SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-5735
Union Financial Bancshares, Inc.
(Name of small business issuer in its charter)
Delaware 57-1001177
- --------------------------------------------- --------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
203 West Main Street, Union, South Carolina 29379
- -------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 427-7692
---------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
during the past 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
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
other information statements incorporated by reference in Part III of this
Form 10-KSB or any amendments to this Form 10-KSB. ______
The registrant's gross revenues for the fiscal year ended September
30, 1996 were approximately $9,510,000.
As of December 13, 1996, there were issued and outstanding 814,286
shares of the registrant's Common Stock. The aggregate market value of the
voting stock, including that held by insiders, computed by reference to the
average bid and asked price on December 13, 1996, was approximately
$12,520,000 (814,286 shares at $15.375 per share).
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year
Ended September 30, 1996 (Parts I and II).
2. Portions of the Proxy Statement for the 1997 Annual Meeting of
Shareholders (Part III).
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PART I
Item 1. Business
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General
Union Financial Bancshares, Inc. ("Union Financial") was
incorporated in the State of Delaware in April 1994 for the purpose of
becoming a savings and loan holding company for Union Federal Savings Bank
(the "Bank"). On August 24, 1994, the stockholders of the Bank approved a
plan to reorganize the Bank into the holding company form of ownership. The
reorganization was completed on November 9, 1994, on which date the Bank
became the wholly-owned subsidiary of Union Financial, and the shareholders
of the Bank became shareholders of Union Financial. Prior to completion of
the reorganization, Union Financial had no material assets or liabilities and
engaged in no business activities. Subsequent to the acquisition of Union
Federal, Union Financial has engaged in no significant activity other than
holding the stock of the Bank and certain passive investment activities.
Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to the Bank. Union Financial
and the Bank are collectively referred to as "the Corporation" herein.
The Bank is a federally-chartered, capital stock savings bank
headquartered in Union, South Carolina. The Bank, which was originally
chartered in 1934 as a mutual savings and loan association, converted from
mutual to stock form in 1987. The Bank was known as Union Federal Savings
and Loan Association until 1992, when it converted its charter to a federal
savings bank charter and changed its name to Union Federal Savings Bank. The
Bank conducts its operations through its main office, which is located at 203
West Main Street, Union, South Carolina, and two full service branch offices
located at 508 North Duncan By-Pass, Union, South Carolina and Jonesville,
South Carolina. The Jonesville branch was approved by the OTS in March 1994
and opened with a temporary office in July 1994. A permanent office may be
constructed sometime in the future. For additional information, see
"Properties." The Bank is a member of the Federal Home Loan Bank ("FHLB")
and its deposits are insured up to applicable limits by the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC").
The business of the Bank consists primarily of attracting deposits
from the general public and originating mortgage loans on residential
properties located in Union County, South Carolina. The Bank also makes
commercial real estate, construction and consumer loans and invests in
obligations of the federal government and its agencies and of state and local
municipalities. The Bank purchases both fixed and adjustable rate
mortgage-backed securities issued by Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and Government
National Mortgage Association ("GNMA"). The Bank has purchased fixed and
variable rate mortgages originated by other organizations. Historically, the
Bank's primary lending focus has been on the origination of long-term,
fixed-rate mortgage loans for its portfolio. Beginning in fiscal year 1989,
the Bank began originating adjustable-rate mortgage loans ("ARMs") and in
1992 began selling its fixed-rate loans in the secondary market. See "Lending
Activities." The Bank has no subsidiaries. The principal sources of funds
for the Bank's lending activities include deposits received from the general
public, interest and principal repayments on loans and, to a lesser extent,
borrowings from the FHLB-Atlanta. The Bank's primary source of income is
interest earned on loans and investments. The Bank's principal expense is
interest paid on deposit accounts and borrowings and expenses incurred in
operating the Bank.
Recent Developments
The Bank has entered into a Purchase and Assumption Agreement dated
October 3, 1996 with First Union National Bank of South Carolina pursuant to
which the Bank will acquire First Union's Laurens, South Carolina branch. At
September 30, 1996, this branch had $21,404,000 in deposits. The branch
acquisition is expected to close at the end of the first quarter in 1997.
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Average Balances, Interest and Average Yields/Cost
The following table sets forth certain information for the periods
indicated regarding average balances of assets and liabilities as well as the
total dollar amounts of interest income from average interest-earning assets
and interest expense on average interest-bearing liabilities and average
yields and costs. Such yields and costs for the periods indicated are
derived by dividing income or expense by the average monthly balance of
assets or liabilities, respectively, for the periods presented. Average
balances are derived from month-end balances. Management does not believe
that the use of month-end balances instead of daily balances results in any
material difference in the information presented.
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<TABLE>
Year Ended September 30,
--------------------------------------------------------------------------------------
1996 1995 1994
-------------------------- ---------------------------- ---------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- ------- -------- -------- ------
(Dollars in Thousands)
Interest-earning
assets:
Loans receivable,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
net (1) . . . . $73,026 $6,436 8.81% $ 75,959 $6,702 8.82% $69,323 $6,281 9.06%
Mortgage-backed
securities. . . 16,867 1,105 6.55 20,166 1,147 5.69 20,814 1,377 6.62
Investment securities:
Taxable . . . . 18,891 1,249 6.61 20,258 1,186 5.89 16,733 866 5.18
Nontaxable. . . 2,665 122 4.58 4,050 159 3.93 2,694 90 3.34
------ ----- ------- ----- ------ ---
Total investment
securities. . . 21,556 1,371 6.36 24,308 1,345 5.53 19,427 956 4.92
------ ----- ------ ----- ------ ---
Overnight deposits. 2,747 92 3.35 2,024 71 3.5 4,046 152 3.76
------ ----- ------ ----- ------ ---
Total interest-
earning assets.114,196 9,004 7.88 122,457 9,265 7.5 113,610 8,766 7.72
Non-interest-
earning assets. . 3,821 4,054 4,211
------- ------- -------
Total
assets. . $118,017 $126,511 $117,821
======== ======== ========
Interest-bearing liabilities:
Savings accounts. $11,641 302 2.59 $ 13,740 422 3.07 $ 16,198 475 2.93
NOW accounts. . . 12,581 264 2.10 12,366 303 2.45 12,799 292 2.28
Certificate
accounts. . . . 70,069 3,913 5.58 67,215 3,370 5.01 68,872 2,830 4.11
FHLB advances and
other borrowings. 9,499 571 6.01 19,693 1,165 5.92 7,783 290 3.73
------ ----- ------ ----- ----- -----
Total interest-
bearing
liabilities 103,790 5,050 4.87 113,014 5,260 4.61 105,652 3,887 3.68
----- ----- -----
Non-interest-bearing
liabilities. . . 1,936 2,266 1,231
------- ------- -------
Total
liabilities 105,726 115,280 107,357
------- ------- -------
Shareholders'
equity. . . . . . 12,291 11,231 10,464
------ ------ ------
Total liabilities and
shareholders'
equity. . .$118,017 $126,511 $117,821
======== ======== ========
Net interest
income . . . . $3,954 $4,005 $4,879
====== ====== ======
Interest rate spread (2). . 3.01% 2.96% 4.04%
Net interest margin (3) . . 3.46% 3.27% 4.29%
Ratio of average interest-earning
assets to average interest-bearing
liabilities. . 1.10x 1.08x 1.09x
- ---------------------
(1) Average loans receivable includes nonaccruing loans. Interest income does not include interest on
loans 90 days or more past due.
(2) Represents difference between weighted average yield on all interest-earning assets and weighted
average rate on all interest-bearing liabilities.
(3) Represents net interest income before provision for loan losses as a percentage of average
interest-earning assets.
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Selected Financial and Other Data
The information contained in the tables captioned "Selected
Financial and Other Data" contained in the Corporation's Annual Report to
Stockholders for the Fiscal Year Ended September 30, 1996 ("Annual Report")
is incorporated herein by reference.
Lending Activities
General. The principal lending activity of the Corporation has
historically been the origination of conventional single family residential
mortgage loans. The Corporation's net loan portfolio totaled approximately
$86.0 million at September 30, 1996, representing approximately 67.1% of
total assets. On that date, 82.5% of total loans consisted of loans secured
by mortgages on one- to four-family residential properties. The balance of
the Corporation's outstanding loans on that date consisted primarily of
commercial real estate loans, consumer loans and construction loans on one-
to four-family properties. At September 30, 1996, approximately $32.7
million, or 38.0% of the Corporation's total loan portfolio, consisted of
long-term, fixed-rate mortgage loans. As of September 30, 1996, ARMs
represented approximately $39.4 million, or 45.8% of the total loan
portfolio. See "Real Estate Loans." At September 30, 1996, construction
loans accounted for $3.0 million (net of undisbursed principal of $1.6
million), or 3.5% of the loan portfolio.
Set forth below is selected data relating to the composition of the
Corporation's loan portfolio on the dates indicated (dollars in thousands):
At September 30,
--------------------------------------------------------------
1996 1995 1994
------------------- ------------------ ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
First mortgage
loans:
Conventional $70,959 82.51% $57,871 78.82% $46,193 65.16%
Construction
loans . . . 4,627 5.38 5,683 7.74 20,500 28.92
Participation
loans
purchased. . 1,133 1.32 571 0.78 419 0.59
------ ------ ------ ----- ------- ------
Total mortgage
loans . . 76,719 89.21 64,125 87.34 67,112 94.67
------ ----- ------ ----- ------- -------
Second mortgage
loans. . . . 1,484 1.73 670 0.91 91 0.13
Consumer and installment
loans. . . 9,871 11.48 10,460 14.24 11,780 16.61
Savings account
loans. . . . 414 0.48 650 0.88 568 0.80
------ ------ ------- ------ ------- -----
Total
loans. . 88,488 102.90 75,905 103.37 79,551 112.21
------ ------ ------ ------ ------ ------
Less:
Undisbursed loans
in process (1,644) (1.91) (1,421) (1.94) (7,745) (10.93)
Allowance for
loan losses. (799) (0.93) (878) (1.19) (754) (1.06)
Deferred loan
fees . . . . (48) (0.06) (175) (0.24) (157) (0.22)
------- ------- -------- ------ ------- ------
Net loans
receivable $85,997 100.00% $ 73,431 100.00% $70,895 100.00%
======= ====== ======== ====== ======= ======
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The following table sets forth, at September 30, 1996, certain
information regarding the dollar amount of principal repayments for loans
becoming due during the periods indicated (in thousands). Demand loans
(loans having no stated schedule of repayments and no stated maturity) and
overdrafts are reported as due in one year or less.
Due Due Due
After After After
Due 1 Year 3 Years 5 Years
Within Through Through Through Due After
One 3 5 10 10
Year Years Years Years Years Total
-------- -------- -------- ------- -------- ------
First mortgage loans:
Conventional loans $5,505 $6,230 $5,901 $13,130 $40,193 $70,959
Construction
loans (a) 4,627 -- -- -- -- 4,627
Participation loans
purchased 8 -- -- -- 1,125 1,113
Second mortgage loans -- 45 109 375 955 1,484
Consumer and installment
loans 6,428 1,913 704 356 470 9,871
Savings account loans 414 -- -- -- -- 414
------- ------ ------ ------- ------- -------
Total $16,982 $8,188 $6,714 $13,861 $42,743 $88,488
======= ====== ====== ======= ======= =======
---------------------
(a) These construction loans include construction/permanent loans.
The actual average life of mortgage loans is substantially less
than their contractual term because of loan repayments and because of
enforcement of due-on-sale clauses which give the Corporation the right to
declare a loan immediately due and payable in the event, among other things,
that the borrower sells the real property subject to the mortgage and the
loan is not repaid. The average life of mortgage loans tends to increase,
however, when current mortgage loan rates substantially exceed rates on
existing mortgage loans.
The following table sets forth the dollar amount of loans due after
September 30, 1997 which have fixed rates of interest and which have
adjustable rates of interest (in thousands).
Fixed Rate Adjustable Rate Total
----------- ---------------- ------
Real estate mortgage loans $27,194 $39,385 $66,579
Consumer and other loans 3,443 1,484 4,927
------- ------- -------
Total $30,637 $40,869 $71,506
======= ======= =======
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Real Estate Loans. The primary lending activity of the Corporation
has been the origination of conventional mortgage loans to enable borrowers
to purchase existing single family homes or to construct new homes. The
Corporation's residential real estate loan portfolio also includes loans on
multi-family dwellings (more than five units). At September 30, 1996,
approximately 85.5% of the Corporation's total loan portfolio consisted of
loans secured by residential real estate (net of undisbursed principal).
OTS regulations limit the amount which federally chartered savings
institutions may lend in relationship to the appraised value of the real
estate securing the loan, as determined by an appraisal at the time of loan
origination. Federal regulations permit a maximum loan-to-value ratio of
100% for one- to four-family dwellings and 80% for all other real estate
loans. The Corporation's lending policies, however, limit the maximum
loan-to-value ratio on one- to four-family real estate mortgage loans to 80%
of the lesser of the appraised value or the purchase price. Any
single-family loan made in excess of an 80% loan-to-value ratio and any
commercial real estate loan in excess of a 75% loan-to-value ratio is
required to have private mortgage insurance or additional collateral. In the
past, the Corporation has originated some commercial real estate in excess of
a 75% loan-to-value ratio without private mortgage insurance or additional
collateral.
The loan-to-value ratio, maturity and other provisions of the loans
made by the Corporation have generally reflected a policy of making less than
the maximum loan permissible under applicable regulations, market conditions,
and underwriting standards established by the Corporation. Mortgage loans
made by the Corporation are generally long-term loans (15-30 years),
amortized on a monthly basis, with principal and interest due on each month.
In the Corporation's experience, real estate loans remain outstanding for
significantly shorter periods than their contractual terms. Borrowers may
refinance or prepay loans, at their option, with no prepayment penalty.
The Corporation offers a full complement of mortgage lending
products with both fixed and adjustable rates. Due to the nature of the
Corporation's marketplace, only a small percentage of "local" loans are
adjustable-rate loans. The majority of adjustable-rate loans in the
portfolio are originated outside of Union County by third party originators.
The Corporation has established a network of third party loan brokers who
originate loans for the Corporation, as well as other originators, throughout
the state of South Carolina. These loans are originated and underwritten
using the same terms and conditions as loans originated by the Corporation.
The Corporation offers ARMs tied to U.S. Treasury Bills with a maximum
interest rate adjustment of 2% annually and 6% over the life of the loan. At
September 30, 1996, the Corporation had approximately $39.4 million of ARMs,
or 45.8% of the Corporation's total outstanding loan portfolio.
At September 30, 1996, 38.0% of the Corporation's loan portfolio
consisted of long-term, fixed-rate real estate loans. Because of this high
concentration of fixed-rate loans, the Corporation is more vulnerable to a
reduction in net interest income during periods of increasing market interest
rates. Net interest income depends to a large extent on how successful the
Corporation is in "matching" interest-earning assets and interest-bearing
liabilities. The Corporation has taken steps to reduce its exposure to
rising interest rates. For a discussion of these steps, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report.
Beginning in fiscal year 1992, the Corporation began selling a
portion of current year loan production to the FHLMC. The Corporation sells
fixed-rate loans with maturities ranging from ten to 30 years. This activity
is one method used by the Corporation to reduce its interest rate risk
exposure. The loans are sold without recourse and the Corporation retains 25
basis points for servicing these loans. During the year ended September 30,
1996, the Corporation sold approximately $800,000 of its fixed-rate mortgage
loans.
The Corporation purchases participation interests from other
financial institutions on a selected basis. These purchased interests are
adjustable-rate loans and are collaterized by either residential or
commercial real estate. At September 30, 1996, these interests totaled
approximately $1.1 million. The Corporation has purchased commercial loans
and participation interests from the Service Corporation of South Carolina
but discontinued the practice due to the losses experienced on these loans.
The Corporation has experienced no significant losses on the remaining
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Service Corporation loans in the past year. The outstanding balance at
September 30, 1996 of loans purchased from the Service Corporation of South
Carolina was approximately $103,000.
Commercial real estate loans constituted approximately $3.0 million,
or 3.5% of Union Financial's loan portfolio at September 30, 1996.
Commercial real estate loans consist of permanent loans secured by
multi-family properties, generally apartment houses, as well as commercial
and industrial properties, including office buildings, warehouses, shopping
centers, hotels, motels and other special purpose properties. Commercial
real estate loans have been originated and purchased for inclusion in the
Corporation's portfolio. These loans generally have 20 to 30 year
amortization schedules and are callable or have balloon payments of five to
ten years. Typically, the loan documents provide for adjustment of the
interest rate every one to three years. Fixed-rate loans secured by
multi-family residential and commercial properties have terms ranging from 20
to 25 years.
Loans secured by commercial properties may involve greater risk than
single-family residential loans. Such loans generally are substantially
larger than single-family residential loans. The payment experience on loans
secured by commercial properties typically depends on the successful
operation of the properties, and thus may be subject to a greater extent to
adverse conditions in the real estate market or in the economy generally.
Construction Loans. Union Financial engages in construction lending
that is primarily secured by single family residential real estate and, to a
much lesser extent, commercial real estate. These loans are made for a
maximum 12-month construction period and require monthly interest payments.
In some cases these loans automatically convert to a permanent loan requiring
monthly principal and interest payments. The Corporation also grants
construction loans to individuals with a takeout for permanent financing from
another financial institution, and to approved builders on both presold and
unsold properties.
Loan brokers are the Corporation's primary source for construction
loans. The loan broker sends the Corporation both individuals seeking
construction financing for their personal dwelling or builders seeking lines
of credit for the construction of single family residences on both presold
and unsold properties. Individuals are made construction loans that mature
in one year or less or construction/permanent loans that convert to permanent
loans at the end of the construction period. Builders are made construction
loans for a term not to exceed 12 months. Generally, all draw inspections
are handled by the appraiser who initially appraised the property; however,
in some instances the draw inspections are performed by the originating
brokerage firm.
Construction financing overall is generally considered to involve a
higher degree of credit risk than the long-term financing of residential
properties. The Corporation's risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. If the estimate of construction cost
or the salability of the property upon completion of the project proves to be
inaccurate, the Corporation may be required to advance funds beyond the
amount originally committed to permit completion of the development. If the
estimate of value proves to be inaccurate, the Corporation may be confronted
at or prior to the maturity of the loan with a projection of a value which is
insufficient to assure full repayment.
At September 30, 1996, the Corporation had approximately $4.6
million outstanding in construction loans, including approximately $1.6
million in undisbursed proceeds. Of the $4.6 million in construction loans
at September 30, 1996, approximately $2.0 million were "speculative," meaning
that, at the time the loan was made, there was no sales contract or permanent
loan in place for the finished home. Substantially all of these loans were
secured by one-to-four family residences. Although these loans afford the
Corporation the opportunity to achieve higher interest rates and fees with
shorter terms to maturity than do single-family permanent mortgage loans,
construction loans are generally considered to involve a higher degree of
risk than single-family permanent mortgage lending due to (i) the
concentration of principal among relatively few borrowers and development
projects, (ii) the increased difficulty at the time the loan is made of
estimating the building costs and selling price of the residence to be built,
(iii) the increased difficulty and costs of monitoring the loan, (iv) the
higher degree of sensitivity to increases in market rates of interest and (v)
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the increased difficulty of working out loan problems. Speculative
construction loans have the added risk associated with identifying an
end-purchaser for the finished home.
Consumer Loans. Federal regulations permit federally chartered
thrift institutions to make secured and unsecured consumer loans up to 35% of
the institution's assets. In addition, a federal thrift institution has
lending authority above the 35% category for certain consumer loans, such as
home equity loans, property improvement loans, mobile home loans and loans
secured by savings accounts. The Corporation's consumer loan portfolio
consists primarily of automobile loans on new and used vehicles, mobile home
loans, boat loans, home equity loans, property improvement loans, loans
secured by savings accounts and unsecured loans. As of September 30, 1996,
consumer loans amounted to $9.9 million, or 11.5% of the Corporation's total
loan portfolio. The Corporation makes consumer loans to serve the needs of
its customers and as a way to improve the interest-rate sensitivity of the
Corporation's loan portfolio. Consumer loans tend to bear higher rates of
interest and have shorter terms to maturity than residential mortgage loans;
however, nationally, consumer loans have historically tended to have a higher
rate of default than residential mortgage loans.
In October 1992, the Corporation started aggressively buying
automobile dealer loans (loans originated by the selling automobile dealer)
to augment the Corporation's own origination of consumer loans. The
Corporation continued this practice until April 1994 when its loss experience
led it to significantly reduce the origination of this product and tighten
underwriting guidelines. The Corporation purchased approximately $5.6
million of these loans over this time period. As of September 30, 1996
approximately $1.2 million remained. During fiscal 1996 the Corporation
experienced net writeoffs of approximately $73,000 as a result of the
purchase of dealer paper. Management is closely monitoring these loans and
believes that the allowance of approximately $174,000 allocated to consumer
loans is sufficient to cover future losses.
Loan Solicitation and Processing. Loan originations come from both
walk-in customers and loan brokers. The loan origination process for walk-in
customers includes an initial interview with an officer of the Corporation
for the purpose of obtaining a formal application. Upon receipt of a loan
application from a prospective borrower, a credit report is ordered to verify
specific information relating to the loan applicant's employment, income and
credit standing. This information may be further verified by personal
contacts with other reference sources. An appraisal of the real estate
intended to secure the proposed loan is undertaken by pre-approved,
independent fee appraisers. As soon as the required information has been
obtained and the appraisal completed, the loan is submitted to the
authorized officer, loan committees or full Board of Directors for review.
The Corporation utilizes various officers and loan committees for the
approval of real estate loans. The President/Chief Executive Officer has the
authority to approve loan requests up to and including $300,000 in secured
credit and up to and including $100,000 in unsecured credit. The Board of
Directors has appointed an Executive Loan Committee comprised of five senior
executive Bank officers consisting of the President/Chief Executive Officer,
the Senior Vice President/Chief Financial Officer, the Vice President/Chief
Operating Officer, the Vice President/Credit Administration Manager, and Vice
President/Mortgage Lending Sales Manager. This Committee has the authority
to approve all loan requests up to and including $500,000 in secured credit
and up to and including $150,000 in unsecured credit. A quorum of two
members is required for any action. The Board of Directors has also
appointed a Board Loan Committee comprised of two members elected annually
from the Board of Directors and four senior executive officers of the Bank.
A quorum of three members, including at least one Board member, is required
for any action. This Committee has the authority to approve all secured and
unsecured loan requests up to the Bank's legal lending limit with the
exception of a single loan request exceeding $1,000,000 in secured credit and
exceeding $300,000 in unsecured credit. Single loan requests exceeding
$1,000,000 in secured credit and $300,000 in unsecured credit require
approval of the entire Board of Directors.
Loan applicants are promptly notified of the decision of the
Corporation by telephone, setting forth the terms and conditions of the
decision. If approved, these terms and conditions include the amount of the
loan, interest rate, amortization term, and a brief description of the real
estate to be mortgaged to the Corporation. The Corporation also issues a
commitment letter to the potential borrower which typically remains in effect
for 30 days. The Corporation's experience is that very few commitments go
unfunded. See "Loan Commitments." The borrower is required to pay all costs
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of the Corporation, as well as his/her own costs, incurred in connection with
the particular loan closing. The Corporation originated approximately $14.6
million in mortgage loans from walk-in customers during fiscal year 1996.
The Board of Directors has appointed a second review loan committee
to review all denied loan applications. This committee reviews the rationale
used to deny credit and reviews denied applications for the possibility of
being able to supply credit under a different loan program, or under
different terms and conditions. Every attempt is made to supply credit to
creditworthy applicants in a manner consistent with their needs.
The process for brokered loans is essentially the same as for
walk-in customers except that the initial underwriting is performed by the
loan broker. All brokered loans must conform to the same underwriting
standards applied to walk-in customers. The review and approval process is
also the same for these types of loans. The Corporation closed approximately
$14.4 million in mortgage loans originated by brokers during the year ended
September 30, 1996.
Loan Originations, Purchases and Sales. Prior to fiscal year 1992,
all mortgage loans originated by the Corporation were retained in the
Corporation's loan portfolio. Most of these loans were long-term, fixed-rate
real estate loans. Beginning in 1992, the Corporation began selling a
portion of its current long-term, fixed-rate loan production to FHLMC on a
servicing-retained basis. These were cash sales with no recourse provisions.
The Corporation receives 25 basis points for servicing these loans.
The Corporation purchases participation interests in loans
originated by other institutions. These participation interests are on both
residential and commercial properties and carry either a fixed or adjustable
interest
rate.
The following table sets forth the Corporation's loan origination
and sale activity for the periods indicated, (in thousands):
Year Ended September 30,
-----------------------------------
1996 1995 1994
---- ---- ----
Loans originated:
First mortgage loans:
Loans on existing property $25,853 $ 8,462 $ 19,224
Construction loans 2,516 1,770 27,437
Total mortgage loans
originated 28,369 20,232 46,661
Consumer and other loans 8,139 6,302 7,794
------ ------ ------
Total loans originated $36,508 $26,534 $54,455
======= ======= =======
Loans purchased $ 570 $ -- $ --
Loans sold $ 810 $ 3,299 $ 9,770
Loan Commitments. The Corporation's commitments to make conventional
mortgage loans on existing residential dwellings are normally made for
periods of up to 30 days from the date of loan approval. Union Financial's
total loan commitments outstanding as of September 30, 1996 were
approximately $894,000. See "Financial Condition, Liquidity and Capital
Resources" in the Annual Report.
Loan Origination and Other Fees. In addition to interest earned on
loans and fees for making loan commitments, the Corporation charges
origination fees or "points" for originating loans. Loan origination fees
are usually a percentage of the principal amount of the mortgage loan,
typically between .5% and 2%, depending on the terms and conditions. The
Corporation does not receive origination fees on broker loans, but does
receive a $150 review fee. The Corporation also offers loan products that
require no origination fees to walk-in customers. Other fees collected
11
<PAGE>
<PAGE>
include late charges applied to delinquent payments and fees collected in
connection with loan modifications. The Corporation charges a 5% late charge
fee on payments delinquent 15 days or more on new loan originations, loan
modifications, loan assumptions and loans currently in the Corporation's
portfolio where applicable. The 5% late charge is calculated on the
delinquent monthly principal and interest payment amount. Late charges and
modification fees do not constitute a material source of income. Current
accounting standards require fees received (net of certain loan origination
costs) for originating loans to be deferred and amortized into interest
income over the contractual life of the loan. As of September 30, 1996, the
Corporation had net deferred loan fees of approximately $48,000.
Problem Assets and Asset Classification. When a borrower fails to
make a required payment on a loan, the Corporation attempts to cure the
default by contacting the borrower. In general, borrowers are contacted
after a payment is more than 30 days past due. In most cases, defaults are
cured promptly. If the delinquency on a mortgage loan is not cured through
the Corporation's normal collection procedures, or an acceptable arrangement
is not worked out with the borrower, the Corporation will institute measures
to remedy the default, including commencing a foreclosure action. The
Corporation generally does not accept voluntary deeds of the secured property
in lieu of foreclosure.
Loans are reviewed on a regular basis and an allowance for
uncollectible interest is established against accrued interest receivable
when, in the opinion of management, the collection of additional interest is
doubtful. An allowance for uncollectible interest on real estate loans and
consumer loans is established when either principal or interest is more than
90 days past due. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment
of the ultimate collectibility of the loan. See Note 3 of Notes to Financial
Statements.
The Corporation generally determines a loan to be impaired at the
time management believes that it is probable that the principal and interest
may be uncollectible. Management has determined that, generally, a failure
to make a payment within a 90-day period constitutes a minimum delay or
shortfall and does not generally constitute an impaired loan. However,
management reviews each past due loan on a loan-by-loan basis and may
determine a loan to be impaired prior to the loan becoming over 90 days past
due, depending upon the circumstances of that particular loan. A loan is
classified as a nonaccrual at the time management believes that the
collection of interest is improbable, generally when a loan becomes 90 days
past due. The Corporation's policy for charge-off of impaired loans is on a
loan-by-loan basis. At the time management believes the collection of
interest and principal is remote, the loan is charged off. The Corporation's
policy is to evaluate impaired loans based on the fair value of the
collateral. Interest income from impaired loans is recorded using the cash
method.
Real estate acquired by the Corporation as a result of foreclosure
or by deed in lieu of foreclosure is classified as real estate acquired in
the settlement of loans. When such property is acquired it is recorded at
the lower of the unpaid principal balance of the related loan or its fair
market value. Any subsequent write-down of the property is charged to
income. See Note 5 of Notes to Consolidated Financial Statements.
The following table sets forth information with respect to the
Corporation's non-performing assets for the periods indicated (dollars in
thousands). It is the policy of the Corporation to cease accruing interest
on loans 90 days or more past due. At the dates indicated, there were no
restructured loans within the meaning of FAS 15 and no impaired loans as
defined by FAS 114 and FAS 118. Also, at the dates indicated, there were no
loans which are not disclosed in the following table about which there was
known information of possible credit problems of the borrowers' ability to
comply with the present repayment terms:
12
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<PAGE>
At September 30,
--------------------------------
1996 1995 1994
---- ----- ----
Loans accounted for
on a nonaccrual basis:
Real estate:
Residential $1,049 $ 249 $ 143
Commercial 74 88 76
Construction -- -- 72
Consumer -- -- 20
----- ------- ------
Total 1,123 337 311
----- ------ ------
Accruing loans which are
contractually past due
90 days or more -- -- --
Real estate owned, net 19 30 129
------ ------ ------
Total non-performing
assets $1,142 $ 367 $ 440
====== ===== =====
Percentage of loans
receivable net 1.33% 0.46% 0.44%
==== ==== ====
Interest income that would have been recorded for the year ended
September 30, 1996 had non-accruing loans been current in accordance with
their original terms amounted to approximately $34,000. The amount of
interest included in interest income on such loans for the year ended
September 30, 1996 amounted to approximately $0.
Allowance for Loan Losses. In originating loans, the Corporation
recognizes that losses will be experienced and that the risk of loss will
vary with, among other things, the type of loan being made, the
creditworthiness of the borrower over the term of the loan, general economic
conditions and, in the case of a secured loan, the quality of the security
for the loan. To cover losses inherent in the portfolio of performing loans,
the Corporation maintains an allowance for loan losses. Management's
periodic evaluation of the adequacy of the allowance is based on a number of
factors, including management's evaluation of the collectibility of the loan
portfolio, the nature of the portfolio, credit concentrations, trends in
historical loss experience, specific impaired loans and economic conditions.
Specific valuation allowances are established to absorb losses on loans for
which full collectibility may not be reasonably assured. The amount of the
allowance is based on the estimated value of the collateral securing the loan
and other analyses pertinent to each situation.
The Corporation increases its allowance for loan losses by charging
provisions for loan losses against income. The allowance for loan losses is
maintained at an amount management considers adequate to absorb losses
inherent in the portfolio. Although management believes that it uses the best
information available to make such determinations, future adjustments to the
allowance for loan losses may be necessary and results of operations could
be significantly and adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.
The Corporation did not provide additional loan provisions during
the fiscal year as compared to additional provisions for the fiscal year
ended September 30, 1995 of $105,000. Management's decision to not increase
the loan provision for the fiscal year ended September 30, 1996 was primarily
due to the reduction in the average balance of the loan portfolio, which
decreased to $73.0 million for the fiscal year ended September 30, 1996 from
$76.0 million for the fiscal year ended September 30, 1995. During the last
quarter
13
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<PAGE>
of the current fiscal year, the Bank experienced growth in the loan portfolio
and it is projected that additional provisions will be added during the year
ending September 30, 1997 as a result of the growth of the loan portfolio.
While the Bank believes it has established its existing allowance
for loan losses in accordance with GAAP, there can be no assurance that
regulators, in reviewing the Bank's loan portfolio, will not request the Bank
to increase significantly its allowance for loan losses. In addition,
because future events affecting borrowers and collateral cannot be predicted
with certainty, there can be no assurance that the existing allowance for
loan losses is adequate or that substantial increases will not be necessary
should the quality of any loans deteriorate as a result of the factors
discussed above. Any material increase in the allowance for loan losses may
adversely affect the Corporation's financial condition and results of
operations. Management periodically evaluates the adequacy of the allowance
based upon historical delinquency rates, the size of the Corporation's loan
portfolio and various other factors. See Notes 1 and 3 of Notes to
Consolidated Financial Statements for information concerning the
Corporation's provision and allowance for possible loan losses.
The following table sets forth an analysis of the Corporation's
allowance for loan losses for the periods indicated (dollars in thousands):
At September 30,
-----------------------------------
1996 1995 1994
---- ---- ----
Balance at beginning of period: $878 $ 754 $ 630
---- ----- ------
Loans charged-off:
Real estate:
Residential (6) (7) (31)
Commercial -- -- --
Consumer (88) (122) (214)
---- ---- ----
Total charge-offs (94) (129) (245)
---- ---- ----
Recoveries:
Real estate:
Residential -- 138 5
Commercial -- -- --
Consumer 15 10 29
---- ---- ----
Total recoveries 15 148 34
---- ---- ----
Net (charge-offs) recoveries (79) 19 (211)
---- ---- ----
Provision for loan losses(1) -- 105 335
---- ---- ----
Balance at end of period $799 $878 $754
==== ==== ====
Ratio of net charge-offs to average
gross loans outstanding during
the period .11% (.03)% .31%
==== ===== ====
_______________
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Annual Report for a discussion of the factors
responsible for changes in the provision for loan losses between the periods.
14
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<PAGE>
The following table sets forth the breakdown of the allowance for
loan losses by loan category and the percentage of loans in each category to
total loans for the periods indicated. Management believes that the allowance
can be allocated by category only on an approximate basis. The allocation of
the allowance to each category is not necessarily indicative of further
losses and does not restrict the use of the allowance to absorb losses in any
category (dollars in thousands):
At September 30,
1996 1995 1994
--------------------- ---------------------- ------------------
% of Loans in % of Loans in % of Loans in
Each Category Each Category Each Category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
------ -------------- ------ -------------- ------ --------------
Real estate:
Residential $400 82.81% $ 405 79.72% $ 248 79.53%
Commercial 125 3.50 125 4.15 125 4.34
Consumer 174 13.69 248 16.13 281 16.13
Unallocated 100 N/A 100 N/A 100 N/A
---- ------ ------ ------- ------ -------
Total allowance
for loan
losses $799 100.00% $ 878 100.00% $ 754 100.00%
==== ====== ===== ====== ===== ======
The Corporation maintains an allowance for losses on real estate
acquired in settlement of loans when needed. At September 30, 1996, Union
Financial had an allowance for losses on real estate acquired in settlement
of loans of approximately $18,000. These values reflect current market
conditions and sales experience. See Notes 1 and 5 of Notes to Consolidated
Financial Statements.
The OTS requires savings institutions to classify problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful" or "loss," depending on the presence
of certain characteristics discussed below.
Asset Classification. An asset is considered "substandard" if
inadequately protected by the current net worth and paying capacity of the
borrower or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the institution will
sustain some loss if the deficiencies are not corrected. Assets classified
as "doubtful" have all of the weaknesses inherent in those classified as
"substandard" with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing
facts, conditions, and values, "highly questionable and improbable." Assets
classified as "loss" are those considered "uncollectible" and of such little
value that their continuance as assets without the establishment
of a specific loss reserve is not warranted.
When an institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses
in an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an institution
classifies problem assets or a portion of assets as loss, it is required
either to establish a specific allowance for losses equal to 100% of the
amount of the asset or a portion thereof so classified or to charge-off such
amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances.
As of September 30, 1996, the Corporation had approximately $721,000
of loans classified as substandard assets, which included 15 real estate
loans totalling $528,00 and 48 consumer loans totalling $193,000. The
Corporation had eight loans totalling approximately $9,000 classified as
doubtful and approximately $1.6 million designated as special mention at
September 30, 1996, which included 19 real estate loans totalling $1.2
million and 35
15
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<PAGE>
consumer loans totalling $400,000. The Corporation carefully monitors its
delinquent loans and real estate owned account as to changes in
collectibility and other characteristics of asset and borrower quality.
Investment Activities
The Corporation is required under OTS regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and is also permitted to make certain other investments. The
Corporation's liquidity requirement at September 30, 1996 was $4.8 million.
At that date the Corporation held approximately $8.0 million in liquid funds,
well in excess of regulatory requirements. Such funds consisted of United
States Treasury and Agency obligations, certificates of deposits, overnight
deposits, mortgage-backed securities and municipal bonds.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as
to the ultimate disposition of each security. SFAS No. 115 allows debt
securities to be classified as "held to maturity" and reported in financial
statements at amortized cost only if the reporting entity has the positive
intent and ability to hold those securities to maturity. Securities that
might be sold in response to changes in market interest rates, changes in the
security's prepayment risk, increases in loan demand, or other similar
factors cannot be classified as "held to maturity." Debt and equity
securities held for current resale are classified as "trading securities."
Such securities are reported at fair value, and unrealized gains and losses
on such securities would be included in earnings. Debt and equity securities
not classified as either "held to maturity" or "trading securities" are
classified as "available for sale." Such securities are reported at fair
value, and unrealized gains and losses on such securities are excluded from
earnings and reported as a net amount in a separate component of equity.
For the period from November 15, 1995 through December 31, 1995, the
Financial Accounting Standards Board ("FASB") permitted a one-time
reassessment of the appropriateness of the designations of all securities and
a redesignation of securities, if appropriate. As a result of this
reassessment, the Corporation reclassified securities with a cost of $12.1
million and a market value of $12.2 million from the held to maturity
classification to the available for sale classification.
16
<PAGE>
<PAGE>
The following table sets forth the Corporation's investment and
mortgage-backed securities portfolio at the dates indicated (dollars in
thousands):
Year Ended September 30,
-------------------------------------------------------------------
1996 1995 1994
-------------------- --------------------- ----------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
-------- ---------- ------- ---------- -------- -----------
Available for Sale:
Investment
securities:
U.S. Agency
obligations $12,221 55.12% $7,754 28.51% $8,935 31.28%
U.S. Treasury
obligations -- -- 3,586 13.18 3,205 11.22
------ ----- ------ -------- ---------- --------
Total debt
securities 12,221 55.12 11,340 41.69 12,140 42.50
------ ----- ------ ------- --------- --------
Municipal
securities 1,444 6.51 -- -- -- --
Mutual funds -- -- 1,920 7.07 1,794 6.28
FHLMC stock -- -- 77 0.28 60 0.22
------ ----- ------ ------- --------- --------
Total investment
securities 13,665 61.63 13,337 49.04 13,994 49.00
------ ----- ------ ------- --------- -------
Mortgage-backed
securities 8,509 38.37 13,861 50.96 14,568 51.00
------- ----- ------- ------ --------- ------
Total available
for sale $22,174 100.00% $27,198 100.00% $28,562 100.00%
======= ====== ======= ====== ======= ======
Held to Maturity:
Investment securities:
U.S. Agency
obligations $5,473 47.09% $4,047 31.91% $4,052 27.79%
U.S. Treasury
obligations -- -- -- -- $ 928 6.37
Municipal
securities -- -- 3,880 30.60 4,220 28.95
------ ----- --------- ------ -------- -------
Total investment
securities 5,473 47.09 7,927 62.51 9,200 63.10
------ ----- --------- ------ -------- ------
Mortgage-backed
securities 6,149 52.91 4,755 37.49 5,379 36.90
-------- ----- -------- ------- -------- ------
Total held to
maturity $11,622 100.00% $12,682 100.00% $14,579 100.00%
======= ====== ======= ====== ======= ======
Management purchases mortgage-backed securities, both fixed-rate and
adjustable-rate, from FHLMC, FNMA and GNMA with maturities from five to 40
years. The Corporation also purchases adjustable-rate Small Business
Administration ("SBA") securities that are backed by the full faith and
credit of the U.S. government.
The Corporation also purchases mortgage derivative securities in the
form of collateralized mortgage obligations (CMOs) and structured notes.
CMOs that are purchased must qualify as investment grade and be considered
non-high risk for inclusion in the investment portfolio. CMOs that do not
meet this criteria are not purchased. If a CMO should fail either of these
tests subsequent to its purchase and the results appear irreversible, the CMO
is disposed of in the most prudent and timely manner possible. The amortized
cost and fair value of the CMOs on the books at September 30, 1996 was
approximately $1.4 million. The Corporation does not purchase CMOs for
speculative or hedging purposes.
The Corporation has purchased structured notes for investment
purposes. These include step-up bonds, single-index floaters and dual-index
floaters. While these types of investments possess minimal credit risk due
to the Federal guarantee backing the issuing U.S. government agencies, they
do possess liquidity risk and interest rate risk. While all financial
instruments are subject to interest rate risk and liquidity risk, structured
notes are more sensitive because of the regulatory concerns and differing
note
17
PAGE
<PAGE>
structures (call provision, rate adjustments, etc.). The Corporation had
approximately $2.6 million in structured notes as of September 30, 1996 with
a fair value of approximately $2.5 million as of that date. See Notes 1 and
2 of Notes to Consolidated Financial Statements for more information
regarding investment and mortgage-backed securities.
18
PAGE
<PAGE>
<TABLE>
The following table sets forth at amortized cost the maturities and weighted average yields of the
Corporation's investment and mortgage-backed securities portfolio at September 30, 1996 (dollars in
thousands):
Amount Due to Repricing within:
------------------------------------------------------------------------------------------
One Year Over One to Over Five to Over
or Less Five Years Ten Years Ten Years Total
------------------ ------------------ ----------------- ---------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
Available for Sale:
Investment Securities:
U.S. Agency
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations $6,282 7.99% $2,201 5.30% $1,522 5.98% $2,216 7.69% $12,221 7.20%
Municipal
Securities(a)1,001 6.44 346 5.43 97 7.90 -- -- 1,444 6.30
----- ----- ----- ----- ------
Total Investment
Securities 7,283 7.78 2,547 5.32 1,619 6.10 2,216 7.69 13,665 7.11
----- ----- ----- ----- ------
Mortgage-backed
Securities 2,135 6.35 3,605 6.54 700 6.50 2,069 7.02 8,509 6.61
----- ----- ----- ----- -----
Total Available
for Sale $9,148 7.45 $6,152 6.03 $2,319 6.22 $4,285 7.37 $22,174 6.91
====== ====== ====== ====== =======
Held to Maturity:
Investment Securities
U.S. Agency
Obligations $2,974 8.90% $1,499 7.58% $500 7.30% $ 500 8.50% $ 5,473 8.36%
Mortgage-backed
Securities -- -- 991 6.80 -- -- 5,158 6.90 6,149 6.88
------ ------ ---- ------ -------
Total Held to
Maturity $2,974 8.90 $2,490 7.27 $500 7.30 $5,658 7.04 $11,622 7.58
====== ====== ==== ====== =======
________________________
(a) Yields are presented on a fully taxable equivalent basis.
19
</TABLE>
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<PAGE>
At September 30, 1996, approximately $2.4 million of debt securities
and $2.7 million of mortgage-backed securities were adjustable-rate
securities.
At September 30, 1996, the Corporation held obligations of Union
County, South Carolina, in the amount of approximately $99,000 with a fair
value of approximately $95,000 as of the same date.
Deposits and Borrowings
Deposits are the major source of the Corporation's funds for lending
and other investment purposes. In addition to deposits, the Corporation
derives funds from principal repayments and interest payments on loans and
investment and mortgage-backed securities. Principal repayments and interest
payments are a relatively stable source of funds, although principal
repayments tend to slow when interest rates increase. Deposit inflows and
outflows may be significantly influenced by general market interest rates and
money market conditions. During fiscal year 1996, the Corporation
experienced a net decrease in deposits of approximately $1.0 million. The
Corporation borrowed funds to cover the outflow and support the growth
experienced in fiscal 1996.
Deposits. Local deposits are, and traditionally have been, the
primary source of the Corporation's funds for use in lending and for other
general business purposes. The Corporation offers a number of deposit
accounts including negotiable order of withdrawal ("NOW") accounts, money
market savings accounts, passbook and statement savings accounts, individual
retirement accounts ("IRAs") and certificate of deposit accounts. Deposit
accounts vary as to terms regarding withdrawal provisions, deposit provisions
and interest rates.
The Corporation adjusts the interest rates offered on its deposit
accounts as necessary so as to remain competitive with other financial
institutions in Union County. The Corporation does not solicit brokered
deposits.
Savings deposits in the Corporation at September 30, 1996 were
represented by the various types of savings programs described below:
Weighted
Average Minimum Percentage
Interest Balance of Total
Deposits Rate Required Balances Balances
-------- ---------- ---------- ---------- --------
(in thousands)
NOW accounts:
Commercial non-interest-
bearing 0.00% $ -- $1,602 1.71%
Noncommercial 1.49 2,500 6,765 7.22
Money market
checking accounts 3.90 1,000 4,982 5.32
Passbook accounts 2.08 10 4,943 5.27
Statement savings 2.38 100 6,365 6.79
Total demand and
savings deposits 2.23 24,657 26.31
---- ------ -----
Certificates of deposit:
91-day 4.62 500 880 0.94
6 months 5.01 500 25,539 27.26
9-12 months 5.10 500 10,761 11.48
15-18 months 5.15 500 7,004 7.47
20-30 months 5.20 500 8,902 9.50
36-40 months 5.29 500 2,429 2.59
(table continued on following page)
20
<PAGE>
<PAGE>
Weighted
Average Minimum Percentage
Interest Balance of Total
Deposits Rate Required Balances Balances
-------- ---------- ---------- ---------- --------
(in thousands)
48 months 5.29% $500 $1,163 1.24
60 months 5.29 500 1,823 1.95
IRAs 5.25 100 10,557 11.26
------ -----
Total certificates
of deposits 5.43 69,058 73.69
------ -----
Total deposits 4.62 93,715 100.00%
====== ======
Time Deposits by Rates and Maturity. The following table sets forth
the time deposits of the Corporation classified by rates as of the dates
indicated (in thousands):
At September 30,
-----------------------------------
1996 1995 1994
---- ----- ----
Up to 4% $ 125 $ 288 $23,541
4.01% to 6.0% 61,794 66,662 27,609
6.01% to 8.0% 7,139 3,107 2,054
8.01% to 10.00% -- 63 1,528
10.00% to 14.00% -- -- 226
------- ------- -------
$69,058 $70,120 $66,958
======= ======= =======
The following table sets forth the maturities of time deposits at September
30, 1996 (in thousands):
Amount
----------
Within three months. . . . . . . . . . . . . . . . . $17,361
After three months but within six months . . . . . . 25,049
After six months but within one year . . . . . . . . 11,935
After one year but within three years . . . . . . . 12,530
After three years but within five years . . . . . . 2,027
After five years but within ten years. . . . . . . . 156
Total. . . . . . . . . . . . . . . . . . . . . . $69,058
Certificates of deposit with maturities of less than one year
increased from $53.9 million at September 30, 1995 to $54.3 million at
September 30, 1996. Historically, the Bank has been able to retain a
significant amount of its deposits as they mature. In addition, management
of the Bank believes that it can adjust the offering rates of savings
certificates to retain deposits in changing interest rate environments. As
discussed above, the Bank has agreed to purchase a commercial bank branch,
which will increase the current deposit base by 24% and increase the
diversification of its deposits.
21
<PAGE>
<PAGE>
The following table indicates the amount of the Bank's jumbo
certificates of deposit by time remaining until maturity as of September 30,
1996 (in thousands). Jumbo certificates of deposit are certificates in
amounts of $100,000 or more.
Maturity Period Amount
--------------- ------
Three months or less . . . . . . . . . $ 2,936
Over three through six months. . . . . 4,228
Over six through 12 months . . . . . . 1,996
Over 12 months . . . . . . . . . . . . 2,584
-------
Total jumbo certificates
of deposit . . . . . . . . . . . $11,744
=======
See Note 6 of Notes Consolidated Financial Statements for additional
information about deposit accounts.
Borrowings. The Corporation utilizes advances from the FHLB and
other borrowings (treasury, tax and loan deposits) to supplement its supply
of lendable funds for granting loans, making investments and meeting deposit
withdrawal requirements. See "Regulation -- Federal Home Loan Bank System."
The following tables sets forth certain information regarding
borrowings by the Bank at the dates and for the periods indicated (dollars in
thousands):
At September 30,
-------------------------------------
1996 1995 1994
------ ----- -----
Balance outstanding at end of period:
FHLB advances and other
borrowings. . . . . . . $20,488 $13,080 $13,400
Weighted average rate paid on:
FHLB advances and other
borrowings. . . . . . . 6.30% 6.07% 5.58%
Year Ended September 30,
--------------------------------------
1996 1995 1994
----- ---- -----
Maximum amount of borrowings
outstanding at any month end:
FHLB advances and other
borrowings. . . . . . . $20,488 $24,200 $13,400
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances and other
borrowings. . . . . . . 9,499 19,693 7,050
Approximate weighted average rate paid on:
FHLB advances and other
borrowings. . . . . . . 6.01% 5.92% 3.73%
22
<PAGE>
<PAGE>
Competition
The Corporation faces competition in both the attraction of deposit
accounts and in the origination of mortgage and consumer loans. Its most
direct competition for savings deposits has historically derived from other
thrift institutions and commercial banks located in and around Union County,
South Carolina. The Corporation faces additional significant competition for
investor funds from money market instruments and mutual funds. It competes
for savings by offering depositors a variety of savings accounts, convenient
office locations and other services.
The Corporation competes for loans principally through the interest
rates and loan fees it charges and the efficiency and quality of the services
it provides borrowers, real estate brokers and home builders. The
Corporation's competition for real estate loans comes principally from other
thrift institutions, commercial banks and mortgage banking companies.
As of September 30, 1996, a local commercial bank, two branch
offices of a regional commercial bank and an office of a regional savings and
loan association were located in Union County, South Carolina. The
Corporation is the largest financial institution based in Union County, South
Carolina.
The State of South Carolina has a reciprocity law with twelve other
states and the District of Columbia that allows for interstate mergers
between financial institutions. As of September 30, 1996, federal law
permits bank holding companies from any state to acquire banks in South
Carolina. These statutes have created, and are expected to continue to
create, additional competition from large, out of state, financial
institutions.
Employees
The Corporation had 40 full-time employees as of September 30, 1996.
None of the employees are represented by a collective bargaining unit. The
Corporation believes that relations with its employees are excellent.
REGULATION
General
The Bank is subject to extensive regulation, examination and
supervision by the OTS as its chartering agency, and the FDIC, as the insurer
of its deposits. The activities of federal savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act ("FDIA") and the regulations
issued by the OTS and the FDIC to implement these statutes. These laws and
regulations delineate the nature and extent of the activities in which
federal savings associations may engage. Lending activities and other
investments must comply with various statutory and regulatory capital
requirements. In addition, the Bank's relationship with its depositors and
borrowers is also regulated to a great extent, especially in such matters as
the ownership of deposit accounts and the form and content of the Bank's
mortgage documents. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions. There are
periodic examinations by the OTS and the FDIC to review the Bank's compliance
with various regulatory requirements. The regulatory structure also gives
the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment
of adequate loan loss reserves for regulatory purposes. Any change in such
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on Union Financial, the Bank and their operations. Union
Financial, as a savings and loan holding company, is also required to file
certain reports with, and otherwise comply with the rules and regulations of,
the OTS.
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Federal Regulation of Savings Associations
Office of Thrift Supervision. The OTS is an office in the
Department of the Treasury subject to the general oversight of the Secretary
of the Treasury. The OTS generally possesses the supervisory and regulatory
duties and responsibilities formerly vested in the Federal Home Loan Bank
Board. Among other functions, the OTS issues and enforces regulations
affecting federally insured savings associations and regularly examines these
institutions.
Federal Home Loan Bank System. The FHLB System, consisting of 12
FHLBs, is under the jurisdiction of the Federal Housing Finance Board
("FHFB"). The designated duties of the FHFB are to supervise the FHLBs, to
ensure that the FHLBs carry out their housing finance mission, to ensure that
the FHLBs remain adequately capitalized and able to raise funds in the
capital markets, and to ensure that the FHLBs operate in a safe and sound
manner.
The Bank, as a member of the FHLB-Atlanta, is required to acquire
and hold shares of capital stock in the FHLB-Atlanta in an amount equal to
the greater of (i) 1.0% of the aggregate outstanding principal amount of
residential mortgage loans, home purchase contracts and similar obligations
at the beginning of each year, or (ii) 1/20 of its advances (borrowings) from
the FHLB-Atlanta. The Bank is in compliance with this requirement with an
investment in FHLB-Atlanta stock of $950,000 at September 30, 1996.
Among other benefits, the FHLB provides a central credit facility
primarily for member institutions. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLB System. It
makes advances to members in accordance with policies and procedures
established by the FHFB and the Board of Directors of the FHLB-Atlanta.
Federal Deposit Insurance Corporation. The FDIC is an independent
federal agency that insures the deposits, up to prescribed statutory limits,
of depository institutions. The FDIC currently maintains two separate
insurance funds: the BIF and the SAIF. As insurer of its deposits, the FDIC
has examination, supervisory and enforcement authority over the Bank.
The Bank's accounts are insured by the SAIF. The FDIC insures
deposits at the Bank to the maximum extent permitted by law. The Bank pays
deposit insurance premiums to the FDIC based on a risk-based assessment
system established by the FDIC. Under applicable regulations, institutions
are assigned to one of three capital groups that are based solely on the
level of an institution's capital -- "well capitalized," "adequately
capitalized," and "undercapitalized" -- which are defined in the same manner
as the regulations establishing the prompt corrective action system, as
discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates that until September 30, 1996 ranged from .23%
for well capitalized, financially sound institutions with only a few minor
weaknesses to .31% for undercapitalized institutions that pose a substantial
risk of loss to the SAIF unless effective corrective action is taken.
Until the second half of 1995, the same matrix applied to
BIF-member institutions. As a result of the BIF having reached its
designated reserve ratio, effective January 1, 1996, the FDIC substantially
reduced deposit insurance premiums for well-capitalized, well-managed
financial institutions that are members of the BIF. Under the new assessment
schedule, rates were reduced to a range of 0 to 27 basis points, with
approximately 92% of BIF members paying the statutory minimum annual
assessment rate of $2,000. Pursuant to the Deposit Insurance Funds Act of
1996 ("DIF Act"), which was enacted on September 30, 1996, the FDIC imposed a
special assessment on each depository institution with SAIF-assessable
deposits equal to 0.657% of SAIF-insured deposits on March 31, 1995 so that
the SAIF may achieve its designated reserve ratio. The Bank's assessment was
$606,000. Beginning January 1, 1997, the assessment schedule for SAIF
members will be the same as that for BIF members. In addition, beginning
January 1, 1997, SAIF members will be charged an assessment of .064% of
SAIF-assessable deposits for the purpose of paying interest on the
obligations issued by the Financing Corporation ("FICO") in
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the 1980s to help fund the thrift industry cleanup. BIF-assessable deposits
will be charged an assessment to help pay interest on the FICO bonds at a
rate of approximately .013% until the earlier of December 31, 1999 or the
date upon which the last savings association ceases to exist, after which
time the assessment will be the same for all insured deposits.
The DIF Act provides for the merger of the BIF and the SAIF into
the Deposit Insurance Fund on January 1, 1999, but only if no insured
depository institution is a savings association on that date. The DIF
contemplates the development of a common charter for all federally chartered
depository institutions and the abolition of separate charters for national
banks and federal savings associations. It is not known what form the common
charter may take and what effect, if any, the adoption of a new charter would
have on the operation of the Bank.
The FDIC may terminate the deposit insurance of any insured
depository institution if it determines after a hearing that the institution
has engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order or any condition imposed by an agreement with the FDIC. It
also may suspend deposit insurance temporarily during the hearing process for
the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could
result in termination of the deposit insurance of the Bank.
Liquidity Requirements. Under OTS regulations, each savings
institution is required to maintain an average daily balance of liquid assets
(cash, certain time deposits and savings accounts, bankers' acceptances, and
specified U.S. Government, state or federal agency obligations and certain
other investments) equal to a monthly average of not less than a specified
percentage (currently 5.0%) of its net withdrawable accounts plus short-term
borrowings. OTS regulations also require each savings institution to
maintain an average daily balance of short-term liquid assets at a specified
percentage (currently 1.0%) of the total of its net withdrawable savings
accounts and borrowings payable in one year or less. Monetary penalties may
be imposed for failure to meet liquidity requirements.
Prompt Corrective Action. Under the FDIA, each federal banking
agency is required to implement a system of prompt corrective action for
institutions that it regulates. The federal banking agencies have
promulgated substantially similar regulations to implement this system of
prompt corrective action. Under the regulations, an institution shall be
deemed to be (i) "well capitalized" if it has a total risk-based capital
ratio of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or
more, has a leverage ratio of 5.0% or more and is not subject to specified
requirements to meet and maintain a specific capital level for any capital
measure; (ii) "adequately capitalized" if it has a total risk-based capital
ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and
a leverage ratio of 4.0% or more (3.0% under certain circumstances) and does
not meet the definition of "well capitalized;" (iii) "undercapitalized" if it
has a total risk-based capital ratio that is less than 8.0%, a Tier I
risk-based capital ratio that is less than 4.0% or a leverage ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less
than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage ratio that is less than 3.0%; and (v) "critically undercapitalized"
if it has a ratio of tangible equity to total assets that is equal to or less
than 2.0%.
A federal banking agency may, after notice and an opportunity for a
hearing, reclassify a well capitalized institution as adequately capitalized
and may require an adequately capitalized institution or an undercapitalized
institution to comply with supervisory actions as if it were in the next
lower category if the institution is in an unsafe or unsound condition or has
received in its most recent examination, and has not corrected, a less than
satisfactory rating for asset quality, management, earnings or liquidity.
(The OTS may not, however, reclassify a significantly undercapitalized
institution as critically undercapitalized.)
An institution generally must file a written capital restoration
plan that meets specified requirements, as well as a performance guaranty by
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each company that controls the institution, with the appropriate federal
banking agency within 45 days of the date that the institution receives
notice or is deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Immediately upon becoming
undercapitalized, an institution shall become subject to various mandatory
and discretionary restrictions on its operations.
At September 30, 1996, the Bank was categorized as "well
capitalized" under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The FDIA requires the federal
banking regulatory agencies to prescribe, by regulation, standards for all
insured depository institutions relating to: (i) internal controls,
information systems and internal audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; (v) asset
growth; and (vi) compensation, fees and benefits. The federal banking
regulatory agencies are also required to prescribe standards relating to
asset quality and earnings. The federal banking agencies adopted regulations
and Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement safety and soundness standards required by the
FDIA. The Guidelines set forth the safety and soundness standards that the
federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. If the OTS
determines that the Bank fails to meet any standard prescribed by the
Guidelines, the agency may require the Bank to submit to the agency an
acceptable plan to achieve compliance with the standard, as required by the
FDIA. OTS regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
Qualified Thrift Lender Test. All savings associations are
required to meet a qualified thrift lender ("QTL") test to avoid certain
restrictions on their operations. A savings institution that fails to become
or remain a QTL shall either become a national bank or be subject to the
following restrictions on its operations: (i) the association may not make
any new investment or engage in activities that would not be permissible for
national banks; (ii) the association may not establish any new branch office
where a national bank located in the savings institution's home state would
not be able to establish a branch office; (iii) the association shall be
ineligible to obtain new advances from any FHLB; and (iv) the payment of
dividends by the association shall be subject to the rules regarding the
statutory and regulatory dividend restrictions applicable to national banks.
Also, beginning three years after the date on which the savings institution
ceases to be a QTL, the savings institution would be prohibited from
retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. In addition, within one year of the date on which a savings
association controlled by a company ceases to be a QTL, the company must
register as a bank holding company and become subject to the rules applicable
to such companies. A savings institution may requalify as a QTL if it
thereafter complies with the QTL test.
Currently, the QTL test requires that either, an institution
qualify as a domestic building and loan under the Internal Revenue Case or
that 65% of an institution's "portfolio assets" (as defined) consist of
certain housing and consumer-related assets on a monthly average basis in
nine out of every 12 months. Assets that qualify without limit for inclusion
as part of the 65% requirement are loans made to purchase, refinance,
construct, improve or repair domestic residential housing and manufactured
housing; home equity loans; mortgage-backed securities (where the mortgages
are secured by domestic residential housing or manufactured housing); FHLB
stock; direct or indirect obligations of the FDIC; and loans for educational
purposes, loans to small businesses and loans made through credit cards. In
addition, the following assets, among others, may be included in meeting the
test subject to an overall limit of 20% of the savings institution's
portfolio assets: 50% of residential mortgage loans originated and sold
within 90 days of origination; 100% of consumer loans; and stock issued by
the FHLMC or Fannie Mae. Portfolio assets consist of total assets minus the
sum of (i) goodwill and other intangible assets, (ii) property used by the
savings institution to conduct its business, and (iii) liquid assets up to
20% of the institution's total assets. At September 30, 1996, the Bank
satisfied the qualified thrift lender test.
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Capital Requirements. Under OTS regulations a savings association
must satisfy three minimum capital requirements: core capital, tangible
capital and risk-based capital. Savings associations must meet all of the
standards in order to comply with the capital requirements. Union Financial
is not subject to any minimum capital requirements.
OTS capital regulations establish a 3% core capital or leverage
ratio (defined as the ratio of core capital to adjusted total assets). Core
capital is defined to include common stockholders' equity, noncumulative
perpetual preferred stock and any related surplus, and minority interests in
equity accounts of consolidated subsidiaries, less (i) any intangible assets,
except for certain qualifying intangible assets; (ii) certain mortgage
servicing rights; and (iii) equity and debt investments in subsidiaries that
are not "includable subsidiaries," which is defined as subsidiaries engaged
solely in activities not impermissible for a national bank, engaged in
activities impermissible for a national bank but only as an agent for its
customers, or engaged solely in mortgage-banking activities. In calculating
adjusted total assets, adjustments are made to total assets to give effect to
the exclusion of certain assets from capital and to account appropriately for
the investments in and assets of both includable and nonincludable
subsidiaries. Institutions that fail to meet the core capital requirement
would be required to file with the OTS a capital plan that details the
steps they will take to reach compliance. In addition, the OTS's prompt
corrective action regulation provides that a savings institution that has a
leverage ratio of less than 4% (3% for institutions receiving the highest
CAMEL examination rating) will be deemed to be "undercapitalized" and may be
subject to certain restrictions. See "-- Federal Regulation of Savings
Associations -- Prompt Corrective Action."
As required by federal law, the OTS has proposed a rule revising
its minimum core capital requirement to be no less stringent than that
imposed on national banks. The OTS has proposed that only those savings
associations rated a composite one (the highest rating) under the CAMEL
rating system for savings associations will be permitted to operate at or
near the regulatory minimum leverage ratio of 3%. All other savings
associations will be required to maintain a minimum leverage ratio of 4% to
5%. The OTS will assess each individual savings association through the
supervisory process on a case-by-case basis to determine the applicable
requirement. No assurance can be given as to the final form of any such
regulation, the date of its effectiveness or the requirement applicable to
the Bank.
Savings associations also must maintain "tangible capital" not less
than 1.5% of the Bank's adjusted total assets. "Tangible capital" is defined,
generally, as core capital minus any "intangible assets" other than purchased
mortgage servicing rights.
Each savings institution must maintain total risk-based capital
equal to at least 8% of risk-weighted assets. Total risk-based capital
consists of the sum of core and supplementary capital, provided that
supplementary capital cannot exceed core capital, as previously defined.
Supplementary capital includes (i) permanent capital instruments such as
cumulative perpetual preferred stock, perpetual subordinated debt and
mandatory convertible subordinated debt, (ii) maturing capital instruments
such as subordinated debt, intermediate-term preferred stock and mandatory
convertible subordinated debt, subject to an amortization schedule, and (iii)
general valuation loan and lease loss allowances up to 1.25% of risk-weighted
assets.
The risk-based capital regulation assigns each balance sheet asset
held by a savings institution to one of four risk categories based on the
amount of credit risk associated with that particular class of assets.
Assets not included for purposes of calculating capital are not included in
calculating risk-weighted assets. The categories range from 0% for cash and
securities that are backed by the full faith and credit of the U.S.
Government to 100% for repossessed assets or assets more than 90 days past
due. Qualifying residential mortgage loans (including multi- family mortgage
loans) are assigned a 50% risk weight. Consumer, commercial, home equity and
residential construction loans are assigned a 100% risk weight, as are
nonqualifying residential mortgage loans and that portion of land loans and
nonresidential construction loans that do not exceed an 80% loan-to-value
ratio. The book value of assets in each category is multiplied by the
weighing factor (from 0% to 100%) assigned to that category. These products
are then totalled to arrive at total risk-weighted assets. Off-balance sheet
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items are included in risk-weighted assets by converting them to an
approximate balance sheet "credit equivalent amount" based on a conversion
schedule. These credit equivalent amounts are then assigned to risk
categories in the same manner as balance sheet assets and included
risk-weighted assets.
The OTS has incorporated an interest rate risk component into its
regulatory capital rule. Under the rule, savings associations with "above
normal" interest rate risk exposure would be subject to a deduction from
total capital for purposes of calculating their risk-based capital
requirements. A savings association's interest rate risk is measured by the
decline in the net portfolio value of its assets (i.e., the difference
between incoming and outgoing discounted cash flows from assets, liabilities
and off-balance sheet contracts) that would result from a hypothetical 200
basis point increase or decrease in market interest rates divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
risk component in calculating its total capital under the risk-based capital
rule. The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. Under the rule, there is
a two quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that
data. A savings association with assets of less than $300 million and
risk-based capital ratios in excess of 12% is not subject to the interest
rate risk component, unless the OTS determines otherwise. The rule also
provides that the Director of the OTS may waive or defer an association's
interest rate risk component on a case-by-case basis. Under certain
circumstances, a savings association may request an adjustment to its
interest rate risk component if it believes that the OTS-calculated interest
rate risk component overstates its interest rate risk exposure. In addition,
certain "well-capitalized" institutions may obtain authorization to use their
own interest rate risk model to calculate their interest rate risk component
in lieu of the OTS-calculated amount. The OTS has postponed the date that
the component will first be deducted from an institution's total capital
until savings associations become familiar with the process for requesting an
adjustment to its interest rate risk component.
Limitations on Capital Distributions. OTS regulations impose
uniform limitations on the ability of all savings associations to engage in
various distributions of capital such as dividends, stock repurchases and
cash-out mergers. In addition, OTS regulations require the Bank to give the
OTS 30 days' advance notice of any proposed declaration of dividends, and the
OTS has the authority under its supervisory powers to prohibit the payment of
dividends. The regulation utilizes a three-tiered approach which permits
various levels of distributions based primarily upon a savings association's
capital level.
A Tier 1 savings association has capital in excess of its fully
phased-in capital requirement (both before and after the proposed capital
distribution). Tier 1 savings association may make (without application but
upon prior notice to, and no objection made by, the OTS) capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus one-half its surplus capital ratio (i.e., the
amount of capital in excess of its fully phased-in requirement) at the
beginning of the calendar year or the amount authorized for a Tier 2
association. Capital distributions in excess of such amount require advance
notice to the OTS. A Tier 2 savings association has capital equal to or in
excess of its minimum capital requirement but below its fully phased-in
capital requirement (both before and after the proposed capital
distribution). Such an association may make (without application) capital
distributions up to an amount equal to 75% of its net income during the
previous four quarters depending on how close the association is to meeting
its fully phased-in capital requirement. Capital distributions exceeding
this amount require prior OTS approval. Tier 3 associations are savings
associations with capital below the minimum capital requirement (either
before or after the proposed capital distribution). Tier 3 associations may
not make any capital distributions without prior approval from the OTS.
The Bank is currently meeting the criteria to be designated a Tier
1 association and, consequently, could at its option (after prior notice to,
and no objection made by, the OTS) distribute up to 100% of its net income
during the calendar year plus 50% of its surplus capital ratio at the
beginning of the calendar year less any distributions previously paid during
the year.
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Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limit on loans to one borrower.
Generally, this limit is 15% of the Bank's unimpaired capital and surplus,
plus an additional 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. The OTS by regulation has amended the
loans to one borrower rule to permit savings associations meeting certain
requirements, including capital requirements, to extend loans to one borrower
in additional amounts under circumstances limited essentially to loans to
develop or complete residential housing units. At September 30, 1996, the
Bank's limit on loans to one borrower was $1.9 million. At September 30,
1996, the Bank's largest aggregate amount of loans to one borrower was
$750,000.
Activities of Associations and Their Subsidiaries. When a savings
association establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
association must notify the FDIC and the OTS 30 days in advance and provide
the information each agency may, by regulation, require. Savings
associations also must conduct the activities of subsidiaries in accordance
with existing regulations and orders.
The OTS may determine that the continuation by a savings
association of its ownership control of, or its relationship to, the
subsidiary constitutes a serious risk to the safety, soundness or stability
of the association or is inconsistent with sound banking practices or with
the purposes of the FDIA. Based upon that determination, the FDIC or the OTS
has the authority to order the savings association to divest itself of
control of the subsidiary. The FDIC also may determine by regulation or
order that any specific activity poses a serious threat to the SAIF. If so,
it may require that no SAIF member engage in that activity directly.
Transactions with Affiliates. Savings associations must comply
with Sections 23A and 23B of the Federal Reserve Act ("Sections 23A and 23B")
relative to transactions with affiliates in the same manner and to the same
extent as if the savings association were a Federal Reserve member bank. A
savings and loan holding company, its subsidiaries and any other company
under common control are considered affiliates of the subsidiary savings
association under the HOLA. Generally, Sections 23A and 23B: (i) limit the
extent to which the insured association or its subsidiaries may engage in
certain covered transactions with an affiliate to an amount equal to 10% of
such institution's capital and surplus and place an aggregate limit on all
such transactions with affiliates to an amount equal to 20% of such capital
and surplus, and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable to the institution or
subsidiary, as those provided to a non-affiliate. The term "covered
transaction" includes the making of loans, the purchase of assets, the
issuance of a guarantee and similar types of transactions.
Three additional rules apply to savings associations: (i) a
savings association may not make any loan or other extension of credit to an
affiliate unless that affiliate is engaged only in activities permissible for
bank holding companies; (ii) a savings association may not purchase or
invest in securities issued by an affiliate (other than securities of a
subsidiary); and (iii) the OTS may, for reasons of safety and soundness,
impose more stringent restrictions on savings associations but may not exempt
transactions from or otherwise abridge Section 23A or 23B. Exemptions from
Section 23A or 23B may be granted only by the Federal Reserve, as is
currently the case with respect to all FDIC-insured banks. The Bank has not
been significantly affected by the rules regarding transactions with
affiliates.
The Bank's authority to extend credit to executive officers,
directors and 10% shareholders, as well as entities controlled by such
persons, is currently governed by Sections 22(g) and 22(h) of the Federal
Reserve Act, and Regulation O thereunder. Among other things, these
regulations require that such loans be made on terms and conditions
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. Regulation O also places
individual and aggregate limits on the amount of loans the Bank may
make to such persons based, in part, on the Bank's capital position, and
requires certain board approval procedures to be followed. The OTS
regulations, with certain minor variances, apply Regulation O to savings
institutions.
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Savings and Loan Holding Company Regulations
Holding Company Acquisitions. The HOLA and OTS regulations issued
thereunder generally prohibit a savings and loan holding company, without
prior OTS approval, from acquiring more than 5% of the voting stock of any
other savings association or savings and loan holding company or controlling
the assets thereof. They also prohibit, among other things, any director or
officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of such holding company, from
acquiring control of any savings association not a subsidiary of such savings
and loan holding company, unless the acquisition is approved by the OTS.
Holding Company Activities. As a unitary savings and loan holding
company, Union Financial generally is not subject to activity restrictions.
If Union Financial acquires control of another savings association as a
separate subsidiary other than in a supervisory acquisition, it would become
a multiple savings and loan holding company. There generally are more
restrictions on the activities of a multiple savings and loan holding company
than on those of a unitary savings and loan holding company. The HOLA
provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not an insured association shall
commence or continue for more than two years after becoming a multiple
savings and loan association holding company or subsidiary thereof, any
business activity other than: (i) furnishing or performing management
services for a subsidiary insured institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or liquidating assets
owned by or acquired from a subsidiary insured institution, (iv) holding or
managing properties used or occupied by a subsidiary insured institution, (v)
acting as trustee under deeds of trust, (vi) those activities previously
directly authorized by regulation as of March 5, 1987 to be engaged in by
multiple holding companies or (vii) those activities authorized by the
Federal Reserve as permissible for bank holding companies, unless the OTS by
regulation, prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above also must be approved
by the OTS prior to being engaged in by a multiple holding company.
Qualified Thrift Lender Test. The HOLA requires any savings and
loan holding company that controls a savings association that fails the QTL
test, as explained under "-- Federal Regulation of Savings Associations --
Qualified Thrift Lender Test," must, within one year after the date on which
the association ceases to be a QTL, register as and be deemed a bank holding
company subject to all applicable laws and regulations.
TAXATION
Federal Taxation
General. Union Financial and the Bank report their income on a
fiscal year basis using the accrual method of accounting and are subject to
federal income taxation in the same manner as other corporations with some
exceptions, including particularly the Bank's reserve for bad debts discussed
below. The following discussion of tax matters is intended only as a summary
and does not purport to be a comprehensive description of the tax rules
applicable to the Bank or Union Financial.
Tax Bad Debt Reserves. For taxable years beginning prior to
January 1, 1996, savings institutions such as the Bank which met certain
definitional tests primarily relating to their assets and the nature of their
business ("qualifying thrifts") were permitted to establish a reserve for bad
debts and to make annual additions thereto, which additions may, within
specified formula limits, have been deducted in arriving at their taxable
income. The Bank's deduction with respect to "qualifying loans," which are
generally loans secured by certain interests in real property, may have been
computed using an amount based on the Bank's actual loss experience, or a
percentage equal to 8% of the Bank's taxable income, computed with certain
modifications and reduced by the amount of any permitted additions to the
nonqualifying reserve. The Bank's deduction with respect to nonqualifying
loans was computed under the experience method, which essentially allows a
deduction based on the Bank's actual loss experience over a period of several
years. Each year the Bank selected the most favorable way to calculate the
deduction attributable
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to an addition to the tax bad debt reserve. The Bank used the percentage
method bad debt deduction for the taxable years ended September 30, 1996,
1995 and 1994.
Recently enacted legislation repealed the reserve method of
accounting for bad debt reserves for tax years beginning after December 31,
1995. As result, savings associations will no longer be able to calculate
their deduction for bad debts using the percentage-of-taxable-income method.
Instead, savings associations will be required to compute their deduction
based on specific charge-offs during the taxable year or, if the savings
association or its controlled group had assets of less than $500 million,
based on actual loss experience over a period of years. This legislation
also requires savings associations to recapture into income over a six-year
period their post-1987 additions to their bad debt tax reserves, thereby
generating additional tax liability. At September 30, 1996, the Bank's
post-1987 reserves totalled approximately $230,000. The recapture may be
suspended for up to two years if, during those years, the institution
satisfies a residential loan requirement. The Bank anticipates that it will
meet the residential loan requirement for the taxable year ending September
30, 1997.
Under prior law, if the Bank failed to satisfy the qualifying
thrift definitional tests in any taxable year, it would be unable to make
additions to its bad debt reserve. Instead, the Bank would be required to
deduct bad debts as they occur and would additionally be required to
recapture its bad debt reserve deductions ratably over a multi-year period.
At September 30, 1996, the Bank's total bad debt reserve for tax purposes was
approximately $1.6 million. Among other things, the qualifying thrift
definitional tests required the Bank to hold at least 60% of its assets as
"qualifying assets." Qualifying assets generally include cash, obligations
of the United States or any agency or instrumentality thereof, certain
obligations of a state or political subdivision thereof, loans secured by
interests in improved residential real property or by savings accounts,
student loans and property used by the Bank in the conduct of its banking
business. Under current law, a savings association will not be required to
recapture its pre-1988 bad debt reserves if it ceases to meet the qualifying
thrift definitional tests.
Distributions. To the extent that the Bank makes "nondividend
distributions" to Union Financial that are considered as made: (I) from the
reserve for losses on qualifying real property loans, to the extent the
reserve for such losses exceeds the amount that would have been allowed under
the experience method; or (ii) from the supplemental reserve for losses on
loans ("Excess Distributions"), then an amount based on the amount
distributed will be included in the Bank's taxable income. Nondividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, distributions in redemption of stock, and
distributions in partial or complete liquidation. However, dividends paid
out of the Bank's current or accumulated earnings and profits, as calculated
for federal income tax purposes, will not be considered to result in a
distribution from the Bank's bad debt reserve. Thus, any dividends to Union
Financial that would reduce amounts appropriated to the Bank's bad debt
reserve and deducted for federal income tax purposes would create a tax
liability for the Bank. The amount of additional taxable income attributable
to an Excess Distribution is an amount that, when reduced by the tax
attributable to the income, is equal to the amount of the distribution.
Thus, if the Bank makes a "nondividend distribution," then approximately
one and one-half times the amount so used would be includable in gross income
for federal income tax purposes, assuming a 34% corporate income tax rate
(exclusive of state taxes). See "REGULATION" for limits on the payment of
dividends by the Bank. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its tax bad debt reserve.
Corporate Alternative Minimum Tax. The Code imposes a tax on
alternative minimum taxable income ("AMTI") at a rate of 20%. The excess of
the tax bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI.
In addition, only 90% of AMTI can be offset by net operating loss carryovers.
AMTI is increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to this
preference and prior to reduction for net operating losses). For taxable
years beginning after December 31, 1986, and before January 1, 1996, an
environmental tax of .12% of the excess of AMTI (with certain modification)
over $2.0 million is imposed on corporations, including the Bank, whether or
not an Alternative Minimum Tax ("AMT") is paid.
31
<PAGE>
<PAGE>
Dividends-Received Deduction and Other Matters. Union Financial may
exclude from its income 100% of dividends received from the Bank as a member
of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which Union Financial and the
Bank will not file a consolidated tax return, except that if Union Financial
or the Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
There have not been any IRS audits of Union Financial's or the
Bank's federal income tax returns during the past five years.
State Taxation
South Carolina. The Bank is subject to tax under South Carolina
law. South Carolina law allows a savings and loan association to use the
federal bad debt deduction method for the purpose of computing net income
subject to state tax, and the present South Carolina tax rate on taxable
income is 6 percent. In order to calculate taxable income for South Carolina
taxation purposes, a corporation begins with its federal taxable income and
then modifies it to take into account certain adjustments. Adjustments which
would be common to most financial institutions include an addition for state
taxes deducted on the federal return, and a subtraction for interest on
certain federal obligations and securities. South Carolina income tax is
deductible for federal income tax purposes. In addition, Union financial is
subject to South Carolina taxes as a regular corporation and pays taxes based
on its shareholders' equity.
Delaware. As a Delaware holding company not earning income in
Delaware, Union Financial is exempted from Delaware corporate income tax, but
is required to file an annual report with and pay an annual franchise tax
to the State of Delaware.
Item 2. Description of Property
- --------------------------------
The Corporation owns its main office, located at 203 West Main
Street in Union, South Carolina, which was opened in 1977, and has
approximately 10,000 square feet. The Corporation also owns a branch office
which opened in April 1989, located at 508 North Duncan By-Pass, Union, South
Carolina. This facility has approximately 2,700 square feet of space. The
Corporation purchased property in Jonesville, S.C. and opened a temporary
office in July 1994. The net book value of the Corporation's investment in
premises and equipment totaled approximately $1.7 million at September 30,
1996. See Note 4 of Notes to Consolidated Financial Statements.
The Corporation owns various bookkeeping and accounting equipment.
Certain data processing services are provided by an outside data processing
center under a long-term contract.
Item 3. Legal Proceedings
- --------------------------
Neither Union Financial nor the Bank is engaged in any legal
proceedings of a material nature at the present time. From time to time, the
Bank is involved in routine legal proceedings occurring in the ordinary
course of business wherein it enforces the Bank's security interest in
mortgage loans the Bank has made.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1996.
32
<PAGE>
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- ----------------------------------------------------------------------------
The information contained under the section captioned "Common Stock
and Dividend Information" in the Annual Report is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- ----------------------------
The financial statements contained in the Annual Report are
incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
- ------------------------------------------------------------------------
The information contained under the caption "Proposal II --
Ratification of Appointment of Auditors" in Union Financial's definitive
proxy statement for the 1996 Annual Meeting of Stockholders ("Proxy
Statement") is incorporated herein by reference.
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- ----------------------------------------------------------------------
For information concerning the Board of Directors of Union
Financial, the information contained under the section captioned "Proposal I
- -- Election of Directors" in the Proxy Statement is incorporated herein by
reference. Reference is made to the cover page of this Form 10-KSB for
information regarding compliance with section 16(a) of the Exchange Act.
Certain executive officers of the Bank also serve as executive
officers of Union Financial. The day-to-day management duties of the
executive officers of Union Financial and the Bank relate primarily to their
duties as to the Bank. The executive officers of Union Financial are as
follows:
Position as of
Name Age(a) September 30, 1996
- ---- ------ -------------------
Dwight V. Neese 46 President, Chief Executive Officer and
Director
Richard H. Flake 48 Senior Vice President - Chief Financial
Officer
Gerald L. Bolin 34 Vice President - Chief Operating Officer
Wanda J. Wells 40 Vice President - Corporate Secretary
________________
(a) At September 30, 1996.
33
<PAGE>
<PAGE>
Dwight V. Neese was appointed as President and Chief Executive
Officer of the Bank effective September 5, 1995. Prior to joining Union
Federal, Mr. Neese was Executive Vice President and Chief Operating Officer
of Home Federal Savings Bank of South Carolina in Rock Hill. As President
and Chief Executive Officer of Union Federal and the Corporation, Mr. Neese
is responsible for daily operations of the Bank and implementation of the
policies and procedures approved by the Board of Directors.
Richard H. Flake joined Union Federal in September 1995. Prior to
joining Union Federal, Mr. Flake was Senior Vice President and Corporate
Accounting Manager for United Financial Corporation in Greenwood, South
Carolina.
Gerald L. Bolin joined Union Federal in September 1995. Prior to
joining Union Federal, Mr. Bolin was Vice President and Director of Internal
Audit and Compliance with Home Federal Savings Bank of South Carolina
in Rock Hill.
Wanda J. Wells has been employed by Union Federal since 1975 and
serves as the Corporation's Corporate Secretary.
Item 10. Executive Compensation
- ---------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein
by reference to the section captioned "Securities
Ownership of Certain Beneficial Owners and Management" in
the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein
by reference to the sections captioned "Proposal I --
Election of Directors" and "Securities Ownership of
Certain Beneficial Owners and Management" in the Proxy
Statement.
(c) Management of Union Financial knows of no arrangements,
including any pledge by any person of securities of Union
Financial, the operation of which may at a subsequent
date result in a change in control of the registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors" and
"Transaction with Management" in the Proxy Statement.
34
<PAGE>
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
- --------------------------------------------
(a) Exhibits
3(a) Certificate of Incorporation(1)
3(b) Bylaws(1)
10(a) Employment Agreement with Dwight V. Neese(2)
10(b) Union Federal Savings and Loan Association 1987
Stock Option Plan(2)
10(c) Union Financial Bancshares, Inc. 1995 Stock
Option Plan(3)
10(d) Purchase and Assumption Agreement dated as of
October 3, 1996 by and between Union Federal
Savings Bank and First Union National Bank of
South Carolina.(4)
13 1996 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23(a) Consent of auditors
23(b) Consent of prior auditors
27 Financial Data Schedule
99 Prior Independent Auditors' Report
(b) No reports on Form 8-K have been filed during the last
quarter of the fiscal year covered by this report.
- --------------------------
(1) Incorporated herein by reference to Union Financial's Registration
Statement on Form S-4 (File No. 33-80808) filed with the Securities
and Exchange Commission on June 29, 1994.
(2) Incorporated herein by reference to Union Financial's Form 10-KSB
for the year ended September 30, 1996.
(3) Incorporated herein by reference to Exhibit A to Union Financial's
Proxy Statement for its 1996 Annual Meeting of Stockholders.
(4) Incorporated herein by reference to Exhibit 10 to Union Financial's
Form 8-K filed October 10, 1996.
35
<PAGE>
<PAGE>
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 FINANCIAL BANCSHARES, INC.
Date: December 30, 1996 By: /s/Dwight V. Neese
---------------------------------
Dwight V. Neese
President and Chief
Executive Officer - Duly Authorized
Representative
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Dwight V. Neese By:
------------------------ -----------------------------
Dwight V. Neese James W. Edwards
Principal Executive Officer Director
Date: December 30, 1996 Date: December __, 1996
By: /s/Richard H. Flake By: /s/David G. Russell
------------------------ ------------------------------
Richard H. Flake David G. Russell
(Principal Financial and Director
Accounting Officer)
Date: December 30, 1996 Date: December 30, 1996
By: By: /s/Louis M. Jordan
------------------------- -------------------------------
Mason G. Alexander Louis M. Jordan
Director Director
Date: December __, 1996 Date: December 30, 1996
By: /s/William M. Graham By:
-------------------------- -------------------------------
William M. Graham Carl L. Mason
Director Director
Date: December 30, 1996 Date: December __, 1996
<PAGE>
<PAGE>
EXHIBIT NO. 13
1996 Annual Report to Shareholders
- --------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
UF
1996 ANNUAL REPORT
- --------------------------------------------------------------------
<PAGE>
<PAGE>
Our Vision
Our vision is to be the financial services provider of choice in
the communities we serve. We will accomplish this through
meaningful and effective partnerships with our employees,
our customers, our communities, and our shareholders.
Our Mission
Our mission is to achieve superior financial performance
through the development and marketing of high quality,
value-added, consumer-preferred financial products
and by providing service that consistently exceeds our
customers' expectations.
Our Core Values
We are committed:
To provide our employees with the tools and training
necessary to enhance their career development and the
opportunity to be successful.
To understand the value of customer confidence and to
provide needs-based products and services at a fair price.
To the concept of corporate social responsibility to our local
communities through individual and company participation
and leadership.
To provide to the shareholders a superior return on their
investment and an opportunity to share in the growth of a
prominent, local financial institution.
To these core values because they are not only right, but
because we believe in them.
<PAGE>
<PAGE>
TO OUR SHAREHOLDERS AND FRIENDS:
It is always a pleasure to be able to report success. And 1996 was truly a
successful year for Union Financial Bancshares, Inc!
At the beginning of the year our Officers and Directors carefully crafted the
vision, mission, and core values statements presented on the opposite page.
Once the essence of the corporate philosophy was quantified, a long-term
strategic business plan was developed. All Associates of Union Financial are
now focused on being the financial services provider of choice in the
communities we serve.
1996 was also a pivotal year for the banking industry as a whole. President
Clinton signed the Omnibus Appropriations Bill on September 30, 1996 outlining
the recapitalization of the FDIC fund that insures our deposits. The new
legislation was controversial and took two years to make its way through
Congress and to the President. The Officers and Directors of Union Financial
endorse the resolution because it brings closure to a problem that has clouded
the industry for years. Union Federal Savings Bank paid its fair share of
$606,000 on the last day of the fiscal year. Even though the special
assessment had a significant impact on earnings for 1996, we all consider it
an important investment in the Bank's future. Recapitalization of the
insurance fund substantially reduces future deposit insurance expense and is a
major step toward eliminating the disparity between banks and thrifts. The
assessment will have no impact on dividends and Union Federal remains a
well-capitalized institution.
Net income as a result of the special assessment was reduced to $862,000, or
$1.07 per share, as compared to the previous year's net income of $1,054,000,
or $1.34 per share. Net income excluding the special assessment would have
been $1,256,000, or 19.2 % higher than the previous year. Return on average
assets for fiscal 1996 was 0.73%, compared to the previous year's return of
0.83%. Return on average equity for fiscal 1996 was 7.01%, compared to the
previous year's return of 9.38%. Return on average assets, excluding the
special FDIC assessment, would have been 1.06% and the return on average
equity would have been 10.20%. Shareholders' equity was $12,254,000,
representing a capital-to-assets ratio of 9.6%, and a risk-based capital ratio
of 19.2%.
One of the primary strategic goals established at the beginning of the fiscal
year was to restructure the Bank's balance sheet to focus more on core
products that would produce higher yielding assets. This goal was met with
yields on earning assets increasing to 7.88% for fiscal 1996, compared to
7.57% for the previous year. Net interest margin, a benchmark of core earning
ability, increased to 3.01% for fiscal 1996, compared to 2.96% for the
previous year. As an indication of future earning ability for the Bank, the
net interest margin at September 30, 1996 was 3.41%. Coupled with the
significant improvement in the net interest margin was the increase in total
assets to $128,133,000 for fiscal 1996, compared to $120,879,000 for the
previous year.
Another one of the Bank's strategic goals was to expand and diversify the
Bank's franchise. During 1996, the Bank took its first expansion step by
entering into an agreement to purchase a branch from First Union National Bank
in Laurens, S. C. Secondly, in an effort to improve interest yields and to
control interest rate risk, the Bank entered into a commitment to purchase
adjustable rate mortgage loans from Palmetto Bank, also located in Laurens.
As a result of this strategic move, the outstanding loans receivable in
adjustable rate mortgage products increased 40.5% to $39,076,000.
<PAGE>
<PAGE>
Both our shareholders and customers realized the benefits of our improved
operations and expansion efforts in 1996. In June, Union Financial announced
a two-for-one stock split of the Corporation's outstanding shares of common
stock. Then, in August, Union Financial increased the liquidity of its stock
by listing it on the Nasdaq Stock Market's Over-the-Counter Bulletin Board
under the symbol UFBS. The market responded favorably to the Corporation's
performance and initiatives in 1996 closing at $15.50 per share at fiscal year
end, up 69.8% over the previous year.
In closing, the Board of Directors and all the Associates of Union Financial
are pleased to present this annual report outlining our achievements in 1996;
profitability up 19.2% (before the special assessment); total assets up $7.3
million, or 6.0%; and the value of our shareholders' investment up 69.8%. But
more importantly, everyone at Union Financial is genuinely excited about the
future of our Bank because we have strategically repositioned our company to
capitalize on our strengths and the many opportunities in the marketplace.
As always, your interest, patronage and support are the primary reasons for
our success. For that, we say Thank You!
Sincerely,
/s/Dwight V. Neese
Dwight V. Neese
President and Chief Executive Officer
<PAGE>
<PAGE>
Table of Contents
Business. . . . . . . . . . . . . . . . . . . . . . 1
Selected Financial and Other Data . . . . . . . . . 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . 4
Independent Auditor's Report. . . . . . . . . . . . 12
Consolidated Financial Statements . . . . . . . . . 13
Notes to Consolidated Financial Statements. . . . . 18
Directors and Leadership Group. . . . . . . . . . . 38
Corporation Information . . . . . . . . . . . . . . 39
Notice of Annual Meeting. . . . . . . . . . . . . . 39
10-KSB Information. . . . . . . . . . . . . . . . . 39
Common Stock Information. . . . . . . . . . . . . . 39
==============
BUSINESS
Union Financial Bancshares, Inc. ("Union Financial") was incorporated in the
State of Delaware in April 1994 for the purpose of becoming a savings and loan
holding company for Union Federal Savings Bank ("the Bank"). On August 24,
1994, the shareholders of the Bank approved a plan to reorganize the Bank into
the holding company form of ownership. The reorganization was completed on
November 9, 1994, on which date the Bank became the wholly-owned subsidiary of
Union Financial, and the shareholders of the Bank became the shareholders of
Union Financial. Prior to the completion of the reorganization, Union
Financial had no material assets or liabilities and engaged in no business
activity. Subsequent to the acquisition of the Bank, Union Financial has
engaged in no significant activity other than holding the stock of the Bank
and engaging in certain passive investment activities. Accordingly, the 1996
and 1995 financial statements reflect the reorganization. Financial
statements and related data for years prior to 1995 relate to the Bank. Union
Financial and the Bank are collectively referred to as the Corporation in this
annual report.
The Bank is a federally-chartered capital stock savings bank headquartered in
Union, South Carolina. The Bank was known as Union Federal Savings and Loan
Association until January 1992, when its shareholders approved a change to a
federally chartered savings bank. The Bank, originally chartered in 1934, is
a member of the Federal Home Loan Bank System. Its deposits are insured to
the maximum limits allowable by the Federal Deposit Insurance Corporation
("FDIC") through the Savings Association Insurance Fund ("SAIF"). In August
1987, the Bank converted from a federal mutual savings and loan association to
a federal capital stock savings and loan association.
The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on residential properties
located in South Carolina. The Bank also makes commercial real estate,
construction and consumer loans, invests in federal government and agency
obligations and purchases fixed and variable rate mortgage participation
certificates. The Bank has no subsidiaries. The principal sources of funds
for the Bank's lending activities include deposits received from the general
public and advances from the Federal Home Loan Bank. The Bank's principal
expenses are interest paid on deposit accounts and other borrowings and
expenses incurred in the operation of the Bank.
The Bank's operations are conducted through its main office and two
full-service branches, all of which are located in Union County, South
Carolina.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
<PAGE>
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data of the Corporation for
the periods indicated.
Operations Data:
Years Ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars In Thousands - Except Share Amounts)
Interest income $9,004 $9,265 $8,767 $8,302 $8,479
Interest expense 5,050 5,260 3,888 3,699 4,733
Net interest income 3,954 4,005 4,879 4,603 3,746
Provision for loan losses -- (105) (335) (210) (201)
------ ------ ------ ------ ------
Net interest income
after provision for
loan losses 3,954 3,900 4,544 4,393 3,545
Other income 506 381 275 537 394
Other expense (3,224) (2,588) (2,727) (2,323) (2,335)
------ ------ ------ ------ ------
Income before income
taxes and cumulative
effect of a change in
accounting principle 1,236 1,693 2,092 2,607 1,604
Income tax expense 374 639 776 896 458
------ ------ ------ ------ ------
Income before cumulative
effect of a change in
accounting principle 862 1,054 1,316 1,711 1,146
Cumulative effect of a
change in accounting
principle (2) -- -- 208 -- --
------ ------ ------ ------ ------
Net income $ 862 $1,054 $1,524 $1,711 $1,146
------ ------ ------ ------ ------
Income per common share (1):
Income before cumulative
effect of a change in
accounting principle $1.07 $1.34 $1.66 $2.16 $1.45
Cumulative effect of a
change in accounting
principle (2) -- -- 0.26 -- --
------ ------ ------ ------ ------
Net income per common
share $1.07 $1.34 $1.92 $2.16 $1.45
------ ------ ------ ------ ------
Weighted average number
of common shares
outstanding 808,307 787,906 792,834 792,782 792,782
(1) All share and per share amounts have been restated for the 2:1
stock split occurring in July 1996.
(2) The Bank adopted Statement of Financial Standards No. 109, Accounting
for Income Taxes ("SFAS 109"), effective October 1, 1993. The
cumulative effect on prior years of adopting SFAS 109 on the Bank's
financial statements was to increase net income by $208,000 ($0.26
per share) for the year ended September 30, 1994.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-2-
<PAGE>
<PAGE>
Financial Condition:
September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars In Thousands)
Total amount of:
Assets $128,133 $120,879 $122,313 $112,316 $98,608
Short-term interest-
bearing deposits 1,938 3,552 2,383 6,492 6,387
Investment securities 19,138 21,264 23,194 13,075 6,646
Mortgage-backed
securities 14,658 18,616 19,946 24,433 20,972
Loans receivable (net) 85,997 73,431 71,006 63,111 56,435
Deposit accounts 93,715 94,750 97,310 98,506 88,506
Shareholders' equity 12,254 11,856 10,693 10,253 8,878
Number of:
Real estate loans
outstanding 1,615 1,641 1,749 1,643 1,772
Deposit accounts 13,095 13,062 12,760 13,075 12,198
Offices 3 3 3 2 2
Other Selected Data:
Years Ended September 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Interest rate spread
during the year 3.01% 2.96% 4.04% 4.42% 3.86%
Net yield on average
interest-earning
assets 3.46% 3.27% 4.29% 4.66% 4.09%
Return on average assets 0.73% 0.83% 1.30% 1.62% 1.20%
Return on average share-
holders' equity 7.01% 9.38% 14.56% 17.89% 13.71%
Dividend payout ratio 46.87% 37.40% 29.92% 19.69% 8.65%
Operating expense to
average assets 2.73% 2.05% 2.33% 2.20% 2.44%
Ratio of average share-
holders' equity to
average assets 10.41% 8.88% 8.94% 9.07% 8.72%
Cash dividends declared
and paid per share of
common stock (1)(2) $0.50 $0.50 $0.58 $0.43 $0.13
(1) 1996 amount does not include cash dividends declared in October,
1996, and paid in November, 1996, of $0.125 per share.
(2) Restated to reflect 2:1 stock split.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-3-
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Asset and Liability Management
- ------------------------------
The Corporation is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. A significant portion of the Corporation's
income results from the spread, or net interest income, between the yield
realized on its interest-earning assets and the rate of interest paid on its
deposits and borrowings. Differences in the timing and volume of repricing
assets versus the timing and volume of repricing liabilities expose the
Corporation to interest rate risk. Management's policies are directed at
minimizing the impact of movements in interest rates on earnings.
The Corporation continues to work to shorten the average life of its assets
and to extend the term on its liabilities in an effort to help minimize the
effects of rising interest rates. The Corporation enjoys an increasing
interest rate spread during periods of falling interest rates. The
Corporation experiences a shrinking interest rate spread in a rising interest
rate environment.
The Corporation's Asset and Liability Committee makes weekly pricing and
marketing decisions on deposit and loan products in conjunction with managing
the Corporation's interest rate risk. The Asset/Liability Committee of the
Board of Directors reviews the Bank's securities portfolio, FHLB advances and
other borrowings as well as the Corporation's asset and liability policies.
The Corporation has established policies and monitors results to control
interest rate sensitivity. Although the Corporation utilizes measures such as
static gap, which is simply the measurement of the difference between
interest-sensitive assets and interest-sensitive liabilities repricing for a
particular time period, just as important a process is the evaluation of how
particular assets and liabilities are impacted by changes in interest rates or
selected indices as they reprice. Asset/liability modeling techniques are
utilized by the Corporation to assess varying interest rate and balance sheet
mix assumptions.
At September 30, 1996 the Corporation's exposure to interest rate risk, as
calculated by the OTS and measured by the impact of changing interest rates on
the Market Value of Portfolio Equity ("MVPE"), was as follows:
Rate Environment
----------------
Minus 200 Plus 200
Basis Points Flat Basis Points
------------ ---- ------------
(In Thousands)
Estimated Market Value of Assets $135,420 $129,710 $123,147
Estimated Market Value of
Liabilities $116,499 $114,098 $111,791
MVPE $ 18,921 $ 15,612 $ 11,356
Increase/(decrease) in MVPE $ 3,309 $ -- $ (4,256)
The analysis above indicates that the Corporation would be negatively affected
by an increase in interest rates and positively affected by a decrease in
interest rates.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-4-
<PAGE>
<PAGE>
Yields Earned and Rates Paid
- ----------------------------
The Corporation's pretax earnings depend primarily on its net interest income,
the difference between the income it receives on its loan portfolio and other
investments and its cost of money, consisting primarily of interest paid on
savings deposits and borrowings. Net interest income is affected by the
average yield on interest-earning assets, the average rate on interest-bearing
liabilities, and the ratio of interest-earning assets to interest-bearing
liabilities.
The following table sets forth at or for the periods and dates indicated the
weighted average yields earned on the Corporation's interest-earning assets,
the weighted average interest rates paid on the Corporation's deposit accounts
and borrowings, the interest rate spread and net yield on interest-earning
assets.
At September 30, Years Ended September 30,
---------------- ----------------------------
1996 1996 1995 1994
---- ---- ---- ----
Average yield on
earnings assets:
Loans 8.70% 8.81% 8.82% 9.06%
Investments (1) 7.75% 6.55% 5.38% 4.72%
Mortgage-backed
securities 6.64% 6.02% 5.69% 6.62%
Total interest-earning
assets 8.23% 7.88% 7.57% 7.72%
Less:
Average rate paid on
deposits 4.62% 4.75% 4.34% 3.68%
Average rate paid on
borrowings 6.30% 6.01% 5.92% 3.73%
Average cost of funds 4.82% 4.87% 4.61% 3.68%
Average interest rate spread 3.41% 3.01% 2.96% 4.04%
Net yield on average
interest-earning assets 3.93% 3.46% 3.27% 4.29%
(1) Includes investment securities, federal funds sold, interest-bearing
time deposits, overnight interest-bearing deposits and Federal Home
Loan Bank (FHLB) stock.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-5-
<PAGE>
<PAGE>
Rate/Volume Analysis
- --------------------
The following table sets forth certain information regarding changes in
interest income and interest expense of the Corporation for the periods
indicated. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (1) changes in
volume (changes in volume multiplied by old rate); (2) changes in rate
(changes in rate multiplied by old volume); and (3) the total. Changes in
rate/volume (change in rate multiplied by the change in volume) have been
allocated to rate and volume variances consistently on a proportionate basis.
Years Ended September 30,
---------------------------------------------------
1996 vs. 1995 1995 vs. 1994
----------------------- -----------------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
Change in interest
income:
Loans ($259) ($4) ($263) $779 ($358) $421
Mortgage-backed
securities (189) 145 (44) (84) (147) (231)
Investments (1) 49 48 342 (34) 308
----- ----- ------ ------ ------- ------
Total interest income (449) 190 (259) 1,037 (539) 498
----- ----- ------ ------ ------- ------
Change in interest
expense:
Deposits (3) 388 385 (134) 631 497
Borrowings and other (603) 10 (593) 703 172 875
----- ----- ------ ------ ------- ------
Total interest expense (606) 398 (208) 569 803 1,372
----- ----- ------ ------ ------- ------
Change in net interest
income $157 ($208) ($51) $468 ($1,342) ($874)
----- ----- ------ ------ ------- ------
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-6-
<PAGE>
<PAGE>
Results of Operations
- ---------------------
Comparison of Years Ended September 30, 1996 and September 30, 1995
- -------------------------------------------------------------------
Net income decreased $192,000 from $1,054,000 in fiscal 1995 to $862,000 in
fiscal 1996. Earnings per share decreased $0.27 to $1.07 for the year ended
September 30, 1996 from $1.34 for the same period in 1995. Fiscal 1996 net
income includes a one-time FDIC assessment of $606,000 ($395,000 after taxes).
On September 30, 1996 President Clinton signed the Omnibus Appropriations Bill
which calls for all financial institutions to share in recapitalizing the FDIC
fund that insures deposits. Earnings before income taxes, gains and losses on
the sale of loans and the effect of the FDIC special assessment were
approximately $1,673,000 for fiscal 1995 and approximately $1,837,000 for
fiscal 1996 or an increase of $164,000 or 9.80%.
Total interest income decreased $261,000, or 2.82%, from $9,265,000 in fiscal
1995 to $9,004,000 in fiscal 1996 due to the reduction in the level of
interest-earning average assets more than offsetting a slight increase in
average yields. Average earning assets decreased due primarily to
management's decision to use the majority of principal repayments from loans
and mortgage-backed securities and maturities of investment securities for the
reduction of FHLB advances. Interest income on loans decreased $266,000, or
3.97%, from $6,702,000 in fiscal 1995 to $6,436,000 in fiscal 1996. Interest
income on investment securities increased $47,000, or 3.57%, from $1,316,000
in fiscal 1995 to $1,363,000 in fiscal 1996. Interest income on
mortgage-backed securities decreased $42,000 or 3.66% from $1,147,000 in
fiscal 1995 to $1,105,000 in fiscal 1996.
Interest expense decreased 3.99% to $5,050,000 for fiscal 1996 from $5,260,000
for fiscal 1995. Interest expense increased $384,000 for deposits and
decreased $594,000 for other borrowings, respectively. Interest expense for
deposits increased due to increasing rates more than offsetting declining
volumes. Interest expense on other borrowings decreased due to lower average
balances and rates on FHLB advances throughout fiscal 1996 as compared to
fiscal 1995.
Provisions for loan losses decreased $105,000 from $105,000 in fiscal 1995 to
$0 in fiscal 1996. The decrease in the provision was due to the reduction in
losses experienced in consumer loans, specifically indirect auto dealer loans.
Dealer loan originations were curtailed dramatically in fiscal 1995. The
Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $79,000 in fiscal 1996. While future losses associated with
indirect dealer loans are possible, management feels that provisions for loan
losses are adequate in regards to this type of lending.
Non-interest income increased 32.81% to $506,000 for the year ended September
30, 1996 from $381,000 for the year ended September 30, 1995. This increase
was due primarily to the increase in fees for financial services.
Non-interest expense increased 24.57% to $3,224,000 in fiscal 1996 from
$2,588,000 in fiscal 1995. The increase in non-interest expense is the result
of the one-time FDIC assessment of $606,000.
Comparison of Years Ended September 30, 1995 and September 30, 1994
- -------------------------------------------------------------------
Net income decreased $470,000 from $1,524,000 in fiscal 1994 to $1,054,000 in
fiscal 1995. Earnings per share decreased $0.58 to $1.34 for the year ended
September 30, 1995 from $1.92 for the same period in 1994. Fiscal 1994 net
income includes non-recurring income of $208,000 due to the adoption of SFAS
109, effective October 1, 1993. Earnings before income taxes, gains and
losses on the sale of loans and the effect of the change in accounting for
income taxes were approximately $2,168,000 for fiscal 1994 and approximately
$1,673,000 for fiscal 1995.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-7-
<PAGE>
<PAGE>
Total interest income increased $498,000, or 5.68%, from $8,767,000 in fiscal
1994 to $9,265,000 in fiscal 1995 due to increased volumes of interest-earning
assets more than offsetting the declining yields. Average interest-earning
assets increased due primarily to an increase in mortgage loan production in
fiscal 1995 as compared to fiscal 1994. The loan production was financed by
advances from the FHLB. Interest income on loans increased $421,000, or
6.70%, from $6,281,000 in fiscal 1994 to $6,702,000 in fiscal 1995. Interest
income on investment securities increased $360,000, or 37.66%, from $956,000
in fiscal 1994 to $1,316,000 in fiscal 1995. The increases in interest income
on loans and investment securities were offset by decreases of $231,000 and
$52,000 in interest income on mortgage-backed securities and on deposits and
federal funds sold, respectively.
Interest expense increased 35.29% to $5,260,000 for fiscal 1995 from
$3,888,000 for fiscal 1994. Interest expense increased $497,000 and $875,000
for deposits and for other borrowings, respectively. Interest expense for
deposits increased due to increasing rates more than offsetting declining
volumes. Interest expense on other borrowings increased due to higher volumes
and rates on FHLB advances throughout fiscal 1995.
Provisions for loan losses decreased $230,000 from $335,000 in fiscal 1994 to
$105,000 in fiscal 1995. The provision was larger in fiscal 1994 due to
losses experienced in consumer loans, specifically indirect auto dealer loans.
Indirect dealer loans are loans purchased directly from the selling dealer.
In fiscal 1994, the Corporation experienced bad debt charge-offs, net of
recoveries, of approximately $200,000. Dealer loan originations were
curtailed dramatically in fiscal 1995. The Corporation experienced bad debt
charge-offs, net of recoveries, of approximately $112,000 in fiscal 1995.
While future losses associated with indirect dealer loans are possible,
management feels that provisions for loan losses are adequate in regards to
this type of lending.
Non-interest income increased 38.55% to $381,000 for the year ended September
30, 1995 from $275,000 for the year ended September 30, 1994. This increase
was due primarily to gains recognized on the sale of loans in the current year
of $20,000 as opposed to losses of $77,000 recognized in fiscal 1994.
Non-interest expense decreased 5.10% to $2,588,000 in fiscal 1995 from
$2,727,000 in fiscal 1994. The decrease in non-interest expense is primarily
a result of declines in compensation and employee benefits and in professional
services, which decreased $50,000 and $71,000, respectively, in fiscal 1995
from fiscal 1994. The decrease in compensation and employee benefits expense
was due to lower staffing levels in fiscal 1995 as compared to fiscal 1994.
Professional services expense was larger in fiscal 1994 due to an advertising
campaign for an opening branch.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-8-
<PAGE>
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Corporation's assets totaled $128,133,000, an
increase of $7,254,000, or 6.00%, as compared to $120,879,000 at September 30,
1995. Investment and mortgage-backed securities decreased $6,084,000 to
$33,796,000 from $39,880,000 at September 30, 1995 due primarily to
management's decision to use the majority of principal repayments from
mortgage-backed securities and maturities of investment securities for the
funding of new loan originations. The decrease in securities was more than
offset by an increase in loans receivable, net, which increased $12,566,000 to
$85,997,000. The increase in loans receivable, net, was also partially funded
by advances from the Federal Home Loan Bank and other borrowings which
increased $7,408,000 from September 30, 1995 to the same period in 1996. The
majority of the increase in loans receivable, net, represents adjustable rate
loans purchased from other organizations. Total deposits decreased $1,035,000
from September 30, 1995 to $93,715,000 in September 30, 1996. There was also
a 3.36% growth in shareholders' equity from September 30, 1995 to September
30, 1996.
Cash and cash equivalents decreased from $3.8 million at September 30, 1995 to
$3.7 million at September 30, 1996. Cash provided by operating activities
decreased from $1.9 million at September 30, 1995 to $760,000 at September 30,
1996; cash provided by (used in) investing activities decreased from $1.8
million at September 30, 1995 to $(6.9) million at September 30, 1996; cash
(used in) provided by financing activities increased from $(3.1) million at
September 30, 1995 to $6.0 million at September 30, 1996. The decrease in
cash provided by operations was due primarily to a reduction in loan sales.
The decrease in cash provided by investing activities was due to a higher
volume of loan originations. The increase in cash provided by financing
activities was due to a reduction in the repayment of advances, along with a
smaller loss in deposit accounts during the year ended September 30, 1996.
Cash and cash equivalents increased from $3.2 million at September 30, 1994 to
$3.8 million at September 30, 1995. Cash provided by operating activities
increased from $1.3 million at September 30, 1994 to $1.9 million at September
30, 1995; cash (used in) provided by investing activities increased from
$(15.1) million at September 30, 1994 to $1.8 million at September 39, 1995;
cash provided by (used in) financing activities decreased from $10.0 million
at September 30, 1994 to $(3.1) million at September 30, 1995. The increase
in cash provided by operations was due to a net increase in other liabilities.
The increase in cash provided by investing activities was due to a lower
volume in loan originations. The decrease in cash provided by financing
activities was due to an increase in FHLB advance activity.
The Bank's liquidity, as measured by the ratio of cash, cash equivalents (not
committed, pledged or required to liquidate specific liabilities) and
investment securities to total deposits was approximately 8.23% at September
30, 1996. Assets that qualify as eligible liquidity are defined by applicable
federal regulation and include cash and cash equivalents and certain types of
United States Treasury and agency obligations, and other similar investments
having maturities of five years or less. The required level of such liquidity
investments is currently 5% of certain of the Bank's liabilities as defined by
the OTS. The liquidity requirement is changed periodically by the OTS to
reflect economic conditions. The Bank has relied upon deposit growth and loan
repayments as its principal sources of funds. If deposit growth and loan
repayments do not generate sufficient liquid funds in the future, the Bank may
borrow additional funds from the FHLB or liquidate short-term investments.
These sources of funds are intended to provide a secondary source of
relatively liquid funds upon which the Bank may rely, if necessary.
Commitments to fund loans in the ordinary course of business at September 30,
1996 were approximately $894,000. See Note 12 to the financial statements for
further information about commitments and contingencies.
As of September 30, 1996, the Bank exceeded the OTS's capital requirements.
See Note 14 to the financial statements for further discussion of these
capital requirements.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-9-
<PAGE>
<PAGE>
Recapture of Bad Debt Reserves
- ------------------------------
The Corporation is permitted a special bad debt deduction in determining
federal taxable income, subject to certain limitations. If the amounts that
qualify as bad debt deductions for federal income tax purposes are later used
for purposes other than for bad debt losses, they will be subject to federal
income tax at the then current corporate rate. As permitted under SFAS 109,
no deferred tax liability is provided for approximately $1,636,000 ($621,000
approximate tax effect) of such tax bad debt reserves that arose prior to
October 1, 1988.
Recent legislation repealed the reserve method of accounting for thrift bad
debt reserves for the first tax year beginning after December 31, 1995 (the
fiscal year ending September 30, 1997 for the Corporation). This legislation
requires all thrifts (including the Corporation) to account for bad debts
using either the specific charge-off method (available to all thrifts) or the
experience method (available only to thrifts that qualify as small banks,
i.e. under $500 million in assets). The Corporation currently uses the PTI
method of accounting for its tax bad debt reserves.
The change in accounting method referred to above would trigger bad debt
reserve recapture for post-1987 reserves over a six year period. At September
30, 1996, the Corporation's post-1987 bad debt reserves were approximately
$230,000.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, non-interest expenses
do reflect general levels of inflation.
Accounting Standards Issued
- ---------------------------
In December 1991, the FASB issued Statement of Financial Standards No. 107,
Disclosure About Fair Value of Financial Instruments ("SFAS 107"), which
extended the then existing fair value disclosure practices by requiring all
entities to disclose the fair value of financial instruments, both assets and
liabilities, recognized and not recognized, for which it is practicable to
estimate fair value in the statement of financial position. If estimating
fair value is not practicable, this standard requires disclosure of
descriptive information pertinent to estimating the value of a financial
instrument. Disclosures about fair value are not required for certain
financial instruments. This standard was effective for financial statements
issued for fiscal years ending after December 15, 1992, except for entities
with less than $150 million in total assets. For those entities, the
effective date of implementation is for fiscal years ending after December 15,
1995. The Corporation implemented this standard effective September 30, 1996.
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The statement is effective for the Corporation for the fiscal
year ending September 30, 1997, although earlier application is encouraged.
Based on the Corporation's present assets, this statement is not expected to
have a significant impact on the Corporation's financial statements.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-10-
<PAGE>
<PAGE>
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS 65, "Accounting for Mortgage Banking Activities."
This statement allows the capitalization of servicing-related costs associated
with mortgage loans that are originated for sale, and to create servicing
assets for such loans. Prior to this statement, originated mortgage servicing
rights were generally accorded off-balance-sheet treatment. The statement is
effective for the fiscal year ending September 30, 1997. The adoption is not
expected to have a material effect on the Corporation's financial condition or
results of operations.
The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," in
October 1995. This statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 requires that
an employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method used
to account for them. The accounting requirements of this statement are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. Though they may be adopted at issuance, the disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which this
statement is initially adopted for recognizing compensation cost. The
Corporation has not determined the impact of adopting SFAS 123 but believes
the impact, if any, will be immaterial.
In August 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FASB's
objective is to develop consistent accounting standards for those
transactions, including determining when financial assets should be considered
sold and derecognized from the statement of financial position and when
related revenues and expenses should be recognized. The approach focuses on
analyzing the components of financial asset transfers and requires each party
to a transfer to recognize the financial assets it controls and liabilities it
has incurred and derecognize assets when control over them has been
relinquished. SFAS 125 is effective for transactions entered into after
December 31, 1996 and is not expected to have a material impact on the
Corporation's financial position or results of operations.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-11-
<PAGE>
<PAGE>
MEMBERS OF THE
AMERICAN INSTITUTE
OF CERTIFIED PUBLIC
ACCOUNTANTS
GREENVILLE, S.C.
GREENWOOD, S.C.
ANDERSON, S.C.
ELLIOTT, DAVIS & COMPANY, L.L.P. AIKEN, S.C.
Certified Public Accountants COLUMBIA, S.C.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Union Financial Bancshares, Inc. and Subsidiary
Union, South Carolina
We have audited the accompanying consolidated balance sheet of Union
Financial Bancshares, Inc. and Subsidiary as of September 30, 1996, and the
related consolidated statements of income, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Union Financial Bancshares,
Inc. and Subsidiary as of September 30, 1995 and for each of the two years in
the period ended September 30, 1995 were audited by other auditors whose
report, dated November 21, 1995, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit 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
audit provides 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 Financial Bancshares, Inc. and Subsidiary as of September 30, 1996
and the consolidated results of their operations and their cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/Elliott, Davis & Company, L.L.P.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
November 14, 1996
-12-
Internationally -- Moore Stephens Elliott Davis, L.L.C.
870 S. Pleasantburg Drive POST OFFICE BOX 6286 GREENVILLE,
SOUTH CAROLINA 29606-6286
TELEPHONE (864) 242-3370 TELEFAX (864) 232-7161
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
---------------------------
September 30,
-------------------
1996 1995
---- ----
(In Thousands)
ASSETS
- ------
Cash $1,747 $253
Short term interest-bearing deposits 1,938 3,552
-------- --------
Total cash and cash equivalents 3,685 3,805
Time deposits -- 99
Investment and mortgage-backed securities:
Held to maturity, at amortized cost (fair value
1996 - $11,526,000, 1995 - $12,767,000) 11,622 12,682
Available for sale, at fair value (amortized
cost 1996 - $22,527,000, 1995 - $27,394,000) 22,174 27,198
-------- --------
Total investment and mortgage-backed securities 33,796 39,880
Loans receivable, net 85,997 73,431
Office properties and equipment, net 1,664 1,714
Federal Home Loan Bank Stock, at cost 950 753
Accrued interest receivable less allowance
(1996 - $13,000, 1995 - $18,000) 1,121 880
Real estate acquired through foreclosure, less
allowance (1996 - $18,000, 1995 - $18,000) 19 30
Other assets 901 287
-------- --------
TOTAL ASSETS $128,133 $120,879
======== ========
LIABILITIES
- -----------
Deposit accounts $93,715 $94,750
Advances from the Federal Home Loan Bank and
other borrowings 20,488 13,080
Accrued interest on deposits 79 30
Advances from borrowers for taxes and insurance 420 434
Other liabilities 1,177 729
-------- --------
TOTAL LIABILITIES 115,879 109,023
COMMITMENTS AND CONTINGENCIES - Note 12
SHAREHOLDERS' EQUITY
- --------------------
Serial preferred stock, no par value,
authorized - 2,000,000 shares, issued
and outstanding - None
Common stock - $0.01 par value,
authorized - 1,500,000 shares,
issued and outstanding - 811,286 shares 8 4
Additional paid-in capital 3,897 3,860
Unrealized loss on investment and mortgage-
backed securities available for sale, net
of income taxes (229) (128)
Retained earnings, substantially restricted 8,578 8,120
-------- --------
TOTAL SHAREHOLDERS' EQUITY 12,254 11,856
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $128,133 $120,879
======== ========
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-13-
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Income
---------------------------------
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
Interest Income: (In Thousands, Except Share Data)
Loans $6,436 $6,702 $6,281
Deposits and federal funds sold 100 100 152
Securities available for sale:
State and municipal 122 -- --
Other investments 1,832 1,558 1,619
Securities held to maturity:
State and municipal -- 159 90
Other investments 514 746 625
----- ------ ------
Total interest income 9,004 9,265 8,767
----- ------ ------
Interest Expense:
Deposit accounts 4,479 4,095 3,598
Advances from the FHLB and other 571 1,165 290
----- ------ ------
Total interest expense 5,050 5,260 3,888
----- ------ ------
Net Interest Income 3,954 4,005 4,879
Provision for loan losses -- (105) (335)
----- ------ ------
Net interest income after
provision for loan losses 3,954 3,900 4,544
----- ------ ------
Non Interest Income:
Fees for financial services 411 296 254
Loan servicing fees 70 65 75
Net gains on sale of investments 20 -- 23
Gains (losses) on sale of loans 5 20 (77)
----- ------ ------
Total non interest income 506 381 275
----- ------ ------
Non Interest Expense:
Compensation and employee benefits 1,265 1,279 1,329
Occupancy and equipment 557 423 434
Deposit insurance premiums 821 226 231
Professional services 173 193 264
Real estate operations (2) 20 33
Other 410 447 436
----- ------ ------
Total non interest expense 3,224 2,588 2,727
----- ------ ------
Income before income taxes and the
cumulative effect of a change in
accounting principle 1,236 1,693 2,092
Provision for income taxes 374 639 776
----- ------ ------
Income before cumulative effect of
a change in accounting principle 862 1,054 1,316
Cumulative effect of a change in
accounting for income taxes -- -- 208
----- ------ ------
Net Income $862 $1,054 $1,524
===== ====== ======
Income per common share:
Income before cumulative effect
of a change in accounting
principle $1.07 $1.34 $1.66
Cumulative effect of a change in
accounting principle -- -- 0.26
----- ------ ------
Net Income per common share $1.07 $1.34 $1.92
===== ====== ======
Weighted average number of common
shares outstanding 808,307 787,906 792,834
======= ======= =======
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-14-
PAGE
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
<TABLE>
Unrealized Retained
Common Stock Additional Gain/Loss Earnings- Total
---------------- Paid-In On Securities Substantially Shareholders'
Shares Amount Capital Available For Sale Restricted Equity
------ ------ ------- ------------------ ---------- ------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMBER
30, 1993 396,391 $396 $3,386 $ -- $6,470 $10,252
Options exercised 153 2 2
Cash dividend ($1.15
per share) (456) (456)
Net unrealized loss
on investment and
mortgage-backed
securities available
for sale (net of
income taxes of
$385,000) (630) (630)
Net income 1,524 1,524
------- ----- ------ ------ ------ -------
BALANCE AT SEPTEMBER
30, 1994 396,544 396 3,388 (630) 7,538 10,692
Reorganization with
conversion of $1.00
par to $0.01 par (392) 392 --
Dissenting shareholder
redemptions (5,161) (51) (78) (129)
Options exercised 11,939 131 131
Cash dividend ($1.00
per share) (394) (394)
Net unrealized gain on
investment and
mortgage-backed
securities available
for sale (net of
income taxes of
$316,000) 502 502
Net income 1,054 1,054
------- ----- ------ ------ ------ -------
BALANCE AT SEPTEMBER
30, 1995 403,322 4 3,860 (128) 8,120 11,856
Options exercised 2,321 41 41
Stock split 405,643 4 (4) --
Cash dividend ($0.50
per share) (404) (404)
Net unrealized loss on
investment and
mortgage-backed
securities available
for sale (net of
income taxes of
$55,000) (101) (101)
Net income 862 862
------- ----- ------ ------ ------ -------
BALANCE AT SEPTEMBER
30, 1996 811,286 $8 $3,897 $(229) $8,578 $12,254
======= ===== ====== ====== ====== =======
See notes to consolidated financial statements.
- -----------------------------------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-15-
</TABLE>
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
OPERATING ACTIVITIES: (In Thousands)
Net income $862 $1,054 $1,524
Adjustments to reconcile net income
to net cash provided by operating
activities:
Cumulative effect of a change in
accounting principle -- -- (208)
Provision for loan losses -- 105 335
Depreciation expense 165 141 131
Recognition of deferred income,
net of costs (111) (88) (247)
Deferral of fee income, net of
costs 244 107 279
Gain on investment transactions (20) -- (23)
Loans originated for sale (805) (3,279) (9,142)
Sale of loans 810 3,279 9,770
(Gain) loss on sale of loans (5) (20) 77
Changes in operating assets and
liabilities:
(Increase) decrease in accrued
interest receivable (241) 103 (279)
FHLB stock dividends -- -- (19)
(Increase) decrease in other
assets (614) 334 (86)
Increase (decrease) in accrued
interest payable 49 (41) 17
Increase (decrease) in other
liabilities 434 195 (833)
Other, Net (8) 16 37
----- ----- -----
Net cash provided by operating
activities 760 1,906 1,333
----- ----- -----
(Continued)
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-16-
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
-------------------------------------
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
INVESTING ACTIVITIES: (In Thousands)
Maturities of time deposits in
other banks $99 $297 $293
Purchase of investment and
mortgage-backed securities:
Held to maturity (11,782) (2,118) (8,677)
Available for sale (10,228) (5,172) (10,575)
Proceeds from maturity of
investment and mortgage-
backed securities:
Held to maturity 500 3,404 245
Available for sale 4,568 1,435 1,950
Proceeds from sale of investment
and mortgage-backed securities:
Held to maturity -- -- --
Available for sale 16,563 -- --
Principal repayments on mortgage-
backed securities:
Held to maturity 242 609 4,734
Available for sale 6,387 5,920 5,698
Transfer of investment and
mortgage-backed securities:
From held to maturity (12,101) -- --
To available for sale 12,266 -- --
Loan originations (37,078) (23,255) (45,313)
Principal repayments of loans 23,951 20,527 36,712
Proceeds from sale of real
estate acquired in settlement
of loans 36 292 104
Property improvements to real
estate owned -- (9) --
Purchase of FHLB stock (197) (459) --
Redemption of FHLB stock -- 459 --
Purchase of office properties and
equipment (116) (109) (255)
------ ------ ------
Net cash (used in) provided by
investing activities (6,890) 1,821 (15,084)
------ ------ ------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock
options 41 131 2
Dividends (404) (394) (456)
Proceeds from FHLB advances and
other borrowings 43,763 46,500 27,000
Repayment of FHLB advances and
other borrowings (36,355) (46,820) (15,320)
Increase (decrease) in deposit
accounts (1,035) (2,561) (1,196)
Net cash provided by (used in)
financing activities 6,010 (3,144) 10,030
------ ------ ------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (120) 583 (3,721)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,805 3,222 6,943
------ ------ ------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $3,685 $3,805 $3,222
====== ====== ======
See notes to consolidated financial statements.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-17-
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Consolidation - Union Financial Bancshares, Inc. ("Union
Financial") was incorporated in the State of Delaware in April 1994, for the
purpose of becoming a savings and loan holding company for Union Federal
Savings Bank, a federally chartered savings bank ("the Bank"). On August 24,
1994, the shareholders of the Bank approved a plan to reorganize the Bank into
the holding company form of ownership. The reorganization was completed on
November 9, 1994, on which date the Bank became a wholly-owned subsidiary of
the Corporation, and the shareholders of the Bank became the shareholders of
the Corporation. Prior to the completion of the reorganization, the
Corporation had no material assets or liabilities and engaged in no business
activity. Subsequent to the acquisition of the Bank, the Corporation has
engaged in no significant activity other than holding the stock of the Bank
and engaging in certain passive investment activities. Accordingly, the 1996
and 1995 financial statements reflect the reorganization. Financial
statements and related data for years prior to 1995 relate to the Bank. Union
Financial and the Bank are collectively referred to herein as the
Corporation. All intercompany amounts and balances have been eliminated in
consolidation.
Accounting Principles - The accounting and reporting policies of the
Corporation conform to generally accepted accounting principles and to general
practice within the savings and loan industry. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and disclosure of commitments and contingencies. Actual results could differ
from those estimates. The following summarizes the more significant
policies.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and
amounts due from depository institutions, federal funds sold and short term,
interest-bearing deposits. From time to time, the Corporation's cash deposits
with other financial institutions may exceed the FDIC insurance limits.
Investments - The Bank adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS
115"), effective October 1, 1993. The effect of the adoption of SFAS 115 was
not material. Under the Statement, debt securities that the Bank has the
positive intent and ability to hold to maturity are classified as held to
maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held to maturity or trading securities are
classified as available for sale securities and reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of shareholders' equity. Transfers of securities between
classifications will be accounted for at fair value. No securities have been
classified as trading securities.
Premiums and discounts on debt securities are amortized or accreted as
adjustments to income over the estimated life of the security using a method
approximating the level yield method. Gains or losses on the sale of
securities are based on the specific identification method. The fair value of
securities is based on quoted market prices or dealer quotes. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-18-
<PAGE>
<PAGE>
Loans Receivable - Loans held for investment are recorded at cost. Mortgage
loans consist principally of conventional one-to-four family residential loans
and interim and permanent financing of non-residential loans that are secured
by real estate. Commercial loans are made primarily on the strength of the
borrower's general credit standing, the ability to generate repayment from
income sources and the collateral securing such loans. Consumer loans
generally consist of home equity loans, automobile and other personal loans.
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the
borrower represents the primary source of repayment, and collateral
liquidation serves as a secondary source of repayment. The Corporation
determines the need for collateral on a case-by-case or product-by-product
basis. Factors considered include the current and prospective credit
worthiness of the customer, terms of the instrument and economic conditions.
Mortgage loans held for sale are valued at the aggregate lower of cost or
market as determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate loan basis. No
mortgage loans were held for sale at September 30, 1996 and 1995.
Allowances for Estimated Losses - The Corporation maintains allowances for
estimated loan losses, uncollected accrued interest receivable and losses on
real estate acquired in settlement of loans. Loss provisions are charged to
income when, in the opinion of management, such losses for which no provision
has been made are probable.
The allowance for loan losses is based upon an evaluation of the loan
portfolio. The evaluation considers such factors as the delinquency status of
loans, current economic conditions, the net realizable value of the underlying
collateral and prior loan loss experience.
The Corporation provides an allowance for uncollectible interest on accrued
interest which is primarily related to loans more than ninety days delinquent
and other loans determined by management to be uncollectible. This allowance
is deducted from accrued interest for financial statement purposes.
Recovery of the carrying value of loans is dependent to some extent on the
future economic environment and operating and other conditions that may be
beyond the Corporation's control. Unanticipated future adverse changes in
such conditions could result in material adjustments to allowances.
Accounting for Impaired Loans - The Financial Accounting Standards Board
issued Statement No. 114, Accounting by Creditors for Impairment of a Loan
("SFAS 114"), which was amended by Statement No. 118. SFAS 114 requires that
impaired loans be measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
matter, at the loan's observable market value or fair value of the collateral
if the loan is collateral dependent. The Statement applies to financial
statements for fiscal years beginning after December 15, 1994. The Statement
was adopted in fiscal 1996; implementation of the Statement did not have a
material impact on financial condition or results of operations. The
Corporation maintains an allowance for impaired loans based on a combination
of evaluation of impairment of smaller balance, homogeneous loans (primarily
consumer loans and 1-4 family real estate mortgages) and specific
identification of impaired loans based on delinquency status and other factors
related to the borrower's ability to repay the loan. The risk characteristics
used to aggregate loans are collateral type, borrower's financial condition
and geographic location. As of and for the years ended September 30, 1996,
1995 and 1994, there were no impaired loans and the Corporation had recognized
no interest income from impaired loans.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-19-
<PAGE>
<PAGE>
The Corporation generally determines a loan to be impaired at the time
management believes that it is probable that the principal and interest may be
uncollectible. Management has determined that, generally, a failure to make a
payment within a 90-day period constitutes a minimum delay or shortfall and
does not generally constitute an impaired loan. However, management reviews
each past due loan on a loan-by-loan basis and may determine a loan to be
impaired prior to the loan becoming over 90 days past due, depending upon the
circumstances of that particular loan. A loan is classified as a nonaccrual
loan at the time management believes that the collection of interest is
improbable, generally when a loan becomes 90 days past due. The Corporation's
policy for charge-off of impaired loans is on a loan-by-loan basis. At the
time management believes the collection of interest and principal is remote,
the loan is charged off. The Corporation's policy is to evaluate impaired
loans based on the fair value of the collateral. Interest income from
impaired loans is recorded using the cash method.
Office Properties and Equipment - Office properties and equipment are
presented at cost less accumulated depreciation. Depreciation is provided on
the straight-line basis over the estimated useful lives of the assets.
Estimated useful lives are 20-50 years for buildings and improvements and
generally five to ten years for furniture, fixtures and equipment.
The cost of maintenance and repairs is charged to expense as incurred, and
improvements and other expenditures, which materially increase property lives,
are capitalized. The costs and accumulated depreciation applicable to
premises and equipment retired or otherwise disposed of are eliminated from
the related accounts, and any resulting gains or losses are credited or
charged to income.
Real Estate Acquired Through Foreclosure - Real estate acquired through
foreclosure is stated at the lower of cost or estimated fair value less
estimated costs to sell. Any accrued interest on the related loan at the date
of acquisition is charged to operations. Costs relating to the development
and improvement of property are capitalized to the extent that such costs do
not exceed the estimated fair value less selling costs of the property,
whereas those relating to holding the property are charged to expense.
Deferred Loan Origination Fees - Nonrefundable loan fees and certain direct
loan origination costs are deferred and recognized over the lives of the loans
using the level yield method. Amortization of these deferrals is recognized
as interest income.
Sale of Loans - The Corporation periodically sells and retains servicing
rights on certain mortgage loans. Gains or losses on the sale of such loans
are recognized when substantially all risks and rewards of ownership are
transferred. If loan servicing is retained, the value of future servicing
rights are considered in the determination of the amount of gain or loss.
Income Taxes - The Bank adopted Statement of Financial Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), effective October 1, 1993. The
adoption of SFAS 109 required a change from the deferred method to the asset
and liability method of accounting for income taxes. The cumulative effect on
prior years of adopting SFAS 109 on the Bank's financial statements was to
increase net income by $208,000 ($0.26 per share) for the year ended
September 30, 1994. The adoption of SFAS 109 did not materially affect the
components of income tax expense for the year ended September 30, 1994. Prior
years' financial statements have not been restated to apply the provisions of
SFAS 109.
Under SFAS 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. A valuation allowance is established for deferred tax assets that
may not be realized. Also, SFAS 109 eliminates, on a prospective basis, the
exception from the requirement to record deferred taxes on tax basis bad debt
reserves in excess of the base year amounts. The tax basis bad debt reserve
that arose prior to the fiscal year 1988 (the base year amount) is frozen, and
the book reserves at that date and all subsequent changes in book and tax
basis reserves are included in the determination of deferred taxes.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-20-
PAGE
<PAGE>
Fair Values of Financial Instruments - The following methods and assumptions
were used by the Corporation in estimating fair values of financial
instruments as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and
short-term instruments approximate their fair value.
Available for sale and held to maturity securities - Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
Loans receivable - For variable rate loans that reprice frequently and
have no significant change in credit risk, fair values are based on
carrying values. Fair values for certain mortgage loans (for example,
one-to-four-family residential), credit-card loans, and other consumer
loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in
loan characteristics. Fair values for commercial real estate and
commercial loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are,
by definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit ("CD's")
approximate their fair values at the reporting date. Fair values for
fixed-rate CD's 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 other short-term
borrowings maturing within 90 days approximate their fair values. Fair
values of other short-term borrowings are estimated using discounted cash
flow analyses based on the Corporation's current incremental borrowing
rates for similar types of borrowing arrangements.
Long-term debt - The fair values of the Corporation's long-term debt are
estimated using discounted cash flow analyses based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the counterparties credit standings.
Net Income Per Common Share - Net income per common share was computed by
dividing net income by the weighted average number of common shares
outstanding during each year. The Corporation's board of directors,
effective July 9, 1996, approved a two-for-one stock split effected in the
form of a 100% common stock dividend. The weighted average number of shares
and per share data has been restated for all periods presented to reflect the
split.
Stock options outstanding are not considered in determining net income per
share because they have no significant dilutive effect on net income per
share.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-21-
<PAGE>
<PAGE>
Reclassifications - Certain amounts in prior years' financial statements have
been reclassified to conform with current year classifications.
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Held to Maturity - Securities classified as held to maturity consisted of the
following (in thousands):
September 30, 1996
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment Securities:
U.S. Agency Obligations $5,473 $3 ($36) $5,440
------- --- ------ -------
Mortgage-backed Securities:
FHLMC 1,282 -- (11) 1,271
FNMA 2,834 1 (53) 2,782
GNMA 2,033 15 (15) 2,033
------- --- ------ -------
Total Mortgage-backed
Securities 6,149 16 (79) 6,086
------- --- ------ -------
Total held to maturity $11,622 $19 ($115) $11,526
======= === ====== =======
September 30, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment Securities:
U.S. Agency Obligations $4,047 $28 ($19) $4,056
Municipal Securities 3,880 10 (17) 3,873
------- --- ------ -------
Total Investment Securities 7,927 38 (36) 7,929
------- --- ------ -------
Mortgage-backed Securities:
FHLMC 2,180 51 (11) 2,220
FNMA 1,329 17 (9) 1,337
GNMA 1,246 35 -- 1,281
------- --- ------ -------
Total Mortgage-backed
Securities 4,755 103 (20) 4,838
------- --- ------ -------
Total held to maturity $12,682 $141 ($56) $12,767
======= === ====== =======
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-22-
<PAGE>
<PAGE>
Available for Sale - Securities classified as available for sale consisted of
the following (in thousands):
September 30, 1996
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment Securities:
U.S. Agency Obligations $12,566 $8 ($353) $12,221
Municipal Securities 1,450 1 (7) 1,444
------- --- ------ -------
Total Investment Securities 14,016 9 (360) 13,665
------- --- ------ -------
Mortgage-backed Securities:
FHLMC 3,455 37 (42) 3,450
FNMA 2,579 25 (19) 2,585
GNMA 1,034 23 -- 1,057
CMO's 1,443 9 (35) 1,417
------- --- ------ -------
Total Mortgage-backed
Securities 8,511 94 (96) 8,509
------- --- ------ -------
Total available for sale $22,527 $103 ($456) $22,174
======= === ====== =======
September 30, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment Securities:
U.S. Treasury Obligations $3,584 $11 ($9) $3,586
U.S. Agency Obligations 7,989 19 (254) 7,754
------- --- ------ -------
Total Debt Securities 11,573 30 (263) 11,340
------- --- ------ -------
Mutual Funds 1,970 -- (50) 1,920
FHLMC Stock 4 73 -- 77
------- --- ------ -------
Total Investment Securities 13,547 103 (313) 13,337
------- --- ------ -------
Mortgage-backed Securities:
FHLMC 6,325 55 (58) 6,322
FNMA 3,644 49 (28) 3,665
CMO's 3,878 42 (46) 3,874
------- --- ------ -------
Total Mortgage-backed
Securities 13,847 146 (132) 13,861
------- --- ------ -------
Total available for sale $27,394 $249 ($445) $27,198
======= === ====== =======
Proceeds, gross gains and gross losses realized from the maturity, sales and
prepayments of available for sale securities were as follows (in thousands):
Years Ended September 30,
---------------------------------
1996 1995 1994
Proceeds $21,131 $1,435 $1,950
Gross gains 168 -- --
Gross losses 148 -- --
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-23-
<PAGE>
<PAGE>
The maturities of securities at September 30, 1996 are as follows (in
thousands):
Held to Maturity Available for Sale
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $2,974 $2,948 $9,436 $9,418
Due after one year
through five years 2,490 2,449 6,181 6,152
Due after five years
through ten years 500 501 2,430 2,319
Due after ten years 5,658 5,628 4,480 4,285
------- ------- ------- -------
Total investment and
mortgage-backed
securities $11,622 $11,526 $22,527 $22,174
======= ======= ======= =======
The mortgage-backed securities held at September 30, 1996 mature between one
and thirty-four years. The actual lives of those securities may be
significantly shorter as a result of prepayments.
At September 30, 1996 and 1995, $5,114,000 and $2,375,000, respectively, of
securities were pledged as collateral for certain deposits.
At September 30, 1996, approximately $2,405,000 of the debt securities and
$2,729,000 of mortgage-backed securities were adjustable rate securities. The
adjustment periods range from monthly to annually and rates are adjusted based
on the movement of a variety of indices.
Investments in collateralized mortgage obligations ("CMO's") represent
securities issued by agencies of the federal government and are non-high risk
securities under regulatory guidelines.
For the period November 15, 1995 through December 31, 1995, the Financial
Accounting Standards Board ("FASB") permitted a one-time reassessment of the
appropriateness of the designations of all securities and a redesignation of
securities, if appropriate. As a result of this reassessment, the Corporation
reclassified securities with a cost of $12,101,000 and a market value of
$12,253,000 from the held to maturity classification to the available for sale
classification.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-24-
<PAGE>
<PAGE>
3. LOANS RECEIVABLE, NET
Loans receivable consisted of the following (in thousands):
September 30,
-------------------
1996 1995
---- ----
Conventional real estate loans:
Fixed rate residential $30,008 $28,159
Fixed rate commercial 2,699 1,608
Adjustable rate residential 39,076 27,814
Adjustable rate commercial 309 861
Construction loans 4,627 5,683
------- -------
Total real estate loans 76,719 64,125
------- -------
Other loans:
Consumer and installment loans 7,740 8,079
Commercial loans 1,879 2,034
Consumer lines of credit 1,736 1,017
Loans secured by deposit accounts 414 650
------- -------
Total other loans 11,769 11,780
------- -------
Total loans 88,488 75,905
------- -------
Less:
Undisbursed portion of interim
construction loans (1,644) (1,421)
Allowance for loan losses (799) (878)
Deferred loan origination fees (48) (175)
------- -------
Total, net $85,997 $73,431
======= =======
Weighted-average interest rate of loans 8.70% 8.63%
===== =====
Participations sold and serviced by the Corporation at September 30, 1996,
1995 and 1994 were approximately $23,364,000, $27,703,000 and $27,177,000,
respectively. The Corporation sells loans in the secondary market without
recourse and retains servicing rights. Servicing loans for others consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments
to investors and foreclosure processing. Loan servicing income is recorded on
the accrual basis and includes servicing fees received from the investors as
well as certain charges collected from the borrowers, such as late payment
fees. In connection with these loans serviced for others, the Corporation
held borrowers' escrow balances of $195,000 at September 30, 1996 and
$215,000 at September 30, 1995.
Adjustable rate real estate loans (approximately $39,385,000 and $28,675,000
at September 30, 1996 and 1995, respectively) are subject to rate adjustments
annually and generally are adjusted based on movement of the Federal Home Loan
Bank National Monthly Median Cost of Funds rate or the Constant Maturity
Treasury index. The maximum loan rates can be adjusted is 200 basis points in
any one year with a lifetime cap of 600 basis points.
The Corporation originated commercial real estate loans which totaled
approximately $3,008,000 and $2,469,000 at September 30, 1996 and 1995,
respectively. These loans are considered by management to contain a somewhat
greater risk of uncollectibility due to the dependency on income production or
future development and sale of the real estate. These commercial real estate
loans are collateralized by housing for the aged, churches, motels, apartments
and other improved real estate.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-25-
<PAGE>
<PAGE>
Under OTS regulations, the Bank may not make loans to one borrower in excess
of 15% of unimpaired capital. This limitation does not apply to loans made
before August 9, 1989. At September 30, 1996, the Bank had loans outstanding
to one borrower ranging up to $750,000 and was in compliance with this
regulation.
Also under current regulations, the Bank's aggregate commercial real estate
loans may not exceed 400% of its capital as determined under regulatory
requirements. These limitations are not expected to significantly restrict
the Bank's ongoing operations.
At September 30, 1996 and 1995, loans which are accounted for on a non-accrual
basis or are contractually past due ninety days or more totaled approximately
$1,123,000 and $337,000, respectively. The amount the Corporation will
ultimately realize from these loans could differ materially from their
carrying value because of future developments affecting the underlying
collateral or the borrower's ability to repay the loans. During the years
ended September 30, 1996, 1995, and 1994, the Corporation recognized no
interest income on loans past due 90 days or more, whereas, under the original
terms of these loans, the Corporation would have recognized additional
interest income of approximately $34,000, $13,000 and $20,000, respectively.
The changes in the allowance for loan losses consisted of the following (in
thousands):
Years Ended September 30,
-------------------------
1996 1995 1994
---- ---- ----
Balance at beginning of year $878 $754 $630
Provision for loan losses -- 105 335
(Charge-offs) recoveries, net (79) 19 (211)
---- ---- ----
Balance at end of year $799 $878 $754
==== ==== ====
Directors and officers of the Corporation are customers of the Corporation in
the ordinary course of business. Loans of directors and officers have terms
consistent with those offered to other customers. Loans for the years ended
September 30, 1996 and 1995 to officers and directors of the Corporation are
summarized as follows (in thousands):
Years Ended September 30,
-------------------------
1996 1995
---- ----
Balance at beginning of year $530 $871
Loans originated during the year 343 13
Loan repayments during the year (161) (94)
Loans to officers whose employment
terminated during the year -- (260)
---- ----
Balance at end of year $712 $530
==== ====
Loans in excess of $60,000 at September 30, 1996 and 1995 to the Corporation's
directors and policy-making officers are included in the table above and
include the following specific loans: a $450,000 loan originated in fiscal
1988 secured by rental and retail commercial properties to William Graham (a
director) and his relative, the unpaid balances of which were $264,000 and
$302,000 at September 30, 1996 and 1995, respectively (Graham became a
director in fiscal 1990); a $340,000 construction loan originated in fiscal
1996 to Carl Mason (a director) secured by real estate, of which $137,000 had
been disbursed as of September 30, 1996; and a $94,000 loan to Carl Mason (a
director) originated in fiscal 1994 secured by his residence, the unpaid
balances of which were $82,000 at September 30, 1996 and $87,000 at September
30, 1995.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-26-
<PAGE> <PAGE>
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following (in thousands):
September 30,
------------------
1996 1995
---- ----
Land $237 $237
Building and improvements 1,513 1,489
Office furniture, fixtures and equipment 1,156 1,065
------ ------
Total 2,906 2,791
Less accumulated depreciation (1,242) (1,077)
------ ------
Office properties and equipment - net $1,664 $1,714
====== ======
5. REAL ESTATE ACQUIRED THROUGH FORECLOSURE
Real estate acquired through foreclosure consisted of the following (in
thousands):
September 30,
------------------
1996 1995
---- ----
Real estate acquired through foreclosure $37 $48
Less allowance for losses (18) (18)
--- ---
Total $19 $30
=== ===
The following is a summary of the results of real estate operations for the
periods indicated (in thousands):
Years Ended September 30,
-------------------------
1996 1995 1994
---- ---- ----
(Income) loss from sales and rental of real
estate acquired through foreclosure, net ($8) $2 ($5)
Provision for loss on real estate -- -- --
Expenses of holding real estate
acquired through foreclosure 6 18 38
--- --- ---
Net charges (increases) to income ($2) $20 $33
=== === ===
The changes in the allowance for losses on real estate acquired through
foreclosure consisted of the following (in thousands):
Years Ended September 30,
-------------------------
1996 1995 1994
---- ---- ----
Allowance, beginning of year $18 $26 $80
Provision -- --
Write-offs (net of recoveries) -- (8) (54)
--- --- ---
Allowance, end of year $18 $18 $26
=== === ===
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-27-
<PAGE>
<PAGE>
6. DEPOSIT ACCOUNTS
Deposit accounts at September 30, were as follows (in thousands):
1996 1995
------------------- --------------------
Rate Balance % Rate Balance %
---- ------- - ---- ------- -
Account Type
NOW accounts:
Commercial noninterest-
bearing 0.00% $1,602 1.71% 0.00% $1,043 1.10%
Noncommercial 1.49% 6,765 7.22% 2.27% 7,674 8.10%
Money market checking
accounts 3.90% 4,982 5.32% 3.50% 3,904 4.12%
Passbook accounts 2.08% 4,943 5.27% 2.85% 5,306 5.60%
Statement savings 2.38% 6,365 6.79% 3.30% 6,703 7.07%
----- ------- ------- ----- ------- -------
Total demand and
savings deposits 2.23% 24,657 26.31% 2.77% 24,630 25.99%
----- ------- ------- ----- ------- -------
Savings certificates:
Up to 3.00% 125 0.13% 0 0.00%
3.01%- 4.00% -- 0.00% 289 0.30%
4.01%- 5.00% 957 1.02% 5,735 6.05%
5.01%- 6.00% 60,837 64.92% 60,926 64.31%
6.01%- 7.00% 7,139 7.62% 3,107 3.28%
7.01%- 8.00% -- 0.00% -- 0.00%
8.01%- 9.00% -- 0.00% 63 0.07%
9.01%-10.00% -- 0.00% -- 0.00%
10.01%-14.00% -- 0.00% -- 0.00%
----- ------- ------- ----- ------- -------
Total savings
certificates 5.43% 69,058 73.69% 5.61% 70,120 74.01%
----- ------- ------- ----- ------- -------
Total deposit accounts 4.62% $93,715 100.00% 4.87% $94,750 100.00%
===== ======= ======= ===== ======= =======
As of September 30, 1996 and 1995, total deposit accounts include
approximately $2,071,000 and $3,414,000, respectively, of deposits from the
Corporation's officers, shareholders, employees or parties related to them.
At September 30, 1996 and 1995, deposit accounts with balances of $100,000 and
over totaled approximately $11,744,000 and $11,197,000, respectively.
Savings certificates by maturity were as follows (in thousands):
September 30,
---------------------
1996 1995
---- ----
Maturity Date
Within 1 year $54,345 $53,871
After 1 but within 2 years 9,727 12,399
After 2 but within 3 years 2,803 1,397
Thereafter 2,183 2,453
------- -------
Total certificate accounts $69,058 $70,120
======= =======
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-28-
<PAGE>
<PAGE>
Interest expense on deposits consisted of the following (in thousands):
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
Account Type
NOW accounts and money market
deposit accounts $264 $304 $294
Passbook and statement savings
accounts 302 422 475
Certificate accounts 3,926 3,397 2,839
Early withdrawal penalties (13) (28) (10)
------ ------ ------
Total $4,479 $4,095 $3,598
====== ====== ======
7. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
At September 30, 1996 and 1995, the Bank had $20,488,000 and $13,080,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of these advances is as
follows (in thousands):
September 30,
---------------------
1996 1995
---- ----
Contractual Maturity:
Within one year - fixed rate $1,000 $2,080
Within one year - adjustable rate 2,488 10,000
After one but within two years -
fixed rate 5,000 1,000
After one but within two years -
adjustable rate 12,000 --
------- -------
Total $20,488 $13,080
======= =======
Weighted average rate 6.30% 6.07%
===== =====
The Bank pledges as collateral to the advances their Federal Home Loan Bank
Stock and has entered into a blanket collateral agreement with the Federal
Home Loan Bank whereby the Bank maintains, free of other encumbrances,
qualifying mortgages (as defined) with unpaid principal balances equal to,
when discounted at 75% of the unpaid principal balances, 100% of total
advances. The amount of qualifying mortgages was $71,157,000 and $56,898,000,
respectively, at September 30, 1996 and 1995.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-29-
<PAGE>
<PAGE>
8. INCOME TAXES
Income tax expense is summarized as follows (in thousands):
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
Current $540 $609 $795
Deferred (166) 30 (19)
---- ---- ----
Total income taxes $374 $639 $776
==== ==== ====
The above tax expense summary does not include an income tax benefit of
$55,000, an income tax provision of $316,000 and an income tax benefit of
$384,000 which were allocated to shareholders' equity during the years ended
September 30, 1996, 1995 and 1994, respectively, relating to net unrealized
gains/losses on securities available for sale.
The provision for income taxes differed from amounts computed by applying the
statutory federal rate of 34% to income before income taxes as follows (in
thousands):
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
Tax at federal income tax rate $420 $576 $711
Increase (decrease) resulting
from:
State income taxes, net of
federal benefit 57 93 76
Interest on municipal bonds (37) (41) (30)
Other, net (66) 11 19
---- ---- ----
Total $374 $639 $776
==== ==== ====
The tax effects of significant items comprising the Corporation's deferred tax
asset as of September 30, 1996 and 1995 are as follows (in thousands):
September 30,
---------------------
1996 1995
---- ----
DEFERRED TAX ASSETS:
Deferred loan fees $23 $66
Book reserves in excess of tax
basis bad debt reserves 168 220
SAIF one-time assessment 246 --
---- ---
Total deferred tax asset 437 286
---- ---
DEFERRED TAX LIABILITIES:
Difference between book and tax
property basis 139 138
Difference between book and tax
Federal Home Loan Bank stock
basis 95 95
Mark to market adjustment on
securities 32 48
---- ---
Total deferred tax liability 266 281
---- ---
NET DEFERRED TAX ASSET $171 $5
==== ===
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-30-
<PAGE>
<PAGE>
Net deferred tax assets of $171,000 and $5,000 at September 30, 1996 and 1995,
respectively, are included in other assets in the balance sheet.
Legislation has been passed which repeals the "reserve" method of accounting
for thrift bad debt reserves for the first tax year beginning after December
31, 1995 (the fiscal year ending September 30, 1997 for the Corporation).
This legislation requires all thrifts (including the Corporation) to account
for bad debts using either the specific charge-off method (available to all
thrifts) or the experience method (available only to thrifts that qualify as
"small banks," i.e. under $500 million in assets). The Corporation currently
uses the Percent of Taxable Income ("PTI") method of accounting, when
beneficial, for its tax bad debt reserves. The change in accounting method
referred to above would trigger bad debt reserve recapture for post-1987
reserves over a six year period. At September 30, 1996, the Corporation's
post-1987 bad debt reserves were approximately $230,000. Deferred taxes have
been provided for the impact of the post-1987 bad debt reserves.
Through September 30, 1996 and prior to the effective date of the legislation,
the Corporation is permitted a special bad debt deduction under PTI in
determining federal taxable income, subject to certain limitations. If the
amounts that qualify as bad debt deductions for federal income tax purposes
are later used for purposes other than for bad debt losses, they will be
subject to federal income tax at the then current corporate rate. As
permitted under SFAS 109, no deferred tax liability is provided for
approximately $1,636,000 ($621,000 approximate tax effect) of such tax bad
debt reserves that arose prior to October 1, 1988.
9. EMPLOYEE BENEFITS
The Corporation has a contributory profit-sharing plan in which substantially
all employees are eligible to participate. Annual contributions to the plan
consist of (1) an amount which matches participant contributions up to a
maximum of 5% of a participant's compensation, (2) a discretionary amount up
to 5% of a participant's compensation and (3) a discretionary amount
determined annually by the Corporation's Board of Directors. Employer
expensed contributions to the plan were $38,000, $77,000 and $75,000 for the
years ended September 30, 1996, 1995 and 1994, respectively.
10. FINANCIAL INSTRUMENTS
The Corporation 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 and to reduce its own exposure to fluctuations in interest rates.
These financial instruments are commitments to extend credit. 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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,
if it is deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counter-party. Collateral held
varies but may include accounts receivable, inventory, property, plant, and
equipment and income-producing commercial properties.
Those instruments involve, to varying degrees, elements of credit and
interest-rate-risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent
of the Corporation's involvement in particular classes of financial
instruments.
The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-31-
<PAGE>
<PAGE>
The Corporation had loan commitments as follows (in thousands):
September 30,
---------------------
1996 1995
---- ----
Commitments to extend credit:
Variable interest rate $430 $88
Fixed interest rate 464 1,252
Total loan commitments 894 1,340
Undisbursed portion of interim
construction loans 1,644 1,421
Unused portion of credit lines
(principally variable-rate
consumer lines secured by
real estate) 2,161 965
------ ------
Total $4,699 $3,726
====== ======
The Corporation has no additional financial instruments with off-balance sheet
risk.
The Corporation has not been required to perform on any financial guarantees
during the past three years. The Corporation has not incurred any losses on
its commitments in 1996, 1995 or 1994.
The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 1996 (in thousands):
Carrying Amount Fair Value
--------------- ----------
Financial assets:
Cash and cash equivalents $3,685 $3,685
Securities available for sale 22,174 22,174
Securities held to maturity 11,622 11,526
Loans receivable 85,997 87,177
Accrued interest receivable 1,121 1,121
Financial liabilities:
Deposits 93,715 92,374
Short-term borrowings 3,488 3,469
Long-term debt 17,000 16,906
------ ------
Total advances from FHLB and
other borrowings 20,488 20,375
------ ------
Off-balance-sheet liabilities:
Commitments to extend credit 4,699 4,699
====== ======
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-32-
<PAGE>
<PAGE>
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
Years Ended September 30,
-----------------------------
1996 1995 1994
---- ---- ----
(In Thousands)
Cash paid for:
Income taxes, net of refund $1,139 $123 $1,000
Interest 5,001 5,301 3,905
Non-cash transactions:
Loans foreclosed 17 199 263
Unrealized (loss) gain on
investment and mortgage-
backed securities available
for sale (353) 196 (1,015)
12. COMMITMENTS AND CONTINGENCIES
Concentrations of Credit Risk - The Corporation's business activity is
principally with customers located in South Carolina. Except for residential
loans in the Corporation's market area, the Corporation has no other
significant concentrations of credit risk.
Litigation - The Corporation is involved in legal actions in the normal course
of business. In the opinion of management, based on the advice of its general
counsel, the resolution of these matters will not have a material adverse
impact on future results of operations or the financial position of the
Corporation.
Potential Impact of Changes in Interest Rates - The Corporation's
profitability depends to a large extent on its net interest income, which is
the difference between interest income from loans and investments and interest
expense on deposits and borrowings. Like most financial institutions, the
Corporation's interest income and interest expense are significantly affected
by changes in market interest rates and other economic factors beyond its
control. The Corporation's interest-earning assets consist primarily of
long-term, fixed rate mortgage loans and investments which adjust more slowly
to changes in interest rates than its interest-bearing liabilities which are
primarily term deposits and advances. Accordingly, the Corporation's earnings
would be adversely affected during periods of rising interest rates.
Savings Association Insurance Fund ("SAIF") Assessment - On September 30,
1996, legislation was enacted which provided for a one-time assessment on all
SAIF-insured deposits for the purpose of recapitalizing the SAIF. The
one-time assessment is 0.657% of SAIF-insured deposits as of March 31, 1995.
The Corporation has accrued with a charge to operations approximately $606,000
representing its estimated liability for the one-time assessment as of
September 30, 1996.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-33-
<PAGE>
<PAGE>
13. STOCK OPTION AND OWNERSHIP PLANS
The Corporation has an Incentive Stock Option Plan ("Plan") for the benefit of
employees. Under the Plan, 50,894 shares of authorized common stock are
reserved for exercise of stock options. The options have a maximum duration
of ten years. Stock options are granted at a price equal to fair market value
on the grant date. At September 30, 1996, after adjusting for all stock
dividend and splits, the Corporation had the following options outstanding:
Shares Average Option Price Expiration
Grant Date Granted Per Share Date
---------- ------- --------- ----
July, 1987 16,450 $4.46 July, 1997
June, 1990 15,810 6.11 June, 2000
February, 1991 3,060 5.39 February, 2001
April, 1993 5,000 5.25 June, 2000
October, 1995 93,000 9.13 October, 2005
January, 1996 3,400 9.13 January, 2006
April, 1996 6,000 10.50 April, 2006
Options were exercised as follows:
Average Exercised
Year Ended September 30, Shares Exercised and Issued Price Per Share
------------------------ --------------------------- ---------------
1996 4,642 $8.89
1995 23,878 5.49
1994 306 6.13
1993 -- --
1992 -- --
1991 9,848 4.76
1990 -- --
1989 14,794 4.81
No stock options have been forfeited during the years ended September 30,
1996, 1995, and 1994.
The Plan also provides for stock appreciation rights ("SAR's"). To date, no
SAR's have been granted.
14. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
On August 7, 1987, the Bank completed its conversion from a federally
chartered mutual association to a federally chartered stock association. A
special liquidation account was established by the Bank for the preconversion
retained earnings of approximately $3,718,000. The liquidation account will
be maintained for the benefit of depositors who held a savings or demand
account as of the March 31, 1986 eligibility or the June 30, 1987 supplemental
eligibility record dates who continue to maintain their deposits at the Bank
after the conversion. In the event of a future liquidation (and only in such
an event), each eligible and supplemental eligible account holder who
continues to maintain his or her savings account will be entitled to receive a
distribution from the liquidation account. The total amount of the
liquidation account will be decreased in an amount proportionately
corresponding to decreases in the savings account balances of eligible and
supplemental eligible account holders on each subsequent annual determination
date. Except for payment of dividends by the Bank to Union Financial and
repurchase of the Bank's stock, the existence of the liquidation account will
not restrict the use or application of such net worth.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-34-
<PAGE>
<PAGE>
The Bank is prohibited from declaring cash dividends on its common stock or
repurchasing its common stock if the effect thereof would cause its net worth
to be reduced below either the amount required for the liquidation account or
the minimum regulatory capital requirement. In addition, the Bank is also
prohibited from declaring cash dividends and repurchasing its own stock
without prior regulatory approval in any amount in a calendar year in excess
of 100% of its current year's net income to the date of any such dividend or
repurchase, plus 50% of the excess of its capital at the beginning of the year
over its regulatory capital requirement.
Under present regulations of the Office of Thrift Supervision ("OTS"), the
Bank must have core capital (leverage requirement) equal to 3.0% of assets, of
which 1.5% must be tangible capital, excluding goodwill. The Bank must also
maintain risk-based regulatory capital as a percent of risk weighted assets at
least equal to 8.0%. In measuring compliance with capital standards, certain
adjustments must be made to capital and total assets.
At September 30, 1996 and 1995, the Bank had the following actual and required
capital amounts and ratios (in thousands):
September 30, 1996
-------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
Actual Capital $11,941 $11,941 $11,941
Unrealized losses on available
for sale securities 229 229 229
General allowance for loan
losses(1) -- -- 799
------- ------ ------
Total Adjusted Capital 12,170 12,170 12,969
Minimum Capital Requirement 1,924 3,848 5,396
------- ------ ------
Regulatory Capital Excess $10,246 $8,322 $7,573
======= ====== ======
Regulatory Capital Ratio 9.49% 9.49% 19.23%
===== ===== ======
September 30, 1995
-------------------------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
Actual Capital $11,649 $11,649 $11,649
Unrealized losses on available
for sale securities 128 128 128
General allowance for loan
losses (1) -- -- 680
------- ------ ------
Total Adjusted Capital 11,777 11,777 12,457
Minimum Capital Requirement 1,812 3,624 4,355
------- ------ ------
Regulatory Capital Excess $9,965 $8,153 $8,102
======= ====== ======
Regulatory Capital Ratio 9.75% 9.75% 22.88%
===== ===== ======
(1) Limited to 1.25% of risk-weighted assets
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-35-
<PAGE>
<PAGE>
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The statement
requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The statement is effective for the Corporation for the fiscal
year ending September 30, 1997, although earlier application is encouraged.
Based on the Corporation's present assets, this statement is not expected to
have a significant impact on the Corporation's financial statements.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Servicing
Rights," which amends SFAS 65, "Accounting for Mortgage Banking Activities."
This statement allows the capitalization of servicing-related costs associated
with mortgage loans that are originated for sale, and to create servicing
assets for such loans. Prior to this statement, originated mortgage servicing
rights were generally accorded off-balance-sheet treatment. The statement is
effective for the fiscal year ending September 30, 1997. The adoption is not
expected to have a material effect on the Corporation's financial condition or
results of operations.
The FASB issued SFAS 123, "Accounting for Stock-Based Compensation," in
October 1995. This statement supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and established financial accounting and reporting
standards for stock-based employee compensation plans. SFAS 123 requires that
an employer's financial statements include certain disclosures about
stock-based employee compensation arrangements regardless of the method used
to account for them. The accounting requirements of this statement are
effective for transactions entered into in fiscal years that begin after
December 15, 1995. Though they may be adopted at issuance, the disclosure
requirements are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which this
statement is initially adopted for recognizing compensation cost. The
Corporation has not determined the impact of adopting SFAS 123 but believes
the impact, if any, will be immaterial.
In August 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." FASB's
objective is to develop consistent accounting standards for those
transactions, including determining when financial assets should be considered
sold and derecognized from the statement of financial position and when
related revenues and expenses should be recognized. The approach focuses on
analyzing the components of financial asset transfers and requires each party
to a transfer to recognize the financial assets it controls and liabilities it
has incurred and derecognize assets when control over them has been
relinquished. SFAS 125 is effective for transactions entered into after
December 31, 1996 and is not expected to have a material impact on the
Corporation's financial position or results of operations.
16. UNION FINANCIAL BANCSHARES, INC. CONDENSED FINANCIAL INFORMATION
(PARENT COMPANY ONLY)
September 30,
---------------------
1996 1995
---- ----
Condensed Balance Sheet
-----------------------
Assets: (In Thousands)
Cash and cash equivalents $256 $132
Investment in thrift subsidiary 11,941 11,650
Other 56 74
------- -------
Total Assets $12,253 $11,856
======= =======
Liabilities and Shareholders'
Equity:
Liabilities $ -- $ --
Shareholders' Equity 12,253 11,856
------- -------
Total Liabilities and Shareholders'
Equity $12,253 $11,856
======= =======
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-36-
<PAGE>
<PAGE>
Years Ended September 30,
-------------------------
1996 1995
---- ----
Condensed Statements of Income (In Thousands)
------------------------------
Equity in undistributed earnings of
subsidiary $893 $1,084
Other expense, net (31) (30)
---- ------
Net income $862 $1,054
==== ======
Condensed Statements of Cash Flows
----------------------------------
Operating Activities:
Net income $862 $1,054
Adjustments to reconcile net income
to net cash used by operating
activities:
Equity in undistributed earnings
of subsidiary (893) (1,084)
Decrease (increase) in other assets 18 (74)
---- ------
Net cash used by operating activities (13) (104)
---- ------
Financing Activities:
Dividends received from subsidiary 500 400
Dividends paid in cash (404) (295)
Proceeds from the exercise of stock
options 41 131
---- ------
Net cash provided by financing
activities 137 236
---- ------
Net increase in cash and cash
equivalents 124 132
Cash and cash equivalents at
beginning of year 132 --
---- ------
Cash and cash equivalents at end of
year $ 256 $ 132
==== ======
17. SUBSEQUENT EVENT
On October 3, 1996, the Corporation, through its subsidiary, Union Federal
Savings Bank, agreed to purchase certain assets and assume certain liabilities
of the Laurens, South Carolina branch of First Union National Bank. Union
Federal will purchase selected assets (primarily real estate) and assume
certain liabilities (primarily deposit liabilities) for which it will pay
$800,000 plus 10.5% of the aggregate outstanding deposits as of the closing
date. The purchase is subject to regulatory approval and is anticipated to
close by March 1997. The acquisition will be accounted for as a purchase.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-37-
<PAGE>
<PAGE>
-------------------------------------------
BOARD OF DIRECTORS
UNION FINANCIAL BANCSHARES AND SUBSIDIARIES
-------------------------------------------
Mason G. Alexander Carl L. Mason, Chairman
Director, Mid-South Management Company President, Carlisle Finishing
James W. Edwards Dwight V. Neese
Dean of Academics, USC-Union President and Chief Executive
Officer
Union Federal Savings Bank
William M. Graham David G. Russell
Owner, Graham's Flowers Self-employed accountant
Louis M. Jordan
President, Jordan's Ace Hardware, Inc.
--------------------------------
LEADERSHIP GROUP
UNION FEDERAL SAVINGS BANK
--------------------------------
Carolyn H. Belue Dwight V. Neese
Assistant Vice President President
Branch & Systems Administration Chief Executive Officer
Manager
L. Matt Pittman
Gerald L. Bolin Assistant Vice President
Vice President Internal Audit & Compliance
Chief Operating Officer Manager
Clemmie W. Boyd James G. Roof
Assistant Vice President Vice President
Duncan By-Pass Branch Manager Mortgage Lending Sales Manager
Gregory S. Duncan David B. Walker
Vice President Assistant Vice President
Credit Administration Manager Consumer Lending Manager
Richard H. Flake Wanda J. Wells
Senior Vice President Vice President & Corporate
Chief Financial Officer Secretary
Human Resource Manager
Robert J. Gregory
Assistant Vice President
Jonesville Branch Manager
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-38-
<PAGE>
<PAGE>
-----------------------
CORPORATE INFORMATION
-----------------------
Common Stock and Dividend Information Corporate Offices
------------------------------------- -----------------
Since August 20, 1996, Union Financial
Bancshares, Inc.'s common stock has been West Main Street
listed on the Nasdaq Stock Market's Over- Union, South Carolina 29379
the-Counter Bulletin Board. The Corpora-
tion is not included on either the Nasdaq Transfer Agent
National Market or the Small Cap Market. --------------
For the period from August 20, 1996
through September 30, 1996, the high and Branch Banking & Trust Co
low bid prices for Union Financial's common 223 West Nash Street
stock were $15.50 and $14.25, respectively. Wilson, North Carolina 27893
Quotations are obtained from the National
Daily Quotation Service. These quotations Independent Certified Public
reflect inter-dealer prices, without retail Accountants
mark-up, mark-down or commissions and may ----------------------------
not necessarily reflect actual transactions.
Prior to August 20, 1996, there was no Elliot, Davis & Company, LLP
established market for the common stock and 870 South Pleasantburg Drive
reliable information was not readily avail- Greenville, SC 29606-6286
able regarding prices for transactions in
the stock. As of September 30, 1996, Special Counsel
there were 467 shareholders of record and ---------------
811,286 shares of common stock issued and
outstanding. This does not reflect the Breyer & Aguggia
number of persons or entities who held 601 13th Street, N.W.
their stock in nominee or "street" names. Washington, D.C. 20005
During the years ended September 30, 1996 General Counsel
and 1995, Union Financial has paid a cash ---------------
dividend of $0.125 per common share per
quarter. See Note 14 to the financial Whitney, White and Diamaduros
statements for information regarding 203 West South Street
certain limitations imposed on the Bank's Union South Carolina 29379
ability to pay cash dividends to the
holding company. Stock Information
-----------------
10-KSB Information
------------------ Wheat First Butcher Singer
A copy of the Form 10-KSB filed with the P. O. Box 10586
Securities and Exchange Commission, will Greenville, SC, 29603
be furnished to shareholders upon written (803) 695-5104
request to the Corporate Secretary, Union
Financial Bancshares, Inc., 203 West Main Trident Securities, Inc.
Street, Union, South Carolina 29379. 4601 Six Forks Road
Raleigh, NC 27609
Annual Meeting of Shareholders Shareholder Relations Officer
------------------------------ -----------------------------
The Annual Meeting of Shareholders will Wanda J. Wells
convene at the Community Room of the Union Financial Bancshares,
University of South Carolina, Union Inc.
Campus, Academy and North Mountain Street, 203 West Main Street
Union, South Carolina on January 22, 1997 Union, SC 29379
at 2:00 p.m.
Additional Information
----------------------
If you are receiving duplicate mailing of
shareholder reports due to multiple accounts,
we can consolidate the mailings without
affecting your account registration. To do
this, or for additional information, contact
our Shareholder Relations Officer, at the
Corporate address shown below.
- ----------------------------------------------------------------------------
Union Financial Bancshares, Inc.
-39-
<PAGE>
<PAGE>
- --------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
- --------------------------------------------------------------------
Corporate Office
203 West Main Street
Union, South Carolina 29379-0866
(864) 427-7692
<PAGE>
<PAGE>
EXHIBIT NO. 21
Subsidiaries of Registrant
Percentage Jurisdiction or State
Subsidiaries Owned Of Incorporation
- -------------- ---------- ----------------------
Union Federal Savings Bank 100% United States
- -------------------
(1) The operations of Union Financial's subsidiary are included in Union
Financial's consolidated financial statements.
<PAGE>
<PAGE>
Exhibit 23 (a)
MEMBERS OF THE
AMERICAN INSTITUTE
OF CERTIFIED PUBLIC
ACCOUNTANTS
GREENVILLE, S.C.
GREENWOOD, S.C.
ANDERSON, S.C.
ELLIOTT, DAVIS & COMPANY, L.L.P. AIKEN, S.C.
Certified Public Accountants COLUMBIA, S.C.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-3628) pertaining to the 1987 Stock Option Plan and the 1995
Stock Option Plan of Union Financial Bancshares, Inc. of our report dated
November 14, 1996, with respect to the consolidated financial statements of
Union Financial Bancshares, Inc. and subsidiary incorporated by reference in
the Annual Report on Form 10-KSB for the year ended September 30, 1996.
/s/Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
December 26, 1996
Internationally -- Moore Stephens Elliott Davis, L.L.C.
870 S. Pleasantburg Drive POST OFFICE BOX 6286 GREENVILLE,
SOUTH CAROLINA 29606-6286
TELEPHONE (864) 242-3370 TELEFAX (864) 232-7161
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Exhibit 23 (b)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Union Financial Bancshares, Inc. on Form S-8 of our report dated November 21,
1995, appearing in the Annual Report on Form 10-KSB of Union Financial
Bancshares, Inc. for the year ended September 30, 1996.
/s/ Deloitte & Touche LLP
Greenville, South Carolina
December 19, 1996
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Exhibit 99
Deloitte &
Touche LLP
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1200 NationsBank Plaza Telephone: (864) 240-5700
7 North Laurens Street Facsimile: (864) 235-8563
Greenville, South Carolina 29601
INDEPENDENT AUDITORS' REPORT
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Union Financial Bancshares, Inc.:
We have audited the consolidated balance sheet of Union Financial Bancshares,
Inc. and subsidiary (the "Corporation") as of September 30, 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the two years in the period ended September 30, 1995. 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 generally accepted auditing
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. As 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation at September 30,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended September 30, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, as of October 1, 1993, the
Corporation changed its method of accounting for income taxes and certain
investments in debt and equity securities to conform with Statements of
Financial Accounting Standards No. 109 and No. 115, respectively.
/s/ Deloitte & Touche LLP
November 21, 1995
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Deloitte Touche
Tohmatsu
International
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<ARTICLE> 9
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
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