<PAGE>
Exhibit 13
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Business........................................... 3
Selected Financial and Other Data.................. 4
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 6
Independent Auditor's Report....................... 12
Consolidated Financial Statements.................. 13
Notes to Consolidated Financial Statements......... 18
Directors and Leadership Group..................... 39
Corporation Information............................ 40
</TABLE>
==============
Business
Union Financial Bancshares, Inc. ("Union Financial") is the savings and
loan holding company for Provident Community Bank, ("the Bank"). Union
Financial engages in no significant activity other than holding the stock
of the Bank and engaging in certain passive investment activities. Union
Financial and the Bank are collectively referred to as "the Corporation" in
this annual report.
The Bank is a federally-chartered capital stock savings bank headquartered
in Union, South Carolina. The Bank, originally chartered in 1934, is a
member of the Federal Home Loan Bank System ("FHLB"). Its deposits are
insured to the maximum limits allowable by the Federal Deposit Insurance
Corporation ("FDIC").
The business of the Bank consists primarily of attracting deposits from the
general public and originating mortgage loans on residential properties
located in South Carolina. The Bank also makes consumer and commercial
loans, commercial real estate loans,and construction loans, invests in
federal government and agency obligations and purchases fixed and variable
rate mortgage participation certificates. The principal sources of funds
for the Bank's lending activities include deposits received from the
general public and advances from the FHLB. The Bank's principal expenses
are interest paid on deposit accounts and other borrowings and expenses
incurred in the operation of the Bank. The Bank's operations are
conducted through its main office and five full-service banking centers, a
mortgage banking center, and a lending and investment center, all of which
are located in the upstate area of South Carolina.
On November 12, 1999 Union Financial completed its acquisition of South
Carolina Community Bancshares, Inc.("SCCB") and its wholly owned
subsidiary, Community Federal Savings Bank. Union Financial issued a total
of 526,183 shares and paid a total of $3,582,081 to the shareholders of
South Carolina Community Bancshares, Inc. The transaction was accounted for
under the purchase method of accounting. The two offices of Community
Federal Savings Bank became offices of Provident Community Bank, the wholly
owned subsidiary of Union Financial Bancshares. At September 30, 1999,
South Carolina Community Bancshares, Inc. had total assets of $46.6
million, loans of $40.2 million and deposits of $35.9 million.
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected financial data of the Corporation for
the periods indicated.
Operations Data:
---------------
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars In Thousands - Except Share Amounts)
<S> <C> <C> <C> <C> <C>
Interest income $ 18,555 $ 14,046 $ 13,405 $ 11,855 $ 9,004
Interest expense (11,175) (7,698) (7,549) (6,647) (5,050)
---------- ---------- ---------- ---------- ----------
Net interest income 7,380 6,348 5,856 5,208 3,954
Provision for loan losses (225) (105) -- (243) --
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 7,155 6,243 5,856 4,965 3,954
Other income 2,580 1,192 1,038 953 506
Other expense (6,352) (4,814) (4,447) (3,616) (3,224)
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,383 2,621 2,447 2,302 1,236
Income tax expense (1,190) (945) (897) (858) (374)
---------- ---------- ---------- ---------- ----------
Net income $ 2,193 $ 1,676 $ 1,550 $ 1,444 $ 862
---------- ---------- ---------- ---------- ----------
Income per common share: (1)
Net income per common
share (Basic) $1.18 $1.26 $ 1.17 $1.12 $ 0.67
---------- ---------- ---------- ---------- ----------
Net income per common
share (Diluted) $1.16 $1.19 $ 1.10 $1.04 $ 0.63
---------- ---------- ---------- ---------- ----------
Weighted average number of
common shares outstanding (Basic) 1,855,706 1,328,305 1,327,845 1,292,284 1,273,083
Weighted average number of
common shares outstanding (Diluted) 1,898,494 1,414,121 1,410,158 1,391,988 1,352,685
</TABLE>
(1) All share and per share amounts have been restated for the 2:1 stock split
occurring in July 1996, the 3:2 stock split occurring in February 1998 and
the 5% stock dividend occurring in February 1999.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-4-
<PAGE>
Financial Condition:
--------------------
<TABLE>
<CAPTION>
September 30,
------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars In Thousands)
Total amount of:
<S> <C> <C> <C> <C> <C>
Assets $259,064 $205,294 $189,286 $171,244 $128,133
Short-term interest-bearing deposits 2,545 2,421 1,124 6,213 1,938
Investment securities 21,212 15,506 9,633 16,783 19,138
Mortgage-backed securities 45,680 17,415 19,922 6,883 14,658
Loans (net) 167,807 149,401 142,202 129,957 85,997
Deposit accounts 187,974 142,624 130,768 117,914 93,715
Shareholders' equity 21,924 14,738 15,300 13,527 12,254
Number of:
Real estate loans outstanding 2,216 1,411 1,651 1,706 1,615
Deposit accounts 28,526 18,865 17,686 16,443 13,095
Banking centers 7 5 4 4 3
</TABLE>
Other Selected Data:
--------------------
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest rate spread during the year 3.02% 3.35% 3.09% 3.16% 3.01%
Net yield on average interest-
earning assets 3.10% 3.46% 3.42% 3.44% 3.46%
Return on average assets 0.85% 0.85% 0.87% 0.92% 0.73%
Return on average shareholders' equity 10.92% 10.96% 10.77% 11.21% 7.01%
Dividend payout ratio 26.13% 29.46% 30.08% 30.13% 46.87%
Operating expense to average assets 2.44% 2.43% 2.52% 2.31% 2.73%
Ratio of average shareholders'
equity to average assets 7.78% 7.44% 8.12% 8.24% 10.41%
Cash dividends declared and paid
per share of common stock (1) $ 0.40 $ 0.37 $ 0.35 $ 0.34 $ 0.33
</TABLE>
(1) All share and per share amounts have been restated for the 2:1 stock split
occurring in July 1996, the 3:2 stock split occurring in February 1998 and
the 5% stock dividend occurring in February 1999.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-5-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Asset and Liability Management
------------------------------
The Corporation is committed to following a program of asset and liability
management in an effort to manage the fluctuations in earnings caused by
movements in interest rates. A significant portion of the Corporation's income
results from the spread, or net interest income, between the yield realized on
its interest-earning assets and the rate of interest paid on its deposits and
other borrowings. Differences in the timing and volume of repricing assets
versus the timing and volume of repricing liabilities expose the Corporation to
interest rate risk. Management's policies are directed at minimizing the impact
of movements in interest rates on earnings.
The Corporation continues to work to shorten the average life of its assets and
to extend the term on its liabilities in an effort to help minimize the effects
of rising interest rates. The Corporation enjoys an increasing net interest
rate spread during periods of falling interest rates. The Corporation
experiences a shrinking net interest rate spread in a rising interest rate
environment.
The Corporation's Asset/Liability Committee makes weekly pricing and marketing
decisions on deposit and loan products in conjunction with managing the
Corporation's interest rate risk. The Asset/Liability Committee reviews the
Bank's securities portfolio, FHLB advances and other borrowings as well as the
Bank's asset and liability policies.
The Corporation has established policies and monitors results to control
interest rate sensitivity. Although the Corporation utilizes measures such as
static gap, which is simply the measurement of the difference between interest-
sensitive assets and interest-sensitive liabilities repricing for a particular
time period, just as important a process is the evaluation of how particular
assets and liabilities are impacted by changes in interest rates or selected
indices as they reprice. Asset/liability modeling techniques are utilized by
the Corporation to assess varying interest rate and balance sheet mix
assumptions.
At September 30, 2000 the Corporation's exposure to interest rate risk, as
calculated by the OTS and measured by the impact of changing interest rates on
the Net Portfolio Value ("NPV"), was as follows:
<TABLE>
<CAPTION>
Rate Environment
----------------
Minus 200 Basis Points Flat Plus 200 Basis Points
---------------------- ---- ---------------------
(In Thousands)
<S> <C> <C> <C>
Estimated Market Value of Assets $269,030 $259,021 $ 244,761
Estimated Market Value of Liabilities $243,267 $240,695 $ 237,713
NPV $ 25,763 $ 18,326 $ 7,048
Increase/(decrease) in NPV $ 7,437 $ - ($11,278)
</TABLE>
The analysis above indicates that the Corporation would be negatively affected
by an increase in interest rates and positively affected by a decrease in
interest rates.
Yields Earned and Rates Paid
----------------------------
The Corporation's pretax earnings depend primarily on its net interest income,
the difference between the income it receives on its loan portfolio and other
investments and its cost of funds, consisting primarily of interest paid on
savings deposits and borrowings. Net interest income is affected by the average
yield on interest-earning assets, the average rate on interest-bearing
liabilities, and the ratio of interest-earning assets to interest-bearing
liabilities.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-6-
<PAGE>
The following table sets forth, at or for the periods and dates indicated, the
weighted average yields earned on the Corporation's interest-earning assets, the
weighted average interest rates paid on the Corporation's deposit accounts and
borrowings, the interest rate spread and net yield on interest-earning assets.
<TABLE>
<CAPTION>
At September 30, Years Ended September 30
------------------ --------------------------
<S> <C> <C> <C> <C>
2000 2000 1999 1998
---- ---- ---- ----
Average yield on earnings assets:
Loans 8.89% 8.31% 8.03% 8.10%
Investments (1) 6.34% 6.27% 6.35% 5.89%
Mortgage-backed securities 5.97% 5.84% 6.31% 6.96%
Total interest-earning assets 8.05% 7.79% 7.65% 7.83%
---- ---- ---- ----
Less:
Average rate paid on deposits 4.71% 4.53% 4.08% 4.45%
Average rate paid on borrowings 6.28% 5.67% 5.04% 5.70%
Average Cost of Funds 5.05% 4.77% 4.29% 4.74%
---- ---- ---- ----
Average interest rate spread 3.00% 3.02% 3.36% 3.09%
---- ---- ---- ----
Net yield on average interest-
earning assets 3.13% 3.10% 3.46% 3.42%
---- ---- ---- ----
</TABLE>
(1) Includes investment securities, federal funds sold, interest-bearing time
deposits, overnight interest-bearing deposits and Federal Home Loan Bank
(FHLB) stock.
Rate/Volume Analysis
--------------------
The following table sets forth certain information regarding changes in interest
income and interest expense of the Corporation for the periods indicated. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (1) changes in volume
(changes in volume multiplied by prior rate); (2) changes in rate (changes in
rate multiplied by prior volume); and (3) the total. The net change
attributable to the combined impact of rate and volume has been allocated to
rate and volume variances consistently on a proportionate basis.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-7-
<PAGE>
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------------------------------
2000 vs. 1999 1999 vs. 1998
------------- -------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Change in interest income:
Loans $3,347 $ 516 $3,863 ($352) ($93) ($445)
Mortgage-backed securities 347 (136) 211 1,036 (155) 881
Investments 454 (20) 434 121 83 204
------ ------ ------ ----- ----- ------
Total interest income 4,148 360 4,508 805 (165) 640
------ ------ ------ ----- ----- ------
Change in interest expense:
Deposits 1,826 834 2,660 681 (518) 162
Borrowings and other 508 308 816 242 (256) (13)
------ ------ ------ ----- ----- ------
Total interest expense 2,334 1,142 3,476 923 (774) 149
------ ------ ------ ----- ----- ------
Change in net interest income $1,814 ($782) $1,032 ($118) $ 609 $ 491
====== ====== ====== ===== ===== ======
</TABLE>
Results of Operations
---------------------
Comparison of Years Ended September 30, 2000 and September 30, 1999
-------------------------------------------------------------------
Net income increased $517,000 from $1,676,000 in fiscal 1999 to $2,193,000 in
fiscal 2000. Earnings per share were $1.18 per share (basic) for the year ended
September 30, 2000 compared to $1.26 per share (basic) for the same period in
1999. Outstanding shares increased 41% from 1,357,214 to 1,911,005 due to shares
issued for the acquisition of South Carolina Community Bancshares ("SCCB") which
was completed on November 12, 1999. See Note 2 of Consolidated Financial
Statements for a discussion of the acquisition of SCCB.
Total interest income increased $4,509,000, or 32.10%, from $14,046,000 in
fiscal 1999 to $18,555,000 in fiscal 2000. All interest income categories were
impacted by the acquisition of South Carolina Community Bancshares. Interest
income on loans increased $3,852,000, or 33.73%, from $11,420,000 in fiscal 1999
to $15,272,000 in fiscal 2000 due primarily to the growth of the loan portfolio.
Interest income on investment and mortgage-backed securities increased
$657,000, or 25.02%, from $2,626,000 in fiscal 1999 to $3,283,000 in fiscal
2000. The increase was due primarily to purchases in investment and mortgage-
backed securities along with $2,602,000 in investments acquired from SCCB.
Interest expense increased 45.17% to $11,175,000 for fiscal 2000 from $7,698,000
for fiscal 1999. Interest expense increased $2,661,000 for deposits and
increased $816,000 for other borrowings. Interest expense for deposits
increased due to the growth in deposits that were acquired from SCCB along with
higher rates paid on deposits for the current year. Interest expense on other
borrowings increased due to higher interest rates on FHLB advances along with
higher volumes throughout fiscal 2000 as compared to fiscal 1999.
Provisions for loan losses are charges to earnings to bring the total allowance
for loan losses to a level considered by management as adequate to provide for
estimated loan losses based on management's evaluation of the collectibility of
the loan portfolio. The provision for loan losses increased from $105,000 in
fiscal 1999 to $225,000 in fiscal 2000. The increase in the provision was made
to provide a adequate level of reserves to be consistent with the growth in the
Corporation's loan portfolio as a result of the acquisition of SCCB along with
an increased level of
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-8-
<PAGE>
non accrual loans from the previous year. See Note 4 of Consolidated Financial
Statements for an analysis of loans.
The Corporation experienced bad debt charge-offs, net of recoveries, of
approximately $150,000 in fiscal 2000 compared to $96,000 for fiscal 1999. The
allowance for loan losses to total loans ratio at the end of fiscal 2000 was
.80% compared to .56% at the end of fiscal 1999.
Non-interest income increased 116.44% to $2,580,000 for the year ended September
30, 2000 from $1,192,000 for the year ended September 30, 1999. Service charges
and fees increased $333,000 to $1,238,000 primarily from increased deposit
account fees as a result of the acquisition of SCCB. The deposit balances
acquired totaled $35,688,000. Loan servicing fees (net) increased $415,000 to
$351,000 for the year ended September 30, 2000 from $(64,000) for the year ended
September 30, 1999. The improvement in loan servicing fees (net) was due to a
reduction in loan premium amortization along with higher loan service fees as a
result of the higher level of loan servicing. Gain on sale of loans increased to
$991,000 during the year ended September 30, 2000 from $342,000 for the year
ended September 30, 1999. During the current fiscal year the Corporation sold
approximately $250 million of servicing rights resulting in a pre-tax gain of
approximately $700,000. The Corporation intends to place increased emphasis on
higher yielding consumer/commercial lending and therefore a reduction in
allocated funds will be available for residential wholesale mortgage lending
that generated the mortgage servicing rights.
Non-interest expense increased 31.95% to $6,352,000 in fiscal 2000 from
$4,814,000 in fiscal 1999. All expenses were affected by the acquisition of
SCCB. Compensation and employee benefits increased 32.73% or $775,000 from
fiscal 1999 to fiscal 2000 due primarily to the additional staff assumed in the
merger. Occupancy and equipment expenses increased 25.77% or $292,000 from
fiscal 1999 to fiscal 2000 due to higher depreciation expense along with higher
data processing expenses due to the growth of the Bank. Goodwill amortization
increased 122.10% or $337,000 due to the amortization of goodwill costs assumed
with the acquisition of SCCB. Other operating expenses increased 14.96% or
$101,000 from fiscal 1999 to fiscal 2000 due primarily to higher costs
associated with the acquisition of South Carolina Community Bancshares.
Comparison of Years Ended September 30, 1999 and September 30, 1998
-------------------------------------------------------------------
Net income increased $126,000 from $1,550,000 in fiscal 1998 to $1,676,000 in
fiscal 1999 primarily as a result of increased interest income from a higher
level of earning assets along with increased non-interest income. Earnings per
share (basic) increased $0.09 to $1.26 for the year ended September 30, 1999
from $1.17 for the same period in 1998.
Total interest income increased $641,000, or 4.78%, from $13,405,000 in fiscal
1998 to $14,046,000 in fiscal 1999 due to the increase in the average level of
interest-earning assets. The increase in average earning assets was due
primarily to the increases in mortgaged-backed securities and investment
securities. The increase in average earning assets was financed by increased
deposits and additional advances from the FHLB. Interest income on loans
decreased $445,000, or 3.75%, from $11,865,000 in fiscal 1998 to $11,420,000 in
fiscal 1999. The reduction in interest income on loans was due to high principal
prepayments on residential loans that resulted in an overall reduction in the
average balance of mortgage loans. Interest income on investment and mortgage-
backed securities increased $1,113,000, or 77.83%, from $1,430,000 in fiscal
1998 to $2,543,000 in fiscal 1999. This increase was due to a higher average
balance for investments and mortgage-backed securities as a result of additional
purchases made during the fiscal year.
Interest expense increased 1.97% to $7,698,000 for fiscal 1999 from $7,549,000
for fiscal 1998. Interest expense increased $162,000 for deposits and
decreased $13,000 for other borrowings. Interest expense for deposits increased
due to higher volumes (9.06% increase from fiscal 1998) offset by a reduction in
the costs of deposits. Interest expense on other borrowings decreased due to
higher volumes that was offset by lower interest rates on FHLB advances
throughout fiscal 1999 as compared to fiscal 1998.
Provisions for loan losses increased from $0 in fiscal 1998 to $105,000 in
fiscal 1999. The increase in the provision was made to provide a adequate level
of reserves to be consistent with the growth in the Corporation's loan
portfolio. The Corporation experienced bad debt charge-offs, net of recoveries,
of approximately $96,000 in fiscal 1999
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-9-
<PAGE>
compared to $101,000 for fiscal 1998. The loan reserves to total loans ratio at
the end of fiscal 1999 was .56% compared to .58% at the end of fiscal 1998.
Non-interest income increased 14.84% to $1,192,000 for the year ended September
30, 1999 from $1,038,000 for the year ended September 30, 1998. Service charges
and fees increased $114,000 to $905,000 primarily as a result of increased
deposit account fees. Loan servicing fees (net) increased $47,000 to $(64,000)
for the year ended September 30, 1999 from $(111,000) for the year ended
September 30, 1998. The improvement in loan servicing fees (net) was due to a
reduction in loan premium amortization along with higher loan service fees. Gain
on sale of loans decreased to $342,000 during the year ended September 30, 1999
from $358,000 for the year ended September 30, 1998.
Non-interest expense increased 8.25% to $4,814,000 in fiscal 1999 from
$4,447,000 in fiscal 1998. Compensation and employee benefits increased 2.91% or
$67,000 from fiscal 1998 to fiscal 1999 due to salary and employee benefits
inflationary increases. Occupancy and equipment expenses increased 16.56% or
$161,000 from fiscal 1998 to fiscal 1999 due to higher depreciation expense as a
result of facilities upgrades and equipment purchases along with higher data
processing expenses due to the growth of the Bank. Other operating expenses
increased 13.89% or $116,000 from fiscal 1998 to fiscal 1999 due primarily to
higher deposit premium amortization as a result of a branch purchase made during
the second quarter of fiscal 1999.
Financial Condition, Liquidity and Capital Resources
----------------------------------------------------
At September 30, 2000, the Corporation's assets totaled $259,064,000, an
increase of $53,770,000, or 26.19%, as compared to $205,294,000 at September 30,
1999. The increase was primarily due to the acquisition of SCCB which was
completed on November 12, 1999. Investment and mortgage-backed securities
increased $33,971,000 to $66,892,000 from $32,921,000 at September 30, 1999.
The increase in securities includes approximately $32.3 million in loans
securitized during the fiscal year. Total loans, net, increased $18,406,000 or
12.32% to $167,807,000 from $149,401,000 at September 30, 1999. The increase in
loans included approximately $41.1 million from the acquisition of SCCB of which
91.4% were residential mortgage loans. The growth in loans acquired from SCCB
was partially offset by the $32.3 million in loans securitized during the fiscal
year. The overall growth in total assets was funded by increased deposits and
additional advances from the FHLB. Total advances increased $1,184,000 from
$46,503,000 at September 30, 1999 to $47,687,000 at September 30, 2000. Total
deposits increased $45,350,000 or 31.8% from $142,624,000 at September 30, 1999
to $187,974,000 on September 30, 2000. Approximately $35.9 million or 79.1% of
the deposit increase was result of the South Carolina Community Bancshares
acquisition. The remaining growth was a result of various deposit promotion
programs with continued emphasis on increasing core deposits.
The Bank's liquidity, as measured by the ratio of cash, cash equivalents (not
committed, pledged or required to liquidate specific liabilities) and investment
securities to total deposits was approximately 25.00% at September 30, 2000.
Assets that qualify as eligible liquidity are defined by applicable federal
regulation and include cash and cash equivalents and certain types of United
States Treasury and agency obligations, and other similar investments. The
required ratio of such liquid investments is currently 4% of certain of the
Bank's liabilities as defined by the Office of Thrift Supervision. The liquidity
requirement is changed periodically by the OTS to reflect economic conditions.
The Bank has relied upon deposit growth and loan repayments as its principal
sources of liquidity. If deposit growth and loan repayments do not generate
sufficient liquid funds in the future, the Bank may borrow additional funds from
the FHLB or liquidate short-term investments. These sources of funds are
intended to provide a secondary source of relatively liquid funds upon which the
Bank may rely, if necessary. See Note 13 to the financial statements for
further information about commitments and contingencies.
At September 30, 2000, the undisbursed portion of construction loans was $5.4
million and the unused portion of credit lines was $7.3 million. Funding for
these commitments is expected to be provided from deposits, loan and mortgage-
backed securities principal repayments, maturing investments and income
generated from operations.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-10-
<PAGE>
As of September 30, 2000, the Bank exceeded the OTS's capital requirements. See
Note 15 to the Consolidated Financial Statements for further discussion of these
capital requirements.
Impact of Inflation and Changing Prices
---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation. Unlike industrial companies, virtually all of the
assets and liabilities of a financial institution are monetary in nature. As a
result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. However, non-interest expenses
do reflect general levels of inflation.
Forward-Looking Statements
--------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other portions of this report contain certain "forward-looking
statements" concerning the future operations of the Corporation. Management
desires to take advantage of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 and is including this statement for the
express purpose of availing the Corporation of the protections of such safe
harbor with respect to all "forward-looking statements" contained in our Annual
Report. We have used "forward-looking statements" to describe future plans and
strategies. Management's ability to predict results or the effect of future
plans or strategies is inherently uncertain. Factors which could affect actual
results include interest rate trends, the general economic climate in the
Corporation's market area and the country as a whole, the ability of the
Corporation to control costs and expenses, the ability of the Corporation to
efficiently incorporate acquisitions into its operations, competitive products
and pricing, loan delinquency rates, and changes in federal and state
regulation. These factors should be considered in evaluating the "forward-
looking statements", and undue reliance should not be placed on such statements.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-11-
<PAGE>
[LOGO]
ELLIOTT, DAVIS & COMPANY, L.L.P.
Certified Public Accountants
and Consultants
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
Union Financial Bancshares, Inc. and Subsidiaries
Union, South Carolina
We have audited the accompanying consolidated balance sheets of Union
Financial Bancshares, Inc. and Subsidiaries as of September 30, 2000 and 1999,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended September 30, 2000.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Union Financial Bancshares, Inc. and Subsidiaries as of September 30, 2000 and
1999 and the consolidated results of their operation and their cash flows for
each of the three years in the period ended September 30, 2000, in conformity
with generally accepted accounting principles.
/s/ Elliott, Davis & Company, LLP
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
November 10, 2000
Moore Stephens Elliott Davis, LLC Letterhead
-12-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
-----------------------------
<TABLE>
<CAPTION>
September 30,
-----------------------
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
Assets
------
Cash $ 2,068 $ 3,149
Short term interest-bearing deposits 2,545 2,421
-------- --------
Total cash and cash equivalents 4,613 5,570
-------- --------
Investment and mortgage-backed securities:
Held to maturity 37,652 5,586
Available for sale 29,240 27,335
-------- --------
Total investment and mortgage-backed securities 66,892 32,921
-------- --------
Loans, net
Held for sale 1,801 216
Held for investment 166,006 149,185
-------- --------
Total loans, net 167,807 149,401
Office properties and equipment, net 6,485 4,524
Federal Home Loan Bank Stock, at cost 2,625 2,050
Accrued interest receivable 1,629 1,574
Goodwill 7,042 2,848
Mortgage servicing rights 452 3,842
Other assets 1,519 2,564
-------- --------
Total assets $259,064 $205,294
======== ========
Liabilities
-----------
Deposit accounts $187,974 $142,624
Advances from the Federal Home Loan Bank and other borrowings 47,687 46,503
Accrued interest payable 329 226
Advances from borrowers for taxes and insurance 473 548
Other liabilities 677 655
-------- --------
Total liabilities 237,140 190,556
-------- --------
Commitments and contingencies - note 13
Shareholders' equity
--------------------
Serial preferred stock, no par value,
authorized - 500,000 shares, issued and outstanding - None
Common stock - $0.01 par value, authorized - 2,500,000 shares
issued and outstanding - 1,911,005 shares at September 30, 2000
and 1,357,214 shares at September 30, 1999 20 14
Additional paid-in capital 11,314 5,484
Accumulated other comprehensive loss (2,050) (1,779)
Retained earnings, substantially restricted 12,640 11,019
-------- --------
Total shareholders' equity 21,924 14,738
-------- --------
Total liabilities and shareholders' equity $259,064 $205,294
======== ========
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-13-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------
2000 1999 1998
---- ---- ----
(In Thousands, Except Share Data)
<S> <C> <C> <C>
Interest Income:
Loans $ 15,272 $ 11,420 $ 11,865
Deposits and federal funds sold 77 83 110
Securities available for sale:
State and municipal 84 36 17
Other investments 1,770 2,320 980
Securities held to maturity 1,352 187 433
---------- ---------- ----------
Total interest income 18,555 14,046 13,405
---------- ---------- ----------
Interest Expense:
Deposit accounts 8,367 5,706 5,544
Advances from the FHLB and other 2,808 1,992 2,005
---------- ---------- ----------
Total interest expense 11,175 7,698 7,549
---------- ---------- ----------
Net Interest Income 7,380 6,348 5,856
Provision for loan losses 225 105 --
---------- ---------- ----------
Net interest income after provision for loan losses 7,155 6,243 5,856
---------- ---------- ----------
Non Interest Income:
Fees for financial services 1,238 905 791
Loan servicing fees, net of servicing amortization 351 (64) (111)
Net gain on sale of investments -- 9 --
Gains on sale of loans 991 342 358
---------- ---------- ----------
Total non interest income 2,580 1,192 1,038
---------- ---------- ----------
Non Interest Expense:
Compensation and employee benefits 3,143 2,368 2,301
Occupancy and equipment 1,425 1,133 972
Deposit insurance premiums 54 77 54
Professional services 303 275 275
Goodwill amortization 613 276 212
Other 814 685 633
---------- ---------- ----------
Total non interest expense 6,352 4,814 4,447
---------- ---------- ----------
Income before income taxes 3,383 2,621 2,447
Provision for income taxes 1,190 945 897
---------- ---------- ----------
Net Income $ 2,193 $ 1,676 $ 1,550
========== ========== ==========
Net Income per common share (Basic) $1.18 $1.26 $1.17
========== ========== ==========
Net Income per common share (Diluted) $1.16 $1.19 $1.10
========== ========== ==========
Cash dividends per common share $0.40 $0.37 $0.35
========== ========== ==========
Weighted average number of common shares 1,855,706 1,328,305 1,327,845
outstanding (Basic) ========== ========== ==========
Weighted average number of common shares 1,898,494 1,414,121 1,410,158
outstanding (Diluted) ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-14-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Additional Earnings Other Total
----------------- Paid-In Substantially Comprehensive Shareholders'
Shares Amount Capital Restricted Income (Loss) Equity
------ ------ ------- ------------- ------------- ------
(In Thousands, Except Share Data)
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1997 827,700 $ 8 $ 3,993 $ 9,589 $ (63) $13,527
-------
Net income -- -- -- 1,550 -- 1,550
Other comprehensive income, net of tax
Unrealized holding gains arising
during period -- -- -- -- 211 211
-------- -------
Comprehensive income 1,761
-------
Options exercised 9,920 -- 51 -- -- 51
Three-for-two stock split 413,850 4 -- (4) -- --
Dividend reinvestment plan contributions 26,780 1 427 -- -- 428
Cash dividend ($.35 per share) -- -- -- (467) -- (467)
--------- --- ------- ------- -------- -------
Balance at September 30, 1998 1,278,250 13 4,471 10,668 148 15,300
Net income -- -- -- 1,676 -- 1,676
Other comprehensive loss, net of tax
Unrealized holding losses arising
during period -- -- -- -- (1,927) (1,927)
-------- -------
Comprehensive loss (251)
-------
Options exercised 315 -- 1 -- -- 1
Five percent stock dividend 63,818 1 830 (829) -- --
Dividend reinvestment plan contributions 14,831 -- 182 -- -- 182
Cash dividend ($.37 per share) -- -- -- (494) -- (494)
--------- --- ------- ------- -------- -------
Balance at September 30, 1999 1,357,214 14 5,484 11,019 (1,779) 14,738
Net income -- -- -- 2,193 -- 2,193
Other comprehensive loss, net of tax
Unrealized holding losses arising
during period -- -- -- -- (271) (271)
-------- -------
Comprehensive income (loss) 1,922
-------
Options exercised 2,200 -- 13 -- -- 13
Acquisition of SCCB 526,183 5 5,617 -- -- 5,622
Dividend reinvestment plan contributions 25,408 1 200 -- -- 201
Cash dividend ($.40 per share) -- -- -- (572) -- (572)
--------- --- ------- ------- -------- -------
Balance at September 30, 2000 1,911,005 $20 $11,314 $12,640 ($2,050) $21,924
========= === ======= ======= ======== =======
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-15-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Operating activities:
Net income $ 2,193 $ 1,676 $ 1,550
Adjustments to reconcile net income to
net cash provided by (used) in operating activities:
Provision for loan losses 225 105 --
Amortization expense 1,241 1,127 561
Depreciation expense 468 343 221
Recognition of deferred income, net of costs (227) (100) (140)
Deferral of fee income, net of costs 471 243 77
Gain on investment transactions -- (9) --
Loans originated for sale (44,102) (108,962) (141,436)
Proceeds from sale of loans 44,102 108,746 123,677
Gain on sale of loans held for sale (991) (342) (358)
(Increase) decrease in accrued interest receivable (50) (377) 120
(Increase) decrease in other assets 1,045 (1,189) (835)
Increase(decrease) in accrued interest payable 103 (239) (22)
Increase (decrease) in other liabilities (53) (110) 434
-------- --------- ---------
Net cash provided by (used) in operating activities 4,425 912 (16,151)
-------- --------- ---------
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-16-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investing activities:
Purchase of investment and mortgage-backed securities:
Held to maturity $(32,213) $ (4,864) $ --
Available for sale (1,575) (16,097) (20,368)
Investment securities acquired (2,602) -- --
Proceeds from maturity of investment and mortgage-backed
securities:
Held to maturity -- 1,500 4,497
Available for sale 100 3,375 7,978
Proceeds from sale of investment and mortgage-backed securities:
Available for sale -- 5,941 --
Principal repayments on mortgage-backed securities:
Held to maturity 779 477 616
Available for sale 1,540 6,356 1,388
Net (increase) decrease in loans 22,985 (9,329) 5,952
Loans acquired (41,144) -- --
Net (increase) decrease in mortgage servicing rights 2,762 (572) (2,814)
Purchase of FHLB stock (575) (27) --
Redemption of FHLB stock -- -- 82
Purchase of office properties and equipment (2,429) (847) (1,231)
-------- -------- --------
Net cash used in investing activities (52,372) (14,087) (3,900)
-------- -------- --------
Financing activities:
Proceeds from the exercise of stock options 13 1 51
Proceeds from dividend reinvestment plan 200 182 427
Dividends paid in cash (572) (494) (467)
Proceeds from term borrowings 1,184 4,863 3,853
Acquired deposits 35,688 12,622 --
Increase in goodwill intangible (4,808) (1,256) --
Stock issued in acquisition 5,622 -- --
Increase (decrease) in deposit accounts 9,663 (766) 11,959
-------- -------- --------
Net cash provided by financing activities 46,990 15,152 15,823
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (957) 1,977 (4,228)
Cash and cash equivalents at beginning of year 5,570 3,593 7,821
-------- -------- --------
Cash and cash equivalents at end of year $ 4,613 $ 5,570 $ 3,593
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-17-
<PAGE>
UNION FINANCIAL BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Summary of Significant Accounting Policies
Organization - The Corporation is the savings and loan holding company for
------------
Provident Community Bank (formerly known as Union Federal Savings Bank), a
federally chartered savings bank ("the Bank"). Provident Community Bank,
founded in 1934, offers a complete array of financial services through six full
service banking centers, a mortgage banking center and a lending and investment
center in three counties in South Carolina. The Bank offers a full range of
financial services including checking, savings, time deposits, individual
retirement accounts (IRAs), investment services, and secured and unsecured
consumer loans. The Bank originates and services home loans and provides
financing for small businesses and affordable housing.
On November 12, 1999 Union Financial acquired SCCB, a thrift headquartered in
Winnsboro, South Carolina ( Note 2).
Accounting Principles - The accounting and reporting policies of the Corporation
---------------------
conform to generally accepted accounting principles and to general practice
within the banking industry. In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses and
disclosure of commitments and contingencies. Actual results could differ from
those estimates. The following summarizes the more significant policies.
Basis of Consolidation - The accompanying consolidated financial statements
----------------------
include the accounts of the Corporation and its wholly owned subsidiary,
Provident Community Bank and its wholly owned subsidiary, Provident Financial
Services, Inc. ("PFS"). PFS consists primarily of investment brokerage
services. All intercompany amounts and balances have been eliminated in
consolidation.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand and
-------------------------
amounts due from depository institutions, federal funds sold and short term,
interest-bearing deposits. From time to time, the Corporation's cash deposits
with other financial institutions may exceed the FDIC insurance limits.
Investments - The Bank accounts for investment securities in accordance with
-----------
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
--------------
Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance
-------------------------------------------------
with SFAS115, debt securities that the Corporation has the positive intent and
ability to hold to maturity are classified as "held to maturity" securities and
reported at amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
"trading" securities and reported at fair value, with unrealized gains and
losses included in earnings. Debt and equity securities not classified as
either held to maturity or trading securities are classified as "available for
sale" securities and reported at fair value with unrealized gains and losses
excluded from earnings and reported as a separate component of shareholders'
equity. Transfers of securities between classifications will be accounted for
at fair value. No securities have been classified as trading securities.
Premiums and discounts on debt securities are amortized or accreted as
adjustments to income over the estimated life of the security using a method
approximating the level yield method. Gains or losses on the sale of securities
are based on the specific identification method. The fair value of securities
is based on quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.
Loans - Loans held for investment are recorded at cost. Mortgage loans consist
-----
principally of conventional one to four family residential loans and interim and
permanent financing of non-residential loans that are secured by real estate.
Commercial loans are made primarily on the strength of the borrower's general
credit standing, the ability to generate repayment from income sources and the
collateral securing such loans. Consumer loans generally consist of home equity
loans, automobile and other personal loans.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-18-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
In many lending transactions, collateral is taken to provide an additional
measure of security. Generally, the cash flow or earning power of the borrower
represents the primary source of repayment, and collateral liquidation serves as
a secondary source of repayment. The Corporation determines the need for
collateral on a case-by-case or product-by-product basis. Factors considered
include the current and prospective credit worthiness of the customer, terms of
the instrument and economic conditions.
Mortgage loans held for sale are valued at the aggregate lower of cost or market
as determined by outstanding commitments from investors or current investor
yield requirements calculated on the aggregate loan basis.
Allowances for Estimated Losses - The Corporation maintains allowances for
-------------------------------
estimated loan losses and losses on real estate acquired in settlement of loans.
Loss provisions are charged to income when, in the opinion of management, such
losses for which no provision has been made are probable.
The allowance for loan losses is based upon an evaluation of the loan portfolio.
The evaluation considers such factors as the delinquency status of loans,
current economic conditions, the net realizable value of the underlying
collateral and prior loan loss experience.
Recovery of the carrying value of loans is dependent to some extent on the
future economic environment and operating and other conditions that may be
beyond the Corporation's control. Unanticipated future adverse changes in such
conditions could result in material adjustments to allowances (and future
results of operation).
Accounting for Impaired Loans - Impaired loans are accounted for in accordance
-----------------------------
with SFAS No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS
------------------------------------------------
114"), which was amended by SFAS No. 118. SFAS 114 requires that impaired loans
be measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical matter, at the loan's
observable market value or fair value of the collateral if the loan is
collateral dependent. The Corporation maintains an allowance for impaired
loans based on a combination of evaluation of impairment of smaller balance,
homogeneous loans (primarily consumer loans and 1-4 family real estate
mortgages) and specific identification of impaired loans based on delinquency
status and other factors related to the borrower's ability to repay the loan.
The risk characteristics used to aggregate loans are collateral type, borrower's
financial condition and geographic location.
The Corporation generally determines a loan to be impaired at the time
management believes that it is probable that the principal and interest may be
uncollectible. Management has determined that, generally, a failure to make a
payment within a 90-day period constitutes a minimum delay or shortfall and does
not generally constitute an impaired loan. However, management reviews each
past due loan on a loan-by-loan basis and may determine a loan to be impaired
prior to the loan becoming over 90 days past due, depending upon the
circumstances of that particular loan. A loan is classified as a non accrual
loan at the time management believes that the collection of interest is
improbable, generally when a loan becomes 90 days past due. The Corporation's
policy for charge-off of impaired loans is on a loan-by-loan basis. At the time
management believes the collection of interest and principal is remote, the loan
is charged off. The Corporation's policy is to evaluate impaired loans based on
the fair value of the collateral. Interest income from impaired loans is
recorded using the cash method.
As of and for the years ended September 30, 2000 and 1999, impaired loans
totaled $55,951 and $12,822 respectively, and the Corporation had recognized no
interest income from impaired loans.
Office Properties and Equipment - Office properties and equipment are presented
-------------------------------
at cost less accumulated depreciation. Depreciation is provided on the
straight-line basis over the estimated useful lives of the assets. Estimated
useful lives are 20-50 years for buildings and improvements and generally five
to ten years for furniture, fixtures and equipment.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-19-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
The cost of maintenance and repairs is charged to expense as incurred, and
improvements and other expenditures, which materially increase property lives,
are capitalized. The costs and accumulated depreciation applicable to office
properties and equipment retired or otherwise disposed of are eliminated from
the related accounts, and any resulting gains or losses are credited or charged
to income.
Federal Home Loan Bank Stock-The Bank , as a member institution of FHLB of
----------------------------
Atlanta, is required to own capital stock in the FHLB of Atlanta based generally
upon the Bank's balances of residential mortgage loans and FHLB advances. No
ready market exists for this stock and it has no quoted market value. However,
redemption of this stock has historically been at par value.
Mortgage Servicing Rights - The Corporation accounts for mortgage servicing
-------------------------
rights in accordance with SFAS No. 122, Accounting for Mortgage Servicing
---------------------------------
Rights. The statement eliminates the distinction between originated and
------
purchased mortgage servicing rights. The Corporation capitalizes the allocated
cost of originated mortgage servicing rights and records a corresponding
increase in mortgage banking income.
Purchased mortgage servicing rights are recorded at the lower of cost or market.
Originated mortgage servicing rights are capitalized based on the allocated cost
which is determined when the underlying loans are sold or securitized. MSRs
are amortized in proportion to and over the period of estimated net servicing
income using a method that is designed to approximate a level-yield method,
taking into consideration the estimated prepayment of the underlying loans. For
purposes of measuring impairment, MSRs are periodically reviewed for impairment
based upon quarterly valuations. Such valuations are based on projections using
a discounted cash flow method that includes assumptions regarding prepayments,
servicing costs and other factors. Impairment is measured on a disaggregated
basis for each pool of rights.
Real Estate Acquired Through Foreclosure - Real estate acquired through
----------------------------------------
foreclosure is stated at the lower of cost or estimated fair value less
estimated costs to sell. Any accrued interest on the related loan at the date
of acquisition is charged to operations. Costs relating to the development and
improvement of property are capitalized to the extent that such costs do not
exceed the estimated fair value less selling costs of the property, whereas
those relating to holding the property are charged to expense. Real estate
acquired through foreclosure is included in other assets on the balance sheet.
Sale of Loans - The Corporation frequently sells and retains servicing rights on
-------------
certain mortgage loans. Gains or losses on the sale of such loans are
recognized when substantially all risks and rewards of ownership are
transferred. If loan servicing is retained, the value of future servicing rights
are considered in the determination of the amount of gain or loss.
Income Taxes - The Corporation accounts for income taxes in accordance with SFAS
------------
No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109, deferred
---------------------------
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. A valuation allowance is established
for deferred tax assets that may not be realized. Also, SFAS 109 eliminates, on
a prospective basis, the exception from the requirement to record deferred taxes
on tax basis bad debt reserves in excess of the base year amounts. The tax
basis bad debt reserve that arose prior to the fiscal year 1988 (the base year
amount) is frozen, and the book reserves at that date and all subsequent changes
in book and tax basis reserves are included in the determination of deferred
taxes.
Fair Values of Financial Instruments - The following methods and assumptions
------------------------------------
were used by the Corporation in estimating fair values of financial instruments
as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and short-term
instruments approximate their fair value.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-20-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Available for sale and held to maturity securities - Fair values for securities
are based on quoted market prices. The carrying values of restricted equity
securities approximate fair values.
Loans - For variable rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair values
for certain mortgage loans (for example, one-to-four-family residential),
credit-card loans, and other consumer loans are based on quoted market prices
of similar loans sold in conjunction with securitization transactions, adjusted
for differences in loan characteristics. Fair values for commercial real
estate and commercial loans are estimated using discounted cash flow analysis,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analysis or underlying collateral values,
where applicable.
Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money-market accounts and certificates of deposit (CD's) approximate their fair
values at the reporting date. Fair values for fixed-rate CD's are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
Short-term borrowings - The carrying amounts of other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analysis based
on the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Long-term debt - The fair values of the Corporation's long-term debt are
estimated using discounted cash flow analysis based on the Corporation's
current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest - The carrying amounts of accrued interest approximate their
fair values.
Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standings.
Per-Share Data - SFAS 128, Earnings Per Share, issued in February 1997,
-------------- ------------------
simplifies the standard for computing earnings per share and makes them
comparable to international earnings per share standards. It also requires the
dual presentation of basic and diluted earnings per share on the face of the
income statement.
Basic earnings per share is computed by dividing net income by the weighted-
average number of shares outstanding for the period. Diluted earnings per share
is similar to the computation of basic earnings per share except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued. The dilutive effect of options outstanding under the Corporation's stock
option plan is reflected in diluted earnings per share by the application of
the treasury stock method.
SFAS128 became effective for the Corporation as of September 30, 1998. As
required by SFAS 128, all prior period earnings per share data presented has
been restated to conform with the provisions of the statement.
Share and per-share data have been restated to reflect the 3:2 stock split which
occurred in February 1998 and the 5% stock dividend which occurred in February,
1999.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-21-
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Goodwill - Goodwill consists of core deposit premiums resulting from the
--------
Corporation's branch acquisition and the excess of cost over the fair value of
net assets resulting from the acquisition of SCCB.
Interest Income - Interest on loans is accrued and credited to income monthly
---------------
based on the principal balance outstanding and the contractual rate on the loan.
The Corporation places loans on non-accrual status when they become greater than
ninety days delinquent or when in the opinion of management, full collection of
principal or interest is unlikely. The Corporation provides an allowance for
uncollectible accrued interest on loans which are ninety days delinquent for all
interest accrued prior to the loan being placed on non-accrual status. The
loans are returned to an accrual status when full collection of principal and
interest appears likely.
Risks and Uncertainties - In the normal course of its business, the Corporation
-----------------------
encounters two significant types of risk: economic and regulatory. There are
three main components of economic risk: interest rate risk, credit risk and
market risk. The Corporation is subject to interest rate risk to the degree that
its interest-bearing liabilities mature or reprice at different speeds, or on
different bases, than its interest earning assets.
Credit risk is the risk of default on the Corporation's loan portfolio that
results from the borrowers' inability or unwillingness to make contractually
required payments. Credit risk also applies to investment securities and
mortgage-backed securities should the issuer of the security be unable to make
principal and interest payments. Market risk reflects changes in the value of
collateral underlying loans receivable, the valuation of real estate held by the
Corporation and the valuation of investment securities.
The Corporation is subject to the regulations of various government agencies.
These regulations can and do change significantly from period to period. The
Corporation also undergoes periodic examinations by the regulatory agencies,
which may subject it to further changes with respect to asset valuations,
amounts of required loss allowances and operating restrictions resulting from
the regulators' judgements based on information available to them at the time of
their examination.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the dates of the balance
sheets and revenues and expenses for the periods covered. Actual results could
differ from those estimates and assumptions.
Reclassifications - Certain amounts in prior years' financial statements have
-----------------
been reclassified to conform with current year classifications.
2. Merger
On November 12,1999, Union Financial acquired the net assets of SCCB. Union
Financial issued 526,183 shares of stock of Union Financial for each of the
outstanding shares of SCCB as of the merger date. The purchase consideration
totaled 526,183 shares of Union Financial stock and $3,582,081 for partial
shares. The transaction was accounted for under the purchase method of
accounting. Accordingly, the results of operations of Union Financial included
in the accompanying consolidated financial statements for the period November
12, 1999 through September 30, 2000 include income and expense associated with
the net assets of the former SCCB. Assets acquired and liabilities assumed have
been recorded at their estimated fair market values. The excess of cost over the
estimated fair value of net assets acquired of $4,693,372 was allocated to
goodwill and will be amortized over a period of 15 years. The following
unaudited pro forma information presents the results of operations of the
Corporation as if the acquisition had taken place on October 1, 1998 ( in
thousands, except per share data):
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-22-
<PAGE>
2. Merger (continued)
For The Years Ended September 30,
---------------------------------
2000 1999
---- ----
Net interest income $7,525 $ 8,012
Net earnings 2,229 2,057
Earnings per share
Basic $ 1.20 $ 1.06
Diluted $ 1.17 $ 1.06
3. Investment And Mortgage-backed Securities
HELD TO MATURITY - Securities classified as held to maturity consisted of the
following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed Securities:
FHLMC $34,589 $ -- ($1,818) $32,771
GNMA 586 -- (2) 584
Investment Securities:
U.S. Agency Obligations 2,477 -- (35) 2,442
------- ---- -------- -------
Total held to maturity $37,652 $ -- ($1,855) $35,797
======= ==== ======== =======
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Mortgage-backed Securities:
FHLMC $4,864 $-- ($326) $4,538
GNMA 722 78 -- 800
------ --- ----- ------
Total held to maturity $5,586 $78 ($326) $5,338
====== === ===== ======
</TABLE>
Available for Sale - Securities classified as available for sale consisted of
------------------
the following (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $16,264 -- $ ($1,414) $14,850
Municipal Securities 1,765 -- (96) 1,669
Other 497 -- (61) 436
------- ---- ------- -------
Total Investment Securities 18,526 -- (1,571) 16,955
------- ---- ------- -------
Mortgage-backed Securities:
FHLMC 7,922 -- (187) 7,735
CMOs 5,996 -- (1,446) 4,550
------- ---- ------- -------
Total Mortgage-backed Securities 13,918 -- (1,633) 12,285
------- ---- ------- -------
Total available for sale $32,444 $ -- ($3,204) $29,240
======= ==== ======= =======
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-23-
<PAGE>
3. Investment And Mortgage-backed Securities (continued)
<TABLE>
<CAPTION>
September 30, 2000
----------------------------------------------
Gross Unrealized
Amortized ------------------ Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Agency Obligations $15,139 $ -- ($1,209) $13,930
Municipal Securities 1,701 -- (125) 1,576
------- ---- ------- -------
Total Investment Securities 16,840 -- (1,334) 15,506
------- ---- ------- -------
Mortgage-backed Securities:
FHLMC 6,358 -- (137) 6,219
FNMA 966 -- (17) 949
CMOs 5,592 -- (1,291) 4,661
------- ---- ------- -------
Total Mortgage-backed Securities 13,274 -- (1,445) 11,829
------- ---- ------- -------
Total available for sale $30,114 $ -- ($2,779) $27,335
======= ==== ======= =======
</TABLE>
Proceeds, gross gains and gross losses realized from the sales, calls and
prepayments of available for sale securities were as follows for the years ended
(in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
<S> <C> <C> <C>
2000 1999 1998
----- ------ ------
Proceeds $ 100 $9,316 $7,978
----- ------ ------
Gross gains $ -- $ 9 $ --
Gross losses -- -- --
----- ------ ------
Net gain on investment transactions $ -- $ 9 $ --
===== ====== ------
</TABLE>
The maturities of securities at September 30, 2000 are as follows (in
thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
----------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 902 $ 989 $ 23 $ 23
Due after one year through five years 1,582 1,551 2,530 2,473
Due after five years through ten years -- -- 1,325 1,276
Due after ten years 35,168 33,257 28,566 25,468
------- ------- ------- -------
Total investment and mortgage-backed
securities $37,652 $35,797 $32,444 $29,240
======= ======= ======= =======
</TABLE>
The mortgage-backed securities held at September 30, 2000 mature between one and
thirty years. The actual lives of those securities may be significantly shorter
as a result of principal payments and prepayments.
At September 30, 2000 and 1999, $12,535,000 and $12,963,000, respectively, of
securities were pledged as collateral for certain deposits.
At September 30, 2000, approximately $17,076,000 of mortgage-backed securities
were adjustable rate securities. The adjustment periods range from monthly to
annually and rates are adjusted based on the movement of a variety of indices.
Investments in collateralized mortgage obligations ("CMOs") represent securities
issued by agencies of the federal government. At September 30, 2000
approximately $5,681,000 was invested in CMOs.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-24-
<PAGE>
<TABLE>
<CAPTION>
4. Loans, Net
Loans receivable consisted of the following (in thousands):
September 30,
----------------------
1999 2000
-------- --------
<S> <C> <C>
Conventional real estate loans:
Fixed rate residential
Held for sale $ 1,801 $ 216
Held for investment 63,776 56,963
Fixed rate commercial 4,419 3,036
Adjustable rate residential
Held for sale -- --
Held for investment 51,524 47,915
Adjustable rate commercial 425 136
Construction loans 12,335 17,039
-------- --------
Total real estate loans 134,280 125,305
-------- --------
Other loans:
Consumer and installment loans 17,751 16,409
Commercial loans 10,719 7,748
Consumer lines of credit 12,433 8,855
Loans secured by deposit accounts 1,971 1,435
-------- --------
Total other loans 42,874 34,447
-------- --------
Total loans 177,154 159,752
-------- --------
Less:
Undisbursed portion of interim
construction loans (5,445) (9,964)
Loan discount unamortized (2,718) --
Allowance for loan losses (1,360) (836)
Net deferred loan origination costs 176 449
-------- --------
Total, net $167,807 $149,401
======== ========
Weighted-average interest rate of loans 8.89% 7.85%
</TABLE>
The Corporation sells loans in the secondary market without recourse and retains
servicing rights. Servicing loans for others consists of collecting mortgage
payments, maintaining escrow accounts, disbursing payments to investors and
foreclosure processing. Loan servicing income is recorded on the accrual basis
and includes servicing fees received from the investors as well as certain
charges collected from the borrowers, such as late payment fees. Loans sold and
serviced by the Corporation at September 30, 2000 and 1999 were approximately
$47,133,000 and $257,906,000, respectively. The Corporation sold approximately
$250,000,000 in mortgage loan servicing during fiscal year 2000 resulting in a
pretax gain of approximately $700,000. In connection with these loans serviced
for others, the Corporation held borrowers' escrow balances of $473,000 at
September 30, 2000 and $548,000 at September 30, 1999.
Adjustable rate real estate loans (approximately $51,524,000 and $47,915,000 at
September 30, 2000 and 1999, respectively) are subject to rate adjustments
annually and generally are adjusted based on movement of the Federal Home Loan
Bank National Monthly Median Cost of Funds rate or the Constant Maturity
Treasury index. The maximum loan rates can be adjusted is 200 basis points in
any one year with a lifetime cap of 600 basis points.
The Corporation made commercial real estate loans which totaled approximately
$4,844,000 and $3,172,000 at September 30, 2000 and 1999, respectively. These
loans are considered by management to contain a somewhat
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-25-
<PAGE>
4. Loans, Net (continued)
greater risk of uncollectibility due to the dependency on income production or
future development and sale of the real estate. These commercial real estate
loans are collateralized by housing for the aged, churches, motels, apartments
and other improved real estate.
Mortgage loans held for sale are stated at the lower of aggregate cost or
market, net of discounts and deferred loan fees and are included in net loans in
the consolidated balance sheets. Nonrefundable deferred origination fees and
cost and discount points collected at loan closing, net of commitment fees paid,
are deferred and recognized at the time of sale of the mortgage loans. Gain or
loss on sales of mortgage loans is recognized based upon the difference between
the selling price and the carrying amount of the mortgage loans sold. Other
fees earned during the loan origination process are also included in net gain or
loss on sales of mortgage loans.
Mortgage servicing rights are accounted for in accordance with SFAS No. 122,
Accounting for Mortgage Servicing Rights. SFAS No. 122 requires that an entity
----------------------------------------
recognize, as separate assets, rights to service mortgage loans for others,
whether purchased or originated, by allocating the total cost of loans between
the loan and the mortgage servicing rights ("MSR") based on their relative fair
values.
Capitalized MSRs are amortized based on a method which approximates the
proportion of current net servicing revenues to the total estimated net
servicing revenues expected to be recognized over the average estimated
remaining lives of the underlying loans. Capitalized MSRs are assessed for
impairment based on their fair values.
The Bank paid $621,000 for mortgage servicing rights for approximately
$44,102,000 of loans in 2000. The amortization of servicing rights and excess
servicing rights included in loan servicing fees amounted to $628,653, $850,589,
and $348,764 in 2000, 1999, and 1998 respectively. The fair value of mortgage
servicing rights at September 30, 2000 is approximately $530,000.
Nonrefundable loan fees and certain direct loan origination costs are deferred
and recognized over the lives of the loans using the level yield method.
Amortization of these deferrals is recognized as interest income. Deferred loan
origination fees are included in loans held for investment on the balance
sheet.
Under OTS regulations, the Bank may not make loans to one borrower in excess of
15% of unimpaired capital. This limitation does not apply to loans made before
August 9, 1989. At September 30, 2000, the Bank had loans outstanding to one
borrower ranging up to $1,260,000 and was in compliance with this regulation.
Also under current regulations, the Bank's aggregate commercial real estate
loans may not exceed 400% of its capital as determined under regulatory
requirements. These limitations are not expected to have a material impact on
the Bank's ongoing operations.
At September 30, 2000 and 1999, loans which are accounted for on a non-accrual
basis or contractually past due ninety days or more totaled approximately
$1,116,000 and $184,000, respectively. All non-accruing loans and allowance for
loan losses for the year ending September 30, 2000 include loans and balances
assumed with the acquisition of SCCB. The amount the Corporation will
ultimately realize from these loans could differ materially from their carrying
value because of future developments affecting the underlying collateral or the
borrower's ability to repay the loans. During the years ended September 30,
2000, 1999, and 1998, the Corporation recognized no interest income on loans
past due 90 days or more, whereas, under the original terms of these loans, the
Corporation would have recognized additional interest income of approximately
$95,000, $8,000, and $20,000, respectively.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-26-
<PAGE>
4. Loans, Net (continued)
The changes in the allowance for loan losses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
---------------------------
<S> <C> <C> <C>
2000 1999 1998
------ ----- -----
Balance at beginning of year $ 836 $ 827 $ 928
Provision for loan losses 225 105 --
Merger additions 449 -- --
(Charge-offs) recoveries, net (150) (96) (101)
------ ----- -----
Balance at end of year $1,360 $ 836 $ 827
====== ===== =====
</TABLE>
Directors and officers of the Corporation are customers of the Corporation in
the ordinary course of business. Loans of directors and officers have terms
consistent with those offered to other customers. Loans to officers and
directors of the Corporation are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------
<S> <C> <C> <C>
2000 1999 1998
------ ------ -------
Balance at beginning of year $2,304 $1,919 $ 1,014
Loans originated during the year 81 472 1,908
Loan repayments during the year (840) (87) (1,003)
------ ------ -------
Balance at end of year $1,545 $2,304 $ 1,919
====== ====== =======
</TABLE>
5. Office Properties And Equipment
Office properties and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------
1999 2000
---- ----
<S> <C> <C>
Land $ 889 $ 660
Building and improvements 3,676 3,212
Office furniture, fixtures and equipment 4,336 1,912
------- -------
Total 8,901 5,784
Less accumulated depreciation (2,416) (1,260)
------- -------
Office properties and equipment, net $ 6,485 $ 4,524
======= =======
</TABLE>
6. Goodwill
The changes in goodwill consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of year $2,848 $1,868 $2,009
Additions 4,807 1,256 --
------ ------
Amortization (613) (276) (141)
------ ------ ------
Balance at end of year $7,042 $2,848 $1,868
====== ====== ======
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-27-
<PAGE>
7. Deposit Accounts
Deposit accounts at September 30, were as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------------------- ----------------------
Rate Balance % Rate Balance %
---- ------- - ---- ------- -
Account Type
------------
NOW accounts:
<S> <C> <C> <C> <C> <C> <C>
Commercial noninterest-bearing $ 6,904 3.67% $ 8,146 5.71%
Noncommercial 1.07% 11,918 6.34% 0.81% 12,091 8.48%
Money market checking accounts 4.39% 9,404 5.00% 3.31% 7,303 5.12%
Regular savings 2.04% 15,818 8.41% 1.60% 12,695 8.90%
-------- ------ -------- ------
Total demand and savings deposits 1.69% 44,044 23.43% 1.34% 40,235 28.21%
-------- ------ -------- ------
Savings certificates:
Up to 3.00% 81 0.04% 558 0.39%
3.01 %- 4.00% 359 0.19% -- 0.00%
4.01 %- 5.00% 35,182 18.72% 53,566 37.56%
5.01 %- 6.00% 17,870 9.51% 41,597 29.17%
6.01 %- 7.00% 84,066 44.72% 5,972 4.19%
7.01 %- 8.00% 4,600 2.45% -- 0.00%
-------- ------ -------- ------
Total savings certificates 5.51% 142,158 75.63% 4.95% 101,693 71.30%
-------- ------ -------- ------
Sweep accounts 5.00% 1,772 0.94% 4.00% 696 0.49%
Total deposit accounts 4.71% $187,974 100.00% 3.92% $142,624 100.00%
==== ======== ====== ==== ======== ======
</TABLE>
As of September 30, 2000 and 1999, total deposit accounts include approximately
$1,921,000 and $1,322,000, respectively, of deposits from the Corporation's
officers, directors, employees or parties related to them.
At September 30, 2000 and 1999, deposit accounts with balances of $100,000 and
over totaled approximately $47,298,000 and $23,022,000, respectively.
Savings certificates by maturity were as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Maturity Date
-------------
Within 1 year $118,798 $ 89,343
After 1 but within 2 years 22,178 6,998
After 2 but within 3 years 1,131 4,232
Thereafter 51 1,120
-------- --------
Total certificate accounts $142,158 $101,693
======== ========
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-28-
<PAGE>
7. Deposit Accounts (continued)
Interest expense on deposits consisted of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------
2000 1999 1998
------ ------ ------
<S> <C> <C> <C>
Account Type
------------
NOW accounts and money market deposit accounts $ 507 $ 411 $ 410
Passbook and statement savings accounts 319 207 253
Certificate accounts 7,577 5,107 4,912
Early withdrawal penalties (36) (19) (31)
------ ------ ------
Total $8,367 $5,706 $5,544
====== ====== ======
</TABLE>
8. Advances From The Federal Home Loan Bank And Other Borrowings
At September 30, 2000 and 1999, the Bank had $47,687,000 and $46,503,000,
respectively, of advances outstanding from the Federal Home Loan Bank and
treasury, tax and loan deposits. The maturity of the advances from the Federal
Home Loan Bank and treasury, tax and loan deposits is as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
Contractual Maturity:
Within one year - fixed rate $ 5,000 $14,503
Within one year - adjustable rate 20,187 7,000
After one but within three years - fixed rate 5,000 --
After one but within three years - adjustable rate 10,000 --
Greater than three years-adjustable rate $ 7,500 $25,000
------- -------
Total Advances $47,687 $46,503
======= =======
Weighted average rate 6.28% 5.69%
</TABLE>
The Bank pledges as collateral to the advances their Federal Home Loan Bank
Stock, and has entered into a blanket collateral agreement with the Federal Home
Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying
mortgages (as defined) with unpaid principal balances equal to, when discounted
at 75% of the unpaid principal balances, 100% of total advances. The amount of
qualifying mortgages was $102,041,000 and $112,304,000, respectively, at
9. Income Taxes
Income tax expense (benefit) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
For the Years Ended September 30,
-----------------------------------
<S> <C> <C> <C>
2000 1999 1998
------ ------ ------
Current $1,020 ($364) $1,094
Deferred 170 1,309 197
------ ------ ------
Total income taxes $1,190 $ 945 $ 897
====== ====== ======
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-29-
<PAGE>
9. Income Taxes (continued)
The provision for income taxes differed from amounts computed by applying the
statutory federal rate of 34% to income before income taxes as follows (in
thousands):
<TABLE>
<CAPTION>
For the Years Ended September 30,
----------------------------------
<S> <C> <C> <C>
2000 1999 1998
------ ----- -----
Tax at federal income tax rate $1,150 $ 891 $ 832
-----------------------------
Increase (decrease) resulting from:
State income taxes, net of federal benefit 109 100 96
Interest on municipal bonds (23) (9) (6)
Non-taxable life insurance income 4 (28) --
Other, net (50) (9) (25)
------ ----- -----
Total $1,190 $ 945 $ 897
====== ===== =====
</TABLE>
The tax effects of significant items comprising the Corporation's deferred taxes
as of September 30, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
----------------
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Book reserves in excess of tax basis bad debt reserves $ 208 $ 207
Book reserves and amortization in excess of tax on mortgage servicing rights 58 58
SFAS No. 115 mark to market adjustment 1,337 1,001
Difference between book and tax goodwill basis 118 76
Other 76 30
------ ------
Total deferred tax asset 1,797 1,372
Deferred tax liabilities:
Difference between book and tax property basis 269 199
Difference between book and tax Federal Home Loan Bank stock basis 95 95
Deferred loan fees 72 184
Tax mark to market adjustment on securities 1,089 1,056
Other 276 --
------ ------
Total deferred tax liability 1,801 1,534
------ ------
Net deferred tax asset (liability) ($4) ($162)
====== ======
</TABLE>
Net deferred tax liabilities of $4,000 and $162,000 at September 30, 2000 and
1999, are included in other assets in the balance sheet.
Legislation has been passed which repeals the "reserve" method of accounting for
thrift bad debt reserves for the first tax year beginning after December 31,
1995 (the fiscal year ending September 30, 1999 for the Corporation which
qualifies for deferral of the recapture under the "residential loan
requirement"). This legislation requires all thrifts (including the
Corporation) to account for bad debts using either the specific charge-off
method (available to all thrifts) or the experience method (available only to
thrifts that qualify as "small banks," i.e. under $500 million in assets). The
Corporation currently uses the experience method of accounting for its tax bad
debt reserves. The legislation also suspends recapture of bad debt reserves
taken through 1987 (i.e., the base year reserve), but requires thrifts to
recapture or repay bad debt deductions taken after 1987 over six years.
As of September 30, 2000, the bad debt reserve subject to recapture, for which
deferred taxes have previously been
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-30-
<PAGE>
9. Income Taxes (continued)
provided, totaled approximately $226,000. As permitted under SFAS 109, no
deferred tax liability is provided for approximately $1,636,000 ($621,000
approximate tax effect) of such tax bad debt reserves that arose prior to
October 1, 1988.
10. Employee Benefits
The Corporation has a contributory profit-sharing plan which is available to all
eligible employees. Annual employer contributions to the plan consist of an
amount which matches participant contributions up to a maximum of 5% of a
participant's compensation and a discretionary amount determined annually by the
Corporation's Board of Directors. In addition, the Corporation implemented a
money purchase pension plan, effective October 1, 1996, in which all eligible
employees participate. The annual contributions to the pension plan will be 5%
of a participant's compensation. Employer expensed contributions to the plans
were $209,000, $154,000, and $182,000 for the years ended September 30, 2000,
1999 and 1998, respectively.
11. Financial Instruments
The Corporation is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates. These
financial instruments are commitments to extend credit. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of
any condition established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Corporation upon extension of credit, is based on management's
credit evaluation of the counter-party. Collateral held varies but may include
accounts receivable, inventory, property, plant, and equipment and income-
producing commercial properties.
Those instruments involve, to varying degrees, elements of credit and interest-
rate-risk in excess of the amount recognized in the Consolidated Balance Sheets.
The contract amounts of those instruments reflect the extent of the
Corporation's involvement in particular classes of financial instruments.
The Corporation had loan commitments as follows (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------------------------
2000 1999
----- -----
<S> <C> <C>
Fixed interest rate commitments to extend credit $0 $830
Undisbursed portion of interim construction loans 5,445 9,964
Unused portion of credit lines (principally variable-rate
consumer lines secured by real estate) 7,334 7,292
------- -------
Total $12,779 $18,086
======= =======
</TABLE>
The Corporation has no additional financial instruments with off-balance sheet
risk.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-31-
<PAGE>
11. Financial Instruments (continued)
The Corporation has not been required to perform on any financial guarantees
during the past two years. The Corporation has not incurred any losses on its
commitments in 2000, 1999 or 1998.
The estimated fair values of the Corporation's financial instruments were as
follows at September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets
----------------
Cash and cash equivalents $4,613 $4,613
Securities available for sale 29,240 29,240
Securities held to maturity 37,652 35,797
FHLB Stock 2,625 2,625
Loans 167,807 164,870
Accrued interest receivable 1,629 1,629
Financial liabilities
---------------------
Deposits $187,974 $187,320
Advances from FHLB and other borrowings 47,687 46,886
Off-balance-sheet asset (liabilities)
-------------------------------------
Commitments to extend credit $12,779 $12,779
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
---------------------------------------------
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Financial assets $5,570 $5,570
----------------
Cash and cash equivalents 27,335 27,335
Securities available for sale 5,586 5,338
Securities held to maturity 2,050 2,050
FHLB Stock 149,401 146,293
Loans 1,574 1,574
Accrued interest receivable
Financial liabilities
---------------------
Deposits $142,624 $138,642
Advances from FHLB and other borrowings 46,503 41,814
Off-balance-sheet asset (liabilities)
-------------------------------------
Commitments to extend credit $18,086 $18,086
</TABLE>
-------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-32-
<PAGE>
12. Supplemental Cash Flow Disclosures
<TABLE>
<CAPTION>
For the Years Ended September 30,
---------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash paid for:
Income taxes $520 $1,231 $792
Interest 11,072 7,698 7,213
Non-cash transactions:
Loans foreclosed 387 214 --
Unrealized gain (loss) on securities available for sale (3,204) (3,119) 250
Exchanges of mortgage loans for securities $32,300 -- --
</TABLE>
13. Commitments And Contingencies
Concentrations of Credit Risk - The Corporation's business activity is
-----------------------------
principally with customers located in South Carolina. Except for residential
loans in the Corporation's market area, the Corporation has no other significant
concentrations of credit risk.
Litigation - The Corporation is involved in legal actions in the normal course
----------
of business. In the opinion of management, based on the advice of its general
counsel, the resolution of these matters will not have a material adverse impact
on future results of operations or the financial position of the Corporation.
Potential Impact of Changes in Interest Rates - The Corporation's profitability
---------------------------------------------
depends to a large extent on its net interest income, which is the difference
between interest income from loans and investments and interest expense on
deposits and borrowings. Like most financial institutions, the Corporation's
interest income and interest expense are significantly affected by changes in
market interest rates and other economic factors beyond its control. The
Corporation's interest-earning assets consist primarily of long-term, fixed rate
mortgage loans and investments which adjust more slowly to changes in interest
rates than its interest-bearing liabilities which are primarily term deposits
and advances. Accordingly, the Corporation's earnings would be adversely
affected during periods of rising interest rates.
14. Stock Option and Ownership Plans
The Corporation has a stock option plan through which the Board of Directors may
grant stock options to officers and employees to purchase common stock of the
Corporation at prices not less than 100 percent of the fair market value on the
date of grant. The outstanding options expire ten years from the date of grant.
The Corporation applies Accounting Principles Board (APB) Opinion 25 and related
Interpretations in accounting for the plan. Accordingly, no compensation cost
has been charged to operations. Had compensation cost for the plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the accounting method available under SFAS No. 123, Accounting
----------
for Stock-Based Compensation, the Corporations's net income and net income per
----------------------------
common share would have been reduced to the pro forma amounts indicated below:
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-33-
<PAGE>
14. Stock Option and Ownership Plans (continued)
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net income (in thousands)
As reported $2,193 $1,676 $1,550
Pro forma 2,164 1,658 1,532
Basic net income per common share
As reported 1.18 1.26 1.17
Pro forma 1.17 1.25 1.15
Diluted net income per common share
As reported 1.16 1.19 1.10
Pro forma 1.14 1.17 1.09
</TABLE>
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Dividend yield -- -- 2%
Expected volatility -- -- 17%
Risk-free interest rate -- -- 6%
Expected lives -- -- 10 years
</TABLE>
A summary of the status of the plan as of September 30, 2000 and 1999, and
changes during the years ending on those dates is presented below (all shares
have been adjusted for the 3:2 stock split in February 1998 and the 5% stock
dividend in February 1999):
<TABLE>
<CAPTION>
Shares Average Option Price Expiration
Grant Date Granted Per Share Date
---------- ------- --------- ----
<S> <C> <C> <C>
October, 1995 132,719 5.79 October, 2005
January, 1996 1,890 5.79 January, 2006
April, 1996 6,300 6.67 April, 2006
March, 1997 3,939 10.00 March, 2007
May, 1998 38,382 15.83 May, 2008
------
Total Shares Granted 183,230
</TABLE>
As of September 30, 2000, the number of shares exercisable were 82,072. Options
for the three previous fiscal years were exercised as follows (adjusted for
stock splits and dividends):
<TABLE>
<CAPTION>
Average Exercise
For the Years Ended September 30, Shares Exercised Price Per Share
-------------------------------- ---------------- ---------------
<S> <C> <C>
2000 2,200 $5.79
1999 315 $5.79
1998 9,920 $5.09
</TABLE>
Stock options for 316 shares were forfeited during the year ended September 30,
2000.Stock options for 5,827 shares were forfeited during the year ended
September 30, 1999. No stock options were forfeited during the year ended
September 30, 1998. At September 30, 2000, 15,522 shares were available for
grant.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
14. Stock Option and Ownership Plans (continued)
The Plan also provides for stock appreciation rights ("SARs"). To date, no SARs
have been granted. Employees participate in stock ownership through the profit
sharing plan (see Note 10).
During the fiscal year 1998, the Corporation implemented a dividend reinvestment
plan that allows existing shareholders to reinvest their dividends for the
purchase of additional Union Financial Bancshares stock. The plan currently
offers a 5% discount on all purchases and does not charge purchase fees.
15. Shareholders' Equity, Dividend Restrictions And Regulatory Matters
On August 7, 1987, the Bank completed its conversion from a federally chartered
mutual association to a federally chartered stock association. A special
liquidation account was established by the Bank for the preconversion retained
earnings of approximately $3,718,000. The liquidation account is maintained for
the benefit of depositors who held a savings or demand account as of the March
31, 1986 eligibility or the June 30, 1987 supplemental eligibility record dates
who continue to maintain their deposits at the Bank after the conversion. In the
event of a future liquidation (and only in such an event), each eligible and
supplemental eligible account holder who continues to maintain his or her
savings account will be entitled to receive a distribution from the liquidation
account. The total amount of the liquidation account will be decreased in an
amount proportionately corresponding to decreases in the savings account
balances of eligible and supplemental eligible account holders on each
subsequent annual determination date. Except for payment of dividends by the
Bank to Union Financial and repurchase of the Bank's stock, the existence of the
liquidation account will not restrict the use or application of such net worth.
The Bank is prohibited from declaring cash dividends on its common stock or
repurchasing its common stock if the effect thereof would cause its net worth to
be reduced below either the amount required for the liquidation account or the
minimum regulatory capital requirement. In addition, the Bank is also prohibited
from declaring cash dividends and repurchasing its own stock without prior
regulatory approval if the total amount of all dividends and stock repurchases
(including any proposed dividends and stock repurchases) for the applicable
calendar year exceeds its current year's net income plus its retained net income
for the preceding two years.
Under present regulations of the Office of Thrift Supervision ("OTS"), the Bank
must have core capital (leverage requirement) equal to 4.0% of assets, of which
1.5% must be tangible capital, excluding goodwill. The Bank must also maintain
risk-based regulatory capital as a percent of risk weighted assets at least
equal to 8.0%. In measuring compliance with capital standards, certain
adjustments must be made to capital and total assets.
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
15. Shareholders' Equity, Dividend Restrictions And Regulatory Matters
(continued)
At September 30, 2000 and 1999, the Bank had the following actual and required
capital amounts and ratios (in thousands):
<TABLE>
<CAPTION>
September 30, 2000
------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Actual Capital $21,827 $21,827 $21,827
Unrealized loss on available for sale securities 1,937 1,937 1,937
Goodwill and other intangible assets (7,042) (7,042) (7,042)
Allowances for loan losses (1) -- -- 1,359
------- ------ ------
Total Adjusted capital 16,722 16,722 18,081
Minimum Capital Requirement 3,880 10,347 10,991
----- ------ ------
Regulatory Capital Excess $12,842 $6,375 $7,090
------- ------ ------
Regulatory Capital Ratio 6.46% 6.46% 13.16%
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
------------------
Tangible Core Risk-Based
Capital Capital Capital
------- ------- -------
<S> <C> <C> <C>
Actual Capital $14,563 $14,563 $14,563
Unrealized gain on available for sale securities 1,779 1,779 1,779
Goodwill and other intangible assets (2,694) (2,694) (2,694)
Allowance for loan losses (1) -- -- 835
------- ------- ------
Total Adjusted capital 13,648 13,648 14,483
Minimum Capital Requirement 3,072 8,182 9,427
----- ----- -----
Regulatory Capital Excess $10,576 $5,468 $5,058
------- ------ ------
Regulatory Capital Ratio 6.66% 6.66% 12.29%
</TABLE>
(1) Limited to 1.25% of risk-weighted assets
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and discretionary actions by regulators that, if
undertaken, could have a material adverse effect on the Corporation. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors. As of the most recent
regulatory examination, the Bank was in compliance with the regulatory capital
requirements. There are no conditions or events that management believes have
changed the Bank's compliance with the guidelines since that examination.
16. Recently Issued Accounting Standards
The Financial Accounting Standards Board recently issued new accounting
standards that will affect accounting, reporting, and disclosure of financial
information by the Corporation. Adoption of these standards is not expected to
have a material impact on financial condition or results of operations. The
following is a summary of the standards and their required implementation date:
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
16. Recently Issued Accounting Standards (continued)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
-------------------------
Instruments and Hedging Activities. All derivatives are to be measured at fair
----------------------------------
value and recognized in the balance sheet as assets and liabilities. SFAS No.
138,"Accounting for Certain Derivative Instruments and Certain Hedging
Activities" was issued June 2000 and amends the accounting and reporting
standards of SFAS no. 133 for certain derivative instruments and hedging
activities. The two statements are to be adopted concurrently and are effective
for fiscal years and quarters beginning after June 15, 2000. Adoption of SFAS
no. 133 and SFAS 138 did not have a material impact on the presentation of the
Corporation"s financial results or financial position.
Other accounting standards that have been issued or proposed by the Financial
Accounting Standards Board that do not require adoption until a future date are
not expected to have a material impact on the consolidated financial statements
upon adoption.
17. Union Financial Bancshares, Inc. Financial Information (Parent Corporation
Only)
Condensed financial information for Union Financial is presented as follows
(in thousands):
Condensed Balance Sheets September 30,
------------------------ -------------
2000 1999
---- ----
Assets:
Cash and cash equivalents $70 $167
Investment in subsidiary 21,827 14,563
Other 27 8
------- -------
Total Assets $21,924 $14,738
======= =======
Liabilities and Shareholders' Equity:
Liabilities $ -- $ --
Shareholders' Equity 21,924 14,738
------ ------
Total Liabilities and Shareholders' Equity $21,924 $14,738
======= =======
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
17. Union Financial Bancshares, Inc. Financial Information (Parent Corporation
Only) (continued)
<TABLE>
<CAPTION>
Condensed Statements of Income For Years Ended September 30,
------------------------------ -----------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiary $2,280 $1,744 $1,610
Other expense, net (87) (68) (60)
------ ------ ------
Net income $2,193 $1,676 $1,550
====== ====== ======
Operating Activities:
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
----------------------------------
<S> <C> <C> <C>
Net income $2,193 $1,676 $1,550
Adjustments to reconcile net income to
net cash used in operating activities:
Equity in undistributed earnings of subsidiary (2,280) (1,744) (1,610)
(Increase)Decrease in other assets (19) (4) (2)
------ ------ ------
Net cash used in operating activities (106) (72) (62)
------ ------ ------
Financing Activities:
Dividends received from subsidiary 500 200 --
Dividend reinvestment plan contributions 69 182 428
Dividends paid (573) (494) (467)
Proceeds from the exercise of stock options 13 1 51
------ ------ ------
Net cash provided by (used in) financing activities 9 (111) 12
------ ------ ------
Net increase (decrease) in cash and cash equivalents (97) (183) 50
Cash and cash equivalents at beginning of year 167 350 400
------ ------ ------
Cash and cash equivalents at end of year $70 $167 $350
------ ------ ------
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
BOARD OF DIRECTORS
UNION FINANCIAL BANCSHARES AND SUBSIDIARIES
<TABLE>
<S> <C>
Mason G. Alexander Quay W. McMaster
Director, Mid-South Management Company Owner, Winnsboro Plywood
James W. Edwards John S. McMeekin
Dean of Academics, USC-Union President, Winnsboro Furniture Company
William M. Graham Dwight V. Neese
Owner, Graham's Flowers President and Chief Executive Officer
Provident Community Bank
Louis M. Jordan
President, Jordan's Ace Hardware, Inc. Philip C. Wilkins, DMD
Dentist
Carl L. Mason
Chairman
Retired
</TABLE>
LEADERSHIP GROUP
PROVIDENT COMMUNITY BANK
<TABLE>
<S> <C>
Gerald L. Bolin Anthony E. Lawton
Senior Vice President Senior Vice President
Chief Operating Officer Chief Credit Officer
Carolyn H. Belue Dwight V. Neese
Vice President President
Operational Administration Manager Chief Executive Officer
Diane F. Ebert Michael H. Vanderford
Vice President Senior Vice President
Mortgage Loan Acquisitions Manager Mortgage Lending Manager
Richard H. Flake Wanda J. Wells
Executive Vice President Vice President & Corporate Secretary
Chief Financial Officer Shareholder Relations Officer
George E. Hall, Jr. Gerald B. Wyatt
Vice President Vice President
Retail Banking Manager Consumer/Commercial Lending Manager
</TABLE>
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
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<PAGE>
CORPORATE INFORMATION
Common Stock Information
------------------------
Union Financial Bancshares, Inc.'s common stock is quoted on the Nasdaq National
Market under the symbol UFBS. As of September 30, 2000, there were 797
shareholders of record and 1,911,005 shares of common stock issued and
outstanding. The following table contains the range of high and low bid
information of Union Financial's common stock as reported by the Nasdaq Stock
Market and per share dividend as declared during each quarter of the last two
fiscal years. Share prices and dividends have been adjusted to reflect all stock
splits and stock dividends. See Note 15 to the financial statements for
information regarding certain limitations imposed on the Bank's ability to pay
cash dividends to the holding company.
High Low Dividend
------ ------ --------
Fiscal 2000
Fourth Quarter $ 8.75 $ 6.75 $.100
Third Quarter $ 8.37 $ 6.25 $.100
Second Quarter $ 9.00 $ 7.00 $.100
First Quarter $12.50 $ 8.37 $.093
High Low Dividend
------ ------ --------
Fiscal 1999
Fourth Quarter $12.38 $10.50 $.093
Third Quarter $14.00 $10.00 $.093
Second Quarter $14.50 $12.00 $.093
First Quarter $14.29 $12.86 $.093
Dividend Reinvestment and Stock Purchase Plan
---------------------------------------------
The Corporation has a dividend reinvestment program that allow shareholders to
purchase additional shares with corporate dividends. Details of the program are
outlined in the dividend reinvestment prospectus. To receive more information,
please contact the Shareholder Relations Officer at the corporate address.
10-KSB Information
------------------
A copy of the Form 10-KSB filed with the Securities and Exchange Commission,
will be furnished to shareholders, without charge, upon written request to the
Corporate Secretary, Union Financial Bancshares, Inc., 203 West Main Street,
Union, South Carolina 29379.
Annual Meeting of Shareholders
------------------------------
The Annual Meeting of Shareholders will convene at the Main Street Auditorium of
the University of South Carolina, Union Campus, Union, South Carolina on January
17, 2001 at 2:00 p.m.
Additional Information
----------------------
If you are receiving duplicate mailings of shareholder reports due to multiple
accounts, we can consolidate the mailings without affecting your account
registration. To do this, or for additional information, contact our Shareholder
Relations Officer at the corporate address shown below.
Corporate Offices
-----------------
203 West Main Street
Union, South Carolina 29379
(888) 427-9002
Transfer Agent
--------------
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
(800) 456-0596
Independent Certified Public Accountants
----------------------------------------
Elliott, Davis & Company, LLP
870 South Pleasantburg Drive
Greenville, SC 29607-6286
(864) 242-3370
Special Counsel
---------------
Muldoon, Murphy & Faucette LLP
5101 Wisconsin Avenue, N.W.
Washington, D.C. 20016
(202) 362-0840
General Counsel
---------------
Nelson Mullins Riley & Scarborough
104 South Main Street, Suite 900
Greenville, South Carolina 29601
(864) 250-2300
--------------------------------------------------------------------------------
UNION FINANCIAL BANCSHARES, INC.
-40-
