UNION FINANCIAL BANCSHARES INC
10QSB, 1999-08-13
SAVINGS INSTITUTION, FEDERALLY CHARTERED
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<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 June 30, 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 1,352,992 shares, $0.01 par value, common stock as of June 30, 1999.








<PAGE> 2



                           UNION FINANCIAL BANCSHARES, INC.


                                    INDEX

PART I.           FINANCIAL INFORMATION                                    PAGE
                  ---------------------                                    ----

         Item 1.  Consolidated Financial Statements (unaudited)

         Consolidated Balance Sheets as of June 30, 1999
          and September 30, 1998                                             3

         Consolidated Statements of Income for the three and nine months
          ended June 30, 1999 and 1998                                       4

         Consolidated Statements of Cash Flows for the nine
          months ended June 30, 1999 and 1998                                5

         Consolidated Statements of Shareholders' Equity for the
          nine months ended June 30, 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                                               14-15
         -----------------

            Signatures                                                      16



<PAGE> 3

<TABLE>
<CAPTION>


ITEM 1.    FINANCIAL STATEMENTS
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 (UNAUDITED) AND SEPTEMBER 30, 1998

                                                                                     JUNE 30,                    SEPTEMBER 30,
ASSETS                                                                                 1999                          1998
                                                                                --------------------          --------------------
                                                                                             (DOLLARS IN THOUSANDS)

<S>                                                                            <C>                           <C>
Cash                                                                           $              2,154          $              2,469
Short term interest-bearing deposits                                                          2,534                         1,124
                                                                                --------------------          --------------------
Total cash and cash equivalents                                                               4,688                         3,593
                                                                                --------------------          --------------------
Investment and mortgage-backed securities:
  Held to maturity                                                                              799                         2,699
  Available for sale                                                                         38,927                        26,856
                                                                                --------------------          --------------------
Total investment and mortgage-backed securities                                              39,726                        29,555
Loans , net
  Held for sale                                                                               3,361                        37,584
  Held for investment                                                                       139,686                       104,618
                                                                                --------------------          --------------------
Total loans receivable, net                                                                 143,047                       142,202
Office properties and equipment, net                                                          4,352                         4,020
Federal Home Loan Bank Stock, at cost                                                         2,029                         2,023
Accrued interest receivable                                                                   1,618                         1,197
Mortgage servicing rights                                                                     3,657                         3,270
Other assets                                                                                  5,245                         3,426
                                                                                --------------------          --------------------
TOTAL ASSETS                                                                   $            204,362          $            189,286
                                                                                ====================          ====================

LIABILITIES

Deposit accounts                                                               $            144,582          $            129,873
Securities sold under repurchase agreements                                                     845                           895
Advances from the Federal Home Loan Bank and other borrowings                                42,825                        41,441
Accrued interest on deposits                                                                    245                           336
Advances from borrowers for taxes and insurance                                                 346                           496
Other liabilities                                                                               589                           945
                                                                                --------------------          --------------------
TOTAL LIABILITIES                                                                           189,432                       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 - 1,352,992 shares at 6/30/99 and 1,278,250 at 9/30/98                  13                            13
Additional paid-in capital                                                                    4,541                         4,471
Accumulated other comprehensive income                                                       (1,207)                          148
Retained earnings, substantially restricted                                                  11,583                        10,668
                                                                                --------------------          --------------------
TOTAL SHAREHOLDERS' EQUITY                                                                   14,930                        15,300
                                                                                --------------------          --------------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                     $            204,362          $            189,286
                                                                                ====================          ====================

See notes to consolidated financial statements.



</TABLE>




<PAGE> 4

<TABLE>
<CAPTION>

UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE  MONTHS AND NINE MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND 1998 (UNAUDITED)


                                                                THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                         JUNE 30,            JUNE 30,            JUNE 30,            JUNE 30,
                                                           1999                1998                1999                1998
                                                      ----------------    ----------------   -----------------   -----------------
                                                              (DOLLARS IN THOUSANDS)                (DOLLARS IN THOUSANDS)
<S>                                                  <C>                 <C>                <C>                 <C>
Interest Income:
  Loans                                              $          2,742    $          3,023   $           8,311   $           8,823
  Deposits and federal funds sold                                  17                  28                  67                  88
  Mortgage-backed securities                                      385                 130               1,132                 385
  Interest and dividends on
   investment securities                                          279                 205                 713                 640
                                                      ----------------    ----------------   -----------------   -----------------
TOTAL INTEREST INCOME                                           3,423               3,386              10,223               9,936
                                                      ----------------    ----------------   -----------------   -----------------

INTEREST EXPENSE:
  Deposit accounts                                              1,419               1,429               4,288               4,085
  Advances from the FHLB and other borrowings                     409                 478               1,376               1,485
                                                      ----------------    ----------------   -----------------   -----------------
TOTAL INTEREST EXPENSE                                          1,828               1,907               5,664               5,570
                                                      ----------------    ----------------   -----------------   -----------------

NET INTEREST INCOME                                             1,595               1,479               4,559               4,366
  Provision for loan losses                                        25                  44                  70                 108
                                                      ----------------    ----------------   -----------------   -----------------
NET INTEREST INCOME AFTER
   PROVISION FOR LOAN LOSSES                                    1,570               1,435               4,489               4,258
                                                      ----------------    ----------------   -----------------   -----------------

NON INTEREST INCOME:
  Fees for financial services                                     287                 182                 635                 558
  Loan servicing fees (costs)                                     (60)                 10                (135)                  3
  Net gains on sale of loans                                      119                 139                 493                 313
  Net gains on sale of investments                                  0                   0                   7                   0
                                                      ----------------    ----------------   -----------------   -----------------
TOTAL NON INTEREST INCOME                                         346                 331               1,000                 874
                                                      ----------------    ----------------   -----------------   -----------------

NON INTEREST EXPENSE:
  Compensation and employee benefits                              592                 606               1,774               1,724
  Occupancy and equipment                                         292                 248                 828                 707
  Deposit insurance premiums                                       17                  13                  59                  45
  Professional services                                            68                  51                 206                 205
  Real estate operations                                            1                   2                   3                   7
  Other                                                           253                 206                 715                 606
                                                      ----------------    ----------------   -----------------   -----------------
TOTAL NON INTEREST EXPENSE                                      1,223               1,126               3,585               3,294
                                                      ----------------    ----------------   -----------------   -----------------

INCOME BEFORE INCOME TAXES                                        693                 640               1,904               1,838
Income tax expense                                                251                 234                 689                 675
                                                      ----------------    ----------------   -----------------   -----------------
NET INCOME                                           $            442    $            406   $           1,215   $           1,163
                                                      ================    ================   =================   =================

BASIC NET INCOME PER COMMON SHARE                    $           0.33    $           0.32                0.92   $            0.92
                                                      ================    ================   =================   =================

DILUTED NET INCOME PER COMMON SHARE                  $           0.31    $           0.30                0.86   $            0.86
                                                      ================    ================   =================   =================

WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING

BASIC                                                       1,351,762           1,273,301           1,319,069           1,260,309

DILUTED                                                     1,442,277           1,363,816           1,407,385           1,350,640

See notes to consolidated financial statements.

</TABLE>





<PAGE> 5
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended June 30, 1999 (unaudited) and 1998 (unaudited)
<TABLE>
<CAPTION>
                                                                                        Nine Months Ended
                                                                               June 30,                June 30,
                                                                                 1999                    1998
                                                                             ------------           --------------
                                                                                          (IN THOUSANDS)
OPERATING ACTIVITIES:

<S>                                                                             <C>                     <C>
Net income                                                                      $1,215                  $1,163
Adjustments to reconcile net income to
net cash provided by (used by) operating activities:
Provision for loan losses                                                           70                     108
Amortization of intangibles                                                        195                     159
Depreciation expense                                                               249                     172
Recognition of deferred income, net of costs                                       (81)                    (90)
Deferral of fee income, net of costs                                               231                      56
Loans originated for sale                                                      (90,166)                (96,995)
Sale of loans                                                                   90,166                  96,995
Gain  on sale of loans                                                             493                     313
Changes in operating assets and liabilities:
Decrease (increase) in accrued interest receivable                                (421)                    253
Increase  in other assets                                                       (2,014)                 (1,742)
Decrease in other liabilities                                                     (506)                    (30)
Increase (decrease) in accrued interest payable                                    (91)                      1
                                                                       ----------------         ----------------
Net cash provided by (used by) operating activities                               (660)                    363
                                                                       ----------------         ----------------

INVESTING ACTIVITIES:

Purchase of investment and mortgage-backed securities:
Available for sale                                                             (21,539)                 (5,657)
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                   9,478
Principal repayments on mortgage-backed securities:
Held to maturity                                                                   165                      70
Available for sale                                                               4,456                   1,501
Loan originations                                                              (42,754)                (54,989)
Principal repayments of loans                                                   39,837                  36,000
Proceeds from sale of real estate acquired in settlement of loans                    4                      22
Purchase of mortgage servicing rights                                             (387)                 (1,335)
Purchase of FHLB stock                                                              (6)                      0
Redemption of FHLB stock                                                             0                     255
Purchase of office properties and equipment                                       (581)                   (527)
                                                                       ----------------         ----------------

Net cash used by investing activities                                         ($14,058)               ($15,182)
                                                                       ----------------         ----------------

FINANCING ACTIVITIES:

Proceeds from the exercise of stock options                                          2                      51
Proceeds from the dividend reinvestment plan                                        68                     306
Dividends paid in cash ($0.28  per share - 1999
and $0.27 per share - 1998)                                                       (300)                   (290)
Proceeds from FHLB advances and other borrowings                                18,256                  59,100
Repayment of FHLB advances and other borrowings                                (16,872)                (60,611)
Increase (Decrease) in securities sold under repurchase agreements                 (50)                     59
Acquired deposits from purchased branch                                         12,622                       0
Increase (Decrease) in deposit accounts                                          2,087                  12,083
                                                                       ----------------         ----------------

Net cash  provided by financing activities                                      15,813                  10,698
                                                                       ----------------         ----------------
NET  DECREASE \ INCREASE IN CASH
AND CASH EQUIVALENTS                                                             1,095                  (4,121)

CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD                                                           3,593                   7,821

CASH AND CASH EQUIVALENTS
AT END OF PERIOD                                                                $4,688                   $3,700
                                                                       ================         ================

SUPPLEMENTAL DISCLOSURES:

Cash paid for:
Income taxes                                                                      $953                     $642
Interest                                                                         5,755                    5,568

Non-cash transactions:
Loans foreclosed                                                                  $220                        0

See notes to consolidated financial statements.
</TABLE>
                                                           5

<PAGE> 6


<TABLE>
<CAPTION>

                                               UNION FINANCIAL BANCSHARES, INC.
                                        CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                                     NINE MONTHS ENDED JUNE 30, 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                                                                                       1,163                     1,163

  Other comprehensive income
   Unrealized gains on securities:
     Unrealized holding gains arising during
       period                                                                                                  (9)
                                                                                                               ---
   Other comprehensive income                                                                                  (9)            (9)
                                                                                                                              ---
  Comprehensive income                                                                                                     1,154

Options exercised                                           11,565                     51                                     51

Dividend  reinvestment plan contributions                   22,349                    306                                    306

Cash dividend ($.27 per share)                                                                    (291)                     (291)
                                                       ---------------------------------------------------------------------------

BALANCE AT JUNE 30, 1998                                    1,275,464     12        4,346       10,461        (72)        14,747
                                                       ===========================================================================
BALANCE AT SEPTEMBER 30, 1998                               1,278,250     13        4,471       10,668        148         15,300

Net income                                                                                       1,215                     1,215

  Other comprehensive income
    Unrealized losses on securities:
      Unrealized holding losses arising during
       period                                                                                              (1,355)
                                                                                                           -------
    Other comprehensive income                                                                             (1,355)        (1,355)
                                                                                                                          -------
  Comprehensive income                                                                                                      (140)

Options exercised                                               2,000                   2                                      2

Dividend reinvestment plan contributions                        8,652                  68                                     68

Five percent stock dividend                                    64,090

Cash dividend ($.28 per share)                                                                    (300)                     (300)

                                                       ---------------------------------------------------------------------------
BALANCE AT JUNE 30, 1999                                    1,352,992    $13       $4,541      $11,583    ($1,207)       $14,930
                                                       ===========================================================================
</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 nine months  ended June 30,  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
      financiastatements  have been  reclassified  to conform  with current year
      classifications.

      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 Corporation 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 Corporation for the fiscal year
      beginning  October  1,  1998.  The  adoption  of SFAS 132 will not have an
      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 Corporation for the
      fiscal   year   beginning   October  1,  1999,  and  may  not  be  applied
      retroactively.

                                      7

<PAGE> 8



      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 Corporation'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 and
      all other  share data have been  restated  for all  periods  presented  to
      reflect this dividend.

      Income per share amounts for the three and nine months ended June 30, 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  $11,880,000  and $10,383,000 of debt securities at June 30,
      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 for
      Federal Home Loan Bank  advances  the Bank's  Federal Home Loan Bank stock
      and has entered into a blanket collateral  agreement with the Federal Home
      Loan  Bank  whereby  the  Bank  maintains,  free  of  other  encumbrances,
      qualifying mortgages (as defined) with unpaid principal balances equal to,
      when  discounted at 75% of the unpaid  principal  balances,  100% of total
      advances.

4.    Contingencies and Loan Commitments
      ----------------------------------

      The Bank is a party to financial instruments with  off-balance-sheet  risk
      in the  normal  course  of  business  to meet the  financing  needs of its
      customers.  These instruments  expose the Bank to credit risk in excess of
      the amount recognized in the balance sheet.

      The Bank's exposure to credit loss in the event of  nonperformance  by the
      other party to the financial  instrument for  commitments to extend credit
      is represented by the contractual


                                        8



<PAGE> 9

      amount of those  instruments.  The Bank uses the same  credit  policies in
      making commitments and conditional  obligations as it does for on-balance-
      sheet instruments. Total credit exposure at June 30, 1999 related to these
      items is summarized below:
<TABLE>
<CAPTION>

      Loan Commitments:                                   Contract Amount
      ----------------                                    ---------------
            <S>                                             <C>
            Approved loan commitments                       $    812,000
            Unadvanced portions of loans                       7,230,000
                                                            ------------
            Total loan commitments                          $  8,042,000
                                                            ------------
</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 June 30, 1999 consist of fixed and adjustable
      rate loans of  approximately  $8,042,000  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   $17,516,000  at  June  30,  1999.  Of  these  lines,   the
      outstanding loan balances totaled approximately $10,286,000. 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
      June 30, 1999 of  approximately  $167,000.  At June 30, 1999, the Bank had
      loan commitments to sell $13,000,000 in fixed rate residential loans which
      had  not  been  closed to  Freddie  Mac for the  months of July-September,
      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 June 30, 1999, total assets of the Corporation increased $15,076,000 or
      7.96% to $204,362,000 from $189,286,000 at September 30, 1998. Investments
      and  mortgage-backed  securities  increased  approximately  $10,171,000 or
      34.41%  during the nine months ended June 31, 1999.  Available  funds were
      invested in mortgage backed  securities as a result in a slow down in loan
      growth.  Deposits increased  $14,709,000 or 11.33% to $144,582,000 for the
      nine months ended June 30, 1999. Approximately $12,622,000 or 85.8% 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.  At June 30, 1999,  mortgage  servicing  rights  increased
      $387,000 or 11.83% to $3,657,000 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 $247,324,000 at June 30, 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 18.55%
      as of June 30, 1999. As in the past,  management expects that the Bank can
      meet its obligations to fund outstanding mortgage loan commitments,  which
      were  approximately  $812,000,  as described in Note 4 to the Consolidated
      Financial  Statements,  and other loan  commitments  as of June 30,  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.

      As of June 30, 1999,  the Bank's  capital  position,  as calculated  under
      regulatory  guidelines,  exceeds  these  minimum  requirements  as follows
      (dollars in thousands):


                                      10

<PAGE> 11
<TABLE>
<CAPTION>


                                                       REQUIREMENT           ACTUAL           EXCESS
- -----------------------------------------------------------------------------------------------------

      <S>                                                <C>                <C>              <C>
      Tangible capital                                   $3,073             $13,288          $10,215
      Tangible capital to adjusted total assets            1.50%               6.55%            5.05%

      Core capital                                       $8,114              $13,28           $5,174
      Core capital to adjusted total assets                4.00%                6.5%            2.55%

      Risk based capital                                 $9,054             $14,118           $5,064
      Risk based capital to risk weighted assets           8.00%              12.47%            4.47%
</TABLE>

      The reported capital requirements are based on information reported in the
      OTS June 30, 1999 quarterly thrift financial report.

      RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
      ----------------------------------------------------------------------

      General
      -------

      Net income  increased  $52,000 or 4.47% to $1,215,000  for the nine months
      ended June 30, 1999 as compared to the same period in 1998.  Non  interest
      income  increased  $126,000  or  14.42%  and  net  interest  income  after
      provision for loan losses increased $231,000 or 5.43%.

      Interest Income
      ---------------

      Interest income increased $287,000 or 2.89% for the nine months ended June
      30,1999 as compared to the same period in 1998.  Interest  income on loans
      decreased  5.80% or $512,000 to $8,311,000  for the nine months ended June
      30, 1999 from $8,823,000 for the nine months ended June 30, 1998. Interest
      income on overnight  deposits and federal funds sold had a net decrease of
      $21,000  for the nine  months  ended June 30, 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 $820,000
      or 80% for the  nine  months  ended  June  30,  1999  to  $1,845,000  from
      $1,025,000  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 three 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 $94,000 or 1.69% in
      interest  expense for the nine  months  ended June 30, 1999 as compared to
      the nine  months  ended June 30, 1998, due primarily  to the growth in the
      deposit base.  Interest expense on deposit accounts  increased $203,000 or
      4.97%  to  $4,288,000  for the  nine  months  ended  June  30,  1999  from
      $4,085,000 during the same period in 1998.  Interest expense on borrowings
      decreased  $109,000  or 7.34% for the nine months  ended June 30, 1999, as
      compared to the nine months

                                      11

<PAGE> 12



      ended  June 30, 1998.  The  decrease  was  due  to  lower  volumes in FHLB
      advances during the period.

      Provision for Loan Loss
      -----------------------

      During the nine months  ended June 30,  1999,  provisions  for loan losses
      were  $70,000 as compared to $108,000  for the same period in the previous
      year.  The decrease in loan loss  provisions  are due to the low volume of
      loan charge offs along with low level of delinquent  loans to total loans.
      Management believes the Bank's loan loss allowances are adequate to absorb
      estimated future loan losses.  The Bank's loan loss allowances at June 30,
      1999 were approximately .60% of the Bank's outstanding loan portfolio, net
      of loans  held  for sale  compared  to .79%  for the  same  period  in the
      previous year.

      The  following  table sets forth  information  with  respect to the Bank's
      non-performing assets at the dates indicated (dollars in thousands):

                                          JUNE 30, 1999      SEPTEMBER 30, 1998
                                          -------------      ------------------

      Non-accruing loans which are
      contractually past due 90 days
       or more:

      Real Estate:
       Residential                                 $   71             $   581
       Commercial                                      --                  --
       Construction                                    --                  --
      Non-mortgage                                     48                 115
                                                     ----               -----
      Total                                         $ 119               $ 696
                                                    =====               =====

      Percentage of loans receivable, net            0.08                0.49%
                                                    =====               =====

      Allowance for loan losses                      $830                $827
                                                     ====                ====

      Real estate acquired through
       foreclosure and repossessed
       assets, net of allowances                    $274                $ 10
                                                    ====                ====

      Non Interest Income and Expense
      -------------------------------

      Total non interest income  increased  $126,000 or 14.42% to $1,000,000 for
      the nine months  ended June 30, 1999 from  $874,000 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 $493,000 for the nine


                                       12

<PAGE> 13



      months  ended  June  30,  1999 as  compared  to a gain on sale of loans of
      $313,000 for the nine months ended June 30, 1998.  The  increased  gain on
      sale of loans was partially  offset by negative loan service fee income of
      ($135,000) for the nine months ended June 30, 1999 compared to service fee
      income of $3,000 for the nine months ended June 30, 1998.  The increase in
      the negative  income is due to higher  premium  amortization  expense as a
      result of higher loan prepayments.

      For the nine  months  ended  June 30,  1999,  total non  interest  expense
      increased  $291,000 or 8.83% to $3,585,000  from  $3,294,000  for the same
      period in 1998.  Compensation and employee  benefits  increased $50,000 or
      2.90% to  $1,774,000  for the nine months  period ended June 30, 1999 from
      $1,724,000  for the same period in 1998.  Occupancy and equipment  expense
      increased  $121,000 or 17.11% to $828,000  for the nine months  ended June
      30, 1999 from $707,000 for the same period in 1998.  Professional services
      expenses  increased  $1,000 or .49% to $206,000  for the nine month period
      ended  June 30,  1999  from  $205,000  for the same  period  in 1998.  The
      increase in compensation  and employee  benefits was due primarily to cost
      of living increases.  The increase in occupancy and equipment expenses was
      due to  higher  data  processing  costs  along  with  higher  depreciation
      expense.  Deposit  insurance  premiums  for the nine months ended June 30,
      1999 increased $14,000 to $59,000 from $45,000 for the same period in 1998
      due to an increase in the deposit base.  Other  operating  expense for the
      nine months  ended June 30,  1999  increased  $109,000  to  $715,000  from
      $606,000  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.

      Recent Developments
      -------------------

      On  July 1, 1999, the  Corporation  entered  into  an agreement to acquire
      South  Carolina Community Bancshares, Inc., holding company for  Community
      Federal  Savings  Bank,  a  $45  million  savings  bank  headquartered  in
      Winnsboro, South  Carolina.  The merger  entails an  exchange of $12.25 in
      Union common stock  and $5.25 in cash, subject to adjustment under certain
      circumstances,  for  each  South  Carolina  Community share. The merger is
      subject  to  the approval  of  both companies' shareholders and applicable
      regulatory authorities.













                                         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  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: 8/4/99                        By:/s/ Dwight V. Neese, CEO
     --------                          --------------------------------------
                                       Dwight V. Neese, CEO


Date: 8/4/99                        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
JUNE 30, 1999 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>                   9-MOS
<FISCAL-YEAR-END>                              SEP-30-1999
<PERIOD-START>                                 OCT-01-1998
<PERIOD-END>                                   JUN-30-1999
<EXCHANGE-RATE>                                1
<CASH>                                         2,154
<INT-BEARING-DEPOSITS>                         2,534
<FED-FUNDS-SOLD>                               0
<TRADING-ASSETS>                               0
<INVESTMENTS-HELD-FOR-SALE>                    38,927
<INVESTMENTS-CARRYING>                         799
<INVESTMENTS-MARKET>                           800
<LOANS>                                        143,047
<ALLOWANCE>                                    830
<TOTAL-ASSETS>                                 204,362
<DEPOSITS>                                     144,582
<SHORT-TERM>                                   23,670
<LIABILITIES-OTHER>                            1,180
<LONG-TERM>                                    20,000
                          0
                                    0
<COMMON>                                       13
<OTHER-SE>                                     14,917
<TOTAL-LIABILITIES-AND-EQUITY>                 204,362
<INTEREST-LOAN>                                8,311
<INTEREST-INVEST>                              1,845
<INTEREST-OTHER>                               67
<INTEREST-TOTAL>                               10,223
<INTEREST-DEPOSIT>                             4,288
<INTEREST-EXPENSE>                             5,664
<INTEREST-INCOME-NET>                          4,559
<LOAN-LOSSES>                                  70
<SECURITIES-GAINS>                             7
<EXPENSE-OTHER>                                3,585
<INCOME-PRETAX>                                1,904
<INCOME-PRE-EXTRAORDINARY>                     1,215
<EXTRAORDINARY>                                0
<CHANGES>                                      0
<NET-INCOME>                                   1,215
<EPS-BASIC>                                  0.92
<EPS-DILUTED>                                  0.86
<YIELD-ACTUAL>                                 7.29
<LOANS-NON>                                    119
<LOANS-PAST>                                   0
<LOANS-TROUBLED>                               0
<LOANS-PROBLEM>                                418
<ALLOWANCE-OPEN>                               827
<CHARGE-OFFS>                                  26
<RECOVERIES>                                   29
<ALLOWANCE-CLOSE>                              830
<ALLOWANCE-DOMESTIC>                           0
<ALLOWANCE-FOREIGN>                            0
<ALLOWANCE-UNALLOCATED>                        830



</TABLE>

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