<PAGE>
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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-5735
------
Union Financial Bancshares, Inc.
----------------------------------------------
(Name of small business issuer in its charter)
<TABLE>
<S> <C>
Delaware 57-1001177
- ------------------------------------------------- ----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
203 West Main Street, Union, South Carolina 29379
- ------------------------------------------------- ---------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (864) 427-9000
---------------
Securities registered pursuant to Section 12(b) of the Act: None
--------------
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
</TABLE>
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
-----
The issuer's gross revenues for the fiscal year ended September 30, 1999
were approximately $15,238,000.
As of November 5, 1999, there were issued and outstanding 1,357,562 shares
of the registrant's Common Stock. The aggregate market value of the voting stock
held by non-affiliates, computed by reference to the average bid and asked price
on November 5, 1999, was approximately $15,109,665 (1,357,562 shares at $11.13
per share). It is assumed for purposes of this calculation that directors and
officers are not affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Shareholders for the Fiscal Year Ended
September 30, 1999 (Parts I and II).
2. Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders
(Part III).
<PAGE>
PART I
Item 1. Business
- ----------------
General
Union Financial Bancshares, Inc. ("Union Financial") is the savings and
loan holding company for Provident Community Bank (formerly known as Union
Federal Savings Bank) (the "Bank"). Union Financial has no material assets or
liabilities. Union Financial's business activity consists primarily of directing
the activities of the Bank. 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's operations are conducted through its main
office and five full-service banking centers, a mortgage banking center, and a
lending and investment center, all of which are located in the upstate area of
South Carolina. 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 Laurens ,Union and Fairfield 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 Freddie Mac, Fannie Mae and Ginnie Mae. 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.
This discussion and analysis contains certain "forward-looking statements"
within the meaning of the federal securities laws. These forward-looking
statements include, but are not limited to, estimates and expectation of future
performance with respect to the financial condition and results of operations of
the Corporation and other factors. These forward-looking statements are not
guarantees of future performance and are subject to various factors that would
cause actual results to differ materially from these forward-looking statements.
These factors include, but are not limited to, changes in general economic and
market conditions and the legal and regulatory environment in which Union
Financial and the Bank operate and the development of an interest rate
environment that adversely affects the Corporation's interest rate spread or
other income anticipated from the Corporation's operations.
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 and Laurens
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.
2
<PAGE>
As of September 30, 1999, a local commercial bank and an office of a
regional commercial bank 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 banking center. The makeup of the area and
the competition is similar to that of Union County.
Recent Developments
On November 12, 1999, Union Financial completed its acquisition of South
Carolina Community Bancshares, Inc. and its wholly owned subsidiary, Community
Federal Savings Bank. Union Financial issued a total of 526,290 shares and paid
a total of $3,582,484 to the shareholders of South Carolina Community
Bancshares, Inc. The two offices of Community Federal Savings Bank became
offices of the Bank. At September 30, 1999, South Carolina Community Bancshares,
Inc. had total assets of $46.6 million, loans of $40.2 million and deposits of
$35.9 million.
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.
3
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
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)... $142,020 $11,420 8.03% $146,515 $11,865 8.10% $120,542 $ 9,747 8.08%
Mortgage-backed securities.. 23,663 1,480 6.31 8,610 599 6.96 8,079 546 6.76
Investment securities:
Taxable..................... 14,197 1,027 7.23 12,432 814 6.55 19,691 1,462 7.42
Nontaxable.................. 769 36 4.68 449 17 3.88 952 37 3.92
-------- ------- ---- -------- ------- -------- -------
Total investment securities.... 14,966 1,063 7.10 12,881 831 6.45 20,643 1,499 7.26
Overnight deposits.......... 3,079 83 2.70 3,103 110 3.54 2,076 63 3.03
-------- ------- ---- -------- ------- -------- -------
Total interest-earning
assets............... 183,728 14,046 7.65 171,109 13,405 7.83 151,340 11,855 7.83
Non-interest-earning assets.... 14,478 6,055 5,072
-------- -------- --------
Total assets.......... $198,206 $177,164 $156,412
======== ======== ========
Interest-bearing liabilities:
Savings accounts............ $ 12,681 207 1.63 $ 11,527 253 2.20 $ 11,611 274 2.36
Negotiable order of
withdrawal ("NOW")
accounts................. 30,392 410 1.34 24,056 411 1.71 20,493 353 1.72
Certificate accounts........ 96,733 5,089 5.26 88,492 4,880 5.51 75,008 4,038 5.38
FHLB advances and other
borrowings................. 39,452 1,992 5.04 35,197 2,005 5.70 35,237 1,982 5.62
-------- ------- ---- -------- ------- -------- -------
Total interest-bearing
liabilities.......... 179,258 7,698 4.29 159,272 7,549 4.74 142,349 6,647 4.67
Non-interest-bearing
liabilities................ 3,652 3,494 1,180
-------- -------- --------
Total liabilities..... 182,910 162,766 143,529
Shareholders' equity........ 15,296 14,398 12,883
-------- -------- --------
Total liabilities and
shareholders' equity $198,206 $177,164 $156,412
======== ======== ========
Net interest income............ $ 6,348 $ 5,856 $ 5,208
======= ======= =======
Interest rate spread (2)....... 3.36% 3.09% 3.16%
Net interest margin (3)........ 3.46% 3.42% 3.44%
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................ 1.02x 1.07x 1.06x
</TABLE>
________________________
(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.
4
<PAGE>
Lending Activities
General. Set forth below is selected data relating to the composition of
the Corporation's loan portfolio on the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
Conventional...................... $108,266 72.47% $114,383 80.44% $105,242 80.98%
Construction loans................ 17,039 11.40 12,838 9.03 13,508 10.39
Participation loans purchased..... 377 0.25 665 0.47 1,002 0.77
-------- ------ -------- ------ -------- ------
Total mortgage loans........... 125,682 84.12 127,886 89.94 119,752 92.14
-------- ------ -------- ------ -------- ------
Second mortgage loans................ 8,499 5.69 5,857 4.12 4,478 3.45
Consumer and installment loans....... 24,136 16.16 14,218 10.00 12,990 10.00
Savings account loans................ 1,435 0.96 1,551 1.09 183 0.14
-------- ------ -------- ------ -------- ------
Total loans.................... 159,752 106.93 149,512 105.15 137,403 105.73
------ ------ ------
Less:
Undisbursed loans in process...... (9,964) (6.67) (6,625) (4.66) (6,598) (5.08)
Allowance for loan losses......... (836) (0.56) (827) (0.59) (928) (0.71)
Deferred loan fees................ 449 0.30 142 0.10 80 0.06
-------- ------ -------- ------ -------- ------
Net loans receivable........... $149,401 100.00% $142,202 100.00% $129,957 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth, at September 30, 1999, 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.
<TABLE>
<CAPTION>
Due After Due After Due 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
----------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
First mortgage loans:
Conventional loans.................... $14,040 $8,868 $ 9,806 $20,204 $55,348 $108,266
Construction loans (1)................ 17,039 -- - -- - 17,039
Participation loans purchased......... - -- - -- 377 377
Second mortgage loans.................... - -- - -- 8,499 8,499
Consumer and installment loans........... 11,396 955 1,492 6,071 4,222 24,136
Savings account loans.................... 1,435 - - - - 1,435
------- ------ ------- ------- ------- --------
Total.............................. $43,910 $9,823 $11,298 $26,275 $68,446 $159,752
======= ------ ------- ------- ------- --------
</TABLE>
______________________________
(1) Includes 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.
5
<PAGE>
The following table sets forth the dollar amount of loans due after
September 30, 2000 which have fixed rates of interest and which have adjustable
rates of interest (in thousands).
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ---------- --------
<S> <C> <C> <C>
Real estate mortgage loans............... $39,386 $54,840 $ 94,226
Consumer and other loans................. 18,948 2,668 21,616
------- ---------- --------
Total.............................. $58,334 $57,508 $115,842
======= ========== ========
</TABLE>
Real Estate Loans. The primary lending activity of the Corporation is 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, 1999, approximately $120.7
million, or 80.8% of the Corporation's total loan portfolio consisted of loans
secured by residential real estate (net of undisbursed principal). During the
current fiscal year the Corporation recorded a net reduction in conventional
first mortgage loans of $6.1 million or 5.34%. The Corporation also experienced
a significant reduction in loans held for sale from the previous fiscal year end
to the current fiscal year end.
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 loans 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 and Laurens 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, 1999, the
Corporation had approximately $48.1 million of ARMs, or 32.2% of the
Corporation's net loans receivable.
At September 30, 1999, 40.3% 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.
6
<PAGE>
The Corporation sells a portion of its loan production to Freddie Mac. 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,
1999, the Corporation sold approximately $108.7 million of its fixed-rate
mortgage loans.
The Corporation purchases participation interests from other financial
institutions on a selected basis. These purchased interests are on adjustable-
rate loans and are collateralized by either residential or commercial real
estate. At September 30, 1999, these interests totaled approximately $377,000.
Commercial real estate loans constituted approximately $3.2 million, or
2.1% of Union Financial's loan portfolio at September 30, 1999. 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 after 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. 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
7
<PAGE>
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.
At September 30, 1999, the Corporation had approximately $17.0 million
outstanding in construction loans, including approximately $9.9 million in
undisbursed proceeds. Of the $17.0 million in construction loans at
September 30, 1999, approximately $2.6 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.
Consumer Loans. Federal regulations permit federally chartered thrift
institutions to make secured and unsecured consumer loans up to 35% of the
institution's assets. In addition, a federal thrift institution has lending
authority above the 35% category for certain consumer loans, such as home equity
loans, property improvement loans, mobile home loans and loans secured by
savings accounts. The Corporation's consumer loan portfolio consists primarily
of automobile loans on new and used vehicles, mobile home loans, boat loans,
home equity loans, property improvement loans, loans secured by savings accounts
and unsecured loans. As of September 30, 1999, consumer loans amounted to $24.1
million, or 16.2% of the Corporation's total loan portfolio. The Corporation
experienced a $9.9 million net growth in consumer loans over the previous fiscal
year end primarily due to the successful efforts of the Lending and Investment
Center opened in the previous fiscal year along with a significant increase in
production from the Laurens facility acquired in 1997. 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.
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 $500,000 in secured
credit and up to and including $150,000 in unsecured credit. The Board of
Directors has appointed an Executive Loan Committee comprised of seven senior
executive Bank officers. 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 60 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 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
8
<PAGE>
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. The Corporation sells a portion of
its current long-term, fixed-rate loan production to Freddie Mac on a servicing-
retained basis. These are cash sales with no recourse provisions. The
Corporation receives 25 basis points for servicing these loans.
During 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 are also
purchased. The mortgage division had total purchases through the broker network
of $144.1 million with loan sales of $108.7 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, 1999 the Bank was servicing
$257.9 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):
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------
1999 1998 1997
---------------- --------------- --------------
<S> <C> <C> <C>
Loans originated:
First mortgage loans:
Loans on existing property................... $153,665 $150,924 $ 83,419
Construction loans........................... 17,635 10,728 17,649
-------- -------- --------
Total mortgage loans originated (1)....... 171,300 161,652 101,068
Consumer and other loans........................... 29,208 23,351 15,984
-------- -------- --------
Total loans originated.................... $200,508 $185,003 $117,052
======== ======== ========
Loans purchased.................................... -- -- --
Loans sold......................................... $108,746 $123,676 $ 46,763
</TABLE>
_____________________________
(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. The Corporation's total loan
commitments outstanding as of September 30, 1999 were approximately $830,000.
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 0.5%
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
9
<PAGE>
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, 1999, the Corporation had net deferred
loan fees of approximately $131,000.
Problem Assets and Asset Classification. When a borrower fails to make a
required payment on a loan, the Corporation attempts to cure the default by
contacting the borrower. In general, borrowers are contacted after a payment is
more than 30 days past due. In most cases, defaults are cured promptly. If the
delinquency on a mortgage loan is not cured through the Corporation's normal
collection procedures, or an acceptable arrangement is not worked out with the
borrower, the Corporation will institute measures to remedy the default,
including commencing a foreclosure action. The Corporation generally does not
accept voluntary deeds of the secured property in lieu of foreclosure.
Loans are reviewed on a regular basis and an allowance for uncollectible
interest is established against accrued interest receivable when, in the opinion
of management, the collection of additional interest is doubtful. An allowance
for uncollectible interest on real estate loans and consumer loans is
established when either principal or interest is more than 90 days past due.
Subsequent payments are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. See Notes 1 and 3 of Notes to Consolidated 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.
10
<PAGE>
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:
<TABLE>
<CAPTION>
At September 30,
-------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loans accounted for on a nonaccrual basis:
Real estate:
Residential.......................... $ 43 $ 581 $ 751
Commercial........................... -- -- --
Construction......................... -- -- --
Consumer............................. 141 115 27
----- ----- -----
Total............................. 184 696 778
----- ----- -----
Accruing loans which are contractually
past due 90 days or more................ -- -- --
Real estate owned, net..................... 241 35 1
----- ----- -----
Total non-performing assets....... $ 425 $ 731 $ 779
===== ===== =====
Percentage of loans receivable net......... 0.28% 0.55% 0.60%
===== ===== =====
</TABLE>
Interest income that would have been recorded for the year ended
September 30, 1999 had nonaccruing loans been current in accordance with their
original terms amounted to approximately $8,000. The amount of interest included
in interest income on such loans for the year ended September 30, 1999 amounted
to approximately $4,000.
Allowance for Loan Losses. In originating loans, the Corporation
recognizes that losses will be experienced and that the risk of loss will vary
with, among other things, the type of loan being made, the creditworthiness of
the borrower over the term of the loan, general economic conditions and, in the
case of a secured loan, the quality of the security for the loan. To cover
losses inherent in the portfolio of performing loans, the Corporation maintains
an allowance for loan losses. Management's periodic evaluation of the adequacy
of the allowance is based on a number of factors, including management's
evaluation of the collectibility of the loan portfolio, the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific
impaired loans and economic conditions. Specific valuation allowances are
established to absorb losses on loans for which full collectibility may not be
reasonably assured. The amount of the allowance is based on the estimated value
of the collateral securing the loan and other analysis 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 generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase 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
11
<PAGE>
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):
<TABLE>
<CAPTION>
At September 30,
---------------------------
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Balance at beginning of year................ $ 827 $ 928 $ 799
----- ----- -----
Loans charged off:
Real estate:
Residential........................... -- -- --
Commercial............................ -- -- --
Consumer................................. (106) (127) (165)
----- ----- -----
Total charge-offs.................. (106) (127) (165)
----- ----- -----
Recoveries:
Real estate:
Residential........................... -- -- --
Commercial............................ -- -- --
Consumer................................. 10 26 51
----- ----- -----
Total recoveries................... 10 26 51
----- ----- -----
Net charge-offs............................. (96) (101) (114)
----- ----- -----
Provision for loan losses (1)............... 105 -- 243
----- ----- -----
Balance at end of year...................... $ 836 $ 827 $ 928
===== ===== =====
Ratio of net charge-offs to average gross
loans outstanding during the period...... 0.07% 0.07% 0.09%
===== ===== =====
</TABLE>
________________________________
(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.
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):
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------
1999 1998 1997
------------------------ ----------------------- ------------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ------------ ------ ------------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential............................. $400 80.77% $400 85.90% $400 83.49%
Commercial.............................. 75 2.12 100 2.90 162 4.88
Consumer................................... 311 17.11 277 11.20 266 11.63
Unallocated................................ 50 N/A 50 N/A 100 N/A
---- ------ ---- ------ ---- ------
Total allowance for loan losses............ $836 100.00% $827 100.00% $928 100.00%
==== ==== ====== ==== ======
</TABLE>
The Corporation adjusts balances on real estate acquired in settlement of
loans to the lower of cost or market based on appraised value when the property
is received in settlement. These values reflect current market conditions and
sales experience. See Notes 1 and 3 of Notes to Consolidated Financial
Statements.
12
<PAGE>
Asset Classification. 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. 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.
The following tables set forth the number and amount of classified loans at
September 30, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Loss Doubtful Substandard
--------------- ------------------- ------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential.... -- $-- -- $-- 14 $191
Commercial..... -- -- -- -- -- --
Consumer.......... 1 2 10 13 29 263
</TABLE>
Investment Activities
The Bank 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 Bank's liquidity
requirement at September 30, 1999 was $6.7 million. At that date, the Bank held
approximately $27.0 million in liquid funds, well in excess of regulatory
requirements. Such funds consisted of United States Treasury and Agency
obligations, certificates of deposits, overnight deposits, mortgage-backed
securities and municipal bonds.
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that investments be categorized as "held to maturity,"
"trading securities" or "available for sale," based on management's intent as to
the ultimate disposition of each security. SFAS No. 115 allows debt securities
to be classified as "held to maturity" and reported in financial statements at
amortized cost only if the reporting entity has the positive intent and ability
to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, or other similar factors cannot be classified as "held
to maturity." Debt and equity securities held for current resale are classified
as "trading securities." Such securities are reported at fair value, and
unrealized gains and losses on such securities would be included in earnings.
Debt and equity securities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale." Such securities are
reported at fair value, and unrealized gains and losses on such securities are
excluded from earnings and reported as a net amount in a separate component of
equity.
The following table sets forth the Corporation's investment and mortgage-
backed securities portfolio at the dates indicated (dollars in thousands):
13
<PAGE>
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------------
Carrying Percent of Carrying Percent of Carrying Percent of
Value Portfolio Value Portfolio Value Portfolio
---------- ----------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Investment securities:
U.S. Agency obligations............... $13,930 50.96% $ 7,682 28.60% $10,341 65.22%
Municipal securities.................. 1,576 5.76 451 1.68 447 2.82
------- ------ ------- ------ ------- ------
Total investment securities........ 15,506 56.72 8,133 30.28 10,788 68.04
------- ------ ------- ------ ------- ------
Mortgage-backed securities............... 11,829 43.28 18,723 69.72 5,067 31.96
------- ------ ------- ------ ------- ------
Total available for sale........... $27,335 100.00% $26,856 100.00% $15,855 100.00%
======= ====== ======= ====== ======= ======
Held to Maturity:
Investment securities:
U.S. Agency obligations............... $ - -% $ 1,524 55.54% $ 5,995 76.75%
Mortgage-backed securities............ 5,338 100.00 1,220 44.46 1,816 23.25
------- ------ ------- ------ ------- ------
Total held to maturity............. $ 5,338 100.00% $ 2,744 100.00% $ 7,811 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The Corporation purchases mortgage-backed securities, both fixed-rate and
adjustable-rate, from Freddie Mac, Fannie Mae and Ginnie Mae with maturities
from five to 30 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. While
these securities possess minimal credit risk due to the Federal guarantee
backing the U. S. government agencies, they do posses liquidity risk and
interest rate risk. The amortized cost of the CMOs on the books at September 30,
1999 was approximately $5.9 million with a fair value of $4.7 million. The
Corporation has purchased structured notes for investment purposes. These
include step-up bonds, single-index floaters and dual-index floaters. While all
financial instruments are subject to interest rate risk and liquidity risk,
structured notes are more sensitive to changes in interest rates and differing
note structures (call provision, rate adjustments, etc.). The Corporation had
approximately $1.1 million in structured notes as of September 30, 1999 with a
fair value of approximately $1.1 million as of that date. See Note 2 of Notes to
Consolidated Financial Statements for more information regarding investment and
mortgage-backed securities.
14
<PAGE>
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, 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Amount Due Or Repricing Within:
--------------------------------------------------------------------------------------------------
One Year Over One to Over Five to Over
or Less Five Years Ten Years Ten Years Total
------------------ ------------------ ------------------ ------------------ ------------------
Weighted Weighted Weigthed Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying 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....... $ - -% $ 1,000 4.60% $ 1,138 6.42% $ 11,763 7.85% $ 13,901 7.50%
Municipal securities(1)....... 100 5.76 30 6.93 - - 1,447 7.14 1,577 7.05
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total investment securities.. 100 5.76 1,030 4.67 1,138 6.42 13,210 7.77 15,478 7.45
Mortgage-backed securities..... 38 7.70 431 6.85 30 6.75 11,358 5.10 11,857 5.18
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total available for sale..... $ 138 6.32% $ 1,461 5.31% $ 1,168 6.43% $ 24,568 6.54% $ 27,335 6.47%
======== ======== ======== ======== ========
Held to Maturity:
Investment securities: $ - -% $ - -% $ - -% $ - -% $ -- -%
U.S. Agency obligations....... - - - - - - - - -- --
Mortgage-backed securities.... - - - - - - 5,586 6.24 5,586 6.24
-------- -------- -------- --------
Total held to maturity....... $ - -% $ - -% $ - -% $ 5,586 6.24% $ 5,586 6.24%
</TABLE>
________________________________
(1) Yields are presented on a fully taxable equivalent basis.
15
<PAGE>
At September 30, 1999, approximately $1.1 million of debt securities and
$577,000 of mortgage-backed securities were adjustable-rate securities.
At September 30, 1999, the Corporation held obligations of Union County,
South Carolina, in the amount of approximately $99,000 with a fair value of
approximately $97,000 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 1999, the Corporation experienced a net increase in deposits of
approximately $11.9 million. The Corporation borrowed funds to support the
remaining growth experienced in fiscal 1999.
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.
The following table sets forth the time deposits of the Corporation
classified by rates as of the dates indicated (in thousands):
<TABLE>
<CAPTION>
At September 30,
------------------------------
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Up to 4.0%....................... $ 558 $ 37 $ 22
4.01% to 6.0%.................... 95,163 89,155 77,401
6.01% to 8.0%.................... 5,972 3,956 5,342
-------- -------- --------
Total savings certificates..... $101,693 $ 93,148 $ 82,765
======== ======== ========
</TABLE>
The following table sets forth the maturities of time deposits at September 30,
1999 (in thousands):
<TABLE>
<CAPTION>
Amount
--------
<S> <C>
Within three months....................... $ 25,617
After three months but within six months.. 29,848
After six months but within one year...... 34,365
After one year but within three years..... 10,870
After three years but within five years... 993
After five years but within ten years..... --
--------
Total $101,693
========
</TABLE>
Certificates of deposit with maturities of less than one year increased
from $74.6 million at September 30, 1998 to $89.8 million at September 30, 1999.
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.
16
<PAGE>
The following table indicates the amount of the Bank's jumbo certificates
of deposit by time remaining until maturity as of September 30, 1999 (in
thousands). Jumbo certificates of deposit are certificates in amounts of
$100,000 or more.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- ---------
<S> <C>
Three months or less............... $ 5,779
Over three through six months...... 6,733
Over six months through 12 months.. 7,752
Over 12 months..................... 2,758
-------
Total jumbo certificates...... $23,022
=======
</TABLE>
See Note 5 of Notes to 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):
<TABLE>
<CAPTION>
At September 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance outstanding at end of period:
FHLB advances and other borrowings...... $46,503 $41,441 $37,979
Weighted average rate paid on:
FHLB advances and other borrowings...... 5.17% 5.69% 6.00%
</TABLE>
<TABLE>
<CAPTION>
At September 30,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Maximum amount of borrowings
outstanding at any month end:
FHLB advances and other borrowings........ $46,503 $41,441 $37,979
Approximate average short-term borrowings
outstanding with respect to:
FHLB advances and other borrowings........ 39,452 35,197 35,237
Approximate weighted average rate paid on:
FHLB advances and other borrowings..... 5.05% 5.70% 5.62%
</TABLE>
At September 30, 1999, the Corporation had unused short-term lines of
credit to purchase federal funds from unrelated banks totaling $8.0 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, 1999, the Corporation had
unused lines of credit with the FHLB of Atlanta totaling $14.8 million.
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 the 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.
17
<PAGE>
Employees
The Corporation has 75 full-time employees and 14 part-time employees
including 12 full-time employees acquired in the recent merger with South
Carolina Community Bancshares, Inc.. None of the employees are represented by a
collective bargaining unit. The Corporation believes that relations with its
employees are excellent.
REGULATION AND SUPERVISION
General
As a savings and loan holding company, Union Financial is required by
federal law to file reports with, and otherwise comply with, the rules and
regulations of the OTS. The Bank is subject to extensive regulation,
examination and supervision by the OTS, as its primary federal regulator, and
the FDIC, as the deposit insurer. The Bank is a member of the FHLB and its
deposit accounts are insured up to applicable limits by the SAIF managed by the
FDIC. 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 savings institutions. The OTS and/or the FDIC conduct
periodic examinations to test the Bank's safety and soundness and compliance
with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. 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 regulatory requirements and
policies, whether by the OTS, the FDIC or the Congress, could have a material
adverse impact on Union Financial, the Bank and their operations. Certain of
the regulatory requirements applicable to the Bank and to Union Financial are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this report does not purport to be a complete description of such
statutes and regulations and their effects on Union Financial and the Bank.
Recent legislation designed to modernize the regulation of the financial
services industry expands the ability of bank holding companies to affiliate
with other types of financial services companies such as insurance companies and
investment banking companies. However, the legislation provides that companies
that acquire control of a single savings association after May 4, 1999 (or that
filed an application for that purpose after that date) are not entitled to the
unrestricted activities formerly allowed for a unitary savings and loan holding
company. Rather, these companies will have authority to engage in the activities
permitted "a financial holding company" under the new legislation, including
insurance and securities-related activities, and the activities currently
permitted for multiple savings and loan holding companies, but generally not in
commercial activities. The authority for unrestricted activities is
grandfathered for unitary savings and loan holding companies, such as Union
Financial, that existed prior to May 4, 1999. However, the authority for
unrestricted activities would not apply to any company that acquired Union
Financial.
Holding Company Regulation
Union Financial is a nondiversified unitary savings and loan holding
company within the meaning of federal law. As a unitary savings and loan
holding company, Union Financial generally is not restricted under existing laws
as to the types of business activities in which it may engage, provided that the
Bank continues to be a qualified thrift lender. See "--Federal Savings
Institution Regulation--QTL Test." Upon any non-supervisory acquisition by
Union Financial of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the
OTS, Union Financial would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would
generally be limited to activities permissible for bank holding companies under
Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval
of the OTS, and certain activities authorized by OTS regulation.
A savings and loan holding company is prohibited from, directly or
indirectly, acquiring more than 5% of the voting stock of another savings
institution or savings and loan holding company, without prior written approval
of the
18
<PAGE>
OTS and from acquiring or retaining control of a depository institution that is
not insured by the FDIC. In evaluating applications by holding companies to
acquire savings institutions, the OTS considers the financial and managerial
resources and future prospects of the company and institution involved, the
effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, federal regulations do prescribe such restrictions
on subsidiary savings institutions as described below. The Bank must notify the
OTS 30 days before declaring any dividend to Union Financial. In addition, the
financial impact of a holding company on its subsidiary institution is a matter
that is evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Federal Savings Institution Regulation
Business Activities. The activities of federal savings institutions are
governed by federal law and regulations. These laws and regulations delineate
the nature and extent of the activities in which federal associations may
engage. In particular, many types of lending authority for federal association,
e.g., commercial, non-residential real property loans and consumer loans, are
limited to a specified percentage of the institution's capital or assets. In
addition, certain activities, such as mergers and acquisitions, and branching
are subject to the prior approval of the OTS.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three minimum capital standards: a 1.5% tangible capital
ratio, a 3% leverage ratio and an 8% risk-based capital ratio. Effective April
1, 1999, however, the minimum core capital ratio increased to 4% for all
institutions except those with the highest ratings on the CAMELS financial
institution rating system. In addition, the prompt corrective action standards
discussed below also establish, in effect, a minimum 2% tangible capital
standard, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS financial institution rating system), and, together with the risk-
based capital standard itself, a 4% Tier I risk-based capital standard. The OTS
regulations also require that, in meeting the tangible, leverage and risk-based
capital standards, institutions must generally deduct investments in and loans
to subsidiaries engaged in activities as principal that are not permissible for
a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier I) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair values. Overall, the amount of supplementary capital included
as part of total capital cannot exceed 100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the OTS has deferred implementation
of the interest rate risk component. At September 30, 1999, the Bank met each
of its capital requirements.
19
<PAGE>
The following table presents the Bank's capital position at September 30,
1999.
<TABLE>
<CAPTION>
Capital
--------------------
Actual Required Excess Actual Required
Capital Capital Amount Percent Percent
--------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible $13,648 $3,072 $10,576 6.66% 1.50%
Core (Leverage) 13,648 8,182 5,468 6.66 4.00
Risk-based 14,483 9,427 5,058 12.29 8.00
</TABLE>
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company in an amount of
up to the lesser of 5% of the institution's assets or the amount which would
bring the institution into compliance with all capital standards. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
Insurance of Deposit Accounts. Deposits of the Bank are presently insured
by the SAIF. The FDIC maintains a risk-based assessment system by which
institutions are assigned to one of three categories based on their
capitalization and one of three subcategories based on examination ratings and
other supervisory information. An institution's assessment rate depends upon
the categories to which it is assigned. Assessment rates for SAIF member
institutions are determined semiannually by the FDIC and currently range from
zero basis points for the healthiest institutions to 27 basis points for the
riskiest.
In addition to the assessment for deposit insurance, institutions are
required to make payments on bonds issued in the late 1980s by the Financing
Corporation ("FICO") to recapitalize the predecessor to the SAIF. During 1998,
FICO payments for SAIF members, including the Bank, approximated 6.10 basis
points, while Bank Insurance Fund ("BIF") members paid 1.22 basis points. By
law, there will be equal sharing of FICO payments between SAIF and BIF members
beginning January 1, 2000. The FDIC has authority to increase insurance
assessments. A significant increase in SAIF insurance premiums would likely
have an adverse effect on the operating expenses and results of operations of
the Bank. Management cannot predict what insurance assessment rates will be in
the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to
20
<PAGE>
a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if secured by specified readily-marketable
collateral. At September 30, 1999, the Bank's limit on loans to one borrower was
$2 million, and the Bank's largest aggregate outstanding balance of loans to one
borrower was $1.3 million.
QTL Test. Federal law requires savings institutions to meet a qualified
thrift lender test. Under the test, a savings association is required to either
qualify as a "domestic building and loan association" under the Internal Revenue
Code or maintain at least 65% of its "portfolio assets" (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least nine
months out of each 12 month period.
A savings institution that fails the qualified thrift lender test is
subject to certain operating restrictions and may be required to convert to a
bank charter. As of September 30, 1999, the Bank met the qualified thrift
lender test. Recent legislation has expanded the extent to which education
loans, credit card loans and small business loans may be considered "qualified
thrift investments."
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of
another institution in a cash-out merger. The rule effective in 1998
established three tiers of institutions based primarily on an institution's
capital level. An institution that exceeded all capital requirements before and
after a proposed capital distribution ("Tier I Bank") and had not been advised
by the OTS that it was in need of more than normal supervision, could, after
prior notice but without obtaining approval of the OTS, make capital
distributions during the calendar year equal to the greater of (i) 100% of its
net earnings to date during the calendar year plus the amount that would reduce
by one-half the excess capital over its capital requirements at the beginning of
the calendar year or (ii) 75% of its net income for the previous four quarters.
Any additional capital distributions required prior regulatory approval. At
September 30, 1999, the Bank was a Tier I Bank. Effective April 1, 1999, the
OTS's capital distribution regulation changed. Under the new regulation, an
application to and the prior approval of the OTS will be required prior to any
capital distribution if the institution does not meet the criteria for
"expedited treatment" of applications under OTS regulations (i.e., generally,
safety and soundness, compliance and Community Reinvestment Act examination
ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net
income for the preceding two years, the institution would be undercapitalized
following the distribution or the distribution would otherwise be contrary to a
statute, regulation or agreement with OTS. If an application is not required,
the institution must still provide prior notice to OTS of the capital
distribution. In the event the Bank's capital fell below its regulatory
requirements or the OTS notified it that it was in need of more than normal
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Liquidity. The Bank is required to maintain an average daily balance of
specified liquid assets equal to a monthly average of not less than a specified
percentage of its net withdrawable deposit accounts plus short-term borrowings.
This liquidity requirement is currently 4%, but may be changed from time to time
by the OTS to any amount within the range of 4% to 10%. Monetary penalties may
be imposed for failure to meet these liquidity requirements. The Bank's has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
Assessments. Savings institutions are required to pay assessments to the
OTS to fund the agency's operations. The general assessments, paid on a semi-
annual basis, are computed upon the savings institution's total assets,
including consolidated subsidiaries, as reported in the Bank's latest quarterly
thrift financial report.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
21
<PAGE>
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The Bank's authority to extend credit to executive officers, directors and
10% shareholders ("insiders"), as well as entities such persons control, is also
governed by federal law. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not
involve more than the normal risk of repayment. An exception exists for loans
made pursuant to a benefit or compensation program that is widely available to
all employees of the institution and does not give preference to insiders over
other employees. The law limits both the individual and aggregate amount of
loans The Bank may make to insiders based, in part, on the Bank's capital
position and requires certain board approval procedures to be followed. Special
limitations apply to loans made to executive officers of the institution.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have
adopted Interagency Guidelines prescribing Standards for Safety and Soundness.
The guidelines set forth the safety and soundness standards that the federal
banking agencies use to identify and address problems at insured depository
institutions before capital becomes impaired. If the OTS determines that a
savings institution fails to meet any standard prescribed by the guidelines, the
OTS may require the institution to submit an acceptable plan to achieve
compliance with the standard.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a
central credit facility primarily for member institutions. The Bank, as a
member of the Federal Home Loan Bank-Atlanta, is required to acquire and hold
shares of capital stock in the Federal Home Loan Bank-Atlanta in an amount at
least equal to 1.0% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20 of
its advances (borrowings) from the Federal Home Loan Bank-Atlanta, whichever is
greater. The Bank was in compliance with this requirement with an investment in
Federal Home Loan Bank stock at September 30, 1999, of $2.0 million. Federal
Home Loan Bank advances must be secured by specified types of collateral and all
long-term advances may only be obtained for the purpose of providing funds for
residential housing finance.
The Federal Home Loan Banks are required to provide funds for the
resolution of insolvent thrifts and to contribute funds for affordable housing
programs. These requirements could reduce the amount of dividends that the
Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members.
22
<PAGE>
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The regulations generally
provide that reserves be maintained against aggregate transaction accounts as
follows: for accounts aggregating $46.5 million or less (subject to adjustment
by the Federal Reserve Board) the reserve requirement is 3%; and for accounts
aggregating greater than $46.5 million, the reserve requirement is $1.395
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $46.5
million. The first $4.9 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Bank complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
Federal Taxation
General. Union Financial and the Bank report their income on a fiscal
year, consolidated basis and 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 Union Financial or the Bank. For its 1999 taxable year, Union
Financial is subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31, 1995,
thrift institutions which qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans (generally secured by interests in real
property improved or to be improved) under (i) the percentage of taxable income
method or (ii) the experience method. The reserve for nonqualifying loans was
computed using the experience method.
Congress repealed the reserve method of accounting for bad debts for tax
years beginning after 1995 and required savings institutions to recapture (i.e.,
take into income) certain portions of their accumulated bad debt reserves.
Thrift institutions eligible to be treated as "small banks" (assets of $500
million or less) are allowed to use the experience method applicable to such
institutions, while thrift institutions that are treated as large banks (assets
exceeding $500 million) are required to use only the specific charge-off method.
Thus, the percentage of taxable income method of accounting for bad debts is no
longer available for any financial institution.
A thrift institution required to change its method of computing reserves
for bad debts will treat such change as a change in method of accounting,
initiated by the taxpayer, and having been made with the consent of the Internal
Revenue Service. Any Section 481(a) adjustment required to be taken into income
with respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to a 2-year suspension if the "residential loan requirement" is
satisfied.
Under the residential loan requirement provision, the required recapture
will be suspended for each of two successive taxable years, beginning with the
Bank's 1996 taxable year, in which the Bank originates a minimum of certain
residential loans based upon the average of the principal amounts of such loans
made by the Bank during its six taxable years preceding its current taxable
year.
Distributions. If the Bank makes "non-dividend distributions" to Union
Financial, such distributions will be considered to have been made from the
Bank's unrecaptured tax bad debt reserves (including the balance of its reserves
as of December 31, 1987) to the extent thereof, and then from the Bank's
supplemental reserve for losses on loans, to the extent thereof, and an amount
based on the amount distributed (but not in excess of the amount of such
reserves) will be included in the Bank's income. Non-dividend distributions
include distributions in excess of the Bank's current and accumulated earnings
and profits, as calculated for federal income tax purposes, distributions in
23
<PAGE>
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in its income.
The amount of additional taxable income triggered by a non-dividend is an
amount that, when reduced by the tax attributable to the income, is equal to the
amount of the distribution. Thus, if the Bank makes a non-dividend distribution
to Union Financial, approximately one and one-half times the amount of such
distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
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%. 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. At September 30, 1999, the
Corporation also owned a banking center which opened in April 1989, located at
508 North Duncan By-Pass, Union, South Carolina ,a branch office, acquired in
1997, in Laurens, South Carolina, a lending and investment center located in
Union, South Carolina and a branch office in Jonesville, South Carolina. As a
result of the recently completed merger with South Carolina Community
Bancshares, the Corporation acquired two branch locations in Winnsboro, South
Carolina. The net book value of the Corporation's investment in premises and
equipment totaled approximately $4.5 million at September 30, 1999. 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, 1999.
24
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Common Stock Market
Price 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 changes in or disagreements 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
and to the section captioned "Compliance with Section 16(a) of the Exchange Act"
for information regarding compliance with section 16(a) of the Exchange Act.
Certain executive officers of the Bank also serve as executive officers of
Union Financial. The day-to-day management duties of the executive officers of
Union Financial and the Bank relate primarily to their duties as to the Bank.
The executive officers of Union Financial are as follows:
<TABLE>
<CAPTION>
Position as of
Name Age(1) September 30, 1999
- ---- ------ ------------------
<S> <C> <C>
Dwight V. Neese 49 President, Chief Executive Officer and Director
Richard H. Flake 51 Executive Vice President - Chief Financial Officer
Gerald L. Bolin 37 Senior Vice President - Chief Operating Officer
Wanda J. Wells 43 Vice President - Corporate Secretary
</TABLE>
- --------------------
(1) At September 30, 1999.
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.
25
<PAGE>
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 "Stock Ownership" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the section captioned "Stock Ownership" in the Proxy Statement.
(c) Management of Union Financial knows of no arrangements, including any
pledge by any person of securities of Union Financial, the operation of
which may at a subsequent date result in a change in control of the
registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" and "Transactions
with Management" in the Proxy Statement.
26
<PAGE>
PART IV
Item 13. Exhibits and Reports on Form 8-K
- -------------------------------------------
(a) Exhibits
2(a) Agreement and Plan of Merger, dated as of July 1, 1999, by and
between Union Financial Bancshares, Inc. and South Carolina
Community Bancshares, Inc.(1)
3(a) Certificate of Incorporation(2)
3(b) Bylaws
3(c) Certificate of Amendment of Certificate of Incorporation dated
January 22, 1997(3)
10(a) Employment Agreement with Dwight V. Neese(4)
10(b) Employment Agreement with Richard H. Flake
10(c) Union Financial Bancshares, Inc. 1995 Stock Option Plan(5)
13 1999 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Independent Auditor
27 Financial Data Schedule
(b) On July 9, 1999, Union Financial filed an 8-K to announce that it had
entered into an Agreement and Plan of Merger with South Carolina
Community Bancshares, Inc. The Merger Agreement provided that South
Carolina Community will be merged with and into Union Financial and
that South Carolina Community's subsidiary, Community Federal Savings
Bank will merge with and into the Bank. The Agreement and Plan of
Merger and press release announcing the merger were filed by exhibit.
__________________________________
(1) Incorporated herein by reference to Union Financial's Form 8-K filed on
July 9, 1999.
(2) 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.
(3) Incorporated herein by reference to Exhibit 3(c) to Union Financial's
Form 10-KSB for the year ended September 30, 1997.
(4) Incorporated herein by reference to Union Financial's Form 10-KSB for
the year ended September 30, 1996.
(5) Incorporated herein by reference to Exhibit A to Union Financial's
Proxy Statement for its 1996 Annual Meeting of Stockholders.
27
<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 21, 1999 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.
/s/ Dwight V. Neese /s/ James W. Edwards
By: _____________________________ By: _____________________________
Dwight V. Neese James W. Edwards
(Principal Executive Officer) Director
Date: December 21, 1999 Date: December 21, 1999
/s/ Richard H. Flake /s/ David G. Russell
By: _____________________________ By: _____________________________
Richard H. Flake David G. Russell
(Principal Financial and Director
Accounting Officer)
Date: December 21, 1999 Date: December 21, 1999
/s/ Mason G. Alexander /s/ Louis M. Jordan
By: _____________________________ By: _____________________________
Mason G. Alexander Louis M. Jordan
Director Director
Date: December 21, 1999 Date: December 21, 1999
/s/ William M. Graham /s/ Carl L. Mason
By: _____________________________ By: _____________________________
William M. Graham Carl L. Mason
Director Director
Date: December 21, 1999 Date: December 21, 1999
/s/ John S. McMeekin
By: _____________________________ By: _____________________________
Quay W. McMaster John S. McMeekin
Director Director
Date: December __, 1999 Date: December 21, 1999
/s/ Philip C. Wilkins
By: _____________________________
Philip C. Wilkins
Director
Date: December 21, 1999
<PAGE>
Exhibit No. 3(b)
Bylaws
<PAGE>
BYLAWS
OF
UNION FINANCIAL BANCSHARES, INC.
ARTICLE I
Home Office
The home office of Union Financial Bancshares, Inc. (herein the
"Corporation") shall be at 203 West Main Street, Union, South Carolina. The
Corporation may also have offices at such other places within or without the
State of South Carolina as the board of directors shall from time to time
determine.
ARTICLE II
Stockholders
SECTION 1. Place of Meetings. All annual and special meetings of
-----------------
stockholders shall be held at the home office of the Corporation or at such
other place within or without the State in which the home office of the
Corporation is located as the board of directors may determine and as designated
in the notice of such meeting.
SECTION 2. Annual Meeting. A meeting of the stockholders of the
--------------
Corporation for the election of directors and for the transaction of any other
business of the Corporation shall be held annually at such date and time as the
board of directors may determine.
SECTION 3. Special Meetings. Special meetings of the stockholders for any
----------------
purpose or purposes may be called at any time by the majority of the board of
directors or by a committee of the board of directors in accordance with the
provisions of the Corporation's Certificate of Incorporation.
SECTION 4. Conduct of Meetings. Annual and special meetings shall be
-------------------
conducted in accordance with the rules and procedures established by the board
of directors. The board of directors shall designate, when present, either the
chairman of the board or president to preside at such meetings.
SECTION 5. Notice of Meetings. Written notice stating the place, day and
------------------
hour of the meeting and the purpose or purposes for which the meeting is called
shall be mailed by the secretary or the officer performing his duties, not less
than ten days nor more than sixty days before the meeting to each stockholder of
record entitled to vote at such meeting. If mailed, such notice shall be deemed
to be delivered when deposited in the United States mail, addressed to the
stockholder at his address as it appears on the stock transfer books or records
of the Corporation as of the record date prescribed in Section 6 of this Article
II, with postage thereon prepaid. If a stockholder be present at a meeting, or
in writing waive notice thereof before or after the meeting, notice of the
meeting to such stockholder shall be unnecessary. When any stockholders'
meeting, either annual or special, is adjourned for thirty days, notice of the
adjourned meeting shall be given as in the case of an original meeting. It shall
not be necessary to give any notice of the time and place of any meeting
adjourned for less than thirty days or of the business to be transacted at such
adjourned meeting, other than an announcement at the meeting at which such
adjournment is taken.
1
<PAGE>
SECTION 6. Fixing of Record Date. For the purpose of determining
---------------------
stockholders entitled to notice of or to vote at any meeting of stockholders, or
any adjournment thereof, or stockholders entitled to receive payment of any
dividend, or in order to make a determination of stockholders for any other
proper purpose, the board of directors shall fix in advance a date as the record
date for any such determination of stockholders. Such date in any case shall be
not more than sixty days, and in case of a meeting of stockholders, not less
than ten days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken. When a determination of
stockholders entitled to vote at any meeting of stockholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
SECTION 7. Voting Lists. The officer or agent, having charge of the stock
------------
transfer books for shares of the Corporation shall make, at least ten days
before each meeting of shareholders, a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
The record, for a period of ten days before such meeting, shall be kept on file
at the principal office of the Corporation, and shall be subject to inspection
by any shareholder for any purpose germane to the meeting at any time during
usual business hours. Such record shall also be produced and kept open at the
time and place of the meeting and shall be subject to the inspection of any
stockholder for any purpose germane to the meeting during the whole time of the
meeting. The original stock transfer books shall be prima facie evidence as to
who are the stockholders entitled to examine such record or transfer books or to
vote at any meeting of stockholders.
SECTION 8. Quorum. A majority of the outstanding shares of the
------
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than a majority of the
outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
SECTION 9. Proxies. At all meetings of stockholders, a stockholder may
-------
vote by proxy executed in writing by the stockholder or by his duly authorized
attorney in fact. Proxies solicited on behalf of the management shall be voted
as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the board of directors. No proxy shall be valid
after eleven months from the date of its execution unless otherwise provided in
the proxy.
SECTION 10. Voting. At each election for directors every stockholder
------
entitled to vote at such election shall be entitled to one vote for each share
of stock held by him. Unless otherwise provided in the Certificate of
Incorporation, by Statute, or by these Bylaws, a majority of those votes cast by
stockholders at a lawful meeting shall be sufficient to pass on a transaction or
matter.
SECTION 11. Voting of Shares in the Name of Two or More Persons. When
---------------------------------------------------
ownership of stock stands in the name of two or more persons, in the absence of
written directions to the Corporation to the contrary, at any meeting of the
stockholders of the Corporation any one or more of such stockholders may cast,
in person or by proxy, all votes to which such ownership is entitled. In the
event an attempt is made to cast conflicting votes, in person or by proxy, by
the several persons in whose name shares of stock stand, the vote or votes to
which these persons are entitled shall be cast as directed by a majority of
those holding such stock and present in person or by proxy at such meeting, but
no votes shall be cast for such stock if a majority cannot agree.
SECTION 12. Voting of Shares by Certain Holders. Shares standing in the
-----------------------------------
name of another corporation may be voted by any officer, agent or proxy as the
bylaws of such corporation may prescribe, or, in the absence of such provision,
as the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian or conservator may be voted by him, either in
person or by proxy, without a transfer
2
<PAGE>
of such shares into his name. Shares standing in the name of a trustee may be
voted by him, either in person or by proxy, but no trustee shall be entitled to
vote shares held by him without a transfer of such shares into his name. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver without
the transfer thereof into his name if authority to do so is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
SECTION 13. Inspectors of Election. In advance of any meeting of
----------------------
stockholders, the board of directors may appoint any persons, other than
nominees for office, as inspectors of election to act at such meeting or any
adjournment thereof. The number of inspectors shall be either one or three. If
the board of directors so appoints either one or three inspectors, that
appointment shall not be altered at the meeting. If inspectors of election are
not so appointed, the chairman of the board or the president may make such
appointment at the meeting. In case any person appointed as inspector fails to
appear or fails or refuses to act, the vacancy may be filled by appointment by
the board of directors in advance of the meeting or at the meeting by the
chairman of the board or the president.
Unless otherwise prescribed by applicable law, the duties of such
inspectors shall include: determining the number of shares of stock and the
voting power of each share, the shares of stock represented at the meeting, the
existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining the result; and such acts as may
be proper to conduct the election or vote with fairness to all stockholders.
SECTION 14. Nominating Committee. The board of directors shall act as a
--------------------
nominating committee for selecting the management nominees for election as
directors. Except in the case of a nominee substituted as a result of the death
or other incapacity of a management nominee, the nominating committee shall
deliver written nominations to the secretary at least twenty days prior to the
date of the annual meeting. Provided such committee makes such nominations, no
nominations for directors except those made by the nominating committee shall be
voted upon at the annual meeting unless other nominations by stockholders are
made in writing and delivered to the secretary of the Corporation in accordance
with the provisions of the Corporation's Certificate of Incorporation.
SECTION 15. New Business. Any new business to be taken up at the annual
------------
meeting shall be stated in writing and filed with the secretary of the
Corporation in accordance with the provisions of the Corporation's Certificate
of Incorporation. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of reports of officers, directors
and committees, but in connection with such reports no new business shall be
acted upon at such annual meeting unless stated and filed as provided in the
Corporation's Certificate of Incorporation.
3
<PAGE>
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
--------------
shall be under the direction of its board of directors. The board of directors
may also elect a chairman of the board from among its members. The board of
directors shall designate, when present, either the chairman of the board or the
president to preside at its meetings.
SECTION 2. Number, Term and Election. The board of directors shall
-------------------------
initially consist of seven (7) members and shall be divided into three classes
as nearly equal in number as possible. The members of each class shall be
elected for a term of three years and until their successors are elected or
qualified. One class shall be elected by ballot annually. The board of directors
shall be classified in accordance with the provisions of the Corporation's
Certificate of Incorporation.
SECTION 3. Qualification. Each director shall at all times be the
-------------
beneficial owner of not less than 100 shares of capital stock of the
Corporation.
SECTION 4. Regular Meetings. A regular meeting of the board of directors
----------------
shall be held without other notice than this Bylaw immediately after, and at the
same place as, the annual meeting of stockholders. The board of directors may
provide, by resolution, the time and place for the holding of additional regular
meetings without other notice than such resolution.
SECTION 5. Special Meetings. Special meetings of the board of directors
----------------
may be called by or at the request of the chairman of the board or the
president, or by one-third of the directors. The persons authorized to call
special meetings of the board of directors may fix any place in the State of
South Carolina as the place for holding any special meeting of the board of
directors called by such persons.
Members of the board of directors may participate in special meetings by
means of conference telephone or similar communications equipment by which all
persons participating in the meeting can hear each other. Such participation
shall constitute presence in person but directors will not receive any
compensation for participation in meetings by conference telephone.
SECTION 6. Notice. Written notice of any special meeting shall be given
------
to each director at least two days previous thereto delivered personally or by
telegram or at least five days previous thereto delivered by mail at the address
at which the director is most likely to be reached. Such notice shall be deemed
to be delivered when deposited in the United States mail so addressed, with
postage thereon prepaid if mailed or when delivered to the telegraph company if
sent by telegram. Any director may waive notice of any meeting by a writing
filed with the secretary. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
SECTION 7. Quorum. A majority of the number of directors fixed by
------
Section 2 of this Article III shall constitute a quorum for the transaction of
business at any meeting of the board of directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time. Notice of any adjourned meeting shall be
given in the same manner as prescribed by Section 6 of this Article III.
SECTION 8. Manner of Acting. The act of the majority of the directors
----------------
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless a greater number is prescribed by these Bylaws, the
Certificate of Incorporation, or the laws of Delaware.
4
<PAGE>
SECTION 9. Action Without a Meeting. Any action required or permitted to
------------------------
be taken by the board of directors at a meeting may be taken without a meeting
if a consent in writing, setting forth the action so taken, shall be signed by
all of the directors.
SECTION 10. Resignation. Any director may resign at any time by sending a
-----------
written notice of such resignation to the home office of the Corporation
addressed to the chairman of the board or the president. Unless otherwise
specified herein such resignation shall take effect upon receipt thereof by the
chairman of the board or the president.
SECTION 11. Vacancies. Any vacancy occurring in the board of directors
---------
shall be filled in accordance with the provisions of the Corporation's
Certificate of Incorporation. Any directorship to be filled by reason of an
increase in the number of directors may be filled by the affirmative vote of
two-thirds of the directors then in office. The term of such director shall be
in accordance with the provisions of the Corporation's Certificate of
Incorporation.
SECTION 12. Removal of Directors. Any director or the entire board of
--------------------
directors may be removed only in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 13. Compensation. Directors, as such, may receive a stated fee
------------
for their services. By resolution of the board of directors, a reasonable fixed
sum, and reasonable expenses of attendance, if any, may be allowed for actual
attendance at each regular or special meeting of the board of directors.
Members of either standing or special committees may be allowed such
compensation for actual attendance at committee meetings as the board of
directors may determine. Nothing herein shall be construed to preclude any
director from serving the Corporation in any other capacity and receiving
remuneration therefor.
SECTION 14. Presumption of Assent. A director of the Corporation who is
---------------------
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent or abstention shall be entered in the minutes of the meeting or
unless he shall file his written dissent to such action with the person acting
as the secretary of the meeting before the adjournment thereof or shall forward
such dissent by registered mail to the secretary of the Corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply to
a director who votes in favor of such action.
SECTION 15. Advisory Directors. The board of directors may by resolution
------------------
appoint advisory directors to the board, and shall have such authority and
receive such compensation and reimbursement as the board of directors shall
provide. Advisory director or directors emeriti shall not have the authority to
participate by vote in the transaction of business.
SECTION 16. Age Limitation. No person of an age seventy-two years (72) or
--------------
older will be eligible for election, reelection, appointment or reappointment to
the board of directors of the Corporation. No director shall serve as such
following the day of his or her seventy-second (72nd) birthday.
ARTICLE IV
Committees of the Board of Directors
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, as they may determine to be necessary
or appropriate for the conduct of the business of the Corporation, and may
prescribe the duties, constitution and procedures thereof. Each committee shall
consist of one or more directors of the Corporation. The board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee.
5
<PAGE>
The board of directors shall have power, by the affirmative vote of a
majority of the authorized number of directors, at any time to change the
members of, to fill vacancies in, and to discharge any committee of the board.
Any member of any such committee may resign at any time by giving notice to the
Corporation provided, however, that notice to the board, the chairman of the
board, the chief executive officer, the chairman of such committee, or the
secretary shall be deemed to constitute notice to the Corporation. Such
resignation shall take effect upon receipt of such notice or at any later time
specified therein; and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective. Any member of any such
committee may be removed at any time, either with or without cause, by the
affirmative vote of a majority of the authorized number of directors at any
meeting of the board called for that purpose.
6
<PAGE>
ARTICLE V
Officers
SECTION 1. Positions. The officers of the Corporation shall be a
---------
president, one or more vice presidents, a secretary and a treasurer, each of
whom shall be elected by the board of directors. The board of directors may
also designate the chairman of the board as an officer. The president shall be
the chief executive officer unless the board of directors designates the
chairman of the board as chief executive officer. The offices of the secretary
and treasurer may be held by the same person and a vice president may also be
either the secretary or the treasurer. The board of directors may designate one
or more vice presidents as executive vice president or senior vice president.
The board of directors may also elect or authorize the appointment of such other
officers as the business of the Corporation may require. The officers shall
have such authority and perform such duties as the board of directors may from
time to time authorize or determine. In the absence of action by the board of
directors, the officers shall have such powers and duties as generally pertain
to their respective offices.
SECTION 2. Election and Term of Office. The officers of the Corporation
---------------------------
shall be elected annually by the board of directors at the first meeting of the
board of directors held after each annual meeting of the shareholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as possible. Each officer shall hold office until his successor
shall have been duly elected and qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided. Election
or appointment of an officer, employee or agent shall not of itself create
contract rights. The board of directors may authorize the Corporation to enter
into an employment contract with any officer in accordance with state law; but
no such contract shall impair the right of the board of directors to remove any
officer at any time in accordance with Section 3 of this Article V.
SECTION 3. Removal. Any officer may be removed by vote of two-thirds of
-------
the board of directors whenever, in its judgment, the best interests of the
Corporation will be served thereby, but such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the person so
removed.
SECTION 4. Vacancies. A vacancy in any office because of death,
---------
resignation, removal, disqualification or otherwise, may be filled by the board
of directors for the unexpired portion of the term.
SECTION 5. Remuneration. The remuneration of the officers shall be fixed
------------
from time to time by the board of directors and no officer shall be prevented
from receiving such salary by reason of the fact that he is also a director of
the Corporation.
ARTICLE VI
Contracts, Loans, Checks and Deposits
SECTION 1. Contracts. To the extent permitted by applicable law, and
---------
except as otherwise prescribed by the Corporation's Certificate of Incorporation
or these Bylaws with respect to certificates for shares, the board of directors
may authorize any officer, employee, or agent of the Corporation to enter into
any contract or execute and deliver any instrument in the name of and on behalf
of the Corporation. Such authority may be general or confined to specific
instances.
SECTION 2. Loans. No loans shall be contracted on behalf of the
-----
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the board of directors. Such authority may be general or confined
to specific instances.
7
<PAGE>
SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for
-------------------
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by one or more officers, employees or
agents of the Corporation in such manner as shall from time to time be
determined by resolution of the board of directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
--------
shall be deposited from time to time to the credit of the Corporation in any of
its duly authorized depositories as the board of directors may select.
ARTICLE VII
Certificates for Shares and Their Transfer
SECTION 1. Certificates for Shares. The shares of the Corporation shall
-----------------------
be represented by certificates signed by the chairman of the board of directors
or by the president or a vice president and by the treasurer or by the secretary
of the Corporation, and may be sealed with the seal of the Corporation or a
facsimile thereof. Any or all of the signatures upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. If any officer who has signed or whose facsimile signature has
been placed upon such certificate shall have ceased to be such officer before
the certificate is issued, it may be issued by the Corporation with the same
effect as if he were such officer at the date of its issue.
SECTION 2. Form of Share Certificates. All certificates representing
--------------------------
shares issued by the Corporation shall set forth upon the face or back that the
Corporation will furnish to any shareholder upon request and without charge a
full statement of the designations, preferences, limitations, and relative
rights of the shares of each class authorized to be issued, the variations in
the relative rights and preferences between the shares of each such series so
far as the same have been fixed and determined, and the authority of the board
of directors to fix and determine the relative rights and preferences of
subsequent series.
Each certificate representing shares shall state upon the face thereof:
that the Corporation is organized under the laws of the State of Delaware; the
name of the person to whom issued; the number and class of shares; the date of
issue; the designation of the series, if any, which such certificate represents;
the par value of each share represented by such certificate, or a statement that
the shares are without par value. Other matters in regard to the form of the
certificates shall be determined by the board of directors.
SECTION 3. Payment for Shares. No certificate shall be issued for any
------------------
shares until such share is fully paid.
SECTION 4. Form of Payment for Shares. The consideration for the
--------------------------
issuance of shares shall be paid in accordance with the provisions of the
Corporation's Certificate of Incorporation.
SECTION 5. Transfer of Shares. Transfer of shares of capital stock of
------------------
the Corporation shall be made only on its stock transfer books. Authority for
such transfer shall be given only by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of such authority, or by
his attorney thereunto authorized by power of attorney duly executed and filed
with the Corporation. Such transfer shall be made only on surrender for
cancellation of the certificate for such shares. The person in whose name
shares of capital stock stand on the books of the Corporation shall be deemed by
the Corporation to be the owner thereof for all purposes.
8
<PAGE>
SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be
------------
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 7. Lost Certificates. The board of directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen, or destroyed
certificate, or his legal representative, to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen,
or destroyed.
SECTION 8. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such shares on
the part of any other person, whether or not the Corporation shall have express
or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
Fiscal Year; Annual Audit
The fiscal year of the Corporation shall end on the 30th day of September
of each year. The Corporation shall be subject to an annual audit as of the end
of its fiscal year by independent public accountants appointed by and
responsible to the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Certificate of Incorporation and
applicable law, the board of directors may, at any regular or special meeting,
declare dividends on the Corporation's outstanding capital stock. Dividends may
be paid in cash, in property or in the Corporation's own stock.
ARTICLE X
Corporate Seal
The corporate seal of the Corporation shall be in such form as the board of
directors shall prescribe.
ARTICLE XI
Amendments
In accordance with the Corporation's Certificate of Incorporation, these
Bylaws may be repealed, altered, amended or rescinded by the stockholders of the
Corporation only by vote of not less than 80% of the outstanding shares of
capital stock of the Corporation entitled to vote generally in the election of
directors (considered for this purpose as one class) cast at a meeting of the
stockholders called for that purpose (provided that notice of such proposed
repeal, alteration, amendment or rescission is included in the notice of such
meeting). In addition, the board
9
<PAGE>
of directors may repeal, alter, amend or rescind these Bylaws by vote of two-
thirds of the board of directors at a legal meeting held in accordance with the
provisions of these Bylaws.
Effective as of November 12, 1999.
10
<PAGE>
Exhibit No. 10(b)
Employment Agreement
with
Richard H. Flake
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made effective as of July 27, 1995, by and between UNION
FEDERAL SAVINGS BANK (the "Bank"), Union, South Carolina; UNION FINANCIAL
BANCSHARES, INC. (the "Company"), a Delaware corporation; and RICHARD H. FLAKE
(the "Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, the Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to serve as
Senior Vice President/Chief Financial Officer of the Bank. During said period,
Executive also agrees to serve, if elected, as an officer of the Company or any
subsidiary or affiliate of the Company or the Bank.
2. TERMS AND DUTIES.
(a) The term of this Agreement shall be deemed to have commenced as of
September 5, 1995 (or such later date as determined by the parties) and shall
continue for a period of thirty-six (36) full calendar months thereafter.
Commencing on the first anniversary date, and continuing at each anniversary
date thereafter, the Board of Directors of the Bank (the "Board") may extend the
Agreement for an additional year. Prior to the extension of the Agreement as
provided herein, the Board of Directors of the Bank will conduct a formal
performance evaluation of the Executive for purposes of determining whether to
extend the Agreement, and the results thereof shall be included in the minutes
of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement. Executive shall relocate to Union, South Carolina as a condition of
employment under this
<PAGE>
Agreement. The Bank will reimburse Executive up to $3,000 for expenses incurred
in connection with his relocation upon presentation of appropriate documentation
of such expenses.
3. COMPENSATION AND REIMBURSEMENT.
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Sections 1 and 2. The Bank
shall pay Executive as compensation a salary of $66,500 per year ("Base
Salary"). Such Base Salary shall be payable in accordance with the customary
payroll practices of the Bank. During the period of this Agreement, Executive's
Base Salary shall be reviewed at least annually; the first such review will be
made no later than one year from the date of this Agreement. Such review shall
be conducted by a Committee designated by the Board, and the Board may increase
Executive's Base Salary. In addition to the Base Salary provided in this Section
3(a), the Bank shall provide Executive at no cost to Executive with all such
other benefits as are provided uniformly to permanent full-time employees of the
Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including, but not limited to, retirement
plans, supplemental retirement plans, pension plans, profit-sharing plans,
health-and-accident plan, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to, and on a basis consistent with, the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan, or pursuant to any arrangement of the Bank, in which Executive is
eligible to participate; provided, however, that any cash bonus will not exceed
twenty-five (25) percent of Base Salary, without approval thereof by the Board.
Nothing paid to the Executive under any such plan or arrangement will be deemed
to be in lieu of other compensation to which the Executive is entitled under
this Agreement, except as provided under Section 5(e).
(c) (i) In addition to the Base Salary provided for by paragraph (a) of
this Section 3, the Bank shall pay or reimburse Executive for all reasonable
travel and other obligations under this Agreement and may provide such
additional compensation in such form and such amounts as the Board may from time
to time determine.
(ii) Executive shall be entitled to at least three (3) weeks of paid
vacation annually.
(iii) Upon Executive's first day of employment under this Agreement
and subject to shareholder approval of the Company's 1995 Stock Option Plan,
Executive shall be granted an
-2-
<PAGE>
option for ten thousand five hundred (10,500) shares of the Common Stock of the
Company ("Common Stock") upon the terms and conditions of the 1995 Stock Option
Plan at an exercise price equal to one hundred (100) percent of the fair market
value of the Common Stock on the date of grant (but not less than $18.25 per
share). Upon shareholder approval of the 1995 Stock Option Plan, the option
shall be exercisable with respect to three thousand (3,000) shares. Thereafter,
on the first through the fifth anniversaries of such date, the option shall
become exercisable with respect to an additional fifteen hundred (1,500) shares.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank of Executive's full-time employment hereunder for any
reason other than a Change in Control, as defined in Section 5(a) hereof;
disability, as defined in Section 6(a) hereof; death; retirement, as defined in
Section 7 hereof; or for Cause, as defined in Section 8 hereof; (ii) Executive's
resignation from the Bank's employ, upon (A) unless consented to by the
Executive, a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Sections 1 and 2, above, (any such material change shall be
deemed a continuing breach of this Agreement), (B) a relocation of Executive's
principal place of employment by more than 35 miles from its location at the
effective date of this Agreement, or a material reduction in the benefits and
perquisites to Executive from those being provided as of the effective date of
this Agreement, (C) the liquidation or dissolution of the Bank, or (D) any
breach of this Agreement by the Bank. Upon the occurrence of any event described
in clauses (A), (B), (C), or (D), above, Executive shall have the right to elect
to terminate his employment under this Agreement by resignation upon not less
than sixty (60) days prior written notice given within a reasonable period of
time not to exceed, except in case of a continuing breach, four calendar months
after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the payments due to the Executive for the
remaining term of the Agreement, including Base Salary, bonuses, and any other
cash or deferred compensation paid or to be paid (including the value of
employer contributions that would have been made on the Executive's behalf over
the remaining term of the agreement to any tax-qualified retirement plan
sponsored by the Bank as of the Date of Termination), to the Executive for the
term of the Agreement provided, however, that if the Bank is not in compliance
with its minimum capital requirements or if such payments would cause the Bank's
capital to be reduced below its minimum capital requirements, such payments
shall be deferred until such time as the Bank is in capital compliance. All
payments made pursuant to this Section 4(b) shall be paid in substantially equal
monthly installments over the remaining term of this Agreement following
-3-
<PAGE>
the Executive's termination; provided, however, that if the remaining term of
the Agreement is less than one (1) year (determined as of the Executive's Date
of Termination), such payments and benefits shall be paid to the Executive in a
lump sum within 30 days of the Date of Termination.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination. Such coverage shall cease upon the expiration of the remaining
term of this Agreement.
5. CHANGE IN CONTROL.
(a) No benefit shall be paid under this Section 5 unless there shall have
occurred a Change in Control of the Company or the Bank. For purposes of this
Agreement, a "Change in Control" of the Company or the Bank shall be deemed to
occur if and when (a) an offeror other than the Company purchases shares of the
common stock of the Company or the Bank pursuant to a tender or exchange offer
for such shares, (b) any person (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) is or becomes the beneficial
owner, directly or indirectly, of securities of the Company or the Bank
representing 25% or more of the combined voting power of the Company's then
outstanding securities, (c) the membership of the board of directors of the
Company or the Bank changes as the result of a contested election, such that
individuals who were directors at the beginning of any twenty-four month period
(whether commencing before or after the date of adoption of this Plan) do not
constitute a majority of the Board at the end of such period, or (d)
shareholders of the Company or the Bank approve a merger, consolidation, sale or
disposition of all or substantially all of the Company's or the Bank's assets,
or a plan of partial or complete liquidation.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred or the Board of the Bank or the Company has
determined that a Change in Control has occurred, Executive shall be entitled to
the benefits provided in paragraphs (c), (d) and (e) of this Section 5 upon his
subsequent involuntary termination of employment at any time during the term of
this Agreement (or voluntary termination within twelve (12) months following a
Change of Control following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 35 miles from its location
immediately prior to the Change in Control), unless such termination is because
of his death, retirement as provided in Section 7, termination for Cause, or
termination for Disability.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to 2.99
times the Executive's "base amount," within the meaning of (S)280G(b)(3) of the
Internal Revenue Code of 1986 ("Code"), as amended. Such payment shall be made
in a lump sum paid within ten (10) days of the Executive's Date of Termination.
-4-
<PAGE>
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. In addition,
Executive shall be entitled to receive the value of employer contributions that
would have been made on the Executive's behalf over the remaining term of the
agreement to any tax-qualified retirement plan sponsored by the Bank as of the
Date of Termination. Such coverage and payments shall cease upon the expiration
of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, the Executive shall be
entitled to receive benefits due him under, or contributed by the Company or the
Bank on his behalf, pursuant to any retirement, incentive, profit sharing,
bonus, performance, disability or other employee benefit plan maintained by the
Bank or the Company on the Executive's behalf to the extent that such benefits
are not otherwise paid to the Executive upon a Change in Control.
(f) Notwithstanding the preceding paragraphs of this Section 5, in the
event that the aggregate payments or benefits to be made or afforded to the
Executive under this Section would be deemed to include an "excess parachute
payment" under (S)280G of the Code, such payments or benefits shall be payable
or provided to Executive in equal monthly installments over the minimum period
necessary to reduce the present value of such payments or benefits to an amount
which is one dollar ($1.00) less than three times the Executive's "base amount"
under (S)280G(b)(3) of the Code.
6. TERMINATION FOR DISABILITY.
(a) If the Executive shall become disabled as defined in the Bank's then
current disability plan (or, if no such plan is then in effect, if the Executive
is permanently and totally disabled within the meaning of Section 22(e)(3) of
the Code as determined by a physician designated by the Board), the Bank may
terminate Executive's employment for "Disability."
(b) Upon the Executive's termination of employment for Disability, the
Bank will pay Executive, as disability pay, a bi-weekly payment equal to three-
quarters (3/4) of Executive's bi-weekly rate of Base Salary on the effective
date of such termination. These disability payments shall commence on the
effective date of Executive's termination and will end on the earlier of (i) the
date Executive returns to the full-time employment of the Bank in the same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive attaining the age of
65; or (iv) Executive's death; or (v) the expiration of the term of this
Agreement. The disability pay shall be reduced by the amount, if any, paid to
the Executive under any plan of the Bank providing disability benefits to the
Executive.
(c) The Bank will cause to be continued life, medical, dental and
disability coverage substantially identical to the coverage maintained by the
Bank for Executive prior to his termination for Disability. This coverage and
payments shall cease upon the earlier of (i) the date
-5-
<PAGE>
Executive returns to the full-time employment of the Bank, in the same capacity
as he was employed prior to his termination for Disability and pursuant to an
employment agreement between Executive and the Bank; (ii) Executive's full-time
employment by another employer; (iii) Executive's attaining the age of 65; or
(iv) the Executive's death; or (v) the expiration of the term of this Agreement.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
7. TERMINATION UPON RETIREMENT; DEATH OF EXECUTIVE.
Termination by the Bank of Executive based on "Retirement" shall mean
retirement at age 65 or in accordance with any retirement arrangement
established with Executive's consent with respect to him. Upon termination of
Executive upon Retirement, Executive shall be entitled to all benefits under any
retirement plan of the Bank or the Company and other plans to which Executive is
a party. Upon the death of the Executive during the term of this Agreement,
the Bank shall pay to Executive's estate the compensation due to the Executive
through the last day of the calendar month in which his death occurred.
8. TERMINATION FOR CAUSE.
For purposes of this Agreement, "Termination for Cause" shall include
termination because of the Executive's personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
For purposes of this Section, no act, or the failure to act, on Executive's part
shall be "willful" unless done, or omitted to be done, not in good faith and
without reasonable belief that the action or omission was in the best interest
of the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three-fourths of the members of the Board at a
meeting of the Board called and held for that purpose (after reasonable notice
to Executive and an opportunity for him, together with counsel, to be heard
before the Board), finding that in the good faith opinion of the Board,
Executive was guilty of conduct justifying termination for Cause and specifying
the reasons thereof. The Executive shall not have the right to receive
compensation or other benefits for any period after termination for Cause. Any
stock options granted to Executive under any stock option plan or any unvested
awards granted under any other stock benefit plan of the Bank, the Company, or
any subsidiary or affiliate thereof, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause pursuant to Section 9
hereof, and shall not be exercisable by Executive at any time subsequent to such
Termination for Cause.
-6-
<PAGE>
9. REQUIRED PROVISIONS.
(a) The Bank may terminate Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 herein.
(b) If Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay Executive all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate (in whole or in part) any
of its obligations that were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Agreement shall terminate as of the effective
date of the order, but vested rights of the contracting parties shall not be
affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) of the FDIA),
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the parties.
(e) All obligations under this Agreement shall be terminated (except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank): (i) by the Director of the Office of Thrift
Supervision (the "Director") or his or her designee at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) of the FDIA or (ii) by the Director, or his or her
designee at the time the Director or such designee approves a supervisory merger
to resolve problems related to operation of the Bank or when the Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
(f) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
10. NOTICE.
-7-
<PAGE>
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to all other amounts due under this Agreement and shall
not be offset against or reduce any other amounts due under this Agreement.
11. NON-COMPETITION.
(a) Upon any termination of Executive's employment hereunder pursuant to
an Event of Termination as provided in Section 4 hereof, Executive agrees not to
compete with the Bank and/or the Company for a period of one (1) year following
such termination in any city, town or county in which the Bank and/or the
Company has an office or has filed an application for regulatory approval to
establish an office, determined as of the effective date of such termination.
Executive agrees that during such period and within said cities, towns and
counties, Executive shall not work for or advise, consult or otherwise serve
with, directly or indirectly, any entity whose business materially competes with
the depository, lending or other business activities of the Bank and/or the
Company. The parties hereto, recognizing that irreparable injury will result to
-8-
<PAGE>
the Bank and/or the Company, its business and property in the event of
Executive's breach of this Subsection 11(a) agree that in the event of any such
breach by Executive, the Bank and/or the Company will be entitled, in addition
to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive's partners, agents, servants,
employers, employees and all persons acting for or with Executive. Executive
represents and admits that in the event of the termination of his employment
pursuant to Section 8 hereof, Executive's experience and capabilities are such
that Executive can obtain employment in a business engaged in other lines and/or
of a different nature than the Bank and/or the Company, and that the enforcement
of a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Bank and/or the
Company from pursuing any other remedies available to the Bank and/or the
Company for such breach or threatened breach, including the recovery of damages
from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS.
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees all
payments and the provision of all amounts and benefits due hereunder to
Executive and, if such payments are not timely paid or provided by the Bank,
such amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or
-9-
<PAGE>
compensation inuring to the Executive of a kind elsewhere provided. No provision
of this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
14. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank, the Company and their respective successors and assigns.
15. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there by any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
16. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
17. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW.
-10-
<PAGE>
This Agreement shall be governed by the laws of the State of South
Carolina, unless otherwise specified herein; provided, however, that in the
event of a conflict between the terms of this Agreement and any applicable
federal or state law or regulation, the provisions of such law or regulation
shall prevail.
19. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within one
hundred (100) miles from the location of the Bank, in accordance with the rules
of the American Arbitration Bank then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, if successful pursuant to a legal judgment,
arbitration or settlement.
21. INDEMNIFICATION.
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Bank (whether or not he continues to be a directors or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgment, court costs and attorneys' fees and
the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK OR THE COMPANY.
The Bank and the Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's or the Company's
obligations under this Agreement, in the same manner and to the same extent that
the Bank or the Company would be required to perform if no such succession or
assignment had taken place.
-11-
<PAGE>
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to
be executed and their seal to be affixed hereunto by a duly authorized officer
or director, and Executive has signed this Agreement, all on the 27th day of
July, 1995.
ATTEST: UNION FEDERAL SAVINGS BANK
/s/ Wanda Wells /s/ David G. Russell
___________________ BY: ______________________________________
[SEAL]
ATTEST: UNION FINANCIAL BANCSHARES, INC.
/s/ Wanda Wells /s/ David G. Russell
___________________ BY: ______________________________________
[SEAL]
WITNESS:
/s/ Paula Gault /s/ Richard H. Flake
___________________ ______________________________________
Richard H. Flake
-12-
<PAGE>
Amendment to Employment Agreement
---------------------------------
WHEREAS, Provident Community Bank (the "Bank") and Union Financial
Bancshares, Inc. (the "Company") have entered into an employment agreement with
Richard H. Flake (Executive Vice President/Chief Financial Officer);
WHEREAS, pursuant to Section 15 thereof, said agreement may be amended
by mutual agreement of the parties thereto;
WHEREAS, the parties have determined that clarification of the agreement
in the manner and to the extent contemplated herein is necessary and
appropriate;
NOW, THEREFORE, the parties agree as follows:
1. Effective as of the date hereof, the second and third full sentences of
section 2(b) are deleted from the agreement.
2. In all other respects, the terms and conditions of the agreement are
hereby ratified and confirmed.
IN WITNESS WHEREOF, the Bank and the Company have caused this amendment
to be executed and their seal to be affixed hereunto by a duly authorized
officer, and Mr. Flake has signed this amendment, all on the 17th day of
February, 1998.
ATTEST: PROVIDENT COMMUNITY BANK
/s/ Wanda J. Wells By: /s/ Dwight V. Neese
- --------------------------- --------------------------------
[SEAL]
ATTEST: UNION FINANCIAL BANCSHARES, INC.
/s/ Wanda J. Wells By: /s/ Carl L. Mason
- --------------------------- --------------------------------
[SEAL]
/s/ Wanda J. Wells By: /s/ Richard H. Flake
- --------------------------- --------------------------------
[SEAL] Richard H. Flake
<PAGE>
EXHIBIT NO. 13
1999 Annual Report to Shareholders
<PAGE>
December 1999
Dear Fellow Shareholder:
As the twentieth century draws to a close, the Associates of Union Financial
Bancshares and Provident Community Bank are proud of our sixty-five-year
heritage of providing quality financial products and services in the upstate of
South Carolina. But more importantly, we are genuinely excited about the future
of our company as we turn the corner on Y2K and begin the new millennium.
Union Financial Bancshares and Provident Community Bank are stronger today than
ever before. We are strategically focused on enhancing shareholder value through
improved profitability and consistent growth. We believe, however, that Charles
Darwin was right when he observed, "It is not the strongest of the species that
survive, nor the most intelligent, but the one most responsive to change." All
the associates of Union Financial Bancshares and Provident Community Bank
enthusiastically embrace change as the key to our success in the new millennium.
Before going into depth about our initiatives to prepare for the future, I am
pleased to report on the current condition of our company and the progress made
during the last year. The Bank's net income increased from $1.550 million in
fiscal 1998 to $1.676 million in fiscal 1999, an increase of 8.13%. Earnings per
share of common stock in fiscal 1999 totaled $1.26, up 7.7% from the previous
year. Return on average assets for fiscal 1999 was 0.85%, down slightly from the
previous year. Return on average shareholders' equity, however, was up
significantly from 10.77% in fiscal 1998 to 10.96% in fiscal 1999. The Bank's
operating expense ratio fell from 2.52% at the end of 1998 to 2.43% at the end
of fiscal 1999. Total assets of $205.3 million at 1999 fiscal year end were up
$16 million over total assets of $189.3 million at 1998 fiscal year end, an
increase of 8.46%. The continued growth in total assets is primarily the result
of 5.06% growth in the Bank's loan portfolio. The Bank's total loans increased
$7.2 million while the consumer and commercial loan portfolio increased $10.5
million. In addition, Bank deposits increased $11.9 million.
The increased earnings and continued growth of Union Financial Bancshares and
Provident Community Bank are the result of continuous planning and hard work.
The company's rolling five-year Strategic Business Plan is reviewed, revised and
rewritten each year through a cooperative effort of the management team and
Board of Directors. The Plan not only provides the company with a clear vision
into its future, but it also establishes specific time-lines for meeting
strategic goals and objectives. The Plan provides flexibility for adjusting long
term goals and objectives to short-term needs as opportunities arise or changes
occur in the economic or regulatory environment. The five-year Strategic
Business Plan is the cornerstone of the company's planning process.
Two important initiatives started in the fall of 1998 were consummated in fiscal
1999. First, the acquisition of the deposits of CCB Financial's wholly-owned
subsidiary, American Federal Bank, FSB, (Union) was consummated in February
1999. This successful acquisition brought many new clients to Provident
Community Bank and allowed the Bank to increase its already leading market share
in Union County. Second, the construction of a new full-service Jonesville
Banking Center was completed and put into service in June 1999. The new design
features high-tech automation in a warm and friendly atmosphere. The Jonesville
Banking Center design will become the Bank's prototype for expansion in new
markets.
<PAGE>
Another upgrade completed in 1999 was the construction of the Duncan Bypass ATM
Park. Utilizing land the Bank already owned, this convenient new drive-up ATM is
a natural extension of Provident's existing Banking Center and the new Lending &
Investment Center one block to the north.
The most exciting initiative for calendar year 1999 was the announcement on July
1 that Union Financial Bancshares had entered into an agreement to acquire South
Carolina Community Bancshares, the parent company of Community Federal Savings
Bank, a $45 million savings bank in Winnsboro, South Carolina. Regulatory
approval was received quickly and the shareholders of both companies voted
overwhelmingly on November 9 to approve the merger. Because the closing on
November 12 occurred after Union Financial Bancshares' fiscal year ended on
September 30, 1999, the financial statements of the combined company will not be
reported until the first quarter of the new fiscal year ends on December 31,
1999.
The systems and operations conversions have been completed without complications
and we are now actively working on blending the corporate cultures of the two
companies. We are very pleased with the success of this merger and are already
experiencing the synergies expected from bringing two good companies together to
create an even better one.
The market for publicly traded bank and thrift stocks has only recently begun to
recover from the sell off that started in the summer of 1998. The officers and
Board of Directors of Union Financial Bancshares and Provident Community Bank
are continuously searching for ways to enhance the value of your investment in
our company. Early in the year the Board of Directors declared a 5% stock
dividend that was paid out in February 1999. Later in the year the Board of
Directors seized the opportunity created by the South Carolina Community
Bancshares merger to upgrade the stock listing of Union Financial Bancshares
from the NASDAQ SmallCap Market to the NASDAQ National Market System. Union
Financial's stock began trading on the National Market on November 15, 1999 and
continues to be traded under the ticker symbol "UFBS".
This has been an exciting year of improved profitability and growth for Union
Financial Bancshares. We are both pleased and proud to have you as a shareholder
in our company. Thank you for your continued interest and support.
Sincerely,
/s/ Dwight V. Neese
- -------------------------------------
Dwight V. Neese
President and Chief Executive Officer
<PAGE>
Table of Contents
<TABLE>
<S> <C>
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....................... 12
Consolidated Financial Statements.................. 13
Notes to Consolidated Financial Statements......... 18
Directors and Leadership Group..................... 39
Corporation Information............................ 40
</TABLE>
==============
Business
Union Financial Bancshares, Inc. ("Union Financial") is the savings and
loan holding company for Provident Community Bank (formerly known as Union
Federal Savings Bank), ("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. 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, 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"). In August 1987, the Bank converted from a federal mutual savings
and loan association to a federal capital stock savings and loan
association. 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. 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 consumer and
commercial loans, commercial real estate loans, construction 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 five full-
service banking centers, a mortgage banking center, and a lending and
investment center, all of which are located in the upstate area of South
Carolina.
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data of the Corporation for
the periods indicated.
Operations Data:
- ----------------
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Thousands - Except Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 14,046 $ 13,405 $ 11,855 $ 9,004 $ 9,265
Interest expense (7,698) (7,549) (6,647) (5,050) (5,260)
---------- ---------- ---------- ---------- ----------
Net interest income 6,348 5,856 5,208 3,954 4,005
Provision for loan losses (105) -- (243) -- (105)
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 6,243 5,856 4,965 3,954 3,900
Other income 1,192 1,038 953 506 381
Other expense (4,814) (4,447) (3,616) (3,224) (2,588)
---------- ---------- ---------- ---------- ----------
Income before income taxes 2,621 2,447 2,302 1,236 1,693
Income tax expense (945) (897) (858) (374) (639)
---------- ---------- ---------- ---------- ----------
Net income $ 1,676 $ 1,550 $ 1,444 $ 862 $ 1,054
---------- ---------- ---------- ---------- ----------
Income per common share: (1)
Net income per common $ 1.26 $ 1.17 $ 1.12 $ 0.67 $ 0.84
share (Basic) ---------- ---------- ---------- ---------- ----------
Net income per common $ 1.19 $ 1.10 $ 1.04 $ 0.63 $ 0.84
share (Diluted) ---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding (Basic) 1,328,305 1,327,845 1,292,284 1,273,083 1,240,951
Weighted average number of
common shares outstanding (Diluted)
1,414,121 1,410,158 1,391,988 1,352,685 1,240,951
</TABLE>
(1) All share and per share amounts have been restated for the 2:1 stock split
occurring in July 1996, the 3:2 stock split occurring in February 1998 and
the 5% stock dividend occurring in February 1999.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-4-
<PAGE>
Financial Condition:
- --------------------
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $205,294 $189,286 $171,244 $128,133 $120,879
Short-term interest-bearing deposits 2,421 1,124 6,213 1,938 3,552
Investment securities 15,506 9,633 16,783 19,138 21,264
Mortgage-backed securities 17,415 19,922 6,883 14,658 18,616
Loans (net) 149,401 142,202 129,957 85,997 73,431
Deposit accounts 142,624 130,768 117,914 93,715 94,750
Shareholders' equity 14,738 15,300 13,527 12,254 11,856
Number of:
Real estate loans outstanding 1,411 1,651 1,706 1,615 1,641
Deposit accounts 18,865 17,686 16,443 13,095 13,062
Banking centers 5 4 4 3 3
</TABLE>
Other Selected Data:
- -------------------
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Interest rate spread during the year 3.35% 3.09% 3.16% 3.01% 2.96%
Net yield on average interest-
earning assets 3.46% 3.42% 3.44% 3.46% 3.27%
Return on average assets 0.85% 0.87% 0.92% 0.73% 0.83%
Return on average shareholders' equity 10.96% 10.77% 11.21% 7.01% 9.38%
Dividend payout ratio 29.46% 30.08% 30.13% 46.87% 37.40%
Operating expense to average assets 2.43% 2.52% 2.31% 2.73% 2.05%
Ratio of average shareholders'
equity to average assets 7.44% 8.12% 8.24% 10.41% 8.88%
Cash dividends declared and paid
per share of common stock (1) $0.37 $0.35 $0.34 $0.33 $0.33
</TABLE>
(1) All share and per share amounts have been restated for the 2:1 stock split
occurring in July 1996, the 3:2 stock split occurring in February 1998 and
the 5% stock dividend occurring in February 1999.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-5-
<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/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 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, 1999 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:
<TABLE>
<CAPTION>
Rate Environment
-----------------
Minus 200 Basis Points Flat Plus 200 Basis Points
---------------------- ---- ----------------------
(In Thousands)
<S> <C> <C> <C>
Estimated Market Value of Assets $216,979 $203,385 $189,894
Estimated Market Value of Liabilities $190,180 $183,972 $178,313
MVPE $ 26,799 $ 19,413 $ 11,581
Increase/(decrease) in MVPE $ 7,386 $ - ($7,832)
</TABLE>
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.
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.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-6-
<PAGE>
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.
<TABLE>
<CAPTION>
At September 30, Years Ended September 30
---------------- ------------------------
1999 1999 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Average yield on earnings assets:
Loans 7.85% 8.03% 8.10% 8.08%
Investments (1) 7.15% 6.35% 5.89% 6.88%
Mortgage-backed securities 6.76% 6.31% 6.96% 6.76%
Total interest-earning assets 7.67% 7.65% 7.83% 7.83%
---- ---- ---- ----
Less:
Average rate paid on deposits 3.92% 4.08% 4.45% 4.36%
Average rate paid on borrowings 5.17% 5.04% 5.70% 5.62%
Average Cost of Funds 4.23% 4.29% 4.74% 4.67%
---- ---- ---- ----
Average interest rate spread 3.44% 3.35% 3.09% 3.16%
---- ---- ---- ----
Net yield on average interest-
earning assets 3.53% 3.46% 3.42% 3.44%
---- ---- ---- ----
</TABLE>
(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 prior rate); (2) changes in rate (changes in
rate multiplied by prior volume); and (3) the total. The net change attributable
to the combined impact of rate and volume has been allocated to rate and volume
variances consistently on a proportionate basis.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-7-
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------- -------------
Volume Rate Total Volume Rate Total
------ ----- ----- ------ ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in interest income:
Loans ($352) ($93) ($445) $2,100 $ 18 $2,118
Mortgage-backed securities 1,036 (155) 881 36 18 54
Investments 121 83 204 (463) (159) (622)
----- ----- ------ ------ ------ ------
Total interest income 805 (165) 640 1,673 (123) 1,550
----- ----- ------ ------ ------ ------
Change in interest expense:
Deposits 681 (518) 162 758 120 878
Borrowings and other 242 (256) (13) (2) 26 24
----- ----- ------ ------ ------ ------
Total interest expense 923 (774) 149 756 146 902
----- ----- ------ ------ ------ ------
Change in net interest income ($118) $609 $491 $917 ($269) $648
===== ===== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
Comparison of Years Ended September 30, 1999 and September 30, 1998
- -------------------------------------------------------------------
Net income increased $126,000 from $1,550,000 in fiscal 1998 to $1,676,000 in
fiscal 1999 primarily as a result of increased interest income from a higher
level of earning assets along with increased non-interest income. Earnings per
share (basic) increased $0.09 to $1.26 for the year ended September 30, 1999
from $1.17 for the same period in 1998.
Total interest income increased $641,000, or 4.78%, from $13,405,000 in fiscal
1998 to $14,046,000 in fiscal 1999 due to the increase in the average level of
interest-earning assets. The increase in average earning assets was due
primarily to the increases in mortgaged-backed securities and investment
securities. The increase in average earning assets was financed by increased
deposits and additional advances from the FHLB. Interest income on loans
decreased $445,000, or 3.75%, from $11,865,000 in fiscal 1998 to $11,420,000 in
fiscal 1999. The reduction in interest income on loans was due to high principal
prepayments on residential loans that resulted in an overall reduction in the
average balance of mortgage loans. Interest income on investment and mortgage-
backed securities increased $1,113,000, or 77.83%, from $1,430,000 in fiscal
1998 to $2,543,000 in fiscal 1999. This increase was due to a higher average
balance for investments and mortgage-backed securities as a result of additional
purchases made during the fiscal year.
Interest expense increased 1.97% to $7,698,000 for fiscal 1999 from $7,549,000
for fiscal 1998. Interest expense increased $162,000 for deposits and decreased
$13,000 for other borrowings. Interest expense for deposits increased due to
higher volumes (9.06% increase from fiscal 1998) offset by a reduction in the
costs of deposits. Interest expense on other borrowings decreased due to higher
volumes that was offset by lower interest rates on FHLB advances throughout
fiscal 1999 as compared to fiscal 1998.
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. Provisions for loan losses increased from $0 in fiscal 1998
to $105,000 in fiscal
________________________________________________________________________________
Union Financial Bancshares, Inc.
-8-
<PAGE>
1999. The increase in the provision was made to provide a adequate level of
reserves to be consistent with the growth in the Corporation's loan portfolio.
The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $98,000 in fiscal 1999 compared to $101,000 for fiscal 1998. The
loan reserves to total loans ratio for fiscal 1999 was .56% compared to .58% for
fiscal 1998.
Non-interest income increased 14.84% to $1,192,000 for the year ended September
30, 1999 from $1,038,000 for the year ended September 30, 1998. Service charges
and fees increased $114,000 to $905,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) increased $47,000 to $(64,000)
for the year ended September 30, 1999 from $(111,000) for the year ended
September 30, 1998. The improvement in loan servicing fees (net) was due to a
reduction in loan premium amortization along with higher loan service fees. Gain
on sale of loans decreased to $342,000 during the year ended September 30, 1999
from $358,000 for the year ended September 30, 1998.
Non-interest expense increased 8.25% to $4,814,000 in fiscal 1999 from
$4,447,000 in fiscal 1998. Compensation and employee benefits increased 2.91% or
$67,000 from fiscal 1998 to fiscal 1999 due to salary and employee benefits
inflationary increases. Occupancy and equipment expenses increased 16.56% or
$161,000 from fiscal 1998 to fiscal 1999 due to higher depreciation expense as a
result of facilities upgrades and equipment purchases along with higher data
processing expenses due to the growth of the Bank. Other operating expenses
increased 13.89% or $116,000 from fiscal 1998 to fiscal 1999 due primarily to
higher deposit premium amortization as a result of a branch purchase made during
the second quarter of fiscal 1999.
Comparison of Years Ended September 30, 1998 and September 30, 1997
- -------------------------------------------------------------------
Net income increased $106,000 from $1,444,000 in fiscal 1997 to $1,550,000 in
fiscal 1998 primarily as a result of increased interest income from loans and
increased non-interest income. Earnings per share (basic) increased $0.06 to
$1.17 for the year ended September 30, 1998 from $1.11 for the same period in
1997.
Total interest income increased $1,550,000, or 13.07%, from $11,855,000 in
fiscal 1997 to $13,405,000 in fiscal 1998 due to the increase in the level of
interest-earning average assets that more than offset a slight decrease in
average yields. Average earning assets increased due primarily to higher loan
production from the Mortgage Division. The loan production was financed by
increased deposits and additional advances from the FHLB. Interest income on
loans increased $2,118,000, or 21.73%, from $9,747,000 in fiscal 1997 to
$11,865,000 in fiscal 1998. Interest income on investment and mortgage-backed
securities decreased $615,000, or 30.07%, from $2,045,000 in fiscal 1997 to
$1,430,000 in fiscal 1998. This reduction was due to a high level of security
calls that occurred during fiscal 1998 along with declining interest rates on
new securities.
Interest expense increased 13.57% to $7,549,000 for fiscal 1998 from $6,647,000
for fiscal 1997. Interest expense increased $878,000 for deposits and $24,000
for other borrowings, respectively. Interest expense for deposits increased due
to higher volumes (10.14% increase from fiscal 1997) along with a slight
increase in the costs of deposits. Interest expense on other borrowings
increased due to higher volumes and rates on FHLB advances throughout fiscal
1998 as compared to fiscal 1997.
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. Provisions for loan losses decreased from $243,000 in fiscal
1997 to $0 in fiscal 1998. The decrease in the provision was due to the
reduction in the Bank loan portfolio that is held for investment , along with
the reduction in losses experienced in consumer loans. The Corporation
experienced bad debt charge-offs, net of recoveries, of approximately $101,000
in fiscal 1998 compared to $114,000 for fiscal 1997. The loan reserves to total
loans ratio excluding loans held for sale for fiscal 1998 was .79% compared to
.80% for fiscal 1997.
Non-interest income increased 8.92% to $1,038,000 for the year ended September
30, 1998 from $953,000 for the year ended September 30, 1997. Service charges
and fees increased $81,000 to $791,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) decreased $199,000 to $(111,000)
for the year ended September 30, 1998 from $88,000 for the year ended September
30, 1997 primarily as a result of the establishment
________________________________________________________________________________
Union Financial Bancshares, Inc.
-9-
<PAGE>
of a $108,000 loss provision for the Bank's loan servicing portfolio. Gain on
sale of loans increased to $358,000 during the year ended September 30, 1998
from $96,000 for the year ended September 30, 1997 due to increased conventional
mortgage loan sales.
Non-interest expense increased 22.98% to $4,447,000 in fiscal 1998 from
$3,616,000 in fiscal 1997. The increase in non-interest expense is the result of
additional expenses absorbed with the purchase of the Laurens, S. C. branch
along with the startup of the Mortgage Division. Both operations were
established during the third quarter of fiscal 1997.
Year 2000
- ---------
The approach of the year 2000 ("Year 2000") presents significant issues for many
financial, information, and operational systems. Many systems in use today may
not be able to interpret dates after December 31, 1999, appropriately, because
such systems allow only two digits to indicate the year in a date. The Year 2000
problems may occur in computer programs, computer hardware, or electronic
devices that utilize computer chips to process any information that contains
dates. Therefore, the issue is not limited to dates in computer programs but is
a complex combination of problems that may exist in computer programs, data
files, computer hardware, and other devices essential to the operation of the
business. Further, companies must consider the potential impact that Year 2000
may have on services provided by third parties.
Substantially all of the Year 2000 risk is related to the Bank's activities. The
Bank has a formal Year 2000 Plan which includes a Year 2000 Task Force. The Plan
has been reviewed by the senior management and the Board of Directors. Included
in the Plan is a listing of all systems (whether in-house or provided/supported
by third parties) which may be impacted by Year 2000 and a categorization of the
systems by their potential impact on Bank operations. The Task Force has
received Year 2000 plans from third parties identified during the assessment
phase of the Year 2000 Plan. For systems that have been classified as critical
to the operations of the Bank, contingency plans have been developed.
Contingency plans may include utilization of alternate third party vendors,
alternate processing methods and software, or manual processing. Specific
contingency plans have been developed regarding liquidity needs for the Bank.
The liquidity contingency plans include additional funding lines through the
Federal Reserve and other financial institutions. The plans have various
activation dates (e.g., the date on which a third party processor fails to meet
its Year 2000 compliance deadline). In addition to addressing its own Year 2000
issues, the Bank is in the process of assessing the impact of the Year 2000 on
significant commercial borrowers. The Bank's Year 2000 readiness is reviewed and
monitored by the Office of Thrift Supervision ("OTS").
The Bank's core processing systems are outsourced through a contract with The
BISYS Group, Inc. ("BISYS"). BISYS has developed a Year 2000 Plan and provides
the Bank with periodic updates. BISYS also has held Year 2000 workshops, whose
objectives have been to assist the Bank in the development of its Year 2000
Plan, to provide updates on the BISYS Year 2000 plan, and training on the use of
the BISYS Year 2000 test facility, whose function is to allow BISYS clients to
test their systems' compatibility with the BISYS system. BISYS completed all
program maintenance associated with Year 2000 prior to October 31, 1998, and
performed a full year of testing prior to January 1, 2000. Like the Bank, BISYS
Year 2000 activities are subject to OTS oversight.
The incremental cost associated with the Bank's compliance is expected to be
less than $50,000. The majority of all hardware upgrades began in 1995 as a
-------
result of the Bank's plan to increase efficiencies and eliminate obsolescence of
some system components. Should the Bank or any of its third party service
providers fail to complete Year 2000 measures in a timely manner, it would
likely have a material adverse effect, which amount cannot be reasonably
estimated at this time.
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
At September 30, 1999, the Corporation's assets totaled $205,294,000, an
increase of $16,008,000, or 8.45%, as compared to $189,286,000 at September 30,
1998. Investment and mortgage-backed securities increased $3,366,000 to
$32,921,000 from $29,555,000 at September 30, 1998.The increase in securities
was a result of the Corporation's decision to increase investment holdings in
municipal securities. Total loans, net, increased
________________________________________________________________________________
Union Financial Bancshares, Inc.
-10-
<PAGE>
$7,199,000 or 5.06% to $149,401,000 from $142,202,000 at September 30, 1998.
Residential mortgage loans, net, decreased $5,536,000 from fiscal 1998 to fiscal
1999 while consumer and commercial loans, net, increased $10,453,000 during the
same period. The increase in consumer/commercial loans along with the reduction
in residential mortgage loans is more consistent with the liability structure of
the Corporation insofar as the shorter terms of these loans more closely match
the terms of the Corporation's deposits. The overall growth in total assets was
funded by increased deposits and additional advances from the Federal Home Loan
Bank. Total advances increased $5,062,000 from $41,441,000 at September 30, 1998
to $46,503,000 at September 30, 1999. Total deposits increased $11,856,000 from
$130,768,000 at September 30, 1998 to $142,624,000 on September 30, 1999 due to
the purchase of a branch located in Union County. During the second quarter of
fiscal 1999 the Corporation completed the acquisition of the CCB/American
Federal's Union, South Carolina branch, which was completed in the second
quarter of fiscal 1999.
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 17.08% at September 30, 1999.
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. The
required ratio of such liquid investments is currently 4% 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, 1999 were approximately $830,000. See Note 11 to the financial
statements for further information about commitments and contingencies.
As of September 30, 1999, the Bank exceeded the OTS's capital requirements. See
Note 13 to the financial statements for further discussion of these capital
requirements.
Impact of Inflation and Changing Prices
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, non-interest expenses do
reflect general levels of inflation.
Subsequent Event
- ----------------
On November 12, 1999 Union Financial completed its acquisition of South Carolina
Community Bancshares, Inc. and its wholly owned subsidiary, Community Federal
Savings Bank. Union Financial issued a total of 526,290 shares and paid a total
of $3,582,081 to the shareholders of South Carolina Community Bancshares, Inc.
The transaction was accounted for under the purchase method of accounting. The
two offices of Community Federal Savings Bank became offices of Provident
Community Bank, the wholly owned subsidiary of Union Financial Bancshares. At
September 30, 1999, South Carolina Community Bancshares, Inc. had total assets
of $46.6 million, loans of $40.2 million and deposits of $35.9 million.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-11-
<PAGE>
[LETTERHEAD OF 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, 1999 and 1998, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended September 30, 1999. 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.
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, 1999 and
1998 and the consolidated results of their operations and their cash flows for
each of the three years in the period ended September 30, 1999, in conformity
with generally accepted accounting principles.
/s/ Elliot, Davis & Company, LLP
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
October 29, 1999
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
-----------------------------
<TABLE>
<CAPTION>
September 30,
------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Assets
- ------
Cash $ 3,149 $ 2,469
Short term interest-bearing deposits 2,421 1,124
-------- --------
Total cash and cash equivalents 5,570 3,593
-------- --------
Investment and mortgage-backed securities:
Held to maturity 5,586 2,699
Available for sale 27,335 26,856
-------- --------
Total investment and mortgage-backed securities 32,921 29,555
-------- --------
Loans, net
Held for sale 216 37,584
Held for investment 149,185 104,618
-------- --------
Total loans, net 149,401 142,202
Office properties and equipment, net 4,524 4,020
Federal Home Loan Bank Stock, at cost 2,050 2,023
Accrued interest receivable 1,574 1,197
Mortgage servicing rights 3,842 3,270
Other assets 5,412 3,426
-------- --------
Total assets $205,294 $189,286
======== ========
Liabilities
- -----------
Deposit accounts $142,624 $130,768
Advances from the Federal Home Loan Bank and other borrowings 46,503 41,441
Accrued interest payable 226 336
Advances from borrowers for taxes and insurance 548 496
Other liabilities 655 945
-------- --------
Total liabilities 190,556 173,986
-------- --------
Commitments and contingencies - note 11
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 - 1,357,214 shares in 1999 and 14 13
1,278,250 shares in 1998
Additional paid-in capital 5,484 4,471
Accumulated other comprehensive income (loss) (1,779) 148
Retained earnings, substantially restricted 11,019 10,668
-------- --------
Total shareholders' equity 14,738 15,300
-------- --------
Total liabilities and shareholders' equity $205,294 $189,286
======== ========
</TABLE>
See notes to consolidated financial statements.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-13-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------
1999 1998 1997
---- ---- ----
(In Thousands, Except Share Data)
<S> <C> <C> <C>
Interest Income:
Loans $ 11,420 $ 11,865 $ 9,747
Deposits and federal funds sold 83 110 63
Securities available for sale:
State and municipal 36 17 37
Other investments 2,320 980 1,128
Securities held to maturity:
Other investments 187 433 880
---------- ---------- ----------
Total interest income 14,046 13,405 11,855
---------- ---------- ----------
Interest Expense:
Deposit accounts 5,706 5,544 4,666
Advances from the FHLB and other 1,992 2,005 1,981
---------- ---------- ----------
Total interest expense 7,698 7,549 6,647
---------- ---------- ----------
Net Interest Income 6,348 5,856 5,208
Provision for loan losses 105 -- 243
---------- ---------- ----------
Net interest income after provision for loan losses 6,243 5,856 4,965
---------- ---------- ----------
Non Interest Income:
Fees for financial services 905 791 710
Loan servicing fees, net of servicing amortization (64) (111) 88
Net gains on sale of investments 9 -- 59
Gains on sale of loans 342 358 96
---------- ---------- ----------
Total non interest income 1,192 1,038 953
---------- ---------- ----------
Non Interest Expense:
Compensation and employee benefits 2,368 2,301 1,768
Occupancy and equipment 1,133 972 702
Deposit insurance premiums 77 54 93
Professional services 275 275 332
Deposit premium amortization 276 212 106
Other 685 633 615
---------- ---------- ----------
Total non interest expense 4,814 4,447 3,616
---------- ---------- ----------
Income before income taxes 2,621 2,447 2,302
Provision for income taxes 945 897 858
---------- ---------- ----------
Net Income $ 1,676 $ 1,550 $ 1,444
========== ========== ==========
Net Income per common share (Basic) $ 1.26 $ 1.17 $ 1.12
========== ========== ==========
Net Income per common share (Diluted) $ 1.19 $ 1.10 $ 1.04
========== ========== ==========
Cash dividends per common share $ 0.37 $ 0.35 $ 0.34
========== ========== ==========
Weighted average number of common shares outstanding (Basic) 1,328,305 1,327,845 1,292,284
========== ========== ==========
Weighted average number of common shares outstanding 1,414,121 1,410,158 1,391,988
(Diluted) ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-14-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings Other Total
Common Stock Paid-In Substantially Comprehensive Shareholders'
------------------
Shares Amount Capital Restricted Income Equity
------ ------ ------- ---------- ------ ------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 811,286 $ 8 $3,897 $ 8,578 ($ 229) $12,254
-------
Net income -- -- -- 1,444 -- 1,444
Other comprehensive income, net of tax
Unrealized holding gains arising
during period -- -- -- -- 166 166
------ -------
Comprehensive income 1,610
-------
Options exercised 16,414 -- 96 -- -- 96
Cash dividend ($.34 per share) -- -- -- (433) -- (433)
------ --- ------ ------- ------ -------
Balance at September 30, 1997 827,700 8 3,993 9,589 (63) 13,527
-------
Net income -- -- -- 1,550 -- 1,550
Other comprehensive income, net of tax
Unrealized holding gains arising
during period -- -- -- -- 211 211
------ -------
Comprehensive income 1,761
-------
Options exercised 9,920 -- 51 -- -- 51
Three-for-two stock split 413,850 4 -- (4) -- --
Dividend reinvestment plan contributions 26,780 1 427 -- -- 428
Cash dividend ($.35 per share) -- -- -- (467) -- (467)
--------- --- ------ ------- ------ -------
Balance at September 30, 1998 1,278,250 13 4,471 10,668 148 15,300
-------
Net income -- -- -- 1,676 -- 1,676
Other comprehensive income, net of tax
Unrealized holding losses arising
during period -- -- -- -- (1,927) (1,927)
------ -------
Comprehensive loss (251)
-------
Options exercised 315 -- 1 -- -- 1
Five percent stock dividend 63,818 1 830 (829) -- --
Dividend reinvestment plan contributions 14,831 -- 182 -- -- 182
Cash dividend ($.37 per share) -- -- -- (494) -- (494)
--------- --- ------ ------- ------ -------
Balance at September 30, 1999 1,357,214 $14 $5,484 $11,019 ($1,779) $14,738
========= === ====== ======= ====== =======
</TABLE>
See notes to consolidated financial statements.
_______________________________________________________________________________
Union Financial Bancshares, Inc.
-15-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 1,676 $ 1,550 $ 1,444
Adjustments to reconcile net income to
net cash provided by (used) in operating activities:
Provision for loan losses 105 -- 243
Amortization expense 1,127 561 106
Depreciation expense 343 221 188
Recognition of deferred income, net of costs (100) (140) (7)
Deferral of fee income, net of costs 243 77 29
Gain on investment transactions (9) -- (59)
Loans originated for sale (108,962) (141,436) (61,806)
Proceeds from sale of loans 108,746 123,677 46,762
Gain on sale of loans held for sale (342) (358) (96)
(Increase) decrease in accrued interest receivable (377) 120 (196)
(Increase) decrease in other assets (1,189) (835) 2,720
Increase (decrease) in accrued interest payable (239) (22) 235
Increase (decrease) in other liabilities (110) 434 (830)
--------- --------- ---------
Net cash provided by (used) in operating activities $ 912 ($ 16,151) ($ 11,267)
--------- --------- ---------
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-16-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
------------------------------------
1999 1998 1997
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Investing activities:
Purchase of investment and mortgage-backed securities:
Held to maturity $ (4,864) $ -- $ (2,000)
Available for sale (16,097) (20,368) (2,950)
Proceeds from maturity of investment and mortgage- backed securities:
Held to maturity 1,500 4,497 500
Available for sale 3,375 7,978 4,450
Proceeds from sale of investment and mortgage-backed securities:
Available for sale 5,941 -- 8,281
Principal repayments on mortgage-backed securities:
Held to maturity 477 616 137
Available for sale 6,356 1,388 1,712
Net (increase) decrease in loans (9,512) 5,952 (28,861)
Purchase of mortgage servicing rights (572) (2,814) --
Purchase of FHLB stock (27) -- (1,380)
Redemption of FHLB stock -- 82 225
Purchase of office properties and equipment (847) (1,231) (1,534)
-------- -------- --------
Net cash used in investing activities (14,270) (3,900) (21,420)
-------- -------- --------
Financing activities:
Proceeds from the exercise of stock options 1 51 96
Proceeds from dividend reinvestment plan 182 427 --
Dividends paid in cash (494) (467) (433)
Proceeds from term borrowings 4,863 3,853 17,997
Acquired deposits from purchased branch 12,622 -- 20,073
Premium paid for acquired deposits (1,073) -- (2,115)
Increase (decrease) in deposit accounts (766) 11,959 1,205
-------- -------- --------
Net cash provided by financing activities 15,335 15,823 36,823
-------- -------- --------
Net (decrease) increase in cash and cash equivalents 1,977 (4,228) 4,136
Cash and cash equivalents at beginning of year 3,593 7,821 3,685
-------- -------- --------
Cash and cash equivalents at end of year $ 5,570 $ 3,593 $ 7,821
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
_______________________________________________________________________________
Union Financial Bancshares, Inc.
-17-
<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 or the "Corporation"
(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 through four full service banking centers, a
mortgage banking center and a lending and investment center in two counties in
South Carolina. The Bank offers a full range of financial services including
checking, savings, time deposits, individual retirement accounts (IRAs),
investment services, and secured and unsecured consumer loans. The Bank
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.
Basis of Consolidation - The accompanying consolidated financial statements
- ----------------------
include the accounts of the Corporation and its wholly owned subsidiary,
Provident Community Bank and its wholly owned subsidiary, Provident Financial
Services, Inc. ("PFS"). PFS consists primarily of investment brokerage
services. All inter corporation 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"). In accordance
- -------------------------------------------------
with the Statement, debt securities that the Corporation 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 repayment from income sources and the
collateral securing such loans. Consumer loans generally consist of home equity
loans, automobile and other personal loans.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-18-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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 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.
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 SFAS 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 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.
As of and for the years ended September 30, 1999 and 1998, 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.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-19-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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 office
properties 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.
Federal Home Loan Bank Stock - The Corporation, as a member institution of the
- ----------------------------
Federal Home Loan Bank (FHLB) of Atlanta, is required to own capital stock in
the FHLB of Atlanta based generally upon the Corporation's balances of
residential mortgage loans and FHLB advances. No ready market exists for this
stock and it has no quoted market value. However, redemption of this stock has
historically been at par value.
Mortgage Servicing Rights - The Corporation accounts for mortgage servicing
- -------------------------
rights in accordance with SFAS No. 122, Accounting for Mortgage Servicing
---------------------------------
Rights. The statement eliminates the distinction between originated and
- ------
purchased mortgage servicing rights. The Corporation capitalizes the allocated
cost of originated mortgage servicing rights and records a corresponding
increase in mortgage banking income.
Purchased mortgage servicing rights are recorded at the 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 approximate 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. Real estate
acquired through foreclosure is included in other assets on the balance sheet.
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 SFAS No.
- ------------
109, Accounting for Income Taxes. Under SFAS 109, deferred income taxes reflect
---------------------------
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. A valuation allowance is established for deferred tax
assets that may not be realized. Also, SFAS 109 eliminates, on a prospective
basis, the exception from the requirement to record deferred taxes on tax basis
bad debt reserves in excess of the base year amounts. The tax basis bad debt
reserve that arose prior to the fiscal year 1988 (the base year amount) is
frozen, and the book reserves at that date and all subsequent changes in book
and tax basis reserves are included in the determination of deferred taxes.
Fair Values of Financial Instruments - The following methods and assumptions
- ------------------------------------
were used by the Corporation in estimating fair values of financial instruments
as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-
term instruments approximate their fair value.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-20-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
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 analysis 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 analysis
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 analysis 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.
Per-Share Data - SFAS 128, Earnings Per Share, issued in February 1997,
- -------------- ------------------
simplifies the standard for computing earnings per share and makes them
comparable to international earnings per share standards. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement.
Basic earnings per share is computed by dividing net income by the weighted-
average number of shares outstanding for the period. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common share that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Corporation's stock
option plan is reflected in diluted earnings per share by the application of
the treasury stock method.
SFAS128 became effective for the Corporation as of September 30, 1998. As
required by SFAS 128, all prior period earnings per share data presented has
been restated to conform with the provisions of the statement.
Share and per-share data have been restated to reflect stock splits issued in
July 1996, February 1998 and the 5% stock dividend occurring in February, 1999.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-21-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Intangible Assets - Intangible assets, included in other assets, consist of core
- -----------------
deposit premiums resulting from the Corporation's branch acquisition.
During 1999, $276,000 of intangible expense was charged to operations. 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
ninety 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 ninety 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.
Comprehensive Income - SFAS No.130 Reporting Comprehensive Income, establishes
- -------------------- ------------------------------
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses). This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income (including, for example, unrealized holding gains and
losses on available-for-sale securities) be reported in a financial statement
that is displayed with the same prominence as other financial statements. The
Corporation discloses components of comprehensive income in its statement of
shareholder's equity. The accumulated balance of other comprehensive income is
disclosed separately from retained earnings in the equity section of the balance
sheet.
Reclassifications - Certain amounts in prior years' financial statements have
- -----------------
been reclassified to conform with current year classifications.
2. Investment And Mortgage-backed Securities
Held to Maturity - Securities classified as held to maturity consisted of the
- ----------------
following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed Securities:
FHLMC $4,864 $-- ($326) $4,538
GNMA 722 78 -- 800
------ --- ----- ------
Total held to maturity $5,586 $78 ($326) $5,338
====== === ===== ======
<CAPTION>
September 30, 1998
-----------------------------------------
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $1,500 $24 $ -- $1,524
Mortgage-backed Securities:
GNMA 1,199 21 -- 1,220
------ --- ----- ------
Total held to maturity $2,699 $45 $ -- $2,744
====== === ===== ======
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-22-
<PAGE>
2. Investment And Mortgage-backed Securities (continued)
Available for Sale - Securities classified as available for sale consisted of
- ------------------
the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------------------
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
---- ----- ------ ------
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $15,139 $ -- ($1,209) $13,930
Municipal Securities 1,701 -- (125) 1,576
------- ------- ------- -------
Total Investment Securities 16,840 -- (1,334) 15,506
------- ------- ------- -------
Mortgage-backed Securities:
FHLMC 6,356 -- (137) 6,219
FNMA 966 -- (17) 949
CMOs 5,952 -- (1,291) 4,661
------- ------- ------- -------
Total Mortgage-backed Securities 13,274 -- (1,445) 11,829
------- ------- ------- -------
Total available for sale $30,114 $ -- ($2,779) $27,335
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------
Amortized Gross Unrealized Fair
----------------
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $ 7,668 $ 45 ($31) $ 7,682
Municipal Securities 449 2 -- 451
------- ---- ---- -------
Total Investment Securities 8,117 47 (31) 8,133
------- ---- ---- -------
Mortgage-backed Securities:
FHLMC 9,713 158 -- 9,871
FNMA 880 16 (2) 894
CMOs 7,806 157 (5) 7,958
------- ---- ---- -------
Total Mortgage-backed Securities 18,399 331 (7) 18,723
------- ---- ---- -------
Total available for sale $26,516 $378 ($38) $26,856
======= ==== ==== =======
</TABLE>
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):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Proceeds $9,316 $7,978 $13,231
------ ------ -------
Gross gains 9 -- 76
Gross losses -- -- 17
------ ------ -------
Net gain on investment transactions $ 9 $ -- $ 59
====== ====== =======
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-23-
<PAGE>
2. Investment And Mortgage-backed Securities (continued)
-----------------------------------------------------
The maturities of securities at September 30, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ------ ---- ------
<S> <C> <C> <C> <C>
Due in one year or less $ -- $ -- $ 138 $ 138
Due after one year through five years -- -- 1,514 1,461
Due after five years through ten years -- -- 1,223 1,168
Due after ten years 5,586 5,338 27,240 24,568
------ ------ ------- -------
Total investment and mortgage-backed
securities $5,586 $5,338 $30,115 $27,335
====== ====== ======= =======
</TABLE>
The mortgage-backed securities held at September 30, 1999 mature between one and
thirty years. The actual lives of those securities may be significantly shorter
as a result of principal payments and prepayments.
At September 30, 1999 and 1998, $12,963,000 and $10,383,000, respectively, of
securities were pledged as collateral for certain deposits.
At September 30, 1999, approximately $1,151,000 of the debt securities and
$577,000 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 ("CMOs") represent securities
issued by agencies of the federal government.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-24-
<PAGE>
3. Loans, Net
Loans receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1999 1998
---- ----
<S> <C> <C>
Conventional real estate loans:
Fixed rate residential
Held for sale $ 216 $ 37,584
Held for investment 56,963 24,075
Fixed rate commercial 3,036 4,053
Adjustable rate residential
Held for sale -- --
Held for investment 47,915 48,531
Adjustable rate commercial 136 140
Construction loans 17,039 12,838
-------- --------
Total real estate loans 125,305 127,221
-------- --------
Other loans:
Consumer and installment loans 16,409 9,797
Commercial loans 7,748 3,539
Consumer lines of credit 8,855 7,404
Loans secured by deposit accounts 1,435 1,551
-------- --------
Total other loans 34,447 22,291
-------- --------
Total loans 159,752 149,512
-------- --------
Less:
Undisbursed portion of interim
construction loans (9,964) (6,625)
Allowance for loan losses (836) (827)
Net deferred loan origination costs 449 142
-------- --------
Total, net $149,401 $142,202
======== ========
Weighted-average interest rate of loans 7.85% 8.01%
</TABLE>
Loans sold and serviced by the Corporation at September 30, 1999 and 1998 were
approximately $257,906,000 and $164,396,000, 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 $548,000 at
September 30, 1999 and $496,000 at September 30, 1998.
Adjustable rate real estate loans (approximately $47,915,000 and $48,531,000 at
September 30, 1999 and 1998, 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 made commercial real estate loans which totaled approximately
$3,172,000 and $4,193,000 at September 30, 1999 and 1998, respectively. These
loans are considered by management to contain a somewhat greater risk of
uncollectibility due to the dependency on income production or future
development and sale of the real estate. These commercial real estate loans are
collateralized by housing for the aged, churches, motels, apartments and other
improved real estate.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-25-
<PAGE>
3. Loans, Net (continued)
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 sheets. 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 of mortgage loans.
Mortgage servicing rights are accounted for in accordance with 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.
Capitalized MSRs 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.
The Bank paid $1,423,000 for mortgage servicing rights for approximately
$108,746,000 of loans in 1999. The amortization of servicing rights and excess
servicing rights included in loan servicing fees amounted to $850,589, $348,764,
and $19,171 in 1999, 1998, and 1997 respectively.
The fair value of mortgage servicing rights at September 30, 1999 is
approximately $3,988,000.
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. Deferred loan
origination fees are included in loans held for investment on the balance sheet.
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, 1999, the Bank had loans outstanding to one
borrower ranging up to $1,293,000 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, 1999 and 1998, loans which are accounted for on a non-accrual
basis or contractually past due ninety days or more totaled approximately
$184,000 and $696,000, 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,
1999, 1998, and 1997, 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
$8,000, $20,000, and $36,000, respectively.
The changes in the allowance for loan losses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 827 $ 928 $ 799
Provision for loan losses 105 -- 243
(Charge-offs) recoveries, net (96) (101) (114)
----- ----- -----
Balance at end of year $ 836 $ 827 $ 928
===== ===== =====
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-26-
<PAGE>
3. Loans, Net (continued)
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):
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Balance at beginning of year $1,919 $ 1,014 $ 712
Loans originated during the year 472 1,908 685
Loan repayments during the year (87) (1,003) (383)
------ ------- ------
Balance at end of year $2,304 $ 1,919 $1,014
====== ======= ======
</TABLE>
4. Office Properties And Equipment
Office properties and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Land $ 660 $ 660
Building and improvements 3,212 2,859
Office furniture, fixtures and equipment 1,912 2,151
------- -------
Total 5,784 5,670
Less accumulated depreciation (1,260) (1,650)
------- -------
Office properties and equipment, net $ 4,524 $ 4,020
======= =======
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-27-
<PAGE>
5. Deposit Accounts
Deposit accounts at September 30, were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ----------------------------------
Rate Balance % Rate Balance %
---- ------- - ---- ------- -
<S> <C> <C> <C> <C> <C> <C>
Account Type
- ------------
NOW accounts:
Commercial noninterest-bearing 0.00% $ 8,146 5.71% 0.00% $ 7,119 5.44%
Noncommercial 0.81% 12,091 8.48% 1.33% 10,925 8.35%
Money market checking accounts 3.31% 7,303 5.12% 3.40% 6,832 5.22%
Regular savings 1.60% 12,695 8.90% 1.97% 11,849 9.06%
-------- ------ -------- ------
Total demand and savings deposits 1.34% 40,235 28.21% 1.60% 36,725 28.08%
-------- ------ -------- ------
Savings certificates:
Up to 3.00% 558 0.39% 29 0.02%
3.01 %- 4.00% -- 0.00% 55 0.04%
4.01 %- 5.00% 53,566 37.56% 19,393 14.83%
5.01 %- 6.00% 41,597 29.17% 68,969 52.74%
6.01 %- 7.00% 5,972 4.19% 4,702 3.60%
-------- ------ -------- ------
Total savings certificates 4.95% 101,693 71.30% 5.51% $ 93,148 71.23%
-------- ------ -------- ------
Sweep accounts 4.00% 696 0.49% 4.00% 895 0.68%
Total deposit accounts 3.92% $142,624 100.00% 4.40% $130,768 100.00%
==== ======== ====== ==== ======== ======
</TABLE>
As of September 30, 1999 and 1998, total deposit accounts include approximately
$1,322,000 and $1,432,000, respectively, of deposits from the Corporation's
officers, directors, employees or parties related to them.
At September 30, 1999 and 1998, deposit accounts with balances of $100,000 and
over totaled approximately $23,022,000 and $18,829,000, respectively.
Savings certificates by maturity were as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
---------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Maturity Date
- -------------
Within 1 year $ 89,343 $74,647
After 1 but within 2 years 6,998 11,408
After 2 but within 3 years 4,232 2,038
Thereafter 1,120 5,055
-------- -------
Total certificate accounts $101,693 $93,148
======== =======
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-28-
<PAGE>
5. Deposit Accounts (continued)
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Account Type
- ------------
NOW accounts and money market deposit accounts $ 411 $ 410 $ 353
Passbook and statement savings accounts 207 253 275
Certificate accounts 5,107 4,912 4,062
Early withdrawal penalties (19) (31) (24)
------ ------ ------
Total $5,706 $5,544 $4,666
====== ====== ======
</TABLE>
6. Advances From The Federal Home Loan Bank And Other Borrowings
At September 30, 1999 and 1998, the Bank had $46,503,000 and $41,441,000,
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):
<TABLE>
<CAPTION>
September 30,
--------------------------------
1999 1998
---- ----
<S> <C> <C>
Contractual Maturity:
Within one year - fixed rate $14,503 $19,441
Within one year - adjustable rate 7,000 16,000
After one but within two years - fixed rate -- 1,000
After one but within two years -
adjustable rate -- 5,000
Greater than three years-adjustable rate $25,000 --
------- -------
Total Advances $46,503 $41,441
======= =======
Weighted average rate 5.41% 5.69%
</TABLE>
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 $112,304,000 and $117,840,000, respectively, at
September 30, 1999 and 1998.
7. Income Taxes
Income tax expense(benefit) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Current ($364) $1,094 $ 755
Deferred 1,309 197 103
------ ------ -----
Total income taxes $ 945 $ 897 $ 858
====== ====== =====
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-29-
<PAGE>
7. Income Taxes (continued)
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):
<TABLE>
<CAPTION>
For the Years Ended September 30,
-------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax at federal income tax rate $ 891 $ 832 $ 783
- ------------------------------
Increase (decrease) resulting from:
State income taxes, net of federal benefit 100 96 91
Interest on municipal bonds (9) (6) (10)
Non-taxable life insurance income 28 -- --
Other, net (9) (25) (6)
----- ----- -----
Total $ 945 $ 897 $ 858
===== ===== =====
</TABLE>
The tax effects of significant items comprising the Corporation's deferred taxes
as of September 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Book reserves in excess of tax basis bad debt reserves
arising after September 30, 1988 $ 207 $ 251
Tax mark to market adjustment on securities -- 129
Book reserves and amortization in excess of tax on
mortgage servicing rights -- 58
SFAS No. 115 mark to market adjustment 1,001 --
Difference between book and tax goodwill basis 76 40
Other 30 24
------ ------
Total deferred tax asset -- 502
------ ------
Deferred tax liabilities:
Difference between book and tax property basis 199 199
Difference between book and tax Federal Home Loan
Bank stock basis 95 95
Deferred loan fees 184 54
Tax mark to market adjustment on securities 1,056 --
SFAS No. 115 mark to market adjustment -- 122
Other -- 8
------ ------
Total deferred tax liability 1,534 478
------ ------
Net deferred tax asset (liability) ($162) $ 24
====== ======
</TABLE>
Net deferred tax liabilities of $162,000 at September 30, 1999, are included in
other liabilities in the balance sheet. Net deferred tax assets of $24,000 at
September 30, 1998, 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, 1999 for the Corporation which
qualifies for deferral of the recapture under the "residential loan
requirement"). 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, 1999, the bad debt reserve subject to recapture, for which
deferred taxes have previously been
________________________________________________________________________________
Union Financial Bancshares, Inc.
-30-
<PAGE>
7. Income Taxes (continued)
provided, totaled approximately $272,000. 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.
8. Employee Benefits
The Corporation has a contributory profit-sharing plan which is available to all
eligible employees. Annual employer 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 $154,000, $182,000, and $91,000 for the years ended September 30, 1999,
1998 and 1997, respectively.
9. 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.
The Corporation had loan commitments as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
---- ----
<S> <C> <C>
Fixed interest rate commitments to extend credit $ 830 $ 2,736
Undisbursed portion of interim construction loans 9,964 6,625
Unused portion of credit lines (principally variable-rate
consumer lines secured by real estate) 7,292 5,767
------- -------
Total $18,086 $15,128
======= =======
</TABLE>
The Corporation has no additional financial instruments with off-balance sheet
risk.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-31-
<PAGE>
9. Financial Instruments (continued)
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 1999, 1998 or 1997.
The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets
- ----------------
Cash and cash equivalents $ 5,570 $ 5,570
Securities available for sale 27,335 27,335
Securities held to maturity 5,586 5,338
FHLB Stock 2,050 2,050
Loans 149,401 146,293
Accrued interest receivable 1,574 1,574
Financial liabilities
- ---------------------
Deposits $142,624 $138,642
Advances from FHLB and other borrowings 46,503 41,814
Off-balance-sheet asset (liabilities)
- -------------------------------------
Commitments to extend credit $ 18,086 $ 18,086
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
----------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets
- ----------------
Cash and cash equivalents $ 3,593 $ 3,593
Securities available for sale 26,856 26,856
Securities held to maturity 2,699 2,744
FHLB Stock 2,023 2,023
Loans 142,202 144,634
Accrued interest receivable 1,197 1,197
Financial liabilities
- ---------------------
Deposits $130,768 $128,850
Advances from FHLB and other borrowings 41,441 41,547
Off-balance-sheet asset (liabilities)
- -------------------------------------
Commitments to extend credit $ 14,896 $ 14,896
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-32-
<PAGE>
10. Supplemental Cash Flow Disclosures
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Income taxes, net of refund $ 1,231 $ 792 $ 873
Interest 7,698 7,213 6,333
Non-cash transactions:
Loans foreclosed 214 -- --
Unrealized gain (loss) on securities available for sale ($3,119) $ 250 $ 255
</TABLE>
11. Commitments And Contingencies
Concentrations of Credit Risk - The Corporation's business activity is
- -----------------------------
principally with customers located in South Carolina. Except for residential
loans in the Corporation's market area, the Corporation has no other significant
concentrations of credit risk.
Litigation - The Corporation is involved in legal actions in the normal course
- ----------
of business. In the opinion of management, based on the advice of its general
counsel, the resolution of these matters will not have a material adverse impact
on future results of operations or the financial position of the Corporation.
Potential Impact of Changes in Interest Rates - The Corporation's profitability
- ---------------------------------------------
depends to a large extent on its net interest income, which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings. Like most financial institutions, the Corporation's
interest income and interest expense are significantly affected by changes in
market interest rates and other economic factors beyond its control. The
Corporation's interest-earning assets consist primarily of long-term, fixed rate
mortgage loans and investments which adjust more slowly to changes in interest
rates than its interest-bearing liabilities which are primarily term deposits
and advances. Accordingly, the Corporation's earnings would be adversely
affected during periods of rising interest rates.
12. 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:
________________________________________________________________________________
Union Financial Bancshares, Inc.
-33-
<PAGE>
12. Stock Option and Ownership Plans (continued)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (in thousands)
As reported $1,676 $1,550 $1,444
Pro forma 1,658 1,532 1,443
Basic net income per common share
As reported 1.26 1.17 1.12
Pro forma 1.25 1.15 1.12
Diluted net income per common share
As reported 1.19 1.10 1.04
Pro forma 1.17 1.09 1.04
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Dividend yield -- 2% 2%
Expected volatility -- 17% 17%
Risk-free interest rate -- 6% 6%
Expected lives -- 10 years 10 years
</TABLE>
A summary of the status of the plan as of September 30, 1999 and 1998, and
changes during the years ending on those dates is presented below (all shares
have been adjusted for the 3:2 stock split in February 1998 and the 5% stock
dividend in February 1999):
<TABLE>
<CAPTION>
Shares Average Option Price Expiration
Grant Date Granted Per Share Date
---------- ------- --------- ----
<S> <C> <C> <C>
October, 1995 134,919 5.79 October, 2005
January, 1996 1,890 5.79 January, 2006
April, 1996 6,300 6.67 April, 2006
March, 1997 3,938 10.00 March, 2007
May, 1998 38,698 15.83 May, 2008
-------
Total Shares Granted 185,745
</TABLE>
As of September 30, 1999, the number of shares exercisable were 79,872. Options
for the three previous fiscal years were exercised as follows (adjusted for
stock splits and dividends):
<TABLE>
<CAPTION>
Average Exercise
For the Years Ended September 30, Shares Exercised Price Per Share
- --------------------------------- ---------------- ---------------
<S> <C> <C>
1999 315 $5.79
1998 9,920 $5.09
1997 25,852 $3.75
</TABLE>
Stock options for 5,827 shares were forfeited during the year ended September
30, 1999. No stock options have been forfeited during the years ended September
30, 1998 and 1997. At September 30, 1999, 15,206 shares were available for
grant.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-34-
<PAGE>
12. Stock Option and Ownership Plans (continued)
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).
During the fiscal year 1998, the Corporation implemented a dividend reinvestment
plan that allows existing shareholders to reinvest their dividends for the
purchase of additional Union Financial Bancshares stock. In addition, the plan
can accept cash contributions up to a maximum of $50,000 annually for the
purchase of Union Financial Bancshares stock. The plan currently offers a 5%
discount on all purchases and does not charge purchase fees.
13. 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 4.0% 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, 1999 and 1998, the Bank had the following actual and required
capital amounts and ratios (in thousands):
________________________________________________________________________________
Union Financial Bancshares, Inc.
-35-
<PAGE>
13. Shareholders' Equity, Dividend Restrictions And Regulatory Matters
(continued)
<TABLE>
<CAPTION>
September 30, 1999
------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Actual Capital $14,563 $14,563 $14,563
Unrealized loss on available for sale securities 1,779 1,779 1,779
Goodwill and other intangible assets (2,694) (2,694) (2,694)
Allowances for loan losses (1) -- -- 835
------- ------- -------
Total Adjusted capital 13,648 13,648 14,483
Minimum Capital Requirement 3,072 8,182 9,427
------- ------- -------
Regulatory Capital Excess $10,576 $ 5,468 $ 5,058
------- ------- -------
Regulatory Capital Ratio 6.66% 6.66% 12.29%
</TABLE>
<TABLE>
<CAPTION>
September 30, 1998
------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Actual Capital $14,945 $14,945 $14,945
Unrealized gain on available for sale securities (148) (148) (148)
Goodwill and other intangible assets (1,873) (1,873) (1,873)
Allowance for loan losses (1) -- -- 994
------- ------- -------
Total Adjusted capital 12,924 12,924 13,918
Minimum Capital Requirement 2,824 7,530 8,454
------- ------- -------
Regulatory Capital Excess $10,100 $ 5,394 $ 5,464
------- ------- -------
Regulatory Capital Ratio 6.86% 6.86% 13.17%
</TABLE>
(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. As of the most recent
regulatory examination, the Bank was in compliance with the regulatory capital
requirements. There are no conditions or events that management believes have
changed the Bank's compliance with the guidelines since that examination.
14. Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued new accounting
standards that will affect accounting, reporting, and disclosure of financial
information by the Corporation. Adoption of these standards is not expected to
have a material impact on financial condition or results of operations. The
following is a summary of the standards and their required implementation date:
________________________________________________________________________________
Union Financial Bancshares, Inc.
-36-
<PAGE>
14. Recently Issued Accounting Standards (continued)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities. All derivatives are to be measured at fair
- ----------------------------------
value and recognized in the balance sheet as assets or liabilities. This
statement's effective date was delayed by the issuance of SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
- ----------------------------------------------------------------------------
Effective Date of SFAS No. 133-an amendment of SFAS No. 133, and is effective
- -----------------------------------------------------------
for fiscal years and quarters beginning after June 15, 2000. The Corporation
does not expect that the adoption of SFAS No. 133 will have a material impact on
the presentation of the Corporation's financial results or financial position.
In February 1999, the FASB issued SFAS No. 135, Rescission of SFAS No. 75 and
-----------------------------
Technical Corrections. This statement provides technical corrections for
- ---------------------
previously issued statements and rescinds SFAS No. 75, which provides guidance
related to pension plans of state and local governmental units. SFAS No. 135 is
effective for fiscal years ending after February 15, 1999. The adoption of SFAS
No. 135 did not have a material impact on the presentation of the Corporation's
financial results or financial position.
In June 1999, the FASB issued SFAS No. 136, Transfers of Assets to a Not-for-
--------------------------------
Profit Organization or Charitable Trust that Raises or Holds Contributions for
- ------------------------------------------------------------------------------
Others. This statement establishes standards for transactions in which an entity
- -------
makes a contribution by transferring assets to a not-for-profit organization or
a charitable trust and then requires these contributions to be used on specified
manner. SFAS 136 is effective for fiscal years beginning after December 15,
1999. The Corporation does not expect that the adoption of SFAS No. 136 will
have a material impact on the presentation of the Corporation's financial
results or financial position.
15. Union Financial Bancshares, Inc. Financial Information (Parent Corporation
Only)
Condensed financial information for Union Financial is presented as follows (in
thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets September 30,
------------------------ -------------
1999 1998
---- ----
<S> <C> <C>
Assets:
Cash and cash equivalents $ 167 $ 350
Investment in subsidiary 14,563 14,922
Other 8 28
------- -------
Total Assets $14,738 $15,300
======= =======
Liabilities and Shareholders' Equity:
Liabilities $ -- $ --
Shareholders' Equity 14,738 15,300
------- -------
Total Liabilities and Shareholders' Equity $14,738 $15,300
======= =======
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-37-
<PAGE>
15. Union Financial Bancshares, Inc. Financial Information (Parent Corporation
Only) (continued)
<TABLE>
<CAPTION>
Condensed Statements of Income For Years Ended September 30,
------------------------------- -------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiary $ 1,744 $ 1,610 $ 1,477
Other expense, net (68) (60) (33)
------- ------- -------
Net income $ 1,676 $ 1,550 $ 1,444
======= ======= =======
Operating Activities:
Condensed Statements of Cash Flows
----------------------------------
Net income $ 1,676 $ 1,550 $ 1,444
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in undistributed earnings of subsidiary (1,744) (1,610) (1,477)
(Increase)Decrease in other assets (4) (2) 14
------- ------- -------
Net cash used in operating activities (72) (62) (19)
------- ------- -------
Financing Activities:
Dividends received from subsidiary 200 -- 500
Dividend reinvestment plan contributions 182 428 --
Dividends paid (494) (467) (433)
Proceeds from the exercise of stock options 1 51 96
------- ------- -------
Net cash provided by (used in) financing activities (111) 12 163
------- ------- -------
Net increase (decrease) in cash and cash equivalents (183) (50) 144
Cash and cash equivalents at beginning of year 350 400 256
------- ------- -------
Cash and cash equivalents at end of year $ 167 $ 350 $ 400
======= ======= =======
</TABLE>
16. Subsequent Event
----------------
On November 12, 1999 Union Financial completed its acquisition of South Carolina
Community Bancshares, Inc. and its wholly owned subsidiary, Community Federal
Savings Bank. Union Financial issued a total of 526,290 shares and paid a total
of $3,582,081 to the shareholders of South Carolina Community Bancshares, Inc.
The transaction was accounted for under the purchase method of accounting. The
two offices of Community Federal Savings Bank became offices of Provident
Community Bank, the wholly owned subsidiary of Union Financial Bancshares. At
September 30, 1999, South Carolina Community Bancshares, Inc. had total assets
of $46.6 million, loans of $40.2 million and deposits of $35.9 million.
________________________________________________________________________________
Union Financial Bancshares, Inc.
-38-
<PAGE>
Board of Directors
Union Financial Bancshares And Subsidiaries
<TABLE>
<S> <C>
Mason G. Alexander Quay W. McMaster
Director, Mid-South Management Company Owner, Winnsboro Plywood
James W. Edwards John S. McMeekin
Dean of Academics, USC-Union President, Winnsboro Furniture Company
William M. Graham Dwight V. Neese
Owner, Graham's Flowers President and Chief Executive Officer
Provident Community Bank
Louis M. Jordan
President, Jordan's Ace Hardware, Inc. David G. Russell
Self-employed accountant
Carl L. Mason
Chairman Philip C. Wilkins, DMD
Retired Dentist
Leadership Group
Provident Community Bank
Gerald L. Bolin Alan W. Pullen
Senior Vice President Senior Vice President
Chief Operating Officer City Executive
Richard H. Flake Michael H. Vanderford
Executive Vice President Senior Vice President
Chief Financial Officer Mortgage Lending Manager
George E. Hall, Jr. Mary E. Weiland
Vice President Investment Services Manager
Retail Banking Manager Provident Financial Services
Suzanne M. Lowery Wanda J. Wells
Vice President Vice President & Corporate Secretary
Mortgage Loan Acquisitions Manager Shareholder Relations Officer
Dwight V. Neese Gerald B. Wyatt
President Vice President
Chief Executive Officer Consumer/Commercial Lending Manager
</TABLE>
________________________________________________________________________________
Union Financial Bancshares, Inc.
-39-
<PAGE>
Corporate Information
Common Stock Information
- ------------------------
Union Financial Bancshares, Inc.'s common stock began trading on the Nasdaq
National Market under the symbol UFBS on November 15, 1999. From July 10, 1998
until November 15, 1999, Union Financial's common stock was quoted on the Nasdaq
SmallCap Market under the same trading symbol. As of September 30, 1999, there
were 534 shareholders of record and 1,357,214 shares of common stock issued and
outstanding. The following table contains the range of high and low bid
information of Union Financial's common stock as reported by the Nasdaq Stock
Market since Union Financial was first listed and per share dividend as declared
during each quarter of the last two fiscal years. Share prices and dividends
have been adjusted to reflect all stock splits and stock dividends. 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
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <C> <C> <C>
Fiscal 1999
Fourth Quarter $12.38 $10.50 $.093
Third Quarter $14.00 $10.00 $.093
Second Quarter $14.50 $12.00 $.093
First Quarter $14.29 $12.86 $.093
</TABLE>
<TABLE>
<CAPTION>
High Low Dividend
---- --- --------
<S> <S> <C> <C>
Fiscal 1998
Fourth Quarter $16.67 $13.33 $.093
Third Quarter N/A N/A $.093
Second Quarter N/A N/A $.093
First Quarter N/A N/A $.090
</TABLE>
Dividend Reinvestment and Stock Purchase Plan
- ---------------------------------------------
The Corporation has 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 19, 2000 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.
Corporate Offices
- -----------------
203 West Main Street
Union, South Carolina 29379
(888) 427-9002
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
(864) 242-3370
Special Counsel
- ---------------
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
General Counsel
- ---------------
Whitney, White and Diamaduros
203 West South Street
Union, South Carolina 29379
(864) 427-5661
________________________________________________________________________________
Union Financial Bancshares, Inc.
-40-
<PAGE>
Stock Information
- -----------------
I J L Wachovia
Interstate Tower
P. O. Box 1012
Charlotte, NC 28201-10123
(800) 929-1003
Trident Securities, Inc.
4601 Six Forks Road
Raleigh, NC 27609
(800) 222-2618
Wheat First Union
P. O. Box 10586
Greenville, SC 29603
(800) 695-5104
Shareholder Relations Officer
- ------------------------------
Wanda J. Wells
Union Financial Bancshares, Inc.
203 West Main Street
Union, SC 29379
(864) 429-1861
________________________________________________________________________________
Union Financial Bancshares, Inc.
-41-
<PAGE>
EXHIBIT NO. 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Percentage Jurisdiction or State
Subsidiaries Owned of Incorporation
------ ----------------
<S> <C> <C>
Provident Community Bank 100% United States
Provident Financial Services, Inc. (1) 100% South Carolina
</TABLE>
____________
(1) A wholly-owned subsidiary of Provident Community Bank.
<PAGE>
EXHIBIT 23
[ELLIOTT, DAVIS & COMPANY, L.L.P. APPEARS HERE]
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. and in the Registration on
Form S-3 (No. 333-35319) pertaining to the Dividend and Stock Purchase Plan of
Union Financial Bancshares, Inc. of our report dated October 29, 1999, 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, 1999.
/s/ Elliott, Davis & Company, L.L.P.
December 20, 1999
Greenville, South Carolina
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains financial information extracted from the consolidated
financial statements of Union Financial Bancshares, Inc. for the year ended
September 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 3,149
<INT-BEARING-DEPOSITS> 2,421
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,335
<INVESTMENTS-CARRYING> 5,586
<INVESTMENTS-MARKET> 5,338
<LOANS> 149,401
<ALLOWANCE> 836
<TOTAL-ASSETS> 205,294
<DEPOSITS> 142,624
<SHORT-TERM> 21,503
<LIABILITIES-OTHER> 1,207
<LONG-TERM> 25,000
0
0
<COMMON> 13
<OTHER-SE> 14,725
<TOTAL-LIABILITIES-AND-EQUITY> 205,294
<INTEREST-LOAN> 11,420
<INTEREST-INVEST> 2,543
<INTEREST-OTHER> 83
<INTEREST-TOTAL> 14,046
<INTEREST-DEPOSIT> 5,706
<INTEREST-EXPENSE> 7,698
<INTEREST-INCOME-NET> 6,348
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 9
<EXPENSE-OTHER> 4,814
<INCOME-PRETAX> 2,621
<INCOME-PRE-EXTRAORDINARY> 2,621
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,676
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 3.46
<LOANS-NON> 184
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 697
<ALLOWANCE-OPEN> 827
<CHARGE-OFFS> 106
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 836
<ALLOWANCE-DOMESTIC> 836
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
