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, 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 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. [ ]
The aggregate market value of the shares of Common Stock of the
Registrant held by nonaffiliates of the Registrant was
$42,817,807 as of March 23, 1999. As of March 23, 1999, the
Registrant had 2,401,246 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Union National Financial Corporation's 1998
Annual Report to Stockholders (the "1998 Annual Report") are
incorporated by reference into Parts I, II and IV, hereof. The
Registrant's Proxy Statement for its 1999 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 11
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 12
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, 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"). Union National Financial
Corporation was incorporated on June 26, 1986, under the Business
Corporation Law of the Commonwealth of Pennsylvania. Union
National Financial Corporation 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. Union National Financial Corporation's business
consists primarily of managing and supervising Union National
Community Bank, and its principal source of income is dividends
paid by Union National Community Bank. Union National Financial
Corporation has one wholly-owned subsidiary, Union National
Community Bank.
Union National Community Bank was organized in 1865 under a
national charter. Union National Community Bank is a national
banking association and a member of the Federal Reserve System.
The deposits of Union National Community Bank are insured by the
Federal Deposit Insurance Corporation (the "FDIC") to the maximum
extent permitted by law. Union National Community 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. Union National Community Bank also has a
full-service trust department.
Union National Financial Corporation's executive offices are
located at 101 East Main Street, P.O. Box 567, Mount Joy,
Pennsylvania 17552 (telephone number: (717) 653-1441).
We have made forward-looking statements in this document, and
in documents that we incorporate by reference, that are subject
to risks and uncertainties. Forward-looking statements include
the information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank or the combined company. When we use
words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements.
Readers should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial
results of Union National Financial Corporation, Union National
Community Bank or the combined company and could cause those
results to differ materially from those expressed in our
<PAGE>
forward-looking statements contained or incorporated by reference
in this document. These factors include the following:
- operating, legal and regulatory risks;
- economic, political, and competitive forces affecting
our banking, securities, asset management and credit
services businesses;
- rapidly changing technology; and
- the risk that our analyses of these risks and forces
could be incorrect and/or that the strategies developed
to address them could be unsuccessful.
Union National Financial Corporation operates in a heavily
regulated environment. Changes in laws and regulations affecting
Union National Financial Corporation and its subsidiary, Union
National Community Bank, may have an impact on operations. See
"Supervision and Regulation Union National Financial Corporation"
and "Supervision and Regulation Union National Community Bank"
and page 32 of the 1998 Annual Report, which page is included at
Exhibit 13 hereto, and incorporated herein by reference.
Union National Financial Corporation 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 Union National
Financial Corporation's business activities, see Part II, Item 7
hereof. Certain significant regulatory matters are discussed
below.
Supervision and Regulation - Union National Financial Corporation
_________________________________________________________________
Union National Financial Corporation 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 Union National Financial
Corporation 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 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.
<PAGE>
A bank holding company is prohibited from engaging in or
acquiring direct or indirect control of more than 5 percent of
the voting shares of any company engaged in non-banking
activities unless the Federal Reserve Board, by order or
regulation, has found such activities to be so closely related to
banking or managing or controlling banks as to be a proper
incident thereto. In making this determination, the Federal
Reserve Board considers whether the performance of these
activities by a bank holding company would offer benefits to the
public that outweigh possible adverse effects.
Federal law also prohibits acquisitions of control of a bank
holding company without prior notice to certain federal bank
regulators. Control is defined for this purpose as the power,
directly or indirectly, to direct the management or policies of
the bank or bank holding company or to vote 25 percent or more of
any class of voting securities.
Subsidiary banks of a bank holding company are subject to
certain restrictions imposed by the Federal Reserve Act on any
extensions of credit to the bank holding company or any of its
subsidiaries, on investments in the stock or other securities of
the bank holding company and on taking of such stock or
securities as collateral for loans to any borrower.
Permitted Activities. The Federal Reserve Board permits bank
___________________
holding companies to engage in certain activities so closely
related to banking or managing or controlling banks as to be a
proper incident thereto. Other than making equity investments in
low to moderate income housing limited partnerships, Union
National Financial Corporation does not at this time engage in
any other permissible activities, nor does Union National
Financial Corporation 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 Union National Financial
Corporation and its subsidiary. Certain changes of potential
significance to Union National Financial Corporation which have
been enacted recently and others which are currently under
consideration by Congress or various regulatory or professional
agencies are discussed below.
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
<PAGE>
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
Union National Financial Corporation's consolidated assets,
management does not believe that the risk-based capital rules
have a material effect on Union National Financial Corporation's
business and capital plans. Union National Community Bank has
capital ratios exceeding the regulatory requirements. See pages
13, 31 and 32 of Union National Financial Corporation's 1998
Annual Report for information concerning Union National Financial
Corporation's capital ratios, which pages are included at Exhibit
13, hereto, and incorporated herein by reference.
Pending Legislation. Management cannot anticipate what
___________________
changes Congress may enact or, if enacted, their impact on Union
National Financial Corporation's financial position and reported
results of operation. As a consequence of the extensive
regulation of commercial banking activities in the United States,
Union National Financial Corporation's and Union National
Community 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 32 of
Union National Financial Corporation's 1998 Annual Report, which
page is included at Exhibit 13, hereto, and incorporated herein
by reference.
Effects of Inflation. Inflation has some impact on Union
____________________
National Financial Corporation's and Union National Community
Bank's operating costs. Unlike many industrial companies,
however, substantially all of Union National Community Bank's
assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on Union National
Financial Corporation's and Union National Community Bank's
performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as prices of goods and
services.
Monetary Policy. The earnings of Union National Financial
_______________
Corporation and Union National Community 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.
Union National Community Bank is a member of the Federal
Reserve System. 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 Union National Community Bank's
operations in the future. The effect of such policies and
regulations upon the future business and earnings of Union
National Financial Corporation and Union National Community Bank
cannot be predicted.
<PAGE>
Federal Taxation. Union National Financial Corporation and
________________
Union National Community 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. Union National Financial Corporation and its
subsidiary 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. Union National Financial Corporation is subject
_________
to the Pennsylvania Corporate Net Income Tax and Capital Stock
Tax. The Corporate Net Income Tax rate for 1998 and thereafter
is 9.99% and is imposed upon a corporate taxpayer's
unconsolidated taxable income for federal tax purposes with
certain adjustments. In general, the Capital Stock Tax is a
property tax imposed on a corporate taxpayer's capital stock
value apportionable to the Commonwealth of Pennsylvania, which is
determined in accordance with a fixed formula based upon average
book income and net worth. In the case of a holding company, an
optional elective method permits the corporate taxpayer to be
taxed on only 10% of such capital stock value. The Capital Stock
Tax rate is presently 1.275%.
Environmental Laws. Neither Union National Financial
__________________
Corporation nor Union National Community 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, Union National Community 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
<PAGE>
examinations and reports are the responsibility of the borrower.
These costs may be substantial and may deter a prospective
borrower from entering into a loan transaction with Union
National Community Bank. Union National Financial Corporation 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 Union National Community 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 Union National Community Bank.
Further, the liability has the potential to far exceed the
original amount of the loan issued by Union National Community
Bank. Currently, neither Union National Financial Corporation
nor Union National Community Bank is a party to any pending legal
proceeding pursuant to any environmental statute, nor is Union
National Financial Corporation or Union National Community Bank
aware of any circumstances that may give rise to liability under
any such statute.
Supervision and Regulation - Union National Community Bank
_________________________________________________________________
The operations of Union National Community 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 Union National Community
Bank is the Comptroller, which regulates and examines Union
National Community Bank. The Comptroller has the authority
<PAGE>
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, Union National
Community 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 Union National Community
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. The Community Reinvestment Act
__________________________
("CRA") now emphasizes performance over process and
documentation. Under these revised rules, a five-point rating
scale is used; a bank's compliance is determined by a three-prong
test whereby examiners assign a numerical score for a bank's
performance in each of three areas: lending, service and
investment. The area of lending is weighted to increase its
importance in the application of the test. When rating a bank in
the area of lending, regulators examine the number and amount of
loan originations, the location of where the loans were made, and
the income levels of the borrowers. Although banks, under the
revised rules, are not required to make loans in every area, if
there are apparent tracts in which there is little lending,
examiners will focus their investigations in that area. The
service prong evaluates how a bank delivers its products to the
community through branching. As with lending, banks are not
required to branch in every area, although conspicuous gaps will
be investigated. The third prong, investment in community,
examines how Union National Community 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
<PAGE>
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 Secrecy 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 Union National
Community 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).
<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
<PAGE>
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,
Union National Community Bank is required to provide information
to depositors concerning the terms of their deposit accounts, and
in particular, to disclose the annual percentage yield. There
are some operational costs of complying with the Truth-In-Savings
law.
Management believes that full implementation of FDICIA has
had no material impact on liquidity, capital resources or
reported results of operation. If FDIC insurance premiums
assessments increase in the future, Management believes such
future increase may have a material impact on future reported
results of operations.
Other. From time to time, various types of federal and
_____
state legislation have been proposed that could result in
additional regulation of, and restrictions on, the business of
Union National Community Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such
legislation would affect the business of Union National Community
Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National Community
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 18 through 32 of Union
National Financial Corporation's 1998 Annual Report.
Employees. As of March 23, 1999, Union National
__________
Community Bank had 110 full-time employees and 23 part-time
employees. None of these employees is represented by a
collective bargaining agent, and Union National Financial
Corporation believes it enjoys good relations with its personnel.
<PAGE>
ITEM 2. PROPERTIES.
______ ___________
Union National Community 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. Union National Community 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 Union National Community Bank's
properties. In addition, Union National Community Bank leases
office space for one branch office located in Manheim,
Pennsylvania.
<TABLE>
PROPERTIES OWNED BY UNION NATIONAL COMMUNITY 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 Annex Wood frame September, 1992
115 East Main Street construction
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.
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.
<PAGE>
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 Union National Community Bank's
purposes.
ITEM 3. LEGAL PROCEEDINGS.
______ __________________
Management, after consulting with Union National Financial
Corporation's legal counsel, is not aware of any litigation that
would have a material adverse effect on the consolidated
financial position of Union National Financial Corporation.
There are no proceedings pending other than ordinary routine
litigation incident to the business of Union National Financial
Corporation and its subsidiary, Union National Community Bank.
In addition, no material proceedings are known to be contemplated
by governmental authorities against Union National Financial
Corporation or Union National Community Bank.
<PAGE>
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
Union National Financial Corporation's 1998 Annual Report. Union
National Financial Corporation'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
Union National Financial Corporation's 1998 Annual Report. This
information represents a limited amount of share transfer
activity.
Union National Financial Corporation and, prior to Union
National Financial Corporation's organization as a bank holding
company, Union National Community Bank paid regular cash
dividends on their common stock for more than thirty-five years.
Union National Financial Corporation expects to pay future
dividends; however, payment of such dividends will depend upon
earnings of Union National Financial Corporation and of Union
National Community 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 Union National
Financial Corporation will be derived from dividends paid to it
by Union National Community Bank.
Additional information required by this Item regarding
dividend restrictions is incorporated by reference herein, from
page 32 of Union National Financial Corporation's 1998 Annual
Report, which page is included in Exhibit 13, attached hereto.
As of March 23, 1999, there were approximately 927 holders of
record of Union National Financial Corporation's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
______ ________________________
The information required by this Item is incorporated by
reference herein, from pages 18 and 19 of Union National
Financial Corporation's 1998 Annual Report, which page is
included in Exhibit 13, attached hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
______ _________________________________________________
CONDITION AND RESULTS OF OPERATION.
___________________________________
The information required by this Item is incorporated by
reference herein, from pages 20 through 32 of Union National
Financial Corporation's 1998 Annual Report, which pages are
included in Exhibit 13, attached hereto.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
_______ _____________________________________________
MARKET RISK.
____________
The information required by this Item is incorporated by
reference herein, from pages 29 and 30 of Union National
Financial Corporation's 1998 Annual Report, which pages are
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 4 through 18 of Union National
Financial Corporation's 1998 Annual Report, which pages are
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 REGISTRANT.
________ _______________________________________________
The information required by this Item is incorporated by
reference herein, from pages 5 through 11 and pages 22 through 24
of Union National Financial Corporation's Proxy Statement for its
1999 Annual Meeting of Shareholders.
Section 16(a) Beneficial Ownership Compliance. Section 16(a)
_____________________________________________
of the Securities Exchange Act of 1934, as amended, requires
Union National Financial Corporation's officers and directors,
and persons who own more than 10 percent of a registered class of
Union National Financial Corporation'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 Union National Financial Corporation 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, Union National Financial Corporation believes that
during the period January 1, 1998 through December 31, 1998, its
officers and directors were in compliance with all filing
requirements applicable to them, except that Mr. Daniel H.
Raffensperger, Class B Director, filed one late report during
1998 for one transaction affecting his ownership of Union
National Financial Corporation Common Stock.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
________ _______________________
The information required by this Item is incorporated by
reference herein, from pages 12 through 20 of Union National
Financial Corporation's Proxy Statement for its 1999 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 4 through 6 and pages 22 through 24
of Union National Financial Corporation's Proxy Statement for its
1999 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_______ _______________________________________________
The information required by this Item is incorporated by
reference herein, from pages 21 and 22 of Union National
Financial Corporation's Proxy Statement for its 1999 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:
<PAGE>
3(i) Union National Financial
Corporation's Amended Articles of
Incorporation. (Incorporated by
reference toExhibit 3(i) to Union
National Financial Corporation's
Registration Statement No. 333-27837
on Form S-8, filed with the
Commission on May 27, 1997.)
3(ii) Union National Financial
Corporation's Amended By-laws.
(Incorporated by reference to
Exhibit 3(ii) to Union National
Financial Corporation's Registration
Statement No. 333-27837 on Form S-8,
filed with the Commission on May 27,
1997), and the amendment thereto
dated November 14, 1998.
10.1 Executive Employment Agreement
dated as of January 1, 1999,
between Mark D. Gainer and
Union National Financial
Corporation.
10.2 Union National Financial
Corporation 1988 Stock Incentive
Plan. (Incorporated by reference
to Union National Financial
Corporation'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 Union National
Financial Corporation'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
page of 1 of Union National
Financial Corporation's 1998 Annual
Report, which is included herein at
Exhibit 13.)
12 Statement re: Computation of
Ratios. (Incorporated by
Reference to page 19 of Union
National Financial Corporation's
1998 Annual Report, which is
included herein at Exhibit 13.)
<PAGE>
13 Excerpts from Union National
Financial Corporation's 1998
Annual Report to Shareholders.
21 Subsidiaries of the Union National
Financial Corporation.
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) No Current Report on Form 8-K was filed by
Union National Financial Corporation during the
fourth quarter of the 1998 fiscal year.
(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/ Mark D. Gainer
____________________________
Mark D. Gainer, President
and Chief Executive Officer
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of Union National Financial Corporation and in the
capacities and on the dates indicated.
DATE
____
By /s/ Mark D. Gainer March 25, 1999
________________________
Mark D. Gainer
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Donald H. Wolgemuth March 25, 1999
________________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 25, 1999
________________________
William E. Eby, Director
By /s/ Clement M. Hoober March 25, 1999
________________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
<PAGE>
By /s/ Franklin R. Eichler March 25, 1999
________________________
Franklin R. Eichler, Director
By /s/ E. Ralph Garber March 25, 1999
________________________
E. Ralph Garber, Director
By /s/ Daniel C. Gohn March 25, 1999
________________________
Daniel C. Gohn, Director
By /s/ Carl R. Hallgren March 25, 1999
________________________
Carl R. Hallgren, Director
By /s/ David G. Heisey March 25, 1999
________________________
David G. Heisey, Director
By /s/ William D. Linkous March 25, 1999
________________________
William D. Linkous, Director
By /s/ Daniel H. Raffensperger March 25, 1999
________________________
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 25, 1999
________________________
Benjamin W. Piersol, Jr., Director
:94699
<PAGE>
<TABLE>
EXHIBIT INDEX
Sequential Page
Exhibit Number in Manually
Number Signed Original
______ _________________
<S> <C> <C>
3(i) Union National Financial Corporation's
Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Union National Financial Corporation's
Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
3(ii) Union National Financial Corporation's 27
Amended By-laws.(Incorporated by reference
to Exhibit 3(ii) to Union National Financial
Corporation's Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997), and the amendment thereto dated
November 14, 1998.
10.1 Executive Employment Agreement dated as of 29
January 1, 1999, between Mark D. Gainer and
Union National Financial Corporation.
10.2 Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to
Union National Financial Corporation'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
Union National Financial Corporation'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 page 1 of Union
National Financial Corporation's 1998 Annual Report,
which is included herein at Exhibit 13.)
12 Statement re: Computation of Ratios.
(Incorporated by Reference to page 19 of
Union National Financial Corporation's 1998 Annual
Report, which is included herein at Exhibit 13.)
<PAGE>
13 Excerpts from Union National Financial 47
Corporation's 1998 Annual Report to
shareholders.
21 Subsidiaries of Union National Financial 84
Corporation.
23 Consent of Independent Auditors. 86
27 Financial Data Schedule. 88
</TABLE>
EXHIBIT 3(i)
Union National Financial Corporation's Amended
Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with
the Commission on May 27, 1997.)
EXHIBIT 3(ii)
Union National Financial Corporation's
Amended By-laws.
(Incorporated by reference to Exhibit 3(ii)
to Union National Financial Corporation's
Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997) and the Amendment thereto
dated November 14, 1998.
EXHIBIT 3(ii)
Section 2.2 of Union National
Financial Corporation's By-Laws
as Adopted November 14, 1998
Section 2.2. The Annual Meeting of the
Shareholders shall be held no later than the thrity-
first day of May in each year, when they shall
elect a Board of Directors and transact such other
business as may properly be brought before the
meeting.
EXHIBIT 10.1
Executive Employment Agreement dated as of
January 1, 1999, between Mark D. Gainer and
Union National Financial Corporation.
<PAGE>
EMPLOYMENT AGREEMENT
____________________
THIS AGREEMENT is made as of the first day of January, 1999,
between UNION NATIONAL FINANCIAL CORPORATION ("Corporation"), a
Pennsylvania business corporation having a place of business at
101 E. Main Street, Mount Joy, Pennsylvania 17552-0567, UNION
NATIONAL COMMUNITY BANK ("Bank") a national banking association
having a place of business at 101 E. Main Street, Mount Joy,
Pennsylvania 17552-0567, and MARK D. GAINER ("Executive"), an
individual residing at 329 Kelly Avenue, Mount Joy, Pennsylvania
17552.
WITNESSETH:
__________
WHEREAS, the Corporation is a registered bank holding
company;
WHEREAS, the Bank is a subsidiary of the Corporation;
WHEREAS, Corporation and Bank desire to employ Executive to
serve in the capacity of President and Chief Executive Officer
of each of Corporation and Bank under the terms and conditions
set forth herein;
WHEREAS, Executive desires to accept employment with
Corporation and Bank on the terms and conditions set forth
herein.
AGREEMENT:
__________
NOW, THEREFORE, the parties hereto, intending to be legally
bound, agree as follows:
1. Employment. Corporation and Bank hereby employ Executive
__________
and Executive hereby accepts employment with Corporation and
Bank, under the terms and conditions set forth in this Agreement.
2. Duties of Employee. Executive shall perform and discharge
__________________
well and faithfully such duties as an executive officer of
Corporation and Bank as may be assigned to Executive from time to
time by the Board of Directors of Corporation and Bank.
Executive shall be employed as President and Chief Executive
Officer of Corporation and Bank, and shall hold such other
titles as may be given to him from time to time by the Board of
Directors of Corporation and Bank. Executive shall devote his
full time, attention and energies to the business of Corporation
and Bank during the Employment Period (as defined in Section 3 of
this Agreement); provided, however, that this Section 2 shall not
be construed as preventing Executive from (a) engaging in
activities incident or necessary to personal investments so long
as such investment does not exceed 5% of the outstanding shares
of any publicly held company, (b) acting as a member of the Board
of Directors of any other corporation or as a member of the Board
of Trustees of any other organization, with the prior approval of
the Board of Directors of Corporation and Bank, or (c) being
involved in any other activity with the prior approval of the
Board of Directors of Corporation and Bank. The Executive shall
not engage in any business or commercial activities,
<PAGE>
duties or pursuits which compete with the business or commercial
activities of Corporation or Bank, nor may the Executive serve as
a director or officer or in any other capacity in a company which
competes with Corporation or Bank.
3. Term of Agreement.
__________________
(a) This Agreement shall be for a five (5) year period
(the "Employment Period") beginning on the first day of January,
1999, and if not previously terminated pursuant to the terms of
this Agreement, the Employment Period shall end five (5) years
later. Unless written notice of nonrenewal is given at least one
hundred eighty (180) days prior to the fifth anniversary date,
the Employment Period shall be automatically extended on the
fifth anniversary date of commencement of the Employment Period
(the "Renewal Date") for a period ending five (5) years
thereafter. Unless written notice of nonrenewal is given at
least one hundred eighty (180) days prior to the fifth
anniversary date of each Renewal Date, the Employment Period
shall be automatically extended for an additional five (5) year
period.
(b) Notwithstanding the provisions of Section 3(a) of
this Agreement, this Agreement shall terminate automatically for
Cause (as defined herein) upon written notice from the Board of
Directors of each of Corporation and Bank to Executive. As used
in this Agreement, "Cause" shall mean any of the following:
(i) Executive's conviction of or plea of guilty or
nolo contendere to a felony, a crime of falsehood or a crime
involving moral turpitude, or the actual incarceration of
Executive for a period of forty five (45) consecutive days or
more;
(ii) Executive's failure to follow the good faith
lawful instructions of the Board of Directors
of Corporation or Bank with respect to its operations, after
written notice from Corporation or Bank and a failure to cure
such violation within twenty (20) days of said written notice;
(iii) Executive's willful failure to substantially
perform Executive's duties to Corporation or Bank, other than a
failure resulting from Executive's incapacity because of physical
or mental illness, as provided in subsection (d) of this Section
3, after written notice from Corporation or Bank and a failure
to cure such violation within twenty (20) days of said written
notice;
(iv) Executive's intentional violation of the
provisions of this Agreement, after written notice from
Corporation or Bank and a failure to cure such violation within
twenty (20) days of said written notice;
(v) dishonesty of the Executive in the performance of
his duties;
(vi) Executive's removal or prohibition from being an
institutional-affiliated party by a final order of an appropriate
federal banking agency pursuant to Section
<PAGE>
8(e) of the Federal Deposit Insurance Act or by the Office of the
Comptroller of the Currency pursuant to national law;
(vii) conduct on the part of the Executive as
determined by an affirmative vote of seventy-five percent (75%)
of the disinterested members of the Board of Directors which
brings public discredit to Corporation or Bank; or
(viii) Executive's breach of fiduciary duty involving
personal profit.
If this Agreement is terminated for Cause, all of
Executive's rights under this Agreement shall cease as of the
effective date of such termination.
(c) Notwithstanding the provisions of Section 3(a) of this
Agreement, this Agreement shall terminate automatically upon
Executive's voluntary termination of employment (other than in
accordance with Section 5 of this Agreement) for Good Reason.
The term "Good Reason" shall mean (i) the assignment of duties
and responsibilities inconsistent with Executive's status as
President and Chief Executive Officer of Corporation and Bank,
(ii) a reassignment which requires Executive to move his
principal residence more than fifty (50) miles from the
Corporation's and Bank's principal executive office immediately
prior to this Agreement, (iii) any removal of the Executive from
office or any adverse change in the terms and conditions of the
Executive's employment, except for any termination of the
Executive's employment under the provisions of Section 3(b)
hereof, (iv) any reduction in the Executive's Annual Base Salary
as in effect on the date hereof or as the same may be increased
from time to time, except such reductions that are the result of
a national financial depression or national or bank emergency
when such reduction has been implemented by the Board of
Directors for the Corporation and Bank's senior management, or
(v) any failure of Corporation and Bank to provide the Executive
with benefits at least as favorable as those enjoyed by the
Executive during the Employment Period under any of the pension,
life insurance, medical, health and accident, disability or other
employee plans of Corporation and Bank, or the taking of any
action that would materially reduce any of such benefits unless
such reduction is part of a reduction applicable to all
employees. If such termination occurs for Good Reason, then
Corporation or Bank shall pay Executive an amount equal to the
greater of the remaining balance of the Agreed Compensation
otherwise due to the Executive for the remainder of the then
existing Employment Period or 2.99 times the Executive's Agreed
Compensation as defined in subsection (f) of this Section 3,
which amount shall be payable in thirty-six (36) equal monthly
installments and shall be subject to federal, state and local tax
withholdings. In addition, for a period of three (3) years from
the date of termination of employment, or until Executive secures
substantially similar benefits through other employment,
whichever shall first occur, Executive shall receive a
continuation of all life, disability, medical insurance and other
normal health and welfare benefits in effect with respect to
Executive during the two (2) years prior to his termination of
employment, or, if Corporation and Bank cannot provide such
benefits because Executive is no longer an employee, a dollar
amount equal to the cost to Executive of obtaining such benefits
(or substantially similar benefits). If permitted under the
terms of the plan, Executive
<PAGE>
shall receive the additional retirement benefits to which he
would have been entitled had his employment continued through the
then remaining term of the Agreement. However, in the event the
payment described herein, when added to all other amounts or
benefits provided to or on behalf of the Executive in connection
with his termination of employment, would result in the
imposition of an excise tax under Code Section 4999, such
payments shall be retroactively (if necessary) reduced to the
extent necessary to avoid such excise tax imposition. Upon
written notice to Executive, together with calculations of
Corporation's independent auditors, Executive shall remit to
Corporation the amount of the reduction plus such interest as may
be necessary to avoid the imposition of such excise tax.
Notwithstanding the foregoing or any other provision of this
contract to the contrary, if any portion of the amount herein
payable to the Executive is determined to be non-deductible
pursuant to the regulations promulgated under Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code"), the
Corporation shall be required only to pay to Executive the amount
determined to be deductible under Section 280G.
At the option of the Executive, exercisable by the Executive
within ninety (90) days after the occurrence of the event
constituting "Good Reason," the Executive may resign from
employment under this Agreement by a notice in writing (the
"Notice of Termination") delivered to Corporation and Bank and
the provisions of this Section 3(c) hereof shall thereupon apply.
(d) Notwithstanding the provisions of Section 3(a) of this
Agreement, this Agreement shall terminate automatically upon
Executive's Disability and Executive's rights under this
Agreement shall cease as of the date of such termination;
provided, however, that Executive shall nevertheless be entitled
to receive an amount equal to and no greater than 70% of the
Executive's Agreed Compensation as defined in subsection (f) of
this Section 3, less amounts payable under any disability plan of
Corporation and Bank, until the earliest of (i) Executive's
return to employment, (ii) his attainment of age 65, (iii) his
death, or (iv) the end of the then existing Employment Period.
In addition, Executive shall receive for such period a
continuation of all life, disability, medical insurance and other
normal health and welfare benefits in effect with respect to
Executive during the two (2) years prior to his disability, or,
if Corporation and Bank cannot provide such benefits because
Executive is no longer an employee, a dollar amount equal to the
cost to Executive of obtaining such benefits (or substantially
similar benefits). For purposes of this Agreement, the Executive
shall have a Disability if, as a result of physical or mental
injury or impairment, Executive is unable to perform all of the
essential job functions of his position on a full time basis with
or without a reasonable accommodation and without posting a
direct threat to himself and others, for a period of one hundred
eighty (180) days. The Executive shall have no duty to mitigate
any payment provided for in this Section 3(d) by seeking other
employment.
(e) Executive agrees that in the event his employment under
this Agreement is terminated, Executive shall resign as a
director of Corporation and Bank, or any affiliate or subsidiary
thereof, if he is then serving as a director of any of such
entities.
<PAGE>
(f) The term "Agreed Compensation" shall equal the sum of
(A) the Executive's highest Annual Base Salary under the
Agreement, and (B) the average of the Executive's annual bonuses
with respect to the three (3) calendar years immediately
preceding the Executive's termination.
4. Employment Period Compensation.
_______________________________
(a) Annual Base Salary. For services performed by Executive
___________________
under this Agreement, Corporation or Bank shall pay Executive an
Annual Base Salary during the Employment Period at the rate of
$132,017.60 per year, minus applicable withholdings and
deductions, payable at the same times as salaries are payable to
other executive employees of Corporation or Bank. Corporation or
Bank may, from time to time, increase Executive's Annual Base
Salary, and any and all such increases shall be deemed to
constitute amendments to this Section 4(a) to reflect the
increased amounts, effective as of the date established for such
increases by the Board of Directors of Corporation or Bank or any
committee of such Board in the resolutions authorizing such
increases.
(b) Bonus. For services performed by Executive under this
_____
Agreement, Corporation or Bank may, from time to time, pay a
bonus or bonuses to Executive as Corporation or Bank, in its sole
discretion, deems appropriate. The payment of any such bonuses
shall not reduce or otherwise affect any other obligation of
Corporation or Bank to Executive provided for in this Agreement.
(c) Vacations. During the term of this Agreement, Executive
___________
shall be entitled to paid annual vacation in accordance with the
policies as established from time to time by the Boards of
Directors of Corporation and Bank. However, Executive shall not
be entitled to receive any additional compensation from
Corporation and Bank for failure to take a vacation, nor shall
Executive be able to accumulate unused vacation time from one
year to the next, except to the extent authorized by the Boards
of Directors of Corporation and Bank.
(d) Automobile. During the term of this Agreement,
__________
Corporation and Bank shall provide Executive with exclusive use
of an automobile mutually agreed upon by Corporation and Bank.
Corporation and Bank shall be responsible and shall pay for all
costs of insurance coverage, repairs, maintenance and other
operating and incidental expenses, including license, fuel and
oil. Corporation and Bank shall provide Executive with a
replacement automobile at approximately the time Executive's
automobile reaches three (3) years of age or 50,000 miles,
whichever is first, and approximately every three (3) years or
50,000 miles thereafter, upon the same terms and conditions.
(e) Employee Benefit Plans. During the term of this
______________________
Agreement, Executive shall be entitled to participate in or
receive the benefits of any employee benefit plan currently in
effect at Corporation and Bank, subject to the terms of said
plan, until such time that the Boards of Directors of Corporation
and Bank authorize a change
<PAGE>
in such benefits. Corporation and Bank shall not make any
changes in such plans or benefits which would adversely affect
Executive's rights or benefits thereunder, unless such change
occurs pursuant to a program applicable to all executive officers
of Corporation and Bank and does not result in a proportionately
greater adverse change in the rights of or benefits to Executive
as compared with any other executive officer of Corporation and
Bank. Nothing paid to Executive under any plan or arrangement
presently in effect or made available in the future shall be
deemed to be in lieu of the salary payable to Executive pursuant
to Section 4(a) hereof.
(f) Business Expenses. During the term of this Agreement,
_________________
Executive shall be entitled to receive prompt reimbursement for
all reasonable expenses incurred by him, which are properly
accounted for, in accordance with the policies and procedures
established by the Boards of Directors of Corporation and Bank
for their executive officers.
5. Termination of Employment Following Change in Control.
______________________________________________________
(a) If a Change in Control (as defined in Section 5(b) of
this Agreement) shall occur or if thereafter at any time during
the term of this Agreement there shall be:
(i) any involuntary termination of Executive's
employment (other than for the reasons set forth in Section 3(b)
or 3(d) of this Agreement);
(ii) any reduction in Executive's title,
responsibilities, including reporting responsibilities, or
authority, including such title, responsibilities or authority as
such may be increased from time to time during the term of this
Agreement;
(iii) the assignment to Executive of duties inconsistent
with Executive's office on the date of the Change in Control or
as the same may be increased from time to time after the Change
in Control;
(iv) any reassignment of Executive to a location greater
than fifty (50) miles from the location of Executive's office on
the date of the Change in Control;
(v) any reduction in Executive's Annual Base Salary in
effect on the date of the Change in Control or as the same may be
increased from time to time after the Change in Control;
(vi) any failure to provide Executive with benefits at
least as favorable as those enjoyed by Executive under any of
Corporation or Bank's retirement or pension, life insurance,
medical, health and accident, disability or other employee plans
in which Executive participated at the time of the Change in
Control, or the taking of any action that would materially reduce
any of such benefits in effect at the time of the Change in
Control;
<PAGE>
(vii) any requirement that Executive travel in
performance of his duties on behalf of Corporation or Bank for a
significantly greater period of time during any year than was
required of Executive during the year preceding the year in which
the Change in Control occurred; or
(viii) any sustained pattern of interruption or
disruption of Executive for matters substantially unrelated to
Executive's discharge of Executive's duties on behalf of
Corporation and Bank;
then, at the option of Executive, exercisable by
Executive within one hundred twenty (120) days of the Change in
Control or occurrence of any of the foregoing events, Executive
may resign from employment with Corporation and Bank (or, if
involuntarily terminated, give notice of intention to collect
benefits under this Agreement) by delivering a notice in writing
(the "Notice of Termination") to Corporation and Bank and the
provisions of Section 6 of this Agreement shall apply.
(b) As used in this Agreement, "Change in Control" shall mean
the occurrence of any of the following:
(i) (A) a merger, consolidation or division involving
Corporation or Bank, (B) a sale, exchange, transfer or other
disposition of substantially all of the assets of Corporation or
Bank, or (C) a purchase by Corporation or Bank of substantially
all of the assets of another entity, unless (y) such merger,
consolidation, division, sale, exchange, transfer, purchase or
disposition is approved in advance by seventy percent (70%) or
more of the members of the Board of Directors of Corporation or
Bank who are not interested in the transaction and (z) a majority
of the members of the Board of Directors of the legal entity
resulting from or existing after any such transaction and of the
Board of Directors of such entity's parent corporation, if any,
are former members of the Board of Directors of Corporation or
Bank; or
(ii) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934 (the
"Exchange Act")), other than Corporation or Bank or any "person"
who on the date hereof is a director or officer of Corporation or
Bank is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of
securities of Corporation or Bank representing twenty-five
(25%) percent or more of the combined voting power of Corporation
or Bank's then outstanding securities, or
(iii) during any period of two (2) consecutive years
during the term of Executive's employment under this Agreement,
individuals who at the beginning of such period constitute the
Board of Directors of Corporation or Bank 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
<PAGE>
(iv) any other change in control of Corporation and Bank
similar in effect to any of the foregoing.
6. Rights in Event of Termination of Employment Following
______________________________________________________
Change in Control.
__________________
(a) In the event that Executive delivers a Notice of
Termination (as defined in Section 5(a) of this Agreement) to
Corporation and Bank, Executive shall be entitled to receive the
compensation and benefits set forth below:
If, at the time of termination of Executive's
employment, a "Change in Control" (as defined in Section 5(b) of
this Agreement) has also occurred, Corporation and Bank shall pay
Executive a lump sum amount equal to and no greater than 2.99
times the Executive's Agreed Compensation as defined in
subsection (f) of Section 3, minus applicable taxes and
withholdings. In addition, for a period of three (3) years from
the date of termination of employment, or until Executive secures
substantially similar benefits through other employment,
whichever shall first occur, Executive shall receive a
continuation of all life, disability, medical insurance and other
normal health and welfare benefits in effect with respect to
Executive during the two (2) years prior to his termination of
employment, or, if Corporation and Bank cannot provide such
benefits because Executive is no longer an employee, a dollar
amount equal to the cost to Executive of obtaining such benefits
(or substantially similar benefits). If permitted under the
terms of the plan, Executive shall receive additional retirement
benefits to which he would have been entitled had his employment
continued through the then remaining term of the Agreement.
However, in the event the payment described herein, when added to
all other amounts or benefits provided to or on behalf of the
Executive in connection with his termination of employment, would
result in the imposition of an excise tax under Code Section
4999, such payments shall be retroactively (if necessary)
reduced to the extent necessary to avoid such excise tax
imposition. Upon written notice to Executive, together with
calculations of Corporation's independent auditors, Executive
shall remit to Corporation the amount of the reduction plus such
interest as may be necessary to avoid the imposition of such
excise tax. Notwithstanding the foregoing or any other provision
of this contract to the contrary, if any portion of the amount
herein payable to the Executive is determined to be non-
deductible pursuant to the regulations promulgated under Section
280G of the Internal Revenue Code of 1986, as amended (the
"Code"), the Corporation shall be required only to pay to
Executive the amount determined to be deductible under Section
280G.
(b) Executive shall not be required to mitigate the amount
of any payment provided for in this Section 6 by seeking other
employment or otherwise. Unless otherwise agreed to in writing,
the amount of payment or the benefit provided for in this Section
6 shall not be reduced by any compensation earned by Executive as
the result of employment by another employer or by reason of
Executive's receipt of or right to receive any retirement or
other benefits after the date of termination of employment or
otherwise.
<PAGE>
7. Rights in Event of Termination of Employment Absent Change
__________________________________________________________
in Control.
___________
(a) In the event that Executive's employment is
involuntarily terminated by Corporation and/or Bank without
Cause and no Change in Control shall have occurred at the date of
such termination, Corporation and Bank shall pay Executive an
amount equal to and no greater than 2.99 times the Executive's
Agreed Compensation as defined in subsection (f) of Section 3,
and shall be payable in thirty-six (36) equal monthly
installments and shall be subject to federal, state and local tax
withholdings. In addition, for a period of three (3) years from
the date of termination of employment, or until Executive secures
substantially similar benefits through other employment,
whichever shall first occur, Executive shall receive a
continuation of all life, disability, medical insurance and other
normal health and welfare benefits in effect with respect to
Executive during the two (2) years prior to his termination of
employment, or, if Corporation and Bank cannot provide such
benefits because Executive is no longer an employee, a dollar
amount equal to the cost to Executive of obtaining such benefits
(or substantially similar benefits). In addition, if permitted
pursuant to the terms of the plan, Executive shall receive
additional retirement benefits to which he would have been
entitled had his employment continued through the then remaining
term of the Agreement. However, in the event the payment
described herein, when added to all other amounts or benefits
provided to or on behalf of the Executive in connection with his
termination of employment, would result in the imposition of an
excise tax under Code Section 4999, such payments shall be
retroactively (if necessary) reduced to the extent necessary to
avoid such excise tax imposition. Upon written notice to
Executive, together with calculations of Corporation's
independent auditors, Executive shall remit to Corporation the
amount of the reduction plus such interest as may be necessary to
avoid the imposition of such excise tax. Notwithstanding the
foregoing or any other provision of this contract to the
contrary, if any portion of the amount herein payable to the
Executive is determined to be non-deductible pursuant to the
regulations promulgated under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), the Corporation
shall be required only to pay to Executive the amount determined
to be deductible under Section 280G.
(b) Executive shall not be required to mitigate the amount
of any payment provided for in this Section 7 by seeking other
employment or otherwise. Unless otherwise agreed to in writing,
the amount of payment or the benefit provided for in this Section
7 shall not be reduced by any compensation earned by Executive as
the result of employment by another employer or by reason of
Executive's receipt of or right to receive any retirement or
other benefits after the date of termination of employment or
otherwise.
8. Covenant Not to Compete.
________________________
(a) Executive hereby acknowledges and recognizes the highly
competitive nature of the business of Corporation and Bank and
accordingly agrees that, during and for the applicable period set
forth in Section 8(c) hereof, Executive shall not, except as
otherwise permitted in writing by the Corporation and the Bank:
<PAGE>
(i) be engaged, directly or indirectly, either for his own
account or as agent, consultant, employee, partner, officer,
director, proprietor, investor (except as an investor owning less
than 5% of the stock of a publicly owned company) or otherwise of
any person, firm, corporation or enterprise engaged in (1) the
banking (including bank holding company) or financial services
industry, or (2) any other activity in which Corporation or Bank
or any of their subsidiaries are engaged during the Employment
Period, and remain so engaged at the end of the Employment
Period, in any area in which, at any time during the Employment
Period or at the date of termination of the Executive's
employment, is within twenty (20) miles of any branch location,
office or other facility of Corporation or Bank or any of their
subsidiaries, unless Executive exclusively performs all such
activity outside of said twenty (20) mile area (the "Non-
Competition Area"); or
(ii) provide financial or other assistance to any person,
firm, corporation, or enterprise engaged in (1) the banking
(including bank holding company) or financial services industry,
or (2) any other activity in which Corporation or Bank or any of
their subsidiaries are engaged during the Employment Period, in
the Non-Competition Area; or
(iii) if employed in a capacity provided in (i) and (ii),
solicit current customers, during the term of this Agreement, of
Corporation, Bank or any Corporation subsidiary in the Non-
Competition Area; or
(iv) solicit employees of Corporation, Bank or any
Corporation subsidiary who are employed during the term of this
Agreement.
(b) It is expressly understood and agreed that, although
Executive and Corporation and Bank consider the restrictions
contained in Section 8(a) hereof reasonable for the purpose of
preserving for Corporation and Bank and their subsidiaries their
good will and other proprietary rights, if a final judicial
determination is made by a court having jurisdiction that the
time or territory or any other restriction contained in Section
8(a) hereof is an unreasonable or otherwise unenforceable
restriction against Executive, the provisions of Section 8(a)
hereof shall not be rendered void but shall be deemed amended to
apply as to such maximum time and territory and to such other
extent as such court may judicially determine or indicate to be
reasonable.
(c) The provisions of this Section 8 shall be applicable
commencing on the date of this Agreement and ending on one of the
following dates, as applicable:
(i) if Executive's employment terminates in accordance with
the provisions of Section 3 (other than Section 3(b) relating to
termination for Cause), the effective date of termination of
employment; or
(ii) if Executive's employment terminates in accordance with
the provisions of Section 3(b) of this Agreement (relating to
termination for Cause), the second anniversary date of the
effective date of termination of employment; or
<PAGE>
(iii) if the Executive voluntarily terminates his employment
in accordance with the provisions of Section 5 hereof, the second
anniversary date of the effective date of termination of
employment; or
(iv) if the Executive's employment is involuntarily
terminated in accordance with the provisions of Section 7 hereof,
the second anniversary date of the effective date of termination
of employment.
9. Unauthorized Disclosure. During the term of his employment
_______________________
hereunder, or at any later time, the Executive shall not, without
the written consent of the Boards of Directors of Corporation and
Bank or a person authorized thereby, knowingly disclose to any
person, other than an employee of 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 Corporation and Bank, any material
confidential information obtained by him while in the employ of
Corporation and Bank with respect to any of Corporation and
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 damaging to
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 of a business similar to that conducted by Corporation
and Bank or any information that must be disclosed as required by
law.
10. Liability Insurance. Corporation and Bank shall use their
___________________
best efforts to obtain insurance coverage for the Executive under
an insurance policy covering officers and directors of
Corporation and Bank against lawsuits, arbitrations or other
legal or regulatory proceedings; however, nothing herein shall be
construed to require Corporation and/or Bank to obtain such
insurance, if the Board of Directors of the Corporation and/or
Bank determine that such coverage cannot be obtained at a
reasonable price.
11. Notices. Except as otherwise provided in this Agreement,
_______
any notice required or permitted to be given under this Agreement
shall be deemed properly given if in writing and if mailed by
registered or certified mail, postage prepaid with return receipt
requested, to Executive's residence, in the case of notices to
Executive, and to the principal executive offices of Corporation
and Bank, in the case of notices to Corporation and Bank.
12. Waiver. No provision of this Agreement may be modified,
_______
waived or discharged unless such waiver, modification or
discharge is agreed to in writing and signed by Executive and an
executive officer specifically designated by the Boards of
Directors of Corporation and Bank. No waiver by either party
hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at
any prior or subsequent time.
<PAGE>
13. Assignment. This Agreement shall not be assignable by any
__________
party, except by Corporation and Bank to any successor in
interest to their respective businesses.
14. 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 Bank and/or
Corporation and this Agreement contains all the covenants and
agreements between the parties with respect to employment. This
Agreement specifically releases all parties of any rights and
obligations under the Executive Employment Agreement of Mark D.
Gainer dated January 27, 1994, between Union National Financial
Corporation and Mark D. Gainer and said agreement is hereafter
null and void.
15. Successors; Binding Agreement.
_____________________________
(a) Corporation and Bank will require any successor (whether
direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the businesses and/or
assets of Corporation and Bank to expressly assume and agree to
perform this Agreement in the same manner and to the same extent
that Corporation and Bank would be required to perform it if no
such succession had taken place. Failure by Corporation and Bank
to obtain such assumption and agreement prior to the
effectiveness of any such succession shall constitute a breach of
this Agreement and the provisions of Section 3 of this Agreement
shall apply. As used in this Agreement, "Corporation" and "Bank"
shall mean Corporation and Bank, as defined previously and any
successor to their respective businesses and/or assets as
aforesaid which assumes and agrees to perform this Agreement by
operation of law or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives,
executors, administrators, heirs, distributees, devisees and
legatees. If Executive should die after a Notice of Termination
is delivered by Executive, or following termination of
Executive's employment without Cause, and any amounts would be
payable to Executive under this Agreement if Executive had
continued to live, all such amounts shall be paid in accordance
with the terms of this Agreement to Executive's devisee, legatee,
or other designee, or, if there is no such designee, to
Executive's estate.
16. Arbitration. Corporation, Bank and Executive recognize
___________
that in the event a dispute should arise between them concerning
the interpretation or implementation of this Agreement, lengthy
and expensive litigation will not afford a practical resolution
of the issues within a reasonable period of time. Consequently,
each party agrees that all disputes, disagreements and questions
of interpretation concerning this Agreement are to be submitted
for resolution, in Philadelphia, Pennsylvania, to the American
Arbitration Association (the "Association") in accordance with
the Association's National Rules for the Resolution of Employment
Disputes or other applicable rules then in effect ("Rules").
Corporation, Bank or Executive may initiate an arbitration
proceeding at any time by giving notice to the other in
accordance with the Rules. Corporation and Bank and Executive
may, as a matter of right, mutually agree on the appointment of a
particular arbitrator from the Association's pool. The
arbitrator shall not be bound by the rules of evidence and
procedure of the courts of the
<PAGE>
Commonwealth of Pennsylvania but shall be bound by the
substantive law applicable to this Agreement. The decision of
the arbitrator, absent fraud, duress, incompetence or gross and
obvious error of fact, shall be final and binding upon the
parties and shall be enforceable in courts of proper
jurisdiction. Following written notice of a request for
arbitration, Corporation, Bank and Executive shall be entitled to
an injunction restraining all further proceedings in any pending
or subsequently filed litigation concerning this Agreement,
except as otherwise provided herein.
17. Validity. The invalidity or unenforceability of any
_________
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
18. Applicable Law. This Agreement shall be governed by and
_______________
construed in accordance with the domestic, internal laws of the
Commonwealth of Pennsylvania, without regard to its conflicts of
laws principles.
19. Headings. The section headings of this Agreement are for
________
convenience only and shall not control or affect the meaning or
construction or limit the scope or intent of any of the
provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first above written.
ATTEST: UNION NATIONAL FINANCIAL
CORPORATION
/s/ Carl R. Hallgren By /s/ Donald H. Wolgemuth
_____________________________ ____________________________
"Corporation"
UNION NATIONAL COMMUNITY BANK
/s/ Marcene L. Camara By /s/ Donald H. Wolgemuth
_____________________________ ____________________________
"Bank"
WITNESS:
/s/ Marcene L. Camara /s/ Mark D. Gainer
______________________________ ____________________________
Mark D. Gainer
"Executive"
:94699
EXHIBIT 10.2
Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to
Union National Financial Corporation'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
Union National Financial Corporation'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 page 1 of Union National
Financial Corporation's 1998 Annual Report, which is
included herein at Exhibit 13.)
EXHIBIT 12
Statement re: Computation of Ratios.
(Incorporated by Reference to page 19 of
Union National Financial Corporation's 1998
Annual Report, which is included herein at
Exhibit 13.)
EXHIBIT 13
Excerpts From Union National Financial Corporation's
1998 Annual Report to Shareholders
<PAGE>
STOCK, DIVIDEND AND BROKER INFORMATION
Union National Financial Corporation has only one class of
common stock authorized, issued and outstanding. The outstanding
common stock is traded in the local over-the-counter market,
primarily in Lancaster County, Pennsylvania. Prices presented in
the table below reflect actual transactions known to management.
Prices and dividends per share are adjusted for stock splits 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 may
purchase additional shares within specified limits.
<TABLE>
<CAPTION>
Dividends
Quarter High Low Per Share
_________________________________________________________________
<S> <C> <C> <C>
First, 1998 $23.88 $22.50 $0.100
Second 23.75 22.25 0.105
Third 23.75 19.00 0.110
Fourth 21.00 18.00 0.115
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
</TABLE>
FOR FURTHER INFORMATION, WE REFER YOU TO:
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>
FINANCIAL HIGHLIGHTS
<CAPTION>
December 31, December 31,
1998 1997 %Increase
_________________________________________________________________
<S> <C> <C> <C>
For the Year
Total Interest Income $18,063,621 $16,205,692 11.5%
Total Interest Expense 8,694,963 7,549,909 15.2%
Net Interest Income 9,368,658 8,655,783 8.2%
Net Income 2,767,632 2,325,487 19.0%
Per Share
Net Income (Basic and Assuming
Dilution) $1.14 $.93 22.6%
Cash Dividends Paid .430 .351 22.5%
Stockholders' Equity 9.83 9.55 2.9%
Average Balances
Net Loans $162,090,000 $140,925,000 15.0%
Investments and Other
Earning Assets 67,672,000 61,115,000 10.7%
Total Assets 241,639,000 213,986,000 12.9%
Total Deposits 188,179,000 168,814,000 11.5%
Stockholders' Equity 22,971,000 22,859,000 .5%
Return on Average
Assets 1.15% 1.09%
Stockholders' Equity 12.05% 10.17%
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1998 1997
____________ ____________
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 7,341,240 $ 6,489,595
Federal Funds Sold 7,795,000 2,835,000
Investment Securities Held
to Maturity (Market Value:
1998-$24,523,740;1997-$18,942,946) 24,079,161 18,869,847
Investment Securities Available
for Sale 51,676,350 45,866,774
Loans(Net of Unearned Income) 163,795,702 152,699,249
Less: Allowance for Loan Losses (1,742,620) (1,592,763)
____________ ____________
Total Net Loans 162,053,082 151,106,486
Premises and Equipment - Net 5,247,349 5,414,864
Accrued Interest Receivable 1,560,703 1,445,767
Deferred Income Taxes 218,708 153,982
Investments in Limited Partnerships 882,161 941,287
Other Assets 513,759 119,404
____________ ____________
TOTAL ASSETS $261,367,513 $233,243,006
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 20,606,222 $ 18,463,193
Interest-Bearing 184,937,546 161,671,680
____________ ____________
Total Deposits 205,543,768 180,134,873
Short-Term Borrowing 186,691 900,000
Long-Term Debt 30,623,660 27,329,060
Accrued Interest Payable 1,060,439 1,008,362
Other Liabilities 256,218 114,861
____________ ____________
TOTAL LIABILITIES 237,670,776 209,487,156
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 627,121 627,332
Shares: Authorized - 20,000,000; Issued -
2,508,484 in 1998 (2,509,327 in 1997);
Outstanding - 2,410,820 in 1998 (2,487,175
in 1997)
Surplus 4,793,416 4,814,975
Retained Earnings 20,183,938 18,460,729
Accumulated Other Comprehensive Income -
Unrealized Gain on Investment
Securities Available for Sale,
Net of Tax 241,515 294,723
Less: Treasury Stock -
97,664 shares in 1998
(22,152 in 1997), at cost (2,149,253) (441,909)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 23,696,737 23,755,850
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $261,367,513 $233,243,006
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
_____________________________
1998 1997
_______________ ___________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 14,048,363 $ 12,483,471
Investment Securities:
Taxable 2,796,098 2,659,213
Exempt from Federal Taxes 995,140 868,149
Deposits in Banks 1,796 3,328
Federal Funds Sold 222,224 191,531
_______________ ___________
Total Interest Income 18,063,621 16,205,692
INTEREST EXPENSE
Deposits 7,051,458 6,354,343
Short-Term Borrowing 22,806 87,259
Long-Term Debt 1,620,699 1,108,307
_______________ ___________
Total Interest Expense 8,694,963 7,549,909
_______________ ___________
Net Interest Income 9,368,658 8,655,783
PROVISION for LOAN LOSSES 325,350 390,250
_______________ ___________
Net Interest Income after Provision
for Loan Losses 9,043,308 8,265,533
OTHER OPERATING INCOME
Trust Income 119,600 134,645
Service Charges on Deposit Accounts 471,126 374,697
Other Service Charges, Commissions, Fees 488,882 405,007
Investment Securities Gains/(Losses) (6,716) 2,063
Other Income 84,526 69,692
_______________ __________
Total Other Operating Income 1,157,418 986,104
OTHER OPERATING EXPENSES
Salaries and Wages 3,145,664 2,783,105
Retirement Plan and Other
Employee Benefits 633,011 857,410
Net Occupancy Expense 556,608 562,661
Furniture and Equipment Expense 399,058 411,484
FDIC Insurance Assessment 21,737 20,109
Other Operating Expenses 1,962,103 1,712,285
_______________ __________
Total Other Operating Expenses 6,718,181 6,347,054
_______________ __________
Income before Income Taxes 3,482,545 2,904,583
PROVISION for INCOME TAXES 714,913 579,096
_______________ __________
NET INCOME for YEAR $ 2,767,632 $ 2,325,487
=============== ==========
PER SHARE INFORMATION
Net Income for Year (Basic and Assuming
Dilution) $ 1.14 $ .93
Cash Dividends $ .430 $ .351
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
_____________________________
1996
_______________
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 11,175,845
Investment Securities:
Taxable 2,072,695
Exempt from Federal Taxes 830,203
Deposits in Banks 2,768
Federal Funds Sold 136,238
______________
Total Interest Income 14,217,749
INTEREST EXPENSE
Deposits 5,778,953
Short-Term Borrowing 115,372
Long-Term Debt 485,232
______________
Total Interest Expense 6,379,557
______________
Net Interest Income 7,838,192
PROVISION for LOAN LOSSES 150,000
______________
Net Interest Income after Provision
for Loan Losses 7,688,192
OTHER OPERATING INCOME
Trust Income 120,495
Service Charges on Deposit Accounts 327,567
Other Service Charges, Commissions, Fees 298,355
Investment Securities Gains/(Losses) 2,308
Other Income 62,574
______________
Total Other Operating Income 811,299
OTHER OPERATING EXPENSES
Salaries and Wages 2,637,584
Retirement Plan and Other
Employee Benefits 751,684
Net Occupancy Expense 583,074
Furniture and Equipment Expense 373,133
FDIC Insurance Assessment 2,000
Other Operating Expenses 1,603,742
______________
Total Other Operating Expenses 5,951,217
______________
Income before Income Taxes 2,548,274
PROVISION for INCOME TAXES 356,462
______________
NET INCOME for YEAR $ 2,191,812
==============
PER SHARE INFORMATION
Net Income for Year (Basic and Assuming
Dilution) $ .88
Cash Dividends $ .305
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
______________________________
1998 1997
______________ ___________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,767,632 $ 2,325,487
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 464,567 506,353
Provision for Loan Losses 325,350 390,250
Investment Securities (Gains)/Losses 6,716 (2,063)
Provision for Deferred Income Taxes (37,317) (1,302)
(Increase)/Decrease in Accrued
Interest Receivable (114,936) (133,324)
(Increase)/Decrease in Other Assets (356,821) 292,578
Increase/(Decrease) in Other
Liabilities 193,434 52,625
____________ ___________
Net Cash Provided by
Operating Activities 3,248,625 3,430,604
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold (4,960,000) 1,955,000
Proceeds from Sales of
Available for Sale Securities 4,935,869 5,548,285
Proceeds from Maturities of
Available for Sale Securities 38,352,132 15,337,934
Proceeds from Maturities of
Held to Maturity Securities 1,068,938 2,564,118
Purchases of Available for Sale
Securities (49,184,910) (28,694,305)
Purchases of Held to Maturity
Securities (6,278,251) (4,310,406)
Loans Made to Customers, Net of
Principal Collected on Loans (11,271,946) (22,476,796)
Purchases of Property and Equipment (275,461) (139,226)
Net Cash (Used in)Investing
Activities (27,613,629) (30,215,396)
____________ ___________
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 19,559,864 7,532,740
Net Increase in Certificates
of Deposits 5,849,031 8,088,803
Net Increase/(Decrease) in Short-Term
Borrowing (713,309) (2,089,414)
Proceeds from Issuance of Long-Term
Debt 10,455,600 14,793,060
Payment of Long-Term Debt (7,161,000) (140,000)
Acquisition of Treasury Stock (1,995,379) (306,746)
Issuance of Common and Treasury Stock 266,265 198,827
Cash Dividends Paid (1,044,423) (876,280)
____________ ___________
Net Cash Provided by
Financing Activities 25,216,649 27,200,990
____________ ___________
Net Increase/(Decrease) in Cash
and Cash Equivalents 851,645 416,198
CASH and CASH EQUIVALENTS
Beginning of Year 6,489,595 6,073,397
____________ ___________
CASH and CASH EQUIVALENTS
End of Year $ 7,341,240 $ 6,489,595
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $ 7,016,409 $ 6,291,787
Interest Paid - Other 1,626,477 1,132,613
Income Taxes 726,748 616,710
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Retirement of Treasury Stock (13,000 shares
in 1998, 12,000 shares in 1997,
and 10,000 shares in 1996) $ 288,035 $ 227,542
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
______________________________
1996
______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,191,812
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 515,600
Provision for Loan Losses 150,000
Investment Securities (Gains)/Losses (2,308)
Provision for Deferred Income Taxes 34,598
(Increase)/Decrease in Accrued
Interest Receivable (95,220)
(Increase)/Decrease in Other Assets (6,488)
Increase/(Decrease) in Other
Liabilities 218,395
______________
Net Cash Provided by
Operating Activities 3,006,389
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold (4,790,000)
Proceeds from Sales of
Available for Sale Securities 8,994,369
Proceeds from Maturities of
Available for Sale Securities 11,685,792
Proceeds from Maturities of
Held to Maturity Securities 1,566,157
Purchases of Available for Sale
Securities (32,875,864)
Purchases of Held to Maturity
Securities (4,805,526)
Loans Made to Customers, Net of
Principal Collected on Loans (10,017,453)
Purchases of Property and Equipment (298,385)
_____________
Net Cash (Used in)Investing
Activities (30,540,910)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 7,337,206
Net Increase in Certificates
of Deposits 13,808,609
Net Increase/(Decrease) in Short-Term
Borrowing (409,203)
Proceeds from Issuance of Long-Term
Debt 6,546,000
Payment of Long-Term Debt (140,000)
Acquisition of Treasury Stock (119,173)
Issuance of Common and Treasury Stock 130,866
Cash Dividends Paid (760,044)
______________
Net Cash Provided by
Financing Activities 26,394,261
______________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,140,260)
CASH and CASH EQUIVALENTS
Beginning of Year 7,213,657
______________
CASH and CASH EQUIVALENTS
End of Year $ 6,073,397
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositor $ 5,692,146
Interest Paid - Other 567,181
Income Taxes 370,000
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (13,000 shares
in 1998, 12,000 shares in 1997,
and 10,000 shares in 1996) $ 153,385
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, 1995 $ 600,000 $2,018,898 $18,484,397
Comprehensive Income:
Net Income 2,191,812
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $6,087
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $785
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common and Treasury
Stock 1,041 99,825
Retirement of Treasury Stock
(10,000 shares) (2,500) (150,885)
Cash Dividends ($.305 per share) (760,044)
__________ __________ __________
BALANCE, December 31, 1996 598,541 1,967,838 19,916,165
Comprehensive Income:
Net Income 2,325,487
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $99,451
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $701
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 1,970 182,652
Issuance of Common Stock Under
Employee Plans 181 14,024
Issuance of Common Stock Under
5% Common Stock Dividend 29,640 2,875,003 (2,904,643)
Retirement of Treasury Stock
(12,000 shares) (3,000) (224,542)
Cash Dividends ($.351 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 627,332 4,814,975 18,460,729
Comprehensive Income:
Net Income 2,767,632
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $29,694
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $2,283
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 2,925 254,892
Issuance of Common Stock Under
Employee Plans 114 8,334
Retirement of Treasury Stock
(13,000 shares) (3,250) (284,785)
Cash Dividends ($.430 per share) (1,044,423)
__________ __________ __________
BALANCE, December 31, 1998 $627,121 $4,793,416 $20,183,938
========== ========== ==========
See notes to consolidated financial statements.
<CAPTION>
Accumulated Other
Comprehensive Treasury
Income Stock Total
_____________ _________ ___________
<S> <C> <C> <C>
BALANCE, December 31, 1995 $ 92,741 $ (426,917) $20,769,119
____________
Comprehensive Income:
Net Income 2,191,812
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $6,087 11,815 11,815
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $785 (1,523) (1,523)
___________
Total Comprehensive Income 2,202,104
___________
Acquisition of Treasury Stock (119,173) (119,173)
Issuance of Common and Treasury
Stock 30,000 130,866
Retirement of Treasury Stock
(10,000 shares) 153,385 -0-
Cash Dividends ($.305 per share) (760,044)
__________ __________ __________
BALANCE, December 31, 1996 103,033 (362,705) 22,222,872
___________
Comprehensive Income:
Net Income 2,325,487
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $99,451 193,052 193,052
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $701 (1,362) (1,362)
___________
Total Comprehensive Income 2,517,177
___________
Acquisition of Treasury Stock (306,746) (306,746)
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 184,622
Issuance of Common Stock Under
Employee Plans 14,205
Issuance of Common Stock Under
5% Common Stock Dividend -0-
Retirement of Treasury Stock
(12,000 shares) 227,542 -0-
Cash Dividends ($.351 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 294,723 (441,909) 23,755,850
__________
Comprehensive Income:
Net Income 2,767,632
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $29,694 (57,641) (57,641)
Reclassification Adjustment for (Gains)/Losses
included in Net Income,
Net of Tax $2,283 4,433 4,433
___________
Total Comprehensive Income 2,714,424
___________
Acquisition of Treasury Stock (1,995,379) (1,995,379)
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 257,817
Issuance of Common Stock Under
Employee Plans 8,448
Retirement of Treasury Stock
(13,000 shares) 288,035 -0-
Cash Dividends ($.430 per share) (1,044,423)
__________ __________ __________
BALANCE, December 31, 1998 $241,515 $(2,149,253) $23,696,737
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National Financial
Corporation (the Corporation) and its subsidiary, Union National
Community 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
northwestern 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
premiums or accretion of discounts, computed by the interest
method.
Securities classified as available for sale are those debt
securities that the Corporation intends to hold for an indefinite
period of time, but not necessarily to maturity, and all equity
securities. Any decision to sell a security classified as
available for sale would be based on various factors, including
significant movements in interest rates, changes in maturity mix
of the Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value with
premiums and discounts amortized or accreted to interest income
using the interest method. Changes in unrealized gains or losses
for available for sale securities, net of taxes, are recorded as
a component of stockholders' equity.
When a determination is made that a market value decline below
cost on a marketable equity or debt security is other than
temporary, the cost basis of the individual security is written
down to the market value. The amount of the write-down is charged
to expense. Realized security gains and losses are computed
using the specific identification method.
Loans
Loans generally are stated at their outstanding unpaid principal
balances, net of any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment to interest income
generally over the contractual life of the related loans.
Impaired Loans - 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 will 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 $379,150 and $0 at
December 31, 1998 and 1997, 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, 1998, 1997,
and 1996 amounted to $76,122, $80,062, and $86,613, 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.
<PAGE>
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.
Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive
Income," as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains, and losses be
included in net income. However, certain changes in assets and
liabilities, such as unrealized gains and losses on investment
securities available for sale, are reported as a separate
component of the equity section of the balance sheet. Such items
along with net income, are components of comprehensive income.
The Corporation reports comprehensive income and the components
of other comprehensive income in the Consolidated Statements of
Changes in Stockholders' Equity. The Corporation's only
component of other comprehensive income is changes in unrealized
gains and losses on 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 adoption of SFAS No. 130 had no effect on the
Corporation's net income or stockholders' equity.
Segment Reporting
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 Corporation has only
one operating segment which comprises the Bank's banking and
fiduciary activities.
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.
Recent Accounting Standards Issued
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. In addition, the transition provisions
of this Statement allow the Corporation to reclassify held to
maturity securities to an available for sale classification. The
Corporation does not expect the provisions of this Statement to
have a material effect on the liquidity, results of operations,
or capital resources of the Corporation when it becomes effective
in the first quarter of 2000.
In October 1998, the Financial Accounting Standards Board issued
Statement No. 134, (SFAS No. 134), "Accounting for Mortgage-
Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." There is
no incidence of coverage for the Corporation under this
Statement.
<TABLE>
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and fair values of investment securities are
as follows:
<CAPTION>
At December 31, 1998
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ 21,805,749 $ 471,358
Corporate Securities 2,273,412 16,997
_______________ ______________
TOTAL $ 24,079,161 $ 488,355
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ 3,522,874 $ 37,441
Obligations of Other U.S.
Government Agencies 14,143,678 81,071
Mortgage-Backed Securities 29,019,819 68,220
Corporate Securities 1,956,885 2,451
Equity Securities 2,667,162 288,579
_______________ ______________
TOTAL $ 51,310,418 $ 477,762
=============== ==============
<CAPTION>
At December 31, 1998
________________________________
Gross
Unrealized Fair
Losses Values
_______________ ______________
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ (42,980) $ 22,234,127
Corporate Securities (796) 2,289,613
_______________ ______________
TOTAL $ (43,776) $ 24,523,740
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ -0- $ 3,560,315
Obligations of Other U.S.
Government Agencies (4,096) 14,220,653
Mortgage-Backed Securities (106,144) 28,981,895
Corporate Securities (1,590) 1,957,746
Equity Securities -0- 2,955,741
_______________ ______________
TOTAL $ (111,830) $ 51,676,350
=============== ==============
<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
=============== ==============
</TABLE>
<PAGE>
There are no significant concentrations of investments (greater
than 10% of stockholders' equity) in any individual security
issuer.
Investment securities carried at $21,882,546 and $18,194,486 at
December 31, 1998 and 1997, respectively, were pledged to secure
public, trust, and government deposits.
The amortized cost and fair value of debt securities at December
31, 1998, 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 $ 1,536,999 $ 1,551,770
Due after one year through
five years 3,530,603 3,573,107
Due after five years through
ten years 3,301,296 3,356,931
Due after ten years 15,710,263 16,041,932
______________ _________________
24,079,161 24,523,740
Mortgage-Backed Securities -0- -0-
______________ _________________
$ 24,079,161 $ 24,523,740
============== =================
<CAPTION>
Debt Securities
_____________________________________
Available for Sale
_____________________________________
Amortized Fair
Cost Values
______________ _______________
<S> <C> <C>
Due in one year or less $ 6,502,008 $ 6,512,497
Due after one year through
five years 3,975,564 4,003,377
Due after five years through
ten years 9,145,865 9,222,840
Due after ten years -0- -0-
______________ _______________
19,623,437 19,738,714
Mortgage-Backed Securities 29,019,819 28,981,895
______________ _______________
$ 48,643,256 $ 48,720,609
============== ===============
</TABLE>
Proceeds from sales of available for sale securities were
$4,935,869 and $5,548,285 during 1998 and 1997, respectively.
Investment securities gains/losses include gross realized gains
of $12,897 and gross realized losses of $19,613 during 1998 and
gross realized gains of $4,838 and gross realized losses of
$2,775 during 1997 as a result of sales of available for sale
securities. The related income tax expense (benefit) for net
investment securities gains/losses amounted to ($2,283) and
$701 during 1998 and 1997, respectively.
Mortgage-backed securities, as disclosed in the two preceding
tables, are issued by U.S. Government agencies or corporations.
NOTE 3 - LOANS
Loans, net of unamortized loan orgination fees of $1,429,650 and
$1,429,885 at December 31, 1998 and 1997, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
____________ ______________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 99,984,129 $ 93,495,375
Commercial and Industrial 29,967,643 23,777,078
Construction and Land Development 6,585,711 9,629,413
Agricultural 5,727,829 4,598,191
Commercial and Industrial 6,041,639 6,035,077
Consumer 9,310,576 9,320,106
Agricultural 2,549,598 2,212,888
Political Subdivisions 2,842,255 3,390,061
Other 856,241 329,639
____________ ______________
Total Loans 163,865,621 152,787,828
Less: Unearned Income (69,919) (88,579)
____________ ______________
Net Loans $163,795,702 $152,699,249
============ ==============
</TABLE>
The Corporation grants commercial, residential and consumer loans
to customers primarily located in the northwestern 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 $70,099 and $25,772 at December 31, 1998 and 1997,
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 $22,124 and $1,546
at December 31, 1998 and 1997, respectively. The average recorded
investment in impaired loans was $450,876 and $302,655 and
$98,317 during the years ended December 31, 1998, 1997, and 1996,
respectively. For the years ended December 31, 1998, 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 $974,271, $706,046, and
$842,949 at December 31, 1998, 1997, and 1996, 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
$5,011,513 at December 31, 1998. 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>
1998 1997 1996
__________ __________ __________
<S> <C> <C> <C>
Balance, Beginning of Year $4,878,930 $3,380,461 $3,343,586
Additions 2,327,784 4,336,242 2,682,659
Deductions (2,195,201) (2,837,773) (2,645,784)
__________ __________ __________
Balance, End of Year $5,011,513 $4,878,930 $3,380,461
========== ========== ==========
</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>
1998 1997 1996
__________ __________ ___________
<S> <C> <C> <C>
Balance, Beginning of Year $1,592,763 $1,371,245 $1,264,528
Provision Charged to
Operating Expense 325,350 390,250 150,000
Recoveries of Charged-Off Loans 60,964 31,254 21,188
Charged-Off Loans (236,457) (199,986) (64,471)
__________ __________ ___________
Balance, End of Year $1,742,620 $1,592,763 $1,371,245
========== ========== ===========
</TABLE>
<PAGE>
<TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<CAPTION>
Estimated December 31, December 31,
Useful Lives 1998 1997
_____________ ____________ ____________
<S> <C> <C> <C>
Land $ 411,593 $ 411,593
Land Improvements 20 years 499,927 495,390
Buildings and
Improvements 15-50 years 5,115,889 5,086,515
Leasehold Improvements 20 years 266,120 266,120
Furniture, Fixtures and
Equipment 5-20 years 3,333,247 3,147,989
____________ ____________
Subtotal 9,626,776 9,407,607
Less: Accumulated Depreciation
and Amortization (4,379,427) (3,992,743)
____________ ____________
Premises and Equipment - Net $5,247,349 $5,414,864
============ ============
</TABLE>
Depreciation and amortization expense amounted to $442,976 in
1998, $465,748 in 1997, and $461,458 in 1996.
Total rental expense amounted to $50,961, $43,461, and $43,461
for the years ended December 31, 1998, 1997, and 1996,
respectively.
At December 31, 1998, the Corporation was obligated under
noncancelable operating leases for real estate with the future
minimum payments as follows:
<TABLE>
<S> <C>
1999 $ 57,861
2000 57,461
2001 54,660
2002 42,660
2003 42,660
Thereafter 63,990
________
$319,292
=========
</TABLE>
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings consisted entirely of Treasury Tax and Loan
Notes at December 31, 1998 and 1997. At December 31, 1998,
outstanding borrowings amounted to $186,691 with a weighted
average rate of 4.11% and at December 31, 1997, outstanding
borrrowings amounted to $900,000 with a weighted average rate of
5.25%.
NOTE 7 - LONG-TERM DEBT
<TABLE>
A summary of long-term debt as of December 31 is as follows:
<CAPTION>
1998 1997
___________________ __________________
Amount Rate Amount Rate
________ ________ ________ _______
<S> <C> <C> <C> <C>
FHLB fixed-rate advances
maturing:
1998 $ -0- - % $ 4,671,000 5.92%
1999 1,675,000 5.18 1,675,000 5.18
2000 3,300,000 6.02 3,300,000 6.02
2001 808,600 5.39 -0- -
2003 2,347,000 5.71 -0- -
2007 1,460,660 6.00 1,460,660 6.00
FHLB adjustable-rate advances maturing:
2002 3,532,400 5.23 3,532,400 5.74
FHLB convertible fixed-rate advances maturing:
2002 12,500,000 5.62 12,500,000 5.62
2008 5,000,000 4.70 -0- -
___________ ______ ___________ _____
30,623,660 5.46 27,139,060 5.73
Limited Partnership Capital
Notes, maturing
1998 to 1999 -0- - 190,000 -
___________ ___________
Total $30,623,660 $27,329,060
=========== ===========
</TABLE>
The FHLB advances are collateralized by a security agreement
covering qualifying mortgage loans and unpledged treasury,
agency, and mortgage0backed securities which at December 31, 1998
had a combined carrying value of $101,158,217. In addition, all
FHLB advances are secured by the FHLB capital stock owned by the
Corporation having fair value of $2,469,700 and $2,153,900 at
December 31, 1998 and 1997, respectively. Under the Bank's
membership agreement with the FHLB, additional stock purchases
are required when total advances from the FHLB are increased.
The FHLB's covertible fixed-rate advances allow the FHLB the
periodic option to convert to a LIBOR adjustable-rate advances at
the three month LIBOR plus .07% to .14%. Options amounting to
$12,500,000 and $5,000,000 commence in 1999 and 2000,
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. On September 10, 1998, the
Board of Directors authorized the replacement of the existing
plan with the Union National Community Bank 401(k) Profit Sharing
Plan. This plan is effective January 1, 1999 and allows
employees to contribute a portion of their salaries and wages to
the plan. The Bank may elect to make a discretionary
contribution to the plan and may also match a portion of employee
elected salary deferrals, subject to a 6% maximum of their
salaries and wages. For 1999, the Bank has elected to match 50%
of employee elected salary deferrals which do not exceed 6% of
their salaries and wages.
Contributions in the amount of $125,156, $374,283, and $330,873,
for the years ended December 31, 1998, 1997, and 1996,
respectively, were made to the profit-sharing plan.
<PAGE>
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>
1998 1997
___________ __________
<S> <C> <C>
Deferred Tax Assets(Liabilities)
Deferred Net Loan Fees $ (7,284) $ 21,997
Provision for Loan Losses 485,346 434,395
Depreciation (147,036) (133,943)
Investment in Limited Partnerships (24,334) (28,521)
Unrealized loss/(gain) on investment
securities available for sale (124,417) (151,826)
Other 36,433 11,880
___________ __________
Net Deferred Tax Asset $218,708 $153,982
=========== ==========
</TABLE>
The Corporation as of December 31, 1998, has not established any
valuation allowance against deferred tax assets since these tax
benefits are realizable through carryback availability against
prior years taxable income or the reversal of existing deferred
tax liabilities.
An analysis of the income tax expense included in the
consolidated statements of income for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
_________ __________ __________
<S> <C> <C> <C>
Taxes Currently Payable $748,043 $580,399 $321,865
Deferred Income Taxes/(Benefit)
Related to:
Provision for
Loan Losses (50,951) (68,430) (43,170)
Deferred Net Loan Fees 29,281 40,871 44,549
Fixed Asset Depreciation 13,093 25,060 48,143
Other - Net (24,553) 1,196 (14,925)
_________ __________ __________
Provision for Income
Taxes $714,913 $579,096 $356,462
========= ========== ==========
</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>
1998 1997
__________________ ________________
Amount % Amount %
___________ ____ ________ _____
<S> <C> <C> <C> <C>
Tax at Statutory
Federal Income Tax Rate $1,184,065 34.0 $ 987,558 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (361,366) (10.4) (298,629)(10.3)
Income Tax Credits (118,229) (3.4) (113,672) (3.9)
Other 10,443 .3 3,839 .1
___________ ____ ________ _____
Provision for Income Taxes $ 714,913 20.5 $ 579,096 19.9
=========== ==== ======== =====
<CAPTION>
1996
__________________
Amount %
___________ ____
<S> <C> <C>
Tax at Statutory
Federal Income Tax Rate $ 866,413 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (280,938) (11.0)
Income Tax Credits (231,277) (9.1)
Other 2,264 .1
___________ ____
Provision for Income Taxes $ 356,462 14.0
=========== ====
</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,
1998 1997
______________ ____________
<S> <C> <C>
Financial Instruments whose
Contract Amounts represent
Credit Risk:
Commitments to Extend Credit $ 7,933,093 $10,400,856
Unused Portion of Home Equity and
Overdraft Lines 7,305,673 5,173,238
Other Unused Commitments, Principally
Commercial Lines of Credit 12,574,835 11,949,139
Standby Letters of Credit and Financial
Guarantees Written 1,990,759 3,279,348
</TABLE>
<PAGE>
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.
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
according to SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments" (SFAS No.
119). 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 previous table 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
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
[S] [C]
1999 $57,647,406
2000 35,252,422
2001 3,983,087
2002 1,261,850
2003 1,912,251
_____________
$100,057,016
=============
Certificates of deposit in denominations of $100,000 or more
amounted to $16,349,539 and $16,357,336 at December 31, 1998 and
1997, respectively. Interest expense on certificates of deposit
in denominations of $100,000 or more amounted to $890,193,
$958,253, and $877,033 for the years ended December 31, 1998,
1997, and 1996, respectively.
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 1998
was approximately $1,196,000.
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 1999 of
approximately $1,044,595 plus an amount equal to the net profits of
the Bank in 1999 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, 1998 and
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>
<CAPTION>
December 31,
_________________________
1998 1997
__________ ________
<S> <C> <C>
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.84% 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 13.51% 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 14.57% 16.45%
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, 1998, this limitation amounted to
approximately $2,397,000. 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 10, 1997, the Corporation's Board of Directors declared a
5% common stock dividend that was paid 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 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,
1998, 24,019 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.
<PAGE>
The earnings per share, net income and weighted average number of
shares outstanding for the years ended December 31, 1998, 1997 and
1996 as computed under the basic and diluted earnings per share
methods are as follows:
<TABLE>
<CAPTION>
Net Income Shares Per Share
Year Ended December 31, ______________ ___________ _________
1998
<S> <C> <C> <C>
Basic Earnings per Share:
Income Available to
Common Stockholders $2,767,632 2,420,553 $1.14
Effect of Dilutive Securities:
Employee Stock Incentive
and Purchase Plans -0- 3,403
______________ ___________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $2,767,632 2,423,956 $1.14
============== =========== =========
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
============== =========== =========
</TABLE>
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. Options granted in 1997 have a 5 year
term and can be exercised at the lower of $19.84 or 85% of the
fair market value of the stock on the date of exercise. Options
granted in 1998 also have a term of 5 years and can be exercised
at 85% of the fair market value of the stock on the date of
exercise. During 1997, 726 shares were issued under the plan at
prices ranging from $19.52 to $19.77 and during 1998, 455 shares
were issued at prices ranging from $16.67 to $19.79.
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.
Stock option transactions for the year ended December 31, 1998
and 1997 are summarized below:
<TABLE>
<CAPTION>
Stock Weighted-Average
Options Exercise Price
________ _________________
<S> <C> <C>
Year Ended December 31, 1997:
Options Granted:
Employee Stock Purchase Plan 15,000 $19.82
Stock Incentive Plans 4,830 23.27
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
Year Ended December 31, 1998:
Options Granted:
Employee Stock Purchase Plan 20,000 $19.04
Stock Incentive Plans 12,000 19.75
Options Exercised (455) 18.57
Options Forfeited (4,723) 19.19
________
Options Outstanding and Exercisable
at December 31, 1998 (Prices range
from $16.53 to $23.27) 45,926 $18.08
========
</TABLE>
The remaining average contractual life of options outstanding as
of December 31, 1998 and 1997 is 6.1 and 5.8 years, respectively.
The per share weighted-average fair value of stock options
granted
for the year ended December 31, 1998 was $3.94 on the date of
grant using the Black Scholes option-pricing model with the
following weighted-average assumptions for 1998: expected
dividend yield of 2.74%; risk-free interest rate of 4.89%;
expected life of 4.6 years; and an expected volatility over the
expected life of the options was 25.4%. 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, 1998
_________________
<S> <C>
Net Income
As Reported $2,767,632
Pro Forma 2,641,592
Net Income per Share (Basic and
Assuming Dilution)
As Reported $1.14
Pro Forma 1.09
<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>
<PAGE>
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.
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, 1998 and 1997, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
______________________________
Carrying
Value Fair Value
_____________ _______________
<S> <C> <C>
Assets:
Cash and Due from Banks $ 7,341,240 $ 7,341,240
Investment Securities
Held to Maturity 24,079,161 24,523,740
Investment Securities
Available for Sale 51,676,350 51,676,350
Loans, net of Unearned Income
and Allowance for Loan Losses 162,053,082 165,035,000
Accrued Interest Receivable 1,560,703 1,560,703
Liabilities:
Demand and Savings Deposits 105,486,752 105,486,752
Time Deposits 100,057,016 100,543,000
Short-term Borrowing 186,691 186,691
Long-term Debt 30,623,660 30,800,000
<CAPTION>
Contract
Amount Fair Value
____________ _____________
<S> <C> <C>
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit $ 29,804,360 $ 29,804,360
<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
</TABLE>
<PAGE>
NOTE 16 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1998 1997
____________ _____________
<S> <C> <C>
ASSETS
Cash in Subsidiary Bank $ 35,477 $ 114,631
Investment in Subsidiary 22,281,338 22,459,264
Other Equity Investment Securities 395,541 399,696
Investments in Limited
Partnerships 882,161 941,287
Recoverable Federal Income Taxes 224,672 159,022
____________ _____________
Total Assets $23,819,189 $ 24,073,900
============ =============
LIABILITIES
Limited Partnership Capital Notes$ -0- $ 190,000
Deferred Income Taxes 122,452 128,050
____________ _____________
Total Liabilities 122,452 318,050
STOCKHOLDERS' EQUITY
Common Stock 627,121 627,332
Surplus 4,793,416 4,814,975
Retained Earnings 20,183,938 18,460,729
Unrealized gain on investment
securities available for sale,
net of tax 241,515 294,723
Less: Treasury Stock (2,149,253) (441,909)
____________ _____________
Total Stockholders' Equity 23,696,737 23,755,850
____________ _____________
Total Liabilities and
Stockholders' Equity $ 23,819,189 $ 24,073,900
============ =============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
__________________________
1998 1997
_____________ __________
<S> <C> <C>
INCOME
Dividends from Subsidiary $2,820,000 $1,100,000
Dividends on Other Equity
Investment Securities 10,270 8,882
Interest on Deposits in Subsidiary 5,185 3,647
Management Fees from Subsidiary 49,273 39,690
_____________ __________
Total Income 2,884,728 1,152,219
EXPENSES 127,722 140,660
_____________ __________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 2,757,006 1,011,559
PROVISION FOR INCOME TAXES (BENEFIT)(138,087) (141,872)
_____________ __________
2,895,093 1,153,431
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY (127,461) 1,172,056
_____________ _________
NET INCOME $2,767,632 $2,325,487
============= ==========
<CAPTION>
Years Ended December 31,
_________________________
1996
_____________
<S> <C>
INCOME
Dividends from Subsidiary $ 742,500
Dividends on Other Equity
Investment Securities 9,358
Interest on Deposits in Subsidiary 3,054
Management Fees from Subsidiary 39,758
_____________
Total Income 794,670
EXPENSES 166,870
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 627,800
PROVISION FOR INCOME TAXES (BENEFIT) (272,244)
_____________
900,044
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 1,291,768
_____________
NET INCOME $2,191,812
=============
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
_____________________________
1998 1997
______________ _____________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,767,632 $2,325,487
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Undistributed Income of
Subsidiary 127,461 (1,172,056)
Provision for Deferred Income Taxes (4,186) (1,556)
Decrease/(Increase) in Other Assets (6,524) 78,200
______________ _____________
Net Cash Provided by Operating
Activities 2,884,383 1,230,075
CASH FLOWS from INVESTING ACTIVITIES
Purchases of Available for Sale
Securities -0- (5,950)
______________ _____________
Net Cash Provided by (Used in)
Investing Activities -0- (5,950)
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (1,995,379) (306,746)
Payments on Long-Term Debt (190,000) (140,000)
Issuance of Common and Treasury Stock 266,265 198,827
Cash Dividends Paid (1,044,423) (876,280)
______________ _____________
Net Cash (Used in)
Financing Activities (2,963,537) (1,124,199)
______________ _____________
NET INCREASE/(DECREASE) in CASH (79,154) 99,926
CASH - Beginning of Year 114,631 14,705
______________ _____________
CASH - End of Year $ 35,477 $ 114,631
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (13,000
shares in 1998,12,000
shares in 1997, and 10,000
shares in 1996) $ 288,035 $ 227,542
<CAPTION>
Years Ended December 31,
____________________________
1996
_______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,191,812
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Undistributed Income of
Subsidiary (1,291,768)
Provision for Deferred Income Taxes(19,497)
Decrease/(Increase) in Other Assets(20,249)
______________
Net Cash Provided by Operating
Activities 860,298
CASH FLOWS from INVESTING ACTIVITIES
Purchases of Available for Sale
Securities -0-
_______________
Net Cash Provided by (Used in)
Investing Activities -0-
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (119,173)
Payments on Long-Term Debt (140,000)
Issuance of Common and Treasury Stock 130,866
Cash Dividends Paid (760,044)
_______________
Net Cash (Used in)
Financing Activities (888,351)
_______________
NET INCREASE/(DECREASE) in CASH (28,053)
CASH - Beginning of Year 42,758
_______________
CASH - End of Year $ 14,705
===============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (13,000
shares in 1998,12,000
shares in 1997,and 10,000 shares in
1996) $153,385
</TABLE>
NOTE 17 - SUBSEQUENT EVENT
On February 11, 1999, the Corporation announced that the Board of
Directors had authorized and approved a plan to purchase up to
56,000 shares of the Corporation's outstanding common stock in
open market or privately negotiated transactions. The
announcement includes the 6,000 shares remaining from the 1998
common stock repurchase plan. The number of shares to be
purchased under the plan represents approximately 2.3% of the
outstanding shares of the Corporation. 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).
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Union National Financial Corporation and Subsidiary
Mount Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets of
UNION NATIONAL FINANCIAL CORPORATION AND SUBSIDIARY as of
December 31, 1998 and 1997, 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, 1998. 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, 1998 and 1997 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
January 15, 1999, except for Note 17, as to which the date is
February 11, 1999
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, 1998 and 1997, are as follows:
<CAPTION>
1998
__________________________________________
(Dollars in thousands, March June September December
except per share data) 31 30 30 31
_______ ______ ________ ________
<S> <C> <C> <C> <C>
Interest Income $4,356 $4,473 $4,541 $4,693
Interest Expense 2,096 2,150 2,228 2,220
_______ ______ ________ ________
Net Interest Income 2,260 2,323 2,313 2,473
Provision for Loan Losses 99 130 53 43
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,161 2,193 2,260 2,430
Other Operating Income 286 266 295 310
Other Operating Expenses 1,626 1,604 1,663 1,825
_______ ______ ________ ________
Income before Income Taxes 821 855 892 915
Provision for Income Taxes 169 178 185 184
_______ ______ ________ ________
Net Income $652 $677 $707 $731
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution) $ .27 $ .28 $ .29 $ .30
======= ====== ======== ========
<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) $ .23 $ .23 $ .23 $ .24
======= ====== ======== ========
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED SUMMARY OF OPERATIONS
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31,
__________________________________________
1998 1997 1996
__________ __________ __________
<S> <C> <C> <C>
INCOME AND EXPENSE
Interest Income $ 18,064 $ 16,205 $ 14,218
Interest Expense 8,695 7,550 6,380
__________ __________ __________
Net Interest Income 9,369 8,655 7,838
Provision for Loan Losses 325 390 150
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses 9,044 8,265 7,688
Other Operating Income 1,157 986 811
Other Operating Expenses 6,718 6,347 5,951
__________ __________ __________
Income before Income Taxes 3,483 2,904 2,548
Provision for Income Taxes 715 579 356
__________ __________ __________
Net Income for Year $ 2,768 $ 2,325 $ 2,192
========== ========== ==========
PER SHARE *
Net Income (Basic and
Assuming Dilution) $ 1.14 $ .93 $ .88
Cash Dividends Paid .430 .351 .305
Average Shares Outstanding
(Basic) 2,420,553 2,489,403 2,493,951
FINANCIAL RATIOS
Return on Average Assets 1.15% 1.09% 1.17%
Return on Average
Stockholders' Equity 12.05 10.17 10.24
Dividend Payout Ratio 37.74 37.68 34.68
Average Stockholders' Equity
to Average Assets 9.51 10.68 11.40
AVERAGE BALANCE SHEET
Net Loans $ 162,090 $ 140,925 $124,483
Investments 63,461 57,551 48,707
Other Earning Assets 4,211 3,564 2,576
Total Assets 241,639 213,986 187,814
Deposits 188,179 168,814 154,474
Short-Term Borrowings 412 1,461 2,009
Long-Term Debt 28,584 19,425 8,411
Stockholders' Equity 22,971 22,859 21,411
BALANCE SHEET AT YEAR-END
Net Loans $163,796 $152,699 $130,391
Investments 75,756 64,737 54,890
Other Earning Assets 7,795 2,835 4,790
Total Assets 261,368 233,243 203,472
Deposits 205,544 180,135 164,513
Short-Term Borrowing 187 900 2,989
Long-Term Debt 30,624 27,329 12,676
Stockholders' Equity 23,697 23,756 22,223
* Per Share information reflects two-for-one stock split of the
Corporation's Common Stock effective on June 1, 1995 and the 5%
stock dividend efective on May 15, 1997.
<CAPTION>
Years Ended December 31,
__________________________________________
1995 1994
__________ __________
<S> <C> <C>
INCOME AND EXPENSE
Interest Income $ 12,773 $ 11,801
Interest Expense 5,175 4,131
__________ __________
Net Interest Income 7,598 7,670
Provision for Loan Losses 159 113
__________ __________
Net Interest Income
after Provision for
Loan Losses 7,439 7,557
Other Operating Income 753 631
Other Operating Expenses 5,479 5,207
__________ __________
Income before Income Taxes 2,713 2,981
Provision for Income Taxes 614 733
__________ __________
Net Income for Year $ 2,099 $ 2,248
========== ==========
PER SHARE *
Net Income (Basic and
Assuming Dilution) $ .84 $ .89
Cash Dividends Paid .224 .210
Average Shares Outstanding
(Basic) 2,501,548 2,515,080
FINANCIAL RATIOS
Return on Average Assets 1.28% 1.42%
Return on Average
Stockholders' Equity 10.42 12.15
Dividend Payout Ratio 26.68 23.45
Average Stockholders' Equity
to Average Assets 12.24 11.72
AVERAGE BALANCE SHEET
Net Loans $ 115,026 $105,427
Investments 38,320 40,859
Other Earning Assets 880 3,313
Total Assets 164,631 157,830
Deposits 139,896 138,126
Short-Term Borrowings 1,197 383
Long-Term Debt 2,320 -0-
Stockholders' Equity 20,149 18,499
BALANCE SHEET AT YEAR-END
Net Loans $120,417 $108,266
Investments 39,437 38,652
Other Earning Assets -0- 1,870
Total Assets 174,657 159,160
Deposits 143,368 139,208
Short-Term Borrowing 3,399 309
Long-Term Debt 6,270 -0-
Stockholders' Equity 20,769 19,053
* Per Share information reflects two-for-one stock split of the
Corporation's Common Stock effective on June 1, 1995 and the 5%
stock dividend efective on May 15, 1997.
</TABLE>
<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. 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. Current
performance does not guarantee, assure, or may be indicative of
similar performance in the future.
We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank, or the combined company. When we use
words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial
results of Union National Financial Corporation, Union National
Community Bank, or the combined company and could cause those
results to differ materially from those expressed in our forward-
looking statements contained or incorporated by reference in this
document. These factors include the following:
- - operating, legal, and regulatory risks;
- - economic, political, and competitive forces affecting our
banking, securities, asset management, and credit services
businesses; and
- - the risk that our analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
RESULTS OF OPERATIONS
Overview
Consolidated net income for 1998 was $2,768,000, an increase of
19.1%, as compared to consolidated net income of $2,325,000 for
1997. Consolidated net income for 1997 increased by 6.1%, as
compared to consolidated net income of $2,192,000 for 1996.
On a per share basis, net income for 1998 was $1.14, as compared
to $.93 for 1997, and $.88 for 1996. The earnings per share
information is the same under the basic and assuming dilution
methods.
Results of operations for 1998 as compared to 1997 were impacted
by the following items:
- - Net income increased due to a 15.0% increase in average net
loans, which were funded by growth in deposits and by additions
to average borrowings. Loan growth was primarily a result of
increases in residential and commercial mortgages.
- - Net income increased due to a 17.4% increase in other
operating income.
- - 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.
- - Net income decreased due to a 5.8% increase in other operating
expenses.
- - Net income increased due to a decrease in the provision for
loan losses.
The above items are quantified and discussed in further detail
under their respective sections below.
Results of operations for 1997 as compared to 1996 were impacted
by the following items:
- - 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.
- - 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.
- - Net income decreased due to a 6.7% increase in other operating
expenses.
- - Net income increased due to a 21.5% increase in other
operating income.
- - Net income decreased due to a reduction in income tax credits
available in 1997 as compared to 1996.
Net income as a percent of total average assets, also known as
return on average assets (ROA), was 1.15% for 1998, compared to
1.09% for 1997, and 1.17% for 1996. Net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE), was 12.05% for 1998, compared to 10.17% for 1997,
and 10.24% for 1996. ROE was positively impacted by the
repurchase of 88,513 shares of outstanding common stock in 1998.
See the discussion under the section on Stockholders' Equity for
further details.
Management currently expects the growth in deposits for 1999 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
increased emphasis on business development and continued sales
training 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 result of the
above described efforts, the Bank's certificate of deposit
portfolio under $100,000 increased by d5,856,000dand the Bank's
checking and savings deposits increased by d19,560,000dduring
1998. The funding for the loan growth is further discussed under
the section on Liquidity.
Management currently expects a moderation in loan growth for 1999
as compared to historic growth rates. However, the following
items are currently expected to enhance loan growth during 1999:
- - lending rates are at generally affordable rates for
prospective borrowers;
- - increased emphasis on business development and continued sales
training for staff;
- - further product development and promotion of the Bank's
consumer and home equity lines of credit;
- - economic stability of the Bank's Market Area as discussed
later in this section; and
- - continued population growth and business development in the
Bank's Market Area.
It is anticipated that economic activity in the Bank's Market
Area during 1999 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 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
<PAGE>
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 1998, 1997, and 1996.
Net interest income for 1998 increased by $824,000, or 9.0%, over
1997. Net interest income for 1997 increased by $853,000, or
10.3%, over 1996. For 1998, commercial, residential, and
consumer average loan growth of $21,165,000 and average
investment security growth of $5,910,000 were funded by the
growth in average deposits of $19,365,000 and by the growth in
average long-term borrowings of $9,159,000. The additional
borrowings represented fixed-rate and variable-rate advances from
the Federal Home Loan Bank of Pittsburgh (FHLB). Average earning
assets increased in the amount of $27,722,000 in the aggregate
over 1997. The volume growth in earning assets and interest-
bearing liabilities increased net interest income by the amount
of $1,179,000 in 1998 over 1997, as compared to $1,002,000 in
1997 over 1996.
The overall interest rate on the average total earning assets
decreased to 8.13% for 1998, as compared to 8.28% for 1997, due
to an overall market decline in interest rates and the
refinancing of higher interest rate loans with lower interest
rates. Conversely, the overall interest rate on the average
interest-bearing liabilities increased to 4.39% for 1998, as
compared to 4.36% for 1997, 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
$355,000 for 1998 from 1997, as compared to a decrease of
$149,000 for 1997 from 1996. See Management's discussion below
concerning the anticipated impact of these interest rate
fluctuations to the results of operations for 1999.
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 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, 1998, the Bank has
received long-term advances of $30,624,000 from its available
credit of $81,189,000 at the FHLB for purposes of funding loan
demand and mortgage-backed security purchases. The total
advances have a current average effective rate of 5.46% with
maturities ranging from January 1999 to September 2008.
Commencing October 1998, the Federal Reserve Bank began easing
the monetary supply causing the prime interest rate to decrease
from 8.50% to 7.75%. The immediate impact of the short-term
interest rate decreases was to decrease interest rates on loans
and deposits that adjust according to short-term rate indexes and
to decrease reinvestment rates on
<TABLE>
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
<CAPTION>
Year Ended
December 31, 1998
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
ASSETS
Interest-Bearing Deposits
in Other Banks $ 51 $ 2 3.92%
Federal Funds Sold 4,160 222 5.34
Investment Securities:
Taxable 44,540 2,796 6.28
Exempt from Federal Taxes 18,921 1,508 7.97
Loans-Net* 162,090 14,163 8.74
_________ ________ ______
Total Earning Assets 229,762 $ 18,691 8.13%
======== ======
Allowance for Loan Losses (1,681)
Other Nonearning Assets 13,558
_________
TOTAL ASSETS $ 241,639
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 44,528 $ 1,015 2.28%
Savings 25,598 601 2.35
Time 98,842 5,435 5.50
Short-Term Borrowing 412 23 5.58
Long-Term Debt 28,584 1,621 5.67
_________ ________ ______
Total Interest-Bearing
Liabilities 197,964 $ 8,695 4.39%
======== ======
Demand Deposits 19,211
Other Liabilities 1,493
_________
TOTAL LIABILITIES 218,668
Stockholders' Equity 22,971
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 241,639
=========
Net Interest Income/Yield on
Average Earning Assets $ 9,996 4.35%
======== ======
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 $613,000 for the year ended December 31,
1998, $572,000 for 1997, and $515,000 for 1996.
<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 3.57%
Federal Funds Sold 3,480 192 5.52
Investment Securities:
Taxable 41,262 2,659 6.44
Exempt from Federal Taxes 16,289 1,315 8.07
Loans-Net* 140,925 12,553 8.91
_________ ________ ______
Total Earning Assets 202,040 $ 16,722 8.28%
======== ======
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 2.23%
Savings 24,184 590 2.44
Time 89,992 4,913 5.46
Short-Term Borrowing 1,461 87 5.95
Long-Term Debt 19,425 1,108 5.70
_________ ________ ______
Total Interest-Bearing
Liabilities 173,196 $ 7,550 4.36%
======== ======
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 4.54%
======== ======
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 $613,000 for the year ended December 31,
1998, $572,000 for 1997, and $515,000 for 1996.
<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 6.25%
Federal Funds Sold 2,528 136 5.38
Investment Securities:
Taxable 33,546 2,073 6.18
Exempt from Federal Taxes 15,161 1,258 8.29
Loans-Net* 124,483 11,229 9.02
_________ ________ ______
Total Earning Assets 175,766 $ 14,699 8.36%
======== ======
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 2.06%
Savings 23,343 585 2.51
Time 82,701 4,495 5.44
Short-Term Borrowing 2,009 115 5.72
Long-Term Debt 8,411 485 5.77
_________ ________ ______
Total Interest-Bearing
Liabilities 150,388 $ 6,379 4.24%
======== ======
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 4.73%
======== ======
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 $613,000 for the year ended December 31,
1998, $572,000 for 1997, and $515,000 for 1996.
</TABLE>
<PAGE>
investment securities and renewing certificates of deposit. In
addition, the Bank's balances of liabilities in the form of long-
term debt and funds in money market accounts that are paying
higher interest rates have increased. For 1999, Management
currently expects its net interest margin percentage to be
comparable to 1998. In addition, the growth in the earning assets
during 1998 is currently expected to increase the net interest
margin for 1999 over 1998. 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. However, the yield curve during 1999, 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 December
31, 1998, the factors discussed above will have a net positive
impact to the net interest margin for 1999,as compared to 1998.
See further discussions under the sections 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 $175,000 for 1998, as compared to $168,000 for 1997,
and $44,000 for 1996. 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
$325,000 in 1998, $390,000 in 1997, and $150,000 in 1996. The
decrease in the provision for loan losses from 1998 to 1997 is
mainly a result of lower loan growth in 1998 as compared to 1997.
See discussion on Loan Quality/Allowance for Loan Losses.
Other Operating Income
Other operating income for 1998 was $1,157,000, representing an
increase of $171,000, or 17.3%, over 1997. Contributing to this
increase were the following items:
- -additional earnings in automatic teller machine (ATM) and card
usage fees including ATM surcharges in the amount of $26,000;
- -additional earnings in insufficient funds charges in the amount
of $81,000;
- -additional earnings in debit card interchange fee income in the
amount of $39,000; and
- -additional earnings in mutual fund commissions from the Bank's
continued relationship with T.H.E. Financial Group, Ltd. in the
amount of $31,000.
The additional earnings in insufficient funds charges is mainly a
result of an increase in the Bank's per item insufficient funds
charge which was effective in June 1998. The Bank also currently
assesses a surcharge at its ATMs; however, ATM surcharges, or the
elimination thereof, may be subject to future legislation.
Other operating income for 1997 was $986,000, representing an
increase of $175,000, or 21.5%, over 1996. Contributing to this
increase were additional earnings resulting from the following
items:
- -an increase in 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;
- -an increase in insufficient funds charges as volumes increased
by an amount of $28,000;
- -new revenue sources in the amount of $24,000 including debit
card interchange and commercial account analysis fees; and
- -an increase in letter of credit fees and trust revenues.
Other Operating Expenses
The aggregate of noninterest expenses for 1998 increased by
$371,000, or 5.8%, over 1997. This noninterest expense increase
is discussed below as it pertains to the various expense
categories.
Employee salaries and wages increased by $363,000, or 13.0%, over
the same period in 1997. This increase was essentially due to
annual merit and cost of living increases, early retirement
payments, and planned new staff positions. New staff positions
include a senior vice president to lead retail and commercial
banking, a senior vice president to lead sales and marketing
efforts, a community banking group manager, an accounting
officer, a full-time business development officer, a quality
service manager, and additional staff for our new telephone
banking center and credit services division.
On January 1, 1999, Mark D. Gainer assumed the position of
President/CEO of the Corporation upon the retirement of William
E. Eby who retired as President/CEO on December 31, 1998 after 40
years with the Bank. Mr. Eby will, however, continue to serve as
a
<TABLE>
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
<CAPTION>
1998 Compared to 1997
_____________________________
Total
(In Thousands) Change Volume Rate
________ ________ _____
<S> <C> <C> <C>
Interest Income From Interest-
Bearing Deposits in Other Banks $ (1) $ (1) $ -0-
Federal Funds Sold 30 36 (6)
Investment Securities:
Taxable 137 207 (70)
Exempt from Federal Taxes 193 210 (17)
Loans-Net 1,610 1,853 (243)
________ ________ _____
Total Earning Assets 1,969 2,305 (336)
Interest Exepense On
Deposits:
Interest-Bearing Demand 163 146 17
Savings 11 33 (22)
Time 522 487 35
Short-Term Borrowing (64) (59) (5)
Long-Term Debt 513 519 (6)
________ ________ _____
Total Interest-Bearing
Liabilities 1,145 1,126 19
________ ________ _____
Net Interest Income $ 824 $ 1,179 $(355)
======== ======== =====
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. The change in interest
due to both volume and rate has been allocated individually to
the change in volume and rate on a proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
<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 nonaccrual loans and related income recognized have
been included for computational purposes. The change in interest
due to both volume and rate has been allocated individually to
the change in volume and rate on a proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
</TABLE>
<PAGE>
member of the Board of Directors. Mr. Gainer has worked at the
Bank for the past 22 years, most recently as Senior Vice
President/Chief Operating Officer. The Board of Directors also
recently announced that Michael A. Frey and Nancy H. Draude have
joined the Bank as Senior Vice Presidents and Clement M. Hoober,
CPA has been promoted to the position of Senior Vice President.
Mr. Frey, who comes to the Bank with 11 years of previous
experience in the financial services industry will be responsible
for retail and commercial banking. In addition, as of January 1,
1999, Mr. Frey was appointed to the position of Chief Operating
Officer of the Bank. Ms. Draude, who comes to the Bank with 19
years of previous experience in the financial services industry
will be responsible for the Bank's sales and marketing efforts.
Mr. Hoober, who has been with the Bank for 10 years, will have
direct responsibility for financial services, operations, and
risk management.
The effect of staff changes, including retirements and new
positions, are currently expected to reduce results of operations
by approximately $55,000, net of income taxes, for 1999 as
compared to 1998.
Related fringe benefits decreased by $224,000, or 26.1%, from
1997. The decrease is essentially due to a reduction in the
Bank's discretionary contribution to the Bank's profit-sharing
plan. On September 10, 1998, the Board of Directors authorized
the replacement of the existing plan with the Union National
Community Bank 401(k) Profit Sharing Plan. This plan is
effective January 1, 1999 and allows employees to contribute a
portion of their salaries and wages to the plan. The Bank may
elect to make a discretionary contribution to the plan and may
also match a portion of employee elected salary deferrals,
subject to a 6% maximum of their salaries and wages. For 1999,
the Bank has elected to match 50% of employee elected salary
deferrals which do not exceed 6% of their salaries and wages.
The Bank currently expects its total 1999 contribution to the new
401(k) profit-sharing plan to reduce results of operations by
approximately $40,000, net of income taxes, for 1999 as compared
to 1998.
Occupancy, furniture, and equipment expenses for 1998 decreased
by $18,000, or 1.9%, from 1997.
Other operating expenses for 1998, increased by $250,000, or
14.6%, 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:
- - an increase in supplies expenses of $57,000;
- - an increase in professional and consulting fees in the amount
of $47,000; and
- - an increase in ATM transaction and clearing costs in the
amount of $28,000.
The increase in professional and consulting fees included
consulting fees for a sales training program for staff,
consulting fees for an electronic data processing consultant to
perform a comprehensive review of current system capabilities and
alternatives, fees paid to an independent consultant for loan
review services, and legal costs for certain loan collection
services in connection with charge-offs and non-performing assets
in 1998.
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.
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:
- - an increase in professional and consulting fees in the amount
of $79,000; and
- - 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 a 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.
Income Taxes
The Corporation's income tax expense for 1998 was $715,000 as
compared to $579,000 for 1997 and $356,000 for 1996. The
effective tax rate for 1998 was 20.5% as compared to 19.9% in
1997 and 14.0% in 1996. The increase in income tax expense from
1997 to 1998 was primarily due to the increase in corporate
earnings before income taxes. 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 of $117,000 from 1996 to 1997 in total available income
tax credits from tax advantaged limited partnerships. In 1996,
historic federal income 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. Currently, the effective tax rate of the Corporation
for 1999 and the income tax credits from limited partnerships are
expected to approximate the effective tax rate and tax credits in
1998.
Year 2000 Issues
The following section contains forward-looking statements which
involve risks and uncertainties. The actual impact on the
Corporation of the Year 2000 issue could materially differ from
that which is anticipated in the forward-looking statements as a
result of certain factors identified below.
The "Year 2000 Problem" (Y2K) arose because many existing
computer programs use only the last two digits to refer to a
year. Therefore, these computer programs do not properly
recognize a year that begins with "20" instead of the familiar
"19". If not corrected, many computer applications could fail or
create erroneous results by or at the year 2000. This could
cause entire system failures, miscalculations, and disruptions of
normal business operations including, among other things, a
temporary inability to process transactions, generate statements,
or engage in similar day to day business activities. The extent
of the potential impact of the Year 2000 Problem is not yet
known, and if not timely corrected, it could affect the global
economy.
The Bank is subject to the regulation and oversight of various
banking regulators, whose oversight includes the provision of
specific timetables, programs, and guidance regarding Year 2000
issues. Regulatory examinations of the Bank's Year 2000 programs
are conducted on a quarterly basis and reports are regularly
provided to the Corporation's Board of Directors.
Corporation's State of Readiness
Union National Financial Corporation is committed to ensuring
that the Corporation's daily operations suffer little or no
impact from the
<PAGE>
century date change. The Corporation has applied due diligence
throughout the Y2K process, following the guidelines contained in
the series of Federal Financial Institutions Examinations
Council's Interagency Guidelines and the Securities and Exchange
Commission's Release No. 33-7558. The guidelines identify the
following phases: awareness, assessment, renovation or
remediation, testing or validation, and implementation.
Based on an ongoing assessment, the Corporation has determined
that it will be required to modify or replace portions of its
software so that its computer systems will properly use dates
beyond December 31, 1999. The Corporation presently believes
that implementing modifications to existing software and
hardware, the Year 2000 Problem can be mitigated. However, if
such modifications are not made, or are not completed on a timely
basis, the Year 2000 Problem could have a material adverse impact
on the operations of the Corporation.
Management has initiated an enterprise-wide program to prepare
the Corporation's computer systems and applications for the Year
2000. The Corporation has developed a comprehensive inventory of
all mainframe and PC based applications, third-party
relationships, environmental systems, proprietary programs, and
non-computer related systems (such as postage meters and fax
machines). This assessment identified eleven mission-critical or
related systems which could have a significant impact on the
Corporation due to the effect of the century date change. As of
December 31, 1998, the Corporation has largely remedied its
eleven identified mission-critical and related systems.
The Bank has communicated with and completed its Year 2000 credit
risk assessment of nearly all of its material customers.
Material customers include significant commercial borrowers that
could pose a credit risk to the Bank and significant commercial
depositors that could pose a liquidity risk to the Bank, if they
are not Year 2000 compliant and their businesses are disrupted.
In addition, follow-up communication will be scheduled during the
second and third quarters of 1999 for certain material customers
according to the Bank's initial risk assessment.
The Corporation has initiated communications with all of its
significant vendors, suppliers, and business partners to
determine the extent to which the Corporation is vulnerable to
those third-parties' failure to remedy their own Year 2000
Problems. These include external suppliers, such as, wire
transfer systems, telephone systems, electric companies, and
other utility companies for continuation of service. These
vendors' Year 2000 readiness responses are being assessed as to
their Year 2000 compliance status. In the event that any of the
Corporation's significant vendors, suppliers and business
partners do not successfully achieve Year 2000 compliance in a
timely manner, the Corporation's business or operations could be
adversely affected. Currently, these significant entities are
indicating that they are on schedule to be Year 2000 ready. If
significant entities fail to meet Year 2000 operating
requirements, the Corporation intends to engage alternative
suppliers or systems. Nevertheless, the Corporation does not
believe that the cost of addressing the Year 2000 issues will be
a material event or uncertainty that would cause reported
financial information not to be necessarily indicative of future
operating results or financial conditions. The Corporation does
not believe that the costs or the consequences of incomplete or
untimely resolution of its Year 2000 issues represent a known
material event or uncertainty that is reasonably likely to affect
its future financial results, or cause its reported financial
information not to be necessarily indicative of future operating
results or future financial condition.
Costs of Year 2000
The Corporation is utilizing both internal and external resources
to correct or modify and test its systems for Year 2000
compliance. For 1999, the Corporation is currently expecting
incremental costs related to the Year 2000 problem to reduce
results of operations by $20,000, net of income taxes. The
estimated Year 2000 project costs include the costs associated
with the impact of third-parties' Year 2000 issues, and are based
on presently available information. The total cost of the
project is being funded through operating cash flows. The
Corporation does not expect the amounts required to be expensed
in 1999 to have a material effect on the financial position or
results of operations. However, if compliance is not achieved in
a timely manner by the Corporation or any of its significant
third-parties, be it a supplier of services or a customer, the
Y2K issue could possibly have a material adverse effect on the
Corporation's operations and financial position.
The cost of the projects and the date on which the Corporation
plans to complete both Year 2000 modifications and systems
conversions are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual
results could differ materially from those plans. Specific
factors that might cause such material differences include, but
are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
Risks of Year 2000
At present, Management believes its progress in remedying the
Corporation's systems, programs, and applications and installing
Year 2000 compliant upgrades is on target. The Year 2000 computer
problem creates risk for the Corporation from unforseen problems
in its own computer systems and from third-party vendors who
provide the majority of mainframe and PC based computer
applications. Presently, the Corporation is testing its own
remediated mission-critical systems for Year 2000 compliance.
Testing is expected to be largely completed by March 31, 1999.
Failure of third-party systems relative to the Year 2000 issue
could have a material impact on the Corporation's ability to
conduct business.
Contingency Plans
The Corporation is currently developing a business resumption
contingency plan. This plan is for the possibility of the
failure of its systems at critical dates in the future. The
business resumption plan has a target completion date of June 30,
1999.
Since the Corporation's mission-critical systems have been
remediated and largely tested for Year 2000 compliance, the
Corporation has not developed a remediation contingency plan at
this time. It is the Corporation's intent to mitigate the risks
associated with a failure to fully complete the implementation of
its Year 2000 compliant mission-critical systems. The
Corporation will continue to monitor the progress of remediation
on the mission-critical systems and will develop a remediation
contingency plan in the future if such a need should arise.
RECENT ACCOUNTING STANDARDS ISSUED
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. In addition, the transition provisions
of this Statement allow the Corporation to reclassify held to
maturity securities to an available for sale classification. The
Corporation does not expect the provisions of this Statement to
have a material effect on the liquidity, results of operations,
or capital resources of the Corporation when it becomes effective
in the first quarter of 2000.
In October 1998, the Financial Accounting Standards Board issued
Statement No. 134, (SFAS No. 134), "Accounting for Mortgage-Backed
<PAGE>
Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." There is no
incidence of coverage for the Corporation under this Statement.
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 under Accumulated Other Comprehensive
Income 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 1999.
The amortized cost of the investment securities increased by
$11,100,000 from the prior year, representing a 17.3% increase.
The increase primarily consisted of purchases of obligations of
state and political subdivisions, corporate debt securities, and
mortgage-backed securities, which amounted to an increase in
amortized cost of $15,432,000 from the prior year. The net
increase in the investment securities was funded by growth in
average deposits and additional borrowing from the FHLB.
Fixed rate mortgage-backed securities, known as collateralized
mortgage obligations (CMOs), had an amortized cost of $17,032,000
at December 31, 1998, compared to $-0- at December 31, 1997.
These CMOs had a weighted-average yield of 6.23% at December 31,
1998. The currently expected weighted-average life of these CMOs
is approximately four years. The weighted-average life
represents expected cash flows of the investment weighted over
time. The weighted-average life of the CMOs increases to
approximately 6.7 years if there is an immediate increase in
long-term market interest rates of 2% and decreases to
approximately one year if there is an immediate decrease in long-
term market interest rates of 2%. These factors are included in
the Bank's internal management information when assessing
liquidity and interest rate risks. See sections on Liquidity and
Market Risk - Interest Rate Risk for further discussions on these
risks.
Due to the generally lower long-term mortgage rates during 1998
as compared to 1997, the prepayment speed on adjustable-rate
mortgage securities significantly increased as homebuyers moved
to lower cost 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 affected in order to enhance the Bank's
net interest margin, while managing liquidity and interest rate
risk within specified limits. The amortized cost of mortgage-backed
securities with adjustable-rate caps of 2% per year
amounted to $4,968,000 at December 31, 1998 and $6,418,000 at
December 31, 1997. The amortized cost of mortgage backed
securities with adjustable-rate caps of 1% per year amounted to
$3,775,000 at December 31, 1998 and $7,801,000 at December 31,
1997. The amortized cost of floating rate securities, including
adjustable rate-mortgage-backed securities, decreased to
$10,758,000 at December 31, 1998, as compared to $16,991,000 at
December 31, 1997.
The expected cash flows from the investment securities, including
estimated prepayments and expected call options, is currently
estimated at an amount of $19,535,000 for 1999, which represents
nearly 26% of the Bank's investment securities as compared to
nearly 22% as estimated on December 31, 1997 for 1998. The
Bank's mortgage-backed 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, 1998. In addition, there are
no significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issuer.
At December 31, 1998, the total unrealized holding gain for
securities classified as available for sale was $366,000 and the
total unrealized holding gain for securities classified as held
to maturity was $445,000. In comparison, at December 31, 1997,
the total unrealized holding gain for securities classified as
available for sale was $447,000 and the total unrealized holding
gain for securities classified as held to maturity was $73,000.
The unrealized holding gain on the available for sale securities,
net of income tax effect, amounted to an increase in
stockholders' equity of $242,000 at December 31, 1998 and
$295,000 at December 31, 1997. 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>
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1998 1997
_______________________ _____________________
Available Held to Available Held to
for Sale Maturity for Sale Maturity
____________ ________ _________ ________
<S> <C> <C> <C> <C>
U. S. Treasury
Securities $ 3,560 $ -0- $ 4,018 $ -0-
Obligations of
Other U.S.
Government Agencies 14,220 -0- 18,397 -0-
Obligations of State
and Political
Subdivisions -0- 21,806 -0- 17,361
Corporate Securities 1,958 2,273 -0- 1,509
Mortgage-Backed
Securities 28,982 -0- 20,808 -0-
Equity Securities 2,956 -0- 2,644 -0-
____________ ________ __________ ________
Total $51,676 $24,079 $ 45,867 $18,870
============ ======== ========== ========
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1996
________________________
Available Held to
for Sale Maturity
____________ _________
<S> <C> <C>
U. S. Treasury
Securities $ 2,986 $ -0-
Obligations of
Other U.S.
Government Agencies 8,860 -0-
Obligations of State
and Political
Subdivisions -0- 16,116
Corporate Securities -0- 1,008
Mortgage-Backed
Securities 24,398 -0-
Equity Securities 1,522 -0-
____________ _________
Total $ 37,766 $17,124
============ =========
</TABLE>
<PAGE>
The following table illustrates the maturities of investment
securities and the weighted average yields based upon amortized
costs as of December 31, 1998. 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 $ 1,515 $ 2,045 $ -0- $ -0-
Amortized Cost 1,504 2,019 -0- -0-
Yield 6.11% 5.56%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 4,998 -0- 9,222 -0-
Amortized Cost 4,998 -0- 9,146 -0-
Yield 5.25% 6.26%
Mortgage-Backed Securities
by contractual maturity (1):
Estimated Market Value -0- -0- 1,708 27,274
Amortized Cost -0- -0- 1,748 27,272
Yield 5.68% 6.43%
Corporate Securities:
Estimated Market Value -0- 1,958 -0- -0-
Amortized Cost -0- 1,957 -0- -0-
Yield 5.78%
Equity Securities:
Estimated Market Value
Amortized Cost
Yield
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 1,048 1,787 3,357 16,042
Amortized Cost 1,035 1,760 3,301 15,710
Yield 7.55% 7.59% 7.53% 7.90%
Corporate Securities:
Estimated Market Value 504 1,786 -0- -0-
Amortized Cost 502 1,771 -0- -0-
Yield 6.35% 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 based on
current market interest rates.
<CAPTION>
(In Thousands) Total
______
<S> <C>
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ 3,560
Amortized Cost 3,523
Yield 5.79%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 14,220
Amortized Cost 14,144
Yield 5.90%
Mortgage-Backed Securities
by contractual maturity (1):
Estimated Market Value 28,982
Amortized Cost 29,020
Yield 6.38%
Corporate Securities:
Estimated Market Value 1,958
Amortized Cost 1,957
Yield 5.78%
Equity Securities:
Estimated Market Value 2,956
Amortized Cost 2,667
Yield 6.54%
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 22,234
Amortized Cost 21,806
Yield 7.80%
Corporate Securities:
Estimated Market Value 2,290
Amortized Cost 2,273
Yield 6.21%
______
Total Securities:
Estimated Market Value $76,200
Amortized Cost 75,390
Yield 6.66%
======
(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 based on
current market interest rates.
</TABLE>
Loans
Total net loans were $163,796,000 at December 31, 1998,
representing an $11,097,000, or 7.3%, increase over net loans of
$152,699,000 at December 31, 1997. The increase in loans
resulted primarily from continued demand for residential and
commercial mortgage loans including lines of credit secured by
residential real estate. At December 31, 1998, there were no
loan concentrations over 10% of loans outstanding to any one
category or borrower. However, mortgage loans constitute 87% 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
$50,853,000 and $43,717,000 as of December 31, 1998 and 1997,
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 adverse 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 $2,526,000 to comply with their respective repayment
terms. This represents a decrease from 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. 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 1999. The nonperforming loans
table, appearing in the section entitled Nonperforming Loans,
does not include the aforementioned loans.
<PAGE>
<TABLE>
Loans are composed of the following:
<CAPTION>
December 31,
__________________________________
(In Thousands) 1998 1997 1996
__________ _________ __________
<S> <C> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 99,984 $ 93,495 $ 82,169
Commercial and Industrial 29,968 23,777 21,948
Construction and Land
Development 6,586 9,630 4,035
Agricultural 5,727 4,598 4,368
Commercial and Industrial 6,042 6,035 5,235
Consumer 9,311 9,320 8,794
Agricultural 2,550 2,213 1,609
Other 3,698 3,720 2,299
__________ _________ __________
Total Loans 163,866 152,788 130,457
Less: Unearned Income (70) (89) (66)
__________ _________ __________
Net Loans $163,796 $152,699 $130,391
========== ========= ==========
<CAPTION>
December 31,
____________________________________
(In Thousands) 1995 1994
__________ _________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 75,430 $ 67,760
Commercial and Industrial 21,098 17,099
Construction and Land
Development 4,198 4,431
Agricultural 3,602 3,734
Commercial and Industrial 4,725 3,815
Consumer 7,853 7,647
Agricultural 1,609 2,252
Other 2,003 1,778
__________ _________
Total Loans 120,518 108,516
Less: Unearned Income (101) (250)
__________ _________
Net Loans $120,417 $108,266
========== =========
</TABLE>
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 1998, 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 $ 8,273 $ 7,834 $31,878 $47,985
Construction and Land
Development 4,558 1,323 705 6,586
_______ _________ ________ _________
Total $12,831 $ 9,157 $32,583 $54,571
======= ========= ======== =========
Fixed Interest Rates $ 4,117 $ 4,788 $11,480 $20,385
Floating or Adjustable
Interest Rates 8,714 4,369 21,103 34,186
_______ _________ ________ _________
Total $12,831 $ 9,157 $32,583 $54,571
======= ========= ======== =========
(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 $96,000 and $47,000
would have been recorded on such loans for the years ended
December 31, 1998 and 1997, respectively. Interest income
recognized on such loans approximated $27,000 for the year ended
December 31, 1998 and $4,000 for the year ended December 31,
1997. At December 31, 1998, total nonperforming loans amounted
to $974,000, or .6% of total net loans, as compared to $706,000
at December 31, 1997. 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
loans. There are no troubled debt restructurings.
At December 31, 1998, the recorded investment in loans that are
considered to be impaired under generally accepted accounting
principles was $70,000 as compared to $26,000 at December 31,
1997. 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 amounted to $22,000 at December
31, 1998 and $2,000 at December 31, 1997. The average recorded
investment in impaired loans was $451,000 during the year ended
December 31, 1998 and $303,000 during the year ended December 31,
1997.
<TABLE>
The following shows the summary of nonperforming loans:
<CAPTION>
December 31,
_________________________________
(In Thousands) 1998 1997 1996
_________ ________ _________
<S> <C> <C> <C>
Nonaccruing Loans $ 131 $ 94 $ 91
Accrual Loans - 90 days or
more past due 843 612 752
_________ ________ __________
Total Nonperforming
Loans $ 974 $ 706 $ 843
========= ======== ==========
Nonperforming Loans
as a % of Net Loans .6% .5% .6%
========= ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans 179% 226% 163%
========= ======== ==========
<CAPTION>
December 31,
___________________________________
(In Thousands) 1995 1994
_____________ _____________
<S> <C> <C>
Nonaccruing Loans $ 203 $ -0-
Accrual Loans - 90 days or
more past due 1,022 618
_____________ _____________
Total Nonperforming
Loans $ 1,225 $ 618
========= ========
Nonperforming Loans
as a % of Net Loans 1.0% .6%
========= ========
Allowance for Loan
Losses as a % of
Nonperforming Loans 103% 191%
========= ========
</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 $379,000 at December 31, 1998 and $-0- at December
31, 1997. The other real estate owned as of December 31, 1998
represents commercial and residential real estate that was
foreclosed on after two unrelated borrowers defaulted on their
small business loans. The other real estate expense, including
cost writedowns to fair value, that impacted the results of
operations amounted to $26,000 for the year ended December 31,
1998 and $34,000 for the year ended December 31, 1997.
<PAGE>
Loan Quality/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. No adjustment to the
allowance for loan losses was necessary as a result of the Office
of Comptroller's most recent examination of the allowance as of
June 30, 1997.
As of October 1998, a review of selected portions of the Bank's
commercial loan portfolio was completed by an outside independent
consultant. This review included an evaluation of credit
relationships exceeding $400,000 and all loans on nonaccrual
status, past due 90 days or more, or on the Bank's internal
watchlist. At the conclusion of the review, the consultant did
not recommend any increase in the allowance for loan losses.
Through September 1998, the Bank had the loan portfolio formally
reviewed by an independent loan review officer on an ongoing
basis. This loan review consisted 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. It is anticipated that during 1999 there will be
two semiannual reviews performed by an outside independent
consultant. 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, 1998, the percent of
loans secured by real estate was 87% of the overall loan
portfolio. 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.
The allowance for loan losses increased by $150,000 from the
prior year and the ratio of the allowance for loan losses to net
loans was 1.06% at December 31, 1998, as compared to 1.04% at
December 31, 1997. The increase in the allowance for loan losses
over 1997 is primarily a result of an increase in loans
outstanding of 7.3%, including an 11.3% increase in
nonresidential mortgages. Management believes based on
information currently available that the current allowance for
loan losses of $1,743,000 is 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) 1998 1997 1996
__________ ________ _________
<S> <C> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $162,090 $ 140,925 $124,483
========== ======== =========
Allowance for Loan Losses,
Beginning of Year $ 1,593 $ 1,371 $ 1,265
Loans Charged-Off During Year:
Real Estate-Mortgage* 16 -0- -0-
Installment Loans to
Individuals 186 83 47
Commercial, Industrial
and Agricultural 34 117 18
__________ ________ _________
Total Charge-Offs 236 200 65
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0- -0-
Installment Loans to
Individuals 51 13 11
Commercial, Industrial
and Agricultural 10 19 10
__________ ________ _________
Total Recoveries 61 32 21
__________ ________ _________
Net Loans Charged-Off 175 168 44
Provision for Loan Losses
Charged to Operations 325 390 150
__________ ________ _________
Allowance for Loan Losses,
End of Year $ 1,743 $ 1,593 $ 1,371
========== ======== =========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .11% .12% .04%
========== ======== =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.06% 1.04% 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) 1995 1994
__________ ________
<S> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $115,026 $105,427
========== ========
Allowance for Loan Losses,
Beginning of Year $ 1,182 $ 1,114
Loans Charged-Off During Year:
Real Estate-Mortgage* -0- -0-
Installment Loans to
Individuals 57 30
Commercial, Industrial
and Agricultural 50 46
__________ ________
Total Charge-Offs 107 76
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* -0- -0-
Installment Loans to
Individuals 7 19
Commercial, Industrial
and Agricultural 24 12
__________ ________
Total Recoveries 31 31
__________ ________
Net Loans Charged-Off 76 45
Provision for Loan Losses
Charged to Operations 159 113
__________ ________
Allowance for Loan Losses,
End of Year $ 1,265 $ 1,182
========== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .07% .04%
========== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.05% 1.09%
========== ========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
</TABLE>
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, 1998
________________________________________
Amount Percent of Loans
(In Thousands) in each Category
_________________ ___________________
<S> <C> <C>
Commercial, Industrial
and Agricultural $ 705 33%
Real Estate-
Residential Mortgages 543 61
Installment Loans to
Individuals 495 6
____________ _____
$ 1,743 100%
============ =====
<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%
============ =====
</TABLE>
<PAGE>
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.
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 a maximum available funding capacity of $81,189,000.
In order to provide funding for the Bank's loans and investments,
the Bank has outstanding borrowings from the FHLB of $30,624,000
with an average rate of 5.46% at December 31, 1998 and
$27,139,000 with an average rate of 5.73% at December 31, 1997.
As of December 31, 1998, advances of $1,675,000 are due in 1999
and advances of $12,500,000 are convertible in 1999. The FHLB's
convertible fixed-rate advances allow the FHLB the periodic
option to convert to a LIBOR adjustable rate advance. Upon the
FHLB's conversion, the Bank has the option to repay the
respective advances in full. As of December 31, 1998, the FHLB
would likely convert advances in the amount of $5,000,000 if
market interest rates increase more than 1.25% and $7,500,000 if
market interest rates increase by more than 2%.
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 illustrates the time
intervals of cash flows or the next repricing date of interest-earning assets
and interest-bearing liabilities. The Bank's GAP
reports reflect a consistent negative rate-sensitivity position
throughout the first year, in that rate-sensitive liabilities
exceed rate-sensitive assets. The following analysis reflects
cumulative rate-sensitive assets of $96,911,000 as compared to
cumulative rate-sensitive liabilities of $117,904,000 as of the
one-year time frame. The Bank's cumulative interest-sensitivity
gap for the one-year time frame is a negative 8.1% of total
assets at December 31, 1998, as compared to a policy range of
plus 15% to negative 15%, and as compared to a negative 6.8% at
December 31, 1997. The interest rate-sensitivity analysis for the
Bank with investment securities at amortized cost at December 31,
1998, 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 $ 7,795 $ -0- $ -0- $ -0-
Mortgage-Backed Securities:
Variable 3,977 6,765 -0- -0-
Fixed 462 1,374 2,926 5,874
Investment Securities 4,942 6,309 19,073 8,594
Net Loans:
Variable 25,424 12,272 11,071 630
Fixed 7,330 20,261 39,865 24,300
________ ________ ________ ________
TOTAL $ 49,930 $ 46,981 $ 72,935 $ 39,398
======== ======== ======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 8,046 $ -0- $ -0- $ -0-
Money Market 23,876 -0- -0- -0-
Savings 9,349 1,084 -0- -0-
Time 21,068 36,587 39,234 3,168
FHLB Advances and
Other Borrowings 11,677 6,217 9,109 2,347
________ ________ ________ ________
TOTAL $ 74,016 $ 43,888 $ 48,343 $ 5,515
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap $(24,086)$(20,993) $ 3,599 $ 37,482
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets (9.3%) (8.1%) 1.4% 14.4%
======== ======== ======== ========
<CAPTION>
Over 5
(In Thousands) Years Total
________ ________
<S> <C> <C>
ASSETS
Earning Assets:
Federal Funds Sold $ -0-$ 7,795
Mortgage-Backed Securities:
Variable -0- 10,742
Fixed 7,642 18,278
Investment Securities 7,345 46,263
Net Loans:
Variable 1,432 50,829
Fixed 21,211 112,967
________ ________
TOTAL $ 37,630 $246,874
======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 25,086 $ 33,132
Money Market -0- 23,876
Savings 17,490 27,923
Time -0- 100,057
FHLB Advances and
Other Borrowings 1,461 30,811
________ ________
TOTAL $ 44,037 $215,799
======== ========
Cumulative Interest-
Sensitivity Gap $ 31,075
========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 11.9%
========
</TABLE>
<PAGE>
The amount of assets and liabilities shown, which reprice or
mature during a particular period, were determined based on the
earlier of when it reprices or when it is to be repaid for each
asset or liability. Callable investment securitiesare 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 based on current market interest rates. Interest-bearing demand
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, 1998, 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. While assumptions are developed based upon current
economic and local market conditions, Management cannot make any
assurances as to the predictive nature of these assumptions.
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. The percentage
declines in the table below are measured as percentage changes
from the values of simulated net interest income in the current
rate scenario and the impact of those changes on the prior year's
net income. 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, 1998 and 1997:
<TABLE>
<CAPTION>
Sensitivity Analysis Percent Decrease in Categories
___________________________________
Market Current Market
Interest Market Interest
Rate Interest Rate
Decline 2% Rates Increase 2%
__________ _________ ___________
<S> <C> <C> <C>
Net Interest Income:
Policy Limit <10% - <10%
Hypothetical Percent Decrease
from Base Scenario:
As of December 31, 1998 <3% - -
As of December 31, 1997 <1% - Nominal
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 1998 <6% - -
As of December 31, 1997 <2% - Nominal
</TABLE>
The preceding schedule indicates that as of December 31, 1998, a
hypothetical 2% decline in prevailing market interest rates would
cause the Bank's net interest income to decline less than 3% from
the current rate scenario and after adjusting for income taxes a
2% decline in rates would cause less than a 6% impact to the net
income in comparison to the prior year. As of December 31, 1998,
a 2% rise in prevailing market interest rates would have a
positive impact on net interest income and 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 1998 by the
following:
- -paying higher rates on intermediate term certificates in order
to manage the average remaining term on certificates of deposit
below $100,000;
- -marketing its variable rate home equity line of credit
(outstanding balances increased by $3,255,000 for the year);
- -additions to or by repositioning of its investment security
portfolio into floating or fixed and short- or long-term
securities;
- -utilization of seven- and ten-year balloon mortgages
(outstanding balances increased by $2,511,000 for the year);
- -increasing its extensions of adjustable and variable rate loans
for new or refinanced commercial and agricultural loans (these
outstanding loans increased by $4,268,000 for the year);
- -managing and expanding the Bank's core deposit base including
deposits obtained in the Bank's commercial cash management
programs; and
- -additions to or restructuring of adjustable- and fixed-rate
advances from the FHLB, including convertible advances.
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.
<PAGE>
<TABLE>
Deposits
The average amounts of deposits are summarized below:
<CAPTION>
Years Ended December 31,
________________________________
(In Thousands) 1998 1997 1996
_________ _________ _________
<S> <C> <C> <C>
Demand Deposits $ 19,211 $ 16,504 $14,506
Interest-Bearing Demand Deposits 44,528 38,134 33,924
Savings Deposits 25,598 24,184 23,343
Time Deposits 98,842 89,992 82,701
_________ _________ _________
Total $188,179 $168,814 $154,474
========= ========= =========
</TABLE>
<TABLE>
The following is a breakdown of maturities of time deposits of
$100,000 or more:
<CAPTION>
December 31,
______________________________
(In Thousands) 1998 1997 1996
________ ________ _______
<S> <C> <C> <C>
Three months or less $ 8,388 $ 8,261 $ 9,765
Over three months through six months 1,570 942 1,411
Over six months through twelve months2,076 4,030 4,312
Over twelve months 4,316 3,124 2,399
_________ _________ ________
Total $16,350 $16,357 $17,887
========= ========= ========
</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, was 9.51% for 1998, as compared
to 10.68% for 1997. The decrease in this capital ratio is a
result of a 12.9% growth in average assets for the year and open
market treasury stock purchases in the amounts of $1,995,000 in
1998 and $307,000 in 1997. Average stockholders' equity grew by
0.5% from 1997 to 1998, as compared to 6.8% from 1996 to 1997.
The dividend payout ratio, which represents the percentage of
earnings returned to the stockholders in the form of cash
dividends, was 37.7% for 1998 and 1997.
There are no material commitments for capital expenditures as of
December 31, 1998. 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 1999,
except as discussed below concerning the Corporation's common
stock repurchase plan. In addition, see discussion on Regulatory
Activity.
On February 11, 1999, the Corporation announced that the Board of
Directors had authorized and approved a plan to purchase up to
56,000 shares of the Corporation's outstanding common stock in
open market or privately negotiated transactions. The
announcement includes the 6,000 shares remaining from the 1998
common stock repurchase plan. The total number of shares to be
purchased under the plan represents approximately 2.3% of the
outstanding shares of the Corporation as of December 31, 1998.
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 expected to be held as treasury shares
(issued, but not outstanding shares).
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, 1998, as compared to the Bank's current risk-based capital
ratio of 14.57%. 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, 1998 and 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>
<CAPTION>
(In Thousands) December 31, December 31,
1998 1997
____________ ___________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 22,231 $ 22,358
Tier II - Allowance for Loan Losses 1,743 1,593
____________ ___________
Total Qualifying Capital $ 23,974 $ 23,951
============ ===========
Risk-adjusted On-balance-sheet Assets $155,280 $137,256
Risk-adjusted Off-balance-sheet Exposure 9,276 8,352
____________ ___________
Total Risk-adjusted Assets $164,556 $145,608
============ ===========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.84% 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 13.51% 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 14.57% 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 $ 10,810 $ 12,302
============ ===========
</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 1999 of approximately $1,045,000, plus an amount equal to the
net profits of the Bank in 1999 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, 1998, the enrollment in the Plan
is 19% of the shares outstanding. The Plan is currently
estimated to increase capital in the amount of $280,000 in 1999,
but this will be offset by the shares purchased under the
Corporation's common stock repurchase plan.
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 and Stock Purchase Plan. As of December
31, 1998, options to purchase 16,830 shares have been granted
under the Corporation's Stock Incentive Plans. There were 4,830
options granted in 1997 with an exercise price of $23.27, and
there were 12,000 options granted in 1998 with an exercise price
of $19.75. No options have been exercised as of December 31,
1998 under these plans. As of December 31, 1998, options to
purchase 35,000 shares have been granted under the Corporation's
1997 Employee Stock Purchase Plan. There were 15,000 options
granted in 1997 and 20,000 options granted in 1998. The current
exercise price for such options is $16.53. As of December 31,
1998, 1,181 options have been exercised under this plan. As of
December 31, 1998, 24,019 shares have been issued under the
Corporation's Dividend Reinvestment and Stock Purchase Plan.
REGULATORY ACTIVITY
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. Congress has proposed "modernization" of the financial
services industry. This proposed modernization will have the
effect of deregulating and expanding the business activities of
financial institutions. These additional activities may include
broader insurance powers, securities underwriting activities, and
the offering of equity investments by commercial banks. 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 adopted, 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 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 integration
issues related to business combinations.
In addition, the OCC recently issued an advisory providing
guidance in key milestones and testing methods for institutions
to use to prepare their systems and applications for the Year
2000. Institutions should develop and implement written testing
strategies and plan to test both internal and external systems.
In May 1998, the FFIEC issued two interagency statements with
regard to Year 2000 readiness. The first statement provided
guidance for institutions to design its Year 2000 contingency
plan to mitigate the risks associated with the institution's
failure to become Year 2000 compliant or the failure of mission
critical systems at specific dates. The second statement
provided suggestions for developing a customer awareness program
and identifies issues that financial institutions should be
prepared to discuss with customers.
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."
EXHIBIT 21
Subsidiaries of Union National Financial
Corporation
<PAGE>
EXHIBIT 21
Union National Financial Corporation
Subsidiaries
Subsidiary Incorporation
________________________
Union National Community Bank National Banking Association
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, 1999, except for Note 17, as to which
the date is February 11, 1999, included in the 1998 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, 1999, except for Note 17, as to
which the date is February 11, 1999, 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, 1998.
/s/ Trout, Ebersole & Groff, LLP
________________________________
March 25, 1999 TROUT, EBERSOLE & GROFF, LLP
Lancaster, Pennsylvania Certified Public Accountants
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 7341
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 7795
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 51676
<INVESTMENTS-CARRYING> 24079
<INVESTMENTS-MARKET> 24524
<LOANS> 163796
<ALLOWANCE> 1743
<TOTAL-ASSETS> 261368
<DEPOSITS> 205544
<SHORT-TERM> 187
<LIABILITIES-OTHER> 1317
<LONG-TERM> 30624
0
0
<COMMON> 627
<OTHER-SE> 23070
<TOTAL-LIABILITIES-AND-EQUITY> 261368
<INTEREST-LOAN> 14048
<INTEREST-INVEST> 3791
<INTEREST-OTHER> 224
<INTEREST-TOTAL> 18064
<INTEREST-DEPOSIT> 7051
<INTEREST-EXPENSE> 8695
<INTEREST-INCOME-NET> 9369
<LOAN-LOSSES> 325
<SECURITIES-GAINS> (7)
<EXPENSE-OTHER> 6718
<INCOME-PRETAX> 3483
<INCOME-PRE-EXTRAORDINARY> 3483
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2768
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<YIELD-ACTUAL> 4.35
<LOANS-NON> 131
<LOANS-PAST> 843
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2526
<ALLOWANCE-OPEN> 1593
<CHARGE-OFFS> 236
<RECOVERIES> 61
<ALLOWANCE-CLOSE> 1743
<ALLOWANCE-DOMESTIC> 1743
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 667
</TABLE>
