UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- ------- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
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.
--------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 57-1001177
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
203 West Main Street, Union, South Carolina 29379
-------------------------------------------------
(Address of Principal Executive Offices)
(864) 429-1864
--------------
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Exchange Act 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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) Yes ___ No _X_
The Corporation had 1,904,368 shares, $0.01 par value, of common stock issued
and outstanding as of July 27, 2005.
1
UNION FINANCIAL BANCSHARES, INC.
INDEX
Part I. Financial Information Page
--------------------- ----
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2005
and December 31, 2004 3
Consolidated Statements of Income for the three and six
months ended June 30, 2005 and 2004 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2005 and 2004 5
Consolidated Statements of Shareholders' Equity for the
six months ended June 30, 2005 and 2004 6
Notes to Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 21-22
Item 4. Controls and Procedures 23
Part II. Other Information
-----------------
Item 1. Legal Proceedings 24
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits 25
Signatures 26
2
Part 1. Financial Information
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2005 (unaudited) and December 31, 2004
June 30, December 31,
ASSETS 2005 2004
-------------- --------------
(DOLLARS IN THOUSANDS)
Cash $ 2,942 $ 1,586
Short term interest-earning deposits 4,253 11,611
-------------- --------------
Total cash and cash equivalents 7,195 13,197
-------------- --------------
Investment and mortgage-backed securities
Held to maturity 1,625 1,630
Available for sale 159,082 141,864
-------------- --------------
Total investment and mortgage-backed securities 160,707 143,494
-------------- --------------
Loans, net 183,493 171,094
Office properties and equipment, net 5,262 5,635
Federal Home Loan Bank Stock, at cost 3,966 3,522
Federal Reserve Stock, at cost 539 539
Accrued interest receivable 2,447 2,068
Intangible assets 3,894 4,212
Cash surrender value of life insurance 5,304 5,206
Other assets 2,439 2,631
-------------- --------------
TOTAL ASSETS $ 375,246 $ 351,598
============== ==============
LIABILITIES
Deposit accounts $ 235,969 $ 227,589
Advances from the Federal Home Loan Bank and other borrowings 72,500 63,500
Securities sold under agreements to repurchase 29,000 24,000
Floating rate junior subordinated deferrable interest debentures 8,247 8,247
Accrued interest on deposits 488 333
Advances from borrowers for taxes and insurance 158 40
Other liabilities 2,884 1,870
-------------- --------------
TOTAL LIABILITIES 349,246 325,579
-------------- --------------
Commitments and contingencies-Note 4
SHAREHOLDERS' EQUITY
Serial preferred stock, no par value, authorized - 500,000 shares,
issued and outstanding - None -- --
Common stock - $0.01 par value, authorized - 5,000,000 shares,
issued and outstanding - 1,904,368 shares at 6/30/05 and
1,957,989 at 12/31/04 19 20
Additional paid-in capital 12,212 12,109
Accumulated other comprehensive gain 372 109
Retained earnings, substantially restricted 15,923 15,221
Treasury stock, at cost (2,526) (1,440)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 26,000 26,019
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 375,246 $ 351,598
============== ==============
See notes to consolidated financial statements.
3
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 2005 and 2004 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE)
Interest Income:
Loans $ 3,042 $ 2,498 $ 5,865 $ 4,956
Deposits and federal funds sold 13 3 71 15
Mortgage-backed securities 356 509 744 979
Interest and dividends on investment securities 1,297 1,190 2,438 2,292
---------- ---------- ---------- ----------
Total Interest Income 4,708 4,200 9,118 8,242
---------- ---------- ---------- ----------
Interest Expense:
Deposit accounts 1,282 941 2,421 1,920
Floating rate junior subordinated deferrable interest
debentures 140 100 267 199
Advances from the FHLB and other borrowings 786 743 1,481 1,447
---------- ---------- ---------- ----------
Total Interest Expense 2,208 1,784 4,169 3,566
---------- ---------- ---------- ----------
Net Interest Income 2,500 2,416 4,949 4,676
Provision for loan losses 341 250 548 385
---------- ---------- ---------- ----------
Net Interest Income After
Provision for Loan Losses 2,159 2,166 4,401 4,291
---------- ---------- ---------- ----------
Non-Interest Income:
Fees for financial services 646 634 1,189 1,209
Other fees 15 17 29 33
Net gain on sale of loans 15 6 26 43
Net gain (loss) on sale of investments (3) -- 6 --
---------- ---------- ---------- ----------
Total Non-Interest Income 673 657 1,250 1,285
---------- ---------- ---------- ----------
Non-Interest Expense:
Compensation and employee benefits 983 959 1,998 1,974
Occupancy and equipment 522 515 1,031 1,023
Deposit insurance premiums 9 8 17 16
Professional services 102 82 189 159
Advertising/Public relations 23 45 61 82
Loan operations 35 35 77 62
Deposit premium intangible 159 159 318 318
Items processing 29 59 61 124
Telephone 38 39 84 77
Other 190 186 356 333
---------- ---------- ---------- ----------
Total Non-Interest Expense 2,090 2,087 4,192 4,168
---------- ---------- ---------- ----------
Income Before Income Taxes 742 736 1,459 1,408
Income tax expense 193 188 371 351
---------- ---------- ---------- ----------
Net Income $ 549 $ 548 $ 1,088 $ 1,057
========== ========== ========== ==========
Basic Net Income Per Common Share $ 0.29 $ 0.28 $ 0.57 $ 0.54
========== ========== ========== ==========
Diluted Net Income Per Common Share $ 0.28 $ 0.27 $ 0.55 $ 0.51
========== ========== ========== ==========
Weighted Average Number of Common Shares Outstanding
Basic 1,907,551 1,949,950 1,918,190 1,958,255
Diluted 1,970,142 2,045,549 1,981,012 2,062,495
See notes to consolidated financial statements.
4
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2005 and 2004 (unaudited)
Six Months Ended
June 30, June 30,
2005 2004
------------ ------------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net income $1,088 $1,057
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 548 385
Amortization of intangibles 318 318
Depreciation expense 467 482
Recognition of deferred income, net of costs (184) (165)
Deferral of fee income, net of costs 173 191
Changes in operating assets and liabilities:
Increase in accrued interest receivable (379) (530)
(Increase) decrease in other assets 148 (1,113)
Increase in other liabilities 1,132 1,794
Increase in accrued interest payable 155 68
------------ ------------
Net cash provided by operating activities 3,466 2,487
------------ ------------
INVESTING ACTIVITIES:
Purchase of investment and mortgage-backed securities:
Available for sale (41,373) (89,114)
Held to maturity (3,576) --
Proceeds from sale of investment and mortgage-
backed securities 10,911 --
Proceeds from maturity of investment and mortgage-
backed securities:
Available for sale 12,073 41,359
Held to maturity 3,000 --
Principal repayments on mortgage-backed securities:
Available for sale 2,015 9,990
Net increase in loans (12,990) (8,433)
Purchase of FHLB stock (444) --
Redemption of FHLB stock -- 712
Purchase of office properties and equipment (94) (93)
------------ ------------
Net cash used by investing activities (30,478) (45,579)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from the dividend reinvestment plan 52 57
Dividends paid in cash ($0.20 per share -2005
and $0.20 per share - 2004) (387) (392)
Proceeds from the exercise of stock options 51 30
Share repurchase program (1,086) (510)
Proceeds from term borrowings 14,000 18,750
Increase in deposit accounts 8,380 3,740
------------ ------------
Net cash provided by financing activities 21,010 21,675
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,002) (21,417)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,197 28,702
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,195 $7,285
============ ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $515 $120
Interest 4,014 3,498
Non-cash transactions:
Loans foreclosed $54 $647
See notes to consolidated financial statements.
5
UNION FINANCIAL BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 2005 and 2004 (unaudited)
Retained Accumulated
Additional Earnings, Other Treasury Total
Common Stock Paid-in Substantially Comprehensive Stock Shareholders'
Shares Amount Capital Restricted Income At Cost Equity
------------------------------------------------------------------------------------
(Dollars in Thousands,
Except Share Data)
BALANCE AT DECEMBER 31, 2003 1,969,770 $20 $11,906 $13,848 $99 ($366) $25,507
Net income 1,057 1,057
Other comprehensive income
Unrealized losses on securities:
Unrealized holding losses arising
during period (2,135) (2,135)
--------- ---------
Comprehensive loss (1,078)
Stock option activity 4,248 30 30
Dividend reinvestment plan contributions 3,455 57 57
Share repurchase program (29,364) (510) (510)
Cash dividend ($.20 per share) (392) (392)
------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2004 1,948,109 $20 $11,993 $14,513 ($2,036) ($876) $23,614
====================================================================================
BALANCE AT DECEMBER 31, 2004 1,957,989 $20 $12,109 $15,221 $109 ($1,440) $26,019
Net income 1,088 1,088
Other comprehensive income, net of tax
Unrealized holding gains arising during
period 257 257
Less reclassification adjustment for
gains included in net income 6 6
--------- ---------
Comprehensive income 1,351
Stock option activity 7,246 51 51
Dividend reinvestment plan contributions 3,101 52 52
Share repurchase program (63,968) (1) 1 (1,086) (1,086)
Cash dividend ($.20 per share) (387) (387)
------------------------------------------------------------------------------------
BALANCE AT JUNE 30, 2005 1,904,368 $19 $12,212 $15,923 $372 ($2,526) $26,000
====================================================================================
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" or "Union Financial") were
prepared in accordance with instructions for Form 10-Q 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 accounting principles generally accepted in the United
States of America. 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 June 30, 2005 are not necessarily indicative of the results which may
be expected for the entire calendar year. Certain amounts in the prior
year's financial statements have been reclassified to conform with current
year classifications.
Recently Issued Accounting Standards
The following is a summary of recent authoritative pronouncements that
affect accounting, reporting, and disclosure of financial information by
the Corporation:
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "Share-Based Payment" ("SFAS No. 123(R))"). SFAS No. 123(R)) will
require companies to measure all employee stock-based compensation awards
using a fair value method and record such expense in its financial
statements. In addition, the adoption of SFAS No. 123(R)) requires
additional accounting and disclosure related to the income tax and cash
flow effects resulting from share-based payment arrangements. SFAS No.
123(R)) is effective beginning as of the first annual reporting period
beginning after June 15, 2005. The Corporation is currently evaluating the
impact that the adoption of SFAS No. 123(R)) will have on its financial
position, results of operations and cash flows. The cumulative effect of
adoption, if any, will be measured and recognized in the statement of
income on the date of adoption.
In November 2003, the Emerging Issues Task Force ("EITF") reached a
consensus that certain quantitative and qualitative disclosures should be
required for debt and marketable equity securities classified as available
for sale or held to maturity under SFAS No. 115 and SFAS No. 124 that are
impaired at the balance sheet date but for which other-than-temporary
impairment has not been recognized. Accordingly, the EITF issued EITF No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments." This issue addresses the meaning of other-than-
temporary impairment and its application to investments classified as
either available for sale or held to maturity under SFAS No. 115 and
7
provides guidance on quantitative and qualitative disclosures. The
disclosure requirements of EITF No. 03-1 were effective for annual
financial statements for fiscal years ending after June 15, 2004. The
effective date for the measurement and recognition guidance of EITF No.
03-1 has been delayed. The FASB staff has issued a proposed Board-directed
FASB Staff Position ("FSP"), FSP EITF 03-1-a, "Implementation Guidance for
the Application of Paragraph 16 of Issue No. 03-1." The proposed FSP would
provide implementation guidance with respect to debt securities that are
impaired solely due to interest rates and/or sector spreads and analyzed
for other-than-temporary impairment under the measurement and recognition
requirements of EITF No. 03-1. The delay of the effective date for the
measurement and recognition requirements of EITF No. 03-1 will be
superseded concurrent with the final issuance of FSP EITF 03-1-a. Adopting
the disclosure provisions of EITF No. 03-1 did not have any impact on the
Corporation's financial position or results of operations.
Additional accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies 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
----------------
Basic income per share amounts for the three and six months ended June 30,
2005 and 2004 were computed based on the weighted average number of common
shares outstanding during the period. Diluted income per share adjusts for
the dilutive effect of outstanding common stock options during the periods.
3. Assets Pledged
--------------
Approximately $81,571,000 and $62,396,000 of debt securities at June 30,
2005 and December 31, 2004, respectively, were pledged by Provident
Community Bank, N.A. (the "Bank") as collateral to secure deposits of the
State of South Carolina, and Union, Laurens and York counties. 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. The Bank will also pledge securities to
cover additional advances from the Federal Home Loan Bank that exceed the
qualifying mortgages balance along with security repurchase lines with
various brokerage houses.
8
4. Contingencies and Loan Commitments
----------------------------------
In the ordinary course of business, the Bank enters into financial
instruments with off-balance-sheet risk 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 June
30, 2005 related to these items is summarized below:
Loan Commitments: Contract Amount
---------------- ---------------
Approved loan commitments $ 1,557,000
Unadvanced portions of loans and credit lines 39,089,000
----------
Total loan commitments $ 40,646,000
==========
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 and commercial property.
Commitments outstanding at June 30, 2005 consisted of fixed and adjustable
rate loans at rates ranging from 5.0% to 6.5%. 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
$86,147,000 at June 30, 2005. Of these lines, the outstanding loan balances
totaled approximately $47,058,000.
5. Floating Rate Junior Subordinated Deferrable Interest Debentures
----------------------------------------------------------------
On December 18, 2001, the Trust issued $8,000,000 of floating rate capital
securities through a pooled trust preferred securities offering. The
proceeds from this issuance, along with the Corporation's $247,000 capital
contribution for the Trust's common securities, were used to acquire
$8,247,000 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. 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 Debentures, taken together, fully irrevocably and
unconditionally guaranteed all of the Trust's obligations under the capital
securities.
9
A summary of the Trust securities issued and outstanding follows:
- ---------------------------------------------------------------------------------------------------------------
Amount Outstanding
at June 30,
Distribution
Prepayment Payment
Option Date Maturity Frequency
- ---------------------------------------------------------------------------------------------------------------
Name 2005 2004 Rate
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Union Financial
Statutory Trust I $8,000,000 $8,000,000 6.64% December 18, 2006 December 18, 2031 Quarterly
- ---------------------------------------------------------------------------------------------------------------
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.
The Corporation has the right, at one or more times, to defer interest
payments on the Debentures for up to twenty consecutive quarterly periods.
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. Additionally, during
any deferral period, the Corporation will be prohibited from declaring or
paying cash dividends on its common stock.
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 may contain certain
"forward-looking statements" concerning the future operations of the
Corporation and the Bank. These forward-looking statements are generally
identified by the use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. Management
intends 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 this report 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
-------------------
Assets
------
Total assets of the Corporation increased $23,648,000, or 6.73%, to
$375,246,000 at June 30, 2005 from $351,598,000 at December 31, 2004.
Investment and mortgage-backed securities increased approximately
$17,213,000, or 12.00%, from December 31, 2004 to June 30, 2005, due to the
purchase of shorter-term agency securities.
Loans increased $12,399,000, or 7.25%, to $183,493,000 at June 30, 2005.
The Corporation continues to focus on consumer and commercial lending with
reduced emphasis on residential fixed rate mortgage loans. Consumer and
commercial loans outstanding during this period increased $15,895,000, or
14.52%, while outstanding residential mortgage loans decreased $2,063,000
or 3.32%. Short term interest earning deposits decreased $7,358,000, or
63.37%, to $4,253,000, from December 31, 2004 to June 30, 2005, as these
deposits were used to fund growth in loans and investments. Other assets
decreased $192,000, or 7.30%, to $2,439,000, from December 31, 2004 to June
30, 2005, due to a decrease in a net deferred tax receivable that was
related to the mark to market adjustment for investments available for
sale.
11
Liabilities
-----------
Total liabilities increased $23,667,000, or 7.27%, to $349,246,000 at June
30, 2005 from $325,579,000 at December 31, 2004. Deposits increased
$8,380,000, or 3.68%, to $235,969,000 at June 30, 2005 from $227,589,000 at
December 31, 2004. The increase was due primarily to growth in lower cost
demand accounts partially offset by a reduction in higher cost certificates
of deposit accounts. The Corporation continues to target lower cost demand
deposit accounts through media advertising versus traditional higher cost
certificates of deposits.
Borrowings from the Federal Home Loan Bank "FHLB" increased $9,000,000, or
14.17%, to $72,500,000 at June 30, 2005 from $63,500,000 at December 31,
2004. Securities sold under agreement to repurchase increased $5,000,000 to
$29,000,000 at June 30, 2005 from $24,000,000 at December 31, 2004. The
increases in borrowings were utilized to fund additional growth for the
Corporation. Other liabilities increased $1,014,000 to $2,884,000 at June
30, 2005 from $1,870,000 at December 31, 2004, due primarily to an increase
in outstanding loan fundings.
Shareholders' Equity
--------------------
Shareholders' equity decreased $19,000, or 0.07%, to $26,000,000 at June
30, 2005 from $26,019,000 at December 31, 2004 due to the repurchase of
63,968 shares at a cost of $1,086,000 and dividend payments of $0.20 per
share at a cost of $387,000, offset by net income of $1,088,000 and a
$257,000 increase in unrealized gains on securities available for sale.
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 deposits, loan
repayments, borrowings, maturity of securities and interest payments.
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 commercial and consumer loans, and the purchase of
investment, municipal 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 six months ended June 30, 2005, the Corporation's loan
originations totaled $31,994,000. At June 30, 2005, the Corporation's
investment in agency and mortgage-backed securities totaled $160,707,000,
nearly all of which is available for sale.
12
Additionally, outstanding loan commitments (including commitments to fund
credit lines) totaled $40,646,000 at June 30, 2005. Management of the
Corporation anticipates that it will have sufficient funds available to
meet its current loan commitments.
At June 30, 2005, the undisbursed portion of construction loans was
$2,922,000 and the unused portion of credit lines was $36,167,000. 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.
During the six months ended June 30, 2005, total deposits increased
$8,380,000. 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 June 30, 2005, totaled $83,809,000. 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 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 June 30, 2005, the Corporation had $72,500,000 of FHLB
borrowings and $29,000,000 of securities sold under agreements to
repurchase. At June 30, 2005, the Corporation had unused short-term lines
of credit to purchase federal funds from unrelated banks totaling
$29,000,000. The lines of credit are available on a one-to-ten day basis
for general purposes of the Corporation. All of the lenders have reserved
the right to withdraw these lines at their option.
Capital Management
------------------
The Bank and the Corporation are subject to various regulatory capital
requirements administered by banking regulators. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's consolidated financial
statements. 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 judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank and the Corporation to maintain minimum amounts and ratios
of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital
to average assets (as defined in the regulations). Management believes, as
of June 30, 2005, that the Bank and the Corporation meet the capital
adequacy requirements to which they are subject.
13
As of June 30, 2005, the Bank was "well capitalized" under the regulatory
framework for prompt corrective action based on its capital ratio
calculations. In order to be "well capitalized", the Bank must maintain
minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the following table. Under present regulations of the Office
of the Comptroller of the Currency, the Bank must have core capital
(leverage requirement) equal to 4.0% of assets, of which 1.5% must be
tangible capital, excluding intangible assets. 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.
The following tables present the total risk-based, Tier 1 risk-based and
Tier 1 leverage requirements for the Corporation and the Bank (dollars in
thousands).
June 30, 2005
-------------
Actual Regulatory Minimum "Well Capitalized"
------ ------------------ ------------------
- -----------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
$ % $ % $ %
- -----------------------------------------------------------------------------------------------------------
Leverage ratio
Corporation 29,687 8.16% 14,560 4.00% n/a n/a
Bank 29,350 8.06% 14,560 4.00% 18,200 5.00%
Tier 1 capital ratio
Corporation 29,687 13.37% 8,883 4.00% n/a n/a
Bank 29,350 13.21% 8,888 4.00% 13,332 6.00%
Total risk-based capital
ratio
Corporation 32,153 14.48% 17,766 8.00% n/a n/a
Bank 31,816 14.32% 17,776 8.00% 22,220 10.00%
- -----------------------------------------------------------------------------------------------------------
14
During fiscal 2003, the Corporation implemented a share repurchase program
under which the Board of Directors of the Corporation authorized the
repurchase of up to 5% of the outstanding shares or 98,000 shares. The
program was expanded by an additional 5% in fiscal 2004 and again in fiscal
2005. The shares are to be repurchased either through open market purchases
or privately negotiated transactions and will be made from time to time
depending on market conditions and other factors. Repurchased shares will
be held in treasury and will be available for the Corporation's benefit
plans. The repurchase program is expected to improve the Corporation's
operating performance on a per share basis, enhance, in the long term, the
market price per share of the Corporation's common stock and increase the
liquidity of the Corporation's common stock. During the quarter ended June
30, 2005, the Corporation repurchased 11,302 shares. As of June 30, 2005,
the Corporation had repurchased a total of 146,953 shares under this
authorization.
Off-Balance Sheet Risk
----------------------
In the normal course of operations, the Corporation engages in a variety of
financial transactions that, in accordance with generally accepted
accounting principles, are not recorded in its financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate
and liquidity risk. Such transactions are used primarily to manage
customer's requests for funding and take the form of legally binding
agreements to lend money to customers at predetermined interest rates for a
specified period of time. Outstanding loan commitments (including
commitments to fund credit lines) totaled $40,646,000 at June 30, 2005.
Each customer's credit worthiness is evaluated on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on the credit evaluation of the borrower.
Collateral varies but may include accounts receivable, inventory, property,
plant and equipment, commercial and residential real estate. The credit
risk on these commitments is managed by subjecting each customer to normal
underwriting and risk management processes.
For the period ended June 30, 2005, the Corporation did not engage in any
off-balance sheet transactions reasonably likely to have a material effect
on its financial condition, results of operation and cash flows.
15
Results of operations for the three months ended June 30, 2005 and 2004
-----------------------------------------------------------------------
General
-------
Net income increased $1,000, or 0.18%, to $549,000 for the three months
ended June 30, 2005 as compared to the same period in 2004 as increases in
net interest income and non- interest income were offset by increases in
the provision for loan losses.
Interest Income
---------------
Interest income increased $508,000, or 12.10%, to $4,708,000 for the three
months ended June 30, 2005 as compared to the same period in 2004. Interest
income on loans increased by 21.78%, or $544,000, to $3,042,000 for the
three months ended June 30, 2005 from $2,498,000 for the three months ended
June 30, 2004, due primarily to increasing market interest rates along with
a higher average balance of loans due to our increased emphasis on
commercial and consumer loan originations. Interest on deposits and federal
funds sold, combined with interest and dividends on investment and
mortgage-backed securities decreased $36,000, or 2.12%, for the three
months ended June 30, 2005 to $1,666,000 from $1,702,000 during the same
period in 2004 due to lower average investable balances, offset by higher
yields. Investment securities average balances as of June 30, 2005
decreased by $5,324,000, or 3.38%, when compared to the same period in
2004. Proceeds from the maturity and sale of investment securities were
utilized to fund loans that produced a higher yield.
Interest Expense
----------------
Interest expense increased $424,000, or 23.77%, to $2,208,000 for the three
months ended June 30, 2005 as compared to the three months ended June 30,
2004. Interest expense on deposit accounts increased $341,000, or 36.24%,
to $1,282,000 for the three months ended June 30, 2005 from $941,000 during
the same period in 2004 due to higher cost of deposits as a result of
higher market rates offset by growth in lower costing transaction accounts.
The Corporation continues to target lower cost demand deposit accounts
versus traditional higher cost certificates of deposits. Interest expense
on borrowings increased $43,000, or 5.79%, for the three months ended June
30, 2005 as compared to the same period in the previous year due to higher
borrowing levels and market interest rates. Interest expense on floating
rate junior subordinated deferrable interest debentures increased $40,000,
or 40.00%, to $140,000 for the three months ended June 30, 2005 from
$100,000 during the same period in 2004 due to higher market interest
rates.
16
Provision for Loan Losses
-------------------------
During the three months ended June 30, 2005, the provision for loan losses
was $341,000 as compared to $250,000 for the same period in the previous
year, due to the growth in the loan portfolio and the increase in
commercial and consumer loans with greater risk along with an increase in
non-accrual loans, offset by a decrease in net charge-offs. Commercial and
consumer loans accounted for 67.63% of the loan portfolio at June 30, 2005
compared to 60.53% for the same period in 2004. During the three months
ended June 30, 2005, bad debt charge-offs, net of recoveries, was $46,000
as compared to $683,000 in net bad debt charge-offs for the same period in
the previous year. During the three months ended June 30, 2005, non-accrual
loans increased $3,012,000 from $989,000 at March 31, 2005 to $4,001,000 at
June 30, 2005. This compares to non-accrual loans at June 30, 2004 of
$955,000. The increase in non-accrual loans for the quarter ending June 30,
2005 included one commercial loan for $2.4 million that is well supported
by a low loan to value mortgage and a second commercial loan that is in
process of being restructured. Management believes the Corporation's loan
loss allowance is adequate to absorb possible loan losses inherent in the
portfolio.
The allowance 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 weight 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 allowance for loan loss calculation
will adjust accordingly.
Non-Interest Income
-------------------
Total non-interest income increased $16,000, or 2.44%, to $673,000 for the
three months ended June 30, 2005 from $657,000 for the same period in the
previous year. Fees from financial services increased $12,000, or 1.89%, to
$646,000 for the three months ended June 30, 2005 from $634,000 for the
same period in the previous year. The increase was due primarily to higher
service charges that resulted from an increase in transaction accounts that
was offset by lower fees generated from third party investment brokerage
and financing receivables programs due to a reduction in product volumes.
Non-Interest Expense
--------------------
For the three months ended June 30, 2005, total non-interest expense
increased $3,000, or 0.14%, to $2,090,000 from $2,087,000 for the same
period in 2004. Compensation and employee benefits increased $24,000, or
2.50%, to $983,000 for the three months ended June 30, 2005 from $959,000
for the same period in 2004 due to normal merit salary increases.
Professional services expense increased $20,000, or 24.39%, to $102,000 for
the three months ended June 30, 2005 from $82,000 for the same period in
2004 due to higher consultant expense utilized to implement improved loan
documentation policies and procedures. Advertising expense decreased
$22,000, or 48.89%, to $23,000 for the three months ended June 30, 2005
from $45,000 for the same period in 2004, due to reductions in media
advertising in slower growth markets. Items processing expense decreased
$30,000, or 50.85%, to $29,000 for the three months ended June 30, 2005
from $59,000 for the same period in 2004. The Corporation entered into a
new items processing contract that was effective January 1, 2005 that
reduced the long term expense for demand accounts.
17
Results of operations for the six months ended June 30, 2005 and 2004
---------------------------------------------------------------------
General
-------
Net income increased $31,000, or 2.93%, to $1,088,000 for the six months
ended June 30, 2005 as compared to the same period in 2004 as an increase
in net interest income was partially offset by increases in provision for
loan losses and non-interest expense along with a reduction in non-interest
income.
Interest Income
---------------
Interest income increased $876,000, or 10.63%, to $9,118,000 for the six
months ended June 30, 2005 as compared to the same period in 2004. Interest
income on loans increased by 18.34%, or $909,000, to $5,865,000 for the six
months ended June 30, 2005 from $4,956,000 for the six months ended June
30, 2004, due primarily to increasing market interest rates along with a
higher average balance of loans due to our increased emphasis on commercial
and consumer loan originations. Interest on deposits and federal funds
sold, combined with interest and dividends on investment and
mortgage-backed securities decreased $33,000, or 1.00%, for the six months
ended June 30, 2005 to $3,253,000 from $3,286,000 during the same period in
2004 due to lower average balances, offset by higher yields. Proceeds from
the maturity and sale of investment securities were utilized to fund growth
in higher yielding loans
Interest Expense
----------------
Interest expense increased $603,000, or 16.91%, to $4,169,000 for the six
months ended June 30, 2005 as compared to $3,566,000 for the six months
ended June 30, 2004. Interest expense on deposit accounts increased
$501,000, or 26.09%, to $2,421,000 for the six months ended June 30, 2005
from $1,920,000 during the same period in 2004 due to higher cost of
deposits as a result of higher market rates offset by growth in lower
costing transaction accounts. The Corporation continues to target lower
cost demand deposit accounts versus traditional higher cost certificates of
deposits. Interest expense on borrowings increased $34,000, or 2.35%, for
the six months ended June 30, 2005 as compared to the same period in the
previous year due to higher borrowing levels and market interest rates.
Interest expense on floating rate junior subordinated deferrable interest
debentures increased $68,000, or 34.17%, to $267,000 for the six months
ended June 30, 2005 from $199,000 during the same period in 2004 due to
higher market interest rates.
Provision for Loan Losses
-------------------------
During the six months ended June 30, 2005, the provision for loan losses
was $548,000 as compared to $385,000 for the same period in the previous
year, primarily due to loan growth along with an increase in non-accrual
loans, offset by a decrease in net charge-offs. The 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.
18
Consumer and commercial loans carry higher risk weighted rates in the
reserve calculation as compared to residential mortgage loans. Non
performing loans increased $3,251,000 from $750,000 at December 31, 2004 to
$4,001,000 at June 30, 2005. The increase in non-accrual loans for the six
months ending June 30, 2005 includes one commercial loan for $2.4 million
that is well supported by a low loan to value mortgage. Loans 30-89 days
past due and still accruing was $3,521,000 at June 30, 2005 compared to
$7,214,000 at December 31, 2004. The reduction in delinquent loans is a
result of increased emphasis and focus from the Credit Administration area
of the Bank that was developed with the utilization of outside loan
consultants. During the six months ended June 30, 2005, bad debt
charge-offs, net of recoveries, was $108,000 as compared to $881,000 for
the same period in the previous year. The previous year bad debt
charge-offs included approximately $737,000 from two commercial loans that
were written down due to a reduction in the market value of the supporting
loan collateral. The Corporation's loan loss allowance at June 30, 2005 was
approximately 1.33% of the Corporation's outstanding loan portfolio and
61.63% of non-performing loans compared to 1.18% of the Corporation's
outstanding loan portfolio and 270.13% of non-performing loans at December
31, 2004.
The changes in the allowance for loan losses consisted of the following (in
thousands):
Balance at beginning of year $2,026
Provision for loan losses 548
Charge-offs, net (108)
-----
Balance at end of quarter $2,466
=====
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated (dollars in thousands):
June 30, 2005 December 31, 2004
------------- -----------------
Non-accruing loans which are
contractually past due 90 days
or more:
Real Estate $ 547 $ 217
Commercial 3,236 142
Consumer 218 391
------- -------
Total $ 4,001 $ 750
======= =======
Percentage of loans receivable, net 2.16% 0.44%
===== =====
Percentage of allowance for loan losses
to total loans outstanding 1.33% 1.18%
===== =====
Allowance for loan losses $ 2,466 $ 2,026
======= =======
Real estate acquired through
foreclosure and repossessed
assets, net of allowances $ 286 $ 373
======= =======
19
Non-Interest Income
-------------------
Total non-interest income decreased $35,000, or 2.72%, to $1,250,000 for
the six months ended June 30, 2005 from $1,285,000 for the same period in
the previous year. Fees from financial services decreased $20,000, or
1.65%, to $1,189,000 for the six months ended June 30, 2005 from $1,209,000
for the same period in the previous year. The decrease was due primarily to
lower fees generated from third party investment brokerage and financing
receivables programs due to a reduction in product volumes. Gain on sale of
loans for the six months ended June 30, 2005 was $26,000 compared to
$43,000 for the same period in the previous year due to lower residential
loan originations as a result of the rising interest rate environment along
with the Corporation's shift in focus to consumer/commercial loans. The
sales represent loans funded and sold through a third party on a servicing
released basis.
Non-Interest Expense
--------------------
For the six months ended June 30, 2005, total non-interest expense
increased $24,000, or 0.58%, to $4,192,000 from $4,168,000 for the same
period in 2004. Compensation and employee benefits increased $24,000, or
1.22% to $1,998,000 for the six month period ended June 30, 2005 from
$1,974,000 for the same period in 2004, due to normal merit salary
increases. Professional services expense increased $30,000, or 18.87%, to
$189,000 for the six months ended June 30, 2005 from $159,000 for the same
period in 2004 due to higher consultant expense utilized to implement
improved loan documentation policies and procedures. Advertising expense
decreased $21,000, or 25.61%, to $61,000 for the six months ended June 30,
2005 from $82,000 for the same period in 2004, due to reductions in media
advertising in slower growth markets. Loan operations costs increased
$15,000, or 24.19%, to $77,000 for the six months ended June 30, 2005 from
$62,000 for the same period in 2004, due to higher costs associated with
foreclosures. Items processing expense decreased $63,000, or 50.81%, to
$61,000 for the six months ended June 30, 2005 from $124,000 for the same
period in 2004. The Corporation entered into a new items processing
contract that was effective January 1, 2005 that reduced the long term
expense for demand accounts. Telephone expense increased $7,000, or 9.09%,
to $84,000 for the six months ended June 30, 2005 from $77,000 for the same
period in 2004, due to installation charges incurred for two new banking
center systems. Other expense increased $23,000, or 6.91%, to $356,000 for
the six months ended June 30, 2005 from $333,000 for the same period in
2004, due primarily to higher expenses for postage and general office
supplies along with increases in insurance expense.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 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 on earnings of movements in interest rates.
The Corporation's Asset/Liability Committee makes pricing and marketing
decisions on deposit and loan products in conjunction with managing the
Corporation's interest rate risk. In addition, the Asset/Liability
Committee reviews the Corporation's securities portfolio, FHLB advances and
other borrowings as well as the Corporation's asset and liability policies.
The primary objective of Asset/Liability management at the Corporation is
to manage interest rate risk and achieve reasonable stability in net
interest income throughout interest rate cycles in order to maintain
adequate liquidity. This is achieved by maintaining the proper balance of
rate-sensitive earning assets and rate-sensitive costing liabilities. The
relationship of rate-sensitive earning assets to rate-sensitive costing
liabilities is the principal factor in projecting the effect that
fluctuating interest rates will have on future net interest income.
Rate-sensitive assets and interest-bearing liabilities are those that can
be repriced to current market rates within a relatively short time period.
Management monitors the rate sensitivity of earning assets and
interest-bearing liabilities over the entire life of these instruments.
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.
Net Interest Income Simulation Analysis. We analyze our interest rate
sensitivity position to manage the risk associated with interest rate
movements through the use of interest income simulation. The matching of
assets and liabilities may be analyzed by examining the extent to which
such assets and liabilities are "interest sensitive." An asset or liability
is said to be interest rate sensitive within a specific time period if it
will mature or reprice within that time period.
Our goal is to manage asset and liability positions to moderate the effects
of interest rate fluctuations on net interest income. Interest income
simulations utilizing interest rate shocks are completed quarterly and
presented to the Asset/Liability Committee. The simulations provide an
estimate of the impact of changes in interest rates on net interest income
under a range of assumptions. The interest rate shocks are compared to
board approved policy limits and are reviewed by the Asset/Liability
21
Committee on a quarterly basis. The simulation incorporates assumptions
regarding the potential timing in the repricing of certain assets and
liabilities when market rates change and the changes in spreads between
different market rates. The simulation analysis incorporates management's
current assessment of the risk that pricing margins will change adversely
over time due to competition or other factors.
Simulation analysis is only an estimate of our interest rate risk exposure
at a particular point in time. We continually review the potential effect
changes in interest rates could have on the repayment of rate sensitive
assets and funding requirements of rate sensitive liabilities.
The table below sets forth an approximation of our exposure as a percentage
of estimated net interest income for the next twelve month period using
interest income simulation. The simulation uses projected repricing of
assets and liabilities on the basis of contractual maturities, anticipated
repayments and scheduled rate adjustments. Prepayment rates can have a
significant impact on interest income simulation. When interest rates rise,
prepayments tend to slow. When interest rates fall, prepayments tend to
rise.
The following table reflects changes in estimated net interest income from
rate shocks of (+) or (-)1% and (+)2% in a rising and falling interest rate
environment for the Corporation.
At At
June 30, December 31,
2005 2004
---- ----
---------------------------------------------------------------------------
200 basis point increase in rates
+6.28% +5.75%
---------------------------------------------------------------------------
100 basis point increase in rate
+3.54% +3.12%
---------------------------------------------------------------------------
100 basis point decrease in rates
(7.80)% (3.22)%
---------------------------------------------------------------------------
The 200 and 100 basis point change in rates in the above table is assumed
to occur evenly over the following twelve months. Based on the scenario
above, net interest income would be positively affected in the twelve-month
periods if rates rose by 100 and 200 basis points, but would be adversely
affected if rates declined by 100 basis points.
22
Item 4. Controls and Procedures
The Corporation's management, including the Corporation's principal
executive officer and principal financial officer, have evaluated the
effectiveness of the Corporation's "disclosure controls and procedures," as
such term is defined in Rule 13a-15(e) promulgated under the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"). Based upon their
evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, the
Corporation's disclosure controls and procedures were effective for the
purpose of ensuring that the information required to be disclosed in the
reports that the Corporation files or submits under the Exchange Act with
the Securities and Exchange Commission (the "SEC") (1) is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and (2) is accumulated and communicated to the
Corporation's management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding
required disclosure. There has been no change in the Corporation's internal
control over financial reporting identified in connection with the
evaluation required by Rule 13(a)-15(e) that occurred during the
Corporation's last fiscal quarter that has materially affected or is
reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
23
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. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
The following table provides certain information with regard to shares
repurchased by the Corporation during the second quarter of 2005.
- -----------------------------------------------------------------------------------------------------
(c)
(a) Total Number of (d)
Total (b) Shares Purchased Maximum Number of
Number of Average as part of Shares that may be
Shares Price Paid Publicly Announced purchased under
Period Purchased per share Programs Program
- -----------------------------------------------------------------------------------------------------
April 1, 2005 through 155,724
April 30, 2005
- -----------------------------------------------------------------------------------------------------
May 1, 2005 through 11,126 $16.68 11,126 144,598
May 31, 2005
- -----------------------------------------------------------------------------------------------------
June 1, 2005 through 176 $17.00 176 144,422
June 30, 2005
- -----------------------------------------------------------------------------------------------------
Total 11,302 $16.69 11,302 N/A
- -----------------------------------------------------------------------------------------------------
In November 2004, the Corporation implemented a share repurchase program
under which the Corporation may repurchase up to 5% of the outstanding
shares or 98,000 shares. In May 2005, the program was expanded by an
additional 5% or 95,000 shares. The repurchase program will continue until
it is completed or terminated by the Board of Directors.
Item 3. Defaults upon Senior Securities
-------------------------------
Not applicable.
24
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of the Stockholders of the Corporation was held on April
20, 2005. 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 by the following vote:
Votes For Votes Withheld
--------- --------------
Carl L. Mason 1,493,860 20,067
William M. Graham 1,507,318 6,609
2. The appointment of Elliott Davis, LLC, as auditors for the Corporation
for the year ending December 31, 2005 was ratified by the stockholders
by the following vote:
For 1,505,084 Against 2,565 Abstain 6,278
--------- ----- -----
Item 5. Other Information
-----------------
None
Item 6. Exhibits
--------
3 Bylaws of Union Financial Bancshares, Inc.
31(a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31(b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32(a) Chief Executive Officer Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32(b) Chief Financial Officer Certification Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
25
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: August 8, 2005 By: /s/ Dwight V. Neese
----------------- -------------------
Dwight V. Neese, CEO
Date: August 8, 2005 By: /s/ Richard H. Flake
----------------- --------------------
Richard H. Flake, CFO
26