FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
_________________________________
OR
[ ] 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,Pennsylvania 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.
2,490,973 shares of $.25 (par) common stock were
_________________
outstanding as of April 30, 1997.
____________________
<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
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<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 3/31/97 12/31/96
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $7,333 $6,073
Federal Funds Sold 1,925 4,790
Investment Securities Held to Maturity
(Market Value - 1997-$16,624;1996-$17,228) 16,741 17,124
Investment Securities Available for Sale 45,894 37,766
Loans(Net of Unearned Income) 133,239 130,391
Less: Allowance for Loan Losses (1,375) (1,371)
______________________
Total Net Loans 131,864 129,020
Premises and Equipment - Net 5,665 5,741
Accrued Interest Receivable 1,440 1,312
Deferred Income Taxes 310 252
Investment in Limited Partnerships 984 1,003
Other Assets 501 391
______________________
TOTAL ASSETS $212,657 $203,472
======================
LIABILITIES
Deposits:
Noninterest-Bearing $16,878 $16,887
Interest-Bearing 148,883 147,626
______________________
Total Deposits 165,761 164,513
Short-Term Borrowing 664 2,989
Long-Term Debt 22,491 12,676
Accrued Interest Payable 944 883
Other Liabilities 364 188
_____________________
TOTAL LIABILITIES 190,224 181,249
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 629 599
Shares: Authorized - 20,000,000; Issued -
2,514,012 in 1997 (2,394,164 in 1996)
Outstanding - 2,490,973 in 1997 (2,373,222
in 1996)
Surplus 4,874 1,968
Retained Earnings 17,364 19,916
Unrealized gain/(loss) on securities
available for sale, net of tax (21) 103
Less: Treasury Stock - at cost
(23,039 shares in 1997 and 20,942 shares
in 1996) (413) (363)
______________________
TOTAL STOCKHOLDERS' EQUITY 22,433 22,223
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $212,657 $203,472
======================
* The Stockholders' Equity and share information as of March 31,
1997 reflects the 5% stock dividend declared by the Corporation's
Board of Directors on April 10, 1997, payable on May 15, 1997 to
stockholders of record on April 28, 1997.
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,
_______________________________
(In Thousands, except Per Share Data) 1997 1996
_______________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $2,908 $2,734
Investment Securities:
Taxable 639 446
Exempt from Federal Taxes 212 194
Deposits in Banks 0 1
Federal Funds Sold 45 27
______________________
Total Interest Income 3,804 3,402
INTEREST EXPENSE
Deposits 1,495 1,380
Short-Term Borrowing 42 7
Long-Term Debt 207 102
______________________
Total Interest Expense 1,744 1,489
______________________
Net Interest Income 2,060 1,913
PROVISION for LOAN LOSSES 11 8
______________________
Net Interest Income after Provision
for Loan Losses 2,049 1,905
OTHER OPERATING INCOME
Trust Income 30 24
Service Charges on Deposit Accounts 83 73
Other Service Charges, Commissions, Fees 78 66
Other Income 46 45
______________________
Total Other Operating Income 237 208
OTHER OPERATING EXPENSES
Salaries and Wages 672 640
Retirement Plan and Other Employee Benefits 225 205
Net Occupancy Expense 173 162
Furniture and Equipment Expense 88 85
FDIC Insurance Assessment 4 1
Other Operating Expenses 418 371
______________________
Total Other Operating Expenses 1,580 1,464
______________________
Income before Income Taxes 706 649
PROVISION for INCOME TAXES 139 92
______________________
NET INCOME for PERIOD $567 $557
======================
PER SHARE INFORMATION
Net Income for Period $0.23 $0.22
Cash Dividends $0.086 $0.062
Average Common Shares Outstanding 2,492,515 2,491,800
* Per Share information reflects the 5% stock dividend declared
by the Corporation's Board of Directors on April 10, 1997,
payable on May 15, 1997 to stockholders of record on April 28,
1997.
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>
Three Months Ended March 31,
_____________________________
(In Thousands) 1997 1996
_____________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $567 $557
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciating and Amortization 127 125
Provision for Loan Losses 11 8
Provision for Deferred Income Taxes 5 36
(Increase)/Decrease in Accrued
Interest Receivable (128) (160)
(Increase)/Decrease in Other Assets (102) (10)
Increase/(Decrease) in Other Liabilities 238 138
_______________________
Net Cash Provided by Operating Activities 718 694
CASH FLOWS from INVESTING ACTIVITIES
Net (Increase)/Decrease in Federal Funds Sold 2,865 0
Proceeds from Maturities of
Available for Sale Securities 2,467 4,236
Proceeds from Maturities of
Held to Maturity Securities 1,110 505
Purchases of Available for Sale Securities (10,782) (10,380)
Purchases of Held to Maturity Securities (728) (2,622)
Loans Made to Customers, Net of
Principal Collected on Loans (2,855) (764)
Purchases of Property and Equipment (40) (35)
_______________________
Net Cash (Used in)Investing Activities (7,963) (9,060)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (689) (256)
Net Increase/(Decrease) in Certificates
of Deposits 1,936 8,402
Net Increase/(Decrease) in Short-Term
Borrowing (2,325) (2,304)
Proceeds from Issuance of Long-Term Debt 9,815 1,675
Acquisition of Treasury Stock (51) 0
Issuance of Treasury Stock 32 17
Cash Dividends Paid (213) (154)
_______________________
Net Cash Provided by (Used in)
Financing Activities 8,505 7,380
_______________________
Net Increase/(Decrease) in Cash
and Cash Equivalents 1,260 (986)
CASH and CASH EQUIVALENTS -
Beginning of Period 6,073 7,214
_______________________
CASH and CASH EQUIVALENTS - End of Period $7,333 $6,228
=======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $1,471 $1,342
Interest Paid - Other 211 101
Income Taxes 0 0
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Retirement of Treasury Stock (4,000 shares
1996) $0 $62
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES 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 1996 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 as follows: 246,000 shares which are
reserved for issuance under the Corporation's 1988 and 1997
Stock Incentive Plans, 100,000 shares which are reserved for
issuance under the Corporation's 1997 Employee Stock
Purchase Plan, and 157,500 shares which are reserved for
issuance under the Corporation's Dividend Reinvestment Plan.
As of March 31, 1997, options to purchase 4,830 shares have
been granted under the Corporation's 1988 Stock Incentive
Plan. The exercise price for such options is $23.26. No
options have been exercised as of March 31, 1997.
Information regarding shares above reflect the 5% stock
dividend declared by the Corporation's Board of Directors on
April 10, 1997, payable on May 15, 1997 to stockholders of
record on April 28, 1997.
5. The results of operations for the three month period ended
March 31, 1997 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. Such financial
condition and results of operations are not intended to be
indicative of future performance. This discussion should be read
in conjunction with the 1996 Annual Report.
In addition to historical information, this First 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. 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
1997, and any Current Reports on Form 8-K filed by the
Corporation.
Results of Operations
_____________________
Overview
Consolidated net income for the three months ended March 31, 1997
was $567,000, an increase of 1.8%, as compared to the
consolidated net income of $557,000 for the same period in 1996.
On a per share basis, net income for the three months ended March
31, 1997 was $.23, as compared to $.22 for the same period in
1996. Per share information reflects the 5% stock dividend
declared by the Corporation's Board of Directors on April 10,
1997, payable on May 15, 1997 to stockholders of record on April
28, 1997.
Results of operations for the three months ended March 31, 1997
as compared to the same period in 1996 were impacted by the
following items: (1) Net income was positively impacted by a 9.2%
increase in average net loans, primarily residential and
commercial mortgages, which were funded by growth in certificates
of deposit and by additions to average borrowings; (2) net income
was negatively impacted by the narrowing of the spread between
the rates on loans and investments and the rates on certificates
of deposit during 1996; (3) net income was negatively impacted by
a 7.9% increase in other operating expenses; and (4) net income
was negatively impacted by a reduction in income tax credits
available in 1997 as compared to 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 1.12% on an annualized basis for the
three months ended March 31, 1997, as compared to 1.25% for the
same period in 1996. Net income as a percent of average
stockholders' equity, also known as return on equity (ROE), was
10.2% on an annualized basis for the three months ended March 31,
1997, as compared to 10.6% for the same period in 1996.
The growth in loans is considered a material favorable trend of
the Corporation which Management expects to continue for the
remainder of 1997. Management expects the growth in deposits for
1997 to be comparable to historic growth rates. 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 the level
of net income increase and the growth in deposits and loans.
Other actions include the strategic promotion of the Bank's
branch offices in light of continued bank consolidation in the
Bank's market
<PAGE>
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 certificate of deposit which has
a no-penalty for early withdrawal feature during the life of the
certificate; and a special promotion of the Bank's checking
account products. In the first quarter of 1997, the Bank received
new funds exceeding $1,900,000 from a special certificate of
deposit promotion. 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) further enhancement and promotion of the new
loan product first introduced in September, 1996, home equity
lines of credit; (4) new loan originations resulting from the
recently opened Manheim branch office; (5) economic stability of
Lancaster County as discussed later in this section; and (6)
continued population growth in the Bank's market area.
It is anticipated that economic activity in the Bank's market
area during 1997 appears favorable due to the availability of
generally low lending rates and continued construction activity.
Current long-term interest rates remain below levels of late 1994
and early 1995. This decline in long-term interest rates is
expected to augment economic activity. The overall effects of
current and past economic conditions 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 three months ended March 31, 1997
increased by $159,000, or 7.8%, over the same period in 1996.
Commercial and residential average loan growth of $11,067,000 and
average investment security growth of $13,359,000 was funded by
the growth in average deposits of $14,161,000 and by the growth
in average borrowings of $10,081,000. The additional borrowings
represented fixed-rate and variable-rate advances. Average
earning assets increased in the amount of $25,860,000 over the
same period from 1996. The volume growth in earning assets and
interest-bearing liabilities contributed to the increase in net
interest income by the amount of $221,000.
Commencing July 1995, the Federal Reserve Bank began loosening
the monetary supply causing the prime interest rate to decrease
from 9% to 8.25% by the first quarter of 1996. The immediate
impact of these short-term interest rate decreases was to
decrease the interest rates on loans that adjust according to the
prime lending rate and on reinvested funds from maturing
investment securities. The overall interest rate on the average
total earning assets decreased to 8.2% for the current period as
compared to 8.5% for the same period last year. The decline in
short-term interest rates had the effect of a slight decline in
the average interest rate on the certificate of deposit
portfolio. However, the increase in the mix of interest-bearing
liabilities in the form of long-term debt has the overall effect
of increasing the total cost of funds. See Management's
discussion below concerning the anticipated impact of these
interest rate fluctuations to the results of operations for 1997.
The overall interest rate on the average interest-bearing
liabilities increased to 4.3% for the current period, as compared
to 4.2% for the same period last year. The net effect of all
interest rate fluctuations and funding changes was to decrease
net interest income in the amount of $62,000 for the current
period over the same period in 1996.
The Bank retains an outside consulting group to assist in
monitoring its interest rate risk using income simulation models
on a quarterly basis. 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 have an immaterial
impact to the Bank's net interest income over the next twelve
months. 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 March 31, 1997, the Bank has received short-
term and long-term
<PAGE>
fixed rate advances of $22,161,000 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 5.76% with maturities ranging from May, 1997 to
March, 2002. Additional asset/liability management strategies
available from the FHLB include access to interest rate caps,
floors and swaps. As of March 31, 1997, 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.
As of September, 1996, Management offered a new loan product,
home equity lines of credit, that will provide additional rate
sensitive assets. At March 31, 1997, the total lines of credit
balances outstanding amounted to $634,000.
For the remaining months of 1997, Management expects the
effective interest rate in the loan and investment portfolios to
trend slightly upward as compared to their current levels. This
is primarily a result of the recent Federal Reserve Bank's
tightened monetary policy when the prime lending rate was
increased by .25% in March, 1997. This action similarly increased
overnight fed funds investment rates and increased long-term bond
rates impacting interest rates on residential mortgages. In
addition, Management expects a modest rise in the effective rate
on its interest-bearing liabilities as deposits of lower interest
rate structured money market and savings accounts move to higher
interest rate structured certificates of deposit and as the
increase in short-term rates impacts the Bank's certificate of
deposit portfolio. The growth in earning assets during 1996 and
the first three months of 1997 is expected to have a positive
impact on the net interest margin for the remaining months of
1997. Although the effective interest rate 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 1997, the options selected 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 March 31, 1997, Management expects an
overall immaterial impact to the net interest margin for the
remaining months of 1997, as compared to the same period in 1996.
Provision for Loan Losses
The provision for loan losses was $11,000 and $8,000 for the
three months ended March 31, 1997 and 1996, respectively. Net
charge-offs for the three months ended March 31, 1997 amounted to
$7,000 as compared to net recoveries that amounted to $1,000 for
the same period in 1996. 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 as compared to the
balance of outstanding loans.
Other Operating Income
Other operating income for the three months ended March 31, 1997
was $237,000, representing an increase of $29,000, or 13.9%, over
the same period in 1996. Contributing to this increase were
additional earnings resulting from an increase in remote ATM fees
and from an increase in trust income.
Other Operating Expenses
Other operating expenses for the three months ended March 31,
1997 increased by $116,000, or 7.9%, over the same period in
1996. Of this increase, employee salaries and wages and related
fringe benefits increased by $52,000, or 6.2%, over the same
period in 1996. This increase was essentially due to new staff
positions for teller training and loan administration and due to
annual merit, cost of living, and health care cost increases.
Occupancy, furniture and equipment expenses for the three months
ended March 31, 1997 increased by $14,000, or 5.7%, over the same
period in 1996. This increase was primarily due to other real
estate expense incurred on a foreclosed property amounting to
$31,200 offset by a reduction in snow removal costs in the amount
of $20,000 due to the milder 1997 Winter season as compared to
1996.
<PAGE>
The FDIC Insurance Assessment expense increased by $3,000 for the
three months ended March 31, 1997, as compared to the same period
in 1996. The FDIC Insurance Assessment rate increased to 1.29
cents for every $100 in deposits in the first quarter of 1997
from $500 per quarter in the first quarter of 1996. 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 three months ended March 31,
1997, increased by $47,000, or 12.7%, over the same period in
1996. Contributing factors to the increase in other operating
expenses as compared to the same period in 1996 included an
increase in net losses and charge-offs from the limited
partnerships, in director subcommittee meetings for the period
and per meeting fees, in volume increases impacting the
Pennsylvania shares tax, in consulting fees, in software
maintenance costs and in ATM locations and transactions.
Income Taxes
The Corporation's income tax expense increased by $47,000 for the
three months ended March 31, 1997 to $139,000 from $92,000 for
the same period in 1996. The effective tax rate was 19.7% and
14.2% for the three months ended March 31, 1997 and 1996,
respectively. The increase in income tax expense and the
effective tax rate was due to the increase in corporate earnings
before income taxes and a reduction in available federal income
tax credits from 1996. 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. Total income
tax credits from the project amounted to $17,000 of low income
housing credits for the three months ended March 31, 1997 as
compared to $50,000 of historic credits for the same period in
1996. Currently, the effective tax rate of the Corporation for
the remaining months of 1997 is expected to be more than the
effective tax rate in 1996 due to the expected change in Nissly's
tax credits from 1996.
Regulatory Activity
___________________
The United States Supreme Court has recently 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; consequently, the
entrance of banks into the insurance industry is inevitable. On
the heels of the Supreme Court's ruling, the Office of the
Comptroller of the Currency has issued 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. 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. Consequently, equity
underwriting activities of banks may increase in the near future.
However, the Corporation does not currently anticipate entering
into these activities.
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. 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 their target
capital ratios provided by law.
Based on current deposit levels, Management expects that the
increase in the FDIC assessment rate will adversely impact
results of operations, net of income taxes, in a currently
estimated amount of $9,000 for the remaining months of 1997.
<PAGE>
The Act also provides regulatory relief to the financial services
industry relative to environmental risks, frequency of
examinations, and the simplification of forms and disclosures.
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 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. However, Statement No. 127 was issued December,
1996, to defer certain provisions of SFAS No. 125 for
transactions occurring after December 31, 1997. 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.
There was no incidence of coverage under SFAS No. 125 with
respect to applicable provisions for the first quarter of 1997.
The Bank does not expect this Statement to have a material effect
on the liquidity, results of operations or capital resources when
the applicable provisions become effective in 1998.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS No. 128), "Earnings per Share." This
Statement establishes standards for computing and presenting
earnings per share. SFAS No. 128 replaces the presentation of
primary earnings per share with a dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. This Statement is
effective for financial statements issued for periods ending
after December 15, 1997, and earlier application is not
permitted. The Bank does not expect this Statement to have a
material effect on its earnings per share computations.
<PAGE>
Credit Risk and Loan Quality
____________________________
Other than as described herein, Management does not believe there
are any trends, events 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 effects of
current and past economic conditions and other unfavorable
specific business conditions may result in the inability of loans
amounting to $2,141,000 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
1997.
At March 31, 1997, total nonperforming assets decreased to a
level of $658,000, or .5% of total net loans, from a level of
$960,000, or .7%, at December 31, 1996. The reduction is a result
of increased review and supervision of the applicable loan
credits. Historically, the percentage of nonperforming assets to
total net loans as of December 31, for the previous five year
period was an average of .8%.
The reserve increased by $4,000 for the three months ended March
31, 1997, and the ratio of the allowance for loan losses to net
loans was 1.03% at March 31, 1997, as compared to 1.05% at
December 31, 1996. Management believes based on information
currently available that the current allowance for loan losses of
$1,375,000 is adequate to meet potential loan losses.
Allowance for Loan Losses
_________________________
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses
and is formally reviewed by Management on a quarterly basis. The
allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's periodic evaluation
of the adequacy of the allowance is based on the Corporation's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant
factors. While Management uses available information to make such
evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process,
review the Bank's Allowance for Loan Losses. Such agencies may
require the Bank to recognize additions to the allowance based on
their judgement of information available to them at the time of
their examination.
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 $78,300,000. In order to provide funding for the Bank's
loans and investments, the Bank borrowed from the FHLB
$7,315,000, net of repayment, for the three months ended March
31, 1997 at varying maturities and terms. The outstanding
borrowings from the FHLB amounted to $22,161,000 and $7,475,000
at March 31, 1997 and 1996, respectively.
<PAGE>
Stockholders' Equity
____________________
The Corporation maintains capital ratios that are well above the
minimum total capital levels required by federal regulatory
authorities including the risk-based capital guidelines. There
are no material commitments for capital expenditures. There are
no known trends, events or uncertainties including regulatory
items that are expected to have a material impact on the capital
resources of the Corporation for the remaining months of 1997.
See discussion on Regulatory Activity.
The Bank has risk-based capital ratios exceeding the regulatory
requirement. The risk-based capital guidelines require banks to
maintain a minimum risk-based capital ratio of 8.0% at March 31,
1997, as compared to the Bank's current risk-based capital ratio
of 17.54%. The total risk-based capital ratio is computed by
dividing stockholders' equity plus the allowance for loan losses
by risk-adjusted assets. Risk-adjusted assets are determined by
assigning credit risk-weighing factors from 0% to 100% to various
categories of assets and off-balance-sheet financial instruments.
A tabular presentation of the risk-based capital ratios for the
Bank is as follows:
<TABLE>
(In Thousands) March 31, December 31,
1997 1996
___________ _____________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 21,534 $ 21,186
Tier II - Allowance for Loan Losses 1,375 1,371
___________ _____________
Total Qualifying Capital $ 22,909 $ 22,557
=========== =============
Risk-adjusted On-balance-sheet Assets $123,225 $118,844
Risk-adjusted Off-balance-sheet Exposure 7,404 5,666
___________ _____________
Total Risk-adjusted Assets $130,629 $124,510
=========== =============
Ratios:
Tier I Capital Ratio - Actual 16.48% 17.02%
Minimum Required 4.00% 4.00%
Total Capital Ratio - Actual 17.54% 18.12%
Minimum Required 8.00% 8.00%
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 12,459 $ 12,596
=========== =============
</TABLE>
No shares of common stock are reserved for issuance in the event
of conversions or the exercise of warrants, options or other
rights, except as follows: 246,000 shares which are reserved for
issuance under the Corporation's 1988 and 1997 Stock Incentive
Plans, 100,000 shares which are reserved for issuance under the
Corporation's 1997 Employee Stock Purchase Plan, and 157,500
shares which are reserved for issuance under the Corporation's
Dividend Reinvestment Plan. As of March 31, 1997, options to
purchase 4,830 shares have been granted under the Corporation's
1988 Stock Incentive Plan at an exercise price of $23.26. No
options have been exercised as of March 31, 1997. Information
regarding shares above reflect the 5% stock dividend declared by
the Corporation's Board of Directors on April 10, 1997, payable
on May 15, 1997 to stockholders of record on April 28, 1997.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
<CAPTION>
Schedule of Nonperforming Assets
________________________________
March 31, December 31,
___________ _______________
(In Thousands) 1997 1996
___________ _______________
<S> <C> <C>
Nonaccruing Loans $170 $ 91
Accrual Loans - 90 days or more
past due 401 752
Restructured Accrual Loans 0 0
Other Real Estate Owned 87 117
______ ______
Total Nonperforming Assets $ 658 $ 960
====== ======
Nonperforming Assets
as a % of Net Loans 0.5% 0.7%
====== ======
Allowance for Loan Losses
as a % of Nonperforming Loans 343% 163%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
_____________________________________
Three Months Ended March 31,
_____________________________
(In Thousands) 1997 1996
________ ________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $131,763 $120,696
======== ========
Allowance for Loan Losses,
Beginning of Period $1,371 $1,265
Loans Charged-off During Period 15 3
Recoveries of Loans Previously
Charged-off 8 4
________ ________
Net Loans Charged-off 7 (1)
Addition to Provision for Loan Losses
Charged to Operations 11 8
_________ _______
Allowance for Loan Losses,
End of Period $1,375 $1,274
======== ========
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.02% 0.00%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.03% 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 -
(a) An annual meeting of shareholders was held at 10:00 a.m. on
April 22, 1997 at The Country Table Restaurant, 740 East Main
Street, Mount Joy, Pennsylvania 17552.
(b)-(c) Three matters were voted upon, as follows:
Three Class A directors were elected, as below:
Votes* Votes*
cast cast Votes*
Reelected Term Expires "FOR" "AGAINST" "ABSTAINED"
_________ ____________ _________ _______ _______
Franklin R. Eichler 2000 1,889,109 2,918 0
E. Ralph Garber 2000 1,889,109 2,918 0
Mark D. Gainer 2000 1,889,109 2,918 0
Directors whose term continued after meeting
____________________________________________
Class B Directors
Daniel C. Gohn 1998
Daniel H. Raffensperger 1998
David G. Heisey 1998
Carl R. Hallgren 1998
Class C Directors
Donald H. Wolgemuth 1999
William E. Eby 1999
William D. Linkous 1999
Benjamin W. Piersol, Jr. 1999
Proposal to approve and adopt the
Union National Financial Corporation
1997 Employee Stock Purchase
Plan 1,819,833 33,097 23,066
Proposal to approve and adopt the
Union National Financial Corporation
1997 Stock Incentive Plan 1,744,860 116,766 10,613
* Information of shares voted do not reflect the 5% stock
dividend declared by the Corporation's Board of Directors on
April 10, 1997, payable on May 15, 1997 to stockholders of record
on April 28, 1997.
(d) Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
On March 25, 1997, a Form 8-K was filed by the Registrant to file
the Registrant's Articles of Incorporation, as amended, and
Registrant's Bylaws, as amended.
<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: May 8, 1997
By:/s/ Clement M. Hoober
______________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 8, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7333
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1925
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45894
<INVESTMENTS-CARRYING> 16741
<INVESTMENTS-MARKET> 16624
<LOANS> 133239
<ALLOWANCE> 1375
<TOTAL-ASSETS> 212657
<DEPOSITS> 165761
<SHORT-TERM> 664
<LIABILITIES-OTHER> 1308
<LONG-TERM> 22491
0
0
<COMMON> 629
<OTHER-SE> 21804
<TOTAL-LIABILITIES-AND-EQUITY> 212657
<INTEREST-LOAN> 2908
<INTEREST-INVEST> 851
<INTEREST-OTHER> 45
<INTEREST-TOTAL> 3804
<INTEREST-DEPOSIT> 1495
<INTEREST-EXPENSE> 1744
<INTEREST-INCOME-NET> 2060
<LOAN-LOSSES> 11
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1580
<INCOME-PRETAX> 706
<INCOME-PRE-EXTRAORDINARY> 706
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 567
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<YIELD-ACTUAL> 4.57
<LOANS-NON> 170
<LOANS-PAST> 401
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2141
<ALLOWANCE-OPEN> 1371
<CHARGE-OFFS> 15
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1375
<ALLOWANCE-DOMESTIC> 1375
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 653
</TABLE>
