SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 March 31, 1998
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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.
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Delaware 57-1001177
- -----------------------------------------------------------------------------
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
203 West Main Street, Union, South Carolina 29379
- ------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (864)427-7692
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: The Corporation had issued
and outstanding 1,265,647 shares, $0.01 par value, common stock as of March
31, 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 March 31, 1998
and September 30, 1997 3
Consolidated Statements of Income for the three and
six months ended March 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the six
months ended March 31, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
Part II. Other Information 14-16
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Signatures 17
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Item 1. Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1998 (unaudited) and September 30, 1997
March 31, September 30,
ASSETS 1998 1997
--------- -------------
(DOLLARS IN THOUSANDS)
Cash $ 1,909 $ 1,608
Short term interest-bearing deposits 2,989 6,213
--------------- ---------------
Total cash and cash equivalents 4,898 7,821
--------------- ---------------
Investment and mortgage-backed securities:
Held to maturity 4,004 7,811
Available for sale 16,842 15,855
--------------- ---------------
Total investment and mortgage-backed
securities 20,846 23,666
Loans , net
Held for sale 38,252 15,044
Held for investment 110,300 114,913
--------------- ---------------
Total loans receivable, net 148,552 129,957
Office properties and equipment, net 3,194 3,009
Federal Home Loan Bank Stock, at cost 2,108 2,105
Accrued interest receivable 1,173 1,317
Other assets 5,329 3,369
--------------- ---------------
TOTAL ASSETS $ 186,100 $ 171,244
=============== ===============
LIABILITIES
Deposit accounts $ 127,299 $ 117,914
Securities sold under repurchase agreements 1,306 504
Advances from the Federal Home Loan Bank
and other borrowings 42,142 37,979
Accrued interest on deposits 298 314
Advances from borrowers for taxes and
insurance 318 389
Other liabilities 442 617
--------------- ---------------
TOTAL LIABILITIES 171,805 157,717
--------------- ---------------
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 - 1,265,647 shares
at 3/31/98 and 827,700 at 9/30/97 12 8
Additional paid-in capital 4,249 3,993
Unrealized (loss) on investment and mortgage-
backed securities available for sale (113) (63)
Retained earnings, substantially restricted 10,147 9,589
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 14,295 13,527
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 186,100 $ 171,244
============== ===============
See notes to consolidated financial statements.
3
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended March 31, 1998 (unaudited) and 1997 (unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------- ---------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Interest Income:
Loans $ 2,908 $ 2,292 $ 5,800 $ 4,267
Deposits and federal funds
sold 33 11 60 28
Mortgage-backed securities 133 138 255 356
Interest and dividends on
investment securities 208 378 435 758
--------- --------- --------- ---------
Total Interest Income 3,282 2,819 6,550 5,409
--------- --------- --------- ---------
Interest Expense:
Deposit accounts 1,352 1,056 2,656 2,127
Advances from the FHLB and
other borrowings 499 480 1,006 816
--------- --------- --------- ---------
Total Interest Expense 1,851 1,536 3,662 2,943
--------- --------- --------- ---------
Net Interest Income 1,431 1,283 2,888 2,466
Provision for loan losses 19 106 64 144
--------- --------- --------- ---------
Net Interest Income After
Provision for Loan Losses 1,412 1,177 2,824 2,322
--------- --------- --------- ---------
Non Interest Income:
Fees for financial services 187 138 376 252
Loan servicing fees (costs) (14) (1) (8) (11)
Net gains (losses) on sale of
loans 99 0 174 0
Net gains on sale of
investments 0 15 0 38
--------- --------- --------- ---------
Total Non Interest Income 272 152 542 279
--------- --------- --------- ---------
Non Interest Expense:
Compensation and employee
benefits 563 386 1,118 744
Occupancy and equipment 235 161 459 324
Deposit insurance premiums 16 3 32 59
Professional services 65 85 154 148
Real estate operations 2 (5) 5 (4)
Other 178 125 400 228
--------- --------- --------- ---------
Total Non Interest Expense 1,059 755 2,168 1,499
--------- --------- --------- ---------
Income Before Income Taxes 625 574 1,198 1,102
Income tax expense 229 210 442 408
--------- --------- --------- ---------
Net Income $ 396 $ 364 $ 756 $ 694
========= ========= ========= =========
Basic Net Income Per Common
Share $ 0.31 $ 0.30 $ 0.60 $ 0.57
========= ========= ========= =========
Diluted Net Income Per Common
Share $ 0.31 $ 0.28 $ 0.57 $ 0.54
========= ========= ========= =========
Weighted Average Number of
Common Shares Outstanding
Basic 1,258,672 1,229,481 1,253,813 1,216,929
Diluted 1,296,256 1,300,425 1,320,398 1,294,289
See notes to consolidated financial statements.
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Months Ended March 31, 1998
(unaudited) and 1997 (unaudited)
Three Months Ended Six Months Ended
March 31, March 31, March 31, March 31,
1998 1997 1998 1997
--------- ---------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Net Income $ 396 $ 364 $ 756 $ 694
Other comprehensive income,
net of tax:
Unrealized gains (losses)
on securities:
Unrealized holding gains
(losses) arising
during period (53) (147) (49) (24)
-------- -------- ------ -------
Net Comprehensive Income $ 343 $ 217 $ 707 $ 670
======== ======== ====== =======
4
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1998 (unaudited) and 1997 (unaudited)
Six Months Ended
March 31, March 31,
1998 1997
---------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $756 $694
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 65 144
Amortization of intangibles 106 0
Depreciation expense 91 83
Recognition of deferred income, net of costs (8) (11)
Deferral of fee income, net of costs 179 87
(Gain) Loss on investment transactions 0 (38)
Loans originated for sale 62,782 0
Sale of loans (62,782) 0
(Gain) loss on sale of loans (174) 0
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest
receivable 144 (217)
Decrease (increase) in other assets (1,982) 665
Decrease (increase) in deposit premium
intangible 0 (2,115)
Increase (decrease) in other liabilities (246) (695)
Increase (decrease) in accrued interest payable (17) 65
------ ------
Net cash provided by (used by) operating
activities (1,086) (1,338)
------ ------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Held to maturity 0 (2,000)
Available for sale (4,728) (1,950)
Proceeds from sale of investment and mortgage-
backed securities 0 5,763
Proceeds from maturity of investment and mortgage-
backed securities:
Held to maturity 0 0
Available for sale 6,724 3,389
Principal repayments on mortgage-backed securities:
Held to maturity 40 37
Available for sale 783 1,559
Loan originations (37,707) (42,390)
Principal repayments of loans 18,947 5,535
Proceeds from sale of real estate acquired
in settlement of loans 22 14
Purchase of FHLB stock (3) (717)
Redemption of FHLB stock 0 225
Purchase of office properties and equipment (275) (912)
------ ------
Net cash provided by (used by) investing
activities ($16,197) ($31,447)
-------- --------
5
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UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1998 (unaudited) and 1997 (unaudited)
Six Months Ended
March 31, March 31,
1998 1997
--------- ----------
(IN THOUSANDS)
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options $39 $62
Proceeds from the dividend reinvestment plan 169 0
Dividends paid in cash ($0.135 per share - 1997
and $0.125 per share - 1996) (198) (212)
Proceeds from FHLB advances and other borrowings 59,100 70,241
Repayment of FHLB advances and other borrowings (54,937) (60,550)
Increase (Decrease) in securities sold under
repurchase agreements 802 0
Acquired deposits from purchased branch 0 20,144
Increase (Decrease) in deposit accounts 9,385 3,983
------ ------
Net cash (used by) provided by financing
activities 14,360 33,668
------ ------
NET DECREASE\INCREASE IN CASH AND CASH EQUIVALENTS (2,923) 883
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,821 3,685
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $4,898 $4,568
====== ======
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $240 $302
Interest 2,673 2,943
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 six months ended March 31,
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
7
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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.
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 six months ended March 31, 1998 and
1997 were 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 $14,864,000 and $9,013,000 of debt securities at March 31, 1998
and September 30, 1997, respectively, were pledged by the Bank as collateral
to secure deposits of the State of South Carolina, the City of Union and
certain other liabilities. The Bank pledges as collateral to Federal Home
Loan Bank advances 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 March 31,
1998 related to these items is summarized below:
Loan Commitments: Contract Amount
- ---------------- ---------------
Approved loan commitments $ 4,645,000
8
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Unadvanced portions of loans 5,181,000
------------
Total loan commitments $ 9,826,000
------------
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 credit-
worthiness 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 March 31, 1998 consist of fixed and adjustable rate
loans of approximately $9,826,000 at rates ranging from 7% to 9%. Commitments
to originate loans generally expire within 30 to 60 days.
Commitments to fund credit lines (principally variable rate, consumer lines
secured by real estate and overdraft protection) totaled approximately
$12,573,000. Of these lines, the outstanding loan balances totaled
approximately $7,392,000. 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 March 31, 1998 of approximately $982,000.
At March 31, 1998, the Bank had loan commitments to sell $29,500,000 in fixed
rate residential loans which had not been closed to Freddie Mac for the months
of April-July, 1998.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Condition
- -------------------
At March 31, 1998 total assets of the Corporation increased 8.68% to
$186,100,000 from $171,244,000 at September 30, 1997. The increase was due
primarily to an increase in loan receivable, net, of approximately $18,595,000
or 14.31% during the six months ended March 31, 1998. The increase was due
primarily to increased origination of fixed-rate loans held for sale through
the wholesale mortgage operation in the six months ended March 31, 1998. At
March 31, 1998 the Corporation had $38.3 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 37.37% since September
30,1997. Total investment and mortgage-backed securities decreased $2,820,000,
or 11.92%, to $20,846,000 during the six months ended March 31, 1998. The
current year trend for loan production is expected to be slower growth with
fixed rate production generated being securitized and sold in the secondary
market. Deposits increased $9,385,000 or 7.96% to $127,299,000 for the six
months ended March 31, 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
increased $4,163,000 or 10.96% from $37,979,000 at September 30, 1997 to
$42,142,000 at March 31, 1998, as a result of increased loan originations.
As of March 31, 1998, real estate acquired through foreclosure ("REO")
consisted of one property with a net book value of $22,700. 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 7.90% as of March 31, 1998.
As in the past, management expects that the Bank can meet its obligations to
fund outstanding mortgage loan commitments, which were approximately
$4,645,000, as described in Note 4 to the Consolidated Financial Statements,
and other loan commitments as of March 31, 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 March 31, 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 $2,586 $11,982 $9,396
Tangible capital to adjusted total assets 1.50% 6.46% 4.96%
Core capital $7,508 $11,982 $4,474
Core capital to adjusted total assets 4.00% 6.46% 2.46%
Risk based capital $8,151 $12,756 $4,605
Risk based capital to risk weighted assets 8.00% 12.52% 4.52%
The reported capital requirements are based on information reported in the OTS
March 31, 1998 quarterly thrift financial report.
Results of Operations for the Six Months Ended March 31, 1998 and 1997
- ----------------------------------------------------------------------
General
- -------
Net income increased $62,000 or 8.93% to $756,000 for the six months ended
March 31, 1998 as compared to the same period in 1997. The increase in net
income was due primarily to a 21.62% increase in net interest income for the
six months ended March 31, 1998 as compared to the same period in 1997. 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 $1,141,000 or 21.09% for the six months ended March
31, 1998 as compared to the same period in 1997. Interest income on loans
increased 35.93% or $1,533,000 to $5,800,000 for the six months ended March
31, 1998 from $4,267,000 for the six months ended March 31, 1997 due to higher
loan volumes. The average balance of loans outstanding increased as a result
of the investment of the funds received in connection with the acquisition of
the Laurens branch in March, 1997. Interest income on overnight deposits and
federal funds sold and on mortgage-backed securities had a net decrease of
$69,000 for
11
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the six months ended March 31, 1998 as compared to the same period in the
prior year due primarily to lower balances. Interest and dividends on
investment securities decreased $323,000 or 42.61% for the six months ended
March 31, 1998 to $435,000 from $758,000 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
two quarters of the fiscal year.
Interest Expense
- ----------------
The Corporation experienced an overall increase of $719,000 or 24.43% in
interest expense for the six months ended March 31, 1998 as compared to the
six months ended March 31, 1997 due primarily to the acquisition of the
Laurens branch deposit base. Interest expense on deposit accounts increased
$529,000 or 24.87% to $2,656,000 for the six months ended March 31, 1998 from
$2,127,000 during the same period in 1997. Interest expense on borrowings
increased $190,000 or 23.28% for the six months ended March 31, 1998 as
compared to the six months ended March 31, 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 six months ended March 31, 1998, provisions for loan losses were
$64,000 as compared to $144,000 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 March 31, 1998 were approximately
.86% of the Bank's outstanding loan portfolio, net of loans held for sale
compared to .82% 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):
March 31, 1998 September 30, 1997
-------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate:
Residential $ 845 $ 751
Commercial 0 26
Construction -- --
Non-mortgage 36 --
----- -----
Total $ 881 $ 777
===== =====
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Percentage of loans receivable, net 0.60% 0.60%
===== =====
Allowance for loan losses $ 952 $ 928
===== =====
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $ 22 $ 2
===== =====
Non Interest Income and Expense
- -------------------------------
Total non interest income increased $263,000 or 94.27% to $542,000 for the six
months ended March 31, 1998 from $279,000 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 $174,000 for the six
months ended March 31, 1998 as compared to $0 for the six months ended March
31, 1997. The gains reflect the operations of the Mortgage Division that was
established in the third quarter of the previous year.
For the six months ended March 31, 1998, total non interest expense increased
$669,000 or 44.63% to $2,168,000 from $1,499,000 for the same period in 1997.
The current year period ending March 31, 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 $374,000 or 50.27% to
$1,118,000 for the six months period ended March 31, 1998 from $744,000 for
the same period in 1997. Occupancy and equipment expense increased $135,000 or
41.67% to $459,000 for the six months ended March 31, 1998 from $324,000 for
the same period in 1997. Professional services expenses increased $6,000 or
4.05% to $154,000 for the six month period ended March 31, 1998 from $148,000
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. Professional services expenses increased due to higher advertising
expenses incurred for the new deposit promotion programs. These increases were
partially offset by a decrease in deposit insurance premiums for the six
months ended March 31, 1998 due to reduction in the deposit assessment rate
from 23 basis points to 6.45 basis points.
13
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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
---------------------------------------------------
The Annual Meeting of the Stockholders of the Corporation was held
on January 21, 1998. The results of the vote on the matters
presented at the meeting is as follows:
1 - The following individuals were elected as directors, each for a
three-year term:
Vote For Vote Withheld
-------- -------------
Mason G. Alexander 537,837 12,620
------- ------
James W. Edwards 535,659 14,798
------- ------
Broker non-votes totaled 22,994
------
2 - The appointment of Elliott, Davis & Company, LLP, as auditors
for the Corporation for the fiscal year ending September 30,
1998 was ratified by shareholders by the following vote:
For 536,457 Against 10,986 Abstain 3,014
------- ------ -----
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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 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
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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: May 11, 1998 By: /s/ Dwight V. Neese
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Dwight V. Neese, CEO
Date: May 11, 1998 By: /s/ Richard H. Flake
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Richard H. Flake, CFO
17
<PAGE>
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