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 September 30, 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.
2,491,242 shares of $.25 (par) common stock were
_________________
outstanding as of November 01, 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 4-5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-19
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 16-17
PART II - OTHER INFORMATION
__________________
Item 1 - Legal Proceedings 20
Item 2 - Change in Securities 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of
Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature Page 21
Exhbit 27 - Financial Data Schedule 22
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 9/30/99 12/31/98
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $6,553 $7,341
Federal Funds Sold 0 7,795
Investment Securities Held to Maturity
(Market Value - 1999-$28,711;1998-$24,524) 29,453 24,079
Investment Securities Available for Sale 50,192 51,676
Loans(Net of Unearned Income) 174,702 163,796
Less: Allowance for Loan Losses (1,818) (1,743)
______________________
Total Net Loans 172,884 162,053
Premises and Equipment - Net 5,140 5,247
Accrued Interest Receivable 1,845 1,561
Deferred Income Taxes 708 219
Investment in Limited Partnerships 844 882
Other Assets 325 515
_____________________
TOTAL ASSETS $267,944 $261,368
=====================
LIABILITIES
Deposits:
Noninterest-Bearing $21,305 $20,606
Interest-Bearing 185,571 184,938
_____________________
Total Deposits 206,876 205,544
Short-Term Borrowing 4,710 187
Long-Term Debt 31,535 30,624
Accrued Interest Payable 1,226 1,060
Other Liabilities 333 256
_____________________
TOTAL LIABILITIES 244,680 237,671
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 656 627
Shares: Authorized - 20,000,000; Issued -
2,622,536 in 1999 (2,508,484 in 1998)
Outstanding - 2,505,007 in 1999 (2,410,820
in 1998)
Surplus 7,158 4,793
Retained Earnings 18,934 20,184
Accumulated Other Comprehensive Income (705) 242
Less: Treasury Stock - at cost
(126,419 shares in 1999 and 97,664 shares
in 1998) (2,779) (2,149)
______________________
TOTAL STOCKHOLDERS' EQUITY 23,264 23,697
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $267,944 $261,368
======================
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 September 30,
___________________________________
(In Thousands, except Per Share Data) 1999 1998
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,669 $3,590
Investment Securities:
Taxable 834 642
Exempt from Federal Taxes 325 248
Deposits in Banks 0 0
Federal Funds Sold 11 61
_____________________
Total Interest Income 4,839 4,541
INTEREST EXPENSE
Deposits 1,787 1,810
Short-Term Borrowing 30 6
Long-Term Debt 420 412
_____________________
Total Interest Expense 2,237 2,228
_____________________
Net Interest Income 2,602 2,313
PROVISION for LOAN LOSSES 94 53
_____________________
Net Interest Income after Provision
for Loan Losses 2,508 2,260
OTHER OPERATING INCOME
Trust Income 42 34
Service Charges on Deposit Accounts 166 124
Other Service Charges, Commissions, Fees 143 124
Investment Securities Gains/(Losses) 0 0
Other Income 24 13
_____________________
Total Other Operating Income 375 295
OTHER OPERATING EXPENSES
Salaries and Wages 902 820
Retirement Plan and Other Employee Benefits 190 162
Net Occupancy Expense 152 128
Furniture and Equipment Expense 100 103
FDIC Insurance Assessment 6 5
Other Operating Expenses 633 445
_____________________
Total Other Operating Expenses 1,983 1,663
_____________________
Income before Income Taxes 900 892
PROVISION for INCOME TAXES 127 185
_____________________
NET INCOME for PERIOD $773 $707
=====================
PER SHARE INFORMATION*
Net Income for Period (Basic and Assuming
Dilution) $0.31 $0.28
Cash Dividends $0.150 $0.105
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $773 $707
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period (292) 132
Reclassification Adjustment for (Gains)/Losses
included in Net Income 0 0
_____________________
Other Comprehensive Income/(Loss) (292) 132
______________________
COMPREHENSIVE INCOME for PERIOD $481 $839
=====================
* 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.
<CAPTION>
Nine months ended September 30,
__________________________________
(In Thousands, except Per Share Data) 1999 1998
__________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $10,721 $10,436
Investment Securities:
Taxable 2,478 2,059
Exempt from Federal Taxes 943 725
Deposits in Banks 1 1
Federal Funds Sold 105 149
_____________________
Total Interest Income 14,248 13,370
INTEREST EXPENSE
Deposits 5,262 5,259
Short-Term Borrowing 40 18
Long-Term Debt 1,221 1,198
_____________________
Total Interest Expense 6,523 6,475
_____________________
Net Interest Income 7,725 6,895
PROVISION for LOAN LOSSES 193 282
_____________________
Net Interest Income after Provision
for Loan Losses 7,532 6,613
OTHER OPERATING INCOME
Trust Income 104 101
Service Charges on Deposit Accounts 429 335
Other Service Charges, Commissions, Fees 442 347
Investment Securities Gains/(Losses) 0 (7)
Other Income 87 72
_____________________
Total Other Operating Income 1,062 848
OTHER OPERATING EXPENSES
Salaries and Wages 2,676 2,290
Retirement Plan and Other Employee Benefits 598 473
Net Occupancy Expense 445 408
Furniture and Equipment Expense 293 304
FDIC Insurance Assessment 18 16
Other Operating Expenses 1,715 1,402
_____________________
Total Other Operating Expenses 5,745 4,893
_____________________
Income before Income Taxes 2,849 2,568
PROVISION for INCOME TAXES 527 532
_____________________
NET INCOME for PERIOD $2,322 $2,036
=====================
PER SHARE INFORMATION*
Net Income for Period $0.92 $0.80
Cash Dividends $0.417 $0.300
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Net income for Period $2,322 $2,036
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period (946) 165
Reclassification adjustments for (Gains)/Losses
included in Net Income 0 4
_____________________
Other Comprehensive Income/(Loss) (946) 169
_____________________
COMPREHENSIVE INCOME for PERIOD $1,376 $2,205
=====================
* 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>
Nine Months Ended September 30,
________________________________
(In Thousands) 1999 1998
________________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,322 $2,036
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 334 355
Provision for Loan Losses 193 282
Investment Securities (Gains)/Losses 0 7
Provision for Deferred Income Taxes (2) (12)
(Increase)/Decrease in Accrued
Interest Receivable (284) (196)
(Increase)/Decrease in Other Assets 212 (57)
Increase/(Decrease) in Other Liabilities 243 462
_____________________
Net Cash Provided by Operating Activities 3,018 2,877
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold 7,795 2,445
Proceeds from Sales of
Available for Sale Securities 0 4,936
Proceeds from Maturities of
Available for Sale Securities 16,735 26,906
Proceeds from Maturities of
Held to Maturity Securities 2,060 681
Purchases of Available for Sale Securities (16,684) (33,057)
Purchases of Held to Maturity Securities (7,433) (3,674)
Loans Made to Customers, Net of
Principal Collected on Loans (11,025) (14,659)
Purchases of Property and Equipment (212) (80)
_____________________
Net Cash (Used in)Investing Activities (8,764) (16,502)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (4,405) 4,641
Net Increase/(Decrease) in Certificates
of Deposits 5,736 8,002
Net Increase/(Decrease) in Short-Term
Borrowing 4,523 (586)
Proceeds from Issuance of Long-Term Debt 2,587 10,456
Payment on Long-Term Debt (1,675) (7,111)
Acquisition of Treasury Stock (1,004) (1,881)
Issuance of Common Stock 246 198
Cash Dividends Paid (1,050) (767)
_____________________
Net Cash Provided by
Financing Activities 4,958 12,952
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (788) (673)
CASH and CASH EQUIVALENTS -
Beginning of Period 7,341 6,490
_____________________
CASH and CASH EQUIVALENTS - End of Period $6,553 $5,817
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $5,108 $5,101
Interest Paid - Other 1,250 1,217
Income Taxes 606 507
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (17,000 shares
in 1999 and 13,000 shares in 1998) $374 $288
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
he 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 2,500,828 and 2,533,887 for the three month period
ended September 30, 1999 and 1998,respectively, and 2,513,513 and
2,544,453 for the nine month period ended September 30, 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
Union National's 1988 and 1997 Stock Incentive Plans,
- - 105,000 shares which are reserved for issuance under
the Union National's 1997 Employee Stock Purchase Plan
- - 63,000 shares which are reserved for issuance under
Union National's 1999 Independent Stock Purchase Plan;
- - 165,375 shares which are reserved for issuance under Union
National's Dividend Reinvestment and Stock Purchase Plan
As of September 30, 1999, options to purchase 5,071 shares have
been granted under Union National's Stock Incentive Plan. The
exercise price for such options is $22.16. No options have been
exercised as of September 30, 1999 under this plan. As of
September 30,1999, options to purchase 12,600 shares have been
issued under Union National's 1997 Employee Stock Purchase Plan.
The current exercise price for such options is $18.52. As of
September 30, 1999, 1,697 options have been exercised under
this plan. As of September 30, 1999, options to purchase 10,500
shares have been granted under Union National's 1999 Independent
Directors Stock Option Plan. The exercise price for such options
is $22.75. No options have been exercised as of September 30,
1999. As of September 30, 1999, 36,227 shares have been issued
under Union National'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 $481,000 for the quarter ended September
30, 1999, compared to $839,000 for the same period of 1998. Year
to date total comprehensive income was $1,376,000 for 1999,
compared to $839,000 for the same period of 1998. For none months
ended September 30, 1999 total comprehensive income was
$1,376,000 compared to $2,205,000 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. 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 effective January
1, 2001. 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 is
expected to issue a final standard in the fourth quarter of 2000.
9. The results of operations for the nine month period ended
September 30, 1999 are not necessarily indicative of the results
to be expected for the full year.
10. Certain reclassifications have been made to the 1998
consolidated financial statements to conform with the 1999
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 (Union National), and its
wholly-owned subsidiary, Union National Community Bank (the
Bank). Union National'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
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 nine months ended September 30,
1999 was $2,322,000, an increase of 14.0%, as compared to the
consolidated net income of $2,036,000 for the same period of
1998.
Consolidated net income for the three months ended September 30,
1999 was $773,000, an increase of 9.3%, as compared to the
consolidated net income of $707,000 for the same period of 1998.
On a per share basis, net income for the nine months ended
September 30, 1999 was $.92, an increase of 15.0%, as compared to
$.80 for the same period in 1998. On a per share basis, net
income for the three months ended September 30, 1999 was $.31, an
increase of 10.7%, as compared to $.28 for the same period in
1998. Per share information reflects the 5% stock dividend
declared by Union National'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 nine months ended September 30,
1999 as compared to the same period in 1998 were impacted by the
following items:
- - Net income increased due to growth of 4.7% in average net
loans and growth of 26.8% in average investment securities,
which was funded primarily by growth in average deposits.
- - Net income increased due to a 25.2% 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.
<PAGE>
- - Net income decreased due to a 17.4% 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 assets (ROA), was 1.18% on an annualized basis
for the nine months ended September 30, 1999, as compared to
1.14% for the same period in 1998. Net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE), was 13.3% on an annualized basis for the nine
months ended September 30, 1999, as compared to 11.9% for the
same period in 1998. ROE was positively impacted by the
repurchase of 45,755 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 will result from an increased
competitiveness for deposits as financial institutions build cash
liquidity for the year end as part of Year 2000 liquidity plans.
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 nine months ended September 30, 1999
increased by $940,000, or 12.8%, over the same period in 1998.
Average loan growth of $7,505,000 and average investment security
growth of $16,606,000 was funded primarily by the growth in
average deposits of $20,511,000. Average earning assets
increased in the amount of $23,480,000 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 $773,000.
The overall interest rate on the average total earning assets
decreased to 7.91% for the current period, as compared to 8.15%
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 4.05% for the current period, as compared to 4.44%
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
<PAGE>
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 interest income in the
amount of $167,000 for the current period over the same period in
1998. See Management's discussion below concerning the
anticipated impact of these interest rate fluctuations on 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 September 30, 1999, the
Bank has received long-term advances of $31,535,000 and short-
term advances of $2,000,000 from its available credit of
$76,334,000 at the FHLB for purposes of funding loan demand and
mortgage-backed security purchases. The total advances had an
effective rate of 5.50% at September 30, 1999 with maturities
ranging from February 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 these 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. However, in June 1999, the
Federal Reserve Bank opted to begin to tighten the monetary
supply and the prime interest rate was increased on two different
occasions from 7.75% to its current level of 8.25%. This current
level still reflects an overall decline in interest rates in
comparison to the first nine months of 1998. 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 continue to be slightly above the
same period of 1998. In addition, the growth in the earning
assets during 1998 and the first nine 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 September 30, 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 $193,000 for the nine months
ended September 30, 1999 and $282,000 for the nine months ended
September 30, 1998. Net charge-offs for the nine months ended
September 30, 1999 were $118,000 as compared to $125,000 for the
same period of last year. The decrease in the provision over the
same period of last year is primarily a result of the decrease in
net charge-offs and $3,629,000 less loan growth in the first nine
months of 1999 as compared to the same period of the prior year.
Future adjustments to the allowance, and consequently, the
provision for loan losses, may be necessary if economic
conditions or loan credit quality differ substantially from the
assumptions used in making Management's evaluation of the level
of the allowance for loan losses as compared to the balance of
outstanding loans.
Other Operating Income
Other operating income for the nine months ended September 30,
1999 was $1,062,000, representing an increase of $214,000, or
25.2%, over the same period in 1998. Contributing to this
increase were the following items:
- - increased mutual fund sales and resulting commissions of
$23,000 from the
<PAGE>
Bank's continued relationship with T.H.E. Financial Group,
Ltd.;
- - additional earnings in insufficient funds charges in the
amount of $50,000, which were partially a result of an
increase in the Bank's per item insufficient funds charge
effective in June 1998;
- - additional earnings in monthly service charges in the amount
of $36,000, which were primarily a result of increases in
monthly service charges on noninterest bearing accounts
effective May 1, 1999;
- - additional earnings from check sales in the amount of
$14,000;
- - additional earnings on commissions from the sale of loan
insurance in the amount of $34,000, which was primarily a
result of an increase in the Bank's commission rates; and
- - increased usage of the Bank's debit cards resulting in
additional earnings in interchange fee income in the amount
of $33,000.
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 Expenses
The aggregate of noninterest expenses for the nine months ended
September 30, 1999 increased by $852,000, or 17.4%, 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 $386,000, or 16.9%, over
the same period in 1998. This increase was essentially due to
annual merit and cost of living increases, planned staff
additions, and an accrual for an incentive compensation plan
which is based on the Bank's 1999 financial performance. 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, for the credit services division, and
for retail banking, training, and support. The majority of these
staff positions were added during the third and fourth quarters
of 1998. 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 $125,000, or 26.4%, 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 $39,000 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 $15,000, net of income
taxes, for the remainder of 1999 compared to the same period of
last year.
Occupancy, furniture and equipment expenses for the nine months
ended September 30, 1999 increased by $26,000, or 3.7%, from the
same period in 1998. This was due to an increase in lease
expense, repairs and maintenance costs, and due to minor
increases in various other expense categories. The increase in
lease expense is a result of additional costs relative to our new
credit services division.
Other operating expenses for the nine months ended September 30,
1999, increased by $313,000, or 22.3%, 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:
<PAGE>
- - an increase in advertising expenses in the amount of $58,000
as a result of expenditures for the development and
promotion of the Bank's new logo and expenditures for
various sales campaigns;
- - an increase in supplies expense of $52,000;
- - an increase in legal and professional fees of $56,000;
- - an increase in MAC fees of $29,000 due to higher transaction
volumes; and
- - minor increases in various other expense categories.
Expenditures in 1999 for professional fees included fees paid to
an electronic data processing consultant to assist in the
assessment of current system capabilities and alternatives, fees
paid to an independent consultant for loan review services, fees
paid to an independent company to perform internal audit
services, and fees paid to a consultant for a review and analysis
of current and potential market areas.
Income Taxes
Union National's income tax expense decreased by $5,000 for the
nine months ended September 30, 1999 to $527,000 from $532,000
for the same period in 1998. The effective tax rate was 18.5% for
the nine months ended September 30, 1999 and 20.7% for the nine
months ended September 30, 1998. The decrease in income tax
expense was due to the decrease in the effective tax rate which
was caused by an increase in tax exempt income on loans and
securities in the first nine months of 1999 as compared to the
same period of 1998. Currently, the effective tax rate of Union
National for the remaining months of 1999 is expected to
approximate the current effective tax rate.
Year 2000 Issues
________________
The following section contains forward-looking statements which
involve risks and uncertainties. The actual impact on Union
National 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 Union National's Board of Directors.
Corporation's State of Readiness
Union National Financial Corporation is committed to ensuring
that daily operations suffer little or no impact from the century
date change. Union National 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 Management's assessment, Union National determined that
it was required to modify or replace portions of its software so
that its computer systems will properly use dates beyond December
31, 1999. Union National presently believes that by 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
<PAGE>
on a timely basis, the Year 2000 Problem could have a material
adverse impact on the operations of Union National.
Management initiated an enterprise-wide program to prepare Union
National's computer systems and applications for the Year 2000.
Union National 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 Union National due to
the effect of the century date change. By March 31, 1999, Union
National had remedied all eleven of its identified mission-critical
and related systems.
The Bank communicated with and completed its Year 2000 credit
risk assessment of its material customers as of September 30,
1999. 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.
Union National also initiated communications with all of its
significant vendors, suppliers, and business partners to assure
continuation of service by determining the extent to which Union
National 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. These vendors' Year 2000
readiness responses have been assessed as to their Year 2000
compliance status. In the event that any of Union National's
significant vendors, suppliers and business partners do not
successfully achieve Year 2000 compliance in a timely manner,
Union National'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, Union
National intends to engage alternative suppliers or systems.
Nevertheless, Union National 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 condition. Union National 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
Union National is using both internal and external resources to
correct or modify and test its systems for Year 2000 compliance.
For the first nine months of 1999, Union National spent
approximately $35,000 in addressing Year 2000 issues. For the
remaining months of 1999, Union National is currently expecting
direct incremental costs related to the Year 2000 problem to
reduce results of operations by approximately $10,000, net of
income taxes. This cost estimate reflects only an immaterial
increase over Year 2000 related costs incurred in the remaining
months of 1998. 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. In
addition to these direct incremental costs, Union National has
and will continue to use significant internal labor resources in
its Year 2000 related activities including systems, audit, and
administrative staff. The total cost of the project is being
funded through operating cash flows. Union National 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 Union National's significant third-parties, be it
suppliers of services or customers, the Y2K issue could possibly
have a material adverse effect on Union National's operations and
financial position.
<PAGE>
Risks of Year 2000
At present, Management believes its progress in remedying Union
National's systems, programs, and applications and installing
Year 2000 compliant upgrades is on target. By March 31, 1999,
Union National had remedied all eleven of its identified mission-
critical and related systems. The Year 2000 computer problem
creates risk for Union National from unforseen problems in its
own computer systems and from third-party vendors who provide the
majority of mainframe and PC based computer applications. Union
National completed testing of its own remediated mission-critical
systems for Year 2000 compliance by June 30, 1999. However,
failure of third-party systems relative to the Year 2000 issue
could have a material impact on Union National's ability to
conduct business.
Contingency Plans
Union National has developed business resumption and cash
liquidity 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.
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 Union National's mission-critical systems have been
remediated and tested for Year 2000 compliance, Management does
not believe it is necessary for Union National to develop a
remediation contingency 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 Union National and the Bank.
Congress recently enacted the Financial Institutions
Modernization Act. This law will dramatically change the
financial services industry by eliminating the barriers between
commercial banking, insurance, and securities. These barriers
have existed since the enactment of the Glass-Steagall Act during
the height of the Great Depression. Management is analyzing the
effect of the aforementioned law on liquidity, capital resources,
and results of operations of the corporation. The law may have a
substantial long term impact by changing the business environment
in which the corporation operates. It cannot be predicted
whether such legislation will be adopted or, if adopted, how such
legislation would affect the business of Union National and the
Bank.
As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National'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. Management is not aware of any other current
specific recommendations by regulatory authorities or proposed
legislation, which if they were implemented, would have a
material adverse effect upon the liquidity, capital resources, or
results of operations, although the general cost of compliance
with numerous and multiple federal and state laws and regulations
does have, and in the future may have a negative impact on Union
National's results of operations.
Further, the business of Union National 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 Union National 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 Union National and/or
the Bank follows.
<PAGE>
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 Union National'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
_______________________________
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 Union National to reclassify held to
maturity securities to an available for sale classification.
Union National does not expect the provisions of this Statement
to have a material effect on the liquidity, results of
operations, or capital resources of Union National when it
becomes effective. The effective date of this pronouncement was
delayed until the first quarter of 2001 through the issuance of
SFAS No. 137.
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 Union National 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 effective January 1,
2001. 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
<PAGE>
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 is expected to issue a final standard in the fourth
quarter of 2000.
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 $2,664,000 to comply with their respective repayment
terms. This amount represents a slight increase 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 September 30, 1999, total nonperforming assets amounted to
$1,781,000, or 1.0% of total net loans, as compared to 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%.
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 Union National'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 $75,000 for the nine
months ended September 30, 1999, and the ratio of the allowance
for loan losses to net loans was 1.04% at September 30, 1999, as
compared to 1.06% at December 31, 1998. The increase in the
allowance for loan losses for the nine month period was due
primarily to an increase in loans outstanding of $10,906,000 for
the nine month period. Management believes, based on information
currently available, that the current allowance for loan losses
of $1,818,000 is adequate to meet potential loan losses. As of
April 1999, 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 another review performed by an
outside independent consultant in 1999.
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
Schedule of Nonperforming Assets
________________________________
<CAPTION>
September 30, December 31,
(In Thousands) 1999 1998
_______________________________
<S> <C> <C>
Nonaccruing Loans $692 $131
Accrual Loans - 90 days or more
past due 1,003 843
Restructured Accrual Loans 0 0
Other Real Estate Owned 86 379
_______________________________
Total Nonperforming Assets $1,781 $1,353
===============================
Nonperforming Assets
as a % of Net Loans 1.0% 0.8%
===============================
Allowance for Loan Losses
as a % of Nonperforming Assets 107% 179%
===============================
</TABLE>
<TABLE>
Analysis of Allowance for Loan Losses
_____________________________________
<CAPTION>
Nine Months Ended September 30,
(In Thousands) 1999 1998
________________________________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $168,056 $160,551
===============================
Allowance for Loan Losses,
Beginning of Period $1,743 $1,593
Loans Charged-off During Period 159 171
Recoveries of Loans Previously
Charged-off 41 46
_______________________________
Net Loans Charged-off 118 125
Addition to Provision for Loan Losses
Charged to Operations 193 282
_______________________________
Allowance for Loan Losses,
End of Period $1,818 $1,750
===============================
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.09% 0.10%
===============================
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.04% 1.05%
===============================
</TABLE>
<PAGE>
Liquidity
__________
Union National'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, except the expectation for
customers to withdraw or request additional amounts in cash from
their deposit accounts or lines of credit as the year 2000
approaches. Union National has developed a cash liquidity
contingency plan incorporating third-party cash sources and the
Federal Reserve Bank. Union National believes it will meet any
temporary increases in cash demands resulting from the year 2000
issue.
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 $76,334,000 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 $33,535,000 at
September 30, 1999 and $30,624,000 at December 31, 1998.
Market Risk - Interest Rate Risk
_________________________________
As a financial institution, Union National'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 Union National'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. Union National does not own any trading
assets. Union National 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
<PAGE>
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 decline in prevailing market interest rates
over a one-year period will have a favorable impact on the Bank's
net interest income over the next twelve months. In contrast, a
hypothetical two percent general rise in rates will have an
unfavorable impact on net interest income over the next twelve
months. This unfavorable impact on net interest income is
currently estimated at $125,000. 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 nine
months ended September 30, 1999 by the following:
- - Marketing its variable rate home equity line of credit
(these outstanding loans increased by $704,000 for the
period);
- - 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 $3,293,000 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.
Stockholders' Equity
_____________________
Union National 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 Union National
for the remaining months of 1999, except as discussed below
concerning Union National's common stock repurchase plan. In
addition, see discussion on Regulatory Activity.
On February 11, 1999, Union National announced that the Board of
Directors had authorized and approved a plan to purchase up to
56,000 shares of Union National'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 Union National 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 September 30, 1999, a total of 39,291
shares of common stock were repurchased under this plan at a cost
of $877,527. This amount was funded from consolidated earnings.
Union National and the Bank remain well capitalized and meet all
regulatory capital guidelines after the repurchase of the shares.
<PAGE>
The Bank's risk-based capital ratios exceed regulatory
requirements. The risk-based capital guidelines require banks to
maintain a minimum risk-based capital ratio of 8.0% at September
30, 1999, as compared to the Bank's current risk-based capital
ratio of 13.86%. 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 affect the
Bank's capital. The Bank maintains the following leverage and
risk-based capital ratios:
<TABLE>
<CAPTION>
(In Thousands) September 30, December 31,
1999 1998
____________ _____________
S> <C> <C>
Tier I - Total Stockholders' Equity $ 22,922 $ 22,231
Tier II - Allowance for Loan Losses 1,818 1,743
____________ _____________
Total Qualifying Capital $ 24,740 $ 23,974
============ =============
Risk-adjusted On-balance-sheet Assets $167,523 $155,280
Risk-adjusted Off-balance-sheet Exposure 10,924 9,276
____________ _____________
Total Risk-adjusted Assets $178,447 $164,556
============ =============
Ratios:
Tier I Capital Ratio - Actual 8.65% 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 Captial Ratio - Actual 12.85% 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 13.86% 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 $ 10,464 $ 10,810
============ =============
</TABLE>
No shares of common stock are reserved for issuance in the event
of conversions or the exercise of warrants, options or other
rights, except as follows:
- - 131,071 shares which are reserved for issuance under Union
National's 1988 and 1997 Stock Incentive Plans;
- - 105,000 shares which are reserved for issuance under Union
National's 1997 Employee Stock Purchase Plan;
- - 63,000 shares which are reserved for issuance under Union
National's 1999 Independent Directors Stock Option Plan; and
- - 165,375 shares which are reserved for issuance under Union
National's Dividend Reinvestment and Stock Purchase Plan.
As of September 30, 1999, options to purchase 5,071 shares have
been granted under Union National's 1988 Stock Incentive Plan.
The exercise price for such options is $22.16. No options have
been exercised as of September 30, 1999 under this plan. As of
September 30, 1999, options to purchase 12,600 shares have been
issued under Union National's 1997 Stock Incentive Plan. The
exercise price for such options in $18.81. No options have been
exercised as of September 30, 1999 under this plan. As of
September 30, 1999, options to purchase 52,500 shares have been
granted under Union National's 1997 Employee Stock Purchase Plan.
The current exercise price for such options is $18.52. As of
<PAGE>
September 30, 1999, 1,697 options have been exercised under this
plan. As of September 30, 1999, options to purchase 10,500
shares have been granted under Union National's 1999 Independent
Directors Stock Option Plan. The exercise price for such options
is $22.75. No options have been exercised as of September 30,
1999. As of September 30, 1999, 36,227 shares have been issued
under Union National'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
Union National. There are no proceedings pending other than the
ordinary routine litigation incident to the business of Union
National and its subsidiary, Union National Community Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against Union National and the Bank by
government authorities.
Item 2. Changes in Securities - Nothing to report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information:
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibit is being filed as
part of this Report: (see also Item 6(b)).
Exhibit No. 27 - Financial Data Schedule as of
September 30, 1999.
(b) Reports on Form 8-K - Nothing to report.
<PAGE>
Signatures
___________
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By /s/ Mark D. Gainer
___________________________
Mark D. Gainer
President & CEO
(Principal Executive
Officer)
Date: November 10, 1999
By /s/ Clement M. Hoober
__________________________
Clement M. Hoober
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 10, 1999
<TABLE> <S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6553
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<LIABILITIES-OTHER> 1559
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0
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