10-Q 1 thirdquarter2000.txt Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30,2000 _____________________________ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to _______________ _______________ Commission file number 0-19214 ____________________________________________ Union National Financial Corporation ________________________________________________________________ (Exact name of registrant as specified in its charter) Pennsylvania 23-2415179 ___________________________________ _______________________ (State of Incorporation) (I.R.S. Employer ID No.) 101 East Main Street, P.O. Box 567, Mount Joy, PA 17552 ____________________________________________________ ________ (Address of principal executive offices) Zip Code (717) 653 - 1441 _________________________________________________________________ (Registrant's telephone number, including area code) Not Applicable _________________________________________________________________ (Former name, former address, & former fiscal year, if changes since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] ______________ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. 2,569,081 shares of $.25 (par) common stock were _________________ outstanding as of November 1, 2000. _________________ UNION NATIONAL FINANCIAL CORPORATION 10-Q INDEX Page # PART I - FINANCIAL INFORMATION: _________ _______________________ Item 1 - Financial Statements - Consolidated Statements of Financial Condition 1 - Consolidated Statements of Income 2 - Consolidated Statements of Comprehensive Income 2 - Consolidated Statements of Cash Flows 3 - Notes to Consolidated Financial Statements 4 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 5-17 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 15-16 PART II - OTHER INFORMATION __________________ Item 1 - Legal Proceedings 18 Item 2 - Change in Securities and Use of Proceeds 18 Item 3 - Defaults Upon Senior Securities 18 Item 4 - Submission of Matters to a Vote of Security Holders 18 Item 5 - Other Information 18 Item 6 - Exhibits and Reports on Form 8-K 18-19 Signature Page 20 Exhibit 27 - Financial Data Schedule 21 PART 1 - FINANCIAL INFORMATION Item 1 - FINANCIAL STATEMENTS Union National Financial Corporation CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(In Thousands) 9/30/00 12/31/99 ______________________ ASSETS Cash and Due from Banks $6,004 $7,004 Interest-Bearing Deposits in Other Banks 0 0 Federal Funds Sold 1,080 0 Investment Securities Held to Maturity (Market Value - 2000-$13,444;1999-$27,620) 14,143 28,712 Investment Securities Available-for-Sale 67,989 52,114 Loans(Net of Unearned Income) 186,296 174,854 Less: Allowance for Loan Losses (1,794) (1,783) ______________________ Total Net Loans 184,502 173,071 Premises and Equipment - Net 5,904 5,191 Accrued Interest Receivable 1,898 1,716 Deferred Income Taxes 486 813 Investment in Limited Partnerships 777 823 Other Assets 4,099 135 _____________________ TOTAL ASSETS $286,882 $269,579 ===================== LIABILITIES Deposits: Noninterest-Bearing $23,511 $21,889 Interest-Bearing 191,571 187,292 _____________________ Total Deposits 215,082 209,181 Short-Term Borrowing 25,385 9,100 Long-Term Debt 20,735 27,035 Accrued Interest Payable 1,459 963 Other Liabilities 471 236 _____________________ TOTAL LIABILITIES 263,132 246,515 STOCKHOLDERS' EQUITY Common Stock (Par Value $.25) 686 657 Shares: Authorized - 20,000,000; Issued - 2,741,935 in 2000 (2,626,935 in 1999) Outstanding - 2,572,805 in 2000 (2,483,072 in 1999) Surplus 9,000 7,250 Retained Earnings 17,934 19,323 Accumulated Other Comprehensive Income/(Loss) (431) (1,038) Less: Treasury Stock - at cost (168,888 shares in 2000 and 143,863 shares in 1999) (3,439) (3,128) ______________________ TOTAL STOCKHOLDERS' EQUITY 23,750 23,064 ______________________ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $286,882 $269,579 ====================== The accompanying notes are an integral part of the consolidated financial statements.
Union National Financial Corporation CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, ___________________________________ (In Thousands, except Per Share Data) 2000 1999 ___________________________________ INTEREST INCOME Interest and Fees on Loans $3,977 $3,669 Investment Securities: Taxable 1,010 834 Exempt from Federal Taxes 304 325 Other 4 11 _____________________ Total Interest Income 5,295 4,839 INTEREST EXPENSE Deposits 2,042 1,787 Short-Term Borrowing 329 30 Long-Term Debt 386 420 _____________________ Total Interest Expense 2,757 2,237 _____________________ Net Interest Income 2,538 2,602 PROVISION for LOAN LOSSES 112 94 _____________________ Net Interest Income after Provision for Loan Losses 2,426 2,508 OTHER OPERATING INCOME Trust Income 9 42 Service Charges on Deposit Accounts 197 166 Other Service Charges, Commissions, Fees 176 143 Investment Securities Gains/(Losses) (18) 0 Other Income 59 24 _____________________ Total Other Operating Income 423 375 OTHER OPERATING EXPENSES Salaries and Wages 1,093 902 Retirement Plan and Other Employee Benefits 245 190 Net Occupancy Expense 174 152 Furniture and Equipment Expense 121 100 FDIC Insurance Assessment 11 6 Other Operating Expenses 762 633 _____________________ Total Other Operating Expenses 2,406 1,983 _____________________ Income before Income Taxes 443 900 PROVISION for INCOME TAXES (BENEFIT) (11) 127 _____________________ NET INCOME for PERIOD $454 $773 ===================== PER SHARE INFORMATION Net Income for Period-Basic $0.18 $0.29 Net Income for Period-Assuming Dilution $0.18 $0.29 Cash Dividends $0.145 $0.143 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED) Net Income for Period $454 $773 Other Comprehensive Income, Net of Tax: Unrealized Holding Gains/(Losses) on Investment Securities Available for Sale Arising During Period 488 (292) Reclassification Adjustment for (Gains)/Losses included in Net Income 12 0 _____________________ Total Other Comprehensive Income/(Loss) 500 (292) ______________________ COMPREHENSIVE INCOME for PERIOD $954 $481 ===================== The accompanying notes are an integral part of the consolidated financial statements.
Union National Financial Corporation CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine months Ended September 30, ___________________________________ (In Thousands, except Per Share Data) 2000 1999 ___________________________________ INTEREST INCOME Interest and Fees on Loans $11,540 $10,721 Investment Securities: Taxable 2,828 2,478 Exempt from Federal Taxes 927 943 Other 14 106 _____________________ Total Interest Income 15,309 14,248 INTEREST EXPENSE Deposits 5,873 5,262 Short-Term Borrowing 509 40 Long-Term Debt 1,164 1,221 _____________________ Total Interest Expense 7,546 6,523 _____________________ Net Interest Income 7,763 7,725 PROVISION for LOAN LOSSES 240 193 _____________________ Net Interest Income after Provision for Loan Losses 7,523 7,532 OTHER OPERATING INCOME Trust Income 90 104 Service Charges on Deposit Accounts 539 429 Other Service Charges, Commissions, Fees 504 442 Investment Securities Gains/(Losses) (13) 0 Other Income 114 87 _____________________ Total Other Operating Income 1,234 1,062 OTHER OPERATING EXPENSES Salaries and Wages 3,131 2,676 Retirement Plan and Other Employee Benefits 749 598 Net Occupancy Expense 509 445 Furniture and Equipment Expense 343 293 FDIC Insurance Assessment 32 18 Other Operating Expenses 2,023 1,715 _____________________ Total Other Operating Expenses 6,787 5,745 _____________________ Income before Income Taxes 1,970 2,849 PROVISION for INCOME TAXES 228 527 _____________________ NET INCOME for PERIOD $1,742 $2,322 ===================== PER SHARE INFORMATION Net Income for Period-Basic $0.68 $0.88 Net Income for Period-Assuming Dilution $0.67 $0.88 Cash Dividends $0.431 $0.397 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED) Net Income for Period $1,742 $2,322 Other Comprehensive Income, Net of Tax: Unrealized Holding Gains/(Losses) on Investment Securities Available for Sale Arising During Period 598 (946) Reclassification Adjustment for (Gains)/Losses included in Net Income 9 0 _____________________ Total Other Comprehensive Income/(Loss) 607 (946) ______________________ COMPREHENSIVE INCOME for PERIOD $2,349 $1,376 ===================== The accompanying notes are an integral part of the consolidated financial statements.
Union National Financial Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, ________________________________ (In Thousands) 2000 1999 ________________________________ CASH FLOWS from OPERATING ACTIVITIES Net Income $1,742 $2,322 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 365 334 Provision for Loan Losses 240 193 Investment Securities (Gains)/Losses 13 0 Provision for Deferred Income Taxes 15 (2) Earnings on Bank-Owned Life Insurance (54) 0 (Increase)/Decrease in Accrued Interest Receivable (183) (284) (Increase)/Decrease in Other Assets (885) 212 Increase/(Decrease) in Other Liabilities 730 243 _____________________ Net Cash Provided by Operating Activities 1,983 3,018 CASH FLOWS from INVESTING ACTIVITIES Net(Increase)/Decrease in Federal Funds Sold (1,080) 7,795 Proceeds from Sales of Available-for-Sale Securities 9,708 0 Proceeds from Maturities of Available-for-Sale Securities 4,895 16,735 Proceeds from Maturities of Held-to-Maturity Securities 1,648 2,060 Purchases of Available-for-Sale Securities (14,933) (16,684) Purchases of Held-to-Maturity Securities (1,718) (7,433) Loans Made to Customers, Net of Principal Collected on Loans (11,670) (11,025) Purchases of Property and Equipment (1,057) (212) Purchase of Bank-Owned Life Insurance (3,000) 0 _______________________ Net Cash (Used in)Investing Activities (17,207) (8,764) CASH FLOWS from FINANCING ACTIVITIES Net Increase/(Decrease)in Demand Deposits and Savings Accounts (559) (4,405) Net Increase/(Decrease) in Certificates of Deposits 6,459 5,736 Net Increase/(Decrease) in Short-Term Borrowing 16,286 4,523 Proceeds from Issuance of Long-Term Debt 10,000 2,587 Payment on Long-Term Debt (16,300) (1,675) Acquisition of Treasury Stock (803) (1,004) Issuance of Common Stock 255 246 Cash Dividends Paid (1,114) (1,050) _____________________ Net Cash Provided by Financing Activities 14,224 4,958 _____________________ Net Increase/(Decrease) in Cash and Cash Equivalents (1,000) (788) CASH and CASH EQUIVALENTS - Beginning of Period 7,004 7,341 _____________________ CASH and CASH EQUIVALENTS - End of Period $6,004 $6,553 ===================== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash Payments for: Interest $7,050 $6,357 Income Taxes 280 606 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Retirement of Treasury Stock (24,000 shares in 2000 and 17,000 shares in 1999) $493 $374 The accompanying notes are an integral part of the consolidated financial statements.
UNION NATIONAL FINANCIAL CORPORATION MOUNT JOY, PENNSYLVANIA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The information contained in this interim report is unaudited and subject to year-end adjustment and audit. However, in the opinion of management, the information reflects all adjustments necessary to present fairly the financial condition and results of operations for the periods presented. All such adjustments were of a normal, recurring nature. All material intercompany transactions have been eliminated in consolidation. 2. These statements should be read in conjunction with notes to the financial statements contained in the 1999 Annual Report to Stockholders. 3. All per share computations include the retroactive effect of stock dividends. This includes the 5% stock dividend declared by the board of directors on April 13, 2000, payable on May 19, 2000, to stockholders of record on May 2, 2000. The weighted- average number of shares of common stock outstanding was as follows: Basic Assuming Dilution __________ ___________________ Nine months ended: September 30, 2000 2,577,381 2,587,342 September 30, 1999 2,639,189 2,646,469 Three months ended: September 30, 2000 2,572,291 2,581,552 September 30, 1999 2,625,869 2,635,131 4. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities. This statement, which was subsequently amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards for derivative instruments and for hedging activities. In addition, the transition provisions of these statements allow the reclassification of held-to-maturity securities to an available- for-sale classification. Union National adopted the provisions of these statements effective April 1, 2000, and reclassified a portion of its municipal and corporate investment securities portfolio from held-to-maturity to available-for-sale. Union National reclassified securities that had a book value of $14,639,000 and unrealized gains of approximately $52,000 on April 1, 2000. The other provisions of these statements did not have a material effect on the liquidity, results of operations or capital resources of Union National when they were adopted. In September 2000, the Financial Accounting Standards Board issued Statement No. 140 (SFAS No. 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement, which replaces SFAS No. 125, will become effective for all transactions after March 31, 2001. When this statement becomes effective it will not have a material effect on the liquidity, results of operations or capital resources of Union National. 5. The results of operations for the nine-month period ended September 30, 2000, are not necessarily indicative of the results to be expected for the full year. 6. Certain reclassifications have been made to the 1999 consolidated financial statements to conform with the 2000 presentation. Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the significant changes in the results of operations, capital resources and liquidity presented in the accompanying consolidated financial statements for Union National Financial Corporation, a bank holding company, and its wholly-owned subsidiary, Union National Community Bank. Union National's consolidated financial condition and results of operations consist almost entirely of the bank's financial condition and results of operations. This discussion should be read in conjunction with the 1999 Annual Report. Current performance does not guarantee, assure or indicate similar performance in the future. We have made forward-looking statements in this document, and in documents that we incorporate by reference, that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of Union National Financial Corporation, Union National Community Bank or the combined company. When we use words such as believes, expects, anticipates or similar expressions, we are making forward-looking statements. Shareholders should note that many factors, some of which are discussed elsewhere in this document and in the documents that we incorporate by reference, could affect the future financial results of Union National Financial Corporation, Union National Community Bank or the combined company and could cause those results to differ materially from those expressed in our forward- looking statements contained or incorporated by reference in this document. These factors include the following: * operating, legal and regulatory risks; * economic, political and competitive forces affecting our banking, securities, asset management and credit services businesses; and * the risk that our analyses of these risks and forces could be incorrect and/or that the strategies developed to address them could be unsuccessful. Union National undertakes no obligation to publicly revise or update these forward- looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in other documents that Union National periodically files with the Securities and Exchange Commission. Results of Operations _____________________ Overview Consolidated net income for the nine months ended September 30, 2000, was $1,742,000, a decrease of 25.0%, as compared to consolidated net income of $2,322,000 for the same period of 1999. For the quarter ended September 30, 2000, consolidated net income was $454,000, a decrease of 41.3% as compared to consolidated net income of $773,000 for the same period of 1999. Basic earnings per share for the first nine months of 2000 amounted to 68 cents and diluted earnings per share amounted to 67 cents, as compared to basic and diluted earnings per share of 88 cents for the first nine months of 1999. For the quarter ended September 30, 2000, basic and diluted earnings per share amounted to 18 cents, as compared to 29 cents for the same period of last year. Results of operations for the nine months and the three months ended September 30, 2000, as compared to the same periods in 1999 were impacted by the following items: * Net income decreased due to a narrowing of the spread between the earnings rates on loans and investments as compared to the interest rates paid on deposits and short- and long-term borrowings. * Net income increased due to growth in average net loans, which was funded by growth in average deposits and additional borrowings. * Net income decreased due to an increase in the provision for loan losses. * Net income increased due to an increase in other operating income. * Net income decreased due to an increase in other operating expenses. The above items are quantified and discussed in further detail under their respective sections below. Net income as a percent of total average assets, also known as return on average assets (ROA), was 0.84% on an annualized basis for the nine months ended September 30, 2000, as compared to 1.18% for the same period in 1999. Net income as a percent of average stockholders' equity, also known as return on average equity (ROE), was 10.1% on an annualized basis for the nine months ended September 30, 2000, as compared to 13.3% for the same period in 1999. ROE was negatively impacted by the decline in earnings as discussed above. In contrast, ROE was positively impacted by the treasury stock repurchase plan and by an increase in average unrealized losses on available-for-sale securities. ROE without considering unrealized losses on available-for-sale securities was 9.8% for the first nine months of 2000 as compared to 13.2% for the same period of last year. See the discussion under the section on Stockholders' Equity for further details. Management currently expects a moderation in the growth of loans and deposits for the remainder of 2000 as compared to historic growth rates of loans and deposits. Moderation in loan and deposit growth is expected due to increased competition in Union National's market area. However, management has taken specific actions to enhance the bank's competitive position for loans, deposits and other financial services in northwestern Lancaster County, Pennsylvania (the bank's market area). These actions include the following: * increased emphasis on business development and continued sales training for staff; * further development of both loan and deposit products; * further development of the bank's cash management program for commercial customers; and * the strategic promotion of the bank's retail offices in light of continued consolidation in the banking and financial services industry. In addition, there is also general economic stability in the bank's market area and there is continued population and business growth. The funding for loan growth is further discussed under the section on Liquidity. It is anticipated that economic activity in the bank's market area during the remainder of 2000 will be favorable due to continued economic growth and construction activity and low unemployment rates. The overall effects of past economic conditions, as well as other factors, can be seen by a mild lessening of certain borrowers' financial strength. Management is monitoring these general and specific trends closely. Their various effects are discussed later under the section on Loans. Net Interest Income Net interest income is the amount by which interest income on loans and investments exceeds interest incurred on deposits and other interest-bearing liabilities. Net interest income is Union National's primary source of revenue. The amount of net interest income is affected by changes in interest rates and by changes in the volume and mix of interest-sensitive assets and liabilities. For analytical and discussion purposes, net interest income and corresponding yields are presented on a taxable equivalent basis. Net interest income for the nine months ended September 30, 2000, increased by $74,000, or 0.9%, over the same period in 1999. For the quarter ended September 30, 2000, net interest income decreased by $57,000, or 2.0%, as compared to the same period of the prior year. Volume growth in average earning assets and interest-bearing liabilities increased net interest income by $250,000 in comparing the nine months ended September 30, 2000, to the same period of 1999. In comparing the quarters ended September 30, 2000 and 1999, volume growth increased net interest income by $22,000. For the nine months, average loan growth of $13,191,000, or 7.8%, accounted for most of the increase in average earning assets and was funded by growth in average deposits of $8,556,000 and by additional borrowings. For the comparison of the three-month periods ended September 30, 2000 and 1999, average loan growth of $12,993,000 and average growth in investment securities of $3,898,000 were funded by growth in average deposits of $6,518,000 and by additional borrowings. The overall interest rate on the average total earning assets for the nine months ended September 30, 2000, was 8.04%, which compares favorably to the 7.91% for the same period of last year. However, for the same period, the overall interest rate on the average interest-bearing liabilities increased to 4.40% from 4.05%. This was due to rising short- and intermediate-term interest rates which are reflected in higher rates on high-yield money market accounts, certificates of deposit and short-term borrowings. In addition, due to rising interest rates and the prohibitively high cost of long-term, fixed-rate advances from the Federal Home Loan Bank of Pittsburgh, the bank utilized additional short-term borrowings during the first nine months of 2000. The net effect of all interest rate fluctuations and funding changes was to decrease net interest income in the amount of $176,000 for the nine months ended September 30, 2000 over the same period in 1999. In a comparison of the third quarters of 2000 and 1999, the interest rate on average earning assets increased from 7.94% to 8.15% and the interest rate on average interest-bearing liabilities increased from 4.05% to 4.61%. The net effect of these interest rate fluctuations and funding changes was to decrease net interest income in the amount of $79,000 for the quarter ended September 30, 2000 over the same period in 1999. See management's discussion below concerning the anticipated impact of these interest rate fluctuations on the results of operations for the remainder of 2000. As referenced above, in order to enhance the net interest income in future periods, management has entered into transactions that increase earning assets funded by advances from the Federal Home Loan Bank (FHLB). The terms and amounts of the transactions, when combined with the bank's overall balance sheet structure, maintain the bank within its interest rate risk policies. As of September 30, 2000, the bank received long-term advances of $20,735,000 and short-term advances of $24,700,000 from its available credit of $72,235,000 at the FHLB for purposes of funding loan demand and security purchases. The total advances had an effective rate of 6.37% at September 30, 2000, with maturities ranging from overnight borrowings to January 2010. Long-term borrowings outstanding have declined by $6,300,000 since the beginning of the year, but the weighted-average rate on these borrowings has increased from 5.45% to 5.99%. Outstanding short-term borrowings have increased by $16,285,000 and the weighted-average rate on these borrowings has increased from 5.11% to 6.69%. The additional funding from the FHLB was used to help fund loan growth and investment securities purchases. In June 1999, the Federal Reserve Bank began tightening the monetary supply and the prime interest rate was increased from 7.75% to 9.50% by May 2000. With these increases in interest rates, there also has been an increase in the rates the bank must pay to attract and retain deposits and must pay on maturing or repricing advances from the Federal Home Loan Bank. For the remainder of 2000, it is currently anticipated that the bank's net interest margin percentage will stabilize dependent upon future actions by the Federal Reserve Bank. This percentage is expected to be less than the net interest margin percentage earned during the last three months of 1999. As an offset to the narrowing of the net interest margin percentage, income from growth in earning assets during 1999 and the first nine months of 2000, net of costs resulting from growth in deposits and borrowings, will increase the net interest margin for the remainder of 2000. The netting of these two factors, as reflected in the bank's current simulation model and estimates as of September 30, 2000, may result in a net interest margin for the remainder of 2000 that is currently expected to be comparable to the net interest margin earned during the same period of 1999. The bank's current model includes a $3,000,000 purchase of bank- owned life insurance made in June 2000. This is a financial transaction reflected in the net interest margin of the model, but for financial reporting purposes the increase in the cash surrender value of the life insurance is recorded as other noninterest income. The model also includes an interest rate cap purchased in October 2000. The interest rate cap was purchased to mitigate interest rate risk in a rising-rate environment. The bank purchased, for $70,000, a three-year interest rate cap with a notional amount of $10,000,000 and a strike price of 7%. If the three-month LIBOR rate exceeds the 7% strike price, the cap is in the money and pays the bank the difference in interest cost between the current three-month LIBOR rate and 7% on the nominal amount of $10,000,000. The cap will be accounted for on a marked-to-market basis in accordance with SFAS No. 133. In the model, the effective interest rate impact of expected cash flows on investments and of renewing certificates of deposit can be reasonably estimated at current interest rate levels, but the yield curve during the remainder of 2000, the options selected by customers and the future mix of the loan, investment and deposit products in the bank's portfolios may significantly change the estimates used in the simulation model. See discussions on Liquidity and Market Risk - Interest Rate Risk. Provision for Loan Losses The provision for loan losses was $240,000 for the nine months ended September 30, 2000, and $193,000 for the nine months ended September 30, 1999. Net charge-offs for the nine months ended September 30, 2000, were $229,000 as compared to $118,000 for the same period of last year. For the three months ended September 30, 2000, the provision for loan losses was $112,000 versus $94,000 for the same period of 1999. The increase in the provision is primarily a result of the increase in net charge- offs. Future adjustments to the allowance, and consequently, the provision for loan losses, may be necessary if economic conditions or loan credit quality differ substantially from the assumptions used in making management's evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. Other Operating Income Other operating income increased by $172,000, or 16.2%, for the nine months ended September 30, 2000, and it increased by $48,000, or 12.9%, for the three months ended September 30, 2000, as compared to the same periods of 1999. Contributing factors to the increases in other operating income as compared to the same periods in 1999 are summarized below: Nine Months Three Months ________________ ________________ Monthly Deposit Account Service Charges $ 41,000 $ 5,000 Insufficient Funds Charges $ 39,000 $ 19,000 Commercial Account Analysis Charges $ 21,000 $ 3,000 Earnings on Bank-Owned Life Insurance $ 54,000 $ 48,000 Debit Card Earnings $ 27,000 $ 8,000 Letter of Credit Fees $ 18,000 $ 8,000 The increase in monthly service charges is primarily a result of increases in monthly service charges on noninterest-bearing accounts that were effective May 1, 1999. Also, the insufficient funds charge was increased effective June 1, 2000. The bank also currently assesses a surcharge at its ATMs; however, ATM surcharges, or the elimination thereof, may be subject to future legislation. Other Operating Expenses The aggregate of noninterest expenses for the nine months ended September 30, 2000, increased by $1,042,000, or 18.1%, over the same period in 1999. For the three months ended September 30, 2000, noninterest expenses increased by $423,000, or 21.3%, over the same period in 1999. These noninterest expense increases are discussed below as they pertain to the various expense categories. For the nine-month period, employee salaries and wages increased by $455,000, or 17.0%, and for the three-month period the increase was $191,000 or 21.1%. These increases were essentially due to annual merit and cost of living increases, planned staff additions and the compensation impact of our new paid time off program. New staff positions include a manager and trust administrator for our newly developed Wealth Management Group, a chief lending officer, a chief technology/operations officer, staff for a new community office and various other support staff positions. The chief lending officer will lead our lending efforts and assist in the overall management of credit quality in the bank's loan portfolio. Management believes the addition of this position will enhance the credit review process for new loans and should further allow our loan and business development officers to focus on their sales efforts. See the section entitled Initiatives for 2000 for further discussion on staff additions for the Wealth Management Group, the new office and the technology officer and their impact to the operating results of Union National. Related fringe benefits increased by $151,000, or 25.3%, for the nine-month period and $55,000, or 28.9%, for the three-month period ended September 30, 2000, as compared to the same periods of the last year. The increased expense is primarily a result of increased employee benefit costs as a result of staff additions and the addition of a short-term disability benefit for employees. Occupancy, furniture and equipment expenses increased by $114,000, or 15.4%, for the nine months ended September 30, 2000, and increased by $43,000, or 17.1%, for the three months ended September 30, 2000, as compared to the same periods of 1999. This was due to an increase in lease expense, equipment and furniture depreciation and equipment and maintenance costs. The increase in lease expense is a result of additional costs relative to the opening of a new community office and the opening of a new office for our Wealth Management Group. A new office was opened on April 17, 2000, at 401 Locust Street, Columbia and our Wealth Management Group opened their offices on August 1, 2000, in the Armstrong building located at 150 North Queen Street, Lancaster. Other operating expenses increased by $308,000, or 18.0%, for the nine months ended September 30, 2000, and they increased by $129,000, or 20.4%, for the three months ended September 30, 2000, as compared to the same periods of 1999. Contributing factors to the increases in other operating expenses as compared to the same periods in 1999 are summarized below: Nine Months Three Months ______________ ________________ Legal & Professional Fees $146,000 $ 74,000 Travel & Meals $ 49,000 $ 41,000 Advertising & Related Expenses$ 36,000 $ 9,000 Staff Training Costs $ 14,000 $ 3,000 Outside Computer Services $ 17,000 $ (4,000) Debit Card Expenses $ 11,000 $ 4,000 Expenditures in 2000 for professional fees included fees paid to consultants in connection with the implementation of a new data processing system and fees paid to an independent company to perform internal audit services. The fees paid for internal audit services replace the cost of maintaining our own internal audit department that had two employees. The former internal auditor assumed a position with oversight of risk management and compliance for the bank. Increased training, travel, and meal costs primarily relate to increased costs associated with the implementation of the new data processing system. For further explanation of increases in other operating costs see the discussion of the bank's initiatives in the section below entitled Initiatives for 2000. Income Taxes Union National's income tax expense decreased by $299,000 for the nine months ended September 30, 2000, and the expense decreased by $138,000 for the three months ended September 30, 2000. The effective tax rate was 11.6% for the nine months ended September 30, 2000, and 18.5% for the nine months ended September 30, 1999. The decrease in income tax expense was due to lower pretax income and an increase in tax-exempt income on loans, securities and the investment in bank-owned life insurance. Currently, the effective tax rate of Union National for the remaining months of 2000 is expected to be less than the current effective tax rate. Initiatives for 2000 _____________________ During 2000, the bank is implementing various initiatives that have and will impact the results of operations of Union National. First, in January 2000 the bank began developing its new Wealth Management Group with the hiring of a manager to lead this new initiative. The addition of this position will allow Union National to diversify and grow our trust services with additional investment and asset management services. A trust administrator and investment manager were added to our Wealth Management Group later in 2000. The Wealth Management Group opened its new offices located in the Armstrong building at 150 North Queen Street in Lancaster on August 1, 2000. The bank has entered into a five-year lease for this office space. Staff, lease and other operating costs are expected to reduce Union National's results of operations by a currently estimated amount of $75,000, net of tax, for the remainder of 2000. However, this expanded department will also enable Union National to enhance both interest income and fee income in 2000 and future years. This new office location required furnishings and equipment which cost approximately $185,000. The bank also opened a community banking office at 401 Locust Street in Columbia on April 17, 2000. The bank has entered into an agreement to lease the facilities for a five-year period with four renewal options that have terms of five years each. Staffing costs, office costs and other general expenses are expected to impact results of operations for the start-up and operation of the office. These operating costs are currently expected to reduce results of operations for the remainder of 2000 by an estimated amount of $40,000, net of tax. Management anticipates that a significant part of these expenses will be offset by interest and fee income generated from new customer relationships at this location. The facility required some renovations, furnishings and equipment, which cost approximately $105,000. Union National has been evaluating its technology resources and alternatives since 1999. A technology plan has been developed and is being implemented during 2000 and 2001. This plan includes a voice-response unit, a marketing customer information file (MCIF) database system, a bank-wide network and a change in our core and trust data processing systems. The current internal core processing system will be converted to an externally-based, state-of-the-art system. These system enhancements will allow Union National to provide additional services to customers, more effectively market our existing products, significantly increase operational efficiencies and position the bank to remain on the cutting edge with technology. In June 2000, the bank entered into an eight-year agreement with Metavante Corporation of Milwaukee, Wisconsin (formerly M&I Data Services, Inc.) to provide the core and trust data processing systems, electronic payment system (EPS) and ATM processing, platform systems and the wide-area network needed by the bank. We are currently anticipating a conversion in November 2000. Based on current volumes and transactions, the contract with Metavante will require total annual expenditures of approximately $685,000. The services to be provided by Metavante will replace services that are currently being provided by other vendors at a cost of approximately $235,000. In addition, since we will be utilizing a more fully-integrated system and reducing manual processes, we will achieve greater efficiencies in the utilization of staff and effect significant operating cost savings. To assist us in the implementation of the technology plan, we have added the position of chief technology/operations officer as mentioned earlier. The systems mentioned above that will be implemented during 2000, related costs and the addition to staff are currently expected to reduce results of operations for the remainder of 2000 by an estimated amount of $210,000, net of tax. The implementation of these systems is currently expected to require expenditures of $465,000 during the remainder of 2000 for equipment, software and various other products and services. Systems changes may also materially impact the results of operations in future years. However, in future periods systems changes and enhancements should result in both increased revenue and operating cost savings to the bank. Union National has also engaged the consulting division of Metavante Corporation to provide services in connection with the implementation of the new core data processing and related systems. With their assistance, we are evaluating our internal processes, products and procedures in order to identify efficiencies, cost savings and additional fee income opportunities. The total contract for their services to be performed in 2000 and 2001 will require payments which will total $296,000 plus reimbursement for expenses. The cost of the consultants will reduce results of operations for the remainder of 2000 by approximately $85,000, net of tax. For 2001 and subsequent years, Union National currently expects the results of this engagement to exceed the impact of the operating costs of the new data processing and related systems. The addition of the Wealth Management Group, the new retail office location and the technology plan mentioned above have negatively impacted results of operations for the first nine months of 2000 by approximately $315,000, net of taxes. Union National also has developed and begun promoting several new products in 2000. These products include a small business checking account, an unsecured consumer line of credit and other additions to our current product line. Management believes that these new products will enhance results of operations for 2000. As mentioned previously, with the implementation of our technology plan we will be looking to achieve significant staff and operating cost savings in 2000 and beyond. As one of the first steps in this process Union National offered an early retirement package in October 2000 to certain employees who met certain age and years of service qualifications. The cost of this early retirement package is currently expected to reduce results of operations for the fourth quarter by a currently estimated amount of $205,000, net of taxes. The final cost will depend upon the response from employees regarding this early retirement option. This one-time cost will be offset by annual cost savings of approximately the same amount as the one-time cost. See the Stockholders' Equity section for further discussion on the impact of the above items on the capital resources of Union National in 2000. Regulatory Activity ___________________ From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of Union National and the bank. In November 1999, President Clinton signed into law the Gramm- Leach-Bliley Act of 1999, which is also known as the Financial Services Modernization Act. The act repeals some Depression-era banking laws and permits banks, insurance companies and securities firms to engage in each others' businesses after complying with certain conditions and regulations which are yet to be finalized. The act grants to community banks the power to enter new financial markets as a matter of right that larger institutions have managed to do on an ad hoc basis. At this time, Union National is continuing to assess the impact of and opportunities available in the Act, but has no immediate plans to pursue these additional business activities. Union National does not believe that the Financial Services Modernization Act will have an immediate positive or negative material effect on its operations. However, the act may have the result of increasing the amount of competition that Union National faces from other financial service companies, many of whom have substantially more financial resources, which may now offer banking services in addition to insurance and brokerage services. As a consequence of the extensive regulation of commercial banking activities in the United States, Union National's and the bank's business is particularly susceptible to being affected by federal legislation and regulations that may increase the cost of doing business. Except as discussed above, management is not aware of any other current specific recommendations by regulatory authorities or proposed legislation, which if they were implemented, would have a material adverse effect upon the liquidity, capital resources or results of operations. However, the general cost of compliance with numerous and multiple federal and state laws and regulations does have, and in the future may have, a negative impact on Union National's results of operations. Further, the business of Union National is affected by the state of the financial services industry in general. As a result of legal and industry changes, management predicts that the industry will continue to experience an increase in consolidations and mergers as the financial services industry strives for greater cost efficiencies and market share. Management believes that such consolidations and mergers may enhance its competitive position as a community bank. The bank is routinely examined by the OCC and no material adverse impact is anticipated on current or future operations and financial position as a result of this process. Changes in Accounting Standards _______________________________ In June 1998, the Financial Accounting Standards Board issued Statement No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging Activities. This statement, which was subsequently amended by SFAS No. 137 and SFAS No. 138, establishes accounting and reporting standards for derivative instruments and for hedging activities. In addition, the transition provisions of these statements allow the reclassification of held-to-maturity securities to an available- for-sale classification. Union National adopted the provisions of these statements effective April 1, 2000, and reclassified a portion of its municipal and corporate investment securities portfolio from held-to-maturity to available-for-sale. Union National reclassified securities that had a book value of $14,639,000 and unrealized gains of approximately $52,000 on April 1, 2000. The other provisions of these statements did not have a material effect on the liquidity, results of operations or capital resources of Union National when they were adopted. In September 2000, the Financial Accounting Standards Board issued Statement No. 140 (SFAS No. 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This statement, which replaces SFAS No. 125, becomes effective for all transactions after March 31, 2001. When this statement becomes effective it will not have a material effect on the liquidity, results of operations or capital resources of Union National. Credit Risk and Loan Quality ____________________________ Other than as described herein, management does not believe there are any trends, events or uncertainties which are reasonably expected to have a material impact on future results of operations, liquidity or capital resources. Further, based on known information, management believes that the effects of current and past economic SUPPORTING SCHEDULES Schedule of Nonperforming Assets ________________________________
September 30, December 31, (In Thousands) 2000 1999 _______________________________ Nonaccruing Loans $1,400 $1,343 Accrual Loans - 90 days or more past due 140 132 Restructured Accrual Loans 0 0 Other Real Estate Owned 329 20 _______________________________ Total Nonperforming Assets $1,869 $1,495 =============================== Nonperforming Assets as a % of Net Loans 1.0% 0.9% =============================== Allowance for Loan Losses as a % of Nonperforming Loans 116% 121% ===============================
Analysis of Allowance for Loan Losses _____________________________________
Nine Months Ended September 30, (In Thousands) 2000 1999 ________________________________ Average Total Loans Outstanding (Less Unearned Income) $181,247 $168,056 =============================== Allowance for Loan Losses, Beginning of Period $1,783 $1,743 Loans Charged-off During Period 251 159 Recoveries of Loans Previously Charged-off 22 41 _______________________________ Net Loans Charged-off 229 118 Addition to Provision for Loan Losses Charged to Operations 240 193 _______________________________ Allowance for Loan Losses, End of Period $1,794 $1,818 =============================== Ratio of Net Loans Charged-off to Average Loans Outstanding (Annualized) 0.17% 0.09% =============================== Ratio of Allowance for Loan Losses to Net Loans at End of Period 0.96% 1.04% ===============================
conditions and other unfavorable specific business conditions may result in the inability of loans amounting to $2,324,000 to comply with their respective repayment terms. This amount represents an increase from the amount of $2,092,000 at December 31, 1999. In aggregate, these loans are well secured, essentially with real estate, equipment and vehicles. Management currently believes that potential losses on these loans have already been provided for in the Allowance for Loan Losses. The borrowers are of special mention since they have shown a decline in financial strength and payment quality. Management has increased its monitoring of the borrowers' financial strength. In addition, management currently estimates that a portion of these loans will be classified as nonperforming in the remaining months of 2000. At September 30, 2000, total nonperforming assets amounted to $1,869,000, or 1.0% of total net loans, as compared to a level of $1,495,000, or .9%, at December 31, 1999. Historically, the percentage of nonperforming assets to total net loans as of December 31, for the previous five-year period was an average of .7%. Allowance for Loan Losses _________________________ The allowance for loan losses is maintained at a level believed adequate by management to absorb estimated probable loan losses. Management is responsible for the adequacy of the allowance for loan losses, which is formally reviewed by management on a quarterly basis. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. Management's periodic evaluation of the adequacy of the allowance is based on Union National's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. While management uses available information to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, review the bank's allowance for loan losses. Such agencies may require the bank to recognize additions to the allowance based on their judgement of information available to them at the time of their examination. After management's assessment, no adjustment to the allowance for loan losses was necessary as a result of the Office of Comptroller's most recent examination as of June 30, 2000. The allowance for loan losses increased by $11,000 for the nine months ended September 30, 2000, and the ratio of the allowance for loan losses to net loans was 0.96% at September 30, 2000, as compared to 1.02% at December 31, 1999. Management believes, based on information currently available, that the current allowance for loan losses of $1,794,000 is adequate to meet potential loan losses. During 2000, an ongoing loan review is being performed on selected portions of the loan portfolio by an independent consultant. Liquidity _________ Union National's objective is to maintain adequate liquidity to fund needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk. Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals and for funding Corporate operations. Sources of liquidity are as follows: * maturing investment securities, which include overnight investments in federal funds sold; * overnight correspondent bank (including FHLB) borrowing on various credit lines; * payments on loans and mortgage-backed securities; and * a growing core deposit base. Management believes that its core deposits are fairly stable even in periods of changing interest rates. Liquidity management is governed by policies and measured on a quarterly basis. These measurements indicate that liquidity generally remains stable and that liquidity consistently exceeds the bank's minimum defined level. There are no known trends, or any known demands, commitments, events or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way. Membership in the Federal Home Loan Bank provides the bank with additional liquidity alternatives such as short- or long-term funding on fixed- or variable-rate terms. The bank has a maximum funding capacity of up to $72,235,000 available at the Federal Home Loan Bank. In order to provide funding for the bank's loans and investments, the bank had outstanding borrowing from the Federal Home Loan Bank of $45,435,000 at September 30, 2000, and $35,235,000 at December 31, 1999. Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk - Interest Rate Risk ________________________________ As a financial institution, Union National's primary component of market risk is interest rate volatility. Fluctuations in interest rates will ultimately impact the level of income and expense recorded on a large portion of the bank's assets and liabilities. Virtually all of Union National's interest- sensitive assets and liabilities are held by the bank, and therefore, interest rate risk management procedures are performed by the bank. The nature of the bank's current operations is such that the bank is not subject to foreign currency exchange or commodity price risk. Union National does not own any trading assets. Except as described below, Union National has not entered into any hedging transactions such as interest rate floors, caps and swaps. The objectives of interest rate risk management are to maintain or increase net interest income over a broad range of market interest rate movements. The Asset and Liability Management Committee is responsible for managing interest rate risk using policies approved by the bank's board of directors. The bank manages interest rate risk by changing the mix or repricing characteristics of its investment securities portfolio and borrowings from the Federal Home Loan Bank and by the promotion or development of specific loan and deposit products. As mentioned earlier, in October 2000 the bank took steps to mitigate interest rate risk in a rising rate environment. The bank purchased, for $70,000, a three-year interest rate cap with a notional amount of $10,000,000 and a strike price of 7%. If the three-month LIBOR rate exceeds the 7% strike price, the cap is in the money and pays the bank the difference in interest cost between the current three-month LIBOR rate and 7% on the nominal amount of $10,000,000. The cap will be accounted for on a marked-to-market basis in accordance with SFAS No. 133. The bank retains an outside consulting group to assist in monitoring its interest rate risk using income simulation models on a quarterly basis. The simulation model measures the sensitivity of future net interest income to hypothetical changes in market interest rates. In an effort to assess market risk, the bank utilizes a simulation model to determine the effect of gradual increases or decreases in market interest rates on net interest income and net income. The aforementioned assumptions are revised based on defined scenarios of assumed speed and direction changes of market interest rates. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions, as well as management strategies, among other factors. Because it is difficult to accurately quantify into assumptions the reaction of depositors and borrowers to market interest rate changes, the actual net interest income and net income results may differ from simulated results. While assumptions are developed based upon current economic and local market conditions, management cannot make any assurances as to the predictive nature of these assumptions. The simulation model assumes a hypothetical gradual shift in market interest rates over a twelve-month period. This is based on a review of historical changes in market interest rates and the level and curve of current interest rates. The simulated results represent the hypothetical effects to the bank's net interest income and net income. Projections for loan and deposit growth are ignored in the simulation model. The simulation model includes all of the bank's earning assets and interest-bearing liabilities and assumes a parallel and prorated shift in interest rates over a twelve-month period. As mentioned previously, the bank's model also includes the purchase in June 2000 of $3,000,000 in bank-owned life insurance and the purchase of an interest rate cap in October 2000. The simulation model currently indicates that a hypothetical two-percent general decline in prevailing market interest rates over a one-year period will have an unfavorable impact on the bank's net interest income over the next twelve months as compared to the constant rate scenario. This unfavorable impact on net interest income is currently estimated at $85,000, net of taxes. A hypothetical two-percent general rise in rates will have an unfavorable impact on net interest income over the next twelve months. This unfavorable impact is currently estimated at $75,000, net of taxes. The computations do not contemplate any actions management or the Asset Liability Management Committee could undertake in response to changes in market conditions or market interest rates. The bank managed its interest rate risk position for the nine months ended September 30, 2000, by the following: * marketing its variable-rate home equity line of credit and its variable-rate unsecured consumer line of credit; * increasing its extensions of adjustable- and floating-rate loans for new or refinanced commercial and agricultural loans (these outstanding loans increased by $4,594,000 for the period); * managing and expanding the bank's core deposit base including deposits obtained in the bank's commercial cash management programs; and * additions to or restructuring of adjustable- and fixed-rate advances from the Federal Home Loan Bank, including convertible advances. The above strategies and actions impact interest rate risk and are all included in the bank's quarterly simulation models in order to determine future asset and liability management strategies. See the related discussions in the section on Net Interest Income. Stockholders' Equity ____________________ Union National maintains capital ratios that are well above the minimum total capital levels required by federal regulatory authorities including the risk-based capital guidelines. The bank's average stockholders' equity to average assets ratio, which measures the adequacy of capital, was 8.13% as of September 30, 2000, as compared to 8.70% as of December 31, 1999. The decrease in this capital ratio was primarily a result of growth in average assets during the period and dividends paid by the bank to Union National to fund the common stock repurchase plan discussed below. Items which could have a material impact on the capital resources of Union National for the remainder of 2000 include the implementation of various systems in accordance with our technology plan, the payment of fees to Metavante Corporation for consulting services, and contracts in the amount of $435,000 for the purchase and development of real estate for the expansion and remodeling of an existing community banking office. The implementation of the technology initiatives is currently expected to require expenditures of approximately $465,000 and the consulting services are expected to require expenditures of approximately $130,000, all during the remainder of 2000. The expansion and remodeling of the existing community banking office will cost a total that is currently estimated at $845,000. There are no other material commitments for capital expenditures as of September 30, 2000. There are no known trends or uncertainties, including regulatory matters, that are expected to have a material impact on the capital resources of Union National for 2000, except as discussed below concerning Union National's common stock repurchase plan. In addition, see discussion on Regulatory Activity. On January 13, 2000, Union National announced that the board of directors had authorized and approved a plan to purchase up to 50,000 shares of Union National's outstanding common stock in open market or privately negotiated transactions. The board of directors believes that a redemption or repurchase of this type is in the best interests of Union National and its stockholders as a method to enhance long-term shareholder value. Currently, the shares are to be held as treasury shares (issued, but not outstanding shares). As of September 30, 2000, a total of 49,025 shares of common stock were repurchased under this plan at a cost of $803,000. This amount was funded from consolidated earnings. Union National and the bank remain well capitalized and meet all regulatory capital guidelines after the repurchase of the shares. The bank's risk-based capital ratios exceed regulatory requirements. The risk-based capital guidelines require banks to maintain a minimum risk-based capital ratio of 8.0% at September 30, 2000, as compared to the bank's current risk-based capital ratio of 12.42%. The total risk-based capital ratio is computed by dividing stockholders' equity plus the allowance for loan losses by risk-adjusted assets. Risk-adjusted assets are determined by assigning credit risk-weighting factors from 0% to 100% to various categories of assets and off-balance-sheet financial instruments. Banking regulations also require the bank to maintain certain minimum capital levels in relation to bank assets. Failure to meet minimum capital requirements could result in prompt regulatory action. As of September 30, 2000, the bank was categorized as well capitalized. Management is not aware of any conditions or events that would adversely affect the bank's capital. The bank maintains the following leverage and risk-based capital ratios:
(In Thousands) September 30, December 31, 2000 1999 ____________ ___________ S> Tier I - Total Stockholders' Equity $ 23,122 $ 23,176 Tier II - Allowance for Loan Losses 1,794 1,783 ____________ ___________ Total Qualifying Capital $ 24,916 $ 24,959 ============ =========== Risk-adjusted On-balance-sheet Assets $188,020 $168,830 Risk-adjusted Off-balance-sheet Exposure 12,532 10,958 ____________ ___________ Total Risk-adjusted Assets $200,552 $179,788 ============ =========== Actual Capital Ratio: Tier I Capital to Average Total Assets 8.13% 8.70% Minimum Required 4.00 4.00 To Be Well Capitalized Under Prompt Corrective Action Provisions 5.00 5.00 Risk-based Capital Ratios: Tier I Capital Ratio - Actual 11.53% 12.89% Minimum Required 4.00 4.00 To Be Well Capitalized under Prompt Corrective Action Provisions 6.00 6.00 Total Capital Ratio - Actual 12.42% 13.88% Minimum Required 8.00 8.00 To Be Well Capitalized under Prompt Corrective Action Provisions 10.00 10.00 Total Risk-Based Capital in Excess of the Minimum Regulatory Requirement $ 8,872 $ 10,576 ========== ==========
Part II - Other Information: Item 1. Legal Proceedings Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of Union National. There are no proceedings pending other than the ordinary routine litigation incident to the business of Union National and its subsidiary, Union National Community Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against Union National and the bank by government authorities. Item 2. Changes in Securities and Use of Proceeds - Nothing to report. Item 3. Defaults Upon Senior Securities - Nothing to report. Item 4. Submission of Matters to a Vote of Security Holders - Nothing to report. Item 5. Other Information - Nothing to report. Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits - The following exhibits are being filed herewith, or incorporated by reference as part of this Report: (see also Item 6(b)). Exhibit No. 3(i) - Union National Financial Corporation's Amended Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to Union National Financial Corporation's Registration Statement No. 333-27837 on Form S-8, filed with the Commission on May 27, 1997). Exhibit No. 3(ii) - Union National Financial Corporation's Amended By-laws (Incorporated by reference to Exhibit 3(ii) to Union National Financial Corporation's Registration Statement No. 333-27837 on Form S-8, filed with the Commission on May 27, 1997), and the amendment thereto dated November 14, 1998 (Incorporated by reference to Exhibit 3(ii) to Union National Financial Corporation's Annual Report on Form 10-K for the Year Ended December 31, 1998). Exhibit No. 10.1 - Executive Employment Agreement dated as of January 1, 1999, between Mark D. Gainer and Union National Financial Corporation (Incorporated by Reference to Exhibit 10.1 to Union National Financial Corporation's Annual Report on Form 10-K for the Year Ended December 31, 1998). Exhibit No. 10.2 - Union National Financial Corporation 1988 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.3 to Union National Financial Corporation's Registration Statement No. 333-27837 on Form S-8, filed with the Commission on May 27, 1997). Exhibit No. 10.3 - Union National Financial Corporation 1997 Stock Incentive Plan. (Incorporated by reference to Exhibit 4.5 to Union National Financial Corporation's Registration Statement No. 333-27837 on Form S-8, filed with the Commission on May 27, 1997). Exhibit No. 10.4 - Change of Control Agreement, dated June 17, 1999, between Michael A. Frey and Union National Financial Corporation (Incorporated by reference to Exhibit 10.4 to Union National Financial Corporation's Annual Report on form 10-K for the Year Ended December 31, 1999). Exhibit No. 10.5 - Union National Financial Corporation's Employee Stock Purchase Plan (Incorporated by Reference to Exhibit 4.4 to Union National Financial Corporation's Registration Statement No. 333-27837 on Form S-8, filed with the Commission on May 27, 1997). Exhibit No. 11 - Statement re: Computation of Earnings Per Share (Incorporated by Reference to page 2 of this Report). Exhibit No. 27 - Financial Data Schedule as of September 30, 2000. (b) Reports on Form 8-K Nothing to report. Signatures ___________ Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Union National Financial Corporation (Registrant) /s/ Mark D. Gainer By _____________________________ Mark D. Gainer President & CEO (Principal Executive Officer) Date: November 14, 2000 /s/ Clement M. Hoober By _____________________________ Clement M. Hoober Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 14, 2000