 ANNUAL REPORT
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, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Union National
Bancorp, Inc. and subsidiary as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
Frederick, Maryland
January 15, 1999
To the Stockholders and Board of Directors
Union National Bancorp, Inc.
Westminster, Maryland
We have audited the accompanying consolidated statements of income,
comprehensive income, changes in stockholders' equity, and cash flows of Union
National Bancorp, Inc. and subsidiary for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Union National Bancorp, Inc. and subsidiary for the year ended December 31,
1996, in conformity with generally accepted accounting principles.
[Signature to come]
Baltimore, Maryland
January 8, 1997
25
<PAGE>
UNION NATIONAL BANCORP, INC.
UNION NATIONAL BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks $ 6,867,629 $ 7,870,449
Interest bearing deposits with banks 280,817 25,108
Federal funds sold 7,716,140 6,072,396
Investment securities available for sale-at fair value 76,804,462 58,770,760
Investment securities held to maturity-at amortized cost-fair value of
$22,382,238 (1998) and $13,647,089 (1997) 22,006,195 13,419,839
Loans 163,464,538 158,347,687
Less: allowance for credit losses (1,772,895) (1,793,112)
----------- -----------
Loans-net 161,691,643 156,554,575
----------- -----------
Premises and equipment 4,326,226 4,205,824
Foreclosed real estate - 215,000
Accrued interest receivable 1,699,794 1,708,814
Other assets 2,520,529 1,938,115
----------- -----------
TOTAL ASSETS $283,913,435 $250,780,880
----------- -----------
----------- -----------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing deposits $28,247,301 $26,096,600
Interest-bearing deposits 198,090,078 179,542,196
----------- -----------
TOTAL DEPOSITS 226,337,379 205,638,796
Short-term borrowings 13,577,689 13,776,373
Federal Home Loan Bank borrowings 20,000,000 10,000,000
Accrued expenses and other liabilities 1,761,688 1,301,385
----------- -----------
TOTAL LIABILITIES 261,676,756 230,716,554
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 4 & 11)
STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
Common stock-$.01 par; 10,000,000 shares authorized; 1,851,458 shares in 1998
and 1,674,800 shares in 1997 issued and outstanding 18,514 16,748
Capital surplus 13,570,913 8,469,115
Accumulated other comprehensive income 203,833 149,136
Retained earnings 8,443,419 11,429,327
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 22,236,679 20,064,326
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $283,913,435 $250,780,880
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
26
<PAGE>
1998 ANNUAL REPORT
UNION NATIONAL BANCORP, INC
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
- ---------------------------------------------------------------------------------------------------------
Interest and fees on loans $14,558,024 $13,652,870 $13,707,367
Interest and dividends on investment securities:
Taxable interest on mortgage backed securities 2,562,551 1,361,956 1,453,544
Other taxable interest and dividends 1,931,675 2,432,532 1,346,903
Nontaxable interest 586,900 303,532 361,482
Interest on deposits at other banks 3,568 3,762 61,229
Interest on federal funds sold 734,448 459,479 430,342
---------- ---------- ----------
TOTAL INTEREST INCOME 20,377,166 18,214,131 17,360,867
---------- ---------- ----------
INTEREST EXPENSE:
- ---------------------------------------------------------------------------------------------------------
Interest on deposits:
Certificates of deposit of $100,000 and more 1,118,868 1,021,731 1,097,504
Other deposits 7,093,244 6,677,699 6,604,581
---------- ---------- ----------
TOTAL INTEREST ON DEPOSITS 8,212,112 7,699,430 7,702,085
Interest on short-term borrowings 770,918 537,058 370,144
Interest on Federal Home Loan Bank borrowings 852,858 156,299 26,300
---------- ---------- ----------
TOTAL INTEREST EXPENSE 9,835,888 8,392,787 8,098,529
---------- ---------- ----------
Net interest income 10,541,278 9,821,344 9,262,338
Provision for credit losses 246,000 275,000 329,000
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 10,295,278 9,546,344 8,933,338
---------- ---------- ----------
NONINTEREST INCOME:
- ---------------------------------------------------------------------------------------------------------
Service charges on deposit accounts 1,105,455 1,023,404 796,490
Other service charges 205,089 162,104 152,765
Net gain on sale of loans - - 19,791
Net gain on sale of securities 107,111 - -
Other income 136,799 141,192 116,754
---------- ---------- ----------
TOTAL NONINTEREST INCOME 1,554,454 1,326,700 1,085,800
---------- ---------- ----------
NONINTEREST EXPENSE:
- ---------------------------------------------------------------------------------------------------------
Salaries and employee benefits 4,522,630 4,057,005 3,879,323
Occupancy expense 859,869 756,231 802,443
Equipment expense 424,487 430,638 335,136
Computer service fees 514,981 418,459 598,147
FDIC assessment 25,168 24,559 2,000
Legal and professional 266,407 173,399 199,965
Check clearing fees 59,827 71,031 40,784
Expenses related to terminated merger activities - - 287,824
Other expenses 1,483,132 1,377,722 1,109,356
---------- ---------- ----------
TOTAL NONINTEREST EXPENSES 8,156,501 7,309,044 7,254,978
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 3,693,231 3,564,000 2,764,160
PROVISION FOR INCOME TAXES 1,055,407 1,163,898 934,132
---------- ---------- ----------
NET INCOME $2,637,824 $2,400,102 $1,830,028
---------- ---------- ----------
---------- ---------- ----------
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ 1.43 $ 1.30 $ 1.00
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
UNION NATIONAL BANCORP, INC.
UNION NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Net Income $2,637,824 $2,400,102 $1,830,028
OTHER COMPREHENSIVE INCOME, BEFORE TAXES
Unrealized holding gains arising during period 196,223 338,419 202,817
Less: reclassification adjustment for gains included in net income 107,111 - -
--------- --------- ---------
Other comprehensive income, before tax 89,112 338,419 202,817
Income tax expense related to items of other comprehensive income (34,415) (130,697) (78,328)
--------- --------- ---------
Other comprehensive income, net of taxes 54,697 207,722 124,489
--------- --------- ---------
COMPREHENSIVE INCOME $2,692,521 $2,607,824 $1,954,517
--------- --------- ---------
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
1998 ANNUAL REPORT
UNION NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Comprehensive Retained
Stock Surplus Income Earnings Total
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 8,340 $8,342,055 $ (183,075) $8,253,883 $16,421,203
Net income - - - 1,830,028 1,830,028
Cash dividends ($.26 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) 9,608,531 $17,900,340
Net income - - - 2,400,102 2,400,102
Cash dividends ($.31 per share) - - - (567,120) (567,120)
Dividend Reinvestment Plan 34 127,060 - (3,812) 123,282
Two-for-one stock split effected in the
form of a 100% stock dividend 8,374 - - (8,374) -
Unrealized appreciation on securities
available for sale (net of tax) - - 207,722 - 207,722
----------- ---------- -------------- ---------- ----------
BALANCE AT DECEMBER 31, 1997 16,748 8,469,115 149,136 11,429,327 $20,064,326
Net income - - - 2,637,824 2,637,824
Cash dividends ($.40 per share) - - - (740,829) (740,829)
Dividend Reinvestment Plan 84 227,441 - (6,864) 220,661
Stock dividend (10%) 1,682 4,874,357 - (4,876,039) -
Unrealized appreciation on securities
available for sale (net of tax) - - 54,697 - 54,697
----------- ---------- -------------- ---------- ----------
BALANCE AT DECEMBER 31, 1998 $ 18,514 $13,570,913 $ 203,833 $8,443,419 $22,236,679
----------- ---------- -------------- ---------- ----------
----------- ---------- -------------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
UNION NATIONAL BANCORP, INC.
UNION NATIONAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income....................................................... $ 2,637,824 $ 2,400,102 $ 1,830,028
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for credit losses................................... 246,000 275,000 329,000
Depreciation and amortization.................................. 663,236 641,442 565,016
Gain on sale of foreclosed real estate and other assets........ (990) (21,128) (50,227)
Net gain on sale of securities................................. (107,111) - -
Provision for deferred income taxes............................ (15,494) (21,378) (29,433)
Provision for foreclosed real estate........................... 85,160 75,000 -
Non-cash contribution.......................................... 1,404 1,571 -
Net decrease (increase) in accrued interest receivable......... 9,020 (416,620) 108,996
Net increase in accrued expenses and other liabilities......... 460,302 170,285 263,979
Other--net..................................................... (573,062) 26,689 201,992
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES...................... 3,406,289 3,130,963 3,219,351
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities....................... (84,510,680) (34,962,184) (18,009,500)
Proceeds from sale of available for sale securities.............. 15,997,507 - -
Proceeds from maturities of available for sale securities........ 50,542,642 15,235,953 6,176,022
Purchases of held to maturity securities......................... (13,161,433) - (650,000)
Proceeds from maturities of held to maturity securities.......... 4,678,461 3,785,800 9,272,045
Proceeds from sale of other real estate and other assets......... 349,550 537,364 351,413
Net increase in loans............................................ (5,601,798) (11,666,468) (1,301,595)
Premises and equipment acquired.................................. (783,638) (918,705) (642,719)
Foreclosed real estate acquired.................................. - - (124,451)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES.......................... (32,489,389) (27,988,240) (4,928,785)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits, NOW accounts, money
market accounts, and savings accounts.......................... 25,979,546 3,579,932 215,218
Net increase (decrease) in time deposits......................... (5,280,961) 2,767,428 5,614,375
Net increase (decrease) in short-term borrowings................. (198,684) 6,967,776 3,667,886
Proceeds from Federal Home Loan Bank borrowings.................. 10,000,000 10,000,000 -
Repayments of Federal Home Loan Bank borrowings.................. - - (5,000,000)
Dividend reinvestment plan....................................... 220,661 123,282 -
Cash dividends paid.............................................. (740,829) (567,120) (475,380)
----------- ----------- -----------
NET CASH PROVIDED BY FINACING ACTIVITIES....................... 29,979,733 22,871,298 4,022,099
----------- ----------- -----------
Net Increase (Decrease) In Cash And Cash Equivalents............... 896,633 (1,985,979) 2,312,665
Cash And Cash Equivalents At Beginning Of Year..................... 13,967,953 15,953,932 13,641,267
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................... $14,864,586 $13,967,953 $15,953,932
----------- ----------- -----------
----------- ----------- -----------
Supplemental Disclosures Of Cash Flow Information:
Interest paid.................................................... $ 9,849,303 $ 8,367,151 $ 8,112,787
----------- ----------- -----------
----------- ----------- -----------
Income taxes paid................................................ $ 1,024,000 $ 1,490,000 $ 922,000
----------- ----------- -----------
----------- ----------- -----------
Non-Cash Investing Activities
Transfer from loans to foreclosed real estate.................... $ 218,731 $ 415,000 $ 384,904
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
<PAGE>
1998 ANNUAL REPORT
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Union National Bancorp, Inc. (the "Parent Company") is a bank holding company
that provides a full range of banking and certain non-banking services to
individuals and businesses through its wholly owned subsidiary Union National
Bank (the Bank). The Bank's primary loan products include commercial and
consumer loans and real estate mortgages. The Bank's principal market area
encompasses Carroll County, Maryland and the surrounding region. Additionally,
the Bank maintains correspondent banking relationships and transacts daily
federal funds sales on an unsecured basis with regional correspondent banks.
The accounting and reporting policies of Union National Bancorp, Inc. and its
wholly owned subsidiary (collectively the "Company) 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 the current year. The following is a
summary of the Company's significant accounting polices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Parent Company
and the Bank. All significant intercompany transactions and balances have been
eliminated in consolidation. In the Parent Company's unconsolidated financial
statements the investment in subsidiary is accounted for using the equity method
of accounting.
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
allowances for real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of these allowances
management may obtain 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 the
Company's allowances for credit losses and foreclosed real estate. Such agencies
may require the Company 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
Securities available for sale represent those securities that management may
sell as part of its asset/liability management strategy or that may be sold in
response to changing interest rates or liquidity needs. Investment securities
available for sale are carried at fair value, with any unrealized gains and
losses reported, net of related income tax effects, in stockholders' equity as a
component of comprehensive income. The cost of securities sold is recognized
using the specific identification method.
INVESTMENT SECURITIES HELD TO MATURITY
Investment securities held to maturity are those that the Company has the
ability and intent to hold until maturity. These investments are carried at cost
adjusted for amortization of premiums and accretion of discounts.
31
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTEREST ON LOANS
Loans are carried 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 a yield adjustment.
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 payments received on such loans generally are applied as a reduction of
the loan principal balance unless the likelihood of further loss is remote.
IMPAIRED LOANS
Loans are considered impaired when, based on current information, it is probable
that the Company 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, loan cash flows and the value of the related collateral when
evaluating loan impairment. Impaired loans do not include large groups of
smaller balance homogeneous loans such as residential real estate and consumer
installment loans that 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. Impairment of a 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 the Company'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 when the likelihood of further
loss is remote.
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.
Management's evaluation of the loan portfolio considers the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. The allowance is increased by a
provision for credit losses, which is charged to expense, and reduced by
charge-offs, net of recoveries.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization of properties are computed using the
straight-line method over the estimated useful lives of the properties.
Expenditures for maintenance and repairs are charged to operations. Expenditures
for improvements that extend the life of an asset are capitalized and
depreciated over the asset's remaining useful life.
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure of loans is carried at the lower of
cost or fair market value minus estimated cost of disposal. 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 income.
INCOME TAXES
Provisions for income taxes are based on taxes payable or refundable for the
current year and deferred income taxes on temporary differences between the
amount of taxable income and pretax financial income and between tax bases of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are
32
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
included in the financial statements at current enacted tax rates and represent
the future tax return consequences of temporary differences, which will either
be taxable or deductible when the assets and liabilities are recovered or
settled.
BASIC AND DILUTED EARNINGS PER COMMON SHARE
In 1997 the Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share." This Statement established new standards for
computing and presenting earnings per share ("EPS"). It replaced the former
presentation of primary EPS with a presentation of basic EPS and, when
applicable, requires the dual presentation of basic and diluted EPS. Basic EPS
is computed by dividing net income by the weighted-average number of common
shares for the period. Diluted EPS reflects the potential dilution that could
occur if other contracts to issue common stock were exercised. Per share amounts
are based on weighted-average number of shares outstanding during each year as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING 1,847,663 1,834,819 1,834,800
Effect of stock options 5,693 - -
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING 1,853,356 1,834,819 1,834,800
</TABLE>
CASH FLOWS
The Company 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. 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 totaled $1,662,000 at December
31, 1998 and $1,600,000 at December 31, 1997. The average daily reserve balance
maintained during 1998 was $1,539,000 and 1997 was $1,322,000.
33
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
The amortized cost and estimated fair values of securities available for sale at
December 31, were as follows:
AVAILABLE FOR SALE:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government agencies $28,103,821 $ 174,572 $ 14,092 $28,264,301
Obligations of states and political subdivisions 500,000 56,250 - 556,250
Mortgage-backed securities 43,982,572 118,166 54,091 44,046,647
---------- ----------- ----------- ----------
Total debt securities 72,586,393 348,988 68,183 72,867,198
Equity securities 3,807,132 130,132 - 3,937,264
---------- ----------- ----------- ----------
TOTAL $76,393,525 $ 479,120 $ 68,183 $76,804,462
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government agencies $36,917,220 $ 112,812 $ 18,474 $37,011,558
Obligations of states and political subdivisions 500,000 77,400 - 577,400
Mortgage-backed securities 19,683,611 167,942 64,912 19,786,641
---------- ----------- ----------- ----------
Total debt securities 57,100,831 358,154 83,386 57,375,599
Equity securities 1,257,456 137,705 - 1,395,161
---------- ----------- ----------- ----------
TOTAL $58,358,287 $ 495,859 $ 83,386 $58,770,760
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
34
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair values of securities to be held to
maturity at December 31, were as follows:
HELD TO MATURITY:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government agencies $ 173,592 $ - $ 203 $ 173,389
Obligations of states and political subdivisions 17,875,549 363,947 42,207 18,197,289
Mortgage-backed securities 3,957,054 56,712 2,206 4,011,560
---------- ----------- ----------- ----------
TOTAL $22,006,195 $ 420,659 $ 44,616 $22,382,238
---------- ----------- ----------- ----------
---------- ----------- ----------- ----------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 Cost Gains Losses Value
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
U.S. Treasury securities and obligations of U.S.
government agencies $ 879,382 $ 2,819 $ 2,394 $ 879,807
Obligations of states and political subdivisions 5,233,663 104,824 265 5,338,222
Mortgage-backed securities 7,306,794 123,858 1,592 7,429,060
---------- ----------- ------ ----------
TOTAL $13,419,839 $ 231,501 $ 4,251 $13,647,089
---------- ----------- ------ ----------
---------- ----------- ------ ----------
</TABLE>
Gross realized gains and losses on sales of securities available for sale for
the years ended December 31, were:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
GROSS REALIZED GAINS: $ 126,727 $ - $ -
--------- --------- ---------
--------- --------- ---------
GROSS REALIZED LOSSES: $ 19,616 $ - $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
The scheduled maturities of securities held to maturity and securities available
for sale at December 31,1998, were as follows:
<TABLE>
<CAPTION>
Securities held to Securities available
maturity for sale
---------------------- ----------------------
<S> <C> <C> <C> <C>
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------
Due in one year or less $ 173,606 $ 173,389 $4,103,023 $4,097,143
Due from one year to five years 2,771,059 2,857,744 18,188,978 18,225,661
Due from five to ten years 4,579,133 4,703,686 10,792,221 10,983,816
Due after ten years 14,482,397 14,647,419 39,502,171 39,560,578
---------- ---------- ---------- ----------
TOTAL DEBT SECURITIES $22,006,195 $22,382,238 $72,586,393 $72,867,198
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
35
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $23,736,391 at December 31, 1998 and $26,990,800
at December 31, 1997 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, 1998 or
1997.
4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
At December 31 loans were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Real estate:
Construction $ 4,646,007 $ 5,893,105
Conventional mortgages 109,948,918 101,246,580
Loans to farmers 202,528 3,135,651
Commercial and industrial loans 26,151,033 22,715,372
Loans to individuals 18,020,174 22,379,555
Tax-exempt loans to political subdivisions 4,554,185 3,183,743
All other loans 262,303 230,202
----------- -----------
Gross loans 163,785,148 158,784,208
Net deferred loan fees and costs (320,610) (436,521)
----------- -----------
TOTAL LOANS $163,464,538 $158,347,687
----------- -----------
----------- -----------
</TABLE>
Changes in the allowance for credit losses for the years ended December 31,
1998, 1997, and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Balance at beginning of year $1,793,112 $1,772,433 $1,769,077
Provision charged to operating expenses 246,000 275,000 329,000
Recoveries 105,508 57,059 61,088
Loans charged off (371,725) (311,380) (386,732)
--------- --------- ---------
BALANCE AT END OF YEAR $1,772,895 $1,793,112 $1,772,433
--------- --------- ---------
--------- --------- ---------
</TABLE>
36
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding impaired loans for the years ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Impaired loans with a specific valuation allowance $ 171,965 $ 5,625 $ 109,495
Impaired loans without a specific valuation allowance 3,662,542 3,552,246 1,150,063
--------- --------- ---------
TOTAL IMPAIRED LOANS $3,834,507 $3,557,871 $1,259,558
--------- --------- ---------
--------- --------- ---------
Allowance for credit losses related to impaired loans $ 277,101 $ 221,178 $ 96,314
Allowance for credit losses related to other than impaired loans 1,495,794 1,571,934 1,676,119
--------- --------- ---------
TOTAL ALLOWANCE FOR CREDIT LOSSES $1,772,895 $1,793,112 $1,772,433
--------- --------- ---------
--------- --------- ---------
Average impaired loans for the year $3,219,507 $1,281,158 $ 965,871
--------- --------- ---------
--------- --------- ---------
Interest income on impaired loans recognized on a cash basis $ 23,717 $ 63,256 $ -
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's loans are widely dispersed among individuals and industries. On
December 31, 1998, there was no concentration of loans in any single industry
that exceeded 5% of total loans.
The Company 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.
The Company'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. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company 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.
The contract amounts of financial instruments that represent credit risk at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Commitments to extend credit 28,008,885 $29,376,732
Standby letters of credit 3,113,986 2,237,699
</TABLE>
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. The Company evaluates each customer's
creditworthiness on a case-by-case basis.
Standby letters of credit are conditional commitments issued by the Company 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.
37
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Land $ 260,085 $ 204,756
Buildings and leasehold improvements 5,231,962 5,124,858
Equipment 3,848,109 3,226,904
---------- ----------
9,340,156 8,556,518
Accumulated depreciation and amortization (5,013,930) (4,350,694)
---------- ----------
TOTAL $4,326,226 $4,205,824
---------- ----------
---------- ----------
</TABLE>
Depreciation and amortization charged to operations amounted to $663,236 in
1998, $641,442 in 1997, and $565,016 in 1996.
6. DEPOSITS
Interest-bearing deposits include certificates of deposit and other time
deposits in denominations of $100,000 or more which totaled $22,646,924 at
December 31,1998 and $20,024,381 at December 31, 1997.
At December 31,1998, the maturity distribution of certificates of deposit is as
follows:
<TABLE>
<S> <C>
Maturing in:
1999 $59,340,404
2000 40,023,509
2001 13,787,206
2002 1,967,219
2003 1,583,604
Thereafter 190,021
-----------
TOTAL $116,891,963
-----------
-----------
</TABLE>
Interest on deposits for the years ended December 31, 1998, 1997, and 1996
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Savings deposits $1,947,767 $1,828,015 $1,873,911
Certificates of deposit ($100,000 or more) 1,118,868 1,021,731 1,097,504
Other deposits 5,145,477 4,849,684 4,730,670
--------- --------- ---------
TOTAL $8,212,112 $7,699,430 $7,702,085
--------- --------- ---------
--------- --------- ---------
</TABLE>
38
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHORT-TERM BORROWINGS
Short-term borrowings include federal funds purchased and securities sold under
agreements to repurchase.
Selected information at December 31, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Average amount outstanding during year $16,362,656 $11,771,647
Weighted-average interest rate during year 4.71% 4.56%
Amount outstanding at year end 13,577,689 13,776,373
Weighted-average interest rate at year-end 3.92% 5.02%
Highest amount during year $30,005,162 $21,670,304
</TABLE>
At December 31, 1998, the Company had unused lines of credit in the total amount
of $27,500,000.
8. FEDERAL HOME LOAN BANK BORROWINGS
At December 31,1998, the Company had received two separate $10,000,000 advances
from the Federal Home Loan Bank. The first advance is due September 24, 2002,
callable in September 1999, with interest at 5.66%, and the second advance is
due June 23, 2008 callable in June 2003, with interest at 5.51%. The Bank has
pledged $40,000,000 of conventional mortgage loans as collateral on advances
from this source.
9. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT PENSION:
The Company sponsors a defined benefit pension plan covering substantially all
employees. Benefits are based on years of service and the employee's
compensation. The Company'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
39
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
those expected to be earned in the future. The change in benefit obligation and
change in plan assets for the years ended December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
Change in Benefit Obligation 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT BEGINNING OF YEAR $1,035,496 $1,160,553
SERVICE COST - BENEFITS EARNED DURING THE YEAR 72,280 83,251
INTEREST COST ON PROJECTED BENEFIT OBLIGATION 60,149 65,815
ACTUARIAL (GAIN) LOSS (33,526) 48,684
BENEFITS PAID (970) (322,807)
---------- ----------
BENEFIT OBLIGATION AT END OF YEAR $1,133,429 $1,035,496
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Change in Plan Assets
<S> <C> <C>
FAIR VALUE OF PLAN ASSETS AT BEGINNING OF YEAR $ 688,437 $ 832,418
ACTUAL RETURN ON PLAN ASSETS 50,921 93,269
EMPLOYER CONTRIBUTION 131,740 134,537
BENEFITS PAID (970) (371,787)
--------- ---------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR $ 870,128 $ 688,437
--------- ---------
FUNDED STATUS $(263,301) $(347,059)
UNRECOGNIZED NET ACTUARIAL LOSS 166,823 205,652
UNRECOGNIZED PRIOR SERVICE COST - (278)
UNRECOGNIZED NET OBLIGATION AT DECEMBER 15, 1988 BEING RECOGNIZED OVER 15 YEARS 17,482 23,309
--------- ---------
ACCRUED BENEFIT COST $ (78,996) $(118,376)
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
Weighted-average assumptions as of December 31, 1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
DISCOUNT RATE 7.50% 7.50%
EXPECTED LONG-TERM RETURN ON ASSETS 7.50 7.50
RATE OF COMPENSATION INCREASE 4.50 4.50
</TABLE>
The components of net periodic benefit cost for the years ended December 31,
1998, 1997 and 1996 is detailed in the following table:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SERVICE COST $ 72,280 $ 83,251 $ 86,195
INTEREST COST 60,149 65,815 84,964
ACTUAL RETURN ON ASSETS (50,921) (93,269) (103,395)
NET AMORTIZATION AND DEFERRAL 10,982 61,321 54,406
--------- --------- ---------
NET PERIODIC BENEFIT COST 92,490 117,118 122,170
ADDITIONAL EXPENSE RELATED TO SETTLEMENT OF PENSION OBLIGATION - 88,718 155,612
--------- --------- ---------
TOTAL $ 92,490 $ 205,836 $ 277,782
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1997, the Company'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 $88,718 and $155,612 for
the years ended December 31, 1997 and 1996.
40
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE SAVINGS AND INVESTMENT PLAN:
The Company has an Employee Savings and Investment Plan in which substantially
all employees are eligible to participate. Under the terms of the Plan, the
Company will match 50% of the employee contributions up to 6% of compensation.
The Company's contributions to the Plan were $79,388 for 1998, $62,564 for 1997,
and $56,314 for 1996.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN:
The Company has entered into supplemental executive retirement 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 the Company
upon retirement is being accrued over the number of years remaining to the
retirement date of these individuals. The expense (income) recognized for this
plan was $12,884 in 1998, ($9,754) in 1997, and $116,129 in 1996.
STOCK OPTION PLAN:
On April 15, 1997 the Company established the 1997 Key Employee Stock Option
Plan (the "1997 Plan"). The 1997 Plan is accounted for in accordance with
Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations.
Had compensation expense for the 1997 Plan been determined based on the fair
value of each option on the date of grant using an option-pricing model as
prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," there
would have been no effect on the Company's net income and basic and diluted
earnings per share for the years ended December 31, 1998 and 1997.
The 1997 Plan provides that 66,000 shares of the Company's common stock will be
reserved for the granting of both incentive stock options (ISO) and
non-qualified stock options (NQSO) to purchase these shares. At December 31,
1998, reserved shares remaining for future grants under this 1997 Plan totaled
25,128. The exercise price per share for incentive stock options and
non-qualified stock options shall be equal to the fair market value on the date
the options are granted. However, in the case of incentive stock options, if at
the time the options are granted the participant owns shares possessing more
than 10% of the total combined voting power of all classes of stock of the
Company, then the exercise price shall not be less than 110% of the fair market
value of the shares on the date the options are granted.
The options granted would become exercisable in increments of 20% on each
anniversary date of the grant of the options, so that the options will become
fully exercisable on the fifth anniversary of the date the options were granted.
The fair value of each option is estimated on the date of the grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions for the year ended December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------
DIVIDEND YIELD 2.00% 2.00%
EXPECTED VOLATILITY 24.10% 9.90%
RISK FREE INTEREST RATE 4.75% 5.74%
EXPECTED LIFE, IN YEARS 10 YEARS 10 YEARS
WEIGHTED-AVERAGE FAIR VALUE OF OPTIONS GRANTED DURING THE YEAR $9.46 $5.43
</TABLE>
During 1998, the Company granted options to purchase 18,982 shares with an
exercise price of $29.50. At December 31, 1998 options issued and outstanding
had exercise prices ranging from $19.09 to $29.50 and had a weighted-average
remaining contractual life of 9.46 years.
41
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Options Issued Weighted-Average
and Outstanding Exercise Price
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 1997 - $ -
- ------------------------------------------------------------------------------------------------------------
EXERCISED - -
GRANTED 21,890 19.09
- ------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 21,890 $19.09
- ------------------------------------------------------------------------------------------------------------
EXERCISED - -
GRANTED 18,982 29.50
- ------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 40,872 $23.92
- ------------------------------------------------------------------------------------------------------------
</TABLE>
As of December 31, 1998 exercisable options totaled 4,378 shares with a
weighted-average exercise price of $19.09.
10. INCOME TAXES
The provision for income taxes for the years ended December 31, 1998, 1997 and
1996 consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------- ----------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal State Total Federal State Total Federal State Total
- ------------------------------------------------------------------------------------------------------------------------
CURRENTLY
PAYABLE $ 1,077,537 $ (6,636) $ 1,070,901 $ 1,061,389 $ 123,887 $ 1,185,276 $ 788,837 $ 174,728 $ 963,565
DEFERRED TAX
EXPENSE
(BENEFITS) (10,680) (4,814) (15,494) (25,491) 4,113 (21,378) (24,098) (5,335) (29,433)
----------- --------- ----------- ----------- --------- ----------- --------- --------- ---------
TOTAL $ 1,066,857 $ (11,450) $ 1,055,407 $ 1,035,898 $ 128,000 $ 1,163,898 $ 764,739 $ 169,393 $ 934,132
----------- --------- ----------- ----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- ----------- --------- ----------- --------- --------- ---------
</TABLE>
Deferred tax benefits resulting from temporary differences in the tax bases of
assets and liabilities for tax and financial statement purposes for the years
ended December 31 1998, 1997, and 1996 are attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES $ 7,808 $ (8,267) $ 5,647
DEFERRED LOAN FEES 63,035 (3,918) 89,941
DEPRECIATION AND AMORTIZATION (68,152) (41,104) (49,801)
PENSION EXPENSE (20,565) 9,664 (22,933)
DEFERRED COMPENSATION (39,391) 3,071 (40,148)
LOAN INCOME 31,945 9,770 (23,905)
HEALTH INSURANCE - - 23,638
OTHER 9,826 9,406 (11,872)
--------- --------- ---------
TOTAL DEFERRED TAX BENEFIT $ (15,494) $ (21,378) $ (29,433)
--------- --------- ---------
--------- --------- ---------
</TABLE>
42
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated deferred income tax benefits of $1,087,082 at December 31, 1998 and
$1,105,089 at December 31, 1997 are included in other assets and consist of the
following:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES $ 541,648 $ 549,456
DEFERRED LOAN FEES 118,415 181,450
UNREALIZED GAINS ON INVESTMENT SECURITIES (127,337) (93,836)
DEPRECIATION AND AMORTIZATION 285,890 217,738
DEFERRED COMPENSATION 280,721 241,330
PENSION EXPENSE (5,798) (26,363)
LOAN INCOME 4,165 36,110
OTHER (10,622) (796)
---------- ----------
NET DEFERRED TAX ASSET $1,087,082 $1,105,089
---------- ----------
---------- ----------
</TABLE>
A reconciliation of the maximum statutory income tax to the provision for income
taxes in the consolidated statements of income for the years ended December 31,
1998, 1997, and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Percent Percent Percent
of Pretax of Pretax of Pretax
Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------------------------------------
COMPUTED TAX AT STATUTORY RATE $1,255,698 34.0% $1,211,760 34.0% $ 939,815 34.0%
INCREASES (DECREASES) IN TAXES RESULTING FROM:
TAX EXEMPT INTEREST INCOME (284,688) (7.7) (172,797) (4.8) (159,792) (5.8)
STATE INCOME TAXES, NET OF FEDERAL INCOME TAX
BENEFIT 25,012 0.7 78,151 2.2 111,800 4.1
NONDEDUCTIBLE INTEREST EXPENSE 54,233 1.6 37,166 1.1 26,271 .9
OFFICERS AND DIRECTORS LIFE INSURANCE 2,065 0.1 4,936 .1 7,306 .3
OTHER 3,087 (0.1) 4,682 .1 8,732 .3
---------- ----- ---------- ----- --------- -----
$1,055,407 28.6% $1,163,898 32.7% $ 934,132 33.8%
---------- ----- ---------- ----- --------- -----
---------- ----- ---------- ----- --------- -----
</TABLE>
43
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. LEASES
The Company is obligated under noncancelable lease agreements for certain bank
premises. The leases generally contain renewal options and provide that the
Company pays property taxes, insurance and maintenance costs.
Future minimum lease payments under leases having initial or remaining
noncancelable lease terms in excess of one year are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
<S> <C>
- -------------------------------------------------------------------------------------------
1999 $ 310,409
2000 232,033
2001 214,929
2002 187,726
2003 169,932
THEREAFTER 669,391
----------
TOTAL $1,784,420
----------
----------
</TABLE>
The Company 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. The Company also has an agreement
with an advisory board member to lease a branch facility through November 2002
at a minimum annual rental of $21,532.
12. STOCKHOLDERS' EQUITY
RESTRICTIONS ON DIVIDENDS:
The amount of dividends that the Bank can pay to the Company without approval is
limited to its net profits for the current year plus its retained net profits
for the preceding two years. Amounts available for the payment of dividends
during 1998 aggregated $5,824,272.
RESTRICTIONS ON LENDING FROM SUBSIDIARY TO PARENT:
Federal law imposes certain restrictions limiting the ability of the Bank to
transfer funds to the Parent Company in the form of loans or advances. Section
23A of the Federal Reserve Act prohibits the Bank from making loans or advances
to the Parent Company in excess of 10 percent of its capital stock and surplus,
as defined therein. There were no material loans or advances outstanding at
December 31, 1998.
REPURCHASE PLAN:
On October 1, 1997, the Board of Directors authorized a stock repurchase
program. Pursuant to the terms of this program, the Company may repurchase up to
6% of its common stock during the ten year period ending September 31, 2007. As
of December 31, 1998 no shares had been purchased.
DIVIDEND REINVESTMENT PLAN:
The Company maintains a Dividend Reinvestment and Stock Purchase Plan for all
stockholders of the Company. This Plan provides that 330,000 shares, as adjusted
for stock distributions, of the Company's common stock will be reserved for
issuance under the Plan. At December 31, 1998, reserved shares remaining for
future issuance under this Plan totaled 313,265. The terms of this Plan allow
participating shareholders to purchase additional shares of common stock in the
Company by reinvesting the dividends paid on shares registered in their name, by
making optional cash payments, or both. Shares purchased under the Plan with
reinvested dividends or optional cash payment can be acquired at 97% of current
market prices. Optional cash payments to this Plan are limited and may not
exceed $10,000 in any calendar quarter. The Company reserves the right to amend,
modify, suspend or terminate this Plan at any time at its discretion.
44
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL:
The Company and the Bank 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 the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and 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 the Company and the Bank to maintain amounts and ratios (set forth in
the table below) of Total and Tier 1 capital (as defined) to risk-weighted
assets (as defined) and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1998, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of December 31,1998, the most recent notification from the regulatory agency
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank 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 the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the following table:
<TABLE>
<CAPTION>
To be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------ ------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
As of December 31,1998:
Total Capital (to risk-weighted assets)
Consolidated $23,805,741 13.1% $14,518,218 8.0% N/A
Union National Bank $23,314,982 12.9% $14,517,807 8.0% $18,147,259 10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated $22,032,846 12.1% $ 7,259,109 4.0% N/A
Union National Bank $21,542,087 11.9% $ 7,258,904 4.0% $10,888,356 6.0%
Tier 1 Capital (average assets)
Consolidated $22,032,846 8.2% $10,744,569 4.0% N/A
Union National Bank $21,542,087 8.0% $10,740,740 4.0% $13,425,925 5.0%
As of December 31,1997:
Total Capital (to risk-weighted assets)
Consolidated $21,708,111 12.8% $13,585,475 8.0% N/A
Union National Bank $21,431,005 12.7% $13,565,425 8.0% $16,956,781 10.0%
Tier 1 Capital (to risk-weighted assets)
Consolidated $19,914,999 11.7% $ 6,792,738 4.0% N/A
Union National Bank $19,637,893 11.6% $ 6,782,712 4.0% $10,174,069 6.0%
Tier 1 Capital (average assets)
Consolidated $19,914,999 8.0% $ 9,872,109 4.0% N/A
Union National Bank $19,637,893 8.0% $ 9,865,349 4.0% $12,331,686 5.0%
</TABLE>
N/A = NOT APPLICABLE
45
<PAGE>
Union National Bancorp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "REPORTING COMPREHENSIVE INCOME". Comprehensive Income, as
defined by Statement 130, is the change in equity of a business enterprise
during a reporting period from transactions and other events and circumstances
from non-owner sources. In addition to the Company's net income, change in
equity components under comprehensive income reporting would also include such
items as the net change in unrealized gains and losses on available for sale
securities, foreign currency transactions and adjustments in minimum pension
liability. As required by Statement 130, prior year information has been
modified to conform to the new presentation. The following table details related
tax effects allocated to each component of other comprehensive income.
<TABLE>
<CAPTION>
Before-Tax Tax Net-of-Tax
1998 Amount Expense Amount
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during period $ 196,223 $ (75,781) $ 120,442
Less: Realized gains on securities sold 107,111 (41,366) 65,745
----------- --------- -----------
Other comprehensive income $ 89,112 $ (34,415) $ 54,697
----------- --------- -----------
----------- --------- -----------
1997
- --------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during period $ 338,419 $(130,697) $ 207,722
Less: Realized gains on securities sold - - -
----------- --------- -----------
Other comprehensive income $ 338,419 $(130,697) $ 207,722
----------- --------- -----------
----------- --------- -----------
1996
- --------------------------------------------------------------------------------------------------------------
Unrealized holding gains arising during period $ 202,817 $ (78,328) $ 124,489
Less: Realized gains on securities sold - - -
----------- --------- -----------
Other comprehensive income $ 202,817 $ (78,328) $ 124,489
----------- --------- -----------
----------- --------- -----------
</TABLE>
14. RELATED PARTY TRANSACTIONS
Certain members of the Board of Directors and senior officers had loan
transactions with the Bank. 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
The following schedule summarizes changes in amounts of loans outstanding to
directors and senior officers, both direct and indirect, during 1998.
<TABLE>
<S> <C>
Balance at January 1,1998 $5,190,487
Additions 380,551
Repayments (286,592)
---------
Balance at December 31,1998 $5,284,446
---------
---------
</TABLE>
46
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" requires disclosure of fair value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instruments. This standard excludes all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amount presented does not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value
disclosures for financial instruments as for December 31, 1998 and 1997:
Cash and due from banks: The carrying amounts reported in the balance sheets
approximate their 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 techniques,
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: Fair values for the Company's off-balance sheet
instruments, consisting entirely of lending commitments, are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
Deposit liabilities: The fair values disclosed for demand deposits (e.g.,
interest and noninterest 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 technique
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.
Federal Home Loan Bank Borrowings: Fair value for these borrowings is based on
quoted market price.
47
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair value of the Company's financial instruments were as follows
at:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS:
Cash and due from banks, interest-bearing deposits
with banks, and federal funds sold $14,864,586 $14,864,586 $13,967,953 $13,967,953
Investment securities available for sale 76,804,462 76,804,462 58,770,760 58,770,760
Investment securities held to maturity 22,006,195 22,382,238 13,419,839 13,647,089
Loans receivable 163,464,538 159,879,224 158,347,687 157,021,020
Accrued interest receivable 1,699,794 1,699,794 1,708,814 1,708,814
FINANCIAL LIABILITIES:
Deposit liabilities 226,337,379 205,741,056 205,638,796 209,204,688
Short-term borrowings 13,577,689 13,577,689 13,776,373 13,776,373
Federal Home Loan Bank borrowings 20,000,000 20,933,048 10,000,000 10,000,000
</TABLE>
16. PARENT COMPANY FINANCIAL INFORMATION
The condensed financial statements for Union National Bancorp, Inc. (Parent
Only) pertaining to the periods covered by the Company's consolidated financial
statement are presented below:
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 1997
---------- ----------
<S> <C> <C>
ASSETS
- ----------------------------------------------------------------------------------------------------------
Cash and due from banks $ 485,620 $ 26,480
Investment in subsidiary 21,745,921 19,787,220
Other assets 5,138 136,082
Due from Union National Bank - 114,544
---------- ----------
TOTAL ASSETS $22,236,679 $20,064,326
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $ - $ -
---------- ----------
Common stock 18,514 16,748
Capital surplus 13,570,913 8,469,115
Accumulated other comprehensive income 203,833 149,136
Retained earnings 8,443,419 11,429,327
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 22,236,679 20,064,326
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $22,236,679 $20,064,326
---------- ----------
---------- ----------
</TABLE>
48
<PAGE>
1998 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiary $ 740,829 $ 592,120 $ 660,380
Expenses 10,620 17,947 287,824
---------- ---------- ----------
Income before income taxes and equity in undistributed income of
subsidiary 730,209 574,173 372,556
Income tax expense (benefit) (3,611) (6,102) (97,860)
---------- ---------- ----------
Income before equity in undistributed income of subsidiary 733,820 580,275 470,416
Equity in undistributed income of subsidiary 1,904,004 1,819,827 1,359,612
---------- ---------- ----------
NET INCOME $2,637,824 $2,400,102 $1,830,028
Other comprehensive income, net of taxes 54,697 207,722 124,489
---------- ---------- ----------
COMPREHENSIVE INCOME $2,692,521 $2,607,824 $1,954,517
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998 1997 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $2,637,824 $2,400,102 $1,830,028
Equity in undistributed income of subsidiary (1,904,004) (1,819,827) (1,359,612)
Amortization of organization cost 10,420 10,419 13,181
(Increase) Decrease in amount due from subsidiary 122,952 (6,101) (97,860)
Decrease in other assets 112,116 - 88,385
---------- ---------- ----------
Net cash provided by operating activities 979,308 584,593 474,122
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from Dividend Reinvestment Plan 220,661 - -
Dividends paid (740,829) (567,120) (475,380)
---------- ---------- ----------
Net cash used in financing activities (520,168) (567,120) (475,380)
Net increase (decrease) in cash and cash equivalents 459,140 17,473 (1,258)
Cash and Cash Equivalents at Beginning of Year 26,480 9,007 10,265
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 485,620 $ 26,480 $ 9,007
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
17. TERMINATION OF PROPOSED ACQUISITION
On October 25, 1995, the Company 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 the Company,
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.
49
<PAGE>
UNION NATIONAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the Company's unaudited quarterly results of
operations:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Three months ended
------------------------------------------------
1998 December 31 September 30 June 30 March 31
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Interest Income $5,139 $5,263 $5,097 $4,878
Net Interest Income 2,612 2,623 2,711 2,595
Net Security gains 86 - 21 -
Provision for credit losses 60 60 41 85
Income before taxes 998 803 968 924
Net Income 688 631 679 640
Basic and diluted earnings per share(1) 0.41 0.31 0.36 0.35
</TABLE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Three months ended
------------------------------------------------
1997 December 31 September 30 June 30 March 31
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Interest Income $4,825 $4,511 $4,496 $4,382
Net Interest Income 2,557 2,432 2,438 2,394
Provision for credit losses 130 30 55 60
Income before taxes 880 929 882 873
Net Income 594 628 592 586
Basic and diluted earnings per share(1) 0.32 0.35 0.32 0.32
</TABLE>
(1) Basic and diluted earnings per share have been restated for the effects of a
10% stock dividend that was distributed on October 22, 1998.
50
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,867,629
<INT-BEARING-DEPOSITS> 280,817
<FED-FUNDS-SOLD> 7,716,140
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76,804,462
<INVESTMENTS-CARRYING> 22,006,195
<INVESTMENTS-MARKET> 0
<LOANS> 163,464,538
<ALLOWANCE> 1,772,895
<TOTAL-ASSETS> 283,913,435
<DEPOSITS> 226,337,379
<SHORT-TERM> 13,577,689
<LIABILITIES-OTHER> 1,761,688
<LONG-TERM> 20,000,000
0
0
<COMMON> 18,514
<OTHER-SE> 22,218,165
<TOTAL-LIABILITIES-AND-EQUITY> 283,913,435
<INTEREST-LOAN> 14,558,024
<INTEREST-INVEST> 5,081,126
<INTEREST-OTHER> 738,016
<INTEREST-TOTAL> 20,377,166
<INTEREST-DEPOSIT> 8,212,112
<INTEREST-EXPENSE> 9,835,888
<INTEREST-INCOME-NET> 10,541,278
<LOAN-LOSSES> 246,000
<SECURITIES-GAINS> 107,111
<EXPENSE-OTHER> 8,156,501
<INCOME-PRETAX> 3,693,231
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,637,824
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
<YIELD-ACTUAL> 1.43
<LOANS-NON> 466,605
<LOANS-PAST> 420,156
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 271,446
<ALLOWANCE-OPEN> 1,793,112
<CHARGE-OFFS> 371,726
<RECOVERIES> 105,508
<ALLOWANCE-CLOSE> 1,772,894
<ALLOWANCE-DOMESTIC> 1,772,894
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
