FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone numberincluding area code:
(765) 362-2400
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES _____ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 26 1999 was $29,758,300.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 31, 1998, was 2,889,663 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 29 Pages
<PAGE>
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................... 3
PART I
Item 1 Business.................................................... 3
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 4.5. Executive Officers of the Registrant........................ 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 26
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risks. 26
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 27
PART III
Item 10. Directors and Executive Officers of Registrant.............. 27
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................................... 27
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 27
SIGNATURES ........................................................ 28
<PAGE>
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Union Community Bancorp, an Indiana corporation (the "Holding
Company"), was organized in September, 1997. On December 29, 1997, it acquired
the common stock of Union Federal Savings and Loan Association ("Union Federal")
upon the conversion of Union Federal from a federal mutual savings and loan
association to a federal stock savings and loan association.
Union Federal was organized as a state-chartered savings and loan
association in 1913. Since then, Union Federal has conducted its business from
its full-service office located in Crawfordsville, Indiana. Union Federal's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Union Federal's
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Management believes that it has developed a solid reputation among its
loyal customer base because of its commitment to personal service and because of
strong support of the local community. Union Federal offers a number of
financial services, including: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans; (vi) money market demand accounts ("MMDAs"); (vii)
passbook savings accounts; and (viii) certificates of deposit.
Lending Activities
Union Federal has historically concentrated its lending activities on the
origination of loans secured by first-mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Union Federal's loan origination activities, representing 77.2% of its total
loan portfolio at December 31, 1998. Union Federal also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and, to a
limited extent, consumer loans consisting of loans secured by deposits and home
improvement loans. Mortgage loans secured by multi-family properties and
commercial real estate totaled approximately 11.4% and 6.8%, respectively, of
Union Federal's total loan portfolio at December 31, 1998. Construction loans
totaled approximately 4.3% of Union Federal's total loans as of December 31,
1998. Consumer loans, which consist of home improvement loans and passbook
loans, constituted approximately .2% of Union Federal's total loan portfolio at
December 31, 1998.
Loan Portfolio Data. The following table sets forth the composition of
Union Federal's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
<S> <C> <C> <C> <C> <C> <C>
One-to-four-family............... $71,823 77.19% $62,436 76.95% $57,031 77.46%
Multi-family..................... 10,609 11.40 10,197 12.57 10,920 14.83
Commercial....................... 6,355 6.83 3,627 4.47 3,593 4.88
Real estate construction loans...... 3,993 4.29 4,652 5.73 1,740 2.36
Commercial loans.................... 51 .06 --- --- --- ---
Consumer loans ..................... 213 .23 223 .28 346 .47
------- ------ ------- ------ ------- ------
Gross loans receivable......... $93,044 100.00% $81,135 100.00% $73,630 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family real estate... $73,130 78.60% $64,730 79.78% $58,271 79.14%
Multi-family real estate......... 12,037 12.93 11,172 13.77 11,520 15.65
Commercial real estate........... 7,666 8.24 5,094 6.28 3,593 4.88
Deposits......................... 160 .17 139 .17 246 .33
Other............................ 51 .06 --- --- --- ---
------- ------ ------- ------ ------- ------
Gross loans receivable......... 93,044 100.00 81,135 100.00 73,630 100.00
======= ====== ======= ====== ======= ======
Deduct:
Allowance for loan losses........... 362 .39 252 .31 159 .22
Deferred loan fees.................. 334 .36 325 .40 356 .48
Loans in process.................... 1,448 1.55 2,122 2.62 418 .57
------- ------ ------- ------ ------- ------
Net loans receivable............. $90,900 97.70% $78,436 96.67% $72,697 98.73%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $19,954 21.51% $ 20,683 25.56% $24,238 33.07%
Fixed-rate....................... 72,826 78.49 60,229 74.44 49,046 66.93
------- ------ ------- ------ ------- ------
Total.......................... $92,780 100.00% $80,912 100.00% $73,284 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31, 1998,
regarding the dollar amount of loans maturing in Union Federal's loan portfolio
based on the contractual terms to maturity. Demand loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects that prepayments will
cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2002 2004 2009 2014
December 31, to to to and
1998 1999 2000 2001 2003 2008 2013 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential loans.................. $71,823 $97 $485 $237 $1,119 $22,254 $29,191 $18,440
Multi-family loans.................... 10,609 --- 465 --- 285 3,826 4,269 1,764
Commercial loans................... 6,355 --- 9 9 88 1,151 1,414 3,684
Construction loans.................... 3,993 --- 914 514 --- 648 1,067 850
Commercial loans...................... 51 51 --- --- --- --- --- ---
Loans secured by deposits............. 160 160 --- --- --- --- --- ---
Home improvement loans................ 53 1 2 11 9 18 12 ---
------- ---- ------ ---- ------ ------- ------- -------
Total............................ $93,044 $309 $1,875 $771 $1,501 $27,897 $35,953 $24,738
======= ==== ====== ==== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1998, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
<TABLE>
<CAPTION>
Due After December 31, 1999
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
<S> <C> <C> <C>
Residential loans................................. $63,466 $8,260 $71,726
Multi-family loans................................ 4,021 6,588 10,609
Commercial loans.................................. 2,625 3,730 6,355
Construction loans................................... 2,619 1,374 3,993
Commercial loans..................................... --- --- ---
Installment loans.................................... --- --- ---
Loans secured by deposits............................ --- --- ---
Home improvement loans............................... 52 --- 52
------- ------- -------
Total............................................. $72,783 $19,952 $92,735
======= ======= =======
</TABLE>
One- to Four-Family Residential Loans. Union Federal's primary lending
activity consists of originating one- to four-family residential mortgage loans
secured by property located in its primary market area. Union Federal generally
does not originate one- to four-family residential mortgage loans if the ratio
of the loan amount to the lesser of the current cost or appraised value of the
property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private
mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and
factors the cost of such insurance into the annual percentage rate on such
loans. Union Federal originates and retains fixed rate loans which provide for
the payment of principal and interest over a 15- or 20-year period, or balloon
loans having terms of up to 15 years with principal and interest payments
calculated using a 30-year amortization period.
Union Federal also offers adjustable-rate mortgage ("ARM") loans. The
interest rate on ARM loans is indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity. Union Federal may offer discounted
initial interest rates on ARM loans, but requires that the borrower qualify for
the ARM loan at the fully-indexed rate (the index rate plus the margin). A
substantial portion of the ARM loans in Union Federal's portfolio at December
31, 1998 provide for maximum rate adjustments per year and over the life of the
loan of 1% and 5%, respectively. Union Federal's residential ARMs are amortized
for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 1998, approximately
21.5% of Union Federal's real estate mortgage loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Union
Federal originates include "due-on-sale" clauses, which give it the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, Union Federal occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At December 31, 1998, approximately $71.8 million, or 77.2% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $50,000, or .07% of total residential loans, were included
in non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At December 31, 1998, approximately $10.6 million, or
11.4% of Union Federal's total loan portfolio, consisted of mortgage loans
secured by multi-family dwellings (those consisting of more than four units).
Union Federal's multi-family loans are generally written as one-year adjustable
rate loans indexed to the one-year U.S. Treasury rate with an original term of
up to 20 years. Union Federal writes multi-family loans with maximum
Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of
December 31, 1998 had a balance of approximately $1.0 million and was secured by
28 duplexes located in Crawfordsville, Indiana. On the same date, Union Federal
had $210,000 in multi-family loans included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a greater
risk than do residential loans. See "-- Commercial Real Estate Loans" below.
Commercial Real Estate Loans. Union Federal's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Union Federal generally originates commercial real estate loans as one-year
adjustable rate loans indexed to the one-year U.S. Treasury securities yield
adjusted to a constant maturity, with a maximum term of 20 years and a maximum
Loan-to-Value ratio of 80%. At December 31, 1998, Union Federal's largest
commercial loan had an outstanding balance of $782,000 and was secured by
commercial property in Crawfordsville, Indiana. At December 31, 1998,
approximately $6.4 million, or 6.8% of Union Federal's total loan portfolio,
consisted of commercial real estate loans. On the same date, Union Federal had
$89,000 or 15.7% of commercial real estate loans included in non-performing
assets.
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate.
Construction Loans. Union Federal offers construction loans with respect
to residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). Union Federal provides
construction loans only to borrowers who commit to permanent financing on the
finished project. At December 31, 1998, approximately $4.0 million, or 4.3% of
Union Federal's total loan portfolio, consisted of construction loans. The
largest construction loan had a balance of $914,000 on December 31, 1998 and was
secured by a condominium project and golf course in Pittsboro, Indiana. None of
Union Federal's construction loans were included in non-performing assets on
that date.
Construction loans generally match the term of the construction contract
and are written as fixed-rate loans with interest calculated on the amount
disbursed under the loan and payable monthly. The maximum Loan-to-Value Ratio
for a construction loan is based upon the nature of the construction project.
For example, a construction loan for a one- to four-family residence may be
written with a maximum Loan-to-Value Ratio of 95%, while a construction loan for
a multi-family project may be written with a maximum Loan-to-Value Ratio of 80%.
Inspections are made prior to any disbursement under a construction loan. Union
Federal does not normally charge commitment fees for construction loans.
While providing Union Federal with a comparable, and in some cases higher,
yield than conventional mortgage loans, construction loans involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Union Federal may have to hire another contractor to complete the
project at a higher cost. Also, a project may be completed, but may not be
salable, resulting in the borrower defaulting and Union Federal's taking title
to the project.
Consumer Loans. Union Federal's consumer loans, consisting of passbook
loans and home improvement loans, aggregated approximately $213,000 at December
31, 1998, or .2% of its total loan portfolio. Union Federal's home improvement
loans generally have a fixed rate and a term of up to seven years. Union
Federal's passbook loans are made up to 90% of the deposit account balance and,
at December 31, 1998, accrued at a rate of 8.8%. This rate may change but will
always be at least 3% over the underlying passbook or certificate of deposit
rate. Interest on loans secured by deposits is paid semi-annually. At December
31, 1998, none of Union Federal's consumer loans were included in non-performing
assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. Union Federal historically has
originated its mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In
the event that Union Federal begins originating fixed-rate residential mortgage
loans for sale to the FHLMC in the secondary market, such loans will be
originated in accordance with the guidelines established by the FHLMC and will
be sold promptly after they are originated. Union Federal has no intention to
originate loans for sale to the FHLMC at this time, however.
Union Federal confines its loan origination activities primarily to
Montgomery County and the surrounding counties of Boone, Hendricks, Putnam,
Parke and Fountain. Union Federal has also originated several loans in Marion
County. At December 31, 1998, Union Federal also had six loans which it
originated, totaling approximately $641,000, secured by property located outside
of Indiana. Union Federal's loan originations are generated from referrals from
existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten and processed at Union Federal's
office.
Union Federal's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, Union Federal studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved or ratified by Union Federal's board
of directors.
Union Federal generally requires appraisals on all real property securing
its loans and requires an attorney's opinion and a valid lien on the mortgaged
real estate. Appraisals for all real property securing mortgage loans are
performed by independent appraisers who are state-licensed. Union Federal
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing its interest if the property is in a flood plain. Union
Federal also generally requires private mortgage insurance for all residential
mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow
accounts for insurance premiums and taxes for loans that require private
mortgage insurance.
Union Federal's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Union Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Union Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 1998, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $7.8 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $713,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 1998 was a $914,000 interest in a loan
secured by a condominium project and golf course located in Pittsboro, Indiana.
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period..................................... $81,135 $73,630 $63,024
Loans originated:
Real estate mortgage loans:
One-to-four family loans............................... 24,763 18,116 19,332
Multi-family loans..................................... 1,052 654 1,532
Commercial loans....................................... 3,763 483 45
Construction loans....................................... 3,163 5,284 2,220
Commercial loans......................................... 51 --- ---
Loans secured by deposits................................ 155 161 322
Home improvement loans................................... 30 85 36
Total originations................................... 32,977 24,783 23,487
Purchases (sales) of participation loans, net................. 800 500 1,350
Reductions:
Principal loan repayments................................ 21,853 17,541 14,211
Transfers from loans to real estate owned................ 15 237 20
Total reductions..................................... 21,868 17,778 14,231
------- ------- -------
Total gross loans receivable at
end of period.............................................. $93,044 $81,135 $73,630
======= ======= =======
</TABLE>
Union Federal's residential loan originations during the year ended
December 31, 1998 totaled $24.8 million, compared to $18.1 million and $19.3
million in the years ended December 31, 1997 and 1996, respectively.
Origination and Other Fees. Union Federal realizes income from late
charges, checking account service charges, and fees for other miscellaneous
services. Union Federal currently charges a commitment fee of $200 on all loans
and an additional $500 origination fee on construction loans. Union Federal also
may charge points on a mortgage loan as consideration for a lower interest rate,
although it does so infrequently. Late charges are generally assessed if payment
is not received within a specified number of days after it is due. The grace
period depends on the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 30 days past due, Union Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Union Federal sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Union Federal again contacts the borrower, this
time in person, to establish an acceptable repayment schedule. When a mortgage
loan is 90 days delinquent, Union Federal will have either entered into a
workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Union Federal reviews mortgage loans on a regular basis and places such
loans on a non-accrual status when they become 90 days delinquent. Generally,
when loans are placed on a non-accrual status, unpaid accrued interest is
written off, and further income is recognized only to the extent received.
Non-performing Assets. At December 31, 1998, $349,000, or .3% of Union
Federal's total assets, were non-performing (non-performing loans, non-accruing
loans and foreclosed real estate) compared to $98,000, or .07%, of its total
assets at December 31, 1997. At December 31, 1998, residential loans accounted
for $50,000 of Union Federal's non-performing assets. Union Federal had no real
estate owned ("REO") properties as of December 31, 1998.
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Non-performing assets:
<S> <C> <C> <C>
Non-performing loans..................... $349 $52 $ 489
Foreclosed real estate................... --- 46 ---
Total non-performing assets............ $349 $98 $489
Non-performing loans to total loans......... .38% .07% .67%
Non-performing assets to total assets....... .32% .07% .59%
</TABLE>
Interest income of $30,000, $4,000 and $10,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, was recognized on the
non-performing loans summarized above. Interest income of $33,000, $5,000 and
$33,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
would have been recognized under the original terms of these non-performing
loans.
At December 31, 1998, Union Federal held loans delinquent from 30 to 89
days totaling approximately $423,000. Other than in connection with these loans
and the other delinquent loans disclosed elsewhere in this section, management
was not aware of any other borrowers who were experiencing financial
difficulties.
Delinquent Loans. The following table sets forth certain information at
December 31, 1998, 1997 and 1996, relating to delinquencies in Union Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997 At December 31, 1996
-------------------------------------- ----------------------------------- --------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------ ------------------ ----------------- ---------------- -------------- ----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loansof Loans of Loans of Loansof Loans of Loans of Loans of Loansof Loans of Loans
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-
family loans........ 6 $406 3 $50 9 $300 4 $ 47 7 $226 8 $377
Commercial
real estate loans... 1 17 2 89 1 48 --- --- --- --- --- ---
Multi-family
loans............... --- --- 1 210 1 207 --- --- --- --- 1 112
Loans secured
by deposits......... --- --- --- --- --- --- --- --- --- --- --- ---
Home improvement loans. --- --- --- --- --- --- 1 5 --- --- --- ---
----- ---- ---- ---- ----- ---- - --- ---- ---- ---- ----
Total............... 7 $423 6 $349 11 $555 5 $52 7 $226 9 $489
= ==== = ==== == ==== = === = ==== = ====
Delinquent loans to
total loans......... .85% .77% .98%
=== === ===
</TABLE>
Classified assets. Federal regulations and Union Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At December 31, 1998, the aggregate amount of Union Federal's classified
assets and its general and specific loss allowances were as follows:
At December 31, 1998
--------------------
(In thousands)
Substandard assets.......................................... $840
Doubtful assets............................................. ---
Loss assets................................................. ---
-----
Total classified assets................................. $840
=====
General loss allowances..................................... $362
Specific loss allowances.................................... ---
-----
Total allowances........................................ $362
=====
Union Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Included in substandard assets at December 31, 1998, Union Federal had a
multi-family loan in the amount of $491,000 that was performing. The loan was
classified as substandard as a result of a regulatory examination.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Union Federal's review and evaluation of current
economic conditions (including those of its lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Union Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1998. However,
there can be no assurance that regulators, when reviewing Union Federal's loan
portfolio in the future, will not require increases in Union Federal's
allowances for loan losses or that changes in economic conditions will not
adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended December 31, 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period............................ $252 $159 $111
Gross charge-offs - Multi-family loans.................... (72)
Provision for losses on loans............................. 110 165 48
Balance end of period.................................. $362 $252 $159
Allowance for loan losses as a percent of
total loans outstanding................................ .40% .32% .22%
Ratio of net charge-offs to average
loans outstanding...................................... --- .10% ---
</TABLE>
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Union Federal's allowance for loan losses at the
dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict Union Federal's use of the allowance to absorb losses in other
categories.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------
1998 1997 1996
--------------------- ----------------------- --------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate mortgage loans:
Residential............... $75 77.19% $ 65 76.95% $60 77.46%
Commercial................ 67 6.83 29 4.47 13 4.88
Multi-family.............. 134 11.40 82 12.57 75 14.83
Construction loans.......... 19 4.29 10 5.73 11 2.36
Commercial loans............ --- .06
Loans secured by deposits... --- .17 --- .17 --- .33
Home improvement loans...... --- .06 --- .11 --- .14
Unallocated................. 67 66 --- --- ---
---- ------ ---- ------ ---- ------
Total....................... $362 100.00% $252 100.00% $159 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
Investments. Union Federal's investment portfolio generally consists of
U.S. Treasury and federal agency securities, FHLB stock and an investment in
Pedcor Investments - 1993 - XVI, L.P. See "--Service Corporation Subsidiary." At
December 31, 1998, approximately $9.8 million, or 9.1%, of Union Federal's total
assets consisted of such investments. Union Federal also had $6.2 million, or
5.7% of its assets, in interest-earning deposits as of that date.
The amount of interest-earning deposits held by Union Federal increased
significantly during 1997 as a result of the Conversion. Because the
subscription offering for the Holding Company's Common Stock was oversubscribed,
Union Federal delivered refund checks during the last week of December, 1997 to
those subscribers whose purchase orders were not filled. Many of those checks
had not cleared as of December 31, 1997, thereby increasing the amount of funds
held by Union Federal in interest-bearing deposits. In addition, Union Federal
invested some of the proceeds that it received from the stock offering in
interest-bearing overnight accounts at the FHLB Indianapolis, which also
increased the amount of its interest-bearing deposits at December 31, 1997. The
amount of interest-earning deposits decreased to $6.2 million at December 31,
1998 as a result of the payment of the stock subscription of $22.7 million and
increased investment in loans and investment securities during 1998.
The following table sets forth the amortized cost and the market value of
Union Federal's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
U.S. Treasury.......................$ --- $ --- $ 350 $ 350 $ 350 $ 348
Federal agencies.................... 4,500 4,479 3,346 3,351 2,645 2,611
Mortgage-backed securities.......... 3,526 3,696 2,124 2,302 2,752 2,933
Total investment securities
held to maturity................ 8,026 8,175 5,820 6,003 5,747 5,892
Investment in limited partnership...... 1,055 (1) 1,176 (1) 1,334 (1)
FHLB stock (2)......................... 745 745 708 708 580 580
------ ------ ------
Total investments...................... $9,826 $7,704 $7,661
====== ====== ======
</TABLE>
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, FHLB stock and investment in limited
partnership) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998 which matures in
------------------------------------------------------------------------------------
One Year One Year Five Years
or Less to Five Years to Ten Years After Ten Years
------------------------------------------------------------------------------------
Amortized Average Amoritzed Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Federal agency securities............. $100 2.47% $1,800 6.21% $500 6.10% $2,100 6.63%
</TABLE>
Mortgage-backed Securities
The following table sets forth the composition of Union Federal's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- --------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
--------- ------- ------ --------- -------------- --------- ------- ------
(In thousands)
Governmental National
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Corporation.................... $991 28.1% $1,095 $1,223 57.6% $1,348 $1,391 50.5% $1,511
Federal Home Loan Mortgage Corporation..... 2,395 67.9 2,464 635 29.9 691 1,039 37.8 1,103
Federal National
Mortgage Corporation.................... 123 3.5 120 243 11.4 240 294 10.7 291
Other...................................... 17 .5 17 23 1.1 23 28 1.0 28
------ ----- ------ ------ ----- ------ ------ ----- ------
Total mortgage- backed securities....... $3,526 100.0% $3,696 $2,124 100.0% $2,302 $2,752 100.0% $2,933
====== ===== ====== ====== ===== ====== ====== ===== ======
</TABLE>
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1998.
<TABLE>
<CAPTION>
Amount at December 31, 1998 which matures in
------------------------------------------------------------------------------
One Year One Year to After
or Less Five Years Five Years
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities...................... $37 7.00% $11 8.95% $3,478 7.44%
</TABLE>
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 1998, 1997
and 1996.
For the Year Ended
December 31,
-----------------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
Beginning balance.......... $2,124 $2,752 $3,423
Purchases.................. 2,004 --- ---
Repayments................. (607) (639) (676)
Premium and discount
amortization, net....... 5 11 5
------ ------ ------
Ending balance............. $3,526 $2,124 $2,752
====== ====== ======
Sources of Funds
General. Deposits have traditionally been Union Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Union Federal derives funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings, income on earning assets and borrowings.
While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis may be used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Union Federal attracts deposits principally from within
Montgomery County through the offering of a broad selection of deposit
instruments, including fixed-rate passbook accounts, NOW accounts, variable rate
money market accounts, fixed-term certificates of deposit and savings accounts.
Union Federal does not actively solicit or advertise for deposits outside of
Montgomery County, and substantially all of its depositors are residents of that
county. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. Union Federal does not pay broker fees for any deposits it
receives.
Union Federal establishes the interest rates paid, maturity terms, service
fees and withdrawal penalties on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and applicable regulations. Union Federal relies,
in part, on customer service and long-standing relationships with customers to
attract and retain its deposits. Union Federal also closely prices its deposits
to the rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Union Federal offers has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. Union Federal has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. Union Federal manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on Union
Federal's experience, management believes that its passbook, NOW and MMDAs are
relatively stable sources of deposits. However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
An analysis of Union Federal's deposit accounts by type, maturity, and
rate at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1998 Deposits Rate
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Withdrawable:
Fixed rate, passbook accounts.............................. $ 10 $3,410 5.26% 4.00%
Variable rate, money market................................ 10 10,794 16.65 4.87
NOW accounts and other transaction accounts................ 500 1,845 2.84 1.93
------- ------
Total withdrawable....................................... 16,049 24.75 4.35
Certificates (original terms):
3 months or less........................................... 1,000 101 .16 4.13
6 months................................................... 1,000 3,186 4.91 4.75
12 months.................................................. 1,000 3,931 6.06 5.41
18 months.................................................. 1,000 8,055 12.42 5.57
24 months.................................................. 1,000 5,444 8.40 5.79
30 months.................................................. 1,000 8,990 13.86 5.78
36 months ................................................. 1,000 3,468 5.35 5.89
48 months.................................................. 1,000 509 .78 5.99
60 months.................................................. 1,000 5,762 8.89 6.08
Jumbo certificates - $100,000 and over........................ 100,000 9,351 14.42 6.00
------- ------
Total certificates............................................ 48,797 75.25 5.73
------- ------
Total deposits................................................ $64,846 100.00% 5.39%
======= ======
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996
----------------------------------------
(In thousands)
<S> <C> <C> <C>
4.00 to 4.99%.............. $ 4,193 $ 3,622 $ 4,760
5.00 to 5.99%.............. 27,459 19,245 19,400
6.00 to 6.99%.............. 17,119 22,894 20,954
7.00 to 7.99%.............. 26 420 1,941
------- ------- -------
Total................... $48,797 $46,181 $47,055
======= ======= =======
</TABLE>
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1998. Matured certificates, which have not been renewed as of
December 31, 1998, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at December 31, 1998 Maturing In
----------------------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
<S> <C> <C> <C> <C>
4.00 to 4.99%.... $ 3,482 $ 711
5.00 to 5.99%.... 15,086 7,831 $2,882 $1,660
6.00 to 6.99%.... 10,481 4,148 775 1,714
7.00 to 7.99%.... 10 17 --- ---
------- ------- ------ ------
Total......... $29,059 $12,707 $3,657 $3,374
======= ======= ====== ======
</TABLE>
The following table indicates the amount of Union Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1998.
At December 31, 1998
--------------------
Maturity Period (In thousands)
Three months or less.............................. $2,707
Greater than three months through six months...... 1,259
Greater than six months through twelve months..... 1,985
Over twelve months................................ 3,400
------
Total........................................ $9,351
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Union Federal offers at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
<TABLE>
<CAPTION>
DEPOSIT ACTIVITY
-----------------------------------------------------------------------------------------
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1998 Deposits 1997 1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts...... $3,410 5.26% $(1,169) $ 4,579 7.35% $ 712 $3,867 6.40%
Variable rate, money market........ 10,794 16.65 1,669 9,125 14.66 510 8,615 14.25
NOW accounts and other
transaction accounts............. 1,845 2.84 (528) 2,373 3.81 1,474 899 1.49
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............... 16,049 24.75 (28) 16,077 25.82 2,696 13,381 22.14
Certificates (original terms):
3 months........................... 101 .16 101 .16 (48) 149 .25
6 months........................... 3,186 4.91 (592) 3,778 6.07 (489) 4,267 7.06
12 months.......................... 3,931 6.06 (1,546) 5,477 8.80 244 5,233 8.66
18 months.......................... 8,055 12.42 69 7,986 12.83 (204) 8,190 13.55
24 months.......................... 5,444 8.40 270 5,174 8.31 678 4,496 7.44
30 months.......................... 8,990 13.86 2,375 6,615 10.62 1,133 5,482 9.07
36 months ......................... 3,468 5.35 (386) 3,854 6.19 (1,344) 5,198 8.60
48 months.......................... 509 .78 188 321 .52 (55) 376 .62
60 months.......................... 5,762 8.89 (53) 5,815 9.34 (793) 6,608 10.93
Jumbo certificates.................... 9,351 14.42 2,291 7,060 11.34 4 7,056 11.68
------- ------ ------ ------- ------ ------ ------- ------
Total certificates.................... 48,797 75.25 2,616 46,181 74.18 (874) 47,055 77.86
------- ------ ------ ------- ------ ------ ------- ------
Total deposits........................ $64,846 100.00% $2,588 $62,258 100.00% $1,822 $60,436 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
Total deposits at December 31, 1998 were approximately $64.8 million,
compared to approximately $60.4 million at December 31, 1996. Union Federal's
deposit base depends somewhat upon the manufacturing sector of Montgomery
County's economy. Although Montgomery County's manufacturing sector is
relatively diversified and does not significantly depend upon any industry, a
loss of a material portion of the manufacturing workforce could adversely affect
Union Federal's ability to attract deposits due to the loss of personal income
attributable to the lost manufacturing jobs and the attendant loss in service
industry jobs.
In the unlikely event of Union Federal's liquidation after the Conversion,
all claims of creditors (including those of deposit account holders, to the
extent of their deposit balances) would be paid first followed by distribution
of the liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Union Federal.
Borrowings. Management focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 1998, Union Federal had borrowings in the amount of $772,000 from
the FHLB of Indianapolis which bear fixed and variable interest rates and are
due at various dates through 2004. Union Federal is required to maintain
eligible loans in its portfolio of at least 160% of outstanding advances as
collateral for advances from the FHLB of Indianapolis. Union Federal does not
anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI,
L.P. ("Pedcor") $1.0 million under a note payable that is not included in the
following table. See "--Service Corporation Subsidiary."
The following table presents certain information relating to Union
Federal's borrowings at or for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
1998 1997 1996
---------------------------------------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period.................... $772 $2,373 $6,482
Average balance outstanding for period.......... 873 5,748 3,566
Maximum amount outstanding at any
month-end during the period................... 1,272 6,873 6,482
Weighted average interest rate
during the period............................. 5.84 % 5.90% 5.36 %
Weighted average interest rate
at end of period.............................. 5.71 % 5.71% 5.52 %
Return on Equity and Assets
1998 1997 1996
---------------------------------------
Return on assets (net income
divided by average total assets)............. 1.82 % 1.38% 1.13 %
Return on equity (net income
divided by average equity)................... 4.65 8.10 6.54
Dividend payout ratio (dividends
per share divided by net
income per share)............................ 50.71 --- ---
Equity to assets ratio (average
equity divided by average
total assets)................................ 39.24 17.03 17.31
</TABLE>
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"),
whose sole asset is its investment in Pedcor, which is an Indiana limited
partnership that was established to organize, build, own, operate and lease a
48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II
Apartments (the "Project"). Union Federal owns the limited partner interest in
Pedcor. The general partner is Pedcor Investments LLC. The Project, operated as
a multi-family, low- and moderate-income housing project, is completed and is
performing as planned. Because UFS engages exclusively in activities that are
permissible for a national bank, OTS regulations permit Union Federal to include
its investment in UFS in its calculation of regulatory capital.
A low- and moderate-income housing project qualifies for certain federal
income tax credits if (i) it is a residential rental property, (ii) the units
are used on a nontransient basis, and (iii) 20% or more of the units in the
project are occupied by tenants whose incomes are 50% or less of the area median
gross income, adjusted for family size, or alternatively, at least 40% of the
units in the project are occupied by tenants whose incomes are 60% of the area
median gross income. Qualified low income housing projects generally must comply
with these and other rules for fifteen years, beginning with the first year the
project qualified for the tax credit, or some or all of the tax credit together
with interest may be recaptured. The tax credit is subject to the limitations on
the use of general business credit, but no basis reduction is required for any
portion of the tax credit claimed.
UFS committed to invest approximately $1.8 million in Pedcor at the
inception of the project in November, 1993. Through December 31, 1998, UFS had
invested cash of approximately $789,000 in Pedcor with five additional annual
capital contributions remaining to be paid in January of each year through
January, 2004, totaling $1,021,000. The additional contributions will be used
for operating and other expenses of the partnership. In addition, Union Federal
borrowed funds from the FHLB of Indianapolis to advance to Pedcor, and Pedcor
currently owes Union Federal $772,000 pursuant to a promissory note payable in
installments through January 1, 2004 and bearing interest at an annual rate of
9%.
UFS transfers the tax credits resulting from Pedcor's operation of the
Project to Union Federal. These tax credits will be available to Union Federal
through 2003. Although Union Federal has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it may not
use tax credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. Union Federal may carry forward unused tax
credits for a period of fifteen years and management believes that Union Federal
will be able to utilize available tax credits during the carry forward period.
Additionally, Pedcor has incurred operating losses in the early years of its
operations primarily due to its accelerated depreciation of assets. UFS has
accounted for its investment in Pedcor on the equity method and, accordingly,
has recorded its share of these losses as reductions to its investment in
Pedcor, which at December 31, 1998, was $1.1 million. As of December 31, 1998,
98% of the units in the Project were occupied, and all of the tenants met the
income test required for the tax credits. UFS does not engage in any activity or
hold any assets other than its investment in Pedcor.
The following summarizes UFS's equity in Pedcor's losses and tax credits
recognized in Union Federal's consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Investment in Pedcor:
Net of equity in losses.................. $1,055 $1,176 $1,334
Equity in losses, net
of income tax effect..................... $ (73) $ (95) $ (104)
Tax credit.................................. 178 178 178
Increase in after-tax net income from
Pedcor investment........................ $ 105 $ 83 $ 74
</TABLE>
Employees
As of December 31, 1998, Union Federal employed 14 persons on a full-time
basis. Union Federal does not have any part-time employees. None of Union
Federal's employees is represented by a collective bargaining group. Management
considers its employee relations to be good.
Employee benefits for Union Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, a
noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, dental and eye care
insurance, long-term disability insurance, life insurance, and participation in
the Financial Institutions Thrift Plan.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in the area. See
"Executive Compensation" and "Certain Relationships and Related Transactions of
Union Federal."
COMPETITION
Union Federal originates most of its loans to and accepts most of its
deposits from residents of Montgomery County, Indiana. Union Federal is subject
to competition from various financial institutions, including state and national
banks, state and federal savings associations, credit unions, and certain
nonbanking consumer lenders that provide similar services in Montgomery County
with significantly larger resources than are available to Union Federal. In
total, there are 12 other financial institutions located in Montgomery County,
including eight banks, two credit unions and two other savings associations.
Union Federal also competes with money market funds with respect to deposit
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Union Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Union Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Union
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Union Federal's books and records and, in
conjunction with the FDIC in certain situations, has examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and the federal deposit insurance funds. Union
Federal's semi- annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $16,000.
Union Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, Union Federal's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as Union Federal, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Union Federal.
Savings and Loan Holding Company Regulation
As the holding company for Union Federal, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, Union Federal is subject to certain restrictions in its
dealings with the Holding Company and with other companies affiliated with the
Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to operate the
Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At December 31, 1998, Union Federal's asset composition was in
excess of that required to qualify as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Union
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Union Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the Federal Reserve Board (the "FRB") as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS before a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
Union Federal is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, Union Federal is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At December 31, 1998, Union Federal's
investment in stock of the FHLB of Indianapolis was $745,000. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate-related collateral to 30% of a member's capital and limiting total
advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1998, dividends paid by
the FHLB of Indianapolis to Union Federal totaled approximately $59,000, for an
annual rate of 8.0%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations such as Union Federal
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. As of September
30, 1996, the reserves of the SAIF were below the level required by law,
primarily because a significant portion of the assessments paid into the SAIF
have been used to pay the cost of prior thrift failures, while the reserves of
the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law. See "-- Assessments"
below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Union Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Union Federal recognized this one-time
assessment as a non-recurring operating expense of $362,000 ($219,000 after tax)
during the three-month period ending September 30, 1996, and Union Federal paid
this assessment on November 27, 1996. The assessment was fully deductible for
both federal and state income tax purposes. Beginning January 1, 1997, Union
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for all other savings
associations. This amendment becomes effective April 1, 1999. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustment in an amount up to
100% of tangible capital) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 1998, Union Federal was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation,
Union Federal would be exempt from its provisions because it has less than $300
million in assets and its risk-based capital ratio exceeds 12%. Union Federal
nevertheless measure its interest rate risk in conformity with the OTS
regulation and, as of December 31, 1998, Union Federal would have been required
to deduct $1.4 million from its total capital available to calculate its
risk-based capital requirement. See "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk."
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequatelycapitalized, under capitialized,
significantly undercapitalzied, and critically undercapitalized. At December 31,
1998, Union Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was not subject
to a regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS recently adopted a regulation, which becomes effective on April
1, 1999, that revises the current restrictions that apply to "capital
distributions" by savings associations. The amended regulation defines a capital
distribution as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. This definition
includes a savings association's payment of cash dividends to shareholders, or
any payment by a savings association to repurchase, redeem, retire, or otherwise
acquire any of its shares or debt instruments that are included in total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. The amended regulation does not apply to dividends
consisting only of a savings association's shares or rights to purchase such
shares.
The amended regulation exempts certain savings associations from the
current requirement that all savings associations file either a notice or an
application with the OTS before making any capital distribution. As revised, the
regulation requires a savings association to file an application for approval of
a proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At December 31, 1998, Union Federal's retained net income
standard was approximately $3.1 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because Union
Federal is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that Union Federal file a notice with the
OTS 30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Union Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Union
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Union Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Union Federal's current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Union Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 1998, Union
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its lending limits. Management does not believe
that the loans-to-one-borrower limits will have a significant impact on Union
Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Union Federal maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 1998, Union Federal was in compliance
with its QTL requirement, with approximately 90.04% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
Union Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the 1934 Act. The Holding Company is therefore subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Union Federal's conversion to stock form, if the Holding Company
has fewer than 300 shareholders, it may deregister its shares under the 1934 Act
and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Union Federal's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Union Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Union Federal
will recapture approximately $55,000 over a six-year period that began with the
year ended December 31, 1996. In addition, the pre-1988 reserve, for which no
deferred taxes have been recorded, need not be recaptured into income unless (i)
the savings association no longer qualifies as a bank under the Code, or (ii)
the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Union Federal has been reporting its
income and expenses on the accrual method of accounting. Union Federal's federal
income tax returns have not been audited in recent years.
State Taxation
Union Federal is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Union Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to Union
Federal's office as of December 31, 1998:
<TABLE>
<CAPTION>
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
----------- ------ ------ -------- -------- -------
(Dollars in thousands)
<C> <C> <C> <C> <C> <C>
221 East Main Street Owned 1913 $64,846 $355 19,065
Crawfordsville, Indiana 47933
</TABLE>
Union Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Union Federal's electronic data processing equipment was approximately $2,200
at December 31, 1998.
Union Federal has also contracted for data processing and reporting
services from Intrieve, Incorporated in Cincinnati, Ohio. The cost of these data
processing services is approximately $5,500 per month.
Union Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $1,100 per month.
Union Federal also receives income from leasing office space on the second
floor of its building and parking spaces located behind its building. Union
Federal's gross income from renting the office space was $28,000 for fiscal year
ended December 31, 1998 and December 31, 1997. Union Federal's gross income from
renting the parking spaces was approximately $10,000 for the fiscal year ended
December 31, 1998 and approximately $9,000 for the year ended December 31, 1997.
Item 3. Legal Proceedings.
Although Union Federal is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which it presently is a party or to which any of its property is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1998.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
Joseph E. Timmons Chairman of the Board, President
and Chief Executive Officer
Denise E. Swearingen Secretary and Treasurer
Ronald L. Keeling Vice President
Joseph E. Timmons (age 64) has served as President and Chief Executive
Officer of the Holding Company since 1997, of Union Federal since 1974 and of
UFS Service Corp. since its inception in 1994. He has been an employee of Union
Federal since 1954.
Denise E. Swearingen (age 40) has served as the Holding Company's
Secretary and Treasurer since 1997 and as Union Federal's Secretary and
Controller/Treasurer since 1995. She has worked for Union Federal since 1983.
Ronald L. Keeling (age 47) has served as the Holding Company's Vice
President since 1997, as Union Federal's Vice President and Assistant Secretary
since 1984 and as Senior Loan Officer since 1979. He has worked for Union
Federal since 1971.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is incorporated by reference to
the material under the heading "Shareholder Information" on page 42 of the
Holding Company's 1998 Shareholder Annual Report (the "Shareholder Annual
Report").
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data" on pages 2
and 3 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to
pages 3 through 18 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated by reference to
pages 16 through 18 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and
Notes thereto contained on pages 19 through 39 of the Shareholder Annual
Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to Directors is
incorporated by reference to pages 2 to 4 of the Holding Company's Proxy
Statement for its Annual Shareholder meeting to be held April 21, 1999 (the
"1999 Proxy Statement"). The information concerning the Holding Company's
executive officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to Directors is
incorporated by reference to pages 5 to 7 of the Holding Company's 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item with respect to Directors is
incorporated by reference to pages 3 to 4 of the Holding Company's 1999 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item with respect to Directors is
incorporated by reference to page 7 of the Holding Company's 1999 Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Annual Report
Page No.
--------
Financial Statements 19
Consolidated Balance Sheet at December 31, 1998, and 1997 20
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997, and 1996 21
Consolidated Statement of Shareholders'
Equity for the Years Ended
December 31, 1998, 1997, and 1996. 22
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 23
Notes to Consolidated Financial Statements 24
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
UNION COMMUNITY BANCORP
Date: March 29, 1999 By: /s/ Joseph E. Timmons
------------------------------------
Joseph E. Timmons, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 29th day of March, 1999.
Signatures Title Date
(1) Principal Executive Officer:
/s/ Joseph E. Timmons )
--------------------------- )
Joseph E. Timmons President and )
Chief Executive Officer)
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
)
/s/ Denise E. Swearingen Treasurer )
--------------------------- )
Denise E. Swearingen )
)
) March 29, 1999
)
(3) The Board of Directors: )
)
)
/s/ Philip L. Boots Director )
Philip L. Boots )
)
)
/s/ Marvin L. Burkett Director )
--------------------------- )
Marvin L. Burkett )
)
)
/s/ Phillip E. Grush Director )
--------------------------- )
Phillip E. Grush )
)
)
/s/ Samuel H. Hillenbrand )
--------------------------- )
Samuel H. Hillenbrand Director )
)
)
<PAGE>
/s/ John M. Horner Director )
--------------------------- )
John M. Horner )
)
) March 29, 1999
/s/ Harry A. Siamas Director )
--------------------------- )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
--------------------------- )
Joseph E. Timmons )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to to Exhibit 3(1) to the Registration Statement
(2) Registrant's Code of By-Laws is incorporated by reference to
to Exhibit 3(2) to the Registration Statement
10(4) Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement
(5) Employment Agreement between Union Federal Savings and Loan
Association and Joseph E. Timmons incorporated by reference to
to Exhibit 10(5) to the Registration Statement
(6) Exempt Loan and Share Purchase Agreement between Trust under
Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement and Union Community Bancorp
13 1998 Shareholder Annual Report
21 Subsidiaries of the Registrant
23 Consent of independent certified public accountants
27 Financial Data Schedule (filed electronically)
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
EXHIBIT 23 -- CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference to the Registration
Statement on Form S-8, File Number 333-68837, of our report dated February 19,
1999, on the consolidated financial statements of Union Community Bancorp and
subsidiary, Crawfordsville, Indiana, which report is incorporated by reference
in the Annual Report on Form 10-K of Union Community Bancorp and subsidiary,
Crawfordsville, Indiana.
/s/ Olive LLP
Indianapolis, Indiana
March 30, 1999
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