SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization)
Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
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 report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 1999 was 2,736,763.
<PAGE>
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance
Sheet (Unaudited) 4
Consolidated Condensed Statement of Income
(Unaudited) 5
Consolidated Condensed Statement of Shareholders'
Equity (Unaudited) 6
Consolidated Condensed Statement of Cash Flows
(Unaudited) 7
Notes to Unaudited Consolidated Condensed
Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
<PAGE>
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") 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-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q 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-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------------ -------------------------
<S> <C> <C>
Assets
Cash $ 144,533 $ 32,153
Interest-bearing demand deposits 2,568,305 6,158,927
------------------------ -------------------------
Cash and cash equivalents 2,712,838 6,191,080
Investment securities
Available for sale 867,670
Held to maturity 7,988,957 8,026,162
------------------------ -------------------------
Total investment securities 8,856,627 8,026,162
Loans, net of allowance for loan losses of $392,258 and $362,258 99,296,236 90,900,269
Premises and equipment 369,965 355,194
Federal Home Loan Bank stock 848,700 744,500
Investment in limited partnership 1,002,609 1,055,109
Interest receivable 647,436 714,691
Other assets 113,416 174,687
------------------------ -------------------------
Total assets $ 113,847,827 $ 108,161,692
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 1,086,812 $ 656,796
Interest-bearing 66,964,099 64,188,836
------------------------ -------------------------
Total deposits 68,050,911 64,845,632
Federal Home Loan Bank advances 4,658,526 772,226
Note payable 837,442 1,020,642
Interest payable 108,883 109,337
Dividends payable 282,006 270,567
Other liabilities 593,634 612,427
------------------------ -------------------------
Total liabilities 74,531,402 67,630,831
------------------------ -------------------------
Commitments and Contingent Liabilities
<PAGE>
Shareholders' Equity
Preferred stock, no-par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 2,736,763 and 2,889,663 shares 26,709,173 28,193,644
Retained earnings 15,757,398 15,708,073
Accumulated other comprehensive income 53,832
Unearned employee stock ownership plan ("ESOP") shares (1,677,591) (1,730,736)
Unearned recognition and retention plan ("RRP") shares (1,526,387) (1,640,120)
------------------------ -------------------------
Total shareholders' equity 39,316,425 40,530,861
------------------------ -------------------------
Total liabilities and shareholders' equity $ 113,847,827 $ 108,161,692
======================== =========================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
---------------- ----------------- ---------------- ----------------
1999 1998 1999 1998
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest and Dividend Income
Loans $ 1,903,945 $ 1,716,660 $ 3,720,294 $ 3,348,026
Investment securities 142,018 72,549 283,550 179,389
Dividends on Federal Home Loan Bank stock 16,882 14,825 31,568 28,785
Deposits with financial institutions 24,012 208,734 73,057 470,287
---------------- ----------------- ---------------- ----------------
Total interest and dividend income 2,086,857 2,012,768 4,108,469 4,026,487
---------------- ----------------- ---------------- ----------------
Interest Expense
Deposits 865,493 823,252 1,724,718 1,627,775
Federal Home Loan Bank advances 46,626 11,271 58,040 28,035
---------------- ----------------- ---------------- ----------------
Total interest expense 912,119 834,523 1,782,758 1,655,810
---------------- ----------------- ---------------- ----------------
Net Interest Income 1,174,738 1,178,245 2,325,711 2,370,677
Provision for loan losses 15,000 98,000 30,000 98,000
---------------- ----------------- ---------------- ----------------
Net Interest Income After Provision for Loan Losses 1,159,738 1,080,245 2,295,711 2,272,677
---------------- ----------------- ---------------- ----------------
Other Income (Losses)
Equity in losses of limited partnerships (27,500) (36,000) (52,500) (61,000)
Other income 38,434 18,996 52,213 33,512
---------------- ----------------- ---------------- ----------------
Total other income (losses) 10,934 (17,004) (287) (27,488)
---------------- ----------------- ---------------- ----------------
Other Expenses
Salaries and employee benefits 248,376 162,230 515,245 380,414
Net occupancy and equipment expenses 21,496 16,449 36,546 28,812
Deposit insurance expense 10,774 11,466 21,995 21,177
Legal and professional fees 48,113 53,601 82,662 73,491
Other expenses 115,352 88,865 246,554 168,359
---------------- ----------------- ---------------- ----------------
Total other expenses 444,111 332,611 903,002 672,253
---------------- ----------------- ---------------- ----------------
Income Before Income Tax 726,561 730,630 1,392,422 1,572,936
Income tax expense 256,150 259,721 486,886 565,103
---------------- ----------------- ---------------- ----------------
Net Income $ 470,411 $ 470,909 $ 905,536 $ 1,007,833
================ ================= ================ ================
Basic Earnings per Share $ .19 $ .16 $ .36 $ .35
================ ================= ================ ================
Diluted Earnings per Share $ .19 $ .16 $ .36 $ .35
================ ================= ================ ================
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Unearned
-----------------------
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income Shares Compensation Total
-------------- --------- ------------- ----------- -------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1999 2,889,663 $28,193,644 $ 15,708,073 $(1,730,736) (1,640,120) $ 40,530,861
Comprehensive income
Net income for the $ 905,536 905,536 905,536
period
Other comprehensive
income, net of tax
Unrealized gains on
securities $ 53,832 $ 53,832 $ 53,832
=============
Comprehensive income $ 959,368
=============
Cash dividends
($.215 per share) (555,698) (555,698)
Purchase of common stock (152,900) (1,492,097) (300,513) (1,792,610)
Amortization of unearned
compensation expense 113,733 113,733
ESOP shares earned 7,626 60,771
53,145
----------- ----------- ----------- -------------- ----------- ------------- -----------
Balances, June 30, 1999 2,736,763 26,709,173 15,757,398 1,677,591) (1,526,387) $ 39,316,425
=========== =========== =========== ============== =========== ============= ===========
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------- ---------------
1999 1998
---------------- ---------------
<S> <C> <C>
Operating Activities
Net income $ 905,536 $ 1,007,833
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses 30,000 98,000
Depreciation and amortization 17,177 16,257
Investment securities accretion, net (4,206) (4,691)
Gain on sale of foreclosed assets (284)
Equity in losses of limited partnerships 52,500 61,000
Amortization of unearned compensation expense 113,733
ESOP shares earned 60,771 80,855
Net change in:
Interest receivable 67,255 (40,491)
Interest payable (454) (24,054)
Other assets 25,962 29,440
Other liabilities (13,336) 14,195
---------------- ---------------
Net cash provided by operating activities 1,254,654 1,238,344
---------------- ---------------
Investing Activities
Investment securities
Purchase of securities available for sale (778,529)
Purchase of securities held to maturity (815,000) (5,903,586)
Proceeds from maturities of securities
held to maturity and paydowns of
mortgage-backed securities 856,411 1,865,959
Net changes in loans (8,523,313) (9,446,696)
Purchase of FHLB of Indianapolis stock (104,200) (36,800)
Purchases of property and equipment (31,948) (1,946)
Proceeds on sale of foreclosed assets 100,356
Other investing activities (2,726)
---------------- ---------------
Net cash used by investing activities (9,298,949) (13,523,069)
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 4,587,743 (793,169)
Certificates of deposit (1,382,464) 413,348
Stock subscription escrow accounts (22,687,104)
Proceeds from borrowings 4,000,000
Repayment of borrowings (296,900) (1,780,225)
Cash dividends (544,258) (214,332)
Repurchase of common stock (1,792,610)
Net change in advances by borrowers for taxes and insurance (5,458) 30,352
---------------- ---------------
Net cash provided (used) by financing activities 4,566,053 (25,031,130)
---------------- ---------------
Net Change in Cash and Cash Equivalents (3,478,242) (37,315,855)
Cash and Cash Equivalents, Beginning of Period 6,191,080 44,780,827
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 2,712,838 $ 7,464,972
================ ===============
Additional Cash Flows Information
Interest paid $ 1,783,212 $ 1,679,864
Income tax paid 551,860 424,650
</TABLE>
See notes to consolidated condensed financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Union Community
Bancorp (the "Company") and its wholly owned subsidiary, Union Federal Savings
and Loan Association, a federally chartered savings and loan association ("Union
Federal"). A summary of significant accounting policies is set forth in Note 1
of Notes to Financial Statements included in the December 31, 1998 Annual Report
to Shareholders. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 1999, and for the six
and three months ended June 30, 1999 and 1998, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended June
June 30, 1999 30, 1998
------------- --------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share
Income available to common
shareholders $ 470,411 2,488,607 $ .19 $ 470,909 2,861,847 $ .16
=========== =============
Effect of dilutive RRP awards
and stock options
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 470,411 2,488,607 $ .19 $ 470,909 2,861,847 $ .16
============== =============== =========== ============= ============= =============
Six Months Ended Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
Basic earnings per share
Income available to common
shareholders $ 905,536 2,541,514 $ .36 $ 1,007,833 2,860,482 $ .35
=========== =============
Effect of dilutive RRP awards
and stock options
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 905,536 2,541,514 $ .36 $ 1,007,833 2,860,482 $ .35
============== =============== =========== ============= ============= =============
</TABLE>
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Union Community Bancorp, an Indiana corporation (the "Company"), was organized
in September, 1997. On December 29, 1997, it acquired all of the outstanding
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"). 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.
Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"), whose
sole asset is its investment in Pedcor Investments 1993-XVI, L.P. ("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.
Union Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Union Federal's non-interest
income, including fee income and service charges, and the level of its
non-interest expenses, including general and administrative expenses.
Financial Condition
Total assets increased approximately $5.6 million, or 5.2%, to $113.8 million at
June 30, 1999, from $108.2 million at December 31, 1998. The increase was
primarily due to loan growth of $8.4 million offset by a decrease in cash and
cash equivalents of $3.5 million. Net loans increased by 9.2% to $99.3 million
due to an increase in customer demand and an increased focus by the Company in
the areas of commercial and consumer lending. Investment securities available
for sale and held to maturity also increased by $831,000, or 10.4% during the
six months ended June 30, 1999.
Deposits increased by $3.2 million to $68.1 million during the six months ended
June 30, 1999. Demand and savings deposits increased $4.6 million, or 28.6%,
from December 31, 1998 to June 30, 1999 primarily due to an increase in money
market savings of $4.1 million. Certificates of deposit decreased $1.4 million,
or 2.8%, during this period.
Borrowed funds increase by $3.7 million from December 31, 1998 to June 30, 1999.
The increase in total borrowed funds resulted from an increase in FHLB advances
of $3.9 million and a decrease in the note payable to a limited partnership of
$184,000. The increases in borrowings were primarily used to fund loan growth.
Shareholders' equity decreased $1.2 million to $39.3 million at June 30, 1999.
The decrease was primarily due to stock repurchases of $1.8 million and cash
dividends of $556,000. These decreases were offset by net income for six months
ended June 30, 1999 of $906,000, Employee Stock Ownership Plan shares earned of
$61,000 and unearned compensation amortization of $114,000.
Comparison of Operating Results for the Three Months Ended June 30, 1999 and
1998
Net income decreased approximately $1,000 from $471,000 for the three months
ended June 30, 1998 to $470,000 for the three months ended June 30, 1999. The
return on average assets was 1.67% and 1.74 % for the three months ended June
30, 1999 and 1998, respectively.
Interest income was $2,087,000 for the three months ended June 30, 1999 as
compared to $2,013,000 for the comparable period in 1998. Interest expense
increased approximately $77,000, or 9.2%, from $834,000 for the three months
ended June 30, 1998 to $912,000 for the same period in 1999. As a result, net
interest income for the three months ended June 30, 1999 amounted to $1,175,000,
approximately a $4,000 decrease from the three months ended June 30, 1998.
The provision for loan losses made for the three months ended June 30, 1999 was
$15,000 as compared to $98,000 for the same period in 1998. The 1999 provision
and the allowance for loan losses were considered adequate, based on size,
condition and components of the loan portfolio. While management estimates loan
losses using the best available information, no assurance can be given that
future addition to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding problem loans, identification of additional problem loans and other
factors, both within and outside of management's control.
Other income (losses) was $11,000 for the three months ended June 30, 1999
compared to losses of $17,000 for the same period in 1998. Other income (losses)
includes the equity in losses of the Company's investment in a limited
partnership, 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
$45,000 was recorded for the three months ended June 30, 1999 and 1998. The
increase in other income was due to nominal increases in a variety of income
categories.
Salaries and employee benefits were $248,000 for the three months ended June 30,
1999 compared to $162,000 for the 1998 period, an increase of $86,000, or 53.1%.
This increase was primarily due to compensation expense related to the
management recognition and retention plan that became effective on June 30,
1998. Other expenses, consisting primarily of expenses related to service center
fees, advertising, directors' fees, supervisory examination fees, supplies, and
postage increased approximately $26,000 for three months ended June 30, 1999
compared to the same period in 1998. The increase in other expenses was
primarily due to nominal increases in a variety of expense categories.
Income tax expense decreased $4,000, or 1.4%, for the three months ended June
30, 1999 compared to the same period in 1998. The decrease was directly related
to the decrease in taxable income for the period.
Comparison of Operating Results for the Six Months Ended June 30, 1999 and 1998
Net income decreased $102,000, or 10.1%, from $1,008,000 for the six months
ended June 30, 1998 to $906,000 for the six months ended June 30, 1999. The
decrease was primarily attributable to a decline in the Company's net interest
income and increases in non-interest expenses. The return on average assets was
1.63% and 1.87 % for the six months ended June 30, 1999 and 1998, respectively.
Interest income was $4,108,000 for the six months ended June 30, 1999 as
compared to $4,026,000 for the six months ended June 30, 1998. Interest expense
increased $127,000, or 7.7%, from $1,656,000 for the six months ended June 30,
1998 to $1,783,000 for the same period in 1999. As a result, net interest income
for the six months ended June 30, 1999 amounted to $2,326,000, a 1.9% decrease
from six months ended June 30, 1998. The Company's net interest margin decreased
from 4.5% for the six months ended June 30, 1998 to 4.3% for the comparable
period in 1999.
The provision for loan losses made for the six months ended June 30, 1999 was
$30,000 as compared to $98,000 for the same period in 1998. The 1999 provision
and the allowance for loan losses were considered adequate, based on size,
condition and components of the loan portfolio. While management estimates loan
losses using the best available information, no assurance can be given that
future addition to the allowance will not be necessary based on changes in
economic and real estate market conditions, further information obtained
regarding problem loans, identification of additional problem loans and other
factors, both within and outside of management's control.
Other losses decreased $27,000 for the six months ended June 30, 1999 compared
to the same period in 1998. Other income (losses) includes the equity in losses
of the Company's investment in a limited partnership, 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 $45,000 was recorded for the six months
ended June 30, 1999 and 1998. The increase in other income was due to nominal
increases in a variety of income categories.
Salaries and employee benefits were $515,000 for the six months ended June 30,
1999 compared to $380,000 for the 1998 period, an increase of $135,000, or
35.5%. This increase was primarily due to compensation expense related to the
management recognition and retention plan that began effective on June 30, 1998.
Other expenses, consisting primarily of expenses related to service center fees,
advertising, directors' fees, supervisory examination fees, supplies, and
postage increased approximately $78,000 for six months ended June 30, 1999
compared to the same period in 1998. The increase in other expenses was
primarily due to approximately $45,000 of non-recurring expenses related to the
Company's data processing conversion during the first quarter of 1999.
Income tax expense decreased $78,000, or 13.8%, for the six months ended June
30, 1999 compared to the same period in 1998. The decease was directly related
to the decrease in taxable income for the period.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
Union Federal had no loans classified as special mention as of June 30, 1999
while there were $1.2 million of special mention loans at December 31, 1998. In
addition, Union Federal had $826,000 and $840,000 of loans classified as
substandard at June 30, 1999 and December 31, 1998, respectively. At June 30,
1999 and December 31, 1998, no loans were classified as doubtful or loss. At
June 30, 1999, and December 31, 1998, respectively, $337,000 and $349,000 of the
substandard loans were non-accrual loans. The allowance for loan losses was
$392,000 or .4% of loans at June 30, 1999 as compared to $362,000 or .4% of
loans at December 31, 1998.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of June
30 , 1999, Union Federal had liquid assets of $5.4 million and a liquidity ratio
of 7.3%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
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 ("Intrieve"), located in Cincinnati, Ohio. 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 $45,000 in converting
its data processing to Intrieve's system. It is not expected that data
processing expense incurred by the Company in the future will differ materially
from prior periods. Bankers' 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 contacted the 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 and received
responses from all of these companies confirming that their systems are Year
2000 compliant. 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 compliance
will not exceed $10,000. At June 30, 1999, the Company had spent approximately
$7,000 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 their computer
systems are, or soon will be, Year 2000 compliant. As of June 30, 1999, all 18
confirmations had been received and no items of concern were noted. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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.
Management believes it is critical to manage the relationship between interest
rates and the effect on Union Federal's net portfolio value ("NPV"). This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Union Federal manages
assets and liabilities within the context of the marketplace, regulatory
limitations and within limits established by its Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal
does not meet either of these requirements, it is not required file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of June 30, 1999 and December 31, 1998, are analyses
performed by the OTS of Union Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis points increments, up and down 300 basis points. At June 30,
1999, 2% of the present value of Union Federal's assets was approximately $2.3
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 $5.6 million at June 30, 1999. Union Federal would have been
required to deduct $1.6 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. This amount represents an increase of
$200,000 over the $1.4 million calculated at December 31, 1998. Union Federal's
exposure to interest rate risk results from a concentration of fixed rate
mortgage loans in its portfolio.
<TABLE>
<CAPTION>
June 30, 1999
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
+300 bp $ 24,379 $ -8,455 -26% 23.30% -547 bp
+200 bp 27,261 -5,573 -17 25.27 -350 bp
+100 bp 30,147 -2,687 -8 27.13 -163 bp
0 bp 32,834 28.76
- -100 bp 35,074 2,240 7 30.04 126 bp
- -200 bp 36,965 4,131 13 31.06 230 bp
- -300 bp 38,920 6,086 19 32.08 331 bp
December 31, 1998
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
+300 bp $ 25,730 $ -7,687 -23% 25.18% -498 bp
+200 bp 28,509 -4,907 -15 27.08 -308 bp
+100 bp 31,161 -2,256 -7 28.79 -137 bp
0 bp 33,417 30.16
- -100 bp 35,042 1,625 +5 31.08 +92 bp
- -200 bp 36,542 3,125 +9 31.90 +175 bp
- -300 bp 38,272 4,855 +15 32.84 +268 bp
</TABLE>
The chart at June 30, 1999 illustrates, for example, that a 200 basis point (or
2%) increase in interest rates would result in a $5.6 million, or 17% decrease
in the net portfolio value of Union Federal's assets compared to a $4.9 million,
or 15% decrease, at December 31, 1998. This hypothetical increase in interest
rates at June 30, 1999 would also result in a 350 basis point, or 3.49% decrease
in the ratio of the net portfolio value to the present value of Union Federal's
assets compared to a 308 basis point, or 3.08% decrease at December 31, 1998.
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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
On April 21, 1999, the Company held its annual meeting of
shareholders. A total of 2,427,742 shares were represented in
person or by proxy at the meeting. Marvin L. Burkett was elected
to the Board of Directors for a three-year term expiring in 2002.
2,340,137 shares were voted in favor of the election of the
nominee and there were 87,605 votes withheld. Phillip E. Grush was
elected to the Board of Directors for a three-year term expiring
in 2002. 2,343,617 shares were voted in favor of the election of
the nominee and there were 84,125 votes withheld. Joseph E.
Timmons was elected to the Board of Directors for a three-year
term expiring in 2002. 2,344,569 shares were voted in favor of the
election of the nominee and there were 83,173 votes withheld
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended June 30, 1999.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: August 13, 1999 By: /s/ Joseph E. Timmons
--------------- -------------------------
Joseph E. Timmons
President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ Denise E. Swearingen
--------------- ----------------------------
Denise E. Swearingen
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's unaudited consolidated financial statements for the six months
ended June 30, 1999 and is qualified in its entirety by reference to such
statements.
</LEGEND>
<CIK> 0001046183
<NAME> Union Community Bancorp
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<S> <C>
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<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
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0
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</TABLE>
