SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ----- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
COMMISSION FILE NUMBER 1-5735
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
Delaware 57-1001177
- ------------------------------------------------------------------------------
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
203 West Main Street, Union, South Carolina 29379
- ------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (864)429-1864
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The Corporation had issued
and outstanding 1,275,464 shares, $0.01 par value, common stock as of June 30,
1998.
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UNION FINANCIAL BANCSHARES, INC.
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 1998
and September 30, 1997 3
Consolidated Statements of Income for the three and nine
months ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the nine
months ended June 30, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Part II. Other Information 15-17
-----------------
Signatures 18
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Item 1. Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 1998 (unaudited) and September 30, 1997
June 30, September 30,
ASSETS 1998 1997
------------- ----------------
(DOLLARS IN THOUSANDS)
Cash $ 1,854 $ 1,608
Short term interest-bearing deposits 1,846 6,213
--------- ---------
Total cash and cash equivalents 3,700 7,821
Investment and mortgage-backed securities: --------- ---------
Held to maturity 2,810 7,811
Available for sale 15,464 15,855
--------- ---------
Total investment and mortgage-backed securities 18,274 23,666
Loans , net
Held for sale 40,752 15,044
Held for investment 107,775 114,913
--------- ---------
Total loans receivable, net 148,527 129,957
Office properties and equipment, net 3,364 3,009
Federal Home Loan Bank Stock, at cost 1,850 2,105
Accrued interest receivable 1,064 1,317
Other assets 6,287 3,369
--------- ---------
TOTAL ASSETS $ 183,066 $ 171,244
========= =========
LIABILITIES
Deposit accounts $ 129,997 $ 117,914
Securities sold under repurchase agreements 563 504
Advances from the Federal Home Loan Bank and
other borrowings 36,468 37,979
Accrued interest on deposits 315 314
Advances from borrowers for taxes and insurance 396 389
Other liabilities 580 617
--------- ---------
TOTAL LIABILITIES 168,319 157,717
--------- ---------
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None 0 0
Common stock - $0.01 par value,
authorized - 2,500,000 shares,
issued and outstanding - 1,275,464 shares
at 6/30/98 and 827,70 13 8
Additional paid-in capital 4,346 3,993
Unrealized (loss) on investment and mortgage-
backed securities available for sale (72) (63)
Retained earnings, substantially restricted 10,460 9,589
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 14,747 13,527
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 183,066 $ 171,244
========= =========
See notes to consolidated financial statements.
3
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Nine Months Ended June 30, 1998 (unaudited) and 1997 (unaudited)
Three Months Ended Nine Months Ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------------------------------------
(DOLLARS IN (DOLLARS IN
THOUSANDS) THOUSANDS)
Interest Income:
Loans $ 3,023 $ 2,827 $ 8,823 $ 7,095
Deposits and federal funds sold 28 13 88 40
Mortgage-backed securities 130 94 385 450
Interest and dividends on
investment securities 205 386 640 1,145
------- ------- ------- -------
Total Interest Income 3,386 3,320 9,936 8,730
------- ------- ------- -------
Interest Expense:
Deposit accounts 1,429 1,260 4,085 3,386
Advances from the FHLB and other
borrowings 478 570 1,485 1,387
------- ------- ------- -------
Total Interest Expense 1,907 1,830 5,570 4,773
------- ------- ------- -------
Net Interest Income 1,479 1,490 4,366 3,957
Provision for loan losses 44 55 108 200
Net Interest Income After ------- ------- ------- -------
Provision for Loan Losses 1,435 1,435 4,258 3,757
------- ------- ------- -------
Non Interest Income:
Fees for financial services 182 196 558 448
Loan servicing fees (costs) 10 (9) 3 (20)
Net gains (losses) on sale of loans 139 (47) 313 (47)
Net gains on sale of investments 0 0 0 38
------- ------- ------- -------
Total Non Interest Income 331 140 874 419
------- ------- ------- -------
Non Interest Expense:
Compensation and employee benefits 606 484 1,724 1,228
Occupancy and equipment 248 183 707 507
Deposit insurance premiums 13 15 45 74
Professional services 51 58 205 206
Real estate operations 2 0 7 (4)
Other 206 247 606 475
------- ------- ------- -------
Total Non Interest Expense 1,126 987 3,294 2,486
------- ------- ------- -------
Income Before Income Taxes 640 588 1,838 1,690
Income tax expense 234 221 675 628
------- ------- ------- -------
Net Income $ 406 $ 367 $ 1,163 $ 1,062
======= ======= ======= =======
Basic Net Income Per Common Share $ 0.32 $ 0.30 0.92 $ 0.86
======= ======= ======= =======
Diluted Net Income Per Common Share $ 0.30 $ 0.28 0.87 $ 0.82
======= ======= ======= =======
Weighted Average Number of
Common Shares Outstanding
Basic 1,273,301 1,232,346 1,260,309 1,228,931
Diluted 1,363,816 1,294,599 1,334,871 1,297,995
See notes to consolidated financial statements.
4
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1998 (unaudited) and 1997 (unaudited)
Nine Months Ended
June 30, June 30,
1998 1997
---------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $ 1,163 $ 1,062
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 108 200
Amortization of intangibles 159 53
Depreciation expense 172 136
Recognition of deferred income, net of costs (90) (78)
Deferral of fee income, net of costs 56 71
(Gain) Loss on investment transactions 0 38
Loans originated for sale 96,995 (16,317)
Sale of loans (96,995) 16,317
(Gain) loss on sale of loans 313 47
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest
receivable 253 (133)
Decrease (increase) in other assets (3,077) 613
Decrease (increase) in deposit premium
intangible 0 (2,421)
Increase (decrease) in other liabilities (30) (900)
Increase (decrease) in accrued interest payable 1 160
-------- --------
Net cash provided by (used by) operating
activities (972) (1,152)
-------- --------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed
securities:
Held to maturity 0 (2,000)
Available for sale (5,657) (1,950)
Proceeds from sale of investment and mortgage-
backed securities 0 6,736
Proceeds from maturity of investment and mortgage-
backed securities:
Held to maturity 0 500
Available for sale 9,478 3,388
Principal repayments on mortgage-backed
securities:
Held to maturity 70 110
Available for sale 1,501 1,424
Loan originations (54,989) (59,013)
Principal repayments of loans 36,000 11,163
Proceeds from sale of real estate acquired
in settlement of loans 22 11
Purchase of FHLB stock 0 (1,272)
Redemption of FHLB stock 255 225
Purchase of office properties and equipment (527) (1,132)
-------- --------
Net cash provided by (used by) investing
activities ($13,847) ($41,810)
-------- --------
5
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1998 (unaudited) and 1997 (unaudited)
Nine Months Ended
June 30, June 30,
1998 1997
---------- ---------
(IN THOUSANDS)
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options $51 $69
Proceeds from the dividend reinvestment plan 306 0
Dividends paid in cash ($0.135 per share - 1997
and $0.125 per share - 1996) (290) (323)
Proceeds from FHLB advances and other
borrowings 59,100 99,940
Repayment of FHLB advances and other
borrowings (60,611) (79,800)
Increase (Decrease) in securities sold under
repurchase agreements 59 0
Acquired deposits from purchased branch 0 20,144
Increase (Decrease) in deposit accounts 12,083 2,697
-------- --------
Net cash (used by) provided by financing
activities 10,698 42,727
-------- --------
NET DECREASE\INCREASE IN CASH
AND CASH EQUIVALENTS (4,121) (235)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 7,821 3,685
-------- --------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 3,700 $ 3,450
======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $642 $578
Interest 5,568 4,613
Non-cash transactions:
Loans foreclosed 0 0
See notes to consolidated financial statements.
6
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UNION FINANCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Presentation of Consolidated Financial Statements
-------------------------------------------------
The accompanying unaudited consolidated financial statements of Union
Financial Bancshares, Inc. (the "Corporation") were prepared in accordance
with instructions for Form 10-QSB and, therefore, do not include all
disclosures necessary for a complete presentation of consolidated financial
condition, results of operations, and cash flows in conformity with generally
accepted accounting principles. However, all adjustments which are, in the
opinion of management, necessary for the fair presentation of the interim
consolidated financial statements have been included. All such adjustments
are of a normal and recurring nature. The consolidated financial statements
include the Corporation's wholly owned subsidiary, Provident Community Bank
(the "Bank"). The results of operations for the nine months ended June 30,
1998 are not necessarily indicative of the results which may be expected for
the entire fiscal year. The consolidated balance sheet as of September 30,
1997 has been derived from the Company's audited financial statements
presented in the annual report to shareholders. Certain amounts in the prior
year's financial statements have been reclassified to conform with current
year classifications.
In February, 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure", which was 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 adoption of this standard did 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
adopted Statement 130 effective March 31, 1998 and provided 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
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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.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which provided
guidance as to when it is or is not appropriate to capitalize the cost of
software developed or obtained for internal use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998 with
early adoption encourage. The Corporation does not anticipate the adoption of
SOP 98-1 will have a material effect on its financial statements.
In April 1998, the FASB issued SFAS 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits". The new Statement revises the
required disclosures for employee benefit plans, but it does not change the
measurement or recognition of such plans. While the new standard requires
some additional information about benefit plans, it helps preparers of
financial statements by eliminating certain disclosures and by standardizing
the disclosures for pensions and other postretirement benefits to the extent
practicable. SFAS 132 supercedes the disclosure requirements in SFAS 87,
"Employers' Accounting for Pensions", SFAS 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits", and SFAS 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions". The new disclosures are
effective for fiscal years beginning after December 15, 1997. The adoption of
SFAS 132 will not have a impact on the financial statements of the
Corporation's due the disclosure only requirements.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instrument
and Hedging Activities". All derivatives are to be measured at fair value and
recognized in the statement of financial position as assets or liabilities.
The statement is effective for fiscal years and quarters beginning after June
15, 1999. Because the Corporation has limited use of derivative transactions
at this time, management does not expect that this standard would have a
significant effect on the Corporation.
2. Income Per Share
----------------
Effective January 29, 1998, the Corporation declared a three-for-two stock
split in the form of a 50% stock dividend of the Corporation's common stock.
The weighted average number of shares and all other share data have been
restated for all periods presented to reflect this stock split.
Income per share amounts for the three and nine months ended June 30, 1998 and
1997 were
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computed based on the weighted average number of common shares outstanding
adjusted for the dilutive effect of outstanding common stock options during
the periods.
3. Assets Pledged
--------------
Approximately $12,676,000 and $9,013,000 of debt securities at June 30, 1998
and September 30, 1997, respectively, were pledged by the Bank as collateral
to secure deposits of the State of South Carolina, Laurens County and certain
other liabilities. The Bank pledges as collateral to Federal Home Loan Bank
advances the Bank's 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.
4. Contingencies and Loan Commitments
----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These instruments expose the Bank to credit risk in excess of the amount
recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. Total credit exposure at June 30, 1998
related to these items is summarized below:
Loan Commitments: Contract Amount
- ---------------- ---------------
Approved loan commitments $ 1,712,000
Unadvanced portions of loans 5,601,000
-----------
Total loan commitments $ 7,313,000
-----------
Loan commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Loan
commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of credit is based on management's credit evaluation of the
counter party. Collateral held is primarily residential property. Interest
rates on loan commitments are a combination of fixed and variable.
Commitments outstanding at June 30, 1998 consist of fixed and adjustable rate
loans of approximately $7,313,000 at rates ranging from 7% to 9%. Commitments
to originate loans generally expire within 30 to 60 days.
9
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Commitments to fund credit lines (principally variable rate, consumer lines
secured by real estate and overdraft protection) totaled approximately
$12,827,000. Of these lines, the outstanding loan balances totaled
approximately $7,226,000. The Bank also has commitments to fund warehouse
lines of credit for various mortgage banking companies totaling $1,500,000,
which had an outstanding balance at June 30, 1998 of approximately $608,000.
At June 30, 1998, the Bank had loan commitments to sell $30,000,000 in fixed
rate residential loans which had not been closed to Freddie Mac for the months
of July-October, 1998.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
- -------------------
At June 30, 1998 total assets of the Corporation increased 6.90% to
$183,066,000 from $171,244,000 at September 30, 1997. The increase was due
primarily to an increase in loans receivable, net, of approximately
$18,570,000 or 14.29% during the nine months ended June 30, 1998. The
increase was due primarily to increased origination of fixed-rate loans held
for sale through the wholesale mortgage operation in the nine months ended
June 30, 1998. At June 30, 1998 the Corporation had $40.7 million of loans
held for sale. This increase in loans receivable was funded by a reduction
in investments and mortgage-backed securities that resulted from maturities
and calls and through the use of cash and cash equivalents, which decreased
52.69% since September 30,1997. Total investment and mortgage-backed
securities decreased $5,392,000, or 22.78%, to $18,274,000 during the nine
months ended June 30, 1998. Although the Corporation expects loan growth to
continue, the growth will be slower than prior years with fixed rate
production generated being securitized and sold in the secondary market.
Deposits increased $12,083,000 or 10.25% to $129,997,000 for the nine months
ended June 30, 1998. The increase was a result of additions in certificate
deposit balances due to the Bank adopting a focus product concept whereby
speciality products are advertised on a frequent basis. Borrowings decreased
$1,511,000 or 3.98% from $37,979,000 at September 30, 1997 to $36,468,000 at
June 30, 1998, as a result of increased deposits.
As of June 30, 1998, real estate acquired through foreclosure ("REO")
consisted of two properties with a net book value of $231,954. REO assets are
carried at their estimated fair values less estimated selling costs.
Liquidity
- ---------
Liquidity is the ability to meet demand for loan disbursements, deposit
withdrawals, repayment of debt, payment of interest on deposits and other
operating expenses. The primary sources of liquidity are savings deposits,
loan repayments, borrowings and interest payments.
The OTS imposes a minimum level of liquidity on the Bank which is currently 4%
of withdrawable deposits plus short-term borrowings. The liquidity level of
the Bank as measured for regulatory purposes was 7.60% as of June 30, 1998. As
in the past, management expects that the Bank can meet its obligations to fund
outstanding mortgage loan commitments, which were approximately $1,712,000, as
described in Note 4 to the Consolidated Financial Statements, and other loan
commitments as of June 30, 1998, while maintaining liquidity in excess of
regulatory requirements.
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Capital Resources
- -----------------
The capital requirement of the Bank consists of three components: (1) tangible
capital, (2) core capital and (3) risk based capital. Tangible capital must
equal or exceed 1.5% of adjusted total assets. Core capital must be a minimum
of 4% of adjusted total assets and risk based capital must be a minimum of 8%
of risk weighted assets.
As of June 30, 1998, the Bank's capital position, as calculated under
regulatory guidelines, exceeds these minimum requirements as follows (dollars
in thousands):
Requirement Actual Excess
- ------------------------------------------------------------------------------
Tangible capital $2,745 $12,459 $9,714
Tangible capital to adjusted total assets 1.50% 6.81% 5.31%
Core capital $7,320 $12,459 $5,139
Core capital to adjusted total assets 4.00% 6.81% 2.81%
Risk based capital $8,251 $13,517 $5,266
Risk based capital to risk weighted assets 8.00% 13.11% 5.11%
The reported capital requirements are based on information reported in the OTS
June 30, 1998 quarterly thrift financial report.
Results of Operations for the Nine Months Ended June 30, 1998 and 1997
- ----------------------------------------------------------------------
General
- -------
Net income increased $101,000 or 9.51% to $1,163,000 for the nine months ended
June 30, 1998 as compared to the same period in 1997. Non interest income
increased $455,000 or 108.59% and net interest income after provision for loan
losses increased $501,000 or 13.34%. These gains were partially offset by an
$808,000 or 32.50% increase in non interest expense. All income and expense
items reflect the first year of operation for the Laurens branch purchased
from First Union and the startup of Provident Mortgage Company.
Interest Income
Interest income increased $1,206,000 or 13.81% for the nine months ended June
30, 1998 as compared to the same period in 1997. Interest income on loans
increased 24.36% or $1,728,000 to $8,823,000 for the nine months ended June
30, 1998 from $7,095,000 for the nine months ended June 30, 1997 due to higher
loan volumes. Interest income on overnight deposits and federal funds sold
and on mortgage-backed securities had a net decrease of $17,000 for the nine
months ended June 30, 1998 as compared to the same period in the prior year
due primarily to lower balances. Interest and dividends on investment
securities
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decreased $505,000 or 44.10% for the nine months ended June 30, 1998 to
$640,000 from $1,145,000 during the same period in 1997. The decrease was due
primarily to a reduction in the level of investment securities due to the high
volume of agency calls experienced during the first three quarters of the
fiscal year.
Interest Expense
- ----------------
The Corporation experienced an overall increase of $797,000 or 16.70% in
interest expense for the nine months ended June 30, 1998 as compared to the
nine months ended June 30, 1997 due primarily to the previous year acquisition
of the Laurens branch deposit base. Interest expense on deposit accounts
increased $699,000 or 20.64% to $4,085,000 for the nine months ended June 30,
1998 from $3,386,000 during the same period in 1997. Interest expense on
borrowings increased $98,000 or 7.07% for the nine months ended June 30, 1998
as compared to the nine months ended June 30, 1997. The increase was due to
higher volumes in FHLB advances during the period which were required to fund
higher loan originations.
Provision for Loan Loss
- -----------------------
During the nine months ended June 30, 1998, provisions for loan losses were
$108,000 as compared to $200,000 for the same period in the previous year. The
decrease in loan loss provisions are due to the low volume of loan charge
offs along with low level of delinquent loans to total loans. Management
believes the Bank's loan loss allowances are adequate to absorb estimated
future loan losses. The Bank's loan loss allowances at June 30, 1998 were
approximately .91% of the Bank's outstanding loan portfolio, net of loans held
for sale compared to .79% for the same period in the previous year.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
June 30, 1998 September 30, 1997
------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate:
Residential $ 646 $ 751
Commercial 0 26
Construction -- --
Non-mortgage 42 --
----- -----
Total $ 688 $ 777
===== =====
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Percentage of loans receivable, net 0.47% 0.60%
===== =====
Allowance for loan losses $ 986 $ 928
===== =====
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $ 231 $ 2
===== =====
Non Interest Income and Expense
- -------------------------------
Total non interest income increased $455,000 or 108.59% to $874,000 for the
nine months ended June 30, 1998 from $419,000 for the same period in the
previous year. This increase reflects the operation of the branch acquired
from First Union on March 24, 1997. Gains on sale of loans was $313,000 for
the nine months ended June 30, 1998 as compared to a loss on sale of loans of
$47,000 for the nine months ended June 30, 1997. The gains reflect the
operations of the Mortgage Division that was established in the third quarter
of the previous year.
For the nine months ended June 30, 1998, total non interest expense increased
$808,000 or 32.50% to $3,294,000 from $2,486,000 for the same period in 1997.
The current year period ending June 30, 1998 reflects a full year of operation
for a previous year branch acquisition along with expenses for the new
Mortgage Division that was started during the same period in the previous
year. Compensation and employee benefits increased $496,000 or 40.39% to
$1,724,000 for the nine months period ended June 30, 1998 from $1,228,000 for
the same period in 1997. Occupancy and equipment expense increased $200,000
or 39.45% to $707,000 for the nine months ended June 30, 1998 from $507,000
for the same period in 1997. Professional services expenses decreased $1,000
or .49% to $205,000 for the nine month period ended June 30, 1998 from
$206,000 for the same period in 1997. The increase in compensation and
employee benefits was due to cost of living increases along with additional
staffing for the new branch acquisition and Mortgage Division. Occupancy and
equipment expense increased due to increases in maintenance and data
processing expenses. These increases were partially offset by a decrease in
deposit insurance premiums for the nine months ended June 30, 1998 due to
reduction in the deposit assessment rate from 23 basis points to 6.45 basis
points.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Corporation is involved in various claims and legal actions
arising in the normal course of business. Management believes
that these proceedings will not result in a material loss to the
Corporation.
Item 2. Changes in Securities
---------------------
Not applicable.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
Year 2000 Issues
----------------
The Corporation recognizes that there is a business risk in
computerized systems as the calendar rolls over into the next
century. The Federal Financial Institutions Examination Council
("FFIEC") issued an interagency statement on May 5, 1997,
outlining five phases for institutions to effectively manage the
Year 2000 challenge. The phases were: Awareness; Assessment;
Renovation; Validation; and, Implementation. The FFIEC encouraged
institutions to have all critical applications identified and
priorities set by September 30, 1997 and to have renovation work
largely completed and testing well underway by December 31, 1998.
The Corporation has an internal task force assigned to this
project and the Board of Directors and management of the Company
have established year 2000 compliance as a strategic initiative.
The Corporation is well into the assessment phase of the project.
While the Corporation believes that it has available resources to
assure year 2000 compliance, it is to some extent dependent on
vendor cooperation. At the present time, the Corporation expects
its most critical application software vendor to have all of its
systems compliant by January, 1999. The Corporation expects to
install the necessary software releases in fiscal 1999 and have
testing of such systems substantially completed by March 31, 1999.
At this time, the Corporation
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has not determined the cost of making modification to correct any
year 2000 problems; however, equipment and software expenses are
not expected to materially differ from past results.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
27 Financial Data Schedule
16
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
(Registrant)
Date: 8-5-98 By: /s/ Dwight V. Neese
------------- -------------------------------------
Dwight V. Neese, CEO
Date: 8/5/98 By: /s/ Richard H. Flake
------------- -------------------------------------
Richard H. Flake, CFO
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1998
<CASH> 1854
<INT-BEARING-DEPOSITS> 1846
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15464
<INVESTMENTS-CARRYING> 2810
<INVESTMENTS-MARKET> 3039
<LOANS> 148527
<ALLOWANCE> 986
<TOTAL-ASSETS> 183066
<DEPOSITS> 129997
<SHORT-TERM> 24031
<LIABILITIES-OTHER> 580
<LONG-TERM> 13000
0
0
<COMMON> 13
<OTHER-SE> 14734
<TOTAL-LIABILITIES-AND-EQUITY> 183066
<INTEREST-LOAN> 8823
<INTEREST-INVEST> 640
<INTEREST-OTHER> 473
<INTEREST-TOTAL> 9936
<INTEREST-DEPOSIT> 4085
<INTEREST-EXPENSE> 5570
<INTEREST-INCOME-NET> 4366
<LOAN-LOSSES> 108
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3294
<INCOME-PRETAX> 1838
<INCOME-PRE-EXTRAORDINARY> 1163
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1163
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.87
<YIELD-ACTUAL> 8.09
<LOANS-NON> 688
<LOANS-PAST> 0
<LOANS-TROUBLED> 299
<LOANS-PROBLEM> 1163
<ALLOWANCE-OPEN> 928
<CHARGE-OFFS> 50
<RECOVERIES> 108
<ALLOWANCE-CLOSE> 986
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 986
</TABLE>
