<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ---
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
-----------------
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
COMMISSION FILE NUMBER 1-5735
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
Delaware 57-1001177
- --------------------------------------------------------------------------------
(Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
203 West Main Street, Union, South Carolina 29379
- ------------------------------------------- ------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (864)429-1864
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: The Corporation had issued and
outstanding 1,281,400 shares, $0.01 par value, common stock as of December 31,
1998.
<PAGE> 2
UNION FINANCIAL BANCSHARES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of December 31, 1998
and September 30, 1998 3
Consolidated Statements of Income for the three months
ended December 31, 1998 and 1997 4
Consolidated Statements of Cash Flows for the three
months ended December 31, 1998 and 1997 5
Consolidated Statements of Shareholders' Equity for the
three months ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION 14-15
-----------------
Signatures 16
<PAGE> 3
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 (UNAUDITED) AND SEPTEMBER 30, 1998
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1998
------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash $ 1,483 $ 2,469
Short term interest-bearing deposits 3,248 1,124
------------------- -----------------
Total cash and cash equivalents 4,731 3,593
------------------- -----------------
Investment and mortgage-backed securities:
Held to maturity 2,534 2,699
Available for sale 33,099 26,856
------------------- -----------------
Total investment and mortgage-backed securities 35,633 29,555
Loans , net
Held for sale 34,511 37,584
Held for investment 100,148 104,618
------------------- -----------------
Total loans receivable, net 134,659 142,202
Office properties and equipment, net 4,101 4,020
Federal Home Loan Bank Stock, at cost 2,053 2,023
Accrued interest receivable 1,246 1,197
Mortgage servicing rights 3,955 3,270
Other assets 3,025 3,426
------------------- -----------------
TOTAL ASSETS $ 189,403 $ 189,286
=================== =================
LIABILITIES
Deposit accounts $ 134,028 $ 129,873
Securities sold under repurchase agreements 2,788 895
Advances from the Federal Home Loan Bank and other borrowings 36,546 41,441
Accrued interest on deposits 292 336
Advances from borrowers for taxes and insurance 148 496
Other liabilities 238 945
------------------- -----------------
TOTAL LIABILITIES 174,040 173,986
------------------- -----------------
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value,
authorized - 500,000 shares, issued
and outstanding - None 0 0
Common stock - $0.01 par value,
authorized - 2,500,000 shares,
issued and outstanding - 1,281,400 shares at 12/31/98 and 1,278,250 at 9/30/98 13 13
Additional paid-in capital 4,408 4,471
Accumulated other comprehensive income (79) 148
Retained earnings, substantially restricted 11,021 10,668
------------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 15,363 15,300
------------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 189,403 $ 189,286
=================== =================
See notes to consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED) AND 1997 (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
INTEREST INCOME:
Loans $ 2,938 $ 2,892
Deposits and federal funds sold 19 27
Mortgage-backed securities 356 122
Interest and dividends on
investment securities 208 227
------------------- --------------------
TOTAL INTEREST INCOME 3,521 3,268
------------------- --------------------
INTEREST EXPENSE:
Deposit accounts 1,414 1,304
Advances from the FHLB and other borrowings 560 507
------------------- --------------------
TOTAL INTEREST EXPENSE 1,974 1,811
------------------- --------------------
NET INTEREST INCOME 1,547 1,457
Provision for loan losses 15 45
------------------- --------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,532 1,412
------------------- --------------------
NON INTEREST INCOME:
Fees for financial services 196 189
Loan servicing fees (costs) (86) 6
Net gains (losses) on sale of loans 143 75
Net gains on sale of investments 0 0
------------------- --------------------
TOTAL NON INTEREST INCOME 253 270
------------------- --------------------
NON INTEREST EXPENSE:
Compensation and employee benefits 582 555
Occupancy and equipment 283 224
Deposit insurance premiums 25 16
Professional services 75 89
Real estate operations 5 3
Other 239 222
------------------- --------------------
TOTAL NON INTEREST EXPENSE 1,209 1,109
------------------- --------------------
INCOME BEFORE INCOME TAXES 576 573
Income tax expense 208 213
------------------- --------------------
NET INCOME $ 368 $ 360
=================== ====================
BASIC NET INCOME PER COMMON SHARE $ 0.29 $ 0.29
=================== ====================
DILUTED NET INCOME PER COMMON SHARE $ 0.27 $ 0.27
=================== ====================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 1,280,347 1,249,060
DILUTED 1,369,323 1,338,036
See notes to consolidated financial statements.
</TABLE>
50
<PAGE> 5
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED DECEMBER 31, 1998 (UNAUDITED ) AND 1997 (UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1998
---------------- ---------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $368 $360
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 15 45
Amortization of intangibles 53 53
Depreciation of deferred income, net of costs 79 55
Recognition of deferred income, net of costs (25) (8)
Deferral of fee income, net of costs 4 98
Loans originated for sale 40,119 23,094
Sale of loans (40,119) (23,094)
(Gain) loss on sale of loans 143 75
Changes in operaing assets and liabilities:
Decrease (increase) in accrued interest receivable (49) 231
Decrease (increase) in other assets (401) (260)
Increase (decrease) in other liabilities (1,055) (177)
Increase (decrease) in accrued interest payable (44) (41)
-------------------- -------------------
(912) 431
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (11,022) (1,148)
Proceeds from sale of investment and mortgage-
backed securities 2,090 0
Proceeds from maturity of investment and mortgage-
backed securiites:
Available for sale 1,374 6,724
Principal repayments on morgage-backed securities:
Held to maturity 165 40
Available for sale 1,315 389
Loan originations (7,385) (19,707)
Principal repayments of loans 15,309 8,300
Proceeds from sale of real estate acquired in settlement of loans 4 0
Purchase of mortage servicing rights (685) 0
Purchase of FHLB stock (30) 0
Redemption of FHLB stock 0 255
Purchase of office properties and equipment (161) (171)
-------------------- -------------------
Net cash provided by (used by) investing activities $974 ($5,318)
-------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan 19 151
Dividends paid in cash ($0.093 per share - 1998
and $0.082 per share - 1997) (96) (102)
Proceeds from FHLB advances and other borrowings 0 26,100
Repayment of FHLB advances and other borrowings (4,895) (24,106)
Increase (Decrease) in securities sold under repurchase agreements 1,893 688
Increase (Decrease) in deposit accounts 4,155 (2,015)
-------------------- -------------------
Net cash (used by) provided by financing activities 1,076 716
-------------------- -------------------
NET DECREASE \ INCREASE IN CASH
AND CASH EQUIVALENTS 1,138 (4,171)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,593 7,821
-------------------- -------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $4,731 $3,650
==================== ===================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $443 $437
Interest 1,974 1,811
Non-cash transactions:
Loans foreclosed 0 0
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
UNION FINANCIAL BANSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT SEPTEMER 30, 1997 1,241,550 12 3,989 9,589 (63) 13,527
Net income 359 359
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising during
period 5
-
Other comprehensive income 5 5
-
Comprehensive income 364
Dividend reinvestment plan contributions 11,237 0 151 151
-
Cash dividend ($.09 per share) (99) (99)
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 1,252,787 12 4,140 9,849 (58) 13,943
=============================================================================
BALANCE AT SEPTEMBER 30, 1997 1,278,250 13 4,475 10,664 148 15,300
Net income 368 368
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising during
period (227)
---
Other comprehensive income (227) (227)
---
Comprehensive income 141
Dividend reinvestment plan contributions 3,150 0 18 18
-
Cash dividend ($.093 per share) (96) (96)
-----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 1,281,400 13 4,493 10,936 (79) 15,363
=============================================================================
6
</TABLE>
<PAGE> 7
UNION FINANCIAL BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Presentation of Consolidated Financial Statements
-------------------------------------------------
The accompanying unaudited consolidated financial statements of Union
Financial Bancshares, Inc. (the "Corporation") were prepared in accordance
with instructions for Form 10-QSB and, therefore, do not include all
disclosures necessary for a complete presentation of consolidated
financial condition, results of operations, and cash flows in conformity
with generally accepted accounting principles. However, all adjustments
which are, in the opinion of management, necessary for the fair
presentation of the interim consolidated financial statements have been
included. All such adjustments are of a normal and recurring nature. The
consolidated financial statements include the Corporation's wholly owned
subsidiary, Provident Community Bank (the "Bank"). The results of
operations for the three months ended December 31, 1998 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. The consolidated balance sheet as of September 30, 1998 has
been derived from the Company's audited financial statements presented in
the annual report to shareholders. Certain amounts in the prior year's
financial statements have been reclassified to conform with current year
classifications.
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1), which
provided guidance as to when it is or is not appropriate to capitalize the
cost of software developed or obtained for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after
December 15, 1998 with early adoption encouraged. The Corporation does not
anticipate the adoption of SOP 98-1 will have a material effect on its
financial statements.
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
----------------------------------------------------------
Information- This statement establishes standards for the way public
-----------
enterprises are to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued
to shareholders. Statement 131 is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of
application, interim disclosures will not be needed. The Company will
adopt this standard in its September 30, 1999 financial statements.
7
<PAGE> 8
SFAS No. 132, Employers' Disclosures about Pensions and other
--------------------------------------------------------
Post-Retirement Benefits- This statement deals principally with employers'
------------------------
disclosures about defined benefit plans and other post-retirement benefit
plans. This statement is effective for the Bank for the fiscal year
beginning October 1, 1998. The adoption of SFAS 132 will not have a impact
on the financial statements of the Corporation due to the disclosure
requirements only.
SFAS No. 133, Accounting for Derivative Instruments and Hedging
--------------------------------------------------------
Activities-This statement establishes accounting and reporting standards
----------
for derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use
of the derivative. The statement is effective for the Bank for the fiscal
year beginning October 1, 1999 and may not be applied retroactively.
SFAS No. 134, Accounting for Mortgage-Backed Securities Retained after the
------------------------------------------------------------
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
--------------------------------------------------------------------------
Enterprise-This statement is effective for the first quarter beginning
----------
after December 15, 1998. This statement conforms the subsequent accounting
for securities retained after the securitization of mortgage loans by a
mortgage banking enterprise with the subsequent accounting for securities
retained after the securitization of other types of assets by a non
mortgage banking enterprise. The adoption of this standard is not expected
to have a material effect on the Bank's financial statements.
2. Income Per Share
----------------
Effective January 29, 1998, the Corporation declared a three-for-two stock
split in the form of a 50% stock dividend of the Corporation's common
stock. The weighted average number of shares and all other share data have
been restated for all periods presented to reflect this stock split.
Income per share amounts for the three months ended December 31, 1998 and
1997 were computed based on the weighted average number of common shares
outstanding adjusted for the dilutive effect of outstanding common stock
options during the periods.
3. Assets Pledged
--------------
Approximately $10,686,000 and $10,383,000 of debt securities at December
31, 1998 and September 30, 1998, respectively, were pledged by the Bank as
collateral to secure deposits of the State of South Carolina, Laurens
County and certain other liabilities. The Bank pledges as collateral to
Federal Home Loan Bank advances the Bank's Federal Home Loan Bank stock
and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances,
qualifying mortgages (as defined) with unpaid principal balances equal to,
when discounted at 75% of the unpaid principal balances, 100% of total
advances.
8
<PAGE> 9
4. Contingencies and Loan Commitments
----------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These instruments expose the Bank to credit risk in excess of
the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. Total credit
exposure at December 31, 1998 related to these items is summarized below:
<TABLE>
<CAPTION>
Loan Commitments: Contract Amount
---------------- ---------------
<S> <C>
Approved loan commitments $ 757,000
Unadvanced portions of loans 6,007,000
------------
Total loan commitments $ 6,764,000
------------
</TABLE>
Loan commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Loan commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained upon extension of credit is based on management's
credit evaluation of the counter party. Collateral held is primarily
residential property. Interest rates on loan commitments are a combination
of fixed and variable.
Commitments outstanding at December 31, 1998 consist of fixed and
adjustable rate loans of approximately $6,764,000 at rates ranging from 7%
to 9%. Commitments to originate loans generally expire within 30 to 60
days.
Commitments to fund credit lines (principally variable rate, consumer
lines secured by real estate and overdraft protection) totaled
approximately $14,361,000. Of these lines, the outstanding loan balances
totaled approximately $8,354,000. The Bank also has commitments to fund
warehouse lines of credit for various mortgage banking companies totaling
$750,000, which had an outstanding balance at December 31, 1998 of
approximately $192,000. At December 31, 1998, the Bank had loan
commitments to sell $34,000,000 in fixed rate residential loans which had
not been closed to Freddie Mac for the months of January-March, 1999.
On October 5, 1998, the Corporation, through its subsidiary, Provident
Community Bank, entered into a definitive agreement with CCB Financial's
wholly-owned subsidiary, American Federal Bank, FSB to purchase the
deposits of American Federal's Union, South Carolina banking center. At
September 30, 1998, this branch had $14,756,000 in deposits. This
transaction is expected to close in February, 1999.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
-------------------
At December 31, 1998 total assets of the Corporation increased $117,000 or
.06% to $189,403,000 from $189,286,000 at September 30, 1998. Investments
and mortgage-backed securities increased approximately $6,078,000 or
20.57% during the three months ended December 31, 1998. The increase was
due primarily to increased loan prepayments of fixed-rate loans that
resulted in a $7,543,000 reduction in loans. This decrease in loans
receivable funded the increase in investments and mortgage-backed
securities. Deposits increased $4,155,000 or 3.20% to $134,028,000 for the
three months ended December 31, 1998. The increase was a result of
additions in certificate deposit balances due to the Bank adopting a focus
product concept whereby speciality products are advertised on a frequent
basis. These funds were used to repay borrowings which decreased
$4,895,000 or 3.98% from $41,441,000 at September 30, 1998 to $36,546,000
at December 31, 1998. At December 31, 1998, mortgage servicing rights
increased $685,000 or 20.95% to $3,955,000 from $3,270,000 at September
30, 1998. In conjunction with this increase, loans serviced for others
increased from $164,396,000 at September 30, 1998 to $202,305,000 at
December 31, 1998.
Liquidity
---------
Liquidity is the ability to meet demand for loan disbursements, deposit
withdrawals, repayment of debt, payment of interest on deposits and other
operating expenses. The primary sources of liquidity are savings deposits,
loan repayments, borrowings and interest payments.
The OTS imposes a minimum level of liquidity on the Bank which is
currently 4% of withdrawable deposits plus short-term borrowings. The
liquidity level of the Bank as measured for regulatory purposes was 17.78%
as of December 31, 1998. As in the past, management expects that the Bank
can meet its obligations to fund outstanding mortgage loan commitments,
which were approximately $757,000, as described in Note 4 to the
Consolidated Financial Statements, and other loan commitments as of
December 31, 1998, while maintaining liquidity in excess of regulatory
requirements.
Capital Resources
-----------------
The capital requirement of the Bank consists of three components: (1)
tangible capital, (2) core capital and (3) risk based capital. Tangible
capital must equal or exceed 1.5% of adjusted total assets. Core capital
must be a minimum of 4% of adjusted total assets and risk based capital
must be a minimum of 8% of risk weighted assets.
10
<PAGE> 11
As of December 31, 1998, the Bank's capital position, as calculated under
regulatory guidelines, exceeds these minimum requirements as follows
(dollars in thousands):
<TABLE>
<CAPTION>
REQUIREMENT ACTUAL EXCESS
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Tangible capital $2,818 $13,361 $10,543
Tangible capital to adjusted total assets 1.50% 7.11% 5.61%
Core capital $7,516 $13,361 $5,845
Core capital to adjusted total assets 4.00% 7.1% 3.11%
Risk based capital $8,342 $14,187 $5,845
Risk based capital to risk weighted assets 8.00% 13.61% 5.61%
</TABLE>
The reported capital requirements are based on information reported in the
OTS December 31, 1998 quarterly thrift financial report.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
1997
General
-------
Net income increased $8,000 or 2.22% to $368,000 for the three months
ended December 31, 1998 as compared to the same period in 1997. Non
interest income decreased $17,000 or 6.30% and net interest income after
provision for loan losses increased $120,000 or 8.50%.
Interest Income
---------------
Interest income increased $253,000 or 7.74% for the three months ended
December 31, 1998 as compared to the same period in 1997. Interest income
on loans increased 1.59% or $46,000 to $2,938,000 for the three months
ended December 31, 1998 from $2,892,000 for the three months ended
December 31, 1997. Interest income on overnight deposits and federal funds
sold had a net decrease of $8,000 for the three months ended December 31,
1998 as compared to the same period in the prior year due primarily to
lower balances. Interest and dividends on investment and mortgage-backed
securities increased $215,000 or 61.60% for the three months ended
December 31, 1998 to $564,000 from $349,000 during the same period in
1997. The increase was due primarily to an increase in the level of
purchases in investment and mortgage-backed securities made during the
first quarter of the fiscal year.
Interest Expense
----------------
The Corporation experienced an overall increase of $163,000 or 9.00% in
interest expense for the three months ended December 31, 1998 as compared
to the three months ended December 31, 1997 due primarily to the growth in
the deposit base. Interest expense on
11
<PAGE> 12
deposit accounts increased $110,000 or 8.44% to $1,414,000 for the three
months ended December 31, 1998 from $1,304,000 during the same period in
1997. Interest expense on borrowings increased $53,000 or 10.45% for the
three months ended December 31, 1998 as compared to the three months ended
December 31, 1997. The increase was due to higher volumes in FHLB advances
during the period which were required to fund higher loan originations.
Provision for Loan Loss
-----------------------
During the three months ended December 31, 1998, provisions for loan
losses were $15,000 as compared to $45,000 for the same period in the
previous year. The decrease in loan loss provisions are due to the low
volume of loan charge offs along with low level of delinquent loans to
total loans. Management believes the Bank's loan loss allowances are
adequate to absorb estimated future loan losses. The Bank's loan loss
allowances at December 31, 1998 were approximately .82% of the Bank's
outstanding loan portfolio, net of loans held for sale compared to .84%
for the same period in the previous year.
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate:
Residential $ 592 $ 581
Commercial -- --
Construction -- --
Non-mortgage 165 115
--- -----
Total $ 757 $ 696
===== =====
Percentage of loans receivable, net 0.56% 0.49%
----- =====
Allowance for loan losses $826 $827
==== ====
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $79 $ 10
=== ====
</TABLE>
12
<PAGE> 13
Non Interest Income and Expense
-------------------------------
Total non interest income decreased $17,000 or 6.30% to $253,000 for the
three months ended December 31, 1998 from $270,000 for the same period in
the previous year. The reduction in non-interest income from the previous
year was due to increased amortization expense as part of the servicing
income as a result of increased prepayments on loans serviced for others.
Gross service fee income for the current year was $152,000 compared to the
previous year income of $61,000. The increased income was offset by higher
premium amortization on purchased loans of $198,000 in the current year
compared to $34,000 in the previous year. The current year also included
$32,000 in servicing portfolio provision for mark to market valuation.
Gains on sale of loans was $143,000 for the three months ended December
31, 1998 as compared to a gain on sale of loans of $75,000 for the three
months ended December 31, 1997.
For the three months ended December 31, 1998, total non-interest expense
increased $73,000 or 6.58% to $1,209,000 from $1,109,000 for the same
period in 1997. Compensation and employee benefits increased $27,000 or
4.86% to $582,000 for the three months period ended December 31, 1998 from
$555,000 for the same period in 1997. Occupancy and equipment expense
increased $59,000 or 26.34% to $283,000 for the three months ended
December 31, 1998 from $224,000 for the same period in 1997. Professional
services expenses decreased $14,000 or 15.73% to $75,000 for the three
month period ended December 31, 1998 from $896,000 for the same period in
1997. The increase in compensation and employee benefits was due primarily
to cost of living increases along with additional staffing for the growth
in the mortgage operation. The increase in occupancy and equipment
expenses was due to higher data processing costs along with higher
depreciation expense. Deposit insurance premiums for the three months
ended December 31, 1998 increased $9,000 to $25,000 from $16,000 for the
same period in 19997 due to an increase in the deposit base.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
-----------------
The Corporation is involved in various claims and legal
actions arising in the normal course of business. Management
believes that these proceedings will not result in a material
loss to the Corporation.
ITEM 2. Changes in Securities
---------------------
Not applicable.
ITEM 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
YEAR 2000
- ---------
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. To date,
14
<PAGE> 15
no critical problems are anticipated. 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 will continue discussing the Year 2000 compliance
activities with commercial borrowers and will not lend to borrowers who have not
addressed Year 2000 procedures. 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. The
Bank began completed its initial testing phase of the BISYS system for Year 2000
compliance. During the testing phase, no significant problems were found. The
Bank will continue testing the BISYS system during their next testing phase to
ensure overall compliance for Year 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, whose amount cannot be reasonably
estimated at this time.
ITEM 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibits
--------
27 Financial Data Schedule
15
<PAGE> 16
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION FINANCIAL BANCSHARES, INC.
--------------------------------
(REGISTRANT)
Date: 2/5/99 By: /s/ Dwight V. Neese, CEO
---------------
----------------------------
Dwight V. Neese, CEO
Date: 2/5/99 By: /s/ Richard H. Flake, CFO
---------------- ----------------------------
Richard H. Flake, CFO
16
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL
STATEMENTS OF UNION FINANCIAL BANCSHARES, INC. FOR THE YEAR TO DATE PERIOD ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000926164
<NAME> Union Financial Bancshares Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1,483
<INT-BEARING-DEPOSITS> 3,248
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 33,099
<INVESTMENTS-CARRYING> 2,534
<INVESTMENTS-MARKET> 2,564
<LOANS> 134,659
<ALLOWANCE> 826
<TOTAL-ASSETS> 189,403
<DEPOSITS> 134,028
<SHORT-TERM> 31,546
<LIABILITIES-OTHER> 238
<LONG-TERM> 5,000
0
0
<COMMON> 13
<OTHER-SE> 15,363
<TOTAL-LIABILITIES-AND-EQUITY> 189,403
<INTEREST-LOAN> 2,938
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<INTEREST-TOTAL> 3,521
<INTEREST-DEPOSIT> 1,414
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<INTEREST-INCOME-NET> 1,547
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<EXPENSE-OTHER> 1,209
<INCOME-PRETAX> 576
<INCOME-PRE-EXTRAORDINARY> 368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 368
<EPS-PRIMARY> 0.29
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<YIELD-ACTUAL> 7.98
<LOANS-NON> 757
<LOANS-PAST> 0
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<LOANS-PROBLEM> 770
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</TABLE>
