-----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, B24aMbWrPLVqRXzn6z6g8w8vIqOWQg4nKjXLdAmMRLfvy2IXy38yZMWQpk9UmQlA f9jv/q/fM/snZm5gAJOSfw== 0000939057-96-000009.txt : 19960619 0000939057-96-000009.hdr.sgml : 19960619 ACCESSION NUMBER: 0000939057-96-000009 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960513 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION FINANCIAL BANCSHARES INC CENTRAL INDEX KEY: 0000926164 STANDARD INDUSTRIAL CLASSIFICATION: 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: 96561238 BUSINESS ADDRESS: STREET 1: 203 WEST MAIN ST CITY: UNION STATE: SC ZIP: 29379 BUSINESS PHONE: 8644277692 MAIL ADDRESS: STREET 1: 203 WEST MAIN STREET STREET 2: PO BOX 866 CITY: UNION STATE: SC ZIP: 29379 10QSB 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 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)427-7692 Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: The Corporation had issued and outstanding 404,990 shares, $0.01 par value, common stock as of April 30, 1996. UNION FINANCIAL BANCSHARES, INC. INDEX Part I. FINANCIAL INFORMATION PAGE Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 1996 and September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Consolidated Statements of Income for the three and six months ended March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Cash Flows for the six months ended March 31, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . 3-4 Notes to Consolidated Financial Statements . . . . . . . . . . . . 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . . . 10-15 Part II. OTHER INFORMATION. . . . . . . . . . . . . . . . . 16-17 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS March 31, 1996 (unaudited) and September 30, 1995 March 31, September 30, 1996 1995 ASSETS --------- --------- (In Thousands) Cash $ 439 $ 253 Short term interest-bearing deposits 1,747 3,552 Total cash and cash equivalents 2,186 3,805 Time deposits 0 99 Investment and mortgage-backed securities: Held to maturity 0 12,682 Available for sale 38,830 27,198 Total investment and mortgage-backed securities 38,830 39,880 Loans receivable, net: Held for sale 0 0 Held for investment 71,254 73,431 Total loans receivable, net 71,254 73,431 Office properties and equipment,net 1,711 1,714 Federal Home Loan Bank Stock, at cost 753 753 Accrued interest receivable 1,022 880 Real estate acquired through foreclosure 2 30 Other assets 330 287 -------- -------- TOTAL ASSETS $116,088 $120,879 LIABILITIES Deposit accounts $ 96,085 $ 96,750 Advances from the Federal Home Loan Bank and other borrowings 7,236 13,080 Accrued interest on deposits 27 30 Advances from borrowers for taxes and insurance 251 434 Other liabilities 252 729 -------- -------- TOTAL LIABILITIES 103,851 109,023 SHAREHOLDERS' EQUITY Serial preferred stock, no par value, authorized - 2,000,000 shares, issued and outstanding - None 0 0 Common Stock - $0.01 par value, authorized - 1,500,000 shares, issued and outstanding - 403,490 shares 4 4 Additional paid-in capital 3,861 3,860 Unrealized gain (loss) on investment and mortgage-backed securities available for sale (101) (128) Retained earnings, substantially restricted 8,473 8,120 -------- -------- TOTAL SHAREHOLDERS' EQUITY 12,237 11,856 TOTAL LIABILITIES AND SHARE HOLDERS' EQUITY $116,088 $120,879 ======== ======== UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF INCOME Three and Six Months Ended March 31, 1996 and 1995 (unaudited) Three Months Ended Six Months Ended March 31, March 31, March 31, March 31, 1996 1995 1996 1995 (Dollars in Thousands) ------ ------ ------ ------ Interest Income: Loans $1,606 $1,689 $3,180 $3,285 Deposits and federal funds sold 16 20 44 41 Mortgage-backed securities 269 279 533 524 Interest and dividends on investment securities 337 291 655 687 ------ ------ ------ ------ Total Interest Income 2,228 2,279 4,412 4,537 Interest Expense: Deposit accounts 1,123 953 2,269 1,891 Advances from the FHLB and other borrowings 131 289 291 548 ------ ------ ------ ------ Total Interest Expense 1,254 1,242 2,560 2,439 Net Interest Income 974 1,037 1,852 2,098 Provision for loan losses (5) 10 0 70 Net Interest Income After ------ ------ ------ ------ Provision for Loan Losses 979 1,027 1,852 2,028 Non-Interest Income: Fees for financial services 103 66 197 132 Loan servicing fees 19 19 42 31 Gains (losses) on sale of loans 0 12 7 7 ------ ------ ------ ------ Total Non-Interest Income 122 97 246 170 Non-Interest Expense: Compensation and employee benefits 306 334 637 633 Occupancy and equipment 131 109 272 196 Deposit insurance premiums 53 48 107 118 Professional services 37 57 79 103 Real estate operations (6) 13 (3) 19 Other 112 98 203 183 ------ ------ ------ ------ Total Non-Interest Expense 633 659 1,295 1,252 Income Before Income Taxes 468 465 803 946 Income tax expense 145 189 249 379 ------ ------ ------ ------ Net Income 323 276 554 567 Net Income Per Common Share $0.80 $0.70 $1.37 $1.45 Weighted Average Number of Common Shares Outstanding 403,490 391,539 403,451 392,594 UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended March 31, 1996 and 1995 (unaudited) Six Months Ended March 31, March 31, 1996 1995 (In Thousands) OPERATING ACTIVITIES: ------- ------- Net income $ 554 $ 567 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 0 70 Depreciation expense 87 67 Provision for and (gain)/loss on real estate owned, net (8) 0 Rental proceeds and cash recovery applied to reduce real estate owned 0 9 Recognition of deferred income, net of costs (92) (60) Deferral of fee income, net of costs 162 58 (Gain) loss on sale of investment and mortgage backed securities available for sale (2) 0 Loan originated for sale (805) (1,637) Proceeds from loans sold 805 1,637 Loss (gain) on sale of loans held for sale (5) (7) (Increase) decrease in accrued interest receivable (142) 44 (Increase) decrease in other assets (42) 1,078 (Decrease) increase in other liabilities (660) (772) Increase (decrease) in accrued interest payable (3) 57 ------ ------ Net cash (used by provided by operating activities (151) 1,111 INVESTING ACTIVITIES: Purchases of time deposits 0 (100) Maturities of time deposits 99 299 Purchase of investment and mortgage-backed securities: Held to maturity 0 (628) Available for sale (6,020) (4,495) Proceeds from sale of investment and mortgage-backed securities: Held to maturity 0 0 Available for sale 2,953 2,895 Proceeds from maturity of investment and mortgage-backed securities: Held to maturity 0 100 Available for sale 2,751 410 Principal repayments on mortgage-backed securities: Held to maturity 0 414 Available for sale 1,218 1,790 Loan originations (8,562) (14,191) Principal repayments of loans 10,807 6,259 Proceeds from sale of real estate acquired in settlement of loans 36 101 Property improvements to real estate owned 0 0 Purchase of FHLB stock 0 (459) Redemption of FHLB stock 0 0 Purchase of office properties and equipment (141) (95) Net cash provided by (used by) ------ ------ investing activities $3,141 $(7,700) ====== ======= UNION FINANCIAL BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended March 31, 1996 and 1995 (unaudited) Six Months Ended March 31, March 31, 1996 1995 (In Thousands) FINANCING ACTIVITIES: ------- ------- Proceeds from the exercise of stock options $ 1 $ 25 Dividends paid in cash ($0.25 per share - 1996 and $0.50 per share - 1995) (101) (197) Stock redemption 0 (94) Proceeds from FHLB advances and other borrowings 9,461 45,500 Repayment of FHLB advances and other borrowings (15,305) (34,660) Increase (decrease) in deposit accounts 1,335 (4,509) ------- ------- Net cash (used by) provided by financial activities (4,609) 6,065 ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,619) (524) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,805 3,223 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 2,186 2,699 ======= ======= SUPPLEMENTAL DISCLOSURES: Cash paid for: Income taxes $ 674 $ 145 Interest 2,563 2,382 Non-cash transactions: Loans foreclosed $ 0 $ 30 UNION FINANCIAL BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Presentation of Consolidated Financial Statements The accompanying unaudited consolidated financial statements 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 results of operations for the six months ended March 31, 1996 are not necessarily indicative of the results which may be expected for the entire fiscal year. Certain amounts in the prior year's financial statements have been reclassified to conform with current year classifications. On November 9, 1994, Union Federal Savings Bank (the "Bank") reorganized into the holding company form of ownership (the "Reorganization"), resulting in Union Financial Bancshares, Inc. (the "Registrant," "Union Financial" or the "Corporation") becoming the sole stockholder of the Bank (after resolution of dissenters' rights). Each outstanding share of common stock of the Bank and options to acquire shares of common stock of the Bank, became outstanding shares of common stock of the Registrant, respectively, as a result of the Reorganization. The consolidated financial statements as of March 31, 1996 and for the three and six months ended March 31, 1996 and 1995 include the accounts of Union Financial and the Bank. Significant intercompany balances and transactions have been eliminated in consolidation. Prior to the Reorganization, Union Financial had no material assets or liabilities and engaged in no business activity. Subsequent to the acquisition of the Bank, the Registrant has engaged in no significant activity other than holding the stock of the Bank and engaging in certain passive investment activities. In May, 1993, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan ("SFAS 114") (which was subsequently amended by SFAS No. 118). It 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 Statement applies to financial statements for fiscal years beginning after December 15, 1994. The Corporation implemented this standard effective October 1, 1995. Implementation of the Statement did not have a material impact on financial condition or results of operations. PAGE The Corporation maintains an allowance for impaired loans based on a combination of evaluation of impairment of smaller balance, homogeneous loans such as 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'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. At March 31, 1996, there were no impaired loans. In connection with adopting the guidance in A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities published by the FASB in November, 1995, management reclassified all held-to-maturity securities to the available-for-sale classification. The securities transferred had a total amortized cost of approximately $12,101,000 and a total market value of approximately $12,266,000. The transfer resulted in an unrealized gain of approximately $165,000. In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement is effective for the Corporation for the fiscal year ending September 30, 1997, although earlier application is encouraged. Based on the Corporation s present assets, this statement is not expected to have a significant impact on the Corporation's financial statements. In May 1995, the FASB issued SFAS 122, Accounting for Mortgage Servicing Rights, which amends SFAS 65, Accounting for Mortgage Banking Activities. This statement allows the capitalization of servicing-related costs associated with mortgage loans that are originated for sale, and to create servicing assets for such loans. Prior to this statement, originated mortgage servicing rights were generally accorded off-balance sheet treatment. The statement is effective for the Corporation for the fiscal year ending September 30, 1997. The adoption is not expected to have a material effect on the company's financial condition or results of operations. The FASB issued SFAS 123, Accounting for Stock-Based Compensation, in October 1995. This statement supersedes APB Opinion 25, Accounting for Stock Issued to Employees and established financial accounting and reporting standards for stock-based compensation plans. SFAS 123 requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The accounting requirements of this statement are effective for transactions entered into in fiscal years that begin after December 15, 1995. Though they may be adopted at issuance, the disclosure requirements are effective for financial statements for fiscal years beginning after December 15, 1995, or for an earlier fiscal year for which this statement is initially adopted for recognizing compensation cost. The Corporation has not determined the impact of adopting SFAS 123 but believes the impact, if any, will be immaterial. 2. Income Per Share Income per share amounts for the three and six months ended March 31, 1996 and 1995 were computed based on the weighted average number of common shares outstanding during the periods. Stock options outstanding are not considered in determining weighted average shares outstanding because they have no significant dilutive effect. 3. Assets Pledged Approximately $2,375,000 and $3,600,000 of debt securities at September 30, 1995 and March 31, 1996, respectively, were pledged by the Bank as collateral to secure deposits of the State of South Carolina, the City of Union and certain other liabilities. The Bank pledges as collateral to Federal Home Loan Bank 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% the unpaid principal balances, 100% of total advances. 4. Contingencies and Loan Commitments The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These instruments expose the Bank to credit risk in excess of the amount recognized in the balance sheet. PAGE The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Total credit exposure at March 31, 1996 related to these items is summarized below: Contract Amount Loan commitments: Approved loan commitments $ 3,251,000 Unadvanced portion of loans 544,000 ----------- Total loan commitments $ 3,795,000 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 counterparty. Collateral held is primarily residential property. Interest rates on loan commitments are a combination of fixed and variable. Commitments outstanding at March 31, 1996 consist of adjustable and fixed rate loans of approximately $325,000 and $3,470,000, respectively, at rates ranging from 6.5% to 11.5%. 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 $1,055,000. Of these lines, the outstanding loan balances totaled approximately $1,618,000. The Bank also has commitments to fund warehouse lines of credit for various mortgage banking companies totaling $1,000,000, which had an outstanding balance at March 31, 1996 of approximately $706,000. Effective, January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the Bank Insurance Fund ("BIF"). Under the new assessment schedule, approximately 92% of BIF members pay the statutory minimum annual assessment of $2,000. With respect to Savings Association Insurance Fund ("SAIF") member institutions, the FDIC has retained the existing rate schedule of 23 to 31 basis points. Proposed federal legislation would recapitalize the SAIF and resolve the current premium disparity by requiring savings associations like the Bank to pay a one-time assessment to increase the SAIF s reserves to $1.25 per $100 of deposits. The assessment is expected to be approximately 80 basis points on the amount of deposits held by a SAIF member institution at March 31, 1995. The payment of a one-time fee would have the effect of immediately reducing the capital and pre-tax earnings of SAIF-member institutions by the amount of the fee. Based on the Bank s assessable deposits of approximately $92.8 million at March 31, 1995, a one-time assessment of 80 basis points would equal approximately $742,000. Management cannot predict whether any legislation, including legislation imposing such a fee, will be enacted, or, if enacted, the amount of any one-time fee or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL On November 9, 1994, Union Federal Savings Bank (the "Bank") reorganized into the holding company form of ownership (the "Reorganization"), resulting in Union Financial Bancshares, Inc. (the "Corporation") becoming the sole stockholder of the Bank (after resolution of dissenters' rights). Pursuant to an Agreement and Plan of Reorganization, dated May 23, 1994, between the Corporation and the Bank, each outstanding share of common stock of the Bank and options to acquire shares of common stock of the Bank, became outstanding shares of common stock of the Corporation and options to acquire shares of common stock of the Corporation, respectively, as a result of the Reorganization. Effective, January 1, 1996, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed financial institutions that are members of the Bank Insurance Fund ("BIF"). Under the new assessment schedule, approximately 92% of BIF members pay the statutory minimum annual assessment of $2,000. With respect to Savings Association Insurance Fund ("SAIF") member institutions, the FDIC has retained the existing rate schedule of 23 to 31 basis points. Proposed federal legislation would recapitalize the SAIF and resolve the current premium disparity by requiring savings associations like the Bank to pay a one-time assessment to increase the SAIF s reserves to $1.25 per $100 of deposits. The assessment is expected to be approximately 80 basis points on the amount of deposits held by a SAIF member institution at March 31, 1995. The payment of a one-time fee would have the effect of immediately reducing the capital and pre-tax earnings of SAIF-member institutions by the amount of the fee. Based on the Bank s assessable deposits of approximately $92.8 million at March 31, 1995, a one-time assessment of 80 basis points would equal approximately $742,000. Management cannot predict whether any legislation, including legislation imposing such a fee, will be enacted, or, if enacted, the amount of any one-time fee or whether ongoing SAIF premiums will be reduced to a level equal to that of BIF premiums. FINANCIAL CONDITION At March 31, 1996 total assets of the Corporation decreased 3.97% to $116,088,000 from $120,879,000 at September 30, 1995. This reduction was due primarily to a decrease in net loans receivable of approximately $2,176,000 or 2.97% during the six months ended March 31, 1996. The previous year loan balances included approximately $4,300,000 in construction loans as compared to the current period balance of approximately $1,900,000. The current year trend for loan production is a focus toward more conventional, lower risk loans. Total cash and cash equivalents also decreased from $3,805,000 at September 30, 1995 to $2,186,000 at March 31, 1996, a decrease of $1,619,000 or 42.55%. Total investment and mortgage-backed securities experienced a decrease of $1,050,000, or 2.64%, to $38,830,000 during the six months ended March 31, 1996. The reduction in cash equivalents and securities were utilized to reduce borrowings. Deposits increased $1,335,000 or 1.41% to $96,085,000 for the six months ended March 31, 1996. This increase was due to an increased emphasis on core deposits through product development along with increased advertising. Borrowings decreased from $13,080,000 at September 30, 1995 to $7,236,000 at March 31, 1996, a decrease of $5,844,000 or 44.68% as a result of increased deposits along with reductions in securities and cash equivalents. Net gains of $7,000 were realized on the sale of whole loans to the Federal Home Loan Mortgage Corporation ("FHLMC") for the six months ended March 31, 1996. The loans sold to FHLMC were current production. Interest rates have recently increased to such an extent that management believes it is more prudent to retain conforming loans. This practice will be reviewed periodically in order to ascertain its continued economic benefit. As of March 31, 1996, real estate acquired through foreclosure ("REO") consisted of two properties with a net book value of $2,000. Repossessed assets, which are included in other assets, consisted of $36,000 of automobiles as of March 31, 1996. REO and repossessed assets are carried at their estimated fair values less estimated selling costs. LIQUIDITY Liquidity is the ability to meet demand for loan disbursements, deposit withdrawals, repayment of debt, payment of interest on deposits and other operating expenses. The primary sources of liquidity are savings deposits, loan repayments, borrowings and interest payments. The OTS imposes a minimum level of liquidity on the Bank which is currently 5% of withdrawable deposits plus short-term borrowings. The liquidity level of the Bank as measured for regulatory purposes was 18.81% as of March 31, 1996. As in the past, management expects that the Bank can meet its obligations to fund outstanding loan commitments, which were approximately $3,251,000, as described in Note 4 to the Consolidated Financial Statements, and other loan commitments as of March 31, 1996, while maintaining liquidity in excess of regulatory requirements. In addition, the Bank believes that it can meet any deposit liability maturities through a combination of replacement of the deposits with deposits of a similar type and through its borrowing capacity with the Federal Home Loan Bank. 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 3% of adjusted total assets and risk based capital must be a minimum of 8% of risk weighted assets. As of March 31, 1996, the Bank's capital position, as calculated under regulatory guidelines, exceeds these minimum requirements as follows (dollars in thousands): Requirement Actual Excess ----------- ------- ------- Tangible capital $ 1,737 $11,816 $10,079 Tangible capital to adjusted total assets 1.50% 10.20% 8.70% Core capital $ 3,475 $11,816 $ 8,341 Core capital to adjusted total assets 3.00% 10.20% 7.20% Risk based capital $ 4,315 $12,490 $ 8,175 Risk based capital to risk weighted assets 8.00% 23.16% 15.16% The reported capital requirements are based on information reported in the OTS March 31, 1996 quarterly thrift financial report. Results of Operations for the Six Months Ended March 31, 1996 and 1995 GENERAL Net income decreased $13,000 or 2.30% to $554,000 for the six months ended March 31, 1996 as compared to the same period in 1995. The decrease in net income was due primarily to a 4.97% increase in total interest expense for the six months ended March 31, 1996 as compared to the same period in 1995. INTEREST INCOME Interest income decreased $125,000 or 2.76% for the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. Interest income on loans, due to lower volumes, decreased 3.23% or $106,000 to $3,179,000 for the six months ended March 31, 1996 from $3,285,000 for the six months ended March 31, 1995. The lower loan volumes were a direct result of reductions in construction loan balances with net balances for six months ended March 31, 1996 at approximately $1,900,000 compared to approximately $10,400,000 for the same previous year period. The trend in loan production for the current fiscal year is toward more conventional lending. Interest income on deposits and federal funds sold and on mortgage-backed securities increased $3,000 and $9,000, respectively, for the six months ended March 31, 1996 as compared to the same period in the prior year. Interest and dividends on investment securities decreased $32,000 or 4.66% for the six months ended March 31, 1996 to $655,000 from $687,000 during the same period in 1995. The decrease was due primarily to a decrease in volume and in interest rates. INTEREST EXPENSE The Bank experienced an overall increase of $121,000 or 4.97% in interest expense for the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. Interest expense on deposit accounts increased $377,000 or 19.94% to $2,268,000 for the six months ended March 31, 1996 from $1,891,000 during the same period in 1995. In addition to higher rates, deposit balances increased $3,284,000 with balances as of March 31, 1996 at $96,085,000 compared to $92,801,000 for the comparable period for the previous year. Interest expense on borrowings decreased $257,000 or 46.90% for the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. Lower volumes in FHLB advances for the six months ended March 31, 1996 as compared to the same period for the previous year accounted for this decrease. PROVISION FOR LOAN LOSS During the six months ended March 31, 1996, provisions for loan losses decreased $70,000 or 100% from $70,000 during the same period in the previous year. Additional provisions were not established due to the reduction in the loan portfolio balance and the current year focus toward more conventional lending. Management believes the Bank's loan loss allowances are adequate to absorb estimated future loan losses. The Bank's loan loss allowances at March 31, 1996 were approximately 1.18% of the Bank's outstanding loan portfolio, net as compared to 0.97% for the comparable period in the prior year. The following table sets forth information with respect to the Bank's non-performing assets for the period indicated (dollars in thousands): March 31, 1996 September 30, 1995 -------------- ------------------ Non-accruing loans which are contractually past due 90 days or more: Real Estate: Residential $ 544 $ 249 Commercial 74 88 Construction -- -- Non-mortgage -- -- Total $ 618 $ 337 Percentage of loans receivable, net 0.87% 0.46% Allowance for loan losses $ 843 $ 878 Real estate acquired through foreclosure and repossessed assets, net of allowances $ 37 $ 40 OTHER INCOME AND EXPENSE Total other income increased $76,000 or 44.71% to $246,000 for the six months ended March 31, 1996 from $170,000 for the same period in the previous year. This increase was due in large part to an increase in fees for financial services of $65,000 or 49.25% during the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. There were also increases in loan servicing fees of $11,000 for the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. For the six months ended March 31, 1996, total other expense increased $43,000 or 3.44% to $1,295,000 from $1,252,000 for the same period in 1995. The increase was due primarily to an increase in occupancy and equipment expense of $76,000 for the six months ended March 31, 1996 as compared to the six months ended March 31, 1995. Occupancy and equipment expense increased due to increases in maintenance and service corporation expenses. These increases were partially offset by a decrease in deposit insurance premiums for the six months ended March 31, 1996 due to decreased average volumes in deposits as compared to the same period in the previous year. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Corporation is involved in various claims and legal actions arising in the normal course of business. Management believes that these proceedings will not result in a material loss to the Corporation. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on January 24, 1996. The results of the vote on the matters presented at the meeting is as follows: 1> The following individuals were elected as directors, each for a three- year term: Vote For Vote Withheld David G. Russell 195,774 23,422 Carl L. Mason 195,774 23,422 William M. Graham 195,774 23,422 Broker non-votes totaled 52,504 . 2> The 1995 Stock Option Plan was approved by shareholders by the following vote: For 171,073; Against 46,095; Abstain 2,028 Broker non-votes totaled 52,504 . 3> The appointment of Elliott, Davis & Company, LLP, as auditors for the Corporation for the fiscal year ending September 30, 1996 was ratified by shareholders by the following vote: For 191,473; Against 21,315; Abstain 6,408 Broker non-votes totaled 52,504 . Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K A report on Form 8-K was filed on January 4, 1996, which was subsequently amended on January 11, 1996, reporting under Item 4 the change in the Company's certifying accountant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNION FINANCIAL BANCSHARES, INC. (Registrant) Date: 5-13-96 By:/s/ DWIGHT V. NEESE ------------------------- Dwight V. Neese, CEO Date: 5-13-96 By:/s/ RICHARD H. FLAKE ------------------------- Richard H. Flake, CFO EX-27 2
9 6-MOS SEP-30-1996 MAR-31-1996 439000 1747000 0 0 38830000 0 0 71254000 0 116088000 96112000 7487000 252000 0 0 0 4000 12233000 116088000 3180000 655000 577000 4412000 2269000 2560000 1852000 0 0 1295000 803000 803000 0 0 554000 1.37 1.37 0 618000 0 37000 0 843000 0 0 843000 843000 0 0
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