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 June 30, 2002
_____________________________
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 the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,550,485 shares of $.25 (par) common stock were
_________________
outstanding as of August 1, 2002.
______________
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
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 5 - 15
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 15 - 16
PART II - OTHER INFORMATION
__________________
Item 1 - Legal Proceedings 17
Item 2 - Change in Securities and Use of Proceeds 17
Item 3 - Defaults Upon Senior Securities 17
Item 4 - Submission of Matters to a Vote of
Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signature Page 18
Exhibit 99 - Certification of Principal Executive
Officer and Principal Financial Officer 19 - 20
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share data)6/30/02 12/31/01
_______________________
ASSETS
Cash and Due from Banks $ 6,528 $ 8,227
Interest-Bearing Deposits in Other Banks 83 63
Federal Funds Sold 985 -
Short-Term Investments 3,999 4,999
________ _______
Total Cash and Cash Equivalents 11,595 13,289
Investment Securities Held-to-Maturity
(Fair Value - 2002-$0;2001-$12,995) - 13,335
Investment Securities Available-for-Sale 82,707 65,033
Loans Held for Sale 40 574
Loans(Net of Unearned Income) 199,956 203,581
Less: Allowance for Loan Losses (1,907) (1,893)
_______________________
Net Loans 198,049 201,688
Premises and Equipment - Net 6,525 6,734
Other Assets 7,193 7,020
_______________________
TOTAL ASSETS $306,109 $307,673
=======================
LIABILITIES
Deposits:
Noninterest-Bearing $ 25,938 $ 24,065
Interest-Bearing 186,536 191,479
_______________________
Total Deposits 212,474 215,544
Short-Term Borrowings 3,543 3,400
Long-Term Debt 62,517 61,252
Other Liabilities 1,662 1,932
_______________________
TOTAL LIABILITIES 280,196 282,128
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 691 687
Shares: Authorized - 20,000,000; Issued -
2,762,705 in 2002 (2,749,500 in 2001)
Outstanding - 2,556,824 in 2002 (2,590,964
in 2001)
Surplus 9,143 8,960
Retained Earnings 19,498 18,631
Accumulated Other Comprehensive Income 461 434
Less: Treasury Stock - 205,881 shares in
2002 (158,536 in 2001), at cost (3,880) (3,167)
_______________________
TOTAL STOCKHOLDERS' EQUITY 25,913 25,545
_______________________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $306,109 $307,673
=======================
The accompanying notes are an integral part of the
consolidated financial statements.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended June 30,
(Dollars in thousands,
except per share data) ___________________________
2002 2001
___________________________
INTEREST INCOME
Interest and Fees on Loans $ 3,838 $ 3,939
Investment Securities:
Taxable Interest 734 990
Tax-Exempt Interest 268 289
Dividends 28 54
Other 10 63
____________________________
Total Interest Income 4,878 5,335
INTEREST EXPENSE
Deposits 1,172 1,898
Short-Term Borrowings 13 111
Long-Term Debt 820 636
____________________________
Total Interest Expense 2,005 2,645
____________________________
Net Interest Income 2,873 2,690
PROVISION for LOAN LOSSES 59 160
____________________________
Net Interest Income after Provision
for Loan Losses 2,814 2,530
OTHER OPERATING INCOME
Income from Fiduciary Activities 32 55
Service Charges on Deposit Accounts 246 261
Other Service Charges, Commissions, Fees 269 226
Investment Securities Gains/(Losses) 140 (12)
Mortgage Banking Activities 91 -
Other Income 74 70
____________________________
Total Other Operating Income 852 600
OTHER OPERATING EXPENSES
Salaries and Wages 1,155 1,061
Retirement Plan and Other Employee Benefits 280 236
Net Occupancy Expense 180 165
Furniture and Equipment Expense 160 142
Professional Fees 89 134
Data Processing Services 141 149
Pennsylvania Shares Tax 67 64
Advertising and Marketing Expenses 61 63
ATM Processing Expenses 65 77
Other Operating Expenses 421 415
____________________________
Total Other Operating Expenses 2,619 2,506
____________________________
Income before Income Taxes 1,047 624
PROVISION for INCOME TAXES 215 56
____________________________
NET INCOME for PERIOD $ 832 $ 568
============================
PER SHARE INFORMATION
Net Income for Period(Basic and Assuming
Dilution) $ 0.32 $ 0.22
Cash Dividends 0.140 0.105
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $ 832 $ 568
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains on Investment
Securities Available-for-Sale Arising
During Period 453 277
Unrealized Holding Losses on Investment
Securities Transferred to Available-for-Sale
During Period (27) -
Reclassification adjustment for (Gains)/Losses
Included in Net Income (92) 9
___________________________
Total Other Comprehensive Income 334 286
___________________________
COMPREHENSIVE INCOME for PERIOD $ 1,166 $ 854
===========================
The accompanying notes are an integral part of the consolidated
financial statements.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended June 30,
(Dollars in thousands,
except per share data) ___________________________
2002 2001
___________________________
INTEREST INCOME
Interest and Fees on Loans $ 7,785 $ 7,890
Investment Securities:
Taxable Interest 1,513 1,897
Tax-Exempt Interest 535 574
Dividends 68 108
Other 25 120
____________________________
Total Interest Income 9,926 10,589
INTEREST EXPENSE
Deposits 2,494 3,887
Short-Term Borrowings 30 268
Long-Term Debt 1,691 1,198
____________________________
Total Interest Expense 4,215 5,353
____________________________
Net Interest Income 5,711 5,236
PROVISION for LOAN LOSSES 85 273
____________________________
Net Interest Income after Provision
for Loan Losses 5,626 4,963
OTHER OPERATING INCOME
Income from Fiduciary Activities 63 91
Service Charges on Deposit Accounts 502 489
Other Service Charges, Commissions, Fees 487 396
Investment Securities Gains/(Losses) 120 (1)
Mortgage Banking Activities 171 -
Other Income 153 146
____________________________
Total Other Operating Income 1,496 1,121
OTHER OPERATING EXPENSES
Salaries and Wages 2,251 2,119
Retirement Plan and Other Employee Benefits 565 512
Net Occupancy Expense 344 336
Furniture and Equipment Expense 318 279
Professional Fees 243 307
Data Processing Services 286 273
Pennsylvania Shares Tax 133 127
Advertising and Marketing Expenses 121 139
ATM Processing Expenses 121 134
Other Operating Expenses 833 811
____________________________
Total Other Operating Expenses 5,215 5,037
____________________________
Income before Income Taxes 1,907 1,047
PROVISION for INCOME TAXES 358 46
____________________________
NET INCOME for PERIOD $ 1,549 $ 1,001
============================
PER SHARE INFORMATION
Net Income for Period(Basic and Assuming
Dilution) $ 0.60 $ 0.39
Cash Dividends 0.265 0.210
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $ 1,549 $ 1,001
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains on Investment
Securities Available-for-Sale Arising
During Period 133 750
Unrealized Holding Losses on Investment
Securities Transferred to Available-for-Sale
During Period (27) -
Reclassification Adjustment for (Gains)/Losses
Included in Net Income (79) 1
____________________________
Total Other Comprehensive Income 27 751
____________________________
COMPREHENSIVE INCOME for PERIOD $ 1,576 $ 1,752
============================
The accompanying notes are an integral part of the consolidated
financial statements.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended June 30,
__________________________
(In Thousands) 2002 2001
_________________________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 1,549 $ 1,001
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 400 359
Provision for Loan Losses 85 273
Investment Securities (Gains)/Losses (120) 1
Provision for Deferred Income Taxes 28 (90)
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance (107) (102)
Gains on Loans Sold (151) -
Proceeds from Sales of Loans 5,979 -
Loans Originated for Sale (5,294) -
Decrease in Accrued Interest Receivable 31 49
Increase in Other Assets (227) (107)
Decrease in Other Liabilities (270) (299)
____________________________
Net Cash Provided by Operating Activities 1,903 1,085
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities 19,056 14,696
Proceeds from Maturities of
Available-for-Sale Securities 10,839 8,899
Proceeds from Maturities of
Held-to-Maturity Securities 503 1,007
Purchases of Available-for-Sale Securities (34,576) (34,894)
Net Principal Collected on Loans 3,554 1,960
Purchases of Property and Equipment (103) (546)
____________________________
Net Cash Used in Investing Activities (727) (8,878)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase in Demand Deposits
and Savings Accounts 2,873 9,600
Decrease in Certificates of Deposits (5,943) (8,571)
Net Increase/(Decrease) in Short-Term
Borrowings 143 (6,551)
Proceeds from Issuance of Long-Term Debt 9,580 19,000
Payment on Long-Term Debt (8,315) (809)
Acquisition of Treasury Stock (713) -
Issuance of Treasury Stock - 6
Issuance of Common Stock 187 125
Cash Dividends Paid (682) (541)
____________________________
Net Cash Provided by/(Used in)
Financing Activities (2,870) 12,259
____________________________
Net Increase/(Decrease) in Cash
and Cash Equivalents (1,694) 4,466
CASH and CASH EQUIVALENTS -
Beginning of Year 13,289 7,715
____________________________
CASH and CASH EQUIVALENTS - End of Period $ 11,595 $ 12,181
============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 4,427 $ 5,368
Income Taxes 315 55
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Reclassification of Held-to-Maturity
Investment Securities to
Available-for-Sale $ 10,358 $ -
The accompanying notes are an integral part of the consolidated
financial statements.
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is unaudited
and subject to year-end adjustment and audit. However, in the
opinion of management, the information reflects all adjustments
necessary to present fairly the financial condition and results
of operations for the periods presented. All such adjustments
were of a normal, recurring nature. All material intercompany
transactions have been eliminated in consolidation. The results
of operations for the six-month period ended June 30, 2002, 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 financial statements contained in the 2001 Annual Report to
Stockholders.
3. The weighted-average number of shares of common stock
outstanding was as follows:
Basic Assuming Dilution
_____ _________________
Three months ended:
June 30, 2002 2,560,806 2,584,854
June 30, 2001 2,583,088 2,596,445
Six months ended:
June 30, 2002 2,570,082 2,589,921
June 30, 2001 2,580,558 2,594,521
4. In June of 2001, the Financial Accounting Standards Board
issued Statement No. 143, "Accounting for Asset Retirement
Obligations," which addresses the financial accounting and
reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement
costs. This statement requires that the fair value of a
liability for an asset retirement obligation be recognized in the
period in which it is incurred if a reasonable estimate of fair
value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived
asset. This statement will become effective on January 1, 2003.
In April of 2002, the Financial Accounting Standards Board issued
Statement No. 145, "Recission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement updates, clarifies and simplifies
existing accounting pronouncements.
The provisions of the above statements did not have or are not
expected to have a significant impact on the financial condition
or results of operations of Union National.
5. Certain reclassifications have been made to the 2001
consolidated financial statements to conform to the 2002
presentation.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in the accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company, and its wholly owned
subsidiary, Union National Community Bank. Union National's
consolidated financial condition and results of operations
consist almost entirely of the bank's financial condition and
results of operations. This discussion should be read in
conjunction with the 2001 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
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; and
* the risk that our analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
Union National undertakes no obligation to publicly revise or
update these forward- looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that Union National periodically files with the
Securities and Exchange Commission.
Results of Operations
_____________________
Overview
Consolidated net income for the three months ended June 30, 2002,
was $832,000, an increase of 46.5%, as compared to $568,000 for
the same period of 2001. Basic and diluted earnings per share
for the three months ended June 30, 2002, amounted to 32 cents
and for the same period of 2001 basic and diluted earnings per
share amounted to 22 cents. Net income for the six months ended
June 30, 2002, was $1,549,000, an increase of 54.7%, as compared
to $1,001,000 for the same period of 2001. Basic and diluted
earnings per share for the six months ended June 30, 2002,
amounted to 60 cents and for the same period of 2001 basic and
diluted earnings per share amounted to 39 cents.
Results of operations for the three months and six months ended
June 30, 2002, as compared to the same periods of 2001 were
impacted by the following items:
* Net income increased due to growth in average earning assets,
which was funded primarily by additional long-term borrowings.
* Net income increased due to a decrease in the provision for
loan losses.
* Net income increased due to an increase in other operating
income.
* Net income decreased due to a increase in other operating
expenses.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of total average assets, also known as
return on average assets (ROA), and net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE) were as follows on an annualized basis:
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
____ ____ ____ ____
ROA 1.10% 0.77% 1.02% 0.69%
ROE 13.07% 9.27% 12.21% 8.27%
Management currently expects moderate growth in loans and
deposits for the remainder of 2002. This is expected due to
continued strong competition in Union National's market area and
uncertain current economic conditions. 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 the first six months of 2002, Union National experienced
strong commercial loan demand and this is currently expected to
continue for the remainder of 2002. However, residential
mortgage and consumer loan balances declined during the first six
months of 2002 and this trend is also expected to continue.
Overall, loan balances have declined by $3,625,000 since the
beginning of 2002. This decline can be attributed to lower
demand for consumer loans and a reduction in residential
mortgages due to increased refinancing activity. In addition,
Union National now sells some of its residential mortgage loans
under a new program that was implemented in the fourth quarter of
2001.
The economy in the bank's market area may be negatively impacted
by the effects of national events and may be subject to overall
national economic trends. The overall effects of 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, investments and other interest-bearing assets exceeds
interest incurred on deposits and other interest-bearing
liabilities. Net interest income is Union National's primary
source of revenue. The amount of net interest income is affected
by changes in interest rates and by changes in the volume and mix
of interest-bearing assets and liabilities.
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the three months ended June 30, 2002,
increased by $164,000 or 5.7% over the same period of 2001. For
the six months ended June 30, 2002, net interest income increased
by $441,000, or 7.8%, over the same period of 2001.
In order to enhance the net interest income in future periods,
management has entered into transactions that increase earning
assets funded by advances from the Federal Home Loan Bank (FHLB).
The terms and amounts of the transactions, when combined with the
bank's overall balance sheet structure, maintain the bank within
its interest rate risk policies. As of June 30, 2002, the bank
received long-term advances of $62,517,000 from its available
credit of $138,177,000 at the FHLB for purposes of funding loan
demand and security purchases. The total advances had a
weighted-average interest rate of 4.88% at June 30, 2002, with
maturities ranging from September 2002 to February 2011.
Impacting net interest income during the first six months of
2002, were costs incurred on the early payoff of some of these
FHLB borrowings. These additional costs were reflected as
increased interest expense on the related long-term
borrowings. During the three months ended June 30, 2002, total
early payoff costs on borrowings amounted to $80,000 and for the
six months ended June 30, 2002, total early payoff costs amounted
to $180,000. During the first six months of 2002, Union National
restructured $6,000,000 in long-term borrowings with the FHLB.
These borrowings had a weighted-average rate of 5.46% and were
paid off and were replaced with $4,000,000 of borrowings of
slightly longer maturities that bear a weighted-average rate of
3.84%. The balance of the payoffs were funded through Union
National's overnight funding position and the sale of some
investment securities. Gains on the sale of investment
securities partially offset the costs associated with these
payoffs. The restructuring of these borrowings will benefit
Union National with lower funding costs in future periods. It is
currently anticipated that management may continue to payoff a
portion of these borrowings and replace them with lower current
rate funding during the remainder of 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 these one-time early payoff costs
to provide a better comparison to prior periods.
The net effect of volume growth in average earning assets and
interest-bearing liabilities increased net interest income by
$256,000 in comparing the three months ended June 30, 2002, to
the same period of 2001 and by $462,000 in comparing the six
months ended June 30, 2002, to the same period of 2001. Growth
in average earning assets was funded primarily by additional
long-term borrowings. Average earning assets increased by 2.8%
for the three months ended June 30, 2002, and by 4.7% for the six
months ended June 30, 2002, as compared to the same periods of
2001.
The overall interest rate on the average total earning assets for
the three months ended June 30, 2002, was 7.09%, as compared to
7.97% for the same period of last year. The overall interest
rate on the average interest-bearing liabilities was 3.21% (3.08%
without the impact of early payoff costs on long-term FHLB
borrowings) for the three months ended June 30, 2002, and 4.33%
for the three months ended June 30, 2001. The net effect of
these interest rate changes was to decrease net interest income
in the amount of $92,000 for the three months ended June 30,
2002, over the same period of 2001. The net interest margin
percentage for the three months ended June 30, 2002, was 4.27%
(4.39% without the impact of payoff costs), as compared to 4.16%
for the same period of 2001.
For the six months ended June 30, 2002, the overall interest rate
on the average total earning assets was 7.18%, as compared to
8.02% for the same period of last year. The overall interest
rate on the average interest-bearing liabilities was 3.36% (3.22%
without the impact of early payoff costs on FHLB borrowings) for
the six months ended June 30, 2002, and 4.47% for the six months
ended June 30, 2001. The net effect of these interest rate
changes was to decrease net interest income in the amount of
$21,000 for the six months ended June 30, 2002, over the same
period of 2001. The net interest margin percentage for the six
months ended June 30, 2002, was 4.24% (4.36% without the impact
of payoff costs), as compared to 4.11% for the same period of
2001. See management's discussion below concerning the
anticipated impact of these interest rate fluctuations on the
results of operations for the remainder of 2002.
The overall decline in interest rates has been prompted by
actions of the Federal Reserve Bank, which started reducing
interest rates in January 2001. Since that time, the prime
interest rate has declined from 9.50% to 4.75%. As indicated by
the yields 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.
For the remainder of 2002, it is currently anticipated that the
bank's net interest margin percentage will narrow slightly in
comparison to current levels. The net
interest margin is currently expected to narrow as maturing
investments and loans reprice to lower current rate levels. This
will be somewhat offset by higher fixed-rate certificates of
deposit that mature and reprice to current levels. However, a
significant portion of Union National's certificates of deposit
have already repriced to lower interest rate levels. In
addition, a portion of Union National's loan portfolio has now
repriced to their interest rate floor and will not be impacted by
future rate reductions.
Union National's net interest income may still be impacted by
future actions of the Federal Reserve Bank. In addition, income
from growth in earning assets during 2001 and the first six
months of 2002, net of costs resulting from growth in deposits
and borrowings, should increase net interest income for the
remainder of 2002. The netting of these two factors, as
reflected in the bank's current simulation model and estimates as
of June 30, 2002, may result in net interest income for the
remainder of 2002 that reflects a moderate increase over the net
interest income earned during the same period of 2001. The yield
curve during the remainder of 2002, the options selected by
customers and the future mix of the loan, investment and deposit
products in the bank's portfolios may significantly change the
estimates used in the simulation model. See discussions on
Liquidity and Market Risk - Interest Rate Risk.
Provision for Loan Losses
The provision for loan losses was $59,000 for the three months
ended June 30, 2002, as compared to $160,000 for the three months
ended June 30, 2001. Net charge-offs for the three months ended
June 30, 2002, were $56,000, as compared to $78,000 for the same
period of last year. For the six months ended June 30, 2002, the
provision for loan losses was $85,000, as compared to $273,000
for the same period of 2001. Net charge-offs for the six months
ended June 30, 2002, amounted to $71,000, as compared to $91,000
for the same period of 2001. The lower provision for loan losses
can be attributed to a low level of net charge-offs accompanied
by declining levels of nonperforming loans. In contrast, during
the first six months of 2001, Union National experienced
increased levels of nonperforming loans. Future adjustments to
the allowance, and consequently, the provision for loan losses,
may be necessary if economic conditions or loan credit quality
are substantially different from the assumptions used in
establishing the current level of the allowance for loan losses.
Other Operating Income
Other operating income increased by $252,000, or 42.0%, for the
three months ended June 30, 2002, as compared to the same period
of 2001. For the six months ended June 30, 2002, other operating
income increased by $375,000, or 33.5%, as compared to the same
period of the prior year. Contributing factors to the increase
in other operating income as compared to the same periods in 2001
are summarized below:
Amount of Increase (Decrease)
________________________________
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
_____________ ________________
Income from Fiduciary
Activities $(23,000) $(28,000)
Insufficient Funds Charges (10,000) 2,000
ATM Usage Fees (3,000) 16,000
Loan Insurance Commissions (8,000) (9,000)
Alternative Investment
Commissions 36,000 82,000
Debit Card Earnings 18,000 37,000
Mortgage Banking Activities 91,000 171,000
Investment Securities
Gains/(Losses) 152,000 121,000
Various Other Changes (1,000) (17,000)
_________ _________
TOTAL $252,000 $375,000
========= =========
The decrease in income from fiduciary activities is primarily a
result of a decrease in estate fee income. The increase in ATM
usage fees for the six months ended June 30, 2002, is a result of
a fee change implemented in the first quarter of 2001. The
increase in commissions from alternative investment products is a
result of increased sales of annuities, mutual funds and
brokerage services. Union National has expanded the sale of
alternative investment products and now has a licensed
representative to sell these products in each of our retail
offices. The increase in income from mortgage banking activities
relates to a new mortgage program that Union National implemented
in November 2001. Through this program, Union National is able
to offer expanded mortgage products at competitive rates. These
mortgages are sold to the FHLB, but the servicing is still
handled by Union National so the sale is transparent to
customers. As of June 30, 2002, Union National was servicing 65
loans through this program with an outstanding balance of $6.7
million. Investment securities gains in the second quarter of
2002 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, some funds from the sale of these securities
were utilized to payoff some FHLB borrowings and as indicated
earlier these gains partially offset the costs of the early
payoff of these borrowings. Other fee increases detailed above
are generally a result of increased transaction volumes. Other
operating income (excluding investment securities gains or
losses) as a percentage of total revenue (net interest income and
other operating income) was as follows:
Three Months Ended Six Months Ended
__________________ ________________
June 30, 2002 19.9% 19.4%
June 30, 2001 18.5% 17.6%
Other Operating Expenses
The aggregate of noninterest expenses for the three months ended
June 30, 2002, increased by $113,000, or 4.5%, over the same
period of 2001. For the six months ended June 30, 2002,
noninterest expenses increased by $178,000, or 3.5%, over the
same period of the prior year. These noninterest expense
increases are discussed below as they pertain to the various
expense categories.
Employee salaries and wages increased by $94,000, or 8.9%, for
the three months ended June 30, 2002, as compared to the same
period of last year. For the six months ended June 30, 2002,
salaries and wages increased by $132,000, or 6.2%, over the same
period of 2001. These increases were essentially due to annual
merit and cost-of-living increases and increased incentives for
staff for reaching certain sales and profitability goals.
Partially offsetting these items is savings from a slight
reduction in overall staff levels in 2002 as compared to the same
period of 2001.
The cost of retirement plans and other employee benefits for the
three months ended June 30, 2002, increased by $44,000, or 18.6%,
as compared to the same period of 2001. For the six months ended
June 30, 2002, employee benefit costs increased by $53,000, or
10.4%, over the same period of last year. These increases were
primarily a result of an increase in profit sharing costs (due to
higher salaries and an increase in employee eligibility), health
insurance and worker's compensation insurance expenses.
Occupancy, furniture and equipment expenses increased by $33,000,
or 10.7%, for the three months ended June 30, 2002, as compared
to the same period of the previous year. For the six months
ended June 30, 2002, occupancy, furniture and equipment expenses
increased by $47,000, or 7.6%, as compared to the same period of
2001. These increases were primarily related to an increase in
depreciation and maintenance costs.
Professional fees for the three months ended June 30, 2002,
decreased by $45,000, as compared to the same period of last year
and for the six months ended June 30, 2002, professional fees
decreased by $64,000. The decrease in professional fees related
primarily to non-recurring consulting expenses incurred in the
first six months of
2001. These consultants helped to review our internal processes,
products and procedures in order to identify efficiencies, cost
savings and additional fee income opportunities.
Other operating expenses increased by $6,000 for the three months
ended June 30, 2002, as compared to the same period of 2001. For
the six months ended June 30, 2002, other operating expenses
increased by $22,000, as compared to the same period of 2001.
Impacting other operating expenses as compared to the same period
in 2001 were an increase in software costs, liability insurance
costs, check and other losses that were offset by decreases in
supplies, foreclosed real estate and travel expenses. Increased
software costs primarily related to the systems implemented with
technology initiatives implemented in the fourth quarter of 2000.
The increase in check losses was due to a large recovery that
occurred during the first quarter of 2001 and the increase in
other losses was primarily a result of a robbery loss at a retail
branch location in the first quarter of 2002.
Income Taxes
Union National's income tax expense increased by $159,000 for the
three months ended June 30, 2002, as compared to the same period
of last year. For the six months ended June 30, 2002, income tax
expense increased by $312,000, as compared to the same period of
2001. Union National's effective tax rates were as follows:
Three Months Ended Six Months Ended
__________________ ________________
June 30, 2002 20.5% 18.8%
June 30, 2001 9.0% 4.4%
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. The increase
in income tax expense in 2002 as compared to the same periods of
2001 was primarily due to an increase in earnings before income
taxes. The realization of net deferred tax assets, which
amounted to $514,000 at June 30, 2002, is dependent on future
earnings of Union National. Management currently anticipates
future earnings will be adequate to utilize these deferred tax
assets.
Investment Securities
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
will allow 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 FASB Statement 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 $10,398,000 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.
Regulatory Activity
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. 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. As a result of
legal and industry changes, management predicts that the industry
will continue to experience an increase in consolidations and
mergers as the financial services industry strives for greater
cost efficiencies and market share. Management believes that
such consolidations and mergers may enhance its competitive
position as a community bank. In addition, management also
expects increased competition in the banking industry as a result
of the passage of the Gramm-Leach-Bliley Financial Services
Modernization Act in November 1999. This act expanded the range
of non-bank activities for certain bank holding companies, but
also removed restrictions to the banking industry for other
financial service companies.
The bank is routinely examined by the OCC and no material adverse
impact is anticipated on current or future operations and
financial position as a result of this process. The last
Community Reinvestment Act performance evaluation by the OCC
resulted in a "satisfactory" rating of the bank's record of
meeting the credit needs of its entire community.
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, including the continuing
economic slowdown, and other unfavorable specific business
conditions may result in the inability of loans amounting to
$2,628,000 to comply with their respective repayment terms. This
compares to the amount of $1,893,000 at December 31, 2001, and
the increase is mainly a result of two commercial loan
relationships that were added to this amount during the first six
months of 2002. These loans are secured with real estate,
equipment, inventory and vehicles. 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 2002.
At June 30, 2002, total nonperforming loans amounted to
$1,771,000, or 0.9% of total net loans, as compared to a level of
$2,204,000, or 1.1%, at December 31, 2001. These loans are
essentially collateralized with real estate. Historically, the
percentage of nonperforming loans to total net loans as of
December 31, for the previous five-year period was an average of
..8%.
Schedule of Nonperforming Assets:
June 30, December 31,
(In Thousands) 2002 2001
___________ ___________
Nonaccruing Loans $ 1,661 $ 1,589
Accrual Loans 90 days
or more past due 110 615
Restructured Accrual Loans - -
___________ ___________
Total Nonperforming Loans 1,771 2,204
Foreclosed Real Estate 56 43
___________ ___________
Total Nonperforming Assets $ 1,827 $ 2,247
=========== ===========
Nonperforming Loans
as a % of Net Loans 0.9% 1.1%
=========== ===========
Allowance for Loan Losses
as a % of Nonperforming Loans 108% 86%
=========== ===========
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 June
30, 2002, Union National had corporate debt securities that were
rated below investment grade and were carried at a fair value of
$315,000 and had unrealized losses of $161,000. 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 also 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
June 30, 2002, 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 cost have not been provided for in the income
statement because management currently expects these fair value
declines to be temporary. As of June 30, 2002, Union National
held corporate debt securities with a total fair value of
$15,097,000 and total unrealized losses on these securities
amounted to $239,000.
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 and the
Board of Directors on a quarterly basis. In addition, ongoing
loan reviews are performed on selected portions of the loan
portfolio by an independent consultant.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. Management's periodic
evaluation of the adequacy of the allowance is based on Union
National's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant
factors. While management uses available information to make
such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination
process, review the bank's allowance for loan losses. Such
agencies may require the bank to recognize additions to the
allowance based on their judgment of information available to
them at the time of their examination. After management's
assessment, no adjustment to the allowance for loan losses was
necessary as a result of the Office of Comptroller's most recent
examination.
Management believes, based on information currently available,
that the current allowance for loan losses of $1,907,000 is
adequate to meet potential loan losses. In addition, management
expects loan charge-offs, net of recoveries for the remainder of
2002 to be below the level of net loan charge-offs for the same
period of 2001.
Analysis of Allowance for Loan Losses:
Three Months Ended Six Months Ended
June 30, June 30,
(In Thousands) 2002 2001 2002 2001
________ ________ ________ ________
Average Total Loans Outstanding
(Less Unearned Income)$202,163 $185,188 $202,869 $185,484
======== ======== ======== ========
Allowance for Loan Losses,
Beginning of Period $ 1,904 $ 1,887 $ 1,893 $ 1,787
Loans Charged-Off
During Period 73 103 130 146
Recoveries of Loans Previously
Charged-Off 17 25 59 55
________ ________ ________ ________
Net Loans Charged-Off 56 78 71 91
Addition to Provision for Loan Losses
Charged to Operations 59 160 85 273
________ ________ ________ ________
Allowance for Loan Losses,
End of Period $ 1,907 $ 1,969 $ 1,907 $ 1,969
======== ======== ======== ========
Ratio of Net Loans Charged-Off to Average
Loans Outstanding
(Annualized) .11% .17% .07% .10%
======== ======== ======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of
Period 0.95% 1.07% 0.95% 1.07%
======== ======== ======== ========
As detailed above, the ratio of the allowance for loan losses to
net loans has decreased from 1.07% at June 30, 2001 to 0.95% at
the end of the current quarter. This decline can be primarily
attributed to the purchase of a pool of approximately $25,000,000
of first-lien residential mortgage loans in November 2001. These
well-secured loans present a lower risk of loss to Union National
and accordingly require a lower related allowance for loan
losses.
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,
which include overnight investments in federal funds sold;
* overnight correspondent bank borrowings on various credit
lines and borrowing capacity available from the FHLB;
* acquisition of brokered certificates of deposit (CDs);
* 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
consistently exceeds the bank's minimum defined level. There are
no known trends, or any known demands, commitments, events or
uncertainties that will result in, or that are reasonably likely
to result in, liquidity increasing or decreasing in any material
way.
Membership in the FHLB provides the bank with liquidity
alternatives such as short- or long-term funding on fixed- or
variable-rate terms. As of June 30, 2002, the bank had received
long-term advances of $62,517,000 from its available credit of
$138,177,000 at the FHLB for purposes of funding loan demand and
mortgage-backed security purchases. Advances of $4,217,000 are
due over the next twelve months and advances of $20,000,000 are
convertible during 2002. The FHLB's convertible fixed-rate
advances allow the FHLB the periodic option to convert to a LIBOR
adjustable-rate advance. Upon the FHLB's conversion, the bank
has the option to repay the respective advances in full. See
section on Market Risk - Interest Rate Risk for further analysis
of these advances.
As indicated above, another alternative source of liquidity for
Union National is the use of brokered CDs. During the second
quarter of 2002, Union National obtained funding of approximately
$2,000,000 in brokered CDs. These CDs have a final maturity of
two years.
Stockholders' Equity
Union National and the bank maintain capital ratios that are well
above the minimum total capital levels required by federal
regulatory authorities and are considered to be well-capitalized
under regulatory guidelines. Except as discussed below
concerning Union National's common stock repurchase plan, there
are no known trends or uncertainties, including regulatory
matters that are expected to have a material impact on the
capital resources of Union National for 2002. In addition, see
discussion on Regulatory Activity.
On January 24, 2002, the Board of Directors of Union National
authorized and approved a plan to purchase up to 100,000 shares
of its outstanding common stock in open market or privately
negotiated transactions. The number of shares to be purchased
under the plan represents approximately 3.9% of the outstanding
shares of Union National. The Board of Directors believes that a
redemption or repurchase of this type is in the best interests of
Union National and its stockholders as a method to enhance long-
term shareholder value. Currently, the shares are to be held as
treasury shares (issued, but not outstanding shares). As of June
30, 2002, approximately 47,300 shares have been repurchased under
this plan.
Union National and the bank have risk-based capital ratios that
exceed the regulatory requirements. The risk-based capital
guidelines require banks to maintain a minimum risk-based capital
ratio of 8.0% at June 30, 2002, as compared to the bank's current
risk-based capital ratio of 12.37%. The total risk-based capital
ratio is computed by dividing stockholders' equity (as adjusted)
plus the allowance for loan losses by risk-adjusted assets.
Risk-adjusted assets are determined by assigning credit risk-
weighting factors from 0% to 100% to various categories of assets
and off-balance-sheet financial instruments. Banking regulations
also require the bank to maintain certain minimum capital levels
in relation to bank assets. Failure to meet minimum capital
requirements could result in prompt regulatory action. As of
June 30, 2002, the bank was categorized as well-capitalized.
Management is not aware of any conditions or events that would
adversely affect the bank's capital. The bank maintains the
following leverage and risk-based capital ratios:
(In Thousands) June 30, December 31,
2002 2001
___________ ___________
Tier I - Total Stockholders' Equity $ 24,444 $ 23,979
Tier II - Allowance for Loan Losses 1,907 1,893
___________ ___________
Total Qualifying Capital $ 26,351 $ 25,872
=========== ===========
Risk-adjusted On-balance-sheet Assets $198,299 $203,351
Risk-adjusted Off-balance-sheet Exposure 14,697 11,806
___________ ___________
Total Risk-adjusted Assets $212,996 $215,157
=========== ===========
Leverage Ratio:
Tier I Capital to Average Total Assets 8.09% 7.95%
Minimum Required 4.00 4.00
To Be Well-Capitalized Under Prompt
Corrective Action Provisions 5.00 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio - Actual 11.48% 11.14%
Minimum Required 4.00 4.00
To Be Well-Capitalized under Prompt
Corrective Action Provisions 6.00 6.00
Total Capital Ratio - Actual 12.37% 12.02%
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 $ 9,311 $ 8,659
=========== ===========
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk - Interest Rate Risk
As a financial institution, Union National's primary component of
market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact the level of income and
expense recorded on a large portion of the bank's assets and
liabilities. Virtually all of Union National's interest-
sensitive assets and liabilities are held by the bank, and
therefore, interest rate risk management procedures are performed
by the bank. The nature of the bank's current operations is such
that the bank is not subject to foreign currency exchange or
commodity price risk. Union National does not own any trading
assets.
The objectives of interest rate risk management are to maintain
or increase net interest income over a broad range of market
interest rate movements. The Asset and Liability Management
Committee is responsible for managing interest rate risk using
policies approved by the bank's board of directors. The bank
manages interest rate risk by changing the mix or repricing
characteristics of its investment securities portfolio and
borrowings from the Federal Home Loan Bank and by the promotion
or development of specific loan and deposit products. The bank
retains an outside consulting group to assist in monitoring its
interest rate risk using income simulation models on a quarterly
basis. The simulation model measures the sensitivity of future
net interest income to hypothetical changes in market interest
rates.
The simulation model is utilized by the bank to determine the
effect of gradual increases or decreases in market interest rates
on net interest income and net income. Certain assumptions are
made in the simulation model and these 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. The simulated
results represent the hypothetical effects to the bank's net
interest income and net income. Projections for loan and deposit
growth are ignored in the simulation model. The simulation model
includes all of the bank's earning assets and interest-bearing
liabilities and assumes a parallel and prorated shift in interest
rates over a twelve-month period.
The simulation model currently indicates that a hypothetical one-
percent general decline in prevailing market interest rates over
a one-year period will have an immaterial negative impact on the
bank's net interest income over the next twelve months as
compared to the constant rate scenario. Only a one-percent
decline in interest rates was modeled at June 30, 2002, based on
management's assessment of potential future interest rate levels.
A hypothetical two-percent general rise in
rates will have an immaterial 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. Management determined
that this is a potential scenario considering current market
interest rates as compared to historical average interest rates.
A "flattening" interest rate environment with short-term interest
rates increasing two-percent will have an immaterial negative
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.
The bank managed its interest rate risk position in 2002 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
floating-rate, short- or long-term securities;
* 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
* additions to or restructuring of fixed-rate advances from the
Federal Home Loan Bank.
The above strategies and actions impact interest rate risk and
are all included in the bank's quarterly simulation models in
order to determine future asset and liability management
strategies. See the related discussions in the section on Net
Interest Income.
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
Union National. There are no proceedings pending other than the
ordinary routine litigation incident to the business of Union
National and its subsidiary, Union National Community Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against Union National and the bank by
government authorities.
Item 2. Changes in Securities and Use of Proceeds - Nothing to
report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An annual meeting of shareholders was held at 10:00
a.m. on April 24, 2002, at The Gathering Place, 6 Pine Street,
Mount Joy, Pennsylvania, 17552.
(b) (c) The following matters were voted upon:
Three Class C Directors were elected, as follows:
Votes Votes to
Cast "Withhold
Re-elected Term Expires "For" Authority"
__________ ____________ _____ __________
William E. Eby 2005 2,114,403 8,229
Benjamin W. Piersol, Jr. 2005 2,102,693 19,939
Donald H. Wolgemuth 2005 2,102,759 19,873
Directors whose term continued after the meeting:
Class A Directors
Franklin R. Eichler 2003
Mark D. Gainer 2003
Darwin A. Nissley 2003
Class B Directors
Carl R. Hallgren 2004
David G. Heisey 2004
Lloyd C. Pickell 2004
Daniel H. Raffensperger 2004
(d) Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit No. 99 Certification of Principal Executive
Officer and Principal Financial Officer Pursuant to 18 U.S.C.
Section 1350
(b) Reports on Form 8-K
Union National filed a report on form 8-K via EDGAR dated
April 11, 2002. The report was filed pursuant to Item 5, Other
Events, and reported the issuance of a press release. The press
release was attached to the report as an exhibit and reported
first quarter earnings for 2002 and announced the second quarter
cash dividend for 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 & CEO
(Principal Executive Officer)
Date: August 14, 2002
By /s/Clement M. Hoober
_______________________
Clement M. Hoober
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: August 14, 2002
EXHIBIT 99
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
___________________________
In connection with the quarterly report of Union National
Financial Corporation on Form 10-Q for the period ending June 30,
2002, 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 adopted 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. 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: August 14, 2002
By /s/Clement M. Hoober
_______________________
Treasurer/CFO
Date: August 14, 2002