UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
_________________________________
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ ________________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy, PA 17552
____________________________________________________ ________
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(Former name, former address, & former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court. Yes [ ] No[ ]
_________________
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,375,683 shares of $.25 (par) common stock were
_________________
outstanding as of July 30, 1996.
____________________
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
PART I - FINANCIAL INFORMATION:
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4
- Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-12
PART II - OTHER INFORMATION 13
Signature Page 14
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 6/30/96 12/31/95
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $5,729 $7,214
Federal Funds Sold 1,280 0
Investment Securities Held to Maturity
(Market Value - 1996-$16,555;1995-$14,096) 16,690 13,884
Investment Securities Available for Sale 34,259 25,553
Loans(Net of Unearned Income) 124,677 120,417
Less:Allowance for Loan Losses (1,309) (1,265)
______________________
Total Net Loans 123,368 119,152
Premises and Equipment - Net 5,821 5,904
Accrued Interest Receivable 1,348 1,217
Deferred Income Taxes 359 291
Investment in Limited Partnerships 1,057 1,111
Other Assets 468 331
______________________
TOTAL ASSETS $190,379 $174,657
======================
LIABILITIES
Deposits:
Noninterest-Bearing $14,963 $13,452
Interest-Bearing 141,844 129,915
______________________
Total Deposits 156,807 143,367
Short-Term Borrowing 3,131 3,399
Long-Term Borrowing 7,805 6,270
Accrued Interest Payable 895 763
Other Liabilities 306 89
_____________________
TOTAL LIABILITIES 168,944 153,888
STOCKHOLDER'S EQUITY
Common Stock (Par Value $.25) 599 600
Shares: Authorized - 20,000,000; Issued -
2,397,765 in 1996 (2,400,000 in 1995)
Outstanding - 2,375,683 in 1996 (2,372,672
in 1995)
Surplus 1,999 2,019
Retained Earnings 19,239 18,484
Unrealized gain/(loss) on securities
available for sale, net of tax (68) 93
Less: Treasury Stock - at cost
(22,082 shares in 1996 and 27,328 shares
in 1995) (334) (427)
______________________
TOTAL STOCKHOLDER'S EQUITY 21,435 20,769
______________________
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $190,379 $174,657
======================
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
1996 1995
<S> <C> <C>
(In thousands, except per share date)
INTEREST INCOME
Interest and Fees on Loans $2,768 $2,598
Investment Securities:
Taxable 517 419
Exempt from Federal Taxes 205 155
Deposits in Banks 1 0
Federal Funds Sold 22 9
______________________
Total Interest Income 3,513 3,181
INTEREST EXPENSE
Deposits 1,427 1,214
Short-Term Borrowing 25 35
Long-Term Debt 106 17
______________________
Total Interest Expense 1,558 1,266
______________________
Net Interest Income 1,955 1,915
PROVISION for LOAN LOSSES 41 27
______________________
Net Interest Income after Provision
for Loan Losses 1,914 1,888
OTHER OPERATING INCOME
Trust Income 23 40
Service Charges on Deposit Accounts 80 73
Other Service Charges, Commissions, Fees 73 61
Investment Securities Gains/(Losses) 2 1
Other Income 9 12
______________________
Total Other Operating Income 187 187
OTHER OPERATING EXPENSES
Salaries and Wages 642 584
Retirement Plan and Other Employee Benefits 198 187
Net Occupancy Expense 131 107
Furniture and Equipment Expense 92 77
FDIC Insurance Assessment 1 78
Other Operating Expenses 415 329
______________________
Total Other Operating Expenses 1,479 1,362
______________________
Income before Income Taxes 622 713
PROVISION for INCOME TAXES 80 178
______________________
NET INCOME for PERIOD $542 $535
======================
PER SHARE INFORMATION
Net Income for Period $0.23 $0.23
Cash Dividends $0.080 $0.060
Average Common Shares Outstanding 2,375,161 2,381,361
<CAPTION>
Six Months Ended June 30,
1996 1995
<S> <C> <C>
(In thousands, except per share date)
INTEREST INCOME
Interest and Fees on Loans $5,503 $5,057
Investment Securities:
Taxable 962 822
Exempt from Federal Taxes 400 304
Deposits in Banks 2 0
Federal Funds Sold 48 19
______________________
Total Interest Income 6,915 6,202
INTEREST EXPENSE
Deposits 2,807 2,331
Short-Term Borrowing 32 46
Long-Term Debt 208 17
______________________
Total Interest Expense 3,047 2,394
______________________
Net Interest Income 3,868 3,808
PROVISION for LOAN LOSSES 49 48
______________________
Net Interest Income after Provision
for Loan Losses 3,819 3,760
OTHER OPERATING INCOME
Trust Income 47 81
Service Charges on Deposit Accounts 154 144
Other Service Charges, Commissions, Fees 139 118
Investment Securities Gains/(Losses) 2 1
Other Income 54 38
______________________
Total Other Operating Income 396 382
OTHER OPERATING EXPENSES
Salaries and Wages 1,283 1,153
Retirement Plan and Other Employee Benefits 403 380
Net Occupancy Expense 293 200
Furniture and Equipment Expense 177 127
FDIC Insurance Assessment 2 156
Other Operating Expenses 786 678
______________________
Total Other Operating Expenses 2,944 2,694
______________________
Income before Income Taxes 1,271 1,448
PROVISION for INCOME TAXES 172 350
______________________
NET INCOME for PERIOD $1,099 $1,098
======================
PER SHARE INFORMATION
Net Income for Period $0.46 $0.46
Cash Dividends $0.145 $0.115
Average Common Shares Outstanding 2,374,152 2,387,329
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six Months Ended June 30,
(In thousands) 1996 1995
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,099 $1,098
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 254 199
Provision for Loan Losses 49 48
Investment Securities (Gains)/Losses (2) (1)
Provision for Deferred Income Taxes 15 (6)
(Increase)/Decrease in Accrued
Interest Receivable (131) (46)
(Increase)/Decrease in Other Assets (106) (397)
Increase/(Decrease) in Other Liabilities 348 373
______________________
Net Cash Provided by Operating Activities 1,526 1,268
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold (1,280) 1,870
Proceeds from Sales of
Available for Sale Securities 1,996 1,008
Proceeds from Maturities of
Available for Sale Securities 6,408 1,848
Proceeds from Maturities of
Held to Maturity Securities 512 4,560
Purchases of Available for Sale Securities (17,353) (4,088)
Purchases of Held to Maturity Securities (3,318) (2,062)
Loans Made to Customers, Net of
Principal Collected on Loans (4,264) (7,872)
Investment in Limited Partnership 0 0
Purchases of Property and Equipment (147) (1,653)
______________________
Net Cash (Used in)Investing Activities (17,446) (6,389)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 2,019 (7,211)
Net Increase/(Decrease) in Certificates
of Deposits 11,421 7,652
Net Increase/(Decrease) in Short-Term
Borrowings (268) 622
Proceeds from Issuance of Long-Term Debt 1,535 3,500
Acquisition of Treasury Stock 0 (211)
Issuance of Treasury Stock 72 0
Cash Dividends Paid (344) (275)
______________________
Net Cash Provided by (Used in)
Financing Activities 14,435 4,077
______________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,485) (1,044)
CASH and CASH EQUIVALENTS -
Beginning of Period 7,214 5,572
______________________
CASH and CASH EQUIVALENTS - End of Period $5,729 $4,528
======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositor $2,693 $2,200
Interest Paid - Other 222 46
Income Taxes 110 275
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of 4,000 shares of Treasury Stock $62 $0
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is
unaudited and subject to year-end adjustment and audit.
However, in the opinion of management, the information
reflects all adjustments necessary to present fairly the
financial condition and results of operations for the latest
period. All such adjustments were of a normal, recurring
nature.
2. These statements should be read in conjunction with notes to
the financial statements contained in the 1995 Annual Report
to Stockholders.
3. Management considers the allowance for loan losses (reserve)
to be adequate at this time.
4. No shares of common stock are reserved for issuance in the
event of conversions or the exercise of warrants, options or
other rights, except for 120,000 shares which are reserved
for issuance under the Corporation's 1988 Stock Incentive
Plan and 150,000 shares which are reserved for issuance
under the Corporation's Dividend Reinvestment Plan.
5. The results of operations for the six month period ended
June 30, 1996 are not necessarily indicative of the results
to be expected for the full year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in its accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company (the Corporation), and its
wholly-owned subsidiary, Union National Mount Joy Bank (the
Bank). The Corporation's consolidated financial condition and
results of operations consist almost entirely of the Bank's
financial condition and results of operations. This discussion
should be read in conjunction with the 1995 Annual Report.
Current performance does not guarantee, assure, or may be
indicative of similar performance in the future.
Results of Operations
Overview
Consolidated net income for the six months ended June 30, 1996
was $1,099,000, an increase of .1%, as compared to the
consolidated net income of $1,098,000 for the same period in
1995.
Consolidated net income for the three months ended June 30, 1996
was $542,000, an increase of 1.3%, as compared to the
consolidated net income of $535,000 for the same period in 1995.
On a per share basis, net income for the six months ended June
30, 1996 was $.46, no change as compared to the same period in
1995.
Results of operations for the six months ended June 30, 1996 as
compared to the same period in 1995 were impacted by the
following items: (1) Net income was positively impacted by a 9%
increase in average net loans, primarily residential and
commercial mortgages, which were funded by growth in deposits and
by additions to average borrowings; (2) net income was negatively
impacted by the narrowing of the spread between short-term and
long-term interest rates during 1995 and these rates related
effects on loans, investments, and deposits; (3) net income was
negatively impacted by a 9.2% increase in other operating
expenses; and (4) net income was positively impacted by income
tax credits available in 1996. The above items are quantified and
discussed in further detail under their respective sections
below.
Net income as a percent of total average assets, also known as
return on assets (ROA), was 1.21% on an annualized basis for the
six months ended June 30, 1996, as compared to 1.36% for the same
period in 1995. Net income as a percent of average stockholders'
equity, also known as return on equity (ROE), was 10.4% on an
annualized basis for the six months ended June 30, 1996, as
compared to 11.1% for the same period in 1995.
The growth in loans is considered a material favorable trend of
the Corporation which Management expects to continue for the
remainder of 1996. Management expects the growth in deposits for
1996 to return to similar historic growth rates achieved prior to
1995. Management has taken specific actions to enhance the Bank's
competitive position for core deposits. These actions include the
implementation of a formal officer calling program to enhance the
Bank's competitive position for loans, deposits and other
financial services in the communities it serves and the
implementation of a bank-wide incentive program for employee
participation. Other actions include the strategic promotion of
the Bank's branch offices in light of continual bank
consolidation in the Bank's market area; the promotion of
intermediate-term certificates of deposit including the
reintroduced push-button certificate allowing a one-time increase
in the interest rate during the term of the certificate; the
promotion of a new certificate of deposit which has a no-penalty
feature during the life of the certificate; and a special
promotion of the Bank's regular checking account featuring no
monthly service charges when payroll is electronically deposited.
As a result of the above described efforts, the Bank's
certificate of deposit portfolio under $100,000 has increased
$7,395,000, or 12.4%, to $67,127,000 at June 30, 1996, from
$59,732,000 at December 31, 1995. The funding for the loan growth
is further discussed under the section on Liquidity.
<PAGE>
Management expects the loan growth to continue for the following
reasons: (1) lending rates are at generally affordable rates for
prospective borrowers, (2) implementation of a formal officer
calling program, (3) plans in the Summer of 1996 to offer a new
loan product, home equity lines of credit, (4) expansion of the
Bank's retail consumer lending through automobile dealers, (5)
economic stability of Lancaster County as discussed later in this
section, (6) the recently opened Manheim branch office, and (7)
continued population growth in the Bank's market area.
It is anticipated that economic activity in the Bank's market
area during 1996 appears favorable due to the availability of
generally low lending rates and continued construction activity.
The decline in long-term interest rates from 1994 and early 1995
levels is expected to augment economic activity. The overall
effect of the previous economic slowdown as well as other factors
can be seen by a mild lessening of certain borrowers' financial
strength. Management is monitoring these general and specific
trends closely. Their various effects are discussed later under
the section on Credit Risk and Loan Quality.
Net Interest Income
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the six months ended June 30, 1996
increased by $112,000, or 2.8%, over the same period in 1995.
Commercial and residential average loan growth of $10,093,000 and
average investment security growth of $6,803,000 was funded by
the growth in average deposits of $12,614,000 and by the growth
in average long-term debt of $6,749,000. Average earning assets
increased in the amount of $18,105,000 over the same period in
1995. The volume growth in earning assets and interest-bearing
liabilities contributed to the increase in net interest income by
the amount of $215,000.
During the first quarter of 1995, the Federal Reserve Bank was
tightening monetary supply causing prime to increase to 9%. The
immediate impact of these short-term interest rate increases was
to increase the interest rates on loans that adjust according to
the prime lending rate and on reinvested funds from maturing
investment securities. Commencing July 1995, the Federal Reserve
Bank began loosening the monetary supply by lowering short-term
rates causing prime to decline to 8.25% in the first quarter of
1996. However, current interest rates on certificates of deposit
remained above the rates being paid during the previous low rate
environment in the years of 1992, 1993 and into 1994.
Consequently, the effective interest rate on the certificate of
deposit portfolio increased as funds began to renew at higher
interest rates. See Management's discussion below concerning the
anticipated impact of these interest rate fluctuations to the
results of operations for 1996. The overall interest rate on the
average total earning assets was unchanged at 8.4% for the
current period, as compared to the same period last year. More
significantly, the overall interest rate on the average interest-bearing
liabilities increased to 4.2% for the current period, as
compared to 3.6% for the same period last year. Contributing to
this increase was the movement of deposits from lower interest
rate structured money market and savings accounts to higher
interest rate structured certificates of deposit. The net effect
of all interest rate fluctuations and funding changes was to
decrease net interest income in the amount of $103,000 for the
current period over the same period in 1995.
In 1994, the Bank engaged an outside consulting group to assist
in monitoring its interest rate risk using income simulation
models. Based on the models, it is currently anticipated that a
two percent general rise or decline in interest rates over a one-year period
will negatively impact the Bank's net interest income
by under 1% for the first full year. In order to enhance the net
interest income in future periods, Management has entered into
transactions that increase earning assets funded by advances from
the Federal Home Loan Bank of Pittsburgh (FHLB). The structure of
these transactions are similarly matched with investment
securities and loans in order to limit net interest income
exposure to interest rate fluctuations. As of June 30, 1996, the
Bank has received fixed rate advances of $9,975,000 from its
available credit at the FHLB for purposes of funding loan demand
and mortgage-backed security purchases. The total advances have a
current average effective rate of 5.78% with maturities ranging
from May, 1997 to June, 2000. Additional asset/liability
management strategies available from the FHLB include access to
interest rate caps, floors and swaps. As of June 30, 1996, the
Bank did not utilize any of these aforementioned strategies.
<PAGE>
Other interest rate risk management tools available to the Bank
include the promotion and development of specific loan and
deposit products and the structuring of its investment portfolio.
In the first quarter of 1995, Management introduced a new
mortgage product with a seven year payment balloon feature with
amortized monthly payments over a thirty year period. This
product is a long-range strategy to increase rate sensitive
assets, and therefore it will not have an impact on the Bank's
one-year cumulative gap position in 1996. In the summer of 1996,
Management plans to offer a new loan product, home equity lines
of credit, that will provide additional rate sensitive assets.
For 1996, Management expects the effective interest rate in the
loan and investment portfolios to trend slightly downward as
compared to the levels of 1995. This is primarily a result of (1)
the recent Federal Reserve Bank's relaxed monetary policy from
July, 1995 to February, 1996, resulting in three .25% declines in
the prime lending rate and a similar decline in the overnight fed
funds investment rates, and (2) the increased residential
mortgage refinancing activity to lower borrower's interest rate.
In addition, Management expects a modest rise in the effective
rate on its deposits as deposits of lower interest rate
structured money market and savings accounts move to higher
interest rate structured certificates of deposit, partially
offset by certificates of deposit renewing at lower rates during
the first six months of 1996. The impact of these effective
interest rate changes, including loan and deposit changes
effected at the customer's option, to the results of operations
for 1996, as compared to 1995, is expected to have a negative
impact on the net interest margin. The growth in earning assets
during 1995 and the first six months of 1996 is expected to have
a positive impact on the net interest margin for the remaining
months of 1996. Although the impact of expected cash flows on
investments and of renewing certificates of deposit can be
reasonably estimated at current interest rate levels, the actual
shape of the yield curve during the last six months of 1996, the
options effected by customers, and the future mix of the loan,
investment and deposit products in the Bank's portfolios may
significantly change the estimates used in the simulation models.
However, based on the Bank's current model and estimates as of
June 30, 1996, Management expects an overall positive impact to
the net interest margin for the remaining months of 1996, as
compared to the same period in 1995.
Provision for Loan Losses
The provision for loan losses was $49,000 and $48,000 for the six
months ended June 30, 1996 and 1995, respectively. Future
adjustments to the allowance, and consequently, the provision for
loan losses, may be necessary if economic conditions or loan
credit quality differ substantially from the assumptions used in
making Management's evaluation of the level of the allowance for
loan losses, and if the loans outstanding substantially
increases.
Other Operating Income
Other operating income for the six months ended June 30, 1996 was
$396,000, representing an increase of $14,000, or 3.7%, over the
same period in 1995. Contributing to this increase were
additional earnings resulting from ATM usage, rental income,
mutual fund commissions, insufficient funds charges, and safe
deposit box rents.
Other Operating Expenses
Other operating expenses for the six months ended June 30, 1996
increased by $250,000, or 9.3%, over the same period in 1995. Of
this increase, employee salaries and wages and related fringe
benefits increased by $153,000, or 10.0%, over the same period in
1995. This increase was essentially due to new staff additions
and due to annual merit, cost of living, and health care cost
increases. Staff additions included the initial staffing of the
recently opened Manheim branch office ($80,000 in salaries and
wages above the same period of last year) and several support
staff positions.
<PAGE>
Occupancy, furniture and equipment expenses for the six months
ended June 30, 1996 increased by $143,000, or 43.7%, over the
same period in 1995. This increase was primarily due to the
following: (1) the increased depreciation and occupancy costs in
the amount of $46,000 resulting from the completion of the main
office expansion and renovation in August, 1995 and the related
furniture and equipment acquired for the project; (2) the
additional lease, depreciation, and other costs related to the
recently opened Manheim branch office in the amount of $34,000;
and (3) snow removal and related costs that exceeded the same
period of last year by $22,000.
The FDIC Insurance Assessment expense decreased by $154,000 for
the six months ended June 30, 1996, as compared to the same
period of last year. The FDIC Insurance Assessment rate declined
from $.23 for every $100 in deposits in the first quarter of 1995
to $500 per quarter in the first quarter of 1996 because the FDIC
Bank Insurance Fund had reached its statutorily mandated reserve
level. For the remaining months of 1996, the FDIC Insurance
Assessment rate is currently expected to continue at $500 per
quarter. However, this could change in the future. See further
discussion under the Section on Regulatory Activity.
Other operating expenses for the six months ended June 30, 1996,
increased by $108,000, or 15.9%, over the same period in 1995.
Net losses and charge-offs from the limited partnerships in the
amount of $54,000 were recognized as other operating expenses for
the six months ended June 30, 1996. In addition, general volume
growth, amortization expense for software additions, and the
timing of significant supply orders contributed to the increase
in other operating expenses.
Income Taxes
The Corporation's income tax expense decreased by $178,000 for
the six months ended June 30, 1996 to $172,000 from $350,000 for
the same period in 1995. The decline was due to the decline in
taxable earnings and newly available federal income tax credits.
The tax credits result from the Corporation's $632,500, 49.5%,
investment in Nissly Chocolate Factory Apartments Associates,
which was formed to rehabilitate the former Nissly Chocolate
Factory into 28 housing units to be marketed to seniors with low-to-moderate
incomes. Currently, the effective tax rate of the
Corporation for the remaining months of 1996 is expected to be
less than the effective tax rate in 1995 due to these tax
credits.
Building Expansion and Branch Office
The expenses related to the building expansion and branch office
projects completed in 1995 are expected to impact the results of
operations for the remaining months of 1996, as compared to the
same period in 1995, by decreasing earnings in the currently
estimated amount of $45,000, net of income taxes. However, a
significant portion of these expenses will be offset by interest
and fee income generated from loan and deposit relationships
established since the opening of the branch office in November,
1995.
REGULATORY ACTIVITY
The passage of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 and the Riegle Community Development and
Regulatory Improvement Act may have a significant impact upon the
Corporation. The key provisions pertain to interstate banking and
interstate branching as well as a reduction in the regulatory
burden on the banking industry. Since September, 1995, bank
holding companies may acquire banks in other states without
regard to state law. In addition, banks can merge with other
banks in another state beginning in June, 1997. States may adopt
laws preventing interstate branching but, if so, no out-of-state
bank can establish a branch in such state and no bank in such
state may branch outside the state. Pennsylvania recently amended
the provisions of its Banking Code to authorize full interstate
banking and branching under Pennsylvania law and to facilitate
the operations of interstate banks in Pennsylvania.
Although, the United States Supreme Court has rendered a decision
in favor of nationwide insurance sales by banks and which also
bars states from blocking insurance sales by national banks in
towns with populations of no more than 5,000, the entrance of
banks into the insurance industry is hotly contested. On the
heels of the Supreme Court's ruling, the Office of the
Comptroller of the Currency has issued draft guidelines for
national banks to sell insurance. This federal guidance, however,
will not necessarily ease state restrictions which currently
hinder bank
<PAGE>
insurance sales. States that have traditionally been opposed to
bank insurance sales could impose licensing requirements and
other restrictions hampering bank insurance activities. Because
the insurance industry is opposed to banks selling and
underwriting insurance, it is difficult to determine to what
extent banks will be allowed to engage in insurance activities
and the regulatory costs that will be attached to such
activities.
Congress is currently considering legislative reform centered on
repealing the Glass-Steagall Act which prohibits commercial banks
from engaging in the securities industry. The major initiative
proposed by the House Banking Committee Chairman, James Leach,
has recently been defeated. Leach's proposal required a financial
services holding company structure which would be permitted to
own a bank and a separately capitalized securities firm. Under
Leach's proposal, banks, however, would be prohibited from
affiliating with insurance companies or nonfinancial firms. The
holding company structure would be regulated by the Federal
Reserve Board, and its subsidiaries would be supervised by the
applicable regulator based on their respective functions.
Alternatively, Leach's proposal also permitted a securities firm
to establish an investment bank holding company to own an
uninsured wholesale financial institution and a securities unit.
Although Leach's proposal, as currently drafted, has been
cancelled, he has announced his plans to introduce legislation
proposing limited regulatory relief.
Congress is also considering a variety of proposals to remedy the
large disparity of insurance premiums paid by savings and loan
associations for deposit insurance under the Savings Association
Insurance Fund ("SAIF") administered by the Federal Deposit
Insurance Corporation ("FDIC") in comparison to the premiums paid
by banks for deposit insurance under the Bank Insurance Fund
("BIF") also administered by the FDIC. In order to recapitalize
the SAIF and remedy the disparity in premiums for deposit
insurance, the following has been proposed: the payment of a one-time special
assessment, a merger of SAIF and the BIF, and
sharing the FICO costs (the costs representing the bonds which
were floated in connection with the bailout) pro-rata among all
FDIC-insured institutions and credit unions. Management is unable
to assess the exact cost associated with any of these proposals,
but one or more of these proposals could result in an increase of
FDIC premiums in the future and/or the payment of some type of
special assessment.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of,
and restrictions on, the business of the Corporation and the
Bank. It cannot be predicted whether such legislation will be
adopted or, if adopted, how such legislation would affect the
business of the Corporation and the Bank. As a consequence of the
extensive regulation of commercial banking activities in the
United States, the Corporation's and the Bank's business is
particularly susceptible to being affected by federal legislation
and regulations that may increase the costs of doing business.
Except as specifically described above, Management believes that
the effect of the provisions of the aforementioned legislation on
the liquidity, capital resources, and results of operations of
the Corporation will be immaterial. Management is not aware of
any other current specific recommendations by regulatory
authorities or proposed legislation, which if they were
implemented, would have a material adverse effect upon the
liquidity, capital resources, or results of operations, although
the general cost of compliance with numerous and multiple federal
and state laws and regulations does have, and in the future may
have, a negative impact on the Corporation's results of
operations.
Further, the business of the Corporation is also affected by the
state of the financial services industry in general. As a result
of legal and industry changes, Management predicts that the
industry will continue to experience an increase in
consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share.
Management believes that such consolidations and mergers my
enhance its competitive position as a community bank.
CHANGES IN ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued
Statement No. 121 (SFAS No. 121), "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." This Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. In performing the review for recoverability,
the Corporation estimates the future cash flows expected to
result
<PAGE>
from the use of the asset and its eventual disposition. If the
sum of the expected future cash flows is less than the carrying
amount of the asset, an impairment loss is recognized. Otherwise,
an impairment loss is not recognized. SFAS No. 121 was adopted by
the Corporation as of January 1, 1996. No impairment of
applicable assets was currently recognized for 1996.
In May 1995, the Financial Accounting Standards Board issued
Statement No. 122 (SFAS No. 122), "Accounting for Mortgage
Servicing Rights an amendment of SFAS No. 65." SFAS No. 65 and
SFAS No. 122 require that a mortgage banking enterprise recognize
as separate assets rights to service mortgage loans for others.
This Statement requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. SFAS No. 122 was adopted by the
Corporation as of January 1, 1996 and is to be applied
prospectively to transactions with retained servicing rights and
to impairment evaluations of capitalized amounts. Currently, the
Corporation is not servicing mortgage loans for others.
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123 (SFAS No.123), "Accounting for Stock-Based
Compensation." This Statement defines a fair value based method
of accounting for an employee stock option or similar equity
instrument. Under this method, compensation cost is measured at
the grant date or other measurement date over the amount an
employee must pay to acquire the stock. The accounting
requirements of SFAS No.123 were adopted as of January 1, 1996.
Currently, there is no incidence of coverage under this
Statement.
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125 (SFAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement becomes effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and shall be applied
prospectively. SFAS No. 125 provides consistent standards for
distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The accounting approach is
called the financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes
liabilities when extinguished. The Bank does not expect this
Statement to have a material effect on the liquidity, results of
operations or capital resources when it becomes effective in
1997.
CREDIT RISK AND LOAN QUALITY
Other than as described herein, Management does not believe there
are any trends or uncertainties which are reasonably expected to
have a material impact on future results of operation, liquidity
or capital resources. Further based on known information,
Management believes that the ongoing effects of the previous
economic slowdown and other unfavorable specific business
conditions may result in the inability of loans amounting to
$1,846,000 to comply with their respective repayment terms. These
loans are well secured essentially with real estate, equipment
and vehicles. Management believes that potential losses on these
loans have already been provided for in the Allowance for Loan
Losses. The borrowers are of special mention since they have
shown a decline in financial strength and payment quality.
Management has increased its monitoring of the borrowers'
financial strength. In addition, Management expects that a
portion of these loans will be classified as nonperforming in
1996 and continues to monitor this situation.
At June 30, 1996, total nonperforming loans decreased to a level
of $571,000, or .5% of total net loans, from a level of
$1,225,000, or 1.0%, at December 31, 1995. The reduction is a
result of increased monitoring of the applicable loan credits.
Historically, the percent of nonperforming loans to total net
loans as of December 31, for the previous five year period was an
average of .9%.
The reserve increased by $44,000 for the six months ended June
30, 1996, and the ratio of the allowance for loan losses to net
loans was 1.05% at June 30, 1996, as compared to 1.05% at
December 31, 1995. Management believes based on information
currently available that the current allowance for loan losses of
$1,309,000 is adequate to meet potential loan losses.
<PAGE>
LIQUIDITY
The Corporation's objective is to maintain adequate liquidity
while minimizing interest rate risk. Adequate liquidity provides
resources for credit needs of borrowers, for depositor
withdrawals, and for funding Corporate operations. Sources of
liquidity are maturing investment securities which include
overnight investments in federal funds sold, overnight
correspondent bank borrowings on various credit lines, payments
on loans and mortgage-backed securities, and a growing core
deposit base, primarily certificates of deposit. Management
believes that its core deposits are fairly stable even in periods
of changing interest rates. There are no known trends or any
known demands, commitments, events or uncertainties that will
result in, or that are reasonably likely to result in, liquidity
increasing or decreasing in any material way. Membership in the
FHLB provides the Bank with additional liquidity alternatives
such as short or long-term funding on fixed or variable rate
terms. Available funding from the FHLB amounts to an overnight
borrowing capacity of up to $6,532,000 and a maximum available
funding capacity of up to $71,313,000. In order to provide
funding for the Bank's loans and mortgage-backed security
investments, the Bank utilized FHLB's long-term fixed rate
advances totaling $9,975,000 as of June 30, 1996.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
<CAPTION>
Schedule of Nonperforming Assets
June 30, December 31,
(In Thousands) 1996 1995
<S> <C> <C>
Nonaccruing Loans $ 74 $203
Accrual Loans - 90 days or more
past due 337 1,022
Restructured Accrual Loans 0 0
Other Real Estate Owned 160 0
______ ______
Total Nonperforming Assets $ 571 $1,225
====== ======
Nonperforming Assets
as a % of Net Loans 0.5% 1.0%
====== ======
Allowance for Loan Losses
as a % of Nonperforming Loans 229% 103%
====== ======
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Six Months Ended June 30,
(In Thousands) 1996 1995
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $121,937 $111,844
======== ========
Allowance for Loan Losses,
Beginning of Period $1,265 $1,182
Loans Charged-off During Period 19 39
Recoveries of Loans Previously
Charged-off 14 20
______________________
Net Loans Charged-off 5 19
Addition to Provision for Loan Losses
Charged to Operations 49 48
______________________
Allowance for Loan Losses,
End of Period $1,309 $1,211
======== ========
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.01% 0.03%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.05% 1.04%
======== ========
</TABLE>
<PAGE>
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Corporation. There are no proceedings pending other than the
ordinary routine litigation incident to the business of the
Corporation and its subsidiary, Union National Mount Joy Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank
by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K
On July 11, 1996, the Registrant filed a Form 8-K with the
Securities and Exchange Commission dated July 8, 1996. This Form
8-K contained the Registrants Amended Articles of Incorporation
and Amended Bylaws - Exhibit 3(i) Amended Articles of
Incorporation of the Registrant and Exhibit 3(ii) Amended Bylaws
of the Registrant.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By:/s/ William E. Eby
______________________________
William E. Eby
President & CEO
(Principal Executive Officer)
Date: August 1, 1996
By:/s/ Clement M. Hoober
______________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 1, 1996
