UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
_______________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
Commission file number 0-19214
___________________
UNION NATIONAL FINANCIAL CORPORATION
_________________________________________________________________
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2415179
_______________________________ _______________________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
101 East Main Street, P.O. Box 567
Mount Joy, Pennsylvania 17552
______________________________________ ___________
(Address of Principal Executive Offices) (Zip Code)
(717) 653-1441
_________________________________________________________________
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 Par Value
_________________________________________________________________
(Title of Class)
<PAGE>
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
_______________________
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the shares of Common Stock of
the Registrant held by nonaffiliates of the Registrant was
$37,805,560.55 as of March 21, 2000. As of March 21, 2000, the
Registrant had 2,454,168.91 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Union National Financial Corporation's 1999
Annual Report to Stockholders are incorporated by reference into
Parts I, II and IV, of this Form 10-K. Union National's Proxy
Statement for its 2000 Annual Meeting is incorporated by
reference in response to Parts III and IV of this Form 10-K.
<PAGE>
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PAGE N0.
PART I
Item 1 - Business 1
Item 2 - Properties 7
Item 3 - Legal Proceedings 9
Item 4 - Submission of Matters to a Vote of
Security Holders 9
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters 9
Item 6 - Selected Financial Data 10
Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operation 10
Item 7A- Quantitative and Qualitative About Market Risk 10
Item 8 - Financial Statements and Supplementary Data 11
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 11
PART III
Item 10 - Directors and Executive Officers of the
Registrant 11
Item 11 - Executive Compensation 11
Item 12 - Security Ownership of Certain Beneficial
Owners and Management 11
Item 13 - Certain Relationships and Related
Transactions 11
<PAGE>
PART IV
Item 14 - Exhibits, Financial Statements, Schedules
and Reports on Form 8-K 12
Signatures 14
Exhibit Index 16
<PAGE>
PART I
ITEM 1. BUSINESS.
___________________
Union National's management has 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 management uses words such as
"believes," "expects," "anticipates" or similar expressions,
management is making forward-looking statements.
Readers should note that many factors, some of which are
discussed elsewhere in this document and in the documents that
management incorporates 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 the
<PAGE>
forward-looking statements contained or incorporated by reference
in this document. These factors include the following:
. operating, legal and regulatory risks;
. economic, political, and competitive forces affecting
our banking, securities, asset management and credit
services businesses; and
. rapidly changing technology; and
. the risk that our analyses of these risks and forces
could be incorrect and/or that the strategies developed
to address them could be unsuccessful.
Union National 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.
ITEM 1. BUSINESS.
___________________
Union National Financial Corporation, a Pennsylvania business
corporation, is a bank holding company registered under the Bank
Holding Company Act of 1956 and is supervised by the Board of
Governors of the Federal Reserve System. Union National
Financial Corporation was incorporated on June 26, 1986, under
the Business Corporation Law of the Commonwealth of Pennsylvania.
Union National Financial Corporation commenced operations on
January 2, 1987, upon consummation of the acquisition of all of
the outstanding shares of The Union National Mount Joy Bank,
which effective February 6, 1998, changed its name to Union
National Community Bank. Union National Financial Corporation's
business consists primarily of managing and supervising Union
National Community Bank, and its principal source of income is
dividends paid by Union National Community Bank. Union National
Financial Corporation has one wholly-owned subsidiary, Union
National Community Bank.
Union National Community Bank was organized in 1865 under a
national charter. Union National Community Bank is a national
banking association and a member of the Federal Reserve System.
The deposits of Union National Community Bank are insured by the
Federal Deposit Insurance Corporation to the maximum extent
permitted by law. Union National Community Bank has one main
office with an annex and six branch locations within Lancaster
County, Pennsylvania. It is a full service commercial bank,
providing a wide range of services to individuals and small to
medium-sized businesses in its south central Pennsylvania market
area. Union National Community Bank accepts time, demand, and
savings deposits and makes secured and unsecured commercial, real
estate and consumer loans. Union National Community Bank also
has a full-service trust department.
Union National Financial Corporation's executive offices are
located at 101 East Main Street, P.O. Box 567, Mount Joy,
Pennsylvania 17552. Its telephone number is (717) 653-1441.
Union National Financial Corporation experiences substantial
competition in attracting and retaining deposits and in lending
funds. Financial institutions compete for deposits by offering
attractive rates and the convenient office locations. Direct
competition for deposits comes primarily from other commercial
banks and thrift institutions. Competition for deposits also
comes from money market mutual funds, corporate and government
securities and credit unions. The primary factors in the
competition for loans are interest rates, loan origination fees
and the range of products and services offered. Competition for
origination of real estate loans normally comes from other
commercial banks, thrift institutions, mortgage bankers, mortgage
brokers and insurance companies.
For additional information concerning Union National
Financial Corporation's business activities, see Part II, Item 7
of this Form 10-K.
Supervision and Regulation - Union National Financial Corporation
_________________________________________________________________
Union National Financial Corporation operates in a heavily
regulated environment. Changes in laws and regulations affecting
Union National Financial Corporation and its subsidiary, Union
National Community Bank, may have an impact on operations. See
"Supervision and Regulation Union National Financial Corporation"
and "Supervision and Regulation Union National Community Bank"
below and pages 33 and 34 of the 1999 annual report. The annual
report is included in Exhibit 13 to this report and is
incorporated here by reference.
<PAGE>
The Bank Holding Company Act prohibits Union National
Financial Corporation from acquiring:
. direct or indirect control of more than 5% of the
voting stock of any bank; or
. substantially all of the assets of any bank; or
. merging with another bank holding company;
without the prior approval of the Federal Reserve. The
Pennsylvania Department of Banking also must approve any similar
consolidation. Pennsylvania law permits Pennsylvania bank
holding companies to control an unlimited number of banks.
The Bank Holding Company Act restricts Union National
Financial Corporation from engaging in activities to those that
the Federal Reserve has found:
. to be closely related to banking; and
. which are expected to produce benefits for the
public that will outweigh any potentially adverse
effects.
To this end, the Bank Holding Company Act prohibits Union
National Financial Corporation from:
. engaging in most non-banking businesses; or
. acquiring ownership or control of more than 5% of
the outstanding voting stock of any company engaged
in a non-banking business; unless
. the Federal Reserve has determined that the
non-banking business is closely related to banking.
Under the Bank Holding Company Act, the Federal Reserve may
require a bank holding company to end a non-banking business if
it constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
Other than making equity investments in low to moderate
income housing limited partnerships, Union National Financial
Corporation does not at this time engage in any other permissible
activities, nor does Union National Financial Corporation have
any current plans to engage in any other permissible activities
in the foreseeable future.
Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on any extensions
of credit to the bank holding company or any of its subsidiaries,
on investments in the stock or other securities of the bank
holding company and on taking of such stock or securities as
collateral for loans to any borrower.
Legislation and Regulatory Changes. From time to time,
Congress or the Pennsylvania legislature enacts legislation which
has the effect of increasing the cost of doing business, limiting
or expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. Management cannot
predict the likelihood of any major changes or the impact such
changes might have on Union National Financial Corporation and
its subsidiary. The following paragraphs discuss legislative or
regulatory changes of potential significance to Union National
Financial Corporation which Congress has recently enacted and
others which Congress or various regulatory or professional
agencies currently are discussing.
The Federal Reserve Board, the Federal Deposit Insurance
Corporation and the Comptroller of the Currency have issued
certain risk-based capital guidelines, which supplement existing
capital requirements. The guidelines require all United States
banks and bank holding companies to maintain a minimum risk-based
capital ratio of 8 percent,of which at least 4 percent must be in
the form of common stockholders' equity. Assets are assigned to
five risk categories, with higher levels of capital required for
the categories perceived as representing greater risk. The
required capital will represent equity and (to the extent
permitted) nonequity capital as a percentage of total
risk-weighted
<PAGE>
assets. The risk-based capital rules are designed to make
regulatory capital requirements more sensitive to differences in
risk profiles among banks and bank holding companies and to
minimize disincentives for holding liquid assets. On the basis
of an analysis of the rules and the projected composition of
Union National Financial Corporation's consolidated assets,
management does not believe that the risk-based capital rules
have a material effect on Union National Financial Corporation's
business and capital plans. Union National Community Bank has
capital ratios exceeding the regulatory requirements. See pages
15, 32 and 33 of Union National Financial Corporation's 1999
annual report for information concerning Union National Financial
Corporation's capital ratios which are included in Exhibit 13 and
incorporated here by reference.
Pending Legislation. Management cannot anticipate what
changes Congress may enact or, if enacted, their impact on Union
National Financial Corporation's financial position and reported
results of operation. As a consequence of the extensive
regulation of commercial banking activities in the United States,
Union National Financial Corporation's and Union National
Community Bank's businesses may be adversely affected by federal
and state legislation and regulations that may increase the costs
of doing business. See also pages 33 and 34 of Union National
Financial Corporation's 1999 annual report, which pages are
included in Exhibit 13 and incorporated here by reference.
Effects of Inflation. Inflation has some impact on Union
National Financial Corporation's and Union National Community
Bank's operating costs. Unlike many industrial companies,
however, substantially all of Union National Community Bank's
assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on Union National
Financial Corporation's and Union National Community Bank's
performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as prices of goods and
services.
Monetary Policy. Domestic economic conditions and the
monetary and fiscal policies of the United States Government and
its agencies affect the earnings of Union National Financial
Corporation and Union National Community Bank. An important
function of the Federal Reserve System is to regulate the money
supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United
States government securities and changes in reserve requirements
against member bank deposits. The Federal Reserve uses these
instruments in varying combinations to influence overall growth
and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for
deposits.
Union National Community Bank is a member of the Federal
Reserve System. The policies and regulations of the Federal
Reserve Board have a significant effect on its deposits, loans
and investment growth, as well as the rate of interest earned and
paid, and are expected to affect Union National Community Bank's
operations in the future. The effect of Federal Reserve Board
policies and regulations upon the future business and earnings of
Union National Financial Corporation and Union National Community
Bank cannot be predicted.
<PAGE>
Environmental Laws. Neither Union National Financial
Corporation nor Union National Community Bank anticipate that
compliance with environmental laws and regulations will have any
material effect on capital, expenditures, earnings, or on its
competitive position. However, environmentally related hazards
have become a source of high risk and potentially unlimited
liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may
result in a drastic reduction in the value of the collateral
securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in
favor of the institution to a state or federal lien securing
clean up costs, and liability to the institution for clean up
costs if it forecloses on the contaminated property or becomes
involved in the management of the borrower. To minimize this
risk, Union National Community Bank may require an environmental
examination of and report with respect to the property of any
borrower or prospective borrower if circumstances affecting the
property indicate a potential for contamination, taking into
consideration a potential loss to the institution in relation to
the borrower. Such examination must be performed by an
engineering firm experienced in environmental risk studies and
acceptable to the institution, and the cost of such
<PAGE>
examinations and reports are the responsibility of the borrower.
These costs may be substantial and may deter a prospective
borrower from entering into a loan transaction with Union
National Community Bank. Union National Financial Corporation is
not aware of any borrower who is currently subject to any
environmental investigation or clean up proceeding that is likely
to have a material adverse effect on the financial condition or
results of operations of Union National Community Bank.
In 1995, the Pennsylvania General Assembly enacted the
Economic Development Agency, Fiduciary and Lender Environmental
Liability Protection Act which, among other things, provides
protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in
activities involved in the routine practices of commercial
lending, including, but not limited to, the providing of
financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of
property shall not be liable under the environmental acts or
common law equivalents to the Pennsylvania Department of
Environmental Resources or to any other person by virtue of the
fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents,
directly cause an immediate release or directly exacerbate a
release of regulated substances on or from the property, or
knowingly and willfully compelled the borrower to commit an
action which caused such release or violate an environmental act.
The Economic Development Agency, Fiduciary and Lender
Environmental Liability Protection Act, however, does not limit
federal liability which still exists under certain circumstances.
As discussed above, there are several federal and state
statutes that regulate the obligations and liabilities of
financial institutions pertaining to environmental issues. In
addition to the potential for attachment of liability resulting
from its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third parties,
when such actions result in environmental problems on properties
that collateralize loans held by Union National Community Bank.
Further, the liability has the potential to far exceed the
original amount of the loan issued by Union National Community
Bank. Currently, neither Union National Financial Corporation
nor Union National Community Bank is a party to any pending legal
proceeding pursuant to any environmental statute, nor is Union
National Financial Corporation or Union National Community Bank
aware of any circumstances that may give rise to liability under
any such statute.
Supervision and Regulation - Union National Community Bank
_________________________________________________________________
The operations of Union National Community Bank are subject to
federal and state statutes applicable to banks chartered under
the banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by the
FDIC. Bank operations are also subject to regulations of the
Comptroller of the Currency, the Federal Reserve Board and the
FDIC.
The primary supervisory authority of Union National Community
Bank is the Comptroller of the Currency, which regulates and
examines Union National Community Bank. The Comptroller of the
Currency has the authority
<PAGE>
under the Financial Institutions Supervisory Act to prevent a
national bank from engaging in an unsafe or unsound practice in
conducting its business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must
maintain, loans a bank makes and collateral it takes, the maximum
interest rates a bank may pay on deposits, the activities of a
bank with respect to mergers and consolidations and the
establishment of branches.
As a subsidiary of a bank holding company, Union National
Community Bank is subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the parent
bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its
subsidiaries and on taking such stock or securities as collateral
for loans. The Federal Reserve Act and Federal Reserve Board
regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition,
such legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding company
may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship.
Other. From time to time, various types of federal and
_____
state legislation have been proposed that could result in
additional regulation of, and restrictions on, the business of
Union National Community Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such
legislation would affect the business of Union National Community
Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National Community
Bank's business is particularly susceptible to being affected by
federal legislation and regulations that may increase the costs
of doing business.
Statistical Data. The information required by this Item
________________
is incorporated by reference from pages 19 through 33 of Union
National Financial Corporation's 1999 annual report.
Employees. As of March 23, 2000, Union National
__________
Community Bank had 123 full-time employees and 20 part-time
employees. None of these employees is represented by a
collective bargaining agent, and Union National Financial
Corporation believes it enjoys good relations with its personnel.
<PAGE>
ITEM 2. PROPERTIES.
Union National Community Bank owns its main office, five
branch offices, the administration services center and certain
parking facilities related to its banking offices, all of which
are free and clear of any lien. Union National Community Bank's
main office is located in the central business district of Mount
Joy, Pennsylvania. Below is a table containing the location and
date of acquisition of Union National Community Bank's
properties. In addition, Union National Community Bank leases
office space for one branch office located in Manheim,
Pennsylvania and office space for our Credit Services Division
located in Mount Joy, Pennsylvania.
<TABLE>
PROPERTIES OWNED BY UNION NATIONAL COMMUNITY BANK
<CAPTION>
Office and Address Description of Property Date Acquired
__________________ _______________________ ________________
<S> <C> <C>
Main Office Main Bank Office 1911
101 East Main Street Cut limestone and brick.
Mount Joy, PA 17552 1995 addition is concrete
over steel construction.
Containing approximately
a total of 22,251 sq. ft.
of space.
Main Office Annex Wood frame
115 East Main Street construction September, 1992
Mount Joy, PA 17552 with aluminum siding.
Containing approximately
1,632 sq. ft. of space.
Maytown Branch Office Branch Bank April, 1972
100 West High Street Brick veneer, shingled roof
Maytown, PA 17550 with wood trusses. Containing
approximately 4,960 sq. ft.
of space.
Hempfield Branch Office Branch Bank June, 1979
190 Stony Battery Road Brick with wood shingle roof.
Salunga, PA 17538 Containing approximately
4,619 sq. ft. of space.
Elizabethtown Branch Branch Bank January, 1988
Office Brick veneer, shingled roof
1275 South Market Street with wood trusses.
Elizabethtown PA 17022 Containing approximately
6,668 sq. ft. of space.
<PAGE>
Motor Bank Branch Office Drive-up Bank Branch November, 1972
21 North Barbara Street Brick on frame.
Mount Joy, PA 17552 Containing approximately
445 sq. ft. of space.
Administration Services Brick on concrete block December, 1984
Center with wood and steel frame.
Bank Administration Containing approximately
Building 9,398 sq. ft. of space.
25 North Barbara Street
Mount Joy, PA 17552
Columbia Branch Office Branch Bank October, 1992
921 Lancaster Avenue One story brick building
Columbia, PA 17512 containing approximately
2,257 sq. ft. of space.
</TABLE>
<TABLE>
PROPERTY LEASED BY THE BANK
<CAPTION>
Office and Address Description of Property Date Leased
_____________________ ________________________ _____________
<S> <C> <C>
Manheim Branch Office Concrete block building January, 1995
701 Lancaster Road containing 4,266 sq. ft.
Manheim, PA 17545 of space of which approximately
2,600 sq. ft. of space is
currently used for banking
purposes.
Credit Services Division Second floor of brick September, 1998
32 Mount Joy Street building containing
Mount Joy, PA 17552 approximately 3,000 sq. ft.
of office space.
</TABLE>
In management's opinion, the above properties are in good
condition and are adequate for Union National Community Bank's
purposes.
ITEM 3. LEGAL PROCEEDINGS.
______ __________________
Management, after consulting with Union National Financial
Corporation's legal counsel, is not aware of any litigation that
would have a material adverse effect on the consolidated
financial position of Union National Financial Corporation.
There are no proceedings pending other than ordinary routine
litigation incident to the business of Union National Financial
Corporation and its subsidiary, Union National Community Bank.
In addition, no material proceedings are known to be contemplated
by governmental authorities against Union National Financial
Corporation or Union National Community Bank.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
______ ____________________________________________________
None.
PART II
_______
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
______ _________________________________________________
STOCKHOLDER MATTERS.
____________________
Market and dividend information required by this Item is
incorporated here by reference from the inside front cover of
Union National Financial Corporation's 1999 annual report which
is included in Exhibit 13 to this Form 10-K. Union National
Financial Corporation's common stock is traded on a very limited
basis in the local over-the-counter market and on the OTC
Bulletin Board under the symbol UNNF. Bid and asked information
is available on some internet websites providing financial market
news. Information concerning actual trades is included on the
inside front cover of Union National Financial Corporation's 1999
annual report and is also available on some internet websites.
This information represents a limited amount of share transfer
activity.
Union National Financial Corporation and, prior to Union
National Financial Corporation's organization as a bank holding
company, Union National Community Bank have paid regular cash
dividends on their common stock for more than thirty-five years.
Union National Financial Corporation expects to pay future
dividends; however, payment of such dividends will depend upon
earnings of Union National Financial Corporation and of Union
National Community Bank, their financial condition, capital
requirements and other factors, such as regulatory and legal
requirements. It is anticipated that substantially all of the
funds available for the payment of dividends by Union National
Financial Corporation will be derived from dividends paid to it
by Union National Community Bank.
Additional information required by this Item regarding
dividend restrictions is incorporated here by reference from page
33 of Union National Financial Corporation's 1999 annual report,
which is included in Exhibit 13 to this Form 10-K.
As of March 21, 2000, there were approximately 927 holders of
record of Union National Financial Corporation's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
______ ________________________
The information required by this Item is incorporated here by
reference from page 4 and 20 of Union National Financial
Corporation's 1999 annual report which is included in Exhibit 13
to this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
______ _________________________________________________
CONDITION AND RESULTS OF OPERATION.
___________________________________
The information required by this Item is incorporated by
reference from pages 21 through 34 of Union National Financial
Corporation's 1999 annual report which are included in Exhibit 13
to this Form 10-K.
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
_______ _____________________________________________
MARKET RISK.
____________
The information required by this Item is incorporated here by
reference from pages 30, 31 and 32 of Union National Financial
Corporation's 1999 annual report which pages are included in
Exhibit 13 to this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
_______ ____________________________________________
The information required by this Item is incorporated here by
reference from pages 6 through 20 of Union National Financial
Corporation's 1999 annual report are included in Exhibit 13 to
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
______ ________________________________________________
ACCOUNTING AND FINANCIAL DISCLOSURE.
____________________________________
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
________ _______________________________________________
The information required by this Item is incorporated here by
reference from pages 3 through 12, 14, 15 and 25 of Union
National Financial Corporation's proxy statement for its 2000
annual meeting of shareholders.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
________ _______________________
The information required by this Item is incorporated here by
reference from pages 16 through 23 of Union National Financial
Corporation's proxy statement for its 2000 annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
________ ___________________________________________________
MANAGEMENT.
___________
The information required by this Item is incorporated here by
reference from pages 3 through 5 and pages 14, 15 and 25 of Union
National Financial Corporation's proxy statement for its 2000
annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_______ _______________________________________________
The information required by this Item is incorporated here by
reference from and 25 of Union National Financial Corporation's
proxy statement for its 2000 annual meeting of shareholders.
PART IV
________
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
________ _____________________________________________________
ON FORM 8-K.
____________
(a) 1. Financial Statements.
The following financial statements are
included by reference in Part II, Item 8
hereof.
Independent Auditors' Report.
Consolidated Balance Sheets.
Consolidated Statements of Income
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in
Stockholders' Equity
Notes to Consolidated Financial
Statements
2. The financial statement schedules
required by this Item are omitted because
the information is either inapplicable,
not required or is in the consolidated
financial statements as a part of this
Report.
3. The following Exhibits are filed
herewith, or incorporated by reference as
a part of this Report:
<PAGE>
3(i) Union National Community Bank's
Amended Articles of Incorporation.
(Incorporated by reference to
Exhibit 3(i) to Union National
Financial Corporation's Registration
Statement No. 333-27837 on Form S-8,
filed with the Commission on May 27,
1997.)
3(ii) Union National Financial
Corporation's Amended By-laws.
(Incorporated by reference to
Exhibit 3(ii) to Union National
Financial Corporation's Registration
Statement No. 333-27837 on Form S-8,
filed with the Commission on May 27,
1997), and the amendment thereto
dated November 14, 1998.
10.1 Executive Employment Agreement
dated as of January 1, 1999,
between Mark D. Gainer and
Union National Financial
Corporation (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).
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.)
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.)
10.4 Change of Control Agreement, dated
June 17, 1999, between Michael A.
Frey and Union National Financial
Corporation.
10.5 Union National Financial
Corporation 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).
11 Statement re: Computation of
Earnings Per Share.
(Incorporated by Reference to
page of 4 of Union National
Financial Corporation's 1999 Annual
Report, which is included herein at
Exhibit 13.)
12 Statement re: Computation of
Ratios. (Incorporated by
Reference to page 4 of Union
National Financial Corporation's
1999 Annual Report, which is
included herein at Exhibit 13.)
<PAGE>
13 Excerpts from Union National
Financial Corporation's 1999
Annual Report to Shareholders.
21 Subsidiaries of the Union National
Financial Corporation (Incorporated
by Reference to Union National
Financial Corporation's Annual
Report on Form 10-K for the Year
Ended December 31, 1998).
23 Consent of Independent Auditors.
27 Financial Data Schedule.
(b) No Current Report on Form 8-K was filed by
Union National Financial Corporation during the
fourth quarter of the 1999 fiscal year.
(c) The exhibits required to be filed by this Item
are listed under Item 14(a)3, above.
(d) NOT APPLICABLE.
<PAGE>
SIGNATURES
____________
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNION NATIONAL FINANCIAL CORPORATION
____________________________________
(Registrant)
By /s/ Mark D. Gainer
____________________________
Mark D. Gainer, President
and Chief Executive Officer
Date: March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of Union National Financial Corporation and in the
capacities and on the dates indicated.
DATE
____
By /s/ Mark D. Gainer March 23, 2000
________________________
Mark D. Gainer
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Donald H. Wolgemuth March 23, 2000
________________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 23, 2000
________________________
William E. Eby, Director
By /s/ Clement M. Hoober March 23, 2000
________________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Frank R. Eichler March 23, 2000
________________________
Franklin R. Eichler, Director
By /s/ Daniel C. Gohn March 23, 2000
______________________
Daniel C. Gohn, Director
By /s/ Carl R. Hallgren March 23, 2000
________________________
Carl R. Hallgren, Director
By /s/ David G. Heisey March 23, 2000
________________________
David G. Heisey, Director
By /s/ William D. Linkous March 23, 2000
________________________
William D. Linkous, Director
By /s/ Darwin A. Nissley March 23, 2000
________________________
Darwin A. Nissley, Director
By /s/ Daniel H. Raffensperger March 23, 2000
________________________
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 23, 2000
________________________
Benjamin W. Piersol, Jr., Director
:94699
<PAGE>
<TABLE>
EXHIBIT INDEX
Sequential Page
Exhibit Number in Manually
Number Signed Original
______ _________________
<S> <C>
3(i) Union National Financial Corporation's
Amended Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Union National Financial Corporation's
Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997.)
3(ii) Union National Financial Corporation's
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).
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).
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.)
10.3 Union National Financial Corporation's 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.)
10.4 Change in Control Agreement, dated as of June 17,
1999, between Michael a. Frey and Union National
Financial Corporation.
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, file with the Commission on May 27, 1997.)
11 Statement re: Computation of Earnings Per Share.
(Incorporated by Reference to page 4 of Union
National Financial Corporation's 1999 Annual Report,
which is included herein at Exhibit 13.)
12 Statement re: Computation of Ratios.
(Incorporated by Reference to page 4 of
Union National Financial Corporation's 1999 Annual
Report, which is included herein at Exhibit 13.)
<PAGE>
13 Excerpts from Union National Financial
Corporation's 1999 Annual Report to
Shareholders.
21 Subsidiaries of Union National Financial
Corporation (Incorporated by Reference to Union
National Financial Corporation's Annual Report on Form 10-K for
the Year Ended December 31, 1998).
23 Consent of Independent Auditors.
27 Financial Data Schedule.
</TABLE>
EXHIBIT 3(i)
Union National Financial Corporation's Amended
Articles of Incorporation.
(Incorporated by reference to Exhibit 3(i)
to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with
the Commission on May 27, 1997.)
EXHIBIT 3(ii)
Union National Financial Corporation's
Amended By-laws.
(Incorporated by reference to Exhibit 3(ii)
to Union National Financial Corporation's
Registration Statement No. 333-27837
on Form S-8, filed with the Commission on
May 27, 1997) and the amendment thereto
dated November 14, 1998 (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 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).
<PAGE>
:94699
EXHIBIT 10.2
Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to
Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed
with the Commission on May 27, 1997.)
EXHIBIT 10.3
Union National Financial Corporation 1997 Stock
Incentive Plan. (Incorporated by Reference to
Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed
with the Commission on May 27, 1997.)
EXHIBIT 10.4
Change in Control Agreement
dated as of June 17, 1999,between
Michael A. Frey and Union National Financial Corporation.
CHANGE OF CONTROL AGREEMENT
THIS AGREEMENT is made as of this 17th day of June, 1999,
between Union National Community Bank, a Pennsylvania commercial
bank (the "Bank"), and Michael A. Frey, an adult individual (the
"Executive"), collectively (the "Parties") and, individually,
sometimes referred to herein as a ("Party").
WHEREAS, the Executive has been employed by the Bank as
Senior Vice President of Retail Banking since August 3, 1998; and
WHEREAS, the purpose of this Agreement is to define certain
severance benefits that will be paid by the Bank in the event of
a Change of Control (as defined herein). This Agreement is not
intended to affect, nor does it affect, the terms of the
Executive's employment at will, in the absence of a Change of
Control (as defined herein) of the Bank. Accordingly, although
this Agreement will be a binding legal obligation of the Bank
upon its execution, the Agreement will become operative only upon
a Change of Control, as defined below.
NOW THEREFORE, in consideration of the Executive's service to
the Bank and of the mutual covenants, undertakings and agreements
set forth herein and intending to be legally bound hereby, the
Parties agree as follows:
1. TERM. The term of the Agreement shall be effective as
of August 3, 1998, and shall continue until either Party gives
the other written notice of termination of employment, with or
without cause. Provided, however, that during the period of time
between the execution of an agreement to effect a Change of
Control (as defined herein) and the actual Date of Change of
Control (as defined herein) termination of the Executive's
employment by the Bank shall only be "For Cause."
For Cause shall be defined, for purposes of this section as
the occurrence of one of the following: (1) the willful failure
by the Executive to substantially perform his duties hereunder,
after notice from the Bank and a failure to cure such violation
within twenty (20) days of said notice; (2) the willful engaging
by the Executive in misconduct injurious to the Bank; (3) the
dishonesty or gross negligence of the Executive in the
performance of his duties; (4) the breach of Executive's
fiduciary duty involving personal profit; (5) the violation of
any law, rule or regulation governing banks or bank officers or
any final cease and desist order issued by a bank regulatory
authority any of which materially jeopardizes the business of the
Bank; or (6) conduct on the part of Executive which brings public
discredit to the Bank.
If, during the period of time between the execution of an
agreement to effect a Change of Control(as defined herein) and
the actual Date of the Change of Control (as defined herein),
Executive's employment is terminated For Cause (as defined
herein), all rights of the Executive under this Agreement shall
cease as of the effective date of such termination, except that
Executive (i) shall be entitled to receive accrued salary through
the date of such termination and (ii) shall be entitled to
receive the payments and benefits to which he is then entitled
under the employee benefit plans of the Employer or any affiliate
thereof as of the date of such termination.
2. DEFINITION OF CHANGE OF CONTROL. For purposes of this
Agreement, the term "Change of Control" shall mean a change of
control (other than one occurring by reason of an acquisition of
the Bank by Executive) of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of Regulation
14A or any successor rule or regulation promulgated under the
Securities Exchange Act of 1934, as amended (the "Act"); provided
that, without limiting the foregoing, a Change of Control shall
be deemed to have occurred if:
(a) a merger or consolidation of the Bank or purchase
of substantially all of the Bank's assets by
another "person" or group of "persons" (as such
term is defined or used in Sections 3, 13(d), and
14(d) of the Act) and, as a result of such merger,
consolidation or sale of assets, less than a
majority of the outstanding voting stock of the
surviving, resulting or purchasing person is
owned, immediately after the transaction, by the
holders of the voting stock of the Bank before
the transaction;
(b) any "person" as defined above, other than the
Bank, the Executive or any "person" who on the
date hereof is a director or officer of the Bank,
is or becomes the "beneficial owner" (as defined
in Rule 13d-3 and Rule 13d-5, or any successor
rule or regulation, promulgated under the Act),
directly or indirectly, of securities of the Bank
which represent twenty-five percent (25%) or more
of the combined voting power of the securities of
the Bank, then outstanding; or
(c) during any period of two consecutive years during
the term of this Agreement and any extension
thereof, individuals who at the beginning of such
period constitute the Board of Directors of the
Bank cease for any reason to constitute at least
two-thirds thereof, unless the election of each
director who was not a director at the beginning
of such period has been approved in advance by
directors representing at least two-thirds of the
directors then in office who were directors at the
beginning of the period.
3. DEFINITION OF DATE OF CHANGE OF CONTROL. For purposes
of this Agreement, the "Date of Change of Control" shall be
defined as the first date upon which the events delineated in
Subsections (a), (b) and (c) of Section 2 are consummated or
occur.
4. PAYMENTS UPON TERMINATION. If a Change of Control (as
defined herein) occurs, then the Executive shall be entitled to
receive a payment of twenty-one (21) months of his then current
Annual Direct Salary minus applicable withholdings and paid on a
biweekly basis on regular bank pay days, beginning on the
earliest of the following events:
(a) If, between the execution of an agreement to
effect a Change of Control (as defined herein) and
the actual Date of a Change of Control (as defined
herein) the Executive's employment with the Bank
is terminated, other than For Cause (as defined
herein);
(b) If the Executive is not offered employment by the
acquiring person or entity as of the Date of
Change of Control (as defined herein) in a
position having equivalent responsibilities,
authority, compensation and benefits as he
received immediately prior to the Change of
Control (as defined herein);
(c) If, between the Date of the Change of Control (as
defined herein) and six (6) months after the Date
of Change of Control (as defined herein), the
Executive is terminated from employment, for any
reason whatsoever, other than For Cause, by the
acquiring person or entity; or
(d) If, between three (3) and (6) months after the
Date of Change of Control (as defined herein), the
Executive terminates his employment with the
acquiring person or entity.
If at the end of six (6) months after the Date of the Change of
Control (as defined herein), none of the events described above
in Subsections (a), (b), (c) or (d) of this Section have
occurred, then the Executive shall no longer be entitled to
receive the Payments Upon Termination set forth in this Section,
and the Agreement shall thereafter be null and void.
Annual Direct Salary shall be defined herein as the fixed,
gross, base annual salary paid to the Executive at such time as
the Bank customarily pays its other senior officers and shall not
include any benefits, bonuses, incentives or other compensation.
5. COVENANT NOT TO COMPETE.
(a) Executive hereby acknowledges and recognizes the
highly competitive nature of the business of
Corporation and Bank and accordingly agrees that,
during and for the first twelve (12) months of the
applicable payment period set forth in Section 4
hereof, Executive shall not:
(i) be engaged, directly or indirectly, either
for his own account or as agent, consultant,
employee, partner, officer, director,
proprietor, investor (except as an investor
owning less than 5% of the stock of a
publicly owned company) or otherwise of any
person, firm, corporation or enterprise
engaged in (1) the banking (including bank
holding company) or financial services
industry, or (2) any other activity in which
Corporation or Bank or any of their
subsidiaries are engaged during the
Employment Period, and remain so engaged at
the end of the Employment Period, in any
area in which, at any time during the
Employment Period or at the date of
termination of the Executive's employment,
is within twenty (20) miles of any branch
location, office or other facility of
Corporation or Bank or any of their
subsidiaries, unless Executive exclusively
performs all such activity outside of said
twenty (20) mile area (the "Non-Competition
Area"); or
(ii) provide financial or other assistance to
any person, firm, corporation, or to
enterprise engaged in (1) the banking to
(including bank holding company) or to
financial services industry, or (2) any to
other activity in which Corporation or to
Bank or any of their subsidiaries are to
engaged during the Employment Period, in to
the Non-Competition Area; or
(iii) if employed in a capacity provided in (i)
or (ii), solicit current customers, during
the term of this Agreement, of
Corporation, Bank or any Corporation
subsidiary in the Non-Competition Area; or
(iv) solicit employees of Corporation, Bank or
any Corporation subsidiary who are employed
during the term of this Agreement.
(b) It is expressly understood and agreed that,
although Executive and Corporation and Bank
consider the restrictions contained in Section
5(a) hereof reasonable for the purpose of
preserving for Corporation and Bank and their
subsidiaries their good will and other proprietary
rights, if a final judicial determination is made
by a court having jurisdiction that the time or
territory or any other restriction contained in
Section 5(a) hereof is an unreasonable or
otherwise unenforceable restriction against
Executive, the provisions of Section 5(a) hereof
shall not be rendered void but shall be deemed
amended to apply as to such maximum time and
territory and to such other extent as such court
may judicially determine or indicate to be
reasonable.
(c) The provisions of this Section 5 shall be
applicable commencing on the date of this
Agreement and ending on the second anniversary
date of the effective date of termination of
Executive's employment.
6. NOTICE. For the purposes of this Agreement, notices
and all other communications provided for in the Agreement shall
be in writing and shall be deemed to have been duly given when
delivered or mailed by United States certified mail, return
receipt requested, postage prepaid, addressed as follows:
If to the Executive: Michael A. Frey
163 Canterbury Turn
Lancaster, PA 17601
If to the Bank: Mr. Mark D. Gainer
President and CEO
Union National Community Bank
P.O. Box 567
Mt. Joy, PA 17552-0567
or to such other address as any party may have furnished to the
other in writing in accordance herewith, except that notices of
change of address shall be effective only upon receipt.
7. SUCCESSORS. This Agreement shall inure to the benefit
of and be binding upon the Executive, his personal
representatives, heirs or assigns, and any of their successors or
assigns, provided, however, that the Executive may not commute,
anticipate, encumber, dispose or assign any payment herein except
as specifically set forth in paragraph 9 herein.
8. SEVERABILITY. If any provision of this Agreement is
declared unenforceable for any reason, the remaining provisions
of this Agreement shall be unaffected thereby and shall remain in
full force and effect.
9. AMENDMENT. This Agreement may be amended or canceled
only by mutual agreement of the parties in writing.
10. PAYMENT OF MONEY DUE DECEASED EXECUTIVE. In the event
of Executive's death, any monies that may be due him from the
Bank under this Agreement as of the date of death or thereafter
shall be paid to the person designated by him in writing for this
purpose, or, in the absence of any such designation, to his
estate.
11. NO GUARANTEE OF EMPLOYMENT. Nothing in this Agreement
shall constitute or give rise to any guarantee or contract of
employment of the Executive by the Bank, and shall not give the
Executive any right to be employed by or retained in the employ
of the Bank in any position or capacity.
12. LIMITATION OF DAMAGES FOR BREACH OF AGREEMENT. In the
event of a breach of this Agreement by either the Bank or the
Executive, each hereby waives to the fullest extent permitted by
law the right to assert any claim against the others for punitive
or exemplary damages. In no event shall any party be entitled to
the recovery of attorney's fees or costs.
13. LAW GOVERNING. This Agreement shall be governed by
and construed in accordance with the laws of the state of
Pennsylvania.
14. ENTIRE AGREEMENT. This Agreement supersedes any and
all prior agreements, either oral or in writing, between the
parties with respect to payments upon termination after a Change
of Control, and this Agreement contains all the covenants and
agreements between the parties with respect to same.
IN WITNESS WHEREOF, the parties hereto, intending to be
legally bound hereby, have caused this Agreement to be duly
executed in their respective names and, in the case of the Bank,
by its authorized representatives the day and year above
mentioned.
ATTEST: UNION NATIONAL COMMUNITY BANK
/s/ Marcene L. Camara By: /s/ Mark D. Gainer
_____________________ __________________
Mark D. Gainer, President and
CEO
WITNESS:
/s/ Dwight Kreiser /s/ Michael A. Frey
__________________ ___________________
Michael A. Frey
EXHIBIT 10.5
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).
EXHIBIT 11
Statement Re: Computation of Earnings Per Share
(Incorporated by Reference to page 4 of Union National
Financial Corporation's 1999 Annual Report, which is
included herein at Exhibit 13.)
EXHIBIT 12
Statement re: Computation of Ratios.
(Incorporated by Reference to page 4 of
Union National Financial Corporation's 1999
Annual Report, which is included herein at
Exhibit 13.)
EXHIBIT 13
Excerpts From Union National Financial Corporation's
1999 Annual Report to Shareholders
<PAGE>
STOCK AND DIVIDEND INFORMATION
Union National Financial Corporation has only one class of
common stock authorized, issued and outstanding. The outstanding
common stock is traded in the local over-the-counter market,
primarily in Lancaster County, Pennsylvania. Prices presented in
the table below reflect actual transactions known to management.
Prices and dividends per share are adjusted for stock splits and
stock dividends. Cash Dividends are payable on the 5th day of
February, May, August and November. Stockholders of record may
elect to have cash dividends deposited directly to their checking
or savings account.
The Corporation offers its stockholders a Dividend
Reinvestment and Stock Purchase Plan, whereby holders of stock
may have their quarterly cash dividends automatically invested in
additional shares of common stock of the Corporation and may
purchase additional shares within specified limits.
<TABLE>
<CAPTION>
Dividends
Quarter High Low Per Share
_________________________________________________________________
<S> <C> <C> <C>
First, 1999 $20.00 $17.62 $0.129
Second 25.75 19.29 0.138
Third 23.50 21.25 0.150
Fourth 22.25 16.25 0.150
First, 1998 $22.74 $21.43 $0.095
Second 22.62 21.19 0.100
Third 22.62 18.10 0.105
Fourth 20.00 17.14 0.110
</TABLE>
FOR FURTHER INFORMATION, WE REFER YOU TO:
Dean Witter Reynolds, Inc. F.J. Morrissey & Company, Inc.
46 East King Street 1700 Market Street
P.O. Box 358 Suite 1420
Lancaster, PA 17603 Philadelphia, PA 19103
(717) 293-4811 (800) 842-8928
Hazlett, Burt, & Watson, Inc. Tucker Anthony
100 East King Street Formally Hopper Soliday & Co.,Inc.
P.O. Box 1267 2101 Oregon Pike
Lancaster, PA 17608 Lancaster, PA 17601
(717) 397-5515 (800) 526-6371
Janney Montgomery Scott, Inc.
61 North Duke Street
Lancaster, PA 17602
(717) 293-4100
REGISTRAR AND TRANSFER AGENT
Trust Department
Union National Community Bank
P.O. Box 567
Mount Joy, PA 17552
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
December 31, December 31,
1999 1998 %Increase
_________________________________________________________________
<S> <C> <C> <C>
For the Year
Total Interest Income $19,079,621 $18,063,621 5.6%
Total Interest Expense 8,810,334 8,694,963 1.3%
Net Interest Income 10,269,287 9,368,658 9.6%
Net Income 3,084,811 2,767,632 11.5%
Per Share*
Net Income (Basic and Assuming
Dilution) $1.23 $1.09 12.8%
Cash Dividends Paid 0.567 0.410 38.3%
Stockholders' Equity 9.29 9.36 (0.7%)
Average Balances
Net Loans $169,667,000 $162,090,000 4.7%
Investments and Other
Earning Assets 81,384,000 67,672,000 20.3%
Total Assets 263,075,000 241,639,000 8.9%
Total Deposits 206,470,000 188,179,000 9.7%
Stockholders' Equity 23,218,000 22,971,000 1.1%
Return on Average
Assets 1.17% 1.15%
Stockholders' Equity 13.29% 12.05%
*Per Share information reflects the 5% stock dividend effective
on May 14, 1999.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED SUMMARY OF OPERATIONS
<CAPTION>
(Dollars in thousands, except per share data)
Years Ended December 31,
__________________________________________
1999 1998 1997
__________ __________ __________
<S> <C> <C> <C>
INCOME AND EXPENSE
Interest Income $ 19,080 $ 18,064 $ 16,205
Interest Expense 8,811 8,695 7,550
__________ __________ __________
Net Interest Income 10,269 9,369 8,655
Provision for Loan Losses 214 325 390
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses 10,055 9,044 8,265
Other Operating Income 1,477 1,157 986
Other Operating Expenses 7,725 6,718 6,347
__________ __________ __________
Income before Income Taxes 3,807 3,483 2,904
Provision for Income Taxes 722 715 579
__________ __________ __________
Net Income for Year $ 3,085 $ 2,768 $ 2,325
========== ========== ==========
PER SHARE *
Net Income (Basic and
Assuming Dilution) $ 1.23 $ 1.09 $ 0.89
Cash Dividends Paid 0.567 0.410 0.335
Average Shares Outstanding
(Basic) 2,507,925 2,541,581 2,613,873
FINANCIAL RATIOS
Return on Average Assets 1.17% 1.15% 1.09%
Return on Average
Stockholders' Equity 13.29 12.05 10.17
Dividend Payout Ratio 46.18 37.74 37.68
Average Stockholders' Equity
to Average Assets 8.83 9.51 10.68
AVERAGE BALANCE SHEET
Net Loans $ 169,667 $ 162,090 $140,925
Investments 79,078 63,461 57,551
Other Earning Assets 2,306 4,211 3,564
Total Assets 263,075 241,639 213,986
Deposits 206,470 188,179 168,814
Short-Term Borrowings 2,020 412 1,461
Long-Term Debt 29,882 28,584 19,425
Stockholders' Equity 23,218 22,971 22,859
BALANCE SHEET AT YEAR-END
Net Loans $174,854 $163,796 $152,699
Investments 80,826 75,756 64,737
Other Earning Assets 0 7,795 2,835
Total Assets 269,579 261,368 233,243
Deposits 209,181 205,544 180,135
Short-Term Borrowing 9,100 187 900
Long-Term Debt 27,035 30,624 27,329
Stockholders' Equity 23,063 23,697 23,756
* Per Share information reflects two-for-one stock split of the
Union National's common stock effective on June 1, 1995, the 5%
stock dividend effective on May 15, 1997, and the 5% stock
dividend effective on May 14, 1999.
<CAPTION>
Years Ended December 31,
__________________________________________
1996 1995
__________ __________
<S> <C> <C>
INCOME AND EXPENSE
Interest Income $ 14,218 $ 12,773
Interest Expense 6,380 5,175
__________ __________
Net Interest Income 7,838 7,598
Provision for Loan Losses 150 159
__________ __________
Net Interest Income
after Provision for
Loan Losses 7,688 7,439
Other Operating Income 811 753
Other Operating Expenses 5,951 5,479
__________ __________
Income before Income Taxes 2,548 2,713
Provision for Income Taxes 356 614
__________ __________
Net Income for Year $ 2,192 $ 2,099
========== ==========
PER SHARE *
Net Income (Basic and
Assuming Dilution) $ 0.84 $ 0.80
Cash Dividends Paid 0.290 0.213
Average Shares Outstanding
(Basic) 2,618,648 2,626,626
FINANCIAL RATIOS
Return on Average Assets 1.17% 1.28%
Return on Average
Stockholders' Equity 10.24 10.42
Dividend Payout Ratio 34.68 26.68
Average Stockholders' Equity
to Average Assets 11.40 12.24
AVERAGE BALANCE SHEET
Net Loans $ 124,483 $115,026
Investments 48,707 38,320
Other Earning Assets 2,576 880
Total Assets 187,814 164,631
Deposits 154,474 139,896
Short-Term Borrowings 2,009 1,197
Long-Term Debt 8,411 2,320
Stockholders' Equity 21,411 20,149
BALANCE SHEET AT YEAR-END
Net Loans $130,391 $120,417
Investments 54,890 39,437
Other Earning Assets 4,790 0
Total Assets 203,472 174,657
Deposits 164,513 143,368
Short-Term Borrowing 2,989 3,399
Long-Term Debt 12,676 6,270
Stockholders' Equity 22,223 20,769
* Per Share information reflects two-for-one stock split of Union
National's common stock effective on June 1, 1995, the 5% stock
dividend effective on May 15, 1997, and the 5% stock dividend
effective on May 14, 1999.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1999 1998
____________ ____________
<S> <C> <C>
ASSETS
Cash and Due from Banks $ 7,004,064 $ 7,341,240
Federal Funds Sold 0 7,795,000
Investment Securities Held
to Maturity (Market Value:
1999-$27,620,119;1998-$24,523,740) 28,712,219 24,079,161
Investment Securities Available
for Sale 52,114,270 51,676,350
Loans(Net of Unearned Income) 174,854,230 163,795,702
Less: Allowance for Loan Losses (1,782,747) (1,742,620)
____________ ____________
Total Net Loans 173,071,483 162,053,082
Premises and Equipment - Net 5,190,860 5,247,349
Accrued Interest Receivable 1,715,645 1,560,703
Deferred Income Taxes 812,781 218,708
Investments in Limited Partnerships 823,158 882,161
Other Assets 134,936 513,759
____________ ____________
TOTAL ASSETS $269,579,416 $261,367,513
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 21,889,233 $ 20,606,222
Interest-Bearing 187,291,986 184,937,546
____________ ____________
Total Deposits 209,181,219 205,543,768
Short-Term Borrowing 9,100,000 186,691
Long-Term Debt 27,035,360 30,623,660
Accrued Interest Payable 962,677 1,060,439
Other Liabilities 236,706 256,218
____________ ____________
TOTAL LIABILITIES 246,515,962 237,670,776
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25) 656,734 627,121
Shares: Authorized - 20,000,000; Issued -
2,626,935 in 1999 (2,508,484 in 1998);
Outstanding - 2,483,072 in 1999 (2,410,820
in 1998)
Surplus 7,249,699 4,793,416
Retained Earnings 19,322,781 20,183,938
Accumulated Other Comprehensive
Income - (1,037,597) 241,515
Less: Treasury Stock -
143,863 shares in 1999
(97,664 in 1998), at cost (3,128,163) (2,149,253)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 23,063,454 23,696,737
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $269,579,416 $261,367,513
============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
_____________________________
1999 1998
_______________ ___________
<S> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $ 14,365,563 $ 14,048,363
Investment Securities:
Taxable 3,336,797 2,796,098
Exempt from Federal Taxes 1,267,659 995,140
Deposits in Banks 1,750 1,796
Federal Funds Sold 107,852 222,224
_______________ ___________
Total Interest Income 19,079,621 18,063,621
INTEREST EXPENSE
Deposits 7,070,267 7,051,458
Short-Term Borrowing 112,643 22,806
Long-Term Debt 1,627,424 1,620,699
_______________ ___________
Total Interest Expense 8,810,334 8,694,963
_______________ ___________
Net Interest Income 10,269,287 9,368,658
PROVISION for LOAN LOSSES 214,150 325,350
_______________ ___________
Net Interest Income after Provision
for Loan Losses 10,055,137 9,043,308
OTHER OPERATING INCOME
Trust Income 142,252 119,600
Service Charges on Deposit Accounts 601,337 471,126
Other Service Charges, Commissions, Fees 632,220 488,882
Investment Securities Gains/(Losses) 0 (6,716)
Other Income 101,514 84,526
_______________ ___________
Total Other Operating Income 1,477,323 1,157,418
OTHER OPERATING EXPENSES
Salaries and Wages 3,588,327 3,145,664
Retirement Plan and Other
Employee Benefits 798,967 633,011
Net Occupancy Expense 600,119 556,608
Furniture and Equipment Expense 392,654 399,058
FDIC Insurance Assessment 23,502 21,737
Other Operating Expenses 2,321,884 1,962,103
_______________ __________
Total Other Operating Expenses 7,725,453 6,718,181
_______________ __________
Income before Income Taxes 3,807,007 3,482,545
PROVISION for INCOME TAXES 722,196 714,913
_______________ __________
NET INCOME for YEAR $ 3,084,811 $ 2,767,632
=============== ==========
PER SHARE INFORMATION*
Net Income for Year (Basic and Assuming
Dilution) $ 1.23 $ 1.09
Cash Dividends $ 0.567 $ 0.410
*Per share information reflects the 5% stock dividend effective
on May 14, 1999.
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
_____________________________
1997
_______________
<S> <C>
INTEREST INCOME
Interest and Fees on Loans $ 12,483,471
Investment Securities:
Taxable 2,659,213
Exempt from Federal Taxes 868,149
Deposits in Banks 3,328
Federal Funds Sold 191,531
______________
Total Interest Income 16,205,692
INTEREST EXPENSE
Deposits 6,354,343
Short-Term Borrowing 87,259
Long-Term Debt 1,108,307
______________
Total Interest Expense 7,549,909
______________
Net Interest Income 8,655,783
PROVISION for LOAN LOSSES 390,250
_______________
Net Interest Income after Provision
for Loan Losses 8,265,533
OTHER OPERATING INCOME
Trust Income 134,645
Service Charges on Deposit Accounts 374,697
Other Service Charges, Commissions, Fees 405,007
Investment Securities Gains/(Losses) 2,063
Other Income 69,692
_______________
Total Other Operating Income 986,104
OTHER OPERATING EXPENSES
Salaries and Wages 2,783,105
Retirement Plan and Other
Employee Benefits 857,410
Net Occupancy Expense 562,661
Furniture and Equipment Expense 411,484
FDIC Insurance Assessment 20,109
Other Operating Expenses 1,712,285
_______________
Total Other Operating Expenses 6,347,054
_______________
Income before Income Taxes 2,904,583
PROVISION for INCOME TAXES 579,096
_______________
NET INCOME for YEAR $ 2,325,487
===============
PER SHARE INFORMATION*
Net Income for Year (Basic and Assuming
Dilution) $ 0.89
Cash Dividends $ 0.335
*Per share information reflects the 5% stock dividend effective
on May 14, 1000.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
______________________________
1999 1998
______________ ___________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 3,084,811 $ 2,767,632
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 442,869 464,567
Provision for Loan Losses 214,150 325,350
Investment Securities (Gains)/Losses 0 6,716
Provision for Deferred Income Taxes 64,864 (37,317)
(Increase)/Decrease in Accrued
Interest Receivable (154,942) (114,936)
(Increase)/Decrease in Other Assets 417,861 (356,821)
Increase/(Decrease) in Other
Liabilities (117,274) 193,434
____________ ___________
Net Cash Provided by
Operating Activities 3,952,339 3,248,625
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold 7,795,000 (4,960,000)
Proceeds from Sales of
Available for Sale Securities 0 4,935,869
Proceeds from Maturities of
Available for Sale Securities 18,911,344 38,352,132
Proceeds from Maturities of
Held to Maturity Securities 2,800,317 1,068,938
Purchases of Available for Sale
Securities (21,287,313) (49,184,910)
Purchases of Held to Maturity
Securities (7,433,375) (6,278,251)
Loans Made to Customers, Net of
Principal Collected on Loans (11,232,551) (11,271,946)
Purchases of Property and Equipment (366,415) (275,461)
____________ ___________
Net Cash (Used in)Investing
Activities (10,812,993) (27,613,629)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (3,956,090) 19,559,864
Net Increase in Certificates
of Deposits 7,593,541 5,849,031
Net Increase/(Decrease) in Short-Term
Borrowing 8,913,309 (713,309)
Proceeds from Issuance of Long-Term
Debt 2,586,700 10,455,600
Payment of Long-Term Debt (6,175,000) (7,161,000)
Acquisition of Treasury Stock (1,352,675) (1,995,379)
Issuance of Common and Treasury Stock 338,190 266,265
Cash Dividends Paid (1,424,497) (1,044,423)
____________ ___________
Net Cash Provided by
Financing Activities 6,523,478 25,216,649
____________ ___________
Net Increase/(Decrease) in Cash
and Cash Equivalents (337,176) 851,645
CASH and CASH EQUIVALENTS-
Beginning of Year 7,341,240 6,489,595
___________ ____________
CASH and CASH EQUIVALENTS-
End of Year $ 7,004,064 $ 7,341,240
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $ 7,072,155 $ 7,016,409
Interest Paid - Other 1,835,941 1,626,477
Income Taxes 761,231 726,748
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Retirement of Treasury Stock (17,000 shares
in 1999, 13,000 shares in 1998,
and 12,000 shares in 1997) $ 373,765 $ 288,035
See notes to consolidated financial statements.
<CAPTION>
Years Ended December 31,
______________________________
1997
______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,325,487
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 506,353
Provision for Loan Losses 390,250
Investment Securities (Gains)/Losses (2,063)
Provision for Deferred Income Taxes (1,302)
(Increase)/Decrease in Accrued
Interest Receivable (133,324)
(Increase)/Decrease in Other Assets 292,578
Increase/(Decrease) in Other
Liabilities 52,625
______________
Net Cash Provided by
Operating Activities 3,430,604
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold 1,955,000
Proceeds from Sales of
Available for Sale Securities 5,548,285
Proceeds from Maturities of
Available for Sale Securities 15,337,934
Proceeds from Maturities of
Held to Maturity Securities 2,564,118
Purchases of Available for Sale
Securities (28,694,305)
Purchases of Held to Maturity
Securities (4,310,406)
Loans Made to Customers, Net of
Principal Collected on Loans (22,476,796)
Purchases of Property and Equipment (139,226)
_____________
Net Cash (Used in)Investing
Activities (30,215,396)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 7,532,740
Net Increase in Certificates
of Deposits 8,088,803
Net Increase/(Decrease) in Short-Term
Borrowing (2,089,414)
Proceeds from Issuance of Long-Term
Debt 14,793,060
Payment of Long-Term Debt (140,000)
Acquisition of Treasury Stock (306,746)
Issuance of Common and Treasury Stock 198,827
Cash Dividends Paid (876,280)
______________
Net Cash Provided by
Financing Activities 27,200,990
______________
Net Increase/(Decrease) in Cash
and Cash Equivalents 416,198
CASH and CASH EQUIVALENTS-
Beginning of Year 6,073,397
______________
CASH and CASH EQUIVALENTS-
End of Year $ 6,489,595
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest Paid to Depositors $ 6,291,787
Interest Paid - Other 1,132,613
Income Taxes 616,710
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Retirement of Treasury Stock (17,000 shares
in 1999, 13,000 shares in 1998,
and 12,000 shares in 1997) $ 227,542
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Common Retained
Stock Surplus Earnings
__________ __________ __________
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ 598,541 $1,967,838 $19,916,165
Comprehensive Income:
Net Income 2,325,487
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $99,451.
Reclassification Adjustment for (Gains)/Losses
Included in Net Income,
Net of Tax $701
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 1,970 182,652
Issuance of Common Stock under
Employee Plans 181 14,024
Issuance of Common Stock under
5% Common
Stock Dividend 29,640 2,875,003 (2,904,643)
Retirement of Treasury Stock
(12,000 shares) (3,000) (224,542)
Cash Dividends ($.335 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 672,332 4,814,975 18,460,729
Comprehensive Income:
Net Income 2,767,632
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax Benefit of $29,694
Reclassification Adjustment for (Gains)/Losses
Included in Net Income,
Net of Tax Benefit of $2,283
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 2,925 254,892
Issuance of Common Stock under
Employee Plans 114 8,334
Retirement of Treasury Stock
(13,000 shares) (3,250) (284,785)
Cash Dividends ($.410 per share) (1,044,423)
____________
Balance, December 31, 1998 627,121 4,793,416 20,183,938
Comprehensive Income:
Net Income 3,084,811
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax Benefit of $658,936
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 3,735 320,682
Issuance of Common Stock under
Employee Plans 200 13,573
Issuance of Common Stock under
5% Common Stock Dividend 29,928 2,491,543 (2,521,471)
Retirement of Treasury Stock
(17,000 shares) (4,250) (369,515)
Cash Dividends ($.567 per share) (1,424,497)
__________ __________ __________
BALANCE, December 31, 1999 $656,734 $7,249,699 $19,322,781
========== ========== ==========
See notes to consolidated financial statements.
<CAPTION>
Accumulated Other
Comprehensive Treasury
Income Stock Total
_____________ _________ ___________
<S> <C> <C> <C>
BALANCE, December 31, 1996 $103,033 $ (362,705) $22,222,872
____________
Comprehensive Income:
Net Income 2,325,487
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax of $99,451 193,052 193,052
Reclassification Adjustment for (Gains)/Losses
Included in Net Income,
Net of Tax $701 (1,362) (1,362)
___________
Total Comprehensive Income 2,517,177
___________
Acquisition of Treasury Stock (306,746) (306,746)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 184,622
Issuance of Common Stock under
Employee Plans 14,205
Issuance of Common Stock under
5% Common Stock Dividend 0
Retirement of Treasury Stock
(12,000 shares) 227,542 0
Cash Dividends ($.335 per share) (876,280)
__________ __________ __________
BALANCE, December 31, 1997 294,723 (441,909) 23,755,850
___________
Comprehensive Income:
Net Income 2,767,632
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax Benefit of $29,694 (57,641) (57,641)
Reclassification Adjustment for (Gains)/Losses
Included in Net Income,
Net of Tax Benefit of $2,283 4,433 4,433
___________
Total Comprehensive Income 2,714,424
___________
Acquisition of Treasury Stock (1,995,379) (1,995,379)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 257,817
Issuance of Common Stock under
Employee Plans 8,448
Retirement of Treasury Stock
(13,000 shares) 288,035 0
Cash Dividends ($.410 per share) (1,044,423)
__________ __________ ___________
BALANCE, December 31, 1998 241,515 (2,149,253) 23,696,737
___________
Comprehensive Income:
Net Income 3,084,811
Unrealized Holding Gains/(Losses) on
Investment Securities Available for
Sale Arising During the Year, Net of
Tax Benefit of $658,936 (1,279,112) (1,279,112)
___________
Total Comprehensive Income 1,805,699
___________
Acquisition of Treasury Stock (1,352,675) (1,352,675)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 324,417
Issuance of Common Stock under
Employee Plans 13,773
Issuance of Common Stock under
5% Common Stock Dividend 0
Retirement of Treasury Stock
(17,000 shares) 373,765 0
Cash Dividends ($.567 per share) (1,424,497)
___________ _________ __________
BALANCE, December 31, 1998 $(1,037,597) $(3,128,163) $23,063,454
========== ========= ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accounting and reporting policies of Union National
Financial Corporation (Union National) and its subsidiary, Union
National Community Bank (the Bank), conform with generally
accepted accounting principles and prevailing practices within
the banking industry. Union National and the Bank provide banking
and related services to residents and businesses primarily in
northwestern Lancaster County, Pennsylvania.
Basis of Presentation
The consolidated financial statements include the accounts of
Union National and the Bank. All material intercompany accounts
and transactions have been eliminated in the consolidation.
Use of Estimates
The process of preparing financial statements in conformity
with generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Accordingly, actual results
may differ from estimated amounts.
Investment Securities
Investment securities include both debt securities and equity
securities. Union National has segregated its investment
securities into two categories: those "held to maturity" and
those "available for sale."
Securities classified as held to maturity are those debt
securities Union National has both the intent and ability to hold
to maturity regardless of changes in market conditions, liquidity
needs or general economic conditions. These securities are
carried at cost adjusted for amortization of premiums or
accretion of discounts, computed by the interest method.
Securities classified as available for sale are those debt
securities that Union National intends to hold for an indefinite
period of time, but not necessarily to maturity, and all equity
securities. Any decision to sell a security classified as
available for sale would be based on various factors, including
significant movements in interest rates, changes in maturity mix
of Union National's assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors.
Securities available for sale are carried at fair value with
premiums and discounts amortized or accreted to interest income
using the interest method. Changes in unrealized gains or losses
for available for sale securities, net of taxes, are recorded as
other comprehensive income, a component of stockholders' equity.
When a determination is made that a market value decline below
cost on a marketable equity or debt security is other than
temporary, the cost basis of the individual security is written
down to the market value. The amount of the write-down is charged
to expense. Realized security gains and losses are computed using
the specific identification method.
Loans
Loans generally are stated at their outstanding unpaid
principal balances, net of any deferred fees or costs on
originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment
to interest income generally over the contractual life of the
related loans.
Impaired Loans Union National determines a loan impaired
when, based on current information and events, it is probable
that all interest and principal payments due according to the
contractual terms of the loan agreement will not be collected.
Larger groups of small-balance loans, such as residential
mortgages and consumer installment loans, are collectively
evaluated for impairment.
An insignificant delay or shortfall in the amounts of payments
would not cause a loan to be rendered impaired. Union National
determines a "delay" and "shortfall" insignificant when the loan
is generally under 90 days past due or when the loan is
sufficiently secured so that all amounts due including late
charges and costs of collection would be expected to be
collected.
Interest income is recognized on impaired loans, excluding
loans that are classified as nonaccrual, as the increase in the
net carrying amount attributable to the passage of time.
Allowance for Loan Losses The allowance for loan losses is
established through provisions for loan losses charged against
income. Loans, including impaired loans, deemed to be
uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is maintained at a level believed
adequate by Management to absorb estimated probable loan losses.
Management's periodic evaluation of the adequacy of the allowance
is based on 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. This evaluation is
inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant
change.
Specifically, Union National measures impairment based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or the fair value of the
collateral for certain collateral dependent loans where
foreclosure is probable. If the measure of the impaired loan is
less than the recorded investment in the loan, the allowance for
loan losses is credited and the provision for loan losses is
charged. Subsequent measures in the impairment of the loan will
increase or decrease the allowance for loan losses. However, the
net carrying amount of the loan will not exceed the recorded
investment in the loan.
Nonaccrual Loans Generally, a loan (including an impaired
loan as discussed above) is classified as nonaccrual and the
accrual of interest on such loan is discontinued when the
contractual payment of principal or interest has become 90 days
past due or Management has serious doubts about further
collectibility of principal or interest. A loan may remain on
accrual status if it is in the process of collection and is
either guaranteed or well secured. When a loan is placed on
nonaccrual status, unpaid interest previously credited to
interest income, that is now deemed uncollectible, is reversed.
Interest received on nonaccrual loans is either applied against
principal or reported as interest income, according to
Management's judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when both
principal and interest are brought current, the loan has
performed in accordance with the contractual terms for a
reasonable period of time and the ultimate collectibility of the
total contractual principal and interest is no longer in doubt.
Impaired loans that are classified as nonaccrual will have a
net carrying amount that will not exceed the individual loan's
measure of impairment as noted under the Section on Allowance for
Loan Losses.
Other Real Estate Owned Other real estate owned includes
assets acquired through foreclosure and loans identified as in-
substance foreclosures. A loan is classified as in-substance
foreclosure when Union National has taken possession of the
collateral regardless of whether formal foreclosure proceedings
have taken place. Other real estate owned is valued at the lower
of the loan balance at the time of foreclosure or estimated fair
market value, net of selling costs, and is included in other
assets. Gains and losses resulting from the sale or write-down of
other real estate owned and income and expenses related to the
operation of other real estate owned are recorded in other
expenses. Other real estate owned amounted to $20,000 at December
31, 1999, and $379,150 at December 31, 1998.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation, which is computed over the assets' estimated useful
lives on both the accelerated and the straight-line methods.
Leasehold improvements are stated at cost less accumulated
amortization, which is computed over the term of the lease
including renewal options on the straight-line method. Gains and
losses on premises and equipment are recognized upon disposal of
the asset. Charges for maintenance and repairs are charged to
expense as incurred.
Investments in Limited Partnerships
Union National has investments in two limited partnerships
providing low to moderate income housing in the community of
Mount Joy. Union National's 18.8% investment of $478,000 is
carried on the cost method, which is being reduced to the
investment's currently estimated residual value over the
remaining period that tax credits are being realized, and Union
National's 49.995% investment of $632,500 is carried on the
equity method.
Advertising Costs
Advertising costs are charged to expense when incurred.
Advertising expense for the years ended December 31, 1999, 1998
and 1997 amounted to $157,173, $76,122 and $80,062, respectively.
Income Taxes
The provision for income taxes is based upon the results of
operations, adjusted principally for tax-exempt income.
Accounting for income taxes is under the asset/liability method.
Under this method, the deferred tax asset is recorded based on
the difference between the tax basis of assets and liabilities
and their carrying amounts for financial reporting purposes. The
deferred tax asset is measured by the enacted tax rates which
will be in effect when these differences reverse. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized in the future.
Income tax expense is the tax payable or refundable for the
period plus or minus the change during the period in deferred tax
assets and liabilities.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Net Income per Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement No. 128 (SFAS No. 128), "Earnings per
Share." This Statement establishes standards for computing and
presenting earnings per share. SFAS No. 128 replaces the
presentation of primary earnings per share with a dual
presentation of basic and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. See Note 13 - Stockholders' Equity for the computation of
basic and diluted earnings per share.
All per share amounts and average shares outstanding reflected
in the accompanying statements were adjusted to give retroactive
effect to the 5% stock dividend effective on May 15, 1997, and
the 5% stock dividend effective on May 14, 1999.
Comprehensive Income
Union National adopted SFAS No. 130, "Reporting Comprehensive
Income," as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be
included in net income. However, certain changes in assets and
liabilities, such as unrealized gains and losses on investment
securities available for sale, are reported as a separate
component of the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income.
Union National reports comprehensive income and the components of
other comprehensive income in the Consolidated Statements of
Changes in Stockholders' Equity. Union National's only component
of other comprehensive income is changes in unrealized gains and
losses on investment securities available for sale. Changes in
the interest rate environment and other factors result in
fluctuations in the value of investment securities available for
sale. The adoption of SFAS No. 130 had no effect on Union
National's net income or stockholders' equity.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued
Statement No. 131 (SFAS No. 131), "Disclosures about Segments of
an Enterprise and Related Information." This Statement
establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services,
geographic areas and major customers. Union National has only one
operating segment which comprises the Bank's banking and
fiduciary activities.
Statements of Cash Flows
For purposes of the statements of cash flows, Union National
considers cash and amounts due from banks to be cash equivalents.
Recent Accounting Standards Issued
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. In addition, the transition provisions of
this Statement allow Union National to reclassify held to
maturity securities to an available for sale classification.
Union National does not expect the provisions of this Statement
to have a material effect on the liquidity, results of operations
or capital resources of Union National. The effective date of
this pronouncement was delayed until the first quarter of 2001
through the issuance of SFAS No. 137, how-ever, earlier
application is encouraged.
<TABLE>
NOTE 2 - INVESTMENT SECURITIES
The amortized costs and fair values of investment securities are
as follows:
<CAPTION>
At December 31, 1999
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ 25,451,771 $ 98,984
Corporate Securities 3,260,448 0
_______________ ______________
TOTAL $ 28,712,219 $ 98,984
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ 2,005,614 $ 0
Obligations of Other U.S.
Government Agencies 11,512,191 0
Mortgage-Backed Securities 31,248,868 57,373
Corporate Securities 5,698,743 0
Equity Securities 3,220,971 179,366
_______________ ______________
TOTAL $ 53,686,387 $ 236,739
=============== ==============
<CAPTION>
At December 31, 1999
________________________________
Gross
Unrealized Fair
Losses Values
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ (1,113,797) $ 24,436,958
Corporate Securities (77,287) 3,183,161
_______________ ______________
TOTAL $ (1,191,084) $ 27,620,119
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ (5,115) $ 2,000,499
Obligations of Other U.S.
Government Agencies (498,825) 11,013,366
Mortgage-Backed Securities (1,196,009) 30,110,232
Corporate Securities (106,460) 5,592,283
Equity Securities (2,447) 3,397,890
_______________ ______________
TOTAL $ (1,808,856) $ 52,114,270
=============== ==============
<CAPTION>
At December 31, 1998
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ 21,805,749 $ 471,358
Corporate Securities 2,273,412 16,997
_______________ ______________
TOTAL $ 24,079,161 $ 488,355
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ 3,522,874 $ 37,441
Obligations of Other U.S.
Government Agencies 14,143,678 81,071
Mortgage-Backed Securities 29,019,819 68,220
Corporate Securities 1,956,885 2,451
Equity Securities 2,667,162 288,579
_______________ ______________
TOTAL $ 51,310,418 $ 477,762
=============== ==============
<CAPTION>
At December 31, 1998
________________________________
Gross
Unrealized Fair
Losses Values
_______________ ______________
<S> <C> <C>
SECURITIES HELD to MATURITY:
Obligations of State and
Political Subdivisions $ (42,980) $ 22,234,127
Corporate Securities (796) 2,289,613
_______________ _____________
TOTAL $ (43,776) $ 24,523,740
=============== ==============
SECURITIES AVAILABLE for SALE:
U.S. Treasury Securities $ 0 $ 3,560,315
Obligations of Other U.S.
Government Agencies (4,096) 14,220,653
Mortgage-Backed Securities (106,144) 28,981,895
Corporate Securities (1,590) 1,957,746
Equity Securities 0 2,955,741
_______________ ______________
TOTAL $ (111,830) $ 51,676,350
=============== ==============
</TABLE>
<PAGE>
NOTE 2 - INVESTMENT SECURITIES (continued)
There are no significant concentrations of investments (greater
than 10% of stockholders' equity) in any individual security
issuer.
Investment securities carried at $24,162,164 and $21,882,546
at December 31, 1999 and 1998, respectively, were pledged to
secure public, trust and government deposits.
The amortized cost and fair value of debt securities at
December 31, 1999, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Debt Securities
_____________________________________
Held to Maturity
_____________________________________
Amortized Fair
Cost Values
______________ _________________
<S> <C> <C>
Due in One Year or Less $ 501,280 $ 498,537
Due After One Year Through
Five Years 1,227,580 1,218,119
Due After Five Years Through
Ten Years 3,009,384 2,963,198
Due After Ten Years 23,973,975 22,940,265
______________ _________________
28,712,219 27,620,119
Mortgage-Backed Securities 0 0
______________ _________________
$ 28,712,219 $ 27,620,119
============== =================
<CAPTION>
Debt Securities
_____________________________________
Available for Sale
_____________________________________
Amortized Fair
Cost Values
______________ _______________
<S> <C> <C>
Due in One Year or Less $ 2,005,614 $ 2,000,499
Due After One Year Through
Five Years 7,916,068 7,801,012
Due After Five Years Through
Ten Years 7,295,552 6,862,117
Due After Ten Years 1,999,314 1,942,520
______________ _______________
19,216,548 18,606,148
Mortgage-Backed Securities 31,248,868 30,110,232
______________ _______________
$ 50,465,416 $ 48,716,380
============== ================
</TABLE>
There were no sales of available for sale securities during
1999. During 1998, proceeds from the sale of available for sale
securities were $4,935,869. During 1998, investment securities
gains/losses from these sales of securities include gross
realized gains of $12,897 and gross realized losses of $19,613.
The related income tax expense (benefit) for net investment
securities gains/losses amounted to $(2,283) during 1998. During
1997, proceeds for the sale of available for sale securities were
$5,548,285. Investment securities gains/losses from these sales
in 1997 included gross realized gains of $4,838 and gross
realized losses of $2,775. The related income tax expense for net
investment securities gains/losses for 1997 amounted to $701.
Mortgage-backed securities, as disclosed in the two preceding
tables, are issued by U. S. Government agencies or corporations.
NOTE 3 - LOANS
Loans, net of unamortized loan origination fees of $1,287,104
and $1,429,650 at December 31, 1999 and 1998, respectively, are
summarized as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
____________ ______________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $103,263,624 $ 99,984,129
Commercial and Industrial 34,332,379 29,967,643
Construction and Land Development 5,942,944 6,585,711
Agricultural 6,355,519 5,727,829
Commercial and Industrial 7,570,523 6,041,639
Consumer 8,724,764 9,310,576
Agricultural 2,073,173 2,549,598
Political Subdivisions 5,388,317 2,842,255
Other 1,264,441 856,241
____________ ______________
Total Loans 174,915,684 163,865,621
Less: Unearned Income (61,454) (69,919)
____________ ______________
Net Loans $174,854,230 $163,795,702
============ ==============
</TABLE>
Union National grants commercial, residential and consumer
loans to customers primarily located in northwestern Lancaster
County. Although Union National has a diversified loan portfolio,
its debtors' ability to honor their contracts is influenced by
the region's economy.
The recorded investment in loans that is considered to be
impaired was $1,040,719 and $70,099 at December 31, 1999 and
1998, respectively. This entire amount is included in the
nonaccrual loans reflected below. The measure of impairment is
based on the fair value of the collateral, since foreclosure is
probable. The related allowance for loan losses amounted to
$82,230 and $22,124 at December 31, 1999 and 1998, respectively.
The average recorded investment in impaired loans was $366,615,
$450,876 and $302,655 during the years ended December 31, 1999,
1998 and 1997, respectively. For the year ended December 31,
1999, Union National recognized interest income of $3,838 on
impaired loans. For the years ended December 31, 1998 and 1997,
Union National did not recognize interest income on impaired
loans.
Nonperforming loans, which consist of loans 90 days or more
past due and nonaccruing loans, amounted to $1,474,569, $974,271
and $706,046 at December 31, 1999, 1998 and 1997, respectively.
Loans to certain directors and principal officers of Union
National, including their immediate families and companies in
which they are principal owners (more than 10%), amounted to
$5,754,565 at December 31, 1999. Such loans were made in the
ordinary course of business at Union National's normal credit
terms, including interest rates and security, and do not
represent more than a normal risk of collection. Transactions on
these loans for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
__________ __________ __________
<S> <C> <C> <C>
Balance, Beginning of Year $5,011,513 $4,878,930 $3,380,461
Additions 5,898,611 2,327,784 4,336,242
Deductions (5,155,559) (2,195,201) (2,837,773)
__________ __________ __________
Balance, End of Year $5,754,565 $5,011,513 $4,878,930
========== ========== ==========
</TABLE>
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses for the
years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
__________ __________ ___________
<S> <C> <C> <C>
Balance, Beginning of Year $1,742,620 $1,592,763 $1,371,245
Provision Charged to
Operating Expense 214,150 325,350 390,250
Recoveries of Charged-Off Loans 48,915 60,964 31,254
Charged-Off Loans (222,938) (236,457) (199,986)
__________ __________ ___________
Balance, End of Year $1,782,747 $1,742,620 $1,592,763
========== ========== ===========
</TABLE>
<PAGE>
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
Estimated December 31, December 31,
Useful Lives 1999 1998
_____________ ____________ ____________
<S> <C> <C> <C>
Land $ 437,519 $ 411,593
Construction in Progress 143,811 0
Land Improvements 20 years 495,390 499,927
Buildings and
Improvements 15-50 years 5,110,764 5,115,889
Leasehold Improvements 20 years 278,207 266,120
Furniture, Fixtures and
Equipment 5-20 years 3,526,058 3,333,247
____________ ____________
Subtotal 9,991,749 9,626,776
Less: Accumulated Depreciation
and Amortization (4,800,889) (4,379,427)
____________ ____________
Premises and Equipment - Net $5,190,860 $5,247,349
============ ============
</TABLE>
Depreciation and amortization expense amounted to $422,904 in
1999, $442,976 in 1998, and $465,748 in 1997.
Total rental expense amounted to $61,951, $50,961, and $43,461
for the years ended December 31, 1999, 1998, and 1997,
respectively.
At December 31, 1999, the Corporation was obligated under
noncancelable operating leases for real estate with the future
minimum payments as follows:
<TABLE>
<S> <C>
2000 $ 81,044
2001 79,656
2002 63,636
2003 59,616
2004 59,616
Thereafter 21,330
________
$364,898
========
</TABLE>
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted average interest rates at
December 31, were as follows:
[CAPTION]
<TABLE>
1999 1998
___________________ __________________
Amount Rate Amount Rate
________ ________ ________ _______
<S> <C> <C> <C> <C>
Treasury Tax and
Loan Notes $ 900,000 4.54% $ 186,691 4.11%
FHLB Fixed-Rate
Advances 8,200,000 5.11 0 -
___________ __________
Total $ 9,100,000 $ 186,691
=========== ===========
</TABLE>
Under an agreement with the Federal Home Loan Bank of
Pittsburgh (FHLB), Union National has a line of credit available
in the amount of $15,000,000. As of December 31, 1999 and 1998,
no balance was outstanding on this line of credit. All FHLB
advances are collateralized by a security agreement covering
qualifying mortgage loans and unpledged treasury, agency and
mortgage-backed securities which at December 31, 1999, had a
combined carrying value of $108,226,721. In addition, all FHLB
advances are secured by the FHLB capital stock owned by Union
National having a fair value of $3,011,500 and $2,469,700 at
December 31, 1999 and 1998, respectively. Under the Bank's
membership agreement with the FHLB, additional stock purchases
are required when total advances from the FHLB are increased.
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
[CAPTION]
<TABLE>
1999 1998
___________________ __________________
Amount Rate Amount Rate
________ ________ ________ _______
<S> <C> <C> <C> <C>
FHLB Fixed-Rate Advances
Maturing:
1999 $ 0 - % $ 1,675,000 5.18%
2000 1,300,000 5.89 3,300,000 6.02
2001 808,600 5.39 808,600 5.39
2003 2,347,000 5.71 2,347,000 5.71
2004 1,000,000 6.65 0 -
2007 1,460,660 6.00 1,460,660 6.00
FHLB Adjustable-Rate Advances Maturing:
2002 3,532,400 4.99 3,532,400 5.23
FHLB Floating-Rate Advance Maturing:
2004 1,586,700 5.61 0 -
FHLB Convertible Fixed-Rate Advances Maturing:
2002 10,000,000 5.65 12,500,000 5.62
2008 5,000,000 4.70 5,000,000 4.70
___________ ____ ___________ ____
Total $27,035,360 5.45% $30,623,660 5.46%
=========== ==== =========== ====
</TABLE>
The FHLB advances are collateralized by the security agreement
and FHLB capital stock described in Note 6. The FHLB's
convertible fixed-rate advances allow the FHLB the periodic
option to convert to a LIBOR adjustable-rate advance at the
three-month LIBOR plus .07% to .14%. Options to convert all of
the $15,000,000 in outstanding convertible advances commence in
2000. Upon the FHLB's conversion, the Bank has the option to
repay the respective advances in full. The FHLB's adjustable-rate
advances adjust annually at .06% to .07% above the interest rate
on the one-year treasury's constant maturity. The FHLB's
floating-rate advance reprices at 2.89% below prime.
NOTE 8 - PROFIT-SHARING PLAN
Union National's subsidiary implemented a new 401(k) profit-
sharing plan effective January 1, 1999, covering substantially
all full-time employees. This plan allows employees to contribute
a portion of their salaries and wages to the plan. The Bank may
elect to make a discretionary contribution to the plan and may
also match a portion of employee-elected salary deferrals,
subject to a 6% maximum of their salaries and wages. For 1999,
the Bank elected to make a discretionary contribution of 5% of
eligible salaries and to match 50% of employee-elected salary
deferrals that do not exceed 6% of their salaries and wages.
Prior to the implementation of the new plan, the Bank maintained
a noncontributory profit-sharing plan with contributions
determined annually by the Board of Directors and costs funded as
accrued.
The Bank's expense relative to its profit-sharing plans
amounted to $178,524 for the year ended December 31, 1999,
$125,156 for 1998 and $374,283 for 1997.
<PAGE>
NOTE 9 - INCOME TAXES
Union National accounts for income taxes under the
asset/liability method. Under this method, the deferred tax asset
is recorded based on the difference between the tax basis of
assets and liabilities and their carrying amounts for financial
reporting purposes. The deferred tax asset is measured by the
enacted tax rates that will be in effect when these differences
reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized
in the future. Income tax expense is the tax payable or
refundable for the period, plus or minus the change during the
period in deferred tax assets and liabilities.
Deferred income taxes consists of the following components as of
December 31:
<TABLE>
<CAPTION>
1999 1998
___________ __________
<S> <C> <C>
Deferred Tax Assets(Liabilities)
Deferred Net Loan Fees $(92,220) $ (7,284)
Provision for Loan Losses 498,989 485,346
Depreciation (154,234) (147,036)
Investment in Limited Partnerships (20,000) (24,334)
Unrealized Loss/(Gain) on Investment
Securities Available for Sale 534,520 (124,417)
Amortization on Securities 55,740 52,020
Other (10,014) (15,587)
___________ __________
Net Deferred Tax Asset $812,781 $218,708
=========== ==========
</TABLE>
Union National, as of December 31, 1999, has not established any
valuation allowance against deferred tax assets since these tax
benefits are realizable through carryback availability against
prior years' taxable income or the reversal of existing deferred
tax liabilities.
An analysis of the income tax expense included in the
consolidated statements of income for the years ended December 31
is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
_________ __________ __________
<S> <C> <C> <C>
Taxes Currently Payable $667,550 $748,043 $580,399
Deferred Income Taxes/(Benefit)
Related to:
Provision for
Loan Losses (13,643) (50,951) (68,430)
Deferred Net Loan Fees 84,936 29,281 40,871
Fixed Asset Depreciation 7,198 13,093 25,060
Other - Net (23,845) (24,553) 1,196
_________ __________ __________
Provision for Income
Taxes $722,196 $714,913 $579,096
========= ========== ==========
</TABLE>
The reasons for the difference between the Union National's
provision for income taxes and the amount computed by applying
the statutory federal income tax rate to income before income
taxes for the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
__________________ ________________
Amount % Amount %
___________ ____ ________ _____
<S> <C> <C> <C> <C>
Tax at Statutory
Federal Income Tax Rate $1,294,382 34.0 $1,184,065 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (444,792) (11.7) (361,366)(10.4)
Income Tax Credits (118,229) (3.1) (118,229) (3.4)
Other (9,165) (.2) 10,443 .3
___________ ____ ________ _____
Provision for Income Taxes $ 722,196 19.0 $ 714,913 20.5
=========== ==== ======== =====
<CAPTION>
1997
__________________
Amount %
___________ ____
<S> <C> <C>
Tax at Statutory
Federal Income Tax Rate $ 987,558 34.0
(Reduction)/Increase in Tax
Resulting From:
Tax-Exempt Income (298,629) (10.3)
Income Tax Credits (113,672) (3.9)
Other 3,839 .1
___________ ____
Provision for Income Taxes $ 579,096 19.9
=========== ====
</TABLE>
NOTE 10 - COMMITMENTS AND CONTINGENT LIABILITIES
The Bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and
financial guarantees. Those instruments involve, to varying
degrees, elements of credit risk and interest rate risk in excess
of the amount recognized in the consolidated balance sheets. The
contract amounts of those instruments reflect the exposure to
credit loss in the event of nonperformance by the other party to
the financial instrument.
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
______________ ____________
<S> <C> <C>
Financial Instruments whose
Contract Amounts Represent
Credit Risk:
Commitments to Extend Credit $ 7,892,090 $ 7,933,093
Unused Portion of Home Equity and
Overdraft Lines 9,838,149 7,305,673
Other Unused Commitments, Principally
Commercial Lines of Credit 9,481,749 12,574,835
Standby Letters of Credit and Financial
Guarantees Written 2,018,184 1,990,759
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Certain commitments may expire without being
drawn upon and, therefore, future cash may not be required. The
Bank evaluates each customer's creditworthiness on a case-by-case
basis. The Bank generally requires collateral or other security
to support financial instruments with credit risk.
Standby letters of credit and financial guarantees written are
conditional commitments issued by the Bank to guarantee the
performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing
arrangements. Most guarantees are less than two years. The credit
risk involved in issuing letters of credit is essentially the
same as that involved in extending loan advances to customers.
With respect to derivative financial instruments, Union
National does not currently engage in the use of futures,
forward, swap or option contracts that are typically defined as
derivatives according to SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments" (SFAS No. 119). SFAS No. 119 defines fixed-rate loan
commitments, variable-rate loan commitments and other variable-
rate financial instruments as derivatives for purposes of this
Statement. Those financial instruments shown in the previous
table would represent the only derivatives as defined by SFAS No.
119 currently held by Union National. See Note 15 for the
estimated fair value and related valuation assumptions of these
financial instruments.
<PAGE>
NOTE 11 - TIME DEPOSITS
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<S> <C>
2000 $81,816,191
2001 18,194,153
2002 3,976,890
2003 2,838,444
2004 824,879
_____________
$107,650,557
=============
</TABLE>
Certificates of deposit in denominations of $100,000 or more
amounted to $23,885,233 and $16,349,539 at December 31, 1999 and
1998, respectively. Interest expense on certificates of deposit
in denominations of $100,000 or more amounted to $1,061,767,
$890,193 and $958,253 for the years ended December 31, 1999, 1998
and 1997, respectively.
NOTE 12 - REGULATORY RESTRICTIONS
The Bank is required to maintain reserves, in the form of cash
and balances with the Federal Reserve Bank, against their deposit
liabilities. The average amount of required reserves during 1999
was approximately $1,785,000.
Union National's Bank subsidiary is subject to certain
restrictions in connection with the payment of dividends. The
National Banking Laws require the approval of the Comptroller of
the Currency if the total of all dividends declared by a national
bank in any calendar year exceeds the net profits of the bank (as
defined) for that year combined with its retained net profits for
the preceding two calendar years. Under this formula, the Bank
may declare dividends to its parent Corporation in 2000 of
approximately $818,514 plus an amount equal to the net profits of
the Bank in 2000 up to the date of any such dividend declaration.
Banking regulations also require the Bank to maintain certain
minimum capital levels in relation to Bank assets. Failure to
meet minimum capital requirements could result in prompt
corrective action by the federal banking agencies. As of December
31, 1999 and 1998, the Bank was categorized as well-capitalized
under the regulatory framework for prompt corrective action.
There are no conditions or events since year end that Management
believes have changed the Bank's category. The Bank maintains the
following leverage and risk-based capital ratios:
<TABLE>
<CAPTION>
December 31,
_________________________
1999 1998
__________ ________
<S> <C> <C>
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.70% 8.84%
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 12.89% 13.51%
Minimum Required 4.00 4.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 13.88% 14.57%
Minimum Required 8.00 8.00
To Be Well Capitalized Under Prompt
Corrective Action Provisions 10.00 10.00
</TABLE>
Additionally, banking regulations limit the amount of
investments, loans, extensions of credit and advances the Bank
can make to Union National at any time to 10% of the Bank's
capital stock and surplus. At December 31, 1999, this limitation
amounted to approximately $2,496,000. These regulations also
require that any such investment, loan, extension of credit or
advance be secured by securities having a market value in excess
of the amount thereof.
NOTE 13 - STOCKHOLDERS' EQUITY
On April 8, 1999, Union National's Board of Directors declared
a 5% common stock dividend that was paid on May 14, 1999. On
April 10, 1997, Union National's Board of Directors declared a 5%
common stock dividend that was paid May 15, 1997. All per share
amounts and average shares outstanding reflected in the
accompanying statements were adjusted to give retroactive effect
to these common stock dividends.
In addition, Union National maintains a Dividend Reinvestment
and Stock Purchase Plan (the Plan). Stockholders of common stock
may participate in the Plan, which provides that additional
shares of common stock may be purchased with reinvested dividends
and optional cash payments within specified limits at prevailing
market prices. To the extent that shares are not available for
purchase by the Plan in the open market, Union National has
reserved 165,375 shares of common stock to be issued under the
Plan. At December 31, 1999, 40,344 shares have been issued under
the Plan. The number of shares available for issuance under the
Plan are adjusted for stock dividends and stock splits. Open
market purchases are usually made by an independent purchasing
agent retained to act as agent for Plan participants, and the
purchase price to participants will be the actual price paid,
excluding brokerage commissions and other expenses that will be
paid by Union National.
The earnings per share, net income and weighted average number of
shares outstanding for the years ended December 31, 1999, 1998
and 1997 as computed under the basic and diluted earnings per
share methods are as follows:
<TABLE>
<CAPTION>
Net Income Shares Per Share
______________ ___________
_________
<S> <C> <C> <C>
Year Ended December 31, 1999
Basic Earnings per Share:
Income Available to
Common Stockholders $3,084,811 2,507,925 $1.23
Effect of Dilutive Securities:
Independent Directors' Stock Option,
Employee Stock Incentive and
Employee Stock Purchase Plans 0 7,628
____________ ____________ __________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $3,084,811 2,515,553 $ 1.23
=========== ============ ===========
Year Ended December 31, 1998
Basic Earnings per Share:
Income Available to
Common Stockholders $2,767,632 2,541,581 $1.09
Effect of Dilutive Securities:
Employee Stock Incentive
and Purchase Plans 0 3,573
_____________ __________ __________
Diluted Earnings Per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $2,767,632 $2,545,154 $1.09
============== ===========
=========
Year Ended December 31, 1997
Basic Earnings per Share:
Income Available to
Common Stockholders $2,325,487 2,613,873 $.89
Effect of Dilutive Securities:
Employee Stock Incentive
and Purchase Plans 0 735
___________ ______________ _________
Diluted Earnings per Share:
Income Available to
Common Stockholders $2,325,487 2,614,608 $ .89
============== =========== =========
</TABLE>
<PAGE>
NOTE 14 - STOCK OPTION PLANS
Union National currently has three separate stock option plans
in place. First, there is the Employee Stock Purchase Plan, which
allows eligible employees to purchase stock in Union National.
Options granted under this plan have a five-year term and can be
exercised at 85% of the fair market value of the stock on the
date of exercise. The other two plans are the Stock Incentive
Plan, where options are granted to key personnel, and the
Independent Directors' Stock Option Plan, which was implemented
in 1999. Options granted under these two plans have terms up to
10 years and have option prices equal to the fair value of the
shares on the date of the grant. No shares have been issued under
either of these plans.
Stock option transactions for the years ended December 31,
1999, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Stock Weighted-Average
Options Exercise Price
________ _________________
<S> <C> <C>
Year Ended December 31, 1997:
Options Granted:
Employee Stock Purchase Plan 15,750 $18.87
Stock Incentive Plans 5,071 22.16
Options Exercised
(at $18.59 to $18.83) (762) 18.63
________
Options Outstanding and Exercisable
at December 31, 1997 (Prices range
from $18.79 to $22.16) 20,059 $19.64
Year Ended December 31, 1998:
Options Granted:
Employee Stock Purchase Plan 21,000 $18.13
Stock Incentive Plans 12,600 18.81
Options Exercised
(at $15.88 to $18.85) (478) 17.68
Options Forfeited (4,959) 18.28
________
Options Outstanding and Exercisable
at December 31, 1998 (Prices range
from $15.74 to $22.16) 48,222 $17.22
Year Ended December 31, 1999:
Options Granted:
Employee Stock Purchase Plan 21,000 $18.58
Stock Incentive Plans 26,100 20.39
Independent Directors'Stock
Option Plan 10,500 22.75
Options Exercised
(at $15.12 to $19.58) (803) 17.14
Options Forfeited (4,573) 19.38
_________
Options Outstanding and Exercisable at
December 31, 1999 (Prices range from
$15.12 to $22.75) 100,446 $18.03
=========
</TABLE>
The remaining average contractual life of options outstanding
as of December 31, 1999, is 6.7 years.
The Financial Accounting Standards Board issued Statement No.
123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
This Statement defines a fair value-based method of accounting
for an employee stock option or similar equity instrument. Under
this method, compensation cost is measured at the grant date, or
other measurement date, based on the calculated fair value of the
stock options granted. The accounting requirements of SFAS No.
123 were adopted as of January 1, 1996. As permitted by SFAS No.
123, Union National has chosen to apply APB No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in
accounting for the Stock Option Plans. Accordingly, no
compensation cost has been recognized for its stock options in
the financial statements. Had Union National determined
compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, Union National's net income
and earnings per share would have been reduced to the pro forma
amounts as follows:
<TABLE>
<CAPTION>
Years Ended
December 31, 1999
_________________
<S> <C>
Net Income
As Reported $3,084,811
Pro Forma 2,826,499
Net Income per Share (Basic and
Assuming Dilution)
As Reported $1.23
Pro Forma (Basic) 1.13
Pro Forma (Assuming Dilution) 1.12
<CAPTION>
Years Ended
December 31, 1998
_________________
<S> <C>
Net Income
As Reported $2,767,632
Pro Forma 2,641,592
Net Income per Share (Basic and
Assuming Dilution)
As Reported $1.09
Pro Forma (Basic) 1.04
Pro Forma (Assuming Dilution) 1.04
<CAPTION>
Years Ended
December 31, 1997
_________________
<S> <C>
Net Income
As Reported $2,325,487
Pro Forma 2,211,846
Net Income per Share As Reported
(Basic and
Assuming Dilution) $.89
Pro Forma (Basic) .85
Pro Forma (Assuming Dilution) .85
</TABLE>
The fair value of each option is estimated on the date of grant
using the Black-Scholes option pricing model. The per share
weighted-average fair value of stock options granted is as
follows with the weighted-average assumptions also noted for the
year:
<TABLE>
<CAPTION>
Years Ended
December 31, 1999
_________________
<S> <C>
Weighted-Average Fair
Value of Options Granted $ 4.48
Weighted-Average Assumptions:
Expected Dividend Yield 3.01%
Risk-Free Interest Rate 5.84%
Expected Life (Years) 6.0
Expected Volatility Over the
Expected Life 35.1%
<CAPTION>
Years Ended
December 31, 1998
_________________
<S> <C>
Weighted-Average Fair
Value of Options Granted $ 3.75
Weighted-Average Assumptions:
Expected Dividend Yield 2.74%
Risk-Free Interest Rate 4.89%
Expected Life (Years) 4.6
Expected Volatility Over the
Expected Life 25.4%
<CAPTION>
Years Ended
December 31, 1997
_________________
<S> <C>
Weighted-Average Fair
Value of Options Granted $ 5.46
Weighted-Average Assumptions:
Expected Dividend Yield 1.71%
Risk-Free Interest Rate 6.13%
Expected Life (Years) 3.8
Expected Volatility Over the
Expected Life 22.5%
</TABLE>
<PAGE>
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" (SFAS No. 107), Union National has
presented estimated fair value information about financial
instruments, whether or not recognized in the Consolidated
Balance Sheets, for which it is practicable to estimate that
value. Fair value is best determined by values quoted through
active trading markets. Because no active trading market exists
for various types of financial instruments, many of the fair
values disclosed were derived using present value or other
valuation techniques. These fair values are significantly
affected by assumptions used, principally the timing of future
cash flows and the discount rate. As a result, Union National's
ability to realize these derived values cannot be assured.
Further, certain financial instruments and all nonfinancial
instruments are excluded. Accordingly, the aggregate fair value
amounts presented do not necessarily represent the underlying
value of Union National.
The following methods and assumptions were used by Union
National in estimating the fair value of its financial
instruments:
Cash and cash equivalents The carrying amounts reported in
the consolidated balance sheets for cash and short-term
investments approximate their fair values.
Investment securities Fair values for investment securities
are based on quoted prices, where available. If quoted prices are
not available, fair values are based on quoted prices of
comparable instruments.
Loans For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based
on carrying values. The fair values of other loans are determined
using estimated future cash flows, discounted at the interest
rates currently being offered for loans with similar terms to
borrowers with similar credit quality. The carrying amount of
accrued interest receivable approximates its fair value.
Off-balance-sheet instruments For Union National's off-
balance-sheet instruments, consisting of commitments to extend
credit and financial and performance standby letters of credit,
the estimated fair value is the same as the instrument's contract
or notional values since they are generally short-term in nature
or they are priced at market when funded.
Deposit liabilities The fair values of deposits with no
stated maturities, such as demand deposits, savings accounts, NOW
and money market deposits, equal their carrying amounts, which
represent the amount payable on demand. Fair values for fixed-
rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings The carrying amounts of federal funds
purchased, advances from the Federal Home Loan Bank and other
short-term borrowings approximate their fair values.
Long-term debt The fair values of Union National's long-term
debt are estimated using discounted cash flow analyses, based on
Union National's incremental borrowing rates for similar types of
borrowing arrangements.
At December 31, 1999 and 1998, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
<TABLE>
<CAPTION>
December 31, 1999
______________________________
Carrying
Value Fair Value
_____________ _______________
<S> <C> <C>
Assets:
Cash and Due from Banks $ 7,004,064 $ 7,004,064
Investment Securities
Held to Maturity 28,712,219 27,620,119
Investment Securities
Available for Sale 52,114,270 52,114,270
Loans, Net of Unearned Income
and Allowance for Loan Losses 173,071,483 172,299,000
Accrued Interest Receivable 1,715,645 1,715,645
Liabilities:
Demand and Savings Deposits 101,530,662 101,530,662
Time Deposits 107,650,557 107,671,000
Short-term Borrowing 9,100,000 9,100,000
Long-term Debt 27,035,360 26,768,000
<CAPTION>
Contract
Amount Fair Value
____________ _____________
<S> <C> <C>
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit $ 29,230,172 $ 29,230,172
<CAPTION>
December 31, 1998
______________________________
Carrying
Value Fair Value
_____________ _______________
<S> <C> <C>
Assets:
Cash and Due from Banks $ 7,341,240 $ 7,341,240
Investment Securities
Held to Maturity 24,079,161 24,523,740
Investment Securities
Available for Sale 51,676,350 51,676,350
Loans, Net of Unearned Income
and Allowance for Loan Losses 162,053,082 165,035,000
Accrued Interest Receivable 1,560,703 1,560,703
Liabilities:
Demand and Savings Deposits 105,486,752 105,486,752
Time Deposits 100,057,016 100,543,000
Short-term Borrowing 186,691 186,691
Long-term Debt 30,623,660 30,800,000
<CAPTION>
Contract
Amount Fair Value
____________ _____________
<S> <C> <C>
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit $ 29,804,360 $ 29,804,360
</TABLE>
<PAGE>
NOTE 16 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1999 1998
____________ _____________
<S> <C> <C>
ASSETS
Cash in Subsidiary Bank $ 8,108 $ 35,477
Investment in Subsidiary 22,021,896 22,281,338
Other Equity Investment Securities 295,890 395,541
Investments in Limited
Partnerships 823,158 882,161
Recoverable Federal Income Taxes 0 224,672
____________ _____________
Total Assets $23,149,052 $ 23,819,189
============ =============
LIABILITIES
Limited Partnership Capital Notes$ 5,446 $ 0
Deferred Income Taxes 80,152 122,452
____________ _____________
Total Liabilities 85,598 122,452
STOCKHOLDERS' EQUITY
Common Stock 656,734 627,121
Surplus 7,249,699 4,793,416
Retained Earnings 19,322,781 20,183,938
Accumulated Other Comprehensive
Income (1,037,597) 241,515
Less: Treasury Stock (3,128,163) (2,149,253)
____________ _____________
Total Stockholders' Equity 23,063,454 23,696,737
____________ _____________
Total Liabilities and
Stockholders' Equity $ 23,149,052 $ 23,819,189
============ =============
</TABLE>
<TABLE>
CONDENSED STATEMENTS OF INCOME
<CAPTION>
Years Ended December 31,
__________________________
1999 1998
_____________ __________
<S> <C> <C>
INCOME
Dividends from Subsidiary $2,075,000 $2,820,000
Dividends on Other Equity
Investment Securities 12,118 10,270
Interest on Deposits in Subsidiary 5,421 5,185
Management Fees from Subsidiary 40,973 49,273
_____________ __________
Total Income 2,133,512 2,884,728
EXPENSES 151,038 127,722
_____________ __________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 1,982,474 2,757,006
PROVISION FOR INCOME TAXES (BENEFIT)(156,363) (138,087)
_____________ __________
2,138,837 2,895,093
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 945,974 (127,461)
_____________ __________
NET INCOME $3,084,811 $2,767,632
============= ==========
<CAPTION>
Years Ended December 31,
_________________________
1997
_____________
<S> <C>
INCOME
Dividends from Subsidiary $1,100,000
Dividends on Other Equity
Investment Securities 8,882
Interest on Deposits in Subsidiary 3,647
Management Fees from Subsidiary 39,690
_____________
Total Income 1,152,219
EXPENSES 140,660
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 1,011,559
PROVISION FOR INCOME TAXES (BENEFIT) (141,872)
_____________
1,153,431
EQUITY in UNDISTRIBUTED INCOME
of SUBSIDIARY 1,172,056
_____________
NET INCOME $2,325,487
=============
</TABLE>
<PAGE>
<TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
_____________________________
1999 1998
______________ _____________
<S> <C> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $3,084,811 $2,767,632
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Undistributed Income of
Subsidiary (945,974) 127,461
Provision for Deferred Income Taxes (4,336) (4,186)
Decrease/(Increase) in Other
Assets 283,675 (6,524)
(Decrease)/Increase in Other
Liabilities 5,446 0
______________ _____________
Net Cash Provided by Operating
Activities 2,423,622 2,884,383
CASH FLOWS from INVESTING ACTIVITIES
Purchases of Available for Sale
Securities (12,009) 0
______________ _____________
Net Cash Provided by (Used in)
Investing Activities (12,009) 0
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (1,352,675) (1,995,379)
Payments on Long-Term Debt 0 (190,000)
Issuance of Common and Treasury Stock 338,190 266,265
Cash Dividends Paid (1,424,497) (1,044,423)
______________ _____________
Net Cash (Used in)
Financing Activities (2,438,982) (2,963,537)
______________ _____________
NET INCREASE/(DECREASE) in CASH (27,369) (79,154)
CASH - Beginning of Year 35,477 114,631
______________ _____________
CASH - End of Year $ 8,108 $ 35,477
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (17,000
shares in 1999,13,000
shares in 1998, and 12,000
shares in 1997) $ 373,765 $ 288,035
<CAPTION>
Years Ended December 31,
____________________________
1997
______________
<S> <C>
CASH FLOWS from OPERATING ACTIVITIES
Net Income $2,325,487
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Undistributed Income of
Subsidiary (1,172,056)
Provision for Deferred Income Taxes (1,556)
Decrease/(Increase) in Other Assets 78,200
(Decrease)/Increase in Other Liabilities 0
______________
Net Cash Provided by Operating
Activities 1,230,075
CASH FLOWS from INVESTING ACTIVITIES
Purchases of Available for Sale
Securities (5,950)
_______________
Net Cash Provided by (Used in)
Investing Activities (5,950)
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (306,746)
Payments on Long-Term Debt (140,000)
Issuance of Common and Treasury Stock 198,827
Cash Dividends Paid (876,280)
_______________
Net Cash (Used in)
Financing Activities (1,124,199)
_______________
NET INCREASE/(DECREASE) in CASH 99,926
CASH - Beginning of Year 14,705
_______________
CASH - End of Year $ 114,631
===============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Retirement of Treasury Stock (17,000
shares in 1999,13,000
shares in 1998,and 12,000 shares in
1997) $227,542
</TABLE>
NOTE 17 - SUBSEQUENT EVENT
On January 13, 2000, the Board of Directors of Union National
authorized and approved a plan to purchase up to 50,000 shares of
its outstanding common stock in open market or privately
negotiated transactions. The number of shares to be purchased
under the plan represents approximately 2.0% of the outstanding
shares of Union National. 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).
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
Union National Financial Corporation and Subsidiary
Mount Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets of
UNION NATIONAL FINANCIAL CORPORATION and SUBSIDIARY as of
December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December
31, 1999. These consolidated financial statements are the
responsibility of management. Our responsibility is to express
an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Union National Financial Corporation and Subsidiary
as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
January 13, 2000
Lancaster, Pennsylvania
/s/ Trout, Ebersole & Groff, LLP
____________________________________
Trout, Ebersole and Groff, LLP
Certified Public Accountants
<TABLE>
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 1999 and 1998, are as follows:
<CAPTION>
1999
__________________________________________
(Dollars in thousands, March June September December
except per share data) 31 30 30 31
_______ ______ ________ ________
<S> <C> <C> <C> <C>
Interest Income $4,660 $4,749 $4,839 $4,831
Interest Expense 2,139 2,148 2,237 2,287
_______ ______ ________ ________
Net Interest Income 2,521 2,601 2,602 2,544
Provision for Loan Losses 41 57 94 21
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,480 2,544 2,508 2,523
Other Operating Income 335 353 375 415
Other Operating Expenses 1,858 1,905 1,983 1,980
_______ ______ ________ ________
Income before Income Taxes 957 992 900 958
Provision for Income Taxes 199 201 127 195
_______ ______ ________ ________
Net Income $758 $791 $773 $763
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution) $ 0.30 $ 0.31 $ 0.31 $ 0.31
======= ====== ======== ========
<CAPTION>
1998
__________________________________________
(In Thousands) March June September December
31 30 30 31
_______ ______ ________ ________
<S> <C> <C> <C> <C>
Interest Income $4,356 $4,473 $4,541 $4,693
Interest Expense 2,096 2,150 2,228 2,220
_______ ______ ________ ________
Net Interest Income 2,260 2,323 2,313 2,473
Provision for Loan Losses 99 130 53 43
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,161 2,193 2,260 2,430
Other Operating Income 286 266 295 310
Other Operating Expenses 1,626 1,604 1,663 1,825
_______ ______ ________ ________
Income before Income Taxes 821 855 892 915
Provision for Income Taxes 169 178 185 184
_______ ______ ________ ________
Net Income $652 $677 $707 $731
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution) $ 0.25 $ 0.27 $ 0.28 $ 0.29
======= ====== ======== ========
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in its accompanying
consolidated financial statements for Union National Financial
Corporation (Union National), a bank holding company, and its
wholly-owned subsidiary, Union National Community Bank (the
Bank). Union National's consolidated financial condition and
results of operations consist almost entirely of the Bank's
financial condition and results of operations. This discussion
should be read in conjunction with the financial
tables/statistics, financial statements and notes to financial
statements appearing elsewhere in this annual report. Current
performance does not guarantee, assure or may not be indicative
of similar performance in the future.
We have made forward-looking statements in this document, and
in documents that we incorporate by reference, that are
subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future
results of operations of Union National Financial Corporation,
Union National Community Bank or the combined company. When we
use words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial
results of Union National Financial Corporation, Union National
Community Bank or the combined company and could cause those
results to differ materially from those expressed in our forward-
looking statements contained or incorporated by reference in this
document. These factors include the following:
- - operating, legal and regulatory risks;
- - economic, political and competitive forces affecting our
banking, securities, asset management and credit services
businesses; and
- - the risk that our analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
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 1999 was $3,085,000, an increase
of 11.5%, as compared to consolidated net income of $2,768,000
for 1998. Consolidated net income for 1998 increased by 19.1%, as
compared to consolidated net income of $2,325,000 for 1997.
On a per share basis, net income for 1999 was $1.23, as
compared to $1.09 for 1998 and $.89 for 1997. The earnings per
share information is the same under the basic and assuming
dilution methods.
Results of operations for 1999 as compared to 1998 were
impacted by the following items:
- - Net income increased due to growth of 4.7% in average net loans
and growth of 24.6% in average investment securities, which were
funded primarily by growth in average deposits and by additions
to average borrowings.
- - Net income increased due to a 27.6% increase in other operating
income.
- - Net income increased due to a slight widening of the spread
between the earnings rates on loans and investments as compared
to the interest rates paid on deposits and long-term debt.
- - Net income increased due to a decrease in the provision for
loan losses.
- - Net income decreased due to a 15.0% increase in other
operating expenses.
The above items are quantified and discussed in further detail
under their respective sections below.
Results of operations for 1998 as compared to 1997 were
impacted by the following items:
- - Net income increased due to a 15.0% increase in average net
loans, which were funded by growth in deposits and by
additions to average borrowings.
- - Net income increased due to a 17.4% increase in other operating
income.
- - Net income decreased due to the narrowing of the spread between
the earnings rates on loans and investments as compared to the
interest rates paid on certificates of deposit and long-term
debt.
- - Net income decreased due to a 5.8% increase in other operating
expenses.
- - Net income increased due to a decrease in the provision for
loan losses.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of total average assets, also known as
return on average assets (ROA), was 1.17% for 1999, compared to
1.15% for 1998 and 1.09% for 1997. Net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE), was 13.29% for 1999, compared to 12.05% for 1998
and 10.17% for 1997. ROE was positively impacted by the
repurchase of 63,198 shares of outstanding common stock in 1999
and 88,513 shares in 1998. See the discussion under the section
on Stockholders' Equity for further details.
Management currently expects the growth in loans and deposits
for 2000 to be comparable to its historic growth rates. Growth
should be comparable due to specific actions that management has
taken 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 of financial institutions in the
Bank's Market Area;
- - 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 2000 appears favorable due to continued economic
growth and construction activity. 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
<PAGE>
the volume and mix of interest-sensitive assets and liabilities.
Net interest income and corresponding yields are presented
in the tables and related discussion on a taxable equivalent
basis. Income from tax-exempt assets, primarily loans to or
securities issued by state and local governments, is adjusted by
an amount equivalent to the federal income taxes that would have
been paid if the income received on these assets was taxable at
the statutory rate of 34% for 1999, 1998 and 1997.
Net interest income for 1999 increased by $1,044,000, or
10.4%, over 1998. Net interest income for 1998 increased by
$824,000, or 9.0%, over 1997. For 1999, average loan growth of
$7,577,000 and average investment security growth of $15,617,000
were funded primarily by the growth in average deposits of
$18,291,000 and by growth in average borrowings of $2,906,000.
Average earning assets increased in the amount of $21,289,000 in
the aggregate over 1998. The volume growth in earning assets and
interest-bearing liabilities increased net interest income by the
amount of $943,000 in 1999 over 1998, as compared to $1,179,000
in 1998 over 1997.
The overall interest rate on the average total earning assets
decreased to 7.91% for 1999, as compared to 8.13% for 1998, due
to an overall market decline in interest rates and the
refinancing of higher interest rate loans with lower interest
rates. The overall interest rate on the average interest-bearing
liabilities decreased to 4.07% for 1999, as compared to 4.39% for
1998. This is due to decreases in rates paid on interest-bearing
demand deposits, savings deposits and time deposits of less than
$100,000 and the repricing of adjustable-rate advances from the
Federal Home Loan Bank of Pittsburgh (FHLB) to current market
rates. The net effect of all interest rate fluctuations and
funding changes was to increase net interest income in the amount
of $101,000 for 1999 over 1998, as compared to a decrease of
$355,000 for 1998 from 1997. See Management's discussion below
concerning the anticipated impact of these interest rate
fluctuations to the results of operations for 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 FHLB. The terms and amounts of the transactions, when
combined with the Bank's overall balance sheet structure,
maintain the Bank within its interest rate risk policies. As of
December 31, 1999, the Bank
<TABLE>
Distribution of Assets, Liabilities, and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
<CAPTION>
Year Ended
December 31, 1999
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
ASSETS
Interest-Bearing Deposits
in Other Banks $ 53 $ 2 3.77%
Federal Funds Sold 2,253 108 4.79
Investment Securities:
Taxable 54,306 3,337 6.14
Exempt from Federal Taxes 24,772 1,921 7.75
Loans-Net* 169,667 14,482 8.54
_________ ________ ______
Total Earning Assets 251,051 $ 19,850 7.91%
======== ======
Allowance for Loan Losses (1,791)
Other Nonearning Assets 13,815
_________
TOTAL ASSETS $ 263,075
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 52,084 $ 1,127 2.16%
Savings 28,258 589 2.08
Time 104,224 5,355 5.14
Short-Term Borrowing 2,020 112 5.54
Long-Term Debt 29,882 1,627 5.44
_________ ________ ______
Total Interest-Bearing
Liabilities 216,468 $ 8,810 4.07%
======== ======
Demand Deposits 21,904
Other Liabilities 1,485
_________
TOTAL LIABILITIES 239,857
Stockholders' Equity 23,218
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 263,075
=========
Net Interest Income/Yield on
Average Earning Assets $11,040 4.40%
======== ======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. Balances reflect
amortized historical cost for available for sale securities. The
related average unrealized holding gain or loss on securities is
included in other nonearning assets. Tax-exempt income included
in loans and securities has been adjusted to a taxable equivalent
basis using an incremental rate of 34%.
* Includes loan fees of $589,000 for the year ended December 31,
1999, $613,000 for 1998, and $572,000 for 1997.
<CAPTION>
Year Ended
December 31, 1998
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
ASSETS
Interest-Bearing Deposits
in Other Banks $ 51 $ 2 3.92%
Federal Funds Sold 4,160 222 5.34
Investment Securities:
Taxable 44,540 2,796 6.28
Exempt from Federal Taxes 18,921 1,508 7.97
Loans-Net* 162,090 14,163 8.74
_________ ________ ______
Total Earning Assets 229,762 $ 18,691 8.13%
======== ======
Allowance for Loan Losses (1,681)
Other Nonearning Assets 13,558
_________
TOTAL ASSETS $ 241,639
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 44,528 $ 1,015 2.28%
Savings 25,598 601 2.35
Time 98,842 5,435 5.50
Short-Term Borrowing 412 23 5.58
Long-Term Debt 28,584 1,621 5.67
_________ ________ ______
Total Interest-Bearing
Liabilities 197,964 $ 8,695 4.39%
======== ======
Demand Deposits 19,211
Other Liabilities 1,493
_________
TOTAL LIABILITIES 218,668
Stockholders' Equity 22,971
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 241,639
=========
Net Interest Income/Yield on
Average Earning Assets $ 9,996 4.35%
======== ======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. Balances reflect
amortized historical cost for available for sale securities. The
related average unrealized holding gain or loss on securities is
included in other nonearning assets. Tax-exempt income included
in loans and securities has been adjusted to a taxable equivalent
basis using an incremental rate of 34%.
* Includes loan fees of $589,000 for the year ended December 31,
1999, $613,000 for 1998, and $572,000 for 1997.
<CAPTION>
Year Ended
December 31, 1997
_________________________________
(In Thousands) Average
Balance Interest Rate
_________ ________ ______
<S> <C> <C> <C>
ASSETS
Interest-Bearing Deposits
in Other Banks $ 84 $ 3 3.57%
Federal Funds Sold 3,480 192 5.52
Investment Securities:
Taxable 41,262 2,659 6.44
Exempt from Federal Taxes 16,289 1,315 8.07
Loans-Net* 140,925 12,553 8.91
_________ ________ ______
Total Earning Assets 202,040 $ 16,722 8.28%
======== ======
Allowance for Loan Losses (1,456)
Other Nonearning Assets 13,402
_________
TOTAL ASSETS $ 213,986
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 38,134 $ 852 2.23%
Savings 24,184 590 2.44
Time 89,992 4,913 5.46
Short-Term Borrowing 1,461 87 5.95
Long-Term Debt 19,425 1,108 5.70
_________ ________ ______
Total Interest-Bearing
Liabilities 173,196 $ 7,550 4.36%
======== ======
Demand Deposits 16,504
Other Liabilities 1,427
_________
TOTAL LIABILITIES 191,127
Stockholders' Equity 22,859
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 213,986
=========
Net Interest Income/Yield on
Average Earning Assets $ 9,172 4.54%
======== ======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. Balances reflect
amortized historical cost for available for sale securities. The
related average unrealized holding gain or loss on securities is
included in other nonearning assets. Tax-exempt income included
in loans and securities has been adjusted to a taxable equivalent
basis using an incremental rate of 34%.
* Includes loan fees of $589,000 for the year ended December 31,
1999, $613,000 for 1998, and $572,000 for 1997.
</TABLE>
<PAGE>
had received long-term advances of $27,035,000 and short-term
advances of $8,200,000 from its available credit of $73,689,000
at the FHLB for purposes of funding loan demand and mortgage-
backed security purchases. The total advances have a current
average effective rate of 5.37% with maturities ranging from
January 2000 to September 2008.
Commencing October 1998, the Federal Reserve Bank began
loosening the monetary supply, causing the prime interest rate
to decrease from 8.50% to 7.75%. The immediate impact of these
short-term interest rate decreases was to decrease interest rates
on loans and deposits that adjust according to short-term rate
indexes and to decrease reinvestment rates on investment
securities and renewing certificates of deposit. However, in June
1999, the Federal Reserve Bank began tightening the monetary
supply and the prime interest rate was increased from 7.75% to
8.50% by November 1999. In addition, subsequent to year-end the
Federal Reserve again increased interest rates, causing the prime
interest rate to increase to 8.75%. 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 FHLB.
As a result of the general increase in interest rates, it is
currently anticipated that for 2000, the Bank's net interest
margin percentage will narrow in comparison to the net interest
margin percentage for 1999. As an offset to the narrowing of the
net interest margin percentage, income from growth in earning
assets during 1999, net of costs of growth in deposits and
borrowings, will increase the net interest margin in 2000. The
netting of these two factors, as reflected in the Bank's current
model and estimates as of December 31, 1999, may result in a net
interest margin for 2000 that is currently expected to range from
comparable to a moderate increase in the net interest margin over
1999. However, currently expected growth in earning assets during
the year 2000 should increase the Bank's net interest margin.
This growth is not reflected in the Bank's model at December 31,
1999. Although the effective interest rate impact of expected
cash flows on investments and of renewing certificates of deposit
can be reasonably estimated at current interest rate levels, the
yield curve during 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 models. See discussions on Liquidity and Market
Risk Interest Rate Risk.
Provision for Loan Losses
The loan loss provision is an estimated expense charged to
earnings in anticipation of losses attributable to uncollectible
loans. The provision is based on Management's analysis of the
adequacy of the allowance for loan losses. Net charge-offs
amounted to $174,000 for 1999, as compared to $175,000 for 1998
and $168,000 for 1997. Future adjustments to the allowance, and
consequently the provision for loan losses, may be necessary if
economic conditions or loan credit quality differ substantially
from the assumptions used in making Management's evaluation of
the level of the allowance for loan losses as compared to the
balance of outstanding loans. The provision for loan losses was
$214,000 in 1999, $325,000 in 1998 and $390,000 in 1997. The
decrease in the provision for loan losses from 1999 to 1998 is
mainly a result of a decline in the required level of the
allowance for loan losses. See discussion on Loan
Quality/Allowance for Loan Losses.
Other Operating Income
Other operating income for 1999 was $1,477,000, representing
an increase of $320,000, or 27.6%, over 1998. Contributing to
this
<TABLE>
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
<CAPTION>
1999 Compared to 1998
_____________________________
Total
(In Thousands) Change Volume Rate
________ ________ _____
<S> <C> <C> <C>
Interest Income From Interest-
Bearing Deposits in Other Banks $ 0 $ 0 $ 0
Federal Funds Sold (114) (93) (21)
Investment Securities:
Taxable 541 601 (60)
Exempt from Federal Taxes 413 455 (42)
Loans-Net 319 652 (333)
________ ________ _____
Total Earning Assets 1,159 1,615 (456)
Interest Expense On
Deposits:
Interest-Bearing Demand 112 165 (53)
Savings (12) 59 (71)
Time (80) 287 (367)
Short-Term Borrowing 89 89 0
Long-Term Debt 6 72 (66)
________ ________ _____
Total Interest-Bearing
Liabilities 115 672 (557)
________ ________ _____
Net Interest Income $ 1,044 $ 943 $ 101
======== ======== =====
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. The change in interest
due to both volume and rate has been allocated individually to
the change in volume and rate on a proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
<CAPTION>
1998 Compared to 1997
_____________________________
Total
(In Thousands) Change Volume Rate
________ ________ _____
<S> <C> <C> <C>
Interest Income From Interest-
Bearing Deposits in Other Banks $ (1) $ (1) $ 0
Federal Funds Sold 30 36 (6)
Investment Securities:
Taxable 137 207 (70)
Exempt from Federal Taxes 193 210 (17)
Loans-Net 1,610 1,853 (243)
________ ________ _____
Total Earning Assets 1,969 2,305 (336)
Interest Expense On
Deposits:
Interest-Bearing Demand 163 146 17
Savings 11 33 (22)
Time 522 487 35
Short-Term Borrowing (64) (59) (5)
Long-Term Debt 513 519 (6)
________ ________ _____
Total Interest-Bearing
Liabilities 1,145 1,126 19
________ ________ _____
Net Interest Income $ 824 $ 1,179 $(355)
======== ======== =====
Balances of nonaccrual loans and related income recognized have
been included for computational purposes. The change in interest
due to both volume and rate has been allocated individually to
the change in volume and rate on a proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
</TABLE>
<PAGE>
increase were the following items:
- - additional earnings in insufficient funds charges in the amount
of $60,000, which were partially a result of an increase in the
Bank's per-item insufficient funds charge effective in June 1998;
- - additional earnings in monthly service charges in the amount of
$59,000, which were primarily a result of increases in monthly
service charges on non-interest bearing accounts effective May 1,
1999;
- - additional earnings on commissions from the sale of loan
insurance in the amount of $52,000, which was primarily a result
of an increased sales focus and an increase in the Bank's
commission rates;
- - increased usage of the Bank's debit cards, resulting in
additional earnings in interchange fee income in the amount of
$45,000;
- - additional commission earnings in the amount of $36,000 from
the sales of alternative investment products through the Bank's
continued relationship with T.H.E. Financial Group, Ltd.;
- - additional earnings from check sales in the amount of $15,000;
- - an increase in income from trust services in the amount of
$23,000; and
- - an increase in safe deposit box revenue in the amount of
$11,000 as a result of an increase in fees effective January 1,
1999.
The Bank also currently assesses a surcharge at its automatic
teller machines (ATMs); however, ATM surcharges, or the
elimination thereof, may be subject to future legislation.
Other operating income for 1998 was $1,157,000, representing
an increase of $171,000, or 17.3%, over 1997. Contributing to
this increase were the following items:
- - additional earnings in ATM and card usage fees including ATM
surcharges in the amount of $26,000;
- - additional earnings in insufficient funds charges in the amount
of $81,000;
- - additional earnings in debit card interchange fee income in the
amount of $39,000; and
- - additional commission earnings in the amount of $31,000 from
the sales of alternative investment products through T.H.E.
Financial Group, Ltd.
Other Operating Expenses
The aggregate of non-interest expenses for 1999 increased by
$1,007,000, or 15.0%, over 1998. This non-interest expense
increase is discussed below as it pertains to the various expense
categories.
Employee salaries and wages increased by $443,000, or 14.1%,
over 1998. This increase was essentially due to annual merit and
cost-of-living increases, planned staff additions and an
incentive compensation plan based on the Bank's 1999 financial
performance. New staff positions include a senior vice president
to lead retail and commercial banking, a senior vice president to
lead sales and marketing efforts, a community banking group
manager, an accounting officer, a full-time business development
officer, a quality service manager and additional staff for our
new Telephone Banking Center, for the Credit Services Division
and for retail banking, training and support. The majority of
these staff positions were added during the third and fourth
quarters of 1998 and their costs were partially offset by savings
as a result of staff retirements in 1998.
Related fringe benefits increased by $166,000, or 26.2%, from
the same period in 1998. The increased expense is primarily a
result of increased employee benefit costs as a result of staff
additions. Benefit costs were also increased by $52,000 as a
result of the implementation of the Union National Community Bank
401(k) Profit Sharing Plan, which replaced the previous profit-
sharing plan. This plan was effective January 1, 1999, and allows
employees to contribute a portion of their salaries and wages to
the plan. The Bank may elect to make a discretionary contribution
to the plan and may also match a portion of employee-elected
salary deferrals, subject to a 6% maximum of their salaries and
wages. For 1999, the Bank elected to match 50% of employee-
elected salary deferrals, which do not exceed 6% of their
salaries and wages, and elected to contribute 5% of eligible
salaries as its discretionary contribution.
Occupancy, furniture and equipment expenses for 1999
increased by $37,000, or 3.9%, over 1998. This was due to an
increase in lease expense, repairs and maintenance costs and
due to minor increases in various other expense categories. The
increase in lease expense is a result of our new Credit Services
Division, which was leased as of September 1, 1998.
Other operating expenses for 1999 increased by $360,000, or
18.3%, over 1998. Contributing factors to the increase in other
operating expenses as compared to 1998 included the following:
- - an increase in advertising expenses in the amount of $81,000 as
a result of expenditures for the development and promotion
of the Bank's new logo, advertising efforts to increase Union
National's brand awareness and increased expenditures for
various sales campaigns;
- - an increase in professional and consulting fees of $84,000;
- - an increase in MAC fees of $39,000 due to higher transaction
volumes;
- - an increase in staff training costs of $27,000;
- - an increase in director fees of $25,000; and
- - minor increases in various other expense categories.
Expenditures in 1999 for professional fees included fees paid to
an electronic data processing consultant to assist in the
assessment of current system capabilities and alternatives, fees
paid to an independent consultant for loan review services, fees
paid to an independent company to perform internal audit services
and fees paid to a consultant for a review and analysis of
current and potential market areas.
The aggregate of non-interest expenses for 1998 increased by
$371,000, or 5.8%, over 1997. This non-interest expense increase
is discussed below as it pertains to the various expense
categories.
Employee salaries and wages increased by $363,000, or 13.0%,
for 1998 over 1997. This increase was essentially due to annual
merit and cost-of-living increases, early retirement payments and
planned new staff positions as discussed above.
Related fringe benefits decreased by $224,000, or 26.1%, in
1998 from 1997. The decrease is essentially due to a reduction in
the Bank's discretionary contribution to the Bank's profit-
sharing plan.
Occupancy, furniture and equipment expenses for 1998
decreased by $18,000, or 1.9%, from 1997.
Other operating expenses for 1998 increased by $250,000, or
14.6%, over the same period in 1997. Contributing factors to the
increase in other operating expenses as compared to the same
period in 1997 included the following:
- - an increase in supplies expenses of $57,000;
- - an increase in professional and consulting fees in the amount
of $47,000; and
- - an increase in ATM transaction and clearing costs in the amount
of $28,000.
The increase in professional and consulting fees included
consulting fees for a sales training program for staff,
consulting fees for an electronic data processing consultant to
perform a comprehensive review of current system capabilities and
alternatives, fees paid to an independent consultant for loan
review services and legal costs for certain loan collection
services in connection with charge-offs and non-performing assets
in 1998.
Income Taxes
Union National's income tax expense for 1999 was $722,000,
as compared to $715,000 for 1998 and $579,000 for 1997. The
effective tax rate for 1999 was 19.0% as compared to 20.5% in
1998 and 19.9% in 1997. The increase in income tax expense over
<PAGE>
the past three years was primarily due to the increase in
corporate earnings before income taxes. The slight decline in the
effective tax rate from 1998 to 1999 is a result of an increase
in earnings on tax-exempt investments and loans. Currently, the
effective tax rate of Union National for 2000 is expected to
approximate the effective tax rate in 1999.
Initiatives for 2000
During 2000, the Bank is implementing various initiatives
that should impact the results of operations of Union National.
In January 2000, the Bank added two key staff positions. First,
the Bank added a chief lending officer who 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 should enhance the credit review process for new
loans and should further allow our loan and business development
officers to focus on their sales efforts. The Bank also added
a manager to lead our newly developed Wealth Management Group.
The addition of this position will allow Union National to
diversify and grow our Trust Services with additional investment
and asset management services. These additions to staff are
currently expected to reduce results of operations in 2000 by an
estimated amount of $100,000, net of tax, for salary and related
benefit costs. However, these additions to staff will also enable
Union National to enhance both interest income and fee income in
2000 and beyond.
The Bank also received regulatory approval to open a
community banking office at 401 Locust Street in Columbia.
Management currently anticipates an opening date in April 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 2000
by an estimated amount of $125,000, 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 will require some
renovations, furnishings and equipment, which are currently
estimated at a cost of $130,000 to be incurred in 2000.
In an effort to increase brand awareness for Union National
during 2000 there will be sign and other changes at our community
offices. The costs of sign changes are currently estimated at
$139,000, and the addition of these signs is expected to decrease
results of operations by $22,000 in 2000, net of tax, including
the write-off of existing sign assets.
Union National has been evaluating its technology resources
and alternatives during 1999. A technology plan has been
developed and is expected to be implemented over the next two
years. These plans include a voice-response unit, a marketing
central information file (MCIF) database system, a bank-wide
network and a change in our core data processing system. These
system enhancements will allow Union National to provide
additional services to customers, more effectively market our
existing products and significantly increase operational
efficiencies. The systems implemented during 2000 are currently
expected to have an immaterial impact on the results of
operations. Future systems changes may materially impact the
results of operations in future years.
Union National also will be developing and promoting several
new products in 2000. These products include a small business
checking account, an unsecured consumer line of credit, a
relationship package account and other additions to our current
product line. Management believes that these new products will
enhance results of operations for 2000.
See Stockholders' Equity section for further discussion on
the impact of the above items on the capital resources of Union
National in 2000.
Year 2000 Date Change
The Year 2000 Problem resulted because many computer programs
were written using two digits rather than four to define the
applicable year. In 1997, Union National initiated a company-wide
program to ensure that our date-sensitive information, telephone
and business systems and other certain equipment would properly
recognize the Year 2000 as a result of the century date change on
January 1, 2000 and other identified dates. The program focused
on the hardware, software, embedded chips, third-party vendors
and suppliers, as well as third-party networks that were
associated with the identified systems. The program was
substantially completed during the third quarter of 1999 and our
systems did not experience any significant disruptions as a
result of the century date change. Total nonrecurring Year 2000
related costs for 1999 and 1998, net of income taxes, were
immaterial. Management does not currently expect to incur any
significant additional costs related to Year 2000 compliance.
While there can be no assurance that no legal claims will arise
due to perceived or real Year 2000 issues, Union National does
not expect a material impact on its liquidity, financial position
or results of operations caused by internal Year 2000 issues or
by possible claims asserted by third parties.
Changes in Accounting Standards
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133 (SFAS No. 133), "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes
accounting and reporting standards for derivative instruments and
for hedging activities. In addition, the transition provisions of
this Statement allow Union National to reclassify held to
maturity securities to an available for sale classification.
Union National does not expect the provisions of this Statement
to have a material effect on the liquidity, results of operations
or capital resources of Union National when it becomes effective.
The effective date of this pronouncement was delayed until the
first quarter of 2001 through the issuance of SFAS No. 137,
however earlier application is encouraged.
Current Accounting Developments
During the fourth quarter of 1999, the Financial Accounting
Standards Board issued an Exposure Draft on Business Combinations
and Intangible Assets. Under the proposed Draft, companies would
account for all business combinations using the purchase method;
amortize goodwill over its useful economic life, but in no event
over a period longer than 20 years; present goodwill charges on a
net-of-tax basis as the last component of continuing operations
on the income statement; recognize negative goodwill as an
extraordinary gain; and recognize all reliably measureable
identifiable intangible assets at their fair value, among other
recommendations. The FASB expects to issue a final statement in
the fourth quarter of 2000, applicable to business combinations
and to intangible assets acquired in transactions initiated after
the issuance date of the final statement.
Financial Condition
Investment Securities
Union National has segregated its investment securities into
two categories: those held to maturity and those available for
sale. Union National possesses both the intent, subject to credit
impairment, and ability to hold each security in its investment
<PAGE>
portfolio to maturity. Union National does recognize that the
investment portfolio serves other functions including an ultimate
source of liquidity and a tool to manage interest rate risk. In
order to acknowledge these functions, Union National has
designated certain specific debt securities as being available
for sale. The designation of these securities as available for
sale gives Union National the ability to liquidate them without
calling into question Union National's intent to hold the
remaining portion of its portfolio to maturity. In addition, all
marketable equity securities are classified as available for
sale. Unrealized holding gains and losses for available for sale
securities are reported as Accumulated Other Comprehensive Income
as a separate component of stockholders' equity, net of tax,
until realized. Securities classified as being held to maturity
will continue to be carried in the financial statements at their
amortized cost. The Bank's mortgage-backed securities are issued
by U.S. Government agencies or corporations.
The amortized cost of the investment securities increased by
$7,009,000 from the prior year, representing a 9.3% increase. The
increase primarily consisted of purchases of obligations of state
and political subdivisions, corporate debt securities and
mortgage-backed securities, which amounted to an increase in
amortized cost of $10,604,000 from the prior year. The net
increase in the investment securities was funded primarily by
growth in average deposits and average borrowings.
Fixed-rate mortgage-backed securities, known as
collateralized mortgage obligations (CMOs), had an amortized cost
of $19,593,000 at December 31, 1999, compared to $17,032,000 at
December 31, 1998. These CMOs had a weighted-average yield of
6.42% at December 31, 1999. As of December 31, 1999, the expected
weighted-average life of these CMOs was approximately 7.4 years,
as compared to 4.0 years at December 31, 1998. The weighted-
average life represents expected cash flows of the investment
weighted over time. The increase in the weighted-average life
from 1998 to 1999 resulted from the significant rise in market
interest rates during the second half of 1999. These increased
rates decreased the payment speeds on the underlying mortgage
loans resulting in the reduction of overall investment cash
flows. The weighted-average life of the CMOs at December 31,
1999, increases to approximately 9.5 years if there is an
immediate increase in long-term market interest rates of 2% and
decreases to approximately 2.3 years if there is an immediate
decrease in long-term market interest rates of 2%.
Due to the generally lower long-term mortgage rates during
the first half of 1999 as compared to 1998, the prepayment speed
on adjustable-rate mortgage securities significantly increased as
homebuyers moved to lower-cost fixed-rate mortgages. Higher
prepayment speeds on investment securities purchased with a
premium will depress the net interest margin as the premium is
amortized more rapidly. The amortized cost of mortgage-backed
securities with adjustable-rate caps of 2% per year amounted to
$6,282,000 at December 31, 1999, and $4,968,000 at December 31,
1998. The amortized cost of mortgage-backed securities with
adjustable-rate caps of 1% per year amounted to $2,817,000 at
December 31, 1999, and $3,775,000 at December 31, 1998. The
amortized cost of floating-rate securities, including adjustable-
rate mortgage-backed securities, amounted to $10,742,000 at
December 31, 1999, and $10,758,000 at December 31, 1998.
The expected cash flows from the investment securities,
including estimated prepayments and expected call options, is
currently estimated at $11,772,000 for 2000, which represents
approximately 15% of the Bank's investment securities as compared
to nearly 26% as estimated on December 31, 1998, for 1999. This
decline in expected cash flows is mainly a result of the slowdown
in expected cash flows from CMOs. These factors affecting the
Bank's investment securities, as previously discussed, are
included in the Bank's internal management information when
assessing liquidity and interest rate risks. See sections on
Liquidity and Market Risk Interest Rate Risk for further
discussions on these risks.
Management periodically assesses the strategy of selling
adjustable-rate mortgage-backed securities, CMOs and other
available for sale securities. Investment security purchases and
sales are affected in order to enhance the Bank's net interest
margin, while managing liquidity and interest rate risk within
specified limits. Based on the current interest rate environment,
Management will be evaluating its available for sale portfolio
for possible opportunities to increase its earnings for year 2000
and future years through potential investment security sales.
Management currently expects that net investment gains or
losses realized in 2000 will be immaterial.
Union National did not hold any subinvestment grade security
or a security that had a market value decline below cost that is
other than temporary at December 31, 1999. In addition, there are
no significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issuer.
At December 31, 1999, the total unrealized holding loss for
securities classified as available for sale was $1,572,000, and
the total unrealized holding loss for securities classified as
held to maturity was $1,092,000. In comparison, at December 31,
1998, the total unrealized holding gain for securities classified
as available for sale was $366,000 and the total unrealized
holding gain for securities classified as held to maturity was
$445,000. The unrealized holding gain (loss) on the available for
sale securities, net of income tax effect, amounted to a decrease
in stockholders' equity of $1,038,000 at December 31, 1999, and
an increase of $242,000 at December 31, 1998. Except as discussed
under the Net Interest Income section with regards to the impact
of interest rate changes on the results of operations, Management
believes that the effects of any unrealized losses in the
available for sale investment portfolio on future earnings,
liquidity and capital resources to be immaterial.
The following shows the summary of investment securities held by
Union National:
<TABLE>
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1999 1998
_______________________ _____________________
Available Held to Available Held to
for Sale Maturity for Sale Maturity
____________ ________ __________ ________
<S> <C> <C> <C> <C>
U. S. Treasury
Securities $ 2,001 $ 0 $ 3,560 $ 0
Obligations of
Other U.S.
Government Agencies 11,013 0 14,220 0
Obligations of State
and Political
Subdivisions 0 25,452 0 21,806
Corporate Securities 5,592 3,260 1,958 2,273
Mortgage-Backed
Securities 30,110 0 28,982 0
Equity Securities 3,398 0 2,956 0
____________ ________ __________ ________
Total $52,114 $28,712 $ 51,676 $24,079
============ ======== ========== ========
<CAPTION>
(In Thousands) Carrying Value at December 31,
________________________________________________
1997
________________________
Available Held to
for Sale Maturity
____________ _________
<S> <C> <C>
U. S. Treasury
Securities $ 4,018 $ 0
Obligations of
Other U.S.
Government Agencies 18,397 0
Obligations of State
and Political
Subdivisions 0 17,361
Corporate Securities 0 1,509
Mortgage-Backed
Securities 20,808 0
Equity Securities 2,644 0
____________ _________
Total $ 45,867 $18,870
============ =========
</TABLE>
<PAGE>
The following table illustrates the maturities of investment
securities and the weighted-average yields based upon amortized
costs as of December 31, 1999. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
<TABLE>
<CAPTION>
Within 1 - 5 5 - 10 Over
(In Thousands) 1 Year Years Years 10 Years
________ _______ _______ _________
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ 2,001 $ 0 $ 0 $ 0
Amortized Cost 2,006 0 0 0
Yield 5.57%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 0 4,151 6,862 0
Amortized Cost 0 4,217 7,295 0
Yield 5.63% 5.78%
Mortgage-Backed Securities
by Contractual Maturity:*
Estimated Market Value 0 0 1,443 28,667
Amortized Cost 0 0 1,499 29,750
Yield 5.42% 6.49%
Corporate Securities:
Estimated Market Value 0 3,650 0 1,942
Amortized Cost 0 3,700 0 1,999
Yield 6.43% 6.02%
Equity Securities:
Estimated Market Value
Amortized Cost
Yield
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 0 972 2,963 20,502
Amortized Cost 0 974 3,010 21,468
Yield 7.00% 7.17% 7.71%
Corporate Securities:
Estimated Market Value 499 246 938 1,500
Amortized Cost 501 253 1,006 1,500
Yield 6.03% 5.36% 6.46% 9.25%
Total Securities:
Estimated Market Value
Amortized Cost
Yield
*It is anticipated that these mortgage-backed securities will
be repaid prior to their contractual maturity dates. The
weighted-average yield for mortgage-backed securities is impacted
for normal amortization and estimated prepayments based on
current market interest rates.
<CAPTION>
(In Thousands) Total
______
<S> <C>
Available for Sale Securities:
U.S. Treasury Securities:
Estimated Market Value $ 2,001
Amortized Cost 2,006
Yield 5.57%
Obligations of Other U.S.
Government Agencies:
Estimated Market Value 11,013
Amortized Cost 11,512
Yield 5.73%
Mortgage-Backed Securities
by Contractual Maturity:*
Estimated Market Value 30,110
Amortized Cost 31,249
Yield 6.44%
Corporate Securities:
Estimated Market Value 5,592
Amortized Cost 5,699
Yield 6.29%
Equity Securities:
Estimated Market Value 3,398
Amortized Cost 3,221
Yield 6.78%
Held to Maturity Securities:
Obligations of State and
Political Subdivisions:
Estimated Market Value 24,437
Amortized Cost 25,452
Yield 7.62%
Corporate Securities:
Estimated Market Value 3,183
Amortized Cost 3,260
Yield 7.59%
______
Total Securities:
Estimated Market Value $79,734
Amortized Cost 82,399
Yield 6.73%
======
*It is anticipated that these mortgage-backed securities will
be repaid prior to their contractual maturity dates. The
weighted-average yield for mortgage-backed securities is impacted
for normal amortization and estimated prepayments based on
current market interest rates.
</TABLE>
Loans
Total net loans were $174,854,000 at December 31, 1999,
representing an $11,058,000, or 6.8%, increase over net loans of
$163,796,000 at December 31, 1998. As shown in the following
table, the increase in loans resulted primarily from continued
demand for residential and commercial mortgage loans. The growth
in residential mortgage loans included growth in lines of credit
secured by residential real estate. At December 31, 1999, there
were no loan concentrations over 10% of loans outstanding to any
one category or borrower. However, loans secured by real estate
constitute 86% of the Bank's loan portfolio; consequently, the
quality of these loans is affected by the region's economy and
real estate market. Total net loans with variable-rate pricing
amounted to $53,743,000 at December 31, 1999, and $50,853,000 at
December 31, 1998. See section on Market Risk Interest Rate
Risk.
Other than as described herein, Management does not believe
there are any trends, events or uncertainties which are
reasonably expected to have a material adverse impact on future
results of operations, liquidity or capital resources. Further,
based on known information, Management believes that the effects
of current and past economic conditions and other unfavorable
business conditions may result in the inability of loans
amounting to $2,092,000 to comply with their respective repayment
terms. This represents a decrease from the amount of $2,526,000
at December 31, 1998. The decrease is primarily a result of
several loans that were transferred to nonaccrual status during
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. These loans are
not considered impaired as defined by current generally accepted
accounting principles. The borrowers are of special mention since
they have shown a decline in financial strength and payment
quality. Management has increased its monitoring of the
borrowers' financial strength. In addition, Management expects
that a portion of these loans will be classified as nonperforming
in 2000. The nonperforming loans table, appearing in the section
entitled Nonperforming Assets, does not include the
aforementioned loans.
<PAGE>
<TABLE>
Loans are composed of the following:
<CAPTION>
December 31,
__________________________________
(In Thousands) 1999 1998 1997
__________ _________ __________
<S> <C> <C> <C>
Real Estate-Mortgage:
First and Second Residential $103,264 $ 99,984 $ 93,495
Commercial and Industrial 34,332 29,968 23,777
Construction and Land
Development 5,943 6,586 9,630
Agricultural 6,355 5,727 4,598
Commercial and Industrial 7,571 6,042 6,035
Consumer 8,725 9,311 9,320
Agricultural 2,073 2,550 2,213
Other 6,653 3,698 3,720
__________ _________ __________
Total Loans 174,916 163,866 152,788
Less: Unearned Income (62) (70) (89)
__________ _________ __________
Net Loans $174,854 $163,796 $152,699
========== ========= ==========
<CAPTION>
December 31,
____________________________________
(In Thousands) 1996 1995
__________ _________
<S> <C> <C>
Real Estate-Mortgage:
First and Second Residential $ 82,169 $ 75,430
Commercial and Industrial 21,948 21,098
Construction and Land
Development 4,035 4,198
Agricultural 4,368 3,602
Commercial and Industrial 5,235 4,725
Consumer 8,794 7,853
Agricultural 1,609 1,609
Other 2,299 2,003
__________ _________
Total Loans 130,457 120,518
Less: Unearned Income (66) (101)
__________ _________
Net Loans $130,391 $120,417
========== =========
</TABLE>
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Years to Maturity*
____________________________________
Within 1 - 5 Over
(In Thousands) 1 Year Years 5 Years Total
_______ _________ ________ _________
<S> <C> <C> <C> <C>
Commercial,
Agricultural and Other $ 9,168 $ 7,397 $40,419 $56,984
Construction and Land
Development 4,493 660 790 5,943
_______ _________ ________ _________
Total $13,661 $ 8,057 $41,209 $62,927
======= ========= ======== =========
Fixed Interest Rates $ 4,054 $ 6,283 $15,846 $26,183
Floating or Adjustable
Interest Rates 9,607 1,774 25,363 36,744
_______ _________ ________ _________
Total $13,661 $ 8,057 $41,209 $62,927
======= ========= ======== =========
*Due to interest rate levels, economic conditions, and other
relevant factors, it is anticipated that there will be loans that
are repaid prior to their contractual maturity dates.
</TABLE>
Nonperforming Assets
Nonperforming loans consist of nonaccruing loans and loans
90 days or more past due. Nonaccruing loans are comprised of
loans that are no longer accruing interest income because of
apparent financial difficulties of the borrower. Interest on
nonaccruing loans is recorded when received only after past due
principal is brought current and deemed collectible in full. If
nonaccrual loans had been current and in accordance with their
original terms, gross interest income of approximately $125,000
and $96,000 would have been recorded on such loans for the years
ended December 31, 1999, and 1998, respectively. Interest income
recognized on such loans approximated $70,000 for the year ended
December 31, 1999, and $27,000 for the year ended December 31,
1998. At December 31, 1999, total nonperforming loans amounted to
$1,475,000, or .8% of total net loans, as compared to $974,000 at
December 31, 1998. The increase in nonperforming loans is
primarily a result of two commercial loans that are in nonaccrual
status at December 31, 1999. These loans are both mostly secured
by real estate. Historically, the percent of nonperforming loans
to total net loans as of December 31, for the previous five-year
period, was an average of .7%. There are no troubled debt
restructurings.
At December 31, 1999, the recorded investment in loans that
are considered to be impaired under generally accepted accounting
principles was $1,041,000 as compared to $70,000 at December 31,
1998. These amounts are included in the nonaccrual loans
reflected below. The measure of impairment is based on the fair
value of the collateral, since foreclosure is probable. The
related allowance for loan losses amounted to $82,000 at December
31, 1999, and $22,000 at December 31, 1998. The average recorded
investment in impaired loans was $367,000 during the year ended
December 31, 1999, and $451,000 during the year ended December
31, 1998.
<TABLE>
The following shows the summary of nonperforming loans:
<CAPTION>
December 31,
_________________________________
(In Thousands) 1999 1998 1997
_________ ________ _________
<S> <C> <C> <C>
Nonaccruing Loans $ 1,343 $ 131 $ 94
Accrual Loans - 90 days or
more past due 132 843 612
_________ ________ __________
Total Nonperforming
Loans $ 1,475 $ 974 $ 706
========= ======== ==========
Nonperforming Loans
as a % of Net Loans .8% .6% .5%
========= ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans 121% 179% 226%
========= ======== ==========
<CAPTION>
December 31,
___________________________________
(In Thousands) 1996 1995
_____________ _____________
<S> <C> <C>
Nonaccruing Loans $ 91 $ 203
Accrual Loans - 90 days or
more past due 752 1,022
_____________ _____________
Total Nonperforming
Loans $ 843 $ 1,225
========= ========
Nonperforming Loans
as a % of Net Loans .6% 1.0%
========= ========
Allowance for Loan
Losses as a % of
Nonperforming Loans 163% 103%
========= ========
</TABLE>
Other real estate owned includes assets acquired through
foreclosure and loans identified as in-substance foreclosures. A
loan is classified as in-substance foreclosure when Union
National has taken possession of the collateral regardless of
whether formal foreclosure proceedings have taken place. Other
real estate owned is valued at the lower of the loan balance at
the time of foreclosure or estimated fair market value, net of
selling costs, and is included in other assets. Gains and losses
resulting from the sale or write-down of other real estate and
income and expenses related to the operation of other real estate
owned are recorded in
<PAGE>
other expenses. Other real estate owned amounted to $20,000 at
December 31, 1999, and $379,000 at December 31, 1998. The other
real estate owned as of December 31, 1999, represents residential
real estate that was foreclosed on after a borrower defaulted on
their residential mortgage loan. The other real estate expense,
including cost write-downs to fair value, which impacted the
results of operations amounted to $17,000 for the year ended
December 31, 1999, and $26,000 for the year ended December 31,
1998.
Loan Quality/Allowance for Loan Losses
The allowance for loan losses is maintained at a level
believed adequate by Management to absorb estimated probable loan
losses. 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.
As of October 1999, a review of selected portions of the
Bank's loan portfolio was completed by an independent consultant.
This review included an evaluation of credit relationships
exceeding $400,000 and all loans on nonaccrual status, past due
90 days or more or on the Bank's internal watchlist. At the
conclusion of the review, the consultant did not recommend that
Management increase the allowance for loan losses. Over the past
year and a half loan reviews have been performed semiannually by
an independent consultant. Prior to that, the Bank had the loan
portfolio formally reviewed by an independent loan review officer
on an ongoing basis. For 2000, it is anticipated that an ongoing
loan review will be performed on selected portions of the loan
portfolio by an independent consultant. In addition, the loan
portfolio is reviewed annually by the external independent
auditors. Senior Management evaluates credit risk on a quarterly
basis, or more frequently, as circumstances dictate. At December
31, 1999, the percent of loans secured by real estate was 86% of
the overall loan portfolio. Union National's policy generally
requires that the borrower provides 20% equity for first mortgage
real estate loans and 20% equity for other loans secured by real
estate.
The allowance for loan losses increased by $40,000 from the
prior year, which was primarily a result of an increase in loans
outstanding of 6.8%. The ratio of the allowance for loan losses
to net loans was 1.02% at December 31, 1999, as compared to 1.06%
at December 31, 1998. Management believes, based on information
currently available, that the current allowance for loan losses
of $1,783,000 is adequate to meet potential loan losses.
Management expects loan charge-offs, net of recoveries, to be
comparable to the average level of net loan charge-offs for the
previous five-year period.
<TABLE>
Analysis of Allowance for Loan Losses
<CAPTION>
Years Ended December 31,
_________________________________
(In Thousands) 1999 1998 1997
__________ ________ _________
<S> <C> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $169,667 $ 162,090 $140,925
========== ======== =========
Allowance for Loan Losses,
Beginning of Year $ 1,743 $ 1,593 $ 1,371
Loans Charged-Off During Year:
Real Estate-Mortgage* 72 16 0
Installment Loans to
Individuals 74 186 83
Commercial, Industrial
and Agricultural 77 34 117
__________ ________ _________
Total Charge-Offs 223 236 200
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* 0 0 0
Installment Loans to
Individuals 35 51 13
Commercial, Industrial
and Agricultural 14 10 19
__________ ________ _________
Total Recoveries 49 61 32
__________ ________ _________
Net Loans Charged-Off 174 175 168
Provision for Loan Losses
Charged to Operations 214 325 390
__________ ________ _________
Allowance for Loan Losses,
End of Year $ 1,783 $ 1,743 $ 1,593
========== ======== =========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .10% .11% .12%
========== ======== =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.02% 1.06% 1.04%
========== ======== =========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
<CAPTION>
Years Ended December 31,
_________________________________
(In Thousands) 1996 1995
__________ ________
<S> <C> <C>
Average Total Loans
Outstanding
(Less Unearned Income) $124,483 $115,026
========== ========
Allowance for Loan Losses,
Beginning of Year $ 1,265 $ 1,182
Loans Charged-Off During Year:
Real Estate-Mortgage* 0 0
Installment Loans to
Individuals 47 57
Commercial, Industrial
and Agricultural 18 50
__________ ________
Total Charge-Offs 65 107
Recoveries of Loans
Previously Charged-Off:
Real Estate-Mortgage* 0 0
Installment Loans to
Individuals 11 7
Commercial, Industrial
and Agricultural 10 24
__________ ________
Total Recoveries 21 31
__________ ________
Net Loans Charged-Off 44 76
Provision for Loan Losses
Charged to Operations 150 159
__________ ________
Allowance for Loan Losses,
End of Year $ 1,371 $ 1,265
========== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .04% .07%
========== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.05% 1.05%
========== ========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
</TABLE>
<PAGE>
With the services of the independent loan review consultant
and other consultants in 1999, Management has reassessed its
allocation of the allowance for loan losses. The allowance for
loan losses is evaluated based on an assessment of the losses
inherent in the loan portfolio. This assessment results in an
allowance consisting of two components, allocated and
unallocated. The allocated component of the allowance for loan
losses reflects expected losses resulting from the analysis of
individual loans, developed through specific credit allocations
for individual loans and historical loss experience for each loan
category. The determination of the unallocated portion of the
allowance inherently involves a higher degree of uncertainty and
considers current risk factors that may not have yet manifested
themselves in Union National's historical loss factors used to
determine the allocated component of the allowance, and it
recognizes that knowledge of the portfolio may be incomplete.
The following sets forth an allocation of the allowance for
loan losses by category. As discussed above, 1999 shows an
unallocated portion of the allowance for loan losses. The
specific allocation in any particular category may be reallocated
in the future to reflect current conditions. Accordingly,
Management considers the entire allowance to be available to
absorb losses in any category.
<TABLE>
<CAPTION>
December 31, 1999
________________________________________
Amount Percent of Loans
(In Thousands) in each Category
_________________ ___________________
<S> <C> <C>
Commercial, Industrial
and Agricultural $ 857 36%
Real Estate-
Residential Mortgages 460 59
Installment Loans to
Individuals 142 5
Unallocated 324
____________ _____
$ 1,783 100%
============ =====
<CAPTION>
December 31, 1998
________________________________________
Amount Percent of Loans
(In Thousands) in each Category
_________________ ___________________
<S> <C> <C>
Commercial, Industrial
and Agricultural $ 705 33%
Real Estate-
Residential Mortgages 543 61
Installment Loans to
Individuals 495 6
Unallocated 0
____________ _____
$ 1,743 100%
============ =====
</TABLE>
Liquidity
Union National's objective is to maintain adequate liquidity
to fund needs at a reasonable cost and to provide contingency
plans to meet unanticipated funding needs or a loss of funding
sources, while minimizing interest rate risk. Adequate liquidity
provides resources for credit needs of borrowers, for depositor
withdrawals and for funding Corporate operations. Sources of
liquidity are as follows:
- - maturing investment securities, which include overnight
investments in federal funds sold;
- - overnight correspondent bank borrowing on various credit lines;
- - payments on loans and mortgage-backed securities; and
- - a growing core deposit base.
Management believes that its core deposits are fairly stable even
in periods of changing interest rates. Liquidity management is
governed by policies and measured on a quarterly basis. These
measurements indicate that liquidity generally remains stable and
that liquidity consistently exceeds the Bank's minimum defined
level. There are no known trends, or any known demands,
commitments, events or uncertainties that will result in, or that
are reasonably likely to result in, liquidity increasing or
decreasing in any material way.
Membership in the FHLB provides the Bank with additional
liquidity alternatives such as short- or long-term funding on
fixed- or variable-rate terms. As of December 31, 1999, the Bank
had received long-term advances of $27,035,000 and short-term
advances of $8,200,000 from its available credit of $73,689,000
at the FHLB for purposes of funding loan demand and mortgage-
backed security purchases. Total outstanding borrowings of
$35,235,000 at December 31, 1999, had a weighted-average rate of
5.37% and total borrowings of $30,624,000 at December 31, 1998,
had a weighted-average rate of 5.46%. As of December 31, 1999,
advances of $9,500,000 are due in 2000 and advances of
$15,000,000 are convertible in 2000. The FHLB's convertible
fixed-rate advances allow the FHLB the periodic option to convert
to a LIBOR adjustable-rate advance. Upon the FHLB's conversion,
the Bank has the option to repay the respective advances in full.
Subsequent to December 31, 1999, the FHLB converted $10,000,000
of advances at a weighted-average rate of 5.65%. These advances
were replaced with new convertible advances at a weighted-average
rate of 5.85%. Based on current market interest rates, the
remaining convertible advance of $5,000,000, which has a current
rate of 4.70%, is expected to convert in September 2000. See
section on Market Risk Interest Rate Risk for further analysis
of these advances.
Market Risk Interest Rate Risk
As a financial institution, Union National's primary
component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact the level
of income and expense recorded on a large portion of the Bank's
assets and liabilities. Virtually all of Union National's
interest-sensitive assets and liabilities are held by the Bank,
and therefore, interest rate risk management procedures are
performed by the Bank. The nature of the Bank's current
operations is such that the Bank is not subject to foreign
currency exchange or commodity price risk. Union National does
not own any trading assets. Union National has not entered into
any hedging transactions such as interest rate floors, caps and
swaps.
The objectives of interest rate risk management are to
maintain or increase net interest income over a broad range of
market interest rate movements. The Asset and Liability
Management Committee is responsible for managing interest rate
risk using policies approved by the Bank's Board of Directors.
The Bank manages interest rate risk by changing the mix or
repricing characteristics of its investment securities portfolio
and borrowings from the FHLB and by the promotion or development
of specific loan and deposit products. The Bank retains an
outside consulting group to assist in monitoring its interest
rate risk using income simulation models on a quarterly basis.
The simulation model measures the sensitivity of future net
interest income to hypothetical changes in market interest rates.
In addition, the Bank utilizes an interest rate-sensitivity
report called a "GAP" report, which illustrates the time
intervals of cash flows or the next repricing date of interest-
earning assets and interest-bearing liabilities. The Bank's GAP
reports reflect a consistent negative rate-sensitivity position
throughout the first year, in that rate-sensitive liabilities
exceed rate-sensitive assets. The following analysis reflects
cumulative rate-sensitive assets of $90,752,000 as compared to
cumulative rate-sensitive liabilities of $124,354,000 as of the
one-year time frame. The Bank's cumulative interest-sensitivity
gap for the one-year time frame is a negative 12.5% of total
assets at December 31, 1999, as compared to a policy range of
plus 15% to negative 15%, and as
<PAGE>
compared to a negative 2.8% at December 31, 1998 (adjusted to
be comparable for revised assumptions at December 31, 1999). The
interest rate-sensitivity analysis for the Bank with investment
securities at amortized cost at December 31, 1999, is as follows:
<TABLE>
Interest Rate Sensitivity
<CAPTION>
1 - 90 91 - 365 1 - 3 3 - 5
(In Thousands) Days Days Years Years
________ ________ ________ ________
<S> <C> <C> <C> <C>
ASSETS
Earning Assets:
Mortgage-Backed Securities:
Variable $ 2,397 $ 7,743 $ 602 $ 0
Fixed 773 1,342 1,285 4,798
Investment Securities 4,110 5,721 13,353 4,109
Net Loans:
Variable 24,552 12,334 10,472 6,385
Fixed 8,833 22,947 37,259 22,041
________ ________ ________ ________
TOTAL $ 40,665 $ 50,087 $ 62,971 $37,333
======== ======== ======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 666 $ 0 $ 0 $ 0
Money Market 20,506 0 0 0
Savings 101 743 0 0
Time 27,437 54,382 22,170 3,662
FHLB Advances and
Other Borrowings 13,002 7,517 809 3,347
________ ________ ________ ________
TOTAL $ 61,712 $ 62,642 $ 22,979 $ 7,009
======== ======== ======== =======
Cumulative Interest-
Sensitivity Gap $(21,047)$(33,602) $ 6,390 $ 36,714
======== ======== ======== =======
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets (7.8%) (12.5%) 2.4% 13.7%
======== ======== ======== =======
<CAPTION>
Over 5
(In Thousands) Years Total
________ ________
<S> <C> <C>
ASSETS
Earning Assets:
Mortgage-Backed Securities:
Variable $ 0 $10,742
Fixed 12,309 20,507
Investment Securities 23,738 51,031
Net Loans:
Variable 0 53,743
Fixed 30,031 121,111
________ ________
TOTAL $66,078 $257,134
======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 31,429 $ 32,095
Money Market 0 20,506
Savings 26,204 27,048
Time 0 107,651
FHLB Advances and
Other Borrowings 11,460 36,135
________ ________
TOTAL $ 69,093 $223,435
======== ========
Cumulative Interest-
Sensitivity Gap $ 33,699
========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 12.5%
========
</TABLE>
The amount of assets and liabilities shown, which reprice or
mature during a particular period, were determined based on the
earlier of when it reprices or when it is to be repaid for each
asset or liability. Callable investment securities are reflected
based on the security's anticipated call date, where the call on
the security is likely when compared to the current interest rate
yield curve. Also, loans and mortgage-backed securities are
reflected based on contractual amortization or contractual
interest rate adjustments and on estimates for prepayments and
refinancings based on current market interest rates. Interest-
bearing demand and savings deposits have always been considered a
stable source of funds, and although the rates are subject to
change, rates on these accounts historically have not changed as
quickly or as often as other loan and deposit rates. Based on a
historical analysis during periods of rising interest rates, a
portion of these deposits will invest in higher yielding
instruments. This portion is determined to be sensitive to
interest rate fluctuations in the earliest periods. Management
believes that the remaining balances of these deposits are not
repriceable based on current industry practice. Management
currently does not expect to fluctuate the interest rates on
these deposit balances in any significant amount that would
materially affect its GAP or income simulation models.
Certain shortcomings are inherent in the method of analysis
presented in the foregoing schedule. For example, although
certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain types
of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain
repriceable assets, such as adjustable-rate securities or loans,
have features, like annual and lifetime rate caps or floors, that
restrict changes in interest rates both on a short-term basis and
over the life of the asset. Further, a change in market interest
rates from the interest rate scenarios that existed on December
31, 1999, would likely cause assumptions, such as estimated
prepayment speeds, refinancings, imbedded options and early
withdrawals, to significantly change the GAP results above.
In an effort to assess market risk, the Bank utilizes a
simulation model to determine the effect of gradual increases or
decreases in market interest rates on net interest income and net
income. The aforementioned assumptions are revised based on
defined scenarios of assumed speed and direction changes of
market interest rates. These assumptions are inherently uncertain
due to the timing, magnitude and frequency of rate changes and
changes in market conditions, as well as management strategies,
among other factors. Because it is difficult to accurately
quantify into assumptions the reaction of depositors and
borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results. While assumptions are developed based upon current
economic and local market conditions, Management cannot make any
assurances as to the predictive nature of these assumptions.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve-month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to the Bank's net
interest income and net income. Projections for loan and deposit
growth were ignored in the simulation model. The simulation model
includes all of the Bank's earning assets and interest-bearing
liabilities and assumes a parallel and prorated shift in interest
rates over a twelve-month period. The percentage declines in the
table below are measured as percentage changes from the values of
simulated net interest income in the current rate scenario and
the impact of those changes on the prior year's net income. As a
result of the simulation model, the following reflects the Bank's
net interest income and net income sensitivity analysis as of
December 31, 1999 and 1998:
<PAGE>
<TABLE>
<CAPTION>
Sensitivity Analysis Percent Decrease in Categories
___________________________________
Market Current Market
Interest Market Interest
Rate Interest Rate
Decline 2% Rates Increase 2%
__________ _________ ___________
<S> <C> <C> <C>
Net Interest Income:
Policy Limit <10% - <10%
Hypothetical Percent Decrease
from Current Rate Scenario:
As of December 31, 1999 <1% - <3%
As of December 31, 1998 <3% - -
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 1999 <1% - <5%
As of December 31, 1998 <6% - -
</TABLE>
The preceding schedule indicates that as of December 31, 1999,
a hypothetical 2% decline in prevailing market interest rates
would cause the Bank's net interest income to decline less than
1% from the current rate scenario and after adjusting for income
taxes a 2% decline in rates would cause less than a 1% impact to
the net income in comparison to the prior year. As of December
31, 1999, a 2% rise in prevailing market interest rates would
cause the Bank's net interest income to decline less than 3% from
the current rate scenario and after adjusting for income taxes a
2% decline in rates would cause less than a 5% impact to the net
income in comparison to the prior year. The computations do not
contemplate any actions Management or the Asset Liability
Management Committee could undertake in response to changes in
market conditions or market interest rates.
The Bank managed its interest rate risk position in 1999 by
the following:
- - paying higher rates on various term certificates in order to
manage the average remaining term on certificates of deposit;
- - marketing its variable-rate home equity line of credit (these
outstanding loans increased by $1,036,000 for the period);
- - additions to or by repositioning of its investment security
portfolio into floating-rate, short- or long-term securities;
- - increasing its extensions of adjustable- and floating-rate
loans for new or refinanced commercial and agricultural loans
(these outstanding loans increased by $2,944,000 for the period);
- - managing and expanding the Bank's core deposit base
including deposits obtained in the Bank's commercial cash
management programs; and
- - additions to or restructuring of adjustable- and fixed-rate
advances from the FHLB, including convertible advances.
The above strategies and actions impact interest rate risk and
are all included in the Bank's quarterly simulation models in
order to determine future asset and liability management
strategies. See related discussions in the section on Net
Interest Income.
<TABLE>
Deposits
The average amounts of deposits are summarized below:
<CAPTION>
Years Ended December 31,
________________________________
(In Thousands) 1999 1998 1997
__________ ________ _______
<S> <C> <C> <C>
Demand Deposits $ 21,904 $ 19,211 $16,504
Interest-Bearing Demand Deposits 52,084 44,528 38,134
Savings Deposits 28,258 25,598 24,184
Time Deposits 104,224 98,842 89,992
__________ ________ _______
Total $ 206,470 $188,179 $168,814
========== ======== =======
</TABLE>
<TABLE>
The following is a breakdown of maturities of time deposits of
$100,000 or more:
<CAPTION>
December 31,
______________________________
(In Thousands) 1999 1998 1997
_________ ________ _______
<S> <C> <C> <C>
Three months or less $12,463 $ 8,388 $ 8,261
Over three months through six months 2,626 1,570 942
Over six months through twelve months5,530 2,076 4,030
Over twelve months 3,266 4,316 3,124
_________ ________ _______
Total $23,885 $16,350 $16,357
========= ======== =======
</TABLE>
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
average stockholders' equity to average assets ratio, which
measures the adequacy of capital, was 8.83% for 1999, as compared
to 9.51% for 1998. The decrease in this capital ratio is
primarily a result of 8.9% growth in average assets for the year,
a decline in the market value of available for sale securities
and open market treasury stock purchases in the amounts of
$1,353,000 in 1999 and $1,995,000 in 1998. Average stockholders'
equity grew by 1.1% from 1998 to 1999, as compared to 0.5% from
1997 to 1998. The dividend payout ratio, which represents the
percentage of earnings returned to the stockholders in the form
of cash dividends, was 46.1% for 1999 and 37.7% for 1998.
Items that could have a material impact on capital resources
of Union National for 2000 include plans to open a community
banking office at 401 Locust Street in Columbia, plans to change
signs at our community banking offices and a contract in the
amount of $200,000 for the purchase of real estate. 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 December 31,
1999. There are no known trends or uncertainties, including
regulatory matters,
<PAGE>
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, the Board of Directors of Union National
authorized and approved a plan to purchase up to 50,000 shares of
its outstanding common stock in open market or privately
negotiated transactions. The total number of shares to be
purchased under the plan represents approximately 2.0% of the
outstanding shares of Union National as of December 31, 1999. 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).
The Bank has risk-based capital ratios exceeding the
regulatory requirement. The risk-based capital guidelines require
banks to maintain a minimum risk-based capital ratio of 8.0% at
December 31, 1999, as compared to the Bank's current risk-based
capital ratio of 13.88%. The total risk-based capital ratio is
computed by dividing stockholders' equity plus the allowance for
loan losses by risk-adjusted assets. Risk-adjusted assets are
determined by assigning credit risk-weighing factors from 0% to
100% to various categories of assets and off-balance-sheet
financial instruments.
Banking regulations also require the Bank to maintain certain
minimum capital levels in relation to Bank assets. Failure to
meet minimum capital requirements could result in prompt
corrective action by the federal banking agencies. As of December
31, 1999 and 1998, the Bank was categorized as well-capitalized
under the regulatory framework for prompt corrective action.
There are no conditions or events since that year end that
Management believes have changed the Bank's category. The Bank
maintains the following leverage and risk-based capital ratios:
Union National is subject to restrictions on the payment of
divi-
<TABLE>
<CAPTION>
(In Thousands) December 31, December 31,
1999 1998
____________ ___________
<S> <C> <C>
Tier I - Total Stockholders' Equity $ 23,176 $ 22,231
Tier II - Allowance for Loan Losses 1,783 1,743
____________ ___________
Total Qualifying Capital $ 24,959 $ 23,974
============ ===========
Risk-adjusted On-balance-sheet Assets $168,830 $155,280
Risk-adjusted Off-balance-sheet Exposure10,958 9,276
____________ ___________
Total Risk-adjusted Assets $179,788 $164,556
============ ===========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.70% 8.84%
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 12.89% 13.51%
Minimum Required 4.00 4.00
To Be Well-Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 13.88% 14.57%
Minimum Required 8.00 8.00
To Be Well-Capitalized under Prompt
Corrective Action Provisions 10.00 10.00
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 10,576 $ 10,810
============ ===========
</TABLE>
dends to its stockholders pursuant to the Pennsylvania Business
Corporation Law of 1988, as amended (the "BCL"). The BCL operates
generally to preclude dividend payments if the effect thereof
would render Union National insolvent, or result in negative net
worth, as defined. As a practical matter, Union National's
payment of dividends is contingent upon its ability to obtain
funding in the form of dividends from the Bank. Payment of
dividends to Union National by the Bank is subject to the
restrictions set forth in the National Bank Act. Generally, the
National Bank Act would permit the Bank to declare dividends
in 2000 of approximately $819,000, plus an amount equal to
the net profits of the Bank in 2000 up to the date of any such
dividend declaration.
Union National maintains a Dividend Reinvestment and Stock
Purchase Plan (the Plan). Stockholders of common stock may
participate in the Plan, which provides that additional shares of
common stock may be purchased with reinvested dividends and
optional cash payments within specified limits at prevailing
market prices. At December 31, 1999, the enrollment in the Plan
was 18% of the shares outstanding. The Plan is currently
estimated to increase capital in the amount of $340,000 in 2000,
but this will be offset by the shares purchased under Union
National's common stock repurchase plan.
No shares of common stock are reserved for issuance in the
event of conversions or the exercise of warrants, options or
other rights, except as follows:
- - 131,072 shares which are reserved for issuance under Union
National's 1988 and 1997 Stock Incentive Plans;
- - 105,000 shares which are reserved for issuance under Union
National's 1997 Employee Stock Purchase Plan;
- - 63,000 shares which are reserved for issuance under Union
National's 1999 Independent Directors' Stock Option Plan; and
- - 165,375 shares which are reserved for issuance under Union
National's Dividend Reinvestment and Stock Purchase Plan.
As of December 31, 1999, options to purchase 43,771 shares have
been granted under Union National's Stock Incentive Plans. There
were 5,071 options granted in 1997 with an exercise price of
$22.16, there were 12,600 options granted in 1998 with an
exercise price of $18.81 and there were 26,100 options granted in
1999 with an exercise price of $20.39. No options have been
exercised as of December 31, 1999, under these plans. As of
December 31, 1999, options to purchase 57,750 shares have been
granted under Union National's 1997 Employee Stock Purchase Plan.
There were 15,750 options granted in 1997 and 21,000 options
granted in 1998 and 1999. The exercise price for such options as
of December 31, 1999, was $15.12. As of December 31, 1999, 2,043
options have been
<PAGE>
exercised under this plan. As of December 31, 1999, 40,344 shares
have been issued under Union National's Dividend Reinvestment and
Stock Purchase Plan.
Regulatory Activity
From time to time, various types of federal and state
legislation have been proposed that could result in additional
regulation of, and restrictions on, the business of 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 will permit 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. The last
Community Reinvestment Act performance evaluation by the OCC
resulted in a "satisfactory" rating of the Bank's record of
meeting the credit needs of its entire community.
EXHIBIT 21
Subsidiaries of Union National Financial
Corporation
<PAGE>
EXHIBIT 21
Union National Financial Corporation
Subsidiaries of Registrant
Subsidiary Incorporation
________________________
Union National Community Bank National Banking Association
EXHIBIT 23
Consent of Independent Auditors
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual
Report (Form 10-K) of Union National Financial Corporation of our
report dated January 13, 2000,included in the 1999 Annual Report
to Stockholders of Union National Financial Corporation.
We also consent to the incorporation by reference in the
Registration Statements No. 33-80093,and 333-27837, of Union
National Financial Corporation and in the related Prospectus of
our report dated January 13, 2000, with respect to the
consolidated financial statements of Union National Financial
Corporation Incorporated by reference in this Annual Report (Form
10-K) for the year ended December 31, 1999.
/s/ Trout, Ebersole & Groff, LLP
________________________________
March 23, 2000 TROUT, EBERSOLE & GROFF, LLP
Lancaster, Pennsylvania Certified Public Accountants
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 7004
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 52114
<INVESTMENTS-CARRYING> 28712
<INVESTMENTS-MARKET> 27620
<LOANS> 174854
<ALLOWANCE> 1783
<TOTAL-ASSETS> 269579
<DEPOSITS> 209181
<SHORT-TERM> 9100
<LIABILITIES-OTHER> 1199
<LONG-TERM> 27035
0
0
<COMMON> 657
<OTHER-SE> 22407
<TOTAL-LIABILITIES-AND-EQUITY> 269579
<INTEREST-LOAN> 14366
<INTEREST-INVEST> 4604
<INTEREST-OTHER> 110
<INTEREST-TOTAL> 19080
<INTEREST-DEPOSIT> 7070
<INTEREST-EXPENSE> 8810
<INTEREST-INCOME-NET> 10269
<LOAN-LOSSES> 214
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7725
<INCOME-PRETAX> 3807
<INCOME-PRE-EXTRAORDINARY> 3807
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3085
<EPS-BASIC> 1.23
<EPS-DILUTED> 1.23
<YIELD-ACTUAL> 4.40
<LOANS-NON> 1343
<LOANS-PAST> 132
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2092
<ALLOWANCE-OPEN> 1743
<CHARGE-OFFS> 223
<RECOVERIES> 49
<ALLOWANCE-CLOSE> 1783
<ALLOWANCE-DOMESTIC> 1783
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 324
</TABLE>
