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, 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 000-23543
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(765) 362-2400
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 27, 2000 was $23,726,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 27, 2000, was 2,568,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1999, are incorporated into Part II. Portions of the Proxy Statement for the
2000 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 31 Pages
<PAGE>
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement.................................................... 3
PART I
Item 1 Business..................................................... 3
Item 2. Properties................................................... 26
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...................................... 27
Item 6. Selected Financial Data...................................... 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 27
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.. 27
Item 8. Financial Statements and Supplementary Data.................. 27
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.............................. 28
SIGNATURES ......................................................... 29
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"
and together with "Union Federal", as defined below, the "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 74.3% of its total
loan portfolio at December 31, 1999. Union Federal also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and, to a
limited extent, commercial loans and 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 8.8% and 11.4%,
respectively, of Union Federal's total loan portfolio at December 31, 1999.
Construction loans totaled approximately 4.0% of Union Federal's total loans as
of December 31, 1999. Commercial loans totaled approximately 1.3% of Union
Federal's total loans as of December 31, 1999. Consumer loans, which consist of
personal installment loans and passbook loans, constituted approximately .2% of
Union Federal's total loan portfolio at December 31, 1999.
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,
-------------------------------------------------------------------------
1999 1998 1997
--------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
One-to-four-family............... $80,552 74.27% $71,823 77.19% $62,436 76.95%
Multi-family..................... 9,549 8.80 10,609 11.40 10,197 12.57
Commercial....................... 12,410 11.44 6,355 6.83 3,627 4.47
Real estate construction loans...... 4,380 4.04 3,993 4.29 4,652 5.73
Commercial loans.................... 1,394 1.29 51 .06 --- ---
Consumer loans ..................... 177 .16 213 .23 223 .28
-------- ------ ------- ------ ------- ------
Gross loans receivable......... $108,462 100.00% $93,044 100.00% $81,135 100.00%
======== ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family real estate... $83,558 77.04% $73,130 78.60% $64,730 79.78%
Multi-family real estate......... 10,063 9.28 12,037 12.93 11,172 13.77
Commercial real estate........... 13,270 12.24 7,666 8.24 5,094 6.28
Deposits......................... 124 .11 160 .17 139 .17
Other............................ 1,447 1.33 51 .06 --- ---
-------- ------ ------- ------ ------- ------
Gross loans receivable......... 108,462 100.00 93,044 100.00 81,135 100.00
Deduct:
Allowance for loan losses........... 422 .39 362 .39 252 .31
Deferred loan fees.................. 334 .31 334 .36 325 .40
Loans in process.................... 1,532 1.41 1,448 1.55 2,122 2.62
-------- ------ ------- ------ ------- ------
Net loans receivable............. $106,174 97.89% $90,900 97.70% $78,436 96.67%
======== ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $21,724 20.32% $19,954 21.51% $ 20,683 25.56%
Fixed-rate....................... 85,167 79.68 72,826 78.49 60,229 74.44
-------- ------ ------- ------ ------- ------
Total.......................... $106,891 100.00% $92,780 100.00% $80,912 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
The following table sets forth certain information at December 31, 1999,
regarding the dollar amount of loans maturing in Union Federal's loan portfolio
based on the contractual terms to maturity. Demand loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects that prepayments will
cause actual maturities to be shorter.
<TABLE>
<CAPTION>
Balance Due During Years Ended December 31,
Outstanding at 2003 2005 2010 2015
December 31, to to to and
1999 2000 2001 2002 2004 2009 2014 following
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans:
Residential loans..................$ 80,552 $ 647 $ 292 $216 $ 858 $26,043 $31,673 $20,823
Multi-family loans................. 9,549 --- --- --- 1,668 2,610 4,751 520
Commercial loans................... 12,410 65 5 274 214 3,702 2,549 5,601
Construction loans.................... 4,380 --- 1,299 --- --- 912 959 1,210
Commercial loans...................... 1,394 876 100 --- 271 147 --- ---
Loans secured by deposits............. 124 124 --- --- --- --- --- ---
Personal loans........................ 53 19 --- 5 29 --- --- ---
-------- ------ ------ ---- ------ ------- ------- -------
Total............................ $108,462 $1,731 $1,696 $495 $3,040 $33,414 $39,932 $28,154
======== ====== ====== ==== ====== ======= ======= =======
</TABLE>
The following table sets forth, as of December 31, 1999, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
Due After December 31, 2000
-----------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
Residential loans........ $71,064 $8,841 $79,905
Multi-family loans....... 5,442 4,107 9,549
Commercial loans......... 4,815 7,530 12,345
Construction loans.......... 3,238 1,142 4,380
Commercial loans............ 191 327 518
Installment loans........... 34 --- 34
Loans secured by deposits... --- --- ---
------- ------- --------
Total.................... $84,784 $21,947 $106,731
======= ======= ========
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, 1999 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, 1999, approximately
20.3% 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, 1999, approximately $80.6 million, or 74.3% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $166,000, or .2% 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, 1999, approximately $9.5 million, or
8.8% 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, 1999 had a balance of approximately $979,000 and was secured by 28
duplexes located in Crawfordsville, Indiana. On the same date, Union Federal had
no 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, 1999, Union Federal's largest
commercial loan had an outstanding balance of $1.8 million and was secured by
farm property in Montgomery County. At December 31, 1999, approximately $12.4
million, or 11.4% of Union Federal's total loan portfolio, consisted of
commercial real estate loans. On the same date, Union Federal had no commercial
real estate loans included in non-performing assets.
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate.
Construction Loans. Union Federal offers construction loans with respect
to residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). Union Federal provides
construction loans only to borrowers who commit to permanent financing on the
finished project. At December 31, 1999, approximately $4.4 million, or 4.0% of
Union Federal's total loan portfolio, consisted of construction loans. The
largest construction loan had a balance of $514,000 on December 31, 1999 and was
secured by a condominium project in Crawfordsville, 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.
Commercial Loans. Union Federal offers commercial loans, which consist
primarily of loans to businesses that are secured by assets other than real
estate. As of December 31, 1999, commercial loans amounted to $1.4 million, or
1.3% of Union Federal's total loan portfolio. Commercial loans tend to bear
somewhat greater risk than residential mortgage loans, depending on the ability
of the underlying enterprise to repay the loan. Although commercial loans have
not historically comprised a large portion of Union Federal's portfolio, Union
Federal intends to increase the amount of loans it makes to small businesses in
the future in order to increase its rate of return and diversify its portfolio.
As of December 31, 1999, none of Union Federal's commercial loans were included
in nonperforming assets.
Consumer Loans. Union Federal's consumer loans, consisting of passbook
loans and personal installment loans, aggregated approximately $177,000 at
December 31, 1999, or .2% of its total loan portfolio. Union Federal's passbook
loans are made up to 90% of the deposit account balance and, at December 31,
1999, accrued at a rate of 7.7%. 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, 1999, 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, 1999, Union Federal also had six loans which it
originated, totaling approximately $609,000, 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, 1999, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $7.7 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $688,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 1999 was a $775,000 interest in a loan
secured by a nursing home located in Greensburg, Indiana.
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
-------- ------- -------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable
at beginning of period....................... $93,044 $81,135 $73,630
Loans originated:
Real estate mortgage loans:
One-to-four family loans................. 23,539 24,763 18,116
Multi-family loans....................... 908 1,052 654
Commercial loans......................... 3,461 3,763 483
Construction loans......................... 4,719 3,163 5,284
Commercial loans........................... 3,655 51 ---
Loans secured by deposits.................. 224 155 161
Personal installment loans................. 392 30 85
-------- ------- -------
Total originations..................... 36,898 32,977 24,783
Purchases (sales) of participation loans, net... 1,139 800 500
Reductions:
Principal loan repayments.................. 22,424 21,853 17,541
Transfers from loans to real estate owned.. 195 15 237
-------- ------- -------
Total reductions....................... 22,619 21,868 17,778
-------- ------- -------
Total gross loans receivable at
end of period................................ $108,462 $93,044 $81,135
======== ======= =======
</TABLE>
Union Federal's residential loan originations during the year ended
December 31, 1999 totaled $23.5 million, compared to $24.8 million and $18.1
million in the years ended December 31, 1998 and 1997, 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, 1999, $263,000, or .2% of Union
Federal's total assets, were non-performing (non-performing loans, non-accruing
loans and foreclosed real estate) compared to $349,000, or .3%, of its total
assets at December 31, 1998. At December 31, 1999, residential loans accounted
for $166,000 of Union Federal's non-performing assets. Union Federal had real
estate owned ("REO") properties in the amount of $97,000 as of December 31,
1999.
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
At December 31,
----------------------------
1999 1998 1997
---- ------ ----
(Dollars in thousands)
Non-performing assets:
Non-performing loans................. $166 $349 $52
Foreclosed real estate............... 97 --- 46
---- ---- ---
Total non-performing assets........ $263 $349 $98
==== ==== ===
Non-performing loans to total loans..... .16% .38% .07%
Non-performing assets to total assets... .22% .32% .07%
Interest income of $7,000, $30,000 and $4,000 for the years ended December
31, 1999, 1998 and 1997, respectively, was recognized on the non-performing
loans summarized above. Interest income of $13,000, $33,000 and $5,000 for the
years ended December 31, 1999, 1998 and 1997, respectively, would have been
recognized under the original terms of these non-performing loans.
At December 31, 1999, Union Federal held loans delinquent from 30 to 89
days totaling approximately $622,000. 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, 1999, 1998 and 1997, 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, 1999 At December 31, 1998 At December 31, 1997
------------------------------------- ---------------------------------- ----------------------------------
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 Loans of 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....... 9 $429 4 $166 6 $406 3 $50 9 $300 4 $ 47
Commercial
real estate loans.. 2 61 --- --- 1 17 2 89 1 48 --- ---
Multi-family
loans.............. 1 132 --- --- --- --- 1 210 1 207 --- ---
Loans secured
by deposits........ --- --- --- --- --- --- --- --- --- --- --- ---
--- ---- --- ---- --- ---- --- ---- --- ---- --- ---
Total.............. 12 $622 4 $166 7 $423 6 $349 11 $555 5 $52
== ==== === ==== === ==== === ==== == ==== === ===
Delinquent loans to
total loans........ .74% .85% .77%
=== === ===
</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, 1999, the aggregate amount of Union Federal's classified
assets and its general and specific loss allowances were as follows:
At December 31, 1999
--------------------
(In thousands)
Substandard assets.......................................... $747
Doubtful assets............................................. ---
Loss assets................................................. ---
----
Total classified assets................................. $747
====
General loss allowances..................................... $422
Specific loss allowances.................................... ---
----
Total allowances........................................ $422
====
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, 1999, Union Federal had a
multi-family loan in the amount of $484,000 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, 1999. 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, 1999.
Year Ended December 31,
-----------------------------
1999 1998 1997
---- ----- ----
(Dollars in thousands)
Balance at beginning of period.............. $362 $252 $159
Gross charge-offs - Multi-family loans...... --- --- (72)
Provision for losses on loans............... 60 110 165
---- ---- ----
Balance end of period.................... $422 $362 $252
==== ==== ====
Allowance for loan losses as a percent of
total loans outstanding.................. .40% .40% .32%
Ratio of net charge-offs to average
loans outstanding........................ --- --- .10%
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,
---------------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- --------------------
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............... $90 74.27% $75 77.19% $ 65 76.95%
Commercial................ 124 8.80 67 6.83 29 4.47
Multi-family.............. 115 11.44 134 11.40 82 12.57
Construction loans.......... 11 4.04 19 4.29 10 5.73
Commercial loans............ 32 1.29 --- .06 --- ---
Loans secured by deposits... --- .11 --- .17 --- .17
Personal installment loans.. 2 .05 --- .06 --- .11
Unallocated................. 48 --- 67 --- 66 ---
---- ------ ---- ------ ---- ------
Total..................... $422 100.00% $362 100.00% $252 100.00%
==== ====== ==== ====== ==== ======
</TABLE>
Investments
Investments. The Company's investment portfolio generally consists of U.S.
Treasury and federal agency securities, mortgaged-backed securities, marketable
equity securities, FHLB stock and an investment in Pedcor Investments - 1993 -
XVI, L.P. See "--Service Corporation Subsidiary." At December 31, 1999,
approximately $9.9 million, or 8.2%, of the Company's total assets consisted of
such investments. The Company also had $2.8 million, or 2.3% of its assets, in
interest-earning deposits as of that date.
The amount of interest-earning deposits held by the Company increased
significantly during 1997 as a result of the Conversion. Because the
subscription offering for the Holding Company's Common Stock was oversubscribed,
the Company 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 the Company in interest-bearing deposits. In addition, the Company
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
the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
1999 1998 1997
------------------ ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
Available for sale:
marketable equity securities....... $290 $315 $ --- $ --- $ --- $ ---
Held to maturity:
U.S. Treasury....................... --- --- --- --- 350 350
Federal agencies.................... 4,715 4,386 4,500 4,479 3,346 3,351
Mortgage-backed securities.......... 2,807 2,813 3,526 3,696 2,124 2,302
----- ----- ----- ----- ----- -----
Total investment securities
held to maturity................ 7,522 7,199 8,026 8,175 5,820 6,003
Investment in limited partnership...... 1,012 (1) 1,055 (1) 1,176 (1)
FHLB stock (2)......................... 1,044 1,044 745 745 708 708
------ ------ ------
Total investments...................... $9,868 $9,826 $7,704
====== ====== ======
</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, marketable equity 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, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 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>
Federal agency securities........... $--- ---% $2,415 5.97% $--- ---% $2,300 6.64%
</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,
-----------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- --------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
--------- -------- ------ --------- -------- ------ --------- -------- ------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Governmental National
Mortgage Corporation.................... $ 689 24.5% $ 748 $991 28.1% $1,095 $1,223 57.6% $1,348
Federal Home Loan Mortgage Corporation..... 2,043 72.8 1,995 2,395 67.9 2,464 635 29.9 691
Federal National
Mortgage Corporation.................... 63 2.3 58 123 3.5 120 243 11.4 240
Other...................................... 12 .4 12 17 .5 17 23 1.1 23
------ ----- ------ ------ ----- ------ ------ ----- ------
Total mortgage- backed securities....... $2,807 100.0% $2,813 $3,526 100.0% $3,696 $2,124 100.0% $2,302
====== ===== ====== ====== ===== ====== ====== ===== ======
</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, 1999.
<TABLE>
<CAPTION>
Amount at December 31, 1999 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...................... $3 10.66% $494 8.75% $2,310 7.07%
</TABLE>
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 1999, 1998
and 1997.
For the Year Ended
December 31,
--------------------------------------------------
1999 1998 1997
------ ------ ------
(In thousands)
Beginning balance...... $3,526 $2,124 $2,752
Purchases.............. --- 2,004 ---
Repayments............. (731) (607) (639)
Premium and discount
amortization, net... 12 5 11
------ ------ ------
Ending balance......... $2,807 $3,526 $2,124
====== ====== ======
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 the Company's deposit accounts by type, maturity, and rate
at December 31, 1999, is as follows:
<TABLE>
<CAPTION>
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1999 Deposits Rate
- -----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C>
Fixed rate, passbook accounts.................. $ 10 $3,184 4.62% 4.00%
Variable rate, money market.................... 10 16,329 23.67 4.97
NOW accounts and other transaction accounts.... 500 2,852 4.13 1.78
------- ------ ----
Total withdrawable........................... 22,365 32.42 4.43
------- ------ ----
Certificates (original terms):
3 months or less............................... 1,000 10 .01 4.12
6 months....................................... 1,000 2,740 3.97 4.60
12 months...................................... 1,000 3,669 5.32 4.74
18 months...................................... 1,000 5,999 8.69 5.09
24 months...................................... 1,000 3,574 5.18 5.39
30 months...................................... 1,000 10,380 15.05 5.54
36 months ..................................... 1,000 2,957 4.29 5.83
48 months...................................... 1,000 557 .81 5.84
60 months...................................... 1,000 6,039 8.75 5.96
Jumbo certificates - $100,000 and over............ 100,000 10,700 15.51 5.63
------- ------ ----
Total certificates................................ 46,625 67.58 5.45
------- ------ ----
Total deposits.................................... $68,990 100.00% 5.12%
======= ====== ====
</TABLE>
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
At December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
3.00 to 3.99%........ $ 1 $ --- $ ---
4.00 to 4.99%........ 11,957 4,193 3,622
5.00 to 5.99%........ 22,850 27,459 19,245
6.00 to 6.99%........ 11,800 17,119 22,894
7.00 to 7.99%........ 17 26 420
------- ------- -------
Total............. $46,625 $48,797 $46,181
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1999. Matured certificates, which have not been renewed as of
December 31, 1999, have been allocated based upon certain rollover assumptions.
<TABLE>
<CAPTION>
Amounts at December 31, 1999 Maturing In
----------------------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ------- -------- ------
(In thousands)
<S> <C> <C> <C> <C>
3.00 to 3.99%.. $ 1 $ --- $ --- $ ---
4.00 to 4.99%.. 8,793 3,168 159 ---
5.00 to 5.99%.. 12,961 7,029 1,141 3,446
6.00 to 6.99%.. 3,685 2,403 3,017 815
7.00 to 7.99%.. 7 --- --- ---
------- ------- -------- ------
Total....... $25,447 $12,600 $ 4,317 $4,261
======= ======= ======== ======
</TABLE>
The following table indicates the amount of the Company's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1999.
At December 31, 1999
---------------------
Maturity Period (In thousands)
Three months or less................................... $ 2,895
Greater than three months through six months........... 1,194
Greater than six months through twelve months.......... 2,101
Over twelve months..................................... 4,510
-------
Total............................................. $10,700
=======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that the Company 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
1999 Deposits 1998 1998 Deposits 1997 1997 Deposits
------- ------ ------ ------- ------ ------ ------- ------
(Dollars in thousands)
Withdrawable:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate, passbook accounts...... $3,184 4.62% $ (226) $3,410 5.26% $(1,169) $ 4,579 7.35%
Variable rate, money market........ 16,329 23.67 5,535 10,794 16.65 1,669 9,125 14.66
NOW accounts and other
transaction accounts............. 2,852 4.13 1,007 1,845 2.84 (528) 2,373 3.81
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............... 22,365 32.42 6,316 16,049 24.75 (28) 16,077 25.82
------- ------ ------ ------- ------ ------ ------- ------
Certificates (original terms):
3 months........................... 10 .01 (91) 101 .16 101 .16
6 months........................... 2,740 3.97 (446) 3,186 4.91 (592) 3,778 6.07
12 months.......................... 3,669 5.32 (262) 3,931 6.06 (1,546) 5,477 8.80
18 months.......................... 5,999 8.69 (2,056) 8,055 12.42 69 7,986 12.83
24 months.......................... 3,574 5.18 (1,870) 5,444 8.40 270 5,174 8.31
30 months.......................... 10,380 15.05 1,390 8,990 13.86 2,375 6,615 10.62
36 months ......................... 2,957 4.29 (511) 3,468 5.35 (386) 3,854 6.19
48 months.......................... 557 .81 48 509 .78 188 321 .52
60 months.......................... 6,039 8.75 277 5,762 8.89 (53) 5,815 9.34
Jumbo certificates.................... 10,700 15.51 1,349 9,351 14.42 2,291 7,060 11.34
------- ------ ------ ------- ------ ------ ------- ------
Total certificates.................... 46,625 67.58 (2,172) 48,797 75.25 2,616 46,181 74.18
------- ------ ------ ------- ------ ------ ------- ------
Total deposits........................ $68,990 100.00% $4,144 $64,846 100.00% $2,588 $62,258 100.00%
======= ====== ====== ======= ====== ====== ======= ======
</TABLE>
Total deposits at December 31, 1999 were approximately $69.0 million,
compared to approximately $64.8 million at December 31, 1998. 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, 1999, Union Federal had borrowings in the amount of $11.7 million
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") $837,000 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, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
At or for the Year
Ended December 31,
------------------------------------------
1999 1998 1997
------- ---- ------
(Dollars in thousands)
FHLB Advances:
<S> <C> <C> <C>
Outstanding at end of period.................. $11,659 $772 $2,373
Average balance outstanding for period........ 6,043 873 5,748
Maximum amount outstanding at any
month-end during the period................. 11,659 1,272 6,873
Weighted average interest rate
during the period........................... 5.66% 5.84% 5.90%
Weighted average interest rate
at end of period............................ 5.76% 5.71% 5.71%
Return on Equity and Assets
1999 1998 1997
------- ---- ------
Return on assets (net income
divided by average total assets)........... 1.72% 1.82% 1.38%
Return on equity (net income
divided by average equity)................. 5.02 4.65 8.10
Dividend payout ratio (dividends
per share divided by net
income per share).......................... 57.41 50.71 ---
Equity to assets ratio (average
equity divided by average
total assets).............................. 34.25 39.24 17.03
</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, 1999, UFS had
invested cash of approximately $973,000 in Pedcor with five additional annual
capital contributions remaining to be paid in January of each year through
January, 2004, totaling $837,000. 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 $659,000 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, 1999, was $1.0 million. As of December 31, 1999,
100% 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.
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------ ------
(In Thousands)
Investment in Pedcor:
Net of equity in losses............... $1,012 $1,055 $1,176
====== ====== ======
Equity in losses, net
of income tax effect.................. $ (26) $ (73) $ (95)
Tax credit............................... 178 178 178
------- ------ ------
Increase in after-tax net income from
Pedcor investment..................... $ 152 $ 105 $ 83
====== ====== ======
Employees
As of December 31, 1999, Union Federal employed 16 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 federal deposit insurance funds. A savings
association must pay a semi-annual assessment to the OTS based upon a marginal
assessment rate that decreases as the asset size of the savings association
increases, and which includes a fixed-cost component that is assessed on all
savings associations. The assessment rate that applies to a savings association
depends upon the institution's size, condition, and the complexity of its
operations. Union Federal's semi-annual assessment is $17,000.
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 its loans and
investments, regulatory approval of any merger or consolidation, issuances or
retirements of Union Federal's 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.
Savings and Loan Holding Company Regulation
The Holding Company is regulated as a "non-diversified savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
(the "HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, the Holding Company is registered with the OTS and is 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 obtaining the 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 currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") on November 12, 1999, there were no restrictions on the permissible
business activities of a unitary savings and loan holding company. The GLB Act
included a provision that prohibits any new unitary savings and loan holding
company, defined as a company that acquires a thrift after May 4, 1999, from
engaging in commercial activities. This provision also includes a grandfather
clause, however, that permits a company that was a savings and loan holding
company as of May 4, 1999, or had an application to become a savings and loan
holding company on file with the OTS as of that date, to acquire and continue to
control a thrift and to continue to engage in commercial activities. Because the
Holding Company qualifies under this grandfather provision, the GLB Act did not
affect the Holding Company's authority to engage in diversified business
activities.
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 be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and Union Federal
were a bank. See "-Qualified Thrift Lender." At December 31, 1999, Union
Federal's asset composition was in excess of that required to qualify us 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
Union Federal's 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. The FHLB is funded primarily from funds
deposited by banks and 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.
Prior to the enactment of the GLB Act, a federal savings association
was required to become a member of the FHLB for the district in which the thrift
is located. The GLB Act abolished this requirement, effective six months
following the enactment of the statute. At that time, membership with the FHLB
will become voluntary. Any savings association that chooses to become (or
remain) a member of the FHLB following the expiration of this six-month period
will have to qualify for membership under the criteria that existed prior to the
enactment of the GLB Act. Union Federal currently intends to remain a member of
the FHLB of Indianapolis.
As a member of the FHLB, 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 1, 1999, Union
Federal's investment in stock of the FHLB of Indianapolis was $1.0 million. 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. For the fiscal year ended
December 31, 1999, dividends paid by the FHLB of Indianapolis to Union Federal
totaled approximately $70,000, 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. During
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 had been
used to pay the cost of prior thrift failures, while the reserves of the BIF met
the level required by law. In 1996, however, legislation was enacted to
recapitalize the SAIF and eliminate the premium disparity between the BIF and
SAIF. 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.
In 1996, legislation was enacted that 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 approximately $1.3 million ($785,000 after tax) during the
three-month period ending September 30, 1996, and paid this assessment during
the fourth quarter of 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"). Although Congress has considered
merging the SAIF and the BIF, until then, 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 became 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, 1999, 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. Even though the OTS has delayed implementing this
rule, Union Federal nevertheless measures its interest rate risk in conformity
with the OTS regulation and, as of December 31, 1999, would have been required
to deduct $2.0 million from its total capital available to calculate its
risk-based capital requirement. The OTS recently updated its standards regarding
the management of interest rate risk to include summary guidelines to assist
savings associations in determining their exposures to interest rate 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 operating 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, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
1999, 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 it 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 adopted a regulation, which became effective on April 1, 1999,
that revised the 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
requirement under the prior version of the regulation 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, 1999, Union Federal's retained net income standard
was approximately $4.0 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 requires, 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
In 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. During 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 be
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% 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. Union Federal has
established an "in-house" lending limit of $2 million to a single or related
group of borrowers, which is significantly lower than the regulatory lending
limit described above. Any loan that exceeds this "in-house" lending limit up to
the regulatory lending limit must first be approved by Union Federal's board of
directors. At December 31, 1999, Union Federal had no loan relationships that
exceeded its "in-house" lending limit. Also on that date, Union Federal did not
have any loans or extensions of credit to a single or related group of borrowers
in excess of its regulatory 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 that requires the association
to maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. 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, 1999, Union Federal was in compliance
with its QTL requirement, with approximately 89.4% 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 be bound by regulations
applicable to national banks respecting payment of dividends. Three years after
failing the QTL test the association must dispose of any investment or activity
not permissible for a national bank and a savings association. 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, which became effective in 1996, 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.
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 their
directors, executive officers 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 and, as a result, the Holding Company is 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, 1999:
<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)
<S> <C> <C> <C> <C> <C>
221 East Main Street Owned 1913 $68,990 $367 19,065
Crawfordsville, Indiana 47933
</TABLE>
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 $6,800 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 $1,200 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 $27,000 for the year
ended December 31, 1999, and its gross income from renting the parking spaces
was approximately $9,000 for the year ended December 31, 1999.
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, 1999.
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 65) 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 41) 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 48) 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 43 of the
Holding Company's 1999 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 15 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 13 through 15 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 16 through 40 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 and page 7 of the Holding Company's
Proxy Statement for its Annual Shareholder meeting to be held April 19, 2000
(the "2000 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 and 6 of the Holding Company's 2000 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 page 3 of the Holding Company's 2000 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item with respect to Directors is
incorporated by reference to pages 6 and 7 of the Holding Company's 2000 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:
Independent Auditor's Report 16
Consolidated Balance Sheet at December 31, 1999, and 1998 17
Consolidated Statement of Income for the Years Ended
December 31, 1999, 1998, and 1997 18
Consolidated Statement of Shareholders' Equity
for the Years Ended
December 31, 1999, 1998, and 1997. 19
Consolidated Statement of Cash Flows for the Years Ended
December 31, 1999, 1998, and 1997 20
Notes to Consolidated Financial Statements 21
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1999.
(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.
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 30, 2000 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 30th day of March, 2000.
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 30, 2000
)
(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 )
)
)
<PAGE>
/s/ Samuel H. Hildebrand )
-------------------------- )
Samuel H. Hildebrand Director )
)
)
/s/ John M. Horner Director )
-------------------------- )
John M. Horner )
)
) March 30, 2000
/s/ Harry A. Siamas Director )
-------------------------- )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
-------------------------- )
Joseph E. Timmons )
)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
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(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 is
incorporated by reference to Exhibit 10(6) to the
Registrant's Form 10-K for the fiscal year ended December
31, 1997, which was filed with the Commission on April 1,
1998
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
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............................................... 16
Consolidated Balance Sheet.................................................. 17
Consolidated Statement of Income............................................ 18
Consolidated Statement of Shareholders' Equity.............................. 19
Consolidated Statement of Cash Flows........................................ 20
Notes to Consolidated Financial Statements.................................. 21
Directors and Officers...................................................... 42
Shareholder Information..................................................... 43
DESCRIPTION OF BUSINESS
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, installment loans and commercial 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 1999 Annual Report of Shareholders of Union Community
Bancorp, the holding company for Union Federal Savings and Loan Association.
The past year was a good lending year. Net loans increased by approximately 17%,
or by $15.3 million, to $106.2 million. Our deposits increased moderately by
$4.1 million, to $69.0 million, while our total assets increased by 11.5%, or
$12.5 million to $120.7 million.
In furtherance of our continuing efforts to increase shareholder value, Union
Community completed the repurchase of 288,963 shares of its outstanding stock
during 1999 at a cost of approximately$3.4 million. By reducing the number of
the Corporation's shares of common stock, these share repurchases have a
positive effect on our return on equity. However, the share repurchases had a
negative effect on our return on assets because the foregone earnings on the
cash used for the repurchase decreased our net earnings for the year. The
Corporation has now repurchased 441,050 shares at a cost of approximately $5.3
million and has received approval from the Office of Thrift Supervision to
repurchase up to an additional 10% of our outstanding common stock during 2000.
We did not experience any significant problems in connection with the "Y2K"
issue. Each of our material electronic data processing systems made the
transition from 1999 to 2000. Now we are on to the new millennium and our third
year as a savings and loan holding company and as a stock savings association.
Our entire management team and your Board of Directors look forward to the
challenges which lie ahead with a renewed sense of anticipation and commitment.
We thank you, our customers and shareholders, for your support.
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,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
(Dollars in thousands)
Summary of Selected Consolidated
Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets....................................... $120,654 $108,162 $132,040 $82,789 $73,631
Loans, net......................................... 106,174 90,900 78,436 72,697 61,279
Cash and interest-bearing
deposits in other banks (1)................ 3,117 6,191 44,781 1,465 1,993
Investment securities available for sale........... 315 --- --- --- ---
Investment securities held to maturity............. 7,522 8,026 5,820 5,747 7,423
Deposits........................................... 68,990 64,846 62,258 60,436 57,407
Stock subscriptions refundable..................... --- --- 22,687 --- ---
Borrowings......................................... 12,496 1,793 3,573 7,880 2,642
Shareholders' equity............................... 38,280 40,531 42,906 13,910 13,024
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
Summary of Operating Data:
<S> <C> <C> <C> <C> <C>
Total interest and dividend income................. $8,470 $8,105 $6,801 $6,112 $5,729
Total interest expense............................. 3,817 3,415 3,836 3,424 3,148
------ ------ ------ ------- -------
Net interest income............................. 4,653 4,690 2,965 2,688 2,581
Provision for loan losses.......................... 60 110 165 48 24
------ ------ ------ ------- -------
Net interest income after
provision for loan losses..................... 4,593 4,580 2,800 2,640 2,557
------ ------ ------ ------- -------
Other income (losses):
Equity in losses of limited partnership......... (44) (121) (158) (173) (249)
Gain on sales of available for sale securities.. 73 --- --- --- ---
Other........................................... 110 73 62 57 32
------ ------ ------ ------- -------
Total other income (losses)................... 139 (48) (96) (116) (217)
------ ------ ------ ------- -------
Other expenses:
Salaries and employee benefits.................. 1,069 850 480 461 481
Net occupancy expenses.......................... 47 39 39 39 66
Equipment expenses.............................. 27 28 22 20 20
Deposit insurance expense....................... 44 46 31 495 127
Legal and professional fees..................... 127 128 34 29 47
Data processing................................. 122 77 66 57 49
Other........................................... 323 296 289 201 232
------ ------ ------ ------- -------
Total other expenses.......................... 1,759 1,464 961 1,302 1,022
------ ------ ------ ------- -------
Income before income taxes......................... 2,973 3,068 1,743 1,222 1,318
Income taxes....................................... 1,003 1,094 545 336 326
------ ------ ------ ------- -------
Net income...................................... $1,970 $1,974 $1,198 $ 886 $ 992
====== ====== ====== ======= =======
</TABLE>
Table continued on following page
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
Supplemental Data:
<S> <C> <C>
Basic earnings per share........................... $ .81 $.70 --- --- ---
Diluted earnings per share......................... .81 .70 --- --- ---
Dividends per share................................ .465 .355 --- --- ---
Dividend payout ratio.............................. 57.41% 50.71% --- --- ---
Interest rate spread during period................. 2.31 2.23 2.55% 2.54% 2.69%
Net yield on interest-earning assets (2) .......... 4.14 4.42 3.50 3.53 3.67
Return on assets (3)............................... 1.72 1.82 1.38 1.13 1.36
Return on equity (4)............................... 5.02 4.65 8.10 6.54 7.84
Other expenses to average assets (5)............... 1.53 1.35 1.11 1.66 1.41
Equity to assets (6)............................... 31.73 37.47 32.49 16.80 17.69
Average interest-earning assets to average
interest-bearing liabilities.................... 153.70 167.89 120.98 121.94 121.83
Non-performing assets to total assets (6).......... .22 .32 .07 .59 .21
Allowance for loan losses to total loans
outstanding (6)................................. .40 .40 .32 .22 .18
Allowance for loan losses to
non-performing loans (6)........................ 253.69 103.72 484.62 32.52 71.15
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, 1999,
1998 and 1997, 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,
------------------------------------------------------------------------------------------------
1999 1998 1997
----------------------------- ------------------------------- ------------------------------
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....... $2,981 $123 4.13% $11,441 $ 600 5.24% $3,821 $246 6.44%
Mortgage-backed securities...... 3,093 238 7.69 3,304 257 7.78 2,421 214 8.84
Other investment securities..... 5,451 329 6.04 4,301 257 5.98 3,487 197 5.65
Loans receivable (2)............100,056 7,710 7.71 86,421 6,932 8.02 74,382 6,090 8.19
FHLB stock...................... 876 70 7.99 735 59 8.03 676 54 7.99
------- ----- -------- ----- ------- ------
Total interest-earning assets.112,457 8,470 7.53 106,202 8,105 7.63 84,787 6,801 8.02
----- ----- ------
Non-interest earning assets, net of
allowance for loan losses....... 2,173 2,030 2,039
-------- -------- -------
Total assets.................$114,630 $108,232 $86,826
======== ======== =======
Liabilities and shareholder's equity:
Interest-bearing liabilities:
Savings deposits................ $3,389 134 3.95 $3,466 139 4.01 $3,845 159 4.14
Interest-bearing demand......... 16,422 793 4.83 11,920 496 4.16 10,350 444 4.29
Certificates of deposit......... 47,313 2,548 5.39 46,999 2,729 5.81 47,403 2,764 5.83
Stock subscriptions refundable.. --- --- --- --- --- --- 2,737 130 4.75
FHLB advances................... 6,043 342 5.66 873 51 5.84 5,748 339 5.90
------- ----- -------- ----- ------- ------
Total interest-
bearing liabilities........ 73,167 3,817 5.22 63,258 3,415 5.40 70,083 3,836 5.47
----- ----- ------
Other liabilities.................. 2,199 2,504 1,960
-------- -------- -------
Total liabilities............. 75,366 65,762 72,043
Shareholders' equity............... 39,264 42,470 14,783
-------- -------- -------
Total liabilities and
shareholders' equity.....$114,630 $108,232 $86,826
======== ======== =======
Net interest-earning assets........$39,290 $42,944 $14,704
Net interest income................ $4,653 $4,690 $2,965
====== ====== ======
Interest rate spread (3)........... 2.31% 2.23% 2.55%
Net yield on weighted average
interest-earning assets (4)..... 4.14% 4.42% 3.50%
Average interest-earning
assets to average interest-
bearing liabilities........... 153.70% 167.89% 120.98%
</TABLE>
(1) Interest income on loans receivable includes loan fee income of $79,000,
$88,000 and $97,000 for each of the years ended December 31, 1999, 1998 and
1997, respectively.
(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.
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>
Year Ended December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
Weighted average interest rate earned on:
<S> <C> <C> <C>
Interest-earning deposits....................... 4.13% 5.24% 6.44%
Mortgage-backed securities...................... 7.69 7.78 8.84
Other investment securities..................... 6.04 5.98 5.65
Loans receivable................................ 7.71 8.02 8.19
FHLB stock...................................... 7.99 8.03 7.99
Total interest-earning assets................. 7.53 7.63 8.02
Weighted average interest rate cost of:
Savings deposits................................ 3.95 4.01 4.14
Interest-bearing demand......................... 4.83 4.16 4.29
Certificates of deposit......................... 5.39 5.81 5.83
Stock subscriptions refundable.................. --- --- 4.75
FHLB advances................................... 5.66 5.84 5.90
Total interest-bearing liabilities............ 5.22 5.40 5.47
Interest rate spread (1)........................... 2.31 2.23 2.55
Net yield on weighted average
interest-earning assets (2)..................... 4.14 4.42 3.50
</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.
<TABLE>
<CAPTION>
Increase (Decrease) in Net Interest Income
------------------------------------------
Total
Due to Due to Net
Rate Volume Change
---- ------ ------
(In thousands)
<S> <C> <C> <C>
Year ended December 31, 1999 compared
to year ended December 31, 1998
Interest-earning assets:
Interest-earning deposits..................... $(107) $(370) $(477)
Mortgage-backed securities.................... (3) (16) (19)
Other investment securities................... 3 69 72
Loans receivable.............................. (281) 1,059 778
FHLB stock.................................... --- 11 11
----- ------ ------
Total....................................... (388) 753 365
----- ------ ------
Interest-bearing liabilities:
Savings deposits.............................. (2) (3) (5)
Interest-bearing demand....................... 89 208 297
Certificates of deposit....................... (199) 18 (181)
FHLB advances................................. (2) 293 291
----- ------ ------
Total....................................... (114) 516 402
----- ------ ------
Net change in net interest income............... $(274) $237 $(37)
===== ==== ====
Year ended December 31, 1998 compared
to year ended December 31, 1997
Interest-earning assets:
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
====== ===== ========
</TABLE>
Financial Condition at December 31, 1999 Compared to Financial Condition at
December 31, 1998
Total assets increased approximately $12.5 million, or 11.5%, to $120.7
million at December 31, 1999, from $108.2 million at December 31, 1998. The
increase was primarily due to loan growth of $15.3 million offset by a decrease
in cash and cash equivalents of $3.1 million. Net loans increased by 16.8% to
$106.2 million due to an increase in customer demand and an increased focus by
the Company in the areas of commercial and consumer lending.
Loans and Allowance for Loan Losses. Average loans for the year ended
December 31, 1999 were $100.1 million compared to average loans for the 1998
period of $86.4 million, an increase of approximately 16%. The growth in loans
was funded by a decrease in short-term interest bearing deposits and increases
in deposits and FHLB advances. The average rates on loans were 8.02% for 1998
and 7.71% for 1999, a decrease of 31 basis points. As loans increased the
allowance for loan losses also increased from $362,000 at December 31, 1998 to
$422,000 at December 31, 1999. The allowance for loan losses as a percentage of
total loans remained constant from 1998 to 1999 at .40%. The increase in the
allowance for loan losses was a result of a $60,000 provision for loan losses
for the year ended December 31, 1999. The ratio of the allowance for loan losses
to non-performing loans was 103.7% at December 31, 1998 compared to 253.7% at
December 31, 1999. Nonperforming loans decreased from $349,000 at December 31,
1998 to $166,000 at December 31, 1999.
Deposits. Deposits increased $4.1 million to $69.0 million during 1999,
an increase of 6.4%. Increased deposits were utilized to fund loan growth.
Interest bearing demand accounted for the majority of the growth with an
increase of $6.0 million, or 50.5%, during this period. Average total deposits
increased $4.7 million, or 7.6%, from $62.4 million for the year ended December
31, 1998 compared to $67.1 million for the year ended December 31, 1999.
Borrowed Funds. Borrowed funds increased $10.7 million from December
31, 1998 to December 31, 1999. The increase in total borrowed funds was
comprised of an increase in FHLB advances of $10.9 million 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
$183,000. 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. As with deposits, the increased
borrowed funds were used to fund loan growth. Average FHLB advances increased to
$6.0 million for 1999 compared to $873,000 for 1998.
Shareholders' Equity. Stockholders' equity decreased approximately $2.3
million to $38.3 million at December 31, 1999. The decrease was primarily due to
stock repurchases of $3.4 million and cash dividends of $1.2 million. These
decreases were offset by net income for year ended December 31, 1999 of $2.0
million, Employee Stock Ownership Plan shares earned of $122,000 and unearned
compensation amortization of $227,000.
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%.
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.
Comparison of Operating Results For Years Ended December 31, 1999 and 1998
General. Net income decreased $4,000, or .2%, from $1,974,000 for the year
ended December 31, 1998 to $1,970,000 for the year ended December 31, 1999. The
decrease was primarily due to an increase in total other expenses. The return on
average assets was 1.72% and 1.82 % for the years ended December 31, 1999 and
1998, respectively.
Interest Income. Total interest income was $8.5 million for 1999 compared
to $8.1 million for 1998. The increase in interest income was due to an increase
in volume. Average earning assets increased $6.3 million, or 5.9%, from $106.2
million for 1998 compared to $112.5 million for 1999. The average yield on
interest-earning assets decreased from 7.6% for the year ended December 31, 1998
to 7.5% for the comparable period in 1999.
Interest Expense. Interest expense increased $402,000, or 11.8%, for the
year ended December 31, 1999 compared to the year ended December 31, 1998.
Average interest-bearing liabilities increased $9.9 million, or 15.6%, from
$63.3 million for the 1998 period to $73.2 million during the 1999 period.
Average deposits increased by $4.7 million, or 7.5%, from $62.4 million for the
1998 period to $67.1 million for the 1999 period. Average FHLB advances
increased $5.2 million, or 592.2%, from $873,000 for the 1998 period to $6.0
million during the 1999 period.
Net Interest Income. Net interest income decreased $37,000, or .8%, for the
year ended December 31, 1999 compared to the year ended December 31, 1998. The
decrease was primarily due to a decline in the net interest margin from 4.4 %
for the year ended December 31, 1998 to 4.1% for the year ended December 31,
1999.
Provision for Loan Losses. The provision for loan losses for the year ended
December 31, 1999 was $60,000 compared to $110,000 for the same period in 1998.
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 Income (Losses). Other income (losses) increased from losses of
$48,000 for the year ended December 31, 1998 to income of $139,000 for the
comparable period in 1999. This increase was in part due to $73,000 of gains on
sales of securities available for sale. Securities available for sale with a
cost of $523,000 were sold during the third quarter of 1999. In addition, equity
in losses of the limited partnership was down $77,000 from 1998 due to the
operating results of the 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 1999 and 1998 was recorded.
Salaries and Employee Benefits. Salaries and employee benefits were $1.1
million for the year ended December 31, 1999 compared to $850,000 for the 1998
period, and increase of $219,000, or 25.8%. This increase was in part due to a
$114,000 increase in compensation expense related to the recognition and
retention compensation plan that became effective on June 30, 1998. 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 $7,000, or 10.4%, during 1999 compared to 1998.
Deposit Insurance Expense. Deposit insurance expense decreased $2,000, or
4.3%, from $46,000 for the year ended December 31, 1998 to $44,000 for the same
period in 1999.
Legal and Professional Fees. Legal and professional fees were $127,000 for
the year ended December 31, 1999 compared to $128,000 for the 1998 period, a
decrease of $1,000.
Data Processing. Data processing expense increased from $77,000 for the
year ended December 31, 1998 to $122,000 for the comparable period in 1999, an
increase of $45,000. This increase was due to approximately $45,000 of
non-recurring expenses related to the Company's data processing conversion
during the first quarter of 1999.
Other Expense. Other expenses, consisting primarily of expenses related to
advertising, directors' fees, supervisory examination fees, supplies, and
postage increased $27,000, or 9.1% for 1999 compared to 1998. The increase
resulted from nominal increases in a variety of expense categories.
Income Tax Expense. Income tax expense decreased $91,000, or 8.3%, during
1999 compared to 1998. The effective tax rate was 33.7% and 35.7% for the
respective 1999 and 1998 periods.
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.
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.
Data Processing. Data processing expense increased $11,000, or 16.7%, from
$66,000 for the year ended December 31, 1998 to $77,000 for the same period in
1999.
Other Expense. Other expenses, consisting primarily of expenses related to
service center fees, advertising, directors' fees, supervisory examination fees,
supplies, and postage increased $7,000, or 2.4% 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.
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, 1999.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Operating activities.......................................... $2,099 $2,355 $1,367
------- -------- -------
Investing activities:
Investment securities
Purchases of investment securities
available for sale..................................... (812) --- ---
Proceeds from sales of investment
securities available for sale.......................... 596 --- ---
Proceeds from maturities and paydowns of
mortgage-backed securities held to maturity.............. 731 607 639
Purchases of other investment
securities held to maturity............................ (1,415) (9,204) (1,200)
Proceeds from maturities of
investment securities held to maturity................. 1,200 6,400 500
Purchase of loans............................................. (1,439) (800) (500)
Other net change in loans..................................... (14,088) (11,729) (5,517)
Purchase of FHLB of Indianapolis Stock........................ (299) (37) (128)
Proceeds on sale of foreclosed real estate.................... 100 5 76
Purchases of premises and equipment........................... (45) (18) (23)
Other investing activities.................................... (3) (2) (3)
------- -------- -------
Net cash used by investing activities.................... (15,474) (14,778) (6,156)
------- -------- -------
Financing activities:
Net change in
Interest-bearing demand and savings deposits............... 6,316 (28) 2,696
Certificates of deposits................................... (2,171) 2,616 (874)
Stock subscription escrow accounts......................... --- (22,687) 22,687
Proceeds from borrowings...................................... 11,000 --- 1,500
Repayment of borrowings....................................... (297) (1,780) (5,807)
Net change in advances by borrowers
for taxes and insurance.................................... (5) 54 20
Cash dividends................................................ (1,118) (729) ---
Contribution of unearned compensation ........................ --- (1,754) ---
Repurchase of common stock.................................... (3,424) (1,859) ---
Proceeds from sale of common stock, net of costs.............. --- --- 27,883
------- -------- -------
Net cash provided (used) by financing activities......... 10,301 (26,167) 48,105
------- -------- -------
Net increase(decrease) in cash and cash equivalents.......... $(3,074) $(38,590) $43,316
======= ======== =======
</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, 1999, Union Federal had liquid assets
of $5.6 million, and a regulatory liquidity ratio of 6.5%.
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, 1999, 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, 1999:
At December 31, 1999
---------------------------------------------------
OTS Requirement Union Federal's Capital Level
--------------- -----------------------------
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
- ---------------- ------ ------ --------- ------ ---------
(Dollars in thousands)
Tangible capital........ 1.5% $1,796 27.2% $32,532 $30,736
Core capital (2)........ 3.0 3,592 27.2 32,532 28,940
Risk-based capital...... 8.0 5,245 50.3 32,954 27,709
(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 adopted a core capital requirement for savings associations
comparable to that recently adopted by the OCC for national banks. The new
regulation, which became 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 is in compliance with the revised
regulation.
As of December 31, 1999, 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.
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.
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 79.7% of its loan portfolio at December 31,
1999. To manage the interest rate risk of this type of loan portfolio, Union
Federal limits maturities of fixed-rate loans to no more than 20 years. In
addition, Union Federal continues to offer and attempts to increase its volume
of adjustable rate loans when market interest rates make these type loans more
attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Union Federal's net portfolio value ("NPV").
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Union
Federal manages assets and liabilities within the context of the marketplace,
regulatory limitations and within limits established by its Board of Directors
on the amount of change in NPV which is acceptable given certain interest rate
changes.
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal
does not meet either of these requirements, it is not required to file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
It is estimated that at December 31, 1999, NPV would decrease 20% and
30% in the event of 200 and 300 basis point increases in market interest rates,
respectively, compared to 15% and 23% for the same increases at December 31,
1998. Union Federal's NPV at December 31, 1999 would increase 15% and 22% in the
event of 200 and 300 basis point decreases in market rates, respectively. A year
earlier, 200 and 300 basis point decreases in market rates would have increased
NPV 9% and 15%, respectively.
Presented below, as of December 31, 1999 and 1998, is an analysis
performed by the OTS of Union Federal's interest rate risk as measured by
changes in NPV for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 300 basis points. At December
31, 1999, 2% of the present value of Union Federal's assets was approximately
$2.4 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 $6.3 million at December 31, 1999, Union Federal would have been
required to deduct $2.0 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.
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in thousands)
+ 300 bp * $22,656 $(9,490) (30)% 20.81% (615) bp
+ 200 bp 25,801 (6,345) (20) 22.97 (399) bp
+ 100 bp 29,033 (3,112) (10) 25.06 (190) bp
0 bp 32,145 26.96
- 100 bp 34,871 2,726 8 28.53 157 bp
- 200 bp 37,056 4,910 15 29.72 276 bp
- 300 bp 39,087 6,941 22 30.78 382 bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock
Pre-Shock NPV Ratio: NPV as % of PV of Assets..................... 26.96%
Exposure Measure: Post-Shock NPV Ratio............................ 22.97%
Sensitivity Measure: Change in NPV Ratio.......................... 399 bp
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in thousands)
+ 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
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
* 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 accompanying consolidated balance sheet of Union Community
Bancorp and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Olive LLP
Indianapolis, Indiana
January 21, 2000
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
December 31 1999 1998
- -----------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 286,812 $ 32,153
Interest-bearing demand deposits 2,830,213 6,158,927
------------ ------------
Cash and cash equivalents 3,117,025 6,191,080
Investment securities
Available for sale 315,463
Held to maturity (fair value of $7,199,000 and $8,175,000) 7,521,923 8,026,162
------------ ------------
Total investment securities 7,837,386 8,026,162
Loans, net of allowance for loan losses of $422,258 and $362,258 106,173,782 90,900,269
Premises and equipment 367,427 355,194
Federal Home Loan Bank stock 1,043,700 744,500
Investment in limited partnership 1,011,609 1,055,109
Interest receivable 823,768 714,691
Other assets 278,942 174,687
------------ ------------
Total assets $120,653,639 $108,161,692
============ ============
Liabilities
Deposits
Noninterest bearing $ 1,151,075 $ 656,796
Interest bearing 67,839,367 64,188,836
------------ ------------
Total deposits 68,990,442 64,845,632
Federal Home Loan Bank advances 11,658,526 772,226
Note payable 837,442 1,020,642
Interest payable 122,565 109,337
Dividends payable 315,591 270,567
Other liabilities 449,158 612,427
------------ ------------
Total liabilities 82,373,724 67,630,831
------------ ------------
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--2,600,700 and 2,889,663 shares 25,389,422 28,193,644
Retained earnings 15,912,206 15,708,073
Accumulated other comprehensive income 15,385
Unearned employee stock ownership plan (ESOP) shares (1,624,444) (1,730,736)
Unearned recognition and retention plan (RRP) shares (1,412,654) (1,640,120)
------------ ------------
Total shareholders' equity 38,279,915 40,530,861
------------ ------------
Total liabilities and shareholders' equity $120,653,639 $108,161,692
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and Dividend Income
Loans $7,710,042 $6,932,194 $6,090,003
Investment securities
Mortgage-backed securities 237,665 256,870 214,121
Other investment securities 329,441 257,305 196,937
Dividends on Federal Home Loan Bank stock 70,089 58,866 53,956
Deposits with financial institutions 123,002 599,612 245,927
---------- ---------- ----------
Total interest and dividend income 8,470,239 8,104,847 6,800,944
---------- ---------- ----------
Interest Expense
Deposits 3,474,851 3,364,222 3,366,097
Stock subscription escrow accounts 130,411
Federal Home Loan Bank advances 342,481 50,952 339,258
---------- ---------- ----------
Total interest expense 3,817,332 3,415,174 3,835,766
---------- ---------- ----------
Net Interest Income 4,652,907 4,689,673 2,965,178
Provision for loan losses 60,000 110,000 165,000
---------- ---------- ----------
Net Interest Income After Provision for Loan Losses 4,592,907 4,579,673 2,800,178
---------- ---------- ----------
Other Income (Losses)
Equity in losses of limited partnership (43,500) (121,000) (157,800)
Net realized gains on sales of available-for-sale securities 73,150
Other income 109,485 73,126 61,952
---------- ---------- ----------
Total other income (losses) 139,135 (47,874) (95,848)
---------- ---------- ----------
Other Expenses
Salaries and employee benefits 1,068,985 849,909 479,726
Net occupancy expenses 46,989 38,741 39,159
Equipment expenses 26,967 28,182 22,436
Deposit insurance expense 43,556 45,847 31,482
Legal and professional fees 126,733 128,193 33,813
Data processing 121,994 76,901 66,002
Other expenses 323,871 295,413 288,704
---------- ---------- ----------
Total other expenses 1,759,095 1,463,186 961,322
---------- ---------- ----------
Income Before Income Tax 2,972,947 3,068,613 1,743,008
Income tax expense 1,002,512 1,094,377 544,556
---------- ---------- ----------
Net Income $1,970,435 $1,974,236 $1,198,452
========== ========== ==========
Basic Earnings per Share $ .81 $ .70
Diluted Earnings per Share .81 .70
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Shareholders' Equity
Accumulated
Common Stock Other
Shares Comprehensive Retained Comprehensive Unearned Unearned
Outstanding Amount Income Earnings Income ESOP Shares Compensation Total
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 $13,909,833 $13,909,833
Comprehensive income
Net income $1,198,452 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
======================= =================================================================
Comprehensive income
Net income $1,974,236 1,974,236 1,974,236
==========
Cash dividends
($.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
----------------------- -----------------------------------------------------------------
Comprehensive income
Net income $1,970,435 1,970,435 1,970,435
Other comprehensive income,
net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 15,385 $15,385 15,385
----------
Comprehensive income $1,985,820
==========
Cash dividends
($.465 per share) (1,162,604) (1,162,604)
Purchase of common stock (288,963) (2,820,059) (603,698) (3,423,757)
Amortization of unearned
compensation expense 227,466 227,466
ESOP shares earned 15,837 106,292 122,129
----------------------- -----------------------------------------------------------------
Balances, December 31, 1999 2,600,700 $25,389,422 $15,912,206 $15,385 $(1,624,444) $(1,412,654) $38,279,915
======================= =================================================================
</TABLE>
See notes to consolidated financial statements.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $1,970,435 $1,974,236 $ 1,198,452
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 60,000 110,000 165,000
Depreciation 32,589 30,344 27,335
Deferred income tax 20,928 (40,926) 36,750
Investment securities accretion, net (12,061) (9,223) (11,677)
Gains on sale of investment securities available for sale (73,150)
Gains on sale of foreclosed real estate (284) (2,500) (5,565)
Equity in losses of limited partnership 43,500 121,000 157,800
Amortization of unearned compensation expense 227,466 113,733
ESOP shares earned 122,129 149,145
Net change in
Interest receivable (109,077) (133,165) (127,922)
Interest payable 13,228 (9,530) 27,415
Other assets (38,750) (8,396) (21,878)
Other liabilities (157,776) 60,780 (78,749)
----------- ---------- -----------
Net cash provided by operating activities 2,099,177 2,355,498 1,366,961
----------- ---------- -----------
Investing Activities
Investment securities
Purchases of investment securities available for sale (812,492)
Purchases of investment securities held to maturity (1,415,000) (9,203,586) (1,200,000)
Proceeds from sales of investment securities available for sale 595,655
Proceeds from maturities and paydowns of mortgage-backed
securities held to maturity 731,300 606,716 638,955
Proceeds from maturities of investment
securities held to maturity 1,200,000 6,400,000 500,000
Net change in loans (15,527,383) (12,529,034) (6,017,272)
Purchases of premises and equipment (44,822) (18,178) (23,331)
Proceeds from sale of foreclosed real estate 100,356 4,500 76,274
Purchase of Federal Home Loan Bank of Indianapolis stock (299,200) (36,800) (127,600)
Other investing activity (2,726) (1,934) (2,728)
----------- ---------- -----------
Net cash used by investing activities (15,474,312) (14,778,316) (6,155,702)
----------- ---------- -----------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 6,316,311 (28,493) 2,695,812
Certificates of deposit (2,171,501) 2,616,080 (874,209)
Stock subscription escrow accounts (22,687,104) 22,687,104
Proceeds from borrowings 11,000,000 1,500,000
Repayment of borrowings (296,900) (1,780,225) (5,807,277)
Cash dividends (1,117,580) (728,726)
Contribution of unearned compensation (1,753,853)
Repurchase of common stock (3,423,757) (1,858,984)
Net change in advances by borrowers for taxes and insurance (5,493) 54,376 19,981
Proceeds from sale of common stock, net of costs 27,882,967
---------- ---------- -----------
Net cash provided (used) by financing activities 10,301,080 (26,166,929) 48,104,378
---------- ---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (3,074,055) (38,589,747) 43,315,637
Cash and Cash Equivalents, Beginning of Year 6,191,080 44,780,827 1,465,190
---------- ---------- -----------
Cash and Cash Equivalents, End of Year $3,117,025 $6,191,080 $44,780,827
========== ========== ===========
Additional Cash Flows Information
Interest paid $3,804,104 $3,424,704 $3,808,351
Income tax paid 1,087,326 984,063 527,433
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 193,870 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)
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. Debt
securities not classified as held to maturity and marketable equity securities
are classified as available for sale. Securities available for sale are carried
at fair value with unrealized gains and losses reported separately in
accumulated other comprehensive income, net of tax.
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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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, 1999, 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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 each year. 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.
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.
Note 3 -- Investment Securities
1999
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Available for sale
Marketable equity securities $ 290 $ 25 $ 315
Held to maturity
Federal agencies 4,715 $329 4,386
Mortgage-backed securities 2,807 85 79 2,813
--------------------------------------------
Total held to maturity 7,522 85 408 7,199
--------------------------------------------
Total investment securities $7,812 $110 $408 $7,514
============================================
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- --------------------------------------------------------------------------------
Held to maturity
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
=============================================
The amortized cost and fair value of securities held to maturity at December 31,
1999, 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.
Available for Sale Held to Maturity
----------------------------------------------
Amortized Fair Amortized Fair
December 31 Cost Value Cost Value
- ------------------------------------------------------------------------------
One to five years $2,415 $2,343
After ten years 2,300 2,043
----------------------------------------------
4,715 4,386
Mortgage-backed securities 2,807 2,813
Marketable equity securities $290 $315
----------------------------------------------
Totals $290 $315 $7,522 $7,199
==============================================
Securities with a carrying value of $2,807,000 and $3,597,000 were pledged at
December 31, 1999 and 1998 to secure FHLB advances.
Proceeds from sales of securities available for sale during 1999 were $596,000.
Gross gains of $73,000 were realized on those sales.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Mortgage-backed securities included in investment securities held to maturity
above consist of the following:
<TABLE>
<CAPTION>
1999
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Held to maturity
Government National Mortgage Corporation $ 689 $59 $ 748
Federal Home Loan Mortgage Corporation 2,043 26 $74 1,995
Federal National Mortgage Corporation 63 5 58
Other 12 12
--------------------------------------------
Total mortgage-backed securities $2,807 $85 $79 $2,813
============================================
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Held to maturity
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
=====================================================
</TABLE>
Note 4 -- Loans and Allowance
December 31 1999 1998
- -----------------------------------------------------------------------------
Real estate mortgage loans
One-to-four family $ 80,552 $71,823
Multi-family 9,549 10,609
Commercial 12,410 6,355
Real estate construction loans 2,848 2,545
Commercial loans 1,394 51
Individuals' loans for household and
other personal expenditures 177 213
---------------------------
106,930 91,596
Deferred loan fees (334) (334)
Allowance for loan losses (422) (362)
---------------------------
Total loans $106,174 $90,900
===========================
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Allowance for loan losses
Balances, beginning of year $362 $252 $159
Provision for losses 60 110 165
Loans charged off (72)
---------------------------------
Balances, end of year $422 $362 $252
=================================
Information on impaired loans is summarized below.
December 31 1999 1998
Impaired loans for which the discounted cash flows or collateral
value exceeds the carrying value of the loan $197 $322
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Average balance of impaired loans $214 $110 $33
Interest income recognized on impaired loans 21 10
Cash basis interest included above 18 10
Note 5 -- Premises and Equipment
December 31 1999 1998
- --------------------------------------------------------------------------------
Land $146 $146
Buildings 579 569
Equipment 171 140
--------------------
Total cost 896 855
Accumulated depreciation (529) (500)
--------------------
Net $367 $355
====================
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6 -- Investment in Limited Partnership
The investment in limited partnership of $1,012,000 and $1,055,000 at December
31, 1999 and 1998 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, 1999, 1998 and 1997.
Condensed financial statements for Pedcor are as follows:
December 31 1999 1998
- --------------------------------------------------------------------------------
Condensed statement of financial condition
Assets
Cash $ 21 $ 31
Land and property 2,178 2,235
Other assets 175 19
---------------------
Total assets $2,374 $2,285
=====================
Liabilities
Notes payable--Association $ 659 $ 772
Notes payable--other 1,338 1,256
Other liabilities 161 159
---------------------
Total liabilities 2,158 2,187
Partners' equity 216 98
---------------------
Total liabilities and partners' equity $2,374 $2,285
=====================
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Condensed statement of operations
Total revenue $ 253 $ 232 $ 219
Total expenses 318 354 340
-----------------------------------
Net loss $ (65) $(122) $(121)
===================================
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- Deposits
December 31 1999 1998
- --------------------------------------------------------------------------------
Noninterest-bearing demand $ 1,151 $ 657
Interest-bearing demand 18,030 11,982
Savings deposits 3,184 3,410
Certificates and other time deposits of $100,000 or more 10,700 9,351
Other certificates and time deposits 35,925 39,446
-------------------
Total deposits $68,990 $64,846
===================
Certificates and other time deposits maturing in years ending December 31:
- --------------------------------------------------------------------------------
2000 $25,447
2001 12,600
2002 4,317
2003 2,271
2004 1,990
-------
$46,625
=======
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Interest expense on deposits
Interest-bearing demand $ 793 $ 496 $ 444
Savings deposits 134 139 159
Certificates 2,548 2,729 2,763
-----------------------------------------
$3,475 $3,364 $3,366
=========================================
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Federal Home Loan Bank Advances
1999
---------------------------
Weighted
Average
December 31 Amount Rate
- --------------------------------------------------------------------------------
Advances from FHLB
Maturities in years ending
2000 $11,124 5.76%
2001 129 5.67
2002 138 5.80
2003 147 5.90
2004 121 6.03
-------
$11,659 5.76%
=======
The Association has an available line of credit with the FHLB totaling
$5,000,000. The line of credit expires March 1, 2000 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, 1999.
FHLB advances are secured by first-mortgage loans and investment securities
totaling $80,867,000 and $73,501,000 at December 31, 1999 and 1998. Advances are
subject to restrictions or penalties in the event of prepayment.
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 1999
- --------------------------------------------------------------------------------
Note payable to Pedcor Maturities in years ending:
2000 $183
2001 177
2002 174
2003 171
2004 132
------
$837
======
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 -- Income Tax
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 726 $ 848 $353
State 256 287 155
Deferred
Federal 16 (27) 37
State 5 (14)
-----------------------------
Total income tax expense $1,003 $1,094 $545
=============================
Reconciliation of federal statutory
to actual tax expense
Federal statutory income tax at 34% $1,011 $1,043 $593
Effect of state income taxes 172 180 102
Tax credits (178) (178) (178)
Other (2) 49 28
-----------------------------
Actual tax expense $1,003 $1,094 $545
=============================
Effective tax rate 33.7% 35.7% 31.2%
The components of the cumulative net deferred tax asset included in other assets
are as follows:
December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $173 $144
Loan fees 15
Pensions and employee benefits 48 63
Other 19
-----------------
Total assets 240 222
-----------------
Liabilities
Depreciation (23) (21)
State income tax (5) (6)
FHLB stock dividend (23) (23)
Loan fees (16)
Equity in partnership losses (107) (87)
Unrealized gain on securities available-for-sale (10)
Other (5)
-----------------
Total liabilities (184) (142)
-----------------
Valuation Allowance (7)
-----------------
$ 49 $ 80
=================
The valuation allowance at December 31, 1999 is $7,000, all of which arose
during the current year.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
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 1999 1998
- --------------------------------------------------------------------------------
Commitments to extend credit $3,762 $2,566
Standby letters of credit 3,215 2,514
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Association upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Association
to guarantee the performance of a customer to a third party.
The 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
agreement, 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 the agreement in the event of a change in control is
approximately $300,000. The Company is not required to pay any amounts under
this agreement which cannot be deducted for federal income tax purposes.
The Company, Association and UFS are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 12 -- Dividend and Capital Restrictions
Without prior approval, current regulations allow the Association to pay
dividends to the Company not exceeding retained net income for the current year
plus those for the previous two years. The Association normally restricts
dividends to a lesser amount because of the need to maintain an adequate capital
structure.
At the time of conversion, a liquidation account was established in an amount
equal to the Association's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Association after conversion. In the event
of a complete liquidation, and only in such event, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution may
be made to 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, 1999, the shareholders' equity of the Association was
$32,532,000, of which approximately $4,018,000 was available for the payment of
dividends.
Note 13 -- 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,
1999 and 1998, the Association is categorized as well capitalized and meets all
subject capital adequacy requirements. There are no conditions or events since
December 31, 1999 that management believes have changed the Association's
classification.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1999
---------------------------------------------------------------
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) $32,954 50.3% $5,245 8.0% $6,557 10.0%
Tier 1 capital 1 (to risk-weighted assets) 32,532 49.6% 2,623 4.0% 3,934 6.0%
Core capital 1 (to adjusted total assets) 32,532 27.2% 3,592 3.0% 5,987 5.0%
Core capital 1 (to adjusted tangible assets) 32,532 27.2% 2,395 2.0% N/A
Tangible capital 1 (to adjusted total assets) 32,532 27.2% 1,796 1.5% N/A
1 As defined by regulatory agencies
</TABLE>
<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%
Tier 1 capital 1 (to risk-weighted assets) 30,331 56.1% 2,163 4.0% 3,245 6.0%
Core capital 1 (to adjusted total assets) 30,331 28.3% 3,219 3.0% 5,365 5.0%
Core capital 1 (to adjusted tangible assets) 30,331 28.3% 2,146 2.0% N/A
Tangible capital 1 (to adjusted total assets) 30,331 28.3% 1,610 1.5% N/A
</TABLE>
1 As defined by regulatory agencies
Note 14 -- 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, $2,000,
and $(4,000) for 1999, 1998, and 1997.
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 $8,000, $10,000 and $11,000 for 1999, 1998,
and 1997.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 162,444 and 173,074 at December 31, 1999
and 1998 and had a fair value of $1,787,000 and $1,947,000 at December 31, 1999
and 1998. 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 years ended December
31, 1999 and 1998 was $122,000 and $149,000. There was no expense under the ESOP
for the year ended December 31, 1997. At December 31, 1999, the ESOP had 21,556
allocated shares, 162,444 suspense shares and no committed-be-be released
shares. At December 31, 1998, the ESOP had 10,926 allocated shares, 173,074
suspense shares and no committed-to-be released 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. Expense under the plan for the
years ended December 31, 1999 and 1998 was $227,000 and $114,000.
Note 15 -- 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 per 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. No options were
granted in 1999. The fair value of each option grant was estimated on the grant
date using an option-pricing model with the following assumptions:
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
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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:
1999 1998
- --------------------------------------------------------------------------------
Net income As reported $1,970 $1,974
Pro forma 1,872 1,876
Basic earnings per share As reported .81 .70
Pro forma .77 .67
Diluted earnings per share As reported .81 .70
Pro forma .77 .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 years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of year 186,000 $14.59
Granted 186,000 $14.59
------- -------
Outstanding, end of year 186,000 $14.59 186,000 $14.59
======= =======
Options exercisable at year end 37,200
Weighted-average fair value of options
granted during the year $2.94
</TABLE>
As of December 31, 1999, the 186,000 options outstanding have an exercise price
of $14.59 and a weighted-average remaining contractual life of 8.5 years.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16 -- 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, 1999 $2,093
New loans, including renewals 1,184
Payments, etc. including renewals (291)
------
Balances, December 31, 1999 $2,986
======
Deposits from related parties held by the Association at December 31, 1999, and
1998 totaled $1,930,000 and $1,826,000.
Note 17 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
Year Ended December 31, 1999
------------------------------------
Weighted Per-Share
Income Average Shares Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common shareholders $1,970 2,444,080 $.81
Effect of Dilutive Securities
Stock options
---------------------
Diluted Earnings Per Share
Income available to common shareholders
and assumed conversions $1,970 2,444,080 $.81
=================================
Options to purchase 186,000 shares of common stock at $14.59 per share were
outstanding at December 31, 1999, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Year Ended December 31, 1999
----------------------------------
Weighted Per-Share
Income Average Shares Amount
- --------------------------------------------------------------------------------
Basic Earnings Per Share
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
==============================
Note 18 -- 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.
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.
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans, and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts of these
commitments, which are immaterial, are reasonable estimates of the fair value of
these financial instruments.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------------------
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
- -----------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and cash equivalents $3,117 $3,117 $ 6,191 $ 6,191
Investment securities available for sale 315 315
Investment securities held to maturity 7,522 7,199 8,026 8,175
Loans, net 106,174 103,846 90,900 92,365
Stock in FHLB 1,044 1,044 745 745
Interest receivable 824 824 715 715
Liabilities
Deposits 68,990 68,735 64,846 61,460
Borrowings
FHLB advances 11,659 11,646 772 781
Notes payable--limited partnership 837 712 1,021 835
Interest payable 123 123 109 109
Advances by borrowers for taxes and insurance 270 270 275 275
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 19 -- 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
<TABLE>
<CAPTION>
December 31 1999 1998
- --------------------------------------------------------------------------------
Assets
<S> <C> <C>
Cash $ 5,555 $10,243
Investment securities available-for-sale 315
Investment in subsidiary 32,532 30,332
Other assets 216 238
--------------------
Total assets $38,618 $40,813
====================
Liability--other $ 338 $ 282
Shareholders' Equity 38,280 40,531
--------------------
Total liabilities and shareholders' equity $38,618 $40,813
====================
</TABLE>
<TABLE>
<CAPTION>
Condensed Statement of Income
Year Ended December 31 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Interest income $ 11 $ 4
Other income 175 81
-----------------------------------------
186 85
-----------------------------------------
Expenses
Salaries and employee benefits 80 65
Legal and professional fees 83 97
Other expenses 17 14
-----------------------------------------
Total expenses 180 176
-----------------------------------------
Income (loss) before income tax and equity
in undistributed income of subsidiaries 6 (91)
Income tax benefit (expense) 9 (20)
-----------------------------------------
Loss before equity in undistributed income of subsidiaries (3) (71)
Equity in undistributed income of subsidiaries 1,973 2,045 $1,198
-----------------------------------------
Net Income $1,970 $1,974 $1,198
=========================================
</TABLE>
<PAGE>
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended December 31 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $1,970 $ 1,974 $ 1,198
Adjustments to reconcile net income to
net cash provided by operating activities (1,900) (2,165) (1,198)
-----------------------------------------
Net cash provided (used) by operating activities 70 (191)
-----------------------------------------
Investing Activities
Purchases of investments available for sale (812)
Proceeds from sales of investments available for sale 596
-----------------------------------------
Net cash used by investing activities (216)
-----------------------------------------
Financing Activities
Net proceeds from issuance of stock 27,883
Capital contribution to Association (14,861)
Cash dividend (1,118) (729)
Repurchase of common stock (3,424) (1,859)
-----------------------------------------
Net cash provided (used) by financing activities (4,542) (2,588) 13,022
-----------------------------------------
Net Change in Cash (4,688) (2,779)
Cash at Beginning of Year 10,243 13,022
-----------------------------------------
Cash at End of Year $5,555 $10,243 $13,022
=========================================
</TABLE>
<PAGE>
DIRECTORS AND OFFICERS
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>
DIRECTORS AND OFFICERS
Philip L. Boots (age 53) 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 72) has worked as a self-employed farmer in
Montgomery County since 1956. He currently is semi-retired from farming.
Phillip E. Grush (age 68) 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 60) a resident of Montgomery County since
1964, has served in management positions at R R Donnelley & Sons Co., Crawford
Industries, Inc., and Atapco Custom Products. Since 1995, he has served as
President of Hildebrand's Village Traditions, Inc. The company is engaged in
property management as well as custom fabrication of rain gutter systems through
its Custom Flo Division.
John M. Horner (age 63) has served as the president of Horner Pontiac
Buick, Inc. in Crawfordsville since 1974.
Harry A. Siamas (age 49) has practiced law in Crawfordsville since 1976
and has served as Union Federal's attorney for 18 years.
Joseph E. Timmons (age 65) 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>
SHAREHOLDER INFORMATION
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 February 21, 2000, there
were approximately 352 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. Applicable law restricts the amount of dividends Union Federal may
pay to the Holding Company without obtaining the prior approval of the OTS to an
amount that does not exceed Union Federal's year-to-date net income plus its
retained net income for the preceding two years. 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
Quarter Ended High Low Per Share
March 31, 1998 $15 7/8 $14 $0.075
June 30, 1998 15 5/8 14 1/8 0.085
September 30, 1998 14 7/8 10 3/4 0.095
December 31, 1998 13 9 13/16 0.100
March 31, 1999 12 1/2 11 1/8 0.105
June 30, 1999 12 10 1/4 0.110
September 30, 1999 12 1/2 10 13/16 0.120
December 31, 1999 12 3/8 8 7/8 0.130
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, 1999 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 21
SUBSIDIARIES OF UNION COMMUNITY BANCORP
Name Jurisdiction of Incorporation
Union Federal Savings and Loan Association Federal
UFS Service Corp. Indiana
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference to the Registration Statement on
Form S-8 of Union Community Bancorp (the "Company"), File Number 000-23543, of
our report dated January 21, 2000 on the consolidated financial statements of
the Company which report is incorporated by reference in the Company's Annual
Report on Form 10-K for the three years ended December 31, 1999 filed pursuant
to the Securities and Exchange Act of 1934.
/s/ Olive LLP
Olive LLP
Indianapolis, Indiana
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001046183
<NAME> Union Community Bancorp
<MULTIPLIER> 1,000
<CURRENCY> U.S.Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 287
<INT-BEARING-DEPOSITS> 2,830
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 315
<INVESTMENTS-CARRYING> 7,522
<INVESTMENTS-MARKET> 7,199
<LOANS> 106,596
<ALLOWANCE> 422
<TOTAL-ASSETS> 120,654
<DEPOSITS> 68,990
<SHORT-TERM> 11,307
<LIABILITIES-OTHER> 1,189
<LONG-TERM> 888
<COMMON> 25,389
0
0
<OTHER-SE> 12,891
<TOTAL-LIABILITIES-AND-EQUITY> 120,654
<INTEREST-LOAN> 7,710
<INTEREST-INVEST> 567
<INTEREST-OTHER> 193
<INTEREST-TOTAL> 8,470
<INTEREST-DEPOSIT> 3,475
<INTEREST-EXPENSE> 3,817
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</TABLE>
