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, 2001
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)
(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)
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. [ X ]
The aggregate market value of the shares of Common Stock of
the Registrant held by nonaffiliates of the Registrant was
$37,088,072.53 as of March 20, 2002. As of March 20, 2002, the
Registrant had 2,576,374.13015 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Union National Financial Corporation's 2001
Annual Report to Stockholders are incorporated by reference into
Parts I, II and IV, hereof. Union National Financial
Corporation's Proxy Statement for its 2002 Annual Meeting is
incorporated by reference in response to Parts III and IV,
hereof.
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PAGE NO.
PART I
Item 1 - Business 1
Item 2 - Properties 8
Item 3 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders 10
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters 11
Item 6 - Selected Financial Data 11
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation 12
Item 7A- Quantitative and Qualitative Disclosure About Market
Risk 12
Item 8 - Financial Statements and Supplementary Data 12
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure 12
PART III
Item 10 - Directors and Executive Officers of the Registrant 13
Item 11 - Executive Compensation 13
Item 12 - Security Ownership of Certain Beneficial Owners and
Management 13
Item 13 - Certain Relationships and Related Transactions 13
PART IV
Item 14 - Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 14
Signatures 17
Exhibit Index 19
PART I
______
Union National's management has made forward-looking
statements in this document, and in documents that it
incorporates 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
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;
* 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.
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. The bank's wholly owned subsidiary, the
Union National Insurance Agency, Inc. was formed on May 21, 2001.
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, the Wealth Management Group
located in Lancaster City. Through a third party provider
affiliation, Union National Community Bank offers certain non
depository products to its customers to include annuities and
brokerage services.
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 Annual Report on 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 31 and 32 of the 2001 Annual
Report to Stockholders. The annual report is included in Exhibit
13 to this report and is incorporated herein by reference.
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 other than
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%, of which at least 4% 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 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
14 and 32 of Union National Financial Corporation's 2001 Annual
Report to Stockholders 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 page 32 of Union National Financial
Corporation's 2001 Annual Report to Stockholders, 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.
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 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 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. The Union National
Insurance Agency, Inc. provides insurance-related products to the
bank's customers. The agency is subject to supervision and
regulation by the Insurance Department of the Commonwealth of
Pennsylvania, the Office of the Comptroller of Currency and other
regulatory agencies.
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 32 of Union
National Financial Corporation's 2001 Annual Report to
Stockholders.
Employees. As of March 20, 2002, Union National Community
__________
Bank had 120 full-time employees and 10 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.
ITEM 2. PROPERTIES.
____________________
Union National Community Bank owns its main office, six
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 two branch offices located in Columbia and
Manheim, Pennsylvania. The bank also leases its Wealth
Management Group property in Lancaster.
PROPERTIES OWNED BY UNION NATIONAL COMMUNITY BANK
Office and Address Description of Property Date Acquired
__________________ _______________________ ________________
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
6,808 sq. ft. of space.
Elizabethtown MotorBank Office
Drive-up Bank September, 2001
Brick on Frame
Containing approximately
574 sq. ft. of space.
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.
PROPERTY LEASED BY THE BANK
Office and Address Description of Property Date Leased
_____________________ ________________________ _____________
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.
Columbia Branch Office Branch Bank April 11, 2000
401 Locust Street Brick/Granite Building
Columbia, PA 17512 First floor of 3 story building
containing 2,120 sq. ft. of space
Currently used for banking purposes.
No drive-up facilities.
Wealth Management Group Brick/Steel Frame August 1, 2000
150 N. Queen Street Building Fifth floor of
5 th Floor, Suite 500 7 story building containing
Lancaster, PA 17604 5,080 sq. ft. of space currently
used for trust and asset
management purposes.
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.
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 2001 Annual Report to
Stockholders which is included in Exhibit 13 to this Annual
Report on 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 2001 Annual Report to
Stockholders 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-six 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
pages 31 and 32 of Union National Financial Corporation's 2001
Annual Report to Stockholders, which is included in Exhibit 13 to
this Form 10-K.
As of March 20, 2002, there were approximately 934 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 pages 19 and 20 of Union National Financial
Corporation's 2001 Annual Report to Stockholders which is
included in Exhibit 13 to this Annual Report on 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 32 of Union National Financial
Corporation's 2001 Annual Report to Stockholders which are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
______________________________________________________________
RISK.
_____
The information required by this Item is incorporated here
by reference from pages 30 and 31 of Union National Financial
Corporation's 2001 Annual Report to Stockholders which pages are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
_____________________________________________________
The information required by this Item is incorporated here
by reference from pages 4 through 19 of Union National Financial
Corporation's 2001 Annual Report to Stockholders which are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
_________________________________________________________
ACCOUNTING AND FINANCIAL DISCLOSURE.
____________________________________
The information required by this Item is incorporated herein
by reference from page 29 of the Union National Financial
Corporation's Proxy Statement for its 2002 Annual Meeting of
Shareholders.
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 13, 17, 18 and 28 of Union
National Financial Corporation's proxy statement for its 2002
Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
_________________________________
The information required by this Item is incorporated here
by reference from pages 19 through 27 of Union National Financial
Corporation's proxy statement for its 2001 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 17,18 and 28 of
Union National Financial Corporation's proxy statement for its
2001 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_________________________________________________________
The information required by this Item is incorporated here
by reference from page 28 of Union National Financial
Corporation's Proxy Statement for its 2002 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 Auditor's 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:
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 and Restated By-laws.
(Incorporated by reference to Exhibit
3(ii) to Union National Financial
Corporation's current report on Form 8-K,
filed with the Commission on March 30,
2001.)
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 August
2, 2001, between Michael A. Frey and
Union National Financial Corporation.
(Incorporated by Reference to Union
National Financial Corporation's
Quarterly Report on Form 10-Q for the
Period Ended September 30, 2001).
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).
10.6 Change of Control Agreement, dated May
29, 2001, between Clement M. Hoober and
Union National Financial Corporation.
(Incorporated by Reference to Union
National Financial Corporation's
Quarterly Report on Form 10-Q for the
Period Ended June 30, 2001).
11 Statement re: Computation of Earnings Per
Share. (Incorporated by Reference to
page 15 of Union National Financial
Corporation's 2001 Annual Report to
Stockholders, which is included herein at
Exhibit 13.)
12 Statement re: Computation of Ratios.
(Incorporated by Reference to page 20 of
Union National Financial Corporation's
2001 Annual Report to Stockholders, which
is included herein at Exhibit 13.)
13 Excerpts from Union National Financial
Corporation's 2001 Annual Report to
Stockholders.
21 Subsidiaries of the Union National
Financial Corporation (Incorporated by
Reference to Exhibit 21 to Union National
Financial Corporation's Annual Report on
Form 10-K for the Year Ended December 31,
1998).
23.1 Consent of Beard Miller Company LLP,
Independent Auditors.
23.2 Consent of Trout, Ebersole, & Groff, LLP,
Certified Public Accountants
(b) Union National filed a report on form 8-K via EDGAR
dated October 15, 2001. The report was filed pursuant
to Item 5, Other Events, and reported the issuance of a
press release. The press release was attached to the
report as an exhibit and reported third quarter
earnings and announced the fourth quarter cash dividend
for 2001.
(c) The exhibits required to be filed by this Item are
listed under Item 14(a)3, above.
(d) NOT APPLICABLE.
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 28, 2002
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 28, 2002
__________________________
Mark D. Gainer
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Donald H. Wolgemuth March 28, 2002
__________________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 28, 2002
__________________________
William E. Eby, Director
By /s/ Clement M. Hoober March 28, 2002
__________________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Frank R. Eichler March 28, 2002
__________________________
Franklin R. Eichler, Director
By /s/ Carl R. Hallgren March 28, 2002
__________________________
Carl R. Hallgren, Director
By /s/ David G. Heisey March 28, 2002
__________________________
David G. Heisey, Director
By /s/ Darwin A. Nissley March 28, 2002
__________________________
Darwin A. Nissley, Director
By /s/ Daniel H. Raffensperger March 28, 2002
__________________________
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 28, 2002
__________________________
Benjamin W. Piersol, Jr., Director
By /s/ Lloyd C. Pickell March 28, 2002
__________________________
Lloyd C. Pickell, Director
EXHIBIT INDEX
Sequential Page
Number in Manually
Exhibit Number Signed Original
______________ _______________
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 and
Restated By-laws. (Incorporated by reference to
Exhibit 3(ii) to Union National Financial
Corporation's current report on Form 8-K, filed with
the Commission on March 30, 2001.)
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 August 2,
2001, between Michael A. Frey and Union National
Financial Corporation. (Incorporated by Reference to
Exhibit 10 to Union National Financial Corporation's
Quarterly Report on Form 10-Q for the Period Ended
September 30, 2001).
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.)
10.6 Change in Control Agreement, dated as of May 29, 2001,
between Clement M. Hoober and Union National Financial
Corporation. (Incorporated by Reference to Exhibit 10
to Union National Financial Corporation's Quarterly
Report on Form 10-Q for the Period Ended June 30,
2001).
11 Statement re: Computation of Earnings Per Share.
(Incorporated by Reference to page 20 of Union
National Financial Corporation's 2001 Annual Report to
Stockholders, which is included herein at Exhibit 13.)
12 Statement re: Computation of Ratios. (Incorporated
by Reference to page 20 of Union National Financial
Corporation's 2001 Annual
Report, which is included herein at Exhibit 13.)
13 Excerpts from Union National Financial Corporation's
2001 Annual Report to Shareholders.
21 Subsidiaries of Union National Financial Corporation.
(Incorporated by Reference to Exhibit 21 to Union
National Financial Corporation's Annual Report on
Form 10-K for the Year Ended December 31, 1998.)
23.1 Consent of Beard Miller Company, LLP, Independent
Auditors.
23.2 Consent of Trout, Ebersole & Groff, LLP, Certified
Public Accountants.
EX-13
Excerpts From Union National
Financial Corporation's 2001 Annual
Report
EXHIBIT 13
__________
Excerpts From Union National Financial Corporation's
2001 Annual Report to Shareholders
Excerpts From Union National Financial Corporation's
2001 Annual Report to Shareholders
STOCK, BROKER 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, under the symbol UNNF. 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. Union National 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.
Dividends
Quarter High Low Per Share
_________________________________________________________________
First, 2001 $14.75 $11.75 $0.105
Second 12.60 11.75 0.105
Third 14.00 11.82 0.105
Fourth 14.00 12.80 0.110
First, 2000 $16.90 $14.76 $0.143
Second 18.00 13.75 0.143
Third 14.25 12.25 0.145
Fourth 13.00 11.75 0.145
Corporate Introduction
January 2, 1987 was the effective date of Union National
Financial Corporation as a one-bank holding company of the Union
National Mount Joy Bank. On February 6, 1998, the bank changed
its name to Union National Community Bank. The bank has been
serving northwestern Lancaster County since 1853. Union National
Community Bank has seven full-service offices in Columbia,
Elizabethtown, Hempfield, Manheim, Maytown and Mount Joy. The
deposits of Union National Community Bank are insured by the
Federal Deposit Insurance Corporation (FDIC) to the maximum
extent provided by law.
Regarding Forward-Looking Information
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.
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.
REGISTRAR AND TRANSFER AGENT
Wealth Management Group
Union National Community Bank
150 North Queen Street
5 th Floor, Suite 500
Lancaster, PA 17604
FOR FURTHER INFORMATION
ON PURCHASING OUR STOCK,
WE REFER YOU TO:
Morgan Stanley
46 East King Street
P. O. Box 358
Lancaster, PA 17603
(717) 293-4811
Hazlett, Burt & Watson, Inc.
100 East King Street
P. O. Box 1267
Lancaster, PA 17608
(717) 397-5515
F. J. Morrissey & Company, Inc.
1700 Market Street
Suite 1420
Philadelphia, PA 19103
(800) 842-8928
Janney Montgomery Scott, Inc.
61 North Duke Street
Lancaster, PA 17602
(717) 293-4100
Form 10-K Request
The Form 10-K Report filed with the Securities & Exchange
Commission may be obtained, without charge, by writing to:
Mr. Clement M. Hoober, CPA
Chief Financial Officer
Union National Financial Corporation
P.O. Box 567
Mount Joy, PA 17552
The Annual Report and other Company reports are also filed
electronically through the Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR") which performs automated
collection, validation, indexing, acceptance and forwarding of
submissions
to the Securities & Exchange Commission (SEC) and is accessible
by the public using the internet at
http://www.sec.gov/edgar.shtml.
Notice of Annual Meeting
The Annual Meeting of Stockholders will
be held on Wednesday, April 24, 2002, at: The Gathering Place, 6
Pine Street, Mount Joy, PA 17552.
FINANCIAL HIGHLIGHTS
(In thousands)
December 31, December 31, % Increase
2001 2000 (Decrease)
_________________________________________________________________
For the Year
Total Interest Income $ 21,085 $20,583 2.4%
Total Interest Expense 10,190 10,352 (1.6%)
Net Interest Income 10,895 10,231 6.5%
Net Income 2,242 1,667 34.5%
Per Share
Net Income (Basic) $ 0.87 $ 0.65 33.8%
Net Income (Assuming Dilution) 0.86 0.64 34.4%
Cash Dividends Paid 0.425 0.576 (26.2%)
Stockholders' Equity 9.86 9.15 7.8%
Average Balances
Loans $186,877 $182,728 2.3%
Investments and Other
Earning Assets 90,321 82,263 9.8%
Total Assets 294,401 278,416 5.7%
Total Deposits 214,297 214,464 (0.1%)
Stockholders' Equity 24,730 23,110 7.0%
Return on Average
Assets 0.76% 0.60%
Stockholders' Equity 9.07% 7.21%
TO OUR STOCKHOLDERS:
Traditionally, my message acknowledges the achievements of the
past year and sets the tone for the future. But before I review
our successes, I must acknowledge an issue of far greater
importance - the events of September 11. This tragedy continues
to affect us all, both as individuals and as united Americans.
From our perspective at Union National Community Bank, September
11 and the months that followed have brought us all closer
together as a community - and helped us to reaffirm the
importance of our role as a community bank and our commitment to
serving our neighbors.
In 1999, we made a commitment to become the best financial
services provider in our market. We called our efforts "Quantum
Leap - Journey to Excellence." The focus during 2000 was to
enhance our technology and processes in order to position Union
National Community Bank for the future. By the end of 2000, we
achieved our technology initiatives and recognized it was time to
move into the next phase of our journey. In 2001, our strategic
priority was for a renewed emphasis on non-technology areas - a
renewed emphasis on people. We concentrated on product
development and customer service.
During the past year, we . . .
. . .Introduced a new mortgage program offering competitive rates
and greater flexibility, with terms of up to 30 years with as
little as 5% down.
. . .Completed the renovations at our Elizabethtown office. The
project consisted of a new freestanding drive-in facility with
five lanes and a completely renovated office to enhance retail
sales.
. . .Created a new UnionNationalAdvisors group to capitalize on
fee income opportunities. This group offers financial solutions
through such products as annuities, mutual funds, brokerage
services, investment management and trust services.
. . .Increased our emphasis on Business Banking to focus on the
segments that we identified as having the most opportunities.
. . .Introduced Union National Insurance Agency as a wholly owned
subsidiary of the bank to offer insurance products.
. . .Developed several new products designed to help retain
valued customers, expand relationships with customers and acquire
new valued relationships. Included in our new product
offerings for 2001, were a relationship package account called
UnionNationalRewards and a new Premier Money Market Account. The
UnionNationalRewards program is designed to increase
relationships with our customers. The program has three levels
with an increasing value of products and services corresponding
to the total deposit and loan relationship. The Premier Money
Market Account pays a premium interest rate while allowing
customers to maintain liquidity.
. . .Developed our Internet Banking solution for both retail and
business customers.
We also focused on developing our team members by . . .
. . .Investing in continuing education through the use of the BVS
program for in-house training. This internet based training
system allows team members to take job-related courses via the
computer.
. . .Encouraging all team members to read the book Who Moved My
Cheese? written by Spencer Johnson, M.D. This book is a valuable
resource because of the numerous changes taking place in both our
bank and the financial services industry as a whole and it aids
in explaining change and helping people manage and deal with
change. In February 2001, we held an all-team meeting where we
showed the short film based upon the book and formed small groups
to discuss the concepts of change, why it is necessary and how to
find opportunities within these changes.
. . .Holding an all-team meeting in December 2001, with the theme
based upon the book, Fish!, authored by Stephen C. Lundin, Ph.D.,
Harry Paul and John Christensen. Fish! focuses on four areas:
Choose Your Attitude, Play, Make Their
Day and Be Present. Each area is significant in providing world-
class customer service. And, delivering world-class customer
service is our goal.
We have a formula that we discuss regularly. It is ES=CS=SV.
Employee Satisfaction = Customer Satisfaction = Shareholder
Value. We believe that if team members are excited about coming
to work each day, they will serve our customers better, thereby
creating value for the bank and enhancing shareholder value.
Finally, I would like to thank the Board of Directors, whose
leadership and support has been invaluable as we work through
these changes designed to enable Union National Community Bank to
grow and prosper.
Sincerely yours,
/s/ Mark D. Gainer
Mark D. Gainer
President/CEO
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31, December 31,
2001 2000
____________ ____________
ASSETS
Cash and Due from Banks $ 8,290 $ 7,715
Short-Term Investments 4,999 -
____________ ____________
Total Cash and Cash Equivalents 13,289 7,715
Investment Securities Held-
to-Maturity (Fair Value:
2001-$12,995; 2000-$13,960) 13,335 14,139
Investment Securities Available-
for-Sale 65,033 63,429
Loans Held for Sale 574 -
Loans(Net of Unearned Income) 203,581 185,981
Less: Allowance for Loan Losses (1,893) (1,787)
___________ ____________
Net Loans 201,688 184,194
Premises and Equipment - Net 6,734 5,975
Other Assets 7,020 7,228
____________ ____________
TOTAL ASSETS $ 307,673 $ 282,680
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 24,065 $ 24,941
Interest-Bearing 191,479 187,604
____________ ____________
Total Deposits 215,544 212,545
Short-Term Borrowings 3,400 13,495
Long-Term Debt 61,252 30,735
Other Liabilities 1,932 2,343
____________ ____________
TOTAL LIABILITIES 282,128 259,118
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 687 687
Shares: Authorized - 20,000,000; Issued -
2,749,500 in 2001 (2,748,068 in 2000)
Outstanding - 2,590,964 in 2001
(2,575,218 in 2000)
Surplus 8,960 9,078
Retained Earnings 18,631 17,487
Accumulated Other Comprehensive
Income/(Loss) 434 (201)
Less: Treasury Stock -
158,536 shares in 2001
(172,850 in 2000), at cost (3,167) (3,489)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 25,545 23,562
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $307,673 $282,680
============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
_____________________________
2001 2000
_______________ ___________
INTEREST INCOME
Interest and Fees on Loans $ 15,718 $ 15,524
Investment Securities:
Taxable Interest 3,830 3,596
Tax-Exempt Interest 1,117 1,214
Dividends 211 232
Other 209 17
_______________ ___________
Total Interest Income 21,085 20,583
INTEREST EXPENSE
Deposits 7,246 7,956
Short-Term Borrowings 340 753
Long-Term Debt 2,604 1,643
_______________ ___________
Total Interest Expense 10,190 10,352
_______________ ___________
Net Interest Income 10,895 10,231
PROVISION for LOAN LOSSES 576 397
_______________ ___________
Net Interest Income after Provision
for Loan Losses 10,319 9,834
OTHER OPERATING INCOME
Income from Fiduciary Activities 157 111
Service Charges on Deposit Accounts 991 747
Other Service Charges, Commissions, Fees 850 675
Investment Securities Gains 75 27
Other Income 283 172
_______________ ___________
Total Other Operating Income 2,356 1,732
OTHER OPERATING EXPENSES
Salaries and Wages 4,471 4,575
Retirement Plan and Other
Employee Benefits 1,066 1,072
Net Occupancy Expense 678 634
Furniture and Equipment Expense 596 541
Professional Fees 554 604
Data Processing Services 537 214
Other Operating Expenses 2,300 2,309
_______________ __________
Total Other Operating Expenses 10,202 9,949
_______________ __________
Income before Income Taxes 2,473 1,617
PROVISION (BENEFIT) FOR INCOME TAXES 231 (50)
_______________ __________
NET INCOME for YEAR $ 2,242 $ 1,667
=============== ==========
PER SHARE INFORMATION
Net Income for Year (Basic) $ 0.87 $ 0.65
Net Income for Year (Assuming
Dilution) 0.86 0.64
Cash Dividends 0.425 0.576
See notes to consolidated financial statements.
Years Ended December 31,
_____________________________
1999
_______________
INTEREST INCOME
Interest and Fees on Loans $ 14,366
Investment Securities:
Taxable Interest 3,146
Tax-Exempt Interest 1,268
Dividends 191
Other 109
______________
Total Interest Income 19,080
INTEREST EXPENSE
Deposits 7,070
Short-Term Borrowings 113
Long-Term Debt 1,628
______________
Total Interest Expense 8,811
______________
Net Interest Income 10,269
PROVISION for LOAN LOSSES 214
_______________
Net Interest Income after Provision
for Loan Losses 10,055
OTHER OPERATING INCOME
Income from Fiduciary Activities 142
Service Charges on Deposit Accounts 601
Other Service Charges, Commissions, Fees 632
Investment Securities Gains -
Other Income 102
_______________
Total Other Operating Income 1,477
OTHER OPERATING EXPENSES
Salaries and Wages 3,588
Retirement Plan and Other
Employee Benefits 799
Net Occupancy Expense 583
Furniture and Equipment Expense 393
Professional Fees 353
Data Processing Services 61
Other Operating Expenses 1,948
_______________
Total Other Operating Expenses 7,725
_______________
Income before Income Taxes 3,807
PROVISION (BENEFIT) FOR INCOME TAXES 722
_______________
NET INCOME for YEAR $ 3,085
===============
PER SHARE INFORMATION
Net Income for Year (Basic) $ 1.17
Net Income for Year (Assuming
Dilution) 1.17
Cash Dividends 0.540
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
______________________________
2001 2000
______________ ___________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,242 $ 1,667
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 764 545
Provision for Loan Losses 576 397
Investment Securities Gains (75) (27)
Provision for Deferred Income Taxes (107) (394)
Increase in Cash-Surrender Value
of Bank-Owned Life Insurance (206) (105)
Gains on Loans Sold (9) -
Proceeds from Sales of Loans 792 -
Loans Originated for Sale (1,357) -
(Increase)/Decrease in Accrued
Interest Receivable 10 (80)
(Increase)/Decrease in Other Assets 21 (634)
Increase/(Decrease) in Other
Liabilities (411) 1,143
____________ ___________
Net Cash Provided by
Operating Activities 2,240 2,512
CASH FLOWS from INVESTING ACTIVITIES
Net Decrease in Federal Funds Sold - -
Proceeds from Sales of
Available-for-Sale Securities 30,253 14,256
Proceeds from Maturities of
Available-for-Sale Securities 19,784 8,839
Proceeds from Maturities of
Held-to-Maturity Securities 1,014 1,652
Purchases of Available-for-Sale
Securities (50,603) (18,476)
Purchases of Held-to-Maturity
Securities (210) (1,718)
(Net Loans Made to Customers)/Net
Principal Collected on Loans 7,125 (11,519)
Purchases of Residential Mortgage Loans (25,196) -
Purchases of Property and Equipment (1,360) (1,289)
Purchase of Bank-Owned Life Insurance - (3,000)
____________ ____________
Net Cash (Used in)Investing
Activities (19,193) (11,255)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 20,317 (2,525)
Net Increase/(Decrease) in Certificates
of Deposits (17,318) 5,889
Net Increase/(Decrease) in Short-Term
Borrowings (10,095) 4,395
Proceeds from Issuance of Long-Term
Debt 31,325 20,000
Payment on Long-Term Debt (808) (16,300)
Acquisition of Treasury Stock (52) (854)
Issuance of Treasury Stock 7 -
Issuance of Common Stock 249 335
Cash Dividends Paid (1,098) (1,486)
____________ ___________
Net Cash Provided by
Financing Activities 22,527 9,454
____________ ___________
Net Increase/(Decrease) in Cash
and Cash Equivalents 5,574 711
CASH and CASH EQUIVALENTS-
Beginning of Year 7,715 7,004
____________ ____________
CASH and CASH EQUIVALENTS-
End of Year $ 13,289 $ 7,715
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 10,351 $ 9,996
Income Taxes 370 280
See notes to consolidated financial statements.
Years Ended December 31,
______________________________
1999
______________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 3,085
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 443
Provision for Loan Losses 214
Investment Securities Gains -
Provision for Deferred Income Taxes 55
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance -
Gains on Loans Sold -
Proceeds from Sales of Loans -
Loans Originated for Sales -
(Increase)/Decrease in Accrued
Interest Receivable (155)
(Increase)/Decrease in Other Assets 428
Increase/(Decrease) in Other
Liabilities (118)
______________
Net Cash Provided by
Operating Activities 3,952
CASH FLOWS from INVESTING ACTIVITIES
Net(Increase)/Decrease in
Federal Funds Sold 7,795
Proceeds from Sales of
Available-for-Sale Securities -
Proceeds from Maturities of
Available-for-Sale Securities 11,413
Proceeds from Maturities of
Held-to-Maturity Securities 2,800
Purchases of Available-for-Sale
Securities (18,787)
Purchases of Held-to-Maturity
Securities (7,433)
(Net Loans Made to Customers)/Net of
Principal Collected on Loans (11,233)
Purchase of Residential Mortgage Loans -
Purchases of Property and Equipment (366)
Purchase of Bank-Owned Life Insurance -
_____________
Net Cash (Used in)Investing
Activities (15,811)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (3,956)
Net Increase/(Decrease) in Certificates
of Deposits 7,594
Net Increase/(Decrease) in Short-Term
Borrowings 8,913
Proceeds from Issuance of Long-Term
Debt 2,587
Payment on Long-Term Debt (6,175)
Acquisition of Treasury Stock (1,353)
Issuance of Treasury Stock -
Issuance of Common Stock 338
Cash Dividends Paid (1,424)
______________
Net Cash Provided by
Financing Activities 6,524
______________
Net Increase/(Decrease) in Cash
and Cash Equivalents (5,335)
CASH and CASH EQUIVALENTS-
Beginning of Year 12,339
______________
CASH and CASH EQUIVALENTS-
End of Year $ 7,004
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 8,908
Income Taxes 761
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Common Retained
Stock Surplus Earnings
__________ __________ __________
BALANCE, December 31, 1998 $ 627 $ 4,793 $ 20,184
Comprehensive Income:
Net Income 3,085
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax Benefit of $659
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 4 321
Issuance of Common Stock under
Employee Plans - 14
Issuance of Common Stock under
5% Common Stock Dividend 30 2,492 (2,522)
Retirement of Treasury Stock
(17,000 shares) (4) (370)
Cash Dividends ($.540 per share) (1,424)
__________ __________ __________
BALANCE, December 31, 1999 657 7,250 19,323
Comprehensive Income:
Net Income 1,667
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $423
Unrealized Holding Gains on Investment
Securities Transferred to
Available-for-Sale During the Year,
Net of Tax of $17
Reclassification Adjustment for (Gains)/
Losses Included in Net Income,
Net of Tax of $9
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 5 318
Issuance of Common Stock under
Employee Plans - 11
Issuance of Common Stock under
5% Common Stock Dividend 31 1,986 (2,017)
Retirement of Treasury Stock
(24,000 shares) (6) (487)
Cash Dividends ($.576 per share) (1,486)
________ __________ ____________
BALANCE, December 31, 2000 687 9,078 17,487
Comprehensive Income:
Net Income 2,242
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $352
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $25
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 4 221
Issuance of Common Stock under
Employee & Director Plans 1 23
Issuance of Treasury Stock (4)
Retirement of Treasury Stock
(18,000 shares) (5) (358)
Cash Dividends ($.425 per share) (1,098)
__________ __________ __________
BALANCE, December 31, 2001 $ 687 $ 8,960 $ 18,631
========== ========== ==========
See notes to consolidated financial statements.
Accumulated Other
Comprehensive Treasury
Income (Loss) Stock Total
_____________ _________ ___________
BALANCE, December 31, 1998 $ 242 $ (2,149) $ 23,697
____________
Comprehensive Income:
Net Income 3,085
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax Benefit of $659 (1,280) (1,280)
____________
Total Comprehensive Income 1,805
____________
Acquisition of Treasury Stock (1,353) (1,353)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 325
Issuance of Common Stock under
Employee Plans 14
Issuance of Common Stock under
5% Common Stock Dividend -
Retirement of Treasury Stock
(17,000 shares) 374 -
Cash Dividends ($.540 per share) (1,424)
__________ __________ __________
BALANCE, December 31, 1999 (1,038) (3,128) 23,064
Comprehensive Income:
Net Income 1,667
Unrealized Holding Gains/(Losses)
on Investment Securities
Available-for-Sale Arising
During the Year, Net of
Tax of $423 821 821
Unrealized Holding Gains on
Investment Securities Transferred
to Available-for-Sale During
the Year, Net of Tax of $17 34 34
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $9 (18) (18)
___________
Total Comprehensive Income 2,504
___________
Acquisition of Treasury Stock (854) (854)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 323
Issuance of Common Stock under
Employee Plans 11
Issuance of Common Stock under
5% Common Stock Dividend -
Retirement of Treasury Stock
(24,000 shares) 493 -
Cash Dividends ($.576 per share) (1,486)
__________ __________ ___________
BALANCE, December 31, 2000 (201) (3,489) 23,562
Comprehensive Income:
Net Income 2,242
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $352 685 685
Reclassification Adjustment for
(Gains)/Losses Included in Net
Income, Net of Tax of $25 (50) (50)
___________
Total Comprehensive Income 2,877
___________
Acquisition of Treasury Stock (52) (52)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 225
Issuance of Common Stock under
Employee & Director Plans 24
Issuance of Treasury Stock 11 7
Retirement of Treasury Stock
(18,000 shares) 363 -
Cash Dividends ($.425 per share) (1,098)
___________ _________ __________
BALANCE, December 31, 2001 $ 434 $ (3,167) $ 25,545
=========== ========= ==========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National
Financial Corporation and its subsidiary, Union National
Community Bank, conform with generally accepted accounting
principles and prevailing practices within the banking industry.
Union National Community Bank operates seven retail office
locations in Lancaster County, Pennsylvania. The bank is a full-
service commercial bank, providing a wide range of services to
individuals and businesses. The bank accepts time, demand and
savings deposits and offers secured and unsecured commercial,
real estate and consumer loans. The bank also offers investment,
custodial, estate planning and trust services. The bank is
subject to government regulation and undergoes periodic
examinations by its federal regulator, the Office of the
Comptroller of the Currency.
During 2001, Union National announced the formation of the
Union National Insurance Agency, which operates as a wholly owned
subsidiary of the bank. The insurance agency offers various
insurance products at the bank's retail offices through an
agreement with the Wiley Insurance Agency of Mount Joy, PA. The
insurance agency's operating results are not significant to the
consolidated financial statements.
Basis of Presentation
_____________________
The consolidated financial statements include the accounts
of Union National, the bank and the insurance agency. 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.
Available-for-sale securities 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
on 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.
In accordance with SFAS No. 133, Union National recognizes
derivatives on the balance sheet at fair value. To date, the use
of derivatives has consisted of one interest rate cap with a
notional value of $10,000,000. A value of $32,000 was included
in other assets at December 31, 2000, and no value remained on
the balance sheet at December 31, 2001. The interest rate cap,
which was entered into during 2000 to minimize the impact of
potential interest rate increases on variable-rate borrowings,
will mature on October 23, 2003. Since the transaction did not
meet the criteria for a hedge under SFAS No. 133, a write-down to
current fair market value was recorded in the financial
statements as an increase in interest expense. This write-down
amounted to $32,000 for the year ended December 31, 2001, and
$38,000 for the year ended December 31, 2000.
Loans Held for Sale
___________________
Loans held for sale consist of residential mortgage loans
that are originated and are intended to be sold through an
agreement the bank has with the Federal Home Loan Bank of
Pittsburgh. Realized gains and losses on sales are computed
using the specific identification method. These loans are
carried on the balance sheet at the lower of cost or estimated
fair value, which is determined in the aggregate. The bank
continues to service these mortgage loans after they are sold in
exchange for a servicing fee and also provides limited recourse
in the event of loss in exchange for a credit enhancement fee.
Union National considered this exposure in the establishment of
the allowance for loan losses. Loans with an outstanding balance
of $760,000 at December 31, 2001, were sold to the FHLB and were
being serviced by Union National.
Loans
_____
Loans generally are stated at their outstanding unpaid
principal balances, plus any unamortized premiums on purchased
loans, 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 considers a loan to be
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. An insignificant delay or shortfall in the amounts of
payments would not cause a loan to be rendered impaired.
Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of
the shortfall in relation to the principal and interest owed.
Larger groups of small-balance loans, such as residential
mortgages and consumer installment loans, are collectively
evaluated for impairment. Union National measures impairment of
commercial loans on a loan-by-loan basis 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.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Mortgage Servicing Rights - Union National serviced
residential mortgage loans for others totaling $760,000 at
December 31, 2001, compared to $0 in 2000 and 1999. Mortgage
servicing rights totaled $8,000 at December 31, 2001, as compared
to $0 at December 31, 2000. Mortgage servicing rights are
established at 1% of the principal balance of loans sold and are
amortized over the expected life of the loan.
Foreclosed Real Estate
______________________
Foreclosed real estate 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.
Foreclosed real estate is valued at its estimated fair market
value, net of selling costs, at the time of foreclosure and is
included in other assets. Gains and losses resulting from the
sale or write-down of foreclosed real estate and income and
expenses related to the operation of foreclosed real estate are
recorded in other expenses. Foreclosed real estate amounted to
$43,000 at December 31, 2001, and $159,000 at December 31, 2000.
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.
Trust Assets
____________
Assets held in a fiduciary capacity are not assets of Union
National and are therefore not included in the consolidated
financial statements.
Advertising Costs
_________________
Advertising costs are charged to expense when incurred.
Advertising expense for the years ended December 31, 2001, 2000
and 1999 amounted to $220,000, $201,000 and $157,000,
respectively.
Stock-Based Compensation
________________________
Stock options and shares issued under Union National's
Employee Stock Purchase Plan, Stock Incentive Plan and the
Independent Directors' Stock Option Plan are accounted for under
SFAS No. 123. As permitted by this statement, Union National has
chosen to apply Accounting Principles Board Opinion (APB) No. 25.
Under APB No. 25, no compensation expense is recognized related
to these plans. The pro forma impact to net income and earnings
per share that would occur if compensation expense was recognized
based on the estimated fair value of the options on the date of
the grant is disclosed in the notes to the consolidated financial
statements.
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 liability method. Under
this method, a deferred tax asset or liability 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 assets and liabilities are adjusted for the impact
of tax-rate changes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized in the future. Income tax expense or benefit is the
tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Net Income 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 options 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.
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
comprehensive income consists of net income and unrealized gains
and losses on available-for-sale investment securities arising
during the period.
Treasury Stock
______________
The acquisition of treasury stock is recorded under the cost
method. The subsequent disposition or sale of the treasury stock
is recorded using the average cost method.
Segment Reporting
_________________
Based on the way management monitors financial results,
Union National has only one operating segment consisting
primarily of its banking and fiduciary activities. Activities of
the insurance agency are not material to the consolidated
financial statements.
Statements of Cash Flows
________________________
For purposes of the statements of cash flows, Union National
considers cash, amounts due from banks and short-term investments
with maturities less than 90 days at the time of purchase to be
cash equivalents.
Recent Accounting Standards Issued
__________________________________
In July of 2001, the Financial Accounting Standards Board
issued Statement No. 141, "Business Combinations," and Statement
No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 requires all business combinations to be
accounted for using the purchase method of accounting as use of
the pooling-of-interests method is prohibited. In addition, this
statement requires that negative goodwill that exists after the
basis of certain acquired assets is reduced to zero should be
recognized as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June
30, 2001.
Statement No. 142 prescribes that goodwill associated with a
business combination and intangible assets with an indefinite
useful life should not be amortized, but should be tested for
impairment at least annually. The statement requires intangibles
that are separable from goodwill and that have a determinable
useful life to be amortized over the determinable useful life.
The provisions of this statement became effective for Union
National in January of 2002. Union National has no goodwill or
other intangible assets covered by this statement.
In June of 2001, the Financial Accounting Standards Board
issued Statement 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived
asset. This statement will become effective on January 1, 2003.
In August of 2001, the Financial Accounting Standards Board
issued Statement 144, "Accounting for the Impairment of or
Disposal of Long-Lived Assets." This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the
Disposal of a Segment of a Business." This statement also amends
APB No. 51, "Consolidated Financial Statements" and was effective
for Union National on January 1, 2002.
The provisions of the above statements did not have or are
not expected to have a significant impact on the financial
condition or results of operations of Union National.
Reclassifications
_________________
Certain prior period amounts have been reclassified to
conform with the 2001 presentation. Such reclassifications did
not impact net income.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are
as follows:
At December 31, 2001
________________________________
Gross
Amortized Unrealized
Cost Gains
(In thousands) _______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ 11,835 $ 46
Corporate Securities 1,500 -
_______________ ______________
TOTAL $ 13,335 $ 46
=============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ 9,697 $ 188
Obligations of U.S.
Government Agencies 1,020 16
Mortgage-Backed Securities 34,170 405
Corporate Securities 16,186 285
Equity Securities 3,303 134
_______________ ______________
TOTAL $ 64,376 $ 1,028
=============== ==============
(In thousands)
At December 31, 2001
________________________________
Gross
Unrealized Fair
Losses Value
_______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ (318) $ 11,563
Corporate Securities (68) 1,432
_______________ ______________
TOTAL $ (386) $ 12,995
=============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ (61) $ 9,824
Obligations of U.S.
Government Agencies (12) 1,024
Mortgage-Backed Securities (91) 34,484
Corporate Securities (207) 16,264
Equity Securities - 3,437
_______________ ______________
TOTAL $ (371) $ 65,033
=============== ==============
(In thousands) At December 31, 2000
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ 11,639 $ 76
Corporate Securities 2,500 -
_______________ ______________
TOTAL $ 14,139 $ 76
=============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ 9,354 $ 226
Obligations of U.S.
Government Agencies 9,941 9
Mortgage-Backed Securities 34,045 199
Corporate Securities 7,141 7
Equity Securities 3,252 95
_______________ ______________
TOTAL $ 63,733 $ 536
=============== ==============
(In thousands)
At December 31, 2000
________________________________
Gross
Unrealized Fair
Losses Value
_______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ (218) $ 11,497
Corporate Securities (37) 2,463
_______________ _____________
TOTAL $ (255) $ 13,960
=============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ - $ 9,580
Obligations of U.S.
Government Agencies (96) 9,854
Mortgage-Backed Securities (352) 33,892
Corporate Securities (392) 6,756
Equity Securities - 3,347
_______________ ______________
TOTAL $ (840) $ 63,429
=============== ==============
Investment securities carried at $32,976,000 at December 31,
2001, and at $27,121,000 at December 31, 2000, were pledged to
secure public, trust and government deposits and for other
purposes.
The amortized cost and fair value of debt securities at
December 31, 2001, 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.
(In thousands)
Debt Securities
_____________________________________
Held-to-Maturity
_____________________________________
Amortized Fair
Cost Values
______________ _________________
Due in One Year or Less $ - $ -
Due After One Year Through
Five Years - -
Due After Five Years Through
Ten Years 2,323 2,317
Due After Ten Years 11,012 10,678
______________ _________________
13,335 12,995
Mortgage-Backed Securities - -
______________ _________________
$ 13,335 $ 12,995
============== =================
(In thousands)
Debt Securities
_____________________________________
Available-for-Sale
_____________________________________
Amortized Fair
Cost Values
______________ _______________
Due in One Year or Less $ 2,173 $ 2,180
Due After One Year Through
Five Years 7,531 7,554
Due After Five Years Through
Ten Years 2,474 2,482
Due After Ten Years 14,725 14,896
______________ _______________
26,903 27,112
Mortgage-Backed Securities 34,170 34,484
______________ _______________
$ 61,073 $ 61,596
============== ===============
Following is information related to the sales of available-
for-sale securities:
(In thousands)
Realized Realized Income Tax
Gains Losses Expense(Benefit)
________ ____________ _________________
The year ended
December 31, 2001 $ 228 $ (153) $ 25
The year ended
December 31, 2000 141 (114) 9
The year ended
December 31, 1999 - - -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3 - LOANS
Loans, net of unamortized loan origination fees of
$1,053,000 and $1,226,000 at December 31, 2001 and 2000,
respectively, are summarized as follows:
(In thousands)
December 31, December 31,
2001 2000
____________ ____________
Real Estate-Mortgages:
First and Second Residential $ 127,547 $ 105,903
Commercial and Industrial 35,842 39,126
Construction and Land Development 8,388 4,868
Agricultural 7,752 8,763
Commercial and Industrial 9,141 9,446
Consumer 7,649 8,854
Agricultural 569 987
Political Subdivisions 5,629 7,191
Other 543 889
____________ ___________
Total Loans 203,060 186,027
Add: Unamortized Premium on
Purchased Loans 558 -
Less: Unearned Income (37) (46)
____________ ___________
Net Loans $ 203,581 $ 185,981
============ ============
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.
Following is a summary of information related to impaired
loans:
(In thousands)
December 31,
_________________________________
2001 2000 1999
__________ ___________ __________
Outstanding Balance at Year End $ 681 $ 1,085 $ 1,041
Related Allowance for Loan Losses 107 178 82
Average Outstanding Balance
for the Year 968 1,087 367
Recognized Interest Income - 13 4
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
$5,588,000 at December 31, 2001. 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 year ended December 31, 2001, are as follows
(in thousands):
Balance, Beginning of Year $ 5,472
Additions 1,006
Deductions (890)
__________
Balance, End of Year $ 5,588
==========
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:
(In thousands)
2001 2000 1999
__________ __________ __________
Balance, Beginning of Year $ 1,787 $ 1,783 $ 1,743
Provision Charged to
Operating Expense 576 397 214
Recoveries of Charged-Off Loans 70 30 49
Charged-Off Loans (540) (423) (223)
__________ __________ __________
Balance, End of Year $ 1,893 $ 1,787 $ 1,783
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
(In thousands)
Estimated December 31, December 31,
Useful Lives 2001 2000
____________ ____________ ____________
Land $ 644 $ 438
Construction in Progress - 286
Land Improvements 20 years 1,049 495
Buildings and
Improvements 15-50 years 5,626 5,198
Leasehold Improvements 20 years 308 308
Furniture, Fixtures and
Equipment 5-20 years 4,846 4,553
____________ ____________
Subtotal 12,473 11,278
Less: Accumulated Depreciation
and Amortization (5,739) (5,303)
____________ ____________
Premises and Equipment - Net $ 6,734 $ 5,975
============ ============
Depreciation and amortization expense amounted to $601,000
in 2001 , $505,000 in 2000 and $423,000 in 1999. Total rental
expense amounted to $144,000 in 2001, $117,000 in 2000 and
$62,000 for the year ended December 31, 1999.
At December 31, 2001, Union National was obligated under
noncancelable operating leases for real estate with future
minimum payments as follows (in thousands):
2002 $ 142
2003 135
2004 125
2005 47
________
$ 449
========
NOTE 6 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted-average interest rates at
December 31 are as follows:
(Dollars in thousands)
2001 2000
____________________ _________________
Amount Rate Amount Rate
___________ _____ __________ ______
Treasury Tax and Loan Notes$ 109 1.41% $ 431 5.74%
Federal Funds Purchased 820 2.00 640 6.56
Securities Sold Under
Repurchase Agreements 2,471 1.69 1,854 6.06
FHLB Short-Term Advances - - 10,570 6.39
___________ _____ __________ ______
Total $ 3,400 1.76% $ 13,495 6.33%
=========== ===== ========== ======
Short-term advances from the Federal Home Loan Bank of
Pittsburgh (FHLB) had an average outstanding balance of
$3,292,000 during 2001 at a weighted-average interest rate of
6.46%. The highest balance outstanding at a month-end during
2001 was $12,040,000. During 2000, FHLB short-term advances had
an average outstanding balance of $9,564,000 at a weighted-
average interest rate of 6.67%. The highest balance outstanding
at a month-end during 2000 was $24,700,000.
Under an agreement with the FHLB, Union National has a line
of credit available in the amount of $15,000,000 of which no
balance was outstanding at December 31, 2001. All FHLB advances
are collateralized by a security agreement covering qualifying
loans and unpledged treasury, agency and mortgage-backed
securities. In addition, all FHLB advances are secured by the
FHLB capital stock owned by Union National having a par value of
$3,063,000 at December 31, 2001 and $3,012,000 at December 31,
2000. Under the bank's membership agreement with the FHLB,
additional stock purchases are required when total advances from
the FHLB are increased.
During 2000, Union National established a short-term
investment program for corporate customers for secured investing.
This program consists of overnight and short-term repurchase
agreements that are secured by designated investment securities
of the bank.
NOTE 7 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
(In thousands)
2001 2000
____________________ ___________________
Amount Rate Amount Rate
__________ _______ __________ ______
FHLB fixed-rate advances maturing:
2001 $ - - % $ 808 5.39%
2003 6,347 5.23 2,347 5.71
2004 6,000 5.49 1,000 6.65
2005 7,325 4.32 - -
2006 5,000 4.37 - -
2007 1,461 6.00 1,461 6.00
FHLB adjustable-rate advances maturing:
2002 3,532 4.04 3,532 6.25
FHLB floating-rate advance maturing:
2004 1,587 1.86 1,587 6.61
FHLB convertible fixed-rate advances maturing:
2010 20,000 5.70 20,000 5.70
2011 10,000 5.23 - -
___________ _____ ___________ ______
Total $ 61,252 5.09% $ 30,735 5.85%
=========== ===== =========== ======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7 - LONG-TERM DEBT (continued)
The FHLB advances are collateralized by the security
agreement and FHLB capital stock described in Note 6. Union
National can borrow a maximum of $126,179,000 from the FHLB, of
which $64,927,000 was available at December 31, 2001. 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 .08% to .20%. Options to convert
$20,000,000 of the outstanding convertible advances commence in
2002, options to convert $5,000,000 commence in 2004 and options
to convert the remaining $5,000,000 commence in 2006. 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 AND TERMINATION BENEFITS
The bank has a 401(k) profit-sharing plan that covers
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 2001, the bank elected to make a
discretionary contribution of 6% of eligible salaries and to
match 50% of employee-elected salary deferrals that do not exceed
6% of their salaries and wages.
The bank's expense relative to its profit-sharing plans
amounted to $278,000 for the year ended December 31, 2001,
$228,000 for 2000 and $179,000 for 1999.
During 2000, a total of $368,000 was accrued for the expense
associated with a voluntary early retirement package that was
accepted by a group of ten employees who met certain age and
years-of-service requirements. The $368,000 consisted of salary
costs of $292,000 and payroll tax and health insurance benefit
costs of $76,000. The salary amounts accrued were paid out in
the first quarter of 2001 and the health insurance benefits will
be paid through 2003.
NOTE 9 - INCOME TAXES
The net deferred tax asset consists of the following
components as of December 31:
(In thousands)
2001 2002
_________ _________
Deferred Tax Assets:
Allowance for Loan Losses $ 537 $ 501
Unrealized Losses on Investment
Securities Available-for-Sale - 103
Amortization on Securities 13 37
Early Retirement Plan 13 125
Recoverable Alternative Minimum Taxes 317 147
Income Tax Credit Carryforward 236 118
_________ _________
Total Deferred Tax Assets 1,116 1,031
Deferred Tax Liabilities:
Unrealized Gains on Investment
Securities Available-for-Sale (224) -
Deferred Net Loan Fees (56) (39)
Depreciation (224) (179)
Investment in Limited Partnerships (12) (15)
Other (44) (22)
_________ _________
Total Deferred Tax Liabilities (560) (255)
_________ _________
Net Deferred Tax Asset $ 556 $ 776
========= =========
An analysis of the income tax expense (benefit) included in
the consolidated statements of income for the years ended
December 31 is as follows:
(In thousands)
2001 2000 1999
_____________ _____________ ____________
Taxes Currently Payable $ 338 $ 344 $ 667
Deferred Income Taxes/
(Benefit) (107) (394) 55
_____________ _____________ ____________
Provision for Income
Taxes/(Benefit) $ 231 $ (50) $ 722
============= ============= ============
The reasons for the difference between 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:
(Dollars in thousands)
2001 2000 1999
___________ ___________ ___________
Amount % Amount % Amount %
_________ ____ __________ ____ ___________ _____
Tax at Statutory
Federal Income
Tax Rate $ 841 34.0% $ 550 34.0% $ 1,294 34.0%
Tax-Exempt Income,
Net of Disallowed
Interest
Expense (495) (20.0) (489)(30.2) (445) (11.7)
Income Tax
Credits (118) (4.8) (118) (7.3) (118) (3.1)
Other 3 .1 7 .4 (9) (.2)
_________ ____ ___________ _____ __________ _____
Provision for Income
Taxes/(Benefit) $ 231 9.3% $ (50) (3.1)% $ 722 19.0%
========= ==== =========== ===== ========== =====
Income tax credits are recognized as earned. Credits earned
were $118,000 in 2001 and 2000. Projected tax credits are as
follows (in thousands):
2002 $ 85
2003 to 2006 72
2007 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 and standby letters of
credit. These 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 these instruments reflect the exposure to credit loss
in the event of nonperformance by the other party to the
financial instrument.
(In thousands)
December 31, December 31,
2001 2000
____________ ____________
Financial Instruments Whose Contract Amounts
Represent Credit Risk:
Commitments to Extend Credit $ 13,124 $ 7,617
Unused Portion of Home Equity,
Personal and Overdraft Lines 12,129 8,527
Other Unused Commitments, Principally
Commercial Lines of Credit 14,928 15,220
Standby Letters of Credit 3,131 2,688
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 are conditional commitments issued
by the bank to guarantee the performance of a customer to a third
party. These letters of credit are primarily issued to support
public and private borrowing arrangements and have terms of 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.
NOTE 11 - TIME DEPOSITS
At December 31, 2001, the scheduled maturities of
certificates of deposit are as follows (in thousands):
2002 $ 69,197
2003 17,172
2004 6,267
2005 1,929
2006 1,577
____________
$ 96,142
============
Certificates of deposit in denominations of $100,000 or more
amounted to $17,004,000 at December 31, 2001, and $25,029,000 at
December 31, 2000. The maturities of these certificates of
deposit of $100,000 or more at December 31, 2001, is as follows
(in thousands):
Three months or less $ 6,709
Over three months through six months 5,323
Over six months through twelve months 1,912
Over twelve months 3,060
__________
Total $ 17,004
==========
NOTE 12 - REGULATORY RESTRICTIONS
The bank is required to maintain reserves, in the form of
cash and balances with the Federal Reserve Bank, against its
deposit liabilities. The average amount of required reserves
during 2001 was approximately $2,192,000 and during 2000 it was
approximately $2,111,000.
The bank is also subject to certain restrictions in
connection with the payment of dividends. 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 2002 of
approximately $802,000 plus an amount equal to the net profits of
the bank in 2002 up to the date of any such dividend declaration.
Banking regulations also require the bank and the holding
company to maintain certain minimum capital levels in relation to
total assets. Failure to meet minimum capital requirements could
result in prompt corrective action by the federal banking
agencies. As of December 31, 2001 and 2000, the bank and holding
company were 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
this categorization. The bank maintained the following capital
levels and leverage and risk-based capital ratios:
December 31, 2001 December 31, 2000
_________________ _________________
Amount % Amount %
___________ _____ ___________ _____
(Dollars in thousands)
Leverage Ratio:
Tier I Capital to
Average Total Assets $ 23,979 7.95% $ 22,612 8.00%
Minimum Required 12,065 4.00 11,298 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 15,081 5.00 14,123 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio
- Actual 23,979 11.14 22,612 11.26
Minimum Required 8,606 4.00 8,032 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 12,909 6.00 12,048 6.00
Total Capital Ratio
- Actual 25,872 12.02 24,399 12.15
Minimum Required 17,213 8.00 16,064 8.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 21,516 10.00 20,080 10.00
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Consolidated leverage and risk-based capital ratios are not
materially different from the ratios for the bank shown on
previous page.
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, 2001, this limitation
amounted to approximately $2,587,000. 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 13, 2000, Union National's Board of Directors
declared a 5% common stock dividend that was paid on May 19,
2000. 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. Stockholders 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 173,644 shares of common stock to be issued under the
plan. At December 31, 2001, 81,976 shares have been issued under
the plan. 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.
Earnings per share, net income and weighted-average number
of shares outstanding for the years ended December 31, 2001, 2000
and 1999, as computed under the basic and diluted earnings per
share methods are as follows:
(In thousands except per share data)
Net Income Shares Per Share
____________ __________ ___________
Year Ended December 31, 2001:
Basic Earnings per Share:
Income Available to
Common Stockholders $ 2,242 2,584 $ .87
Effect of Dilutive Options - 11
____________ ___________ __________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $ 2,242 2,595 $ .86
============ =========== ==========
Year Ended December 31, 2000:
Basic Earnings per Share:
Income Available to Common
Stockholders $ 1,667 2,576 $ .65
Effect of Dilutive Options - 10
____________ ___________ __________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $ 1,667 2,586 $ .64
=========== ============ ==========
Year Ended December 31, 1999:
Basic Earnings per Share:
Income Available to Common
Stockholders $ 3,085 2,633 $1.17
Effect of Dilutive Options - 8
___________ ____________ __________
Diluted Earnings per Share:
Income Available to Common Stockholders
Plus Assumed Exercised
Options $ 3,085 2,641 $1.17
=========== ============ ==========
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. There are 110,250 shares reserved for issuance under
this plan. 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 Employee
Stock Incentive Plan and the Independent Directors' Stock Option
Plan. There are 137,625 shares reserved for issuance under the
Employee Stock Incentive Plan and 66,150 shares reserved for
issuance under the Independent Directors' Stock Option Plan.
Options granted under these two plans have terms up to 10 years,
have option prices equal to the fair value of the shares on the
date of the grant and are exercisable six months after their
grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option transactions for the years ended December 31,
2001, 2000 and 1999, are summarized below:
Stock Weighted-Average
Options Exercise Price
________ _________________
Options Outstanding at December 31, 1998
(Prices range from $14.99
to $21.11) 50,633 $ 16.40
Year Ended December 31, 1999:
Options Granted 60,480 19.20
Options Exercised (844) 16.32
Options Forfeited (4,801) 18.46
_________ ________________
Options Outstanding at December
31, 1999 (Prices range from
$14.40 to $21.67) 105,468 $ 17.17
Year Ended December 31, 2000:
Options Granted 57,325 $ 12.95
Options Exercised (893) 12.54
Options Forfeited (14,796) 12.16
__________ ________________
Options Outstanding at December
31, 2000 (Prices range from
$10.29 to $21.67) 147,104 $ 14.46
Year Ended December 31, 2001:
Options Granted 82,168 $ 12.84
Options Exercised (2,093) 11.63
Options Forfeited (18,058) 13.30
__________ ________________
Options Outstanding at December
31, 2001 (Prices range from
$11.70 to $21.67) 209,121 $ 14.36
========== ================
Options outstanding at December 31, 2001, consisted of the
following:
Range of Options
Exercise Prices Outstanding
________________ ___________
$11.70 to $14.20 148,991
$14.21 to $16.70 11,025
$16.71 to $19.20 12,128
$19.21 to $21.67 36,977
________________ ___________
$11.70 to $21.67 209,121
================ ===========
These options had an average exercise price of $14.36 with
an average remaining contractual life of 6.9 years. Of the total
options outstanding, 156,871 were exercisable at December 31,
2001, at an average exercise price of $14.58.
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:
(In thousands except per share data)
Years Ended December 31,
__________________________________
2001 2000 1999
__________ _________ _________
Net Income
As Reported $ 2,242 $ 1,667 $ 3,085
Pro Forma 2,109 1,550 2,826
Net Income Per Share
As Reported (Basic) $ .87 $ .65 $ 1.17
As Reported
(Assuming Dilution) .86 .64 1.17
Pro Forma (Basic) .82 .60 1.07
Pro Forma
(Assuming Dilution) .81 .60 1.07
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:
Years Ended December 31,
__________________________________
2001 2000 1999
__________ _________ _________
Weighted-Average Fair Value
of Options Granted:
Employee Stock Purchase Plan
(Granted at 85% of fair value
on the date of grant): $ 2.23 $ 3.18 $ 4.28
Stock Incentive Plan and
Independent Directors' Stock
Option Plan (granted at
fair value on the
date of grant): $ 2.35 $ 2.81 $ 4.27
Weighted-Average Assumptions:
Expected Dividend Yield 3.77% 3.26% 3.01%
Risk-Free Interest Rate 4.74% 5.78% 5.84%
Expected Life (Years) 6.7 6.0 6.0
Expected Volatility Over
the Expected Life 43.7% 41.0% 35.1%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by SFAS No. 107, "Disclosures about Fair Value
of Financial Instruments," 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
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 held for sale: Fair value is based on a quoted sales
price from the Federal Home Loan Bank of Pittsburgh.
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.
Interest rate cap: The estimated fair value of the interest
rate cap is based on dealer quotes. The fair value represents the
amount that Union National would receive to terminate the
contract, taking into account current interest rates.
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 based on fees currently charged to
enter into similar agreements, taking into account the remaining
term of the agreements and the present creditworthiness of the
counter parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
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. The carrying amount of
accrued interest payable approximates its fair value.
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, 2001 and 2000, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
(In thousands)
December 31, 2001
______________________________
Carrying
Amount Fair Value
______________ _____________
Assets:
Cash and Cash Equivalents $ 13,289 $ 13,289
Investment Securities
Held-to-Maturity 13,335 12,995
Investment Securities
Available-for-Sale 65,033 65,033
Loans Held for Sale 574 574
Loans, Net of Unearned Income
and Allowance for Loan Losses 201,688 205,848
Accrued Interest Receivable 1,785 1,785
Interest Rate Cap - -
Liabilities:
Demand and Savings Deposits 119,402 119,402
Time Deposits 96,142 97,515
Short-term Borrowings 3,400 3,400
Long-term Debt 61,252 62,982
Accrued Interest Payable 1,157 1,157
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit - -
(In thousands)
December 31, 2000
______________________________
Carrying
Amount Fair Value
_____________ ______________
Assets:
Cash and Cash Equivalents $ 7,715 $ 7,715
Investment Securities
Held-to-Maturity 14,139 13,960
Investment Securities
Available-for-Sale 63,429 63,429
Loans Held for Sale - -
Loans, Net of Unearned Income
and Allowance for Loan Losses 184,194 184,884
Accrued Interest Receivable 1,795 1,795
Interest Rate Cap 32 32
Liabilities:
Demand and Savings Deposits 99,085 99,085
Time Deposits 113,460 113,766
Short-term Borrowings 13,495 13,495
Long-term Debt 30,735 31,972
Accrued Interest Payable 1,318 1,318
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit - -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEETS
(In thousands)
December 31, December 31,
2001 2000
____________ _____________
ASSETS
Cash in Subsidiary Bank $ 180 $ 169
Interest-Bearing Deposits
in Other Banks 2 75
Investment in Subsidiary 24,325 22,348
Other Equity Investment Securities 283 245
Investments in Limited
Partnerships 719 761
Recoverable Federal Income Taxes 95 11
____________ _____________
Total Assets $ 25,604 $ 23,609
============ =============
LIABILITIES $ 59 $ 47
STOCKHOLDERS' EQUITY 25,545 23,562
____________ _____________
Total Liabilities and
Stockholders' Equity $ 25,604 $ 23,609
============ =============
CONDENSED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31,
__________________________
2001 2000
_____________ ___________
INCOME
Dividends from Subsidiary $ 788 $ 2,118
Dividends on Other Equity
Investment Securities 9 14
Interest on Deposits in Subsidiary 4 6
Gain on Sale of Securities 6 74
Management Fees from Subsidiary 42 42
_____________ ___________
Total Income 849 2,254
EXPENSES 112 144
_____________ ___________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 737 2,110
Provision for Income Taxes (Benefit) (138) (122)
_____________ ___________
875 2,232
EQUITY in (EXCESS of) UNDISTRIBUTED INCOME
of SUBSIDIARY 1,367 (565)
_____________ ___________
NET INCOME $ 2,242 $ 1,667
============= ===========
(In thousands)
Year Ended December 31,
_________________________
1999
_____________
INCOME
Dividends from Subsidiary $ 2,075
Dividends on Other Equity
Investment Securities 12
Interest on Deposits in Subsidiary 6
Gain on Sale of Securities -
Management Fees from Subsidiary 41
_____________
Total Income 2,134
EXPENSES 151
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 1,983
Provision for Income Taxes (Benefit) (156)
_____________
2,139
EQUITY in (EXCESS of) UNDISTRIBUTED INCOME
of SUBSIDIARY 946
_____________
NET INCOME $ 3,085
=============
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31,
_____________________________
2001 2000
______________ _____________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 2,242 $ 1,667
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
(Equity in) Excess of
Undistributed Income of
Subsidiary (1,367) 565
Investment Securities Gains (6) (74)
Provision for Deferred Income Taxes (3) (5)
Decrease/(Increase) in Other
Assets (42) 51
(Decrease)/Increase in Other
Liabilities 2 (6)
______________ _____________
Net Cash Provided by Operating
Activities 826 2,198
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities 31 119
Purchases of Available-for-Sale
Securities (25) (76)
______________ _____________
Net Cash Provided by (Used in)
Investing Activities 6 43
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (52) (854)
Issuance of Common and Treasury Stock 256 335
Cash Dividends Paid (1,098) (1,486)
______________ _____________
Net Cash (Used in) Financing
Activities (894) (2,005)
______________ _____________
NET INCREASE/(DECREASE) in CASH (62) 236
CASH - Beginning of Year 244 8
______________ _____________
CASH - End of Year $ 182 $ 244
============== =============
Year Ended December 31,
____________________________
1999
______________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 3,085
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
(Equity in) Excess of
Undistributed Income of
Subsidiary (946)
Investment Securities
Gains -
Provision for Deferred Income Taxes (4)
Decrease/(Increase) in Other Assets 284
(Decrease)/Increase in Other Liabilities 5
_______________
Net Cash Provided by Operating
Activities 2,424
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities -
Purchases of Available-for-Sale
Securities (12)
_______________
Net Cash Provided by (Used in)
Investing Activities (12)
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (1,353)
Issuance of Common and Treasury Stock 338
Cash Dividends Paid (1,424)
_______________
Net Cash (Used in)
Financing Activities (2,439)
_______________
NET INCREASE/(DECREASE) in CASH (27)
CASH - Beginning of Year 35
_______________
CASH - End of Year $ 8
===============
INDEPENDENT AUDITOR'S REPORT
Beard Miller Company LLP, Certified Public Accountants and
Consultants
To the Board of Directors
Union National Financial Corporation
Mount Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets
of Union National Financial Corporation and Subsidiary as of
December 31, 2001 and 2000, and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are
the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial
statements of Union National Financial Corporation and Subsidiary
for the year ended December 31, 1999, were audited by other
auditors whose report dated January 13, 2000, expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the 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 our audits provide a reasonable basis
for our opinion.
In our opinion, the 2001 and 2000 financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Union National Financial
Corporation and Subsidiary as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for the
years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Beard Miller Company LLP
Harrisburg, Pennsylvania
January 18, 2002
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 2001 and 2000, are as follows:
(Dollars in thousands, except per share data)
2001
__________________________________________
March June September December
31 30 30 31
_______ ______ ________ ________
Interest Income $5,254 $5,335 $5,219 $5,276
Interest Expense 2,708 2,645 2,508 2,328
_______ ______ ________ ________
Net Interest Income 2,546 2,690 2,711 2,948
Provision for Loan Losses 113 160 83 220
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,433 2,530 2,628 2,728
Other Operating Income 510 612 558 601
Investment Securities
Gains/(Losses) 11 (12) 25 51
Other Operating Expenses 2,531 2,506 2,509 2,656
_______ ______ ________ ________
Income before Income Taxes 423 624 702 724
Provision for Income Taxes
(Benefit) (10) 56 88 97
_______ ______ ________ ________
Net Income $ 433 $ 568 $ 614 $ 627
======= ====== ======== ========
Net Income (Loss) per Common Share
(Basic and Assuming
Dilution) $ 0.17 $ 0.22 $ 0.24 $ 0.24
======= ====== ======== ========
(Dollars in thousands, except per share data)
2000
__________________________________________
March June September December
31 30 30* 31*
_______ ______ ________ ________
Interest Income $4,931 $5,082 $5,295 $5,275
Interest Expense 2,355 2,434 2,757 2,806
_______ ______ ________ ________
Net Interest Income 2,576 2,648 2,538 2,469
Provision for Loan Losses 51 77 112 157
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,525 2,571 2,426 2,312
Other Operating Income 388 419 441 457
Investment Securities
Gains/(Losses) (5) 9 (18) 41
Other Operating Expenses 2,094 2,286 2,406 3,163
_______ ______ ________ ________
Income before Income Taxes 814 713 443 (353)
Provision for Income Taxes
(Benefit) 139 100 (11) (278)
_______ ______ ________ ________
Net Income $ 675 $ 613 $ 454 $ (75)
======= ====== ======== ========
Net Income (Loss) per Common Share
(Basic and Assuming
Dilution) $ 0.26 $ 0.24 $ 0.18 $(0.03)
======= ====== ======== ========
*The results of operations for the third and fourth quarters of
2000 were impacted by various initiatives as reviewed in
Management's Discussion and Analysis. The third quarter of 2000
included non-recurring costs related to various technology
initiatives of approximately $113,000, net of tax. The fourth
quarter of 2000 included non-recurring costs related to the
technology initiatives and an early retirement plan of
approximately $430,000, net of tax.
Note: Due to rounding, quarterly earnings per share may not add
up to reported annual earnings per share.
CONSOLIDATED SUMMARY OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
____________________________________
2001 2000 1999
__________ __________ __________
INCOME AND EXPENSE
Interest Income $ 21,085 $ 20,583 $ 19,080
Interest Expense 10,190 10,352 8,811
__________ __________ __________
Net Interest Income 10,895 10,231 10,269
Provision for Loan Losses 576 397 214
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses 10,319 9,834 10,055
Other Operating Income 2,356 1,732 1,477
Other Operating Expenses 10,202 9,949 7,725
__________ __________ __________
Income before Income Taxes 2,473 1,617 3,807
Provision for Income Taxes
(Benefit) 231 (50) 722
__________ __________ __________
Net Income for Year $ 2,242 $ 1,667 $ 3,085
========== ========== ==========
SHARE INFORMATION
Net Income Per Share (Basic) $ 0.87 $ 0.65 $ 1.17
Cash Dividends Per Share 0.425 0.576 0.540
Average Shares Outstanding
(Basic) 2,584 2,576 2,633
FINANCIAL RATIOS
Return on Average Assets 0.76% 0.60% 1.17%
Return on Average
Stockholders' Equity 9.07% 7.21% 13.29%
Dividend Payout Ratio 48.95% 89.16% 46.18%
Average Stockholders' Equity
to Average Assets 8.40% 8.30% 8.83%
AVERAGE BALANCE SHEET
Loans $ 186,877 $ 182,728 $169,667
Investments 84,749 81,970 79,078
Other Earning Assets 5,572 293 2,306
Total Assets 294,401 278,416 263,075
Deposits 214,297 214,464 206,470
Short-Term Borrowings 6,672 11,314 2,020
Long-Term Debt 46,907 27,920 29,882
Stockholders' Equity 24,730 23,110 23,218
BALANCE SHEET AT YEAR-END
Loans $203,581 $185,981 $174,854
Investments 78,368 77,568 80,826
Total Earning Assets 287,522 263,549 255,680
Total Assets 307,673 282,680 269,579
Deposits 215,544 212,545 209,181
Short-Term Borrowings 3,400 13,495 9,100
Long-Term Debt 61,252 30,735 27,035
Stockholders' Equity 25,545 23,562 23,063
(In thousands, except per share data)
Years Ended December 31,
_______________________
1998 1997
__________ __________
INCOME AND EXPENSE
Interest Income $ 18,064 $ 16,205
Interest Expense 8,695 7,550
__________ __________
Net Interest Income 9,369 8,655
Provision for Loan Losses 325 390
__________ __________
Net Interest Income
after Provision for
Loan Losses 9,044 8,265
Other Operating Income 1,157 986
Other Operating Expenses 6,718 6,347
__________ __________
Income before Income Taxes 3,483 2,904
Provision for Income Taxes
(Benefit) 715 579
__________ __________
Net Income for Year $ 2,768 $ 2,325
========== ==========
SHARE INFORMATION
Net Income Per Share (Basic) $ 1.04 $ 0.85
Cash Dividends Per Share 0.390 0.319
Average Shares Outstanding
(Basic) 2,669 2,745
FINANCIAL RATIOS
Return on Average Assets 1.15% 1.09%
Return on Average
Stockholders' Equity 12.05% 10.17%
Dividend Payout Ratio 37.74% 37.68%
Average Stockholders' Equity
to Average Assets 9.51% 10.68%
AVERAGE BALANCE SHEET
Loans $ 162,090 $140,925
Investments 63,461 57,551
Other Earning Assets 4,211 3,564
Total Assets 241,639 213,986
Deposits 188,179 168,814
Short-Term Borrowings 412 1,461
Long-Term Debt 28,584 19,425
Stockholders' Equity 22,971 22,859
BALANCE SHEET AT YEAR-END
Loans $163,796 $152,699
Investments 70,758 59,742
Total Earning Assets 247,347 220,271
Total Assets 261,368 233,243
Deposits 205,544 180,135
Short-Term Borrowings 187 900
Long-Term Debt 30,624 27,329
Stockholders' Equity 23,697 23,756
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 financial tables/statistics, financial
statements and notes to financial statements appearing elsewhere
in this 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, regulatory and interest rate risks;
* economic, political and competitive forces; 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 & Exchange Commission.
Results of Operations
_____________________
OVERVIEW
Consolidated net income for 2001 was $2,242,000, an increase
of 34.5%, as compared to consolidated net income of $1,667,000
for 2000. Consolidated net income for 2000 decreased by 46.0%,
as compared to consolidated net income of $3,085,000 for 1999.
Basic earnings per share for 2001 amounted to 87 cents and
diluted earnings per share amounted to 86 cents, as compared to
basic earnings per share of 65 cents and diluted earnings per
share of 64 cents for 2000 and basic and diluted earnings per
share of $1.17 for 1999.
The following items impacted results of operations for 2001
as compared to 2000:
* Net income increased due to a widening of the spread between
the interest rates earned on loans and investments as compared to
the interest rates paid on deposits and short- and long-term
borrowings.
* Net income increased due to growth of 4.6% in average earning
assets, which was funded primarily by additional long-term
borrowings.
* Net income decreased due to an increase in the provision for
loan losses of $179,000.
* Net income increased due to an increase in other operating
income of $624,000, or 36.0%.
* Net income decreased due to an increase in other operating
expenses of $253,000, or 2.5%.
The above items are quantified and discussed in further detail
under their respective sections following.
The following items impacted results of operations for 2000
as compared to 1999:
* Net income decreased due to a narrowing of the spread between
the interest rates earned on loans and investments as compared to
the interest rates paid on deposits and short- and long-term
borrowings.
* Net income increased due to growth of 7.7% 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 of $183,000.
* Net income increased due to an increase in other operating
income of $255,000, or 17.3%.
* Net income decreased due to an increase in other operating
expenses of $2,224,000, or 28.8%.
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 0.76% for 2001, 0.60% for
2000 and 1.17% for 1999. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROE), was 9.07% for 2001, 7.21% for 2000 and 13.29% for 1999.
Management currently expects a moderation in the growth of
loans and deposits for 2002 as compared to historic growth rates.
Moderation in loan and deposit growth is expected due to
increased competition in Union National's market area and
uncertain current economic conditions. However, management
continues to develop and promote additional loan and deposit
products, implement various sales strategies and offer increased
incentives to employees to generate loan and deposit growth. In
addition, continued mergers in the banking and financial services
industry should benefit Union National as an independent,
community bank. The funding for loan growth is further discussed
under the section on Liquidity.
The economy in the bank's market may be negatively impacted
by national events and may be subject to overall national
economic trends. 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 borrowings. 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.
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 which would have
been paid if the income received on these assets was taxable at
the statutory rate of 34%.
Net interest income for 2001 increased by $606,000, or 5.5%,
over 2000. Net interest income for 2000 decreased by $10,000
over 1999. For 2001, average earning asset growth of $12,207,000
was funded primarily by additional long-term borrowings. The
additional long-term borrowings were utilized to replace short-
term borrowings as of December 31, 2000. In addition, a pool of
residential mortgage loans of approximately $25,000,000 was
purchased in November 2001 that was partially funded by long-term
borrowings. The volume growth in earning assets and interest-
bearing liabilities increased net interest income by the amount
of $140,000 in 2001 over 2000, as compared to $266,000 in 2000
over 1999.
The overall interest rate on the average total earning
assets decreased to 7.87% for 2001, as compared to 8.07% for
2000. However, the overall interest rate on the average interest-
bearing liabilities decreased even more drastically to 4.16% for
2001, as compared to 4.49% for 2000. The overall decline in
market interest rates during 2001 was prompted by actions of the
Federal Reserve Bank which started reducing interest rates in
January
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
2001. By the end of 2001 the prime interest rate had declined
from 9.50% to 4.75%. The net effect of all interest rate
fluctuations and funding changes was to increase net interest
income in the amount of $466,000 for 2001 over 2000, as compared
to a decrease of $276,000 for 2000 from 1999. See management's
discussion below concerning the anticipated impact of these
interest rate fluctuations on the results of operations for 2002.
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
of Pittsburgh. 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, 2001, the bank had received long-term advances of
$61,252,000 from its available credit of $126,179,000 at the FHLB
for purposes of funding loan demand and security purchases. The
total advances have maturities that range from March 2002 to
February 2011. The total advances outstanding at December 31,
2001, represent an increase of $19,947,000 from the prior year
and with falling interest rates during 2001, the average interest
rate on these borrowings has decreased to 5.09% from 5.99%.
It is currently anticipated that for 2002, the bank's net
interest margin percentage will widen slightly in comparison to
the net interest margin percentage for 2001. A slight increase in
the net interest margin percentage is expected as higher-rate
borrowings and certificates of deposit continue to mature. These
funds will either automatically renew at lower current interest
rates or will be replaced with lower rate funding. In addition, a
portion of Union National's loan portfolio has now repriced to
their interest rate floors. However, the bank's net interest
margin may still be impacted by future actions of the Federal
Reserve Bank. In addition to an increasing net interest margin
percentage, income from growth in earning assets during 2001, net
of costs of growth in deposits and borrowings, should also
increase the net interest margin in 2002. The netting of these
two factors, as reflected in the bank's current net interest
income simulation model and estimates as of December 31, 2001,
may result in a net interest margin for 2002 that is currently
expected to represent a moderate increase over the net interest
margin earned in 2001. Expected growth in earning assets during
the year 2002 should also increase the bank's net interest
margin. This expected growth was not reflected in the bank's
model at December 31, 2001.
The bank's current net interest income simulation model
includes an investment in bank-owned life insurance that had a
value of $3,311,000 at December 31, 2001. 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. 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 2002, the options
selected by customers and the future mix of the loan, investment,
deposit products and borrowings 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.
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
Year Ended
December 31, 2001
__________________________________
(In thousands) Average
Balance Interest Rate
_________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 72 $ 1 1.39%
Short-Term Investments 1,599 45 2.81
Federal Funds Sold 3,901 163 4.18
Investment Securities:
Taxable 62,914 4,041 6.42%
Tax-Exempt 21,835 1,693 7.75%
Loans-Net* 186,877 15,883 8.50
_________ ________ ______
Total Earning Assets 277,198 $ 21,826 7.87%
======== ======
Allowance for Loan Losses (1,944)
Other Nonearning Assets 19,147
_________
TOTAL ASSETS $ 294,401
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 60,690 $ 1,072 1.77%
Savings 25,126 343 1.37
Time 105,478 5,831 5.53
Short-Term Borrowings 6,672 340 5.10
Long-Term Debt 46,907 2,604 5.55
_________ ________ ______
Total Interest-Bearing
Liabilities 244,873 $ 10,190 4.16%
======== ======
Demand Deposits 23,003
Other Liabilities 1,795
_________
TOTAL LIABILITIES 269,671
Stockholders' Equity 24,730
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 294,401
=========
Net Interest Income/
Interest Rate Spread $ 11,636 3.71%
======== ======
Net Interest Margin 4.20%
======
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 $802,000 for the year ended December 31,
2001, $516,000 for the year ended December 31, 2000 and $589,000
for the year ended December 31, 1999.
Year Ended
December 31, 2000
_________________________________
(In thousands) Average
Balance Interest Rate
_________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 50 $ 2 4.00%
Short-Term Investments - - -
Federal Funds Sold 243 15 6.17
Investment Securities:
Taxable 58,014 3,828 6.60
Tax-Exempt 23,956 1,840 7.68
Loans-Net* 182,728 15,697 8.59
_________ ________ ______
Total Earning Assets 264,991 $ 21,382 8.07%
======== ======
Allowance for Loan Losses (1,807)
Other Nonearning Assets 15,232
_________
TOTAL ASSETS $ 278,416
=========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 52,392 $ 1,243 2.37%
Savings 26,525 497 1.87
Time 112,372 6,215 5.53
Short-Term Borrowings 11,314 753 6.66
Long-Term Debt 27,920 1,644 5.89
_________ ________ ______
Total Interest-Bearing
Liabilities 230,523 $ 10,352 4.49%
======== ======
Demand Deposits 23,175
Other Liabilities 1,608
_________
TOTAL LIABILITIES 255,306
Stockholders' Equity 23,110
_________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 278,416
=========
Net Interest Income/
Interest Rate Spread $ 11,030 3.58%
======== ======
Net Interest Margin 4.16%
======
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 $802,000 for the year ended December 31,
2001, $516,000 for the year ended December 31, 2000 and $589,000
for the year ended December 31, 1999.
Year Ended
December 31, 1999
_________________________________
(In thousands) Average
Balance Interest Rate
_________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 53 $ 2 3.77%
Short-Term Investments - - -
Federal Funds Sold 2,253 108 4.79
Investment Securities:
Taxable 54,306 3,337 6.14
Tax-Exempt 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 Borrowings 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/
Interest Rate Spread $ 11,040 3.84%
======== ======
Net Interest Margin 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 $802,000 for the year ended December 31,
2001, $516,000 for the year ended December 31, 2000 and $589,000
for the year ended December 31, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
2001 Compared to 2000
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks $ (1) $ 1 $ (2)
Short-Term Investments 45 45 -
Federal Funds Sold 148 155 (7)
Investment Securities:
Taxable 213 317 (104)
Tax-Exempt (147) (164) 17
Loans-Net 186 354 (168)
________ ________ _____
Total Earning Assets 444 708 (264)
Interest Expense On Deposits:
Interest-Bearing Demand (171) 178 (349)
Savings (154) (25) (129)
Time (384) (381) (3)
Short-Term Borrowings (413) (263) (150)
Long-Term Debt 960 1,059 (99)
________ ________ _____
Total Interest-Bearing
Liabilities (162) 568 (730)
________ ________ _____
Net Interest Income $ 606 $ 140 $ 466
======== ======== =====
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%.
2000 Compared to 1999
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks $ - $ - $ -
Short-Term Investments - - -
Federal Funds Sold (93) (117) 24
Investment Securities:
Taxable 491 236 255
Tax-Exempt (81) (63) (18)
Loans-Net 1,215 1,121 94
________ ________ _____
Total Earning Assets 1,532 1,177 355
Interest Expense On Deposits:
Interest-Bearing Demand 116 7 109
Savings (92) (35) (57)
Time 860 435 425
Short-Term Borrowings 641 615 26
Long-Term Debt 17 (111) 128
________ ________ _____
Total Interest-Bearing
Liabilities 1,542 911 631
________ ________ _____
Net Interest Income $ (10) $ 266 $(276)
======== ======== =====
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%.
PROVISION FOR LOAN LOSSES
The loan loss provision is an estimated expense charged to
earnings to address losses attributable to uncollectible loans.
The provision is based on management's analysis of the adequacy
of the allowance for loan losses. The provision for loan losses
was $576,000 in 2001, $397,000 in 2000 and $214,000 in 1999. Net
charge-offs amounted to $470,000 for 2001, as compared to
$393,000 for 2000 and $174,000 for 1999. 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. See
discussion on Loan Quality/Allowance for Loan Losses.
OTHER OPERATING INCOME
Other operating income for 2001 was $2,356,000, representing
an increase of $624,000, or 36.0%, over 2000. Contributing to
this increase were the following items:
* additional earnings in monthly service charges in the amount
of $175,000, which is primarily attributable to fee changes that
were effective in January 2001;
* increased earnings from mutual fund commissions of $168,000,
which was primarily a result of a change in the commission and
cost-sharing structure the bank has with T.H.E. Financial Group,
Ltd;
* an increase in earnings on the bank's June 2000 investment in
bank-owned life insurance of $101,000;
* an increase in ATM usage fees of $54,000 as a result of a fee
change that was effective in January 2001;
* increased usage of the bank's debit cards, resulting in
additional earnings in interchange fee income in the amount of
$53,000;
* an increase in investment securities gains of $48,000; and
* an increase in earnings from fiduciary activities in the
amount of $46,000.
Other operating income for 2000 was $1,732,000, representing
an increase of $255,000, or 17.3%, over 1999. Contributing to
this increase were the following items:
* additional earnings in monthly service charges in the amount
of $75,000, which were partially attributable to a higher fee
structure on noninterest-bearing accounts which was effective May
1, 1999;
* additional earnings in insufficient funds charges in the
amount of $55,000, which were partially a result of an increase
in the bank's per-item charge effective June 1, 2000;
* additional earnings in debit card fee income in the amount of
$48,000; and
* earnings of $105,000 on the bank's investment during 2000 in
bank-owned life insurance.
Other operating income as a percentage of total revenue (net
interest income and other operating income) amounted to 17.8% for
2001, 14.5% for 2000 and 12.6% for 1999. This increase is the
result of revenue enhancement initiatives, some of which are
discussed above, that were implemented primarily in January 2001.
OTHER OPERATING EXPENSES
The aggregate of noninterest expenses for 2001 increased by
$253,000, or 2.5%, over 2000. This increase in noninterest
expense is discussed below as it pertains to the various expense
categories.
Employee salaries and wages decreased by $104,000, or 2.3%,
from 2000. This decrease was essentially due to a reduction in
staff that occurred through an early retirement program and
attrition. In addition, the cost of the early retirement program
significantly increased expenses in 2000 in the amount of
$292,000. Since December 2000, full-time equivalent employees
have been reduced from 131 to 124 in December 2001. The above
items were partially offset by increases in salaries and wages
for 2001 that were a result of annual merit and cost-of-living
increases, planned staff additions and the cost of incentives
paid to staff under a bank-wide incentive plan that was based on
the bank's 2001 financial performance. New staff positions in
2001 included an investment representative for T.H.E. Financial
Group who is now a bank employee and various support staff
positions.
Employee benefit costs decreased by $6,000, or 0.6%, from
2000. For 2001, there was an increase in profit sharing cost as
the bank increased its contribution from 5% of qualifying wages
2000 to 6% in 2001. This increase was offset by a decrease in
costs related to the staff reduction discussed above. In
addition, results for 2000 included benefit and payroll tax costs
related to the early retirement program.
Occupancy, furniture and equipment expenses for 2001
increased by $99,000, or 8.4%, over 2000. This was due to an
increase in equipment depreciation expense, lease expense and
other occupancy related expenses. The increase in lease and other
occupancy related expenses related primarily to the opening of
the new Locust Street, Columbia office in April 2000 and the
opening of an office in Lancaster for our Wealth Management Group
in August 2000. The increase in equipment depreciation is related
to systems and equipment implemented with technology initiatives
primarily in the fourth quarter of 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Professional fees for 2001 decreased by $50,000, or 8.3%,
from 2000. The decrease is primarily a result of consulting fees
paid in 2000 to the consulting division of Metavante Corporation
to provide services in connection with the implementation of
various technology, operational efficiency and revenue
enhancement initiatives. Payments under this contract concluded
in the first quarter of 2001.
Expenses related to data processing services amounted to
$537,000 for 2001, as compared to $214,000 for 2000. This
increase related primarily to costs for services related to new
core processing and trust systems, a sales platform and a wide-
area network which were implemented in November 2000.
Other operating expenses for 2001 decreased by $9,000, or
0.4%, from 2000. Impacting other operating expenses in 2001 were
the following:
* an increase in foreclosed real estate expense of $27,000;
* a decrease in travel and meals costs of $67,000;
* a decrease in check losses in the amount of $53,000;
* an increase in software amortization costs in the amount of
$123,000; and
* slight decreases in various other expense categories.
Decreased travel and meals costs related primarily to
increased costs in 2000 associated with the implementation of a
new core processing system. Decreased check loss expense related
primarily to the recovery in 2001 of a large check loss that
occurred during 2000. Increased software amortization and staff
training costs primarily related to the implementation of the new
data processing system and related technology initiatives.
The aggregate of noninterest expenses for 2000 increased by
$2,224,000, or 28.8%, over 1999. This noninterest expense
increase is discussed below as it pertains to the various expense
categories.
Employee salaries and wages increased by $987,000, or 27.5%,
over 1999. This increase was essentially due to annual merit and
cost-of-living increases, the cost of the early retirement
package, planned staff additions and the compensation impact of
our new paid-time-off program. The new paid-time-off program
required an accrual of $62,000 for the cost of time-off earned,
but not taken in 2000. The early retirement package was offered
in October 2000 to certain employees who met age and years-of-
service requirements. Ten employees took advantage of the early
retirement offer at a total salary cost of $292,000. In addition
to the salary cost, eligible employees were also able to continue
health insurance coverage for three years. Planned staff
additions in 2000 included staff for our expanded Wealth
Management Group, key senior management positions and staff for a
new community banking office.
Related fringe benefits increased by $274,000, or 34.2%,
over 1999. The increased expense was primarily a result of the
cost of health insurance and payroll taxes under the early
retirement program which amounted to $76,000, the cost of a new
short-term disability benefit plan and increased employee benefit
costs as a result of staff additions.
Occupancy, furniture and equipment expenses for 2000
increased by $199,000, or 20.4%, over 1999. This was due to an
increase in lease expense, other occupancy related expenses,
equipment depreciation and other equipment related costs. The
increase in lease and other occupancy related expenses related
primarily to the opening of the new offices described earlier.
The increase in equipment depreciation and other equipment
related costs was primarily a result of equipment installed with
the bank's technology initiatives undertaken during 2000. The
technology initiatives included the implementation of a voice-
response unit, a marketing customer information file (MCIF)
database system, a bank-wide network and new core and trust data
processing systems. The bank's former internal core processing
system was converted to an externally based system provided by
Metavante Corporation of Milwaukee, Wisconsin, in November 2000.
Professional fees for 2000 increased by $251,000, or 71.1%,
over 1999. Consulting fees incurred in 2000 included amounts
paid to 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 evaluated our internal processes, products and procedures in
order to identify efficiencies, cost savings and additional fee
income opportunities. Other professional fees incurred in 2000
included amounts paid to an independent company to perform
internal audit and loan review services. The fees paid for
internal audit services replaced the cost of maintaining our own
internal audit department that had two employees.
Data processing services amounted to $214,000 for 2000, as
compared to $61,000 for 1999. This increase relates primarily to
costs for services provided by Metavante Corporation related to
new core-processing and trust systems, a sales platform and a
wide-area network which were implemented in November 2000.
Other operating expenses for 2000 increased by $361,000, or
18.5%, over 1999. Contributing factors to the increase in other
operating expenses as compared to 1999 included the following:
* an increase in travel and meals costs in the amount of
$116,000;
* an increase in advertising and marketing related expenses in
the amount of $44,000;
* an increase in check losses in the amount of $30,000;
* an increase in MAC fees of $23,000;
* an increase in software amortization costs in the amount of
$20,000;
* an increase in staff training costs of $15,000; and
* minor increases in various other expense categories.
Increased travel and meals costs, software amortization and
staff training costs were primarily related to the implementation
of the new data processing system and related technology
initiatives.
During 2000, with the implementation of the technology
initiatives discussed above, Union National incurred total non-
recurring costs of approximately $330,000, net of tax. These
costs included travel and meals costs, consulting fees, training
and additional salary and wage costs. Total non-recurring costs
incurred in 2000 for technology-related initiatives and the early
retirement package discussed above amounted to approximately
$575,000, net of tax. Without considering these non-recurring
costs, net income would have amounted to $2,242,000, a decrease
of $843,000, or 27.3%, from total net income for 1999.
INCOME TAXES
For 2001, Union National had income tax expense of $231,000,
as compared to an income tax benefit of $50,000 for 2000 and
income tax expense of $722,000 for 1999. The effective tax rate
for 2001 was 9.3%, as compared to 3.1% for 2000 and 19.0% for
1999. The increase in income tax expense in 2001 was primarily
due to an increase in earnings before income taxes. The
realization of net deferred tax assets, which amounted to
$556,000 at December 31, 2001, is dependent on future earnings of
Union National. Management currently anticipates future earnings
will be adequate to utilize these deferred tax assets.
CHANGES IN ACCOUNTING STANDARDS
In July of 2001, the Financial Accounting Standards Board
issued Statement No. 141, "Business Combinations," and Statement
No. 142, "Goodwill and Other Intangible Assets."
Statement No. 141 requires all business combinations to be
accounted for using the purchase method of accounting as use of
the pooling-of-interests method is prohibited. In addition, this
statement requires that negative goodwill that exists after the
basis of certain acquired assets is reduced to zero should be
recognized as an extraordinary gain. The provisions of this
statement apply to all business combinations initiated after June
30, 2001.
Statement No. 142 prescribes that goodwill associated with a
business combination and intangible assets with an indefinite
useful life should not be amortized, but should be tested for
impairment at least annually. The statement requires intangibles
that are separable from goodwill and that have a determinable
useful life to be amortized over the determinable useful life.
The provisions of this statement became effective for Union
National in January of 2002. Union National has no goodwill or
other intangible assets covered by this statement.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In June of 2001, the Financial Accounting Standards Board
issued Statement 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived
asset. This statement will become effective on January 1, 2003.
In August of 2001, the Financial Accounting Standards Board
issued Statement 144, "Accounting for the Impairment of or
Disposal of Long-Lived Assets." This statement supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions for the
Disposal of a Segment of a Business." This statement also amends
APB No. 51, "Consolidated Financial Statements" and was effective
for Union National on January 1, 2002.
The provisions of the above statements did not have or are
not expected to have a significant impact on the financial
condition or results of operations of Union National.
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
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 on available-for-sale
securities are reported net of tax as accumulated other
comprehensive income, which is a separate component of
stockholders' equity. Securities classified as being held-to-
maturity are carried in the financial statements at their
amortized cost.
The amortized cost of the investment securities decreased by
$161,000 from the prior year. This decrease was primarily a
factor of changes in available funding and the amount of funding
that was needed to invest in loan growth at Union National.
Fixed-rate mortgage-backed securities, known as
collateralized mortgage obligations (CMOs), had an amortized cost
of $15,803,000 at December 31, 2001, compared to $17,922,000 at
December 31, 2000. These CMOs had a weighted-average yield of
6.29% at December 31, 2001. As of December 31, 2001, the expected
weighted-average life of these CMOs was approximately 2.8 years,
as compared to 4.8 years at December 31, 2000. The weighted-
average life represents expected cash flows of the investment
weighted over time. The decrease in the weighted-average life
from 2000 to 2001 resulted from normal amortization and a decline
in long-term mortgage interest rates during 2001. These decreased
rates increased the payment speeds on the underlying mortgage
loans resulting in an increase of overall investment cash flows.
Cash flows from these securities and changes in market interest
rates are considered in the bank's net interest income simulation
model. See sections on Liquidity and Market Risk - Interest Rate
Risk for further discussion.
The amortized cost of variable-rate mortgage-backed
securities, amounted to $4,087,000 at December 31, 2001, and
$12,477,000 at December 31, 2000. These securities were reduced
through prepayments and security sales as management anticipated
interest rate declines.
The expected cash flows from the investment securities,
including estimated prepayments and expected call options, is
currently estimated at $14,800,000 for 2002, which represents
approximately 19% of the bank's investment securities as compared
to 18% as estimated at December 31, 2000, for 2001. 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 the year
2002 and future years through potential investment security
sales.
Union National did not hold any security that had a market
value decline below cost that is other than temporary at December
31, 2001. In addition, there are no significant concentrations of
investments (greater than 10% of stockholders' equity) in any
individual security issuer. During 2001, Union National purchased
approximately $9,551,000, net of sales, in investment-grade
corporate securities. Corporate security holdings include
floating- and fixed-rate long-term trust preferred securities
that had a carrying value of $6,550,000 at December 31, 2001.
These securities presented value as compared to current market
interest rates in exchange for the inherent credit risk.
At December 31, 2001, net unrealized gains for securities
classified as available-for-sale were $657,000, and the net
unrealized losses for securities classified as held-to-maturity
were $340,000. In comparison, at December 31, 2000, the net
unrealized losses for securities classified as available-for-sale
were $304,000 and the total unrealized losses for securities
classified as held-to-maturity were $179,000. The unrealized
gains on the available-for-sale securities, net of income tax
effect, amounted to an increase in stockholders' equity of
$434,000 at December 31, 2001, and a decrease of $201,000 at
December 31, 2000. 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following shows the summary of investment securities
held by Union National:
(In thousands) Carrying Value at December 31,
________________________________________________
2001 2000
_______________________ _____________________
Available- Held-to- Available- Held-to-
for-Sale Maturity for-Sale Maturity
____________ ________ __________ ________
U.S. Treasury
Securities $ - $ - $ - $ -
Obligations of U.S.
Government Agencies 1,024 - 9,854 -
Obligations of State
and Political
Subdivisions 9,824 11,835 9,580 11,639
Corporate Securities 16,264 1,500 6,757 2,500
Mortgage-Backed
Securities 34,484 - 33,892 -
Equity Securities 3,437 - 3,346 -
____________ _________ __________ ________
Total $65,033 $13,335 $ 63,429 $14,139
============ ========= ========== ========
(In thousands) Carrying Value at December 31,
________________________________________________
1999
________________________
Available- Held-to-
for-Sale Maturity
____________ _________
U.S. Treasury
Securities $ 2,001 $ -
Obligations of U.S.
Government Agencies 11,013 -
Obligations of State
and Political
Subdivisions - 25,452
Corporate Securities 5,592 3,260
Mortgage-Backed
Securities 30,110 -
Equity Securities 3,398 -
____________ _________
Total $ 52,114 $28,712
============ =========
The following table illustrates the maturities of investment
securities and the weighted-average yields based upon amortized
cost as of December 31, 2001. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
Within 1 - 5 5 - 10 Over
(In thousands) 1 Year Years Years 10 Years
________ _______ _______ _________
Available-for-Sale Securities:
Obligations of State and Political Subdivisions:
Fair Value $ - $ 550 $ 1,482 $ 7,792
Amortized Cost - 548 1,474 7,675
Yield 8.16% 7.84% 7.99%
Obligations of U.S.
Government Agencies:
Fair Value - 1,024 - -
Amortized Cost - 1,020 - -
Yield 4.72%
Mortgage-Backed Securities
by Contractual Maturity:*
Fair Value - - 3,660 30,824
Amortized Cost - - 3,704 30,466
Yield 5.18% 6.20%
Corporate Securities:
Fair Value 2,180 5,981 1,000 7,103
Amortized Cost 2,173 5,963 1,000 7,050
Yield 6.22% 6.16% 7.50% 6.03%
Equity Securities:
Fair Value
Amortized Cost
Yield
Held-to-Maturity Securities:
Obligations of State and
Political Subdivisions:
Fair Value - - 2,317 9,246
Amortized Cost - - 2,323 9,512
Yield 6.92% 7.33%
Corporate Securities:
Fair Value - - - 1,432
Amortized Cost - - - 1,500
Yield 9.25%
Total Securities:
Fair 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.
(In thousands) Total
______
Available-for-Sale Securities:
Obligations of State and Political Subdivisions:
Fair Value $ 9,824
Amortized Cost 9,697
Yield 7.98%
Obligations of U.S.
Government Agencies:
Fair Value 1,024
Amortized Cost 1,020
Yield 4.72%
Mortgage-Backed Securities
by Contractual Maturity:*
Fair Value 34,484
Amortized Cost 34,170
Yield 6.09%
Corporate Securities:
Fair Value 16,264
Amortized Cost 16,186
Yield 6.19%
Equity Securities:
Fair Value 3,437
Amortized Cost 3,303
Yield 6.38%
Held-to-Maturity Securities:
Obligations of State and
Political Subdivisions:
Fair Value 11,563
Amortized Cost 11,835
Yield 7.25%
Corporate Securities:
Fair Value 1,432
Amortized Cost 1,500
Yield 9.25%
______
Total Securities:
Fair Value $78,028
Amortized Cost 77,711
Yield 6.58%
======
* 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.
LOANS
Total net loans were $203,581,000 at December 31, 2001,
representing a 9.5% increase over net loans of $185,981,000 at
December 31, 2000. As shown in the following table, the increase
in loans resulted primarily from growth in numerous loan
categories, including construction and land development and
residential mortgages. The large increase in residential mortgage
loans related primarily to the purchase of a pool of
approximately $25,000,000 in first-lien residential mortgage
loans in November 2001. The purchase of these loans was funded by
the sale of certain mortgage-backed and other securities and by
additional borrowings from the FHLB. These loans were purchased
at a premium and the resulting yield may be impacted by future
prepayment speeds. The impact of these prepayment speeds on the
bank's net interest margin was included in the income simulation
model at December 31, 2001. At December 31, 2001, there were no
loan concentrations over 10% of loans outstanding to any one
category or borrower. However, loans secured by real estate
constitute 88% 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 $64,039,000 at December 31, 2001, and $59,132,000 at
December 31, 2000. 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, liq-
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
uidity 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 $1,893,000 to comply with
their respective repayment terms. This represents a decrease from
the amount of $3,061,000 at December 31, 2000. This decrease is
due to several large loans that were paid off, partially charged-
off or began to perform satisfactorily for an extended period of
time. These loans are secured with real estate, equipment,
inventory 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 may be classified as nonperforming in
2002. The nonperforming loans table, appearing in the section
entitled Nonperforming Assets, does not include the
aforementioned loans.
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 the 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 $168,000
would have been recorded on such loans for the year ended
December 31, 2001, and $199,000 for the year ended December 31,
2000. Interest income recognized on such loans approximated
$4,000 for the year ended December 31, 2001, and $60,000 for the
year ended December 31, 2000. At December 31, 2001, total
nonperforming loans amounted to $2,204,000, or 1.1% of total net
loans, as compared to $1,789,000, or 1.0% of total net loans, at
December 31, 2000. Historically, the percent of nonperforming
loans to total net loans as of December 31, for the previous
five-year period, was an average of 0.8%. The increase in
nonperforming loans at December 31, 2001, was due to several
well-secured mortgage loans that are in the process of
collection. There are no troubled debt restructurings.
Loans are composed of the following:
December 31,
__________________________________
(In thousands) 2001 2000 1999
__________ _________ __________
Real Estate Mortgage:
First and Second Residential $127,547 $105,903 $103,264
Commercial and Industrial 35,842 39,126 34,332
Construction and Land
Development 8,388 4,868 5,943
Agricultural 7,752 8,763 6,355
Commercial and Industrial 9,141 9,446 7,571
Consumer 7,649 8,854 8,725
Agricultural 569 987 2,073
Other 6,172 8,080 6,653
__________ _________ __________
Total Loans 203,060 186,027 174,916
Add: Unamortized Premium on
Purchased Loans 558 - -
Less: Unearned Income (37) (46) (62)
__________ _________ __________
Net Loans $203,581 $185,981 $174,854
========== ========= ==========
December 31,
____________________________________
(In thousands) 1998 1997
__________ _________
Real Estate Mortgage:
First and Second Residential $ 99,984 $ 93,495
Commercial and Industrial 29,968 23,777
Construction and Land
Development 6,586 9,630
Agricultural 5,727 4,598
Commercial and Industrial 6,042 6,035
Consumer 9,311 9,320
Agricultural 2,550 2,213
Other 3,698 3,720
__________ _________
Total Loans 163,866 152,788
Add: Unamortized Premium on
Purchased Loans - -
Less: Unearned Income (70) (89)
__________ _________
Net Loans $163,796 $152,699
========== =========
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 2001, are as follows:
Years to Maturity*
____________________________________
Within 1 - 5 Over
(In thousands) 1 Year Years 5 Years Total
_______ _________ ________ _________
Commercial,
Agricultural and Other $ 8,507 $ 7,951 $43,018 $59,476
Construction and Land
Development 6,170 288 1,930 8,388
_______ _________ ________ _________
Total $14,677 $ 8,239 $44,948 $67,864
======= ========= ======== =========
Fixed Interest Rates $ 3,363 $ 6,535 $17,272 $27,170
Floating or Adjustable
Interest Rates 11,314 1,704 27,676 40,694
_______ _________ ________ _________
Total $14,677 $ 8,239 $44,948 $67,864
======= ========= ======== =========
* 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.
At December 31, 2001, the recorded investment in loans that
are considered to be impaired under generally accepted accounting
principles was $681,000 as compared to $1,085,000 at December 31,
2000. The decrease in impaired loans is primarily related to a
large commercial loan that was returned to accrual status in
2001. 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 $107,000 at
December 31, 2001, and $178,000 at December 31, 2000. The
average recorded investment in impaired loans was $968,000 during
the year ended December 31, 2001, and $1,087,000 during the year
ended December 31, 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following shows the summary of nonperforming loans:
December 31,
_________________________________
(In thousands) 2001 2000 1999
_________ ________ _________
Nonaccruing Loans $ 1,589 $ 1,625 $ 1,343
Accruing Loans - 90 days or
more past due 615 164 132
_________ ________ __________
Total Nonperforming
Loans $ 2,204 $ 1,789 $ 1,475
========= ======== ==========
Nonperforming Loans
as a % of Net Loans 1.1% 1.0% .8%
========= ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans 86% 100% 121%
========= ======== ==========
December 31,
___________________________
(In thousands) 1998 1997
_____________ _____________
Nonaccruing Loans $ 131 $ 94
Accruing Loans - 90 days or
more past due 843 612
_____________ _____________
Total Nonperforming
Loans $ 974 $ 706
========= ========
Nonperforming Loans
as a % of Net Loans .6% .5%
========= ========
Allowance for Loan
Losses as a % of
Nonperforming Loans 179% 226%
========= ========
Foreclosed real estate 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.
Foreclosed real estate is valued at fair market value, net of
selling costs, at the time of foreclosure and is included in
other assets. Gains and losses resulting from the sale or write-
down of foreclosed real estate and income and expenses related to
the operation of foreclosed real estate are recorded in other
expenses. Foreclosed real estate amounted to $43,000 at December
31, 2001, and $159,000 at December 31, 2000. Foreclosed real
estate as of December 31, 2001, consists of residential real
estate that was foreclosed on after a borrower defaulted on their
mortgage loan. The foreclosed real estate expense, including cost
write-downs to fair value, which impacted the results of
operations amounted to $46,000 for the year ended December 31,
2001, and $19,000 for the year ended December 31, 2000.
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
judgment 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, 2001.
During 2001, an ongoing loan review was performed on
selected portions of the loan portfolio by an independent
consultant. Senior management evaluates credit risk on a
quarterly basis, or more frequently, as circumstances dictate. At
December 31, 2001, the percent of loans secured by real estate
was 88% of the overall loan portfolio. Union National's current
policy generally requires that the borrower provide 20% equity
for residential mortgage loans. However, certain home equity
loans will be made with less than 20% equity and the interest
rate on the loan is adjusted to reflect this increased risk.
The allowance for loan losses increased by $106,000 from the
prior year. This increase was primarily a result of increased
loan balances and increased nonperforming loans. The ratio of the
allowance for loan losses to net loans was 0.93% at December 31,
2001, as compared to 0.96% at December 31, 2000. Management
believes, based on information currently available, that the
current allowance for loan losses of $1,893,000 is adequate to
meet potential loan losses. Management expects loan charge-offs,
net of recoveries, to be below the level of net loan charge-offs
for 2001 and 2000.
Analysis of Allowance for Loan Losses
Years Ended December 31,
_________________________________
(In thousands) 2001 2000 1999
__________ ________ _________
Average Total Loans
Outstanding
(Less Unearned Income) $186,877 $ 182,728 $169,667
========== ======== =========
Allowance for Loan Losses,
Beginning of Year $ 1,787 $ 1,783 $ 1,743
Loans Charged-Off During Year:
Real Estate* 133 162 72
Consumer 167 92 74
Commercial, Industrial
and Agricultural 240 169 77
__________ ________ _________
Total Charge-Offs 540 423 223
Recoveries of Loans
Previously Charged-Off:
Real Estate* 5 1 -
Consumer 54 22 35
Commercial, Industrial
and Agricultural 11 7 14
__________ ________ _________
Total Recoveries 70 30 49
__________ ________ _________
Net Loans Charged-Off 470 393 174
Provision for Loan Losses
Charged to Operations 576 397 214
__________ ________ _________
Allowance for Loan Losses,
End of Year $ 1,893 $ 1,787 $ 1,783
========== ======== =========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .25% .22% .10%
========== ======== =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year .93% .96% 1.02%
========== ======== =========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
Years Ended December 31,
_____________________
(In thousands) 1998 1997
__________ ________
Average Total Loans
Outstanding
(Less Unearned Income) $162,090 $140,925
========== ========
Allowance for Loan Losses,
Beginning of Year $ 1,593 $ 1,371
Loans Charged-Off During Year:
Real Estate* 16 -
Consumer 186 83
Commercial, Industrial
and Agricultural 34 117
__________ ________
Total Charge-Offs 236 200
Recoveries of Loans
Previously Charged-Off:
Real Estate* - -
Consumer 51 13
Commercial, Industrial
and Agricultural 10 19
__________ ________
Total Recoveries 61 32
__________ ________
Net Loans Charged-Off 175 168
Provision for Loan Losses
Charged to Operations 325 390
__________ ________
Allowance for Loan Losses,
End of Year $ 1,743 $ 1,593
========== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .11% .12%
========== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.06% 1.04%
========== ========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
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,
a specific allocation and a portion unallocated to specific loans
or specific groups of loans. The specific allocation 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 as adjusted for current
economic conditions. The determination of the remaining 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 specific allocation component of
the allowance, and it recognizes that knowledge of the portfolio
may be incomplete. This portion of the allowance for loan losses
is established to cover probable and incurred losses in Union
National's overall loan portfolio that have not yet been
identified.
The following sets forth an allocation of the allowance for
loan losses by category. 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.
Amount Percent of Loans
(In thousands) in each Category
_________________ __________________
December 31, 2001:
Commercial, Industrial
and Agricultural $ 1,131 33%
Real Estate-
Residential Mortgages 250 63
Consumer 266 4
Unallocated 246 -
__________ _____
$ 1,893 100%
========== =====
December 31, 2000:
Commercial, Industrial
and Agricultural $ 971 38%
Real Estate-
Residential Mortgages 430 57
Consumer 129 5
Unallocated 257 -
__________ _____
$ 1,787 100%
========== =====
December 31, 1999:
Commercial, Industrial
and Agricultural $ 857 36%
Real Estate-
Residential Mortgages 460 59
Consumer 142 5
Unallocated 324 -
__________ _____
$ 1,783 100%
========== =====
December 31, 1998:
Commercial, Industrial
and Agricultural $ 705 33%
Real Estate-
Residential Mortgages 543 61
Consumer 495 6
__________ _____
$ 1,743 100%
========== =====
December 31, 1997:
Commercial, Industrial
and Agricultural $ 532 33%
Real Estate-
Residential Mortgages 580 61
Consumer 481 6
__________ _____
$ 1,593 100%
========== =====
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 and the sale of available-for-
sale investment securities;
* overnight correspondent bank borrowings 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, 2001, the bank
had received long-term advances of $61,252,000 from its available
credit of $126,179,000 at the FHLB for purposes of funding loan
demand and mortgage-backed security purchases. Total outstanding
borrowings of $61,252,000 at December 31, 2001, had a weighted-
average rate of 5.09% and total borrowings of $41,305,000 at
December 31, 2000, had a weighted-average rate of 5.99%. As of
December 31, 2001, advances of $3,532,000 are due in 2002 and
advances of $20,000,000 are convertible in 2002. 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. See section on Market Risk -
Interest Rate Risk for further analysis of these advances.
INFLATION
Inflation has some impact on Union National's operating
costs, but unlike many other companies, substantially all of
Union National's assets and liabilities are monetary in nature.
As a result, interest rates have a more significant impact on
Union National's performance than the
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
general level of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as prices of
goods and services. The effects of changes in interest rates is
discussed in the following section on Market Risk Interest Rate
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.
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 firm 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 $108,494,000, as compared to
cumulative rate-sensitive liabilities of $114,259,000 as of the
one-year time frame. The bank's cumulative interest-sensitivity
gap for the one-year time frame is a negative 1.9% of total
assets at December 31, 2001, as compared to a negative 6.6% at
December 31, 2000. The bank manages the interest-sensitivity gap
for the one-year time frame with a guideline of plus 15% to
negative 15% of total assets. The interest rate-sensitivity
analysis for the bank with investment securities at amortized
cost at December 31, 2001, is as follows:
Interest Rate Sensitivity
1 - 90 91 - 365 1 - 3 3 - 5
(In thousands) Days Days Years Years
________ ________ ________ ________
ASSETS
Earning Assets:
Mortgage-Backed Securities:
Variable $ 687 $ 3,400 $ - $ -
Fixed 1,178 3,890 10,712 6,160
Short-Term Investments and
Other Investment
Securities 11,413 6,703 5,204 10,473
Net Loans:
Variable 28,536 11,585 17,159 6,759
Fixed 12,694 28,408 46,310 24,311
________ ________ ________ ________
TOTAL $ 54,508 $ 53,986 $ 79,385 $ 47,703
======== ======== ======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 1,568 $ - $ - $ -
Money Market 34,859 - - -
Savings - 161 - -
Time 22,831 46,321 22,956 4,034
FHLB Advances and
Other Borrowings 7,302 1,217 12,347 12,325
________ ________ ________ ________
TOTAL $ 66,560 $ 47,699 $ 35,303 $ 16,359
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap $(12,052)$ (5,765) $ 38,317 $ 69,661
======== ======== ======== ========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets (3.9%) (1.9%) 12.5% 22.6%
======== ======== ======== ========
Over 5
(In thousands) Years Total
________ ________
ASSETS
Earning Assets:
Mortgage-Backed Securities:
Variable $ - $ 4,087
Fixed 8,143 30,083
Short-Term Investments and
Other Investment
Securities 14,594 48,387
Net Loans:
Variable - 64,039
Fixed 27,819 139,542
________ ________
TOTAL $50,556 $286,138
======== ========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 34,075 $ 35,643
Money Market - 34,859
Savings 24,616 24,777
Time - 96,142
FHLB Advances and
Other Borrowings 31,461 64,652
________ ________
TOTAL $ 90,152 $256,073
======== ========
Cumulative Interest-
Sensitivity Gap $ 30,065
========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 9.8%
========
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 an
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 experience. 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, 2001, would likely cause assumptions,
such as estimated prepayment speeds, refinancings, imbedded
options, early withdrawals and FHLB advance conversion clauses to
significantly change the GAP results above. Based on current
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
market interest rates the $20,000,000 in FHLB convertible
advances convertible in 2002 will not convert and are shown in
the GAP report above based on their maturity date. In addition,
as included in the bank's simulation model these advances will
also not convert if market interest rates increase 2%.
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 results of the simulation
model could change significantly if there was not a parallel
shift in interest rates and there was a resulting change in the
assumed shape of the interest rate yield curve. 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, 2001 and 2000:
Sensitivity Analysis
Percent Decrease in Categories
___________________________________
Market Current Market
Interest Market Interest
Rate Interest Rate
Decline Rates Increase
of 2% of 2%
__________ _________ ___________
Net Interest Income:
Policy Limit <10% - <10%
Hypothetical Percent Decrease
from Current Rate Scenario:
As of December 31, 2001 <2% - <1%
As of December 31, 2000 <2% - <1%
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 2001 <5% - <3%
As of December 31, 2000 <9% - <5%
The preceding schedule indicates that as of December 31,
2001, a hypothetical 2% decline in prevailing market interest
rates would cause the bank's net interest income to decline less
than 2% 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 net income earned
in 2001. As of December 31, 2001, a 2% rise 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% rise in rates would cause less
than a 3% impact to net income in comparison to the net income
earned in 2001. 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 2001 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;
* repositioning of its investment security portfolio into
floating-rate, short- or long-term securities or into purchased
residential mortgages;
* managing and expanding the bank's core deposit base including
deposits obtained in the bank's commercial cash management
programs; and
* adding 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 related discussions in the section on Net
Interest Income.
STOCKHOLDERS' EQUITY
Union National and the bank maintain capital ratios that are
well above the minimum total capital levels required by federal
regulatory authorities. Except as discussed below concerning
Union National's common stock repurchase plan, there are no known
trends or uncertainties, including regulatory matters that are
expected to have a material adverse impact on the capital
resources of Union National for 2002.
On January 24, 2002, the Board of Directors of Union
National authorized and approved a plan to purchase up to 100,000
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 3.9% of the
outstanding shares of Union National. The Board of Directors
believes that a repurchase of this type, as available, 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).
Union National's average stockholders' equity to average
assets ratio, which measures the adequacy of capital, was 8.40%
for 2001, as compared to 8.30% for 2000. The dividend payout
ratio, which represents the percentage of earnings returned to
the stockholders in the form of cash dividends, was 48.9% for
2001 and 89.2% for 2000.
Union National and the bank have risk-based capital ratios
that exceed the regulatory requirements. The risk-based capital
guidelines require banks to maintain a minimum risk-based capital
ratio of 8.0% at December 31, 2001, as compared to the bank's
current risk-based capital ratio of 12.02%. The total risk-based
capital ratio is computed by dividing adjusted 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Banking regulations also require Union National and the bank
to maintain certain minimum capital levels in relation to total
assets. Failure to meet minimum capital requirements could result
in prompt corrective action by the federal banking agencies. As
of December 31, 2001 and 2000, Union National and the bank were
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 these
categorizations. The bank maintains the following leverage and
risk-based capital ratios:
(In thousands) December 31, December 31,
2001 2000
____________ ____________
Tier I - Total Stockholders' Equity $ 23,979 $ 22,611
Tier II - Allowance for Loan Losses 1,893 1,787
____________ ____________
Total Qualifying Capital $ 25,872 $ 24,398
============ ============
Risk-adjusted On-balance-sheet Assets $203,351 $184,273
Risk-adjusted Off-balance-sheet
Exposure 11,806 16,526
____________ ____________
Total Risk-adjusted Assets $215,157 $200,799
============ ============
Actual Capital Ratio:
Tier I Capital to Average Total Assets 7.95% 8.00%
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 11.14% 11.26%
Minimum Required 4.00 4.00
To Be Well-Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 12.02% 12.15%
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 $ 8,659 $ 8,334
============ ============
Consolidated leverage and risk-based capital ratios are not
materially different from the ratios of the bank shown above.
Union National is subject to restrictions on the payment of
dividends 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
2002 of approximately $802,000, plus an amount equal to the net
profits of the bank in 2002 up to the date of any such dividend
declaration.
Union National maintains a Dividend Reinvestment and Stock
Purchase 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, 2001, the enrollment in the plan was 17% of the
shares outstanding. As of December 31, 2001, 81,976 shares have
been issued under Union National's Dividend Reinvestment and
Stock Purchase Plan. Union National had approximately 1,292
stockholders at December 31, 2001, and approximately 1,282
stockholders at December 31, 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, the bank and its subsidiary. As a consequence of the
extensive regulation of commercial banking and insurance
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. Specifically, Union National is susceptible to changes
in tax law that may increase the cost of doing business or impact
Union National's ability to realize the value of deferred tax
assets. Management is not aware of any 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. In
addition, management also expects increased competition in the
banking industry as a result of the passage of the Gramm-Leach-
Bliley Financial Services Modernization Act in November 1999.
This act expanded the range of non-bank activities for certain
bank holding companies, but also removed restrictions to the
banking industry for other financial service companies.
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.
EX-23.1
Consent of Beard Miller Company,
LLP, Independent Auditors
EXHIBIT 23.1
____________
Consent of Beard Miller Company LLP, Independent Auditors
CONSENT OF BEARD MILLER COMPANY LLP
INDEPENDENT AUDITORS
Regarding:
Registration Statements, File No. 33-80093, 333-80739, and No.
333-27837
We consent to the incorporation by reference in the above
listed Registration Statements of our report dated January 18,
2002, with respect to the 2001 and 2000 consolidated financial
statements of Union National Financial Corporation included in
this Annual Report (Form 10-K) for the years ended December 31,
2001.
/s/ Beard Miller Company, LLP
Harrisburg, Pennsylvania
March 27, 2002
EX-23.2
Consent of Trout, Ebersole & Groff,
LLP, Certified Public Accountants
EXHIBIT 23.2
____________
Consent of Trout, Ebersole, & Groff, LLP,
Certified Public Accountants
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, 333-27837, and 333-80739,
of Union National Financial Corporation and in the related
propectus 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
Trout, Ebersole & Groff, LLP
Certified Public Accountants
March 27, 2002
Lancaster, Pennsylvania