Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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.
2,569,081 shares of $.25 (par) common stock were
_________________
outstanding as of November 1, 2000.
_________________
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
10-Q INDEX Page
#
PART I - FINANCIAL INFORMATION: _________
_______________________
Item 1 - Financial Statements
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Comprehensive Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5-17
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15-16
PART II - OTHER INFORMATION
__________________
Item 1 - Legal Proceedings 18
Item 2 - Change in Securities and Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18-19
Signature Page 20
Exhibit 27 - Financial Data Schedule 21
<PAGE>
<TABLE>
PART 1 - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
<CAPTION>
(In Thousands) 9/30/00 12/31/99
______________________
<S> <C> <C>
ASSETS
Cash and Due from Banks $6,004 $7,004
Interest-Bearing Deposits in Other Banks 0 0
Federal Funds Sold 1,080 0
Investment Securities Held to Maturity
(Market Value - 2000-$13,444;1999-$27,620) 14,143 28,712
Investment Securities Available-for-Sale 67,989 52,114
Loans(Net of Unearned Income) 186,296 174,854
Less: Allowance for Loan Losses (1,794) (1,783)
______________________
Total Net Loans 184,502 173,071
Premises and Equipment - Net 5,904 5,191
Accrued Interest Receivable 1,898 1,716
Deferred Income Taxes 486 813
Investment in Limited Partnerships 777 823
Other Assets 4,099 135
_____________________
TOTAL ASSETS $286,882 $269,579
=====================
LIABILITIES
Deposits:
Noninterest-Bearing $23,511 $21,889
Interest-Bearing 191,571 187,292
_____________________
Total Deposits 215,082 209,181
Short-Term Borrowing 25,385 9,100
Long-Term Debt 20,735 27,035
Accrued Interest Payable 1,459 963
Other Liabilities 471 236
_____________________
TOTAL LIABILITIES 263,132 246,515
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 686 657
Shares: Authorized - 20,000,000; Issued -
2,741,935 in 2000 (2,626,935 in 1999)
Outstanding - 2,572,805 in 2000 (2,483,072
in 1999)
Surplus 9,000 7,250
Retained Earnings 17,934 19,323
Accumulated Other Comprehensive Income/(Loss) (431) (1,038)
Less: Treasury Stock - at cost
(168,888 shares in 2000 and 143,863 shares
in 1999) (3,439) (3,128)
______________________
TOTAL STOCKHOLDERS' EQUITY 23,750 23,064
______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $286,882 $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 September 30,
___________________________________
(In Thousands, except Per Share Data) 2000 1999
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,977 $3,669
Investment Securities:
Taxable 1,010 834
Exempt from Federal Taxes 304 325
Other 4 11
_____________________
Total Interest Income 5,295 4,839
INTEREST EXPENSE
Deposits 2,042 1,787
Short-Term Borrowing 329 30
Long-Term Debt 386 420
_____________________
Total Interest Expense 2,757 2,237
_____________________
Net Interest Income 2,538 2,602
PROVISION for LOAN LOSSES 112 94
_____________________
Net Interest Income after Provision
for Loan Losses 2,426 2,508
OTHER OPERATING INCOME
Trust Income 9 42
Service Charges on Deposit Accounts 197 166
Other Service Charges, Commissions, Fees 176 143
Investment Securities Gains/(Losses) (18) 0
Other Income 59 24
_____________________
Total Other Operating Income 423 375
OTHER OPERATING EXPENSES
Salaries and Wages 1,093 902
Retirement Plan and Other Employee Benefits 245 190
Net Occupancy Expense 174 152
Furniture and Equipment Expense 121 100
FDIC Insurance Assessment 11 6
Other Operating Expenses 762 633
_____________________
Total Other Operating Expenses 2,406 1,983
_____________________
Income before Income Taxes 443 900
PROVISION for INCOME TAXES (BENEFIT) (11) 127
_____________________
NET INCOME for PERIOD $454 $773
=====================
PER SHARE INFORMATION
Net Income for Period-Basic $0.18 $0.29
Net Income for Period-Assuming Dilution $0.18 $0.29
Cash Dividends $0.145 $0.143
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $454 $773
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period 488 (292)
Reclassification Adjustment for (Gains)/Losses
included in Net Income 12 0
_____________________
Total Other Comprehensive Income/(Loss) 500 (292)
______________________
COMPREHENSIVE INCOME for PERIOD $954 $481
=====================
The accompanying notes are an integral part of the consolidated
financial statements.
</TABLE>
<TABLE>
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<CAPTION>
Nine months Ended September 30,
___________________________________
(In Thousands, except Per Share Data) 2000 1999
___________________________________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $11,540 $10,721
Investment Securities:
Taxable 2,828 2,478
Exempt from Federal Taxes 927 943
Other 14 106
_____________________
Total Interest Income 15,309 14,248
INTEREST EXPENSE
Deposits 5,873 5,262
Short-Term Borrowing 509 40
Long-Term Debt 1,164 1,221
_____________________
Total Interest Expense 7,546 6,523
_____________________
Net Interest Income 7,763 7,725
PROVISION for LOAN LOSSES 240 193
_____________________
Net Interest Income after Provision
for Loan Losses 7,523 7,532
OTHER OPERATING INCOME
Trust Income 90 104
Service Charges on Deposit Accounts 539 429
Other Service Charges, Commissions, Fees 504 442
Investment Securities Gains/(Losses) (13) 0
Other Income 114 87
_____________________
Total Other Operating Income 1,234 1,062
OTHER OPERATING EXPENSES
Salaries and Wages 3,131 2,676
Retirement Plan and Other Employee Benefits 749 598
Net Occupancy Expense 509 445
Furniture and Equipment Expense 343 293
FDIC Insurance Assessment 32 18
Other Operating Expenses 2,023 1,715
_____________________
Total Other Operating Expenses 6,787 5,745
_____________________
Income before Income Taxes 1,970 2,849
PROVISION for INCOME TAXES 228 527
_____________________
NET INCOME for PERIOD $1,742 $2,322
=====================
PER SHARE INFORMATION
Net Income for Period-Basic $0.68 $0.88
Net Income for Period-Assuming Dilution $0.67 $0.88
Cash Dividends $0.431 $0.397
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $1,742 $2,322
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available for Sale Arising
During Period 598 (946)
Reclassification Adjustment for (Gains)/Losses
included in Net Income 9 0
_____________________
Total Other Comprehensive Income/(Loss) 607 (946)
______________________
COMPREHENSIVE INCOME for PERIOD $2,349 $1,376
=====================
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) 2000 1999
________________________________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $1,742 $2,322
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 365 334
Provision for Loan Losses 240 193
Investment Securities (Gains)/Losses 13 0
Provision for Deferred Income Taxes 15 (2)
Earnings on Bank-Owned Life Insurance (54) 0
(Increase)/Decrease in Accrued
Interest Receivable (183) (284)
(Increase)/Decrease in Other Assets (885) 212
Increase/(Decrease) in Other Liabilities 730 243
_____________________
Net Cash Provided by Operating Activities 1,983 3,018
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in Federal Funds Sold (1,080) 7,795
Proceeds from Sales of
Available-for-Sale Securities 9,708 0
Proceeds from Maturities of
Available-for-Sale Securities 4,895 16,735
Proceeds from Maturities of
Held-to-Maturity Securities 1,648 2,060
Purchases of Available-for-Sale Securities (14,933) (16,684)
Purchases of Held-to-Maturity Securities (1,718) (7,433)
Loans Made to Customers, Net of
Principal Collected on Loans (11,670) (11,025)
Purchases of Property and Equipment (1,057) (212)
Purchase of Bank-Owned Life Insurance (3,000) 0
_______________________
Net Cash (Used in)Investing Activities (17,207) (8,764)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (559) (4,405)
Net Increase/(Decrease) in Certificates
of Deposits 6,459 5,736
Net Increase/(Decrease) in Short-Term
Borrowing 16,286 4,523
Proceeds from Issuance of Long-Term Debt 10,000 2,587
Payment on Long-Term Debt (16,300) (1,675)
Acquisition of Treasury Stock (803) (1,004)
Issuance of Common Stock 255 246
Cash Dividends Paid (1,114) (1,050)
_____________________
Net Cash Provided by
Financing Activities 14,224 4,958
_____________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,000) (788)
CASH and CASH EQUIVALENTS -
Beginning of Period 7,004 7,341
_____________________
CASH and CASH EQUIVALENTS - End of Period $6,004 $6,553
=====================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $7,050 $6,357
Income Taxes 280 606
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Retirement of Treasury Stock (24,000 shares
in 2000 and 17,000 shares in 1999) $493 $374
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
__________ ___________________
Nine months ended:
September 30, 2000 2,577,381 2,587,342
September 30, 1999 2,639,189 2,646,469
Three months ended:
September 30, 2000 2,572,291 2,581,552
September 30, 1999 2,625,869 2,635,131
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 they were adopted.
In September 2000, the Financial Accounting Standards Board
issued Statement No. 140 (SFAS No. 140), Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement, which replaces SFAS No. 125, will
become effective for all transactions after March 31, 2001. When
this statement becomes effective it will not have a material
effect on the liquidity, results of operations or capital
resources of Union National.
5. The results of operations for the nine-month period ended
September 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>
Item 2 - 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 nine months ended September 30,
2000, was $1,742,000, a decrease of 25.0%, as compared to
consolidated net income of $2,322,000 for the same period of
1999. For the quarter ended September 30, 2000, consolidated net
income was $454,000, a decrease of 41.3% as compared to
consolidated net income of $773,000 for the same period of 1999.
Basic earnings per share for the first nine months of 2000
amounted to 68 cents and diluted earnings per share amounted to
67 cents, as compared to basic and diluted earnings per share of
88 cents for the first nine months of 1999. For the quarter
ended September 30, 2000, basic and diluted earnings per share
amounted to 18 cents, as compared to 29 cents for the same period
of last year.
Results of operations for the nine months and the three months
ended September 30, 2000, as compared to the same periods 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.
<PAGE>
* Net income increased due to growth in average net loans,
which was funded by growth in average deposits and additional
borrowings.
* Net income decreased due to an increase in the provision
for loan losses.
* Net income increased due to an increase in other operating
income.
* Net income decreased due to an 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 0.84% on an annualized basis
for the nine months ended September 30, 2000, as compared to
1.18% for the same period in 1999. Net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE), was 10.1% on an annualized basis for the nine
months ended September 30, 2000, as compared to 13.3% 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 9.8% for the first nine 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 loans and deposits. Moderation in loan and
deposit growth is expected due to increased competition in Union
National's market area. 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; and
* the strategic promotion of the bank's retail offices in
light of continued consolidation in the banking and financial
services industry.
In addition, there is also general economic stability in the
bank's market area and there is continued population and business
growth. 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 nine months ended September 30, 2000,
increased by $74,000, or 0.9%, over the same period in 1999. For
the quarter ended September 30, 2000, net interest income
decreased by $57,000, or 2.0%, as compared to the same period of
the prior year.
<PAGE>
Volume growth in average earning assets and interest-bearing
liabilities increased net interest income by $250,000 in
comparing the nine months ended September 30, 2000, to the same
period of 1999. In comparing the quarters ended September 30,
2000 and 1999, volume growth increased net interest income by
$22,000. For the nine months, average loan growth of
$13,191,000, or 7.8%, accounted for most of the increase in
average earning assets and was funded by growth in average
deposits of $8,556,000 and by additional borrowings. For the
comparison of the three-month periods ended September 30, 2000
and 1999, average loan growth of $12,993,000 and average growth
in investment securities of $3,898,000 were funded by growth in
average deposits of $6,518,000 and by additional borrowings.
The overall interest rate on the average total earning assets for
the nine months ended September 30, 2000, was 8.04%, which
compares favorably to the 7.91% for the same period of last year.
However, for the same period, the overall interest rate on the
average interest-bearing liabilities increased to 4.40% from
4.05%. 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 nine months of
2000. The net effect of all interest rate fluctuations and
funding changes was to decrease net interest income in the amount
of $176,000 for the nine months ended September 30, 2000 over the
same period in 1999. In a comparison of the third quarters of
2000 and 1999, the interest rate on average earning assets
increased from 7.94% to 8.15% and the interest rate on average
interest-bearing liabilities increased from 4.05% to 4.61%. The
net effect of these interest rate fluctuations and funding
changes was to decrease net interest income in the amount of
$79,000 for the quarter ended September 30, 2000 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 (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, 2000, the bank received long-term advances of
$20,735,000 and short-term advances of $24,700,000 from its
available credit of $72,235,000 at the FHLB for purposes of
funding loan demand and security purchases. The total advances
had an effective rate of 6.37% at September 30, 2000, with
maturities ranging from overnight borrowings to January 2010.
Long-term borrowings outstanding have declined by $6,300,000
since the beginning of the year, but the weighted-average rate on
these borrowings has increased from 5.45% to 5.99%. Outstanding
short-term borrowings have increased by $16,285,000 and the
weighted-average rate on these borrowings has increased from
5.11% to 6.69%. The additional funding from the FHLB was used to
help fund loan growth and investment securities purchases.
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, it is currently anticipated that 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 three 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 nine months of
2000, net of costs resulting from growth in deposits and
<PAGE>
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 September 30, 2000, may result in a net interest margin for
the remainder of 2000 that is currently expected to be comparable
to the net interest margin earned 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. The model also includes an interest rate cap
purchased in October 2000. The interest rate cap was purchased
to mitigate interest rate risk in a rising-rate environment. The
bank purchased, for $70,000, a three-year interest rate cap with
a notional amount of $10,000,000 and a strike price of 7%. If
the three-month LIBOR rate exceeds the 7% strike price, the cap
is in the money and pays the bank the difference in interest cost
between the current three-month LIBOR rate and 7% on the nominal
amount of $10,000,000. The cap will be accounted for on a
marked-to-market basis in accordance with SFAS No. 133. 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 - Interest Rate Risk.
Provision for Loan Losses
The provision for loan losses was $240,000 for the nine months
ended September 30, 2000, and $193,000 for the nine months ended
September 30, 1999. Net charge-offs for the nine months ended
September 30, 2000, were $229,000 as compared to $118,000 for the
same period of last year. For the three months ended September
30, 2000, the provision for loan losses was $112,000 versus
$94,000 for the same period of 1999. 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 increased by $172,000, or 16.2%, for the
nine months ended September 30, 2000, and it increased by
$48,000, or 12.9%, for the three months ended September 30, 2000,
as compared to the same periods of 1999. Contributing factors to
the increases in other operating income as compared to the same
periods in 1999 are summarized below:
Nine Months Three Months
________________ ________________
Monthly Deposit Account
Service Charges $ 41,000 $ 5,000
Insufficient Funds Charges $ 39,000 $ 19,000
Commercial Account
Analysis Charges $ 21,000 $ 3,000
Earnings on Bank-Owned
Life Insurance $ 54,000 $ 48,000
Debit Card Earnings $ 27,000 $ 8,000
Letter of Credit Fees $ 18,000 $ 8,000
The increase in monthly service charges is primarily a result of
increases in monthly service charges on noninterest-bearing
accounts that were effective May 1, 1999. Also, the insufficient
funds charge was increased effective June 1, 2000. 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
<PAGE>
The aggregate of noninterest expenses for the nine months ended
September 30, 2000, increased by $1,042,000, or 18.1%, over the
same period in 1999. For the three months ended September 30,
2000, noninterest expenses increased by $423,000, or 21.3%, over
the same period in 1999. These noninterest expense increases are
discussed below as they pertain to the various expense
categories.
For the nine-month period, employee salaries and wages increased
by $455,000, or 17.0%, and for the three-month period the
increase was $191,000 or 21.1%. These increases were 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 $151,000, or 25.3%, for the
nine-month period and $55,000, or 28.9%, for the three-month
period ended September 30, 2000, as compared to the same periods
of the last year. 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 increased by
$114,000, or 15.4%, for the nine months ended September 30, 2000,
and increased by $43,000, or 17.1%, for the three months ended
September 30, 2000, as compared to the same periods of 1999.
This was due to an increase in lease expense, equipment and
furniture depreciation and equipment and maintenance 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 increased by $308,000, or 18.0%, for the
nine months ended September 30, 2000, and they increased by
$129,000, or 20.4%, for the three months ended September 30,
2000, as compared to the same periods of 1999. Contributing
factors to the increases in other operating expenses as compared
to the same periods in 1999 are summarized below:
Nine Months Three Months
______________ ________________
Legal & Professional Fees $146,000 $ 74,000
Travel & Meals $ 49,000 $ 41,000
Advertising & Related Expenses$ 36,000 $ 9,000
Staff Training Costs $ 14,000 $ 3,000
Outside Computer Services $ 17,000 $ (4,000)
Debit Card Expenses $ 11,000 $ 4,000
Expenditures in 2000 for professional fees included fees paid to
consultants in connection with the 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. Increased training, travel, and meal
costs primarily relate to increased costs associated with the
implementation of the new data processing system. For further
explanation of increases in other operating costs see the
discussion of the bank's initiatives in
<PAGE>
the section below entitled Initiatives for 2000.
Income Taxes
Union National's income tax expense decreased by $299,000 for the
nine months ended September 30, 2000, and the expense decreased
by $138,000 for the three months ended September 30, 2000. The
effective tax rate was 11.6% for the nine months ended September
30, 2000, and 18.5% for the nine months ended September 30, 1999.
The decrease in income tax expense was due to lower pretax income
and an increase in tax-exempt income on loans, securities and the
investment in bank-owned life insurance. Currently, the
effective tax rate of Union National for the remaining months of
2000 is expected to be less than the current effective tax rate.
Initiatives for 2000
_____________________
During 2000, the bank is implementing various initiatives that
have and will 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
and investment manager were added to our Wealth Management Group
later in 2000. 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 $75,000, 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 $185,000.
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 $40,000, net of tax. Management
anticipates that a significant part of these expenses will be
offset by interest and fee income generated from new customer
relationships at this location. The facility required some
renovations, furnishings and equipment, which cost approximately
$105,000.
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
<PAGE>
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 $210,000, net of tax.
The implementation of these systems is currently expected to
require expenditures of $465,000 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 $85,000, 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 nine
months of 2000 by approximately $315,000, net of taxes.
Union National also has developed and begun promoting several new
products in 2000. These products include 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.
As mentioned previously, with the implementation of our
technology plan we will be looking to achieve significant staff
and operating cost savings in 2000 and beyond. As one of the
first steps in this process Union National offered an early
retirement package in October 2000 to certain employees who met
certain age and years of service qualifications. The cost of
this early retirement package is currently expected to reduce
results of operations for the fourth quarter by a currently
estimated amount of $205,000, net of taxes. The final cost will
depend upon the response from employees regarding this early
retirement option. This one-time cost will be offset by annual
cost savings of approximately the same amount as the one-time
cost.
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 that could result in additional regulation of,
and restrictions on, the business of Union National and the bank.
In November 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
<PAGE>
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 other 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 they were adopted.
In September 2000, the Financial Accounting Standards Board
issued Statement No. 140 (SFAS No. 140), Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of
Liabilities. This statement, which replaces SFAS No. 125,
becomes effective for all transactions after March 31, 2001.
When this statement becomes effective it will not have a material
effect on the liquidity, results of operations or capital
resources of Union National.
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
known information, management believes that the effects of
current and past economic
<PAGE>
<TABLE>
SUPPORTING SCHEDULES
Schedule of Nonperforming Assets
________________________________
<CAPTION>
September 30, December 31,
(In Thousands) 2000 1999
_______________________________
<S> <C> <C>
Nonaccruing Loans $1,400 $1,343
Accrual Loans - 90 days or more
past due 140 132
Restructured Accrual Loans 0 0
Other Real Estate Owned 329 20
_______________________________
Total Nonperforming Assets $1,869 $1,495
===============================
Nonperforming Assets
as a % of Net Loans 1.0% 0.9%
===============================
Allowance for Loan Losses
as a % of Nonperforming Loans 116% 121%
===============================
</TABLE>
<TABLE>
Analysis of Allowance for Loan Losses
_____________________________________
<CAPTION>
Nine Months Ended September 30,
(In Thousands) 2000 1999
________________________________
<S> <C> <C>
Average Total Loans Outstanding
(Less Unearned Income) $181,247 $168,056
===============================
Allowance for Loan Losses,
Beginning of Period $1,783 $1,743
Loans Charged-off During Period 251 159
Recoveries of Loans Previously
Charged-off 22 41
_______________________________
Net Loans Charged-off 229 118
Addition to Provision for Loan Losses
Charged to Operations 240 193
_______________________________
Allowance for Loan Losses,
End of Period $1,794 $1,818
===============================
Ratio of Net Loans Charged-off to Average
Loans Outstanding (Annualized) 0.17% 0.09%
===============================
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 0.96% 1.04%
===============================
</TABLE>
<PAGE>
conditions and other unfavorable specific business conditions may
result in the inability of loans amounting to $2,324,000 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 September 30, 2000, total nonperforming assets amounted to
$1,869,000, or 1.0% 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, 2000.
The allowance for loan losses increased by $11,000 for the nine
months ended September 30, 2000, and the ratio of the allowance
for loan losses to net loans was 0.96% at September 30, 2000, as
compared to 1.02% at December 31, 1999. Management believes,
based on information currently available, that the current
allowance for loan losses of $1,794,000 is adequate to meet
potential loan losses. 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 $72,235,000 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 $45,435,000 at September 30, 2000, and
$35,235,000 at December 31, 1999.
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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. Except as described below, 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. As
mentioned earlier, in October 2000 the bank took steps to
mitigate interest rate risk in a rising rate environment. The
bank purchased, for $70,000, a three-year interest rate cap with
a notional amount of $10,000,000 and a strike price of 7%. If
the three-month LIBOR rate exceeds the 7% strike price, the cap
is in the money and pays the bank the difference in interest cost
between the current three-month LIBOR rate and 7% on the nominal
amount of $10,000,000. The cap will be accounted for on a
marked-to-market basis in accordance with SFAS No. 133. 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.
<PAGE>
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 and the purchase of an
interest rate cap in October 2000. 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 unfavorable impact on the bank's net interest
income over the next twelve months as compared to the constant
rate scenario. This unfavorable impact on net interest income is
currently estimated at $85,000, net of taxes. 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 is currently estimated at $75,000, 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 nine
months ended September 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 $4,594,000 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 8.13% as of September
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 contracts in the amount of $435,000 for
the purchase and development of real estate for the expansion and
remodeling of an existing community banking office. The
implementation of the technology initiatives is currently
expected to require expenditures of approximately $465,000 and
the consulting services are expected to require expenditures of
approximately $130,000, all during the remainder of 2000. The
expansion and remodeling of the existing community banking office
will cost a total that is currently estimated at $845,000. There
are no other material commitments for capital expenditures as of
September 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
<PAGE>
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 September 30, 2000, a total of 49,025
shares of common stock were repurchased under this plan at a cost
of $803,000. 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.
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, 2000, as compared to the bank's current risk-based capital
ratio of 12.42%. 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-weighting 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 September 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) September 30, December 31,
2000 1999
____________ ___________
S> <C> <C>
Tier I - Total Stockholders' Equity $ 23,122 $ 23,176
Tier II - Allowance for Loan Losses 1,794 1,783
____________ ___________
Total Qualifying Capital $ 24,916 $ 24,959
============ ===========
Risk-adjusted On-balance-sheet Assets $188,020 $168,830
Risk-adjusted Off-balance-sheet Exposure 12,532 10,958
____________ ___________
Total Risk-adjusted Assets $200,552 $179,788
============ ===========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.13% 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 Capital Ratio - Actual 11.53% 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 12.42% 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 $ 8,872 $ 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 Corporation'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
<PAGE>
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).
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
September 30, 2000.
(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)
/s/ Mark D. Gainer
By _____________________________
Mark D. Gainer
President & CEO
(Principal Executive Officer)
Date: November 14, 2000
/s/ Clement M. Hoober
By _____________________________
Clement M. Hoober
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 14, 2000
