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, 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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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)
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>
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. [ X ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$48,187,572 as of March 23, 1998. As of March 23, 1998, the
Registrant had 2,412,308 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Registrant's 1997 Annual Report to Stockholders
(the "1997 Annual Report") are incorporated by reference into
Parts I, II and IV, hereof. The Registrant's Proxy Statement for
its 1998 Annual Meeting is incorporated by reference in response
to Parts III and IV, hereof.
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PAGE N0.
PART I
Item 1 - Business 1
Item 2 - Properties 10
Item 3 - Legal Proceedings 12
Item 4 - Submission of Matters to a Vote of
Security Holders 12
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 13
Item7A- Quantitative and Qualitative About Market Risk
13
Item 8 - Financial Statements and Supplementary Data 13
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 14
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 14
<PAGE>
Item 13 - Certain Relationships and Related
Transactions 14
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 14
Signatures 17
Exhibit Index 19
<PAGE>
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, which effective February 6,
1998, changed its name to Union National Community 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 may include forward-looking statements
relating to such matters as anticipated financial performance,
business prospects, technological developments, new products,
research and development activities and similar matters in this
and other filings with the Commission. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the
safe harbor, the Registrant notes that a variety of factors could
cause the Registrant's actual results and experience to differ
materially from the anticipated results or other expectations
expressed in the Registrant's forward-looking statements. The
risks and uncertainties that may affect the operations,
performance, development and results of the Registrant's business
include the following: general economic conditions, including
their impact on capital expenditures; business conditions in the
banking industry; the regulatory environment; rapidly changing
technology and evolving banking industry standards; competitive
factors, including increased competition with community, regional
and national financial institutions; new service and product
offerings by competitors and price pressures; and similar items.
<PAGE>
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 27 of the 1997 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.
Supervision and Regulation - The Registrant
___________________________________________
The Registrant is subject to the provisions of the BHC Act,
and to supervision by the Board of Governors of the Federal
Reserve System (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.
<PAGE>
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 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 27 of Registrant's 1997 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.
<PAGE>
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 26 and 27 of Registrant's 1997
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.
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 27 of Registrant's 1997 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.
<PAGE>
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.
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 tentative 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, as provided in IRC Sections 56 and 58, and tax
preference items, as provided in IRC Section 57 ("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). The excess of the tentative AMT over
the regular tax for the taxable year is the taxpayer's net
minimum tax liability.
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%.
<PAGE>
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 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
<PAGE>
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 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.
Federal Deposit Insurance Act. 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.
Community Reinvestment Act. In 1995, federal regulators
__________________________
revised the Community Reinvestment Act ("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
<PAGE>
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.
Home Mortgage Disclosure Act. 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 were 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.
Bank Security Act. 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.
Federal Deposit Insurance Corporation Improvement Act of
________________________________________________________
1991. 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).
<PAGE>
<TABLE>
<CAPTION>
Total Tier 1 Under a
Risk- Risk- Tier 1 Capital
Based Based Leverage Order or
Ratio Ratio Ratio Directive
_______ ______ ______ __________
<S> <C> <C> <C> <C>
CAPITAL CATEGORY
Well capitalized >10.0 >6.0 >5.0 No
Adequately capitalized > 8.0 >4.0 >4.0*
Undercapitalized < 8.0 <4.0 <4.0*
Significantly
undercapitalized < 6.0 <3.0 <3.0
Critically
undercapitalized <2.0
*3.0 for those banks having the highest available regulatory
rating.
</TABLE>
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 capital, asset
quality, management, earnings, liquidity or sensitivity to market
risk. All but well capitalized institutions are prohibited from
accepting brokered deposits without prior regulatory approval.
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.
<PAGE>
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 15 through 27 of the
Registrant's 1997 Annual Report.
Employees. As of March 23, 1998, the Bank had 93 full-
__________
time employees and 17 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.
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.
<TABLE>
PROPERTIES OWNED BY THE BANK
<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 AnnexWood frame
115 East Main Street construction September, 1992
Mount Joy, PA 17552 with aluminum siding.
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.
<PAGE>
Hempfield 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 Branch Bank January, 1988
Office Brick veneer, shingled roof
1275 South Market Street with wood trusses.
Elizabethtown PA 17022 Containing approximately
6,668 sq. ft. of space.
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 Brick on concrete block December, 1984
Center with wood and steel frame.
Bank Administration Containing approximately
Building 9,398 sq. ft. of space.
25 North Barbara Street
Mount Joy, PA 17552
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>
PROPERTY LEASED BY THE BANK
<CAPTION>
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.
_______ __________________
<PAGE>
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.
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 1997 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 1997 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 1997 Annual Report, which page is
included in Exhibit 13, attached hereto.
As of March 23, 1998, there were approximately 898 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 16 of the Registrant's 1997 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.
___________________________________
<PAGE>
The information required by this Item is incorporated by
reference herein, from pages 17 through 27 of the Registrant's
1997 Annual Report, which page is included in Exhibit 13,
attached hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
_______ ____________________________________________________
RISK.
_____
The information required by this Item is incorporated by
reference herein, from pages 24 and 25 of the Registrant's 1997
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 15 of the Registrant's
1997 Annual Report, which page is included in Exhibit 13,
attached hereto.
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 16 through 18
of the Registrant's Proxy Statement for its 1998 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 (the "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, the Registrant believes that during the period January
1, 1997 through December 31, 1997, its officers and directors
were in compliance with all filing requirements applicable to
them.
ITEM 11. EXECUTIVE COMPENSATION.
________ ______________________
<PAGE>
The information required by this Item is incorporated by
reference herein, from pages 9 through 13 of the Registrant's
Proxy Statement for its 1998 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 16 and 17 of
the Registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_______ _______________________________________________
The information required by this Item is incorporated by
reference herein, from pages 15 and 16 of the Registrant's Proxy
Statement for its 1998 Annual Meeting of Shareholders.
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 Statements 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 Registration
Statement No. 333-27837
on Form S-8, filed with the
Commission on May 27, 1997.)
<PAGE>
3(ii) Registrant's Amended By-laws.
(Incorporated by reference to
Exhibit 3(ii) to Registrant's
Registration Statement No. 333-
27837 on Form S-8, filed with
the Commission on May 27, 1997.)
10.1 Executive Employment Agreement
dated as of January 27, 1994,
between William E. Eby and
Union National Financial
Corporation, and addenda thereto.
10.2 Union National Financial
Corporation 1988 Stock Incentive
Plan. (Incorporated by Reference
to Registrant's Registration
Statement No. 333-27837 on Form
S-8, filed with the Commission
on May 27, 1997.)
10.3 Union National Financial
Corporation 1997 Stock
Incentive Plan. (Incorporated
by Reference to Registrant's
Registration Statement No. 333-
27837 on Form S-8, filed with
the Commission on May 27, 1997.)
11 Statement re: Computation of
Earnings Per Share.
(Incorporated by Reference to
the inside cover page of
Registrant's 1997 Annual Report,
which is included herein at
Exhibit 13.)
12 Statement re: Computation of
Ratios. (Incorporated by
Reference to page 16 of
Registrant's 1997 Annual Report,
which is included herein at
Exhibit 13.)
13 Excerpts from Registrant's 1997
Annual Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) No Current Report on Form 8-K was filed by the
Registrant during the fourth quarter of the 1997
fiscal year.
<PAGE>
(c) The exhibits required to be filed by this Item
are listed under Item 14(a)3, above.
(d) NOT APPLICABLE.
<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 26, 1998
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 26, 1998
________________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 26, 1998
________________________
William E. Eby
President, Chief Executive Officer and
Director (principal executive officer)
By /s/ Clement M. Hoober March 26, 1998
________________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Franklin R. Eichler March 26, 1998
________________________
Franklin R. Eichler, Director
<PAGE>
By /s/ E. Ralph Garber March 26, 1998
________________________
E. Ralph Garber, Director
By /s/ Mark D. Gainer March 26, 1998
________________________
Mark D. Gainer, Director and
Vice President
By /s/ Daniel C. Gohn March 26, 1998
________________________
Daniel C. Gohn, Director
By /s/ Carl R. Hallgren March 26, 1998
________________________
Carl R. Hallgren, Director
By /s/ David G. Heisey March 26, 1998
________________________
David G. Heisey, Director
By /s/ William D. Linkous March 26, 1998
________________________
William D. Linkous, Director
By /s/ Daniel H. Raffensperger March 26, 1998
________________________
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 26, 1998
________________________
Benjamin W. Piersol, Jr., Director
<PAGE>
<TABLE>
EXHIBIT INDEX
Sequential Page
Exhibit Number in Manually
Number Signed Original
______ ______________________
<S> <C>
3(i) Registrant's Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
3(ii) Registrant's Amended By-laws.
(Incorporated by reference to Exhibit 3(ii)
to Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
10.1 Executive Employment Agreement dated as of
January 27, 1994, between William E. Eby and
Union National Financial Corporation, and addenda
thereto.
10.2 Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to
Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
10.3 Union National Financial Corporation 1997 Stock
Incentive Plan. (Incorporated by Reference to
Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
11 Statement re: Computation of Earnings Per Share.
(Incorporated by Reference to the inside cover page
of Registrant's 1997 Annual Report, which is
included herein at Exhibit 13.)
12 Statement re: Computation of Ratios.
(Incorporated by Reference to page 16 of
Registrant's 1997 Annual Report, which is
included herein at Exhibit 13.)
<PAGE>
13 Excerpts from Registrant's 1997 Annual
Report to Shareholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
EXHIBIT 3(i)
Registrant's Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
EXHIBIT 3(ii)
Registrant's Amended By-laws.
(Incorporated by reference to Exhibit 3(ii)
to Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
EXHIBIT 10.1
Executive Employment Agreement dated as of
January 27, 1994, between William E. Eby and
Union National Financial Corporation, and
addenda thereto.
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of January 27, 1994, between UNION
NATIONAL FINANCIAL CORPORATION, a Pennsylvania business
corporation (the "Corporation") and WILLIAM E. EBY, an adult
individual (the "Executive").
WHEREAS, The Union National Mount Joy Bank (the "Bank") is a
subsidiary of the Corporation; and
WHEREAS, the Corporation desires to employ the Executive as
its President and Chief Executive Officer and also desires that
the Executive serve as the Bank's President and Chief Executive
Officer under the terms and conditions set forth herein; and
WHEREAS, the Executive desires to serve the Corporation and
Bank in an executive capacity under the terms and conditions set
forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein and intending to be legally bound
hereby, the parties agree as follows:
1. TERMS OF EMPLOYMENT. The Corporation shall hereby
___________________
employ the Executive and the Executive hereby accepts employment
with the Corporation for a term of three (3) years beginning on
January 1, 1994, and terminating on December 31, 1996, subject,
however, to prior termination of this Agreement as set forth
below.
<PAGE>
Furthermore, subject to the subsequent provisions, upon the
expiration of the first twelve (12) full calendar months after
the date first above written, the term hereof shall be extended
for another twelve (12) full calendar months, and upon expiration
of each subsequent twelve (12) full calendar months thereafter
the term of this Agreement shall likewise be extended for an
additional twelve (12) full calendar months. Each such extension
of this Agreement's term shall be contingent upon the Corporation
providing the Executive written notice of its intention to extend
this Agreement, which written notice must be given by the
Corporation not less than fifteen (15) days before the expiration
of the current twelve (12) months.
2. POSITION AND DUTIES. The Executive shall serve as the
____________________
President and Chief Executive Officer of the Corporation and of
the Bank and shall serve as a member of the Board of Directors of
the Corporation and of the Bank, reporting only to the Boards of
Directors of the Corporation and Bank. The Executive shall have
supervision and control over, and responsibility for, the general
management and operation of the Corporation and Bank, and shall
have such other powers and duties as may from time to time be
prescribed by the Board of Directors of the Corporation and Bank,
<PAGE>
provided that such powers and duties are consistent with the
Executive's position as the Chief Executive Officer in charge of
the general management of the Corporation and Bank.
3. ENGAGEMENT IN OTHER EMPLOYMENT. The Executive shall
______________________________
devote all of his working time, ability and attention to the
business of the Corporation and Bank during the term of this
Agreement. The Executive shall notify the Board of Directors of
the Corporation and Bank in writing and receive written approval
from the Corporation and Bank before the Executive engages in any
other business or commercial duties or pursuits, including, but
not limited to, directorships of other companies. Under no
circumstances may the Executive engage in any business or
commercial activities, duties or pursuits which compete with the
business or commercial activities of the Corporation or Bank, nor
may the Executive serve as a director or officer or in any other
capacity in a company which competes with the Corporation or
Bank. Executive shall not be precluded, however, upon
notification to the Boards of Directors, from engaging in
voluntary or philanthropic endeavors, or from engaging in
activities incident or necessary to personal investments, so long
as they are, in the Boards' reasonable opinion, not in conflict
with or detrimental to
<PAGE>
the Executive's rendition of services on behalf of the
Corporation and Bank.
4. COMPENSATION.
_____________
(a) ANNUAL DIRECT SALARY: As compensation for
____________________
services rendered to the Corporation and Bank under this
Agreement, the Executive shall be entitled to receive from the
Corporation an annual direct salary of One Hundred and Six
Thousand and Eighty and 00/100 ($106,080.00) Dollars per year,
(the "Annual Direct Salary") payable in substantially equal
installments consistent with the Bank's payroll policy prorated
for any partial employment period. The Annual Direct Salary
shall be reviewed annually, no later than December 15 of the then
calendar year and shall be subject to such annual change (but not
reduced below $100,000.00 without the Executive's consent, except
in cases of national financial depression or emergency when
compensation reduction has been implemented by the Board of
Directors for the Bank's senior management) as may be set by the
Board of Directors of the Corporation taking into account the
position and duties of the Executive and the performance of the
Corporation and Bank under the Executive's leadership.
<PAGE>
(b) ANNUAL BUSINESS PLAN. The Executive shall
____________________
prepare a business plan establishing the financial and business
goals of the Corporation and Bank prior to his annual employment
review. The business plan prepared by the Executive shall be
reviewed by the Board of Directors of the Corporation and Bank,
which may in its sole discretion alter or modify such plan prior
to its adoption.
(c) BONUS. The Board of Directors of the
______
Corporation in its sole discretion may provide for payment of a
periodic bonus to the Executive in such an amount or nature as it
may deem appropriate to provide incentive to the Executive and to
reward the Executive for his performance.
(d) DIRECTOR FEES. The Executive shall not be
______________
entitled to any director's fee or other compensation as paid to
other members of the Board of Directors of the Bank and/or
Corporation or subsidiaries of either. The Executive also agrees
to serve on any committee of the Board of Directors of the Bank
and/or Corporation or subsidiary of either without any additional
compensation or fees.
<PAGE>
5. FRINGE BENEFITS, VACATION, EXPENSES, AND PERQUISITES.
_____________________________________________________
(a) EMPLOYEE BENEFIT PLANS. The Executive shall be
______________________
entitled to participate in or receive benefits under all Bank
employment benefit plans including, but not limited to, any
pension plan, profit-sharing plan, savings plan, life insurance
plan or disability insurance plan as made available by the Bank
to its employees, subject to and on a basis consistent with
terms, conditions and overall administration of such plans and
arrangements. The Bank shall maintain for Executive during his
employment long-term disability insurance which terms shall be at
least as favorable as the policy terms in effect on January 1,
1994.
(b) VACATION, HOLIDAYS, SICK DAYS AND PERSONAL DAYS.
________________________________________________
The Executive shall be entitled to the number of paid vacation
days in each calendar year determined by the Bank from time to
time for its senior executive officers (prorated in any calendar
year during which the Executive is employed hereunder for less
than the entire such year in accordance with the number of days
in such calendar year during which he is so employed). The
Executive shall also be entitled to all paid holidays, sick days
and personal days given by the Bank to its employees.
<PAGE>
(c) BUSINESS EXPENSES. During the term of his
__________________
employment hereunder, the Executive shall be entitled to receive
prompt reimbursement for all reasonable expenses incurred by him
(in accordance with the policies and procedures established by
the Board of Directors of the Bank for its senior executive
officers) in performing services hereunder, provided that the
Executive properly accounts therefor in accordance with policy.
6. ADDITIONAL POSITIONS. The Executive agrees to serve
____________________
without additional compensation, if elected or appointed to one
or more offices of the Corporation or Bank, and/or to one or more
offices or as a director of any of the Corporation's and/or
Bank's subsidiaries.
7. LIABILITY INSURANCE. The Corporation shall use its
___________________
best efforts to obtain insurance coverage for the Executive under
an insurance policy covering officers and directors of the Bank
against lawsuits, arbitrations or other legal or regulatory
proceedings; however, nothing herein shall be construed to
require the Corporation to obtain such insurance, if the Board of
Directors of the Corporation determines that such coverage cannot
be obtained at commercially reasonable rates.
<PAGE>
8. UNAUTHORIZED DISCLOSURE. During and after the term of
_______________________
his employment hereunder, the Executive shall not, without the
written consent of the Board of Directors of the Corporation or
Bank or a person authorized thereby, knowingly disclose to any
person, other than an employee of the Corporation or Bank or a
person to whom disclosure is reasonably necessary or appropriate
in connection with the performance by the Executive of his duties
as an executive of the Corporation or Bank, any material
confidential information obtained by him while in the employ of
the Corporation or Bank with respect to any of the Corporation or
Bank's services, products, improvements, formulas, designs or
styles, processes, customers, methods of business or any business
practices the disclosure of which could be or will be materially
damaging to the Corporation or Bank provided, however, that
confidential information shall not include any information known
generally to the public (other than as a result of unauthorized
disclosure by the Executive or any person with the assistance,
consent or direction of the Executive) or any information of a
type not otherwise considered confidential by persons engaged in
the same business or a business similar to that conducted by the
Corporation
<PAGE>
or Bank or any information that must be disclosed as required by
law.
9. RESTRICTIVE COVENANT. The Executive covenants and
____________________
agrees that the Executive shall not directly or indirectly,
within the marketing area of the Bank (defined as an area within
twenty-five (25) miles of any office of the Bank as of January,
1994), enter into or engage generally in direct or indirect
competition with the Corporation or Bank or any subsidiary of the
Corporation, either as an individual on his own or as a partner
or joint venturer, or as a director, officer, shareholder,
employee, agent, independent contractor, lessor or creditor of or
for any person, for a period of two (2) years after the date of
termination of his employment if the Executive's employment is
terminated for any reason whatsoever except upon resignation by
the Executive for "Good Reason" under paragraph 10(d)(2) hereof
(except that change of control shall not constitute Good Reason
for this paragraph). The foregoing restriction shall not be
construed to prohibit the ownership by Executive of not more than
five percent (5%) of any class of securities of any corporation
which is in competition with the Bank or Corporation, provided
that such ownership represents a passive investment and that
neither Executive nor any group of
<PAGE>
persons including Executive in any way, either directly or
indirectly, manages or exercises control of such corporation,
guarantees any of its financial obligations, otherwise takes any
part in its business, other than by exercising his rights as a
shareholder, or seeks to do any of the foregoing. The existence
of any claim or cause of action of any party against the other,
whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by the Corporation of
this covenant. The Executive agrees that any breach of the
restrictions set forth in paragraphs 8 and 9 will result in
irreparable injury to the Corporation or Bank for which it shall
have no adequate remedy at law and the Corporation or Bank shall
be entitled to injunctive relief in order to enforce the
provisions hereof. In the event that this paragraph shall be
determined by any court of competent jurisdiction to be
unenforceable in part by reason of it being too great a period of
time or covering too great a geographical area, it shall be in
full force and effect as to that period of time or geographical
area determined to be reasonable by the court.
10. TERMINATION.
____________
<PAGE>
(a) The Executive's employment hereunder shall
terminate upon his death.
(b) If the Executive becomes disabled because of
sickness, physical or mental disability, or any other reason, the
Corporation shall have the option to terminate this Agreement by
giving written notice of termination to the Executive. Executive
shall be deemed to have become "disabled" only in the event and
at such time as he qualifies (after expiration of any applicable
waiting period) to receive benefits for disability under the
employee long-term disability insurance benefit plan referred to
in paragraph 5(a) above.
(c) The Corporation may terminate the Executive's
employment hereunder for Cause. For purposes of this Agreement,
the Corporation shall have "Cause" to terminate the Executive's
employment hereunder upon: (1) the willful failure by the
Executive to substantially perform his duties hereunder after
notice from the Corporation and a failure to cure such violation
within thirty (30) days of said notice; (2) the willful engaging
by the Executive in misconduct injurious to the Corporation or
Bank; (3) the willful violation by the Executive of the
provisions of paragraphs 3 or 8 hereof after notice from the
Corporation and a
<PAGE>
failure to cure such violation within thirty (30) days of said
notice, or if said violation cannot be cured within thirty (30)
days, within a reasonable time thereafter unless the Executive is
diligently attempting to cure the violation; (4) the dishonesty
or gross negligence of the Executive in the performance of his
duties; (5) the breach of Executive's fiduciary duty involving
personal profit; (6) the violation of any law, rule or regulation
governing banks or bank officers or any final cease and desist
order issued by a bank regulatory authority any of which
materially jeopardizes the business of the Corporation or Bank;
(7) committing acts of moral turpitude or other conduct on the
part of Executive which brings public discredit to the
Corporation or Bank; or (8) the Executive's failure to either be
elected or to serve as a member of the Board of Directors of the
Corporation after having been nominated by the Board of Directors
unless such nomination is inconsistent with the duties of the
Directors or the terms of this Agreement.
(d) The Executive may terminate his employment
hereunder if (1) his health should become impaired to an extent
that it makes continued performance of his duties hereunder
hazardous to his physical or mental health or his life, or (2)
for Good Reason. The
<PAGE>
term "Good Reason" shall mean: (i) any assignment to the
Executive, without his consent, of any duties other than those
contemplated by, or any limitation of the powers of the Executive
not contemplated by, paragraphs 2 and 6 hereof, after notice from
the Executive to the Corporation and Bank that such assignment or
limitation of the Executive's powers constitutes Good Reason and
the failure to cure such situation within thirty (30) days of
said notice, or if said situation cannot be cured within thirty
(30) days, within a reasonable time thereafter unless a diligent
effort is being made to cure such situation; (ii) any removal of
the Executive from (other than as a result of his failure to be
re-elected on the Corporation or Bank's Boards of Directors) any
of the positions indicated in paragraph 2 hereof, except in
connection with termination of the Executive's employment for
Cause; (iii) the failure of the Bank to comply with paragraphs
4, 5, and 7 hereof; or (iv) any Change of Control (as defined
herein).
11. PAYMENTS UPON TERMINATION.
__________________________
(a) If the Executive's employment shall be
terminated because of death, disability, for Cause, or by the
Executive for other than Good Reason, the Corporation shall pay
the Executive or his fiduciary his full Annual Direct Salary
through the date of
<PAGE>
termination at the rate in effect at the time of termination and
the Corporation and Bank shall have no further obligation to the
Executive under this Agreement. In the event of death or
disability termination, the Executive shall receive Annual Direct
Salary through the end of the month of such termination.
(b) If the Executive's employment is terminated by
the Corporation (other than pursuant to paragraphs 10(a) or 10(b)
or 10(c) hereof), then the Corporation shall pay the Executive an
amount equal to of his Annual Direct Salary on the date of
termination. If the Executive shall terminate his employment for
Good Reason, other than a Change of Control as defined herein,
then the Corporation shall pay the Executive an amount equal to
his Annual Direct Salary at the date of termination. If, within
six (6) months following a Change of Control, the Executive shall
terminate his employment for Good Reason, as defined in paragraph
10(d), then the Corporation or any successor thereof shall pay
the Executive his Annual Direct Salary from the Date of
termination and continuing through the last day of the term of
this Agreement (in no event shall this payment be more than two
(2) years' annual direct salary and also in no event shall this
payment be less than one (1) year annual direct salary). The
Corporation and Bank shall
<PAGE>
thereafter have no further obligation to the Executive under this
Agreement.
(c) In the event the Corporation does not offer to
renew this Agreement, the Executive shall not be entitled to any
severance allowance whatsoever and the Corporation and Bank shall
have no further obligations to the Executive under this
Agreement.
(d) All payments under this paragraph 11 shall,
unless otherwise agreed upon between the parties, be made at
regular payroll policy intervals as if the Executive remained an
employee.
12. DAMAGES FOR BREACH OF CONTRACT. In the event of a
______________________________
breach of this Agreement by either the Corporation or the
Executive resulting in damages to another party to this
Agreement, that party may recover from the party breaching the
Agreement only those damages as set forth herein. In no event
shall any party be entitled to the recovery of attorney's fees or
costs.
13. DEFINITION OF CHANGE OF CONTROL. For purposes of this
_______________________________
Agreement, the term "Change of Control" shall mean a change in
control of a nature that would be required to be reported in
response to Item 6(e) of Schedule 14A of Regulation 14A and any
successor rule or regulation promulgated under the Securities
Exchange Act of 1934 (the "Exchange Act"); provided that, without
<PAGE>
limitation, such a change in control shall be deemed to have
occurred if: (a) any "person" (as such term is used in Sections
13(d) and 14(d) of the Exchange Act), other than the Corporation
or any "person" who on the date hereof is a director or officer
of the Corporation is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing thirty
percent (30%) or more of the combined voting power of the
Corporation's then outstanding securities; (b) during any period
of two consecutive years during the term of this Agreement,
individuals who at the beginning of such period constitute the
Board of Directors of the Bank or Corporation cease for any
reason to constitute at least a majority thereof, unless the
election of each director who was not a director at the beginning
of such period has been approved in advance by directors
representing at least two-thirds of the directors then in office
who were directors at the beginning of the period; or (c) the
sale or transfer of all or substantially all of the Bank or
Corporation's assets.
14. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes
_______________________________________
of this Agreement, the date of Change of Control shall mean:
<PAGE>
(a) the first date on which a single person and/or
entity, or group of affiliated persons and/or entities, acquire
the beneficial ownership of thirty percent (30%) or more of the
Corporation's voting securities;
(b) the date of the transfer of all or substantially
all of the Bank or Corporation's assets;
(c) the date on which a merger, consolidation or
combination is consummated, as applicable; or
(d) the date on which individuals who formerly
constituted a majority of the Board of Directors of the Bank or
Corporation under paragraph 13(b) above, ceased to be a majority.
15. NOTICE. For the purposes of this Agreement, notices
_______
and all other communications provided for in the Agreement shall
be in writing and shall be deemed to have been duly given when
hand-delivered or mailed by United States certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive: William E. Eby
13 Walnut Street
Mount Joy, Pennsylvania 17552
If to the Corporation: Chairman of the Board
Union National Financial Corporation
<PAGE>
101 East Main Street
Box 567
Mount Joy, Pennsylvania 17552
or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
16. SUCCESSORS. This Agreement shall inure to the benefit
__________
of and be binding upon the Executive and the Corporation and any
of their successors or assigns, provided however, that the
Executive may not commute, anticipate, encumber, dispose or
assign any payment except as set forth in paragraph 19.
17. SEVERABILITY. If any provision of this Agreement is
_____________
declared unenforceable for any reason, the remaining provisions
of this Agreement shall be unaffected thereby and shall remain in
full force and effect.
18. AMENDMENT. This Agreement may be amended or canceled
__________
only by mutual agreement of the parties in writing.
19. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event
________________________________________
of Executive's death, any moneys that may be due him from the
Corporation under this Agreement as of the date of death shall be
paid to the person designated by him in writing for this purpose,
or in the absence of any such designation to his estate.
<PAGE>
20. LAW GOVERNING. This Agreement shall be governed by and
_____________
construed in accordance with the laws of the Commonwealth of
Pennsylvania.
21. ENTIRE AGREEMENT. This Agreement supersedes any and
_________________
all agreements, either oral or in writing, between the parties
with respect to the employment of the Executive by the
Corporation, and this Agreement contains all the covenants and
agreements between the parties with respect to the employment.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, intending to be legally
bound hereby, have caused this Agreement to be duly
executed in their respective names and, in the case of the
Corporation, by its authorized representatives the day and year
above mentioned.
ATTEST: UNION NATIONAL FINANCIAL
CORPORATION
/s/ Carl R. Hallgren By: /s/ Donald H. Wolgemuth
_____________________________ ____________________________
Carl R. Hallgren Donald H. Wolgemuth
Secretary Chairman of the Board
WITNESS:
/s/ Franklin R. Eichler /s/ William E. Eby
______________________________ ______________________________
Franklin R. Eichler William E. Eby
:82564
<PAGE>
ADDENDUM TO EXECUTIVE EMPLOYMENT AGREEMENT
With respect to paragraph 4, "Compensation", sub paragraph (a)
"Annual Direct Salary" of the Executive Employment Agreement
executed January 27, 1994, the following change is mutually
agreed to:
"but not reduces below $100,000.00" will be replaced with "but
not reduced below 90% of the then current year's Annual Direct
Salary".
UNION NATIONAL FINANCIAL CORPORATION
Attest:
/s/ Thomas C. Mayer /s/ Donald H. Wolgemuth
______________________ __________________________
Thomas C. Mayer Donald H. Wolgemuth
12/14/94 12/14/94
______________________ __________________________
Date Date
Witness: Individual:
/s/ Marcene L. Camara /s/ William E. Eby
______________________ __________________________
Marcene L. Camara William E. Eby
12/14/94 12/14/94
______________________ __________________________
Date Date
<PAGE>
Addendum to Executive Employment Agreement
Between WILLIAM E. EBY
and UNION NATIONAL FINANCIAL CORPORATION
The following changes have been mutually agreed to by the
Executive and the Corporation, effective January 1, 1998:
I. The following paragraphs shall be added to the
Agreement immediately prior to the paragraph starting
"Now Therefore".
WHEREAS, the Executive has announced his desire
to elect early retirement on or before December
31, 1998, and
WHEREAS, the Corporation appreciated the
Executive's many years of excellent service and
is willing to defer to Executive's wishes to
elect early retirement on or before December 31,
1998.
II. Replace existing Paragraph 1, "TERMS OF EMPLOYMENT"
with the following:
1. TERMS OF EMPLOYMENT. The Corporation shall
hereby employ the Executive and the Executive
accepts employment with the Corporation for a
term of one (1) year beginning on January 1,
1998, and ending December 31, 1998, subject
however, to prior termination of this Agreement
as set forth below.
ATTEST: UNION NATIONAL FINANCIAL CORPORATION
/s/ Mark D. Gainer By: /s/ Donald H. Wolgemuth
___________________ _____________________________
Mark D. Gainer Donald H. Wolgemuth
Chairman of the Board
Date: 12/11/97 Date: 12/11/97
___________________ _____________________________
WITNESS:
/s/ Lori A. McCorkel /s/ William E. Eby
___________________ _____________________________
Lori A. McCorkel William E. Eby
Date: 12/11/97 Date: 12/11/97
___________________ _____________________________
EXHIBIT 10.2
Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to
Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the
Commission on May 27, 1997.)
EXHIBIT 10.3
Union National Financial Corporation 1997 Stock
Incentive Plan. (Incorporated by Reference to
Registrant's Registration Statement No. 333-27837
on Form S-8, filed with the
Commission on May 27, 1997.)
EXHIBIT 11
Statement Re: Computation of Earnings Per Share
(Incorporated by Reference to the inside cover page
of Registrant's 1997 Annual Report, which is included
herein at Exhibit 13.)
EXHIBIT 12
Statement re: Computation of Ratios.
(Incorporated by Reference to page 16 of
Registrant's 1997 Annual Report, which is
included herein at Exhibit 13.)
EXHIBIT 13
Excerpts From Registrant's 1997 Annual Report to
Shareholders
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
December 31, 1997 1996 %Increase
_________________________________________________________________
<S> <C> <C> <C>
For the Year
Total Interest Income $16,205,692 $14,217,749 14.0%
Total Interest Expense 7,549,909 6,379,557 18.3%
Net Interest Income 8,655,783 7,838,192 10.4%
Net Income 2,325,487 2,191,812 6.1%
Per Share*
Net Income (Basic and Assuming
Dilution) $0.93 $0.88 5.7%
Cash Dividends Paid 0.351 0.305 15.1%
Stockholders' Equity 9.55 8.92 7.1%
Average Balances
Net Loans $140,925,000 $124,483,000 13.2%
Investments and other
Earning Assets 61,115,000 51,283,000 19.2%
Total Assets 213,986,000 187,814,000 13.9%
Total Deposits 168,814,000 154,474,000 9.3%
Stockholders' Equity 22,859,000 21,411,000 6.8%
Return on Average
Assets 1.09% 1.17%
Stockholders' Equity 10.17% 10.24%
*Per Share information reflects the 5% stock dividend effective
on May 15, 1997.
</TABLE>
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 and
stock dividends. 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 and Stock Purchase Plan, whereby holders of stock
may have their quarterly cash dividends automatically invested in
additional shares of common stock of the Corporation and purchase
additional shares within specified limits.
<TABLE>
<CAPTION>
Dividends
Declared
Quarter High Low Per Share
_________________________________________________________________
<S> <C> <C> <C>
First, 1997 $24.05 $22.86 $0.086
Second 24.29 22.25 0.086
Third 24.00 22.25 0.090
Fourth 24.00 22.50 0.090
First, 1996 $23.57 $20.48 $0.062
Second 24.76 22.14 0.076
Third 24.76 22.86 0.081
Fourth 24.76 22.62 0.086
</TABLE>
Dean Witter Reynolds, Inc. F.J. Morrissey & Company, Inc.
46 East King Street 1700 Market Street
P.O. Box 358 Suite 1420
Lancaster, PA 17603 Philadelphia, PA 19103
(717) 293-4811 (800) 842-8928
Hazlett, Burt, & Watson, Inc. Hopper Soliday & Co., Inc.
100 East King Street 1703 Oregon Pike
P.O. Box 1267 Lancaster, PA 17601
Lancaster, PA 17608 (800) 526-6371
(717) 397-5515
Janney Montgomery Scott, Inc.
61 North Duke Street
Lancaster, PA 17602
(717) 293-4100
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1997 1996
____________ ____________
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 6,489,595 $ 6,073,397
Federal Funds Sold 2,835,000 4,790,000
Investment Securities Held
to Maturity (Market Value -
1997-$18,942,946;1996-$17,228,139) 18,869,847 17,123,559
Investment Securities Available
for Sale 45,866,774 37,766,188
Loans(Net of Unearned Income) 152,699,249 130,391,185
Less: Allowance for Loan Losses (1,592,763) (1,371,245)
____________ ____________
Total Net Loans 151,106,486 129,019,940
Premises and Equipment - Net 5,414,864 5,741,386
Accrued Interest Receivable 1,445,767 1,312,443
Deferred Income Taxes 153,982 251,429
Investments in Limited Partnerships 941,287 1,003,002
Other Assets 119,404 390,870
____________ ____________
TOTAL ASSETS $233,243,006 $203,472,214
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 18,463,193 $ 16,887,496
Interest-Bearing 161,671,680 147,625,834
____________ ____________
Total Deposits 180,134,873 164,513,330
Short-Term Borrowing 900,000 2,989,414
Long-Term Debt 27,329,060 12,676,000
Accrued Interest Payable 1,008,362 882,853
Other Liabilities 114,861 187,745
____________ ____________
TOTAL LIABILITIES 209,487,156 181,249,342
STOCKHOLDERS' EQUITY*
Common Stock (Par Value $0.25) 627,332 598,541
Shares: Authorized - 20,000,000; Issued -
2,509,327 in 1997 (2,394,164 in 1996)
Outstanding - 2,487,175 in 1997 (2,373,222
in 1996)
Surplus 4,814,975 1,967,838
Retained Earnings 18,460,729 19,916,165
Unrealized gain on investment securities
available for sale, net of tax 294,723 103,033
Less: Treasury Stock -
22,152 shares in 1997
(20,942 in 1996), at cost (441,909) (362,705)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 23,755,850 22,222,872
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $233,243,006 $203,472,214
============ ============
*The Stockholders' Equity and share information reflects the 5%
common stock dividend effective May 15, 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
_____________________________
1997 1996
_______________ __________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 12,483,471 $ 11,175,845
Investment Securities:
Taxable 2,659,213 2,072,695
Exempt from Federal Taxes 868,149 830,203
Deposits in Banks 3,328 2,768
Federal Funds Sold 191,531 136,238
_______________ __________
Total Interest Income 16,205,692 14,217,749
INTEREST EXPENSE
Deposits 6,354,343 5,778,953
Short-Term Borrowing 87,259 115,372
Long-Term Debt 1,108,307 485,232
_______________ __________
Total Interest Expense 7,549,909 6,379,557
_______________ __________
Net Interest Income 8,655,783 7,838,192
PROVISION for LOAN LOSSES 390,250 150,000
_______________ __________
Net Interest Income after Provision
for Loan Losses 8,265,533 7,688,192
OTHER OPERATING INCOME
Trust Income 134,645 120,495
Service Charges on Deposit Accounts 374,697 327,567
Other Service Charges, Commissions, Fees 405,007 298,355
Investment Securities Gains 2,063 2,308
Other Income 69,692 62,574
_______________ __________
Total Other Operating Income 986,104 811,299
OTHER OPERATING EXPENSES
Salaries and Wages 2,783,105 2,637,584
Retirement Plan and Other
Employee Benefits 857,410 751,684
Net Occupancy Expense 562,661 583,074
Furniture and Equipment Expense 411,484 373,133
FDIC Insurance Assessment 20,109 2,000
Other Operating Expenses 1,712,285 1,603,742
_______________ __________
Total Other Operating Expenses 6,347,054 5,951,217
_______________ __________
Income before Income Taxes 2,904,583 2,548,274
PROVISION for INCOME TAXES 579,096 356,462
_______________ __________
NET INCOME for YEAR $ 2,325,487 $ 2,191,812
=============== ==========
PER SHARE INFORMATION*
Net Income for Year (Basic and Assuming
Dilution) $ 0.93 $ 0.88
Cash Dividends $ 0.351 $ 0.305
*Per Share information reflects the 5% common stock dividend
effective on May 15, 1997.
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
_____________________________
1995
_______________
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 10,505,245
Investment Securities:
Taxable 1,573,411
Exempt from Federal Taxes 643,386
Deposits in Banks 3,273
Federal Funds Sold 47,618
_______________
Total Interest Income 12,772,933
INTEREST EXPENSE
Deposits 4,965,502
Short-Term Borrowing 70,430
Long-Term Debt 139,055
_______________
Total Interest Expense 5,174,987
_______________
Net Interest Income 7,597,946
PROVISION for LOAN LOSSES 158,800
_______________
Net Interest Income after Provision
for Loan Losses 7,439,146
OTHER OPERATING INCOME
Trust Income 164,970
Service Charges on Deposit Accounts 292,556
Other Service Charges, Commissions, Fees 237,539
Investment Securities Gains 4,669
Other Income 53,492
_______________
Total Other Operating Income 753,226
OTHER OPERATING EXPENSES
Salaries and Wages 2,420,440
Retirement Plan and Other
Employee Benefits 731,524
Net Occupancy Expense 430,117
Furniture and Equipment Expense 283,109
FDIC Insurance Assessment 160,348
Other Operating Expenses 1,454,021
_______________
Total Other Operating Expenses 5,479,559
_______________
Income before Income Taxes 2,712,813
PROVISION for INCOME TAXES 613,761
_______________
NET INCOME for YEAR $ 2,099,052
===============
PER SHARE INFORMATION*
Net Income for Year (Basic and Assuming
Dilution) $ 0.84
Cash Dividends $ 0.224
*Per Share information reflects the 5% common stock dividend
effective on May 15, 1997.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
______________________________
1997 1996
______________ ___________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,325,487 $ 2,191,812
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 506,353 515,600
Provision for Loan Losses 390,250 150,000
Investment Securities (Gains)/Losses (2,063) (2,308)
Provision for Deferred Income Taxes (1,302) 34,598
(Increase)/Decrease in Accrued
Interest Receivable (133,324) (95,220)
(Increase)/Decrease in Other Assets 292,578 (6,488)
Increase/(Decrease) in Other
Liabilities 52,625 218,395
______________ ___________
Net Cash Provided by
Operating Activities 3,430,604 3,006,389
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold 1,955,000 (4,790,000)
Proceeds from Sales of
Available for Sale Securities 5,548,285 8,994,369
Proceeds from Maturities of
Available for Sale Securities 15,337,934 11,685,792
Proceeds from Maturities of
Held to Maturity Securities 2,564,118 1,566,157
Purchases of Available for Sale
Securities (28,694,305) (32,875,864)
Purchases of Held to Maturity
Securities (4,310,406) (4,805,526)
Loans Made to Customers, Net of
Principal Collected on Loans (22,476,796) (10,017,453)
Investment in Limited Partnership -0- -0-
Purchases of Property and Equipment (139,226) (298,385)
______________ ___________
Net Cash (Used in)Investing
Activities (30,215,396) (30,540,910)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 7,532,740 7,337,206
Net Increase in Certificates
of Deposits 8,088,803 13,808,609
Net Increase/(Decrease) in Short-Term
Borrowing (2,089,414) (409,203)
Proceeds from Issuance of Long-Term
Debt 14,793,060 6,546,000
Payment of Long-Term Debt (140,000) (140,000)
Acquisition of Treasury Stock (306,746) (119,173)
Issuance of Common and Treasury Stock 198,827 130,866
Cash Dividends Paid (876,280) (760,044)
______________ ___________
Net Cash Provided by
Financing Activities 27,200,990 26,394,261
______________ ___________
Net Increase/(Decrease) in Cash
and Cash Equivalents 416,198 (1,140,260)
CASH and CASH EQUIVALENTS
Beginning of Year 6,073,397 7,213,657
______________ ___________
CASH and CASH EQUIVALENTS
End of Year $ 6,489,595 $ 6,073,397
============== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $ 6,291,787 $ 5,692,146
Interest Paid - Other 1,132,613 567,181
Income Taxes 616,710 370,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Retirement of Treasury Stock (12,000 shares
in 1997 and 10,000 shares in 1996) $ 227,542 $ 153,384
Issuance of Capital Note for Limited Partnership
Interest -0- -0-
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
______________________________
1995
______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,099,052
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 422,644
Provision for Loan Losses 158,800
Investment Securities (Gains)/Losses (4,669)
Provision for Deferred Income Taxes 62,186
(Increase)/Decrease in Accrued
Interest Receivable (93,443)
(Increase)/Decrease in Other Assets (192,416)
Increase/(Decrease) in Other
Liabilities 261,606
______________
Net Cash Provided by
Operating Activities 2,713,760
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold 1,870,000
Proceeds from Sales of
Available for Sale Securities 6,937,192
Proceeds from Maturities of
Available for Sale Securities 7,564,379
Proceeds from Maturities of
Held to Maturity Securities 8,005,080
Purchases of Available for Sale
Securities (15,324,619)
Purchases of Held to Maturity
Securities (7,147,581)
Loans Made to Customers, Net of
Principal Collected on Loans (12,227,887)
Investment in Limited Partnership (162,500)
Purchases of Property and Equipment (2,715,262)
______________
Net Cash (Used in)Investing
Activities (13,201,198)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (7,258,717)
Net Increase in Certificates
of Deposits 11,418,464
Net Increase/(Decrease) in Short-Term
Borrowing 3,089,401
Proceeds from Issuance of Long-Term
Debt 5,800,000
Payment of Long-Term Debt -0-
Acquisition of Treasury Stock (359,876)
Issuance of Common and Treasury Stock -0-
Cash Dividends Paid (560,072)
______________
Net Cash Provided by
Financing Activities 12,129,200
______________
Net Increase/(Decrease) in Cash
and Cash Equivalents 1,641,762
CASH and CASH EQUIVALENTS
Beginning of Year 5,571,895
______________
CASH and CASH EQUIVALENTS
End of Year $ 7,213,657
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositor $ 4,752,285
Interest Paid - Other 180,510
Income Taxes 555,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (12,000 shares
in 1997 and 10,000 shares in 1996) $ -0-
Issuance of Capital Note for Limited Partnership
Interest 470,000
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common Retained
Stock Surplus Earnings
__________ __________ __________
<S> <C> <C> <C>
BALANCE, December 31, 1994 $ 600,000 $2,018,898 $16,945,417
Net Income 2,099,052
Acquisition of Treasury Stock
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax
Cash Dividends ($.224 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 ($.305 per share) (760,044)
__________ __________ __________
BALANCE, December 31, 1996 598,541 1,967,838 19,916,165
Net Income 2,325,487
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 1,970 182,652
Issuance of Common Stock under
Employee Plans 181 14,024
Issuance of Common Stock under
5% Common Stock Dividend 29,640 2,875,003 (2,904,643)
Retirement of Treasury Stock
(12,000 shares) (3,000) (224,542)
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale, net of tax
Cash Dividends($.351 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 $ 627,332 $4,814,975 $18,460,729
========== ========== ==========
See notes to consolidated financial statements.
<CAPTION>
Net Unrealized
Gain/(Loss) Treasury
on Securities Stock TOTAL
__________ __________ __________
<S> <C> <C> <C>
BALANCE, December 31, 1994 $(444,729) $ (67,041) $19,052,545
Net Income 2,099,052
Acquisition of Treasury Stock (359,876) (359,876)
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax 537,470 537,470
Cash Dividends ($.224 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 ($.305 per share) (760,044)
__________ __________ __________
BALANCE, December 31, 1996 103,033 (362,705) 22,222,872
Net Income 2,325,487
Acquisition of Treasury Stock (306,746) (306,746)
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 184,622
Issuance of Common Stock under
Employee Plans 14,205
Issuance of Common Stock under
5% Common Stock Dividend -0-
Retirement of Treasury Stock
(12,000 shares) 227,542 -0-
Change in Net Unrealized Gain/
(Loss) on Investment Securities
Available for Sale,
net of tax 191,690 191,690
Cash Dividends($.351 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 $ 294,723 $ (441,909) $23,755,850
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
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, Union National
Community Bank formerly known as 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
<PAGE>
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 - The Corporation determines a loan impaired when,
based on current information and events, it is probable that all
interest and principal payments due according to the contractual
terms of the loan agreement will not be collected. Larger groups
of small-balance loans, such as residential mortgages and
consumer installment loans, are collectively evaluated for
impairment.
An insignificant delay or shortfall in the amounts of payments
would not cause a loan to be rendered impaired. 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.
Nonaccrual Loans - Generally, a loan (including an impaired loan
as discussed above) 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. 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. 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 $-0- and $117,000
at December 31, 1997 and 1996, 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. This latter limited partnership investment has
increased to 49.995% as of January 1, 1998.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred.
Advertising expense for the years ended December 31, 1997, 1996,
and 1995 amounted to $80,062, $86,613, and $102,071,
respectively.
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
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. The Corporation
restated all prior period earnings per share data upon adoption
of this Statement effective December 31, 1997. See Note 13 -Stockholders'
Equity for the computation of basic and diluted earnings per share.
All per share amounts and average shares outstanding reflected in
the accompanying statements were adjusted to give retroactive
effect to the 5% common stock dividend effective on May 15, 1997.
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.
Effective January 1, 1997, the Corporation adopted the applicable
provisions of SFAS No. 125. There was no material incidence of
coverage under this Statement for 1997. The Corporation does not
expect the remaining provisions of these Statements to have a
material effect on the liquidity, results of operations or
capital resources when they become effective in 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, (SFAS No. 130), "Reporting Comprehensive
Income." This Statement establishes standards for the 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 impact of this
Statement on the Corporation would be to require additional
disclosures in the Corporation's financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." This Statement
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective
for fiscal years beginning after December 15, 1997. The impact of
this Statement on the Corporation will be to require additional
disclosures in the Corporation's financial statements.
<PAGE>
<TABLE>
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and fair values of investment securities are
as follows:
<CAPTION>
At December 31, 1997
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ 17,360,686 $ 382,639
Corporate Securities 1,509,161 5,209
_______________ ______________
TOTAL $ 18,869,847 $ 387,848
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ 4,008,381 $ 11,016
Obligations of Other U.S.
Government Agencies 18,306,612 102,521
Mortgage-Backed Securities 20,753,868 149,693
Equity Securities 2,351,362 292,734
_______________ ______________
TOTAL $ 45,420,223 $ 555,964
=============== ==============
<CAPTION>
At December 31, 1997
________________________________
Gross
Unrealized Fair
Losses Values
_______________ ______________
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ (311,629) $ 17,431,696
Corporate Securities (3,120) 1,511,250
_______________ ______________
TOTAL $ (314,749) $ 18,942,946
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ (1,892) $ 4,017,505
Obligations of Other U.S.
Government Agencies (12,097) 18,397,036
Mortgage-Backed Securities (95,424) 20,808,137
Equity Securities -0- 2,644,096
_______________ ______________
TOTAL $ (109,413) $ 45,866,774
=============== ==============
<CAPTION>
At December 31, 1996
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
<S> <C> <C>
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
=============== ==============
<CAPTION>
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
=============== ==============
</TABLE>
There are no significant concentrations of investments (greater
than 10% of stockholders' equity) in any individual security
issuer.
Investment securities carried at $18,194,486 and $10,211,117 at
December 31, 1997 and 1996, respectively, were pledged to secure
public, trust, and government deposits.
The amortized cost and fair value of debt securities at December
31, 1997, 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.
<TABLE>
<CAPTION>
Debt Securities
_____________________________________
Held to Maturity
_____________________________________
Amortized Fair
Cost Values
______________ _________________
<S> <C> <C>
Due in one year or less $ 496,586 $ 500,000
Due after one year through
five years 3,644,328 3,693,306
Due after five years through
ten years 2,700,368 2,742,912
Due after ten years 12,028,565 12,006,728
______________ _________________
18,869,847 18,942,946
Mortgage-Backed Securities -0- -0-
______________ _________________
$ 18,869,847 $ 18,942,946
============== =================
<CAPTION>
Debt Securities
_____________________________________
Available for Sale
_____________________________________
Amortized Fair
Cost Values
______________ _______________
<S> <C> <C>
Due in one year or less $ 8,492,780 $ 8,489,654
Due after one year through
five years 3,535,737 3,554,743
Due after five years through
ten years 10,286,476 10,370,144
Due after ten years -0- -0-
______________ _______________
22,314,993 22,414,541
Mortgage-Backed Securities 20,753,868 20,808,137
______________ _______________
$ 43,068,861 $ 43,222,678
============== ================
</TABLE>
Proceeds from sales of available for sale securities were
$5,548,285 and $8,994,369 during 1997 and 1996, respectively.
Investment securities gains/losses include gross realized gains
of $4,838 and gross realized losses of $2,775 during 1997 and
gross realized gains of $45,671 and gross realized losses of
$43,363 during 1996 as a result of sales of available for sale
securities. The related income tax expense amounted to $701 and
$785 during 1997 and 1996, respectively, for net investment
securities gains/losses.
Mortgage-backed securities, as disclosed in the two preceding
tables, are issued by U.S. Government agencies or corporations.
<PAGE>
<TABLE>
NOTE 3 - LOANS
Loans are summarized as follows:
<CAPTION>
December 31, December 31,
1997 1996
____________ ______________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 93,495,375 $ 82,169,284
Commercial and Industrial 23,777,078 21,947,488
Construction and Land Development 9,629,413 4,035,276
Agricultural 4,598,191 4,366,652
Commercial and Industrial 6,035,077 5,235,323
Consumer 9,320,106 8,793,805
Agricultural 2,212,888 1,609,225
Political Subdivisions 3,390,061 2,027,186
Other 329,639 272,703
____________ ______________
Total Loans 152,787,828 130,456,942
Less: Unearned Income (88,579) (65,757)
____________ ______________
Net Loans $152,699,249 $130,391,185
============ ==============
</TABLE>
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 was $25,772 and $28,129 at December 31, 1997 and 1996,
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 $1,546 and $2,250 at
December 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans was $302,655 and $98,317 during the
year ended December 31, 1997 and 1996, respectively. For the year
ended December 31, 1997 and 1996, 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 $706,046, $842,949, and
$1,225,261 at December 31, 1997, 1996, and 1995, 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
$4,878,930 at December 31, 1997. 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:
<TABLE>
<CAPTION>
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
Balance, Beginning of Year $3,380,461 $3,343,586 $1,964,262
Additions 4,336,242 2,682,659 2,528,095
Deductions (2,837,773) (2,645,784) (1,148,771)
__________ __________ __________
Balance, End of Year $4,878,930 $3,380,461 $3,343,586
========== ========== ==========
</TABLE>
<TABLE>
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:
<CAPTION>
1997 1996 1995
__________ __________ ___________
<S> <C> <C> <C>
Balance, Beginning of Year $1,371,245 $1,264,528 $1,182,215
Provision Charged to
Operating Expense 390,250 150,000 158,800
Recoveries of Charged-Off Loans 31,254 21,188 30,836
Charged-Off Loans (199,986) (64,471) (107,323)
__________ __________ ___________
Balance, End of Year $1,592,763 $1,371,245 $1,264,528
========== ========== ===========
</TABLE>
<TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<CAPTION>
Estimated December 31, December 31,
Useful Lives 1997 1996
_____________ ____________ ____________
<S> <C> <C> <C>
Land $ 411,593 $ 411,593
Land Improvements 20 years 495,390 495,390
Buildings and
Improvements 15-50 years 5,086,515 5,080,215
Leasehold Improvements 20 years 266,120 262,176
Furniture, Fixtures and
Equipment 5-25 years 3,147,989 3,019,006
____________ ____________
Subtotal 9,407,607 9,268,380
Less: Accumulated Depreciation
and Amortization (3,992,743) (3,526,994)
____________ ____________
Premises and Equipment - Net $5,414,864 $5,741,386
============ ============
</TABLE>
Depreciation and amortization expense amounted to $465,748 in
1997, $461,458 in 1996, and $374,257 in 1995.
Total rental expense amounted to $43,461, $43,461, and $23,481
for the years ended December 31, 1997, 1996, and 1995,
respectively.
At December 31, 1997, the Corporation was obligated under
noncancelable operating leases for real estate with the future
minimum payments as follows:
<TABLE>
<S> <C>
1998 $ 43,461
1999 39,861
2000 39,461
2001 42,660
2002 42,660
Thereafter 106,650
________
$314,753
=========
</TABLE>
<PAGE>
<TABLE>
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted average interest rates at
December 31, were as follows:
<CAPTION>
1997 1996
____________________ ____________________
Amount Rate Amount Rate
___________ _____ ___________ ______
<S> <C> <C> <C> <C>
Treasury Tax and
Loan Notes $ 900,000 5.25% $ 489,414 5.15%
FHLB fixed-rate advance -0- - 2,500,000 5.93
___________ ___________
Total $ 900,000 $2,989,414
=========== ===========
</TABLE>
Under an agreement with the Federal Home Loan Bank of Pittsburgh
(FHLB), the Corporation has a line of credit available in the
amount of $7,829,000. As of December 31, 1997 and 1996, no
balance was outstanding on this line of credit. 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, 1997 had a
combined carrying value of $97,804,000. In addition, all FHLB
advances are secured by the FHLB capital stock owned by the
Corporation having a fair value of $2,153,900 and $1,159,900 at
December 31, 1997 and 1996, respectively. Under the Bank's
membership agreement with the FHLB, additional stock purchases
are required when total advances from the FHLB are increased.
<TABLE>
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
<CAPTION>
1997 1996
___________________ __________________
Amount Rate Amount Rate
________ ________ ________ _______
<S> <C> <C> <C> <C>
FHLB fixed-rate advances
maturing:
1997 $ -0- - % $ 1,500,000 5.85%
1998 4,671,000 5.92 4,671,000 5.92
1999 1,675,000 5.18 1,675,000 5.18
2000 3,300,000 6.02 2,000,000 6.11
2007 1,460,660 6.00 -0- -
FHLB adjustable-rate advances maturing:
2002 3,532,400 5.74 -0- -
FHLB convertible fixed-rate advances maturing:
2001 -0- - 2,500,000 4.97
2002 12,500,000 5.62 -0- -
___________ ______ ___________ _____
27,139,060 5.73 12,346,000 5.65
Limited Partnership Capital
Notes, maturing
1997 to 1999 190,000 - 330,000 -
___________ ___________
Total $27,329,060 $12,676,000
=========== ===========
</TABLE>
The FHLB advances are collateralized by the security agreement
and FHLB capital stock described in Note 6. FHLB's convertible
fixed-rate advances allow the FHLB the periodic option to convert
to a LIBOR adjustable-rate advance at the three-month LIBOR plus
.07% to .08%. Options amounting to $2,500,000 and $10,000,000
commence in 1998 and 1999, respectively. Upon FHLB's conversion,
the Bank has the option to repay the respective advances in full.
FHLB's adjustable-rate advances adjust annually at .06% to .07%
above the interest rate on the one year treasury's constant
maturity.
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 $374,283, $330,873, and $318,092
for the years ended December 31, 1997, 1996, and 1995,
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:
<TABLE>
<CAPTION>
1997 1996
___________ __________
<S> <C> <C>
Deferred Tax Assets(Liabilities)
Deferred Net Loan Fees $ 21,997 $ 62,868
Provision for Loan Losses 434,395 365,965
Depreciation (133,943) (108,884)
Investment in Limited Partnerships (28,521) (30,077)
Unrealized loss/(gain) on investment
securities available for sale (151,826) (53,078)
Other 11,880 14,635
___________ __________
Net Deferred Tax Asset $153,982 $251,429
=========== ==========
</TABLE>
The Corporation as of December 31, 1997, 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.
<PAGE>
An analysis of the income tax expense included in the
consolidated statements of income for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
_________ __________ __________
<S> <C> <C> <C>
Taxes Currently Payable $580,399 $321,865 $549,875
Deferred Income Taxes/(Benefit)
Related to:
Provision for
Loan Losses (68,430) (43,170) (27,986)
Deferred Net Loan Fees 40,871 44,549 49,520
Fixed Asset Depreciation 25,060 48,143 40,130
Other - Net 1,196 (14,925) 2,222
_________ __________ __________
Provision for Income
Taxes $579,096 $356,462 $613,761
========= ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996
__________________ ________________
Amount % Amount %
___________ ____ ________ _____
<S> <C> <C> <C> <C>
Tax at Statutory
Federal Income Tax Rate $ 987,558 34.0 $ 866,413 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (298,629) (10.3) (280,938)(11.0)
Income Tax Credits (113,672) (3.9) (231,277) (9.1)
Other 3,839 .1 2,264 .1
___________ ____ ________ _____
Provision for Income Taxes $ 579,096 19.9 $ 356,462 14.0
=========== ==== ======== =====
<CAPTION>
1995
__________________
Amount %
___________ ____
<S> <C> <C>
Tax at Statutory
Federal Income Tax Rate $ 922,356 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (229,378) (8.5)
Income Tax Credits (76,919) (2.8)
Other (2,298) (.1)
___________ ____
Provision for Income Taxes $ 613,761 22.6
=========== ====
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
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.
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
______________ ____________
<S> <C> <C>
Financial Instruments whose
Contract Amounts represent
Credit Risk:
Commitments to Extend Credit $10,400,856 $ 9,894,399
Unused Portion of Home Equity and
Overdraft Lines 5,173,238 2,078,493
Other Unused Commitments, Principally
Commercial Lines of Credit 11,949,139 10,504,256
Standby Letters of Credit and Financial
Guarantees Written 3,279,348 1,610,249
</TABLE>
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 15 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 $16,357,336 and $17,887,482 at December 31, 1997 and
1996, respectively. Interest expense on certificates of deposit
in denominations of $100,000 or more amounted to $958,253,
$877,033, and $598,287 for the years ended December 31, 1997,
1996, and 1995, respectively.
<PAGE>
NOTE 12 - REGULATORY RESTRICTIONS
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 1997
was approximately $1,021,000.
The Corporation's Bank subsidiary is subject to certain
restrictions in connection with the payment of dividends. 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 to its parent Corporation in 1998 of
approximately $4,306,324 plus an amount equal to the net profits
of the Bank in 1998 up to the date of any such dividend
declaration.
Banking regulations also require the Bank to maintain certain
minimum capital levels in relation to Bank assets. Failure to
meet minimum capital requirements could result in prompt
corrective action by the federal banking agencies. As of December
31, 1997 and 1996, the Bank was categorized as well capitalized
under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that
Management believes have changed the Bank's category. The Bank
maintains the following leverage and risk-based capital ratios:
<TABLE>
<CAPTION>
December 31,
_________________________
1997 1996
__________ ________
<S> <C> <C>
Actual Capital Ratio:
Tier I Capital to Average Total Assets 10.51% 11.36%
Minimum Required 4.00 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 15.35% 17.02%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 16.45% 18.12%
Minimum Required 8.00 8.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 10.00 10.00
</TABLE>
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, 1997, this limitation
amounted to approximately $2,395,000. These regulations also
require that any such investment, loan, extension of credit, or
advance be secured by securities having a market value in excess
of the amount thereof.
NOTE 13 - STOCKHOLDERS' EQUITY
On April 13, 1995, the Corporation approved the increase in the
number of authorized shares of Common Stock from 10,000,000 to
20,000,000 shares and the change in the par value of the
Corporation's Common Stock from fifty cents ($.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. On April 10, 1997, the Corporation's Board of
Directors declared a 5% common stock dividend effective May 15,
1997. All per share amounts and average shares outstanding
reflected in the accompanying statements were adjusted to give
retroactive effect to the common stock split and common stock
dividend.
In addition, the Corporation maintains a Dividend Reinvestment
and Stock Purchase 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
and optional cash payments within specified limits at prevailing
market prices. To the extent that shares are not available for
purchase by the plan in the open market, the Corporation has
reserved 157,500 shares of common stock to be issued under the
Plan. At December 31, 1997, 28,196 shares have been 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 earnings per share, net income and weighted average number of
shares outstanding for the years ended December 31, 1997, 1996
and 1995 as computed under the basic and diluted earnings per
share methods are as follows:
<TABLE>
<CAPTION>
Net Income Shares Per Share
___________ ________ ____________
<S> <C> <C> <C>
Year Ended December 31, 1997
Basic Earnings per Share:
Income Available to
Common Stockholders $2,325,487 2,489,403 $.93
Effect of Dilutive Securities:
Employee Stock Incentive
and Purchase Plans -0- 700
___________ ________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $2,325,487 2,490,103 $.93
=========== ========= =======
Year Ended December 31, 1996
Basic and Diluted Earnings per Share:
Income Available to
Common Stockholders $2,191,812 2,493,951 $.88
=========== ========= =======
Year Ended December 31, 1995
Basic and Diluted Earnings per Share:
Income Available to
Common Stockholders $2,099,052 2,501,548 $.84
=========== ========= =======
</TABLE>
<PAGE>
NOTE 14 - STOCK OPTION PLANS
On February 1, 1997, the Corporation established an Employee
Stock Purchase Plan which allows eligible employees to purchase
stock in the Corporation at the lower of $19.84 or 85% of the
fair market value of the stock on the date of exercise. Since
inception, 726 shares have been issued under the plan at prices
ranging from $19.52 to $19.77.
Under the Corporation's Stock Incentive Plans, options have been
granted to key personnel for terms up to 10 years at option
prices equal to the fair value of the shares on the date of the
grant. No shares have been issued under these plans.
There were no stock option transactions for the years ended
December 31, 1996 and 1995. Stock option transactions for the
year ended December 31, 1997 are summarized below:
<TABLE>
<CAPTION>
Stock Weighted-Average
Options Exercise Price
________ _________________
<S> <C> <C>
Options Granted:
Employee Stock Purchase Plan 15,000 $19.82
Stock Incentive Plans 4,830 23.27
________
19,830
Options Exercised (726) 19.57
__________
Options Outstanding and Exercisable
at December 31, 1997 (Prices range
from $19.73 to $23.27) 19,104 $20.63
==========
</TABLE>
The remaining average contractual life of options outstanding as
of December 31, 1997 is 5.8 years.
The per share weighted-average fair value of stock options
granted for the year ended December 31, 1997 was $5.73 on the
date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions for 1997: expected
dividend yield of 1.71%; risk-free interest rate of 6.13%;
expected life of 3.8 years; and an expected volatility over the
expected life of the options was 22.5%.
The Financial Accounting Standards Board issued Statement No. 123
(SFAS No.123), "Accounting for Stock-Based Compensation." This
Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument. Under this
method, compensation cost is measured at the grant date or other
measurement date over the amount an employee must pay to acquire
the stock. The accounting requirements of SFAS No.123 were
adopted as of January 1, 1996. As permitted by SFAS No. 123, the
Corporation has chosen to apply APB No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting
for the Stock Option Plans. Accordingly, no compensation cost has
been recognized for its stock options in the financial
statements. Had the Corporation determined compensation cost
based on the fair value at the grant date for its stock options
under SFAS No. 123, the Corporation's net income and earnings per
share would have been reduced to the pro forma amounts as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
_________________
<S> <C>
Net Income
As Reported $2,325,487
Pro Forma 2,211,846
Net Income per Share (Basic and
Assuming Dilution)
As Reported $.93
Pro Forma .89
</TABLE>
NOTE 15 - 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.
<PAGE>
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.
At December 31, 1997 and 1996, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
______________________________
Carrying
Value Fair Value
_____________ _______________
<S> <C> <C>
Assets:
Cash and Due from Banks $ 6,489,595 $ 6,489,595
Investment Securities
Held to Maturity 18,869,847 18,942,946
Investment Securities
Available for Sale 45,866,774 45,866,774
Loans, net of Unearned Income
and Allowance for Loan Losses 151,106,486 153,742,000
Accrued Interest Receivable 1,445,767 1,445,767
Liabilities:
Demand and Savings Deposits 85,926,798 85,926,798
Time Deposits 94,208,075 94,069,000
Short-term Borrowing 900,000 900,000
Long-term Debt 27,329,060 27,242,000
<CAPTION>
Contract
Amount Fair Value
____________ _____________
<S> <C> <C>
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit $ 30,802,581 $ 30,802,581
<CAPTION>
December 31, 1996
______________________________
Carrying
Value Fair Value
_____________ _______________
<S> <C> <C>
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
<CAPTION>
Contract
Amount Fair Value
____________ _____________
<S> <C> <C>
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit $ 24,087,397 $ 24,087,397
</TABLE>
NOTE 16 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1997 1996
____________ _____________
<S> <C> <C>
ASSETS
Cash in Subsidiary Bank $ 114,631 $ 14,705
Investment in Subsidiary 22,459,264 21,176,278
Other Equity Investment Securities 399,696 271,382
Investments in Limited
Partnerships 941,287 1,003,002
Recoverable Federal Income Taxes 159,022 175,508
____________ _____________
Total Assets $24,073,900 $ 22,640,875
============ =============
LIABILITIES
Limited Partnership Capital Notes$ 190,000 $ 330,000
Deferred Income Taxes 128,050 88,003
____________ _____________
Total Liabilities 318,050 418,003
STOCKHOLDERS' EQUITY
Common Stock 627,332 598,541
Surplus 4,814,975 1,967,838
Retained Earnings 18,460,729 19,916,165
Unrealized gain on investment
securities available for sale,
net of tax 294,723 103,033
Less: Treasury Stock (441,909) (362,705)
____________ _____________
Total Stockholders' Equity 23,755,850 22,222,872
____________ _____________
Total Liabilities and
Stockholders' Equity $ 24,073,900 $ 22,640,875
============ =============
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
__________________________
1997 1996
_____________ __________
<S> <C> <C>
INCOME
Dividends from Subsidiary $1,100,000 $ 742,500
Dividends on Other Equity
Investment Securities 8,882 9,358
Interest on Deposits in Subsidiary 3,647 3,054
Investment Securities Gains -0- -0-
Management Fees from Subsidiary 39,690 39,758
_____________ __________
Total Income 1,152,219 794,670
EXPENSES 140,660 166,870
_____________ __________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 1,011,559 627,800
PROVISION FOR INCOME TAXES (BENEFIT)(141,872) (272,244)
_____________ __________
1,153,431 900,044
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 1,172,056 1,291,768
_____________ _________
NET INCOME $2,325,487 $2,191,812
============= ==========
<CAPTION>
Years Ended December 31,
_________________________
1995
_____________
<S> <C>
INCOME
Dividends from Subsidiary $1,202,025
Dividends on Other Equity
Investment Securities 7,174
Interest on Deposits in Subsidiary 3,737
Investment Securities Gains 12,292
Management Fees from Subsidiary 37,155
_____________
Total Income 1,262,383
EXPENSES 41,589
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 1,220,794
PROVISION FOR INCOME TAXES (BENEFIT) (41,108)
_____________
1,261,902
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 837,150
_____________
NET INCOME $2,099,052
=============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
____________________________
1997 1996
______________ _____________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,325,487 $2,191,812
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Investment Securities (Gains)/Losses -0- -0-
Undistributed Income of
Subsidiary (1,172,056) (1,291,768)
Provision for Deferred Income Taxes (1,556) (19,497)
Decrease/(Increase) in Other Assets 78,200 (20,249)
______________ _____________
Net Cash Provided by Operating
Activities 1,230,075 860,298
CASH FLOWS from INVESTING ACTIVITIES
Investment in Limited Partnership -0- -0-
Increase in Investment in Subsidiary's
Common Stock -0- -0-
Purchases of Available for Sale
Securities (5,950) -0-
Proceeds from Sales of Available for
Sale Securities -0- -0-
______________ _____________
Net Cash Provided by (Used in)
Investing Activities (5,950) -0-
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (306,746) (119,173)
Payments on Long-Term Debt (140,000) (140,000)
Issuance of Common and Treasury Stock 198,827 130,866
Cash Dividends Paid (876,280) (760,044)
______________ _____________
Net Cash (Used in)
Financing Activities (1,124,199) (888,351)
______________ _____________
NET INCREASE/(DECREASE) in CASH 99,926 (28,053)
CASH - Beginning of Year 14,705 42,758
______________ _____________
CASH - End of Year $ 114,631 $ 14,705
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (12,000
shares in 1997 and 10,000
shares in 1996) $ 227,542 $ 153,384
Issuance of Capital Note for
Limited Partnership Interest -0- -0-
<CAPTION>
Years Ended December 31,
____________________________
1995
______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,099,052
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Investment Securities
Gains)/Losses (12,292)
Undistributed Income of
Subsidiary (837,150)
Provision for Deferred Income Taxes 10,081
Decrease/(Increase) in Other Assets (820)
______________
Net Cash Provided by Operating
Activities 1,258,871
CASH FLOWS from INVESTING ACTIVITIES
Investment in Limited Partnership (162,500)
Increase in Investment in Subsidiary's
Common Stock (300,000)
Purchases of Available for Sale
Securities -0-
Proceeds from Sales of Available for
Sale Securities 25,500
_______________
Net Cash Provided by (Used in)
Investing Activities (437,000)
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (359,876)
Payments on Long-Term Debt -0-
Issuance of Common and Treasury Stock -0-
Cash Dividends Paid (560,072)
_______________
Net Cash (Used in)
Financing Activities (919,948)
_______________
NET INCREASE/(DECREASE) in CASH (98,077)
CASH - Beginning of Year 140,835
_______________
CASH - End of Year $ 42,758
===============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (12,000
shares in 1997 and 10,000
shares in 1996) $ -0-
Issuance of Capital Note for
Limited Partnership Interest 470,000
</TABLE>
<PAGE>
NOTE 17 - SUBSEQUENT EVENTS
On February 5, 1998, the Corporation announced that the Board of
Directors had authorized and approved a plan to purchase up to
100,000 shares of the Corporation's outstanding common stock in
open market or privately negotiated transactions. The Board of
Directors believes that a redemption or repurchase of this type
is in the best interests of the Corporation and its stockholders
as a method to enhance long-term shareholder value. Currently,
the shares are to be held as treasury shares (issued, but not
outstanding shares). As of February 6, 1998, a total of 75,616
shares of common stock were repurchased under this plan at a cost
of $1,720,264. The amount repurchased thus far represents
approximately 3% of the outstanding shares of the Corporation as
of December 31, 1997. This amount was funded by a $1,725,000
dividend from the Corporation's wholly-owned subsidiary, Union
National Community Bank. The Bank paid the dividend from its
current cash flow and available retained earnings.
Effective February 6, 1998, the corporate title of the
Corporation's wholly-owned subsidiary was changed to "Union
National Community Bank" from "The Union National Mount Joy
Bank". The name change emphasizes the Bank's commitment to serve
its communities as an independent community bank and to ensure
the Bank's growth in these communities.
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, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
January 15, 1998, except for Note 17, as to which the date is
February 6, 1998
Lancaster, Pennsylvania
/s/ Trout, Ebersole & Groff, LLP
____________________________________
Trout, Ebersole and Groff, LLP
Certified Public Accountants
<TABLE>
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 1997 and 1996, are as follows:
<CAPTION>
1997
__________________________________________
(In Thousands) March June September December
31 30 30 31
_______ ______ ________ ________
<S> <C> <C> <C> <C>
Interest Income $3,804 $3,995 $4,111 $4,296
Interest Expense 1,744 1,821 1,928 2,058
_______ ______ ________ ________
Net Interest Income 2,060 2,174 2,183 2,238
Provision for Loan Losses 11 101 91 187
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,049 2,073 2,092 2,051
Other Operating Income 237 218 244 286
Other Operating Expenses 1,581 1,578 1,603 1,584
_______ ______ ________ ________
Income before Income Taxes 705 713 733 753
Provision for Income Taxes 139 144 147 149
_______ ______ ________ ________
Net Income $566 $569 $586 $604
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution)* $ 0.23 $0.23 $0.23 $0.24
======= ====== ======== ========
*Per Share information reflects the 5% stock dividend effective
on May 15, 1997 as discussed in Note 13 of the accompanying
consolidated financial statements.
<CAPTION>
1996
__________________________________________
(In Thousands) March June September December
31 30 30 31
_______ ______ ________ ________
<S> <C> <C> <C> <C>
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
(Basic and Assuming
Dilution)* $ 0.22 $0.22 $0.22 $0.22
======= ====== ======== ========
*Per Share information reflects the 5% stock dividend effective
on May 15, 1997 as discussed in Note 13 of the accompanying
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED SUMMARY OF OPERATIONS
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31,
__________________________________________
1997 1996 1995
__________ __________ __________
<S> <C> <C> <C>
INCOME AND EXPENSE
Interest Income $ 16,205 $ 14,218 $ 12,773
Interest Expense 7,550 6,380 5,175
__________ __________ __________
Net Interest Income 8,655 7,838 7,598
Provision for Loan Losses 390 150 159
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses 8,265 7,688 7,439
Other Operating Income 986 811 753
Other Operating Expenses 6,347 5,951 5,479
__________ __________ __________
Income before Income Taxes 2,904 2,548 2,713
Provision for Income Taxes
and Cumulative Effect of
Change in Accounting for
Income Taxes* 579 356 614
__________ __________ __________
Net Income for Year $ 2,325 $ 2,192 $ 2,099
========== ========== ==========
PER SHARE * *
Net Income (Basic and
Assuming Dilution) $ 0.93 $ 0.88 $ 0.84
Cash Dividends Paid 0.351 0.305 0.224
Average Shares Outstanding 2,489,403 2,493,951 2,501,548
FINANCIAL RATIOS
Return on Average Assets 1.09% 1.17% 1.28%
Return on Average
Stockholders' Equity 10.17 10.24 10.42
Dividend Payout Ratio 37.68 34.68 26.68
Average Stockholders' Equity
to Average Assets 10.68 11.40 12.24
AVERAGE BALANCE SHEET
Net Loans $ 140,925 $ 124,483 $115,026
Investments 57,551 48,707 38,320
Other Earning Assets 3,564 2,576 880
Total Assets 213,986 187,814 164,631
Deposits 168,814 154,474 139,896
Short-Term Borrowings 1,461 2,009 1,197
Long-Term Debt 19,425 8,411 2,320
Stockholders' Equity 22,859 21,411 20,149
BALANCE SHEET AT YEAR-END
Net Loans $152,699 $130,391 $120,417
Investments 64,737 54,890 39,437
Other Earning Assets 2,835 4,790 -0-
Total Assets 233,243 203,472 174,657
Deposits 180,135 164,513 143,368
Short-Term Borrowing 900 2,989 3,399
Long-Term Debt 27,329 12,676 6,270
Stockholders' Equity 23,756 22,223 20,769
* 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 and the 5% stock dividend effective on May 15, 1997.
<CAPTION>
Years Ended December 31,
__________________________________________
1994 1993
__________ __________
<S> <C> <C>
INCOME AND EXPENSE
Interest Income $ 11,801 $ 11,794
Interest Expense 4,131 4,277
__________ __________
Net Interest Income 7,670 7,517
Provision for Loan Losses 113 224
__________ __________
Net Interest Income
after Provision for
Loan Losses 7,557 7,293
Other Operating Income 631 577
Other Operating Expenses 5,207 5,021
__________ __________
Income before Income Taxes 2,981 2,849
Provision for Income Taxes
and Cumulative Effect of
Change in Accounting for
Income Taxes* 733 370*
__________ __________
Net Income for Year $ 2,248 $ 2,479
========== ==========
PER SHARE * *
Net Income (Basic and
Assuming Dilution) $ 0.89 $ 0.99
Cash Dividends Paid 0.210 0.202
Average Shares Outstanding 2,515,080 2,516,491
FINANCIAL RATIOS
Return on Average Assets 1.42% 1.67%
Return on Average
Stockholders' Equity 12.15 14.54
Dividend Payout Ratio 23.45 20.54
Average Stockholders' Equity
to Average Assets 11.72 11.48
AVERAGE BALANCE SHEET
Net Loans $ 105,427 $ 98,319
Investments 40,859 36,804
Other Earning Assets 3,313 4,986
Total Assets 157,830 148,476
Deposits 138,126 130,284
Short-Term Borrowings 383 429
Long-Term Debt -0- -0-
Stockholders' Equity 18,499 17,048
BALANCE SHEET AT YEAR-END
Net Loans $108,266 $102,176
Investments 38,652 36,284
Other Earning Assets 1,870 7,257
Total Assets 159,160 155,143
Deposits 139,208 135,839
Short-Term Borrowing 309 900
Long-Term Debt -0- -0-
Stockholders' Equity 19,053 17,800
* 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 and the 5% stock dividend effective on May 15, 1997.
</TABLE>
<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, Union National Community Bank
(the Bank) formerly known as The Union National Mount Joy 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. Readers should carefully review the risk factors
described in other documents the Corporation files from time to
time with the Securities and Exchange Commission (SEC), including
the Annual Report on SEC's Form 10-K for the year ended December
31, 1997, Quarterly Reports on Form 10-Q filed by the Corporation
in 1997 and 1998, and any Current Reports on Form 8-K filed by
the Corporation.
Results of Operations
_____________________
Overview
Consolidated net income for 1997 was $2,325,000, an increase of
6.1% over the consolidated net income of $2,192,000 for 1996. The
consolidated net income for 1996, increased by 4.4% from the
consolidated net income of $2,099,000 for 1995.
On a per share basis, net income for 1997 was $.93, as compared
to $.88 for 1996, and $.84 for 1995. The per share amounts
reflect the two-for-one stock split of the Corporation's Common
Stock effective on June 1, 1995 and the 5% stock dividend
effective May 15, 1997. The earnings per share information is the
same under the basic and assuming dilution methods.
Results of operations for 1997 as compared to 1996 were impacted
by the following items: (1) Net income increased due to a 13.2%
increase in average net loans, primarily residential and
commercial mortgages, which were funded by growth in deposits and
by additions to average borrowings; (2) net income decreased due
to the narrowing of the spread between the earnings rates on
loans and investments as compared to the interest rates paid on
certificates of deposit and long-term debt; (3) net income
decreased due to a 6.7% increase in other operating expenses; (4)
net income increased due to a 21.5% increase in other operating
income; and (5) net income decreased due to 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.
Results of operations for 1996 as compared to 1995 were impacted
by the following items: (1) Net income increased due to 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 borrowing; (2) net income
decreased due to the narrowing of the spread between the earnings
rates on loans and investments as compared to the interest rates
paid on certificates of deposit during 1996; (3) net income
increased due to a 7.7% increase in other operating income; (4)
net income decreased due to an 8.6% increase in other operating
expenses; and (5) net income increased due to an increase in
income tax credits available in 1996 as compared to 1995.
The growth in loans is considered a material favorable trend of
the Corporation which Management expects to continue through
1998. Management expects the growth in deposits for 1998 to be
comparable to the historic growth rate of deposits. Management
has taken specific actions to enhance the Bank's competitive
position for core deposits. These actions include a formal
officer calling program and a broadly based staff sales training
and incentive program to enhance the Bank's competitiveness for
loans, deposits and other financial services in northwestern
Lancaster County, Pennsylvania (the Market Area). Other actions
include the strategic promotion of the Bank's retail offices in
light of continued consolidation of financial institutions in the
Bank's market area; the promotion of intermediate-term
certificates of deposit, including a 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 early withdrawal feature during the life
of the certificate; and special promotions of the Bank's checking
account products. As a result of the above described efforts, the
Bank's certificate of deposit portfolio under $100,000 has
increased $9,600,000, or 14.1%, to $77,851,000 at December 31,
1997, from $68,232,000 at December 31, 1996. In addition, the
overnight cash deposits of the Bank's Trust Department were
invested into a money market account with the Bank currently
paying interest at a rate of 5.35%. This increased average
deposits for 1997 by $2,233,000. Other average checking and
savings deposits increased by $4,816,000 for 1997 over 1996, or
6.7%. The funding for the loan growth is further discussed under
the section on Liquidity.
Management expects the loan growth to continue through 1998 for
the following reasons: (1) lending rates are at generally
affordable rates for prospective borrowers; (2) implementation of
an officer calling program and a broadly based staff sales
training and incentive program; (3) further product development
and promotion of the Bank's consumer and home equity lines of
credit; (4) economic stability of the Market Area as discussed
later in this section; and (5) 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 1.09% for 1997, compared to 1.17% for
1996 and 1.28% for 1995. Net income as a percent of average
stockholders' equity, also known as return on equity (ROE), was
10.17% for 1997, compared to 10.24% for 1996 and 10.42% for 1995.
The ROA and ROE for 1997 and 1996 were impacted by the factors
discussed above.
It is anticipated that economic activity in the Bank's Market
Area during 1998 appears favorable due to the availability of
generally low lending rates and continued residential
construction 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 1997, 1996, and 1995.
Net interest income for 1997 increased by $853,000, or 10.3%,
over 1996. Net interest income for 1996 increased by $336,000, or
4.2%, from 1995. Commercial, residential, and consumer average
loan growth of $16,442,000 and average investment security growth
of $8,844,000 was funded by the growth in average deposits of
$14,340,000 and by the growth in average long-term debt of
$11,014,000. The additional long-term debt represented fixed-rate
and variable-rate advances. Average earning assets increased in
the amount of $26,274,000 in the aggregate over 1996. The volume
growth in earning assets and interest-bearing liabilities
increased net interest income by the amount of $1,002,000 in 1997
over 1996, as compared to $512,000 in 1996 over 1995.
<PAGE>
The overall interest rate on the average total earning assets
decreased to 8.3% for 1997 as compared to 8.4% for 1996 due to
the refinancing of higher interest rate loans to lower interest
rates. More significantly, the overall interest rate on the
average interest-bearing liabilities increased to 4.4% for 1997,
as compared to 4.2% for 1996 due to the change in the mix of
interest-bearing liabilities in the form of additional long-term
debt and additional funds in higher paying money market accounts.
The net effect of all interest rate fluctuations and funding
changes was to decrease net interest income in the amount of
$149,000 in 1997 from 1996, as compared to a decrease of $176,000
in 1996 from 1995. See Management's discussion below concerning
the anticipated impact of these interest rate fluctuations to the
results of operations for 1998.
In order to enhance the net interest income in future periods,
Management has entered into transactions that increase earning
assets funded by advances from the Federal Home Loan Bank of
Pittsburgh (FHLB). The terms and amounts of the transactions,
when combined with the Bank's overall balance sheet structure,
maintain the Bank within its interest rate risk policies. As of
December 31, 1997, the Bank has received long-term advances of
$27,139,000 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 March 1998 to December 2007.
For 1998, Management currently expects a further narrowing of its
net interest margin percentage due to a currently expected
increase in the overall interest rate on average interest-bearing
liabilities as compared to the levels of 1997. This results from
the increased level of higher interest rate average liabilities
in the form of long-term debt and funds in money market accounts.
In contrast, the growth in the earning assets during 1997 is
currently expected to increase net interest margin for 1998 over
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 1998, 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, 1997, Management expects
an overall immaterial impact to the net interest margin for 1998,
as compared to 1997. See discussions on Liquidity and Market Risk
- - Interest Rate Risk.
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 $168,000 for
<TABLE>
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
<CAPTION>
Year Ended
December 31, 1997
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
ASSETS
Interest-Bearing Deposits
in Other Banks $ 84 $ 3 3.6%
Federal Funds Sold 3,480 192 5.5
Investment Securities:
Taxable 41,262 2,659 6.4
Exempt from Federal Taxes 16,289 1,315 8.1
Loans-Net* 140,925 12,553 8.9
_________ ________ ______
Total Earning Assets 202,040 $ 16,722 8.3%
======== ======
Allowance for Loan Losses (1,456)
Other Nonearning Assets 13,402
_________
TOTAL ASSETS $ 213,986
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 38,134 $ 852 2.2%
Savings 24,184 590 2.4
Time 89,992 4,913 5.5
Short-Term Borrowing 1,461 87 6.0
Long-Term Debt 19,425 1,108 5.7
_________ ________ ______
Total Interest-Bearing
Liabilities 173,196 $ 7,550 4.4%
======== ======
Demand Deposits 16,504
Other Liabilities 1,427
_________
TOTAL LIABILITIES 191,127
Stockholders' Equity 22,859
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 213,986
=========
Net Interest Income/Yield on
Average Earning Assets $ 9,172 4.5%
======== ======
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 $572,000 for the year ended December 31,
1997, $515,000 for 1996 and $458,000 for 1995.
<CAPTION>
Year Ended
December 31, 1996
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
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%
======== ======
<CAPTION>
Year Ended
December 31, 1995
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
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%
======== ======
<PAGE>
1997, as compared to $44,000 for 1996 and $76,000 for 1995.
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 $390,000 in
1997, $150,000 in 1996 and $159,000 in 1995. The increase in the
provision for loan losses from 1996 to 1997 was in response to
the volume loan growth during 1997 and the increase in net
charge-offs in 1997 over 1996. See discussion on Loan
Quality/Allowance for Loan Losses.
Other Operating Income
Other operating income for the current year was $986,000,
representing an increase of $175,000, or 21.5%, over 1996.
Contributing to this increase were additional earnings resulting
from an increase in automatic teller machine (ATM) usage fees,
card usage fees (surcharges) established in October 1997, and
related revenues generated from new ATM locations established in
1997 and 1996 by an aggregate amount of $60,000; from an increase
in insufficient funds charges as volumes increased by an amount
of $28,000; from new revenue sources in the amount of $24,000
including debit card interchange and commercial account analysis
fees; and from an increase in letter of credit fees and trust
revenues. Currently, the Bank surcharges at its ATMs; however,
ATM surcharges, or the elimination thereof, may be subject to
future legislation.
Other operating income for 1996 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 Expenses
Total other operating expenses for 1997 increased by $396,000, or
6.7%, over 1996. Of this increase, employee salaries and wages
and related fringe benefits increased by $251,000, or 7.4%, over
1996. This increase was essentially due to new staff additions
and due to annual merit, cost of living, and incentive pay
increases. Related profit sharing expense, payroll taxes, and
healthcare costs increased similarly. Staff additions included
training and administrative support positions.
Occupancy, furniture and equipment expenses in 1997 increased by
$17,900, or 1.9%, from 1996. This increase was primarily due to
increases in other real estate expenses and equipment service
agreements offset by a decrease in snow removal costs.
The FDIC Insurance Assessment expense increased by $18,000 for
1997 as compared to 1996. The FDIC Insurance Assessment rate
increased to $.0129 for every $100 in deposits as of January 1,
1997 from a charge of $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
1998.
Other operating expense items in 1997 increased by $109,000, or
6.8%, over 1996. Contributing factors to the increase in other
operating expenses as compared to 1996 included the following:
(1) an increase in professional and consulting fees in the amount
of $79,000; and (2) an increase in ATM transaction and clearing
costs in the amount of $36,000. The increase in professional and
consulting fees included implementation legal costs for employee
stock option plans, consulting fees for broadly based staff sales
training program, additional legal fees with respect to certain
loan collections, and fees for the audit of electronic data
processing systems. ATM transaction and clearing costs increased
due to the addition of remote ATMs in 1997 and 1996, due to new
debit card clearing costs, and due to an increase in customer
transactions by 44% in 1997 over 1996 at the Bank's ATMs. As an
offset to the increase in other operating expenses, net losses
and charge-offs from the limited partnerships in the amount of
$62,000 were recognized as other operating expenses for 1997, as
compared to $107,000 for 1996.
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, 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 Manheim retail
office with costs of $104,000 in 1996 over 1995 and additional
support staff positions. Occupancy, furniture and equipment
expenses for 1996 increased by $243,000, or 34.1%, over 1995.
This increase was primarily due to increased depreciation and
occupancy costs in the amount of $70,000 resulting from the main
office expansion, renovation and furnishing and due to the
additional occupancy costs related to the Manheim retail office
in the amount of $47,500. Other expense items in 1996 decreased
by $9,000, or .5%, from 1995. The significant items that changed
as compared to 1995 are as follows: (1) FDIC insurance
assessments decreased by $158,000 due to the decline in the FDIC
Insurance Assessment rate as of June 1, 1995; (2) a net increase
of $32,000 in net losses, charge-offs and costs related to the
limited partnerships; (3) an increase in various expenses
impacted
</TABLE>
<TABLE>
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
<CAPTION>
1997 Compared to 1996
_____________________________
Total
(In Thousands) Change Volume Rate
________ ________ _____
<S> <C> <C> <C>
Interest Income From Interest-
Bearing Deposits in Other Banks $ -0- $ 1 $ (1)
Federal Funds Sold 56 53 3
Investment Securities:
Taxable 586 494 92
Exempt from Federal Taxes 58 92 (34)
Loans-Net 1,324 1,467 (143)
________ ________ _____
Total Earning Assets 2,024 2,107 (83)
Interest Exepense On
Deposits:
Interest-Bearing Demand 153 91 62
Savings 5 21 (16)
Time 418 398 20
Short-Term Borrowing (28) (33) 5
Long-Term Debt 623 628 (5)
________ ________ _____
Total Interest-Bearing
Liabilities 1,171 1,105 66
________ ________ _____
Net Interest Income $ 853 $ 1,002 $(149)
======== ======== =====
Balances of nonaccuaral 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%.
<CAPTION>
1996 Compared to 1995
_____________________________
Total
(In Thousands) Change Volume Rate
________ ________ _____
<S> <C> <C> <C>
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 Exepense 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)
======== ======== =====
Balances of nonaccuaral 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%.
<PAGE>
by a general growth in business loan and deposit volumes; and (4)
an increase in amortization expense for computer software
additions.
The Corporation has conducted a comprehensive review of its
computer systems to identify the systems that could be affected
by the Year 2000 issue including interfaces with external
sources. The Corporation is utilizing both internal and external
resources to correct or modify and test the systems for Year 2000
compliance. It is currently expected that all modifications will
be completed by December 31, 1998, allowing adequate time for
testing. All significant computer software utilized by the
Corporation is supplied by outside vendors. These vendors have
confirmed either that the software is currently Year 2000
compliant or that plans for modification will be made available
to the Corporation no later than December 31, 1998. In addition,
the costs of converting these programs are largely included in
the annual maintenance costs expensed by the Corporation. The
Corporation currently expects that the Year 2000 issue will not
pose significant operational problems for the Corporation's
computer systems after modification and conversion during 1998.
Significant testing for compliance is currently expected to be
completed in 1998. The total cost of the project is currently
estimated to have an immaterial impact to the Corporation's
financial position and results of operations for 1998 and 1999.
Income Taxes
The Corporation's income tax expense for 1997 was $579,000, as
compared to $356,000 in 1996 and $614,000 in 1995. The effective
tax rate was 19.9%, 14.0% and 22.6% in 1997, 1996 and 1995,
respectively. The increase in the income tax expense and
effective tax rate from 1996 to 1997 was due to the increase in
corporate earnings before income taxes and the reduction in total
available income tax credits from tax advantaged limited
partnerships of $117,000 from 1996 to 1997. The decline in the
income tax expense and effective tax rate from 1995 to 1996 was
due to the decrease in corporate earnings before income taxes and
newly available historic federal income tax credits. The 1996
historic tax credits in the amount of $185,000 resulted 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. The available
income tax credits from the limited partnerships for 1998 are
currently expected to be commensurate with 1997 levels.
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
borrowing. 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.
Effective January 1, 1997, the Corporation adopted the applicable
provisions of SFAS No. 125. There was no material incidence of
coverage under this Statement for 1997. The Corporation does not
expect the remaining provisions of these Statements to have a
material effect on the liquidity, results of operations or
capital resources when they become effective in 1998.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 130, (SFAS No. 130), "Reporting Comprehensive
Income." This Statement establishes standards for the 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 impact of this
Statement on the Corporation will be to require additional
disclosures in the Corporation's financial statements.
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131, (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." This Statement
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas, and major customers. The Statement is effective
for fiscal years beginning after December 15, 1997. The impact of
this Statement on the Corporation will be to require additional
disclosures in the Corporation's financial statements.
Financial Condition
Investment Securities
The Corporation has segregated its investment securities into two
categories: those held to maturity and those available for sale.
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 1998.
The amortized cost of the investment securities increased by
$9,556,000 from the prior year, representing a 17.5% increase.
The increase primarily consisted of purchases of fixed-rate
securities in U. S. Treasuries and other U. S. Government
Agencies, which amounted to an increase in amortized cost of
$10,482,000 from the prior year. Primarily all these purchases
are currently expected to be called or to mature within three
years. Adjustable-rate mortgage-backed securities decreased by an
amortized cost of $6,043,000 from the prior year as a result of
normal amortization, prepayments and certain selected security
sales. The net increase in the investment securities was funded
by growth in average deposits and additional borrowing from the
FHLB. Due to the generally lower long-term mortgage rates during
1997 as compared to 1996, the prepayment speed on adjustable-rate
mortgage securities significantly increased as homebuyers moved
to fixed-rate mortgages. Higher prepayment speeds on investment
securities purchased with a premium will depress the net interest
margin as the premium is amortized more rapidly. Consequently,
Management periodically assesses the strategy of selling
adjustable-rate mortgage-backed securities, as well as other
available for sale securities. Investment security purchases and
sales are effected in order to enhance the Bank's net interest
margin, while managing liquidity and interest rate risk within
specified limits. As of December 31, 1997 and 1996, the amortized
cost of mortgage-backed securities with adjustable-rate caps of
2% per year amounted to $6,418,000 and $13,415,000 and with
adjustable-rate caps of 1% per year amounted to $7,801,000 and
$6,792,000, respectively. The amortized cost of floating rate
securities, including adjustable rate-mortgage-backed securities,
decreased to $16,991,000 at December 31, 1997, as compared to
$23,034,000 at December 31, 1996.
The expected cash flows from the investment securities, including
estimated prepayments and expected call options, is currently
estimated at an amount of $14,124,000 for 1998, a decrease from
approximately $17,902,000 in cash flows for 1997. The Bank's
mortgage-backed
<PAGE>
securities are issued by U. S. Government agencies or
corporations.
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, 1997. 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 $447,000
and $73,000 at December 31, 1997, respectively. This compared to
a total unrealized holding gain for securities classified as
available for sale and as held to maturity of $156,000 and
$105,000 at December 31, 1996, respectively. The unrealized
holding gain on the available for sale securities, net of income
tax effect, amounted to an increase in stockholders' equity of
$295,000 and $103,000 at December 31, 1997 and 1996,
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:
</TABLE>
<TABLE>
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1997 1996
_______________________ _____________________
Available Held to Available Held to
for Sale Maturity for Sale Maturity
____________ ________ __________ ________
<S> <C> <C> <C> <C>
U. S. Treasury
Securities $ 4,018 $ -0- $ 2,986 $ -0-
Obligations of
Other U.S.
Government Agencies 18,397 -0- 8,860 -0-
Obligations of State
and Political
Subdivisions -0- 17,361 -0- 16,116
Corporate Securities -0- 1,509 -0- 1,008
Mortgage-Backed
Securities 20,808 -0- 24,398 -0-
Equity Securities 2,644 -0- 1,522 -0-
____________ ________ __________ ________
Total $ 45,867 $18,870 $ 37,766 $17,124
============ ======== ========== ========
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1995
________________________
Available Held to
for Sale Maturity
____________ _________
<S> <C> <C>
U. S. Treasury
Securities $ 4,011 $ -0-
Obligations of
Other U.S.
Government Agencies 7,663 -0-
Obligations of State
and Political
Subdivisions -0- 13,384
Corporate Securities -0- 500
Mortgage-Backed
Securities 12,854 -0-
Equity Securities 1,025 -0-
____________ _________
Total $ 25,553 $13,884
============ =========
</TABLE>
The following table illustrates the maturities of investment
securities and the weighted average yields based upon amortized
costs as of December 31, 1997. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
<TABLE>
<CAPTION>
Within 1 - 5 5 - 10 Over
(In Thousands) 1 Year Years Years 10 Years
________ _______ _______ _________
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ 2,500 $ 1,518 $ -0- $ -0-
Amortized Cost 2,500 1,508 -0- -0-
Yield 5.59% 6.11%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 5,990 2,037 10,370 -0-
Amortized Cost 5,993 2,027 10,287 -0-
Yield 5.87% 6.70% 6.78%
Mortgage-Backed Securities
by contractual maturity (1):
Estimated Market Value -0- -0- 125 20,683
Amortized Cost -0- -0- 129 20,625
Yield 5.84% 6.61%
Equity Securities:
Estimated Market Value
Amortized Cost
Yield
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value -0- 2,682 2,743 12,007
Amortized Cost -0- 2,632 2,701 12,028
Yield 7.65% 7.51% 8.21%
Corporate Securities:
Estimated Market Value 500 1,011 -0- -0-
Amortized Cost 497 1,012 -0- -0-
Yield 6.02% 6.17%
Total Securities:
Estimated Market Value
Amortized Cost
Yield
(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.
<CAPTION>
(In Thousands) Total
______
<S> <C>
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ 4,018
Amortized Cost 4,008
Yield 5.79%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 18,397
Amortized Cost 18,307
Yield 6.47%
Mortgage-Backed Securities
by contractual maturity (1):
Estimated Market Value 20,808
Amortized Cost 20,754
Yield 6.61%
Equity Securities:
Estimated Market Value 2,644
Amortized Cost 2,351
Yield 6.48%
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 17,432
Amortized Cost 17,361
Yield 8.02%
Corporate Securities:
Estimated Market Value 1,511
Amortized Cost 1,509
Yield 6.12%
______
Total Securities:
Estimated Market Value $64,810
Amortized Cost 64,290
Yield 6.88%
======
(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.
</TABLE>
<PAGE>
Loans
The total investment in net loans was $152,699,000 at December
31, 1997, representing a $22,308,000, or 17.1%, increase over the
investment of $130,391,000 at December 31, 1996. The increase in
loans resulted primarily from continued demand for residential
and commercial mortgage loans. The category of construction and
land development loans increased to $9,630,000 from $4,035,000 at
December 31, 1996. This increase resulted from new loan
originations for land development, commercial and agricultural
building construction, and residential construction mortgages. At
December 31, 1997, 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 $43,717,000 and $36,175,000 as
of December 31, 1997 and 1996, respectively. See section on
Market Risk - Interest Rate Risk.
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
operations, liquidity, or capital resources. Further, based on
known information, Management believes that the effects of
current and past economic conditions and other unfavorable
business conditions may result in the inability of loans
amounting to $2,705,000 to comply with their respective repayment
terms. This represents an increase over the amount of $1,860,000
at December 31, 1996. In aggregate, 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. These
loans are not considered impaired as defined by current generally
accepted accounting principles. 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 1998. The nonperforming loans table, appearing in the section
entitled Nonperforming Loans, does not include the aforementioned
loans.
Loans are composed of the following:
<TABLE>
<CAPTION>
December 31,
__________________________________
(In Thousands) 1997 1996 1995
__________ _________ __________
<S> <C> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 93,495 $ 82,169 $75,430
Commercial and Industrial 23,777 21,948 21,098
Construction and Land
Development 9,630 4,035 4,198
Agricultural 4,598 4,368 3,602
Commercial and Industrial 6,035 5,235 4,725
Consumer 9,320 8,794 7,853
Agricultural 2,213 1,609 1,609
Other 3,720 2,299 2,003
__________ _________ __________
Total Loans 152,788 130,457 120,518
Less: Unearned Income (89) (66) (101)
__________ _________ __________
Net Loans $152,699 $130,391 $120,417
========== ========= ==========
<CAPTION>
December 31,
____________________________________
(In Thousands) 1994 1993
__________ _________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 67,760 $ 61,473
Commercial and Industrial 17,099 18,591
Construction and Land
Development 4,431 3,276
Agricultural 3,734 4,779
Commercial and Industrial 3,815 3,337
Consumer 7,647 7,223
Agricultural 2,252 2,362
Other 1,778 1,611
__________ _________
Total Loans 108,516 102,652
Less: Unearned Income (250) (476)
__________ _________
Net Loans $108,266 $102,176
========== =========
</TABLE>
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Years to Maturity (1)
____________________________________
Within 1 - 5 Over
(In Thousands) 1 Year Years 5 Years Total
_______ _________ ________ _________
<S> <C> <C> <C> <C>
Commercial,
Agricultural and Other $ 7,657 $ 8,251 $24,435 $40,343
Construction and Land
Development 6,494 2,217 919 9,630
_______ _________ ________ _________
Total $14,151 $10,468 $25,354 $49,973
======= ========= ======== =========
Fixed Interest Rates $ 5,394 $ 5,561 $ 8,090 $19,045
Floating or Adjustable
Interest Rates 8,757 4,907 17,264 30,928
_______ _________ ________ _________
Total $14,151 $10,468 $25,354 $49,973
======= ========= ======== =========
(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.
</TABLE>
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 $47,000 and $17,000
would have been recorded on such loans for the years ended
December 31, 1997 and 1996, respectively. Interest income
recognized on such loans for the years ended December 31, 1997
and 1996, approximated $4,000 and $5,000, respectively. At
December 31, 1997, total nonperforming loans amounted to
$706,000, or .5% of total net loans, as compared to $843,000 at
December 31, 1996. Historically, the percent of nonperforming
loans to total net loans as of December 31, for the previous
five-year period, was an average of .7%. The reduction is a
result of increased review and supervision of the applicable loan
credits. There are no troubled debt restructurings.
At December 31, 1997 and 1996, the recorded investment in loans
that are considered to be impaired under generally accepted
accounting principles was $26,000 and $28,000, 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 $2,000 as of
December 31, 1997 and 1996, respectively. The average recorded
investment in impaired loans was $303,000 and $98,000 during the
years ended December 31, 1997 and 1996, respectively.
<PAGE>
<TABLE>
The following shows the summary of nonperforming loans:
<CAPTION>
December 31,
_________________________________
(In Thousands) 1997 1996 1995
_________ ________ __________
<S> <C> <C> <C>
Nonaccruing Loans $ 94 $ 91 $ 203
Accrual Loans - 90 days or
more past due 612 752 1,022
_________ ________ __________
Total Nonperforming
Loans $ 706 $ 843 $ 1,225
========= ======== ==========
Nonperforming Loans
as a % of Net Loans .5% .6% 1.0%
========= ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans 226% 163% 103%
========= ======== ==========
<CAPTION>
December 31,
___________________________________
(In Thousands) 1994 1993
_____________ _____________
<S> <C> <C>
Nonaccruing Loans $ -0- $ 55
Accrual Loans - 90 days or
more past due 618 541
_____________ _____________
Total Nonperforming
Loans $ 618 $ 596
========= ========
Nonperforming Loans
as a % of Net Loans .6% .6%
========= ========
Allowance for Loan
Losses as a % of
Nonperforming Loans 191% 187%
========= ========
</TABLE>
Other real estate owned includes assets acquired through
foreclosure and loans identified as in-substance foreclosures. 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. 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
owned are recorded in other expenses. Other real estate owned
amounted to $-0- and $117,000 at December 31, 1997 and 1996,
respectively. The other real estate expense, including cost
writedowns to fair value, that impacted the results of operations
amounted to $34,000 and $23,000 for the years ended December 31,
1997 and 1996, respectively.
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, 1997, 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 for first mortgage
real estate loans.
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 June 30, 1997.
The allowance for loan losses increased by $222,000 from the
prior year and the ratio of the allowance to net loans was 1.04%
and 1.05% at December 31, 1997 and 1996, respectively. The
increase in the allowance for loan losses over 1996 reflects an
increase of $94,000 in net loan charge-offs over the average of
the previous five-year period and a 17.1% increase in net loans.
The allowance for loan losses as a percentage of nonperforming
loans reflected an increase in coverage to 226% at December 31,
1997, as compared to 163% at December 31, 1996. Management
believes the current allowance for loan losses of $1,593,000 to
be adequate to meet potential loan losses. Management expects
loan charge-offs, net of recoveries, to exceed the average level
of net loan charge-offs for the previous five-year period as a
result of the annual growth in net loans.
<TABLE>
Analysis of Allowance for Loan Losses
<CAPTION>
Years Ended December 31,
_________________________________
(In Thousands) 1997 1996 1995
__________ ________ _________
<S> <C> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $140,925 $124,483 $115,026
========== ======== =========
Allowance for Loan Losses,
Beginning of Year $ 1,371 $ 1,265 $ 1,182
Loans Charged-Off During Year:
Real Estate-Mortgage* -0- -0- -0-
Installment Loans to
Individuals 83 47 57
Commercial, Industrial
and Agricultural 117 18 50
__________ ________ _________
Total Charge-Offs 200 65 107
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0- -0-
Installment Loans to
Individuals 13 11 7
Commercial, Industrial
and Agricultural 19 10 24
__________ ________ _________
Total Recoveries 32 21 31
__________ ________ _________
Net Loans Charged-Off 168 44 76
Provision for Loan Losses
Charged to Operations 390 150 159
__________ ________ _________
Allowance for Loan Losses,
End of Year $ 1,593 $ 1,371 $ 1,265
========== ======== =========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .12% .04% .07%
========== ======== =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.04% 1.05% 1.05%
========== ======== =========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
<CAPTION>
Years Ended December 31,
_________________________________
(In Thousands) 1994 1993
__________ ________
<S> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $105,427 $ 98,319
========== ========
Allowance for Loan Losses,
Beginning of Year $ 1,114 $ 952
Loans Charged-Off During Year:
Real Estate-Mortgage* -0- 15
Installment Loans to
Individuals 30 88
Commercial, Industrial
and Agricultural 46 54
__________ ________
Total Charge-Offs 76 157
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0-
Installment Loans to
Individuals 19 44
Commercial, Industrial
and Agricultural 12 51
__________ ________
Total Recoveries 31 95
__________ ________
Net Loans Charged-Off 45 62
Provision for Loan Losses
Charged to Operations 113 224
__________ ________
Allowance for Loan Losses,
End of Year $ 1,182 $ 1,114
========== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .04% .06%
========== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.09% 1.09%
========== ========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
December 31, 1997
________________________________________
Amount Percent of Loans
(In Thousands) in each Category
_________________ ___________________
<S> <C> <C>
Commercial, Industrial
and Agricultural $ 532 33%
Real Estate-
Residential Mortgages 580 61
Installment Loans to
Individuals 481 6
____________ _____
$ 1,593 100%
============ =====
<CAPTION>
December 31, 1996
________________________________________
Amount Percent of Loans
(In Thousands) in each Category
_________________ ___________________
<S> <C> <C>
Commercial, Industrial
and Agricultural $ 436 30%
Real Estate-
Residential Mortgages 648 63
Installment Loans to
Individuals 287 7
____________ _____
$ 1,371 100%
============ =====
</TABLE>
Liquidity
The Corporation's objective is to maintain adequate liquidity to
fund needs at a reasonable cost and to provide contingency plans
to meet unanticipated funding needs or a loss of funding sources,
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 as follows: maturing investment securities, which
include overnight investments in federal funds sold; overnight
correspondent bank borrowing 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. Liquidity management is governed by policies and
measured on a quarterly basis. These measurements indicate that
liquidity generally remains stable and that liquidity
consistently exceeds the Bank's minimum defined level. There are
no known trends, or any known demands, commitments, events, or
uncertainties that will result in, or that are reasonably likely
to result in, liquidity increasing or decreasing in any material
way.
Membership in the FHLB provides the Bank with additional
liquidity alternatives such as short- or long-term funding on
fixed- or variable-rate terms. Available funding from the FHLB
amounts to an overnight borrowing capacity of up to $7,829,000
and a maximum available funding capacity of up to $75,669,000. In
order to provide funding for the Bank's loans and investments,
the Bank has outstanding borrowing from the FHLB of $27,139,000
and $14,846,000 at December 31, 1997 and 1996, respectively. For
1997, additional liquidity was provided from the Trust
Department's overnight cash deposits being invested with the Bank
in a money market account. As of December 31, 1997, $4,590,000
was held in the Trust's money market account.
Market Risk - Interest Rate Risk
As a financial institution, the Corporation's primary component
of market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact the level of income and
expense recorded on a large portion of the Bank's assets and
liabilities. Virtually all of the Corporation's interest-sensitive
assets and liabilities are held by the Bank, and
therefore, interest rate risk management procedures are performed
by the Bank. The nature of the Bank's current operations is such
that the Bank is not subject to foreign currency exchange or
commodity price risk. The Corporation does not own any trading
assets. The Corporation has not entered into any hedging
transactions such as interest rate floors, caps, and swaps.
The objectives of interest rate risk management are to maintain
or increase net interest income over a broad range of market
interest rate movements. The Asset and Liability Management
Committee is responsible for managing interest rate risk using
policies approved by the Bank's Board of Directors. The Bank
manages interest rate risk by changing the mix or repricing
characteristics of its investment securities portfolio and
borrowings from the FHLB and by the promotion or development of
specific loan and deposit products. The Bank retains an outside
consulting group to assist in monitoring its interest rate risk
using income simulation models on a quarterly basis. The
simulation model measures the sensitivity of future net interest
income to hypothetical changes in market interest rates.
In addition, the Bank utilizes an interest rate-sensitivity
report called a "GAP" report, which measures the terms to cash
flows or next repricing date of interest-earning assets and
interest-bearing liabilities. The Bank's GAP reports reflect a
consistent negative rate-sensitivity position, in that rate-sensitive
liabilities exceed rate-sensitive assets. The following
analysis reflects cumulative rate-sensitive assets of $86,834,000
as compared to cumulative rate-sensitive liabilities of
$102,575,000 as of the one-year time frame. The Bank's cumulative
interest-sensitivity gap for the one-year time frame is a
negative 6.8% of total assets at December 31, 1997, as compared
to a policy range of plus 15% to negative 15%, and as compared to
a negative 8.4% at December 31, 1996. The interest rate-sensitivity
analysis for the Bank with investment securities at
amortized cost at December 31, 1997, is as follows:
<TABLE>
Interest Rate Sensitivity
<CAPTION>
1 - 90 91 - 365 1 - 3 3 - 5
(In Thousands) Days Days Years Years
________ ________ ________ ________
<S> <C> <C> <C> <C>
ASSETS
Earning Assets:
Federal Funds Sold $ 2,835 $ -0- $ -0- $ -0-
Mortgage-Backed Securities:
Variable 5,283 11,207 -0- -0-
Fixed 140 413 1,052 975
Investment Securities 10,195 4,303 15,903 7,934
Net Loans:
Variable 20,347 12,433 8,245 2,692
Fixed 4,966 14,712 32,281 25,250
________ ________ ________ ________
TOTAL $ 43,766 $ 43,068 $ 57,481 $36,851
======== ======== ======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 9,234 $ -0- $ -0- $ -0-
Money Market 11,920 -0- -0- -0-
Savings 1,711 10,394 -0- -0-
Time 17,879 39,834 34,765 1,730
FHLB Advances and
Other Borrowings 5,715 5,888 14,975 -0-
________ ________ ________ ________
TOTAL $ 46,459 $ 56,116 $ 49,740 $ 1,730
======== ======== ======== =======
Cumulative Interest-
Sensitivity Gap $ (2,693)$(15,741) $ (8,000) $ 27,121
======== ======== ======== =======
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets (1.2%) (6.8%) (3.5%) 11.7%
======== ======== ======== =======
<CAPTION>
Over 5
(In Thousands) Years Total
________ ________
<S> <C> <C>
ASSETS
Earning Assets:
Federal Funds Sold $ -0- $ 2,835
Mortgage-Backed Securities:
Variable -0- 16,490
Fixed 1,682 4,262
Investment Securities 5,097 43,432
Net Loans:
Variable -0- 43,717
Fixed 31,773 108,982
________ ________
TOTAL $ 38,552 $219,718
======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 17,644 $26,878
Money Market 4,543 16,463
Savings 12,131 24,236
Time -0- 94,208
FHLB Advances and
Other Borrowings 1,461 28,039
________ ________
TOTAL $ 35,779 $189,824
======== ========
Cumulative Interest-
Sensitivity Gap $ 29,894
========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 12.9%
========
</TABLE>
<PAGE>
The amount of assets and liabilities shown, which reprice or
mature during a particular period, were determined based on the
earlier of the term to repricing or the term to repayment of the
asset or liability. Callable investment securities are reflected
based on the security's anticipated call date, where the call on
the security is likely when compared to the current interest rate
yield curve. Also, loans and mortgage-backed securities are
reflected based on contractual amortization or contractual
interest rate adjustments and on estimates for prepayments and
refinancings. Interest-bearing demand, money market, and savings
deposits have always been considered a stable source of funds and
although the rates are subject to change, rates on these accounts
historically have not changed as quickly or as often as other
loan and deposit rates. 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 periods. 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
fluctuations in these deposits as compared to the more sudden and
significant fluctuations of interest rates on short-term loans
and time deposits. Similar computations were made for savings
deposits.
Certain shortcomings are inherent in the method of analysis
presented in the foregoing schedule. For example, although
certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types
of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain
repriceable assets, such as adjustable-rate securities or loans,
have features, like annual and lifetime rate caps or floors, that
restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, a change in market interest
rates from the interest rate scenarios that existed on December
31, 1997, would likely cause assumptions, such as estimated
prepayment speeds, refinancings, imbedded options, and early
withdrawals, to significantly change the GAP results above.
In an effort to assess market risk, the Bank utilizes a
simulation model to determine the effect of gradual increases or
decreases in market interest rates on net interest income and net
income. The aforementioned assumptions are revised based on
defined scenarios of assumed speed and direction changes of
market interest rates. These assumptions are inherently uncertain
due to the timing, magnitude and frequency of rate changes and
changes in market conditions as well as management strategies,
among other factors. Because it is difficult to accurately
quantify into assumptions the reaction of depositors and
borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to the Bank's net
interest income and net income. Projections for loan and deposit
growth were ignored in the simulation model. The simulation model
includes all of the Bank's earning assets and interest-bearing
liabilities and assumes a parallel and prorated shift in interest
rates over a twelve month period. As a result of the simulation
model, the following reflects the Bank's net interest income and
net income sensitivity analysis as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Sensitivity Analysis Percent Decrease in Categories
___________________________________
2% Decline Current Rates 2% Rise
__________ ______________ _________
<S> <C> <C> <C>
Net Interest Income:
Policy Limit <10% - <10%
Hypothetical Percent Decrease
from Base Scenario:
As of December 31, 1997 <1% - Nominal
As of December 31, 1996 Nominal - <1%
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 1997 <2% - Nominal
As of December 31, 1996 Nominal - <1%
</TABLE>
The preceding schedule indicates that a hypothetical 2% rise or
decline in prevailing market interest rates would cause the
Bank's net interest income to decline less than 1% from the
current base rate scenario. The current simulated net interest
income impact is less than 2% of the prior year's net income. The
computations do not contemplate any actions Management or the
Asset Liability Management Committee could undertake in response
to changes in market conditions or market interest rates.
The Bank managed its interest rate risk position in 1997 by the
following: (1) paying higher rates on intermediate term
certificates in order to extend the average remaining term on
certificates of deposit below $100,000 (nearly one month was
added to the weighted-average maturity for the year); (2)
marketing its floating rate home equity line of credit
(outstanding balances increased by $2,854,000 for the year); (3)
additions to or by repositioning of its investment security
portfolio into floating, short- or long-term securities; (4)
utilization of seven- and ten-year balloon mortgages (outstanding
balances increased by $2,745,000 for the year); (5) increasing
its extensions of adjustable and floating rate loans for new or
refinanced commercial and agricultural loans (these outstanding
loans increased by $4,771,000 for the year); (6) investing the
overnight cash deposits of the Bank's Trust Department into a
money market account; (7) managing and expanding the Bank's core
deposit base; and (8) additions to or restructuring of
adjustable- and fixed-rate advances from the FHLB. The above
strategies and actions impact interest rate risk and are all
included in the Bank's quarterly simulation models in order to
determine future asset and liability management strategies. See
related discussions in the section on Net Interest Income.
<TABLE>
Deposits
The average amounts of deposits are summarized below:
<CAPTION>
Years Ended December 31,
________________________________
(In Thousands) 1997 1996 1995
__________ ________ _______
<S> <C> <C> <C>
Demand Deposits $ 16,504 $ 14,506 $13,336
Interest-Bearing Demand Deposits 38,134 33,924 33,195
Savings Deposits 24,184 23,343 25,317
Time Deposits 89,992 82,701 68,048
__________ ________ _______
Total $ 168,814 $154,474 $139,896
========== ======== =======
</TABLE>
<PAGE>
The following is a breakdown of maturities of time deposits of
$100,000 or more:
<TABLE>
<CAPTION>
December 31,
______________________________
(In Thousands) 1997 1996 1995
_________ ________ _______
<S> <C> <C> <C>
Three months or less $ 8,261 $ 9,765 $ 5,250
Over three months through six months 942 1,411 1,532
Over six months through twelve months 4,030 4,312 2,528
Over twelve months 3,124 2,399 3,269
_________ ________ _______
Total $ 16,357 $17,887 $12,579
========= ======== =======
</TABLE>
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. The
average stockholders' equity to average assets ratio, which
measures the adequacy of capital, decreased to 10.68% for 1997,
as compared to 11.40% for 1996. The decrease in this capital
ratio is a result of a 13.9% growth in average assets for the
year, an increase in the dividend payout ratio, and open market
treasury stock purchases in the amounts of $307,000 in 1997 and
$119,000 in 1996. Average stockholders' equity grew by 6.8% from
1996 to 1997, as compared to 6.3% from 1995 to 1996. The dividend
payout ratio, which represents the percentage of earnings
returned to the stockholders in the form of cash dividends, was
37.7% for 1997, as compared to 34.7% for 1996.
There are no material commitments for capital expenditures as of
December 31, 1997. 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 1998,
except as discussed below concerning the Corporation's common
stock repurchase plan. In addition, see discussion on Regulatory
Activity.
On February 5, 1998, the Corporation announced that the Board of
Directors had authorized and approved a plan to purchase up to
100,000 shares of the Corporation's outstanding common stock in
open market or privately negotiated transactions. The Board of
Directors believes that a redemption or repurchase of this type
is in the best interests of the Corporation and its stockholders
as a method to enhance long-term shareholder value. Currently,
the shares are to be held as treasury shares (issued, but not
outstanding shares). As of February 6, 1998, a total of 75,616
shares of common stock were repurchased under this plan at a cost
of $1,720,264. The amount repurchased thus far represents
approximately 3% of the outstanding shares of the Corporation as
of December 31, 1997. This amount was funded by a $1,725,000
dividend from the Corporation's wholly-owned subsidiary, Union
National Community Bank. The Bank paid the dividend from its
current cash flow and available retained earnings. The pro forma
effect as of December 31, 1997, of the dividend to fund the
repurchase would be to reduce the Bank's Tier I capital ratio
from 10.51% to 9.70%. However, the Bank would remain well
capitalized as defined below.
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, 1997, as compared to the Bank's current risk-based capital
ratio of 16.45%. 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.
Banking regulations also require the Bank to maintain certain
minimum capital levels in relation to Bank assets. Failure to
meet minimum capital requirements could result in prompt
corrective action by the federal banking agencies. As of December
31, 1997 and 1996, the Bank was categorized as well capitalized
under the regulatory framework for prompt corrective action.
There are no conditions or events since that notification that
Management believes have changed the Bank's category. The Bank
maintains the following leverage and risk-based capital ratios:
<TABLE>
<CAPTION>
(In Thousands) December 31, December 31,
1997 1996
____________ ___________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 22,358 $ 21,186
Tier II - Allowance for Loan Losses 1,593 1,371
____________ ___________
Total Qualifying Capital $ 23,951 $ 22,557
============ ===========
Risk-adjusted On-balance-sheet Assets $137,256 $118,844
Risk-adjusted Off-balance-sheet Exposure 8,352 5,666
____________ ___________
Total Risk-adjusted Assets $145,608 $124,510
============ ===========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 10.51% 11.36%
Minimum Required 4.00 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 15.35% 17.02%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 16.45% 18.12%
Minimum Required 8.00 8.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 10.00 10.00
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 12,302 $ 12,596
============ ===========
</TABLE>
<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
1998 of approximately $4,306,000, plus an amount equal to the net
profits of the Bank in 1998 up to the date of any such dividend
declaration.
The Corporation maintains a Dividend Reinvestment and Stock
Purchase 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 and
optional cash payments within specified limits at prevailing
market prices. At December 31, 1997, the enrollment in the Plan
is 18% of the shares outstanding. The Plan is currently estimated
to increase capital in the amount of $250,000 in 1998.
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 and Stock Purchase Plan. At December 31,
1997, options to purchase 4,830 shares have been granted under
the Corporation's 1988 Stock Incentive Plan at an exercise price
of $23.27. No options have been exercised as of December 31, 1997
under this plan. At December 31, 1997, options to purchase 15,000
shares have been granted under the Corporation's 1997 Employee
Stock Purchase Plan. The current exercise price for such options
is $19.73. At December 31, 1997, 726 options have been exercised
under this plan.
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. The holding company
structure, under such a proposal, would be regulated by the
Federal Reserve Board, and its subsidiaries would be supervised
by the applicable regulator based on their respective functions.
Since the Deposit Insurance Funds Act of 1996 was enacted, it is
anticipated that changes in the FDIC assessment rate will
immaterially impact the results of operations, net of income
taxes, for 1998. However, future changes in deposit premiums may
impact the results of operations.
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 cost 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.
As the Year 2000 approaches, regulation of the Corporation and
the Bank with respect to completing Year 2000 modifications is
likely to increase. A brief discussion of the most recent federal
banking agency pronouncements that affect the Corporation and/or
the Bank follows.
In December 1997, the Federal Financial Institutions Examination
Council (FFIEC) issued an interagency statement. The statement
indicates that senior management and the board of directors
should be actively involved in managing the Corporation's and the
Bank's Year 2000 compliance efforts. The statement also
recommended that institutions obtain Year 2000 compliance
certification from vendors followed by comprehensive internal
testing. In addition, contingency plans should be developed for
all vendors that service "mission critical" applications, which
are applications vital to the successful continuance of a core
business activity.
The OCC recently issued an advisory indicating that Year 2000
preparedness will be factored into reviews of de novo charters,
conversions, business combinations and establishment of federal
branches and agencies as well as hardware and software systems
integrations issues related to business combinations.
The Bank is routinely examined by the OCC and no material adverse
impact is anticipated on current or future operations and
financial position. The last Community Reinvestment Act
performance evaluation by the OCC resulted in a rating of
"Outstanding Record of Meeting Community Credit Needs."
<PAGE>
EXHIBIT 21
Subsidiaries of the Registrant
<PAGE>
EXHIBIT 21
Union National Financial Corporation
Subsidiaries of Registrant
Subsidiary Incorporation
__________ _______________
Union National Community Bank National Banking Association
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
<PAGE>
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 15, 1998, except for Note 17, as to which
the date is February 6, 1998, included in the 1997 Annual Report
to Stockholders of Union National Financial Corporation.
We also consent to the incorporation by reference in the
Registration Statements No. 33-80093, and 333-27837, of Union
National Financial Corporation and in the related Prospectus of
our report dated January 15, 1998, except for Note 17, as to
which the date is February 6, 1998, 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, 1997.
/s/ Trout, Ebersole & Groff, LLP
________________________________
March 26, 1998 TROUT, EBERSOLE & GROFF, LLP
Lancaster, Pennsylvania Certified Public Accountants
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 6490
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2835
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45867
<INVESTMENTS-CARRYING> 18870
<INVESTMENTS-MARKET> 18943
<LOANS> 152699
<ALLOWANCE> 1593
<TOTAL-ASSETS> 233243
<DEPOSITS> 180135
<SHORT-TERM> 900
<LIABILITIES-OTHER> 1123
<LONG-TERM> 27329
0
0
<COMMON> 627
<OTHER-SE> 23129
<TOTAL-LIABILITIES-AND-EQUITY> 233243
<INTEREST-LOAN> 12483
<INTEREST-INVEST> 3527
<INTEREST-OTHER> 195
<INTEREST-TOTAL> 16206
<INTEREST-DEPOSIT> 6354
<INTEREST-EXPENSE> 7550
<INTEREST-INCOME-NET> 8656
<LOAN-LOSSES> 390
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 6347
<INCOME-PRETAX> 2905
<INCOME-PRE-EXTRAORDINARY> 2905
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2325
<EPS-PRIMARY> .93
<EPS-DILUTED> .93
<YIELD-ACTUAL> 4.54
<LOANS-NON> 94
<LOANS-PAST> 612
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2705
<ALLOWANCE-OPEN> 1371
<CHARGE-OFFS> 200
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 1593
<ALLOWANCE-DOMESTIC> 1593
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 818
</TABLE>
