Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,2003
_____________________________
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
_______________ _______________
Commission file number 0-19214
____________________________________________
Union National Financial Corporation
________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2415179
___________________________________ _______________________
(State of Incorporation) (I.R.S. Employer ID No.)
101 East Main Street, P.O. Box 567, Mount Joy, PA 17552
___________________________________________________ ________
(Address of principal executive offices) Zip Code
(717) 653 - 1441
_________________________________________________________________
(Registrant's telephone number, including area code)
Not Applicable
_________________________________________________________________
(Former name, former address, & former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
______________
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
2,507,091 shares of $.25 (par) common stock were
_________________
outstanding as of April 1, 2003.
______________
UNION NATIONAL FINANCIAL CORPORATION
10Q INDEX Page
#
PART I - FINANCIAL INFORMATION: _________
_______________________
Item 1 - Financial Statements
- Consolidated Statements of Financial Condition 1
- Consolidated Statements of Income 2
- Consolidated Statements of Comprehensive Income 2
- Consolidated Statements of Cash Flows 3
- Notes to Consolidated Financial Statements 4-6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-17
Item 3 - Quantitative and Qualitative Disclosures About
Market Risk 18-19
Item 4 - Controls and Procedures 19
PART II - OTHER INFORMATION
_________________
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of
Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature Page 21
Certifications 22-25
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 26-27
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
(Dollars in thousands, except per share data)3/31/03 12/31/02
_________ _________
ASSETS
Cash and Due from Banks $ 9,121 $ 7,215
Interest-Bearing Deposits in Other Banks 273 70
Federal Funds Sold - 2,260
Short-Term Investments - 5,000
_________ _________
Total Cash and Cash Equivalents 9,394 14,545
Investment Securities Available-for-Sale 94,194 90,679
Loans Held for Sale 522 892
Loans(Net of Unearned Income) 194,138 199,065
Less: Allowance for Loan Losses (1,806) (1,812)
_________ _________
Net Loans 192,332 197,253
Premises and Equipment - Net 6,206 6,320
Restricted Investment in Bank Stocks 3,981 3,772
Other Assets 7,029 7,048
_________ _________
TOTAL ASSETS $ 313,658 $ 320,509
========= =========
LIABILITIES
Deposits:
Noninterest-Bearing $ 26,743 $ 31,141
Interest-Bearing 190,071 192,209
_________ _________
Total Deposits 216,814 223,350
Short-Term Borrowings 3,889 3,387
Long-Term Debt 64,299 65,299
Other Liabilities 1,705 1,738
_________ _________
TOTAL LIABILITIES 286,707 293,774
STOCKHOLDERS' EQUITY
Common Stock (Par Value $.25 per share) 689 688
Shares: Authorized - 20,000,000; Issued -
2,757,786 in 2003 (2,753,243 in 2002)
Outstanding - 2,505,882 in 2003 (2,517,469
in 2002)
Surplus 9,015 8,939
Retained Earnings 20,734 20,319
Accumulated Other Comprehensive Income 1,118 1,120
Treasury Stock - 251,904 shares in
2003 (235,774 in 2002), at cost (4,605) (4,331)
_________ _________
TOTAL STOCKHOLDERS' EQUITY 26,951 26,735
_________ _________
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 313,658 $ 320,509
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
____________________________
2003 2002
_____________ _____________
INTEREST INCOME
Interest and Fees on Loans $ 3,535 $ 3,947
Investment Securities:
Taxable Interest 686 779
Tax-Exempt Interest 278 267
Dividends 34 40
Other 10 15
_____________ _____________
Total Interest Income 4,543 5,048
INTEREST EXPENSE
Deposits 904 1,322
Short-Term Borrowings 7 17
Long-Term Debt 809 871
_____________ _____________
Total Interest Expense 1,720 2,210
_____________ _____________
Net Interest Income 2,823 2,838
PROVISION for LOAN LOSSES 7 25
_____________ _____________
Net Interest Income after Provision
for Loan Losses 2,816 2,813
OTHER OPERATING INCOME
Income from Fiduciary Activities 30 31
Service Charges on Deposit Accounts 238 256
Other Service Charges, Commissions, Fees 211 220
Investment Securities Gains/(Losses) 71 (20)
Mortgage Banking Activities 274 80
Other Income 72 77
_____________ _____________
Total Other Operating Income 896 644
OTHER OPERATING EXPENSES
Salaries and Wages 1,181 1,096
Employee Benefits 307 285
Net Occupancy Expense 198 164
Furniture and Equipment Expense 146 158
Professional Fees 126 154
Data Processing Services 159 144
Pennsylvania Shares Tax 57 67
Advertising and Marketing Expenses 57 59
ATM Processing Expenses 63 57
Other Expenses 421 412
_____________ _____________
Total Other Operating Expenses 2,715 2,596
_____________ _____________
Income before Income Taxes 997 861
PROVISION for INCOME TAXES 193 144
_____________ _____________
NET INCOME for PERIOD $ 804 $ 717
============= =============
PER SHARE INFORMATION
Net Income for Period - Basic and Assuming
Dilution $ 0.32 $ 0.28
Cash Dividends $0.155 $0.125
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(UNAUDITED)
Net Income for Period $ 804 $ 717
Other Comprehensive Income, Net of Tax:
Unrealized Holding Gains/(Losses) on Investment
Securities Available-for-Sale Arising
During Period 44 (320)
Reclassification Adjustment for (Gains)/Losses
Included in Net Income (46) 13
_____________ _____________
Total Other Comprehensive Income/(Loss) (2) (307)
_____________ _____________
COMPREHENSIVE INCOME for PERIOD $ 802 $ 410
============= =============
The accompanying notes are an integral part of the consolidated
financial statements.
Union National Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31,
____________________________
(In thousands) 2003 2002
_____________ _____________
CASH FLOWS from OPERATING ACTIVITIES
Net Income $ 804 $ 717
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 195 201
Provision for Loan Losses 7 25
Net Amortization of Investment
Securities' Premiums 351 126
Investment Securities (Gains)/Losses (71) 20
Provision for Deferred Income Taxes 12 7
Increase in Cash-Surrender Value of
Bank-Owned Life Insurance (52) (54)
Gains on Loans Sold (220) (78)
Proceeds from Sales of Loans 6,700 3,663
Loans Originated for Sale (6,110) (3,383)
Increase in Accrued Interest Receivable (52) (116)
(Increase)/Decrease in Other Assets 62 (196)
Increase/(Decrease) in Other Liabilities (33) 49
_____________ _____________
Net Cash Provided by
Operating Activities 1,593 981
CASH FLOWS from INVESTING ACTIVITIES
Proceeds from Sales of
Available-for-Sale Securities 4,052 5,293
Proceeds from Maturities of
Available-for-Sale Securities 8,358 4,709
Proceeds from Maturities of
Held-to-Maturity Securities - 495
Purchases of Available-for-Sale
Securities (16,209) (11,169)
Net Purchases of Restricted
Investments in Bank Stocks (209) (139)
Net Principal Collected on Loans 4,914 1,241
Purchases of Property and Equipment (30) (62)
_____________ _____________
Net Cash Provided by
Investing Activities 876 368
CASH FLOWS from FINANCING ACTIVITIES
Net Increase in Demand Deposits
and Savings Accounts (5,350) (889)
Decrease in Time Deposits (1,186) (11)
Net Increase in Short-Term Borrowings 502 455
Proceeds from Issuance of Long-Term Debt 4,000 3,000
Payment on Long-Term Debt (5,000) (6,315)
Acquisition of Treasury Stock (274) (488)
Issuance of Common Stock 77 88
Cash Dividends Paid (389) (324)
_____________ _____________
Net Cash Used in Financing Activities (7,620) (4,484)
_____________ _____________
Net Decrease in Cash and Cash Equivalents (5,151) (3,135)
CASH and CASH EQUIVALENTS -
Beginning of Year 14,545 13,289
_____________ _____________
CASH and CASH EQUIVALENTS -
End of Period $ 9,394 $ 10,154
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments for:
Interest $ 1,797 $ 2,286
Income Taxes 10 -
The accompanying notes are an integral part of the consolidated
financial statements.
UNION NATIONAL FINANCIAL CORPORATION
MOUNT JOY, PENNSYLVANIA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information contained in this interim report is unaudited
and subject to year-end audit. However, in the opinion of
management, the information reflects all adjustments necessary to
present fairly the financial condition and results of operations
for the periods presented. All such adjustments were of a
normal, recurring nature. All material intercompany transactions
have been eliminated in consolidation. The results of operations
for the three-month period ended March 31, 2003, are not
necessarily indicative of the results to be expected for the full
year.
2. These statements should be read in conjunction with notes to
the financial statements contained in the 2002 Annual Report to
Stockholders.
3. The weighted-average number of shares of common stock
outstanding was as follows:
Basic Assuming Dilution
_________ _________________
Three months ended:
March 31, 2003 2,510,039 2,535,835
March 31, 2002 2,579,461 2,595,090
4. As permitted by SFAS No. 123, Union National accounts for
stock-based compensation in accordance with Accounting Principles
Board Opinion (APB) No. 25. Under APB No. 25, no compensation
expense is recognized in the income statement related to any
options granted under Union National's stock option plans. The
pro forma impact to net income and earnings per share that would
occur if compensation expense was recognized, based on the
estimated fair value of the options on the date of the grant, is
as follows:
Three Months Ended
______________________
(In thousands, except per share data)
March 31, 2003 March 31, 2002
______________ ______________
Net Income - As Reported $ 804 $ 717
Less: Stock Based Compensation Cost (38) (63)
______________ ______________
Net Income - Pro Forma $ 766 $ 654
============== ==============
Net Income Per Share:
As Reported (Basic) $ 0.32 $ 0.28
As Reported (Assuming Dilution) 0.32 0.28
Pro Forma (Basic) 0.31 0.25
Pro Forma (Assuming Dilution) 0.30 0.25
5. 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 April 2003, the Financial Accounting Standards Board issued
Statement No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". This statement clarifies
the definition of a derivative and
incorporates certain decisions made by the Board as part of the
Derivatives Implementation Group process. This statement is
effective for contracts entered into or modified, and for hedging
relationships designated after June 30, 2003, and should be
applied prospectively. The provisions of the statement that
relate to implementation issues addressed by the Derivatives
Implementation Group that have been effective should continue to
be applied in accordance with their respective effective dates.
The provisions of the above statements did not have or are not
expected to have a significant impact on the financial condition
or results of operations of Union National.
In November 2002, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This
Interpretation expands the disclosures to be made by a guarantor
in its financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability
for the fair value of an obligation assumed under certain
specified guarantees. FIN 45 clarifies the requirements of FASB
Statement No. 5, "Accounting for Contingencies". In general, FIN
45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the
guaranteed party based on changes in an underlying that is
related to an asset, liability or equity security of the
guaranteed party, which would include financial standby letters
of credit. Certain guarantee contracts are excluded from both the
disclosure and recognition requirements of this interpretation,
including, among others, guarantees related to commercial letters
of credit and loan commitments. The disclosure requirements of
FIN 45 require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor
could be required to make under the guarantee and the current
amount of the liability, if any, for the guarantor's obligations
under the guarantee. The accounting recognition requirements of
FIN 45 are to be applied prospectively to guarantees issued or
modified after December 31, 2002. Adoption of FIN 45 did not
have a significant impact on Union National's financial condition
or results of operations.
Outstanding letters of credit written are conditional commitments
issued by Union National to guarantee the performance of a
customer to a third party. Union National's exposure to credit
loss in the event of nonperformance by the other party to the
financial instrument for standby letters of credit is represented
by the contractual amount of those instruments. Union National
had $3,023,000 of standby letters of credit as of March 31, 2003.
The Bank uses the same credit policies in making conditional
obligations as it does for on-balance sheet instruments.
The majority of these standby letters of credit expire within the
next twelve months. The credit risk involved in issuing letters
of credit is essentially the same as that involved in extending
other loan commitments. Union National requires collateral and
personal guarantees supporting these letters of credit as deemed
necessary. Management believes that the proceeds obtained
through a liquidation of such collateral and the enforcement of
personal guarantees would be sufficient to cover the maximum
potential amount of future payments required under the
corresponding guarantees. The current amount of the
liability as of March 31, 2003, for guarantees under standby
letters of credit issued after December 31, 2002, is not
material.
7. Certain reclassifications have been made to the 2002
consolidated financial statements to conform to the 2003
presentation.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the
significant changes in the results of operations, capital
resources and liquidity presented in the accompanying
consolidated financial statements for Union National Financial
Corporation, a bank holding company, and its wholly-owned
subsidiary, Union National Community Bank. Union National's
consolidated financial condition and results of operations
consist almost entirely of the bank's financial condition and
results of operations. This discussion should be read in
conjunction with the 2002 Annual Report. Current performance
does not guarantee, assure or indicate similar performance in the
future.
We have made forward-looking statements in this document, and in
documents that we incorporate by reference, that are subject to
risks and uncertainties. Forward-looking statements include
information concerning possible or assumed future results of
operations of Union National Financial Corporation, Union
National Community Bank or the combined company. When we use
words such as "believes," "expects," "anticipates" or similar
expressions, we are making forward-looking statements.
Stockholders should note that many factors, some of which are
discussed elsewhere in this document and in the documents that we
incorporate by reference, could affect the future financial
results of Union National Financial Corporation, Union National
Community Bank or the combined company and could cause those
results to differ materially from those expressed in our forward-
looking statements contained or incorporated by reference in this
document. These factors include the following:
* operating, legal and regulatory risks;
* economic, political and competitive forces; and
* the risk that our analyses of these risks and forces could be
incorrect and/or that the strategies developed to address them
could be unsuccessful.
Union National undertakes no obligation to publicly revise or
update these forward-looking statements to reflect events or
circumstances that arise after the date of this report. Readers
should carefully review the risk factors described in other
documents that Union National periodically files with the
Securities and Exchange Commission.
Critical Accounting Policies
____________________________
The reporting of Union National's financial condition and results
of operations is impacted by the application of accounting
policies by management. Certain accounting policies are
particularly sensitive and require significant judgments,
estimates and assumptions to be made by management in matters
that are inherently uncertain.
Union National's provision for loan losses and the level of the
allowance for loan losses involve significant estimates by
management in evaluating the adequacy of the allowance for loan
losses. 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 may be
necessary if economic conditions or loan credit quality differ
substantially from the assumptions used in making the evaluation.
Union National carries all of its investments at fair value with
any unrealized gains or losses reported net of tax as an
adjustment to stockholders' equity. Based on management's
assessment, at March 31, 2003, 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
Basic and diluted earnings per share for the three months ended
March 31, 2003, amounted to 32 cents, an increase of 14.3%, as
compared to 28 cents per share for the same period of 2002.
Consolidated net income was $804,000 for the three months ended
March 31, 2003, an increase of 12.1%, as compared to $717,000 for
the same period of 2002.
Results of operations for the three months ended March 31, 2003,
as compared to the same period of 2002 were impacted by the
following items:
* Net income increased due to a decrease in the provision for
loan losses.
* Net income increased due to an increase in other operating
income.
* Net income decreased due to an increase in other operating
expenses.
The above items are quantified and discussed in further detail
under their respective sections below.
Net income as a percent of total average assets, also known as
return on average assets (ROA), and net income as a percent of
average stockholders' equity, also known as return on average
equity (ROE) were as follows on an annualized basis:
Three Months Ended March 31,
2003 2002
____ ____
ROA 1.03% 0.94%
ROE 12.09% 11.35%
Management currently expects moderate growth in loans and
deposits for the remainder of 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 the first three months of 2003, Union National experienced
relatively strong commercial loan demand and this is currently
expected to continue for the remainder of 2003. However,
residential mortgage and consumer loan balances declined during
the first quarter of 2003 and this trend is also expected to
continue. Overall, loan balances have declined by $4,927,000
since the beginning of 2003. 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
$15,275,000 at March 31, 2003, a decline of $2,709,000 from
December 31, 2002. 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 $6,110,000 for the three
months ended March 31, 2003, and $3,383,000 for the three months
ended March 31, 2002.
The economy in the bank's market may be negatively impacted by
national events and may be subject to overall national economic
trends. The overall effects of past economic conditions, as well
as other factors, can be seen by a mild lessening of certain
borrowers' financial strength. Management is monitoring these
general and specific trends closely. Their various effects are
discussed later under the section on Credit Risk and Loan
Quality.
Net Interest Income
Net interest income is the amount by which interest income on
loans, investments and other interest-bearing assets exceeds
interest incurred on deposits and other interest-bearing
liabilities. Net interest income is Union National's primary
source of revenue. The amount of net interest income is affected
by changes in interest rates and by changes in the volume and mix
of interest-bearing assets and liabilities.
For analytical and discussion purposes, net interest income and
corresponding yields are presented on a taxable equivalent basis.
Net interest income for the three months ended March 31, 2003,
decreased by $4,000 from the same period of 2002.
In order to enhance the net interest income in future periods,
management has entered into transactions that increase earning
assets funded by advances from the Federal Home Loan Bank (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 March 31, 2003, the bank
received long-term advances of $64,299,000 from its available
credit of $147,360,000 at the FHLB for purposes of funding loan
demand and security purchases. The total advances had a
weighted-average interest rate of 4.54% at March 31, 2003, with
maturities ranging from August 2003 to February 2011.
Impacting net interest income during the first quarter of 2003
and 2002, were costs incurred on the early payoff of some of
these FHLB borrowings. These additional costs were reflected as
increased interest expense on the related
long-term borrowings. Total early payoff costs on borrowings
amounted to $59,000 for the three months ended March 31, 2003,
and $100,000 for the three months ended March 31, 2002. During
the first three months of 2003, Union National restructured
$4,000,000 in long-term borrowings with the FHLB. These
borrowings had a weighted-average rate of 3.91% and were paid off
and were replaced with $4,000,000 of borrowings of slightly
longer or comparable maturities that bear a weighted-average rate
of 1.82%. Gains on the sale of investment securities offset the
costs associated with these payoffs. The restructuring of these
borrowings will benefit Union National with lower funding costs
in future periods. It is currently anticipated that management
may continue to pay off a portion of these borrowings and replace
them with lower current rate funding during the remainder of
2003. In the following discussion, the interest rate on average
interest-bearing liabilities and the net interest margin
percentage is shown both with and without the impact of these
one-time early payoff costs to provide a better comparison to
prior periods.
The net effect of volume growth in average earning assets and
interest-bearing liabilities increased net interest income by
$19,000 in comparing the three months ended March 31, 2003, to
the same period of 2002. Growth in average earning assets was
funded primarily by additional long-term borrowings and increased
deposit balances. Average earning assets increased by 1.6% for
the three months ended March 31, 2003, as compared to the same
period of 2002.
The overall interest rate on the average total earning assets for
the three months ended March 31, 2003, was 6.48%, as compared to
7.27% for the same period of last year. The overall interest
rate on the average interest-bearing liabilities was 2.70% (2.61%
without the impact of early payoff costs on long-term FHLB
borrowings) for the three months ended March 31, 2003, and 3.52%
(3.36% without the impact of early payoff costs on long-term FHLB
borrowings) for the three months ended March 31, 2002. The net
effect of these interest rate changes was to decrease net
interest income in the amount of $23,000 for the three months
ended March 31, 2003, over the same period of 2002. The net
interest margin percentage for the three months ended March 31,
2003, was 4.12% (4.21% without the impact of payoff costs), as
compared to 4.20% (4.34% without the impact of payoff costs) for
the same period of 2002.
The overall decline in interest rates has been prompted by
actions of the Federal Reserve Bank, which started reducing
interest rates in January 2001. Since that time, the prime
interest rate has declined from 9.50% to 4.25%. 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.
For the remainder of 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 and 2003, 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 March 31, 2003, may result in net interest income
for 2003 that reflects a moderate increase over the net interest
income earned during the same period of 2002. Expected growth in
earning assets during the remainder of 2003 should also increase
the bank's net interest margin. This expected growth was not
reflected in the bank's model at March 31, 2003. The yield curve
during the remainder of 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 model. See discussions on Liquidity and
Market Risk - Interest Rate Risk. Union National's net interest
income may also be impacted by future actions of the Federal
Reserve Bank.
Provision for Loan Losses
The provision for loan losses was $7,000 for the three months
ended March 31, 2003, as compared to $25,000 for the three months
ended March 31, 2002. Net charge-offs for the three months ended
March 31, 2003, were $13,000, as compared to $14,000 for the same
period of last year. The decline in the provision for loan
losses can be primarily attributed to a decline in loan balances
of 2.5% since December 31, 2002, as well as management's
assessment of the overall maintenance of the credit quality of
Union National's loan portfolio. As discussed earlier, Union
National has begun to experience a change in the mix of
outstanding loan balances with declining balances of residential
mortgage and consumer loans along with increasing commercial loan
balances. Future adjustments to the allowance, and consequently,
the provision for loan losses, may be necessary if economic
conditions or loan credit quality are substantially different
from the assumptions used in establishing the current level of
the allowance for loan losses.
Other Operating Income
Other operating income increased by $252,000, or 39.1%, for the
three months ended March 31, 2003, as compared to the same period
of 2002. Contributing to the increase in other operating income
as compared to the same period in 2002 was an increase in income
from mortgage banking activities in the amount of $194,000, and
an increase in investment securities gains of $91,000.
The increase in income from mortgage banking activities relates
to increased mortgage sales activity that is a result of low
mortgage rates. These low interest rates have caused both
increased refinancing activity and increased real estate sales
activity in Union National's market area. Union National sells
the majority of its residential mortgage loans to the FHLB, but
servicing is retained by Union National. As of March 31, 2003,
Union National was servicing 198 loans through this program with
an outstanding balance of $19.5 million. Future changes in
interest rates and the corresponding level of refinancing
activity may significantly impact the future level of income from
mortgage banking activities.
Investment securities gains in the first quarter of 2003 were a
result of some restructuring in the investment security
portfolio. After a thorough analysis, certain securities were
sold at a net gain and the funds were invested in other
securities that management believed had better structures with
comparable earnings rates. Management believes these securities
are positioned better for various changes in interest rates. In
addition, as indicated earlier, these gains offset the costs of
the early payoff of FHLB borrowings.
Other operating income (excluding investment securities gains or
losses) as a percentage of total revenue (net interest income and
other operating income) was as follows:
Three Months Ended
__________________
March 31, 2003 22.6%
March 31, 2002 19.0%
Other Operating Expenses
The aggregate of noninterest expenses for the three months ended
March 31, 2003, increased by $119,000, or 4.6%, over the same
period of 2002. This noninterest expense increase is discussed
below as it pertains to the various expense categories.
Employee salaries and wages increased by $85,000, or 7.8%, for
the three months ended March 31, 2003, as compared to the same
period of last year. This increase was due to staff additions,
annual merit and cost-of-living increases and increased
incentives for staff for reaching certain sales and profitability
goals. Staff additions include an experienced business
development officer who will lead our business banking group and
several support staff positions.
The cost of retirement plans and other employee benefits for the
three months ended March 31, 2003, increased by $22,000, or 7.7%,
as compared to the same period of 2002. This was primarily a
result of increased 401(k) profit sharing plan expense and
payroll tax expense, which was due to increased salary levels.
Occupancy, furniture and equipment expenses increased by $22,000,
or 6.8%, for the three months ended March 31, 2003, as compared
to the same period of the previous year. This increase was
primarily related to an increase in snow removal costs in 2003.
Other changes in operating expenses for the three months ended
March 31, 2003, as compared to the three months ended March 31,
2002, included the following:
(In thousands) Change
__________
Professional Fees $ (28)
Data Processing Services 15
Pennsylvania Shares Tax (10)
ATM Processing Expenses 6
Foreclosed Real Estate Expense 16
Appraisal Fees 14
Donations 14
Postage (9)
Amortization of Mortgage Servicing Assets
And Credit Enhancement Fees Receivable 6
Other Losses (24)
The decrease in Pennsylvania Shares Tax and the increase in
donations is a result of contributions that Union National made
under the PA Educational Improvement Tax Credit program. Through
this program, Union National receives a 90% tax credit for
contributions made to certain organizations. The increase in
appraisal fees and amortization of mortgage servicing assets and
credit enhancement fees receivable is related to an increase in
mortgage banking activities. The decrease in postage costs is a
result of a cost savings that resulted from a change in the
sorting of outgoing mail. The decrease in other losses relates
to a robbery loss at one of our retail branch
locations in the first quarter of 2002.
Income Taxes
Union National's income tax expense increased by $49,000 for the
three months ended March 31, 2003, as compared to the same period
of last year. Union National's effective tax rates were as
follows:
Three Months Ended
__________________
March 31, 2003 19.4%
March 31, 2002 16.7%
The effective tax rate for Union National is below the statutory
rate due to tax-exempt earnings on investments, loans and bank-
owned life insurance and the impact of tax credits. The increase
in the effective tax rate for 2003 is due to a lower percentage
of income being derived from tax-exempt sources. The realization
of net deferred tax assets, which amounted to $122,000 at March
31, 2003, is dependent on future earnings of Union National.
Management currently anticipates future earnings will be adequate
to utilize these deferred tax assets.
Regulatory Activity
___________________
From time to time, various types of federal and state legislation
have been proposed that could result in additional regulation of,
and restrictions on, the business of Union National and the bank.
As a consequence of the extensive regulation of commercial
banking activities in the United States, Union National's and the
bank's business is particularly susceptible to being affected by
federal and state legislation and regulations that may increase
the cost of doing business. Specifically, Union National is
susceptible to changes in tax law that may increase the cost of
doing business or impact Union National's ability to realize the
value of deferred tax assets. Management is not aware of any
current specific recommendations by regulatory authorities or
proposed legislation, which if implemented, would have a material
adverse effect upon the liquidity, capital resources or results
of operations. However, the general cost of compliance with
numerous federal and state laws and regulations does have, and in
the future may have, a negative impact on Union National's
results of operations.
Further, the business of Union National is affected by the state
of the financial services industry in general. The bank is
routinely examined by the OCC and no material adverse impact is
anticipated on current or future operations and financial
position as a result of this process. The last Community
Reinvestment Act performance evaluation by the OCC resulted in a
"satisfactory" rating of the bank's record of meeting the credit
needs of its entire community.
Credit Risk and Loan Quality
____________________________
Other than as described herein, management does not believe there
are any trends, events or uncertainties that are reasonably
expected to have a material impact on future results of
operations, liquidity or capital resources. Further, based on
known information, management believes that the effects of
current and past economic conditions, including the continuing
economic slowdown, and other unfavorable specific business
conditions may result in the inability of loans amounting to
$1,563,000 to comply with their respective repayment terms. This
compares to an amount of $1,689,000 at December 31, 2002. These
loans are secured with real estate, equipment,
inventory and vehicles. Management currently believes that
probable losses on these loans have already been provided for in
the allowance for loan losses. The borrowers are of special
mention since they have shown a decline in financial strength and
payment quality. Management has increased its monitoring of the
borrowers' financial strength. In addition, management currently
expects that a portion of these loans may be classified as
nonperforming in the remaining months of 2003.
At March 31, 2003, total nonperforming loans amounted to
$1,798,000, or 0.9% of total net loans, as compared to a level of
$1,674,000, or 0.8%, at December 31, 2002. These loans are
essentially collateralized with real estate. Historically, the
percentage of nonperforming loans to total net loans as of
December 31, for the previous five-year period was an average of
..9%.
Schedule of Nonperforming Assets:
March 31, December 31,
(In thousands) 2003 2002
____________ ____________
Nonaccruing Loans $ 1,438 $ 1,310
Accrual Loans 90 days or more past due 360 364
Restructured Accrual Loans - -
____________ ____________
Total Nonperforming Loans 1,798 1,674
Foreclosed Real Estate 267 307
____________ ____________
Total Nonperforming Assets $ 2,065 $ 1,981
============ ============
Nonperforming Loans
as a % of Net Loans 0.9% 0.8%
============ ============
Allowance for Loan Losses
as a % of Nonperforming Loans 100% 108%
============ ============
In addition to the credit risk present in the loan portfolio,
Union National also has credit risk associated with its
investment security holdings. Based on recent national economic
trends and other factors, Union National has increased its
monitoring of its corporate debt securities and changes in their
credit ratings as published by bond rating agencies. As of March
31, 2003, Union National had corporate debt securities that were
rated below investment grade and were carried at a fair value of
$453,000 and had unrealized losses of $23,000. As of April 30,
2003, these securities had a market value of $486,000 and
unrealized gains of $10,000. 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. Union National carries all of its
investments at fair value with any unrealized gains or losses
reported net of tax as an adjustment to stockholders' equity.
Based on management's assessment, at March 31, 2003, Union
National did not hold any security that had a fair value decline
that is currently expected to be other than temporary.
Consequently, any declines in a specific security's fair value
below amortized cost have not been provided for in the income
statement because management currently expects these fair value
declines to be temporary. As of March 31, 2003, Union National
held corporate debt securities with a total fair value of
$18,409,000 and net unrealized gains on these securities amounted
to $201,000.
Allowance for Loan Losses
_________________________
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable loan losses.
Management is responsible for the adequacy of the allowance for
loan losses, which is formally reviewed by management and the
Board of Directors on a quarterly basis. In addition, ongoing
loan reviews are performed on selected portions of the loan
portfolio by an independent consultant.
The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. Management's periodic
evaluation of the adequacy of the allowance is based on Union
National's past loan loss experience, known and inherent risks in
the portfolio, adverse situations that may affect the borrower's
ability to repay (including the timing of future payments), the
estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions and other relevant
factors. While management uses available information to make
such evaluations, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the
assumptions used in making the evaluation. In addition, various
regulatory agencies, as an integral part of their examination
process, review the bank's allowance for loan losses. Such
agencies may require the bank to recognize additions to the
allowance based on their judgment of information available to
them at the time of their examination. After management's
assessment, no adjustment to the allowance for loan losses was
necessary as a result of the Office of Comptroller's most recent
examination.
Management believes, based on information currently available,
that the current allowance for loan losses of $1,806,000 is
adequate to meet potential loan losses. In addition, management
expects loan charge-offs, net of recoveries for the remainder of
2003 to be below the level of net loan charge-offs for the same
period of 2002.
Analysis of Allowance for Loan Losses:
Three Months Ended
March 31,
(In thousands) 2003 2002
________ ________
Average Total Loans Outstanding
(Less Unearned Income) $196,730 $203,583
======== ========
Allowance for Loan Losses,
Beginning of Period $ 1,812 $ 1,893
Loans Charged-Off During Period 20 57
Recoveries of Loans Previously
Charged-Off 7 43
________ ________
Net Loans Charged-Off 13 14
Addition to Provision for Loan Losses
Charged to Operations 7 25
________ ________
Allowance for Loan Losses,
End of Period $ 1,806 $ 1,904
======== ========
Ratio of Net Loans Charged-Off to Average
Loans Outstanding (Annualized) .03% .03%
======== ========
Ratio of Allowance for Loan Losses to
Net Loans at End of Period 0.93% 0.94%
======== ========
Liquidity
_________
Union National's objective is to maintain adequate liquidity to
fund needs at a reasonable cost and to provide contingency plans
to meet unanticipated funding needs or a loss of funding sources,
while minimizing interest rate risk. Adequate liquidity provides
resources for credit needs of borrowers, for depositor
withdrawals and for funding corporate operations. Sources of
liquidity are as follows:
* proceeds from the sale or maturity of investment securities
* overnight correspondent bank borrowings on various credit
lines and borrowing capacity available from the FHLB;
* acquisition of brokered certificates of deposit (CDs);
* payments on loans and mortgage-backed securities; and
* a growing core deposit base.
Management believes that its core deposits are fairly stable even
in periods of changing interest rates. Liquidity management is
governed by policies and measured on a quarterly basis. These
measurements indicate that liquidity generally remains stable and
consistently exceeds the bank's minimum defined level. There are
no known trends, or any known demands, commitments, events or
uncertainties that will result in, or that are reasonably likely
to result in, liquidity increasing or decreasing in any material
way.
Membership in the FHLB provides the bank with liquidity
alternatives such as short- or long-term funding on fixed- or
variable-rate terms. As of March 31, 2003, the bank had received
long-term advances of $64,299,000 from its available credit of
$147,360,000 at the FHLB for purposes of funding loan demand and
mortgage-backed security purchases. Over the next twelve months,
advances of $3,347,000 are due and advances of $25,000,000 are
convertible. The FHLB's convertible fixed-rate advances allow
the FHLB the periodic option to convert to a LIBOR adjustable-
rate advance. Upon the FHLB's conversion, the bank has the
option to repay the respective advances in full. See section on
Market Risk - Interest Rate Risk for further analysis of these
advances.
As indicated above, another alternative source of liquidity for
Union National is the use of brokered CDs. During the second
quarter of 2002, Union National obtained funding of approximately
$2,000,000 in brokered CDs. These CDs have a final maturity of
two years.
Stockholders' Equity
____________________
Union National and the bank maintain capital ratios that are well
above the minimum total capital levels required by federal
regulatory authorities and are considered to be well-capitalized
under regulatory guidelines. Except as discussed below
concerning Union National's common stock repurchase plan and
retail office expansion plans, there are no known trends or
uncertainties, including regulatory matters that are expected to
have a material impact on the capital resources of Union National
for 2002. In addition, see discussion on Regulatory Activity.
On January 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 represented 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). As of March 31, 2003,
approximately 15,000 shares have been repurchased under this
plan.
Union National also recently announced plans to open a new retail
office location at 38 East Roseville Road in Manheim Township,
PA. Current plans are to open this location during the summer of
2003. In addition, Union National continues to evaluate further
opportunities for retail office expansion in new markets. The
opening of new offices will require significant expenditures for
building improvements and fixed asset purchases.
Union National and the bank have risk-based capital ratios that
exceed the regulatory requirements. The risk-based capital
guidelines require banks to maintain a minimum risk-based capital
ratio of 8.0% at March 31, 2003, as compared to the bank's
current risk-based capital ratio of 11.60%. The total risk-based
capital ratio is computed by dividing stockholders' equity (as
adjusted) plus the allowance for loan losses by risk-adjusted
assets. Risk-adjusted assets are determined by assigning credit
risk-weighting factors from 0% to 100% to various categories of
assets and off-balance-sheet financial instruments. Banking
regulations also require the bank to maintain certain minimum
capital levels in relation to bank assets. Failure to meet
minimum capital requirements could result in prompt regulatory
action. As of March 31, 2003, the bank was categorized as well-
capitalized. Management is not aware of any conditions or events
that would adversely affect the bank's capital. The bank
maintains the following leverage and risk-based capital ratios:
(In thousands) March 31, December 31,
2003 2002
_________ ____________
Tier I - Total Stockholders' Equity $ 24,865 $ 24,621
Tier II - Allowance for Loan Losses 1,806 1,812
_________ ____________
Total Qualifying Capital $ 26,671 $ 26,433
========= ============
Risk-adjusted On-balance-sheet Assets $ 204,822 $ 207,458
Risk-adjusted Off-balance-sheet Exposure 25,156 20,316
_________ ____________
Total Risk-adjusted Assets $ 229,978 $ 227,774
========= ============
Leverage Ratio:
Tier I Capital to Average Total Assets 8.02% 7.88%
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% 10.81%
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% 11.60%
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 $ 8,273 $ 8,211
========= ============
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Market Risk - Interest Rate Risk
________________________________
As a financial institution, Union National's primary component of
market risk is interest rate volatility. Fluctuations in
interest rates will ultimately impact the level of income and
expense recorded on a large portion of the bank's assets and
liabilities. Virtually all of Union National's interest-
sensitive assets and liabilities are held by the bank, and
therefore, interest rate risk management procedures are performed
by the bank. The nature of the bank's current operations is such
that the bank is not subject to foreign currency exchange or
commodity price risk. Union National does not own any trading
assets.
The objectives of interest rate risk management are to maintain
or increase net interest income over a broad range of market
interest rate movements. The Asset and Liability Management
Committee is responsible for managing interest rate risk using
policies approved by the bank's board of directors. The bank
manages interest rate risk by changing the mix or repricing
characteristics of its investment securities portfolio and
borrowings from the Federal Home Loan Bank and by the promotion
or development of specific loan and deposit products. The bank
retains an outside consulting group to assist in monitoring its
interest rate risk using income simulation models on a quarterly
basis. The simulation model measures the sensitivity of future
net interest income to hypothetical changes in market interest
rates.
The simulation model is utilized by the bank to determine the
effect of gradual increases or decreases in market interest rates
on net interest income and net income. Certain assumptions are
made in the simulation model and these are revised based on
defined scenarios of assumed speed and direction changes of
market interest rates. These assumptions are inherently
uncertain due to the timing, magnitude and frequency of rate
changes and changes in market conditions, as well as management
strategies, among other factors. Because it is difficult to
accurately quantify into assumptions the reaction of depositors
and borrowers to market interest rate changes, the actual net
interest income and net income results may differ from simulated
results. While assumptions are developed based upon current
economic and local market conditions, management cannot make any
assurances as to the predictive nature of these assumptions.
The simulation model assumes a hypothetical gradual shift in
market interest rates over a twelve-month period. The simulated
results represent the hypothetical effects on the bank's net
interest income and net income. Projections for loan and deposit
growth are ignored in the simulation model. The simulation model
includes all of the bank's earning assets and interest-bearing
liabilities and assumes a parallel and prorated shift in interest
rates over a twelve-month period.
The simulation model currently indicates that a hypothetical one-
percent general decline in prevailing market interest rates over
a one-year period will have an immaterial positive impact on the
bank's net interest income over the next twelve months as
compared to the constant rate scenario. Only a one-percent
decline in interest rates was modeled at March 31, 2003, based on
management's assessment of potential future interest rate levels.
A hypothetical two-percent general rise in rates will have an
immaterial positive impact on net interest income over the next
twelve months.
In addition to the above scenarios, management modeled the impact
of a "flattening" interest rate yield curve on the bank's net
interest income. The rate assumptions for this scenario included
an increase in short-term interest rates while minimizing
increases in longer-term interest rates. Management determined
that this is a potential scenario considering current market
interest rates as compared to historical average interest rates.
A "flattening" interest rate environment with short-term interest
rates increasing two-percent will have a negligible impact on net
interest income over the next twelve months as compared to the
constant rate scenario. The computations do not contemplate any
actions management or the Asset Liability Management Committee
could undertake in response to changes in market conditions or
market interest rates.
The bank managed its interest rate risk position in 2003 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 the related discussions in the section on Net
Interest Income.
Item 4 CONTROLS AND PROCEDURES
Controls and Procedures
_______________________
Evaluation of Disclosure Controls and Procedures
Union National maintains controls and procedures designed to
ensure that information required to be disclosed in the reports
that the company files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation
of those controls and procedures performed within 90 days of the
filing date of this report, Union National's Chief Executive
Officer and Chief Financial Officer concluded that the disclosure
controls and procedures were adequate.
Changes in Internal Controls
Union National made no significant changes in its internal
controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of the
controls by the Chief Executive Officer and Chief Financial
Officer.
Part II - Other Information:
Item 1. Legal Proceedings
Management is not aware of any litigation that would have a
material adverse effect on the consolidated financial position of
Union National. There are no proceedings pending other than the
ordinary routine litigation incident to the business of Union
National and its subsidiary, Union National Community Bank. In
addition, no material proceedings are pending or are known to be
threatened or contemplated against Union National and the bank by
government authorities.
Item 2. Changes in Securities and Use of Proceeds - Nothing to
report.
Item 3. Defaults Upon Senior Securities - Nothing to report.
Item 4. Submission of Matters to a Vote of Security Holders
Nothing to report.
Item 5. Other Information - Nothing to report.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
Exhibit No. 99 Certification of Principal Executive Officer and
Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as
Added by Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Union National filed a report on form 8-K via EDGAR dated January
9, 2003. 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 announced the first
quarter cash dividend for 2003 and the approval of a stock
repurchase program.
Union National filed a report on form 8-K via EDGAR dated January
24, 2003. 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 fourth
quarter earnings and annual earnings for 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Union National Financial Corporation
(Registrant)
By /s/ Mark D. Gainer
_______________________
Mark D. Gainer
President/Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2003
By /s/ Clement M. Hoober
_______________________
Clement M. Hoober
Treasurer/Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 14, 2003
CERTIFICATION
I, Mark D. Gainer, President/CEO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Union
National Financial Corporation.
2. Based on my knowledge, the quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-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 quarterly 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 quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly 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 quarterly 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: May 14, 2003
CERTIFICATION
I, Clement M. Hoober, Treasurer/CFO, certify, that:
1. I have reviewed this quarterly report on Form 10-Q of Union
National Financial Corporation.
2. Based on my knowledge, the quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.
4. Union National's other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-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 quarterly 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 quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly 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 quarterly 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: May, 14, 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 quarterly report of Union National
Financial Corporation on Form 10-Q for the period ending March
31, 2003, as filed with the Securities and Exchange Commission
(the "Report"), I, Mark D. Gainer, President/CEO, and I, Clement
M. Hoober, Treasurer/CFO, certify, pursuant to 18 U.S.C. Section
1350, as added pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2. To my knowledge, the information contained in the Report
fairly presents, in all material respects the financial condition
and results of operations of Union National as of the dates and
for the periods expressed in the Report.
By /s/ Mark D. Gainer
_________________________
President/CEO
Date: May 14, 2003
By /s/ Clement M. Hoober
_________________________
Treasurer/CFO
Date: May 14, 2003