FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
_________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
_________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ ________________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy,Pennsylvania 17552
__________________________________________________________ _____
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(former name, former address, & former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court. Yes [ ] No[ ]
_________________
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,409,618 shares of $.25 (par) common stock were
_________________
outstanding as of April 30, 1998.
____________________
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
____
PART I - FINANCIAL INFORMATION:
______________________
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Comprehensive Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4
- Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-13
PART II - OTHER INFORMATION 14
_________________
Signature Page 15
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<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 3/31/98 12/31/97
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $5,379 $6,490
Federal Funds Sold 800 2,835
Investment Securities Held to Maturity
(Market Value - 1998-$19,386;1997-$18,943) 19,060 18,870
Investment Securities Available for Sale 50,545 45,867
Loans(Net of Unearned Income) 156,612 152,699
Less: Allowance for Loan Losses (1,618) (1,593)
______________________
Total Net Loans 154,994 151,106
Premises and Equipment - Net 5,324 5,415
Accrued Interest Receivable 1,600 1,446
Deferred Income Taxes 139 154
Investment in Limited Partnerships 925 941
Other Assets 440 119
______________________
TOTAL ASSETS $239,206 $233,243
======================
LIABILITIES
Deposits:
Noninterest-Bearing $19,323 $18,463
Interest-Bearing 167,521 161,672
______________________
Total Deposits 186,844 180,135
Short-Term Borrowing 411 900
Long-Term Debt 27,998 27,329
Accrued Interest Payable 1,122 1,008
Other Liabilities 416 115
______________________
TOTAL LIABILITIES 216,791 209,487
STOCKHOLDERS' EQUITY*
Common Stock (Par Value $.25) 628 627
Shares: Authorized - 20,000,000; Issued -
2,512,108 in 1998 (2,509,327 in 1997)
Outstanding - 2,409,618 in 1998 (2,487,175
in 1997)
Surplus 4,878 4,815
Retained Earnings 18,864 18,461
Unrealized gain/(loss) on securities
available for sale, net of tax 315 295
Less: Treasury Stock - at cost
(102,490 shares in 1998 and 22,152 shares
in 1997) (2,270) (442)
______________________
TOTAL STOCKHOLDERS' EQUITY 22,415 23,756
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $239,206 $233,243
======================
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended June 30,
_______________________________
(In Thousands, except Per Share Data) 1998 1997
_______________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,363 $2,908
Investment Securities:
Taxable 706 639
Exempt from Federal Taxes 236 212
Deposits in Banks 0 0
Federal Funds Sold 51 45
______________________
Total Interest Income 4,356 3,804
INTEREST EXPENSE
Deposits 1,700 1,495
Short-Term Borrowing 7 42
Long-Term Debt 389 207
______________________
Total Interest Expense 2,096 1,744
______________________
Net Interest Income 2,260 2,060
PROVISION for LOAN LOSSES 99 11
______________________
Net Interest Income after Provision
for Loan Losses 2,161 2,049
OTHER OPERATING INCOME
Trust Income 34 30
Service Charges on Deposit Accounts 96 83
Other Service Charges, Commissions, Fees 106 78
Other Income 50 46
_____________________
Total Other Operating Income 286 237
OTHER OPERATING EXPENSES
Salaries and Wages 743 672
Retirement Plan and Other Employee Benefits 158 225
Net Occupancy Expense 131 173
Furniture and Equipment Expense 93 88
FDIC Insurance Assessment 5 4
Other Operating Expenses 496 418
______________________
Total Other Operating Expenses 1,626 1,580
______________________
Income before Income Taxes 821 706
PROVISION for INCOME TAXES 169 139
______________________
NET INCOME for PERIOD $652 $567
======================
PER SHARE INFORMATION
Net Income for Period (Basic and Assuming
Dilution) $0.27 $0.23
Cash Dividends $0.100 $0.086
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME* (UNAUDITED)
Net Income for Period $652 $567
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on
Investment Securities Arising during
Period 21 (124)
______________________
COMPREHENSIVE INCOME for PERIOD $673 $443
======================
* This Statement is required by Statement No. 130, "Reporting
Comprehensive Income," as issued by the Financial Accounting
Standards Board. This Statement reflects net income as adjusted
for changes in stockholders' equity that result from changes in
the Corporation's unrealized gains and losses on its investment
securities available for sale. Changes in the interest rate
environment and other factors result in fluctuations in the value
of investment securities available for sale.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
_____________________________
(In Thousands) 1998 1997
_____________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $652 $567
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciating and Amortization 118 127
Provision for Loan Losses 99 11
Provision for Deferred Income Taxes 5 5
(Increase)/Decrease in Accrued
Interest Receivable (155) (128)
(Increase)/Decrease in Other Assets (313) (102)
Increase/(Decrease) in Other Liabilities 415 238
_______________________
Net Cash Provided by Operating Activities 821 718
CASH FLOWS from INVESTING ACTIVITIES
Net (Increase)/Decrease in Federal Funds Sold 2,035 2,865
Proceeds from Maturities of
Available for Sale Securities 9,139 2,467
Proceeds from Maturities of
Held to Maturity Securities 508 1,110
Purchases of Available for Sale Securities (13,786) (10,782)
Purchases of Held to Maturity Securities (698) (728)
Loans Made to Customers, Net of
Principal Collected on Loans (3,986) (2,855)
Purchases of Property and Equipment (19) (40)
_______________________
Net Cash (Used in)Investing Activities (6,807) (7,963)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 4,015 (689)
Net Increase/(Decrease) in Certificates
of Deposits 2,694 1,936
Net Increase/(Decrease) in Short-Term
Borrowing (489) (2,325)
Proceeds from Issuance of Long-Term Debt 809 9,815
Payment of Long-Term Debt (140) 0
Acquisition of Treasury Stock (1,829) (51)
Issuance of Treasury Stock 64 32
Cash Dividends Paid (249) (213)
_______________________
Net Cash Provided by (Used in)
Financing Activities 4,875 8,505
_______________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,111) 1,260
CASH and CASH EQUIVALENTS -
Beginning of Period 6,490 6,073
_______________________
CASH and CASH EQUIVALENTS - End of Period $5,379 $7,333
=======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $1,596 $1,471
Interest Paid - Other 386 211
Income Taxes 0 0
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is
unaudited and subject to year-end adjustment and audit.
However, in the opinion of management, the information
reflects all adjustments necessary to present fairly the
financial condition and results of operations for the latest
period. All such adjustments were of a normal, recurring
nature. All material intercompany transactions have been
eliminated in consolidation.
2. These statements should be read in conjunction with notes to
the financial statements contained in the 1997 Annual Report
to Stockholders.
3. Management considers the allowance for loan losses (reserve)
to be adequate at this time.
4. All per share computations include the retroactive effect of
stock dividends. The weighted average number of shares of
common stock outstanding used was approximately 2,445,699
and 2,492,515 for the three month period ended March 31,
1998 and 1997, respectively.
5. 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: 124,830 shares which are
reserved for issuance under the Corporation's 1988 and 1997
Stock Incentive Plans, 100,000 shares which are reserved for
issuance under the Corporation's 1997 Employee Stock
Purchase Plan, and 157,500 shares which are reserved for
issuance under the Corporation's Dividend Reinvestment Plan.
As of March 31, 1998, options to purchase 4,830 shares have
been granted under the Corporation's 1988 Stock Incentive
Plan. The exercise price for such options is $23.27. No
options have been exercised as of March 31, 1998 under this
plan. As of March 31, 1998, options to purchase 15,000 have
been granted under the Corporation's 1997 Employee Stock
Purchase Plan. The current exercise price for such options
is $19.60. As of March 31, 1998, 816 options have been
exercised under the plan.
6. The results of operations for the three month period ended
March 31, 1998 are not necessarily indicative of the results
to be expected for the full year.
7. Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1997
presentation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in its accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company (the Corporation), and its
wholly-owned subsidiary, Union National Community Bank (the
Bank). The Corporation's consolidated financial condition and
results of operations consist almost entirely of the Bank's
financial condition and results of operations. Such financial
condition and results of operations are not intended to be
indicative of future performance. This discussion should be read
in conjunction with the 1997 Annual Report.
In addition to historical information, this 10-Q Report for the
three months ended March 31, 1998 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. For example, risks and uncertainties
can arise with changes in: general economic conditions, including
their impact on capital expenditures; business conditions in the
financial services industry; the regulatory environment; rapidly
changing technology and competition with community, regional and
national financial institutions; new service and product
offerings by competitors; and price pressures. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis only as of the
date hereof. The Corporation undertakes no obligation to publicly
revise or update these forward-looking statements to reflect
events or circumstances that arise after the date hereof. Readers
should carefully review the risk factors described in other
documents the Corporation files from time to time with the
Securities and Exchange Commission, including any Current Reports
on Form 8-K filed by the Corporation.
Results of Operations
_____________________
Overview
Consolidated net income for the three months ended March 31, 1998
was $652,000, an increase of 15.0%, as compared to the
consolidated net income of $567,000 for the same period in 1997.
On a per share basis, net income for the three months ended March
31, 1998 was $.27, an increase of 17.4%, as compared to $.23 for
the same period in 1997.
Results of operations for the three months ended March 31, 1998
as compared to the same period in 1997 were impacted by the
following items: (1) Net income increased due to a 17.3% 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 2.9% increase in other operating expenses; (4)
net income increased due to a 20.7% increase in other operating
income; and (5) net income was decreased due to an increase in
the provision for loan losses. The above items are quantified and
discussed in further detail under their respective sections
below.
Net income as a percent of total average assets, also known as
return on average assets (ROAA), was 1.13% on an annualized basis
for the three months ended March 31, 1998, as compared to 1.12%
for the same period in 1997. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROAE), was 11.4% on an annualized basis for the three months
ended March 31, 1998, as compared to 10.2% for the same period in
1997.
The growth in loans is considered a material favorable trend of
the Corporation which Management expects to continue for the
remainder of 1998. Management expects the growth in deposits for
1998 to be comparable to its historic growth rates of deposits.
Management has taken specific actions to enhance the Bank's
competitive position for core deposits. These actions include a
broad based sales training program for staff to enhance the
Bank's competitive position for loans, deposits and other
financial services in northwestern Lancaster County, Pennsylvania
(the Bank's 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
and the promotion of intermediate-term certificates of deposit.
As a
<PAGE>
result of the above described efforts, the Bank's certificate of
deposit portfolio under $100,000 increased by $3,800,000 and the
Bank's checking and savings deposits increased by $3,600,000 for
the three months ended March 31, 1998. The funding for the loan
growth is further discussed under the section on Liquidity.
Management expects the loan growth to continue in 1998 for the
following reasons: (1) lending rates are at generally affordable
rates for prospective borrowers; (2) implementation of a broad
based sales training program for staff; (3) further product
development and promotion of the Bank's consumer and home equity
lines of credit; (4) economic stability of the Bank's Market Area
as discussed later in this section; and (5) continued population
growth in the Bank's Market Area.
It is anticipated that economic activity in the Bank's Market
Area during 1998 appears favorable due to the availability of
generally low lending rates and continued 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 Credit Risk and Loan
Quality.
Net Interest Income
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the three months ended March 31, 1998
increased by $219,000, or 10.0%, over the same period in 1997.
Commercial, residential, and consumer average loan growth of
$22,787,000 and average investment security growth of $5,485,000
were funded by the growth in average deposits of $17,502,000 and
by the growth in average borrowings of $10,337,000. The
additional borrowings represented fixed-rate and variable-rate
advances. Average earning assets increased in the amount of
$28,579,000 in the aggregate over the same period in 1997. The
volume growth in earning assets and interest-bearing liabilities
increased net interest income by the amount of $316,000.
The overall interest rate on the average total earning assets
decreased to 8.19% for the current period, as compared to 8.22%
for the same period of last year, 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 4.49% for the current period, as
compared to 4.31% for the same period of last year, 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 $97,000 for the current period over the
same period in 1997. See Management's discussion below concerning
the anticipated impact of these interest rate fluctuations to the
results of operations for the remainder of 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
March 31, 1998, the Bank has received long-term advances of
$27,948,000 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 5.69%
with maturities ranging from June 1998 to December 2007.
For the remainder of 1998, Management currently expects its net
interest margin to further narrow as compared to the same period
of last year due to an increase in the weighted average interest
rates on interest-bearing liabilities. This is a result of
increased balances of liabilities in the form of long-term debt
and funds in money market accounts that are paying higher
interest rates. In contrast, the growth in the earning assets
during 1997 and the first three months of 1998 is currently
expected to increase the net interest margin for the remaining
months of 1998 over the same period of 1997. Although the
effective interest rate impact of expected cash flows on
investments and of renewing certificates of deposit can be
reasonably estimated at current interest rate levels, the yield
curve during the remainder of 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. Based on the Bank's
current model and estimates as of March 31, 1998, the factors
discussed above will have a net positive impact to the net
interest
<PAGE>
margin for the remaining months of 1998, as compared to the same
period in 1997. See discussions on Liquidity and Market Risk -
Interest Rate Risk.
Provision for Loan Losses
The provision for loan losses was $99,000 and $11,000 for the
three months ended March 31, 1998 and 1997, respectively. Net
charge-offs for the three months ended March 31, 1998 amounted to
$74,000 as compared to $7,000 for the same period in 1997. The
increase in the provision over the same period of last year is a
result of the additional net charge-offs. Future adjustments to
the allowance, and consequently, the provision for loan losses,
may be necessary if economic conditions or loan credit quality
differ substantially from the assumptions used in making
Management's evaluation of the level of the allowance for loan
losses as compared to the balance of outstanding loans.
Other Operating Income
Other operating income for the three months ended March 31, 1998
was $286,000, representing an increase of $49,000, or 20.7%, over
the same period in 1997. Contributing to this increase were
additional earnings resulting from an increase in ATM and card
usage fees including ATM surcharges, from an increase in
insufficient funds charges, and from the new debit card
interchange fee income. Currently, the Bank assesses a surcharge
at its ATMs; however, ATM surcharges, or the elimination thereof,
may be subject to future legislation.
Other Operating Expenses
The aggregate of noninterest expenses for the three months ended
March 31, 1998 increased by $46,000, or 2.9%, over the same
period in 1997.
Employee salaries and wages increased by $71,000, or 10.6%, over
the same period in 1997. This increase was essentially due to
annual merit and cost of living increases and a new staff
position for a retail office manager. Related fringe benefits
decreased by $67,000, or 29.8%, from the same period in 1997. The
decrease is essentially due to a reduction in the Bank's profit-sharing plan
expense.
Occupancy, furniture and equipment expenses for the three months
ended March 31, 1998 decreased by $37,000, or 14.2%, from the
same period in 1997. This decrease was primarily due to a
decrease in other real estate expense in the amount of $31,000
from the same period in 1997.
Other operating expenses for the three months ended March 31,
1998, increased by $78,000, or 18.7%, over the same period in
1997. Contributing factors to the increase in other operating
expenses as compared to the same period in 1997 included the
following: (1) an increase in professional and consulting fees in
the amount of $30,000; and (2) an increase in ATM transaction and
clearing costs in the amount of $13,000. The increase in
professional and consulting fees included consulting fees for a
broad based sales training program for staff, legal costs for
employee benefit matters, and legal costs for certain loan
collection services.
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.
Currently, the Bank has plans to communicate with all material
customers during the second quarter of 1998. Material customers
include significant commercial borrowers
<PAGE>
that would pose a credit risk to the Bank and significant
commercial depositors that would pose a liquidity risk to the
Bank, if they are not Year 2000 compliant and their businesses
are disrupted. Responses from material customers will be
evaluated accordingly.
Income Taxes
The Corporation's income tax expense increased by $30,000 for the
three months ended March 31, 1998 to $169,000 from $139,000 for
the same period in 1997. The effective tax rate was 20.6% and
19.7% for the three months ended March 31, 1998 and 1997,
respectively. The increase in income tax expense and the
effective tax rate was due to the increase in corporate earnings
before income taxes. Currently, the effective tax rate of the
Corporation for the remaining months of 1997 is expected to be
more than the effective tax rate in 1996 due to the expected
change in the nature and amount of the tax credits from the
Corporation's investment in limited partnerships.
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 the remainder of 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
<PAGE>
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.
Changes in Accounting Standards
________________________________
In 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"
and Statement No. 127, an amendment to SFAS No. 125. All
provisions of these Statements have become effective for
transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1997. The provisions
are to be applied prospectively. These Statements provide
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. The
Corporation has adopted the provisions of these Statements when
they became applicable. There has been no incidence of coverage
under SFAS No. 125 and No. 127 since adoption.
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 has been
adopted by the Corporation as of January 1, 1998 with interim
comparative financial reporting effective in 1999. The impact of
this Statement on the Corporation will be to require additional
disclosures in the Corporation's annual financial statements for
1998 and interim reports for 1999.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, (SFAS No. 132), "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This Statement
revises employers' disclosures about pension and other
postretirement benefit plans. It standardizes the disclosure
requirements for these plans to the extent practicable, requires
additional information on changes in the benefit obligation and
fair values of plan assets, and eliminates certain previously
required disclosures. This Statement has been adopted by the
Corporation as of January 1, 1998. The impact of this Statement
on the Corporation will be to require additional disclosures in
the Corporation's annual financial statements for 1998.
Credit Risk and Loan Quality
____________________________
Other than as described herein, Management does not believe there
are any trends, events or uncertainties which are reasonably
expected to have a material impact on future results of
operation, liquidity or capital resources. Further, based on
known information, Management believes that the effects of
current and past economic conditions and other unfavorable
specific business conditions may result in the inability of loans
amounting to $2,992,000 to comply with their respective repayment
terms. This amount represents an increase over the amount of
$2,705,000 at December 31, 1997. 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. 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.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
<CAPTION>
Schedule of Nonperforming Assets
________________________________
March 31, December 31,
(In Thousands) 1998 1997
___________ ____________
<S> <C> <C>
Nonaccruing Loans $ 25 $ 94
Accrual Loans - 90 days or more
past due 460 612
Restructured Accrual Loans 0 0
Other Real Estate Owned 100 0
______ ______
Total Nonperforming Assets $ 585 $ 706
====== ======
Nonperforming Assets
as a % of Net Loans 0.4% 0.5%
====== ======
Allowance for Loan Losses
as a % of Nonperforming Loans 334% 226%
====== ======
</TABLE>
<TABLE>
<CAPTION>
Analysis of Allowance for Loan Losses
_____________________________________
Three Months Ended March 31,
____________________________
(In Thousands) 1998 1997
________ ________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $154,550 $131,763
======== ========
Allowance for Loan Losses,
Beginning of Period $1,593 $1,371
Loans Charged-off During Period 80 15
Recoveries of Loans Previously
Charged-off 6 8
________ ________
Net Loans Charged-off 74 7
Addition to Provision for Loan Losses
Charged to Operations 99 11
_________ _______
Allowance for Loan Losses,
End of Period $1,618 $1,375
======== ========
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.19% 0.02%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.03% 1.03%
======== ========
</TABLE>
<PAGE>
At March 31, 1998, total nonperforming assets amounted to
$585,000, or .4% of total net loans, from a level of $706,000, or
.5%, at December 31, 1997. Historically, the percentage of
nonperforming assets to total net loans as of December 31, for
the previous five year period was an average of .7%.
Allowance for Loan Losses
_________________________
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses
and is formally reviewed by Management on a quarterly basis. The
allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's periodic evaluation
of the adequacy of the allowance is based on the Corporation's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant
factors. While Management uses available information to make such
evaluations, future adjustments to the allowance may be necessary
if economic conditions differ substantially from the assumptions
used in making the evaluation. In addition, various regulatory
agencies, as an integral part of their examination process,
review the Bank's Allowance for Loan Losses. Such agencies may
require the Bank to recognize additions to the allowance based on
their judgement of information available to them at the time of
their examination.
The allowance for loan losses increased by $25,000 for the three
months ended March 31, 1998, and the ratio of the allowance for
loan losses to net loans was 1.03% at March 31, 1998, as compared
to 1.04% at December 31, 1997. The increase in the allowance for
loan losses for the three month period was due to an increase in
loans outstanding amounting to $3,913,000 for the three month
period. Management believes based on information currently
available that the current allowance for loan losses of
$1,618,000 is adequate to meet potential loan losses.
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 $7,707,000
and a maximum available funding capacity of up to $77,073,000. In
order to provide funding for the Bank's loans and investments,
the Bank has outstanding borrowing from the FHLB of $27,948,000
and $22,161,000 at March 31, 1998 and 1997, respectively.
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.
<PAGE>
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 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, it is currently anticipated that a hypothetical two
percent general rise or decline in prevailing market interest
rates over a one-year period will have an immaterial impact to
the Bank's net interest income over the next twelve months. 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 for the three
months ended March 31, 1998 by the following: (1) paying higher
rates on intermediate term certificates in order to manage the
average remaining term on certificates of deposit below $100,000;
(2) marketing its floating rate home equity line of credit
(outstanding balances increased by $1,053,000 for the period);
(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 $690,000 for the period); (5) increasing
its extensions of adjustable and floating rate loans for new or
refinanced commercial and agricultural loans (these outstanding
loans increased by $895,000 for the period); (6) managing and
expanding the Bank's core deposit base; and (7) 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.
Stockholders' Equity
The Corporation maintains capital ratios that are well above the
minimum total capital levels required by federal regulatory
authorities including the risk-based capital guidelines. There
are no material commitments for capital expenditures. There are
no known trends, events or uncertainties, including regulatory
matters that are expected to have a material impact on the
capital resources of the Corporation for the remaining months of
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 March 31, 1998, a total of 79,571
shares of common stock were repurchased under this plan at a cost
of $1,810,772. This amount was funded by dividends from the
Corporation's wholly-owned subsidiary, Union
<PAGE>
National Community Bank. The Bank paid the dividends from its
current cash flow and available retained earnings. The Bank
remains well capitalized after payment of the dividends 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 March 31,
1998, as compared to the Bank's current risk-based capital ratio
of 15.11%. 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, 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>
(In Thousands) March 31, December 31,
1998 1997
___________ _____________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 21,035 $ 22,358
Tier II - Allowance for Loan Losses 1,618 1,593
___________ _____________
Total Qualifying Capital $ 22,653 $ 23,951
=========== =============
Risk-adjusted On-balance-sheet Assets $140,608 $137,256
Risk-adjusted Off-balance-sheet Exposure 9,297 8,352
___________ _____________
Total Risk-adjusted Assets $149,905 $145,608
=========== =============
Actual Capital Ratio:
Tier I Capital to Average Total Assets 9.13% 9.95%
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 14.03% 15.35%
Minimum Required 4.00% 4.00%
To Be Well Capitalized Under Prompt
Corrective Action Provisions 6.00% 6.00%
Total Capital Ratio - Actual 15.11% 16.45%
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 $ 10,661 $ 12,302
=========== =============
</TABLE>
No shares of common stock are reserved for issuance in the event
of conversions or the exercise of warrants, options or other
rights, except as follows: 124,830 shares which are reserved for
issuance under the Corporation's 1988 and 1997 Stock Incentive
Plans, 100,000 shares which are reserved for issuance under the
Corporation's 1997 Employee Stock Purchase Plan, and 157,500
shares which are reserved for issuance under the Corporation's
Dividend Reinvestment Plan. As of March 31, 1998, 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 March 31, 1998 under this plan.
As of March 31, 1998, 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 $19.60. As
of March 31, 1998, 816 options have been exercised under this
plan.
<PAGE>
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Corporation. There are no proceedings pending other than the
ordinary routine litigation incident to the business of the
Corporation and its subsidiary, Union National Community Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against the Corporation and the Bank
by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibit is being filed as
part of this Report: (see also Item 6(b)).
Exhibit No. 27 - Financial Data Schedule as of March
31, 1998.
(b) Reports on Form 8-K -
The Corporation filed a Form 8-K via EDGAR dated
February 17, 1998. It contained a comprehensive
electronic filing of one exhibit as follows:
Exhibit No. 99 - Press release of registrant dated
February 5, 1998 announcing a stock
repurchase program and wholly-owned
subsidiary name change.
Signatures
__________
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By:/s/ William E. Eby
______________________________
William E. Eby
President & CEO
(Principal Executive Officer)
Date: May 7, 1998
By:/s/ Clement M. Hoober
______________________________
Clement M. Hoober,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 7, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 5379
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50545
<INVESTMENTS-CARRYING> 19060
<INVESTMENTS-MARKET> 19386
<LOANS> 156612
<ALLOWANCE> 1618
<TOTAL-ASSETS> 239206
<DEPOSITS> 186844
<SHORT-TERM> 411
<LIABILITIES-OTHER> 1538
<LONG-TERM> 27998
0
0
<COMMON> 628
<OTHER-SE> 21787
<TOTAL-LIABILITIES-AND-EQUITY> 239206
<INTEREST-LOAN> 3363
<INTEREST-INVEST> 942
<INTEREST-OTHER> 51
<INTEREST-TOTAL> 4356
<INTEREST-DEPOSIT> 1700
<INTEREST-EXPENSE> 2096
<INTEREST-INCOME-NET> 2260
<LOAN-LOSSES> 99
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1626
<INCOME-PRETAX> 821
<INCOME-PRE-EXTRAORDINARY> 821
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 652
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 4.37
<LOANS-NON> 25
<LOANS-PAST> 460
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2992
<ALLOWANCE-OPEN> 1593
<CHARGE-OFFS> 80
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1618
<ALLOWANCE-DOMESTIC> 1618
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 812
</TABLE>
