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, 1997
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.
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(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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 427-7692
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Securities registered pursuant to Section 12(b) of the Act: None
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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. X
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The registrant's gross revenues for the fiscal year ended September 30,
1997 were approximately $12,046,000.
As of December 1, 1997, there were issued and outstanding 827,700 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 1, 1997, was approximately $19,087000 (827,700
shares at $23.06 per share).
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year Ended
September 30, 1997 (Parts I and II).
2. Portions of the Proxy Statement for the 1998 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 Provident Community Bank (formerly known as "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. In
1997, the Bank changed its name to Provident Community Bank. The Bank
conducts its operations through its main office, which is located at 203 West
Main Street, Union, South Carolina, and three full service branch offices
located in Union, Jonesville, and Laurens, South Carolina. The Jonesville
branch was approved by the OTS in March 1994 and opened with a temporary
office in July 1994. The branch site is currently under review for future
expansion. The Bank acquired its Laurens branch in 1997 in a purchase and
assumption agreement with First Union National Bank of South Carolina. 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
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.
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,
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1997 1996 1995
------------------------- ------------------------- ------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net(1). $120,542 $9,747 8.08% $73,026 $6,436 8.81% $ 75,959 $6,702 8.82%
Mortgage-backed securities 8,079 546 6.76 16,867 1,105 6.55 20,166 1,147 5.69
Investment securities:
Taxable. . . . . . . . . . 19,691 1,462 7.42 18,891 1,249 6.61 20,258 1,186 5.89
Nontaxable . . . . . . . . 952 37 3.92 2,665 122 4.58 4,050 159 3.93
-------- ------ -------- ------ -------- ------
Total investment
securities . . . . . . . . 20,643 1,499 7.26 21,556 1,371 6.36 24,308 1,345 5.53
-------- ------ -------- ------ -------- ------
Overnight deposits . . . . 2,076 63 3.03 2,747 92 3.35 2,024 71 3.51
-------- ------ -------- ------ -------- ------
Total interest-earning
assets 151,340 11,855 7.83 114,196 9,004 7.88 122,457 9,265 7.57
Non-interest-earning assets 5,072 3,821 4,054
-------- -------- --------
Total assets. . . . . . $156,412 $118,017 $126,511
======== ======== ========
Interest-bearing liabilities:
Savings accounts . . . . . 11,611 274 2.36 $11,641 302 2.59 $ 13,740 422 3.07
Negotiable order of
withdrawal ("NOW")
accounts. . . . . . . . . 20,493 353 1.72 12,581 264 2.10 12,366 303 2.45
Certificate accounts . . . 75,008 4,038 5.38 70,069 3,913 5.58 67,215 3,370 5.01
FHLB advances and other
borrowings. . . . . . . . 35,237 1,982 5.62 9,499 571 6.01 19,693 1,165 5.92
-------- ------ -------- ------ -------- ------
Total interest-bearing
liabilities 142,349 6,647 4.67 103,790 5,050 4.87 113,014 5,260 4.61
------ ------ ------
Non-interest-bearing
liabilities. . . . . . . . 1,180 1,936 2,266
-------- -------- --------
Total liabilities. . . . 143,529 105,726 115,280
-------- -------- --------
Shareholders' equity. . . . 12,883 12,291 11,231
-------- -------- --------
Total liabilities and
shareholders' equity . 156,412 $118,017 $126,511
======== ======== ========
Net interest income . . . . $5,208 $3,954 $4,005
====== ====== ======
Interest rate spread(2) . . 3.16% 3.01% 2.96%
Net interest margin (3) . . 3.44% 3.46% 3.27%
Ratio of average interest-
earning assets to
average interest-bearing
liabilities . . . . . . . 1.06x 1.10x 1.08x
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(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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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
$129.9 million at September 30, 1997, representing approximately 76.0% of
total assets. At September 30, 1997, approximately $41.7 million, or 32.1% of
the Corporation's total loan portfolio, consisted of long-term, fixed-rate
mortgage loans. As of September 30, 1997, ARMs represented approximately
$64.5 million, or 49.6% of the total loan portfolio. See "Real Estate Loans."
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,
-----------------------------------------------------
1997 1996 1995
--------------- ---------------- ---------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
First mortgage loans:
Conventional . . . . $105,242 80.98% $70,959 82.51% $57,871 78.82%
Construction loans . 13,508 10.39 4,627 5.38 5,683 7.74
Participation loans
purchased . . . . . 1,000 2.77 1,133 1.32 571 0.78
Total mortgage -------- ------ ------- ------ -------- ------
loans . . . . . . 119,752 92.14 76,719 89.21 64,125 87.34
-------- ------ ------- ------ -------- ------
Second mortgage loans. 4,478 3.45 1,484 1.73 670 0.91
Consumer and installment
loans. . . . . . . . 12,990 10.00 9,871 11.48 10,460 14.24
Savings account loans 183 .14 414 0.48 650 0.88
-------- ------ ------- ------ -------- ------
Total loans. . . . 137,403 105.73 88,488 102.90 75,905 103.37
Less: -------- ------ ------- ------ -------- ------
Undisbursed loans
in process. . . . . (6,598) (5.08) (1,644) (1.91) (1,421) (1.94)
Allowance for loan
losses. . . . . . . (928) (.71) (799) (0.93) (878) (1.19)
Deferred loan fees . 80 .06 (48) (0.06) (175) (0.24)
Net loans -------- ------ ------- ------ -------- ------
receivable . . . . $129,957 100.00% $85,997 100.00% $ 73,431 100.00%
======== ====== ======= ====== ======== ======
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The following table sets forth, at September 30, 1997, 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 Year 3 Years 5 Years 10 Years 10 Years Total
-------- ------- ------- -------- -------- -----
First mortgage loans:
Conventional loans . . $9,951 $11,530 $11,594 $19,462 $52,705 $105,242
Construction loans (a) 13,508 13,508
Participation loans
purchased. . . . . . . 1,002 1,002
Second mortgage loans. . 4,478 4,478
Consumer and installment
loans . . . . . . . . . 4,633 2,256 1,142 1,515 3,444 12,990
Savings account loans. . 183 183
------- ------- ------- ------- ------- --------
Total. . . . . . . . .$28,275 $13,786 $12,736 $20,977 $61,629 $137,403
======= ======= ======= ======= ======= ========
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(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, 1998 which have fixed rates of interest and which have
adjustable rates of interest (in thousands).
Fixed Rate Adjustable Rate Total
---------- --------------- -----
Real estate mortgage loans $31,758 $64,535 $96,293
Consumer and other loans . 8,357 4,478 12,835
------- ------- --------
Total. . . . . . . . . $40,115 $69,013 $109,128
======= ======= ========
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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, 1997,
approximately 87.6% 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, 1997, the
Corporation had approximately $64.5 million of ARMs, or 49.7% of the
Corporation's total outstanding loan portfolio.
At September 30, 1997, 32.1% 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, 1997, the
Corporation sold approximately $46.7 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, 1997, these interests totaled approximately $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 Service Corporation loans
in the past year. The outstanding balance at September 30, 1997 of loans
purchased from the Service Corporation of South Carolina was approximately
$99,000.
6
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Commercial real estate loans constituted approximately $3.8 million, or
2.9% of Union Financial's loan portfolio at September 30, 1997. 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. The Corporation 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, 1997, the Corporation had approximately $13.5 million
outstanding in construction loans, including approximately $6.6 million in
undisbursed proceeds. Of the $13.5 million in construction loans at September
30, 1997, approximately $2.5 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) 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
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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, 1997,
consumer loans amounted to $12.9 million, or 10% 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, 1997 approximately $421,000
remained.
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 Executive
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 of the Corporation,
as well as his/her own costs, incurred in connection with the particular loan
closing. The Corporation originated approximately $15.1 million in mortgage
loans from walk-in customers during fiscal year 1997.
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.
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
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FHLMC on a servicing-retained basis. These were cash sales with no recourse
provisions. The Corporation receives 25 basis points for servicing these
loans.
During the second quarter of the fiscal year 1997 the Corporation established
Provident Mortgage Corporation as a division of Provident Community Bank. The
primary purpose of the mortgage division is to purchase residential mortgage
loans that will be packaged as securities and sold in the secondary market.
The mortgage division purchases the loans from mortgage brokers primarily
located in South Carolina. The loan types purchased are primarily fixed rate
residential along with some adjustable rate residential. In addition,
construction/permanent loans will also be purchased. The mortgage division
had total purchases through the broker network of $85.9 million with loan
sales of $46.7 million. The mortgage division will limit the Bank's interest
rate risk exposure by purchasing forward commitments whereby approximately 50%
to 75% of projected closings will be presold. The mortgage division retains
the servicing of the loans in order to generate additional fee income for the
Bank. At September 30, 1997 the Bank was servicing $64.7 million of loans for
others.
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,
--------------------------
1997 1996 1995
---- ---- ----
Loans originated:
First mortgage loans:
Loans on existing property $83,419 $25,853 $ 8,462
Construction loans . 17,649 2,516 11,770
-------- ------- -------
Total mortgage loans
originated (1) . 101,068 28,369 20,232
Consumer and other loans 15,984 8,139 6,302
-------- ------- -------
Total loans originated $117,052 $36,508 $26,534
======== ======= =======
Loans purchased. . . . . -- $ 570 $ --
Loans sold . . . . . . . $46,763 $ 810 $ 3,259
(1) Includes mortgage division loans purchased.
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, 1997 were approximately
$1,290,000. 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 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, 1997, the Corporation had net deferred loan fees of approximately $80,000.
9
PAGE
<PAGE>
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.
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 Statement of Financial Accounting
Standards ("SFAS") No. 15 and no impaired loans as defined by SFAS No. 114 and
SFAS No. 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:
At September 30,
----------------------
1997 1996 1995
---- ---- ----
Loans accounted for
on a nonaccrual basis:
Real estate:
Residential . . . . . $751 $1,049 $ 249
Commercial. . . . . . -- 74 88
Construction. . . . . -- -- --
Consumer. . . . . . . . 27 -- --
---- ------ -----
Total . . . . . . . $778 1,123 337
---- ------ -----
Accruing loans which are
contractually past due
90 days or more . . . . . -- -- --
Real estate owned, net . . 1 19 30
---- ------ -----
10
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<PAGE>
Total non-performing assets $779 $1,142 $ 367
==== ====== =====
Percentage of loans
receivable net. . . . . .60% 1.33% 0.46%
=== ==== ====
Interest income that would have been recorded for the year ended
September 30, 1997 had non-accruing loans been current in accordance with
their original terms amounted to approximately $36,000. The amount of
interest included in interest income on such loans for the year ended
September 30, 1997 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 collectible 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
collectible 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.
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,
------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of period: $799 $878 $754
Loans charged-off: ---- ---- ----
Real estate:
Residential. . . . . . . . -- (6) (7)
Commercial . . . . . . . . -- -- --
Consumer . . . . . . . . . . (165) (88) (122)
---- ---- ----
Total charge-offs. . . . (165) (94) (129)
Recoveries: ---- ---- ----
Real estate:
Residential. . . . . . . . -- -- 138
Commercial . . . . . . . . -- -- --
Consumer . . . . . . . . . . 51 15 10
---- ---- ----
11
<PAGE>
<PAGE>
Total recoveries . . . . 51 15 148
---- ---- ----
Net (charge-offs) recoveries . (114) (79) 19
---- ---- ----
Provision for loan losses(1) . 243 -- 105
---- ---- ----
Balance at end of period . . . $928 $799 $878
Ratio of net charge-offs to average ==== ==== ====
gross loans outstanding during
the period . . . . . . . . . .09% .11% (.03)%
=== === =====
- ------------------
(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.
12
<PAGE>
<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,
-------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
% of % of % of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
Real estate:
Residential . . . . $400 83.49% $400 82.81% $405 79.72%
Commercial. . . . . 162 4.88 125 3.50 125 4.15
Consumer. . . . . . 266 11.63 174 13.69 248 16.13
Unallocated. . . . . 100 N/A 100 N/A 100 N/A
Total allowance for ---- ------ ---- ------ ---- ------
loan losses . . . . $928 100.00% $799 100.00% $878 100.00%
==== ====== ==== ====== ==== ======
The Corporation maintains an allowance for losses on real estate acquired
in settlement of loans when needed. At September 30, 1997, Union Financial
had an allowance for losses on real estate acquired in settlement of loans of
approximately $0. These values reflect current market conditions and sales
experience. See Notes 1 and 3 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, 1997, the Corporation had approximately $1,243,000
of loans classified as substandard assets, which included real estate loans
totaling $1,174,000 and consumer loans totaling $56,000. The Corporation had
loans totaling approximately $28,000 classified as doubtful and approximately
$1,234,000 designated as special mention at September 30, 1997, which included
real estate loans totaling $1,184,000 and consumer loans totaling $50,000.
The Corporation carefully monitors its delinquent loans and real estate owned
account as to changes in collectible and other characteristics of asset and
borrower quality.
13
<PAGE>
<PAGE>
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, 1997 was $6.5 million.
At that date the Corporation held approximately $8.7 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.
14
<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,
-----------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
----- --------- ----- --------- ----- --------
Available for
Sale:
Investment
securities:
U.S. Agency
obligations. $10,341 65.22% $12,221 55.12% $ 7,754 28.51%
U.S. Treasury
obligations. -- -- -- -- 3,586 13.18
Total debt ------- ------ ------- ------ ------- ------
securities. 10,341 65.22 12,221 55.12 11,340 41.69
Municipal ------- ------ ------- ------ ------- ------
securities . 447 2.82 1,444 6.51 -- --
Mutual funds. -- -- -- -- 1,920 7.07
FHLMC stock . -- -- -- -- 77 0.28
Total investment------- ------ ------- ------ ------- ------
securities. . 10,788 68.04 13,665 61.63 13,337 49.04
Mortgage-backed ------- ------ ------- ------ ------- ------
securities. . 5,067 31.96 8,509 38.37 13,861 50.96
Total available ------- ------ ------- ------ ------- ------
for sale. . . $15,855 100.00% $22,174 100.00% $27,198 100.00%
======= ====== ======= ====== ======= ======
Held to Maturity:
Investment
securities:
U.S. Agency
obligations. $5,995 76.75% $5,473 47.09% $4,047 31.91%
U.S. Treasury
obligations. -- -- -- -- -- --
Municipal
securities . -- -- -- -- 3,880 30.60
Total investment------ ------ ------- ------ ------- ------
securities. . 5,995 76.75 5,473 47.09 7,927 62.51
Mortgage-backed ------ ------ ------- ------ ------- ------
securities. . 1,816 23.25 6,149 52.91 4,755 37.49
Total held to ------ ------ ------- ------ ------- ------
maturity. . . $7,811 100.00% $11,622 100.00% $12,682 100.00%
======= ====== ======= ====== ======= ======
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 of the CMOs on the books at September 30, 1997 was approximately $896,000
with a fair value of $885,000. 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
structures (call provision, rate adjustments, etc.). The Corporation had
approximately $2.6 million in structured notes as of September 30, 1997 with a
fair value of approximately $2.5 million as of that date. See Note 2 of
Notes to Consolidated Financial Statements for more information regarding
investment and mortgage-backed securities.
15
<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, 1997 (dollars in
thousands):
Amount Due or Repricing within:
------------------------------------------------------------------
One Year Over One to Over Five to Over
or Less Five years Ten Years Ten Years Total
--------------- ---------------- ---------------- ---------------- ----------------
Carry- Weighted Carry- Weighted Carry- Weighted Carry- Weighted Carry- Weighted
ing Average ing Average rying Average ing Average ing Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale:
Investment Securities:
U.S. Agency
Obligations. . . . . $ -- --% $1,192 4.21% $1,207 5.36% $7,942 7.45% $10,341 6.82%
Municipal
Securities(a). . . . -- -- 349 5.43 30 6.93 68 8.31 447 5.82
---- ---- ------ ---- ------ ---- ------ ---- ------- ----
Total Investment
Securities . . . . . -- -- 1,541 4.48 1,237 5.42 8,010 7.45 10,788 6.78
Mortgage-backed
Securities . . . . . -- -- 1,470 7.01 2,483 6.32 1,114 6.10 5,067 6.47
---- ---- ------ ---- ------ ---- ------ ---- ------- ----
Total Available for
Sale . . . . . . . . -- -- 3,011 5.71 3,720 6.02 9,124 7.29 15,855 6.68
Held to Maturity:
Investment Securities
U.S. Agency
Obligations. . . . . -- -- -- -- -- -- 5,995 7.69 5,995 7.69
Mortgage-backed
Securities . . . . . -- -- -- -- -- -- 1,816 7.88 1,816 7.88
---- ---- ------ ---- ------ ---- ------ ---- ------- ----
Total Held to
Maturity . . . . . . $ -- --% $-- --% $-- --% $7,811 7.73% $7,811 7.73%
- -----------------------
(a) Yields are presented on a fully taxable equivalent basis.
16
</TABLE>
<PAGE>
<PAGE>
At September 30, 1997, approximately $2.6 million of debt securities and
$2.1 million of mortgage-backed securities were adjustable-rate securities.
At September 30, 1997, the Corporation held obligations of Union County,
South Carolina, in the amount of approximately $99,000 with a fair value of
approximately $98,000 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 1997, the Corporation purchased a First Union
branch that resulted in a net deposit increase of $17.2 million In addition,
the Corporation experienced a net increases in deposits of approximately $4.1
million. The Corporation borrowed funds to support the growth experienced in
fiscal 1997.
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 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 and Laurens County.
Savings deposits in the Corporation at September 30, 1997 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% $ -- $6,512 5.52%
Noncommercial. . . . . . 1.33 2,500 9,982 8.47%
Money market
checking accounts. . . . 3.89 1,000 6,913 5.86
Regular savings accounts . 2.43 50 11,652 9.88
Total demand and
savings deposits. . . 1.95 35,059 29.73%
Certificates of deposit: ---- ------ -----
91-day . . . . . . . . . 4.32 500 1,216 1.03%
6 months . . . . . . . . 5.13 500 29,446 24.97
9-12 months. . . . . . . 5.46 500 12,212 10.35
15-19 months . . . . . . 5.72 500 16,540 14.03
20-30 months . . . . . . 5.81 500 4,493 3.81
36-40 months . . . . . . 5.60 500 1,915 1.62
(table continued on following page)
17
<PAGE>
<PAGE>
Weighted
Average Minimum Percentage
Interest Balance of Total
Deposits Rate Required Balances Balances
-------- ---- -------- -------- --------
(in thousands)
48 months. . . . . . . . 5.72% $500 691 .59
60 months. . . . . . . . 5.76 500 3,790 3.30
IRAs . . . . . . . . . . . 5.57 100 12,462 10.57
Total certificates
of deposits . . . . . 5.39 82,765 70.27%
Total deposits . . . . . . 4.39 $117,914 100.00%
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,
---------------------------
1997 1996 1995
---- ---- ----
Up to 4% . . . . . . . . . . . . $ 22 $ 125 $ 288
4.01% to 6.0%. . . . . . . . . . 77,401 61,794 66,662
6.01% to 8.0%. . . . . . . . . . 5,342 7,139 3,107
8.01% to 10.00% . . . . . . . . -- -- 63
Total savings certificates $82,765 $69,058 $70,120
======= ======= =======
The following table sets forth the maturities of time deposits at September
30, 1997 (in thousands):
Amount
------
Within three months . . . . . $20,144
After three months but
within six months. . . . . . 22,528
After six months but
within one year. . . . . . . 18,112
After one year but within
three years. . . . . . . . . 18,249
After three years but
within five years. . . . . . 3,732
After five years but
within ten years . . . . . . --
-------
Total. . . . . . . . . $82,765
=======
Certificates of deposit with maturities of less than one year increased
from $54.3 million at September 30, 1996 to $60.8 million at September 30,
1997. 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.
18
<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,
1997 (in thousands). Jumbo certificates of deposit are certificates in
amounts of $100,000 or more.
Maturity Period Amount
--------------- ------
Three months or less. . . . . $3,222
Over three through six months 3,603
Over six through 12 months 2,897
Over 12 months. . . . . . . . 3,516
Total jumbo certificates -------
of deposit . . . . . . . $13,238
=======
See Note 5 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,
---------------------
1997 1996 1995
---- ---- ----
Balance outstanding at end of period:
FHLB advances and other
borrowings. . . . . . . . . . . $37,979 $20,488 $13,080
Weighted average rate paid on:
FHLB advances and other
borrowings. . . . . . . . . . . 6.00% 6.30% 6.07%
At September 30,
---------------------
1997 1996 1995
---- ---- ----
Maximum amount of borrowings
outstanding at any month end:
FHLB advances and other
borrowings. . . . . . . . . . . $37,979 $20,488 $24,200
Approximate average short-term
borrowings outstanding with
respect to:
FHLB advances and other
borrowings. . . . . . . . . . . 35,237 9,499 19,693
Approximate weighted average rate
paid on:
FHLB advances and other
borrowings. . . . . . . . . . . 5.62% 6.01% 5.92%
At September 30, 1997, the Corporation had unused short-term lines of credit
to purchase federal funds from unrelated banks totaling $9.5 million. These
lines of credit are available on a one-to-ten day basis for general purposes
of the Corporation. All of the lenders have reserved the right to withdraw
these lines at their option. At September 30, 1997, the Corporation had
unused line of credit with the FHLB of Atlanta totaling $11.6 million.
19
<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, 1997, a local commercial bank, one branch office 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.
During the fiscal year 1997, the Corporation expanded to Laurens County
with the purchase of a First Union branch. The makeup of the area and the
competition is similar to that of Union County.
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 June 30, 1997, 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.
Subsidiary Activities
Under OTS regulations, the Bank generally may invest up to 3% of its
assets in service corporations, provided that at least one-half of investment
in excess of 1% is used primarily for community, inner-city and community
development projects. In 1997, the Bank formed Provident Financial Services,
Inc. for the purpose of engaging in securities brokerage activities for the
benefit of the Bank's customers.
Year 2000 Issues
Computer programs that use only two digits to identify a year could fail
or create erroneous results by or at the Year 2000. The Corporation has
implemented a "Year 2000" task force to ensure all computer programs being
used by the Corporation will be "Year 2000" compliant. The Corporation uses
a national service bureau for its day-to-day operations-Bisys. Bisys has
provided the Corporation with written communication that their 100% compliance
date will be January, 1999. The Corporation does not expect to incur any
material expenses to be in compliance. Any expenses incurred will be expensed
in the month of the expenditure.
Employees
The Corporation had 55 full-time employees as of September 30, 1997.
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 ("HOLA") and, in certain respects, the
Federal Deposit Insurance Act ("FDIA") and the regulations issued
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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 the Corporation, the Bank
and their operations. The Corporation, 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 and the Securities and Exchange Commission
("SEC").
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; ensure that the
FHLBs carry out their housing finance mission; ensure that the FHLBs remain
adequately capitalized and able to raise funds in the capital markets; and
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
$2.1 million at September 30, 1997. Among other benefits, the FHLB-Atlanta
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 maintains two separate insurance funds:
the Bank Insurance Fund ("BIF") and the SAIF. As insurer of the Bank's
deposits, the FDIC has examination, supervisory and enforcement authority over
the Bank.
The Bank's deposit accounts are insured by the FDIC under the SAIF 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
for all SAIF-member institutions. 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" or
"undercapitalized"), which are defined in the same manner as the regulations
establishing the prompt corrective action system under the FDIA as discussed
below. The matrix so created results in nine assessment risk classifications,
with rates that until September 30, 1996 ranged from 0.23% for well
capitalized, financially sound institutions with only a few minor weaknesses
to 0.31% for undercapitalized institutions that pose a substantial risk of
loss to the SAIF unless effective corrective action is taken.
Pursuant to the Deposit Insurance Fund Act ("DIF Act"), which was
enacted on September 30, 1996, the FDIC imposed a special assessment on each
depository institution with SAIF-assessable deposits which resulted in the
SAIF achieving its designated reserve ratio. In connection therewith, the
FDIC reduced the assessment schedule for SAIF members, effective January 1,
1997, to a range of 0% to 0.27%, with most institutions, including the Bank,
paying 0%. This assessment schedule is the same as that for the BIF, which
reached its designated reserve ratio in 1995. In addition, since
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January 1, 1997, SAIF members are charged an assessment of 0.065% of
SAIF-assessable deposits for the purpose of paying interest on the obligations
issued by the Financing Corporation ("FICO") in the 1980's 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 Act 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 4.0%) of its net withdrawable accounts plus short-term
borrowings. 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, has a
Tier I risk-based capital ratio of 4.0% or more, has 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%, has 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%, has 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 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.
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At September 30, 1997, the Bank was categorized as "well capitalized"
under the prompt corrective action regulations of the OTS.
Standards for Safety and Soundness. The federal banking regulatory
agencies have prescribed, 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; (vi) asset quality; (vii)
earnings, and (viii) compensation, fees and benefits. The regulations 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 regulations, the agency may require the Bank to
submit to the agency an acceptable plan to achieve compliance with the
standard. 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 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 association under the Internal Revenue Code of
1986, as amended ("Code") 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 Federal Home Loan Mortgage Corporation or FNMA. 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, 1997, the Bank was in compliance with the QTL test.
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. The Corporation 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.
An institution that fails to meet the core capital requirement
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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 "-- Prompt Corrective Action."
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 totaled to arrive
at total risk-weighted assets. Off-balance sheet 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.
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
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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). A 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. A Tier 3
savings association has capital below the minimum capital requirement (either
before or after the proposed capital distribution). A Tier 3 savings
association may not make any capital distributions without prior approval from
the OTS.
The Bank currently meets 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.
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, 1997, the
Bank's limit on loans to one borrower was $1.6 million. At September 30,
1997, the Bank's largest aggregate amount of loans to one borrower was $1.2
million.
Activities of Savings 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 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 n 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
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types of transactions. Any loan or extension of credit by the Bank to an
affiliate must be secured by collateral in accordance with Section 23A.
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 Board, 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
governed by Sections 22(g) and 22(h) of the Federal Reserve Act, and
Regulation O thereunder. Among other things, these regulations generally
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. Generally, 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.
Community Reinvestment Act. Under the federal CRA, all
federally-insured financial institutions have a continuing and affirmative
obligation consistent with safe and sound operations to help meet all the
credit needs of its delineated community. The CRA does not establish specific
lending requirements or programs nor does it limit an institution's discretion
to develop the types of products and services that it believes are best suited
to meet all the credit needs of its delineated community. The CRA requires
the federal banking agencies, in connection with regulatory examinations, to
assess an institution's record of meeting the credit needs of its delineated
community and to take such record into account in evaluating regulatory
applications to establish a new branch office that will accept deposits,
relocate an existing office, or merge or consolidate with, or acquire the
assets or assume the liabilities of, a federally regulated financial
institution, among others.
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, the Corporation generally is not subject to activity restrictions
under the HOLA. If the Corporation 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 Board 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 savings and loan holding company.
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Qualified Thrift Lender Test. The HOLA provides that 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. Historically, savings institutions such as the
Bank which met certain definitional tests primarily related to their assets
and the nature of their business ("qualifying thrift") were permitted to
establish a reserve for bad debts and to make annual additions thereto, which
may 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 deductions with respect to "qualifying real property loans," which are
generally loans secured by certain interest in real property, were 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 non-qualifying
reserve.
The provisions repealing the current thrift bad debt rules were passed
by Congress as part of "The Small Business Job Protection Act of 1996." The
new rules eliminated the 8% of taxable income method for deducting additions
to the tax bad debt reserves for all thrifts for tax years beginning after
December 31, 1995. These rules also require that all institutions recapture
all or a portion of their bad debt reserves added since the base year (last
taxable year beginning before January 1, 1988). The Bank has previously
recorded a deferred tax liability equal to the bad debt recapture and as such
the new rules will have no effect on the net income or federal income tax
expense. For taxable years beginning after December 31, 1995, the Bank's bad
debt deduction has been determined under the experience method using a formula
based on actual bad debt experience over a period of years. The new rules
allow an institution to suspend bad debt reserve recapture for the 1996 and
1997 tax years if the institution's lending activity for those years is equal
to or greater than the institution's average mortgage lending activity for the
six taxable years preceding 1996, adjusted for inflation. For this purpose,
only home purchase or home improvement loans are included and the institution
can elect to have the tax years with the highest and lowest lending activity
removed from the average calculation. If an institution is permitted to
postpone the reserve recapture, it must begin its six year recapture no later
than the 1998 tax year. The unrecaptured base year reserves will not be
subject to recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988 bad debt
reserves continue to be subject to provisions of present law referred to below
that require recapture in the case of certain excess distributions to
shareholders.
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,
27
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<PAGE>
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.
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.
Other Federal Tax Matters. Other recent changes in the federal tax
system could also affect the business of the Bank. These changes include
limitations on the deduction of personal interest paid or accrued by
individual taxpayers, limitations on the deductibility of losses attributable
to investment in certain passive activities and limitations on the
deductibility of contributions to individual retirement accounts. The Bank
does not believe these changes will have a material effect on its operations.
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. The Corporation also owns a
branch office which opened in April 1989, located at 508 North Duncan By-Pass,
Union, South Carolina and a branch office, acquired in 1997, in Laurens, South
Carolina. 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
28
PAGE
<PAGE>
in premises and equipment totaled approximately $3 million at September 30,
1997. See Note 4 of Notes to Consolidated Financial Statements. All property
is in good condition and meets the operating needs of the Corporation.
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, 1997.
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 to Shareholders ("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
--------------------
No disagreement with the Corporation's independent accountants on
accounting and financial disclosure has occurred during the two most recent
fiscal years.
PART III
Item 9. Directors, Executive Officers, Promoters 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" and "Directors' Compensation" 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.
29
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<PAGE>
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, 1997
- ---- ------ ------------------
Dwight V. Neese 47 President, Chief Executive Officer and
Director
Richard H. Flake 49 Executive Vice President - Chief
Financial Officer
Gerald L. Bolin 35 Vice President - Chief Operating Officer
Wanda J. Wells 41 Vice President - Corporate Secretary
- -----------------
(a) At September 30, 1997.
Dwight V. Neese was appointed as President and Chief Executive Officer
of the Bank effective September 5, 1995. Prior to joining Union Financial,
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 Provident Community Bank 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 Financial in September 1995. Prior to
joining Union Financial, Mr. Flake was Senior Vice President and Corporate
Accounting Manager for United Financial Corporation in Greenwood, South
Carolina.
Gerald L. Bolin joined Union Financial in September 1995. Prior to
joining Union Financial, 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 Financial 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
- --------------------------------------------------------
30
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<PAGE>
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.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
3(a) Certificate of Incorporation(1)
3(b) Bylaws(1)
3(c) Certificate of Amendment of Certificate of Incorporation dated
January 22, 1997
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)
13 1997 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditor
27 Financial Data Schedule
(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.
31
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<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 24, 1997 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: /s/ James W. Edwards
--------------------------- -------------------------
Dwight V. Neese James W. Edwards
Principal Executive Officer Director
Date: December 24, 1997 Date: December 24, 1997
By: /s/ Richard H. Flake By: /s/ David G. Russell
--------------------------- -------------------------
Richard H. Flake David G. Russell
(Principal Financial and Director
Accounting Officer)
Date: December 24, 1997 Date: December 24, 1997
By: /s/ Mason G. Alexander By: /s/ Louis M. Jordan
--------------------------- -------------------------
Mason G. Alexander Louis M. Jordan
Director Director
Date: December 24, 1997 Date: December 24, 1997
By: /s/ William M. Graham By: /s/ Carl L. Mason
--------------------------- -------------------------
William M. Graham Carl L. Mason
Director Director
Date: December 24, 1997 Date: December 24, 1997
<PAGE>
EXHIBIT NO. 3(c)
Certificate of Amendment of Certificate of Incorporation
<PAGE>
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
Union Financial Bancshares, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the state of Delaware,
does hereby certify:
First: That the board of directors of said corporation, at a meeting
duly convened and held, adopted a resolution proposing and declaring advisable
the following amendment to the certificate of incorporation of said
corporation:
"NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation of
the corporation be amended by changing Article VII thereof so that, as
amended, said Article shall be and read as follows:
`ARTICLE VII
Capital Stock
The aggregate number of shares of all classes of capital stock which the
Corporation has authority to issue is 3,000,000 of which 2,500,000 are to be
shares of common stock, $.01 par value per share, and of which 500,000 are to
be shares of serial preferred stock, $.01 par value per share. The shares may
be issued by the Corporation from time to time as approved by the board of
directors of the Corporation without the approval of stockholders except as
otherwise provided in this Article VII or the rules of a national securities
exchange, if applicable. The consideration for the issuance of the shares
shall be paid to or received by the Corporation in full before their issuance
and shall not be less than the par value per share. The consideration for the
issuance of the shares shall be cash, services rendered, personal property
(tangible or intangible), real property, leases of real property or any
combination of the foregoing. In the absence of actual fraud in the
transaction, the judgment of the board of directors as to the value of such
consideration shall be conclusive. Upon payment of such consideration such
shares shall be deemed to be fully paid and nonassessable. In the case of a
stock dividend, the part of the surplus of the Corporation which is
transferred to stated capital upon the issuance of shares as a stock dividend
shall be deemed to be the consideration for their issuance.
A description of the different classes and series (if any) of the
Corporation's capital stock, and a statement of the relative powers,
designations, preferences and rights of the shares of each class and series
(if any) of capital stock, and the qualifications, limitations or restrictions
thereof, are as follows:
A. Common Stock. Except as provided in this Certificate, the holders of
the common stock shall exclusively possess all voting power. Each holder of
shares of common stock shall be entitled to one vote for each share held by
such holders.
1
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<PAGE>
Whenever there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class of stock having
preference over the common stock as to the payment of dividends, the full
amount of dividends and sinking fund or retirement fund or other retirement
payments, if any, to which such holders are respectively entitled in
preference to the common stock, then dividends may be paid on the common
stock, and on any class or series of stock entitled to participate therewith
as to dividends, out of any assets legally available for the payment of
dividends, but only when as declared by the board of directors of the
Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after there shall have been paid, or declared and set aside for
payment, to the holders of the outstanding shares of any class having
preference over the common stock in any such event, the full preferential
amounts to which they are respectively entitled, the holders of the common
stock and of any class or series of stock entitled to participate therewith,
in whole or in part, as to distribution of assets shall be entitled, after
payment or provision for payment of all debts and liabilities of the
Corporation, to receive the remaining assets of the Corporation available for
distribution, in cash or in kind.
Each share of common stock shall have the same relative powers,
preferences and rights as, and shall be identical in all respects with, all
the other shares of common stock of the Corporation.
B. Serial Preferred Stock. Except as provided in this Certificate, the
board of directors of the Corporation is authorized, by resolution or
resolutions from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the powers, designations,
preferences and relative, participating, optional or other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof, including, but not limited to determination of any of the following:
1. the distinctive serial designation and the number of shares
constituting such series;
2. the dividend rates or the amount of dividends to be paid on the
shares of such series, whether dividends shall be cumulative and, if so, from
which date or dates, the payment date or dates for dividends, and the
participating or other special rights, if any, with respect to dividends;
3. the voting powers, full or limited, if any, of the shares of such
series;
4. whether the shares of such series shall be redeemable and, if so,
the price or prices at which, and the terms and conditions upon which such
shares may be redeemed;
5. the amount or amounts payable upon the shares of such series in
the event of voluntary or involuntary liquidation, dissolution or winding up
of the Corporation;
2
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<PAGE>
6. whether the shares of such series shall be entitled to the
benefits of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and, if so entitled, the amount of such fund and
the manner of its application, including the price or prices at which such
shares may be redeemed or purchased through the application of such funds;
7. whether the shares of such series shall be convertible into, or
exchangeable for, shares of any other class or classes or any other series of
the same or any other class or classes of stock of the Corporation and, if so
convertible or exchangeable, the conversion price or prices, or the rate or
rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any other terms and conditions of such
conversion or exchange;
8. the subscription or purchase price and form of consideration for
which the shares of such series shall be issued; and
9. whether the shares of such series which are redeemed or converted
shall have the status of authorized but unissued shares of serial preferred
stock and whether such shares may be reissued as shares of the same or any
other series of serial preferred stock.
Each share of each series of serial preferred stock shall have the
same relative powers, preferences and rights as, and shall be identical in all
respects with, all the other shares of the Corporation of the same series.'"
Second: That thereafter, pursuant to a resolution of its board of
directors, at the annual meeting of the stockholders of said corporation a
majority of the outstanding shares of common stock (there being no other class
of capital stock outstanding) was voted in favor of the amendment.
Third: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Sections 242 of the General Corporation Law of
the State of Delaware.
In witness whereof, said Union Financial Bancshares, Inc. has caused this
certificate to be signed by Dwight V. Neese, its President, and Wanda J.
Wells, its Secretary, its authorized officers, this 22nd day of January 1997.
By /s/ Dwight V. Neese
---------------------
Dwight V. Neese
President
By /s/ Wanda J. Wells
---------------------
Wanda J. Wells
Secretary
3
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<PAGE>
EXHIBIT NO. 13
1997 Annual Report to Shareholders
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC.
1997 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 customers, our employees, 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 understand the value of customer confidence and to do whatever is necessary
and appropriate to achieve customer satisfaction.
To provide our employees with the tools and training necessary to enhance
their career development and the opportunity to be successful.
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.
PROVIDENT
COMMUNITY BANK
<PAGE>
<PAGE>
December, 1997
Dear Fellow Shareholder:
This has been an exceptional year for Union Financial Bancshares, Inc!
Net income of $1.444 million, or $1.76 per share, was up 67.5% over net income
of $862 thousand, or $1.07 per share, in fiscal 1996. Our return on average
shareholder's equity for fiscal 1997 was 11.21%, up from 7.01% in 1996. Our
return on average assets for fiscal 1997 was 0.92%, up from 0.73% in 1996.
Total assets of $171.2 million in 1997 were up $43.1 million, or 33.6%, over
total assets of $128.1 million in 1996. The phenomenal growth in assets
occurred largely as a result of 51.1% growth in our loan portfolio.
The fiscal year 1996 included a special assessment of $606,000 (pre-tax). The
special assessment was a recapitalization of the Savings Institutions
Insurance Fund (SAIF) signed into law by the Omnibus Appropriations Bill on
September 30, 1996. Net income in 1996, excluding the special assessment,
would have been $1,256,000.
The exceptional performance of Union Financial Bancshares is the result of
significant progress being made in transforming the Company from a traditional
thrift institution to a consumer-oriented community bank. To draw attention
to the changes occurring within the Company, the name Union Federal Savings
Bank was changed to Provident Community Bank in January 1997. The new name was
chosen after a lengthy search process to reflect the new vision, mission and
core values of Union Financial Bancshares and to properly position the Company
for the future.
The name Provident evokes a completely new image for the Company that is no
longer geographic in nature, but rather is a philosophical statement.
Provident was chosen because it means "prudent, frugal, saving and making
provision for the future." Community Bank was a natural addition to the new
name because in these days of mergers and megabanks, we are committed to
serving the financial needs of our customers with high quality products and
personal attention at the community level. To further reinforce the meaning of
Provident Community Bank, the slogan "Providing for Today, Planning for
Tomorrow" was added to the new corporate logo.
In today's highly competitive financial services marketplace, our customers
have come to expect a broader spectrum of financial services and products and
they also expect them to be available at a time and place convenient for them.
As a Bank always known for its personalized service, we have made substantial
strides in the past year to be even more responsive to our customers' needs.
In late March, the Bank opened its fourth retail office in Laurens, South
Carolina. This first-ever acquisition enabled Provident to expand its
distribution system into a contiguous county with an established presence and
immediate market share. Provident seized this opportunity for rapid growth by
quickly modifying and upgrading the operational support systems necessary to
service an expanded base of customers, including a high concentration of
commercial accounts.
Over the past year, Provident tripled the number of ATM's available for the
convenience of our customers. We also substantially upgraded telephone
banking with the introduction of BANKLINE. This new service puts our
customer's account information at their fingertips twenty-four hours a day,
three hundred and sixty-five days a year. BANKLINE is simple to use and
provides instant access banking to customers from any touch-tone telephone.
The Bank is presently in the final stages of developing an interactive web
page for anyone in the world who wants to access the Bank through the
Internet. This new service should be available during first quarter of 1998.
The rapid pace of technological change coupled with the ever-changing needs of
our customers requires constant evaluation of, and investment in, retail
banking systems. In addition to the enhancements listed above, Provident
recently completed
<PAGE>
<PAGE>
a thorough evaluation of its existing distribution channels, systems, and
personnel and is progressing toward an exciting overhaul of the retail
systems. The new "face" of the retail branch office network will be completed
in mid-1998 and will result in greater efficiency, increased sales and
customer satisfaction.
Provident's loan portfolio grew a phenomenal $44.0 million last year, up over
51% in a single year. We set a record with total loan originations of $116.8
million, up 201.3% from total organizations of $38.8 million the previous
year.
Investment in a new automated loan origination system has added significant
capacity to our ability to be responsive to our customers. We have
dramatically reduced processing time from weeks to days and in some cases even
hours.
Provident Mortgage Company, a newly created division of Provident Community
Bank, opened in Laurens at the end of the second quarter. During the
remaining half of the fiscal year, Provident Mortgage Company closed $82.8
million in mortgage loans and sold $46.7 million into the secondary market.
We expect continued growth and profitability in this division as we integrate
wholesale and retail loan administration in the new year.
The Bank also set new records in consumer and commercial loan originations
last year. Total originations of $18.3 million were up 86.3% over originations
of $9.8 million the previous year.
Concentrated efforts to improve credit quality over the past year have
resulted in continued declines in problem assets. Provisions for loan losses
were increased $243 thousand last year, against charge-offs, net of
recoveries, of $114 thousand, for a year-end balance of $928 thousand. We have
maintained high credit standards and implemented new monitoring systems to
quickly identify and resolve problem assets.
The Bank took another major step in 1997 with the establishment of a new
subsidiary service corporation and the opening of Provident Financial
Services. Securities and other investment products are now available in the
communities we serve through our relationship with UVEST Investment Services,
a registered broker-dealer and member of both the National Association of
Securities Dealers (NASD) and the Securities Investment Protection Corporation
(SIPC). A complete line of investment products and services, including stocks
and bonds, mutual funds and tax-deferred annuities, as well as financial
planning are available in the new "Investment Center".
Other financial products and services are under consideration where strong
customer demand indicates good prospects for growth and profitability for the
Bank.
In today's competitive and quickly changing environment, an experienced and
highly motivated management team and staff are essential to the long-term
health of any organization. Provident's senior management team averages 20
years of banking experience. Of the 58 total employees, 7 have over 20 years
of experience and an additional 14 have over 10 years of experience in the
financial services industry. We have skilled and dedicated employees
committed to the success of our Company. Their compensation and incentive
programs are tied directly to shareholder returns.
The directors, management and staff of Provident are also the Bank's most
prominent stockholders, owning 19.7% of our common stock.
Peter Drucker has said, "The best way to predict the future is to create it."
Everyone associated with Union Financial Bancshares knows our future
ultimately depends on our ability to deliver superior value to our
shareholders and we are excited about our Company's future because we are
proactively creating it. While there are still many challenges in the
economic environment and continuously changing marketplace, we are confident
that Union Financial Bancshares will continue to be a high-performing Company
and the best is yet to come.
Thank you for your interest, patronage and support.
Sincerely,
/s/ Dwight V. Neese
Dwight V. Neese
President & Chief Executive Officer
<PAGE>
<PAGE>
Table of Contents
Business. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Selected Financial and Other Data . . . . . . . . . . . . . 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 6
Independent Auditor's Report. . . . . . . . . . . . . . . .13
Consolidated Financial Statements . . . . . . . . . . . . .14
Notes to Consolidated Financial Statements. . . . . . . . .19
Directors and Leadership Group. . . . . . . . . . . . . . .39
Corporation Information . . . . . . . . . . . . . . . . . .40
Notice of Annual Meeting. . . . . . . . . . . . . . . . . .40
10-KSB Information. . . . . . . . . . . . . . . . . . . . .40
Common Stock Information. . . . . . . . . . . . . . . . . .40
----------------
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 Provident Community Bank (formerly known as 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 1997 and 1996 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. In January, 1997, the
Bank changed its name to Provident Community Bank.
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 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 three full-service branches, all of which are located in the
upstate area of South Carolina.
<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,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands - Except Share Amounts)
Interest income $11,855 $9,004 $9,265 $8,767 $8,302
Interest expense 6,647 5,050 5,260 3,888 3,699
Net interest income 5,208 3,954 4,005 4,879 4,603
Provision for loan losses (243) -- (105) (335) (210)
Net interest income after ------- ------ ------ ------ ------
provision for loan losses 4,965 3,954 3,900 4,544 4,393
Other income 953 506 381 275 537
Other expense (3,616) (3,224) (2,588) (2,727) (2,323)
------- ------ ------ ------ ------
Income before income taxes
and cumulative effect of
a change in accounting
principle 2,302 1,236 1,693 2,092 2,607
Income tax expense 858 374 639 776 896
Income before cumulative ------- ------ ------ ------ ------
effect of a change in
accounting principle $1,444 862 1,054 1,316 1,711
Cumulative effect of a
change in accounting
principle (2) -- -- -- 208 --
------- ------ ------ ------ ------
Net income $1,444 $862 $1,054 $1,524 $1,711
------- ------ ------ ------ ------
Income per common share: (1)
Income before cumulative
effect of a change in
accounting principle $1.76 $1.07 $1.34 $1.66 $2.16
Cumulative effect of a
change in accounting
principle (2) -- -- -- 0.26 --
----- ----- ----- ----- -----
Net income per common share $1.76 $1.07 $1.34 $1.92 $2.16
----- ----- ----- ----- -----
Weighted average number
of common shares
outstanding 820,498 808,307 787,906 792,834 792,782
(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.
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UNION FINANCIAL BANCSHARES, INC.
4
<PAGE>
<PAGE>
Financial Condition:
Years Ended September 30,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars In Thousands)
Total amount of:
Assets $171,244 $128,133 $120,879 $122,313 $112,316
Short-term interest-
bearing deposits 6,213 1,938 3,552 2,383 6,492
Investment securities 16,783 19,138 21,264 23,194 13,075
Mortgage-backed
securities 6,883 14,658 18,616 19,946 24,433
Loans receivable (net) 129,957 85,997 73,431 71,006 63,111
Deposit accounts 117,914 93,715 94,750 97,310 98,506
Shareholders' equity 13,527 12,254 11,856 10,693 10,253
Number of:
Real estate loans
outstanding 1,706 1,615 1,641 1,749 1,643
Deposit accounts 16,443 13,095 13,062 12,760 13,075
Offices 4 3 3 3 2
Other Selected Data:
Years Ended September 30,
------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Interest rate spread
during the year 3.16% 3.01% 2.96% 4.04% 4.42%
Net yield on average
interest- earning
assets 3.44% 3.46% 3.27% 4.29% 4.66%
Return on average assets 0.92% 0.73% 0.83% 1.30% 1.62%
Return on average
shareholders' equity 11.21% 7.01% 9.38% 14.56% 17.89%
Dividend payout ratio 30.13% 46.87% 37.40% 29.92% 19.69%
Operating expense to
average assets 2.31% 2.73% 2.05% 2.33% 2.20%
Ratio of average
shareholders' equity
to average assets 8.24% 10.41% 8.88% 8.94% 9.07%
Cash dividends declared
and paid per share of
common stock (1)(2) $0.53 $0.50 $0.50 $0.58 $0.43
(1) 1997 amount does not include cash dividends declared in October, 1997, and
paid in November, 1997, of $.135 per share.
(2) Restated to reflect 2:1 stock split.
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UNION FINANCIAL BANCSHARES, INC.
5
<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. 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 net
interest rate spread during periods of falling interest rates. The
Corporation experiences a shrinking net 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 Bank'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, 1997 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 Basis Points Flat Plus 200 Basis Points
---------------------- ---- ---------------------
(In Thousands)
Estimated Market
Value of Assets $179,994 $172,437 $163,610
Estimated Market
Value of Liabilities $159,821 $156,489 $153,214
MVPE $ 20,173 $ 15,948 $ 10,396
Increase/(decrease) in MVPE $ 4,225 $ -- $ (5,552)
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.
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UNION FINANCIAL BANCSHARES, INC.
6
<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,
---------------- -------------------------
1997 1997 1996 1995
---- ---- ---- ----
Average yield on earnings assets:
Loans 8.05% 8.24% 8.81% 8.82%
Investments (1) 6.41% 6.88% 6.55% 5.38%
Mortgage-backed securities 6.12% 6.76% 6.02% 5.69%
Total interest-earning assets 7.74% 7.96% 7.88% 7.57%
---- ---- ---- ----
Less:
Average rate paid on deposits 4.39% 4.36% 4.75% 4.34%
Average rate paid on borrowings 6.00% 5.62% 6.01% 5.92%
Average Cost of Funds 4.78% 4.67% 4.87% 4.61%
---- ---- ---- ----
Average interest rate spread 2.96% 3.29% 3.01% 2.96%
---- ---- ---- ----
Net yield on average interest-
earning assets 3.25% 3.57% 3.46% 3.27%
---- ---- ---- ----
(1) Includes investment securities, federal funds sold, interest-bearing time
deposits, overnight interest-bearing deposits and Federal Home Loan Bank
(FHLB) stock.
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.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
7
<PAGE>
<PAGE>
Years Ended September 30,
---------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------- -------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
Change in interest
income:
Loans $4,186 ($875) $3,311 ($262) ($4) ($266)
Mortgage-backed
securities (575) 17 (558) (188) 145 (43)
Investments (95) 193 98 (1) 49 48
------ ----- ------ ---- ----- ----
Total interest
income 3,516 (665) 2,851 (451) 190 (261)
------ ----- ------ ---- ----- ----
Change in interest
expense:
Deposits 609 (422) 187 (3) 387 384
Borrowings and other 1,546 (136) 1,410 (604) 10 (594)
------ ----- ------ ---- ----- ----
Total interest
expense 2,155 (558) 1,597 (607) 397 (210)
------ ----- ------ ---- ----- ----
Change in net
interest income $1,361 $(107) $1,254 $156 ($207) ($51)
------ ----- ------ ---- ----- ----
RESULTS OF OPERATIONS
- ----------------------
Comparison of Years Ended September 30, 1997 and September 30, 1996
- -------------------------------------------------------------------
Net income increased $582,000 from $862,000 in fiscal 1996 to $1,444,000 in
fiscal 1997. Earnings per share increased $0.69 to $1.76 for the year ended
September 30, 1997 from $1.07 for the same period in 1996. Fiscal 1996 net
income included a one-time FDIC assessment of $606,000 ($395,000 after taxes).
On September 30, 1996 President Clinton signed the Omnibus Appropriations Bill
which called 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 $1,837,000 for fiscal 1996 and approximately $2,206,000 for
fiscal 1997 or an increase of $369,000 or 20.09%.
Total interest income increased $2,851,000, or 31.66%, from $9,004,000 in
fiscal 1996 to $11,855,000 in fiscal 1997 due to the increased level of
interest-earning assets more than offsetting a slight decrease in average
yields. Average interest-earning assets increased due primarily to the
purchase of adjustable rate loans during the year along with higher loan
production as a result of the startup of a Mortgage Division within the Bank.
The loan production was financed by advances from the FHLB. Interest income
on loans increased $3,311,000, or 51.44%, from $6,436,000 in fiscal 1996 to
$9,747,000 in fiscal 1997. Interest income on investment securities increased
$136,000, or 9.97%, from $1,363,000 in fiscal 1996 to $1,499,000 in fiscal
1997. The increases in interest income on loans and investment securities
were offset by decreases of $559,000 and $37,000 in interest income on
mortgage-backed securities and on deposits and federal funds sold,
respectively.
Interest expense increased 31.62% to $6,647,000 for fiscal 1997 from
$5,050,000 for fiscal 1996. Interest expense increased $187,000 and
$1,410,000 for deposits and for other borrowings, respectively. Interest
expense for deposits increased due to increasing volumes as a result of the
acquisition of a branch location in Laurens, SC with acquired deposits of
$20,144,000. Interest expense on other borrowings increased due to higher
volumes required by the Mortgage Division and rates on FHLB advances
throughout fiscal 1997.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
8
<PAGE>
<PAGE>
Provisions for loan losses increased $243,000 from $0 in fiscal 1996 to
$243,000 in fiscal 1997. The provision was larger in fiscal 1997 due to the
increased size of the loan portfolio. In fiscal 1997, the Corporation
experienced bad debt charge-offs, net of recoveries, of approximately
$114,000. The Corporation experienced bad debt charge-offs, net of
recoveries, of approximately $79,000 in fiscal 1996. While future losses in
the loan portfolio are probable, management feels that provisions for loan
losses are adequate.
Non-interest income increased 88.34% to $953,000 for the year ended September
30, 1997 from $506,000 for the year ended September 30, 1996. This increase
was due primarily to increased fees from financial services from $411,000 in
fiscal 1996 to $710,000 in fiscal 1997. In addition, gains recognized on the
sale of loans and investments in the current year were $155,000 compared to
$25,000 recognized in fiscal 1996.The servicing of loans purchased during the
year was outsourced and therefore resulted in net servicing fee expense of
$24,000 in fiscal 1997 compared to net servicing fee income in fiscal 1996 of
$70,000.
Non-interest expense increased 12.15% to $3,616,000 in fiscal 1997 from
$3,224,000 in fiscal 1996. The increase in non-interest expense is a result
of additional expenses absorbed with the purchase of the Laurens, S.C. branch
along with the startup of the Mortgage Division.
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 volumes
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.
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.
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UNION FINANCIAL BANCSHARES, INC.
9
<PAGE>
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
- ----------------------------------------------------
At September 30, 1997, the Corporation's assets totaled $171,244,000, an
increase of $43,111,000, or 33.64%, as compared to $128,133,000 at September
30, 1996. Investment and mortgage-backed securities decreased $10,130,000 to
$23,666,000 from $33,796,000 at September 30, 1996. The decrease in
securities due to principal reductions and security calls was more than offset
by an increase in loans receivable, net, which increased $43,960,000 to
$129,957,000. The increase in loans receivable, net, was partially funded by
advances from the Federal Home Loan Bank and other borrowings which increased
$17,996,000 from September 30, 1996 to the same period in 1997. The majority
of the increase in loans receivable, net, represents adjustable rate product
purchased from other organizations through the Bank's Mortgage Division. Total
deposits increased $24,199,000 from September 30, 1996 to $117,914,000 in
September 30, 1997. The Bank purchased a branch during the second quarter of
fiscal 1997 from First Union National Bank of South Carolina located in
Laurens, S.C. with an acquired deposit base of $20,144,000. There was also a
10.38% growth in shareholders' equity from September 30, 1996 to September 30,
1997.
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 6.85% at September
30, 1997. 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 ratio of such liquid
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 liquidity. 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,
1997 were approximately $1,290,000. See Note 10 to the financial statements
for further information about commitments and contingencies.
As of September 30, 1997, the Bank exceeded the OTS's capital requirements.
See Note 13 to the financial statements for further discussion of these
capital requirements.
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.
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 "experience" 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, 1997, the Corporation's post-1987 bad debt reserves were approximately
$275,000.
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
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
10
<PAGE>
<PAGE>
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 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 was
effective for the fiscal year ending September 30, 1997. The Bank implemented
the requirements of FASB 122 in the Bank's Mortgage Division during fiscal
year 1997.
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 implemented the requirements of SFAS 123 during fiscal 1997. The
adoption had no effect on financial position or results of operations.
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 did not have a material impact on the Corporation's
financial position or results of operations.
In February, 1997, the FASB issued SFAS No. 128, "Earnings per Share", which
is effective for both interim and annual periods ending after December 15,
1997. This statement supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share". The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The Corporation
anticipates that adoption of this standard will not have a material effect on
EPS.
Also, in February, 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements for periods ending after December 31, 1997. This statement applies
to both public and nonpublic entities. The new statement requires no change
for entities subject to existing requirements. The Corporation anticipates
that adoption of this standard will not have a material effect on the Company.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purposes financial statements.
Under this statement, enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both
interim and annual periods beginning after December 15, 1997. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of the
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
11
<PAGE>
<PAGE>
statement. The Corporation will adopt Statement 130 effective March 31, 1998
and will provide the required disclosures in the Company's Form 10-Q.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". This statement establishes
standards for the way public enterprises are to report information about
operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports issued to shareholders. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated unless it is impractical to do so. It is not anticipated that the
adoption of this statement will materially effect the Corporation's current
method of financial reporting.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
12
<PAGE>
<PAGE>
ELLIOTT, DAVIS & COMPANY, L.L.P.
Certified Public Accountants
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 sheets of Union
Financial Bancshares, Inc. and Subsidiary as of September 30, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the years 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
audits. The consolidated financial statements of Union Financial Bancshares,
Inc. and Subsidiary for the year 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Union Financial Bancshares, Inc. and Subsidiary as of September 30, 1997
and 1996 and the consolidated results of their operations and their cash flows
for the years 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 27, 1997
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
13
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
--------------------------
September 30.
-----------------
1997 1996
---- ----
(In Thousands)
ASSETS
- ------
Cash $1,608 $1,747
Short term interest-bearing deposits 6,213 1,938
-------- --------
Total cash and cash equivalents 7,821 3,685
Investment and mortgage-backed securities: -------- --------
Held to maturity, at amortized cost (fair value
1997 - $7,927, 1996 - $11,526) 7,811 11,622
Available for sale, at fair value (amortized
cost 1997 - $15,945, 1996 - $22,527) 15,855 22,174
-------- --------
Total investment and mortgage-backed securities 23,666 33,796
Loans, net -------- --------
Held for sale 15,044 --
Held for investment 114,913 85,997
Total Loans, net 129,957 85,997
-------- --------
Office properties and equipment, net 3,009 1,664
Federal Home Loan Bank Stock, at cost 2,105 950
Accrued interest receivable less allowance
(1997 - $5, 1996 - $13) 1,317 1,121
Other assets 3,369 920
-------- --------
TOTAL ASSETS $171,244 $128,133
======== ========
LIABILITIES
- -----------
Deposit accounts $117,914 $93,715
Securities sold under repurchase agreements 504 --
Advances from the Federal Home Loan Bank and
other borrowings 37,979 20,488
Accrued interest on deposits 314 79
Advances from borrowers for taxes and insurance 389 420
Other liabilities 617 1,177
-------- --------
TOTAL LIABILITIES 157,717 115,879
======== ========
COMMITMENTS AND CONTINGENCIES - Note 12
SHAREHOLDERS' EQUITY
- --------------------
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None
Common stock - $0.01 par value,
authorized - 2,500,000 shares,
issued and outstanding - 827,700
shares in 1997 and 811,286 shares in 1996 8 8
Additional paid-in capital 3,993 3,897
Unrealized loss on investment and mortgage-backed
securities available for sale, net of income taxes (63) (229)
Retained earnings, substantially restricted 9,589 8,578
-------- --------
TOTAL SHAREHOLDERS' EQUITY 13,527 12,254
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $171,244 $128,133
======== ========
See notes to consolidated financial statements.
- ----------------------------------------------
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
14
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
For the Years Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands, Except Share Data)
Interest Income:
Loans $9,747 $6,436 $6,702
Deposits and federal funds sold 63 100 100
Securities available for sale:
State and municipal 37 122 --
Other investments 1,128 1,832 1,558
Securities held to maturity:
State and municipal -- -- 159
Other investments 880 514 746
------ ----- -------
Total interest income 11,855 9,004 9,265
Interest Expense: ------ ----- -------
Deposit accounts 4,666 4,479 4,095
Advances from the FHLB and other 1,981 571 1,165
------ ----- -------
Total interest expense 6,647 5,050 5,260
------ ----- -------
Net Interest Income 5,208 3,954 4,005
Provision for loan losses (243) -- (105)
Net interest income after provision ------ ----- -------
for loan losses 4,965 3,954 3,900
Non Interest Income: ------ ----- -------
Fees for financial services 710 411 296
Loan servicing fees 88 70 65
Net gains on sale of investments 59 20 --
Gains on sale of loans 96 5 20
------ ----- -------
Total non interest income 953 506 381
Non Interest Expense: ------ ----- -------
Compensation and employee benefits 1,768 1,265 1,279
Occupancy and equipment 702 557 423
Deposit insurance premiums 93 821 226
Professional services 332 173 193
Real estate operations (3) (2) 20
Other 724 410 447
------ ----- -------
Total non interest expense 3,616 3,224 2,588
------ ----- -------
Income before income taxes 2,302 1,236 1,693
Provision for income taxes 858 374 639
------ ----- -------
Net Income $1,444 $862 $1,054
====== ==== ======
Net Income per common share $1.76 $1.07 $1.34
Weighted average number of common ===== ===== =====
shares outstanding 820,498 808,307 787,906
======= ======= =======
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
15
<PAGE>
<PAGE>
<TABLE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
Unrealized Gain/(Loss) Retained
Common Stock Additional on Securities Earnings Total
---------------- Paid-In Available For Substantially Shareholders'
Shares Amount Capital Sale Restricted Equity
------ ------ ------- ---- ---------- ------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
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
$316,000) 502 502
Net income 1,054 1,054
------- -- ------ ---- ------ -------
Balance at September
30, 1995 403,322 4 3,860 (128) 8,120 11,856
Options exercised 2,321 41 41
Two-for-one stock
split in the form of
a 100% common stock
dividend 405,643 4 (4)
Cash dividend ($.50
per share) (404) (404)
Net unrealized gain
on investment and
mortgage-backed
securities available
for sale (net of
income taxes of $55,000) (101) (101)
Net income 862 862
------- -- ------ ---- ------ -------
Balance at September
30, 1996 811,286 8 3,897 (229) 8,578 12,254
Options Exercised 16,414 96 96
Cash Dividend ($.53
per share) (433) (433)
Net unrealized gain
on investment and
mortgage-backed
securities available
for sale (net of
income taxes of $89,000) 166 166
Net income 1,444 1,444
------- -- ------ ---- ------ -------
Balance at September
30, 1997 827,700 $8 $3,993 $(63) $9,589 $13,527
======= == ====== ==== ====== =======
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
16
</TABLE>
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
For the Years Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
OPERATING ACTIVITIES:
Net income $1,444 $862 $1,054
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 243 -- 105
Amortization of intangibles 106 -- --
Depreciation expense 188 165 141
Recognition of deferred income,
net of costs (7) (111) (88)
Deferral of fee income, net of costs 29 244 107
Gain on investment transactions (59) (20) --
Loans originated for sale (61,806) (805) (3,279)
Proceeds from sale of loans 46,762 810 3,279
Gain on sale of loans available
for sale (96) (5) (20)
(Increase) decrease in accrued
interest receivable (196) (241) 103
(Increase) decrease in other assets 598 (614) 334
(Increase) decrease in accrued
interest payable 235 49 (41)
Increase (decrease) in other
liabilities (830) 426 211
------- ---- -------
Net cash (used in) provided by
operating activities (13,389) 760 1,906
------- ---- -------
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
17
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
-------------------------------------------------
For the Years Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
INVESTING ACTIVITIES:
Maturities of time deposits $ -- $99 $297
Purchase of investment and
mortgage-backed securities:
Held to maturity (2,000) (11,617) (2,118)
Available for sale (2,950) (10,228) (5,172)
Proceeds from maturity of
investment and mortgage-
backed securities:
Held to maturity 500 500 3,404
Available for sale 4,450 4,568 1,435
Proceeds from sale of investment
and mortgage-backed securities
Held to maturity -- -- --
Available for sale 8,281 16,563 --
Principal repayments on mortgage-
backed securities:
Held to maturity 137 242 609
Available for sale 1,712 6,387 5,920
Loan originations (53,449) (37,078) (23,255)
Principal repayments of loans 24,588 23,951 20,527
Proceeds from sale of real estate
acquired in settlement of loans 7 36 292
Purchase of FHLB stock (1,380) (197) (459)
Redemption of FHLB stock 225 -- 459
Purchase of office properties and
equipment (1,534) (116) (118)
Net cash (used in) provided by -------- ------- --------
investing activities (21,413) (6,890) 1,821
-------- ------- --------
FINANCING ACTIVITIES:
Proceeds from the exercise of
stock options 96 41 131
Dividends (433) (404) (394)
Proceeds from FHLB advances and
other borrowings 99,440 43,763 46,500
Repayment of FHLB advances and
other borrowings (81,443) (36,355) (46,820)
Acquired deposits from purchased
branch 17,223 -- --
Increase (decrease) in deposit
accounts 4,055 (1,035) (2,561)
-------- ------- --------
Net cash provided by (used in)
financing activities 38,938 6,010 (3,144)
NET (DECREASE) INCREASE IN CASH -------- ------- --------
AND CASH EQUIVALENTS 4,136 (120) 583
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,685 3,805 3,222
-------- ------- --------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $7,821 $3,685 $3,805
====== ====== ======
See notes to consolidated financial statements.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
18
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Union Financial Bancshares, Inc. ("Union Financial") was
incorporated in the State of Delaware in April 1994, for the purpose of
becoming a thrift holding company for Provident Community Bank (formerly known
as Union Federal Savings Bank), a federally chartered savings bank ("the
Bank"). Provident Community Bank, founded in 1934, offers a complete array of
financial services throughout four full service branches in two counties in
South Carolina. Provident offers a full range of financial services including
checking, savings, and time deposits, individual retirement accounts (IRAs),
investment services, secured and unsecured consumer loans. Provident
originates and services home loans and provides financing for small businesses
and affordable housing.
Accounting Principles - The accounting and reporting policies of the
Corporation conform to generally accepted accounting principles and to general
practice within the banking 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.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amount of income and expenses during the reporting
periods. Actual results could differ from those estimates.
Basis of Consolidation - The accompanying consolidated financial statements
include the accounts of Union Financial Bancshares, Inc. (the "Corporation")
and its wholly owned subsidiary, Provident Community Bank (the "Bank") and its
wholly owned subsidiary, Provident Financial Services, Inc. ("PFS"). PFS
consists primarily of investment brokerage services. All intercompany amounts
and balances have been eliminated in consolidation. 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 accounts for investment securities in accordance with
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115"). 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.
Loans - 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
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
19
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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 (and future
results of operation).
Accounting for Impaired Loans - Impaired loans are accounted for in accordance
with SFAS 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 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.
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.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
20
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of and for the years ended September 30, 1997 and 1996, there were no
impaired loans and the Corporation had recognized no interest income from
impaired loans.
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.
Mortgage Servicing Rights - Effective October 1, 1996, the Corporation adopted
Statement of Financial Accounting Standards ("SFAS") 122, "Accounting for
Mortgage Servicing Rights." The statement eliminates the distinction between
originated and purchased mortgage servicing rights. Since the adoption of
SFAS 122, the Corporation capitalizes the allocated cost of originated
mortgage servicing rights and records a corresponding increase in mortgage
banking income.
The rights to service mortgage loans for others ("mortgage servicing rights'
or "MSRs") are included in other assets. Purchased mortgage servicing rights
are recorded at lower of cost or market. Originated mortgage servicing rights
are capitalized based on the allocated cost which is determined when the
underlying loans are sold or securitized. MSRs are amortized in proportion to
and over the period of estimated net servicing income using a method that is
designed to approximated a level-yield method, taking into consideration the
estimated prepayment of the underlying loans. For purposes of measuring
impairment, MSRs are periodically reviewed for impairment based upon quarterly
valuations. Such valuations are based on projections using a discounted cash
flow method that includes assumptions regarding prepayments, servicing costs
and other factors. Impairment is measured on a disaggregated basis for each
pool of rights.
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 frequently 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 accounts for income taxes in accordance with Statement
of Financial Standards No. 109, Accounting for Income Taxes (SFAS 109). Under
SFAS 109, deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes, and
(b) operating loss carryforwards. 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.
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:
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
21
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 are based on quoted market prices. The carrying values of
restricted equity securities approximate fair values.
Loans - 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 analysis, 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 analyzes 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 analyzes 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 analyzes 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
counter parties' 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.
Stock options outstanding are not considered in determining net income per
share because they have no significant dilutive effect on net income per
share.
Reclassifications - Certain amounts in prior years' financial statements have
been reclassified to conform with current year classifications.
Intangible Assets - Intangible assets, included in other assets, consist
primarily of captialized mortgage servicing rights ("MSRs") and core deposit
premiums resulting from the Corporation's branch acquisition. On an ongoing
basis, the Corporation evaluates the carrying value of these intangible assets
and charges to expense any difference between the carrying value and the
estimated fair market value.
During 1997, branch acquisitions generated intangible assets of $2,921,000.
$106,000 of intangible expense was charged to operations during 1997. Core
deposit intangibles are being amortized over 10 years using the straight-line
method.
Interest Income - Interest on loans is accrued and credited to income monthly
based on the principal balance outstanding and the contractual rate on the
loan. The Corporation places loans on non-accrual status when they become
greater than
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
22
<PAGE>
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
sixty days delinquent or when in the opinion of management, full collection of
principal or interest is unlikely. The Corporation provides an allowance for
uncollectible accrued interest on loans which are sixty days delinquent for
all interest accrued prior to the loan being placed on non-accrual status.
The loans are returned to an accrual status when full collection of principal
and interest appears likely.
2.INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Held to Maturity - Securities classified as held to maturity consisted of the
following (in thousands):
September 30, 1997
------------------------------------------
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
---- ----- ------ -----
Investment Securities:
U.S. Agency Obligations $5,995 $51 ($29) $6,017
Mortgage-backed Securities:
GNMA 1,816 94 -- 1,910
------ ---- ---- ------
Total held to maturity $7,811 $145 ($29) $7,927
====== ==== ==== ======
September 30, 1996
------------------------------------------
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
======= === ===== =======
Available for Sale - Securities classified as available for sale consisted of
the following (in thousands):
September 30, 1997
------------------------------------------
Gross Unrealized
Amortized ---------------- Fair
Cost Gains Losses Value
---- ----- ------ -----
Total held to maturity $7,811 $145 ($29) $7,927
Investment Securities:
U.S. Agency Obligations $10,429 $21 ($109) $10,341
Municipal Securities 449 -- (2) 447
------- ---- ----- -------
Total Investment Securities 10,878 21 (111) 10,788
Mortgage-backed Securities: ------- ---- ----- -------
FHLMC 2,783 11 (8) 2,786
FNMA 1,388 11 (3) 1,396
CMO's 896 5 (16) 885
------- ---- ----- -------
Total Mortgage-backed Securities 5,067 27 (27) 5,067
------- ---- ----- -------
Total available for sale $15,945 $48 ($138) $15,855
======= === ===== =======
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
23
<PAGE>
<PAGE>
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
September 30, 1997
------------------------------------------
Gross Unrealized
Amortized ---------------- 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
======= ==== ===== =======
Proceeds, gross gains and gross losses realized from the sales, calls and
prepayments of available for sale securities were as follows for the years
ended (in thousands):
September 30,
------------------------------
1997 1996 1995
---- ---- ----
Proceeds $8,281 $21,131 $1,435
====== ======= ======
Gross gains 76 168 --
Gross losses 17 148 --
------ ------- ------
Net gain on investment transactions $59 $20 $ --
=== === =====
The maturities of securities at September 30, 1997 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 $0 $0 $985 $981
Due after one year
through five years 0 0 934 926
Due after five years
through ten years 0 0 1,618 1,621
Due after ten years 7,811 7,927 12,408 12,327
------ ------ ------- -------
Total investment and
mortgage-backed
securities $7,811 $7,927 $15,945 $15,855
====== ====== ======= =======
The mortgage-backed securities held at September 30, 1997 mature between one
and thirty-four years. The actual lives of those securities may be
significantly shorter as a result of principal payments and prepayments.
At September 30, 1997 and 1996, $9,013,000 and $5,114,000, respectively, of
securities were pledged as collateral for certain deposits.
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UNION FINANCIAL BANCSHARES, INC.
24
<PAGE>
<PAGE>
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES (continued)
At September 30, 1997, approximately $2,650,000 of the debt securities and
$2,113,000 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.
In accordance with "A guide to Implementation of Statement 115 on Accounting
for Certain Investments in Debt and Equity Securities,", the Financial
Accounting Standard Board permitted a one-time reassessment of the
appropriateness of the designations of all securities and a redesignation of
securities, if appropriate. In December of 1995 and 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.
3. LOANS, NET
Loans receivable consisted of the following (in thousands):
September 30,
-------------------
1997 1996
---- ----
Conventional real estate loans:
Fixed rate residential
Held for sale $8,044 $ --
Held for investment 30,036 30,008
Fixed rate commercial 3,629 2,699
Adjustable rate residential
Held for sale 7,000 --
Held for investment 57,365 39,076
Adjustable rate commercial 170 309
Construction loans 13,508 4,627
-------- --------
Total real estate loans 119,752 76,719
Other loans: -------- --------
Consumer and installment loans 9,957 7,740
Commercial loans 2,550 1,879
Consumer lines of credit 4,961 1,736
Loans secured by deposit accounts 183 414
-------- --------
Total other loans 17,651 11,769
-------- --------
Total loans 137,403 88,488
Less: -------- --------
Undisbursed portion of interim
construction loans (6,598) (1,644)
Allowance for loan losses (928) (799)
Deferred loan origination fees 80 (48)
-------- --------
Total, net $129,957 $85,997
======== =======
Weighted-average interest rate of loans 8.05% 8.70%
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UNION FINANCIAL BANCSHARES, INC.
25
<PAGE>
<PAGE>
3. LOANS, NET (continued)
Participations sold and serviced by the Corporation at September 30, 1997,
1996, and 1995 were approximately $64,730,000, $23,364,000, and $27,703,000,
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 $389,000 at September 30, 1997 and $420,000
at September 30, 1996.
Adjustable rate real estate loans (approximately $64,535,000 and $39,385,000
at September 30, 1997 and 1996, 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 makes commercial real estate loans which totaled approximately
$3,629,000 and $3,008,000 at September 30, 1997 and 1996, 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.
Mortgage loans held for sale are stated at the lower of aggregate cost or
market, net of discounts and deferred loan fees and are included in net loans
in the consolidated balance sheet. Nonrefundable deferred origination fees
and cost and discount points collected at loan closing, net of commitment fees
paid, are deferred and recognized at the time of sale of the mortgage loans.
Gain or loss on sales of mortgage loans is recognized based upon the
difference between the selling price and the carrying amount of the mortgage
loans sold. Other fees earned during the loan origination process are also
included in net gain or loss on sales or mortgage loans.
During 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
122, "Accounting for Mortgage Servicing Rights." SFAS No. 122 requires that
an entity recognize, as separate assets, rights to service mortgage loans for
others, whether purchased or originated, by allocating the total cost of loans
between the loan and the mortgage servicing rights ("MSR") based on their
relative fair values. The effect of adoption of SFAS No. 122 was not
material.
Capitalized MSRs are included in intangible assets in the consolidated balance
sheet and are amortized based on a method which approximates the proportion of
current net servicing revenues to the total estimated net servicing revenues
expected to be recognized over the average estimated remaining lives of the
underlying loans. Capitalized MSRs are assessed for impairment based on their
fair values.
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, 1997, the Bank had loans outstanding
to one borrower ranging up to $1,217,000 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 have a material impact on
the Bank's ongoing operations.
At September 30, 1997 and 1996, loans which are accounted for on a non-accrual
basis or are contractually past due ninety days or more totaled approximately
$778,000 and $1,123,000, 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, 1997, 1996, and
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UNION FINANCIAL BANCSHARES, INC.
26
<PAGE>
<PAGE>
3. LOANS, NET (continued)
1995, 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 $36,000,
$34,000, and $13,000, respectively.
The changes in the allowance for loan losses consisted of the following (in
thousands):
Years Ended September 30,
-------------------------------
1997 1996 1995
---- ---- ----
Balance at beginning of year $799 $878 $754
Provision for loan losses 243 -- 105
(Charge-offs) recoveries, net (114) (79) 19
---- ---- ----
Balance at end of year $928 $799 $878
==== ==== ====
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 to officers and
directors of the Corporation are summarized as follows (in thousands):
Years Ended September 30,
-------------------------
1997 1996
---- ----
Balance at beginning of year $712 $530
Loans originated during the year 685 343
Loan repayments during the year (383) (161)
------ ----
Balance at end of year $1,014 $712
====== ====
4. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment consisted of the following (in thousands):
September 30,
---------------------
1997 1996
---- ----
Land $422 $237
Building and improvements 2,096 1,513
Office furniture, fixtures and
equipment 1,922 1,156
------ ------
Total 4,440 2,906
Less accumulated depreciation (1,431) (1,242)
------ ------
Office properties and equipment - net $3,009 $1,664
====== ======
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UNION FINANCIAL BANCSHARES, INC.
27
<PAGE>
<PAGE>
5. DEPOSIT ACCOUNTS
Deposit accounts at September 30, were as follows (in thousands):
1997 1996
----------------------- ------------------------
Rate Balance % Rate Balance %
---- ------- - ---- ------- -
Account Type
- ------------
NOW accounts:
Commercial
noninterest-
bearing 0.00% $6,502 5.52% 0.00% $1,602 1.71%
Noncommercial 1.33% 9,982 8.47% 1.49% 6,765 7.22%
Money market
checking accounts 3.89% 6,913 5.86% 3.90% 4,982 5.32%
Regular savings 2.43% 11,652 9.88% 2.25% 11,308 12.07%
Total demand and -------- ------ ------- ------
savings deposits 1.95% 35,049 29.73% 2.23% 24,657 26.32%
-------- ------ ------- ------
Savings certificates:
Up to 3.00% 22 0.02% 125 0.13%
3.01 %- 4.00% -- 0.00% -- 0.00%
4.01 %- 5.00% -- 0.00% 957 1.02%
5.01 %- 6.00% 77,401 65.64% 60,837 64.92%
6.01 %- 7.00% 5,342 4.61% 7,139 7.62%
Total savings -------- ------ ------- ------
certificates 5.39% 82,765 70.27% 5.43% 69,058 73.69%
-------- ------ ------- ------
Total deposit
accounts 4.39% $117,914 100.00% 4.62% $93,715 100.00%
======== ====== ======= ======
As of September 30, 1997 and 1996, total deposit accounts include
approximately $1,528,000 and $2,071,000, respectively, of deposits from the
Corporation's officers, shareholders, employees or parties related to them.
At September 30, 1997 and 1996, deposit accounts with balances of $100,000 and
over totaled approximately $13,238,224 and $11,744,000, respectively.
Savings certificates by maturity were as follows (in thousands):
September 30,
-------------------
1997 1996
---- ----
Maturity Date
- -------------
Within 1 year $60,910 $54,345
After 1 but within 2 years 14,178 9,727
After 2 but within 3 years 4,017 2,803
Thereafter 3,660 2,183
------- -------
Total certificate accounts $82,765 $69,058
======= =======
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UNION FINANCIAL BANCSHARES, INC.
28
<PAGE>
<PAGE>
5. DEPOSITS ACCOUNTS (continued)
Interest expense on deposits consisted of the following (in thousands):
Years Ended September 30,
----------------------------------
1997 1996 1995
---- ---- ----
Account Type
NOW accounts and money market
deposit accounts $353 $264 $304
Passbook and statement savings
accounts 275 302 422
Certificate accounts 4,062 3,926 3,397
Early withdrawal penalties (24) (13) (28)
------ ------ ------
Total $4,666 $4,479 $4,095
====== ====== ======
6. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements at September 30, 1997 and 1996,
amounted to $504 and $0, respectively. U.S. government securities with a book
value of $1,000,000 ($1,002,000 market value) at September 30, 1997, are used
as collateral for the agreements.
The Corporation enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed coupon reverse repurchase agreements
are treated as financings. The obligations to repurchase securities sold are
reflected as a liability and securities underlying the agreements continue to
be reflected as assets in the Consolidated Statements of Financial Condition.
7. ADVANCES FROM THE FEDERAL HOME LOAN BANK AND OTHER BORROWINGS
At September 30, 1997 and 1996, the Bank had $38,484,000 and $20,488,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of the advances from the
Federal Home Loan Bank and treasury, tax and loan deposits is as follows (in
thousands):
September 30,
---------------------
1997 1996
---- ----
Contractual Maturity:
Within one year - fixed rate $15,979 $1,000
Within one year - adjustable rate 0 2,488
After one but within two years -
fixed rate 5,000 5,000
After one but within two years -
adjustable rate 17,000 12,000
------- -------
Total Advances - FHLB $37,979 $20,488
======= =======
Weighted average rate 6.00% 6.30%
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 $106,880,000 and
$71,157,000, respectively, at September 30, 1997 and 1996.
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
29
<PAGE>
<PAGE>
8. INCOME TAXES
Income tax expense is summarized as follows (in thousands):
For the Years Ended September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Current $755 $540 $609
Deferred 103 (166) 30
---- ---- ----
Total income taxes $858 $374 $639
==== ==== ====
The above tax expense summary does not include an income tax provision of
$89,000, an income tax benefit of $55,000, and an income tax provision of
$316,000 which were allocated to shareholders' equity during the years ended
September 30, 1997, 1996 and 1995, respectively, relating to net unrealized
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):
For the Years Ended September 30,
-----------------------------------
1997 1996 1995
---- ---- ----
Tax at federal income tax rate $783 $420 $576
Increase (decrease) resulting from:
State income taxes, net of federal
benefit 91 57 93
Interest on municipal bonds (10) (37) (41)
Other, net (6) (66) 11
---- ---- ----
Total $858 $374 $639
==== ==== ====
The tax effects of significant items comprising the Corporation's deferred tax
asset as of September 30, 1997 and 1996 are as follows (in thousands):
September 30,
---------------------
1997 1996
---- ----
DEFERRED TAX ASSETS:
Deferred loan fees $32 $23
Book reserves in excess of tax basis bad
debt reserves arising after September
30, 1988 177 168
SAIF one-time assessment 0 246
----- ----
Total deferred tax asset 209 437
----- ----
DEFERRED TAX LIABILITIES:
Difference between book and tax property basis 157 139
Difference between book and tax Federal Home
Loan Bank stock basis 100 95
Mark to market adjustment on securities 17 32
Tax bad debt reserve in excess of base year
reserve 94 0
Total deferred tax liability 368 266
----- ----
NET DEFERRED TAX ASSET (LIABILITY) ($159) $171
===== ====
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UNION FINANCIAL BANCSHARES, INC.
30
<PAGE>
<PAGE>
8. INCOME TAXES (continued)
Net deferred tax liabilities of $159,000 at September 30, 1997, are included
in other liabilities in the balance sheet. Net deferred tax assets of
$171,000 at September 30, 1996, 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 experience method of accounting for its tax bad debt reserves. The
legislation also suspends recapture of bad debt reserves taken through 1987
(i.e., the base year reserve), but requires thrifts to recapture or repay bad
debt deductions taken after 1987 over six years. As of September 30, 1997,
the bad debt reserve subject to recapture, for which deferred taxes have
previously been provided, totaled approximately $275,000. 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 which is available to
all eligible employees. Annual contributions to the plan consist of an
amount which matches participant contributions up to a maximum of 5% of a
participant's compensation and a discretionary amount determined annually by
the Corporation's Board of Directors. In addition, the corporation
implemented a money purchase pension plan, effective October 1, 1996, in which
all eligible employees participate. The annual contributions to the pension
plan will be 5% of a participant's compensation. Employer expensed
contributions to the plans were $91,000, $38,000, and $77,000 for the years
ended September 30, 1997, 1996 and 1995, 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>
10. FINANCIAL INSTRUMENTS (continued)
The Corporation had loan commitments as follows (in thousands):
September 30,
---------------------
1997 1996
---- ----
Commitments to extend credit:
Variable interest rate $0 $430
Fixed interest rate 1,290 464
------- ------
Total loan commitments 1,290 894
Undisbursed portion of interim construction
loans 6,598 1,644
Unused portion of credit lines (principally
variable-rate consumer lines secured by
real estate) 4,463 2,161
------- ------
Total $12,351 $4,699
======= ======
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 two years. The Corporation has not incurred any losses on its
commitments in 1997, 1996 or 1995.
The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 1997 (in thousands):
September 30. 1997
----------------------------------
Carrying Amount Fair Value
--------------- ----------
Financial assets:
- ----------------
Cash and cash equivalents $7,821 $7,821
Securities available for sale 15,855 15,855
Securities held to maturity 7,811 7,927
FHLB Stock 2,105 2,105
Loans 129,957 131,887
Accrued interest receivables 1,317 1,317
Financial liabilities
- ---------------------
Deposits $117,914 $115,332
Advances from FHLB and other borrowings 37,979 38,457
Securities sold under repurchase
agreements 504 504
Off-balance-sheet asset (liabilities)
- -------------------------------------
Commitments to extend credit $12,351 $12,351
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UNION FINANCIAL BANCSHARES, INC.
32
<PAGE>
<PAGE>
10. FINANCIAL INSTRUMENTS (continued)
September 30. 1997
----------------------------------
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
FHLB Stock 950 950
Loans 85,997 87,177
Accrued interest receivables 1,121 1,121
Financial liabilities
- ---------------------
Deposits 93,715 92,374
Advances from FHLB and other borrowings 20,488 20,375
Off-balance-sheet asset (liabilities)
- -------------------------------------
Commitments to extend credit $4,699 $4,699
11. SUPPLEMENTAL CASH FLOW DISCLOSURES
For the Years Ended September 30,
---------------------------------
1997 1996 1995
---- ---- ----
Cash paid for:
Income taxes, net of refund $873 $1,139 $123
Interest 6,333 5,001 5,301
Non-cash transactions:
Loans foreclosed 0 17 199
Unrealized (loss) gain on investment
and mortgage-backed securities
available for sale 166 (353) 196
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-
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
33
<PAGE>
<PAGE>
12. COMMITMENTS AND CONTINGENCIES (continued)
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.
13. STOCK OPTION AND OWNERSHIP PLANS
The Corporation has a stock option incentive compensation plan through which
the Board of Directors may grant stock options to officers and employees to
purchase common stock of the Corporation at prices not less than 100 percent
of the fair market value on the date of grant. The outstanding options expire
ten years from the date of grant. The Corporation applies Accounting
Principles Board (APB) Opinion 25 and related Interpretations in accounting
for the plan. Accordingly, no compensation cost has been charged to
operations. Had compensation cost for the plan been determined based on the
fair value at the grant dates for awards under the plan consistent with the
accounting method available under SFAS No. 123, "Accounting for Stock-Based
Compensation", the Corporations's net income and net income per common share
would have been reduced to the pro forma amounts indicated below:
For the Years Ended September 30,
---------------------------------
Net income (in thousands) 1997 1996
---- ----
As reported $1,444 $862
Pro forma 1,443 859
Net income per common share
As reported $1.76 $1.07
Pro forma 1.76 1.06
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions for grants in 1997 and 1996: dividend yield of 30 percent,
expected volatility of 17 percent, risk-free interest rate of 6 percent and
expected lives of 10 years.
A summary of the status of the plan as of September 30, 1997 and 1996, and
changes during the years ending on those dates is presented below (all shares
have been adjusted for the 2 for 1 stock split in 1996):
Shares Average Option Price Expiration
Grant Date Granted Per Share Date
---------- ------- --------- ----
June, 1990 4,080 $6.13 June, 2000
October, 1995 85,000 9.13 October, 2005
January, 1996 3,400 9.13 January, 2006
April, 1996 5,000 10.50 April, 2006
March, 1997 4,000 15.75 March, 2007
April, 1997 300 15.63 April, 2007
Total Shares Granted 101,780
As of September 30, 1997, the number of shares exercisable were 69,637.
Options were exercised as follows:
Average Exercised
For the Years Ended September 30, Shares Exercised Price Per Share
- --------------------------------- ---------------- ---------------
1997 16,414 $5.91
1996 4,642 $8.89
1995 23,878 $5.49
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UNION FINANCIAL BANCSHARES, INC.
34
<PAGE>
<PAGE>
13. STOCK OPTION AND OWNERSHIP PLANS (continued)
No stock options have been forfeited during the years ended September 30,
1997, 1996, and 1995. At September 30, 1997, 1,500 shares were available for
grant.
The Plan also provides for stock appreciation rights ("SARs"). To date, no
SARs have been granted. Employees participate in stock ownership through the
profit sharing plan (see Note 9).
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.
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, 1997 and 1996, the Bank had the following actual and required
capital amounts and ratios (in thousands):
September 30, 1997
------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
Actual Capital $13,088 $13,088 $13,088
Unrealized losses on available
for sale securities 63 63 63
Goodwill and other intangible
assets (2,009) (2,009) (2,009)
Allowances for loan and lease
losses (1) -- -- 928
------- ------- -------
Total Adjusted capital 11,142 11,142 12,070
Minimum Capital Requirement 2,556 5,111 7,310
------- ------- -------
Regulatory Capital Excess $8,586 $6,031 $4,760
------- ------- -------
Regulatory Capital Ratio 6.54% 6.54% 13.21%
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
35
<PAGE>
<PAGE>
14. SHAREHOLDERS' EQUITY, DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
(continued)
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%
(1) Limited to 1.25% of risk-weighted assets
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and discretionary actions by regulators that,
if undertaken, could have a material adverse effect on the corporation. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classifications are also subject to qualitative
judgements by the regulators about components, risk weightings and other
factors.
15. RECENTLY ISSUED ACCOUNTING STANDARDS
In February, 1997, the FASB issued SFAS No. 128, "Earnings per Share". Which
is effective for both interim and annual periods ending after December 15,
1997. This statement supersedes Accounting Principles Board Opinion No. 15,
"Earnings per Share". The purpose of this statement is to simplify current
reporting and make U.S. reporting comparable to international standards. The
statement requires dual presentation of basic and diluted EPS by entities with
complex capital structures (as defined by the statement). The Corporation
anticipates that adoption of this standard will not have a material effect on
net income per common share.
Also, in February, 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which is effective for financial
statements for periods ending after December 31, 1997. This statement applies
to both public and nonpublic entities. The new statement requires no change
for entities subject to existing requirements. The Corporation anticipates
that adoption of this standard will not have a material effect on the Company.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general purposes financial statements.
Under this statement, enterprises are required to classify items of "other
comprehensive income" by their nature in the financial statement and display
the balance of other comprehensive income separately in the equity section of
a statement of financial position. Statement 130 is effective for both
interim and annual periods beginning after December 15, 1997. Comparative
financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of the statement. The Corporation will
adopt Statement 130 effective March 31, 1998 and will provide the required
disclosures in the Company's Form 10-QSB.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
36
<PAGE>
<PAGE>
15. RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
Information". This statement establishes standards for the way public
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. Statement 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated unless it is
impractical to do so. It is not anticipated that the adoption of this
statement will materially effect the Corporation's current method of financial
reporting.
16. UNION FINANCIAL BANCSHARES, INC. FINANCIAL INFORMATION (PARENT COMPANY
ONLY)
Condensed financial information for Union Financial is presented as follows
(in thousands):
Condensed Balance Sheets September 30,
------------------------ -------------
1997 1996
Assets: ---- ----
Cash and cash equivalents $400 $256
Investment in subsidiary 13,086 11,941
Other 42 56
------- -------
Total Assets $13,528 $12,253
======= =======
Liabilities and Shareholders' Equity:
Liabilities $ -- $ --
Shareholders' Equity 13,528 12,253
------- -------
Total Liabilities and Shareholders' Equity $13,528 $12,253
======= =======
Condensed Statements of Income For Years Ended September 30,
------------------------------ -----------------------------
1997 1996
---- ----
Equity in undistributed earnings of
subsidiary $1,477 $893
Other expense, net (33) (31)
------- -------
Net income $1,444 $862
======= =======
Condensed Statements of Cash Flows For Years Ended September 30,
---------------------------------- -----------------------------
1997 1996
---- ----
Operating Activities:
Net income $1,444 $862
Adjustments to reconcile net income to
net cash used by operating activities:
Equity in undistributed earnings of
subsidiary (1,477) (893)
Decrease in other assets 14 18
------- -------
Net cash used by operating activities (19) (13)
======= =======
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
37
<PAGE>
<PAGE>
16. UNION FINANCIAL BANCSHARES, INC. FINANCIAL INFORMATION (continued)
Financing Activities:
Dividends received from subsidiary 500 500
Dividends paid (433) (404)
Proceeds from the exercise of stock options 96 41
---- ----
Net cash provided by financing activities 163 137
---- ----
Net increase in cash and cash equivalents 144 124
Cash and cash equivalents at beginning of year 256 132
---- ----
Cash and cash equivalents at end of year $400 $256
==== ====
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
38
<PAGE>
<PAGE>
-------------------------------------------
BOARD OF DIRECTORS
UNION FINANCIAL BANCSHARES AND SUBSIDIARIES
-------------------------------------------
Mason G. Alexander Carl L. Mason
Director, Mid-South Management Company Chairman
President, Carlisle Finishing
James W. Edwards
Dean of Academics, USC-Union Dwight V. Neese
President and Chief Executive Officer
William M. Graham Provident Community Bank
Owner, Graham's Flowers
David G. Russell
Louis M. Jordan Self-employed accountant
President, Jordan's Ace Hardware, Inc.
----------------------------------
LEADERSHIP GROUP
PROVIDENT COMMUNITY BANK
----------------------------------
Benjamin D. Aiken David L. Garrett
Assistant Vice President Vice President
Internal Audit & Compliance Manager Mortgage Loan Acquisitions
Carolyn H. Belue Robert J. Gregory
Assistant Vice President Assistant Vice President
Branch & Systems Administration Manager Jonesville Branch Manger
Gerald L. Bolin George E. Hall
Vice President Vice President
Chief Operating Officer City Executive, Laurens
Clemmie W. Boyd Dwight V. Neese
Assistant Vice President President
Duncan By-Pass Branch Manager Chief Executive Officer
Holly Coffer James G. Roof
Assistant Vice President Vice President
Financial Accounting Manager Mortgage Lending Sales Manager
Gregory S. Duncan Michael H. Vanderford
Vice President Vice President
Credit Administration Manager Mortgage Lending
Richard H. Flake David B. Walker
Executive Vice President Assistant Vice President
Chief Financial Officer Consumer Lending Manger
Emma Garner Wanda J. Wells
Assistant Vice President Vice President & Corporate Secretary
Collections Officer Human Resource Manager
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
39
<PAGE>
<PAGE>
CORPORATE INFORMATION
Common Stock Information
- ------------------------
Union Financial Bancshares, Inc.'s (UFBS) common stock
is quoted on the Over-the-Counter Bulletin Board. The
Corporation is not included on either the Nasdaq
National market or the Small Cap market. As of
September 30, 1997, the bid and ask prices for Union
Financial Bancshares, Inc. was $21.25 and $24.75,
respectively. Quotations are obtained form the National
Daily Quotation Service. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down,
or commissions and may not necessarily reflect actual
transactions.
As of September 30, 1997, there were 467 shareholders of
record and 827,700 shares of common stock issued and
outstanding. This does not reflect the number of persons
or entities who held their stock in nominee or "street"
names.
Dividend Information
- --------------------
During the year ended September 30, 1997, the Corporation
declared and paid a cash dividend of $.53 per share. See
Note 13 to the financial statements for information
regarding certain limitations imposed on the Bank's
ability to pay cash dividends to the holding company
Dividend Reinvestment and Stock Purchase Plan
- ---------------------------------------------
During the year ended September 30, 1997, the
Corporation implemented a dividend reinvestment program
that allow shareholders to purchase additional shares
with corporate dividends and additional cash purchases.
Details of the program are outlined in the dividend
reinvestment prospectus. To receive more information,
please contact Shareholder Services at the corporate
address.
10-KSB Information
------------------
A copy of the Form 10-KSB filed with the Securities and
Exchange Commission, will be furnished to shareholders
upon written request to the Corporate Secretary, Union
Financial Bancshares, Inc., 203 West Main Street, Union,
South Carolina 29379.
Annual Meeting of Shareholders
------------------------------
The Annual Meeting of Shareholders will convene at the
Community Room of the University of South Carolina,
Union Campus, Academy and North Mountain Street, Union,
South Carolina on January 22, 1998 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.
<PAGE>
<PAGE>
Corporate Offices
- -----------------
203 West Main Street
Union, South Carolina 29379
Transfer Agent
- --------------
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 456-0596
Independent Certified Public Accountants
- ----------------------------------------
Elliott, Davis & Company, LLP
870 South Pleasantburg Drive
Greenville, SC 29607-6286
Special Counsel
- ---------------
Breyer & Aguggia
1300 I Street, N.W.
Washington, D.C. 20005
General Counsel
- ---------------
Whitney, White and Diamaduros
203 West South Street
Union, South Carolina 29379
Stock Information
- -----------------
Wheat First Butcher Singer
P. O. Box 10586
Greenville, SC 29603
(800) 695-5104
Trident Securities, Inc.
4601 Six Forks Road
Raleigh, NC 27609
(800) 222-2618
Shareholder Services Officer
- ----------------------------
Wanda J. Wells
Union Financial Bancshares, Inc.
203 West Main Street
Union, SC 29379
(864) 429-1861
- ------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
40
<PAGE>
<PAGE>
UNION FINANCIAL BANCSHARES, INC.
Corporate Offices:
203 West Main Street PO Box 866
Union, South Carolina 29379-0866
864-427-9000
<PAGE>
<PAGE>
EXHIBIT NO. 21
Subsidiaries of Registrant
Percentage Jurisdiction or State
Subsidiaries Owned of Incorporation
- ------------ ----- ----------------
Provident Community Bank 100% United States
Provident Financial Services, Inc. (a) 100% South Carolina
____________
(a) A wholly-owned subsidiary of Provident Community Bank.
<PAGE>
<PAGE>
Exhibit 23
[Letterhead of Elliott, Davis & Company, L.L.P.]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
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 27, 1997, 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, 1997.
/s/Elliott, Davis & Company, L.L.P.
Elliott, Davis & Company, L.L.P.
December 24, 1997
Greenville, South Carolina
<PAGE>
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