SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant: Yes.
Filed by a Party other than the Registrant: No.
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as Permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
UNION COMMUNITY BANCORP
(Name Of Registrant As Specified In Its Charter)
UNION COMMUNITY BANCORP
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
(1) Title of each class of securities to which transaction
applies: N/A
(2) Aggregate number of securities to which transaction
applies: N/A
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth
the amount on which the filing fee is calculated and
state how it was determined): N/A
(4) Proposed maximum aggregate value of transaction: N/A
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing. N/A
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
Union Community Bancorp
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2400
----------------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
To Be Held On June 30, 1998
Notice is hereby given that the Annual Meeting of Shareholders of Union
Community Bancorp (the "Holding Company") will be held at the Holding Company's
principal office at 221 E. Main Street, Crawfordsville, Indiana, on Tuesday,
June 30, 1998, at 3:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of all seven of the directors
of the Holding Company to serve staggered terms, with terms
expiring in 1999, 2000 and 2001.
2. Approval of Stock Option Plan. Approval and ratification of
the Union Community Bancorp Stock Option Plan (the "Option
Plan").
3. Approval of Recognition and Retention Plan and Trust. Approval
and ratification of the Union Federal Savings and Loan
Association Recognition and Retention Plan and Trust (the
"RRP").
4. Other Business. Such other matters as may properly come before
the meeting or any adjournment thereof.
Shareholders of record at the close of business on April 28, 1998, are
entitled to vote at the meeting or any adjournment thereof.
We urge you to read the enclosed Proxy Statement carefully so that you may
be informed about the business to come before the meeting, or any adjournment
thereof. At your earliest convenience, please sign and return the accompanying
proxy in the postage-paid envelope furnished for that purpose.
A copy of our Annual Report for the fiscal year ended December 31, 1997, is
enclosed. The Annual Report is not a part of the proxy soliciting material
enclosed with this letter.
By Order of the Board of Directors
/s/ Joseph E. Timmons
Joseph E. Timmons,
President and Chief Executive Officer
Crawfordsville, Indiana
May 15, 1998
IT IS IMPORTANT THAT THE PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT
YOU PLAN TO BE PRESENT IN PERSON AT THE ANNUAL MEETING, PLEASE SIGN, DATE AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
<PAGE>
Union Community Bancorp
221 E. Main Street
Crawfordsville, Indiana 47933
(765) 362-2400
---------------
PROXY STATEMENT
---------------
FOR
ANNUAL MEETING OF SHAREHOLDERS
June 30, 1998
This Proxy Statement is being furnished to the holders of common stock,
without par value (the "Common Stock"), of Union Community Bancorp (the "Holding
Company"), an Indiana corporation, in connection with the solicitation of
proxies by the Board of Directors of the Holding Company to be voted at the
Annual Meeting of Shareholders to be held at 3:00 p.m., Eastern Standard Time,
on June 30, 1998, at the Holding Company's principal office at 221 E. Main
Street, Crawfordsville, Indiana, and at any adjournment of such meeting. The
principal asset of the Holding Company consists of 100% of the issued and
outstanding shares of common stock, $.01 par value per share, of Union Federal
Savings and Loan Association (the "Association"). This Proxy Statement is
expected to be mailed to the shareholders of the Holding Company on or about May
15, 1998.
The proxy solicited hereby, if properly signed and returned to the Holding
Company and not revoked prior to its use, will be voted in accordance with the
instructions contained therein. If no contrary instructions are given, each
proxy received will be voted for each of the matters described below and, upon
the transaction of such other business as may properly come before the meeting,
in accordance with the best judgment of the persons appointed as proxies.
Any shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of the Holding Company
written notice thereof (Denise E. Swearingen, 221 E. Main Street,
Crawfordsville, Indiana 47933), (ii) submitting a duly executed proxy bearing a
later date, or (iii) by appearing at the Annual Meeting and giving the Secretary
notice of his or her intention to vote in person. Proxies solicited hereby may
be exercised only at the Annual Meeting and any adjournment thereof and will not
be used for any other meeting.
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on April 28, 1998
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 3,041,750 shares of the Common Stock issued and
outstanding, and the Holding Company had no other class of equity securities
outstanding. Each share of Common Stock is entitled to one vote at the Annual
Meeting on all matters properly presented at the Annual Meeting. The holders of
over 50% of the outstanding shares of Common Stock as of the Voting Record Date
must be present in person or by proxy at the Annual Meeting to constitute a
quorum. In determining whether a quorum is present, shareholders who abstain,
cast broker non-votes, or withhold authority to vote on one or more director
nominees will be deemed present at the Annual Meeting.
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of April 28, 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 Beneficial Owner(1) Beneficially Owned of Class
- ---------------------- ------------------ --------
Home Federal Savings Bank, as Trustee
501 Washington Street
Columbus, Indiana 47201 184,000 (2) 6.0%
(1) The information in this chart is based on a Schedule 13G Report filed
by the above-listed person with the Securities and Exchange Commission
(the "SEC") containing information concerning shares held by it. It
does not reflect any changes in those shareholdings which may have
occurred since the date of such filing.
(2) These shares are held by the Trustee of the Union Community Bancorp
Employee Stock Ownership Plan and Trust (the "ESOP"). The Employees
participating in that Plan are entitled to instruct the Trustee how to
vote shares held in their accounts under the Plan. Unallocated shares
held in a suspense account under the Plan are required under the Plan
terms to be voted by the Trustee in the same proportion as allocated
shares are voted. Prior to the initial allocation of shares, the ESOP
shares will be voted by the ESOP committee.
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors consists of seven members. The By-Laws provide that
the Board of Directors is to be divided into three classes as nearly equal in
number as possible. The members of each class are to be elected for a term of
three years and until their successors are elected and qualified. One class of
directors is to be elected annually. Directors must have their principal
domicile in Montgomery County, Indiana, must have had a loan or deposit
relationship with the Association for a continuous period of 12 months prior to
their nomination to the Board (or in the case of directors in office on
September 11, 1997, prior to that date), and non-employee directors must have
served as a member of a civic or community organization based in Montgomery
County, Indiana for at least a continuous period of 12 months during the five
years prior to their nomination to the Board. Since this is the first Annual
Meeting of Shareholders following the organization of the Holding Company, it is
necessary to elect all of the directors for the terms set forth below.
<PAGE>
Unless otherwise directed, each proxy executed and returned by a
shareholder will be voted for the election of the nominees listed below. If any
person named as a nominee should be unable or unwilling to stand for election at
the time of the Annual Meeting, the proxy holders will nominate and vote for a
replacement nominee recommended by the Board of Directors. At this time, the
Board of Directors knows of no reason why the nominees listed below may not be
able to serve as directors if elected.
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 the
Voting Record Date. Unless otherwise indicated, each nominee has sole investment
and/or voting power with respect to the shares shown as beneficially owned by
him. No nominee for director is related to any other nominee for director or
executive officer of the Holding Company by blood, marriage, or adoption, and
there are no arrangements or understandings between any nominee and any other
person pursuant to which such nominee was selected. 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>
Director Common Stock
Expiration of Director of the of the Beneficially
Term as Holding Association Owned as of Percentage
Name Director Company Since Since April 28, 1998 of Class(1)
- --------------------- ------------- --------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Director
Nominees
- ------------------
Philip L. Boots 2001 1997 1991 12,100 (2) .4%
Marvin L. Burkett 1999 1997 1975 6,000 (3) .2%
Phillip E. Grush 1999 1997 1982 15,500 (4) .5%
Samuel H. Hildebrand 2000 1997 1995 16,418 .5%
John M. Horner 2001 1997 1979 22,500 (5) .7%
Harry A. Siamas 2000 1997 1994 11,300 (6) .4%
Joseph E. Timmons 1999 1997 1973 30,417 (7) 1.0%
All directors and
executive officers
as a group (9 persons) 119,773 3.9%
</TABLE>
<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 10,000 shares owned by a corporation controlled by Mr. Boots.
(3) Includes 300 shares owned jointly by Mr. Burkett and his wife.
(4) Includes 4,500 shares jointly owned by Mr. Grush and his wife.
(5) Includes 3,601 shares owned by a corporation controlled by Mr. Horner,
3,000 shares owned by a partnership controlled by Mr. Horner, 14,000
shares owned jointly by Mr. Horner and his wife, and 890 shares held
jointly by Mr. Horner or his wife and their children or by Mr. Horner
as custodian for his minor grandchildren.
(6) Includes 1,000 shares held jointly by Mr. Siamas and his aunt and 300
shares held by his wife as custodian for their minor children.
(7) These shares are held jointly by Mr. Timmons and his wife.
Presented below is certain information concerning the director nominees of
the Holding Company:
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.
The Association also has a director emeritus program pursuant to which our
former directors may continue to serve as advisors to the Board of Directors
upon their retirement or resignation from the Board. Currently, Lester B. Sommer
serves as a director emeritus.
<PAGE>
THE DIRECTORS SHALL BE ELECTED UPON RECEIPT OF A PLURALITY OF VOTES CAST AT
THE ANNUAL SHAREHOLDERS MEETING. PLURALITY MEANS THAT INDIVIDUALS WHO RECEIVE
THE LARGEST NUMBER OF VOTES CAST ARE ELECTED UP TO THE MAXIMUM NUMBER OF
DIRECTORS TO BE CHOSEN AT THE MEETING. ABSTENTIONS, BROKER NON-VOTES, AND
INSTRUCTIONS ON THE ACCOMPANYING PROXY TO WITHHOLD AUTHORITY TO VOTE FOR ONE OR
MORE OF THE NOMINEES WILL RESULT IN THE RESPECTIVE NOMINEE RECEIVING FEWER
VOTES. HOWEVER, THE NUMBER OF VOTES OTHERWISE RECEIVED BY THE NOMINEE WILL NOT
BE REDUCED BY SUCH ACTION.
The Board of Directors and its Committees
During the fiscal year ended December 31, 1997, the Board of Directors of
the Holding Company acted by written consent two times. No director attended
fewer than 75% of the aggregate total number of meetings during the last fiscal
year of the Board of Directors of the Holding Company held while he served as
director and of meetings of committees which he served during that fiscal year.
The Board of Directors of the Holding Company has an Audit Committee and a Stock
Compensation Committee, among its other Board Committees. All committee members
are appointed by the Board of Directors.
The Audit Committee, comprised of all directors except Joseph E. Timmons,
recommends the appointment of the Holding Company's independent accountants, and
meets with them to outline the scope and review the results of such audit. The
Audit Committee did not meet during the fiscal year ended December 31, 1997,
because the stock conversion of the Association did not close until December 29,
1997.
The Stock Compensation Committee administers the Option Plan and the RRP
which are being submitted to a vote of the shareholders at the Annual Meeting.
The members of that Committee are Messrs. Boots, Burkett, Grush, Hildebrand, and
Horner. It did not meet during fiscal 1997 because the plans were not adopted
until March 11, 1998.
The Board of Directors of the Holding Company nominated the slate of
directors set forth in the Proxy Statement. Although the Board of Directors of
the Holding Company will consider nominees recommended by shareholders, it has
not actively solicited recommendations for nominees from shareholders nor has it
established procedures for this purpose. Directors must satisfy certain
qualification requirements set forth in the Holding Company's By-Laws. Article
III, Section 12 of the Holding Company's By-Laws provides that shareholders
entitled to vote for the election of directors may name nominees for election to
the Board of Directors but there are certain requirements that must be satisfied
in order to do so. Among other things, written notice of a proposed nomination
must be received by the Secretary of the Holding Company not less than 120 days
prior to the Annual Meeting; provided, however, that in the event that less than
130 days' notice or public disclosure of the date of the meeting is given or
made to shareholders (which notice or public disclosure includes the date of the
Annual Meeting specified in the Holding Company's By-Laws if the Annual Meeting
is held on such date), notice must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made.
<PAGE>
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended December 31, 1997, no cash compensation was
paid directly by the Holding Company to any of its executive officers. Each of
such officers was compensated by the Association.
The following tables set forth information as to annual, long term and
other compensation for services in all capacities to the President and Chief
Executive Officer of the Holding Company for the two fiscal years ended December
31, 1997 (the "Named Executive Officer"). There were no other executive officers
of the Holding Company who earned over $100,000 in salary and bonuses during the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal Other Annual All Other
Position Year Salary (1) Bonus Compensation (2) Compensation
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Joseph E. Timmons, President 1997 $108,300 $25,000 -- --
and Chief Executive Officer 1996 $105,000 $20,000 -- --
</TABLE>
(1) This column includes directors fees paid to Mr. Timmons.
(2) 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.
Stock Options
No stock options were granted during fiscal 1997 to, or held as of December
31, 1997 by, the Named Executive Officer. For information concerning grants of
stock options made in fiscal 1998, including a grant of a stock option for
75,000 shares of the Common Stock to Joseph E. Timmons, see "Proposal II--Stock
Option Plan."
Employment Contract
The Association entered into a three-year employment contract with Mr.
Timmons. The contract with Mr. Timmons, effective as of the effective date of
the Conversion, extends annually for an additional one-year term to maintain its
three-year term if the Association'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
salary with the Association prior to the Conversion, 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 the Association's employees. Mr. Timmons may terminate his employment upon 60
days' written notice to the Association. The Association may discharge Mr.
Timmons for cause (as defined in the contract) at any time or in certain
specified events. If the Association 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
<PAGE>
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 the Association'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 the Association 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 the Association, are deemed to be payments
in violation of the "golden parachute" rules of the Internal Revenue Code of
1986, as amended (the "Code"), such payments will be reduced to the largest
amount which would not cause the Association 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
after a change of control of the Holding Company, without cause by the
Association, 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 the Association's confidential business
information and protects the Association from competition by Mr. Timmons should
he voluntarily terminate his employment without cause or be terminated by the
Association for cause.
Compensation of Directors
The Association pays its directors a monthly retainer of $500 plus $250
for each month in which they attend one or more meetings. Total fees paid to its
directors and advisory directors for the year ended December 31, 1997 were
approximately $64,400.
Directors of the Holding Company 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.
Transactions With Certain Related Persons
The Association has followed a policy of offering to their directors,
officers, and employees real estate mortgage loans secured by their principal
residence and other loans. These loans are made in the ordinary course of
business with the same collateral, interest rates and underwriting criteria as
those of comparable transactions prevailing at the time and do not involve more
than the normal risk of collectibility or present other unfavorable features.
Loans to directors, executive officers and their associates totaled
approximately $2.4 million or 5.6% of net worth, at December 31, 1997.
Current law authorizes the Association 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 its employees. At
present, the Association's loans to executive officers, directors, principal
shareholders and employees are made on the same terms generally available to the
public. The Association 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 the Association's 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. The Association's policy
regarding loans to directors and all employees meets the requirements of current
law.
<PAGE>
PROPOSAL II -- STOCK OPTION PLAN
The Board of Directors of the Holding Company adopted the Union Community
Bancorp Stock Option Plan (the "Option Plan") on March 11, 1998. The essential
features of the Option Plan are summarized below, but the Option Plan is set
forth in full in Exhibit A to this Proxy Statement, and all statements made in
this summary are qualified by reference to the full text of the Option Plan.
Purpose
The purpose of the Option Plan is to provide to certain directors, officers
and other key employees of the Holding Company and its subsidiaries (the
"Subsidiaries") (currently approximately 10 persons) a favorable opportunity to
acquire Common Stock of the Holding Company and thereby increase the incentive
of such persons to work for the success of the Holding Company and its
subsidiaries and better enabling such entities to attract or retain capable
directors and executive personnel.
The Option Plan provides for the grant of both incentive stock options
(options that afford favorable tax treatment to recipients upon compliance with
certain restrictions and that do not normally result in tax deductions to the
Holding Company) and options that do not so qualify (non-qualified stock
options).
Administration
The Option Plan is administered, construed and interpreted by a committee
consisting of at least two members of the Holding Company's Board of Directors.
Currently, the Holding Company's Stock Compensation Committee (the "Stock
Compensation Committee") administers the Option Plan. The Stock Compensation
Committee selects the individuals to whom options will be granted and determines
the time of grant, the number of shares of stock to be covered by each option,
the option price, the period within which the option may be exercised, whether
the option is an incentive stock option or non-qualified stock option, and any
other terms and conditions of the options granted. Members of the Stock
Compensation Committee must be nonemployee directors of the Holding Company. The
current members of that Committee are set forth on page 3 of this Proxy
Statement.
Reservation of Shares
The Holding Company has reserved 304,175 shares of its Common Stock for
issuance upon exercise of options to be granted under the Option Plan, and stock
options for 186,000 of such shares have already been granted, subject to and
effective as of the date the Holding Company's shareholders approve the Option
Plan. Shares issued under the Option Plan may be authorized but unissued shares
or treasury shares of the Holding Company. In the event of corporate changes
affecting the Holding Company's Common Stock, such as reorganizations,
recapitalizations, stock splits, stock dividends, mergers, consolidations,
extraordinary distributions or liquidations, the Stock Compensation Committee
may make appropriate adjustments in the number and kind of shares reserved under
the Option Plan and in the option price under, and the number and kind of shares
covered by, outstanding options granted under the Option Plan. Any shares
subject to an option which expires or is terminated before exercise will again
be available for issuance under the Option Plan.
<PAGE>
Options may be granted to officers (including officers who are members of
the Board of Directors), directors, directors emeritus and other key employees
of the Holding Company and its subsidiaries who are materially responsible for
the management or operation of the business of the Holding Company or its
subsidiaries and have provided valuable services to the Holding Company or its
subsidiaries. Such individuals may be granted more than one option under the
Option Plan.
Since its adoption by the Board of Directors, the following incentive stock
options have been granted under the Option Plan. All such options were granted
effective as of the date the Holding Company's shareholders approve the Option
Plan, have an option price per share equal to the average between the high and
low sales prices for a share of the Holding Company's Common Stock ("Market
Value") on that date (or the closest trading date if there is no trading on that
date), and have ten-year terms. These options become exercisable at the rate of
20% per year beginning on the anniversary of the date of grant, subject to
earlier vesting in the event of the death or disability of the option holder,
and subject to any requirement to extend the vesting period to preserve
incentive stock option treatment. Such grants of incentive stock options are as
follows:
Shares Subject
Optionee To Options
-------- ----------
Joseph E. Timmons 75,000
All other executive officers as a group
(2 persons) 20,000
Total 95,000
In addition, non-qualified stock options were granted to the six directors
and one director emeritus of the Holding Company who are not employees of the
Holding Company or its subsidiaries ("Outside Directors"). These options for
such Outside Directors were granted effective as of the date the Holding
Company's shareholders approve the Option Plan and are each non-qualified stock
options to purchase 13,000 shares of the Holding Company Common Stock at the
Market Value of such shares on such date. The terms of these options end ten
years and one day following the date of grant, and became exercisable at the
rate of 20% per year beginning on the anniversary of the date of the grant,
subject to earlier vesting in the event of the death or disability of the option
holder. At May 5, 1998, the last sale price for a share of the Holding Company's
Common Stock was $15.50 per share.
Terms of the Options
Stock Option Price. The price to be paid for shares of Common Stock upon
the exercise of each incentive stock option shall not be less than the fair
market value of such shares on the date on which the option is granted.
Incentive stock options granted to holders of more than 10% of the combined
voting power of all classes of stock of the Holding Company may be granted at an
option price no less than 110% of the fair market value of the stock on the date
of grant.
Option Term. No option may have a term longer than ten years and one day
from the date of grant. However, under the Code, incentive stock options may not
have terms in excess of ten years. Incentive stock options granted to holders of
more than 10% of the combined voting power of all classes of stock of the
Holding Company may not have terms in excess of five years.
<PAGE>
Exercise of Option. The option price of each share of stock is to be paid
in full in cash at the time of exercise. Under certain circumstances, the Option
Plan permits optionees to deliver a notice to their broker to deliver to the
Holding Company the total option price in cash and the amount of any taxes to be
withheld from the optionee's compensation as a result of any withholding tax
obligation of the Holding Company. Beginning on December 29, 2000, payment of
the option price may also be effected by tendering whole shares of the Holding
Company's Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which the option
is being exercised. Options may be exercisable in full at any time during their
term or in such installments, on a cumulative basis, as the Stock Compensation
Committee may determine, except that no option may be exercised at any time as
to fewer than 100 shares unless the exercise is with respect to an entire
residue of fewer than 100 shares, no option may be exercised during the first
six months of its term, and options are exercisable no earlier than 20% per year
beginning on the anniversary of the date of grant of such options, except in the
event of death or disability.
Exercise of Options by Other Than Outside Directors. Except as provided
below, upon termination of an optionholder's employment by the Holding Company
and its subsidiaries, all rights under any options granted to him but not yet
exercised terminate. In the event that an optionee retires pursuant to any then
existing pension plan of the Holding Company or its subsidiaries, his option may
be exercised by him in whole or in part within three years after his retirement
until the expiration of the option term fixed by the Committee, to the extent
the option was otherwise exercisable by him at his date of retirement; provided,
however, that if he remains a director or director emeritus of the Holding
Company or any of its subsidiaries the option granted to him continues to vest
while he serves as a director or director emeritus and he may exercise such
option until the later of (a) three years after his retirement or (b) six months
after he ceases to be a director or director emeritus of the Holding Company or
any of its subsidiaries. If an optionee's employment by the Holding Company and
its subsidiaries terminates by reason of permanent and total disability, his
option may be exercised by him in whole or in part within one year after such
termination of employment, whether or not the option was otherwise exercisable
by him at the time of such termination of employment. If the optionee dies while
employed by the Holding Company or its subsidiaries, within three years after
his retirement (or, if later, six months following his termination of service as
a director or director emeritus of the Holding Company or its subsidiaries), or
within one year after his termination of employment because of permanent and
total disability, his option may be exercised by his estate or by the person or
persons entitled thereto by will or by the applicable laws of descent or
distribution at any time within one year after the date of such death, whether
or not the option was otherwise exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
Exercise of Options by Outside Directors. Options granted to Outside
Directors terminate six months after the date such Outside Director ceases to be
a director and director emeritus of the Holding Company and the subsidiaries for
any reason. If an optionee who is an Outside Director ceases to be a director
and a director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised in whole or in part
within one year of such termination of service, whether or not the option was
otherwise exercisable by him at the time of such termination of service. In the
event of the death of an Outside Director while serving as a director or
director emeritus of the Holding Company or a subsidiary, within six months
after he ceases to be a director or a director emeritus of the Holding Company
<PAGE>
or the subsidiaries, or within one year after he ceases to be a director and a
director emeritus of the Holding Company or a subsidiary by reason of
disability, any option granted to him may be exercised by his estate or by the
person or persons entitled thereto by will or by the applicable laws of descent
or distribution at any time within one year after the date of such death,
whether or not the option was exercisable by the optionee at the date of his
death. Notwithstanding the foregoing, in no event may any option be exercised
after the expiration of the option term set by the Stock Compensation Committee.
Nontransferability of Option. Options may not be transferred except by will
or the laws of descent and distribution or pursuant to a qualified domestic
relations order. During the lifetime of an optionee, they may be exercised only
by him or his guardian or legal representative.
Maximum Incentive Stock Options. The aggregate fair market value of stock
with respect to which incentive stock options are exercisable for the first time
by an optionee during any calendar year under the Option Plan may not exceed
$100,000. For purposes of these computations, the fair market value of the
shares is to be determined as of the date the option is granted and computed in
the manner determined by the Stock Compensation Committee consistent with the
requirements of the Code. This limitation does not apply to non-qualified stock
options granted under the Option Plan.
Other Provisions
The Stock Compensation Committee may provide for such other terms,
provisions and conditions of an option as are not inconsistent with the Option
Plan. The Stock Compensation Committee may also prescribe, and amend, waive and
rescind rules and regulations relating to the Option Plan, may accelerate the
vesting of stock options granted the Option Plan, may make amendments or
modifications in the terms and conditions (including exercisability) of the
options relating to the effect of termination of employment of the optionees,
and may waive any restrictions or conditions applicable to any option or the
exercise thereof.
Amendment and Termination
The Board of Directors of the Holding Company may amend the Option Plan
from time to time, and, with the consent of the optionee, the terms and
provisions of his option, provided, however, that (1) no amendment may, without
the consent of an optionee, make any changes in any outstanding option which
would adversely affect the rights of the optionee and (2) without approval of
the holders of at least a majority of the shares of the Holding Company voting
in person or by proxy at a duly constituted meeting, or adjournment thereof, the
following changes in the Option Plan may not be made: an increase in the number
of shares reserved for issuance under the Option Plan (except as permitted by
the antidilutive provisions in the Option Plan); an extension of the option
terms to more than 10 years and one day from the date of grant of the option; or
a material modification of the class of employees eligible to receive options
under the Option Plan. The Board of Directors of the Holding Company may
terminate the Option Plan at any time. In any event, no incentive stock options
may be granted under the Stock Option Plan after June 30, 2008.
It is possible that the Option Plan will be amended after December 28,
1998, to permit stock options to vest upon a change in control of the Holding
Company or an optionee's retirement or at some earlier time. Such an amendment
could be made without seeking shareholder approval.
<PAGE>
Federal Income Tax Consequences
The grant of incentive and non-qualified stock options will have no federal
tax consequences to the Holding Company or the optionee. Moreover, if an
incentive stock option is exercised (a) while the employee is employed by the
Holding Company or its subsidiaries, (b) within three months after the optionee
ceases to be an employee of the Holding Company or its subsidiaries, (c) after
the optionee's death, or (d) within one year after the optionee ceases to be an
employee of the Holding Company or its subsidiaries if the optionee's employment
is terminated because of permanent and total disability (within the meaning of
ss. 22(e)(3) of the Code), the exercise of the incentive stock option will
ordinarily have no federal income tax consequences to the Holding Company or the
optionee. However, the amount by which the fair market value of the shares at
the time of exercise exceeds the option price of the option will, along with
other specified items, be considered taxable income in the taxable year of the
optionee in which the option was exercised for purposes of determining the
applicability of the alternative minimum tax. As a result, the exercise of an
incentive stock option may subject an optionee to an alternative minimum tax
depending on that optionee's particular circumstances.
On the other hand, the recipient of a non-qualified stock option generally
will realize taxable ordinary income at the time of exercise of his option in an
amount equal to the excess of the fair market value of the shares acquired at
the time of such exercise over the option price. A like amount is generally
deductible by the Holding Company for federal income tax purposes as of that
date, as long as the Holding Company withholds federal income tax with respect
to that taxable amount, assuming the optionholder's income is subject to income
tax witholding by the Holding Company. The Option Plan permits, under certain
circumstances, holders of non-qualified stock options to satisfy their
withholding obligation by having shares equal in value to the applicable
withholding taxes withheld from the shares which they would otherwise receive
upon the exercise of a non-qualified stock option.
Upon the sale of the shares acquired upon the exercise of an incentive
stock option no sooner than two years after the grant of the option and no
sooner than one year after receipt of the shares by the optionee, any capital
gain recognized would be taxed to the optionee at long-term or mid-term rates.
Upon the sale of shares acquired upon the exercise of an incentive stock option
prior to two years after the grant of an option or prior to one year after
receipt of the shares by the optionee, the optionee will generally recognize, in
the year of disposition, ordinary income equal to the lesser of (a) the spread
between the fair market value of the shares on the date of exercise and the
exercise price; and (b) the gain realized upon the disposition of those shares.
The Holding Company will be entitled to a deduction equal to the amount of
income recognized as ordinary income by the optionee, so long as the Holding
Company withholds federal income tax with respect to that taxable amount
(assuming the optionholder's income is subject to income tax witholding by the
Holding Company). If the spread is the basis for determining the amount of
ordinary income realized by the optionee, there will be additional long-term,
mid-term or short-term capital gain realized if the proceeds of such sale exceed
such spread.
Upon the subsequent sale of shares acquired upon exercise of a
non-qualified stock option, the optionholder will recognize long-term capital
gain or loss if the shares are deemed to have been held for more than 18-months,
mid-term capital gain or loss of the shares have been held for more than 12
months but less than 18 months, and short-term capital gain or loss in all other
cases. Currently, long-term capital gains for noncorporate taxpayers are
generally taxed at a maximum rate of 20% and mid-term capital gains for
noncorporate taxpayers are generally taxed at a maximum rate of 28%. Short-term
capital gains are taxed at the same rates as ordinary income.
<PAGE>
Financial Accounting Consequences
At this time, neither the grant of incentive or non-qualified stock options
nor the issuance of shares upon exercise of such options will result in a
compensation expense charge to the Holding Company's earnings for financial
accounting purposes. Option proceeds from the exercise of these options and tax
savings from non-qualified stock options are credited to capital. The Financial
Accounting Standards Board (the "FASB") has adopted rules that require increased
disclosure about the value of stock options in financial statements for the
Holding Company, including their impact on earnings.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE AND
RATIFY THE OPTION PLAN. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT
LEAST A MAJORITY OF THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO
VOTE AT THE ANNUAL MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER
NON-VOTES WILL BE INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE
ON THE PROPOSAL AND ACCORDINGLY TREATED AS "NO" VOTES.
PROPOSAL III -- RECOGNITION AND RETENTION PLAN AND TRUST
The Board of Directors of the Holding Company and the Association adopted
the Union Federal Savings and Loan Association Recognition and Retention Plan
and Trust (the "RRP") on March 11, 1998. The central features of the RRP are
summarized below, but the RRP is set forth in full in Exhibit B to this Proxy
Statement, and all statements made in this summary are qualified by reference to
the full text of the RRP.
Purpose
The purpose of the RRP is to retain directors and key employees of the
Holding Company and its subsidiaries by providing such persons with a
proprietary interest in the Holding Company, as compensation for their
contributions to the Holding Company and its subsidiaries and as an incentive to
make such contributions in the future.
Administration
The RRP is administered by the Stock Compensation Committee (the "Stock
Compensation Committee") of the Holding Company's Board of Directors, which must
at all times consist of at least two directors of the Holding Company, each of
whom is a non-employee director within the meaning of the definition of that
term contained in Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The current members of the Stock Compensation
Committee are set forth on page 3 of this Proxy Statement. The Stock
Compensation Committee selects recipients and establishes terms of awards made
under the RRP. The Stock Compensation Committee's interpretations and
constructions of the RRP provisions or any award made under the RRP are final
and binding.
The Committee may adopt rules or regulations under the RRP. The Trustee of
the RRP is Fifth Third Bank of Central Indiana. The Trustee acquires, holds and
distributes shares of Common Stock and other RRP assets in accordance with the
terms of the RRP.
The Holding Company has agreed to indemnify the Trustee, the Committee
members, and any director of the Holding Company or the Association against
liability for good faith determinations made under the RRP. The Holding Company
has also agreed to indemnify the Trustee for actions under the RRP not
constituting negligence or willful misconduct.
<PAGE>
Eligibility
Employees of the Holding Company and its affiliated corporations who elect
to participate in the RRP ("Affiliates"), the Outside Directors, and future
directors and directors emeritus are eligible to receive awards under the RRP.
The Committee is to consider the position and responsibilities of the eligible
employees and directors, the length and value of their services, their level of
compensation, and any other factors the Committee deems relevant.
Contributions
The Board of Directors of the Association determines the amount or method
of computing the amount of cash contributions to be made to the RRP by the
Association. No employee contributions are permitted.
Investment of Contributions
Contributions made to the RRP are to be invested by the Trustee in Common
Stock, to the fullest extent possible. At the time the Plan became effective,
121,670 shares of the Holding Company's Common Stock were reserved for purchase
under the RRP. Such shares may be authorized but unissued shares, treasury
shares, or issued and outstanding shares. In the event additional authorized but
unissued shares or treasury shares are acquired by the RRP, the interests of
existing shareholders will be diluted. Earnings, gains and losses with respect
to Trust assets (including dividends and distributions payable with respect to
shares of Common Stock) will be allocated to recipients of RRP awards, to the
extent allocable to awards made to those recipients, and, otherwise, to the
general account of the Trust. All expenses and costs of administering the RRP
are to be paid by the Holding Company or its Affiliates.
If the RRP is approved by shareholders, the Association will make
contributions to the RRP in an amount necessary to purchase at least 78,900
shares of the Holding Company's Common Stock on the open market to fund the RRP.
Based on the market price of such Common Stock on May 5, 1998, the amount of
such contribution is estimated to be $15.50. Effective as of the date the RRP is
approved by the Holding Company's shareholders, shares will be awarded to the
following persons in the following amounts:
Recipient of Award Number of Shares Awarded
- ------------------ ------------------------
Joseph E. Timmons 30,000
All other executive officers as a group (2 persons) 12,500
Total 42,500
These awards vest at a rate of 20% per year commencing with the date of the
award, subject to earlier vesting in the event of the death or disability of the
grantee.
In addition, each of the seven Outside Directors of the Holding Company
will receive awards of 5,200 shares as of the date the Plan is approved by the
Holding Company's shareholders. These awards also vest at a rate of 20% per year
commencing with the date of the award, subject to earlier vesting in the event
of the death or disability of the grantee.
<PAGE>
Awards
Under the RRP, awards are granted to eligible employees and directors in
the form of shares of Common Stock held by the RRP. Awards are nontransferable
and nonassignable, other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order, and during the lifetime of the
recipient may only be earned by and paid to him. Unless the Committee provides
otherwise, at the time an RRP award is granted, the shares which are the subject
of the award are to vest and be earned by the recipient at the rate of 20% of
the shares awarded at the end of each full 12 months of service with the
Association after the date of grant of the award. Awards are adjusted for
capital changes such as stock dividends and stock splits. Awards are subject to
the claims of the creditors of the Association until distributed.
Notwithstanding the foregoing, awards will be 100% vested upon termination
of employment or service as a director or director emeritus due to death or
disability. In the event that a grantee terminates employment with the Holding
Company and an Affiliate and service as a director and director emeritus for any
other reason, the nonvested awards will be forfeited. If an employee's
employment or a director's or director emeritus' service is terminated for cause
(as defined in the RRP), or if his conduct would have justified termination for
cause, shares not already delivered to him under the RRP, whether or not vested,
may be forfeited by resolution of the Board of Directors of the Holding Company
or the Association. Earned shares are distributed to recipients as soon as
practicable following the day on which they are earned. When shares become
vested and are actually distributed in accordance with the RRP, the participants
will also receive amounts equal to any accrued dividends and other earnings or
distributions payable with respect thereto.
Voting
Prior to vesting, shares held in the RRP will be voted by the RRP Trustee
taking into account the best interests of the award recipients.
Federal Income Tax Consequences
The Trust should be treated as a grantor trust under the Code and, thus, in
computing the taxable income and credits of the Holding Company, those items of
income, deductions and credits which are attributable to the Trust shall be
taken into account by the Holding Company. When shares become vested in
accordance with the RRP, the participants will recognize income equal to the
fair market value of the Common Stock at that time; provided however that
participants may make a ss. 83(b) election under the Code with respect to all or
part of their awards prior to vesting and in such situations restricted stock
certificates will be delivered to such participants and those participants will
be taxed on the the fair market value of the shares at the time the ss. 83(b)
election is made. The amount of income recognized by the participants will be a
deductible expense for tax purposes for the Holding Company assuming the
employer satisfies its withholding tax obligation with respect to persons
subject to such withholding.
Accounting Treatment
When the Stock Compensation Committee makes an RRP award, an amount equal
to the fair market value at the date of grant of the awarded stock is charged to
compensation expense over the period of the restriction. The unearned portion of
the award is included in the Holding Company's balance sheet as a reduction of
shareholders' equity.
<PAGE>
Amendment or Termination
The Board of Directors of the Holding Company or the Association may amend
or terminate the RRP. The RRP remains in effect until the earlier of 21 years
from its effective date, termination by the Board of Directors as provided
above, or the distribution of all Trust assets.
It is possible that the RRP will be amended after December 28, 1998, to
permit RRP awards to vest upon a change in control of the Holding Company or an
optionee's retirement or at some earlier time. Such an amendment could be made
without seeking shareholder approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE TO APPROVE THE
RRP. SUCH ACTION REQUIRES THE APPROVAL OF THE HOLDERS OF AT LEAST A MAJORITY OF
THE SHARES OF THE HOLDING COMPANY'S COMMON STOCK ENTITLED TO VOTE AT THE ANNUAL
MEETING, OR ANY ADJOURNMENT THEREOF. ABSTENTIONS AND BROKER NON-VOTES WILL BE
INCLUDED IN THE NUMBER OF SHARES PRESENT AND ENTITLED TO VOTE ON THE PROPOSAL
AND ACCORDINGLY TREATED AS "NO" VOTES.
ACCOUNTANTS
Geo. S. Olive & Co. LLC has served as auditors for the Association since
July 1, 1995, and for the Holding Company since its formation in 1997. The
Holding Company believes that a representative of Geo. S. Olive & Co. LLC will
be present at the Annual Meeting with the opportunity to make a statement if he
or she so desires. He or she will also be available to respond to any
appropriate questions shareholders may have. The Board of Directors of the
Holding Company has not yet completed the process of selecting an independent
public accounting firm to audit its books, records and accounts for the fiscal
year ended December 31, 1998.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 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.
There were no filing requirements applicable to the Holding Company's
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act during the fiscal year ended December 31, 1997.
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company must be received at the main office of the
Holding Company for inclusion in the proxy statement no later than 120 days in
advance of March 7, 1999. Any such proposal should be sent to the attention of
the Secretary of the Holding Company at 221 E. Main Street, Crawfordsville,
Indiana 47933.
<PAGE>
OTHER MATTERS
Management is not aware of any business to come before the Annual Meeting
other than those matters described in the Proxy Statement. However, if any other
matters should properly come before the Annual Meeting, it is intended that the
proxies solicited hereby will be voted with respect to those other matters in
accordance with the judgment of the persons voting the proxies.
The cost of solicitation of proxies will be borne by the Holding Company.
The Holding Company will reimburse brokerage firms and other custodians,
nominees and fiduciaries for reasonable expenses incurred by them in sending
proxy material to the beneficial owners of the Common Stock. In addition to
solicitation by mail, directors, officers, and employees of the Holding Company
may solicit proxies personally or by telephone without additional compensation.
Each shareholder is urged to complete, date and sign the proxy and return
it promptly in the enclosed envelope.
By Order of the Board of Directors
/s/ Joseph E. Timmons
Joseph E. Timmons
May 15, 1998
<PAGE>
EXHIBIT A
UNION COMMUNITY BANCORP
STOCK OPTION PLAN
1. Purpose. The purpose of the Union Community Bancorp Stock Option
Plan (the "Plan") is to provide to directors, officers and other key employees
of Union Community Bancorp (the "Holding Company") and its majority-owned and
wholly-owned subsidiaries (individually a "Subsidiary" and collectively the
"Subsidiaries"), including, but not limited to, Union Federal Savings and Loan
Association upon its conversion to stock form ("Union"), who are materially
responsible for the management or operation of the business of the Holding
Company or a Subsidiary and have provided valuable services to the Holding
Company or a Subsidiary, a favorable opportunity to acquire Common Stock,
without par value ("Common Stock"), of the Holding Company, thereby providing
them with an increased incentive to work for the success of the Holding Company
and its Subsidiaries and better enabling each such entity to attract and retain
capable directors and executive personnel.
2. Administration of the Plan. The Plan shall be administered,
construed and interpreted by a committee (the "Committee") consisting of at
least two members of the Board of Directors of the Holding Company, each of whom
is a "Non-Employee Director" within the meaning of the definition of that term
contained in Reg. ss. 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "1934 Act"). The members of the Committee shall be
designated from time to time by the Board of Directors of the Holding Company.
The decision of a majority of the members of the Committee shall constitute the
decision of the Committee, and the Committee may act either at a meeting at
which a majority of the members of the Committee is present or by a written
consent signed by all members of the Committee. The Committee shall have the
sole, final and conclusive authority to determine, consistent with and subject
to the provisions of the Plan:
(a) the individuals (the "Optionees") to whom options or successive
options shall be granted under the Plan;
(b) the time when options shall be granted hereunder;
(c) the number of shares of Common Stock to be covered under each
option;
(d) the option price to be paid upon the exercise of each option;
(e) the period within which each such option may be exercised;
(f) the extent to which an option is an incentive stock option or a
non-qualified stock option; and
(g) the terms and conditions of the respective agreements by which
options granted shall be evidenced.
The Committee shall also have authority to prescribe, amend, waive, and rescind
rules and regulations relating to the Plan, to accelerate the vesting of any
stock options made hereunder (subject to Office of Thrift and Supervision
regulations), to make amendments or modifications in the terms and conditions
(including exercisability) of the options relating to the effect of termination
of employment of the optionee (subject to the last sentence of Section 9
hereof), to waive any restrictions or conditions applicable to any option or the
exercise thereof, and to make all other determinations necessary or advisable in
the administration of the Plan.
<PAGE>
3. Eligibility. The Committee may, consistent with the purposes of the
Plan, grant options to officers and other key employees and directors or
directors emeritus (whether or not also employees) of the Holding Company or of
a Subsidiary who in the opinion of the Committee are from time to time
materially responsible for the management or operation of the business of the
Holding Company or of a Subsidiary and have provided valuable services to the
Holding Company or a Subsidiary; provided, however, that in no event may any
employee who owns (after application of the ownership rules in ss. 425(d) of the
Internal Revenue Code of 1986, as amended (the "Code")) shares of stock
possessing more than 10 percent of the total combined voting power of all
classes of stock of the Holding Company or any of its Subsidiaries be granted an
incentive stock option hereunder unless at the time such option is granted the
option price is at least 110% of the fair market value of the stock subject to
the option and such option by its terms is not exercisable after the expiration
of five (5) years from the date such option is granted. Subject to the
provisions of Section 7 hereof, an individual who has been granted an option
under the Plan (an "Optionee"), if he is otherwise eligible, may be granted an
additional option or options if the Committee shall so determine.
4. Stock Subject to the Plan. There shall be reserved for issuance upon
the exercise of options granted under the Plan, shares of Common Stock of the
Holding Company equal to 10% of the total number of shares of Common Stock
issued by the Holding Company upon the conversion of Union from mutual to stock
form, which may be authorized but unissued shares or treasury shares of the
Holding Company. Subject to Section 7 hereof, the shares for which options may
be granted under the Plan shall not exceed that number. If any option shall
expire or terminate or be surrendered for any reason without having been
exercised in full, the unpurchased shares subject thereto shall (unless the Plan
shall have terminated) become available for other options under the Plan.
5. Terms of Options. Each option granted under the Plan shall be
subject to the following terms and conditions and to such other terms and
conditions not inconsistent therewith as the Committee may deem appropriate in
each case:
(a) Option Price. The price to be paid for shares of stock
upon the exercise of each option shall be determined by the Committee
at the time such option is granted, but such price in no event shall be
less than the fair market value, as determined by the Committee
consistent with Treas. Reg. ss. 20.2031-2 and any requirements of ss.
422A of the Code, of such stock on the date on which such option is
granted.
(b) Period for Exercise of Option. An option shall not be
exercisable after the expiration of such period as shall be fixed by
the Committee at the time of the grant thereof, but such period in no
event shall exceed ten (10) years and one day from the date on which
such option is granted; provided, that incentive stock options granted
hereunder shall have terms not in excess of ten (10) years and
non-qualified options shall be for a period of not in excess of ten
(10) years and one day from the date of grant thereof. Options shall be
subject to earlier termination as hereinafter provided.
<PAGE>
(c) Exercise of Options. The option price of each share of
stock purchased upon exercise of an option shall be paid in full at the
time of such exercise. Payment may be in (i) cash, (ii) if the Optionee
may do so in conformity with Regulation T (12 C.F.R. ss. 220.3(e)(4))
without violating ss.16(b) or ss. 16(c) of the 1934 Act, pursuant to a
broker's cashless exercise procedure, by delivering a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Holding Company the total option price in cash
and, if desired, the amount of any taxes to be withheld from the
Optionee's compensation as a result of any withholding tax obligation
of the Holding Company or any of its Subsidiaries, as specified in such
notice, or (iii) beginning on a date which is three years following
Union's conversion from mutual to stock form and with the approval of
the Committee, by tendering whole shares of the Holding Company's
Common Stock owned by the Optionee and cash having a fair market value
equal to the cash exercise price of the shares with respect to which
the option is being exercised. For this purpose, any shares so tendered
by an Optionee shall be deemed to have a fair market value equal to the
mean between the highest and lowest quoted selling prices for the
shares on the date of exercise of the option (or if there were no sales
on such date the weighted average of the means between the highest and
lowest quoted selling prices for the shares on the nearest date before
and the nearest after the date of exercise of the option as prescribed
by Treas. Reg. ss. 20-2031-2), as reported in The Wall Street Journal
or a similar publication selected by the Committee. The Committee shall
have the authority to grant options exercisable in full at any time
during their term, or exercisable in such installments at such times
during their term as the Committee may determine; provided, however,
that options shall not be exercisable during the first six (6) months
of their term, and provided further that options shall become
exercisable no earlier than at the rate of 20% per year beginning on
the anniversary of the date of grant of such options, subject to
earlier vesting in the event of death or disability. Installments not
purchased in earlier periods shall be cumulated and be available for
purchase in later periods. Subject to the other provisions of this
Plan, an option may be exercised at any time or from time to time
during the term of the option as to any or all whole shares which have
become subject to purchase pursuant to the terms of the option or the
Plan, but not at any time as to fewer than one hundred (100) shares
unless the remaining shares which have become subject to purchase are
fewer than one hundred (100) shares. An option may be exercised only by
written notice to the Holding Company, mailed to the attention of its
Secretary, signed by the Optionee (or such other person or persons as
shall demonstrate to the Holding Company his or their right to exercise
the option), specifying the number of shares in respect of which it is
being exercised, and accompanied by payment in full in either cash or
by check in the amount of the aggregate purchase price therefor, by
delivery of the irrevocable broker instructions referred to above, or,
if the Committee has approved the use of the stock swap feature
provided for above, followed as soon as practicable by the delivery of
the option price for such shares.
<PAGE>
(d) Certificates. The certificate or certificates for the
shares issuable upon an exercise of an option shall be issued as
promptly as practicable after such exercise. An Optionee shall not have
any rights of a shareholder in respect to the shares of stock subject
to an option until the date of issuance of a stock certificate to him
for such shares. In no case may a fraction of a share be purchased or
issued under the Plan, but if, upon the exercise of an option, a
fractional share would otherwise be issuable, the Holding Company shall
pay cash in lieu thereof.
(e) Termination of Option. If an Optionee (other than a
director or director emeritus of the Holding Company or its
Subsidiaries who is not an employee of the Holding Company or its
Subsidiaries ("Outside Director")) ceases to be an employee of the
Holding Company and the Subsidiaries for any reason other than
retirement, permanent and total disability (within the meaning of ss.
22(e)(3) of the Code), or death, any option granted to him shall
forthwith terminate. Leave of absence approved by the Committee shall
not constitute cessation of employment. If an Optionee (other than an
Outside Director) ceases to be an employee of the Holding Company and
the Subsidiaries by reason of retirement, any option granted to him may
be exercised by him in whole or in part within three (3) years after
the date of his retirement, to the extent the option was otherwise
exercisable at the date of his retirement; provided, however, that if
such employee remains a director or director emeritus of the Holding
Company, the option granted to him shall continue to vest while he
serves as a director or director emeritus and may be exercised by him
in whole or in part until the later of (a) three (3) years after the
date of his retirement, or (b) six months after his service as a
director or director emeritus of the Holding Company terminates. (The
term "retirement" as used herein means such termination of employment
as shall entitle such individual to early or normal retirement benefits
under any then existing pension plan of the Holding Company or a
Subsidiary.) If an Optionee (other than an Outside Director) ceases to
be an employee of the Holding Company and the Subsidiaries by reason of
permanent and total disability (within the meaning of ss. 22(e)(3) of
the Code), any option granted to him may be exercised by him in whole
or in part within one (1) year after the date of his termination of
employment by reason of such disability whether or not the option was
otherwise exercisable at the date of such termination. Options granted
to Outside Directors shall cease to be exercisable six (6) months after
the date such Outside Director is no longer a director or director
emeritus of the Holding Company or its Subsidiaries for any reason
other than death or disability. If an Optionee who is an Outside
Director ceases to be a director or a director emeritus of the Holding
Company or its Subsidiaries by reason of disability, any option granted
to him may be exercised in whole or in part within one (1) year after
the date the Optionee ceases to be a director or a director emeritus by
reason of such disability, whether or not the option was otherwise
exercisable at such date. In the event of the death of an Optionee
while in the employ or service as a director or director emeritus of
the Holding Company or a Subsidiary, or, if the Optionee is not an
Outside Director, within three (3) years after the date of his
retirement (or, if later, six months following his termination of
service as a director or director emeritus of the Holding Company or
its Subsidiaries) or within one (1) year after the termination of his
employment by reason of permanent and total disability (within the
meaning of ss. 22(e)(3) of the Code), or, if the Optionee is an Outside
<PAGE>
Director, within six (6) months after he is no longer a director or
director emeritus of the Holding Company or its Subsidiaries for
reasons other than disability or, within one (1) year after the
termination of his service by reason of disability, any option granted
to him may be exercised in whole or in part at any time within one (1)
year after the date of such death by the executor or administrator of
his estate or by the person or persons entitled to the option by will
or by applicable laws of descent and distribution until the expiration
of the option term as fixed by the Committee, whether or not the option
was otherwise exercisable at the date of his death. Notwithstanding the
foregoing provisions of this subsection (e), no option shall in any
event be exercisable after the expiration of the period fixed by the
Committee in accordance with subsection (b) above.
(f) Nontransferability of Option. No option may be transferred
by the Optionee otherwise than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and during the lifetime of the
Optionee options shall be exercisable only by the Optionee or his
guardian or legal representative.
(g) No Right to Continued Service. Nothing in this Plan or in
any agreement entered into pursuant hereto shall confer on any person
any right to continue in the employ or service of the Holding Company
or its Subsidiaries or affect any rights the Holding Company, a
Subsidiary, or the shareholders of the Holding Company may have to
terminate his service at any time.
(h) Maximum Incentive Stock Options. The aggregate fair market
value of stock with respect to which incentive stock options (within
the meaning of ss. 422A of the Code) are exercisable for the first time
by an Optionee during any calendar year under the Plan or any other
plan of the Holding Company or its Subsidiaries shall not exceed
$100,000. For this purpose, the fair market value of such shares shall
be determined as of the date the option is granted and shall be
computed in such manner as shall be determined by the Committee,
consistent with the requirements of ss. 422A of the Code.
(i) Agreement. Each option shall be evidenced by an agreement
between the Optionee and the Holding Company which shall provide, among
other things, that, with respect to incentive stock options, the
Optionee will advise the Holding Company immediately upon any sale or
transfer of the shares of Common Stock received upon exercise of the
option to the extent such sale or transfer takes place prior to the
later of (a) two (2) years from the date of grant or (b) one (1) year
from the date of exercise.
<PAGE>
(j) Investment Representations. Unless the shares subject to
an option are registered under applicable federal and state securities
laws, each Optionee by accepting an option shall be deemed to agree for
himself and his legal representatives that any option granted to him
and any and all shares of Common Stock purchased upon the exercise of
the option shall be acquired for investment and not with a view to, or
for the sale in connection with, any distribution thereof, and each
notice of the exercise of any portion of an option shall be accompanied
by a representation in writing, signed by the Optionee or his legal
representatives, as the case may be, that the shares of Common Stock
are being acquired in good faith for investment and not with a view to,
or for sale in connection with, any distribution thereof (except in
case of the Optionee's legal representatives for distribution, but not
for sale, to his legal heirs, legatees and other testamentary
beneficiaries). Any shares issued pursuant to an exercise of an option
may bear a legend evidencing such representations and restrictions.
6. Incentive Stock Options and Non-Qualified Stock Options. Options
granted under the Plan may be incentive stock options under ss. 422A of the Code
or non-qualified stock options, provided, however, that Outside Directors shall
be granted only non-qualified stock options. All options granted hereunder will
be clearly identified as either incentive stock options or non-qualified stock
options. In no event will the exercise of an incentive stock option affect the
right to exercise any non-qualified stock option, nor shall the exercise of any
non-qualified stock option affect the right to exercise any incentive stock
option. Nothing in this Plan shall be construed to prohibit the grant of
incentive stock options and non-qualified stock options to the same person,
provided, further, that incentive stock options and non-qualified stock options
shall not be granted in a manner whereby the exercise of one non-qualified stock
option or incentive stock option affects the exercisability of the other.
7. Adjustment of Shares. In the event of any change after the effective
date of the Plan in the outstanding stock of the Holding Company by reason of
any reorganization, recapitalization, stock split, stock dividend, combination
of shares, exchange of shares, merger or consolidation, liquidation,
extraordinary distribution (consisting of cash, securities, or other assets), or
any other change after the effective date of the Plan in the nature of the
shares of stock of the Holding Company, the Committee shall determine what
changes, if any, are appropriate in the number and kind of shares reserved under
the Plan, and the Committee shall determine what changes, if any, are
appropriate in the option price under and the number and kind of shares covered
by outstanding options granted under the Plan. Any determination of the
Committee hereunder shall be conclusive.
8. Tax Withholding. Whenever the Holding Company proposes or is
required to issue or transfer shares of Common Stock under the Plan, the Holding
Company shall have the right to require the Optionee or his or her legal
representative to remit to the Holding Company an amount sufficient to satisfy
any federal, state and/or local withholding tax requirements prior to the
delivery of any certificate or certificates for such shares, and whenever under
the Plan payments are to be made in cash, such payments shall be net of an
amount sufficient to satisfy any federal, state and/or local withholding tax
requirements. If permitted by the Committee and pursuant to procedures
established by the Committee, an Optionee may make a written election to have
shares of Common Stock having an aggregate fair market value, as determined by
the Committee, consistent with the requirements of Treas. Reg. ss. 20.2031-2,
sufficient to satisfy the applicable withholding taxes, withheld from the shares
otherwise to be received upon the exercise of a non-qualified option.
<PAGE>
9. Amendment. Subject to Section 13, the Board of Directors of the
Holding Company may amend the Plan from time to time and, with the consent of
the Optionee, the terms and provisions of his option, except that without the
approval of the holders of at least a majority of the shares of the Holding
Company voting in person or by proxy at a duly constituted meeting or
adjournment thereof:
(a) the number of shares of stock which may be reserved for
issuance under the Plan may not be increased except as provided in
Section 7 hereof;
(b) the period during which an option may be exercised may not
be extended beyond ten (10) years and one day from the date on which
such option was granted; and
(c) the class of persons to whom options may be granted under
the Plan shall not be modified materially.
No amendment of the Plan, however, may, without the consent of the
Optionees, make any changes in any outstanding options theretofore granted under
the Plan which would adversely affect the rights of such Optionees.
10. Termination. The Board of Directors of the Holding Company may
terminate the Plan at any time and no option shall be granted thereafter. Such
termination, however, shall not affect the validity of any option theretofore
granted under the Plan. In any event, no incentive stock option may be granted
under the Plan after the date which is ten (10) years from the effective date of
the Plan.
11. Successors. This Plan shall be binding upon the successors and
assigns of the Holding Company.
12. Governing Law. The terms of any options granted hereunder and the
rights and obligations hereunder of the Holding Company, the Optionees and their
successors in interest shall, except to the extent governed by federal law, be
governed by Indiana law.
13. Government and Other Regulations. The obligations of the Holding
Company to issue or transfer and deliver shares under options granted under the
Plan shall be subject to compliance with all applicable laws, governmental rules
and regulations (including Office of Thrift and Supervision regulations), and
administrative action. In particular, grants of stock options under the Plan
shall comply with the requirements of 12. C.F.R. ss. 563b.3(g)(4)(vi), to the
extent applicable to such grants.
14. Effective Date. The Plan shall become effective on the date it is
approved by the holders of at least a majority of the shares of the Holding
Company entitled to vote at a duly constituted meeting or adjournment thereof.
The options granted pursuant to the Plan may not be exercised until the Board of
Directors of the Holding Company has been advised by counsel that such approval
has been obtained and all other applicable legal requirements have been met.
<PAGE>
EXHIBIT B
UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
RECOGNITION AND RETENTION PLAN AND TRUST
ARTICLE I
ESTABLISHMENT OF THE PLAN AND TRUST
1.01 Union Federal Savings and Loan Association hereby establishes the
Recognition and Retention Plan (the "Plan") and Trust (the "Trust") upon the
terms and conditions hereinafter stated in this Recognition and Retention Plan
and Trust Agreement (the "Agreement").
1.02 The Trustee, which initially shall be Fifth Third Bank of Central
Indiana, hereby accepts this Trust and agrees to hold the Trust assets existing
on the date of this Agreement and all additions and accretions thereto upon the
terms and conditions hereinafter stated.
ARTICLE II
PURPOSE OF THE PLAN
2.01 The purpose of the Plan is to retain directors and executive officers
in key positions by providing such persons with a proprietary interest in the
Holding Company (as hereinafter defined) as compensation for their contributions
to the Holding Company and to the Association and its Affiliates (as hereinafter
defined) and as an incentive to make such contributions and to promote the
Holding Company's and the Association's growth and profitability in the future.
ARTICLE III
DEFINITIONS
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural.
3.01 "Affiliate" means the Holding Company and those subsidiaries or
affiliates of the Holding Company or the Association which, with the consent of
the Board, agree to participate in this Plan.
3.02 "Association" means Union Federal Savings and Loan Association and its
successors, whether in mutual or stock form.
3.03 "Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or, if none, his estate.
3.04 "Board" means the Board of Directors of the Association.
3.05 "Committee" means the Stock Compensation Committee of the Board of
Directors of the Holding Company. At all times during its administration of this
Plan, the Committee shall consist of two or more directors of the Holding
Company, each of whom shall be a "Non-Employee Director" within the meaning of
the definition of that term contained in Regulation 16b-3 ("Rule 16b-3")
promulgated under the Securities Exchange Act of 1934, as amended (the "1934
Act").
<PAGE>
3.06 "Common Stock" means shares of the common stock, without par value, of
the Holding Company.
3.07 "Conversion" shall mean the conversion of the Association from the
mutual to stock form of organization and the simultaneous acquisition of the
Association by the Holding Company.
3.08 "Director" means a member of the Board of Directors of the Association
or the Holding Company.
3.09 "Director Emeritus" shall mean an honorary, non-voting member of the
Board of Directors of the Association or the Holding Company.
3.10 "Disability" means any physical or mental impairment which qualifies
an Employee, Director or Director Emeritus for disability benefits under the
applicable long-term disability plan maintained by the Association or an
Affiliate, or, if no such plan applies, which would qualify such Employee,
Director or Director Emeritus for disability benefits under the long-term
disability plan maintained by the Association, if such Employee, Director or
Director Emeritus were covered by that Plan.
3.11 "Employee" means any person who is currently employed by the
Association or an Affiliate, including officers.
3.12 "Holding Company" shall mean Union Community Bancorp.
3.13 "Outside Director" means a member of the Board of Directors of the
Association or the Holding Company, who is not also an Employee and who may be a
Director or Director Emeritus.
3.14 "Plan Shares" means shares of Common Stock held in the Trust and
issued or issuable to a Recipient pursuant to the Plan.
3.15 "Plan Share Award" or "Award" means a right granted under this Plan to
earn Plan Shares.
3.16 "Plan Share Reserve" means the shares of Common Stock held by the
Trustee pursuant to Sections 5.03 and 5.04.
3.17 "Recipient" means an Employee or Outside Director who receives a Plan
Share Award under the Plan.
3.18 "Trustee" means that person(s) or entity nominated by the Committee
and approved by the Board pursuant to Sections 4.01 and 4.02 to hold legal title
to the Plan assets for the purposes set forth herein.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 Role of the Committee. The Plan shall be administered and interpreted
by the Committee, which shall have all of the powers allocated to it in this and
other Sections of the Plan. The interpretation and construction by the Committee
of any provisions of the Plan or of any Plan Share Award granted hereunder shall
be final and binding. The Committee shall act by vote or written consent of a
majority of its members. Subject to the express provisions and limitations of
the Plan, the Committee may adopt such rules, regulations and procedures as it
deems appropriate for the conduct of its affairs. If permitted by applicable
law, the Committee, with the consent of Recipients, may change the vesting
schedule for Awards after the date of grant thereof. The Committee shall
recommend to the Board one or more persons or entities to act as Trustee in
accordance with the provisions of this Plan and Trust and the terms of Article
VIII hereof.
<PAGE>
4.02 Role of the Board. The members of the Committee and the Trustee shall
be appointed or approved by, and will serve at the pleasure of, the Board of
Directors of the Holding Company. The Board of Directors of the Holding Company
may in its discretion from time to time remove members from, or add members to,
the Committee, and may remove, replace or add Trustees.
4.03 Limitation on Liability. Neither a Director nor the Committee nor the
Trustee shall be liable for any determination made in good faith with respect to
the Plan or any Plan Shares or Plan Share Awards granted under it. If a Director
or the Committee or any Trustee is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of anything done or
not done by him in such capacity under or with respect to the Plan, the
Association shall indemnify such person against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in the best interests
of the Association and its Affiliates and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct was
unlawful. The indemnification of officers and directors of the Association
pursuant to this Section 4.03 shall be subject to 12 C.F.R. ss. 545.121.
ARTICLE V
CONTRIBUTION; PLAN SHARE RESERVE
5.01 Amount and Timing of Contributions. The Association shall be permitted
to contribute to the Trust an amount sufficient to purchase up to 4% of the
shares of Common Stock issued by the Holding Company in connection with the
Conversion. Such amounts shall be paid to the Trustee no later than the date
required to purchase shares of Common Stock for Awards made under this Plan. No
contributions by Employees or Outside Directors shall be permitted.
5.02 Initial Investment. Any amounts held by the Trust until such amounts
are invested in accordance with Section 5.03, shall be invested by the Trustee
in such interest-bearing account or accounts at the Association as the Trustee
shall determine to be appropriate.
5.03 Investment of Trust Assets; Creation of Plan Share Reserve. As soon as
practicable following the first shareholder meeting of the Holding Company
following the Conversion ("First Shareholder Meeting Date"), the Trustee shall
invest all of the Trust's assets exclusively in the number of shares of Common
Stock, designated by the Association as subject to Awards made under the Plan,
which may be purchased directly from the Holding Company, on the open market, or
from any other source; provided, however that the Trust shall not invest in an
amount of Common Stock greater than 4.0% of the shares of the Common Stock sold
in the Conversion, which shall constitute the "Plan Share Reserve" and provided,
further that if the Trustee is required to purchase such shares on the open
market or from the Holding Company for an amount per share greater than the
price per share at which shares were trading on the date the contributions
therefor were made to the Trust, the Association shall have the discretion to
reduce the number of shares to be awarded and purchased. The Trust may hold cash
in interest-bearing accounts pending investment in Common Stock for periods of
not more than one year after deposit. The Trustee, in accordance with applicable
rules and regulations and Section 5.01 hereof, shall purchase shares of Common
Stock in the open market and/or shall purchase authorized but unissued shares of
the Common Stock from the Holding Company sufficient to acquire the requisite
percentage of shares. Any earnings received or distributions paid with respect
to Common Stock held in the Plan Share Reserve shall be held in an
interest-bearing account. Any earnings received or distributions paid with
respect to Common Stock subject to a Plan Share Award shall be held in an
interest-bearing account on behalf of the individual Recipient.
<PAGE>
5.04 Effect of Allocations, Returns and Forfeitures Upon Plan Share
Reserves. Upon the allocation of Plan Share Awards under Sections 6.02 and 6.03
after acquisition by the Trustee of such shares, or the decision of the
Committee to return Plan Shares to the Holding Company, the Plan Share Reserve
shall be reduced by the number of Plan Shares so allocated or returned. Any
shares subject to an Award which may not be earned because of a forfeiture by
the Recipient pursuant to Section 7.01 shall be returned (added) to the Plan
Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 Eligibility. Employees and Outside Directors are eligible to receive
Plan Share Awards provided in Section 6.02.
6.02 Allocations. The Committee may determine which of the Employees and
Outside Directors referenced in Section 6.01 above will be granted Plan Share
Awards and the number of Plan Shares covered by each Award, including grants
effective upon the First Shareholder Meeting Date, provided, however, that the
number of Plan Shares covered by such Awards may not exceed the number of Plan
Shares in the Plan Share Reserve immediately prior to the grant of such Awards,
and provided further, that in no event shall any Awards be made which will
violate the Charter, Articles of Incorporation, Bylaws or Plan of Conversion of
the Holding Company or the Association or any applicable federal or state law or
regulation and provided further that Awards may not be granted at any time in
which the Association fails to meet its applicable minimum capital requirements.
In the event Plan Shares are forfeited for any reason and unless the Committee
decides to return the Plan Shares to the Holding Company, the Committee may,
from time to time, determine which of the Employees or Outside Directors
referenced in Section 6.01 above will be granted additional Plan Share Awards to
be awarded from forfeited Plan Shares. In selecting those Employees or Outside
Directors to whom Plan Share Awards will be granted and the number of Plan
Shares covered by such Awards, the Committee shall consider the position and
responsibilities of the eligible Employees or Outside Directors, the length and
value of their services to the Association and its Affiliates, the compensation
paid to such Employees or Outside Directors, and any other factors the Committee
may deem relevant.
6.03 Form of Allocation. As promptly as practicable after a determination
is made pursuant to Section 6.02 that a Plan Share Award is to be made, the
Committee shall notify the Recipient in writing of the grant of the Award, the
number of Plan Shares covered by the Award, and the terms upon which the Plan
Shares subject to the Award may be earned. The stock certificates for Plan Share
Awards shall be registered in the name of the Recipient until forfeited or
transferred to the Recipient after such Award has been earned. The Committee
shall maintain records as to all grants of Plan Share Awards under the Plan.
6.04 Allocations Not Required. Notwithstanding anything to the contrary in
Sections 6.01 and 6.02, no Employee or Outside Director shall have any right or
entitlement to receive a Plan Share Award hereunder, such Awards being at the
total discretion of the Committee, nor shall the Employees or Outside Directors
as a group have such a right. The Committee may, with the approval of the Board
(or, if so directed by the Board, shall) return all Common Stock in the Plan
Share Reserve not yet allocated to the Holding Company at any time, and cease
issuing Plan Share Awards.
<PAGE>
6.05. Distribution Election Before Plan Shares Are Earned. Notwithstanding
anything contained in the Plan to the contrary, an Employee or an Outside
Director who has received an allocation of Plan Shares in accordance with
Article VI may request in writing that the Committee authorize the distribution
to him or her of all or a portion of the Plan Shares awarded before the date on
which the Plan Shares become earned in accordance with Article VII. The decision
as to whether to distribute to any Employee or Outside Director who requests
distribution shall be made by the Committee, in its sole discretion. In
addition, the distribution shall be subject to the following parameters:
(a) The Committee shall be required to make a separate determination
for each request received by an Employee or Outside Director for
distribution.
(b) Any Plan Shares awarded shall be required to have a legend on the
Plan Shares confirming that the Plan Shares are subject to
restriction and transfer in accordance with the terms set forth in
the Plan. This legend may not be removed until the date that the
Plan Shares become earned in accordance with Article VII.
(c) The Plan Shares distributed shall be voted by the Trustee in
accordance with Section 7.04.
(d) Any cash dividends or other cash distributions paid with respect
to the Plan Shares before the date that the Plan Shares are earned
shall be paid to the Trustee to be held for the Employee or
Outside Director, whichever is applicable, until the date that the
Plan Shares are earned.
(e) At the date on which the Plan Shares are earned, the Trustee may
withhold from any cash dividends or other cash distributions held
on behalf of such Employee or Outside Director the amount needed
to cover any applicable withholding and employment taxes arising
at the time that the Plan Shares are earned. If the amount of such
cash dividends or distributions is insufficient, the Trustee may
require the Employee or Outside Director to pay to the Trustee the
amount required to be withheld as a condition of removing the
legend on the Plan Shares.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 Earning Plan Shares; Forfeitures.
(a) General Rules. Plan Shares subject to an Award shall be earned by
a Recipient at the rate of twenty percent (20%) of the aggregate
number of Shares covered by the Award at the end of each full
twelve months of consecutive service with the Association or an
Affiliate after the date of grant of the Award. If the term of
service of a Recipient terminates as an Employee, as a Director
and as a Director Emeritus prior to the fifth anniversary (or
such later date as the Committee shall determine) of the date of
grant of an Award for any reason (except as specifically provided
in Subsection (b) below or in Section 4.01 hereof), the Recipient
shall forfeit the right to earn any Shares subject to the Award
which have not theretofore been earned.
<PAGE>
In determining the number of Plan Shares which are earned,
fractional shares shall be rounded down to the nearest whole
number, provided that such fractional shares shall be aggregated
and earned, on the fifth anniversary of the date of grant.
(b) Exception for Terminations due to Death and Disability.
Notwithstanding the general rule contained in Section 7.01(a)
above, all Plan Shares subject to a Plan Share Award held by a
Recipient whose term of service as an Employee and as a Director
or Director Emeritus with the Holding Company, Association or an
Affiliate terminates due to death or Disability shall be deemed
earned as of the Recipient's last day of service with the Holding
Company, Association or an Affiliate as a result of such death or
Disability. If the Recipient's service as an Employee and as a
Director or Director Emeritus terminates due to Disability within
one year of the effective date of the Conversion, the Shares
earned by the Recipient may not be disposed of by the Recipient
during the one-year period following the Conversion, and stock
certificate legends to that effect may be placed on the stock
certificates for any such shares.
(c) Revocation for Misconduct. Notwithstanding anything hereinafter
to the contrary, the Board may by resolution immediately revoke,
rescind and terminate any Plan Share Award, or portion thereof,
previously awarded under this Plan, to the extent Plan Shares
have not been delivered thereunder to the Recipient, whether or
not yet earned, in the case of an Employee who is discharged from
the employ of the Holding Company, Association or an Affiliate
for cause (as hereinafter defined), or who is discovered after
termination of employment to have engaged in conduct that would
have justified termination for cause or, in the case of an
Outside Director who is removed from the Board of Directors of
the Association and the Holding Company or an Affiliate for cause
(as hereinafter defined), or who is discovered after termination
of service as an Outside Director to have engaged in conduct
which would have justified removal for cause. "Cause" is defined
as personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to
perform stated duties, or the willful violation of any law, rule,
regulation (other than traffic violations or similar offenses) or
order which results in a loss to the Holding Company, Association
or any Affiliate or in a final cease and desist order.
7.02 Accrual of Dividends. Whenever Plan Shares are paid to a Recipient or
Beneficiary under Section 7.03, such Recipient or Beneficiary shall also be
entitled to receive, with respect to each Plan Share paid, an amount equal to
any cash dividends or cash distributions and a number of shares of Common Stock
or other assets equal to any stock dividends and any other assets distributions
declared and paid with respect to a share of Common Stock between the date the
Plan Shares are being distributed and the date the Plan Shares were granted.
There shall also be distributed an appropriate amount of net earnings, if any,
of the Trust with respect to any cash dividends or cash distributions so paid
out. Until the Plan Shares are vested and distributed to any such Recipient or
Beneficiary, such dividends, distributions and net earnings thereon, if any,
shall be retained by the Trust.
<PAGE>
7.03 Distribution of Plan Shares.
(a) Timing of Distributions: General Rule. Plan Shares shall be
distributed to the Recipient or his Beneficiary, as the case may
be, as soon as practicable after they have been earned.
(b) Form of Distribution. All Plan Shares, together with any shares
representing stock dividends, shall be distributed in the form of
Common Stock. One share of Common Stock shall be given for each
Plan Share earned and payable. Payments representing accumulated
cash dividends and cash or other distributions (and earnings
thereon) shall be made in cash or in the form of such non-cash
distributions.
(c) Withholding. The Trustee may withhold from any payment or
distribution made under this Plan sufficient amounts of cash or
shares of Common Stock to cover any applicable withholding and
employment taxes, and if the amount of such payment is
insufficient, the Trustee may require the Recipient or
Beneficiary to pay to the Trustee the amount required to be
withheld as a condition of delivering the Plan Shares.
Alternatively, a Recipient may pay to the Trustee that amount of
cash necessary to be withheld in taxes in lieu of any withholding
of payments or distribution under the Plan. The Trustee shall pay
over to the Holding Company, the Association or Affiliate which
employs or employed such Recipient any such amount withheld from
or paid by the Recipient or Beneficiary.
(d) Cessation of Payment. The Trustee shall cease payment of benefits
to Recipients or, if applicable, their Beneficiaries in the event
of the Association's insolvency. The Association shall be
considered insolvent for purposes of this RRP if the Association
is unable to pay its debts as they become due or if a receiver is
appointed for the Association under applicable law. If payments
cease by reason of this subsection, payments will be resumed,
with appropriate make-up payments, once the Association ceases to
be insolvent but only to the extent the payments were not made
directly by the Association or its Affiliates.
7.04 Voting of Plan Shares. All shares of Common Stock held by the Trust
shall be voted by the Trustee, taking into account the best interests of the
Plan Share Award recipients.
ARTICLE VIII
TRUST
8.01 Trust. The Trustee shall receive, hold, administer, invest and make
distributions and disbursements from the Trust in accordance with the provisions
of the Plan and Trust and the applicable directions, rules, regulations,
procedures and policies established by the Committee pursuant to the Plan.
<PAGE>
8.02 Management of Trust. It is the intent of this Plan and Trust that,
subject to the provisions of this Plan, the Trustee shall have complete
authority and discretion with respect to the management, control and investment
of the Trust, and that the Trustee shall invest all assets of the Trust, except
those attributable to cash dividends paid with respect to Plan Shares, in Common
Stock to the fullest extent practicable, and except to the extent that the
Trustee determines that the holding of monies in cash or cash equivalents is
necessary to meet the obligation of the Trust. Neither the Holding Company, the
Association, nor any Affiliate shall exercise any direct or indirect control or
influence over the time when, or the prices at which, the Trustee may purchase
such shares, the number of shares to be purchased, the manner in which the
shares are to be purchased, or the broker (if any) through whom the purchases
may be executed. In performing its duties, the Trustee shall have the power to
do all things and execute such instruments as may be deemed necessary or proper,
including the following powers:
(a) To invest up to one hundred percent (100%) of all Trust assets in
Common Stock without regard to any law now or hereafter in force
limiting investments for Trustees or other fiduciaries. The
investment authorized herein and in paragraph (b) constitutes the
only investment of the Trust, and in making such investment, the
Trustee is authorized to purchase Common Stock from the Holding
Company or an Affiliate or from any other source and such Common
Stock so purchased may be outstanding, newly issued, or treasury
shares.
(b) To invest any Trust assets not otherwise invested in accordance
with (a) above in such deposit accounts, and certificates of
deposit (including those issued by the Association), securities
of any open-end or closed-end management investment company or
investment trust registered under the Investment Company Act of
1940, whether or not the Trustee or any affiliate of the Trustee
is being compensated for providing services to the investment
company or trust as investment advisor or otherwise, obligations
of the United States government or its agencies or such other
investments as shall be considered the equivalent of cash.
(c) To sell, exchange or otherwise dispose of any property at any
time held or acquired by the Trust.
(d) To cause stocks, bonds or other securities to be registered in
the name of a nominee, without the addition of words indicating
that such security is an asset of the Trust (but accurate records
shall be maintained showing that such security is an asset of the
Trust).
(e) To hold cash without interest in such amounts as may be in the
opinion of the Trustee reasonable for the proper operation of the
Plan and Trust and to hold cash pending investment.
(f) To employ brokers, agents, custodians, consultants and
accountants.
(g) To hire counsel to render advice with respect to their rights,
duties and obligations hereunder, and such other legal services
or representation as they may deem desirable.
(h) To hold funds and securities representing the amounts to be
distributed to a Recipient or his or her Beneficiary as a
consequence of a dispute as to the disposition thereof, whether
in a segregated account or held in common with other assets of
the Trust.
<PAGE>
Notwithstanding anything herein contained to the contrary, the Trustee
shall not be required to make any inventory, appraisal or settlement or report
to any court, or to secure any order of court for the exercise of any power
herein contained, or give bond.
8.03 Records and Accounts. The Trustee shall maintain accurate and detailed
records and accounts of all transactions of the Trust, which shall be available
at all reasonable times for inspection by any legally entitled person or entity
to the extent required by applicable law, or any other person determined by the
Committee.
8.04 Earnings. All earnings, gains and losses with respect to Trust assets
shall be allocated, in accordance with a reasonable procedure adopted by the
Committee, to bookkeeping accounts for Recipients or to the general account of
the Trust, depending on the nature and allocation of the assets generating such
earnings, gains and losses. In particular, any earnings on cash dividends or
distributions received with respect to shares of Common Stock shall be allocated
to accounts for Recipients, if such shares are the subject of outstanding Plan
Share Awards, or otherwise to the Plan Share Reserve. Recipients (or their
Beneficiaries) shall not be entitled to any such allocations until the Plan
Share Awards to which they relate are vested and distributed to those Recipients
(or their Beneficiaries).
8.05 Expenses. All costs and expenses incurred in the operation and
administration of this Plan, including those incurred by the Trustee, shall be
borne by the Association or the Holding Company.
8.06 Indemnification. The Association shall indemnify, defend and hold the
Trustee harmless against all claims, expenses and liabilities arising out of or
related to the exercise of the Trustee's powers and the discharge of its duties
hereunder, unless the same shall be due to its negligence or willful misconduct.
ARTICLE IX
MISCELLANEOUS
9.01 Adjustments for Capital Changes. The aggregate number of Plan Shares
available for issuance pursuant to the Plan Share Awards (which, as of the
effective date of this Plan, shall not exceed 4% of the shares of the Holding
Company's Common Stock issued in the Conversion), and the number of shares to
which any Plan Share Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding shares of Common Stock
issued subsequent to the effective date of the Plan resulting from any stock
dividend or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, extraordinary cash or
non-cash distribution, or other similar capital adjustment, or other increase or
decrease in such shares effected without receipt or payment of consideration, by
the Committee.
9.02 Amendment and Termination of Plan. The Board may, by resolution, at
any time amend or terminate the Plan. The power to amend or terminate shall
include the power to direct the Trustee to return to the Holding Company all or
any part of the assets of the Trust, including shares of Common Stock held in
the Plan Share Reserve, as well as shares of Common Stock and other assets
subject to Plan Share Awards but not yet earned by the Employees or Outside
Directors to whom they are allocated. However, the termination of the Trust
shall not affect a Recipient's right to the distribution of Common Stock
relating to Plan Share Awards already earned, including earnings thereon, in
accordance with the terms of this Plan and the grant by the Committee.
<PAGE>
9.03 Nontransferable. Plan Share Awards and rights to Plan Shares shall not
be transferable by a Recipient other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended, or Title I of the Employee
Retirement Income Security Act of 1974, as amended, or the rules thereunder, and
during the lifetime of the Recipient, Plan Shares may only be earned by and paid
to the Recipient who was notified in writing of the Award by the Committee
pursuant to Section 6.03. The assets of the RRP, prior to the distribution of
Plan Shares to a Recipient or his or her Beneficiary, shall be subject to the
claims of creditors of the Association. Unless Plan Shares are distributed in
accordance with Section 6.05 or 7.03 to a Recipient or his or her Beneficiary,
such Recipient or, if applicable, Beneficiary shall not have any right in or
claim to any specific assets of the RRP or Trust and shall only be an unsecured
creditor of the Association, nor shall the Holding Company or the Association be
subject to any claim for benefits hereunder.
9.04 Employment Rights. Neither the Plan nor any grant of a Plan Share
Award or Plan Shares hereunder nor any action taken by the Trustee, the
Committee or the Board in connection with the Plan shall create any right on the
part of any Employee to continue in the employ of, or of any Outside Director to
continue in the service of, the Association, the Holding Company or any
Affiliate thereof.
9.05 Voting and Dividend Rights. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by a Plan Share Award, except as expressly provided in Sections 7.02 and
7.04 above, prior to the time said Plan Shares are actually distributed to him.
9.06 Governing Laws. The Plan and Trust shall be governed by the laws of
the State of Indiana, except to the extent governed by federal law, including
regulations of the Office of Thrift Supervision. In particular, grants of Plan
Share Awards under the Plan shall comply with the requirements of 12 C.F.R. ss.
563b.3(g)(4)(vi) to the extent applicable thereto.
9.07 Effective Date. This Plan shall be effective as of the date of its
approval by the shareholders of the Holding Company.
9.08 Term of Plan. This Plan shall remain in effect until the earlier of
(1) 21 years from the effective date of its adoption, (2) termination by the
Board, or (3) the distribution of all assets of the Trust. Termination of the
Plan shall not affect any Plan Share Awards previously granted, and such Awards
shall remain valid and in effect until they have been earned and paid, or by
their terms expire or are forfeited.
9.09 Tax Status of Trust. It is intended that the trust established hereby
be treated as a grantor trust of the Association under the provisions of Section
671, et seq., of the Internal Revenue Code of 1986, as amended.
9.10. Compensation. The Trustee shall be entitled to receive fair and
reasonable compensation for its services hereunder, as agreed to by the Trustee
and the Association, 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 the 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
Association or the Holding Company.
9.11. Resignation of Trustee. The Trustee may resign at any time by giving
sixty (60) calendar days' prior written notice to the Association, and the
Trustee may be removed, with or without cause, by the Association 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 Association a
written account of its administration of the Plan and the Trust for the period
since the last written accounting and shall do all necessary acts to transfer
the assets of the Trust to the successor Trustee or Trustees.
<PAGE>
[PROXY CARD -- FRONT]
REVOCABLE PROXY UNION COMMUNITY BANCORP
Annual Meeting of Shareholders
June 30, 1998
The undersigned hereby appoints Ronald L. Keeling and Denise E. Swearingen,
with full powers of substitution, to act as attorneys and proxies for the
undersigned to vote all shares of common stock of Union Community Bancorp which
the undersigned is entitled to vote at the Annual Meeting of Shareholders to be
held at the Holding Company's principal office at 221 E. Main Street,
Crawfordsville, Indiana, on Tuesday, June 30, 1998, at 3:00 p.m., and at any and
all adjournments thereof, as follows:
1. The election as directors of all nominees
listed below, except as marked to the contrary [ ] FOR [ ] VOTE WITHHELD
INSTRUCTIONS: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name on the list below:
Marvin L. Burkett Phillip E. Grush Joseph E. Timmons
(each for a one year term)
Samuel H. Hildebrand Harry A. Siamas
(each for a two year term)
Philip L. Boots John M. Horner
(for a three year term)
2. Approval and Ratification of the Union Community Bancorp Stock Option Plan
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Approval and Ratification of the Union Federal Savings and Loan Association
Recognition and Retention Plan and Trust.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
In their discretion, the proxies are authorized to vote on any other business
that may properly come before the Meeting or any adjournment thereof.
The Board of Directors recommends a vote "FOR" each of the listed
propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
<PAGE>
[PROXY CARD -- BACK]
This Proxy may be revoked at any time prior to the voting thereof.
The undersigned acknowledges receipt from Union Community Bancorp, prior to the
execution of this Proxy, of a Notice of the Meeting, a Proxy Statement and an
Annual Report to Shareholders.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED. IF ANY OTHER BUSINESS
IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS
PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS
OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
______________________, 1998
------------------------- -------------------------
Print Name of Shareholder Print Name of Shareholder
------------------------- -------------------------
Signature of Shareholder Signature of Shareholder
Please sign as your name appears on the envelope in
which this card was mailed. When signing as attorney,
executor, administrator, trustee or guardian, please
give your full title. If shares are held jointly, each
holder should sign.
Message to Shareholders..................................................... 1
Selected Consolidated Financial Data........................................ 2
Management's Discussion and Analysis........................................ 3
Report of Independent Auditor............................................... 18
Consolidated Balance Sheet.................................................. 19
Consolidated Statement of Income............................................ 20
Consolidated Statement of Changes in
Stockholders' Equity................................................... 21
Consolidated Statement of Cash Flows........................................ 22
Notes to Consolidated Financial Statements.................................. 23
Directors and Officers...................................................... 37
Shareholder Information..................................................... 39
================================================================================
Union Community Bancorp (the "Holding Company" and together with the
Association, as defined below, the "Company") is an Indiana corporation
organized in September, 1997, to become a savings and loan holding company upon
its acquisition of all the issued and outstanding capital stock of Union Federal
Savings and Loan Association ("Union Federal" or the "Association") in
connection with the Association's conversion from mutual to stock form. The
Holding Company became the Association's holding company on December 29, 1997;
therefore, all historical financial and other data contained for periods prior
to December 29, 1997 herein relate solely to the Association while historical
financial and other data contained herein for the period after December 29, 1997
relate to the Company. The principal asset of the Holding Company currently
consists of 100% of the issued and outstanding shares of capital stock, $.01 par
value per share, of the Association.
The Association is a federal savings and loan association which
conducts its business from a full-service office located in Crawfordsville,
Indiana. The Association offers a variety of lending, deposit and other
financial services to its retail and commercial customers. The Association's
principal business consists of attracting deposits from the general public and
originating mortgage loans, most of which are secured by one- to four-family
residential real property in Montgomery County. The Association also offers
multi-family loans, construction loans, non-residential real estate loans, home
equity loans and consumer loans, including single-pay loans, loans secured by
deposits, and installment loans. The Association derives most of its funds for
lending from deposits of its customers, which consist primarily of certificates
of deposit, demand accounts and savings accounts.
<PAGE>
TO OUR SHAREHOLDERS:
On behalf of the directors, officers and employees of Union Community
Bancorp and its wholly-owned subsidiary, Union Federal Savings and Loan
Association, I am pleased to report to you, our shareholders, our first annual
report. The past twelve months have been an exciting time for all of us. On June
2, 1997, our Board of Directors adopted a Plan of Conversion pursuant to which
Union Federal Savings and Loan Association converted from the mutual to the
stock form of ownership and became a wholly-owned subsidiary of Union Community
Bancorp. We completed our conversion to a stock institution on December 29,
1997, selling 3,041,750 shares of Union Community Bancorp stock to our
depositors at $10.00 per share. On that day, our shares of common stock began
trading on the NASDAQ National Market System.
The enclosed audited financial statements reflect our operations for
the year ended December 31, 1997. During that period, total assets increased
$49.3 million, or 59.5% 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 resulted primarily from our receipt of the net proceeds from the
conversion and from stock subscriptions refundable. Net proceeds of the stock
issuance, after costs and excluding the shares issued to our Employee Stock
Ownership Plan, were $27.8 million, and stock subscriptions refundable were
$22.7 million. Net loans increased primarily due to an increase in our level of
real estate mortgage loans, which resulted from increased customer demand. Our
net income in 1997 was $1.2 million, reflecting a return on assets of 1.4%, and
our return on equity was 8.1%.
The Management and the Board of Directors want to thank you for your
business, your support and your confidence in Union Federal Savings and Loan
Association. We encourage you to recommend Union Federal to your friends,
neighbors and associates, and we look forward to serving you with the same
professional service that has marked our performance for the last 85 years.
Sincerely,
/s/ Joseph E. Timmons
Joseph E. Timmons,
President & Chief Executive Officer
<PAGE>
The following selected consolidated financial data of the Company is qualified
in its entirety by, and should be read in conjunction with, the consolidated
financial statements, including notes thereto, included elsewhere in this Annual
Report.
SELECTED CONSOLIDATED FINANCIAL DATA OF
UNION COMMUNITY BANCORP AND SUBSIDIARY
<TABLE>
<CAPTION>
At December 31,
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
(Dollars 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
-------- ------- ------- ------- -------
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
====== ======= ======= ====== ======
</TABLE>
Table continued on following page
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
UNION COMMUNITY BANCORP AND SUBSIDIARY (continued)
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
Supplemental Data:
<S> <C> <C> <C> <C> <C>
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.
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
<PAGE>
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.
<PAGE>
Average Balances and Interest Rates and Yields
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>
AVERAGE BALANCE SHEET/YIELD ANALYSIS
Year Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest(1)Yield/Cost BalanceInterest(1)Yield/CostBalanceInterest(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>
<PAGE>
(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
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.
<PAGE>
<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)
<S> <C> <C> <C>
Year ended December 31, 1997 compared
to year ended December 31, 1996
Interest-earning assets:
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
<PAGE>
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>
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.
<PAGE>
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 was 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.
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.
<PAGE>
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.
<PAGE>
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.
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.
<PAGE>
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.
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.
<PAGE>
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.
<PAGE>
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.
<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>
<PAGE>
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%.
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."
<PAGE>
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.
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.
<PAGE>
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, establishing standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 will also require 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.
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.
<PAGE>
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>
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
<PAGE>
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
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.
<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>
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>
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> <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>
<TABLE>
<CAPTION>
Year Ended December 31 1997 1996 1995
- --------------------------------------------------------------------------------
Allowance for loan losses
<S> <C> <C> <C>
Balances, Beginning of Period $159 $111 $ 87
Provision for losses 165 48 24
Loans charged off (72)
----------------------------------------
Balances, End of Period $252 $159 $111
========================================
</TABLE>
<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)
=====================
- -- 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
-------
$46,181
=======
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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
============================
- -- 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.
<PAGE>
- -- 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.
- -- 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%
<PAGE>
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
=================
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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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.
<PAGE>
- -- 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
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
- -- 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>
<PAGE>
1996
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) $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
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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%.
- -- 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.
<PAGE>
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
Cash and
<S> <C> <C> <C> <C>
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
=====
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>
BOARD OF DIRECTORS
Joseph E. Timmons
Chairman of the Board
President and Chief Executive Officer
Union Federal Savings and Loan Association
Philip L. Boots Samuel H. Hildebrand
President, Boots Brothers President, Village
Oil Company, Inc. Traditions, Inc.
Marvin L. Burkett John M. Horner
Farmer (Retired) President, Horner
Pontiac Buick, Inc.
Phillip E. Grush Harry A. Siamas
Optometrist Attorney
================================================================================
OFFICERS OF UNION COMMUNITY BANCORP
Joseph E. Timmons Ronald L. Keeling Denise E. Swearingen
Chairman of the Board Vice President Secretary and Treasurer
President and
Chief Executive Officer
================================================================================
OFFICERS OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION
Joseph E. Timmons Ronald L. Keeling Denise E. Swearingen
President and Senior Loan Officer Secretary, Controller/
Chief Executive Officer Vice President and Treasurer
Assistant Secretary
<PAGE>
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.
<PAGE>
MARKET INFORMATION
The Association converted from a federal mutual savings and loan
association to a federal stock savings and loan associaiton effective December
29, 1997, and simultaneously formed a savings and loan holding company, the
Holding Company. The Holding Company's Common Stock, is traded on the NASDAQ
National Market System under the symbol "UCBC." As of March 30, 1998, there were
approximately 425 record holders of the Holding Company's Common Stock.
Any dividends paid by the Holding Company will be subject to
determination and declaration by the Board of Directors in its discretion. In
determining the level of any future dividends, the Board of Directors will
consider, among other factors, the following: tax considerations; industry
standards; economic conditions; capital levels; regulatory restrictions on
dividend payments by the Association to the Holding Company; and, general
business practices.
The Holding Company is not subject to OTS regulatory restrictions on
the payment of dividends to its shareholders although the source of such
dividends will depend in part upon the receipt of dividends from the
Association. The Holding Company is subject, however, to the requirements of
Indiana law, which generally limit the payment of dividends to amounts that will
not affect the ability of the Holding Company, after the dividend has been
distributed, to pay its debts in the ordinary course of business and will not
exceed the difference between the Holding Company's total assets and total
liabilities plus preferential amounts payable to shareholders with rights
superior to those of the holders of the Holding Company's common stock.
In addition to the foregoing, the portion of the Association's earnings
which has been appropriated for bad debt reserves and deducted for federal
income tax purposes cannot be used by the Association to pay cash dividends to
the Holding Company without the payment of federal income taxes by the
Associaiton at the then current income tax rate on the amount deemed
distributed, which would include any federal income taxes attributable to the
distribution. The Holding Company does not contemplate any distribution by the
Assciation that would result in a recapture of the Association's bad debt
reserve or otherwise create federal tax liabilities.
Stock Price Dividends
Month Ended High Low Per Share
December 31, 1997 14 4/6 14 5/8 $ ---
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Fifth Third Bank
Corporate Trust Operations
38 Fountain Square Plaza, MD - 1090F5
Cincinnati, Ohio 45202
(513) 579-5320 or (800) 837-2755
GENERAL COUNSEL
Barnes & Thornburg
11 South Meridian Street
Indianapolis, Indiana 46204
INDEPENDENT AUDITOR
Geo. S. Olive & Co., LLC
201 N. Illinois Street, Suite 700S
Indianapolis, Indiana 46204
SHAREHOLDERS AND GENERAL INQUIRIES
The Company filed an Annual Report on Form 10-K for its fiscal year ended
December 31, 1997 with the Securities and Exchange Commission. Copies of this
annual report may be obtained without charge upon written request to:
Joseph E. Timmons
President and Chief Executive Officer
Union Community Bancorp
221 East Main Street
Crawfordsville, Indiana 47933
