FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(765) 362-2400
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 20, 1998 was $42,175,144.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 29, 1997, was 3,041,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 69 Pages
<PAGE>
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................. 3
PART I
Item 1 Business.................................................. 3
Item 2. Properties................................................ 25
Item 3. Legal Proceedings......................................... 25
Item 4. Submission of Matters to a Vote of Security Holders....... 25
Item 4.5. Executive Officers of the Registrant...................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................... 26
Item 6. Selected Financial Data................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 29
Item 7A. Quantitative and Qualitative Disclosures
about Market Risks.................................... 40
Item 8. Financial Statements and Supplementary Data............... 42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 64
PART III
Item 10. Directors and Executive Officers of Registrant............ 64
Item 11. Executive Compensation.................................... 65
Item 12. Security Ownership of
Certain Beneficial Owners and Management.............. 66
Item 13. Certain Relationships and Related Transactions............ 67
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................... 67
SIGNATURES ...................................................... 68
<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Union Community Bancorp, an Indiana corporation (the "Holding
Company"), was organized in September, 1997. On December 29, 1997, it acquired
the common stock of Union Federal Savings and Loan Association ("Union Federal")
upon the conversion of Union Federal from a federal mutual savings and loan
association to a federal stock savings and loan association.
Union Federal was organized as a state-chartered savings and loan
association in 1913. Since then, Union Federal has conducted its business from
its full-service office located in Crawfordsville, Indiana. Union Federal's
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. Union Federal's
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Management believes that it has developed a solid reputation among its
loyal customer base because of its commitment to personal service and because of
strong support of the local community. Union Federal offers 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
Union Federal has historically concentrated its 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
Union Federal's loan origination activities, representing 77.0% of its total
loan portfolio at December 31, 1997. Union Federal also offers 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 12.6% and 4.5%, respectively, of
Union Federal's total loan portfolio at December 31, 1997. Construction loans
totaled approximately 5.7% of Union Federal's total loans as of December 31,
1997. Consumer loans, which consist of home improvement loans and passbook
loans, constituted approximately .3% of Union Federal's total loan portfolio at
December 31, 1997.
<PAGE>
Loan Portfolio Data. The following table sets forth the composition of
Union Federal's 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 December 31,
1997 1996 1995
Percent Percent Percent
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>
One-to-four-family............... $62,436 76.95% $57,031 77.46% $48,295 76.64%
Multi-family..................... 10,197 12.57 10,920 14.83 9,617 15.26
Commercial....................... 3,627 4.47 3,593 4.88 2,814 4.46
Real estate construction loans...... 4,652 5.73 1,740 2.36 2,107 3.34
Consumer loans ..................... 223 .28 346 .47 191 .30
------- ------ ------- ------ ------- ------
Gross loans receivable......... $81,135 100.00% $73,630 100.00% $63,024 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family real estate... $64,730 79.78% $58,271 79.14% $49,762 78.96%
Multi-family real estate......... 11,172 13.77 11,520 15.65 10,367 16.45
Commercial real estate........... 5,094 6.28 3,593 4.88 2,814 4.46
Deposits......................... 139 .17 246 .33 81 .13
------- ------ ------- ------ ------- ------
Gross loans receivable......... 81,135 100.00 73,630 100.00 63,024 100.00
======= ====== ======= ====== ======= ======
Deduct:
Allowance for loan losses........... 252 .31 159 .22 111 .18
Deferred loan fees.................. 325 .40 356 .48 379 .60
Loans in process.................... 2,122 2.62 418 .57 1,255 1.99
------- ------ ------- ------ ------- ------
Net loans receivable............. $78,436 96.67% $72,697 98.73% $61,279 97.23%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $ 20,683 25.56% $24,238 33.07% $27,057 43.06%
Fixed-rate....................... 60,229 74.44 49,046 66.93 35,776 56.94
------- ------ ------- ------ ------- ------
Total.......................... $80,912 100.00% $73,284 100.00% $62,833 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of loans maturing in Union Federal's 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. Management expects that prepayments will
cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2001 2003 2008 2013
December 31, to to to and
1997 1998 1999 2000 2002 2007 2012 following
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Residential loans.................. $62,436 $307 $174 $ 296 $ 965 $18,401 $23,656 $18,637
Multi-family loans.................... 10,197 1 --- 473 --- 3,726 4,812 1,185
Commercial loans................... 3,627 --- --- 15 70 1,318 921 1,303
Construction loans.................... 4,652 154 --- 975 --- 610 1,118 1,795
Loans secured by deposits............. 139 139 --- --- --- --- --- ---
Home improvement loans................ 84 8 6 13 31 26 --- ---
------- ---- ---- ------ ------ ------- ------- -------
Total............................ $81,135 $609 $180 $1,772 $1,066 $24,081 $30,507 $22,920
======= ==== ==== ====== ====== ======= ======= =======
</TABLE>
<PAGE>
The following table sets forth, as of December 31, 1997, 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, 1998
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans................. $50,649 $11,480 $62,129
Multi-family loans................ 5,446 4,750 10,196
Commercial loans.................. 1,450 2,177 3,627
Construction loans................... 2,905 1,593 4,498
Installment loans.................... --- --- ---
Loans secured by deposits............ --- --- ---
Home improvement loans............... 76 --- 76
------- ------- -------
Total............................. $60,526 $20,000 $80,526
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. Union Federal's primary lending
activity consists of originating one- to four-family residential mortgage loans
secured by property located in its primary market area. Union Federal generally
does 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%. Union Federal requires private
mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and
factors the cost of such insurance into the annual percentage rate on such
loans. Union Federal originates and retains 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.
Union Federal also offers 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. Union Federal may offer discounted
initial interest rates on ARM loans, but requires 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 Union Federal's portfolio at December
31, 1997 provide for maximum rate adjustments per year and over the life of the
loan of 1% and 5%, respectively. Union Federal's 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 December 31, 1997, approximately
25.6% of Union Federal's real estate mortgage loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Union
Federal originates include "due-on-sale" clauses, which give it 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, Union Federal occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
<PAGE>
At December 31, 1997, approximately $62.4 million, or 77.0% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $47,000, or .1% of total residential loans, were included
in non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At December 31, 1997, approximately $10.2 million, or
12.6% of Union Federal's total loan portfolio, consisted of mortgage loans
secured by multi-family dwellings (those consisting of more than four units).
Union Federal's 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. Union Federal writes multi-family loans with maximum
Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of
December 31, 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 Union
Federal's 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. Union Federal's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Union Federal generally originates 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, with a maximum term of 20 years and a maximum
Loan-to-Value ratio of 80%. At December 31, 1997, Union Federal's largest
commercial loan had an outstanding balance of $497,000 and was secured by a
nursing home in Richmond, Indiana. At December 31, 1997, approximately $3.6
million, or 4.5% of Union Federal's total loan portfolio, consisted of
commercial real estate loans. On the same date, Union Federal had 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. Union Federal offers 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). Union Federal provides
construction loans only to borrowers who commit to permanent financing on the
finished project. At December 31, 1997, approximately $4.7 million, or 5.73% of
Union Federal's total loan portfolio, consisted of construction loans. The
largest construction loan had a balance of $975,000 on December 31, 1997 and was
secured by a condominium project and golf course in Pittsboro, Indiana. None of
Union Federal's 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. Union
Federal does not normally charge commitment fees for construction loans.
While providing Union Federal 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, Union Federal 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 Union Federal's taking title
to the project.
<PAGE>
Consumer Loans. Union Federal's consumer loans, consisting of passbook
loans and home improvement loans, aggregated approximately $223,000 at December
31, 1997, or .3% of its total loan portfolio. Union Federal's home improvement
loans generally have a fixed rate and a term of up to seven years. Union
Federal's passbook loans are made up to 90% of the deposit account balance and,
at December 31, 1997, accrued at a rate of 8.8%. 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 December
31, 1997, none of Union Federal's consumer loans were included in non-performing
assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. Union Federal historically has
originated its mortgage loans pursuant to its 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 Union Federal begins 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. Union Federal has no intention to
originate loans for sale to the FHLMC at this time, however.
Union Federal confines its loan origination activities primarily to
Montgomery County and the surrounding counties of Boone, Hendricks, Putnam,
Parke and Fountain. Union Federal has also originated several loans in Marion
County. At December 31, 1997, Union Federal also had six loans which it
originated, totaling approximately $671,000, secured by property located outside
of Indiana. Union Federal's loan originations are generated from referrals from
existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten and processed at Union Federal's
office.
Union Federal's 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, Union Federal studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved or ratified by Union Federal's board
of directors.
Union Federal generally requires appraisals on all real property securing
its loans and requires 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. Union Federal
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing its interest if the property is in a flood plain. Union
Federal also generally requires private mortgage insurance for all residential
mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow
accounts for insurance premiums and taxes for loans that require private
mortgage insurance.
Union Federal's 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.
Union Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Union Federal purchases 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 December 31, 1997, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $7.6 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $736,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 1997 was a $975,000 interest in a loan
secured by a condominium project and golf course located in Pittsboro, Indiana.
<PAGE>
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
Gross loans receivable
<S> <C> <C> <C>
at beginning of period............................. $73,630 $63,024 $61,880
Loans originated:
Real estate mortgage loans:
One-to-four family loans....................... 18,116 19,332 9,655
Multi-family loans............................. 654 1,532 ---
Commercial loans............................... 483 45 139
Construction loans............................... 5,284 2,220 2,135
Loans secured by deposits........................ 161 322 95
Home improvement loans........................... 85 36 50
------- ------- -------
Total originations........................... 24,783 23,487 12,074
Purchases (sales) of participation loans, net......... 500 1,350 742
Reductions:
Principal loan repayments........................ 17,541 14,211 11,672
Transfers from loans to real estate owned........ 237 20 ---
Total reductions............................. 17,778 14,231 11,672
------- ------- -------
Total gross loans receivable at
end of period...................................... $81,135 $73,630 $63,024
======= ======= =======
</TABLE>
Union Federal's residential loan originations during the year ended
December 31, 1997 totaled $18.1 million, compared to $19.3 million and $9.7
million in the years ended December 31, 1996 and 1995, respectively.
Origination and Other Fees. Union Federal realizes income from late
charges, checking account service charges, and fees for other miscellaneous
services. Union Federal currently charges a commitment fee of $200 on all loans
and an additional $500 origination fee on construction loans. Union Federal also
may charge points on a mortgage loan as consideration for a lower interest rate,
although it does 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, Union Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Union Federal sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Union Federal again contacts the borrower, this
time in person, to establish an acceptable repayment schedule. When a mortgage
loan is 90 days delinquent, Union Federal will have either entered into a
workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Union Federal reviews mortgage loans on a regular basis and places 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 December 31, 1997, $98,000, or .07% of Union
Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $489,000, or .59%, of its total assets at
December 31, 1996. At December 31, 1997, residential loans accounted for $52,000
of Union Federal's non-performing assets. Union Federal had real estate owned
("REO") properties in the amount of $46,000 as of December 31, 1997.
<PAGE>
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans 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.
At December 31,
1997 1996 1995
(Dollars in thousands)
Non-performing assets:
Non-performing loans.................... $52 $ 489 $ 156
Foreclosed real estate.................. 46 --- ---
Total non-performing assets........... $98 $489 $ 156
Non-performing loans to total loans........ .07% .67% .25%
Non-performing assets to total assets...... .07% .59% .21%
Interest income of $4,000, $10,000 and $14,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, was recognized on the
non-performing loans summarized above. Interest income of $5,000, $33,000 and
$17,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
would have been recognized under the original terms of these non-performing
loans.
At December 31, 1997, Union Federal held loans delinquent from 30 to 89
days totaling approximately $555,000. Other than in connection with these loans
and the other delinquent loans disclosed elsewhere in this section, management
was not aware of any other borrowers who were experiencing financial
difficulties.
Delinquent Loans. The following table sets forth certain information at
December 31, 1997, 1996 and 1995, relating to delinquencies in Union Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
Classified assets. Federal regulations and Union Federal's 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.
<PAGE>
At December 31, 1997, the aggregate amount of Union Federal's classified
assets and its general and specific loss allowances were as follows:
At December 31, 1997
(In thousands)
Substandard assets..................................... $ 98
Doubtful assets........................................ ---
Loss assets............................................ ---
Total classified assets............................ $ 98
General loss allowances................................ $252
Specific loss allowances............................... ---
Total allowances................................... $252
Union Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations. All
of Union Federal's 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 Union Federal's review and evaluation of current
economic conditions (including those of its 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 management's
opinion, Union Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1997. However,
there can be no assurance that regulators, when reviewing Union Federal's loan
portfolio in the future, will not require increases in Union Federal's
allowances for loan losses or that changes in economic conditions will not
adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period................ $159 $111 $ 87
Gross charge-offs - Multi-family loans........ (72)
Provision for losses on loans................. 165 48 24
Balance end of period...................... $252 $159 $111
Allowance for loan losses as a percent of
total loans outstanding.................... .32% .22% .18%
Ratio of net charge-offs to average
loans outstanding.......................... .10% --- ---
</TABLE>
<PAGE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Union Federal's 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 Union Federal's use of the allowance to absorb losses in other
categories.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total total
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>
Residential............... $ 65 76.95% $60 77.46% $57 76.64%
Commercial................ 29 4.47 13 4.88 11 4.46
Multi-family.............. 82 12.57 75 14.83 39 15.26
Construction loans.......... 10 5.73 11 2.36 4 3.34
Loans secured by deposits... --- .17 --- .33 --- .13
Home improvement loans...... --- .11 --- .14 --- .17
Unallocated................. 66 --- --- --- --- ---
---- ------ ---- ------ ---- ------
Total....................... $252 100.00% $159 100.00% $111 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
Investments. Union Federal's 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
December 31, 1997, approximately $7.7 million, or 5.8%, of Union Federal's total
assets consisted of such investments. Union Federal also had $44.8 million, or
33.9% of its assets, in interest-earning deposits as of that date.
The amount of interest-earning deposits held by Union Federal increased
significantly as a result of the Conversion. Because the subscription offering
for the Holding Company's Common Stock was oversubscribed, Union Federal
delivered refund checks during the last week of December, 1997 to those
subscribers whose purchase orders were not filled. Many of those checks had not
cleared as of December 31, 1997, thereby increasing the amount of funds held by
Union Federal in interest-bearing deposits. In addition, Union Federal invested
some of the proceeds that it received from the stock offering in
interest-bearing overnight accounts at the FHLB Indianapolis, which also
increased the amount of its interest-bearing deposits at December 31, 1997.
<PAGE>
The following table sets forth the amortized cost and the market value of
Union Federal's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Investment securities held to maturity:
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury....................... $ 350 $ 350 $ 350 $ 348 $1,050 $1,051
Federal agencies.................... 3,346 3,351 2,645 2,611 2,950 2,944
Mortgage-backed securities.......... 2,124 2,302 2,752 2,933 3,423 3,668
Total investment securities
held to maturity................ 5,820 6,003 5,747 5,892 7,423 7,663
Investment in limited partnership...... 1,176 (1) 1,334 (1) 1,506 (1)
FHLB stock (2)......................... 708 708 580 580 563 563
Total investments...................... $7,704 $7,661 $9,492
====== ====== ======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, FHLB stock and investment in limited
partnership) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1997.
<TABLE>
<CAPTION>
Amount at December 31, 1997 which matures in
One Year One Year Five Years
or Less to Five Years to Ten Years
Amortized Average Amoritzed Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities........................$ 350 5.14% $ --- ---% $ --- ---%
Federal agency securities....................... 1,050 4.41 2,296 6.49 --- ---
$1,400 4.59% $2,296 6.49%
</TABLE>
Mortgage-backed Securities
The following table sets forth the composition of Union Federal's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
---- -------- ----- ---- -------- ----- ---- -------- -----
(In thousands)
Governmental National
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Corporation................. $1,223 57.6% $1,348 $1,391 50.5% $1,511 $1,707 49.9% $1,856
Federal Home Loan Mortgage Corporation.. 635 29.9 691 1,039 37.8 1,103 1,338 39.1 1,431
Federal National
Mortgage Corporation................. 243 11.4 240 294 10.7 291 341 9.9 343
Other................................... 23 1.1 23 28 1.0 28 37 1.1 38
Total mortgage- backed securities.... $2,124 100.0% $2,302 $2,752 100.0% $2,933 $3,423 100.0% $3,668
</TABLE>
<PAGE>
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, 1997.
<TABLE>
<CAPTION>
Amount at December 31, 1997 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...................... $--- ---% $283 8.40% $1,841 8.59%
</TABLE>
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
For the Year Ended
December 31,
1997 1996 1995
---------------------------------------------
(In thousands)
<S> <C> <C> <C>
Beginning balance.......... $2,752 $3,423 $4,079
Repayments/sales........ (639) (676) (663)
Premium and discount
amortization, net....... 11 5 7
Ending balance............. $2,124 $2,752 $3,423
====== ====== ======
</TABLE>
Sources of Funds
General. Deposits have traditionally been Union Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Union Federal derives 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. Union Federal attracts 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 and savings accounts.
Union Federal does not actively solicit or advertise for deposits outside of
Montgomery County, and substantially all of its 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.
Union Federal does not pay broker fees for any deposits it receives.
Union Federal establishes 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. Union Federal relies,
in part, on customer service and long-standing relationships with customers to
attract and retain its deposits. Union Federal also closely prices its deposits
to the rates offered by its competitors.
<PAGE>
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 Union Federal offers has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. Union Federal has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. Union Federal manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on Union
Federal's experience, management believes that its passbook, NOW and MMDAs are
relatively stable sources of deposits. However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
An analysis of Union Federal's deposit accounts by type, maturity, and
rate at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1997 Deposits Rate
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts.............................. $ 10 $ 4,579 7.35% 4.00%
Variable rate, money market................................ 10 9,125 14.66 4.58
NOW accounts and other transaction accounts................ 500 2,373 3.81 2.94
------- ------ ----
Total withdrawable....................................... 16,077 25.82 4.17
Certificates (original terms):
3 months or less........................................... 1,000 101 .16 4.23
6 months................................................... 1,000 3,778 6.07 5.02
12 months.................................................. 1,000 5,477 8.80 5.57
18 months.................................................. 1,000 7,986 12.83 5.73
24 months.................................................. 1,000 5,174 8.31 5.95
30 months.................................................. 1,000 6,615 10.62 5.95
36 months ................................................. 1,000 3,854 6.19 6.09
48 months.................................................. 1,000 321 .52 5.97
60 months.................................................. 1,000 5,815 9.34 6.02
Jumbo certificates - $100,000 and over........................ 100,000 7,060 11.34 6.18
------- ------ ----
Total certificates............................................ 46,181 74.18 5.84
------- ------ ----
Total deposits................................................ $62,258 100.00% 5.41%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
At December 31,
1997 1996 1995
------------------------------------------------
(In thousands)
4.00 to 4.99%....... $ 3,622 $ 4,760 $ 5,432
5.00 to 5.99%....... 19,245 19,400 11,330
6.00 to 6.99%....... 22,894 20,954 21,991
7.00 to 7.99%....... 420 1,941 6,516
------- ------- --------
Total............ $46,181 $47,055 $ 45,269
======= ======= ========
<PAGE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1997. Matured certificates, which have not been renewed as of
December 31, 1997, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at December 31, 1997 Maturing In
One Year Two Three Greater Than
or Less Years Years Three Years
(In thousands)
<C> <C> <C> <C> <C>
4.00 to 4.99%....... $ 3,622
5.00 to 5.99%....... 12,548 $ 5,427 $ 953 $ 317
6.00 to 6.99%....... 10,806 7,817 2,733 1,538
7.00 to 7.99%....... 394 10 16 ---
------- ------- ------ ------
Total............ $27,370 $13,254 $3,702 $1,855
======= ======= ====== ======
</TABLE>
The following table indicates the amount of Union Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1997.
At December 31, 1997
--------------------
Maturity Period (In thousands)
Three months or less................................... $2,471
Greater than three months through six months........... 583
Greater than six months through twelve months.......... 1,585
Over twelve months..................................... 2,421
------
Total............................................. $7,060
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Union Federal offers 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
December 31, % 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...... $ 4,579 7.35% $ 712 $3,867 6.40% $356 $3,511 6.11%
Variable rate, money market........ 9,125 14.66 510 8,615 14.25 218 8,397 14.63
NOW accounts and other
transaction accounts............. 2,373 3.81 1,474 899 1.49 669 230 .40
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............... 16,077 25.82 2,696 13,381 22.14 1,243 12,138 21.14
Certificates (original terms):
3 months........................... 101 .16 (48) 149 .25 19 130 .23
6 months........................... 3,778 6.07 (489) 4,267 7.06 (265) 4,532 7.89
12 months.......................... 5,477 8.80 244 5,233 8.66 (131) 5,364 9.34
18 months.......................... 7,986 12.83 (204) 8,190 13.55 1,152 7,038 12.26
24 months.......................... 5,174 8.31 678 4,496 7.44 (94) 4,590 8.00
30 months.......................... 6,615 10.62 1,133 5,482 9.07 273 5,209 9.07
36 months ......................... 3,854 6.19 (1,344) 5,198 8.60 113 5,085 8.86
48 months.......................... 321 .52 (55) 376 .62 (29) 405 .71
60 months.......................... 5,815 9.34 (793) 6,608 10.93 79 6,529 11.37
Jumbo certificates.................... 7,060 11.34 4 7,056 11.68 669 6,387 11.13
------- ------ ------ ------- ------ ------ ------- ------
Total certificates.................... 46,181 74.18 (874) 47,055 77.86 1,786 45,269 78.86
------- ------ ------ ------- ------ ------ ------- ------
Total deposits........................ $62,258 100.00% $1,822 $60,436 100.00% $3,029 $57,407 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
<PAGE>
Total deposits at December 31, 1997 were approximately $62.3 million,
compared to approximately $57.4 million at December 31, 1995. Union Federal's
deposit base depends somewhat upon the manufacturing sector of Montgomery
County's economy. Although Montgomery County's manufacturing sector is
relatively diversified and does not significantly depend upon any industry, a
loss of a material portion of the manufacturing workforce could adversely affect
Union Federal's 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 Union Federal's 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.
Borrowings. Management focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 1997, Union Federal had borrowings in the amount of $2.4 million
from the FHLB of Indianapolis which bear fixed and variable interest rates and
are due at various dates through January 2, 2004. Union Federal is required to
maintain eligible loans in its portfolio of at least 170% of outstanding
advances as collateral for advances from the FHLB of Indianapolis. Union Federal
does not anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. Union Federal also owes 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 Union
Federal's borrowings at or for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
1997 1996 1995
---------------------------------------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period.................... $2,373 $6,482 $1,065
Average balance outstanding for period.......... 5,748 3,566 1,857
Maximum amount outstanding at any
month-end during the period................... 6,873 6,482 3,065
Weighted average interest rate
during the period............................. 5.90% 5.36% 6.03%
Weighted average interest rate
at end of period.............................. 5.71% 5.52% 5.46%
</TABLE>
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
<PAGE>
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).
Union Federal currently owns 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"). Union Federal owns the limited partner interest in
Pedcor. The general partner is Pedcor Investments LLC. 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 Union Federal to include
its investment in UFS in its 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.
UFS committed to invest approximately $1.8 million in Pedcor at the
inception of the project in November, 1993. Through December 31, 1997, UFS had
invested cash of approximately $610,000 in Pedcor with six 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 Union Federal. These tax credits will be available to Union Federal
through 2003. Although Union Federal has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it may not
use tax credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. Union Federal may carry forward unused tax
credits for a period of fifteen years and management believes that Union Federal
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 December 31, 1997, was $1.2 million. As of December 31, 1997,
83% 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.
<PAGE>
The following summarizes UFS's equity in Pedcor's losses and tax credits
recognized in Union Federal's consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------------------------------
(In Thousands)
Investment in Pedcor:
<S> <C> <C> <C>
Net of equity in losses.................. $1,176 $1,334 $1,506
Equity in losses, net
of income tax effect..................... $ (95) $ (104) $(150)
Tax credit.................................. 178 178 178
Increase in after-tax net income from
Pedcor investment........................ $ 83 $ 74 $ 28
</TABLE>
Employees
As of December 31, 1997, Union Federal employed 12 persons on a full-time
basis. Union Federal does not have any part-time employees. None of Union
Federal's employees is represented by a collective bargaining group. Management
considers its employee relations to be good.
Employee benefits for Union Federal's full-time employees include, among
other things, an employee stock ownership plan, 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.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in the area. See
"Executive Compensation" and "Certain Relationships and Related Transactions of
Union Federal."
COMPETITION
Union Federal originates most of its loans to and accepts most of its
deposits from residents of Montgomery County, Indiana. Union Federal is 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 Union Federal. In
total, there are 13 other financial institutions located in Montgomery County,
including nine banks, two credit unions and two other savings associations.
Union Federal also competes with money market funds with respect to deposit
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Union Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides 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 management cannot readily predict.
<PAGE>
REGULATION
General
As a federally chartered, SAIF-insured savings association, Union Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Union
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Union Federal's 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 the federal deposit insurance funds. Union
Federal's semi- annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $14,135.
Union Federal is 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 loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, Union Federal's 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, Union Federal is subject to certain restrictions in its
dealings with the Holding Company and with other companies affiliated with the
Holding Company.
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.
<PAGE>
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 December 31, 1997, Union Federal's asset composition was in
excess of that required to qualify 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.
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
<PAGE>
Union Federal is 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, Union Federal is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At December 31, 1997, Union Federal's
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, 1997, dividends paid by
the FHLB of Indianapolis to Union Federal totaled approximately $54,000, for an
annual rate of 7.99%.
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.
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,
Union Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Union Federal 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 Union Federal paid
this assessment on November 27, 1996. The assessment was fully deductible for
both federal and state income tax purposes. Beginning January 1, 1997, Union
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
<PAGE>
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 December 31, 1997, Union Federal was 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,
Union Federal would be exempt from its provisions because it has less than $300
million in assets and its risk-based capital ratio exceeds 12%. Union Federal
nevertheless measure its interest rate risk in conformity with the OTS
regulation and, as of December 31, 1997, Union Federal would have been required
to deduct $1.7 million from its total capital available to calculate its
risk-based capital requirement. See "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk."
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.
<PAGE>
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, adequatelycapitalized, under capitialized,
significantly undercapitalzied, and critically undercapitalized. At December 31,
1997, Union Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was 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." Union Federal is
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 December 31, 1997, Union Federal had available approximately $13,004,000 for
distribution, without consideration of the restrictions on its capital
distributions as a result of the establishment of a liquidation account in
connection with the Conversion.
<PAGE>
The OTS has proposed revisions to these regulations which would permit a
savings association, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in an amount that does not
exceed the association's undistributed net income for the prior two years plus
the amount of its undistributed income from the current year. This proposed rule
would require a savings association, such as Union Federal, that is a subsidiary
of a savings and loan holding company to file a notice with the OTS before
making a capital distribution up to the "maximum amount" described above. The
proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for expedited
processing under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
Pursuant to the Plan of Conversion, Union Federal established a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. Union Federal will not be permitted to pay dividends
to the Holding Company if its net worth would be reduced below the amount
required for the liquidation account. In addition, Union Federal must file
either a notice or an application with the OTS 30 days before declaring a
dividend to the Holding Company, as described above.
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. Management does not believe that these regulations
will have a materially adverse effect on Union Federal's 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.
<PAGE>
Loans to One Borrower
Under OTS regulations, Union Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its 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 December 31, 1997, Union
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its lending limits. Management does not believe
that the loans-to-one-borrower limits will have a significant impact on Union
Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Union Federal maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it 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 December 31, 1997, Union Federal was in compliance
with its QTL requirement, with approximately 93.3% of its 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.
<PAGE>
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.
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
Union Federal is 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 have been registered
with the SEC under the 1934 Act. The Holding Company is therefore 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 Union Federal's 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 Union Federal's 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, Union Federal has been reporting its
income and expenses on the accrual method of accounting. Union Federal's federal
income tax returns have not been audited in recent years.
State Taxation
Union Federal is 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.
Union Federal's state income tax returns have not been audited in recent
years.
<PAGE>
Item 2. Properties.
The following table provides certain information with respect to Union
Federal's office as of December 31, 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 $62,258 $367 19,065
Crawfordsville, Indiana 47933
</TABLE>
Union Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Union Federal's electronic data processing equipment was approximately $4,000
at December 31, 1997.
Union Federal has 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.
Union Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $1,100 per month.
Union Federal also receives income from leasing office space on the second
floor of its building and parking spaces located behind its building. Union
Federal's gross income from renting the office space was $28,000 for fiscal year
ended December 31, 1997 and $27,000 for the year ended December 31, 1996. Union
Federal's gross income from renting the parking spaces was approximately $9,000
for the fiscal year ended December 31, 1997 and approximately $9,000 for the
year ended December 31, 1996.
Item 3. Legal Proceedings.
Although Union Federal is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which it presently is a party or to which any of its property is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1997.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
Joseph E. Timmons Chairman of the Board, President
and Chief Executive Officer
Denise E. Swearingen Secretary and Treasurer
Ronald L. Keeling Vice President
<PAGE>
Joseph E. Timmons (age 63) has served as President and Chief Executive
Officer of the Holding Company since 1997, 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.
Denise E. Swearingen (age 39) has served as the Holding Company's
Secretary and Treasurer since 1997 and as Union Federal's Secretary and
Controller/Treasurer since 1995. She has worked for Union Federal since 1983.
Ronald L. Keeling (age 46) has served as the Holding Company's Vice
President since 1997, 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.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
a) The Holding Company's common stock, without par value ("Common
Stock"), is listed on the NASDAQ National Market System under the symbol "UCBC"
The Holding Company shares began to trade on December 29, 1997. The high and low
bid prices for the period December 29, 1997 to March 20, 1998, were $13.75 and
$14.88, respectively. Since the Holding Company has no independent operation or
other subsidiaries to generate income, its ability to accumulate earnings for
the payment of cash dividends to shareholders directly depends upon the ability
of Union Federal to pay dividends to the Holding Company and upon the earnings
on its investment securities. On March 30, 1998, there were 425 shareholders of
record.
Under current federal income tax law, dividend distributions to the
Holding Company, to the extent that such dividends paid are from the current or
accumulated earnings and profits of Union Federal (as calculated for federal
income tax purposes), will be taxable as ordinary income to the Holding Company
and will not be deductible by Union Federal. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from Union Federal's accumulated
bad debt reserves, which could result in increased federal income tax liability
for Union Federal. Moreover, Union Federal may not pay dividends to the Holding
Company if such dividends would result in the impairment of the liquidation
account established in connection with the Conversion.
Generally, there is no OTS regulatory restriction on the payment of
dividends by the Holding Company unless there is a determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of Union Federal. The FDIC also has authority under current law to
prohibit a financial institution from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the financial institution. Indiana law, however,
would prohibit the Holding Company from paying a dividend if, after giving
effect to the payment of that dividend, the Holding Company would not be able to
pay its debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
The Holding Company paid no dividends to its shareholders in the fiscal
year ended December 31, 1997.
b) Use of Proceeds.
The Registration Statement filed by the Company pursuant to the
Securities Act of 1933 was declared effective by the Securities and Exchange
Commission on November 12, 1997 (SEC File No. 333-35799). The offering of the
Company's common stock (the "Common Stock") commenced on November 19, 1997 and
terminated at 12:00 noon, Crawfordsville, Indiana time, on December 10, 1997.
The Company sold each of the 3,041,750 shares of Common Stock registered
pursuant to the Registration Statement at $10 per share. The Union Community
Bancorp Employee Stock Ownership Plan and Trust (the "ESOP") purchased 184,000
shares of the Common Stock with the proceeds of a loan it received from the
Company. Trident Securities, Inc. acted as the Company's exclusive agent in
marketing the Common Stock on a best efforts basis.
<PAGE>
The following table indicates the net proceeds from the offering of the
Common Stock by the Company:
Gross proceeds from sale of
3,041,750 shares at $10/share $30,417,500
Expenses:
Underwriting commissions $ 394,397
Underwriting expenses 31,903
Other expenses 353,608
Total expenses 779,908
Net proceeds $29,637,592
As described in the prospectus, the Company used 50% of the net
proceeds (or $14,818,796) to purchase all of the capital stock of the Bank. From
the proceeds that it retained, the Company made a loan to the ESOP for the
purchase of 184,000 shares of the Common Stock. After providing for this loan
and for the purchase of the Bank's capital stock, the Company retained
$12,978,796 of the net proceeds, as the following table indicates:
Net proceeds $29,637,592
Purchase of Bank capital stock $14,818,796
Loan to ESOP 1,840,000
Total 16,658,796
Net proceeds retained by Company $12,978,796
The Company deposited the remainder of the net proceeds that it
retained in an account with the Bank, thereby increasing the Bank's working
capital.
The Bank used $4,500,000 of its portion of the net proceeds to repay
short-term advances from the FHLB of Indianapolis. The Bank deposited the
remainder of the net proceeds it received in an overnight account with the FHLB
of Indianapolis to be used for daily operations.
The payments described above reflect reasonable estimates of amounts
paid by the Company and the Bank. Neither the Company nor the Bank paid any of
the expenses indicated above, either directly or indirectly, to its directors,
officers or their associates, or to any person owning 10% or more of any class
of its securities, or to any affiliate. The Company's and the Bank's use of the
proceeds from the offering of the Common Stock described above does not
represent a material change in the use of proceeds described in the prospectus.
Item 6. Selected Financial Data.
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 Form 10-K.
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996 1995 1994 1993
(In thousands)
Summary of Selected Consolidated
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets..................................... $132,040 $82,789 $73,631 $72,540 $66,833
Loans, net....................................... 78,436 72,697 61,279 60,059 55,256
Cash and interest-bearing
deposits in other banks (1)................. 44,781 1,465 1,993 1,329 963
Investment securities held to maturity........... 5,820 5,747 7,423 7,985 9,355
Deposits......................................... 62,258 60,436 57,407 54,886 55,076
Stock subscriptions refundable................... 22,687 --- --- --- ---
Borrowings....................................... 3,573 7,880 2,642 4,943 ---
Shareholders' equity............................. 42,906 13,910 13,024 12,033 10,878
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
(In thousands)
Summary of Operating Data:
<S> <C> <C> <C> <C> <C>
Total interest and dividend income............... $6,801 $6,112 $5,729 $5,249 $5,334
Total interest expense........................... 3,836 3,424 3,148 2,507 2,594
Net interest income........................... 2,965 2,688 2,581 2,742 2,740
Provision for loan losses........................ 165 48 24 24 15
Net interest income after
provision for loan losses................... 2,800 2,640 2,557 2,718 2,725
Other income (losses):
Equity in losses of limited partnership....... (158) (173) (249) (54) ---
Investment securities gains................... --- --- --- --- ---
Other......................................... 62 57 32 14 13
Total other losses.......................... (96) (116) (217) (40) 13
Other expenses:
Salaries and employee benefits................ 480 461 481 489 434
Net occupancy expenses........................ 39 39 66 44 57
Equipment expenses............................ 22 20 20 17 17
Deposit insurance expense..................... 31 495 127 126 94
Other......................................... 389 287 328 208 234
Total other expenses........................ 961 1,302 1,022 884 836
Income before income taxes and cumulative effect
of change in accounting principle............. 1,743 1,222 1,318 1,794 1,902
Income taxes..................................... 545 336 326 639 755
Cumulative effective of change
in accounting principle....................... --- --- --- --- 12
Net income.................................... $1,198 $ 886 $ 992 $1,155 $1,159
Supplemental Data:
Interest rate spread during period............... 2.55% 2.54% 2.69% 3.25% 3.45%
Net yield on interest-earning assets (2) ........ 3.50 3.53 3.67 4.01 4.23
Return on assets (3)............................. 1.38 1.13 1.36 1.63 1.77
Return on equity (4)............................. 8.10 6.54 7.84 10.02 11.19
Other expenses to average assets (5)............. 1.11 1.66 1.41 1.25 1.28
Equity to assets (6)............................. 32.49 16.80 17.69 16.59 16.28
Average interest-earning assets to average
interest-bearing liabilities.................. 120.98 121.94 121.83 120.63 119.42
Non-performing assets to total assets (6)........ .07 .59 .21 .20 .31
Allowance for loan losses to total loans
outstanding (6)............................... .32 .22 .18 .15 .11
Allowance for loan losses to
non-performing loans (6)...................... 484.62 32.52 71.15 60.84 30.88
Net charge-offs to average
total loans outstanding ...................... .10 --- --- --- ---
Number of full service offices (6)............... 1 1 1 1 1
</TABLE>
- - --------------
(1) Includes certificates of deposit in other financial institutions.
(2) Net interest income divided by average interest-earning assets.
(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>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of Union Federal. The following discussion and analysis
of the Holding Company's financial condition as of December 31, 1997 and Union
Federal's results of operations should be read in conjunction with and with
reference to the consolidated financial statements and the notes thereto
included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Holding Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and the Holding Company's general market area. The forward-looking statements
contained herein include, but are not limited to, those with respect to the
following matters:
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift charter
and the separate federal regulation of thrifts.
Average Balances and Interest Rates and Yields
<PAGE>
The following tables present for the years ended December 31, 1997,
1996 and 1995, the balances, interest rates and average monthly balances of each
category of Union Federal's interest-earning assets and interest-bearing
liabilities, and the interest earned or paid on such amounts. 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>
Year Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest (1)Yield/Cost BalanceInterest (1) Yield/Cost BalanceInterest (1)Yield/Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits............ $3,821 $246 6.44% $ 959 $ 67 6.99% $ 1,089 $ 71 6.52%
Mortgage-backed securities
held to maturity................... 2,421 214 8.84 3,061 263 8.59 3,777 321 8.50
Other investment securities
held to maturity................... 3,487 197 5.65 3,169 175 5.52 3,918 227 5.79
Loans receivable (2)................. 74,382 6,090 8.19 68,346 5,562 8.14 60,950 5,066 8.31
FHLB stock........................... 676 54 7.99 576 45 7.81 562 44 7.83
Total interest-earning assets...... 84,787 6,801 8.02 76,111 6,112 8.03 70,296 5,729 8.15
Non-interest earning assets, net of
allowance for loan losses............ 2,039 2,152 2,391
Total assets.......................$86,826 $78,263 $72,687
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings deposits..................... $3,845 159 4.14 $ 3,754 148 3.94 $ 3,650 146 4.00
Interest-bearing demand.............. 10,350 444 4.29 9,061 369 4.07 8,594 385 4.48
Certificates of deposit.............. 47,403 2,764 5.83 46,035 2,716 5.90 43,597 2,505 5.75
Stock subscriptions refundable....... 2,737 130 4.75 --- --- --- --- --- ---
FHLB advances........................ 5,748 339 5.90 3,566 191 5.36 1,857 112 6.03
Total interest-bearing liabilities. 70,083 3,836 5.47 62,416 3,424 5.49 57,698 3,148 5.46
Other liabilities....................... 1,960 2,303 2,333
Total liabilities.................. 72,043 64,719 60,031
Shareholders' equity.................... 14,783 13,544 12,656
Total liabilities and
stockholders' equity...........$86,826 $78,263 $ 72,687
Net interest-earning assets.............$14,704 $13,695 $ 12,598
Net interest income..................... $2,965 $2,688 $2,581
Interest rate spread (3)................ 2.55% 2.54% 2.69%
Net yield on weighted average
interest-earning assets (4).......... 3.50% 3.53% 3.67%
Average interest-earning assets to
average interest-bearing liabilities. 120.98% 121.94% 121.83%
</TABLE>
(1) Interest income on loans receivable includes loan fee income of $97,000,
$97,000 and $101,000 for the years ended December 31, 1997, 1996 and 1995.
(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.
Interest Rate Spread
<PAGE>
Union Federal's 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. Union Federal's net interest income is
determined by the interest rate spread between the yields Union Federal earns on
interest-earning assets and the rates it pays 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 Union Federal earned on its loan and investment portfolios, the
weighted average effective cost of its 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. 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 December 31, Year Ended December 31,
1997 1997 1996 1995
--------------------------------------------------------
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits.............................. 5.13% 6.44% 6.99% 6.52%
Mortgage-backed securities held to maturity............ 8.57 8.84 8.59 8.50
Other investment securities held to maturity........... 5.77 5.65 5.52 5.79
Loans receivable....................................... 8.11 8.19 8.14 8.31
FHLB stock............................................. 7.99 7.99 7.81 7.83
Total interest-earning assets........................ 7.02 8.02 8.03 8.15
Weighted average interest rate cost of:
Savings deposits....................................... 4.00 4.14 3.94 4.00
Interest-bearing demand................................ 4.32 4.29 4.07 4.48
Certificates of deposit................................ 5.87 5.83 5.90 5.75
Stock subscriptions refundable......................... 4.00 4.75 --- ---
FHLB advances.......................................... 5.71 5.90 5.36 6.03
Total interest-bearing liabilities................... 5.09 5.47 5.49 5.46
Interest rate spread (1).................................. 1.93 2.55 2.54 2.69
Net yield on weighted average
interest-earning assets (2)............................ --- 3.50 3.53 3.67
</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.
<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 Union Federal's 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 old volume) and (2) changes in volume
(changes in volume multiplied by old 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)
Year ended December 31, 1997 compared
to year ended December 31, 1996
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.................................. $ (6) $ 185 $ 179
Mortgage-backed securities held to maturity................ 7 (56) (49)
Other investment securities held to maturity............... 4 18 22
Loans receivable........................................... 34 494 528
FHLB stock................................................. 1 8 9
Total.................................................... 40 649 689
Interest-bearing liabilities:
Savings deposits........................................... 7 4 11
Interest-bearing demand.................................... 20 55 75
Certificates of deposit.................................... (32) 80 48
Stock subscriptions refundable............................. --- 130 130
FHLB advances.............................................. 21 127 148
Total.................................................... 16 396 412
Net change in net interest income............................ $ 24 $ 253 $ 277
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 December 31, 1997 Compared to Financial Condition at
December 31, 1996
Total assets increased $49.3 million, or 59.5% at December 31, 1997,
compared to December 31, 1996. The largest increases were primarily in cash and
cash equivalents which increased $43.3 million, and net loans which increased
$5.7 million. The increase in cash and cash equivalents was principally in
short-term interest-bearing deposits due to net proceeds from the conversion and
stock subscriptions refundable. Net proceeds of the Holding Company's stock
issuance, after costs and excluding the shares issued for the ESOP, were $27.8
million and stock subscriptions refundable were $22.7 million. The increase in
net loans was principally in real estate mortgage loans, and a result of
increased customer demand.
Average assets increased $8.5 million from $78.3 million for the period
ended December 31, 1996, to $86.8 million for the period ended December 31,
1997, an increase of 10.9%. Average interest-earning assets represented 97.3% of
average assets for the period ended December 31, 1996 compared to 97.7% for the
period ended December 31, 1997. Although the average of most interest-earning
assets increased during 1997, average loans experienced the largest increase
amounting to $6.0 million, or 8.8%, compared to 1996. Average interest-earning
assets as a percentage of average interest-bearing liabilities were 121.9% for
1996 and 121.0% for 1997.
Average balances of mortgage-backed securities held to maturity
decreased $640,000, or 20.9%, from December 31, 1996 to December 31, 1997 as a
result of principal repayments, while other investment securities held to
maturity increased $318,000, or 10.0%, from $3.2 million for the period ended
December 31, 1996 to $3.5 million for the period ended December 31, 1997 due to
purchases. Although no mortgage-backed securities have been purchased 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 -- Investments -- Mortgage-Backed Securities."
Loans and Allowance for Loan Losses. Average loans increased $6.0
million, or 8.8%, from the period ended December 31, 1996, to December 31, 1997.
The growth in loans was in part funded by increased average deposits of $2.7
million and increased average FHLB advances of $2.2 million. Average loans were
$68.3 million for the 1996 period and $74.4 million for the 1997 period. The
average rates on loans were 8.14% for 1996 and 8.19% for 1997, an increase of 5
basis points. The allowance for loan losses as a percentage of total loans
increased from .22% to .32% due to an increase in the allowance for loan losses
from $159,000 at December 31, 1996 to $252,000 at December 31, 1997. The
increase in our allowance for loan losses was a result of a $165,000 provision
for loan losses for the year ended December 31, 1997 offset by a $72,000
charge-off. The ratio of the allowance for loan losses to non-performing loans
was 32.5% at December 31, 1996 compared to 484.6% at December 31, 1997.
Nonperforming loans decreased from $489,000 at December 31, 1996 to $52,000 at
December 31, 1997. Nonperforming loans of $203,000 were transferred to
foreclosed real estate during the period ended December 31, 1997 and a
charge-off of $72,000 relating to a multi-family loan taken at the time of the
transfer. In response to this loss, the risk factor used to calculate the
necessary allowance for loan losses related to loans secured by multi-family and
commercial real estate was increased. Union Federal has experienced minimal
residential loan losses in the past with no losses recorded in over five years
and does not expect this experience in this area to change in future years;
therefore, the risk factor used on the residential loan portfolio has not been
adjusted.
<PAGE>
Premises and Equipment. Premises and equipment decreased slightly from
December 31, 1996 to December 31, 1997 due to depreciation for the period
exceeding purchases. Union Federal has no branches, and it leases to other
businesses a portion of its main office and parking lot. See "Business --
Properties."
Deposits. Deposits increased $1.8 million to $62.3 million during 1997,
an increase of 3.0%. Increased deposits were utilized to fund loan growth.
Demand and savings deposits increased $2.7 million, or 20.1%, between December
31, 1996 and December 31, 1997. Certificates of deposits decreased $874,000, or
1.9%, during this period. Average total deposits increased $2.7 million, or
4.6%, from $58.9 million for the year ended December 31, 1996 compared to $61.6
million for the year ended December 31, 1997.
Borrowed Funds. Borrowed funds decreased $4.3 million, or 54.7%, from
December 31, 1996 to December 31, 1997. The decline in total borrowed funds was
comprised of a decrease in FHLB advances of $4.1 million, 63.4%, 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 14.0%. The note to Pedcor was used to fund an 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 $5.7 million for 1997 compared to $3.6 million for 1996, an
increase of $2.1 million, or 58.3%.
Shareholders' Equity. Shareholders' equity increased $29.0 million from
$13.9 million at December 31, 1996 to $42.9 million at December 31, 1997. The
increase was due to net proceeds of the Holding Company's stock issuance, after
costs and excluding the shares issued for the ESOP, of $27.8 million and net
income for 1997 of $1.2 million.
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 Union Federal's
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 of 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 Union Federal did not offer any
special deposit programs during 1996, it increased its 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. Union Federal 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 Years Ended December 31, 1997 and 1996
General. Net income increased $312,000, or 35.2%, from $886,000 for the
year ended December 31, 1996 to $1,198,000 for the year ended December 31, 1997.
The increase is primarily due to an increase in net interest income and a
decrease in deposit insurance expense. The return on average assets was 1.38%
and 1.13 % for the years ended December 31, 1997 and 1996, respectively.
Interest Income. Our total interest income was $6.8 million for 1997
compared to $6.1 million for 1996. The increase in interest income was due
primarily to an increase in volume. Average earning assets increased $8.7
million, or 11.4%, from $76.1 million for 1996 compared to $84.8 for 1997. The
average yield on interest-earning assets decreased slightly from 8.03% for the
year ended December 31, 1996 to 8.02% for the comparable period in 1997.
Interest Expense. Interest expense increased $412,000, or 12.0%, for
the year ended December 31, 1997 compared to the year ended December 31,1996.
Average interest-bearing liabilities increased $7.7 million, or 12.3%, from
$62.4 million for the 1996 period to $70.1 million during the 1997 period. The
average balance of each deposit type increased from the 1996 period to the 1997
period with a $2.7 million, or 4.6%, increase in total average deposits. Average
FHLB advances increased $2.1 million, or 58.3%, from $3.6 million for the 1996
period to $5.7 million during the 1997 period.
Net Interest Income. Net interest income increased $277,000, or 10.3%,
for the year ended December 31, 1997 compared to the year ended December 31,
1996. The increase was primarily due to the $253,000 increase due to volume
increases. The interest spread was 2.55% for the year ended December 31, 1997
compared to 2.54% for the comparable 1996 period.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1997 was $165,000 compared to $48,000 for the same period in
1996. The provision for loan losses increased 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, the risk factor used on multi-family and commercial real estate loans was
increased.
<PAGE>
Other Losses. Other losses decreased $20,000, or 17.2%, for the year
ended December 31, 1997 compared to the 1996 period primarily due to decreased
losses of $15,000 from our investment in a low-income housing income tax credit
limited partnership. The investment in the limited partnership represents a 99%
equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a
benefit of low income housing income tax credits in the amount of $178,000 for
both 1997 and 1996 was recorded.
Salaries and Employee Benefits. Salaries and employee benefits were
$480,000 for the year ended December 31, 1997 compared to $461,000 for the 1996
period, and increase of $19,000, or 4.1%. This increase resulted from the
addition of 3 full-time employees to our staff and normal increases in employee
compensation and related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy expenses and equipment
expenses increased $2,000, or 3.4%, during 1997 compared to 1996.
Deposit Insurance Expense. Deposit insurance expense decreased
$464,000, or 93.7%, from $495,000 for the year ended December 31, 1996 to
$31,000 for the same period in 1997. This decrease was due to the one time
Savings Association Insurance Fund ("SAIF") special assessment of approximately
$362,000 expensed in the fourth quarter of 1996. The recapitalization of SAIF
resulted in a decline in the assessment for 1997. Prior to the recapitalization
of SAIF, an assessment of $.23 per $100 of deposits was paid. 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 $102,000, or 35.5%
for 1997 compared to 1996. The increase was primarily due to an increase in
director fees of $26,000 and a $30,000 charitable contribution. The remaining
increase resulted from nominal increases in a variety of expense categories.
Income Tax Expense. Income tax expense increased $209,000, or 62.2%,
during 1997 compared to 1996. The increase was directly related to the increase
in taxable income for the period. The effective tax rate was 31.3% and 27.5% for
the respective 1997 and 1996 periods.
Comparison of Operating Results For Years Ended December 31, 1996 and 1995
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. Return on average
assets for the years ended December 31, 1996, and 1995 was 1.13% and 1.36%,
respectively. Return on average equity was 6.54% for 1996 and 7.84% for 1995.
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.
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%.
The deposit growth and increased borrowings from the FHLB were used to fund loan
growth.
Net Interest Income. Net interest income increased $107,000, or 4.1%,
from $2.6 million for 1995 to $2.7 million for 1996. Interest rate spread was
2.54% and 2.69% for 1996 and 1995, respectively.
<PAGE>
Provision for Loan Losses. The 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
1995 reflected a more moderate growth of the loan portfolio.
Other Losses. Other losses decreased $101,000, or 46.5%, from 1995 to
1996 primarily due to a decrease in losses of $76,000 from the investment in a
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.
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.
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.
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.
Income Tax Expense. Income tax expense increased $10,000, or 3.1%, from
1995 to 1996. The effective tax rate were 27.5% and 24.7% for 1996 and 1995,
respectively.
Liquidity and Capital Resources
The following is a summary of Union Federal's 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 Union Federal experiences 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 year in the three-year period
ended December 31, 1997.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Operating activities................................. $1,367 $ 1,088 $1,160
Investing activities:
Investment securities
Proceeds from maturities and
paydowns of mortgage-backed
securities held to maturity..................... 639 676 663
Purchases of other investment
securities held to maturity................... (1,200) (994) (100)
Proceeds from maturities of
investment securities held to maturity........ 500 2,000 ---
Purchase of loans............................... (500) (1,350) (742)
Other net change in loans....................... (5,517) (10,116) (502)
Purchase of FHLB of
Indianapolis Stock............................ (128) (18) (1)
Proceeds on sale of foreclosed real estate........... 73 --- ---
Purchases of premises and equipment............. (23) (3) (38)
Net cash used by investing activities........... (6,156) (9,805) (720)
Financing activities:
Net change in
Interest-bearing demand and savings deposits...... 2,696 1,243 (1,375)
Certificates of deposits.......................... (874) 1,786 3,896
Stock subscription escrow accounts................ 22,687 --- ---
Proceeds from borrowings.......................... 1,500 10,500 2,500
Repayment of borrowings........................... (5,807) (5,261) (4,801)
Net change in advances by borrowers
for taxes and insurance....................... 20 (79) 4
Proceeds from sale of common stock,
net of costs.................................... 27,883 --- ---
Net cash provided by financing activities....... 48,105 8,189 224
Net increase(decrease) in cash
and cash equivalents.............................. $43,316 $ (528) $ 664
</TABLE>
Federal law requires that savings associations maintain an average daily
balance of liquid assets in an amount not less than 4% or more than 10% of their
withdrawable accounts 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. The OTS recently amended its
regulation that implements this statutory liquidity requirement to reduce the
amount of liquid assets a savings association must hold from 5% of net
withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated
the requirement that savings associations maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. The revised OTS rule also permits
savings associations to calculate compliance with the liquidity requirement
based upon their average daily balance of liquid assets during each quarter
rather than during each month, as was required under the prior rule. The OTS may
impose monetary penalties on savings associations that fail to meet these
liquidity requirements. As of December 31, 1997, Union Federal had liquid assets
of $48.6 million, and a regulatory liquidity ratio of 49.4%.
<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 December 31, 1997, Union Federal's tangible capital ratio was 22.7%, its core
capital ratio was 22.7%, and its risk-based capital to risk-weighted assets
ratio was 56.5%. Therefore, at December 31, 1997, Union Federal's capital levels
exceeded all applicable regulatory capital requirements currently in effect. The
following table provides the minimum regulatory capital requirements and Union
Federal's capital ratios as of December 31, 1997:
<TABLE>
<CAPTION>
At December 31, 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% $29,969 22.7% $1,981 $27,988
Core capital (2)............ 3.0 29,969 22.7 3,961 26,008
Risk-based capital.......... 8.0 30,221 56.5 4,279 25,942
</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 December 31, 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 Union
Federal's liquidity, capital resources or results of operations.
Current Accounting Issues
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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 the 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.
<PAGE>
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. The adoption of SFAS No. 128 will not
have a material impact on financial position or results of operations.
The Statement is effective for the 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 financial
statements issued for periods ending after December 15, 1997, including interim
periods. The adoption of SFAS No. 129 will not have a material impact on the
Holding Company's financial position or results of operations.
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 the (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) displaying
of 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. The adoption of SFAS No. 130 will not have
a material impact on 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.
<PAGE>
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. The adoption of SFAS No. 131 will not have a
material impact on financial condition or results of operations.
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.
The Holding Company's primary assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on the
Holding Company's 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 Union Federal's 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 Union Federal has made. Union Federal is unable to determine
the extent, if any, to which properties securing its loans have appreciated in
dollar value due to inflation.
Year 2000 Compliance
Because computer memory was so expensive on early mainframe computers,
some computer programs used only the final two digits for the year in the date
field and assumed that the first two digits were "19." As a result, some
computer applications may be unable to interpret the change from year 1999 to
year 2000. The Holding Company is actively monitoring its year 2000 computer
compliance issues. The bulk of the Holding Company's computer processing is
provided under contract by On-Line Financial Services, Inc., Oak Brook, IL.
("On-Line") On-Line expects to be in year 2000 compliance by June 1999. The
Holding Company's loan documentation system is provided by Banker's Systems and
is also expected to be in year 2000 compliance within the next year. The Holding
Company has also appointed the three executive officers to address all aspects
of year 2000 compliance. The Holding Company's expense in connection with year
2000 compliance is not expected to be material to its overall financial
condition.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
An important component of Union Federal's asset/liability management
policy includes examining the interest rate sensitivity of its assets and
liabilities and monitoring the expected effects of interest rate changes on its
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 Union Federal's
assets mature or reprice more quickly or to a greater extent than its
liabilities, Union Federal's 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 Union Federal's assets mature
or reprice more slowly or to a lesser extent than its liabilities, its 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.
Union Federal's 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 its earnings to material and prolonged changes in
interest rates.
Because of the lack of customer demand for adjustable rate loans in its
market area, Union Federal primarily originates fixed-rate real estate loans,
which accounted for approximately 74.4% of its loan portfolio at December 31,
1997. To manage the interest rate risk of this type of loan portfolio, Union
Federal limits maturities of fixed-rate loans to no more than 20 years. In
addition, Union Federal continues to offer and attempts to increase its volume
of adjustable rate loans when market interest rates make these type loans more
attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Union Federal's 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. Union
Federal manages assets and liabilities within the context of the marketplace,
regulatory limitations and within limits established by its 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 Union Federal
does not meet either of these requirements, it is not required to file Schedule
CMR, although it does 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 December 31, 1997, is an analysis performed by
the OTS of Union Federal's 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 December 31, 1997, 2% of the
<PAGE>
present value of Union Federal's assets was approximately $2.2 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 $3.9
million at June 30, 1997, Union Federal would have been required to deduct
$850,000 from its total capital available to calculate its risk based capital
requirement if it had been subject to the OTS' reporting requirements under this
methodology. Union Federal's exposure to interest rate risk results from the
concentration of fixed rate mortgage loans in our portfolio.
The following table sets forth Union Federal's interest rate
sensitivity as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates as of
December 31, 1997).
<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 * $24,383 $(8,362) (26)% 23.94% (555) bp
+ 300 bp 26,661 (6,084) (19)% 25.55% (394) bp
+ 200 bp 28,860 (3,885) (12)% 27.03% (246) bp
+ 100 bp 30,947 (1,799) (5)% 28.37% (111) bp
0 bp 32,746 29.49%
- 100 bp 33,973 1,227 4 % 30.21% 73 bp
- 200 bp 34,782 2,036 6 % 30.67% 118 bp
- 300 bp 35,809 3,064 9 % 31.25% 177 bp
- 400 bp 37,247 4,501 14 % 32.08% 259 bp
</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 $3.9 million (or 12%) decrease in
the net portfolio value of Union Federal's assets. This hypothetical increase in
interest rates would also result in a 246 basis point (or 2.46%) decrease in the
ratio of the net portfolio value to the present value of Union Federal's assets.
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.
<PAGE>
Item 8. Financial Statements and Supplementary Data.
Independent Auditor's Report
Board of Directors
Union Community Bancorp
Crawfordsville, Indiana
We have audited the accompanying consolidated balance sheet of Union
Community Bancorp (formerly Union Federal Savings and Loan Association)
and subsidiary as of December 31, 1997 and 1996 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,
1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 Community Bancorp and subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 20, 1998
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 1997 1996
- - -------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 22,424 $ 29,297
Short-term interest-bearing deposits 44,758,403 1,435,893
Total cash and cash equivalents 44,780,827 1,465,190
Investment securities held to maturity 5,820,069 5,747,347
Loans 78,687,999 72,856,009
Allowance for loan losses (252,258) (159,000)
Net loans 78,435,741 72,697,009
Premises and equipment 367,360 371,364
Federal Home Loan Bank stock 707,700 580,100
Investment in limited partnership 1,176,109 1,333,909
Interest receivable
Loans 440,641 385,530
Mortgage-backed securities 18,036 23,600
Other investment securities
and interest-bearing deposits 122,849 44,474
Deferred income tax 38,674 75,424
Other assets 132,251 64,813
Total assets $ 132,040,257 $ 82,788,760
Liabilities
Deposits
Noninterest bearing $ 1,532,647 $ 321,523
Interest bearing 60,725,398 60,114,919
Total deposits 62,258,045 60,436,442
Stock subscriptions refundable 22,687,104
Federal Home Loan Bank advances 2,373,051 6,482,478
Note payable 1,200,042 1,397,892
Interest payable 118,867 91,452
Other liabilities 497,271 470,663
Total liabilities 89,134,380 68,878,927
Stockholders' Equity Preferred stock,
without par value Authorized and
unissued--2,000,000 shares Common stock,
without par value Authorized--5,000,000 shares
Issued and outstanding--3,041,750 shares 29,637,592
Retained earnings 15,108,285 13,909,833
Unearned employee stock ownership plan ("ESOP") shares (1,840,000)
Total stockholders' equity 42,905,877 13,909,833
Total liabilities and stockholders' equity $ 132,040,257 $ 82,788,760
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
Interest and Dividend Income
<S> <C> <C> <C>
Loans $6,090,003 $5,561,735 $5,065,944
Investment securities
Mortgage-backed securities 214,121 262,711 321,262
Other investment securities 196,937 175,332 227,154
Dividends on Federal Home Loan Bank stock 53,956 45,027 44,291
Deposits with financial institutions 245,927 66,886 70,575
Total interest and dividend income 6,800,944 6,111,691 5,729,226
Interest Expense
Deposits 3,366,097 3,232,877 3,036,215
Stock subscription escrow accounts 130,411
Federal Home Loan Bank advances 339,258 190,800 111,569
Total interest expense 3,835,766 3,423,677 3,147,784
Net Interest Income 2,965,178 2,688,014 2,581,442
Provision for loan losses 165,000 48,000 24,000
Net Interest Income After Provision for Loan Losses 2,800,178 2,640,014 2,557,442
Other Income (Losses)
Equity in losses of limited partnership (157,800) (172,552) (249,092)
Other income 61,952 56,457 31,346
Total other losses (95,848) (116,095) (217,746)
Other Expenses
Salaries and employee benefits 479,726 460,615 480,770
Net occupancy expenses 39,159 39,103 65,698
Equipment expenses 22,436 19,886 20,460
Deposit insurance expense 31,482 494,679 127,053
Other expenses 388,519 287,654 328,184
Total other expenses 961,322 1,301,937 1,022,165
Income Before Income Tax 1,743,008 1,221,982 1,317,531
Income tax expense 544,556 336,286 326,018
Net Income $1,198,452 $ 885,696 $ 991,513
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
Shares Retained Unearned
Outstanding Amount Earnings ESOP Shares Total
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995 $12,032,624 $12,032,624
Net income for 1995 991,513 991,513
Balances, December 31, 1995 13,024,137 13,024,137
Net income for 1996 885,696 885,696
Balances, December 31, 1996 13,909,833 13,909,833
Net income for 1997 1,198,452 1,198,452
Common stock issued in conversion,
net of costs 3,041,750 $29,637,592 29,637,592
Contribution for unearned ESOP shares $(1,840,000) (1,840,000)
Balances, December 31, 1997 3,041,750 $29,637,592 $15,108,285 $(1,840,000) $42,905,877
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
Operating Activities
<S> <C> <C> <C>
Net income $ 1,198,452 $ 885,696 $ 991,513
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 165,000 48,000 24,000
Depreciation 27,335 25,913 25,005
Deferred income tax 36,750 (13,910) 40,462
Investment securities accretion, net (11,677) (6,181) (812)
Gains on sale of foreclosed real estate (5,565)
Equity in losses of limited partnership 157,800 172,552 249,092
Net change in
Interest receivable (127,922) (83,459) (103,132)
Interest payable 27,415 (1,964) 12,260
Other assets (21,878) (24,199) 59,003
Other liabilities (78,749) 85,879 (137,157)
Net cash provided by operating activities 1,366,961 1,088,327 1,160,234
Investing Activities
Investment securities
Purchases of investment securities held to maturity (1,200,000) (994,342) (100,000)
Proceeds from maturities and paydowns of mortgage-backed
securities held to maturity 638,955 675,913 663,446
Proceeds from maturities of investment securities held to maturity 500,000 2,000,000
Net change in loans (6,017,272) (11,466,414) (1,243,891)
Purchases of premises and equipment (23,331) (2,602) (38,381)
Proceeds on sale of foreclose real estate 73,546
Purchase of Federal Home Loan Bank of Indianapolis stock (127,600) (17,500) (1,000)
Net cash used by investing activities (6,155,702) (9,804,945) (719,826)
Financing Activities
Net change in
Interest-bearing demand and savings deposits 2,695,812 1,243,027 (1,375,313)
Certificates of deposit (874,209) 1,786,193 3,896,285
Stock subscription escrow accounts 22,687,104
Proceeds from borrowings 1,500,000 10,500,000 2,500,000
Repayment of borrowings (5,807,277) (5,261,331) (4,801,291)
Net change in advances by borrowers for taxes and insurance 19,981 (79,558) 4,201
Proceeds from sale of common stock, net of costs 27,882,967
Net cash provided by financing activities 48,104,378 8,188,331 223,882
Net Increase (Decrease) in Cash and Cash Equivalents 43,315,637 (528,287) 664,290
Cash and Cash Equivalents, Beginning of Year 1,465,190 1,993,477 1,329,187
Cash and Cash Equivalents, End of Year $44,780,827 $1,465,190
$1,993,477
Additional Cash Flows Information
Interest paid $3,808,351 $3,425,641 $3,135,524
Income tax paid 527,433 375,405 227,747
Stock issuance costs included in other liabilities 85,375
Common stock issued to ESOP leveraged with an employer loan 1,840,000
Loans transferred to foreclosed real estate 163,540
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Union Community Bancorp ("Company") and
its wholly owned subsidiary, Union Federal Savings and Loan Association
("Association") and the Association's 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 Company is a thrift holding company whose principal activity is the
ownership and management of the Association. 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 and the Federal Deposit Insurance Corporation.
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
Company, the Association and UFS after elimination of all material intercompany
transactions.
Investment Securities--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 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 COMMUNITY BANCORP 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
December 31, 1997 and 1996, 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.
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.
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.
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 Company
files consolidated income tax returns with its subsidiary.
Earnings per share will be computed based upon the weighted average common and
common equivalent shares outstanding during the period subsequent to the
Association's conversion to a stock savings and loan association on December 29,
1997. Net income per share for the periods before the conversion, is not
meaningful.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Conversion
On December 29, 1997, the Association completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings and loan
association and the formation of the Company as the holding company of the
Association. As part of the conversion, the Company issued 3,041,750 shares of
common stock at $10 per share. Net proceeds of the Company's stock issuance,
after costs of $779,908 and excluding the shares issued for the ESOP, were
$27,797,592, of which $14,861,484 was used to acquire 100% of the stock and
ownership of the Association. The transaction was accounted for at historical
cost in a manner similar to that utilized in a pooling of interests.
- - - Investment Securities Held to Maturity
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury $ 350 $ 350
Federal agencies 3,346 $ 8 $3 3,351
Mortgage-backed securities 2,124 183 5 2,302
Total investment securities $5,820 $191 $8 $6,003
</TABLE>
<TABLE>
<CAPTION>
1996
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 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>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity at December 31,
1997, 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.
1997
Amortized Fair
December 31 Cost Value
Within one year $1,400 $1,398
One to five years 2,296 2,303
3,696 3,701
Mortgage-backed securities 2,124 2,302
Totals $5,820 $6,003
Securities with a carrying value of $2,194,000 and $2,832,000 were pledged at
December 31, 1997 and 1996 to secure FHLB advances.
Mortgage-backed securities included in investment securities held to maturity
above consist of the following:
<TABLE>
<CAPTION>
1997
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
<S> <C> <C> <C>
Government National Mortgage Corporation $1,223 $125 $1,348
Federal Home Loan Mortgage Corporation 635 56 691
Federal National Mortgage Corporation 243 2 $5 240
Other 23 23
Total mortgage-backed securities $2,124 $183 $5 $2,302
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1996
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 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>
- - - Loans and Allowance
<TABLE>
<CAPTION>
December 31 1997 1996
Real estate mortgage loans
<S> <C> <C>
One-to-four family $62,436 $57,031
Multi-family 10,197 10,920
Commercial 3,627 3,593
Real estate construction loans 2,530 1,322
Individuals' loans for household and other personal expenditures 223 346
79,013 73,212
Deferred loan fees (325) (356)
Total loans $78,688 $72,856
</TABLE>
Year Ended December 31 1997 1996 1995
Allowance for loan losses
Balances, Beginning of Period $159 $111 $ 87
Provision for losses 165 48 24
Loans charged off (72)
Balances, End of Period $252 $159 $111
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At December 31, 1997, 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
years ended December 31, 1997 and 1996 was $33,000 and $110,000. The Association
had no interest income or cash receipts of interest on impaired loans during the
years ended December 31, 1997 and 1996. The Association has no loans that were
impaired during 1995.
In addition, at December 31, 1997, 1996 and 1995, the Association had nonaccrual
loans of $52,000, $377,000 and $156,000, 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 $1,000,
$14,000 and $3,000 for the years ended December 31, 1997, 1996 and 1995.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
The Association has entered into transactions with certain directors and
officers and their affiliates or associates (related parties). 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, January 1, 1997 $1,528
New loans, including renewals 1,291
Payments, etc. including renewals (461)
Balances, December 31, 1997 $2,358
- - - Premises and Equipment
December 31 1997 1996
Land $146 $146
Buildings
553 538 Equipment 142 134
Total cost 841 818
Accumulated depreciation (474) (447)
Net $367 $371
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Investment in Limited Partnership
The investment in limited partnership of $1,176,000 and $1,334,000 at December
31, 1997 and 1996 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 Company has recorded the benefit of low income housing tax
credits of $178,000 for the years ended December 31, 1997, 1996 and 1995.
Condensed financial statements for Pedcor are as follows:
December 31 1997 1996
Condensed statement of financial condition
Assets
Cash $ 5 $ 29
Land and property 2,292 2,350
Other assets 55 30
Total assets $2,352 $2,409
Liabilities
Notes payable--Association $ 873 $ 982
Notes payable--other 1,274 1,290
Other liabilities 165 173
Total liabilities 2,312 2,445
Partners' equity 40 (36)
Total liabilities and partners' equity $2,352 $2,409
Year Ended December 31 1997 1996 1995
Condensed statement of operations
Total revenue $219 $219 $222
Total expenses 340 435 454
Net loss $(121) $(216) $(232)
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Deposits
December 31 1997 1996
Noninterest-bearing demand $ 1,533 $ 322
Interest-bearing demand 9,965 9,192
Savings deposits 4,579 3,867
Certificates and other time deposits of $100,000 or more 7,060 7,056
Other certificates and time deposits 39,121 39,999
Total deposits $62,258 $60,436
Certificates and other time deposits maturing
in years ending December 31
1998 $27,369
1999 13,254
2000 3,703
2001 774
2002 1,081
v $46,181
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $7,060,000 and $7,056,000 at December 31, 1997 and
1996. Deposits in excess of $100,000 are not federally insured.
Year Ended December 31 1997 1996 1995
Interest expense on deposits
Interest-bearing demand $ 444 $ 369 $ 385
Savings deposits 159 148 146
Certificates 2,763 2,716 2,505
$3,366 $3,233 $3,036
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Federal Home Loan Bank Advances
1997
Weighted
Average
December 31 Amount Rate
Advances from FHLB
Maturities in years ending
1998 $1,601 5.71%
1999 114 5.33
2000 123 5.49
2001 129 5.67
2002 138 5.80
2003 147 5.90
2004 121 6.03
$2,373 5.71%
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $62,517,000 and $57,954,000 at December 31, 1997 and 1996. Advances are
subject to restrictions or penalties in the event of prepayment.
- - - 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.
December 31 1997
Note payable to Pedcor Maturities in years ending:
1998 $ 179
1999 184
2000 183
2001 177
2002 174
Thereafter 303
$1,200
The Association has an available line of credit with the FHLB totaling
$1,000,000. The line of credit expires September 16,1998 and bears interest at a
rate equal to the current variable advance rate. There were no drawings on this
line of credit at December 31, 1997.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Income Tax
Year Ended December 31 1997 1996 1995
Income tax expense
Currently payable
Federal $353 $246 $184
State 155 104 102
Deferred
Federal 37 (20) 32
State 6 8
Total income tax expense $545 $336 $326
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $593 $415 $448
Effect of state income taxes 102 73 73
Tax credits (178) (178) (178)
Other 28 26 (17)
Actual tax expense $545 $336 $326
Effective tax rate 31.2% 27.5% 24.7%
The components of the cumulative net deferred tax asset are as follows:
December 31 1997 1996
Assets
Allowance for loan losses $92 $49
Loan fees 37 66
Business income tax credits 29 68
Other 2 13
Total assets 160 196
Liabilities
Depreciation 26 28
State income tax 2 2
FHLB stock dividend 23 23
Equity in partnership losses 70 67
Total liabilities 121 120
$39 $76
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At December 31, 1997 and 1996, the Association had an unused business income tax
credit carryforward of $29,000 and $68,000 expiring in 2011.
Retained earnings at December 31, 1997 and 1996 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 December 31, 1997 and 1996.
- - - 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:
December 31 1997 1996
Mortgage and consumer loan commitments
At variable rates $ 773 $ 107
At fixed rates ranging from
7.13 to 8.25% for 1997 and 2,136
7.38 to 9.25% for 1996 697
Standby letters of credit 2,014 1,500
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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association has entered into an employment agreement with the president
which provides for the continuation of salary and certain benefits for a
specified period of time under certain conditions. Under the terms of the
agreements, these payments could occur in the event of a change in control of
the Association, as defined, along with other specific conditions. The
contingent liability under these agreements in the event of a change in control
is approximately $300,000. The Association is not required to pay any amounts
under these agreements which cannot be deducted for federal income tax purposes.
The Company, 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 Company.
- - - Dividend and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
The OTS regulations provide that savings associations which meet fully phased-in
capital requirements and are subject only to "normal supervision" may pay out,
as a dividend, 100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the calendar year
without supervisory approval, but with 30 days prior notice to the OTS. OTS
regulations also prohibit a savings association from declaring or paying any
dividends if, as a result, the regulatory capital of the Association would be
reduced below the minimum amount required to be maintained for the liquidation
account established in connection with the conversion. Any additional amount of
capital distributions would require prior regulatory approval. Savings
associations failing to meet current capital standards may only pay dividends
with supervisory approval.
At the time of conversion, a liquidation account was established in an amount
equal to the Association's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Association after conversion. In the event
of a complete liquidation, and only in such event, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution may
be made to stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the use or
application of net worth. The initial balance of the liquidation account was
$14,472,934.
At December 31, 1997, the stockholder's equity of the Association was
$29,969,000, of which approximately $13,004,000 was available for the payment of
dividends.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1997 and 1996,
the Association is categorized as well capitalized and meets all subject capital
adequacy requirements. There are no conditions or events since December 31, 1997
that management believes have changed the Association's classification.
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1997
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
December 31 Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital 1
(to risk weighted assets) $30,221 56.5% $4,279 8.0% $5,349 10.0%
Core capital 1 (to adjusted tangible assets) 29,969 22.7 3,961 3.0 7,922 6.0
Core capital 1 (to adjusted total assets) 29,969 22.7 3,961 3.0 6,602 5.0
</TABLE>
1 As defined by regulatory agencies
<TABLE>
<CAPTION>
1996
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
December 31 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital 1
<S> <C> <C> <C> <C> <C> <C>
(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 December 31, 1997 and 1996 was $29,629,000
and $13,910,000, which amount was 22.7% and 16.8% of tangible assets and
exceeded the required ratio of 1.5%.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Employee Benefit Plans
The Company 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 (benefit) was $(4,000), $47,000 and
$53,000 for 1997, 1996, 1995.
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The Company matches employees' contributions at the
rate of 50% for the first 5% of base salary contributed by participants. The
Company's expense for the plan was $11,000, $10,000 and $11,000 for 1997, 1996,
and 1995.
As part of the conversion in 1997, the Company established an ESOP covering
substantially all employees of the Company and Association. The ESOP acquired
184,000 shares of the Company common stock at $10 per share in the conversion
with funds provided by a loan from the Company. Accordingly, the $1,840,000 of
common stock acquired by the ESOP is shown as a reduction of stockholders'
equity. Shares are released to participants proportionately as the loan is
repaid. Dividends on allocated shares are recorded as dividends and charged to
retained earnings. Dividends on unallocated shares, which will be distributed to
participants, are treated as compensation expense. Compensation expense is
recorded equal to the fair market value of the stock when contributions, which
are determined annually by the Board of Directors of the Association, are made
to the ESOP. There was no expense under the ESOP for the year ended December 31,
1997. At December 31, 1997, the ESOP had no allocated shares, 184,000 suspense
shares and no committed-to-be released shares.
In connection with the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Retention Plan ("RRP"). The Plans are subject
to stockholder's approval. Under the stock option plan, stock options covering
shares representing an aggregate of up to 10% of the common stock issued in the
conversion may be granted to directors and executive officers. Restricted stock
awards covering up to 4% of the common stock issued in the conversion may be
awarded to directors and executive officers under the RRP.
- - - 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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
Stock Subscriptions Refundable and Advance Payments by Borrowers for Taxes and
Insurance--The fair value approximates carrying value.
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.
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.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $44,781 $44,781 $1,465 $1,465
Investment securities held to maturity 5,820 6,003 5,747 5,892
Loans, net 78,436 79,611 72,697 73,220
Stock in FHLB 708 708 580 580
Interest receivable 582 582 454 454
Liabilities
Deposits 62,258 62,476 60,436 60,683
Stock subscriptions refundable 22,687 22,687
Borrowings
FHLB advances 2,373 2,345 6,482 6,587
Notes payable--limited partnership 1,200 1,170 1,398 1,343
Interest payable 119 119 91 91
Advances by borrowers for taxes and insurance 221 221 201 201
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1997
Assets
Cash $13,022
Investment in subsidiary 29,927
Total assets $42,949
Liability--other $ 43
Stockholders' Equity 42,906
Total liabilities and stockholders' equity $42,949
Condensed Statement of Income
Year Ended December 31 1997
Net Income--equity in undistributed income of subsidiaries $ 7
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
December 31 1997
Operating Activities
Net income $ 7
Adjustments to reconcile net income to
net cash provided by operating activities (7)
Net cash provided by operating activities 0
Financing Activities
Net proceeds from issuance of stock 27,883
Capital contribution to Association (14,861)
Net cash provided by financing activities 13,022
Net Change in Cash 13,022
Cash at Beginning of Year 0
Cash at End of Year $13,022
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employee loan $1,840
Stock issuance cost included in other liabilities 43
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Holding Company's executive officers is
included in Item 4.5 in Part I of this report. Section 16(a) of the Securities
Exchange Act of 1934 ("1934 Act") requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
Based solely on the Holding Company's review of the copies of such forms
received by it, and/or written representations from certain reporting persons
that no Forms 5 were required for those persons, the Holding Company believes
that during the fiscal year ended December 31, 1997, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
with respect to Section 16(a) of the 1934 Act were complied with.
Presented below is certain information concerning the directors of the
Holding Company:
<TABLE>
<CAPTION>
Director of Director of Position Position
Holding Company Union Federal Expiration with Holding with
Director Since Since of Term Company Union Federal
<S> <C> <C> <C> <C> <C>
Philip L. Boots 1997 1991 1998 Director Director
Marvin L. Burkett 1997 1975 1999 Director Director
Phillip E. Grush 1997 1982 1999 Director Director, Vice
Chairman of the
Board and Vice
President
Samuel H. Hildebrand 1997 1995 2000 Director Director
John M. Horner 1997 1979 1998 Director Director,
Chairman of the
Board and Vice
President
Harry A. Siamas 1997 1994 2000 Director Director
Joseph E. Timmons 1997 1973 1999 Director, Director,
President and President and
Chief Executive Chief Executive
Officer Officer
</TABLE>
<PAGE>
Presented below is certain information concerning the directors of Union
Federal:
Philip L. Boots (age 51) 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 70) 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 61) 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.
Union Federal also has a director emeritus program pursuant to which its
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.
Item 11. Executive Compensation.
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by Union Federal.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities paid to Union Federal's
President and Chief Executive Officer for the fiscal year ended December 31,
1997. Other than Mr. Timmons, Union Federal 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 1997 $108,300 (1)(2) $25,000 -- --
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 $8,300 directors fees paid to Mr. Timmons.
<PAGE>
Employment Contract
Union Federal has entered into a three-year employment contract with Mr.
Timmons. The contract with Mr. Timmons, which became effective as of the
effective date of the Conversion, extends annually for an additional one-year
term to maintain its three-year term if Union Federal's 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 Union Federal's
employees. Mr. Timmons may terminate his employment upon 60 days' written notice
to Union Federal. Union Federal may discharge Mr. Timmons for cause (as defined
in the contract) at any time or in certain specified events. If Union Federal
terminates 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 Union Federal's 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 Union Federal 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 Union Federal,
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
Union Federal 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 Union Federal, 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 Union Federal's confidential business
information and protects Union Federal from competition by Mr. Timmons should he
voluntarily terminate his employment without cause or be terminated by Union
Federal for cause.
Compensation of Directors
Union Federal pays its 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 Union Federal's directors and advisory directors for the year
ended December 31, 1997 were approximately $64,000. Beginning in July, 1997,
Union Federal began paying its 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.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 20, 1998, by each person
who is known by the Holding Company to own beneficially 5% or more of the Common
Stock. Unless otherwise indicated, the named beneficial owner has sole voting
and dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent of
of Beneficial Owner(1) Beneficially Owned Class
---------------------- ------------------ -----
Home Federal Savings Bank 184,000(2) 6.05%
501 Washington Street
Columbus, IN 47201
(1) The information in this chart is based on Schedule 13D and 13G
Report(s) filed by the above-listed person(s) with the SEC containing
information concerning shares held by them. It does not reflect any
changes in those shareholdings which may have occurred since the date
of such filings.
(2) These shares are held by the Trustee of the Union Community Bancorp
ESOP. The Employees participating in the ESOP are entitled to instruct
the Trustee how to vote shares held in their accounts under the ESOP.
Unallocated shares held in a suspense account under the ESOP are
required to be voted by the Trustee in the same proportion as allocated
shares are voted.
The following table sets forth certain information regarding the
nominees for the position of director of the Holding Company, including the
number and percent of shares of Common Stock beneficially owned by such persons
as of March 20, 1998. Unless otherwise indicated, each nominee has sole
investment and/or voting power with respect to the shares shown as beneficially
owned by him. The table also sets forth the number of shares of Holding Company
Common Stock beneficially owned by all directors and executive officers of the
Holding Company as a group.
<TABLE>
<CAPTION>
Common Stock
Expiration of Director of the Beneficially
Term as Holding Owned as of Percentage
Name Director Company Since March 20, 1998 of Class(1)
- - ------------------------------------ ------------- -----------------------
<S> <C> <C> <C> <C>
Philip Boots 1998 1997 12,100 (2) (3) .40%
Marvin L. Burkett 1999 1997 6,000 (2) .20
Phillip E. Grush 1999 1997 15,550 (2) .51
Samuel H. Hildebrand 2000 1997 16,418 (2) .54
John M. Horner 1998 1997 22,500 (2) (3) (4) .74
Harry A. Siamas 2000 1997 11,300 (4) (5) .37
Joseph E. Timmons 1999 1997 30,417 (2) 1.00
All directors and
executive officers
as a group (9 persons) 119,773 3.94%
</TABLE>
footnotes on following page.
<PAGE>
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not he or she has
any economic power with respect to the shares. Includes shares
beneficially owned by members of the immediate families of the
directors residing in their homes.
(2) Includes shares owned by director and his spouse.
(3) Includes shares owned by a company deemed to be controlled by director.
(4) Includes shares held by spouse of director as custodian for a minor.
(5) Includes shares held jointly by director and his aunt.
Item 13. Certain Relationships and Related Transactions.
Union Federal has followed a policy of offering to its directors,
officers, and employees real estate mortgage loans secured by their principal
residence as well as other loans. All of Union Federal's loans to its 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 $2.4
million, or approximately 5.5% of consolidated shareholders' equity at December
31, 1997.
Current law authorizes Union Federal to make loans or extensions of credit
to its executive officers, directors, and principal shareholders on the same
terms that are available with respect to loans made to all of its employees. At
present, Union Federal's loans to executive officers, directors, principal
shareholders and employees are made on the same terms generally available to the
public. Union Federal may in the future, however, adopt a program under which it
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 its 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. Union Federal's policy regarding loans to directors
and all employees meets the requirements of current law.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Consolidated Balance Sheet at December 31, 1997, and 1996
Consolidated Statement of Income for the Years Ended December 31,
1997, 1996, and 1995
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995.
Consolidated Statement of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
UNION COMMUNITY BANCORP
Date: March 31, 1998 By: /s/ Joseph E. Timmons
Joseph E. Timmons, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 31st day of March, 1998.
Signatures Title Date
(1) Principal Executive Officer:
/s/ Joseph E. Timmons )
Joseph E. Timmons President and )
Chief Executive Officer)
)
)
(2) Principal Financial and Accounting )
Officer: )
)
)
/s/ Denise E. Swearingen Treasurer )
Denise E. Swearingen )
)
)March 31, 1998
)
(3) The Board of Directors: )
)
)
/s/ Philip L. Boots Director )
Philip L. Boots )
)
)
/s/ Marvin L. Burkett Director )
Marvin L. Burkett )
)
)
/s/ Phillip E. Grush Director )
Phillip E. Grush )
)
)
/s/ Samuel H. Hillenbrand )
Samuel H. Hillenbrand Director )
)
)
/s/ John M. Horner Director )
John M. Horner )
)
)March 31, 1998
/s/ Harry A. Siamas Director )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
Joseph E. Timmons )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to to Exhibit 3(1) to the Registration Statement
(2) Registrant's Code of By-Laws is incorporated by reference to
to Exhibit 3(2) to the Registration Statement
10(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 incorporated by reference to
to Exhibit 10(5) to the Registration Statement
(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
27 Financial Data Schedule (filed electronically)
UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN AND
TRUST AGREEMENT
(EFFECTIVE JANUARY 1, 1997)
<PAGE>
UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN AND
TRUST AGREEMENT
(EFFECTIVE JANUARY 1, 1997)
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS.......................................................1
Section 1.1. Accrued Company Contributions Benefit........1
Section 1.2. Act..........................................1
Section 1.3. Anniversary Date.............................1
Section 1.4. Annual Addition..............................1
Section 1.5. Bank.........................................1
Section 1.6. Beneficiary..................................2
Section 1.7. Code.........................................2
Section 1.8. Committee....................................2
Section 1.9. Company......................................2
Section 1.10. Company Contributions Account................2
Section 1.11. Compensation.................................2
Section 1.12. Date of Employment...........................3
Section 1.13. Date of Separation...........................3
Section 1.14. Deferred Retirement..........................3
Section 1.15. Deferred Retirement Date.....................3
Section 1.16. Defined Benefit Fraction.....................3
Section 1.17. Defined Contribution Fraction................3
Section 1.18. Effective Date...............................4
Section 1.19. Employee.....................................4
Section 1.20. Exempt Loan..................................4
Section 1.21. Fund.........................................4
Section 1.22. Highly Compensated Employee..................4
Section 1.23. Holding Company..............................5
Section 1.24. Hour of Service..............................5
Section 1.25. Leave of Absence.............................6
Section 1.26. Normal Retirement............................6
Section 1.27. Normal Retirement Date.......................6
Section 1.28. One Year Service Break.......................6
Section 1.29. Participant..................................6
Section 1.30. Period of Separation.........................6
Section 1.31. Period of Service............................6
-i-
<PAGE>
Section 1.32. Period of Severance..........................7
Section 1.33. Plan.........................................7
Section 1.34. Plan Year....................................7
Section 1.35. Re-employed Individual.......................7
Section 1.36. Section 415 Compensation.....................8
Section 1.37. Stock........................................9
Section 1.38. Top Paid Group...............................9
Section 1.39. Total Disability............................10
Section 1.40. Trust.......................................10
Section 1.41. Trustee.....................................10
Section 1.42. Valuation Date..............................10
Section 1.43. Year of Service.............................10
ARTICLE II ELIGIBILITY AND PARTICIPATION........................11
Section 2.1. Eligibility.................................11
Section 2.2. Entry Dates.................................11
Section 2.3. Certification by Company....................11
Section 2.4. Deferred Retirement.........................11
ARTICLE III COMPANY CONTRIBUTIONS................................11
Section 3.1. Company Contributions.......................11
Section 3.2. Form of Contributions.......................12
Section 3.3. Holding by Trustee..........................12
Section 3.4. Expenses....................................12
Section 3.5. No Company Liability for Benefits. .........12
Section 3.6. No Rollover Contributions...................12
ARTICLE IV ALLOCATION TO PARTICIPANTS' ACCOUNTS.................12
Section 4.1. Company Contributions Accounts..............12
Section 4.2. Allocation of Company Contributions.........12
Section 4.3. Limitations on Annual Additions.............13
Clause (a). Basic Limitations...................13
Clause (b). Participation in Other Plans........13
Section 4.4. Effective Date of Allocations...............14
Section 4.5. Cash Dividends..............................14
Section 4.6. Allocation of Forfeitures...................14
Section 4.7. Special Allocation Rules....................14
Section 4.8. Rehire after Military Service...............16
ARTICLE V VALUATIONS AND ADJUSTMENTS...........................16
Section 5.1. Valuation of Fund...........................16
Clause (a). Valuations..........................16
Clause (b). Frequency...........................16
-ii-
<PAGE>
Clause (c). Records...............................16
Section 5.2. Adjustments...................................17
Section 5.3. Amount of Adjustments.........................17
Section 5.4. Effective Date of Adjustments.................17
Section 5.5. Notice to Participants........................17
ARTICLE VI BENEFITS...........................................17
Part A. Retirement Benefits................................17
Section 6.1. Retirement................................17
Part B. Termination Benefits...............................18
Section 6.2. Effect of Termination.....................18
Section 6.3. Vesting...................................18
Section 6.4. Payment...................................19
Part C. Death Benefits.....................................19
Section 6.5. Benefits upon Death.......................19
Section 6.6. Beneficiaries.............................19
Section 6.7. Lack of Beneficiaries.....................19
Section 6.8. Termination or Retirement prior to Death..20
Part D. General............................................20
Section 6.9. Date of Distribution......................20
Section 6.10. Form of Distribution......................20
Section 6.11. Liability.................................21
Section 6.12. Right of First Refusal....................21
Section 6.13. Put Options...............................21
Section 6.14. Eligible Rollover Distributions...........22
ARTICLE VII ADMINISTRATIVE COMMITTEE...........................23
Section 7.1. Establishment.............................23
Section 7.2. Duties....................................23
Section 7.3. Actions...................................23
Section 7.4. Disqualification..........................23
Section 7.5. Powers....................................24
Section 7.6. Discrimination Prohibited.................24
Section 7.7. Statements and Forms......................24
Section 7.8. Liability.................................24
Section 7.9. Determination of Right to Benefits........24
Section 7.10. Investment Directions.....................25
Section 7.11. Voting Power..............................25
ARTICLE VIII THE TRUSTEE........................................25
Section 8.1. Assets Held in Trust......................25
Section 8.2. Investments...............................25
Section 8.3. Directions of Committee...................25
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Section 8.4. Receipt of Additional Shares.................26
Section 8.5. Delivery of Materials to Committee...........26
Section 8.6. Powers.......................................26
Section 8.7. Loans to the Trust...........................27
Clause (a). Interest.............................27
Clause (b). Use of Proceeds......................27
Clause (c). Terms of Exempt Loan.................28
Clause (d). Collateral...........................28
Clause (e). Limited Recourse.....................28
Clause (f). Repayment............................28
Clause (g). Agreement by Companies...............28
Clause (h). Release of Collateral................28
Clause (i). Default..............................29
Clause (j). Termination of Plan..................29
Section 8.8. Annual Accounting............................29
Section 8.9. Audit........................................29
Section 8.10. Uncertainty Concerning Payment of Benefits...30
Section 8.11. Compensation.................................30
Section 8.12. Standard of Care.............................30
Section 8.13. Request for Instructions.....................30
Section 8.14. Resignation of Trustee.......................30
Section 8.15. Vacancies in Trusteeship.....................31
Section 8.16. Information to Be Furnished..................31
Section 8.17. Voting Rights of Participants................31
Section 8.18. Delegation of Authority......................32
Section 8.19. Diversification of Company
Contributions Account......................32
Section 8.20. Tender Offer.................................32
ARTICLE IX AMENDMENT, TERMINATION AND MERGER.....................33
Section 9.1. Amendment....................................33
Section 9.2. Termination or Complete
Discontinuance of Contributions............33
Section 9.3. Determination by Internal Revenue Service....34
Section 9.4. Nonreversion.................................34
Section 9.5. Merger.......................................34
ARTICLE X MISCELLANEOUS.........................................35
Section 10.1. Creation of Plan Voluntary...................35
Section 10.2. No Employment Contract.......................35
Section 10.3. Limitation on Rights Created.................35
Section 10.4. Waiver of Claims.............................35
Section 10.5. Spendthrift Provision........................35
Section 10.6. Payment of Benefits to Others................36
Section 10.7. Payments to Missing Persons..................36
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Section 10.8. Severability.................................36
Section 10.9. Captions.....................................36
Section 10.10. Construction....................................36
Section 10.11. Counterparts....................................36
Section 10.12. Indemnification.................................36
Section 10.13. Standards of Interpretation and Administration..37
Section 10.14. Governing Law...................................37
Section 10.15. Successors and Assigns..........................37
Section 10.16. Adoption of Plan................................37
Section 10.17. Withdrawal from Plan............................37
ARTICLE XI TEFRA TOP-HEAVY RULES.................................37
Section 11.1. Application..................................37
Section 11.2. Determination................................37
Section 11.3. Accrued Benefits.............................39
Section 11.4. Vesting Provisions...........................39
Section 11.5. Minimum Contribution.........................40
Section 11.6. Code Section 415 Limitations.................41
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UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN AND
TRUST AGREEMENT
(EFFECTIVE JANUARY 1, 1997)
ARTICLE I
DEFINITIONS
Section 1.1. "Accrued Company Contributions Benefit" shall mean the
balance of a Participant's Company Contributions Account as of the last
preceding Valuation Date.
Section 1.2. "Act" shall mean the Employee Retirement Income Security
Act of 1974, as now in effect or hereafter amended, and shall also include all
regulations promulgated thereunder.
Section 1.3. "Anniversary Date" shall mean the last calendar day of any
Plan Year.
Section 1.4. "Annual Addition" shall mean, with respect to any
Participant for any Plan Year and with respect to this Plan and to all other
qualified defined contribution plans maintained by a Company, the sum of:
(a) Company contributions credited to his Company Contributions
Account for that Plan Year under this Plan;
(b) that Participant's non-deductible contributions;
(c) forfeitures; and
(d) amounts allocated to an individual medical account as defined
in Section 415(1)(2) of the Code which is part of a qualified
defined benefit plan maintained by a Company shall be treated
as Annual Additions to a qualified defined contribution plan,
and amounts derived from Company contributions paid or accrued
in taxable years ending after such date which are attributable
to post-retirement medical benefits allocated to the separate
account of a key employee as defined in Section 416 of the
Code under a welfare benefit fund as defined in Section 419(e)
of the Code maintained by a Company shall also be treated as
Annual Additions to a qualified defined contribution plan.
Annual Additions shall not include any amounts allocated as income to a
Participant's Company Contributions Account in accordance with Section 8.7(j).
Section 1.5. "Bank" means the Union Federal Savings & Loan Association
and any successor thereto.
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Section 1.6. "Beneficiary" shall mean the person(s) entitled under the
provisions of Section 6.5 to receive benefits after the death of a Participant.
Section 1.7. "Code" shall mean the Internal Revenue Code of 1986, as
now in effect or hereafter amended, and shall also include all regulations
promulgated thereunder.
Section 1.8. "Committee" shall mean the administrative committee
appointed and acting in accordance with the provisions of Article VII. The
Committee shall be deemed to be the Plan Administrator for purposes of the Act.
Section 1.9. "Company" shall mean the Holding Company, the Bank, any
Company which becomes a participating employer pursuant to Section 10.16, and
any successors thereto. Solely for the purpose of:
(a) computing an Employee's Years of Service and Period of Service
to determine his eligibility to participate in and the vesting
of his benefits under this Plan;
(b) applying the limitations contained in Section 4.3;
(c) determining whether this Plan is a Top Heavy Plan under
Section 11.2 and, thus, subject to the provisions of Article
XI; and
(d) determining whether an Employee terminated his employment with
the Companies,
"Company" shall also include any entity which, together with a participating
Company, constitutes a member of a controlled group of corporations, a member of
a commonly controlled group of trades or businesses or a member of an affiliated
service group within the meaning of Section 414(b), Section 414(c) or Section
414(m) of the Code or any entity which is required to be aggregated with a
participating Company under Section 414(o) of the Code.
Section 1.10. "Company Contributions Account" shall mean the account
maintained for each Participant to which contributions made by the Companies
shall be allocated.
Section 1.11. "Compensation" shall mean the total of all amounts paid
or payable in cash by the Companies by reason of services performed by an
Employee during any period, including bonuses, overtime, any other cash payments
included on an Employee's W-2, amounts deferred by the Employee under any cash
or deferred arrangement maintained by a Company under Section 401(k) of the Code
and any salary reductions elected by the Employee pursuant to a salary reduction
plan maintained by a Company under Section 125 of the Code but excluding, with
respect to any Employee, any other amounts contributed by a Company for or on
account of that Employee under this Plan or under any other employee benefit
plan; provided, however, that Compensation in a Plan Year in excess of one
hundred and fifty thousand ($150,000), as adjusted pursuant to Section
401(a)(17) of the Code, shall be disregarded.
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Section 1.12. "Date of Employment" means any date on which an Employee
first completes an Hour of Service.
Section 1.13. "Date of Separation" means the earlier of:
(a) the date an Employee's employment with the Companies
terminates by reason of a quit, discharge, retirement
(including disability retirement) or death; or
(b) the first anniversary of the first date of a period in which
the Employee remains absent from active employment with the
Companies for some reason other than a quit, discharge,
retirement, death, approved leave of absence or military
service.
Section 1.14. "Deferred Retirement" shall mean retirement after a
Participant's Normal Retirement Date in accordance with Section 2.4.
Section 1.15. "Deferred Retirement Date" shall mean the first (1st)
calendar day of the month after a Participant's Normal Retirement Date as of
which he retires or his employment with the Companies is terminated for any
reason other than his death.
Section 1.16. "Defined Benefit Fraction" shall mean for a given Plan
Year a fraction:
(a) the numerator of which is the projected annual benefit of a
Participant under all qualified defined benefit plans
maintained by a Company (determined as of the Anniversary Date
of that Plan Year), and
(b) the denominator of which is the lesser of:
(i) the product of one and twenty-five one hundredths
(1.25) multiplied by ninety thousand dollars
($90,000), as adjusted pursuant to Section
415(b)(1)(A) and (d)(1) of the Code, or
(ii) the product of one and four tenths (1.4) multiplied
by one hundred percent (100%) of that Participant's
average Section 415 Compensation for his three (3)
consecutive highest paid Years of Service with the
Companies.
Section 1.17. "Defined Contribution Fraction" shall mean for a given
Plan Year a fraction:
(a) the numerator of which is the sum of the Annual Additions to a
Participant's accounts under all qualified defined
contribution plans maintained by a Company as of the
Anniversary Date of that Plan Year, and
(b) the denominator of which is the sum of the lesser of the
following amounts determined for that Plan Year and for each
prior year of service with the Companies:
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(i) the product of one and twenty-five one hundredths
(1.25) multiplied by the dollar limit in effect for
that Plan Year pursuant to Section 415(c)(1)(A) of
the Code, or
(ii) the product of one and four tenths (1.4) multiplied
by twenty-five percent (25%) of that Participant's
Section 415 Compensation for that Plan Year.
Section 1.18. "Effective Date" shall mean January 1, 1997; provided,
however, that if prior to March 31, 1998, the Bank shall not have completed its
conversion from mutual to stock form, this Plan shall be null and void and any
shares of Stock and other assets held hereunder shall be returned to the
Companies.
Section 1.19. "Employee" shall mean any person employed by a Company,
and shall also include any individual deemed to be a leased employee (as defined
below) of the Companies but only to the extent required by the Code. For
purposes of this Plan, the term "leased employee" means any person (other than
an employee of the recipient) who pursuant to an agreement between the recipient
and any other person ("leasing organization") has performed services for the
recipient (or for the recipient and related persons determined in accordance
with Section 414(n)(6) of the Code) on a substantially full-time basis for a
period of at least one (1) year, and such services are of a type historically
performed by employees in the business field of the recipient employer;
provided, however, that a leased employee shall not be considered an employee of
the recipient if (a) such employee is covered by a money purchase pension plan
providing a nonintegrated employer contribution rate of at least ten percent
(10%) of Compensation, immediate participation and full and immediate vesting
and (b) leased employees do not constitute more than twenty percent (20%) of the
recipient's non-highly compensated workforce. A leased employee within the
meaning of Section 414(n)(2) of the Code shall become a Participant in the Plan
based on service as a leased employee only as provided in provisions of the Plan
other than this Section. Contributions or benefits provided a leased employee by
the leasing organization which are attributable to services performed for the
recipient employer shall be treated as provided by the recipient employer.
Section 1.20. "Exempt Loan" shall mean a loan made to this Plan by a
party in interest or disqualified person or a loan to this Plan which is
guaranteed by a party in interest or disqualified person, including a direct
loan of cash, a purchase-money transaction and an assumption of any obligation
of this Plan. For purposes of this definition, a guarantee shall include an
unsecured guarantee and the use of assets of a party in interest or disqualified
person as collateral for a loan even though the use of assets may not constitute
a guarantee under any applicable State laws.
Section 1.21. "Fund" shall mean all cash, investments and other
properties held by the Trustee hereunder.
Section 1.22. "Highly Compensated Employee" shall include any Employee
described in Section 414(q) of the Code who:
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(a) is a five percent (5%) or more owner (as then defined in
Section 416(i)(1) of the Code) of the Company at any time
during that Plan Year or the immediately preceding Plan Year;
or
(b) received more than eighty thousand dollars ($80,000), as
automatically adjusted pursuant to Sections 414(q)(1) and
415(d) of the Code without the necessity of any amendment to
the Plan, of Section 415 Compensation from the Company in the
immediately preceding Plan Year and was in the Top Paid Group
for that immediately preceding Plan Year.
For purposes of determining whether an Employee is a Highly
Compensated Employee and notwithstanding anything else
contained in this Section, the following rules shall apply:
(c) A former Employee shall be treated as a Highly Compensated
Employee if he was a Highly Compensated Employee in the Plan
Year during which his employment with the Company terminated
or in any Plan Year during which occurs or commencing after
his fifty-fifth (55th) birthday.
(d) Section 415 Compensation shall include any amount which is
contributed by the Company pursuant to a salary reduction
agreement and which is not includible in the gross income of
an Employee under Sections 125, 401(k), 402(a)(8),
402(h)(1)(B) and 403(b) of the Code.
(e) An Employee shall only be deemed to be a Highly Compensated
Employee to the extent required by the Code.
Section 1.23. "Holding Company" shall mean Union Community Bancorp.
Section 1.24. "Hour of Service" shall mean:
(a) each hour for which an Employee is paid, or entitled to
payment, for the performance of duties for a Company; these
hours shall be credited to the Employee for the computation
period or periods in which the duties are performed; and
(b) each hour for which an Employee is paid, or entitled to
payment, by a Company on account of a period of time during
which no duties are performed (irrespective of whether the
employment relationship has terminated) due to vacation,
holiday, illness, incapacity (including disability but
excluding payments made because of Total Disability under
Section 6.3), layoff, jury duty, military duty or leave of
absence; no more than five hundred and one (501) Hours of
Service shall be credited under this Subsection (b) for any
single continuous period (whether or not such period occurs in
a single computation period); hours under this Subsection (b)
shall
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be calculated and credited pursuant to Section 2530.200b-2 of
the Department of Labor Regulations which are incorporated
herein by this reference; and
(c) each hour for which back pay, irrespective of mitigation of
damages, is either awarded or agreed to by a Company; the same
Hours of Service shall not be credited both under Subsection
1.24(a) or Subsection 1.24(b), as the case may be, and under
this Subsection 1.24(c); these hours shall be credited to the
Employee for the computation period or periods to which the
award or agreement pertains, rather than to the computation
period in which the award, agreement or payment is made.
Section 1.25. "Leave of Absence" shall mean a leave granted by a
Company, in accordance with rules uniformly applied to all Employees in a
non-discriminatory manner, for reasons of health, public service or other
satisfactory reasons.
Section 1.26. "Normal Retirement" shall mean retirement on a
Participant's Normal Retirement Date.
Section 1.27. "Normal Retirement Date" shall mean the first (1st)
calendar day of the month immediately following a Participant's sixty-fifth
(65th) birthday. A Participant's benefits under this Plan shall be fully vested
and non-forfeitable on and after the date he attains age sixty-five (65), which
is deemed to be the normal retirement age under this Plan, regardless of his
Period of Service and regardless of the vesting schedules in Section 6.3 and in
Section 11.4.
Section 1.28. "One Year Service Break" shall mean a consecutive twelve
(12) month Period of Severance.
Section 1.29. "Participant" shall mean any Employee who has commenced
participation in this Plan pursuant to Section 2.2. Participation in this Plan
shall continue until such time as the Participant has received all of the
benefits to which he is entitled under the terms of this Plan.
Section 1.30. "Period of Separation" means, for an Employee, the period
of time commencing with the date such Employee separates from service with the
Companies and ending with the date such Employee resumes his employment with the
Companies.
Section 1.31. "Period of Service" means, for an Employee, the period
commencing on the later of the following dates:
(a) such Employee's Date of Employment; or
(b) the date on which such Employee's Employer is required to be
aggregated with the Company under Code Section 414(b), (c),
(m) or (o), whichever is applicable,
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and ending on the date a Period of Severance begins, including any Period of
Separation of less than twelve (12) consecutive months; provided, however, that
in the case of any person who terminates his employment with the Employers but
later resumes his employment with the Companies, the Period of Service before
such resumption of employment shall be aggregated only if that person is a
Re-employed Individual.
Section 1.32. "Period of Severance" means, for an Employee, the period
of time commencing with the earlier of:
(a) the date on which such Employee terminates his employment with
the Companies by reason of quitting, retirement, death or
discharge, or
(b) the date twelve (12) consecutive months after the date a
person remains absent from service with the Companies (with or
without pay) for any reason other than quitting, retirement,
death or discharge,
and ending, in the case of an Employee who terminates his employment with the
Companies by reason other than death, with the date such Employee resumes his
employment with the Companies. Solely for purposes of determining whether a One
Year Service Break has occurred for participation and vesting purposes has
occurred, an Employee who is absent from work for maternity or paternity reasons
shall receive credit at least one (1) year. For purposes of this Section 1.32,
an absence from work for maternity and paternity reasons means an absence:
(c) by reason of the pregnancy of the Employee,
(d) by reason of the birth of a child of the Employee,
(e) by reason of the placement of a child with the Employee in
connection with the adoption of that child by the Employee, or
(f) for purposes of caring for such a child for the period
beginning immediately following such birth or placement.
Section 1.33. "Plan" shall mean the employee stock ownership plan and
trust established pursuant to the provisions of this Agreement, as amended from
time to time, which shall be known as the "Union Community Bancorp Savings
Employee Stock Ownership Plan." This Plan is intended to be an employee stock
ownership plan under Section 4975(e)(7) of the Code and under Section 407(d)(6)
of the Act.
Section 1.34. "Plan Year" shall mean the calendar year. The Plan Year
shall also be the limitation year for purposes of Section 415 of the Code for
this Plan and for all other qualified retirement plans maintained by a Company.
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Section 1.35. "Re-employed Individual" shall mean a person who, after
having terminated his employment with the Companies, resumes his employment with
the Companies:
(a) with any vested interest in his Company Contributions Account
as provided in Section 6.3 or 11.4, or
(b) with no such vested interest but who resumes his employment
with the Companies either:
(i) before a One Year Service Break,
(ii) after a One Year Service Break but before his latest
Period of Severance equals or exceeds his Period of
Service, or
(iii) after a One Year Service Break but before the number
of his consecutive One Year Service Breaks equals or
exceeds the greater of five (5) or his Period of
Service.
Section 1.36. "Section 415 Compensation" shall mean with respect to any
Plan Year and shall:
(a) include amounts accrued to a Participant (regardless of
whether he was a Participant during the entire Plan Year and
regardless of whether in cash):
(i) as wages, salaries, fees for professional services
and other amounts received for personal services
actually rendered in the course of his employment
with the Companies including but not limited to
commissions, compensation for services on the basis
of a percentage of profits and bonuses;
(ii) for purposes of Subsection (a)(i) above, earned
income from sources outside the United States (as
defined in Section 911(b) of the Code), whether or
not excludible from gross income under Section 911 of
the Code or deductible under Section 913 of the Code;
(iii) amounts described in Sections 104(a)(3), 105(a) and
115(h) of the Code but only to the extent that these
amounts are includible in the gross income of that
Participant; and
(iv) amounts paid or reimbursed by the Companies for
moving expenses incurred by that Participant, but
only to the extent that these amounts are not
deductible by that Participant under Section 217 of
the Code;
(b) not include:
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(i) notwithstanding Subsection (a)(i) above, there shall
be excluded from Section 415 Compensation amounts
contributed to a plan as contributions to a qualified
cash or deferred plan under Section 401(k) of the
Code;
(ii) other contributions made by a Company to any plan of
deferred compensation to the extent that, before the
application of the Section 415 of the Code
limitations to that plan, the contributions are not
includible in the gross income of that Participant
for the taxable year in which contributed; in
addition, Company contributions made on behalf of
that Participant to a simplified employee pension
plan described in Section 408(k) of the Code shall
not be considered as Section 415 Compensation for the
Plan Year in which contributed; additionally, any
distributions from a plan of deferred compensation
shall not be considered as Section 415 Compensation,
regardless of whether such amounts are includible in
the gross income of that Participant when
distributed; however, any amounts received by that
Participant pursuant to an unfunded nonqualified plan
shall be considered as Section 415 Compensation in
the Plan Year in which such amounts are includible in
the gross income of that Participant; and
(iii) other amounts which receive special federal income
tax benefits, such as premiums for group term life
insurance (but only to the extent that the premiums
are not includible in the gross income of that
Participant);
provided, however, that Section 415 Compensation in a Plan Year in excess of one
hundred and fifty thousand ($150,000), as adjusted pursuant to Section
401(a)(17) of the Code, shall be disregarded. Notwithstanding anything in this
Section 1.36 to the contrary, for Plan Years beginning on or after January 1,
1998, Section 415 Compensation shall include any elective deferral (as defined
in Section 402(g) of the Code) and any amount contributed or deferred at the
election of the Participant that is not includible in that Participant's gross
income by reason of Section 125 or Section 457 of the Code.
Section 1.37. "Stock" shall mean any duly-issued shares of common stock
of the Holding Company, without par value, which shares constitute employer
securities under Section 409(1) and Section 4975(e)(8) of the Code.
Section 1.38. "Top Paid Group" shall mean the Employees who are in the
top twenty percent (20%) of the Employees of the Company in terms of Section 415
Compensation for such Plan Year; provided, however, that for purposes of
determining the number of Employees to be included in the Top Paid Group, the
following Employees shall be excluded to the extent permitted by Section
414(q)(4) of the Code:
(a) Employees who have not completed six (6) months of service
with the Group;
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(b) Employees who normally work less than seventeen and one-half
(17 1/2) hours per week or less than six (6) months during a
Plan Year;
(c) Employees who have not attained age twenty-one (21);
(d) except as provided by regulations promulgated under the Code,
Employees who are covered by a collectively bargained
agreement; and
(e) Employees who are non-resident aliens and who receive no
earned income (within the meaning of Section 911(d)(2) of the
Code) from the Company which constitutes income from sources
in the United States (within the meaning of Section 861(a)(3)
of the Code).
Section 1.39. "Total Disability" shall mean a mental or physical
condition which, in the judgment of the Committee based upon medical reports and
other evidence satisfactory to the Committee, presumably permanently prevents a
Participant from satisfactorily performing his usual duties for his employing
Company or the duties of such other position or job which his employing Company
makes available to that Participant and for which that Participant is qualified
by reason of training, education or experience.
Section 1.40. "Trust" shall mean the employee stock ownership trust
established pursuant to the provisions of this Agreement, as amended from time
to time, which shall be known as the "Citizens Bancorp Employee Stock Ownership
Trust."
Section 1.41. "Trustee" shall mean Home Federal Savings Bank, and any
successors thereto.
Section 1.42. "Valuation Date" shall mean each December 31 and each
other date as of which the Committee shall cause the Trustee to determine the
value of the Trust assets as prescribed in Section 5.1.
Section 1.43. "Year of Service" shall mean for purposes of
participation the consecutive twelve (12) month period computed with reference
to the date on which the Employee first (1st) completes an Hour of Service and
any Plan Year beginning after such date during which twelve (12) month period an
Employee has completed at least one thousand (1,000) Hours of Service.
Notwithstanding the foregoing, periods of time during which an Employee or
Participant:
(a) is on an approved Leave of Absence continuing for a period of
not more than two (2) consecutive years; or
(b) is on military leave for training or service, or both, with
the Armed Forces of the United States under any form of law
requiring military service; provided, however, that he shall
make application for re-employment by a Company within ninety
(90) calendar days after discharge or release from such Armed
Forces or from
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hospitalization continuing after such discharge for a period
of not more than one (1) year;
shall also be credited towards his Years of Service and shall not constitute a
Break in Service for purposes of this Plan. A Participant's Years of Service
shall be calculated taking into account employment before the Effective Date.
ARTICLE II
ELIGIBILITY AND PARTICIPATION
Section 2.1. Eligibility. Each Employee in the employ of a Company
shall become eligible to participate in this Plan on the date on which he
completes one (1) Year of Service or, if later, on the date on which he attains
age twenty-one (21).
Section 2.2. Entry Dates. Each Employee who was eligible to participate
under Section 2.1 on the Effective Date automatically became a Participant in
this Plan as of the Effective Date. Each other Employee shall become a
Participant in this Plan on the first day of January or July coincident with or
next following the first (1st) date on which he meets the eligibility
requirements of Section 2.1. A re-employed Employee who has once met the one (1)
Year of Service requirement for eligibility shall become (or, if formerly a
Participant, be reinstated as) a Participant in this Plan on his re-employment
date or, if later, on the first day of January or July coincident with or next
following the date he attains age twenty-one (21).
Section 2.3. Certification by Company. Not later than thirty (30)
calendar days after an Employee shall become a Participant in this Plan, his
employing Company shall certify such fact in writing to the Committee, together
with such additional facts regarding such Participant as the Committee may
request. Except as otherwise provided by the Act, each such certification shall
be final and conclusive and the Committee shall be entitled to rely thereon
without any investigation, but it may correct any errors discovered in any such
certificate.
Section 2.4. Deferred Retirement. A Participant who continues in the
employment of a Company after his Normal Retirement Date shall continue to
participate in this Plan, and contributions shall be allocated to his Company
Contributions Account as otherwise provided in this Plan. Any such Participant
who elects Deferred Retirement shall be entitled to benefits under this Plan
payable at his Deferred Retirement Date in the same manner as if he had retired
on his Normal Retirement Date; provided, however, that the deferral of benefit
payments after a Participant's Normal Retirement Date shall be permitted only to
the extent authorized by and in compliance with all requirements imposed under
Section 2530.203-3 of the Department of Labor Regulations which are incorporated
herein by reference.
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ARTICLE III
COMPANY CONTRIBUTIONS
Section 3.1. Company Contributions. For the initial Plan Year and for
each Plan Year thereafter, the Companies shall make contributions to the Trust
in one (1) or more installments in such amounts as the Board of Directors of the
Bank may determine.
If Company contributions are paid to the Trust by reason of a mistake
in fact made in good faith or a mistake made in good faith in determining the
deductibility of such Company contributions for federal income tax purposes
under Section 404 of the Code, such Company contributions may, except as
otherwise provided in Section 8.7, be returned to the Companies by the Trustee
(upon the written direction of the Committee) within one (1) year after the
payment to the Trust or after the date the federal income tax deduction is
denied, whichever is applicable.
Section 3.2. Form of Contributions. The Companies' contributions, if
any, for each Plan Year shall be paid to the Trustee either in cash or in Stock
valued at the fair market value thereof as of the date of the contribution (as
determined consistent with Section 5.1(a)) and within such period as is provided
for in Section 404 of the Code or any other statute of similar import or any
rule or regulations thereunder.
Section 3.3. Holding by Trustee. All contributions made by the
Companies under Section 3.1 shall be a part of the Fund and shall be held in
trust by the Trustee until distributed as provided in this Plan.
Section 3.4. Expenses. In addition to the contributions to be made
under Section 3.1, the Companies shall pay all reasonable expenses incident to
the operation of this Plan; in the event of any failure by the Companies to make
such payment, the same shall be a charge against and paid from the Fund but only
to the extent permitted under the Code and under the Act.
Section 3.5. No Company Liability for Benefits. The benefits under this
Plan shall be only such as can be provided by the Fund, and there shall be no
liability or obligation on the part of the Company to make any further
contributions or payments. Except as otherwise provided by the Act, no liability
for the payment of benefits under this Plan shall be imposed upon the Companies
or upon the officers, directors or shareholders of the Companies.
Section 3.6. No Rollover Contributions. Rollover contributions (within
the meaning of Section 402(a)(5) of the Code) shall not be permitted nor
accepted.
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ARTICLE IV
ALLOCATION TO PARTICIPANTS' ACCOUNTS
Section 4.1. Company Contributions Accounts. For purposes of allocating
the Company contributions, the Committee shall establish and maintain a separate
Company Contributions Account in the name of each Participant.
Section 4.2. Allocation of Company Contributions. Except as provided in
Section 4.7, the Company contributions for each Plan Year shall be allocated
among the Company Contributions Accounts of all Employees who were Participants
on the Anniversary Date of that Plan Year or whose employment with the Companies
terminated during that Plan Year because of death, Total Disability or Deferred
or Normal Retirement proportionately in the ratio that the Compensation paid to
such Participant, if any, for that Plan Year or since becoming a Participant in
this Plan if he became a Participant within that Plan Year bears to the
aggregate Compensation paid to all Participants for that Plan Year or since
becoming Participants in this Plan if they became Participants within that Plan
Year. To the extent cash dividends are applied to pay of an Exempt Loan under
Section 4.5 and notwithstanding anything contained herein to the contrary,
Company contributions shall first be applied towards crediting the Participant's
Company Contributions Account to which the cash dividends would have been
allocated before they are allocated under the preceding provisions of this
Section.
Section 4.3. Limitations on Annual Additions.
Clause (a). Basic Limitations. Notwithstanding any other
provision of this Plan, the maximum Annual Addition during any Plan Year for any
Participant under this Plan and under any other qualified defined contribution
plans maintained by the Companies shall in no event exceed the lesser of:
(i) twenty-five percent (25%) of that Participant's
Section 415 Compensation for that Plan Year, or
(ii) thirty thousand dollars ($30,000), or, if greater,
one-fourth (1/4) of the dollar limitation in effect
for that Plan Year pursuant to Section 415(b)(1)(A)
of the Code; provided, however, that such adjustments
shall only apply to the Plan Years ending on or after
the date in which the adjustment was made.
Any Company contributions which are applied by the Trustee (not later
than the due date, including extensions, for filing a Company's federal income
tax return for that Plan Year) to pay interest on an Exempt Loan shall not be
included as Annual Additions under this Section 4.3; provided, however, that the
provisions of this Section shall be applicable only in Plan Years for which not
more than one-third (1/3) of the Company contributions applied to pay principal
and interest on an Exempt Loan are allocated among Highly Compensated Employees.
The Committee may reallocate Company contributions in order to satisfy this
special limitation.
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If due to a reasonable error in estimation of a Participant's
Compensation or due to the allocation of forfeitures these maximum Annual
Additions would be exceeded as to any Participant, any excess amount shall be
used to reduce Company Contributions for that Participant in the next, and
succeeding, Plan Years. If that Participant was not covered by this Plan at the
Anniversary Date of that Plan Year, such excess shall be reallocated among the
Company Contributions Accounts of the other Participants under Section 4.2 to
the fullest extent possible without exceeding the limitations with respect to
any other Participant for that Plan Year. Any excess amount which cannot be so
allocated to any Participant's Company Contributions Account by reason of these
limitations shall be allocated under this Section 4.3(a) for the next succeeding
Plan Years (prior to the allocation of Company Contributions for such succeeding
Plan Years).
Clause (b). Participation in Other Plans. In any case in which
an Employee is a participant in one (1) or more qualified defined contribution
plans and in one (1) or more qualified defined benefit plans (as these terms are
defined in Section 415(k) of the Code) maintained by a Company and for Plan
Year, beginning before January 1, 2000, the sum of the Defined Benefit Fraction
and of the Defined Contribution Fraction, computed as of the Anniversary Date of
that Plan Year, shall not exceed one (1.0).
Section 4.4. Effective Date of Allocations. For all purposes of this
Plan, allocations to the Participants' Company Contributions Accounts under this
Article shall be deemed to have been made on the Anniversary Date to which they
relate although they may actually be determined at some later date. The fact
that such allocations are made, however, shall not vest in any Participant or in
his spouse or other Beneficiary any right, title or interest in or to any part
of the Fund except at the times, to the extent and on the terms and conditions
specified in this Plan.
Section 4.5. Cash Dividends. Any cash dividends received by the Trustee
on Stock allocated to the Company Contributions Accounts of Participants shall
be credited to the applicable Participants' Company Contributions Accounts
unless the Bank, in its sole discretion, elects to pay the cash dividends
directly to the applicable Participants or directs the Trustee to pay the cash
dividends to the Participants (or, if applicable, their Beneficiaries) within
ninety (90) calendar days of the close of the Plan Year in which the cash
dividends were paid by the Holding Company to the Fund. Notwithstanding anything
contained in this Section to the contrary, the Bank may direct cash dividends,
including dividends on non-allocated shares, be applied to repay an Exempt Loan,
but only to the extent shares of Stock with an aggregate fair market value equal
to the amount of dividends so applied are allocated to the Company Contributions
Accounts of the applicable Participants and to the extent the cash dividends are
deductible under Section 404(k) of the Code.
Section 4.6. Allocation of Forfeitures. The Trustee, shall, as soon as
practicable following the Anniversary Date marking the close of each Plan Year,
allocate the forfeitures which have occurred in that Plan Year first to
reinstate any forfeitures of any reemployed Participant under Section 6.2 and
second, if any forfeitures are remaining after the reinstatements described
above are completed, among the Company Contributions Accounts of all Employees
who were or became Participants on the Anniversary Date of that Plan Year or
whose Years of Service terminated during
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that Plan Year because of death, Total Disability or Deferred or Normal
Retirement. The forfeitures shall be allocated among such Accounts in the same
manner provided for under Section 4.2.
Section 4.7. Special Allocation Rules. Notwithstanding any other
provision in this Plan to the contrary, no Stock acquired by this Plan in a sale
to which Section 1042 of the Code applies may be allocated directly or
indirectly under this Plan:
(a) during the non-allocation period (as such term is defined
below), for the benefit of:
(i) any Participant who makes an election under Section
1042(a) of the Code with respect to Stock sold to
this Plan, or
(ii) any Participant who is related to the Participant
making the election under Section 1042(a) of the Code
or to the deceased Participant (within the meaning of
Section 267(b) of the Code); provided, however, that
this Subsection (a)(ii) shall not apply to any
Participant who is a lineal descendent of a
Participant as long as the aggregate amount allocated
to the benefit of all such lineal descendants during
the non-allocation period (as such term is defined
below) does not exceed more than five percent (5%) of
the Stock (or amounts allocated in lieu thereof) held
by this Plan which are attributable to the sale to
this Plan by any person related to such descendants
(within the meaning of Section 267(c)(4)) in a
transaction to which Section 1042 of the Code
applies,
or
(b) for the benefit of any Participant who owns (after the
application of the attribution rules contained in Section
318(a) of the Code, but disregarding Section 318(a)(2)(B)(i)
of the Code) more than twenty-five percent (25%) of:
(i) any class of the outstanding stock of the Holding
Company or of any other corporation which is a member
of a controlled group of corporations (within the
meaning of Section 409(1)(4) of the Code) which
includes the Holding Company, or
(ii) the total value of any class of outstanding stock of
the Holding Company or of any other corporation which
is a member of the controlled group of corporations
(within the meaning of Section 409(1)(4) of the Code)
which includes the Holding Company.
For purposes of this Section 4.7, the "non-allocation period" shall mean a
period beginning on the date of the sale of the stock to the Plan and ending on
the later of:
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(c) the date which is ten (10) years after the sale of the Stock
to this Plan to which Section 1042 of the Code applies, or
(d) the date of the Plan allocation of Stock attributable to the
final payment of any acquisition indebtedness incurred in
connection with a sale of such Stock to this Plan to which
Section 1042 of the Code applies.
For purposes of this Section 4.7 a Participant shall be deemed to be a
twenty-five percent (25%) or greater shareholder if such Participant owns more
than twenty-five percent (25%) of the shares at any time during a one (1) year
period ending:
(e) on the date of a sale of the Stock to this Plan to which
Section 1042 of the Code applies, or
(f) on the date as of which the Stock sold to this Plan through a
sale to which Section 1042 of the Code applies is allocated to
Participants.
The provisions contained in this Section 4.7 shall be interpreted consistent
with and in accordance with Section 409(n) of the Code.
Section 4.8. Rehire after Military Service. The provisions relating to
qualified retirement plans which are set forth in the Uniformed Services
Employment and Reemployment Rights Act of 1994 ("USERRA") are hereby
incorporated into, and made a part of, this Plan by reference. The Committee
shall apply the provisions of the USERRA with respect to any Participant who is
reemployed after completing covered military service in a manner consistent with
the USERRA and all other applicable law and regulations.
ARTICLE V
VALUATIONS AND ADJUSTMENTS
Section 5.1. Valuation of Fund.
Clause (a). Valuations. The Committee shall provide the
Trustee with a written valuation showing the fair market value of the Stock,
upon which valuation the Trustee may fully rely. For all purposes of this Plan,
fair market value shall be determined by an independent appraiser (as such term
is defined in Treasury Regulations promulgated under Section 170(a)(1) of the
Code) unless the Stock is readily tradeable on an established securities market
at the date of valuation. The Committee shall also direct the Trustee to
determine the fair market value of all other assets of the Fund on each
Valuation Date.
Clause (b). Frequency. The Fund shall be valued as soon as
practical after the Anniversary Date of each Plan Year and as soon as practical
after the removal or resignation of the Trustee on the basis of fair market
values determined as of the Anniversary Date of the Plan Year
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or as of the effective date of the resignation or removal of the Trustee,
respectively. The Committee may require valuation of the Fund on such other
dates as it may prescribe.
Clause (c). Records. Records of valuation of the Fund shall be
prepared by the Trustee in such manner and within such time after each Valuation
Date as may be prescribed in this Section 5.1, and such records shall be filed
with the Committee, including a written statement reflecting the value of the
assets and liabilities of the Fund and the receipts and disbursements of the
Fund since the last previous statement filed with the Committee. As to the fair
market value of Stock, the Trustee shall rely solely upon the most recent
valuation furnished by the Committee as provided in Section 5.1(a). If
information necessary to ascertain the fair market value of the Fund assets
other than Stock is not readily available to the Trustee or if the Trustee is
unable in its sole discretion fairly to determine the fair market value of the
other Fund assets, the Trustee may request the Committee in writing to instruct
the Trustee as to such values to be used for all purposes under this Plan; in
such event, the values as determined by the Committee shall be binding and
conclusive, except as otherwise provided by the Act. If the Committee shall fail
or refuse to instruct the Trustee as to such values within a reasonable time
after receipt of the Trustee's written request therefor, the Trustee may take
such action as it deems necessary or advisable to ascertain such values. Except
for the Trustee's negligence, willful misconduct or lack of good faith, upon the
expiration of ninety (90) calendar days from the filing of such records and
except as otherwise provided by the Act, the Trustee shall be forever released
and discharged from all liability and accountability to anyone with respect to
the propriety of its acts or transactions as set forth in such records unless
written objection is filed with the Trustee within the said ninety (90) calendar
day period by the Committee or by the Bank.
Section 5.2. Adjustments. As of each Valuation Date the Committee shall
cause the Trustee to allocate to each Participant's Company Contributions
Account, by credit thereto or deduction therefrom as the case may be, a
proportion of the increase or decrease in the fair market value of the Fund
since the last preceding Effective Date or Valuation Date. Such allocation shall
be made in the proportion that each Participant's Company Contributions Account
on such date bears to the total of all such Company Contributions Accounts on
such date.
Section 5.3. Amount of Adjustments. The increase or decrease in the
Fund to be allocated shall be the difference between:
(a) the fair market value of the Fund on the last preceding
Effective Date or Valuation Date (excluding any amounts
withdrawn from the Fund as of such Date for the payment of
benefits hereunder), and
(b) the fair market value of the Fund on the current Valuation
Date (including any amounts to be withdrawn from the Fund as
of such Date for the payment of benefits hereunder).
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Section 5.4. Effective Date of Adjustments. For all purposes of this
Plan, allocations to the Participants' Company Contributions Accounts under this
Article shall be deemed to have been made on the Effective Date or Valuation
Date to which they relate although they may actually be determined at some later
date. The fact that such allocations are made, however, shall not vest in any
Participant or in his spouse or other Beneficiary any right, title or interest
in or to any part of the Fund except at the times, to the extent and on the
terms and conditions specified in this Plan.
Section 5.5. Notice to Participants. Promptly after the allocations
herein described shall be completed, the Committee shall advise each Participant
in writing of the fair market value of the Stock and other Fund assets then
credited to his Company Contributions Account.
ARTICLE VI
BENEFITS
Part A. Retirement Benefits.
Section 6.1. Retirement. Each Participant who retires on his Normal
Retirement Date or Deferred Retirement Date shall be entitled to receive the
entire balance credited to his Company Contributions Account as of the Valuation
Date coincidental with or immediately following such Retirement Date plus any
Company contributions to which he is entitled pursuant to Section 4.2 for the
Plan Year in which his Normal Retirement or Deferred Retirement occurs. Payment
of such benefits shall be made in accordance with the provisions of Section
6.10.
Part B. Termination Benefits.
Section 6.2. Effect of Termination. If a Participant's employment with
the Companies is terminated before his Normal Retirement Date for any reason
other than his death, that Participant shall cease to be a Participant in this
Plan and shall not be entitled to any benefits under this Plan except as
expressly provided in this Part B.
Section 6.3. Vesting. Any Participant whose employment with the
Companies is terminated as set forth in Section 6.2 shall be entitled to a
percentage (as determined below) of the entire balance credited to his Company
Contributions Account as of the Valuation Date coincidental with or immediately
following the date of termination of his employment. The percentage of his
Company Contributions Account to which a terminated Participant is entitled
shall be determined on the basis of his Period of Service on such date of
termination of employment, as follows:
Period of Service Vested Percentage
Less than five (5) years 0
Five (5) years or more 100%
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Any portion of the terminated Participant's Company Contributions Account which
is not vested shall be treated as a forfeiture; provided, however, that such
forfeiture shall not be allocated to the other Plan Participants until the first
(1st) to occur of the following:
(a) that Participant's Period of Severance is at least five (5)
years; or
(b) that Participant's death;
provided, further, that if that Participant is reemployed prior to his
completion of a five (5) year Period of Severance, the forfeited amount shall be
reinstated as the beginning balance of that Participant's Company Contribution
Account. A Participant whose vested percentage of his Company Contributions
Account is zero (0) at the date of his termination of employment shall be deemed
to have received a distribution upon his termination of employment.
In the case of any Participant whose Period of Severance is at least
five (5) years, that Participant's pre-break service shall count in vesting of
his post-break Company Contributions Account balance only if either:
(a) that Participant has any nonforfeitable interest in his
Company Contributions Account balance at the time of his
separation from service with the Companies; or
(b) upon returning to service with a Company his Period of
Severance is less than five (5) or, if greater, less than his
Period of Service completed prior to his Period of Severance.
In the case of any Participant whose Period of Separation is at least
five (5) years, all service after such Period of Severance shall be disregarded
for the purpose of vesting the Company Contributions Account balance that
accrued before such Period of Severance.
Separate sub-accounts shall be maintained for that Participant's
pre-break and post-break Company Contributions Account. Both sub-accounts shall
share in the earnings and losses of the Fund.
Any Participant whose employment with the Companies is terminated
because of his Total Disability shall be entitled to his entire Company
Contributions Account balance and shall also be entitled to receive any Company
contributions to which he is entitled pursuant to Section 4.2 for the Plan Year
in which his employment is so terminated.
Section 6.4. Payment. All benefits payable under Part B shall be paid
in accordance with the provisions of Section 6.10.
Part C. Death Benefits.
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Section 6.5. Benefits upon Death. If the death of any Employee occurs
while he is still a Participant in this Plan and prior to his actual retirement
or other termination of employment with the Companies, the entire balance
credited to his Company Contributions Account as of the Valuation Date
coincidental with or immediately preceding the date of his death plus any
Company contributions to which he is entitled pursuant to Section 4.2 for the
Plan Year in which his death occurs shall be paid to the Beneficiary of that
deceased Participant in accordance with the provisions of Section 6.10.
Section 6.6. Beneficiaries. Each Participant shall notify the Committee
in writing of one (1) or more primary and contingent Beneficiaries to receive on
his death any benefits payable under this Part C. Each such Beneficiary
designation may be revoked, amended or changed by a Participant by like notice
in writing delivered to the Committee prior to his death. The Beneficiary
designation of any Participant who is married at the date such a designation is
made or changed shall be signed by that Participant's spouse and witnessed by
the Committee or by a Notary Public if it results in a designation of a
Beneficiary other than that Participant's spouse. Notwithstanding anything
contained in this Section to the contrary, the Beneficiary of a married
Participant shall be his spouse unless his spouse consents to the designation of
a non-spouse Beneficiary in a writing witnessed by the Committee or by a Notary
Public.
Section 6.7. Lack of Beneficiaries. Any portion of the amounts payable
under Section 6.5 which is undisposed of because all or some of the designated
Beneficiaries have predeceased a Participant or because of a Participant's
failure to designate a Beneficiary in writing prior to his death shall be paid
to the deceased Participant's surviving spouse, if any, and, if none, to the
deceased Participant's estate.
Section 6.8. Termination or Retirement prior to Death. On and after the
actual retirement of a Participant from the employ of the Companies or other
termination of his employment, the rights of such Participant and his spouse or
other Beneficiary to any benefits under this Part C shall cease and the benefits
payable to such Participant or to any person claiming through or under him shall
be limited to the benefits provided in Parts A or B of this Article.
Part D. General.
Section 6.9. Date of Distribution. Unless the Participant or, if
deceased, his Beneficiary, surviving spouse or estate, as the case may be,
otherwise elects, the payment of benefits to which any such person is entitled
shall begin not later than sixty (60) calendar days after the latest of the
Anniversary Date of the Plan Year in which:
(a) the Participant attains age sixty-five (65),
(b) occurs the tenth (10th) anniversary of the date on which the
Participant initially became eligible to participate in this
Plan, or
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(c) the Participant terminates his employment with the Companies;
provided, however, that the distribution of benefits to a Participant shall
commence on or before April 1 of the calendar year following the calendar year
during which that Participant attains age seventy and one-half (70 1/2) or, if
the Participant is not a five percent (5%) owner of a Company (within the
meaning of Section 416 of the Code) and if later, of the calendar year during
which his employment with the Company is terminated.
Section 6.10. Form of Distribution. The distributions provided under
this Article VI shall be made by the Trustee, as directed by the Participant or,
if deceased, his Beneficiary, in a single lump sum distribution of the amount to
be paid to the Participant or, if deceased, to his Beneficiary; provided,
however, that except as otherwise provided in Section 6.9, payment shall be made
as soon as practicable after the Plan Year during which the employment of the
Participant from the Companies terminated; provided, further, that in no event
shall payments to a deceased Participant's estate or to any Beneficiary other
than the surviving spouse of a deceased Participant extend more than five (5)
years after the date of the Participant's death. Notwithstanding the above, a
Participant whose Company Contributions Account at the initial distribution date
or at any subsequent distribution date (when aggregated with other
distributions) is greater than five thousand dollars ($5,000) effective on or
after January, may elect to defer the commencement of the distribution of his
Company Contributions Account to the date on which he attains age sixty-five
(65). Distributions under this Section 6.10 shall be distributed in Stock with
fractional share interests distributed in cash. If shares of Stock are
distributed and the shares of Stock available for distribution consist of more
than one (1) class of security, a distributee shall receive substantially the
same proportion of each such class.
If the Trust purchases shares of Stock from a Company shareholder who
is eligible to elect and so elects nonrecognition of gain under Section 1042 of
the Code in connection with such purchase and notwithstanding anything contained
herein to the contrary, no distribution that would be made within three (3)
years after the date of such purchase shall be made to a Participant before he
incurs a One Year Service Break, unless his employment with the Companies
terminates as a result of his Normal Retirement, Total Disability or death or
unless the distribution is made pursuant to Section 8.19.
Section 6.11. Liability. Any payment to a Participant or to that
Participant's legal representative, Beneficiary, surviving spouse or estate, in
accordance with the provisions of this Plan, shall to the extent thereof be in
full satisfaction of all claims hereunder against the Trustee, the Committee and
the Companies, any of whom may require such Participant, legal representative,
Beneficiary, surviving spouse or estate, as a condition precedent to such
payment, to execute a receipt and release therefor in such form as shall be
determined by the Trustee, the Committee or the Companies. The Companies do not
guarantee the Trust, the Participants or, if deceased, their Beneficiaries,
surviving spouses or estates, as the case may be, against the loss of or
depreciation in value of any right or benefit that any of them may acquire under
the terms of this Plan.
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Section 6.12. Right of First Refusal. If any recipient of shares of
Stock from this Plan elects at any time to sell all or any part of such shares,
the Trustee shall have a right of first refusal to purchase all or any part of
such shares of Stock for the Fund. The price to be paid by the Trustee for
shares of Stock purchased pursuant to this Section 6.12 shall be no less than
the greater of:
(a) the fair market value of such shares of Stock at the date of
their purchase, or
(b) the price offered to the recipient by another potential buyer
(other than a Company) making a good faith, bona fide offer to
buy such shares of Stock,
and the terms of the purchase may not be less favorable to the recipient than
the terms offered in the bona fide offer. This right of first refusal shall
lapse no later than fourteen (14) calendar days after the recipient gives
written notice to the Trustee that an offer by a third party to purchase his
shares of Stock has been received. The right of first refusal granted by this
Section 6.12 shall only exist if the Stock is not publicly traded within the
meaning of Treasury Regulations ss. 54.4975-7(b)(1)(iv).
Section 6.13. Put Options. The Holding Company shall issue a put option
to any Participant, Beneficiary, surviving spouse or estate of a deceased
Participant, or any other person (including distributees of an estate) to whom
shares of Stock distributed under this Plan may pass by reason of a
Participant's death (herein collectively referred to as the "Recipient"). This
put option shall permit the Recipient to sell such Stock to the Holding Company,
at any time during two (2) option periods, at the then fair market value. The
first put option period shall be a period of at least sixty (60) calendar days
beginning on the actual date of distribution of such Stock to the Recipient. The
second put option period shall be a period of at least sixty (60) calendar days
beginning after the determination of the fair market value of such Stock is made
by the Committee (and notice of same is given in writing to the Recipient) for
the next succeeding Plan Year. Such Recipient shall be deemed to have a put
option as herein provided with respect to the shares of Stock and may exercise
this put option by delivering to the Holding Company a written notice of his
election to sell such shares of Stock, or any portion thereof, together with the
certificates representing the shares of Stock to be sold duly endorsed for
transfer. The Holding Company shall be obligated to purchase the shares of
Stock, or the designated portion thereof, at their fair market value at the date
the put option is exercised; provided, however, that the Holding Company may
grant the Trustee an option to assume on behalf of this Plan and Trust the
Holding Company's rights and obligations with respect to the put option at the
date the put option is actually exercised by the Recipient. Except as
hereinafter provided, the Holding Company (or the Trustee, if it assumes the
Holding Company's obligation) shall pay for the shares of Stock so sold to it by
check within thirty (30) calendar days following the date of sale.
Notwithstanding anything contained herein to the contrary, the Holding Company
(or, if applicable, the Trustee) may pay the purchase price in substantially
equal periodic payments (not less frequently than annually) over a period
beginning not later than thirty (30) calendar days after the exercise of the put
option and not exceeding five (5) years as long as reasonable interest is paid
on the unpaid amounts and adequate security is provided to the Recipient. If the
Stock is readily tradeable on an established market on the date of distribution,
the put option granted by this Section 6.13 shall not exist; provided, however,
that if the Stock ceases to be publicly
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traded within either of the sixty (60) day calendar periods as provided herein,
the Holding Company shall notify the Recipient in writing within a reasonable
time after the Stock ceases to be so publicly traded that the Stock shall be
subject to the put option for the remainder of the applicable sixty (60) day
calendar period. If the date of actual written notice to the Recipient by the
Holding Company is later than ten (10) calendar days after the Stock ceases to
be so publicly traded, the put option shall automatically be extended to the
extent that the date on which written notice is actually given to the Recipient
is more than ten (10) calendar days later.
Section 6.14. Eligible Rollover Distributions. Notwithstanding any
provision of the Plan to the contrary that would otherwise limit a distributee's
election under this Section, a distributee may elect, at the time and in the
manner prescribed by the Committee, to have any portion of an eligible rollover
distribution paid directly to an eligible retirement plan specified by the
distributee in a direct rollover. For purposes of this Section, the following
terms shall have the meanings set forth below:
(a) Eligible rollover distribution: An eligible rollover distribution
is any distribution of all or any portion of the balance to the credit of the
distributee, except that an eligible rollover distribution does not include: (1)
any distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or life
expectancy) of the distributee or the joint lives (or joint life expectancies)
of the distributee and the distributee's designated beneficiary, or for a
specified period of ten (10) years or more; (2) any distribution to the extent
such distribution is required under Section 401(a)(9) of the Code; and (3) the
portion of any distribution that is not includible in gross income.
(b) Eligible retirement plan: An eligible retirement plan is an
individual retirement account described in Section 408(a) of the Code, an
individual retirement annuity described in Section 408(b) of the Code, an
annuity plan described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code, that accepts the distributee's eligible
rollover distribution. However, in the case of an eligible rollover distribution
to the surviving spouse, an eligible retirement plan is an individual retirement
account or individual retirement annuity.
(c) Distributee: A distributee includes an Employee or former Employee.
In addition, the Employee's or former Employee's surviving spouse and the
Employee's or former Employee's spouse or former spouse who is an alternate
payee under a qualified domestic relations order, as defined in Section 414(p)
of the Code, are distributees with regard to the interest of the spouse or
former spouse.
ARTICLE VII
ADMINISTRATIVE COMMITTEE
Section 7.1. Establishment. The Committee shall consist of at least
three (3) members to be appointed by the Board of Directors of the Bank, and the
members shall hold office at the pleasure of such Board of Directors. The
members of the Committee shall be individuals and may,
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but need not, be officers, shareholders or Directors of the Holding Company or
the Bank, Participants or Beneficiaries. The Bank may, at its sole discretion,
designate to serve as the Committee its Board of Directors as duly-constituted
from time to time.
Section 7.2. Duties. The Committee shall discharge its duties and
powers in conformance with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise of a like
character and with like aims. It shall have complete control of the
administration of this Plan and shall have all powers necessary or convenient to
enable it to exercise such control. In connection therewith, it may provide
rules and regulations, not inconsistent with the provisions hereof or with
requirements imposed under the Code or under the Act, for the administration of
this Plan and may from time to time amend or rescind such rules and regulations.
In addition, it may employ or appoint a secretary and such advisors, agents or
representatives as it may deem desirable and may consult with and employ counsel
(who may, but need not, be counsel to a Company or to the Trustee) or actuaries
with regard to any questions arising in connection with this Plan. All
reasonable expenses incurred by the Committee in connection with this Plan shall
be paid as provided in Section 3.4.
Section 7.3. Actions. The Committee may decide any questions hereunder
and may take or authorize or direct the taking of any action hereunder with the
approval of a majority of the members of the Committee. The approval of such
members, expressed from time to time by a vote at a meeting or in writing
without a meeting, shall constitute the action of the Committee and shall be
valid and effective for all purposes of this Plan. The fact that any member of
the Committee shall be a Participant, former Participant or Beneficiary shall
not disqualify or debar him from participating in any action or decision
affecting any class of Participants, former Participants or Beneficiaries, but
he shall not participate in any action or decision affecting his own separate
interest as a Participant, former Participant or Beneficiary.
Section 7.4. Disqualification. The fact that any member of the
Committee is a Director, shareholder or officer of a Company or a Participant or
Beneficiary shall not disqualify him from doing any act or thing which this Plan
authorizes or requires him to do as a member of the Committee (except as
otherwise provided in Section 7.3) or render him accountable for any allowance
or distribution or other pecuniary or material profit or advantage received by
him.
Section 7.5. Powers. The Committee shall have the power to construe
this Plan and to determine all questions of fact or law arising under it. It may
correct any defect, supply any omission or reconcile any inconsistency in this
Plan in such manner and to such extent as it may deem expedient and, except as
otherwise provided by the Act, it shall be the sole and final judge of such
expediency. Except as otherwise provided in Section 7.9, all acts and
determinations of the Committee made in good faith within the scope of its
authority shall be final and conclusive on all the parties hereto and on all
Employees, Participants and their Beneficiaries, surviving spouses or estates
hereunder and shall not be subject to appeal or review.
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Section 7.6. Discrimination Prohibited. The Committee shall not take
any action or direct the Trustee to take any action with respect to any of the
benefits provided hereunder or otherwise in pursuance of the powers conferred
herein upon the Committee which would be discriminatory in favor of Employees
who are officers, Directors, shareholders, persons whose principal duties
consist of supervising the work of other Employees or Highly Compensated
Employees or which would result in benefiting one (1) Participant or group of
Participants at the expense of another or in discrimination as between
Participants similarly situated or in the application of different rules to
substantially-similar sets of facts.
Section 7.7. Statements and Forms. The Committee shall be authorized to
require of a Company and of any person claiming any rights hereunder a written
statement of any information or the execution of any forms or instruments it may
deem necessary or desirable for the administration of this Plan.
Section 7.8. Liability. Except as otherwise provided by the Act, no
member of the Committee shall be directly or indirectly responsible or under any
liability by reason of any action or default by him as a member of the Committee
or the exercise of or failure to exercise any power or discretion as such member
except for his own fraud or bad faith shown in the exercise of or failure to
exercise such power or discretion, and no member of the Committee shall be
liable in any way for the acts or defaults of any other member. The Committee
may consult with counsel (who may, but need not, be counsel to a Company or to
the Trustee) or accountants selected by it and, except as otherwise provided by
the Act, the opinion of such counsel or the recommendations of such accountants
shall be full and complete authority and protection for any action or conduct
pursued by the Committee in good faith and in accordance with such opinion or
recommendations.
Section 7.9. Determination of Right to Benefits. The Committee shall
make all determinations as to the right of any person to a benefit under the
provisions of this Plan. Any denial by the Committee of a claim for benefits
under this Plan by an Employee or, if deceased, by such Employee's spouse or
other Beneficiary, shall be stated in writing by the Committee and delivered or
mailed to the Employee, spouse or other Beneficiary, as the case may be, within
ninety (90) calendar days after receipt of such benefit claim by the Committee.
Such notice shall set forth the specific reasons for the denial and such
additional information as is required under Section 503 of the Act, written to
the best of the Committee's ability in a manner that may be understood without
legal or actuarial counsel. In addition, the Committee shall afford a reasonable
opportunity to any Employee, spouse or other Beneficiary, as the case may be,
whose claim for benefits has been denied, for a review of the decision denying
the claim in accordance with Section 503 of the Act.
Section 7.10. Investment Directions. The Committee may direct the
investment of the Fund, by written directions to the Trustee, but such direction
shall not be inconsistent with the provisions of this Plan, of the Act or of the
Code.
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Section 7.11. Voting Power. Except as otherwise provided in Section
8.17, the Committee shall be authorized to vote, either in person or by proxy,
the Stock or other securities which are held by the Trustee as part of the Fund.
ARTICLE VIII
THE TRUSTEE
Section 8.1. Assets Held in Trust. The Trustee shall hold the Fund and
shall accept and hold all contributions thereto and all investments and
reinvestments thereof in trust for the persons ultimately entitled thereto under
the terms of this Plan.
Section 8.2. Investments. This Plan is designed to invest primarily in
shares of Stock. Except as otherwise provided in this Plan, the Trustee shall
invest the cash contributed or accruing to the Fund in Stock and shall not make
any other investment for the Fund. There shall be no limit on the permissible
investment in shares of Stock. The Trustee may purchase such shares of Stock
from the Holding Company or from any other source, and such shares of Stock may
be outstanding, newly-issued or treasury shares. All such purchases shall be
made at fair market value (as determined consistent with Section 5.1(a)). If no
shares of Stock are available for purchase, the Trustee may retain cash
uninvested or may invest all or any part thereof in any other investment if such
retention or investment is prudent under all the facts and circumstances then
prevailing. The Trustee shall have the power at any time to enter into
legally-binding agreements to purchase shares of Stock from any person or
entity, whether or not such person or entity shall own such shares of Stock at
the date such purchase agreement is entered into, including but not limited to
Participants in and Beneficiaries of this Plan, except as otherwise provided in
the Act and in Treasury Regulations ss. 54.4975-11(a)(7). Except as otherwise
required by Section 6.12, the purchase price set forth in any such purchase
agreement shall be determined by the fair market value of such shares of Stock
at the date of purchase (as determined consistent with Section 5.1(a)).
Section 8.3. Directions of Committee. The powers granted to the Trustee
under this Plan shall be exercised by the Trustee in its sole discretion. Except
as provided in Section 8.20, the Committee may at any time and from time to time
by written direction to the Trustee require the Trustee to invest in, to retain
or to dispose of any security or other form of investment as may be specified in
such direction, limited, however, to investments permitted under this Plan,
under the Act and under the Code. Neither the Trustee nor any other person shall
be under any duty to question any such written direction of the Committee, and
the Trustee shall as promptly as possible comply with any such written
direction. Any such direction may be of a continuing nature or otherwise and may
be revoked in writing by the Committee at any time. The Trustee shall not be
liable in any manner or for any reason for the making, retention or disposition
of any investment pursuant to the lawful written direction of the Committee.
Section 8.4. Receipt of Additional Shares. Any securities received by
the Trustee as a stock split or a stock dividend or as a result of a
reorganization or other recapitalization shall be allocated as of each Valuation
Date in the same manner as the Stock to which it is attributable is then
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allocated. If any rights, warrants or options are issued on common shares or
other securities held in the Fund, the Trustee shall exercise them for the
acquisition of additional common shares or other securities to the extent that
cash is then available. Any common shares or other securities acquired in this
fashion shall be treated as common shares or other securities bought by the
Trustee for the net price paid. Any rights, warrants or options on common shares
or other securities which cannot be exercised for lack of cash may be sold by
the Trustee with the proceeds thereof treated as a current cash dividend
received on such common shares or other securities.
Section 8.5. Delivery of Materials to Committee. Except as otherwise
provided in Section 8.17 and Section 8.20, the Trustee shall deliver or cause to
be delivered to the Committee copies of all notices, prospectuses and financial
statements relating to investments held in the Fund.
Section 8.6. Powers. The Trustee shall have power with regard to all
property in the Fund at any time and from time to time:
(a) to sell, convey, transfer, mortgage, pledge, lease, exchange
or otherwise dispose of the same, without the necessity of
approval of any court therefor or notice to any person,
natural or legal, thereof and without obligation on the part
of any person dealing with the Trustee to see to the
application of any money or property delivered to it;
(b) except as otherwise provided in Section 7.11, Section 8.17 and
Section 8.20, to exercise any and all rights or options
pertaining to any share of Stock held as part of the assets of
the Fund and to enter into agreements and consent to or oppose
the reorganization, consolidation, merger, readjustment of
financial structure or sale of assets of any corporation or
organization, the securities of which are held in the Fund;
(c) except as otherwise provided in Section 4.5, to collect the
principal and income of such property as the same shall become
due and payable and to give binding receipt therefor;
(d) to take such action, whether by legal proceedings, compromise,
abandonment or otherwise, as the Trustee, in its sole
discretion, shall deem to be in the best interest of the Fund,
but the Trustee shall be under no obligation to take any legal
action unless it shall have been first indemnified by the
Companies with respect to any expenses or losses to which it
may be subjected through taking such action;
(e) to register any securities and to hold any other property in
the Fund in its own name or in the name of a nominee with or
without the addition of words indicating that such securities
or other property are held in a fiduciary capacity;
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(f) pending the selection or the purchase of suitable investments
or the payment of expenses or the making of any other payment
required or permitted under this Plan, to retain in or to
convert to cash, without liability for interest or any other
return thereon, such portion of the Fund as it shall deem
reasonable under the circumstances, including, but not by way
of limitation, the power to retain sufficient cash to permit
the acquisition of large blocks of shares of Stock as the same
may from time to time become available for purchase;
(g) to borrow from banks or similar lending institutions
reasonable sums of money for the purchase of shares of Stock
for the Company Contributions Accounts of Participants in
accordance with the provisions of Section 8.7; provided,
however, that the Trustee may not borrow from itself or from
an affiliated institution even if the Trustee is a bank or
similar lending institution except to the extent specifically
permitted by the Act and by the Code; and
(h) to do all other acts in its judgment necessary or desirable
for the proper administration of the Trust and permissible
under the Act and under the Code although the power to do such
acts is not specifically set forth herein.
Section 8.7. Loans to the Trust. The following conditions shall be met
with respect to any Exempt Loan to the Trust:
Clause (a). Interest. The rate of interest on any Exempt Loan
shall not be in excess of a reasonable rate of interest. At the date an Exempt
Loan is made, the interest rate for the Exempt Loan and the price of any shares
of Stock to be purchased with the Exempt Loan proceeds shall not be such that
the Plan assets might be drained off.
Clause (b). Use of Proceeds. The proceeds of an Exempt Loan
shall be used within a reasonable time after receipt by the Trustee for any or
all of the following purposes:
(i) to acquire Stock;
(ii) to repay that Exempt Loan; or
(iii) to repay a prior Exempt Loan.
Except as otherwise provided in Section 6.12 and Section 6.13, no Stock acquired
with Exempt Loan proceeds shall be subject to a put, call or other option or a
buy-sell or similar arrangement while held by the Trustee and when distributed
from this Plan.
Clause (c). Terms of Exempt Loan. The terms of each Exempt
Loan shall be, at the time that Exempt Loan is made, as favorable to this Plan
as the terms of a comparable loan resulting
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from arm's-length negotiations between independent parties. Each Exempt Loan
shall be for a specific term and shall not be payable at the demand of any
person, except in the case of default.
Clause (d). Collateral. Any collateral pledged to the lender
by the Trustee shall consist only of Stock purchased with the borrowed funds or
Stock that was used as collateral for a prior Exempt Loan repaid with the
proceeds of the current Exempt Loan; provided, however, that in addition to such
collateral, the Companies may guarantee the repayment of an Exempt Loan.
Clause (e). Limited Recourse. Under the terms of each Exempt
Loan, the lender shall not have any recourse against the Fund or the Trust
except with respect to the collateral.
Clause (f). Repayment. No person entitled to payment under any
Exempt Loan shall have any right to assets of the Fund or the Trust other than:
(i) collateral given for that Exempt Loan;
(ii) contributions (other than contributions of
Stock) that are made by the Companies under
this Plan to meet this Plan's obligations
under that Exempt Loan;
(iii) earnings attributable to such collateral and
the investment of such contributions; and
(iv) to the extent directed by the Holding
Company under Section 4.5, cash dividends on
allocated shares of Stock.
Payments made with respect to an Exempt Loan by the Trustee during any Plan Year
shall not exceed an amount equal to the sum of such contributions and earnings
received during or prior to that Plan Year less such payments in prior Plan
Years. Such contributions and earnings shall be accounted for separately in the
books of account of this Plan and Trust until that Exempt Loan is repaid.
Clause (g). Agreement by Companies. The Companies shall agree
in writing with the Trustee to contribute to the Fund amounts sufficient to
enable the Trustee to pay each installment of principal and interest on each
Exempt Loan on or before the date such installment is due, even if no tax
benefit to the Companies results from such contribution.
Clause (h). Release of Collateral. All assets of the Fund
acquired by this Plan and Trust with Exempt Loan proceeds and all collateral
pledged to secure an Exempt Loan shall be held in a suspense account and
considered encumbered by the Exempt Loan. For each Plan Year during the duration
of an Exempt Loan, the number of assets to be released from encumbrance and
withdrawn from the suspense account shall be based upon the ratio that the
payment of principal and interest on that Exempt Loan for that Plan Year bears
to the total projected payments of principal
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and interest over the duration of the Exempt Loan period. Assets released from
encumbrance and withdrawn from the suspense account shall be allocated to the
various Company Contributions Accounts in the Plan Year during which such
portion is paid off and in the same manner as if the assets had been obtained by
the Trustee when no Exempt Loan was involved. Income with respect to shares of
Stock acquired with Exempt Loan proceeds and held in the suspense account shall
be allocated to Company Contributions Accounts along with other income earned by
the Fund, except to the extent that such income is to be used to repay an Exempt
Loan.
Clause (i). Default. In the event of any default upon an
Exempt Loan, the value of Trust assets transferred in satisfaction of that
Exempt Loan shall not exceed the amount of the default. If the lender is a
disqualified person within the meaning of Section 4975(e)(2) of the Code, the
Exempt Loan shall provide for a transfer of Trust assets upon default only upon
and to the extent of the failure of the Trustee to meet the payment schedule of
that Exempt Loan; provided, however, that the making of a guarantee shall not
make a person a lender within the meaning of this Clause (i).
Clause (j). Termination of Plan. Upon a complete termination
of the Plan but only to the extent permitted by the Code and the Act, any
unallocated Stock shall be sold to the Corporation at a price no less than fair
market value or on the open market. To the extent permitted by Code and the Act,
the proceeds of such sale shall be used to satisfy any outstanding Exempt Loan
and the balance of any funds remaining shall be allocated as income to each
Participant's Company Contributions Account based on the proportion that the
Participant's Company Contributions Account balance as of the immediately
preceding Valuation Date bears to the aggregate Company Contributions Account
balances of all Participants as of the immediately preceding Valuation Date.
Section 8.8. Annual Accounting. At least annually the Trustee shall
render to the Committee a written account of its administration of the Fund
during the period since the establishment of this Plan or the last accounting
thereafter. Pursuant to this requirement, Stock acquired by the Trustee shall be
accounted for as provided in Treasury Regulations ss. 1.402(a)-1(b)(2)(ii).
Unless written notice of disapproval is furnished to the Trustee by the
Committee within ninety (90) calendar days after receipt of such account, such
account shall be deemed to have been approved.
Section 8.9. Audit. In the case of any disapproval as provided in
Section 8.8 and unless a satisfactory corrected written account is furnished to
the Committee, an audit of the Trustee's account shall be made by a certified
public accountant selected jointly by the Holding Company and the Trustee, but
at the expense of the Companies. Upon completion of any such audit, the
inaccuracies in the Trustee's account, if any, shall be corrected to conform to
such audit and a corrected written account shall be delivered to the Committee
by the Trustee. Except as otherwise provided by the Act, an approved account or
an account corrected pursuant to such an audit shall be final and binding upon
the Companies and upon all other persons who shall then or thereafter have any
interest under this Plan.
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Section 8.10. Uncertainty Concerning Payment of Benefits. In the event
of any dispute or uncertainty as to the person to whom payment of any funds or
other property shall be made under this Plan, the Trustee may, in its sole
discretion, withhold such payment or delivery until such dispute or uncertainty
shall have been determined or resolved by a court of competent jurisdiction or
otherwise settled by the parties concerned.
Section 8.11. Compensation. The Trustee shall be entitled to receive
fair and reasonable compensation for its services hereunder, taking into account
the amount and nature of its services and the responsibilities involved, and
shall also be entitled to be reimbursed for all reasonable out-of-pocket
expenses, including, but not by way of limitation, legal, actuarial and
accounting expenses and all costs and expenses incurred in prosecuting or
defending any action concerning this Plan or the Trust or the rights or
responsibilities of any person hereunder, brought by or against the Trustee.
Such reasonable compensation and expenses shall be paid by the Companies as
provided in Section 3.4.
Section 8.12. Standard of Care. The Trustee shall use its best judgment
in exercising any duties or powers or in taking any action hereunder and shall
be bound at all times to act in good faith and in accordance with all
requirements imposed under the Act and under the Code. Except as otherwise
provided by the Act, the Trustee shall not incur any liability by reason of any
error of judgment, mistake of law or fact or any act or omission hereunder of
itself or of any agent, proxy or attorney so long as it has acted in good faith.
The Trustee may act on any paper or document believed by it to be genuine and to
have been signed and presented by the proper person. The Trustee may consult
with counsel (who may, but need not, be counsel to a Company), accountants or
actuaries selected by it and, except as otherwise provided by the Act, the
written opinion of such counsel or the written recommendations of such
accountants or actuaries shall be full and complete authority and protection for
any action or conduct pursued by the Trustee in good faith and in accordance
with such written opinion or recommendations. Except as otherwise provided by
the Act, the Trustee shall not be liable for any action taken by it pursuant to
the written direction of the Committee.
Section 8.13. Request for Instructions. In addition to written
instructions relating to valuation and except as otherwise provided in Section
8.20, at any time the Trustee may, by written request, seek written instructions
from the Committee on any matter and may await such written instructions from
the Committee without incurring any liability whatsoever. If at any time the
Committee should fail to give written directions to the Trustee, the Trustee may
act, and shall be protected in acting, without such written directions, in such
manner as in its sole discretion seems appropriate and advisable under the
circumstances for carrying out the purposes of the Trust.
Section 8.14. Resignation of Trustee. The Trustee may resign at any
time by giving sixty (60) calendar days' prior written notice to the Bank, and
the Trustee may be removed, with or without cause, by the Bank on sixty (60)
calendar days' prior written notice to the Trustee. Such prior written notice
may be waived by the party entitled to receive it. Upon any such resignation or
removal becoming effective, the Trustee shall render to the Committee a written
account of its
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administration of the Fund for the period since the last written accounting and
shall do all necessary acts to transfer the assets of the Fund to the successor
Trustee or Trustees.
Section 8.15. Vacancies in Trusteeship. In the event of any vacancy in
the trusteeship of the Trust hereby created, the Bank may designate and appoint
a qualified successor Trustee or Trustees. Any such successor Trustee or
Trustees shall have all the powers herein conferred upon the original Trustee.
Section 8.16. Information to Be Furnished. The Companies shall furnish
to the Trustee, and the Trustee shall furnish to the Companies, such information
relevant to this Plan and Trust as may be required under the Code and under the
Act. The Trustee shall keep such records, make such identification and file with
the Internal Revenue Service and with the U.S. Department of Labor such returns
and other information concerning this Plan and Trust as may be required of it
under the Code and under the Act. The Companies shall fulfill any reporting and
disclosure obligations imposed on it by the Act, and each Participant shall be
given any reports required by the Act. To the extent that the Trustee assumes
any such Company obligations, it may charge a reasonable fee for its services
apart from its normal fee and its expenses as provided in Section 8.11.
Section 8.17. Voting Rights of Participants. Each Participant (or, if
applicable, his Beneficiary) shall have the right to direct the Trustee as to
the manner in which voting rights of shares of Stock which are allocated to his
Company Contributions Account are to be exercised with respect to any corporate
matter which involves the voting of such shares with respect to the approval or
disapproval of any corporate merger or consolidation, recapitalization,
reclassification, liquidation, dissolution, sale of substantially all assets of
a trade or business, or such similar transactions which may be prescribed by the
Secretary of Treasury in regulations. Each Participant (or, if applicable, his
Beneficiary) shall also have the right to direct the Trustee as to the manner in
which voting rights of shares of Stock which are allocated to his Company
Contributions Account are to be exercised at any time the Holding Company has a
class of securities that are required to be registered under Section 12 of the
Securities Exchange Act of 1934 or that would be required to be so registered
except for the exemption from registration provided by Section 12(g)(2)(H) of
the Securities Exchange Act of 1934. In all other cases, the Committee shall be
authorized to vote the Stock held by the Trustee as part of the Fund as provided
in Section 7.11. Not less than thirty (30) calendar days prior to each annual or
special meeting of shareholders of the Holding Company at which one (1) or more
Participants are entitled to vote shares of Stock allocated to their Company
Contributions Accounts under this Section 8.17, the Trustee shall cause to be
prepared and delivered to each such Participant who has a Company Contributions
Account as of the record date established by the Holding Company a copy of the
notice of the meeting and form of proxy directing the Trustee as to how it shall
vote at such meeting or at any adjournment thereof with respect to each issue.
Upon receipt of such proxies, the Trustee shall vote or may grant the Committee
a proxy to vote the shares of Stock in accordance with the proxies received by
the Participants. The shares of Stock for which no direction is received by the
Participant (or, if applicable, his Beneficiary) or held by the Trustee in any
unallocated account shall be tendered in proportion to the tendering directions
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received by the Trustee with respect to the allocated shares of Stock. The
Trustee shall take steps to keep a Participant's voting directions confidential
and shall not provide them to the Companies.
Section 8.18. Delegation of Authority. The Trustee may delegate any of
its ministerial powers or duties under this Plan, including the signing of any
checks drawn on the Fund, to any of its agents or employees.
Section 8.19. Diversification of Company Contributions Account.
Notwithstanding anything contained in Article VI to the contrary, a Participant
who has attained age fifty-five (55) and who has completed at least ten (10)
years of participation in this Plan shall be permitted to elect that during a
six (6) year period beginning with the Plan Year during which he had obtained
age fifty-five (55) or, if later, during which he completed his tenth (10th)
year of participation in this Plan a portion of his vested Company Contribution
Account be distributed. In the first (1st) Plan Year for which the Participant
has an election under this Section 8.19, the Participant may elect a
distribution of up to twenty-five percent (25%) of his vested Company
Contribution Account as of the end of such Plan Year. In the second (2nd), third
(3rd), fourth (4th) and fifth (5th) Plan Year for which the Participant has an
election under this Section 8.19, the Participant may elect a distribution
which, when aggregated to any earlier distributions made by reason of this
Section 8.19, does not exceed twenty-five percent (25%) of the vested balance
held in his Company Contribution Account as of the end of the Plan Year for
which the election is made. In the final Plan Year for which a Participant has
an election under this Section 8.19, the Participant may elect a distribution of
an amount which, when aggregated with any other distribution made by reason of
this Section 8.19, does not exceed fifty percent (50%) of his vested Company
Contribution Account balance as of the end of such Plan Year. The Trustee shall
provide Participants eligible for an election under this Section 8.19 with
information relating to the election before the end of the first (1st) Plan Year
for which the election relates. A Participant electing a distribution under this
Section 8.19 shall have until the ninetieth (90th) calendar day immediately
following the end of the Plan Year for which the election is made to make his
election. Any distribution made by reason of this Section 8.19 shall be in cash
and shall be made within one hundred and eighty (180) calendar days after the
end of the Plan Year for which the election is made.
Section 8.20. Tender Offer. Each Participant (or, if applicable, his
Beneficiary) shall have the right to direct the Trustee as to whether the shares
of Stock which are allocated to his Company Contributions Account are to be
tendered pursuant to any tender offer made for the Stock of the Holding Company.
The Trustee shall as soon as practical (and in no event later than five (5)
calendar days) after its receipt of the tender offer documents shall cause to be
prepared and delivered to each Participant (and, if applicable, his Beneficiary)
who has a Company Contributions Account as of the date of the tender offer a
copy of all relevant information as to the tender offer and a written election
form which will direct the Trustee as to whether it should tender the shares of
Stock held in such Participant's Company Contributions Account. The shares of
Stock for which no direction is received by the Participant (or, if applicable,
his Beneficiary) or held by the Trustee in any unallocated account shall be
tendered in proportion to the tendering directions received by the Trustee with
respect to the allocated shares of Stock. The Trustee shall take steps to keep a
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Participant's decision whether or not to tender shares of Stock confidential and
shall not provide the information to the Companies.
ARTICLE IX
AMENDMENT, TERMINATION AND MERGER
Section 9.1. Amendment. Except for such amendments as are permitted
under this Section 9.1 and as otherwise provided in Section 1.18 and Section
9.3, the Trust is irrevocable. The Bank reserves the right to amend this Plan,
at any time and from time to time, in whole or in part, including without
limitation, retroactive amendments necessary or advisable to qualify this Plan
and the Trust under the provisions of Sections 401(a) and 501(a) of the Code or
the corresponding provisions of any similar statute hereafter enacted. However,
the Bank's right to amend this Plan shall remain at all times subject to the
provisions of Section 9.4. Further, no amendment of this Plan shall:
(a) alter, change or modify the duties, powers, or liabilities of
the Trustee hereunder without their written consent;
(b) permit any part of the Fund to be used to pay premiums or
contributions of the Companies under any other employee
benefit plan maintained by the Companies for the benefit of
its Employees;
(c) effect any discrimination among the Participants;
(d) change the vesting schedule in Section 6.3 or, if applicable,
in Section 11.4 unless each Participant who has completed
three (3) or more Years of Service as of the effective date of
the amendment is permitted to elect, within sixty (60)
calendar days after he is notified by the Committee of his
rights under this Subsection (d), to have his vested interest
determined without regard to such amendment;
(e) decrease the accrued benefit of any Participant unless the
amendment is approved by the Department of Labor because of
substantial business hardship; or
(f) decrease a Participant's Company Contributions Account balance
or eliminate an optional form of distribution for the accrued
benefits of a Participant determined as of the date of the
amendment.
Section 9.2. Termination or Complete Discontinuance of Contributions.
The Companies are not and shall not be under any obligation or liability
whatsoever to continue their contributions pursuant to this Plan or to maintain
this Plan for any given length of time, except as otherwise provided in Section
8.7. A Company may, in its sole discretion, discontinue Company contributions to
this Plan completely, except as otherwise provided in Section 8.7, with or
without notice, or partially or totally terminate this Plan in accordance with
its provisions at any time without any
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liability whatsoever for such discontinuance or termination. If this Plan shall
be partially or totally terminated or if contributions of a Company shall be
completely discontinued, the rights of all Participants directly affected by the
partial or total termination or the complete discontinuance of contributions in
their Company Contributions Accounts shall thereupon become fully vested and
non-forfeitable notwithstanding any other provisions of this Plan. However, the
Trust shall continue until all Participants' Company Contributions Accounts have
been completely distributed to, or for the benefit of, the Participants in
accordance with this Plan.
Section 9.3. Determination by Internal Revenue Service. Notwithstanding
any other provisions of this Plan, if the Internal Revenue Service shall fail or
refuse to issue a favorable written determination or ruling with respect to the
initial qualification of this Plan and the initial exemption of the Trust from
tax under Sections 401(a) and 501(a) of the Code, the Trustee shall, within a
reasonable time after receiving a written direction from the Committee to do so,
return to the Companies the current value of all Company contributions
theretofore made. As a condition to such repayment, the Companies shall execute,
acknowledge and deliver to the Trustee its written undertaking, in form
satisfactory to the Trustee, to indemnify, defend and hold the Trustee harmless
from all claims, actions, demands, or liabilities arising in connection with
such repayment. If for any reason the Key District Director of the Internal
Revenue Service should at any time after initial qualification fail to approve
any of the terms, conditions or amendments contained in or implied from this
Plan and Trust for continuing qualification and tax exemption under Sections
401(a) and 501(a) of the Code, then the Holding Company shall make such
modifications, alterations and amendments of this Plan as are necessary to
retain such approval and such modifications, alterations and amendments shall be
effective retroactively to the Effective Date or to such later date as is
required to retain such approval.
Section 9.4. Nonreversion. Except as otherwise provided in Section 3.1
and Section 9.3:
(a) The Bank shall have no power to amend or to terminate this
Plan in such a manner which would cause or permit any part of
the Fund to be diverted to purposes other than for the
exclusive benefit of Participants or, if deceased, of their
spouse or other Beneficiaries or as would cause or permit any
portion of the Fund to revert to or to become the property of
the Companies, and
(b) The Bank shall have no right to modify or to amend this Plan
retroactively in such a manner as to deprive any Participants,
or if deceased, their spouses or other Beneficiaries of any
benefits to which they are entitled under this Plan by reason
of contributions made by the Companies prior to the
modification or amendment, unless such modification or
amendment is necessary to meet the qualification requirements
of Sections 401(a) and 501(a) of the Code.
Section 9.5. Merger. The Bank shall have the right, by action of its
Board of Directors, to merge or to consolidate this Plan with, or to transfer
the assets or liabilities of the Fund to, any other qualified retirement plan
and trust at any time, except that no such merger, consolidation or transfer
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<PAGE>
shall be authorized unless each Participant in this Plan would receive a benefit
immediately after the merger, consolidation or transfer (if the merged,
consolidated or transferred plan and trust then terminated) equal to or greater
than the benefit to which he would have been entitled immediately before the
merger, consolidation or transfer (if this Plan then terminated).
ARTICLE X
MISCELLANEOUS
Section 10.1. Creation of Plan Voluntary. The Plan hereby created is
purely voluntary on the part of the Companies and, except as otherwise provided
in Section 8.7, any Company may suspend or discontinue payments hereunder at any
time or from time to time as it may decide in accordance with Section 10.17, but
no suspension or discontinuance shall operate retroactively with respect to the
rights of any Participant hereunder or his spouse or other Beneficiary.
Section 10.2. No Employment Contract. Except as may be required by the
Act, no contributions or other payments under this Plan shall constitute any
contract on the part of the Company to continue such contributions or other
payments hereunder. Participation hereunder shall not give any Participant the
right to be retained in the service of the Companies or any right or claim to
any benefits hereunder unless the right to such benefits has accrued under this
Plan. All Participants shall remain subject to assignment, reassignment,
promotion, transfer, layoff, reduction, suspension and discharge by the
Companies to the same extent as if this Plan had never been established.
Section 10.3. Limitation on Rights Created. Nothing contained in this
Plan or any modification of the same or act done in pursuance hereof shall be
construed as giving any person whomsoever any legal or equitable right against
the Companies, the Committee, the Trustee or the Fund, unless specifically
provided herein or granted by the Act.
Section 10.4. Waiver of Claims. Except as otherwise provided by the
Act, no liability whatsoever shall attach to or be incurred by any shareholder,
officer or Director, as such, of the Companies under or by reason of any
provision of this Plan or any act with reference to this Plan, and any and all
rights and claims thereof, as such, whether arising at common law or in equity
or created by statute, constitution or otherwise, are hereby expressly waived
and released to the fullest extent permitted by law by every Participant and by
his spouse or other Beneficiary as a condition of and as part of the
consideration for the payments by the Companies under this Plan and for the
receipt of benefits hereunder.
Section 10.5. Spendthrift Provision. To the fullest extent permitted by
law, none of the benefits, payments, accounts, funds or proceeds of any contract
held hereunder shall be subject, voluntarily or involuntarily, to any claim of
any creditor of any Participant or of his spouse or other Beneficiary, nor shall
the same be subject to attachment, garnishment or other legal or equitable
process by any creditor of a Participant or of his spouse or other Beneficiary,
nor shall any Participant or his spouse or other Beneficiary have any right to
alienate, anticipate, commute, pledge,
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encumber or assign any such benefits, payments, accounts, funds or proceeds of
any such contract. The preceding sentence shall also apply to the creation,
assignment or recognition of a right to any benefit payable with respect to a
Participant pursuant to a domestic relations order, unless such order is
determined to be a qualified domestic relations order as defined in Section
414(p) of the Code. It is the intention of the Companies that benefit payments
hereunder shall be made only at the times, in the amounts and to the
distributees as specified in this Plan regardless of any marital dissolution,
bankruptcy or other legal proceedings to which such distributees may be a party
to the fullest extent permitted by law.
Section 10.6. Payment of Benefits to Others. If any person to whom
benefit payments are due or payable under this Plan shall be unable to care for
his affairs because of illness or accident, any such payment may be made (unless
prior claim thereto shall have been made by a duly-qualified guardian or other
legal representative) to the spouse, parent, brother, sister or other person
deemed by the Committee, in its sole discretion, to have incurred expense for
such person and on such terms as the Committee, in its sole discretion, may
impose. Any such payment and any payment to a Participant or to his legal
representative or, if deceased, to his spouse or other Beneficiary made pursuant
to the provisions of this Plan shall to the extent thereof be in full
satisfaction of all claims arising hereunder against this Plan, the Fund, the
Committee, the Trustee and the Companies.
Section 10.7. Payments to Missing Persons. If the Trustee is unable to
effect delivery of any amounts payable under this Plan to the person entitled
thereto or, upon such person's death, to such person's personal representative,
they shall so advise the Committee in writing, and the Committee shall give
written notice by certified mail to said person at the last known address of
such person as shown in the Companies' records. If such person or the personal
representative thereof shall not have responded to the Committee within three
(3) years from the date of mailing such certified notice, the Committee shall
direct the Trustee to distribute such amount, including any amount thereafter
becoming due to such person or the personal representative thereof, in the
manner provided in Section 6.7 with respect to the death of a Participant when
there is no valid designation of Beneficiary on file.
Section 10.8. Severability. If any provisions of this Plan shall be
held illegal or invalid for any reason, such illegality or invalidity shall not
affect the remaining part of this Plan and it shall be construed and enforced as
if such illegal or invalid provisions had never been inserted herein.
Section 10.9. Captions. Titles of Articles, Sections and Clauses herein
are for general information only and shall be ignored in any construction of the
provisions hereof.
Section 10.10. Construction. Words in the masculine gender shall be
construed to include the feminine gender in all cases where appropriate, and
words in the singular or plural shall be construed as being in the plural or
singular where appropriate.
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Section 10.11. Counterparts. This Plan may be executed in any number of
counterparts, each of which shall be deemed to be an original. All the
counterparts shall constitute but one (1) and the same instrument and may be
sufficiently evidenced by any one (1) counterpart.
Section 10.12. Indemnification. The Companies shall indemnify and hold
harmless each member of the Committee and any individual Trustee who is also an
Employee of the Company from any and all claims, loss, damage, expense and
liability arising from any act or omission of such member or Trustee, as the
case may be, except when the same is judicially determined to be due to the
fraud or bad faith of such member or Trustee, as the case may be, if possible.
Section 10.13. Standards of Interpretation and Administration. This
Plan and the Fund held hereunder shall be for the exclusive benefit of Employees
of the Companies and their spouses or other Beneficiaries and defraying
reasonable costs of administration. This Plan shall be interpreted and
administered in a manner consistent with the requirements of the Code relating
to qualified stock bonus plans and trusts and the requirements imposed by the
Act. Wherever in this Plan discretionary powers are given to any party or
wherever any interpretation may be necessary, such powers shall be exercised and
such interpretation shall be made in a non-discriminatory manner and in
conformity with the fiduciary duties imposed under Section 404 of the Act.
Section 10.14. Governing Law. Except as otherwise provided by the Act,
this Plan shall be administered and construed and its validity determined under
the laws of the State of Indiana.
Section 10.15. Successors and Assigns. This Plan shall be binding upon
the successors and assigns of the Companies and of the Trustee.
Section 10.16. Adoption of Plan. Any corporation, who together with the
Holding Company, constitutes a member of a controlled group of corporations
under Section 414(b) of the Code, with the approval of the Board of Directors of
the Holding Company may adopt this Plan and participate as a Company in this
Plan by the execution of an instrument of adoption of this Plan which shall
specify the Effective Date as to such party. A listing of the subsidiaries and
affiliates who have adopted this Plan is shown as Appendix A.
Section 10.17. Withdrawal from Plan. Any Company in this Plan may, by
resolution of its Board of Directors or other governing body, withdraw from
participation as a Company in this Plan.
ARTICLE XI
TEFRA TOP-HEAVY RULES
Section 11.1. Application. The rules set forth in this Article XI shall
be applicable with respect to any Plan Year beginning on or after the Effective
Date in which this Plan is determined to be a Top-Heavy Plan. The provisions of
this Article XI shall be applied only to the extent necessary to comply with
Section 416 of the Code and in a manner consistent with all requirements imposed
under Section 416 of the Code.
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<PAGE>
Section 11.2. Determination. This Plan shall be considered a Top-Heavy
Plan with respect to any Plan Year if as of the Anniversary Date of the
immediately preceding Plan Year or, if the determination is to be made for this
Plan's first (1st) Plan Year, the last calendar day of the first (1st) Plan Year
(the "determination date"):
(a) the present value of the Accrued Benefits (as such term is
defined in Section 11.3) of Key Employees (as such term is
defined below) exceeds sixty percent (60%) of the present
value of the Accrued Benefits of all Employees and former
Employees (other than former Key Employees (as such term is
defined below)); provided, however, that the Accrued Benefits
of any Participant who has not completed an Hour of Service
for the Company during a five (5) year period ending on the
determination date (as such term is defined above) shall be
disregarded, or
(b) this Plan is part of a required aggregation group (as such
term is defined below) and the required aggregation group is
top-heavy;
provided, however, that this Plan shall not be considered a Top-Heavy Plan with
respect to any Plan Year in which this Plan is part of a required or permissive
aggregation group (as such terms are defined below) which is not top-heavy. For
purposes of this Article XI, the term "Key Employee" shall include for any Plan
Year any Employee or former Employee who at any time during that Plan Year or
any of the four (4) preceding Plan Years is:
(c) an officer of a Company whose Section 415 Compensation from
the Companies is greater than fifty percent (50%) of the
maximum dollar limitation under Section 415(b)(1)(A) of the
Code in effect for the calendar year in which the
determination date (as such term is defined above) falls,
(d) one (1) of the ten (10) Employees owning (or considered as
owning within the meaning of Section 318 of the Code) the
largest interest in a Company whose ownership interest in that
Company is at least one-half of one percent (0.5%) and whose
Section 415 Compensation from the Companies is equal to or
greater than the maximum dollar limitation under Section
415(c)(1)(A) of the Code in effect for the calendar year in
which the determination date (as such term is defined above)
falls; provided, however, that if two (2) Employees have the
same interest in a Company, the Employee whose annual Section
415 Compensation from the Companies is greater shall be
treated as having a larger interest in the Company,
(e) a five percent (5%) owner (determined without regard to
Sections 414(b),(c) and (n) of the Code) of a Company,
(f) a one percent (1%) owner (determined without regard to
Sections 414(b),(c) and (n) of the Code) of a Company whose
Section 415 Compensation from the Companies is in excess of
one hundred and fifty thousand dollars ($150,000);
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<PAGE>
provided, however, that the Beneficiary of any deceased Employee or of any
deceased former Employee who was included as a Key Employee by reason of this
Section 11.2 shall also be included as a Key Employee; provided, further, that
an individual shall only be included as a Key Employee to the extent required by
Section 416(i) of the Code. For purposes of this Article XI, "Non-Key Employee"
is any Employee or former Employee who is not a Key Employee. For purposes of
determining who is a key employee, Section 415 Compensation shall include
amounts deferred or redirected by an Employee pursuant to Sections 401(k) and
125 of the Code. For purposes of this Section 11.2, the term "required
aggregation group" shall include:
(g) all qualified retirement plans maintained by a Company in
which a Key Employee (as such term is defined above) is a
participant; provided, however, that the term "required
aggregation group" shall also include all qualified retirement
plans previously maintained by a Company but terminated within
the five (5) year period ending on the determination date (as
such term is defined above) in which a key employee (as such
term is defined above) was a participant; and
(h) any other qualified retirement plans maintained by a Company
which enable any qualified retirement plan described in
Subsection (g) above to meet the requirements of Section
401(a)(4) or of Section 410 of the Code.
For purposes of this Section 11.2, the term "permissive aggregation group" shall
include all qualified retirement plans that are part of a required aggregation
group (as such term is defined above) and any other qualified retirement plans
maintained by a Company if such group will continue to meet the requirements of
Section 401(a)(4) and of Section 410 of the Code.
Section 11.3. Accrued Benefits. For purposes of this Article XI,
Accrued Benefits with respect to any Plan Year shall be determined as of the
determination date (as such term is defined in Section 11.2) for that Plan Year
based on the Company Contributions Account balances as of the most recent
Valuation Date within a consecutive twelve (12) month period ending on such
determination date; provided, however, that such Company Contributions Account
balances shall be adjusted to the extent required by Section 416 of the Code to
increase the Company Contributions Accounts balances by the amount of any
Company Contributions made and allocated after the Valuation Date but on or
before such determination date and by any distributions made to Participants
prior to the Valuation Date during any of the five (5) consecutive Plan Years
immediately preceding the Plan Year for which the determination as to whether
this Plan is a Top-Heavy Plan is being made (including distributions from a
terminated plan which if not terminated would have been part of a required
aggregation group (as such term is defined in Section 11.7)) and to reduce the
Company Contributions Account balances by any rollovers or plan to plan
transfers made to this Plan before the Valuation Date which are initiated by a
Participant from any qualified retirement plan maintained by an unrelated
employer and by any deductible employee contributions.
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Section 11.4. Vesting Provisions. Notwithstanding the provisions of
Section 6.3, with respect to any Plan Year in which this Plan is determined to
be a Top-Heavy Plan, a Participant's Accrued Benefit which is derived from
Company Contributions shall vest in accordance with the following vesting
schedule if it would result in a larger vested percentage than the percentage
determined under Section 6.3:
Period of Service Vested Percentage
Less than two (2) years 0
Two (2) years or more but
less than three (3) years 20%
Three (3) years or more but
less than four (4) years 40%
Four (4) years or more but
less than five (5) years 60%
Five (5) years or more but
less than six (6) years 80%
Six (6) years or more 100%
provided, however, that if this Plan becomes a Top-Heavy Plan and subsequently
ceases to be such:
(a) the vesting schedule shown above shall continue to apply but
only with respect to Participants whose Period of Service is
as least three (3) years as of the Anniversary Date of the
final Top-Heavy Plan Year,
(b) the vesting schedule shown above shall continue to apply but
only with respect to the Accrued Benefits of all other
Participants as of the Anniversary Date of the final Top-Heavy
Plan Year, and
(c) the vesting schedule in Section 6.3 shall apply to any
additional Accrued Benefits of the Participants described in
Subsection (b) above which accrue after the Anniversary Date
of the final Top-Heavy Plan Year.
Section 11.5. Minimum Contribution. Notwithstanding the provisions of
Section 4.2, with respect to any Plan Year in which this Plan is a Top-Heavy
Plan, the Company contributions for such Plan Year shall be allocated in the
following order of priority:
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(a) first, among the Company Contributions Accounts of all
eligible Participants who had not separated from service with
the Companies as of the Anniversary Date of that Plan Year
regardless of the number of Hours of Service completed by each
such Participant during that Plan Year according to the ratio
that each Participant's Compensation for that Plan Year bears
to the total Compensation of all eligible Participants;
provided, however, that the portion of the Company
contributions to be allocated pursuant to this Subsection (a)
shall not exceed three percent (3%) of the total Compensation
of all eligible Participants for that Plan Year;
(b) next, the remaining portion, if any, of the Company
contributions for such Plan Year shall be allocated in
accordance with Section 4.2;
provided, however, that if a Participant also participates in a top-heavy
defined benefit plan, he shall receive the minimum benefit for such Plan Year
under the defined benefit plan.
Section 11.6. Code Section 415 Limitations. With respect to any Plan
Year beginning before January 1, 2000, in which this Plan is a Top-Heavy Plan,
Section 4.3 shall be read by substituting the number one (1.00) for the number
one and twenty-five one hundredths (1.25) wherever it appears therein; provided,
however, that such substitution shall not have the effect of reducing a
Participant's Accrued Benefit under any qualified defined benefit plan
maintained by a Company prior to the first (1st) calendar day of the Plan Year
in which this Article XI initially becomes applicable.
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This Plan has been adopted on this ________ day of ______________,
1997, but is to be effective as of January 1, 1997.
UNION COMMUNITY BANCORP
By:
Its:
Attest:
By:
Its:
UNION FEDERAL SAVINGS &
LOAN ASSOCIATION
By:
Its:
Attest:
By:
Its:
HOME FEDERAL SAVINGS BANK
By:
Its:
Attest:
By:
Its:
-43-
EXEMPT LOAN AND SHARE PURCHASE AGREEMENT
between
TRUST UNDER
UNION COMMUNITY BANCORP
EXEMPT STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
(EFFECTIVE AS OF JANUARY 1, 1997)
and
UNION COMMUNITY BANCORP
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS AND INTERPRETATION.....................2
Section 1.1. General Interpretation.............................2
Section 1.2. Certain Definitions................................2
ARTICLE II TRUST LOAN; TRUST NOTE; PAYMENTS...................2
Section 2.1. Trust Loan.........................................2
Section 2.2. Use of Trust Loan Proceeds.........................3
Section 2.3. Trust Note.........................................3
Section 2.4. Interest...........................................3
Section 2.5. Payments...........................................3
Section 2.6. Optional Prepayment................................4
Section 2.7. Place and Time of Payment..........................4
Section 2.8. Application of Certain Payments....................4
Section 2.9. Due Date Extension.................................4
Section 2.10. Computations..............................5
Section 2.11. Interest on Overdue Amounts...............5
ARTICLE III SECURITY...........................................5
Section 3.1. Security...........................................5
Section 3.2. Release of Shares..................................5
ARTICLE IV REPRESENTATIONS, WARRANTIES
AND COVENANTS......................................5
Section 4.1. Representations and Warranties of Trustee..........5
Section 4.2. Representations and Warranties of Company..........6
Section 4.3. Covenants of Company...............................8
ARTICLE V CONDITIONS PRECEDENT...............................8
Section 5.1. Documentation Satisfactory to Company..............8
Section 5.2. Other Conditions Precedent to Company Obligations..9
Section 5.3. Documentation Satisfactory to Trustee..............9
Section 5.4. Other Conditions Precedent to Trustee's Obligation.9
ARTICLE VI EVENTS OF DEFAULT AND THEIR EFFECT.................9
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Section 6.1. Events of Default; Effect...........................9
ARTICLE VII SHARE PURCHASES....................................10
Section 7.1. Purchase of Shares.................................10
Section 7.2. Manner of Purchase.................................10
Section 7.3. Readily Tradeable..................................10
Section 7.4. No Prohibited Transactions.........................10
Section 7.5. Maximum Number of Shares...........................10
ARTICLE VIII GENERAL............................................11
Section 8.1. Waivers; Amendments................................11
Section 8.2. Confirmations; Information.........................11
Section 8.3. Captions...........................................11
Section 8.4. Governing Law......................................11
Section 8.5. Notices............................................11
Section 8.6. Expenses...........................................12
Section 8.7. Reimbursement......................................12
Section 8.8. Entire Agreement...................................12
Section 8.9. Severability.......................................12
Section 8.10. No Assignment......................................12
Section 8.11. Counterparts..............................12
ARTICLE IX LIMITED RECOURSE...................................12
Section 9.1. Limited Recourse...................................12
Section 9.2. No Personal Recourse Against Trustee...............13
Exhibit A-TRUST NOTE Exhibit B-SHARE PLEDGE AGREEMENT Exhibit C-CERTIFICATE OF
TRUSTEE Exhibit D-CERTIFICATE OF THE COMPANY
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<PAGE>
EXEMPT LOAN AND SHARE PURCHASE AGREEMENT
THIS EXEMPT LOAN AND SHARE PURCHASE AGREEMENT (this "Agreement" or
"Loan Agreement"), dated December 29, 1997, between the Trust (the "Trust")
established pursuant to the provisions of the UNION COMMUNITY BANCORP EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1997) (the
"ESOP") by Home Federal Savings Bank, as Trustee (the "Trustee"), and UNION
COMMUNITY BANCORP, an Indiana corporation (the "Company").
W I T N E S S E T H:
WHEREAS, the Company has duly established the ESOP in connection with
which the Trust has been created;
WHEREAS, pursuant to the ESOP and direction of the Company pursuant to
Section 8.7 of the ESOP, the Trust desires to borrow from the Company, and the
Company desires to lend to the Trust, an aggregate principal amount equal to up
to One Million Eight Hundred and Forty Thousand Dollars ($1,840,000) (the "Trust
Loan"), representing the cost of 8% of the shares of Common Stock, without par
value, of the Company (the "Common Stock"), offered in the Subscription Offering
and the Community Offering of the Company's Common Stock being made in
connection with the Company's acquisition of the common stock of Union Federal
Savings and Loan Association (the "Association") upon conversion of the
Association from a federal mutual savings and loan association to a federal
stock savings and loan association (the "Conversion"), but no more than 184,000
such shares, on the terms and conditions hereof;
WHEREAS, the parties hereto intend that the Trust Loan constitute an
"exempt loan" within the meaning of Section 4975(d)(3) of the Code, Treasury
Regulation ss. 54.4975-7(b), Section 408(b)(3) of ERISA, and Department of Labor
Regulation ss. 2550.408b-3 (collectively, the "Exempt Loan Rules") and an
"Exempt Loan" within the meaning of Sections 1.20 and 8.7 of the ESOP;
WHEREAS, the parties intend that the Trustee will utilize the Trust
Loan for the purpose of effecting purchases in the Subscription Offering and
Community Offering (collectively, the "Offering") or otherwise of shares of
Company Common Stock, without par value ("Shares"), to be held in the Trust for
participants in the ESOP.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements herein contained and other good and valuable
consideration (the receipt, adequacy and sufficiency of which each party hereto
respectively acknowledges by its execution hereof), the parties hereto intending
legally to be bound do hereby agree as follows:
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<PAGE>
ARTICLE I
DEFINITIONS AND INTERPRETATION
Section 1.1. General Interpretation. This Agreement shall be construed
and interpreted so as to maintain the status of the ESOP as a qualified
leveraged employee stock ownership plan under Sections 401(a) and 4975(e)(7) of
the Code, the Trust as exempt from taxation under Section 501(a) of the Code,
and the Trust Loan as an "exempt loan" under the Exempt Loan Rules, and as an
"Exempt Loan" under Section 8.7 of the ESOP (collectively, the "Required
Status").
Section 1.2. Certain Definitions. In this Agreement, unless a clear
contrary intention appears, the terms set forth below have the following
meanings when used herein. Other terms are defined elsewhere herein.
(a) "Business Day" means a day, other than a Saturday, Sunday or public
holiday, on which commercial banks are open in Crawfordsville, Indiana for the
purpose of conducting commercial banking business.
(b) "Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
(c) "Default" means an event or circumstance which, with notice or
lapse of time or both, would constitute an Event of Default as defined in
Section 6.1.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended, and regulations promulgated thereunder.
(e) "Loan Documents" shall mean, collectively, this Agreement, the
Trust Note, the Share Pledge Agreement and any other instruments or documents
required to be delivered pursuant hereto or thereto, in each case as amended and
in effect from time to time.
ARTICLE II
TRUST LOAN; TRUST NOTE; PAYMENTS
Section 2.1. Trust Loan. Subject to the terms and conditions of this
Agreement, the Company agrees to make available to the Trust, and the Trust may
borrow from the Company, on the Closing Date (hereinafter defined), the Trust
Loan under this Agreement in an amount up to One Million Eight Hundred Forty
Thousand Dollars ($1,840,000), representing the cost of 8% of the Shares offered
in the Offering, subject to a maximum of 184,000 such Shares. The Company shall,
upon fulfillment of the applicable conditions set forth in Article V, on the
Closing Date make the Trust Loan up to such amount available to the Trustee in
immediately available funds, at its principal office. Notwithstanding the
foregoing, the Company shall not be obligated to make any portion of
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<PAGE>
the Trust Loan available to the Trust if the Conversion is not consummated, or
if the ESOP is not permitted to purchase any shares because of an
oversubscription in the first category of eligible subscribers. The Closing of
the Trust Loan (the "Closing") will occur at the offices of Barnes & Thornburg,
1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, Indiana
46204, on the same date that the Conversion closes, or such later date as the
parties shall agree upon (the "Closing Date").
Section 2.2. Use of Trust Loan Proceeds. The Trust will use the
proceeds of the Trust Loan to purchase Shares in the Offering, in accordance
with Article VII hereof.
Section 2.3. Trust Note. The Trust Loan will be represented by a
promissory note of the Trust (the "Trust Note"), substantially in the form of
Exhibit A hereto, appropriately completed, dated the Closing Date, payable to
the order of the Company in the original principal amount of the Trust Loan, or
so much thereof as may at any time have been advanced hereunder and thereunder,
on the maturity date thereof.
Section 2.4. Interest. The portion of the Trust Loan principal
outstanding at any time shall accrue and bear daily interest at a fixed rate per
annum equal to the prime rate as published in "The Wall Street Journal" on the
Closing Date (the "Interest Rate"), payable annually in accordance with Section
2.5. On any stated or accelerated maturity of the Trust Loan all accrued and
unpaid interest thereon shall be forthwith due and payable.
Section 2.5. Payments. The Trust shall pay the principal amount of the
Trust Loan together with accrued interest as follows:
(a) an initial principal installment of one twentieth (1/25)
of the initial principal amount of the Trust Loan, shall be due and
payable on December 31, 1998, together with all interest accrued on the
Trust Loan from the Closing Date through and including December 31,
1998; and
(b) thereafter, payments of principal and interest shall be
made in annual installments due and payable on the last business day of
December of each year, commencing on December 31, 1999, through and
including December 31, 2022, which annual installments shall include a
principal payment in the amount of one-twentieth of the initial
principal amount of the Trust Loan, plus all interest accrued on the
Trust Loan through and including the date of such payment.
The outstanding principal of the Trust Loan, together with all accrued and
unpaid interest and any other obligations then outstanding, will in any event be
due and payable in full on December 31, 2022.
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Section 2.6. Optional Prepayment.
(a) Upon compliance with this Section 2.6, the Trust, at its
option, may prepay the Trust Note at any time and from time to time,
either in whole or in part, by payment of the principal amount of the
Trust Note or portion thereof to be prepaid and accrued interest
thereon to the date of such prepayment.
(b) The Trustee will give notice of any prepayment of the
Trust Note pursuant to this Section 2.6 to the Company not less than 3
days nor more than 60 days before the date fixed for such optional
prepayment specifying (i) such date, (ii) that prepayment is to be made
under Section 2.6 of this Agreement, (iii) the principal amount of the
Trust Note to be prepaid on such date, and (iv) accrued interest
applicable to the prepayment. Such notice of prepayment shall be signed
by the Trustee. Notice of prepayment having been so given, the
aggregate principal amount of the Trust Note specified in such notice,
together with accrued interest thereon shall become due and payable on
the prepayment date.
(c) Partial prepayments of the Trust Note made pursuant to
this Section 2.6 shall be credited in each case against remaining
scheduled payments on the Trust Note in the inverse order of the due
dates of such payments.
(d) No such prepayment shall, however, be permitted if such
prepayment would adversely affect the Required Status.
Section 2.7. Place and Time of Payment. All payments of principal of,
or interest on, the Trust Note shall be made by the Trust to the Company in same
day funds at Crawfordsville, Indiana, not later than 11:00 a.m. on the date due.
Funds received after that hour shall be deemed to have been received on the next
following Business Day.
Section 2.8. Application of Certain Payments. If, and to the extent,
Shares acquired with proceeds of the Trust Loan, held in the Trust and not yet
allocated to participant accounts are sold, then, to the extent allowable by the
Exempt Loan Rules and applicable law, the Trustee, at the direction of the ESOP
Committee administering the ESOP (the "Committee"), may apply the proceeds
thereof toward the repayment of the Trust Loan. Dividends or other cash
distributions paid on the Shares purchased with the proceeds of the Trust Loan
(whether or not allocated to the accounts of Participants) shall be used by the
Trustee, at the discretion of the Committee, to the extent permissible to repay
the Trust Loan in accordance with the provisions of Section 4.5 of the ESOP.
Section 2.9. Due Date Extension. If any payment of principal of, or
interest on, the Trust Note falls due on a day that is not a Business Day, then
such due date shall be extended to the next following Business Day, and
additional interest shall accrue and be payable for the period of such
extension.
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Section 2.10. Computations. All computations of interest on the Trust
Loan and other amounts due hereunder shall be based on a year of 360 days,
comprising twelve 30-day months.
Section 2.11. Interest on Overdue Amounts. If any payment of principal
of, or interest on, the Trust Note is not made when due, interest shall accrue
on the amount thereof, commencing on such due date through the date on which
such amount is paid in full, at a rate per annum equal to the Interest Rate plus
two percent (2%).
ARTICLE III
SECURITY
Section 3.1. Security. Payment of the Trust Note and performance by the
Trust of its obligations under this Agreement and the Trust Note will be secured
by a pledge of, and the grant of a security interest in, the Shares by the
Trustee on behalf of the Trust to and in favor of the Company under a Share
Pledge Agreement, substantially in the form of Exhibit B hereto (the "Share
Pledge Agreement").
Section 3.2. Release of Shares. Notwithstanding any provision of this
Agreement or the Share Pledge Agreement to the contrary contained or implied,
the Company will release from the pledge and security interest under the Share
Pledge Agreement, such Shares as must be allocated to ESOP participants under
the ESOP pursuant to Section 8.7(h) of the ESOP and otherwise under the Code,
the Exempt Loan Rules or other applicable law, provided that Section 8.7(h) of
the ESOP shall not be amended without the Trustee's prior consent.
ARTICLE IV
REPRESENTATIONS, WARRANTIES
AND COVENANTS
Section 4.1. Representations and Warranties of Trustee. To induce the
Company to enter this Agreement and to make the Trust Loan, the Trustee
represents and warrants to the Company as follows:
(a) The Trustee has determined that the Trust Loan is
primarily for the benefit of ESOP participants and their beneficiaries
and bears interest at a rate not in excess of a reasonable rate and
that the terms of the loan are at least as favorable to the Trust and
the ESOP participants as the terms of a comparable loan resulting from
arm's-length negotiations between completely independent parties;
(b) The Trustee is a national bank, legally existing and in
good standing under federal law, has corporate power and authority and
is duly authorized to enter into and perform the Trust;
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(c) The Trustee has full right, power and authority to
execute, deliver and perform on behalf of the Trust under the Trust
Agreement, the ESOP and otherwise the obligations set forth in the Loan
Documents, and the execution and performance of such obligations will
not conflict with or result in a breach of the terms of the ESOP or the
Trust or result in a breach or violation of the Trustee's Articles of
Association or By-Laws or of any law or regulation, order, writ,
injunction or decree of any court or governmental authority binding on
the Trust or Trustee;
(d) The ESOP (and related Trust) has been duly authorized by
all necessary corporate action on the part of the Trustee, if any, has
been duly executed by an authorized officer of the Trustee and
delivered and constitutes a legal, valid and binding obligation of the
Trustee and declaration of trust enforceable in accordance with its
terms;
(e) The Loan Documents have been duly authorized, executed and
delivered by the Trustee and constitute legal, valid and binding
obligations, contracts and agreements of the Trustee on behalf of the
Trust, enforceable in accordance with their respective terms;
(f) The execution, delivery and performance of the Loan
Documents do not conflict with, or result in the creation or imposition
of any lien or encumbrance upon any of the property of the Trustee
(other than the Collateral, as defined in the Share Pledge Agreement)
pursuant to the provisions of the ESOP (and related Trust) or any other
agreement or other instrument to which the Trustee is a party or may be
bound; and
(g) No approval, consent or withholding of objection on the
part of, or filing, registration or qualification with, any
governmental body, Federal, state or local, is necessary in connection
with the execution, delivery and performance by the Trustee of the Loan
Documents.
Section 4.2. Representations and Warranties of Company. To induce the
Trust to enter this Agreement and undertake the obligations hereunder, the
Company represents and warrants to the Trust as follows:
(a) The Company is a corporation duly organized and validly
existing under the laws of the State of Indiana, has corporate power
and authority and is duly authorized to enter into and perform its
obligations under this Agreement;
(b) Neither the execution and delivery of this Agreement, nor
the performance of the terms hereof nor the establishment of the ESOP
or the Trust violates, conflicts with or constitutes a default under
Company's Articles of Incorporation or By-Laws or any material
agreement to which the Company is a party or by which the Company or
any of its assets is bound, or violates any law, regulation, order or
decree of any court, arbitration or governmental authority applicable
to the Company, in any manner that would have a material adverse effect
on the Trust, the ESOP, the Required Status or the Company;
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(c) The Company and the Association have taken all actions
required to be taken by it to establish the ESOP and the related Trust.
The ESOP and related Trust are intended to, and the terms thereof have
been drafted with the purpose to, comply with the requirements of
Sections 401(a) and 501(a) of the Code, as applicable, with the
requirements for treatment as a leveraged employee stock ownership
plan, as that term is defined in Section 4975(e)(7) of the Code, and
with other applicable laws;
(d) The Association has duly appointed the Trustee as trustee
of the Trust and the Committee under the ESOP;
(e) The Company has delivered to Trustee copies of its
Articles of Incorporation and its By-Laws, the ESOP, and resolutions of
its Board of Directors with respect to approval of this Agreement and
entering into of the transactions and execution of all documents
contemplated by this Agreement, in each case certified by the Secretary
of the Company, which copies are true, correct and complete. None of
such documents or resolutions has been amended or modified in any
respect and such documents and resolutions remain in full force and in
effect, in the form previously delivered to the Trustee;
(f) Other than the Common Stock, the Company has no other
classes of shares outstanding or treasury shares.
(g) The Company's ability to honor put options (the "Put
Options"), which would obligate the Company to repurchase shares of
Common Stock distributed from time to time to ESOP participants and
beneficiaries under Section 6.13 of the ESOP, is not presently
restricted by the provisions of any law, rule or regulation in effect
on the date hereof (except for capital, liquidation account,
requirements to obtain regulatory approval of repurchase transactions,
and similar constraints imposed by regulatory authorities on savings
associations) or by the terms of any loan, financing or other agreement
or instrument to which the Company is a party or by which the Company
is or may be bound.
(h) There are no actions, proceedings, or investigations
pending or, to the Company's knowledge, threatened against or affecting
the Company or any of its property or rights at law or in equity or
before or by any court or tribunal that have not been disclosed to the
Trustee and may have a material adverse effect on the value of the
Common Stock.
(i) All employee plans of the Association and the Company are
in compliance, in all material respects, with all applicable reporting,
disclosure and filing requirements pertaining to employee benefit plans
set forth in the Code and ERISA.
(j) No consent, approval or other authorization or notice to
any governmental authority or expiration of any government-imposed
waiting period is required in connection with the execution or delivery
of this Agreement, except such as has been obtained, given or expired.
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(k) The shares of Common Stock constitute "qualifying employer
securities" within the meaning of Section 409(l) of the Code.
Section 4.3. Covenants of Company. The Company covenants that:
(a) The Company shall submit or cause to be submitted to the
Internal Revenue Service within ninety (90) days following the Closing
Date an application for a determination letter confirming that the
ESOP, effective as of January 1, 1997, and the related Trust are
qualified and exempt from taxation under Sections 401(a) and 501(a),
respectively, of the Code and that the ESOP meets the requirements of
Section 4975(e)(7) of the Code.
(b) The Company and the Association shall make all changes
reasonably requested by the Internal Revenue Service as a condition of
obtaining a determination letter from the Internal Revenue Service with
respect to the ESOP, effective January 1, 1997. The Company and the
Association shall continue to do all things necessary to cause the ESOP
and the Trust at all times to be operated and administered such that
the ESOP remains qualified under Section 401(a) and remains an employee
stock ownership plan under Section 4975(e)(7) of the Code and the Trust
remains tax-exempt under Section 501(a) of the Code.
(c) If at any time the ESOP is required, by applicable law,
court order, or otherwise, to make distributions of Shares that
otherwise would be in violation of Federal or state securities laws,
the Company shall take all actions necessary to permit such required
distributions to be made in full compliance with such laws.
(d) The Company shall honor the Put Options if, and to the
extent, required by Section 409(h) of the Code and regulations
thereunder, and shall not permit its ability to honor such Options to
be materially restricted in any way.
(e) The Company or the Association shall provide to the
Trustee all governmental filings relating to the ESOP and all ESOP
amendments within sixty days of the date on which such filing or
amendment is effected, and, on an annual basis, shall provide complete
financial statements of the ESOP and the Company.
ARTICLE V
CONDITIONS PRECEDENT
Section 5.1. Documentation Satisfactory to Company. The obligation of
the Company to make the Trust Loan is, in addition to the conditions precedent
contained in Section 5.2, subject to the condition precedent that the Company
shall have received each of the following, duly executed and dated as of the
Closing Date (or such earlier date as shall be satisfactory to the Company) and
in form and substance satisfactory to the Company:
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(a) the Trust Note;
(b) the Share Pledge Agreement; and
(c) a certificate of the Trustee, substantially in the form of
Exhibit C hereto, with such changes thereto as shall be acceptable to
the Company and its counsel, and with respect to such other matters as
the Company may reasonably request.
Section 5.2. Other Conditions Precedent to Company Obligations. In
addition to the condition precedent contained in Section 5.1, the obligation of
the Company to make the Trust Loan available is subject to the conditions
precedent that (i) the Conversion is consummated, (ii) the representations and
warranties made by the Trustee herein shall be true and correct in all material
respects on the Closing Date as if made on and as of the Closing Date; and (iii)
the ESOP shall be permitted to purchase Shares in the Conversion.
Section 5.3. Documentation Satisfactory to Trustee. The obligation of
the Trust to enter into the Trust Loan is subject to the condition precedent
that the Trustee shall have received each of the following, duly executed and
dated as of the Closing Date (or such earlier date as shall be satisfactory to
Trustee) and in form and substance satisfactory to Trustee:
(a) The Share Pledge Agreement; and
(b) A certificate of the Company, substantially in the form of
Exhibit D hereto, with such changes thereto as shall be acceptable to
the Trustee and its counsel, and with respect to such other matters as
the Trustee may reasonably request.
Section 5.4. Other Conditions Precedent to Trustee's Obligation. The
obligation of the Trustee to enter into the Trust Loan is subject to the
conditions precedent that (i) the Conversion is consummated, (ii) the
representations and warranties made by the Company herein shall be true and
correct in all material respects on the Closing Date as if made on and as of the
Closing Date, and (iii) no injunction or restraining order shall be in effect or
litigation pending or threatened to forbid or enjoin the consummation of the
transaction contemplated by this Agreement.
ARTICLE VI
EVENTS OF DEFAULT AND THEIR EFFECT
Section 6.1. Events of Default; Effect. If default in the payment when
due of any principal of, or default (and continuance thereof for 5 days) in the
payment when due of interest on, the Trust Note (an "Event of Default") occurs,
unless the effect thereof as an Event of Default has been waived in writing by
the Company, then the Company may declare the Trust Note to be due and payable,
whereupon the Trust Note shall become immediately due and payable, without
presentment, demand, protest or notice to the Trust or other action by the
Company of any kind whatsoever, all of which
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actions the Trust hereby waives to the maximum extent permitted by law. The
Company shall promptly advise the Trust of any declaration of default, but
failure to do so or delay in doing so shall not impair the effect of such
declaration. Notwithstanding anything to the contrary herein or in the Trust
Note or the Share Pledge Agreement contained or implied, if a Default or Event
of Default occurs with respect to the Trust Loan by the Trust, the value of
Trust assets transferred in satisfaction thereof shall not exceed the amount of
such default. In addition, such a transfer of such Trust assets shall only occur
upon and to the extent of the failure of the Trust to meet the payment schedule
of the Trust Loan provided in Article II.
ARTICLE VII
SHARE PURCHASES
Section 7.1. Purchase of Shares. The Company is making the Trust Loan
available to the Trustee for the purpose of allowing the Trustee to purchase
Shares in the Conversion. To the extent the ESOP is permitted to purchase up to
184,000 Shares in the Conversion, the Trustee agrees to use all of the proceeds
of the Trust Loan to purchase Shares in accordance with this Article VII.
Section 7.2. Manner of Purchase. The Trustee shall timely subscribe to
purchase the Shares the ESOP is permitted to purchase in the Conversion pursuant
to the Association's Plan of Conversion. The Trustee shall draw upon the Trust
Loan and use the proceeds thereof to purchase the number of Shares the ESOP may
purchase in the Offering, simultaneously with consummation of the Conversion.
Section 7.3. Readily Tradeable. The Company agrees to use reasonable
efforts to cause the Shares to be, and to maintain the Shares' status as,
"readily tradeable on an established securities market" within the meaning of
Section 409(l)(1) of the Code.
Section 7.4. No Prohibited Transactions. The Trustee in the performance
of its obligations under this Agreement, shall observe its fiduciary obligations
under Section 404 of ERISA, shall not engage in any transaction prohibited by
ERISA or contrary to such fiduciary obligations, and, in acquiring Shares, shall
not (and shall not be deemed obligated to) pay more than "adequate
consideration", as defined in Section 3(18) of ERISA.
Section 7.5. Maximum Number of Shares. The Trust shall not purchase
Shares with proceeds of the Trust Loan in excess of the lesser of 8% of the
outstanding Shares of the Company at the time of purchase and 184,000 Shares.
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ARTICLE VIII
GENERAL
Section 8.1. Waivers; Amendments. No delay on the part of the Company,
or the holder of the Trust Note in the exercise of any right, power or remedy
shall operate as a waiver thereof, nor shall any single or partial exercise by
any of them of any right, power or remedy preclude other or further exercise
thereof, or the exercise of any other right, power or remedy. No amendment,
modification or waiver of, or consent with respect to, any provision of this
Agreement, the Trust Note or the Share Pledge Agreement shall in any event be
effective unless the same shall be in writing and signed and delivered by the
Company and then any such amendment, modification, waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
Section 8.2. Confirmations; Information. The Company and the Trust (or
holder of the Trust Note) agree from time to time, upon written request received
by it from the other, to confirm to the other in writing the aggregate unpaid
principal balance then outstanding under the Trust Note and such other matters
relating to the Trust Loan, the Trust, the ESOP or the purchase of Shares as may
reasonably be the subject of inquiry.
Section 8.3. Captions. Section captions used in this Agreement are for
convenience only, and shall not affect the construction of this Agreement.
Section 8.4. Governing Law. To the extent not preempted by ERISA, this
Agreement and the Trust Note shall be a contract made under and governed by the
laws of the State of Indiana, without regard to conflict of laws principles. All
obligations of the Trust and rights of the Company and other holder of the Trust
Note expressed herein or in such Trust Note shall be in addition to and not in
limitation of those provided by law.
Section 8.5. Notices. All communications and notices hereunder shall be
in writing and shall be deemed to be given when sent by registered or certified
mail, postage prepaid, return receipt requested, or by telecopier, duly
confirmed, and addressed to such party at the address indicated below or to such
other address as such party may designate in writing pursuant to this Section
8.5.
Union Community Bancorp
221 East Main Street
Crawfordsville, Indiana 47933
Attention: Joseph E. Timmons, President
Home Federal Savings Bank
P. O. Box 408
501 Washington Street
Columbus, Indiana 47201
Attention: David L. Fisher
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Section 8.6. Expenses. All expenses of the transaction contemplated by
this Agreement shall be paid by the Company.
Section 8.7. Reimbursement. If the Trustee uses proceeds from the Trust
Loan to purchase Common Stock directly from the Company and it is subsequently
determined by a court of competent jurisdiction that the Trustee paid in excess
of "adequate consideration" within the meaning of ERISA for such shares, the
Company shall, as soon as practicable following such judgment, reimburse the
Trustee for the amount of the excess payment.
Section 8.8. Entire Agreement. This Agreement constitutes the entire
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all prior agreements and understandings between the parties.
Section 8.9. Severability. Should any clause, paragraph or part of this
Agreement be held or declared to be void or illegal for any reason, all other
clauses, paragraphs or parts of this Agreement which can be affected without
such illegal clause, paragraph or part shall nevertheless remain in full force
and effect.
Section 8.10. No Assignment. This Agreement and the obligations of the
parties herein may not be assigned or assumed by any other parties.
Section 8.11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
put together shall constitute one and the same instrument.
ARTICLE IX
LIMITED RECOURSE
Section 9.1. Limited Recourse. Notwithstanding anything to the contrary
herein or in the Trust Note, the Share Pledge Agreement or any other instrument,
agreement or document contained or implied, the obligations of the Trust under
this Agreement, the Trust Note and the Share Pledge Agreement (collectively, the
"Trust Loan Obligations") shall be enforceable to the extent permitted under
law, including (without limitation) the Exempt Loan Rules, only against the
Trust to the extent of the Collateral (as defined in the Share Pledge Agreement)
not theretofore released from the pledge and security interest under the Share
Pledge Agreement as provided in Section 3.2 and contributions and other payments
(other than contributions of employer securities) made to the Trust in
accordance with the ESOP to enable the Trust to pay and satisfy the Trust Loan
Obligations and from earnings attributable to the Shares purchased with Trust
Loan proceeds and the investment of such contributions and payments
(collectively, the "Trust Loan Collateral"). No recourse shall be had to or
against the Trust or the assets thereof (other than the Trust Loan Collateral)
for any deficiency judgment against the Trust for the purpose of obtaining
payment or other satisfaction of the Trust Loan Obligations.
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Section 9.2. No Personal Recourse Against Trustee. Without limiting the
provisions of Section 9.1, the Trustee of the Trust shall have no personal
liability for any of the Trust Loan Obligations.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered by their respective representatives thereunto duly
authorized as of the date first above written.
TRUST UNDER UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
By: Home Federal Savings Bank, Trustee
By: /s/ David L. Fisher
Printed: David L. Fisher
Its: Vice President and
Senior Trust Officer
UNION COMMUNITY BANCORP
By: /s/ Joseph E. Timmons
Printed: Joseph E. Timmons
Its: President
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Exhibit A
TRUST NOTE
$___________ December ___, 1997
Due: December 31, 2022
FOR VALUE RECEIVED, the undersigned, the Trust (the "Trust")
established pursuant to the provisions of the UNION COMMUNITY BANCORP EMPLOYEE
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT, DATED AND EFFECTIVE AS OF JANUARY 1,
1997 (the "Plan") by HOME FEDERAL SAVINGS BANK, as Trustee (the "Trustee"),
promises to pay to the order of UNION COMMUNITY BANCORP, an Indiana corporation
(together with its successors, endorsees and assigns, the "Company"), at such
place and in such other manner as the Company may direct in writing, and when
required pursuant to the provisions of that certain Exempt Loan and Share
Purchase Agreement, dated December 29, 1997 (the "Loan Agreement"), by and among
the Trustee and the Company, the principal amount of
____________________________ Dollars ($__________) or so much thereof as may be
advanced by the Company to the Trust hereunder and under the Loan Agreement,
said amount being due and payable together with accrued interest in such
installments and at such times as provided in the Loan Agreement, with the
entire unpaid principal balance due and payable with accrued interest in full on
December 31, 2022, as provided in the Loan Agreement.
The principal balance hereof from time to time outstanding shall bear
interest from the date of each disbursement of the Trust Loan evidenced by this
Trust Note through and including the date on which such principal amount is paid
in full, at the times provided in the Loan Agreement, at the Interest Rate, as
defined in the Loan Agreement which is _____________ percent (_____%) per annum
(or, in the case of overdue principal and, to the extent legally enforceable,
overdue interest, at the Interest Rate plus two percent (2%) per annum).
This Trust Note has been issued by the Trust in accordance with the
terms of the Loan Agreement to evidence the Trust Loan made by the Company to
the Trust under the Loan Agreement, to which reference is hereby made for the
statement of the terms thereof. This Trust Note and the Company are entitled to
the benefits of the Loan Agreement and the Company may enforce the agreements of
the Trust contained therein and in the Loan Documents, and may exercise the
respective remedies provided for thereby or otherwise available in respect
thereof, all in accordance with the respective terms thereof. All capitalized
terms used in this Trust Note which are not otherwise defined herein have the
respective meanings assigned to them in the Loan Agreement.
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The Trust has the right to prepay the principal amount of this Trust
Note without penalty on the terms and conditions specified in the Loan
Agreement.
If any Event of Default shall occur, the entire unpaid principal amount
of this Trust Note and all of the accrued but unpaid interest thereon may become
or be due and payable in the manner and with the effect provided in the Loan
Agreement. The collection and enforcement of this Trust Note are subject to the
provisions and limitations of Section 9.1 of the Loan Agreement.
To the extent not preempted by ERISA, this Trust Note and the
obligations of the Trust hereunder shall be governed by the laws of the State of
Indiana without regard to principles of conflict of laws.
All parties to this Trust Note, including endorsers, sureties and
guarantors, if any, hereby waive presentment, demand, protest, notice, relief
from valuation and appraisement laws and any and all other notices and demands
in connection with the delivery, acceptance, performance and enforcement of this
Trust Note and also hereby assent to extensions of the time of payment or
forbearance or other indulgences without notice, and agree to remain bound until
the principal, premium, if any, and interest are paid in full, notwithstanding
any extensions of time for payment which may be granted, even though the period
or periods of extension may be indefinite, and notwithstanding any inaction by,
or failure to assert any legal rights available to, the holder of this Trust
Note.
IN WITNESS WHEREOF, the Trust has caused this instrument to be executed
by the Trustee, the day and year first above written.
TRUST UNDER UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
By: Home Federal Savings Bank, Trustee
By:
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Exhibit B
SHARE PLEDGE AGREEMENT
between
TRUST UNDER
UNION COMMUNITY BANCORP
STOCK OWNERSHIP PLAN AND TRUST AGREEMENT
and
UNION COMMUNITY BANCORP
Dated: December ___, 1997
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SHARE PLEDGE AGREEMENT
THIS SHARE PLEDGE AGREEMENT (this "Agreement" or "Share Pledge
Agreement"), dated as of December 29, 1997, between the Trust (the "Trust")
established pursuant to the provisions of UNION COMMUNITY BANCORP EMPLOYEE STOCK
OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1997) (the
"Plan") by HOME FEDERAL SAVINGS BANK, as Trustee ("Trustee"), and UNION
COMMUNITY BANCORP, an Indiana corporation (the "Company").
WITNESSETH:
WHEREAS, contemporaneously herewith, the Trust and the Company have
entered into that certain Exempt Loan and Share Purchase Agreement (the "Loan
Agreement"; definitions of terms appearing in which have the same meanings
herein, unless a clear contrary intention appears), dated December 29, 1997,
pursuant to which the Company has agreed to lend to the Trust, and the Trust has
agreed to borrow from the Company, the Trust Loan, and the Trust, to evidence
its indebtedness to the Company with respect to the Trust Loan, has executed and
delivered the Trust Note to the Company; and
WHEREAS, it is a condition precedent to the obligation of the Company
to make the Trust Loan that, among other things, the Trust execute and deliver
this Agreement to the Company,
NOW, THEREFORE, in consideration of the Loan Agreement and the Trust
Loan and other good and valuable consideration (the receipt, adequacy and
sufficiency of which the Trust acknowledges by its execution hereof, the Trust
intending to be legally bound does hereby covenant and agree with the Company as
follows:
Section 1. Pledge. To secure the due and punctual payment and
performance of the obligations of the Trust hereunder and under the Loan
Agreement and the Trust Note (collectively, the "Liabilities"), the Trustee on
behalf of the Trust hereby pledges, hypothecates, assigns, transfers, sets over
and delivers unto the Company, its successors and assigns and hereby grants to
the Company, its successors and assigns a security interest in:
(a) All Shares of Company Common Stock purchased or to be
purchased with the proceeds of the Trust Loan (collectively, the
"Pledged Shares") and the certificates representing or evidencing the
Pledged Shares, and, to the extent permitted by Section 4975(e)(7) of
the Internal Revenue Code of 1986, as amended, and Reg. ss.
54.4975-7(b)(5) promulgated thereunder, all cash, securities, interest,
dividends, rights and other property at any time and from time to time
received in respect of or in exchange for any or all of the Pledged
Shares; and
(b) all proceeds of all of the foregoing
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(all such Pledged Shares, certificates, cash, securities, interest, dividends,
rights and other property, and proceeds thereof, other than as released, sold or
otherwise applied by the Company pursuant to the' terms hereof, being herein
collectively called the "Collateral"), TO HAVE AND TO HOLD such Collateral,
together with all rights, titles, interests, privileges and preferences
appertaining or incidental thereto, forever, subject, however, to the terms,
covenants and conditions hereafter set forth.
Section 2. Warranties and Covenants.
(a) The Trust represents and warrants to the Company that the
Trust is, or at the time of any future delivery, pledge, assignment or
transfer will be, the lawful owner of the Collateral, free of all
claims and liens other than the security interest hereunder, with full
right to deliver, pledge, assign and transfer the Collateral to the
Company as Collateral hereunder.
(b) So long as any of the Liabilities remain outstanding, the
Trust will, unless the Company shall otherwise consent in writing:
(i) promptly deliver to the Company from time to time
certificates representing Pledged Shares as the Trustee
acquires them and, upon request of the Company, such stock
powers and other documents, satisfactory in form and substance
to the Company, with respect to the Collateral as the Company
may reasonably request to preserve and protect, and to enable
the Company to enforce, its rights and remedies hereunder;
(ii) not create or suffer to exist any lien, security
interest or other charge or encumbrance against, in or with
respect to any of the Collateral except for the pledge
hereunder and the security interest created hereby;
(iii) not make or consent to any amendment or other
modification or waiver with respect to any of the Collateral
or enter into any agreement or permit to exist any restriction
with respect to any of the Collateral other than pursuant
hereto; and
(iv) not take or fail to take any action which would
in any manner impair the value or enforceability of the
Company's security interest in any of the Collateral.
Section 3. Care of Collateral. The Company shall be deemed to have
exercised reasonable care with respect to the interest of the Trust in the
custody and preservation of the Collateral if it takes such action for that
purpose as the Trust shall request in writing or as it would with respect to
similar assets of its own, but failure of the Company to comply with any such
request shall not of itself be deemed a failure to exercise reasonable care.
-3-
<PAGE>
Section 4. Certain Rights Regarding Collateral and Liabilities.
(a) The Company may from time to time, whether before or after any of
the Liabilities shall become due and payable, without notice to the Trust, to
the extent otherwise permitted (i) retain or obtain a security interest in the
Collateral, to secure payment and performance of any of the Liabilities, (ii)
retain or obtain the primary or secondary liability of any party or parties, in
addition to the Trust, with respect to any of the Liabilities, (iii) extend or
renew for any period (whether or not longer than the original period) or
exchange any of the Liabilities or release or compromise any obligation of any
nature of any party with respect thereto, and (iv) surrender, release or
exchange all or any part of any property, in addition to the Collateral,
securing payment and performance of any of the Liabilities, or compromise or
extend or renew for any period (whether or not longer than the original period)
any obligations of any nature of any party with respect to any such property.
(b) The Company shall have no right to vote the Pledged Shares prior to
the occurrence of an Event of Default (hereinafter in Section 6(a) hereof
defined). After the occurrence of an Event of Default, the Trust shall have the
right to vote any and all of the Pledged Shares in accordance with the Plan
unless and until it receives notice from the Company that such right has been
terminated with respect to shares subject to execution as a result of the
Default.
Section 5. Dividends, etc.
(a) So long as no Default or Event of Default, shall have occurred and
be continuing, the Trust shall be entitled to receive any and all cash dividends
on the Pledged Shares which it is otherwise entitled to receive, and to vote the
Pledged Shares in accordance with the terms of the Plan and to give consents,
waivers and ratifications in respect of the Pledged Shares, but any and all
stock and/or liquidating dividends, distributions in property, returns of
capital or other distributions made on or in respect of the Pledged Shares,
whether resulting from a subdivision, combination or reclassification of the
outstanding capital stock of any issuer thereof or received in exchange for the
Pledged Shares or any part thereof or as a result of any merger, consolidation,
acquisition or other exchange of assets to which any issuer may be a party or
otherwise, and any and all cash and other property received in exchange for any
Collateral shall be, and become part of the Collateral pledged hereunder and, if
received by the Trust, shall forthwith be delivered to the Company or its
designated nominee (accompanied, if appropriate, by proper instruments of
assignment and/or stock powers executed by the Trust in accordance with the
Company's instructions) to be held subject to the terms of this Agreement and
the Plan.
(b) Upon the occurrence and during the continuance of an Event of
Default, subject to the terms of Section 4(b) hereof, all rights of the Trust
pursuant to Section 5(a) hereof shall cease and the Company shall have the sole
and exclusive right and authority to receive and retain the dividends which the
Trust would otherwise be authorized to retain and, to the extent permitted by
law, to vote and give consents, waivers and ratifications pursuant to Section
5(a) hereof. Any and all money and other property paid over to or received by
the Company pursuant to the provisions
-4-
<PAGE>
of this paragraph (b) shall be retained by the Company as additional Collateral
hereunder and be applied in accordance with the provisions hereof.
Section 6. Event of Default.
(a) The occurrence of any of the following shall constitute an Event
of Default hereunder nonpayment, when due, whether by acceleration or otherwise,
of any amount payable on any of the Liabilities; an Event of Default as defined
in the Loan Agreement; any representation or warranty of the Trust contained
herein or given pursuant hereto being untrue in any material respect; or the
Trust's failure to perform any covenant or agreement contained herein.
(b) Upon the occurrence of an Event of Default, (i) the Company may
exercise from time to time any rights and remedies available to it under the
Uniform Commercial Code as in effect from time to time in Indiana or otherwise
available to it, including, but not limited to, sale, assignment, or other
disposal of the Pledged Shares in exchange for cash or credit, and (ii) the
Company may, without demand or notice of any kind, but subject to Section 7,
appropriate and apply toward the payment of such of the Liabilities, and in such
order of application, as the Company may from time to time elect, any balances,
credits, deposits, accounts or moneys of the Trust. If any notification of
intended disposition of any of the Collateral is required by law, such
notification, if mailed, shall be deemed reasonably and properly given if mailed
at least five (5) days before such disposition, postage prepaid, addressed to
the Trust, either at the address of the Trust shown below, or at any other
address of the Trust appearing on the records of the Company. Any proceeds of
any disposition of Collateral shall be applied as provided in Section 7 hereof.
All rights and remedies of the Company expressed hereunder are in addition to
all other rights and remedies possessed by it, including those under any other
agreement or instrument relating to any of the Liabilities or security therefor.
No delay on the part of the Company in the exercise of any right or remedy shall
operate as a waiver thereof, and no single or partial exercise by the Company of
any right or remedy shall preclude other or further exercise thereof or the
exercise of any other right or remedy. No action of the Company permitted
hereunder shall impair or affect the rights of the Company in and to the
Collateral.
(c) The Trust agrees that in any sale of any of the Collateral
whenever an Event of Default hereunder shall have occurred and be continuing,
the Company is hereby authorized to comply with any limitation or restriction in
connection with such sale as it may be advised by counsel is necessary in order
to avoid any violation of law (including, without limitation, compliance with
such procedures as may restrict the number of prospective bidders and
purchasers, require that such prospective bidders and purchasers have certain
qualification, and restrict such prospective bidders and purchasers to persons
who will represent and agree that they are purchasing for their own account for
investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale or of the
purchaser by any governmental regulatory authority or official, and the Trust
further agrees that such compliance shall not result in such sale being
considered or deemed not to have been made in a commercially reasonable manner,
nor shall
-5-
<PAGE>
the Company be liable nor accountable to the Trust for any discount allowed by
the reason of the fact that such Collateral is sold in compliance with any such
limitation or restriction.
(d) Notwithstanding anything to the contrary herein or in the Trust
Note or the Loan Agreement contained or implied, if an Event of Default occurs
with respect to the Trust Loan by the Trust, the value of Trust assets
transferred in satisfaction thereof shall not exceed the amount of such default.
In addition, such a transfer of such Trust assets shall only occur upon, and to
the extent of the failure of, the Trust to meet the payment schedule of the
Trust Loan provided in Article II of the Loan Agreement.
Section 7. Application of Proceeds of Sale or Cash Held as
Collateral. The proceeds of sale of Collateral sold pursuant to the terms of
Section 6 hereof and/or, after an Event of Default, the cash held as Collateral
hereunder, shall be applied by the Company, to the extent permitted by
applicable law, as follows:
First: to payment of the costs and expenses of such sale,
including the out-of-pocket costs and expenses of the Company and the
reasonable fees and out-of-pocket costs and expenses of counsel
employed in connection therewith, and to the payment of all advances
made by the Company for the account of the Trust hereunder and the
payment of all costs and expenses incurred by the Company in connection
with the administration and enforcement of this Agreement, to the
extent that such advances, costs and expenses shall not have been
reimbursed to the Company;
Second: to the payment in full of the Liabilities; and
Third: the balance, if any, of such proceeds shall be paid to
the Trust, its successors and assigns, or as a court of competent
jurisdiction may direct.
Section 8. Authority of Company. The Company shall have and be
entitled to exercise all such powers hereunder as are specifically delegated to
the Company by the terms hereof, together with such powers as are incidental
thereto. The Company may execute any of its duties hereunder by or through
agents or employees and shall be entitled to retain counsel and to act in
reliance upon the advice of such counsel concerning all matters pertaining to
its duties hereunder. Neither the Company, nor any director, officer or employee
of the Company, shall be liable for any action taken or omitted to be taken by
it or them hereunder or in connection herewith, except for its or their own
gross negligence or wilful misconduct. The Trust hereby agrees, to the extent
permitted by applicable law, to reimburse the Company, on demand, for all costs
and expenses incurred by the Company in connection with the enforcement of this
Agreement (including costs and expenses incurred by any agent employed by the
Company).
Section 9. Termination. This Agreement shall terminate when all the
Liabilities have been fully paid and performed, at which time the Company shall
reassign and redeliver (or cause to be reassigned and redelivered) to the Trust,
or to such person or persons as the Trust shall designate,
-6-
<PAGE>
against receipt, such of the Collateral (if any) as shall not have been
theretofore released, sold or otherwise applied by the Company pursuant to the
terms hereof and shall still be held by it hereunder, together with any
appropriate instruments of reassignment and release. Any such reassignment shall
be without recourse upon, or representation or warranty by, the Company.
Section 10. Required Release of Collateral. Notwithstanding any
provision of this Agreement or the Loan Agreement to the contrary, the Company
from time to time will release from the pledge and security interest under the
Loan Agreement, such Collateral as must be allocated to participants under the
Plan pursuant to Section 8.7(h) of the Plan and otherwise under the Code, the
Exempt Loan Rules or other applicable law.
Section 11. Limited Recourse. Notwithstanding anything to the
contrary herein or in the Trust Note, the Loan Agreement or any other
instrument, agreement or document contained or implied, the Liabilities shall be
enforceable to the extent permitted under applicable law, including, without
limitation, the Exempt Loan Rules, only against the Trust to the extent of the
Collateral not theretofore released from the pledge and security interest under
this Agreement as provided herein and contributions (other than contributions of
employer securities) made to the Trust in accordance with the Plan to enable the
Trust to pay and satisfy the Liabilities and from earnings attributable to the
Shares and the investment of such contributions (collectively, the "'Trust Loan
Collateral"). No recourse shall be had to or against the Trust or the assets
thereof (other than the Trust Loan Collateral) for any deficiency judgment
against the Trust for the purpose of obtaining payment or other satisfaction of
the Liabilities. Without limiting the foregoing, the Trustee of the Trust shall
have no personal liability for any of the Liabilities, other than as required by
or arising under applicable law.
Section 12. Notices. All communications and notices hereunder shall
be in writing and, if mailed, shall be deemed to be given when sent by
registered or certified mail, postage prepaid, return receipt requested, or by
telecopier, duly confirmed, and addressed to such party at the address indicated
below or to such other address as such party may designate in writing pursuant
to this Section 12.
UNION COMMUNITY BANCORP
221 East Main Street
P.O. Box 151
Crawfordsville, Indiana 47933
Attention: Joseph E. Timmons, President
HOME FEDERAL SAVINGS BANK
P. O. Box 408
501 Washington Street
Columbus, Indiana 47201
Attention: David L. Fisher
-7-
<PAGE>
Section 13. Binding Agreement Assignment. This Agreement, and the
terms, covenants and conditions hereof, shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors and assigns,
except the Trust shall not be permitted to assign this Agreement or any interest
herein or in the Collateral, or any part thereof, or otherwise grant any option
with respect to the Collateral, or any part thereof and the Company shall not
assign any interest herein or in the Collateral unless such assignment is
expressly made subject to the terms of the Loan Documents.
Section 14. Miscellaneous Provisions. Neither this Agreement nor any
provision hereof may be amended, modified, waived, discharged or terminated nor
may any of the Collateral be released or the pledge or the security interest
created hereby extended, except by an instrument in writing duly signed by or on
behalf of the Company hereunder. The section headings used herein are for
convenience of reference only and shall not define or limit the provisions of
this Agreement. This Agreement may be executed in any number of counterparts and
by the different parties on separate counterparts and each such counterpart
shall be deemed to be an original, but all such counterparts shall together
constitute but one and the same Agreement.
Section 15. Governing Law; Interpretation. This Agreement has been
made and delivered at Spencer, Indiana, and, except to the extent preempted by
ERISA, shall be governed by the internal laws of the State of Indiana, without
regard to principles of conflict of laws. Wherever possible each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be prohibited
by or invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement.
Section 16. Filing as a Financing Statement. At the option of the
Company, this Agreement, or a carbon, photographic or other reproduction of this
Agreement or of any Uniform Commercial Code financing statement covering the
Collateral or any portion thereof shall be sufficient as a Uniform Commercial
Code financing statement and may be filed as such.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective representatives thereunto duly authorized
as of the date first above written.
TRUST UNDER UNION COMMUNITY BANCORP
EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
By: Home Federal Savings Bank, Trustee
By:
Printed:
Its:
-8-
<PAGE>
UNION COMMUNITY BANCORP
By: /s/ Joseph E. Timmons
Printed: Joseph E. Timmons
Its: President
-9-
<PAGE>
Exhibit C
CERTIFICATE OF TRUSTEE
The undersigned, Home Federal Savings Bank, a federal savings bank,
in its capacity as Trustee ("Trustee") of the Trust under Union Community
Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of
January 1, 1997) (the "Trust") hereby certifies, pursuant to Section 5.1(c) of
that certain Exempt Loan and Share Purchase Agreement between the Trust and
Union Community Bancorp of even date herewith (the "Loan Agreement") that:
(i) it has determined that the Trust Loan, as defined in the
Loan Agreement, is primarily for the benefit of ESOP participants and
their beneficiaries and bears interest at a rate not in excess of a
reasonable rate and that the terms of the loan are at least as
favorable to the Trust and the ESOP participants as the terms of a
comparable loan resulting from arm's-length negotiations between
completely independent parties;
(ii) the other representations and warranties of the Trust
contained in the Loan Agreement are true in all material respects as of
the date of this Certificate; and
(iii) the conditions set forth in Article V of the Loan
Agreement, to the extent their satisfaction depends upon action on the
part of the Trust or the Trustee, have been satisfied as of the date of
this Certificate.
EXECUTED this ____ day of December, 1997.
Home Federal Savings Bank, as Trustee of the Trust
under the Union Community Bancorp Employee
Stock Ownership Plan and Trust Agreement
(Effective as of January 1, 1997)
By:
-10-
<PAGE>
Exhibit D
CERTIFICATE OF THE COMPANY
The undersigned, Union Community Bancorp, an Indiana corporation (the
"Company"), pursuant to Section 5.3(b) of that certain Exempt Loan and Share
Purchase Agreement between Home Federal Savings Bank, a federal savings bank, in
its capacity as Trustee of the Trust under the Union Community Bancorp Employee
Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1997) and
the Company of even date herewith (the "Loan Agreement"), hereby certifies that
the representations and warranties of the Company contained in the Loan
Agreement are true and correct in all material respects, and the Company is in
compliance with its covenants set forth in the Loan Agreement in all material
respects, as of the date of this Certificate.
EXECUTED as of this ___ day of December, 1997.
UNION COMMUNITY BANCORP
By: /s/ Joseph E. Timmons
Joseph E. Timmons, President
-11-
SUBSIDIARIES OF UNION COMMUNITY BANCORP
Subsidiaries of Union Community Bancorp:
Name Jurisdiction of Incorporation
Union Federal Savings and Loan Association Federal
UFS Service Corp. Indiana
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCETO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001046183
<NAME> UNION COMMUNITY BANCORP
<MULTIPLIER> 1,000
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
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<INCOME-PRE-EXTRAORDINARY> 1,198
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