UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
_________________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ _______________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy, PA 17552
____________________________________________________ ________
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(Former name, former address, & former fiscal year,
if changes since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13, or
15 (d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a
court. Yes [ ] No[ ]
_________________
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,516,471 shares of $.25 (par) common stock were
_________________
outstanding as of April 30, 1999
____________________
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
PART I - FINANCIAL INFORMATION:
_____________________
Item 1 - Financial Statements
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Comprehensive Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-17
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 14-15
PART II - OTHER INFORMATION
__________________
Item 1 - Legal Proceedings 18
Item 2 - Change in Securities 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18-19
Signature Page 20
Exhibit 27 - Financial Data Schedule 21
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 3/31/99 12/31/98
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $5,639 $7,341
Federal Funds Sold 630 7,795
Investment Securities Held to Maturity
(Market Value - 1999-$26,413;1998-$24,524) 26,124 24,079
Investment Securities Available for Sale 54,433 51,676
Loans(Net of Unearned Income) 167,398 163,796
Less:Allowance for Loan Losses (1,794) (1,743)
______________________
Total Net Loans 165,604 162,053
Premises and Equipment - Net 5,253 5,247
Accrued Interest Receivable 1,817 1,561
Deferred Income Taxes 320 219
Investment in Limited Partnerships 869 882
Other Assets 591 515
______________________
TOTAL ASSETS $261,280 $261,368
======================
LIABILITIES
Deposits:
Noninterest-Bearing $22,244 $20,606
Interest-Bearing 184,373 184,938
______________________
Total Deposits 206,617 205,544
Short-Term Borrowing 293 187
Long-Term Debt 28,949 30,624
Accrued Interest Payable 1,142 1,060
Other Liabilities 520 256
______________________
TOTAL LIABILITIES 237,521 237,671
STOCKHOLDERS' EQUITY*
Common Stock (Par Value $.25) 658 627
Shares: Authorized - 20,000,000; Issued -
2,632,008 in 1999 (2,508,484 in 1998)
Outstanding - 2,520,873 in 1999 (2,410,820
in 1998)
Surplus 7,361 4,793
Retained Earnings 18,095 20,184
Unrealized gain on investment securities
available for sale, net of tax 64 242
Less: Treasury Stock - at cost
(111,135 shares in 1999 and 97,664 shares
in 1998) (2,419) (2,149)
_______________________
TOTAL STOCKHOLDERS' EQUITY 23,759 23,697
_______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $261,280 $261,368
=======================
*The Stockholders' Equity and share information as of March 31,
1999 reflects the 5% stock dividend declared by the Corporation's
Board of Directors on April 8, 1999, payable on May 14, 1999 to
stockholders of record on April 26, 1999.
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
______________________
(In Thousands, except Per Share Data) 1999 1998
______________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,497 $3,363
Investment Securities:
Taxable 799 706
Exempt from Federal Taxes 302 236
Deposits in Banks 1 0
Federal Funds Sold 61 51
_____________________
Total Interest Income 4,660 4,356
INTEREST EXPENSE
Deposits 1,742 1,700
Short-Term Borrowing 3 7
Long-Term Debt 393 389
_____________________
Total Interest Expense 2,138 2,096
_____________________
Net Interest Income 2,522 2,260
PROVISION for LOAN LOSSES 42 99
_____________________
Net Interest Income after Provision
for Loan Losses 2,480 2,161
OTHER OPERATING INCOME
Trust Income 31 34
Service Charges on Deposit Accounts 120 96
Other Service Charges, Commissions, Fees 138 106
Other Income 46 50
_____________________
Total Other Operating Income 335 286
OTHER OPERATING EXPENSES
Salaries and Wages 853 743
Retirement Plan and Other Employee Benefits 209 158
Net Occupancy Expense 161 131
Furniture and Equipment Expense 90 93
FDIC Insurance Assessment 6 5
Other Operating Expenses 539 496
_____________________
Total Other Operating Expenses 1,858 1,626
_____________________
Income before Income Taxes 957 821
PROVISION for INCOME TAXES 199 169
_____________________
NET INCOME for PERIOD $758 $652
=====================
PER SHARE INFORMATION*
Net Income for Period (Basic and Assuming
Dilution) $0.30 $0.25
Cash Dividends $0.129 $0.095
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income for Period $758 $652
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Arising during Period (178) 21
_____________________
COMPREHENSIVE INCOME for PERIOD $580 $673
=====================
* Per share information reflects the 5% stock dividend declared by
the Corporation's Board of Directors on April 8, 1999, payable on
May 14, 1999 to stockholders of record on April 26, 1999.
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
Three Months Ended March 31,
______________________
(In Thousands) 1999 1998
______________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $758 $652
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 113 118
Provision for Loan Losses 42 99
Provision for Deferred Income Taxes (11) 5
(Increase)/Decrease in Accrued
Interest Receivable (257) (155)
(Increase)/Decrease in Other Assets (70) (313)
Increase/(Decrease) in Other Liabilities 346 415
_____________________
Net Cash Provided by Operating Activities 921 821
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold 7,165 2,035
Proceeds from Maturities of
Available for Sale Securities 8,939 9,139
Proceeds from Maturities of
Held to Maturity Securities 406 508
Purchases of Available for Sale Securities (11,960) (13,786)
Purchases of Held to Maturity Securities (2,455) (698)
Loans Made to Customers, Net of
Principal Collected on Loans (3,592) (3,986)
Purchases of Property and Equipment (112) (19)
_____________________
Net Cash (Used in)Investing Activities (1,609) (6,807)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (849) 4,015
Net Increase/(Decrease) in Certificates
of Deposits 1,922 2,694
Net Increase/(Decrease) in Short-Term
Borrowing 106 (489)
Proceeds from Issuance of Long-Term Debt -0- 809
Payment on Long-Term Debt (1,675) (140)
Acquisition of Treasury Stock (270) (1,829)
Issuance of Common Stock 77 64
Cash Dividends Paid (325) (249)
_____________________
Net Cash Provided by
Financing Activities (1,014) 4,875
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,702) (1,111)
CASH and CASH EQUIVALENTS -
Beginning of Period 7,341 6,490
_____________________
CASH and CASH EQUIVALENTS - End of Period $5,639 $5,379
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $1,650 $1,596
Interest Paid - Other 407 386
Income Taxes 25 0
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<PAGE>
Union National Financial Corporation
Mount Joy, Pennsylvania
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is
unaudited and subject to year-end adjustment and audit.
However, in the opinion of management, the information
reflects all adjustments necessary to present fairly the
financial condition and results of operations for the latest
period. All such adjustments were of a normal, recurring
nature. All material intercompany transactions have been
eliminated in consolidation.
2. These statements should be read in conjunction with notes to
the financial statements contained in the 1998 Annual Report
to Stockholders.
3. Management considers the allowance for loan losses (reserve)
to be adequate at this time.
4. All per share computations include the retroactive effect of
stock dividends. This includes the 5% stock dividend declared
by the Board of Directors on April 8, 1999, payable on May 14,
1999 to stockholders of record on April 26, 1999. The basic
weighted average number of shares of common stock outstanding
used was approximately 2,526,477 and 2,567,984 for the three
month period ended March 31, 1999 and 1998, respectively.
5. No shares of common stock are reserved for issuance in the
event of conversions or the exercise of warrants, options or
other rights, except as follows: 131,071 shares which are
reserved for issuance under the Corporation's 1988 and 1997
Stock Incentive Plans, 105,000 shares which are reserved for
issuance under the Corporation's 1997 Employee Stock
Purchase Plan, and 165,375 shares which are reserved for
issuance under the Corporation's Dividend Reinvestment and
Stock Purchase Plan. As of March 31, 1999, options to
purchase 5,071 shares have been granted under the
Corporation's 1988 Stock Incentive Plan. The exercise price
for such options is $22.16. No options have been exercised
as of March 31, 1999 under this plan. As of March 31, 1999
options to purchase 12,600 shares have been granted
under the Corporation's 1997 Employee Stock Purchase Plan.
The exercise price for such options is $18.8. No options
have been exercised as of March 31, 1999 under this plan. As
of March 31, 1999, options to purchase 36,750 shares have
been granted under the Corporation's 1997 Employee Stock
Purchase Plan. The current exercise price for such options is
$16.69. As of March 31, 1999, 1,292 options have been
exercised under this plan. As of March 31, 1999 29,104 shares
have been issued under the Corporation's Dividend Reinvestment
and Stock Purchase Plan.
6. As of January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new
rules for the reporting and display of comprehensive income
and its components; however, the adoption of this Statement
had no impact on the Company's net income or stockholder's
equity. Statement No. 130 requires unrealized gains or losses
on available for sale securities, to be included in other
comprehensive income. Total comprehensive income was $580,000
for the quarter ended March 31, 1999, compared to $673,000
for the same period of 1998.
7. In June 1997, the Financial Accounting Standards Board issued
Statement 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 and interim financial statements. The Corporation has
only one operating segment which comprises the Bank's banking
and fiduciary activities.
8. The results of operations for the three month period ended
March 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
9. Certain reclassifications have been made to the 1999
consolidated financial statements to conform with the
1998 presentation.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources, and liquidity presented in its accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company (the Corporation), and its
wholly-owned subsidiary, Union National Community Bank (the
Bank). The Corporation's consolidated financial condition and
results of operations consist almost entirely of the Bank's
financial condition and results of operations. This discussion
should be read in conjunction with the 1998 Annual Report.
Current performance does not guarantee or indicate 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 the three months ended March 31, 1999
was $758,000, an increase of 16.3%, as compared to the
consolidated net income of $652,000 for the same period of 1998.
On a per share basis, net income for the three months ended March
31, 1999 was $.30, an increase of 20.0%, as compared to $.25 for
the same period in 1998. Per share information reflects the 5%
stock dividend declared by the Corporation's Board of Directors
on April 8, 1999, payable on May 14, 1999 to stockholders of
record on April 26, 1999.
Results of operations for the three months ended March 31, 1999
as compared to the same period in 1998 were impacted by the
following items:
- -Net income increased due to growth of 6.3% in average net loans
and growth of 22.7% in average investment securities, which was
funded primarily by growth in deposits.
- -Net income increased due to a 17.1% increase in other operating
income.
- -Net income increased due to a slight widening of the spread
between the earnings rates on loans and investments as compared
to the interest rates paid on deposits and long-term debt.
- -Net income increased due to a decrease in the provision for loan
losses.
- -Net income decreased due to a 14.3% increase in other operating
expenses.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of total average assets, also known as
return on average
<PAGE>
assets (ROA), was 1.18% on an annualized basis for the three
months ended March 31, 1999, as compared to 1.13% for the same
period in 1998. Net income as a percent of average stockholders'
equity, also known as return on average equity (ROE), was 12.8%
on an annualized basis for the three months ended March 31, 1999,
as compared to 11.4% for the same period in 1998. ROE was
positively impacted by the repurchase of 13,470 shares of
outstanding common stock since the beginning of 1999. See the
discussion under the section on Stockholder's Equity for further
details.
Management currently expects a moderation in the growth of
deposits for the remainder of 1999 as compared to historic growth
rates of deposits. This is due to the Bank's ability to lower
its cost of funds rate on deposits since growth in deposits has
recently outpaced the Bank's funding needs for loan growth. As a
result the rate paid on average interest-bearing deposits has
decreased from 4.27% at March 31, 1998 to 3.87% at March 31,
1999. However, Management has taken specific actions to enhance
the Bank's competitive position for loans, deposits, and other
financial services in northwestern Lancaster County, Pennsylvania
(the Bank's Market Area). These actions include renewed emphasis
on business development and on sales training for staff, further
development of the Bank's cash management program for commercial
customers, and the strategic promotion of the Bank's retail
offices in light of continued consolidation of financial
institutions in the Bank's Market Area. The funding for loan
growth is further discussed under the section on Liquidity.
Management also currently expects a moderation in loan growth for
the remainder of 1999 as compared to historic growth rates.
However, the following items are currently expected to enhance
loan growth during the remainder of 1999:
- -lending rates are at generally affordable rates for prospective
borrowers;
- -renewed emphasis on business development and 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 the remainder of 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
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the three months ended March 31, 1999
increased by $297,000, or 12.4%, over the same period in 1998.
Commercial, residential, and consumer average loan growth of
$9,805,000 and average investment security growth of $13,998,000
was funded primarily by the growth in average deposits of
$23,471,000. Average earning assets increased in the amount of
$25,309,000 in the aggregate over the same period in 1998. The
volume growth in earning assets and interest-bearing liabilities
increased net interest income by the amount of $283,000.
The overall interest rate on the average total earning assets
decreased to 7.90% for the current period, as compared to 8.19%
for the same period of last year. This was due to overall
declines in market interest rates and due to the refinancing of
higher interest rate loans to lower interest rates. The overall
interest rate on the average interest-bearing liabilities
decreased to 4.09% for the current period, as compared to 4.49%
for the same period of last year. This is due to decreases in
rates paid on core deposits and the repricing of adjustable-rate
advances from the Federal Home Loan Bank of Pittsburgh (FHLB) to
lower current market rates. The net effect of all interest rate
fluctuations and funding changes was to increase net
<PAGE>
interest income in the amount of $14,000 for the current period
over the same period in 1998. See Management's discussion below
concerning the anticipated impact of these interest rate
fluctuations to the results of operations for the remainder of
1999.
As referenced above, 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 March 31, 1999, the Bank
has received long-term advances of $28,949,000 from its available
credit of $74,590,000 at the FHLB for purposes of funding loan
demand and mortgage-backed security purchases. The total
advances have a current average effective rate of 5.43% with
maturities ranging from June 2000 to September 2008.
Commencing October 1998, the Federal Reserve Bank began loosening
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 investment securities and
renewing certificates of deposit. As a result of this and
Management's efforts to manage the net interest margin, it is
currently expected that for the remainder of 1999, the Bank's net
interest margin will remain stable in comparison to the current
net interest margin and will widen slightly in comparison to the
same period of 1998. In addition, the growth in the earning
assets during 1998 and the first three months of 1999 is
currently expected to increase the net interest margin for the
remaining months of 1999 over the same period of 1998. Although
the effective interest rate impact of expected cash flows on
investments and of renewing certificates of deposit can be
reasonably estimated at current interest rate levels, the yield
curve during the remainder of 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 March 31, 1999, the factors
discussed above will have a net positive impact to the net
interest margin for the remaining months of 1999, as compared to
the same period in 1998. See discussions on Liquidity and Market
Risk - Interest Rate Risk.
Provision for Loan Losses
The provision for loan losses was $42,000 for the three months
ended March 31, 1999 and $99,000 for the three months ended March
31, 1998. Net charge-offs for the three months ended March 31,
1998 were $74,000 as compared to net recoveries of $9,000 for the
three months ended March 31, 1999. The decrease in the provision
over the same period of last year is primarily a result of the
decrease in net charge-offs. Future adjustments to the
allowance, and consequently, the provision for loan losses, may
be necessary if economic conditions or loan credit quality differ
substantially from the assumptions used in making Management's
evaluation of the level of the allowance for loan losses as
compared to the balance of outstanding loans.
Other Operating Income
Other operating income for the three months ended March 31, 1999
was $335,000, representing an increase of $49,000, or 17.1%, over
the same period in 1998. Contributing to this increase were the
following items:
- -additional earnings in mutual fund commissions from the Bank's
continued relationship with T.H.E. Financial Group, Ltd. in the
amount of $13,000;
- -additional earnings in insufficient funds charges in the amount
of $21,000; and
- -additional earnings in debit card interchange fee income in the
amount of $9,000.
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.
<PAGE>
Other Operating Expenses
The aggregate of noninterest expenses for the three months ended
March 31, 1999 increased by $232,000, or 14.3%, over the same
period in 1998. This noninterest expense increase is discussed
below as it pertains to the various expense categories.
Employee salaries and wages increased by $110,000, or 14.8%, over
the same period in 1998. This increase was essentially due to
annual merit and cost of living increases and planned staff
additions. 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. Staff
changes from 1998 to 1999, including the above staff additions
and retirements and early retirement payments in 1998, are
currently expected to reduce results of operations by an
immaterial amount for the remainder of 1999 as compared to the
same period of last year.
Related fringe benefits increased by $51,000, or 32.3%, from the
same period in 1998. The increased expense is primarily a result
of increased employee benefit costs as a result of staff
additions. Benefit costs were also increased by $8,000 as a
result of the implementation of the Union National Community Bank
401(k) Profit Sharing Plan which replaced the previous profit
sharing plan. This plan was 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 $35,000, net of income
taxes, for the remainder of 1999 compared to the same period of
last year.
Occupancy, furniture and equipment expenses for the three months
ended March 31, 1999 increased by $27,000, or 12.1%, from the
same period in 1998. This increase was due to an increase of
$12,000 in other real estate expense from the same period in 1998
and due to minor increases in various other expense categories.
Other operating expenses for the three months ended March 31,
1999, increased by $43,000, or 8.7%, over the same period in
1998. Contributing factors to the increase in other operating
expenses as compared to the same period in 1998 included the
following:
- -an increase in advertising expenses in the amount of $23,000 as
a result of expenditures for the development and promotion of the
Bank's new logo and expenditures for a loan sales campaign;
- -an increase in supplies expense of $9,000; and
- -an increase in costs related to Y2K preparations.
The above items were partially offset by a decrease in legal and
professional fees which resulted from a decrease in expenditures
in 1999 for legal fees related to loan matters and a decrease in
expenditures for consulting fees.
Income Taxes
The Corporation's income tax expense increased by $30,000 for the
three months ended March 31, 1999 to $199,000 from $169,000 for
the same period in 1998. The effective tax rate was 20.8% for the
three months ended March 31, 1999 and 20.6% for the three months
ended March 31, 1998. The increase in income tax expense was due
to the increase in corporate earnings before income taxes.
Currently, the effective tax rate of the Corporation for the
remaining months of 1999 is expected to approximate the effective
tax rate in 1998.
Year 2000 Issues
________________
<PAGE>
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 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
March 31, 1999, the Corporation has remedied all eleven of its
identified mission-critical and related systems.
The Bank has communicated with and completed its Year 2000 credit
risk assessment 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 assure
continuation of service by determining 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.
<PAGE>
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 the remaining months of 1999, the Corporation is
currently expecting incremental costs related to the Year 2000
problem to reduce results of operations by $30,000, 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.
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. As of March 31, 1999,
the Corporation has remedied all eleven of its identified
mission-critical and related systems. 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 has been 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 business resumption
contingency plans. These plans are for the possibility of the
failure of its systems at critical dates in the future and for
disruptions caused by power outages and telecommunication system
failures. The business resumption plans have a target completion
date of June 30, 1999.
A remediation contingency plan is to provide an alternative
system in the event a mission-critical system cannot be fully
implemented and tested for Y2K readiness by a reasonable date
that ensures a continuity of the Bank's core business processes.
Since the Corporation's mission-critical systems have been
remediated and largely tested for Year 2000 compliance as of
March 31, 1999, it is not necessary for the Corporation to
develop a remediation contingency plan.
Regulatory Activity
___________________
<PAGE>
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.
Changes in Accounting Standards
_______________________________
<PAGE>
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.
Current Accounting Developments
_______________________________
In December 1998, the Financial Accounting Standards Board (FASB)
issued an invitation to comment document entitled "Methods of
Accounting for Business Combinations: Recommendations of the G4+1
for Achieving Convergence." Subsequently in April 1999, the FASB
tentatively agreed to eliminate the pooling-of-interests method
of accounting for business combinations. In reaching its
conclusion, the Board commented that the use of two methods,
purchase and pooling-of-interests, makes it difficult for users
to compare the financial statements of companies engaged in
business combinations, and that the pooling method is
inconsistent with the general concept of fair value associated
with acquisitions. Accordingly, the Board concluded that there
should be a single method of accounting for all business
combinations, and that method is the purchase method. As a
general rule, the purchase method establishes a new accounting
basis for the assets and liabilities acquired based on fair value
and recognizes goodwill (positive or negative). Goodwill, the
difference between the purchase price and total value of assets
and liabilities obtained, is an intangible asset that must be
amortized over future periods. Regarding transition, the Board
tentatively concluded that all business combinations reported
before final issuance of a new standard, as well as all
combinations in process at the time the new standard is issued
should be accounted for under APB 16 as a pooling, if the pooling
criteria within the standard are met. The FASB expects to issue
an Exposure Draft during 1999, but has not yet indicated when it
expects to issue the final standard.
Credit Risk and Loan Quality
_____________________________
Other than as described herein, Management does not believe there
are any trends, events or uncertainties which are reasonably
expected to have a material impact on future results of
operation, liquidity or capital resources. Further, based on
known information, Management believes that the effects of
current and past economic conditions and other unfavorable
specific business conditions may result in the inability of loans
amounting to $2,350,000 to comply with their respective repayment
terms. This amount represents a slight decrease from the amount
of $2,526,000 at December 31, 1998. In aggregate, these loans
are well secured, essentially with real estate, equipment and
vehicles. Management currently believes that potential losses on
these loans have already been provided for in the Allowance for
Loan Losses. The borrowers are of special mention since they
have shown a decline in financial strength and payment quality.
Management has increased its monitoring of the borrowers'
financial strength. In addition, Management currently estimates
that a portion of these loans will be classified as nonperforming
in the remaining months of 1999.
At March 31, 1999, total nonperforming assets amounted to
$1,269,000, or .8% of total net loans, from a level of
$1,353,000, or .8%, at December 31, 1998. Historically, the
percentage of nonperforming assets to total net loans as of
December 31, for the previous five year period was an average of
.7%.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
Schedule of Nonperforming Assets
________________________________
<CAPTION>
March 31, December 31,
(In Thousands) 1999 1998
_______________________________
<S> <C> <C>
Nonaccruing Loans $130 $131
Accrual Loans - 90 days or more
past due 896 843
Restructured Accrual Loans 0 0
Other Real Estate Owned 243 379
_______________________________
Total Nonperforming Assets $1,269 $1,353
===============================
Nonperforming Assets
as a % of Net Loans 0.8% 0.8%
===============================
Allowance for Loan Losses
as a % of Nonperforming Assets 175% 179%
===============================
</TABLE>
<TABLE>
Analysis of Allowance for Loan Losses
_____________________________________
<CAPTION>
Three Months Ended March 31,
(In Thousands) 1999 1998
_______________________________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $164,355 $154,550
===============================
Allowance for Loan Losses,
Beginning of Period $1,743 $1,593
Loans Charged-off During Period 17 80
Recoveries of Loans Previously
Charged-off 26 6
_______________________________
Net Loans Charged-off (9) 74
Addition to Provision for Loan Losses
Charged to Operations 42 99
_______________________________
Allowance for Loan Losses,
End of Period $1,794 $1,618
===============================
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) -0.02% 0.19%
===============================
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.07% 1.03%
===============================
</TABLE>
<PAGE>
Allowance for Loan Losses
_________________________
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses
and is formally reviewed by Management on a quarterly basis. The
allowance is increased by provisions charged to operating expense
and reduced by net charge-offs. Management's periodic evaluation
of the adequacy of the allowance is based on the Corporation's
past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant
factors. While Management uses available information to make
such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination
process, review the Bank's Allowance for Loan Losses. Such
agencies may require the Bank to recognize additions to the
allowance based on their judgement of information available to
them at the time of their examination.
The allowance for loan losses increased by $51,000 for the three
months ended March 31, 1999, and the ratio of the allowance for
loan losses to net loans was 1.07% at March 31, 1999, as compared
to 1.06% at December 31, 1998. The increase in the allowance for
loan losses for the three month period was due primarily to an
increase in loans outstanding of $3,602,000 for the three month
period. Management believes based on information currently
available that the current allowance for loan losses of
$1,794,000 is adequate to meet potential loan losses. As of
October 1998, a review of selected portions of the Bank's
commercial loan portfolio was completed by an outside independent
consultant. At the conclusion of the review, the consultant did
not recommend any increase in the allowance for loan losses. It
is anticipated that there will be two semiannual reviews
performed by this outside independent consultant in 1999.
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. The Bank has a maximum funding
capacity of up to $74,590,000 available at the FHLB. In order to
provide funding for the Bank's loans and investments, the Bank
had outstanding borrowing from the FHLB of $28,949,000 at March
31, 1999 and $27,948,000 at March 31, 1998.
Market Risk - Interest Rate Risk
________________________________
<PAGE>
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 an effort to assess market risk, the Bank utilizes a
simulation model to determine the effect of gradual increases or
decreases in market interest rates on net interest income and net
income. The aforementioned assumptions are revised based on
defined scenarios of assumed speed and direction changes of
market interest rates. These assumptions are inherently
uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions as well as management
strategies, among other factors. Because it is difficult to
accurately quantify into assumptions the reaction of depositors
and borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to the Bank's net
interest income and net income. Projections for loan and deposit
growth were ignored in the simulation model. The simulation
model includes all of the Bank's earning assets and interest-bearing liabilities
and assumes a parallel and prorated shift in
interest rates over a twelve month period. As a result of the
simulation model, it is currently anticipated that a hypothetical
two percent general rise or decline in prevailing market interest
rates over a one-year period will have an immaterial impact to
the Bank's net interest income over the next twelve months. The
computations do not contemplate any actions Management or the
Asset Liability Management Committee could undertake in response
to changes in market conditions or market interest rates.
The Bank managed its interest rate risk position for the three
months ended March 31, 1999 by the following:
- -marketing its variable rate home equity line of credit;
- -additions to or by repositioning of its investment security
portfolio into floating, short- or long-term securities;
- -increasing its extensions of adjustable and floating rate loans
for new or refinanced commercial and agricultural loans (these
outstanding loans increased by $792,000 for the period);
- -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>
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. Other
than discussed herein, there are no material commitments for
capital expenditures. There are no known trends, events or
uncertainties, including regulatory matters that are expected to
have a material impact on the capital resources of the
Corporation for the remaining months of 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 Board of
Directors believes that a redemption or repurchase of this type
is in the best interests of the Corporation and its stockholders
as a method to enhance long-term shareholder value. Currently,
the shares are to be held as treasury shares (issued, but not
outstanding shares). As of March 31, 1999, a total of 7,007
shares of common stock were repurchased under this plan at a cost
of $142,854. This amount was funded from consolidated earnings.
The Corporation and the Bank remain well capitalized and meet all
regulatory capital guidelines after the repurchase of the 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 March 31,
1999, as compared to the Bank's current risk-based capital ratio
of 14.24%. 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
regulatory action. As of December 31, 1998, the Bank was
categorized as well capitalized. Management is not aware of any
conditions or events that would adversely effect the Bank's
capital. The Bank maintains the following leverage and risk-
based capital ratios:
<TABLE>
<CAPTION>
(In Thousands) March 31, December 31,
1999 1998
____________ ___________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 22,455 $ 22,231
Tier II - Allowance for Loan Losses 1,794 1,743
____________ ___________
Total Qualifying Capital $ 24,249 $ 23,974
============ ===========
Risk-adjusted On-balance-sheet Assets $158,954 $155,280
Risk-adjusted Off-balance-sheet Exposure 11,295 9,276
____________ ___________
Total Risk-adjusted Assets $170,249 $164,556
============ ===========
Ratios:
Tier I Capital Ratio - Actual 8.76% 8.84%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratio:
Tier I Capital Ratio - Actual 13.19% 13.51%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 14.24% 14.57%
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 $ 10,629 $ 10,810
============ ===========
</TABLE>
<PAGE>
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:
- -131,071 shares which are reserved for issuance under the
Corporation's 1988 and 1997 Stock Incentive Plans;
- -105,000 shares which are reserved for issuance under the
Corporation's 1997 Employee Stock Purchase Plan; and
- -165,375 shares which are reserved for issuance under the
Corporation's Dividend Reinvestment and Stock Purchase Plan.
As of March 31, 1999, options to purchase 5,071 shares have been
granted under the Corporation's 1988 Stock Incentive Plan. The
exercise price for such options is $22.16. No options have been
exercised as of March 31, 1999 under this plan. As of March 31,
1999, options to purchase 12,600 shares have been issued under
the Corporation's 1997 Stock Incentive Plan. The exercise price
for such options in $18.81. No options have been exercised as of
March 31, 1999 under this plan. As of March 31, 1999, options to
purchase 36,750 shares have been granted under the Corporation's
1997 Employee Stock Purchase Plan. The current exercise price
for such options is $16.69. As of March 31, 1999, 1,292 options
have been exercised under this plan. As of March 31, 1999,
29,104 shares have been issued under the Corporation's Dividend
Reinvestment and Stock Purchase Plan.
<PAGE>
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
the Corporation. There are no proceedings pending other than the
ordinary routine litigation incident to the business of the
Corporation and its subsidiary, Union National Community Bank.
In addition, no material proceedings are pending or are known to
be threatened or contemplated against the Corporation and the
Bank by government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held at 10:00 a.m. on
April 28, 1999 at The Gathering Place, 6 Pine Street, Mount Joy,
Pennsylvania, 17552.
(b)- (c) The following matters were voted upon:
Four Class C directors were elected, as follows:
<TABLE>
Votes* Votes*
cast cast Votes*
Reelected Term Expires "For" "Against""Abstained"
_________ ___________ ___________ ________ __________
<S> <C> <C> <C> <C>
Donald H. Wolgemuth 2002 1,802,777 5,227 0
William E. Eby 2002 1,802,678 5,326 0
William D. Linkous 2002 1,802,754 5,250 0
Benjamin W. Piersol,Jr. 2002 1,802,777 5,227 0
Directors whose term continued after the meeting
Class A Directors
Franklin R. Eichler 2000
E. Ralph Garber 2000
Mark D. Gainer 2000
Class B Directors
Daniel C. Gohn 2001
Carl R. Hallgren 2001
David G. Heisey 2001
Daniel H. Raffensperger 2001
Proposal to approve and adopt the
Union National Financial Corporation
1999 Independent Directors Stock
Option Plan 1,723,076 79,446 5,482
* Information of shares voted does not reflect the 5% stock
dividend declared by the Corporation's Board of Directors on
April 8, 1999, payable on May 14, 1999 to stockholders of record
on April 26, 1999.
</TABLE>
(d) Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibit is being filed as
part of this Report: (see
also Item 6(b)).
<PAGE>
Exhibit No. 27 - Financial Data Schedule as of March
31, 1999.
(b) Reports on Form 8-K:
The Corporation filed a Form 8-K via EDGAR dated
February 25, 1999. It contained a comprehensive
electronic filing of one exhibit as follows:
Exhibit No. 10 - Employment Agreement dated January
1, 1999 , between Union National Financial
Corporation, a Pennsylvania business corporation and
Mark D. Gainer.
<PAGE>
Signatures
___________
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By /s/ Mark D. Gainer
___________________________
Mark D. Gainer
President & CEO
(Principal Executive Officer)
Date: May 13, 1999
By /s/ Clement M. Hoober
__________________________
Clement M. Hoober
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 13, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 5639
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 630
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 54433
<INVESTMENTS-CARRYING> 26124
<INVESTMENTS-MARKET> 26413
<LOANS> 167398
<ALLOWANCE> 1794
<TOTAL-ASSETS> 261280
<DEPOSITS> 206617
<SHORT-TERM> 293
<LIABILITIES-OTHER> 1662
<LONG-TERM> 28949
0
0
<COMMON> 658
<OTHER-SE> 23101
<TOTAL-LIABILITIES-AND-EQUITY> 261280
<INTEREST-LOAN> 3497
<INTEREST-INVEST> 1101
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 4660
<INTEREST-DEPOSIT> 1742
<INTEREST-EXPENSE> 2138
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</TABLE>
