10-K 1 ucb_10k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (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, 2002 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) (765) 362-2400 (Registrant's telephone number including area code) 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, Regulation S-K (ss. 229.405 of this chapter) 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. [ ] The aggregate market value of the Registrant's voting stock held by non-affiliates, as of June 28, 2002, was $29,707,000. The number of shares of the Registrant's Common Stock, without par value, outstanding as of March 26, 2003, was 2,278,000 shares. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [ ] NO [X] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 2002, are incorporated into Part II. Portions of the Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated in Part I and Part III. Exhibit Index on Page E-1 Page 1 of 38 pages UNION COMMUNITY BANCORP Form 10-K INDEX Page FORWARD LOOKING STATEMENT ........................................................ 3 PART I Item 1. Business .............................................................. 3 Item 2. Properties............................................................. 30 Item 3. Legal Proceedings...................................................... 30 Item 4. Submission of Matters to a Vote of Security Holders.................... 29 Item 4.5. Executive Officers of the Registrant................................... 30 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.. 31 Item 6. Selected Financial Data................................................ 31 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................ 31 Item 7A. Quantitative and Qualitative Disclosures about Market Risk............. 31 Item 8. Financial Statements and Supplementary Data............................ 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................. 32 PART III Item 10. Directors and Executive Officers of the Registrant..................... 32 Item 11. Executive Compensation................................................. 32 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.......................................... 32 Item 13. Certain Relationships and Related Transactions......................... 33 Item 14. Controls and Procedures................................................ 31 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 33 SIGNATURES......................................................................... 34 CERTIFICATIONS..................................................................... 35
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 (the "Holding 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," and together with the Holding Company, the "Company") in connection with Union Federal's conversion from mutual to stock form. The Holding Company became Union Federal's holding company on December 29, 1997. 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 Union Federal. Union Federal was organized as a state-chartered savings and loan association in 1913. 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"). On January 2, 2002, the Company acquired Montgomery Financial Corporation ("Montgomery"), the holding company of Montgomery Savings, a Federal Association ("Montgomery Savings"), a federally chartered thrift. Montgomery was merged with and into the Company and Montgomery Savings was merged with and into Union Federal. MSA Service Corporation ("MSA"), an Indiana corporation and wholly-owned subsidiary of Montgomery Savings, will continue as a subsidiary of Union Federal. See Consolidated Financial Statements - Note 2. Union Federal conducts its business from its main office located in Crawfordsville, Indiana. In addition, Union Federal has two additional branch offices in Crawfordsville and branch offices in Covington, Williamsport and Lafayette, Indiana. Four of the above mentioned branch offices were added in connection with the acquisition of Montgomery. Union Federal offers a variety of lending, deposit and other financial services to its retail and commercial customers. 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 mortgages on one- to four-family residential real estate. Union Federal's deposits accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). Union Federal offers a number of other financial services, which include: (i) residential real estate loans; (ii) multi-family loans, (iii) commercial real estate loans; (iv) construction loans; (v) home improvement loans and consumer loans, including single-pay loans, loans secured by deposits, installment loans and commercial loans; (vi) money market demand accounts; (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 75.0% of its total loan portfolio at December 31, 2002. Union Federal also offers multi-family mortgage loans, commercial real estate loans, construction loans, 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 3.3% and 17.4%, respectively, of Union Federal's total loan portfolio at December 31, 2002. Construction loans totaled approximately 1.1% of Union Federal's total loans as of December 31, 2002. Commercial loans totaled approximately 2.9% of Union Federal's total loans as of December 31, 2002. Consumer loans, which consist of personal installment loans and passbook loans, constituted approximately 0.3% of Union Federal's total loan portfolio at December 31, 2002. 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.
At December 31, ------------------------------------------------------------------------- 2002 2001 2000 -------------------- --------------------- ----------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- -------- -------- (Dollars in thousands) TYPE OF LOAN Real estate mortgage loans: One- to four-family ........... $163,890 75.03% $ 91,796 74.37% $ 83,012 74.48% Multi-family .................. 7,098 3.25 7,095 5.75 8,522 7.65 Commercial .................... 37,957 17.38 14,777 11.97 12,878 11.55 Real estate construction loans .. 2,429 1.11 2,230 1.80 3,221 2.89 Commercial loans ................ 6,433 2.95 7,342 5.95 3,661 3.28 Consumer loans .................. 614 0.28 198 .16 165 .15 -------- ------ -------- ------ --------- ------ Gross loans receivable ...... $218,421 100.00% $123,438 100.00% $111,459 100.00% ======== ====== ======== ====== ======== ====== TYPE OF SECURITY One- to four-family real estate $166,144 76.07% $ 93,275 75.56% $ 85,100 76.35% Multi-family real estate ...... 7,098 3.25 7,095 5.75 9,010 8.08 Commercial real estate ........ 38,132 17.46 15,528 12.58 13,523 12.13 Deposits ...................... 104 0.05 35 .03 49 .05 Other ......................... 6,943 3.17 7,505 6.08 3,777 3.39 -------- ------ -------- ------ --------- ------ Gross loans receivable ...... 218,421 100.00% 123,438 100.00 111,459 100.00 Deduct: Allowance for loan losses ....... 1,030 0.47 520 .43 480 .43 Deferred loan fees (costs) ...... (126) (0.05) 333 .27 290 .26 Loans in process ................ 814 0.37 836 .69 1,184 1.06 -------- ------ -------- ------ --------- ------ Net loans receivable .......... $216,703 99.21% $121,798 .61% $109,505 98.25% ======== ====== ======== ====== ======== ====== Mortgage Loans: Adjustable-rate ............... $ 38,464 18.20% $ 24,001 20.71% $ 26 24.18% Fixed-rate .................... 172,910 81.80 91,897 79.29 81,605 75.82 -------- ------ -------- ------ --------- ------ Total ....................... $211,374 100.00% $115,898 100.00% $107,633 100.00% ======== ====== ======== ====== ======== ======
The following table sets forth certain information at December 31, 2002, 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.
Due During Years Ending December 31, Balance -------------------------------------------------------------------- Outstanding at 2006 2008 2013 2018 December 31, to to to and 2002 2003 2004 2005 2007 2012 2017 following -------------- ------- ------- ------- ------- ------- ------- --------- (In thousands) Real estate mortgage loans: Residential loans ........ $163,890 $1,458 $309 $527 $3,611 $31,130 $57,694 $69,161 Multi-family loans ...... 7,098 536 5 74 249 2,706 2,256 1,272 Commercial loans ......... 37,957 4,303 24 257 1,706 8,411 19,436 3,820 Construction loans ........ 2,429 2,429 -- -- -- -- -- -- Commercial loans .......... 6,433 2,650 121 179 2,532 951 -- -- Loans secured by deposits . 104 104 -- -- -- -- -- -- Personal loans ............ 510 117 103 113 177 -- -- -- -------- ------- ---- ------ ------ ------- ------- ------- Total ................. $218,421 $11,597 $562 $1,150 $8,275 $43,198 $79,386 $74,253 ======== ======= ==== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 2002, 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, 2003 --------------------------------------- Fixed Rates Variable Rates Total ----------- -------------- --------- (In thousands) Real estate mortgage loans: Residential loans ......... $144,892 $17,540 $162,432 Multi-family loans......... 3,656 2,906 6,562 Commercial loans........... 16,613 17,041 33,654 Construction loans........... -- -- -- Commercial loans............. 1,094 2,689 3,783 Installment loans............ -- -- -- Loans secured by deposits.... 393 -- 393 -------- ------- -------- Total.................... $166,648 $40,176 $206,824 ======== ======= ======== 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-, 20- or 30-year 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, however, it 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, 2002 provide for maximum rate adjustments per year and over the life of the loan of 2% and 6%, respectively. Union Federal's residential ARMs are amortized for terms up to 30 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, 2002, approximately 18.2% 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, 2002, approximately $163.9 million, or 75.0% of Union Federal's portfolio of loans, consisted of one- to four-family residential loans. Approximately $2.7 million, or 1.6% 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, 2002, approximately $7.1 million, or 3.2% 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 fixed-rate loans with a maximum term of 15 years or as one-year adjustable rate loans indexed to the one-year U.S. Treasury rate with an original term of up to 30 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, 2002 had a balance of approximately $604,000 and was secured by 28 duplexes located in Crawfordsville, Indiana. On the same date, Union Federal had one multi-family loan 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, 2002, Union Federal's largest commercial loan had an outstanding balance of $1.6 million and was secured by a motel in Montgomery County. At December 31, 2002, approximately $38.0 million, or 17.4% of Union Federal's total loan portfolio, consisted of commercial real estate loans. On the same date, Union Federal had two loans totaling $245,000 of commercial real estate loans included in non-performing assets. Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Construction Loans. Union Federal offers construction loans with respect to residential and commercial real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Union Federal provides construction loans only to borrowers who commit to permanent financing on the finished project. At December 31, 2002, approximately $2.4 million, or 1.1% of Union Federal's total loan portfolio, consisted of construction loans. At December 31, 2002, the largest construction loan had an outstanding balance of $37,000, an unused commitment of $206,000, and was secured by a single-family residence 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, are written as fixed-rate loans with interest calculated on the amount disbursed under the loan and are 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. Construction loans may provide a comparable, and in some cases higher, yield than conventional mortgage loans, however, they also 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, 2002, commercial loans amounted to $6.4 million, or 3.0% 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, 2002, 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 $614,000 at December 31, 2002, or 0.3% of its total loan portfolio. Union Federal's passbook loans are made up to 90% of the deposit account balance and, at December 31, 2002, accrued at a rate of 7.3%. This rate may change but will always be at least 2% over the underlying passbook or certificate of deposit rate. Interest on loans secured by deposits is paid semi-annually. At December 31, 2002, one of Union Federal's consumer loans totaling $7,000 was 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 is currently investigating the process to originate loans for sale to the FHLMC. Union Federal confines its loan origination activities primarily to Montgomery County and the surrounding counties of Boone, Hendricks, Putnam, Parke, Tippecanoe, Warren and Fountain. Union Federal has also originated several loans in Marion County. At December 31, 2002, Union Federal also had seven loans which it originated, totaling approximately $2.0 million, 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 evaluates 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 a title insurance policy or 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 plane. 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, 2002, Union Federal held in its loan portfolio participations in mortgage loans aggregating $6.1 million that it purchased, all of which were serviced by others. Included within this amount were participations in the aggregate amount of $1.1 million which were secured by property located outside of Indiana. The largest participation loan in Union Federal's portfolio at December 31, 2002 was a $711,000 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:
Year Ended December 31, --------------------------------- 2002 2001 2000 --------- --------- --------- (In thousands) Gross loans receivable at beginning of period ...... $ 123,438 $ 111,459 $ 108,462 Loans originated: Real estate mortgage loans: One-to-four family loans ....................... 41,958 27,980 10,794 Multi-family loans ............................. 1,177 0 0 Commercial loans ............................... 16,645 3,277 1,753 Construction loans ............................... 3,607 2,129 2,435 Commercial loans ................................. 10,695 15,748 5,796 Loans secured by deposits ........................ 189 97 18 Personal installment loans ....................... 184 421 110 -------- -------- -------- Total originations ............................. 74,455 49,652 20,906 Loans acquired in acquisition ...................... 117,033 -- -- Purchases (sales) of participation loans, net ...... 450 376 375 Reductions: Principal loan repayments ........................ 96,292 38,049 18,372 Loans transferred to (from) foreclosed real estate 663 0 (88) -------- -------- -------- Total reductions ............................... 96,955 38,049 18,284 -------- -------- -------- Total gross loans receivable at end of period ...... $218,421 $123,438 $111,459 ======== ======== ========
Union Federal's residential loan originations during the year ended December 31, 2002 totaled $42.0 million, compared to $28.0 million and $10.8 million in the years ended December 31, 2001 and 2000, 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 $250 on all 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, 2002, $3.5 million, or 1.3% of Union Federal's total assets, were non-performing (non-performing loans, non-accruing loans and foreclosed real estate) compared to $691,000, or .5%, of its total assets at December 31, 2001. At December 31, 2002, residential loans accounted for $2.8 million of Union Federal's non-performing assets. Union Federal had real estate owned ("REO") properties in the amount of $432,000 as of December 31, 2002. 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, ---------------------------- 2002 2001 2000 ------ ------ ------ (Dollars in thousands) Non-performing assets: Non-performing loans $3,069 $682 $406 Foreclosed real estate 432 9 9 ------ ---- ---- Total non-performing assets $3,501 $691 $415 ====== ==== ==== Non-performing loans to total loans 1.41% .55% .36% Non-performing assets to total assets 1.30% .49% .33% Interest income of $40,000, $39,000 and $25,000 was recognized on the non-performing loans summarized above for the years ended December 31, 2002, 2001 and 2000, respectively. Interest income of $328,000, $57,000 and $34,000 would have been recognized under the original terms of these non-performing loans for the years ended December 31, 2002, 2001 and 2000, respectively. At December 31, 2002, Union Federal held loans delinquent from 30 to 89 days totaling approximately $3.7 million. 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, 2002, 2001 and 2000, relating to delinquencies in Union Federal's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 2002 At December 31, 2001 At December 31, 2000 -------------------------------------- ------------------------------------ ----------------------------------- 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 Loans of Loans of Loans of Loans of Loans of Loans of Loans -------- -------- -------- --------- -------- -------- -------- -------- -------- -------- -------- --------- (Dollars in thousands) One- to four- family loans....... 51 $2,441 39 $2,686 13 $ 742 5 $194 12 $ 632 5 $255 Commercial real estate loans....... 3 1,172 2 245 1 83 2 488 -- -- 1 18 Multi-family loans... -- -- 1 131 2 1,008 -- -- 2 750 1 133 Personal installment loans.............. 5 73 1 7 -- -- -- -- -- -- -- -- Commercial loans..... 1 31 -- -- -- -- -- -- -- -- -- -- -- ------ -- ------ -- ------ -- ---- -- ------ -- ---- Total............ 60 $3,717 43 $3,069 16 $1,833 7 $682 14 $1,382 7 $406 == ====== == ====== == ====== == ==== == ====== == ==== Delinquent loans to total loans........ 3.13% 2.06% 1.63% ==== ==== ====
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, 2002, the aggregate amount of Union Federal's classified assets and its general and specific loss allowances were as follows: At December 31, 2002 -------------------- (In thousands) Substandard assets........... $4,419 Doubtful assets.............. 103 Loss assets.................. -- ------ Total classified assets.... $4,522 ====== Union Federal regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Included in substandard and doubtful assets at December 31, 2002, Union Federal had two one- to four-family loans and six commercial real estate loans in the aggregate sum of $139,000 and $1,049,000 respectively, that were performing. The loans were classified as substandard and doubtful 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, 2002. 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, 2002. Year Ended December 31, ------------------------------ 2002 2001 2000 ------- ------- ------- (Dollars in thousands) Balance at beginning of period ...................... $ 520 $ 480 $ 422 Gross charge-offs - residential loans ............... (241) -- (2) Allowance acquired in acquisition ................... 379 -- -- Provision for losses on loans ....................... 372 40 60 ------- ------- ------- Balance end of period ............................. $ 1,030 $ 520 $ 480 ======= ======= ======= Allowance for loan losses as a percent of total loans outstanding ....................................... .47% .43% .44% 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.
At December 31, ------------------------------------------------------- 2002 2001 2000 ---------------- ----------------- ---------------- Percent Percent Percent of loans of loans of loans in each in each in each category category category of total of total of total Amount loans Amount loans Amount loans ------ -------- ------ --------- ------ -------- (Dollars in thousands) Balance at end of period applicable to: Real estate mortgage loans: Residential ....................... $378 75.03% $117 74.37% $102 74.48% Commercial ........................ 507 17.38 165 5.75 130 7.65 Multi-family ...................... 50 3.25 108 11.97 124 11.55 Construction loans .................. 1 1.11 4 1.80 4 2.89 Commercial loans .................... 81 2.95 121 5.95 77 3.28 Loans secured by deposits .......... -- 0.05 -- .03 -- .05 Personal installment loans .......... 12 0.23 5 .13 3 .10 Unallocated ......................... 1 -- -- -- 40 -- ------ ------ ---- ------ ---- ------ Total ............................. $1,030 100.00% $520 100.00% $480 100.00% ====== ====== ==== ====== ==== =======
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, 2002, approximately $5.9 million, or 2.2%, of the Company's total assets consisted of such investments. The Company also had $35.7 million, or 13.3% of its assets, in interest-earning deposits as of that date. The following table sets forth the amortized cost and the market value of the Company's investment portfolio at the dates indicated.
At December 31, ---------------------------------------------------------- 2002 2001 2000 ----------------- ----------------- ------------------ Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- ------ --------- ------ --------- ------ (In thousands) Investment securities: Held to maturity: Federal agencies...................... $ 300 $ 308 $ 700 $ 728 $5,015 $4,945 Mortgage-backed securities ........... 1,337 1,424 2,148 2,240 2,582 2,637 ------ ------ ------ ------ ------ ------ Total investment securities held to maturity.................. 1,637 1,732 2,848 2,968 7,597 7,582 Investment in limited partnership (1)... 837 -- 857 -- 912 -- FHLB stock (2) ......................... 3,424 3,424 1,530 1,530 1,044 1,044 ------ ------ ------ Total investments ...................... $5,898 $5,235 $9,553 ====== ====== ======
---------------------- (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, 2002.
Amount at December 31, 2002 which matures in ------------------------------------------------------------------------------ One Year One Year Five Years or Less to Five Years to Ten Years After Ten Years ------------------ ------------------ ------------------ ------------------ Amortized Average Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) Federal agency securities....... -- -- $300 8.20% -- -- -- --
Mortgage-backed Securities The following table sets forth the composition of Union Federal's mortgage-backed securities portfolio at the dates indicated.
December 31, ------------------------------------------------------------------------------------------ 2002 2001 2000 ---------------------------- ---------------------------- ---------------------------- Amortized Percent Market Amortized Percent Market Amortized Percent Market Cost of Total Value Cost of Total Value Cost of Total Value --------- -------- ------ --------- -------- ------ --------- -------- ------ (In thousands) Governmental National Mortgage Corporation ............. $ 275 20.6% $ 304 $ 477 22.2% $ 533 $ 622 24.1% $ 666 Federal Home Loan Mortgage Corporation ...................... 1,019 76.2 1,077 1,619 75.4 1,657 1,897 73.5 1,911 Federal National Mortgage Corporation ...................... 38 2.8 38 45 2.1 43 55 2.1 52 Other .............................. 5 0.4 5 7 .3 7 8 .3 ------ ----- ------ ------ ----- ------ ------ ----- ------ Total mortgage- backed securities $1,337 100.0% $1,424 $2,148 100.0% $2,240 $2,582 100.0% $2,637 ====== ===== ====== ====== ===== ====== ====== ===== ======
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, 2002.
Amount at December 31, 2002, which matures in ------------------------------------------------------------------ One Year to Five Years to After Five Years Ten Years Ten Years -------------------- --------------------- -------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Mortgage-backed securities ......... $178 7.98% $14 8.94% $1,145 6.87%
The following table sets forth the changes in Union Federal's mortgage-backed securities portfolio for the years ended December 31, 2002, 2001 and 2000. Year Ended December 31, ------------------------------ 2002 2001 2000 -------- -------- -------- (In thousands) Beginning balance............................ $2,148 $2,582 $2,807 Purchases.................................... -- -- -- Repayments................................... (827) (437) (190) Premium and discount amortization, net....... 16 3 (35) ------ ------ ------ Ending balance............................... $1,337 $2,148 $2,582 ====== ====== ====== 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, Fountain, Tippecanoe and Warren Counties 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 the four counties, and substantially all of its depositors are residents of those counties. 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, 2002, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 2002 Deposits Rate --------------- --------- ---------- ---------- ---------- (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts ...... $ 10 $ 32,414 17.04% 2.44% Variable rate, money market ........ 500 43,093 22.66 2.59 NOW accounts ....................... 100 6,369 3.35 1.74 Demand deposits .................... 100 3,850 2.02 -- -------- ------ ---- Total withdrawable ............... 85,726 45.07 2.36 -------- ------ ---- Certificates (original terms): 3 months or less ................... 1,000 149 0.08 2.09 6 months ........................... 1,000 4,597 2.42 2.29 12 months .......................... 1,000 8,200 4.31 2.77 18 months .......................... 1,000 9,104 4.79 3.49 24 months .......................... 1,000 8,968 4.72 4.35 30 months .......................... 1,000 7,293 3.83 4.58 36 months .......................... 1,000 6,943 3.65 5.53 48 months .......................... 1,000 2,543 1.34 4.93 60 months .......................... 1,000 14,435 7.59 5.61 Jumbo certificates - $100,000 and over 100,000 42,233 22.20 4.07 -------- ------ ---- Total certificates ................... 104,465 54.93 4.22 -------- ------ ---- Total deposits ....................... $190,191 100.00% 3.38% ======== ====== ====
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, 2002. At December 31, 2002 -------------------- Maturity Period (In thousands) Three months or less........................... $14,424 Greater than three months through six months... 5,923 Greater than six months through twelve months.. 9,916 Over twelve months............................. 11,970 ------- Total ....................................... $42,233 ======= 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.
Deposit Activity --------------------------------------------------------------------------------------------- Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 2002 Deposits 2001 2001 Deposits 2000 2000 Deposits ------------ -------- ---------- ------------ -------- ---------- ------------ -------- (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts ................. $ 32,414 17.04% $ 29,130 $ 3,284 4.02% $ 511 $ 2,773 3.81% Variable rate, money market ................... 43,093 22.66 18,860 24,233 29.66 7,810 16,423 22.557 NOW accounts ............... 6,369 3.35 3,935 2,434 2.98 747 1,687 2.32 Demand deposits ............ 3,850 2.02 2,817 1,033 1.26 (185) 1,218 1.67 -------- ------ -------- ------- ------ ------ ------- ------ Total withdrawable ....... 85,726 45.07 54,742 30,984 37.92 8,883 22,101 30.35 -------- ------ -------- ------- ------ ------ ------- ------ Certificates (original terms): 3 months ................... 149 0.08 128 21 .03 9 12 .02 6 months ................... 4,597 2.42 1,813 2,784 3.41 428 2,356 3.24 12 months .................. 8,200 4.31 3,516 4,684 5.73 189 4,873 6.69 18 months .................. 9,104 4.79 5,023 4,081 4.99 (1,708) 7.95 24 months .................. 8,968 4.72 5,013 3,955 4.84 128 3,827 5.26 30 months .................. 7,293 3.83 (47) 7,340 8.98 (2,295) 13.23 36 months .................. 6,943 3.65 2,282 4,661 5.71 140 4,521 6.21 48 months .................. 2,543 1.34 1,518 1,025 1.26 383 642 .88 60 months .................. 14,435 7.59 9,640 4,795 5.87 (328) 5,123 7.03 Jumbo certificates ........... 42,233 22.20 24,861 17,372 21.26 3,435 13,937 19.14 -------- ------ -------- ------- ------ ------ ------- ------ Total certificates ........... 104,465 54.93 53,747 50,718 62.08 3 50,715 69.65 -------- ------ -------- ------- ------ ------ ------- ------ Total deposits ............... $190,191 100.00% $108,489 $81,702 100.00% $8,886 $72,816 100.00% ======== ====== ======== ======= ====== ====== ======= ======
Total deposits at December 31, 2002 were approximately $190.2 million, compared to approximately $81.7 million at December 31, 2001. Deposits acquired in conjunction with the Montgomery acquisition totaled $117.4 million. 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, 2002, Union Federal had borrowings in the amount of $39.8 million from the FHLB of Indianapolis which bear fixed and variable interest rates and are due at various dates through 2011. 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") $303,000 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, 2002, 2001 and 2000. At or for the Year Ended December 31, --------------------------- 2002 2001 2000 ------- ------- ------- (Dollars in thousands) FHLB Advances: Outstanding at end of period ................... $39,752 $25,406 $14,535 Average balance outstanding for period ......... 40,579 14,143 11,612 Maximum amount outstanding at any month-end during the period ............................ 42,875 25,406 14,535 Weighted average interest rate during the period 4.58% 5.13% 6.42% Weighted average interest rate at end of period 5.03 3.35 6.31 Return on Equity and Assets 2002 2001 2000 ------- ------- ------- Return on assets (net income divided by average total assets)................................. 1.03% 1.44% 1.59% Return on equity (net income divided by average equity)....................................... 7.19 5.38 5.17 Dividend payout ratio (dividends per share divided by net income per share).............. 41.94 64.52 67.24 Equity to assets ratio (average equity divided by average total assets)...................... 13.81 26.80 30.77 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 has two wholly-owned subsidiaries. MSA Service Corporation ("MSA") engages in real estate development and is currently completing the construction of a seven-unit condominium project located in Crawfordsville, Indiana. UFS also owns 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, 2002, UFS had invested cash of approximately $1.5 million in Pedcor with two additional annual capital contributions remaining to be paid in January of each year through January 2004, totaling $303,000. 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 $268,000 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 the 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, 2002, was $837,000. As of December 31, 2002, 85% of the units in the Project were occupied, and 100% 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, ----------------------------------------- 2002 2001 2000 ------ ------ ------ (Dollars in thousands) Investment in Pedcor: Net of equity in losses......................................... $ 837 $ 857 $ 912 ====== ====== ====== Equity in losses, net of income tax effect......................... $ (12) $ (34) $ (60) Tax credit......................................................... 178 178 178 ------ ------ ------ Increase in after-tax net income from Pedcor investment............ $ 166 $ 144 $ 118 ====== ====== ======
Employees As of December 31, 2002, Union Federal employed 54 persons on a full-time basis and 4 part-time employees. None of Union Federal's employees are 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, Fountain, Tippecanoe and Warren Counties, Indiana. The home office of the Association is located in Crawfordsville, Montgomery County, Indiana and its branch offices are in Montgomery, Fountain, Tippecanoe and Warren Counties. 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 the four county area. In total, there are 27 other financial institutions located in the four county area, including 20 banks, five 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. During 2002, Union Federal's semi-annual assessment was $34,000. 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, antitrust laws and regulations protecting the confidentiality of consumer financial information. 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") in 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, 2002, Union Federal's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with Union Federal, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of 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 in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987, 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 savings and loan 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 or make a capital distribution 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 system, which consists of 12 regional banks. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System including the FHLB of Indianapolis. The FHLB System provides a central credit facility primarily for member financial institutions. At December 31, 2002, Union Federal's investment in stock of the FHLB of Indianapolis was $3.4 million. For the fiscal year ended December 31, 2002, the FHLB of Indianapolis paid approximately $208,000 in dividends to Union Federal. All 12 FHLB's are required to provide funds to establish affordable housing programs through direct loans or interest subsidies on advances to members to be used for lending at subsidized interest rates for low- and moderate-income, owner-occupied housing projects, affordable rental housing, and certain other community projects. These contributions and obligations could adversely affect the value of FHLB stock in the future. A reduction in the value of such stock may result in a corresponding reduction in Union Federal's capital. The FHLB of Indianapolis serves as a reserve or central bank for its member institutions. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHLB and the Board of Directors of the FHLB of Indianapolis. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. Eligible collateral includes first mortgage loans not more than 90 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, cash or FHLB deposits, certain small business and agricultural loans of smaller institutions and real estate with readily ascertainable value in which a perfected security interest may be obtained. Other forms of collateral may be accepted as additional security or, under certain circumstances, to renew outstanding advances. All long-term advances are required to provide funds for residential home financing and the FHLB has established standards of community service that members must meet to maintain access to long-term advances. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. 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. 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 addition to the assessment for deposit insurance, savings institutions are required to pay on bonds issued in the late 1980s by the Financing Corporation ("FICO"), which is a federally-chartered corporation that was organized to provide some of the financing to resolve the thrift crisis in the 1980s. During 1998, FICO payments for SAIF members approximated 6.10 basis points, while BIF members paid 1.22 basis points. By law, payments on FICO obligations have been shared equally between BIF members and SAIF members since January 1, 2000. Legislation is pending before Congress that would increase the deposit insurance assessments paid by all financial institutions, including Union Federal. 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. 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 requires 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. 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, 2002, Union Federal was in compliance with all capital requirements imposed by law. The OTS issued a final rule in 1993 which sets forth a methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS delayed the implementation of this rule, however, and in 2002 deleted this interest rate risk component from capital requirements applicable to savings associations. The OTS has also revised 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, 2002, 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 also restricts the amount of "capital distributions" that may be made by savings associations. The 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 regulation exempts certain savings associations from filing either a notice or an application with the OTS before making any capital distribution and 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"). Based on Union Federal's retained net income standard at December 31, 2002, Union Federal would be required to file an application with the OTS before making any capital distributions. 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 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. Liquidity The Financial Regulatory Relief and Economic Efficiency Act of 2000 repealed the former statutory requirement that all savings associations maintain an average daily balance of liquid assets in a minimum amount of not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. The OTS adopted an interim final rule in March 2001 that implemented this revised statutory requirement, although savings associations remain subject to the OTS regulation that requires them to maintain sufficient liquidity to ensure their safe and sound operation. Safety and Soundness Standards The federal banking agencies have 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, interest rate exposure, asset quality and earnings standards. 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. 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. At December 31, 2002, 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, 2002, Union Federal was in compliance with its QTL requirement, with approximately 80.4% 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; and (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 reciprocal basis. Transactions with Affiliates Union Federal is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which limits credit transactions between a bank or savings association and its executive officers and its affiliates. These provisions also prescribe terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restrict 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. Sarbanes-Oxley Act of 2002 On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity or debt securities registered under the Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new requirements for audit committees, including independence, expertise, and responsibilities; (ii) additional responsibilities regarding financial statements for the Chief Executive Officer and Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for the reporting company and their directors and executive officers; and (v) new and increased civil and criminal penalties for violation of the securities laws. Many of the provisions became effective immediately while other provisions become effective over a period of 30 to 270 days and are subject to rulemaking by the Securities and Exchange Commission. Although the Holding Company anticipates that additional expense will be incurred to comply with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. 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. Predatory Lending The Federal Reserve Board issued a regulation that became effective on October 1, 2002 that is aimed at curbing "predatory lending." The term "predatory lending" encompasses a variety of practices, but the term generally is used to refer to abusive lending practices involving fraud, deception or unfairness. Predatory lending typically involves one or more of the following: (i) making unaffordable loans based on the assets of the borrower rather than on the borrower's ability to repay an obligation ("asset-based lending"); (ii) inducing a borrower to refinance a loan repeatedly in order to charge high points and fees each time the loan is refinanced ("loan flipping"); or (iii) engaging in fraud or deception to conceal the true nature of the loan obligation from an unsuspecting or unsophisticated borrower. The Federal Reserve Board's new regulation, which amends Regulation Z, broadens the scope of loans subject to the protections of the Home Ownership and Equity Protection Act of 1994 ("HOEPA"). Among other things, the regulation brings within the scope of HOEPA first-lien mortgage loans with interest rates that are at least 8 percentage points above Treasury securities having a comparable maturity. In addition, the regulation requires that the cost of optional insurance and similar debt protection products paid by a borrower at closing be included in calculating the finance charge paid by the borrower. HOEPA coverage is triggered if such finance charges exceed 8 percent of the total loan. Finally, the regulation restricts creditors from engaging in repeated refinancings of their own HOEPA loans over a short time period when the transactions are not in the borrower's interest. Lenders that violate the rules face cancellation of loans and penalties equal to the finance charges paid. Union Community is unable at this time to determine the impact that these new regulations, or any similar state predatory lending regulations, may have on its financial condition or results of operation. USA Patriot Act of 2001 On October 26, 2001, President Bush signed the USA Patriot Act of 2001. The Patriot Act is intended is to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Act on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws. On July 23, 2002, the Treasury Department proposed regulations requiring institutions to incorporate into their written money laundering plans a board-approved customer identification program implementing reasonable procedures for: (i) verifying the identity of any person seeking to open an account, to the extent reasonable and practicable; (ii) maintaining records of the information used to verify the person's identity; and (iii) determining whether the person appears on any list of known or suspected terrorists or terrorist organizations. The Bank does not anticipate that these requirements will materially affect its operations. 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 offices as of December 31, 2002:
Net Book Value of Year Property, Approximate Owned or Opened or Total Furniture & Square Description and Address Leased Acquired Deposits Fixtures Footage ----------------------- ---------- -------- ----------- -------------- -------------- (Dollars in thousands) Main Office: 221 East Main Street Crawfordsville, IN 47933 Owned 1888 $138,222 $1,011 19,100 Mall Office: 1688 Crawfordsville Square Drive Crawfordsville, IN 47933 Leased 2001 $ 2,113 $ 65 1,100 Mill Street Office: 816 South Mill Street Crawfordsville, IN 47933 Owned 2002 $ 5,869 $ 392 3,200 Covington Office: 417 Liberty Street Covington, IN 47932 Owned 2002 $ 13,457 $ 410 2,800 Williamsport Office: 118 North Monroe Street Williamsport, IN 47993 Owned 2002 $ 22,326 $ 274 4,100 Lafayette Office: 50 West 250 South Lafayette, IN 47909 Owned 2002 $ 8,204 $ 850 3,700 --------------------------- (1) Offices acquired in acquisition of Montgomery Savings, A Federal Association.
Union Federal also owns one building located at 119 East Main Street, Crawfordsville, Indiana, which was acquired in the acquisition of Montgomery Savings, A Federal Association ("Montgomery"). The building contains approximately 16,000 square feet and was previously used by Montgomery as its main office. The net book value of the building is $237,000. The accounting, compliance, audit and a portion of the item processing functions are being housed in this facility. Upon the completion of current remodeling to the 221 East Main Street location, these functions will be moved and allow for the sale or lease of the 119 East Main Street location. Union Federal has also contracted for data processing and reporting services from Aurum Technology in Plano, Texas. The cost of these data processing services is approximately $29,500 per month. Union Federal has also executed a Correspondent Services Agreement with the FHLB of Indianapolis under which it receives item processing and other services for a fee of approximately $4,200 per month. 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. None. 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 and President Alan L. Grimble Chief Executive Officer J. Lee Walden Chief Financial Officer Denise E. Swearingen Secretary and Treasurer Joseph E. Timmons (age 68) has served as Chairman and President of the Holding Company since 1997 and President of Union Federal since 1974. He has also served as President of UFS Service Corp. since its inception in 1994 and of MSA Service Corp. since its acquisition in 2002. He has been an employee of Union Federal since 1954. Alan L. Grimble (age 45) has served as the Chief Executive Officer of the Holding Company and Union Federal since 2002. He has worked for Union Federal since 1998. J. Lee Walden (age 55) has served as Chief Financial Officer of the Holding Company and Union Federal since the 2002 acquisition of Montgomery Financial Corp. and Montgomery Savings. He had previously worked for Montgomery Savings since 1984. Denise E. Swearingen (age 44) has served as the Holding Company' Secretary and Treasurer since 1997 and as Chief Operations Officer of Union Federal since 2002. She has worked for Union Federal since 1983. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The information required by this item is included in the material under the heading "Shareholder Information" on page 45 of the Holding Company's 2002 Shareholder Annual Report (the "Shareholder Annual Report"), which is incorporated herein by this reference. Item 6. Selected Financial Data. The information required by this item is included in the material under the heading "Selected Consolidated Financial Data of Union Community Bancorp and Subsidiary" on pages 2 and 3 of the Shareholder Annual Report, which is incorporated herein by this reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is included on pages 3 through 19 of the Shareholder Annual Report, which is incorporated herein by this reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risks. The information required by this item is included on pages 17 through 19 of the Shareholder Annual Report, which is incorporated herein by this reference. Item 8. Financial Statements and Supplementary Data. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 20 through 42 of the Shareholder Annual Report are incorporated herein by this reference. The Holding Company's supplementary financial information required by this item is included on page 17 of the Shareholder Annual Report, which is incorporated herein by this 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 page 5 and pages 8 to 9 of the Holding Company's Proxy Statement for its Annual Shareholder meeting to be held April 16, 2003 (the "2003 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 6 to 8 of the Holding Company's 2003 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item with respect to Directors is incorporated by reference to pages 3 to 4 of the Holding Company's 2003 Proxy Statement. Equity Compensation Plans The following table provides information, as of December 31, 2002, regarding the securities authorized for issuance under the company's equity compensation plan.
Number of Securities Number of Remaining Available For Securities To Be Weighted-Average Future Issuance Under Issued Upon Exercise Exercise Price of Equity Compensation Plans of Outstanding Options, Outstanding Options, (Excluding Securities Warrants and Rights Warrants and Rights Reflected In Column (a)) Plan Category (a) (b) (c) -------------------------- ------------------------ -------------------- ------------------------- Equity compensation plans approved by security holders: Union Community Bancorp Stock Option Plan 165,000 $14.49 131,175 Union Community Bancorp Recognition and Retention Plan and Trust ("RRP") 121,670 (1) $ 0.00 (1) 32,700 (1) Equity compensation plans not approved by security holders -- -- -- ------- ------ ------- Total 286,670 $14.49 (2) 131,175 ======= ====== ======= ---------------------------------- (1) Column (a) includes 22,740 shares granted to management that have not yet vested. In addition, 66,160 shares granted to management have fully vested and shares have already been issued to management in connection therewith. (2) The total in column (b) includes only the weighted-average price of stock options, as the restricted shares awarded under the RRP have no exercise price.
Item 13. Certain Relationships and Related Transactions. The information required by this item with respect to Directors is incorporated by reference to page 9 of the Holding Company's 2003 Proxy Statement. Item 14. Controls and Procedures. Within the 90-day period prior to the filing date of this report, an evaluation was carried out under the supervision and with the participation of the Holding Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Holding Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934). Based on its evaluation, the Holding Company's Chief Executive Officer and Chief Financial Officer have concluded that the Holding Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Holding Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Subsequent to the date of their evaluation, the Holding Company's Chief Executive Officer and Chief Financial Officer have concluded that there were no significant changes in the Holding Company's internal controls or in other factors that could significantly affect its internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses.
PART IV Item 15. 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 Accountants' Report ........................................ 20 Consolidated Balance Sheets at December 31, 2002 and 2001............... 21 Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000................................................ 22 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000................................... 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000................................................ 24 Notes to Consolidated Financial Statements.............................. 25 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 2002. (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 28 , 2003 By: /s/ Alan L. Grimble ---------------------------------------- Alan L. Grimble, 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 28th day of March, 2003. Signatures Title Date (1) Principal Executive Officer: ) ) ) /s/ Alan L. Grimble Chief Executive Officer ) -------------------------------- ) Alan L. Grimble ) ) ) (2) Principal Financial and Accounting ) Officer: ) ) ) March 28, 2003 /s/ J. Lee Walden Chief Financial Officer ) -------------------------------- ) J. Lee Walden ) ) ) ) (3) The Board of Directors: ) ) ) /s/ Philip L. Boots Director ) -------------------------------- ) Philip L. Boots ) ) ) /s/ Marvin L. Burkett Director ) -------------------------------- ) Marvin L. Burkett ) ) ) /s/ Mark E. Foster Director ) -------------------------------- ) Mark E. Foster ) ) ) /s/ Phillip E. Grush Director ) -------------------------------- ) Phillip E. Grush ) ) ) /s/ Samuel H. Hildebrand Director ) -------------------------------- ) Samuel H. Hildebrand ) ) ) /s/ John M. Horner Director ) -------------------------------- ) John M. Horner ) ) ) /s/ C. Rex Henthorn Director ) March 28, 2003 -------------------------------- ) C. Rex Henthorn ) ) ) /s/ Joseph M. Malott Director ) -------------------------------- ) Joseph M. Malott ) ) ) /s/ Harry A. Siamas Director ) -------------------------------- ) Harry A. Siamas ) ) ) /s/ Joseph E. Timmons Director ) -------------------------------- ) Joseph E. Timmons ) ) ) CERTIFICATION I, Alan L. Grimble, certify that: 1. I have reviewed this annual report on Form 10-K of Union Community Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Alan L. Grimble ---------------------------------------- Alan L. Grimble Chief Executive Officer CERTIFICATION I, J. Lee Walden, certify that: 1. I have reviewed this annual report on Form 10-K of Union Community Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ J. Lee Walden ---------------------------------------- J. Lee Walden Chief Financial Officer CERTIFICATION By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Union Community Bancorp. Signed this 28th day of March 2003. /s/ J. Lee Walden /s/ Alan L. Grimble -------------------------------- ------------------------------------- J. Lee Walden Alan L. Grimble Chief Financial Officer Chief Executive Officer
EXHIBIT INDEX Exhibit No. Description 3 (1) Registrant's Articles of Incorporation are incorporated herein by reference to to Exhibit 3(1) to the Registrant's Registration Statement on form S-1 filed with the Commission on September17, 1997 (the "Registration Statement") (2) Registrant's Code of By-Laws is incorporated herein by reference to Exhibit 3(2) to the Registration Statement 10 (2) Union Community Bancorp Stock Option Plan incorporated herein by reference to Exhibit 10(2) to the Registration Statement (3) Union Federal Savings and Loan Association Recognition and Retention Plan and Trust incorporated herein by reference to Exhibit 10(3) to the Registration Statement (4) Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement incorporated herein by reference to Exhibit 10(4) to the Registration Statement (5) Employment Agreement between Union Federal Savings and Loan Association and Joseph E. Timmons incorporated herein by reference 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 incorporated herein by reference to Exhibit 10(6) to the Registration Statement (7) Employment Agreement between Union Federal Savings and Loan Association and Alan L. Grimble dated July 1, 2001, and the first amendment thereto dated as of April 17, 2002 (8) Employment Agreement between Union Federal Savings and Loan Association and J. Lee Walden dated January 2, 2002 13 2002 Annual Report 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants