<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 March 31, 1999
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 1,349,153 shares, $0.01 par value, common stock as of March 31,
1999.
<PAGE> 2
UNION FINANCIAL BANCSHARES, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of March 31, 1999
and September 30, 1998 3
Consolidated Statements of Income for the three and six months
ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows for the six
months ended March 31, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity for the
six months ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-13
PART II. OTHER INFORMATION 14-16
-----------------
Signatures 18
<PAGE> 3
<TABLE>
<CAPTION>
Item 1. Financial Statements
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
March 31, 1999 (unaudited) and September 30, 1998
MARCH 31, SEPTEMBER 30,
ASSETS 1999 1998
------------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash $ 1,988 $ 2,469
Short term interest-bearing deposits 3,704 1,124
-------------- -------------
Total cash and cash equivalents 5,692 3,593
-------------- -------------
Investment and mortgage-backed securities:
Held to maturity 2,410 2,699
Available for sale 36,598 26,856
-------------- -------------
Total investment and mortgage-backed securities 39,008 29,555
Loans , net
Held for sale 9,074 37,584
Held for investment 122,665 104,618
-------------- -------------
Total loans receivable, net 131,739 142,202
Office properties and equipment, net 4,280 4,020
Federal Home Loan Bank Stock, at cost 1,733 2,023
Accrued interest receivable 1,332 1,197
Mortgage servicing rights 4,103 3,270
Other assets 4,335 3,426
-------------- -------------
TOTAL ASSETS $ 192,222 $ 189,286
============== =============
LIABILITIES
Deposit accounts $ 146,325 $ 129,873
Securities sold under repurchase agreements 5,559 895
Advances from the Federal Home Loan Bank and other borrowings 24,569 41,441
Accrued interest on deposits 256 336
Advances from borrowers for taxes and insurance 130 496
Other liabilities 14 945
-------------- -------------
TOTAL LIABILITIES 176,853 173,986
-------------- -------------
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 - 1,349,153 shares at 3/31/99 and 1,278,250
at 9/30/98 13 13
Additional paid-in capital 4,440 4,471
Accumulated other comprehensive income (411) 148
Retained earnings, substantially restricted 11,327 10,668
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 15,369 15,300
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 192,222 $ 189,286
============== =============
See notes to consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS AND SIX MONTHS ENDED MARCH 31, 1999 (UNAUDITED) AND 1998 (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 2,631 $ 2,908 $ 5,569 $ 5,800
Deposits and federal funds sold 31 33 50 60
Mortgage-backed securities 391 133 747 255
Interest and dividends on
investment securities 226 208 434 435
---------------- ---------------- ---------------- ----------------
TOTAL INTEREST INCOME 3,279 3,282 6,800 6,550
---------------- ---------------- ---------------- ----------------
INTEREST EXPENSE:
Deposit accounts 1,454 1,352 2,868 2,656
Advances from the FHLB and other borrowings 407 499 968 1,006
---------------- ---------------- ---------------- ----------------
TOTAL INTEREST EXPENSE 1,861 1,851 3,836 3,662
---------------- ---------------- ---------------- ----------------
NET INTEREST INCOME 1,418 1,431 2,964 2,888
Provision for loan losses 30 19 45 64
---------------- ---------------- ---------------- ----------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,388 1,412 2,919 2,824
---------------- ---------------- ---------------- ----------------
NON INTEREST INCOME:
Fees for financial services 206 187 388 376
Loan servicing fees (costs) (3) (14) (75) (8)
Net gains on sale of loans 231 99 374 174
Net gains on sale of investments 7 0 7 0
---------------- ---------------- ---------------- ----------------
TOTAL NON INTEREST INCOME 441 272 694 542
---------------- ---------------- ---------------- ----------------
NON INTEREST EXPENSE:
Compensation and employee benefits 600 563 1,182 1,118
Occupancy and equipment 252 235 535 459
Deposit insurance premiums 17 16 42 32
Professional services 62 65 137 154
Real estate operations (3) 2 2 5
Other 264 178 503 400
---------------- ---------------- ---------------- ----------------
TOTAL NON INTEREST EXPENSE 1,192 1,059 2,401 2,168
---------------- ---------------- ---------------- ----------------
INCOME BEFORE INCOME TAXES 637 625 1,212 1,198
Income tax expense 232 229 439 442
---------------- ---------------- ---------------- ----------------
NET INCOME $ 405 $ 396 $ 773 $ 756
================ ================ ================ ================
BASIC NET INCOME PER COMMON SHARE $ 0.31 $ 0.31 0.59 $ 0.60
================ ================ ================ ================
DILUTED NET INCOME PER COMMON SHARE $ 0.29 $ 0.29 0.56 $ 0.56
================ ================ ================ ================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC 1,325,594 1,258,672 1,302,722 1,253,813
DILUTED 1,411,013 1,344,091 1,389,939 1,344,053
See notes to consolidated financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1999 (unaudited) and 1998 (unaudited)
Six Months Ended
March 31, March 31,
1999 1998
-------------------- -------------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $773 $756
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 45 65
Amortization of intangibles 115 106
Depreciation expense 163 91
Recognition of deferred income, net of costs (55) (8)
Deferral of fee income, net of costs 18 179
Loans originated for sale (81,611) (62,782)
Sale of loans 86,529 62,782
(Gain) loss on sale of loans (381) (174)
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable (135) 144
Decrease (increase) in other assets 164 (647)
Decrease (increase) in Deposit Premium Intangible (1,073) 0
Increase (decrease) in other liabilities (1,297) (246)
Increase (decrease) in accrued interest payable (80) (17)
-------------------- -------------------
Net cash provided by (used by) operating activities 3,175 249
-------------------- -------------------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (18,930) (4,728)
Proceeds from sale of investment and mortgage-
backed securities 2,090 0
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale 4,657 6,724
Principal repayments on mortgage-backed securities:
Held to maturity 165 40
Available for sale 2,565 783
Loan originations (20,056) (37,707)
Principal repayments of loans 25,296 18,947
Proceeds from sale of real estate acquired in settlement of loans 4 22
Purchase of mortgage servicing rights (833) (1,335)
Purchase of FHLB stock 0 (3)
Redemption of FHLB stock 290 0
Purchase of office properties and equipment (423) (275)
-------------------- -------------------
Net cash provided by (used by) investing activities ($5,175) ($17,532)
-------------------- -------------------
FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 0 39
Proceeds from the dividend reinvestment plan 97 169
Dividends paid in cash ($0.093 per share - 1999
and $0.093 per share - 1998) (242) (198)
Proceeds from FHLB advances and other borrowings 0 59,100
Repayment of FHLB advances and other borrowings (16,872) (54,937)
Increase (Decrease) in securities sold under repurchase agreements 4,664 802
Acquired deposits from purchased branch 12,622 0
Increase (Decrease) in deposit accounts 3,830 9,385
-------------------- -------------------
Net cash (used by) provided by financing activities 4,099 14,360
-------------------- -------------------
NET DECREASE \ INCREASE IN CASH
AND CASH EQUIVALENTS 2,099 (2,923)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 3,593 7,821
-------------------- -------------------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $5,692 $4,898
==================== ===================
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $803 $240
Interest 3,916 2,673
Non-cash transactions:
Loans foreclosed 0 0
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
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, 1997 1,241,550 $12 $3,989 $ 9,589 ($63) $13,527
Net income 756 756
Other comprehensive income
Unrealized gains on securities:
Unrealized holding gains arising
during period (50)
--
Other comprehensive income (50) (50)
--
Comprehensive income 706
Options exercised 6,120 27 27
Dividend reinvestment plan contributions 17,977 0 231 231
Cash dividend ($.09 per share) (198) (198)
-------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 1,265,647 12 4,247 10,147 (113) 14,293
===========================================================================================
BALANCE AT SEPTEMBER 30, 1998 1,278,250 13 4,475 10,664 148 5,300
Net income 773 773
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising
during period (559)
---
Other comprehensive income (559) (559)
---
Comprehensive income 214
Dividend reinvestment plan contributions 6,813 0 97 97
Five percent stock dividend 64,090
Cash dividend ($.093 per share) (242) (242)
-------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1999 1,349,153 $13 $4,572 $11,195 ($411) $15,369
===========================================================================================
</TABLE>
6
<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 six months ended March 31, 1999 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.
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
7
<PAGE> 8
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.
Effective January 31, 1999, the Corporation declared a stock dividend of
5% per share on common stock. The weighted average number of shares for
the current period reflect this dividend.
Income per share amounts for the three and months ended March 31, 1999 and
1998 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 $13,532,000 and $10,383,000 of debt securities at March 31,
1999 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 March 31, 1999 related to these items is summarized below:
<TABLE>
<CAPTION>
Loan Commitments: Contract Amount
---------------- ---------------
<S> <C>
Approved loan commitments $ 1,346,000
Unadvanced portions of loans 6,104,000
-----------
Total loan commitments $ 7,450,000
-----------
</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 March 31, 1999 consist of fixed and adjustable
rate loans of approximately $7,450,000 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 $16,160,000. Of these lines, the outstanding loan balances
totaled approximately $10,056,000. 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 March 31, 1999 of
approximately $298,000. At March 31, 1999, the Bank had loan commitments
to sell $21,500,000 in fixed rate residential loans which had not been
closed to Freddie Mac for the months of April-June, 1999.
On February 8, 1999, the Corporation, through its subsidiary, Provident
Community Bank, assumed certain liabilities of the CCB/American Federal
Union, South Carolina banking center. Provident Community Bank acquired
$12,622,000 in deposit liabilities in the transaction. The total premium
paid for the acquisition was approximately $1,073,000. The premium paid
will be amortized using straight-line amortization over a period of ten
years.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Financial Condition
-------------------
At March 31, 1999 total assets of the Corporation increased $2,936,000 or
1.55% to $192,222,000 from $189,286,000 at September 30, 1998. Investments
and mortgage-backed securities increased approximately $9,453,000 or
31.98% during the six months ended March 31, 1999. The increase was due
primarily to increased loan prepayments of fixed-rate loans that resulted
in a $10,463,000 reduction in loans. This decrease in loans receivable
funded the increase in investments and mortgage-backed securities.
Deposits increased $16,452,000 or 12.67% to $146,325,000 for the six
months ended March 31, 1999. Approximately $12,622,000 or 76.7% of the
deposit increase was a result of the CCB/American Federal branch purchase
that was consummated on February 8, 1999. The remaining growth was a
result of various deposit promotion programs with continued emphasis on
core deposits. These funds were used to repay borrowings which decreased
$16,872,000 or 40.71% from $41,441,000 at September 30, 1998 to
$24,569,000 at March 31, 1999. At March 31, 1999, mortgage servicing
rights increased $833,000 or 25.47% to $4,103,000 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 $234,214,000
at March 31, 1999.
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 15.36%
as of March 31, 1999. As in the past, management expects that the Bank can
meet its obligations to fund outstanding mortgage loan commitments, which
were approximately $1,346,000, as described in Note 4 to the Consolidated
Financial Statements, and other loan commitments as of March 31, 1999,
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 March 31, 1999, 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 $2,855 $12,752 $9,897
Tangible capital to adjusted total assets 1.50% 6.70% 5.20%
Core capital $7,614 $12,752 $5,138
Core capital to adjusted total assets 4.00% 6.70% 2.70%
Risk based capital $8,464 $13,594 $5,130
Risk based capital to risk weighted assets 8.00% 12.85% 4.85%
</TABLE>
The reported capital requirements are based on information reported in the
OTS March 31, 1999 quarterly thrift financial report.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
----------------------------------------------------------------------
General
-------
Net income increased $17,000 or 2.20% to $773,000 for the six months ended
March 31, 1999 as compared to the same period in 1998. Non interest income
increased $152,000 or 28.04% and net interest income after provision for
loan losses increased $95,000 or 3.36%.
Interest Income
---------------
Interest income increased $250,000 or 3.68% for the six months ended
March 31, 1999 as compared to the same period in 1998. Interest income on
loans decreased 3.98%or $231,000 to $5,569,000 for the six months ended
March 31, 1999 from $5,800,000 for the six months ended March 31, 1998.
Interest income on overnight deposits and federal funds sold had a net
decrease of $10,000 for the six months ended March 31, 1999 as compared
to the same period in the prior year due primarily to lower rates.
Interest and dividends on investment and mortgage-backed securities
increased $491,000 or 192.94% for the six months ended March 31, 1999 to
$1,181,000 from $690,000 during the same period in 1998. The increase was
due primarily to an increase in the level of purchases in investment and
mortgage-backed securities made during the first two quarters of the
fiscal year. This increase in purchases was a direct result of lower loan
volumes and higher loan prepayments made during this period.
Interest Expense
----------------
The Corporation experienced an overall increase of $174,000 or 4.54% in
interest expense for the six months ended March 31, 1999 as compared to
the six months ended March 31,
11
<PAGE> 12
1998 due primarily to the growth in the deposit base. Interest expense
on deposit accounts increased $212,000 or 7.98% to $2,868,000 for the six
months ended March 31, 1999 from $2,656,000 during the same period in
1998. Interest expense on borrowings decreased $38,000 or 3.78% for the
six months ended March 31, 1999 as compared to the six months ended March
31, 1998. The decrease was due to lower volumes in FHLB advances during
the period.
Provision for Loan Loss
-----------------------
During the six months ended March 31, 1999, provisions for loan losses
were $45,000 as compared to $64,000 for the same period in the previous
year. The decrease in loan loss provisions are due to the low volume of
loan charge offs along with low level of delinquent loans to total loans.
Management believes the Bank's loan loss allowances are adequate to absorb
estimated future loan losses. The Bank's loan loss allowances at March 31,
1999 were approximately .74% 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>
MARCH 31, 1999 SEPTEMBER 30, 1998
-------------- ------------------
Non-accruing loans which are
contractually past due 90 days
or more:
<S> <C> <C>
Real Estate:
Residential $ 237 $ 581
Commercial -- --
Construction -- --
Non-mortgage 184 115
--- -----
Total $ 411 $ 696
===== =====
Percentage of loans receivable, net 0.36% 0.49%
==== =====
Allowance for loan losses $843 $ 827
==== =====
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $75 $ 10
=== =====
</TABLE>
12
<PAGE> 13
Non Interest Income and Expense
-------------------------------
Total non interest income increased $152,000 or 28.04% to $694,000 for the
six months ended March 31, 1999 from $542,000 for the same period in the
previous year. The increase in non-interest income from the previous year
was due to increased gain on sale of loans through the mortgage division
of the bank. Gains on sale of loans was $374,000 for the six months ended
March 31, 1999 as compared to a gain on sale of loans of $174,000 for the
six months ended March 31, 1998. The increased gain on sale of loans was
partially offset by negative loan service fee income of ($75,000) for the
six months ended March 31, 1999 compared to negative service fee income of
($8,000) for the six months ended March 31, 1998. The increase in the
negative income is due to higher premium amortization expense as a result
of higher loan prepayments.
For the six months ended March 31, 1999, total non interest expense
increased $233,000 or 10.75% to $2,401,000 from $2,168,000 for the same
period in 1998. Compensation and employee benefits increased $64,000 or
5.72% to $1,182,000 for the six months period ended March 31, 1999 from
$1,118,000 for the same period in 1998. Occupancy and equipment expense
increased $76,000 or 16.56% to $535,000 for the six months ended March 31,
1999 from $459,000 for the same period in 1998. Professional services
expenses decreased $17,000 or 11.04% to $137,000 for the six month period
ended March 31, 1999 from $154,000 for the same period in 1998. 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 six months ended March 31,
1999 increased $10,000 to $42,000 from $32,000 for the same period in 1998
due to an increase in the deposit base. Other operating expense for the
six months ended March 31, 1999 increased $103,000 to $503,000 from
$400,000 for the same period in 1998. The increase in other operating
expenses was due to continued expansion in the mortgage division of the
bank along with increased deposit premium amortization expense as a result
of the current year branch acquisition.
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
---------------------------------------------------
The Annual Meeting of the Stockholders of the Corporation was held
on January 20, 1999. The results of the vote on the matters
presented at the meeting is as follows:
1. The following individuals were elected as directors, each for
a three-year term:
<TABLE>
<CAPTION>
Vote For Vote Withheld
-------- -------------
<S> <C> <C>
David G. Russell 781,115 60,463
------- ------
Carl L. Mason 781,115 60,463
------- ------
William M. Graham 756,473 85,105
------- ------
Broker non-votes 1,071
totaled -----
</TABLE>
2. Approval to increase shares available under the 1995 stock option
plan:
For 735,394; Against 51,676; Abstain 54,509;
------- ------ ------
3. The appointment of Elliott, Davis & Company, LLP, as auditors
for the Corporation for the fiscal year ending September 30,
1999 was ratified by the shareholders by the following vote:
For 811,726; Against 16,479; Abstain 13,374;
------- ------ ------
14
<PAGE> 15
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, 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.
15
<PAGE> 16
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
16
<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: 5-6-99 By: /s/ Dwight V. Neese
----------- --------------------------
Dwight V. Neese, CEO
Date: 5-6-99 By: /s/ Richard H. Flake, CFO
----------- --------------------------
Richard H. Flake, CFO
18
<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
SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000926164
<NAME> Union Financial Bancshares Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,988
<INT-BEARING-DEPOSITS> 3,704
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<TRADING-ASSETS> 0
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<LOANS> 131,739
<ALLOWANCE> 842
<TOTAL-ASSETS> 192,222
<DEPOSITS> 146,325
<SHORT-TERM> 30,128
<LIABILITIES-OTHER> 400
<LONG-TERM> 5,000
0
0
<COMMON> 13
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<INTEREST-TOTAL> 6,800
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<INCOME-PRETAX> 1,212
<INCOME-PRE-EXTRAORDINARY> 773
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<NET-INCOME> 773
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</TABLE>
