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, 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, 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.
2,484,571 shares of $.25 (par) common stock were
_________________
outstanding as of October 31, 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
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 9/30/97 12/31/96
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $4,235 $6,073
Federal Funds Sold 0 4,790
Investment Securities Held to Maturity
(Market Value - 1997-$18,579;1996-$17,228) 18,607 17,124
Investment Securities Available for Sale 40,639 37,766
Loans(Net of Unearned Income) 148,387 130,391
Less:Allowance for Loan Losses (1,524) (1,371)
______________________
Total Net Loans 146,863 129,020
Premises and Equipment - Net 5,485 5,741
Accrued Interest Receivable 1,443 1,312
Deferred Income Taxes 116 252
Investment in Limited Partnerships 947 1,003
Other Assets 495 391
______________________
TOTAL ASSETS $218,830 $203,472
======================
LIABILITIES
Deposits:
Noninterest-Bearing $17,615 $16,887
Interest-Bearing 154,252 147,626
______________________
Total Deposits 171,867 164,513
Short-Term Borrowing 1,185 2,989
Long-Term Debt 20,868 12,676
Accrued Interest Payable 1,025 883
Other Liabilities 448 188
_____________________
TOTAL LIABILITIES 195,393 181,249
STOCKHOLDERS' EQUITY*
Common Stock (Par Value $.25) 627 599
Shares: Authorized - 20,000,000; Issued -
2,506,568 in 1997 (2,394,164 in 1996)
Outstanding - 2,487,746 in 1997 (2,373,222
in 1996)
Surplus 4,753 1,968
Retained Earnings 18,081 19,916
Unrealized gain/(loss) on securities
available for sale, net of tax 341 103
Less: Treasury Stock - at cost
(18,822 shares in 1997 and 20,942 shares
in 1996) (365) (363)
______________________
TOTAL STOCKHOLDERS' EQUITY 23,437 22,223
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $218,830 $203,472
======================
*The Stockholders' Equity and 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 INCOME (UNAUDITED)
<CAPTION>
Three Months Ended September 30,
___________________________________
(In Thousands, except Per Share Data) 1997 1996
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,180 $2,824
Investment Securities:
Taxable 671 553
Exempt from Federal Taxes 226 216
Deposits in Banks 1 1
Federal Funds Sold 33 32
_____________________
Total Interest Income 4,111 3,626
INTEREST EXPENSE
Deposits 1,649 1,477
Short-Term Borrowing 13 42
Long-Term Debt 266 131
_____________________
Total Interest Expense 1,928 1,650
_____________________
Net Interest Income 2,183 1,976
PROVISION for LOAN LOSSES 91 49
_____________________
Net Interest Income after Provision
for Loan Losses 2,092 1,927
OTHER OPERATING INCOME
Trust Income 30 23
Service Charges on Deposit Accounts 97 83
Other Service Charges, Commissions, Fees 114 79
Investment Securities Gains (2) (3)
Other Income 5 4
_____________________
Total Other Operating Income 244 186
OTHER OPERATING EXPENSES
Salaries and Wages 715 651
Retirement Plan and Other Employee Benefits 203 191
Net Occupancy Expense 130 138
Furniture and Equipment Expense 99 92
FDIC Insurance Assessment 5 1
Other Operating Expenses 451 394
_____________________
Total Other Operating Expenses 1,603 1,467
_____________________
Income before Income Taxes 733 646
PROVISION for INCOME TAXES 147 101
_____________________
NET INCOME for PERIOD $586 $545
=====================
PER SHARE INFORMATION*
Net Income for Period $0.23 $0.22
Cash Dividends $0.090 $0.081
Average Common Shares Outstanding 2,488,597 2,495,193
<CAPTION>
Nine months ended September 30,
___________________________________
(In Thousands, except Per Share Data) 1997 1996
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $9,151 $8,327
Investment Securities:
Taxable 1,987 1,515
Exempt from Federal Taxes 637 616
Deposits in Banks 3 2
Federal Funds Sold 132 81
_____________________
Total Interest Income 11,910 10,541
INTEREST EXPENSE
Deposits 4,670 4,284
Short-Term Borrowing 78 74
Long-Term Debt 743 340
______________________
Total Interest Expense 5,491 4,698
______________________
Net Interest Income 6,419 5,843
PROVISION for LOAN LOSSES 203 98
______________________
Net Interest Income after Provision
for Loan Losses 6,216 5,745
OTHER OPERATING INCOME
Trust Income 90 70
Service Charges on Deposit Accounts 269 236
Other Service Charges, Commissions, Fees 279 218
Investment Securities Gains 2 0
Other Income 59 58
_____________________
Total Other Operating Income 699 582
OTHER OPERATING EXPENSES
Salaries and Wages 2,070 1,934
Retirement Plan and Other Employee Benefits 643 594
Net Occupancy Expense 436 431
Furniture and Equipment Expense 300 268
FDIC Insurance Assessment 15 2
Other Operating Expenses 1,299 1,180
_____________________
Total Other Operating Expenses 4,763 4,409
_____________________
Income before Income Taxes 2,152 1,918
PROVISION for INCOME TAXES 430 274
_____________________
NET INCOME for PERIOD $1,722 $1,644
=====================
PER SHARE INFORMATION*
Net Income for Period $0.69 $0.66
Cash Dividends $0.261 $0.219
Average Common Shares Outstanding 2,490,395 2,493,643
*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>
Nine Months Ended September 30,
_________________________________
(In Thousands) 1997 1996
_________________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,722 $1,644
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 382 385
Provision for Loan Losses 203 98
Investment Securities (Gains)/Losses (2) 0
Provision for Deferred Income Taxes 12 59
(Increase)/Decrease in Accrued
Interest Receivable (131) (148)
(Increase)/Decrease in Other Assets (81) (57)
Increase/(Decrease) in Other Liabilities 402 460
_____________________
Net Cash Provided by Operating Activities 2,507 2,441
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold 4,790 (1,250)
Proceeds from Sales of
Available for Sale Securities 5,548 3,502
Proceeds from Maturities of
Available for Sale Securities 11,503 8,063
Proceeds from Maturities of
Held to Maturity Securities 2,332 1,179
Purchases of Available for Sale Securities (19,561) (21,753)
Purchases of Held to Maturity Securities (3,815) (4,354)
Loans Made to Customers, Net of
Principal Collected on Loans (18,046) (6,248)
Purchases of Property and Equipment (92) (247)
_____________________
Net Cash (Used in)Investing Activities (17,341) (21,108)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 3,292 3,280
Net Increase/(Decrease) in Certificates
of Deposits 4,062 11,421
Net Increase/(Decrease) in Short-Term
Borrowing (1,804) (251)
Proceeds from Issuance of Long-Term Debt 8,192 3,906
Acquisition of Treasury Stock (229) 0
Issuance of Treasury Stock 136 100
Cash Dividends Paid (653) (546)
_____________________
Net Cash Provided by (Used in)
Financing Activities 12,996 17,910
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,838) (757)
CASH and CASH EQUIVALENTS -
Beginning of Period 6,073 7,214
_____________________
CASH and CASH EQUIVALENTS - End of Period $4,235 $6,457
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositor $4,555 $4,145
Interest Paid - Other 795 384
Income Taxes 462 140
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (12,000 shares
in 1997 and 4,000 shares in 1996) $228 $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 September 30, 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
$23.27. No options have been exercised as of September 30,
1997 under this plan. As of September 30, 1997, options to
purchase 10,000 shares have been granted under the
Corporation's 1997 Employee Stock Purchase Plan. The current
exercise price for such options is $19.63. As of September
30, 1997, 506 options have been exercised under the plan.
5. The results of operations for the nine month period ended
September 30, 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 report for the nine
months ended September 30, 1997 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 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 nine months ended September 30,
1997 was $1,722,000, an increase of 4.7%, as compared to the
consolidated net income of $1,644,000 for the same period in
1996.
Consolidated net income for the three months ended September 30,
1997 was $586,000, an increase of 7.5%, as compared to the
consolidated net income of $545,000 for the same period in 1996.
On a per share basis, net income for the nine months ended
September 30, 1997 was $.69, as compared to $.66 for the same
period in 1996. Per share information reflects the 5% stock
dividend paid on May 15, 1997.
Results of operations for the nine months ended September 30,
1997 as compared to the same period in 1996 were impacted by the
following items: (1) Net income was positively impacted by a
11.5% 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 decline in the average earnings
rate in the loan portfolio as compared to the same period in
1996; (3) net income was negatively impacted by an 8.0% increase
in other operating expenses; (4) net income was positively
impacted by a 20.1% increase in other operating income; and (5)
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 average assets (ROAA), was 1.09% on an annualized basis
for the nine months ended September 30, 1997, as compared to
1.18% for the same period in 1996. Net income as a percent of
average stockholders' equity, also known as return on average
equity (ROAE), was 10.1% on an annualized basis for the nine
months ended September 30, 1997, as compared to 10.3% 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 for 1997 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
<PAGE>
promotion of the Bank's branch offices in light of continued 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 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. For
the nine months ended September 30, 1997, the Bank received new
funds exceeding $4,500,000 from special certificate of deposit
promotions. In addition, the liquid reserves of the Bank's Trust
Department were invested into a money market account with the
Bank currently paying interest at a rate of 5.25%. This increased
average deposits for the quarter by $4,000,000. 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 an officer calling
program including bank wide business development efforts; (3)
further enhancement and promotion of the new loan product first
introduced in September, 1996, home equity lines of credit; (4)
economic stability of Lancaster County, Pennsylvania (the Bank's
primary market area) as discussed later in this section; and (5)
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 nine months ended September 30, 1997
increased by $598,000, or 9.6%, over the same period in 1996.
Commercial and residential average loan growth of $14,215,000 and
average investment security growth of $9,300,000 were funded by
the growth in average deposits of $13,799,000 and by the growth
in average borrowings of $9,585,000. The additional borrowings
represented fixed-rate and variable-rate advances. Average
earning assets increased in the amount of $24,770,000 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 $680,000.
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 8.3% for the current period as
compared to 8.4% for the same period last year. Cost of funds
increased due to the change in the mix of interest-bearing
liabilities in the form of additional long-term debt and
additional funds in higher paying money market accounts. See
Management's discussion below concerning the anticipated impact
of these interest rate fluctuations to the results of operations
for the remainder of 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 $82,000 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 terms and amounts of the transactions,
when combined with the Bank's overall balance sheet structure,
maintain the Bank within
<PAGE>
its interest rate risk policies. As of September 30, 1997, the
Bank has received long-term fixed rate advances of $20,678,000
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 5.74% with
maturities ranging from August, 1998 to September, 2002. As of
October, 1997, the Bank received an advance from the FHLB in the
amount of $5,000,000 maturing in 2002 with the interest rate
fixed for two years at 5.63%. Additional asset/liability
management strategies available from the FHLB include access to
interest rate caps, floors and swaps. As of September 30, 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 September 30, 1997, the total lines of
credit balances outstanding amounted to $2,520,000.
For the remaining months of 1997, Management expects no material
change to the effective interest rate in the loan and investment
portfolios as compared to their current levels. This is a result
of the stabilization of the financial markets, as short-term and
long-term interest rates are currently comparable to the interest
rates as of December, 1996. In addition, Management expects a
slight increase in the effective rate on its interest-bearing
liabilities for the remaining months of 1997 as a result of
upward competitive pressure on certificate of deposit rates and
additional funds in higher paying money market accounts. The
growth in earning assets during 1996 and the first nine 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 the
remaining months of 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 September 30, 1997, Management expects
an overall impact to the net interest margin for the remaining
months of 1997 to be immaterial, as compared to the same period
in 1996.
Provision for Loan Losses
The provision for loan losses was $203,000 and $98,000 for the
nine months ended September 30, 1997 and 1996, respectively. Net
charge-offs for the nine months ended September 30, 1997 amounted
to $50,000 as compared to $33,000 for the same period in 1996.
The increase in the provision over the same period of last year
is a result of the additional net charge-offs and the increase in
the volume of loans, primarily residential and commercial
mortgage loans, amounting to $17,996,000 for the current period
as compared to $6,216,000 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 as compared to the balance of
outstanding loans.
Other Operating Income
Other operating income for the nine months ended September 30,
1997 was $699,000, representing an increase of $117,000, or
20.1%, over the same period in 1996. Contributing to this
increase were additional earnings resulting from an increase in
ATM usage fees, from an increase in revenues generated from
remote ATMs, from an increase in estate settlements generating
additional trust income, and from increases in other fee income
including NSF charges, commercial account analysis fees, and
letter of credit fees. As of October, 1997 the Bank commenced
assessing a card usage fee (surcharge) for transactions at its
ATMs for cards issued by other institutions. This surcharge, or
the elimination thereof, may be subject to future legislation.
Other Operating Expenses
Other operating expenses for the nine months ended September 30,
1997 increased by $354,000, or 8.0%, over the same period in
1996. Of this increase, employee salaries and wages and related
fringe benefits increased by $185,000, or 7.3%, over the same
period in 1996. This increase was essentially due to new staff
positions for teller training and loan administration, due to
annual merit, cost of living, and health care cost increases.
<PAGE>
Occupancy, furniture and equipment expenses for the nine months
ended September 30, 1997 increased by $37,000, or 5.3%, over the
same period in 1996. This increase was primarily due to other
real estate expense incurred on a foreclosed property amounting
to $34,000 and due to an increase in equipment service agreement
costs. These increases were 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.
The FDIC Insurance Assessment expense increased by $13,000 for
the nine months ended September 30, 1997, as compared to the same
period in 1996. The FDIC Insurance Assessment rate increased to
1.29 cents for every $100 in deposits as of January 1, 1997 from
$500 per quarter in 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 nine months ended September 30,
1997, increased by $119,000, or 10.1%, over the same period in
1996. Contributing factors to the increase in other operating
expenses as compared to the same period in 1996 included (1) an
increase in legal and professional fees relative to legal fees
for implementing new employee benefit plans, to consulting fees,
and to electronic data processing audit fee; (2) an increase in
the Pennsylvania shares tax as a result of growth in total
assets; (3) an increase in automatic teller machine (ATM)
expenses as a result of increases in transactions and ATM
locations.
Income Taxes
The Corporation's income tax expense increased by $156,000 for
the nine months ended September 30, 1997 to $430,000 from
$274,000 for the same period in 1996. The effective tax rate was
20.0% and 14.3% for the nine months ended September 30, 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 $50,000 of low income
housing credits for the nine months ended September 30, 1997 as
compared to $139,000 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 the
nature and amount of the tax credits from the Nissly project.
Regulatory Activity
___________________
Recently, Pennsylvania enacted a law to permit State chartered
financial institutions to sell insurance. This follows a United
States Supreme Court 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, banks are permitted to sell insurance in
Pennsylvania. The Office of the Comptroller of the Currency has
issued guidelines for national banks to sell insurance. The Bank
is evaluating its options regarding the sale of insurance.
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.
Since the Deposit Insurance Funds Act of 1996 was enacted, it is
anticipated that changes in the FDIC assessment rate will
immaterially impact the results of operations, net of income
taxes, for the remaining months of 1997.
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
enacted or, if enacted, how such legislation would affect the
business of the Corporation and the Bank. As a consequence of the
extensive regulation of commercial
<PAGE>
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 also expects increased diversification of financial
products and services that may be offered by the Bank. Management
believes that such consolidations and mergers, and product and
service diversification 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 nine months of
1997. The Corporation 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 (FASB)
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 Corporation does not expect this Statement to have
a material effect on its earnings per share computations.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, (SFAS No. 129), "Disclosure of Information
about Capital Structure." This Statement establishes standards
for disclosing information about an entity's capital structure.
This Statement is effective for financial statements for periods
ending after December 15, 1997. The adoption of this Statement is
not expected to have a material effect on the financial position
or results of operations of the Corporation.
<PAGE>
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, (SFAS No. 130), "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. The Corporation has not
completed the analysis required to estimate the impact of this
Statement.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." This Statement
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. This Statement supersedes
FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise", but retains the requirement to report
information about major customers. It amends FASB Statement No.
94, "Consolidation of All Majority-Owned Subsidiaries", to remove
the special disclosure requirements for previously unconsolidated
subsidiaries. The Statement is effective for fiscal years
beginning after December 15, 1997. The Corporation has not
completed the analysis required to estimate the impact of this
Statement.
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 $2,027,000 to comply with their respective repayment
terms. This amount has been relatively stable for the first and
second quarter of 1997 and reflects a modest increase over the
quarterly levels of 1996. These loans are well secured
essentially with real estate, equipment and vehicles. Management
currently 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 September 30, 1997, total nonperforming assets amounted to
$1,124,000, or .8% of total net loans, from a level of $960,000,
or .7%, at December 31, 1996. 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%.
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.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
Schedule of Nonperforming Assets
________________________________
<CAPTION>
September 30, December 31,
(In Thousands) 1997 1996
_______________________________
<S> <C> <C>
Nonaccruing Loans $430 $91
Accrual Loans - 90 days or more
past due 694 752
Restructured Accrual Loans 0 0
Other Real Estate Owned 0 117
_______________________________
Total Nonperforming Assets $1,124 $960
===============================
Nonperforming Assets
as a % of Net Loans 0.8% 0.7%
===============================
Allowance for Loan Losses
as a % of Nonperforming Assets 136% 163%
===============================
</TABLE>
<TABLE>
Analysis of Allowance for Loan Losses
_____________________________________
<CAPTION>
Nine Months Ended September 30,
(In Thousands) 1997 1996
________________________________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $137,483 $123,268
===============================
Allowance for Loan Losses,
Beginning of Period $1,371 $1,265
Loans Charged-off During Period 78 49
Recoveries of Loans Previously
Charged-off 28 16
_______________________________
Net Loans Charged-off 50 33
Addition to Provision for Loan Losses
Charged to Operations 203 98
_______________________________
Allowance for Loan Losses,
End of Period $1,524 $1,330
===============================
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.05% 0.04%
===============================
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.03% 1.05%
===============================
</TABLE>
<PAGE>
The allowance for loan losses increased by $153,000 for the nine
months ended September 30, 1997, and the ratio of the allowance
for loan losses to net loans was 1.03% at September 30, 1997, as
compared to 1.05% at December 31, 1996. The increase in the
allowance for loan losses for the nine month period was due to an
increase in loans outstanding amounting to $17,996,000 for the
nine month period. Management believes based on information
currently available that the current allowance for loan losses of
$1,524,000 is adequate to meet potential loan losses.
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 moderately 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 $7,829,000 and a maximum available funding capacity of
up to $79,900,000. In order to provide funding for the Bank's
loans and investments, the Bank borrowed from the FHLB
$5,832,000, net of repayments, for the nine months ended
September 30, 1997 at varying maturities and terms. The
outstanding borrowings from the FHLB amounted to $20,678,000 and
$12,346,000 at September 30, 1997 and 1996, respectively. As of
October, 1997, the Bank received an advance from the FHLB in the
amount of $5,000,000 to fund loan demand. The advance matures in
2002 with an interest rate of 5.63% fixed for two years.
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
matters 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 September
30, 1997, as compared to the Bank's current risk-based capital
ratio of 16.83%. 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>
<CAPTION>
(In Thousands) September 30, December 31,
1997 1996
____________ _____________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 22,081 $ 21,186
Tier II - Allowance for Loan Losses 1,524 1,371
____________ _____________
Total Qualifying Capital $ 23,605 $ 22,557
============ =============
Risk-adjusted On-balance-sheet Assets $132,057 $118,844
Risk-adjusted Off-balance-sheet Exposure 8,230 5,666
____________ _____________
Total Risk-adjusted Assets $140,287 $124,510
============ =============
Ratios:
Tier I Capital Ratio - Actual 15.74% 17.02%
Minimum Required 4.00% 4.00%
Total Capital Ratio - Actual 16.83% 18.12%
Minimum Required 8.00% 8.00%
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 12,382 $ 12,596
============ =============
</TABLE>
<PAGE>
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 September 30, 1997, options to purchase
4,830 shares have been granted under the Corporation's 1988 Stock
Incentive Plan at an exercise price of $23.27. No options have been
exercised as of September 30, 1997 under this plan. As of September
30, 1997, options to purchase 10,000 shares have been granted under
the Corporation's 1997 Employee Stock Purchase Plan. The current
exercise price for such options is $19.63. As of September 30,
1997, 506 options have been exercised under this plan.
Other Matters
The Corporation is in the process of assessing the cost and extent
of vulnerability of the Corporation's computer systems to the "Year
2000 problem." Modifications or replacements of computer systems to
attain Year 2000 compliance have begun, and the Corporation expects
to attain Year 2000 compliance and institute appropriate testing of
its modifications and replacements before the Year 2000 date
change. The Corporation believes that, with modifications to
existing software and conversions to new software, the year 2000
problem will not pose a significant problem for the Corporation.
However, because most computer systems are, by their very nature,
interdependent, it s possible that non-compliant third party
computers could "reinfect" the Corporation's computer systems. The
Corporation could be adversely affected by the Year 2000 problem if
it or unrelated parties fail to successfully address this problem.
The Company has taken steps to communicate with the unrelated
parties with whom it deals to coordinate Year 2000 compliance. Most
of the costs incurred in addressing the Year 2000 problem are
expected to be expensed as incurred, in compliance with GAAP.
The financial impact to the Corporation of Year 2000 compliance has
not been and is not anticipated to be material to the Corporation's
financial position or results of operations in any given year.
<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 13, 1997
By: /s/ Clement M. Hoober
__________________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 13, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4235
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 40639
<INVESTMENTS-CARRYING> 18607
<INVESTMENTS-MARKET> 18579
<LOANS> 148387
<ALLOWANCE> 1524
<TOTAL-ASSETS> 218830
<DEPOSITS> 171867
<SHORT-TERM> 1185
<LIABILITIES-OTHER> 1473
<LONG-TERM> 20868
0
0
<COMMON> 627
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<TOTAL-LIABILITIES-AND-EQUITY> 218830
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<INCOME-PRE-EXTRAORDINARY> 2152
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<ALLOWANCE-DOMESTIC> 1524
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</TABLE>
