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 April 21, 1999
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 Wednesday,
April 21, 1999, at 3:00 p.m., Eastern Standard Time.
The Annual Meeting will be held for the following purposes:
1. Election of Directors. Election of three directors of the Holding
Company to serve three-year terms expiring in 2002.
2. 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 February 19, 1999, 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, 1998, 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
March 26, 1999
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
April 21, 1999
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 April 21, 1999, 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
March 26, 1999.
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.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Only shareholders of record at the close of business on February 19, 1999
("Voting Record Date"), will be entitled to vote at the Annual Meeting. On the
Voting Record Date, there were 2,889,663 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.
<PAGE>
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 19, 1999, 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) 6.4%
(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.
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. The nominees for director this
year are Marvin L. Burkett, Phillip E. Grush, and Joseph E. Timmons, each of
whom is a current director of the Holding Company. If elected by the
shareholders at the Annual Meeting, the terms of Messrs. Burkett, Grush and
Timmons will expire in 2002.
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.
<PAGE>
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 February 19, 1999 of Class(1)
- -------------------- --------------- --------------- ----------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Director Nominees
Marvin L. Burkett 2002 1997 1975 11,200 (2) .4%
Phillip E. Grush 2002 1997 1982 20,750 (3) .7%
Joseph E. Timmons 2002 1997 1973 63,907 (4) 2.2%
Directors
Continuing in Office
Philip L. Boots 2001 1997 1991 17,300 (5) .6%
Samuel H. Hildebrand 2000 1997 1995 21,618 (6) .7%
John M. Horner 2001 1997 1979 27,700 (7) 1.0%
Harry A. Siamas 2000 1997 1994 16,500 (8) .6%
All directors and
executive officers
as a group (9 persons) 199,701 (9) 6.9%
</TABLE>
(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 300 shares owned jointly by Mr. Burkett and his wife and 5,200
shares held under the Union Federal Savings and Loan Association
Recognition and Retention Plan and Trust (the "RRP"). Does not include
options for 13,000 shares granted to the director under the Union
Community Bancorp Stock Option Plan (the "Option Plan"), which are not
exercisable within 60 days of the Voting Record Date.
(3) Includes 4,500 shares jointly owned by Mr. Grush and his wife and 5,200
shares held under the RRP. Does not include options for 13,000 shares
granted to the director under the Option Plan which are not exercisable
within 60 days of the Voting Record Date.
(4) Includes 30,417 shares held jointly by Mr. Timmons and his wife, 30,000
shares held under the RRP, and 3,490 shares allocated to Mr. Timmons'
account under the Union Community Bancorp Employee Stock Ownership Plan
and Trust ("ESOP") as of December 31, 1998. Does not include options
for 75,000 shares granted to the director under the Option Plan which
are not exercisable within 60 days of the Voting Record Date.
(5) Includes 10,000 shares owned by a corporation controlled by Mr. Boots
and 5,200 shares held under the RRP. Does not include options for
13,000 shares granted to the director under the Option Plan which are
not exercisable within 60 days of the Voting Record Date.
(6) Includes 5,200 shares held under the RRP. Does not include options for
13,000 shares granted to the director under the Option Plan which are
not exercisable within 60 days of the Voting Record Date.
(7) 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, 890 shares held
jointly by Mr. Horner or his wife and their children or by Mr. Horner
as custodian for his minor grandchildren, and 5,200 shares held under
the RRP. Does not include options for 13,000 shares granted to the
director under the Option Plan which are not exercisable within 60 days
of the Voting Record Date.
(8) Includes 1,000 shares held jointly by Mr. Siamas and his aunt, 300
shares held by his wife as custodian for their minor children, and
5,200 shares held under the RRP. Does not include options for 13,000
shares granted to the director under the Option Plan which are not
exercisable within 60 days of the Voting Record Date.
(9) Includes 73,700 shares held under the RRP and 6,228 shares allocated to
the accounts of such persons under the ESOP as of December 31, 1998.
Does not include options for 73,700 shares granted to the executive
officers and directors under the Option Plan, which are not exercisable
within 60 days of the Voting Record Date
<PAGE>
Presented below is certain information concerning the directors and
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 71) has worked as a self-employed farmer in
Montgomery County since 1956. He currently is semi-retired from farming.
Phillip E. Grush (age 67) 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 part-time
employee/consultant.
Samuel H. Hildebrand, II (age 59) 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 62) has served as the president of Horner Pontiac
Buick, Inc. in Crawfordsville since 1974.
Harry A. Siamas (age 48) has practiced law in Crawfordsville since 1976 and
has served as Union Federal's attorney for 18 years.
Joseph E. Timmons (age 64) has served as President and Chief Executive
Officer of the Holding Company since 1997, and 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.
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, 1998, 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 met one time during the fiscal year ended December 31, 1998.
<PAGE>
The Stock Compensation Committee administers the Option Plan and the RRP.
The members of that Committee are Messrs. Boots, Burkett, Grush, Hildebrand, and
Horner. It met one time during fiscal 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.
Management Remuneration and Related Transactions
Remuneration of Named Executive Officer
During the fiscal year ended December 31, 1998, 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 three fiscal years ended
December 31, 1998 (the "Named Executive Officer"). There were no other executive
officers of the Holding Company who earned over $100,000 in salary and bonuses
during the fiscal year ended December 31, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
-------------------------------------- ----------------------
Other All
Annual Restricted Securities Other
Name and Fiscal Compen- Stock Underlying Compen-
Principal Position Year Salary ($)(1) Bonus ($) sation($)(2) Awards($) Options(#) sation($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph E. Timmons, 1998 $109,250 $30,000 --- $437,813(3) 75,000 ---
President and 1997 $108,300 $25,000 --- --- --- ---
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.
(3) The value of the restricted stock awards was determined by multiplying the
fair market value of the Common Stock on the date the shares were awarded
by the number of shares awarded. These shares vest over a five year period,
commencing June 30, 1998. As of December 31, 1998, the number and aggregate
value of restricted stock holdings by Mr. Timmons were 30,000 and $330,000,
respectively. Dividends paid on the restricted shares are payable to the
grantee as the shares are vested and are not included in the table.
<PAGE>
Stock Options
The following table sets forth information related to options granted
during fiscal year 1998 to the Named Executive Officer.
<TABLE>
<CAPTION>
Option Grants - Last Fiscal Year
Individual Grants
% of Total
Options Granted Exercise or
Options to Employees Base Price Expiration
Name Granted(#)(1) In Fiscal Year ($/Share)(2) Date
---- ------------- -------------- ------------ ----
<S> <C> <C> <C> <C>
Joseph E. Timmons 75,000 80% $14.59 6/29/2008
</TABLE>
(1) Options to acquire shares of the Holding Company's Common Stock. These
options become exercisable as to 6,852 shares on June 30, 1999, as to 6,852
shares the first days of years 2001 - 2008, and as to 6,480 shares on
January 1, 2009, subject to earlier vesting under certain circumstances.
(2) The option exercise price may be paid in cash or with the approval of the
Stock Compensation Committee beginning on December 29, 2000, in shares of
Holding Company Common Stock or a combination thereof. The option exercise
price equaled the market value of a share of the Holding Company Common
Stock on the date of grant.
The following table includes the number of shares covered by
exercisable and unexercisable stock options held by the Named Executive Officer
as of December 31, 1998. Also reported are the values for "in-the-money" options
(options whose exercise price is lower than the market value of the shares at
fiscal year end) which represent the spread between the exercise price of any
such existing stock options and the fiscal year-end market price of the stock.
Outstanding Stock Option Grants and Value Realized as of 12/31/98
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End (#) Fiscal Year End ($) (1)
--------------------------------- ----------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Joseph E. Timmons --- 75,000 --- ---
</TABLE>
(1) Since the average between the high asked and low bid prices for the
shares on December 31, 1998, was $11.00 per share, and this price is
below the $14.59 per share exercise price of the options, none of Mr.
Timmons' options were "in-the-money" on December 31, 1998.
<PAGE>
No stock options were exercised during fiscal 1998 by the Named Executive
Officer.
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
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, 1998, were
approximately $73,250.
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.
<PAGE>
Transactions With Certain Related Persons
The law firm Collier, Homann & Siamas, based in Crawfordsville, Indiana, of
which Harry S. Siamas, a director of the Holding Company, is a partner, served
as legal counsel to the Holding Company and its subsidiaries in various matters
during 1998. The Holding Company expects to continue using the services of this
law firm for such matters in the current fiscal year.
The Association has followed a policy of offering to its 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 $2.1 million or 5.2% of net worth, at December 31, 1998.
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.
ACCOUNTANTS
Olive LLP 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 Olive LLP 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, 1999.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 ("1934 Act") requires
that the Holding Company's officers and directors and persons who own more than
10% of the Holding Company's Common Stock file reports of ownership and changes
in ownership with the Securities and Exchange Commission (the "SEC"). Officers,
directors and greater than 10% shareholders are required by SEC regulations to
furnish the Holding Company with copies of all Section 16(a) forms that they
file.
Based solely on its review of the copies of each forms received by it,
and/or written representations from certain reporting persons that no Forms 5
were required for those persons, the Holding Company believes that during the
fiscal year ended December 31, 1998, all filing requirements applicable to its
officers, directors and greater than 10% beneficial owners with respect to
Section 16(a) of the 1934 Act were satisfied in a timely manner.
<PAGE>
SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have presented at the next
Annual Meeting of the Holding Company and included in the Proxy Statement and
form of proxy relating to that meeting 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 26, 2000. Any such proposal should be sent to the attention
of the Secretary of the Holding Company at 221 E. Main Street, Crawfordsville,
Indiana 47933. A shareholder proposal being submitted outside the processes of
Rule 14a-8 promulgated under the 1934 Act, will be considered untimely if it is
received by the Holding Company later than 45 days in advance of March 26, 2000.
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
March 26, 1999
<PAGE>
REVOCABLE PROXY UNION COMMUNITY BANCORP
Annual Meeting of Shareholders
April 21, 1999
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 Wednesday, April 21, 1999, 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 three-year term)
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>
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.
___________________, 1999
------------------------ ------------------------
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............................................. 19
Consolidated Balance Sheet................................................ 20
Consolidated Statement of Income.......................................... 21
Consolidated Statement of Shareholders' Equity............................ 22
Consolidated Statement of Cash Flows...................................... 23
Notes to Consolidated Financial Statements................................ 24
Directors and Officers.................................................... 40
Shareholder Information................................................... 42
================================================================================
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 our employees and Board of Directors, I take great pleasure in
providing you with the 1998 Annual Report to Shareholders of Union Community
Bancorp, the holding company for Union Federal Savings and Loan Association.
We have now completed one year as a stock company and look forward to the future
with great enthusiasm.
The Board of Directors, officers and employees of Union Community remain
committed to enhancing the value of your investment with us. To that end, the
Board increased the quarterly dividends paid by Union Community throughout 1998
and authorized the repurchase of shares of Union Community's outstanding common
stock. During November 1998, we repurchased 5% of our outstanding common stock,
and we have received approval from the Office of Thrift Supervision to
repurchase up to an additional 10% of our outstanding common stock during 1999.
These share repurchases reduce the number of our outstanding shares of common
stock, which is intended to improve the book value of the remaining outstanding
shares and positively impact our return on equity.
We also introduced several new products and services during 1998, including home
equity loans, commercial loans and commercial lines of credit. We also increased
our electronic banking during 1998 by adding two new automatic teller machines.
We expect to further expand our ATM network in the future and to increase our
participation in debit card programs. In addition, we hope to expand the types
of checking accounts that we currently offer to our customers.
We appreciate the continued support and confidence of our customers and
shareholders as we look to the future. Remember, this is your financial
institution, so be sure to use us for all of your personal and business needs
and to recommend us to your friends and neighbors.
Sincerely,
/s/ Joseph E. Timmons
Joseph E. Timmons,
President & Chief Executive Officer
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF
UNION COMMUNITY BANCORP AND SUBSIDIARY
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.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
Summary of Selected Consolidated
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $108,162 $132,040 $82,789 $73,631 $72,540
Loans, net......................................... 90,900 78,436 72,697 61,279 60,059
Cash and interest-bearing deposits
in other banks (1)............................ 6,191 44,781 1,465 1,993 1,329
Investment securities held to maturity............. 8,026 5,820 5,747 7,423 7,985
Deposits........................................... 64,846 62,258 60,436 57,407 54,886
Stock subscriptions refundable..................... --- 22,687 --- --- ---
Borrowings......................................... 1,793 3,573 7,880 2,642 4,943
Shareholders' equity............................... 40,531 42,906 13,910 13,024 12,033
Year Ended December 31,
1998 1997 1996 1995 1994
------ ------ ------- ------- ------
Summary of Operating Data:
Total interest and dividend income................. $8,105 $6,801 $6,112 $5,729 $5,249
Total interest expense............................. 3,415 3,836 3,424 3,148 2,507
------ ------ ------- ------- ------
Net interest income............................. 4,690 2,965 2,688 2,581 2,742
Provision for loan losses.......................... 110 165 48 24 24
------ ------ ------- ------- ------
Net interest income after provision
for loan losses............................... 4,580 2,800 2,640 2,557 2,718
------ ------ ------- ------- ------
Other income (losses):
Equity in losses of limited partnership......... (121) (158) (173) (249) (54)
Other........................................... 73 62 57 32 14
------ ------ ------- ------- ------
Total other losses............................ (48) (96) (116) (217) (40)
------ ------ ------- ------- ------
Other expenses:
Salaries and employee benefits.................. 850 480 461 481 489
Legal and professional fees..................... 128 34 29 47 21
Net occupancy expenses.......................... 39 39 39 66 44
Equipment expenses.............................. 28 22 20 20 17
Deposit insurance expense....................... 46 31 495 127 126
Other........................................... 373 355 258 281 187
------ ------ ------- ------- ------
Total other expenses.......................... 1,464 961 1,302 1,022 884
------ ------ ------- ------- ------
Income before income taxes and cumulative effect
of change in accounting principle............... 3,068 1,743 1,222 1,318 1,794
Income taxes....................................... 1,094 545 336 326 639
------ ------ ------- ------- ------
Net income...................................... $1,974 $1,198 $ 886 $ 992 $1,155
====== ====== ======= ======= ======
</TABLE>
Table continued on following page
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
Supplemental Data:
<S> <C> <C> <C> <C> <C>
Interest rate spread during period................. 2.23 %2.55 %2.54 %2.69 %3.25 %
Net yield on interest-earning assets (2) .......... 4.42 3.50 3.53 3.67 4.01
Return on assets (3)............................... 1.82 1.38 1.13 1.36 1.63
Return on equity (4)............................... 4.65 8.10 6.54 7.84 10.02
Other expenses to average assets (5)............... 1.35 1.11 1.66 1.41 1.25
Equity to assets (6)............................... 37.47 32.49 16.80 17.69 16.59
Average interest-earning assets to average
interest-bearing liabilities.................... 167.89 120.98 121.94 121.83 120.63
Non-performing assets to total assets (6).......... .32 .07 .59 .21 .20
Allowance for loan losses to total loans
outstanding (6)................................. .40 .32 .22 .18 .15
Allowance for loan losses to
non-performing loans (6)........................ 103.72 484.62 32.52 71.15 60.84
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 Company's financial condition and results of operations should be read in
conjunction with and with reference to the consolidated financial statements and
the notes thereto included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The 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 Company's general market area. The forward-looking statements contained
herein include, but are not limited to, those with respect to the following
matters:
1. Management's determination of the amount of loan loss
allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift
charter and the separate federal regulation of thrifts.
Average Balances and Interest Rates and Yields
The following tables present for the years ended December 31, 1998,
1997 and 1996, the balances, interest rates and average monthly balances of each
category of the Company'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.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET/YIELD ANALYSIS
Year Ended December 31,
------------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- -------------------------------- -------------------------------
Average Average Average Average Average Average
Balance Interest(1) Yield/Cost Balance Interest(1) Yield/Cost Balance Interest(1) Yield/Cost
------- ---------- ---------- ------- ----------- ---------- ------- ----------- ----------
(Dollars in thousands)
Assets:
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning deposits.......$11,441 $ 600 5.24% $3,821 $246 6.44% $ 959 $ 67 6.99%
Mortgage-backed securities
held to maturity.............. 3,304 257 7.78 2,421 214 8.84 3,061 263 8.59
Other investment securities
held to maturity.............. 4,301 257 5.98 3,487 197 5.65 3,169 175 5.52
Loans receivable (2)............ 86,421 6,932 8.02 74,382 6,090 8.19 68,346 5,562 8.14
FHLB stock...................... 735 59 8.03 676 54 7.99 576 45 7.81
Total interest-earning assets.106,202 8,105 7.63 84,787 6,801 8.02 76,111 6,112 8.03
Non-interest earning assets, net of
allowance for loan losses....... 2,030 2,039 2,152
Total assets.................$108,232 $86,826 $ 78,263
Liabilities and shareholder's equity:
Interest-bearing liabilities:
Savings deposits................ $3,466 139 4.01 $3,845 159 4.14 $ 3,754 148 3.94
Interest-bearing demand......... 11,920 496 4.16 10,350 444 4.29 9,061 369 4.07
Certificates of deposit......... 46,999 2,729 5.81 47,403 2,764 5.83 46,035 2,716 5.90
Stock subscriptions refundable.. --- --- --- 2,737 130 4.75 --- --- ---
FHLB advances................... 873 51 5.84 5,748 339 5.90 3,566 191 5.36
Total interest-bearing
liabilities.............. 63,258 3,415 5.40 70,083 3,836 5.47 62,416 3,424 5.49
Other liabilities.................. 2,504 1,960 2,303
Total liabilities............. 65,762 72,043 64,719
Shareholders' equity............... 42,470 14,783 13,544
Total liabilities and
shareholders' equity.....$108,232 $86,826 $ 78,263
Net interest-earning assets........$42,944 $14,704 $ 13,695
Net interest income................ $4,690 $2,965 $2,688
Interest rate spread (3)........... 2.23% 2.55% 2.54%
Net yield on weighted average
interest-earning assets (4)..... 4.42% 3.50% 3.53%
Average interest-earning assets to
average interest-bearing liabilities 167.89% 120.98% 121.94%
</TABLE>
(1) Interest income on loans receivable includes loan fee income of $88,000
for the year ended December 31, 1998 and $97,000 for each of the years
ended December 31, 1997 and 1996.
(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.
<PAGE>
Interest Rate Spread
The Company'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. The Company's net interest income is
determined by the interest rate spread between the yields the Company 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 the Company earned on its loan and investment portfolios, the weighted
average effective cost of its deposits and advances, the interest rate spread,
and net yield on weighted average interest-earning assets for the periods and as
of the dates shown. Average balances are based on average month-end balances.
Management believes that the use of month-end average balances instead of daily
average balances has not caused any material difference in the information
presented.
<TABLE>
<CAPTION>
At December 31, Year Ended December 31,
1998 1998 1997 1996
---- ---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C> <C>
Interest-earning deposits....................... 4.60% 5.24% 6.44% 6.99%
Mortgage-backed securities held to maturity..... 7.44 7.78 8.84 8.59
Other investment securities held to maturity.... 6.30 5.98 5.65 5.52
Loans receivable................................ 7.85 8.02 8.19 8.14
FHLB stock...................................... 8.00 8.03 7.99 7.81
Total interest-earning assets................. 7.58 7.63 8.02 8.03
Weighted average interest rate cost of:
Savings deposits................................ 4.00 4.01 4.14 3.94
Interest-bearing demand......................... 4.52 4.16 4.29 4.07
Certificates of deposit......................... 5.73 5.81 5.83 5.90
Stock subscriptions refundable.................. --- --- 4.75 ---
FHLB advances................................... 5.71 5.84 5.90 5.36
Total interest-bearing liabilities............ 5.41 5.40 5.47 5.49
Interest rate spread (1)........................... 2.18 2.23 2.55 2.54
Net yield on weighted average
interest-earning assets (2)..................... N/A 4.42 3.50 3.53
</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.
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected the Company'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.
<PAGE>
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
----------------------------------------------------
Total
Due to Due to Net
Rate Volume Change
(In thousands)
Year ended December 31, 1998 compared
to year ended December 31, 1997
Interest-earning assets:
<S> <C> <C> <C>
Interest-earning deposits.................................. $ (53) $407 $354
Mortgage-backed securities held to maturity................ (28) 71 43
Other investment securities held to maturity............... 12 48 60
Loans receivable........................................... (126) 968 842
FHLB stock................................................. --- 5 5
------ ----- --------
Total.................................................... (195) 1,499 1,304
------ ----- --------
Interest-bearing liabilities:
Savings deposits........................................... (5) (15) (20)
Interest-bearing demand.................................... (14) 66 52
Certificates of deposit.................................... (12) (23) (35)
Stock subscriptions refundable............................. --- (130) (130)
FHLB advances.............................................. (3) (285) (288)
------ ----- --------
Total.................................................... (34) (387) (421)
------ ----- --------
Net change in net interest income............................ $ (161) $1,886 $1,725
====== ====== ======
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
====== ===== ========
</TABLE>
<PAGE>
Financial Condition at December 31, 1998 Compared to Financial Condition at
December 31, 1997
Total assets decreased $23.9 million, or 18.1% at December 31, 1998,
compared to December 31, 1997. The decline was primarily in cash and cash
equivalents, which decreased $38.6 million as the result of the Company's
payment of the stock subscriptions refundable of $22.7 million at December 31,
1997. This decrease in cash and cash equivalents was offset by increases in net
loans and investment securities held to maturity. Net loans increased $12.5
million, or 15.9%, due primarily to an increase in customer demand. Investment
securities held to maturity increased by $2.2 million, or 37.9%.
Average assets increased $21.4 million from $86.8 million for the year
ended December 31, 1997, to $108.2 million for the year ended December 31, 1998,
an increase of 24.7%. Average interest-earning assets represented 97.7% of
average assets for the period ended December 31, 1997 compared to 98.1% for the
period ended December 31, 1998. Although the average of each interest-earning
asset increased during 1998, average interest-earning deposits and loans
experienced the largest increases amounting to $7.6 million and $12.0 million,
or 199.4% and 16.2%, respectively. The increase in average interest-earning
assets was a result of the proceeds received from the stock conversion in the
fourth quarter of 1997. Average interest-earning assets as a percentage of
average interest-bearing liabilities were 121.0% for 1997 and 167.9% for 1998.
Loans and Allowance for Loan Losses. Average loans increased $12.0 million,
or 16.2%, from the period ended December 31, 1997 to December 31, 1998. The
growth in loans was funded by stock conversion proceeds. Average loans were
$74.4 million for the 1997 period and $86.4 million for the 1998 period. The
allowance for loan losses as a percentage of total loans increased from .32% to
.40% due to an increase in the allowance for loan losses from $252,000 at
December 31, 1997 to $362,000 at December 31, 1998. The increase in the
allowance for loan losses was a result of a $110,000 provision for loan losses
for the year ended December 31, 1998. This increase in the allowance was due to
loan growth and an increase in non-performing loans. The ratio of the allowance
for loan losses to non-performing loans was 484.6% at December 31, 1997 compared
to 103.7% at December 31, 1998. Nonperforming loans increased from $52,000 at
December 31, 1997 to $349,000 at December 31, 1998. Included in nonperforming
loans at December 31, 1998 were $322,000 of impaired loans.
Deposits. Deposits increased $2.6 million to $64.8 million during 1998, an
increase of 4.2%. Increased deposits were utilized to fund loan growth.
Certificates of deposits accounted for the majority of the growth with an
increase of $2.6 million, or 5.7%, during this period. Average total deposits
increased $787,000, or 1.3%, from $61.6 million for the year ended December 31,
1997 compared to $62.4 million for the year ended December 31, 1998.
Borrowed Funds. Borrowed funds decreased $1.8 million, or 49.8%, from
December 31, 1997 to December 31, 1998. The decline in total borrowed funds was
comprised of a decrease in FHLB advances of $1.6 million, 67.5%, 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
$179,000, or 14.9%. 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. Due to the conversion
proceeds available to fund loan growth, it was not necessary to renew advances
as they matured. Average FHLB advances decreased to $873 million for 1998
compared to $5.7 million for 1997, a decrease of $4.9 million, or 84.8%.
Shareholders' Equity. Shareholders' equity decreased $2.4 million from
$42.9 million at December 31, 1997 to $40.5 million at December 31, 1998. The
decrease was primarily due to the $1.8 million contribution made to fund the
recognition and retention compensation plan, stock repurchases of $1.9 million
and cash dividends of $1.3 million. These decreases were offset by net income
for the year ended December 31, 1998 of $2.0 million, Employee Stock Ownership
Plan shares earned of $149,000 and unearned compensation amortization of
$114,000.
<PAGE>
Financial Condition at December 31, 1997 Compared to Financial Condition at
December 31, 1996
Total assets increased $49.3 million, or 59.5% at December 31, 1997,
compared to December 31, 1996. The largest increases were primarily in cash and
cash equivalents which increased $43.3 million, and net loans which increased
$5.7 million. The increase in cash and cash equivalents was principally in
short-term interest-bearing deposits due to net proceeds from the conversion and
stock subscriptions refundable. Net proceeds of the Holding Company's stock
issuance, after costs and excluding the shares issued for the ESOP, were $27.8
million and stock subscriptions refundable were $22.7 million. The increase in
net loans was principally in real estate mortgage loans, and a result of
increased customer demand.
Average assets increased $8.5 million from $78.3 million for the period
ended December 31, 1996, to $86.8 million for the period ended December 31,
1997, an increase of 10.9%. Average interest-earning assets represented 97.3% of
average assets for the period ended December 31, 1996 compared to 97.7% for the
period ended December 31, 1997. Although the average of most interest-earning
assets increased during 1997, average loans experienced the largest increase
amounting to $6.0 million, or 8.8%, compared to 1996. Average interest-earning
assets as a percentage of average interest-bearing liabilities were 121.9% for
1996 and 121.0% for 1997.
Average balances of mortgage-backed securities held to maturity
decreased $640,000, or 20.9%, from December 31, 1996 to December 31, 1997 as a
result of principal repayments, while other investment securities held to
maturity increased $318,000, or 10.0%, from $3.2 million for the period ended
December 31, 1996 to $3.5 million for the period ended December 31, 1997 due to
purchases. Although no mortgage-backed securities have been purchased for
several years, mortgage-backed securities have been purchased on occasion and
are considered for purchase on an ongoing basis because such instruments offer
liquidity and lower credit risk than other types of investments. The primary
risk associated with these instruments is that in a declining interest rate
environment the prepayment level of the loans underlying these securities will
accelerate, which reduces the effective yield and exposes the association to
interest rate risk on the prepaid amounts. In an increasing rate environment,
the primary risk associated with these securities is that the fixed-rate portion
of such securities will not adjust to market rates which reduces our spread.
See "Business -- Investments -- Mortgage-Backed Securities."
Loans and Allowance for Loan Losses. Average loans increased $6.0
million, or 8.8%, from the period ended December 31, 1996, to December 31, 1997.
The growth in loans was in part funded by increased average deposits of $2.7
million and increased average FHLB advances of $2.2 million. Average loans were
$68.3 million for the 1996 period and $74.4 million for the 1997 period. The
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.
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.
Comparison of Operating Results For Years Ended December 31, 1998 and 1997
General. Net income increased $776,000, or 64.8%, from $1.2 million for
the year ended December 31, 1997 to $2.0 million for the year ended December 31,
1998. The increase was primarily due to an increase in net interest income which
was primarily attributable to the Company's stock issuance on December 29, 1997
which resulted in net proceeds to the Company in the amount of approximately
$27.8 million after costs and excluding the shares issued for the Employee Stock
Ownership Plan. The Company primarily used the proceeds of the stock offering to
invest in loans and short-term interest-bearing deposits and for the repayment
of Federal Home Loan Bank advances, which resulted in increased net interest
income. The return on average assets was 1.82% and 1.38 % for the years ended
December 31, 1998 and 1997, respectively.
Interest Income. Our total interest income was $8.1 million for 1998
compared to $6.8 million for 1997. The increase in interest income was due
primarily to an increase in volume. Average earning assets increased $21.4
million, or 25.3%, from $84.8 million for 1997 compared to $106.2 million for
1998. The average yield on interest-earning assets decreased from 8.0% for the
year ended December 31, 1997 to 7.6% for the comparable period in 1998.
Interest Expense. Interest expense decreased $421,000, or 11.0%, for
the year ended December 31, 1998 compared to the year ended December 31, 1997.
Average interest-bearing liabilities decreased $6.8 million, or 9.7%, from $70.1
million for the 1997 period to $63.3 million during the 1998 period. Average
deposits increased by $787,000, or 1.3%, from $61.6 million for the 1997 period
to $62.4 million for the 1998 period. Average FHLB advances decreased $4.9
million, or 84.8%, from $5.8 million for the 1997 period to $873,000 during the
1998 period.
Net Interest Income. Net interest income increased $1.7 million, or
58.2%, for the year ended December 31, 1998 compared to the year ended December
31, 1997. $1.9 million of the increase was primarily due to the increase in
volume of earning assets. The net yield of weighted average interest-earning
assets was 4.4% for the year ended December 31, 1998 compared to 3.5% for the
comparable 1997 period.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1998 was $110,000 compared to $165,000 for the same period in
1997. The provision and the related increase in the allowance for loan losses
were considered adequate, based on growth, size, condition and components of the
loan portfolio.
Other Losses. Other losses decreased $48,000, or 50.0%, for the year
ended December 31, 1998 compared to the 1997 period primarily due to decreased
losses of $37,000 from Union Federal's 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 1998 and 1997 was recorded.
<PAGE>
Salaries and Employee Benefits. Salaries and employee benefits were
$850,000 for the year ended December 31, 1998 compared to $480,000 for the 1997
period, an increase of $370,000, or 77.1%. This increase resulted primarily from
$263,000 of compensation expense related to the ESOP and the recognition and
retention compensation plan. The remaining increase resulted from an increase in
the number of full-time equivalent employees and normal increases in employee
compensation and related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy expenses and equipment
expenses increased $6,000, or 9.8%, during 1998 compared to 1997.
Deposit Insurance Expense. Deposit insurance expense increased $15,000,
or 48.4%, from $31,000 for the year ended December 31, 1997 to $46,000 for the
same period in 1998.
Legal and Professional Fees. Legal and professional fees were $128,000
for the year ended December 31, 1998 compared to $34,000 for the 1997 period, an
increase of $94,000. This increase was a result of the additional expenses
incurred as a public company.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, supervisory examination
fees, supplies, and postage increased $18,000, or 5.1% for 1998 compared to
1997. The increase resulted from nominal increases in a variety of expense
categories.
Income Tax Expense. Income tax expense increased $549,000, or 100.7%,
during 1998 compared to 1997. The increase was directly related to the increase
in taxable income for the period. The effective tax rate was 35.7% and 31.2% for
the respective 1998 and 1997 periods.
Comparison of Operating Results For Years Ended December 31, 1997 and 1996
General. Net income increased $312,000, or 35.2%, from $886,000 for the
year ended December 31, 1996 to $1,198,000 for the year ended December 31, 1997.
The increase is primarily due to an increase in net interest income and a
decrease in deposit insurance expense. The return on average assets was 1.38%
and 1.13 % for the years ended December 31, 1997 and 1996, respectively.
Interest Income. Our total interest income was $6.8 million for 1997
compared to $6.1 million for 1996. The increase in interest income was due
primarily to an increase in volume. Average earning assets increased $8.7
million, or 11.4%, from $76.1 million for 1996 compared to $84.8 for 1997. The
average yield on interest-earning assets decreased slightly from 8.03% for the
year ended December 31, 1996 to 8.02% for the comparable period in 1997.
Interest Expense. Interest expense increased $412,000, or 12.0%, for
the year ended December 31, 1997 compared to the year ended December 31,1996.
Average interest-bearing liabilities increased $7.7 million, or 12.3%, from
$62.4 million for the 1996 period to $70.1 million during the 1997 period. The
average balance of each deposit type increased from the 1996 period to the 1997
period with a $2.7 million, or 4.6%, increase in total average deposits. Average
FHLB advances increased $2.1 million, or 58.3%, from $3.6 million for the 1996
period to $5.7 million during the 1997 period.
Net Interest Income. Net interest income increased $277,000, or 10.3%,
for the year ended December 31, 1997 compared to the year ended December 31,
1996. The increase was primarily due to the $253,000 increase due to volume
increases. The interest spread was 2.55% for the year ended December 31, 1997
compared to 2.54% for the comparable 1996 period.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1997 was $165,000 compared to $48,000 for the same period in
1996. The provision for loan losses increased due to the increase in outstanding
loans and the losses recorded in 1997 associated with non-performing loans
secured by multi-family real estate. In response to the loss experienced in
1997, the risk factor used on multi-family and commercial real estate loans was
increased.
<PAGE>
Other Losses. Other losses decreased $20,000, or 17.2%, for the year
ended December 31, 1997 compared to the 1996 period primarily due to decreased
losses of $15,000 from our investment in a low-income housing income tax credit
limited partnership. The investment in the limited partnership represents a 99%
equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a
benefit of low income housing income tax credits in the amount of $178,000 for
both 1997 and 1996 was recorded.
Salaries and Employee Benefits. Salaries and employee benefits were
$480,000 for the year ended December 31, 1997 compared to $461,000 for the 1996
period, and increase of $19,000, or 4.1%. This increase resulted from the
addition of 3 full-time employees to our staff and normal increases in employee
compensation and related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy expenses and equipment
expenses increased $2,000, or 3.4%, during 1997 compared to 1996.
Deposit Insurance Expense. Deposit insurance expense decreased
$464,000, or 93.7%, from $495,000 for the year ended December 31, 1996 to
$31,000 for the same period in 1997. This decrease was due to the one time
Savings Association Insurance Fund ("SAIF") special assessment of approximately
$362,000 expensed in the fourth quarter of 1996. The recapitalization of SAIF
resulted in a decline in the assessment for 1997. Prior to the recapitalization
of SAIF, an assessment of $.23 per $100 of deposits was paid. Subsequent to the
recapitalization, the assessment was reduced to $.0644 per $100 of deposits.
Legal and Professional Fees. Legal and professional fees increased
$5,000, or 17.2%, during 1997 compared to 1996.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, supervisory examination
fees, supplies, and postage increased $97,000, or 37.6% 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.
Liquidity and Capital Resources
The following is a summary of the Company'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 the Company 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, 1998.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1998 1997 1996
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Operating activities.......................................... $2,355 $1,367 $ 1,088
-------- ------- -------
Investing activities:
Investment securities
Proceeds from maturities and paydowns of
mortgage-backed securities held to maturity.............. 607 639 676
Purchases of other investment
securities held to maturity............................ (9,204) (1,200) (994)
Proceeds from maturities of
investment securities held to maturity................. 6,400 500 2,000
Purchase of loans............................................. (500) (1,350)
Other net change in loans..................................... (12,529) (5,517) (10,116)
Purchase of FHLB of Indianapolis Stock........................ (37) (128) (18) Proceeds
on sale of foreclosed real estate............................. 5 76 ---
Purchases of premises and equipment........................... (18) (23) (3)
Other investing activities.................................... (2) (3) ---
-------- ------- -------
Net cash used by investing activities.................... (14,778) (6,156) (9,805)
-------- ------- -------
Financing activities:
Net change in
Interest-bearing demand and savings deposits............... (28) 2,696 1,243
Certificates of deposits................................... 2,616 (874) 1,786
Stock subscription escrow accounts......................... (22,687) 22,687 ---
Proceeds from borrowings...................................... 1,500 10,500
Repayment of borrowings....................................... (1,780) (5,807) (5,261)
Net change in advances by borrowers
for taxes and insurance.................................... 54 20 (79)
Cash dividends................................................ (729) --- ---
Contribution of unearned compensation ........................ (1,754) --- ---
Repurchase of common stock.................................... (1,859) --- ---
Proceeds from sale of common stock, net of costs.............. 27,883 ---
-------- ------- -------
Net cash provided (used) by financing activities......... (26,167) 48,105 8,189
-------- ------- -------
Net increase(decrease) in cash and cash equivalents.......... $(38,590) $43,316 $ (528)
======== ======= =======
</TABLE>
Federal law requires that savings associations maintain an average daily
balance of liquid assets in an amount not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. Liquid assets include cash,
certain time deposits, certain bankers' acceptances, specified U.S. government,
state or federal agency obligations, certain corporate debt securities,
commercial paper, certain mutual funds, certain mortgage-related securities, and
certain first-lien residential mortgage loans. The OTS recently amended its
regulation that implements this statutory liquidity requirement to reduce the
amount of liquid assets a savings association must hold from 5% of net
withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated
the requirement that savings associations maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. The revised OTS rule also permits
savings associations to calculate compliance with the liquidity requirement
based upon their average daily balance of liquid assets during each quarter
rather than during each month, as was required under the prior rule. The OTS may
impose monetary penalties on savings associations that fail to meet these
liquidity requirements. As of December 31, 1998, Union Federal had liquid assets
of $8.1 million, and a regulatory liquidity ratio of 10.8%.
<PAGE>
Pursuant to OTS capital regulations, savings associations must currently
meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital)
requirement, and a total risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1998, 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, 1998:
<TABLE>
<CAPTION>
At December 31, 1998
---------------------------------------------------------------------------
OTS Requirement Union Federal's Capital Level
-------------------- -----------------------------------------
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Tangible capital.................... 1.5% $1,610 28.3% $30,331 $28,721
Core capital (2).................... 3.0 3,219 28.3 30,331 27,112
Risk-based capital.................. 8.0 4,325 56.7 30,693 26,368
</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 adopted a core capital requirement for savings associations
comparable to that recently adopted by the OCC for national banks. The
new regulation, which becomes effective on April 1, 1999, requires at
least 3% of total adjusted assets for savings associations that receive
the highest supervisory rating for safety and soundness, and 4% to 5%
for all other savings associations. Union Federal will be in compliance
with the revised regulation when it takes effect.
As of December 31, 1998, 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
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires companies to record
derivatives on the balance sheet at their fair value. SFAS No. 133 also
acknowledges that the method of recording a gain or loss depends on the use of
the derivative. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a
foreign-currency- denominated forecasted transaction.
o For a derivative designated as hedging the exposure to changes in the
fair value of a recognized asset or liability or a firm commitment
(referred to as a fair value hedge), the gain or loss is recognized in
earnings in the period of change together with the offsetting loss or
gain on the hedged item attributable to the risk being hedged. The
effect of that accounting is to reflect in earnings the extent to
which the hedge is not effective in achieving offsetting changes in
fair value.
o For a derivative designated as hedging the exposure to variable cash
flows of a forecasted transaction (referred to as a cash flow hedge),
the effective portion of the derivative's gain or loss is initially
reported as a component of other comprehensive income (outside
earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. The ineffective portion of
the gain or loss is reported in earnings immediately.
<PAGE>
o For a derivative designated as hedging the foreign currency exposure
of a net investment in a foreign operation, the gain or loss is
reported in other comprehensive income (outside earnings) as part of
the cumulative translation adjustment. The accounting for a fair value
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of an unrecognized firm commitment or an
available-for-sale security. Similarly, the accounting for a cash flow
hedge described above applies to a derivative designated as a hedge of
the foreign currency exposure of a foreign-currency-denominated
forecasted transaction.
o For a derivative not designated as a hedging instrument, the gain or
loss is recognized in earnings in the period of change.
The new Statement applies to all entities. If hedge accounting is elected
by the entity, the method of assessing the effectiveness of the hedging
derivative and the measurement approach of determining the hedge's
ineffectiveness must be established at the inception of the hedge.
SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and
119. SFAS No. 107 is amended to include the disclosure provisions about the
concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task
Force consensuses are also changed or nullified by the provisions of SFAS No.
133.
SFAS No. 133 will be effective for all fiscal years beginning after
June 15, 1999. Early application is encouraged; however, this Statement may not
be applied retroactively to financial statements of prior periods.
FASB has issued Statement of Financial Accounting Standards No. 134,
Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement
establishes accounting standards for certain activities of mortgage banking
enterprises and for other enterprises with similar mortgage operations. This
Statement amends Statement of Financial Accounting Standards (SFAS) No. 65.
SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a
mortgage banking enterprise to classify a mortgage-backed security as a trading
security following the securitization of the mortgage loan held for sale. This
Statement further amends SFAS No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
must classify the resulting mortgage-backed security or other retained interests
based on the entity's ability and intent to sell or hold those investments.
The determination of the appropriate classification for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise now conforms to SFAS No. 115. The only requirement the new Statement
adds is that if an entity has a sales commitment in place, the security must be
classified into trading.
This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. On the date this Statement is initially applied, an
entity may reclassify mortgage-backed securities and other beneficial interests
retained after the securitization of mortgage loans held for sale from the
trading category, except for those with sales commitments in place. Those
securities and other interests shall be classified based on the entity's present
ability and intent to hold the investments.
<PAGE>
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The Company's primary assets and liabilities are monetary in nature. As
a result, interest rates have a more significant impact on the 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 the Company'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 the Company has made. The Company 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
The Company's lending and deposit activities, like those of most
financial institutions, depend significantly upon computer systems. The Company
is addressing the potential problems associated with the possibility that the
computers that it uses to control its operating systems, facilities and
infrastructure may not be programmed to read four-digit date codes. This could
cause some computer applications to be unable to recognize the change from the
year 1999 to the year 2000, which could cause computer systems to generate
erroneous data or to fail.
The Company is actively monitoring its compliance with making its
computer equipment and other information systems Year 2000 compliant. During the
first week of March 1999, the Company switched its electronic data service
provider from On-Line Financial Services, Inc. in Oak Brook, Illinois to
Intrieve Incorporated, located in Cincinnati, Ohio ("Intrieve"). The Company
changed data service providers in order to improve the quality of its computer
and networking technology. Testing conducted during the second week of March
1999 indicates that the data that the Company maintains on Intrieve's system is
Year 2000 compliant. The Company incurred expenses of approximately $34,000 in
converting its data processing to Intrieve's system. It is not expected that
data processing expenses incurred by the Company in the future will differ
materially from prior periods. Banker's Systems, which maintains the Company's
loan documentation system, conducted tests during December 1998 that indicated
that its systems are Year 2000 compliant. The Company will continue to conduct
tests during the remainder of 1999 to ensure that its data processing and
information systems are Year 2000 compliant.
The Company has also contacted the approximately 49 companies that
supply or service its material operations requesting that they certify by
December 31, 1998 that they have plans to make their respective systems Year
2000 compliant. The Company received responses from 29 of these companies
confirming that their systems are Year 2000 compliant. Followup letters have
been delivered to the parties that did not respond to this initial inquiry and,
in some cases, the Company has contacted them by telephone requesting that
confirmation that their systems are Year 2000 compliant. A deadline of May 1,
1999 has been established for venders to respond to this second inquiry.
Notwithstanding these efforts that the Company has made, no assurances can be
given that the systems of its service providers will be timely renovated to
address the Year 2000 issue.
The Company's Board of Directors reviews on a monthly basis its
progress in addressing Year 2000 issues and has appointed three executive
officers to address all aspects of Year 2000 compliance. The Company believes
that its expenses related to upgrading its systems and software for Year 2000
<PAGE>
compliance will not exceed $10,000. At December 31, 1998, the Company had spent
approximately $5,000 in connection with Year 2000 compliance. Although the
Company believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that it will not incur significant additional expenses in future periods. In
the event that the Company is ultimately required to purchase replacement
computer systems, programs and equipment, or to incur substantial expenses to
make its current systems, programs and equipment Year 2000 compliant, its net
income and financial condition could be adversely affected.
In addition to possible expenses related to the Company's own systems
and those of its service providers, the Company could incur losses if Year 2000
problems affect any of its depositors or borrowers. Such problems could include
delayed loan payments due to Year 2000 problems affecting any of its significant
borrowers or impairing the payroll systems of large employers in its market
area. The Company has contacted the approximately 18 commercial borrowers with
outstanding loans in excess of $500,000 for confirmation that, by June 1, 1999,
their computer systems are, or soon will be, Year 2000 compliant. In addition,
the Company requires that borrowers under new commercial loans that it
originates certify that they are aware of the Year 2000 issue and will give all
necessary attention to insure that their information technology will be Year
2000 compliant. Because the Company's loan portfolio to individual borrowers is
diversified and its market area does not depend significantly upon one employer
or industry, the Company does not expect any such Year 2000 related difficulties
that may affect its depositors and borrowers to significantly affect its net
earnings or cash flow.
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 78.5% of its loan portfolio at December 31,
1998. 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.
<PAGE>
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal
does not meet either of these requirements, it is not required to file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
It is estimated that at December 31, 1998, NPV would decrease 15% and
31% in the event of 200 and 400 basis point increases in market interest rates,
respectively, compared to 12% and 26% for the same increases at December 31,
1997. Union Federal's NPV at December 31, 1998 would increase 9% and 19% in the
event of 200 and 400 basis point decreases in market rates, respectively. A year
earlier, 200 and 400 basis point decreases in market rates would have increased
NPV 6% and 14%, respectively.
Presented below, as of December 31, 1998 and 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 200 basis point increments, up and down 400 basis points. At December
31, 1998, 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 $4.9 million at December 31, 1998, Union Federal would have been
required to deduct $1.4 million 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 its
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 * $22,919 $(10,498) (31)% 23.14% (702) bp
+ 200 bp 28,509 (4,907) (15) 27.08 (308) bp
0 bp 33,417 30.16
- 200 bp 36,542 3,125 9 31.90 175 bp
- 400 bp 39,871 6,454 19 33.68 352 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets..................... 30.16%
Exposure Measure: Post-Shock NPV Ratio............................ 27.08%
Sensitivity Measure: Change in NPV Ratio.......................... 308 bp
Change in NPV as % of PV of Assets................................ 10.21%
<PAGE>
<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> <C>
+ 400 bp * $24,383 $(8,362) (26)% 23.94% (555) bp
+ 200 bp 28,860 (3,885) (12)% 27.03% (246) bp
0 bp 32,746 29.49%
- 200 bp 34,782 2,036 6 % 30.67% 118 bp
- 400 bp 37,247 4,501 14 % 32.08% 259 bp
</TABLE>
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets...................... 29.49%
Exposure Measure: Post-Shock NPV Ratio............................. 27.03%
Sensitivity Measure: Change in NPV Ratio........................... 246 bp
Change in NPV as % of PV of Assets................................. 8.34%
* Basis points (1 basis point equals .01%)
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 consolidated balance sheet of Union Community Bancorp and
subsidiary as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Indianapolis, Indiana
February 19, 1999
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31 1998 1997
------------- -------------
Assets
<S> <C> <C>
Cash $ 32,153 $ 22,424
Interest-bearing demand deposits 6,158,927 44,758,403
------------- -------------
Cash and cash equivalents 6,191,080 44,780,827
Investment securities held to maturity
(fair value of $8,175,000 and $6,003,000) 8,026,162 5,820,069
Loans, net of allowance for loan losses of $362,258 and $252,258 90,900,269 78,435,741
Premises and equipment 355,194 367,360
Federal Home Loan Bank stock 744,500 707,700
Investment in limited partnership 1,055,109 1,176,109
Interest receivable 714,691 581,526
Other assets 174,687 170,925
------------- -------------
Total assets $ 108,161,692 $ 132,040,257
============= =============
Liabilities
Deposits
Noninterest bearing $ 656,796 $ 1,532,647
Interest bearing 64,188,836 60,725,398
------------- -------------
Total deposits 64,845,632 62,258,045
Stock subscriptions refundable 22,687,104
Federal Home Loan Bank advances 772,226 2,373,051
Note payable 1,020,642 1,200,042
Interest payable 109,337 118,867
Dividends payable 270,567
Other liabilities 612,427 497,271
------------- -------------
Total liabilities 67,630,831 89,134,380
------------- -------------
Commitments and contingent liabilities
Shareholders' 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--2,889,663 and 3,041,750 shares 28,193,644 29,637,592
Retained earnings 15,708,073 15,108,285
Unearned employee stock ownership plan ("ESOP") shares (1,730,736) (1,840,000)
Unearned recognition and retention plan ("RRP") shares (1,640,120)
------------- -------------
Total shareholders' equity 40,530,861 42,905,877
------------- -------------
Total liabilities and shareholders' equity $ 108,161,692 $ 132,040,257
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
Interest and Dividend Income
<S> <C> <C> <C>
Loans $ 6,932,194 $ 6,090,003 $ 5,561,735
Investment securities
Mortgage-backed securities 256,870 214,121 262,711
Other investment securities 257,305 196,937 175,332
Dividends on Federal Home Loan Bank stock 58,866 53,956 45,027
Deposits with financial institutions 599,612 245,927 66,886
----------- ----------- -----------
Total interest and dividend income 8,104,847 6,800,944 6,111,691
----------- ----------- -----------
Interest Expense
Deposits 3,364,222 3,366,097 3,232,877
Stock subscription escrow accounts 130,411
Federal Home Loan Bank advances 50,952 339,258 190,800
----------- ----------- -----------
Total interest expense 3,415,174 3,835,766 3,423,677
----------- ----------- -----------
Net Interest Income 4,689,673 2,965,178 2,688,014
Provision for loan losses 110,000 165,000 48,000
----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 4,579,673 2,800,178 2,640,014
----------- ----------- -----------
Other Income (Losses)
Equity in losses of limited partnership (121,000) (157,800) (172,552)
Other income 73,126 61,952 56,457
----------- ----------- -----------
Total other losses (47,874) (95,848) (116,095)
----------- ----------- -----------
Other Expenses
Salaries and employee benefits 849,909 479,726 460,615
Net occupancy expenses 38,741 39,159 39,103
Equipment expenses 28,182 22,436 19,886
Deposit insurance expense 45,847 31,482 494,679
Legal and professional fees 128,193 33,813 28,880
Other expenses 372,314 354,706 258,774
----------- ----------- -----------
Total other expenses 1,463,186 961,322 1,301,937
----------- ----------- -----------
Income Before Income Tax 3,068,613 1,743,008 1,221,982
Income tax expense 1,094,377 544,556 336,286
----------- ----------- -----------
Net Income $ 1,974,236 $ 1,198,452 $ 885,696
=========== =========== ===========
Basic Earnings per Share $ .70
Diluted Earnings per Share .70
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock
Shares Retained Unearned Unearned
Outstanding Amount Earnings ESOP Shares Compensation Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996 $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 $(1,840,000) (1,840,000)
---------------------------------------------------------------------------------------
Balances, December 31, 1997 3,041,750 29,637,592 15,108,285 (1,840,000) 42,905,877
Net income for 1998 1,974,236 1,974,236
Cash dividends ($.355 per share) (999,293) (999,293)
Purchase of common stock (152,087) (1,483,829) (375,155) (1,858,984)
Contribution for unearned
RRP shares $(1,753,853) (1,753,853)
Amortization of unearned
compensation expense 113,733 113,733
ESOP shares earned 39,881 109,264 149,145
---------------------------------------------------------------------------------------
Balances, December 31, 1998 2,889,663 $28,193,644 $15,708,073 $(1,730,736) $(1,640,120) $40,530,861
=======================================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 1,974,236 $ 1,198,452 $ 885,696
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 110,000 165,000 48,000
Depreciation 30,344 27,335 25,913
Deferred income tax (40,926) 36,750 (13,910)
Investment securities accretion, net (9,223) (11,677) (6,181)
Gains on sale of foreclosed real estate (2,500) (5,565)
Equity in losses of limited partnership 121,000 157,800 172,552
Amortization of unearned compensation expense 113,733
ESOP shares earned 149,145
Net change in
Interest receivable (133,165) (127,922) (83,459)
Interest payable (9,530) 27,415 (1,964)
Other assets (8,396) (21,878) (24,199)
Other liabilities 60,780 (78,749) 85,879
------------ ------------ ------------
Net cash provided by operating activities 2,355,498 1,366,961 1,088,327
------------ ------------ ------------
Investing Activities
Investment securities
Purchases of investment securities held to maturity (9,203,586) (1,200,000) (994,342)
Proceeds from maturities and paydowns of mortgage-backed
securities held to maturity 606,716 638,955 675,913
Proceeds from maturities of investment securities held to maturity 6,400,000 500,000 2,000,000
Net change in loans (12,529,034) (6,017,272) (11,466,414)
Purchases of premises and equipment (18,178) (23,331) (2,602)
Proceeds on sale of foreclose real estate 4,500 76,274
Purchase of Federal Home Loan Bank of Indianapolis stock (36,800) (127,600) (17,500)
Other investing activity (1,934) (2,728)
------------ ------------ ------------
Net cash used by investing activities (14,778,316) (6,155,702) (9,804,945)
------------ ------------ ------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (28,493) 2,695,812 1,243,027
Certificates of deposit 2,616,080 (874,209) 1,786,193
Stock subscription escrow accounts (22,687,104) 22,687,104
Proceeds from borrowings 1,500,000 10,500,000
Repayment of borrowings (1,780,225) (5,807,277) (5,261,331)
Cash dividends (728,726)
Contribution of unearned compensation (1,753,853)
Repurchase of common stock (1,858,984)
Net change in advances by borrowers for taxes and insurance 54,376 19,981 (79,558)
Proceeds from sale of common stock, net of costs 27,882,967
------------ ------------ ------------
Net cash provided (used) by financing activities (26,166,929) 48,104,378 8,188,331
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (38,589,747) 43,315,637 (528,287)
Cash and Cash Equivalents, Beginning of Year 44,780,827 1,465,190 1,993,477
------------ ------------ ------------
Cash and Cash Equivalents, End of Year $ 6,191,080 $ 44,780,827 $ 1,465,190
============ ============ ============
Additional Cash Flows Information
Interest paid $ 3,424,704 $ 3,808,351 $ 3,425,641
Income tax paid 984,063 527,433 375,405
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 13,619 163,540
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Note 1 -- 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 Company 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. Loans with payment 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, 1998, 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 assets are carried at the lower of cost or fair value less estimated
selling costs. When foreclosed assets are acquired, any required adjustment is
charged to the allowance for loan losses. All subsequent activity is included in
current operations.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Bank accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
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 have been computed based upon the weighted average common
shares outstanding during 1998. Unearned ESOP shares have been excluded from the
computation of average shares outstanding. Net income per share for the periods
before and including the conversion to a stock savings and loan association on
December 29, 1997, is not meaningful.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Note 2 -- 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 3,042,000 shares of
common stock at $10 per share. Net proceeds of the Company's stock issuance,
after costs of $780,000 and excluding the shares issued for the ESOP, were
$27,798,000, of which $14,861,000 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.
o Note 3 -- Investment Securities Held to Maturity
<TABLE>
<CAPTION>
1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agencies $4,500 $ 7 $28 $4,479
Mortgage-backed securities 3,526 174 4 3,696
------ ---- --- ------
Total investment securities $8,026 $181 $32 $8,175
====== ==== === ======
1997
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------
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>
<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,
1998, 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.
1998
------------------------------
Amortized Fair
December 31 Cost Value
- --------------------------------------------------------------------
Within one year $ 100 $ 100
One to five years 1,800 1,807
Five to ten years 500 500
After ten years 2,100 2,072
------ ------
4,500 4,479
Mortgage-backed securities 3,526 3,696
------ ------
Totals $8,026 $8,175
====== ======
Securities with a carrying value of $3,597,000 and $2,194,000 were pledged at
December 31, 1998 and 1997 to secure FHLB advances.
Mortgage-backed securities included in investment securities held to maturity
above consist of the following:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Government National Mortgage Corporation $ 991 $104 $1,095
Federal Home Loan Mortgage Corporation 2,395 69 2,464
Federal National Mortgage Corporation 123 1 $4 120
Other 17 17
------ ---- -- ------
Total mortgage-backed securities $3,526 $174 $4 $3,696
====== ==== == ======
1997
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------
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)
o Note 4 -- Loans and Allowance
<TABLE>
<CAPTION>
December 31 1998 1997
- --------------------------------------------------------------------------------------------
Real estate mortgage loans
<S> <C> <C>
One-to-four family $ 71,823 $ 62,436
Multi-family 10,609 10,197
Commercial 6,355 3,627
Real estate construction loans 2,545 2,530
Commercial loans 51
Individuals' loans for household and other personal expenditures 213 223
-------- --------
91,596 79,013
Deferred loan fees (334) (325)
Allowance for loan losses (362) (252)
-------- --------
Total loans $ 90,900 $ 78,436
======== ========
</TABLE>
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, Beginning of Period $ 252 $ 159 $ 111
Provision for losses 110 165 48
Loans charged off (72)
----- ----- -----
Balances, End of Period $ 362 $ 252 $ 159
===== ===== =====
Information on impaired loans is summarized below.
December 31 1998 1997
- --------------------------------------------------------------------------------
Impaired loans for which the discounted cash flows
or collateral value exceeds the carrying value of the loan $322 $ 0
Year Ended December 31 1998 1997
- --------------------------------------------------------------------------------
Average balance of impaired loans $110 $ 33
Interest income recognized on impaired loans 10
Cash basis interest included above 10
o Note 5 -- Premises and Equipment
December 31 1998 1997
- --------------------------------------------------------------------------------
Land $ 146 $ 146
Buildings 569 553
Equipment 140 142
Total cost 855 841
Accumulated depreciation (500) (474)
----- -----
Net $ 355 $ 367
===== =====
<PAGE>
Union Community Bancorp and Subsidiary
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Note 6 -- Investment in
Limited Partnership
The investment in limited partnership of $1,055,000 and $1,176,000 at December
31, 1998 and 1997 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, 1998, 1997 and 1996.
Condensed financial statements for Pedcor are as follows:
December 31 1998 1997
- -----------------------------------------------------------------
Condensed statement of financial condition
Assets
Cash $ 31 $ 5
Land and property 2,235 2,292
Other assets 19 55
------ ------
Total assets $2,285 $2,352
====== ======
Liabilities
Notes payable--
Association $ 772 $ 873
Notes payable--other 1,256 1,274
Other liabilities 159 165
------ ------
Total liabilities 2,187 2,312
Partners' equity 98 40
------ ------
Total liabilities and
partners' equity $2,285 $2,352
====== ======
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------
Condensed statement of operations
Total revenue $232 $219 $219
Total expenses 354 340 435
----- ----- -----
Net loss $(122) $(121) $(216)
===== ===== =====
o Note 7 -- Deposits
December 31 1998 1997
- ---------------------------------------------------------------------------
Noninterest-bearing demand $ 657 $ 1,533
Interest-bearing demand 11,982 9,965
Savings deposits 3,410 4,579
Certificates and other time
deposits of $100,000 or more 9,351 7,060
Other certificates and
time deposits 39,446 39,121
------- -------
Total deposits $64,846 $62,258
======= =======
Certificates and other time deposits maturing in years ending December 31:
1999 $29,059
2000 12,707
2001 3,657
2002 1,207
2003 2,167
-------
$48,797
=======
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Interest expense on deposits
Interest-bearing demand $ 496 $ 444 $ 369
Savings deposits 139 159 148
Certificates 2,729 2,763 2,716
------ ------ ------
$3,364 $3,366 $3,233
====== ====== ======
o Note 8-- Federal Home Loan Bank Advances
1998
Weighted
Average
December 31 Amount Rate
- -------------------------------------------------------
Advances from FHLB
Maturities in years ending
1999 $114 5.33%
2000 123 5.49
2001 129 5.67
2002 138 5.80
2003 147 5.90
2004 121 6.03
----
$772 5.71%
====
The Association has an available line of credit with the FHLB totaling
$1,000,000. The line of credit expires September 16, 1999 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, 1998.
FHLB advances are secured by first-mortgage loans and investment securities
totaling $73,501,000 and $62,517,000 at December 31, 1998 and 1997. Advances are
subject to restrictions or penalties in the event of prepayment.
o Note 9-- 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 1998
- ----------------------------------------------------------------------
Note payable to Pedcor Maturities in years ending:
1999 $ 183
2000 184
2001 177
2002 174
2003 171
Thereafter 132
--------
$ 1,021
========
<PAGE>
o Note 10 -- Income Tax
Year Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 848 $ 353 $ 246
State 287 155 104
Deferred
Federal (27) 37 (20)
State (14) 6
Total income
tax expense $ 1,094 $ 545 $ 336
Reconciliation of federal
statutory to actual tax expense
Federal statutory
income tax at 34% $ 1,043 $ 593 $ 415
Effect of state
income taxes 180 102 73
Tax credits (178) (178) (178)
Other 49 28 26
Actual tax expense $ 1,094 $ 545 $ 336
Effective tax rate 35.7% 31.2% 27.5%
The components of the cumulative net deferred tax asset are as follows:
December 31 1998 1997
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $144 $ 92
Loan fees 15 37
Business income tax credits 29
Pensions and employee
benefits 63
Other 2
---- ----
Total assets 222 160
---- ----
Liabilities
Depreciation 21 26
State income tax 6 2
FHLB stock dividend 23 23
Equity in partnership losses 87 70
Other 5
---- ----
Total liabilities 142 121
---- ----
$ 80 $ 39
==== ====
Retained earnings 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
including redemption of bank stock or excess dividends, 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.
o Note 11 -- Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Association uses the same credit policies in making
such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
December 31 1998 1997
- -------------------------------------------------------
Commitments to extend credit $2,566 $2,909
Standby letters of credit 2,514 2,014
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
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 Company and Association have 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 Company, 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 Company and Association are 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.
o Note 12 -- Year 2000
Like all entities, the Company and subsidiary are exposed to risks associated
with the Year 2000 Issue, which affects computer software and hardware;
transactions with vendors, and other entities; and equipment dependent on
microchips. The Company has begun, but not yet completed, the process of
identifying and remediating potential Year 2000 problems. It is not possible for
any entity to guarantee the results of its own remediation efforts or to
accurately predict the impact of the Year 2000 Issue on third parties with which
the Company and subsidiary do business. If remediation efforts of the Company or
third parties with which the Company and subsidiary do business are not
successful, the Year 2000 Issue could have negative effects on the Company's
financial condition and results of operation in the near term.
o Note 13 -- Dividend and Capital Restrictions
The OTS regulations provide that savings associations which meet fully phased-in
capital requirements and are subject only to "normal supervision" may pay out,
as a dividend, 100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the calendar year
without supervisory approval, but with 30 days prior notice to the OTS. OTS
regulations also prohibit a savings association from declaring or paying any
dividends if, as a result, the regulatory capital of the Association would be
reduced below the minimum amount required to be maintained for the liquidation
account established in connection with the conversion. Any additional amount of
capital distributions would require prior regulatory approval. Savings
associations failing to meet current capital standards may only pay dividends
with supervisory approval.
At the time of conversion, a liquidation account was established in an amount
equal to the Association's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Association after conversion. In the event
of a complete liquidation, and only in such event, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
<PAGE>
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 shareholders. 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
$14,473,000.
At December 31, 1998, the shareholders' equity of the Association was
$30,332,000, of which approximately $13,184,000 was available for the payment of
dividends.
o Note 14 -- 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 an association in
any of the undercapitalized categories can result in actions by regulators that
could have a material effect on an association's operations. At December 31,
1998 and 1997, the Association is categorized as well capitalized and meets all
subject capital adequacy requirements. There are no conditions or events since
December 31, 1998 that management believes have changed the Association's
classification.
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------------
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) $30,693 56.7% $4,325 8.0% $5,406 10.0%
Core capital 1 (to adjusted tangible assets) 30,331 28.3 3,219 3.0 6,438 6.0
Core capital 1 (to adjusted total assets) 30,331 28.3 3,219 3.0 5,365 5.0
1 As defined by regulatory agencies
</TABLE>
<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
1 As defined by regulatory agencies
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association's tangible capital at December 31, 1998 and 1997 was $30,331,000
and $29,969,000, which amount was 28.3% and 22.7% of tangible assets and
exceeded the required ratio of 1.5%.
o Note 15 -- 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. This plan is
a multi-employer plan; separate actuarial valuations are not made with respect
to each participating employer. Pension expense (benefit) was $2,000, ($4,000)
and $47,000 for 1998, 1997, 1996.
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 $10,000, $11,000 and $10,000 for 1998, 1997,
and 1996.
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 shareholders'
equity. Unearned ESOP shares totaled 173,074 and 184,000 at December 31, 1998
and 1997 and had a fair value of $1,947,000 and $2,691,000 at December 31, 1998
and 1997. 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 may be distributed to
participants or used to repay the loan, 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. ESOP expense for the year ended December
31, 1998 was $149,000. There was no expense under the ESOP for the year ended
December 31, 1997. At December 31, 1998, the ESOP had 10,926 allocated shares,
173,074 suspense shares and no committed-to-be released shares. At December 31,
1997, the ESOP had 184,000 suspense shares.
In connection with the conversion, the Board of Directors established a
Recognition and Retention Plan and Trust ("RRP"). The Bank contributed
$1,753,853 to the RRP for the purchase of 121,670 shares of Company common
stock, and effective June 30, 1998, awards of grants for 78,900 of these shares
were issued to various directors, officers and employees of the Association.
These awards generally are to vest and be earned by the recipient at a rate of
20 percent per year, commencing June 30, 1999. The unearned portion of these
stock awards is presented as a reduction of shareholders' equity.
o Note 16 -- Stock Option Plan
Under the Company's stock option plan (Plan), which is accounted for in
accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for
Stock Issued to Employees, and related interpretations, the Company grants
selected executives and other key employees stock option awards which vest at a
rate of 20 percent a year. During 1998, the Company authorized the grant of
options for up to 304,175 shares of the Company's common stock. Effective June
30, 1998, the Company granted 186,000 of the options. The exercise price of each
option, which has a ten-year life, was equal to the market price of the
Company's stock on the date of grant; therefore, no compensation expense was
recognized.
Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Company had
accounted for its employee stock options under that Statement. The fair value of
each option grant was estimated on the grant date using an option-pricing model
with the following assumptions:
<PAGE>
1998
- -----------------------------------------------------
Risk-free interest rates 5.5%
Dividend yields 2.7%
Volatility factors of expected
market price of common stock 14.0
Weighted-average expected life
of the options 7 years
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1998
- ---------------------------------------------------------------------------
Net income As reported $1,974
Pro forma 1,876
Basic earnings per share As reported .70
Pro forma .67
Diluted earnings per share As reported .70
Pro forma .67
The following is a summary of the status of the Company's stock option plan and
changes in that plan as of and for the year ended December 31, 1998.
Year Ended December 31 1998
Weighted-
Average
Exercise
Options Shares Price
- --------------------------------------------------------------------------
Outstanding, beginning of year
Granted $186,000 $14.59
-------- ------
Outstanding, end of year $186,000 $14.59
======== ======
Options exercisable at year end 0
Weighted-average fair value of
options granted during the year $2.94
As of December 31, 1998, the 186,000 options outstanding have an exercise price
of $14.59 and a weighted-average remaining contractual life of 9.5 years.
o Note 17 -- Related Party Transactions
The Association has entered into transactions with certain directors, executive
officers, significant shareholders 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.
Balances, January 1, 1998 $2,358
- ------------------------------------------------------
New loans, including renewals 266
Payments, etc. including renewals (531)
-------
Balances, December 31, 1998 $2,093
=======
Deposits from related parties held by the Association at December 31, 1998
totaled $1,826,000.
<PAGE>
o Note 18 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
--------------------------------------------------
Weighted Average Per-Share
Income Shares Amount
- ---------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
<S> <C> <C> <C>
Income available to common shareholders $1,974 2,804,584 $.70
Effect of Dilutive Securities
Stock options 9
-------------------------------
Diluted Earnings Per Share
Income available to common
shareholders and assumed conversions $1,974 2,804,593 $.70
==============================================
</TABLE>
o Note 19 -- Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
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>
1998 1997
--------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Cash and cash equivalents $ 6,191 $ 6,191 $44,781 $44,781
Investment securities held to maturity 8,026 8,175 5,820 6,003
Loans, net 90,900 92,365 78,436 79,611
Stock in FHLB 745 745 708 708
Interest receivable 715 715 582 582
Liabilities
Deposits 64,846 61,460 62,258 62,476
Stock subscriptions refundable 22,687 22,687
Borrowings
FHLB advances 772 781 2,373 2,345
Notes payable--limited partnership 1,021 835 1,200 944
Interest payable 109 109 119 119
Advances by borrowers for taxes and insurance 275 275 221 221
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
o Note 20-- 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 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash $10,243 $13,022
Investment in subsidiary 30,332 29,927
Other assets 238
------- -------
Total assets $40,813 $42,949
======= =======
Liability--other $ 282 $ 43
Shareholders' Equity 40,531 42,906
------- -------
Total liabilities and
shareholders' equity $40,813 $42,949
======= =======
Condensed Statement of Income
December 31 1998 1997
- --------------------------------------------------------------------------------
Income
Interest income $ 4
-------
Other income 81
-------
85
Expenses
Salaries and
employee benefits 65
Legal and professional fees 97
Other expenses 14
Total expenses 176
-------
Loss before income tax
and equity in undistributed
income of subsidiaries (91)
Income tax benefit (20)
-------
Loss before equity in
undistributed income
of subsidiaries (71)
Equity in undistributed
income of subsidiaries 2,045 $ 1,198
------- -------
Net Income $ 1,974 $ 1,198
======= =======
<PAGE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1998 1997
Operating Activities
<S> <C> <C>
Net income $ 1,974 $ 1,198
Adjustments to reconcile net income to
net cash provided by operating activities (2,165) (1,198)
-------- --------
Net cash used by operating activities (191) 0
-------- --------
Financing Activities
Net proceeds from issuance of stock 27,883
Capital contribution to Association (14,861)
Cash dividend (729)
Repurchase of common stock (1,859)
-------- --------
Net cash provided (used) by financing activities (2,588) 13,022
-------- --------
Net Change in Cash (2,779) 13,022
Cash at Beginning of Year 13,022 0
-------- --------
Cash at End of Year $ 10,243 $ 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
</TABLE>
<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
President and Senior Loan Officer
Chief Executive Officer Vice President and
Assistant Secretary
Denise E. Swearingen Alan L. Grimble
Secretary, Controller/ Vice President
Treasurer
<PAGE>
Philip L. Boots (age 52) 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 71) has worked as a self-employed farmer in
Montgomery County since 1956. He currently is semi-retired from farming.
Phillip E. Grush (age 67) 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 part-time
employee/consultant.
Samuel H. Hildebrand, II (age 59) 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 62) has served as the president of Horner Pontiac
Buick, Inc. in Crawfordsville since 1974.
Harry A. Siamas (age 48) has practiced law in Crawfordsville since 1976
and has served as Union Federal's attorney for 18 years.
Joseph E. Timmons (age 64) 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, 1999, there were
approximately 550 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
- ----------- ------------ --------- ---------
January 31, 1998 $14 13/16 $14 1/16
February 28, 1998 14 5/8 14
March 31, 1998 15 7/8 14 1/2 $.075
April 30, 1998 15 1/2 14 11/16
May 31, 1998 15 5/8 14 1/2
June 30, 1998 15 1/8 14 1/8 .085
July 31, 1998 14 7/8 13 7/8
August 31, 1998 14 3/4 11 1/4
September 30, 1998 13 10 3/4 .095
October 31, 1998 12 13/16 9 13/16
November 30, 1998 12 3/8 10 1/2
December 31, 1998 13 10 1/2 .10
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
Olive LLP
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, 1998 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
