UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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
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UNION NATIONAL FINANCIAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2415179
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
101 East Main Street, P.O. Box 567
Mount Joy, Pennsylvania 17552
----------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(717) 653-1441
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 Par Value
-----------------------------
(Title of Class)
PAGE 1 OF 57 SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX IS LOCATED ON SEQUENTIAL PAGE 21
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was $53,525,983 as of March
17, 1997. As of March 17, 1997, the Registrant had 2,374,513 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Registrant's 1996 Annual Report to Stockholders (the
"1996 Annual Report") are incorporated by reference into Parts I, II and IV,
hereof. The Registrant's Proxy Statement for its 1997 Annual Meeting is
incorporated by reference in response to Parts III and IV, hereof.
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PAGE #
PART I
Item 1 - Business............................................1
Item 2 - Properties.........................................10
Item 3 - Legal Proceedings..................................11
Item 4 - Submission of Matters to a
Vote of Security Holders...........................11
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters........................12
Item 6 - Selected Financial Data............................12
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of
Operation..........................................12
Item 8 - Financial Statements and Supplementary Data........12
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.............13
PART III
Item 10 - Directors and Executive Officers of
the Registrant.....................................13
Item 11 - Executive Compensation.............................13
Item 12 - Security Ownership of Certain Beneficial
Owners and Management..............................13
Item 13 - Certain Relationships and
Related Transactions...............................13
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K............................14
Signatures ....................................................16
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PART I
ITEM 1. BUSINESS.
Union National Financial Corporation (the "Registrant"), a Pennsylvania
business corporation, is a bank holding company registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act") and is supervised by the
Board of Governors of the Federal Reserve System (the "Federal Reserve Board").
The Registrant was incorporated on June 26, 1986, under the Business Corporation
Law of the Commonwealth of Pennsylvania. The Registrant commenced operations on
January 2, 1987, upon consummation of the acquisition of all of the outstanding
shares of The Union National Mount Joy Bank (the "Bank"). The Registrant's
business consists primarily of managing and supervising the Bank, and its
principal source of income is dividends paid by the Bank. The Registrant has one
wholly-owned subsidiary, the Bank.
The Bank was organized in 1865 under a national charter. The Bank is a
national banking association and a member of the Federal Reserve System. The
deposits of the Bank are insured by the Federal Deposit Insurance Corporation
(the "FDIC") to the maximum extent permitted by law. The Bank, having one main
office with an annex and six branch locations within Lancaster County,
Pennsylvania, is a full service commercial bank, providing a wide range of
services to individuals and small to medium-sized businesses in its south
central Pennsylvania market area, including accepting time, demand, and savings
deposits and making secured and unsecured commercial, real estate and consumer
loans. The Bank also has a full-service trust department.
The Registrant's executive offices are located at 101 East Main Street,
P.O. Box 567, Mount Joy, Pennsylvania 17552 (telephone number: (717) 653-1441).
The Registrant operates in a heavily regulated environment. Changes in
laws and regulations affecting the Registrant and it's subsidiary, the Bank, may
have an impact on operations. See "Supervision and Regulation--The Registrant"
and "Supervision and Regulation--The Bank" and page 25 of the 1996 Annual
Report, which page is included at Exhibit 13 hereto, and incorporated herein by
reference.
The Registrant experiences substantial competition in attracting and
retaining deposits and in lending funds. Primary factors in competing for
deposits are the ability to offer attractive rates and the convenience of office
locations. Direct competition for deposits comes primarily from other commercial
banks and thrift institutions. Competition for deposits also comes from money
market mutual funds, corporate and government securities and credit unions. The
primary factors in the competition for loans are interest rates, loan
origination fees and the range of products and services offered. Competition for
origination of real estate loans normally comes from other commercial banks,
thrift institutions, mortgage bankers, mortgage brokers and insurance companies.
For additional information with respect to the Registrant's business
activities, see Part II, Item 7 hereof. Certain significant regulatory matters
are discussed below.
1
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Supervision and Regulation - The Registrant
The Registrant is subject to the provisions of the BHC Act, and to
supervision by the Federal Reserve Board. The BHC Act requires that the
Registrant secure the prior approval of the Federal Reserve Board before it owns
or controls, directly or indirectly, more than 5 percent of the voting shares or
substantially all of the assets of any institution, including another bank. In
addition, the BHC Act has been amended by the Riegle-Neal Interstate Banking and
Branching Efficiency Act, which amended the BHC Act, permits bank holding
companies to acquire a bank located in any state subject to certain limitations
and restrictions as more fully described below.
A bank holding company is prohibited from engaging in or acquiring
direct or indirect control of more than 5 percent of the voting shares of any
company engaged in non-banking activities unless the Federal Reserve Board, by
order or regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto. In
making this determination, the Federal Reserve Board considers whether the
performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects.
Federal law also prohibits acquisitions of control of a bank holding
company without prior notice to certain federal bank regulators. Control is
defined for this purpose as the power, directly or indirectly, to direct the
management or policies of the bank or bank holding company or to vote 25 percent
or more of any class of voting securities.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve Act on any extensions of credit to
the bank holding company or any of its subsidiaries, on investments in the stock
or other securities of the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
Permitted Activities
The Federal Reserve Board permits bank holding companies to engage in
certain activities so closely related to banking or managing or controlling
banks as to be a proper incident thereto. Other than making equity investments
in low to moderate income housing limited partnerships, the Registrant does not
at this time engage in any other permissible activities, nor does the Registrant
have any current plans to engage in any other permissible activities in the
foreseeable future.
Legislation and Regulatory Changes
From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial institutions. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
institutions are frequently made in Congress, and before various bank regulatory
agencies. Management cannot predict the likelihood of any major changes or the
impact such changes might have on the Registrant and its subsidiary bank.
Certain changes of potential significance to the Registrant which have been
2
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enacted recently and others which are currently under consideration by Congress
or various regulatory or professional agencies are discussed below.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Banking and Branch Act") permitted interstate banking after
September 29, 1995. Bank holding companies, pursuant to an amendment to the BHC
Act, can acquire a bank located in any state, as long as the acquisition does
not result in the bank holding company controlling more than 10 percent of the
deposits in the United States, or 30 percent of the deposits in the target
bank's state. The legislation permits states to waive the concentration limits
and require that the target institution be in existence for up to five years
before it can be acquired by an out-of-state bank or bank holding company.
Interstate branching and merging of existing banks is permitted after three
years from the enactment of the Interstate Banking and Branching Act, if the
bank is adequately capitalized and demonstrates good management. Branch merging
will be permitted earlier if a state undertakes to enact a law which allows it
and states may also enact a law to permit banks to branch de novo. See also,
page 25 of Registrant's 1996 Annual Report, which page is included in Exhibit
13, hereto, and incorporated herein by reference. The Interstate Banking and
Branching Act also amends the International Banking Act to allow a foreign bank
to establish and operate a federal branch or agency upon approval of the
appropriate federal and state banking regulator. As a national bank, the Bank
currently can relocate its main office across state lines by utilizing a
provision in the National Bank Act which permits such relocation to a location
not more than thirty miles from its existing main office. In effect, a national
bank can thereby move across state lines as long as the relocation does not
exceed thirty miles, and also retain as branches the offices located in the
original state.
The Federal Reserve Board, the FDIC and the Comptroller of the Currency
(the "Comptroller") have issued certain risk-based capital guidelines, which
supplement existing capital requirements. The guidelines require all United
States banks and bank holding companies to maintain a minimum risk-based capital
ratio of 8 percent (of which at least 4 percent must be in the form of common
stockholders' equity). Assets are assigned to five risk categories, with higher
levels of capital required for the categories perceived as representing greater
risk. The required capital will represent equity and (to the extent permitted)
nonequity capital as a percentage of total risk-weighted assets. The risk-based
capital rules are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks and bank holding companies
and to minimize disincentives for holding liquid assets. On the basis of an
analysis of the rules and the projected composition of the Registrant's
consolidated assets, management does not believe that the risk-based capital
rules have a material effect on the Registrant's business and capital plans. The
Bank has capital ratios exceeding the regulatory requirements. See also, pages
24 and 25 of Registrant's 1996 Annual Report for information concerning the
Registrant's actual ratios, which page is included at Exhibit 13, hereto, and
incorporated herein by reference.
The United States Supreme Court recently rendered a decision in favor
of nationwide insurance sales by banks. The decision also bars states from
blocking insurance sales by national banks in towns with populations of no more
than 5,000. Subsequent to the Supreme Court's ruling, the Office of the
Comptroller of the Currency has issued draft guidelines for national banks to
sell insurance. This federal guidance, however, will not necessarily ease state
restrictions which currently hinder bank insurance sales. States that have
traditionally been opposed to bank insurance sales could impose licensing
requirements and other restrictions hampering bank insurance activities.
3
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Because the insurance industry is opposed to banks selling and underwriting
insurance, it is difficult to determine to what extent banks will be allowed to
engage in insurance activities and the regulatory costs that will be attached to
such activities.
Pending Legislation
Management cannot anticipate what changes Congress may enact or, if
enacted, their impact on the Registrant's financial position and reported
results of operation. As a consequence of the extensive regulation of commercial
banking activities in the United States, the Registrant's and the Bank's
business is particularly susceptible to being affected by federal and state
legislation and regulations that may increase the costs of doing business. See
also, page 25 of Registrant's 1996 Annual Report, which page is included at
Exhibit 13, hereto, and incorporated herein by reference.
Effects of Inflation
Inflation has some impact on the Registrant's and the Bank's operating
costs. Unlike many industrial companies, however, substantially all of the
Bank's assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on the Registrant's and the Bank's
performance than the general level of inflation. Over short periods of time,
interest rates may not necessarily move in the same direction or in the same
magnitude as prices of goods and services.
Monetary Policy
The earnings of the Registrant and the Bank are affected by domestic
economic conditions and the monetary and fiscal policies of the United States
Government and its agencies. An important function of the Federal Reserve System
is to regulate the money supply and interest rates. Among the instruments used
to implement those objectives are open market operations in United States
government securities and changes in reserve requirements against member bank
deposits. These instruments are used in varying combinations to influence
overall growth and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for deposits.
The Bank is a member of the Federal Reserve System and, therefore, the
policies and regulations of the Federal Reserve Board have a significant effect
on its deposits, loans and investment growth, as well as the rate of interest
earned and paid, and are expected to affect the Bank's operations in the future.
The effect of such policies and regulations upon the future business and
earnings of the Registrant and the Bank cannot be predicted.
Federal Taxation. The Registrant and the Bank are subject to those
rules of federal income taxation generally applicable to corporations and report
their respective income and expenses on the accrual method of accounting. The
Registrant and its subsidiaries file a consolidated federal income tax return on
a calendar year basis. Intercompany distributions (including dividends) and
certain other items of income and loss derived from intercompany transactions
are eliminated upon consolidation of all the consolidated group members'
respective taxable income and losses.
4
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The Internal Revenue Code (the "IRC") imposes a corporate alternative
minimum tax (AMT). The corporate AMT only applies if such tax exceeds a
corporation's regular tax liability. In general, the AMT is calculated by
multiplying the corporate AMT rate of 20% by an amount equal to the excess of
(i) the sum of (a) regular taxable income plus (b) certain adjustments and tax
preference items ("alternative minimum taxable income" or "AMTI") over (ii) an
exemption amount ($40,000 for a corporation, that such amount is reduced by 25%
of the excess of AMTI over $150,000 and is completely eliminated when AMTI
equals $310,000). There are certain applicable adjustment and preference items
(E.G., the adjustment for depreciation) for determining AMTI. If a banking
institution is subject to AMT, then all or a portion of the amount of a
preference will effectively be subject to a 20% surtax.
State Tax. The Registrant is subject to the Pennsylvania Corporate Net
Income Tax and Capital Stock Tax. The Corporate Net Income Tax rate for 1996 and
thereafter is 9.99% and is imposed upon a corporate taxpayer's unconsolidated
taxable income for federal tax purposes with certain adjustments. In general,
the Capital Stock Tax is a property tax imposed on a corporate taxpayer's
capital stock value apportionable to the Commonwealth of Pennsylvania, which is
determined in accordance with a fixed formula based upon average book income and
net worth. In the case of a holding company, an optional elective method permits
the corporate taxpayer to be taxed on only 10% of such capital stock value. The
Capital Stock Tax rate is presently 1.275%.
Environmental Laws. Neither the Registrant nor the Bank anticipate that
compliance with environmental laws and regulations will have any material effect
on capital, expenditures, earnings, or on its competitive position. However,
environmentally related hazards have become a source of high risk and
potentially unlimited liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may result in a
drastic reduction in the value of the collateral securing the institution's
loans to such borrowers, high environmental clean up costs to the borrower
affecting its ability to repay the loans, the subordination of any lien in favor
of the institution to a state or federal lien securing clean up costs, and
liability to the institution for clean up costs if it forecloses on the
contaminated property or becomes involved in the management of the borrower. To
minimize this risk, the Bank may require an environmental examination of and
report with respect to the property of any borrower or prospective borrower if
circumstances affecting the property indicate a potential for contamination,
taking into consideration a potential loss to the institution in relation to the
borrower. Such examination must be performed by an engineering firm experienced
in environmental risk studies and acceptable to the institution, and the cost of
such examinations and reports are the responsibility of the borrower. These
costs may be substantial and may deter prospective borrower from entering into a
loan transaction with the Bank. The Registrant is not aware of any borrower who
is currently subject to any environmental investigation or clean up proceeding
that is likely to have a material adverse effect on the financial condition or
results of operations of the Bank.
In 1995, the Pennsylvania General Assembly enacted the Economic
Development Agency, Fiduciary and Lender Environmental Liability Protection Act
which, among other things, provides protection to lenders from environmental
liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in
5
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the routine practices of commercial lending, including, but not limited to, the
providing of financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of property shall
not be liable under the environmental acts or common law equivalents to the
Pennsylvania Department of Environmental Resources or to any other person by
virtue of the fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents, directly cause
an immediate release or directly exacerbate a release of regulated substances on
or from the property, or knowingly and willfully compelled the borrower to
commit an action which caused such release or violate an environmental act. The
Economic Development Agency, Fiduciary and Lender Environmental Liability
Protection Act, however, does not limit federal liability which still exists
under certain circumstances.
As discussed above, there are several federal and state statutes that
regulate the obligations and liabilities of financial institutions pertaining to
environmental issues. In addition to the potential for attachment of liability
resulting from its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third parties, when such
actions result in environmental problems on properties that collateralize loans
held by the Bank. Further, the liability has the potential to far exceed the
original amount of the loan issued by the Bank. Currently, neither the
Registrant nor the Bank is a party to any pending legal proceeding pursuant to
any environmental statute, nor is the Registrant or the Bank aware of any
circumstances that may give rise to liability under any such statute.
Supervision and Regulation - Bank
The operations of the Bank are subject to federal and state statutes
applicable to banks chartered under the banking laws of the United States, to
members of the Federal Reserve System and to banks whose deposits are insured by
the FDIC. Bank operations are also subject to regulations of the Comptroller,
the Federal Reserve Board and the FDIC.
The primary supervisory authority of the Bank is the Comptroller, which
regulates and examines the Bank. The Comptroller has the authority under the
Financial Institutions Supervisory Act to prevent a national bank from engaging
in an unsafe or unsound practice in conducting its business.
Federal and state banking laws and regulations govern, among other
things, the scope of a bank's business, the investments a bank may make, the
reserves against deposits a bank must maintain, loans a bank makes and
collateral it takes, the maximum interest rates a bank may pay on deposits, the
activities of a bank with respect to mergers and consolidations and the
establishment of branches.
As a subsidiary of a bank holding company, the Bank is subject to
certain restrictions imposed by the Federal Reserve Act on any extensions of
credit to the parent bank holding company or its subsidiaries, on investments in
the stock or other securities of the bank holding company or its subsidiaries
and on taking such stock or securities as collateral for loans. The Federal
Reserve Act and Federal Reserve Board regulations also place certain limitations
and reporting requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to related
6
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interests of such principal shareholders. In addition, such legislation and
regulations may affect the terms upon which any person becoming a principal
shareholder of a holding company may obtain credit from banks with which the
subsidiary bank maintains a correspondent relationship.
FDIA
Under the Federal Deposit Insurance Act, the Comptroller possesses the
power to prohibit institutions regulated by it (such as the Bank) from engaging
in any activity that would be an unsafe or unsound banking practice or would
otherwise be in violation of the law.
CRA
In 1995, federal regulators revised the CRA rules to emphasize
performance over process and documentation. Under the revised rules, a
five-point rating scale is used; A bank's compliance is determined by a
three-prong test whereby examiners assign a numerical score for a bank's
performance in each of three areas: lending, service and investment. The area of
lending is weighted to increase its importance in the application of the test.
When rating a bank in the area of lending, regulators examine the number and
amount of loan originations, the location of where the loans were made, and the
income levels of the borrowers. Although banks, under the revised rules, are not
required to make loans in every area, if there are apparent tracts in which
there is little lending, examiners will focus their investigations in that area.
The service prong evaluates how a bank delivers its products to the community
through branching. As with lending, banks are not required to branch in every
area, although conspicuous gaps will be investigated. The third prong,
investment in community, examines how the bank meets the investment needs in the
community within which it operates. Assessment of investment is accomplished
using a "performance context" pursuant to which regulators meet with civic,
community and bank officials in order to determine the credit needs of the
community.
HMDA
Expanded Home Mortgage Disclosure Act reporting requirements were also
approved for large banks and thrifts which require reporting of census tract
data on mortgages made outside of the delineated communities. In addition,
effective March 1, 1997, institutions with assets above $250 million are
required to report their aggregate small business loans made by geographic
region. Independent banks with total assets of less than $250 million and bank
subsidiaries with total assets of less than $250 million that have holding
companies with total assets of less than $1 billion are subjected to less
stringent CRA examinations.
Under the new regulation, banks enjoy a reduction in compliance burden.
Banks are not required to keep extensive documentation to prove that directors
have participated in drafting and review of CRA policies. A formal CRA statement
need not be prepared. The efforts banks make to market in low- and
moderate-income communities do not have to be documented, nor will banks have to
justify the basis for their community delineation or the methods used to
determine the credit needs of the community.
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BSA
Under the Bank Secrecy Act ("BSA"), banks and other financial
institutions are required to report to the Internal Revenue Service currency
transactions of more than $10,000 or multiple transactions of which the Bank is
aware in any one day that aggregate in excess of $10,000. Civil and criminal
penalties are provided under the BSA for failure to file a required report, for
failure to supply information required by the BSA or for filing a false or
fraudulent report.
FDICIA
Capital Categories
Under the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") institutions must be classified in one of five defined categories as
illustrated below (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized).
<TABLE>
<CAPTION>
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
----- ----- ----- ---------
CAPITAL CATEGORY
<S> <C> <C> <C> <C>
Well capitalized greater than/=10.0 greater than/= 6.0 greater than/= 5.0 No
Adequately capitalized greater than/= 8.0 greater than/= 4.0 greater than/= 4.0*
Undercapitalized less than 8.0 less than 4.0 less than 4.0*
Significantly undercapitalized less than 6.0 l ess than 3.0 less than 3.0
Critically undercapitalized less than/= 2.0
</TABLE>
*3.0 for those banks having the highest available regulatory rating.
Prompt Corrective Action
In the event an institution's capital deteriorates to the
undercapitalized category or below, FDICIA prescribes an increasing amount of
regulatory intervention, including: (1) the institution by a bank of a capital
restoration plan and a guarantee of the plan by a parent institution; and (2)
the placement of a hold on increases in assets, number of branches or lines of
business. If capital has reached the significantly or critically
undercapitalized levels, further material restrictions can be imposed, including
restrictions on interest payable on accounts, dismissal of management and (in
critically undercapitalized situations) appointment of a receiver. For well
capitalized institutions, FDICIA provides authority for regulatory intervention
where the institution is deemed to be engaging in unsafe or unsound practices or
receives a less than satisfactory examination report rating for asset quality,
management, earnings or liquidity. All but well capitalized institutions are
prohibited from accepting brokered deposits without prior regulatory approval.
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Operational Controls
Under FDICIA, financial institutions are subject to increased
regulatory scrutiny and must comply with certain operational, managerial and
compensation standards to be developed by Federal Reserve Board regulations.
FDICIA also requires the regulators to issue new rules establishing certain
minimum standards to which an institution must adhere including standards
requiring a minimum ratio of classified assets to capital, minimum earnings
necessary to absorb losses and minimum ratio of market value to book value for
publicly held institutions. Additional regulations are required to be developed
relating to internal controls, loan documentation, credit underwriting, interest
rate exposure, asset growth and excessive compensation, fees and benefits.
Truth-In-Savings
A separate subtitle within FDICIA, called the "Bank Enterprise Act of
1991", requires "truth- in-savings" on consumer deposit accounts so that
consumers can make meaningful comparisons between the competing claims of banks
with regard to deposit accounts and products. Under this provision, the Bank is
required to provide information to depositors concerning the terms of their
deposit accounts, and in particular, to disclose the annual percentage yield.
There are some operational costs of complying with the Truth-In-Savings law.
Management believes that full implementation of FDICIA has had no
material impact on liquidity, capital resources or reported results of
operation. If FDIC insurance premiums assessments increase in the future,
Management believes such future increase may have a material impact on future
reported results of operations.
Other
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 Bank. It cannot be predicted whether any such
legislation will be adopted or, if adopted, how such legislation would affect
the business of the Bank. As a consequence of the extensive regulation of
commercial banking activities in the United States, the Bank's business is
particularly susceptible to being affected by federal legislation and
regulations that may increase the costs of doing business.
Statistical Data
The information required by this Item is incorporated by reference from
pages 14 through 25 of the Registrant's 1996 Annual Report.
Employees
As of March 17, 1997, the Bank had 96 full-time employees and 12
part-time employees. None of these employees is represented by a collective
bargaining agent, and the Registrant believes it enjoys good relations with its
personnel.
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ITEM 2. PROPERTIES.
The Bank owns its main office, five branch offices, the administration
services center and certain parking facilities related to its banking offices,
all of which are free and clear of any lien. The Bank's main office is located
in the central business district of Mount Joy, Pennsylvania. Below is a table
containing the location and date of acquisition of the Bank's properties. In
addition, the Bank leases office space for one branch office located in Manheim,
Pennsylvania.
PROPERTIES OWNED BY THE BANK
<TABLE>
<CAPTION>
Office and Address Description of Property Date Acquired
------------------ ----------------------- -------------
<S> <C> <C>
Main Office Main Bank Office 1911
101 East Main Street Cut limestone and brick.
Mount Joy, PA 17552 1995 addition is concrete
over steel construction.
Containing approximately
a total of 22,251 sq. ft.
of space.
Main Office Annex Wood frame construction September, 1992
115 East Main Street with aluminum siding.
Mount Joy, PA 17552 Containing approximately
1,632 sq. ft. of space.
Maytown Branch Office Branch Bank April, 1972
100 West High Street Brick veneer, shingled roof
Maytown, PA 17550 with wood trusses. Containing
approximately 4,960 sq. ft.
of space.
Salunga Branch Office Branch Bank June, 1979
190 Stony Battery Road Brick with wood shingle roof.
Salunga, PA 17538 Containing approximately
4,619 sq. ft. of space.
Elizabethtown Branch Office Branch Bank January, 1988
1275 South Market Street Brick veneer, shingled roof
Elizabethtown, PA 17022 with wood trusses.
Containing approximately
6,668 sq. ft. of space.
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Motor Bank Branch Office Drive-up Bank Branch November, 1972
21 North Barbara Street Brick on frame.
Mount Joy, PA 17552 Containing approximately
445 sq. ft. of space.
Administration Services Center Brick on concrete block with December, 1984
Bank Administration Building wood and steel frame.
25 North Barbara Street Containing approximately
Mount Joy, PA 17552 9,398 sq. ft. of space.
Columbia Branch Office Branch Bank October, 1992
921 Lancaster Avenue One story brick building
Columbia, PA 17512 containing approximately
2,257 sq. ft. of space.
</TABLE>
<TABLE>
<CAPTION>
PROPERTY LEASED BY THE BANK
Office and Address Description of Property Date Leased
------------------ ----------------------- -----------
<S> <C> <C>
Manheim Branch Office Concrete block building January, 1995
701 Lancaster Road containing 4,266 sq. ft.
Manheim, PA 17545 of space of which approximately
2,600 sq. ft. of space is
currently used for banking
purposes.
</TABLE>
In management's opinion, the above properties are in good condition and
are adequate for the Bank's purposes.
ITEM 3. LEGAL PROCEEDINGS.
Management, after consulting with the Registrant's legal counsel, is
not aware of any litigation that would have a material adverse effect on the
consolidated financial position of the Registrant. There are no proceedings
pending other than ordinary routine litigation incident to the business of the
Registrant and its subsidiary, the Bank. In addition, no material proceedings
are known to be contemplated by governmental authorities against the Registrant
or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Market and dividend information required by this Item is incorporated
by reference herein, from the inside front cover of the Registrant's 1996 Annual
Report. The Registrant's common stock is traded on a very limited basis in the
local over-the-counter market. Bid and asked information is not regularly
quoted. Information concerning actual trades is included on the inside front
cover of the Registrant's 1996 Annual Report. This information represents a
limited amount of share transfer activity.
The Registrant and, prior to the Registrant's organization as a bank
holding company, the Bank paid regular cash dividends on their common stock for
more than thirty-five years. The Registrant expects to pay future dividends,
however, payment of such dividends will depend upon earnings of the Registrant
and of the Bank, their financial condition, capital requirements and other
factors, such as regulatory and legal requirements. It is anticipated that
substantially all of the funds available for the payment of dividends by the
Registrant will be derived from dividends paid to it by the Bank.
Additional information required by this Item regarding dividend
restrictions is incorporated by reference herein, from page 11 of the
Registrant's 1996 Annual Report, which page is included in Exhibit 13, attached
hereto.
As of March 17, 1997, there were approximately 786 holders of record of
the Registrant's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
The information required by this Item is incorporated by reference
herein, from page 15 of the Registrant's 1996 Annual Report, which page is
included in Exhibit 13, attached hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
The information required by this Item is incorporated by reference
herein, from pages 16 through 25 of the Registrant's 1996 Annual Report, which
page is included in Exhibit 13, attached hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this Item is incorporated by reference
herein, from pages 2 through 14 of the Registrant's 1996 Annual Report, which
page is included in Exhibit 13, attached hereto.
12
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference
herein, from pages 6 through 9 and pages 17 through 19 of the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
Section 16(a) Beneficial Ownership Compliance. Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Registrant's officers
and directors, and persons who own more than 10 percent of a registered class of
the Registrant's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10 percent shareholders are required by SEC
regulation to furnish the Registrant with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by it
or written representations from certain reporting persons that no Forms 5 were
required for those persons, the Registrant believes that during the period
January 1, 1996 through December 31, 1996, its officers and directors were in
compliance with all filing requirements applicable to them, with the exception
of Mr. Benjamin W. Piersol, Jr. who did not timely file a Form 4 reporting one
transaction, during 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference
herein, from pages 10 through 14 of the Registrant's Proxy Statement for its
1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated by reference
herein, from pages 3 through 5 and pages 17 and 18 of the Registrant's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference
herein, from pages 16 and 17 of the Registrant's Proxy Statement for its 1997
Annual Meeting of Shareholders.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) 1. Financial Statements.
The following financial statements are included by
reference in Part II, Item 8 hereof.
Independent Auditors' Report.
Consolidated Balance Sheets.
Consolidated Statement of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders'
Equity
Notes to Consolidated Financial Statements
2. The financial statement schedules required by this
Item are omitted because the information is either
inapplicable, not required or is in the consolidated
financial statements as a part of this Report.
3. The following Exhibits are filed herewith, or
incorporated by reference as a part of this Report:
3(i) Registrant's Amended Articles of
Incorporation. (Incorporated by
reference to Exhibit 3(i) to
Registrant's Current Report on Form
8-K, filed with the Commission on
March 25, 1997.)
3(ii) Registrant's Amended By-laws.
(Incorporated by reference to
Exhibit 3(ii) to Registrant's
Current Report on Form 8-K, filed
with the Commission on March 25,
1997.)
11 Statement re: Computation of
Earnings Per Share. (Included herein
at Exhibit 13, on the inside cover
page of Registrant's 1996 Annual
Report.)
13 Excerpts from Registrant's 1996
Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
14
<PAGE>
(b) No Current Report on Form 8-K was filed by the Registrant
during the fourth quarter of the 1996 fiscal year.
(c) The exhibits required to be filed by this Item are listed
under Item 14(a)3, above.
(d) NOT APPLICABLE.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
UNION NATIONAL FINANCIAL CORPORATION
------------------------------------
(Registrant)
By /s/ William E. Eby
-----------------------------------
William E. Eby, President
and Chief Executive Officer
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
DATE
----
By /s/ Donald H. Wolgemuth March 27, 1997
--------------------------------------------
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 27, 1997
--------------------------------------------
William E. Eby
President, Chief Executive Officer and
Director (principal executive officer)
By /s/ Clement M. Hoober March 27, 1997
---------------------------------------------
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Franklin R. Eichler March 27, 1997
--------------------------------------------
Franklin R. Eichler, Director
<PAGE>
By /s/ E. Ralph Garber March 27, 1997
--------------------------------------------
E. Ralph Garber, Director
By /s/ Mark D. Gainer March 27, 1997
--------------------------------------------
Mark D. Gainer, Director and
Vice President
By /s/ Daniel C. Gohn March 27, 1997
--------------------------------------------
Daniel C. Gohn, Director
By /s/ Carl R. Hallgren March 27, 1997
--------------------------------------------
Carl R. Hallgren, Director
By /s/ David G. Heisey March 27, 1997
--------------------------------------------
David G. Heisey, Director
By /s/ William D. Linkous March 27, 1997
--------------------------------------------
William D. Linkous, Director
By /s/ Daniel H. Raffensperger March 27, 1997
--------------------------------------------
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 27, 1997
--------------------------------------------
Benjamin W. Piersol, Jr., Director
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequential Page
Number in Manually
Exhibit Number Signed Original
- -------------- ---------------
<S> <C>
3(i) Registrant's Amended Articles of Incorporation. (Incorporated by
reference to Exhibit 3(i) to Registrant's Current Report on Form
8-K, filed with the Commission on March 25, 1997.)
3(ii) Registrant's Amended By-laws. (Incorporated by reference to Exhibit
3(ii) to Registrant's Current Report on Form 8-K, filed with the
Commission on March 25, 1997.)
11 Statement re: Computation of Earnings Per Share. (Included
herein at Exhibit 13 on inside cover page of Registrant's 1996
Annual Report.)
13 Excerpts from Registrant's 1996 Annual Report. 25
21 Subsidiaries of the Registrant. 51
23 Consent of Independent Auditors. 53
27 Financial Data Schedule. 55
</TABLE>
<PAGE>
EXHIBIT 3(i)
Registrant's Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Registrant's Current Report on Form 8-K, filed
with the Commission on March 25, 1997.)
EXHIBIT 3(ii)
Registrant's Amended Bylaws.
(Incorporated by reference to Exhibit 3(ii)
to Registrant's Current Report on Form 8-K,
filed with the Commission on March 25, 1997.)
<PAGE>
EXHIBIT 11
Statement Re: Computation of Earnings Per Share
(Included herein at Exhibit 13, on the inside cover
page of Registrant's 1996 Annual Report.)
<PAGE>
EXHIBIT 13
Excerpts From Registrant's 1996 Annual Report to Shareholders
<PAGE>
(INSIDE COVER PAGE)
FINANCIAL HIGHLIGHTS
December 31, 1996 1995 %Increase
- ----------------------------------------------------------------------
For the Year
Total Interest Income $ 14,217,749 $ 12,772,933 11.3%
Total Interest Expense 6,379,557 5,174,987 23.3%
Net Interest Income 7,838,192 7,597,946 3.2%
Net Income Per Share 2,191,812 2,099,052 4.4%
Net Income $0.92 $0.88 4.5%
Cash Dividends Paid 0.32 0.235 36.2%
Stockholders' Equity 9.36 8.75 7.0%
Average Balances
Net Loans $124,483,000 $ 115,026,000 8.2%
Investments and other
Earning Assets 51,283,000 39,200,000 30.8%
Total Assets 187,814,000 164,631,000 14.1%
Total Deposits 154,474,000 139,896,000 10.4%
Stockholders' Equity 21,411,000 20,149,000 6.3%
Return on Average
Assets 1.17% 1.28%
Stockholders' Equity 10.24% 10.42%
<PAGE>
STOCK, DIVIDEND AND BROKER INFORMATION
Union National Financial Corporation has only one class of common stock
authorized, issued, and outstanding. The outstanding common stock is traded in
the local over-the-counter market, primarily in Lancaster County, Pennsylvania.
Prices presented in the table below reflect actual transactions known to
management. Prices and dividends per share are adjusted for stock splits. Cash
Dividends are payable on the 5th day of February, May, August, and November.
Stockholders of record may elect to have cash dividends deposited directly to
their checking or savings account.
The Corporation offers its stockholders a Dividend Reinvestment Plan,
whereby holders of stock may have their quarterly cash dividends automatically
invested in additional shares of common stock of the Corporation.
Dividends
Declared
Quarter High Low Per Share
- -------------------------------------------------------------
First, 1996 $24.75 $21.50 $0.065
Second 26.00 23.25 $0.080
Third 26.00 24.00 $0.085
Fourth 26.00 23.75 $0.090
First, 1995 $15.50 $14.00 $0.055
Second 19.25 15.00 $0.060
Third 20.50 18.25 $0.060
Fourth 21.75 17.75 $0.060
- -------------------------------------------------------------
For further information, we refer you to:
Dean Witter Reynolds, Inc. Hopper Soliday & Co., Inc.
46 East King Street 1703 Oregon Pike
P.O. Box 358 Lancaster PA 17601
Lancaster PA 17603 (800) 526-6371
(717) 293-4811
Hazlett, Burt & Watson, Inc. Janney Montogomery Scott,
100 East King Street Inc.
P.O. Box 1267 61 North Duke Street
Lancaster PA 17608 Lancaster PA 17602
(717) 397-5515 (717) 293-4100
(END INSIDE COVER PAGE)
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
------------ ------------
ASSETS
Cash and Due from Banks $ 6,073,397 $ 7,213,657
Federal Funds Sold 4,790,000 -0-
Investment Securities Held to
Maturity (Market Value-
1996-$17,228,139;
1995-$14,095,519) 17,123,559 13,884,191
Investment Securities Available
for Sale 37,766,188 25,552,584
Loans (Net of Unearned Income) 130,391,185 120,417,014
Less: Allowance for Loan Losses (1,371,245) (1,264,528)
------------ ------------
Total Net Loans 129,019,940 119,152,486
Premises and Equipment - Net 5,741,386 5,904,460
Accrued Interest Receivable 1,312,443 1,217,223
Deferred Income Taxes 251,429 291,328
Investments in Limited Partnerships 1,003,002 1,110,500
Other Assets 390,870 331,025
------------ ------------
TOTAL ASSETS $203,472,214 $174,657,454
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 16,887,496 $ 13,452,263
Interest-Bearing 147,625,834 129,915,252
------------ ------------
Total Deposits 164,513,330 143,367,515
Short-Term Borrowing 2,989,414 3,398,617
Long-Term Debt 12,676,000 6,270,000
Accrued Interest Payable 882,853 762,623
Other Liabilities 187,745 89,580
------------ ------------
TOTAL LIABILITIES 181,249,342 153,888,335
STOCKHOLDERS' EQUITY
Common Stock (Par Value $0.25) 598,541 600,000
Shares: Authorized - 20,000,000;
Issued - 2,394,164 in 1996
(2,400,000 in 1995) Outstanding -
2,373,222 in 1996 (2,372,672 in 1995)
Surplus 1,967,838 2,018,898
Retained Earnings 19,916,165 18,484,397
Unrealized gain on investment
securities available for sale,
net of tax 103,033 92,741
Less: Treasury Stock -
20,942 shares in 1996 (27,328 in
1995), at cost (362,705) (426,917)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 22,222,872 20,769,119
------------ ------------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $203,472,214 $174,657,454
============ ============
See notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
1996 1995
----------- -----------
INTEREST INCOME
Interest and Fees on Loans $11,175,845 $10,505,245
Investment Securities:
Taxable 2,072,695 1,573,411
Exempt from Federal Taxes 830,203 643,386
Deposits in Banks 2,768 3,273
Federal Funds Sold 136,238 47,618
----------- -----------
Total Interest Income 14,217,749 12,772,933
INTEREST EXPENSE
Deposits 5,778,953 4,965,502
Short-Term Borrowing 115,372 70,430
Long-Term Debt 485,232 139,055
----------- -----------
Total Interest Expense 6,379,557 5,174,987
----------- -----------
Net Interest Income 7,838,192 7,597,946
PROVISION for LOAN LOSSES 150,000 158,800
----------- -----------
Net Interest Income after Provision
for Loan Losses 7,688,192 7,439,146
OTHER OPERATING INCOME
Trust Income 120,495 164,970
Service Charges on Deposit Accounts 327,567 292,556
Other Service Charges, Commissions,
Fees 298,355 237,539
Investment Securities Gains 2,308 4,669
Other Income 62,574 53,492
----------- -----------
Total Other Operating Income 811,299 753,226
OTHER OPERATING EXPENSES
Salaries and Wages 2,637,584 2,420,440
Retirement Plan and Other Employee
Benefits 751,684 731,524
Net Occupancy Expense 583,074 430,117
Furniture and Equipment Expense 373,133 283,109
FDIC Insurance Assessment 2,000 160,348
Other Operating Expenses 1,603,742 1,454,021
----------- -----------
Total Other Operating Expenses 5,951,217 5,479,559
----------- -----------
Income before Income Taxes 2,548,274 2,712,813
PROVISION for INCOME TAXES 356,462 613,761
----------- -----------
NET INCOME for YEAR $ 2,191,812 $ 2,099,052
=========== ===========
PER SHARE INFORMATION
Net Income for Year $0.92 $0.88
Cash Dividends $0.32 $0.235
Average Common Shares Outstanding 2,375,191 2,382,427
Years Ended December 31,
1994
-------------
INTEREST INCOME
Interest and Fees on Loans $9,457,707
Investment Securities:
Taxable 1,522,908
Exempt from Federal Taxes 696,171
Deposits in Banks -0-
Federal Funds Sold 124,695
----------
Total Interest Income 11,801,481
INTEREST EXPENSE
Deposits 4,114,897
Short-Term Borrowing 16,178
Long-Term Debt -0-
----------
Total Interest Expense 4,131,075
----------
Net Interest Income 7,670,406
PROVISION for LOAN LOSSES 113,000
----------
Net Interest Income after Provision
for Loan Losses 7,557,406
OTHER OPERATING INCOME
Trust Income 86,612
Service Charges on Deposit Accounts 286,257
Other Service Charges, Commissions, Fees 209,801
Investment Securities Gains 6,883
Other Income 41,331
----------
Total Other Operating Income 630,884
OTHER OPERATING EXPENSES
Salaries and Wages 2,239,122
Retirement Plan and Other Employee
Benefits 694,514
Net Occupancy Expense 382,644
Furniture and Equipment Expense 250,820
FDIC Insurance Assessment 307,060
Other Operating Expenses 1,333,345
----------
Total Other Operating Expenses 5,207,505
----------
Income before Income Taxes 2,980,785
PROVISION for INCOME TAXES 733,108
----------
NET INCOME for YEAR $2,247,677
==========
PER SHARE INFORMATION
Net Income for Year $0.94
Cash Dividends $0.22
Average Common Shares Outstanding 2,395,314
See notes to consolidated financial statements.
3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1996 1995
----------- -----------
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,191,812 $2,099,052
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 515,600 422,644
Provision for Loan Losses 150,000 158,800
Investment Securities (Gains)/Losses (2,308) (4,669)
Provision for Deferred Income Taxes 34,598 62,186
(Increase)/Decrease in Accrued
Interest Receivable (95,220) (93,443)
(Increase)/Decrease in Other Assets (6,488) (192,416)
Increase/(Decrease) in Other Liabilities 218,395 261,606
---------- ----------
Net Cash Provided by Operating Activities 3,006,389 2,713,760
CASH FLOWS from INVESTING ACTIVITIES
Net (Increase)/Decrease in Federal Funds Sold (4,790,000) 1,870,000
Proceeds from Sales of
Available for Sale Securities 8,994,369 6,937,192
Proceeds from Maturities of
Available for Sale Securities 11,685,792 7,564,379
Proceeds from Maturities of
Held to Maturity Securities 1,566,157 8,005,080
Purchases of Available for Sale
Securities (32,875,864) (15,324,619)
Purchases of Held to Maturity Securities (4,805,526) (7,147,581)
Loans Made to Customers, Net of
Principal Collected on Loans (10,017,453) (12,227,887)
Investment in Limited Partnership -0- (162,500)
Purchases of Property and Equipment (298,385) (2,715,262)
---------- ----------
Net Cash (Used in) Investing Activities (30,540,910) (13,201,198)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 7,337,206 (7,258,717)
Net Increase in Certificates of Deposits 13,808,609 11,418,464
Net Increase/(Decrease) in Short-Term
Borrowing (409,203) 3,089,401
Proceeds from Issuance of Long-Term Debt 6,546,000 5,800,000
Payments on Long-Term Debt (140,000) -0-
Acquisition of Treasury Stock (119,173) (359,876)
Issuance of Common and Treasury Stock 130,866 -0-
Cash Dividends Paid (760,044) (560,072)
---------- ----------
Net Cash Provided by
Financing Activities 26,394,261 12,129,200
---------- ----------
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,140,260) 1,641,762
CASH and CASH EQUIVALENTS -
Beginning of Year 7,213,657 5,571,895
---------- ----------
CASH and CASH EQUIVALENTS - End of Year $6,073,397 $7,213,657
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $5,692,146 $4,752,285
Interest Paid - Other 567,181 180,510
Income Taxes 370,000 555,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (10,000
shares in 1996) $ 153,384 $-0-
Issuance of Capital Note for Limited
Partnership Interest -0- 470,000
Years Ended December 31,
1994
-----------
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,247,677
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 330,706
Provision for Loan Losses 113,000
Investment Securities (Gains)/Losses (6,883)
Provision for Deferred Income Taxes 217,716
(Increase)/Decrease in Accrued
Interest Receivable (75,917)
(Increase)/Decrease in Other Assets (120,701)
Increase/(Decrease) in Other Liabilities (12,861)
----------
Net Cash Provided by Operating Activities 2,692,737
CASH FLOWS from INVESTING ACTIVITIES
Net (Increase)/Decrease in Federal Funds Sold 5,387,000
Proceeds from Sales of
Available for Sale Securities 524,128
Proceeds from Maturities of
Available for Sale Securities 6,788,666
Proceeds from Maturities of
Held to Maturity Securities 7,124,402
Purchases of Available for Sale
Securities (11,488,030)
Purchases of Held to Maturity Securities (5,984,324)
Loans Made to Customers, Net of
Principal Collected on Loans (6,134,858)
Investment in Limited Partnership -0-
Purchases of Property and Equipment (686,825)
-----------
Net Cash (Used in)Investing Activities (4,469,841)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 793,972
Net Increase in Certificates of Deposits 2,574,566
Net Increase/(Decrease) in Short-Term
Borrowing (590,784)
Proceeds from Issuance of Long-Term Debt -0-
Payments on Long-Term Debt -0-
Acquistion of Treasury Stock (53,240)
Issuance of Common and Treasury Stock 30,000
Cash Dividends Paid (527,025)
-----------
Net Cash Provided by
Financing Activities 2,227,489
-----------
Net Increase/(Decrease) in Cash
and Cash Equivalents 450,385
CASH and CASH EQUIVALENTS -
Beginning of Year 5,121,510
-----------
CASH and CASH EQUIVALENTS - End of Year $ 5,571,895
===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $ 4,073,993
Interest Paid - Other 16,178
Income Taxes 575,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (10,000
shares in 1996) $-0-
Issuance of Capital Note for Limited
Partnership Interest -0-
See notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Common Retained
Stock Surplus Earnings
------------------------------------
Balance, December 31, 1993 $600,000 $2,003,541 $15,224,765
Net Income 2,247,677
Acquisition of Treasury
Stock
Issuance of Treasury
Stock 15,357
Unrealized (Loss) on
Investment
Securities Available for Sale,
net of tax
Cash Dividends
($.22 per share) (527,025)
-------- ---------- -----------
Balance, December 31, 1994 600,000 2,018,898 16,945,417
Net Income 2,099,052
Acquisition of Treasury
Stock
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax
Cash Dividends
($.235 per share) (560,072)
-------- ---------- -----------
Balance, December 31, 1995 600,000 2,018,898 18,484,397
Net Income 2,191,812
Acquisition of Treasury
Stock
Issuance of Common and
Treasury Stock 1,041 99,825
Retirement of Treasury Stock
(10,000 shares) (2,500) (150,885)
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax
Cash Dividends
($.32 per share) (760,044)
-------- ---------- -----------
Balance, December 31, 1996 $598,541 $1,967,838 $19,916,165
======== ========== ===========
Net Unrealized
Gain/(Loss) Treasury
on Securities Stock Total
---------- ---------- -----------
Balance, December 31, 1993 $-0- $(28,444) $17,799,862
Net Income 2,247,677
Acquisition of Treasury
Stock (53,240) (53,240)
Issuance of Treasury
Stock 14,643 30,000
Unrealized (Loss) on
Investment
Securities Available for
Sale, net of tax (444,729) (444,729)
Cash Dividends
($.22 per share) (527,025)
-------- --------- -----------
Balance, December 31, 1994 (444,729) (67,041) 19,052,545
Net Income 2,099,052
Acquisition of Treasury
Stock (359,876) (359,876)
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax 537,470 537,470
Cash Dividends
($.235 per share) (560,072)
-------- --------- -----------
Balance, December 31, 1995 92,741 (426,917) 20,769,119
Net Income 2,191,812
Acquisition of Treasury
Stock (119,173) (119,173)
Issuance of Common and
Treasury Stock 30,000 130,866
Retirement of Treasury Stock
(10,000 shares) 153,385 -0-
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax 10,292 10,292
Cash Dividends
($.32 per share) (760,044)
-------- --------- -----------
Balance, December 31, 1996 $103,033 $(362,705) $22,222,872
======== ========= ===========
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National Financial Corporation
(the Corporation) and its subsidiary, The Union National Mount Joy Bank (the
Bank), conform with generally accepted accounting principles and prevailing
practices within the banking industry. The Corporation and the Bank provide
banking and related services to residents and businesses primarily in the
northwest portion of Lancaster County, Pennsylvania.
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation
and the Bank. All material intercompany accounts and transactions have been
eliminated in the consolidation.
Use of Estimates
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses.
Accordingly, actual results may differ from estimated amounts.
Investment Securities
Investment securities include both debt securities and equity securities. The
Corporation has segregated its investment securities into two categories: those
"held to maturity" and those "available for sale."
Securities classified as held to maturity are those debt securities the
Corporation has both the intent and ability to hold to maturity regardless of
changes in market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization of
premium and accretion of discount, computed by the interest method.
Securities classified as available for sale are those debt securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity, and all equity securities. Any decision to sell a
security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in maturity mix of
the Corporation's assets and liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities available for sale are
carried at fair value with premiums and discounts amortized or accreted to
interest income using the interest method. Changes in unrealized gains or losses
for available for sale securities, net of taxes, are recorded as a component of
stockholders' equity.
When a determination is made that a market value decline below cost on a
marketable equity or debt security is other than temporary, the cost basis of
the individual security is written down to the market value. The amount of the
write-down is charged to expense. Realized security gains and losses are
computed using the specific identification method.
Loans
Loans generally are stated at their outstanding unpaid principal balances, net
of any deferred fees or costs on originated loans. Interest income is accrued on
the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment to interest
income generally over the contractual life of the related loans.
Impaired Loans-Beginning in 1995, the Corporation adopted Financial Accounting
Standards Board Statement No. 114, "Accounting by Creditors for Impairment of a
Loan" which was subsequently amended by Statement No. 118 under the same name
(SFAS No. 114). The Corporation determines a loan impaired when, based on
current information and events, it is probable that all interest and principal
5
<PAGE>
payments due according to the contractual terms of the loan agreement will not
be collected. Application of SFAS No. 114 is not required for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. Consequently, the Corporation excludes its residential mortgages and
consumer installment loans from the application of SFAS No. 114.
In addition, application of SFAS No. 114 is not required for loans where there
is an insignificant delay or insignificant shortfall in amount of payments.
Consequently, the Corporation determines a "delay" and "shortfall" insignificant
when the loan is generally under 90 days past due or when the loan is
sufficiently secured so that all amounts due including late charges and costs of
collection would be expected to be collected.
Interest income is recognized on impaired loans, excluding loans that are
classified as nonaccrual, as the increase in the net carrying amount
attributable to the passage of time.
Allowance for Loan Losses-The allowance for loan losses is established through
provisions for loan losses charged against income. Loans, including impaired
loans, deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed adequate by
Management to absorb estimated probable loan losses. 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. This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future cash flows
expected to be received on impaired loans that may be susceptible to significant
change.
Specifically, the Corporation measures impairment based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
the fair value of the collateral for certain collateral dependent loans or where
foreclosure is probable. If the measure of the impaired loan is less than the
recorded investment in the loan, the allowance for loan losses is credited and
the provision for loan losses is charged. Subsequent measures in the impairment
of the loan will increase or decrease the allowance for loan losses. However,
the net carrying amount of the loan shall not exceed the recorded investment in
the loan. Prior to 1995, the allowance for loan losses related to these loans
was based on undiscounted cash flows or the fair value of the collateral for
collateral dependent loans.
Nonaccrual Loans-Generally, a loan (including a loan impaired under SFAS No.
114) is classified as nonaccrual and the accrual of interest on such loan is
discontinued when the contractual payment of principal or interest has become 90
days past due or Management has serious doubts about further collectibility of
principal or interest. A loan may remain on accrual status if it is in the
process of collection and is either guaranteed or well secured. When a loan is
placed on nonaccrual status, unpaid interest credited to income is reversed.
Interest received on nonaccrual loans is either applied against principal or
reported as interest income, according to Management's judgment as to the
collectibility of principal. Generally, loans are restored to accrual status
when both principal and interest are brought current, the loan has performed in
accordance with the contractual terms for a reasonable period of time, and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Impaired loans that are classified as nonaccrual will have a net carrying amount
that will not exceed the individual loan's measure of impairment as noted under
the Section on Allowance for Loan Losses.
Other Real Estate Owned-Other real estate owned includes assets acquired through
foreclosure and loans identified as in-substance foreclosures. In accordance
with SFAS No. 114, a loan is classified as in-substance foreclosure when the
Corporation has taken possession of the collateral regardless of whether formal
foreclosure proceedings have taken place. There were no loans previously
classified as in-substance foreclosures, consequently, the Corporation has made
no reclassifications of other real estate owned. Other real estate owned is
valued at the lower of the loan balance at the time of foreclosure or estimated
fair market value, net of selling costs, and is included in other assets. Gains
and losses resulting from the sale or write down of other real estate owned and
income and expenses related to the operation of other real estate owned are
recorded in other expenses. Other real estate owned amounted to $117,000 and
$-0- at December 31, 1996 and 1995, respectively.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation, which
is computed over the assets' estimated useful lives on both the accelerated and
the straight-line methods. Leasehold improvements are stated at cost less
accumulated amortization, which is computed over the term of the lease including
renewal options on the straight-line method. Gains and losses on premises and
equipment are recognized upon disposal of the asset. Charges for maintenance and
repairs are charged to expense as incurred.
Investments in Limited Partnerships
The Corporation has investments in two limited partnerships providing low to
moderate income housing in the community of Mount Joy. The Corporation's 18.8%
investment of $478,000 is carried on the cost method, which is being reduced to
the investment's currently estimated residual value over the remaining period
that tax credits are being realized, and the Corporation's 49.5% investment of
$632,500 is carried on the equity method.
Income Taxes
The provision for income taxes is based upon the results of operations, adjusted
principally for tax-exempt income. Accounting for income taxes is under the
asset/liability method. Under this method, the deferred tax asset is recorded
based on the difference between the tax basis of assets and liabilities and
their carrying amounts for financial reporting purposes. The deferred tax asset
is measured by the enacted tax rates which will be in effect when these
differences reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized in the future.
Income tax expense is the tax payable or refundable for the period plus or minus
the change during the period in deferred tax assets and liabilities.
Net Income per Share
Net income per share is calculated by dividing net income by the weighted
average number of shares outstanding during the period. The weighted average
number of shares outstanding during 1996, 1995, and 1994 was 2,375,191,
2,382,427, and 2,395,314, respectively. All per share amounts and average shares
outstanding reflected in the accompanying statements were adjusted to give
retroactive effect to the two-for-one common stock split as discussed in
Note 13.
Statements of Cash Flows
For purposes of the statements of cash flows, the Corporation considers cash and
amounts due from banks to be cash equivalents.
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. The Bank does not expect this
Statement to have a material effect on the liquidity, results of operations or
capital resources when applicable provisions become effective in 1997 and 1998.
6
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NOTE 2 - Investment Securities
The amortized costs and fair values of investment securities are as follows:
At December 31, 1996
------------------------------------
Gross
Amortized Unrealized
Cost Gains
----------- ----------
Securities Held to Maturity:
Obligations of State and
Political Subdivisions $16,115,361 $ 177,570
Corporate Securities 1,008,198 -0-
----------- -----------
Total $17,123,559 $ 177,570
=========== ===========
Securities Available for Sale:
U.S. Treasury Securities $ 2,998,914 $433
Obligations of Other U.S.
Government Agencies 8,834,045 36,602
Mortgage-Backed Securities 24,425,708 162,265
Equity Securities 1,351,411 170,371
----------- -----------
Total $37,610,078 $ 369,671
=========== ===========
At December 31, 1996
--------------------------------
Gross
Unrealized Fair
Losses Values
----------- -----------
Securities Held to Maturity:
Obligations of State and
Political Subdivisions $ (63,542) $16,229,389
Corporate Securities (9,448) 998,750
----------- -----------
Total $ (72,990) $17,228,139
=========== ===========
Securities Available for Sale:
U.S. Treasury Securities $ (13,097) $ 2,986,250
Obligations of Other U.S.
Government Agencies (10,129) 8,860,518
Mortgage-Backed Securities (190,335) 24,397,638
Equity Securities -0- 1,521,782
----------- -----------
Total $ (213,561) $37,766,188
=========== ===========
At December 31, 1995
-------------------------------
Gross
Amortized Unrealized
Cost Gains
----------- -----------
Securities Held to Maturity:
Obligations of State and
Political Subdivisions $13,383,991 $ 237,582
Corporate Securities 500,200 -0-
----------- ----------
Total $13,884,191 $ 237,582
=========== ==========
Securities Available for Sale:
U.S. Treasury Securities $ 4,007,873 $7,355
Obligations of Other U.S.
Government Agencies 7,597,964 70,301
Mortgage-Backed Securities 12,917,418 93,077
Equity Securities 888,811 135,812
----------- ----------
Total $25,412,066 $ 306,545
=========== ==========
At December 31, 1995
------------------------------
Gross
Unrealized Fair
Losses Values
---------- ----------
Securities Held to Maturity:
Obligations of State and
Political Subdivisions $(26,054) $13,595,519
Corporate Securities (200) 500,000
--------- -----------
Total $ (26,254) $14,095,519
========= ===========
Securities Available for Sale:
U.S. Treasury Securities $ (4,287) $ 4,010,941
Obligations of Other U.S.
Government Agencies (5,000) 7,663,265
Mortgage-Backed Securities (156,740) 12,853,755
Equity Securities -0- 1,024,623
--------- -----------
Total $(166,027) $25,552,584
========= ===========
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There are no significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issuer. Investment securities
carried at $10,211,117 and $8,930,818 at December 31, 1996 and 1995,
respectively, were pledged to secure public funds and government deposits.
The amortized cost and fair value of debt securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Debt Securities
-------------------------
Held to Maturity
-------------------------
Amortized Fair
Cost Values
----------- -----------
Due in one year or less $ 501,590 $ 501,250
Due after one year through five years 1,966,699 1,976,268
Due after five years through ten years 3,229,876 3,230,011
Due after ten years 11,425,394 11,520,610
----------- -----------
17,123,559 17,228,139
Mortgage-Backed Securities -0- -0-
----------- -----------
$17,123,559 $17,228,139
=========== ===========
Debt Securities
--------------------------
Available for Sale
--------------------------
Amortized Fair
Cost Values
----------- ------------
Due in one year or less $ 749,626 $ 760,625
Due after one year through five years 5,787,409 5,772,278
Due after five years through ten years 5,295,924 5,313,865
Due after ten years -0- -0-
----------- ------------
11,832,959 11,846,768
Mortgage-Backed Securities 24,425,708 24,397,638
----------- ------------
$36,258,667 $ 36,244,406
=========== ============
Proceeds from sales of available for sale securities were $8,994,369 and
$6,937,192 during 1996 and 1995, respectively. Investment securities
gains/losses include gross realized gains of $45,671 and gross realized losses
of $43,363 during 1996 and gross realized gains of $70,599 and gross realized
losses of $65,930 during 1995 as a result of sales of available for sale
securities. The related income tax expense amounted to $785 and $1,587 during
1996 and 1995, respectively, for net investment securities gains/losses.
In November 1995, the Financial Accounting Standards Board issued a special
report in the form of "A Guide to Implementation of Statement No. 115 on
Accounting for Certain Investments in Debt and Equity Securities." The Guide
provides an opportunity for the Corporation to reassess the classification of
its investment securities prior to December 31, 1995. As a result, the
Corporation reclassified securities with a total fair value of $2,047,660 and an
unrealized gain of $48,073 from the held to maturity category to the available
for sale category. According to the Guide, reclassification from the held to
maturity category that results from this one-time assessment will not call into
question the intent of the Corporation to hold other debt securities to maturity
in the future.
Mortgage-backed securities, as disclosed in the two preceding tables, are issued
by U.S. Government agencies or corporations.
7
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NOTE 3 - LOANS
Loans are summarized as follows:
December 31, December 31,
1996 1995
------------- ------------
Real Estate-Mortgage:
First and Second Residential $ 82,169,284 $ 75,430,020
Commercial and Industrial 21,947,488 21,097,564
Construction and Land Development 4,035,276 4,198,461
Agricultural 4,366,652 3,602,080
Commercial and Industrial 5,235,323 4,725,213
Consumer 8,793,805 7,852,400
Agricultural 1,609,225 1,608,750
Other 2,299,889 2,003,347
------------ ------------
Total Loans 130,456,942 120,517,835
Less: Unearned Income (65,757) (100,821)
------------ ------------
Net Loans $130,391,185 $120,417,014
============ ============
The Corporation grants commercial, residential and consumer loans to customers
primarily located in the northwest portion of Lancaster County. Although the
Corporation has a diversified loan portfolio, its debtors' ability to honor
their contracts is influenced by the region's economy.
The recorded investment in loans that is considered to be impaired under SFAS
No. 114 was $28,129 and $203,003 at December 31, 1996 and 1995, respectively.
This entire amount is included in the nonaccrual loans reflected below. The
measure of impairment is based on the fair value of the collateral, since
foreclosure is probable. The related allowance for loan losses amounts to $2,250
and $101,500 at December 31, 1996 and 1995, respectively. The average recorded
investment in impaired loans was $98,317 and $220,143 during the year ended
December 31, 1996 and 1995, respectively. For the year ended December 31, 1996
and 1995, the Corporation did not recognize interest income on the impaired
loans.
Nonperforming loans, which consist of loans 90 days or more past due and
nonaccruing loans, amounted to $842,949, $1,225,261, and $617,480 at December
31, 1996, 1995, and 1994, respectively.
Loans to certain directors and principal officers of the Corporation, including
their immediate families and companies in which they are principal owners (more
than 10%), amounted to $3,380,461 at December 31, 1996. Such loans were made in
the ordinary course of business at the Corporation's normal credit terms,
including interest rates and security, and do not represent more than a normal
risk of collection. Transactions on these loans for the years ended December 31
are as follows:
1996 1995 1994
---------- ---------- ----------
Balance, Beginning of Year $3,343,586 $1,964,262 $2,240,907
Additions 2,682,659 2,528,095 1,741,736
Deductions (2,645,784) (1,148,771) (2,018,381)
---------- ---------- ----------
Balance, End of Year $3,380,461 $3,343,586 $1,964,262
========== ========== ==========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses for the years ended
December 31 is as follows:
1996 1995 1994
---------- ---------- -----------
Balance, Beginning of Year $1,264,528 $1,182,215 $1,114,302
Provision Charged to
Operating Expense 150,000 158,800 113,000
Recoveries of Charged-Off Loans 21,188 30,836 30,454
Charged-Off Loans (64,471) (107,323) (75,541)
---------- ---------- ----------
Balance, End of Year $1,371,245 $1,264,528 $1,182,215
========== ========== ==========
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
Estimated December 31, December 31,
Useful Lives 1996 1995
--------------- ------------ ------------
Land $ 411,593 $ 330,138
Land Improvements 20 years 495,390 495,390
Buildings and
Improvements 15-50 years 5,080,215 5,017,853
Leasehold Improvements 20 years 262,176 250,248
Furniture, Fixtures
and Equipment 5-25 years 3,019,006 2,876,367
---------- ----------
Subtotal 9,268,380 8,969,996
Less: Accumulated Depreciation
and Amortization (3,526,994) (3,065,536)
---------- ----------
Premises and Equipment - Net $5,741,386 $5,904,460
========== ==========
Depreciation and amortization expense amounted to $461,458 in 1996, $374,257 in
1995, and $299,511 in 1994.
Total rental expense amounted to $43,461, $23,481, and $4,200 for the years
ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, the Corporation was obligated under noncancelable
operating leases for real estate with the future minimum payments as follows:
1997 $ 43,461
1998 43,461
1999 39,861
2000 39,461
2001 42,660
Thereafter 149,310
--------
$358,214
========
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NOTE 6 - SHORT-TERM BORROWING
Short-term borrowings and weighted average interest rates at December 31, were
as follows:
1996 1995
--------------------- ----------------------
Amount Rate Amount Rate
---------- ---------- ----------- ----------
Treasury Tax and
Loan Notes $ 489,414 5.15% $ 168,617 5.15%
FHLB fixed rate
advance 2,500,000 5.93 -0- --
Federal Funds
Purchased -0- -- 3,230,000 6.13
---------- ----------
Total $2,989,414 $3,398,617
========== ==========
Under an agreement with the Federal Home Loan Bank of Pittsburgh (FHLB), the
Corporation has a line of credit available in the amount of $6,532,000 with no
balance outstanding as of December 31, 1996 and 1995. The line of credit is
collateralized by a security agreement covering qualifying mortgage loans and
unpledged treasury, agency and mortgage-backed securities which at December 31,
1996, had a combined carrying value of $82,400,000. In addition, the Bank has
purchased FHLB stock amounting to $1,159,900 as of December 31, 1996. Under the
Bank's membership agreement with the FHLB, additional stock purchases are
required when total advances from the FHLB are increased.
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
1996 1995
-------------------- ---------------------
Amount Rate Amount Rate
---------- -------- ---------- --------
FHLB fixed rate
advances, maturing:
1997 $1,500,000 5.85% $1,500,000 5.85%
1998, Community
Investment Program
Funding (CIP) 4,671,000 5.92 2,300,000 5.71
1999, CIP 1,675,000 5.18 -0- --
2000 2,000,000 6.11 2,000,000 6.11
FHLB convertible
fixed rate advance,
maturing:
2001 2,500,000 4.97 -0- --
---------- ----- ---------- -----
12,346,000 5.65 5,800,000 5.88
Limited Partnership
Capital Notes, maturing
1996 to 1999 330,000 -- 470,000 --
---------- ----------
Total $12,676,000 $6,270,000
=========== ==========
The FHLB advances are collateralized by the security agreement described in Note
6. FHLB's convertible fixed rate advance allows the FHLB the quarterly option to
convert to a LIBOR adjustable-rate advance at the three-month LIBOR plus .08%.
This option commences March 27, 1997. Upon FHLB's conversion, the Bank has the
option to repay the advance in full. As of February 1997, the Corporation
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 5.67%.
NOTE 8 - PROFIT-SHARING PLAN
The Corporation's subsidiary has a noncontributory profit-sharing plan covering
substantially all full-time employees. Contributions are determined annually by
the Board of Directors and costs are funded as accrued.
Contributions in the amount of $330,873, $318,092, and $300,800 for the years
ended December 31, 1996, 1995, and 1994, respectively, were made to the
profit-sharing plan.
NOTE 9 - INCOME TAXES
The Corporation accounts for income taxes under the asset/liability method.
Under this method, the deferred tax asset is recorded based on the difference
between the tax basis of assets and liabilities and their carrying amounts for
financial reporting purposes. The deferred tax asset is measured by the enacted
tax rates which will be in effect when these differences reverse. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized in the future. Income tax expense is the tax
payable or refundable for the period, plus or minus the change during the period
in deferred tax assets and liabilities.
Deferred income taxes consists of the following components as of December 31:
1996 1995
-------- --------
Deferred Tax Assets (Liabilities)
Deferred Net Loan Fees $ 62,868 $107,417
Provision for Loan Losses 365,965 322,795
Depreciation (108,884) (60,741)
Investment in Limited
Partnership (30,077) (49,574)
Unrealized loss/(gain)
on investment securities
available for sale (53,078) (47,776)
Other 14,635 19,207
-------- --------
Net Deferred Tax Asset $251,429 $291,328
======== ========
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The Corporation as of December 31, 1996, has not established any valuation
allowance against deferred tax assets since these tax benefits are realizable
through carryback availability against prior years taxable income or the
reversal of existing deferred tax liabilities.
An analysis of the income tax expense included in the consolidated statements of
income for the years ended December 31 is as follows:
1996 1995 1994
-------- -------- --------
Taxes Currently Payable $321,865 $549,875 $677,199
Deferred Income Taxes/(Benefit)
Related to:
Provision for Loan Losses (43,170) (27,986) (23,090)
Deferred Net Loan Fees 44,549 49,520 65,895
Fixed Asset Depreciation 48,143 40,130 16,110
Other - Net (14,925) 2,222 (3,006)
-------- -------- --------
Provision for Income
Taxes $356,462 $613,761 $733,108
======== ======== ========
The reasons for the difference between the Corporation's provision for income
taxes and the amount computed by applying the statutory federal income tax rate
to income before income taxes for the years ended December 31 are as follows:
1996 1995
------------------ ----------------
Amount % Amount %
---------- ------ --------- -----
Tax at Statutory
Federal Income Tax Rate $ 866,413 34.0 $922,356 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (280,938) (11.0) (229,378) (8.5)
Income Tax Credits (231,277) (9.1) (76,919) (2.8)
Other 2,264 .1 (2,298) (.1)
--------- ----- -------- ----
Provision for Income Taxes $ 356,462 14.0 $613,761 22.6
========= ===== ======== ====
1994
------------------
Amount %
---------- ------
Tax at Statutory
Federal Income Tax Rate $1,013,467 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (249,117) (8.4)
Income Tax Credits ( 45,600) (1.5)
Other 14,358 .5
---------- -----
Provision for Income Taxes $ 733,108 24.6
========== =====
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is required to maintain reserves, in the form of cash and balances with
the Federal Reserve Bank, against their deposit liabilities. The average amount
of required reserves during 1996 was approximately $925,000.
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit, standby letters of
credit and financial guarantees. Those instruments involve, to varying degrees,
elements of credit risk and interest rate risk in excess of the amount
recognized in the consolidated balance sheets. The contract amounts of those
instruments reflect the exposure to credit loss in the event of nonperformance
by the other party to the financial instrument.
December 31, December 31,
1996 1995
------------ ------------
Financial Instruments whose Contract Amounts
represent Credit Risk:
Commitments to Extend Credit $22,477,148 $14,677,719
Standby Letters of Credit
and Financial
Guarantees Written 1,610,249 1,432,537
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Certain commitments may expire without being drawn
upon and, therefore, future cash may not be required. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The Bank generally requires
collateral or other security to support financial instruments with credit risk.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to support public and private
borrowing arrangements. Most guarantees are less than two years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan advances to customers.
As required by SFAS No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" (SFAS No. 119), with respect to
derivative financial instruments, the Corporation does not currently engage in
the use of futures, forward, swap or option contracts that are typically defined
as derivatives. SFAS No. 119 defines fixed-rate loan commitments, variable-rate
loan commitments and other variable-rate financial instruments as derivatives
for purposes of this Statement. Those financial instruments shown in the table
above would represent the only derivatives as defined by SFAS No. 119 currently
held by the Corporation. See Note 14 for the estimated fair value and related
valuation assumptions of these financial instruments.
NOTE 11 - TIME DEPOSITS
Certificates of deposit in denominations of $100,000 or more amounted to
$17,887,482 and $12,579,053 at December 31, 1996 and 1995, respectively.
Interest expense on certificates of deposit in denominations of $100,000 or more
amounted to $877,033, $598,287, and $318,874 for the years ended December 31,
1996, 1995, and 1994, respectively.
10
<PAGE>
NOTE 12 - REGULATORY RESTRICTIONS
The National Banking Laws require the approval of the Comptroller of the
Currency if the total of all dividends declared by a national bank in any
calendar year exceeds the net profits of the bank (as defined) for that year
combined with its retained net profits for the preceding two calendar years.
Under this formula, the Bank may declare dividends in 1997 of approximately
$4,073,000 plus an amount equal to the net profits of the Bank in 1997 up to the
date of any such dividend declaration.
Additionally, banking regulations limit the amount of investments, loans,
extensions of credit, and advances the Bank can make to the Corporation at any
time to 10% of the Bank's capital stock and surplus. At December 31, 1996, this
limitation amounted to approximately $2,118,000. These regulations also require
that any such investment, loan, extension of credit, or advance be secured by
securities having a market value in excess of the amount thereof.
NOTE 13 - STOCKHOLDERS' EQUITY
On April 13, 1995, the Corporation approved the increase in the number of
authorized shares of Common Stock from 10,000,000 to 20,000,000 shares and the
change in the par value of the Corporation's Common Stock from fifty cents
($.50) per share to twenty-five cents ($.25) per share, thereby effecting a
two-for-one stock split of the Corporation's Common Stock effective on June 1,
1995. All per share amounts and average shares outstanding reflected in the
accompanying statements were adjusted to give retroactive effect to the common
stock split.
The Corporation maintains a Stock Incentive Plan approved in 1988 whereby
120,000 shares of common stock have been reserved for issuance to employees. The
Corporation has not issued shares under the Stock Incentive Plan since its
inception.
In addition, the Corporation maintains a Dividend Reinvestment Plan (the Plan).
Stockholders of common stock may participate in the Plan, which provides that
additional shares of common stock may be purchased with reinvested dividends at
prevailing market prices. To the extent that shares are not available in the
open market, the Corporation has reserved 150,000 shares of common stock to be
issued under the Plan. The number of shares available for issuance under the
Plan are adjusted for stock dividends and stock splits. Open market purchases
are usually made by an independent purchasing agent retained to act as agent for
Plan participants, and the purchase price to participants will be the actual
price paid, excluding brokerage commissions and other expenses which will be
paid by the Corporation.
The Bank maintains the following leverage and risk-based capital ratios:
December 31,
-------------------------
1996 1995
------------ ----------
Leverage Ratio (Stockholders' Equity
to Total Assets) 10.48% 11.47%
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 17.02% 17.92%
Minimum Required 4.00 4.00
Total Capital Ratio - Actual 18.12% 19.06%
Minimum Required 8.00 8.00
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" "SFAS No. 107", the Corporation has presented estimated fair value
information about financial instruments, whether or not recognized in the
Consolidated Balance Sheets, for which it is practicable to estimate that value.
Fair value is best determined by values quoted through active trading markets.
Because no active trading market exists for various types of financial
instruments, many of the fair values disclosed were derived using present value
or other valuation techniques. These fair values are significantly affected by
assumptions used, principally the timing of future cash flows and the discount
rate. As a result, the Corporation's ability to realize these derived values
cannot be assured. Further, certain financial instruments and all nonfinancial
instruments are excluded. Accordingly, the aggregate fair value amounts
presented do not necessarily represent the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
the fair value of its financial instruments:
Cash and cash equivalents -- The carrying amounts reported in the consolidated
balance sheets for cash and short-term investments approximate their fair
values.
Investment securities -- Fair values for investment securities are based on
quoted prices, where available. If quoted prices are not available, fair values
are based on quoted prices of comparable instruments.
Loans -- For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. The fair values
of other loans are determined using estimated future cash flows, discounted at
the interest rates currently being offered for loans with similar terms to
borrowers with similar credit quality. The carrying amount of accrued interest
receivable approximates its fair value.
Off-balance -- sheet instruments-For the Corporation's off-balance-sheet
instruments, consisting of commitments to extend credit and financial and
performance standby letters of credit, the estimated fair value is the same as
the instrument's contract or notional values since they are generally short-term
in nature or they are priced at market when funded.
Deposit liabilities -- The fair values of deposits with no stated maturities,
such as demand deposits, savings accounts, NOW and money market deposits equal
their carrying amounts which represent the amount payable on demand. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term borrowings -- The carrying amounts of federal funds purchased,
advances from the Federal Home Loan Bank and other short-term borrowings
approximate their fair values.
Long-term debt -- The fair values of the Corporation's long-term debt are
estimated using discounted cash flow analyses, based on the Corporation's
incremental borrowing rates for similar types of borrowing arrangements.
11
<PAGE>
At December 31, 1996 and 1995, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
December 31, 1996
--------------------------------
Carrying
Value Fair Value
------------ --------------
ASSETS:
Cash and Due from Banks $ 6,073,397 $ 6,073,397
Investment Securities
Held to Maturity 17,123,559 17,228,139
Investment Securities
Available for Sale 37,766,188 37,766,188
Loans, net of Unearned Income
and Allowance for Loan Losses 129,019,940 128,095,000
Accrued Interest Receivable 1,312,443 1,312,443
LIABILITIES:
Demand and Savings Deposits 78,394,058 78,394,058
Time Deposits 86,119,272 86,476,000
Short-term Borrowing 2,989,414 2,989,414
Long-term Debt 12,676,000 12,593,000
Contract
Amount Fair Value
------------ --------------
OFF-BALANCE-SHEET ITEMS:
Commitments to Extend Credit
and Standby Letters of
Credit $ 24,087,397 $ 24,087,397
December 31, 1995
--------------------------------
Carrying
Value Fair Value
------------ --------------
ASSETS:
Cash and Due from Banks $ 7,213,657 $ 7,213,657
Investment Securities
Held to Maturity 13,884,191 14,095,519
Investment Securities
Available for Sale 25,552,584 25,552,584
Loans, net of Unearned Income
and Allowance for Loan Losses 119,152,486 120,639,000
Accrued Interest Receivable 1,217,223 1,217,223
LIABILITIES:
Demand and Savings Deposits 71,056,852 71,056,852
Time Deposits 72,310,663 72,789,000
Short-term Borrowing 3,398,617 3,398,617
Long-term Debt 6,270,000 6,253,955
Contract
Amount Fair Value
------------ --------------
OFF-BALANCE-SHEET ITEMS:
Commitments to Extend Credit
and Standby Letters
of Credit$ 16,110,256 $ 16,110,256
NOTE 15 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, December 31,
1996 1995
------------ ------------
ASSETS
Cash in Subsidiary Bank $ 14,705 $ 42,758
Investment in Subsidiary 21,176,278 19,897,027
Other Equity Investment Securities 271,382 236,823
Investments in Limited
Partnerships 1,003,002 1,110,500
Recoverable Federal Income Taxes 175,508 47,761
----------- -----------
Total Assets $22,640,875 $21,334,869
=========== ===========
LIABILITIES
Limited Partnership Capital
Notes $ 330,000 $ 470,000
Deferred Income Taxes 88,003 95,750
----------- -----------
Total Liabilities 418,003 565,750
STOCKHOLDERS' EQUITY
Common Stock 598,541 600,000
Surplus 1,967,838 2,018,898
Retained Earnings 19,916,165 18,484,397
Unrealized gain on investment
securities available for sale,
net of tax 103,033 92,741
Less: Treasury Stock (362,705) (426,917)
----------- -----------
Total Stockholders' Equity 22,222,872 20,769,119
----------- -----------
Total Liabilities and
Stockholders' Equity $22,640,875 $21,334,869
=========== ===========
12
<PAGE>
CONDENSED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------
1996 1995
----------- -----------
INCOME
Dividends from Subsidiary $ 742,500 $1,202,025
Dividends on Other Equity
Investment Securities 9,358 7,174
Interest on Deposits in Subsidiary 3,054 3,737
Investment Securities Gains -0- 12,292
Management Fees from Subsidiary 39,758 37,155
---------- ----------
Total Income 794,670 1,262,383
EXPENSES 166,870 41,589
---------- ----------
Income before Income Taxes and
Equity
in Undistributed Income
of Subsidiary 627,800 1,220,794
PROVISION FOR INCOME TAXES (BENEFIT) (272,244) (41,108)
---------- ----------
900,044 1,261,902
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 1,291,768 837,150
---------- ----------
NET INCOME $2,191,812 $2,099,052
========== ==========
Years Ended December 31,
----------------------------
1994
---------
INCOME
Dividends from Subsidiary $ 553,500
Dividends on Other Equity
Investment Securities 6,923
Interest on Deposits in Subsidiary 2,126
Investment Securities Gains 16,302
Management Fees from Subsidiary 37,750
----------
Total Income 616,601
EXPENSES 39,294
----------
Income before Income Taxes and
Equity in Undistributed
Income of Subsidiary 577,307
PROVISION FOR INCOME TAXES (BENEFIT) (19,873)
----------
597,180
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 1,650,497
----------
NET INCOME $2,247,677
==========
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
1996 1995
---------- ----------
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,191,812 $2,099,052
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Investment Securities (Gains)/Losses -0- (12,292)
Undistributed Income of
Subsidiary (1,291,768) (837,150)
Provision for Deferred Income
Taxes (19,497) 10,081
Increase/(Decrease) in Liabilities -0- -0-
Decrease/(Increase) in
Other Assets (20,249) (820)
---------- -----------
Net Cash Provided by Operating
Activities 860,298 1,258,871
CASH FLOWS from INVESTING ACTIVITIES
Investment in Limited Partnership -0- (162,500)
Increase in Investment in Subsidiary's
Common Stock -0- (300,000)
Proceeds from Sales of Available for
Sale Securities -0- 25,500
---------- -----------
Net Cash Provided by (Used in)
Investing Activities -0- (437,000)
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (119,173) (359,876)
Payments on Long-Term Debt (140,000) -0-
Issuance of Common and Treasury Stock 130,866 -0-
Cash Dividends Paid (760,044) (560,072)
---------- -----------
Net Cash (Used in)
Financing Activities (888,351) (919,948)
---------- -----------
NET INCREASE/(DECREASE) in CASH (28,053) (98,077)
CASH - Beginning of Year 42,758 140,835
---------- -----------
CASH - End of Year $ 14,705 $ 42,758
========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock
(10,000 shares in 1996) $ 153,384 $ -0-
Issuance of Capital Note for
Limited Partnership Interest -0- 470,000
Years Ended December 31,
----------------------------
1994
----------
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,247,677
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Investment Securities (Gains)/Losses (16,302)
Undistributed Income of
Subsidiary (1,650,497)
Provision for Deferred Income
Taxes -0-
Increase/(Decrease) in Liabilities 39,494
Decrease/(Increase) in
Other Assets 281
----------
Net Cash Provided by Operating
Activities 620,653
CASH FLOWS from INVESTING ACTIVITIES
Investment in Limited Partnership -0-
Increase in Investment in Subsidiary's
Common Stock -0-
Proceeds from Sales of Available for
Sale Securities 32,175
----------
Net Cash Provided by (Used in)
Investing Activities 32,175
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock ( 53,240)
Payments on Long-Term Debt -0-
Issuance of Common and Treasury Stock 30,000
Cash Dividends Paid (527,025)
----------
Net Cash (Used in)
Financing Activities (550,265)
----------
NET INCREASE/(DECREASE) in CASH 102,563
CASH - Beginning of Year 38,272
----------
CASH - End of Year $ 140,835
==========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock
(10,000 shares in 1996) $ -0-
Issuance of Capital Note for
Limited Partnership Interest -0-
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Union National Financial Corporation
and Subsidiary
Mount Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets of UNION
NATIONAL FINANCIAL CORPORATION and SUBSIDIARY as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Union
National Financial Corporation and Subsidiary as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Trout, Ebersole, & Groff, LLP
-------------------------------------
TROUT, EBERSOLE, & GROFF, LLP
Certified Public Accountants
January 17, 1997
Lancaster, Pennsylvania
Summary of Quarterly Financial Data
The unaudited quarterly results of operations for the years ended December 31,
1996 and 1995, are as follows:
1996
-------------------------------------
(In Thousands) March June September December
31 30 30 31
------- ------- -------- ------
Interest Income $3,402 $3,513 $3,625 $3,677
Interest Expense 1,489 1,559 1,650 1,682
------ ------ ------ ------
Net Interest Income 1,913 1,954 1,975 1,995
Provision for Loan Losses 8 41 48 52
------ ------ ------ ------
Net Interest Income after
Provision for Loan
Losses 1,905 1,913 1,927 1,943
Other Operating Income 208 189 186 229
Other Operating Expenses 1,464 1,479 1,467 1,541
------ ------ ------ ------
Income before Income Taxes 649 623 646 631
Provision for Income Taxes 92 81 101 83
------ ------ ------ ------
Net Income $ 557 $ 542 $ 545 $ 548
====== ====== ====== ======
Net Income per
Common Share* $ 0.23 $ 0.23 $ 0.23 $ 0.23
====== ====== ====== ======
1995
-------------------------------------
(In Thousands) March June September December
31 30 30 31
------- ------- -------- ------
Interest Income $3,021 $3,180 $3,257 $3,314
Interest Expense 1,128 1,265 1,362 1,418
------ ------ ------ ------
Net Interest Income 1,893 1,915 1,895 1,896
Provision for Loan Losses 21 27 61 51
------ ------ ------ ------
Net Interest Income after
Provision for Loan
Losses 1,872 1,888 1,834 1,845
Other Operating Income 195 187 187 184
Other Operating Expenses 1,333 1,361 1,359 1,426
------ ------ ------ ------
Income before Income Taxes 734 714 662 603
Provision for Income Taxes 172 178 136 128
------ ------ ------ ------
Net Income $ 562 $ 536 $ 526 475
====== ====== ====== ======
Net Income per
Common Share* $ 0.23 $ 0.23 $ 0.22 $ 0.20
====== ====== ====== ======
*Per Share information reflects the two-for-one stock split of the Corporation's
Common Stock effective on June 1, 1995, as discussed in Note 13 of the
accompanying consolidated financial statements.
14
<PAGE>
Consolidated Summary of Operations
(Dollars in thousands, except per share data)
Years Ended December 31,
----------------------------------
1996 1995 1994
---------- --------- ----------
INCOME AND EXPENSE
Interest Income $ 14,218 $ 12,773 $ 11,801
Interest Expense 6,380 5,175 4,131
---------- ---------- ----------
Net Interest Income 7,838 7,598 7,670
Provision for Loan Losses 150 159 113
---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 7,688 7,439 7,557
Other Operating Income 811 753 631
Other Operating Expenses 5,951 5,479 5,207
---------- ---------- ----------
Income before Income Taxes 2,548 2,713 2,981
Provision for Income Taxes and
Cumulative Effect of Change in
Accounting for Income Taxes* 356 614 733
---------- ---------- ----------
Net Income for Year $ 2,192 $ 2,099 $ 2,248
========== ========= ==========
PER SHARE **
Net Income $0.92 $0.88 $0.94
Cash Dividends Paid 0.320 0.235 0.22
Average Shares Outstanding 2,375,191 2,382,427 2,395,314
FINANCIAL RATIOS
Return on Average Assets 1.17% 1.28% 1.42%
Return on Average Stockholders'
Equity 10.24% 10.42% 12.15%
Dividend Payout Ratio 34.68% 26.68% 23.45%
Average Stockholders' Equity to
Average Assets 11.40% 12.24% 11.72%
AVERAGE BALANCE SHEET
Net Loans $124,483 $115,026 $105,427
Investments 48,707 38,320 40,859
Other Earning Assets 2,576 880 3,313
Total Assets 187,814 164,631 157,830
Deposits 154,474 139,896 138,126
Short-Term Borrowing 2,009 1,197 383
Long-Term Debt 8,411 2,320 -0-
Stockholders' Equity 21,411 20,149 18,499
BALANCE SHEET AT YEAR-END
Net Loans $130,391 $120,417 $108,266
Investments 54,890 39,437 38,652
Other Earning Assets 4,790 -0- 1,870
Total Assets 203,472 174,657 159,160
Deposits 164,513 143,368 139,208
Short-Term Borrowing 2,989 3,399 309
Long-Term Debt 12,676 6,270 -0-
Stockholders' Equity 22,223 20,769 19,053
Years Ended December 31,
------------------------
1993 1992
---------- ----------
INCOME AND EXPENSE
Interest Income $11,794 $12,102
Interest Expense 4,277 5,562
---------- ----------
Net Interest Income 7,517 6,540
Provision for Loan Losses 224 220
---------- ----------
Net Interest Income after
Provision for Loan Losses 7,293 6,320
Other Operating Income 577 520
Other Operating Expenses 5,021 4,232
---------- ----------
Income before Income Taxes 2,849 2,608
Provision for Income Taxes and
Cumulative Effect of Change in
Accounting for Income Taxes* 370* 659
---------- ----------
Net Income for Year $2,479 $1,949
========== ==========
PER SHARE **
Net Income $1.03 $0.81
Cash Dividends Paid 0.2125 0.175
Average Shares Outstanding 2,396,658 2,396,828
FINANCIAL RATIOS
Return on Average Assets 1.67% 1.38%
Return on Average Stockholders'
Equity 14.54% 12.72%
Dividend Payout Ratio 20.54% 21.53%
Average Stockholders' Equity to
Average Assets 11.48% 10.86%
AVERAGE BALANCE SHEET
Net Loans $98,319 $89,108
Investments 36,804 39,038
Other Earning Assets 4,986 5,402
Total Assets 148,476 141,042
Deposits 130,284 124,505
Short-Term Borrowing 429 517
Long-Term Debt -0- -0-
Stockholders' Equity 17,048 15,318
BALANCE SHEET AT YEAR-END
Net Loans $102,176 $94,191
Investments 36,284 38,969
Other Earning Assets 7,257 3,214
Total Assets 155,143 147,526
Deposits 135,839 130,162
Short-Term Borrowing 900 900
Long-Term Debt -0- -0-
Stockholders' Equity 17,800 15,845
* In 1993 the cumulative effect of change in accounting for income taxes
resulted in an offset to the provision for income taxes in the amount of
$269,000.
** Per Share information reflects two-for-one stock splits of the Corporation's
Common Stock effective on June 1, 1995 and on April 21, 1993.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following section presents a discussion and analysis of the financial
condition and results of operations of Union National Financial Corporation, a
bank holding company (the Corporation), and its wholly-owned subsidiary, The
Union National Mount Joy Bank (the Bank). This discussion should be read in
conjunction with the financial tables/statistics, financial statements and notes
to financial statements appearing elsewhere in this annual report. Such
financial condition and results of operations are not intended to be indicative
of future performance.
In addition to historical information, this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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.
RESULTS OF OPERATIONS
Overview
Consolidated net income for 1996 was $2,192,000, an increase of 4.4% over the
consolidated net income of $2,099,000 for 1995. The consolidated net income for
1995, decreased by 6.6% from the consolidated net income of $2,248,000 for 1994.
On a per share basis, net income for 1996 was $.92, as compared to $.88 for
1995, and $.94 for 1994. The per share amounts reflect the two-for-one stock
split of the Corporation's Common Stock effective on June 1, 1995.
Results of operations for 1996 as compared to 1995 were impacted by the
following items: (1) Net income was positively impacted by an 8.2% 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 positively impacted by a 7.7%
increase in other operating income; (4) net income was negatively impacted by an
8.6% increase in other operating expenses; and (5) net income was positively
impacted by income tax credits available in 1996. The above items are quantified
and discussed in further detail under their respective sections below.
Results of operations for 1995 as compared to 1994 were impacted by the
following items: (1) Net income was positively impacted by a 9.1% increase in
average net loans, primarily residential and commercial mortgages, which were
funded by reductions in other earning assets, by growth in deposits and by
additions to average borrowings; (2) net income was negatively impacted by the
rise in market interest rates, which continued into early 1995, and its related
effects on loans, investments, and deposits; (3) net income was positively
impacted by a 19.4% increase in other operating income; and (4) net income was
negatively impacted by a 5.2% increase in other operating expenses.
The growth in loans is considered a material favorable trend of the Corporation
which Management expects to continue into 1997. Management expects the growth in
deposits for 1997 to maintain 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 implementation of a bank-wide
incentive program for employee participation based on deposit growth and other
factors. Other actions include the strategic promotion of the Bank's branch
offices in light of 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 new
certificate of deposit which has a no-penalty feature during the life of the
certificate; and a special promotion of the Bank's regular checking account
featuring no monthly service charges when payroll is electronically deposited.
As a result of the above described efforts, the Bank's certificate of deposit
portfolio under $100,000 has increased $8,500,000, or 14.2%, to $68,232,000 at
December 31, 1996, from $59,732,000 at December 31, 1995. In January 1997, the
Bank received new funds in the amount of $1,900,000 from a certificate of
deposit promotion. The funding for the loan growth is further discussed under
the section on Liquidity and Rate Sensitivity.
Management expects the loan growth to continue for the following reasons: (1)
lending rates are at generally affordable rates for prospective borrowers; (2)
implementation of a formal officer calling program; (3) the addition and
promotion in September 1996, of a new loan product, home equity lines of credit;
(4) expansion of the Bank's retail consumer lending through automobile dealers;
(5) new loan originations resulting from the recently opened Manheim branch
office; (6) economic stability of Lancaster County as discussed later in this
section; and (7) the continued population growth in the Bank's market area.
Net income as a percent of total average assets, also known as return on assets
(ROA), was 1.17% for 1996, compared to 1.28% for 1995 and 1.42% for 1994. Net
income as a percent of average stockholders' equity, also known as return on
equity (ROE), was 10.24% for 1996, compared to 10.42% for 1995 and 12.15% for
1994. The ROA and ROE for 1996 and 1995 were impacted by the factors discussed
above.
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 residential construction activity. The decline in long-term interest
rates from late 1994 and early 1995 levels 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 Loans.
Net Interest Income
Net interest income is the amount by which interest income on loans and
investments exceeds interest incurred on deposits and other interest-bearing
liabilities. Net interest income is the Corporation's primary source of revenue.
The amount of net interest income is affected by changes in interest rates and
by changes in the volume and mix of interest-sensitive assets and liabilities.
For analytical and discussion purposes, net interest income and corresponding
yields are presented on a taxable equivalent basis. Income from tax-exempt
assets, primarily loans to or securities issued by state and local governments,
is adjusted by an amount equivalent to the federal income taxes which would have
been paid if the income received on these assets was taxable at the statutory
rate of 34% for 1996, 1995, and 1994.
Net interest income for 1996 increased by $336,000, or 4.2%, over 1995. Net
interest income for 1995 decreased by $97,000, or 1.2%, from 1994. Commercial
and residential average loan growth of $9,457,000 and average investment
security growth of $10,387,000 was funded by the growth in average deposits of
$14,578,000 and by the growth in average long-term debt of $6,091,000. The
additional long-term debt represented fixed-rate and variable-rate advances.
See maturity and rate analysis of long-term debt in Note 7 of the accompanying
consolidated financial statements. Average earning assets increased in the
amount of $21,540,000 in the aggregate over 1995. The volume growth in earning
assets and interest-bearing liabilities contributed to an increase in net
interest income by the amount of $512,000 in 1996 over 1995, as compared to
$194,000 in 1995 over 1994.
During the first quarter of 1995, the Federal Reserve Bank tightened monetary
supply causing the prime interest rate to increase to 9%. The immediate impact
of these short-term interest rate increases was to increase the interest rates
on loans that adjust according to the prime lending rate and on reinvested funds
from maturing investment securities. Commencing July 1995, the Federal Reserve
Bank began loosening the monetary supply by lowering short-term rates causing
prime to decline to 8.25% in the first quarter of 1996. However, current
interest rates on
16
<PAGE>
certificates of deposit remained above the rates being paid during the previous
low rate environment in the years of 1992, 1993 and into 1994. Consequently, the
effective interest rate on the certificate of deposit portfolio increased as
funds began to renew at higher interest rates. See Management's discussion below
concerning the anticipated impact of these interest rate fluctuations to the
results of operations for 1997.
The overall interest rate on the average total earning assets decreased slightly
to 8.4% for 1996, as compared to 8.5% for 1995. More significantly, the overall
interest rate on the average interest-bearing liabilities increased to 4.2% for
1996, as compared to 4.0% for 1995. Contributing to this increase was the
movement of deposits from lower interest rate money market and savings accounts
to higher interest rate certificates of deposit. The net effect of all interest
rate fluctuations and funding changes was to decrease net interest income in the
amount of $176,000 in 1996 from 1995, as compared to a decrease in net interest
income in the amount of $291,000 in 1995 from 1994.
In 1994, the Bank engaged an outside consulting group to assist in monitoring
its interest rate risk using income simulation models. Based on the models, it
is currently anticipated that a two percent general rise or decline in interest
rates over a one-year period will negatively impact the Bank's net interest
income by under 1% for the first full year. In order to enhance the net interest
income in future periods, Management has entered into transactions that increase
earning assets funded by advances from the Federal Home Loan Bank of Pittsburgh
(FHLB). The structure of these transactions are similarly matched with
investment securities and loans in order to limit net interest income exposure
to interest rate fluctuations. As of December 31, 1996, the Bank has received
short-term and long-term fixed rate advances of $14,846,000 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
5.70% with maturities ranging from May 1997 to December 2001. Additional
asset/liability management strategies available from the FHLB include access to
interest rate caps, floors and swaps. As of December 31, 1996, the Bank did not
utilize any of these aforementioned strategies. See discussion on Liquidity and
Rate Sensitivity.
Other interest rate risk management tools available to the Bank include the
promotion and development of specific loan and deposit products and the
structuring of its investment portfolio. In the first quarter of 1995,
Management introduced a new mortgage product with a seven-year payment balloon
feature with amortized monthly payments over a thirty-year period. This product
is a long-range strategy to increase rate-sensitive assets, and therefore it
will not have an impact on the Bank's one-year cumulative gap position in 1997.
At December 31, 1996, the total balances in this product amounted to $2,564,000.
As of September 1996, Management offered a new loan product, home equity lines
of credit, that will provide additional rate-sensitive assets. At December 31,
1996, the total lines of credit balances outstanding amounted to $575,000.
For 1997, Management expects immaterial changes to the effective interest rate
in the loan and investment portfolios as compared to the levels of 1996. In
addition, Management expects an immaterial change in the effective rate on its
deposits. The growth in earning assets during 1996 is expected to have a
positive impact on the net interest margin for 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
Distribution of Assets, Liabilities, and Stockholders' Equity; Interest
Rates and Interest Differential (Taxable Equivalent Basis)
Year Ended
December 31, 1996
---------------------------------
Average
(In Thousands) Balance Interest Rate
--------- ----------- ------
ASSETS
Interest-Bearing Deposits
in Other Banks $ 48 $ 3 6.3%
Federal Funds Sold 2,528 136 5.4%
Investment Securities:
Taxable 33,546 2,073 6.2%
Exempt from Federal Taxes 15,161 1,258 8.3%
Loans - Net * 124,483 11,229 9.0%
-------- ------- ---
Total Earning Assets 175,766 $14,699 8.4%
======= ===
Allowance for Loan Losses (1,307)
Other Nonearning Assets 13,355
--------
TOTAL ASSETS $187,814
========
LIABILITIES and
STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $33,924 $699 2.1%
Savings 23,343 585 2.5%
Time 82,701 4,495 5.4%
Short-Term Borrowing 2,009 115 5.7%
Long-Term Debt 8,411 485 5.8%
-------- ------- ---
Total Interest-Bearing
Liabilities 150,388 $ 6,379 4.2%
======= ===
Demand Deposits 14,506
Other Liabilities 1,509
--------
TOTAL LIABILITIES 166,403
Stockholders' Equity 21,411
--------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $187,814
========
Net Interest Income/Yield
on Average Earning Assets $ 8,320 4.7%
======= ===
Year Ended
December 31, 1995
---------------------------------
Average
(In Thousands) Balance Interest Rate
---------- ----------- ------
ASSETS
Interest-Bearing Deposits
in Other Banks $ 63 $ 3 4.8%
Federal Funds Sold 817 48 5.9%
Investment Securities:
Taxable 27,192 1,573 5.8%
Exempt from Federal Taxes 11,128 976 8.8%
Loans - Net * 115,026 10,559 9.2%
-------- ------- ---
Total Earning Assets 154,226 $13,159 8.5%
======= ===
Allowance for Loan Losses (1,218)
Other Nonearning Assets 11,623
--------
TOTAL ASSETS $164,631
========
LIABILITIES and
STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 33,195 $ 705 2.1%
Savings 25,317 703 2.8%
Time 68,048 3,558 5.2%
Short-Term Borrowing 1,197 70 5.8%
Long-Term Debt 2,320 139 6.0%
-------- ------- ---
Total Interest-Bearing
Liabilities 130,077 $ 5,175 4.0%
======= ===
Demand Deposits 13,336
Other Liabilities 1,069
--------
TOTAL LIABILITIES 144,482
Stockholders' Equity 20,149
--------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $164,631
========
Net Interest Income/Yield on
Average Earning Assets $ 7,984 5.2%
======= ===
Year Ended
December 31, 1994
---------------------------------
Average
(In Thousands) Balance Interest Rate
-------- ----------- ------
ASSETS
Interest-Bearing Deposits
in Other Banks $ -0- $ -0- 0.0%
Federal Funds Sold 3,313 125 3.8%
Investment Securities:
Taxable 29,248 1,523 5.2%
Exempt from Federal Taxes 11,611 1,055 9.1%
Loans - Net * 105,427 9,509 9.0%
-------- ------- ---
Total Earning Assets 149,599 $12,212 8.2%
======= ===
Allowance for Loan Losses (1,154)
Other Nonearning Assets 9,385
--------
TOTAL ASSETS $157,830
========
LIABILITIES and
STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $37,012 $812 2.2%
Savings 30,473 835 2.7%
Time 58,384 2,468 4.2%
Short-Term Borrowing 383 16 4.2%
Long-Term Debt -0- -0- --
------- ------- ---
Total Interest-Bearing
Liabilities 126,252 $ 4,131 3.3%
======= ===
Demand Deposits 12,257
Other Liabilities 822
--------
TOTAL LIABILITIES 139,331
Stockholders' Equity 18,499
--------
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $157,830
========
Net Interest Income/Yield on
Average Earning Assets $ 8,081 5.4%
======= ===
Balances of nonaccrual loans and related income recognized have been included
for computational purposes. Balances reflect amortized historical cost for
available for sale securities. The related average unrealized holding gain or
loss on securities is included in other nonearning assets. Tax-exempt income
included in loans and securities has been adjusted to a taxable equivalent basis
using an incremental rate of 34%.
* Includes loan fees of $515,000 for the year ended December 31, 1996, $458,000
for 1995 and $484,000 for 1994.
17
<PAGE>
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 December 31, 1996, Management
expects an overall immaterial impact to the net interest margin for 1997, as
compared to 1996.
Provision for Loan Losses
The loan loss provision is an estimated expense charged to earnings in
anticipation of losses attributable to uncollectible loans. The provision is
based on Management's analysis of the adequacy of the allowance for loan losses.
Net charge-offs amounted to $44,000 for 1996, as compared to $76,000 for 1995
and $45,000 for 1994. 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. The provision for loan losses was
$150,000 in 1996, $159,000 in 1995 and $113,000 in 1994. The increase from 1994
to 1995 and 1996 levels was in response to the volume loan growth during 1995
and 1996. See discussion on Loan Quality/Allowance for Loan Losses.
Other Operating Income
Other operating income for the current year was $811,000, representing an
increase of $58,000, or 7.7%, over 1995. Contributing to this increase were
additional earnings resulting from ATM usage including new ATM locations
established in 1996 and 1995, rental income, mutual fund commissions,
insufficient funds charges, and safe deposit box rents. As an offset to the
other operating income increase was a reduction in trust income due to
significant estate settlements occurring in 1995.
Other operating income for 1995 was $753,000, an increase of $122,000, or 19.4%,
over 1994. Contributing to this increase was an increase in trust income as a
result of fees on estates settled during 1995, an increase in fees received by
the Bank on increased third-party mutual fund sales, and an increase in service
charge fees as a result of a change to the Bank's interest-bearing ("NOW")
checking account.
Other Operating Expenses
Total other operating expenses for 1996 increased by $472,000, or 8.6%, over
1995. Of this increase, employee salaries and wages and related fringe benefits
increased by $237,000, or 7.5%, over 1995. This increase was essentially due to
new staff additions and due to annual merit, cost of living, and healthcare cost
increases. Staff additions included the initial staffing of the recently opened
Manheim branch office with costs of $104,000 in salaries and wages for 1996 over
1995 and additional support staff positions.
Occupancy, furniture and equipment expenses in 1996 increased by $243,000, or
34.1%, from 1995. This increase was primarily due to the following: (1) the
increased depreciation and occupancy costs in the amount of $70,000 resulting
from the completion of the main office expansion and renovation in August 1995,
and resulting from properties, furniture and equipment acquired during 1996 and
1995; (2) the additional lease, depreciation, and other costs related to the
recently opened Manheim branch office in the amount of $47,500; (3) additional
snow removal and related costs in the amount of $22,000 for 1996 over 1995; and
(4) other real estate expense incurred in 1996 in the amount of $23,000.
The FDIC Insurance Assessment expense decreased by $158,000 for 1996 as compared
to 1995. The FDIC Insurance Assessment rate declined from $.23 for every $100 in
deposits in the first quarter of 1995 to $500 per quarter in the first quarter
of 1996 because the FDIC Bank Insurance Fund had reached its statutorily
mandated reserve level. See further discussion under the Section on Regulatory
Activity concerning the expected impact to the FDIC Insurance Assessment rate
for 1997.
Other operating expense items in 1996 increased by $150,000, or 10.3%, over
1995. Net losses and charge-offs from the limited partnerships in the amount of
$107,000 were recognized as other operating expenses for 1996, as compared to
$-0- for 1995. In addition, contributing factors to the increase in other
operating expenses included the following: (1) expenses impacted by a general
growth in business loan and deposit volumes, (2) amortization expense for
software additions, (3) increase in flood hazard certifications for all mortgage
loan products, and (4) the timing of significant supply orders. As an offset to
the increase in other operating expenses was a nonrecurring charge to expense in
the amount of $75,000 during 1995. This charge of $75,000, after netting for
state tax credits, related to the initial funding arrangement for the Nissly
Chocolate Factory Apartments Associates, a limited partnership. Additional
information concerning the investment in the partnership is discussed under the
section on Income Taxes.
Total other operating expenses for 1995 increased by $272,000, or 5.2%, over
1994. Of this increase, employee salaries and wages and related fringe benefits
increased by $218,000, or 7.4%, over 1994, essentially due to new staff
additions and due to annual merit, cost of living, and health care cost
increases. Staff additions included the initial staffing of the recently opened
Manheim branch office with costs of $60,000 in 1995, a calling officer and
several support staff positions.
Rate/Volume Analysis of Changes in Net Interest Income
(Taxable Equivalent Basis)
1996 Compared to 1995
-----------------------------------
Total
(In Thousands) Change Volume Rate
-------- ---------- --------
Interest Income From
Interest-Bearing Deposits
in Other Banks $ -0- $ (1) $ 1
Federal Funds Sold 88 92 (4)
Investment Securities:
Taxable 500 387 113
Exempt from Federal Taxes 282 337 (55)
Loans - Net 670 856 (186)
----- ------ ------
Total Earning Assets 1,540 1,671 (131)
Interest Expense On
Deposits:
Interest-Bearing Demand (6) 15 (21)
Savings (118) (44) (74)
Time 937 791 146
Short-Term Borrowing 45 46 (1)
Long-Term Debt 346 351 (5)
----- ------ ------
Total Interest-Bearing
Liabilities 1,204 1,159 45
------ ------- -------
Net Interest Income $ 336 $ 512 $ (176)
====== ======= =======
1995 Compared to 1994
-----------------------------------
Total
(In Thousands) Change Volume Rate
-------- ---------- --------
Interest Income From
Interest-Bearing Deposits
in Other Banks $ 3 $ 3 $ -0-
Federal Funds Sold (77) (124) 47
Investment Securities:
Taxable 50 (112) 162
Exempt from Federal Taxes (79) (43) (36)
Loans - Net 1,050 879 171
------ ----- -----
Total Earning Assets 947 603 344
Interest Expense On
Deposits:
Interest-Bearing Demand (107) (82) (25)
Savings (132) (143) 11
Time 1,090 449 641
Short-Term Borrowing 54 46 8
Long-Term Debt 139 139 -0-
------ ----- -----
Total Interest-Bearing
Liabilities 1,044 409 635
------ ----- -----
Net Interest Income $ (97) $194 $(291)
====== ===== ======
Balances of nonaccrual loans and related income recognized have been included
for computational purposes. The change in interest due to both volume and rate
has been allocated individually to the change in volume and rate on a
proportional basis. Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate of 34%.
18
<PAGE>
Occupancy, furniture and equipment expenses for 1995 increased by $80,000, or
12.6%, over 1994. This increase was essentially due to increased depreciation
expense in the amount of $61,000 resulting from the completion of the main
office expansion and renovation in August 1995 and the related furniture and
equipment acquired for the project, and the additional lease, depreciation, and
other costs related to the recently opened branch office in the amount of
$32,000. Other expense items in 1995 decreased by $26,000, or 1.6%, from 1994.
The significant items that changed as compared to 1994 are as follows: (1) FDIC
insurance assessments decreased by $147,000 due to the decline in the FDIC
Insurance Assessment rate as of June 1, 1995; and (2) a nonrecurring charge of
$75,000 in 1995 related to the initial funding arrangement for the Nissly
Chocolate Factory Apartments Associates.
Income Taxes
The Corporation's income tax expense for 1996 was $356,000, as compared to
$614,000 in 1995 and $733,000 in 1994. The effective tax rate was 14.0%, 22.6%
and 24.6% in 1996, 1995 and 1994, respectively. The decline in the income tax
expense and effective tax rate was due to the decrease in corporate earnings
before income taxes and newly available historic federal income tax credits. The
tax credits in the amount of $185,000 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. Low income housing
credits in the amount of $60,000 are currently estimated to result from the
investment in 1997. Contributing to the decrease in the income tax expense and
effective tax rate for 1995 as compared to 1994 was the related decrease in
corporate earnings before income taxes and an available federal rehabilitation
tax credit resulting from the main office renovations.
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. The Bank does not expect this
Statement to have a material effect on the liquidity, results of operations,or
capital resources when applicable provisions become effective in 1997 and 1998.
FINANCIAL CONDITION
Investment Securities
The average investment security portfolio increased by $10,387,000 from the
prior year, representing a 27.1% increase. The increase primarily consisted of
purchases of adjustable rate mortgage-backed securities issued by government
agencies funded by growth in average deposits and additional borrowings from the
FHLB. The Bank acquired in the secondary market over $15,453,000 in amortized
cost of adjustable rate mortgage-backed securities in order to enhance the net
interest margin, while managing liquidity and interest rate risk. As of December
31, 1996, the amortized cost of mortgage-backed securities with adjustable rate
caps of 2% per year amounted to $13,415,000 and with adjustable rate caps of 1%
per year amounted to $6,792,000. The expected cash flows from the investment
securities, including prepayments and exercised call options, is currently
estimated at an amount of $11,200,000 for 1997, down from approximately
$13,250,000 in cash flows for 1996. The amortized cost of floating rate
securities, including adjustable rate mortgage-backed securities, increased to
$23,034,000 at December 31, 1996, as compared to $11,601,000 at December 31,
1995. The Bank currently holds in its available for sale category $2,326,000 at
amortized cost of floating rate collateralized mortgage obligations (CMOs)
acquired prior to 1994, which are included in the mortgage-backed securities.
The mortgage-backed securities held are issued by U. S. Government agencies or
corporations.
The Corporation has segregated its investment securities into two categories:
those "held to maturity" and those "available for sale." See Note 1 of the
accompanying consolidated financial statements for additional information
concerning the accounting for investment securities. The Corporation possesses
both the intent, subject to credit impairment, and ability to hold each security
in its investment portfolio to maturity. The Corporation does recognize that the
investment portfolio serves other functions including an ultimate source of
liquidity and a tool to manage interest rate risk. In order to acknowledge these
functions, the Corporation has designated certain specific debt securities as
being available for sale. The designation of these securities as available for
sale gives the Corporation the ability to liquidate them without calling into
question the Corporation's intent to hold the remaining portion of its portfolio
to maturity. In addition, all marketable equity securities are classified as
available for sale. Unrealized holding gains and losses for available for sale
securities are reported as a separate component of stockholders' equity, net of
tax, until realized. Securities classified as being held to maturity will
continue to be carried in the financial statements at their amortized cost.
Based on the current interest rate environment, Management expects to realize
immaterial investment gains or losses in 1997.
The Corporation did not hold any subinvestment grade security or a security that
had a market value decline below cost that is other than temporary at December
31, 1996. In addition, there are no significant concentrations of investments
(greater than 10% of stockholders' equity) in any individual security issuer.
The total unrealized holding gain for securities classified as available for
sale and as held to maturity amounted to $156,000 and $105,000 at December 31,
1996, respectively. This compared to a total unrealized holding gain for
securities classified as available for sale and as held to maturity of $141,000
and $211,000 at December 31, 1995, respectively. The unrealized holding gain on
the available for sale securities, net of income tax effect, amounted to an
increase in stockholders' equity of $103,000 and $93,000 at December 31, 1996
and 1995, respectively. Except as discussed under the Net Interest Income
section with regards to the impact of interest rate changes on the results of
operations, Management believes that the effects of any unrealized losses in the
available for sale investment portfolio on future earnings, liquidity, and
capital resources to be immaterial.
The following shows the summary of investment securities held by the
Corporation:
Carrying Value at December 31,
---------------------------------------------
1996 1995
--------------------------------------------
Available Held to Available Held to
(In Thousands) for Sale Maturity for Sale Maturity
---------- ----------- ----------- ----------
U. S. Treasury
Securities $ 2,986 $ -0- $ 4,011 $ -0-
Obligations of
Other U.S.
Government Agencies 8,860 -0- 7,663 -0-
Obligations of State
and Political
Subdivisions -0- 16,116 -0- 13,384
Corporate Securities -0- 1,008 -0- 500
Mortgage-Backed
Securities 24,398 -0- 12,854 -0-
Equity Securities 1,522 -0- 1,025 -0-
-------- ------- --------- -------
Total $ 37,766 $17,124 $ 25,553 $13,884
========= ======= ======== =======
Carrying Value at December 31,
1994
---------------------
Available Held to
(In Thousands) for Sale Maturity
---------- -----------
U. S. Treasury
Securities $ 10,362 $ -0-
Obligations of
Other U.S.
Government Agencies 6,315 -0-
Obligations of State
and Political
Subdivisions -0- 10,836
Corporate Securities -0- 5,955
Mortgage-Backed
Securities 4,211 -0-
Equity Securities 973 -0-
-------- -------
Total $ 21,861 $16,791
======== =======
19
<PAGE>
The following table illustrates the maturities of investment securities and the
weighted average yields based upon amortized costs as of December 31, 1996.
Yields are shown on a taxable equivalent basis, assuming a 34% federal income
tax rate.
Within 1 - 5 5 - 10
(In Thousands) 1 Year Years Years
--------- --------- ---------
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ -0- $ 2,986 $ -0-
Amortized Cost -0- 2,999 -0-
Yield 5.7%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 760 2,786 5,314
Amortized Cost 750 2,788 5,296
Yield 7.4% 5.7% 6.7%
Mortgage-Backed Securities by
contractual maturity (1):
Estimated Market Value -0- -0- -0-
Amortized Cost -0- -0- -0-
Yield
Equity Securities:
Estimated Market Value
Amortized Cost
Yield
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 1,165 1,119 2,676
Amortized Cost 1,157 1,105 2,678
Yield 10.3% 7.2% 7.4%
Corporate Securities:
Estimated Market Value 501 498 -0-
Amortized Cost 501 507 -0-
Yield 5.5% 6.0%
Total Securities:
Estimated Market Value
Amortized Cost
Yield
Over
(In Thousands) 10 Years Total
--------- ---------
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ -0- $ 2,986
Amortized Cost -0- 2,999
Yield 5.7%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value -0- 8,860
Amortized Cost -0- 8,834
Yield 6.5%
Mortgage-Backed Securities
by contractual maturity (1):
Estimated Market Value 24,398 24,398
Amortized Cost 24,426 24,426
Yield 6.8% 6.8%
Equity Securities:
Estimated Market Value 1,522
Amortized Cost 1,352
Yield 6.3%
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 11,269 16,229
Amortized Cost 11,175 16,115
Yield 8.3% 8.2%
Corporate Securities:
Estimated Market Value -0- 999
Amortized Cost -0- 1,008
Yield 5.7%
-------
Total Securities:
Estimated Market Value $54,994
Amortized Cost 54,734
Yield 7.1%
=======
(1) It is anticipated that these mortgage-backed securities will be repaid prior
to their contractual maturity dates. The weighted average yield for
mortgage-backed securities is impacted for normal amortization and estimated
prepayments.
Loans
The total investment in net loans was $130,391,000 at December 31, 1996,
representing a $9,974,000, or 8.3%, increase over the investment of $120,417,000
at December 31, 1995. The primary increase in loans resulted from continued
demand for residential and commercial mortgage loans. At December 31, 1996,
there were no loan concentrations over 10% of loans outstanding to any one
category or borrower. However, mortgage loans constitute 86% of the Bank's loan
portfolio; consequently, the quality of these loans is affected by the region's
economy and real estate market. Total net loans with variable rate pricing
amounted to $36,175,000 and $34,292,000 as of December 31, 1996 and 1995,
respectively.
Other than as described herein, Management does not believe there are any trends
or uncertainties which are reasonably expected to have a material impact on
future results of operations, 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 $1,860,000 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.
These loans are not considered impaired under the guidance of Financial
Accounting Standards Board Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," (SFAS No. 114), as discussed in Note 1 of the
accompanying consolidated financial statements. 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. The nonperforming loans table, appearing in
the section entitled Nonperforming Loans, does not include the aforementioned
loans.
Loans are composed of the following:
December 31,
---------------------------------
(In Thousands) 1996 1995 1994
--------- --------- ----------
Real Estate-Mortgage:
First and Second Residential $ 82,169 $ 75,430 $67,760
Commercial and Industrial 21,948 21,098 17,099
Construction and Land
Development 4,035 4,198 4,431
Agricultural 4,368 3,602 3,734
Commercial and Industrial 5,235 4,725 3,815
Consumer 8,794 7,853 7,647
Agricultural 1,609 1,609 2,252
Other 2,299 2,003 1,778
-------- -------- -------
Total Loans 130,457 120,518 108,516
Less: Unearned Income (66) (101) (250)
-------- -------- -------
Net Loans $130,391 $120,417 $108,266
======== ======== ========
December 31,
-------------------------------
(In Thousands) 1993 1992
--------- ---------
Real Estate-Mortgage:
First and Second Residential $ 61,473 $ 57,504
Commercial and Industrial 18,591 14,730
Construction and Land
Development 3,276 3,238
Agricultural 4,779 4,533
Commercial and Industrial 3,337 3,839
Consumer 7,223 7,371
Agricultural 2,362 2,255
Other 1,611 1,250
-------- --------
Total Loans 102,652 94,720
Less: Unearned Income (476) (529)
-------- --------
Net Loans $102,176 $ 94,191
======== ========
20
<PAGE>
The loan maturities and interest sensitivity of total loans, excluding
residential real estate mortgages and consumer loans at December 31, 1996, are
as follows:
Years to Maturity (1)
-------------------------------------
Within 1 - 5 Over
(In Thousands) 1 Year Years 5 Years Total
------- ------ -------- -------
Commercial, Financial,
Agricultural and Other $ 7,149 $5,463 $22,847 $35,459
Construction and Land
Development 3,134 200 701 4,035
------- ------ ------- -------
Total $10,283 $5,663 $23,548 $39,494
======= ====== ======= =======
Fixed Interest Rates $ 2,425 $3,850 $ 7,436 $13,711
Floating or Adjustable
Interest Rates 7,858 1,813 16,112 25,783
------ ------ ------- -------
Total $10,283 $5,663 $23,548 $39,494
======= ====== ======= =======
(1) Due to interest rate levels, economic conditions, and other relevant
factors, it is anticipated that there will be loans that are repaid prior to
their contractual maturity dates.
Nonperforming Assets
Nonperforming loans consist of nonaccruing loans and loans 90 days or more past
due. Nonaccruing loans are comprised of loans that are no longer accruing
interest income because of apparent financial difficulties of the borrower.
Interest on nonaccruing loans is recorded when received only after past due
principal is brought current and deemed collectible in full. If nonaccrual loans
had been current and in accordance with their original terms, gross interest
income of approximately $17,000 and $24,000 would have been recorded on such
loans for the years ended December 31, 1996 and 1995, respectively. Interest
income recognized on such loans for the years ended December 31, 1996 and 1995,
approximated $5,000 and $3,000, respectively. At December 31, 1996, total
nonperforming loans amounted to $843,000, or .6% of total net loans, as compared
to $1,225,000 at December 31, 1995. Historically, the percent of nonperforming
loans to total net loans as of December 31, for the previous five-year period,
was an average of .9%. The reduction is a result of increased review and
supervision of the applicable loan credits. There are no troubled debt
restructurings.
At December 31, 1996 and 1995, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $28,000 and $203,000,
respectively. These amounts are included in the nonaccrual loans reflected
below. The measure of impairment is based on the fair value of the collateral,
since foreclosure is probable. The related allowance for loan losses amounts to
$2,000 and $101,500 as of December 31, 1996 and 1995, respectively. The average
recorded investment in impaired loans was $98,000 and $220,000 during the years
ended December 31, 1996 and 1995, respectively.
The following shows the summary of nonperforming loans:
December 31,
------------------------------
(In Thousands) 1996 1995 1994
--------- ------- ------
Nonaccruing Loans $ 91 $ 203 $ -0-
Accrual Loans - 90 days or
more past due 752 1,022 618
------- ------- ------
Total Nonperforming Loans $ 843 $ 1,225 $ 618
======= ======= ======
Nonperforming Loans
as a % of Net Loans .6% 1.0% .6%
======= ======= ======
Allowance for Loan
Losses as a % of
Nonperforming Loans 163% 103% 191%
======= ======= ======
December 31,
------------------------------
(In Thousands) 1993 1992
--------- -------
Nonaccruing Loans $ 55 $ -0-
Accrual Loans - 90 days or
more past due 541 833
------- -------
Total Nonperforming Loans $ 596 $ 833
======= =======
Nonperforming Loans
as a % of Net Loans .6% .9%
======= =======
Allowance for Loan
Losses as a % of
Nonperforming Loans 187% 114%
======= =======
Other real estate owned includes assets acquired through foreclosure and loans
identified as in-substance foreclosures. In accordance with SFAS No. 114, a loan
is classified as in-substance foreclosure when the Corporation has taken
possession of the collateral regardless of whether formal foreclosure
proceedings take place. There were no loans previously classified as
in-substance foreclosures; consequently, the Corporation has made no
reclassifications of other real estate owned. Other real estate owned is valued
at the lower of the loan balance at the time of foreclosure or estimated fair
market value, net of selling costs, and is included in other assets. Gains and
losses resulting from the sale or writedown of other real estate and income and
expenses related to the operation of other real estate are recorded in other
expenses. Other real estate owned amounted to $117,000 and $-0- at December 31,
1996 and 1995, respectively. The other real estate expense, including cost
writedowns to fair value, that impacted the results of operations amounted to
$23,000 and $-0- for the years ended December 31, 1996 and 1995, respectively.
21
<PAGE>
Loan Quality/Allowance for Loan Losses
The loan portfolio is formally reviewed by an independent loan review officer on
an ongoing basis. This loan review consists of an annual review of significant
credit relationships exceeding $500,000, and a quarterly review of loans that
are 90 days or more past due, nonaccruing loans, previously rated loans, and
other specifically watched loans. In addition, the loan portfolio is reviewed
annually by the external independent auditors. Senior Management evaluates
credit risk on a quarterly basis, or more frequently, as circumstances dictate.
At December 31, 1996, the percent of loans secured by real estate was 86% of the
overall loan portfolio. Since 1995, the Corporation's policy generally requires
that the borrower provides 20% equity for first mortgage real estate loans and
20% equity for other loans secured by real estate. Prior to 1995, 30% equity was
required.
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. No adjustment to the allowance for loan losses was necessary as a
result of the Office of Comptroller's examination of the allowance as of
December 31, 1995.
The allowance for loan losses increased by $106,000 from the prior year and the
ratio of the allowance to net loans was 1.05% at December 31, 1996 and 1995. The
allowance for loan losses as a percentage of nonperforming loans reflected an
increase in coverage to 163% at December 31, 1996 as compared to 103% at
December 31, 1995. Management believes the current allowance for loan losses of
$1,371,000 to be adequate to meet any potential loan losses. Management expects
charge-offs, net of recoveries, for 1997 to approximate the historically low
levels of prior years.
Analysis of Allowance for Loan Losses
Years Ended December 31,
------------------------------
(In Thousands) 1996 1995 1994
-------- -------- --------
Average Total Loans
Outstanding
(Less Unearned Income) $124,483 $115,026 $105,427
======== ======== ========
Allowance for Loan Losses,
Beginning of Year $ 1,265 $ 1,182 $ 1,114
Loans Charged-Off During Year:
Real Estate-Mortgage* -0- -0- -0-
Installment Loans to
Individuals 47 57 30
Commercial, Industrial
and Agricultural 18 50 46
-------- ------- --------
Total Charge-Offs 65 107 76
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0- -0-
Installment Loans to
Individuals 11 7 19
Commercial, Industrial
and Agricultural 10 24 12
-------- ------- --------
Total Recoveries 21 31 31
-------- ------- --------
Net Loans Charged-Off 44 76 45
Provision for Loan Losses
Charged to Operations 150 159 113
-------- ------- --------
Allowance for Loan Losses,
End of Year $ 1,371 $ 1,265 $ 1,182
======== ======= ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .04% .07% .04%
======== ======= ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.05% 1.05% 1.09%
======== ======= ========
Years Ended December 31,
------------------------------
(In Thousands) 1993 1992
-------- --------
Average Total Loans
Outstanding
(Less Unearned Income) $ 98,319 $ 89,108
======== ========
Allowance for Loan Losses,
Beginning of Year $ 952 $ 873
Loans Charged-Off During Year:
Real Estate-Mortgage* 15 72
Installment Loans to
Individuals 88 66
Commercial, Industrial
and Agricultural 54 50
-------- -------
Total Charge-Offs 157 188
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0-
Installment Loans to
Individuals 44 30
Commercial, Industrial
and Agricultural 51 17
-------- -------
Total Recoveries 95 47
-------- -------
Net Loans Charged-Off 62 141
Provision for Loan Losses
Charged to Operations 224 220
-------- -------
Allowance for Loan Losses,
End of Year $ 1,114 $ 952
======== =======
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .06% .16%
======== =======
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.09% 1.01%
======== =======
* During this five-year period, there were no charge-offs or recoveries of real
estate construction loans.
The following sets forth an allocation of the allowance for loan losses by
category. The specific allocation in any particular category may be reallocated
in the future to reflect current conditions. Accordingly, Management considers
the entire allowance to be available to absorb losses in any category.
December 31, 1996
---------------------------------
Amount Percent of Loans
(In Thousands) in each Category
-------------- ----------------
Commercial, Industrial
and Agricultural $ 436 30%
Real Estate-
Residential Mortgages 648 63
Installment Loans to
Individuals 287 7
------ ----
$1,371 100%
====== ====
December 31, 1995
---------------------------------
Amount Percent of Loans
(In Thousands) in each Category
-------------- ----------------
Commercial, Industrial
and Agricultural $ 642 31%
Real Estate-
Residential Mortgages 410 63
Installment Loans to
Individuals 213 6
------ ---
$1,265 100%
====== ===
22
<PAGE>
Liquidity and Rate Sensitivity
The Corporation's objective is to maintain adequate liquidity while minimizing
interest rate risk. Adequate liquidity provides resources for credit needs of
borrowers, for depositor withdrawals, and for funding Corporate operations.
Sources of liquidity are maturing investment securities which include overnight
investments in federal funds sold, overnight correspondent bank borrowings on
various credit lines, payments on loans and mortgage-backed securities, and a
growing core deposit base, primarily certificates of deposit. Management
believes that its core deposits are fairly stable even in periods of changing
interest rates. There are no known trends or any known demands, commitments,
events or uncertainties that will result in, or that are reasonably likely to
result in, liquidity increasing or decreasing in any material way. Membership in
the FHLB provides the Bank with additional liquidity alternatives such as short-
or long-term funding on fixed or variable rate terms. Available funding from the
FHLB amounts to an overnight borrowing capacity of up to $6,532,000 and a
maximum available funding capacity of up to $75,478,000. In order to provide
funding for the Bank's loans and investments, the Bank borrowed from the FHLB
$9,046,000 during 1996 and $5,800,000 during 1995 at varying maturities and
terms. The outstanding borrowings from the FHLB amount to $14,846,000 and
$5,800,000 at December 31, 1996 and 1995, respectively. See maturity and rate
analysis in Notes 6 and 7 of the accompanying consolidated financial statements.
The objective of managing interest rate sensitivity is to maintain or increase
net interest income by structuring interest-sensitive assets and liabilities in
such a way that they can be repriced in response to changes in market interest
rates. The Corporation has consistently maintained a negative rate-sensitivity
position, in that rate-sensitive liabilities exceed rate-sensitive assets.
Therefore, in a period of declining interest rates the Corporation's net
interest income is generally enhanced versus a period of rising interest rates
where the Corporation's net interest margin is decreased.
In order to mitigate the risk of eroding profits during extended periods of
interest rate increases, a four-year demand feature is contained in the
documentation of approximately 70% of the residential loans that are secured by
a first lien position on real estate and an "on demand" clause is contained in a
majority of consumer installment loans. Within the limits of the respective loan
provisions, the Bank could demand payment on these loans in order to reprice
them when market rates fluctuate beyond managerially determined acceptable
limits. At this time, Management is not repricing these loans by utilizing the
demand features. Commencing January, 1995, new residential mortgage loans are
being underwritten without the four-year demand feature. As a long-range
strategy to increase rate-sensitive assets and as a substitute for the four-year
demand feature, the Bank has introduced new fixed rate mortgages with a seven-
or ten-year balloon feature. As of December 31, 1996, the Bank has $4,400,000 of
these loans in its loan portfolio.
The Bank minimized the risk of its negative rate-sensitivity position in 1996 by
the following: (1) by paying higher rates on intermediate term certificates in
order to maintain the average remaining term on certificates of deposit below
$100,000 from December 31, 1995 (approximately 13.5 months as of December 31,
1996); (2) by marketing short-term consumer loans that amortize more rapidly;
(3) by purchasing floating rate investment securities (over $23,000,000 at
amortized cost in the investment portfolio at December 31, 1996 representing an
increase of $11,400,000); and (4) by extending floating rate loans for new or
refinanced commercial and agricultural loans secured by real estate (over
$21,900,000 in the loan portfolio at December 31, 1996 representing an increase
of nearly $1,400,000). These floating rate loans have an initial fixed interest
rate for a period of two to five years and then will reprice annually. The
floating rate is tied to a nationally published cost of funds index or the
published Wall Street Journal prime lending rate. In 1994, the Bank became a
member of the Federal Home Loan Bank of Pittsburgh (FHLB). This membership will
provide the Bank with additional asset/liability management strategies to
minimize the Bank's interest rate risk and provide the Bank with additional
liquidity alternatives. The FHLB provides alternatives for overnight and
short-term Bank investments and provides funding lines and loan advances at
variable or fixed interest rates and different maturity terms. The Bank borrowed
from the FHLB over $9,000,000 during 1996 with $5,000,000 maturing or repricing
in 1997.
The following analysis reflects cumulative rate-sensitive assets of $76,656,000
as compared to cumulative rate-sensitive liabilities of $93,546,000 as of the
one-year time frame. The Bank's cumulative interest-sensitivity gap for the
one-year time frame is a negative 8.4% of total assets at December 31, 1996, as
compared to a target range of plus 15% to negative 15%, and as compared to a
negative 8.2% at December 31, 1995. In order to sustain the Bank's net interest
margin during a significant or sudden rise or decline in interest rates, the
Bank is continuing to monitor its one-year cumulative interest-sensitivity gap.
Commencing May 1994, the Bank engaged an asset/liability management consulting
firm to prepare periodic income simulation models based on current and projected
rate assumptions in order to improve the Bank's method of quantifying the net
interest income at risk due to interest rate changes and to consult in the
management of liquidity, interest rate risk and capital utilization. See the
previous discussion and the discussion contained in the Net Interest Income
section. The interest rate-sensitivity analysis for the Bank at December 31,
1996, is as follows:
Interest Rate Sensitivity
1 - 90 91 - 365 1 - 5 5 - 10
(In Thousands) Days Days Years Years
--------- --------- -------- --------
ASSETS
Investment Securities at
amortized cost and
Federal Funds Sold $ 15,207 $ 21,163 $ 13,805 $ 2,979
Loans, Net of
Unearned Income 18,033 22,253 57,989 18,596
-------- -------- -------- -------
TOTAL $ 33,240 $ 43,416 $ 71,794 $21,575
======== ======== ======== =======
LIABILITIES
Interest-Bearing Demand $ 6,756 $ 9,221 $ -0- $ -0-
Savings 1,705 10,312 -0- -0-
Time 19,202 39,361 27,556 -0-
Borrowings 2,989 4,000 8,346 -0-
-------- -------- -------- --------
TOTAL $ 30,652 $ 62,894 $ 35,902 $ -0-
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap $ 2,588 $(16,890) $ 19,002 $ 40,577
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap as a
Percent of Total
Assets 1.3% (8.4%) 9.4% 20.1%
======== ======== ======== ========
Over 10
(In Thousands) Years Total
--------- ---------
ASSETS
Investment Securities at
amortized cost and
Federal Funds Sold $ 6,370 $ 59,524
Loans, Net of
Unearned Income 13,520 130,391
------- --------
TOTAL $19,890 $189,915
======= ========
LIABILITIES
Interest-Bearing Demand $21,415 $ 37,392
Savings 12,113 24,130
Time -0- 86,119
Borrowings -0- 15,335
------- --------
TOTAL $33,528 $162,976
======= ========
Cumulative Interest-
Sensitivity Gap $26,939
=======
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 13.3%
=======
23
<PAGE>
Investments are reflected in the previous schedule generally based on the
security's call date, where the call on the security is likely when compared to
the current interest rate yield curve. Loans and mortgage-backed securities are
reflected based on expected normal amortization plus estimates for prepayments
and refinancings.
Interest-Bearing Demand deposits include money market accounts and NOW accounts.
Based on an historical analysis during periods of rising interest rates, a
portion of these deposits will invest in higher yielding instruments. This
portion is determined to be sensitive to interest rate fluctuations in the
earliest time frames. In addition, a percentage of the deposits that remain
constant is also considered sensitive to interest rate fluctuations in order to
account for the interest rate variations in these deposits as compared to the
more sudden and significant variations of interest rates on short-term loans and
time deposits. Similar computations were made for savings deposits.
Deposits
The average amounts of deposits are summarized below:
Years Ended December 31,
--------------------------------
(In Thousands) 1996 1995 1994
---------- ----------- ---------
Demand Deposits $ 14,506 $ 13,336 $12,257
Interest-Bearing Demand Deposits 33,924 33,195 37,012
Savings Deposits 23,343 25,317 30,473
Time Deposits 82,701 68,048 58,384
--------- -------- --------
Total $ 154,474 $139,896 $138,126
========= ======== ========
The following is a breakdown of maturities of time deposits of $100,000
or more:
December 31,
------------------------------
(In Thousands) 1996 1995 1994
---------- ---------- --------
Three months or less $ 9,765 $ 5,250 $ 2,815
Over three months through six months 1,411 1,532 1,940
Over six months through twelve months 4,312 2,528 2,024
Over twelve months 2,399 3,269 1,453
-------- ------- -------
Total $ 17,887 $12,579 $ 8,232
======== ======= =======
Stockholders' Equity
The Corporation maintains ratios that are well above the minimum total capital
levels required by federal regulatory authorities including the risk-based
capital guidelines. The average stockholders' equity to average assets ratio,
which measures the adequacy of capital, decreased to 11.40% for 1996, as
compared to 12.24% for 1995. The decrease in this capital ratio is a result of
14.1% growth in average assets for the year, an increase in the dividend payout
ratio and treasury stock purchases in the amounts of $119,000 in 1996 and
$360,000 in 1995. Average stockholders' equity grew by 6.3% from 1995 to 1996,
as compared to 8.9% from 1994 to 1995. The dividend payout ratio, which
represents the percentage of earnings returned to the stockholders in the form
of cash dividends, was 34.7% for 1996, as compared to 26.7% for 1995.
There are no material commitments for capital expenditures. There are no known
trends or uncertainties including regulatory items that are expected to have a
material impact on the capital resources of the Corporation for 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 December 31,
1996, as compared to the Bank's current risk-based capital ratio of 18.12%. 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:
(In Thousands) December 31, December 31,
1996 1995
----------------------------
Tier I - Total Stockholders' Equity $ 21,186 $ 19,894
Tier II - Allowance for Loan Losses 1,371 1,265
-------- --------
Total Qualifying Capital $ 22,557 $ 21,159
======== ========
Risk-adjusted On-balance-sheet
Assets $118,844 $107,598
Risk-adjusted Off-balance-sheet
Exposure 5,666 3,428
-------- --------
Total Risk-adjusted Assets $124,510 $111,026
======== ========
Ratios:
Tier I Capital Ratio - Actual 17.02% 17.92%
Minimum Required 4.00% 4.00%
Total Capital Ratio - Actual 18.12% 19.06%
Minimum Required 8.00% 8.00%
Total Risk-Based Capital in Excess of
the Minimum Regulatory Requirement $ 12,596 $ 12,277
======== ========
24
<PAGE>
The Corporation is subject to restrictions on the payment of dividends to its
stockholders pursuant to the Pennsylvania Business Corporation Law of 1988, as
amended (the "BCL"). The BCL operates generally to preclude dividend payments if
the effect thereof would render the Corporation insolvent, or result in negative
net worth, as defined. As a practical matter, the Corporation's payment of
dividends is contingent upon its ability to obtain funding in the form of
dividends from the Bank. Payment of dividends to the Corporation by the Bank is
subject to the restrictions set forth in the National Bank Act. Generally, the
National Bank Act would permit the Bank to declare dividends in 1997 of
approximately $4,073,000, plus an amount equal to the net profits of the Bank in
1997 up to the date of any such dividend declaration.
During 1995, the Corporation adopted and implemented a dividend reinvestment
plan. As of February 5, 1997, the enrollment is 14.8% of the shares outstanding.
The plan is currently estimated to increase capital in the amount of $130,000 in
1997.
Regulatory Activity
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 and the Riegle Community Development and Regulatory Improvement Act may
have a significant impact upon the Corporation. The key provisions pertain to
interstate banking and interstate branching as well as a reduction in the
regulatory burden on the banking industry. Since September 1995, bank holding
companies may acquire banks in other states without regard to state law.
Pennsylvania recently amended the provisions of its Banking Code to authorize
full interstate banking and branching under Pennsylvania law and to facilitate
the operations of interstate banks in Pennsylvania.
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.
On September 30, 1996, the President signed into law the Deposit Insurance Funds
Act of 1996 to recapitalize the Savings Association Insurance Fund ("SAIF")
administered by the Federal Deposit Insurance Corporation ("FDIC") and to
provide for repayment of the FICO (Financial Institution Collateral Obligation)
bonds issued by the United States Treasury Department. The FDIC levied a
one-time special assessment on SAIF deposits equal to 65.7 cents per $100 of the
SAIF-assessable deposit base as of March 31, 1995. During the years 1997, 1998,
and 1999, the Bank Insurance Fund ("BIF") will pay $322 million of FICO debt
service, and SAIF will pay $458 million.
During 1997, 1998 and 1999, the average regular annual deposit insurance
assessment is estimated to be about 1.29 cents per $100 of deposits for BIF
deposits and 6.44 cents per $100 of deposits for SAIF deposits. Individual
institution's assessments will continue to vary according to their capital and
management ratings. As always, the FDIC will be able to raise the assessments as
necessary to maintain the funds at their target capital ratios provided by law.
After 1999, BIF and SAIF will share the FICO costs equally. Under current
estimates, BIF and SAIF assessment bases would each be assessed at the rate of
approximately 2.43 cents per $100 of deposits. The FICO bonds will mature in
2018-2019, ending the interest payment obligation.
The law also provides that BIF and SAIF are to merge in order to form the
Deposit Insurance Fund ("DIF") at the beginning of 1999, provided that there are
no SAIF institutions in existence at that time. Merger of the Funds will require
state laws to be amended in those states authorizing savings associations to
eliminate that authorization (state chartered savings banks will not be
affected). This provision reflects Congress's apparent intent to merge thrift
and commercial bank charters by January 1999; however, no law has yet been
enacted to achieve that purpose.
Based on current deposit levels, Management expects that the increase in the
FDIC assessment rate will adversely impact results of operations, net of income
taxes, in a currently estimated amount of $12,000 in 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 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.
The Bank is routinely examined by the Comptroller of the Currency and no impact
is anticipated on current or future operations and financial position. The last
Community Reinvestment Act performance evaluation by the same agency resulted in
a rating of "Outstanding Record of Meeting Community Credit Needs."
25
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
Union National Financial Corporation
Subsidiaries of Registrant
Subsidiary Incorporation
- ---------- -------------
The Union National Mount Joy Bank National Banking Association
<PAGE>
Consent of Independent Auditors
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of Union National Financial Corporation of our report dated January 17,
1997, included in the 1996 Annual Report to Stockholders of Union National
Financial Corporation.
We also consent to the incorporation by reference in the Registration
Statement (Registration No. 33-80093) of Union National Financial Corporation
and in the related Prospectus of our report dated January 17, 1997, with respect
to the consolidated financial statements of Union National Financial Corporation
Incorporated by reference in this Annual Report (Form 10-K) for the year ended
December 31, 1996.
/s/ Trout, Ebersole & Groff, LLP
---------------------------------
March 21, 1997 TROUT, EBERSOLE & GROFF, LLP
Lancaster, Pennsylvania Certified Public Accountants
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,073
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,790
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,766
<INVESTMENTS-CARRYING> 17,124
<INVESTMENTS-MARKET> 17,228
<LOANS> 130,391
<ALLOWANCE> 1,371
<TOTAL-ASSETS> 203,472
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0
0
<COMMON> 599
<OTHER-SE> 21,624
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<INTEREST-OTHER> 139
<INTEREST-TOTAL> 14,218
<INTEREST-DEPOSIT> 5,779
<INTEREST-EXPENSE> 6,380
<INTEREST-INCOME-NET> 7,838
<LOAN-LOSSES> 150
<SECURITIES-GAINS> 2
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<INCOME-PRETAX> 2,548
<INCOME-PRE-EXTRAORDINARY> 2,548
<EXTRAORDINARY> 0
<CHANGES> 0
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<EPS-PRIMARY> .92
<EPS-DILUTED> .92
<YIELD-ACTUAL> 4.73
<LOANS-NON> 91
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<LOANS-TROUBLED> 0
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<ALLOWANCE-CLOSE> 1,371
<ALLOWANCE-DOMESTIC> 1,371
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 654
</TABLE>
