Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,2000
_____________________________
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 [ ]
______________
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,569,118 shares of $.25 (par) common stock were
_________________
outstanding as of August 1, 2000.
______________
<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 5-16
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 14-15
PART II - OTHER INFORMATION
__________________
Item 1 - Legal Proceedings 17
Item 2 - Change in Securities 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17-18
Signature Page 19
Exhibit 27 - Financial Data Schedule 20
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 6/30/00 12/31/99
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $7,337 $7,004
Investment Securities Held to Maturity
(Market Value - 2000-$12,307;1999-$27,620) 13,198 28,712
Investment Securities Available-for-Sale 70,752 52,114
Loans(Net of Unearned Income) 183,710 174,854
Less: Allowance for Loan Losses (1,839) (1,783)
______________________
Total Net Loans 181,871 173,071
Premises and Equipment - Net 5,428 5,191
Accrued Interest Receivable 1,818 1,716
Deferred Income Taxes 759 813
Investment in Limited Partnerships 793 823
Other Assets 3,601 135
_____________________
TOTAL ASSETS $285,557 $269,579
=====================
LIABILITIES
Deposits:
Noninterest-Bearing $25,032 $21,889
Interest-Bearing 191,204 187,292
_____________________
Total Deposits 216,236 209,181
Short-Term Borrowing 17,695 9,100
Long-Term Debt 27,035 27,035
Accrued Interest Payable 1,172 963
Other Liabilities 277 236
_____________________
TOTAL LIABILITIES 262,415 246,515
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 690 657
Shares: Authorized - 20,000,000; Issued -
2,759,931 in 2000 (2,626,935 in 1999)
Outstanding - 2,571,118 in 2000 (2,483,072
in 1999)
Surplus 9,406 7,250
Retained Earnings 17,853 19,323
Accumulated Other Comprehensive Income/(Loss) (931) (1,038)
Less: Treasury Stock - at cost
(188,813 shares in 2000 and 143,863 shares
in 1999) (3,876) (3,128)
______________________
TOTAL STOCKHOLDERS' EQUITY 23,142 23,064
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $285,557 $269,579
======================
The accompanying notes are an integral part of the
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Three Months Ended June 30,
___________________________________
(In Thousands, except Per Share Data) 2000 1999
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,854 $3,555
Investment Securities:
Taxable 911 844
Exempt from Federal Taxes 311 316
Other 6 34
_____________________
Total Interest Income 5,082 4,749
INTEREST EXPENSE
Deposits 1,950 1,733
Short-Term Borrowing 100 7
Long-Term Debt 384 408
_____________________
Total Interest Expense 2,434 2,148
_____________________
Net Interest Income 2,648 2,601
PROVISION for LOAN LOSSES 77 58
_____________________
Net Interest Income after Provision
for Loan Losses 2,571 2,543
OTHER OPERATING INCOME
Trust Income 41 31
Service Charges on Deposit Accounts 179 144
Other Service Charges, Commissions, Fees 181 160
Investment Securities Gains/(Losses) 9 0
Other Income 18 18
_____________________
Total Other Operating Income 428 353
OTHER OPERATING EXPENSES
Salaries and Wages 1,051 921
Retirement Plan and Other Employee Benefits 251 199
Net Occupancy Expense 169 131
Furniture and Equipment Expense 123 103
FDIC Insurance Assessment 11 6
Other Operating Expenses 681 544
_____________________
Total Other Operating Expenses 2,286 1,904
_____________________
Income before Income Taxes 713 992
PROVISION for INCOME TAXES 100 201
_____________________
NET INCOME for PERIOD $613 $791
=====================
PER SHARE INFORMATION
Net Income for Period-Basic $0.24 $0.30
Net Income for Period-Assuming Dilution $0.24 $0.30
Cash Dividends $0.143 $0.132
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $613 $791
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period 123 (477)
Reclassification Adjustment for (Gains)/Losses
included in Net Income (6) 0
_____________________
Total Other Comprehensive Income/(Loss) 117 (477)
______________________
COMPREHENSIVE INCOME for PERIOD $730 $314
=====================
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Six months Ended June 30,
___________________________________
(In Thousands, except Per Share Data) 2000 1999
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $7,563 $7,052
Investment Securities:
Taxable 1,818 1,643
Exempt from Federal Taxes 622 618
Other 10 96
_____________________
Total Interest Income 10,013 9,409
INTEREST EXPENSE
Deposits 3,830 3,475
Short-Term Borrowing 181 10
Long-Term Debt 778 801
_____________________
Total Interest Expense 4,789 4,286
_____________________
Net Interest Income 5,224 5,123
PROVISION for LOAN LOSSES 128 99
_____________________
Net Interest Income after Provision
for Loan Losses 5,096 5,024
OTHER OPERATING INCOME
Trust Income 81 62
Service Charges on Deposit Accounts 342 264
Other Service Charges, Commissions, Fees 328 298
Investment Securities Gains/(Losses) 4 0
Other Income 55 63
_____________________
Total Other Operating Income 810 687
OTHER OPERATING EXPENSES
Salaries and Wages 2,037 1,774
Retirement Plan and Other Employee Benefits 504 408
Net Occupancy Expense 335 293
Furniture and Equipment Expense 222 193
FDIC Insurance Assessment 21 12
Other Operating Expenses 1,260 1,082
_____________________
Total Other Operating Expenses 4,379 3,762
_____________________
Income before Income Taxes 1,527 1,949
PROVISION for INCOME TAXES 239 400
_____________________
NET INCOME for PERIOD $1,288 $1,549
=====================
PER SHARE INFORMATION
Net Income for Period-Basic $0.50 $0.59
Net Income for Period-Assuming Dilution $0.50 $0.58
Cash Dividends $0.286 $0.254
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $1,288 $1,549
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period 110 (655)
Reclassification Adjustment for (Gains)/Losses
included in Net Income (3) 0
_____________________
Total Other Comprehensive Income/(Loss) 107 (655)
______________________
COMPREHENSIVE INCOME for PERIOD $1,395 $894
=====================
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>
Six Months Ended June 30,
________________________________
(In Thousands) 2000 1999
________________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,288 $1,549
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 240 227
Provision for Loan Losses 128 99
Investment Securities (Gains)/Losses (4) 0
Provision for Deferred Income Taxes (1) 6
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance (6) 0
(Increase)/Decrease in Accrued
Interest Receivable (103) (164)
(Increase)/Decrease in Other Assets (442) 219
Increase/(Decrease) in Other Liabilities 250 24
_____________________
Net Cash Provided by Operating Activities 1,350 1,960
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold 0 7,795
Proceeds from Sales of
Available-for-Sale Securities 2,314 0
Proceeds from Maturities of
Available-for-Sale Securities 3,470 14,335
Proceeds from Maturities of
Held-to-Maturity Securities 1,427 1,493
Purchases of Available-for-Sale Securities (9,616) (16,444)
Purchases of Held-to-Maturity Securities (553) (4,553)
Loans Made to Customers, Net of
Principal Collected on Loans (8,928) (6,092)
Purchases of Property and Equipment (464) (183)
Purchase of Bank-Owned Life Insurance (3,000) 0
_______________________
Net Cash (Used in)Investing Activities (15,350) (3,649)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 2,802 (5,093)
Net Increase/(Decrease) in Certificates
of Deposits 4,253 5,319
Net Increase/(Decrease) in Short-Term
Borrowing 8,595 2,215
Proceeds from Issuance of Long-Term Debt 10,000 1,587
Payment on Long-Term Debt (10,000) (1,675)
Acquisition of Treasury Stock (748) (704)
Issuance of Common Stock 172 162
Cash Dividends Paid (741) (675)
_____________________
Net Cash Provided by
Financing Activities 14,333 1,136
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents 333 (553)
CASH and CASH EQUIVALENTS -
Beginning of Period 7,004 7,341
_____________________
CASH and CASH EQUIVALENTS - End of Period $7,337 $6,788
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $4,580 $4,285
Income Taxes 195 430
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 periods presented. 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 1999 Annual Report to
Stockholders.
3. 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 13, 2000, payable on May 19,
2000, to stockholders of record on May 2, 2000. The weighted-
average number of shares of common stock outstanding was as
follows:
Basic Assuming Dilution
_______ ___________________
Six months ended:
June 30, 2000 2,580,211 2,590,522
June 30, 1999 2,645,958 2,652,275
Three months ended:
June 30, 2000 2,571,523 2,585,319
June 30, 1999 2,639,888 2,647,891
4. In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement, which was
subsequently amended by SFAS No. 137 and SFAS No. 138,
establishes accounting and reporting standards for derivative
instruments and for hedging activities. In addition, the
transition provisions of these statements allow the
reclassification of held-to-maturity securities to an available-
for-sale classification. Union National adopted the provisions
of these statements effective April 1, 2000, and reclassified a
portion of its municipal and corporate investment securities
portfolio from held-to-maturity to available-for-sale. Union
National reclassified securities that had a book value of
$14,639,000 and unrealized gains of approximately $52,000 on
April 1, 2000. The other provisions of these statements did not
have a material effect on the liquidity, results of operations or
capital resources of Union National when it was adopted.
5. The results of operations for the six-month period ended June
30, 2000, are not necessarily indicative of the results to be
expected for the full year.
6. Certain reclassifications have been made to the 1999
consolidated financial statements to conform with the 2000
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 the accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company, and its wholly-owned
subsidiary, Union National Community 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 1999 Annual Report. Current performance
does not guarantee, assure 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.
Union National undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that Union National periodically files with the
Securities and Exchange Commission.
Results of Operations
_____________________
Overview
Consolidated net income for the six months ended June 30, 2000,
was $1,288,000, a decrease of 16.8%, as compared to consolidated
net income of $1,549,000 for the same period of 1999. For the
quarter ended June 30, 2000, consolidated net income was
$613,000, a decrease of 22.5% as compared to consolidated net
income of $791,000 for the same period of 1999.
Basic and diluted earnings per share for the first six months of
2000 amounted to 50 cents per share, as compared to basic
earnings per share of 59 cents and diluted earnings per share of
58 cents for the first six months of 1999. For the quarter ended
June 30, 2000, basic and diluted earnings per share amounted to
24 cents, as compared to 30 cents for the same period of last
year.
Results of operations for the six months ended June 30, 2000, as
compared to the same period in 1999 were impacted by the
following items:
* Net income decreased due to a narrowing of the spread between
the earnings rates on loans and investments as compared to the
interest rates paid on deposits and short- and long-term
borrowings.
* Net income increased due to growth of 8.0% in average net
loans, which was funded by growth in average deposits and
additional borrowings.
<PAGE>
* Net income decreased due to an increase in the provision for
loan losses.
* Net income increased due to a 17.9% increase in other
operating income.
* Net income decreased due to a 16.4% increase in other
operating expenses.
The above items are quantified and discussed in further detail
under their respective sections below. The discussion and
comparisons to the same periods of 1999 generally relate to both
the six months ended June 30, 2000 and the quarter ended June 30,
2000.
Net income as a percent of total average assets, also known as
return on average assets (ROA), was 0.95% on an annualized basis
for the six months ended June 30, 2000, as compared to 1.19% for
the same period in 1999. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROE), was 11.3% on an annualized basis for the six months ended
June 30, 2000, as compared to 13.2% for the same period in 1999.
ROE was negatively impacted by the decline in earnings as
discussed above. In contrast, ROE was positively impacted by the
treasury stock repurchase plan and by an increase in average
unrealized losses on available-for-sale securities. ROE without
considering unrealized losses on available-for-sale securities
was 10.9% for the first six months of 2000 as compared to 13.2%
for the same period of last year. See the discussion under the
section on Stockholders' Equity for further details.
Management currently expects a moderation in the growth of loans
and deposits for the remainder of 2000 as compared to historic
growth rates of deposits. Moderation in loan and deposit growth
is expected due to increased competition in Union National's
market area and due to rising interest rates which currently are
expected to negatively impact loan demand. 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 the following:
* increased emphasis on business development and continued sales
training for staff;
* further development of both loan and deposit products;
* further development of the bank's cash management program for
commercial customers;
* promotion of the bank's consumer and home equity lines of
credit;
* the strategic promotion of the bank's retail offices in light
of continued consolidation in the banking and financial services
industry;
* economic stability of the bank's market area as discussed
below; and
* continued population and business growth in the bank's market
area.
The funding for loan growth is further discussed under the
section on Liquidity.
It is anticipated that economic activity in the bank's market
area during the remainder of 2000 will be favorable due to
continued economic growth and construction activity and low
unemployment rates. The overall effects of past economic
conditions, as well as other factors, can be seen by a mild
lessening of certain borrowers' financial strength. Management
is monitoring these general and specific trends closely. Their
various effects are discussed later under the section on Loans.
Net Interest Income
Net interest income is the amount by which interest income on
loans and investments exceeds interest incurred on deposits and
other interest-bearing liabilities. Net interest income is Union
National's primary source of revenue. The amount of net interest
income is affected by changes in interest rates and by changes in
the volume and mix of interest-sensitive assets and liabilities.
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the six months ended June 30, 2000,
increased by $131,000, or 2.4%, over the same period in 1999.
Average loan growth of $13,304,000 accounted for most of the
increase in average earning assets and was funded by growth in
average deposits of $9,593,000 and by
<PAGE>
additional borrowings. The volume growth in earning assets and
interest-bearing liabilities increased net interest income by the
amount of $229,000.
The overall interest rate on the average total earning assets for
the current period was 7.98%, which compares favorably to the
7.90% for the same period of last year. The overall interest
rate on the average interest-bearing liabilities increased to
4.28% for the current period, as compared to 4.05% for the same
period of last year. This was due to rising short- and
intermediate-term interest rates which are reflected in higher
rates on high-yield money market accounts, certificates of
deposit and short-term borrowings. In addition, due to rising
interest rates and the prohibitively high cost of long-term,
fixed-rate advances from the Federal Home Loan Bank of
Pittsburgh, the bank utilized additional short-term borrowings
during the first six months of 2000. The net effect of all
interest rate fluctuations and funding changes was to decrease
net interest income in the amount of $98,000 for the current
period over the same period in 1999. See management's discussion
below concerning the anticipated impact of these interest rate
fluctuations on the results of operations for the remainder of
2000.
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 Federal Home
Loan Bank. 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
June 30, 2000, the bank received long-term advances of
$27,035,000 and short-term advances of $13,150,000 from its
available credit of $70,589,000 at the Federal Home Loan Bank for
purposes of funding loan demand and security purchases. The
total advances had an effective rate of 6.03% at June 30, 2000,
with maturities ranging from overnight borrowings to January
2010. The total amount of long-term borrowings outstanding has
remained unchanged since December 31, 1999, but the weighted-
average rate on these borrowings has increased from 5.45% to
5.71%. Outstanding short-term borrowings have increased by
$4,950,000 and the weighted-average rate on these borrowings has
also increased from 5.11% to 6.69%. The additional funding from
the FHLB was used to help fund the purchase of approximately
$7,400,000 in corporate and mortgage-backed securities during the
second quarter of 2000. These securities have a current
weighted-average yield of approximately 8%.
In June 1999, the Federal Reserve Bank began tightening the
monetary supply and the prime interest rate was increased from
7.75% to 9.50% by May 2000. With these increases in interest
rates, there also has been an increase in the rates the bank must
pay to attract and retain deposits and must pay on maturing or
repricing advances from the Federal Home Loan Bank.
For the remainder of 2000, the bank's net interest margin
percentage will stabilize dependent upon future actions by the
Federal Reserve Bank. This percentage is expected to be less
than the net interest margin percentage earned during the last
six months of 1999. As an offset to the narrowing of the net
interest margin percentage, income from growth in earning assets
during 1999 and the first six months of 2000, net of costs
resulting from growth in deposits and borrowings, will increase
the net interest margin for the remainder of 2000. The netting
of these two factors, as reflected in the bank's current
simulation model and estimates as of June 30, 2000, may result in
a net interest margin for the remainder of 2000 that is currently
expected to be a moderate increase over the net interest margin
during the same period of 1999. The bank's current model
includes a $3,000,000 purchase of bank-owned life insurance made
in June 2000. This is a financial transaction reflected in the
net interest margin of the model, but for financial reporting
purposes the increase in the cash surrender value of the life
insurance is recorded as other noninterest income. In the model,
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, but the
yield curve during the remainder of 2000, 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 model. See discussions on
Liquidity and Market Risk -
<PAGE>
Interest Rate Risk.
Provision for Loan Losses
The provision for loan losses was $128,000 for the six months
ended June 30, 2000, and $99,000 for the six months ended June
30, 1999. Net charge-offs for the six months ended June 30,
2000, were $72,000 as compared to $56,000 for the same period of
last year. The increase in the provision is primarily a result
of the increase 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 six months ended June 30, 2000,
was $810,000, representing an increase of $123,000, or 17.9%,
over the same period in 1999. Contributing to this increase were
the following items:
* additional earnings in monthly service charges in the amount
of $33,000, which were primarily a result of increases in monthly
service charges on noninterest bearing accounts effective May 1,
1999;
* additional earnings in insufficient funds charges in the
amount of $19,000 (fee was increased effective June 1, 2000);
* an increase in earnings from account analysis charges on
commercial deposit accounts in the amount of $18,000;
* an increase in earnings from letter of credit fees in the
amount of $10,000;
* an increase in income from trust and wealth management
services in the amount of $19,000; and
* increased usage of the bank's debit cards resulting in
additional earnings in interchange fee income in the amount of
$19,000.
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 six months ended
June 30, 2000, increased by $617,000, or 16.4%, over the same
period in 1999. This noninterest expense increase is discussed
below as it pertains to the various expense categories.
Employee salaries and wages increased by $263,000, or 14.8%, over
the same period in 1999. This increase was essentially due to
annual merit and cost of living increases, planned staff
additions and the compensation impact of our new paid time off
program. New staff positions include a manager and trust
administrator for our newly developed Wealth Management Group, a
chief lending officer, a chief technology/operations officer,
staff for a new community office, and various other support staff
positions. The chief lending officer will lead our lending
efforts and assist in the overall management of credit quality in
the bank's loan portfolio. Management believes the addition of
this position will enhance the credit review process for new
loans and should further allow our loan and business development
officers to focus on their sales efforts. See the section
entitled Initiatives for 2000 for further discussion on staff
additions for the Wealth Management Group, the new office and the
technology officer and their impact to the operating results of
Union National.
Related fringe benefits increased by $96,000, or 23.5%, from the
same period in 1999. The increased expense is primarily a result
of increased employee benefit costs as a result of staff
additions and the addition of a short-term disability benefit for
employees.
Occupancy, furniture and equipment expenses for the six months
ended June 30, 2000, increased by $71,000, or 14.6%, from the
same period in 1999. This was due to an
<PAGE>
increase in lease expense, equipment and furniture depreciation,
repairs and maintenance costs and snow removal costs. The
increase in lease expense is a result of additional costs
relative to the opening of a new community office and the opening
of a new office for our Wealth Management Group. A new office
was opened on April 17, 2000, at 401 Locust Street, Columbia and
our Wealth Management Group opened their offices on August 1,
2000, in the Armstrong building located at 150 North Queen
Street, Lancaster.
Other operating expenses for the six months ended June 30, 2000,
increased by $178,000, or 16.5%, over the same period in 1999.
Contributing factors to the increase in other operating expenses
as compared to the same period in 1999 included the following:
* an increase in legal and professional fees of $73,000;
* an increase in marketing and related expenses in the amount of
$38,000;
* an increase in staff training and seminar costs of $12,000;
* an increase in director fees paid in the amount of $10,000;
and
* an increase in outside computer services of $21,000.
Expenditures in 2000 for professional fees included fees paid to
an electronic data processing consultant to assist in the
assessment and implementation of a new data processing system and
fees paid to an independent company to perform internal audit
services. The fees paid for internal audit services replace the
cost of maintaining our own internal audit department that had
two employees. The former internal auditor assumed a position
with oversight of risk management and compliance for the bank.
Income Taxes
Union National's income tax expense decreased by $161,000 for the
six months ended June 30, 2000, to $239,000 from $400,000 for the
same period in 1999. The effective tax rate was 15.7% for the six
months ended June 30, 2000, and 20.5% for the six months ended
June 30, 1999. The decrease in income tax expense was due to
lower pretax income and an increase in tax exempt income on loans
and securities in the first six months of 2000 as compared to the
same period of 1999. Currently, the effective tax rate of Union
National for the remaining months of 2000 is expected to
approximate the current effective tax rate.
Initiatives for 2000
____________________
During 2000, the bank is implementing various initiatives that
should impact the results of operations of Union National.
First, in January 2000 the bank began developing its new Wealth
Management Group with the hiring of a manager to lead this new
initiative. The addition of this position will allow Union
National to diversify and grow our trust services with additional
investment and asset management services. A trust administrator
was also added to our Wealth Management Group in April 2000 and
it is currently anticipated that another staff position will be
added to augment the efforts of our existing trust department in
the development of our Wealth Management Group. The Wealth
Management Group opened its new offices located in the Armstrong
building at 150 North Queen Street in Lancaster on August 1,
2000. The bank has entered into a five-year lease for this
office space. Staff, lease and other operating costs are
expected to reduce Union National's results of operations by a
currently estimated amount of $135,000, net of tax, for the
remainder of 2000. However, this expanded department will also
enable Union National to enhance both interest income and fee
income in 2000 and future years. This new office location
required furnishings and equipment which cost approximately
$160,000.
The bank also opened a community banking office at 401 Locust
Street in Columbia on April 17, 2000. The bank has entered into
an agreement to lease the facilities for a five-year period with
four renewal options that have terms of five years each.
Staffing costs, office costs and other general expenses are
expected to impact results of operations for the start-up and
operation of the office. These operating costs are currently
expected to reduce results of operations for the remainder of
2000 by an estimated amount of $75,000, net of tax. Management
anticipates that a significant part of these expenses will be
offset by interest and fee income
<PAGE>
generated from new customer relationships at this location. The
facility required some renovations, furnishings and equipment,
which cost approximately $130,000.
Union National has been evaluating its technology resources and
alternatives since 1999. A technology plan has been developed
and is being implemented during 2000 and 2001. This plan
includes a voice-response unit, a marketing customer information
file (MCIF) database system, a bank-wide network and a change in
our core and trust data processing systems. The current internal
core processing system will be converted to an externally-based,
state-of-the-art system. These system enhancements will allow
Union National to provide additional services to customers, more
effectively market our existing products, significantly increase
operational efficiencies and position the bank to remain on the
cutting edge with technology. In June 2000, the bank entered
into an eight-year agreement with Metavante Corporation of
Milwaukee, Wisconsin (formerly M&I Data Services, Inc.) to
provide the core and trust data processing systems, electronic
payment system (EPS) and ATM processing, platform systems and the
wide-area network needed by the bank. We are currently
anticipating a conversion in November 2000. Based on current
volumes and transactions, the contract with Metavante will
require total annual expenditures of approximately $685,000. The
services to be provided by Metavante will replace services that
are currently being provided by other vendors at a cost of
approximately $235,000. In addition, since we will be utilizing
a more fully-integrated system and reducing manual processes, we
will achieve greater efficiencies in the utilization of staff and
effect significant operating cost savings.
To assist us in the implementation of the technology plan, we
have added the position of chief technology/operations officer as
mentioned earlier. The systems mentioned above that will be
implemented during 2000, related costs and the addition to staff
are currently expected to reduce results of operations for the
remainder of 2000 by an estimated amount of $247,000, net of tax.
The implementation of these systems is currently expected to
require expenditures of $1,055,000 during the remainder of 2000
for equipment, software and various other products and services.
Systems changes may also materially impact the results of
operations in future years. However, in future periods systems
changes and enhancements should result in both increased revenue
and operating cost savings to the bank.
Union National has also engaged the consulting division of
Metavante Corporation to provide services in connection with the
implementation of the new core data processing and related
systems. With their assistance, we are evaluating our internal
processes, products and procedures in order to identify
efficiencies, cost savings and additional fee income
opportunities. The total contract for their services to be
performed in 2000 and 2001 will require payments which will total
$296,000 plus reimbursement for expenses. The cost of the
consultants will reduce results of operations for the remainder
of 2000 by approximately $165,000, net of tax. For 2001 and
subsequent years, Union National currently expects the results of
this engagement to exceed the impact of the operating costs of
the new data processing and related systems.
The addition of the Wealth Management Group, the new retail
office location, and the technology plan mentioned above have
negatively impacted results of operations for the first six
months of 2000. This amount is approximately $120,000, net of
taxes.
Union National also has developed and began promoting several new
products in 2000. These products included a small business
checking account, an unsecured consumer line of credit and other
additions to our current product line. Management believes that
these new products will enhance results of operations for 2000.
See the Stockholders' Equity section for further discussion on
the impact of the above items on the capital resources of Union
National in 2000.
Regulatory Activity
___________________
From time to time, various types of federal and state legislation
have been proposed
<PAGE>
that could result in additional regulation of, and restrictions
on, the business of Union National and the bank. On November 12,
1999, President Clinton signed into law the Gramm-Leach-Bliley
Act of 1999, which is also known as the Financial Services
Modernization Act. The act repeals some Depression-era banking
laws and permits banks, insurance companies and securities firms
to engage in each others' businesses after complying with certain
conditions and regulations which are yet to be finalized. The
act grants to community banks the power to enter new financial
markets as a matter of right that larger institutions have
managed to do on an ad hoc basis. At this time, Union National
is continuing to assess the impact of and opportunities available
in the Act, but has no immediate plans to pursue these additional
business activities.
Union National does not believe that the Financial Services
Modernization Act will have an immediate positive or negative
material effect on its operations. However, the act may have the
result of increasing the amount of competition that Union
National faces from larger financial service companies, many of
whom have substantially more financial resources, which may now
offer banking services in addition to insurance and brokerage
services.
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. Except as discussed above, 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. However,
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 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.
The bank is routinely examined by the OCC and no material adverse
impact is anticipated on current or future operations and
financial position as a result of this process.
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, which was
subsequently amended by SFAS No. 137 and SFAS No. 138,
establishes accounting and reporting standards for derivative
instruments and for hedging activities. In addition, the
transition provisions of these statements allow the
reclassification of held-to-maturity securities to an available-
for-sale classification. Union National adopted the provisions
of these statements effective April 1, 2000, and reclassified a
portion of its municipal and corporate investment securities
portfolio from held-to-maturity to available-for-sale. Union
National reclassified securities that had a book value of
$14,639,000 and unrealized gains of approximately $52,000 on
April 1, 2000. The other provisions of these statements did not
have a material effect on the liquidity, results of operations or
capital resources of Union National when it was adopted.
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
operations, liquidity or capital resources. Further, based on
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
Schedule of Nonperforming Assets
________________________________
<CAPTION>
June 30, December 31,
(In Thousands) 2000 1999
_______________________________
<S> <C> <C>
Nonaccruing Loans $1,313 $1,343
Accrual Loans - 90 days or more
past due 278 132
Restructured Accrual Loans 0 0
Other Real Estate Owned 71 20
_______________________________
Total Nonperforming Assets $1,662 $1,495
===============================
Nonperforming Assets
as a % of Net Loans 0.9% 0.9%
===============================
Allowance for Loan Losses
as a % of Nonperforming Loans 116% 121%
===============================
</TABLE>
<TABLE>
Analysis of Allowance for Loan Losses
_____________________________________
<CAPTION>
Six Months Ended June 30,
(In Thousands) 2000 1999
________________________________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $179,034 $165,730
===============================
Allowance for Loan Losses,
Beginning of Period $1,783 $1,743
Loans Charged-off During Period 86 92
Recoveries of Loans Previously
Charged-off 14 36
_______________________________
Net Loans Charged-off 72 56
Addition to Provision for Loan Losses
Charged to Operations 128 99
_______________________________
Allowance for Loan Losses,
End of Period $1,839 $1,786
===============================
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.08% 0.07%
===============================
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 1.00% 1.05%
===============================
</TABLE>
<PAGE>
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 $2,509,000 to comply with their respective repayment
terms. This amount represents an increase from the amount of
$2,092,000 at December 31, 1999. 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 2000.
At June 30, 2000, total nonperforming assets amounted to
$1,662,000, or .9% of total net loans, as compared to a level of
$1,495,000, or .9%, at December 31, 1999. 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.
Management is responsible for the adequacy of the allowance for
loan losses, which 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. After management's assessment, no adjustment to the
allowance for loan losses was necessary as a result of the Office
of Comptroller's most recent examination as of June 30, 1999.
The allowance for loan losses increased by $56,000 for the six
months ended June 30, 2000, and the ratio of the allowance for
loan losses to net loans was 1.00% at June 30, 2000, as compared
to 1.02% at December 31, 1999. The increase in the allowance for
loan losses for the six-month period was due primarily to an
increase in loans outstanding. Management believes, based on
information currently available, that the current allowance for
loan losses of $1,839,000 is adequate to meet potential loan
losses. During 2000, an ongoing loan review is being performed
on selected portions of the loan portfolio by an independent
consultant.
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 (including FHLB) 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
<PAGE>
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 Federal Home Loan Bank 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 $70,589,000 available at the Federal
Home Loan Bank. In order to provide funding for the bank's loans
and investments, the bank had outstanding borrowing from the
Federal Home Loan Bank of $40,185,000 at June 30, 2000, and
$35,235,000 at December 31, 1999.
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 Federal Home Loan Bank 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. While assumptions are developed based upon current
economic and local market conditions, management cannot make any
assurances as to the predictive nature of these assumptions.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve-month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to the bank's net
interest income and net income. Projections for loan and deposit
growth are 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 mentioned previously, the
bank's model also includes the purchase in June 2000 of
$3,000,000 in bank-owned life insurance. The simulation model
currently indicates that a hypothetical two-percent general
decline in prevailing market interest rates over a one-year
period will have an
<PAGE>
immaterial impact on the bank's net interest income over the next
twelve months as compared to the constant rate scenario. 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 $232,000, net of taxes. 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 six
months ended June 30, 2000, by the following:
* marketing its variable-rate home equity line of credit and its
variable-rate unsecured consumer line of credit;
* increasing its extensions of adjustable- and floating-rate
loans for new or refinanced commercial and agricultural loans
(these outstanding loans increased by $4,146,000 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 Federal Home Loan Bank, 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 the 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. The
bank's average stockholders' equity to average assets ratio,
which measures the adequacy of capital, was 8.46% as of June 30,
2000, as compared to 8.70% as of December 31, 1999. The decrease
in this capital ratio was primarily a result of growth in average
assets during the period and dividends paid by the bank to Union
National to fund the common stock repurchase plan discussed
below.
Items which could have a material impact on the capital resources
of Union National for the remainder of 2000 include the
implementation of various systems in accordance with our
technology plan, the payment of fees to Metavante Corporation for
consulting services and a contract in the amount of $200,000 for
the purchase of real estate. The implementation of the
technology initiatives is currently expected to require
expenditures of approximately $1,055,000 and the consulting
services are expected to require expenditures of approximately
$250,000, all during the remainder of 2000. The contract for the
purchase of real estate is for land that is expected to be used
for the expansion of an existing community banking office. The
contract is subject to certain contingencies that management
currently expects to be met. There are no other material
commitments for capital expenditures as of June 30, 2000. There
are no known trends or uncertainties, including regulatory
matters, that are expected to have a material impact on the
capital resources of Union National for 2000, except as discussed
below concerning Union National's common stock repurchase plan.
In addition, see discussion on Regulatory Activity.
On January 13, 2000, Union National announced that the board of
directors had authorized and approved a plan to purchase up to
50,000 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 June 30, 2000, a total of 44,949
shares of common stock were repurchased under this plan at a cost
of $748,000. 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 June 30,
2000, as compared to the bank's current risk-based capital ratio
of 12.72%. 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 June 30, 2000, 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) June 30, December 31,
2000 1999
____________ _____________
S> <C> <C>
Tier I - Total Stockholders' Equity $ 23,088 $ 23,176
Tier II - Allowance for Loan Losses 1,839 1,783
____________ _____________
Total Qualifying Capital $ 24,927 $ 24,959
============ =============
Risk-adjusted On-balance-sheet Assets $183,390 $168,830
Risk-adjusted Off-balance-sheet Exposure 12,553 10,958
____________ _____________
Total Risk-adjusted Assets $195,943 $179,788
============ =============
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.46% 8.70%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratios:
Tier I Captial Ratio - Actual 11.78% 12.89%
Minimum Required 4.00 4.00
To Be Well Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 12.72% 13.88%
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 $ 9,252 $ 10,576
============ =============
</TABLE>
<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 and Use of Proceeds - Nothing to
report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits - The following exhibits are being filed
herewith, or incorporated by reference as part of this Report:
(see also Item 6(b)).
Exhibit No. 3(i) - Union National Financial Corporation's
Amended Articles of Incorporation (Incorporated by reference to
Exhibit 3(i) to Union National Financial Corporation's
Registration Statement No. 333-27837 on Form S-8, filed with the
Commission on May 27, 1997).
Exhibit No. 3(ii) - Union National Financial
Corporation's Amended By-laws (Incorporated by reference to
Exhibit 3(ii) to Union National Financial Corporation's
Registration Statement No. 333-27837 on Form S-8, filed with the
Commission on May 27, 1997), and the amendment thereto dated
November 14, 1998 (Incorporated by reference to Exhibit 3(ii) to
Union National Financial Corporations's Annual Report on Form 10-
K for the Year Ended December 31, 1998).
Exhibit No. 10.1 - Executive Employment Agreement dated
as of January 1, 1999, between Mark D. Gainer and Union National
Financial Corporation (Incorporated by Reference to Exhibit 10.1
to Union National Financial Corporation's Annual Report on Form
10-K for the Year Ended December 31, 1998).
Exhibit No. 10.2 - Union National Financial Corporation
1988 Stock Incentive Plan. (Incorporated by reference to Exhibit
4.3 to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with the Commission on
May 27, 1997).
Exhibit No. 10.3 - Union National Financial Corporation
1997 Stock Incentive Plan. (Incorporated by reference to Exhibit
4.5 to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with the Commission on
May 27, 1997).
Exhibit No. 10.4 - Change of Control Agreement, dated
June 17, 1999, between Michael A. Frey and Union National
Financial Corporation (Incorporated by reference to Exhibit 10.4
to Union National Financial Corporation's Annual Report on form
10-K for the Year Ended December 31, 1999).
Exhibit No. 10.5 - Union National Financial Corporation's
Employee Stock Purchase Plan (Incorporated by Reference to
Exhibit 4.4 to Union National Financial Corporation's
Registration Statement No. 333-27837 on Form S-8, filed with the
Commission on May 27, 1997).
<PAGE>
Exhibit No. 11 - Statement re: Computation of Earnings
Per Share (Incorporated by Reference to page 2 of this Report).
Exhibit No. 27 - Financial Data Schedule as of June 30,
2000.
(b) Reports on Form 8-K
(1) Union National filed a report on form 8-K via EDGAR
dated April 10, 2000. The report was filed pursuant to Item 4,
Changes in Registrant's Certifying Accountant, and reported that
Trout, Ebersole, & Groff, LLP had declined to be reappointed as
the Registrant's independent public accountant. As noted in that
filing, during the last two most recent fiscal years and interim
periods, there have been no disagreements with Trout, Ebersole, &
Groff, LLP on matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
Included with the filing as an exhibit was a copy of Trout,
Ebersole, & Groff, LLP's letter directed to the Securities and
Exchange Commission regarding their declining reappointment as
the Registrant's independent public accountant.
(2) Union National filed a second report on form 8-K via
EDGAR dated April 27, 2000. The report was filed pursuant to
Item 4, Changes in Registrant's Certifying Accountant and
reported that the Registrant engaged Beard & Company, Inc. as its
independent public accountant.
<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 there unto duly authorized.
Union National Financial Corporation
(Registrant)
By /s/ Mark D. Gainer
___________________________
Mark D. Gainer
President & CEO
(Principal Executive Officer)
Date: August 14, 2000
By /s/ Clement M. Hoober
__________________________
Clement M. Hoober
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2000
