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 September 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.
2,376,799 shares of $.25 (par) common stock were
_________________
outstanding as of October 31, 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) 9/30/96 12/31/95
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $6,456 $7,214
Federal Funds Sold 1,250 0
Investment Securities Held to Maturity
(Market Value - 1996-$17,040;1995-$14,096) 17,059 13,884
Investment Securities Available for Sale 35,417 25,553
Loans(Net of Unearned Income) 126,633 120,417
Less:Allowance for Loan Losses (1,330) (1,265)
______________________
Total Net Loans 125,303 119,152
Premises and Equipment - Net 5,805 5,904
Accrued Interest Receivable 1,365 1,217
Deferred Income Taxes 342 291
Investment in Limited Partnerships 1,030 1,111
Other Assets 431 331
______________________
TOTAL ASSETS $194,458 $174,657
======================
LIABILITIES
Deposits:
Noninterest-Bearing $15,208 $13,452
Interest-Bearing 142,861 129,915
______________________
Total Deposits 158,069 143,367
Short-Term Borrowing 3,148 3,399
Long-Term Borrowing 10,176 6,270
Accrued Interest Payable 931 763
Other Liabilities 381 89
_____________________
TOTAL LIABILITIES 172,705 153,888
STOCKHOLDER'S EQUITY
Common Stock (Par Value $.25) 600 600
Shares: Authorized - 20,000,000; Issued -
2,398,881 in 1996 (2,400,000 in 1995)
Outstanding - 2,376,799 in 1996 (2,372,672
in 1995)
Surplus 2,026 2,019
Retained Earnings 19,582 18,484
Unrealized gain/(loss) on securities
available for sale, net of tax (121) 93
Less: Treasury Stock - at cost
(22,082 shares in 1996 and 27,328 shares
in 1995) (334) (427)
______________________
TOTAL STOCKHOLDER'S EQUITY 21,753 20,769
______________________
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $194,458 $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 September 30,
1996 1995
<S> <C> <C>
(In thousands, except per share data)
INTEREST INCOME
Interest and Fees on Loans $2,824 $2,692
Investment Securities:
Taxable 553 387
Exempt from Federal Taxes 216 172
Deposits in Banks 1 2
Federal Funds Sold 32 6
_____________________
Total Interest Income 3,626 3,259
INTEREST EXPENSE
Deposits 1,477 1,295
Short-Term Borrowing 42 14
Long-Term Debt 131 53
_____________________
Total Interest Expense 1,650 1,362
_____________________
Net Interest Income 1,976 1,897
PROVISION for LOAN LOSSES 49 61
_____________________
Net Interest Income after Provision
for Loan Losses 1,927 1,836
OTHER OPERATING INCOME
Trust Income 23 40
Service Charges on Deposit Accounts 83 73
Other Service Charges, Commissions, Fees 79 65
Investment Securities Gains/(Losses) (3) 0
Other Income 4 8
_____________________
Total Other Operating Income 186 186
OTHER OPERATING EXPENSES
Salaries and Wages 651 611
Retirement Plan and Other Employee Benefits 191 180
Net Occupancy Expense 138 117
Furniture and Equipment Expense 92 72
FDIC Insurance Assessment/(Reimbursement) 1 (9)
Other Operating Expenses 394 389
_____________________
Total Other Operating Expenses 1,467 1,360
_____________________
Income before Income Taxes 646 662
PROVISION for INCOME TAXES 101 136
_____________________
NET INCOME for PERIOD $545 $526
=====================
PER SHARE INFORMATION
Net Income for Period $0.23 $0.22
Cash Dividends $0.085 $0.060
Average Common Shares Outstanding 2,376,374 2,379,393
<CAPTION>
Nine months ended September 30,
1996 1995
<S> <C> <C>
(In thousands, except per share data)
INTEREST INCOME
Interest and Fees on Loans $8,327 $7,749
Investment Securities:
Taxable 1,515 1,209
Exempt from Federal Taxes 616 476
Deposits in Banks 2 2
Federal Funds Sold 81 23
_____________________
Total Interest Income 10,541 9,459
INTEREST EXPENSE
Deposits 4,284 3,627
Short-Term Borrowing 74 60
Long-Term Debt 340 70
______________________
Total Interest Expense 4,698 3,757
______________________
Net Interest Income 5,843 5,702
PROVISION for LOAN LOSSES 98 108
______________________
Net Interest Income after Provision
for Loan Losses 5,745 5,594
OTHER OPERATING INCOME
Trust Income 70 122
Service Charges on Deposit Accounts 236 217
Other Service Charges, Commissions, Fees 218 183
Investment Securities Gains/(Losses) 0 1
Other Income 58 46
_____________________
Total Other Operating Income 582 569
OTHER OPERATING EXPENSES
Salaries and Wages 1,934 1,764
Retirement Plan and Other Employee Benefits 594 560
Net Occupancy Expense 431 316
Furniture and Equipment Expense 268 199
FDIC Insurance Assessment 2 147
Other Operating Expenses 1,180 1,067
_____________________
Total Other Operating Expenses 4,409 4,053
_____________________
Income before Income Taxes 1,918 2,110
PROVISION for INCOME TAXES 274 486
_____________________
NET INCOME for PERIOD $1,644 $1,624
=====================
PER SHARE INFORMATION
Net Income for Period $0.69 $0.68
Cash Dividends $0.230 $0.175
Average Common Shares Outstanding 2,374,898 2,384,655
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>
Nine Months Ended September 30,
(In thousands) 1996 1995
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,644 $1,624
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 385 311
Provision for Loan Losses 98 108
Investment Securities (Gains)/Losses 0 (1)
Provision for Deferred Income Taxes 59 44
(Increase)/Decrease in Accrued
Interest Receivable (148) (11)
(Increase)/Decrease in Other Assets (57) (354)
Increase/(Decrease) in Other Liabilities 460 437
_____________________
Net Cash Provided by Operating Activities 2,441 2,158
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold (1,250) 1,870
Proceeds from Sales of
Available for Sale Securities 3,502 1,008
Proceeds from Maturities of
Available for Sale Securities 8,063 4,687
Proceeds from Maturities of
Held to Maturity Securities 1,179 4,575
Purchases of Available for Sale Securities (21,753) (5,966)
Purchases of Held to Maturity Securities (4,354) (3,171)
Loans Made to Customers, Net of
Principal Collected on Loans (6,248) (9,559)
Investment in Limited Partnership 0 (633)
Purchases of Property and Equipment (247) (2,396)
_____________________
Net Cash (Used in)Investing Activities (21,108) (9,585)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 3,280 (7,312)
Net Increase/(Decrease) in Certificates
of Deposits 11,421 9,196
Net Increase/(Decrease) in Short-Term
Borrowing (251) 3,102
Proceeds from Issuance of Long-Term Debt 3,906 3,970
Acquisition of Treasury Stock 0 (275)
Issuance of Treasury Stock 100 0
Cash Dividends Paid (546) (417)
_____________________
Net Cash Provided by (Used in)
Financing Activities 17,910 8,264
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (757) 837
CASH and CASH EQUIVALENTS -
Beginning of Period 7,214 5,572
_____________________
CASH and CASH EQUIVALENTS - End of Period $6,457 $6,409
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositor $4,145 $3,453
Interest Paid - Other 384 112
Income Taxes 140 385
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
September 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.
In addition to historical information, this Third Quarter Report
contains forward-looking statements. The forward-looking
statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ
materially from those projected in the forward-looking
statements. Important factors that might cause such a difference
include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations". Readers are cautioned not
to place undue reliance on these forward-looking statements,
which reflect management's analysis only as of the date hereof.
The Corporation undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents
the Corporation files from time to time with the Securities and
Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Corporation in 1996 and 1997, and any Current
Reports on Form 8-K filed by the Corporation.
RESULTS OF OPERATIONS
Overview
Consolidated net income for the nine months ended September 30,
1996 was $1,644,000, an increase of 1.2%, as compared to the
consolidated net income of $1,624,000 for the same period in
1995.
Consolidated net income for the three months ended September 30,
1996 was $545,000, an increase of 3.5%, as compared to the
consolidated net income of $526,000 for the same period in 1995.
On a per share basis, net income for the nine months ended
September 30, 1996 was $.69, as compared to $.68 for the same
period in 1995.
Results of operations for the nine months ended September 30,
1996 as compared to the same period in 1995 were impacted by the
following items: (1) Net income was positively impacted by an
8.6% 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 an 8.8% 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
<PAGE>
(ROA), was 1.18% on an annualized basis for the nine months ended
September 30, 1996, as compared to 1.33% for the same period in
1995. Net income as a percent of average stockholders' equity,
also known as return on equity (ROE), was 10.3% on an annualized
basis for the nine months ended September 30, 1996, as compared
to 10.9% 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 based on deposit growth and other factors. 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 $8,717,000, or 14.6%, to $68,449,000
at September 30, 1996, from $59,732,000 at December 31, 1995. The
funding for the loan growth is further discussed under the
section on Liquidity.
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) the addition and promotion in September,
1996, of 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 nine months ended September 30, 1996
increased by $214,000, or 3.6%, over the same period in 1995.
Commercial and residential average loan growth of $9,717,000 and
average investment security growth of $9,015,000 was funded by
the growth in average deposits of $13,810,000 and by the growth
in average long-term debt of $6,344,000. Average earning assets
increased in the amount of $20,196,000 over the same period from
1995. The volume growth in earning assets and interest-bearing
liabilities contributed to the increase in net interest income by
the amount of $345,000.
<PAGE>
During the first quarter of 1995, the Federal Reserve Bank was
tightening monetary supply causing the prime interest rate 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 decreased
slightly to 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 3.9% 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 $131,000 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 September 30, 1996,
the Bank has received fixed rate advances of $12,346,000 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 5.84% 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 September 30, 1996,
the Bank did not utilize any of these aforementioned strategies.
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. At September 30, 1996,
the total balances in this product amounted to $2,234,000. As of
September, 1996, Management offered 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
<PAGE>
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 nine 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 nine 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 yield
curve during the last three 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 September
30, 1996, Management expects an overall immaterial 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 $98,000 and $108,000 for the
nine months ended September 30, 1996 and 1995, respectively. Net
charge-offs for the nine months ended September 30, 1996 amounted
to $33,000 as compared to $53,000 for the same period of last
year. 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 nine months ended September 30,
1996 was $582,000, representing an increase of $13,000, or 2.3%,
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. As an offset to the other operating income
increase was a reduction in trust income due to significant
estate settlements occurring in 1995.
Other Operating Expenses
Other operating expenses for the nine months ended September 30,
1996 increased by $356,000, or 8.8%, over the same period in
1995. Of this increase, employee salaries and wages and related
fringe benefits increased by $204,000, or 8.8%, 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 ($111,000
in salaries and wages above the same period of last year) and
several support staff positions.
Occupancy, furniture and equipment expenses for the nine months
ended September 30, 1996 increased by $184,000, or 35.7%, 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 $48,000;
and (3) snow removal
<PAGE>
and related costs that exceeded the same period of last year by
$22,000.
The FDIC Insurance Assessment expense decreased by $145,000 for
the nine months ended September 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. See further discussion under the Section on Regulatory
Activity concerning the expected impact to the FDIC Insurance
Assessment rate for 1997.
Other operating expenses for the nine months ended September 30,
1996, increased by $113,000, or 10.6%, over the same period in
1995. Net losses and charge-offs from the limited partnerships in
the amount of $81,000 were recognized as other operating expenses
for the nine months ended September 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. As an
offset to the increase in other operating expenses was a
nonrecurring charge to expense in the amount of $75,000 during
the third quarter of 1995. This charge of $75,000, after netting
for state tax credits, related to the initial funding arrangement
for the Nissly Factory Apartments Associates, a limited
partnership. Additional information concerning the investment in
the partnership is discussed under the section on Income Taxes.
Income Taxes
The Corporation's income tax expense decreased by $212,000 for
the nine months ended September 30, 1996 to $274,000 from
$486,000 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 Nissly's tax credits amounting to approximately $185,000
for 1996.
Building Expansion and Branch Office
The expenses related to the building expansion and branch office
projects completed in 1995 are expected to have an immaterial
impact to the results of operations for the remaining months of
1996, as compared to the same period in 1995.
<PAGE>
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 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.
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 to recapitalize the Savings
Association Insurance Fund ("SAIF") administered by the Federal
Deposit Insurance Corporation ("FDIC") and to provide for
repayment of the FICO (Financial Institution Collateral
Obligation) bonds issued by the United States Treasury
Department. The FDIC will levy a one-time special assessment on
SAIF deposits equal to 65.7 cents per $100 of the SAIF-assessable
deposit base as of March 31, 1995. During the years 1997, 1998,
and 1999, the Bank Insurance Fund ("BIF") will pay $322 million
of FICO debt service, and SAIF will pay $458 million.
During 1997, 1998 and 1999, the average regular annual deposit
insurance assessment is estimated to be about 1.29 cents per $100
of deposits for BIF deposits and 6.44 cents per $100 of deposits
for SAIF deposits. Individual institution's assessments will
continue to vary according to their capital and management
ratings. As always, the FDIC will be able to raise the
assessments as necessary to maintain the funds at
<PAGE>
their target capital ratios provided by law. After 1999, BIF and
SAIF will share the FICO costs equally. Under current estimates,
BIF and SAIF assessment bases would each be assessed at the rate
of approximately 2.43 cents per $100 of deposits. The FICO bonds
will mature in 2018-2019, ending the interest payment obligation.
The law also provides that BIF and SAIF are to merge and to form
the Deposit Insurance Fund ("DIF") at the beginning of 1999,
provided that there are no SAIF institutions in existence at that
time. Merger of the Funds will require state laws to be amended
in those states authorizing savings associations to eliminate
that authorization (state chartered savings banks will not be
affected). This provision reflects Congress's apparent intent to
merge thrift and commercial bank charters by January 1999;
however, no law has yet been enacted to achieve that purpose.
Based on current deposit levels, Management expects that the
increase in the FDIC assessment rate will adversely impact
results of operations in an amount estimated at $20,000.
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 may
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 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."
<PAGE>
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
$2,170,000 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 September 30, 1996, total nonperforming loans decreased to a
level of $666,000, 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 review and supervision 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 $65,000 for the nine months ended
September 30, 1996, and the ratio of the allowance for loan
losses to net loans was 1.05% at September 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 $1,330,000 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, a growing core deposit
base, primarily certificates of deposit, and FHLB funding
products as discussed below. 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 $71,600,000. In order to provide funding for the Bank's
loans and mortgage-backed security investments, the Bank utilized
FHLB's fixed rate advances totaling $12,346,000 as of September
30, 1996, an increase from $5,800,000 at December 31, 1995.
<TABLE>
SUPPORTING SCHEDULES
<CAPTION>
Schedule of Nonperforming Assets
September 30, December 31,
(In Thousands) 1996 1995
<S> <C> <C>
Nonaccruing Loans $ 56 $203
Accrual Loans - 90 days or more
past due 450 1,022
Restructured Accrual Loans 0 0
Other Real Estate Owned 160 0
______ ______
Total Nonperforming Assets $ 666 $1,225
====== ======
Nonperforming Assets
as a % of Net Loans 0.5% 1.0%
====== ======
Allowance for Loan Losses
as a % of Nonperforming Assets 200% 103%
====== ======
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Nine Months Ended September 30,
(In Thousands) 1996 1995
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $123,268 $113,551
======== ========
Allowance for Loan Losses,
Beginning of Period $1,265 $1,182
Loans Charged-off During Period 49 82
Recoveries of Loans Previously
Charged-off 16 29
______________________
Net Loans Charged-off 33 53
Addition to Provision for Loan Losses
Charged to Operations 98 108
______________________
Allowance for Loan Losses,
End of Period $1,330 $1,237
======== ========
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.04% 0.06%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.05% 1.05%
======== ========
</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 - Nothing to report.
<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: November 7, 1996
By: /s/ Clement M. Hoober
__________________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 7, 1996
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 6456
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 35417
<INVESTMENTS-CARRYING> 17059
<INVESTMENTS-MARKET> 17040
<LOANS> 126633
<ALLOWANCE> 1330
<TOTAL-ASSETS> 194458
<DEPOSITS> 158069
<SHORT-TERM> 3148
<LIABILITIES-OTHER> 1312
<LONG-TERM> 10176
0
0
<COMMON> 600
<OTHER-SE> 21153
<TOTAL-LIABILITIES-AND-EQUITY> 194458
<INTEREST-LOAN> 8327
<INTEREST-INVEST> 2131
<INTEREST-OTHER> 83
<INTEREST-TOTAL> 10541
<INTEREST-DEPOSIT> 4284
<INTEREST-EXPENSE> 4698
<INTEREST-INCOME-NET> 5843
<LOAN-LOSSES> 98
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4409
<INCOME-PRETAX> 1918
<INCOME-PRE-EXTRAORDINARY> 1918
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1644
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
<YIELD-ACTUAL> 4.77
<LOANS-NON> 56
<LOANS-PAST> 450
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2170
<ALLOWANCE-OPEN> 1265
<CHARGE-OFFS> 49
<RECOVERIES> 16
<ALLOWANCE-CLOSE> 1330
<ALLOWANCE-DOMESTIC> 1330
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 654
</TABLE>
