SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER 1-5735
UNION FINANCIAL BANCSHARES, INC.
Delaware 57-1001177
(Jurisdiction of Incorporation) (I.R.S. Employer
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
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
State the number of shares outstanding of each of the issuer s classes of
common stock, as of the latest practicable date: The Corporation had issued
and outstanding 808,980 shares, $0.01 par value, common stock as of July 31,
1996.
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UNION FINANCIAL BANCSHARES, INC.
INDEX
Part I. Financial Information Page
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1996
and September 30, 1995 3
Consolidated Statements of Income for the three and nine months
ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1996 and 1995 5-6
Notes to Consolidated Financial Statements 7-11
Item 2. Management s Discussion and Analysis of Financial
Condition and Results of Operations 12-17
Part II. Other Information 18
Signatures 19
2
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Item 1. Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1996 (unaudited) and September 30, 1995
June 30, September 30,
ASSETS 1996 1995
(DOLLARS IN THOUSANDS)
-------- --------
Cash $ 1,355 $ 253
Short term interest-bearing deposits 2,861 3,552
-------- --------
Total cash and cash equivalents 4,216 3,805
-------- --------
Time deposits 0 99
Investment and mortgage-backed securities:
Held to maturity 11,780 18,148
Available for sale 26,242 21,732
-------- --------
Total investment and mortgage-backed securities 38,022 39,880
Loans receivable, net 73,208 73,431
Office properties and equipment, net 1,688 1,714
Federal Home Loan Bank Stock, at cost 753 753
Accrued interest receivable 951 880
Real estate acquired through foreclosure 2 30
Other assets 296 287
-------- --------
TOTAL ASSETS $119,136 $120,879
LIABILITIES
Deposit accounts $ 95,681 $ 94,750
Advances from the Federal Home Loan Bank and
other borrowings 10,566 13,080
Accrued interest on deposits 80 30
Advances from borrowers for taxes and insurance 345 434
Other liabilities 94 729
-------- --------
TOTAL LIABILITIES 106,766 109,023
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 2,000,000 shares, issued
and outstanding - None 0 0
Common stock - $0.01 par value,
authorized - 1,500,000 shares,
issued and outstanding - 809,980 shares 8 8
Additional paid-in capital 3,885 3,856
Unrealized gain (loss) on investment and
mortgage-backed securities available for sale (230) (128)
Retained earnings, substantially restricted 8,707 8,120
-------- --------
TOTAL SHAREHOLDERS' EQUITY 12,370 11,856
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $119,136 $120,879
See notes to consolidated financial statements.
3
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended June 30, 1996 (unaudited) and 1995 (unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
1996 1995 1996 1995
(DOLLARS IN THOUSANDS)
------ ------ ------ ------
Interest Income:
Loans $ 1,548 $ 1,772 $ 4,728 $ 5,057
Deposits and federal funds sold 43 29 87 70
Mortgage-backed securities 282 312 815 837
Interest and dividends on
investment securities 360 314 1,015 1,000
------ ------ ------ ------
Total Interest Income 2,233 2,427 6,645 6,964
Interest Expense:
Deposit accounts 1,109 1,053 3,378 2,944
Advances from the FHLB and other
borrowings 111 355 402 903
------ ------ ------ ------
Total Interest Expense 1,220 1,408 3,780 3,847
Net Interest Income 1,013 1,019 2,865 3,117
Provision for loan losses 0 25 0 95
Net Interest Income After ------ ------ ------ ------
Provision for Loan Losses 1,013 994 2,865 3,022
Non-Interest Income:
Fees for financial services 106 84 303 216
Loan servicing fees 16 21 58 52
Gains (losses) on sale of investment
and mortgage-backed securities
available for sale 4 0 11 0
Gains (losses) on sale of loans 5 13 5 19
------ ------ ------ ------
Total Non-Interest Income 131 118 377 287
Non-Interest Expense:
Compensation and employee benefits 324 353 961 987
Occupancy and equipment 138 108 410 304
Deposit insurance premiums 53 55 160 173
Professional services 38 53 117 156
Real estate operations 0 (2) (3) 16
Other 97 49 300 231
------ ------ ------ ------
Total Non-Interest Expense 650 616 1,945 1,867
Income Before Income Taxes 494 495 1,297 1,442
Income tax expense 158 183 407 562
------ ------ ------ ------
Net Income $ 336 $ 312 $ 890 $ 880
Net Income Per Common Share $0.42 $0.40 $1.10 $1.12
Weighted Average Number of
Common Shares Outstanding 809,386 788,384 807,726 786,254
See notes to consolidated financial statements.
4
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1996 (unaudited) and 1995 (unaudited)
Nine Months Ended
June 30, June 30,
1996 1995
-------- --------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 890 $ 880
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 0 95
Depreciation expense 126 103
Provision for and (gain)/loss on real estate
owned, net (8) 0
Rental proceeds and cash recovery applied to
reduce real estate owned 0 9
Recognition of deferred income, net of costs (106) (66)
Deferral of fee income, net of costs 182 44
Gain on sale of investment and mortgage-
backed securities available-for-sale (11) 0
Loans originated for sale (805) (2,459)
Sale of loans 805 2,245
Gain on sale of loans available-for-sale (5) (19)
FHLB stock dividends 0 (58)
(Increase) decrease in accrued interest receivabl (71) 41
(Increase) decrease in other assets (9) 736
Decrease in other liabilities (724) (142)
Increase (decrease) in accrued interest payable 50 (3)
-------- --------
Net cash provided by operating activities 314 1,406
INVESTING ACTIVITIES:
Maturities of time deposits 99 297
Purchase of investment and mortgage-backed
securities:
Held to maturity (11,777) (1,589)
Available for sale (6,020) (2,485)
Proceeds from sale of investment and mortgage-
backed securities available for sale 11,075 1,094
Proceeds from maturity of investment and mortgage-
backed securities:
Held to maturity 0 3,290
Available for sale 6,091 1,453
Principal repayments on mortgage-backed securities:
Held to maturity 9 457
Available for sale 2,122 2,510
Loan originations (20,080) (19,979)
Principal repayments of loans 22,067 11,393
Proceeds from sale of real estate acquired
in settlement of loans 36 227
Purchase of FHLB stock 0 (305)
Purchase of office properties and equipment (102) (106)
-------- --------
Net cash provided by(used by) investing activities $3,520 $(3,743)
5
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FINANCING ACTIVITIES:
Proceeds from the exercise of stock options $ 29 $ 25
Dividends paid in cash ($0.375 per share - 1996
and $0.375 per share - 1995) (303) (295)
Stock redemption 0 (94)
Proceeds from FHLB advances and other borrowings 11,225 45,500
Repayment of FHLB advances and other borrowings (15,305) (37,820)
Increase (decrease) in deposit accounts 931 (2,945)
-------- --------
Net cash (used by) provided by financing activities (3,423) 4,371
NET INCREASE IN CASH AND CASH EQUIVALENTS 411 2,034
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,805 3,223
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,216 $5,257
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $ 814 $ 578
Interest $3,730 $3,850
Non-cash transactions:
Loans foreclosed $0 $307
See notes to consolidated financial statements.
6
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UNION FINANCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Presentation of Consolidated Financial Statements
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and, therefore, do
not include all disclosures necessary for a complete presentation of
consolidated financial condition, results of operations, and cash flows in
conformity with generally accepted accounting principles. However, all
adjustments which are, in the opinion of management, necessary for the fair
presentation of the interim consolidated financial statements have been
included. All such adjustments are of a normal and recurring nature. The
results of operations for the three and nine months ended June 30, 1996 are
not necessarily indicative of the results which may be expected for the entire
fiscal year. Certain amounts in the prior year s financial statements have
been reclassified to conform with current year classifications.
On November 9, 1994, Union Federal Savings Bank (the "Bank") reorganized
into the holding company form of ownership (the "Reorganization"), resulting
in Union Financial Bancshares, Inc. (the "Registrant", "Union Financial" or
the "Corporation") becoming the sole stockholder of the Bank (after resolution
of dissenters rights). Each outstanding share of common stock of the Bank
and options to acquire shares of common stock of the Bank, became outstanding
shares of common stock of the Registrant, respectively, as a result of the
Reorganization. The consolidated financial statements as of June 30, 1996 and
for the three and nine months ended June 30, 1996 and 1995 include the
accounts of Union Financial and the Bank. Significant intercompany balances
and transactions have been eliminated in consolidation.
Prior to the Reorganization, Union Financial had no material assets or
liabilities and engaged in no business activity. Subsequent to the
acquisition of the Bank, the Registrant has engaged in no significant activity
other than holding the stock of the Bank and engaging in certain passive
investment activities.
7
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In May, 1993, the Financial Accounting Standards Board ( FASB ) issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan ( SFAS 114") (which was subsequently amended by SFAS
No. 118). It 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 Corporation implemented this standard effective
October 1, 1995. 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
such as 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.
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. At June 30, 1996, there were no impaired loans.
In connection with adopting the guidance in A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities published by the FASB in November, 1995, management reclassified
all held-to-maturity securities to the available-for-sale classification. The
securities transferred had a total amortized cost of approximately $12,101,000
and a total market value of approximately $12,266,000. The transfer resulted
in an unrealized gain of approximately $165,000.
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 condition or results
of operations.
8
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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 Corporation for the fiscal year ending September 30, 1997.
The adoption is not expected to have a material effect on the company 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 25, "Accounting for Stock
Issued to Employees" and established financial accounting and reporting
standards for stock-based 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 June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS 125
provides accounting and reporting standards for transfers of financial assets
and extinguishments of liabilities based on a consistent application of
financial components approach that focuses on control of assets and
liabilities. Based on the Corporation's assets and liabilities, SFAS 125
(which is effective for transactions entered into after December 31, 1996) is
not expected to have a significant effect on the Corporation s financial
position, results of operations or liquidity.
2. Income Per Share
Effective July 9, 1996, the Corporation declared a two-for-one stock
split effected in the form of a 100% stock dividend of the Corporation s
common stock. The weighted average number of shares and all other share data
have been restated for all periods presented to reflect this stock split.
Income per share amounts for the three and nine months ended June 30,
1996 and 1995 were computed based on the weighted average number of common
shares outstanding during the periods. Stock options outstanding are not
considered in determining weighted average shares outstanding because they
have no significant dilutive effect.
9
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3. Assets Pledged
Approximately $2,375,000 and $5,122,000 of debt securities at September
30, 1995 and June 30, 1996, respectively, were pledged by the Bank as
collateral to secure deposits of the State of South Carolina, the City of
Union and certain other liabilities. The Bank pledges as collateral to
Federal Home Loan Bank 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%
the unpaid principal balances, 100% of total advances.
4. Contingencies and Loan Commitments
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These instruments expose the Bank to credit risk in excess of the amount
recognized in the balance sheet.
The Bank'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 Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at June 30, 1996
related to these items is summarized below:
Contract Amount
Loan commitments: ---------------
Approved loan commitments $ 890,000
Unadvanced portion of loans 1,471,000
---------------
Total loan commitments $ 2,361,000
Loan 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.
Loan commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management s credit evaluation of the
counterparty. Collateral held is primarily residential property. Interest
rates on loan commitments are a combination of fixed and variable.
Commitments outstanding at June 30, 1996 consist of fixed rate loans of
approximately $2,361,000 at rates ranging from 7.625% to 9.375%. Commitments
to originate loans generally expire within 30 to 60 days.
10
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Commitments to fund credit lines (principally variable rate, consumer
lines, secured by real estate and overdraft protection) totaled approximately
$1,192,000. Of these lines, the outstanding loan balances totaled
approximately $1,550,000. The Bank also has commitments to fund warehouse
lines of credit for various mortgage banking companies totaling $1,000,000,
which had an outstanding balance at June 30, 1996 of approximately $309,000.
During the quarter ended March 31, 1996, the Bank entered into a contract with
another financial institution in South Carolina to purchase 3/1 and 5/1 type
adjustable rate residential mortgage loans. The committment amount at June
30, 1996 was $1,453,000.
Effective, January 1, 1996, the FDIC substantially reduced deposit
insurance premiums for well-capitalized, well-managed financial institutions
that are members of the Bank Insurance Fund ( BIF ). Under the new assessment
schedule, approximately 92% of BIF members pay the statutory minimum annual
assessment of $2,000. With respect to Savings Association Insurance Fund
(SAIF ) member institutions, the FDIC has retained the existing rate schedule
of 23 to 31 basis points. Proposed federal legislation would recapitalize the
SAIF and resolve the current premium disparity by requiring savings
associations like the Bank to pay a one-time assessment to increase the SAIF's
reserves to $1.25 per $100 of deposits. The assessment is expected to be
approximately 80 basis points on the amount of deposits held by a SAIF member
institution at March 31, 1995. The payment of a one-time fee would have the
effect of immediately reducing the capital and pre-tax earnings of SAIF-member
institutions by the amount of the fee. Based on the Bank's assessable
deposits of approximately $92.8 million at March 31, 1995, a one-time
assessment of 80 basis points would equal approximately $742,000. Management
cannot predict whether any legislation, including legislation imposing such a
fee, will be enacted, or, if enacted, the amount of any one-time fee or
whether ongoing SAIF premiums will be reduced to a level equal to that of BIF
premiums.
11
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
On November 9, 1994, Union Federal Savings Bank (the "Bank") reorganized into
the holding company form of ownership (the "Reorganization"), resulting in
Union Financial Bancshares, Inc. (the "Corporation") becoming the sole
stockholder of the Bank (after resolution of dissenters rights).
Effective, January 1, 1996, the FDIC substantially reduced deposit insurance
premiums for well-capitalized, well-managed financial institutions that are
members of the Bank Insurance Fund ("BIF"). Under the new assessment
schedule, approximately 92% of BIF members pay the statutory minimum annual
assessment of $2,000. With respect to Savings Association Insurance Fund (
SAIF ) member institutions, the FDIC has retained the existing rate schedule
of 23 to 31 basis points. Proposed federal legislation would recapitalize the
SAIF and resolve the current premium disparity by requiring savings
associations like the Bank to pay a one-time assessment to increase the SAIF s
reserves to $1.25 per $100 of deposits. The assessment is expected to be
approximately 80 basis points on the amount of deposits held by a SAIF
member institution at March 31, 1995. The payment of a one-time fee would
have the effect of immediately reducing the capital and pre-tax earnings of
SAIF-member institutions by the amount of the fee. Based on the Bank s
assessable deposits of approximately $92.8 million at March 31, 1995, a
one-time assessment of 80 basis points would equal approximately $742,000.
Management cannot predict whether any legislation, including legislation
imposing such a fee, will be enacted, or, if enacted, the amount of any
one-time fee or whether ongoing SAIF premiums will be reduced to a level equal
to that of BIF premiums.
On June 18, 1996 the Corporation declared a stock split in the form of a 100%
stock dividend on the Corporation's outstanding shares of common stock for
each stockholder of record as of the close of business on July 9, 1996.
Financial Condition
At June 30, 1996 total assets of the Corporation decreased 1.44% to
$119,136,000 from $120,879,000 at September 30, 1995. This reduction was due
primarily to a decrease in investment and mortgage-backed securities of
approximately $1,858,000 or 4.66% during the nine months ended June 30, 1996.
The reduction was due primarily to principal reductions along with maturities
in the investment and securities portfolio. The current year trend for the
investments and securities portfolio is a continued reduction with
the proceeds being utilized for the origination and purchase of conventional
mortgage products. Total cash and cash equivalents increased from $3,805,000
at September 30, 1995 to $4,216,000 at June 30, 1996, an increase of $411,000
or 10.80%. Deposits increased $931,000 or .98% to $95,681,000 for the nine
months ended June 30, 1996. This increase was due to an increased emphasis on
core deposits through product development along with increased advertising.
Borrowings decreased from $13,080,000 at September 30, 1995 to $10,566,000 at
June 30, 1996, a decrease of $2,514,000 or 19.22% as a result of increased
deposits along with reductions in investment and mortgage-backed securities.
12
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Net gains of $11,000 were realized on the sale of investment and
mortgage-backed securities available for sale for the nine months ended June
30, 1996. The investment and mortgage-backed securities sales were
primarily directed toward increasing yields on earning assets with a movement
from lower yielding securities to higher yielding conventional mortgage loans.
This practice will be reviewed periodically in order to ascertain its
continued economic benefit.
As of June 30, 1996, real estate acquired through foreclosure ( REO )
consisted of two properties with a net book value of $2,000. Repossessed
assets, which are included in other assets, consisted of $4,400 of automobiles
as of June 30, 1996. REO and repossessed assets are carried at their
estimated fair values less estimated selling costs.
Liquidity
Liquidity is the ability to meet demand for loan disbursements, deposit
withdrawals, repayment of debt, payment of interest on deposits and other
operating expenses. The primary sources of liquidity are savings deposits,
loan repayments, borrowings and interest payments.
The OTS imposes a minimum level of liquidity on the Bank which is currently 5%
of withdrawable deposits plus short-term borrowings. The liquidity level of
the Bank as measured for regulatory purposes was 13.40% as of June 30, 1996.
As in the past, management expects that the Bank can meet its obligations
to fund outstanding loan commitments, which were approximately $2,361,000, as
described in Note 4 to the Consolidated Financial Statements, and other loan
commitments as of June 30, 1996, while maintaining liquidity in excess of
regulatory requirements. In addition, the Bank believes that it can meet
any deposit liability maturities through a combination of replacement of the
deposits with deposits of a similar type and through its borrowing capacity
with the Federal Home Loan Bank.
Capital Resources
The capital requirement of the Bank consists of three components: (1) tangible
capital, (2) core capital and (3) risk based capital. Tangible capital must
equal or exceed 1.5% of adjusted total assets. Core capital must be a minimum
of 3% of adjusted total assets and risk based capital must be a minimum of 8%
of risk weighted assets.
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As of June 30, 1996, the Bank s capital position, as calculated under
regulatory guidelines, exceeds these minimum requirements as follows (dollars
in thousands):
Requirement Actual Excess
----------- ------ --------
Tangible capital $1,801 $12,190 $10,389
Tangible capital to adjusted total assets 1.50% 10.15% 8.65%
Core capital $3,601 $12,190 $8,589
Core capital to adjusted total assets 3.00% 10.15% 7.15%
Risk based capital $4,428 $12,883 $8,455
Risk based capital to risk weighted assets 8.00% 23.28% 15.28%
The reported capital requirements are based on information reported in the OTS
June 30, 1996 quarterly thrift financial report.
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Results of Operations for the Nine Months Ended June 30, 1996 and 1995
General
Net income increased $10,000 or 1.14% to $890,000 for the nine months ended
June 30, 1996 as compared to the same period in 1995. The increase in net
income was due primarily to a 31.36% increase in total non interest income for
the nine months ended June 30, 1996 as compared to the same period in 1995.
Interest Income
Interest income decreased $319,000 or 4.58% for the nine months ended June 30,
1996 as compared to the nine months ended June 30, 1995. Interest income on
loans, due to lower average balances and high levels of refinancing, decreased
6.55% or $329,000 to $4,728,000 for the nine months ended June 30, 1996 from
$5,057,000 for the nine months ended June 30, 1995. Average loan balances
decreased from $76,620,000 at 6/30/95 to $71,472,000 at 6/30/96 due primarily
to reductions in outstanding construction loans. The trend in loan production
for the current fiscal year is toward more conventional lending. Interest
income on deposits and federal funds sold increased $17,000 for the nine
months ended June 30, 1996 as compared to the same period in the prior year.
Interest income on mortgage-backed securities decreased $22,000 for
the nine months ended June 30, 1996 as compared to the same period in the
prior year. The decrease was due to lower outstanding balances as a result of
principal paydowns. Interest and dividends on investment securities increased
$15,000 or 1.50% for the nine months ended June 30, 1996 to $1,015,000 from
$1,000,000 during the same period in 1995. The increase was due primarily to
an increase in interest rates as a result of portfolio structurings that have
taken place during the current fiscal year with a movement to extend
maturities into higher yielding government agency securities.
Interest Expense
The Bank experienced an overall decrease of $67,000 or 1.74% in interest
expense for the nine months ended June 30, 1996 as compared to the nine
months ended June 30, 1995. Interest expense on deposit accounts increased
$434,000 or 14.74% to $3,378,000 for the nine months ended June 30, 1996 from
$2,944,000 during the same period in 1995. In addition to higher rates,
deposit balances increased $937,000 with balances as of June 30, 1996 at
$95,681,000 compared to $94,750,000 for the comparable period for
the previous year. Interest expense on borrowings decreased $501,000 or
55.48% for the nine months ended June 30, 1996 as compared to the nine months
ended June 30, 1995. Lower volumes in FHLB advances for the nine months ended
June 30, 1996 as compared to the same period for the previous year accounted
for this decrease.
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Provision for Loan Loss
During the nine months ended June 30, 1996, provisions for loan losses
decreased $95,000 or 100% from $95,000 during the same period in the previous
year. Additional provisions were not established due to the reduction in the
loan portfolio balance and the current year focus toward more conventional
lending. Management believes the Bank s loan loss allowances are adequate to
absorb estimated future loan losses. The Bank's loan loss allowances at June
30, 1996 were approximately 1.12% of the Bank's outstanding loan portfolio,
net as compared to 1.00% for the comparable period in the prior year.
The following table sets forth information with respect to the Bank's
non-performing assets for the period indicated (dollars in thousands):
June 30, 1996 September 30, 1995
------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate:
Residential $992 $249
Commercial 74 88
Construction -- --
Non-mortgage -- --
------------- ------------------
Total $1,066 $337
Percentage of loans receivable, net 1.46% 0.46%
Allowance for loan losses $817 $878
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $ 36 $ 40
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Non-Interest Income and Expense
Total non-interest income increased $90,000 or 31.36% to $377,000 for the nine
months ended June 30, 1996 from $287,000 for the same period in the previous
year. This increase was due in large part to an increase in fees for
financial services of $87,000 or 40.28% during the nine months ended June 30,
1996 as compared to the nine months ended June 30, 1995. There were also
increases in loan servicing fees of $6,000 for the nine months ended June 30,
1996 as compared to the nine months ended June 30, 1995.
For the nine months ended June 30, 1996, total non-interest expense increased
$78,000 or 4.18% to $1,945,000 from $1,867,000 for the same period in 1995.
The increase was due primarily to an increase in occupancy and equipment
expense of $106,000 for the nine months ended June 30, 1996 as compared to
the nine months ended June 30, 1995. Occupancy and equipment expense increased
due to increases in maintenance and data processing expenses. These increases
were partially offset by a decrease in deposit insurance premiums for the nine
months ended June 30, 1996 due to decreased average volumes in deposits as
compared to the same period in the previous year.
17
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Corporation is involved in various claims and legal actions
arising in the normal course of business. Management believes that
these proceedings will not result in a material loss
to the Corporation.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
On June 18, 1996 the Corporation filed a current report on Form 8-K
disclosing a 2-for-1 stock split.
18
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION FINANCIAL BANCSHARES, INC.
(Registrant)
Date: By:/s/DWIGHT V. NEESE, CEO
------------------------
Dwight V. Neese, CEO
Date: By:/s/RICHARD H. FLAKE, CFO
-------------------------
Richard H. Flake, CFO
19
<PAGE>
<PAGE>
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