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, 2004
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to_____________to_____________
Commission file number 0-19214
________________
UNION NATIONAL FINANCIAL CORPORATION
____________________________________
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 23-2415179
____________ __________
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
101 East Main Street, P.O. Box 567
Mount Joy, Pennsylvania 17552
_______________________ _____
(Address of Principal Executive Offices) (Zip Code)
(717) 653-1441
______________
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 Par Value
_____________________________
(Title of Class)
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 ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes __
No X
___
The aggregate market value of the shares of Common Stock of
the Registrant held by nonaffiliates of the Registrant was
$53,573,725 as of June 30, 2004. As of March 21, 2005, the
Registrant had approximately 2,403,334 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Union National Financial Corporation's 2004
Annual Report to Stockholders are incorporated by reference into
Parts I, II and IV, hereof. Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting is
incorporated by reference in response to Parts II and III,
hereof.
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PART I PAGE NO.
Item 1 - Business..................................... 1
Item 2 - Properties....................................7
Item 3 - Legal Proceedings.............................9
Item 4 - Submission of Matters to a Vote of Security
Holders......................................10
PART II
Item 5 - Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities............................11
Item 6 - Selected Financial Data......................12
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..13
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.......13
Item 9A- Controls and Procedures......................13
PART III
Item 10- Directors and Executive Officers of the
Registrant...................................14
Item 11- Executive Compensation.......................14
Item 12- Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters..........................14
Item 13- Certain Relationships and Related
Transactions.................................14
Item 14- Principal Accountant Fees and Services.......14
PART IV
Item 15- Exhibits, Financial Statements Schedules.....15
Signatures............................................19
Exhibit Index.........................................21
PART I
______
Union National Financial Corporation'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.
Critical Accounting Policies
Disclosure of the corporation's significant accounting
policies is included in Note 1 to the consolidated financial
statements on pages 8 through 11 and in Management's Discussion
and Analysis on page 24 of the 2004 Annual Report to Stockholders
(Exhibit 13). The corporation's accounting policies have been
approved by the Audit Committee.
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, as amended, 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 three
wholly-owned subsidiaries, Union National Community Bank, Union
National Capital Trust I and Union National Capital Trust II.
Union National's two trust subsidiaries were formed on December
19, 2003, and October 23, 2004, respectively, for the purpose of
issuing trust capital securities. The bank's wholly owned
subsidiaries include the Union National Insurance Agency, Inc.
formed on May 21, 2001 and StoneBridge Settlement Services, LLC
formed on June 17, 2003.
Union National Community Bank was organized in 1865 under a
national charter. Union National Community Bank is a national
banking association, a member of the Federal Reserve System and
is regulated by the Office of the Comptroller of the Currency.
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, a commercial banking office opened in March
2004 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 located at its main office.
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 35 and 36 of the 2004 Annual Report to
Stockholders.
Without the prior approval of the Federal Reserve, 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
* acquiring substantially all of the assets of any bank; or
* merging with another bank holding company.
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 page
17 of Union National Financial Corporation's 2004 Annual Report
to Stockholders for information concerning the corporation's and
the bank's capital ratios, which are included in Exhibit 13 and
incorporated here by reference.
Pending Legislation. Management cannot anticipate what
___________________
changes Congress may enact or, if enacted, their impact on Union
National Financial Corporation's financial position and reported
results of operation. As a consequence of the extensive
regulation of commercial banking activities in the United States,
Union National Financial Corporation's and Union National
Community Bank's businesses may be adversely affected by federal
and state legislation and regulations that may increase the costs
of doing business. See also pages 35 and 36 of Union National
Financial Corporation's 2004 Annual Report to Stockholders, which
is 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
Office of the Comptroller of the Currency, the Federal Reserve
Board and the FDIC.
The primary supervisory authority of Union National
Community Bank is the Office of 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 23 through 36 of Union
National Financial Corporation's 2004 Annual Report to
Stockholders.
Employees. As of March 21, 2005, Union National Community
_________
Bank had 132 full-time employees and 19 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. The corporation's
website address is www.uncb.com. The corporation makes available
____________
free of charge its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after it electronically
files such reports with the Securities and Exchange Commission.
Copies of such reports are available at no charge by contacting
Clement M. Hoober, Executive VP, Chief Financial Officer at 101
E. Main Street, Mount Joy, PA 17552. (The information found on
the corporation's website does not constitute a part of this or
any other report.)
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, commercial banking office
and land for future office expansion with construction expected
to begin in the summer of 2005.
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
22,251 sq. ft. of space.
Main Office Annex Wood frame construction September, 1992
115 East Main Street with aluminum siding.
Mount Joy, PA 17552 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 Drive-up Bank September, 2001
Office Brick on Frame
Containing approximately
574 sq. ft. of space.
MotorBank 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.
Manheim Township Branch Branch Bank April 22, 2003
Office One story brick and metal siding
38 E. Roseville Road building containing approximately
Lancaster, PA 17601 2,000 sq. ft. of space.
Future Office Site Undeveloped lot February 1, 2005
1625 Old Philadelphia Approximately 3/4 of an
Pike acre in size.
Lancaster, PA 17602
Commercial Banking Suite 230 (a portion of March, 2005
Office a three story concrete and
Suite 230 masonry office complex) containing
205 Granite Run Drive approximately 3,789 sq. ft. of
Lancaster, PA 17601 office space.
Credit Services Office Third floor of three August, 1998
32 Mount Joy Street story brick building
Mount Joy, PA 17552 containing 3,000 sq. ft. of
office space.
In management's opinion, the above properties are in good
condition and are adequate for Union National Financial
Corporation's and 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. There were no matters submitted to a vote of security
holders during the fourth quarter of 2004.
PART II
_______
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
_______ ______________________________________________
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
__________________________________________________
SECURITIES.
___________
Market and dividend information required by this Item is
incorporated herein by reference from the inside front cover of
Union National Financial Corporation's 2004 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 limited basis in the local over-the-
counter market and on the OTCBB 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 2004 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-nine 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.
Information related to Securities authorized for Issuance
under Equity Compensation Plans is incorporated herein by
reference to page 10 of the Union National Financial Corporation
2005 Proxy Statement.
Additional information required by this item regarding
dividend restrictions is incorporated herein by reference from
Note 13 on page 17 and page 35 of Union National Financial
Corporation's 2004 Annual Report to Stockholders, which is
included in Exhibit 13 to this Form 10-K.
As of March 21, 2005, there were approximately 866 holders
of record of Union National Financial Corporation's common stock.
ISSUER PURCHASES OF EQUITY SECURITIES:
(d)
(c) Maximum
Total Number Numbers of
of Shares Shares that
(a) Purchased as May Yet Be
Total (b) Part of Publicly Purchased
Number of Average Announced Under the
Shares Price Paid Plans or Plans or
Period Purchased per Share Programs* Programs*
_________________________________________________________________
October 1, 2004 to
October 31, 2004 967 $23.21 967 22,048
November 1, 2004
to November 30,
2004 2,486 $23.14 2,486 19,562
December 1, 2004
to December 31,
2004 560 $25.82 560 19,002
_____ _____
Total 4,013 $23.53 4,013
===== =====
*On December 19, 2003, the Board of Directors of Union
National authorized and approved a plan to purchase up to 120,000
shares of its outstanding common stock in open market or
privately negotiated transactions.
ITEM 6. SELECTED FINANCIAL DATA.
______ _______________________
The information required by this Item is incorporated here
by reference from page 23 of Union National Financial
Corporation's 2004 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 OPERATIONS.
___________________________________
The information required by this Item is incorporated by
reference from pages 24 through 36 of Union National Financial
Corporation's 2004 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 herein
by reference from pages 33 to 35 of Union National Financial
Corporation's 2004 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 herein
by reference from pages 4 through 22 of Union National Financial
Corporation's 2004 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.
___________________________________
NONE.
ITEM 9A. CONTROLS AND PROCEDURES
_______ _________________________
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of
management, including the Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation
of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Exchange Act) was evaluated
as of a date within 90 days prior to the filing date of this
report. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that, as of the Evaluation
Date, the corporation's disclosure controls and procedures were
effective in alerting them to the material information relating
to the corporation (or the corporation's consolidated
subsidiaries) required to be included in its periodic SEC
filings.
(b) Changes in internal controls.
There were no significant changes made in the corporation's
internal controls during the period covered by this report or, to
their knowledge, in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
_______ ______________________________________________
The information required by this Item is incorporated herein
by reference from pages 4 through 7 of Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting of
Shareholders. As of July 2003, Union National Financial
Corporation put in place the Directors and Senior Management Code
of Ethics. The code of ethics encourages individuals to report
any conduct that they believe in good faith to be an actual or
apparent violation of the code of ethics. Union National
Financial Corporation has filed a copy of the code of ethics with
the SEC as Exhibit 14 to this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
_______ ______________________
The information required by this Item is incorporated herein
by reference from pages 7 through 9 of Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
_______ ___________________________________________________
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
__________________________________________
The information required by this Item is incorporated here
by reference from pages 6, 7 and 18 of Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting of
Shareholders. The information related to Equity Compensation
Plans as required is incorporated here by reference to the Equity
Compensation Plan Information table on pages 9 and 10 of Union
National Financial Corporation's Proxy Statement for its 2005
Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_______ ______________________________________________
The information required by this Item is incorporated herein
by reference from page 13 of Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting of
Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
_______ ______________________________________
The information required by this Item is incorporated herein
by reference from pages 15 through 16 of Union National Financial
Corporation's Proxy Statement for its 2005 Annual Meeting of
Shareholders.
PART IV
_______
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
_______ _______________________________________
(a) 1. Financial Statements.
The following financial statements are included
by reference in Part II, Item 8 hereof.
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in
Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Accounting Firm
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, 2004, between Mark D. Gainer,
Union National Financial Corporation and
Union National Community Bank.
(Incorporated by reference to Exhibit 10.1
to Union National Financial Corporation's
Annual Report on Form 10-K, filed with the
Commission on March 30, 2004.)
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 and
incorporated by reference to Amendment 1 to
Union National Financial Corporation's
Registration Statement No. 333-107326 on
Form S-8 filed with the commission on July
25, 2003.)
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).
10.7 Executive Incentive Retirement Agreement,
CFO, dated January 1, 2004 between Clement
M. Hoober and Union National Community
Bank. (Incorporated by reference to Exhibit
10.7 to Union National Financial
Corporation's Annual Report on Form 10-K,
filed with the Commission on March 30,
2004.)
10.8 Group Term Replacement Plan for Certain
Officers, CFO, dated January 1, 2004
between Clement M. Hoober and Union
National Community Bank. (Incorporated by
reference to Exhibit 10.8 to Union National
Financial Corporation's Annual Report on
Form 10-K, filed with the Commission on
March 30, 2004.)
10.9 Executive Incentive Retirement Agreement,
COO, dated January 1, 2004 between Michael
A. Frey and Union National Community Bank.
(Incorporated by reference to Exhibit 10.9
to Union National Financial Corporation's
Annual Report on Form 10-K, filed with the
Commission on March 30, 2004.)
10.10 Group Term Replacement Plan for Certain
Officers, COO, dated January 1, 2004
between Michael A. Frey and Union National
Community Bank. (Incorporated by reference
to Exhibit 10.10 to Union National
Financial Corporation's Annual Report on
Form 10-K, filed with the Commission on
March 30, 2004.)
10.11 Executive Salary Continuation Agreement,
CEO, dated December 31, 2003 between Mark
D. Gainer and Union National Community
Bank. (Incorporated by reference to
Exhibit 10.11 to Union National Financial
Corporation's Annual Report on Form 10-K,
filed with the Commission on March 30,
2004.)
10.12 Group Term Replacement Plan for Certain
Officers, CEO, dated January 1, 2004
between Mark D. Gainer and Union National
Community Bank. (Incorporated by reference
to Exhibit 10.12 to Union National
Financial Corporation's Annual Report on
Form 10-K, filed with the Commission on
March 30, 2004.)
10.13 Union National Financial Corporation, 1999
Independent Directors Stock Option Plan.
(Incorporated by Reference to Exhibit 4.3
to Union National Financial Corporation's
Registration Statement No. 333-80739 on
Form S-8, filed with the Commission on June
15, 1999.)
13 Excerpts from Union National Financial
Corporation's 2004 Annual Report to
Stockholders.
14 Union National Financial Corporation
Directors and Senior Management Code of
Ethics. (Incorporated by reference to
Exhibit 14 to Union National Financial
Corporation's Annual Report on Form 10-K,
filed with the Commission on March 30,
2004.)
21 Subsidiaries of the Union National
Financial Corporation
23.1 Consent of Beard Miller Company LLP,
Independent Auditors.
31.1 Rule 13a-14(a)/15d-14(a) Certification of
CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of
CFO
32 Section 1350 Certification of CEO and CFO
(b) The exhibits required to be filed by this Item are listed
under Item 15(a)3, above.
(c) 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 17, 2005
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 17, 2005
__________________
Mark D. Gainer
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Donald H. Wolgemuth March 17, 2005
_______________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ Clement M. Hoober March 17, 2005
_____________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Nancy Shaub Colarik March 17, 2005
_______________________
Nancy Shaub Colarik, Director
By /s/ William E. Eby March 17, 2005
__________________
William E. Eby, Director
By /s/ James R. Godfrey March 17, 2005
____________________
James R. Godfrey, Director
By /s/ Carl R. Hallgren March 17, 2005
____________________
Carl R. Hallgren, Director
By /s/ William M. Nies March 17, 2005
___________________
William M. Nies, Director
By /s/ Darwin A. Nissley March 17, 2005
_____________________
Darwin A. Nissley, Director
By /s/ Lloyd C. Pickell March 17, 2005
____________________
Lloyd C. Pickell, Director
By /s/ Benjamin W. Piersol, Jr. March 17, 2005
____________________________
Benjamin W. Piersol, Jr., Director
EXHIBIT INDEX
Exhibit Number
______________
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,
2004, between Mark D.Gainer, Union National Financial
Corporation and Union National Community Bank.
(Incorporated by reference to Exhibit 10.1 to Union
National Financial Corporation's Annual Report on Form
10-K, filed with the Commission on March 30, 2004.)
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 and
incorporated by reference to Amendment 1 to Union
National Financial Corporation's Registration
Statement No. 333-107326 on Form S-8 filed with the
commission on July 25, 2003.)
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).
10.7 Executive Incentive Retirement Agreement, CFO, dated
January 1, 2004 between Clement M. Hoober and Union
National Community Bank. (Incorporated by reference
to Exhibit 10.7 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.8 Group Term Replacement Plan for Certain Officers, CFO,
dated January 1, 2004 between Clement M. Hoober and
Union National Community Bank. (Incorporated by
reference to Exhibit 10.8 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.9 Executive Incentive Retirement Agreement, COO, dated
January 1, 2004 between Michael A. Frey and Union
National Community Bank. (Incorporated by reference
to Exhibit 10.9 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.10 Group Term Replacement Plan for Certain Officers, COO,
dated January 1, 2004 between Michael A. Frey and
Union National Community Bank. (Incorporated by
reference to Exhibit 10.10 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.11 Executive Salary Continuation Agreement, CEO, dated
December 31, 2003 between Mark D. Gainer and Union
National Community Bank. (Incorporated by reference
to Exhibit 10.11 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.12 Group Term Replacement Plan for Certain Officers, CEO,
dated January 1, 2004 between Mark D. Gainer and Union
National Community Bank. (Incorporated by reference
to Exhibit 10.12 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
10.13 Union National Financial Corporation, 1999 Independent
Directors Stock Option Plan. (Incorporated by
Reference to Exhibit 4.3 to Union National Financial
Corporation's Registration Statement No. 333-80739 on
Form S-8, filed with the Commission on June 15, 1999.)
13 Excerpts from Union National Financial Corporation's
2004 Annual
Report to Shareholders.
14 Union National Financial Corporation Directors and
Senior Management Code of Ethics. (Incorporated by
reference to Exhibit 14 to Union National Financial
Corporation's Annual Report on Form 10-K, filed with
the Commission on March 30, 2004.)
21 Subsidiaries of Union National Financial Corporation.
23.1 Consent of Beard Miller Company LLP, Independent
Auditors.
31.1 Rule 13a-14(a)/15d-14(a) Certification of CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of CFO
32 Section 1350 Certification of CEO and CFO
EXHIBIT 13
__________
Excerpts From Union National Financial Corporation's
2004 Annual Report to Stockholders
ANNUAL REPORT 2004
Rock Solid. Building Momentum.
UNION NATIONAL FINANCIAL CORPORATION
TABLE OF CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . .1
To Our Stockholders . . . . . . . . . . . . . . . . . . . . . 2-3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Income . . . . . . . . . . . . . . . 5
Consolidated Statements of Changes in Stockholders' Equity . . .6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . 8-21
Report of Independent Registered Public Accounting Firm. . . . 22
Summary of Quarterly Financial Data . . . . . . . . . . . . . .22
Selected Financial Data . . . . . . . . . . . . . . . . . . . .23
Management's Discussion and Analysis . . . . . . . . . . . .24-36
Board of Directors . . . . . . . . . . . . . . . . . . . . . . 37
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 on the OTC Bulletin Board (OTCBB), primarily in
Lancaster County, Pennsylvania, under the symbol UNNF. Prices
presented in the table below reflect actual transactions known to
management. Cash dividends, when declared by the Board of
Directors, are payable on the 20th 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.
Stock Price
________________________ Dividends
Quarter High Low Per Share
_________________________________________________________________
First, 2004............$22.45 $21.75 $0.160
Second................. 24.00 22.00 0.160
Third.................. 25.00 22.85 0.160
Fourth................. 28.00 22.90 0.160
First, 2003............$19.00 $16.40 $0.155
Second................. 21.25 18.65 0.155
Third.................. 21.50 19.85 0.160
Fourth................. 22.00 20.00 0.160
CORPORATE INTRODUCTION
Union National Financial Corporation, headquartered in Mount Joy,
Pennsylvania, is the holding company of Union National Community
Bank. The bank provides a full range of financial services for
both retail and business customers in Lancaster County,
Pennsylvania. In addition to traditional banking services, Union
National also offers insurance, retirement plan services and
wealth management services through its UNIONNATIONALAdvisors
Group. Union National Community Bank has seven full-service
offices in Columbia, Elizabethtown, Hempfield, Manheim, Manheim
Township, 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.
CORPORATE OFFICERS
Donald H. Wolgemuth, Chairman of the Board; Mark D. Gainer,
President/CEO; Michael A. Frey, Vice President; Carl R.
Hallgren, Esq., Secretary; Clement M. Hoober, CPA, Treasurer/CFO
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
Union National Community Bank
Attn: Stock Transfer Department
P.O. Box 567
Mount Joy, PA 17552-0567
FOR FURTHER INFORMATION ON PURCHASING OUR STOCK, WE REFER YOU TO:
Ferris Baker Watts
3100 Market Street
Camp Hill, PA 17011
(877) 519-5953
Janney Montgomery Scott, LLC
61 North Duke Street
Lancaster, PA 17602
(717) 293-4100
F. J. Morrissey & Company, Inc.
4 Tower Bridge, Suite 300
200 Barr Harbor Drive
West Conshohocken, PA 19428
(800) 842-8928
Ryan Beck & Co., Inc.
220 South Orange Avenue
Livingston, NJ 07039
(973) 597-6000
Hazlett, Burt & Watson, Inc.
100 East King Street
P. O. Box 1267
Lancaster, PA 17608
(717) 397-5515
FORM 10-K REQUEST
The Annual Report on Form 10-K filed with the Securities &
Exchange Commission may be obtained, without charge, by writing
to:
Clement M. Hoober, CPA
Treasurer/CFO
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 and 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 27, 2005,at 10:00 a.m. at:
The Gathering Place
6 Pine Street
Mount Joy, PA 17552.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
December 31, December 31, % Increase
2004 2003 (Decrease)
_________________________________________________________________
For the Year
Total Interest Income......$ 19,638 $ 18,034 8.9%
Total Interest Expense..... 6,621 6,703 (1.2%)
Net Interest Income........ 13,017 11,331 14.9%
Net Income................. 3,223 3,216 0.2%
Per Share
Net Income (Basic).........$ 1.34 $ 1.29 3.9%
Net Income (Assuming Dilution) 1.31 1.27 3.1%
Cash Dividends Paid........ 0.64 0.63 1.6%
Stockholders' Equity....... 11.18 11.03 1.4%
Average Balances
Loans......................$244,752 $ 200,808 21.9%
Investments and Other
Earning Assets.......... 100,234 105,036 (4.6%)
Total Assets............... 372,207 327,644 13.6%
Total Deposits............. 246,445 226,781 8.7%
Stockholders' Equity....... 26,250 27,046 (2.9%)
Return on Average
Assets.................... 0.87% 0.98%
Stockholders' Equity...... 12.28% 11.89%
Realized Stockholders'
Equity (1).............. 12.62% 12.38%
(1) Excludes the impact of accumulated other comprehensive income
on total stockholders' equity.
TO OUR STOCKHOLDERS
In a business environment where instability has become all too
common, it is reassuring that your local community bank is firmly
built on a rock solid foundation. It is even more reassuring to
know that your local community bank can offer the innovative
financial products and services demanded by a rapidly-changing
business world. The past year has been one of great excitement
for Union National as we have taken huge strides in our
commercial, agricultural and retail banking departments and our
UNIONNATIONALAdvisors group. With this progress, Union National
continues to build momentum as we move toward a very promising
future.
I want to recognize the outstanding efforts in 2004 of our
commercial and agricultural banking team. This group was
successful in acquiring many new relationships and driving
significant growth in both loans and deposits. Since the
beginning of 2004, our total commercial loan portfolio has
increased by over 30% with our ag loan portfolio more than
doubling. As a strategic priority, Union National has focused on
the commercial and agricultural banking areas and has developed a
team of highly-qualified banking professionals who are able to
provide today's businesses with the financial solutions they need
to become stronger and more successful.
During 2004, UNIONNATIONALAdvisors continued its further
development and expansion. We have a solid team in place to
offer solutions that range from investment management to
brokerage and annuity products to trust and estate planning
services. We also have further developed our offering of
retirement plan services and expanded our client base in this
area during 2004. The goal of our UNIONNATIONALAdvisors group is
simply to provide solid financial guidance that will help our
clients secure their financial future.
Union National's retail banking group also had a year of great
progress with the introduction of several new products and
services. Following are just a few highlights of some of our
additional accomplishments in 2004:
* We introduced more customers to our Overdraft Privilege
product, which allows customers additional flexibility
when dealing with unexpected needs. This product
contributed significantly to increased deposit fee income
for Union National in 2004.
* Our recently-opened office located on Roseville Road in
Manheim Township was very well received in this market and
many new customer relationships have been established.
The success of this retail office has exceeded even our
most optimistic projections.
* We unleashed the "Cash Back Attack" campaign to promote
our cash back checking account which is a free checking
account that rewards customers with a cash back bonus for
using their MasterMoney card to make pinless purchases.
* We introduced a product called Certificate of Deposit
Account Registry Service (CDARS) which enables customers
to invest up to $10 million with Union National and
maintain full FDIC insurance.
* We installed a check imaging system enabling us to more
efficiently process checks and offer enhanced services to
customers.
With the tremendous progress Union National has made over the
last several years, we believe we are now well-positioned for
future expansion. We now have the team and the infrastructure in
place to successfully expand into new markets. Our first step
will be a new retail branch on Old Philadelphia Pike in Lancaster
(at the entrance to the Lancaster Campus of Harrisburg Area
Community College) with construction expected to commence in the
summer of 2005. This office will be based on a unique new
concept that we believe will help set Union National apart from
our competition. We also have an agreement to purchase a
property at a prime location on Centerville Road in Lancaster to
be used for a new retail office. It is currently expected that
construction of this office will begin in 2006. We are excited
about the potential of these two new locations and we also
continue to look for additional opportunities that will allow
Union National to grow profitably.
We certainly recognize that our pursuit of new opportunities and
our investment in the future of Union National does come at an
immediate cost, but we truly believe there are significant long-
term benefits for our stockholders, our customers and our
employees. It is our goal to continue to grow the earnings of
Union National while also aggressively pursuing new opportunities
for future growth. For 2004, I am pleased to report that we were
able to again achieve record earnings in spite of our many
investments in strategic initiatives during the year. At Union
National, we are focused on long-term growth and opportunities,
not on short-term, short-lived successes. We believe we have the
team and strategies in place that will lead us to success and
ultimately drive long-term shareholder value. I appreciate your
continued confidence and support as we pursue this vision.
At Union National, our goal has always been, and will always be,
to provide great service rooted in honesty, integrity, genuine
caring... and a passion for serving our stockholders, customers
and employees. At Union National, we strive to be - in a word -
remarkable.
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,
2004 2003
____________ ____________
ASSETS
Cash and Due from Banks.............$ 9,803 $ 8,426
Interest-Bearing Deposits
in Other Banks.................... 40 253
____________ ____________
Total Cash and Cash Equivalents.. 9,843 8,679
Investment Securities Available-
for-Sale........................... 103,490 97,066
Loans Held for Sale................. 232 197
Loans(Net of Unearned Income)....... 263,001 225,381
Less: Allowance for Loan Losses.... (2,288) (1,985)
___________ ____________
Net Loans.................. 260,713 223,396
Premises and Equipment - Net........ 6,517 6,625
Restricted Investment in Bank Stocks 4,961 4,092
Bank-Owned Life Insurance........... 9,487 7,804
Other Assets........................ 4,047 4,033
____________ ____________
TOTAL ASSETS.....................$ 399,290 $ 351,892
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing................$ 37,590 $ 30,687
Interest-Bearing................... 228,380 200,387
____________ ____________
Total Deposits.................... 265,970 231,074
Short-Term Borrowings............... 4,524 9,981
Long-Term Debt...................... 88,630 73,874
Junior Subordinated Debentures...... 11,341 8,248
Other Liabilities................... 1,972 1,591
____________ ____________
TOTAL LIABILITIES................. 372,437 324,768
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 698 690
Shares: Authorized - 20,000,000 Issued -
2,792,046 in 2004 (2,762,099 in 2003)
Outstanding - 2,402,206 in 2004
(2,458,748 in 2003)
Surplus .......................... 9,570 9,090
Retained Earnings................... 23,644 21,963
Accumulated Other Comprehensive
Income............................ 581 1,035
Treasury Stock - 389,840 shares in 2004
(303,351 in 2003), at cost........ (7,640) (5,654)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY........ 26,853 27,124
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY...........$ 399,290 $ 351,892
============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
_____________________________
2004 2003
______________ ____________
INTEREST INCOME
Interest and Fees on Loans..........$ 15,467 $ 13,948
Investment Securities:
Taxable Interest................... 2,933 2,706
Tax-Exempt Interest................ 1,131 1,232
Dividends.......................... 99 100
Other............................... 8 48
______________ ____________
Total Interest Income.............. 19,638 18,034
INTEREST EXPENSE
Deposits............................ 3,032 3,362
Short-Term Borrowings............... 108 28
Long-Term Debt...................... 3,082 3,301
Junior Subordinated Debentures...... 399 12
______________ ____________
Total Interest Expense............. 6,621 6,703
______________ ____________
Net Interest Income................ 13,017 11,331
PROVISION for LOAN LOSSES........... 404 274
______________ ____________
Net Interest Income after Provision
for Loan Losses................... 12,613 11,057
OTHER OPERATING INCOME
Income from Fiduciary Activities.... 225 161
Service Charges on Deposit Accounts. 1,569 1,078
Other Service Charges, Commissions, Fees 1,338 1,220
Investment Securities Gains......... 194 446
Mortgage Banking Activities......... 230 853
Earnings from Bank-Owned Life Insurance 383 282
Other Income........................ 156 125
______________ ____________
Total Other Operating Income...... 4,095 4,165
OTHER OPERATING EXPENSES
Salaries and Wages.................. 5,539 5,055
Retirement Plan and Other Employee
Benefits......................... 1,521 1,189
Net Occupancy Expense............... 801 702
Furniture and Equipment Expense..... 702 606
Professional Fees................... 641 476
Data Processing Services............ 701 672
Pennsylvania Shares Tax............. 268 259
Advertising and Marketing Expenses.. 336 288
ATM Processing Expenses............. 300 273
Other Operating Expenses............ 2,000 1,805
______________ ____________
Total Other Operating Expenses.... 12,809 11,325
______________ ____________
Income before Income Taxes........ 3,899 3,897
PROVISION for INCOME TAXES.......... 676 681
______________ ____________
NET INCOME........................ $ 3,223 $ 3,216
============== ============
PER SHARE INFORMATION
Net Income for Year - Basic....... $ 1.34 $ 1.29
Net Income for Year - Assuming
Dilution......................... 1.31 1.27
Cash Dividends.................... 0.640 0.630
See notes to consolidated financial statements.
Years Ended December 31,
_____________________________
2002
______________
INTEREST INCOME
Interest and Fees on Loans..........$ 15,330
Investment Securities:
Taxable Interest................... 2,949
Tax-Exempt Interest................ 1,085
Dividends.......................... 130
Other............................... 67
______________
Total Interest Income.............. 19,561
INTEREST EXPENSE
Deposits............................ 4,587
Short-Term Borrowings............... 50
Long-Term Debt...................... 3,470
Junior Subordinated Debentures...... -
______________
Total Interest Expense............. 8,107
______________
Net Interest Income................ 11,454
PROVISION for LOAN LOSSES........... 184
______________
Net Interest Income after Provision
for Loan Losses................... 11,270
OTHER OPERATING INCOME
Income from Fiduciary Activities.... 127
Service Charges on Deposit Accounts. 1,008
Other Service Charges, Commissions, Fees 948
Investment Securities Gains......... 327
Mortgage Banking Activities......... 455
Earnings from Bank-Owned Life Insurance 211
Other Income........................ 88
______________
Total Other Operating Income....... 3,164
OTHER OPERATING EXPENSES
Salaries and Wages.................. 4,547
Retirement Plan and Other Employee
Benefits......................... 1,133
Net Occupancy Expense............... 714
Furniture and Equipment Expense..... 603
Professional Fees................... 496
Data Processing Services............ 576
Pennsylvania Shares Tax............. 266
Advertising and Marketing Expenses.. 265
ATM Processing Expenses............. 251
Other Operating Expenses............ 1,687
______________
Total Other Operating Expenses..... 10,538
______________
Income before Income Taxes......... 3,896
PROVISION for INCOME TAXES.......... 736
______________
NET INCOME.........................$ 3,160
==============
PER SHARE INFORMATION
Net Income for Year - Basic.......$ 1.24
Net Income for Year - Assuming
Dilution......................... 1.23
Cash Dividends.................... 0.575
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Shares of
Common stock
Outstanding
____________
BALANCE, December 31, 2001.............. 2,590,964
Comprehensive Income:
Net Income.............................
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During the
Year, Net of Tax of $478..............
Unrealized Holding Losses on Investment
Securities Transferred to
Available-for-Sale During the Year,
Net of Tax of $14.....................
Reclassification Adjustment for
(Gains)/Losses Included in Net Income,
Net of Tax of $111...................
Total Comprehensive Income..........
Acquisition of Treasury Stock........... (97,238)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 17,734
Issuance of Common Stock under Employee
and Director Plans.................... 6,009
Retirement of Treasury Stock
(20,000 shares)......................
Cash Dividends ($.575 per share)........
____________
BALANCE, December 31, 2002.............. 2,517,469
Comprehensive Income:
Net Income............................
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax of $108........
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $152......
Total Comprehensive Income........
Acquisition of Treasury Stock........... (83,577)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 16,118
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $12........................ 8,738
Retirement of Treasury Stock
(16,000 shares).....................
Cash Dividends ($.63 per share).........
_____________
BALANCE, December 31, 2003.............. 2,458,748
=============
Comprehensive Income:
Net Income............................
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax Benefit of $169
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $66.......
Total Comprehensive Income........
Acquisition of Treasury Stock........... (100,489)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 14,572
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $13........................ 29,375
Retirement of Treasury Stock
(14,000 shares).....................
Cash Dividends ($.64 per share).........
_____________
BALANCE, December 31, 2004.............. 2,402,206
=============
See notes to consolidated financial statements.
(Dollars in thousands, except per share data)
Common Retained
Stock Surplus Earnings
______ _______ ________
BALANCE, December 31, 2001..............$ 687 $ 8,960 $ 18,631
Comprehensive Income:
Net Income............................. 3,160
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During the
Year, Net of Tax of $478..............
Unrealized Holding Losses on Investment
Securities Transferred to
Available-for-Sale During the Year,
Net of Tax of $14.....................
Reclassification Adjustment for
(Gains)/Losses Included in Net Income,
Net of Tax of $111...................
Total Comprehensive Income..........
Acquisition of Treasury Stock...........
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 4 274
Issuance of Common Stock under Employee
and Director Plans.................... 2 72
Retirement of Treasury Stock
(20,000 shares)...................... (5) (367)
Cash Dividends ($.575 per share)........ (1,472)
______ _______ ________
BALANCE, December 31, 2002.............. 688 8,939 20,319
Comprehensive Income:
Net Income............................ 3,216
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax of $108........
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $152......
Total Comprehensive Income........
Acquisition of Treasury Stock...........
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 4 306
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $12........................ 2 139
Retirement of Treasury Stock
(16,000 shares)..................... (4) (294)
Cash Dividends ($.63 per share)......... (1,572)
______ _______ ________
BALANCE, December 31, 2003.............. 690 9,090 21,963
Comprehensive Income:
Net Income............................ 3,223
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax Benefit of $169
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $66.......
Total Comprehensive Income........
Acquisition of Treasury Stock...........
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 4 328
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $13........................ 7 423
Retirement of Treasury Stock
(14,000 shares)..................... (3) (271)
Cash Dividends ($.64 per share)......... (1,542)
______ _______ ________
BALANCE, December 31, 2004..............$ 698 $ 9,570 $ 23,644
====== ======= ========
See notes to consolidated financial statements.
(Dollars in thousands, except per share data)
Accumulated
Other
Comprehensive Tresury
Income Stock Total
______ _______ ________
BALANCE, December 31, 2001..............$ 434 $(3,167)$ 25,545
Comprehensive Income:
Net Income............................. 3,160
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During the
Year, Net of Tax of $478.............. 929 929
Unrealized Holding Losses on Investment
Securities Transferred to
Available-for-Sale During the Year,
Net of Tax of $14..................... (27) (27)
Reclassification Adjustment for
(Gains)/Losses Included in Net Income,
Net of Tax of $111................... (216) (216)
________
Total Comprehensive Income.......... 3,846
________
Acquisition of Treasury Stock........... (1,536) (1,536)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 278
Issuance of Common Stock under Employee
and Director Plans.................... 74
Retirement of Treasury Stock
(20,000 shares)...................... 372 -
Cash Dividends ($.575 per share)........ (1,472)
______ _______ ________
BALANCE, December 31, 2002.............. 1,120 (4,331) 26,735
Comprehensive Income:
Net Income............................ 3,216
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax of $108........ 209 209
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $152...... (294) (294)
________
Total Comprehensive Income........ 3,131
________
Acquisition of Treasury Stock........... (1,621) (1,621)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 310
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $12........................ 141
Retirement of Treasury Stock
(16,000 shares)..................... 298 -
Cash Dividends ($.63 per share)......... (1,572)
______ _______ ________
BALANCE, December 31, 2003.............. 1,035 (5,654) 27,124
Comprehensive Income:
Net Income............................ 3,223
Unrealized Holding Gains/(Losses) on
Investment Securities
Available-for-Sale Arising During
the Year, Net of Tax Benefit of $169 (326) (326)
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $66....... (128) (128)
________
Total Comprehensive Income........ 2,769
________
Acquisition of Treasury Stock........... (2,260) (2,260)
Issuance of Common Stock under Dividend
Reinvestment and Stock Purchase Plan.. 332
Issuance of Common Stock under Employee
& Director Plans, Including Tax
Benefit of $13........................ 430
Retirement of Treasury Stock
(14,000 shares)..................... 274 -
Cash Dividends ($.64 per share)......... (1,542)
______ _______ ________
BALANCE, December 31, 2004..............$ 581 $(7,640)$ 26,853
====== ======= ========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
______________________________
2004 2003
______________ ___________
CASH FLOWS from OPERATING ACTIVITIES
Net Income............................$ 3,223 $ 3,216
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization......... 931 831
Provision for Loan Losses............. 404 274
Net Amortization of Investment
Securities' Premiums................ 1,160 1,609
Investment Securities Gains........... (194) (446)
Provision for Deferred Income Taxes... (92) 100
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance........... (382) (282)
Gains on Loans Sold................... (130) (647)
Proceeds from Sales of Loans.......... 5,265 26,300
Loans Originated for Sale............. (5,170) (24,958)
(Increase)/Decrease in Accrued
Interest Receivable................. (27) (46)
(Increase)/Decrease in Other Assets... 186 (592)
Increase/(Decrease) in Other
Liabilities......................... 381 (135)
____________ ___________
Net Cash Provided by
Operating Activities............ 5,555 5,224
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities....... 20,862 29,234
Proceeds from Maturities of
Available-for-Sale Securities....... 18,777 35,441
Proceeds from Maturities of
Held-to-Maturity Securities......... - -
Purchases of Available-for-Sale
Securities.......................... (47,717) (72,354)
Net Purchases of Restricted
Investments in Bank Stocks.......... (869) (320)
(Net Loans Made to Customers)/Net
Principal Collected on Loans........ (37,721) (14,219)
Purchase of Consumer and Residential
Mortgage Loans...................... - (12,198)
Purchases of Premises and Equipment... (598) (901)
Purchase of Bank-Owned Life Insurance. (1,300) (4,000)
____________ ____________
Net Cash Used in Investing
Activities..................... (48,566) (39,317)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase in Demand Deposits and
Savings Accounts.................... 21,483 13,060
Increase/(Decrease) in Time Deposits.. 13,413 (5,336)
Net Increase/(Decrease) in Short-Term
Borrowings.......................... (5,457) 6,594
Proceeds from Issuance of Long-Term
Debt................................ 26,593 19,183
Payment on Long-Term Debt............. (11,837) (10,608)
Proceeds from Issuance of Junior
Subordinated Debentures............. 3,093 8,248
Issuance Costs of Junior
Subordinated Debentures............. (60) (160)
Acquisition of Treasury Stock......... (2,260) (1,621)
Issuance of Common Stock.............. 749 439
Cash Dividends Paid................... (1,542) (1,572)
____________ ___________
Net Cash Provided by
Financing Activities........... 44,175 28,227
____________ ___________
Net Increase/(Decrease) in Cash
and Cash Equivalents................ 1,164 (5,866)
CASH and CASH EQUIVALENTS-
Beginning of Year................... 8,679 14,545
____________ ____________
CASH and CASH EQUIVALENTS-
End of Year.........................$ 9,843 $ 8,679
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest............................$ 6,506 $ 6,862
Income Taxes........................ 570 752
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Reclassification of Held-to-
Maturity Investment Securities
to Available-for-Sale...............$ - $ -
See notes to consolidated financial statements.
(In thousands)
Years Ended December 31,
______________________________
2002
______________
CASH FLOWS from OPERATING ACTIVITIES
Net Income............................$ 3,160
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization......... 776
Provision for Loan Losses............. 184
Net Amortization of Investment
Securities' Premiums................ 829
Investment Securities Gains........... (327)
Provision for Deferred Income Taxes... 70
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance........... (211)
Gains on Loans Sold................... (372)
Proceeds from Sales of Loans.......... 13,159
Loans Originated for Sale............. (13,105)
(Increase)/Decrease in Accrued
Interest Receivable................. 13
(Increase)/Decrease in Other Assets... (441)
Increase/(Decrease) in Other
Liabilities......................... (194)
____________
Net Cash Provided by
Operating Activities............ 3,541
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities....... 28,621
Proceeds from Maturities of
Available-for-Sale Securities....... 22,310
Proceeds from Maturities of
Held-to-Maturity Securities......... 495
Purchases of Available-for-Sale
Securities.......................... (66,353)
Net Purchases of Restricted
Investments in Bank Stocks.......... (619)
(Net Loans Made to Customers)/Net
Principal Collected on Loans........ 4,251
Purchase of Consumer and Residential
Mortgage Loans...................... -
Purchases of Premises and Equipment... (174)
Purchase of Bank-Owned Life Insurance. -
____________
Net Cash Used in Investing
Activities..................... (11,469)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase in Demand Deposits and
Savings Accounts.................... 11,017
Increase/(Decrease) in Time Deposits.. (3,211)
Net Increase/(Decrease) in Short-Term
Borrowings.......................... (13)
Proceeds from Issuance of Long-Term
Debt................................ 19,580
Payment on Long-Term Debt............. (15,533)
Proceeds from Issuance of Junior
Subordinated Debentures............. -
Issuance Costs of Junior
Subordinated Debentures............. -
Acquisition of Treasury Stock......... (1,536)
Issuance of Common Stock.............. 352
Cash Dividends Paid................... (1,472)
____________
Net Cash Provided by
Financing Activities........... 9,184
____________
Net Increase/(Decrease) in Cash
and Cash Equivalents................ 1,256
CASH and CASH EQUIVALENTS-
Beginning of Year................... 13,289
____________
CASH and CASH EQUIVALENTS-
End of Year.........................$ 14,545
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest............................$ 8,362
Income Taxes........................ 495
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Reclassification of Held-to-
Maturity Investment Securities
to Available-for-Sale...............$ 10,358
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 ("Union National") and its subsidiary, Union National
Community Bank, conform with generally accepted accounting
principles and prevailing practices within the banking industry.
Union National's trust subsidiaries, Union National Capital Trust
I and Union National Capital Trust II, were established for the
purpose of issuing $11,000,000 of trust capital securities during
2003 and 2004 (for additional information, see Note 9).
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.
Union National Insurance Agency, which operates as a wholly-owned
subsidiary of the bank, offers various insurance products at the
bank's retail offices through an agreement with a local insurance
agency. During 2003, Union National formed StoneBridge
Settlement Services, LLC along with Title Strategies, LLC of
North Huntingdon, PA. StoneBridge is 70% owned by Union National
Community Bank. StoneBridge offers settlement services and title
insurance for residential and commercial mortgage transactions
through relationships with local attorneys. The operating
results of StoneBridge and the insurance agency are not
significant to the consolidated financial statements.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of
Union National, the bank, the insurance agency and StoneBridge.
All material intercompany accounts and transactions have been
eliminated in the consolidation.
USE OF ESTIMATES
The process of preparing consolidated financial statements in
conformity with generally accepted accounting principles requires
the use of estimates and assumptions that affect the reported
amounts of certain types of assets, liabilities, revenues and
expenses. Accordingly, actual results may differ from estimated
amounts. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination
of the allowance for loans losses and the valuation of investment
securities and deferred tax assets.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of Union National's activities are with customers primarily
located in Lancaster County, PA. Note 2 discusses the types of
securities that Union National invests in. Note 3 discusses the
types of lending that Union National engages in. Union National
does not have any significant concentrations to any one industry
or customer.
INTEREST-BEARING DEPOSITS IN BANKS
Interest-bearing deposits in banks consist of demand deposits and
are carried at cost.
INVESTMENT SECURITIES
Investment securities include both debt securities and equity
securities. As of December 31, 2004 and 2003, all of Union
National's investment securities have been classified as
"available-for-sale."
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 marketable
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.
During the second quarter of 2002, Union National reclassified
all of its held-to-maturity investment securities to available-
for-sale. The transfer of these securities to available-for-sale
allows Union National greater flexibility in managing its
investment securities portfolio and overall interest rate risk.
After a thorough evaluation of these held-to-maturity investment
securities, Union National identified several securities to be
sold. Under the Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 115, the
sale of these securities required that all of Union National's
investment securities be classified as available-for-sale.
Investment securities with a total cost of $10,399,000 and a fair
value of $10,358,000 were transferred to available-for-sale
during the second quarter. The unrealized losses on these
investment securities were recorded net of tax as accumulated
other comprehensive income, an adjustment to stockholders'
equity.
When a determination is made that a fair 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
fair value and the impact is reflected in earnings as realized
losses. In estimating other-than-temporary impairment losses,
management considers (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the
intent and the ability of Union National to retain its investment
in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Realized gains and losses,
determined on the basis of the cost of specific securities sold,
are included in earnings.
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
(FHLB). 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 agreement with the FHLB includes a maximum credit enhancement
liability of $929,000, which Union National may be required to
pay if realized losses on any of the sold mortgages exceed the
amount held in the FHLB's spread account. The FHLB is funding
the spread account annually at 0.04% of the outstanding balance
of loans sold. Union National's historical losses on residential
mortgages have been lower than the amount being funded to the
spread account. As such, Union National does not anticipate
recognizing any losses and accordingly, has not recorded a
liability for the credit enhancement. As compensation for the
credit enhancement, the FHLB is paying Union National 0.10% of
the outstanding loan balance in the portfolio on a monthly basis.
Union National records credit enhancement fees receivable based
upon the present value of estimated future cash flows as loans
are sold. The credit enhancement fees receivable amounted to
$91,000 at December 31, 2004, and $98,000 at December 31, 2003,
and are amortized as principal is received on loans sold.
Union National retains the servicing on the loans sold to the
FHLB and receives a fee based upon the principal balance
outstanding. Following is a summary of information related to
servicing assets:
Servicing Assets Amortization
(In thousands) Capitalized Expense
________________ _______________
Years Ended:
December 31, 2004........$ 35 $ 53
December 31, 2003........ 193 39
December 31, 2002........ 78 10
Book Value Fair Value
________________ _____________
Servicing Assets as of:
December 31, 2004........$ 212 $ 327
December 31, 2003........ 230 345
The fair value of servicing assets is based on the present value
of estimated future cash flows for pools of mortgages stratified
by rate and maturity date. Assumptions that are incorporated in
the valuation of servicing assets include assumptions about
prepayment speeds on mortgages and the cost to service loans.
Servicing assets are reported in other assets and are amortized
over the estimated period of future servicing income to be
received on the underlying mortgage loans. Amortization expense
is netted against loan servicing fee income and is reflected on
the consolidated statements of income with income from mortgage
banking activities. Servicing assets are evaluated for
impairment based on the estimated fair value as compared to the
unamortized book value. Total loans serviced for others amounted
to $37,034,000 at December 31, 2004, and $36,003,000 at December
31, 2003.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
LOANS
Loans generally are stated at their outstanding unpaid principal
balances adjusted for charge-offs, 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.
Accordingly, Union National does not separately identify
individual consumer and residential loans for impairment
disclosures unless such loans are the subject of a restructuring
agreement. 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.
The allowance consists of specific, general and unallocated
components. The specific component relates to loans that are
classified as impaired. For such loans, an allowance is
established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
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.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when
control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the
assets have been isolated from Union National, (2) the transferee
obtains the right (free of conditions that constrain it from
taking advantage of that right) to pledge or exchange the
transferred assets and (3) Union National does not maintain
effective control over the transferred assets through an
agreement to repurchase them before their maturity.
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. Union National had no foreclosed
real estate at December 31, 2004, and foreclosed real estate
amounted to $104,000 at December 31, 2003.
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.
RESTRICTED INVESTMENT IN BANK STOCKS
Union National owns several restricted investments in bank stocks
including stock in the FHLB, the Federal Reserve Bank of
Philadelphia and the Atlantic Central Bankers Bank. These stocks
are reflected on the balance sheet at historical cost. Under the
bank's membership agreement with the FHLB, required stock
purchases are based on a percentage of outstanding borrowings, a
percentage of unused borrowing capacity and may also include a
percentage of assets sold to the FHLB.
BANK-OWNED LIFE INSURANCE
Union National invests in bank-owned life insurance (BOLI) as a
source of funding for employee benefit expenses. BOLI involves
the purchasing of life insurance by the bank on a chosen group of
employees. The bank is the owner and is a joint or sole
beneficiary of the policies. This life insurance investment is
carried at the cash surrender value of the underlying policies.
Income from the increase in cash surrender value of the policies
is included in other income on the income statement.
TRUST ASSETS
Assets held in a fiduciary capacity are not assets of Union
National and are therefore not included in the consolidated
financial statements. The market value of trust assets amounted
to $79,723,000 at December 31, 2004, and $60,793,000 at December
31, 2003.
ADVERTISING COSTS
Advertising costs are charged to expense when incurred.
STOCK-BASED COMPENSATION
Stock options and shares issued under Union National's Employee
Stock Purchase Plan, Stock Incentive Plan and the Independent
Directors' Stock Option Plan are accounted for under SFAS No.
123. As permitted by this statement, Union National has chosen
to apply Accounting Principles Board Opinion (APB) No. 25. Under
APB No. 25, no compensation expense is recognized related to
these plans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Had Union National determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123,
Union National's net income and earnings per share would have
been reduced to the pro forma amounts as follows:
(In thousands, except per share data)
Years Ended December 31,
________________________________
2004 2003 2002
__________ __________ __________
Net Income - As Reported.....$ 3,223 $ 3,216 $ 3,160
Less: Stock-Based
Compensation Cost........ (213) (80) (138)
__________ __________ __________
Net Income - Pro Forma.....$ 3,010 $ 3,136 $ 3,022
========== ========== ==========
Net Income per Share
As Reported (Basic)........$ 1.34 $ 1.29 $ 1.24
As Reported (Assuming
Dilution)................ 1.31 1.27 1.23
Pro Forma (Basic).......... 1.25 1.26 1.18
Pro Forma (Assuming
Dilution)................ 1.23 1.24 1.17
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,
________________________________
2004 2003 2002
__________ __________ __________
Weighted-Average Fair Value
of Options Granted:
Employee Stock Purchase Plan
(granted at 85% of fair
value on the date of grant):.$ - $ 2.76 $ -
Stock Incentive Plan and
Independent Directors' Stock
Option Plan (granted at fair
value on the date of grant):.$ 4.06 $ 3.15 $ 2.41
Weighted-Average Assumptions:
Expected Dividend Yield...... 2.85% 3.24% 3.81%
Risk-Free Interest Rate...... 4.26% 3.29% 4.26%
Expected Life (Years)........ 8.0 6.6 8.0
Expected Volatility Over the
Expected Life............... 44.8% 40.9% 47.5%
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 net income 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. Potential common
shares that may be issued relate solely to outstanding stock
options and are determined using the treasury stock method.
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 Union
National Insurance Agency and StoneBridge Settlement Services are
not material to the consolidated financial statements.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated 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 December 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 123 (revised 2004), "Share-Based Payment."
Statement No. 123(R) addresses the accounting for share-based
payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise
or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. Statement No. 123(R)
requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to
employees in the income statement. The revised statement
generally requires that an entity account for those transactions
using the fair-value-based method, and eliminates the intrinsic
value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees," which was permitted under Statement
No. 123, as originally issued. The revised statement also
requires entities to disclose information about the nature of the
share-based payment transactions and the effects of those
transactions on the financial statements.
Statement No. 123(R) is effective as of the beginning of the
first interim or annual reporting period that begins after June
15, 2005 (i.e., third quarter 2005 for Union National). Union
National is currently evaluating the impact of the adoption of
this pronouncement in light of its current stock-based
compensation programs and anticipated future plans. All of Union
National's stock options outstanding at December 31, 2004, are
fully vested and will not impact Union National as a result of
this pronouncement.
In March 2004, the SEC released Staff Accounting Bulletin (SAB)
No. 105, "Application of Accounting Principles to Loan
Commitments." SAB 105 provides guidance about the measurements
of loan commitments recognized at fair value under FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SAB 105 also requires companies to disclose their
accounting policy for those loan commitments including methods
and assumptions used to estimate fair value and associated
hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into
after March 31, 2004. The adoption of SAB 105 did not have a
material effect on Union National's consolidated financial
statements.
In March 2004, the FASB's Emerging Issues Task Force (EITF)
reached a consensus on EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments" (EITF 03-1). EITF 03-1 provides guidance regarding
the meaning of other-than-temporary impairment and its
application to investments classified as either available-for-
sale or held-to-maturity under FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," and to equity securities accounted for under the
cost method. Included in EITF 03-1 is guidance on how to account
for impairments that are solely due to interest rate
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
changes, including changes resulting from increases in sector
credit spreads. This guidance was to become effective for
reporting periods beginning after June 15, 2004. However, on
September 30, 2004, the FASB issued a Staff Position that delays
the effective date for the recognition and measurement guidance
of EITF 03-1 until additional clarifying guidance is issued.
Union National is unable to assess the impact of the adoption of
EITF 03-1 until final guidance is issued.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform
with the 2004 presentation. Such reclassifications did not
impact net income.
NOTE 2 - INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost and fair value of investment securities are
as follows:
AT DECEMBER 31, 2004
________________________________
GROSS
AMORTIZED UNREALIZED
COST GAINS
(In thousands) _______________ ______________
Obligations of State and
Political Subdivisions......... $ 27,343 $ 839
Obligations of U.S. Government
Agencies....................... 5,265 2
Mortgage-Backed Securities...... 51,880 330
Asset-Backed Securities......... 1,643 16
Corporate Securities............ 16,110 305
Equity Securities............... 370 216
_______________ ______________
Total......................... $ 102,611 $ 1,708
=============== ==============
(In thousands)
At DECEMBER 31, 2004
________________________________
GROSS
UNREALIZED FAIR
LOSSES VALUE
_______________ ______________
Obligations of State and
Political Subdivisions......... $ (133) $ 28,049
Obligations of U.S. Government
Agencies....................... (14) 5,253
Mortgage-Backed Securities...... (513) 51,697
Asset-Backed Securities......... - 1,659
Corporate Securities............ (162) 16,253
Equity Securities............... (7) 579
_______________ ______________
Total......................... $ (829) $ 103,490
=============== ==============
(In thousands) At December 31, 2003
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
Obligations of State and
Political Subdivisions........ $ 25,849 $ 900
Mortgage-Backed Securities...... 47,012 447
Asset-Backed Securities......... 2,177 51
Corporate Securities............ 20,277 482
Equity Securities............... 183 215
______________ ______________
Total.......................... $ 95,498 $ 2,095
============== ==============
(In thousands) At December 31, 2003
________________________________
Gross
Unrealized Fair
Losses Value
_______________ ______________
Obligations of State and
Political Subdivisions........ $ (128) $ 26,621
Mortgage-Backed Securities...... (239) 47,220
Asset-Backed Securities......... - 2,228
Corporate Securities............ (156) 20,603
Equity Securities............... (4) 394
______________ ______________
Total.......................... $ (527) $ 97,066
============== ==============
The following table shows Union National's investments' gross
unrealized losses and fair value, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31, 2004:
(In thousands) LESS THAN 12 MONTHS
________________________________
FAIR UNREALIZED
VALUE LOSSES
______________ ______________
Obligations of State and
Political Subdivisions........ $ 2,749 $ (70)
Obligations of U.S. Government
Agencies...................... 2,400 (14)
Mortgage-Backed Securities...... 21,893 (308)
Corporate Securities............ 4,799 (89)
Equity Securities............... 60 (2)
______________ ______________
Total Temporarily Impaired
Securities................... $ 31,901 $ (483)
============== ==============
(In thousands) 12 MONTHS OR MORE
________________________________
FAIR UNREALIZED
VALUE LOSSES
______________ ______________
Obligations of State and
Political Subdivisions........ $ 2,477 $ (63)
Obligations of U.S. Government
Agencies...................... - -
Mortgage-Backed Securities...... 9,438 (205)
Corporate Securities............ 2,697 (73)
Equity Securities............... 20 (5)
______________ ______________
Total Temporarily Impaired
Securities................... $ 14,632 $ (346)
============== ==============
(In thousands) TOTAL
________________________________
FAIR UNREALIZED
VALUE LOSSES
______________ ______________
Obligations of State and
Political Subdivisions........ $ 5,226 $ (133)
Obligations of U.S. Government
Agencies...................... 2,400 (14)
Mortgage-Backed Securities...... 31,331 (513)
Corporate Securities............ 7,496 (162)
Equity Securities............... 80 (7)
______________ ______________
Total Temporarily Impaired
Securities................... $ 46,533 $ (829)
============== ==============
At December 31, 2004, there were a total of 53 debt securities
that had unrealized losses that amounted to 1.7% of the cost
basis of these securities. In management's opinion, the
unrealized losses primarily reflect changes in interest rates
subsequent to the acquisition of specific securities. Management
believes that the unrealized losses represent temporary
impairment of the securities. In addition, management has the
ability to hold these debt securities for the foreseeable future.
Investment securities carried at $43,391,000 at December 31,
2004, and $39,290,000 at December 31, 2003, were pledged to
secure public, trust and government deposits and for other
purposes. In addition, securities carried at $2,732,000 at
December 31, 2004, and $2,995,000 at December 31, 2003, were
pledged for repurchase agreements.
The amortized cost and fair value of debt securities at December
31, 2004, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
(In thousands)
Amortized Fair
Cost Value
_____________ ________________
Due in One Year or Less......$ - $ -
Due After One Year Through
Five Years.................. 11,739 11,673
Due After Five Years Through
Ten Years................... 7,344 7,490
Due After Ten Years.......... 31,278 32,051
_____________ ________________
50,361 51,214
Mortgage-Backed Securities... 51,880 51,697
_____________ ________________
$ 102,241 $ 102,911
============= ================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
Following is information related to the sales of available-for-
sale securities:
(In thousands)
Realized Realized Income Tax
Gains Losses Expense
________ ____________ _________________
The year ended
December 31, 2004...$ 235 $ (41) $ 66
The year ended
December 31, 2003... 783 (337) 152
The year ended
December 31, 2002... 386 (59) 111
NOTE 3 - LOANS
Loans, net of unamortized loan origination fees of $765,000 at
December 31, 2004 and $743,000 at December 31, 2003, are
summarized as follows:
(In thousands)
December 31,
___________________________
2004 2003
____________ ____________
Real Estate Mortgages:
First and Second Residential.....$ 121,799 $ 116,173
Commercial and Industrial........ 79,711 64,589
Construction and Land Development 9,396 5,337
Agricultural..................... 17,423 8,400
Commercial and Industrial.......... 12,674 10,075
Consumer........................... 9,759 11,089
Agricultural....................... 4,614 478
Political Subdivisions............. 6,166 7,786
Other.............................. 1,349 1,143
____________ ____________
TOTAL LOANS..................... 262,891 225,070
Add: Unamortized Premium on
Purchased Loans.............. 191 371
Less: Unearned Income.............. (81) (60)
____________ ____________
LOANS (NET OF UNEARNED INCOME)..$ 263,001 $ 225,381
============ ============
Union National grants commercial, residential and consumer loans
to customers primarily located in Lancaster County, Pennsylvania.
Although Union National has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the
region's economy.
Union National's nonperforming loans consisted of the following:
(In thousands) December 31,
_______________________________
2004 2003
_____________ _______________
Nonaccruing Loans.................$ 1,192 $ 1,334
Accruing Loans - 90 Days or
More Past Due................... 761 8
_____________ _______________
Total Nonperforming Loans.........$ 1,953 $ 1,342
===============================
Following is a summary of information related to impaired loans:
(In thousands)
December 31,
_________________________________
2004 2003 2002
__________ __________ __________
Impaired Loans with a Related
Allowance for Loan Losses.....$ 2,446 $ 2,192 $ 1,128
Impaired Loans without a Related
Allowance for Loan Losses..... 1,668 226 -
__________ __________ __________
Total Outstanding Balance at
Year End..................... $ 4,114 $ 2,418 $ 1,128
========== ========== ==========
Related Allowance for Loan
Losses........................$ 442 $ 373 $ 194
Average Outstanding Balance for
the Year...................... 2,939 2,022 1,242
Recognized Interest Income...... 134 107 47
Cash Basis Interest Income...... 122 90 47
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
$4,521,000 at December 31, 2004. Such loans were made in the
ordinary course of business at Union National's normal credit
terms, including interest rates and security, and do not
represent more than a normal risk of collection. Transactions on
these loans for the year ended December 31, 2004 are as follows
(in thousands):
Balance, Beginning of Year...........................$ 5,308
Additions............................................ 989
Deductions........................................... (1,776)
____________
Balance, End of Year.................................$ 4,521
============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
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)
2004 2003 2002
__________ __________ __________
Balance, Beginning of Year...$ 1,985 $ 1,812 $ 1,893
Provision Charged to
Operating Expense......... 404 274 184
Recoveries of Charged-Off Loans 60 21 110
Charged-Off Loans............ (161) (122) (375)
__________ __________ __________
Balance, End of Year.........$ 2,288 $ 1,985 $ 1,812
========== ========== ==========
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
(In thousands)
Estimated December 31, December 31,
Useful Lives 2004 2003
____________ ____________ ____________
Construction & Development $ 55 $ 9
Land................... 644 644
Land Improvements...... 20 years 1,055 1,055
Buildings and
Improvements.........15-50 years 5,689 5,675
Leasehold Improvements. 20 years 639 660
Furniture, Fixtures and
Equipment........... 5-20 years 6,036 5,505
____________ ____________
Subtotal.......... 14,118 13,548
Less: Accumulated Depreciation (7,601) (6,923)
____________ ____________
Premises and Equipment - Net $ 6,517 $ 6,625
============ ============
Depreciation expense amounted to $706,000 in 2004 , $596,000 in
2003 and $588,000 in 2002.
Total rental expense amounted to $172,000 in 2004, $119,000 in
2003 and $169,000 in 2002.
At December 31, 2004, Union National was obligated under
noncancelable operating leases for real estate with future
minimum payments as follows (in thousands):
2005....................................... $ 135
2006....................................... 105
2007....................................... 92
2008....................................... 94
2009....................................... 95
Thereafter................................. 210
_________
$ 731
=========
NOTE 6 - TIME DEPOSITS
At December 31, 2004, the scheduled maturities of certificates of
deposit are as follows (in thousands):
2005........................................$ 62,043
2006........................................ 18,655
2007........................................ 10,886
2008........................................ 6,107
2009........................................ 3,304
2010........................................ 13
_________
$101,008
=========
Certificates of deposit in denominations of $100,000 or more
amounted to $27,510,000 at December 31, 2004, and $26,150,000 at
December 31, 2003. The maturities of these certificates of
deposit of $100,000 or more at December 31, 2004, is as follows
(in thousands):
Three months or less........................$ 5,577
Over three months through six months........ 4,144
Over six months through twelve months....... 4,808
Over twelve months.......................... 12,981
_________
Total.....................................$ 27,510
=========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted-average interest rates at
December 31 are as follows:
(Dollars in thousands)
2004 2003
___________________ _________________
Amount Rate Amount Rate
__________ _____ __________ ______
Treasury Tax and Loan Notes.$ 713 2.03% $ 379 0.73%
Federal Funds Purchased..... 300 2.78 6,155 1.13
Securities Sold Under
Repurchase Agreements...... 2,011 1.63 2,447 0.58
FHLB Short-Term Advances.... 1,500 2.33 1,000 1.05
__________ _____ __________ ______
Total.......................$ 4,524 2.00% $ 9,981 0.97%
========== ===== ========== ======
Short-term borrowings had an average outstanding balance of
$7,602,000 during 2004 at a weighted-average interest rate of
1.42%. The highest balance outstanding at a month-end during
2004 was $11,921,000. During 2003, short-term borrowings had an
average outstanding balance of $3,415,000 at a weighted-average
interest rate of 0.82%. The highest balance outstanding at a
month-end during 2003 was $9,981,000. During 2002, short-term
borrowings had an average outstanding balance of $3,501,000 at a
weighted-average interest rate of 1.43%. The highest balance at
a month-end during 2002 was $5,812,000.
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, 2004. 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 with a carrying amount of
$4,661,000 at December 31, 2004, and $4,002,000 at December 31,
2003. In addition, Union National has lines of credit that total
$13,000,000 with correspondent banks for overnight fed funds
borrowings.
Union National offers a short-term investment program for
corporate customers for secured investing. This program consists
of overnight and short-term repurchase agreements that are
secured by designated investment securities of the bank.
NOTE 8 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
(Dollars in thousands)
2004 2003
____________________ ___________________
Amount Rate Amount Rate
__________ _______ __________ ______
FHLB fixed-rate advances maturing:
2004................$ - -% $ 7,250 3.98%
2005................ 17,450 2.00 20,450 2.59
2006................ 17,587 2.81 12,587 2.60
2008................ 1,550 3.36 - -
2009................ 1,550 3.60 - -
2012................ 1,640 4.19 - -
2013................ 1,000 4.39 2,000 4.39
FHLB floating-rate advance maturing:
2004................ - - 1,587 1.11
2005................ 456 2.30 - -
2006................ 15,143 2.28 - -
2007................ 2,254 2.29 - -
FHLB convertible fixed-rate advances maturing:
2010................ 20,000 5.70 20,000 5.70
2011................ 10,000 5.23 10,000 5.23
__________ _____ ___________ ______
Total...............$ 88,630 3.54% $ 73,874 3.90%
========== ===== =========== ======
The FHLB advances are collateralized by the security agreement
and FHLB capital stock described in Note 7. Union National can
borrow a maximum of $129,706,000 from the FHLB, of which
$38,776,000 was available at December 31, 2004. 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%. The FHLB currently has the
option to convert $25,000,000 of the outstanding convertible
advances on a quarterly basis. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 9 - JUNIOR SUBORDINATED DEBENTURES
On December 19, 2003, Union National issued $8,248,000 in junior
subordinated debentures due January 23, 2034, to Union National
Capital Trust I. Union National owns all of the $248,000 in
common equity of the trust and the debentures are the sole asset
of the trust. The trust issued $8,000,000 of floating-rate trust
capital securities in a non-public offering in reliance on
Section 4(2) of the Securities Act of 1933. The floating-rate
capital securities provide for quarterly distributions at a
variable annual coupon rate, reset quarterly, based on three-
month LIBOR plus 2.85%. The coupon rate was 5.01% at December
31, 2004, and 4.02% at December 31, 2003. The securities are
callable by Union National, subject to any required regulatory
approval, at par, after 5 years. Union National unconditionally
guarantees the trust capital securities. The terms of the junior
subordinated debentures and the common equity of the trust mirror
the terms of the trust capital securities issued by the trust.
In December 2003, Union National used the net proceeds from this
offering to fund an additional $4,000,000 capital investment in
Union National Community Bank to fund its operations and future
growth. Union National plans to use the balance of the funding
for the repurchase of common stock and general corporate
purposes. During 2004, Union National repurchased 100,489 shares
of common stock at a cost of $2,260,000.
On October 14, 2004, Union National issued $3,093,000 in junior
subordinated debentures due November 23, 2034, to Union National
Capital Trust II. Union National owns all of the $93,000 in
common equity of the trust and the debentures are the sole asset
of the trust. The trust issued $3,000,000 of floating-rate trust
capital securities in a non-public offering in reliance on
Section 4(2) of the Securities Act of 1933. The floating-rate
capital securities provide for quarterly distributions at a fixed
annual coupon rate of 5.28% until November 2007, and then at an
annual coupon rate, reset quarterly, based on three-month LIBOR
plus 2.00%. The securities are callable by Union National,
subject to any required regulatory approval, at par, after 5
years. Union National unconditionally guarantees the trust
capital securities. The terms of the junior subordinated
debentures and the common equity of the trust mirror the terms of
the trust capital securities issued by the trust. In October
2004, Union National used the net proceeds from this offering to
fund an additional $3,000,000 capital investment in Union
National Community Bank to fund its operations and future growth.
In accordance with FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities," the accounts of Union National
Capital Trust I and Union National Capital Trust II are not
included in the consolidated financial statements of Union
National. However, for regulatory purposes, the trust capital
securities qualify as Tier I capital of Union National subject to
a 25% of capital limitation under risk-based capital guidelines
developed by the Federal Reserve. The portion that exceeds the
25% of capital limitation qualifies as Tier II capital. At
December 31, 2004, $8,757,000 of Union National's $11,000,0000 in
trust capital securities qualified as Tier I capital.
NOTE 10 - EMPLOYEE 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 2004, the bank elected to make a
discretionary contribution of 5.00% 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 plan amounted
to $344,000 for the year ended December 31, 2004, $289,000 for
2003 and $293,000 for 2002.
Union National entered into a salary continuation agreement with
its President/CEO on December 31, 2003. This is an unfunded plan
that provides for target retirement benefits beginning at age 62.
The agreement also provides for benefits in the event of the
disability or death of the participant, the termination of
employment of the participant or a change in control of Union
National. At December 31, 2004, Union National's liability under
this agreement was $49,000. Total expenses related to this
liability and related insurance costs as provided for in the
agreement amounted to $49,000 for the year ended December 31,
2004.
Union National entered into executive incentive retirement
agreements with two senior executive officers during 2004. These
are unfunded arrangements with incentives that are declared based
on Union National meeting certain earnings and profitability
goals established by the Board of Directors on an annual basis.
The rate of return credited to participants' accounts each year,
the vesting provisions and other provisions are set forth in the
agreements. There was no expense relative to these agreements
for the year ended December 31, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 11 - INCOME TAXES
The net deferred tax asset consists of the following components
as of December 31:
(In thousands)
2004 2003
_________ _________
Deferred Tax Assets:
Allowance for Loan Losses.............$ 671 $ 568
Recoverable Alternative Minimum Taxes. 360 336
Income Tax Credit Carryforward........ 277 298
Other................................. 59 39
_________ _________
Total Deferred Tax Assets................. 1,367 1,241
Deferred Tax Liabilities:
Unrealized Gains on Investment
Securities Available-for-Sale....... (299) (533)
Deferred Net Loan Fees................ (62) (61)
Depreciation.......................... (374) (306)
Prepaid Expenses...................... (81) (75)
Mortgage Servicing Assets and Credit
Enhancement Fees Receivable......... (103) (111)
Other................................. (45) (78)
_________ _________
Total Deferred Tax Liabilities............ (964) (1,164)
_________ _________
Net Deferred Tax Asset.................... $ 403 $ 77
========= =========
An analysis of the income tax expense included in the
consolidated statements of income for the years ended December 31
is as follows:
(In thousands)
2004 2003 2002
________ ________ ________
Taxes Currently Payable.........$ 768 $ 581 $ 666
Deferred Income Taxes/(Benefit). (92) 100 70
________ ________ ________
Provision for Income
Taxes.........................$ 676 $ 681 $ 736
======== ======== ========
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)
2004 2003 2002
______________ ______________ ______________
Amount % Amount % Amount %
________ _____ ________ _____ ________ _____
Tax at Statutory
Federal Income
Tax Rate.......$ 1,326 34.0% $ 1,325 34.0% $ 1,325 34.0%
Tax-Exempt Income,
Net of Disallowed
Interest
Expense...... (461)(11.8) (489)(12.5) (427)(11.0)
Earning from Bank-
Owned Life
Insurance...... (130) (3.3) (96) (2.5) (72) (1.8)
Income Tax Credits. (72) (1.9) (72) (1.8) (85) (2.2)
Other.............. 13 .3 13 .3 (5) (.1)
________ _____ ________ _____ ________ _____
Provision for
Income Taxes.....$ 676 17.3% $ 681 17.5% $ 736 18.9%
======== ===== ======== ===== ======== =====
Income tax credit carryforwards begin to expire in 2020. Income
tax credits are recognized as earned. Credits earned were
$72,000 in 2004, $72,000 in 2003 and $85,000 in 2002. Projected
tax credits are $72,000 for 2005 to 2006 and $38,000 for 2007.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES
The bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit
risk and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract amounts of these
instruments reflect the exposure to credit loss in the event of
nonperformance by the other party to the financial instrument.
(In thousands)
December 31, December 31,
2004 2003
____________ ____________
Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit........$ 26,041 $ 27,930
Unused Portion of Home Equity,
Personal and Overdraft Lines....... 31,839 29,613
Other Unused Commitments,
Principally Commercial
Lines of Credit.................... 25,047 18,495
Standby Letters of Credit........... 4,503 3,133
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. Collateral held varies
but may include residential or commercial real estate, equipment,
inventory and accounts receivable.
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. The Bank requires collateral supporting
these letters of credit as deemed necessary. Based on the
creditworthiness of the borrowers, Union National had unsecured
letters of credit outstanding that totaled $441,000 at December
31, 2004. Management believes that the proceeds obtained through
a liquidation of collateral on secured letters of credit would be
sufficient to cover the maximum potential amount of future
payments required under the corresponding guarantees. The amount
of the liability as of December 31, 2004 and 2003, for guarantees
under standby letters of credit issued is not material.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 13 - 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 2004
was approximately $4,027,000, and during 2003 it was
approximately $3,284,000.
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 2005 of approximately
$2,274,000 plus an amount equal to the net profits of the bank in
2005 up to the date of any such dividend declaration.
Union National and the bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet the minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a material
adverse effect on Union National's financial statements. Under
capital adequacy guidelines and the regulatory framework for
prompt corrective action, Union National and the bank must meet
specific capital guidelines that involve quantitative measures of
their assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Union National and the bank to maintain minimum
amounts and ratios (set forth below) of Tier I capital to average
assets and of Tier I and total capital (as defined in the
regulations) to risk-weighted assets. Management believes, as of
December 31, 2004, that Union National and the bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2004, the most recent notification from the
regulators categorized the bank as "well-capitalized" under the
regulatory framework for prompt corrective action. There are no
conditions or events since that notification that management
believes have changed the bank's category.
Union National and the bank maintained the following regulatory
capital levels and leverage and risk-based capital ratios:
(Dollars in thousands)
December 31, 2004 December 31, 2003
_________________ _________________
Amount % Amount %
___________ _____ ___________ _____
Union National Financial Corporation
____________________________________
Leverage Ratio:
Tier I Capital to
Average Total Assets..$ 34,999 8.96% $ 34,047 10.10%
Minimum Required for
Capital Adequacy
Purposes.............. 15,626 4.00 13,488 4.00
Risk-based Capital Ratios:
Tier I Capital Ratio
- Actual............. 34,999 10.67 34,047 12.39
Minimum Required for
Capital Adequacy
Purposes.............. 13,123 4.00 10,996 4.00
Total Capital Ratio
- Actual.............. 39,624 12.08 36,127 13.14
Minimum Required for
Capital Adequacy
Purposes............. 26,245 8.00 21,991 8.00
Union National Community Bank
_____________________________
Leverage Ratio:
Tier I Capital to
Average Total Assets..$ 33,878 8.70% $ 29,125 8.65%
Minimum Required for
Capital Adequacy
Purposes.............. 15,571 4.00 13,463 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions..... 19,463 5.00 16,829 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio
- Actual............. 33,878 10.36 29,125 10.63
Minimum Required for
Capital Adequacy
Purposes.............. 13,080 4.00 10,958 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions..... 19,621 6.00 16,437 6.00
Total Capital Ratio
- Actual.............. 36,166 11.06 31,110 11.36
Minimum Required for
Capital Adequacy
Purposes............. 26,161 8.00 21,917 8.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions..... 32,701 10.00 27,396 10.00
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 total
regulatory capital. At December 31, 2004, this limitation
amounted to approximately $3,617,000. These regulations also
require that any such investment, loan, extension of credit or
advance be secured by securities having a market value in excess
of the amount thereof.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 14 - STOCKHOLDERS' EQUITY
Union National maintains a Dividend Reinvestment and Stock
Purchase Plan. Stockholders may participate in the plan, which
provides that additional shares of common stock may be purchased
with reinvested dividends and optional cash payments within
specified limits at prevailing market prices. To the extent that
shares are not available for purchase by the plan in the open
market, Union National has reserved 173,644 shares of common
stock to be issued under the plan. At December 31, 2004, 130,400
shares have been issued under the plan. Open-market purchases
are usually made by an independent purchasing agent retained to
act as agent for plan participants, and the purchase price to
participants will be the actual price paid, excluding brokerage
commissions and other expenses that will be paid by Union
National.
Earnings per share, net income and weighted-average number of
shares outstanding for the years ended December 31, 2004, 2003
and 2002, as computed under the basic and diluted earnings per
share methods are as follows:
(In thousands, except per share data)
Net Income Shares Per Share
____________ __________ ___________
Year Ended December 31, 2004:
Basic Earnings per Share:
Net Income..................$ 3,223 2,406 $1.34
Effect of Dilutive Options... - 51 -
____________ ___________ __________
Diluted Earnings per Share...$ 3,223 2,457 $1.31
============ =========== ==========
Year Ended December 31, 2003:
Basic Earnings per Share:
Net Income..................$ 3,216 2,498 $1.29
Effect of Dilutive Options... - 37 -
____________ ___________ __________
Diluted Earnings per Share...$ 3,216 2,535 $1.27
=========== ============ ==========
Year Ended December 31, 2002:
Basic Earnings per Share:
Net Income..................$ 3,160 2,557 $1.24
Effect of Dilutive Options... - 21 -
___________ ____________ __________
Diluted Earnings per Share...$ 3,160 2,578 $1.23
=========== ============ ==========
The following options to purchase shares of common stock were
outstanding at year-end, but were not included in the computation
of diluted earnings per share for the year because the options'
exercise price was greater than the average market price of the
common shares:
Options Average
Outstanding Exercise Price
___________ _________________
December 31, 2004................. - $ -
December 31, 2003................. 10,728 21.51
December 31, 2002................. 60,690 18.91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 15 - 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 237,625 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.
Stock option transactions for the years ended December 31, 2004,
2003 and 2002, are summarized below:
Stock Weighted-Average
Options Exercise Price
________ _________________
Options Outstanding at
December 31, 2001 (Prices
range from $11.70 to $21.67)... 209,121 $ 14.36
Year Ended December 31, 2002:
Options Granted................... 23,918 16.30
Options Exercised................. (6,009) 12.26
Options Forfeited................. (11,035) 15.61
Options Expired................... (8,250) 13.18
_________ ________________
Options Outstanding at
December 31, 2002 (Prices
range from $12.10 to $21.67)... 207,745 15.31
Year Ended December 31, 2003:
Options Granted................... 30,986 18.98
Options Exercised................. (8,738) 14.70
Options Forfeited................. (2,776) 14.50
Options Expired................... (10,752) 18.25
_________ ________________
Options Outstanding at
December 31, 2003 (Prices
range from $12.10 to $21.67).... 216,465 16.92
Year Ended December 31, 2004:
Options Granted................... 39,418 23.13
Options Exercised................. (29,375) 14.21
Options Forfeited................. (4,811) 19.10
Options Expired................... (12,823) 18.85
_________ ________________
Options Outstanding at
December 31, 2004 (Prices
range from $12.10 to $23.25).... 208,874 $ 19.01
========= ================
Options outstanding at December 31, 2004, consisted of the
following:
Range of Options Weighted-Average Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
________________ ___________ ________________ _________________
$12.10 to $14.90 45,589 $ 13.23 6.7 years
$14.91 to $17.70 26,657 16.36 7.1 years
$17.71 to $20.50 43,677 18.89 5.3 years
$20.51 to $23.25 92,951 22.66 6.1 years
________________ ___________ ________________ _________________
$12.10 to $23.25 208,874 $ 19.01 6.2 years
================ =========== ================ =================
All options outstanding at December 31, 2004, were exercisable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 16 - 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.
Restricted investment in bank stocks: The carrying amounts
reported in the consolidated balance sheets for restricted
investment in bank stocks approximate their fair values.
Accrued interest receivable: The carrying amount of accrued
interest receivable approximates its fair value.
Mortgage servicing assets and credit enhancement fees receivable:
The fair value of servicing assets and credit enhancement fees
receivable is based on the present value of estimated future cash
flows for pools of mortgages stratified by rate and maturity
date.
Deposit liabilities: The fair values of deposits with no stated
maturities, such as demand deposits, savings accounts, NOW and
money market deposits, equal their carrying amounts, which
represent the amount payable on demand. Fair values for fixed-
rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds
purchased, advances from the Federal Home Loan Bank and other
short-term borrowings approximate their fair values.
Long-term debt: The fair values of Union National's long-term
debt are estimated using discounted cash flow analyses, based on
Union National's incremental borrowing rates for similar types of
borrowing arrangements.
Junior subordinated debentures: For floating-rate debentures fair
value is based on the carrying value. For junior subordinated
debentures that are at a fixed rate for a period of time, the
fair value is determined using discounted cash flow analyses,
based on current interest rates for similar types of borrowing
arrangements.
Accrued interest payable: The carrying amount of accrued
interest payable approximates its fair value.
Off-balance-sheet instruments: For Union National's off-balance-
sheet instruments, consisting of commitments to extend credit and
financial and performance standby letters of credit, the
estimated fair value is 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
counterparties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
At December 31, 2004 and 2003, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
(In thousands)
December 31, 2004
______________________________
Carrying
Amount Fair Value
______________ _____________
Assets:
Cash and Cash Equivalents........$ 9,843 $ 9,843
Investment Securities
Available-for-Sale.............. 103,490 103,490
Loans Held for Sale.............. 232 237
Loans, Net of Unearned Income
and Allowance for Loan Losses... 260,713 263,718
Restricted Investment in Bank Stocks 4,961 4,961
Accrued Interest Receivable...... 1,845 1,845
Mortgage Servicing Assets and
Credit Enhancement Fees Receivable 303 460
Liabilities:
Demand and Savings Deposits...... 164,962 164,962
Time Deposits.................... 101,008 100,916
Short-term Borrowings............ 4,524 4,524
Long-term Debt................... 88,630 90,827
Junior Subordinated Debentures... 11,341 11,239
Accrued Interest Payable......... 858 858
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit.. - -
(In thousands)
December 31, 2003
______________________________
Carrying
Amount Fair Value
______________ _____________
Assets:
Cash and Cash Equivalents........$ 8,679 $ 8,679
Investment Securities
Available-for-Sale.............. 97,066 97,066
Loans Held for Sale.............. 197 202
Loans, Net of Unearned Income
and Allowance for Loan Losses... 223,396 228,252
Restricted Investment in Bank Stocks 4,092 4,092
Accrued Interest Receivable...... 1,818 1,818
Mortgage Servicing Assets and
Credit Enhancement Fees Receivable 328 485
Liabilities:
Demand and Savings Deposits...... 143,479 143,479
Time Deposits.................... 87,595 88,803
Short-term Borrowings............ 9,981 9,981
Long-term Debt................... 73,874 77,719
Junior Subordinated Debentures... 8,248 8,248
Accrued Interest Payable......... 743 743
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit.. - -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS continued
NOTE 17 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEETS
(In thousands)
December 31, December 31,
2004 2003
____________ _____________
ASSETS
Cash in Bank Subsidiary..........$ 2,041 $ 3,873
Interest-Bearing Deposits
in Other Banks............... 20 64
Investment in Subsidiaries....... 34,692 30,301
Other Equity Investment Securities 579 394
Investments in Limited
Partnerships................. 495 570
Recoverable Federal Income Taxes. 346 108
Other Assets..................... 187 160
____________ _____________
Total Assets.................$ 38,360 $ 35,470
============ =============
LIABILITIES
Junior Subordinated Debentures...$ 11,341 $ 8,248
Other Liabilites................. 166 98
STOCKHOLDERS' EQUITY................ 26,853 27,124
____________ _____________
Total Liabilities and
Stockholders' Equity......$ 38,360 $ 35,470
============ =============
CONDENSED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31,
__________________________
2004 2003
_____________ ___________
INCOME
Dividends from Subsidiaries.......$ 1,715 $ 2,648
Dividends on Other Equity
Investment Securities........... 14 11
Interest on Deposits in Bank
Subsidiary...................... 14 2
Gain on Sale of Securities........ 39 49
Management Fees from Bank
Subsidiary...................... 42 42
_____________ ___________
Total Income................. 1,824 2,752
EXPENSES
Interest Expense on Junior
Subordinated Debentures......... 399 12
Other Expenses.................... 187 138
____________ ___________
Total Expenses............... 586 150
____________ ___________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary................... 1,238 2,602
Provision for Income Taxes/(Benefit) (235) (90)
____________ ___________
1,473 2,692
EQUITY in UNDISTRIBUTED INCOME
of BANK SUBSIDIARY................ 1,750 524
____________ ___________
NET INCOME.......................$ 3,223 $ 3,216
============ ===========
(In thousands)
Years Ended December 31,
__________________________
2002
_____________
INCOME
Dividends from Subsidiaries.......$ 2,482
Dividends on Other Equity
Investment Securities........... 10
Interest on Deposits in Bank
Subsidiary...................... 3
Gain on Sale of Securities........ -
Management Fees from Bank
Subsidiary...................... 42
_____________
Total Income................. 2,537
EXPENSES
Interest Expense on Junior
Subordinated Debentures......... -
Other Expenses.................... 134
_____________
Total Expenses............... 134
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary................... 2,403
Provision for Income Taxes/(Benefit) (102)
____________
2,505
EQUITY in UNDISTRIBUTED INCOME
of BANK SUBSIDIARY................ 655
____________
NET INCOME...................... $ 3,160
============
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
___________________________
2004 2003
____________ _____________
CASH FLOWS from OPERATING ACTIVITIES
Net Income.........................$ 3,223 $ 3,216
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Equity In Undistributed
Income of Bank Subsidiary... (1,750) (524)
Investment Securities Gains..... (39) (49)
Provision for Deferred Income Taxes (5) (4)
Decrease/(Increase) in Other
Assets...................... (119) 82
(Decrease)/Increase in Other
Liabilities................. 74 22
____________ _____________
Net Cash Provided by Operating
Activities.................... 1,384 2,743
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities............... 49 59
Purchases of Available-for-Sale
Securities........................ (196) (24)
Investment in Subsidiaries......... (3,093) (4,248)
____________ _____________
Net Cash Used in Investing
Activities........................ (3,240) (4,213)
CASH FLOWS from FINANCING ACTIVITIES
Proceeds from Issuance of Junior
Subordinated Debentures......... 3,093 8,248
Issuance Costs of Junior
Subordinated Debentures......... (60) (160)
Acquisition of Treasury Stock...... (2,260) (1,621)
Issuance of Common Stock........... 749 439
Cash Dividends Paid................ (1,542) (1,572)
____________ _____________
Net Cash Provided by/(Used in)
Financing Activities............ (20) 5,334
____________ _____________
NET INCREASE/(DECREASE) in CASH (1,876) 3,864
CASH - Beginning of Year......... 3,937 73
____________ _____________
CASH - End of Year...............$ 2,061 $ 3,937
============ =============
(In thousands)
Years Ended December 31,
___________________________
2002
____________
CASH FLOWS from OPERATING ACTIVITIES
Net Income.........................$ 3,160
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Equity In Undistributed
Income of Bank Subsidiary... (655)
Investment Securities Gains..... -
Provision for Deferred Income Taxes (3)
Decrease/(Increase) in Other
Assets...................... 67
(Decrease)/Increase in Other
Liabilities................. (2)
____________
Net Cash Provided by Operating
Activities.................... 2,567
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities............... -
Purchases of Available-for-Sale
Securities........................ (20)
Investment in Subsidiaries......... -
____________
Net Cash Used in Investing
Activities...................... (20)
CASH FLOWS from FINANCING ACTIVITIES
Proceeds from Issuance of Junior
Subordinated Debentures......... -
Issuance Costs of Junior
Subordinated Debentures......... -
Acquisition of Treasury Stock...... (1,536)
Issuance of Common Stock........... 352
Cash Dividends Paid................ (1,472)
____________
Net Cash Provided by/(Used in)
Financing Activities............ (2,656)
____________
NET INCREASE/(DECREASE) in CASH (109)
CASH - Beginning of Year......... 182
____________
CASH - End of Year...............$ 73
============
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 its subsidiaries as
of December 31, 2004 and 2003, and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December
31, 2004. These consolidated financial statements are the
responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit 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 that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of Union National Financial Corporation and
its subsidiaries as of December 31, 2004 and 2003, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United
States of America.
/s/Beard Miller Company LLP
Harrisburg, Pennsylvania
January 21, 2005
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 2004 and 2003, are as follows:
(Dollars in thousands, except per share data)
2004
__________________________________________
March June September December
31 30 30 31
_______ ______ ________ ________
Interest Income..........$4,715 $4,759 $4,977 $5,187
Interest Expense......... 1,602 1,586 1,648 1,785
_______ ______ ________ ________
Net Interest Income..... 3,113 3,173 3,329 3,402
Provision for Loan Losses 57 99 95 153
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses................ 3,056 3,074 3,234 3,249
Other Operating Income... 904 947 1,017 1,033
Investment Securities
Gains................. 87 77 10 20
Other Operating Expenses. 3,130 3,134 3,289 3,256
_______ ______ ________ ________
Income before Income Taxes 917 964 972 1,046
Provision for Income
Taxes................. 144 172 166 194
_______ ______ ________ ________
Net Income..............$ 773 $ 792 $ 806 $ 852
======= ====== ======== ========
Per Share Information
Net Income for
Period - Basic.......$ 0.32 $ 0.33 $ 0.34 $ 0.36
Net Income for Period-
Assuming Dilution.... 0.31 0.32 0.33 0.35
Note: Due to rounding, quarterly earnings per share may not add
up to reported annual earnings per share.
(Dollars in thousands, except per share data)
2003
__________________________________________
March June September December
31 30 30 31
_______ ______ ________ ________
Interest Income..........$4,543 $4,548 $4,508 $4,435
Interest Expense......... 1,720 1,805 1,666 1,512
_______ ______ ________ ________
Net Interest Income..... 2,823 2,743 2,842 2,923
Provision for Loan Losses 7 39 69 159
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses................ 2,816 2,704 2,773 2,764
Other Operating Income... 818 1,152 848 902
Investment Securities
Gains................. 71 12 203 160
Other Operating Expenses. 2,708 2,805 2,848 2,965
_______ ______ ________ ________
Income before Income Taxes 997 1,063 976 861
Provision for Income
Taxes................. 193 208 164 116
_______ ______ ________ ________
Net Income..............$ 804 $ 855 $ 812 $ 745
======= ====== ======== ========
Per Share Information
Net Income for
Period - Basic.......$ 0.32 $ 0.34 $ 0.32 $ 0.30
Net Income for Period-
Assuming Dilution.... 0.32 0.34 0.32 0.30
Note: Due to rounding, quarterly earnings per share may not add
up to reported annual earnings per share.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Years Ended December 31,
____________________________________
2004 2003 2002
__________ __________ __________
INCOME STATEMENT
Interest Income..............$ 19,638 $ 18,034 $ 19,561
Interest Expense............. 6,621 6,703 8,107
__________ __________ __________
Net Interest Income.......... 13,017 11,331 11,454
Provision for Loan Losses.... 404 274 184
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses................ 12,613 11,057 11,270
Other Operating Income....... 4,095 4,165 3,164
Other Operating Expenses..... 12,809 11,325 10,538
__________ __________ __________
Income before Income Taxes... 3,899 3,897 3,896
Provision for Income Taxes/
(Benefit)................... 676 681 736
__________ __________ __________
Net Income for Year..........$ 3,223 $ 3,216 $ 3,160
========== ========== ==========
SHARE INFORMATION
Net Income Per Share (Basic).$ 1.34 $ 1.29 $ 1.24
Cash Dividends Per Share..... 0.640 0.630 0.575
Average Shares Outstanding
(Basic)..................... 2,406 2,498 2,557
FINANCIAL RATIOS
Return on Average Assets..... 0.87% 0.98% 1.02%
Return on Average
Stockholders' Equity....... 12.28% 11.89% 12.20%
Return on Average Realized
Stockholders' Equity (1)... 12.62% 12.38% 12.51%
Dividend Payout Ratio........ 47.84% 48.90% 46.58%
Average Stockholders' Equity
to Average Assets........... 7.05% 8.25% 8.39%
AVERAGE BALANCE SHEET
Loans........................$ 244,752 $ 200,808 $ 201,976
Investment Securities........ 95,033 96,650 80,558
Other Earning Assets......... 5,201 8,386 7,381
Total Assets................. 372,207 327,644 308,584
Deposits..................... 246,445 226,781 215,242
Short-Term Borrowings........ 7,602 3,415 3,501
Long-Term Debt............... 81,442 68,623 62,322
Junior Subordinated
Debentures................. 8,916 294 -
Stockholders' Equity......... 26,250 27,046 25,900
BALANCE SHEET AT YEAR-END
Loans........................$ 263,001 $ 225,381 $ 199,065
Investment Securities........ 103,490 97,066 90,679
Total Earning Assets......... 371,724 326,989 301,738
Total Assets................. 399,290 351,892 320,509
Deposits..................... 265,970 231,074 223,350
Short-Term Borrowings........ 4,524 9,981 3,387
Long-Term Debt............... 88,630 73,874 65,299
Junior Subordinated
Debentures................. 11,341 8,248 -
Stockholders' Equity......... 26,853 27,124 26,735
(1) Excludes the impact of accumulated other comprehensive income
on total stockholders' equity.
(Dollars in thousands, except per share data)
Years Ended December 31,
____________________________________
2001 2000
__________ __________
INCOME STATEMENT
Interest Income..............$ 21,085 $ 20,583
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....... 2,356 1,732
Other Operating Expenses..... 10,202 9,949
__________ __________
Income before Income Taxes... 2,473 1,617
Provision for Income Taxes/
(Benefit)................... 231 (50)
__________ __________
Net Income for Year..........$ 2,242 $ 1,667
========== ==========
SHARE INFORMATION
Net Income Per Share (Basic).$ 0.87 $ 0.65
Cash Dividends Per Share..... 0.425 0.576
Average Shares Outstanding
(Basic)..................... 2,584 2,576
FINANCIAL RATIOS
Return on Average Assets..... 0.76% 0.60%
Return on Average
Stockholders' Equity....... 9.07% 7.21%
Return on Average Realized
Stockholders' Equity (1)... 9.21% 6.99%
Dividend Payout Ratio........ 48.95% 89.16%
Average Stockholders' Equity
to Average Assets........... 8.40% 8.30%
AVERAGE BALANCE SHEET
Loans........................$ 186,877 $ 182,728
Investment Securities........ 81,644 78,868
Other Earning Assets......... 8,677 3,395
Total Assets................. 294,401 278,416
Deposits..................... 214,297 214,464
Short-Term Borrowings........ 6,672 11,314
Long-Term Debt............... 46,907 27,920
Junior Subordinated
Debentures................. - -
Stockholders' Equity......... 24,730 23,110
BALANCE SHEET AT YEAR-END
Loans........................$ 203,581 $ 185,981
Investment Securities........ 75,215 74,466
Total Earning Assets......... 287,522 263,549
Total Assets................. 307,673 282,680
Deposits..................... 215,544 212,545
Short-Term Borrowings........ 3,400 13,495
Long-Term Debt............... 61,252 30,735
Junior Subordinated
Debentures................. - -
Stockholders' Equity......... 25,545 23,562
(1) Excludes the impact of accumulated other comprehensive income
on total stockholders' equity.
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. Union National's trust subsidiaries,
Union National Capital Trust I and Union National Capital Trust
II, were established for the purpose of issuing $11,000,000 of
trust capital securities during 2003 and 2004. 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 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.
Union National undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that Union National periodically files with the
Securities and Exchange Commission.
CRITICAL ACCOUNTING POLICIES
The reporting of Union National's financial condition and results
of operations is impacted by the application of accounting
policies by management. Certain accounting policies are
particularly sensitive and require significant judgments,
estimates and assumptions to be made by management in matters
that are inherently uncertain.
Union National's provision for loan losses and the level of the
allowance for loan losses involve significant estimates by
management in evaluating the adequacy of the allowance for loan
losses. The allowance for loan losses is increased by a charge
to the provision for loan losses. Management's evaluation 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 and the provision for loan losses
may be necessary if economic conditions or loan credit quality
differ substantially from the assumptions used in making the
evaluation.
Union National carries all of its investments at fair value with
any unrealized gains or losses reported net of tax as an
adjustment to stockholders' equity. Based on management's
assessment, at December 31, 2004, Union National did not hold any
security that had a fair value decline that is currently expected
to be other than temporary. Consequently, any declines in a
specific security's fair value below amortized cost have not been
provided for in the income statement. Union National's ability
to fully realize the value of its investment in various
securities, including corporate debt securities, is dependent on
the underlying creditworthiness of the issuing organization.
As permitted by SFAS No. 123, Union National accounts for stock-
based compensation in accordance with Accounting Principles Board
Opinion (APB) No. 25. Under APB No. 25, no compensation expense
is recognized in the income statement related to any options
granted under Union National's stock option 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. In December
2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123 (revised 2004), "Share-Based Payment."
Generally, Statement No. 123(R) eliminates the accounting
provisions of APB No. 25 and requires the fair-value of stock
options to be reflected in the income statement as an expense.
Statement No. 123(R) will be effective for Union National in the
third quarter of 2005. Union National is currently evaluating
the impact of the adoption of this pronouncement in light of its
current stock-based compensation programs and anticipated future
plans. All of Union National's stock options outstanding at
December 31, 2004, are fully vested and will not impact Union
National as a result of this pronouncement. See section on
Recent Accounting Standards Issued for additional information.
RESULTS OF OPERATIONS
OVERVIEW
Consolidated net income for 2004 was $3,223,000 as compared to
consolidated net income of $3,216,000 for 2003 and $3,160,000 for
2002.
Basic earnings per share for 2004 amounted to $1.34 and diluted
earnings per share amounted to $1.31, as compared to basic
earnings per share of $1.29 and diluted earnings per share of
$1.27 for 2003 and basic earnings per share of $1.24 and diluted
earnings per share of $1.23 for 2002.
The following items impacted results of operations for 2004 as
compared to 2003:
* Net income increased due to an increase in net interest
income of $1,625,000 (on a taxable equivalent basis), or
13.3%. This was primarily a result of growth of 12.8% in
average earning assets, which was funded by increased
deposits and borrowings.
* Net income decreased due to an increase in the provision for
loan losses of $130,000.
* Net income decreased due to a decrease of $252,000 in
realized gains on the sale of investment securities.
* Net income increased due to an increase in other operating
income (excluding investment securities gains) of $182,000,
or 4.9%, which was primarily a result of increased revenues
from deposit account service charges, net of a decline in
income from mortgage banking activities.
* Net income decreased due to an increase in other operating
expenses of $1,484,000, or 13.1%.
The above items are quantified and discussed in further detail
under their respective sections below.
The following items impacted results of operations for 2003 as
compared to 2002:
* Net income increased due to growth of 5.5% in average earning
assets, which was funded by increased deposits and long-term
borrowings.
* Net income decreased due to the narrowing of the interest
rate spread between the interest earnings on assets and the
interest cost of liabilities.
* Net income decreased due to an increase in the provision for
loan losses of $90,000.
* Net income increased due to an increase of $119,000 in
realized gains on the sale of investment securities. In
2003, total gains on the sale of investment securities of
$446,000 offset early payoff costs of $359,000 on borrowings
from the Federal Home Loan Bank of Pittsburgh (FHLB).
* Net income increased due to an increase in other operating
income (excluding investment securities gains) of $882,000,
or 31.1%, which was primarily a result of increased revenues
from mortgage banking activities and commissions on the sale
of alternative investment products.
* Net income decreased due to an increase in other operating
expenses of $787,000, or 7.5%.
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 0.87% for 2004, 0.98% for
2003 and 1.02% for 2002. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROE),
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
was 12.28% for 2004, 11.89% for 2003 and 12.20% for 2002. Net
income as a percent of average realized stockholders' equity,
which excludes the impact of accumulated other comprehensive
income, was 12.62% for 2004, 12.38% for 2003 and 12.51% for 2002.
For Union National, accumulated other comprehensive income is the
amount of unrealized gains or losses on available-for-sale
investment securities, net of tax.
Management currently expects relatively strong growth in loans
and deposits for 2005. It is expected that loan and deposit
growth will be driven largely by the acquisition of new
commercial and agricultural business relationships. The
expansion of our commercial and agricultural banking business
continues to be a strategic focus for Union National. Management
also continues to develop and promote additional loan and deposit
products, to implement various sales strategies and to offer
incentives to employees to generate loan and deposit growth.
During 2004, overall loan balances increased by $37,620,000 or
16.7% over loans outstanding at December 31, 2003. Union
National experienced strong commercial and agricultural loan
demand and moderate growth in residential real estate loans. The
growth in residential real estate loans was primarily a result of
an increase in home equity lines of credit. In addition, there
was a decline in the balance of purchased loans (residential
mortgages and manufactured housing loans) from 2003 to 2004.
Purchased loans decreased by $4,777,000 during 2004 to a balance
of $16,570,000 at December 31, 2004.
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%.
In order to enhance the net interest income in future periods,
management has entered into transactions that increase earning
assets funded by advances from the FHLB. As of December 31,
2004, the bank had received long-term advances of $88,630,000 and
short-term advances of $1,500,000 from its available credit of
$129,706,000 at the FHLB for purposes of funding loan demand and
security purchases. The total advances have maturities that
range from January 2005 to December 2013.
During 2003 and 2004, Union National obtained net funding of
$11,000,000 from the issuance of junior subordinated debentures
to trust subsidiaries that then issued trust capital securities.
In December 2003, $8,000,000 of net funding was obtained through
the issuance of floating-rate debentures that provide for
quarterly distributions at a variable annual coupon rate, reset
quarterly, based on three-month LIBOR plus 2.85%. The coupon
rate was 5.01% at December 31, 2004, and 4.02% at December 31,
2003. In October 2004, $3,000,000 of net funding was obtained
through the issuance of debentures that are at a fixed rate of
5.28% for an initial period of approximately three years. The
debentures have a 30-year maturity, but are callable by Union
National, at par, after 5 years. Union National used the net
proceeds from these offerings to fund an additional $7,000,000
capital investment in Union National Community Bank to fund its
operations and future growth. Union National used the balance of
the funding for the repurchase of common stock and general
corporate purposes. During 2004, Union National repurchased
100,489 shares of common stock at a total cost of $2,260,000.
The terms and amounts of the FHLB borrowings and the issuance of
the junior subordinated debentures, when combined with Union
National's overall balance sheet structure, maintain Union
National within its interest rate risk policies.
Impacting net interest income, primarily in 2003 and 2002, were
additional costs incurred on the early payoff of FHLB borrowings.
These additional costs were reflected as increased interest
expense on the related long-term borrowings and amounted to
$4,000 in 2004, $359,000 in 2003 and $382,000 in 2002. Union
National restructured $7,261,000 in long-term borrowings with the
FHLB during 2003 and $12,000,000 during 2002. Paid-off
borrowings were primarily replaced with lower current-rate
borrowings. Gains on the sale of investment securities largely
offset the costs associated with these payoffs. The
restructuring of these borrowings will benefit Union National
with lower funding costs in future periods. The average interest
rate on total FHLB borrowings decreased to 3.52% at December 31,
2004, as compared to 3.90% at December 31, 2003, and 4.68% at
December 31, 2002. In the following discussion, the interest
rate on average interest-bearing liabilities and the net interest
margin percentage is shown both with and without the impact of
the one-time early payoff costs during 2003 and 2002 to provide a
better comparison between periods.
2004 Compared to 2003
Net interest income for 2004 increased by $1,625,000, or 13.4%,
over 2003. For 2004, average earning asset growth of
$39,142,000, was funded by increased deposits and borrowings.
The volume growth in earning assets and interest-bearing
liabilities increased net interest income by the amount of
$1,615,000 in 2004 over 2003.
The overall interest rate on the average total earning assets
decreased to 5.91% for 2004, as compared to 6.16% for 2003.
However, the overall interest rate on the average interest-
bearing liabilities also decreased to 2.14% for 2004, as compared
to 2.48% for 2003 (2.34% without the impact of payoff costs on
FHLB borrowings). The net effect of all interest rate
fluctuations and funding changes was to increase net interest
income in the amount of $10,000 for 2004 over 2003. The net
interest margin percentage was 3.99% for 2004 as compared to
3.97% for 2003 (4.09% without the impact of payoff costs). See
management's discussion below concerning the anticipated impact
of these interest rate fluctuations on the results of operations
for 2005.
2003 Compared to 2002
Net interest income for 2003 decreased by $28,000, or 0.2%, from
2002. For 2003, average earning asset growth of $15,929,000, was
funded by increased demand and savings deposits and additional
long-term borrowings. The volume growth in earning assets and
interest-bearing liabilities increased net interest income by the
amount of $501,000 in 2003 over 2002.
The overall interest rate on the average total earning assets
decreased to 6.16% for 2003, as compared to 7.00% for 2002.
However, the overall interest rate on the average interest-
bearing liabilities also decreased to 2.48% (2.34% without the
impact of payoff costs) for 2003, as compared to 3.17% for 2002
(3.02% without the impact of payoff costs). The net effect of
all interest rate fluctuations and funding changes was to
decrease net interest income in the amount of $529,000 for 2003
from 2002. The net interest margin percentage was 3.97% for 2003
(4.09% without the impact of payoff costs) as compared to 4.20%
for 2002 (4.33% without the impact of payoff costs).
There has been an overall decline in market interest rates over a
period of several years. As is reflected in the rates discussed
above, this decline in interest rates has negatively impacted the
yield on Union National's earning assets, but this interest rate
decline has also reduced Union National's funding costs due to a
decrease in rates Union National must pay to attract and retain
deposits and must pay on maturing or repricing advances from the
FHLB.
2005 Net Interest Income
For 2005, it is currently anticipated that Union National's net
interest margin percentage will be slightly lower than current
levels. However, income from growth in earning assets which
occurred during 2004, net of costs resulting from growth in
deposits and borrowings, should increase net interest income for
2005. The netting of these two factors, as reflected in Union
National's current simulation model and estimates as of December
31, 2004, may result in net interest income for 2005 that is
comparable to the net interest income earned during 2004.
Expected growth in earning assets during 2005 should also
increase Union National's net interest income. This expected
growth was not reflected in the model at December 31, 2004.
However, Union National's net interest income may be impacted by
future actions of the Federal Reserve Bank.
Union National's current net interest income simulation model
includes an investment in BOLI that had a value of $9,487,000 at
December 31, 2004. 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 2005, the options selected by customers and the
future mix of the loan, investment and deposit products in the
bank's portfolios may significantly change the estimates used in
the simulation models. See discussions on Liquidity and Market
Risk - Interest Rate Risk.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
PROVISION FOR LOAN LOSSES
The loan loss provision is an estimated expense charged to
earnings to provide for 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 $404,000 in 2004, $274,000 in 2003 and $184,000
in 2002. Net charge-offs amounted to $101,000 for 2004, as
compared to $101,000 for 2003 and $265,000 for 2002. The
increased provision for loan losses in 2004 and 2003 can be
primarily attributed to increased outstanding loan balances. The
lower provision for loan losses in 2002 can be attributed to a
decrease in net charge-offs in comparison to prior years,
declining levels of nonperforming loans and overall stable credit
quality. Future adjustments to the allowance, and consequently
the provision for loan losses, may be necessary if economic
conditions or loan credit quality differ substantially from the
assumptions used in making management's evaluation of the level
of the allowance for loan losses as compared to the balance of
outstanding loans. See discussion on Loan Quality/Allowance for
Loan Losses.
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
Year Ended
December 31, 2004
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks..............$ 127 $ 1 0.79%
Federal Funds Sold........... 517 7 1.35
Short-Term Investments....... - - -
Investment Securities:
Taxable..................... 70,997 2,959 4.17
Tax-Exempt.................. 24,036 1,714 7.13
Loans-Net*................... 244,752 15,637 6.39
Restricted Invest. - Bank Stocks 4,557 73 1.60
__________ ________ ______
Total Earning Assets........ 344,986 20,391 5.91
Allowance for Loan Losses.... (2,116)
Other Nonearning Assets...... 29,337
__________
TOTAL ASSETS.................$ 372,207
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand.....$ 87,300 $ 515 0.59%
Savings..................... 32,532 88 0.27
Time........................ 91,522 2,428 2.65
Short-Term Borrowings........ 7,602 108 1.42
Long-Term Debt**............. 81,442 3,082 3.78
Junior Subordinated
Debentures................. 8,916 400 4.49
__________ ________ ______
Total Interest-Bearing
Liabilities................ 309,314 6,621 2.14
________ ______
Demand Deposits.............. 35,091
Other Liabilities............ 1,552
__________
TOTAL LIABILITIES........... 345,957
Stockholders' Equity.......... 26,250
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY.......$ 372,207
==========
Net Interest Income/
Interest Rate Spread....... $ 13,770 3.77%
======== ======
Net Interest Margin.......... 3.99%
======
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 $728,000 for the year ended December 31,
2004, $920,000 for the year ended December 31, 2003 and $816,000
for the year ended December 31, 2002.
**Includes early payoff costs on FHLB Borrowings of $4,000 for
the year ended December 31, 2004, $359,000 for 2003 and $382,000
for 2002. Rates excluding these payoffs costs are as follows:
Long-Term Debt............. 3.78%
Total Interest-Bearing
Liabilites............... 2.14%
Interest Rate Spread....... 3.77%
Net Interest Margin........ 3.99%
Year Ended
December 31, 2003
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks..............$ 316 $ 3 0.95%
Federal Funds Sold........... 4,015 45 1.12
Short-Term Investments....... 27 - 0.00
Investment Securities:
Taxable..................... 71,260 2,717 3.81
Tax-Exempt.................. 25,390 1,867 7.35
Loans-Net*................... 200,808 14,127 7.04
Restricted Invest. - Bank Stocks 4,028 89 2.21
__________ ________ ______
Total Earning Assets........ 305,844 18,848 6.16
Allowance for Loan Losses.... (1,858)
Other Nonearning Assets...... 23,658
__________
TOTAL ASSETS.................$ 327,644
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand.....$ 78,758 $ 424 0.54%
Savings..................... 30,614 138 0.45
Time........................ 88,984 2,800 3.15
Short-Term Borrowings........ 3,415 28 0.82
Long-Term Debt**............. 68,623 3,301 4.81
Junior Subordinated
Debentures................. 294 12 4.08
__________ ________ ______
Total Interest-Bearing
Liabilities................ 270,688 6,703 2.48
________ ______
Demand Deposits.............. 28,425
Other Liabilities............ 1,485
__________
TOTAL LIABILITIES........... 300,598
Stockholders' Equity.......... 27,046
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY.......$ 327,644
==========
Net Interest Income/
Interest Rate Spread....... $ 12,145 3.69%
======== ======
Net Interest Margin.......... 3.97%
======
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 $728,000 for the year ended December 31,
2004, $920,000 for the year ended December 31, 2003 and $816,000
for the year ended December 31, 2002.
**Includes early payoff costs on FHLB Borrowings of $4,000 for
the year ended December 31, 2004, $359,000 for 2003 and $382,000
for 2002. Rates excluding these payoffs costs are as follows:
Long-Term Debt............. 4.29%
Total Interest-Bearing
Liabilites............... 2.34%
Interest Rate Spread....... 3.82%
Net Interest Margin........ 4.09%
Year Ended
December 31, 2002
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks..............$ 157 $ 2 1.27%
Federal Funds Sold........... 2,925 50 1.71
Short-Term Investments....... 986 15 1.52
Investment Securities:
Taxable..................... 59,005 2,959 5.01
Tax-Exempt.................. 21,553 1,644 7.63
Loans-Net*................... 201,976 15,490 7.67
Restricted Invest. - Bank Stocks 3,313 120 3.62
__________ ________ ______
Total Earning Assets........ 289,915 20,280 7.00
Allowance for Loan Losses.... (1,870)
Other Nonearning Assets...... 20,539
__________
TOTAL ASSETS.................$ 308,584
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand.....$ 68,498 $ 631 0.92%
Savings..................... 28,025 276 0.98
Time........................ 93,785 3,680 3.92
Short-Term Borrowings........ 3,501 50 1.43
Long-Term Debt**............. 62,322 3,470 5.57
Junior Subordinated
Debentures................. - - -
__________ ________ ______
Total Interest-Bearing
Liabilities................ 256,131 8,107 3.17
________ ______
Demand Deposits.............. 24,934
Other Liabilities............ 1,619
__________
TOTAL LIABILITIES........... 282,684
Stockholders' Equity.......... 25,900
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY.......$ 308,584
==========
Net Interest Income/
Interest Rate Spread....... $ 12,173 3.83%
======== ======
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 $728,000 for the year ended December 31,
2004, $920,000 for the year ended December 31, 2003 and $816,000
for the year ended December 31, 2002.
**Includes early payoff costs on FHLB Borrowings of $4,000 for
the year ended December 31, 2004, $359,000 for 2003 and $382,000
for 2002. Rates excluding these payoffs costs are as follows:
Long-Term Debt............. 4.95%
Total Interest-Bearing
Liabilites............... 3.02%
Interest Rate Spread....... 3.98%
Net Interest Margin........ 4.33%
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
2004 Compared to 2003
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks.................$ (2) $ (2) $ -
Federal Funds Sold................. (38) (46) 8
Short-Term Investments............. - - -
Investment Securities:
Taxable......................... 242 (10) 252
Tax-Exempt...................... (153) (98) (55)
Loans-Net.......................... 1,510 2,892 (1,382)
Restricted Invest. - Bank Stocks... (16) 11 (27)
________ ________ _____
Total Earning Assets............ 1,543 2,747 (1,204)
Interest Expense On Deposits:
Interest-Bearing Demand......... 91 48 43
Savings......................... (50) 8 (58)
Time............................ (372) 78 (450)
Short-Term Borrowings.............. 80 56 24
Long-Term Debt..................... (219) 555 (774)
Junior Subordinated Debentures..... 388 387 1
________ ________ _______
Total Interest-Bearing
Liabilities................... (82) 1,132 (1,214)
________ ________ _______
Net Interest Income..............$ 1,625 $ 1,615 $ 10
======== ======== =======
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%.
2003 Compared to 2002
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks.................$ 1 $ 2 $ (1)
Federal Funds Sold................. (5) 15 (20)
Short-Term Investments............. (15) (8) (7)
Investment Securities:
Taxable......................... (242) 546 (788)
Tax-Exempt...................... 223 284 (61)
Loans-Net.......................... (1,363) (89) (1,274)
Restricted Invest. - Bank Stocks... (31) 20 (51)
________ ________ _____
Total Earning Assets............ (1,432) 770 (2,202)
Interest Expense On Deposits:
Interest-Bearing Demand......... (207) 84 (291)
Savings......................... (138) 23 (161)
Time............................ (880) (180) (700)
Short-Term Borrowings.............. (22) (1) (21)
Long-Term Debt..................... (169) 331 (500)
Junior Subordinated Debentures..... 12 12 -
________ ________ _______
Total Interest-Bearing
Liabilities................... (1,404) 269 (1,673)
________ ________ _______
Net Interest Income..............$ (28) $ 501 $ (529)
======== ======== =======
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%.
OTHER OPERATING INCOME
2004 Compared to 2003
Other operating income for 2004 was $4,095,000, as compared to
$4,165,000 for 2003. Impacting other operating income were the
following items:
* a decrease in revenue from mortgage banking activities in the
amount of $623,000;
* a decrease in investment securities gains of $252,000;
* an increase in earnings from service charges on deposit
accounts of $491,000;
* an increase in earnings on BOLI of $101,000 as a result of
additional BOLI purchases during 2003 and 2004;
* an increase in income from merchant credit card fees of
$64,000; and
* an increase in income from fiduciary activities of $64,000.
The decrease in revenue from mortgage banking activities is
primarily a result of a decline in refinancing activity during
2004. The increased income from service charges on deposit
accounts is primarily from increased insufficient funds charges
related to a new product called "Overdraft Privilege" introduced
to customers in November 2003. With Overdraft Privilege
customers are permitted to overdraw their accounts subject to
certain limits. This service can help customers avoid merchant
costs and the embarrassment of having checks returned. With
increased overdrafts there is also increased exposure to loss,
however, the increased revenue is currently expected to more than
offset any related losses. The increase in income from merchant
credit card fees and fiduciary activities is a result of an
increased strategic and sales focus on these areas.
2003 Compared to 2002
Other operating income for 2003 was $4,165,000, representing an
increase of $1,001,000, or 31.6%, over 2002. Contributing to
this increase were the following items:
* an increase in revenue from mortgage banking activities in
the amount of $398,000;
* an increase in investment securities gains of $119,000;
* an increase in commission earnings from the sale of
alternative investment products in the amount of $282,000;
* an increase in earnings from service charges on deposit
accounts related to insufficient funds charges in the amount
of $116,000; and
* an increase in earnings on BOLI of $71,000 as a result of an
additional $4,000,000 investment in BOLI during the third
quarter of 2003.
Investment securities gains in 2003 were a result of some
restructuring in the investment security portfolio. After a
thorough analysis, certain securities were sold at a net gain and
the funds were invested in other securities that management
believed had better structures with comparable earnings rates.
Management believes these securities are positioned better for
various changes in interest rates. In addition, these gains
offset the one-time costs associated with the early payoff and
restructuring of FHLB borrowings. The increase in commission
earnings on the sale of alternative investment products resulted
from the expanded sales of annuities, mutual funds and brokerage
services.
OTHER OPERATING EXPENSES
2004 Compared to 2003
The aggregate of other operating expenses for 2004 increased by
$1,484,000, or 13.1%, over 2003. This increase in other
operating expenses is discussed below as it pertains to the
various expense categories.
Salaries and wages increased by $484,000, or 9.6%, over 2003.
This increase was essentially due to staff additions and annual
merit and cost-of-living increases. Staff additions included
staff for a new retail office location at 38 E. Roseville Road in
Manheim Township which opened in November 2003, an agricultural
lender, an experienced business banker, a salesperson for
corporate services, a retirement plan salesperson, a salesperson
for trust and investment management products and services,
business and credit specialists and other support staff and sales
positions.
Employee benefit costs increased by $332,000, or 27.9%, over
2003. Increased employee benefit costs related to increased
staff and salary levels, increased health insurance premiums,
increased profit-sharing plan expense and costs related to a
supplemental executive retirement plan. The increase in profit-
sharing costs related primarily to an increased contribution
level of 5% of eligible salaries in 2004 as compared to a profit-
sharing contribution of 4.25% in 2003.
Other changes in operating expenses for 2004 included the
following:
* an increase in occupancy expense of $99,000;
* an increase in furniture and equipment expense of $96,000;
* an increase in professional fees of $165,000;
* an increase in advertising and marketing expenses of $48,000;
* a decrease in foreclosed real estate expenses of $53,000;
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
The increase in occupancy and furniture and equipment expense
related primarily to the opening of our new Manheim Township
office in November 2003 and the opening of our new commercial
banking office in Manheim Township in March 2004. The increase
in professional fees is primarily attributable to professional
fees related to the implementation of our Overdraft Privilege
product. These professional fees will not recur in 2005. The
increase in advertising and marketing expense was primarily a
result of the opening of a new office as well as several
advertising campaigns undertaken in 2004. The decrease in
foreclosed real estate expense related to a recovery on the sale
of foreclosed real estate.
2003 Compared to 2002
The aggregate of other operating expenses for 2003 increased by
$787,000, or 7.5%, over 2002. This increase in other operating
expenses is discussed below as it pertains to the various expense
categories.
Salaries and wages increased by $508,000, or 11.2%, over 2002.
This increase was essentially due to staff additions, annual
merit and cost-of-living increases and increased incentives for
staff for reaching certain sales and profitability goals.
Employee benefit costs increased by $56,000, or 4.9%, over 2002.
Increased employee benefit costs related primarily to increased
staff and salary levels.
Other changes in operating expenses for 2003 included the
following:
* an increase in data processing fees of $96,000;
* an increase in advertising and marketing expenses of $23,000,
primarily as a result of the opening of our new Manheim
Township office;
* an increase in ATM processing expenses of $22,000;
* an increase in foreclosed real estate expenses of $24,000;
* an increase in director fees in the amount of $32,000, as a
result of the addition of three new directors in 2003;
* an increase in appraisal costs of $31,000;
* an increase in donations of $24,000;
* an increase in supplies costs in the amount of $24,000; and
* a decrease in postage costs of $32,000.
The increase in data processing costs related to the
implementation of a new data communications system and the
associated costs. The increase in donations was a result of
contributions that Union National made under the PA Educational
Improvement Tax Credit program. Through this program, Union
National receives a 90% tax credit for contributions made to
certain organizations. The increase in appraisal fees was
related to an increase in mortgage banking activities. The
decrease in postage costs was a result of a cost savings that
resulted from a change in the sorting of outgoing mail.
INCOME TAXES
Union National had income tax expense of $676,000 for 2004,
$681,000 for 2003 and $736,000 for 2002. The effective tax rate
for 2004 was 17.3%, as compared to 17.5% for 2003 and 18.9% for
2002. The realization of net deferred tax assets, which amounted
to $403,000 at December 31, 2004, is dependent on future earnings
of Union National. Management currently anticipates future
earnings will be adequate to utilize these deferred tax assets.
RECENT ACCOUNTING STANDARDS ISSUED
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement No. 123 (revised 2004), "Share-Based Payment."
Statement No. 123(R) addresses the accounting for share-based
payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise
or (b) liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. Statement No. 123(R)
requires an entity to recognize the grant-date fair-value of
stock options and other equity-based compensation issued to
employees in the income statement. The revised statement
generally requires that an entity account for those transactions
using the fair-value-based method, and eliminates the intrinsic
value method of accounting in APB Opinion No. 25, "Accounting for
Stock Issued to Employees," which was permitted under Statement
No. 123, as originally issued. The revised statement also
requires entities to disclose information about the nature of the
share-based payment transactions and the effects of those
transactions on the financial statements.
Statement No. 123(R) is effective as of the beginning of the
first interim or annual reporting period that begins after June
15, 2005 (i.e., third quarter 2005 for Union National). Union
National is currently evaluating the impact of the adoption of
this pronouncement in light of its current stock-based
compensation programs and anticipated future plans. All of Union
National's stock options outstanding at December 31, 2004, are
fully vested and will not impact Union National as a result of
this pronouncement.
In March 2004, the SEC released Staff Accounting Bulletin (SAB)
No. 105, "Application of Accounting Principles to Loan
Commitments." SAB 105 provides guidance about the measurements
of loan commitments recognized at fair value under FASB Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SAB 105 also requires companies to disclose their
accounting policy for those loan commitments including methods
and assumptions used to estimate fair value and associated
hedging strategies. SAB 105 is effective for all loan
commitments accounted for as derivatives that are entered into
after March 31, 2004. The adoption of SAB 105 did not have a
material effect on Union National's consolidated financial
statements.
In March 2004, the FASB's Emerging Issues Task Force (EITF)
reached a consensus on EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments" (EITF 03-1). EITF 03-1 provides guidance regarding
the meaning of other-than-temporary impairment and its
application to investments classified as either available-for-
sale or held-to-maturity under FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," and to equity securities accounted for under the
cost method. Included in EITF 03-1 is guidance on how to account
for impairments that are solely due to interest rate changes,
including changes resulting from increases in sector credit
spreads. This guidance was to become effective for reporting
periods beginning after June 15, 2004. However, on September 30,
2004, the FASB issued a Staff Position that delays the effective
date for the recognition and measurement guidance of EITF 03-1
until additional clarifying guidance is issued. Union National
is unable to assess the impact of the adoption of EITF 03-1 until
final guidance is issued.
FINANCIAL CONDITION
INVESTMENT SECURITIES
As of December 31, 2004 and 2003, all of Union National's
investment securities have been classified as available-for-sale.
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 marketable
equity securities. Union National possesses the ability, subject
to credit impairment, to hold each security in its investment
portfolio to maturity. However, Union National recognizes 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 its investment securities as being available-for-
sale. 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. 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.
Beginning in 2002, in light of record-low interest rates, Union
National began to purchase certain types of mortgage-backed and
asset-backed securities to better position its investment
portfolio for a subsequent increase in interest rates. At
December 31, 2004, the total amortized cost of Union National's
mortgage-backed and asset-backed securities amounted to
$53,523,000. These security purchases were funded through
investment cash flows, payments received on Union National's
investment in a pool of residential mortgage loans and additional
FHLB borrowings. These securities were generally purchased at a
premium as their coupons were higher than current market interest
rates. Based on high prepayment speeds on these securities, the
premium paid for these securities has been amortized quickly
which has reduced recorded yields. In the future, as interest
rates rise and prepayment speeds slow down, the recorded yields
on the remaining balance of these securities will increase. The
weighted-average yield on mortgage-backed and asset-backed
securities was 3.82% at December 31, 2004, as compared to 3.57%
at December 31, 2003, and 3.43% at December 31, 2002. With high
prepayment speeds experienced, the estimated average life of
these securities is relatively short and the recorded yield on
these securities is still comparable to other investments with
similar maturities and also compares favorably to current short-
term market interest rates. Cash flows from these securities and
changes in market interest rates are considered in the bank's net
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
interest income simulation model. See sections on Liquidity and
Market Risk - Interest Rate Risk for further discussion.
Total expected cash flows from investment securities, including
estimated prepayments and expected call options, is currently
estimated at $17,870,000 for 2004, which represents approximately
17% of the bank's investment securities as compared to
$26,259,000 or approximately 28% as estimated at December 31,
2003, for 2004. The estimated amount of expected cash flows from
investment securities will vary significantly with changes in
assumed interest rates. For example, an increase in interest
rates will decrease the level of prepayments received on
mortgage-backed securities. These factors affecting the bank's
investment securities are included in the bank's net interest
income simulation model. See sections on Liquidity and Market
Risk - Interest Rate Risk for further discussions on these risks.
Management periodically assesses the strategy of selling
mortgage-backed securities and other available-for-sale
securities. Investment security purchases and sales are effected
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
2005 and future years through potential investment security
sales.
In addition to the credit risk present in the loan portfolio,
Union National also has credit risk associated with its
investment security holdings. Based on recent national economic
trends and other factors, Union National has increased its
monitoring of its corporate debt securities and changes in their
credit ratings as published by national statistical rating
organizations. As of December 31, 2004, Union National had one
corporate debt security that was rated below investment grade and
was carried at a fair value of $211,000. This security had an
unrealized gain of $2,000. Union National's ability to fully
realize the value of its investment in various securities,
including corporate debt securities, is dependent on the
underlying creditworthiness of the issuing organization. This
creditworthiness may be impacted by various national economic
trends and other factors. As discussed earlier, Union National
carries all of its investments at fair value with any unrealized
gains or losses reported net of tax as an adjustment to
stockholders' equity. Based on management's assessment, at
December 31, 2004, Union National did not hold any security that
had a fair value decline that is currently expected to be other
than temporary. Consequently, any declines in a specific
security's fair value below amortized cost have not been provided
for in the income statement because management currently expects
these fair value declines to be temporary. As of December 31,
2004, Union National held corporate debt securities with a total
fair value of $16,253,000, and net unrealized gains on these
securities amounted to $143,000. In addition, there are no
significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issuer.
The following shows the summary of investment securities held by
Union National:
(In thousands) Carrying Value at December 31,
_________________________________
2004 2003 2002
__________ __________ __________
Available- Available- Available-
for-Sale for-Sale for-Sale
__________ __________ __________
Obligations of State
and Political Subdivisions.....$ 28,049 $ 26,621 $ 24,262
Obligations of U.S.
Government Agencies............ 5,253 - -
Mortgage-Backed Securities...... 51,697 47,220 45,392
Asset-Backed Securities......... 1,659 2,228 3,470
Corporate Securities............ 16,253 20,603 17,224
Equity Securities............... 579 394 331
__________ __________ __________
Total...........................$ 103,490 $ 97,066 $ 90,679
========== ========== ==========
The following table illustrates the maturities of investment
securities and the weighted-average yields based upon amortized
cost as of December 31, 2004. 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..............$ - $ 126 $ 2,643 $25,280
Amortized Cost.......... - 120 2,536 24,687
Yield................... 6.25% 7.96% 6.90%
Obligations of U.S. Government Agencies by Contractual Maturity:*
Fair Value.............. - 5,253 - -
Amortized Cost.......... - 5,265 - -
Yield................... 3.83%
Mortgage-Backed Securities by Contractual Maturity:*
Fair Value.............. - 130 11,901 39,666
Amortized Cost.......... - 129 12,017 39,734
Yield................... 2.86% 4.07% 3.62%
Asset-Backed Securities by Contractual Maturity:*
Fair Value.............. - - 1,659 -
Amortized Cost.......... - - 1,643 -
Yield................... 6.86%
Corporate Securities:
Fair Value.............. - 6,294 3,188 6,771
Amortized Cost.......... - 6,354 3,165 6,591
Yield................... 4.48% 6.62% 6.93%
Equity Securities:
Fair Value..............
Amortized Cost..........
Yield...................
________ _______ ________ _________
Total Securities:
Fair Value..............$ - $11,803 $19,391 $71,717
Amortized Cost.......... - 11,868 19,361 71,012
Yield................... 4.19% 5.23% 5.07%
======== ======= ======== =========
* It is anticipated that these mortgage-backed and asset-backed
securities will be repaid prior to their contractual maturity
dates. The weighted-average yield for these securities is
impacted for normal amortization and estimated prepayments based
on current market interest rates.
(In thousands) Total
_________
Available-for-Sale Securities:
Obligations of State and Political Subdivisions:
Fair Value..............$ 28,049
Amortized Cost.......... 27,343
Yield................... 7.00%
Obligations of U.S. Government Agencies by Contractual Maturity:*
Fair Value.............. 5,253
Amortized Cost.......... 5,265
Yield................... 3.83%
Mortgage-Backed Securities by Contractual Maturity:*
Fair Value.............. 51,697
Amortized Cost.......... 51,880
Yield................... 3.72%
Asset-Backed Securities by Contractual Maturity:*
Fair Value.............. 1,659
Amortized Cost.......... 1,643
Yield................... 6.86%
Corporate Securities:
Fair Value.............. 16,253
Amortized Cost.......... 16,110
Yield................... 5.90%
Equity Securities:
Fair Value.............. 579
Amortized Cost.......... 370
Yield................... 3.73%
_________
Total Securities:
Fair Value..............$103,490
Amortized Cost.......... 102 611
Yield................... 4.99%
=========
* It is anticipated that these mortgage-backed and asset-backed
securities will be repaid prior to their contractual maturity
dates. The weighted-average yield for these securities is
impacted for normal amortization and estimated prepayments based
on current market interest rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
LOANS
Net loans were $263,001,000 at December 31, 2004, representing a
16.7% increase over net loans of $225,381,000 at December 31,
2003. As shown in the following table, the increase in loans was
primarily due to an increase in commercial and agricultural
loans. There was also moderate growth in residential real estate
loans which was primarily a result of an increase in home equity
lines of credit. In addition, there has been a decline in the
balance of purchased loans (residential mortgages and
manufactured housing loans) from 2003 to 2004. Purchased loans
decreased by $4,777,000 during 2004 to a balance of $16,570,000
at December 31, 2004.
At December 31, 2004, there were no loan concentrations over 10%
of loans outstanding to any one category or borrower. However,
loans secured by real estate constitute 87% 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 $169,157,000 at December
31, 2004, and $126,380,000 at December 31, 2003. See section on
Market Risk - Interest Rate Risk.
Other than as described herein, management does not believe there
are any trends, events or uncertainties which are reasonably
expected to have a material adverse impact on future results of
operations, liquidity or capital resources. Further, based on
known information, management believes that the effects of
current and past economic conditions and other unfavorable
business conditions may result in the inability of loans
amounting to $394,000 to comply with their respective repayment
terms. These loans are not considered impaired as defined by
current generally accepted accounting principles since it is only
possible, but not probable that they will not be able to comply
with their respective repayment terms. This represents a
decrease from the amount of $1,879,000 at December 31, 2003, and
is primarily a result of numerous loans being classified as
impaired during 2004. 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. 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 2005. The nonperforming loans
table, appearing in the section entitled Nonperforming Assets,
does not include the aforementioned loans.
Loans are composed of the following:
December 31,
__________________________________
(In thousands) 2004 2003 2002
_________ _________ __________
Real Estate Mortgages:
First and Second Residential.$121,799 $116,173 $114,441
Commercial and Industrial.... 79,711 64,589 48,411
Construction and Land
Development................. 9,396 5,337 5,405
Agricultural................. 17,423 8,400 7,147
Commercial and Industrial...... 12,674 10,075 9,109
Consumer....................... 9,759 11,089 5,416
Agricultural................... 4,614 478 516
Other.......................... 7,515 8,929 8,315
_________ _________ __________
Total Loans................. 262,891 225,070 198,760
Add: Unamortized Premium on
Purchased Loans........... 191 371 358
Less: Unearned Income.......... (81) (60) (53)
_________ _________ __________
Loans (Net of Unearned
Income)..................$263,001 $225,381 $199,065
========= ========= ==========
December 31,
____________________________________
(In thousands) 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
Other.......................... 6,172 8,080
_________ _________
Total Loans................. 203,060 186,027
Add: Unamortized Premium on
Purchased Loans........... 558 -
Less: Unearned Income.......... (37) (46)
_________ _________
Loans (Net of Unearned
Income)...................$203,581 $185,981
========= =========
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 2004, are as follows:
Years to Maturity*
Within 1 - 5 Over
(In thousands) 1 Year Years 5 Years Total
_______ ________ _______ _______
Commercial,
Agricultural and Other....$21,180 $11,893 $88,864 $121,937
Construction and Land
Development.............. 7,362 1,625 409 9,396
_______ ________ _______ ________
Total....................$28,542 $13,518 $89,273 $131,333
Fixed Interest Rates........$ 5,107 $ 5,452 $ 7,024 $ 17,583
Floating or Adjustable
Interest Rates........... 23,435 8,066 82,249 113,750
_______ ________ _______ ________
Total....................$28,542 $13,518 $89,273 $131,333
======= ======== ======= ========
* 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.
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 $118,000 would have
been recorded on such loans for the year ended December 31, 2004,
and $113,000 for the year ended December 31, 2003. No interest
income was recognized on such loans for the years ended December
31, 2004 and 2003. At December 31, 2004, total nonperforming
loans amounted to $1,953,000, or 0.7%, of net loans, as compared
to $1,342,000, or 0.6% of net loans, at December 31, 2003. The
increase in non-performing loans primarily related to several
commercial loans that were just beyond 90 days past due at
December 31, 2004. Historically, the percent of nonperforming
loans to net loans as of December 31, for the previous five-year
period, was an average of 0.8%. There are no troubled debt
restructurings.
At December 31, 2004, the recorded investment in loans that are
considered to be impaired under generally accepted accounting
principles was $4,114,000 as compared to $2,418,000 at December
31, 2003. The increase in impaired loans is primarily a result
of several commercial loan relationships that became impaired
during 2004. The measure of impairment is based on the fair
value of collateral securing these loans, which is primarily real
estate. The related allowance for loan losses amounted to
$442,000 at December 31, 2004, and $373,000 at December 31, 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
The following shows the summary of nonperforming loans:
December 31,
_________________________________
(In thousands) 2004 2003 2002
________ ________ _________
Nonaccruing Loans...............$ 1,192 $ 1,334 $ 1,310
Accruing Loans - 90 days or
more past due................. 761 8 364
________ ________ __________
Total Nonperforming
Loans.......................$ 1,953 $ 1,342 $ 1,674
======== ======== ==========
Nonperforming Loans
as a % of Net Loans........... .7% .6% .8%
======== ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans......... 117% 148% 108%
======== ======== ==========
December 31,
_________________________
(In thousands) 2001 2000
________ ________
Nonaccruing Loans...............$ 1,589 $ 1,625
Accruing Loans - 90 days or
more past due................. 615 164
________ ________
Total Nonperforming
Loans.......................$ 2,204 $ 1,789
======== ========
Nonperforming Loans
as a % of Net Loans........... 1.1% 1.0%
======== ========
Allowance for Loan
Losses as a % of
Nonperforming Loans........... 86% 100%
======== ========
Foreclosed real estate includes assets acquired through
foreclosure and loans identified as in-substance foreclosures.
There was no foreclosed real estate at December 31, 2004, and
$104,000 at December 31, 2003. Foreclosed real estate as of
December 31, 2003, consisted of one mixed-use property.
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 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. Management
determined that no adjustment to the allowance for loan losses
was necessary as a result of the Office of the Comptroller of the
Currency's (OCC's) most recent examination.
During 2004, 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, 2004,
the percent of loans secured by real estate was 87% of the
overall loan portfolio. Union National's current policy requires
that the borrower generally provides at least 20% equity for
commercial real estate loans. Residential mortgage loans require
20% equity or the purchase of private mortgage insurance.
Certain home equity loans are made with less than 20% equity, but
the interest rate on the loan is adjusted to reflect this
increased risk.
The allowance for loan losses at December 31, 2004, increased by
$303,000 over the prior year. This increase was primarily a
result of increased loan balances and $69,000 of the increase
related to impaired loans as discussed above. The ratio of the
allowance for loan losses to net loans was 0.87% at December 31,
2004, as compared to 0.88% at December 31, 2003. The overall
level of the allowance for loan losses has increased over the
previous five-year period primarily as a result of loan growth.
During the same period, the allowance for loan losses to total
loans has declined from 0.96% to 0.87% as a result of an improved
net charge-off history and increased overall credit quality.
Management believes, based on information currently available,
that the current allowance for loan losses of $2,288,000 is
adequate to meet potential loan losses. For 2005, management
expects loan charge-offs, net of recoveries, to be comparable to
the level of net loan charge-offs for 2004.
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
Years Ended December 31,
_________________________________
(In thousands) 2004 2003 2002
________ ________ ________
Average Loans Outstanding.......$244,752 $200,808 $201,976
======== ======== ========
Allowance for Loan Losses,
Beginning of Year.............$ 1,985 $ 1,812 $ 1,893
Loans Charged-Off During Year:
Real Estate*................. 112 98 112
Consumer..................... 25 23 86
Commercial, Industrial
and Agricultural........... 24 1 177
________ ________ ________
Total Charge-Offs.......... 161 122 375
Recoveries of Loans
Previously Charged-Off:
Real Estate*................. 24 - 53
Consumer..................... 35 21 52
Commercial, Industrial
and Agricultural........... 1 - 5
________ ________ ________
Total Recoveries............ 60 21 110
________ ________ ________
Net Loans Charged-Off....... 101 101 265
Provision for Loan Losses
Charged to Operations......... 404 274 184
________ ________ ________
Allowance for Loan Losses,
End of Year...................$ 2,288 $ 1,985 $ 1,812
======== ======== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding............. .04% .05% .13%
======== ======== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year................ .87% .88% .91%
======== ======== ========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
Years Ended December 31,
_________________________________
(In thousands) 2001 2000
________ ________
Average Loans Outstanding.......$186,877 $ 182,728
======== ========
Allowance for Loan Losses,
Beginning of Year.............$ 1,787 $ 1,783
Loans Charged-Off During Year:
Real Estate*................. 133 162
Consumer..................... 167 92
Commercial, Industrial
and Agricultural........... 240 169
________ ________
Total Charge-Offs.......... 540 423
Recoveries of Loans
Previously Charged-Off:
Real Estate*................. 5 1
Consumer..................... 54 22
Commercial, Industrial
and Agricultural........... 11 7
________ ________
Total Recoveries............ 70 30
________ ________
Net Loans Charged-Off....... 470 393
Provision for Loan Losses
Charged to Operations......... 576 397
________ ________
Allowance for Loan Losses,
End of Year...................$ 1,893 $ 1,787
======== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding............. .25% .22%
======== ========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year................ .93% .96%
======== ========
* 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 that consists of specific, general and
unallocated components. The specific component relates to loans
that are classified as impaired. For such loans, an allowance is
established when the discounted cash flows (or collateral value
or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers
all other loans and is based on historical loss experience
adjusted for qualitative factors. An unallocated component is
maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the
allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
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, 2004:
Commercial, Industrial
and Agricultural...........$ 1,293 50%
Real Estate-
Residential Mortgages...... 514 46
Consumer.................... 147 4
Unallocated................. 334 -
__________ _____
Total Allowance for
Loan Losses...........$ 2,288 100%
========== =====
December 31, 2003:
Commercial, Industrial
and Agricultural...........$ 1,091 43%
Real Estate-
Residential Mortgages...... 450 52
Consumer.................... 152 5
Unallocated................. 292 -
__________ _____
Total Allowance for
Loan Losses...........$ 1,985 100%
========== =====
December 31, 2002:
Commercial, Industrial
and Agricultural...........$ 1,078 39%
Real Estate-
Residential Mortgages...... 231 58
Consumer.................... 184 3
Unallocated................. 319 -
__________ _____
Total Allowance for
Loan Losses...........$ 1,812 100%
========== =====
December 31, 2001:
Commercial, Industrial
and Agricultural...........$ 1,131 33%
Real Estate-
Residential Mortgages...... 250 63
Consumer.................... 266 4
Unallocated................. 246 -
__________ _____
Total Allowance for
Loan Losses...........$ 1,893 100%
========== =====
December 31, 2000:
Commercial, Industrial
and Agricultural...........$ 971 38%
Real Estate-
Residential Mortgages...... 430 57
Consumer.................... 129 5
Unallocated................. 257 -
__________ _____
Total Allowance for
Loan Losses...........$ 1,787 100%
========== =====
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:
* proceeds from the sale or maturity of investment securities;
* overnight correspondent bank borrowings on various credit
lines and borrowing capacity available from the FHLB;
* acquisition of brokered certificates of deposit (CDs) and CDs
through the CDARS program as discussed below;
* 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
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, 2004, the bank
had received long-term advances of $88,630,000 and short-term
advances of $1,500,000 from its available credit of $129,706,000
at the FHLB for purposes of funding loan demand and mortgage-
backed security purchases. At December 31, 2004, total
outstanding long-term borrowings had a weighted-average rate of
3.54%. At December 31, 2003, total long-term borrowings were
$73,874,000 and had a weighted-average rate of 3.90%. As of
December 31, 2004, advances of $19,406,000 are due in 2005 and
advances of $25,000,000 are currently convertible by the FHLB on
a quarterly basis. 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.
In January 2004, Union National became the first bank in
Lancaster County to offer our customers FDIC insurance coverage
beyond $100,000 through a unique program called the Certificate
of Deposit Account Registry Service (CDARS). Through this
program customers may be able to invest up to $10 million with
Union National and maintain full FDIC insurance coverage. Union
National is also able to bid for and obtain additional brokered
CDs through this program as an additional source of liquidity.
As of December 31, 2004, Union National had $21,332,000
outstanding in brokered CDs and in CDs acquired through the CDARS
program.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations
The following table represents Union National's on- and off-
balance sheet aggregate contractual obligations to make future
payments as of December 31, 2004:
(In thousands) Less Than 1-3 4-5 Over 5
1 Year Years Years Years Total
__________ _______ _______ _______ ________
Time Deposits..... $62,043 $29,541 $ 9,411 $ 13 $101,008
Long-Term Debt.... 17,906 34,984 3,100 32,640 88,630
Junior Subordinated
Debentures...... - - - 11,341 11,341
Real Estate Purchase
Contract........ - 1,300 - - 1,300
Operating Leases.. 135 197 189 210 731
_________ _______ _______ _______ ________
Total............ $80,084 $66,022 $12,700 $44,204 $203,010
========= ======= ======= ======= ========
In addition, Union National, in the conduct of business
operations, routinely enters into contracts for services. These
contracts may require payment for services to be provided in the
future and may also contain penalty clauses for the early
termination of the contracts. Union National is contracted with
its core data processor for the provision of certain services
including transaction processing, branch automation and
communication services, trust processing, ATM processing and
various other services. Payments under these contracts amounted
to $671,000 for the year ended December 31, 2004. Future
payments under these contracts will vary based on transaction and
account volumes and may also reflect inflationary cost
adjustments. The majority of this contract expires in November
2008 and any early termination will require the payment of a
substantial penalty. Management is not aware of any other
commitments or contingent liabilities which may have a material
adverse impact on the liquidity or capital resources of Union
National.
The real estate purchase contract included in the table above
relates to a contract for the purchase of a property located in
East Hempfield Township, PA to be used for the development of a
new retail branch location. It is anticipated that settlement of
this transaction will occur in January 2006.
Union National is also 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 (See Note 12 for additional details).
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 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 are 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 Union National's assets
and liabilities. The nature of Union National's current
operations is such that Union National 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 Union National's Board of Directors. Union
National 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. Union National retains an
outside consulting group to assist in monitoring its interest
rate risk using a net interest income simulation model on a
quarterly basis. The simulation model measures the sensitivity
of future net interest income to hypothetical changes in market
interest rates.
In addition, Union National 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. Union
National's GAP report at December 31, 2004, reflects a positive
rate-sensitivity position throughout the first year, in that
rate-sensitive assets exceed rate-sensitive liabilities. The
following analysis reflects cumulative rate-sensitive assets of
$185,154,000, as compared to cumulative rate-sensitive
liabilities of $167,494,000 as of the one-year time frame. Union
National's cumulative interest-sensitivity gap for the one-year
time frame is 4.4% of total assets at December 31, 2004, as
compared to 9.8% at December 31, 2003. Union National manages the
interest-sensitivity gap for the one-year time frame with a
guideline of plus 15% to negative 15% of total assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
The interest rate sensitivity analysis for Union National with
investment securities at amortized cost at December 31, 2004, is
as follows:
INTEREST RATE SENSITIVITY
1 - 90 91 - 365 1 - 3 3 - 5
(In thousands) Days Days Years Years
________ ________ ________ _________
ASSETS
Earning Assets:
Mortgage-Backed and Asset-Backed Securities:
Variable................$ 366 $ 1,057 $ 44 $ 10
Fixed................... 5,030 11,008 20,359 9,629
Other Investment
Securities and
Other Earning Assets.. 7,478 1,421 4,305 12,574
Net Loans:
Variable................ 96,730 28,774 32,911 9,676
Fixed................... 12,212 21,078 30,344 14,688
________ ________ ________ _________
TOTAL..................$121,816 $ 63,338 $ 87,963 $ 46,577
======== ======== ======== =========
LIABILITIES
Deposits:
Interest-Bearing Demand.$ 700 $ - $ - $ -
Money Market............ 54,648 - - -
Savings................. 450 1,578 - -
Time.................... 23,937 38,106 29,541 9,411
FHLB Advances and
Other Borrowings........ 33,655 14,420 20,680 3,100
________ ________ ________ _________
TOTAL.................$113,390 $ 54,104 $ 50,221 $ 12,511
======== ======== ======== =========
Cumulative Interest-
Sensitivity Gap.........$ 8,426 $ 17,660 $ 55,402 $ 89,468
======== ======== ======== =========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets......... 2.1% 4.4% 13.9% 22.4%
======== ======== ======== =========
Over 5
(In thousands) Years Total
________ ________
ASSETS
Earning Assets:
Mortgage-Backed and Asset-Backed Securities:
Variable................ $ - $ 1,477
Fixed................... 6,020 52,046
Other Investment Securities
and Other
Earning Assets........ 28,311 54,089
Net Loans:
Variable................ 1,066 169,157
Fixed................... 15,754 94,076
_________ _________
TOTAL.................. $ 51,151 $370,845
========= =========
LIABILITIES
Deposits:
Interest-Bearing Demand. $ 39,828 $ 40,528
Money Market............ - 54,648
Savings................. 30,168 32,196
Time.................... 13 101,008
FHLB Advances and
Other Borrowings........ 32,640 104,495
_________ _________
TOTAL................. $102,649 $332,875
========= =========
Cumulative Interest-
Sensitivity Gap......... $ 37,970
=========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets........ 9.5%
=========
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 adjust 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, 2004, would likely cause assumptions,
such as estimated prepayment speeds, refinancings, embedded
options, early withdrawals and FHLB advance conversion clauses to
significantly change the GAP results above. Based on current
market interest rates, the $25,000,000 in FHLB convertible
advances that are currently convertible on a quarterly basis 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, Union National 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 of changes in
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 Union National'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 Union National'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.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
As a result of the simulation model, the following reflects Union
National's net interest income and net income sensitivity
analysis as of December 31, 2004 and 2003:
SENSITIVITY ANALYSIS
Percent Decrease in Categories
_____________________________________
Market Market Market
Interest Interest Current Interest
Rate Rate Market Rate
Decline Decline Interest Increase
of 2% of 1% Rates of 2%
__________ _______ _________ _________
Net Interest Income:
Policy Limit.............. <10% - - <10%
Hypothetical Percent Decrease
In Net Interest Income
from Current Rate Scenario:
As of December 31, 2004. Not Modeled <2% - -
As of December 31, 2003. Not Modeled - - -
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 2004. Not Modeled <4% - -
As of December 31, 2003. Not Modeled - - -
As of December 31, 2004 and 2003, only a one-percent decline in
interest rates was modeled based on management's assessment of
potential future interest rate levels. The preceding schedule
indicates that as of December 31, 2004, a hypothetical 1% decline
in prevailing market interest rates would cause Union National's
net interest income to decline less than 2% from the current rate
scenario. After adjusting for income taxes, a 1% decline in
rates would cause less than a 4% impact to Union National's net
income in comparison to the net income earned for 2004. The
preceding schedule also indicates that a 2% increase in interest
rates as of December 31, 2004, would have an immaterial positive
impact on Union National's net interest income and net income.
These 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.
Union National managed its interest rate risk position in 2004 by
the following:
* increasing its use of adjustable- and floating-rate loans for
new or refinanced commercial and agricultural loans;
* repositioning of its investment security portfolio into
certain types of mortgage-backed and asset-backed securities
to better prepare for any future increase in interest rates;
* managing and expanding the bank's core deposit base including
deposits obtained in the bank's commercial cash management
programs and premium money market accounts;
* adding to or restructuring of fixed-rate and floating-rate
advances from the FHLB; and
* issuing $3,093,000 in junior subordinated debentures.
The above strategies and actions impact interest rate risk and
are all included in Union National's quarterly simulation models
in order to determine future asset and liability management
strategies. See the related discussions in the section on Net
Interest Income.
STOCKHOLDERS' EQUITY
Union National and the bank maintain capital ratios that are
above the minimum total capital levels required by federal
regulatory authorities. See Note 13 to the Consolidated
Financial Statements for additional details.
Items which could impact future capital resources of Union
National include the contract discussed above for $1,300,000 for
the purchase of property for a new retail branch location that is
expected to settle in January 2006. In addition, in February
2005, Union National entered into a construction contract with
PWCampbell Contracting Company of Pittsburgh, PA for the design
and construction of a new retail office location. This retail
office location will be constructed on a leased lot located in
East Lampeter Township, Lancaster County, PA. The contract is
for a projected total amount of $1,209,000 and it is currently
anticipated that construction will begin during the Summer of
2005. There will be additional costs beyond the contract amounts
detailed here related to the construction, furniture and
equipment needed for these two new office locations. There are
no other known trends or uncertainties, including regulatory
matters that are expected to have a material adverse impact on
the capital resources of Union National for 2005.
Union National's average stockholders' equity to average assets
ratio, which measures the adequacy of capital, was 7.05% for
2004, as compared to 8.25% for 2003. The decline in this ratio
is primarily a result of growth in average assets and repurchases
of common stock during 2004. The repurchases of common stock,
which totaled 100,489 shares at a cost of $2,260,000, were funded
by the issuance of junior subordinated debentures as discussed
earlier in the section on Net Interest Income. The dividend
payout ratio, which represents the percentage of earnings
returned to the stockholders in the form of cash dividends, was
47.8% for 2004 and 48.9% for 2003.
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. 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
2005 of approximately $2,274,000, plus an amount equal to the net
profits of the bank in 2005 up to the date of any such dividend
declaration.
Union National maintains a Dividend Reinvestment and Stock
Purchase Plan. Holders 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, 2004, the enrollment in the plan was approximately 20% of the
shares outstanding. As of December 31, 2004, 130,400 shares have
been issued under Union National's Dividend Reinvestment and
Stock Purchase Plan. Union National had approximately 1,381
stockholders (including stockholders of record and individual
participants in security position listings) at December 31, 2004,
and approximately 1,403 stockholders at December 31, 2003.
REGULATORY ACTIVITY
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of,
and restrictions on, the business of Union National and the bank.
As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National's and the
bank's business is particularly susceptible to being affected by
federal legislation and regulations that may increase the cost of
doing business. 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 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. The bank is also
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.
MANAGEMENT'S DISCUSSION AND ANALYSIS continued
USA PATRIOT Act
On October 26, 2001, the USA Patriot Act of 2001 was enacted.
This act contains the International Money Laundering Abatement
and Financial Anti-Terrorism Act of 2001, which sets forth anti-
money laundering measures affecting insured depository
institutions, broker-dealers and other financial institutions.
The Act requires U.S. financial institutions to adopt new
policies and procedures to combat money laundering and grants the
Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on the
operations of financial institutions. The impact of this Act is
not expected to be material to Union National.
SARBANES-OXLEY Act of 2002
On July 30, 2002, the Sarbanes-Oxley Act of 2002 was enacted.
The Sarbanes-Oxley Act represents a comprehensive revision of
laws affecting corporate governance, accounting obligations and
corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity securities registered or that file reports
under the Securities Exchange Act of 1934. In particular, the
Sarbanes-Oxley Act established: (i) new requirements for audit
committees, including independence, expertise and
responsibilities; (ii) additional responsibilities regarding
financial statements for the Chief Executive Officer and Chief
Financial Officer of the reporting company; (iii) new standards
for auditors and regulation of audits; (iv) increased disclosure
and reporting obligations for the reporting company and its
directors and executive officers; and (v) new and increased civil
and criminal penalties for violations of the securities laws.
Many of the provisions were effective immediately while other
provisions became effective over a period of time and are subject
to rulemaking by the SEC. Because Union National's common stock
is registered with the SEC, it is currently subject to this Act.
Throughout 2002, 2003 and 2004, the SEC and Nasdaq Stock Market
issued new regulations affecting our corporate governance and
heightening our disclosure requirements. In addition, Union
National will need to comply with the provisions of Section 404
of the Sarbanes-Oxley Act during 2006. In accordance with
Section 404, Union National will be required to report on its
internal control over financial reporting as of December 31,
2006. To allow for proper reporting on the internal control over
financial reporting, Union National will need to identify,
document and test key controls over the financial reporting
process. There will be significant external and internal costs
associated with complying with the provisions of Section 404.
The full impact of the Sarbanes-Oxley Act and the increased costs
related to Union National's compliance are still uncertain and
evolving.
We cannot predict what other legislation might be enacted or what
regulations might be adopted, or if enacted or adopted, the
effect thereof on our operations.
BOARD OF DIRECTORS
Nancy Shaub Colarik
Retired Senior Officer from Banking
William E. Eby
Retired Bank President/CEO
Mark D. Gainer
President/CEO, Union National Financial Corporation and Union
National Community Bank
James R. Godfrey
Senior Consultant, The Benecon Group
Carl R. Hallgren, Esq.
Attorney-Treasurer, Morgan, Hallgren, Croswell and Kane P.C.
William M. Nies
Real Estate Developer/Sales, L.M.S. Commercial Real Estate
Darwin A. Nissley
Partner, Nissley Brothers
Lloyd C. Pickell
Lloyd C. Pickell, PA
Benjamin W. Piersol, Jr., R.Ph.
Vice President and Co-Owner, Sloan's Pharmacy, Inc.
Donald H. Wolgemuth
Partner, Donegal Producers
RETIRED DIRECTORS
Daniel H. Raffensperger
President and Chairman of the Board, Continental Press, Inc.
Dan began his tenure on January 9, 1992. He retired from the
Financial Corporation in April of 2004, and from the bank's Board
of Directors in December 2004. Although Dan has retired from the
bank's Board of Directors, he is still very active at Continental
Press - a company founded in 1937 by his father. Dan and his
wife Karen enjoy spending time with their two children and four
grandchildren. He also finds the time to golf, which is a sport
at which he excels; however, being in the publishing business, he
also finds time to read current publications and biographies.
Office Locations
COLUMBIA
921 Lancaster Avenue, Columbia, PA 17512
ELIZABETHTOWN
1275 South Market Street, Elizabethtown, PA 17022
HEMPFIELD
190 Stony Battery Road, Landisville, PA 17538
MANHEIM
701 Lancaster Road, Manheim, PA 17545
MANHEIM TWP
38 East Roseville Road, Lancaster, PA 17601
MAYTOWN
100 West High Street, Maytown, PA 17550
MOUNT JOY
101 East Main Street, Mount Joy, PA 17552
www.uncb.com * 717-492-2222
EXHIBIT 21
__________
SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21
__________
UNION NATIONAL FINANCIAL CORPORATION
SUBSIDIARIES OF REGISTRANT
Subsidiary Incorporation
__________ _____________
Union National Community Bank National Banking Association
Union National Capital Trust I Delaware Statutory Trust
Union National Capital Trust II Delaware Statutory Trust
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, 333-8073, No. 333-
27837 and 333-107326
We consent to the incorporation by reference in the above
listed Registration Statements of our report dated January 21,
2005, relating to the consolidated financial statements of Union
National Financial Corporation incorporated by reference in its
Annual Report (Form 10-K) for the year ended December 31, 2004.
/s/ BEARD MILLER COMPANY LLP
Harrisburg, Pennsylvania
March 28, 2005
EXHIBIT 31.1
____________
Rule 13a-14(a)/15d-14(a) Certification of CEO
EXHIBIT 31.1
RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEO
I, Mark D. Gainer, President/CEO, certify, that:
1. I have reviewed this annual report on Form 10-K of Union
National Financial Corporation.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and
other financial information included in this annual
report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented
in this annual report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures,
or caused such disclosure controls and procedures
to be designed under our supervision, to ensure
that material information relating to the
registrant, including its consolidated
subsidiaries, is made known to us by others within
those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the
end of the period covered by this annual report
based on such evaluation (the "Evaluation Date");
and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. Union National's other certifying officer and I have
disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies and material
weaknesses in the design or operation of the
internal control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process, summarize
and
report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls over financial reporting.
By /s/ Mark D. Gainer
__________________
President/CEO
Date: March 29, 2005
EXHIBIT 31.2
____________
Rule 13a-14(a)/15d-14(a) Certification of CFO
EXHIBIT 31.1
RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFO
I, Clement M. Hoober, Treasurer/CFO, certify, that:
1. I have reviewed this annual report on Form 10-K of Union
National Financial Corporation.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this annual report.
3. Based on my knowledge, the financial statements, and
other financial information included in this annual
report, fairly present in all material respects the
financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented
in this annual report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
(a) designed such disclosure controls and procedures,
or caused such disclosure controls and procedures
to be designed under our supervision, to ensure
that material information relating to the
registrant, including its consolidated
subsidiaries, is made known to us by others within
those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the
end of the period covered by this annual report
based on such evaluation (the "Evaluation Date");
and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5. Union National's other certifying officer and I have
disclosed, based on our most recent evaluation of
internal control over financial reporting, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing
the equivalent function):
(a) all significant deficiencies and material
weaknesses in the design or operation of the
internal control over financial reporting which are
reasonably likely to adversely affect the
registrant's ability to record, process, summarize
and
report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a
significant role in the registrant's internal
controls over financial reporting.
By /s/ Clement M. Hoober
_____________________
Treasurer/CFO
Date: March 29, 2005
EXHIBIT 32
__________
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Union National
Financial Corporation on Form 10-K for the period ending December
31, 2004, as filed with the Securities and Exchange Commission
(the "Report"), I, Mark D. Gainer, President/CEO, and I, Clement
M. Hoober, Treasurer/CFO, certify, pursuant to 18 U.S.C. Section
1350, as added pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
1. The report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934.
2. To my knowledge, the information contained in the Report
fairly presents, in all material respects the financial
condition and results of operations of Union National as
of the dates and for the periods expressed in the Report.
By /s/ Mark D. Gainer
__________________
President/CEO
Date: March 29, 2005
By /s/ Clement M. Hoober
_____________________
Treasurer/CFO
Date: March 29, 2005