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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
101 East Main Street, P.O. Box 567
Mount Joy, Pennsylvania 17552
_______________________ _____
(Address of Principal Executive Offices)
(717) 653-1441
______________
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.25 Par Value
_____________________________
(Title of Class)
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act). Yes __
No X
The aggregate market value of the shares of Common Stock of
the Registrant held by nonaffiliates of the Registrant was
$37,544,589 as of June 30, 2002. As of March 24, 2003, the
Registrant had 2,505,877 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Excerpts from Union National Financial Corporation's 2002
Annual Report to Stockholders are incorporated by reference into
Parts I, II and IV, hereof. Union National Financial
Corporation's Proxy Statement for its 2003 Annual Meeting is
incorporated by reference in response to Parts III and IV,
hereof.
UNION NATIONAL FINANCIAL CORPORATION
FORM 10-K
INDEX
PAGE NO.
PART I
Item 1 - Business . . . . . . . . . . . . . . . . . . . 1
Item 2 - Properties . . . . . . . . . . . . . . . . . . . 7
Item 3 - Legal Proceedings . . . . . . . . . . . . . . . 10
Item 4 - Submission of Matters to a Vote of Security
Holders . . . . . . . . . . . . . . . . . . . . 10
PART II
Item 5 - Market for Registrant's Common Equity and
Related Shareholder Matters . . . . . . . . . . 11
Item 6 - Selected Financial Data . . . . . . . . . . . . 11
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operation . .12
Item 7A- Quantitative and Qualitative Disclosure About
Market Risk . . . . . . . . . . . . . . . . . . 12
Item 8 - Financial Statements and Supplementary Data . . 12
Item 9 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure . . . . .12
PART III
Item 10 - Directors and Executive Officers of the
Registrant . . . . . . . . . . . . . . . . . . 13
Item 11 - Executive Compensation . . . . . . . . . . . . .13
Item 12 - Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . .13
Item 13 - Certain Relationships and Related Transactions .13
PART IV
Item 14 - Controls and Procedures . . . . . . . . . . . . 14
Item 15 - Exhibits, Financial Statements, Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . .17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . 23
PART I
______
Union National's management has made forward-looking
statements in this document, and in documents that it
incorporates by reference, that are subject to risks and
uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank or the combined company. When management
uses words such as "believes," "expects," "anticipates" or
similar expressions, management is making forward-looking
statements.
Readers should note that many factors, some of which are
discussed elsewhere in this document and in the documents that
management incorporates by reference, could affect the future
financial results of Union National Financial Corporation, Union
National Community Bank or the combined company and could cause
those results to differ materially from those expressed in the
forward-looking statements contained or incorporated by reference
in this document. These factors include the following:
* operating, legal and regulatory risks;
* economic, political, and competitive forces;
* rapidly changing technology; and
* the risk that our analyses of these risks and forces could
be incorrect and/or that the strategies developed to address them
could be unsuccessful.
Critical accounting policies:
Disclosure of the Corporation's significant accounting
policies is included in Note 1 to the consolidated financial
statements on pages 8 through 10 and in Management's Discussion
and Analysis on page 22 of the Annual Report to Stockholders
(Exhibit 13). The corporation's accounting policies have been
approved by the Audit Committee.
ITEM 1. BUSINESS.
__________________
Union National Financial Corporation, a Pennsylvania
business corporation, is a bank holding company registered under
the Bank Holding Company Act of 1956, as amended, and is
supervised by the Board of Governors of the Federal Reserve
System. Union National Financial Corporation was incorporated on
June 26, 1986, under the Business Corporation Law of the
Commonwealth of Pennsylvania. Union National Financial
Corporation commenced operations on January 2, 1987, upon
consummation of the acquisition of all of the outstanding shares
of The Union National Mount Joy Bank, which effective February 6,
1998, changed its name to Union National Community Bank. Union
National Financial Corporation's business consists primarily of
managing and supervising Union National Community Bank, and its
principal source of income is dividends
paid by Union National Community Bank. Union National Financial
Corporation has one wholly-owned subsidiary, Union National
Community Bank. The bank's wholly owned subsidiary, the Union
National Insurance Agency, Inc. was formed on May 21, 2001.
Union National Community Bank was organized in 1865 under a
national charter. Union National Community Bank is a national
banking association and a member of the Federal Reserve System.
The deposits of Union National Community Bank are insured by the
Federal Deposit Insurance Corporation to the maximum extent
permitted by law. Union National Community Bank has one main
office with an annex and six branch locations within Lancaster
County, Pennsylvania. It is a full-service commercial bank,
providing a wide range of services to individuals and small to
medium-sized businesses in its south central Pennsylvania market
area. Union National Community Bank accepts time, demand, and
savings deposits and makes secured and unsecured commercial, real
estate and consumer loans. Union National Community Bank also
has a full-service trust department, the Wealth Management Group
located in Lancaster City. Through a third party provider
affiliation, Union National Community Bank offers certain non
depository products to its customers to include annuities and
brokerage services.
Union National Financial Corporation's executive offices are
located at 101 East Main Street, P.O. Box 567, Mount Joy,
Pennsylvania 17552. Its telephone number is (717) 653-1441.
Union National Financial Corporation experiences substantial
competition in attracting and retaining deposits and in lending
funds. Financial institutions compete for deposits by offering
attractive rates and the convenient office locations. Direct
competition for deposits comes primarily from other commercial
banks and thrift institutions. Competition for deposits also
comes from money market mutual funds, corporate and government
securities and credit unions. The primary factors in the
competition for loans are interest rates, loan origination fees
and the range of products and services offered. Competition for
origination of real estate loans normally comes from other
commercial banks, thrift institutions, mortgage bankers, mortgage
brokers and insurance companies.
For additional information concerning Union National
Financial Corporation's business activities, see Part II, Item 7
f this Annual Report on Form 10-K.
Supervision and Regulation - Union National Financial Corporation
_________________________________________________________________
Union National Financial Corporation operates in a heavily
regulated environment. Changes in laws and regulations affecting
Union National Financial Corporation and its subsidiary, Union
National Community Bank, may have an impact on operations. See
"Supervision and Regulation Union National Financial
Corporation" and "Supervision and Regulation Union National
Community Bank" below and pages 35 and 36 of the 2002 Annual
Report to Stockholders. The annual report is included in Exhibit
13 to this report and is incorporated herein by reference.
Without the prior approval of the Federal Reserve, the Bank
Holding Company Act prohibits Union National Financial
Corporation from:
* acquiring direct or indirect control of more than 5% of
the voting stock of any bank; or
* acquiring substantially all of the assets of any bank; or
* merging with another bank holding company.
The Pennsylvania Department of Banking also must approve any
similar consolidation. Pennsylvania law permits Pennsylvania
bank holding companies to control an unlimited number of banks.
The Bank Holding Company Act restricts Union National
Financial Corporation from engaging in activities to other than
those that the Federal Reserve has found:
* to be closely related to banking; and
* which are expected to produce benefits for the public that
will outweigh any potentially adverse effects.
To this end, the Bank Holding Company Act prohibits Union
National Financial Corporation from:
* engaging in most non-banking businesses; or
* acquiring ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking
business; unless
* the Federal Reserve has determined that the non-banking
business is closely related to banking.
Under the Bank Holding Company Act, the Federal Reserve may
require a bank holding company to end a non-banking business if
it constitutes a serious risk to the financial soundness and
stability of any bank subsidiary of the bank holding company.
Other than making equity investments in low to moderate
income housing limited partnerships, Union National Financial
Corporation does not at this time engage in any other permissible
activities, nor does Union National Financial Corporation have
any current plans to engage in any other permissible activities
in the foreseeable future.
Subsidiary banks of a bank holding company are subject to
restrictions imposed by the Federal Reserve Act on any extensions
of credit to the bank holding company or any of its subsidiaries,
on investments in the stock or other securities of the bank
holding company and on taking of such stock or securities as
collateral for loans to any borrower.
Legislation and Regulatory Changes. From time to time,
___________________________________
Congress or the Pennsylvania legislature enacts legislation which
has the effect of increasing the cost of doing business, limiting
or expanding permissible activities or affecting the competitive
balance between banks and other financial institutions.
Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and
other financial institutions are frequently made in Congress, and
before various bank regulatory agencies. Management cannot
predict the likelihood of any major changes or the impact such
changes might have on Union National Financial Corporation and
its subsidiary. The following paragraphs discuss legislative or
regulatory changes of potential significance to Union National
Financial Corporation which Congress has recently enacted and
others which Congress or various regulatory or professional
agencies currently are discussing.
The Federal Reserve Board, the Federal Deposit Insurance
Corporation and the Comptroller of the Currency have issued
certain risk-based capital guidelines, which supplement existing
capital requirements. The guidelines require all United States
banks and bank holding companies to maintain a minimum risk-based
capital ratio of 8%, of which at least 4% must be in the form of
common stockholders' equity. Assets are assigned to five risk
categories, with higher levels of capital required for the
categories perceived as representing greater risk. The required
capital will represent equity and (to the extent permitted)
nonequity capital as a percentage of total risk-weighted assets.
The risk-based capital rules are designed to make regulatory
capital requirements more sensitive to differences in risk
profiles among banks and bank holding companies and to minimize
disincentives for holding liquid assets. On the basis of an
analysis of the rules and the projected composition of Union
National Financial Corporation's consolidated assets, management
does not believe that the risk-based capital rules have a
material effect on Union National Financial Corporation's
business and capital plans. Union National Community Bank has
capital ratios exceeding the regulatory requirements. See pages
14, 15, 34, and 35 of Union National Financial Corporation's 2002
Annual Report to Stockholders for information concerning Union
National Financial Corporation's capital ratios which are
included in Exhibit 13 and incorporated here by reference.
Pending Legislation. Management cannot anticipate what
____________________
changes Congress may enact or, if enacted, their impact on Union
National Financial Corporation's financial position and reported
results of operation. As a consequence of the extensive
regulation of commercial banking activities in the United States,
Union National Financial Corporation's and Union National
Community Bank's businesses may be adversely affected by federal
and state legislation and regulations that may increase the costs
of doing business. See also pages 35 and 36 of Union National
Financial Corporation's 2002 Annual Report to Stockholders, which
pages are included in Exhibit 13 and incorporated here by
reference.
Effects of Inflation. Inflation has some impact on Union
_____________________
National Financial Corporation's and Union National Community
Bank's operating costs. Unlike many industrial companies,
however, substantially all of Union National Community Bank's
assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on Union National
Financial Corporation's and Union National Community Bank's
performance than the general level of inflation. Over short
periods of time, interest rates may not necessarily move in the
same direction or in the same magnitude as prices of goods and
services.
Monetary Policy. Domestic economic conditions and the
________________
monetary and fiscal policies of the United States Government and
its agencies affect the earnings of Union National Financial
Corporation and Union National Community Bank. An important
function of the Federal Reserve System is to regulate the money
supply and interest rates. Among the instruments used to
implement those objectives are open market operations in United
States government securities and changes in reserve requirements
against member bank deposits. The Federal Reserve uses these
instruments in varying combinations to influence overall growth
and distribution of bank loans, investments and deposits, and
their use may also affect rates charged on loans or paid for
deposits.
Union National Community Bank is a member of the Federal
Reserve System. The policies and regulations of the Federal
Reserve Board have a significant effect on its deposits, loans
and investment growth, as well as the rate of interest earned and
paid, and are expected to affect Union National Community Bank's
operations in the future. The effect of Federal Reserve Board
policies and regulations upon the future business and earnings of
Union National Financial Corporation and Union National Community
Bank cannot be predicted.
Environmental Laws. Neither Union National Financial
___________________
Corporation nor Union National Community Bank anticipate that
compliance with environmental laws and regulations will have any
material effect on capital, expenditures, earnings, or on its
competitive position. However, environmentally related hazards
have become a source of high risk and potentially unlimited
liability for financial institutions. Environmentally
contaminated properties owned by an institution's borrowers may
result in a drastic reduction in the value of the collateral
securing the institution's loans to such borrowers, high
environmental clean up costs to the borrower affecting its
ability to repay the loans, the subordination of any lien in
favor of the institution to a state or federal lien securing
clean up costs, and liability to the institution for clean up
costs if it forecloses on the contaminated property or becomes
involved in the management of the borrower. To minimize this
risk, Union National Community Bank may require an environmental
examination of and report with respect to the property of any
borrower or prospective borrower if circumstances affecting the
property indicate a potential for contamination, taking into
consideration a potential loss to the institution in relation to
the borrower. Such examination must be performed by an
engineering firm experienced in environmental risk studies and
acceptable to the institution, and the cost of such examinations
and reports are the responsibility of the borrower. These costs
may be substantial and may deter a prospective borrower from
entering into a loan transaction with Union National Community
Bank. Union National Financial Corporation is not aware of any
borrower who is currently subject to any environmental
investigation or clean up proceeding that is likely to have a
material adverse effect on the financial condition or results of
operations of Union National Community Bank.
In 1995, the Pennsylvania General Assembly enacted the
Economic Development Agency, Fiduciary and Lender Environmental
Liability Protection Act which, among other things, provides
protection to lenders from environmental liability and
remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in
activities involved in the routine practices of commercial
lending, including, but not limited to, the providing of
financial services, holding of security interests, workout
practices, foreclosure or the recovery of funds from the sale of
property shall not be liable under the environmental acts or
common law equivalents to the Pennsylvania Department of
Environmental Resources or to any other person by virtue of the
fact that the lender engages in such commercial lending practice.
A lender, however, will be liable if it, its employees or agents,
directly cause an immediate release or directly exacerbate a
release of regulated substances on or from the property, or
knowingly and willfully compelled the borrower to commit an
action which caused such release or violate an environmental act.
The Economic Development Agency, Fiduciary and Lender
Environmental Liability Protection Act, however, does not limit
federal liability which still exists under certain circumstances.
As discussed above, there are several federal and state
statutes that regulate the obligations and liabilities of
financial institutions pertaining to environmental issues. In
addition to the potential for attachment of liability resulting
from its own actions, a bank may be held liable under certain
circumstances for the actions of its borrowers, or third parties,
when such actions result in environmental problems on properties
that collateralize loans held by Union National Community Bank.
Further, the liability has the potential to far exceed the
original amount of the loan issued by Union National Community
Bank. Currently, neither Union National Financial Corporation
nor Union National Community Bank is a party to any pending legal
proceeding pursuant to any environmental statute, nor is Union
National Financial Corporation or Union National Community Bank
aware of any circumstances that may give rise to liability under
any such statute.
Supervision and Regulation - Union National Community Bank
__________________________________________________________
The operations of Union National Community Bank are subject
to federal and state statutes applicable to banks chartered under
the banking laws of the United States, to members of the Federal
Reserve System and to banks whose deposits are insured by the
FDIC. Bank operations are also subject to regulations of the
Comptroller of the Currency, the Federal Reserve Board and the
FDIC.
The primary supervisory authority of Union National
Community Bank is the Comptroller of the Currency, which
regulates and examines Union National Community Bank. The
Comptroller of the Currency has the authority under the
Financial Institutions Supervisory Act to prevent a national bank
from engaging in an unsafe or unsound practice in conducting its
business.
Federal and state banking laws and regulations govern, among
other things, the scope of a bank's business, the investments a
bank may make, the reserves against deposits a bank must
maintain, loans a bank makes and collateral it takes, the maximum
interest rates a bank may pay on deposits, the activities of a
bank with respect to mergers and consolidations and the
establishment of branches.
As a subsidiary of a bank holding company, Union National
Community Bank is subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the parent
bank holding company or its subsidiaries, on investments in the
stock or other securities of the bank holding company or its
subsidiaries and on taking such stock or securities as collateral
for loans. The Federal Reserve Act and Federal Reserve Board
regulations also place certain limitations and reporting
requirements on extensions of credit by a bank to principal
shareholders of its parent holding company, among others, and to
related interests of such principal shareholders. In addition,
such legislation and regulations may affect the terms upon which
any person becoming a principal shareholder of a holding company
may obtain credit from banks with which the subsidiary bank
maintains a correspondent relationship. The Union National
Insurance Agency, Inc. provides insurance-related products to the
bank's customers. The agency is subject to supervision and
regulation by the Insurance Department of the Commonwealth of
Pennsylvania, the Office of the Comptroller of Currency and other
regulatory agencies.
Other. From time to time, various types of federal and
______
state legislation have been proposed that could result in
additional regulation of, and restrictions on, the business of
Union National Community Bank. It cannot be predicted whether
any such legislation will be adopted or, if adopted, how such
legislation would affect the business of Union National Community
Bank. As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National Community
Bank's business is particularly susceptible to being affected by
federal legislation and regulations that may increase the costs
of doing business.
Statistical Data. The information required by this Item is
_________________
incorporated by reference from pages 20 through 36 of Union
National Financial Corporation's 2002 Annual Report to
Stockholders.
Employees. As of March 24, 2003, Union National Community
__________
Bank had 118 full-time employees and 20 part-time employees.
None of these employees is represented by a collective
bargaining agent, and Union National Financial Corporation
believes it enjoys good relations with its personnel.
ITEM 2. PROPERTIES.
____________________
Union National Community Bank owns its main office, six
branch offices, the administration services center and certain
parking facilities related to its banking offices, all of which
are free and clear of any lien. Union National Community Bank's
main office is located in the central business district of Mount
Joy, Pennsylvania. Below is a table containing the location and
date of acquisition of Union National Community Bank's
properties. In addition, Union National Community Bank leases
office space for two branch offices located in Columbia and
Manheim, Pennsylvania. The bank also leases its Wealth
Management Group property in Lancaster.
PROPERTIES OWNED BY UNION NATIONAL COMMUNITY BANK
Office and Address Description of Property Date Acquired
__________________ _______________________ ________________
Main Office Main Bank Office 1911
101 East Main Street Cut limestone and brick.
Mount Joy, PA 17552 1995 addition is concrete
over steel construction.
Containing approximately
a total of 22,251 sq. ft.
of space.
Main Office Annex Wood frame construction
115 East Main Street with aluminum siding. September, 1992
Mount Joy, PA 17552 Containing approximately
1,632 sq. ft. of space.
Maytown Branch Office Branch Bank April, 1972
100 West High Street Brick veneer, shingled roof
Maytown, PA 17550 with wood trusses. Containing
approximately 4,960 sq. ft.
of space.
Hempfield Branch Office Branch Bank June, 1979
190 Stony Battery Road Brick with wood shingle roof.
Salunga, PA 17538 Containing approximately
4,619 sq. ft. of space.
Elizabethtown Branch Branch Bank January, 1988
Office Brick veneer, shingled roof
1275 South Market Street with wood trusses.
Elizabethtown PA 17022 Containing approximately
6,808 sq. ft. of space.
Elizabethtown MotorBank Office
Drive-up Bank September, 2001
Brick on Frame
Containing approximately
574 sq. ft. of space.
MotorBank Branch Office Drive-up Bank Branch November, 1972
21 North Barbara Street Brick on frame.
Mount Joy, PA 17552 Containing approximately
445 sq. ft. of space.
Administration Services Brick on concrete block December, 1984
Center with wood and steel frame.
Bank Administration Containing approximately
Building 9,398 sq. ft. of space.
25 North Barbara Street
Mount Joy, PA 17552
Columbia Branch Office Branch Bank October, 1992
921 Lancaster Avenue One story brick building
Columbia, PA 17512 containing approximately
2,257 sq. ft. of space.
PROPERTY LEASED BY THE BANK
Office and Address Description of Property Date Leased
_____________________ ________________________ _____________
Manheim Branch Office Concrete block building January, 1995
701 Lancaster Road containing 4,266 sq. ft.
Manheim, PA 17545 of space of which approximately
2,600 sq. ft. of space is
currently used for banking
purposes.
Columbia Branch Office Branch Bank April, 2000
401 Locust Street Brick/Granite Building
Columbia, PA 17512 First floor of 3 story building
containing 2,120 sq. ft. of space
currently used for banking purposes.
No drive-up facilities.
Wealth Management Group Brick/Steel Frame August, 2000
150 N. Queen Street Building Fifth floor of
5 th Floor, Suite 500 7 story building containing
Lancaster, PA 17604 5,080 sq. ft. of space currently
used for trust and asset
management purposes.
In management's opinion, the above properties are in good
condition and are adequate for the Corporation's and Union
National Community Bank's purposes.
ITEM 3. LEGAL PROCEEDINGS.
___________________________
Management, after consulting with Union National Financial
Corporation's legal counsel, is not aware of any litigation that
would have a material adverse effect on the consolidated
financial position of Union National Financial Corporation.
There are no proceedings pending other than ordinary routine
litigation incident to the business of Union National Financial
Corporation and its subsidiary, Union National Community Bank.
In addition, no material proceedings are known to be contemplated
by governmental authorities against Union National Financial
Corporation or Union National Community Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
_____________________________________________________________
None. There were no matters submitted to a vote of security
holders during the fourth quarter of 2002.
PART II
_______
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
__________________________________________________________
STOCKHOLDER MATTERS.
____________________
Market and dividend information required by this Item is
incorporated here by reference from the inside front cover of
Union National Financial Corporation's 2002 Annual Report to
Stockholders which is included in Exhibit 13 to this Annual
Report on Form 10-K. Union National Financial Corporation's
common stock is traded on a limited basis in the local over-the-
counter market and on the OTC Bulletin Board under the symbol
UNNF. Bid and asked information is available on some internet
websites providing financial market news. Information concerning
actual trades is included on the inside front cover of Union
National Financial Corporation's 2002 Annual Report to
Stockholders and is also available on some internet websites.
This information represents a limited amount of share transfer
activity.
Union National Financial Corporation and, prior to Union
National Financial Corporation's organization as a bank holding
company, Union National Community Bank have paid regular cash
dividends on their common stock for more than thirty-seven years.
Union National Financial Corporation expects to pay future
dividends; however, payment of such dividends will depend upon
earnings of Union National Financial Corporation and of Union
National Community Bank, their financial condition, capital
requirements and other factors, such as regulatory and legal
requirements. It is anticipated that substantially all of the
funds available for the payment of dividends by Union National
Financial Corporation will be derived from dividends paid to it
by Union National Community Bank.
Information related to Securities authorized for Issuance
under Equity Compensation Plans is incorporated by reference to
page 29 of the Union National Financial Corporation 2003 Proxy
Statement.
Additional information required by this Item regarding
dividend restrictions is incorporated here by reference from Note
12 on page 14 and pages 34 and 35 of Union National Financial
Corporation's 2002 Annual Report to Stockholders, which is
included in Exhibit 13 to this Form 10-K.
As of March 24, 2003, there were approximately 915 holders
of record of Union National Financial Corporation's common stock.
ITEM 6. SELECTED FINANCIAL DATA.
_________________________________
The information required by this Item is incorporated here
by reference from pages 20 and 21 of Union National Financial
Corporation's 2002 Annual Report to Stockholders which is
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
__________________________________________________________
CONDITION AND RESULTS OF OPERATIONS.
____________________________________
The information required by this Item is incorporated by
reference from pages 22 through 36 of Union National Financial
Corporation's 2002 Annual Report to Stockholders which are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
______________________________________________________________
RISK.
_____
The information required by this Item is incorporated here
by reference from pages 32 to 34 of Union National Financial
Corporation's 2002 Annual Report to Stockholders which pages are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
_____________________________________________________
The information required by this Item is incorporated here
by reference from pages 4 through 20 of Union National Financial
Corporation's 2002 Annual Report to Stockholders which are
included in Exhibit 13 to this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
_________________________________________________________
ACCOUNTING AND FINANCIAL DISCLOSURE.
____________________________________
NONE.
PART III
________
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
_________________________________________________________
The information required by this Item is incorporated here
by reference from pages 4 through 6, 15 through 19 and 25 of
Union National Financial Corporation's Proxy Statement for its
2003 Annual Meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION.
_________________________________
The information required by this Item is incorporated here
by reference from pages 26 through 29 of Union National Financial
Corporation's Proxy Statement for its 2003 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
_____________________________________________________________
MANAGEMENT.
___________
The information required by this Item is incorporated here
by reference from pages 3 through 5 and 36 of Union National
Financial Corporation's Proxy Statement for its 2003 Annual
Meeting of Shareholders. The information related to Equity
Compensation Plans as required is incorporated here by reference
to the Equity Compensation Plan Information table on page 29 of
Union National Financial Corporation's Proxy Statement for its
2003 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
_________________________________________________________
The information required by this Item is incorporated here
by reference from page 36 of Union National Financial
Corporation's Proxy Statement for its 2003 Annual Meeting of
Shareholders.
PART IV
_______
ITEM 14. CONTROLS AND PROCEDURES.
_________________________________
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of
management, including the Chief Executive Officer and Chief
Financial Officer, the effectiveness of the design and operation
of the Corporation's disclosure controls and procedures (as
defined in Rule 13a-14(c) under the Exchange Act) was evaluated
as of a date (the "Evaluation Date") within 90 days prior to the
filing date of this report. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as
of the Evaluation Date, the Corporation's disclosure controls and
procedures were effective in timely alerting them to the material
information relating to the Corporation (or the Corporation's
consolidated subsidiaries) required to be included in its
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in the Corporation's
internal controls during the period covered by this report or, to
their knowledge, in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
_________________________________________________________________
FORM 8-K.
_________
(a) 1. Financial Statements.
The following financial statements are included by
reference in Part II, Item 8 hereof.
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders'
Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. The financial statement schedules required by this
Item are omitted because the information is either
inapplicable, not required or is in the consolidated
financial statements as a part of this Report.
3. The following Exhibits are filed herewith, or
incorporated by reference as a part of this Report:
3(i) Union National Community Bank's Amended
Articles of Incorporation. (Incorporated by reference to Exhibit
3(i) to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with the Commission on
May 27, 1997.)
3(ii) Union National Financial Corporation's
Amended and Restated By-laws. (Incorporated by reference to
Exhibit 3(ii) to Union National Financial Corporation's current
report on Form 8-K, filed with the Commission on March 30, 2001.)
10.1 Executive Employment Agreement dated as of January
1, 1999, between Mark D. Gainer and Union National Financial
Corporation (Incorporated by Reference to Exhibit 10.1 to Union
National Financial Corporation's Annual Report on Form 10-K for
the Year Ended December 31, 1998).
10.2 Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by reference to Exhibit 4.3 to
Union National Financial Corporation's Registration Statement
No. 333-27837 on Form S-8, filed with the Commission on May 27,
1997.)
10.3 Union National Financial Corporation 1997 Stock
Incentive Plan. (Incorporated by reference to Exhibit 4.5 to
Union National Financial Corporation's Registration Statement No.
333-27837 on Form S-8, filed with the Commission on May 27,
1997.)
10.4 Change of Control Agreement, dated August 2, 2001,
between Michael A. Frey and Union National Financial Corporation.
(Incorporated by Reference to Union National Financial
Corporation's Quarterly Report on Form 10-Q for the Period Ended
September 30, 2001).
10.5 Union National Financial Corporation's Employee
Stock Purchase Plan (Incorporated by Reference to Exhibit 4.4 to
Union National Financial Corporation's Registration Statement No.
333-27837 on Form S-8, filed with the Commission on May 27,
1997).
10.6 Change of Control Agreement, dated May 29, 2001,
between Clement M. Hoober and Union National Financial
Corporation. (Incorporated by Reference to Union National
Financial Corporation's Quarterly Report on Form 10-Q for the
Period Ended June 30, 2001).
13 Excerpts from Union National Financial Corporation's
2002 Annual Report to Stockholders.
21 Subsidiaries of the Union National Financial
Corporation (Incorporated by Reference to Exhibit 21 to Union
National Financial Corporation's Annual Report on Form 10-K for
the Year Ended December 31, 1998).
23.1 Consent of Beard Miller Company LLP, Independent
Auditors.
(b) Union National filed a report on Form 8-K via EDGAR
dated October 16, 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 third quarter earnings and announced the fourth quarter
cash dividend for 2002.
(c) The exhibits required to be filed by this Item are
listed under Item 14(a)3, above.
(d) NOT APPLICABLE.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UNION NATIONAL FINANCIAL CORPORATION
____________________________________
(Registrant)
By /s/ Mark D. Gainer
____________________________________
Mark D. Gainer
President and Chief Executive Officer
Date: March 13, 2003
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of Union National Financial Corporation and in
the capacities and on the dates indicated.
DATE
____
By /s/ Mark D. Gainer March 13, 2003
__________________________
Mark D. Gainer
President, Chief Executive Officer
and Director (principal executive officer)
By /s/ Donald H. Wolgemuth March 13, 2003
__________________________
Donald H. Wolgemuth
Chairman of the Board of Directors
and Director
By /s/ William E. Eby March 13, 2003
__________________________
William E. Eby, Director
By /s/ Clement M. Hoober March 13, 2003
__________________________
Clement M. Hoober, CPA,
Chief Financial Officer (principal
financial officer and principal
accounting officer)
By /s/ Franklin R. Eichler March 13, 2003
__________________________
Franklin R. Eichler, Director
By /s/ Carl R. Hallgren March 13, 2003
__________________________
Carl R. Hallgren, Director
By /s/ David G. Heisey March 13, 2003
__________________________
David G. Heisey, Director
By /s/ Darwin A. Nissley March 13, 2003
__________________________
Darwin A. Nissley, Director
By /s/ Daniel H. Raffensperger March 13, 2003
__________________________
Daniel H. Raffensperger, Director
By /s/ Benjamin W. Piersol, Jr. March 13, 2003
__________________________
Benjamin W. Piersol, Jr., Director
By /s/ Lloyd C. Pickell March 13, 2003
__________________________
Lloyd C. Pickell, Director
CERTIFICATION
I, Mark D. Gainer, President/CEO, certify, that:
1. I have reviewed this annual report on Form 10-K of Union
National Financial Corporation.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. Union National's other certifying officer and I have
disclosed, based on our most recent evaluation, 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 in the design or
operation of the internal controls which could adversely affect
the registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; 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.
6. Union National's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
By /s/Mark D. Gainer
___________________
President/CEO
Date: March 31, 2003
CERTIFICATION
I, Clement M. Hoober, Treasurer/CFO, certify, that:
1. I have reviewed this annual report on Form 10-K of Union
National Financial Corporation.
2. Based on my knowledge, the annual report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report.
3. Based on my knowledge, the financial statements, and
other financial information included in this annual report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and
for, the periods presented in this annual report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the "Evaluation
Date"); and
(c) presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date.
5. Union National's other certifying officer and I have
disclosed, based on our most recent evaluation, 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 in the design or
operation of the internal controls which could adversely affect
the registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; 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.
6. Union National's other certifying officer and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect the internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
By /s/ Clement M. Hoober
_____________________
Treasurer/CFO
Date: March 31, 2003
EXHIBIT INDEX
Exhibit Number
______________
3(i) Union National Financial Corporation's Amended
Articles of Incorporation. (Incorporated by reference to Exhibit
3(i) to Union National Financial Corporation's Registration
Statement No. 333-27837 on Form S-8, filed with the Commission on
May 27, 1997.)
3(ii) Union National Financial Corporation's Amended and
Restated By-laws. (Incorporated by reference to Exhibit 3(ii) to
Union National Financial Corporation's current report on Form 8-
K, filed with the Commission on March 30, 2001.)
10.1 Executive Employment Agreement dated as of January 1,
1999, between Mark D. Gainer and Union National Financial
Corporation (Incorporated by reference to Exhibit 10.1 to Union
National Financial Corporation's Annual Report on Form 10-K for
the Year Ended December 31, 1998.)
10.2 Union National Financial Corporation 1988 Stock
Incentive Plan. (Incorporated by Reference to Exhibit 4.3 to
Union National Financial Corporation's Registration Statement No.
333-27837 on Form S-8, filed with the
Commission on May 27, 1997.)
10.3 Union National Financial Corporation's 1997 Stock
Incentive Plan. (Incorporated by Reference to Exhibit 4.5 to
Union National Financial Corporation's Registration Statement
No. 333-27837 on Form S-8, filed with the Commission on May 27,
1997.)
10.4 Change in Control Agreement, dated as of August 2,
2001, between Michael A. Frey and Union National Financial
Corporation. (Incorporated by Reference to Exhibit 10 to Union
National Financial Corporation's Quarterly Report on Form 10-Q
for the Period Ended September 30, 2001).
10.5 Union National Financial Corporation's Employee Stock
Purchase Plan. (Incorporated by Reference to Exhibit 4.4 to
Union National Financial Corporation's Registration Statement No.
333-27837 on Form S-8, filed with the Commission on May 27,
1997.)
10.6 Change in Control Agreement, dated as of May 29, 2001,
between Clement M. Hoober and Union National Financial
Corporation. (Incorporated by Reference to Exhibit 10 to Union
National Financial Corporation's Quarterly Report on Form 10-Q
for the Period Ended June 30, 2001).
13 Excerpts from Union National Financial Corporation's 2002
Annual Report to Shareholders.
21 Subsidiaries of Union National Financial Corporation.
(Incorporated by Reference to Exhibit 21 to Union National
Financial Corporation's Annual Report on Form 10-K for the Year
Ended December 31, 1998.)
23.1 Consent of Beard Miller Company LLP, Independent
Auditors.
EXHIBIT 13
__________
Excerpts From Union National Financial Corporation's
2002 Annual Report to Stockholders
150 years of community banking
ANNUAL REPORT 2002
UNION NATIONAL FINANCIAL CORPORATION
TABLE OF CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . .1
To Our Stockholders . . . . . . . . . . . . . . . . . . . . . 2-3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Income . . . . . . . . . . . . . . . 5
Consolidated Statements of Changes in Stockholders' Equity . . .6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . 8-18
Independent Auditor's Report . . . . . . . . . . . . . . . . . 20
Summary of Quarterly Financial Data . . . . . . . . . . . . . .20
Selected Financial Data . . . . . . . . . . . . . . . . . . . .21
Management's Discussion and Analysis . . . . . . . . . . . .22-36
Board of Directors . . . . . . . . . . . . . . . . . . . . . . 37
STOCK, BROKER AND DIVIDEND INFORMATION
Union National Financial Corporation has only one class of common
stock authorized, issued and outstanding. The outstanding common
stock is traded in the local over-the-counter market, primarily
in Lancaster County, Pennsylvania, under the symbol UNNF. Prices
presented in the table below reflect actual transactions known to
management. Cash dividends, when declared by the Board of
Directors, are payable on the 5th day of February, May, August
and November. Stockholders of record may elect to have cash
dividends deposited directly to their checking or savings
account. Union National offers its stockholders a Dividend
Reinvestment and Stock Purchase Plan, whereby holders of stock
may have their quarterly cash dividends automatically invested in
additional shares of common stock of the corporation and may
purchase additional shares within specified limits.
Dividends
Quarter High Low Per Share
_________________________________________________________________
First, 2002 $15.50 $13.90 $0.125
Second 15.75 15.10 0.140
Third 16.50 15.20 0.155
Fourth 17.25 16.20 0.155
First, 2001 $14.75 $11.75 $0.105
Second 12.60 11.75 0.105
Third 14.00 11.82 0.105
Fourth 14.00 12.80 0.110
Corporate Introduction
Union National Financial Corporation, headquartered in Mount Joy,
Pennsylvania, is the holding company of Union National Community
Bank. The bank provides a full range of financial services for
both retail and business customers in Lancaster County,
Pennsylvania. In addition to traditional banking services, Union
National also offers insurance, retirement plan services, and
wealth management services through its UnionNationalAdvisors
Group. Union National Community Bank has six full-service
offices in Columbia, Elizabethtown, Hempfield, Manheim, Maytown
and Mount Joy. The deposits of Union National Community Bank are
insured by the Federal Deposit Insurance Corporation (FDIC) to
the maximum extent provided by law.
Regarding Forward-Looking Information
We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank or the combined company. When we use
words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements. Union
National undertakes no obligation to publicly revise or update
these forward-looking statements to reflect events or
circumstances that arise after the date of this report.
REGISTRAR AND TRANSFER AGENT
Union National Community Bank
Attn: Stock Transfer Department
P.O. Box 567
Mount Joy, PA 17552-0567
FOR FURTHER INFORMATION
ON PURCHASING OUR STOCK,
WE REFER YOU TO:
Ferris Baker Watts
3100 Market Street
Camp Hill, PA 17011
(877) 519-5953
F. J. Morrissey & Company, Inc.
4 Tower Bridge, Suite 300
200 Barr Harbor Drive
West Conshohocken, PA 19428
(800) 842-8928
Hazlett, Burt & Watson, Inc.
100 East King Street
P. O. Box 1267
Lancaster, PA 17608
(717) 397-5515
Janney Montgomery Scott, LLC
61 North Duke Street
Lancaster, PA 17602
(717) 293-4100
RBC Dain Rauscher
2101 Oregon Pike
Lancaster, PA 17601
(866) 835-1422
Ryan Beck & Co., Inc.
220 South Orange Avenue
Livingston, NJ 07039
(973) 597-6000
Form 10-K Request
The Form 10-K Report filed with the Securities & Exchange
Commission may be obtained, without charge, by writing to:
Clement M. Hoober, CPA
Chief Financial Officer
Union National Financial Corporation
P.O. Box 567
Mount Joy, PA 17552
The annual report and other company reports are also filed
electronically through the Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR") which performs automated
collection, validation, indexing, acceptance and forwarding of
submissions to the Securities and Exchange Commission (SEC) and
is accessible by the public using the internet at
http://www.sec.gov/edgar.shtml.
Notice of Annual Meeting
The Annual Meeting of Stockholders will be held on Wednesday,
April 30, 2003, at: The Gathering Place, 6 Pine Street, Mount
Joy, PA 17552.
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share data)
December 31, December 31, % Increase
2002 2001 (Decrease)
_________________________________________________________________
For the Year
Total Interest Income $ 19,561 $ 21,085 (7.2%)
Total Interest Expense 8,107 10,190 (20.4%)
Net Interest Income 11,454 10,895 5.1%
Net Income 3,160 2,242 40.9%
Per Share
Net Income (Basic) $ 1.24 $ 0.87 42.5%
Net Income (Assuming Dilution) 1.23 0.86 43.0%
Cash Dividends Paid 0.575 0.425 35.3%
Stockholders' Equity 10.62 9.86 7.7%
Average Balances
Loans $201,976 $186,877 8.1%
Investments and Other
Earning Assets 87,939 90,321 (2.6%)
Total Assets 308,584 294,401 4.8%
Total Deposits 215,242 214,297 0.4%
Stockholders' Equity 25,900 24,730 4.7%
Return on Average
Assets 1.02% 0.76%
Stockholders' Equity 12.20% 9.07%
TO OUR STOCKHOLDERS:
As we celebrate a successful year, we also reflect on the success
we have achieved over the past 150 years. We have faced many
challenges throughout our history and know that more await us in
the future. Union National was built on a foundation of
individualized, world-class service along with a commitment to
our customers, our employees and the communities we serve. These
foundational principles have served us well in the past and will
continue to guide our future.
Union National achieved record earnings of $3,160,000 in 2002, an
increase of 41% over 2001. Union National was able to achieve
this record profitability level because of the combined efforts
of all of our team members. Several years ago we embarked on an
ambitious effort to prepare Union National to become the best
financial services provider in our market. As I indicated at
that time, becoming the best is a noble goal, but it is rarely an
easy one. We knew our efforts would come at a cost and would
impact short-term earnings. However, while our story is still
not complete, several chapters have been written and we have
accomplished much. We have made many preparations and now you
are seeing the results of our efforts reflected in the record
earnings for 2002. The story is still unfolding and we are
excited and ready to embrace the future that lies ahead.
Following are just a few highlights of what we accomplished
together in 2002:
* Union National capitalized on low long-term interest rates and
generated significant mortgage volume under a new mortgage
program that was introduced in the fourth quarter of 2001. These
mortgage banking activities generated additional income of more
than $450,000 during 2002.
* Our UnionNationalAdvisors group continued to expand the sale
of annuities, mutual funds and other alternative investment
products to our customers. Union National now has a licensed
investment representative in each of our community offices.
Increased sales of these products resulted in additional revenue
of more than $100,000 for 2002. UnionNationalAdvisors also
continued to develop additional products for our customers in
2002. These products will ensure
that we can provide a wide array of services to meet the diverse
needs of our customers and will provide ways to generate
increased revenues for Union National in the future.
* Union National generated significant commercial loan growth
in 2002. Service to small and medium-sized businesses continues
to be a profitable niche for Union National and will be a
continued focus in the future.
* Union National experienced a steep decline in net loan
charge-offs and past due and non-performing loans in 2002,
compared to 2001. This can be attributed to a sound credit
culture at Union National, including strong loan underwriting,
and our proactive collection efforts. With the combination of
these factors, Union National's total provision for loan losses
decreased by $392,000 in comparison to 2001.
From our humble beginnings 150 years ago, Union National has
grown to meet the ever-changing needs of the communities around
us. Over the past several years we have made product, process
and technology changes to prepare Union National to be able to
grow and continue to meet our customers' needs in the future.
More importantly, we have invested in our people. We have built
a team that is well-trained, confident and prepared to face the
challenge of becoming a high-performing financial services
provider. We believe we are now well-positioned for future
growth. During 2003, we expect to expand our community office
network into the greater Lancaster community with two additional
offices. One office location already identified is on Roseville
Road in Manheim Township, which has a targeted opening date in
the summer of 2003. We also continue to identify and further
analyze other opportunities and areas for profitable growth. We
believe we can offer the products and services that customers
need and provide the world-class service that they desire. In
short, we believe we are ready to expand and dominate our markets
through the same world-class service that has been our hallmark
for the past 150 years.
In 2003 we also anticipate the introduction of several new
products for our customers. We are pleased to present an
innovative new product called "Cash Back Checking". This
product, which was introduced in the first quarter of 2003, pays
customers cash back for pinless MasterMoney card purchases on a
monthly basis. This account also features no minimum balance, no
monthly maintenance fees and no limits on transactions. Visit
one of our community office locations for additional details. We
will also be introducing a new personal cash management account
in 2003 designed to meet the diverse financial needs of today's
sophisticated consumer. This product will provide a
comprehensive solution for customers offering a combined
investment account, checking account and a revolving line of
credit intended to make financial management convenient.
As we celebrate 150 years of community banking, we pause to
recognize the reasons for our success. This success can be
directly attributed to dedicated employees, a supportive Board of
Directors, loyal customers and the support of you, our
stockholders. Because of the diligent efforts of so many people,
Union National is now poised to face challenges, create
opportunities and grow profitably. To all of those behind Union
National's achievements I express a heartfelt "Thank you" and ask
for your continued support in the future.
Sincerely yours,
/s/ Mark D. Gainer
Mark D. Gainer, President/CEO
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
December 31, December 31,
2002 2001
____________ ____________
ASSETS
Cash and Due from Banks $ 7,215 $ 8,227
Interest-Bearing Deposits
in Other Banks 70 63
Federal Funds Sold 2,260 -
Short-Term Investments 5,000 4,999
____________ ____________
Total Cash and Cash Equivalents 14,545 13,289
Investment Securities Held-
to-Maturity (Fair Value:
2002-$0; 2001-$12,995) - 13,335
Investment Securities Available-
for-Sale 90,679 61,880
Loans Held for Sale 892 574
Loans(Net of Unearned Income) 199,065 203,581
Less: Allowance for Loan Losses (1,812) (1,893)
___________ ____________
Net Loans 197,253 201,688
Premises and Equipment - Net 6,320 6,734
Restricted Investment in Bank Stocks 3,772 3,153
Other Assets 7,048 7,020
____________ ____________
TOTAL ASSETS $ 320,509 $ 307,673
============ ============
LIABILITIES
Deposits:
Noninterest-Bearing $ 31,141 $ 24,065
Interest-Bearing 192,209 191,479
____________ ____________
Total Deposits 223,350 215,544
Short-Term Borrowings 3,387 3,400
Long-Term Debt 65,299 61,252
Other Liabilities 1,738 1,932
____________ ____________
TOTAL LIABILITIES 293,774 282,128
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 688 687
Shares: Authorized - 20,000,000; Issued -
2,753,243 in 2002 (2,749,500 in 2001)
Outstanding - 2,517,469 in 2002
(2,590,964 in 2001)
Surplus 8,939 8,960
Retained Earnings 20,319 18,631
Accumulated Other Comprehensive
Income 1,120 434
Treasury Stock - 235,774 shares in 2002
(158,536 in 2001), at cost (4,331) (3,167)
____________ ____________
TOTAL STOCKHOLDERS' EQUITY 26,735 25,545
____________ ____________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $320,509 $307,673
============ ============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
Years Ended December 31,
_____________________________
2002 2001
______________ ____________
INTEREST INCOME
Interest and Fees on Loans $ 15,330 $ 15,718
Investment Securities:
Taxable Interest 2,949 3,830
Tax-Exempt Interest 1,085 1,117
Dividends 130 211
Other 67 209
______________ ____________
Total Interest Income 19,561 21,085
INTEREST EXPENSE
Deposits 4,587 7,246
Short-Term Borrowings 50 340
Long-Term Debt 3,470 2,604
______________ ____________
Total Interest Expense 8,107 10,190
______________ ____________
Net Interest Income 11,454 10,895
PROVISION for LOAN LOSSES 184 576
______________ ____________
Net Interest Income after Provision
for Loan Losses 11,270 10,319
OTHER OPERATING INCOME
Income from Fiduciary Activities 127 157
Service Charges on Deposit Accounts 1,008 991
Other Service Charges, Commissions, Fees 948 850
Investment Securities Gains 327 75
Mortgage Banking Activities 466 9
Other Income 299 274
______________ ____________
Total Other Operating Income 3,175 2,356
OTHER OPERATING EXPENSES
Salaries and Wages 4,547 4,471
Employee Benefits 1,133 1,066
Net Occupancy Expense 714 678
Furniture and Equipment Expense 603 596
Professional Fees 496 554
Data Processing Services 576 537
Pennsylvania Shares Tax 266 254
Advertising and Marketing Expenses 265 220
ATM Processing Expenses 251 262
Other Expenses 1,698 1,564
______________ ____________
Total Other Operating Expenses 10,549 10,202
______________ ____________
Income before Income Taxes 3,896 2,473
PROVISION (BENEFIT) FOR INCOME TAXES 736 231
______________ ____________
NET INCOME $ 3,160 $ 2,242
============== ============
PER SHARE INFORMATION
Net Income for Year - Basic $ 1.24 $ 0.87
Net Income for Year - Assuming
Dilution 1.23 0.86
Cash Dividends 0.575 0.425
See notes to consolidated financial statements.
Years Ended December 31,
_____________________________
2000
______________
INTEREST INCOME
Interest and Fees on Loans $ 15,524
Investment Securities:
Taxable Interest 3,596
Tax-Exempt Interest 1,214
Dividends 232
Other 17
______________
Total Interest Income 20,583
INTEREST EXPENSE
Deposits 7,956
Short-Term Borrowings 753
Long-Term Debt 1,643
______________
Total Interest Expense 10,352
______________
Net Interest Income 10,231
PROVISION for LOAN LOSSES 397
______________
Net Interest Income after Provision
for Loan Losses 9,834
OTHER OPERATING INCOME
Income from Fiduciary Activities 111
Service Charges on Deposit Accounts 747
Other Service Charges, Commissions, Fees 675
Investment Securities Gains 27
Mortgage Banking Activities -
Other Income 172
______________
Total Other Operating Income 1,732
OTHER OPERATING EXPENSES
Salaries and Wages 4,575
Employee Benefits 1,072
Net Occupancy Expense 634
Furniture and Equipment Expense 541
Professional Fees 604
Data Processing Services 214
Pennsylvania Shares Tax 242
Advertising and Marketing Expenses 201
ATM Processing Expenses 266
Other Expenses 1,600
______________
Total Other Operating Expenses 9,949
______________
Income before Income Taxes 1,617
PROVISION (BENEFIT) FOR INCOME TAXES (50)
______________
NET INCOME $ 1,667
==============
PER SHARE INFORMATION
Net Income for Year - Basic $ 0.65
Net Income for Year - Assuming
Dilution 0.64
Cash Dividends 0.576
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Shares of
Common stock
Outstanding
____________
BALANCE, December 31, 1999 $2,483,072
Comprehensive Income:
Net Income
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $423
Unrealized Holding Gains on Investment
Securities Transferred to Available-for
Sale During the Year, Net of Tax of $17
Reclassification Adjustment for (Gains)/Losses
Included in Net Income, Net of Tax of $9
Total Comprehensive Income
Acquisition of Treasury Stock (52,987)
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 22,019
Issuance of Common Stock under
Employee Plans 877
Issuance of Common Stock under
5% Common Stock Dividend 122,237
Retirement of Treasury Stock
(24,000 shares)
Cash Dividends ($.576 per share)
____________
BALANCE, December 31, 2000 2,575,218
Comprehensive Income:
Net Income
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $352
Reclassification Adjustment
for (Gains)/Losses Included
in Net Income, Net of Tax of $25
Total Comprehensive Income
Acquisition of Treasury Stock (4,213)
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 17,339
Issuance of Common Stock under
Employee & Director Plans 2,093
Issuance of Treasury Stock 527
Retirement of Treasury Stock
(18,000 shares)
Cash Dividends ($.425 per share)
____________
BALANCE, December 31, 2001 2,590,964
Comprehensive Income:
Net Income
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $478
Unrealized Holding Losses on Investment
Securities Transferred to Available-for
Sale During the year, Net of Tax of $14
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $111
Total Comprehensive Income
Acquisition of Treasury Stock (97,238)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 17,734
Issuance of Common Stock under
Employee & Director Plans 6,009
Retirement of Treasury Stock
(20,000 shares)
Cash Dividends ($.575 per share)
_____________
BALANCE, December 31, 2002 2,517,469
=============
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share data)
Common Retained
Stock Surplus Earnings
__________ __________ __________
BALANCE, December 31, 1999 $ 657 $ 7,250 $ 19,323
Comprehensive Income:
Net Income 1,667
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $423
Unrealized Holding Gains on Investment
Securities Transferred to Available-for
Sale During the Year, Net of Tax of $17
Reclassification Adjustment for (Gains)/Losses
Included in Net Income, Net of Tax of $9
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and
Stock Purchase Plan 5 318
Issuance of Common Stock under
Employee Plans - 11
Issuance of Common Stock under
5% Common Stock Dividend 31 1,986 (2,017)
Retirement of Treasury Stock
(24,000 shares) (6) (487)
Cash Dividends ($.576 per share) (1,486)
__________ __________ __________
BALANCE, December 31, 2000 687 9,078 17,487
Comprehensive Income:
Net Income 2,242
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $352
Reclassification Adjustment for (Gains)/
Losses Included in Net Income,
Net of Tax of $25
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock Under
Dividend Reinvestment and Stock
Purchase Plan 4 221
Issuance of Common Stock under
Employee & Director Plans 1 23
Issuance of Treasury Stock (4)
Retirement of Treasury Stock
(18,000 shares) (5) (358)
Cash Dividends ($.425 per share) (1,098)
________ __________ ____________
BALANCE, December 31, 2001 687 8,960 18,631
Comprehensive Income:
Net Income 3,160
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $478
Unrealized Holding Losses on
Investment Securities Transferred to
Available-for-Sale During the Year,
Net of Tax of $14
Reclassification Adjustment for
(Gains)/Losses Included in
Net Income, Net of Tax of $111
Total Comprehensive Income
Acquisition of Treasury Stock
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 4 274
Issuance of Common Stock under
Employee & Director Plans 2 72
Retirement of Treasury Stock
(20,000 shares) (5) (367)
Cash Dividends ($.575 per share) (1,472)
__________ __________ __________
BALANCE, December 31, 2002 $ 688 $ 8,939 $ 20,319
========== ========== ==========
See notes to consolidated financial statements.
Accumulated Other
Comprehensive Treasury
Income (Loss) Stock Total
_____________ __________ ___________
BALANCE, December 31, 1999 $ (1,038) $ (3,128) $ 23,064
___________
Comprehensive Income:
Net Income 1,667
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $423 821 821
Unrealized Holding Gains on
Investment Securities Transferred
To Available-for-Sale
During the Year, Net of
Tax of $17 34 34
Reclassification Adjustment
for (Gains)/Losses Included
in Net Income, Net of Tax of $9 (18) (18)
___________
Total Comprehensive Income 2,504
___________
Acquisition of Treasury Stock (854) (854)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 323
Issuance of Common Stock under
Employee Plans 11
Issuance of Common Stock under
5% Common Stock Dividend -
Retirement of Treasury Stock
(24,000 shares) 493 -
Cash Dividends ($.576 per share) (1,486)
__________ __________ ___________
BALANCE, December 31, 2000 (201) (3,489) 23,562
Comprehensive Income:
Net Income 2,242
Unrealized Holding Gains/(Losses)
on Investment Securities
Available-for-Sale Arising
During the Year, Net of
Tax of $352 685 685
Reclassification Adjustment
for (Gains)/Losses Included In
Net Income, Net of Tax of $25 (50) (50)
___________
Total Comprehensive Income 2,877
___________
Acquisition of Treasury Stock (52) (52)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 225
Issuance of Common Stock under
Employee & Director Plans 24
Issuance of Treasury Stock 11 7
Retirement of Treasury Stock
(18,000 shares) 363 -
Cash Dividends ($.425 per share) (1,098)
__________ __________ ___________
BALANCE, December 31, 2001 434 (3,167) 25,545
Comprehensive Income:
Net Income 3,160
Unrealized Holding Gains/(Losses) on
Investment Securities Available-for-
Sale Arising During the Year, Net of
Tax of $478 929 929
Unrealized Holding Losses on
Investment Securities
Transferred to Available-for
Sale During the Year, Net of
Tax of $14 (27) (27)
Reclassification Adjustment for
(Gains)/Losses Included in Net
Income, Net of Tax of $111 (216) (216)
___________
Total Comprehensive Income 3,846
___________
Acquisition of Treasury Stock (1,536) (1,536)
Issuance of Common Stock under
Dividend Reinvestment and Stock
Purchase Plan 278
Issuance of Common Stock under
Employee & Director Plans 74
Retirement of Treasury Stock
(20,000 shares) 372 -
Cash Dividends ($.575 per share) (1,472)
____________ __________ ___________
BALANCE, December 31, 2002 $ 1,120 $ (4,331) $ 26,735
============ ========== ===========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
______________________________
2002 2001
______________ ___________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 3,160 $ 2,242
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 776 764
Provision for Loan Losses 184 576
Net Amortization of Investment
Securities' Premiums 829 152
Investment Securities Gains (327) (75)
Provision for Deferred Income Taxes 70 (107)
Increase in Cash-Surrender Value
of Bank-Owned Life Insurance (211) (206)
Gains on Loans Sold (372) (9)
Proceeds from Sales of Loans 13,159 792
Loans Originated for Sale (13,105) (1,357)
(Increase)/Decrease in Accrued
Interest Receivable 13 10
(Increase)/Decrease in Other Assets (441) 22
Increase/(Decrease) in Other
Liabilities (194) (411)
____________ ___________
Net Cash Provided by
Operating Activities 3,541 2,393
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities 28,621 30,253
Proceeds from Maturities of
Available-for-Sale Securities 22,310 18,657
Proceeds from Maturities of
Held-to-Maturity Securities 495 999
Purchases of Available-for-Sale
Securities (66,353) (49,563)
Purchases of Held-to-Maturity
Securities - (210)
Net Purchases of Restricted
Investments in Bank Stocks (619) (51)
(Net Loans Made to Customers)/Net
Principal Collected on Loans 4,251 7,125
Purchase of Residential Mortgage Loans - (25,196)
Purchases of Property and Equipment (174) (1,360)
Purchase of Bank-Owned Life Insurance - -
____________ ____________
Net Cash Used in Investing
Activities (11,469) (19,346)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts 11,017 20,317
Increase/(Decrease) in Time Deposits (3,211) (17,318)
Net Increase/(Decrease) in Short-Term
Borrowings (13) (10,095)
Proceeds from Issuance of Long-Term
Debt 19,580 31,325
Payment on Long-Term Debt (15,533) (808)
Acquisition of Treasury Stock (1,536) (52)
Issuance of Treasury Stock - 7
Issuance of Common Stock 352 249
Cash Dividends Paid (1,472) (1,098)
____________ ___________
Net Cash Provided by
Financing Activities 9,184 22,527
____________ ___________
Net Increase in Cash
and Cash Equivalents 1,256 5,574
CASH and CASH EQUIVALENTS-
Beginning of Year 13,289 7,715
____________ ____________
CASH and CASH EQUIVALENTS-
End of Year $ 14,545 $ 13,289
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 8,362 $ 10,351
Income Taxes 495 370
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Reclassification of Held-to-
Maturity Investment Securities
to Available-for-Sale $ 10,358 $ -
See notes to consolidated financial statements.
Years Ended December 31,
______________________________
2000
______________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 1,667
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 545
Provision for Loan Losses 397
Net Amortization of Investment
Securities' Premiums 101
Investment Securities Gains (27)
Provision for Deferred Income Taxes (394)
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance (105)
Gains on Loans Sold -
Proceeds from Sales of Loans -
Loans Originated for Sale -
(Increase)/Decrease in Accrued
Interest Receivable (80)
(Increase)/Decrease in Other Assets (634)
Increase/(Decrease) in Other
Liabilities 1,143
______________
Net Cash Provided by
Operating Activities 2,613
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities 14,256
Proceeds from Maturities of
Available-for-Sale Securities 8,655
Proceeds from Maturities of
Held-to-Maturity Securities 1,372
Purchases of Available-for-Sale
Securities (18,368)
Purchases of Held-to-Maturity
Securities (1,463)
Net Purchases of Restricted
Investments in Bank Stocks -
(Net Loans Made to Customers)/Net
Principal Collected on Loans (11,519)
Purchase of Residential Mortgage Loans -
Purchases of Property and Equipment (1,289)
Purchase of Bank-Owned Life Insurance (3,000)
_____________
Net Cash Used in Investing
Activities (11,356)
CASH FLOWS from FINANCING ACTIVITIES
Net Increase/(Decrease)in Demand Deposits
and Savings Accounts (2,525)
Net Increase/(Decrease) in Time
Deposits 5,889
Net Increase/(Decrease) in Short-Term
Borrowings 4,395
Proceeds from Issuance of Long-Term
Debt 20,000
Payment on Long-Term Debt (16,300)
Acquisition of Treasury Stock (854)
Issuance of Treasury Stock -
Issuance of Common Stock 335
Cash Dividends Paid (1,486)
______________
Net Cash Provided by
Financing Activities 9,454
______________
Net Increase in Cash
and Cash Equivalents 711
CASH and CASH EQUIVALENTS-
Beginning of Year 7,004
______________
CASH and CASH EQUIVALENTS-
End of Year $ 7,715
==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 9,996
Income Taxes 280
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
Reclassification of Held-to-Maturity
Investment Securities to
Available-for-Sale $ 14,691
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Union National Financial
Corporation and its subsidiary, Union National Community Bank,
conform with generally accepted accounting principles and
prevailing practices within the banking industry.
Union National Community Bank operates seven retail office
locations in Lancaster County, Pennsylvania. The bank is a full-
service commercial bank, providing a wide range of services to
individuals and businesses. The bank accepts time, demand and
savings deposits and offers secured and unsecured commercial,
real estate and consumer loans. The bank also offers investment,
custodial, estate planning and trust services. The bank is
subject to government regulation and undergoes periodic
examinations by its federal regulator, the Office of the
Comptroller of the Currency.
During 2001, Union National announced the formation of the Union
National Insurance Agency, which operates as a wholly-owned
subsidiary of the bank. The insurance agency offers various
insurance products at the bank's retail offices through an
agreement with the Wiley Insurance Agency of Mount Joy, PA. The
insurance agency's operating results are not significant to the
consolidated financial statements.
Basis of Presentation
_____________________
The consolidated financial statements include the accounts of
Union National, the bank and the insurance agency. All material
intercompany accounts and transactions have been eliminated in
the consolidation.
Use of Estimates
________________
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of
estimates and assumptions regarding certain types of assets,
liabilities, revenues and expenses. Accordingly, actual results
may differ from estimated amounts.
Investment Securities
_____________________
Investment securities include both debt securities and equity
securities. As of December 31, 2002, all of Union National's
investment securities have been classified as "available-for-
sale."
Securities classified as available-for-sale are those debt
securities that Union National intends to hold for an indefinite
period of time, but not necessarily to maturity, and marketable
equity securities. Any decision to sell a security classified as
available-for-sale would be based on various factors, including
significant movements in interest rates, changes in maturity mix
of Union National's assets and liabilities, liquidity needs,
regulatory capital considerations and other similar factors.
Available-for-sale securities are carried at fair value with
premiums and discounts amortized or accreted to interest income
using the interest method. Changes in unrealized gains or losses
on available-for-sale securities, net of taxes, are recorded as
other comprehensive income, a component of stockholders' equity.
During the second quarter of 2002, Union National reclassified
all of its held-to-maturity investment securities to available-
for-sale. The transfer of these securities to available-for-sale
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 the Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 115, the
sale of these securities required that all of Union National's
investment securities be classified as available-for-sale.
Investment securities with a total cost of $10,399,000 and a fair
value of $10,358,000 were transferred to available-for-sale
during the second quarter. The unrealized losses on these
investment securities were recorded net of tax as accumulated
other comprehensive income, an adjustment to stockholders'
equity.
When a determination is made that a market value decline below
cost on a marketable equity or debt security is other than
temporary, the cost basis of the individual security is written
down to the market value. The amount of the write-down is
charged to expense. Realized security gains and losses are
computed using the specific identification method.
In accordance with SFAS No. 133, Union National recognizes
derivatives on the balance sheet at fair value. To date, the use
of derivatives has consisted of one interest rate cap with a
notional value of $10,000,000. No value remained on the balance
sheet at December 31, 2002 or 2001. Since the transaction did
not meet the criteria for a hedge under SFAS No. 133, a write-
down to current fair market value was recorded in the financial
statements as an increase in interest expense. This write-down
amounted to $32,000 for the year ended December 31, 2001, and
$38,000 for the year ended December 31, 2000.
Loans Held for Sale
___________________
Loans held for sale consist of residential mortgage loans that
are originated and are intended to be sold through an agreement
the bank has with the Federal Home Loan Bank of Pittsburgh
(FHLB). Realized gains and losses on sales are computed using
the specific identification method. These loans are carried on
the balance sheet at the lower of cost or estimated fair value,
which is determined in the aggregate.
The maximum to be sold to the FHLB under the agreement is
$20,000,000 and $13,570,000 has been sold under this agreement as
of December 31, 2002. The agreement includes a maximum credit
enhancement liability of $354,000, which Union National may be
required to pay if realized losses on any of the sold mortgages
exceed the amount held in the FHLB's spread account. The FHLB is
funding the spread account annually at 0.04% of the outstanding
balance of loans sold. Union National's historical losses on
residential mortgages have been lower than the amount being
funded to the spread account. As such, Union National does not
anticipate recognizing any losses and accordingly, has not
recorded a liability for the credit enhancement. As compensation
for the credit enhancement, the FHLB is paying Union National
0.10% of the outstanding loan balance in the portfolio on a
monthly basis. Union National records credit enhancement fees
receivable based upon the present value of estimated future cash
flows as loans are sold. The credit enhancement fees receivable
amounted to $51,000 at December 31, 2002 and are amortized as
principal is received on loans sold.
Union National retains the servicing on the loans sold to the
FHLB and receives a fee based upon the principal balance
outstanding. During the year ended December 31, 2002, Union
National recognized $78,000 of servicing assets and recorded
amortization expense of $10,000. During 2001, Union National
recognized servicing assets of $8,000 and recorded no
amortization expense. Mortgage servicing assets amounted to
$76,000 at December 31, 2002, and $8,000 at December 31, 2001.
The fair value of servicing assets was $78,000 at December 31,
2002 and $8,000 at December 31, 2001 and was based on the present
value of estimated future cash flows for pools of mortgages
stratified by rate and maturity date. Total loans serviced for
others amounted to $13,266,000 at December 31, 2002, and $760,000
at December 31, 2001.
Loans
_____
Loans generally are stated at their outstanding unpaid principal
balances, plus any unamortized premiums on purchased loans, net
of any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan
origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment to interest income
generally over the contractual life of the related loans.
Impaired Loans - Union National considers a loan to be impaired
when, based on current information and events, it is probable
that all interest and principal payments due according to the
contractual terms of the loan agreement will not be collected.
An insignificant delay or shortfall in the amounts of payments
would not cause a loan to be rendered impaired. Management
determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all
of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall
in relation to the principal and interest owed. Larger groups of
small-balance loans, such as residential mortgages and consumer
installment loans, are collectively evaluated for impairment.
Union National measures impairment of commercial loans on a loan-
by-loan basis based on the present value of expected future cash
flows discounted at the loan's effective interest rate or the
fair value of the collateral for certain collateral-dependent
loans.
Allowance for Loan Losses - The allowance for loan losses is
established through provisions for loan losses charged against
income. Loans, including impaired loans, deemed to be
uncollectible are charged against the allowance for loan losses,
and subsequent recoveries, if any, are credited to the allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses.
Management's periodic evaluation of the adequacy of the allowance
is based on Union National's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may
affect the borrower's ability to repay (including the timing of
future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic
conditions and other relevant factors. This evaluation is
inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant
change.
Nonaccrual Loans - Generally, a loan (including an impaired loan
as discussed above) is classified as nonaccrual and the accrual
of interest on such loan is discontinued when the contractual
payment of principal or interest has become 90 days past due or
management has serious doubts about further collectibility of
principal or interest. A loan may remain on accrual status if it
is in the process of collection and is either guaranteed or well-
secured. When a loan is placed on nonaccrual status, unpaid
interest previously credited to interest income, that is now
deemed uncollectible, is reversed. Interest received on
nonaccrual loans is either applied against principal or reported
as interest income, according to management's judgment as to the
collectibility of principal. Generally, loans are restored to
accrual status when both principal and interest are brought
current, the loan has performed in accordance with the
contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and
interest is no longer in doubt.
Foreclosed Real Estate
______________________
Foreclosed real estate includes assets acquired through
foreclosure and loans identified as in-substance foreclosures. A
loan is classified as in-substance foreclosure when Union
National has taken possession of the collateral regardless of
whether formal foreclosure proceedings have taken place.
Foreclosed real estate is valued at its estimated fair market
value, net of selling costs, at the time of foreclosure and is
included in other assets. Gains and losses resulting from the
sale or write-down of foreclosed real estate and income and
expenses related to the operation of foreclosed real estate are
recorded in other expenses. Foreclosed real estate amounted to
$307,000 at December 31, 2002, and $43,000 at December 31, 2001.
Premises and Equipment
______________________
Premises and equipment are stated at cost less accumulated
depreciation, which is computed over the assets' estimated useful
lives on both the accelerated and the straight-line methods.
Leasehold improvements are stated at cost less accumulated
amortization, which is computed over the term of the lease,
including renewal options, on the straight-line method. Gains
and losses on premises and equipment are recognized upon disposal
of the asset. Charges for maintenance and repairs are charged to
expense as incurred.
Restricted Investment in Bank Stocks
____________________________________
Union National owns several restricted investments in bank stocks
including stock in the FHLB, the Federal Reserve Bank of
Philadelphia and the Atlantic Central Bankers Bank. These stocks
are reflected on the balance sheet at historical cost. Under the
bank's membership agreement with the FHLB required stock
purchases are based on a percentage of outstanding borrowings, a
percentage of unused borrowing capacity and may also include a
percentage of assets sold to the FHLB.
Trust Assets
____________
Assets held in a fiduciary capacity are not assets of Union
National and are therefore not included in the consolidated
financial statements. The market value of trust assets amounted
to $33,061,000 at December 31, 2002, and $25,861,000 at December
31, 2001.
Advertising Costs
_________________
Advertising costs are charged to expense when incurred.
Stock-Based Compensation
________________________
Stock options and shares issued under Union National's Employee
Stock Purchase Plan, Stock Incentive Plan and the Independent
Directors' Stock Option Plan are accounted for under SFAS No.
123. As permitted by this statement, Union National has chosen
to apply Accounting Principles Board Opinion (APB) No. 25. Under
APB No. 25, no compensation expense is recognized related to
these plans. The pro forma impact to net income and earnings per
share that would occur if compensation expense was recognized
based on the estimated fair value of the options on the date of
the grant is disclosed in the notes to the consolidated financial
statements.
Income Taxes
____________
The provision for income taxes is based upon the results of
operations, adjusted principally for tax-exempt income.
Accounting for income taxes is under the liability method. Under
this method, a deferred tax asset or liability is recorded based
on the difference between the tax basis of assets and liabilities
and their carrying amounts for financial reporting purposes. The
deferred tax assets and liabilities are adjusted for the impact
of tax-rate changes. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized in the future. Income tax expense or benefit is the
tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Net Income per Share
____________________
Basic earnings per share excludes dilution and is computed by
dividing net income by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share
reflects the potential dilution that could occur if options or
other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Comprehensive Income
____________________
Union National reports comprehensive income and the components of
other comprehensive income in the Consolidated Statements of
Changes in Stockholders' Equity. Union National's comprehensive
income consists of net income and unrealized gains and losses on
available-for-sale investment securities arising during the
period.
Treasury Stock
______________
The acquisition of treasury stock is recorded under the cost
method. The subsequent disposition or sale of the treasury stock
is recorded using the average cost method.
Segment Reporting
_________________
Based on the way management monitors financial results, Union
National has only one operating segment consisting primarily of
its banking and fiduciary activities. Activities of the
insurance agency are not material to the consolidated financial
statements.
Statements of Cash Flows
________________________
For purposes of the statements of cash flows, Union National
considers cash, amounts due from banks and short-term investments
with maturities less than 90 days at the time of purchase to be
cash equivalents.
Recent Accounting Standards Issued
__________________________________
In April 2002, the Financial Accounting Standards Board issued
Statement No. 145, "Rescission of Statements No. 4, 44 and 64,
Amendment of Statement No. 13". This statement requires that
debt extinguishment no longer be classified as an extraordinary
item since debt extinguishment has become a risk management
strategy for many companies. For the year ended December 31,
2002, Union National incurred costs in the amount of $382,000
for the early payoff of some of its FHLB borrowings. This
additional expense was reflected in total interest expense on
long-term borrowings. This statement also eliminates the
inconsistent accounting treatment for sale-leaseback transactions
and certain lease modifications that have economic effects
similar to sale-lease back transactions. This statement became
effective May 15, 2002.
In June 2002, the Financial Accounting Standards Board issued
Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", which nullifies EITF Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (including certain costs incurred in a
restructuring)". This statement delays recognition of these
costs until liabilities are incurred and requires fair value
measurement. It does not impact the recognition of liabilities
incurred in connection with a business combination or the
disposal of long-lived assets. The provisions of this statement
are effective for exit or disposal activities initiated after
December 31, 2002.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial
Institutions." This statement provides guidance on accounting
for the acquisition of a financial institution, including the
acquisition of part of a financial institution.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The statement defines criteria for determining whether the
acquired financial institution meets the conditions for a
"business combination". If the acquisition meets the conditions
of a "business combination", the specialized accounting guidance
under Statement No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" will not apply after September
30, 2002, and the amount of the unidentifiable intangible asset
will be reclassified to goodwill upon adoption of Statement No.
147. The transition provisions were effective on October 1,
2002.
The provisions of the Statements No. 146 and 147 did not have or
are not expected to have a significant impact on the financial
condition or results of operations of Union National.
Reclassifications
_________________
Certain prior period amounts have been reclassified to conform
with the 2002 presentation. Such reclassifications did not
impact net income.
NOTE 2 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities are
as follows:
At December 31, 2002
________________________________
Gross
Amortized Unrealized
Cost Gains
(In thousands) _______________ ______________
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ 23,448 $ 826
Mortgage-Backed Securities 44,873 589
Asset-Backed Securities 3,344 126
Corporate Securities 17,148 430
Equity Securities 169 171
_______________ ______________
TOTAL $ 88,982 $ 2,142
=============== ==============
(In thousands)
At December 31, 2002
________________________________
Gross
Unrealized Fair
Losses Value
_______________ ______________
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ (12) $ 24,262
Mortgage-Backed Securities (70) 45,392
Asset-Backed Securities - 3,470
Corporate Securities (354) 17,224
Equity Securities (9) 331
_______________ ______________
TOTAL $ (445) $ 90,679
=============== ==============
(In thousands) At December 31, 2001
________________________________
Gross
Amortized Unrealized
Cost Gains
_______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ 11,835 $ 46
Corporate Securities 1,500 -
______________ ______________
TOTAL $ 13,335 $ 46
============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ 9,697 $ 188
Obligations of U.S.
Government Agencies 1,020 16
Mortgage-Backed Securities 34,170 405
Corporate Securities 16,186 285
Equity Securities 150 134
______________ ______________
TOTAL $ 61,223 $ 1,028
============== ==============
(In thousands)
At December 31, 2001
________________________________
Gross
Unrealized Fair
Losses Value
_______________ ______________
SECURITIES HELD-TO-MATURITY:
Obligations of State and
Political Subdivisions $ (318) $ 11,563
Corporate Securities (68) 1,432
_______________ ______________
TOTAL $ (386) $ 12,995
=============== ==============
SECURITIES AVAILABLE-FOR-SALE:
Obligations of State and
Political Subdivisions $ (61) $ 9,824
Obligations of U.S.
Government Agencies (12) 1,024
Mortgage-Backed Securities (91) 34,484
Corporate Securities (207) 16,264
Equity Securities - 284
_______________ ______________
TOTAL $ (371) $ 61,880
=============== ==============
Investment securities carried at $32,457,000 at December 31,
2002, and at $32,976,000 at December 31, 2001, were pledged to
secure public, trust and government deposits and for other
purposes.
The amortized cost and fair value of debt securities at
December 31, 2002, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
(In thousands)
Amortized Fair
Cost Value
______________ _________________
Due in One Year or Less $ 1,002 $ 1,003
Due After One Year Through
Five Years 9,984 10,101
Due After Five Years Through
Ten Years 4,012 4,164
Due After Ten Years 28,942 29,688
______________ _________________
43,940 44,956
Mortgage-Backed Securities 44,873 45,392
______________ _________________
$ 88,813 $ 90,348
============== =================
Following is information related to the sales of available-
for-sale securities:
(In thousands)
Realized Realized Income Tax
Gains Losses Expense
________ ____________ _________________
The year ended
December 31, 2002 $ 386 $ (59) $ 111
The year ended
December 31, 2001 228 (153) 25
The year ended
December 31, 2000 141 (114) 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENT (continued)
NOTE 3 - LOANS
Loans, net of unamortized loan origination fees of $868,000
at December 31, 2002 and $1,053,000 at December 31, 2001, are
summarized as follows:
(In thousands)
December 31,
___________________________
2002 2001
____________ ____________
Real Estate-Mortgages:
First and Second Residential $ 114,441 $ 127,547
Commercial and Industrial 48,411 35,842
Construction and Land Development 5,405 8,388
Agricultural 7,147 7,752
Commercial and Industrial 9,109 9,141
Consumer 5,416 7,649
Agricultural 516 569
Political Subdivisions 6,769 5,629
Other 1,546 543
____________ ____________
Total Loans 198,760 203,060
Add: Unamortized Premium on
Purchased Loans 358 558
Less: Unearned Income (53) (37)
____________ ____________
Net Loans $ 199,065 $ 203,581
============ ============
Union National grants commercial, residential and consumer loans
to customers primarily located in Lancaster County, Pennsylvania.
Although Union National has a diversified loan portfolio, its
debtors' ability to honor their contracts is influenced by the
region's economy.
Union National's nonperforming loans consisted of the following:
(In thousands) December 31,
_______________________________
2002 2001
_______________________________
Nonaccruing Loans $ 1,310 $ 1,589
Accruing Loans - 90 Days or
More Past Due 364 615
_______________________________
Total Nonperforming Loans $ 1,674 $ 2,204
===============================
Following is a summary of information related to impaired loans:
(In thousands)
December 31,
_________________________________
2002 2001 2000
__________ ___________ __________
Outstanding Balance at Year End $ 1,128 $ 681 $ 1,085
Related Allowance for Loan Losses 194 107 178
Average Outstanding Balance
for the Year 1,242 968 1,087
Recognized Interest Income 47 - 13
Cash Basis Interest Income 47 - 13
All impaired loans have a related allowance for loan losses.
Loans to certain directors and principal officers of Union
National, including their immediate families and companies in
which they are principal owners (more than 10%), amounted to
$4,962,000 at December 31, 2002. Such loans were made in the
ordinary course of business at Union National's normal credit
terms, including interest rates and security, and do not
represent more than a normal risk of collection. Transactions on
these loans for the year ended December 31, 2002 are as follows
(in thousands):
Balance, Beginning of Year $ 5,588
Additions 858
Deductions (1,484)
__________
Balance, End of Year $ 4,962
==========
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses for the
years ended December 31 is as follows:
(In thousands)
2002 2001 2000
__________ __________ __________
Balance, Beginning of Year $ 1,893 $ 1,787 $ 1,783
Provision Charged to
Operating Expense 184 576 397
Recoveries of Charged-Off Loans 110 70 30
Charged-Off Loans (375) (540) (423)
__________ __________ __________
Balance, End of Year $ 1,812 $ 1,893 $ 1,787
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5 - PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
(In thousands)
Estimated December 31, December 31,
Useful Lives 2002 2001
____________ ____________ ____________
Land $ 644 $ 644
Land Improvements 20 years 1,055 1,049
Buildings and
Improvements 15-50 years 5,646 5,626
Leasehold Improvements 20 years 308 308
Furniture, Fixtures and
Equipment 5-20 years 4,994 4,846
____________ ____________
Subtotal 12,647 12,473
Less: Accumulated Depreciation (6,327) (5,739)
____________ ____________
Premises and Equipment - Net $ 6,320 $ 6,734
============ ============
Depreciation expense amounted to $588,000 in 2002 , $601,000
in 2001 and $505,000 in 2000.
Total rental expense amounted to $169,000 in 2002, $144,000 in
2001 and $117,000 for the year ended December 31, 2000.
At December 31, 2002, Union National was obligated under
noncancelable operating leases for real estate with future
minimum payments as follows (in thousands):
2003 $ 118
2004 82
2005 26
________
$ 226
========
NOTE 6 - TIME DEPOSITS
At December 31, 2002, the scheduled maturities of certificates of
deposit are as follows (in thousands):
2003 $ 48,861
2004 22,897
2005 10,108
2006 4,161
2007 6,554
2008 350
________
$ 92,931
========
Certificates of deposit in denominations of $100,000 or more
amounted to $24,279,000 at December 31, 2002, and $17,004,000 at
December 31, 2001. The maturities of these certificates of
deposit of $100,000 or more at December 31, 2002, is as follows
(in thousands):
Three months or less $ 4,106
Over three months through six months 4,547
Over six months through twelve months 2,883
Over twelve months 12,743
________
Total $ 24,279
========
NOTE 7 - SHORT-TERM BORROWINGS
Short-term borrowings and weighted-average interest rates at
December 31 are as follows:
(Dollars in thousands)
2002 2001
____________________ _________________
Amount Rate Amount Rate
___________ _____ __________ ______
Treasury Tax and Loan Notes$ 900 0.99% $ 109 1.41%
Federal Funds Purchased - - 820 2.00
Securities Sold Under
Repurchase Agreements 2,487 0.95 2,471 1.69
___________ _____ __________ ______
Total $ 3,387 0.96% $ 3,400 1.76%
=========== ===== ========== ======
Union National also utilizes short-term advances from the Federal
Home Loan Bank of Pittsburgh (FHLB). These short-term advances
had an average outstanding balance of $146,000 during 2002 at a
weighted-average interest rate of 2.01%. The highest balance
outstanding at a month-end during 2002 was $745,000. During
2001, FHLB short-term advances had an average outstanding balance
of $3,292,000 at a weighted-average interest rate of 6.46%. The
highest balance outstanding at a month-end during 2001 was
$12,040,000.
Under an agreement with the FHLB, Union National has a line of
credit available in the amount of $15,000,000 of which no balance
was outstanding at December 31, 2002. All FHLB advances are
collateralized by a security agreement covering qualifying loans
and unpledged treasury, agency and mortgage-backed securities.
In addition, all FHLB advances are secured by the FHLB capital
stock owned by Union National having a par value of $3,681,000 at
December 31, 2002 and $3,063,000 at December 31, 2001. In
addition, Union National has lines of credit that total
$10,000,000 with correspondent banks for overnight fed funds
borrowings.
Union National offers a short-term investment program for
corporate customers for secured investing. This program consists
of overnight and short-term repurchase agreements that are
secured by designated investment securities of the bank.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8 - LONG-TERM DEBT
A summary of long-term debt as of December 31 is as follows:
(Dollars in thousands)
2002 2001
____________________ ___________________
Amount Rate Amount Rate
__________ _______ __________ ______
FHLB fixed-rate advances maturing:
2003 $ 5,347 5.25% $ 6,347 5.23%
2004 7,250 3.98 6,000 5.49
2005 8,355 4.21 7,325 4.32
2006 10,300 3.10 5,000 4.37
2007 2,460 5.31 1,461 6.00
FHLB adjustable-rate advances maturing:
2002 - - 3,532 4.04
FHLB floating-rate advance maturing:
2004 1,587 1.36 1,587 1.86
FHLB convertible fixed-rate advances maturing:
2010 20,000 5.70 20,000 5.70
2011 10,000 5.23 10,000 5.23
___________ _____ ___________ ______
Total $ 65,299 4.68% $ 61,252 5.09%
=========== ===== =========== ======
The FHLB advances are collateralized by the security agreement
and FHLB capital stock described in Note 7. Union National can
borrow a maximum of $149,314,000 from the FHLB, of which
$84,015,000 was available at December 31, 2002. The FHLB's
convertible fixed-rate advances allow the FHLB the periodic
option to convert to a LIBOR adjustable-rate advance at the
three-month LIBOR plus .08% to .20%. The FHLB currently has the
option to convert $20,000,000 of the outstanding convertible
advances on a quarterly basis. Options to convert $5,000,000
commence in 2004 and options to convert the remaining $5,000,000
commence in 2006. Upon the FHLB's conversion, the bank has the
option to repay the respective advances in full.
NOTE 9 - PROFIT-SHARING PLAN AND TERMINATION BENEFITS
The bank has a 401(k) profit-sharing plan that covers
substantially all full-time employees. This plan allows
employees to contribute a portion of their salaries and wages to
the plan. The bank may elect to make a discretionary
contribution to the plan and may also match a portion of
employee-elected salary deferrals, subject to a 6% maximum of
their salaries and wages. For 2002, the bank elected to make a
discretionary contribution of 5% of eligible salaries and to
match 50% of employee-elected salary deferrals that do not exceed
6% of their salaries and wages.
The bank's expense relative to its profit-sharing plans amounted
to $293,000 for the year ended December 31, 2002, $278,000 for
2001 and $228,000 for 2000.
During 2000, a total of $368,000 was accrued for the expense
associated with a voluntary early retirement package that was
accepted by a group of ten employees who met certain age and
years-of-service requirements. The $368,000 consisted of salary
costs of $292,000 and payroll tax and health insurance benefit
costs of $76,000. The salary amounts accrued were paid out in
the first quarter of 2001 and the health insurance benefits will
be paid through 2003.
NOTE 10 - INCOME TAXES
The net deferred tax asset consists of the following components
as of December 31:
(In thousands)
2002 2001
_________ _________
Deferred Tax Assets:
Allowance for Loan Losses $ 509 $ 537
Amortization on Securities 20 13
Early Retirement Plan 7 13
Recoverable Alternative Minimum Taxes 328 317
Income Tax Credit Carryforward 217 236
_________ _________
Total Deferred Tax Assets 1,081 1,116
Deferred Tax Liabilities:
Unrealized Gains on Investment
Securities Available-for-Sale (577) (224)
Deferred Net Loan Fees (59) (56)
Depreciation (249) (224)
Investment in Limited Partnerships (9) (12)
Other (54) (44)
_________ _________
Total Deferred Tax Liabilities (948) (560)
_________ _________
Net Deferred Tax Asset $ 133 $ 556
========= =========
An analysis of the income tax expense (benefit) included in
the consolidated statements of income for the years ended
December 31 is as follows:
(In thousands)
2002 2001 2000
_____________ _____________ ____________
Taxes Currently Payable $ 666 $ 338 $ 344
Deferred Income Taxes/
(Benefit) 70 (107) (394)
_____________ _____________ ____________
Provision for Income
Taxes/(Benefit) $ 736 $ 231 $ (50)
============= ============= ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The reasons for the difference between Union National's
provision for income taxes and the amount computed by applying
the statutory federal income tax rate to income before income
taxes for the years ended December 31 are as follows:
(Dollars in thousands)
2002 2001 2000
___________ ___________ ___________
Amount % Amount % Amount %
_________ ____ __________ ____ ___________ _____
Tax at Statutory
Federal Income
Tax Rate $1,325 34.0% $ 841 34.0% $ 550 34.0%
Tax-Exempt Income,
Net of Disallowed
Interest
Expense (499) (12.8) (495)(20.0) (489) (30.2)
Income Tax Credits (85) (2.2) (118) (4.8) (118) (7.3)
Other (5) (.1) 3 .1 7 .4
_________ ____ ___________ _____ __________ _____
Provision for Income
Taxes/(Benefit) $ 736 18.9% $ 231 9.3% $ (50) (3.1%)
========= ==== =========== ===== ========== =====
Income tax credit carryforwards begin to expire in 2020. Income
tax credits are recognized as earned. Credits earned were
$85,000 in 2002, $118,000 in 2001 and $118,000 in 2000.
Projected tax credits are $72,000 for 2003 to 2006 and $38,000
for 2007.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
The bank is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit.
These instruments involve, to varying degrees, elements of credit
risk and interest rate risk in excess of the amount recognized in
the consolidated balance sheets. The contract amounts of these
instruments reflect the exposure to credit loss in the event of
nonperformance by the other party to the financial instrument.
(In thousands)
December 31, December 31,
2002 2001
_____________ _____________
Financial Instruments Whose Contract
Amounts Represent Credit Risk:
Commitments to Extend Credit $ 8,715 $ 13,124
Unused Portion of Home Equity,
Personal and Overdraft Lines 18,548 12,129
Other Unused Commitments,
Principally Commercial
Lines of Credit 15,791 14,928
Standby Letters of Credit 3,069 3,131
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee.
Certain commitments may expire without being drawn upon and,
therefore, future cash may not be required. The bank evaluates
each customer's creditworthiness on a case-by-case basis. The
bank generally requires collateral or other security to support
financial instruments with credit risk.
Standby letters of credit are conditional commitments issued by
the bank to guarantee the performance of a customer to a third
party. These letters of credit are primarily issued to support
public and private borrowing arrangements and have terms of less
than two years. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
advances to customers.
NOTE 12 - REGULATORY RESTRICTIONS
The bank is required to maintain reserves, in the form of cash
and balances with the Federal Reserve Bank, against its deposit
liabilities. The average amount of required reserves during 2002
was approximately $2,765,000 and during 2001 it was approximately
$2,192,000.
The bank is also subject to certain restrictions in connection
with the payment of dividends. National banking laws require the
approval of the Comptroller of the Currency if the total of all
dividends declared by a national bank in any calendar year
exceeds the net profits of the bank (as defined) for that year
combined with its retained net profits for the preceding two
calendar years. Under this formula, the bank may declare
dividends to its parent corporation in 2003 of approximately
$2,022,000 plus an amount equal to the net profits of the bank in
2003 up to the date of any such dividend declaration.
Union National and the bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet the minimum capital requirements can
initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a 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 Tier 1 and total capital (as defined in the
regulations) to risk weighted assets. Management believes, as of
December 31, 2002, that Union National and the bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2002, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The bank maintained the following capital levels and leverage and
risk-based capital ratios:
(Dollars in thousands)
December 31, 2002 December 31, 2001
_________________ _________________
Amount % Amount %
___________ _____ ___________ _____
Leverage Ratio:
Tier I Capital to
Average Total Assets $ 24,621 7.88% $ 23,979 7.95%
Minimum Required 12,504 4.00 12,065 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 15,629 5.00 15,081 5.00
Risk-based Capital Ratios:
Tier I Capital Ratio
- Actual 24,621 10.81 23,979 11.14
Minimum Required 9,111 4.00 8,606 4.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 13,666 6.00 12,909 6.00
Total Capital Ratio
- Actual 26,433 11.60 25,872 12.02
Minimum Required 18,222 8.00 17,213 8.00
To Be Well-Capitalized
Under Prompt Corrective
Action Provisions 22,777 10.00 21,516 10.00
Consolidated leverage and risk-based capital ratios are not
materially different from the ratios for the bank shown above.
Additionally, banking regulations limit the amount of
investments, loans, extensions of credit and advances the bank
can make to Union National at any time to 10% of the bank's
capital stock and surplus. At December 31, 2002, this limitation
amounted to approximately $2,645,000. These regulations also
require that any such investment, loan, extension of credit or
advance be secured by securities having a market value in excess
of the amount thereof.
NOTE 13 - STOCKHOLDERS' EQUITY
Union National maintains a Dividend Reinvestment and Stock
Purchase Plan. Stockholders may participate in the plan, which
provides that additional shares of common stock may be purchased
with reinvested dividends and optional cash payments within
specified limits at prevailing market prices. To the extent that
shares are not available for purchase by the plan in the open
market, Union National has reserved 173,644 shares of common
stock to be issued under the plan. At December 31, 2002, 99,710
shares have been issued under the plan. Open-market purchases
are usually made by an independent purchasing agent retained to
act as agent for plan participants, and the purchase price to
participants will be the actual price paid, excluding brokerage
commissions and other expenses that will be paid by Union
National.
Earnings per share, net income and weighted-average number of
shares outstanding for the years ended December 31, 2002, 2001
and 2000, as computed under the basic and diluted earnings per
share methods are as follows:
(In thousands, except per share data)
Net Income Shares Per Share
____________ __________ ___________
Year Ended December 31, 2002:
Basic Earnings per Share:
Net Income $ 3,160 2,557 $1.24
Effect of Dilutive Options - 21
____________ ___________ __________
Diluted Earnings per Share $ 3,160 2,578 $1.23
============ =========== ==========
Year Ended December 31, 2001:
Basic Earnings per Share:
Net Income $ 2,242 2,584 $ .87
Effect of Dilutive Options - 11
____________ ___________ __________
Diluted Earnings per Share $ 2,242 2,595 $ .86
=========== ============ ==========
Year Ended December 31, 2000:
Basic Earnings per Share:
Net Income $ 1,667 2,576 $0.65
Effect of Dilutive Options - 10
___________ ____________ __________
Diluted Earnings per Share $ 1,667 2,586 $0.64
=========== ============ ==========
NOTE 14 - STOCK OPTION PLANS
Union National currently has three separate stock option plans in
place. First, there is the Employee Stock Purchase Plan, which
allows eligible employees to purchase stock in Union National.
There are 110,250 shares reserved for issuance under this plan.
Options granted under this plan have a five-year term and can be
exercised at 85% of the fair market value of the stock on the
date of exercise. The other two plans are the Employee Stock
Incentive Plan and the Independent Directors' Stock Option Plan.
There are 137,625 shares reserved for issuance under the Employee
Stock Incentive Plan and 66,150 shares reserved for issuance
under the Independent Directors' Stock Option Plan. Options
granted under these two plans have terms up to 10 years, have
option prices equal to the fair value of the shares on the date
of the grant and are exercisable six months after their grant
date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock option transactions for the years ended December 31, 2002,
2001 and 2000, are summarized below:
Stock Weighted-Average
Options Exercise Price
________ _________________
Options Outstanding at December 31, 1999
(Prices range from $14.40
to $21.67) 105,468 $ 17.17
Year Ended December 31, 2000:
Options Granted 57,325 $ 12.95
Options Exercised (893) 12.54
Options Forfeited (14,796) 12.16
_________ ________________
Options Outstanding at December 31, 2000
(Prices range from $10.29
to $21.67) 147,104 $ 14.46
Year Ended December 31, 2001:
Options Granted 82,168 $ 12.84
Options Exercised (2,093) 11.63
Options Forfeited (18,058) 13.30
__________ ________________
Options Outstanding at December 31, 2001
(Prices range from $11.70
to $21.67) 209,121 $ 14.36
Year Ended December 31, 2002:
Options Granted 23,918 $ 16.30
Options Exercised (6,009) 12.26
Options Forfeited (11,035) 15.61
Options Expired (8,250) 13.18
__________ ________________
Options Outstanding at December 31, 2002
(Prices range from $12.10
to $21.67) 207,745 $ 15.31
========== ================
Options outstanding at December 31, 2002, consisted of the
following:
Range of Options Weighted-Average Average Remaining
Exercise Prices Outstanding Exercise Price Contractual Life
________________ ___________ ________________ _________________
$12.10 to $14.50 128,317 $ 13.53 5.8 years
$14.51 to $16.90 32,738 16.27 9.1 years
$16.91 to $19.30 12,128 17.91 5.9 years
$19.31 to $21.67 34,562 20.07 6.6 years
________________ ___________ ________________ _________________
$12.10 to $21.67 207,745 $ 15.31 6.4 years
================ =========== ================ =================
Of the total options outstanding, 193,745 were exercisable at
December 31, 2002, at an average exercise price of $15.19.
Had Union National determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123,
Union National's net income and earnings per share would have
been reduced to the pro forma amounts as follows:
(In thousands, except per share data)
Years Ended December 31,
__________________________________
2002 2001 2000
__________ _________ _________
Net Income - As Reported $ 3,160 $ 2,242 $ 1,667
Less: Stock-Based
Compensation Cost (138) (133) (117)
__________ _________ _________
Net Income - Pro Forma $ 3,022 $ 2,109 $ 1,550
Net Income Per Share
As Reported (Basic) $ 1.24 $ 0.87 $ 0.65
As Reported
(Assuming Dilution) 1.23 0.86 0.64
Pro Forma (Basic) 1.18 0.82 0.60
Pro Forma
(Assuming Dilution) 1.17 0.81 0.60
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model. The per share
weighted-average fair value of stock options granted is as
follows with the weighted-average assumptions also noted for the
year:
Years Ended December 31,
__________________________________
2002 2001 2000
__________ _________ _________
Weighted-Average Fair Value
of Options Granted:
Employee Stock Purchase Plan
(granted at 85% of fair value
on the date of grant): $ - $ 2.23 $ 3.18
Stock Incentive Plan and
Independent Directors' Stock
Option Plan (granted at
fair value on the
date of grant): $ 2.41 $ 2.35 $ 2.81
Weighted-Average Assumptions:
Expected Dividend Yield 3.81% 3.77% 3.26%
Risk-Free Interest Rate 4.26% 4.74% 5.78%
Expected Life (Years) 8.0 6.7 6.0
Expected Volatility Over
the Expected Life 47.5% 43.7% 41.0%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," Union National has presented estimated
fair value information about financial instruments, whether or
not recognized in the consolidated balance sheets, for which it
is practicable to estimate that value. Fair value is best
determined by values quoted through active trading markets.
Because no active trading market exists for various types of
financial instruments, many of the fair values disclosed were
derived using present value or other valuation techniques. These
fair values are significantly affected by assumptions used,
principally the timing of future cash flows and the discount
rate. As a result, Union National's ability to realize these
derived values cannot be assured. Further, certain financial
instruments and all nonfinancial instruments are excluded.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of Union National.
The following methods and assumptions were used by Union National
in estimating the fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
consolidated balance sheets for cash and short-term investments
approximate their fair values.
Investment securities: Fair values for investment securities are
based on quoted prices, where available. If quoted prices are
not available, fair values are based on quoted prices of
comparable instruments.
Loans held for sale: Fair value is based on a quoted sales price
from the Federal Home Loan Bank of Pittsburgh.
Loans: For variable-rate loans that reprice frequently and with
no significant change in credit risk, fair values are based on
carrying values. The fair values of other loans are determined
using estimated future cash flows, discounted at the interest
rates currently being offered for loans with similar terms to
borrowers with similar credit quality.
Restricted Investment in Bank Stocks: The carrying amounts
reported in the consolidated balance sheets for restricted
investment in bank stocks approximate their fair values.
Accrued Interest Receivable: The carrying amount of accrued
interest receivable approximates its fair value.
Mortgage Servicing Assets and Credit Enhancement Fees Receivable:
The fair value of servicing assets and credit enhancement fees
receivable is based on the present value of estimated future cash
flows for pools of mortgages stratified by rate and maturity
date.
Interest Rate Cap: Fair value is based on a quoted market price.
Deposit liabilities: The fair values of deposits with no stated
maturities, such as demand deposits, savings accounts, NOW and
money market deposits, equal their carrying amounts, which
represent the amount payable on demand. Fair values for fixed-
rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Short-term borrowings: The carrying amounts of federal funds
purchased, advances from the Federal Home Loan Bank and other
short-term borrowings approximate their fair values.
Long-term debt: The fair values of Union National's long-term
debt are estimated using discounted cash flow analyses, based on
Union National's incremental borrowing rates for similar types of
borrowing arrangements.
Accrued Interest Payable: The carrying amount of accrued
interest payable approximates its fair value.
Off-balance sheet instruments: For Union National's off-balance-
sheet instruments, consisting of commitments to extend credit and
financial and performance standby letters of credit, the
estimated fair value is based on fees currently charged to enter
into similar agreements, taking into account the remaining term
of the agreements and the present creditworthiness of the counter
parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates
and the committed rates.
At December 31, 2002 and 2001, the estimated fair values of
financial instruments based on the disclosed assumptions are as
follows:
(In thousands)
December 31, 2002
______________________________
Carrying
Amount Fair Value
______________ _____________
Assets:
Cash and Cash Equivalents $ 14,545 $ 14,545
Investment Securities
Held-to-Maturity - -
Investment Securities
Available-for-Sale 90,679 90,679
Loans Held for Sale 892 926
Loans, Net of Unearned Income
and Allowance for Loan Losses 197,253 203,902
Restricted Investment in Bank Stocks 3,772 3,772
Accrued Interest Receivable 1,772 1,772
Mortgage Servicing Assets and
Credit Enhancement Fees Receivable 127 129
Interest Rate Cap - -
Liabilities:
Demand and Savings Deposits 130,419 130,419
Time Deposits 92,931 95,032
Short-term Borrowings 3,387 3,387
Long-term Debt 65,299 70,694
Accrued Interest Payable 902 902
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit - -
(In thousands)
December 31, 2001
______________________________
Carrying
Amount Fair Value
_____________ ______________
Assets:
Cash and Cash Equivalents $ 13,289 $ 13,289
Investment Securities
Held-to-Maturity 13,335 12,995
Investment Securities
Available-for-Sale 61,880 61,880
Loans Held for Sale 574 574
Loans, Net of Unearned Income
and Allowance for Loan Losses 201,688 205,848
Restricted Investment in Bank Stocks 3,153 3,153
Accrued Interest Receivable 1,785 1,785
Mortgage Servicing Assets and Credit
Enhancement Fees Receivable 8 8
Interest Rate Cap - -
Liabilities:
Demand and Savings Deposits 119,402 119,402
Time Deposits 96,142 97,515
Short-term Borrowings 3,400 3,400
Long-term Debt 61,252 62,982
Accrued Interest Payable 1,157 1,157
Off-balance-sheet Items:
Commitments to Extend Credit
and Standby Letters of Credit - -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16 - UNION NATIONAL FINANCIAL CORPORATION (PARENT COMPANY
ONLY)
CONDENSED BALANCE SHEETS
(In thousands)
December 31, December 31,
2002 2001
____________ _____________
ASSETS
Cash in Subsidiary Bank $ 66 $ 180
Interest-Bearing Deposits
in Other Banks 7 2
Investment in Subsidiary 25,647 24,325
Other Equity Investment Securities 331 283
Investments in Limited
Partnerships 637 719
Recoverable Federal Income Taxes 110 95
____________ _____________
Total Assets $ 26,798 $ 25,604
============ =============
LIABILITIES $ 63 $ 59
STOCKHOLDERS' EQUITY 26,735 25,545
____________ _____________
Total Liabilities and
Stockholders' Equity $ 26,798 $ 25,604
============ =============
CONDENSED STATEMENTS OF INCOME
(In thousands)
Years Ended December 31,
__________________________
2002 2001
_____________ ___________
INCOME
Dividends from Subsidiary $ 2,482 $ 788
Dividends on Other Equity
Investment Securities 10 9
Interest on Deposits in Subsidiary 3 4
Gain on Sale of Securities - 6
Management Fees from Subsidiary 42 42
_____________ ___________
Total Income 2,537 849
EXPENSES 134 112
_____________ ___________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 2,403 737
Provision for Income Taxes (Benefit) (102) (138)
_____________ ___________
2,505 875
EQUITY in (EXCESS of) UNDISTRIBUTED INCOME
of SUBSIDIARY 655 1,367
_____________ ___________
NET INCOME $ 3,160 $ 2,242
============= ===========
(In thousands)
Year Ended December 31,
_________________________
2000
_____________
INCOME
Dividends from Subsidiary $ 2,118
Dividends on Other Equity
Investment Securities 14
Interest on Deposits in Subsidiary 6
Gain on Sale of Securities 74
Management Fees from Subsidiary 42
_____________
Total Income 2,254
EXPENSES 144
_____________
Income before Income Taxes and
Equity in Undistributed Income
of Subsidiary 2,110
Provision for Income Taxes (Benefit) (122)
_____________
2,232
EQUITY in (EXCESS of) UNDISTRIBUTED INCOME
of SUBSIDIARY (565)
_____________
NET INCOME $ 1,667
=============
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
_____________________________
2002 2001
______________ _____________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 3,160 $ 2,242
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
(Equity In) Excess of Undistributed
Income of Subsidiary (655) (1,367)
Investment Securities Gains - (6)
Provision for Deferred Income Taxes (3) (3)
Decrease/(Increase) in Other
Assets 67 (42)
(Decrease)/Increase in Other
Liabilities (2) 2
______________ _____________
Net Cash Provided by Operating
Activities 2,567 826
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities - 31
Purchases of Available-for-Sale
Securities (20) (25)
______________ _____________
Net Cash Provided by (Used in)
Investing Activities (20) 6
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (1,536) (52)
Issuance of Common and Treasury Stock 352 256
Cash Dividends Paid (1,472) (1,098)
______________ _____________
Net Cash (Used in) Financing
Activities (2,656) (894)
______________ _____________
NET INCREASE/(DECREASE) in CASH (109) (62)
CASH - Beginning of Year 182 244
______________ _____________
CASH - End of Year $ 73 $ 182
============== =============
Years Ended December 31,
____________________________
2000
______________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 1,667
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
(Equity in) Excess of Undistributed
Income of Subsidiary 565
Investment Securities
Gains (74)
Provision for Deferred Income Taxes (5)
Decrease/(Increase) in Other Assets 51
(Decrease)/Increase in Other Liabilities (6)
_______________
Net Cash Provided by Operating
Activities 2,198
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of Available-
for-Sale Securities 119
Purchases of Available-for-Sale
Securities (76)
_______________
Net Cash Provided by (Used in)
Investing Activities 43
CASH FLOWS from FINANCING ACTIVITIES
Acquisition of Treasury Stock (854)
Issuance of Common and Treasury Stock 335
Cash Dividends Paid (1,486)
_______________
Net Cash (Used in) Financing
Activities (2,005)
_______________
NET INCREASE/(DECREASE) in CASH 236
CASH - Beginning of Year 8
_______________
CASH - End of Year $ 244
===============
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Union National Financial Corporation
Mount Joy, Pennsylvania
We have audited the accompanying consolidated balance sheets
of Union National Financial Corporation and subsidiary as of
December 31, 2002 and 2001, and the related consolidated
statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States of America.
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
consolidated financial position of Union National Financial
Corporation and subsidiary as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the
United States of America.
/s/ Beard Miller Company LLP
Harrisburg, Pennsylvania
January 24, 2003
SUMMARY OF QUARTERLY FINANCIAL DATA
The unaudited quarterly results of operations for the years ended
December 31, 2002 and 2001, are as follows:
(Dollars in thousands, except per share data)
2002
__________________________________________
March June September December
31 30 30 31
_______ ______ ________ ________
Interest Income $5,048 $4,878 $4,862 $4,773
Interest Expense 2,210 2,005 1,998 1,894
_______ ______ ________ ________
Net Interest Income 2,838 2,873 2,864 2,879
Provision for Loan Losses 25 59 43 57
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,813 2,814 2,821 2,822
Other Operating Income 664 712 701 771
Investment Securities
Gains/(Losses) (20) 140 138 69
Other Operating Expenses 2,596 2,619 2,674 2,660
_______ ______ ________ ________
Income before Income Taxes 861 1,047 986 1,002
Provision for Income Taxes
(Benefit) 144 215 184 193
_______ ______ ________ ________
Net Income $ 717 $ 832 $ 802 $ 809
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution) $ 0.28 $ 0.32 $ 0.31 $ 0.32
======= ====== ======== ========
Note: Due to rounding, quarterly earnings per share may not add
up to reported annual earnings per share.
(Dollars in thousands, except per share data)
2001
__________________________________________
March June September December
31 30 30 31
_______ ______ ________ ________
Interest Income $5,254 $5,335 $5,219 $5,276
Interest Expense 2,708 2,645 2,508 2,328
_______ ______ ________ ________
Net Interest Income 2,546 2,690 2,711 2,948
Provision for Loan Losses 113 160 83 220
_______ ______ ________ ________
Net Interest Income after
Provision for Loan
Losses 2,433 2,530 2,628 2,728
Other Operating Income 510 612 558 601
Investment Securities
Gains/(Losses) 11 (12) 25 51
Other Operating Expenses 2,531 2,506 2,509 2,656
_______ ______ ________ ________
Income before Income Taxes 423 624 702 724
Provision for Income Taxes
(Benefit) (10) 56 88 97
_______ ______ ________ ________
Net Income $ 433 $ 568 $ 614 $ 627
======= ====== ======== ========
Net Income per Common Share
(Basic and Assuming
Dilution) $ 0.17 $ 0.22 $ 0.24 $ 0.24
======= ====== ======== ========
Note: Due to rounding, quarterly earnings per share may not add
up to reported annual earnings per share.
SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
Years Ended December 31,
____________________________________
2002 2001 2000
__________ __________ __________
INCOME STATEMENT
Interest Income $ 19,561 $ 21,085 $ 20,583
Interest Expense 8,107 10,190 10,352
__________ __________ __________
Net Interest Income 11,454 10,895 10,231
Provision for Loan Losses 184 576 397
__________ __________ __________
Net Interest Income
after Provision for
Loan Losses 11,270 10,319 9,834
Other Operating Income 3,175 2,356 1,732
Other Operating Expenses 10,549 10,202 9,949
__________ __________ __________
Income before Income Taxes 3,896 2,473 1,617
Provision for Income Taxes
(Benefit) 736 231 (50)
__________ __________ __________
Net Income for Year $ 3,160 $ 2,242 $ 1,667
========== ========== ==========
SHARE INFORMATION
Net Income Per Share (Basic) $ 1.24 $ 0.87 $ 0.65
Cash Dividends Per Share 0.575 0.425 0.576
Average Shares Outstanding
(Basic) 2,557 2,584 2,576
FINANCIAL RATIOS
Return on Average Assets 1.02% 0.76% 0.60%
Return on Average
Stockholders' Equity 12.20% 9.07% 7.21%
Dividend Payout Ratio 46.58% 48.95% 89.16%
Average Stockholders' Equity
to Average Assets 8.39% 8.40% 8.30%
AVERAGE BALANCE SHEET
Loans $ 201,976 $ 186,877 $ 182,728
Investment Securities 80,558 81,644 78,868
Other Earning Assets 7,381 8,677 3,395
Total Assets 308,584 294,401 278,416
Deposits 215,242 214,297 214,464
Short-Term Borrowings 3,501 6,672 11,314
Long-Term Debt 62,322 46,907 27,920
Stockholders' Equity 25,900 24,730 23,110
BALANCE SHEET AT YEAR-END
Loans $ 199,065 $ 203,581 $ 185,981
Investment Securities 90,679 75,215 74,466
Total Earning Assets 301,738 287,522 263,549
Total Assets 320,509 307,673 282,680
Deposits 223,350 215,544 212,545
Short-Term Borrowings 3,387 3,400 13,495
Long-Term Debt 65,299 61,252 30,735
Stockholders' Equity 26,735 25,545 23,562
(Dollars in thousands, except per share data)
Years Ended December 31,
_______________________
1999 1998
__________ __________
INCOME STATEMENT
Interest Income $ 19,080 $ 18,064
Interest Expense 8,811 8,695
__________ __________
Net Interest Income 10,269 9,369
Provision for Loan Losses 214 325
__________ __________
Net Interest Income
after Provision for
Loan Losses 10,055 9,044
Other Operating Income 1,477 1,157
Other Operating Expenses 7,725 6,718
__________ __________
Income before Income Taxes 3,807 3,483
Provision for Income Taxes
(Benefit) 722 715
__________ __________
Net Income for Year $ 3,085 $ 2,768
========== ==========
SHARE INFORMATION
Net Income Per Share (Basic) $ 1.17 $ 1.04
Cash Dividends Per Share 0.540 0.390
Average Shares Outstanding
(Basic) 2,633 2,669
FINANCIAL RATIOS
Return on Average Assets 1.17% 1.15%
Return on Average
Stockholders' Equity 13.29% 12.05%
Dividend Payout Ratio 46.18% 37.74%
Average Stockholders' Equity
to Average Assets 8.83% 9.51%
AVERAGE BALANCE SHEET
Loans $ 169,667 $ 162,090
Investment Securities 76,377 61,089
Other Earning Assets 5,007 6,583
Total Assets 263,075 241,639
Deposits 206,470 188,179
Short-Term Borrowings 2,020 412
Long-Term Debt 29,882 28,584
Stockholders' Equity 23,218 22,971
BALANCE SHEET AT YEAR-END
Loans $ 174,854 $ 163,796
Investment Securities 77,724 68,198
Total Earning Assets 255,680 247,347
Total Assets 269,579 261,368
Deposits 209,181 205,544
Short-Term Borrowings 9,100 187
Long-Term Debt 27,035 30,624
Stockholders' Equity 23,063 23,697
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in the accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company, and its wholly owned
subsidiary, Union National Community Bank. Union National's
consolidated financial condition and results of operations
consist almost entirely of the bank's financial condition and
results of operations. This discussion should be read in
conjunction with the financial tables/statistics, financial
statements and notes to financial statements appearing elsewhere
in this annual report. Current performance does not guarantee,
assure or indicate similar performance in the future.
We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include the
information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank or the combined company. When we use
words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements.
Shareholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial
results of Union National Financial Corporation, Union National
Community Bank or the combined company and could cause those
results to differ materially from those expressed in our forward-
looking statements contained or incorporated by reference in this
document. These factors include the following:
* operating, legal 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 December 31, 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 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. Union
National intends to continue to account for stock-based
compensation in this manner unless there is more specific
guidance issued by the Financial Accounting Standards Board or
unless a clear consensus develops in the financial services
industry on the application of accounting methods.
Results of Operations
_____________________
OVERVIEW
Consolidated net income for 2002 was $3,160,000, an increase of
40.9%, as compared to consolidated net income of $2,242,000 for
2001. Consolidated net income for 2001 increased by 34.5%, as
compared to consolidated net income of $1,667,000 for 2000.
Basic earnings per share for 2002 amounted to $1.24 and diluted
earnings per share amounted to $1.23, as compared to basic
earnings per share of 87 cents and diluted earnings per share of
86 cents for 2001 and basic earnings per share of 65 cents and
diluted earnings per share of 64 cents for 2000.
The following items impacted results of operations for 2002 as
compared to 2001:
* Net income increased due to growth of 4.6% in average
earning assets, which was funded primarily by additional long-
term borrowings.
* Net income decreased due to costs of $382,000 incurred on
the early payoff of $12,000,000 of FHLB borrowings.
* Net income increased due to a decrease in the provision
for loan losses of $392,000.
* Net income increased due to an increase of $252,000 in
realized gains on the sale of investment securities, which
partially offset the early payoff costs on FHLB borrowings
detailed above.
* Net income increased due to an increase in other operating
income (excluding investment securities gains) of $567,000, or
24.9%, which was primarily a result of increased revenues from
mortgage banking activities.
* Net income decreased due to an increase in other operating
expenses of $347,000, or 3.4%.
The above items are quantified and discussed in further detail
under their respective sections below.
The following items impacted results of operations for 2001 as
compared to 2000:
* Net income increased due to a widening of the spread
between the interest rates earned on loans and investments as
compared to the interest rates paid on deposits and short- and
long-term borrowings.
* Net income increased due to growth of 4.6% in average
earning assets, which was funded primarily by additional long-
term borrowings.
* Net income decreased due to an increase in the provision
for loan losses of $179,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
* Net income increased due to an increase in other operating
income of $624,000, or 36.0%.
* Net income decreased due to an increase in other operating
expenses of $253,000, or 2.5%.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of total average assets, also known as
return on average assets (ROA), was 1.02% for 2002, 0.76% for
2001 and 0.60% for 2000. Net income as a percent of average
stockholders' equity, also known as return on average equity
(ROE), was 12.20% for 2002, 9.07% for 2001 and 7.21% for 2000.
Management currently expects moderate growth in loans and
deposits for 2003. This is expected due to continued strong
competition in Union National's market area and uncertain current
economic conditions. However, management 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, during the fourth
quarter of 2002, Union National hired an experienced commercial
business development officer who will lead our business banking
group in its renewed business development efforts.
During 2002, Union National experienced strong commercial loan
demand and this is currently expected to continue in 2003.
However, residential mortgage and consumer loan balances declined
during 2002 and this trend is also expected to continue.
Overall, loan balances have declined by $4,516,000 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,
there has been a decline in the balance of a pool of residential
mortgage loans that Union National purchased in November 2001.
These purchased mortgage loans had an outstanding balance of
$17,984,000 at December 31, 2002, a decline of $5,935,000 from
December 31, 2001. Also, Union National now sells most of its
new residential mortgage loans under a program that was
implemented in the fourth quarter of 2001. Mortgages generated
for sale under this program amounted to $13,105,000 for the year
ended December 31, 2002, and $1,357,000 for 2001.
The economy in the bank's market may be negatively impacted by
national events and may be subject to overall national economic
trends. The overall effects of past economic conditions, as well
as other factors, can be seen by a mild lessening of certain
borrowers' financial strength. Management is monitoring these
general and specific trends closely. Their various effects are
discussed later under the section on Loans.
NET INTEREST INCOME
Net interest income is the amount by which interest income on
loans and investments exceeds interest incurred on deposits and
borrowings. Net interest income is Union National's primary
source of revenue. The amount of net interest income is affected
by changes in interest rates and by changes in the volume and mix
of interest-sensitive assets and liabilities.
Net interest income and corresponding yields are presented in the
tables and related discussion on a taxable equivalent basis.
Income from tax-exempt assets, primarily loans to or securities
issued by state and local governments, is adjusted by an amount
equivalent to the federal income taxes which would have been paid
if the income received on these assets was taxable at the
statutory rate of 34%.
In order to enhance the net interest income in future periods,
management has entered into transactions that increase earning
assets funded by advances from the Federal Home Loan Bank of
Pittsburgh (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
December 31, 2002, the bank had received long-term advances of
$65,299,000 from its available credit of $149,314,000 at the FHLB
for purposes of funding loan demand and security purchases. The
total advances have maturities that range from February 2003 to
February 2011.
Impacting net interest income during 2002 was $382,000 in
additional 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 2002, Union National restructured $12,000,000 in long-term
borrowings with the FHLB. These borrowings had a weighted-
average rate of 4.88% and were paid off and replaced with
$10,000,000 of borrowings of slightly longer or comparable
maturities that bear a weighted-average rate of 3.36%. The
balance of the payoffs was 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. Total FHLB advances
outstanding at December 31, 2002, represent an increase of
$4,047,000 from the prior year and the average interest rate on
these borrowings has decreased to 4.68% from 5.09%. 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.
2002 COMPARED TO 2001
Net interest income for 2002 increased by $537,000, or 4.6%, over
2001 ($919,000 or 7.9% without the impact of early payoff costs
on long-term FHLB borrowings). Net interest income for 2001
increased by $606,000 over 2000. For 2002, average earning asset
growth of $12,717,000 was funded primarily by additional long-
term borrowings. The volume growth in earning assets and
interest-bearing liabilities increased net interest income by the
amount of $809,000 in 2002 over 2001, as compared to $140,000 in
2001 over 2000.
The overall interest rate on the average total earning assets
decreased to 7.00% for 2002, as compared to 7.87% for 2001.
However, the overall interest rate on the average interest-
bearing liabilities also decreased to 3.17% (3.02% without the
impact of payoff costs) for 2002, as compared to 4.16% for 2001.
The net effect of all interest rate fluctuations and funding
changes was to decrease net interest income in the amount of
$272,000 for 2002 from 2001, as compared to an increase of
$466,000 for 2001 over 2000. The net interest margin percentage
was 4.20% for 2002 and 2001 (2002 would have been 4.33% without
the impact of payoff costs). See management's discussion below
concerning the anticipated impact of these interest rate
fluctuations on the results of operations for 2003.
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 4.25%. 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.
2001 COMPARED TO 2000
Net interest income for 2001 increased by $606,000, or 5.5%, over
2000. Net interest income for 2000 decreased by $10,000 over
1999. For 2001, average earning asset growth of $12,207,000 was
funded primarily by additional long-term borrowings. The
additional long-term borrowings were utilized to replace short-
term borrowings as of December 31, 2000. In addition, a pool of
residential mortgage loans of approximately $25,000,000 was
purchased in November 2001 that was partially funded by long-term
borrowings. The volume growth in earning assets and interest-
bearing liabilities increased net interest income by the amount
of $140,000 in 2001 over 2000, as compared to $266,000 in 2000
over 1999.
The overall interest rate on the average total earning assets
decreased to 7.87% for 2001, as compared to 8.07% for 2000.
However, the overall interest rate on the average interest-
bearing liabilities decreased even more drastically to 4.16% for
2001, as compared to 4.49% for 2000. The overall decline in
market interest rates during 2001 was prompted by actions of the
Federal Reserve Bank which started reducing interest rates in
January 2001. By the end of 2001 the prime interest rate had
declined
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
from 9.50% to 4.75%. The net effect of all interest rate
fluctuations and funding changes was to increase net interest
income in the amount of $466,000 for 2001 over 2000, as compared
to a decrease of $276,000 for 2000 from 1999.
2003 NET INTEREST INCOME
For 2003, it is currently anticipated that the bank's net
interest margin percentage will narrow slightly in comparison to
current levels as maturing investments and loans reprice to
current rates. However, some loans have now repriced to their
interest rate floor and will not be impacted. In addition, Union
National will benefit as a portion of maturing certificates of
deposit will reprice to lower current interest rates.
Offsetting the narrowing margin, income from growth in earning
assets which occurred during 2002, net of costs resulting from
growth in deposits and borrowings, should increase net interest
income for 2003. The netting of these two factors, as reflected
in the bank's current simulation model and estimates as of
December 31, 2002, may result in net interest income for 2003
that reflects a moderate increase over the net interest income
earned during 2002. Expected growth in earning assets during
2003 should also increase the bank's net interest margin. This
expected growth was not reflected in the bank's model at December
31, 2002. However, Union National's net interest income may be
impacted by future actions of the Federal Reserve Bank.
The bank's current net interest income simulation model includes
an investment in bank-owned life insurance that had a value of
$3,522,000 at December 31, 2002. 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 2003, 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.
Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential (Taxable Equivalent
Basis)
Year Ended
December 31, 2002
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 157 $ 2 1.27%
Federal Funds Sold 2,925 50 1.71
Short-Term Investments 986 15 1.52
Investment Securities:
Taxable 59,005 2,959 5.01
Tax-Exempt 21,553 1,644 7.63
Loans-Net* 201,976 15,490 7.67
Restricted Invest. - Bank Stocks 3,313 120 3.62
__________ ________ ______
Total Earning Assets 289,915 20,280 7.00
Allowance for Loan Losses (1,870)
Other Nonearning Assets 20,539
__________
TOTAL ASSETS $ 308,584
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 68,498 $ 631 0.92%
Savings 28,025 276 0.98
Time 93,785 3,680 3.92
Short-Term Borrowings 3,501 50 1.43
Long-Term Debt** 62,322 3,470 5.57
__________ ________ ______
Total Interest-Bearing
Liabilities 256,131 8,107 3.17
________ ______
Demand Deposits 24,934
Other Liabilities 1,619
__________
TOTAL LIABILITIES 282,684
Stockholders' Equity 25,900
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 308,584
==========
Net Interest Income/
Interest Rate Spread $ 12,173 3.83%
======== ======
Net Interest Margin 4.20%
======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes.
Balances reflect amortized historical cost for available for sale
securities. The related average unrealized holding gain or loss
on securities is included in other nonearning assets.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
*Includes loan fees of $816,000 for the year ended December 31,
2002, $802,000 for the year ended December 31, 2001 and $516,000
for the year ended December 31, 2000.
**Includes early payoff costs on FHLB Borrowings of $382,000 for
2002. Excluding these payoff costs, the average rate on long-
term debt would have been 4.95%, the average rate on total
interest-bearing liabilities would have been 3.02%, the interest
rate spread would have been 3.98% and the net interest margin
would have been 4.33%.
Year Ended
December 31, 2001
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 72 $ 1 1.39%
Federal Funds Sold 3,901 163 4.18
Short-Term Investments 1,599 45 2.81
Investment Securities:
Taxable 59,809 3,840 6.42
Tax-Exempt 21,835 1,693 7.75
Loans-Net* 186,877 15,883 8.50
Restricted Invest. - Bank Stocks 3,105 201 6.47
__________ ________ ______
Total Earning Assets 277,198 21,826 7.87
Allowance for Loan Losses (1,944)
Other Nonearning Assets 19,147
__________
TOTAL ASSETS $ 294,401
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 60,690 $ 1,072 1.77%
Savings 25,126 343 1.37
Time 105,478 5,831 5.53
Short-Term Borrowings 6,672 340 5.10
Long-Term Debt** 46,907 2,604 5.55
__________ ________ ______
Total Interest-Bearing
Liabilities 244,873 10,190 4.16
________ ______
Demand Deposits 23,003
Other Liabilities 1,795
__________
TOTAL LIABILITIES 269,671
Stockholders' Equity 24,730
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 294,401
==========
Net Interest Income/
Interest Rate Spread $ 11,636 3.71%
======== ======
Net Interest Margin 4.20%
======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes.
Balances reflect amortized historical cost for available for sale
securities. The related average unrealized holding gain or loss
on securities is included in other nonearning assets.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
*Includes loan fees of $816,000 for the year ended December 31,
2002, $802,000 for the year ended December 31, 2001 and $516,000
for the year ended December 31, 2000.
**Includes early payoff costs on FHLB Borrowings of $382,000 for
2002. Excluding these payoff costs, the average rate on long-
term debt would have been 4.95%, the average rate on total
interest-bearing liabilities would have been 3.02%, the interest
rate spread would have been 3.98% and the net interest margin
would have been 4.33%.
Year Ended
December 31, 2000
___________________________________
(In thousands) Average
Balance Interest Rate
__________ ________ ______
ASSETS
Interest-Bearing Deposits
in Other Banks $ 50 $ 2 4.00%
Federal Funds Sold 243 15 6.17
Short-Term Investments - - -
Investment Securities:
Taxable 54,912 3,610 6.57
Tax-Exempt 23,956 1,840 7.68
Loans-Net* 182,728 15,697 8.59
Restricted Invest. - Bank Stocks 3,102 218 7.03
__________ ________ ______
Total Earning Assets 264,991 21,382 8.07
Allowance for Loan Losses (1,807)
Other Nonearning Assets 15,232
__________
TOTAL ASSETS $ 278,416
==========
LIABILITIES and STOCKHOLDERS' EQUITY
Deposits:
Interest-Bearing Demand $ 52,392 $ 1,243 2.37%
Savings 26,525 497 1.87
Time 112,372 6,216 5.53
Short-Term Borrowings 11,314 753 6.66
Long-Term Debt** 27,920 1,643 5.88
__________ ________ ______
Total Interest-Bearing
Liabilities 230,523 10,352 4.49
________ ______
Demand Deposits 23,175
Other Liabilities 1,608
__________
TOTAL LIABILITIES 255,306
Stockholders' Equity 23,110
__________
TOTAL LIABILITIES and
STOCKHOLDERS' EQUITY $ 278,416
==========
Net Interest Income/
Interest Rate Spread $ 11,030 3.58%
======== ======
Net Interest Margin 4.16%
======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes.
Balances reflect amortized historical cost for available for sale
securities. The related average unrealized holding gain or loss
on securities is included in other nonearning assets.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
*Includes loan fees of $816,000 for the year ended December 31,
2002, $802,000 for the year ended December 31, 2001 and $516,000
for the year ended December 31, 2000.
**Includes early payoff costs on FHLB Borrowings of $382,000 for
2002. Excluding these payoff costs, the average rate on long-
term debt would have been 4.95%, the average rate on total
interest-bearing liabilities would have been 3.02%, the interest
rate spread would have been 3.98% and the net interest margin
would have been 4.33%.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Rate/Volume Analysis of Changes in Net Interest Income (Taxable
Equivalent Basis)
2002 Compared to 2001
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks $ 1 $ 1 $ -
Federal Funds Sold (113) (34) (79)
Short-Term Investments (30) (13) (17)
Investment Securities:
Taxable (881) (51) (830)
Tax-Exempt (49) (22) (27)
Loans-Net (393) 1,226 (1,619)
Restricted Invest. - Bank Stocks (81) 12 (93)
________ ________ _____
Total Earning Assets (1,546) 1,119 (2,665)
Interest Expense On Deposits:
Interest-Bearing Demand (441) 124 (565)
Savings (67) 37 (104)
Time (2,151) (594) (1,557)
Short-Term Borrowings (290) (115) (175)
Long-Term Debt 866 858 8
________ ________ _______
Total Interest-Bearing
Liabilities (2,083) 310 (2,393)
________ ________ _______
Net Interest Income $ 537 $ 809 $(272)
======== ======== =======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes.
The change in interest due to both volume and rate has been
allocated individually to the change in volume and rate on a
proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
2001 Compared to 2000
_____________________________
Total
(In thousands) Change Volume Rate
________ ________ _____
Interest Income From
Interest-Bearing Deposits
in Other Banks $ (1) $ 1 $ (2)
Federal Funds Sold 148 155 (7)
Short-Term Investments 45 45 -
Investment Securities:
Taxable 230 317 (87)
Tax-Exempt (147) (164) 17
Loans-Net 186 354 (168)
Restricted Invest. - Bank Stocks (17) - (17)
________ ________ _____
Total Earning Assets 444 708 (264)
Interest Expense On Deposits:
Interest-Bearing Demand (171) 178 (349)
Savings (154) (25) (129)
Time (385) (382) (3)
Short-Term Borrowings (413) (263) (150)
Long-Term Debt 961 1,060 (99)
________ ________ _______
Total Interest-Bearing
Liabilities (162) 568 (730)
________ ________ _______
Net Interest Income $ 606 $ 140 $ 466
======== ======== =======
Balances of nonaccrual loans and related income recognized have
been included for computational purposes.
The change in interest due to both volume and rate has been
allocated individually to the change in volume and rate on a
proportional basis.
Tax-exempt income included in loans and securities has been
adjusted to a taxable equivalent basis using an incremental rate
of 34%.
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 $184,000 in 2002, $576,000 in 2001 and $397,000
in 2000. Net charge-offs amounted to $265,000 for 2002, as
compared to $470,000 for 2001 and $393,000 for 2000. The lower
provision for loan losses in 2002 can be attributed to declining
levels of nonperforming loans and a decline in net loans of 2.2%
during 2002. 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
______________________
2002 COMPARED TO 2001
Other operating income for 2002 was $3,175,000, representing an
increase of $819,000, or 34.8%, over 2001. Contributing to this
increase were the following items:
* an increase in revenue from mortgage banking activities in
the amount of $457,000;
* an increase in investment securities gains of $252,000;
* an increase in commission earnings from the sale of
alternative investment products in the amount of $105,000; and
* increased usage of the bank's debit cards, resulting in
additional earnings in interchange fee income in the amount of
$67,000.
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 retained by
Union National so the sale is transparent to customers. As of
December 31, 2002, Union National was servicing 135 loans through
this program with an outstanding balance of $13.3 million.
Investment securities gains in 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 pay off some FHLB
borrowings and as indicated earlier these gains partially offset
the costs of the early payoff of these borrowings. The increase
in commission earnings on the sale of alternative investment
products resulted from the expanded sales of annuities, mutual
funds and brokerage services. Union National now has a licensed
representative in each retail office location to sell these
alternative investment products.
2001 COMPARED TO 2000
Other operating income for 2001 was $2,356,000, representing an
increase of $624,000, or 36.0%, over 2000. Contributing to this
increase were the following items:
* additional earnings in monthly service charges in the
amount of $175,000, which is primarily attributable to fee
changes that were effective in January 2001;
* increased earnings from mutual fund commissions of
$168,000, which was primarily a result of a change in the
commission and cost-sharing structure the bank has with T.H.E.
Financial Group, Ltd;
* an increase in earnings on the bank's June 2000 investment
in bank-owned life insurance of $101,000.
* an increase in ATM usage fees of $54,000 as a result of a
fee change that was effective in January 2001;
* increased usage of the bank's debit cards, resulting in
additional earnings in interchange fee income in the amount of
$53,000;
* an increase in investment securities gains of $48,000; and
* an increase in earnings from fiduciary activities in the
amount of $46,000.
Other operating income (excluding investment securities gains) as
a percentage of total revenue (net interest income and other
operating income) amounted to 19.9% for 2002, 17.3% for 2001 and
14.3% for 2000.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Other Operating Expenses
________________________
2002 COMPARED TO 2001
The aggregate of other operating expenses for 2002 increased by
$347,000, or 3.4%, over 2001. This increase in other operating
expenses is discussed below as it pertains to the various expense
categories.
Salaries and wages increased by $76,000, or 1.7%, over 2001. This
increase was essentially due to annual merit and cost-of-living
increases in employee salaries and wages and increased incentives
for staff for reaching certain sales and profitability goals.
These items were partially offset by a small reduction in average
full-time equivalent employees during 2002 as compared to 2001.
Employee benefit costs increased by $67,000, or 6.3%, over 2001.
For 2002, there was an increase in health insurance costs, an
increase in profit sharing costs as a result of increased
employee participation in the 401(k) profit-sharing plan and an
increase in payroll tax costs that resulted from the overall
increase in salaries and wages.
Other changes in operating expenses for 2002 included the
following:
* an increase in net occupancy expense of $36,000;
* a decrease in professional fees of $58,000, primarily as a
result of decreased consulting fees incurred in 2002;
* an increase in data processing fees of $39,000;
* an increase in advertising and marketing expenses of
$45,000;
* an increase in liability insurance costs of $26,000;
* an increase in appraisal costs of $38,000 as a result of
increased mortgage activities;
* a decrease in supplies costs in the amount of $61,000;
* an increase in software amortization and maintenance costs
of $22,000;
* an increase in other services costs of $38,000, primarily
as a result of the increased usage of temporary employment
services;
* an increase in check losses of $30,000, primarily a result
of a large recovery in 2001; and
* an increase in other losses in the amount of $24,000 as a
result of a robbery loss at a retail branch location.
2001 COMPARED TO 2000
The aggregate of other operating expenses for 2001 increased by
$253,000, or 2.5%, over 2000. This increase in other operating
expenses is discussed below as it pertains to the various expense
categories.
Employee salaries and wages decreased by $104,000, or 2.3%, from
2000. This decrease was essentially due to a reduction in staff
that occurred through an early retirement program and attrition.
In addition, the cost of the early retirement program
significantly increased expenses in 2000. Since December 2000,
full-time equivalent employees have been reduced from 131 to 124
in December 2001. The above items were partially offset by
increases in salaries and wages for 2001 that were a result of
annual merit and cost-of-living increases, planned staff
additions and the cost of incentives paid to staff under a bank-
wide incentive plan that was based on the bank's 2001 financial
performance. New staff positions in 2001 included an investment
representative for T.H.E. Financial Group who is now a bank
employee and various support staff positions.
Employee benefit costs decreased by $6,000, or 0.6%, from 2000.
For 2001, there was an increase in profit sharing cost as the
bank increased its contribution from 5% of qualifying wages in
2000 to 6% in 2001. This increase was offset by a decrease in
costs related to the staff reduction discussed above. In
addition, results for 2000 included benefit and payroll tax costs
related to the early retirement program.
Occupancy, furniture and equipment expenses for 2001 increased by
$99,000, or 8.4%, over 2000. This was due to an increase in
equipment depreciation expense, lease expense and other occupancy
related expenses. The increase in lease and other occupancy
related expenses related primarily to the opening of the new
Locust Street, Columbia office in April 2000 and the opening of
an office in Lancaster for our Wealth Management Group in August
2000. The increase in equipment depreciation is related to
systems and equipment implemented with technology initiatives
primarily in the fourth quarter of 2000.
Professional fees for 2001 decreased by $50,000, or 8.3%, from
2000. The decrease is primarily a result of consulting fees paid
in 2000 to the consulting division of Metavante Corporation to
provide services in connection with the implementation of various
technology, operational efficiency and revenue enhancement
initiatives. Payments under this contract concluded in the first
quarter of 2001.
Expenses related to data processing services amounted to $537,000
for 2001, as compared to $214,000 for 2000. This increase
related primarily to costs for services related to new core
processing and trust systems, a sales platform and a wide-area
network which were implemented in November 2001.
Other expenses for 2001 decreased by $9,000, or 0.4%, from 2000.
Impacting other expenses in 2001 were the following:
* an increase in foreclosed real estate expense of $27,000;
* a decrease in travel and meals costs of $67,000;
* a decrease in check losses in the amount of $53,000;
* an increase in software amortization costs in the amount
of $123,000; and
* slight decreases in various other expense categories.
Decreased travel and meals costs related primarily to increased
costs in 2000 associated with the implementation of a new core
processing system. Decreased check loss expense related
primarily to the recovery in 2001 of a large check loss that
occurred during 2000. Increased software amortization and staff
training costs primarily related to the implementation of the new
data processing system and related technology initiatives.
Income Taxes
____________
Union National had income tax expense of $736,000 for 2002 and
$231,000 for 2001, as compared to an income tax benefit of
$50,000 for 2000. The effective tax rate for 2002 was 18.9%, as
compared to 9.3% for 2001 and 3.1% for 2000. The increase in
income tax expense in 2002 was primarily due to an increase in
earnings before income taxes. The realization of net deferred
tax assets, which amounted to $133,000 at December 31, 2002, is
dependent on future earnings of Union National. Management
currently anticipates future earnings will be adequate to utilize
these deferred tax assets.
Changes in Accounting Standards
_______________________________
In April 2002, the Financial Accounting Standards Board issued
Statement No. 145, "Rescission of Statements No. 4, 44 and 64,
Amendment of Statement No. 13". This statement requires that
debt extinguishment no longer be classified as an extraordinary
item since debt extinguishment has become a risk management
strategy for many companies. For the year ended December 31,
2002, Union National incurred costs in the amount of $382,000 for
the early payoff of some of its FHLB borrowings. This additional
expense was reflected in total interest expense on long-term
borrowings. This statement also eliminates the inconsistent
accounting treatment for sale-leaseback transactions and certain
lease modifications that have economic effects similar to sale-
lease back transactions. This statement became effective May 15,
2002.
In June 2002, the Financial Accounting Standards Board issued
Statement No. 146, "Accounting for Costs Associated with Exit or
Disposal
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Activities", which nullifies EITF Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and other
Costs to Exit an Activity (including certain costs incurred in a
restructuring)". This statement delays recognition of these
costs until liabilities are incurred and requires fair value
measurement. It does not impact the recognition of liabilities
incurred in connection with a business combination or the
disposal of long-lived assets. The provisions of this statement
are effective for exit or disposal activities initiated after
December 31, 2002.
In October 2002, the Financial Accounting Standards Board issued
Statement No. 147, "Acquisitions of Certain Financial
Institutions." This statement provides guidance on accounting
for the acquisition of a financial institution, including the
acquisition of part of a financial institution. The statement
defines criteria for determining whether the acquired financial
institution meets the conditions for a "business combination".
If the acquisition meets the conditions of a "business
combination", the specialized accounting guidance under Statement
No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions" will not apply after September 30, 2002, and the
amount of the unidentifiable intangible asset will be
reclassified to goodwill upon adoption of Statement No. 147. The
transition provisions were effective on October 1, 2002.
The provisions of Statements No. 146 and No. 147 did not have or
are not expected to have a significant impact on the financial
condition or results of operations of Union National.
Financial Condition
___________________
Investment Securities
_____________________
As of December 31, 2002, all of Union National's investment
securities have been classified as available-for-sale.
Securities classified as available-for-sale are those debt
securities that Union National intends to hold for an indefinite
period of time, but not necessarily to maturity, and marketable
equity securities. Union National possesses the ability, subject
to credit impairment, to hold each security in its investment
portfolio to maturity. However, Union National recognizes that
the investment portfolio serves other functions including an
ultimate source of liquidity and a tool to manage interest rate
risk. In order to acknowledge these functions, Union National
has designated its investment securities as being available-for-
sale. Any decision to sell a security classified as available-
for-sale would be based on various factors, including significant
movements in interest rates, changes in maturity mix of Union
National's assets and liabilities, liquidity needs, regulatory
capital considerations and other similar factors. Changes in
unrealized gains or losses on available-for-sale securities, net
of taxes, are recorded as other comprehensive income, a component
of stockholders' equity.
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 the Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 115, the
sale of these securities required that all of Union National's
investment securities be classified as available-for-sale.
Investment securities with a total cost of $10,399,000 and a fair
value of $10,358,000 were transferred to available-for-sale
during the second quarter. The unrealized losses on these
investment securities were recorded net of tax as accumulated
other comprehensive income, an adjustment to stockholders'
equity. Securities classified as being held-to-maturity at
December 31, 2001, are carried in the financial statements at
their amortized cost.
During 2002, in light of record-low interest rates, Union
National began to purchase certain types of mortgage-backed and
asset-backed securities to better position its investment
portfolio for a subsequent increase in interest rates. At
December 31, 2002, the total amortized cost of Union National's
mortgage-backed and asset-backed securities amounted to
$48,217,000, an increase of $14,047,000 over December 31, 2001.
These security purchases were funded through investment cash
flows, payments received on Union National's investment in a pool
of residential mortgage loans and some additional FHLB
borrowings. These securities were generally purchased at a
premium as their coupons were higher than current market interest
rates. Based on high prepayment speeds on these securities, the
premium paid for these bonds has been amortized quickly which has
reduced recorded yields. In the future, as interest rates rise
and prepayment speeds slow down, the recorded yields on the
remaining balance of these securities will increase. The
weighted-average yield on mortgage-backed and asset-backed
securities was 3.43% at December 31, 2002, as compared to 6.09%
at December 31, 2001. With high prepayment speeds experienced in
2002, the estimated average life of these securities is
relatively short and the recorded yield on these securities is
still comparable to other investments with similar maturities and
also compares favorably to current short-term market interest
rates. Cash flows from these securities and changes in market
interest rates are considered in the bank's net interest income
simulation model. See sections on Liquidity and Market Risk -
Interest Rate Risk for further discussion.
Total expected cash flows from investment securities, including
estimated prepayments and expected call options, is currently
estimated at $33,800,000 for 2003, which represents approximately
38% of the bank's investment securities as compared to 19% as
estimated at December 31, 2001, for 2002. The estimated amount
of expected cash flows from investment securities will vary
significantly with changes in assumed interest rates. For
example, an increase in interest rates will decrease the level of
prepayments received on mortgage-backed securities. These
factors affecting the bank's investment securities are included
in the bank's net interest income simulation model. See sections
on Liquidity and Market Risk - Interest Rate Risk for further
discussions on these risks.
Management periodically assesses the strategy of selling
mortgage-backed securities, CMOs and other available-for-sale
securities. Investment security purchases and sales are affected
in order to enhance the bank's net interest margin, while
managing liquidity and interest rate risk within specified
limits. Based on the current interest rate environment,
management will be evaluating its available-for-sale portfolio
for possible opportunities to increase its earnings for the year
2003 and future years through potential investment security
sales. Generally, management will utilize net investment
security gains to offset other balance sheet restructuring costs
including early payoff costs on FHLB borrowings.
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
December 31, 2002, Union National had corporate debt securities
that were rated below investment grade and were carried at a fair
value of $330,000 and had unrealized losses of $146,000. Union
National's ability to fully realize the value of its investment
in various securities, including corporate debt securities, is
dependent on the underlying creditworthiness of the issuing
organization. This creditworthiness may be impacted by various
national economic trends and other factors. As discussed
earlier, Union National carries all of its investments at fair
value with any unrealized gains or losses reported net of tax as
an adjustment to stockholders' equity. Based on management's
assessment, at December 31, 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 amortized cost have not been
provided for in the income statement because management currently
expects these fair value declines to be temporary. As of
December 31, 2002, Union National held corporate debt securities
with a total fair value of $17,224,000, and net unrealized gains
on these securities amounted to $76,000. In addition, there are
no significant concentrations of investments (greater than 10% of
stockholders' equity) in any individual security issuer.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
At December 31, 2002, net unrealized gains for securities
classified as available-for-sale were $1,697,000. In comparison,
at December 31, 2001, net unrealized gains for securities
classified as available-for-sale were $657,000, and the net
unrealized losses for securities classified as held-to-maturity
were $340,000. The unrealized gains on the available-for-sale
securities, net of income tax effect, amounted to an increase in
stockholders' equity of $1,120,000 at December 31, 2002, and
$434,000 at December 31, 2001. Except as discussed under the Net
Interest Income section with regards to the impact of interest
rate changes on the results of operations, management believes
that the effects of any unrealized losses in the available-for-
sale investment portfolio on future earnings, liquidity and
capital resources to be immaterial.
The following shows the summary of investment securities held by
Union National:
(In thousands) Carrying Value at December 31,
____________________________________
2002 2001
___________ _____________________
Available- Available- Held-to-
for-Sale for-Sale Maturity
___________ __________ _________
Obligations of U.S.
Government Agencies $ - $ 1,024 $ -
Obligations of State
and Political Subdivisions 24,262 9,824 11,835
Corporate Securities 17,224 16,264 1,500
Mortgage-Backed Securities 45,392 34,484 -
Asset-Backed Securities 3,470 - -
Equity Securities 331 284 -
___________ __________ _________
Total $ 90,679 $ 61,880 $ 13,335
=========== ========== =========
(In thousands) Carrying Value at December 31,
__________________________________
2000
________________________
Available- Held-to-
for-Sale Maturity
____________ _________
Obligations of U.S.
Government Agencies $ 9,854 $ -
Obligations of State
and Political Subdivisions 9,580 11,639
Corporate Securities 6,757 2,500
Mortgage-Backed Securities 33,892 -
Asset-Backed Securities - -
Equity Securities 244 -
____________ _________
Total $ 60,327 $14,139
============ =========
The following table illustrates the maturities of investment
securities and the weighted-average yields based upon amortized
cost as of December 31, 2002. Yields are shown on a taxable
equivalent basis, assuming a 34% federal income tax rate.
Within 1 - 5 5 - 10 Over
(In thousands) 1 Year Years Years 10 Years
________ _______ ________ _________
Available-for-Sale Securities:
Obligations of State and Political Subdivisions:
Fair Value $ - $ 945 $ 2,036 $21,281
Amortized Cost - 907 1,985 20,556
Yield 7.40% 7.59% 7.61%
Mortgage-Backed Securities by Contractual Maturity:*
Fair Value - 130 9,478 35,784
Amortized Cost - 129 9,365 35,379
Yield 3.62% 2.73% 3.45%
Asset-Backed Securities by Contractual Maturity:*
Fair Value - - - 3,470
Amortized Cost - - - 3,344
Yield - 5.15%
Corporate Securities:
Fair Value 1,003 9,156 2,128 4,937
Amortized Cost 1,002 9,077 2,027 5,042
Yield 4.04% 5.88% 8.09% 5.62%
Equity Securities:
Fair Value
Amortized Cost
Yield
________ _______ ________ _________
Total Securities:
Fair Value $ 1,003 $10,231 $13,642 $65,472
Amortized Cost 1,002 10,113 13,377 64,321
Yield 4.04% 5.99% 4.26% 5.04%
======== ======= ======== =========
* It is anticipated that these mortgage-backed and asset-backed
securities will be repaid prior to their contractual maturity
dates. The weighted-average yield for these securities is
impacted for normal amortization and estimated prepayments based
on current market interest rates.
(In thousands) Total
________
Available-for-Sale Securities:
Obligations of State and Political Subdivisions:
Fair Value $24,262
Amortized Cost 23,448
Yield 7.60%
Mortgage-Backed Securities by Contractual Maturity:*
Fair Value 45,392
Amortized Cost 44,873
Yield 3.30%
Asset-Backed Securities by Contractual Maturity:*
Fair Value 3,470
Amortized Cost 3,344
Yield 5.15%
Corporate Securities:
Fair Value 17,224
Amortized Cost 17,148
Yield 5.96%
Equity Securities:
Fair Value 331
Amortized Cost 169
Yield 8.24%
________
Total Securities:
Fair Value $90,679
Amortized Cost 88,982
Yield 5.03%
========
* It is anticipated that these mortgage-backed and asset-backed
securities will be repaid prior to their contractual maturity
dates. The weighted-average yield for these securities is
impacted for normal amortization and estimated prepayments based
on current market interest rates.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Loans
_____
Net loans were $199,065,000 at December 31, 2002, representing a
2.2% decrease from net loans of $203,581,000 at December 31,
2001. As shown in the following table, the decrease in loans was
primarily related to a decline in residential mortgage and
consumer loans which was significantly offset by an increase in
commercial and industrial mortgage loans. The decline in
residential mortgage loans was a result of significant
refinancing activity in 2002 due to low long-term mortgage rates.
This refinancing activity reduced outstanding mortgage balances
as Union National now sells a majority of its new residential
mortgage loans to the FHLB through a program implemented in the
fourth quarter of 2001. In addition, there has been a decline in
the balance of a pool of residential mortgage loans that Union
National purchased in November 2001. These purchased mortgage
loans had an outstanding balance of $17,984,000 at December 31,
2002, a decline of $5,935,000 from December 31, 2001.
At December 31, 2002, there were no loan concentrations over 10%
of loans outstanding to any one category or borrower. However,
loans secured by real estate constitute 88% of the bank's loan
portfolio; consequently, the quality of these loans is affected
by the region's economy and real estate market. Total net loans
with variable-rate pricing amounted to $89,541,000 at December
31, 2002, and $64,039,000 at December 31, 2001. See section on
Market Risk - Interest Rate Risk.
Other than as described herein, management does not believe there
are any trends, events or uncertainties which are reasonably
expected to have a material adverse impact on future results of
operations, liquidity or capital resources. Further, based on
known information, management believes that the effects of
current and past economic conditions and other unfavorable
business conditions may result in the inability of loans
amounting to $1,689,000 to comply with their respective repayment
terms. These loans are not considered impaired as defined by
current generally accepted accounting principles since it is only
possible, but not probable that they will not be able to comply
with their respective repayment terms. This represents a small
decrease from the amount of $1,893,000 at December 31, 2001.
These loans are secured with real estate, equipment, inventory
and vehicles. Management currently believes that potential
losses on these loans have already been provided for in the
allowance for loan losses. The borrowers are of special mention
since they have shown a decline in financial strength and payment
quality. Management has increased its monitoring of the
borrowers' financial strength. In addition, management expects
that a portion of these loans may be classified as nonperforming
in 2003. The nonperforming loans table, appearing in the section
entitled Nonperforming Assets, does not include the
aforementioned loans.
Loans are composed of the following:
December 31,
__________________________________
(In thousands) 2002 2001 2000
__________ _________ __________
Real Estate Mortgages:
First and Second Residential $114,441 $127,547 $105,903
Commercial and Industrial 48,411 35,842 39,126
Construction and Land
Development 5,405 8,388 4,868
Agricultural 7,147 7,752 8,763
Commercial and Industrial 9,109 9,141 9,446
Consumer 5,416 7,649 8,854
Agricultural 516 569 987
Other 8,315 6,172 8,080
__________ _________ __________
Total Loans 198,760 203,060 186,027
Add: Unamortized Premium on
Purchased Loans 358 558 -
Less: Unearned Income (53) (37) (46)
__________ _________ __________
Net Loans $199,065 $203,581 $185,981
========== ========= ==========
December 31,
____________________________________
(In thousands) 1999 1998
__________ _________
Real Estate Mortgages:
First and Second Residential $103,264 $ 99,984
Commercial and Industrial 34,332 29,968
Construction and Land
Development 5,943 6,586
Agricultural 6,355 5,727
Commercial and Industrial 7,571 6,042
Consumer 8,725 9,311
Agricultural 2,073 2,550
Other 6,653 3,698
__________ _________
Total Loans 174,916 163,866
Add: Unamortized Premium on
Purchased Loans - -
Less: Unearned Income (62) (70)
__________ _________
Net Loans $174,854 $163,796
========== =========
The loan maturities and interest sensitivity of total loans,
excluding residential real estate mortgages and consumer loans at
December 31, 2002, are as follows:
Years to Maturity*
Within 1 - 5 Over
(In thousands) 1 Year Years 5 Years Total
_______ _________ ________ _________
Commercial,
Agricultural and Other $ 8,312 $ 9,498 $55,688 $73,498
Construction and Land
Development 3,794 1,117 494 5,405
_______ _________ ________ _________
Total $12,106 $10,615 $56,182 $78,903
======= ========= ======== =========
Fixed Interest Rates $ 1,837 $ 8,121 $15,054 $25,012
Floating or Adjustable
Interest Rates 10,269 2,494 41,128 53,891
_______ _________ ________ _________
Total $12,106 $10,615 $56,182 $78,903
======= ========= ======== =========
* Due to interest rate levels, economic conditions and other
relevant factors, it is anticipated that there will be loans that
are repaid prior to their contractual maturity dates.
Nonperforming Assets
____________________
Nonperforming loans consist of nonaccruing loans and loans 90
days or more past due. Nonaccruing loans are comprised of loans
that are no longer accruing interest income because of apparent
financial difficulties of the borrower. Interest on nonaccruing
loans is recorded when received only after the past due principal
is brought current and deemed collectible in full. If nonaccrual
loans had been current and in accordance with their original
terms, gross interest income of approximately $92,000 would have
been recorded on such loans for the year ended December 31, 2002,
and $168,000 for the year ended December 31, 2001. Interest
income recognized on such loans approximated $2,000 for the year
ended December 31, 2002, and $4,000 for the year ended December
31, 2002. At December 31, 2002, total nonperforming loans
amounted to $1,674,000, or 0.8%, of net loans, as compared to
$2,204,000, or 1.1% of net loans, at December 31, 2001.
Historically, the percent of nonperforming loans to net loans as
of December 31, for the previous five-year period, was an average
of 0.9%. There are no troubled debt restructurings.
At December 31, 2002, the recorded investment in loans that are
considered to be impaired under generally accepted accounting
principles was $1,128,000 as compared to $681,000 at December 31,
2001. The measure of impairment is based on the fair value of
collateral securing these loans. The related allowance for loan
losses amounted to $194,000 at December 31, 2002, and $107,000 at
December 31, 2001. The average recorded investment in impaired
loans was $1,242,000 during the year ended December 31, 2002, and
$968,000 during the year ended December 31, 2001.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The following shows the summary of nonperforming loans:
December 31,
_________________________________
(In thousands) 2002 2001 2000
_________ ________ _________
Nonaccruing Loans $ 1,310 $ 1,589 $ 1,625
Accruing Loans - 90 days or
more past due 364 615 164
_________ ________ __________
Total Nonperforming
Loans $ 1,674 $ 2,204 $ 1,789
========= ======== ==========
Nonperforming Loans
as a % of Net Loans .8% 1.1% 1.0%
========= ======== ==========
Allowance for Loan
Losses as a % of
Nonperforming Loans 108% 86% 100%
========= ======== ==========
December 31,
___________________________
(In thousands) 1999 1998
_____________ _____________
Nonaccruing Loans $ 1,343 $ 131
Accruing Loans - 90 days or
more past due 132 843
_____________ _____________
Total Nonperforming
Loans $ 1,475 $ 974
========= ========
Nonperforming Loans
as a % of Net Loans .8% .6%
========= ========
Allowance for Loan
Losses as a % of
Nonperforming Loans 121% 179%
========= ========
Foreclosed real estate includes assets acquired through
foreclosure and loans identified as in-substance foreclosures. A
loan is classified as in-substance foreclosure when Union
National has taken possession of the collateral regardless of
whether formal foreclosure proceedings have taken place.
Foreclosed real estate is valued at fair market value, net of
selling costs, at the time of foreclosure and is included in
other assets. Gains and losses resulting from the sale or write-
down of foreclosed real estate and income and expenses related to
the operation of foreclosed real estate are recorded in other
expenses. Foreclosed real estate amounted to $307,000 at
December 31, 2002, and $43,000 at December 31, 2001. Foreclosed
real estate as of December 31, 2002, consisted of four
residential real estate properties and one commercial property.
The foreclosed real estate expense, including cost write-downs to
fair value, which impacted the results of operations amounted to
$22,000 for the year ended December 31, 2002, and $46,000 for the
year ended December 31, 2001.
Loan Quality/Allowance for Loan Losses
______________________________________
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses.
Management is responsible for the adequacy of the allowance for
loan losses, which is formally reviewed by management on a
quarterly basis. The allowance is increased by provisions
charged to operating expense and reduced by net charge-offs.
Management's evaluation of the adequacy of the allowance is based
on Union National's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the
borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions
and other relevant factors. While management uses available
information to make such evaluations, future adjustments to the
allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the evaluation.
In addition, various regulatory agencies, as an integral part of
their examination process, review the bank's allowance for loan
losses. Such agencies may require the bank to recognize
additions to the allowance based on their judgment of information
available to them at the time of their examination. 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.
During 2002, an ongoing loan review was performed on selected
portions of the loan portfolio by an independent consultant.
Senior management evaluates credit risk on a quarterly basis, or
more frequently, as circumstances dictate. At December 31, 2002,
the percent of loans secured by real estate was 88% of the
overall loan portfolio. Union National's current policy
generally requires that the borrower provide 20% equity for
residential mortgage loans. However, certain home equity loans
will be made with less than 20% equity and the interest rate on
the loan is adjusted to reflect this increased risk.
The allowance for loan losses at December 31, 2002, decreased by
$81,000 from the prior year. This decrease was primarily a
result of a decrease in total loans and nonperforming loans. The
ratio of the allowance for loan losses to net loans was 0.91% at
December 31, 2002, as compared to 0.93% at December 31, 2001.
Management believes, based on information currently available,
that the current allowance for loan losses of $1,812,000 is
adequate to meet potential loan losses. For 2003, management
expects loan charge-offs, net of recoveries, to be below the
level of net loan charge-offs for 2002 and 2001.
Analysis of Allowance for Loan Losses
Years Ended December 31,
_________________________________
(In thousands) 2002 2001 2000
__________ ________ _________
Average Loans Outstanding $201,976 $ 186,877 $182,728
========== ========= =========
Allowance for Loan Losses,
Beginning of Year $ 1,893 $ 1,787 $ 1,783
Loans Charged-Off During Year:
Real Estate* 112 133 162
Consumer 86 167 92
Commercial, Industrial
and Agricultural 177 240 169
__________ _________ _________
Total Charge-Offs 375 540 423
Recoveries of Loans
Previously Charged-Off:
Real Estate* 53 5 1
Consumer 52 54 22
Commercial, Industrial
and Agricultural 5 11 7
__________ _________ _________
Total Recoveries 110 70 30
__________ ________ _________
Net Loans Charged-Off 265 470 393
Provision for Loan Losses
Charged to Operations 184 576 397
__________ ________ _________
Allowance for Loan Losses,
End of Year $ 1,812 $ 1,893 $ 1,787
========== ========= =========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .13% .25% .22%
========== ========= =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year .91% .93% .96%
========== ======== =========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
Years Ended December 31,
_____________________
(In thousands) 1999 1998
__________ ________
Average Loans Outstanding $169,667 $162,090
========== ========
Allowance for Loan Losses,
Beginning of Year $ 1,743 $ 1,593
Loans Charged-Off During Year:
Real Estate* 72 16
Consumer 74 186
Commercial, Industrial
and Agricultural 77 34
__________ ________
Total Charge-Offs 223 236
Recoveries of Loans
Previously Charged-Off:
Real Estate* - -
Consumer 35 51
Commercial, Industrial
and Agricultural 14 10
__________ ________
Total Recoveries 49 61
__________ ________
Net Loans Charged-Off 174 175
Provision for Loan Losses
Charged to Operations 214 325
__________ ________
Allowance for Loan Losses,
End of Year $ 1,783 $ 1,743
========== ========
Ratio of Net Loans
Charged-Off to Average
Loans Outstanding .10% .11%
========== =========
Ratio of Allowance for
Loan Losses to Net Loans
at End of Year 1.02% 1.06%
========== =========
* During this five-year period, there were no charge-offs or
recoveries of real estate construction loans.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The allowance for loan losses is evaluated based on an assessment
of the losses inherent in the loan portfolio. This assessment
results in an allowance consisting of two components, a specific
allocation and a portion unallocated to specific loans or
specific groups of loans. The specific allocation component of
the allowance for loan losses reflects expected losses resulting
from the analysis of individual loans, developed through specific
credit allocations for individual loans and historical loss
experience for each loan category as adjusted for current
economic conditions. The determination of the remaining portion
of the allowance inherently involves a higher degree of
uncertainty and considers current risk factors that may not have
yet manifested themselves in Union National's historical loss
factors used to determine the specific allocation component of
the allowance, and it recognizes that knowledge of the portfolio
may be incomplete. This portion of the allowance for loan losses
is established to cover probable and incurred losses in Union
National's overall loan portfolio that have not yet been
identified.
The following sets forth an allocation of the allowance for loan
losses by category. The specific allocation in any particular
category may be reallocated in the future to reflect current
conditions. Accordingly, management considers the entire
allowance to be available to absorb losses in any category.
Amount Percent of Loans
(In thousands) in each Category
_________________ __________________
December 31, 2002:
Commercial, Industrial
and Agricultural $ 1,078 39%
Real Estate-
Residential Mortgages 231 58
Consumer 184 3
Unallocated 319 -
__________ _____
$ 1,812 100%
========== =====
December 31, 2001:
Commercial, Industrial
and Agricultural $ 1,131 33%
Real Estate-
Residential Mortgages 250 63
Consumer 266 4
Unallocated 246 -
__________ _____
$ 1,893 100%
========== =====
December 31, 2000:
Commercial, Industrial
and Agricultural $ 971 38%
Real Estate-
Residential Mortgages 430 57
Consumer 129 5
Unallocated 257 -
__________ _____
$ 1,787 100%
========== =====
December 31, 1999:
Commercial, Industrial
and Agricultural $ 857 36%
Real Estate-
Residential Mortgages 460 59
Consumer 142 5
Unallocated 324 -
__________ _____
$ 1,783 100%
========== =====
December 31, 1998:
Commercial, Industrial
and Agricultural $ 705 33%
Real Estate-
Residential Mortgages 543 61
Consumer 495 6
__________ _____
$ 1,743 100%
========== =====
Liquidity
_________
Union National's objective is to maintain adequate liquidity to
fund needs at a reasonable cost and to provide contingency plans
to meet unanticipated funding needs or a loss of funding
sources, while minimizing interest rate risk. Adequate liquidity
provides resources for credit needs of borrowers, for depositor
withdrawals and for funding corporate operations. Sources of
liquidity are as follows:
* maturing investment securities and the sale of available-
for-sale investment securities;
* overnight correspondent bank borrowings on various credit
lines;
* payments on loans and mortgage-backed securities; and
* a growing core deposit base.
Management believes that its core deposits are fairly stable even
in periods of changing interest rates. Liquidity management is
governed by policies and measured on a quarterly basis. These
measurements indicate that liquidity generally remains stable and
that liquidity consistently exceeds the bank's minimum defined
level. There are no known trends, or any known demands,
commitments, events or uncertainties that will result in, or that
are reasonably likely to result in, liquidity increasing or
decreasing in any material way.
Membership in the FHLB provides the bank with additional
liquidity alternatives such as short- or long-term funding on
fixed- or variable-rate terms. As of December 31, 2002, the bank
had received long-term advances of $65,299,000 from its available
credit of $149,314,000 at the FHLB for purposes of funding loan
demand and mortgage-backed security purchases. Total outstanding
borrowings at December 31, 2002, had a weighted-average rate of
4.68% and total borrowings of $61,252,000 at December 31, 2001,
had a weighted-average rate of 5.09%. As of December 31, 2002,
advances of $5,347,000 are due in 2003 and advances of
$20,000,000 are currently convertible by the FHLB on a quarterly
basis. The FHLB's convertible fixed-rate advances allow the FHLB
the periodic option to convert to a LIBOR adjustable-rate
advance. Upon the FHLB's conversion, the bank has the option to
repay the respective advances in full. See section on Market
Risk - Interest Rate Risk for further analysis of these advances.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Off-Balance Sheet Arrangements and Aggregate
Contractual Obligations
The following table represents Union National's on- and off-
balance sheet aggregate contractual obligations to make future
payments as of December 31, 2002:
(In thousands) Less Than 1-3 4-5 Over 5
1 Year Years Years Years Total
__________ _______ _______ _______ ________
Time Deposits $48,861 $33,005 $10,715 $ 350 $ 92,931
Long-Term Debt 5,347 17,192 12,760 30,000 65,299
Operating Leases 118 108 - - 226
__________ _______ _______ _______ ________
Total $54,326 $50,305 $23,475 $30,350 $158,456
========== ======= ======= ======= ========
In addition, Union National in the conduct of business operations
routinely enters into contracts for services. These contracts
may require payment for services to be provided in the future and
may also contain penalty clauses for the early termination of the
contracts. Union National is contracted with its core date
processor for the provision of certain services including
transaction processing, branch automation and communication
services, trust processing, ATM processing and other various
services. Payments under these contracts amounted to $749,000
for the year ended December 31, 2002. Future payments under
these contracts will vary based on transaction and account
volumes and may also reflect inflationary cost adjustments. The
majority of this contract expires in November 2008 and any early
termination will require the payment of a substantial penalty.
Management is not aware of any other commitments or contingent
liabilities which may have a material adverse impact on the
liquidity or capital resources of Union National.
Union National is also party to financial instruments with off-
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of
credit.
Inflation
_________
Inflation has some impact on Union National's operating costs,
but unlike many other companies, substantially all of Union
National's assets and liabilities are monetary in nature. As a
result, interest rates have a more significant impact on Union
National's performance than the general level of inflation.
Interest rates do not necessarily move in the same direction or
in the same magnitude as prices of goods and services. The
effects of changes in interest rates are discussed in the
following section on Market Risk Interest Rate Risk.
Market Risk - Interest Rate Risk
________________________________
As a financial institution, Union National's primary component of
market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact the level of income and
expense recorded on a large portion of the bank's assets and
liabilities. Virtually all of Union National's interest-
sensitive assets and liabilities are held by the bank, and
therefore, interest rate risk management procedures are performed
by the bank. The nature of the bank's current operations is such
that the bank is not subject to foreign currency exchange or
commodity price risk. Union National does not own any trading
assets.
The objectives of interest rate risk management are to maintain
or increase net interest income over a broad range of market
interest rate movements. The Asset and Liability Management
Committee is responsible for managing interest rate risk using
policies approved by the bank's board of directors. The bank
manages interest rate risk by changing the mix or repricing
characteristics of its investment securities portfolio and
borrowings from the FHLB and by the promotion or development of
specific loan and deposit products. The bank retains an outside
consulting group to assist in monitoring its interest rate risk
using a net interest income simulation model on a quarterly
basis. The simulation model measures the sensitivity of future
net interest income to hypothetical changes in market interest
rates.
In addition, the bank utilizes an interest rate-sensitivity
report called a "GAP" report, which illustrates the time
intervals of cash flows or the next repricing date of interest-
earning assets and interest-bearing liabilities. The bank's GAP
report at December 31, 2002, reflects a positive rate-sensitivity
position throughout the first year, in that rate-sensitive assets
exceed rate-sensitive liabilities. The following analysis
reflects cumulative rate-sensitive assets of $143,547,000, as
compared to cumulative rate-sensitive liabilities of $98,879,000
as of the one-year time frame. The bank's cumulative interest-
sensitivity gap for the one-year time frame is 14.0% of total
assets at December 31, 2002, as compared to a negative 1.9% at
December 31, 2001. The bank manages the interest-sensitivity gap
for the one-year time frame with a guideline of plus 15% to
negative 15% of total assets.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The interest rate sensitivity analysis for the bank with
investment securities at amortized cost at December 31, 2002, is
as follows:
Interest Rate Sensitivity
1 - 90 91 - 365 1 - 3 3 - 5
(In thousands) Days Days Years Years
________ ________ ________ _________
ASSETS
Earning Assets:
Mortgage-Backed and Asset Backed Securities:
Variable $ 756 $ 2,491 $ 586 $ 207
Fixed 11,766 15,076 16,837 244
Other Investment
Securities and
Other Earning Assets 15,613 4,087 11,983 7,704
Net Loans:
Variable 43,150 11,875 21,044 13,472
Fixed 12,617 26,116 37,687 17,208
________ ________ ________ _________
TOTAL $ 83,902 $ 59,645 $ 88,137 $ 38,835
======== ======== ======== =========
LIABILITIES
Deposits:
Interest-Bearing Demand $ 819 $ - $ - $ -
Money Market 34,853 - - -
Savings 624 1,955 - -
Time 15,526 34,782 31,558 10,715
FHLB Advances and
Other Borrowings 5,973 4,347 16,605 10,300
________ ________ ________ _________
TOTAL $ 57,795 $ 41,084 $ 48,163 $ 21,015
======== ======== ======== =========
Cumulative Interest-
Sensitivity Gap $ 26,107 $ 44,668 $ 84,642 $102,462
======== ======== ======== =========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 8.2% 14.0% 26.5% 32.1%
======== ======== ======== =========
Over 5
(In thousands) Years Total
________ ________
ASSETS
Earning Assets:
Mortgage-Backed and Asset-Backed Securities:
Variable $ 6 $ 4,046
Fixed 248 44,171
Other Investment Securities
and Other
Earning Assets 12,304 51,691
Net Loans:
Variable - 89,541
Fixed 16,788 110,416
________ _________
TOTAL $29,346 $299,865
======== =========
LIABILITIES
Deposits:
Interest-Bearing Demand $34,880 $ 35,699
Money Market - 34,853
Savings 26,196 28,775
Time 350 92,931
FHLB Advances and
Other Borrowings 31,461 68,686
________ _________
TOTAL $92,887 $260,944
======== =========
Cumulative Interest-
Sensitivity Gap $38,921
========
Cumulative Interest-
Sensitivity Gap as a Percent
of Total Assets 12.2%
========
The amount of assets and liabilities shown, which reprice or
mature during a particular period, were determined based on the
earlier of when it reprices or when it is to be repaid for each
asset or liability. Callable investment securities are reflected
based on the security's anticipated call date, where the call on
the security is likely when compared to the current interest rate
yield curve. Also, loans and mortgage-backed securities are
reflected based on contractual amortization or contractual
interest rate adjustments and on estimates for prepayments and
refinancings based on current market interest rates. Interest-
bearing demand and savings deposits have always been considered a
stable source of funds, and although the rates are subject to
change, rates on these accounts historically have not changed as
quickly or as often as other loan and deposit rates. Based on an
historical analysis during periods of rising interest rates, a
portion of these deposits will invest in higher yielding
instruments. This portion is determined to be sensitive to
interest rate fluctuations in the earliest periods. Management
believes that the remaining balances of these deposits are not
repriceable based on current industry experience. Management
currently does not expect to fluctuate the interest rates on
these deposit balances in any significant amount that would
materially affect its GAP or income simulation models.
Certain shortcomings are inherent in the method of analysis
presented in the foregoing schedule. For example, although
certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to
changes in market interest rates. Interest rates on certain
types of assets and liabilities may fluctuate in advance of or
lag behind changes in market interest rates. Additionally,
certain repriceable assets, such as adjustable-rate securities or
loans, have features like annual and lifetime rate caps or floors
that restrict changes in interest rates both on a short-term
basis and over the life of the asset. Further, a change in
market interest rates from the interest rate scenarios that
existed on December 31, 2002, would likely cause assumptions,
such as estimated prepayment speeds, refinancings, imbedded
options, early withdrawals and FHLB advance conversion clauses to
significantly change the GAP results above. Based on current
market interest rates, the $20,000,000 in FHLB convertible
advances that are currently convertible on a quarterly basis will
not convert and are shown in the GAP report above based on their
maturity date. In addition, as included in the bank's simulation
model these advances will also not convert if market interest
rates increase 2%.
In an effort to assess market risk, the bank utilizes a
simulation model to determine the effect of gradual increases or
decreases in market interest rates on net interest income and net
income. The aforementioned assumptions are revised based on
defined scenarios of assumed speed and direction changes of
market interest rates. These assumptions are inherently
uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions, as well as management
strategies, among other factors. Because it is difficult to
accurately quantify into assumptions the reaction of depositors
and borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results. While assumptions are developed based upon current
economic and local market conditions, management cannot make any
assurances as to the predictive nature of these assumptions.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve-month period. This is based
on a review of historical changes in market interest rates and
the level and curve of current interest rates. The simulated
results represent the hypothetical effects to the bank's net
interest income and net income. Projections for loan and deposit
growth were ignored in the simulation model. The simulation
model includes all of the bank's earning assets and interest-
bearing liabilities and assumes a parallel and prorated shift in
interest rates over a twelve-month period. The results of the
simulation model could change significantly if there was not a
parallel shift in interest rates and there was a resulting change
in the assumed shape of the interest rate yield curve. The
percentage declines in the table below are measured as percentage
changes from the values of simulated net interest income in the
current rate scenario and the impact of those changes on the
prior year's net income.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As a result of the simulation model, the following reflects the
bank's net interest income and net income sensitivity analysis as
of December 31, 2002 and 2001:
Sensitivity Analysis
Percent Decrease in Categories
_____________________________________
Market Market Market
Interest Interest Current Interest
Rate Rate Market Rate
Decline Decline Interest Increase
of 2% of 1% Rates of 2%
__________ _______ _________ _________
Net Interest Income:
Policy Limit <10% - - <10%
Hypothetical Percent Decrease
In Net Interest Income
from Current Rate Scenario:
As of December 31, 2002 Not Modeled - - -
As of December 31, 2001 <2% Not Modeled - <1%
Net Income:
Hypothetical Percent Decrease
from Prior Year's Net Income:
As of December 31, 2002 Not Modeled - - -
As of December 31, 2001 <5% Not Modeled - <3%
As of December 31, 2002, only a one-percent decline in interest
rates was modeled based on management's assessment of potential
future interest rate levels. The preceding schedule indicates
that as of December 31, 2002, a hypothetical 1% decline or 2%
increase in prevailing market interest rates would have an
immaterial positive impact to the bank's net interest income and
net income. As of December 31, 2001, a hypothetical 2% decline
in prevailing market interest rates would have caused the bank's
net interest income to decline less than 2% from the current rate
scenario and after adjusting for income taxes, a 2% decline in
rates would have caused less than a 5% impact to the net income
in comparison to the net income earned in 2001. In addition, a
2% rise in prevailing market interest rates, as of December 31,
2001, would have caused the bank's net interest income to decline
less than 1% from the current rate scenario and after adjusting
for income taxes, a 2% rise in rates would have caused less than
a 3% impact to net income in comparison to the net income earned
in 2001. These computations do not contemplate any actions
management or the Asset Liability Management Committee could
undertake in response to changes in market conditions or market
interest rates.
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
certain types of mortgage-backed and asset-backed securities to
better prepare its investment portfolio 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
* 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 related discussions in the section on Net
Interest Income.
Stockholders' Equity
____________________
Union National and the bank maintain capital ratios that are well
above the minimum total capital levels required by federal
regulatory authorities. Except as discussed below concerning
Union National's common stock repurchase plan, there are no known
trends or uncertainties, including regulatory matters that are
expected to have a material adverse impact on the capital
resources of Union National for 2003.
On January 9, 2003, 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 4.0% 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).
Union National's average stockholders' equity to average assets
ratio, which measures the adequacy of capital, was 8.39% for
2002, as compared to 8.40% for 2001. The dividend payout ratio,
which represents the percentage of earnings returned to the
stockholders in the form of cash dividends, was 46.6% for 2002
and 48.9% for 2001.
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 Tier 1 and total capital (as defined in the
regulations) to risk weighted assets. Management believes, as of
December 31, 2002, that Union National and the bank meet all
capital adequacy requirements to which they are subject.
As of December 31, 2002, 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The bank maintained the following capital levels and leverage and
risk-based capital ratios:
(In thousands) December 31, December 31,
2002 2001
____________ ____________
Tier I - Total Stockholders' Equity $ 24,621 $ 23,979
Tier II - Allowance for Loan Losses 1,812 1,893
____________ ____________
Total Qualifying Capital $ 26,433 $ 25,872
============ ============
Risk-adjusted On-balance-sheet Assets $207,458 $203,351
Risk-adjusted Off-balance-sheet
Exposure 20,316 11,806
____________ ____________
Total Risk-adjusted Assets $227,774 $215,157
============ ============
Actual Capital Ratio:
Tier I Capital to Average Total Assets 7.88% 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 10.81% 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 11.60% 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 $ 8,211 $ 8,659
============ ============
Consolidated leverage and risk-based capital ratios are not
materially different from the ratios of the bank shown above.
Union National is subject to restrictions on the payment of
dividends to its stockholders pursuant to the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"). The
BCL operates generally to preclude dividend payments if the
effect thereof would render Union National insolvent, or result
in negative net worth, as defined. As a practical matter, Union
National's payment of dividends is contingent upon its ability to
obtain funding in the form of dividends from the bank. Payment
of dividends to Union National by the bank is subject to the
restrictions set forth in the National Bank Act. Generally, the
National Bank Act would permit the bank to declare dividends in
2003 of approximately $2,022,000, plus an amount equal to the net
profits of the bank in 2003 up to the date of any such dividend
declaration.
Union National maintains a Dividend Reinvestment and Stock
Purchase Plan. Stockholders of common stock may participate in
the plan, which provides that additional shares of common stock
may be purchased with reinvested dividends and optional cash
payments within specified limits at prevailing market prices. At
December 31, 2002, the enrollment in the plan was approximately
17% of the shares outstanding. As of December 31, 2002, 99,710
shares have been issued under Union National's Dividend
Reinvestment and Stock Purchase Plan. Union National had
approximately 1,322 stockholders at December 31, 2002, and
approximately 1,292 stockholders at December 31, 2001.
Regulatory Activity
___________________
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of,
and restrictions on, the business of Union National and the bank.
As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National's and the
bank's business is particularly susceptible to being affected by
federal legislation and regulations that may increase the cost of
doing business. Specifically, Union National is susceptible to
changes in tax law that may increase the cost of doing business
or impact Union National's ability to realize the value of
deferred tax assets. Management is not aware of any current
specific recommendations by regulatory authorities or proposed
legislation, which if they were implemented, would have a
material adverse effect upon the liquidity, capital resources or
results of operations. However, the general cost of compliance
with numerous and multiple federal and state laws and regulations
does have, and in the future may have, a negative impact on Union
National's results of operations.
Further, the business of Union National is affected by the state
of the financial services industry in general. The bank is also
routinely examined by the OCC and no material adverse impact is
anticipated on current or future operations and financial
position as a result of this process. 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.
USA PATRIOT Act
_______________
In the wake of the tragic events, of September 11th, on October
26, 2001, President Bush signed the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA
PATRIOT Act, financial institutions are subject to prohibitions
against specified financial transactions and account
relationships as well as enhanced due diligence and "know your
customer" standards in their dealings with foreign financial
institutions and foreign customers. For example, the enhanced
due diligence policies, procedures and controls generally require
financial institutions to take reasonable steps:
* to conduct enhanced scrutiny of account relationships to
guard against money laundering and report any suspicious
transaction;
* to ascertain the identity of the nominal and beneficial
owners of, and the source of funds deposited into, each account
as needed to guard against money laundering and report any
suspicious transactions;
* to ascertain for any foreign bank, the shares of which are
not publicly traded, the identity of the owners of the foreign
bank, and the nature and extent of the ownership interest of each
such owner; and
* to ascertain whether any foreign bank provides
correspondent accounts to other foreign banks and, if so, the
identity of those foreign banks and related due diligence
information.
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Under the USA PATRIOT Act, financial institutions were required
to establish anti-money laundering programs by April 25, 2002.
The USA PATRIOT Act sets forth minimum standards for these
programs, including:
* the development of internal policies, procedures and
controls;
* the designation of a compliance officer;
* an ongoing employee training program; and
* an independent audit function to test the programs.
In addition, the USA PATRIOT Act authorizes the Secretary of the
Treasury to adopt rules increasing the cooperation and
information sharing between financial institutions, regulators
and law enforcement authorities regarding individuals, entities
and organizations engaged in, or reasonably suspected based on
credible evidence of engaging in, terrorist acts or money
laundering activities. Any financial institutions complying with
these rules will not be deemed to have violated the privacy
provisions of the Gramm-Leach-Bliley Act. Union National does
not have any significant international banking relationships, and
does not anticipate that the USA PATRIOT Act will have a material
effect on its business or operations.
Sarbanes-Oxley Act of 2002
__________________________
On July 30, 2002, President Bush signed into law the Sarbanes-
Oxley Act of 2002. The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance,
accounting obligations and corporate reporting. The Sarbanes-
Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act
of 1934. In particular, the Sarbanes-Oxley Act establishes: (i)
new requirements for audit committees, including independence,
expertise and responsibilities; (ii) additional responsibilities
regarding financial statements for the Chief Executive Officer
and Chief Financial Officer of the reporting company; (iii) new
standards for auditors and regulation of audits; (iv) increased
disclosure and reporting obligations for the reporting company
and its directors and executive officers; and (v) new and
increased civil and criminal penalties for violations of the
securities laws. Many of the provisions were effective
immediately while other provisions become effective over a period
of time and are subject to rulemaking by the SEC. Because Union
National's common stock is registered with the SEC, it is
currently subject to this Act.
Regulation W
____________
Transactions between a bank and its "affiliates" are
quantitatively and qualitatively restricted under the Federal
Reserve Act. The Federal Deposit Insurance Act applies Sections
23A and 23B to insured nonmember banks in the same manner and to
the same extent as if they were members of the Federal Reserve
System. The Federal Reserve Board has also recently issued
Regulation W, which codifies prior regulations under Sections 23A
and 23B of the Federal Reserve Act and interpretative guidance
with respect to affiliate transactions. Regulation W incorporates
the exemption from the affiliate transaction rules but expands
the exemption to cover the purchase of any type of loan or
extension of credit from an affiliate. Affiliates of a bank
include, among other entities, the bank's holding company and
companies that are under common control with the bank. Union
National is considered to be an affiliate of the bank. In
general, subject to certain specified exemptions, a bank or its
subsidiaries are limited in their ability to engage in "covered
transactions" with affiliates:
* to an amount equal to 10% of the bank's capital and
surplus, in the case of covered transactions with any one
affiliate; and
* to an amount equal to 20% of the bank's capital and
surplus, in the case of covered transactions with all affiliates.
In addition, a bank and its subsidiaries may engage in covered
transactions and other specified transactions only on terms and
under circumstances that are substantially the same, or at least
as favorable to the bank or its subsidiary, as those prevailing
at the time for comparable transactions with nonaffiliated
companies. A "covered transaction" includes:
* a loan or extension of credit to an affiliate;
* a purchase of, or an investment in, securities issued by
an affiliate;
* a purchase of assets from an affiliate, with some
exceptions;
* the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; and
* the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate.
In addition, under Regulation W:
* a bank and its subsidiaries may not purchase a low-quality
asset from an affiliate;
* covered transactions and other specified transactions
between a bank or its subsidiaries and an affiliate must be on
terms and conditions that are consistent with safe and sound
banking practices; and
* with some exceptions, each loan or extension of credit by
a bank to an affiliate must be secured by collateral with a
market value ranging from 100% to 130%, depending on the type of
collateral, of the amount of the loan or extension of credit.
Regulation W generally excludes all non-bank and non-savings
association subsidiaries of banks from treatment as affiliates,
except to the extent that the Federal Reserve Board decides to
treat these subsidiaries as affiliates.
Concurrent with the adoption of Regulation W, the Federal Reserve
Board has proposed a regulation which would further limit the
amount of loans that could be purchased by a bank from an
affiliate to not more than 100% of the bank's capital and
surplus.
BOARD OF DIRECTORS
William E. Eby
Retired
Franklin R. Eichler
Retired
Mark D. Gainer
President/CEO, Union National Financial Corporation and Union
National Community Bank
Carl R. Hallgren, Esq.
Attorney-Treasurer, Morgan, Hallgren, Croswell and Kane P.C.
David G. Heisey
President, David G. Heisey, Inc.
Darwin A. Nissley
Partner, Nissley Brothers
Lloyd C. Pickell
Lloyd C. Pickell, PA
Benjamin W. Piersol, Jr., R.Ph.
Vice President and Co-Owner, Sloan's Pharmacy, Inc.
Daniel H. Raffensperger
President, Continental Press, Inc.
Donald H. Wolgemuth
Partner, Donegal Producers
Office Locations
COLUMBIA
921 Lancaster Avenue, Columbia, PA 17512
401 Locust Street, Columbia, PA 17512
ELIZABETHTOWN
1275 South Market Street, Elizabethtown, PA 17022
HEMPFIELD
190 Stony Battery Road, Salunga, PA 17538
MANHEIM
701 Lancaster Road, Manheim, PA 17545
MAYTOWN
100 West High Street, Maytown, PA 17550
MOUNT JOY
101 East Main Street, Mount Joy, PA 17552
www.uncb.com
Telephone Banking Center: 717-492-2222
Union National
FINANCIAL CORPORATION
EXHIBIT 23.1
____________
Consent of Beard Miller Company LLP, Independent Auditors
CONSENT OF BEARD MILLER COMPANY LLP
INDEPENDENT AUDITORS
Regarding:
Registration Statements, File No. 33-80093, 333-80739 and No.
333-27837
We consent to the incorporation by reference in the above
listed Registration Statements of our report dated January 24,
2003, relating to the consolidated financial statements of Union
National Financial Corporation incorporated by reference in its
Annual Report (Form 10-K) for the year ended December 31, 2002.
/s/ BEARD MILLER COMPANY LLP
Harrisburg, Pennsylvania
March 24, 2003
EXHIBIT 99
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Union National
Financial Corporation on Form 10-K for the year ending December
31, 2002, as filed with the Securities and Exchange Commission
(the "Report"), I, Mark D. Gainer, President/CEO, certify,
pursuant to 18 U.S.C. Section 1350, as added pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
1. The report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2. To my knowledge, the information contained in the Report
fairly presents, in all material respects the financial condition
and results of operations of Union National as of the dates and
for the periods expressed in the Report.
By /s/ Mark D. Gainer
__________________
President/CEO
Date: March 31, 2003
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Union National
Financial Corporation on Form 10-K for the year ending December
31, 2002, as filed with the Securities and Exchange Commission
(the "Report"), 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/ Clement M. Hoober
______________________
Treasurer/CFO
Date: March 31, 2003