FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
_________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ ________________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy,Pennsylvania 17552
__________________________________________________________ _____
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(former name, former address, & former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court. Yes [ ] No[ ]
_________________
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,488,927 shares of $.25 (par) common stock were
_________________
outstanding as of July 29, 1997.
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<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
____
PART I - FINANCIAL INFORMATION:
______________________
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4
- Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-12
PART II - OTHER INFORMATION 13
_________________
Signature Page 14
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 6/30/97 12/31/96
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $6,668 $6,073
Federal Funds Sold 2,990 4,790
Investment Securities Held to Maturity
(Market Value - 1997-$16,723;1996-$17,228) 16,623 17,124
Investment Securities Available for Sale 39,305 37,766
Loans(Net of Unearned Income) 140,300 130,391
Less: Allowance for Loan Losses (1,442) (1,371)
______________________
Total Net Loans 138,858 129,020
Premises and Equipment - Net 5,580 5,741
Accrued Interest Receivable 1,436 1,312
Deferred Income Taxes 191 252
Investment in Limited Partnerships 966 1,003
Other Assets 431 391
______________________
TOTAL ASSETS $213,048 $203,472
======================
LIABILITIES
Deposits:
Noninterest-Bearing $16,582 $16,887
Interest-Bearing 152,908 147,626
______________________
Total Deposits 169,490 164,513
Short-Term Borrowing 900 2,989
Long-Term Debt 18,351 12,676
Accrued Interest Payable 968 883
Other Liabilities 374 188
_____________________
TOTAL LIABILITIES 190,083 181,249
STOCKHOLDERS' EQUITY*
Common Stock (Par Value $.25) 629 599
Shares: Authorized - 20,000,000; Issued -
2,515,587 in 1997 (2,394,164 in 1996)
Outstanding - 2,489,547 in 1997 (2,373,222
in 1996)
Surplus 4,910 1,968
Retained Earnings 17,718 19,916
Unrealized gain/(loss) on securities
available for sale, net of tax 192 103
Less: Treasury Stock - at cost
(26,040 shares in 1997 and 20,942 shares
in 1996) (484) (363)
______________________
TOTAL STOCKHOLDERS' EQUITY 22,965 22,223
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $213,048 $203,472
======================
* The Stockholders' Equity and share information reflects the 5%
stock dividend declared by the Corporation's Board of Directors
on April 10, 1997, payable on May 15, 1997 to stockholders of
record on April 28, 1997.
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended June 30,
_______________________________
(In Thousands, except Per Share Data) 1997 1996
_______________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,063 $2,768
Investment Securities:
Taxable 677 517
Exempt from Federal Taxes 200 205
Deposits in Banks 1 1
Federal Funds Sold 54 22
______________________
Total Interest Income 3,995 3,513
INTEREST EXPENSE
Deposits 1,527 1,427
Short-Term Borrowing 24 25
Long-Term Debt 270 106
______________________
Total Interest Expense 1,821 1,558
______________________
Net Interest Income 2,174 1,955
PROVISION for LOAN LOSSES 101 41
______________________
Net Interest Income after Provision
for Loan Losses 2,073 1,914
OTHER OPERATING INCOME
Trust Income 30 23
Service Charges on Deposit Accounts 89 80
Other Service Charges, Commissions, Fees 87 73
Investment Securities Gains 4 2
Other Income 8 9
______________________
Total Other Operating Income 218 187
OTHER OPERATING EXPENSES
Salaries and Wages 682 642
Retirement Plan and Other Employee Benefits 214 198
Net Occupancy Expense 134 131
Furniture and Equipment Expense 113 92
FDIC Insurance Assessment 5 1
Other Operating Expenses 430 415
______________________
Total Other Operating Expenses 1,578 1,479
______________________
Income before Income Taxes 713 622
PROVISION for INCOME TAXES 144 80
______________________
NET INCOME for PERIOD $569 $542
======================
PER SHARE INFORMATION*
Net Income for Period $0.23 $0.22
Cash Dividends $0.086 $0.076
Average Common Shares Outstanding 2,490,275 2,493,919
Six Months Ended June 30,
_______________________________
(In Thousands, except Per Share Data) 1997 1996
_______________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $5,971 $5,503
Investment Securities:
Taxable 1,316 962
Exempt from Federal Taxes 411 400
Deposits in Banks 2 2
Federal Funds Sold 99 48
______________________
Total Interest Income 7,799 6,915
INTEREST EXPENSE
Deposits 3,021 2,807
Short-Term Borrowing 66 32
Long-Term Debt 477 208
______________________
Total Interest Expense 3,564 3,047
______________________
Net Interest Income 4,235 3,868
PROVISION for LOAN LOSSES 112 49
______________________
Net Interest Income after Provision
for Loan Losses 4,123 3,819
OTHER OPERATING INCOME
Trust Income 60 47
Service Charges on Deposit Accounts 172 154
Other Service Charges, Commissions, Fees 165 139
Investment Securities Gains 4 2
Other Income 54 54
______________________
Total Other Operating Income 455 396
OTHER OPERATING EXPENSES
Salaries and Wages 1,355 1,283
Retirement Plan and Other Employee Benefits 440 403
Net Occupancy Expense 307 293
Furniture and Equipment Expense 201 177
FDIC Insurance Assessment 10 2
Other Operating Expenses 848 786
______________________
Total Other Operating Expenses 3,161 2,944
______________________
Income before Income Taxes 1,417 1,271
PROVISION for INCOME TAXES 282 172
______________________
NET INCOME for PERIOD $1,135 $1,099
======================
PER SHARE INFORMATION*
Net Income for Period $0.46 $0.44
Cash Dividends $0.171 $0.138
Average Common Shares Outstanding 2,491,310 2,492,859
* Per Share information reflects the 5% stock dividend declared
by the Corporation's Board of Directors on April 10, 1997,
payable on May 15, 1997 to stockholders of record on April 28,
1997.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Six Months Ended June 30,
_____________________________
(In Thousands) 1997 1996
_____________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,135 $1,099
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciating and Amortization 254 254
Provision for Loan Losses 112 49
Investment Securities (Gains)/Losses (4) (2)
Provision for Deferred Income Taxes 14 14
(Increase)/Decrease in Accrued
Interest Receivable (123) (131)
(Increase)/Decrease in Other Assets (25) (106)
Increase/(Decrease) in Other Liabilities 272 349
_______________________
Net Cash Provided by Operating Activities 1,635 1,526
CASH FLOWS from INVESTING ACTIVITIES
Net (Increase)/Decrease in Federal Funds Sold 1,800 (1,280)
Proceeds from Sales of
Available for Sale Securities 3,801 1,996
Proceeds from Maturities of
Available for Sale Securities 9,803 6,408
Proceeds from Maturities of
Held to Maturity Securities 1,823 512
Purchases of Available for Sale Securities (15,005) (17,353)
Purchases of Held to Maturity Securities (1,323) (3,318)
Loans Made to Customers, Net of
Principal Collected on Loans (9,950) (4,264)
Purchases of Property and Equipment (70) (147)
_______________________
Net Cash (Used in)Investing Activities (9,121) (17,446)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 1,565 2,019
Net Increase/(Decrease) in Certificates
of Deposits 3,412 11,421
Net Increase/(Decrease) in Short-Term
Borrowing (2,089) (268)
Proceeds from Issuance of Long-Term Debt 5,675 1,535
Acquisition of Treasury Stock (121) 0
Issuance of Treasury Stock 68 72
Cash Dividends Paid (429) (344)
_______________________
Net Cash Provided by (Used in)
Financing Activities 8,081 14,435
_______________________
Net Increase/(Decrease) in Cash
and Cash Equivalents 595 (1,485)
CASH and CASH EQUIVALENTS -
Beginning of Period 6,073 7,214
_______________________
CASH and CASH EQUIVALENTS - End of Period $6,668 $5,729
=======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $2,959 $2,693
Interest Paid - Other 520 222
Income Taxes 275 110
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Retirement of Treasury Stock (4,000 shares
1996) $0 $62
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is
unaudited and subject to year-end adjustment and audit.
However, in the opinion of management, the information
reflects all adjustments necessary to present fairly the
financial condition and results of operations for the latest
period. All such adjustments were of a normal, recurring
nature.
2. These statements should be read in conjunction with notes to
the financial statements contained in the 1996 Annual Report
to Stockholders.
3. Management considers the allowance for loan losses (reserve)
to be adequate at this time.
4. No shares of common stock are reserved for issuance in the
event of conversions or the exercise of warrants, options or
other rights, except as follows: 246,000 shares which are
reserved for issuance under the Corporation's 1988 and 1997
Stock Incentive Plans, 100,000 shares which are reserved for
issuance under the Corporation's 1997 Employee Stock
Purchase Plan, and 157,500 shares which are reserved for
issuance under the Corporation's Dividend Reinvestment Plan.
As of June 30, 1997, options to purchase 4,830 shares have
been granted under the Corporation's 1988 Stock Incentive
Plan. The exercise price for such options is $23.27. No
options have been exercised as of June 30, 1997 under this
plan. As of June 30, 1997, options to purchase 5,000 have
been granted under the Corporation's 1997 Employee Stock
Purchase Plan. The current exercise price for such options
is $19.55. As of June 30, 1997, 175 options have been
exercised under the plan.
5. The results of operations for the six month period ended
June 30, 1997 are not necessarily indicative of the results
to be expected for the full year.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in its accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company (the Corporation), and its
wholly-owned subsidiary, Union National Mount Joy Bank (the
Bank). The Corporation's consolidated financial condition and
results of operations consist almost entirely of the Bank's
financial condition and results of operations. Such financial
condition and results of operations are not intended to be
indicative of future performance. This discussion should be read
in conjunction with the 1996 Annual Report.
In addition to historical information, this report for the six
months ended June 30, 1997 contains forward-looking statements.
The forward-looking statements contained herein are subject to
certain risks and uncertainties that could cause actual results
to differ materially from those projected in the forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Corporation undertakes
no obligation to publicly revise or update these forward-looking
statements to reflect events or circumstances that arise after
the date hereof. Readers should carefully review the risk factors
described in other documents the Corporation files from time to
time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q to be filed by the Corporation in
1997, and any Current Reports on Form 8-K filed by the
Corporation.
Results of Operations
_____________________
Overview
Consolidated net income for the six months ended June 30, 1997
was $1,135,000, an increase of 3.3%, as compared to the
consolidated net income of $1,099,000 for the same period in
1996.
Consolidated net income for the three months ended June 30, 1997
was $569,000, an increase of 5.0%, as compared to the
consolidated net income of $542,000 for the same period in 1996.
On a per share basis, net income for the six months ended June
30, 1997 was $.46, as compared to $.44 for the same period in
1996. Per share information reflects the 5% stock dividend
declared by the Corporation's Board of Directors on April 10,
1997, payable on May 15, 1997 to stockholders of record on April
28, 1997.
Results of operations for the six months ended June 30, 1997 as
compared to the same period in 1996 were impacted by the
following items: (1) Net income was positively impacted by a
10.1% 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 as compared to the same period in 1996; (3) net income
was negatively impacted by a 7.4% increase in other operating
expenses; and (4) net income was negatively impacted by a
reduction in income tax credits available in 1997 as compared to
1996. The above items are quantified and discussed in further
detail under their respective sections below.
Net income as a percent of total average assets, also known as
return on average assets (ROAA), was 1.10% on an annualized basis
for the six months ended June 30, 1997, as compared to 1.21% for
the same period in 1996. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROAE), was 10.1% on an annualized basis for the six months ended
June 30, 1997, as compared to 10.4% for the same period in 1996.
The growth in loans is considered a material favorable trend of
the Corporation which Management expects to continue for the
remainder of 1997. Management expects the growth in deposits for
1997 to be comparable to historic growth rates. Management has
taken specific actions to enhance the Bank's competitive position
for core deposits. These actions include the implementation of a
formal officer calling program to enhance the Bank's competitive
position for loans, deposits and other financial services in the
communities it serves and the implementation for 1997 of a bank-wide incentive
program for employee participation based on the level of net income
<PAGE>
increase and the growth in deposits and loans. Other actions
include the strategic promotion of the Bank's branch offices in
light of continued bank consolidation in the Bank's market area;
the promotion of intermediate-term certificates of deposit
including the reintroduced push-button certificate allowing a
one-time increase in the interest rate during the term of the
certificate; the promotion of a certificate of deposit which has
a no-penalty for early withdrawal feature during the life of the
certificate; and a special promotion of the Bank's checking
account products. For the six months ended June 30, 1997, the
Bank received new funds exceeding $2,400,000 from special
certificate of deposit promotions. The funding for the loan
growth is further discussed under the section on Liquidity.
Management expects the loan growth to continue for the following
reasons: (1) lending rates are at generally affordable rates for
prospective borrowers; (2) implementation of a formal officer
calling program including bank wide business development efforts;
(3) further enhancement and promotion of the new loan product
first introduced in September, 1996, home equity lines of credit;
(4) economic stability of Lancaster County as discussed later in
this section; and (5) continued population growth in the Bank's
market area.
It is anticipated that economic activity in the Bank's market
area during 1997 appears favorable due to the availability of
generally low lending rates and continued construction activity.
Current long-term interest rates remain below levels of late 1994
and early 1995. This decline in long-term interest rates is
expected to augment economic activity. The overall effects of
current and past economic conditions as well as other factors can
be seen by a mild lessening of certain borrowers' financial
strength. Management is monitoring these general and specific
trends closely. Their various effects are discussed later under
the section on Credit Risk and Loan Quality.
Net Interest Income
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the six months ended June 30, 1997
increased by $380,000, or 9.3%, over the same period in 1996.
Commercial and residential average loan growth of $12,313,000 and
average investment security growth of $10,700,000 was funded by
the growth in average deposits of $12,774,000 and by the growth
in average borrowings of $10,692,000. The additional borrowings
represented fixed-rate and variable-rate advances. Average
earning assets increased in the amount of $24,922,000 over the
same period from 1996. The volume growth in earning assets and
interest-bearing liabilities contributed to the increase in net
interest income by the amount of $402,000.
Commencing July 1995, the Federal Reserve Bank began loosening
the monetary supply causing the prime interest rate to decrease
from 9% to 8.25% by the first quarter of 1996. The immediate
impact of these short-term interest rate decreases was to
decrease the interest rates on loans that adjust according to the
prime lending rate and on reinvested funds from maturing
investment securities. The overall interest rate on the average
total earning assets decreased to 8.3% for the current period as
compared to 8.4% for the same period last year. The decline in
short-term interest rates had the effect of a slight decline in
the average interest rate on the certificate of deposit
portfolio. However, the increase in the mix of interest-bearing
liabilities in the form of long-term debt has the overall effect
of increasing the total cost of funds. See Management's
discussion below concerning the anticipated impact of these
interest rate fluctuations to the results of operations for 1997.
The overall interest rate on the average interest-bearing
liabilities increased to 4.3% for the current period, as compared
to 4.2% for the same period last year. The net effect of all
interest rate fluctuations and funding changes was to decrease
net interest income in the amount of $22,000 for the current
period over the same period in 1996.
The Bank retains an outside consulting group to assist in
monitoring its interest rate risk using income simulation models
on a quarterly basis. Based on the models, it is currently
anticipated that a two percent general rise or decline in
interest rates over a one-year period will have an immaterial
impact to the Bank's net interest income over the next twelve
months. In order to enhance the net interest income in future
periods, Management has entered into transactions that increase
earning assets funded by advances from the Federal Home Loan Bank
of Pittsburgh (FHLB). The structure of these transactions are
similarly matched with investment securities and loans in order
to limit net interest income exposure to interest rate
<PAGE>
fluctuations. As of June 30, 1997, the Bank has received short-term and long-
term fixed rate advances of $18,161,000 from its available credit at the FHLB
for purposes of funding loan demand and mortgage-backed security purchases.
The total advances have a current average effective rate of 5.73% with
maturities ranging from August, 1998 to March, 2002. Additional asset/liability
management strategies available from the FHLB include access to
interest rate caps, floors and swaps. As of June 30, 1997, the
Bank did not utilize any of these aforementioned strategies.
Other interest rate risk management tools available to the Bank
include the promotion and development of specific loan and
deposit products and the structuring of its investment portfolio.
As of September, 1996, Management offered a new loan product,
home equity lines of credit, that will provide additional rate
sensitive assets. At June 30, 1997, the total lines of credit
balances outstanding amounted to $1,099,000.
For the remaining months of 1997, Management expects no material
change to the effective interest rate in the loan and investment
portfolios as compared to their current levels. This is a result
of the stabilization of the financial markets, as short-term and
long-term interest rates are currently comparable to the interest
rates as of December, 1996. In addition, Management expects no
material change in the effective rate on its interest-bearing
liabilities for the remaining months of 1997. The growth in
earning assets during 1996 and the first six months of 1997 is
expected to have a positive impact on the net interest margin for
the remaining months of 1997. Although the effective interest
rate impact of expected cash flows on investments and of renewing
certificates of deposit can be reasonably estimated at current
interest rate levels, the yield curve during the remaining months
of 1997, the options selected by customers, and the future mix of
the loan, investment and deposit products in the Bank's
portfolios may significantly change the estimates used in the
simulation models. However, based on the Bank's current model and
estimates as of June 30, 1997, Management expects an overall
impact to the net interest margin for the remaining months of
1997 to be immaterial, as compared to the same period in 1996.
Provision for Loan Losses
The provision for loan losses was $112,000 and $49,000 for the
six months ended June 30, 1997 and 1996, respectively. Net
charge-offs for the six months ended June 30, 1997 amounted to
$41,000 as compared to $5,000 for the same period in 1996. The
increase in the provision over the same period of last year is a
result of the additional net charge-offs and the increase in
loans, primarily residential and commercial mortgage loans,
amounting to $9,909,000 for the current period as compared to
$4,260,000 for the same period of last year. Future adjustments
to the allowance, and consequently, the provision for loan
losses, may be necessary if economic conditions or loan credit
quality differ substantially from the assumptions used in making
Management's evaluation of the level of the allowance for loan
losses as compared to the balance of outstanding loans.
Other Operating Income
Other operating income for the six months ended June 30, 1997 was
$455,000, representing an increase of $59,000, or 14.9%, over the
same period in 1996. Contributing to this increase were
additional earnings resulting from an increase in ATM usage fees
and from an increase in estate settlements generating additional
trust income.
Other Operating Expenses
Other operating expenses for the six months ended June 30, 1997
increased by $217,000, or 7.4%, over the same period in 1996. Of
this increase, employee salaries and wages and related fringe
benefits increased by $109,000, or 6.5%, over the same period in
1996. This increase was essentially due to new staff positions
for teller training and loan administration and due to annual
merit, cost of living, and health care cost increases.
Occupancy, furniture and equipment expenses for the six months
ended June 30, 1997 increased by $38,000, or 8.1%, over the same
period in 1996. This increase was primarily due to other real
estate expense incurred on a foreclosed property amounting to
$34,000 and due to an increase in equipment service agreement
costs offset by a reduction in snow removal costs in the amount
of $20,000 due to the milder 1997 Winter season as compared to
1996.
<PAGE>
The FDIC Insurance Assessment expense increased by $8,000 for the
six months ended June 30, 1997, as compared to the same period in
1996. The FDIC Insurance Assessment rate increased to 1.29 cents
for every $100 in deposits as of January 1, 1997 from $500 per
quarter in 1996. See further discussion under the Section on
Regulatory Activity concerning the expected impact to the FDIC
Insurance Assessment rate for 1997.
Other operating expenses for the six months ended June 30, 1997,
increased by $62,000, or 7.9%, over the same period in 1996.
Contributing factors to the increase in other operating expenses
as compared to the same period in 1996 included an increase in
director fees, in volume increases impacting the Pennsylvania
shares tax, in consulting fees, in software maintenance costs and
in ATM locations and transactions.
Income Taxes
The Corporation's income tax expense increased by $110,000 for
the six months ended June 30, 1997 to $282,000 from $172,000 for
the same period in 1996. The effective tax rate was 19.9% and
13.5% for the six months ended June 30, 1997 and 1996,
respectively. The increase in income tax expense and the
effective tax rate was due to the increase in corporate earnings
before income taxes and a reduction in available federal income
tax credits from 1996. The tax credits result from the
Corporation's $632,500, 49.5%, investment in Nissly Chocolate
Factory Apartments Associates, which was formed to rehabilitate
the former Nissly Chocolate Factory into 28 housing units to be
marketed to seniors with low-to-moderate incomes. Total income
tax credits from the project amounted to $34,000 of low income
housing credits for the six months ended June 30, 1997 as
compared to $101,000 of historic credits for the same period in
1996. Currently, the effective tax rate of the Corporation for
the remaining months of 1997 is expected to be more than the
effective tax rate in 1996 due to the expected change in Nissly's
tax credits from 1996.
Regulatory Activity
___________________
Recently, Pennsylvania enacted a law to permit State chartered
financial institutions to sell insurance. This follows a United
States Supreme Court decision in favor of nationwide insurance
sales by banks and which also bars states from blocking insurance
sales by national banks in towns with populations of no more than
5,000. Consequently, banks are permitted to sell insurance in
Pennsylvania. The Office of the Comptroller of the Currency has
issued guidelines for national banks to sell insurance. The Bank
is evaluating its options regarding the sale of insurance.
Congress is currently considering legislative reform centered on
repealing the Glass-Steagall Act which prohibits commercial banks
from engaging in the securities industry. Consequently, equity
underwriting activities of banks may increase in the near future.
However, the Corporation does not currently anticipate entering
into these activities.
Since the Deposit Insurance Funds Act of 1996 was enacted, it is
anticipated that changes in the FDIC assessment rate will
adversely impact results of operations, net of income taxes, in a
currently estimated amount of $7,000 for the remaining months of
1997.
The Act also provides regulatory relief to the financial services
industry relative to environmental risks, frequency of
examinations, and the simplification of forms and disclosures.
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of,
and restrictions on, the business of the Corporation and the
Bank. It cannot be predicted whether such legislation will be
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
<PAGE>
numerous and multiple federal and state laws and regulations does
have, and in the future may have, a negative impact on the
Corporation's results of operations.
Further, the business of the Corporation is also affected by the
state of the financial services industry in general. As a result
of legal and industry changes, Management predicts that the
industry will continue to experience an increase in
consolidations and mergers as the financial services industry
strives for greater cost efficiencies and market share.
Management also expects increased diversification of financial
products and services that may be offered by the Bank. Management
believes that such consolidations and mergers, and product and
service diversification may enhance its competitive position as a
community bank.
Changes in Accounting Standards
_______________________________
In June 1996, the Financial Accounting Standards Board issued
Statement No. 125 (SFAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities." This Statement becomes effective for transfers and
servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and shall be applied
prospectively. However, Statement No. 127 was issued December,
1996, to defer certain provisions of SFAS No. 125 for
transactions occurring after December 31, 1997. SFAS No. 125
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. The accounting approach is called the financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished.
There was no incidence of coverage under SFAS No. 125 with
respect to applicable provisions for the first six months of
1997. The Corporation does not expect this Statement to have a
material effect on the liquidity, results of operations or
capital resources when the applicable provisions become effective
in 1998.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement No. 128 (SFAS No. 128), "Earnings per Share."
This Statement establishes standards for computing and presenting
earnings per share. SFAS No. 128 replaces the presentation of
primary earnings per share with a dual presentation of basic and
diluted earnings per share. Basic earnings per share excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. This Statement is
effective for financial statements issued for periods ending
after December 15, 1997, and earlier application is not
permitted. The Corporation does not expect this Statement to have
a material effect on its earnings per share computations.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 129, (SFAS No. 129), "Disclosure of Information
about Capital Structure." This Statement establishes standards
for disclosing information about an entity's capital structure.
This Statement is effective for financial statements for periods
ending after December 15, 1997. The adoption of this Statement is
not expected to have a material effect on the financial position
or results of operations of the Corporation.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, (SFAS No. 130), "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose
financial statements. This Statement requires that all items that
are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. The Corporation has not
completed the analysis required to estimate the impact of this
Statement.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." This Statement
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about
<PAGE>
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and
major customers. This Statement supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise", but
retains the requirement to report information about major
customers. It amends FASB Statement No. 94, "Consolidation of All
Majority-Owned Subsidiaries", to remove the special disclosure
requirements for previously unconsolidated subsidiaries. The
Statement is effective for fiscal years beginning after December
15, 1997. The Corporation has not completed the analysis required
to estimate the impact of this Statement.
Credit Risk and Loan Quality
____________________________
Other than as described herein, Management does not believe there
are any trends, events or uncertainties which are reasonably
expected to have a material impact on future results of
operation, liquidity or capital resources. Further, based on
known information, Management believes that the effects of
current and past economic conditions and other unfavorable
specific business conditions may result in the inability of loans
amounting to $2,026,000 to comply with their respective repayment
terms. These loans are well secured essentially with real estate,
equipment and vehicles. Management currently believes that
potential losses on these loans have already been provided for in
the Allowance for Loan Losses. The borrowers are of special
mention since they have shown a decline in financial strength and
payment quality. Management has increased its monitoring of the
borrowers' financial strength. In addition, Management expects
that a portion of these loans will be classified as nonperforming
in 1997.
At June 30, 1997, total nonperforming assets amounted to
$931,000, or .7% of total net loans, from a level of $960,000, or
.7%, at December 31, 1996. Historically, the percentage of
nonperforming assets to total net loans as of December 31, for
the previous five year period was an average of .8%.
Allowance for Loan Losses
_________________________
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses
and is formally reviewed by Management on a quarterly basis. The
allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's periodic evaluation
of the adequacy of the allowance is based on the Corporation's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant
factors. While Management uses available information to make such
evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process,
review the Bank's Allowance for Loan Losses. Such agencies may
require the Bank to recognize additions to the allowance based on
their judgement of information available to them at the time of
their examination.
The allowance for loan losses increased by $71,000 for the six
months ended June 30, 1997, and the ratio of the allowance for
loan losses to net loans was 1.03% at June 30, 1997, as compared
to 1.05% at December 31, 1996. The increase in the allowance for
loan losses was due to an increase in loans outstanding amounting
to $9,909,000 for the six month period. Management believes based
on information currently available that the current allowance for
loan losses of $1,442,000 is adequate to meet potential loan
losses.
Liquidity
_________
The Corporation's objective is to maintain adequate liquidity
while minimizing interest rate risk. Adequate liquidity provides
resources for credit needs of borrowers, for depositor
withdrawals, and for funding Corporate operations. Sources of
liquidity are maturing investment securities which include
overnight investments in federal funds sold, overnight
correspondent bank borrowings on various credit lines, payments
on loans and mortgage-backed securities, a growing core deposit
base, primarily certificates of deposit, and FHLB funding
products as discussed below. Management believes that its core
deposits are fairly stable even in periods of moderately changing
interest rates. There are no known trends or any known demands,
commitments, events or uncertainties that will result in, or that
are reasonably likely to result in, liquidity increasing or
decreasing in any material way.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
<CAPTION>
Schedule of Nonperforming Assets
________________________________
June 30, December 31,
(In Thousands) 1997 1996
___________ ____________
<S> <C> <C>
Nonaccruing Loans $142 $ 91
Accrual Loans - 90 days or more
past due 789 752
Restructured Accrual Loans 0 0
Other Real Estate Owned 0 117
______ ______
Total Nonperforming Assets $ 931 $ 960
====== ======
Nonperforming Assets
as a % of Net Loans 0.7% 0.7%
====== ======
Allowance for Loan Losses
as a % of Nonperforming Loans 155% 163%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
_____________________________________
Six Months Ended June 30,
____________________________
(In Thousands) 1997 1996
________ ________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $134,250 $121,937
======== ========
Allowance for Loan Losses,
Beginning of Period $1,371 $1,265
Loans Charged-off During Period 52 19
Recoveries of Loans Previously
Charged-off 11 14
________ ________
Net Loans Charged-off 41 5
Addition to Provision for Loan Losses
Charged to Operations 112 49
_________ _______
Allowance for Loan Losses,
End of Period $1,442 $1,309
======== ========
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.06% 0.01%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.03% 1.05%
======== ========
</TABLE>
<PAGE>
Membership in the FHLB provides the Bank with additional
liquidity alternatives such as short or long-term funding on
fixed or variable rate terms. Available funding from the FHLB
amounts to an overnight borrowing capacity of up to $7,829,000
and a maximum available funding capacity of up to $86,200,000. In
order to provide funding for the Bank's loans and investments,
the Bank borrowed from the FHLB $3,315,000, net of repayments,
for the six months ended June 30, 1997 at varying maturities and
terms. The outstanding borrowings from the FHLB amounted to
$18,161,000 and $9,975,000 at June 30, 1997 and 1996,
respectively.
Stockholders' Equity
____________________
The Corporation maintains capital ratios that are well above the
minimum total capital levels required by federal regulatory
authorities including the risk-based capital guidelines. There
are no material commitments for capital expenditures. There are
no known trends, events or uncertainties including regulatory
items that are expected to have a material impact on the capital
resources of the Corporation for the remaining months of 1997.
See discussion on Regulatory Activity.
The Bank has risk-based capital ratios exceeding the regulatory
requirement. The risk-based capital guidelines require banks to
maintain a minimum risk-based capital ratio of 8.0% at June 30,
1997, as compared to the Bank's current risk-based capital ratio
of 17.41%. The total risk-based capital ratio is computed by
dividing stockholders' equity plus the allowance for loan losses
by risk-adjusted assets. Risk-adjusted assets are determined by
assigning credit risk-weighing factors from 0% to 100% to various
categories of assets and off-balance-sheet financial instruments.
A tabular presentation of the risk-based capital ratios for the
Bank is as follows:
<TABLE>
(In Thousands) June 30, December 31,
1997 1996
___________ _____________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 21,732 $ 21,186
Tier II - Allowance for Loan Losses 1,442 1,371
___________ _____________
Total Qualifying Capital $ 23,174 $ 22,557
=========== =============
Risk-adjusted On-balance-sheet Assets $126,112 $118,844
Risk-adjusted Off-balance-sheet Exposure 6,966 5,666
___________ _____________
Total Risk-adjusted Assets $133,078 $124,510
=========== =============
Ratios:
Tier I Capital Ratio - Actual 16.33% 17.02%
Minimum Required 4.00% 4.00%
Total Capital Ratio - Actual 17.41% 18.12%
Minimum Required 8.00% 8.00%
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 12,528 $ 12,596
=========== =============
</TABLE>
No shares of common stock are reserved for issuance in the event
of conversions or the exercise of warrants, options or other
rights, except as follows: 246,000 shares which are reserved for
issuance under the Corporation's 1988 and 1997 Stock Incentive
Plans, 100,000 shares which are reserved for issuance under the
Corporation's 1997 Employee Stock Purchase Plan, and 157,500
shares which are reserved for issuance under the Corporation's
Dividend Reinvestment Plan. As of June 30, 1997, options to
purchase 4,830 shares have been granted under the Corporation's
1988 Stock Incentive Plan at an exercise price of $23.27. No
options have been exercised as of June 30, 1997 under this plan.
As of June 30, 1997, options to purchase 5,000 shares have been
granted under the Corporation's 1997 Employee Stock Purchase
Plan. The current exercise price for such options is $19.55. As
of June 30, 1997, 175 options have been exercised under this
plan.
<PAGE>
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Corporation. There are no proceedings pending other than the
ordinary routine litigation incident to the business of the
Corporation and its subsidiary, Union National Mount Joy Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank
by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information:
On May 27, 1997 an amendment to the Registrant's Form S-3
Registration Statement was filed with the Securities and Exchange
Commission in order to file the prospectus for the Registrant's
Amended and Restated Dividend Reinvestment and Stock Purchase
Plan.
On May 27, 1997 a Form S-8 Registration Statement was filed with
the Securities and Exchange Commission by the Registrant for the
Registrant's 1988 Stock Incentive Plan, 1997 Employee Stock
Purchase Plan and 1997 Stock Incentive Plan.
Item 6. Exhibits and Reports on Form 8-K - Nothing to report.
<PAGE>
Signatures
__________
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By:/s/ William E. Eby
______________________________
William E. Eby
President & CEO
(Principal Executive Officer)
Date: August 7, 1997
By:/s/ Clement M. Hoober
______________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 7, 1997
<TABLE> <S> <C>
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<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 6668
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<FED-FUNDS-SOLD> 2990
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<INVESTMENTS-HELD-FOR-SALE> 39305
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0
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</TABLE>
