Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
_____________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ _______________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy, PA 17552
___________________________________________________ ________
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(Former name, former address, & former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b02 of the Exchange Act).
Yes [ ] No [X]
______________
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,531,821 shares of $.25 (par) common stock were
_________________
outstanding as of May 5, 2005
______________
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
PART I - FINANCIAL INFORMATION: _________
_______________________
Item 1 - Financial Statements
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Comprehensive Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4-5
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 6-15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15-16
Item 4 - Controls and Procedures 16-17
PART II - OTHER INFORMATION
_________________
Item 1 - Legal Proceedings 18
Item 2 - Unregistered Sales of Equity Securities and
Use of Proceeds 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters to a Vote of
Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits 18
Signature Page 19
Exhibit 31.1 - Certification of Principal Executive
Officer Pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) as Added by Section
302 of the Sarbanes-Oxley Act of 2002 20-21
Exhibit 31.2 - Certification of Principal Financial
Officer Pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) as Added by Section
302 of the Sarbanes-Oxley Act of 2002 22-23
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 24-25
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except per share data)3/31/05 12/31/04
(Unaudited) (Audited)
______________________
ASSETS
Cash and Due from Banks $ 13,571 $ 9,803
Interest-Bearing Deposits in Other Banks 198 40
____________________
Total Cash and Cash Equivalents 13,769 9,843
Investment Securities Available-for-Sale 107,368 103,490
Loans Held for Sale - 232
Loans(Net of Unearned Income) 267,649 263,001
Less: Allowance for Loan Losses (2,430) (2,288)
____________________
Net Loans 265,219 260,713
Premises and Equipment - Net 6,425 6,517
Restricted Investment in Bank Stocks 4,845 4,961
Bank-Owned Life Insurance 9,591 9,487
Other Assets 4,987 4,047
____________________
TOTAL ASSETS $ 412,204 $ 399,290
====================
LIABILITIES
Deposits:
Noninterest-Bearing $ 39,902 $ 37,590
Interest-Bearing 235,239 228,380
____________________
Total Deposits 275,141 265,970
Short-Term Borrowings 7,458 4,524
Long-Term Debt 89,723 88,630
Junior Subordinated Debentures 11,341 11,341
Other Liabilities 2,021 1,972
____________________
TOTAL LIABILITIES 385,684 372,437
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 732 698
Shares: Authorized - 20,000,000; Issued -
2,928,978 in 2005 (2,792,046 in 2004)
Outstanding - 2,528,396 in 2005 (2,402,206
in 2004)
Surplus 12,709 9,570
Retained Earnings 21,236 23,644
Accumulated Other Comprehensive Income/(Loss) (238) 581
Treasury Stock - 400,582 shares in
2005 (389,840 in 2004), at cost (7,919) (7,640)
____________________
TOTAL STOCKHOLDERS' EQUITY 26,520 26,853
____________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 412,204 $ 399,290
====================
The accompanying notes are an integral part of the
consolidated financial statements.
* The Stockholders' Equity and share information as of March 31,
2005, reflects the 5% stock dividend declared by the
Corporation's Board of Directors on April 21, 2005, payable on
May 20, 2005, to stockholders of record on May 5, 2005
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
____________________________
2005 2004
____________________________
INTEREST INCOME
Interest and Fees on Loans $ 4,315 $ 3,672
Investment Securities:
Taxable Interest 849 735
Tax-Exempt Interest 293 288
Dividends 55 18
Other 1 2
____________________________
Total Interest Income 5,513 4,715
INTEREST EXPENSE
Deposits 934 732
Short-Term Borrowings 48 11
Long-Term Debt 799 775
Junior Subordinated Debentures 153 84
____________________________
Total Interest Expense 1,934 1,602
____________________________
Net Interest Income 3,579 3,113
PROVISION for LOAN LOSSES 124 57
____________________________
Net Interest Income after Provision
for Loan Losses 3,455 3,056
OTHER OPERATING INCOME
Income from Fiduciary Activities 71 71
Service Charges on Deposit Accounts 359 362
Other Service Charges, Commissions, Fees 184 141
Alternative Investment Sales Commissions 170 149
Investment Securities Gains 21 87
Mortgage Banking Activities 46 67
Earnings from Bank-Owned Life Insurance 104 97
Other Income 54 17
____________________________
Total Other Operating Income 1,009 991
OTHER OPERATING EXPENSES
Salaries and Wages 1,441 1,331
Retirement Plan and Other Employee
Benefits 479 375
Net Occupancy Expense 228 219
Furniture and Equipment Expense 173 166
Professional Fees 172 161
Data Processing Services 173 165
Pennsylvania Shares Tax 38 55
Advertising and Marketing Expenses 75 71
ATM Processing Expenses 86 73
Other Operating Expenses 605 514
____________________________
Total Other Operating Expenses 3,470 3,130
____________________________
Income before Income Taxes 994 917
PROVISION for INCOME TAXES 172 144
____________________________
NET INCOME for PERIOD $ 822 $ 773
============================
PER SHARE INFORMATION
Net Income for Period - Basic $ 0.33 $ 0.30
Net Income for Period - Assuming
Dilution 0.32 0.30
Cash Dividends 0.152 0.152
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $ 822 $ 773
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses)on
Investment Securities
Available-for-Sale Arising During
Period (805) 463
Reclassification Adjustment for Gains
Included in Net Income (14) (58)
____________________________
Total Other Comprehensive
Income/(Loss) (819) 405
____________________________
COMPREHENSIVE INCOME for PERIOD $ 3 $ 1,178
============================
The accompanying notes are an integral part of the consolidated
financial statements.
*Per share information is adjusted to reflect the 5% stock
dividend declared by the Corporation's Board of Directors on
April 21, 2005, payable on May 20, 2005, to stockholders of
record on May 5, 2005.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
____________________________
(In thousands) 2005 2004
____________________________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 822 $ 773
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 234 220
Provision for Loan Losses 124 57
Net Amortization of Investment
Securities' Premiums 236 308
Investment Securities Gains (21) (87)
Provision for Deferred Income Taxes 178 (49)
Earnings from Bank-Owned Life Insurance (104) (97)
Gains on Loans Sold (23) (41)
Proceeds from Sales of Loans 1,173 1,368
Loans Originated for Sale (918) (1,215)
(Increase)/Decrease in Accrued
Interest Receivable (186) 14
Increase in Other Assets (541) (217)
Increase in Other Liabilities 49 305
____________________________
Net Cash Provided by
Operating Activities 1,023 1,339
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities 2,939 7,748
Proceeds from Maturities of
Available-for-Sale Securities 4,979 3,386
Purchases of Available-for-Sale
Securities (13,251) (10,724)
Net (Purchases)/Sales of Restricted
Investments in Bank Stocks 116 (252)
Net Loans Made to Customers (4,630) (6,121)
Purchases of Premises and Equipment (88) (307)
____________________________
Net Cash Used in
Investing Activities (9,935) (6,270)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase in Demand Deposits
and Savings Accounts 6,081 5,094
Net Increase in Time Deposits 3,090 1,602
Net Increase/(Decrease) in Short-Term
Borrowings 2,934 (5,453)
Proceeds from Issuance of Long-Term Debt 4,123 8,740
Payment on Long-Term Debt (3,030) (1,000)
Acquisition of Treasury Stock (279) (1,265)
Issuance of Common Stock 303 195
Cash Dividends Paid (384) (393)
____________________________
Net Cash Provided by Financing
Activities 12,838 7,520
____________________________
Net Increase in Cash and Cash
Equivalents 3,926 2,589
CASH and CASH EQUIVALENTS -
Beginning of Year 9,843 8,679
____________________________
CASH and CASH EQUIVALENTS -
End of Period $ 13,769 $ 11,268
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 1,905 $ 1,514
Income Taxes - -
The accompanying notes are an integral part of the consolidated
financial statements.
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is unaudited
and subject to year-end audit. However, in the opinion of
management, the information reflects all adjustments necessary to
present fairly the financial condition and results of operations
for the periods presented. All such adjustments were of a
normal, recurring nature. All material intercompany transactions
have been eliminated in consolidation. The results of operations
for the three-month period ended March 31, 2005, are not
necessarily indicative of the results to be expected for the full
year.
2. These statements should be read in conjunction with notes to
the consolidated financial statements contained in the 2004
Annual Report to Stockholders.
3. All share and per share computations include the retroactive
effect of stock dividends. This includes the 5% stock dividend
declared by the board of directors on April 21, 2005, payable on
May 20, 2005, to stockholders of record on May 5, 2005. A total
of approximately 120,424 shares will be issued on May 20, 2005,
under the 5% stock dividend. The weighted-average number of
shares of common stock outstanding was as follows:
Basic Assuming Dilution
_____ _________________
Three months ended:
March 31, 2005 2,522,424 2,574,099
March 31, 2004 2,563,531 2,612,367
4. 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
as follows:
Three Months
Ended March 31,
(In thousands, except per share data) _______________
2005 2004
______ _______
Net Income - As Reported $ 822 $ 773
Less: Stock Based Compensation Cost - (24)
_______ _______
Net Income - Pro Forma $ 822 $ 749
======= =======
Net Income Per Share:
As Reported (Basic) $ 0.33 $ 0.30
As Reported (Assuming Dilution) 0.32 0.30
Pro Forma (Basic) 0.33 0.29
Pro Forma (Assuming Dilution) 0.32 0.29
5. Union National does not issue any guarantees that would
require liability recognition or disclosure, other than its
standby letters of credit. Standby letters of credit written are
conditional commitments issued by Union National to guarantee the
performance of a customer to a third party. Generally, all
letters of credit, when issued have expiration dates within one
year. The credit risk involved in issuing letters of credit is
essentially the same as those that are involved in extending loan
facilities to customers. Union National generally holds
collateral and/or personal guarantees supporting these
commitments. Union National had outstanding standby letters of
credit of $3,429,000 as of March 31, 2005, and $4,503,000 as of
December 31, 2004. Management believes that the proceeds
obtained through a liquidation of collateral and the enforcement
of guarantees would be sufficient to cover the potential amount
of future payment required under the corresponding guarantees.
The amount of the liability as of March 31, 2005, and December
31, 2004, for guarantees under standby letters of credit issued
is not material.
6. In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement No. 123(R), "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.
On April 14, 2005, the Securities and Exchange Commission ("SEC")
adopted a new rule that amends the compliance dates for Statement
No. 123(R). Under the new rule, Union National is required to
adopt SFAS No. 123(R) in the first annual period beginning after
June 15, 2005. Union National has not yet determined the method
of adoption or the effect of adopting SFAS No. 123(R), and it has
not determined whether the adoption will result in amounts that
are similar to the current pro forma disclosures under SFAS No.
123.
In March 2005, the SEC issued Staff Accounting Bulletin No. 107
("SAB No. 107"), "Share-Based Payment", providing guidance on
option valuation methods, the accounting for income tax effects
of share-based payment arrangements upon adoption of SFAS No.
123(R), and the disclosures in MD&A subsequent to the adoption.
Union National will provide SAB No. 107 required disclosures upon
adoption of SFAS No. 123(R).
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.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in the accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company, and its wholly-owned
subsidiary, Union National Community Bank. Union National's
consolidated financial condition and results of operations
consist almost entirely of the bank's financial condition and
results of operations. Union National's trust subsidiaries,
Union National Capital Trust I and Union National Capital Trust
II, were established during December 2003 and October 2004,
respectively, for the purpose of issuing $11,000,000 of trust
capital securities. This discussion should be read in
conjunction with the 2004 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.
Stockholders 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; 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 March 31, 2005, 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 (R), "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 first quarter
of 2006. 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. See
Note 6 for additional information.
Results of Operations
_____________________
Overview
Consolidated net income for the three months ended March 31,
2005, was $822,000, an increase of 6.3% as compared to
consolidated net income of $773,000 for the same period of 2004.
After adjusting for the impact of the 5% stock dividend that is
payable on May 20, 2005, basic earnings per share for the three
months ended March 31, 2005, amounted to $0.33 and diluted
earnings per share amounted to $0.32, as compared to basic and
diluted earnings per share of $0.30 for the three months ended
March 31, 2004.
The following items impacted results of operations for the three
months ended March 31, 2005, as compared to the same period of
2004:
* Net income increased due to a $462,000, or 14.0%, increase
in net interest income (on a taxable equivalent basis) that
was largely a result of growth in average earning assets,
which was funded by increased deposits and borrowings.
* Net income increased due to an $84,000, or 9.3%, increase in
other operating income (excluding investment securities
gains).
* Net income decreased due to a $66,000 decrease in gains on
the sale of investment securities.
* Net income decreased due to a $67,000 increase in the
provision for loan losses.
* Net income decreased due to a $340,000, or 10.9%, increase
in other operating expenses, primarily as a result of
increased salaries and wage costs and related employee
benefits.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of average stockholders' equity, also
known as return on average equity (ROE) and net income as a
percent of average realized stockholders' equity, which excludes
the impact of accumulated other comprehensive income/(loss), were
as follows on an annualized basis:
Three Months Ended March 31,
____________________________
2005 2004
______ ______
ROE 12.53% 11.35%
ROE (Realized Equity) 12.61% 11.89%
For Union National, accumulated other comprehensive income/(loss)
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 the remainder of 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. In addition,
Union National is currently in the process of establishing a
leasing department to augment the other commercial products and
services that Union National currently offers.
During the first three months of 2005, Union National experienced
strong commercial and agricultural loan demand. However, there
was a slight decline in other loan categories. Overall loan
balances have increased by $4,648,000, or 7.1% on an annualized
basis, since the beginning of 2005.
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 Credit Risk and Loan
Quality.
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.
For analytical and discussion purposes, net interest income and
corresponding yields are presented 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 net interest income in future periods,
management has entered into transactions that increase earning
assets funded by advances from the FHLB. As of March 31, 2005,
the bank had received long-term advances of $89,723,000 from its
available credit of $141,055,000 at the FHLB for purposes of
funding loan demand and security purchases. The total advances
have maturities that range from April 2005 to December 2013.
Total FHLB advances outstanding at March 31, 2005, represent an
increase of $8,109,000 from March 31, 2004, and the average
interest rate on these borrowings has decreased to 3.63% from
3.81%.
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 5.58% at March 31, 2005, and 4.02% at March 31, 2004.
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
this offering 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. 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.
In comparing the three months ended March 31, 2005, to the same
period of 2004, the net effect of volume growth in average
earning assets and interest-bearing liabilities increased net
interest income by $471,000. Growth in average earning assets
was funded primarily by increased deposit balances and additional
borrowings. Average earning assets increased by 14.4% for the
three months ended March 31, 2005, as compared to the same period
of 2004.
The overall interest rate on the average total earning assets for
the three months ended
March 31, 2005, was 6.08%, as compared to 5.99% for the same
period of last year. The overall interest rate on the average
interest-bearing liabilities was 2.32% for the three months ended
March 31, 2005, and 2.19% for the three months ended March 31,
2004. The net effect of these interest rate changes was to
decrease net interest income in the amount of $9,000 for the
three months ended March 31, 2005, over the same period of 2004.
The net interest margin percentage for the three months ended
March 31, 2005, was 4.02%, as compared to 4.03% for the same
period of 2004.
For the remainder of 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 the remainder of 2005 in comparison to the same period
of 2004. The netting of these two factors, as reflected in Union
National's current simulation model and estimates as of March 31,
2005, may result in net interest income for the remainder of 2005
that reflects a moderate increase over the net interest income
earned during the same period of 2004. Expected growth in
earning assets during the remainder of 2005 should also increase
Union National's net interest earnings. This expected growth was
not reflected in the model at March 31, 2005. 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 $9,591,000 at
March 31, 2005. 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.
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 $124,000 for the three months ended March 31,
2005, as compared to $57,000 for the three months ended March 31,
2004. For the three months ended March 31, 2005, Union National
had net recoveries of $18,000 and for the same period of 2004
there were net charge-offs of $5,000. The increased provision
for loan losses in 2005 can be primarily attributed to growth in
outstanding loan balances. Future adjustments to the allowance,
and consequently the provision for loan losses, may be necessary
if economic conditions or loan credit quality differ
substantially from the assumptions used in making management's
evaluation of the level of the allowance for loan losses as
compared to the balance of outstanding loans. See discussion on
Loan Quality/Allowance for Loan Losses.
Other Operating Income
Other operating income (excluding investment securities gains)
for the three months ended March 31, 2005, was $988,000,
representing an increase of $84,000 or 9.3%, from the same period
of 2004. The increase in income for the three-month period was
primarily a result of an increase in debit card interchange
income of $31,000, an increase of $21,000 in commissions earned
on the sale of alternative investment products and an increase in
merchant credit card fees of $14,000.
Investment securities gains amounted to $21,000 in the first
quarter of 2005, as compared to $87,000 for the first three
months of 2004.
Other Operating Expenses
The aggregate of other operating expenses increased by $340,000,
or 10.9%, for the three months ended March 31, 2005, as compared
to the same period of 2004. The increases in
other operating expenses are discussed below as they pertain to
the various expense categories.
During the first quarter of 2005, salaries and wages increased by
$110,000 in comparison to the first quarter of 2004. This
increase was essentially due to sales staff additions and annual
merit and cost-of-living increases.
Employee benefit costs increased by $103,000 for the first
quarter of 2005 as compared to 2004. Increased employee benefit
costs related to increased staff and salary levels and increased
health insurance premiums.
Other changes in operating expenses during the first quarter of
2005 in comparison to the same period of 2004 included the
following (in thousands):
Increases/(Decreases)
_____________________
Occupancy & Equipment Costs $ 16
Professional Fees 11
Pennsylvania Shares Tax (17)
ATM Processing Expenses 13
Donations 34
There were also smaller increases in various other expense
categories. The decrease in Pennsylvania Shares Tax was due to
an increase in donations made under the PA Educational
Improvement Tax Credit program. Under this program Union
National receives a 90% tax credit for contributions to certain
qualifying scholarship or educational improvement organizations.
Income Taxes
Union National's income tax expense increased by $28,000 for the
three months ended March 31, 2005, as compared to the same period
of last year. Union National's effective tax rates were as
follows:
Three Months Ended
__________________
March 31, 2005 17.3%
March 31, 2004 15.7%
The effective tax rate for Union National is below the statutory
rate due to tax-exempt earnings on investments, loans and bank-
owned life insurance and the impact of tax credits. As of March
31, 2005, Union National had a net deferred tax asset of
$880,000. The realization of deferred tax assets is dependent on
future earnings of Union National. Management currently
anticipates future earnings will be adequate to utilize deferred
tax assets.
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 and state 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.
The Sarbanes-Oxley Act, enacted in July 2002, represents a
comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. Many of the
provisions of this act have already been implemented by Union
National and 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. Other than the cost of the
compliance with the Sarbanes-Oxley Act described above,
management is not aware of any current specific recommendations
by regulatory authorities or proposed legislation, which if
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
routinely examined by the Office of the Comptroller of the
Currency (OCC) and no material adverse impact is anticipated on
current or future operations and financial position as a result
of this process. The last Community Reinvestment Act performance
evaluation by the OCC resulted in a "satisfactory" rating of the
bank's record of meeting the credit needs of its entire
community.
Credit Risk and Loan Quality
____________________________
Other than as described herein, management does not believe there
are any trends, events or uncertainties that are reasonably
expected to have a material impact on future results of
operations, liquidity or capital resources. Further, based on
known information, management believes that the effects of
current and past economic conditions and other unfavorable
specific business conditions may result in the inability of loans
amounting to $230,000 to comply with their respective repayment
terms. This compares to the amount of $394,000 at December 31,
2004. These loans are secured with real estate. Management
currently believes that probable losses on these loans have
already been provided for in the allowance for loan losses.
These loans are not considered impaired as defined by current
generally accepted accounting principles. The borrowers are of
special mention since they have shown a decline in financial
strength and payment quality. Management has increased its
monitoring of the borrowers' financial strength. In addition,
management currently expects that a portion of these loans may be
classified as nonperforming in the remaining months of 2005.
At March 31, 2005, total nonperforming loans amounted to
$1,336,000, or 0.5% of net loans, as compared to a level of
$1,953,000, or 0.7%, at December 31, 2004. These loans are
essentially collateralized with real estate. Historically, the
percentage of nonperforming loans to net loans as of December 31,
for the previous five-year period was an average of 0.8%.
Schedule of Nonperforming Assets:
March 31, December 31,
(In thousands) 2005 2004
____________ ____________
Nonaccruing Loans $ 1,336 $ 1,192
Accrual Loans - 90 days or more
past due - 761
Restructured Accrual Loans - -
____________ ____________
Total Nonperforming Loan 1,336 1,953
Foreclosed Real Estate - -
____________ ____________
Total Nonperforming Assets $ 1,336 $ 1,953
============ ============
Nonperforming Loans
as a % of Net Loans 0.5% 0.7%
============ ============
Allowance for Loan Losses
as a % of Nonperforming Loans 182% 117%
============ ============
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 bond rating agencies. As of March
31, 2005, Union National had corporate debt securities that were
rated below investment grade and were carried at a fair value of
$208,000 and had unrealized losses of $1,000. 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
March 31, 2005, 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 March 31, 2005, Union
National held corporate debt securities with a total fair value
of $14,962,000 and net unrealized losses on these securities
amounted to $112,000. Subsequent to the end of the quarter,
securities with a carrying value of $1,981,000 at March 31, 2005,
were downgraded to below investment grade. These securities have
maturities that range from February 2007 to January 2009 and
Union National currently expects that any decline in the fair
value of these securities will be temporary.
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 OCC's most recent examination.
Management believes, based on information currently available,
that the current allowance for loan losses of $2,430,000 is
adequate to meet potential loan losses. In addition, management
expects loan charge-offs, net of recoveries for the remainder of
2005 to be comparable to the level of net loan charge-offs for
the same period of 2004.
Analysis of Allowance for Loan Losses:
Three Months Ended
March 31,
(In thousands) 2005 2004
________ ________
Average Total Loans Outstanding
(Less Unearned Income) $265,124 $229,114
======== ========
Allowance for Loan Losses,
Beginning of Period $ 2,288 $ 1,985
Loans Charged-Off During Period 3 9
Recoveries of Loans Previously
Charged-Off 21 4
________ ________
Net Loans Charged-Off/(Recovered) (18) 5
Addition to Provision for Loan Losses
Charged to Operations 124 57
________ ________
Allowance for Loan Losses,
End of Period $ 2,430 $ 2,037
======== ========
Ratio of Net Loans Charged-Off/
(Recovered) to Average Loans
Outstanding (Annualized) (.03)% .01%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 0.91% 0.88%
======== ========
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 issued 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 levels. There are no known
trends, except the anticipated loan and deposit growth previously
discussed in the Results of Operations section, 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 March 31, 2005, the bank
had received long-term advances of $89,723,000 from its available
credit of $141,055,000 at the FHLB for purposes of funding loan
demand and mortgage-backed security purchases. Total outstanding
FHLB borrowings at March 31, 2005, had a weighted-average rate of
3.63% and total FHLB borrowings of $81,614,000 at March 31, 2004,
had a weighted-average rate of 3.81%. As of March 31, 2005,
advances of $16,876,000 are due in the next twelve months,
advances of $25,000,000 are currently convertible by the FHLB on
a quarterly basis and an additional $5,000,000 of borrowings will
be convertible by the FHLB in February 2006. 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 $15 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 March 31, 2005, Union National had $25,080,000 outstanding
in brokered CDs and in CDs gathered through the CDARS program.
Stockholders' Equity
____________________
Union National and the bank maintain capital ratios that are well
above the minimum total capital levels required by federal
regulatory authorities. Except as discussed below concerning
Union National's common stock repurchase plan, Union National's
planned retail branch expansion and the Federal Reserve position
on trust capital securities, there are no known trends or
uncertainties, including regulatory matters that are expected to
have a material adverse impact on the capital resources of Union
National for the remainder of 2005.
On April 21, 2005, the Board of Directors of Union National
Financial Corporation approved the purchase of up to 100,000
shares of its outstanding common stock. These repurchases, in
open market and privately negotiated transactions, will be made
periodically by management and will generally offset shares
issued under Union National's stock option and dividend
reinvestment plans. The Board of Directors believes that a
repurchase of this type is in the best interests of Union
National and its stockholders as a method to enhance long-term
shareholder value.
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. In addition, in November 2004, Union National
became obligated for the purchase of real estate located in
Lancaster County, PA in the amount of $1,300,000. It is
currently anticipated that settlement of this transaction will
occur in January 2006. It is also currently anticipated that
Union National will construct a retail banking facility on this
property in the future. 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.
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 direct
material 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 1 capital to average
assets and of total capital (as defined in the regulations) to
risk-weighted assets. Management believes, as of March 31, 2005,
that Union National and the bank meet all capital adequacy
requirements to which they are subject.
As of March 31, 2005, 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:
March 31, December 31,
2005 2004
(In thousands) _________ _________
Union National Financial Corporation:
_____________________________________
Tier I Capital $ 35,647 $ 34,999
Tier II Capital 4,606 4,625
_________ _________
Total Qualifying Capital $ 40,253 $ 39,624
========= =========
Risk-adjusted On-balance Sheet Assets $ 292,890 $ 286,436
Risk-adjusted Off-balance Sheet Exposure 37,201 41,629
_________ _________
Total Risk-adjusted Assets $ 330,091 $ 328,065
========= =========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.86% 8.96%
Minimum Required 4.00 4.00
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 10.80% 10.67%
Minimum Required 4.00 4.00
Total Capital Ratio - Actual 12.19% 12.08%
Minimum Required 8.00 8.00
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 13,846 $ 13,379
========= =========
Union National Community Bank:
______________________________
Tier I Capital $ 34,329 $ 33,878
Tier II Capital 2,430 2,288
_________ _________
Total Qualifying Capital $ 36,759 $ 36,166
========= =========
Risk-adjusted On-balance Sheet Assets $ 291,826 $ 285,383
Risk-adjusted Off-balance Sheet Exposure 37,201 41,629
_________ _________
Total Risk-adjusted Assets $ 329,027 $ 327,012
========= =========
Actual Capital Ratio:
Tier I Capital to Average Total Assets 8.56% 8.70%
Minimum Required 4.00 4.00
To Be Well-Capitalized Under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 10.43% 10.36%
Minimum Required 4.00 4.00
To Be Well-Capitalized Under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 11.17% 11.06%
Minimum Required 8.00 8.00
To Be Well-Capitalized Under Prompt
Corrective Action Provisions 10.00 10.00
Total Risk-Based Capital in Excess of the
Minimum Regulatory Requirement $ 10,437 $ 10,005
========= =========
Included in Tier 1 regulatory capital of Union National Financial
Corporation detailed above is $8,919,000 of trust capital
securities issued through Union National Capital Trust I and
Union National Capital Trust II, wholly-owned subsidiaries of
Union National. The balance of the trust capital securities,
$2,081,000, is included in Tier II regulatory capital above.
These securities would become callable if the Federal Reserve
makes a determination that trust capital securities can no longer
be considered in regulatory capital.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market Risk - Interest Rate Risk
________________________________
As a financial institution, Union National's primary component of
market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact the level of income and
expense recorded on a large portion of 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 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 changes of
market interest rates. These assumptions are inherently
uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions, as well as management
strategies, among other factors. Because it is difficult to
accurately quantify into assumptions the reaction of depositors
and borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results. While assumptions are developed based upon current
economic and local market conditions, management cannot make any
assurances as to the predictive nature of these assumptions.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve-month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to 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 simulation model currently indicates that a hypothetical one-
percent general decline in prevailing market interest rates over
a one-year period will have a nominal negative impact on the
bank's net interest income over the next twelve months as
compared to the constant rate scenario. Only a decline in
interest rates of one-percent was modeled at March 31, 2005,
based on management's assessment of potential future interest
rate levels. In addition, a hypothetical two-percent general
rise in rates will have a nominal positive impact on net interest
income over the next twelve months.
In addition to the above scenarios, management modeled the impact
of a "flattening" interest rate yield curve on the bank's net
interest income. The rate assumptions for this scenario included
an increase in short-term interest rates while minimizing
increases in longer-term interest rates. A "flattening" interest
rate environment with short-term interest rates increasing two-
percent will have a nominal positive impact on net interest
income over the next twelve months as compared to the constant
rate scenario. The computations do not contemplate any actions
management or the Asset Liability Management Committee could
undertake in response to changes in market conditions or market
interest rates.
Union National managed its interest rate risk position in 2005 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; and
* adding to or restructuring of fixed-rate and floating-rate
advances from the FHLB.
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.
Item 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Union National maintains controls and procedures designed to
ensure that information required to be disclosed in the reports
that the company files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. Based
upon their evaluation of those controls and procedures as of
March 31, 2005, Union National's Chief Executive Officer and
Chief Financial Officer concluded that the disclosure controls
and procedures were adequate.
Changes in Internal Controls
During the quarter ended March 31, 2005, Union National made no
significant changes in its internal controls or in other factors
that could significantly affect these controls.
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
Union National. There are no proceedings pending other than the
ordinary routine litigation incident to the business of Union
National and its subsidiary, Union National Community Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against Union National and the bank by
government authorities.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
(c)
Total Number of
Shares
(a) Purchased as
Total (b) Part of
Number of Average Publicly
Shares Price Paid Announced Plans
Purchased per Share or Programs*
_________________________________________________________________
January 1, 2005 to
January 31, 2005 2,817 $26.87 2,817
February 1, 2005 to
February 28, 2005 986 $26.05 986
March 1, 2005 to
March 31, 2005 6,939 $25.62 6,939
______ ______
Total 10,742 $25.99 10,742
====== ======
*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. In addition, on April 21, 2005, the
Board of Directors of Union National authorized and approved a
plan to purchase up to 100,000 shares of its outstanding common
stock in open market or privately negotiated transactions.
(d)
Maximum Number
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs*
_________________________________________________________________
January 1, 2005 to
January 31, 2005 16,185
February 1, 2005 to
February 28, 2005 15,199
March 1, 2005 to
March 31, 2005 8,260
Total
*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. In addition, on April 21, 2005, the
Board of Directors of Union National authorized and approved a
plan to purchase up to 100,000 shares of its outstanding common
stock in open market or privately negotiated transactions.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders -
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits:
(a) Exhibits
Exhibit No. 31.1 - Certification of Principal
Executive Officer Pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) as added by Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit No. 31.2 - Certification of Principal
Financial Officer Pursuant to Exchange Act Rules
13a-14(a)/15d-14(a) as added by Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit No. 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
SIGNATURES
__________
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By /s/ Mark D. Gainer
_______________________
Mark D. Gainer
President/Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 2005
By /s/ Clement M. Hoober
_______________________
Clement M. Hoober
Treasurer/Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 13, 2005
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULES
13A-14(A)/15D-14(A) AS ADDED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Mark D. Gainer, President/CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of
Union National Financial Corporation.
2. Based on my knowledge, the quarterly 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 quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
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 quarterly 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-14) 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
quarterly 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 quarterly report
based on such evaluation; and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent 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: May 13, 2005
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULES
13A-14(A)/15D-14(A) AS ADDED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Clement M. Hoober, Treasurer/CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of
Union National Financial Corporation.
2. Based on my knowledge, the quarterly 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 quarterly report.
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly
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 quarterly 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-14) 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
quarterly 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 quarterly report
based on such evaluation; and
(c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent 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: May 13, 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 quarterly report of Union National
Financial Corporation on Form 10-Q for the period ending March
31, 2005, as filed with the Securities and Exchange Commission on
the date hereof (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: May 13, 2005
By /s/ Clement M. Hoober
_________________________
Treasurer/CFO
Date: May 13, 2005