<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
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
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<DEPOSITS> 144,582
<SHORT-TERM> 23,670
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0
0
<COMMON> 13
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