Registration No. 333-35799
Filed with the Securities and Exchange Commission on November 10, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Pre-Effective Amendment No. 2
to
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
Indiana 6712 35-2025237
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code No.) Identification No.)
incorporation or
organization)
221 East Main Street Joseph E. Timmons
P.O. Box 151 Union Federal Savings and
Crawfordsville, Indiana 47933 Loan Association
(765) 362-2400 221 East Main Street
P.O. Box 151
Crawfordsville, Indiana 47933
(765) 362-2400
Copy to:
Claudia V. Swhier, Esq.
Barnes & Thornburg
1313 Merchants Bank Building
11 South Meridian Street
Indianapolis, Indiana 46204
Approximate date of commencement of proposed sale to the public: As
promptly as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box:
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<TABLE>
<CAPTION>
=====================================================================================================================
CALCULATION OF REGISTRATION FEE
Proposed Proposed Maximum Amount of
Title of each Class of Amount to be Maximum Offering Aggregate Offering Registration
Securities to be Registered Registered Price Per Unit Price (1) Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without par value 3,041,750 $10.00 $30,417,500 $9,217.42(2)
=====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>
CROSS-REFERENCE SHEET
Item in Form S-1 Caption in Prospectus
<S> <C> <C>
1. Forepart of Registration Statement Forepart of Registration Statement and
and Outside Front Cover Page of Prospectus and Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
3. Summary Information, Risk Factors, and Ratio of "QUESTIONS AND ANSWERS ABOUT
Earnings to Fixed Charges THE STOCK OFFERING"; "SUMMARY"; "RISK
FACTORS"
4. Use of Proceeds "USE OF PROCEEDS"
5. Determination of Offering Price "THE CONVERSION - Stock Pricing"
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution "SUMMARY"; "THE CONVERSION - Subscription
Offering," "- Community Offering,"
"-Marketing Arrangements," "- Selected Dealers"
9. Description of Securities to be Registered "DESCRIPTION OF CAPITAL STOCK"
10. Interests of Named Experts and Counsel Not Applicable
11. Information with Respect to Registrant
(a) Description of Business "UNION COMMUNITY BANCORP"; "UNION FEDERAL
SAVINGS AND LOAN ASSOCIATION", "BUSINESS
OF UNION FEDERAL SAVINGS AND LOAN
ASSOCIATION"
(b) Description of Property "BUSINESS OF UNION FEDERAL SAVINGS AND LOAN
ASSOCIATION - Properties"
(c) Legal Proceedings "BUSINESS OF UNION FEDERAL SAVINGS
AND LOAN ASSOCIATION - Legal Proceedings"
(d) Market Price of and Dividends on the "MARKET FOR THE COMMON STOCK;"
Registrant's Common Equity and Related "DIVIDENDS;" "PROPOSED PURCHASES
Stockholder Matters BY DIRECTORS AND EXECUTIVE OFFICERS";
"DESCRIPTION OF CAPITAL STOCK"
(e) Financial Statements "FINANCIAL STATEMENTS"; "PRO FORMA DATA"
(f) Selected Financial Data "SELECTED CONSOLIDATED FINANCIAL
DATA OF UNION FEDERAL SAVINGS AND LOAN
ASSOCIATION AND SUBSIDIARY"
(g) Supplementary Financial Information Not Applicable
(h) Management's Discussion and Analysis of "MANAGEMENT'S DISCUSSION AND
Financial Condition and Results of Operations ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF UNION FEDERAL
SAVINGS AND LOAN ASSOCIATION"
(i) Changes in and Disagreements with Accountants Not Applicable
on Accounting and Financial Disclosure
<PAGE>
(j) Directors and Executive Officers "MANAGEMENT OF UNION COMMUNITY BANCORP";
"MANAGEMENT OF UNION FEDERAL SAVINGS AND
LOAN ASSOCIATION"
(k) Executive Compensation "EXECUTIVE COMPENSATION
AND RELATED TRANSACTIONS OF UNION FEDERAL"
(l) Security Ownership of Certain Beneficial "PROPOSED PURCHASES BY DIRECTORS AND
Owners and Management EXECUTIVE OFICERS"
(m) Certain
Relationships
and
Related
Transactions
"EXECUTIVE
COMPENSATION
AND
RELATED
TRANSACTIONS
OF UNION
FEDERAL -
-
Transactions
with
Certain
Related
Persons"
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
</TABLE>
<PAGE>
PROSPECTUS
Up to 3,041,750 Shares of Common Stock
Union Community Bancorp
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2400
Union Federal Savings and Loan Association based in Crawfordsville,
Indiana is converting from the mutual form to the stock form of organization.
Upon completion of the conversion, Union Federal Savings and Loan Association
will become a wholly-owned subsidiary of Union Community Bancorp, which was
formed in September, 1997. The common stock of Union Community Bancorp is being
offered to the public under the terms of a Plan of Conversion which must be
approved by a majority of the votes eligible to be cast by members of Union
Federal Savings and Loan Association and by the Office of Thrift Supervision.
The offering will not go forward if Union Federal Savings and Loan Association
does not receive these approvals. Union Community Bancorp has received
conditional approval to have its common stock quoted on the National Association
of Securities Dealers Automated Quotation National Market System under the
symbol "UCBC."
TERMS OF OFFERING
An independent appraiser has estimated the market value of the
converted Union Federal Savings and Loan Association to be between $19,550,000
to $26,450,000, which establishes the number of shares to be offered. Subject to
Office of Thrift Supervision approval, an additional 15% above the maximum
number of shares, or a total of 3,041,750 shares, may be offered. Based on these
estimates, we are making the following offering of shares of common stock.
<TABLE>
<CAPTION>
Minimum Supermaximum
<S> <C> <C>
o Price Per Share: $10 $10
o Number of Shares 1,955,000 3,041,750
o Conversion Expenses $636,097 $789,673
o Net Proceeds to Union Community Bancorp $18,913,903 $29,627,827
o Net Proceeds per share to Union Community Bancorp $9.67 $9.74
</TABLE>
Please refer to Risk Factors beginning on page 13 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
Trident Securities, Inc. will use its best efforts to help Union Community
Bancorp sell at least the minimum number of shares but does not guarantee this
number will be sold. All funds received from subscribers will be held in an
escrow savings account at Union Federal Savings and Loan Association until the
completion or termination of the Conversion.
For information on how to subscribe, call the Stock Information Center at (765)
362-2428.
TRIDENT SECURITIES, INC.
Prospectus dated November 12, 1997
<PAGE>
TABLE OF CONTENTS
Page
Questions and Answers..................................................... 3
Summary................................................................... 5
Selected Consolidated Financial Data of
Union Federal Savings and Loan Association and Subsidiary.............. 7
Recent Developments of Union Federal Savings and Loan Association......... 10
Risk Factors.............................................................. 13
Proposed Purchases by Directors and Executive Officers.................... 16
Union Community Bancorp................................................... 16
Union Federal Savings and Loan Association................................ 17
Market Area............................................................... 17
Use of Proceeds........................................................... 17
Dividends................................................................. 18
Market for the Common Stock............................................... 19
Competition............................................................... 19
Capitalization............................................................ 19
Pro Forma Data............................................................ 21
The Conversion............................................................ 25
Offering of Common Stock........................................... 28
Subscription Offering.............................................. 29
Community Offering................................................. 31
Limitation on Common Stock Purchases............................... 33
Management's Discussion and Analysis of Financial Condition
and Results of Operations of
Union Federal Savings and Loan Association............................. 37
Business of Union Federal Savings and Loan Association.................... 51
Management of Union Community Bancorp..................................... 66
Management of Union Federal Savings and Loan Association.................. 67
Executive Compensation and Related Transactions of Union Federal......... 68
Regulation................................................................ 72
Taxation.................................................................. 78
Restrictions on Acquisition of the Holding Company........................ 79
Description of Capital Stock.............................................. 84
Transfer Agent............................................................ 85
Registration Requirements................................................. 85
Legal and Tax Matters..................................................... 85
Experts................................................................... 85
Additional Information.................................................... 85
Index to Consolidated Financial Statements................................ F-1
Glossary.................................................................. G-1
This document contains forward-looking statements which involve risks
and uncertainties. Union Community Bancorp's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 13 of this Prospectus.
Please see the Glossary beginning on page G-1 for the meaning of
capitalized terms that are used in this Prospectus.
<PAGE>
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: What is the purpose of the offering?
A: The offering means that you will have the opportunity to share in our
future as a shareholder of the newly formed holding company named Union
Community Bancorp which will own Union Federal Savings and Loan
Association. The stock offering will increase our capital and the
amount of funds available to us for lending and investment activities.
This will give us greater flexibility to diversify operations and
expand into other geographic markets if we choose to do so. As a stock
savings association operating through a holding company structure, we
will have the ability to plan and develop long-term growth and improve
our future access to the capital markets. In addition, our shareholders
might also receive dividends and benefit from any long-term
appreciation of our stock price if our earnings are sufficient in the
future.
<PAGE>
Q: How do I purchase the stock?
A: You must complete and return the Stock Order Form to us together with
your payment, on or before December 10, 1997.
Q: How much stock may I purchase?
A: The minimum purchase is 25 shares (or $250). Each person with
subscription rights, in his capacity as such, may purchase up to 20,000
shares (or $200,000) in the Subscription Offering, subject to an
overall maximum of 30,417 shares ($304,170). Joint account holders
ordering through a single account may not collectively exceed these
purchase limitations.
Thus, for example, if you have more than one account at Union Federal
Savings and Loan Association, each in the same name, you may purchase
up to 20,000 shares in the Subscription Offering. If you have only one
account at Union Federal Savings and Loan Association held jointly with
your spouse, together you and your spouse may only purchase up to
20,000 shares in the Subscription Offering. If you have more than one
account at Union Federal Savings and Loan Association in different
names, you may subscribe for up to 20,000 shares with respect to either
or both such accounts, subject to a combined limit of 30,417 shares.
If we have a Community Offering, each purchaser may purchase up to
20,000 shares in that offering. However, your total purchases in the
Conversion may not exceed 30,417 shares (or $304,170).
In certain instances, your purchase may be grouped together with
purchases by other persons who are associated with you. We may decrease
or increase the maximum purchase limitation without notifying you. If
the offering is oversubscribed, shares will be allocated based upon a
formula.
Q: What happens if there are not enough shares to fill all orders?
A: You might not receive any or all of the shares you want to purchase. If
there is an oversubscription, the stock will be offered on a priority
basis to the following persons:
o Persons who had a deposit account with us on December 31,
1995. (Union Community Bancorp's employee stock ownership plan
will have priority over such persons if more than 2,645,000
shares are sold, to the extent of any shares sold over
2,645,000 and up to the number of shares subscribed for by
such plan). Any remaining shares will be offered to:
o The employee stock ownership plan of Union Community Bancorp.
Any remaining shares will be offered to:
o Persons who had a deposit account with us on September 30,
1997. Any remaining shares will be offered to:
o Other depositors of ours, as of October 31, 1997, and our
borrowers as of July 30, 1997 who remain borrowers on October
31, 1997.
If the above persons do not subscribe for all of the shares, the
remaining shares will be offered to certain members of the general
public in a Community Offering, with preference given to people who
live in Montgomery County, Indiana.
<PAGE>
Q: What particular factors should I consider when deciding whether or not
to buy the stock?
A: Before you decide to purchase stock, you should read this Prospectus.
In particular, you should read and consider the Risk Factors section on
pages 13 to 16 of this document.
Q: As a depositor of Union Federal Savings and Loan Association, what will
happen if I do not purchase any stock?
A: You presently have voting rights while we are in the mutual form;
however, once we convert to the stock form you will lose your voting
rights unless you purchase stock. Even if you do purchase stock, your
voting rights will depend on the amount of stock that you own and not
on your deposit account at Union Federal Savings and Loan Association.
You are not required to purchase stock. Your deposit account,
certificate accounts and any loans you may have with us will not be
affected by the Conversion.
Q: Can I purchase stock on behalf of someone else who does not have an
account or is not a borrower at Union Federal Savings and Loan
Association?
A: No. You may not transfer the subscription rights that you have as a
depositor or borrower at Union Federal Savings and Loan Association.
You will be required to certify that you are purchasing shares solely
for your own account and that you have no agreement or understanding
with another person involving the transfer of the shares that you
purchase. We will not honor orders for shares of the Common Stock by
anyone known to us to be a party to such an agreement and we will
pursue all legal remedies against any person who is a party to such an
agreement.
Q: Who can help answer any other questions I may have about the stock
offering?
A: In order to make an informed investment decision, you should read this
entire document. This section highlights selected information and may
not contain all of the information that is important to you. If you
have questions or need assistance, you should contact:
Stock Information Center
Union Federal Savings and Loan Association
P.O. Box 627
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2428
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read carefully this entire document, including
the consolidated financial statements and the notes to the consolidated
financial statements of Union Federal Savings and Loan Association. References
in this document to "we", "us", "our" and "Union Federal" refer to Union Federal
Savings and Loan Association. In certain instances where appropriate, "us" or
"our" refers collectively to Union Community Bancorp and Union Federal Savings
and Loan Association. References in this document to "the Holding Company" refer
to Union Community Bancorp.
The Companies
Union Community Bancorp
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2400
Union Community Bancorp is not an operating company and has not engaged
in any significant business to date. It was formed in September, 1997, as an
Indiana corporation to be the holding company for Union Federal Savings and Loan
Association. The holding company structure will provide greater flexibility in
terms of operations, expansion and diversification. See page 16.
Union Federal Savings and Loan Association
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2400
We are a community- and customer-oriented federal mutual savings and
loan association. We provide financial services to individuals, families and
small business. Historically, we have emphasized residential mortgage lending,
primarily one- to four-family mortgage loans. On June 30, 1997, we had total
assets of $84.3 million, deposits of $62.1 million, and retained earnings of
$14.5 million. See page 17.
The Stock Offering
Union Community Bancorp is offering for sale between 1,955,000 and
2,645,000 shares of its Common Stock at $10 per share. This offering may be
increased to 3,041,750 shares without further notice to you if market or
financial conditions change prior to the completion of this stock offering or if
additional shares of stock are needed to fill the order of our employee stock
ownership plan.
Stock Purchases
Union Community Bancorp will offer shares of its Common Stock to our
depositors who held deposit accounts as of certain dates and to our borrowers
with outstanding loans as of certain dates. The shares will be offered first in
a Subscription Offering and any remaining shares may be offered in a Community
Offering to members of the general public with preference given to residents of
Montgomery County. See pages 29 to 32. We have engaged Trident Securities, Inc.
to assist in the marketing of the Common Stock.
Prohibition on Transfer of Subscription Rights
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. If you exercise your subscription
rights, you will be required to certify that you are purchasing shares solely
for your own account and that you have no agreement or understanding regarding
the sale or transfer of shares. We intend to pursue any and all legal and
equitable remedies in the event we become aware of the transfer of subscription
rights and will not honor orders known by us to involve the transfer of such
rights. In addition, persons who violate the purchase limitations may be subject
to sanctions and penalties imposed by the Office of Thrift Supervision.
The Offering Range and Determination of the Price Per Share
The offering range is based on an independent appraisal of the pro
forma market value of the Common Stock by RP Financial, LC., an appraisal firm
experienced in appraisals of savings associations. RP Financial, LC. has
estimated that, in its opinion, as of August 22, 1997, and as updated as of
October 17, 1997, the aggregate pro forma market value of the Common Stock
ranged between $19,550,000 and $26,450,000 (with a mid-point of $23,000,000).
The pro forma market value of the shares is our market value after taking into
account the sale of shares in this offering. The appraisal was based in part
upon our financial condition and operations and the effect of the additional
capital raised by the sale of Common Stock in this offering. The $10.00 price
per share was determined by our board of directors and is the price most
commonly used in stock offerings involving conversions of mutual savings
associations. If the pro forma market value of the Common Stock changes to
either below $19,550,000 or above $30,417,500, we will notify you and provide
you with the opportunity to modify or cancel your order. See pages 35 to 36.
<PAGE>
Termination of the Offering
The Subscription Offering will terminate at 12:00 noon, Crawfordsville
time, on December 10, 1997. The Community Offering, if any, may terminate at any
time without notice but no later than January 24, 1998, without approval by the
OTS.
Benefits to Management from the Offering
Our full-time employees will participate in our employee stock
ownership plan, which is a form of retirement plan that will purchase shares of
Union Community Bancorp's Common Stock. We also intend to implement a management
recognition and retention plan and a stock option plan following completion of
the Conversion, which will benefit our officers and directors. If we adopt the
management recognition and retention plan, our executive officers and directors
will be awarded shares of Common Stock at no cost to them. However, the
management recognition and retention plan and stock option plan may not be
adopted until at least six months after the Conversion and are subject to
shareholder approval and compliance with OTS regulations. We also have entered
into a three-year employment contract with Joseph E. Timmons, our President and
Chief Executive Officer, in connection with the Conversion.
See pages 68 to 72.
Use of the Proceeds Raised from the Sale of Common Stock
Union Community Bancorp intends to use a portion of the proceeds from
the stock offering to make a loan to our employee stock ownership plan to fund
its purchase of 8% of the Common Stock issued in the Conversion, up to a maximum
of 184,000 shares. Union Community Bancorp will use 50% of the proceeds that
remain after it pays expenses incurred in connection with the Conversion to
purchase all of the capital stock to be issued by Union Federal Savings and Loan
Association. Union Community Bancorp will retain the balance of the proceeds as
a possible source of funds for the payment of dividends to shareholders, to
repurchase shares of Common Stock in the future, to acquire one or more other
financial institutions or for other general corporate purposes. On a short-term
basis, the Holding Company may invest the net proceeds it retains in short-term
investments. The Holding Company has no present plans to acquire another
financial institution. See pages 17 to 18.
Dividends
Management of Union Community Bancorp expects initially to pay
quarterly cash dividends on the shares of Common Stock at an annual rate of 3%
($0.30 per share based on the $10.00 per share offering price) commencing after
the quarter ended March 31, 1998. See pages 18 to 19.
Market for the Common Stock
Union Community Bancorp has received conditional approval to have its
Common Stock quoted on the National Association of Security Dealers Automated
Quotation National Market System under the symbol "UCBC." Even though we expect
that the shares of Common Stock will be sold on the Nasdaq National Market
System, it is unlikely that an active and liquid trading market for the shares
will develop and be maintained. Investors should have a long-term investment
intent. If you purchase shares, you may not be able to sell them when you want
to at a price that is equal to or more than the price you paid. See page 19.
Important Risks in Owning the Holding Company's Common Stock
Before you decide to purchase stock in the offering, you should read
the Risk Factors section on pages 13 to 16 of this document.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
The following selected consolidated financial data of Union Federal and
its subsidiary is qualified in its entirety by, and should be read in
conjunction with, the consolidated financial statements, including notes
thereto, included elsewhere in this Prospectus. Information at June 30, 1997 and
for the six months ended June 30, 1997 and 1996 is unaudited but, in the opinion
of management, includes all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations as of and for such dates. The operating results for the
six-months ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(In thousands)
Summary of Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets......................................... $84,291 $82,789 $73,631 $72,540 $66,833 $63,107
Loans, net........................................... 73,167 72,697 61,279 60,059 55,256 46,783
Cash and interest-bearing deposits in other banks (1) 2,258 1,465 1,993 1,329 963 1,999
Investment securities held to maturity............... 5,920 5,747 7,423 7,985 9,355 13,038
Deposits............................................. 62,055 60,436 57,407 54,886 55,076 52,802
Borrowings........................................... 7,073 7,880 2,642 4,943 --- ---
Retained earnings - substantially restricted......... 14,473 13,910 13,024 12,033 10,878 9,719
</TABLE>
(1) Includes certificates of deposit in other financial institutions.
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In thousands)
Summary of Operating Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total interest and dividend income................... $3,275 $2,920 $6,112 $5,729 $5,249 $5,334 $5,507
Total interest expense............................... 1,822 1,627 3,424 3,148 2,507 2,594 3,006
------- ------- ------ ------- ------ ------ ------
Net interest income............................... 1,453 1,293 2,688 2,581 2,742 2,740 2,501
Provision for loan losses............................ 111 24 48 24 24 15 12
------- ------- ------ ------- ------ ------ ------
Net interest income after provision
for loan losses................................. 1,342 1,269 2,640 2,557 2,718 2,725 2,489
------- ------- ------ ------- ------ ------ ------
Other income (losses):
Equity in losses of limited partnership........... (114) (79) (173) (249) (54) --- ---
Investment securities gains....................... --- --- --- --- --- --- 306
Other............................................. 19 21 57 32 14 13 22
------- ------- ------ ------- ------ ------ ------
Total other income (losses)..................... (95) (58) (116) (217) (40) 13 328
------- ------- ------ ------- ------ ------ ------
Other expenses:
Salaries and employee benefits.................... 252 230 461 481 489 434 378
Net occupancy expenses............................ 16 12 39 66 44 57 90
Equipment expenses................................ 11 10 20 20 17 17 25
Deposit insurance expense......................... 12 65 495 127 126 94 111
Other............................................. 158 127 287 328 208 234 210
------- ------- ------ ------- ------ ------ ------
Total other expenses............................ 449 444 1,302 1,022 884 836 814
------- ------- ------ ------- ------ ------ ------
Income before income taxes and cumulative effect
of change in accounting principle................. 798 767 1,222 1,318 1,794 1,902 2,003
Income taxes......................................... 235 231 336 326 639 755 797
Cumulative effective of change
in accounting principle........................... --- --- --- --- --- 12 ---
------- ------- ------ ------- ------ ------ ------
Net income........................................ $ 563 $ 536 $ 886 $ 992 $1,155 $1,159 $1,206
======= ======= ====== ======= ====== ====== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
Supplemental Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest rate spread during period.............. 2.62% 2.54% 2.54% 2.69% 3.25% 3.45% 3.22%
Net yield on interest-earning assets (1) (2).... 3.56 3.55 3.53 3.67 4.01 4.23 4.08
Return on assets (2) (3)........................ 1.35 1.43 1.13 1.36 1.63 1.77 1.94
Return on equity (2) (4)........................ 7.90 8.04 6.54 7.84 10.02 11.19 13.08
Other expenses to
average assets (2)(5)........................ 1.07 1.18 1.66 1.41 1.25 1.28 1.31
Equity to assets (6)............................ 17.17 17.55 16.80 17.69 16.59 16.28 15.40
Average interest-earning assets to average
interest-bearing liabilities................. 121.15 122.60 121.94 121.83 120.63 119.42 117.65
Non-performing assets to total assets (6)....... .24 .44 .59 .21 .20 .31 .50
Allowance for loan losses to total loans
outstanding (6).............................. .27 .20 .22 .18 .15 .11 .10
Allowance for loan losses to
non-performing loans (6)..................... 162.30 39.36 32.52 71.15 60.84 30.88 15.05
Net charge-offs to average
total loans outstanding ..................... .1 .--- .--- .--- .--- .--- .---
Number of full service offices (6).............. 1 1 1 1 1 1 1
</TABLE>
(1) Net interest income divided by average interest-earning assets.
(2) Information for six months ended June 30, 1997 and 1996, has been
annualized. Interim results are not necessarily indicative of the
results of operations for an entire year.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) Other expenses divided by average total assets.
(6) At end of period.
<PAGE>
RECENT DEVELOPMENTS OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
The following table sets forth selected consolidated financial
condition data for Union Federal and its subsidiary at September 30, 1997, and
December 31, 1996, and selected consolidated operating data for Union Federal
and its subsidiary for the three months and nine months ended September 30, 1997
and 1996. Information at September 30, 1997 and for the three and nine months
ended September 30, 1997 and 1996 is unaudited but, in the opinion of
management, includes all adjustments (comprising only normal recurring accruals)
necessary for a fair presentation of the financial position and results of
operations as of and for such dates. The selected financial and other data of
Union Federal set forth below does not purport to be complete and should be read
in conjunction with, and is qualified in its entirety by, the more detailed
information, including the consolidated financial statements and related notes
thereto, appearing elsewhere herein. The operating results for the three and
nine months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
<TABLE>
<CAPTION>
At September 30, At December 31,
Summary of Financial Condition Data: 1997 1996
(In Thousands)
<S> <C> <C>
Total assets $85,734 $82,789
Loans, net 75,422 72,697
Cash and interest-bearing deposits in other banks (1) 1,459 1,465
Investment securities held to maturity 5,809 5,747
Deposits 62,132 60,436
Borrowings 8,073 7,880
Retained earnings-substantially restricted 14,775 13,910
</TABLE>
(1) Includes certificates of deposit in other financial institutions
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Summary of Operating Data: 1997 1996 1997 1996
(In thousands)
<S> <C> <C> <C> <C>
Total interest and dividend income $1,655 $1,569 $4,930 $4,489
Total interest expense 930 885 2,752 2,512
------- ------- ------ -------
Net interest income 725 684 2,178 1,977
Provision for loan losses 27 12 138 36
------- ------- ------ -------
Net interest income after provision
for loan losses 698 672 2,040 1,941
Other losses 5 50 100 108
Other expenses 245 583 694 1,027
------- ------- ------ -------
Income before income taxes 448 39 1,246 806
Income taxes (benefit) 146 (28) 381 203
------- ------- ------ -------
Net income $ 302 $ 67 $ 865 $ 603
======= ======= ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At or for the At or for the
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Supplemental Data:
<S> <C> <C> <C> <C>
Interest rate spread (average during period) (1)..................... 2.54% 2.51% 2.59% 2.53%
Net yield on interest-earning assets (1)(2).......................... 3.52 3.49 3.55 3.53
Return on assets (ratio of net income to
average total assets) (1)......................................... 1.43 .33 1.38 1.05
Return on equity (ratio of net income to
average total equity) (1)......................................... 8.23 1.96 8.01 5.98
Other expenses to average assets (1)................................. 1.16 2.90 1.10 1.78
Equity-to-assets, at end of period................................... 17.23 16.59 17.23 16.59
Average interest-earning assets to average
interest-bearing liabilities (1).................................. 121.58 121.69 121.29 122.27
Non-performing assets to total assets, at end of period (3).......... .16 .43 .16 .43
Allowance for loan losses to total loans outstanding................. .30 .20 .30 .20
Allowance for loan losses to non-performing loans,
at end of period.................................................. 409.09 41.53 409.09 41.53
Net charge-offs to average total loans outstanding................... --- --- .10 ---
</TABLE>
(1) Ratios are annualized.
(2) Net interest income divided by average interest-earning assets.
(3) Non-performing assets consist of non-accruing loans, accruing loans 90
days or more past due, restructured loans and real estate owned.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Condition at September 30, 1997 Compared to Financial Condition at
December 31, 1996
Our total consolidated assets increased by $2.9 million, or 3.6%, to
$85.7 million at September 30, 1997 from $82.8 million at December 31, 1996. Our
loans receivable increased $2.7 million, or 3.7%, while deposits increased $1.7
million or 2.8%. We funded the increase in loans primarily with the increase in
our deposits. Capital increased $865,000 or 6.2%, to $14.8 million at September
30, 1997 from $13.9 million at December 31, 1996. At September 30, 1997, our
tangible capital ratio was 17.2%, our core capital ratio was 17.2%, and our
risk-based capital to risk-weighted assets ratio was 34.7%. Each of these
capital levels exceeded applicable regulatory requirements.
<PAGE>
Comparison of Operating Results for the Three Months Ended September 30, 1997
and 1996
Net Income. Net income increased $235,000 to $302,000 for the
three-month period ended September 30, 1997 from $67,000 for the same period in
1996. The increase in net income was impacted primarily by the $362,000
($219,000 net of tax) one-time SAIF special assessment charged to expense in the
three-month period ended September 30, 1996.
Net Interest Income. Net interest income increased $41,000, or 6.0%, to
$725,000 for the three-month period ended September 30, 1997, from $684,000 for
the comparable period in 1996. This increase was due primarily to an increase of
$3.9 million in average interest-earning assets to $82.3 million for the
three-month period ended September 30, 1997 compared to $78.3 million for the
three-month period ended September 30, 1996. Also, our interest rate spread
increased to 2.54% for 1997 as compared to 2.51% for the same period in 1996.
Provision for Loan Losses. Our provisions for loan losses for the three
months ended September 30, 1997 and for the comparable period in 1996 were
$27,000 and $12,000 respectively, an increase of $15,000. We did not have any
charge-offs or recoveries on loans during the three-month periods ended
September 30, 1997 and 1996. We increased our loan loss provision primarily to
give consideration to the growth in loans and to individually large multi-family
and non-residential real estate loans and the inherent risk associated with
these types of loans.
Other Losses. Our other losses decreased $45,000 for the three-month
period ended September 30, 1997 as compared to the comparable period in 1996.
This decrease was due primarily to the decrease in the loss from our investment
in a low-income housing tax credit limited partnership.
Other Expenses. Our non-interest expense decreased $338,000 to $245,000
in 1997 from $583,000 in 1996. This decrease was due largely to the one-time
SAIF special assessment of $362,000 in 1996.
Income Tax Expense. Our income tax expense increased $174,000 due to an
increase in taxable income of approximately $400,000.
Comparison of Operating Results for the Nine Months Ended September 30, 1997 and
1996
Net Income. Net income increased $262,000 to $865,000 in 1997 from
$603,000 for 1996. This increase primarily resulted from our recognition of the
one-time, non-recurring SAIF special assessment in the amount of $362,000
($219,000 net of tax) during 1996. This decrease in expense was offset by an
increase of $102,000 in our provision for loan losses in 1997 compared to 1996.
Net Interest Income. Our net interest income increased $201,000 to $2.2
million in 1997 from $2.0 million in 1996. This increase primarily resulted from
the growth in average interest-earning assets of $7.2 million to $81.8 million
in 1997 from $74.7 million in 1996. Also, our interest rate spread increased to
2.59% for 1997 compared to 2.53% for 1996.
Provision for Loan Losses. Our provisions for loan losses for 1997 and
1996 were $138,000 and $36,000, respectively. We increased our provision for
1997 due to an increase in outstanding loans and losses recorded in 1997
associated with a non-performing loan secured by multi-family real estate. In
response to the loss experienced in 1997, we increased the risk factor used on
multi-family and commercial real estate loans. Our allowance for loan losses as
of September 30, 1997 was $225,000.
Other Expenses. Our other expenses decreased $333,000 to $694,000 in
1997 from $1,027,000 in 1996. The decrease was primarily attributable to a
one-time special SAIF assessment of $362,000.
Income Tax Expense. Our income tax expense increased $178,000 to
$381,000 for the nine-month period ended September 30, 1997 from $203,000 for
the nine-month period ended September 30, 1996 due to an increase in income of
$440,000.
<PAGE>
RISK FACTORS
In addition to the other information in this document, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
Commercial Real Estate and Multi-Family Lending
As of June 30, 1997, we had commercial real estate and multi-family
loans of $3.5 million and $10.2 million, respectively, or 4.7% and 13.6%,
respectively, of our total loan portfolio as of that date. Although commercial
real estate and multi-family loans provide higher interest rates and shorter
terms, these loans have higher credit risks than one- to four-family residential
loans. Commercial real estate and multi-family loans often involve large loan
balances to single borrowers or groups of related borrowers. In addition,
payment experience on loans secured by such properties typically depends upon
the successful operation of the properties and thus may be subject to a greater
extent to adverse conditions in the real estate market or in the general
economy. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate. Although none of our commercial real estate
and multi-family loans were non-performing as of June 30, 1997, if a significant
number of borrowers under these types of loans develop problems, we may be
required to increase by a significant amount our allowance for loan losses
because of the relatively large size of these loans. This, in turn, would reduce
our net income. See "Business of Union Federal Savings and Loan
Association--Lending Activities."
Dependence on President and Possible New Management
Our successful operations depend to a considerable degree on our
President, Joseph E. Timmons, who is 63 years of age. We have entered into a
three-year employment agreement with Mr. Timmons. The employment agreement
requires certain payments to Mr. Timmons if he is terminated without "just
cause" by us or by an entity that acquires us, or if Mr. Timmons terminates the
employment agreement "for cause." The loss of Mr. Timmons' services could
adversely affect us. While the board of directors is seeking to attract and
retain additional management either as a successor or supplement to Mr. Timmons,
there is no assurance that such individuals will be attracted or retained. If
such individuals are retained, their participation in our management could
result in changes to our operating strategy which could affect our
profitability. See "Management of Union Federal Savings and Loan Association"
and "Executive Compensation and Related Transactions of Union Federal--
Employment Contract."
Geographic Concentration of Loans
Substantially all of our real estate mortgage loans are secured by
properties located in Indiana, mostly in Montgomery County. The economy in
Montgomery County is based on a mixture of agricultural (primarily beans, wheat,
oats, and livestock) and industrial (primarily automotive parts, commercial
printing and various small industries), as well as a variety of service,
wholesale and retail businesses. R.R. Donnelly & Sons, a commercial printer, is
the county's largest employer with approximately 2,100 employees. A weakening in
the local real estate market or in the local or national economy, or a reduction
in the workforce at the manufacturing facilities in the area could result in an
increase in the number of borrowers who default on their loans and a reduction
in the value of the collateral securing the loans, which could reduce our
earnings.
Allowance for Loan Losses
We have established our allowance for loan losses based upon historic
practice and in accordance with generally accepted accounting principles. We
determine the adequacy of our allowance for loan losses based upon estimates
that are particularly susceptible to significant changes in the economic
environment and changes in market conditions. Thus, a weakening in the local or
national economy would likely require us to increase our allowance for loan
losses to account for the increased likelihood that we would experience losses
from our loan portfolio. At June 30, 1997, our allowance for loan losses was
$198,000, or .27% of total loans outstanding. This amount reflects our history
of low loan losses and our low level of non-performing assets and, based upon
information currently available to us, we believe that this amount is sufficient
to absorb estimated loan losses. There can be no assurance, however, that
regulators, when reviewing our loan portfolio in the future, will not require us
to increase our allowance for loan losses. Any future increase in our allowance
for loan losses would adversely affect earnings.
<PAGE>
Anti-Takeover Provisions and Statutory Provisions That Could Discourage Hostile
Acquisitions of Control
Provisions in the Holding Company's articles of incorporation, the
corporation law of the state of Indiana, and certain federal regulations may
make it difficult and expensive to pursue a tender offer, change in control or
takeover attempt which our management opposes. As a result, shareholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current board of
directors or management of the Holding Company, or the appointment of new
directors to the Board, more difficult. For example, the Holding Company's
Bylaws provide that directors must be residents of Montgomery County, Indiana,
must have maintained a deposit or loan relationship with us for at least 12
months and, with respect to a non-employee director, must have served as a
member of a civic or community organization in Montgomery County for at least 12
months in the five-year period prior to being nominated to the Board (or in the
case of existing directors, prior to September 11, 1997). Further restrictions
include: restrictions on the acquisition of the Holding Company's equity
securities and limitations on voting rights; the classification of the terms of
the members of the board of directors; certain provisions relating to meetings
of shareholders; denial of cumulative voting by shareholders in the election of
directors; the issuance of preferred stock and additional shares of Common Stock
without shareholder approval; and super majority provisions for the approval of
certain business combinations. These provisions may reduce the trading price of
our stock. See "Restrictions on Acquisition of the Holding Company."
Lack of Active Market for Common Stock
Even though we expect that the Common Stock will be listed on the
Nasdaq National Market System, it is highly unlikely that an active trading
market will develop and be maintained. If an active market does not develop, you
may not be able to sell your shares promptly or perhaps at all, or sell your
shares at a price equal to or above the price you paid for the shares. The
Common Stock may not be appropriate as a short-term investment. See "Market for
the Common Stock."
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
Return on average equity (net income divided by average equity) is a
ratio commonly used to compare the performance of a savings association to its
peers. For the six-month periods ended June 30, 1997 and 1996, our returns on
average equity (on an annualized basis) were 7.9% and 8.04%, respectively. A
lower return on equity could reduce the trading price of our shares. As a result
of the Conversion, our equity will increase substantially. Our expenses also
will increase because of the costs associated with our employee stock ownership
plan ("ESOP"), management recognition and retention plan ("RRP"), and the costs
of being a public company. Because of the increases in our equity and expenses,
our return on equity is likely to decrease as compared to our performance in
previous years. Initially, Union Federal intends to use a portion of the
proceeds of this offering to repay some or all of its short-term obligations
owed to the Federal Home Loan Bank of Indianapolis ("FHLB of Indianapolis").
Union Federal may also use some of the proceeds to purchase loan participations
and mortgage-backed securities on the secondary market and, on an interim basis,
to invest in U.S. government securities and federal agency securities which
generally have lower yields than residential mortgage loans. See "Use of
Proceeds."
Potential Impact of Changes in Interest Rates and the Current Interest Rate
Environment
Our ability to make a profit, like that of most financial institutions,
substantially depends upon our net interest income, which is the difference
between the interest income we earn on our interest-earning assets (such as
mortgage loans) and the interest expense we pay on our interest-bearing
liabilities (such as deposits). As of June 30, 1997, approximately 72 percent of
our mortgage loans have rates of interest which are fixed for the term of the
loan ("fixed rate") and are originated generally with terms of 15 or 20 years,
while deposit accounts have significantly shorter terms to maturity. Because our
interest-earning assets generally have fixed rates of interest and have longer
effective maturities than our interest-bearing liabilities, the yield on our
interest earning assets generally will adjust more slowly to changes in interest
rates than the cost of our interest-bearing liabilities. As a result, our net
interest income will be adversely affected by material and prolonged increases
in interest rates. In addition, rising interest rates may adversely affect our
earnings because there might be a lack of customer demand for loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Union Federal Savings and Loan Association -- Asset/Liability
Management."
<PAGE>
Changes in interest rates also can affect the average life of loans and
mortgage-backed securities. Historically lower interest rates in recent periods
have resulted in increased prepayments of loans and mortgage-backed securities,
as borrowers refinanced their mortgages in order to reduce their borrowing cost.
Under these circumstances, we are subject to reinvestment risk to the extent
that we are not able to reinvest such prepayments at rates which are comparable
to the rates on the prepaid loans or securities.
Intent to Remain Independent
We have operated as an independent community oriented savings and loan
association since 1913 and we intend to continue to operate in this manner
following the Conversion. Accordingly, you are urged not to subscribe for shares
of our Common Stock if you are anticipating a quick sale by us. See "Business of
Union Federal Savings and Loan Association."
Possible Voting Control by Directors and Officers
Our directors and executive officers intend to subscribe for 134,250
shares of Common Stock which, at the midpoint of the Estimated Valuation Range,
would constitute 5.8% of the outstanding shares. When aggregated with the shares
of Common Stock our executive officers and directors expect to acquire through
the Stock Option Plan and RRP, our executive officers and directors would own
approximately 387,250 shares of Common Stock, or 15.6% of the outstanding shares
at the midpoint of the Estimated Valuation Range. This ownership of Common Stock
by our management could make it difficult to obtain majority support for
shareholder proposals which are opposed by management. See "Proposed Purchases
by Directors and Executive Officers," "Executive Compensation and Related
Transactions of Union Federal," "Description of Capital Stock," and
"Restrictions on Acquisition of the Holding Company."
Possible Dilutive Effect of RRP and Stock Options
If the Conversion is completed and shareholders approve the RRP and
Stock Option Plan, we intend to issue shares to our officers and directors
through these plans. If the shares for the RRP are issued from our authorized
but unissued stock, your ownership percentage could be diluted by up to
approximately 3.8% at the midpoint of the Estimated Valuation Range. If the
shares for the Stock Option Plan are issued from our authorized but unissued
stock, your ownership percentage could be diluted by up to approximately 2.9% at
the midpoint of the Estimated Valuation Range. In either case, the trading price
of our Common Stock may be reduced. See "Pro Forma Data" and "Executive
Compensation and Related Transactions of Union Federal."
Financial Institution Regulation and Future of the Thrift Industry
We are subject to extensive regulation, supervision, and examination by
the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance
Corporation (the "FDIC"). A bill has been introduced in the Congress that would
consolidate the OTS with the Office of the Comptroller of the Currency. If this
statute is approved we could be forced to become a state or national commercial
bank, and become subject to regulation by a different government agency. If we
become a commercial bank, our investment authority and the ability of the
Holding Company to engage in diversified activities may be limited or
prohibited, which could affect our profitability. It is impossible at this time
to predict the impact of any such legislation on our operations. See
"Regulation."
Restrictions on Repurchase of Shares
During the first year following the Conversion, the Holding Company may
not generally repurchase its shares except in unusual circumstances as permitted
by the OTS. During each of the second and third years following the Conversion,
the Holding Company may repurchase up to 5% of its outstanding shares. During
those periods, if we decide that repurchases above those limits would be a good
use of funds, we would not be able to do so, without obtaining OTS approval.
There is no assurance that OTS approval would be given. See "The Conversion --
Restrictions on Repurchase of Stock by the Holding Company."
<PAGE>
Competition
We experience strong competition in our local market area in both
originating loans and attracting deposits, primarily from commercial banks,
thrifts and credit unions. Such competition may limit our growth in the future.
See "Competition."
Risk of Delayed Offering
Although we expect to complete the Conversion within the time periods
indicated in this Prospectus, it is possible that adverse market, economic or
other factors could significantly delay the completion of the Conversion, which
could significantly increase our Conversion costs. In this case, however, you
would have the right to modify or rescind your subscription and to have your
subscription funds returned to you promptly, with interest. In the event that
the Conversion is not completed, we will remain a mutual savings and loan
association, and all subscription funds will be promptly returned to
subscribers, with interest. See "The Conversion."
Income Tax Consequences of Subscription Rights
If the Internal Revenue Service were to determine that the subscription
rights offered to you in connection with the Conversion have an ascertainable
value, your exercise of your subscription rights could result in the recognition
of taxable income. In the opinion of RP Financial, LC. ("RP Financial"),
however, the subscription rights do not have an ascertainable fair market value.
See "The Conversion -- Principal Effects of Conversion - Tax Effects."
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the intended purchases of Common Stock
by each director and executive officer and their Associates in the Conversion.
All directors and executive officers will pay the same Purchase Price as all
subscribers and will be subject to the same terms and conditions. In addition,
directors and executive officers may not re-sell the shares of Common Stock that
they purchase for at least one year from the date that they purchase the shares.
All shares will be purchased for investment purposes and not for purposes of
resale. The table assumes that 2,300,000 shares (the midpoint of the Estimated
Value Range) of the Common Stock will be sold at $10.00 per share and that
sufficient shares will be available to satisfy subscriptions.
<TABLE>
<CAPTION>
Aggregate Total
Price of Shares Proposed
Intended to be Subscribed Percent
Name Position Purchases For (1) of Shares
<S> <C> <C> <C> <C>
Philip L. Boots Director $100,000 10,000 .435%
Marvin L. Burkett Director 10,000 1,000 .04
Phillip E. Grush Director 120,000 12,000 .52
Samuel H. Hildebrand Director 264,500 26,450 1.15
John M. Horner Chairman 225,000 22,500 .98
Harry A. Siamas Director 100,000 10,000 .435
Lester B. Sommer Director Emeritus 170,000 17,000 .74
Joseph E. Timmons Director, President and
Chief Executive Officer 300,000 30,000 1.30
All Other Executive
Officers 53,000 5,300 .23
---------- ------- ----
All Directors and
Executive Officers
as a group (10 persons)(2) $1,342,500 134,250 5.83%
========== ======= ====
</TABLE>
(1) Does not include shares subject to stock options which may be granted
under the Stock Option Plan, or shares which may be awarded under the
RRP.
(2) Assuming that all shares awarded under the RRP are purchased on the
open market and all shares subject to stock options are issued from
authorized but unissued shares, and upon (i) the full vesting of the
restricted stock awards to directors and executive officers
contemplated under the RRP and (ii) the exercise in full of all options
expected to be granted to directors and executive officers under the
Stock Option Plan, all directors and executive officers as a group
would beneficially own 349,300 shares (16.5%), 387,250 shares (15.6%),
425,200 shares (14.9%), and 468,842 shares (14.3%) upon sales at the
minimum, midpoint, maximum, and 15% above the maximum of the Estimated
Valuation Range, respectively. See "Executive Compensation and Related
Transactions of Union Federal -- RRP," "-- Stock Option Plan."
<PAGE>
UNION COMMUNITY BANCORP
The Holding Company was formed in September, 1997 as an Indiana
corporation to be the holding company for Union Federal. The Holding Company has
not engaged in any significant business to date and, for that reason, its
financial statements are not included herein. The Holding Company has received
approval from the OTS to become a savings and loan holding company through the
acquisition of all of the capital stock of Union Federal to be issued upon
completion of the Conversion.
The Holding Company will initially receive 50% of the net Conversion
proceeds after payment of expenses incurred in connection with the Conversion.
The holding company structure will provide the Holding Company with greater
flexibility than Union Federal to diversify its business activities, either
through newly-formed subsidiaries or through acquisitions. The Holding Company
has no present plans regarding diversification, acquisitions or expansion,
however. The Holding Company initially will not conduct any active business and
does not intend to employ any persons other than its officers, although it may
utilize our support staff from time to time.
The office of the Holding Company is located at 221 East Main Street,
P.O. Box 151, Crawfordsville, Indiana, 47933. The telephone number is (765)
362-2400.
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
We were originally organized in 1913 as "Union Savings and Loan
Association of Crawfordsville," a state-chartered savings association. We have
operated since then as an independent, community-oriented savings association.
In 1962, we converted to a federal charter and changed our name to "Union
Federal Savings and Loan Association." We currently conduct our business from a
full-service office located in Crawfordsville, which is located in Montgomery
County, Indiana. We believe that we have developed a solid reputation among our
loyal customer base because of our commitment to personal service and our strong
support of the local community. We offer a variety of lending, deposit and other
financial services to our retail and commercial customers.
We attract deposits from the general public and originate mortgage
loans, most of which are secured by one- to four-family residential real
property in Montgomery County. We also offer multi-family loans, commercial real
estate loans, construction loans, loans secured by deposits and home-improvement
loans. We derive most of our funds for lending from deposits of our customers,
which consist primarily of certificates of deposit, demand accounts and savings
accounts.
We have maintained a relatively strong capital position by focusing
primarily on residential real estate mortgage lending in Montgomery County,
Indiana and, to a limited extent, in other nearby counties. At June 30, 1997, we
had total assets of $84.3 million, deposits of $62.1 million and retained
earnings of $14.5 million, or 17.2% of assets. For the fiscal year ended
December 31, 1996, we had net income of $886,000, a return on assets of 1.1% and
a return on equity of 6.5%. We have historically experienced very few asset
quality problems in our total loan portfolio, and at June 30, 1997, our ratio of
non-performing assets to total assets was .24%. During the six months ended June
30, 1997, we charged off $72,000 of loans. During the fiscal year ended December
31, 1996, we did not charge off any loans.
<PAGE>
MARKET AREA
Our primary market area is Montgomery County, Indiana. Crawfordsville,
the county seat of Montgomery County, is located in central Indiana,
approximately 45 miles west of Indianapolis. According to the U.S. Bureau of
Census, in 1996 the city of Crawfordsville had a population of 16,096, and
Montgomery County had a population of 35,888 residents. The Crawfordsville
economy is based on a mixture of agriculture (primarily beans, wheat, oats and
livestock) and industrial (primarily automotive parts, commercial printing and
various small industries), as well as a variety of service, wholesale and retail
businesses. R.R. Donnelley & Sons, Lithonia Hi-Tek Lighting and Raybestos
Products are Crawfordsville's largest employers. Crawfordsville is also home to
Wabash College which has a student population of 800.
Most of our deposits and lending activities come from individuals
residing in Montgomery County. Montgomery County had an unemployment rate of
3.0% as of June 30, 1997 compared to a nationwide unemployment rate of 5.2%. We
think that our diverse economy will continue to provide for a stable market
area.
USE OF PROCEEDS
The Holding Company will retain 50% of the net proceeds from the
offering, after payment of expenses incurred in connection with the Conversion,
and will use the balance of the proceeds to purchase all of the capital stock
issued by Union Federal in connection with the Conversion. A portion of the net
proceeds to be retained by the Holding Company will be loaned to our employee
stock plan to fund its purchase of 8% of the shares of the Holding Company sold
in the Conversion, up to a maximum of 184,000 shares. On a short-term basis, the
balance of the net proceeds retained by the Holding Company initially may be
invested in cash and short-term investments with laddered maturities. The
Holding Company intends to develop prudent investment policies under which it
will invest the proceeds in a manner that limits credit risk while maximizing
yields, and which will provide a continuous source of cash to enhance operating
flexibility. The Holding Company may also use the proceeds as a source of funds
to acquire one or more other financial institutions, to pay dividends to
shareholders or to repurchase shares of Common Stock. The Holding Company has no
present plans to acquire another financial institution, however. The Holding
Company will not take any action in furtherance of an extraordinary capital
distribution during the year following the Conversion.
Union Federal intends to use a portion of the net proceeds that it
receives from the Holding Company to make adjustable- and fixed-rate mortgage
loans and commercial real estate loans to the extent there is demand for such
loans and subject to market conditions. Union Federal may also use a portion of
the net proceeds to fund the purchase of up to 4% of the shares for the RRP
which we anticipate will be adopted by our Board following the Conversion,
subject to shareholder approval, and to repay some or all of its borrowings from
the FHLB of Indianapolis. We anticipate that the balance of the proceeds may be
used to purchase loan participations and possibly mortgage-backed securities in
the secondary market. On an interim basis, we may use some of the net proceeds
to invest in U.S. government securities and other federal agency securities. See
"Business of Union Federal Savings and Loan Association -- Investments."
<PAGE>
The following table shows estimated gross and net proceeds based upon
shares of Common Stock being sold in the Conversion at the minimum, midpoint,
maximum and 15% above the maximum of the Estimated Valuation Range.
<TABLE>
<CAPTION>
15% Above
Minimum, Midpoint, Maximum, Maximum,
1,955,000 2,300,000 2,645,000 3,041,750
Shares Shares Shares Shares
Sold at Price Sold at Price Sold at Price Sold at Price
of $10.00 of $10.00 of $10.00 of $10.00(2)
---------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Gross Proceeds.......................... $19,550 $23,000 $26,450 $30,418
Less:
Estimated Underwriting Commissions
and Other Expenses(1) (2)............ 636 682 732 790
------ ------- ------- -------
Estimated net Conversion
proceeds(1).......................... 18,914 22,318 25,718 29,628
Purchase by Holding Company of
100% of Capital Stock of
Union Federal........................ 9,457 11,159 12,859 14,814
------ ------- ------- -------
Net proceeds retained by
Holding Company...................... $9,457 $11,159 $12,859 $14,814
====== ======= ======= =======
</TABLE>
(1) In calculating estimated net Conversion proceeds, it has been assumed that
no sales will be made through selected dealers, that all shares are sold in
the Subscription Offering, that executive officers and directors of Union
Federal and their Associates purchase 134,250 shares of Common Stock in the
Conversion, and that the ESOP acquires 8% of the shares of Common Stock
issued in the Conversion, up to a maximum of 184,000 shares.
(2) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and the Community Offering, if
any.
The actual net proceeds may differ from the estimated net proceeds
calculated above for various reasons, including variances in the actual amount
of legal and accounting expenses incurred in connection with the Conversion,
commissions paid for sales made through other dealers, and the actual number of
shares of Common Stock sold in the Conversion. Any variance in the actual net
proceeds from the estimates provided in the table above is not expected to be
material.
DIVIDENDS
Upon Conversion, the Holding Company's board of directors will have the
authority to declare dividends, subject to statutory and regulatory
restrictions. The Holding Company expects initially to pay quarterly cash
dividends on the shares at a rate of 3% per annum ($0.30 per share per annum
based on the $10.00 per share offering price) commencing after the quarter ended
March 31, 1998. However, declarations of dividends by the board of directors
will depend upon a number of factors, including: (i) the amount of the net
proceeds retained by the Holding Company in the Conversion, (ii) investment
opportunities available, (iii) capital requirements, (iv) regulatory
limitations, (v) results of operations and financial condition, (vi) tax
considerations, and (vii) general economic conditions. Upon review of such
considerations, the board may authorize future dividends if it deems such
payment appropriate and in compliance with applicable laws and regulations. In
addition, from time to time in an effort to manage capital at a desirable level,
the board may determine to pay special cash dividends. Special cash dividends
may be paid in addition to, or in lieu of, regular cash dividends. In any event,
there can be no assurance that regular or special dividends will be paid, or, if
paid, will continue to be paid. See "Regulation -- Savings Association
Regulatory Capital" and "--Dividend Limitations."
<PAGE>
The Holding Company is not subject to OTS regulatory restrictions on
the payment of dividends to its shareholders although the source of such
dividends depend in part upon the receipt of dividends from us. The Holding
Company is subject, however, to the requirements of Indiana law, which generally
limit the payment of dividends to amounts that will not affect the ability of
the Holding Company, after the dividend has been distributed, to pay its debts
in the ordinary course of business and will not exceed the difference between
the Holding Company's total assets and total liabilities plus preferential
amounts payable to shareholders with rights superior to those of the holders of
Common Stock.
In addition to the foregoing, the portion of our earnings which has
been appropriated for bad debt reserves and deducted for federal income tax
purposes cannot be used by us to pay cash dividends to the Holding Company
without the payment of federal income taxes by us at the then current income tax
rate on the amount deemed distributed, which would include the amount of any
federal income taxes attributable to the distribution. See "Taxation -- Federal
Taxation" and the Notes to the Consolidated Financial Statements at page F-19.
The Holding Company does not contemplate any distribution by us that would
result in a recapture of our bad debt reserve or otherwise create federal tax
liabilities.
MARKET FOR THE COMMON STOCK
The Holding Company has never issued Common Stock to the public.
Consequently, there is no established market for the Common Stock. The Holding
Company has received conditional approval to have the Common Stock quoted on the
NASDAQ National Market System under the symbol "UCBC" upon the successful
closing of the offering, subject to certain conditions which we believe will be
met. Trident Securities has advised us that it intends to act as a market maker
for the Common Stock. In order for the Common Stock to be traded on the NASDAQ
National Market System, there must be at least three market makers for the
Common Stock. We anticipate that we will be able to secure two other market
makers to enable the stock to be quoted on the NASDAQ National Market System.
The existence of a public trading market will depend upon the presence
in the market of both willing buyers and willing sellers at any given time. The
presence of a sufficient number of buyers and sellers at any given time is a
factor over which neither the Holding Company nor any broker or dealer has
control. Although the shares issued in the Conversion are expected to be traded
on the Nasdaq National Market System, it is unlikely that an active or liquid
trading market for the Common Stock will be developed and be maintained.
Further, the absence of an active and liquid trading market may make it
difficult to sell the Common Stock and may have an adverse effect on the price
of the Common Stock. Purchasers should consider the potentially illiquid and
long-term nature of their investment in the shares offered hereby.
The aggregate price of the Common Stock is based upon an independent
appraisal of the pro forma market value of the Common Stock. However, there can
be no assurance that an investor will be able to sell the Common Stock purchased
in the Conversion at or above the Purchase Price.
COMPETITION
We originate most of our loans to and accept most of our deposits from
residents of Montgomery County, Indiana. We are subject to competition from
various financial institutions, including state and national banks, state and
federal savings associations, credit unions, and certain nonbanking consumer
lenders that provide similar services in Montgomery County with significantly
larger resources than are available to us. In total, there are 13 other
financial institutions located in Montgomery County, including nine banks, two
credit unions and two other savings associations. We also compete with money
market funds with respect to deposit accounts and with insurance companies with
respect to individual retirement accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. We compete for loan
originations primarily through the efficiency and quality of the services that
we provide borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that we cannot readily predict.
<PAGE>
CAPITALIZATION
The following table presents our historical capitalization at June 30,
1997, and the pro forma consolidated capitalization of the Holding Company as of
that date, giving effect to the sale of Common Stock offered by this Prospectus
based on the minimum, midpoint, maximum and 15% above the maximum of the
Estimated Valuation Range, and subject to the other assumptions set forth below.
The pro forma data set forth below may change significantly at the time the
Holding Company completes the Conversion due to, among other factors, a change
in the Estimated Valuation Range or a change in the current estimated expenses
of the Conversion. If the Estimated Valuation Range changes so that between
1,955,000 and 3,041,750 shares are not sold in the Conversion, subscriptions
will be returned to subscribers who do not affirmatively elect to continue their
subscriptions during the offering at the revised Estimated Valuation Range.
<TABLE>
<CAPTION>
Pro Forma Holding Company
Capitalization Based on Sale of
1,955,000 2,300,000 2,645,000 3,041,750
Shares Shares Shares Shares
Sold at Sold at Sold at Sold at
Union Federal Price of Price of Price of Price of
Historical $10.00 $10.00 $10.00 $10.00 (6)
---------- ------ ------ ------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1)..................................... $62,055 $62,055 $62,055 $62,055 $62,055
======= ======= ======= ======= =======
Federal Home Loan Bank advances.................. $ 5,873 $ 5,873 $ 5,873 $ 5,873 $ 5,873
======= ======= ======= ======= =======
Note payable..................................... $ 1,200 $ 1,200 $ 1,200 $ 1,200 $ 1,200
======= ======= ======= ======= =======
Capital and retained earnings:
Preferred stock, without par
value, 2,000,000 shares
authorized, none issued.......................$ --- $ --- $ --- $ --- $ ---
Common Stock, without par
value, 5,000,000 shares
authorized; indicated number
of shares assumed outstanding (2) ............ 18,914 22,318 25,718 29,628
Retained earnings (3)......................... 14,473 14,473 14,473 14,473 14,473
Common Stock acquired by ESOP(4) ................ (1,564) (1,840) (1,840) (1,840)
Common Stock acquired by the RRP (5)........... (782) (920) (1,058) (1,217)
------- ------- ------- ------- -------
Total capital and retained earnings.............. $14,473 $31,041 $34,031 $37,293 $41,044
======= ======= ======= ======= =======
</TABLE>
<PAGE>
(1) Excludes accrued interest. Withdrawals from deposit accounts for the
purchase of Common Stock are not reflected. Such withdrawals will reduce
pro forma deposits by the amount thereof.
(2) The number of shares to be issued in the Conversion may be increased or
decreased based on market and financial conditions prior to the completion
of the Conversion. Assumes estimated expenses of $636,000, $682,000,
$732,000 and $790,000 at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. See "Use of
Proceeds."
(3) Retained earnings are substantially restricted. See Notes to Union
Federal's Consolidated Financial Statements. See also "The Conversion --
Principal Effects of Conversion -- Effect on Liquidation Rights." Retained
earnings do not reflect the federal income tax consequences of the
restoration to income of Union Federal's special bad debt reserve for
income tax purposes which would be required in the unlikely event of a
liquidation or if a substantial portion of retained earnings were otherwise
used for a purpose other than absorption of bad debt losses and will be
required as to post-1987 reserves under a recently enacted law.
See "Taxation -- Federal Taxation."
(4) Assumes purchases by the ESOP of a number of shares equal to 8% of the
shares issued in the Conversion up to a maximum of 184,000 shares. The
funds used to acquire the ESOP shares will be borrowed from the Holding
Company. See "Use of Proceeds." Union Federal intends to make contributions
to the ESOP sufficient to service and ultimately retire its debt. The
Common Stock acquired by the ESOP is reflected as a reduction of
shareholders' equity. See "Executive Compensation and Related Transactions
of Union Federal -- Employee Stock Ownership Plan and Trust."
(5) Assuming the receipt of shareholder approval, the Holding Company intends
to implement the RRP. Assuming such implementation, the RRP will purchase
an amount of shares equal to 4% of the Common Stock sold in the Conversion
for issuance to directors and officers of the Holding Company and Union
Federal. Such shares may be purchased from authorized but unissued shares
or on the open market. The Holding Company currently intends that the RRP
will purchase the shares on the open market. Under the terms of the RRP,
assuming it is adopted within one year of the Conversion, shares will vest
at the rate of 20% per year. The Common Stock to be purchased by the RRP
represents unearned compensation and is, accordingly, reflected as a
reduction to pro forma shareholders' equity. As shares of the Common Stock
granted pursuant to the RRP vest, a corresponding reduction in the charge
against capital will occur. In the event that authorized but unissued
shares are acquired, the interests of existing shareholders will be
diluted. Assuming that 2,300,000 shares of Common Stock, the midpoint of
the Estimated Valuation Range, are issued in the Conversion and that all
awards under the RRP are from authorized but unissued shares, the Holding
Company estimates that the per share book value for the Common Stock would
be diluted $.56 per share, or 3.79% on a pro forma basis as of June 30,
1997 at the midpoint of the Estimated Valuation Range. The dilution would
be $.60 per share (3.78%) and $.53 per share (3.76%) at the minimum and
maximum levels, respectively, of the Estimated Valuation Range on a pro
forma basis at June 30, 1997.
(6) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Subscription Offering and Community Offering, if any.
<PAGE>
PRO FORMA DATA
The following table sets forth the pro forma combined consolidated net
income of the Holding Company for the six months ended June 30, 1997 and for the
year ended December 31, 1996 as though the Conversion offering had been
consummated at the beginning of those periods, respectively, and the investable
net proceeds had been invested at 5.86% for the six months ended June 30, 1997
and 5.13% for the year ended December 31, 1996 (the yield on one-year U.S.
government securities). OTS regulations specify that the pro forma yield on net
proceeds be calculated as the arithmetic average of the average yield on Union
Federal's interest-earning assets and the average cost of deposits. Union
Federal did not use this methodology to calculate pro forma yield, however, and
instead assumed a yield based on one-year U.S. government securities. This
latter methodology more accurately reflects Union Federal's and the Holding
Company's intent to invest the net proceeds initially in U.S. government
securities. The pro forma after-tax return for the Holding Company on a
consolidated basis is assumed to be 3.52% for the six months ended June 30, 1997
and 3.08% for the year ended December 31, 1996, after giving effect to (i) the
yield on investable net proceeds from the Conversion offering and (ii) adjusting
for taxes using a federal statutory tax rate of 34% and a net state statutory
income tax rate of 6%. Historical and per share amounts have been calculated by
dividing historical amounts and pro forma amounts by the indicated number of
shares of Common Stock assuming that such number of shares had been outstanding
during each of the entire periods.
Book value represents the difference between the stated amount of
consolidated assets and consolidated liabilities of the Holding Company computed
in accordance with generally accepted accounting principles. Book value does not
necessarily reflect current market value of assets and liabilities, or the
amounts, if any, that would be available for distribution to shareholders in the
event of liquidation. See "The Conversion -- Principal Effects of Conversion --
Effect on Liquidation Rights." Book value also does not reflect the federal
income tax consequences of the restoration to income of our special bad debt
reserves for income tax purposes, which would be required in the unlikely event
of liquidation or if a substantial portion of retained earnings were otherwise
used for a purpose other than absorption of bad debt losses. See "Taxation --
Federal Taxation." Pro forma book value includes only net proceeds from the
Conversion offering as though it occurred as of the indicated dates and does not
include earnings on the proceeds for the periods then ended.
<PAGE>
The pro forma net income derived from the assumptions set forth above
should not be considered indicative of the actual results of operations of the
Holding Company that would have been attained for any period if the Conversion
had been actually consummated at the beginning of such periods and the
assumptions regarding investment yields should not be considered indicative of
the actual yield expected to be achieved during any future period. The pro forma
book values at the dates indicated should not be considered as reflecting the
potential trading value of the Holding Company's stock. There can be no
assurance that an investor will be able to sell the Common Stock purchased in
the Conversion at prices within the range of the pro forma book values of the
Common Stock or at or above the Purchase Price.
<TABLE>
<CAPTION>
1,955,000 Shares 2,300,000 Shares 2,645,000 Shares 3,041,750 Shares (1)
Sold at Sold at Sold at Sold at
$10.00 Per Share $10.00 Per Share $10.00 Per Share $10.00 Per Share
Six Months Year Six Months Year Six Months Year Six Months Year
ended ended ended ended ended ended ended ended
6/30/97 12/31/96 6/30/97 12/31/96 6/30/97 12/31/96 6/30/97 12/31/96
------- -------- ------- -------- ------- -------- ------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross proceeds..................... $19,550 $19,550 $23,000 $ 23,000 $26,450 $26,450 $30,418 $30,418
Less offering expenses............. (636) (636) (682) (682) (732) (732) (790) (790)
--------- --------- --------- --------- --------- --------- --------- ---------
Estimated net conversion
proceeds (2)..................... 18,914 18,914 22,318 22,318 25,718 25,718 29,628 29,628
Less:
Common Stock acquired
by ESOP (3)................... (1,564) (1,564) (1,840) (1,840) (1,840) (1,840) (1,840) (1,840)
Common Stock acquired
by the RRP (4)................ (782) (782) (920) (920) (1,058) (1,058) (1,217) (1,217)
--------- --------- --------- --------- --------- --------- --------- ---------
Investable net proceeds............ $16,568 $16,568 $19,558 $ 19,558 $22,820 $22,820 $26,571 $26,571
========= ========= ========= ========= ========= ========= ========= =========
Consolidated net income:
Historical ...................... $ 563 $ 886 $ 563 $ 886 $ 563 $ 886 $ 563 $ 886
Pro forma income on investable
net proceeds (5)................ 292 510 344 602 402 703 468 818
Pro forma ESOP adjustment (3).... (19) (38) (22) (44) (22) (44) (22) (44)
Pro forma RRP adjustment (4) .... (47) (94) (55) (110) (63) (127) (73) (146)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma net income ............ $ 789 $ 1,264 $ 830 $ 1,334 $ 880 $ 1,418 $ 936 $ 1,514
========= ========= ========= ========= ========= ========= ========= =========
Consolidated earnings per share (7) (8):
Historical ...................... $ 0.31 $ 0.49 $ 0.27 $ 0.42 $ 0.23 $ 0.36 $ 0.20 $ 0.31
Pro forma income on investable
net proceeds.................... 0.16 0.28 0.16 0.28 0.16 0.28 0.16 0.29
Pro forma ESOP adjustment (3).... (0.01) (0.02) (0.01) (0.02) (0.01) (0.02) (0.01) (0.02)
Pro forma RRP adjustment (4)..... (0.03) (0.05) (0.03) (0.05) (0.03) (0.05) (0.03) (0.05)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma earnings per share..... $ 0.43 $ 0.70 $ 0.39 $ 0.63 $ 0.35 $ 0.57 $ 0.32 $ 0.53
========= ========= ========= ========= ========= ========= ========= =========
Consolidated book value (6) :
Historical....................... $14,473 $13,910 $14,473 $13,910 $14,473 $13,910 $14,473 $ 13,910
Estimated net conversion
proceeds (2)................... 18,914 18,914 22,318 22,318 25,718 25,718 29,628 29,628
Less:
Common Stock acquired
by ESOP (3)................... (1,564) (1,564) (1,840) (1,840) (1,840) (1,840) (1,840) (1,840)
Common Stock acquired
by the RRP (4)................ (782) (782) (920) (920) (1,058) (1,058) (1,217) (1,217)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma book value............. $31,041 $30,478 $34,031 $33,468 $37,293 $36,730 $41,044 $ 40,481
========= ========= ========= ========= ========= ========= ========= =========
Consolidated book
value per share (7)(8):
Historical ...................... $ 7.40 $ 7.12 $ 6.29 $ 6.05 $ 5.47 $ 5.26 $ 4.76 $ 4.57
Estimated net conversion proceeds
per share ...................... 9.67 9.67 9.70 9.70 9.72 9.72 9.74 9.74
Less:
Common Stock acquired
by the ESOP (3)............... (0.80) (0.80) (0.80) (0.80) (0.70) (0.70) (0.60) (0.60)
Common Stock acquired
by the RRP (4)................ (0.40) (0.40) (0.40) (0.40) (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- --------- --------- --------- --------- ---------
Pro forma book value per share... $ 15.87 $ 15.59 $ 14.79 $ 14.55 $ 14.09 $ 13.88 $ 13.50 $ 13.31
========= ========= ========= ========= ========= ========= ========= =========
Offering price as a percentage of
pro forma book value per share... 63.01% 64.14% 67.61% 68.73% 70.97% 72.05% 74.07% 75.13%
========= ========= ========= ========= ========= ========= ========= =========
Ratio of offering price to pro
forma earnings
per share (annualized)........... 11.63x 14.29x 12.82x 15.87x 14.29x 17.54x 15.63x 18.87x
========= ========= ========= ========= ========= ========= ========= =========
Number of shares used in
calculating earnings
per share (7).................... 1,804,856 1,804,856 2,123,360 2,123,360 2,468,360 2,468,360 2,865,110 2,865,110
========= ========= ========= ========= ========= ========= ========= =========
Number of shares used in
calculating book value........... 1,955,000 1,955,000 2,300,000 2,300,000 2,645,000 2,645,000 3,041,750 3,041,750
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
(Footnotes on following page.)
<PAGE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Community Offering, if
any.
(2) See "Use of Proceeds" for assumptions utilized to determine the investable
net proceeds of the sale of Common Stock.
(3) It is assumed that 8% of the shares of Common Stock issued in the
Conversion, up to a maximum of 184,000 shares, will be purchased by the
ESOP. The funds used to acquire the ESOP shares will be borrowed by the
ESOP from the Holding Company (see "Use of Proceeds"). Union Federal
intends to make annual contributions to the ESOP in an amount at least
equal to the principal and interest requirements on the debt. Union
Federal's total annual expense in payment of the ESOP debt is based upon 25
equal annual installments of principal with an assumed tax benefit of 40%.
The pro forma net income assumes: (i) Union Federal's total contributions
are equivalent to the debt service requirement for the year, and (ii) the
effective tax rate applicable to the debt was 40%. Expense for the ESOP
will be based on the number of shares committed to be released to
participants for the year at the average market value of the shares during
the year. Accordingly, Union Federal's total annual expense in payment of
the ESOP for such years may be higher than that discussed above. The loan
to the ESOP is reflected as a reduction of shareholders' equity.
(4) Assuming the receipt of shareholder approval, the Holding Company intends
to implement the RRP. Assuming such implementation, the RRP will purchase
an amount of shares equal to 4% of the Common Stock sold in the Conversion
for issuance to directors and officers of the Holding Company and Union
Federal. Such shares may be purchased from authorized but unissued shares
or on the open market. The Holding Company currently intends that the RRP
will purchase the shares on the open market, and the estimated net
Conversion proceeds have been reduced for the purchase of the shares in
determining estimated proceeds available for investment. Under the terms of
the RRP, if it is adopted within one year of the Conversion, shares will
vest at the rate of 20% per year. A tax benefit of 40% has been assumed.
The Common Stock to be purchased by the RRP represents unearned
compensation and is, accordingly, reflected as a reduction to pro forma
shareholders' equity. As shares of the Common Stock granted pursuant to the
RRP vest, a corresponding reduction in the charge against capital will
occur. In the event that authorized but unissued shares are acquired by the
RRP, the interests of existing shareholders will be diluted. Assuming that
2,300,000 shares of Common Stock are issued in the Conversion, the midpoint
of the Estimated Valuation Range, and that all awards under the RRP are
from authorized but unissued shares, the Holding Company estimates that the
per share book value for the Common Stock would be diluted $.56 per share,
or 3.79% on a pro forma basis as of June 30, 1997, at the midpoint of the
Estimated Valuation Range. The dilution would be $.60 per share (3.78%) and
$.53 per share (3.76%) at the minimum and maximum levels, respectively, of
the Estimated Valuation Range on a pro forma basis as of June 30, 1997.
(5) Assuming investable net proceeds had been invested since the beginning of
the period at 3.52% for the six months ended June 30, 1997 and 3.08% for
the year ended December 31, 1996 (the yield on one-year U.S. government
securities) and an assumed effective tax rate of 40%.
(6) Book value represents the excess of assets over liabilities. The effect of
the liquidation account is not reflected in these computations. (For
additional information regarding the liquidation account, see "The
Conversion -- Principal Effects of Conversion -- Effect on Liquidation
Rights.")
(7) The number of shares used in calculating earnings per share was calculated
using the indicated number of shares sold reduced by the assumed number of
ESOP shares that would be unallocated at the end of the first allocation
period. Allocation of ESOP shares is assumed to occur on the first day of
the fiscal year.
(8) Assuming the receipt of shareholder approval, the Holding Company intends
to implement the Stock Option Plan. Assuming such implementation, Common
Stock in an aggregate amount equal to 10% of the shares issued in the
Conversion will be reserved for issuance by the Holding Company upon the
exercise of the stock options granted under the Stock Option Plan. No
effect has been given to the shares of Common Stock reserved for issuance
under the Stock Option Plan. Upon the exercise of stock options granted
under the Stock Option Plan, the interest of existing shareholders will be
diluted. The Holding Company estimates that the per share book value for
the Common Stock would be diluted $.43 per share, or 2.91% on a pro forma
basis as of June 30, 1997, assuming the issuance of 2.3 million shares in
the Conversion, the midpoint, of the Estimated Valuation Range and the
exercise of 230,000 options at an exercise price of $10.00 per share. This
dilution further assumes that the shares will be issued from authorized,
but unissued, shares. The dilution would be $.53 per share (3.34%) and $.36
per share (2.56%) at the minimum and maximum levels, respectively, of the
Estimated Valuation Range on a pro forma basis as of June 30, 1997.
<PAGE>
Regulatory Capital Compliance
The following table compares our historical and pro forma regulatory
capital levels as of June 30, 1997 to our capital requirements after giving
effect to the Conversion.
<TABLE>
<CAPTION>
At June 30, 1997
Pro Forma Capital Based on Sale of
1,955,000 Shares 2,300,000 Shares 2,645,000 Shares 3,041,750 Shares
Union Federal Sold at Price of Sold at Price of Sold at Price of Sold at Price of
Historical $10.00 $10.00 $10.00 $10.00 (1)
Amount Ratio (2) Amount (4) Ratio (2) Amount (4)Ratio (2) Amount (4)Ratio (2) Amount (4) Ratio (2)
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Equity capital based upon
generally accepted
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
accounting principles. $14,473 17.2% $21,584 23.6% $22,872 24.7% $24,434 25.9% $26,230 27.3%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Tangible capital :
Historical or
pro forma........... $14,473 17.2% $21,584 23.6% $22,872 24.7% $24,434 25.9% $26,230 27.3%
Required.............. 1,264 1.5 1,371 1.5 1,390 1.5 1,414 1.5 1,441 1.5
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.............. $13,209 15.7% $20,213 22.1% $21,482 23.2% $23,020 24.4% $24,789 25.8%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Core capital :
Historical or
pro forma .......... $14,473 17.2% $21,584 23.6% $22,872 24.7% $24,434 25.9% $26,230 27.3%
Required.............. 2,529 3.0 2,742 3.0 2,781 3.0 2,828 3.0 2,881 3.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.............. $11,944 14.2% $18,842 20.6% $20,091 21.7% $21,606 22.9% $23,349 24.3%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
Risk-based capital (3):
Historical or
pro forma .......... $14,671 34.6% $21,782 49.7% $23,070 52.4% $24,632 55.5% $26,428 59.1%
Required.............. 3,390 8.0 3,504 8.0 3,525 8.0 3,550 8.0 3,579 8.0
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Excess.............. $11,281 26.6% $18,278 41.7% $19,545 44.4% $21,082 47.5% $22,849 51.1%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following
commencement of the Subscription Offering and the Community Offering, if
any.
(2) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(3) Pro forma risk-based capital amounts and percentages assume net proceeds
have been invested in 20% risk-weighted assets. Computations of ratios are
based on historical adjusted total assets of $84,291,000 and risk-weighted
assets of $42,384,000.
(4) Capital levels are increased for contribution of 50% of the net proceeds of
the Offering by the Holding Company and reduced for charges to capital
resulting from the ESOP and RRP. See notes (4) and (5) on page 20.
<PAGE>
THE CONVERSION
THE BOARDS OF DIRECTORS OF UNION FEDERAL AND THE HOLDING COMPANY AND
THE OTS HAVE APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY OUR MEMBERS AT
A SPECIAL MEETING OF MEMBERS, AND SUBJECT TO THE SATISFACTION OF CERTAIN OTHER
CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL, HOWEVER, DOES NOT
CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS.
General
On June 2, 1997, our Board of Directors adopted a Plan of Conversion
(the "Plan") pursuant to which we will convert from a federal mutual savings and
loans association to a federal stock savings and loan association, and become a
wholly-owned subsidiary of the Holding Company. The Conversion will include
adoption of the proposed Federal Stock Charter and Bylaws which will authorize
the issuance of capital stock by us. Under the Plan, our capital stock is being
sold to the Holding Company and the Common Stock of the Holding Company is being
offered to our customers and, if necessary, to the general public, with a
preference given to residents of Montgomery County, Indiana. The Plan has also
been approved by the OTS, subject to approval of the Plan by our members. A
Special Meeting of Members (the "Special Meeting") has been scheduled for that
purpose on December 15, 1997. The approval of the Plan by the OTS does not
constitute a recommendation or endorsement of the Plan by the OTS.
We have mailed to each person eligible to vote at the Special Meeting a
proxy statement (the "Proxy Statement"). The Proxy Statement contains
information concerning the business purposes of the Conversion and the effects
of the Plan and the Conversion on voting rights, liquidation rights, the
continuation of our business and existing savings accounts, FDIC insurance and
loans. The Proxy Statement also describes the manner in which the Plan may be
amended or terminated.
The following is a summary of all of the material aspects of the Plan,
the Subscription Offering, and the Community Offering. The Plan should be
consulted for a more detailed description of its terms.
Reasons for Conversion
As a stock institution, we will be structured in the form used by
commercial banks, most business entities, and a growing number of savings
associations. Converting to the stock form is intended to have a positive effect
on our future growth and performance by: (i) affording our depositors and
employees the opportunity to become shareholders of the Holding Company and
thereby participate more directly in our future and the Holding Company's
future; (ii) providing the Holding Company with the flexibility to grow through
mergers and acquisitions by permitting the offering of equity participations to
the shareholders of acquired companies; (iii) providing substantially increased
net worth and equity capital for investment in our business, thus enabling
management to pursue new and additional lending and investment opportunities and
to expand operations; and (iv) providing future access to capital markets
through the sale of stock of the Holding Company in order to generate additional
capital to accommodate or promote future growth. We believe that the increased
capital and operating flexibility will enhance our competitiveness with other
types of financial services organizations. Although our current members will,
upon Conversion, lose the voting and liquidation rights they presently have as
members (except to the limited extent of their rights in the liquidation account
established in the Conversion), they are being offered a priority right to
purchase shares in the Conversion and thereby obtain voting and liquidation
rights in the Holding Company.
The net proceeds to us from the sale of Common Stock offered hereby,
after retention by the Holding Company of 50% of the net proceeds after payment
of expenses incurred in connection with the Conversion, will increase our
existing net worth and thus provide an even stronger capital base to support our
lending and investment activities. This increase in our net worth, when combined
with the extra expenses we will incur as a publicy-traded company, will also,
however, likely cause our return on equity to decrease in comparison with our
performance in previous years. The net proceeds will also enable us to take
advantage of new opportunities that may arise, including the possible
acquisition of another financial institution, although we have no such present
plans. In addition, the Conversion will provide us with new opportunities to
attract and retain talented and experienced personnel by offering stock
incentive programs.
<PAGE>
Our Board of Directors believes that the Conversion to a holding
company structure is the best way to enable us to diversify our business
activities should we choose to do so. Currently, there are no plans, written or
oral, for the Holding Company to engage in any material activities apart from
holding our shares of stock that it acquires in connection with the Conversion,
although the Board may determine to further expand the Holding Company's
activities after the Conversion.
The additional Common Stock of the Holding Company being authorized in
the Conversion will be available for future acquisitions (although the Holding
Company has no current discussions, arrangements or agreements with respect to
any acquisition) and for issuance and sale to raise additional equity capital,
subject to market conditions and generally without shareholder approval. The
Holding Company's ability to raise additional funds through the sale of debt
securities to the public or institutional investors should also be enhanced by
the increase in its equity capital base provided by the Conversion. Although the
Holding Company currently has no plans with respect to future issuances of
equity or debt securities, the more flexible operating structure provided by the
Holding Company and the stock form of ownership is expected to assist us in
competing aggressively with other financial institutions in our market area.
The Conversion will also permit our members who subscribe for shares of
Common Stock to become shareholders of the Holding Company, thereby allowing
members to indirectly own stock in the financial institution in which they
maintain deposit accounts. Such ownership may encourage shareholders to promote
us to others, thereby further contributing to our growth.
Principal Effects of Conversion
General. Each savings depositor in a mutual savings and loan
association such as Union Federal has both a savings account and a pro rata
ownership in the net worth of that institution, based upon the balance in his or
her savings account. This ownership interest has no tangible market value
separate from the savings account. Upon conversion to stock form, the ownership
of our net worth will be represented by the outstanding shares of stock to be
owned by the Holding Company. Certificates are issued to evidence ownership of
the capital stock. These stock certificates are transferable and, therefore, the
shares may be transferred with no effect on any account the seller may hold with
us.
Continuity. While the Conversion is being accomplished, we will
continue without interruption our normal business of accepting deposits and
making loans. After the Conversion, we will continue to provide services for
account holders and borrowers under current policies carried on by our present
management and staff.
Our directors at the time of Conversion will continue to serve as our
directors after the Conversion until the expiration of their current terms, and
thereafter, if reelected. All of our executive officers at the time of
Conversion will retain their positions after the Conversion.
Effect on Deposit Accounts. Under the Plan, each of our depositors at
the time of the Conversion will automatically continue as a depositor after the
Conversion, and each deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each account will also continue
to be insured by the FDIC in exactly the same way as before. Depositors will
continue to hold their existing certificates, passbooks and other evidence of
their accounts.
Effect on Loans of Borrowers. None of our loans will be affected by the
Conversion. The amount, interest rate, maturity and security for each loan will
be unchanged.
Effect on Voting Rights of Members. Currently in our mutual form, our
depositor and certain borrower members have voting rights and may vote for the
election of directors. Following the Conversion, depositors and borrowers will
cease to have voting rights. All voting rights in Union Federal will be vested
in the Holding Company as our sole shareholder. Voting rights in the Holding
Company will be vested exclusively in its shareholders, with one vote for each
share of Common Stock. Neither the Common Stock to be sold in the Conversion nor
the capital stock of Union Federal will be insured by the FDIC or by any other
government entity.
<PAGE>
Effect on Liquidation Rights. Current federal regulations and the Plan
of Conversion provide for the establishment of a "liquidation account" by us for
the benefit of our deposit account holders with balances of no less than $50.00
on December 31, 1995 ("Eligible Account Holders"), and our deposit account
holders with balances of no less than $50.00 on September 30, 1997
("Supplemental Eligible Account Holders"), who continue to maintain their
accounts with us after the Conversion. The liquidation account will be credited
with our net worth as reflected in the latest statement of financial condition
in the final prospectus used in the Conversion. Each Eligible Account Holder and
Supplemental Eligible Account Holder will, with respect to each deposit account
held, have a related inchoate interest in a portion of the balance of the
liquidation account. This inchoate interest is referred to in the Plan as a
"subaccount balance." In the event of a complete liquidation of us after the
Conversion (and only in such event), Eligible Account Holders and Supplemental
Eligible Account Holders would be entitled to a distribution from the
liquidation account in an amount equal to the then current adjusted subaccount
balance then held, before any liquidation distribution would be made to the
Holding Company as our sole shareholder. We believe that a liquidation of Union
Federal is unlikely.
Each Eligible Account Holder will have a subaccount balance in the
liquidation account for each deposit account held as of December 31, 1995 (the
"Eligibility Record Date"). Each Supplemental Eligible Account Holder will have
a subaccount balance in the liquidation account for each deposit account held as
of September 30, 1997 (the "Supplemental Eligibility Record Date"). Each initial
subaccount balance will be the amount determined by multiplying the total
opening balance in the liquidation account by a fraction, the numerator of which
is the amount of the qualifying deposit (a deposit of at least $50 as of
December 31, 1995 , or September 30, 1997, respectively) of such deposit
account, and the denominator of which is the total of all qualifying deposits on
that date. If the amount in the deposit account on any subsequent annual closing
date of Union Federal is less than the balance in such deposit account on any
other annual closing date, or the balance in such account on the Eligibility
Record Date or the Supplemental Eligibility Record Date, as the case may be,
this interest in the liquidation account will be reduced by an amount
proportionate to any such reduction, and will not thereafter be increased
despite any subsequent increase in the related deposit account. An Eligible
Account Holder's, as well as a Supplemental Eligible Account Holder's, interest
in the liquidation account will cease to exist if the deposit account is closed.
The liquidation account will never increase and will be correspondingly reduced
as the interests in the liquidation account are reduced or cease to exist. In
the event of liquidation, any assets remaining after the above liquidation
rights of Eligible Account Holders and Supplemental Eligible Account Holders are
satisfied will be distributed to the Holding Company as our sole shareholder.
A merger, consolidation, sale of bulk assets, or similar combination or
transaction in which we are not the surviving entity would not be considered to
be a "liquidation" under which distribution of the liquidation account could be
made, provided the surviving institution is an FDIC-insured institution. In such
a transaction, the liquidation account would be assumed by the surviving
institution. The OTS has stated that the consummation of a transaction of the
type described in the preceding sentence in which the surviving entity is not an
FDIC-insured institution would be reviewed on a case-by-case basis to determine
whether the transaction should constitute a "complete liquidation" requiring
distribution of any then-remaining balance in the liquidation account.
The creation and maintenance of the liquidation account will not
restrict the use of or application of any of the net worth accounts, except that
we may not declare or pay a cash dividend on or repurchase our capital stock if
the effect of such dividend or repurchase would be to cause our net worth to be
reduced below the aggregate amount then required for the liquidation account.
Tax Effects. We intend to proceed with the Conversion on the basis of
an opinion from our special counsel, Barnes & Thornburg, Indianapolis, Indiana,
as to all tax matters that are material to the Conversion. The opinion is based,
among other things, on certain representations made by us, including the
representation that the exercise price of the subscription rights to purchase
the Common Stock will be approximately equal to the fair market value of the
stock at the time of the completion of the Conversion. With respect to the
subscription rights, we have received an opinion of RP Financial which, based on
certain assumptions, concludes that the subscription rights to be received by
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members do not have any economic value at the time of distribution or the time
the subscription rights are exercised, whether or not a Community Offering takes
place, and Barnes & Thornburg's opinion is given in reliance thereon. Barnes &
Thornburg's opinion provides substantially as follows:
<PAGE>
1. Our change in form from a mutual savings and loan association to a
stock savings and loan association will qualify as a reorganization
under Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as
amended (the "Code"), and no gain or loss will be recognized to us in
either our mutual form or our stock form by reason of the Conversion.
2. No gain or loss will be recognized by the converted savings association
upon receipt of money from the Holding Company for the converted
savings association's capital stock, and no gain or loss will be
recognized by the Holding Company upon the receipt of money for Common
Stock of the Holding Company.
3. The basis of the assets of the converted savings and loan association
will be the same as the basis in our hands prior to the Conversion.
4. The holding period of the assets of the converted savings and loan
association will include the period during which the assets were held
by us in our mutual form prior to Conversion.
5. No gain or loss will be realized by our deposit account holders or
borrowers, upon the constructive issuance to them of withdrawable
deposit accounts of the converted savings association immediately after
the Conversion, interests in the liquidation account, and/or on the
distribution to them of nontransferable subscription rights to purchase
Common Stock.
6. The basis of an account holder's deposit accounts in the converted
savings and loan association after the Conversion will be the same as
the basis of his or her deposit accounts with us prior to the
Conversion.
7. The basis of each account holder's interest in the liquidation account
will be zero. The basis of the non-transferable subscription rights
will be zero.
8. The basis of the Holding Company Common Stock to its shareholders will
be the actual purchase price ($10.00) thereof, and a shareholder's
holding period for Common Stock acquired through the exercise of
subscription rights will begin on the date on which the subscription
rights are exercised.
9. No taxable income will be realized by Eligible Account Holders,
Supplemental Eligible Account Holders or Other Members as a result of
the exercise of the nontransferable subscription rights.
10. The converted savings association in its stock form will succeed to and
take into account our earnings and profits or deficit in earnings and
profits, in our mutual form, as of the date of Conversion.
The opinion also concludes in effect that:
1. No taxable income will be realized by us on the issuance of
subscription rights to eligible subscribers to purchase shares of
Common Stock at fair market value.
2. The converted savings and loan association will succeed to and take
into account the dollar amounts of those accounts of Union Federal in
its mutual form which represent bad debt reserves in respect of which
Union Federal in its mutual form has taken a bad debt deduction for
taxable years on or before the date of the transfer.
3. The creation of the liquidation account will have no effect on our
taxable income, deductions, or additions to bad debt reserves or
distributions to shareholders under Section 593 of the Code.
Barnes & Thornburg has also issued an opinion stating in essence that
the Conversion will not be a taxable transaction to the Holding Company or to us
under any Indiana tax statute imposing a tax on income, and that our depositors
and borrowers will be treated under such laws in a manner similar to the manner
in which they will be treated under federal income tax law.
<PAGE>
The opinions of Barnes & Thornburg and RP Financial, unlike a letter
ruling issued by the Internal Revenue Service, are not binding on the Service
and the conclusions expressed herein may be challenged at a future date. The
Service has issued favorable rulings for transactions substantially similar to
the proposed Conversion, but any such ruling may not be cited as precedent by
any taxpayer other than the taxpayer to whom the ruling is addressed. We do not
plan to apply for a letter ruling concerning the transactions described herein.
Offering of Common Stock
Under the Plan of Conversion, up to 2,645,000 shares of Common Stock
are being offered for sale, initially through the Subscription Offering (subject
to a possible increase to 3,041,750 shares). See "-- Subscription Offering." The
Plan of Conversion requires, with certain exceptions, that a number of shares
equal to at least 1,955,000 be sold in order for the Conversion to be completed.
Shares may also be offered to the public in a Community Offering which is
expected to commence after the Subscription Offering terminates, but may begin
at any time during the Subscription Offering. The Community Offering may expire
at any time when orders for at least 1,955,000 shares have been received in the
Subscription Offering and Community Offering, but no later than January 24,
1998, unless extended by us and the Holding Company. The offering may be
extended, subject to OTS approval, until 24 months following the members'
approval of the Plan of Conversion, or until December 15, 1999. The actual
number of shares to be sold in the Conversion will depend upon market and
financial conditions at the time of the Conversion, provided that no fewer than
1,955,000 shares or more than 3,041,750 shares will be sold in the Conversion.
The per share price to be paid by purchasers in the Community Offering, if any,
for any remaining shares will be $10.00, the same price paid by subscribers in
the Subscription Offering. See "-- Stock Pricing."
The Subscription Offering expires at 12:00 noon, Crawfordsville time,
on December 10, 1997. OTS regulations and the Plan of Conversion require that we
complete the sale of Common Stock within 45 days after the close of the
Subscription Offering. This 45-day period expires on January 24, 1998. In the
event we are unable to complete the sale of Common Stock within this 45-day
period, we may request an extension of this time period from the OTS. No single
extension granted by the OTS, however, may exceed 90 days. No assurance can be
given that an extension would be granted if requested. The OTS has, however,
granted extensions due to the inability of mutual financial institutions to
complete a stock offering as a result of the development of adverse conditions
in the stock market. If an extension is granted, we will promptly notify
subscribers of the granting of the extension of time and will promptly return
subscriptions unless subscribers affirmatively elect to continue their
subscriptions during the period of extension. Such extensions may not be made
beyond December 15, 1999.
As permitted by OTS regulations, the Plan of Conversion provides that
if, for any reason, purchasers cannot be found for an insignificant residue of
unsubscribed shares of the Common Stock, our Board of Directors will seek to
make other arrangements for the sale of the remaining shares. Such other
arrangements will be subject to the approval of the OTS. If such other purchase
arrangements cannot be made, the Plan of Conversion will terminate. In the event
that the Conversion is not completed, we will remain a mutual savings and loan
association, all subscription funds will be promptly returned to subscribers
with interest earned thereon at our passbook rate, which is currently 4.0% per
annum, or 4.06% APY (except for payments to have been made through withdrawal
authorizations which will have continued to earn interest at the contractual
account rates), and all withdrawal authorizations will be canceled.
Subscription Offering
In accordance with OTS regulations, nontransferable rights to subscribe
for the purchase of the Holding Company's Common Stock have been granted under
the Plan of Conversion to the following persons in the following order of
priority: (1) our Eligible Account Holders; (2) the ESOP; (3) our Supplemental
Eligible Account Holders; and (4) our members other than Eligible Account
Holders and Supplemental Eligible Account Holders, at the close of business on
October 31, 1997, the voting record date for the Special Meeting, including
holders of deposit accounts on October 31, 1997 and borrowers of Union Federal
on July 30, 1997, who remain borrowers on October 31, 1997 ("Other Members").
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering, and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion (and described below). The December 31,
1995, date for determination of Eligible Account Holders and the September 30,
1997 date for determination of Supplemental Eligible Account Holders were
selected in accordance with federal regulations applicable to the Conversion.
<PAGE>
Category I: Eligible Account Holders. Each Eligible Account Holder, in
his capacity as such (counting all persons on a joint account as one Eligible
Account Holder), is permitted to subscribe for up to 20,000 shares of the
Holding Company's Common Stock, provided that each Eligible Account Holder may
not subscribe for more than 30,417 shares in the Conversion including shares
subscribed for by such person's Associates or persons acting in concert as a
group.
If sufficient shares are not available in this Category I, shares will
be allocated in a manner that will allow each Eligible Account Holder, to the
extent possible, to purchase a number of shares sufficient to make his or her
allocation consist of the lesser of 100 shares or the amount subscribed for.
Thereafter, unallocated shares will be allocated to subscribing Eligible Account
Holders in the proportion that the amounts of their respective qualifying
deposits bear to the total amount of qualifying deposits of all subscribing
Eligible Account Holders.
The "qualifying deposits" of an Eligible Account Holder is the amount
of the deposit balances (provided such aggregate balance is not less than
$50.00) in his or her deposit accounts, including demand deposit accounts, as of
the close of business on December 31, 1995. Subscription rights received by
directors and officers in this category based upon their increased deposits in
Union Federal during the year preceding December 31, 1995, are subordinated to
the subscription rights of other Eligible Account Holders. Notwithstanding the
foregoing, shares of Common Stock with a value in excess of $26,450,000, the
maximum of the Estimated Valuation Range, may be sold to the ESOP before
satisfying the subscriptions of Eligible Account Holders.
Category II: The ESOP. The Holding Company's tax-qualified ESOP is
permitted to subscribe for up to 10% of the total number of shares of the
Holding Company's Common Stock sold in the Conversion, provided that shares
remain available after satisfying the subscription rights of Eligible Account
Holders for up to $26,450,000. The ESOP intends to subscribe for a number of
shares equal to 8% of the Holding Company's Common Stock sold in the Conversion;
provided, however, that such number shall in no event exceed 184,000 shares. If
the ESOP is unable to purchase all or part of the shares of Common Stock for
which it subscribes, the ESOP may purchase such shares on the open market or may
purchase authorized but unissued shares of the Holding Company. Any purchase by
the ESOP of authorized but unissued shares could dilute the interests of the
Holding Company's shareholders.
Category III: Supplemental Eligible Account Holders. Each Supplemental
Eligible Account Holder, in his capacity as such (counting all persons on a
joint account as one Supplemental Eligible Account Holder), is permitted to
subscribe for up to 20,000 shares of the Holding Company's Common Stock,
provided that each Supplemental Account Holder may not subscribe for more than
30,417 shares in the Conversion including shares subscribed for by such person's
Associates or person acting in concert as a group, to the extent that shares of
the Holding Company's Common Stock remain available for purchase after
satisfaction of the subscription rights of all Eligible Account Holders and the
ESOP. Any subscription rights received by a person as a result of his or her
status as an Eligible Account Holder will reduce to the extent thereof the
subscription rights granted to such person as a result of his or her status as a
Supplemental Eligible Account Holder.
If sufficient shares are not available in this Category III, shares
will be allocated in a manner that will allow each Supplemental Eligible Account
Holder, to the extent possible, to purchase a number of shares sufficient to
make his or her allocation consist of the lesser of 100 shares or the amount
subscribed for. Thereafter, unallocated shares will be allocated to subscribing
Supplemental Eligible Account Holders in the proportion that the amounts of
their respective qualifying deposits bear to the total amount of qualifying
deposits of all subscribing Supplemental Eligible Account Holders.
The "qualifying deposits" of a Supplemental Eligible Account Holder is
the amount of the deposit balances (provided such aggregate balance is not less
than $50) in his or her deposit accounts, including demand deposit accounts, as
of the close of business on September 30, 1997.
<PAGE>
Category IV: Other Members. Each Other Member, in his capacity as such
(counting all persons on a joint account as one Other Member), is permitted to
subscribe for up to 20,000 shares of the Holding Company's Common Stock,
provided that each Other Member may not subscribe for more than 30,417 shares in
the Conversion, including shares subscribed for by such person's Associates or
persons acting in concert as a group, to the extent that shares remain available
for purchase after satisfaction of the subscription rights of all Eligible
Account Holders, the ESOP and all Supplemental Eligible Account Holders.
If sufficient shares are not available in this Category IV, shares will
be allocated pro rata among subscribing Other Members in the same proportion
that the number of shares subscribed for by each Other Member bears to the total
number of shares subscribed for by all Other Members.
Timing of Offering and Method of Payment. The Subscription Offering
will expire at 12:00 noon, Crawfordsville time, on December 10, 1997 (the
"Expiration Date"). The Expiration Date may be extended by Union Federal and the
Holding Company for successive 90-day periods, subject to OTS approval, to
December 15, 1999.
Subscribers must, before the Expiration Date, or such date to which the
Expiration Date may be extended, return an original Order Form to us, properly
completed, together with checks or money orders in an amount equal to the
Purchase Price ($10.00 per share) multiplied by the number of shares for which
subscription is made. Payment for stock purchases can also be accomplished
through authorization on the original Order Form of withdrawals from accounts
with us (including a certificate of deposit). Funds must actually be in the
account when an order for the purchase of Common Stock is submitted. We have the
right to reject any orders transmitted by facsimile or on copies of Order Forms
and any payments made by wire transfer.
In the event an Order Form (i) is not delivered and is returned to us
by the United States Postal Service or we are unable to locate the addressee,
(ii) is not received or is received after the Expiration Date, (iii) is
defectively completed or executed, or (iv) is not accompanied by full payment
for the shares subscribed for (including instances where a savings account or
certificate balance from which withdrawal is authorized is insufficient to fund
the amount of such required payment), the subscription rights for the person to
whom such rights have been granted will lapse as though that person failed to
return the completed Order Form within the time period specified. We may, but
will not be required to, waive any irregularity on any Order Form within the
time period specified. We may, but will not be required to, waive any
irregularity on any Order Form or require the submission of corrected Order
Forms or the remittance of full payment for subscribed shares by such date as we
specify. The waiver of an irregularity on an Order Form in no way obligates us
to waive any other irregularity on that, or any irregularity on any other, Order
Form. Waivers will be considered on a case by case basis. Photocopies of Order
Forms, payments from private third parties, or electronic transfers of funds
will not be accepted. Our interpretation of the terms and conditions of the Plan
and of the acceptability of the Order Forms will be final. We have the right to
investigate any irregularity on any Order Form.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), no prospectus will be mailed
any later than five days prior to such date or hand delivered any later than two
days prior to such date. Execution of the Order Form will confirm receipt or
delivery in accordance with Rule 15c2-8. Order Forms will only be distributed
with a prospectus.
Until completion or termination of the Conversion, subscribers who
elect to make payment through authorization of withdrawal from accounts with us
will not be permitted to reduce the deposit balance in any such accounts below
the amount required to purchase the shares for which they subscribed. In such
cases interest will continue to be credited on deposits authorized for
withdrawal until the completion of the Conversion. Interest at the passbook
rate, which is currently 4.0% per annum, for an APY of 4.06%, will be paid on
amounts submitted by check. Authorized withdrawals from certificate accounts for
the purchase of Common Stock will be permitted without the imposition of early
withdrawal penalties or loss of interest. However, withdrawals from certificate
<PAGE>
accounts that reduce the balance of such accounts below the required minimum for
specific interest rate qualification will cause the cancellation of the
certificate accounts at the effective date of the Conversion, and the remaining
balance will earn interest at the passbook savings rate. Stock subscriptions
received and accepted by us are final and may not be revoked by the purchaser.
Subscriptions may be withdrawn only in the event that we extend the Expiration
Date of the Subscription Offering as described above.
Members in Non-Qualified States or Foreign Countries. We will make
reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock pursuant to the
Plan reside. However, no person will be offered or sold or receive any stock
pursuant to the Subscription Offering if such person resides in a foreign
country or resides in a state in the United States with respect to which all of
the following apply: (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside in such state; (ii) the granting of
subscription rights or the offer or sale of Common Stock to such persons would
require us or the Holding Company or our respective officers and directors,
under the securities laws of such state, to register as a broker, dealer,
salesman or selling agent, or to register or otherwise qualify the Common Stock
for sale in such state; and (iii) such registration, qualification or filing in
our judgment or in the judgment of the Holding Company would be impracticable or
unduly burdensome for reasons of cost or otherwise.
To assist in the Subscription Offering and the Community Offering, if
any, the Holding Company has established a Stock Information Center that you may
contact at (765) 362-2428. Callers to the Stock Information Center will be able
to request a Prospectus and other information relating to the offering.
Community Offering
To the extent shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of the Common
Stock in a Community Offering to the general public, with preference given to
residents of Montgomery County, the county in which our sole banking office is
located. The right of any person to purchase shares in the Community Offering is
subject to our right to accept or reject such purchase in whole or in part. We
may terminate the Community Offering as soon as we have received orders for at
least the minimum number of shares available for purchase in the Conversion.
The Community Offering may expire at any time when orders for at least
1,955,000 shares have been received in the Subscription Offering and Community
Offering (but no later than January 24, 1998, unless extended by us and the
Holding Company). Persons wishing to purchase stock in the Community Offering,
if conducted, should return the Order Form to us, properly completed, together
with a check or money order in the amount equal to the Purchase Price ($10.00
per share) multiplied by the number of shares which that person desires to
purchase. However, as noted above, we may terminate the Community Offering as
soon as we receive orders for at least the minimum number of shares available
for purchase in the Conversion.
The maximum number of shares of Common Stock which may be purchased in the
Community Offering by any person (including such person's Associates) or persons
acting in concert is 20,000 in the aggregate. A member who, together with his
Associates and persons acting in concert, has subscribed for shares in the
Subscription Offering may subscribe for a number of additional shares in the
Community Offering that does not exceed the lesser of (i) 20,000 shares or (ii)
the number of shares which, when added to the number of shares subscribed for by
the member (and his Associates and persons acting in concert) in the
Subscription Offering, would not exceed 30,417. We reserve the right to reject
any orders received in the Community Offering in whole or in part.
If all the Holding Company Common Stock offered in the Subscription
Offering is subscribed for, no Holding Company Common Stock will be available
for purchase in the Community Offering. Purchase orders received during the
Community Offering will be filled up to a maximum of 2% of the total number of
shares of Common Stock issued in the Conversion, with any remaining unfilled
purchase orders to be allocated on an equal number of shares basis. If the
Community Offering extends beyond 45 days following the expiration of the
Subscription Offering, subscribers will have the right to increase, decrease or
rescind subscriptions for stock previously submitted. All sales of Holding
Company Common Stock in the Community Offering will be at the same price per
share as the sales of Holding Company Common Stock in the Subscription Offering.
<PAGE>
Cash and checks received in the Community Offering will be placed in a
special savings account with us, and will earn interest at the passbook rate,
which is currently 4.0% per annum, for an APY of 4.06%, from the date of deposit
until completion or termination of the Conversion. In the event that the
Conversion is not consummated for any reason, all funds submitted pursuant to
the Community Offering will be promptly refunded with interest as described
above.
Delivery of Certificates
Certificates representing shares issued in the Subscription Offering
and in the Community Offering, if any, pursuant to Order Forms will be mailed to
the persons entitled to them at the addresses of such persons specified in
properly completed Order Forms as soon as practicable following consummation of
the Conversion. Any certificates returned as undeliverable will be held by the
Holding Company until claimed by the person legally entitled to them or
otherwise disposed of in accordance with applicable law.
Marketing Arrangements
To assist us and the Holding Company in marketing the Common Stock, we
have retained the services of Trident Securities as our financial advisor.
Trident Securities is a broker-dealer registered with the Securities and
Exchange Commission (the "SEC") and a member of the National Association of
Securities Dealers, Inc. (the "NASD"). Trident Securities will assist us in the
Conversion as follows: (1) in training and educating our employees regarding the
mechanics and regulatory requirements of the conversion process; (2) in keeping
records of all stock subscriptions; (3) in obtaining proxies from our members
with respect to the Special Meeting; and (4) in assisting with the Community
Offering. For providing these services, we have agreed to pay Trident Securities
commissions in an amount equal to 1.45% of the aggregate dollar amount of shares
of Common Stock sold in the Conversion other than shares sold to executive
officers and directors and their Associates or to the ESOP. Trident Securities
will also be reimbursed for out-of-pocket expenses, which are not to exceed
$28,000 without our consent (including legal fees and disbursements). Offers and
sales in the Subscription Offering and the Community Offering will be on a best
efforts basis and, as a result, Trident Securities is not obligated to purchase
any shares of the Common Stock. Trident Securities intends to make a market in
the Common Stock, although it is under no obligation to do so.
We have also agreed to indemnify Trident Securities, under certain
circumstances, against liabilities and expenses (including legal fees) arising
out of Trident Securities' engagement by us, including liabilities under the
Securitities Act of 1933 (the "1933 Act").
Selected Dealers
Trident Securities may enter into an agreement with certain dealers
chosen by Union Federal and Trident Securities (together, the "Selected
Dealers") to assist in the sale of shares in the Community Offering. Selected
Dealers will receive commissions at an agreed upon rate for all shares sold by
such Selected Dealers. During the Community Offering, Selected Dealers may only
solicit indications of interest from their customers to place orders with us as
of a certain date (the "Order Date") for the purchase of shares of Common Stock.
When and if the Holding Company, Union Federal and Trident Securities believe
that enough indications of interest and orders have been received in the
Subscription Offering and the Community Offering, if any, to consummate the
Conversion, Trident Securities will request, as of the Order Date, Selected
Dealers to submit orders to purchase shares for which they have previously
received indications of interest from the customers. Selected Dealers will send
confirmations of the orders to such customers on the next business day after the
Order Date. Selected Dealers will debit the accounts of their customers on the
date which will be three business days from the Order Date (the "Settlement
Date"). On the Settlement Date, funds received by Selected Dealers will be
remitted to us. It is anticipated that the Conversion will be consummated on the
Settlement Date. However, if consummation is delayed after payment has been
received by us from Selected Dealers, funds will earn interest at the passbook
rate, which is currently 4.0% per annum, for an APY of 4.06%, until the
completion of the offering. Funds will be returned promptly in the event the
Conversion is not consummated.
<PAGE>
Limitations on Common Stock Purchases
The Plan includes a number of limitations on the number of shares of
Common Stock which may be purchased during the Conversion. These are summarized
below:
(1) No fewer than 25 shares may be purchased by any person purchasing shares
of Common Stock in the Conversion (provided that sufficient shares are
available).
(2) No Eligible Account Holder, Supplemental Eligible Account Holder or Other
Member, in his capacity as such (including all persons on a joint account as
one member), may subscribe for more than 20,000 shares. Notwithstanding the
foregoing, the maximum number of shares of Common Stock which may be
purchased in the Conversion by any Eligible Account Holder, Supplemental
Eligible Account Holder or Other Member (including such person's Associates
or group acting in concert and counting all persons on a joint account as one
member) shall be 30,417 shares in the aggregate, except that the ESOP may
purchase in the aggregate not more than 10% of the total number of shares
offered in the Conversion. The maximum number of shares of Common Stock which
may be purchased in the Community Offering, if any, by any person (including
such person's Associates or persons acting in concert) is 20,000 in the
aggregate. A member who, together with his Associates and persons acting in
concert, has subscribed for shares in the Subscription Offering may subscribe
for a number of additional shares in the Community Offering that does not
exceed the lesser of (i) 20,000 shares or (ii) the number of shares which,
when added to the number of shares subscribed for by the member (and his
Associates and persons acting in concert) in the Subscription Offering
(including all persons on a joint account), would not exceed 30,417. The ESOP
expects to purchase a number of shares equal to 8% of the total number of
shares sold in the Conversion; provided, however, that it will subscribe for
no more than 184,000 shares. Union Federal's and the Holding Company's Boards
of Directors may, however, in their sole discretion, increase the maximum
purchase limitation set forth above up to 9.99% of the shares of Common Stock
sold in the Conversion, provided that orders for shares exceeding 5% of the
shares of Common Stock sold in the Conversion may not exceed, in the
aggregate, 10% of the shares sold in the Conversion. The maximum purchase
limitation likely would be increased only if an insufficient number of
subscriptions is received to sell the number of shares of Common Stock at the
minimum of the Estimated Valuation Range. If the Boards of Directors decide
to increase the purchase limitation, all persons who subscribe for shares of
Common Stock offered in the Conversion will be given the opportunity to
increase their subscriptions accordingly, subject to the rights and
preferences of any person who has priority subscription rights. Subscribers
will be notified in writing delivered to the address indicated on their
respective Stock Order Forms. The overall purchase limitation may be reduced
in the sole discretion of the Boards of Directors of the Holding Company and
Union Federal.
(3) No more than 34.0% of the shares of Common Stock may be purchased in the
Conversion by directors and officers of Union Federal and the Holding Company
and their Associates. This restriction does not apply to shares purchased by
the ESOP.
OTS regulations define "acting in concert" as (i) knowing participation
in a joint activity or interdependent conscious parallel action towards a common
goal whether or not pursuant to an express agreement, or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. The Holding Company and Union
Federal may presume that certain persons are acting in concert based upon, among
other things, joint account relationships or the fact that such persons have
filed joint Schedules 13D with the SEC with respect to other companies.
The term "Associate" of a person is defined to mean (i) any corporation
or organization (other than Union Federal or its subsidiaries or the Holding
Company) of which such person is a director, officer, partner or 10%
shareholder; (ii) any trust or other estate in which such person has a
substantial beneficial interest or serves as trustee or in a similar fiduciary
capacity; provided, however that such term shall not include any employee stock
benefit plan of the Holding Company or Union Federal in which such a person has
a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity, and (iii) any relative or spouse of such person, or relative
of such spouse, who either has the same home as such person or who is a director
<PAGE>
or officer of Union Federal or its subsidiaries or the Holding Company.
Directors are not treated as Associates of one another solely because of their
board membership. Compliance with the foregoing limitations does not necessarily
constitute compliance with other regulatory restrictions on acquisitions of the
Common Stock. For a further discussion of limitations on purchases of the Common
Stock during and subsequent to the Conversion, see "-- Restrictions on Sale of
Stock by Directors and Officers," "-- Restrictions on Purchase of Stock by
Directors and Officers Following Conversion," and "Restrictions on Acquisition
of the Holding Company."
Restrictions on Repurchase of Stock by the Holding Company
Repurchases of its shares by the Holding Company will be restricted for
a period of three years from the date of the Conversion. OTS regulations
currently prohibit the Holding Company from repurchasing any of its shares
within one (1) year following the Conversion except in exceptional
circumstances. So long as we continue to meet certain capitalization
requirements, the Holding Company may repurchase shares in an open-market
repurchase program (which cannot exceed 5% of its outstanding shares in a
twelve-month period except in exceptional circumstances) during the second and
third year following the Conversion by giving appropriate prior notice to the
OTS. The OTS has authority to waive these restrictions under certain
circumstances. Unless repurchases are permitted under the foregoing regulations,
the Holding Company may not, for a period of three years from the date of the
Conversion, repurchase any of its capital stock from any person, except in the
event of an offer to purchase by the Holding Company on a pro rata basis from
all of its shareholders which is approved in advance by the OTS, except in
exceptional circumstances established to the satisfaction of the OTS, or except
for purchases of shares required to fund the RRP. The Holding Company may use
some of the net proceeds received from the sale of the Common Stock offered by
this Prospectus to repurchase such Common Stock, subject to OTS requirements.
Under Indiana law, the Holding Company will be precluded from
repurchasing its equity securities if, after giving effect to such repurchase,
the Holding Company would be unable to pay its debts as they become due or the
Holding Company's assets would be less than its liabilities and obligations to
preferential shareholders.
Restrictions on Sale of Stock by Directors and Officers
All shares of the Common Stock purchased by directors and officers of
Union Federal or the Holding Company in the Conversion will be subject to the
restriction that such shares may not be sold or otherwise disposed of for value
for a period of one year following the date of purchase, except for any
disposition of such shares (i) following the death of the original purchaser or
(ii) by reason of an exchange of securities in connection with a merger or
acquisition approved by the applicable regulatory authorities. Sales of shares
of the Common Stock by the Holding Company's directors and officers will also be
subject to certain insider trading and other transfer restrictions under the
federal securities laws. See "Regulation -- Federal Securities Laws" and
"Description of Capital Stock."
Each certificate for such restricted shares will bear a legend
prominently stamped on its face giving notice of the restrictions on transfer,
and instructions will be issued to the Holding Company's transfer agent to the
effect that any transfer within such time period of any certificate or record
ownership of such shares other than as provided above is a violation of the
restriction. Any shares of Common Stock issued pursuant to a stock dividend,
stock split or otherwise with respect to restricted shares will be subject to
the same restrictions on sale.
Restrictions on Purchase of Stock by Directors and Officers Following Conversion
OTS regulations provide that for a period of three years following the
Conversion, without prior written approval of the OTS, neither directors nor
officers of Union Federal or the Holding Company nor their Associates may
purchase shares of the Common Stock of the Holding Company, except from a dealer
registered with the SEC. This restriction does not, however, apply to negotiated
transactions involving more than one percent of the Holding Company's
outstanding Common Stock, to shares purchased pursuant to stock option or other
incentive stock plans approved by the Holding Company's shareholders, or to
shares purchased by employee benefit plans maintained by the Holding Company
which may be attributable to individual officers or directors.
<PAGE>
Restrictions on Transfer of Subscription Rights and Common Stock
Prior to the completion of the Conversion, OTS regulations and the Plan
of Conversion prohibit any person with subscription rights, including our
Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members, from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Common Stock to be issued upon their exercise.
Such rights may be exercised only by the person to whom they are granted and
only for his or her account. Each person exercising such subscription rights
will be required to certify that he or she is purchasing shares solely for his
or her own account and that he or she has no agreement or understanding
regarding the sale or transfer of such shares. The regulations also prohibit any
person from offering or making an announcement of an offer or intent to make an
offer to purchase such subscription rights or shares of Common Stock prior to
the completion of the Conversion. We intend to pursue any and all legal and
equitable remedies in the event we become aware of the transfer of subscription
rights and will not honor orders known by us to involve the transfer of such
rights. In addition, persons who violate the purchase limitations may be subject
to sanctions and penalties imposed by the OTS and/or the SEC.
Stock Pricing
The aggregate purchase price of the Holding Company Common Stock being
sold in the Conversion will be based on the appraised aggregate pro forma market
value of the Common Stock, as determined by an independent valuation. We
retained RP Financial, which is experienced in the valuation and appraisal of
financial institutions, including savings associations involved in the
conversion process, to prepare an appraisal. RP Financial will receive a fee of
$17,500 for its appraisal, plus out-of-pocket expenses. RP Financial has also
prepared a business plan for us for a fee of $5,000, plus out-of-pocket
expenses. We have agreed to indemnify RP Financial, under certain circumstances,
against liabilities and expenses (including legal fees) arising out of RP
Financial's engagement by us.
RP Financial has prepared an appraisal that establishes the Estimated
Valuation Range of the pro forma market value of the Common Stock as of August
22, 1997, as updated as of October 17, 1997, from a minimum of $19,550,000 to a
maximum of $26,450,000, with a midpoint of $23,000,000. A copy of the appraisal
is on file and available for inspection at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552 and the Central Regional Office of the OTS,
200 West Madison, Suite 1300, Chicago, Illinois 60606. The appraisal has also
been filed as an exhibit to the Holding Company's Registration Statement with
the SEC, and may be reviewed at the SEC's public reference facilities. See
"Additional Information." The appraisal involved a comparative evaluation of our
operating and financial statistics with those of other financial institutions.
The appraisal also took into account such other factors as the market for
savings associations generally, prevailing economic conditions, both nationally
and in Indiana, which affect the operations of savings associations, the
competitive environment within which we operate, and the effect of our becoming
a subsidiary of the Holding Company. No detailed individual analysis of the
separate components of Union Federal's and the Holding Company's assets and
liabilities was performed in connection with the evaluation. The Board of
Directors reviewed with management RP Financial's methods and assumptions and
accepted RP Financial's appraisal as reasonable and adequate. The Holding
Company, in consultation with Trident Securities, has determined to offer the
Common Stock in the Conversion at a price of $10.00 per share. The Holding
Company's decision regarding the Purchase Price was based solely on its
determination that $10.00 per share is a customary purchase price in conversion
transactions. The Estimated Valuation Range may be increased or decreased to
reflect market and financial conditions prior to the completion of the
Conversion.
Promptly after the completion of the Subscription Offering and the
Community Offering, if any, RP Financial will confirm to us that, to the best of
RP Financial's knowledge and judgment, nothing of a material nature has occurred
which would cause RP Financial to conclude that the amount of the aggregate
proceeds received from the sale of the Common Stock in the Conversion was
incompatible with its estimate of our total pro forma market value at the time
of the sale. If, however, the facts do not justify such a statement, a new
Estimated Valuation Range and price per share may be set. Under such
circumstances, the Holding Company will be required to resolicit subscriptions.
<PAGE>
In that event, subscribers would have the right to modify or rescind their
subscriptions and to have their subscription funds returned promptly with
interest and holds on funds authorized for withdrawal from deposit accounts
would be released or reduced; provided that if our pro forma market value upon
Conversion has increased to an amount which does not exceed $30,417,500 (15%
above the maximum of the Estimated Valuation Range), the Holding Company and
Union Federal do not intend to resolicit subscriptions unless it is determined
after consultation with the OTS that a resolicitation is required.
Depending upon market and financial conditions, the number of shares
issued may be more or less than the range in number of shares shown above. A
change in the number of shares to be issued in the Conversion will not affect
subscription rights, which are based on the 2,300,000 shares being offered in
the Subscription Offering. In the event of an increase in the maximum number of
shares being offered, persons who exercise their maximum subscription rights
will be notified of such increase and of their right to purchase additional
shares. Conversely, in the event of a decrease in the maximum number of shares
being offered, persons who exercise their maximum subscription rights will be
notified of such decrease and of the accompanying reduction in the number of
shares for which subscriptions may be made. In the event of a resolicitation,
subscribers will be afforded the opportunity to increase, decrease or maintain
their previously submitted order. The Holding Company will be required to
resolicit if the price per share is changed such that the total aggregate
purchase price is not within the minimum and 15% above the maximum of the
Estimated Valuation Range.
THE INDEPENDENT VALUATION IS NOT INTENDED AND MUST NOT BE CONSTRUED AS
A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF VOTING TO APPROVE THE
CONVERSION OR OF PURCHASING THE SHARES OF THE COMMON STOCK. MOREOVER, BECAUSE
SUCH VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER
OF MATTERS (INCLUDING CERTAIN ASSUMPTIONS AS TO THE AMOUNT OF NET PROCEEDS AND
THE EARNINGS THEREON), ALL OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO
ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SHARES IN THE CONVERSION WILL
THEREAFTER BE ABLE TO SELL THE SHARES AT PRICES RELATED TO THE FOREGOING
VALUATION OF THE PRO FORMA MARKET VALUE.
Number of Shares to be Issued
It is anticipated that the total offering of Common Stock (the number
of shares of Common Stock issued in the Conversion multiplied by the Purchase
Price of $10.00 per share) will be within the current minimum and 15% above the
maximum of the Estimated Valuation Range. Unless otherwise required by the OTS,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions so long as the change in the
number of shares to be issued in the Conversion, in combination with the
Purchase Price, results in an offering within the minimum and 15% above the
maximum of the Estimated Valuation Range.
An increase in the total number of shares of Common Stock to be issued
in the Conversion would decrease both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
increasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. A decrease in the number of shares to be issued
in the Conversion would increase both a subscriber's ownership interest and the
Holding Company's pro forma net worth and net income on a per share basis while
decreasing (assuming no change in the per share price) pro forma net income and
net worth on an aggregate basis. For a presentation of the effects of such
changes, see "Pro Forma Data."
Interpretation and Amendment of the Plan
To the extent permitted by law, all interpretations of the Plan by
Union Federal and the Holding Company will be final. The Plan provides that, if
deemed necessary or desirable by the Boards of Directors of the Holding Company
and Union Federal, the Plan may be substantively amended by the Boards of
Directors, as a result of comments from regulatory authorities or otherwise,
with the concurrence of the OTS. Moreover, if the Plan of Conversion is so
amended, subscriptions which have been received prior to such amendment will not
be refunded unless otherwise required by the OTS.
<PAGE>
Conditions and Termination
Completion of the Conversion requires the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes of
members eligible to be cast at the Special Meeting and the sale of all shares of
the Common Stock within 24 months following approval of the Plan by the members.
If these conditions are not satisfied, the Plan will be terminated and we will
continue business in the mutual form of organization. The Plan may be terminated
by the Boards of Directors of Union Federal and the Holding Company at any time
prior to the Special Meeting and, with the approval of the OTS, by such Boards
of Directors at any time thereafter. Furthermore, OTS regulations and the Plan
of Conversion require that the Holding Company complete the sale of Common Stock
within 45 days after the close of the Subscription Offering. The OTS may grant
an extension of this time period if necessary, but no assurance can be given
that an extension would be granted. See "-- Offering of Common Stock."
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
General
Union Community Bancorp was recently formed as an Indiana corporation
on September 11, 1997, for the purpose of issuing the Common Stock and owning
all of the capital stock of Union Federal issued in the Conversion. As a newly
formed corporation, the Holding Company has no operating history. All
information in this section should be read in conjunction with the consolidated
financial statements and notes thereto included within this document.
Our principal business has historically consisted of attracting
deposits from the general public and making loans secured by residential real
estate. Our earnings primarily depend upon our net interest income, which is the
difference between our interest income and interest expense. Interest income is
a function of the balances of loans and investments outstanding during a given
period and the yield earned on such loans and investments. Interest expense is a
function of the amount of deposits and borrowings outstanding during the same
period and interest rates paid on such deposits and borrowings. Our earnings are
also affected by provisions for loan losses, service charges, operating expenses
and income taxes.
We are also affected by prevailing economic conditions, as well as
government policies and regulations concerning, among other things, monetary and
fiscal affairs, housing and financial institutions. See "Regulation." Deposit
flows are influenced by a number of factors, including interest rates paid on
competing investments, account maturities and levels of personal income and
savings within our market. In addition, deposit growth is affected by how
customers perceive the stability of the financial services industry amid various
current events such as regulatory changes, failures of other financial
institutions and financing of the deposit insurance fund. Lending activities are
influenced by the demand for and supply of housing lenders, the availability and
cost of funds and various other items. Sources of funds for our lending
activities include deposits, payments on loans, borrowings and income provided
from operations.
Current Business Strategy
Our business strategy is to operate a well-capitalized, profitable and
independent community savings and loan association dedicated primarily to
residential lending with an emphasis on personal service. We have sought to
implement this strategy by (i) emphasizing the origination of one- to
four-family residential mortgage loans in our market area, (ii) investing in
high-quality investment securities and loans, and (iii) maintaining high levels
of capital.
The highlights of our business strategy are as follows:
o Profitability. Although no assurance can be made regarding
future profitability, we have been profitable in each of the
past five fiscal years. We had net income of $886,000 in
fiscal 1996, $992,000 in fiscal 1995, and $1.2 million in
fiscal 1994. Our net income for the six months ended June 30,
1997, was $563,000. Our average return on average assets for
the five years ended December 31, 1996, was 1.6%. Our returns
on average assets for the year ended December 31, 1996, and
the six months ended June 30, 1997 (on an annualized basis)
were 1.1% and 1.4%, respectively. Our net income for the
fiscal year ended December 31, 1996 would have been $1.1
million, and our annualized return on average assets would
have been 1.4% if not for our recognition during that period
of the one-time, non-recurring special assessment of
approximately $362,000 ($219,000 net of tax) to replenish the
Savings Association Insurance Fund ("SAIF") of the FDIC. See
"--Comparison of Operation Results for the Six Months ended
June 30, 1997 and 1996."
<PAGE>
o Origination of One- to Four-Family Loans. Our primary lending
activity is the origination of one- to four- family
residential loans secured by property in our primary market
area. As of June 30, 1997, more than 90% of the loans in this
category in our portfolio were secured by property located in
Montgomery County.
o Asset Quality. Due largely to our conservative loan
underwriting standards, we have been successful in maintaining
a high level of asset quality. At June 30, 1997, only
$203,000, or .24% of our total assets were included in
nonperforming assets. At the same date, $269,000, or .32% of
our total assets were delinquent more than 30 days but less
than 90 days. See "Business of Union Federal--Non-Performing
and Problem Assets."
o Capital Position. At June 30, 1997, we exceeded all of our
regulatory capital requirements, and our equity capital was
$14.5 million, or 17.2% of total assets. Assuming net proceeds
at the midpoint of the Estimated Valuation Range, our pro
forma equity to assets ratio (excluding $11.2 million of net
proceeds to be retained by the Holding Company) at such date
would have been 24.7%. Assuming net proceeds at the minimum,
maximum and 15% above the maximum of the Estimated Valuation
Range, our pro forma equity to assets ratio (excluding the
proceeds to be retained by the Holding Company) at such date
would have been 23.6%, 25.9% and 27.3%, respectively.
o Use of Proceeds. We assume that most of the Common Stock
purchased in the Conversion will be purchased with funds that
are not currently on deposit with us. Thus, the sale of the
Common Stock will significantly increase the amount of funds
available to us that we may invest. In order for us to invest
these funds in a prudent manner, we anticipate that in the
short term we will use most of the Conversion proceeds we
receive to invest in low-risk securities, such as Treasury
bills or other government obligations, and to repay a portion
of our advances from the FHLB-Indianapolis. In the long term,
we intend to invest the net conversion proceeds in mortgage
loans and in other assets that are consistent with our normal
investment activities, which we anticipate should improve our
net interest margin and have a positive impact on our
operations.
Asset/Liability Management
An important component of our asset/liability management policy
includes examining the interest rate sensitivity of our assets and liabilities
and monitoring the expected effects of interest rate changes on our net
portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk inherent in the historical business of savings associations,
the origination of long-term loans funded by short-term deposits, by pursuing
certain strategies designed to decrease the vulnerability of our earnings to
material and prolonged changes in interest rates.
Because of the lack of customer demand for adjustable rate loans in our
market area, we primarily originate fixed-rate real estate loans which accounted
for approximately 72% of our loan portfolio at June 30, 1997. To manage the
interest rate risk of this type of loan portfolio, we limit maturities of
fixed-rate loans to no more than 20 years. In addition, we continue to offer and
attempt to increase our volume of adjustable rate loans when market interest
rates make these type loans more attractive to customers. Following the
Conversion, we believe there will be sufficient demand in our market area to
continue our policy of emphasizing lending in the one- to four-family real
estate loan area. In addition, we hope to increase our non-residential mortgage,
consumer and commercial loan portfolios by modest amounts. There is no
assurance, however, that we will be able to do so. See "Business of Union
Federal Savings and Loan Association--Lending Activities."
<PAGE>
We believe it is critical to manage the relationship between interest
rates and the effect on our net portfolio value ("NPV"). This approach
calculates the difference between the present value of expected cash flows from
assets and the present value of expected cash flows from liabilities, as well as
cash flows from off-balance sheet contracts. We manage assets and liabilities
within the context of the marketplace, regulatory limitations and within limits
established by our Board of Directors on the amount of change in NPV which is
acceptable given certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As we do not meet
either of these requirements, we are not required to file Schedule CMR, although
we do so voluntarily. Under the regulation, associations which must file are
required to take a deduction (the interest rate risk capital component) from
their total capital available to calculate their risk based capital requirement
if their interest rate exposure is greater than "normal." The amount of that
deduction is one-half of the difference between (a) the institution's actual
calculated exposure to a 200 basis point interest rate increase or decrease
(whichever results in the greater pro forma decrease in NPV) and (b) its
"normal" level of exposure which is 2% of the present value of its assets.
Presented below, as of June 30, 1997, is an analysis performed by the
OTS of our interest rate risk as measured by changes in NPV for instantaneous
and sustained parallel shifts in the yield curve, in 100 basis point increments,
up and down 400 basis points. At June 30, 1997, 2% of the present value of our
assets was approximately $1.7 million. Because the interest rate risk of a 200
basis point increase in market rates (which was greater than the interest rate
risk of a 200 basis point decrease) was $3.8 million at June 30, 1997, we would
have been required to deduct $1.05 million from our total capital available to
calculate our risk based capital requirement if we had been subject to the OTS'
reporting requirements under this methodology. Our exposure to interest rate
risk results from the concentration of fixed rate mortgage loans in our
portfolio.
<TABLE>
<CAPTION>
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
+ 400 bp * $ 8,112 $(8,134) (50)% 10.62% (821)bp
+ 300 bp 10,243 (6,003) (37)% 12.97% (585)bp
+ 200 bp 12,427 (3,819) (24)% 15.23% (359)bp
+ 100 bp 14,425 (1,821) (11)% 17.17% (166)bp
0 bp 16,246 --- --- % 18.83% --- bp
- 100 bp 17,611 1,365 8% 19.19% 116bp
- 200 bp 18,299 2,053 13% 20.51% 168bp
- 300 bp 18,816 2,570 16% 20.86% 204bp
- 400 bp 19,667 3,422 21% 21.50% 268bp
</TABLE>
* Basis points (1 basis point equals .01%).
This chart illustrates, for example, that a 200 basis point (or 2%)
increase in interest rates would result in a $3.8 million (or 24%) decrease in
the net portfolio value of our assets. This hypothetical increase in interest
rates would also result in a 359 basis point (or 3.59%) decrease in the ratio of
the net portfolio value to the present value of our assets.
<PAGE>
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the methods of analysis presented above. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Average Balances and Interest Rates and Yields
The following tables present the balances and interest rates at June
30, 1997, and for the six-month periods ended June 30, 1997, and 1996, and the
years ended December 31, 1996, 1995 and 1994, the average monthly balances, of
each category of our interest-earning assets and interest-bearing liabilities,
and the interest earned or paid on such amounts. Our management believes that
the use of month-end average balances instead of daily average balances has not
caused any material difference in the information presented.
<TABLE>
<CAPTION>
At June 30, Six Months Ended June 30,
1997 1997 1996
------------------- Average Average Average Average
Balance Yield/Cost Balance Interest(1) Yield/Cost Balance Interest(1) Yield/Cost
------- ---------- ------- -------- ---------- ------- ----------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits.......... $ 2,220 5.60% $ 2,213 $ 50 4.52% $ 1,206 $ 40 6.63%
Mortgage-backed securities
held to maturity................. 2,424 8.41 2,583 111 8.59 3,241 139 8.58
Other investment securities
held to maturity................. 3,496 5.76 3,411 96 5.63 3,328 93 5.59
Loans receivable (2)............... 73,365 8.17 72,732 2,994 8.23 64,484 2,626 8.14
FHLB Stock......................... 708 7.76 644 25 7.76 571 22 7.71
----- ----- ----- ----- -----
Total interest-earning assets.... 82,213 8.00 81,583 3,276 8.03 72,830 2,920 8.02
------ -----
Non-interest earning assets, net of
allowance for loan losses ......... 2,078 2,042 2,180
----- ----- -----
Total assets..................... $ 84,291 $ 83,625 $ 75,010
======== ======== ========
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings deposits...................$ 3,821 4.00 $ 3,817 76 3.98 3,674 73 3.97
Interest-bearing demand............... 9,966 4.29 9,903 186 3.76 8,720 160 3.67
Certificates of deposit............ 47,882 5.84 47,666 1,392 5.84 45,528 1,359 5.97
FHLB advances...................... 5,873 5.76 5,956 169 5.67 1,483 35 4.72
----- ----- -----
Total interest-bearing liabilities 67,542 5.49 67,342 1,823 5.41 59,405 1,627 5.48
Other liabilities..................... 2,276 2,022 2,269
----- ----- -----
Total liabilities................ 69,818 69,364 61,674
Retained earnings..................... 14,473 14,261 13,336
------ ------ ------
Total liabilities and
retained earnings............ $ 84,291 $ 83,625 $ 75,010
======== ======== ========
Net interest-earning assets........... $ 14,285 $ 14,241 $ 13,425
======== ======== ========
Net interest income................... $1,453 $1,293
Interest rate spread (3).............. 2.51% 2.62% 2.54%
==== ==== ====
Net yield on weighted average
interest-earning assets (4)........ 3.56% 3.55%
Average interest-earning assets to
average interest-bearing liabilities 121.15 % 122.60 %
</TABLE>
<PAGE>
(1) Interest income on loans receivable includes loan fee income of $59,000 and
$51,000 for the six months ended June 30, 1997 and 1996, respectively.
(2) Total loans less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated. No net yield amount is presented at June 30,
1997, because the computation of net yield is applicable only over a period
rather than at a specific date.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
Average Average Average Average Average Average
Balance Interest (1)Yield/Cost BalanceInterest (1) Yield/Cost BalanceInterest (1)Yield/Cost
------------------------------ ------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Interest-earning deposits............$ 959 $ 67 6.99% $ 1,089 $ 71 6.52% $1,408 $ 61 4.33%
Mortgage-backed securities
held to maturity................... 3,061 263 8.59 3,777 321 8.50 4,553 390 8.57
Other investment securities
held to maturity................... 3,169 175 5.52 3,918 227 5.79 3,805 233 6.12
Loans receivable (2)................. 68,346 5,562 8.14 60,950 5,066 8.31 58,098 4,533 7.80
FHLB Stock........................... 576 45 7.81 562 44 7.83 547 32 5.85
Total interest-earning assets...... 76,111 6,112 8.03 70,296 5,729 8.15 68,411 5,249 7.67
Non-interest earning assets, net of
allowance for loan losses............ 2,152 2,391 2,463
Total assets.......................$78,263 $72,687 $70,874
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings deposits.....................$ 3,754 148 3.94 $ 3,650 146 4.00 $ 4,616 159 3.44
Interest-bearing demand.............. 9,061 369 4.07 8,594 385 4.48 10,122 364 3.60
Certificates of deposit.............. 46,035 2,716 5.90 43,597 2,505 5.75 40,713 1,925 4.73
FHLB advances........................ 3,566 191 5.36 1,857 112 6.03 1,261 59 4.68
Total interest-bearing liabilities. 62,416 3,424 5.49 57,698 3,148 5.46 56,712 2,507 4.42
Other liabilities....................... 2,303 2,333 2,640
Total liabilities.................. 64,719 60,031 59,352
Retained earnings....................... 13,544 12,656 11,522
Total liabilities and
retained earnings..............$78,263 $ 72,687 $ 70,874
Net interest-earning assets.............$13,695 $ 12,598 $ 11,699
Net interest income..................... $2,688 $2,581 $2,742
Interest rate spread (3)................ 2.54% 2.69% 3.25%
Net yield on weighted average
interest-earning assets (4).......... 3.53% 3.67% 4.01%
Average interest-earning assets to
average interest-bearing liabilities. 121.94% 121.83% 120.63%
</TABLE>
(1) Interest income on loans receivable includes loan fee income of $97,000,
$101,000 and $112,000 for the years ended December 31, 1996, 1995 and 1994.
(2) Total loans less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest
rate cost from weighted average interest rate yield for the period
indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated. No net yield amount is presented at June 30,
1997, because the computation of net yield is applicable only over a period
rather than at a specific date.
<PAGE>
Interest Rate Spread
Our results of operations have been determined primarily by net
interest income and, to a lesser extent, fee income, miscellaneous income and
general and administrative expenses. Our net interest income is determined by
the interest rate spread between the yields we earn on interest-earning assets
and the rates we pay on interest-bearing liabilities, and by the relative
amounts of interest-earning assets and interest-bearing liabilities.
The following table sets forth the weighted average effective interest
rate that we earned on our loan and investment portfolios, the weighted average
effective cost of our deposits and advances, the interest rate spread, and net
yield on weighted average interest-earning assets for the periods and as of the
dates shown. Average balances are based on average month-end balances. Our
management believes that the use of month-end average balances instead of daily
average balances has not caused any material difference in the information
presented.
<TABLE>
<CAPTION>
Six Months Ended
At June 30, June 30, Year Ended December 31,
1997 1997 1996 1996 1995 1994
-------------------------------------------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C> <C> <C>
Interest-earning deposits.................... 5.60% 4.52% 6.63% 6.99% 6.52% 4.33%
Mortgage-backed securities held to maturity.. 8.41 8.59 8.58 8.59 8.50 8.57
Other investment securities held to maturity. 5.76 5.63 5.59 5.52 5.79 6.12
Loans receivable............................. 8.17 8.23 8.14 8.14 8.31 7.80
FHLB stock................................... 7.76 7.76 7.71 7.81 7.83 5.85
Total interest-earning assets.............. 8.00 8.03 8.02 8.03 8.15 7.67
Weighted average interest rate cost of:
Savings deposits............................. 4.00 3.98 3.97 3.94 4.00 3.44
Interest-bearing demand...................... 4.29 3.76 3.67 4.07 4.48 3.60
Certificates of deposit...................... 5.84 5.84 5.97 5.90 5.75 4.73
FHLB advances................................ 5.76 5.67 4.72 5.36 6.03 4.68
Total interest-bearing liabilities......... 5.49 5.41 5.48 5.49 5.46 4.42
Interest rate spread (1)........................ 2.51 2.62 2.54 2.54 2.69 3.25
Net yield on weighted average
interest-earning assets (2).................. N/A 3.56 3.55 3.53 3.67 4.01
</TABLE>
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated. No net yield figure is presented at June
30, 1997 because the computation of net yield is applicable only over a
period rather than at a specific date.
<PAGE>
The following table describes the extent to which changes in interest rates
and changes in volume of interest-related assets and liabilities have affected
our interest income and expense during the periods indicated. For each category
of interest-earning asset and interest-bearing liability, information is
provided on changes attributable to (1) changes in rate (changes in rate
multiplied by prior period volume) and (2) changes in volume (changes in volume
multiplied by prior period rate). Changes attributable to both rate and volume
which cannot be segregated have been allocated proportionally to the change due
to volume and the change due to rate.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
Total
Due to Due to Net
Rate Volume Change
(In thousands)
<S> <C> <C> <C>
Six months ended June 30, 1997 compared
to six months ended June 30, 1996
Interest-earning assets:
Interest-earning deposits.................................. $ (34) $ 44 $10
Mortgage-backed securities held to maturity................ 1 (29) (28)
Other investment securities held to maturity............... 1 2 3
Loans receivable........................................... 29 339 368
FHLB stock................................................. 3 3
------ ---- -----
Total.................................................... (3) 359 356
------ ---- -----
Interest-bearing liabilities:
Savings deposits........................................... --- 3 3
Interest-bearing demand.................................... 4 22 26
Certificates of deposit.................................... (70) 103 33
FHLB advances.............................................. 8 126 134
------ ---- -----
Total.................................................... (58) 254 196
------ ---- -----
Net change in net interest income............................ $ 55 $105 $ 160
====== ==== =====
Year ended December 31, 1996 compared
to year ended December 31, 1995
Interest-earning assets:
Interest-earning deposits.................................. $ 5 $ (9) $ (4)
Mortgage-backed securities held to maturity................ 3 (61) (58)
Other investment securities held to maturity............... (10) (42) (52)
Loans receivable........................................... (108) 604 496
FHLB stock................................................. --- 1 1
------ ---- -----
Total.................................................... (110) 493 383
------ ---- -----
Interest-bearing liabilities:
Savings deposits........................................... (2) 4 2
Interest-bearing demand.................................... (36) 20 (16)
Certificates of deposit.................................... 68 143 211
FHLB advances.............................................. (14) 93 79
------ ---- -----
Total.................................................... 16 260 276
------ ---- -----
Net change in net interest income............................ $ (126) $233 $107
====== ==== =====
Year ended December 31, 1995 compared
to year ended December 31, 1994
Interest-earning assets:
Interest-earning deposits.................................. $ 26 $ (16) $ 10
Mortgage-backed securities held to maturity................ (3) (66) (69)
Other investment securities held to maturity............... (13) 7 (6)
Loans receivable........................................... 304 229 533
FHLB stock................................................. 11 1 12
------ ---- -----
Total.................................................... 325 155 480
------ ---- -----
Interest-bearing liabilities:
Savings deposits........................................... 23 (36) (13)
Interest-bearing demand.................................... 81 (60) 21
Certificates of deposit.................................... 436 144 580
FHLB advances.............................................. 20 33 53
------ ---- -----
Total.................................................... 560 81 641
------ ---- -----
Net change in net interest income............................ $(235) $ 74 $ (161)
====== ==== =====
</TABLE>
<PAGE>
Financial Condition at June 30, 1997 Compared to Financial Condition at December
31, 1996
Total assets increased $1.5 million, or 18.1% at June 30, 1997,
compared to December 31, 1996. The largest increases were primarily in cash and
cash equivalents which increased $793,000, or 54.1%, and net loans which
increased $470,000, or .6%. The increase in cash and cash equivalents was
principally in short-term interest-bearing deposits. Funds were retained in
short-term interest-bearing deposits to meet the liquidity demands of short-term
public funds deposits and to provide additional liquidity for Federal Home Loan
Bank ("FHLB") advances maturing in the third quarter of 1997. The increase in
net loans was principally in real estate mortgage loans, and a result of
increased customer demand. An increase of $1.6 million, or 2.7%, in deposits
funded this growth.
Average assets increased $5.3 million from $78.3 million for the period
ended December 31, 1996, to $83.6 million for the period ended June 30, 1997, an
increase of 6.8%. Average interest-earning assets represented 97.3% of average
assets for the period ended December 31, 1996 compared to 97.6% for the period
ended June 30, 1997. Although the average of most interest-earning assets
increased during the period ended June 1997, average loans experienced the
largest increase amounting to $4.4 million, or 6.4%, compared to the December
1996 period. The percentage of average interest-earning assets to average
interest-bearing liabilities was 121.9% for the period ended December 31, 1996
and 121.2% for the period ended June 30, 1997.
Average balances of mortgage-backed securities held to maturity
decreased $478,000, or 15.6%, from December 31, 1996 to June 30, 1997 as a
result of principal repayments, while other investment securities held to
maturity increased $242,000, or 7.6%, from $3.2 million for the period ended
December 31, 1996 to $3.4 million for the period ended June 30, 1997 due to
purchases. Although we have not purchased any mortgage-backed securities for
several years, mortgage-backed securities have been purchased on occasion and
are considered for purchase on an ongoing basis because such instruments offer
liquidity and lower credit risk than other types of investments. The primary
risk associated with these instruments is that in a declining interest rate
environment the prepayment level of the loans underlying these securities will
accelerate, which reduces the effective yield and exposes the association to
interest rate risk on the prepaid amounts. In an increasing rate environment,
the primary risk associated with these securities is that the fixed-rate portion
of such securities will not adjust to market rates which reduces our spread. See
"Business -- Lending Activities -- Mortgage-Backed Securities."
Loans and Allowance for Loan Losses. Average loans increased $4.4
million, or 6.4%, from the period ended December 31, 1996, to June 30, 1997. The
growth in loans was funded by increased average deposits of $2.5 million and
increased average FHLB advances of $2.4 million. Average loans were $68.3
million for the December 1996 period and $72.7 million for the June 1997 period.
The average rates on loans were 8.14% for the December, 1996 period and 8.23%
for the June 1997 period, an increase of 9 basis points. The allowance for loan
losses as a percentage of total loans increased from .22% to .27% due to an
increase in the allowance for loan losses from $159,000 at December 31, 1996 to
$198,000 at June 30, 1997. The increase in our allowance for loan losses was a
result of a $111,000 provision for loan losses for the period ending June 30,
1997 offset by a $72,000 of a charge-off taken during that same period . The
ratio of the allowance for loan losses to non-performing loans was 32.5% at
December 31, 1996 compared to 162.3% at June 30, 1997. Nonperforming loans
decreased from $489,000 at December 31, 1996 to $122,000 at June 30, 1997.
Nonperforming loans of $203,000 transferred to foreclosed real estate during the
period ended June 30, 1997 consisted of two loans secured by single-family
residences in the amounts of $36,000 and $45,000 and a loan secured by a
multi-family residence in the amount of $122,000. No losses are expected on the
two single-family residences as their current estimated fair value exceeds their
carrying amounts less estimated selling expense. We did chargeoff $72,000
relating to the multi-family loan at the time of the transfer to foreclosed real
estate. Although we consider this charge-off to be an isolated and unusual
occurrence based on our history of little or no loan losses, we increased the
risk factor used to calculate the necessary allowance for loan losses related to
loans secured by multi-family and commercial real estate. We have experienced
minimum residential loan losses in the past with no losses recorded in over five
years and do not expect our experience in this area to change in future years;
therefore, we have not adjusted the risk factor used on the residential loan
portfolio.
<PAGE>
Premises and Equipment. Premises and equipment decreased slightly from
December 31, 1996 to June 30, 1997 due to depreciation for the period exceeding
purchases. We have no branches and lease to other businesses a portion of our
main office and parking lot. See "Business -- Properties."
Deposits. Deposits increased $1.6 million to $62.1 million during the
period from December 31, 1996 to June 30, 1997, an increase of 2.6%. Increased
deposits were utilized to fund loan growth and resulted in an increase in cash
and short-term interest-bearing deposits. Interest-bearing demand and savings
deposits increased $792,000, or 5.9%, between December 31, 1996 and June 30,
1997. Certificates of deposits also increased $827,000, or 1.8%, during this
period. Average total deposits increased $2.5 million, or 4.2%, from $58.9
million for the period ended December 31, 1996 compared to $61.4 million for the
period ended June 30, 1997.
Borrowed Funds. Borrowed funds decreased $807,000, or 10.2%, from
December 31, 1996 to June 30, 1997. The decline in total borrowed funds was
comprised of a decrease in FHLB advances of $609,000, or 9.4%, and a decrease in
the note payable to Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited
partnership organized to build, own and operate a 48-unit apartment complex, of
$198,000, or 14.2%. The note to Pedcor was used to fund our investment in the
Pedcor low-income housing income tax credit limited partnership and bears no
interest so long as there exists no event of default. Average FHLB advances
increased to $6.0 million for the June 1997 period compared to $3.6 million for
the December 1996 period, an increase of $2.4 million, or 66.7%.
Retained Earnings. Retained earnings increased $563,000, or 4.1%, from
$13.9 million at December 31, 1996 to $14.5 million at June 30, 1997. The
increase was due to net income during the period.
Financial Condition at December 31, 1996 Compared to Financial Condition at
December 31, 1995
Total assets increased $9.2 million, or 12.4%, at December 31, 1996,
compared to December 31, 1995. The largest increase was in net loans which
increased $11.4 million, or 18.6%. This increase was funded in part by an
increase in deposits of $3.0 million, or 5.3%, and an increase in FHLB advances
of $5.4 million, or 508.6%. The increase in net loans of $11.4 million was
primarily in one-to-four family loans and resulted from a strong local demand
for residential financing.
Average assets increased from $72.7 million for the period ended
December 31, 1995, to $78.3 million for the period ended December 31, 1996, an
increase of $5.6 million, or 7.7%. Average interest-earning assets represented
97.3% of average assets for the period ended in 1996 compared to 96.7% for the
period ended in 1995. The increase in average earning assets was primarily in
the loan portfolio. Average interest-bearing assets as a percentage of average
interest-bearing liabilities was 121.9% and 121.8% for 1996 and 1995,
respectively.
Average balances of mortgage-backed securities held to maturity
decreased $716,000, or 19.0%, for the year ended December 31, 1996 as a result
of principal repayments, while other investment securities held to maturity
decreased $749,000, or 19.1%, from $3.9 million for the period ended December
31, 1995 to $3.2 million for the period ended December 31, 1996 due to
maturities.
Loans and Allowance for Loan Losses. The increase in our net loans of
$11.4 million, or 18.6% from December 31, 1995 to December 31, 1996 was
primarily in real estate mortgage loans. Average loans increased from $61.0
million to $68.3 million while the average rates earned on such loans decreased
17 basis points to 8.14%. The allowance for loan losses as a percentage of total
loans increased to 0.22% from 0.18% as a result of an increase in loans and no
charge-offs. The allowance for loan losses as a percentage non-performing loans
was 32.5% and 71.15% at December 31, 1996 and 1995 respectively. Non-performing
loans were $489,000 and $156,000 at each date, respectively. Included in
non-performing loans at December 31, 1996 was an impaired loan of $112,000. A
provision for loss of $37,000 had been recorded on this loan.
<PAGE>
Premises and Equipment. Premises and equipment decreased slightly from
December 31, 1995 to December 31, 1996 due to depreciation for the period
exceeding purchases.
Deposits. Deposits increased approximately $3.0 million, or 5.3%,
during the period ended December 31, 1996. Interest-bearing demand and savings
deposits increased $1.2 million, or 10.2%, while certificates of deposit
increased $1.8 million, or 3.9%. Average deposits increased $3.0 million, or
5.4%, during the period ended December 31, 1996. Average interest-bearing demand
and savings deposits increased $571,000, or 4.7% while certificates of deposits
increased $2.4 million, or 5.6%. Although we did not offer any special deposit
programs during 1996, we increased our deposits by offering rates that were
competitive with the rates offered by other institutions in the area. The rates
paid on interest-bearing demand and saving deposits decreased 41 and 6 basis
points, respectively, while the rate paid on certificates of deposits increased
15 basis points.
Borrowed Funds. The growth in loans was partially funded by the
increase in FHLB advances of $5.4 million, or 508.6% from December 31, 1995 to
December 31, 1996. We elected to utilize FHLB advances available at rates
comparable to the cost of acquiring local deposits to partially fund the
increase in loans. The majority of these FHLB advances matured in less than one
year. Average FHLB advances increased from $1.9 million at December 31, 1995 to
$3.6 million at December 31, 1996.
Retained Earnings. Retained earnings increased $886,000, or 6.8%, from
$13.0 million at December 31, 1995 to $13.9 million at December 31, 1996. The
increase was due to net income during the period.
Comparison of Operating Results For Six Months Ended June 30, 1997 and 1996
General. Net income increased $27,000, or 5.0%, from $536,000 for the
six months ended June 30, 1996 to $563,000 for the six months ended June 30,
1997. Net interest income after provision for losses on loans increased $73,000,
or 5.8%, for the 1997 period compared to the 1996. The increase in net interest
income after provision for loan losses more than offset the $37,000 decrease in
other income, the $5,000 increase in other expenses and the $4,000 increase in
income taxes. Annualized return on average assets was 1.35% and 1.43 % for the
six months ended June 30, 1997 and 1996, respectively.
Interest Income. Our total interest income was $3.3 million for the
1997 period compared to $2.9 million for the 1996 period. The increase in
interest income was due primarily to an increase in volume. Average earning
assets increased $8.8 million, or 12.1%, from $72.8 million for the 1996 period
compared to $81.6 for the 1997 period. The average yield on interest-earning
assets increased slightly from 8.02% for the six months ended June 30, 1996 to
8.03% for the comparable period in 1997.
Interest Expense. Interest expense increased $195,000, or 12.0%, for
the six month period ended June 30, 1997 compared to the 1996 period. Average
interest-bearing liabilities increased $7.9 million, or 13.4%, from $59.4
million for the 1996 period to $67.3 million during the 1997 period. The average
balance of each deposit type increased from the 1996 period to the 1997 period
with a $3.5 million, or 6.0%, increase in total average deposits. Average FHLB
advances increased $4.5 million, or 300.0%, from $1.5 million for the 1996
period to $6.0 million during the 1997 period. We continued to use FHLB advances
to partially fund loan growth.
Net Interest Income. Net interest income increased $160,000, or 12.4%,
for the 1997 period compared to the 1996 period. The increase was primarily due
to the $105,000 increase due to volume increases while the lower cost of
interest-bearing liabilities was primarily responsible for the $55,000 increase
due to rate. The interest spread was 2.62% for the six months ended June 30,
1997 compared to 2.54% for the comparable 1996 period.
Provision for Loan Losses. The provision for loan losses for the period
ended June 30, 1997 was $111,000 compared to $24,000 for the same period in
1996. We increased the provision for loan losses due to the increase in
outstanding loans and the losses recorded in 1997 associated with non-performing
loans secured by multi-family real estate. In response to the loss experienced
in 1997, we increased the risk factor used on multi-family and commercial real
estate loans.
<PAGE>
Other Income (Losses). Other income (losses) decreased $37,000 , or
63.8%, for the 1997 period compared to the 1996 period primarily due to
increased losses of $35,000 from our investment in a low-income housing income
tax credit limited partnership. Our investment in the limited partnership
represents a 99% equity in Pedcor. In addition to recording our equity in the
losses of Pedcor, we recorded the benefit of low income housing income tax
credits in the amount of $89,000 for both six-month periods.
Salaries and Employee Benefits. Salaries and employee benefits were
$252,000 for the six-month period ended June 30, 1997 compared to $230,000 for
the 1996 period, and increase of $22,000, or 9.6%. This increase resulted from
the addition of a full-time teller, bookkeeper and receptionist to our staff and
normal increases in employee compensation and related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy expenses increased
$4,000, or 33.3%, and equipment expenses increased $1,000, or 10.0%, during the
1997 period compared to the 1996 period.
Deposit Insurance Expense. Deposit insurance expense decreased $53,000,
or 81.5%, from $65,000 for the six months ended June 30, 1996 to $12,000 for the
same period in 1997. This decrease was due to the recapitalization of the
Savings Association Insurance Fund ("SAIF") which ultimately resulted in a
decline in our assessment. Prior to the recapitalization of SAIF, we paid an
assessment of $.23 per $100 of deposits. Subsequent to the recapitalization, the
assessment was reduced to $.0644 per $100 of deposits.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, professional fees,
supervisory examination fees, supplies, and postage increased $31,000, or 24.4%
for the 1997 period compared to the 1996 period. The increase resulted from
nominal increases in a variety of expense categories.
Income Tax Expense. Income tax expense increased $4,000, or 1.7%,
during the six months ended June 30, 1997 compared to the 1996 period. The
increase was directly related to the increase in taxable income for the period.
The effective tax rate was 29.4% and 30.1% for the respective 1997 and 1996
periods.
Comparison of Operating Results For Years Ended December 31, 1996, 1995, and
1994
General. Net income for the year ended December 31, 1996 decreased
$106,000, or 10.7%, to $886,000 compared to $992,000 for 1995. Net income for
1994 was $1,155,000, $163,000, or 14.1%, greater than the 1995 net income.
Return on average assets for the years ended December 31, 1996, 1995 and 1994
was 1.13%, 1.36% and 1.63%, respectively. Return on average equity was 6.54% for
1996, 7.84% for 1995 and 10.02% for 1994.
Interest Income. Total interest income was $6.1 million for 1996
compared to $5.7 million for 1995. Average earning assets increased $5.8
million, or 8.3%, from $70.3 million to $76.1 million from 1995 to 1996. Volume
increases, primarily from loans, accounted for $493,000 of the increase while
lower interest rates offset the increase by $110,000. Total interest income
increased $480,000, or 9.1%, from 1994 to 1995 due to an increase in the average
earning assets accompanied by an increase in the average yields. Average earning
assets increased $1.9 million, or 2.8%, during this period while the average
yield on earning assets increased 48 basis points to 8.15% from 7.67%. The
increase in average loans and the increased loan yield were the primary factors
contributing to these increases.
Interest Expense. Interest expense increased $276,000, or 8.8%, during
1996 compared to 1995. The increase in interest expense was primarily the result
of an increase in average interest-bearing liabilities of $4.7 million, or 8.1%,
from $57.7 million to $62.4 million. The growth in average interest-bearing
liabilities was primarily attributable to the growth in certificates of deposit
and FHLB advances. The average balance of certificates of deposit increased $2.4
million, or 5.6%, while average FHLB advances increased $1.7 million, or 92.0%.
We utilized the deposit growth and increased borrowings from the FHLB to fund
loan growth. Interest expense increased $641,000, or 25.6%, in 1995 compared to
1994 reflecting increases in interest rates of $560,000 and volume increases of
$81,000. The average cost of interest-bearing liabilities increased from 4.42%
in 1994 to 5.46% in 1995.
<PAGE>
Net Interest Income. Net interest income increased $107,000, or 4.1%,
from $2.6 million for 1995 to $2.7 million for 1996. Net interest income
decrease $161,000, or 5.9%, in 1995 from 1994. Our interest rate spread was
2.54%, 2.69% and 3.25% for 1996, 1995 and 1994, respectively.
Provision for Loan Losses. Our provision for loan losses for the year
ended December 31, 1996 was $48,000. The 1996 provision and the related increase
in the allowance for loan losses was considered adequate, based on growth, size,
condition and components of the loan portfolio. The provision of $24,000 for
both 1995 and 1994 reflected the more moderate growth of the loan portfolio.
Other Income (Losses). Other income (losses) increased $101,000, or
46.5%, from 1995 to 1996 primarily due to a decrease in losses of $76,000 from
our investment in a limited partnership. Other income (losses) decreased
$177,000 from 1994 to 1995 primarily due to increased losses of $195,000 from
our investment in the limited partnership.
Salaries and Employee Benefits. Salaries and employee benefits were
$461,000 for 1996 compared to $481,000 for 1995, a decrease of $20,000, or 4.2%.
This decrease was primarily a result of a $5,000 decrease in retirement plan
contributions and a $13,000 increase loan origination costs which are deferred
over the lives of the related loans. Salaries and employee benefits decreased
$8,000, or 1.6%, from 1994 to 1995.
Net Occupancy and Equipment Expenses. Occupancy expenses decreased
$27,000, or 40.9%, and equipment expenses remained constant during 1996 as
compared to 1995. The decrease in occupancy expenses was primarily attributable
to an additional $32,000 of repairs and maintenance expenses in 1995 as compared
to 1996. Occupancy expenses for 1994 were $22,000, or 50.0%, less than the 1995
expenses and equipment expenses were $3,000, or 17.6%, less than the 1995
expenses. Once again, additional repairs and maintenance expense was the primary
reason for the increase in 1995.
Deposit Insurance Expense. Deposit insurance expense increased
$368,000, or 289.8%, from $127,000 for 1995 to $495,000 for 1996 due to the one
time SAIF special assessment of approximately $362,000. Deposit insurance
expense for 1994 was $126,000, $1,000 less than the 1995 expense.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, professional fees,
supervisory examination fees, supplies, and postage decreased $41,000, or 12.5%,
from 1995 to 1996. The decrease resulted from decreases in a variety of expense
categories. Other expenses increased $120,000, or 57.7%, from 1994 to 1995. The
increase resulted from increases in a variety of expense categories and was not
attributable to any one item.
Income Tax Expense. Income tax expense increased $10,000, or 3.1%, from
1995 to 1996. Income tax expense decreased $313,000, or 49.0%, from 1994 to
1995. The decrease in 1995 was directly related to the decrease in taxable
income for the year and the increase in tax credits from $75,000 in 1994 to
$178,000 in 1995. The effective tax rate was 27.5%, 24.7% and 35.6% for 1996,
1995 and 1994, respectively.
Liquidity and Capital Resources
The following is a summary of our cash flows, which are of three major
types. Cash flows from operating activities consist primarily of net income
generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when we experience loan growth. Cash flows from financing activities include
savings deposits, withdrawals and maturities and changes in borrowings. The
following table summarizes cash flows for each of the six-month periods ended
June 30, 1997 and 1996 and each year in the three-year period ended December 31,
1996.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Operating activities........................ $ 934 $ 796 $ 1,088 $1,160 $941
------ -------- ------- ------- -------
Investing activities: $941
Investment securities
Proceeds from maturities and
paydowns of mortgage-backed
securities held to maturity............ 330 341 676 663 1,769
Purchases of other investment
securities held to maturity.......... (700) (494) (994) (100) (799)
Proceeds from maturities of other
investment securities
held to maturity..................... 200 1,500 2,000 --- 400
Purchase of loans...................... (500) (1,000) (1,350) (742) (1,523)
Proceeds from loan sales............... --- --- --- --- 171
Other net change in loans.............. (162) (5,687) (10,116) (502) (3,475)
Purchase of FHLB of
Indianapolis Stock................... (128) (18) (18) (1) (59)
Purchases of premises
and equipment........................ (7) --- (3) (38) (36)
------ -------- ------- ------- -------
Net cash used by
investing activities................. (967) (5,358) (9,805) (720) (3,552)
------ -------- ------- ------- -------
Financing activities:
Net change in
Interest-bearing
demand and savings deposits............ 791 635 1,243 (1,375) (572)
Certificates of deposits................. 827 476 1,786 3,896 382
Proceeds from borrowings................. 1,000 2,000 10,500 2,500 3,200
Repayment of borrowings.................. (1,807) (261) (5,261) (4,801) (67)
Net change in advances by borrowers
for taxes and insurance.............. 15 97 (79) 4 34
------ -------- ------- ------- -------
Net cash provided by financing
activities........................... 826 2,947 8,189 224 2,977
------ -------- ------- ------- -------
Net increase(decrease) in cash
and cash equivalents..................... $ 793 $ (1,615) $ (528) $ 664 $ 366
====== ======== ======= ======= =======
</TABLE>
<PAGE>
Federal regulations require FHLB-member savings associations to
maintain an average daily balance of liquid assets equal to a monthly average of
not less than a specified percentage of their net withdrawable savings deposits
plus short-term borrowings. Liquid assets include cash, certain time deposits,
certain bankers' acceptances, specified U.S. government, state or federal agency
obligations, certain corporate debt securities, commercial paper, certain mutual
funds, certain mortgage-related securities, and certain first lien residential
mortgage loans. This liquidity requirement may be changed from time-to-time by
the OTS to any amount within the range of 4% to 10%, and is currently 5%,
although the OTS has proposed a reduction of the percentage to 4%. Also, a
savings association currently must maintain short-term liquid assets
constituting at least 1% of its average daily balance of net withdrawable
deposit accounts and current borrowings, although the OTS has proposed
eliminating this requirement. Monetary penalties may be imposed for failure to
meet these liquidity requirements. As of June 30, 1997, we had liquid assets of
$5.5 million, and a regulatory liquidity ratio of 8.7%, of which 56% constituted
short-term investments. It is our belief that upon completion of the Conversion
our liquidity ratios will increase.
<PAGE>
Pursuant to OTS capital regulations, savings associations must
currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core
capital) requirement, and a total risk-based capital to risk-weighted assets
ratio of 8%. At June 30, 1997, our tangible capital ratio was 17.2%, our core
capital ratio was 17.2%, and our risk-based capital to risk-weighted assets
ratio was 34.6%. Therefore, at June 30, 1997, our capital levels exceeded all
applicable regulatory capital requirements currently in effect. The following
table provides the minimum regulatory capital requirements and our capital
ratios as of June 30, 1997:
<TABLE>
<CAPTION>
At June 30, 1997
OTS Requirement Union Federal's Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital.... 1.5% $1,264 17.2% $14,473 $13,209
Core capital (2).... 3.0 2,529 17.2 14,473 11,944
Risk-based capital.. 8.0 3,390 34.6 14,671 11,281
</TABLE>
(1) Tangible and core capital levels are shown as a percentage of total assets;
risk-based capital levels are shown as a percentage of risk-weighted
assets.
(2) The OTS has proposed and is expected to adopt a core capital requirement
for savings associations comparable to that recently adopted by the OCC for
national banks. The new regulation, as proposed, would require at least 3%
of total adjusted assets for savings associations that received the highest
supervisory rating for safety and soundness, and 4% to 5% for all other
savings associations. The final form of such new OTS core capital
requirement may differ from that which has been proposed. Union Federal
expects to be in compliance with such new requirements. See "Regulation --
Regulatory Capital."
For definitions of tangible capital, core capital and risk-based
capital, see "Regulation -- Savings Association Regulatory Capital."
As of June 30, 1997, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on our
liquidity, capital resources or results of operations.
Current Accounting Issues
In November 1993, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 93-6, "Employer's Accounting
for Employee Stock Ownership Plans." The SOP, among other things, changed the
measure of compensation expense recorded by employers from the cost of employee
stock ownership plan shares allocated to employees during the period to the fair
value of employee stock ownership plan shares allocated. Assuming the
acquisition of shares of stock by the ESOP, the application of SOP 93-6 is
likely to result in fluctuations in compensation expense due to changes in the
fair value of the stock.
In October, 1995, the FASB issued SFAS No. 123 entitled "Accounting for
Stock-Based Compensation." SFAS No. 123 establishes a fair value based method of
accounting and disclosing the amount of stock-based compensation paid to
employees. Historically, Accounting Principles Board ("APB") Opinion No. 25
"Accounting for Stock Issued to Employees" has measured compensation cost using
the method based on the award's intrinsic value. Those electing to remain with
the accounting in APB Opinion No. 25 must make pro forma disclosures of net
income and, when presented, earnings per share, as if the fair value based
method of accounting defined in SFAS 123 had been applied. The disclosure
provisions of SFAS No. 123 will be adopted by management upon completion of the
Conversion. We do not believe that adoption of SFAS No. 123 disclosure
provisions will have a material adverse effect on our consolidated financial
position or results of operations.
<PAGE>
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method provides that
the carrying amount of the financial assets transferred be allocated to
components of the transaction based on their relative fair values. Transactions
subject to the provisions of SFAS No. 125 include, among others, transfers
involving repurchase agreements, securitizations of financial assets, loan
participations and transfers of receivables with recourse. An entity that
undertakes an obligation to service financial assets recognizes either a
servicing asset or liability for the servicing contract. A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value. SFAS No.
125 provides that a liability is removed from the balance sheet only if the
debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor. SFAS No. 125 is
effective for applicable transactions occurring after December 31, 1996, and is
to be applied prospectively. Retroactive application is not permitted. We do not
believe that adoption of SFAS No. 125 will have a material adverse effect on our
financial position or results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share,
establishing standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock,
such as the shares issuable under our proposed stock option plan, as well as any
other entity that chooses to present EPS in its financial statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards. It
eliminates the presentation of primary EPS and requires presentation of basic
EPS (the principal difference being that common stock equivalents are not
considered in the computation of basic EPS). It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to that of fully
diluted EPS pursuant to Opinion No. 15. We do not expect the adoption of SFAS
No. 128 to have a material impact on our financial position or results of
operations.
The Statement is effective for our financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Statement requires restatement of all
prior-period EPS data presented.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, continuing the current requirements to
disclose certain information about an entity's capital structure found in APB
Opinion No. 10, Omnibus Opinion--1966, Opinion No. 15, and SFAS No. 47,
Disclosure of Long-Term Obligations. It consolidates specific disclosure
requirements from those standards. SFAS No. 129 is effective for our financial
statements issued for periods ending after December 15, 1997, including interim
periods. We do not expect the adoption of SFAS No. 129 to have a material impact
on our financial position or results of operations.
<PAGE>
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, establishing standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 will also require us to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
The Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. We do not expect the adoption of SFAS No.
130 to have a material impact on our financial condition or results of
operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, establishing standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries. This Statement does not apply to nonpublic business
enterprises or to not-for-profit organizations.
SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
This Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. This Statement also requires that a public business enterprise
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. We do not expect the adoption of SFAS No. 131 to
have a material impact on our financial condition or results of operations.
<PAGE>
Impact of Inflation
The consolidated financial statements presented herein have been prepared
in accordance with generally accepted accounting principles. These principles
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates have a more significant impact on our performance than the
effects of general levels of inflation. Interest rates, however, do not
necessarily move in the same direction or with the same magnitude as the price
of goods and services, since such prices are affected by inflation. In a period
of rapidly rising interest rates, the liquidity and maturities structures of our
assets and liabilities are critical to the maintenance of acceptable performance
levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that we have made. We are unable to determine the extent, if any,
to which properties securing our loans have appreciated in dollar value due to
inflation.
BUSINESS OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
General
We were organized as a state-chartered savings and loan association in
1913. Since then, we have conducted our business from our full-service office
located in Crawfordsville, Indiana. Our principal business consists of
attracting deposits from the general public and originating fixed-rate and
adjustable-rate loans secured primarily by first mortgage liens on one- to
four-family residential real estate. Our deposit accounts are insured up to
applicable limits by the SAIF of the FDIC.
We believe that we have developed a solid reputation among our loyal
customer base because of our commitment to personal service and because of
strong support of the local community. We offer a number of financial services,
including: (i) residential real estate loans; (ii) multi-family loans; (iii)
commercial real estate loans; (iv) construction loans; (v) home improvement
loans (vi) money market demand accounts ("MMDAs") (vii) passbook savings
accounts; and (viii) certificates of deposit.
Lending Activities
We have historically concentrated our lending activities on the
origination of loans secured by first mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
our loan origination activities, representing 77.9% of our total loan portfolio
at June 30, 1997. We also offer multi-family mortgage loans, commercial real
estate loans, construction loans, and, to a limited extent, consumer loans
consisting of loans secured by deposits and home improvement loans. Mortgage
loans secured by multi-family properties and commercial real estate totaled
approximately 13.6% and 4.7%, respectively, of our total loan portfolio at June
30, 1997. Construction loans totaled approximately 3.7% of our total loans as of
June 30, 1997. Consumer loans, which consist of home improvement loans and
passbook loans, constituted approximately .2% of our total loan portfolio at
June 30, 1997.
<PAGE>
Loan Portfolio Data. The following table sets forth the composition of our
loan portfolio by loan type and security type as of the dates indicated,
including a reconciliation of gross loans receivable after consideration of the
allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996 1995 1994 1993 1992
----------------- --------------- --------------- ---------------- --------------- ---------------
Percent Percent Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
-----------------------------------------------------------------------------------------------------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One-to-four-family........ $58,664 77.90% $57,031 77.46% $48,295 76.64% $47,299 76.44% $45,258 80.20% $38,819 81.38%
Multi-family.............. 10,212 13.56 10,920 14.83 9,617 15.26 8,641 13.96 6,651 11.79 4,309 9.03
Commercial................ 3,513 4.66 3,593 4.88 2,814 4.46 3,000 4.85 3,079 5.45 2,565 5.38
Real estate construction
loan.................... 2,782 3.69 1,740 2.36 2,107 3.34 2,748 4.44 1,286 2.28 1,748 3.66
Consumer loans: ............. 143 .19 346 .47 191 .30 192 .31 156 .28 260 .55
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.. $75,314 100.00% $73,630 100.00% $63,024 100.00% $61,880 100.00% $56,430 100.00% $47,701 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family
real estate............. $60,936 80.91% $58,271 79.14% $49,762 78.96% $48,225 77.93% $45,719 81.02% $39,034 81.83%
Multi-family real estate.. 10,812 14.36 11,520 15.65 10,367 16.45 10,319 16.68 7,331 12.99 5,305 11.12
Commercial real estate.... 3,513 4.66 3,593 4.88 2,814 4.46 3,236 5.23 3,315 5.87 3,210 6.73
Deposits.................. 53 .07 246 .33 81 .13 100 .16 65 .12 152 .32
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Gross loans receivable.. $75,314 100.00% $73,630 100.00% $63,024 100.00% $61,880 100.00% $56,430 100.00% $47,701 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
Deduct:
Allowance for loan losses.... 198 .26 159 .22 111 .18 87 .14 63 .11 48 .10
Deferred loan fees........... 329 .44 356 .48 379 .60 405 .65 378 .67 227 .48
Loans in process............. 1,620 2.15 418 .57 1,255 1.99 1,329 2.15 733 1.30 643 1.35
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Net loans receivable...... $73,167 97.15% $72,697 98.73% $61,279 97.23% $60,059 97.06% $55,256 97.92% $46,783 98.07%
Mortgage Loans:
Adjustable-rate........... $21,282 28.31% $24,238 33.07% $27,057 43.06% $26,601 43.12% $22,220 39.49% $17,348 36.57%
Fixed-rate................ 53,889 71.69 49,046 66.93 35,776 56.94 35,087 56.88 34,054 60.51 30,093 63.43
------- ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- ------
Total................... $75,171 100.00% $73,284 100.00% $62,833 100.00% $61,688 100.00% $56,274 100.00% $47,441 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31, 1996,
regarding the dollar amount of loans maturing in our loan portfolio based on the
contractual terms to maturity. Demand loans having no stated schedule of
repayments and no stated maturity are reported as due in one year or less. This
schedule does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses. We expect that prepayments will cause actual maturities to
be shorter.
<PAGE>
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2000 2002 2007 2012
December 31, to to to and
1996 1997 1998 1999 2001 2006 2011 following
------- ------ ---- ----- ------ ------- ------- -------
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans.................. $57,031 $ 194 $435 $ 277 $ 936 $13,554 $22,985 $18,650
Multi-family loans.................... 10,920 --- 4 --- 480 3,398 6,163 875
Commercial loans................... 3,593 5 --- --- 23 1,473 1,204 888
Construction loans.................... 1,740 600 321 --- --- 306 98 415
Loans secured by deposits............. 246 246 --- --- --- --- --- ---
Home improvement loans................ 100 3 14 11 38 34 --- ---
------- ------ ---- ----- ------ ------- ------- -------
Total............................ $73,630 $1,048 $774 $ 288 $1,477 $18,765 $30,450 $20,828
======= ====== ==== ===== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1996, the dollar
amount of all loans due after one year that have fixed interest rates and
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1997
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans............. $40,914 $15,923 $56,837
Multi-family loans............ 5,699 5,221 10,920
Commercial loans.............. 1,405 2,183 3,588
Construction loans............... 993 147 1,140
Installment loans................ --- --- ---
Loans secured by deposits........ --- --- ---
Home improvement loans........... 97 --- 97
------- ------- -------
Total......................... $49,108 $23,474 $72,582
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally do not
originate one- to four-family residential mortgage loans if the ratio of the
loan amount to the lesser of the current cost or appraised value of the property
(the "Loan-to-Value Ratio") exceeds 95%. We require private mortgage insurance
on loans with a Loan-to-Value Ratio in excess of 80%. The cost of such insurance
is factored into the annual percentage rate on such loans. We originate and
retain fixed rate loans which provide for the payment of principal and interest
over a 15- or 20-year period, or balloon loans having terms of up to 15 years
with principal and interest payments calculated using a 30-year amortization
period.
We also offer adjustable-rate mortgage ("ARM") loans. The interest rate
on ARM loans is indexed to the one-year U.S. Treasury securities yields adjusted
to a constant maturity. We may offer discounted initial interest rates on ARM
loans, but we require that the borrower qualify for the ARM loan at the
fully-indexed rate (the index rate plus the margin). A substantial portion of
the ARM loans in our portfolio at June 30, 1997 provide for maximum rate
adjustments per year and over the life of the loan of 1% and 5%, respectively.
Our residential ARMs are amortized for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates
by periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At June 30, 1997, approximately 28.3%
of our one- to four-family residential loans had adjustable rates of interest.
<PAGE>
All of the one- to four-family residential mortgage loans that we
originate include "due-on-sale" clauses, which give us the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid. However, we occasionally permit assumptions
of existing residential mortgage loans on a case-by-case basis.
At June 30, 1997, approximately $58.7 million, or 77.9% of our
portfolio of loans, consisted of one- to four-family residential loans.
Approximately $122,000, or .21% of total residential loans, were included in
non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At June 30, 1997, approximately $10.2 million, or
13.6% of our total loan portfolio, consisted of mortgage loans secured by
multi-family dwellings (those consisting of more than four units). Our
multi-family loans are generally written as one-year adjustable rate loans
indexed to the one-year U.S. Treasury rate with an original term of up to 20
years. We write multi-family loans with maximum Loan-to-Value ratios of 80%. Our
largest multi-family loan as of June 30, 1997 had a balance of approximately
$1.1 million and was secured by 28 duplexes located in Crawfordsville, Indiana.
On the same date, none of our multi-family loans were included in non-performing
assets.
Multi-family loans, like commercial real estate loans, involve a
greater risk than do residential loans. See "-- Commercial Real Estate Loans"
below.
Commercial Real Estate Loans. Our commercial real estate loans are
secured by churches, office buildings, and other commercial properties. We
generally originate commercial real estate loans as one-year adjustable rate
loans indexed to the one-year U.S. Treasury securities yield adjusted to a
constant maturity, and are written for maximum terms of 20 years with maximum
Loan-to-Value ratios of 80%. At June 30, 1997, our largest commercial loan had
an outstanding balance of $500,000 and was secured by a nursing home in
Richmond, Indiana. At June 30, 1997, approximately $3.5 million, or 4.7% of our
total loan portfolio, consisted of commercial real estate loans. On the same
date, there were no commercial real estate loans included in non-performing
assets.
Loans secured by commercial real estate generally are larger than one-
to four-family residential loans and involve a greater degree of risk.
Commercial real estate loans often involve large loan balances to single
borrowers or groups of related borrowers. Payments on these loans depend to a
large degree on results of operations and management of the properties and may
be affected to a greater extent by adverse conditions in the real estate market
or the economy in general. Accordingly, the nature of the loans makes them more
difficult for management to monitor and evaluate.
Construction Loans. We offer construction loans with respect to
residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). We provide construction
loans only to borrowers who commit to permanent financing with us on the
finished project. At June 30, 1997, approximately $2.8 million, or 3.7% of our
total loan portfolio, consisted of construction loans. The largest construction
loan had a balance of $600,000 on June 30, 1997 and was secured by a condominium
project and golf course in Pittsboro. None of our construction loans were
included in non-performing assets on that date.
Construction loans generally match the term of the construction
contract and are written as fixed-rate loans with interest calculated on the
amount disbursed under the loan and payable monthly. The maximum Loan-to-Value
Ratio for a construction loan is based upon the nature of the construction
project. For example, a construction loan for a one- to four-family residence
may be written with a maximum Loan-to-Value Ratio of 95%, while a construction
loan for a multi-family project may be written with a maximum Loan-to-Value
Ratio of 80%. Inspections are made prior to any disbursement under a
construction loan, and we do not normally charge commitment fees for
construction loans.
<PAGE>
While providing us with a comparable, and in some cases higher, yield
than conventional mortgage loans, construction loans involve a higher level of
risk. For example, if a project is not completed and the borrower defaults, we
may have to hire another contractor to complete the project at a higher cost.
Also, a project may be completed, but may not be salable, resulting in the
borrower defaulting and our taking title to the project.
Consumer Loans. Our consumer loans, consisting of passbook loans and
home improvement loans, aggregated approximately $143,000 at June 30, 1997, or
.2% of our total loan portfolio. Our home improvement loans generally have a
fixed rate and a term of up to seven years. Our passbook loans are made up to
90% of the deposit account balance and, at June 30, 1997, accrued at a rate of
8.6%. This rate may change but will always be at least 3% over the underlying
passbook or certificate of deposit rate. Interest on loans secured by deposits
is paid semi-annually. At June 30, 1997, none of our consumer loans were
included in non-performing assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. We historically have
originated our mortgage loans pursuant to our own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In
the event that we begin originating fixed-rate residential mortgage loans for
sale to the FHLMC in the secondary market, such loans will be originated in
accordance with the guidelines established by the FHLMC and will be sold
promptly after they are originated. We have no intention to originate loans for
sale to the FHLMC at this time, however.
We confine our loan origination activities primarily to Montgomery
County and the surrounding counties of Boone, Hendricks, Putnam, Parke and
Fountain. We have also originated several loans in Marion County. At June 30,
1997, we also had seven loans which we originated, totaling approximately
$740,000, secured by property located outside of Indiana. Our loan originations
are generated from referrals from existing customers, real estate brokers, and
newspaper and periodical advertising. Loan applications are underwritten and
processed at our office.
Our loan approval process is intended to assess the borrower's ability
to repay the loan, the viability of the loan and the adequacy of the value of
the property that will secure the loan. To assess the borrower's ability to
repay, we study the employment and credit history and information on the
historical and projected income and expenses of our mortgagors. All mortgage
loans are approved or ratified by our board of directors.
We generally require appraisals on all real property securing our loans
and require an attorney's opinion and a valid lien on the mortgaged real estate.
Appraisals for all real property securing mortgage loans are performed by
independent appraisers who are state-licensed. We require fire and extended
coverage insurance in amounts at least equal to the principal amount of the loan
and also require flood insurance to protect the property securing our interest
if the property is in a flood plain. We also generally require private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%. We require escrow accounts for insurance premiums and taxes
for loans that require private mortgage insurance.
Our underwriting standards for consumer loans are intended to protect
against some of the risks inherent in making consumer loans. Borrower character,
paying habits and financial strengths are important considerations.
We occasionally purchase participation interests in loans originated by
other financial institutions in order to diversify our portfolio, supplement
local loan demand and to obtain more favorable yields. The participations that
we purchase normally represent a portion of residential or commercial real
estate loans originated by other Indiana financial institutions, most of which
are secured by property located in Indiana. As of June 30, 1997, we held in our
loan portfolio participations in mortgage loans aggregating $6.7 million that we
purchased, all of which were serviced by others. Included within this amount
were participations in the aggregate amount of $746,000 which were secured by
property located outside of Indiana. The largest participation loan in our
portfolio at June 30, 1997 was a $600,000 interest in a loan secured by a
condominium project and golf course located in Pittsboro, Indiana.
<PAGE>
The following table shows our loan origination and repayment activity
during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Gross loans receivable
at beginning of period.......................... $73,630 $63,024 $63,024 $61,880 $56,430
------- ------- ------- ------- -------
Loans Originated:
Real estate mortgage loans:
One-to-four family loans.................... 8,112 10,325 19,332 9,655 12,373
Multi-family loans.......................... 304 1,532 1,532 --- 2,889
Commercial loans............................ 13 45 45 139 361
Construction loans............................ 1,953 1,507 2,220 2,135 2,513
Loans secured by deposits..................... 42 116 322 95 153
Home improvement loans........................ 50 23 36 50 69
------- ------- ------- ------- -------
Total originations........................ 10,474 13,548 23,487 12,074 18,358
Purchases (sales) of participation loans, net...... 500 1,000 1,350 742 1,352
Reductions:
Principal loan repayments..................... 9,087 7,636 14,211 11,672 14,260
Transfers from loans to real estate owned..... 203 20 20 --- ---
------- ------- ------- ------- -------
Total reductions.......................... 9,290 7,656 14,231 11,672 14,260
------- ------- ------- ------- -------
Total gross loans receivable at
end of period................................... $75,314 $69,916 $73,630 $63,024 $61,880
======= ======= ======= ======= =======
</TABLE>
Our residential loan originations during the year ended December 31,
1996 totaled $19.3 million, compared to $9.7 million and $12.4 million in the
years ended December 31, 1995 and 1994, respectively.
Origination and Other Fees. We realize income from late charges,
checking account service charges, and fees for other miscellaneous services. We
currently charge a commitment fee of $200 on all loans and an additional $500
origination fee on construction loans. We also may charge points on a mortgage
loan as consideration for a lower interest rate, although we do so infrequently.
Late charges are generally assessed if payment is not received within a
specified number of days after it is due. The grace period depends on the
individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 30 days past due, we deliver a
delinquency notice to the borrower. When loans are 30 to 60 days in default, we
send additional delinquency notices and make personal contact by telephone with
the borrower to establish acceptable repayment schedules. When loans become 60
days in default, we again contact the borrower, this time in person, to
establish acceptable repayment schedules. When a mortgage loan is 90 days
delinquent, we will have either entered into a workout plan with the borrower or
referred the matter to our attorney for collection. Management is authorized to
commence foreclosure proceedings for any loan upon making a determination that
it is prudent to do so.
We review mortgage loans on a regular basis and place such loans on a
non-accrual status when they become 90 days delinquent. Generally, when loans
are placed on a non-accrual status, unpaid accrued interest is written off, and
further income is recognized only to the extent received.
Non-performing Assets. At June 30, 1997, $203,000, or .24% of our total
assets, were non-performing (non-performing loans and non-accruing loans)
compared to $489,000, or .59%, of our total assets at December 31, 1996. At June
30, 1997, residential loans accounted for $122,000 of our non-performing assets.
We had real estate owned ("REO") properties in the amount of $81,000 as of June
30, 1997.
<PAGE>
The table below sets forth the amounts and categories of our
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is our policy that all earned
but uncollected interest on all loans be reviewed monthly to determine if any
portion thereof should be classified as uncollectible for any loan past due in
excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C> <C>
Non-performing loans.................. $122 $ 489 $ 156 $ 143
Foreclosed real estate................ 81 --- --- ---
--
Total non-performing assets......... $203 $489 $ 156 $ 143
==== ==== ===== =====
Non-performing loans to total loans...... .17% .67% .25% .24%
==== ==== ===== =====
Non-performing assets to total assets.... .24% .59% .21% .20%
==== ==== ===== =====
</TABLE>
Interest income of $3,000, $10,000, $14,000 and $14,000 for the six
months ended June 30, 1997 and the years ended December 31, 1996, 1995 and 1994,
respectively, was recognized on the non-performing loans summarized above.
Interest income of $6,000, $33,000, $17,000 and $15,000 for the six months ended
June 30, 1997 and the years ended December 31, 1996, 1995, and 1994,
respectively, would have been recognized under their original loan terms.
At June 30, 1997, we held loans delinquent from 30 to 89 days totaling
approximately $269,000. Other than these loans and the other delinquent loans
disclosed elsewhere in this section, we were not aware of any other loans, the
borrowers of which were experiencing financial difficulties.
<PAGE>
Delinquent Loans. The following table sets forth certain information at
June 30, 1997, and at December 31, 1996, 1995, and 1994, relating to
delinquencies in our portfolio. Delinquent loans that are 90 days or more past
due are considered non-performing assets.
<TABLE>
<CAPTION>
At June 30, 1997 At December 31, 1996
------------------------------------- -----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
-------------------- ----------------- ------------------- ----------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number
of Loans of Loans of Loansof Loans of Loans of Loansof Loans of Loans
(Dollars in thousands)
One- to four-
<S> <C> <C> <C> <C> <C> <C> <C> <C>
family loans............ 6 $264 6 $122 7 $226 8 $377
Commercial
real estate loans....... --- --- --- --- --- --- --- ---
Multi-family
loans................... --- --- --- --- --- --- 1 112
Loans secured
by deposits............. --- --- --- --- --- --- --- ---
Home improvement loans..... 1 5 --- --- --- --- --- ---
- ---- - ---- - ---- - ----
Total................... 7 $269 6 $122 7 $226 9 $489
= ==== = ==== = ==== = ====
Delinquent loans to
total loans............. .53% .98%
=== ===
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994
------------------------------------- -----------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------ ------------------ ---------------- ------------------
Principal Principal Principal Principal
Balance Number Balance Number Balance Number Balance Number
of Loans of Loansof Loans of Loans of Loans of Loans of Loans of Loans
One- to four-
<S> <C> <C> <C> <C> <C> <C> <C> <C>
family loans............ 9 $280 7 $153 6 $171 5 $140
Commercial
real estate loans....... --- --- --- --- --- --- --- ---
Multi-family
loans................... 1 109 --- --- --- --- --- ---
Loans secured
by deposits............. --- --- --- --- --- --- --- ---
Home improvement loans..... --- --- 1 3 --- --- 1 3
-- ---- - ---- - ---- - ----
Total................... 10 $389 8 $156 6 $171 6 $143
== ==== = ==== = ==== = ====
Delinquent loans to
total loans............. .89% .52%
=== ===
</TABLE>
<PAGE>
Classified assets. Federal regulations and our Asset Classification
Policy provide for the classification of loans and other assets such as debt and
equity securities considered by the OTS to be of lesser quality as
"substandard," "doubtful" or "loss" assets. An asset is considered "substandard"
if it is inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets include
those characterized by the "distinct possibility" that the institution will
sustain "some loss" if the deficiencies are not corrected. Assets classified as
"doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At June 30, 1997, the aggregate amount of our classified assets, and of
our general and specific loss allowances were as follows:
At June 30, 1997
(Unaudited)
(In thousands)
Substandard assets........................................ $203
Doubtful assets........................................... ---
Loss assets............................................... ---
Total classified assets............................... $203
General loss allowances................................... $198
Specific loss allowances.................................. ---
Total allowances...................................... $198
We regularly review our loan portfolio to determine whether any loans
require classification in accordance with applicable regulations. All of our
classified assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for
loan losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with our review and evaluation of current economic
conditions (including those of our lending area), changes in the character and
size of the loan portfolio, loan delinquencies (current status as well as past
and anticipated trends) and adequacy of collateral securing loan delinquencies,
historical and estimated net charge-offs, and other pertinent information
derived from a review of the loan portfolio. In our opinion, our allowance for
loan losses is adequate to absorb probable losses inherent in the loan portfolio
at June 30, 1997. However, there can be no assurance that regulators, when
reviewing our loan portfolio in the future, will not require increases in our
allowances for loan losses or that changes in economic conditions will not
adversely affect our loan portfolio.
<PAGE>
Summary of Loan Loss Experience. The following table analyzes changes
in the allowance during the past three fiscal years ended December 31, 1996, and
the six-month periods ended June 30, 1997, and June 30, 1996.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period.............. $159 $ 111 $111 $ 87 $63
Gross charge-offs - Multi-family loans...... (72)
Provision for losses on loans............... 111 24 48 24 24
---- ---- ---- ---- ---
Balance end of period.................... $198 $135 $159 $111 $87
==== ==== ==== ==== ===
Allowance for loan losses as a percent of
total loans outstanding.................. .27% .20% .22% .18% .15%
Ratio of net charge-offs to average
loans outstanding........................ .10 --- --- --- ---
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents
an analysis of the allocation of our allowance for loan losses at the dates
indicated. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict our
use of the allowance to absorb losses in other categories.
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996 1996 1995 1994
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
in each in each in each in each in each
category category category category category
to total total to total to total total
Amount loans Amount loans Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of
period applicable to:
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential............... $65 77.90% $50 75.82% $60 77.46% $57 76.64% $43 76.44%
Commercial................ 28 4.66 10 4.64 13 4.88 11 4.46 9 4.85
Multi-family.............. 82 13.56 71 15.62 75 14.83 39 15.26 28 13.96
Construction loans.......... 7 3.69 4 3.53 11 2.36 4 3.34 7 4.44
Loans secured by deposits... .07 .16 .33 .13 .16
Home improvement loans...... .12 .23 .14 .17 .15
Unallocated................. 16
---- ------ ---- ------ ---- ------ ---- ------ --- ------
Total....................... $198 100.00% $135 100.00% $159 100.00% $111 100.00% $87 100.00%
==== ====== ==== ====== ==== ====== ==== ====== === ======
</TABLE>
Investments
Investments. Our investment portfolio consists of U.S. Treasury and federal
agency securities, FHLB stock and an investment in Pedcor Investments - 1993 -
XVI, L.P. See "--Service Corporation Subsidiary." At June 30, 1997,
approximately $7.8 million, or 9.3%, of our total assets consisted of such
investments. We also had $2.2 million in interest-earning deposits as of that
date.
<PAGE>
The following table sets forth the amortized cost and the market value
of our investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996 1995 1994
Amortized Market Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value Cost Value
(Unaudited) (In thousands)
Investment securities held to maturity:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 350 $ 349 $ 350 $ 348 $1,050 $1,051 $ 1,056 $1,023
Federal agencies.................... 3,146 3,122 2,645 2,611 2,950 2,944 2,850 2,688
Mortgage-backed securities.......... 2,424 2,597 2,752 2,933 3,423 3,668 4,079 4,138
Total investment securities
held to maturity................ $5,920 $6,068 $5,747 $5,892 $7,423 $7,663 $ 7,985 $7,849
Investment in limited partnership...... 1,220 (1) 1,334 (1) 1,506 (1) 1,756 (1)
FHLB stock (2)......................... 708 708 580 580 563 563 562 562
------ ------ ------ -------
Total investments...................... $7,848 $7,661 $9,492 $10,303
====== ====== ====== =======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the FHLB
of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, FHLB stock and investment in limited
partnership) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at June 30, 1997.
<TABLE>
<CAPTION>
Amount at June 30, 1997 which matures in
One Year One Year Five Years
or Less to Five Years to Ten Years
------------------ ------------------ -------------------
Amortized Average Amoritzed Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities..... $350 5.14% $ --- ---% $ --- ---%
Federal agency securities.... 500 5.02 2,346 5.85 300 7.03
---- ------ ----
$850 5.07% $2,346 5.85% $300 7.03%
==== ====== ====
</TABLE>
<PAGE>
Mortgage-backed Securities
The following table sets forth the composition of our mortgage-backed
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
June 30, -----------------------------------------------------------------------------------
1997 1996 1995 1994
--------------------------- -------------------------- ------------------------- --------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value Cost of Total Value
------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------
Governmental
National Mortgage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Corporation..... $1,307 53.9% $1,425 $1,391 50.5% $1,511 $1,707 49.9% $1,856 $2,009 49.2% $2,066
Federal Home
Loan Mortgage
Corporation..... 818 33.8 877 1,039 37.8 1,103 1,338 39.1 1,431 1,651 40.5 1,675
Federal National
Mortgage
Corporation..... 274 11.3 270 294 10.7 291 341 9.9 343 375 9.2 355
Other.............. 25 1.0 25 28 1.0 28 37 1.1 38 44 1.1 42
------ ----- ------ ------ ----- ------ ------ ----- ------ ------ ----- ------
Total mortgage-
backed
securities...... $2,424 100.0% $2,597 $2,752 100.0% $2,933 $3,423 100.0% $3,668 $4,079 100.0% $4,138
====== ===== ====== ====== ===== ====== ====== ===== ====== ====== ===== ======
</TABLE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1996.
<TABLE>
<CAPTION>
Amount at December 31, 1996 which matures in
One Year One Year to After
or Less Five Years Five Years
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities...................... $177 7.70% $422 8.05% $2,153 8.50%
==== ==== ==== ==== ====== ====
</TABLE>
The following table sets forth the changes in the Union Federal's
mortgage-backed securities portfolio for the six-month periods ended June 30,
1997 and 1996 and for the years ended December 31, 1995, 1994 and 1993.
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30, December 31,
1997 1996 1996 1995 1994
--------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance..... $2,752 $3,423 $3,423 $4,079 $5,841
Repayments/sales...... (330) (341) (676) (663) (1,769)
Premium and discount
amortization, net.. 2 2 5 7 7
------ ------ ------ ------ ------
Ending balance........ $2,424 $3,084 $2,752 $3,423 $4,079
====== ====== ====== ====== ======
</TABLE>
<PAGE>
Sources of Funds
General. Deposits have traditionally been our primary source of funds
for use in lending and investment activities. In addition to deposits, we derive
funds from scheduled loan payments, investment maturities, loan prepayments,
retained earnings, income on earning assets and borrowings. While scheduled loan
payments and income on earning assets are relatively stable sources of funds,
deposit inflows and outflows can vary widely and are influenced by prevailing
interest rates, market conditions and levels of competition. Borrowings from the
FHLB of Indianapolis may be used in the short-term to compensate for reductions
in deposits or deposit inflows at less than projected levels.
Deposits. We attract deposits principally from within Montgomery County
through the offering of a broad selection of deposit instruments, including
fixed-rate passbook accounts, NOW accounts, variable rate money market accounts,
fixed-term certificates of deposit, individual retirement accounts and savings
accounts. We do not actively solicit or advertise for deposits outside of
Montgomery County, and substantially all of our depositors are residents of that
county. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate.
We do not pay broker fees for any deposits we receive.
We establish the interest rates paid, maturity terms, service fees and
withdrawal penalties on a periodic basis. Determination of rates and terms are
predicated on funds acquisition and liquidity requirements, rates paid by
competitors, growth goals, and applicable regulations. We rely, in part, on
customer service and long-standing relationships with customers to attract and
retain our deposits. We also closely price our deposits to the rates offered by
our competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. We manage
the pricing of our deposits in keeping with our asset/liability management and
profitability objectives. Based on our experience, we believe that our passbook,
NOW and MMDAs are relatively stable sources of deposits. However, the ability to
attract and maintain certificates of deposit, and the rates we pay on these
deposits, have been and will continue to be significantly affected by market
conditions.
<PAGE>
An analysis of our deposit accounts by type, maturity, and rate at June
30, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening June 30, % of Average
Type of Account Balance 1997 Deposits Rate
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Fixed rate, passbook accounts.............................. $ 10 $ 3,821 6.16% 4.00%
Variable rate, money market................................ 10 9,212 14.84 4.58
NOW accounts............................................... 500 1,140 1.84 2.00
------- ------
Total withdrawable....................................... 14,173 22.84 4.22
------- ------
Certificates (original terms):
3 months or less........................................... 1,000 133 .21 4.23
6 months................................................... 1,000 4,132 6.66 4.94
12 months.................................................. 1,000 6,041 9.73 5.51
18 months.................................................. 1,000 7,627 12.29 5.76
24 months.................................................. 1,000 5,483 8.84 5.99
30 months.................................................. 1,000 6,216 10.02 6.04
36 months ................................................. 1,000 4,082 6.58 6.16
48 months.................................................. 1,000 344 .55 5.73
60 months.................................................. 1,000 6,297 10.15 5.98
Jumbo certificates - $100,000 and over........................ 100,000 7,527 12.13 6.12
------- ------
Total certificates............................................ 47,882 77.16 5.84
------- ------
Total deposits................................................ $62,055 100.00% 5.47%
======= ======
</TABLE>
<PAGE>
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
<TABLE>
<CAPTION>
At June 30, At December 31,
1997 1996 1995 1994
---------------------------------------------------------------------
(In thousands)
<C> <C> <C> <C> <C>
3.00 to 3.99%...... $ --- $ --- $ --- $3,697
4.00 to 4.99%...... 4,149 4,760 5,432 17,929
5.00 to 5.99%...... 19,728 19,400 11,330 10,368
6.00 to 6.99%...... 23,428 20,954 21,991 7,615
7.00 to 7.99%...... 577 1,941 6,516 650
8.00 to 8.99%...... --- --- --- 1,114
------- ------- -------- -------
Total........... $47,882 $47,055 $ 45,269 $41,373
======= ======= ======== =======
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following June
30, 1997. Matured certificates, which have not been renewed as of June 30, 1997,
have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at June 30, 1997 Maturing In
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------- ------ ------
(In thousands)
<C> <C> <C> <C> <C>
3.00 to 3.99%.... $ --- $ --- $ --- $ ---
4.00 to 4.99%.... 4,149 --- --- ---
5.00 to 5.99%.... 10,815 7,482 1,046 386
6.00 to 6.99%.... 10,825 8,476 2,271 1,855
7.00 to 7.99%.... 551 10 16 ---
------- ------- ------ ------
Total......... $26,340 $15,968 $3,333 $2,241
======= ======= ====== ======
</TABLE>
The following table indicates the amount of our other certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1997.
At June 30, 1997
Maturity Period (In thousands)
Three months or less.............................. $ 933
Greater than three months through six months...... 407
Greater than six months through twelve months..... 3,252
Over twelve months................................ 2,935
Total........................................ $7,527
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that we offer at the dates indicated, and the
amount of increase or decrease in such deposits as compared to the previous
period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
June 30, % of from December 31, % of from December 31, % of
1997 Deposits 1996 1996 Deposits 1995 1995 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts... $3,821 6.16% $(46) $3,867 6.40% $356 $3,511 6.11%
Variable rate, money market..... 9,212 14.84 597 8,615 14.25 218 8,397 14.63
NOW accounts.................... 1,140 1.84 241 899 1.49 669 230 .40
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............ 14,173 22.84 792 13,381 22.14 1,243 12,138 21.14
Certificates (original terms):
3 months........................ 133 .21 (16) 149 .25 19 130 .23
6 months........................ 4,132 6.66 (135) 4,267 7.06 (265) 4,532 7.89
12 months....................... 6,041 9.73 808 5,233 8.66 (131) 5,364 9.34
18 months....................... 7,627 12.29 (563) 8,190 13.55 1,152 7,038 12.26
24 months....................... 5,483 8.84 987 4,496 7.44 (94) 4,590 8.00
30 months....................... 6,216 10.02 734 5,482 9.07 273 5,209 9.07
36 months ...................... 4,082 6.58 (1,116) 5,198 8.60 113 5,085 8.86
48 months....................... 344 .55 (32) 376 .62 (29) 405 .71
60 months....................... 6,297 10.15 (311) 6,608 10.93 79 6,529 11.37
Other certificates.................
Jumbo certificates................. 7,527 12.13 471 7,056 11.68 669 6,387 11.13
------- ------ ------ ------- ------ ------ ------- ------
Total certificates................. 47,882 77.16 827 47,055 77.86 1,786 45,269 78.86
------- ------ ------ ------- ------ ------ ------- ------
Total deposits.....................$62,055 100.00% $1,619 $60,436 100.00% $3,029 $57,407 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
Increase Balance
(Decrease) at
from December 31, % of
1994 1994 Deposits
------ ------- ------
Withdrawable:
Fixed rate, passbook accounts... $(599) $4,110 7.49%
Variable rate, money market..... (833) 9,230 16.82
NOW accounts.................... 57 173 .31
------ ------- ------
Total withdrawable............ (1,375) 13,513 24.62
Certificates (original terms):
3 months........................ 1 129 .23
6 months........................ (895) 5,427 9.89
12 months....................... 1,953 3,411 6.21
18 months....................... (1,855) 8,893 16.20
24 months....................... 2,380 2,210 4.03
30 months....................... 347 4,862 8.86
36 months ...................... 587 4,498 8.20
48 months....................... (43) 448 .82
60 months....................... 190 6,339 11.55
Other certificates................. (49) 49 .09
Jumbo certificates................. 1,280 5,107 9.30
------ ------- ------
Total certificates................. 3,896 41,373 75.38
------ ------- ------
Total deposits..................... $2,521 $54,886 100.00%
====== ======= ======
<PAGE>
Total deposits at June 30, 1997 were approximately $62.1 million,
compared to approximately $54.9 million at December 31, 1994. Our deposit base
is somewhat dependent upon the manufacturing sector of Montgomery County's
economy. Although Montgomery County's manufacturing sector is relatively
diversified and not significantly dependent upon any industry, a loss of a
material portion of the manufacturing workforce could adversely affect our
ability to attract deposits due to the loss of personal income attributable to
the lost manufacturing jobs and the attendant loss in service industry jobs.
In the unlikely event of our liquidation after the Conversion, all
claims of creditors (including those of deposit account holders, to the extent
of their deposit balances) would be paid first followed by distribution of the
liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Union Federal. See "The Conversion -- Principal Effects of Conversion --
Effect on Liquidation Rights."
Borrowings. We focus on generating high quality loans and then seek the
best source of funding from deposits, investments or borrowings. At June 30,
1997, we had borrowings in the amount of $5.9 million from the FHLB of
Indianapolis which bear fixed and variable interest rates and are due at various
dates through 2004. We are required to maintain eligible loans in our portfolio
of at least 170% of outstanding advances as collateral for advances from the
FHLB of Indianapolis. We do not anticipate any difficulty in obtaining advances
appropriate to meet our requirements in the future. We also owe Pedcor
Investments 1993-XVI,L.P. ("Pedcor") $1.2 million under a note payable that is
not included in the following table. See "--Service Corporation Subsidiary."
The following table presents certain information relating to our
borrowings at or for the six months ended June 30, 1997 and 1996 and at or for
the years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
At or for the
Six Months At or for the Year
Ended June 30, Ended December 31,
1997 1996 1996 1995 1994
-----------------------------------------------------------------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C> <C> <C>
Outstanding at end of period.................... $5,873 $2,982 $6,482 $1,065 $3,189
Average balance outstanding for period.......... 5,956 1,483 3,566 1,857 1,261
Maximum amount outstanding at any
month-end during the period................... 6,373 2,982 6,482 3,065 3,189
Weighted average interest rate
during the period............................. 5.67 % 4.72% 5.36 % 6.03% 4.68%
Weighted average interest rate
at end of period.............................. 5.76 % 5.57% 5.52 % 5.46% 5.74%
</TABLE>
Properties
The following table provides certain information with respect to our
office as of June 30, 1997:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
221 East Main Street Owned 1913 $62,055 $365 19,065
Crawfordsville, Indiana 47933
</TABLE>
<PAGE>
We own computer and data processing equipment which we use for
transaction processing, loan origination, and accounting. The net book value of
our electronic data processing equipment was approximately $4,000 at June 30,
1997.
We have also contracted for the data processing and reporting services
of On-Line Financial Services, Inc. in Oak Brook, Illinois. The cost of these
data processing services is approximately $5,000 per month.
We have also executed a Correspondent Services Agreement with the FHLB
of Indianapolis under which we receive item processing and other services for a
fee of approximately $1,100 per month.
We also receive income from leasing office space on the second floor of
our building and parking spaces located behind our building. Our gross income
from renting the office space was $27,000 for fiscal year ended December 31,
1996 and $14,000 for the six-month period ended June 30, 1997. Our gross income
from renting the parking spaces was approximately $9,000 for the fiscal year
ended December 31, 1996 and approximately $8,000 for the six-month period ended
June 30, 1997.
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
We currently own one subsidiary, UFS Service Corp. ("UFS"), whose sole
asset is its investment in Pedcor, which is an Indiana limited partnership that
was established to organize, build, own, operate and lease a 48-unit apartment
complex in Crawfordsville, Indiana known as Shady Knoll II Apartments (the
"Project"). We own the limited partner interest in Pedcor. The general partner
is Pedcor Investments, A Limited Liability Company. The Project, operated as a
multi-family, low- and moderate-income housing project, is completed and is
performing as planned. Because UFS engages exclusively in activities that are
permissible for a national bank, OTS regulations permit us to include our
investment in UFS in our calculation of regulatory capital.
A low- and moderate-income housing project qualifies for certain
federal income tax credits if (i) it is a residential rental property, (ii) the
units are used on a nontransient basis, and (iii) 20% or more of the units in
the project are occupied by tenants whose incomes are 50% or less of the area
median gross income, adjusted for family size, or alternatively, at least 40% of
the units in the project are occupied by tenants whose incomes are 60% of the
area median gross income. Qualified low income housing projects generally must
comply with these and other rules for fifteen years, beginning with the first
year the project qualified for the tax credit, or some or all of the tax credit
together with interest may be recaptured. The tax credit is subject to the
limitations on the use of general business credit, but no basis reduction is
required for any portion of the tax credit claimed.
<PAGE>
UFS committed to invest approximately $1.8 million in Pedcor at the
inception of the project in November, 1993. Through June 30, 1997, UFS had
invested cash of approximately $610,000 in Pedcor with seven additional annual
capital contributions remaining to be paid in January of each year through
January, 2004, totaling $1,200,000. The additional contributions will be used
for operating and other expenses of the partnership. In addition, Union Federal
borrowed funds from the FHLB of Indianapolis to advance to Pedcor, and Pedcor
currently owes Union Federal $873,000 pursuant to a promissory note payable in
installments through January 1, 2004 and bearing interest at an annual rate of
9%.
UFS transfers the tax credits resulting from Pedcor's operation of the
Project to us. These tax credits will be available to us through 2003. Although
we have reduced income tax expense by the full amount of the tax credit
available each year, we have not been able to fully utilize available tax
credits to reduce income taxes payable because we may not use tax credits that
would reduce our regular corporate tax liability below our alternative minimum
tax liability. We may carry forward unused tax credits for a period of fifteen
years and we believe that we will be able to utilize available tax credits
during the carry forward period. Additionally, Pedcor has incurred operating
losses in the early years of its operations primarily due to its accelerated
depreciation of assets. UFS has accounted for its investment in Pedcor on the
equity method and, accordingly, has recorded its share of these losses as
reductions to its investment in Pedcor, which at June 30, 1997, was $1.2
million. As of June 30, 1997, 92% of the units in the Project were occupied, and
all of the tenants met the income test required for the tax credits. UFS does
not engage in any activity or hold any assets other than its investment in
Pedcor.
The following summarizes UFS's equity in Pedcor's losses and tax
credits recognized in Union Federal's consolidated financial statements.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, Year Ended December 31,
1997 1996 1995 1994
-------- ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Investment in Pedcor:
Initial investment....................... $ --- $ --- $ --- $1,810
Net of equity in losses.................. 1,220 1,334 1,506 1,756
Equity in losses, net
of income tax effect..................... $ (69) $ (104) $(150) $ (33)
Tax credit.................................. 89 178 178 75
-------- ------- ------- -------
Increase in after-tax net income from
Pedcor investment........................ $ 20 $ 74 $ 28 $ 42
======== ======= ======= =======
</TABLE>
Employees
As of June 30, 1997, we employed 12 persons on a full-time basis. We do
not have any part-time employees. None of our employees is represented by a
collective bargaining group and we consider our employee relations to be good.
Employee benefits for our full-time employees include, among other
things, a Pentegra Group (formerly known as Financial Institutions Retirement
Fund) defined benefit pension plan, a noncontributory, multiple-employer
comprehensive pension plan (the"Pension Plan"), and hospitalization/major
medical insurance, dental and eye care insurance, long-term disability
insurance, life insurance, and participation in the Financial Institutions
Thrift Plan.
We consider our employee benefits to be competitive with those offered
by other financial institutions and major employers in our area. See "Executive
Compensation and Related Transactions of Union Federal."
Legal Proceedings
Although we are involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which we presently are a party or to which any of our property is
subject.
<PAGE>
MANAGEMENT OF UNION COMMUNITY BANCORP
Directors and Executive Officers of the Holding Company
The Board of Directors of the Holding Company consists of the same
individuals who serve as directors of Union Federal. The Holding Company's
Articles of Incorporation and Bylaws require that directors be divided into
three classes, as nearly equal in number as possible. Each class of directors
serves for a three-year period, with approximately one-third of the directors
elected each year. The Holding Company's officers will be elected annually by
its Board of Directors and will serve at the Board's discretion. The terms of
the present directors expire at the Holding Company's first shareholders'
meeting, which is anticipated to be held in June, 1998. At that meeting, it is
anticipated that the directors will be nominated to serve for the following
terms: the terms of Joseph E. Timmons, Marvin L. Burkett and Phillip E. Grush
will expire in 1999, the terms of Harry A. Siamas and Samuel H. Hildebrand will
expire in 2000 and the terms of John M. Horner and Philip L. Boots will expire
in 2001. See "Management of Union Federal Savings and Loan Association of
Crawfordsville."
The Holding Company's Bylaws provide that directors must (1) be
residents of Montgomery County, Indiana, (2) have had a loan or deposit
relationship with us which they have maintained for twelve months prior to their
nomination to the Board, and (3) with respect to nonemployee directors, must
have served as a member of a civic or community organization based in Montgomery
County for at least 12 months during the five years prior to their nomination to
the Board. See "Restrictions on Acquisition of the Holding Company -- Provisions
of the Holding Company's Articles and Bylaws."
The executive officers of the Holding Company are identified below.
Name Position with Holding Company
---- -----------------------------
Joseph E. Timmons Chairman of the Board, President and
Chief Executive Officer
Ronald Keeling Vice President
Denise Swearingen Secretary and Treasurer
MANAGEMENT OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
Directors of Union Federal
Our Board of Directors currently consists of seven persons with one
additional person who serves as a director emeritus. Our director emeritus
attends the Board's regular meetings but does not vote on matters presented to
the Board. Each director holds office for a term of three years, and one-third
of the Board is elected at each annual meeting of our members.
Our Board of Directors met 13 times during the fiscal year ended
December 31, 1996. No director attended fewer than 75% of the aggregate number
of meetings of the Board of Directors and the Board's committees in the past 12
months.
Listed below are the current directors of Union Federal:
<TABLE>
<CAPTION>
Director of Position
Union Federal Expiration with
Director Since of Term Union Federal
<S> <C> <C> <C>
Philip L. Boots 1991 1998 Director
Marvin L. Burkett 1975 1999 Director
Phillip E. Grush 1982 1999 Director, Vice Chairman
of the Board and
Vice President
Samuel H. Hildebrand 1995 2000 Director
John M. Horner 1979 1998 Director, Chairman of the
Board and
Vice President
Harry A. Siamas 1994 2000 Director
Joseph E. Timmons 1973 1999 Director, President and
Chief Executive Officer
</TABLE>
<PAGE>
Presented below is certain information concerning the directors of Union
Federal:
Philip L. Boots (age 50) has served since 1985 as President of Boots
Brothers Oil Company, Inc., a petroleum marketer that operates gasoline outlets,
convenience grocery stores and car washes in the Crawfordsville area.
Marvin L. Burkett (age 69) has worked as a self-employed farmer in
Montgomery County since 1956. He currently is semi-retired from farming.
Phillip E. Grush (age 66) worked as a self-employed optometrist in
Crawfordsville from 1960 until September, 1996 when he sold his practice. He
currently works for Dr. Michael Scheidler in Crawfordsville as a full-time
employee/consultant.
Samuel H. Hildebrand, II (age 58) was Executive Vice President of
Atapco Custom Products Division, a manufacturer of custom decorated looseleaf
ring binders in Crawfordsville from 1987-1995. Since 1995, he has served as
President of Village Traditions, Inc., a home builder located in Crawfordsville.
John M. Horner (age 60) has served as the president of Horner Pontiac
Buick, Inc. in Crawfordsville since 1974.
Harry A. Siamas (age 47) has practiced law in Crawfordsville since 1976
and has served as Union Federal's attorney for 18 years.
Joseph E. Timmons (age 63) has served as President and Chief Executive
Officer of Union Federal since 1974 and of UFS Service Corp. since its inception
in 1994. He has been an employee of Union Federal since 1954.
We also have a director emeritus program pursuant to which our former
directors may continue to serve as advisors to the Board of Directors upon their
retirement or resignation from the Board. Currently, Lester B. Sommer serves as
a director emeritus. Mr. Sommer receives the same directors' fees as the other
directors of Union Federal. See "Executive Compensation and Related Transactions
of Union Federal -- Compensation of Directors."
Executive Officers of Union Federal Who Are Not Directors
Presented below is certain information regarding our executive officers
who are not directors:
Name Position
Ronald L. Keeling Senior Loan Officer, Vice President and
Assistant Secretary
Denise E. Swearingen Secretary, Controller/Treasurer
Ronald L. Keeling (age 46) has served as Union Federal's Vice President
and Assistant Secretary since 1984 and as Senior Loan Officer since 1979. He has
worked for Union Federal since 1971.
Denise E. Swearingen (age 39) has served as Union Federal's Secretary
and Controller/Treasurer since 1995. She has worked for Union Federal since
1983.
Committees of the Boards of Directors of Union Federal and the Holding Company
Our Board of Directors has two committees. The Salary Committee, which
is comprised of John M. Horner, Phillip E. Grush and Harry A. Siamas,
establishes the compensation for our employees and officers. The Budget
Committee, which is comprised of Marvin L. Burkett, Samuel H. Hildebrand and
Philip L. Boots, reviews and approves our operating budget for the following
fiscal year.
<PAGE>
EXECUTIVE COMPENSATION AND RELATED TRANSACTIONS OF UNION FEDERAL
Remuneration of Named Executive Officer
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities to our President and Chief
Executive Officer for the fiscal year ended December 31, 1996. Other than Mr.
Timmons, we had no other executive officers who earned over $100,000 in salary
and bonuses during that fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation (1) Compensation
<S> <C> <C> <C> <C> <C>
Joseph E. Timmons, President 1996 $105,000 (1)(2) $20,000 -- --
and Chief Executive Officer
</TABLE>
(1) Mr. Timmons received certain perquisites, but the incremental cost of
providing such perquisites did not exceed the lesser of $50,000 or 10% of
his salary and bonus.
(2) This column includes $5,000 directors fees paid to Mr. Timmons.
Employment Contract
We have entered into a three-year employment contract with Mr. Timmons.
The contract with Mr. Timmons, effective as of the effective date of the
Conversion, extends annually for an additional one-year term to maintain its
three-year term if our Board of Directors determines to so extend it, unless
notice not to extend is properly given by either party to the contract. Mr.
Timmons receives an initial salary under the contract equal to his current
salary subject to increases approved by the Board of Directors. The contract
also provides, among other things, for participation in other fringe benefits
and benefit plans available to our employees. Mr. Timmons may terminate his
employment upon 60 days' written notice to us. We may discharge Mr. Timmons for
cause (as defined in the contract) at any time or in certain specified events.
If we terminate Mr. Timmons' employment for other than cause or if Mr. Timmons
terminates his own employment for cause (as defined in the contract), Mr.
Timmons will receive his base compensation under the contract for an additional
three years if the termination follows a change of control in the Holding
Company, and for the balance of the contract if the termination does not follow
a change in control. In addition, during such period, Mr. Timmons will continue
to participate in our group insurance plans and retirement plans, or receive
comparable benefits. Moreover, within a period of three months after such
termination following a change of control, Mr. Timmons will have the right to
cause us to purchase any stock options he holds for a price equal to the fair
market value (as defined in the contract) of the shares subject to such options
minus their option price. If the payments provided for in the contract, together
with any other payments made to Mr. Timmons by us, are deemed to be payments in
violation of the "golden parachute" rules of the Code, such payments will be
reduced to the largest amount which would not cause us to lose a tax deduction
for such payments under those rules. As of the date hereof, the cash
compensation which would be paid under the contract to Mr. Timmons if the
contract were terminated either after a change of control of the Holding
Company, without cause by us, or for cause by Mr. Timmons, would be $300,000.
For purposes of this employment contract, a change of control of the Holding
Company is generally an acquisition of control, as defined in regulations issued
under the Change in Bank Control Act and the Savings and Loan Holding Company
Act.
The employment contract protects our confidential business information
and protects us from competition by Mr. Timmons should he voluntarily terminate
his employment without cause or be terminated by us for cause.
<PAGE>
Compensation of Directors
We pay our directors and director emeritus a monthly retainer of $250
plus $300 for each month in which they attend one or more meetings. Total fees
paid to our directors and advisory directors for the year ended December 31,
1996 were approximately $38,800. Beginning in July, 1997, we began paying our
directors a monthly retainer of $500 plus $250 for each monthly meeting
attended.
Directors of the Holding Company and UFS are not currently paid
directors' fees. The Holding Company may, if it believes it is necessary to
attract qualified directors or is otherwise beneficial to the Holding Company,
adopt a policy of paying directors' fees.
Benefits
Insurance Plans. Our officers and employees are covered by
non-contributory medical, dental, eyecare and disability insurance plans. This
coverage is provided pursuant to group plans sponsored by the Indiana League of
Savings Institutions Group Insurance Trust.
Thrift Plan. Our full-time salaried employees who are over 21 years of
age with at least one year of service may also participate in the Financial
Institutions Thrift Plan (the "Thrift Plan"), a contributory multiple employer
tax-exempt trust and savings plan. Participants may elect to make monthly
contributions up to 15% of their salary. We make a matching contribution of 50%
of the employee's contribution that does not exceed 5% of the employee's salary.
Contributions may be invested in an equity fund which invests in widely traded
stocks, a fixed income fund which invests in fixed income instruments including
group annuity contracts, an equity growth fund that invests in higher risk
stocks, a fund which invests in obligations issued by the U.S. government or
agencies and a fund which invests in treasury, agency, corporate and
asset/mortgage-backed securities. The normal distribution is a lump sum upon
termination of employment. Other payment options may be elected. During fiscal
1996, Mr. Timmons received employer contributions of $3,000 under the Thrift
Plan.
Pension Plan. Our full-time employees are included in the Pension Plan.
Separate actuarial valuations are not made for individual employer members of
the Pension Plan. Our employees are eligible to participate in the plan once
they have attained the age of 21 and completed one year of service for us and
provided that the employee is expected to complete a mimimum of 1,000 hours of
service in the 12 consecutive months following his enrollment date. An
employee's pension benefits are 100% vested after five years of service.
The Pension Plan provides for monthly or lump sum retirement benefits
determined as a percentage of the employee's average salary (for the employee's
highest five consecutive years of salary) times his years of service. Salary
includes base annual salary as of each January 1, exclusive of overtime,
bonuses, fees and other special payments. Early retirement, disability, and
death benefits are also payable under the Pension Plan, depending upon the
participant's age and years of service. We expensed approximately $47,000 for
the Pension Plan during the fiscal year ended December 31, 1996.
The estimated base annual retirement benefits presented on a
straight-line basis payable at normal retirement age (65) under the Pension Plan
to persons in specified salary and years of service classifications are as
follows (benefits noted in the table are not subject to any offset).
<TABLE>
<CAPTION>
Highest 5-Year Years of Service
Average -------------------------------------------------------------------------
Compensation 15 20 25 30 35 40 45
<S> <C> <C> <C> <C> <C> <C> <C>
$ 40,000 $ 9,000 $12,000 $15,000 $18,000 $21,000 $24,000 $27,000
$ 60,000 $13,500 $18,000 $22,500 $27,000 $31,500 $36,000 $40,500
$ 80,000 $18,000 $24,000 $30,000 $36,000 $42,000 $48,000 $54,000
$100,000 $22,500 $30,000 $37,500 $45,000 $52,500 $60,000 $67,500
$120,000 $27,000 $36,000 $45,000 $54,000 $63,000 $72,000 $81,000
</TABLE>
<PAGE>
Benefits are currently subject to maximum Code limitations of $120,000
per year. The years of service credited to Mr. Timmons under the Pension Plan as
of December 31, 1996 were 41.
Transactions With Certain Related Persons
We have followed a policy of offering to our directors, officers, and
employees real estate mortgage loans secured by their principal residence as
well as other loans. All of our loans to our directors, officers and employees
are made on substantially the same terms, including interest rates and
collateral as those prevailing at the time for comparable transactions, and do
not involve more than minimal risk of collectibility. Loans to directors,
executive officers and their associates totaled approximately $1.8 million, or
approximately 12.7% of consolidated retained earnings at June 30, 1997.
Current law authorizes us to make loans or extensions of credit to our
executive officers, directors, and principal shareholders on the same terms that
are available with respect to loans made to all of our employees. At present,
our loans to executive officers, directors, principal shareholders and employees
are made on the same terms generally available to the public. We may in the
future, however, adopt a program under which we may waive loan application fees
and closing costs with respect to loans made to such persons. Loans made to a
director or executive officer in excess of the greater of $25,000 or 5% of our
capital and surplus (up to a maximum of $500,000) must be approved in advance by
a majority of the disinterested members of the Board of Directors. Our policy
regarding loans to directors and all employees meets the requirements of current
law.
Employee Stock Ownership Plan and Trust
The Holding Company has established for our eligible employees an ESOP
effective January 1, 1997, subject to our conversion to stock form. Employees
with at least one year of employment with us and who have attained age 21 are
eligible to participate. As part of the Conversion, the ESOP intends to borrow
funds from the Holding Company and use those funds to purchase a number of
shares equal to 8% of the Common Stock to be issued in the Conversion, up to a
maximum of 184,000 shares. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from our
discretionary contributions to the ESOP over a period of twenty-five years. It
is anticipated that the initial interest rate for the loan will be approximately
8.5%. Shares purchased by the ESOP will be held in a suspense account for
allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense
accounts in an amount proportional to the repayment of the ESOP loan will be
allocated among ESOP participants on the basis of compensation in the year of
allocation. Participants in the ESOP will receive credit for service prior to
the effective date of the ESOP. Benefits generally become 100% vested after five
years of credited service. Prior to the completion of five years of credited
service, a participant who terminates employment for reasons other than death,
retirement, or disability will not receive any benefits under the ESOP.
Forfeitures will be reallocated among remaining participating employees upon the
earlier of the forfeiting participant's death or after the expiration of at
least three years from the date on which such participant's employment was
terminated. Benefits will be payable in the form of Common Stock or cash for
fractional shares upon death, retirement, early retirement, disability or
separation from service. Our contributions to the ESOP are not fixed, so
benefits payable under the ESOP cannot be estimated. In November 1993, the
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 93-6, which requires us to record compensation
expense in an amount equal to the fair market value of the shares released from
the suspense account.
In connection with the establishment of the ESOP, the Holding Company
will establish a committee of our employees to administer the ESOP. Home Federal
Savings Bank will serve as corporate trustee of the ESOP. The ESOP committee may
instruct the trustee regarding investment of funds contributed to the ESOP. The
ESOP trustee, subject to its fiduciary duty, must vote all allocated shares held
in the ESOP in accordance with the instructions of participating employees.
Under the ESOP, nondirected shares, and shares held in the suspense account,
will be voted in a manner calculated to most accurately reflect the instructions
it has received from participants regarding the allocated stock so long as such
vote is in accordance with the provisions of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA").
<PAGE>
Stock Option Plan
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors
intends to submit for shareholder approval the Stock Option Plan for directors
and officers of Union Federal and of the Holding Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10.0% of the shares
issued in the Conversion would be reserved for issuance by the Holding Company
upon the exercise of the stock options granted under the Stock Option Plan.
Assuming the issuance of 2,300,000 shares in the Conversion, an aggregate of
230,000 shares would be reserved for issuance under the Stock Option Plan. No
options would be granted under the Stock Option Plan until the date on which
shareholder approval is received. At that time, it is anticipated that options
for the following number of shares will be granted to the following directors,
executive officers and employees of Union Federal and the Holding Company:
Percentage of Shares
Optionee Issued in Conversion
Joseph E. Timmons.................................... 2.5%
Other Executive Officers as a group ................. 2.5
Directors ........................................... 3.0
Total............................................ 8.0%
It is anticipated that these options would be granted for terms of 10
years (in the case of incentive options) or 10 years and one day (in the case of
non-qualified options), and at an option price per share equal to the fair
market value of the shares on the date of grant of the stock options. If the
Stock Option Plan is adopted within one year following the Conversion, options
will become exercisable at a rate of 20% at the end of each twelve (12) months
of service with us after the date of grant, subject to early vesting in the
event of death or disability. Options granted under the Stock Option Plan are
adjusted for capital changes such as stock splits and stock dividends. Unless
the Holding Company decides to call an earlier special meeting of shareholders,
the date of grant of these options is expected to be the date of the Holding
Company's annual meeting of shareholders to be held at least six months after
the Conversion.
The Stock Option Plan would be administered by a Committee of
non-employee members of the Holding Company's Board of Directors. Options
granted under the Stock Option Plan to employees could be "incentive" stock
options designed to result in a beneficial tax treatment to the employee but no
tax deduction to the Holding Company. Non-qualified stock options could also be
granted under the Stock Option Plan, and will be granted to the non-employee
directors to receive grants of stock options. In the event an option recipient
terminated his or her employment or service as an employee or director, the
options would terminate during certain specified periods.
RRP
At a meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion, the Board of Directors also
intends to submit the RRP for shareholder approval. The RRP will provide our
directors and officers with an ownership interest in the Holding Company in a
manner designed to encourage them to continue their service with us. Union
Federal will contribute funds to the RRP from time to time to enable it to
acquire an aggregate amount of Common Stock equal to up to 4% of the shares of
Common Stock issued in the Conversion, either directly from the Holding Company
or on the open market. Four percent of the shares issued in the Conversion would
amount to 78,200 shares, 92,000 shares, 105,800 or 121,670 shares at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. In the event that additional authorized but unissued shares
would be acquired by the RRP after the Conversion, the interests of existing
shareholders would be diluted. Our executive officers and directors will be
awarded Common Stock under the RRP without having to pay cash for the shares.
No awards under the RRP would be made until the date the RRP is
approved by the Holding Company's shareholders. At that time, it is anticipated
that awards of the following number of shares would be made to the following
directors and executive officers of the Holding Company and Union Federal:
Percentage of Shares
Recipient of Issued in Conversion to be
Awards Awarded Under RRP
Joseph E. Timmons.................................. 1.0%
Other Executive Officers as a group ............... .8
Directors.......................................... 1.2
Total.......................................... 3.0%
<PAGE>
Awards would be nontransferable and nonassignable, and during the
lifetime of the recipient could only be earned by and made to him or her. If the
RRP is adopted within one year following the Conversion, the shares which are
subject to an award would vest and be earned by the recipient at a rate of 20%
of the shares awarded at the end of each full twelve (12) months of service with
us after the date of grant of the award. Awards are adjusted for capital changes
such as stock dividends and stock splits. Notwithstanding the foregoing, awards
would be 100% vested upon termination of employment or service due to death or
disability. If employment or service were to terminate for other reasons, the
grantee would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the RRP), or if conduct would have
justified termination or removal for cause, shares not already delivered under
the RRP, whether or not vested, could be forfeited by resolution of the Board of
Directors of the Holding Company.
When shares become vested and could actually be distributed in
accordance with the RRP, the participants would also receive amounts equal to
accrued dividends and other earnings or distributions payable with respect
thereto. When shares become vested under the RRP, the participant will recognize
income equal to the fair market value of the Common Stock earned, determined as
of the date of vesting, unless the recipient makes an election under ss. 83(b)
of the Code to be taxed earlier. The amount of income recognized by the
participant would be a deductible expense for tax purposes for the Holding
Company. Shares not yet vested under the RRP will be voted by the Trustee of the
RRP, taking into account the best interests of the recipients of the RRP awards.
REGULATION
General
As a federally chartered, SAIF-insured savings association, we are
subject to extensive regulation by the OTS and the FDIC. For example, we must
obtain OTS approval before we may engage in certain activities and must file
reports with the OTS regarding our activities and financial condition. The OTS
periodically examines our books and records and, in conjunction with the FDIC in
certain situations, has examination and enforcement powers. This supervision and
regulation are intended primarily for the protection of depositors and federal
deposit insurance funds. Our semi- annual assessment owed to the OTS, which is
based upon a specified percentage of assets, is approximately $13,875.
We are also subject to federal and state regulation as to such matters
as loans to officers, directors, or principal shareholders, required reserves,
limitations as to the nature and amount of our loans and investments, regulatory
approval of any merger or consolidation, issuance or retirements of our
securities, and limitations upon other aspects of banking operations. In
addition, our activities and operations are subject to a number of additional
detailed, complex and sometimes overlapping federal and state laws and
regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would
require all federal savings associations, such as Union Federal, to either
convert to a national bank or a state-chartered bank by a specified date to be
determined. In addition, under the legislation, the Holding Company likely would
not be regulated as a savings and loan holding company but rather as a bank
holding company. This proposed legislation would abolish the OTS and transfer
its functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Union Federal.
Savings and Loan Holding Company Regulation
As the holding company for Union Federal, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, we are subject to certain restrictions in our dealings with the
Holding Company and with other companies affiliated with the Holding Company.
<PAGE>
In general, the HOLA prohibits a savings and loan holding company,
without prior approval of the Director of the OTS, from acquiring control of
another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company's Board of Directors presently intends to operate
the Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities
of unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At June 30, 1997, our asset composition was in excess of that
required to qualify us as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Union
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Union Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the Federal Reserve Board (the "FRB") as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS before a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
<PAGE>
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
We are a member of the FHLB of Indianapolis, which is one of twelve
regional FHLBs. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from funds deposited by
savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, we are required to purchase and maintain stock in the FHLB
of Indianapolis in an amount equal to at least 1% of our aggregate unpaid
residential mortgage loans, home purchase contracts, or similar obligations at
the beginning of each year. At June 30, 1997, our investment in stock of the
FHLB of Indianapolis was $708,000. The FHLB imposes various limitations on
advances such as limiting the amount of certain types of real estate-related
collateral to 30% of a member's capital and limiting total advances to a member.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the FHLB of Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1996, dividends paid by
the FHLB of Indianapolis to us totaled approximately $45,000, for an annual rate
of 7.8%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that
insures the deposits, up to prescribed statutory limits, of banks and thrifts
and safeguards the safety and soundness of the banking and thrift industries.
The FDIC administers two separate insurance funds, the BIF for commercial banks
and state savings banks and the SAIF for savings associations such as Union
Federal and banks that have acquired deposits from savings associations. The
FDIC is required to maintain designated levels of reserves in each fund. As of
September 30, 1996, the reserves of the SAIF were below the level required by
law, primarily because a significant portion of the assessments paid into the
SAIF have been used to pay the cost of prior thrift failures, while the reserves
of the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law. See "-- Assessments"
below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
<PAGE>
On September 30, 1996, President Clinton signed into law legislation
which included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
we were charged a one-time special assessment equal to $.657 per $100 in
assessable deposits at March 31, 1995. We recognized this one-time assessment as
a non-recurring operating expense of $362,000 ($219,000 after tax) during the
three-month period ending September 30, 1996, and we paid this assessment on
November 27, 1996. The assessment was fully deductible for both federal and
state income tax purposes. Beginning January 1, 1997, our annual deposit
insurance premium was reduced from .23% to .0644% of total assessable deposits.
BIF institutions pay lower assessments than comparable SAIF institutions because
BIF institutions pay only 20% of the rate paid by SAIF institutions on their
deposits with respect to obligations issued by the federally-chartered
corporation which provided some of the financing to resolve the thrift crisis in
the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and
the BIF by 1999, but not until such time as bank and thrift charters are
combined. Until the charters are combined, savings associations with SAIF
deposits may not transfer deposits into the BIF system without paying various
exit and entrance fees, and SAIF institutions will continue to pay higher FICO
assessments. Such exit and entrance fees need not be paid if a SAIF institution
converts to a bank charter or merges with a bank, as long as the resulting bank
continues to pay applicable insurance assessments to the SAIF, and as long as
certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At June 30, 1997, we were in compliance with all capital
requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation, we
would be exempt from its provisions because we have less than $300 million in
assets and our risk-based capital ratio exceeds 12%. We nevertheless measure our
interest rate risk in conformity with the OTS regulation and, as of June 30,
1997, we would have been required to deduct $1.05 million from our total capital
available to calculate our risk-based capital requirement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Union Federal Savings and Loan Association -- Asset/Liability Management."
<PAGE>
If an association is not in compliance with the capital requirements,
the OTS is required to prohibit asset growth and to impose a capital directive
that may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At June 30,
1997, we were categorized as "well capitalized," meaning that our total
risk-based capital ratio exceeded 10%, our Tier I risk-based capital ratio
exceeded 6%, our leverage ratio exceeded 5%, and we were not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital
to take corrective actions. For example, a savings association which is
categorized as "undercapitalized" would be subject to growth limitations and
would be required to submit a capital restoration plan, and a holding company
that controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions"
by savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 or Tier 3 Institution if the OTS determines that the
institution is "in need of more than normal supervision." We are currently a
Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval
of the OTS, make capital distributions during a calendar year up to the greater
of (a) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" at the beginning of
the calendar year (the smallest excess over its capital requirements), or (b)
75% of its net income over the most recent four-quarter period. Any additional
amount of capital distributions would require prior regulatory approval.
Accordingly, at June 30, 1997, we had available approximately $5,970,000 for
distribution, without consideration of any capital infusion from the Conversion
and without consideration of the restrictions on our capital distributions as a
result of the establishment of a liquidation account in connection with the
Conversion. See "The Conversion -- Effect on Liquidation Rights."
<PAGE>
The OTS has proposed revisions to these regulations which would permit
savings associations to declare dividends in amounts which would assure that
they remain adequately capitalized following the dividend declaration. Savings
associations in a holding company system which are rated Camel 1 or 2 and which
are not in troubled condition would need to file a prior notice with the OTS
concerning such dividend declaration.
Pursuant to the Plan of Conversion, we will establish a liquidation
account for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders. See "The Conversion -- Principal Effects of Conversion." We
will not be permitted to pay dividends to the Holding Company if our net worth
would be reduced below the amount required for the liquidation account. We must
also must file a notice with the OTS 30 days before declaring a dividend to the
Holding Company.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place
limitations on the ability of insured depository institutions to accept, renew
or roll over deposits by offering rates of interest which are significantly
higher than the prevailing rates of interest on deposits offered by other
insured depository institutions having the same type of charter in the
institution's normal market area. Under these regulations, "well-capitalized"
depository institutions may accept, renew or roll such deposits over without
restriction, "adequately capitalized" depository institutions may accept, renew
or roll such deposits over with a waiver from the FDIC (subject to certain
restrictions on payments of rates) and "undercapitalized" depository
institutions may not accept, renew or roll such deposits over. The regulations
contemplate that the definitions of "well capitalized," "adequately capitalized"
and "undercapitalized" will be the same as the definition adopted by the
agencies to implement the corrective action provisions of FedICIA. We do not
believe that these regulations will have a materially adverse effect on our
current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety
and soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, we may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of our unimpaired capital
and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired
capital and surplus, if such loans or extensions of credit are fully secured by
readily marketable collateral, including certain debt and equity securities but
not including real estate. In some cases, a savings association may lend up to
30 percent of unimpaired capital and surplus to one borrower for purposes of
developing domestic residential housing, provided that the association meets its
regulatory capital requirements and the OTS authorizes the association to use
this expanded lending authority. At June 30, 1997, we did not have any loans or
extensions of credit to a single or related group of borrowers in excess of our
lending limits. We do not believe that the loans-to-one-borrower limits will
have a significant impact on our business operations or earnings following the
Conversion.
<PAGE>
Qualified Thrift Lender
Savings associations must meet a QTL test. If we maintain an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualify as a QTL, we will continue to
enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of June 30, 1997, we were in compliance with our QTL
requirement, with approximately 98.7% of our assets invested in QTIs.
A savings association which fails to meet the QTL test must either
convert to a bank (but its deposit insurance assessments and payments will be
those of and paid to the SAIF) or be subject to the following penalties: (i) it
may not enter into any new activity except for those permissible for a national
bank and for a savings association; (ii) its branching activities shall be
limited to those of a national bank; (iii) it shall not be eligible for any new
FHLB advances; and (iv) it shall be bound by regulations applicable to national
banks respecting payment of dividends. Three years after failing the QTL test
the association must (i) dispose of any investment or activity not permissible
for a national bank and a savings association and (ii) repay all outstanding
FHLB advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to
the extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
<PAGE>
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire
banks in other states and, with state consent and subject to certain
limitations, allows banks to acquire out-of-state branches either through merger
or de novo expansion. The State of Indiana enacted legislation establishing
interstate branching provisions for Indiana state-chartered banks consistent
with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The
Indiana Branching Law authorizes Indiana banks to branch interstate by merger or
de novo expansion, provided that such transactions are not permitted to
out-of-state banks unless the laws of their home states permit Indiana banks to
merge or establish de novo banks on a reciprocial basis. The Indiana Branching
Law became effective March 15, 1996.
Transactions with Affiliates
We are subject to Sections 22(h), 23A and 23B of the Federal Reserve
Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company will be registered
with the SEC under the 1934 Act. The Holding Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following our conversion to stock form, if the Holding Company has fewer
than 300 shareholders, it may deregister its shares under the 1934 Act and cease
to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the
Holding Company may not be resold without registration unless sold in accordance
with the resale restrictions of Rule 144 under the 1933 Act. If the Holding
Company meets the current public information requirements under Rule 144, each
affiliate of the Holding Company who complies with the other conditions of Rule
144 (including those that require the affiliate's sale to be aggregated with
those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Holding Company
or (ii) the average weekly volume of trading in such shares during the preceding
four calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated our record of meeting community credit needs as
satisfactory.
<PAGE>
TAXATION
Federal Taxation
Historically, savings associations, such as Union Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Union Federal
will recapture approximately $55,000 over a six-year period that began with the
year ended December 31, 1996. In addition, the pre-1988 reserve, for which no
deferred taxes have been recorded, need not be recaptured into income unless (i)
the savings association no longer qualifies as a bank under the Code, or (ii)
the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a
savings association may be subject to the alternative minimum tax. A savings
association must pay an alternative minimum tax on the amount (if any) by which
20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption
varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable
income increased or decreased by certain tax preferences and adjustments,
including depreciation deductions in excess of that allowable for alternative
minimum tax purposes, tax-exempt interest on most private activity bonds issued
after August 7, 1986 (reduced by any related interest expense disallowed for
regular tax purposes), the amount of the bad debt reserve deduction claimed in
excess of the deduction based on the experience method and 75% of the excess of
adjusted current earnings over AMTI (before this adjustment and before any
alternative tax net operating loss). AMTI may be reduced only up to 90% by net
operating loss carryovers, but alternative minimum tax paid can be credited
against regular tax due in later years.
For federal income tax purposes, we have been reporting our income and
expenses on the accrual method of accounting. Our federal income tax returns
have not been audited in recent years.
State Taxation
We are subject to Indiana's Financial Institutions Tax ("FIT"), which
is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross
income," for purposes of FIT, begins with taxable income as defined by Section
63 of the Code and, thus, incorporates federal tax law to the extent that it
affects the computation of taxable income. Federal taxable income is then
adjusted by several Indiana modifications. Other applicable state taxes include
generally applicable sales and use taxes plus real and personal property taxes.
Our state income tax returns have not been audited in recent years.
For further information relating to the tax consequences of the
Conversion, see "The Conversion -- Principal Effects of Conversion -- Tax
Effects."
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY
General
Although the Boards of Directors of Union Federal and the Holding
Company are not aware of any effort that might be made to obtain control of the
Holding Company after the Conversion, the Boards of Directors believe that it is
appropriate to include certain provisions in the Holding Company's Articles of
Incorporation (the "Articles") to protect the interests of the Holding Company
and its shareholders from unsolicited changes in the control of the Holding
Company in circumstances that the Board of Directors of the Holding Company
concludes will not be in the best interests of Union Federal, the Holding
Company or the Holding Company's shareholders.
<PAGE>
Although the Holding Company's Board of Directors believes that the
restrictions on acquisition described below are beneficial to shareholders, the
provisions may have the effect of rendering the Holding Company less attractive
to potential acquirors, thereby discouraging future takeover attempts which
would not be approved by the Board of Directors but which certain shareholders
might deem to be in their best interest or pursuant to which shareholders might
receive a substantial premium for their shares over then current market prices.
These provisions will also render the removal of the incumbent Board of
Directors and of management more difficult. The Board of Directors has, however,
concluded that the potential benefits of these restrictive provisions outweigh
the possible disadvantages.
The following general discussion contains a summary of the material
provisions of the Articles, the Holding Company's Code of By-Laws (the
"By-Laws"), and certain other regulatory provisions, that may be deemed to have
an effect of delaying, deferring or preventing a change in the control of the
Holding Company. The following description of certain of these provisions is
general and not necessarily complete, and with respect to provisions contained
in the Articles and By-Laws, reference should be made in each case to the
document in question, each of which is part of our application for approval of
the Conversion or the Holding Company's Registration Statement filed with the
SEC. See "Additional Information."
Provisions of the Holding Company's Articles and By-Laws
Directors. Certain provisions in the Articles and By-Laws will impede
changes in majority control of the Board of Directors of the Holding Company.
The Articles provide that the Board of Directors of the Holding Company will be
divided into three classes, with directors in each class elected for three-year
staggered terms. Therefore, it would take two annual elections to replace a
majority of the Holding Company's Board. Moreover, the Holding Company's By-laws
provide that directors of the Holding Company must be residents of Montgomery
County, Indiana, must have had a loan or deposit relationship with us which they
have maintained for twelve (12) months prior to their nomination to the Board,
and, if nonemployee directors, must have served as a member of a civic or
community organization based in Montgomery County, Indiana for at least twelve
(12) months during the five years prior to their nomination to the Board (or in
the case of existing directors, prior to September 11, 1997). Therefore, the
ability of a shareholder to attract qualified nominees to oppose persons
nominated by the Board of Directors may be limited.
The Articles also provide that the size of the Board of Directors shall
range between five and fifteen directors, with the exact number of directors to
be fixed from time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors of the Holding
Company.
The Articles provide that any vacancy occurring in the Board of
Directors, including a vacancy created by an increase in the number of
directors, shall be filled for the remainder of the unexpired term only by a
majority vote of the directors then in office. Finally, the By-Laws impose
certain notice and information requirements in connection with the nomination by
shareholders of candidates for election to the Board of Directors or the
proposal by shareholders of business to be acted upon at an annual meeting of
shareholders.
The Articles provide that a director or the entire Board of Directors
may be removed only for cause and only by the affirmative vote of at least 80%
of the shares eligible to vote generally in the election of directors. Removal
for "cause" is limited to the grounds for termination in the OTS regulation
relating to employment contracts of federally-insured savings associations.
Restrictions on Call of Special Meetings. The Articles provide that a
special meeting of shareholders may be called only by the Chairman of the Board
of the Holding Company or pursuant to a resolution adopted by a majority of the
total number of directors of the Holding Company. Shareholders are not
authorized to call a special meeting.
No Cumulative Voting. The Articles provide that there shall be no
cumulative voting rights in the election of directors.
<PAGE>
Authorization of Preferred Stock. The Articles authorize 2,000,000
shares of preferred stock, without par value. The Holding Company is authorized
to issue preferred stock from time to time in one or more series subject to
applicable provisions of law, and the Board of Directors is authorized to fix
the designations, powers, preferences and relative participating, optional and
other special rights of such shares, including voting rights (if any and which
could be as a separate class) and conversion rights. In the event of a proposed
merger, tender offer or other attempt to gain control of the Holding Company not
approved by the Board of Directors, it might be possible for the Board of
Directors to authorize the issuance of a series of preferred stock with rights
and preferences that would impede the completion of such a transaction. An
effect of the possible issuance of preferred stock, therefore, may be to deter a
future takeover attempt. The Board of Directors has no present plans or
understandings for the issuance of any preferred stock and does not intend to
issue any preferred stock except on terms which the Board of Directors deems to
be in the best interests of the Holding Company and its shareholders.
Limitations on 10% Shareholders. The Articles provide that: (i) no
person shall directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of equity security of the Holding
Company (provided that such limitation shall not apply to the acquisition of
equity securities by any one or more tax-qualified employee stock benefit plans
maintained by the Holding Company, if the plan or plans beneficially own no more
than 25% of any class of such equity security of the Holding Company); and that
(ii) shares beneficially owned in violation of the stock ownership restriction
described above shall not be entitled to vote and shall not be voted by any
person or counted as voting stock in connection with any matter submitted to a
vote of shareholders. For these purposes, a person (including management) who
has obtained the right to vote shares of the Common Stock pursuant to revocable
proxies shall not be deemed to be the "beneficial owner" of those shares if that
person is not otherwise deemed to be a beneficial owner of those shares.
Evaluation of Offers. The Articles of the Holding Company provide that
the Board of Directors of the Holding Company, when determining to take or
refrain from taking corporate action on any matter, including making or
declining to make any recommendation to the Holding Company's shareholders, may,
in connection with the exercise of its judgment in determining what is in the
best interest of the Holding Company, Union Federal and the shareholders of the
Holding Company, give due consideration to all relevant factors, including,
without limitation, the social and economic effects of acceptance of such offer
on the Holding Company's customers and Union Federal's present and future
account holders, borrowers, employees and suppliers; the effect on the
communities in which the Holding Company and Union Federal operate or are
located; and the effect on the ability of the Holding Company to fulfill the
objectives of a holding company and of us or future financial institution
subsidiaries to fulfill the objectives of a financial institution under
applicable statutes and regulations. The Articles of the Holding Company also
authorize the Board of Directors to take certain actions to encourage a person
to negotiate for a change of control of the Holding Company or to oppose such a
transaction deemed undesirable by the Board of Directors including the adoption
of so-called shareholder rights plans. By having these standards and provisions
in the Articles of the Holding Company, the Board of Directors may be in a
stronger position to oppose such a transaction if the Board concludes that the
transaction would not be in the best interest of the Holding Company, even if
the price offered is significantly greater than the then market price of any
equity security of the Holding Company.
Procedures for Certain Business Combinations. The Articles require that
certain business combinations between the Holding Company (or any majority-owned
subsidiary thereof) and a 10% or greater shareholder either be approved (i) by
at least 80% of the total number of outstanding voting shares of the Holding
Company or (ii) by a majority of certain directors unaffiliated with such 10% or
greater shareholder or involve consideration per share generally equal to the
higher of (A) the highest amount paid by such 10% shareholder or its affiliates
in acquiring any shares of the Common Stock or (B) the "Fair Market Value"
(generally, the highest closing bid paid for the Common Stock during the thirty
days preceding the date of the announcement of the proposed business combination
or on the date the 10% or greater shareholder became such, whichever is higher).
<PAGE>
Amendments to Articles and Bylaws. Amendments to the Articles must be
approved by a majority vote of the Holding Company's Board of Directors and also
by a majority of the outstanding shares of the Holding Company's voting shares;
provided, however, that approval by at least 80% of the outstanding voting
shares is required for certain provisions (i.e., provisions relating to number,
classification, and removal of directors; provisions relating to the manner of
amending the By-Laws; call of special shareholder meetings; criteria for
evaluating certain offers; certain business combinations; and amendments to
provisions relating to the foregoing). The provisions concerning limitations on
the acquisition of shares may be amended only by an 80% vote of the Holding
Company's outstanding shares unless at least two-thirds of the Holding Company's
Continuing Directors (directors of the Holding Company on September 11, 1997, or
directors recommended for appointment or election by a majority of such
directors) approve such amendments in advance of their submission to a vote of
shareholders (in which case only a majority vote of shareholders is required).
The By-Laws may be amended only by a majority vote of the total number
of directors of the Holding Company.
Purpose and Effects of the Anti-Takeover Provisions of the Holding
Company Articles and By-Laws. The Holding Company's Board of Directors believes
that the provisions described above are prudent and will reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by its Board of Directors.
These provisions will also assist in the orderly deployment of the Conversion
proceeds into productive assets during the initial period after the Conversion.
The Board of Directors believes these provisions are in the best interest of
Union Federal and the Holding Company and its shareholders. In the judgment of
the Board of Directors, the Holding Company's Board of Directors will be in the
best position to determine the true value of the Holding Company and to
negotiate more effectively for what may be in the best interests of the Holding
Company and its shareholders. The Board of Directors believes that these
provisions will encourage potential acquirors to negotiate directly with the
Board of Directors of the Holding Company and discourage hostile takeover
attempts. It is also the view of the Board of Directors that these provisions
should not discourage persons from proposing a merger or other transaction at
prices reflecting the true value of the Holding Company and which is in the best
interests of all shareholders.
Attempts to take over financial institutions and their holding
companies have recently increased. Takeover attempts that have not been
negotiated with and approved by the Board of Directors present to shareholders
the risk of a takeover on terms that may be less favorable than might otherwise
be available. A transaction that is negotiated and approved by the Board of
Directors, on the other hand, can be carefully planned and undertaken at an
opportune time to obtain maximum value for the Holding Company and its
shareholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of the
Holding Company's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it to undertake defensive measures at a
great expense. Although a tender offer or other takeover attempt may be made at
a price substantially above then current market prices, such offers are
sometimes made for less than all of the outstanding shares of a target company.
As a result, shareholders may be presented with the alternative of partially
liquidating their investment at a time that may be disadvantageous, or retaining
their investment in an enterprise which is under different management and whose
objective may not be similar to that of the remaining shareholders. The
concentration of control, which could result from a tender offer or other
takeover attempt, could also deprive the Holding Company's remaining
shareholders of the benefits of certain protective provisions of the 1934 Act,
if the number of beneficial owners becomes less than 300 and the Holding Company
terminates its registration under the 1934 Act.
Despite the belief of the Holding Company's Board of Directors in the
benefits to shareholders of the foregoing provisions, the provisions may also
have the effect of discouraging future takeover attempts which would not be
approved by the Board of Directors, but which certain shareholders might deem to
be in their best interest or pursuant to which shareholders might receive a
substantial premium for their shares over then current market prices. As a
result, shareholders who might desire to participate in such a transaction may
not have an opportunity to do so. These provisions will also render the removal
of the incumbent Board of Directors and of management more difficult. The Board
of Directors has, however, concluded that the potential benefits of these
restrictive provisions outweigh the possible disadvantages.
<PAGE>
Other Restrictions on Acquisition of the Holding Company and Union Federal
State Law. Several provisions of the Indiana Business Corporation Law,
as amended (the "IBCL"), could affect the acquisition of shares of the Common
Stock or otherwise affect the control of the Holding Company. Chapter 43 of the
IBCL prohibits certain business combinations, including mergers, sales of
assets, recapitalizations, and reverse stock splits, between corporations such
as the Holding Company (assuming that it has over 100 shareholders) and an
interested shareholder, defined as the beneficial owner of 10% or more of the
voting power of the outstanding voting shares, for five years following the date
on which the shareholder obtained 10% ownership unless the acquisition was
approved in advance of that date by the board of directors. If prior approval is
not obtained, several price and procedural requirements must be met before the
business combination can be completed. These requirements are similar to those
contained in the Holding Company Articles and described in " -- Provisions of
the Holding Company's Articles and By-Laws -- Procedures for Certain Business
Combinations." In general, the price requirements contained in the IBCL may be
more stringent than those imposed in the Holding Company Articles. However, the
procedural restraints imposed by the Holding Company Articles are somewhat
broader than those imposed by the IBCL. Also, the provisions of the IBCL may
change at some future date, but the relevant provisions of the Holding Company
Articles may only be amended by an 80% vote of the shareholders of the Holding
Company.
In addition, the IBCL contains provisions designed to assure that
minority shareholders have some say in their future relationship with Indiana
corporations in the event that a person made a tender offer for, or otherwise
acquired, shares giving that person more than 20%, 33 1/3%, and 50% of the
outstanding voting securities of corporations having 100 or more shareholders
(the "Control Share Acquisitions Statute"). Under the Control Share Acquisitions
Statute, if an acquiror purchases those shares at a time that the corporation is
subject to the Control Share Acquisitions Statute, then until each class or
series of shares entitled to vote separately on the proposal, by a majority of
all votes entitled to be cast by that group (excluding shares held by officers
of the corporation, by employees of the corporation who are directors thereof
and by the acquiror), approves in a special or annual meeting the rights of the
acquiror to vote the shares which take the acquiror over each level of ownership
as stated in the statute, the acquiror cannot vote these shares. An Indiana
corporation otherwise subject to the Control Share Acquisitions Statute may
elect not to be covered by the statute by so providing in its Articles of
Incorporation or By-Laws. The Holding Company, however, will be subject to this
statute following the Conversion because of its desire to discourage
non-negotiated hostile takeovers by third parties.
The IBCL specifically authorizes Indiana corporations to issue options,
warrants or rights for the purchase of shares or other securities of the
corporation or any successor in interest of the corporation. These options,
warrants or rights may, but need not be, issued to shareholders on a pro rata
basis.
The IBCL specifically authorizes directors, in considering the best
interest of a corporation, to consider the effects of any action on
shareholders, employees, suppliers, and customers of the corporation, and
communities in which offices or other facilities of the corporation are located,
and any other factors the directors consider pertinent. As described above, the
Holding Company Articles contain a provision having a similar effect. Under the
IBCL, directors are not required to approve a proposed business combination or
other corporate action if the directors determine in good faith that such
approval is not in the best interest of the corporation. In addition, the IBCL
states that directors are not required to redeem any rights under or render
inapplicable a shareholder rights plan or to take or decline to take any other
action solely because of the effect such action might have on a proposed change
of control of the corporation or the amounts to be paid to shareholders upon
such a change of control. The IBCL explicitly provides that the different or
higher degree of scrutiny imposed in Delaware and certain other jurisdictions
upon director actions taken in response to potential changes in control will not
apply. The Delaware Supreme Court has held that defensive measures in response
to a potential takeover must be "reasonable in relation to the threat posed".
<PAGE>
In taking or declining to take any action or in making any
recommendation to a corporation's shareholders with respect to any matter,
directors are authorized under the IBCL to consider both the short-term and
long-term interests of the corporation as well as interests of other
constituencies and other relevant factors. Any determination made with respect
to the foregoing by a majority of the disinterested directors shall conclusively
be presumed to be valid unless it can be demonstrated that such determination
was not made in good faith.
Because of the foregoing provisions of the IBCL, the Board will have
flexibility in responding to unsolicited proposals to acquire the Holding
Company, and accordingly it may be more difficult for an acquiror to gain
control of the Holding Company in a transaction not approved by the Board.
Federal Limitations. For three years following the Conversion, OTS
regulations prohibit any person (including entities), without the prior approval
of the OTS, from offering to acquire or acquiring more than 10% of any class of
equity security, directly or indirectly, of a converted savings association or
its holding company. This restriction does not apply to the acquisition by any
one or more tax-qualified employee stock benefit plans maintained by Union
Federal or the Holding Company, provided that the plan or plans do not have
beneficial ownership in the aggregate of more than 25% of any class of equity
security of the Holding Company. For these purposes, a person (including
management) who has obtained the right to vote shares of the Common Stock
pursuant to revocable proxies shall not be deemed to be the "beneficial owner"
of those shares if that person is not otherwise deemed to be a beneficial owner
of those shares.
The Change in Bank Control Act provides that no "person," acting
directly or indirectly, or through or in concert with one or more persons, other
than a company, may acquire control of a savings association or a savings and
loan holding company unless at least 60 days prior written notice is given to
the OTS and the OTS has not objected to the proposed acquisition.
The Savings and Loan Holding Company Act also prohibits any "company,"
directly or indirectly or acting in concert with one or more other persons, or
through one or more subsidiaries or transactions, from acquiring control of an
insured savings institution without the prior approval of the OTS. In addition,
any company that acquires such control becomes a "savings and loan holding
company" subject to registration, examination and regulation as a savings and
loan holding company by the OTS.
The term "control" for purposes of the Change in Bank Control Act and
the Savings and Loan Holding Company Act includes the power, directly or
indirectly, to vote more than 25% of any class of voting stock of the savings
association or to control, in any manner, the election of a majority of the
directors of the savings association. It also includes a determination by the
OTS that such company or person has the power, directly or indirectly, to
exercise a controlling influence over or to direct the management or policies of
the savings association.
OTS regulations also set forth certain "rebuttable control
determinations" which arise (i) upon an acquisition of more than 10% of any
class of voting stock of a savings association; or (ii) upon an acquisition of
more than 25% of any class of voting or nonvoting stock of a savings
association; provided that, in either case, the acquiror is subject to any of
eight enumerated "control factors," which are: (1) the acquiror would be one of
the two largest holders of any class of voting stock of the association; (2) the
acquiror would hold more than 25% of the total shareholders' equity of the
association; (3) the acquiror would hold more than 35% of the combined debt
securities and shareholders' equity of the savings association; (4) the acquiror
is a party to any agreement pursuant to which the acquiror possesses a material
economic stake in the savings association or which enables the acquiror to
influence a material aspect of the management or policies of the association;
(5) the acquiror would have the ability, other than through the holding of
revocable proxies, to direct the votes of more than 25% of a class of the voting
stock or to vote in the future more than 25% of such voting stock upon the
occurrence of a future event; (6) the acquiror would have the power to direct
the disposition of more than 25% of the association's voting stock in a manner
other than a widely dispersed or public offering; (7) the acquiror and/or his
representative would constitute more than one member of the association's board
of directors; or (8) the acquiror would serve as an executive officer or in a
similar policy-making position with the association. For purposes of determining
percentage share ownership, a person is presumed to be acting in concert with
certain specified persons and entities, including members of the person's
immediate family, whether or not those family members share the same household
with the person.
<PAGE>
The regulations also specify the criteria which the OTS uses to
evaluate control applications. The OTS is empowered to disapprove an acquisition
of control if it finds, among other things, that (i) the acquisition would
substantially lessen competition, (ii) the financial condition of the acquiring
person might jeopardize the institution or its depositors, or (iii) the
competency, experience, or integrity of the acquiring person indicates that it
would not be in the interest of the depositors, the institution, or the public
to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK
The Holding Company is authorized to issue 5,000,000 shares of Common
Stock, without par value, all of which have identical rights and preferences,
and 2,000,000 shares of preferred stock, without par value. The Holding Company
expects to issue up to 3,041,750 shares of Common Stock and no shares of
preferred stock in the Conversion. The Holding Company has received an opinion
of its counsel that the shares of Common Stock issued in the Conversion will be
validly issued, fully paid, and not liable for further call or assessment. This
opinion was filed with the SEC as an exhibit to the Holding Company's
Registration Statement under the 1933 Act.
Shareholders of the Holding Company will have no preemptive rights to
acquire additional shares of Common Stock which may be subsequently issued. The
Common Stock will represent nonwithdrawable capital, will not be of an insurable
type and will not be federally insured by the FDIC or any government entity.
Under Indiana law, the holders of the Common Stock will possess
exclusive voting power in the Holding Company, unless preferred stock is issued
and voting rights are granted to the holders thereof. Each shareholder will be
entitled to one vote for each share held on all matters voted upon by
shareholders, subject to the limitations discussed under the caption
"Restrictions on Acquisition of the Holding Company." Shareholders may not
cumulate their votes in the election of the Board of Directors. Holders of
Common Stock will be entitled to payment of dividends as may be declared from
time to time by the Holding Company's Board of Directors.
In the unlikely event of the liquidation or dissolution of the Holding
Company, the holders of the Common Stock will be entitled to receive after
payment or provision for payment of all debts and liabilities of the Holding
Company, all assets of the Holding Company available for distribution, in cash
or in kind. See "The Conversion -- Principal Effects of Conversion -- Effect on
Liquidation Rights." If preferred stock is issued subsequent to the Conversion,
the holders thereof may have a priority over the holders of Common Stock in the
event of liquidation or dissolution.
The Board of Directors of the Holding Company will be authorized to
issue preferred stock in series and to fix and state the voting powers,
designations, preferences and relative, participating, optional or other special
rights of the shares of each such series and the qualifications, limitations and
restrictions thereof. Preferred stock may rank prior to the Common Stock as to
dividend rights, liquidation preferences, or both, and may have full or limited
voting rights. The holders of preferred stock will be entitled to vote as a
separate class or series under certain circumstances, regardless of any other
voting rights which such holders may have.
Except as discussed elsewhere herein, the Holding Company has no
specific plans for the issuance of the additional authorized shares of Common
Stock or for the issuance of any shares of preferred stock. In the future, the
authorized but unissued and unreserved shares of Common Stock will be available
for general corporate purposes including, but not limited to, possible issuance
as stock dividends or stock splits, in future mergers or acquisitions, under a
cash dividend reinvestment and stock purchase plan, or in future underwritten or
other public or private offerings. The authorized but unissued shares of
preferred stock will similarly be available for issuance in future mergers or
acquisitions, in future underwritten public offerings or private placements or
for other general corporate purposes. Except as described above or as otherwise
required to approve the transaction in which the additional authorized shares of
Common Stock or authorized shares of preferred stock would be issued, no
shareholder approval will be required for the issuance of these shares.
Accordingly, the Holding Company's Board of Directors without shareholder
approval can issue preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock.
<PAGE>
The offering and sale of Common Stock in the Conversion will be
registered under the 1933 Act. The subsequent sale or transfer of Common Stock
is governed by the 1934 Act, which requires that sales or exchanges of subject
securities be made pursuant to an effective registration statement or qualified
for an exemption from registration requirements of the 1933 Act. Similarly, the
securities laws of the various states also require generally the registration of
shares offered for sale unless there is an applicable exemption from
registration.
The Holding Company, as a newly organized corporation, has never issued
capital stock, and, accordingly, there is no market for the Common Stock. See
"Market for the Common Stock." See "Restrictions on Acquisition of the Holding
Company -- Provisions of the Holding Company's Articles and By-Laws" for a
description of certain provisions of the Holding Company's Articles and By-Laws
which may affect the ability of the Holding Company's shareholders to
participate in certain transactions relating to acquisitions of control of the
Holding Company. Also, see "Dividends" for a description of certain matters
relating to the possible future payment of dividends on the Common Stock.
TRANSFER AGENT
The Fifth Third Bank will act as transfer agent and registrar for the
Common Stock. The Fifth Third Bank's phone number is (513) 579-5320 or (800)
837-2755.
REGISTRATION REQUIREMENTS
Upon the Conversion, the Holding Company's Common Stock will be
registered pursuant to Section 12(g) of the 1934 Act and may not be deregistered
for a period of at least three years following the Conversion. As a result of
the registration under the 1934 Act, certain holders of Common Stock will be
subject to certain reporting and other requirements imposed by the 1934 Act. For
example, beneficial owners of more than 5% of the outstanding Common Stock will
be required to file reports pursuant to Section 13(d) or Section 13(g) of the
1934 Act, and officers, directors and 10% shareholders of the Holding Company
will generally be subject to reporting requirements of Section 16(a) and to the
liability provisions for profits derived from purchases and sales of Holding
Company Common Stock occurring within a six-month period pursuant to Section
16(b) of the 1934 Act. In addition, certain transactions in Common Stock, such
as proxy solicitations and tender offers, will be subject to the disclosure and
filing requirements imposed by Section 14 of the 1934 Act and the regulations
promulgated thereunder.
LEGAL AND TAX MATTERS
Barnes & Thornburg, 11 South Meridian Street, Indianapolis, Indiana
46204, special counsel to Union Federal, will pass upon the legality and
validity of the shares of Common Stock being issued in the Conversion. Barnes &
Thornburg has issued an opinion concerning certain federal and state income tax
aspects of the Conversion and that the Conversion, as proposed, constitutes a
tax-free reorganization under federal and Indiana law. Barnes & Thornburg have
consented to the references herein to their opinions. Certain legal matters
related to this offering will be passed upon for Trident Securities by Luse
Lehman Gorman Pomerenk & Schick, P.C., 5335 Wisconsin Avenue, N.W., Suite 400,
Washington, D.C. 20015.
EXPERTS
Our consolidated financial statements at December 31, 1996 and 1995 and
for each of the three years in the period ended December 31, 1996 appearing in
this Prospectus and Registration Statement have been audited by Geo. S. Olive &
Co, LLC, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
RP Financial has consented to the publication of the summary herein of
its appraisal report as to the estimated pro forma market value of the Common
Stock of the Holding Company to be issued in the Conversion, to the reference to
its opinion relating to the value of the subscription rights, and to the filing
of the appraisal report as an exhibit to the registration statement filed by the
Holding Company under the 1933 Act.
<PAGE>
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the 1933 Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information can be
inspected and copied at the SEC's public reference facilities located at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's Regional Offices in
New York (Seven World Trade Center, 13th Floor, New York, New York 00048) and
Chicago (Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511) and copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. This information can also be found on the SEC's
website, located at www.sec.gov.
Union Federal has filed with the OTS an Application for Conversion from
a federal mutual savings and loan association to a federal stock savings and
loan association, and the Holding Company has filed with the OTS an Application
to become a savings and loan holding company. This Prospectus omits certain
information contained in such Applications. The Applications may be inspected at
the offices of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the
Central Regional Office of the OTS, 200 West Madison, Suite 1300, Chicago,
Illinois 60606.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Table of Contents
Page
Report of Geo. S. Olive & Co. LLC......................................... F-2
Consolidated balance sheet--June 30, 1997 (unaudited) and
December 31, 1996 and 1995........................................... F-3
Consolidated statement of income--for the
six months ended June 30, 1997
and 1996 (unaudited) and the years
ended December 31, 1996, 1995 and 1994............................... F-4
Consolidated statement of changes in retained
earnings for the six months ended
June 30, 1997 (unaudited) and for the
years ended December 31, 1996, 1995 and 1994......................... F-5
Consolidated statement of cash flows--for the
six months ended June 30, 1997 and 1996
(unaudited) and the years ended
December 31, 1996, 1995 and 1994..................................... F-6
Notes to consolidated financial statements................................ F-8
All schedules are omitted because the required information is not applicable or
is included in the consolidated financial statements and related notes.
Union Community Bancorp, the Holding Company, has not commenced operations as of
June 30, 1997 and will not commence operations prior to the conversion of Union
Federal Savings and Loan Association from a federal mutual savings and loan
association to a federal stock savings and loan association. Accordingly, the
financial statements of the Holding Company have been omitted and are not
required.
<PAGE>
Independent Auditor's Report
Board of Directors
Union Federal Savings and Loan Association
Crawfordsville, Indiana
We have audited the consolidated balance sheet of Union Federal Savings and Loan
Association (formerly Union Federal Savings and Loan Association of
Crawfordsville, Indiana) and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of income, changes in retained earnings, and
cash flows for each of the three years in the period ended December 31, 1996.
These consolidated financial statements are the responsibility of the
Association's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of Union
Federal Savings and Loan Association and subsidiary as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Geo. S. Olive & Co. LLC
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
September 12, 1997
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
---------------------------------------------------------
(Unaudited)
Assets
<S> <C> <C> <C>
Cash $ 38,229 $ 29,297 $ 25,300
Interest-bearing deposits in other banks 2,220,067 1,435,893 1,968,177
---------------------------------------------------------
Total cash and cash equivalents 2,258,296 1,465,190 1,993,477
Investment securities held to maturity
(market value-$6,068,000 at June 30, 1997 and
$5,892,000 and $7,663,000 at December 31, 1996 and
1995) 5,920,226 5,747,347 7,422,737
Loans 73,365,481 72,856,009 61,389,595
Allowance for loan losses (198,258) (159,000) (111,000)
---------------------------------------------------------
Net loans 73,167,223 72,697,009 61,278,595
Premises and equipment 365,410 371,364 394,675
Federal Home Loan Bank stock 707,700 580,100 562,600
Foreclosed real estate 81,377
Investment in limited partnership 1,220,179 1,333,909 1,506,461
Interest receivable
Loans 342,046 385,530 278,124
Mortgage-backed securities 20,140 23,600 29,512
Other investment securities and interest-
bearing deposits 57,088 44,474 62,509
Deferred income tax 71,062 75,424 61,514
Other assets 80,198 64,813 40,613
---------------------------------------------------------
Total assets $84,290,945 $82,788,760 $73,630,817
=========================================================
Liabilities
Deposits
Noninterest-bearing $ 386,071 $ 321,523
Interest-bearing 61,668,992 60,114,919 $57,407,222
---------------------------------------------------------
Total deposits 62,055,063 60,436,442 57,407,222
Federal Home Home Bank advances 5,873,051 6,482,478 1,065,209
Note payable 1,200,042 1,397,892 1,576,492
Interest payable 110,171 91,452 93,416
Other liabilities 579,684 470,663 464,341
---------------------------------------------------------
Total liabilities 69,818,011 68,878,927 60,606,680
Commitments and contingencies --- --- ---
Retained Earnings--substantially restricted 14,472,934 13,909,833 13,024,137
---------------------------------------------------------
Total liabilities and retained earnings $84,290,945 $82,788,760 $73,630,817
=========================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
(Unaudited)
---------------------------------------------------------------------------------
Interest and Dividend Income
<S> <C> <C> <C> <C> <C>
Loans, including fees $2,994,235 $2,625,754 $5,561,735 $5,065,944 $4,533,050
Investment securities
Mortgage-backed securities 110,509 139,325 262,711 321,262 389,790
Other investment securities 95,561 92,879 175,332 227,154 232,664
Dividends on Federal Home
Loan Bank stock 24,969 22,134 45,027 44,291 31,593
Deposits with financial institutions 50,053 39,685 66,886 70,575 61,554
---------------------------------------------------------------------------------
Total interest and
dividend income 3,275,327 2,919,777 6,111,691 5,729,226 5,248,651
---------------------------------------------------------------------------------
Interest Expense
Deposits 1,653,754 1,592,387 3,232,877 3,036,215 2,447,864
Federal Home Loan Bank advances 168,945 34,461 190,800 111,569 59,190
---------------------------------------------------------------------------------
Total interest expense 1,822,699 1,626,848 3,423,677 3,147,784 2,507,054
---------------------------------------------------------------------------------
Net Interest Income 1,452,628 1,292,929 2,688,014 2,581,442 2,741,597
Provision for loan losses 111,000 24,000 48,000 24,000 24,000
---------------------------------------------------------------------------------
Net Interest Income After
Provision for Loan Losses 1,341,628 1,268,929 2,640,014 2,557,442 2,717,597
---------------------------------------------------------------------------------
Other Income (Losses)
Equity in losses of limited partnership (113,730) (78,558) (172,552) (249,092) (54,239)
Other income 18,792 20,703 56,457 31,346 14,238
---------------------------------------------------------------------------------
Total other income (losses) (94,938) (57,855) (116,095) (217,746) (40,001)
---------------------------------------------------------------------------------
Other Expenses
Salaries and employee benefits 252,272 229,697 460,615 480,770 488,745
Net occupancy expenses 15,924 11,959 39,103 65,698 44,003
Equipment expenses 11,379 10,108 19,886 20,460 16,867
Deposit insurance expense 12,068 65,463 494,679 127,053 126,482
Other expenses 157,090 127,359 287,654 328,184 207,718
---------------------------------------------------------------------------------
Total other expenses 448,733 444,586 1,301,937 1,022,165 883,815
---------------------------------------------------------------------------------
Income Before Income Tax 797,957 766,488 1,221,982 1,317,531 1,793,781
Income tax expense 234,856 230,637 336,286 326,018 638,769
---------------------------------------------------------------------------------
Net Income $ 563,101 $ 535,851 $ 885,696 $ 991,513 $1,155,012
=================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statement of Changes in Retained Earnings
Balance, January 1, 1994 $10,877,612
Net income for 1994 1,155,012
-----------
Balance, December 31, 1994 12,032,624
Net income for 1995 991,513
-----------
Balance, December 31, 1995 13,024,137
Net income for 1996 885,696
-----------
Balance, December 31, 1996 13,909,833
Net income for the six months ended June 30, 1997 (unaudited) 563,101
-----------
Balance, June 30, 1997 (unaudited) $14,472,934
-----------
===========
See notes to consolidated financial statements.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
---------------------------------------------------------------------------------
(Unaudited)
Operating Activities
<S> <C> <C> <C> <C> <C>
Net income $ 563,101 $535,851 $ 885,696 $ 991,513 $1,155,012
Adjustments to reconcile net
income to net cash provided by
operating activities
Provision for loan losses 111,000 24,000 48,000 24,000 24,000
Depreciation 13,364 12,913 25,913 25,005 21,577
Deferred income tax 4,362 10,181 (13,910) 40,462 29,224
Investment securities accretion, net (3,362) (2,798) (6,181) (812) (405)
Equity in losses of limited partnership 113,730 78,558 172,552 249,092 54,239
Net change in
Interest receivable 34,330 17,506 (83,459) (103,132) (109,578)
Interest payable 18,719 (10,932) (1,964) 12,260 (1,824)
Other assets (15,385) (21,883) (24,199) 59,003 (73,106)
Other liabilities 94,064 152,852 85,879 (137,157) (158,455)
---------------------------------------------------------------------------------
Net cash provided by
operating activities 933,923 796,248 1,088,327 1,160,234 940,684
---------------------------------------------------------------------------------
Investing Activities
Investment securities
Purchases of other investment
securities held to maturity (700,000) (494,342) (994,342) (100,000) (799,492)
Proceeds from maturities and
paydowns of mortgage-backed
securities held to maturity 330,483 341,407 675,913 663,446 1,769,250
Proceeds from maturities of other
investment securities
held to maturity 200,000 1,500,000 2,000,000 400,000
Purchases of loans (500,000) (1,000,000) (1,350,000) (742,000) (1,522,700)
Proceeds from loan sales 171,000
Other net change in loans (162,591) (5,687,855) (10,116,414) (501,891) (3,474,715)
Purchases of premises
and equipment (7,410) (2,602) (38,381) (36,352)
Purchase of FHLB of Indianapolis
stock (127,600) (17,500) (17,500) (1,000) (58,500)
---------------------------------------------------------------------------------
Net cash used by
investing activities (967,118) (5,358,290) (9,804,945) (719,826) (3,551,509)
---------------------------------------------------------------------------------
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
(Unaudited)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Financing Activities
Net change in
Interest-bearing demand and
savings deposits 791,375 634,790 1,243,027 (1,375,313) (571,706)
Certificates of deposit 827,246 476,355 1,786,193 3,896,285 382,018
Proceeds from borrowings 1,000,000 2,000,000 10,500,000 2,500,000 3,200,000
Repayment of borrowings (1,807,277) (261,331) (5,261,331) (4,801,291) (66,800)
Net change in advances by
borrowers for taxes and insurance 14,957 97,233 (79,558) 4,201 33,660
---------------------------------------------------------------------------------
Net cash provided by
financing activities 826,301 2,947,047 8,188,331 223,882 2,977,172
---------------------------------------------------------------------------------
Net Change in
Cash and Cash Equivalents 793,106 (1,614,995) (528,287) 664,290 366,347
Cash and Cash Equivalents,
Beginning of Year 1,465,190 1,993,477 1,993,477 1,329,187 962,840
---------------------------------------------------------------------------------
Cash and Cash Equivalents,
End of Year $2,258,296 $378,482 $1,465,190 1,993,477 $1,329,187
=================================================================================
Additional Cash Flows Information
Interest paid $1,803,980 $1,634,780 $3,425,641 $3,135,524 $2,508,878
Income tax paid 230,033 191,000 375,405 227,747 800,543
Investment in limited partnership 1,809,792
Loans transferred to foreclosed
real estate 203,120
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Union Federal Savings and Loan
Association ("Association") and its wholly owned subsidiary, UFS Service Corp.
("UFS"), conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Association operates under a federal thrift charter and provides full
banking services. As a federally-chartered thrift, the Association is subject to
regulation by the Office of Thrift Supervision.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in Montgomery County, Indiana and surrounding
counties. The Association's loans are generally secured by specific items of
collateral including real property, consumer assets and business assets. UFS
invests in a low income housing partnership.
Consolidation--The consolidated financial statements include the accounts of the
Association and UFS after elimination of all material intercompany transactions
and accounts.
Investment Securities--The Association adopted Statement of Financial Accounting
Standards ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, on January 1, 1994. At adoption, all investment securities
were classified as held to maturity.
Debt securities are classified as held to maturity when the Association has the
positive intent and ability to hold the securities to maturity. Securities held
to maturity are carried at amortized cost.
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Association will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The
Association considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual lives of the loans. When a
loan is paid off or sold, any unamortized loan origination fee balance is
credited to income.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of June
30, 1997 (unaudited) and December 31, 1996 and 1995, the allowance for loan
losses is adequate based on information currently available. A worsening or
protracted economic decline in the area within which the Association operates
would increase the likelihood of additional losses due to credit and market
risks and could create the need for additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 5 to 31.5 years.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank ("FHLB") system. The required investment
in the common stock is based on a predetermined formula.
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
Investment in limited partnership is recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Association files consolidated income tax returns with its subsidiary.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Investment Securities Held to Maturity
<TABLE>
<CAPTION>
June 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
U.S. Treasury $ 350 $ 1 $ 349
Federal agencies 3,146 $ 3 27 3,122
Mortgage-backed securities 2,424 179 6 2,597
----------------------------------------------------------------
Total investment securities $5,920 $182 $34 $6,068
=================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 350 $ 2 $ 348
Federal agencies 2,645 $ 1 35 2,611
Mortgage-backed securities 2,752 186 5 2,933
----------------------------------------------------------------
Total investment securities $5,747 $187 $42 $5,892
================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $1,050 $ 2 $ 1 $1,051
Federal agencies 2,950 10 16 2,944
Mortgage-backed securities 3,423 249 4 3,668
----------------------------------------------------------------
Total investment securities $7,423 $261 $21 $7,663
================================================================
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity at June 30,
1997 (unaudited) and December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
Amortized Fair Amoritzed Fair
Cost Value Cost Value
----------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Within one year $ 850 $ 847 $ 300 $ 300
One to five years 2,346 2,324 2,695 2,659
Five to ten years 300 300
----------------------------------------------------------------
3,496 3,471 2,995 2,959
Mortgage-backed securities 2,424 2,597 2,752 2,933
----------------------------------------------------------------
Totals $5,920 $6,068 $5,747 $5,892
================================================================
</TABLE>
Securities with a carrying value of $2,502,000 and $2,832,000 were pledged at
June 30, 1997 (unaudited) and December 31, 1996 to secure Federal Home Loan Bank
advances.
Mortgage-backed securities included in investment securities held to maturity
above consist of the following:
<TABLE>
<CAPTION>
June 30, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Government National Mortgage Corporation $1,307 $118 $1,425
Federal Home Loan Mortgage Corporation 818 59 877
Federal National Mortgage Corporation 274 2 $6 270
Other 25 25
------------------------------------------------------------------
Total mortgage-backed securities $2,424 $179 $6 $2,597
==================================================================
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Corporation $1,391 $120 $1,511
Federal Home Loan Mortgage Corporation 1,039 64 1,103
Federal National Mortgage Corporation 294 2 $5 291
Other 28 28
----------------------------------------------------------------
Total mortgage-backed securities $2,752 $186 $5 $2,933
================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Government National Mortgage Corporation $1,707 $149 $1,856
Federal Home Loan Mortgage Corporation 1,338 93 1,431
Federal National Mortgage Corporation 341 6 $4 343
Other 37 1 38
----------------------------------------------------------------
Total mortgage-backed securities $3,423 $249 $4 $3,668
================================================================
</TABLE>
o Loans and Allowance
June 30, December 31,
1997 1996 1995
--------------------------------------
(Unaudited)
Real estate mortgage loans
One-to-four family $58,664 $57,031 $48,295
Multi-family 10,212 10,920 9,617
Commercial 3,513 3,593 2,814
Real estate construction loans 1,162 1,322 852
Individuals' loans for household and
other personal expenditures 143 346 191
----------------------------------
73,694 73,212 61,769
Deferred loan fees (329) (356) (379)
----------------------------------
Total loans $73,365 $72,856 $61,390
==================================
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
---------------------------------------------------------
(Unaudited)
Allowance for loan losses
<S> <C> <C> <C> <C> <C>
Balances, Beginning of Period $159 $111 $111 $ 87 $63
Provision for losses 111 24 48 24 24
Loans charged off (72)
--------------------------------------------------------
Balances, End of Period $198 $135 $159 $111 $87
========================================================
</TABLE>
On January 1, 1995, the Association adopted SFAS Nos. 114 and 118, Accounting by
Creditors for Impairment of a Loan and Accounting by Creditors for Impairment of
a Loan - Income Recognition and Disclosures. At June 30, 1997, (unaudited) the
Association had no impaired loans. At December 31, 1996, the Association had an
impaired loan of $112,000 and had recorded an allowance for losses of $37,000.
The average balance of impaired loans for the six months ended June 30, 1997
(unaudited) and the year ended December 31, 1996 was $66,000 and $110,000. The
Association had no interest income or cash receipts on impaired loans during the
six months ended June 30, 1997 (unaudited) and during the year ended December
31, 1997.
In addition, at June 30, 1997 (unaudited) and December 31, 1996, the Association
had nonaccrual loans of $122,000 and $377,000, for which impairment had not been
recognized. If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately $3,000 and
$14,000 for the six months ended June 30, 1997 (unaudited) and for the year
ended December 31, 1996.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
Nonaccruing loans totaled $156,000 and $143,000 at December 31, 1995 and 1994.
Additional interest income of approximately $3,000 for 1995 and $1,000 for 1994
would have been recorded had income on those loans been considered collectible
and accounted for on the accrual basis under the original terms of the loans.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association has entered into transactions with certain directors and
officers. Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties was as follows:
Balances, December 31, 1995 $1,316
Changes in composition of related parties (57)
New loans, including renewals 378
Payments, etc. including renewals (109)
------
Balances, December 31, 1996 1,528
New loans, including renewals (unaudited) 460
Payments, etc. including renewals (unaudited) (151)
------
Balances, June 30, 1997 (unaudited) $1,837
======
o Premises and Equipment
June 30, December 31,
1997 1996 1995
------------------------------------------
(Unaudited)
Land $146 $146 $146
Buildings 538 538 538
Equipment 142 134 133
------------------------------------------
Total cost 826 818 817
Accumulated depreciation (461) (447) (422)
------------------------------------------
Net $365 $371 $395
==========================================
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Investment in Limited Partnership
The investment in limited partnership of $1,220,000, $1,334,000 and $1,506,000
at June 30, 1997 (unaudited), December 31, 1996 and 1995 represents a 99 percent
equity in Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership
organized to build, own and operate a 48-unit apartment complex. In addition to
recording its equity in the losses of Pedcor, the Association has recorded the
benefit of low income housing tax credits of $89,000 (unaudited) for the six
months ended June 30, 1997 and 1996 and $178,000 for the years ended December
31, 1996 and 1995 and $75,000 for the year ended December 31, 1994. Condensed
financial statements for Pedcor are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996 1995
-----------------------------------------------
(Unaudited)
Condensed statement of financial condition
Assets
<S> <C> <C> <C>
Cash $ 5 $ 29 $ 21
Land and property 2,321 2,350 2,408
Other assets 57 30 76
-----------------------------------------
Total assets $2,383 $2,409 $2,505
=========================================
Liabilities
Notes payable--Association $ 873 $ 982 $1,065
Notes payable--other 1,282 1,290 1,304
Other liabilities 129 173 135
-----------------------------------------
Total liabilities 2,284 2,445 2,504
Partners' equity 99 (36) 1
-----------------------------------------
Total liabilities and partners' equity $2,383 $2,409 $2,505
=========================================
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
-------------------------------------------------------------
(Unaudited)
Condensed statement of operations
<S> <C> <C> <C> <C> <C>
Total revenue $110 $107 $219 $222 $96
Total expenses 172 220 435 454 151
-------------------------------------------------------------
Net loss $ (62) $(113) $(216) $(232) $(55)
=============================================================
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Deposits
June 30, December 31,
1997 1996 1995
-----------------------------------
(Unaudited)
Interest-bearing demand $10,352 $ 9,514 $ 8,627
Savings deposits 3,821 3,867 3,511
Certificates and other time deposits
of $100,000 or more 7,527 7,056 6,387
Other certificates and time deposits 40,355 39,999 38,882
-----------------------------------
Total deposits $62,055 $60,436 $57,407
===================================
Certificates maturing in years ending June 30 December 31
-------------------------------
(Unaudited)
1997 $28,545
1998 $26,340 12,844
1999 15,968 3,742
2000 3,333 1,292
2001 1,517 632
2002 724
----------------------------
$47,882 $47,055
============================
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $7,527,000 (unaudited), $7,056,000, and $6,387,000 at
June 30, 1997 and December 31, 1996 and 1995. Deposits in excess of $100,000 are
not federally insured.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
---------------------------------------------------------------------------
(Unaudited)
Interest expense on deposits
<S> <C> <C> <C> <C> <C>
Interest-bearing demand $ 186 $ 160 $ 369 $ 385 $ 364
Savings deposits 76 73 148 146 159
Certificates 1,392 1,359 2,716 2,505 1,925
---------------------------------------------------------------------------
$1,654 $1,592 $3,233 $3,036 $2,448
===========================================================================
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Federal Home Loan Advances
June 30, 1997 December 31, 1996
-----------------------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-----------------------------------------------
(Unaudited)
Advances from FHLB
Maturities in years ending
1997 $5,609 5.50%
1998 $5,101 5.77% 101 5.14
1999 114 5.33 114 5.33
2000 123 5.49 123 5.49
2001 129 5.67 129 5.67
2002 138 5.80 138 5.80
2003 147 5.90 147 5.90
2004 121 6.03 121 6.03
------ ------
$5,873 5.76% $6,482 5.52%
====== ======
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $59,019,000 and $57,954,000 at June 30, 1997 (unaudited) and December
31, 1996. Advances are subject to restrictions or penalties in the event of
prepayment.
o Note Payable
The note payable to Pedcor dated February 1, 1994 in the original amount of
$1,809,792 bears no interest so long as there exists no event of default. In the
instances where an event of default has occurred, interest shall be calculated
at a rate equal to the lesser of 14% per annum or the highest amount permitted
by applicable law. The amount payable represents the remaining unconditional
annual capital contributions due to Pedcor.
June 30, 1997 December 31, 1996
-------------------------------------------
(Unaudited)
Note payable to Pedcor
Maturities in years ending:
1997 $ 198
1998 $ 179 179
1999 184 184
2000 183 183
2001 177 177
2002 174 174
Thereafter 303 303
-----------------------------
$1,200 $1,398
=============================
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association has an available line of credit with the FHLB totaling
$1,000,000. The line of credit expires September 16, 1997 and bears interest at
a rate equal to the current variable advance rate. There were no drawings on
this line of credit at June 30, 1997 (unaudited) and December 31, 1996.
o Income Tax
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
1997 1996 1996 1995 1994
-------------------------------------------------------------
(Unaudited)
Income tax expense
Currently payable
<S> <C> <C> <C> <C> <C>
Federal $161 $156 $246 $184 $461
State 70 65 104 102 149
Deferred
Federal 4 6 (20) 32 23
State 4 6 8 6
-------------------------------------------------------------
Total income tax expense $235 $231 $336 $326 $639
=============================================================
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $271 $261 $415 $448 $610
Effect of state income taxes 46 45 73 73 102
Tax credits (89) (89) (178) (178) (75)
Other 7 14 26 (17) 2
-------------------------------------------------------------
Actual tax expense $235 $231 $336 $326 $639
=============================================================
Effective tax rate 29.4% 30.1% 27.5% 24.7% 35.6%
</TABLE>
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The components of the cumulative net deferred tax asset are as follows:
June 30, December 31,
1997 1996 1995
---------------------------------
(Unaudited)
Differences in depreciation methods $(28) $(28) $(34)
FHLB stock dividend (23) (23) (23)
Differences in accounting for loan fees 51 66 95
Differences in accounting for loan losses 70 49 28
Equity in partnership losses (59) (67) (25)
Business income tax credits 62 68 27
State income tax (2) (2) (4)
Other 13 (2)
------------------------------
$71 $76 $62
==============================
Assets $183 $196 $150
Liabilities (112) (120) (88)
------------------------------
$ 71 $ 76 $ 62
==============================
At June 30, 1997 (unaudited) and December 31, 1996, the Association had an
unused business income tax credit carryforward of $62,000 and $68,000 expiring
in 2011.
Retained earnings at June 30, 1997 (unaudited) and December 31, 1996 and 1995
include approximately $2,632,000 for which no deferred income tax liability has
been recognized. This amount represents an allocation of income to bad debt
deductions as of December 31, 1987 for tax purposes only. Reduction of amounts
so allocated for purposes other than tax bad debt losses or adjustments arising
from carryback of net operating losses or loss of "bank" status, would create
income for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amounts was approximately $1,043,000 at June 30, 1997 (unaudited) and
December 31, 1996 and 1995.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Association uses the same credit policies in making
such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk were as
follows:
June 30, December 31,
1997 1996 1995
-----------------------------------
(Unaudited)
Mortgage loan commitments
At variable rates $57 $28
At fixed rates ranging from
7.50 to 9.25% for June 30, 1997,
7.38 to 9.00% for 1996 and
7.75 to 8.50% for 1995 397 $386 295
Standby letters of credit 2,018 1,500 1,500
Commitments to purchase loans 300 500
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Association upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Association
to guarantee the performance of a customer to a third party.
The Association and UFS are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Association.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Association's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Association must meet specific capital guidelines
that involve quantitative measures of the Association's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Association's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings,
and other factors.
At June 30, 1997 (unaudited) and December 31, 1996, the management of the
Association believes that it meets all capital adequacy requirements to which it
is subject. The most recent notification from the regulatory agency categorized
the Association as well capitalized under the regulatory framework for prompt
corrective action. There have been no conditions or events since that
notification that management believes have changed this categorization.
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
June 30, 1997
Required for To Be Well
------------------------------------------------------------------------
Actual Adequate Capital (1) Capitalized (1)
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1)
(to risk weighted assets) $14,671 34.6% $3,390 8.0% $4,238 10.0%
Core capital (1) (to adjusted tangible assets) 14,473 17.2 2,529 3.0 5,057 6.0
Core capital (1) (to adjusted total assets) 14,473 17.2 2,529 3.0 4,215 5.0
</TABLE>
(1) As defined by regulatory agencies
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
December 31, 1996
Required for To Be Well
------------------------------------------------------------------------
Actual Adequate Capital (1) Capitalized (1)
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1)
(to risk-weighted assets) $14,069 33.6% $3,346 8.0% $4,183 10.0%
Core capital (1) (to adjusted tangible assets) 13,910 16.8 2,484 3.0 4,967 6.0
Core capital (1) (to adjusted total assets) 13,910 16.8 2,484 3.0 4,139 5.0
</TABLE>
(1) As defined by regulatory agencies
The Association's tangible capital at June 30, 1997 (unaudited) and December 31,
1996 was $14,473,000 and $13,910,000, which amount was 17.2% and 16.8% of
tangible assets and exceeded the required ratio of 1.5%.
Reconciliation of capital for financial statement purposes to regulatory capital
was as follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
Core Tangible Risk-Based Core Tangible Risk-Based
Capital Capital Capital Capital Capital Capital
--------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Capital for financial
statement purposes $14,473 $14,473 $14,473 $13,910 $13,910 $13,910
Add
General loan
valuation allowance 198 159
--------------------------------------------------------------------------------------
Regulatory capital $14,473 $14,473 $14,671 $13,910 $13,910 $14,069
======================================================================================
</TABLE>
o Employee Benefit Plans
The Association provides pension benefits for substantially all of its
employees, and is a participant in a pension fund known as the Pentegra Group
(formerly known as the Financial Institutions Retirement Fund). This plan is a
multi-employer plan; separate actuarial valuations are not made with respect to
each participating employer. Pension expense was $20,000 and $26,000 for the six
months ended June 30, 1997 and 1996 (unaudited) and $47,000, $53,000 and $56,000
for 1996, 1995 and 1994.
The Association has a retirement savings 401(k) plan in which substantially all
employees may participate. The Association matches employees' contributions at
the rate of 50% for the first 5% of base salary contributed by participants. The
Association's expense for the plan was $5,000 for the six months ended June 30,
1997 and 1996 (unaudited) and $10,000, $11,000 and $9,000 for 1996, 1995 and
1994.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
Note Payable--Limited Partnership--The fair value of the borrowing is estimated
using a discounted cash flow calculation, based on current rates for similar
debt.
Advance Payments by Borrowers for Taxes and Insurance--The fair value
approximates carrying value.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans, and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts of these
commitments, which are immaterial, are reasonable estimates of the fair value of
these financial instruments.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Association's financial instruments are as
follows:
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996 December 31, 1995
----------------------------------------------------------------------------
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
----------------------------------------------------------------------------
(Unaudited)
Assets
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $2,258 $2,258 $1,465 $1,465 $1,993 $1,993
Investment securities held to maturity 5,920 6,068 5,747 5,892 7,423 7,663
Loans, net 73,167 73,633 72,697 73,220 61,279 62,038
Stock in FHLB 708 708 580 580 370 370
Interest receivable 419 419 454 454 563 563
Liabilities
Deposits 62,055 61,985 60,436 60,683 57,407 58,091
Borrowings
FHLB advances 5,873 5,831 6,482 6,587 1,065 1,043
Note payable--limited partnership 1,200 1,142 1,398 1,343 1,577 1,547
Interest payable 110 110 91 91 93 93
Advances by borrowers for
taxes and insurance 216 216 201 201 280 280
</TABLE>
o Subsequent Event--Plan of Conversion
On June 2, 1997, the Board of Directors adopted a Plan of conversion ("Plan")
whereby the Association will convert from a Federally chartered mutual
institution to a Federally chartered stock savings and loan association. The
Plan is subject to approval of regulatory authorities and members at a special
meeting. The stock of the Association will be issued to Union Community Bancorp
("Union"), a holding company formed in connection with the conversion, and the
Association will become a wholly-owned subsidiary of Union. Pursuant to the
Plan, shares of capital stock of Union are expected to be offered initially for
subscription to eligible members of the Association and certain other persons as
of specified dates subject to various subscription priorities as provided in the
Plan. The capital stock will be offered at a price to be determined by the Board
of Directors based upon an appraisal to be made by an independent appraisal
firm. The exact number of shares to be offered will be determined by the Board
of Directors in conjunction with the determination of the subscription price. At
least the minimum number of shares offered in the conversion must be sold. Any
stock not purchased in the subscription offering will be sold in a community
offering expected to be commenced following the subscription offering.
<PAGE>
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Plan provides that when the conversion is completed, a "liquidation account"
will be established in an amount equal to the retained income of the Association
as of the date of the most recent financial statements contained in the final
conversion prospectus. The liquidation account is established to provide a
limited priority claim to the assets of the Association to qualifying depositors
("eligible account holders") at December 31, 1995 and other depositors
("supplemental eligible account holders") as of September 30, 1997 who continue
to maintain deposits in the Association after conversion. In the unlikely event
of a complete liquidation of the Association, and only in such event, eligible
account holders would receive from the liquidation account a liquidation
distribution based on their proportionate share of the then total remaining
qualifying deposits.
Current regulations allow the Association to pay dividends on its stock after
the conversion if its regulatory capital would not thereby be reduced below the
amount then required for the aforementioned liquidation account. Also, capital
distribution regulations limit the Association's ability to make capital
distributions which include dividends, stock redemptions or repurchases,
cash-out mergers, interest payments on certain convertible debt and other
transactions charged to the capital account based on its capital level and
supervisory condition. Under regulations in effect at June 30, 1997, no
repurchase of bank or holding company stock may be made during the first year
following conversion. For the second and third years following conversion,
subject to the demonstration of a valid business purpose and approval by the
Office of Thrift Supervision, annual repurchases of up to 5 percent of
outstanding stock can be made.
Costs of conversion will be netted from proceeds of sale of common stock and
recorded as a reduction of additional paid-in capital or common stock. If the
conversion is not competed, such costs, totalling $7,500 at June 30, 1997
(unaudited), would be charged to expense.
o Unaudited Financial Statements
The accompanying consolidated balance sheet as of June 30, 1997, and the
consolidated statements of income, changes in retained earnings and cash flows
for the six months ended June 30, 1997 and 1996 are unaudited, but management is
of the opinion that all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results of the periods
reported, have been included in the accompanying financial statements. The
results of operations for the six months ended June 30, 1997 are not necessarily
indicative of those expected for the remainder of the year.
<PAGE>
GLOSSARY
1933 Act Securities Act of 1933, as amended
1934 Act Securities Exchange Act of 1934, as amended
APY Annual Percentage Yield
Associate The term "Associate" of a person is defined to
mean (i) any corporation or organization (other
than Union Federal or its subsidiaries or the
Holding Company) of which such person is a
director, officer, partner or 10% shareholder;
(ii) any trust or other estate in which such
person has a substantial beneficial interest or
serves as trustee or in a similar fiduciary
capacity; provided, however that such term shall
not include any employee stock benefit plan of the
Holding Company or Union Federal in which such a
person has a substantial beneficial interest or
serves as a trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such
person, or relative of such spouse, who either has
the same home as such person or who is a director
or officer of Union Federal or its subsidiaries or
the Holding Company. ATM Automated Teller Machine
BIF Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public
of any shares of Common Stock not subscribed for
in the Subscription Offering, with preference
given to residents of Montgomery County
Common Stock Up to 3,041,750 shares of Common Stock, with no
par value, offered by Union Community Bancorp in
connection with the Conversion
Conversion Simultaneous conversion of Union Federal Savings
and Loan Association to stock form, the issuance
of Union Federal's outstanding capital stock to
Union Community Bancorp and Union Community
Bancorp's offer and sale of Common Stock
Eligible Account Holders Savings account holders of Union Federal with
account balances of at least $50 as of the close
of business on December 31, 1995
ERISA Employee Retirement Income Security Act of 1974,
as amended
ESOP The Union Community Bancorp Employee Stock
Ownership Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the Common
Stock ranging from $19,550,000 to $26,450,000
Expiration Date 12:00 noon, Crawfordsville Time, on December 10,
1997
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
FedICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
Holding Company Union Community Bancorp
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
RP Financial RP Financial, LC
MMDA Money Market Demand Account
NASD National Association of Securities Dealers, Inc.
Nasdaq National National Association of Securities Dealers
Market System Automated Quotation System--National Market
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
OCC Office of the Comptroller of the Currency
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Other Members Savings account holders (other than Eligible
Account Holders and Supplemental Eligible Account
Holders) who are entitled to vote at the Special
Meeting due to the existence of a savings account
on the Voting Record Date for the Special Meeting
and borrowers as of July 30, 1997 who remain
borrowers on the Voting Record Date
OTS Office of Thrift Supervision
Pension Plan Multiple-employer, noncontributory defined benefit
retirement plan adopted by Union Federal for its
full-time employees through Pentegra Group
(formerly known as Financial Institutions
Retirement Fund)
Plan or Plan of Conversion Plan of Union Federal Savings and Loan Association
to convert from a federally chartered mutual
savings and loan association to a federally
chartered stock savings and loan association and
the issuance of all of Union Federal's outstanding
capital stock to Union Community Bancorp and the
issuance of Union Community Bancorp's Common Stock
to the public
Purchase Price $10.00 per share price of the Common Stock
QTI Qualified thrift investment
QTL Qualified thrift lender
REO Real Estate Owned
RRP Management Recognition and Retention Plan to be
submitted for approval at a meeting of the Holding
Company's shareholders to be held at least six
months after the completion of the Conversion
SAIF Savings Association Insurance Fund of the FDIC
SFAS Statement of Financial Accounting Standard
SEC Securities and Exchange Commission
Special Meeting Special Meeting of members of Union Federal called
for the purpose of approving the Plan
Stock Option Plan The Union Community Bancorp Stock Option Plan for
directors and officers to be submitted for
approval at a meeting of the Holding Company's
shareholders to be held at least six months after
the completion of the Conversion Subscription
Offering Offering of non-transferable rights to
subscribe for the Common Stock, in order of
priority, to Eligible Account Holders, the ESOP,
Supplemental Eligible Account Holders and Other
Members Supplemental Eligible Depositors of Union
Federal Savings and Loan Association who are not
Eligible Account Account Holders Holders, with
account balances of at least $50 on September 30,
1997 Trident Securities Trident Securities, Inc.
UFS UFS Service Corp., a wholly-owned subsidiary
of Union Federal Savings and Loan Association
Union Federal Union Federal Savings and Loan Association of
Crawfordsville, Indiana
Voting Record Date The close of business on October 31, 1997, the
date for determining members entitled to vote at
the Special Meeting
<PAGE>
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Holding Company or Union Federal. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the shares of Common Stock offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized, or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor any sale hereunder shall, under any
circumstances, create any implication that information herein is correct as of
any time subsequent to the date hereof.
Union Community Bancorp
(Proposed Holding Company for
Union Federal Savings and Loan Association)
Up to 3,041,750 Shares
Common Stock
(without par value)
SUBSCRIPTION AND
COMMUNITY OFFERING
PROSPECTUS
TRIDENT SECURITIES, INC.
November 12, 1997
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until December 7, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution(1).
Blue Sky Legal Services and Registration Fees $ 5,000
OTS Filing Fees $ 8,400
NASD Filing Fee $ 3,542
Securities and Exchange Commission Registration Fee $ 9,217
NASDAQ National Market System Listing Fee $ 20,209
Legal Services and Disbursements - Issuer's counsel $105,000
Accounting Services $ 70,500
Appraisal fees and expenses $ 20,000
Business plan fees and expenses $ 5,500
Conversion agent fees and expenses $ 7,500
Printing costs (including Desktop Publishing and EDGAR fees) $ 75,000
Postage and mailing $ 30,000
Commissions and other offering fees (2) $287,354
Expenses of Sales Agents
(Including Counsel Fees and Disbursements) $ 28,000
Advertising $ 2,000
Transfer agent fees $ 2,000
Other expenses $ 2,898
--------
TOTAL (3) $682,120
========
(1) Costs represented by salaries and wages of regular employees and
officers of the Registrant are excluded.
(2) Assumes that the Common Stock is sold for $23,000,000, the midpoint of
the Estimated Valuation Range, that no shares of stock will be sold
through brokers, that all shares are sold in the Subscription Offering,
and that executive officers and directors of the Registrant and of
Union Federal Savings and Loan Association and their Associates and the
Union Community Bancorp Employee Stock Ownership Plan acquire 318,250
shares.
(3) All the above items, except the Registration, OTS and NASD Filing Fees,
are estimated.
Item 14. Indemnification of Directors and Officers.
Section 21 of the Indiana Business Corporation Law, as amended (the "BCL"),
grants to each corporation broad powers to indemnify directors, officers,
employees or agents against expenses incurred in certain proceedings if the
conduct in question was found to be in good faith and was reasonably believed to
be in the corporation's best interests. This statute provides, however, that
this indemnification should not be deemed exclusive of any other indemnification
rights provided by the articles of incorporation, by-laws, resolution or other
authorization adopted by a majority vote of the voting shares then issued and
outstanding. Section 10.05 and Article 13 of the Articles of Incorporation of
the Registrant state as follows:
Section 10.05. Limitation of Liability and Reliance on Corporate
Records and Other Information.
Clause 10.051. General Limitation. No Director, member of any committee
of the Board of Directors, or of another committee appointed by the Board,
Officer, employee or agent of the Corporation ("Corporate Person") shall be
liable for any loss or damage if, in taking or omitting to take any action
causing such loss or damage, either (1) such Corporate Person acted (A) in
good faith, (B) with the care an ordinarily prudent person in a like
position would have exercised under similar circumstances, and (C) in a
manner such Corporate Person reasonably believed was in the best interests
of the Corporation, or (2) such Corporate Person's breach of or failure to
act in accordance with the standards of conduct set forth in Clause
10.051(1) above (the "Standards of Conduct") did not constitute willful
misconduct or recklessness.
Clause 10.052. Reliance on Corporate Records and Other Information. Any
"Corporate Person" shall be fully protected, and shall be deemed to have
complied with the Standards of Conduct, in relying in good faith, with
respect to any information contained therein, upon (1) the Corporate
Records, or (2) information, opinions, reports or statements (including
financial statements and other financial data) prepared or presented by (A)
one or more other Corporate Persons whom such Corporate Person reasonably
believes to be competent in the matters presented, (B) legal counsel,
public accountants or other persons as to matters that such Corporate
Person reasonably believes are within such person's professional or expert
competence, (C) a committee of the Board of Directors or other committee
appointed by the Board of Directors, of which such Corporate Person is not
a member, if such Corporate Person reasonably believes such committee of
the Board of Directors or such appointed committee merits confidence, or
(D) the Board of Directors, if such Corporate Person is not a Director and
reasonably believes that the Board merits confidence.
ARTICLE 13
Indemnification
Section 13.01. General. The Corporation shall, to the fullest extent to
which it is empowered to do so by the Act, or any other applicable laws, as
from time to time in effect, indemnify any person who was or is a party, or
is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, by reason of the fact that he
is or was a Director, Officer, employee or agent of the Corporation, or
who, while serving as such Director, Officer, employee or agent of the
Corporation, is or was serving at the request of the Corporation as a
director, officer, partner, trustee, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, whether for profit or not, against expenses (including
counsel fees), judgments, settlements, penalties and fines (including
excise taxes assessed with respect to employee benefit plans) actually or
reasonably incurred by him in accordance with such action, suit or
proceeding, if he acted in good faith and in a manner he reasonably
believed, in the case of conduct in his official capacity, was in the best
interest of the Corporation, and in all other cases, was not opposed to the
best interests of the Corporation, and, with respect to any criminal action
or proceeding, he either had reasonable cause to believe his conduct was
lawful or no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement or conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not meet the prescribed standard of conduct.
Section 13.02. Authorization of Indemnification. To the extent that a
Director, Officer, employee or agent of the Corporation has been
successful, on the merits or otherwise, in the defense of any action, suit
or proceeding referred to in Section 13.01 of this Article, or in the
defense of any claim, issue or matter therein, the Corporation shall
indemnify such person against expenses (including counsel fees) actually
and reasonably incurred by such person in connection therewith. Any other
indemnification under Section 13.01 of this Article (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific
case, upon a determination that indemnification of the Director, Officer,
employee or agent is permissible in the circumstances because he has met
the applicable standard of conduct. Such determination shall be made (1) by
the Board of Directors by a majority vote of a quorum consisting of
Directors who were not at the time parties to such action, suit or
proceeding; or (2) if a quorum cannot be obtained under subdivision (1), by
a majority vote of a committee duly designated by the Board of Directors
(in which designation Directors who are parties may participate),
consisting solely of two or more Directors not at the time parties to such
action, suit or proceeding; or (3) by special legal counsel: (A) selected
by the Board of Directors or its committee in the manner prescribed in
subdivision (1) or (2), or (B) if a quorum of the Board of Directors cannot
be obtained under subdivision (1) and a committee cannot be designated
under subdivision (2), selected by a majority vote of the full Board of
Directors (in which selection Directors who are parties may participate);
or (4) by the Shareholders, but shares owned by or voted under the control
of Directors who are at the time parties to such action, suit or proceeding
may not be voted on the determination.
Authorization of indemnification and evaluation as to reasonableness of
expenses shall be made in the same manner as the determination that
indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as
to reasonableness of expenses shall be made by those entitled under
subsection (3) to select counsel.
Section 13.03. Good Faith Defined. For purposes of any determination
under Section 13.01 of this Article 13, a person shall be deemed to have
acted in good faith and to have otherwise met the applicable standard of
conduct set forth in Section 13.01 if his action is based on information,
opinions, reports, or statements, including financial statements and other
financial data, if prepared or presented by (1) one or more Officers or
employees of the Corporation or another enterprise whom he reasonably
believes to be reliable and competent in the matters presented; (2) legal
counsel, public accountants, appraisers or other persons as to matters he
reasonably believes are within the person's professional or expert
competence; or (3) a committee of the Board of Directors of the Corporation
or another enterprise of which the person is not a member if he reasonably
believes the committee merits confidence. The term "another enterprise" as
used in this Section 13.03 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other
enterprise of which such person is or was serving at the request of the
Corporation as a director, officer, partner, trustee, employee or agent.
The provisions of this Section 13.03 shall not be deemed to be exclusive or
to limit in any way the circumstances in which a person may be deemed to
have met the applicable standards of conduct set forth in Section 13.01 of
this Article 13.
Section 13.04. Payment of Expenses in Advance. Expenses incurred in
connection with any civil or criminal action, suit or proceeding may be
paid for or reimbursed by the Corporation in advance of the final
disposition of such action, suit or proceeding, as authorized in the
specific case in the same manner described in Section 13.02 of this
Article, upon receipt of a written affirmation of the Director, Officer,
employee or agent's good faith belief that he has met the standard of
conduct described in Section 13.01 of this Article and upon receipt of a
written undertaking by or on behalf of the Director, Officer, employee or
agent to repay such amount if it shall ultimately be determined that he did
not meet the standard of conduct set forth in this Article 13, and a
determination is made that the facts then known to those making the
determination would not preclude indemnification under this Article13.
Section 13.05. Provisions Not Exclusive. The indemnification provided
by this Article shall not be deemed exclusive of any other rights to which
a person seeking indemnification may be entitled under these Articles of
Incorporation, the Corporation's Code of By-Laws, any resolution of the
Board of Directors or Shareholders, any other authorization, whenever
adopted, after notice, by a majority vote of all Voting Stock then
outstanding, or any contract, both as to action in his official capacity
and as to action in another capacity while holding such office, and shall
continue as to a person who has ceased to be a Director, Officer, employee
or agent, and shall inure to the benefit of the heirs, executors and
administrators of such a person.
Section 13.06. Vested Right to Indemnification. The right of any
individual to indemnification under this Article shall vest at the time of
occurrence or performance of any event, act or omission giving rise to any
action, suit or proceeding of the nature referred to in Section 13.01 of
this Article 13 and, once vested, shall not later be impaired as a result
of any amendment, repeal, alteration or other modification of any or all of
these provisions. Notwithstanding the foregoing, the indemnification
afforded under this Article shall be applicable to all alleged prior acts
or omissions of any individual seeking indemnification hereunder,
regardless of the fact that such alleged acts or omissions may have
occurred prior to the adoption of this Article. To the extent such prior
acts or omissions cannot be deemed to be covered by this Article 13, the
right of any individual to indemnification shall be governed by the
indemnification provisions in effect at the time of such prior acts or
omissions.
Section 13.07. Insurance. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a Director, Officer,
employee or agent of the Corporation, or who is or was serving at the
request of the Corporation as a director, officer, partner, trustee,
employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability
asserted against or incurred by the individual in that capacity or arising
from the individual's status as a Director, Officer, employee or agent,
whether or not the Corporation would have power to indemnify the individual
against the same liability under this Article.
Section 13.08. Additional Definitions. For purposes of this Article,
references to the "Corporation" shall include any domestic or foreign
predecessor entity of the Corporation in a merger or other transaction in
which the predecessor's existence ceased upon consummation of the
transaction.
For purposes of this Article, serving an employee benefit plan at the
request of the Corporation shall include any service as a Director,
Officer, employee or agent of the Corporation which imposes duties on, or
involves services by such Director, Officer, employee, or agent with
respect to an employee benefit plan, its participants, or beneficiaries. A
person who acted in good faith and in a manner he reasonably believed to be
in the best interests of the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a manner "not opposed to the
best interest of the Corporation" referred to in this Article.
For purposes of this Article, "party" includes any individual who is or
was a plaintiff, defendant or respondent in any action, suit or proceeding,
or who is threatened to be made a named defendant or respondent in any
action, suit or proceeding.
For purposes of this Article, "official capacity," when used with
respect to a Director, shall mean the office of director of the
Corporation; and when used with respect to an individual other than a
Director, shall mean the office in the Corporation held by the Officer or
the employment or agency relationship undertaken by the employee or agent
on behalf of the Corporation. "Official capacity" does not include service
for any other foreign or domestic corporation or any partnership, joint
venture, trust, employee benefit plan, or other enterprise, whether for
profit or not.
Section 13.09. Payments a Business Expense. Any payments made to any
indemnified party under this Article under any other right to
indemnification shall be deemed to be an ordinary and necessary business
expense of the Corporation, and payment thereof shall not subject any
person responsible for the payment, or the Board of Directors, to any
action for corporate waste or to any similar action.
Under the Act, an Indiana corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against any
liability asserted against him or incurred by him in any such capacity, or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liability under the provisions of the Act.
The Registrant has purchased insurance designed to protect and indemnify the
Registrant and its officers and directors in case they are required to pay any
amounts arising from certain claims, including claims under the Securities Act
of 1933, which might be made against the officers and directors by reason of any
actual or alleged act, error, omission, misstatement, misleading statement,
neglect, or breach of duty while acting in their respective capacities as
officers or directors of the Registrant.
Item 15. Recent Sales of Unregistered Securities.
Because the Registrant was only recently incorporated to act as a holding
company upon the completion of the offering registered by means of this
Registration Statement, the Registrant has not yet issued any shares of its
capital stock or other securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) The exhibits furnished with this Registration Statement are
listed beginning on page E-l.
(b) No financial statement schedules are required.
Item 17. Undertakings.
(1) The undersigned Registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table on the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(2) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery to each purchaser.
(3) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of an action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Crawfordsville, State of Indiana, on November 10, 1997.
UNION COMMUNITY BANCORP
By /s/ Joseph E. Timmons
-----------------------------
Joseph E. Timmons
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- -------------------------------------------------------------------------------
(1) Principal Executive Officer and Director:
/s/ Joseph E. Timmons President and )
Joseph E. Timmons Chief Executive Officer )
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
/s/ Denise Swearingen Treasurer and )
Denise E. Swearingen Secretary )
)
) November 10, 1997
)
(3) The Board of Directors: )
)
PHILIP L. BOOTS Director )
)
)
MARVIN L. BURKETT Director )
)
)
PHILLIP E. GRUSH Director )
)
)
SAMUEL H. HILDEBRAND Director )
)
)
JOHN M. HORNER Director )
)
)
HARRY A. SIAMAS Director )
)
)
JOSEPH E. TIMMONS Director )
)
By: /s/ Joseph E. Timmons
Joseph E. Timmons
Attorney-in-fact
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
1 Form of Agency Agreement to be entered into among Registrant, Union
Federal Savings and Loan Association, and Trident Securities, Inc.*
2 Plan of Conversion*
3(1) Registrant's Articles of Incorporation*
(2) Registrant's Code of By-Laws*
4 Form of Stock Certificate*
5 Opinion of Barnes & Thornburg re legality of securities being
registered*
8(1) Opinion of Barnes & Thornburg re tax matters*
(2) Opinion of RP Financial, LLC re economic value of Subscription Rights
10(1) Letter Agreements entered into between Registrant and RP Financial, LLC
relating to appraisal and business plan* (2) Union Community Bancorp
Stock Option Plan*
(3) Union Federal Savings and Loan Association Recognition and Retention
Plan and Trust*
(4) Union Community Bancorp Employee Stock Ownership Plan and Trust
Agreement*
(5) Employment Agreement between Union Federal Savings and Loan Association
and Joseph E. Timmons*
(6) Exempt Loan and Share Purchase Agreement between Trust under Union
Community Bancorp Employee Stock Ownership Plan and Trust Agreement and
Union Community Bancorp*
21 Subsidiaries of the Registrant*
23(1) Consent of RP Financial, LLC*
(2) Consent of Geo. S. Olive & Co. LLC*
(3) Consent of Barnes & Thornburg (included in Exhibit 5)*
24 Power of Attorney included on page S-6 of the Registration Statement*
27 Financial Data Schedule (filed electronically)*
99(1) Appraisal Report of RP Financial, LLC*
(2) Stock Order Form*
(3) Appraisal Update*
- -----------------
*Previously Filed
Exhibit 8(2)
RP Financial, LC.
Financial Services Industry Consultants
November 10, 1997
Board of Directors
Union federal Savings and Loan Association
221 E. Main Street
Crawfordsville, Indiana 47933
Re: Plan of Conversion: Subscription Rights
Union Federal Savings and Loan Association
Gentlemen:
All capitalized items not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion adopted by the Board of
Directors of Union Federal Savings and Loan Association ("Union Federal" or the
"Association") whereby the Association will convert from a federally chartered
mutual savings and loan association to a federally chartered stock savings and
loan association and issue all of the Association's outstanding capital stock to
Union Community Bancorp (the "Holding Company"). Simultaneously, the Holding
Company will issue shares of common stock.
We understand that in accordance with the Plan of Conversion,
Subscription Rights to purchase shares of Common Stock in the Holding Company
are to be issued to: (1) Eligible Account Holders; (2) the ESOP; (3)
Supplemental Eligible Account Holders; and (4) Other Members. Based solely upon
our observation that the Subscription Rights will be available to such parties
without cost, will be legally non-transferable and of short duration, and will
afford such parties the right only to purchase shares of Common Stock at the
same price as will be paid by members of the general public in the Community
Offering, but without undertaking any independent investigation of state or
federal law or the position of the Internal Revenue Service with respect to this
issue, we are of the opinion that, as a factual matter:
(1) the Subscription Rights will have no ascertainable market
value; and,
(2) the price at which the Subscription Rights are exercisable
will not be more or less than the pro forma market value of
the shares upon issuance.
Changes in the local and national economy, the legislative and
regulatory environment, the stock market, interest rates, and other external
forces (such as natural disasters or significant world events) may occur from
time to time, often with great unpredictability and may materially impact the
value of thrift stocks as a whole or the Holding Company's value alone.
Accordingly, no assurance can be given that persons who subscribe to shares of
common stock in the conversion will thereafter be able to buy or sell such
shares at the same price paid in the Subscription Offering.
Very truly yours,
RP FINANCIAL, LC.
By: /s/ Gregory E. Dunn
-------------------
Gregory E. Dunn
Senior Vice President
Washington Headquarters
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
