-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T/s6EkpmWmCC4YR1DQq98GhP/6gQGIO9pmivAsMzyBjWoeHPiCm+WnbgbGj3DTyz smtBLAYvKxhwQSz/LsFroA== 0000928385-02-000302.txt : 20020414 0000928385-02-000302.hdr.sgml : 20020414 ACCESSION NUMBER: 0000928385-02-000302 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020208 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION FINANCIAL BANCSHARES INC CENTRAL INDEX KEY: 0000926164 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 570264560 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 033-80808 FILM NUMBER: 02530850 BUSINESS ADDRESS: STREET 1: 203 WEST MAIN ST STREET 2: C/O PROVIDENT COMMUNITY BANK CITY: UNION STATE: SC ZIP: 29379 BUSINESS PHONE: 8644279000 MAIL ADDRESS: STREET 1: 203 WEST MAIN STREET STREET 2: C/O PROVIDENT COMMUNITY BANK CITY: UNION STATE: SC ZIP: 29379 10QSB 1 d10qsb.txt FORM 10-QSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-QSB (Mark One) X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE - --- ACT OF 1934 For the quarterly period ended December 31, 2001 ----------------- ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ______________ COMMISSION FILE NUMBER 1-5735 UNION FINANCIAL BANCSHARES, INC. -------------------------------- Delaware 57-1001177 - -------------------------------------------------------------------------------- (Jurisdiction of Incorporation) (I.R.S. Employer Identification No.) 203 West Main Street, Union, South Carolina 29379 - ------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (864) 429-1864 State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The Corporation had issued and outstanding 1,928,125 shares, $0.01 par value, common stock as of February 5, 2002. UNION FINANCIAL BANCSHARES, INC. INDEX Part I. Financial Information Page --------------------- ---- Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of December 31, 2001 and September 30, 2001 3 Consolidated Statements of Income for the three months ended December 31, 2001 and 2000 4 Consolidated Statements of Cash Flows for the three months ended December 31, 2001 and 2000 5 Consolidated Statements of Shareholders' Equity for the three months ended December 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information ----------------- Item 1. Legal Proceedings 18 Item 2. Changes in Securities 18 Item 3. Defaults Upon Senior Securities 18 Item 4. Submission of Matters to a Vote of Security Holders 18 Item 5. Other Information 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Item 1. Financial Statements UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS December 31, 2001 (unaudited) and September 30, 2001
December 31, September 30, ASSETS 2001 2001 --------------- --------------- (DOLLARS IN THOUSANDS) Cash $ 2,215 $ 914 Short term interest-bearing deposits 5,278 5,694 --------------- --------------- Total cash and cash equivalents 7,493 6,608 --------------- --------------- Investment and mortgage-backed securities: Held to maturity 18,746 11,315 Available for sale 88,138 77,802 --------------- --------------- Total investment and mortgage-backed securities 106,884 89,117 Loans, net 158,534 158,063 Office properties and equipment, net 7,063 7,204 Federal Home Loan Bank Stock, at cost 2,625 2,625 Accrued interest receivable 1,789 1,629 Mortgage servicing rights 720 842 Intangible assets 6,135 6,299 Cash surrender value of life insurance 4,530 4,465 Other assets 1,215 900 --------------- --------------- TOTAL ASSETS $ 296,988 $ 277,752 =============== =============== LIABILITIES Deposit accounts $ 191,843 $ 194,079 Advances from the Federal Home Loan Bank and other borrowings 54,702 46,007 Securities sold under agreements to repurchase 17,000 11,000 Corporate obligated floating rate capital securities 8,000 -- Accrued interest on deposits 387 404 Advances from borrowers for taxes and insurance 37 374 Other liabilities 611 1,512 --------------- --------------- TOTAL LIABILITIES 272,580 253,376 --------------- --------------- 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 - 1,928,125 shares at 12/31/01 and 1,924,478 at 9/30/01 20 20 Additional paid-in capital 11,356 11,321 Accumulated other comprehensive loss (421) (182) Retained earnings, substantially restricted 13,453 13,217 --------------- --------------- TOTAL SHAREHOLDERS' EQUITY 24,408 24,376 --------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 296,988 $ 277,752 =============== ===============
See notes to consolidated financial statements. 3 UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Three Months Ended December 31, 2001 (unaudited) and 2000 (unaudited)
Three Months Ended December 31, December 31, 2001 2000 --------------- ----------------- (DOLLARS IN THOUSANDS) Interest Income: Loans $ 3,168 $ 3,827 Deposits and federal funds sold 6 81 Mortgage-backed securities 949 690 Interest and dividends on investment securities 446 343 --------------- ----------------- Total Interest Income 4,569 4,941 --------------- ----------------- Interest Expense: Deposit accounts 1,776 2,253 Trust preferred corporate obligation 17 0 Advances from the FHLB and other borrowings 779 859 --------------- ----------------- Total Interest Expense 2,572 3,112 --------------- ----------------- Net Interest Income 1,997 1,829 Provision for loan losses 90 24 --------------- ----------------- Net Interest Income After Provision for Loan Losses 1,907 1,805 --------------- ----------------- Non Interest Income: Fees for financial services 333 261 Loan servicing fees (costs) (69) 25 Net gains on sale of investments 0 3 Net gains on sale of loans 0 110 --------------- ----------------- Total Non Interest Income 264 399 --------------- ----------------- Non Interest Expense: Compensation and employee benefits 690 738 Occupancy and equipment 392 332 Deposit insurance premiums 9 6 Professional services 68 52 Advertising/Public relations 52 41 Real estate operations 7 16 Deposit premium intangible 83 81 Goodwill amortization 82 84 Other 223 221 --------------- ----------------- Total Non Interest Expense 1,606 1,571 --------------- ----------------- Income Before Income Taxes 565 633 Income tax expense 137 226 --------------- ----------------- Net Income $ 428 $ 407 =============== ================= Basic Net Income Per Common Share $ 0.22 $ 0.21 =============== ================= Diluted Net Income Per Common Share $ 0.21 $ 0.21 =============== ================= Weighted Average Number of Common Shares Outstanding Basic 1,926,896 1,913,373 Diluted 1,995,896 1,959,521
See notes to consolidated financial statments. UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended December 31, 2001 (unaudited) and 2000 (unaudited)
Three Months Ended December 31, December 31, 2001 2000 ------------ ------------ (IN THOUSANDS) OPERATING ACTIVITIES: Net income $ 428 $ 407 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 24 Amortization of intangibles 165 165 Depreciation expense 216 195 Recognition of deferred income, net of costs (12) (199) Deferral of fee income, net of costs 58 218 Loans originated for sale 0 6,398 Sale of loans 0 (6,398) Gain on sale of loans 0 109 Changes in operating assets and liabilities: (Increase) in accrued interest receivable (160) (303) (Increase) in other assets (378) (1,180) Increase (decrease) in other liabilities (1,238) 3,669 Increase (decrease) in accrued interest payable (17) 70 -------- -------- Net cash provided by (used by) operating activities (848) 3,175 -------- -------- INVESTING ACTIVITIES: Purchase of investment and mortgage-backed securities: Held to maturity (5,157) 0 Available for sale (19,263) (616) Proceeds from sale of investment and mortgage- backed securities 0 1,735 Proceeds from maturity of investment and mortgage- backed securities: Available for sale 3,530 0 Principal repayments on mortgage-backed securities: Held to maturity 180 174 Available for sale 2,534 606 Net (increase) decrease in loans (471) 65 Net (increase) decrease in mortgage servicing rights 122 (195) Purchase of FHLB stock 0 0 Redemption of FHLB stock 0 0 Purchase of office properties and equipment (75) (335) -------- -------- Net cash provided by (used by) investing activities ($18,600) $ 1,434 -------- -------- FINANCING ACTIVITIES: Proceeds from the dividend reinvestment plan 29 0 Dividends paid in cash ($0.10 per share -2001 and $0.10 per share - 2000) (163) (160) Proceeds from the exercise of stock options 8 0 Proceeds from term borrowings 14,695 8,280 Proceeds from issuance of trust preferred corporate obligations 8,000 0 Increase (Decrease) in deposit accounts (2,236) (5,667) -------- -------- Net cash provided by financing activities 20,333 2,453 -------- -------- NET DECREASE \ INCREASE IN CASH AND CASH EQUIVALENTS 885 7,062 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,608 4,613 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,493 $ 11,675 ======== ======== SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes $ 1,106 $ 672 Interest 2,589 3,042 Non-cash transactions: Loans foreclosed $ 162 $ 52
See notes to consolidated financial statements. 5 UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY THREE MONTHS ENDED DECEMBER 31, 2001 AND 2000 (UNAUDITED)
Retained Accumulated Additional Earnings Other Total Common Stock Paid-in Substantially Comprehensive Shareholders' Shares Amount Capital Restricted Income Equity ------ ------ ------- ---------- ------ ------ (In Thousands, Except Share Data) BALANCE AT SEPTEMBER 30, 2000 1,911,005 20 11,314 12,640 (2,050) 21,924 Net income 407 407 Other comprehensive income Unrealized gains on securities: Equity reclassification 113 113 Unrealized holding gains arising during period 281 281 --- --- Comprehensive income 801 Equity reclassification (113) (113) Dividend reinvestment plan contributions 3,572 30 30 Cash dividend ($.10 per share) (190) (190) --------- -------- ------- --------- -------- -------- BALANCE AT DECEMBER 31, 2000 1,914,577 $20 $11,231 $12,857 ($1,656) $22,452 ========= ======== ======= ========= ======== ======== BALANCE AT SEPTEMBER 30, 2001 1,924,478 20 11,321 13,217 (182) 24,376 Net income 428 428 Other comprehensive income Unrealized losses on securities: Unrealized holding losses arising during period (239) (239) ----- ----- Comprehensive income 189 Options exercised 660 6 6 Dividend reinvestment plan contributions 2,987 29 29 Cash dividend ($.10 per share) (192) (192) --------- -------- ------- --------- -------- -------- BALANCE AT DECEMBER 31, 2001 1,928,125 $20 $11,356 $13,453 ($421) $24,408 ========= ======== ======= ========= ======== ========
6 UNION FINANCIAL BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Presentation of Consolidated Financial Statements ------------------------------------------------- The accompanying unaudited consolidated financial statements of Union Financial Bancshares, Inc. (the "Corporation") were prepared in accordance with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of consolidated financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles. However, all adjustments which are, in the opinion of management, necessary for the fair presentation of the interim consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The consolidated financial statements include the Corporation's wholly owned subsidiaries, Provident Community Bank (the "Bank") and Union Financial Statutory Trust I (the "Trust"). The Trust is a statutory trust created under the laws of the state of Connecticut. The results of operations for the three months ended December 31, 2001 are not necessarily indicative of the results which may be expected for the entire fiscal year. The consolidated balance sheet as of September 30, 2001 has been derived from the Corporation's audited financial statements presented in the annual report to shareholders. Certain amounts in the prior year's financial statements have been reclassified to conform with current year classifications. Recently Issued Accounting Standards In July 2001, the SEC issued Staff Accounting Bulletin (SAB) No. 102 - Selected Loan Loss Allowance Methodology and Documentation Issues. This ----------------------------------------------------------------- staff accounting bulletin clearly defines the required development, documentation, and application of a systematic methodology for determining allowances for loan and lease losses in accordance with generally accepted accounting principles. The Corporation believes that it is in compliance with SAB 102. In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS No. 140, Accounting for Transfers and Servicing of ----------------------------------------- Financial Assets and Extinguishment of Liabilities. This SFAS is a -------------------------------------------------- replacement of SFAS No. 125. The statement was effective for transfers and servicing of financial assets and extinguishment of debt occurring after March 31, 2001. The statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization for fiscal year ending after December 15, 2000. The adoption of the standard did not have a material impact on the Corporation. In June 2001, the FASB issued SFAS No. 141 - Business Combinations. --------------------- This FASB addresses accounting and reporting for all business combinations and defines the purchase method as 7 the only acceptable method. This statement is effective for all business combinations initiated after June 30, 2001. In June 2001, the FASB issued SFAS No. 142 - Goodwill and Other ------------------ Intangible Assets. This SFAS addresses how goodwill and other ----------------- intangible assets should be accounted for at their acquisition (except for those acquired in a business combination) and after they have been initially recognized in the financial statements. The statement is effective for all fiscal years beginning after December 15, 2001. The Corporation is in the process of determining the effect of this SFAS on the financial position of the Corporation and plans to adopt on October 1, 2002. Additional accounting standards that have been issued or proposed by the FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption. 2. Income Per Share ---------------- Income per share amounts for the three months ended December 31, 2001 and 2000 were computed based on the weighted average number of common shares outstanding adjusted for the dilutive effect of outstanding common stock options during the periods. 3. Assets Pledged -------------- Approximately $28,814,000 and $28,411,000 of debt securities at December 31, 2001 and September 30, 2001, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, Laurens County and certain other liabilities. The Bank pledges as collateral for Federal Home Loan Bank advances the Bank's Federal Home Loan Bank stock and has entered into a blanket collateral agreement with the Federal Home Loan Bank whereby the Bank maintains, free of other encumbrances, qualifying mortgages (as defined) with unpaid principal balances equal to, when discounted at 75% of the unpaid principal balances, 100% of total advances. 4. Contingencies and Loan Commitments ---------------------------------- The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These instruments expose the Bank to credit risk in excess of the amount recognized on the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at December 31, 2001 related to these items is summarized below: 8 Loan Commitments: Contract Amount ---------------- --------------- Approved loan commitments $ 2,859,000 Unadvanced portions of loans 12,008,000 ----------- Total loan commitments $14,867,000 ----------- Loan commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of credit is based on management's credit evaluation of the counter party. Collateral held is primarily residential property. Interest rates on loan commitments are a combination of fixed and variable. Commitments outstanding at December 31, 2001 consist of fixed and adjustable rate loans of approximately $14,867,000 at rates ranging from 6.5% to 7.5%. Commitments to originate loans generally expire within 30 to 60 days. Commitments to fund credit lines (principally variable rate, consumer lines secured by real estate and overdraft protection) totaled approximately $27,930,000 at December 31, 2001. Of these lines, the outstanding loan balances totaled approximately $15,922,000. The Bank also has commitments to fund warehouse lines of credit for various mortgage banking companies totaling $4,500,000, which had an outstanding balance at December 31, 2001 of approximately $2,410,000. 5. Corporation Obligated Floating Rate Capital Securities ------------------------------------------------------ On November 14, 2001, the Corporation sponsored the creation of the Trust. The Corporation is the owner of all of the common securities of the Trust. On December 18, 2001, the Trust issued $8.0 million in the form of floating rate capital securities through a pooled trust preferred securities offering. The proceeds from this issuance, along with the Corporation's $248,000 capital contribution for the Trust's common securities, were used to acquire $8.2 million aggregate principal amount of the Corporation's floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the "Debentures"), which constitute the sole asset of the Trust. The interest rate on the Debentures and the capital securities is variable and adjustable quarterly at 3.60% over the three-month LIBOR, with an initial rate of 5.60%. A rate cap of 12.50% is effective through December 18, 2006. The Corporation has, through the Trust agreement establishing the Trust, the Guarantee Agreement, the notes and the related Indenture, taken together, fully irrevocably and unconditionally guaranteed all of the Trust's obligations under the capital securities. A summary of the Trust securities issued and outstanding follows: 9
Amount Outstanding at Distribution December 31, Prepayment Payment ------------------ Name 2001 2000 Rate Option Date Maturity Frequency - ------------------------- ---------- ------- ------- ----------------- ----------------- ------------ Union Financial Statutory $8,000,000 -- 5.60% December 18, 2006 December 18, 2031 Quarterly Trust I
The stated maturity of the Debentures is December 18, 2031. In addition, the Debentures are subject to redemption at par at the option of the Corporation, subject to prior regulatory approval, in whole or in part on any interest payment date after December 18, 2006. The Debentures are also subject to redemption prior to December 18, 2006 at 107.5% of par after the occurrence of certain events that would either have a negative tax effect on the Trust or the Corporation or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities. The Corporation has the right, at one or more times, to defer interest payments on the Debentures for up to twenty consecutive quarterly periods. All deferrals will end on an interest payment date and will not extend beyond December 18, 2031, the stated maturity date of the Debentures. If the Corporation defers interest payments on the Debentures, the Trust will also defer distributions on the capital securities. During any deferral period, each installment of interest that would otherwise have been due and payable will bear additional interest (to the extent payment of such interest would be legally enforceable) at the applicable distribution rate, compounded quarterly. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements -------------------------- Management's discussion and analysis of financial condition and results of operations and other portions of this Form 10-Q contain certain "forward-looking statements" concerning the future operations of the Corporation and the Bank. 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 10-Q 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 effect actual results include interest rate trends, the general economic climate in the Corporation's and the Bank's market area and the country as a whole, the ability of the Corporation and the Bank to control costs and expenses, 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. Financial Condition ------------------- On November 14, 2001, the Corporation established the Trust as a business trust for the purpose of issuing trust preferred securities in a private placement conducted as part of a pooled offering sponsored by First Tennessee Capital Markets and Keefe Bruyette & Woods, Inc. On December 18, 2001, the Trust issued $8.0 million in trust preferred securities in the form of floating rate capital securities and issued approximately $248,000 of trust common securities to Union Financial. The Trust used the proceeds of these issuances to purchase $8.2 million of Union Financial's floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the "Debentures"). The interest rate on the Debentures and the trust preferred securities is variable and adjustable quarterly at 3.60% over three-month LIBOR, with an initial rate of 5.60%. A rate cap of 12.50% is effective through December 18, 2006. The Debentures are the sole assets of the Trust and are subordinate to all of Union Financial's existing and future obligations for borrowed money, its obligations under letters of credit and certain derivative contracts, and any guarantees by Union Financial of any such obligations. The trust preferred securities generally rank equal to the trust common securities in priority of payment, but will rank prior to the trust common securities if and so long as Union Financial fails to make principal or interest payments on the Debentures. Concurrently with the issuance of the Debentures and the trust preferred and common securities, Union Financial issued a guarantee related to the trust securities for the benefit of the holders. The Debentures, the common securities issued by the Trust, and the related income effects are eliminated within Union Financial's financial statements. Union Financial's obligations under the Debentures, the related indenture, the trust agreement relating to the trust securities, and 11 the guarantee constitute a full and unconditional guarantee by Union Financial of the obligations of the Trust under the trust preferred securities. The stated maturity of the Debentures is December 18, 2031. In addition, the Debentures are subject to redemption at par at the option of Union Financial, subject to prior regulatory approval, in whole or in part on any interest payment date after December 18, 2006. The Debentures are also subject to redemption prior to December 18, 2006 at 107.5% of par after the occurrence of certain events that would either have a negative tax effect on the Trust or Union Financial or would result in the Trust being treated as an investment company that is required to be registered under the Investment Company Act of 1940. Upon repayment of the Debentures at their stated maturity or following their redemption, the Trust will use the proceeds of such repayment to redeem an equivalent amount of outstanding trust preferred securities and trust common securities. Union Financial intends to use the proceeds of the offering for general corporate purposes, to fund dividends to shareholders and for contributions to the capital of the Bank. Total assets of the Corporation increased $19,236,000 or 6.93%, to $296,988,000 at December 31, 2001 from $277,752,000 at September 30, 2001. Investments and mortgage-backed securities increased approximately $17,767,000, or 19.94%, from September 30, 2001 to December 31, 2001 due to the purchases of mortgage backed securities and municipal securities with the capital received through the trust preferred capital offering. Loans increased $471,000, or .30%, to $158,534,000 at December 31, 2001. The Corporation continues to focus on consumer and commercial lending with reduced emphasis on wholesale residential mortgage loans. Consumer and commercial lending during this period increased $5,325,000 or 10.02%. Deposits decreased $2,236,000 or 1.15% to $191,843,000 at December 31, 2001. The decrease was due primarily to outflows from demand accounts as a result of normal seasonal reductions. Borrowings from the Federal Home Loan Bank (FHLB) increased $8,695,000, or 18.90%, to $54,702,000 at December 31, 2001 from $46,007,000 at September 30, 2001. Securities sold under agreements to repurchase were $17,000,000 at December 31, 2001 compared to $11,000,000 at September 30, 2001. During this period, securities sold under agreement to repurchase provided a lower-cost funding alternative to Federal Home Loan Bank advances. The increases in borrowings from FHLB and securities sold under agreement to repurchase were utilized to fund additional growth for the Corporation. Other liabilities decreased $901,000 or 59.6% to $611,000 at December 31, 2001 from $1,512,000 at September 30, 2001 due to the payment of state and federal income taxes. Liquidity --------- Liquidity is the ability to meet demand for loan disbursements, deposit withdrawals, repayment of debt, payment of interest on deposits and other operating expenses. The primary sources of liquidity are savings deposits, loan sales and repayments, borrowings, maturity of securities and interest payments. 12 While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. The primary investing activities of the Corporation are the origination of residential one-to-four family mortgage loans and commercial and consumer loans, and the purchase of investment and mortgage-backed securities. These activities are funded primarily by principal and interest payments on loans and investment securities, deposit growth, securities sold under agreements to repurchase and the utilization of FHLB advances. During the three months ended December 31, 2001, the Corporation's loan originations totaled $23.2 million. Additionally, outstanding loan commitments (including commitments to fund credit lines) totaled $14.9 million at December 31, 2001. Management of the Corporation anticipates that it will have sufficient funds available to meet its current loan commitments. At December 31, 2001, the Corporation's investment in investment and mortgage-backed securities totaled $106.9 million. During the three months ended December 31, 2001, total deposits decreased $2.2 million. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by the Corporation and its local competitors and other factors. The Corporation closely monitors its liquidity position on a daily basis. Certificates of deposit, which are scheduled to mature in one year or less from December 31, 2001, totaled $76.6 million. The Corporation relies primarily on competitive rates, customer service, and long-standing relationships with customers to retain deposits. From time to time, the Corporation will also offer competitive special products to its customers to increase retention and to attract new deposits. Based upon the Corporation's experience with deposit retention and current retention strategies, management believes that, although it is not possible to predict future terms and conditions upon renewal, a significant portion of such deposits will remain with the Corporation. If the Corporation requires funds beyond its ability to generate them internally, additional sources of funds are available through FHLB advances and securities sold under agreements to repurchase. At December 31, 2001, the Corporation had $54.7 million of FHLB borrowings and $17.0 million of securities sold under agreements to repurchase. Recent legislation has repealed the Office of Thrift Supervision minimum liquidity ratio requirement. The Office of Thrift Supervision regulations now require the Bank to maintain sufficient liquidity to ensure its safe and sound operation. As in the past, management expects that the Bank can meet its obligations to fund outstanding loan commitments while maintaining liquidity to ensure the Bank's safe and sound operation. Capital Resources ----------------- The capital requirement of the Bank consists of three components: (1) tangible capital, (2) core capital and (3) risk based capital. Tangible capital must equal or exceed 1.5% of adjusted total assets. Core capital must be a minimum of 4% of adjusted total assets and risk 13 based capital must be a minimum of 8% of risk weighted assets. As of December 31, 2001, the Bank's capital position, as calculated under regulatory guidelines, exceeds these minimum requirements as follows (dollars in thousands):
Requirement Actual Excess - ------------------------------------------------------------------------------------------ Tangible capital $ 4,416 $ 23,445 $ 19,029 Tangible capital to adjusted total assets 1.50% 7.96% 6.46% Core capital $ 11,777 $ 23,445 $ 11,668 Core capital to adjusted total assets 4.00% 7.96% 3.96% Risk based capital $ 12,767 $ 24,588 $ 11,821 Risk based capital to risk weighted assets 8.00% 15.41% 7.41%
During the quarter ending December 31, 2001, the Corporation distributed to the Bank a capital contribution of $5 million from the proceeds of the trust preferred capital securities completed on December 18, 2001. The reported capital requirements are based on information reported in the OTS December 31, 2001 quarterly thrift financial report. Results of operations for the three months ended December 31, 2001 and 2000 --------------------------------------------------------------------------- General ------- Net income increased $21,000, or 5.16%, to $428,000 for the three months ended December 31, 2001 as compared to the same period in 2000. An increase in net interest income was partially offset by reductions in non-interest income. Non- interest income decreased due to reduced mortgage loan service fees and lower gain on sale of mortgage loans as a result of the Corporation's phase out of its wholesale mortgage operation during the first quarter of fiscal year 2001. Interest Income --------------- Interest income decreased $372,000, or 7.53%, for the three months ended December 31, 2001 as compared to the same period in 2000. Interest income on loans decreased by 17.22%, or $659,000, to $3,168,000 for the three months ended December 31, 2001 from $3,827,000 for the three months ended December 31, 2000. The reduction in interest income on loans from the previous year was due primarily to declining interest rates along with lower net loan growth. Interest and dividends on investment and mortgage-backed securities increased $362,000, or 35.04%, for the three months ended December 31, 2001 to $1,395,000 from $1,033,000 during the same period in 2000. The increase was due primarily to increased 14 investments in mortgage-backed securities and municipal securities. Interest Expense ---------------- Interest expense decreased $540,000, or 17.35%, for the three months ended December 31, 2001 as compared to the three months ended December 31, 2000 due primarily to lower deposit rates from a declining interest rate environment. Interest expense on deposit accounts decreased $477,000, or 21.17%, to $1,776,000 for the three months ended December 31, 2001 from $2,253,000 during the same period in 2000. Interest expense on borrowings decreased $80,000, or 9.31%, for the three months ended December 31, 2001 as compared to the same period in the previous year. Although the net borrowings have increased in FHLB advances and securities sold under agreements to repurchase over the previous year, interest rates have continued to decline during the period. The Corporation has also extended borrowing terms during this period to improve interest rate risk exposure. The Corporation also recorded $17,000 during the quarter for interest expense on the trust preferred corporate obligation that was issued on December 18, 2001. Provision for Loan Loss ----------------------- During the three months ended December 31, 2001, the provision for loan losses was $90,000 as compared to $24,000 for the same period in the previous year. The increase in the provision reflects the implementation of a risk weighted loan loss reserve methodology that is intended to more closely track the level of risk of different types of loans. During this same period, non-accrual loans increased $270,000 or 33.9%, from $795,000 at September 30, 2001 to $1,065,000 at December 31, 2001. The increased provision also reflects the Corporation's continued movement from longer term, fixed rate residential mortgage loans to shorter term, floating rate consumer and commercial loans. Consumer and commercial loans carry higher risk weighted rates in the reserve calculation as compared to residential mortgage loans. Management believes the Bank's loan loss allowance is adequate to absorb future loan losses inherent in the portfolio. The Bank's loan loss allowance at December 31, 2001 was approximately .71% of the Bank's outstanding loan portfolio compared to .76% at December 31, 2000. The provision for loan loss calculation includes a segmentation of loan categories subdivided by residential mortgage, commercial and consumer loans. Each category is rated for all loans including performing groups. The weights assigned to each performing group is developed from previous loan loss experience and as the loss experience changes, the category weight is adjusted accordingly. In addition, as the loan categories increase and decrease in balance, the provision for loan loss calculation will adjust accordingly. 15 The following table sets forth information with respect to the Bank's non-performing assets at the dates indicated (dollars in thousands):
December 31, 2001 September 30, 2001 ----------------- ------------------ Non-accruing loans which are contractually past due 90 days or more: Real Estate: Residential $ 624 $ 626 Commercial 187 190 Consumer 254 9 ------ ------ Total $1,065 $ 795 ====== ====== Percentage of loans receivable, net 0.67% 0.50% ====== ====== Percentage of allowance for loan losses to total loans receivable, net 0.71% 0.67% ====== ====== Allowance for loan losses $1,143 $1,080 ====== ====== Real estate acquired through foreclosure and repossessed assets, net of allowances $ 202 $ 77 ====== ======
Non-accrual loans increased $270,000 to $1,065,000 for the period ending December 31, 2001 from $795,000 at September 30, 2001. The increase was due primarily to the increase in consumer loan non-accruals as a result of higher unemployment from plant layoffs and closings in the surrounding communities. The well collateralized loans are supported by mortgages, equipment, and automobiles that should reduce the risk of loss for the Corporation. Non Interest Income and Expense ------------------------------- Total non interest income decreased $135,000 or 33.83% to $264,000 for the three months ended December 31, 2001 from $399,000 for the same period in the previous year. Fees from financial services increased $72,000 or 27.59%, to $333,000 for the three months ended December 31, 2001 from $261,000 for the same period in the previous year. The increase was due primarily to the development of new fee income programs that were implemented during the first quarter of the 2002 fiscal year. Loan servicing fee costs for the three months ended December 31, 2001 were $69,000 compared to loan service fee income of $25,000 for the three months ended December 31, 2000. The decrease in loan servicing fee income was due to higher premium mortgage servicing rights amortization as a result of increased loan 16 refinancing activity. Gain on sale of loans was $0 for the three months ended December 31, 2001 compared to $110,000 for the same period in the previous year. The Corporation phased out its wholesale mortgage operation during the first quarter of fiscal year 2001 and no longer actively sells loans into the secondary market. For the three months ended December 31, 2001, total non interest expense increased $35,000, or 2.23%, to $1,606,000 from $1,571,000 for the same period in 2000. Compensation and employee benefits decreased $48,000, or 6.50%, to $690,000 for the three month period ended December 31, 2001 from $738,000 for the same period in 2000 due primarily to staff reductions resulting from the phase out of the wholesale mortgage operation that occurred during the first quarter of the previous fiscal year. Occupancy and equipment expense increased $60,000, or 18.07%, to $392,000 for the three months ended December 31, 2001 from $332,000 for the same period in 2000 due to higher depreciation and equipment expense as a result of a new branch opening in the fourth quarter of the previous fiscal year. Professional services expense increased $16,000, or 30.77%, to $68,000 for the three months ended December 31, 2001 from $52,000 for the same period in 2000 due to higher consultant expense. The Corporation currently uses consultants in the loan and credit administration areas for additional support. Advertising and public relations expense increased $11,000, or 26.83%, to $52,000 for the three months ended December 31, 2001 from $41,000 for the same period in 2000 due to higher costs for product promotions. 17 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- The Corporation is involved in various claims and legal actions arising in the normal course of business. Management believes that these proceedings are immaterial to the Corporation's financial condition and results of operations. Item 2. Changes in Securities --------------------- The Corporation has the right, at one or more times, unless an event of default exists under the floating rate junior subordinated deferrable interest debentures due December 18, 2031 (the "Debentures"), to defer interest payments on the Debentures for up to 20 consecutive quarterly periods. During this time, the Corporation will be prohibited from declaring or paying cash dividends on its common stock. Item 3. Defaults upon Senior Securities ------------------------------- Not applicable. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5. Other Information ----------------- None Item 6. Exhibits and Reports on Form 8-K -------------------------------- Reports on Form 8-K ------------------- None 18 SIGNATURES ---------- In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION FINANCIAL BANCSHARES, INC. -------------------------------- (Registrant) Date: 2-5-02 By: /s/ Dwight V. Neese ---------- --------------------------- Dwight V. Neese, CEO Date: 2/5/02 By: Richard H. Flake ---------- --------------------------- Richard H. Flake, CFO 19 -----END PRIVACY-ENHANCED MESSAGE-----