-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AsLtFF6ydKAyuI6jTBBRjKwVb8U4W80qNto6S1epHre/0kSj8KfZFclIUG5u3uba gF3zRzqDgVuC7kRFBNOFmw== 0000908834-98-000095.txt : 19980408 0000908834-98-000095.hdr.sgml : 19980408 ACCESSION NUMBER: 0000908834-98-000095 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 DATE AS OF CHANGE: 19980407 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION COMMUNITY BANCORP CENTRAL INDEX KEY: 0001046183 STANDARD INDUSTRIAL CLASSIFICATION: 6035 IRS NUMBER: 352025237 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23543 FILM NUMBER: 98584522 BUSINESS ADDRESS: STREET 1: 221 E MAIN ST STREET 2: PO BOX 151 CITY: CRAWFORDSVILLE STATE: IN ZIP: 47933 BUSINESS PHONE: 7653622400 MAIL ADDRESS: STREET 1: 501 WASHINGTON ST STREET 2: PO BOX 151 CITY: COLUMBUS STATE: IN ZIP: 47201 10-K 1 FORM 10-K FOR UNION COMMUNITY BANCORP FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 333-35799 UNION COMMUNITY BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-2025237 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 221 East Main Street Crawfordsville, Indiana 47933 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number including area code: (765) 362-2400 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Without Par Value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (N/A) The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 20, 1998 was $42,175,144. The number of shares of the Registrant's Common Stock, without par value, outstanding as of December 29, 1997, was 3,041,750 shares. DOCUMENTS INCORPORATED BY REFERENCE None. Exhibit Index on Page E-1 Page 1 of 69 Pages UNION COMMUNITY BANCORP Form 10-K INDEX Page Forward Looking Statement................................................. 3 PART I Item 1 Business.................................................. 3 Item 2. Properties................................................ 25 Item 3. Legal Proceedings......................................... 25 Item 4. Submission of Matters to a Vote of Security Holders....... 25 Item 4.5. Executive Officers of the Registrant...................... 26 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................................... 26 Item 6. Selected Financial Data................................... 28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 29 Item 7A. Quantitative and Qualitative Disclosures about Market Risks.................................... 40 Item 8. Financial Statements and Supplementary Data............... 42 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 64 PART III Item 10. Directors and Executive Officers of Registrant............ 64 Item 11. Executive Compensation.................................... 65 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 66 Item 13. Certain Relationships and Related Transactions............ 67 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................... 67 SIGNATURES ...................................................... 68 FORWARD LOOKING STATEMENT This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Holding Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Business General Union Community Bancorp, an Indiana corporation (the "Holding Company"), was organized in September, 1997. On December 29, 1997, it acquired the common stock of Union Federal Savings and Loan Association ("Union Federal") upon the conversion of Union Federal from a federal mutual savings and loan association to a federal stock savings and loan association. Union Federal was organized as a state-chartered savings and loan association in 1913. Since then, Union Federal has conducted its business from its full-service office located in Crawfordsville, Indiana. Union Federal's principal business consists of attracting deposits from the general public and originating fixed-rate and adjustable-rate loans secured primarily by first mortgage liens on one- to four-family residential real estate. Union Federal's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). Management believes that it has developed a solid reputation among its loyal customer base because of its commitment to personal service and because of strong support of the local community. Union Federal offers a number of financial services, including: (i) residential real estate loans; (ii) multi-family loans; (iii) commercial real estate loans; (iv) construction loans; (v) home improvement loans; (vi) money market demand accounts ("MMDAs"); (vii) passbook savings accounts; and (viii) certificates of deposit. Lending Activities Union Federal has historically concentrated its lending activities on the origination of loans secured by first-mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of Union Federal's loan origination activities, representing 77.0% of its total loan portfolio at December 31, 1997. Union Federal also offers multi-family mortgage loans, commercial real estate loans, construction loans, and, to a limited extent, consumer loans consisting of loans secured by deposits and home improvement loans. Mortgage loans secured by multi-family properties and commercial real estate totaled approximately 12.6% and 4.5%, respectively, of Union Federal's total loan portfolio at December 31, 1997. Construction loans totaled approximately 5.7% of Union Federal's total loans as of December 31, 1997. Consumer loans, which consist of home improvement loans and passbook loans, constituted approximately .3% of Union Federal's total loan portfolio at December 31, 1997. 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, 1997 1996 1995 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............... $62,436 76.95% $57,031 77.46% $48,295 76.64% Multi-family..................... 10,197 12.57 10,920 14.83 9,617 15.26 Commercial....................... 3,627 4.47 3,593 4.88 2,814 4.46 Real estate construction loans...... 4,652 5.73 1,740 2.36 2,107 3.34 Consumer loans ..................... 223 .28 346 .47 191 .30 ------- ------ ------- ------ ------- ------ Gross loans receivable......... $81,135 100.00% $73,630 100.00% $63,024 100.00% ======= ====== ======= ====== ======= ====== TYPE OF SECURITY One-to-four-family real estate... $64,730 79.78% $58,271 79.14% $49,762 78.96% Multi-family real estate......... 11,172 13.77 11,520 15.65 10,367 16.45 Commercial real estate........... 5,094 6.28 3,593 4.88 2,814 4.46 Deposits......................... 139 .17 246 .33 81 .13 ------- ------ ------- ------ ------- ------ Gross loans receivable......... 81,135 100.00 73,630 100.00 63,024 100.00 ======= ====== ======= ====== ======= ====== Deduct: Allowance for loan losses........... 252 .31 159 .22 111 .18 Deferred loan fees.................. 325 .40 356 .48 379 .60 Loans in process.................... 2,122 2.62 418 .57 1,255 1.99 ------- ------ ------- ------ ------- ------ Net loans receivable............. $78,436 96.67% $72,697 98.73% $61,279 97.23% ======= ====== ======= ====== ======= ====== Mortgage Loans: Adjustable-rate.................. $ 20,683 25.56% $24,238 33.07% $27,057 43.06% Fixed-rate....................... 60,229 74.44 49,046 66.93 35,776 56.94 ------- ------ ------- ------ ------- ------ Total.......................... $80,912 100.00% $73,284 100.00% $62,833 100.00% ======= ====== ======= ====== ======= ======
The following table sets forth certain information at December 31, 1997, 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.
Balance Due During Years Ended December 31, Outstanding at 2001 2003 2008 2013 December 31, to to to and 1997 1998 1999 2000 2002 2007 2012 following (In thousands) Real estate mortgage loans: Residential loans.................. $62,436 $307 $174 $ 296 $ 965 $18,401 $23,656 $18,637 Multi-family loans.................... 10,197 1 --- 473 --- 3,726 4,812 1,185 Commercial loans................... 3,627 --- --- 15 70 1,318 921 1,303 Construction loans.................... 4,652 154 --- 975 --- 610 1,118 1,795 Loans secured by deposits............. 139 139 --- --- --- --- --- --- Home improvement loans................ 84 8 6 13 31 26 --- --- ------- ---- ---- ------ ------ ------- ------- ------- Total............................ $81,135 $609 $180 $1,772 $1,066 $24,081 $30,507 $22,920 ======= ==== ==== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 1997, 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, 1998 Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Real estate mortgage loans: Residential loans................. $50,649 $11,480 $62,129 Multi-family loans................ 5,446 4,750 10,196 Commercial loans.................. 1,450 2,177 3,627 Construction loans................... 2,905 1,593 4,498 Installment loans.................... --- --- --- Loans secured by deposits............ --- --- --- Home improvement loans............... 76 --- 76 ------- ------- ------- Total............................. $60,526 $20,000 $80,526 ======= ======= =======
One- to Four-Family Residential Loans. Union Federal's primary lending activity consists of originating one- to four-family residential mortgage loans secured by property located in its primary market area. Union Federal generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and factors the cost of such insurance into the annual percentage rate on such loans. Union Federal originates and retains fixed rate loans which provide for the payment of principal and interest over a 15- or 20-year period, or balloon loans having terms of up to 15 years with principal and interest payments calculated using a 30-year amortization period. Union Federal also offers adjustable-rate mortgage ("ARM") loans. The interest rate on ARM loans is indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. Union Federal may offer discounted initial interest rates on ARM loans, but requires that the borrower qualify for the ARM loan at the fully-indexed rate (the index rate plus the margin). A substantial portion of the ARM loans in Union Federal's portfolio at December 31, 1997 provide for maximum rate adjustments per year and over the life of the loan of 1% and 5%, respectively. Union Federal's residential ARMs are amortized for terms up to 25 years. ARM loans decrease the risk associated with changes in interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower also increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustment permitted by the loan documents, and, therefore, is potentially limited in effectiveness during periods of rapidly rising interest rates. At December 31, 1997, approximately 25.6% 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, 1997, approximately $62.4 million, or 77.0% of Union Federal's portfolio of loans, consisted of one- to four-family residential loans. Approximately $47,000, or .1% 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, 1997, approximately $10.2 million, or 12.6% of Union Federal's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). Union Federal's multi-family loans are generally written as one-year adjustable rate loans indexed to the one-year U.S. Treasury rate with an original term of up to 20 years. Union Federal writes multi-family loans with maximum Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of December 31, 1997 had a balance of approximately $1.1 million and was secured by 28 duplexes located in Crawfordsville, Indiana. On the same date, none of Union Federal's multi-family loans were 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, 1997, Union Federal's largest commercial loan had an outstanding balance of $497,000 and was secured by a nursing home in Richmond, Indiana. At December 31, 1997, approximately $3.6 million, or 4.5% of Union Federal's total loan portfolio, consisted of commercial real estate loans. On the same date, Union Federal had no commercial real estate loans included in non-performing assets. Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Construction Loans. Union Federal offers construction loans with respect to residential and commercial real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Union Federal provides construction loans only to borrowers who commit to permanent financing on the finished project. At December 31, 1997, approximately $4.7 million, or 5.73% of Union Federal's total loan portfolio, consisted of construction loans. The largest construction loan had a balance of $975,000 on December 31, 1997 and was secured by a condominium project and golf course in Pittsboro, Indiana. None of Union Federal's construction loans were included in non-performing assets on that date. Construction loans generally match the term of the construction contract and are written as fixed-rate loans with interest calculated on the amount disbursed under the loan and payable monthly. The maximum Loan-to-Value Ratio for a construction loan is based upon the nature of the construction project. For example, a construction loan for a one- to four-family residence may be written with a maximum Loan-to-Value Ratio of 95%, while a construction loan for a multi-family project may be written with a maximum Loan-to-Value Ratio of 80%. Inspections are made prior to any disbursement under a construction loan. Union Federal does not normally charge commitment fees for construction loans. While providing Union Federal with a comparable, and in some cases higher, yield than conventional mortgage loans, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, Union Federal may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be salable, resulting in the borrower defaulting and Union Federal's taking title to the project. Consumer Loans. Union Federal's consumer loans, consisting of passbook loans and home improvement loans, aggregated approximately $223,000 at December 31, 1997, or .3% of its total loan portfolio. Union Federal's home improvement loans generally have a fixed rate and a term of up to seven years. Union Federal's passbook loans are made up to 90% of the deposit account balance and, at December 31, 1997, accrued at a rate of 8.8%. This rate may change but will always be at least 3% over the underlying passbook or certificate of deposit rate. Interest on loans secured by deposits is paid semi-annually. At December 31, 1997, none of Union Federal's consumer loans were included in non-performing assets. See "-- Non-Performing and Problem Assets." Origination, Purchase and Sale of Loans. Union Federal historically has originated its mortgage loans pursuant to its own underwriting standards which do not conform with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In the event that Union Federal begins originating fixed-rate residential mortgage loans for sale to the FHLMC in the secondary market, such loans will be originated in accordance with the guidelines established by the FHLMC and will be sold promptly after they are originated. Union Federal has no intention to originate loans for sale to the FHLMC at this time, however. Union Federal confines its loan origination activities primarily to Montgomery County and the surrounding counties of Boone, Hendricks, Putnam, Parke and Fountain. Union Federal has also originated several loans in Marion County. At December 31, 1997, Union Federal also had six loans which it originated, totaling approximately $671,000, secured by property located outside of Indiana. Union Federal's loan originations are generated from referrals from existing customers, real estate brokers, and newspaper and periodical advertising. Loan applications are underwritten and processed at Union Federal's office. Union Federal's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, Union Federal studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. All mortgage loans are approved or ratified by Union Federal's board of directors. Union Federal generally requires appraisals on all real property securing its loans and requires an attorney's opinion and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. Union Federal requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. Union Federal also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow accounts for insurance premiums and taxes for loans that require private mortgage insurance. Union Federal's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. Union Federal occasionally purchases participation interests in loans originated by other financial institutions in order to diversify its portfolio, supplement local loan demand and to obtain more favorable yields. The participations that Union Federal purchases normally represent a portion of residential or commercial real estate loans originated by other Indiana financial institutions, most of which are secured by property located in Indiana. As of December 31, 1997, Union Federal held in its loan portfolio participations in mortgage loans aggregating $7.6 million that it purchased, all of which were serviced by others. Included within this amount were participations in the aggregate amount of $736,000 which were secured by property located outside of Indiana. The largest participation loan in Union Federal's portfolio at December 31, 1997 was a $975,000 interest in a loan secured by a condominium project and golf course located in Pittsboro, Indiana. The following table shows Union Federal's loan origination and repayment activity during the periods indicated:
Year Ended December 31, 1997 1996 1995 (In thousands) Gross loans receivable at beginning of period............................. $73,630 $63,024 $61,880 Loans originated: Real estate mortgage loans: One-to-four family loans....................... 18,116 19,332 9,655 Multi-family loans............................. 654 1,532 --- Commercial loans............................... 483 45 139 Construction loans............................... 5,284 2,220 2,135 Loans secured by deposits........................ 161 322 95 Home improvement loans........................... 85 36 50 ------- ------- ------- Total originations........................... 24,783 23,487 12,074 Purchases (sales) of participation loans, net......... 500 1,350 742 Reductions: Principal loan repayments........................ 17,541 14,211 11,672 Transfers from loans to real estate owned........ 237 20 --- Total reductions............................. 17,778 14,231 11,672 ------- ------- ------- Total gross loans receivable at end of period...................................... $81,135 $73,630 $63,024 ======= ======= =======
Union Federal's residential loan originations during the year ended December 31, 1997 totaled $18.1 million, compared to $19.3 million and $9.7 million in the years ended December 31, 1996 and 1995, respectively. Origination and Other Fees. Union Federal realizes income from late charges, checking account service charges, and fees for other miscellaneous services. Union Federal currently charges a commitment fee of $200 on all loans and an additional $500 origination fee on construction loans. Union Federal also may charge points on a mortgage loan as consideration for a lower interest rate, although it does so infrequently. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets After a mortgage loan becomes 30 days past due, Union Federal delivers a delinquency notice to the borrower. When loans are 30 to 60 days in default, Union Federal sends additional delinquency notices and makes personal contact by telephone with the borrower to establish an acceptable repayment schedule. When loans become 60 days in default, Union Federal again contacts the borrower, this time in person, to establish an acceptable repayment schedule. When a mortgage loan is 90 days delinquent, Union Federal will have either entered into a workout plan with the borrower or referred the matter to its attorney for collection. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Union Federal reviews mortgage loans on a regular basis and places such loans on a non-accrual status when they become 90 days delinquent. Generally, when loans are placed on a non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. Non-performing Assets. At December 31, 1997, $98,000, or .07% of Union Federal's total assets, were non-performing (non-performing loans and non-accruing loans) compared to $489,000, or .59%, of its total assets at December 31, 1996. At December 31, 1997, residential loans accounted for $52,000 of Union Federal's non-performing assets. Union Federal had real estate owned ("REO") properties in the amount of $46,000 as of December 31, 1997. 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, 1997 1996 1995 (Dollars in thousands) Non-performing assets: Non-performing loans.................... $52 $ 489 $ 156 Foreclosed real estate.................. 46 --- --- Total non-performing assets........... $98 $489 $ 156 Non-performing loans to total loans........ .07% .67% .25% Non-performing assets to total assets...... .07% .59% .21% Interest income of $4,000, $10,000 and $14,000 for the years ended December 31, 1997, 1996 and 1995, respectively, was recognized on the non-performing loans summarized above. Interest income of $5,000, $33,000 and $17,000 for the years ended December 31, 1997, 1996 and 1995, respectively, would have been recognized under the original terms of these non-performing loans. At December 31, 1997, Union Federal held loans delinquent from 30 to 89 days totaling approximately $555,000. Other than in connection with these loans and the other delinquent loans disclosed elsewhere in this section, management was not aware of any other borrowers who were experiencing financial difficulties. Delinquent Loans. The following table sets forth certain information at December 31, 1997, 1996 and 1995, relating to delinquencies in Union Federal's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets. 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, 1997, the aggregate amount of Union Federal's classified assets and its general and specific loss allowances were as follows: At December 31, 1997 (In thousands) Substandard assets..................................... $ 98 Doubtful assets........................................ --- Loss assets............................................ --- Total classified assets............................ $ 98 General loss allowances................................ $252 Specific loss allowances............................... --- Total allowances................................... $252 Union Federal regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. All of Union Federal's classified assets constitute non-performing assets. 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, 1997. 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, 1997.
Year Ended December 31, 1997 1996 1995 (Dollars in thousands) Balance at beginning of period................ $159 $111 $ 87 Gross charge-offs - Multi-family loans........ (72) Provision for losses on loans................. 165 48 24 Balance end of period...................... $252 $159 $111 Allowance for loan losses as a percent of total loans outstanding.................... .32% .22% .18% 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, 1997 1996 1995 Percent Percent Percent of loans of loans of loans in each in each in each category category category to total to total total Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Real estate mortgage loans: Residential............... $ 65 76.95% $60 77.46% $57 76.64% Commercial................ 29 4.47 13 4.88 11 4.46 Multi-family.............. 82 12.57 75 14.83 39 15.26 Construction loans.......... 10 5.73 11 2.36 4 3.34 Loans secured by deposits... --- .17 --- .33 --- .13 Home improvement loans...... --- .11 --- .14 --- .17 Unallocated................. 66 --- --- --- --- --- ---- ------ ---- ------ ---- ------ Total....................... $252 100.00% $159 100.00% $111 100.00% ==== ====== ==== ====== ==== ======
Investments Investments. Union Federal's investment portfolio consists of U.S. Treasury and federal agency securities, FHLB stock and an investment in Pedcor Investments - 1993 - XVI, L.P. See "--Service Corporation Subsidiary." At December 31, 1997, approximately $7.7 million, or 5.8%, of Union Federal's total assets consisted of such investments. Union Federal also had $44.8 million, or 33.9% of its assets, in interest-earning deposits as of that date. The amount of interest-earning deposits held by Union Federal increased significantly as a result of the Conversion. Because the subscription offering for the Holding Company's Common Stock was oversubscribed, Union Federal delivered refund checks during the last week of December, 1997 to those subscribers whose purchase orders were not filled. Many of those checks had not cleared as of December 31, 1997, thereby increasing the amount of funds held by Union Federal in interest-bearing deposits. In addition, Union Federal invested some of the proceeds that it received from the stock offering in interest-bearing overnight accounts at the FHLB Indianapolis, which also increased the amount of its interest-bearing deposits at December 31, 1997. The following table sets forth the amortized cost and the market value of Union Federal's investment portfolio at the dates indicated.
At December 31, 1997 1996 1995 Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value ---- ----- ---- ----- ---- ----- (In thousands) Investment securities held to maturity: U.S. Treasury....................... $ 350 $ 350 $ 350 $ 348 $1,050 $1,051 Federal agencies.................... 3,346 3,351 2,645 2,611 2,950 2,944 Mortgage-backed securities.......... 2,124 2,302 2,752 2,933 3,423 3,668 Total investment securities held to maturity................ 5,820 6,003 5,747 5,892 7,423 7,663 Investment in limited partnership...... 1,176 (1) 1,334 (1) 1,506 (1) FHLB stock (2)......................... 708 708 580 580 563 563 Total investments...................... $7,704 $7,661 $9,492 ====== ====== ======
(1) Market values are not available (2) Market value is based on the price at which stock may be resold to the FHLB of Indianapolis. The following table sets forth the amount of investment securities (excluding mortgage-backed securities, FHLB stock and investment in limited partnership) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1997.
Amount at December 31, 1997 which matures in One Year One Year Five Years or Less to Five Years to Ten Years Amortized Average Amoritzed Average Amortized Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- (Dollars in thousands) U.S. Treasury securities........................$ 350 5.14% $ --- ---% $ --- ---% Federal agency securities....................... 1,050 4.41 2,296 6.49 --- --- $1,400 4.59% $2,296 6.49%
Mortgage-backed Securities The following table sets forth the composition of Union Federal's mortgage-backed securities portfolio at the dates indicated.
December 31, 1997 1996 1995 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................. $1,223 57.6% $1,348 $1,391 50.5% $1,511 $1,707 49.9% $1,856 Federal Home Loan Mortgage Corporation.. 635 29.9 691 1,039 37.8 1,103 1,338 39.1 1,431 Federal National Mortgage Corporation................. 243 11.4 240 294 10.7 291 341 9.9 343 Other................................... 23 1.1 23 28 1.0 28 37 1.1 38 Total mortgage- backed securities.... $2,124 100.0% $2,302 $2,752 100.0% $2,933 $3,423 100.0% $3,668
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, 1997.
Amount at December 31, 1997 which matures in One Year One Year to After or Less Five Years Five Years Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield ---- ----- ---- ----- ---- ----- (Dollars in thousands) Mortgage-backed securities...................... $--- ---% $283 8.40% $1,841 8.59%
The following table sets forth the changes in Union Federal's mortgage-backed securities portfolio for the years ended December 31, 1997, 1996 and 1995.
For the Year Ended December 31, 1997 1996 1995 --------------------------------------------- (In thousands) Beginning balance.......... $2,752 $3,423 $4,079 Repayments/sales........ (639) (676) (663) Premium and discount amortization, net....... 11 5 7 Ending balance............. $2,124 $2,752 $3,423 ====== ====== ======
Sources of Funds General. Deposits have traditionally been Union Federal's primary source of funds for use in lending and investment activities. In addition to deposits, Union Federal derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Union Federal attracts deposits principally from within Montgomery County through the offering of a broad selection of deposit instruments, including fixed-rate passbook accounts, NOW accounts, variable rate money market accounts, fixed-term certificates of deposit and savings accounts. Union Federal does not actively solicit or advertise for deposits outside of Montgomery County, and substantially all of its depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. Union Federal does not pay broker fees for any deposits it receives. Union Federal establishes the interest rates paid, maturity terms, service fees and withdrawal penalties on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. Union Federal relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits. Union Federal also closely prices its deposits to the rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that Union Federal offers has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Union Federal has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. Union Federal manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on Union Federal's experience, management believes that its passbook, NOW and MMDAs are relatively stable sources of deposits. However, the ability to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. An analysis of Union Federal's deposit accounts by type, maturity, and rate at December 31, 1997, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 1997 Deposits Rate - - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts.............................. $ 10 $ 4,579 7.35% 4.00% Variable rate, money market................................ 10 9,125 14.66 4.58 NOW accounts and other transaction accounts................ 500 2,373 3.81 2.94 ------- ------ ---- Total withdrawable....................................... 16,077 25.82 4.17 Certificates (original terms): 3 months or less........................................... 1,000 101 .16 4.23 6 months................................................... 1,000 3,778 6.07 5.02 12 months.................................................. 1,000 5,477 8.80 5.57 18 months.................................................. 1,000 7,986 12.83 5.73 24 months.................................................. 1,000 5,174 8.31 5.95 30 months.................................................. 1,000 6,615 10.62 5.95 36 months ................................................. 1,000 3,854 6.19 6.09 48 months.................................................. 1,000 321 .52 5.97 60 months.................................................. 1,000 5,815 9.34 6.02 Jumbo certificates - $100,000 and over........................ 100,000 7,060 11.34 6.18 ------- ------ ---- Total certificates............................................ 46,181 74.18 5.84 ------- ------ ---- Total deposits................................................ $62,258 100.00% 5.41% ======= ====== ====
The following table sets forth by various interest rate categories the composition of time deposits of Union Federal at the dates indicated: At December 31, 1997 1996 1995 ------------------------------------------------ (In thousands) 4.00 to 4.99%....... $ 3,622 $ 4,760 $ 5,432 5.00 to 5.99%....... 19,245 19,400 11,330 6.00 to 6.99%....... 22,894 20,954 21,991 7.00 to 7.99%....... 420 1,941 6,516 ------- ------- -------- Total............ $46,181 $47,055 $ 45,269 ======= ======= ======== The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1997. Matured certificates, which have not been renewed as of December 31, 1997, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1997 Maturing In One Year Two Three Greater Than or Less Years Years Three Years (In thousands) 4.00 to 4.99%....... $ 3,622 5.00 to 5.99%....... 12,548 $ 5,427 $ 953 $ 317 6.00 to 6.99%....... 10,806 7,817 2,733 1,538 7.00 to 7.99%....... 394 10 16 --- ------- ------- ------ ------ Total............ $27,370 $13,254 $3,702 $1,855 ======= ======= ====== ======
The following table indicates the amount of Union Federal's other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1997. At December 31, 1997 -------------------- Maturity Period (In thousands) Three months or less................................... $2,471 Greater than three months through six months........... 583 Greater than six months through twelve months.......... 1,585 Over twelve months..................................... 2,421 ------ Total............................................. $7,060 ====== The following table sets forth the dollar amount of savings deposits in the various types of deposits that Union Federal offers at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
DEPOSIT ACTIVITY Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 1997 Deposits 1996 1996 Deposits 1995 1995 Deposits (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts...... $ 4,579 7.35% $ 712 $3,867 6.40% $356 $3,511 6.11% Variable rate, money market........ 9,125 14.66 510 8,615 14.25 218 8,397 14.63 NOW accounts and other transaction accounts............. 2,373 3.81 1,474 899 1.49 669 230 .40 ------- ------ ------ ------- ------ ------ ------- ------ Total withdrawable............... 16,077 25.82 2,696 13,381 22.14 1,243 12,138 21.14 Certificates (original terms): 3 months........................... 101 .16 (48) 149 .25 19 130 .23 6 months........................... 3,778 6.07 (489) 4,267 7.06 (265) 4,532 7.89 12 months.......................... 5,477 8.80 244 5,233 8.66 (131) 5,364 9.34 18 months.......................... 7,986 12.83 (204) 8,190 13.55 1,152 7,038 12.26 24 months.......................... 5,174 8.31 678 4,496 7.44 (94) 4,590 8.00 30 months.......................... 6,615 10.62 1,133 5,482 9.07 273 5,209 9.07 36 months ......................... 3,854 6.19 (1,344) 5,198 8.60 113 5,085 8.86 48 months.......................... 321 .52 (55) 376 .62 (29) 405 .71 60 months.......................... 5,815 9.34 (793) 6,608 10.93 79 6,529 11.37 Jumbo certificates.................... 7,060 11.34 4 7,056 11.68 669 6,387 11.13 ------- ------ ------ ------- ------ ------ ------- ------ Total certificates.................... 46,181 74.18 (874) 47,055 77.86 1,786 45,269 78.86 ------- ------ ------ ------- ------ ------ ------- ------ Total deposits........................ $62,258 100.00% $1,822 $60,436 100.00% $3,029 $57,407 100.00% ======= ====== ====== ======= ====== ====== ======= ======
Total deposits at December 31, 1997 were approximately $62.3 million, compared to approximately $57.4 million at December 31, 1995. 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, 1997, Union Federal had borrowings in the amount of $2.4 million from the FHLB of Indianapolis which bear fixed and variable interest rates and are due at various dates through January 2, 2004. Union Federal is required to maintain eligible loans in its portfolio of at least 170% of outstanding advances as collateral for advances from the FHLB of Indianapolis. Union Federal does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI, L.P. ("Pedcor") $1.2 million under a note payable that is not included in the following table. See "--Service Corporation Subsidiary." The following table presents certain information relating to Union Federal's borrowings at or for the years ended December 31, 1997, 1996 and 1995.
At or for the Year Ended December 31, 1997 1996 1995 --------------------------------------- (Dollars in thousands) FHLB Advances: Outstanding at end of period.................... $2,373 $6,482 $1,065 Average balance outstanding for period.......... 5,748 3,566 1,857 Maximum amount outstanding at any month-end during the period................... 6,873 6,482 3,065 Weighted average interest rate during the period............................. 5.90% 5.36% 6.03% Weighted average interest rate at end of period.............................. 5.71% 5.52% 5.46%
Service Corporation Subsidiary OTS regulations permit federal savings associations to invest in the capital stock, obligations or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 2% of the association's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries (other than special purpose finance subsidiaries) in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's regulatory capital is in compliance with applicable regulations. A savings association that acquires a non-savings association subsidiary, or that elects to conduct a new activity within a subsidiary, must give the FDIC and the OTS at least 30 days advance written notice. The FDIC may, after consultation with the OTS, prohibit specified activities if it determines such activities pose a serious threat to the SAIF. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"), whose sole asset is its investment in Pedcor, which is an Indiana limited partnership that was established to organize, build, own, operate and lease a 48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II Apartments (the "Project"). Union Federal owns the limited partner interest in Pedcor. The general partner is Pedcor Investments LLC. The Project, operated as a multi-family, low- and moderate-income housing project, is completed and is performing as planned. Because UFS engages exclusively in activities that are permissible for a national bank, OTS regulations permit Union Federal to include its investment in UFS in its calculation of regulatory capital. A low- and moderate-income housing project qualifies for certain federal income tax credits if (i) it is a residential rental property, (ii) the units are used on a nontransient basis, and (iii) 20% or more of the units in the project are occupied by tenants whose incomes are 50% or less of the area median gross income, adjusted for family size, or alternatively, at least 40% of the units in the project are occupied by tenants whose incomes are 60% of the area median gross income. Qualified low income housing projects generally must comply with these and other rules for fifteen years, beginning with the first year the project qualified for the tax credit, or some or all of the tax credit together with interest may be recaptured. The tax credit is subject to the limitations on the use of general business credit, but no basis reduction is required for any portion of the tax credit claimed. UFS committed to invest approximately $1.8 million in Pedcor at the inception of the project in November, 1993. Through December 31, 1997, UFS had invested cash of approximately $610,000 in Pedcor with six additional annual capital contributions remaining to be paid in January of each year through January, 2004, totaling $1,200,000. 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 $873,000 pursuant to a promissory note payable in installments through January 1, 2004 and bearing interest at an annual rate of 9%. UFS transfers the tax credits resulting from Pedcor's operation of the Project to Union Federal. These tax credits will be available to Union Federal through 2003. Although Union Federal has reduced income tax expense by the full amount of the tax credit available each year, it has not been able to fully utilize available tax credits to reduce income taxes payable because it may not use tax credits that would reduce its regular corporate tax liability below its alternative minimum tax liability. Union Federal may carry forward unused tax credits for a period of fifteen years and management believes that Union Federal will be able to utilize available tax credits during the carry forward period. Additionally, Pedcor has incurred operating losses in the early years of its operations primarily due to its accelerated depreciation of assets. UFS has accounted for its investment in Pedcor on the equity method and, accordingly, has recorded its share of these losses as reductions to its investment in Pedcor, which at December 31, 1997, was $1.2 million. As of December 31, 1997, 83% of the units in the Project were occupied, and all of the tenants met the income test required for the tax credits. UFS does not engage in any activity or hold any assets other than its investment in Pedcor. The following summarizes UFS's equity in Pedcor's losses and tax credits recognized in Union Federal's consolidated financial statements.
Year Ended December 31, 1997 1996 1995 --------------------------------- (In Thousands) Investment in Pedcor: Net of equity in losses.................. $1,176 $1,334 $1,506 Equity in losses, net of income tax effect..................... $ (95) $ (104) $(150) Tax credit.................................. 178 178 178 Increase in after-tax net income from Pedcor investment........................ $ 83 $ 74 $ 28
Employees As of December 31, 1997, Union Federal employed 12 persons on a full-time basis. Union Federal does not have any part-time employees. None of Union Federal's employees is represented by a collective bargaining group. Management considers its employee relations to be good. Employee benefits for Union Federal's full-time employees include, among other things, an employee stock ownership plan, a Pentegra Group (formerly known as Financial Institutions Retirement Fund) defined benefit pension plan, a noncontributory, multiple-employer comprehensive pension plan (the"Pension Plan"), and hospitalization/major medical insurance, dental and eye care insurance, long-term disability insurance, life insurance, and participation in the Financial Institutions Thrift Plan. Management considers its employee benefits to be competitive with those offered by other financial institutions and major employers in the area. See "Executive Compensation" and "Certain Relationships and Related Transactions of Union Federal." COMPETITION Union Federal originates most of its loans to and accepts most of its deposits from residents of Montgomery County, Indiana. Union Federal is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, and certain nonbanking consumer lenders that provide similar services in Montgomery County with significantly larger resources than are available to Union Federal. In total, there are 13 other financial institutions located in Montgomery County, including nine banks, two credit unions and two other savings associations. Union Federal also competes with money market funds with respect to deposit accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. Union Federal competes for loan originations primarily through the efficiency and quality of the services that it provides borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that management cannot readily predict. REGULATION General As a federally chartered, SAIF-insured savings association, Union Federal is subject to extensive regulation by the OTS and the FDIC. For example, Union Federal must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines Union Federal's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. Union Federal's semi- annual assessment owed to the OTS, which is based upon a specified percentage of assets, is approximately $14,135. Union Federal is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of securities, and limitations upon other aspects of banking operations. In addition, Union Federal's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The United States Congress is considering legislation that would require all federal savings associations, such as Union Federal, to either convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Holding Company likely would not be regulated as a savings and loan holding company but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Holding Company and Union Federal. Savings and Loan Holding Company Regulation As the holding company for Union Federal, the Holding Company will be regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, Union Federal is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company's Board of Directors presently intends to operate the Holding Company as a unitary savings and loan holding company. There are generally no restrictions on the permissible business activities of a unitary savings and loan holding company. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply.) See "--Qualified Thrift Lender." At December 31, 1997, Union Federal's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with Union Federal, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than Union Federal or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the Federal Reserve Board (the "FRB") as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System Union Federal is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. As a member, Union Federal is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 1997, Union Federal's investment in stock of the FHLB of Indianapolis was $708,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended December 31, 1997, dividends paid by the FHLB of Indianapolis to Union Federal totaled approximately $54,000, for an annual rate of 7.99%. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as Union Federal and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law. See "-- Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, Union Federal was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. Union Federal recognized this one-time assessment as a non-recurring operating expense of $362,000 ($219,000 after tax) during the three-month period ending September 30, 1996, and Union Federal paid this assessment on November 27, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, Union Federal's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. 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, 1997, Union Federal was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, Union Federal would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. Union Federal nevertheless measure its interest rate risk in conformity with the OTS regulation and, as of December 31, 1997, Union Federal would have been required to deduct $1.7 million from its total capital available to calculate its risk-based capital requirement. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequatelycapitalized, under capitialized, significantly undercapitalzied, and critically undercapitalized. At December 31, 1997, Union Federal was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations An OTS regulation imposes limitations upon all "capital distributions" by savings associations, including cash dividends, payments by an association to repurchase or otherwise acquire its shares, payments to shareholders of another institution in a cash-out merger and other distributions charged against capital. The regulation establishes a three-tiered system of regulation, with the greatest flexibility being afforded to well-capitalized associations. A savings association which has total capital (immediately prior to and after giving effect to the capital distribution) that is at least equal to its fully phased-in capital requirements would be a Tier 1 institution ("Tier 1 Institution"). An association that has total capital at least equal to its minimum capital requirements, but less than its fully phased-in capital requirements, would be a Tier 2 institution ("Tier 2 Institution"). An institution having total capital that is less than its minimum capital requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an institution which otherwise qualifies as a Tier 1 Institution may be designated by the OTS as a Tier 2 or Tier 3 Institution if the OTS determines that the institution is "in need of more than normal supervision." Union Federal is currently a Tier 1 Institution. A Tier 1 Institution may, after prior notice but without the approval of the OTS, make capital distributions during a calendar year up to the greater of (a) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" at the beginning of the calendar year (the smallest excess over its capital requirements), or (b) 75% of its net income over the most recent four-quarter period. Any additional amount of capital distributions would require prior regulatory approval. Accordingly, at December 31, 1997, Union Federal had available approximately $13,004,000 for distribution, without consideration of the restrictions on its capital distributions as a result of the establishment of a liquidation account in connection with the Conversion. The OTS has proposed revisions to these regulations which would permit a savings association, without filing a prior notice or application with the OTS, to make a capital distribution to its shareholders in an amount that does not exceed the association's undistributed net income for the prior two years plus the amount of its undistributed income from the current year. This proposed rule would require a savings association, such as Union Federal, that is a subsidiary of a savings and loan holding company to file a notice with the OTS before making a capital distribution up to the "maximum amount" described above. The proposed rule would also require all savings associations, whether under a holding company or not, to file an application with the OTS prior to making any capital distribution where the association is not eligible for expedited processing under the OTS "Expedited Processing Regulation," or where the proposed distribution, together with any other distributions made in the same year, would exceed the "maximum amount" described above. Pursuant to the Plan of Conversion, Union Federal established a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders. Union Federal will not be permitted to pay dividends to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. In addition, Union Federal must file either a notice or an application with the OTS 30 days before declaring a dividend to the Holding Company, as described above. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on Union Federal's current operations. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, Union Federal may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 1997, Union Federal did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on Union Federal's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test. If Union Federal maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 1997, Union Federal was in compliance with its QTL requirement, with approximately 93.3% of its assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocial basis. The Indiana Branching Law became effective March 15, 1996. Transactions with Affiliates Union Federal is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following Union Federal's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated Union Federal's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as Union Federal, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, no savings association may use the percentage of taxable income method of computing its allowable bad debt deduction for tax purposes. Instead, all savings associations are required to compute their allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for associations meeting a residential mortgage loan origination test. Union Federal will recapture approximately $55,000 over a six-year period that began with the year ended December 31, 1996. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, need not be recaptured into income unless (i) the savings association no longer qualifies as a bank under the Code, or (ii) the savings association pays out excess dividends or distributions. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax on the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, Union Federal has been reporting its income and expenses on the accrual method of accounting. Union Federal's federal income tax returns have not been audited in recent years. State Taxation Union Federal is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Union Federal's state income tax returns have not been audited in recent years. Item 2. Properties. The following table provides certain information with respect to Union Federal's office as of December 31, 1997:
Net Book Value of Property, Approximate Description Owned or Year Total Furniture & Square and Address leased Opened Deposits Fixtures Footage (Dollars in thousands) 221 East Main Street Owned 1913 $62,258 $367 19,065 Crawfordsville, Indiana 47933
Union Federal owns computer and data processing equipment which it uses for transaction processing, loan origination, and accounting. The net book value of Union Federal's electronic data processing equipment was approximately $4,000 at December 31, 1997. Union Federal has also contracted for the data processing and reporting services of On-Line Financial Services, Inc. in Oak Brook, Illinois. The cost of these data processing services is approximately $5,000 per month. Union Federal has also executed a Correspondent Services Agreement with the FHLB of Indianapolis under which it receives item processing and other services for a fee of approximately $1,100 per month. Union Federal also receives income from leasing office space on the second floor of its building and parking spaces located behind its building. Union Federal's gross income from renting the office space was $28,000 for fiscal year ended December 31, 1997 and $27,000 for the year ended December 31, 1996. Union Federal's gross income from renting the parking spaces was approximately $9,000 for the fiscal year ended December 31, 1997 and approximately $9,000 for the year ended December 31, 1996. Item 3. Legal Proceedings. Although Union Federal is involved, from time to time, in various legal proceedings in the normal course of business, there are no material legal proceedings to which it presently is a party or to which any of its property is subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 1997. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Holding Company are elected annually by the Holding Company's Board of Directors. Name Position with Holding Company ---- ----------------------------- Joseph E. Timmons Chairman of the Board, President and Chief Executive Officer Denise E. Swearingen Secretary and Treasurer Ronald L. Keeling Vice President Joseph E. Timmons (age 63) has served as President and Chief Executive Officer of the Holding Company since 1997, of Union Federal since 1974 and of UFS Service Corp. since its inception in 1994. He has been an employee of Union Federal since 1954. Denise E. Swearingen (age 39) has served as the Holding Company's Secretary and Treasurer since 1997 and as Union Federal's Secretary and Controller/Treasurer since 1995. She has worked for Union Federal since 1983. Ronald L. Keeling (age 46) has served as the Holding Company's Vice President since 1997, as Union Federal's Vice President and Assistant Secretary since 1984 and as Senior Loan Officer since 1979. He has worked for Union Federal since 1971. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. a) The Holding Company's common stock, without par value ("Common Stock"), is listed on the NASDAQ National Market System under the symbol "UCBC" The Holding Company shares began to trade on December 29, 1997. The high and low bid prices for the period December 29, 1997 to March 20, 1998, were $13.75 and $14.88, respectively. Since the Holding Company has no independent operation or other subsidiaries to generate income, its ability to accumulate earnings for the payment of cash dividends to shareholders directly depends upon the ability of Union Federal to pay dividends to the Holding Company and upon the earnings on its investment securities. On March 30, 1998, there were 425 shareholders of record. Under current federal income tax law, dividend distributions to the Holding Company, to the extent that such dividends paid are from the current or accumulated earnings and profits of Union Federal (as calculated for federal income tax purposes), will be taxable as ordinary income to the Holding Company and will not be deductible by Union Federal. Any dividend distributions in excess of current or accumulated earnings and profits will be treated for federal income tax purposes as a distribution from Union Federal's accumulated bad debt reserves, which could result in increased federal income tax liability for Union Federal. Moreover, Union Federal may not pay dividends to the Holding Company if such dividends would result in the impairment of the liquidation account established in connection with the Conversion. Generally, there is no OTS regulatory restriction on the payment of dividends by the Holding Company unless there is a determination by the Director of the OTS that there is reasonable cause to believe that the payment of dividends constitutes a serious risk to the financial safety, soundness or stability of Union Federal. The FDIC also has authority under current law to prohibit a financial institution from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice in light of the financial condition of the financial institution. Indiana law, however, would prohibit the Holding Company from paying a dividend if, after giving effect to the payment of that dividend, the Holding Company would not be able to pay its debts as they become due in the usual course of business or the Holding Company's total assets would be less than the sum of its total liabilities plus preferential rights of holders of preferred stock, if any. The Holding Company paid no dividends to its shareholders in the fiscal year ended December 31, 1997. b) Use of Proceeds. The Registration Statement filed by the Company pursuant to the Securities Act of 1933 was declared effective by the Securities and Exchange Commission on November 12, 1997 (SEC File No. 333-35799). The offering of the Company's common stock (the "Common Stock") commenced on November 19, 1997 and terminated at 12:00 noon, Crawfordsville, Indiana time, on December 10, 1997. The Company sold each of the 3,041,750 shares of Common Stock registered pursuant to the Registration Statement at $10 per share. The Union Community Bancorp Employee Stock Ownership Plan and Trust (the "ESOP") purchased 184,000 shares of the Common Stock with the proceeds of a loan it received from the Company. Trident Securities, Inc. acted as the Company's exclusive agent in marketing the Common Stock on a best efforts basis. The following table indicates the net proceeds from the offering of the Common Stock by the Company: Gross proceeds from sale of 3,041,750 shares at $10/share $30,417,500 Expenses: Underwriting commissions $ 394,397 Underwriting expenses 31,903 Other expenses 353,608 Total expenses 779,908 Net proceeds $29,637,592 As described in the prospectus, the Company used 50% of the net proceeds (or $14,818,796) to purchase all of the capital stock of the Bank. From the proceeds that it retained, the Company made a loan to the ESOP for the purchase of 184,000 shares of the Common Stock. After providing for this loan and for the purchase of the Bank's capital stock, the Company retained $12,978,796 of the net proceeds, as the following table indicates: Net proceeds $29,637,592 Purchase of Bank capital stock $14,818,796 Loan to ESOP 1,840,000 Total 16,658,796 Net proceeds retained by Company $12,978,796 The Company deposited the remainder of the net proceeds that it retained in an account with the Bank, thereby increasing the Bank's working capital. The Bank used $4,500,000 of its portion of the net proceeds to repay short-term advances from the FHLB of Indianapolis. The Bank deposited the remainder of the net proceeds it received in an overnight account with the FHLB of Indianapolis to be used for daily operations. The payments described above reflect reasonable estimates of amounts paid by the Company and the Bank. Neither the Company nor the Bank paid any of the expenses indicated above, either directly or indirectly, to its directors, officers or their associates, or to any person owning 10% or more of any class of its securities, or to any affiliate. The Company's and the Bank's use of the proceeds from the offering of the Common Stock described above does not represent a material change in the use of proceeds described in the prospectus. Item 6. Selected Financial Data. The following selected consolidated financial data of Union Federal and its subsidiary is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Form 10-K.
AT DECEMBER 31, 1997 1996 1995 1994 1993 (In thousands) Summary of Selected Consolidated Financial Condition Data: Total assets..................................... $132,040 $82,789 $73,631 $72,540 $66,833 Loans, net....................................... 78,436 72,697 61,279 60,059 55,256 Cash and interest-bearing deposits in other banks (1)................. 44,781 1,465 1,993 1,329 963 Investment securities held to maturity........... 5,820 5,747 7,423 7,985 9,355 Deposits......................................... 62,258 60,436 57,407 54,886 55,076 Stock subscriptions refundable................... 22,687 --- --- --- --- Borrowings....................................... 3,573 7,880 2,642 4,943 --- Shareholders' equity............................. 42,906 13,910 13,024 12,033 10,878
YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 (In thousands) Summary of Operating Data: Total interest and dividend income............... $6,801 $6,112 $5,729 $5,249 $5,334 Total interest expense........................... 3,836 3,424 3,148 2,507 2,594 Net interest income........................... 2,965 2,688 2,581 2,742 2,740 Provision for loan losses........................ 165 48 24 24 15 Net interest income after provision for loan losses................... 2,800 2,640 2,557 2,718 2,725 Other income (losses): Equity in losses of limited partnership....... (158) (173) (249) (54) --- Investment securities gains................... --- --- --- --- --- Other......................................... 62 57 32 14 13 Total other losses.......................... (96) (116) (217) (40) 13 Other expenses: Salaries and employee benefits................ 480 461 481 489 434 Net occupancy expenses........................ 39 39 66 44 57 Equipment expenses............................ 22 20 20 17 17 Deposit insurance expense..................... 31 495 127 126 94 Other......................................... 389 287 328 208 234 Total other expenses........................ 961 1,302 1,022 884 836 Income before income taxes and cumulative effect of change in accounting principle............. 1,743 1,222 1,318 1,794 1,902 Income taxes..................................... 545 336 326 639 755 Cumulative effective of change in accounting principle....................... --- --- --- --- 12 Net income.................................... $1,198 $ 886 $ 992 $1,155 $1,159 Supplemental Data: Interest rate spread during period............... 2.55% 2.54% 2.69% 3.25% 3.45% Net yield on interest-earning assets (2) ........ 3.50 3.53 3.67 4.01 4.23 Return on assets (3)............................. 1.38 1.13 1.36 1.63 1.77 Return on equity (4)............................. 8.10 6.54 7.84 10.02 11.19 Other expenses to average assets (5)............. 1.11 1.66 1.41 1.25 1.28 Equity to assets (6)............................. 32.49 16.80 17.69 16.59 16.28 Average interest-earning assets to average interest-bearing liabilities.................. 120.98 121.94 121.83 120.63 119.42 Non-performing assets to total assets (6)........ .07 .59 .21 .20 .31 Allowance for loan losses to total loans outstanding (6)............................... .32 .22 .18 .15 .11 Allowance for loan losses to non-performing loans (6)...................... 484.62 32.52 71.15 60.84 30.88 Net charge-offs to average total loans outstanding ...................... .10 --- --- --- --- Number of full service offices (6)............... 1 1 1 1 1
- - -------------- (1) Includes certificates of deposit in other financial institutions. (2) Net interest income divided by average interest-earning assets. (3) Net income divided by average total assets. (4) Net income divided by average total equity. (5) Other expenses divided by average total assets. (6) At end of period. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. General The Holding Company was incorporated for the purpose of owning all of the outstanding shares of Union Federal. The following discussion and analysis of the Holding Company's financial condition as of December 31, 1997 and Union Federal's results of operations should be read in conjunction with and with reference to the consolidated financial statements and the notes thereto included herein. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Holding Company's operations and actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Holding Company's general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to the following matters: 1. Management's determination of the amount of loan loss allowance; 2. The effect of changes in interest rates; 3. Changes in deposit insurance premiums; and 4. Proposed legislation that would eliminate the federal thrift charter and the separate federal regulation of thrifts. Average Balances and Interest Rates and Yields The following tables present for the years ended December 31, 1997, 1996 and 1995, the balances, interest rates and average monthly balances of each category of Union Federal's interest-earning assets and interest-bearing liabilities, and the interest earned or paid on such amounts. Management believes that the use of month-end average balances instead of daily average balances has not caused any material difference in the information presented.
Year Ended December 31, 1997 1996 1995 Average Average Average Average Average Average Balance Interest (1)Yield/Cost BalanceInterest (1) Yield/Cost BalanceInterest (1)Yield/Cost (Dollars in thousands) Assets: Interest-earning assets: Interest-earning deposits............ $3,821 $246 6.44% $ 959 $ 67 6.99% $ 1,089 $ 71 6.52% Mortgage-backed securities held to maturity................... 2,421 214 8.84 3,061 263 8.59 3,777 321 8.50 Other investment securities held to maturity................... 3,487 197 5.65 3,169 175 5.52 3,918 227 5.79 Loans receivable (2)................. 74,382 6,090 8.19 68,346 5,562 8.14 60,950 5,066 8.31 FHLB stock........................... 676 54 7.99 576 45 7.81 562 44 7.83 Total interest-earning assets...... 84,787 6,801 8.02 76,111 6,112 8.03 70,296 5,729 8.15 Non-interest earning assets, net of allowance for loan losses............ 2,039 2,152 2,391 Total assets.......................$86,826 $78,263 $72,687 Liabilities and retained earnings: Interest-bearing liabilities: Savings deposits..................... $3,845 159 4.14 $ 3,754 148 3.94 $ 3,650 146 4.00 Interest-bearing demand.............. 10,350 444 4.29 9,061 369 4.07 8,594 385 4.48 Certificates of deposit.............. 47,403 2,764 5.83 46,035 2,716 5.90 43,597 2,505 5.75 Stock subscriptions refundable....... 2,737 130 4.75 --- --- --- --- --- --- FHLB advances........................ 5,748 339 5.90 3,566 191 5.36 1,857 112 6.03 Total interest-bearing liabilities. 70,083 3,836 5.47 62,416 3,424 5.49 57,698 3,148 5.46 Other liabilities....................... 1,960 2,303 2,333 Total liabilities.................. 72,043 64,719 60,031 Shareholders' equity.................... 14,783 13,544 12,656 Total liabilities and stockholders' equity...........$86,826 $78,263 $ 72,687 Net interest-earning assets.............$14,704 $13,695 $ 12,598 Net interest income..................... $2,965 $2,688 $2,581 Interest rate spread (3)................ 2.55% 2.54% 2.69% Net yield on weighted average interest-earning assets (4).......... 3.50% 3.53% 3.67% Average interest-earning assets to average interest-bearing liabilities. 120.98% 121.94% 121.83%
(1) Interest income on loans receivable includes loan fee income of $97,000, $97,000 and $101,000 for the years ended December 31, 1997, 1996 and 1995. (2) Total loans less loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. Interest Rate Spread Union Federal's results of operations have been determined primarily by net interest income and, to a lesser extent, fee income, miscellaneous income and general and administrative expenses. Union Federal's net interest income is determined by the interest rate spread between the yields Union Federal earns on interest-earning assets and the rates it pays on interest-bearing liabilities, and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate that Union Federal earned on its loan and investment portfolios, the weighted average effective cost of its deposits and advances, the interest rate spread, and net yield on weighted average interest-earning assets for the periods and as of the dates shown. Average balances are based on average month-end balances. Management believes that the use of month-end average balances instead of daily average balances has not caused any material difference in the information presented.
At December 31, Year Ended December 31, 1997 1997 1996 1995 -------------------------------------------------------- Weighted average interest rate earned on: Interest-earning deposits.............................. 5.13% 6.44% 6.99% 6.52% Mortgage-backed securities held to maturity............ 8.57 8.84 8.59 8.50 Other investment securities held to maturity........... 5.77 5.65 5.52 5.79 Loans receivable....................................... 8.11 8.19 8.14 8.31 FHLB stock............................................. 7.99 7.99 7.81 7.83 Total interest-earning assets........................ 7.02 8.02 8.03 8.15 Weighted average interest rate cost of: Savings deposits....................................... 4.00 4.14 3.94 4.00 Interest-bearing demand................................ 4.32 4.29 4.07 4.48 Certificates of deposit................................ 5.87 5.83 5.90 5.75 Stock subscriptions refundable......................... 4.00 4.75 --- --- FHLB advances.......................................... 5.71 5.90 5.36 6.03 Total interest-bearing liabilities................... 5.09 5.47 5.49 5.46 Interest rate spread (1).................................. 1.93 2.55 2.54 2.69 Net yield on weighted average interest-earning assets (2)............................ --- 3.50 3.53 3.67
(1) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected Union Federal's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume) and (2) changes in volume (changes in volume multiplied by old rate). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionally to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income Total Due to Due to Net Rate Volume Change (In thousands) Year ended December 31, 1997 compared to year ended December 31, 1996 Interest-earning assets: Interest-earning deposits.................................. $ (6) $ 185 $ 179 Mortgage-backed securities held to maturity................ 7 (56) (49) Other investment securities held to maturity............... 4 18 22 Loans receivable........................................... 34 494 528 FHLB stock................................................. 1 8 9 Total.................................................... 40 649 689 Interest-bearing liabilities: Savings deposits........................................... 7 4 11 Interest-bearing demand.................................... 20 55 75 Certificates of deposit.................................... (32) 80 48 Stock subscriptions refundable............................. --- 130 130 FHLB advances.............................................. 21 127 148 Total.................................................... 16 396 412 Net change in net interest income............................ $ 24 $ 253 $ 277 Year ended December 31, 1996 compared to year ended December 31, 1995 Interest-earning assets: Interest-earning deposits.................................. $ 5 $ (9) $ (4) Mortgage-backed securities held to maturity................ 3 (61) (58) Other investment securities held to maturity............... (10) (42) (52) Loans receivable........................................... (108) 604 496 FHLB stock................................................. --- 1 1 Total.................................................... (110) 493 383 Interest-bearing liabilities: Savings deposits........................................... (2) 4 2 Interest-bearing demand.................................... (36) 20 (16) Certificates of deposit.................................... 68 143 211 FHLB advances.............................................. (14) 93 79 Total.................................................... 16 260 276 Net change in net interest income............................ $ (126) $ 233 $ 107 Year ended December 31, 1995 compared to year ended December 31, 1994 Interest-earning assets: Interest-earning deposits.................................. $ 26 $ (16) $ 10 Mortgage-backed securities held to maturity................ (3) (66) (69) Other investment securities held to maturity............... (13) 7 (6) Loans receivable........................................... 304 229 533 FHLB stock................................................. 11 1 12 Total.................................................... 325 155 480 Interest-bearing liabilities: Savings deposits........................................... 23 (36) (13) Interest-bearing demand.................................... 81 (60) 21 Certificates of deposit.................................... 436 144 580 FHLB advances.............................................. 20 33 53 Total.................................................... 560 81 641 Net change in net interest income............................ $(235) $ 74 $ (161)
Financial Condition at December 31, 1997 Compared to Financial Condition at December 31, 1996 Total assets increased $49.3 million, or 59.5% at December 31, 1997, compared to December 31, 1996. The largest increases were primarily in cash and cash equivalents which increased $43.3 million, and net loans which increased $5.7 million. The increase in cash and cash equivalents was principally in short-term interest-bearing deposits due to net proceeds from the conversion and stock subscriptions refundable. Net proceeds of the Holding Company's stock issuance, after costs and excluding the shares issued for the ESOP, were $27.8 million and stock subscriptions refundable were $22.7 million. The increase in net loans was principally in real estate mortgage loans, and a result of increased customer demand. Average assets increased $8.5 million from $78.3 million for the period ended December 31, 1996, to $86.8 million for the period ended December 31, 1997, an increase of 10.9%. Average interest-earning assets represented 97.3% of average assets for the period ended December 31, 1996 compared to 97.7% for the period ended December 31, 1997. Although the average of most interest-earning assets increased during 1997, average loans experienced the largest increase amounting to $6.0 million, or 8.8%, compared to 1996. Average interest-earning assets as a percentage of average interest-bearing liabilities were 121.9% for 1996 and 121.0% for 1997. Average balances of mortgage-backed securities held to maturity decreased $640,000, or 20.9%, from December 31, 1996 to December 31, 1997 as a result of principal repayments, while other investment securities held to maturity increased $318,000, or 10.0%, from $3.2 million for the period ended December 31, 1996 to $3.5 million for the period ended December 31, 1997 due to purchases. Although no mortgage-backed securities have been purchased for several years, mortgage-backed securities have been purchased on occasion and are considered for purchase on an ongoing basis because such instruments offer liquidity and lower credit risk than other types of investments. The primary risk associated with these instruments is that in a declining interest rate environment the prepayment level of the loans underlying these securities will accelerate, which reduces the effective yield and exposes the association to interest rate risk on the prepaid amounts. In an increasing rate environment, the primary risk associated with these securities is that the fixed-rate portion of such securities will not adjust to market rates which reduces our spread. See "Business -- Investments -- Mortgage-Backed Securities." Loans and Allowance for Loan Losses. Average loans increased $6.0 million, or 8.8%, from the period ended December 31, 1996, to December 31, 1997. The growth in loans was in part funded by increased average deposits of $2.7 million and increased average FHLB advances of $2.2 million. Average loans were $68.3 million for the 1996 period and $74.4 million for the 1997 period. The average rates on loans were 8.14% for 1996 and 8.19% for 1997, an increase of 5 basis points. The allowance for loan losses as a percentage of total loans increased from .22% to .32% due to an increase in the allowance for loan losses from $159,000 at December 31, 1996 to $252,000 at December 31, 1997. The increase in our allowance for loan losses was a result of a $165,000 provision for loan losses for the year ended December 31, 1997 offset by a $72,000 charge-off. The ratio of the allowance for loan losses to non-performing loans was 32.5% at December 31, 1996 compared to 484.6% at December 31, 1997. Nonperforming loans decreased from $489,000 at December 31, 1996 to $52,000 at December 31, 1997. Nonperforming loans of $203,000 were transferred to foreclosed real estate during the period ended December 31, 1997 and a charge-off of $72,000 relating to a multi-family loan taken at the time of the transfer. In response to this loss, the risk factor used to calculate the necessary allowance for loan losses related to loans secured by multi-family and commercial real estate was increased. Union Federal has experienced minimal residential loan losses in the past with no losses recorded in over five years and does not expect this experience in this area to change in future years; therefore, the risk factor used on the residential loan portfolio has not been adjusted. Premises and Equipment. Premises and equipment decreased slightly from December 31, 1996 to December 31, 1997 due to depreciation for the period exceeding purchases. Union Federal has no branches, and it leases to other businesses a portion of its main office and parking lot. See "Business -- Properties." Deposits. Deposits increased $1.8 million to $62.3 million during 1997, an increase of 3.0%. Increased deposits were utilized to fund loan growth. Demand and savings deposits increased $2.7 million, or 20.1%, between December 31, 1996 and December 31, 1997. Certificates of deposits decreased $874,000, or 1.9%, during this period. Average total deposits increased $2.7 million, or 4.6%, from $58.9 million for the year ended December 31, 1996 compared to $61.6 million for the year ended December 31, 1997. Borrowed Funds. Borrowed funds decreased $4.3 million, or 54.7%, from December 31, 1996 to December 31, 1997. The decline in total borrowed funds was comprised of a decrease in FHLB advances of $4.1 million, 63.4%, and a decrease in the note payable to Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and operate a 48-unit apartment complex, of $198,000, or 14.0%. The note to Pedcor was used to fund an investment in the Pedcor low-income housing income tax credit limited partnership and bears no interest so long as there exists no event of default. Average FHLB advances increased to $5.7 million for 1997 compared to $3.6 million for 1996, an increase of $2.1 million, or 58.3%. Shareholders' Equity. Shareholders' equity increased $29.0 million from $13.9 million at December 31, 1996 to $42.9 million at December 31, 1997. The increase was due to net proceeds of the Holding Company's stock issuance, after costs and excluding the shares issued for the ESOP, of $27.8 million and net income for 1997 of $1.2 million. Financial Condition at December 31, 1996 Compared to Financial Condition at December 31, 1995 Total assets increased $9.2 million, or 12.4%, at December 31, 1996, compared to December 31, 1995. The largest increase was in net loans which increased $11.4 million, or 18.6%. This increase was funded in part by an increase in deposits of $3.0 million, or 5.3%, and an increase in FHLB advances of $5.4 million, or 508.6%. The increase in net loans of $11.4 million was primarily in one-to-four family loans and resulted from a strong local demand for residential financing. Average assets increased from $72.7 million for the period ended December 31, 1995, to $78.3 million for the period ended December 31, 1996, an increase of $5.6 million, or 7.7%. Average interest-earning assets represented 97.3% of average assets for the period ended in 1996 compared to 96.7% for the period ended in 1995. The increase in average earning assets was primarily in the loan portfolio. Average interest-bearing assets as a percentage of average interest-bearing liabilities was 121.9% and 121.8% for 1996 and 1995, respectively. Average balances of mortgage-backed securities held to maturity decreased $716,000, or 19.0%, for the year ended December 31, 1996 as a result of principal repayments, while other investment securities held to maturity decreased $749,000, or 19.1%, from $3.9 million for the period ended December 31, 1995 to $3.2 million for the period ended December 31, 1996 due to maturities. Loans and Allowance for Loan Losses. The increase in Union Federal's net loans of $11.4 million, or 18.6% from December 31, 1995 to December 31, 1996 was primarily in real estate mortgage loans. Average loans increased from $61.0 million to $68.3 million while the average rates earned on such loans decreased 17 basis points to 8.14%. The allowance for loan losses as a percentage of total loans increased to 0.22% from 0.18% as a result of an increase in loans and no charge-offs. The allowance for loan losses as a percentage of non-performing loans was 32.5% and 71.15% at December 31, 1996 and 1995 respectively. Non-performing loans were $489,000 and $156,000 at each date, respectively. Included in non-performing loans at December 31, 1996 was an impaired loan of $112,000. A provision for loss of $37,000 had been recorded on this loan. Premises and Equipment. Premises and equipment decreased slightly from December 31, 1995 to December 31, 1996 due to depreciation for the period exceeding purchases. Deposits. Deposits increased approximately $3.0 million, or 5.3%, during the period ended December 31, 1996. Interest-bearing demand and savings deposits increased $1.2 million, or 10.2%, while certificates of deposit increased $1.8 million, or 3.9%. Average deposits increased $3.0 million, or 5.4%, during the period ended December 31, 1996. Average interest-bearing demand and savings deposits increased $571,000, or 4.7%, while certificates of deposits increased $2.4 million, or 5.6%. Although Union Federal did not offer any special deposit programs during 1996, it increased its deposits by offering rates that were competitive with the rates offered by other institutions in the area. The rates paid on interest-bearing demand and saving deposits decreased 41 and 6 basis points, respectively, while the rate paid on certificates of deposits increased 15 basis points. Borrowed Funds. The growth in loans was partially funded by the increase in FHLB advances of $5.4 million, or 508.6% from December 31, 1995 to December 31, 1996. Union Federal elected to utilize FHLB advances available at rates comparable to the cost of acquiring local deposits to partially fund the increase in loans. The majority of these FHLB advances matured in less than one year. Average FHLB advances increased from $1.9 million at December 31, 1995 to $3.6 million at December 31, 1996. Retained Earnings. Retained earnings increased $886,000, or 6.8%, from $13.0 million at December 31, 1995 to $13.9 million at December 31, 1996. The increase was due to net income during the period. Comparison of Operating Results For Years Ended December 31, 1997 and 1996 General. Net income increased $312,000, or 35.2%, from $886,000 for the year ended December 31, 1996 to $1,198,000 for the year ended December 31, 1997. The increase is primarily due to an increase in net interest income and a decrease in deposit insurance expense. The return on average assets was 1.38% and 1.13 % for the years ended December 31, 1997 and 1996, respectively. Interest Income. Our total interest income was $6.8 million for 1997 compared to $6.1 million for 1996. The increase in interest income was due primarily to an increase in volume. Average earning assets increased $8.7 million, or 11.4%, from $76.1 million for 1996 compared to $84.8 for 1997. The average yield on interest-earning assets decreased slightly from 8.03% for the year ended December 31, 1996 to 8.02% for the comparable period in 1997. Interest Expense. Interest expense increased $412,000, or 12.0%, for the year ended December 31, 1997 compared to the year ended December 31,1996. Average interest-bearing liabilities increased $7.7 million, or 12.3%, from $62.4 million for the 1996 period to $70.1 million during the 1997 period. The average balance of each deposit type increased from the 1996 period to the 1997 period with a $2.7 million, or 4.6%, increase in total average deposits. Average FHLB advances increased $2.1 million, or 58.3%, from $3.6 million for the 1996 period to $5.7 million during the 1997 period. Net Interest Income. Net interest income increased $277,000, or 10.3%, for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase was primarily due to the $253,000 increase due to volume increases. The interest spread was 2.55% for the year ended December 31, 1997 compared to 2.54% for the comparable 1996 period. Provision for Loan Losses. The provision for loan losses for the year ended December 31, 1997 was $165,000 compared to $48,000 for the same period in 1996. The provision for loan losses increased due to the increase in outstanding loans and the losses recorded in 1997 associated with non-performing loans secured by multi-family real estate. In response to the loss experienced in 1997, the risk factor used on multi-family and commercial real estate loans was increased. Other Losses. Other losses decreased $20,000, or 17.2%, for the year ended December 31, 1997 compared to the 1996 period primarily due to decreased losses of $15,000 from our investment in a low-income housing income tax credit limited partnership. The investment in the limited partnership represents a 99% equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a benefit of low income housing income tax credits in the amount of $178,000 for both 1997 and 1996 was recorded. Salaries and Employee Benefits. Salaries and employee benefits were $480,000 for the year ended December 31, 1997 compared to $461,000 for the 1996 period, and increase of $19,000, or 4.1%. This increase resulted from the addition of 3 full-time employees to our staff and normal increases in employee compensation and related payroll taxes. Net Occupancy and Equipment Expenses. Occupancy expenses and equipment expenses increased $2,000, or 3.4%, during 1997 compared to 1996. Deposit Insurance Expense. Deposit insurance expense decreased $464,000, or 93.7%, from $495,000 for the year ended December 31, 1996 to $31,000 for the same period in 1997. This decrease was due to the one time Savings Association Insurance Fund ("SAIF") special assessment of approximately $362,000 expensed in the fourth quarter of 1996. The recapitalization of SAIF resulted in a decline in the assessment for 1997. Prior to the recapitalization of SAIF, an assessment of $.23 per $100 of deposits was paid. Subsequent to the recapitalization, the assessment was reduced to $.0644 per $100 of deposits. Other Expense. Other expenses, consisting primarily of expenses related to service center fees, advertising, directors' fees, professional fees, supervisory examination fees, supplies, and postage increased $102,000, or 35.5% for 1997 compared to 1996. The increase was primarily due to an increase in director fees of $26,000 and a $30,000 charitable contribution. The remaining increase resulted from nominal increases in a variety of expense categories. Income Tax Expense. Income tax expense increased $209,000, or 62.2%, during 1997 compared to 1996. The increase was directly related to the increase in taxable income for the period. The effective tax rate was 31.3% and 27.5% for the respective 1997 and 1996 periods. Comparison of Operating Results For Years Ended December 31, 1996 and 1995 General. Net income for the year ended December 31, 1996 decreased $106,000, or 10.7%, to $886,000 compared to $992,000 for 1995. Return on average assets for the years ended December 31, 1996, and 1995 was 1.13% and 1.36%, respectively. Return on average equity was 6.54% for 1996 and 7.84% for 1995. Interest Income. Total interest income was $6.1 million for 1996 compared to $5.7 million for 1995. Average earning assets increased $5.8 million, or 8.3%, from $70.3 million to $76.1 million from 1995 to 1996. Volume increases, primarily from loans, accounted for $493,000 of the increase while lower interest rates offset the increase by $110,000. Interest Expense. Interest expense increased $276,000, or 8.8%, during 1996 compared to 1995. The increase in interest expense was primarily the result of an increase in average interest-bearing liabilities of $4.7 million, or 8.1%, from $57.7 million to $62.4 million. The growth in average interest-bearing liabilities was primarily attributable to the growth in certificates of deposit and FHLB advances. The average balance of certificates of deposit increased $2.4 million, or 5.6%, while average FHLB advances increased $1.7 million, or 92.0%. The deposit growth and increased borrowings from the FHLB were used to fund loan growth. Net Interest Income. Net interest income increased $107,000, or 4.1%, from $2.6 million for 1995 to $2.7 million for 1996. Interest rate spread was 2.54% and 2.69% for 1996 and 1995, respectively. Provision for Loan Losses. The provision for loan losses for the year ended December 31, 1996 was $48,000. The 1996 provision and the related increase in the allowance for loan losses was considered adequate, based on growth, size, condition and components of the loan portfolio. The provision of $24,000 for 1995 reflected a more moderate growth of the loan portfolio. Other Losses. Other losses decreased $101,000, or 46.5%, from 1995 to 1996 primarily due to a decrease in losses of $76,000 from the investment in a limited partnership. Salaries and Employee Benefits. Salaries and employee benefits were $461,000 for 1996 compared to $481,000 for 1995, a decrease of $20,000, or 4.2%. This decrease was primarily a result of a $5,000 decrease in retirement plan contributions and a $13,000 increase loan origination costs which are deferred over the lives of the related loans. Net Occupancy and Equipment Expenses. Occupancy expenses decreased $27,000, or 40.9%, and equipment expenses remained constant during 1996 as compared to 1995. The decrease in occupancy expenses was primarily attributable to an additional $32,000 of repairs and maintenance expenses in 1995 as compared to 1996. Deposit Insurance Expense. Deposit insurance expense increased $368,000, or 289.8%, from $127,000 for 1995 to $495,000 for 1996 due to the one time SAIF special assessment of approximately $362,000. Other Expense. Other expenses, consisting primarily of expenses related to service center fees, advertising, directors' fees, professional fees, supervisory examination fees, supplies, and postage decreased $41,000, or 12.5%, from 1995 to 1996. The decrease resulted from decreases in a variety of expense categories. Income Tax Expense. Income tax expense increased $10,000, or 3.1%, from 1995 to 1996. The effective tax rate were 27.5% and 24.7% for 1996 and 1995, respectively. Liquidity and Capital Resources The following is a summary of Union Federal's cash flows, which are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination and principal collection on loans as well as purchases and sales of securities. Investing activities will generally result in negative cash flows when Union Federal experiences loan growth. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for each year in the three-year period ended December 31, 1997.
Year Ended December 31, 1997 1996 1995 (In thousands) Operating activities................................. $1,367 $ 1,088 $1,160 Investing activities: Investment securities Proceeds from maturities and paydowns of mortgage-backed securities held to maturity..................... 639 676 663 Purchases of other investment securities held to maturity................... (1,200) (994) (100) Proceeds from maturities of investment securities held to maturity........ 500 2,000 --- Purchase of loans............................... (500) (1,350) (742) Other net change in loans....................... (5,517) (10,116) (502) Purchase of FHLB of Indianapolis Stock............................ (128) (18) (1) Proceeds on sale of foreclosed real estate........... 73 --- --- Purchases of premises and equipment............. (23) (3) (38) Net cash used by investing activities........... (6,156) (9,805) (720) Financing activities: Net change in Interest-bearing demand and savings deposits...... 2,696 1,243 (1,375) Certificates of deposits.......................... (874) 1,786 3,896 Stock subscription escrow accounts................ 22,687 --- --- Proceeds from borrowings.......................... 1,500 10,500 2,500 Repayment of borrowings........................... (5,807) (5,261) (4,801) Net change in advances by borrowers for taxes and insurance....................... 20 (79) 4 Proceeds from sale of common stock, net of costs.................................... 27,883 --- --- Net cash provided by financing activities....... 48,105 8,189 224 Net increase(decrease) in cash and cash equivalents.............................. $43,316 $ (528) $ 664
Federal law requires that savings associations maintain an average daily balance of liquid assets in an amount not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first-lien residential mortgage loans. The OTS recently amended its regulation that implements this statutory liquidity requirement to reduce the amount of liquid assets a savings association must hold from 5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated the requirement that savings associations maintain short-term liquid assets constituting at least 1% of their average daily balance of net withdrawable deposit accounts and current borrowings. The revised OTS rule also permits savings associations to calculate compliance with the liquidity requirement based upon their average daily balance of liquid assets during each quarter rather than during each month, as was required under the prior rule. The OTS may impose monetary penalties on savings associations that fail to meet these liquidity requirements. As of December 31, 1997, Union Federal had liquid assets of $48.6 million, and a regulatory liquidity ratio of 49.4%. Pursuant to OTS capital regulations, savings associations must currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital) requirement, and a total risk-based capital to risk-weighted assets ratio of 8%. At December 31, 1997, Union Federal's tangible capital ratio was 22.7%, its core capital ratio was 22.7%, and its risk-based capital to risk-weighted assets ratio was 56.5%. Therefore, at December 31, 1997, Union Federal's capital levels exceeded all applicable regulatory capital requirements currently in effect. The following table provides the minimum regulatory capital requirements and Union Federal's capital ratios as of December 31, 1997:
At December 31, 1997 OTS Requirement Union Federal's Capital Level % of % of Amount Capital Standard Assets Amount Assets(1) Amount of Excess (Dollars in thousands) Tangible capital............ 1.5% $29,969 22.7% $1,981 $27,988 Core capital (2)............ 3.0 29,969 22.7 3,961 26,008 Risk-based capital.......... 8.0 30,221 56.5 4,279 25,942
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has proposed and is expected to adopt a core capital requirement for savings associations comparable to that recently adopted by the OCC for national banks. The new regulation, as proposed, would require at least 3% of total adjusted assets for savings associations that received the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. The final form of such new OTS core capital requirement may differ from that which has been proposed. Union Federal expects to be in compliance with such new requirements. See "Regulation -- Regulatory Capital." For definitions of tangible capital, core capital and risk-based capital, see "Regulation -- Savings Association Regulatory Capital." As of December 31, 1997, management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on Union Federal's liquidity, capital resources or results of operations. Current Accounting Issues In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, establishing standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock, such as the shares issuable under the proposed stock option plan, as well as any other entity that chooses to present EPS in its financial statements. This Statement simplifies the current standards of APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. It eliminates the presentation of primary EPS and requires presentation of basic EPS (the principal difference being that common stock equivalents are not considered in the computation of basic EPS). It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if the potential common shares were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to that of fully diluted EPS pursuant to Opinion No. 15. The adoption of SFAS No. 128 will not have a material impact on financial position or results of operations. The Statement is effective for the financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Statement requires restatement of all prior-period EPS data presented. In February 1997, the FASB issued SFAS No. 129, Disclosure of Information about Capital Structure, continuing the current requirements to disclose certain information about an entity's capital structure found in APB Opinion No. 10, Omnibus Opinion--1966, Opinion No. 15, and SFAS No. 47, Disclosure of Long-Term Obligations. It consolidates specific disclosure requirements from those standards. SFAS No. 129 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The adoption of SFAS No. 129 will not have a material impact on the Holding Company's financial position or results of operations. In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, establishing standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 will also require the (a) classification of items of other comprehensive income by their nature in a financial statement and (b) displaying of the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The adoption of SFAS No. 130 will not have a material impact on financial condition or results of operations. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, establishing standards for the way public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, but retains the requirement to report information about major customers. It amends SFAS No. 94, Consolidation of All Majority-Owned Subsidiaries, to remove the special disclosure requirements for previously unconsolidated subsidiaries. This Statement does not apply to nonpublic business enterprises or to not-for-profit organizations. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. This Statement requires that a public business enterprise report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets. It requires reconciliations of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to corresponding amounts in the enterprise's general-purpose financial statements. This Statement also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. This Statement need not be applied to interim financial statements in the initial year of its application, but comparative information for interim periods in the initial year of application is to be reported in financial statements for interim periods in the second year of application. The adoption of SFAS No. 131 will not have a material impact on financial condition or results of operations. Impact of Inflation The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The Holding Company's primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Holding Company's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of Union Federal's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that Union Federal has made. Union Federal is unable to determine the extent, if any, to which properties securing its loans have appreciated in dollar value due to inflation. Year 2000 Compliance Because computer memory was so expensive on early mainframe computers, some computer programs used only the final two digits for the year in the date field and assumed that the first two digits were "19." As a result, some computer applications may be unable to interpret the change from year 1999 to year 2000. The Holding Company is actively monitoring its year 2000 computer compliance issues. The bulk of the Holding Company's computer processing is provided under contract by On-Line Financial Services, Inc., Oak Brook, IL. ("On-Line") On-Line expects to be in year 2000 compliance by June 1999. The Holding Company's loan documentation system is provided by Banker's Systems and is also expected to be in year 2000 compliance within the next year. The Holding Company has also appointed the three executive officers to address all aspects of year 2000 compliance. The Holding Company's expense in connection with year 2000 compliance is not expected to be material to its overall financial condition. Item 7A. Quantitative and Qualitative Disclosures about Market Risks An important component of Union Federal's asset/liability management policy includes examining the interest rate sensitivity of its assets and liabilities and monitoring the expected effects of interest rate changes on its net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If Union Federal's assets mature or reprice more quickly or to a greater extent than its liabilities, Union Federal's net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. Conversely, if Union Federal's assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. Union Federal's policy has been to mitigate the interest rate risk inherent in the historical business of savings associations, the origination of long-term loans funded by short-term deposits, by pursuing certain strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. Because of the lack of customer demand for adjustable rate loans in its market area, Union Federal primarily originates fixed-rate real estate loans, which accounted for approximately 74.4% of its loan portfolio at December 31, 1997. To manage the interest rate risk of this type of loan portfolio, Union Federal limits maturities of fixed-rate loans to no more than 20 years. In addition, Union Federal continues to offer and attempts to increase its volume of adjustable rate loans when market interest rates make these type loans more attractive to customers. Management believes it is critical to manage the relationship between interest rates and the effect on Union Federal's net portfolio value ("NPV"). This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. Union Federal manages assets and liabilities within the context of the marketplace, regulatory limitations and within limits established by its Board of Directors on the amount of change in NPV which is acceptable given certain interest rate changes. The OTS issued a regulation, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this OTS regulation, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than a 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal does not meet either of these requirements, it is not required to file Schedule CMR, although it does so voluntarily. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal." The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. Presented below, as of December 31, 1997, is an analysis performed by the OTS of Union Federal's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 400 basis points. At December 31, 1997, 2% of the present value of Union Federal's assets was approximately $2.2 million. Because the interest rate risk of a 200 basis point increase in market rates (which was greater than the interest rate risk of a 200 basis point decrease) was $3.9 million at June 30, 1997, Union Federal would have been required to deduct $850,000 from its total capital available to calculate its risk based capital requirement if it had been subject to the OTS' reporting requirements under this methodology. Union Federal's exposure to interest rate risk results from the concentration of fixed rate mortgage loans in our portfolio. The following table sets forth Union Federal's interest rate sensitivity as measured by changes in NPV for instantaneous and sustained parallel shifts of 100 basis point increments in market interest rates as of December 31, 1997).
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change - - ------------------------------------------------------------------------------------------- (Dollars in thousands) + 400 bp * $24,383 $(8,362) (26)% 23.94% (555) bp + 300 bp 26,661 (6,084) (19)% 25.55% (394) bp + 200 bp 28,860 (3,885) (12)% 27.03% (246) bp + 100 bp 30,947 (1,799) (5)% 28.37% (111) bp 0 bp 32,746 29.49% - 100 bp 33,973 1,227 4 % 30.21% 73 bp - 200 bp 34,782 2,036 6 % 30.67% 118 bp - 300 bp 35,809 3,064 9 % 31.25% 177 bp - 400 bp 37,247 4,501 14 % 32.08% 259 bp
* Basis points (1 basis point equals .01%). This chart illustrates, for example, that a 200 basis point (or 2%) increase in interest rates would result in a $3.9 million (or 12%) decrease in the net portfolio value of Union Federal's assets. This hypothetical increase in interest rates would also result in a 246 basis point (or 2.46%) decrease in the ratio of the net portfolio value to the present value of Union Federal's assets. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Item 8. Financial Statements and Supplementary Data. Independent Auditor's Report Board of Directors Union Community Bancorp Crawfordsville, Indiana We have audited the accompanying consolidated balance sheet of Union Community Bancorp (formerly Union Federal Savings and Loan Association) and subsidiary as of December 31, 1997 and 1996 and the related consolidated statements of income, changes in retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Union Community Bancorp and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Geo. S. Olive & Co. LLC Indianapolis, Indiana February 20, 1998 UNION COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
December 31 1997 1996 - - ------------------------------------------------------------------------------------------- Assets Cash $ 22,424 $ 29,297 Short-term interest-bearing deposits 44,758,403 1,435,893 Total cash and cash equivalents 44,780,827 1,465,190 Investment securities held to maturity 5,820,069 5,747,347 Loans 78,687,999 72,856,009 Allowance for loan losses (252,258) (159,000) Net loans 78,435,741 72,697,009 Premises and equipment 367,360 371,364 Federal Home Loan Bank stock 707,700 580,100 Investment in limited partnership 1,176,109 1,333,909 Interest receivable Loans 440,641 385,530 Mortgage-backed securities 18,036 23,600 Other investment securities and interest-bearing deposits 122,849 44,474 Deferred income tax 38,674 75,424 Other assets 132,251 64,813 Total assets $ 132,040,257 $ 82,788,760 Liabilities Deposits Noninterest bearing $ 1,532,647 $ 321,523 Interest bearing 60,725,398 60,114,919 Total deposits 62,258,045 60,436,442 Stock subscriptions refundable 22,687,104 Federal Home Loan Bank advances 2,373,051 6,482,478 Note payable 1,200,042 1,397,892 Interest payable 118,867 91,452 Other liabilities 497,271 470,663 Total liabilities 89,134,380 68,878,927 Stockholders' Equity Preferred stock, without par value Authorized and unissued--2,000,000 shares Common stock, without par value Authorized--5,000,000 shares Issued and outstanding--3,041,750 shares 29,637,592 Retained earnings 15,108,285 13,909,833 Unearned employee stock ownership plan ("ESOP") shares (1,840,000) Total stockholders' equity 42,905,877 13,909,833 Total liabilities and stockholders' equity $ 132,040,257 $ 82,788,760
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Income
Year Ended December 31 1997 1996 1995 Interest and Dividend Income Loans $6,090,003 $5,561,735 $5,065,944 Investment securities Mortgage-backed securities 214,121 262,711 321,262 Other investment securities 196,937 175,332 227,154 Dividends on Federal Home Loan Bank stock 53,956 45,027 44,291 Deposits with financial institutions 245,927 66,886 70,575 Total interest and dividend income 6,800,944 6,111,691 5,729,226 Interest Expense Deposits 3,366,097 3,232,877 3,036,215 Stock subscription escrow accounts 130,411 Federal Home Loan Bank advances 339,258 190,800 111,569 Total interest expense 3,835,766 3,423,677 3,147,784 Net Interest Income 2,965,178 2,688,014 2,581,442 Provision for loan losses 165,000 48,000 24,000 Net Interest Income After Provision for Loan Losses 2,800,178 2,640,014 2,557,442 Other Income (Losses) Equity in losses of limited partnership (157,800) (172,552) (249,092) Other income 61,952 56,457 31,346 Total other losses (95,848) (116,095) (217,746) Other Expenses Salaries and employee benefits 479,726 460,615 480,770 Net occupancy expenses 39,159 39,103 65,698 Equipment expenses 22,436 19,886 20,460 Deposit insurance expense 31,482 494,679 127,053 Other expenses 388,519 287,654 328,184 Total other expenses 961,322 1,301,937 1,022,165 Income Before Income Tax 1,743,008 1,221,982 1,317,531 Income tax expense 544,556 336,286 326,018 Net Income $1,198,452 $ 885,696 $ 991,513
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Changes in Stockholders' Equity
Common Stock Shares Retained Unearned Outstanding Amount Earnings ESOP Shares Total Balances, January 1, 1995 $12,032,624 $12,032,624 Net income for 1995 991,513 991,513 Balances, December 31, 1995 13,024,137 13,024,137 Net income for 1996 885,696 885,696 Balances, December 31, 1996 13,909,833 13,909,833 Net income for 1997 1,198,452 1,198,452 Common stock issued in conversion, net of costs 3,041,750 $29,637,592 29,637,592 Contribution for unearned ESOP shares $(1,840,000) (1,840,000) Balances, December 31, 1997 3,041,750 $29,637,592 $15,108,285 $(1,840,000) $42,905,877
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Cash Flows
Year Ended December 31 1997 1996 1995 Operating Activities Net income $ 1,198,452 $ 885,696 $ 991,513 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 165,000 48,000 24,000 Depreciation 27,335 25,913 25,005 Deferred income tax 36,750 (13,910) 40,462 Investment securities accretion, net (11,677) (6,181) (812) Gains on sale of foreclosed real estate (5,565) Equity in losses of limited partnership 157,800 172,552 249,092 Net change in Interest receivable (127,922) (83,459) (103,132) Interest payable 27,415 (1,964) 12,260 Other assets (21,878) (24,199) 59,003 Other liabilities (78,749) 85,879 (137,157) Net cash provided by operating activities 1,366,961 1,088,327 1,160,234 Investing Activities Investment securities Purchases of investment securities held to maturity (1,200,000) (994,342) (100,000) Proceeds from maturities and paydowns of mortgage-backed securities held to maturity 638,955 675,913 663,446 Proceeds from maturities of investment securities held to maturity 500,000 2,000,000 Net change in loans (6,017,272) (11,466,414) (1,243,891) Purchases of premises and equipment (23,331) (2,602) (38,381) Proceeds on sale of foreclose real estate 73,546 Purchase of Federal Home Loan Bank of Indianapolis stock (127,600) (17,500) (1,000) Net cash used by investing activities (6,155,702) (9,804,945) (719,826) Financing Activities Net change in Interest-bearing demand and savings deposits 2,695,812 1,243,027 (1,375,313) Certificates of deposit (874,209) 1,786,193 3,896,285 Stock subscription escrow accounts 22,687,104 Proceeds from borrowings 1,500,000 10,500,000 2,500,000 Repayment of borrowings (5,807,277) (5,261,331) (4,801,291) Net change in advances by borrowers for taxes and insurance 19,981 (79,558) 4,201 Proceeds from sale of common stock, net of costs 27,882,967 Net cash provided by financing activities 48,104,378 8,188,331 223,882 Net Increase (Decrease) in Cash and Cash Equivalents 43,315,637 (528,287) 664,290 Cash and Cash Equivalents, Beginning of Year 1,465,190 1,993,477 1,329,187 Cash and Cash Equivalents, End of Year $44,780,827 $1,465,190 $1,993,477 Additional Cash Flows Information Interest paid $3,808,351 $3,425,641 $3,135,524 Income tax paid 527,433 375,405 227,747 Stock issuance costs included in other liabilities 85,375 Common stock issued to ESOP leveraged with an employer loan 1,840,000 Loans transferred to foreclosed real estate 163,540
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Union Community Bancorp ("Company") and its wholly owned subsidiary, Union Federal Savings and Loan Association ("Association") and the Association's wholly owned subsidiary, UFS Service Corp. ("UFS"), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Association. The Association operates under a federal thrift charter and provides full banking services. As a federally chartered thrift, the Association is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Association generates mortgage and consumer loans and receives deposits from customers located primarily in Montgomery County, Indiana and surrounding counties. The Association's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. UFS invests in a low income housing partnership. Consolidation--The consolidated financial statements include the accounts of the Company, the Association and UFS after elimination of all material intercompany transactions. Investment Securities--Debt securities are classified as held to maturity when the Association has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Association will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Association considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1997 and 1996, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Association operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets which range from 5 to 31.5 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank ("FHLB") system. The required investment in the common stock is based on a predetermined formula. Investment in limited partnership is recorded using the equity method of accounting. Losses due to impairment are recorded when it is determined that the investment no longer has the ability to recover its carrying amount. The benefits of low income housing tax credits associated with the investment are accrued when earned. Foreclosed real estate is carried at the lower of cost or fair value less estimated selling costs. When foreclosed real estate is acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiary. Earnings per share will be computed based upon the weighted average common and common equivalent shares outstanding during the period subsequent to the Association's conversion to a stock savings and loan association on December 29, 1997. Net income per share for the periods before the conversion, is not meaningful. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Conversion On December 29, 1997, the Association completed the conversion from a federally chartered mutual institution to a federally chartered stock savings and loan association and the formation of the Company as the holding company of the Association. As part of the conversion, the Company issued 3,041,750 shares of common stock at $10 per share. Net proceeds of the Company's stock issuance, after costs of $779,908 and excluding the shares issued for the ESOP, were $27,797,592, of which $14,861,484 was used to acquire 100% of the stock and ownership of the Association. The transaction was accounted for at historical cost in a manner similar to that utilized in a pooling of interests. - - - Investment Securities Held to Maturity
1997 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value U.S. Treasury $ 350 $ 350 Federal agencies 3,346 $ 8 $3 3,351 Mortgage-backed securities 2,124 183 5 2,302 Total investment securities $5,820 $191 $8 $6,003
1996 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value U.S. Treasury $ 350 $ 2 $ 348 Federal agencies 2,645 $ 1 35 2,611 Mortgage-backed securities 2,752 186 5 2,933 Total investment securities $5,747 $187 $42 $5,892
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The amortized cost and fair value of securities held to maturity at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 1997 Amortized Fair December 31 Cost Value Within one year $1,400 $1,398 One to five years 2,296 2,303 3,696 3,701 Mortgage-backed securities 2,124 2,302 Totals $5,820 $6,003 Securities with a carrying value of $2,194,000 and $2,832,000 were pledged at December 31, 1997 and 1996 to secure FHLB advances. Mortgage-backed securities included in investment securities held to maturity above consist of the following:
1997 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value Government National Mortgage Corporation $1,223 $125 $1,348 Federal Home Loan Mortgage Corporation 635 56 691 Federal National Mortgage Corporation 243 2 $5 240 Other 23 23 Total mortgage-backed securities $2,124 $183 $5 $2,302
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands)
1996 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value Government National Mortgage Corporation $1,391 $120 $1,511 Federal Home Loan Mortgage Corporation 1,039 64 1,103 Federal National Mortgage Corporation 294 2 $5 291 Other 28 28 Total mortgage-backed securities $2,752 $186 $5 $2,933
- - - Loans and Allowance
December 31 1997 1996 Real estate mortgage loans One-to-four family $62,436 $57,031 Multi-family 10,197 10,920 Commercial 3,627 3,593 Real estate construction loans 2,530 1,322 Individuals' loans for household and other personal expenditures 223 346 79,013 73,212 Deferred loan fees (325) (356) Total loans $78,688 $72,856
Year Ended December 31 1997 1996 1995 Allowance for loan losses Balances, Beginning of Period $159 $111 $ 87 Provision for losses 165 48 24 Loans charged off (72) Balances, End of Period $252 $159 $111 UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) At December 31, 1997, the Association had no impaired loans. At December 31, 1996, the Association had an impaired loan of $112,000 and had recorded an allowance for losses of $37,000. The average balance of impaired loans for the years ended December 31, 1997 and 1996 was $33,000 and $110,000. The Association had no interest income or cash receipts of interest on impaired loans during the years ended December 31, 1997 and 1996. The Association has no loans that were impaired during 1995. In addition, at December 31, 1997, 1996 and 1995, the Association had nonaccrual loans of $52,000, $377,000 and $156,000, for which impairment had not been recognized. If interest on these loans had been recognized at the original interest rates, interest income would have increased approximately $1,000, $14,000 and $3,000 for the years ended December 31, 1997, 1996 and 1995. The Association has no commitments to loan additional funds to the borrowers of impaired or nonaccrual loans. The Association has entered into transactions with certain directors and officers and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties was as follows: Balances, January 1, 1997 $1,528 New loans, including renewals 1,291 Payments, etc. including renewals (461) Balances, December 31, 1997 $2,358 - - - Premises and Equipment December 31 1997 1996 Land $146 $146 Buildings 553 538 Equipment 142 134 Total cost 841 818 Accumulated depreciation (474) (447) Net $367 $371 UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Investment in Limited Partnership The investment in limited partnership of $1,176,000 and $1,334,000 at December 31, 1997 and 1996 represents a 99 percent equity in Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and operate a 48-unit apartment complex. In addition to recording its equity in the losses of Pedcor, the Company has recorded the benefit of low income housing tax credits of $178,000 for the years ended December 31, 1997, 1996 and 1995. Condensed financial statements for Pedcor are as follows: December 31 1997 1996 Condensed statement of financial condition Assets Cash $ 5 $ 29 Land and property 2,292 2,350 Other assets 55 30 Total assets $2,352 $2,409 Liabilities Notes payable--Association $ 873 $ 982 Notes payable--other 1,274 1,290 Other liabilities 165 173 Total liabilities 2,312 2,445 Partners' equity 40 (36) Total liabilities and partners' equity $2,352 $2,409 Year Ended December 31 1997 1996 1995 Condensed statement of operations Total revenue $219 $219 $222 Total expenses 340 435 454 Net loss $(121) $(216) $(232) UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Deposits December 31 1997 1996 Noninterest-bearing demand $ 1,533 $ 322 Interest-bearing demand 9,965 9,192 Savings deposits 4,579 3,867 Certificates and other time deposits of $100,000 or more 7,060 7,056 Other certificates and time deposits 39,121 39,999 Total deposits $62,258 $60,436 Certificates and other time deposits maturing in years ending December 31 1998 $27,369 1999 13,254 2000 3,703 2001 774 2002 1,081 v $46,181 The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $7,060,000 and $7,056,000 at December 31, 1997 and 1996. Deposits in excess of $100,000 are not federally insured. Year Ended December 31 1997 1996 1995 Interest expense on deposits Interest-bearing demand $ 444 $ 369 $ 385 Savings deposits 159 148 146 Certificates 2,763 2,716 2,505 $3,366 $3,233 $3,036 UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Federal Home Loan Bank Advances 1997 Weighted Average December 31 Amount Rate Advances from FHLB Maturities in years ending 1998 $1,601 5.71% 1999 114 5.33 2000 123 5.49 2001 129 5.67 2002 138 5.80 2003 147 5.90 2004 121 6.03 $2,373 5.71% The FHLB advances are secured by first-mortgage loans and investment securities totaling $62,517,000 and $57,954,000 at December 31, 1997 and 1996. Advances are subject to restrictions or penalties in the event of prepayment. - - - Note Payable The note payable to Pedcor dated February 1, 1994 in the original amount of $1,809,792 bears no interest so long as there exists no event of default. In the instances where an event of default has occurred, interest shall be calculated at a rate equal to the lesser of 14% per annum or the highest amount permitted by applicable law. December 31 1997 Note payable to Pedcor Maturities in years ending: 1998 $ 179 1999 184 2000 183 2001 177 2002 174 Thereafter 303 $1,200 The Association has an available line of credit with the FHLB totaling $1,000,000. The line of credit expires September 16,1998 and bears interest at a rate equal to the current variable advance rate. There were no drawings on this line of credit at December 31, 1997. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Income Tax Year Ended December 31 1997 1996 1995 Income tax expense Currently payable Federal $353 $246 $184 State 155 104 102 Deferred Federal 37 (20) 32 State 6 8 Total income tax expense $545 $336 $326 Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $593 $415 $448 Effect of state income taxes 102 73 73 Tax credits (178) (178) (178) Other 28 26 (17) Actual tax expense $545 $336 $326 Effective tax rate 31.2% 27.5% 24.7% The components of the cumulative net deferred tax asset are as follows: December 31 1997 1996 Assets Allowance for loan losses $92 $49 Loan fees 37 66 Business income tax credits 29 68 Other 2 13 Total assets 160 196 Liabilities Depreciation 26 28 State income tax 2 2 FHLB stock dividend 23 23 Equity in partnership losses 70 67 Total liabilities 121 120 $39 $76 UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) At December 31, 1997 and 1996, the Association had an unused business income tax credit carryforward of $29,000 and $68,000 expiring in 2011. Retained earnings at December 31, 1997 and 1996 include approximately $2,632,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $1,043,000 at December 31, 1997 and 1996. - - - Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Association uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet. Financial instruments whose contract amount represents credit risk were as follows: December 31 1997 1996 Mortgage and consumer loan commitments At variable rates $ 773 $ 107 At fixed rates ranging from 7.13 to 8.25% for 1997 and 2,136 7.38 to 9.25% for 1996 697 Standby letters of credit 2,014 1,500 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Association evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Association upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Association to guarantee the performance of a customer to a third party. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Association has entered into an employment agreement with the president which provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreements, these payments could occur in the event of a change in control of the Association, as defined, along with other specific conditions. The contingent liability under these agreements in the event of a change in control is approximately $300,000. The Association is not required to pay any amounts under these agreements which cannot be deducted for federal income tax purposes. The Company, Association and UFS are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. - - - Dividend and Capital Restrictions The Company is not subject to any regulatory restrictions on the payment of dividends to its stockholders. The OTS regulations provide that savings associations which meet fully phased-in capital requirements and are subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to the OTS. OTS regulations also prohibit a savings association from declaring or paying any dividends if, as a result, the regulatory capital of the Association would be reduced below the minimum amount required to be maintained for the liquidation account established in connection with the conversion. Any additional amount of capital distributions would require prior regulatory approval. Savings associations failing to meet current capital standards may only pay dividends with supervisory approval. At the time of conversion, a liquidation account was established in an amount equal to the Association's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Association after conversion. In the event of a complete liquidation, and only in such event, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $14,472,934. At December 31, 1997, the stockholder's equity of the Association was $29,969,000, of which approximately $13,004,000 was available for the payment of dividends. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Regulatory Capital The Association is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 1997 and 1996, the Association is categorized as well capitalized and meets all subject capital adequacy requirements. There are no conditions or events since December 31, 1997 that management believes have changed the Association's classification. The Association's actual and required capital amounts and ratios are as follows:
1997 Required for To Be Well Actual Adequate Capital (1) Capitalized (1) December 31 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital 1 (to risk weighted assets) $30,221 56.5% $4,279 8.0% $5,349 10.0% Core capital 1 (to adjusted tangible assets) 29,969 22.7 3,961 3.0 7,922 6.0 Core capital 1 (to adjusted total assets) 29,969 22.7 3,961 3.0 6,602 5.0
1 As defined by regulatory agencies
1996 Required for To Be Well Actual Adequate Capital (1) Capitalized (1) December 31 Amount Ratio Amount Ratio Amount Ratio Total risk-based capital 1 (to risk weighted assets) $14,069 33.6% $3,346 8.0% $4,183 10.0% Core capital 1 (to adjusted tangible assets) 13,910 16.8 2,484 3.0 4,967 6.0 Core capital 1 (to adjusted total assets) 13,910 16.8 2,484 3.0 4,139 5.0
1 As defined by regulatory agencies The Association's tangible capital at December 31, 1997 and 1996 was $29,629,000 and $13,910,000, which amount was 22.7% and 16.8% of tangible assets and exceeded the required ratio of 1.5%. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Employee Benefit Plans The Company provides pension benefits for substantially all of its employees, and is a participant in a pension fund known as the Pentegra Group (formerly known as the Financial Institutions Retirement Fund). This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. Pension expense (benefit) was $(4,000), $47,000 and $53,000 for 1997, 1996, 1995. The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The Company matches employees' contributions at the rate of 50% for the first 5% of base salary contributed by participants. The Company's expense for the plan was $11,000, $10,000 and $11,000 for 1997, 1996, and 1995. As part of the conversion in 1997, the Company established an ESOP covering substantially all employees of the Company and Association. The ESOP acquired 184,000 shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $1,840,000 of common stock acquired by the ESOP is shown as a reduction of stockholders' equity. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which will be distributed to participants, are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Association, are made to the ESOP. There was no expense under the ESOP for the year ended December 31, 1997. At December 31, 1997, the ESOP had no allocated shares, 184,000 suspense shares and no committed-to-be released shares. In connection with the conversion, the Board of Directors approved a Stock Option Plan and a Recognition and Retention Plan ("RRP"). The Plans are subject to stockholder's approval. Under the stock option plan, stock options covering shares representing an aggregate of up to 10% of the common stock issued in the conversion may be granted to directors and executive officers. Restricted stock awards covering up to 4% of the common stock issued in the conversion may be awarded to directors and executive officers under the RRP. - - - Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Investment Securities--Fair values are based on quoted market prices. Loans--The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Interest Receivable/Payable--The fair value of accrued interest receivable/payable approximates carrying values. Deposits--Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Stock Subscriptions Refundable and Advance Payments by Borrowers for Taxes and Insurance--The fair value approximates carrying value. Federal Home Loan Bank Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Note Payable--Limited Partnership--The fair value of the borrowing is estimated using a discounted cash flow calculation, based on current rates for similar debt. Off-Balance Sheet Commitments--Commitments include commitments to originate mortgage and consumer loans, and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The estimated fair values of the Company's financial instruments are as follows:
1997 1996 Carrying Fair Carrying Fair December 31 Amount Value Amount Value Assets Cash and cash equivalents $44,781 $44,781 $1,465 $1,465 Investment securities held to maturity 5,820 6,003 5,747 5,892 Loans, net 78,436 79,611 72,697 73,220 Stock in FHLB 708 708 580 580 Interest receivable 582 582 454 454 Liabilities Deposits 62,258 62,476 60,436 60,683 Stock subscriptions refundable 22,687 22,687 Borrowings FHLB advances 2,373 2,345 6,482 6,587 Notes payable--limited partnership 1,200 1,170 1,398 1,343 Interest payable 119 119 91 91 Advances by borrowers for taxes and insurance 221 221 201 201
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) - - - Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheet December 31 1997 Assets Cash $13,022 Investment in subsidiary 29,927 Total assets $42,949 Liability--other $ 43 Stockholders' Equity 42,906 Total liabilities and stockholders' equity $42,949 Condensed Statement of Income Year Ended December 31 1997 Net Income--equity in undistributed income of subsidiaries $ 7 UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Condensed Statement of Cash Flows December 31 1997 Operating Activities Net income $ 7 Adjustments to reconcile net income to net cash provided by operating activities (7) Net cash provided by operating activities 0 Financing Activities Net proceeds from issuance of stock 27,883 Capital contribution to Association (14,861) Net cash provided by financing activities 13,022 Net Change in Cash 13,022 Cash at Beginning of Year 0 Cash at End of Year $13,022 Additional Cash Flow and Supplementary Information Common stock issued to ESOP leveraged with an employee loan $1,840 Stock issuance cost included in other liabilities 43 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 concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. Section 16(a) of the Securities Exchange Act of 1934 ("1934 Act") requires that the Holding Company's officers and directors and persons who own more than 10% of the Holding Company's Common Stock file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish the Holding Company with copies of all Section 16(a) forms that they file. Based solely on the Holding Company's review of the copies of such forms received by it, and/or written representations from certain reporting persons that no Forms 5 were required for those persons, the Holding Company believes that during the fiscal year ended December 31, 1997, all filing requirements applicable to its officers, directors and greater than 10% beneficial owners with respect to Section 16(a) of the 1934 Act were complied with. Presented below is certain information concerning the directors of the Holding Company:
Director of Director of Position Position Holding Company Union Federal Expiration with Holding with Director Since Since of Term Company Union Federal Philip L. Boots 1997 1991 1998 Director Director Marvin L. Burkett 1997 1975 1999 Director Director Phillip E. Grush 1997 1982 1999 Director Director, Vice Chairman of the Board and Vice President Samuel H. Hildebrand 1997 1995 2000 Director Director John M. Horner 1997 1979 1998 Director Director, Chairman of the Board and Vice President Harry A. Siamas 1997 1994 2000 Director Director Joseph E. Timmons 1997 1973 1999 Director, Director, President and President and Chief Executive Chief Executive Officer Officer
Presented below is certain information concerning the directors of Union Federal: Philip L. Boots (age 51) has served since 1985 as President of Boots Brothers Oil Company, Inc., a petroleum marketer that operates gasoline outlets, convenience grocery stores and car washes in the Crawfordsville area. Marvin L. Burkett (age 70) has worked as a self-employed farmer in Montgomery County since 1956. He currently is semi-retired from farming. Phillip E. Grush (age 66) worked as a self-employed optometrist in Crawfordsville from 1960 until September, 1996 when he sold his practice. He currently works for Dr. Michael Scheidler in Crawfordsville as a full-time employee/consultant. Samuel H. Hildebrand, II (age 58) was Executive Vice President of Atapco Custom Products Division, a manufacturer of custom decorated looseleaf ring binders in Crawfordsville from 1987-1995. Since 1995, he has served as President of Village Traditions, Inc., a home builder located in Crawfordsville. John M. Horner (age 61) has served as the president of Horner Pontiac Buick, Inc. in Crawfordsville since 1974. Harry A. Siamas (age 47) has practiced law in Crawfordsville since 1976 and has served as Union Federal's attorney for 18 years. Joseph E. Timmons (age 63) has served as President and Chief Executive Officer of Union Federal since 1974 and of UFS Service Corp. since its inception in 1994. He has been an employee of Union Federal since 1954. Union Federal also has a director emeritus program pursuant to which its former directors may continue to serve as advisors to the Board of Directors upon their retirement or resignation from the Board. Currently, Lester B. Sommer serves as a director emeritus. Mr. Sommer receives the same directors' fees as the other directors of Union Federal. Item 11. Executive Compensation. No cash compensation is paid directly by the Holding Company to any of its executive officers. Each of such officers is compensated by Union Federal. The following table sets forth information as to annual, long-term and other compensation for services in all capacities paid to Union Federal's President and Chief Executive Officer for the fiscal year ended December 31, 1997. Other than Mr. Timmons, Union Federal had no other executive officers who earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table Annual Compensation Name and Principal Fiscal Other Annual All Other Position Year Salary Bonus Compensation (1) Compensation Joseph E. Timmons, President 1997 $108,300 (1)(2) $25,000 -- -- and Chief Executive Officer
(1) Mr. Timmons received certain perquisites, but the incremental cost of providing such perquisites did not exceed the lesser of $50,000 or 10% of his salary and bonus. (2) This column includes $8,300 directors fees paid to Mr. Timmons. Employment Contract Union Federal has entered into a three-year employment contract with Mr. Timmons. The contract with Mr. Timmons, which became effective as of the effective date of the Conversion, extends annually for an additional one-year term to maintain its three-year term if Union Federal's Board of Directors determines to so extend it, unless notice not to extend is properly given by either party to the contract. Mr. Timmons receives an initial salary under the contract equal to his current salary subject to increases approved by the Board of Directors. The contract also provides, among other things, for participation in other fringe benefits and benefit plans available to Union Federal's employees. Mr. Timmons may terminate his employment upon 60 days' written notice to Union Federal. Union Federal may discharge Mr. Timmons for cause (as defined in the contract) at any time or in certain specified events. If Union Federal terminates Mr. Timmons' employment for other than cause or if Mr. Timmons terminates his own employment for cause (as defined in the contract), Mr. Timmons will receive his base compensation under the contract for an additional three years if the termination follows a change of control in the Holding Company, and for the balance of the contract if the termination does not follow a change in control. In addition, during such period, Mr. Timmons will continue to participate in Union Federal's group insurance plans and retirement plans, or receive comparable benefits. Moreover, within a period of three months after such termination following a change of control, Mr. Timmons will have the right to cause Union Federal to purchase any stock options he holds for a price equal to the fair market value (as defined in the contract) of the shares subject to such options minus their option price. If the payments provided for in the contract, together with any other payments made to Mr. Timmons by Union Federal, are deemed to be payments in violation of the "golden parachute" rules of the Code, such payments will be reduced to the largest amount which would not cause Union Federal to lose a tax deduction for such payments under those rules. As of the date hereof, the cash compensation which would be paid under the contract to Mr. Timmons if the contract were terminated either after a change of control of the Holding Company, without cause by Union Federal, or for cause by Mr. Timmons, would be $300,000. For purposes of this employment contract, a change of control of the Holding Company is generally an acquisition of control, as defined in regulations issued under the Change in Bank Control Act and the Savings and Loan Holding Company Act. The employment contract protects Union Federal's confidential business information and protects Union Federal from competition by Mr. Timmons should he voluntarily terminate his employment without cause or be terminated by Union Federal for cause. Compensation of Directors Union Federal pays its directors and director emeritus a monthly retainer of $250 plus $300 for each month in which they attend one or more meetings. Total fees paid to Union Federal's directors and advisory directors for the year ended December 31, 1997 were approximately $64,000. Beginning in July, 1997, Union Federal began paying its directors a monthly retainer of $500 plus $250 for each monthly meeting attended. Directors of the Holding Company and UFS are not currently paid directors' fees. The Holding Company may, if it believes it is necessary to attract qualified directors or is otherwise beneficial to the Holding Company, adopt a policy of paying directors' fees. Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of March 20, 1998, by each person who is known by the Holding Company to own beneficially 5% or more of the Common Stock. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. Number of Shares Name and Address of Common Stock Percent of of Beneficial Owner(1) Beneficially Owned Class ---------------------- ------------------ ----- Home Federal Savings Bank 184,000(2) 6.05% 501 Washington Street Columbus, IN 47201 (1) The information in this chart is based on Schedule 13D and 13G Report(s) filed by the above-listed person(s) with the SEC containing information concerning shares held by them. It does not reflect any changes in those shareholdings which may have occurred since the date of such filings. (2) These shares are held by the Trustee of the Union Community Bancorp ESOP. The Employees participating in the ESOP are entitled to instruct the Trustee how to vote shares held in their accounts under the ESOP. Unallocated shares held in a suspense account under the ESOP are required to be voted by the Trustee in the same proportion as allocated shares are voted. The following table sets forth certain information regarding the nominees for the position of director of the Holding Company, including the number and percent of shares of Common Stock beneficially owned by such persons as of March 20, 1998. Unless otherwise indicated, each nominee has sole investment and/or voting power with respect to the shares shown as beneficially owned by him. The table also sets forth the number of shares of Holding Company Common Stock beneficially owned by all directors and executive officers of the Holding Company as a group.
Common Stock Expiration of Director of the Beneficially Term as Holding Owned as of Percentage Name Director Company Since March 20, 1998 of Class(1) - - ------------------------------------ ------------- ----------------------- Philip Boots 1998 1997 12,100 (2) (3) .40% Marvin L. Burkett 1999 1997 6,000 (2) .20 Phillip E. Grush 1999 1997 15,550 (2) .51 Samuel H. Hildebrand 2000 1997 16,418 (2) .54 John M. Horner 1998 1997 22,500 (2) (3) (4) .74 Harry A. Siamas 2000 1997 11,300 (4) (5) .37 Joseph E. Timmons 1999 1997 30,417 (2) 1.00 All directors and executive officers as a group (9 persons) 119,773 3.94%
footnotes on following page. (1) Based upon information furnished by the respective director nominees. Under applicable regulations, shares are deemed to be beneficially owned by a person if he or she directly or indirectly has or shares the power to vote or dispose of the shares, whether or not he or she has any economic power with respect to the shares. Includes shares beneficially owned by members of the immediate families of the directors residing in their homes. (2) Includes shares owned by director and his spouse. (3) Includes shares owned by a company deemed to be controlled by director. (4) Includes shares held by spouse of director as custodian for a minor. (5) Includes shares held jointly by director and his aunt. Item 13. Certain Relationships and Related Transactions. Union Federal has followed a policy of offering to its directors, officers, and employees real estate mortgage loans secured by their principal residence as well as other loans. All of Union Federal's loans to its directors, officers and employees are made on substantially the same terms, including interest rates and collateral as those prevailing at the time for comparable transactions, and do not involve more than minimal risk of collectibility. Loans to directors, executive officers and their associates totaled approximately $2.4 million, or approximately 5.5% of consolidated shareholders' equity at December 31, 1997. Current law authorizes Union Federal to make loans or extensions of credit to its executive officers, directors, and principal shareholders on the same terms that are available with respect to loans made to all of its employees. At present, Union Federal's loans to executive officers, directors, principal shareholders and employees are made on the same terms generally available to the public. Union Federal may in the future, however, adopt a program under which it may waive loan application fees and closing costs with respect to loans made to such persons. Loans made to a director or executive officer in excess of the greater of $25,000 or 5% of its capital and surplus (up to a maximum of $500,000) must be approved in advance by a majority of the disinterested members of the Board of Directors. Union Federal's policy regarding loans to directors and all employees meets the requirements of current law. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List the following documents filed as part of the report: Financial Statements Consolidated Balance Sheet at December 31, 1997, and 1996 Consolidated Statement of Income for the Years Ended December 31, 1997, 1996, and 1995 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended December 31, 1997, 1996, and 1995. Consolidated Statement of Cash Flows for the Years Ended December 31, 1997, 1996, and 1995 Notes to Consolidated Financial Statements (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 1997. (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 31, 1998 By: /s/ Joseph E. Timmons Joseph E. Timmons, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 31st day of March, 1998. Signatures Title Date (1) Principal Executive Officer: /s/ Joseph E. Timmons ) Joseph E. Timmons President and ) Chief Executive Officer) ) ) (2) Principal Financial and Accounting ) Officer: ) ) ) /s/ Denise E. Swearingen Treasurer ) Denise E. Swearingen ) ) )March 31, 1998 ) (3) The Board of Directors: ) ) ) /s/ Philip L. Boots Director ) Philip L. Boots ) ) ) /s/ Marvin L. Burkett Director ) Marvin L. Burkett ) ) ) /s/ Phillip E. Grush Director ) Phillip E. Grush ) ) ) /s/ Samuel H. Hillenbrand ) Samuel H. Hillenbrand Director ) ) ) /s/ John M. Horner Director ) John M. Horner ) ) )March 31, 1998 /s/ Harry A. Siamas Director ) Harry A. Siamas ) ) ) /s/ Joseph E. Timmons Director ) Joseph E. Timmons ) ) EXHIBIT INDEX Exhibit No. Description 3(1) Registrant's Articles of Incorporation are incorporated by reference to to Exhibit 3(1) to the Registration Statement (2) Registrant's Code of By-Laws is incorporated by reference to to Exhibit 3(2) to the Registration Statement 10(4) Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement (5) Employment Agreement between Union Federal Savings and Loan Association and Joseph E. Timmons incorporated by reference to to Exhibit 10(5) to the Registration Statement (6) Exempt Loan and Share Purchase Agreement between Trust under Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement and Union Community Bancorp 21 Subsidiaries of the Registrant 27 Financial Data Schedule (filed electronically) EX-10.4 2 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1997) UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1997) TABLE OF CONTENTS Page ARTICLE I DEFINITIONS.......................................................1 Section 1.1. Accrued Company Contributions Benefit........1 Section 1.2. Act..........................................1 Section 1.3. Anniversary Date.............................1 Section 1.4. Annual Addition..............................1 Section 1.5. Bank.........................................1 Section 1.6. Beneficiary..................................2 Section 1.7. Code.........................................2 Section 1.8. Committee....................................2 Section 1.9. Company......................................2 Section 1.10. Company Contributions Account................2 Section 1.11. Compensation.................................2 Section 1.12. Date of Employment...........................3 Section 1.13. Date of Separation...........................3 Section 1.14. Deferred Retirement..........................3 Section 1.15. Deferred Retirement Date.....................3 Section 1.16. Defined Benefit Fraction.....................3 Section 1.17. Defined Contribution Fraction................3 Section 1.18. Effective Date...............................4 Section 1.19. Employee.....................................4 Section 1.20. Exempt Loan..................................4 Section 1.21. Fund.........................................4 Section 1.22. Highly Compensated Employee..................4 Section 1.23. Holding Company..............................5 Section 1.24. Hour of Service..............................5 Section 1.25. Leave of Absence.............................6 Section 1.26. Normal Retirement............................6 Section 1.27. Normal Retirement Date.......................6 Section 1.28. One Year Service Break.......................6 Section 1.29. Participant..................................6 Section 1.30. Period of Separation.........................6 Section 1.31. Period of Service............................6 -i- Section 1.32. Period of Severance..........................7 Section 1.33. Plan.........................................7 Section 1.34. Plan Year....................................7 Section 1.35. Re-employed Individual.......................7 Section 1.36. Section 415 Compensation.....................8 Section 1.37. Stock........................................9 Section 1.38. Top Paid Group...............................9 Section 1.39. Total Disability............................10 Section 1.40. Trust.......................................10 Section 1.41. Trustee.....................................10 Section 1.42. Valuation Date..............................10 Section 1.43. Year of Service.............................10 ARTICLE II ELIGIBILITY AND PARTICIPATION........................11 Section 2.1. Eligibility.................................11 Section 2.2. Entry Dates.................................11 Section 2.3. Certification by Company....................11 Section 2.4. Deferred Retirement.........................11 ARTICLE III COMPANY CONTRIBUTIONS................................11 Section 3.1. Company Contributions.......................11 Section 3.2. Form of Contributions.......................12 Section 3.3. Holding by Trustee..........................12 Section 3.4. Expenses....................................12 Section 3.5. No Company Liability for Benefits. .........12 Section 3.6. No Rollover Contributions...................12 ARTICLE IV ALLOCATION TO PARTICIPANTS' ACCOUNTS.................12 Section 4.1. Company Contributions Accounts..............12 Section 4.2. Allocation of Company Contributions.........12 Section 4.3. Limitations on Annual Additions.............13 Clause (a). Basic Limitations...................13 Clause (b). Participation in Other Plans........13 Section 4.4. Effective Date of Allocations...............14 Section 4.5. Cash Dividends..............................14 Section 4.6. Allocation of Forfeitures...................14 Section 4.7. Special Allocation Rules....................14 Section 4.8. Rehire after Military Service...............16 ARTICLE V VALUATIONS AND ADJUSTMENTS...........................16 Section 5.1. Valuation of Fund...........................16 Clause (a). Valuations..........................16 Clause (b). Frequency...........................16 -ii- Clause (c). Records...............................16 Section 5.2. Adjustments...................................17 Section 5.3. Amount of Adjustments.........................17 Section 5.4. Effective Date of Adjustments.................17 Section 5.5. Notice to Participants........................17 ARTICLE VI BENEFITS...........................................17 Part A. Retirement Benefits................................17 Section 6.1. Retirement................................17 Part B. Termination Benefits...............................18 Section 6.2. Effect of Termination.....................18 Section 6.3. Vesting...................................18 Section 6.4. Payment...................................19 Part C. Death Benefits.....................................19 Section 6.5. Benefits upon Death.......................19 Section 6.6. Beneficiaries.............................19 Section 6.7. Lack of Beneficiaries.....................19 Section 6.8. Termination or Retirement prior to Death..20 Part D. General............................................20 Section 6.9. Date of Distribution......................20 Section 6.10. Form of Distribution......................20 Section 6.11. Liability.................................21 Section 6.12. Right of First Refusal....................21 Section 6.13. Put Options...............................21 Section 6.14. Eligible Rollover Distributions...........22 ARTICLE VII ADMINISTRATIVE COMMITTEE...........................23 Section 7.1. Establishment.............................23 Section 7.2. Duties....................................23 Section 7.3. Actions...................................23 Section 7.4. Disqualification..........................23 Section 7.5. Powers....................................24 Section 7.6. Discrimination Prohibited.................24 Section 7.7. Statements and Forms......................24 Section 7.8. Liability.................................24 Section 7.9. Determination of Right to Benefits........24 Section 7.10. Investment Directions.....................25 Section 7.11. Voting Power..............................25 ARTICLE VIII THE TRUSTEE........................................25 Section 8.1. Assets Held in Trust......................25 Section 8.2. Investments...............................25 Section 8.3. Directions of Committee...................25 -iii- Section 8.4. Receipt of Additional Shares.................26 Section 8.5. Delivery of Materials to Committee...........26 Section 8.6. Powers.......................................26 Section 8.7. Loans to the Trust...........................27 Clause (a). Interest.............................27 Clause (b). Use of Proceeds......................27 Clause (c). Terms of Exempt Loan.................28 Clause (d). Collateral...........................28 Clause (e). Limited Recourse.....................28 Clause (f). Repayment............................28 Clause (g). Agreement by Companies...............28 Clause (h). Release of Collateral................28 Clause (i). Default..............................29 Clause (j). Termination of Plan..................29 Section 8.8. Annual Accounting............................29 Section 8.9. Audit........................................29 Section 8.10. Uncertainty Concerning Payment of Benefits...30 Section 8.11. Compensation.................................30 Section 8.12. Standard of Care.............................30 Section 8.13. Request for Instructions.....................30 Section 8.14. Resignation of Trustee.......................30 Section 8.15. Vacancies in Trusteeship.....................31 Section 8.16. Information to Be Furnished..................31 Section 8.17. Voting Rights of Participants................31 Section 8.18. Delegation of Authority......................32 Section 8.19. Diversification of Company Contributions Account......................32 Section 8.20. Tender Offer.................................32 ARTICLE IX AMENDMENT, TERMINATION AND MERGER.....................33 Section 9.1. Amendment....................................33 Section 9.2. Termination or Complete Discontinuance of Contributions............33 Section 9.3. Determination by Internal Revenue Service....34 Section 9.4. Nonreversion.................................34 Section 9.5. Merger.......................................34 ARTICLE X MISCELLANEOUS.........................................35 Section 10.1. Creation of Plan Voluntary...................35 Section 10.2. No Employment Contract.......................35 Section 10.3. Limitation on Rights Created.................35 Section 10.4. Waiver of Claims.............................35 Section 10.5. Spendthrift Provision........................35 Section 10.6. Payment of Benefits to Others................36 Section 10.7. Payments to Missing Persons..................36 -iv- Section 10.8. Severability.................................36 Section 10.9. Captions.....................................36 Section 10.10. Construction....................................36 Section 10.11. Counterparts....................................36 Section 10.12. Indemnification.................................36 Section 10.13. Standards of Interpretation and Administration..37 Section 10.14. Governing Law...................................37 Section 10.15. Successors and Assigns..........................37 Section 10.16. Adoption of Plan................................37 Section 10.17. Withdrawal from Plan............................37 ARTICLE XI TEFRA TOP-HEAVY RULES.................................37 Section 11.1. Application..................................37 Section 11.2. Determination................................37 Section 11.3. Accrued Benefits.............................39 Section 11.4. Vesting Provisions...........................39 Section 11.5. Minimum Contribution.........................40 Section 11.6. Code Section 415 Limitations.................41 -v- UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE JANUARY 1, 1997) ARTICLE I DEFINITIONS Section 1.1. "Accrued Company Contributions Benefit" shall mean the balance of a Participant's Company Contributions Account as of the last preceding Valuation Date. Section 1.2. "Act" shall mean the Employee Retirement Income Security Act of 1974, as now in effect or hereafter amended, and shall also include all regulations promulgated thereunder. Section 1.3. "Anniversary Date" shall mean the last calendar day of any Plan Year. Section 1.4. "Annual Addition" shall mean, with respect to any Participant for any Plan Year and with respect to this Plan and to all other qualified defined contribution plans maintained by a Company, the sum of: (a) Company contributions credited to his Company Contributions Account for that Plan Year under this Plan; (b) that Participant's non-deductible contributions; (c) forfeitures; and (d) amounts allocated to an individual medical account as defined in Section 415(1)(2) of the Code which is part of a qualified defined benefit plan maintained by a Company shall be treated as Annual Additions to a qualified defined contribution plan, and amounts derived from Company contributions paid or accrued in taxable years ending after such date which are attributable to post-retirement medical benefits allocated to the separate account of a key employee as defined in Section 416 of the Code under a welfare benefit fund as defined in Section 419(e) of the Code maintained by a Company shall also be treated as Annual Additions to a qualified defined contribution plan. Annual Additions shall not include any amounts allocated as income to a Participant's Company Contributions Account in accordance with Section 8.7(j). Section 1.5. "Bank" means the Union Federal Savings & Loan Association and any successor thereto. -1- Section 1.6. "Beneficiary" shall mean the person(s) entitled under the provisions of Section 6.5 to receive benefits after the death of a Participant. Section 1.7. "Code" shall mean the Internal Revenue Code of 1986, as now in effect or hereafter amended, and shall also include all regulations promulgated thereunder. Section 1.8. "Committee" shall mean the administrative committee appointed and acting in accordance with the provisions of Article VII. The Committee shall be deemed to be the Plan Administrator for purposes of the Act. Section 1.9. "Company" shall mean the Holding Company, the Bank, any Company which becomes a participating employer pursuant to Section 10.16, and any successors thereto. Solely for the purpose of: (a) computing an Employee's Years of Service and Period of Service to determine his eligibility to participate in and the vesting of his benefits under this Plan; (b) applying the limitations contained in Section 4.3; (c) determining whether this Plan is a Top Heavy Plan under Section 11.2 and, thus, subject to the provisions of Article XI; and (d) determining whether an Employee terminated his employment with the Companies, "Company" shall also include any entity which, together with a participating Company, constitutes a member of a controlled group of corporations, a member of a commonly controlled group of trades or businesses or a member of an affiliated service group within the meaning of Section 414(b), Section 414(c) or Section 414(m) of the Code or any entity which is required to be aggregated with a participating Company under Section 414(o) of the Code. Section 1.10. "Company Contributions Account" shall mean the account maintained for each Participant to which contributions made by the Companies shall be allocated. Section 1.11. "Compensation" shall mean the total of all amounts paid or payable in cash by the Companies by reason of services performed by an Employee during any period, including bonuses, overtime, any other cash payments included on an Employee's W-2, amounts deferred by the Employee under any cash or deferred arrangement maintained by a Company under Section 401(k) of the Code and any salary reductions elected by the Employee pursuant to a salary reduction plan maintained by a Company under Section 125 of the Code but excluding, with respect to any Employee, any other amounts contributed by a Company for or on account of that Employee under this Plan or under any other employee benefit plan; provided, however, that Compensation in a Plan Year in excess of one hundred and fifty thousand ($150,000), as adjusted pursuant to Section 401(a)(17) of the Code, shall be disregarded. -2- Section 1.12. "Date of Employment" means any date on which an Employee first completes an Hour of Service. Section 1.13. "Date of Separation" means the earlier of: (a) the date an Employee's employment with the Companies terminates by reason of a quit, discharge, retirement (including disability retirement) or death; or (b) the first anniversary of the first date of a period in which the Employee remains absent from active employment with the Companies for some reason other than a quit, discharge, retirement, death, approved leave of absence or military service. Section 1.14. "Deferred Retirement" shall mean retirement after a Participant's Normal Retirement Date in accordance with Section 2.4. Section 1.15. "Deferred Retirement Date" shall mean the first (1st) calendar day of the month after a Participant's Normal Retirement Date as of which he retires or his employment with the Companies is terminated for any reason other than his death. Section 1.16. "Defined Benefit Fraction" shall mean for a given Plan Year a fraction: (a) the numerator of which is the projected annual benefit of a Participant under all qualified defined benefit plans maintained by a Company (determined as of the Anniversary Date of that Plan Year), and (b) the denominator of which is the lesser of: (i) the product of one and twenty-five one hundredths (1.25) multiplied by ninety thousand dollars ($90,000), as adjusted pursuant to Section 415(b)(1)(A) and (d)(1) of the Code, or (ii) the product of one and four tenths (1.4) multiplied by one hundred percent (100%) of that Participant's average Section 415 Compensation for his three (3) consecutive highest paid Years of Service with the Companies. Section 1.17. "Defined Contribution Fraction" shall mean for a given Plan Year a fraction: (a) the numerator of which is the sum of the Annual Additions to a Participant's accounts under all qualified defined contribution plans maintained by a Company as of the Anniversary Date of that Plan Year, and (b) the denominator of which is the sum of the lesser of the following amounts determined for that Plan Year and for each prior year of service with the Companies: -3- (i) the product of one and twenty-five one hundredths (1.25) multiplied by the dollar limit in effect for that Plan Year pursuant to Section 415(c)(1)(A) of the Code, or (ii) the product of one and four tenths (1.4) multiplied by twenty-five percent (25%) of that Participant's Section 415 Compensation for that Plan Year. Section 1.18. "Effective Date" shall mean January 1, 1997; provided, however, that if prior to March 31, 1998, the Bank shall not have completed its conversion from mutual to stock form, this Plan shall be null and void and any shares of Stock and other assets held hereunder shall be returned to the Companies. Section 1.19. "Employee" shall mean any person employed by a Company, and shall also include any individual deemed to be a leased employee (as defined below) of the Companies but only to the extent required by the Code. For purposes of this Plan, the term "leased employee" means any person (other than an employee of the recipient) who pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for a period of at least one (1) year, and such services are of a type historically performed by employees in the business field of the recipient employer; provided, however, that a leased employee shall not be considered an employee of the recipient if (a) such employee is covered by a money purchase pension plan providing a nonintegrated employer contribution rate of at least ten percent (10%) of Compensation, immediate participation and full and immediate vesting and (b) leased employees do not constitute more than twenty percent (20%) of the recipient's non-highly compensated workforce. A leased employee within the meaning of Section 414(n)(2) of the Code shall become a Participant in the Plan based on service as a leased employee only as provided in provisions of the Plan other than this Section. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. Section 1.20. "Exempt Loan" shall mean a loan made to this Plan by a party in interest or disqualified person or a loan to this Plan which is guaranteed by a party in interest or disqualified person, including a direct loan of cash, a purchase-money transaction and an assumption of any obligation of this Plan. For purposes of this definition, a guarantee shall include an unsecured guarantee and the use of assets of a party in interest or disqualified person as collateral for a loan even though the use of assets may not constitute a guarantee under any applicable State laws. Section 1.21. "Fund" shall mean all cash, investments and other properties held by the Trustee hereunder. Section 1.22. "Highly Compensated Employee" shall include any Employee described in Section 414(q) of the Code who: -4- (a) is a five percent (5%) or more owner (as then defined in Section 416(i)(1) of the Code) of the Company at any time during that Plan Year or the immediately preceding Plan Year; or (b) received more than eighty thousand dollars ($80,000), as automatically adjusted pursuant to Sections 414(q)(1) and 415(d) of the Code without the necessity of any amendment to the Plan, of Section 415 Compensation from the Company in the immediately preceding Plan Year and was in the Top Paid Group for that immediately preceding Plan Year. For purposes of determining whether an Employee is a Highly Compensated Employee and notwithstanding anything else contained in this Section, the following rules shall apply: (c) A former Employee shall be treated as a Highly Compensated Employee if he was a Highly Compensated Employee in the Plan Year during which his employment with the Company terminated or in any Plan Year during which occurs or commencing after his fifty-fifth (55th) birthday. (d) Section 415 Compensation shall include any amount which is contributed by the Company pursuant to a salary reduction agreement and which is not includible in the gross income of an Employee under Sections 125, 401(k), 402(a)(8), 402(h)(1)(B) and 403(b) of the Code. (e) An Employee shall only be deemed to be a Highly Compensated Employee to the extent required by the Code. Section 1.23. "Holding Company" shall mean Union Community Bancorp. Section 1.24. "Hour of Service" shall mean: (a) each hour for which an Employee is paid, or entitled to payment, for the performance of duties for a Company; these hours shall be credited to the Employee for the computation period or periods in which the duties are performed; and (b) each hour for which an Employee is paid, or entitled to payment, by a Company on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability but excluding payments made because of Total Disability under Section 6.3), layoff, jury duty, military duty or leave of absence; no more than five hundred and one (501) Hours of Service shall be credited under this Subsection (b) for any single continuous period (whether or not such period occurs in a single computation period); hours under this Subsection (b) shall -5- be calculated and credited pursuant to Section 2530.200b-2 of the Department of Labor Regulations which are incorporated herein by this reference; and (c) each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by a Company; the same Hours of Service shall not be credited both under Subsection 1.24(a) or Subsection 1.24(b), as the case may be, and under this Subsection 1.24(c); these hours shall be credited to the Employee for the computation period or periods to which the award or agreement pertains, rather than to the computation period in which the award, agreement or payment is made. Section 1.25. "Leave of Absence" shall mean a leave granted by a Company, in accordance with rules uniformly applied to all Employees in a non-discriminatory manner, for reasons of health, public service or other satisfactory reasons. Section 1.26. "Normal Retirement" shall mean retirement on a Participant's Normal Retirement Date. Section 1.27. "Normal Retirement Date" shall mean the first (1st) calendar day of the month immediately following a Participant's sixty-fifth (65th) birthday. A Participant's benefits under this Plan shall be fully vested and non-forfeitable on and after the date he attains age sixty-five (65), which is deemed to be the normal retirement age under this Plan, regardless of his Period of Service and regardless of the vesting schedules in Section 6.3 and in Section 11.4. Section 1.28. "One Year Service Break" shall mean a consecutive twelve (12) month Period of Severance. Section 1.29. "Participant" shall mean any Employee who has commenced participation in this Plan pursuant to Section 2.2. Participation in this Plan shall continue until such time as the Participant has received all of the benefits to which he is entitled under the terms of this Plan. Section 1.30. "Period of Separation" means, for an Employee, the period of time commencing with the date such Employee separates from service with the Companies and ending with the date such Employee resumes his employment with the Companies. Section 1.31. "Period of Service" means, for an Employee, the period commencing on the later of the following dates: (a) such Employee's Date of Employment; or (b) the date on which such Employee's Employer is required to be aggregated with the Company under Code Section 414(b), (c), (m) or (o), whichever is applicable, -6- and ending on the date a Period of Severance begins, including any Period of Separation of less than twelve (12) consecutive months; provided, however, that in the case of any person who terminates his employment with the Employers but later resumes his employment with the Companies, the Period of Service before such resumption of employment shall be aggregated only if that person is a Re-employed Individual. Section 1.32. "Period of Severance" means, for an Employee, the period of time commencing with the earlier of: (a) the date on which such Employee terminates his employment with the Companies by reason of quitting, retirement, death or discharge, or (b) the date twelve (12) consecutive months after the date a person remains absent from service with the Companies (with or without pay) for any reason other than quitting, retirement, death or discharge, and ending, in the case of an Employee who terminates his employment with the Companies by reason other than death, with the date such Employee resumes his employment with the Companies. Solely for purposes of determining whether a One Year Service Break has occurred for participation and vesting purposes has occurred, an Employee who is absent from work for maternity or paternity reasons shall receive credit at least one (1) year. For purposes of this Section 1.32, an absence from work for maternity and paternity reasons means an absence: (c) by reason of the pregnancy of the Employee, (d) by reason of the birth of a child of the Employee, (e) by reason of the placement of a child with the Employee in connection with the adoption of that child by the Employee, or (f) for purposes of caring for such a child for the period beginning immediately following such birth or placement. Section 1.33. "Plan" shall mean the employee stock ownership plan and trust established pursuant to the provisions of this Agreement, as amended from time to time, which shall be known as the "Union Community Bancorp Savings Employee Stock Ownership Plan." This Plan is intended to be an employee stock ownership plan under Section 4975(e)(7) of the Code and under Section 407(d)(6) of the Act. Section 1.34. "Plan Year" shall mean the calendar year. The Plan Year shall also be the limitation year for purposes of Section 415 of the Code for this Plan and for all other qualified retirement plans maintained by a Company. -7- Section 1.35. "Re-employed Individual" shall mean a person who, after having terminated his employment with the Companies, resumes his employment with the Companies: (a) with any vested interest in his Company Contributions Account as provided in Section 6.3 or 11.4, or (b) with no such vested interest but who resumes his employment with the Companies either: (i) before a One Year Service Break, (ii) after a One Year Service Break but before his latest Period of Severance equals or exceeds his Period of Service, or (iii) after a One Year Service Break but before the number of his consecutive One Year Service Breaks equals or exceeds the greater of five (5) or his Period of Service. Section 1.36. "Section 415 Compensation" shall mean with respect to any Plan Year and shall: (a) include amounts accrued to a Participant (regardless of whether he was a Participant during the entire Plan Year and regardless of whether in cash): (i) as wages, salaries, fees for professional services and other amounts received for personal services actually rendered in the course of his employment with the Companies including but not limited to commissions, compensation for services on the basis of a percentage of profits and bonuses; (ii) for purposes of Subsection (a)(i) above, earned income from sources outside the United States (as defined in Section 911(b) of the Code), whether or not excludible from gross income under Section 911 of the Code or deductible under Section 913 of the Code; (iii) amounts described in Sections 104(a)(3), 105(a) and 115(h) of the Code but only to the extent that these amounts are includible in the gross income of that Participant; and (iv) amounts paid or reimbursed by the Companies for moving expenses incurred by that Participant, but only to the extent that these amounts are not deductible by that Participant under Section 217 of the Code; (b) not include: -8- (i) notwithstanding Subsection (a)(i) above, there shall be excluded from Section 415 Compensation amounts contributed to a plan as contributions to a qualified cash or deferred plan under Section 401(k) of the Code; (ii) other contributions made by a Company to any plan of deferred compensation to the extent that, before the application of the Section 415 of the Code limitations to that plan, the contributions are not includible in the gross income of that Participant for the taxable year in which contributed; in addition, Company contributions made on behalf of that Participant to a simplified employee pension plan described in Section 408(k) of the Code shall not be considered as Section 415 Compensation for the Plan Year in which contributed; additionally, any distributions from a plan of deferred compensation shall not be considered as Section 415 Compensation, regardless of whether such amounts are includible in the gross income of that Participant when distributed; however, any amounts received by that Participant pursuant to an unfunded nonqualified plan shall be considered as Section 415 Compensation in the Plan Year in which such amounts are includible in the gross income of that Participant; and (iii) other amounts which receive special federal income tax benefits, such as premiums for group term life insurance (but only to the extent that the premiums are not includible in the gross income of that Participant); provided, however, that Section 415 Compensation in a Plan Year in excess of one hundred and fifty thousand ($150,000), as adjusted pursuant to Section 401(a)(17) of the Code, shall be disregarded. Notwithstanding anything in this Section 1.36 to the contrary, for Plan Years beginning on or after January 1, 1998, Section 415 Compensation shall include any elective deferral (as defined in Section 402(g) of the Code) and any amount contributed or deferred at the election of the Participant that is not includible in that Participant's gross income by reason of Section 125 or Section 457 of the Code. Section 1.37. "Stock" shall mean any duly-issued shares of common stock of the Holding Company, without par value, which shares constitute employer securities under Section 409(1) and Section 4975(e)(8) of the Code. Section 1.38. "Top Paid Group" shall mean the Employees who are in the top twenty percent (20%) of the Employees of the Company in terms of Section 415 Compensation for such Plan Year; provided, however, that for purposes of determining the number of Employees to be included in the Top Paid Group, the following Employees shall be excluded to the extent permitted by Section 414(q)(4) of the Code: (a) Employees who have not completed six (6) months of service with the Group; -9- (b) Employees who normally work less than seventeen and one-half (17 1/2) hours per week or less than six (6) months during a Plan Year; (c) Employees who have not attained age twenty-one (21); (d) except as provided by regulations promulgated under the Code, Employees who are covered by a collectively bargained agreement; and (e) Employees who are non-resident aliens and who receive no earned income (within the meaning of Section 911(d)(2) of the Code) from the Company which constitutes income from sources in the United States (within the meaning of Section 861(a)(3) of the Code). Section 1.39. "Total Disability" shall mean a mental or physical condition which, in the judgment of the Committee based upon medical reports and other evidence satisfactory to the Committee, presumably permanently prevents a Participant from satisfactorily performing his usual duties for his employing Company or the duties of such other position or job which his employing Company makes available to that Participant and for which that Participant is qualified by reason of training, education or experience. Section 1.40. "Trust" shall mean the employee stock ownership trust established pursuant to the provisions of this Agreement, as amended from time to time, which shall be known as the "Citizens Bancorp Employee Stock Ownership Trust." Section 1.41. "Trustee" shall mean Home Federal Savings Bank, and any successors thereto. Section 1.42. "Valuation Date" shall mean each December 31 and each other date as of which the Committee shall cause the Trustee to determine the value of the Trust assets as prescribed in Section 5.1. Section 1.43. "Year of Service" shall mean for purposes of participation the consecutive twelve (12) month period computed with reference to the date on which the Employee first (1st) completes an Hour of Service and any Plan Year beginning after such date during which twelve (12) month period an Employee has completed at least one thousand (1,000) Hours of Service. Notwithstanding the foregoing, periods of time during which an Employee or Participant: (a) is on an approved Leave of Absence continuing for a period of not more than two (2) consecutive years; or (b) is on military leave for training or service, or both, with the Armed Forces of the United States under any form of law requiring military service; provided, however, that he shall make application for re-employment by a Company within ninety (90) calendar days after discharge or release from such Armed Forces or from -10- hospitalization continuing after such discharge for a period of not more than one (1) year; shall also be credited towards his Years of Service and shall not constitute a Break in Service for purposes of this Plan. A Participant's Years of Service shall be calculated taking into account employment before the Effective Date. ARTICLE II ELIGIBILITY AND PARTICIPATION Section 2.1. Eligibility. Each Employee in the employ of a Company shall become eligible to participate in this Plan on the date on which he completes one (1) Year of Service or, if later, on the date on which he attains age twenty-one (21). Section 2.2. Entry Dates. Each Employee who was eligible to participate under Section 2.1 on the Effective Date automatically became a Participant in this Plan as of the Effective Date. Each other Employee shall become a Participant in this Plan on the first day of January or July coincident with or next following the first (1st) date on which he meets the eligibility requirements of Section 2.1. A re-employed Employee who has once met the one (1) Year of Service requirement for eligibility shall become (or, if formerly a Participant, be reinstated as) a Participant in this Plan on his re-employment date or, if later, on the first day of January or July coincident with or next following the date he attains age twenty-one (21). Section 2.3. Certification by Company. Not later than thirty (30) calendar days after an Employee shall become a Participant in this Plan, his employing Company shall certify such fact in writing to the Committee, together with such additional facts regarding such Participant as the Committee may request. Except as otherwise provided by the Act, each such certification shall be final and conclusive and the Committee shall be entitled to rely thereon without any investigation, but it may correct any errors discovered in any such certificate. Section 2.4. Deferred Retirement. A Participant who continues in the employment of a Company after his Normal Retirement Date shall continue to participate in this Plan, and contributions shall be allocated to his Company Contributions Account as otherwise provided in this Plan. Any such Participant who elects Deferred Retirement shall be entitled to benefits under this Plan payable at his Deferred Retirement Date in the same manner as if he had retired on his Normal Retirement Date; provided, however, that the deferral of benefit payments after a Participant's Normal Retirement Date shall be permitted only to the extent authorized by and in compliance with all requirements imposed under Section 2530.203-3 of the Department of Labor Regulations which are incorporated herein by reference. -11- ARTICLE III COMPANY CONTRIBUTIONS Section 3.1. Company Contributions. For the initial Plan Year and for each Plan Year thereafter, the Companies shall make contributions to the Trust in one (1) or more installments in such amounts as the Board of Directors of the Bank may determine. If Company contributions are paid to the Trust by reason of a mistake in fact made in good faith or a mistake made in good faith in determining the deductibility of such Company contributions for federal income tax purposes under Section 404 of the Code, such Company contributions may, except as otherwise provided in Section 8.7, be returned to the Companies by the Trustee (upon the written direction of the Committee) within one (1) year after the payment to the Trust or after the date the federal income tax deduction is denied, whichever is applicable. Section 3.2. Form of Contributions. The Companies' contributions, if any, for each Plan Year shall be paid to the Trustee either in cash or in Stock valued at the fair market value thereof as of the date of the contribution (as determined consistent with Section 5.1(a)) and within such period as is provided for in Section 404 of the Code or any other statute of similar import or any rule or regulations thereunder. Section 3.3. Holding by Trustee. All contributions made by the Companies under Section 3.1 shall be a part of the Fund and shall be held in trust by the Trustee until distributed as provided in this Plan. Section 3.4. Expenses. In addition to the contributions to be made under Section 3.1, the Companies shall pay all reasonable expenses incident to the operation of this Plan; in the event of any failure by the Companies to make such payment, the same shall be a charge against and paid from the Fund but only to the extent permitted under the Code and under the Act. Section 3.5. No Company Liability for Benefits. The benefits under this Plan shall be only such as can be provided by the Fund, and there shall be no liability or obligation on the part of the Company to make any further contributions or payments. Except as otherwise provided by the Act, no liability for the payment of benefits under this Plan shall be imposed upon the Companies or upon the officers, directors or shareholders of the Companies. Section 3.6. No Rollover Contributions. Rollover contributions (within the meaning of Section 402(a)(5) of the Code) shall not be permitted nor accepted. -12- ARTICLE IV ALLOCATION TO PARTICIPANTS' ACCOUNTS Section 4.1. Company Contributions Accounts. For purposes of allocating the Company contributions, the Committee shall establish and maintain a separate Company Contributions Account in the name of each Participant. Section 4.2. Allocation of Company Contributions. Except as provided in Section 4.7, the Company contributions for each Plan Year shall be allocated among the Company Contributions Accounts of all Employees who were Participants on the Anniversary Date of that Plan Year or whose employment with the Companies terminated during that Plan Year because of death, Total Disability or Deferred or Normal Retirement proportionately in the ratio that the Compensation paid to such Participant, if any, for that Plan Year or since becoming a Participant in this Plan if he became a Participant within that Plan Year bears to the aggregate Compensation paid to all Participants for that Plan Year or since becoming Participants in this Plan if they became Participants within that Plan Year. To the extent cash dividends are applied to pay of an Exempt Loan under Section 4.5 and notwithstanding anything contained herein to the contrary, Company contributions shall first be applied towards crediting the Participant's Company Contributions Account to which the cash dividends would have been allocated before they are allocated under the preceding provisions of this Section. Section 4.3. Limitations on Annual Additions. Clause (a). Basic Limitations. Notwithstanding any other provision of this Plan, the maximum Annual Addition during any Plan Year for any Participant under this Plan and under any other qualified defined contribution plans maintained by the Companies shall in no event exceed the lesser of: (i) twenty-five percent (25%) of that Participant's Section 415 Compensation for that Plan Year, or (ii) thirty thousand dollars ($30,000), or, if greater, one-fourth (1/4) of the dollar limitation in effect for that Plan Year pursuant to Section 415(b)(1)(A) of the Code; provided, however, that such adjustments shall only apply to the Plan Years ending on or after the date in which the adjustment was made. Any Company contributions which are applied by the Trustee (not later than the due date, including extensions, for filing a Company's federal income tax return for that Plan Year) to pay interest on an Exempt Loan shall not be included as Annual Additions under this Section 4.3; provided, however, that the provisions of this Section shall be applicable only in Plan Years for which not more than one-third (1/3) of the Company contributions applied to pay principal and interest on an Exempt Loan are allocated among Highly Compensated Employees. The Committee may reallocate Company contributions in order to satisfy this special limitation. -13- If due to a reasonable error in estimation of a Participant's Compensation or due to the allocation of forfeitures these maximum Annual Additions would be exceeded as to any Participant, any excess amount shall be used to reduce Company Contributions for that Participant in the next, and succeeding, Plan Years. If that Participant was not covered by this Plan at the Anniversary Date of that Plan Year, such excess shall be reallocated among the Company Contributions Accounts of the other Participants under Section 4.2 to the fullest extent possible without exceeding the limitations with respect to any other Participant for that Plan Year. Any excess amount which cannot be so allocated to any Participant's Company Contributions Account by reason of these limitations shall be allocated under this Section 4.3(a) for the next succeeding Plan Years (prior to the allocation of Company Contributions for such succeeding Plan Years). Clause (b). Participation in Other Plans. In any case in which an Employee is a participant in one (1) or more qualified defined contribution plans and in one (1) or more qualified defined benefit plans (as these terms are defined in Section 415(k) of the Code) maintained by a Company and for Plan Year, beginning before January 1, 2000, the sum of the Defined Benefit Fraction and of the Defined Contribution Fraction, computed as of the Anniversary Date of that Plan Year, shall not exceed one (1.0). Section 4.4. Effective Date of Allocations. For all purposes of this Plan, allocations to the Participants' Company Contributions Accounts under this Article shall be deemed to have been made on the Anniversary Date to which they relate although they may actually be determined at some later date. The fact that such allocations are made, however, shall not vest in any Participant or in his spouse or other Beneficiary any right, title or interest in or to any part of the Fund except at the times, to the extent and on the terms and conditions specified in this Plan. Section 4.5. Cash Dividends. Any cash dividends received by the Trustee on Stock allocated to the Company Contributions Accounts of Participants shall be credited to the applicable Participants' Company Contributions Accounts unless the Bank, in its sole discretion, elects to pay the cash dividends directly to the applicable Participants or directs the Trustee to pay the cash dividends to the Participants (or, if applicable, their Beneficiaries) within ninety (90) calendar days of the close of the Plan Year in which the cash dividends were paid by the Holding Company to the Fund. Notwithstanding anything contained in this Section to the contrary, the Bank may direct cash dividends, including dividends on non-allocated shares, be applied to repay an Exempt Loan, but only to the extent shares of Stock with an aggregate fair market value equal to the amount of dividends so applied are allocated to the Company Contributions Accounts of the applicable Participants and to the extent the cash dividends are deductible under Section 404(k) of the Code. Section 4.6. Allocation of Forfeitures. The Trustee, shall, as soon as practicable following the Anniversary Date marking the close of each Plan Year, allocate the forfeitures which have occurred in that Plan Year first to reinstate any forfeitures of any reemployed Participant under Section 6.2 and second, if any forfeitures are remaining after the reinstatements described above are completed, among the Company Contributions Accounts of all Employees who were or became Participants on the Anniversary Date of that Plan Year or whose Years of Service terminated during -14- that Plan Year because of death, Total Disability or Deferred or Normal Retirement. The forfeitures shall be allocated among such Accounts in the same manner provided for under Section 4.2. Section 4.7. Special Allocation Rules. Notwithstanding any other provision in this Plan to the contrary, no Stock acquired by this Plan in a sale to which Section 1042 of the Code applies may be allocated directly or indirectly under this Plan: (a) during the non-allocation period (as such term is defined below), for the benefit of: (i) any Participant who makes an election under Section 1042(a) of the Code with respect to Stock sold to this Plan, or (ii) any Participant who is related to the Participant making the election under Section 1042(a) of the Code or to the deceased Participant (within the meaning of Section 267(b) of the Code); provided, however, that this Subsection (a)(ii) shall not apply to any Participant who is a lineal descendent of a Participant as long as the aggregate amount allocated to the benefit of all such lineal descendants during the non-allocation period (as such term is defined below) does not exceed more than five percent (5%) of the Stock (or amounts allocated in lieu thereof) held by this Plan which are attributable to the sale to this Plan by any person related to such descendants (within the meaning of Section 267(c)(4)) in a transaction to which Section 1042 of the Code applies, or (b) for the benefit of any Participant who owns (after the application of the attribution rules contained in Section 318(a) of the Code, but disregarding Section 318(a)(2)(B)(i) of the Code) more than twenty-five percent (25%) of: (i) any class of the outstanding stock of the Holding Company or of any other corporation which is a member of a controlled group of corporations (within the meaning of Section 409(1)(4) of the Code) which includes the Holding Company, or (ii) the total value of any class of outstanding stock of the Holding Company or of any other corporation which is a member of the controlled group of corporations (within the meaning of Section 409(1)(4) of the Code) which includes the Holding Company. For purposes of this Section 4.7, the "non-allocation period" shall mean a period beginning on the date of the sale of the stock to the Plan and ending on the later of: -15- (c) the date which is ten (10) years after the sale of the Stock to this Plan to which Section 1042 of the Code applies, or (d) the date of the Plan allocation of Stock attributable to the final payment of any acquisition indebtedness incurred in connection with a sale of such Stock to this Plan to which Section 1042 of the Code applies. For purposes of this Section 4.7 a Participant shall be deemed to be a twenty-five percent (25%) or greater shareholder if such Participant owns more than twenty-five percent (25%) of the shares at any time during a one (1) year period ending: (e) on the date of a sale of the Stock to this Plan to which Section 1042 of the Code applies, or (f) on the date as of which the Stock sold to this Plan through a sale to which Section 1042 of the Code applies is allocated to Participants. The provisions contained in this Section 4.7 shall be interpreted consistent with and in accordance with Section 409(n) of the Code. Section 4.8. Rehire after Military Service. The provisions relating to qualified retirement plans which are set forth in the Uniformed Services Employment and Reemployment Rights Act of 1994 ("USERRA") are hereby incorporated into, and made a part of, this Plan by reference. The Committee shall apply the provisions of the USERRA with respect to any Participant who is reemployed after completing covered military service in a manner consistent with the USERRA and all other applicable law and regulations. ARTICLE V VALUATIONS AND ADJUSTMENTS Section 5.1. Valuation of Fund. Clause (a). Valuations. The Committee shall provide the Trustee with a written valuation showing the fair market value of the Stock, upon which valuation the Trustee may fully rely. For all purposes of this Plan, fair market value shall be determined by an independent appraiser (as such term is defined in Treasury Regulations promulgated under Section 170(a)(1) of the Code) unless the Stock is readily tradeable on an established securities market at the date of valuation. The Committee shall also direct the Trustee to determine the fair market value of all other assets of the Fund on each Valuation Date. Clause (b). Frequency. The Fund shall be valued as soon as practical after the Anniversary Date of each Plan Year and as soon as practical after the removal or resignation of the Trustee on the basis of fair market values determined as of the Anniversary Date of the Plan Year -16- or as of the effective date of the resignation or removal of the Trustee, respectively. The Committee may require valuation of the Fund on such other dates as it may prescribe. Clause (c). Records. Records of valuation of the Fund shall be prepared by the Trustee in such manner and within such time after each Valuation Date as may be prescribed in this Section 5.1, and such records shall be filed with the Committee, including a written statement reflecting the value of the assets and liabilities of the Fund and the receipts and disbursements of the Fund since the last previous statement filed with the Committee. As to the fair market value of Stock, the Trustee shall rely solely upon the most recent valuation furnished by the Committee as provided in Section 5.1(a). If information necessary to ascertain the fair market value of the Fund assets other than Stock is not readily available to the Trustee or if the Trustee is unable in its sole discretion fairly to determine the fair market value of the other Fund assets, the Trustee may request the Committee in writing to instruct the Trustee as to such values to be used for all purposes under this Plan; in such event, the values as determined by the Committee shall be binding and conclusive, except as otherwise provided by the Act. If the Committee shall fail or refuse to instruct the Trustee as to such values within a reasonable time after receipt of the Trustee's written request therefor, the Trustee may take such action as it deems necessary or advisable to ascertain such values. Except for the Trustee's negligence, willful misconduct or lack of good faith, upon the expiration of ninety (90) calendar days from the filing of such records and except as otherwise provided by the Act, the Trustee shall be forever released and discharged from all liability and accountability to anyone with respect to the propriety of its acts or transactions as set forth in such records unless written objection is filed with the Trustee within the said ninety (90) calendar day period by the Committee or by the Bank. Section 5.2. Adjustments. As of each Valuation Date the Committee shall cause the Trustee to allocate to each Participant's Company Contributions Account, by credit thereto or deduction therefrom as the case may be, a proportion of the increase or decrease in the fair market value of the Fund since the last preceding Effective Date or Valuation Date. Such allocation shall be made in the proportion that each Participant's Company Contributions Account on such date bears to the total of all such Company Contributions Accounts on such date. Section 5.3. Amount of Adjustments. The increase or decrease in the Fund to be allocated shall be the difference between: (a) the fair market value of the Fund on the last preceding Effective Date or Valuation Date (excluding any amounts withdrawn from the Fund as of such Date for the payment of benefits hereunder), and (b) the fair market value of the Fund on the current Valuation Date (including any amounts to be withdrawn from the Fund as of such Date for the payment of benefits hereunder). -17- Section 5.4. Effective Date of Adjustments. For all purposes of this Plan, allocations to the Participants' Company Contributions Accounts under this Article shall be deemed to have been made on the Effective Date or Valuation Date to which they relate although they may actually be determined at some later date. The fact that such allocations are made, however, shall not vest in any Participant or in his spouse or other Beneficiary any right, title or interest in or to any part of the Fund except at the times, to the extent and on the terms and conditions specified in this Plan. Section 5.5. Notice to Participants. Promptly after the allocations herein described shall be completed, the Committee shall advise each Participant in writing of the fair market value of the Stock and other Fund assets then credited to his Company Contributions Account. ARTICLE VI BENEFITS Part A. Retirement Benefits. Section 6.1. Retirement. Each Participant who retires on his Normal Retirement Date or Deferred Retirement Date shall be entitled to receive the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately following such Retirement Date plus any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his Normal Retirement or Deferred Retirement occurs. Payment of such benefits shall be made in accordance with the provisions of Section 6.10. Part B. Termination Benefits. Section 6.2. Effect of Termination. If a Participant's employment with the Companies is terminated before his Normal Retirement Date for any reason other than his death, that Participant shall cease to be a Participant in this Plan and shall not be entitled to any benefits under this Plan except as expressly provided in this Part B. Section 6.3. Vesting. Any Participant whose employment with the Companies is terminated as set forth in Section 6.2 shall be entitled to a percentage (as determined below) of the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately following the date of termination of his employment. The percentage of his Company Contributions Account to which a terminated Participant is entitled shall be determined on the basis of his Period of Service on such date of termination of employment, as follows: Period of Service Vested Percentage Less than five (5) years 0 Five (5) years or more 100% -18- Any portion of the terminated Participant's Company Contributions Account which is not vested shall be treated as a forfeiture; provided, however, that such forfeiture shall not be allocated to the other Plan Participants until the first (1st) to occur of the following: (a) that Participant's Period of Severance is at least five (5) years; or (b) that Participant's death; provided, further, that if that Participant is reemployed prior to his completion of a five (5) year Period of Severance, the forfeited amount shall be reinstated as the beginning balance of that Participant's Company Contribution Account. A Participant whose vested percentage of his Company Contributions Account is zero (0) at the date of his termination of employment shall be deemed to have received a distribution upon his termination of employment. In the case of any Participant whose Period of Severance is at least five (5) years, that Participant's pre-break service shall count in vesting of his post-break Company Contributions Account balance only if either: (a) that Participant has any nonforfeitable interest in his Company Contributions Account balance at the time of his separation from service with the Companies; or (b) upon returning to service with a Company his Period of Severance is less than five (5) or, if greater, less than his Period of Service completed prior to his Period of Severance. In the case of any Participant whose Period of Separation is at least five (5) years, all service after such Period of Severance shall be disregarded for the purpose of vesting the Company Contributions Account balance that accrued before such Period of Severance. Separate sub-accounts shall be maintained for that Participant's pre-break and post-break Company Contributions Account. Both sub-accounts shall share in the earnings and losses of the Fund. Any Participant whose employment with the Companies is terminated because of his Total Disability shall be entitled to his entire Company Contributions Account balance and shall also be entitled to receive any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his employment is so terminated. Section 6.4. Payment. All benefits payable under Part B shall be paid in accordance with the provisions of Section 6.10. Part C. Death Benefits. -19- Section 6.5. Benefits upon Death. If the death of any Employee occurs while he is still a Participant in this Plan and prior to his actual retirement or other termination of employment with the Companies, the entire balance credited to his Company Contributions Account as of the Valuation Date coincidental with or immediately preceding the date of his death plus any Company contributions to which he is entitled pursuant to Section 4.2 for the Plan Year in which his death occurs shall be paid to the Beneficiary of that deceased Participant in accordance with the provisions of Section 6.10. Section 6.6. Beneficiaries. Each Participant shall notify the Committee in writing of one (1) or more primary and contingent Beneficiaries to receive on his death any benefits payable under this Part C. Each such Beneficiary designation may be revoked, amended or changed by a Participant by like notice in writing delivered to the Committee prior to his death. The Beneficiary designation of any Participant who is married at the date such a designation is made or changed shall be signed by that Participant's spouse and witnessed by the Committee or by a Notary Public if it results in a designation of a Beneficiary other than that Participant's spouse. Notwithstanding anything contained in this Section to the contrary, the Beneficiary of a married Participant shall be his spouse unless his spouse consents to the designation of a non-spouse Beneficiary in a writing witnessed by the Committee or by a Notary Public. Section 6.7. Lack of Beneficiaries. Any portion of the amounts payable under Section 6.5 which is undisposed of because all or some of the designated Beneficiaries have predeceased a Participant or because of a Participant's failure to designate a Beneficiary in writing prior to his death shall be paid to the deceased Participant's surviving spouse, if any, and, if none, to the deceased Participant's estate. Section 6.8. Termination or Retirement prior to Death. On and after the actual retirement of a Participant from the employ of the Companies or other termination of his employment, the rights of such Participant and his spouse or other Beneficiary to any benefits under this Part C shall cease and the benefits payable to such Participant or to any person claiming through or under him shall be limited to the benefits provided in Parts A or B of this Article. Part D. General. Section 6.9. Date of Distribution. Unless the Participant or, if deceased, his Beneficiary, surviving spouse or estate, as the case may be, otherwise elects, the payment of benefits to which any such person is entitled shall begin not later than sixty (60) calendar days after the latest of the Anniversary Date of the Plan Year in which: (a) the Participant attains age sixty-five (65), (b) occurs the tenth (10th) anniversary of the date on which the Participant initially became eligible to participate in this Plan, or -20- (c) the Participant terminates his employment with the Companies; provided, however, that the distribution of benefits to a Participant shall commence on or before April 1 of the calendar year following the calendar year during which that Participant attains age seventy and one-half (70 1/2) or, if the Participant is not a five percent (5%) owner of a Company (within the meaning of Section 416 of the Code) and if later, of the calendar year during which his employment with the Company is terminated. Section 6.10. Form of Distribution. The distributions provided under this Article VI shall be made by the Trustee, as directed by the Participant or, if deceased, his Beneficiary, in a single lump sum distribution of the amount to be paid to the Participant or, if deceased, to his Beneficiary; provided, however, that except as otherwise provided in Section 6.9, payment shall be made as soon as practicable after the Plan Year during which the employment of the Participant from the Companies terminated; provided, further, that in no event shall payments to a deceased Participant's estate or to any Beneficiary other than the surviving spouse of a deceased Participant extend more than five (5) years after the date of the Participant's death. Notwithstanding the above, a Participant whose Company Contributions Account at the initial distribution date or at any subsequent distribution date (when aggregated with other distributions) is greater than five thousand dollars ($5,000) effective on or after January, may elect to defer the commencement of the distribution of his Company Contributions Account to the date on which he attains age sixty-five (65). Distributions under this Section 6.10 shall be distributed in Stock with fractional share interests distributed in cash. If shares of Stock are distributed and the shares of Stock available for distribution consist of more than one (1) class of security, a distributee shall receive substantially the same proportion of each such class. If the Trust purchases shares of Stock from a Company shareholder who is eligible to elect and so elects nonrecognition of gain under Section 1042 of the Code in connection with such purchase and notwithstanding anything contained herein to the contrary, no distribution that would be made within three (3) years after the date of such purchase shall be made to a Participant before he incurs a One Year Service Break, unless his employment with the Companies terminates as a result of his Normal Retirement, Total Disability or death or unless the distribution is made pursuant to Section 8.19. Section 6.11. Liability. Any payment to a Participant or to that Participant's legal representative, Beneficiary, surviving spouse or estate, in accordance with the provisions of this Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Trustee, the Committee and the Companies, any of whom may require such Participant, legal representative, Beneficiary, surviving spouse or estate, as a condition precedent to such payment, to execute a receipt and release therefor in such form as shall be determined by the Trustee, the Committee or the Companies. The Companies do not guarantee the Trust, the Participants or, if deceased, their Beneficiaries, surviving spouses or estates, as the case may be, against the loss of or depreciation in value of any right or benefit that any of them may acquire under the terms of this Plan. -21- Section 6.12. Right of First Refusal. If any recipient of shares of Stock from this Plan elects at any time to sell all or any part of such shares, the Trustee shall have a right of first refusal to purchase all or any part of such shares of Stock for the Fund. The price to be paid by the Trustee for shares of Stock purchased pursuant to this Section 6.12 shall be no less than the greater of: (a) the fair market value of such shares of Stock at the date of their purchase, or (b) the price offered to the recipient by another potential buyer (other than a Company) making a good faith, bona fide offer to buy such shares of Stock, and the terms of the purchase may not be less favorable to the recipient than the terms offered in the bona fide offer. This right of first refusal shall lapse no later than fourteen (14) calendar days after the recipient gives written notice to the Trustee that an offer by a third party to purchase his shares of Stock has been received. The right of first refusal granted by this Section 6.12 shall only exist if the Stock is not publicly traded within the meaning of Treasury Regulations ss. 54.4975-7(b)(1)(iv). Section 6.13. Put Options. The Holding Company shall issue a put option to any Participant, Beneficiary, surviving spouse or estate of a deceased Participant, or any other person (including distributees of an estate) to whom shares of Stock distributed under this Plan may pass by reason of a Participant's death (herein collectively referred to as the "Recipient"). This put option shall permit the Recipient to sell such Stock to the Holding Company, at any time during two (2) option periods, at the then fair market value. The first put option period shall be a period of at least sixty (60) calendar days beginning on the actual date of distribution of such Stock to the Recipient. The second put option period shall be a period of at least sixty (60) calendar days beginning after the determination of the fair market value of such Stock is made by the Committee (and notice of same is given in writing to the Recipient) for the next succeeding Plan Year. Such Recipient shall be deemed to have a put option as herein provided with respect to the shares of Stock and may exercise this put option by delivering to the Holding Company a written notice of his election to sell such shares of Stock, or any portion thereof, together with the certificates representing the shares of Stock to be sold duly endorsed for transfer. The Holding Company shall be obligated to purchase the shares of Stock, or the designated portion thereof, at their fair market value at the date the put option is exercised; provided, however, that the Holding Company may grant the Trustee an option to assume on behalf of this Plan and Trust the Holding Company's rights and obligations with respect to the put option at the date the put option is actually exercised by the Recipient. Except as hereinafter provided, the Holding Company (or the Trustee, if it assumes the Holding Company's obligation) shall pay for the shares of Stock so sold to it by check within thirty (30) calendar days following the date of sale. Notwithstanding anything contained herein to the contrary, the Holding Company (or, if applicable, the Trustee) may pay the purchase price in substantially equal periodic payments (not less frequently than annually) over a period beginning not later than thirty (30) calendar days after the exercise of the put option and not exceeding five (5) years as long as reasonable interest is paid on the unpaid amounts and adequate security is provided to the Recipient. If the Stock is readily tradeable on an established market on the date of distribution, the put option granted by this Section 6.13 shall not exist; provided, however, that if the Stock ceases to be publicly -22- traded within either of the sixty (60) day calendar periods as provided herein, the Holding Company shall notify the Recipient in writing within a reasonable time after the Stock ceases to be so publicly traded that the Stock shall be subject to the put option for the remainder of the applicable sixty (60) day calendar period. If the date of actual written notice to the Recipient by the Holding Company is later than ten (10) calendar days after the Stock ceases to be so publicly traded, the put option shall automatically be extended to the extent that the date on which written notice is actually given to the Recipient is more than ten (10) calendar days later. Section 6.14. Eligible Rollover Distributions. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner prescribed by the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. For purposes of this Section, the following terms shall have the meanings set forth below: (a) Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: (1) any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten (10) years or more; (2) any distribution to the extent such distribution is required under Section 401(a)(9) of the Code; and (3) the portion of any distribution that is not includible in gross income. (b) Eligible retirement plan: An eligible retirement plan is an individual retirement account described in Section 408(a) of the Code, an individual retirement annuity described in Section 408(b) of the Code, an annuity plan described in Section 403(a) of the Code, or a qualified trust described in Section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (c) Distributee: A distributee includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is an alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. ARTICLE VII ADMINISTRATIVE COMMITTEE Section 7.1. Establishment. The Committee shall consist of at least three (3) members to be appointed by the Board of Directors of the Bank, and the members shall hold office at the pleasure of such Board of Directors. The members of the Committee shall be individuals and may, -23- but need not, be officers, shareholders or Directors of the Holding Company or the Bank, Participants or Beneficiaries. The Bank may, at its sole discretion, designate to serve as the Committee its Board of Directors as duly-constituted from time to time. Section 7.2. Duties. The Committee shall discharge its duties and powers in conformance with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. It shall have complete control of the administration of this Plan and shall have all powers necessary or convenient to enable it to exercise such control. In connection therewith, it may provide rules and regulations, not inconsistent with the provisions hereof or with requirements imposed under the Code or under the Act, for the administration of this Plan and may from time to time amend or rescind such rules and regulations. In addition, it may employ or appoint a secretary and such advisors, agents or representatives as it may deem desirable and may consult with and employ counsel (who may, but need not, be counsel to a Company or to the Trustee) or actuaries with regard to any questions arising in connection with this Plan. All reasonable expenses incurred by the Committee in connection with this Plan shall be paid as provided in Section 3.4. Section 7.3. Actions. The Committee may decide any questions hereunder and may take or authorize or direct the taking of any action hereunder with the approval of a majority of the members of the Committee. The approval of such members, expressed from time to time by a vote at a meeting or in writing without a meeting, shall constitute the action of the Committee and shall be valid and effective for all purposes of this Plan. The fact that any member of the Committee shall be a Participant, former Participant or Beneficiary shall not disqualify or debar him from participating in any action or decision affecting any class of Participants, former Participants or Beneficiaries, but he shall not participate in any action or decision affecting his own separate interest as a Participant, former Participant or Beneficiary. Section 7.4. Disqualification. The fact that any member of the Committee is a Director, shareholder or officer of a Company or a Participant or Beneficiary shall not disqualify him from doing any act or thing which this Plan authorizes or requires him to do as a member of the Committee (except as otherwise provided in Section 7.3) or render him accountable for any allowance or distribution or other pecuniary or material profit or advantage received by him. Section 7.5. Powers. The Committee shall have the power to construe this Plan and to determine all questions of fact or law arising under it. It may correct any defect, supply any omission or reconcile any inconsistency in this Plan in such manner and to such extent as it may deem expedient and, except as otherwise provided by the Act, it shall be the sole and final judge of such expediency. Except as otherwise provided in Section 7.9, all acts and determinations of the Committee made in good faith within the scope of its authority shall be final and conclusive on all the parties hereto and on all Employees, Participants and their Beneficiaries, surviving spouses or estates hereunder and shall not be subject to appeal or review. -24- Section 7.6. Discrimination Prohibited. The Committee shall not take any action or direct the Trustee to take any action with respect to any of the benefits provided hereunder or otherwise in pursuance of the powers conferred herein upon the Committee which would be discriminatory in favor of Employees who are officers, Directors, shareholders, persons whose principal duties consist of supervising the work of other Employees or Highly Compensated Employees or which would result in benefiting one (1) Participant or group of Participants at the expense of another or in discrimination as between Participants similarly situated or in the application of different rules to substantially-similar sets of facts. Section 7.7. Statements and Forms. The Committee shall be authorized to require of a Company and of any person claiming any rights hereunder a written statement of any information or the execution of any forms or instruments it may deem necessary or desirable for the administration of this Plan. Section 7.8. Liability. Except as otherwise provided by the Act, no member of the Committee shall be directly or indirectly responsible or under any liability by reason of any action or default by him as a member of the Committee or the exercise of or failure to exercise any power or discretion as such member except for his own fraud or bad faith shown in the exercise of or failure to exercise such power or discretion, and no member of the Committee shall be liable in any way for the acts or defaults of any other member. The Committee may consult with counsel (who may, but need not, be counsel to a Company or to the Trustee) or accountants selected by it and, except as otherwise provided by the Act, the opinion of such counsel or the recommendations of such accountants shall be full and complete authority and protection for any action or conduct pursued by the Committee in good faith and in accordance with such opinion or recommendations. Section 7.9. Determination of Right to Benefits. The Committee shall make all determinations as to the right of any person to a benefit under the provisions of this Plan. Any denial by the Committee of a claim for benefits under this Plan by an Employee or, if deceased, by such Employee's spouse or other Beneficiary, shall be stated in writing by the Committee and delivered or mailed to the Employee, spouse or other Beneficiary, as the case may be, within ninety (90) calendar days after receipt of such benefit claim by the Committee. Such notice shall set forth the specific reasons for the denial and such additional information as is required under Section 503 of the Act, written to the best of the Committee's ability in a manner that may be understood without legal or actuarial counsel. In addition, the Committee shall afford a reasonable opportunity to any Employee, spouse or other Beneficiary, as the case may be, whose claim for benefits has been denied, for a review of the decision denying the claim in accordance with Section 503 of the Act. Section 7.10. Investment Directions. The Committee may direct the investment of the Fund, by written directions to the Trustee, but such direction shall not be inconsistent with the provisions of this Plan, of the Act or of the Code. -25- Section 7.11. Voting Power. Except as otherwise provided in Section 8.17, the Committee shall be authorized to vote, either in person or by proxy, the Stock or other securities which are held by the Trustee as part of the Fund. ARTICLE VIII THE TRUSTEE Section 8.1. Assets Held in Trust. The Trustee shall hold the Fund and shall accept and hold all contributions thereto and all investments and reinvestments thereof in trust for the persons ultimately entitled thereto under the terms of this Plan. Section 8.2. Investments. This Plan is designed to invest primarily in shares of Stock. Except as otherwise provided in this Plan, the Trustee shall invest the cash contributed or accruing to the Fund in Stock and shall not make any other investment for the Fund. There shall be no limit on the permissible investment in shares of Stock. The Trustee may purchase such shares of Stock from the Holding Company or from any other source, and such shares of Stock may be outstanding, newly-issued or treasury shares. All such purchases shall be made at fair market value (as determined consistent with Section 5.1(a)). If no shares of Stock are available for purchase, the Trustee may retain cash uninvested or may invest all or any part thereof in any other investment if such retention or investment is prudent under all the facts and circumstances then prevailing. The Trustee shall have the power at any time to enter into legally-binding agreements to purchase shares of Stock from any person or entity, whether or not such person or entity shall own such shares of Stock at the date such purchase agreement is entered into, including but not limited to Participants in and Beneficiaries of this Plan, except as otherwise provided in the Act and in Treasury Regulations ss. 54.4975-11(a)(7). Except as otherwise required by Section 6.12, the purchase price set forth in any such purchase agreement shall be determined by the fair market value of such shares of Stock at the date of purchase (as determined consistent with Section 5.1(a)). Section 8.3. Directions of Committee. The powers granted to the Trustee under this Plan shall be exercised by the Trustee in its sole discretion. Except as provided in Section 8.20, the Committee may at any time and from time to time by written direction to the Trustee require the Trustee to invest in, to retain or to dispose of any security or other form of investment as may be specified in such direction, limited, however, to investments permitted under this Plan, under the Act and under the Code. Neither the Trustee nor any other person shall be under any duty to question any such written direction of the Committee, and the Trustee shall as promptly as possible comply with any such written direction. Any such direction may be of a continuing nature or otherwise and may be revoked in writing by the Committee at any time. The Trustee shall not be liable in any manner or for any reason for the making, retention or disposition of any investment pursuant to the lawful written direction of the Committee. Section 8.4. Receipt of Additional Shares. Any securities received by the Trustee as a stock split or a stock dividend or as a result of a reorganization or other recapitalization shall be allocated as of each Valuation Date in the same manner as the Stock to which it is attributable is then -26- allocated. If any rights, warrants or options are issued on common shares or other securities held in the Fund, the Trustee shall exercise them for the acquisition of additional common shares or other securities to the extent that cash is then available. Any common shares or other securities acquired in this fashion shall be treated as common shares or other securities bought by the Trustee for the net price paid. Any rights, warrants or options on common shares or other securities which cannot be exercised for lack of cash may be sold by the Trustee with the proceeds thereof treated as a current cash dividend received on such common shares or other securities. Section 8.5. Delivery of Materials to Committee. Except as otherwise provided in Section 8.17 and Section 8.20, the Trustee shall deliver or cause to be delivered to the Committee copies of all notices, prospectuses and financial statements relating to investments held in the Fund. Section 8.6. Powers. The Trustee shall have power with regard to all property in the Fund at any time and from time to time: (a) to sell, convey, transfer, mortgage, pledge, lease, exchange or otherwise dispose of the same, without the necessity of approval of any court therefor or notice to any person, natural or legal, thereof and without obligation on the part of any person dealing with the Trustee to see to the application of any money or property delivered to it; (b) except as otherwise provided in Section 7.11, Section 8.17 and Section 8.20, to exercise any and all rights or options pertaining to any share of Stock held as part of the assets of the Fund and to enter into agreements and consent to or oppose the reorganization, consolidation, merger, readjustment of financial structure or sale of assets of any corporation or organization, the securities of which are held in the Fund; (c) except as otherwise provided in Section 4.5, to collect the principal and income of such property as the same shall become due and payable and to give binding receipt therefor; (d) to take such action, whether by legal proceedings, compromise, abandonment or otherwise, as the Trustee, in its sole discretion, shall deem to be in the best interest of the Fund, but the Trustee shall be under no obligation to take any legal action unless it shall have been first indemnified by the Companies with respect to any expenses or losses to which it may be subjected through taking such action; (e) to register any securities and to hold any other property in the Fund in its own name or in the name of a nominee with or without the addition of words indicating that such securities or other property are held in a fiduciary capacity; -27- (f) pending the selection or the purchase of suitable investments or the payment of expenses or the making of any other payment required or permitted under this Plan, to retain in or to convert to cash, without liability for interest or any other return thereon, such portion of the Fund as it shall deem reasonable under the circumstances, including, but not by way of limitation, the power to retain sufficient cash to permit the acquisition of large blocks of shares of Stock as the same may from time to time become available for purchase; (g) to borrow from banks or similar lending institutions reasonable sums of money for the purchase of shares of Stock for the Company Contributions Accounts of Participants in accordance with the provisions of Section 8.7; provided, however, that the Trustee may not borrow from itself or from an affiliated institution even if the Trustee is a bank or similar lending institution except to the extent specifically permitted by the Act and by the Code; and (h) to do all other acts in its judgment necessary or desirable for the proper administration of the Trust and permissible under the Act and under the Code although the power to do such acts is not specifically set forth herein. Section 8.7. Loans to the Trust. The following conditions shall be met with respect to any Exempt Loan to the Trust: Clause (a). Interest. The rate of interest on any Exempt Loan shall not be in excess of a reasonable rate of interest. At the date an Exempt Loan is made, the interest rate for the Exempt Loan and the price of any shares of Stock to be purchased with the Exempt Loan proceeds shall not be such that the Plan assets might be drained off. Clause (b). Use of Proceeds. The proceeds of an Exempt Loan shall be used within a reasonable time after receipt by the Trustee for any or all of the following purposes: (i) to acquire Stock; (ii) to repay that Exempt Loan; or (iii) to repay a prior Exempt Loan. Except as otherwise provided in Section 6.12 and Section 6.13, no Stock acquired with Exempt Loan proceeds shall be subject to a put, call or other option or a buy-sell or similar arrangement while held by the Trustee and when distributed from this Plan. Clause (c). Terms of Exempt Loan. The terms of each Exempt Loan shall be, at the time that Exempt Loan is made, as favorable to this Plan as the terms of a comparable loan resulting -28- from arm's-length negotiations between independent parties. Each Exempt Loan shall be for a specific term and shall not be payable at the demand of any person, except in the case of default. Clause (d). Collateral. Any collateral pledged to the lender by the Trustee shall consist only of Stock purchased with the borrowed funds or Stock that was used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan; provided, however, that in addition to such collateral, the Companies may guarantee the repayment of an Exempt Loan. Clause (e). Limited Recourse. Under the terms of each Exempt Loan, the lender shall not have any recourse against the Fund or the Trust except with respect to the collateral. Clause (f). Repayment. No person entitled to payment under any Exempt Loan shall have any right to assets of the Fund or the Trust other than: (i) collateral given for that Exempt Loan; (ii) contributions (other than contributions of Stock) that are made by the Companies under this Plan to meet this Plan's obligations under that Exempt Loan; (iii) earnings attributable to such collateral and the investment of such contributions; and (iv) to the extent directed by the Holding Company under Section 4.5, cash dividends on allocated shares of Stock. Payments made with respect to an Exempt Loan by the Trustee during any Plan Year shall not exceed an amount equal to the sum of such contributions and earnings received during or prior to that Plan Year less such payments in prior Plan Years. Such contributions and earnings shall be accounted for separately in the books of account of this Plan and Trust until that Exempt Loan is repaid. Clause (g). Agreement by Companies. The Companies shall agree in writing with the Trustee to contribute to the Fund amounts sufficient to enable the Trustee to pay each installment of principal and interest on each Exempt Loan on or before the date such installment is due, even if no tax benefit to the Companies results from such contribution. Clause (h). Release of Collateral. All assets of the Fund acquired by this Plan and Trust with Exempt Loan proceeds and all collateral pledged to secure an Exempt Loan shall be held in a suspense account and considered encumbered by the Exempt Loan. For each Plan Year during the duration of an Exempt Loan, the number of assets to be released from encumbrance and withdrawn from the suspense account shall be based upon the ratio that the payment of principal and interest on that Exempt Loan for that Plan Year bears to the total projected payments of principal -29- and interest over the duration of the Exempt Loan period. Assets released from encumbrance and withdrawn from the suspense account shall be allocated to the various Company Contributions Accounts in the Plan Year during which such portion is paid off and in the same manner as if the assets had been obtained by the Trustee when no Exempt Loan was involved. Income with respect to shares of Stock acquired with Exempt Loan proceeds and held in the suspense account shall be allocated to Company Contributions Accounts along with other income earned by the Fund, except to the extent that such income is to be used to repay an Exempt Loan. Clause (i). Default. In the event of any default upon an Exempt Loan, the value of Trust assets transferred in satisfaction of that Exempt Loan shall not exceed the amount of the default. If the lender is a disqualified person within the meaning of Section 4975(e)(2) of the Code, the Exempt Loan shall provide for a transfer of Trust assets upon default only upon and to the extent of the failure of the Trustee to meet the payment schedule of that Exempt Loan; provided, however, that the making of a guarantee shall not make a person a lender within the meaning of this Clause (i). Clause (j). Termination of Plan. Upon a complete termination of the Plan but only to the extent permitted by the Code and the Act, any unallocated Stock shall be sold to the Corporation at a price no less than fair market value or on the open market. To the extent permitted by Code and the Act, the proceeds of such sale shall be used to satisfy any outstanding Exempt Loan and the balance of any funds remaining shall be allocated as income to each Participant's Company Contributions Account based on the proportion that the Participant's Company Contributions Account balance as of the immediately preceding Valuation Date bears to the aggregate Company Contributions Account balances of all Participants as of the immediately preceding Valuation Date. Section 8.8. Annual Accounting. At least annually the Trustee shall render to the Committee a written account of its administration of the Fund during the period since the establishment of this Plan or the last accounting thereafter. Pursuant to this requirement, Stock acquired by the Trustee shall be accounted for as provided in Treasury Regulations ss. 1.402(a)-1(b)(2)(ii). Unless written notice of disapproval is furnished to the Trustee by the Committee within ninety (90) calendar days after receipt of such account, such account shall be deemed to have been approved. Section 8.9. Audit. In the case of any disapproval as provided in Section 8.8 and unless a satisfactory corrected written account is furnished to the Committee, an audit of the Trustee's account shall be made by a certified public accountant selected jointly by the Holding Company and the Trustee, but at the expense of the Companies. Upon completion of any such audit, the inaccuracies in the Trustee's account, if any, shall be corrected to conform to such audit and a corrected written account shall be delivered to the Committee by the Trustee. Except as otherwise provided by the Act, an approved account or an account corrected pursuant to such an audit shall be final and binding upon the Companies and upon all other persons who shall then or thereafter have any interest under this Plan. -30- Section 8.10. Uncertainty Concerning Payment of Benefits. In the event of any dispute or uncertainty as to the person to whom payment of any funds or other property shall be made under this Plan, the Trustee may, in its sole discretion, withhold such payment or delivery until such dispute or uncertainty shall have been determined or resolved by a court of competent jurisdiction or otherwise settled by the parties concerned. Section 8.11. Compensation. The Trustee shall be entitled to receive fair and reasonable compensation for its services hereunder, taking into account the amount and nature of its services and the responsibilities involved, and shall also be entitled to be reimbursed for all reasonable out-of-pocket expenses, including, but not by way of limitation, legal, actuarial and accounting expenses and all costs and expenses incurred in prosecuting or defending any action concerning this Plan or the Trust or the rights or responsibilities of any person hereunder, brought by or against the Trustee. Such reasonable compensation and expenses shall be paid by the Companies as provided in Section 3.4. Section 8.12. Standard of Care. The Trustee shall use its best judgment in exercising any duties or powers or in taking any action hereunder and shall be bound at all times to act in good faith and in accordance with all requirements imposed under the Act and under the Code. Except as otherwise provided by the Act, the Trustee shall not incur any liability by reason of any error of judgment, mistake of law or fact or any act or omission hereunder of itself or of any agent, proxy or attorney so long as it has acted in good faith. The Trustee may act on any paper or document believed by it to be genuine and to have been signed and presented by the proper person. The Trustee may consult with counsel (who may, but need not, be counsel to a Company), accountants or actuaries selected by it and, except as otherwise provided by the Act, the written opinion of such counsel or the written recommendations of such accountants or actuaries shall be full and complete authority and protection for any action or conduct pursued by the Trustee in good faith and in accordance with such written opinion or recommendations. Except as otherwise provided by the Act, the Trustee shall not be liable for any action taken by it pursuant to the written direction of the Committee. Section 8.13. Request for Instructions. In addition to written instructions relating to valuation and except as otherwise provided in Section 8.20, at any time the Trustee may, by written request, seek written instructions from the Committee on any matter and may await such written instructions from the Committee without incurring any liability whatsoever. If at any time the Committee should fail to give written directions to the Trustee, the Trustee may act, and shall be protected in acting, without such written directions, in such manner as in its sole discretion seems appropriate and advisable under the circumstances for carrying out the purposes of the Trust. Section 8.14. Resignation of Trustee. The Trustee may resign at any time by giving sixty (60) calendar days' prior written notice to the Bank, and the Trustee may be removed, with or without cause, by the Bank on sixty (60) calendar days' prior written notice to the Trustee. Such prior written notice may be waived by the party entitled to receive it. Upon any such resignation or removal becoming effective, the Trustee shall render to the Committee a written account of its -31- administration of the Fund for the period since the last written accounting and shall do all necessary acts to transfer the assets of the Fund to the successor Trustee or Trustees. Section 8.15. Vacancies in Trusteeship. In the event of any vacancy in the trusteeship of the Trust hereby created, the Bank may designate and appoint a qualified successor Trustee or Trustees. Any such successor Trustee or Trustees shall have all the powers herein conferred upon the original Trustee. Section 8.16. Information to Be Furnished. The Companies shall furnish to the Trustee, and the Trustee shall furnish to the Companies, such information relevant to this Plan and Trust as may be required under the Code and under the Act. The Trustee shall keep such records, make such identification and file with the Internal Revenue Service and with the U.S. Department of Labor such returns and other information concerning this Plan and Trust as may be required of it under the Code and under the Act. The Companies shall fulfill any reporting and disclosure obligations imposed on it by the Act, and each Participant shall be given any reports required by the Act. To the extent that the Trustee assumes any such Company obligations, it may charge a reasonable fee for its services apart from its normal fee and its expenses as provided in Section 8.11. Section 8.17. Voting Rights of Participants. Each Participant (or, if applicable, his Beneficiary) shall have the right to direct the Trustee as to the manner in which voting rights of shares of Stock which are allocated to his Company Contributions Account are to be exercised with respect to any corporate matter which involves the voting of such shares with respect to the approval or disapproval of any corporate merger or consolidation, recapitalization, reclassification, liquidation, dissolution, sale of substantially all assets of a trade or business, or such similar transactions which may be prescribed by the Secretary of Treasury in regulations. Each Participant (or, if applicable, his Beneficiary) shall also have the right to direct the Trustee as to the manner in which voting rights of shares of Stock which are allocated to his Company Contributions Account are to be exercised at any time the Holding Company has a class of securities that are required to be registered under Section 12 of the Securities Exchange Act of 1934 or that would be required to be so registered except for the exemption from registration provided by Section 12(g)(2)(H) of the Securities Exchange Act of 1934. In all other cases, the Committee shall be authorized to vote the Stock held by the Trustee as part of the Fund as provided in Section 7.11. Not less than thirty (30) calendar days prior to each annual or special meeting of shareholders of the Holding Company at which one (1) or more Participants are entitled to vote shares of Stock allocated to their Company Contributions Accounts under this Section 8.17, the Trustee shall cause to be prepared and delivered to each such Participant who has a Company Contributions Account as of the record date established by the Holding Company a copy of the notice of the meeting and form of proxy directing the Trustee as to how it shall vote at such meeting or at any adjournment thereof with respect to each issue. Upon receipt of such proxies, the Trustee shall vote or may grant the Committee a proxy to vote the shares of Stock in accordance with the proxies received by the Participants. The shares of Stock for which no direction is received by the Participant (or, if applicable, his Beneficiary) or held by the Trustee in any unallocated account shall be tendered in proportion to the tendering directions -32- received by the Trustee with respect to the allocated shares of Stock. The Trustee shall take steps to keep a Participant's voting directions confidential and shall not provide them to the Companies. Section 8.18. Delegation of Authority. The Trustee may delegate any of its ministerial powers or duties under this Plan, including the signing of any checks drawn on the Fund, to any of its agents or employees. Section 8.19. Diversification of Company Contributions Account. Notwithstanding anything contained in Article VI to the contrary, a Participant who has attained age fifty-five (55) and who has completed at least ten (10) years of participation in this Plan shall be permitted to elect that during a six (6) year period beginning with the Plan Year during which he had obtained age fifty-five (55) or, if later, during which he completed his tenth (10th) year of participation in this Plan a portion of his vested Company Contribution Account be distributed. In the first (1st) Plan Year for which the Participant has an election under this Section 8.19, the Participant may elect a distribution of up to twenty-five percent (25%) of his vested Company Contribution Account as of the end of such Plan Year. In the second (2nd), third (3rd), fourth (4th) and fifth (5th) Plan Year for which the Participant has an election under this Section 8.19, the Participant may elect a distribution which, when aggregated to any earlier distributions made by reason of this Section 8.19, does not exceed twenty-five percent (25%) of the vested balance held in his Company Contribution Account as of the end of the Plan Year for which the election is made. In the final Plan Year for which a Participant has an election under this Section 8.19, the Participant may elect a distribution of an amount which, when aggregated with any other distribution made by reason of this Section 8.19, does not exceed fifty percent (50%) of his vested Company Contribution Account balance as of the end of such Plan Year. The Trustee shall provide Participants eligible for an election under this Section 8.19 with information relating to the election before the end of the first (1st) Plan Year for which the election relates. A Participant electing a distribution under this Section 8.19 shall have until the ninetieth (90th) calendar day immediately following the end of the Plan Year for which the election is made to make his election. Any distribution made by reason of this Section 8.19 shall be in cash and shall be made within one hundred and eighty (180) calendar days after the end of the Plan Year for which the election is made. Section 8.20. Tender Offer. Each Participant (or, if applicable, his Beneficiary) shall have the right to direct the Trustee as to whether the shares of Stock which are allocated to his Company Contributions Account are to be tendered pursuant to any tender offer made for the Stock of the Holding Company. The Trustee shall as soon as practical (and in no event later than five (5) calendar days) after its receipt of the tender offer documents shall cause to be prepared and delivered to each Participant (and, if applicable, his Beneficiary) who has a Company Contributions Account as of the date of the tender offer a copy of all relevant information as to the tender offer and a written election form which will direct the Trustee as to whether it should tender the shares of Stock held in such Participant's Company Contributions Account. The shares of Stock for which no direction is received by the Participant (or, if applicable, his Beneficiary) or held by the Trustee in any unallocated account shall be tendered in proportion to the tendering directions received by the Trustee with respect to the allocated shares of Stock. The Trustee shall take steps to keep a -33- Participant's decision whether or not to tender shares of Stock confidential and shall not provide the information to the Companies. ARTICLE IX AMENDMENT, TERMINATION AND MERGER Section 9.1. Amendment. Except for such amendments as are permitted under this Section 9.1 and as otherwise provided in Section 1.18 and Section 9.3, the Trust is irrevocable. The Bank reserves the right to amend this Plan, at any time and from time to time, in whole or in part, including without limitation, retroactive amendments necessary or advisable to qualify this Plan and the Trust under the provisions of Sections 401(a) and 501(a) of the Code or the corresponding provisions of any similar statute hereafter enacted. However, the Bank's right to amend this Plan shall remain at all times subject to the provisions of Section 9.4. Further, no amendment of this Plan shall: (a) alter, change or modify the duties, powers, or liabilities of the Trustee hereunder without their written consent; (b) permit any part of the Fund to be used to pay premiums or contributions of the Companies under any other employee benefit plan maintained by the Companies for the benefit of its Employees; (c) effect any discrimination among the Participants; (d) change the vesting schedule in Section 6.3 or, if applicable, in Section 11.4 unless each Participant who has completed three (3) or more Years of Service as of the effective date of the amendment is permitted to elect, within sixty (60) calendar days after he is notified by the Committee of his rights under this Subsection (d), to have his vested interest determined without regard to such amendment; (e) decrease the accrued benefit of any Participant unless the amendment is approved by the Department of Labor because of substantial business hardship; or (f) decrease a Participant's Company Contributions Account balance or eliminate an optional form of distribution for the accrued benefits of a Participant determined as of the date of the amendment. Section 9.2. Termination or Complete Discontinuance of Contributions. The Companies are not and shall not be under any obligation or liability whatsoever to continue their contributions pursuant to this Plan or to maintain this Plan for any given length of time, except as otherwise provided in Section 8.7. A Company may, in its sole discretion, discontinue Company contributions to this Plan completely, except as otherwise provided in Section 8.7, with or without notice, or partially or totally terminate this Plan in accordance with its provisions at any time without any -34- liability whatsoever for such discontinuance or termination. If this Plan shall be partially or totally terminated or if contributions of a Company shall be completely discontinued, the rights of all Participants directly affected by the partial or total termination or the complete discontinuance of contributions in their Company Contributions Accounts shall thereupon become fully vested and non-forfeitable notwithstanding any other provisions of this Plan. However, the Trust shall continue until all Participants' Company Contributions Accounts have been completely distributed to, or for the benefit of, the Participants in accordance with this Plan. Section 9.3. Determination by Internal Revenue Service. Notwithstanding any other provisions of this Plan, if the Internal Revenue Service shall fail or refuse to issue a favorable written determination or ruling with respect to the initial qualification of this Plan and the initial exemption of the Trust from tax under Sections 401(a) and 501(a) of the Code, the Trustee shall, within a reasonable time after receiving a written direction from the Committee to do so, return to the Companies the current value of all Company contributions theretofore made. As a condition to such repayment, the Companies shall execute, acknowledge and deliver to the Trustee its written undertaking, in form satisfactory to the Trustee, to indemnify, defend and hold the Trustee harmless from all claims, actions, demands, or liabilities arising in connection with such repayment. If for any reason the Key District Director of the Internal Revenue Service should at any time after initial qualification fail to approve any of the terms, conditions or amendments contained in or implied from this Plan and Trust for continuing qualification and tax exemption under Sections 401(a) and 501(a) of the Code, then the Holding Company shall make such modifications, alterations and amendments of this Plan as are necessary to retain such approval and such modifications, alterations and amendments shall be effective retroactively to the Effective Date or to such later date as is required to retain such approval. Section 9.4. Nonreversion. Except as otherwise provided in Section 3.1 and Section 9.3: (a) The Bank shall have no power to amend or to terminate this Plan in such a manner which would cause or permit any part of the Fund to be diverted to purposes other than for the exclusive benefit of Participants or, if deceased, of their spouse or other Beneficiaries or as would cause or permit any portion of the Fund to revert to or to become the property of the Companies, and (b) The Bank shall have no right to modify or to amend this Plan retroactively in such a manner as to deprive any Participants, or if deceased, their spouses or other Beneficiaries of any benefits to which they are entitled under this Plan by reason of contributions made by the Companies prior to the modification or amendment, unless such modification or amendment is necessary to meet the qualification requirements of Sections 401(a) and 501(a) of the Code. Section 9.5. Merger. The Bank shall have the right, by action of its Board of Directors, to merge or to consolidate this Plan with, or to transfer the assets or liabilities of the Fund to, any other qualified retirement plan and trust at any time, except that no such merger, consolidation or transfer -35- shall be authorized unless each Participant in this Plan would receive a benefit immediately after the merger, consolidation or transfer (if the merged, consolidated or transferred plan and trust then terminated) equal to or greater than the benefit to which he would have been entitled immediately before the merger, consolidation or transfer (if this Plan then terminated). ARTICLE X MISCELLANEOUS Section 10.1. Creation of Plan Voluntary. The Plan hereby created is purely voluntary on the part of the Companies and, except as otherwise provided in Section 8.7, any Company may suspend or discontinue payments hereunder at any time or from time to time as it may decide in accordance with Section 10.17, but no suspension or discontinuance shall operate retroactively with respect to the rights of any Participant hereunder or his spouse or other Beneficiary. Section 10.2. No Employment Contract. Except as may be required by the Act, no contributions or other payments under this Plan shall constitute any contract on the part of the Company to continue such contributions or other payments hereunder. Participation hereunder shall not give any Participant the right to be retained in the service of the Companies or any right or claim to any benefits hereunder unless the right to such benefits has accrued under this Plan. All Participants shall remain subject to assignment, reassignment, promotion, transfer, layoff, reduction, suspension and discharge by the Companies to the same extent as if this Plan had never been established. Section 10.3. Limitation on Rights Created. Nothing contained in this Plan or any modification of the same or act done in pursuance hereof shall be construed as giving any person whomsoever any legal or equitable right against the Companies, the Committee, the Trustee or the Fund, unless specifically provided herein or granted by the Act. Section 10.4. Waiver of Claims. Except as otherwise provided by the Act, no liability whatsoever shall attach to or be incurred by any shareholder, officer or Director, as such, of the Companies under or by reason of any provision of this Plan or any act with reference to this Plan, and any and all rights and claims thereof, as such, whether arising at common law or in equity or created by statute, constitution or otherwise, are hereby expressly waived and released to the fullest extent permitted by law by every Participant and by his spouse or other Beneficiary as a condition of and as part of the consideration for the payments by the Companies under this Plan and for the receipt of benefits hereunder. Section 10.5. Spendthrift Provision. To the fullest extent permitted by law, none of the benefits, payments, accounts, funds or proceeds of any contract held hereunder shall be subject, voluntarily or involuntarily, to any claim of any creditor of any Participant or of his spouse or other Beneficiary, nor shall the same be subject to attachment, garnishment or other legal or equitable process by any creditor of a Participant or of his spouse or other Beneficiary, nor shall any Participant or his spouse or other Beneficiary have any right to alienate, anticipate, commute, pledge, -36- encumber or assign any such benefits, payments, accounts, funds or proceeds of any such contract. The preceding sentence shall also apply to the creation, assignment or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order as defined in Section 414(p) of the Code. It is the intention of the Companies that benefit payments hereunder shall be made only at the times, in the amounts and to the distributees as specified in this Plan regardless of any marital dissolution, bankruptcy or other legal proceedings to which such distributees may be a party to the fullest extent permitted by law. Section 10.6. Payment of Benefits to Others. If any person to whom benefit payments are due or payable under this Plan shall be unable to care for his affairs because of illness or accident, any such payment may be made (unless prior claim thereto shall have been made by a duly-qualified guardian or other legal representative) to the spouse, parent, brother, sister or other person deemed by the Committee, in its sole discretion, to have incurred expense for such person and on such terms as the Committee, in its sole discretion, may impose. Any such payment and any payment to a Participant or to his legal representative or, if deceased, to his spouse or other Beneficiary made pursuant to the provisions of this Plan shall to the extent thereof be in full satisfaction of all claims arising hereunder against this Plan, the Fund, the Committee, the Trustee and the Companies. Section 10.7. Payments to Missing Persons. If the Trustee is unable to effect delivery of any amounts payable under this Plan to the person entitled thereto or, upon such person's death, to such person's personal representative, they shall so advise the Committee in writing, and the Committee shall give written notice by certified mail to said person at the last known address of such person as shown in the Companies' records. If such person or the personal representative thereof shall not have responded to the Committee within three (3) years from the date of mailing such certified notice, the Committee shall direct the Trustee to distribute such amount, including any amount thereafter becoming due to such person or the personal representative thereof, in the manner provided in Section 6.7 with respect to the death of a Participant when there is no valid designation of Beneficiary on file. Section 10.8. Severability. If any provisions of this Plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining part of this Plan and it shall be construed and enforced as if such illegal or invalid provisions had never been inserted herein. Section 10.9. Captions. Titles of Articles, Sections and Clauses herein are for general information only and shall be ignored in any construction of the provisions hereof. Section 10.10. Construction. Words in the masculine gender shall be construed to include the feminine gender in all cases where appropriate, and words in the singular or plural shall be construed as being in the plural or singular where appropriate. -37- Section 10.11. Counterparts. This Plan may be executed in any number of counterparts, each of which shall be deemed to be an original. All the counterparts shall constitute but one (1) and the same instrument and may be sufficiently evidenced by any one (1) counterpart. Section 10.12. Indemnification. The Companies shall indemnify and hold harmless each member of the Committee and any individual Trustee who is also an Employee of the Company from any and all claims, loss, damage, expense and liability arising from any act or omission of such member or Trustee, as the case may be, except when the same is judicially determined to be due to the fraud or bad faith of such member or Trustee, as the case may be, if possible. Section 10.13. Standards of Interpretation and Administration. This Plan and the Fund held hereunder shall be for the exclusive benefit of Employees of the Companies and their spouses or other Beneficiaries and defraying reasonable costs of administration. This Plan shall be interpreted and administered in a manner consistent with the requirements of the Code relating to qualified stock bonus plans and trusts and the requirements imposed by the Act. Wherever in this Plan discretionary powers are given to any party or wherever any interpretation may be necessary, such powers shall be exercised and such interpretation shall be made in a non-discriminatory manner and in conformity with the fiduciary duties imposed under Section 404 of the Act. Section 10.14. Governing Law. Except as otherwise provided by the Act, this Plan shall be administered and construed and its validity determined under the laws of the State of Indiana. Section 10.15. Successors and Assigns. This Plan shall be binding upon the successors and assigns of the Companies and of the Trustee. Section 10.16. Adoption of Plan. Any corporation, who together with the Holding Company, constitutes a member of a controlled group of corporations under Section 414(b) of the Code, with the approval of the Board of Directors of the Holding Company may adopt this Plan and participate as a Company in this Plan by the execution of an instrument of adoption of this Plan which shall specify the Effective Date as to such party. A listing of the subsidiaries and affiliates who have adopted this Plan is shown as Appendix A. Section 10.17. Withdrawal from Plan. Any Company in this Plan may, by resolution of its Board of Directors or other governing body, withdraw from participation as a Company in this Plan. ARTICLE XI TEFRA TOP-HEAVY RULES Section 11.1. Application. The rules set forth in this Article XI shall be applicable with respect to any Plan Year beginning on or after the Effective Date in which this Plan is determined to be a Top-Heavy Plan. The provisions of this Article XI shall be applied only to the extent necessary to comply with Section 416 of the Code and in a manner consistent with all requirements imposed under Section 416 of the Code. -38- Section 11.2. Determination. This Plan shall be considered a Top-Heavy Plan with respect to any Plan Year if as of the Anniversary Date of the immediately preceding Plan Year or, if the determination is to be made for this Plan's first (1st) Plan Year, the last calendar day of the first (1st) Plan Year (the "determination date"): (a) the present value of the Accrued Benefits (as such term is defined in Section 11.3) of Key Employees (as such term is defined below) exceeds sixty percent (60%) of the present value of the Accrued Benefits of all Employees and former Employees (other than former Key Employees (as such term is defined below)); provided, however, that the Accrued Benefits of any Participant who has not completed an Hour of Service for the Company during a five (5) year period ending on the determination date (as such term is defined above) shall be disregarded, or (b) this Plan is part of a required aggregation group (as such term is defined below) and the required aggregation group is top-heavy; provided, however, that this Plan shall not be considered a Top-Heavy Plan with respect to any Plan Year in which this Plan is part of a required or permissive aggregation group (as such terms are defined below) which is not top-heavy. For purposes of this Article XI, the term "Key Employee" shall include for any Plan Year any Employee or former Employee who at any time during that Plan Year or any of the four (4) preceding Plan Years is: (c) an officer of a Company whose Section 415 Compensation from the Companies is greater than fifty percent (50%) of the maximum dollar limitation under Section 415(b)(1)(A) of the Code in effect for the calendar year in which the determination date (as such term is defined above) falls, (d) one (1) of the ten (10) Employees owning (or considered as owning within the meaning of Section 318 of the Code) the largest interest in a Company whose ownership interest in that Company is at least one-half of one percent (0.5%) and whose Section 415 Compensation from the Companies is equal to or greater than the maximum dollar limitation under Section 415(c)(1)(A) of the Code in effect for the calendar year in which the determination date (as such term is defined above) falls; provided, however, that if two (2) Employees have the same interest in a Company, the Employee whose annual Section 415 Compensation from the Companies is greater shall be treated as having a larger interest in the Company, (e) a five percent (5%) owner (determined without regard to Sections 414(b),(c) and (n) of the Code) of a Company, (f) a one percent (1%) owner (determined without regard to Sections 414(b),(c) and (n) of the Code) of a Company whose Section 415 Compensation from the Companies is in excess of one hundred and fifty thousand dollars ($150,000); -39- provided, however, that the Beneficiary of any deceased Employee or of any deceased former Employee who was included as a Key Employee by reason of this Section 11.2 shall also be included as a Key Employee; provided, further, that an individual shall only be included as a Key Employee to the extent required by Section 416(i) of the Code. For purposes of this Article XI, "Non-Key Employee" is any Employee or former Employee who is not a Key Employee. For purposes of determining who is a key employee, Section 415 Compensation shall include amounts deferred or redirected by an Employee pursuant to Sections 401(k) and 125 of the Code. For purposes of this Section 11.2, the term "required aggregation group" shall include: (g) all qualified retirement plans maintained by a Company in which a Key Employee (as such term is defined above) is a participant; provided, however, that the term "required aggregation group" shall also include all qualified retirement plans previously maintained by a Company but terminated within the five (5) year period ending on the determination date (as such term is defined above) in which a key employee (as such term is defined above) was a participant; and (h) any other qualified retirement plans maintained by a Company which enable any qualified retirement plan described in Subsection (g) above to meet the requirements of Section 401(a)(4) or of Section 410 of the Code. For purposes of this Section 11.2, the term "permissive aggregation group" shall include all qualified retirement plans that are part of a required aggregation group (as such term is defined above) and any other qualified retirement plans maintained by a Company if such group will continue to meet the requirements of Section 401(a)(4) and of Section 410 of the Code. Section 11.3. Accrued Benefits. For purposes of this Article XI, Accrued Benefits with respect to any Plan Year shall be determined as of the determination date (as such term is defined in Section 11.2) for that Plan Year based on the Company Contributions Account balances as of the most recent Valuation Date within a consecutive twelve (12) month period ending on such determination date; provided, however, that such Company Contributions Account balances shall be adjusted to the extent required by Section 416 of the Code to increase the Company Contributions Accounts balances by the amount of any Company Contributions made and allocated after the Valuation Date but on or before such determination date and by any distributions made to Participants prior to the Valuation Date during any of the five (5) consecutive Plan Years immediately preceding the Plan Year for which the determination as to whether this Plan is a Top-Heavy Plan is being made (including distributions from a terminated plan which if not terminated would have been part of a required aggregation group (as such term is defined in Section 11.7)) and to reduce the Company Contributions Account balances by any rollovers or plan to plan transfers made to this Plan before the Valuation Date which are initiated by a Participant from any qualified retirement plan maintained by an unrelated employer and by any deductible employee contributions. -40- Section 11.4. Vesting Provisions. Notwithstanding the provisions of Section 6.3, with respect to any Plan Year in which this Plan is determined to be a Top-Heavy Plan, a Participant's Accrued Benefit which is derived from Company Contributions shall vest in accordance with the following vesting schedule if it would result in a larger vested percentage than the percentage determined under Section 6.3: Period of Service Vested Percentage Less than two (2) years 0 Two (2) years or more but less than three (3) years 20% Three (3) years or more but less than four (4) years 40% Four (4) years or more but less than five (5) years 60% Five (5) years or more but less than six (6) years 80% Six (6) years or more 100% provided, however, that if this Plan becomes a Top-Heavy Plan and subsequently ceases to be such: (a) the vesting schedule shown above shall continue to apply but only with respect to Participants whose Period of Service is as least three (3) years as of the Anniversary Date of the final Top-Heavy Plan Year, (b) the vesting schedule shown above shall continue to apply but only with respect to the Accrued Benefits of all other Participants as of the Anniversary Date of the final Top-Heavy Plan Year, and (c) the vesting schedule in Section 6.3 shall apply to any additional Accrued Benefits of the Participants described in Subsection (b) above which accrue after the Anniversary Date of the final Top-Heavy Plan Year. Section 11.5. Minimum Contribution. Notwithstanding the provisions of Section 4.2, with respect to any Plan Year in which this Plan is a Top-Heavy Plan, the Company contributions for such Plan Year shall be allocated in the following order of priority: -41- (a) first, among the Company Contributions Accounts of all eligible Participants who had not separated from service with the Companies as of the Anniversary Date of that Plan Year regardless of the number of Hours of Service completed by each such Participant during that Plan Year according to the ratio that each Participant's Compensation for that Plan Year bears to the total Compensation of all eligible Participants; provided, however, that the portion of the Company contributions to be allocated pursuant to this Subsection (a) shall not exceed three percent (3%) of the total Compensation of all eligible Participants for that Plan Year; (b) next, the remaining portion, if any, of the Company contributions for such Plan Year shall be allocated in accordance with Section 4.2; provided, however, that if a Participant also participates in a top-heavy defined benefit plan, he shall receive the minimum benefit for such Plan Year under the defined benefit plan. Section 11.6. Code Section 415 Limitations. With respect to any Plan Year beginning before January 1, 2000, in which this Plan is a Top-Heavy Plan, Section 4.3 shall be read by substituting the number one (1.00) for the number one and twenty-five one hundredths (1.25) wherever it appears therein; provided, however, that such substitution shall not have the effect of reducing a Participant's Accrued Benefit under any qualified defined benefit plan maintained by a Company prior to the first (1st) calendar day of the Plan Year in which this Article XI initially becomes applicable. -42- This Plan has been adopted on this ________ day of ______________, 1997, but is to be effective as of January 1, 1997. UNION COMMUNITY BANCORP By: Its: Attest: By: Its: UNION FEDERAL SAVINGS & LOAN ASSOCIATION By: Its: Attest: By: Its: HOME FEDERAL SAVINGS BANK By: Its: Attest: By: Its: -43- EX-10.6 3 EXEMPT LOAN AND SHARE PURCHASE AGREEMENT EXEMPT LOAN AND SHARE PURCHASE AGREEMENT between TRUST UNDER UNION COMMUNITY BANCORP EXEMPT STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1997) and UNION COMMUNITY BANCORP TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND INTERPRETATION.....................2 Section 1.1. General Interpretation.............................2 Section 1.2. Certain Definitions................................2 ARTICLE II TRUST LOAN; TRUST NOTE; PAYMENTS...................2 Section 2.1. Trust Loan.........................................2 Section 2.2. Use of Trust Loan Proceeds.........................3 Section 2.3. Trust Note.........................................3 Section 2.4. Interest...........................................3 Section 2.5. Payments...........................................3 Section 2.6. Optional Prepayment................................4 Section 2.7. Place and Time of Payment..........................4 Section 2.8. Application of Certain Payments....................4 Section 2.9. Due Date Extension.................................4 Section 2.10. Computations..............................5 Section 2.11. Interest on Overdue Amounts...............5 ARTICLE III SECURITY...........................................5 Section 3.1. Security...........................................5 Section 3.2. Release of Shares..................................5 ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS......................................5 Section 4.1. Representations and Warranties of Trustee..........5 Section 4.2. Representations and Warranties of Company..........6 Section 4.3. Covenants of Company...............................8 ARTICLE V CONDITIONS PRECEDENT...............................8 Section 5.1. Documentation Satisfactory to Company..............8 Section 5.2. Other Conditions Precedent to Company Obligations..9 Section 5.3. Documentation Satisfactory to Trustee..............9 Section 5.4. Other Conditions Precedent to Trustee's Obligation.9 ARTICLE VI EVENTS OF DEFAULT AND THEIR EFFECT.................9 -i- Section 6.1. Events of Default; Effect...........................9 ARTICLE VII SHARE PURCHASES....................................10 Section 7.1. Purchase of Shares.................................10 Section 7.2. Manner of Purchase.................................10 Section 7.3. Readily Tradeable..................................10 Section 7.4. No Prohibited Transactions.........................10 Section 7.5. Maximum Number of Shares...........................10 ARTICLE VIII GENERAL............................................11 Section 8.1. Waivers; Amendments................................11 Section 8.2. Confirmations; Information.........................11 Section 8.3. Captions...........................................11 Section 8.4. Governing Law......................................11 Section 8.5. Notices............................................11 Section 8.6. Expenses...........................................12 Section 8.7. Reimbursement......................................12 Section 8.8. Entire Agreement...................................12 Section 8.9. Severability.......................................12 Section 8.10. No Assignment......................................12 Section 8.11. Counterparts..............................12 ARTICLE IX LIMITED RECOURSE...................................12 Section 9.1. Limited Recourse...................................12 Section 9.2. No Personal Recourse Against Trustee...............13 Exhibit A-TRUST NOTE Exhibit B-SHARE PLEDGE AGREEMENT Exhibit C-CERTIFICATE OF TRUSTEE Exhibit D-CERTIFICATE OF THE COMPANY -ii- EXEMPT LOAN AND SHARE PURCHASE AGREEMENT THIS EXEMPT LOAN AND SHARE PURCHASE AGREEMENT (this "Agreement" or "Loan Agreement"), dated December 29, 1997, between the Trust (the "Trust") established pursuant to the provisions of the UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1997) (the "ESOP") by Home Federal Savings Bank, as Trustee (the "Trustee"), and UNION COMMUNITY BANCORP, an Indiana corporation (the "Company"). W I T N E S S E T H: WHEREAS, the Company has duly established the ESOP in connection with which the Trust has been created; WHEREAS, pursuant to the ESOP and direction of the Company pursuant to Section 8.7 of the ESOP, the Trust desires to borrow from the Company, and the Company desires to lend to the Trust, an aggregate principal amount equal to up to One Million Eight Hundred and Forty Thousand Dollars ($1,840,000) (the "Trust Loan"), representing the cost of 8% of the shares of Common Stock, without par value, of the Company (the "Common Stock"), offered in the Subscription Offering and the Community Offering of the Company's Common Stock being made in connection with the Company's acquisition of the common stock of Union Federal Savings and Loan Association (the "Association") upon conversion of the Association from a federal mutual savings and loan association to a federal stock savings and loan association (the "Conversion"), but no more than 184,000 such shares, on the terms and conditions hereof; WHEREAS, the parties hereto intend that the Trust Loan constitute an "exempt loan" within the meaning of Section 4975(d)(3) of the Code, Treasury Regulation ss. 54.4975-7(b), Section 408(b)(3) of ERISA, and Department of Labor Regulation ss. 2550.408b-3 (collectively, the "Exempt Loan Rules") and an "Exempt Loan" within the meaning of Sections 1.20 and 8.7 of the ESOP; WHEREAS, the parties intend that the Trustee will utilize the Trust Loan for the purpose of effecting purchases in the Subscription Offering and Community Offering (collectively, the "Offering") or otherwise of shares of Company Common Stock, without par value ("Shares"), to be held in the Trust for participants in the ESOP. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which each party hereto respectively acknowledges by its execution hereof), the parties hereto intending legally to be bound do hereby agree as follows: -1- ARTICLE I DEFINITIONS AND INTERPRETATION Section 1.1. General Interpretation. This Agreement shall be construed and interpreted so as to maintain the status of the ESOP as a qualified leveraged employee stock ownership plan under Sections 401(a) and 4975(e)(7) of the Code, the Trust as exempt from taxation under Section 501(a) of the Code, and the Trust Loan as an "exempt loan" under the Exempt Loan Rules, and as an "Exempt Loan" under Section 8.7 of the ESOP (collectively, the "Required Status"). Section 1.2. Certain Definitions. In this Agreement, unless a clear contrary intention appears, the terms set forth below have the following meanings when used herein. Other terms are defined elsewhere herein. (a) "Business Day" means a day, other than a Saturday, Sunday or public holiday, on which commercial banks are open in Crawfordsville, Indiana for the purpose of conducting commercial banking business. (b) "Code" means the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder. (c) "Default" means an event or circumstance which, with notice or lapse of time or both, would constitute an Event of Default as defined in Section 6.1. (d) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder. (e) "Loan Documents" shall mean, collectively, this Agreement, the Trust Note, the Share Pledge Agreement and any other instruments or documents required to be delivered pursuant hereto or thereto, in each case as amended and in effect from time to time. ARTICLE II TRUST LOAN; TRUST NOTE; PAYMENTS Section 2.1. Trust Loan. Subject to the terms and conditions of this Agreement, the Company agrees to make available to the Trust, and the Trust may borrow from the Company, on the Closing Date (hereinafter defined), the Trust Loan under this Agreement in an amount up to One Million Eight Hundred Forty Thousand Dollars ($1,840,000), representing the cost of 8% of the Shares offered in the Offering, subject to a maximum of 184,000 such Shares. The Company shall, upon fulfillment of the applicable conditions set forth in Article V, on the Closing Date make the Trust Loan up to such amount available to the Trustee in immediately available funds, at its principal office. Notwithstanding the foregoing, the Company shall not be obligated to make any portion of -2- the Trust Loan available to the Trust if the Conversion is not consummated, or if the ESOP is not permitted to purchase any shares because of an oversubscription in the first category of eligible subscribers. The Closing of the Trust Loan (the "Closing") will occur at the offices of Barnes & Thornburg, 1313 Merchants Bank Building, 11 South Meridian Street, Indianapolis, Indiana 46204, on the same date that the Conversion closes, or such later date as the parties shall agree upon (the "Closing Date"). Section 2.2. Use of Trust Loan Proceeds. The Trust will use the proceeds of the Trust Loan to purchase Shares in the Offering, in accordance with Article VII hereof. Section 2.3. Trust Note. The Trust Loan will be represented by a promissory note of the Trust (the "Trust Note"), substantially in the form of Exhibit A hereto, appropriately completed, dated the Closing Date, payable to the order of the Company in the original principal amount of the Trust Loan, or so much thereof as may at any time have been advanced hereunder and thereunder, on the maturity date thereof. Section 2.4. Interest. The portion of the Trust Loan principal outstanding at any time shall accrue and bear daily interest at a fixed rate per annum equal to the prime rate as published in "The Wall Street Journal" on the Closing Date (the "Interest Rate"), payable annually in accordance with Section 2.5. On any stated or accelerated maturity of the Trust Loan all accrued and unpaid interest thereon shall be forthwith due and payable. Section 2.5. Payments. The Trust shall pay the principal amount of the Trust Loan together with accrued interest as follows: (a) an initial principal installment of one twentieth (1/25) of the initial principal amount of the Trust Loan, shall be due and payable on December 31, 1998, together with all interest accrued on the Trust Loan from the Closing Date through and including December 31, 1998; and (b) thereafter, payments of principal and interest shall be made in annual installments due and payable on the last business day of December of each year, commencing on December 31, 1999, through and including December 31, 2022, which annual installments shall include a principal payment in the amount of one-twentieth of the initial principal amount of the Trust Loan, plus all interest accrued on the Trust Loan through and including the date of such payment. The outstanding principal of the Trust Loan, together with all accrued and unpaid interest and any other obligations then outstanding, will in any event be due and payable in full on December 31, 2022. -3- Section 2.6. Optional Prepayment. (a) Upon compliance with this Section 2.6, the Trust, at its option, may prepay the Trust Note at any time and from time to time, either in whole or in part, by payment of the principal amount of the Trust Note or portion thereof to be prepaid and accrued interest thereon to the date of such prepayment. (b) The Trustee will give notice of any prepayment of the Trust Note pursuant to this Section 2.6 to the Company not less than 3 days nor more than 60 days before the date fixed for such optional prepayment specifying (i) such date, (ii) that prepayment is to be made under Section 2.6 of this Agreement, (iii) the principal amount of the Trust Note to be prepaid on such date, and (iv) accrued interest applicable to the prepayment. Such notice of prepayment shall be signed by the Trustee. Notice of prepayment having been so given, the aggregate principal amount of the Trust Note specified in such notice, together with accrued interest thereon shall become due and payable on the prepayment date. (c) Partial prepayments of the Trust Note made pursuant to this Section 2.6 shall be credited in each case against remaining scheduled payments on the Trust Note in the inverse order of the due dates of such payments. (d) No such prepayment shall, however, be permitted if such prepayment would adversely affect the Required Status. Section 2.7. Place and Time of Payment. All payments of principal of, or interest on, the Trust Note shall be made by the Trust to the Company in same day funds at Crawfordsville, Indiana, not later than 11:00 a.m. on the date due. Funds received after that hour shall be deemed to have been received on the next following Business Day. Section 2.8. Application of Certain Payments. If, and to the extent, Shares acquired with proceeds of the Trust Loan, held in the Trust and not yet allocated to participant accounts are sold, then, to the extent allowable by the Exempt Loan Rules and applicable law, the Trustee, at the direction of the ESOP Committee administering the ESOP (the "Committee"), may apply the proceeds thereof toward the repayment of the Trust Loan. Dividends or other cash distributions paid on the Shares purchased with the proceeds of the Trust Loan (whether or not allocated to the accounts of Participants) shall be used by the Trustee, at the discretion of the Committee, to the extent permissible to repay the Trust Loan in accordance with the provisions of Section 4.5 of the ESOP. Section 2.9. Due Date Extension. If any payment of principal of, or interest on, the Trust Note falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension. -4- Section 2.10. Computations. All computations of interest on the Trust Loan and other amounts due hereunder shall be based on a year of 360 days, comprising twelve 30-day months. Section 2.11. Interest on Overdue Amounts. If any payment of principal of, or interest on, the Trust Note is not made when due, interest shall accrue on the amount thereof, commencing on such due date through the date on which such amount is paid in full, at a rate per annum equal to the Interest Rate plus two percent (2%). ARTICLE III SECURITY Section 3.1. Security. Payment of the Trust Note and performance by the Trust of its obligations under this Agreement and the Trust Note will be secured by a pledge of, and the grant of a security interest in, the Shares by the Trustee on behalf of the Trust to and in favor of the Company under a Share Pledge Agreement, substantially in the form of Exhibit B hereto (the "Share Pledge Agreement"). Section 3.2. Release of Shares. Notwithstanding any provision of this Agreement or the Share Pledge Agreement to the contrary contained or implied, the Company will release from the pledge and security interest under the Share Pledge Agreement, such Shares as must be allocated to ESOP participants under the ESOP pursuant to Section 8.7(h) of the ESOP and otherwise under the Code, the Exempt Loan Rules or other applicable law, provided that Section 8.7(h) of the ESOP shall not be amended without the Trustee's prior consent. ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS Section 4.1. Representations and Warranties of Trustee. To induce the Company to enter this Agreement and to make the Trust Loan, the Trustee represents and warrants to the Company as follows: (a) The Trustee has determined that the Trust Loan is primarily for the benefit of ESOP participants and their beneficiaries and bears interest at a rate not in excess of a reasonable rate and that the terms of the loan are at least as favorable to the Trust and the ESOP participants as the terms of a comparable loan resulting from arm's-length negotiations between completely independent parties; (b) The Trustee is a national bank, legally existing and in good standing under federal law, has corporate power and authority and is duly authorized to enter into and perform the Trust; -5- (c) The Trustee has full right, power and authority to execute, deliver and perform on behalf of the Trust under the Trust Agreement, the ESOP and otherwise the obligations set forth in the Loan Documents, and the execution and performance of such obligations will not conflict with or result in a breach of the terms of the ESOP or the Trust or result in a breach or violation of the Trustee's Articles of Association or By-Laws or of any law or regulation, order, writ, injunction or decree of any court or governmental authority binding on the Trust or Trustee; (d) The ESOP (and related Trust) has been duly authorized by all necessary corporate action on the part of the Trustee, if any, has been duly executed by an authorized officer of the Trustee and delivered and constitutes a legal, valid and binding obligation of the Trustee and declaration of trust enforceable in accordance with its terms; (e) The Loan Documents have been duly authorized, executed and delivered by the Trustee and constitute legal, valid and binding obligations, contracts and agreements of the Trustee on behalf of the Trust, enforceable in accordance with their respective terms; (f) The execution, delivery and performance of the Loan Documents do not conflict with, or result in the creation or imposition of any lien or encumbrance upon any of the property of the Trustee (other than the Collateral, as defined in the Share Pledge Agreement) pursuant to the provisions of the ESOP (and related Trust) or any other agreement or other instrument to which the Trustee is a party or may be bound; and (g) No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, Federal, state or local, is necessary in connection with the execution, delivery and performance by the Trustee of the Loan Documents. Section 4.2. Representations and Warranties of Company. To induce the Trust to enter this Agreement and undertake the obligations hereunder, the Company represents and warrants to the Trust as follows: (a) The Company is a corporation duly organized and validly existing under the laws of the State of Indiana, has corporate power and authority and is duly authorized to enter into and perform its obligations under this Agreement; (b) Neither the execution and delivery of this Agreement, nor the performance of the terms hereof nor the establishment of the ESOP or the Trust violates, conflicts with or constitutes a default under Company's Articles of Incorporation or By-Laws or any material agreement to which the Company is a party or by which the Company or any of its assets is bound, or violates any law, regulation, order or decree of any court, arbitration or governmental authority applicable to the Company, in any manner that would have a material adverse effect on the Trust, the ESOP, the Required Status or the Company; -6- (c) The Company and the Association have taken all actions required to be taken by it to establish the ESOP and the related Trust. The ESOP and related Trust are intended to, and the terms thereof have been drafted with the purpose to, comply with the requirements of Sections 401(a) and 501(a) of the Code, as applicable, with the requirements for treatment as a leveraged employee stock ownership plan, as that term is defined in Section 4975(e)(7) of the Code, and with other applicable laws; (d) The Association has duly appointed the Trustee as trustee of the Trust and the Committee under the ESOP; (e) The Company has delivered to Trustee copies of its Articles of Incorporation and its By-Laws, the ESOP, and resolutions of its Board of Directors with respect to approval of this Agreement and entering into of the transactions and execution of all documents contemplated by this Agreement, in each case certified by the Secretary of the Company, which copies are true, correct and complete. None of such documents or resolutions has been amended or modified in any respect and such documents and resolutions remain in full force and in effect, in the form previously delivered to the Trustee; (f) Other than the Common Stock, the Company has no other classes of shares outstanding or treasury shares. (g) The Company's ability to honor put options (the "Put Options"), which would obligate the Company to repurchase shares of Common Stock distributed from time to time to ESOP participants and beneficiaries under Section 6.13 of the ESOP, is not presently restricted by the provisions of any law, rule or regulation in effect on the date hereof (except for capital, liquidation account, requirements to obtain regulatory approval of repurchase transactions, and similar constraints imposed by regulatory authorities on savings associations) or by the terms of any loan, financing or other agreement or instrument to which the Company is a party or by which the Company is or may be bound. (h) There are no actions, proceedings, or investigations pending or, to the Company's knowledge, threatened against or affecting the Company or any of its property or rights at law or in equity or before or by any court or tribunal that have not been disclosed to the Trustee and may have a material adverse effect on the value of the Common Stock. (i) All employee plans of the Association and the Company are in compliance, in all material respects, with all applicable reporting, disclosure and filing requirements pertaining to employee benefit plans set forth in the Code and ERISA. (j) No consent, approval or other authorization or notice to any governmental authority or expiration of any government-imposed waiting period is required in connection with the execution or delivery of this Agreement, except such as has been obtained, given or expired. -7- (k) The shares of Common Stock constitute "qualifying employer securities" within the meaning of Section 409(l) of the Code. Section 4.3. Covenants of Company. The Company covenants that: (a) The Company shall submit or cause to be submitted to the Internal Revenue Service within ninety (90) days following the Closing Date an application for a determination letter confirming that the ESOP, effective as of January 1, 1997, and the related Trust are qualified and exempt from taxation under Sections 401(a) and 501(a), respectively, of the Code and that the ESOP meets the requirements of Section 4975(e)(7) of the Code. (b) The Company and the Association shall make all changes reasonably requested by the Internal Revenue Service as a condition of obtaining a determination letter from the Internal Revenue Service with respect to the ESOP, effective January 1, 1997. The Company and the Association shall continue to do all things necessary to cause the ESOP and the Trust at all times to be operated and administered such that the ESOP remains qualified under Section 401(a) and remains an employee stock ownership plan under Section 4975(e)(7) of the Code and the Trust remains tax-exempt under Section 501(a) of the Code. (c) If at any time the ESOP is required, by applicable law, court order, or otherwise, to make distributions of Shares that otherwise would be in violation of Federal or state securities laws, the Company shall take all actions necessary to permit such required distributions to be made in full compliance with such laws. (d) The Company shall honor the Put Options if, and to the extent, required by Section 409(h) of the Code and regulations thereunder, and shall not permit its ability to honor such Options to be materially restricted in any way. (e) The Company or the Association shall provide to the Trustee all governmental filings relating to the ESOP and all ESOP amendments within sixty days of the date on which such filing or amendment is effected, and, on an annual basis, shall provide complete financial statements of the ESOP and the Company. ARTICLE V CONDITIONS PRECEDENT Section 5.1. Documentation Satisfactory to Company. The obligation of the Company to make the Trust Loan is, in addition to the conditions precedent contained in Section 5.2, subject to the condition precedent that the Company shall have received each of the following, duly executed and dated as of the Closing Date (or such earlier date as shall be satisfactory to the Company) and in form and substance satisfactory to the Company: -8- (a) the Trust Note; (b) the Share Pledge Agreement; and (c) a certificate of the Trustee, substantially in the form of Exhibit C hereto, with such changes thereto as shall be acceptable to the Company and its counsel, and with respect to such other matters as the Company may reasonably request. Section 5.2. Other Conditions Precedent to Company Obligations. In addition to the condition precedent contained in Section 5.1, the obligation of the Company to make the Trust Loan available is subject to the conditions precedent that (i) the Conversion is consummated, (ii) the representations and warranties made by the Trustee herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date; and (iii) the ESOP shall be permitted to purchase Shares in the Conversion. Section 5.3. Documentation Satisfactory to Trustee. The obligation of the Trust to enter into the Trust Loan is subject to the condition precedent that the Trustee shall have received each of the following, duly executed and dated as of the Closing Date (or such earlier date as shall be satisfactory to Trustee) and in form and substance satisfactory to Trustee: (a) The Share Pledge Agreement; and (b) A certificate of the Company, substantially in the form of Exhibit D hereto, with such changes thereto as shall be acceptable to the Trustee and its counsel, and with respect to such other matters as the Trustee may reasonably request. Section 5.4. Other Conditions Precedent to Trustee's Obligation. The obligation of the Trustee to enter into the Trust Loan is subject to the conditions precedent that (i) the Conversion is consummated, (ii) the representations and warranties made by the Company herein shall be true and correct in all material respects on the Closing Date as if made on and as of the Closing Date, and (iii) no injunction or restraining order shall be in effect or litigation pending or threatened to forbid or enjoin the consummation of the transaction contemplated by this Agreement. ARTICLE VI EVENTS OF DEFAULT AND THEIR EFFECT Section 6.1. Events of Default; Effect. If default in the payment when due of any principal of, or default (and continuance thereof for 5 days) in the payment when due of interest on, the Trust Note (an "Event of Default") occurs, unless the effect thereof as an Event of Default has been waived in writing by the Company, then the Company may declare the Trust Note to be due and payable, whereupon the Trust Note shall become immediately due and payable, without presentment, demand, protest or notice to the Trust or other action by the Company of any kind whatsoever, all of which -9- actions the Trust hereby waives to the maximum extent permitted by law. The Company shall promptly advise the Trust of any declaration of default, but failure to do so or delay in doing so shall not impair the effect of such declaration. Notwithstanding anything to the contrary herein or in the Trust Note or the Share Pledge Agreement contained or implied, if a Default or Event of Default occurs with respect to the Trust Loan by the Trust, the value of Trust assets transferred in satisfaction thereof shall not exceed the amount of such default. In addition, such a transfer of such Trust assets shall only occur upon and to the extent of the failure of the Trust to meet the payment schedule of the Trust Loan provided in Article II. ARTICLE VII SHARE PURCHASES Section 7.1. Purchase of Shares. The Company is making the Trust Loan available to the Trustee for the purpose of allowing the Trustee to purchase Shares in the Conversion. To the extent the ESOP is permitted to purchase up to 184,000 Shares in the Conversion, the Trustee agrees to use all of the proceeds of the Trust Loan to purchase Shares in accordance with this Article VII. Section 7.2. Manner of Purchase. The Trustee shall timely subscribe to purchase the Shares the ESOP is permitted to purchase in the Conversion pursuant to the Association's Plan of Conversion. The Trustee shall draw upon the Trust Loan and use the proceeds thereof to purchase the number of Shares the ESOP may purchase in the Offering, simultaneously with consummation of the Conversion. Section 7.3. Readily Tradeable. The Company agrees to use reasonable efforts to cause the Shares to be, and to maintain the Shares' status as, "readily tradeable on an established securities market" within the meaning of Section 409(l)(1) of the Code. Section 7.4. No Prohibited Transactions. The Trustee in the performance of its obligations under this Agreement, shall observe its fiduciary obligations under Section 404 of ERISA, shall not engage in any transaction prohibited by ERISA or contrary to such fiduciary obligations, and, in acquiring Shares, shall not (and shall not be deemed obligated to) pay more than "adequate consideration", as defined in Section 3(18) of ERISA. Section 7.5. Maximum Number of Shares. The Trust shall not purchase Shares with proceeds of the Trust Loan in excess of the lesser of 8% of the outstanding Shares of the Company at the time of purchase and 184,000 Shares. -10- ARTICLE VIII GENERAL Section 8.1. Waivers; Amendments. No delay on the part of the Company, or the holder of the Trust Note in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by any of them of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement, the Trust Note or the Share Pledge Agreement shall in any event be effective unless the same shall be in writing and signed and delivered by the Company and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Section 8.2. Confirmations; Information. The Company and the Trust (or holder of the Trust Note) agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal balance then outstanding under the Trust Note and such other matters relating to the Trust Loan, the Trust, the ESOP or the purchase of Shares as may reasonably be the subject of inquiry. Section 8.3. Captions. Section captions used in this Agreement are for convenience only, and shall not affect the construction of this Agreement. Section 8.4. Governing Law. To the extent not preempted by ERISA, this Agreement and the Trust Note shall be a contract made under and governed by the laws of the State of Indiana, without regard to conflict of laws principles. All obligations of the Trust and rights of the Company and other holder of the Trust Note expressed herein or in such Trust Note shall be in addition to and not in limitation of those provided by law. Section 8.5. Notices. All communications and notices hereunder shall be in writing and shall be deemed to be given when sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopier, duly confirmed, and addressed to such party at the address indicated below or to such other address as such party may designate in writing pursuant to this Section 8.5. Union Community Bancorp 221 East Main Street Crawfordsville, Indiana 47933 Attention: Joseph E. Timmons, President Home Federal Savings Bank P. O. Box 408 501 Washington Street Columbus, Indiana 47201 Attention: David L. Fisher -11- Section 8.6. Expenses. All expenses of the transaction contemplated by this Agreement shall be paid by the Company. Section 8.7. Reimbursement. If the Trustee uses proceeds from the Trust Loan to purchase Common Stock directly from the Company and it is subsequently determined by a court of competent jurisdiction that the Trustee paid in excess of "adequate consideration" within the meaning of ERISA for such shares, the Company shall, as soon as practicable following such judgment, reimburse the Trustee for the amount of the excess payment. Section 8.8. Entire Agreement. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings between the parties. Section 8.9. Severability. Should any clause, paragraph or part of this Agreement be held or declared to be void or illegal for any reason, all other clauses, paragraphs or parts of this Agreement which can be affected without such illegal clause, paragraph or part shall nevertheless remain in full force and effect. Section 8.10. No Assignment. This Agreement and the obligations of the parties herein may not be assigned or assumed by any other parties. Section 8.11. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which put together shall constitute one and the same instrument. ARTICLE IX LIMITED RECOURSE Section 9.1. Limited Recourse. Notwithstanding anything to the contrary herein or in the Trust Note, the Share Pledge Agreement or any other instrument, agreement or document contained or implied, the obligations of the Trust under this Agreement, the Trust Note and the Share Pledge Agreement (collectively, the "Trust Loan Obligations") shall be enforceable to the extent permitted under law, including (without limitation) the Exempt Loan Rules, only against the Trust to the extent of the Collateral (as defined in the Share Pledge Agreement) not theretofore released from the pledge and security interest under the Share Pledge Agreement as provided in Section 3.2 and contributions and other payments (other than contributions of employer securities) made to the Trust in accordance with the ESOP to enable the Trust to pay and satisfy the Trust Loan Obligations and from earnings attributable to the Shares purchased with Trust Loan proceeds and the investment of such contributions and payments (collectively, the "Trust Loan Collateral"). No recourse shall be had to or against the Trust or the assets thereof (other than the Trust Loan Collateral) for any deficiency judgment against the Trust for the purpose of obtaining payment or other satisfaction of the Trust Loan Obligations. -12- Section 9.2. No Personal Recourse Against Trustee. Without limiting the provisions of Section 9.1, the Trustee of the Trust shall have no personal liability for any of the Trust Loan Obligations. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their respective representatives thereunto duly authorized as of the date first above written. TRUST UNDER UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: Home Federal Savings Bank, Trustee By: /s/ David L. Fisher Printed: David L. Fisher Its: Vice President and Senior Trust Officer UNION COMMUNITY BANCORP By: /s/ Joseph E. Timmons Printed: Joseph E. Timmons Its: President -13- Exhibit A TRUST NOTE $___________ December ___, 1997 Due: December 31, 2022 FOR VALUE RECEIVED, the undersigned, the Trust (the "Trust") established pursuant to the provisions of the UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT, DATED AND EFFECTIVE AS OF JANUARY 1, 1997 (the "Plan") by HOME FEDERAL SAVINGS BANK, as Trustee (the "Trustee"), promises to pay to the order of UNION COMMUNITY BANCORP, an Indiana corporation (together with its successors, endorsees and assigns, the "Company"), at such place and in such other manner as the Company may direct in writing, and when required pursuant to the provisions of that certain Exempt Loan and Share Purchase Agreement, dated December 29, 1997 (the "Loan Agreement"), by and among the Trustee and the Company, the principal amount of ____________________________ Dollars ($__________) or so much thereof as may be advanced by the Company to the Trust hereunder and under the Loan Agreement, said amount being due and payable together with accrued interest in such installments and at such times as provided in the Loan Agreement, with the entire unpaid principal balance due and payable with accrued interest in full on December 31, 2022, as provided in the Loan Agreement. The principal balance hereof from time to time outstanding shall bear interest from the date of each disbursement of the Trust Loan evidenced by this Trust Note through and including the date on which such principal amount is paid in full, at the times provided in the Loan Agreement, at the Interest Rate, as defined in the Loan Agreement which is _____________ percent (_____%) per annum (or, in the case of overdue principal and, to the extent legally enforceable, overdue interest, at the Interest Rate plus two percent (2%) per annum). This Trust Note has been issued by the Trust in accordance with the terms of the Loan Agreement to evidence the Trust Loan made by the Company to the Trust under the Loan Agreement, to which reference is hereby made for the statement of the terms thereof. This Trust Note and the Company are entitled to the benefits of the Loan Agreement and the Company may enforce the agreements of the Trust contained therein and in the Loan Documents, and may exercise the respective remedies provided for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Trust Note which are not otherwise defined herein have the respective meanings assigned to them in the Loan Agreement. -14- The Trust has the right to prepay the principal amount of this Trust Note without penalty on the terms and conditions specified in the Loan Agreement. If any Event of Default shall occur, the entire unpaid principal amount of this Trust Note and all of the accrued but unpaid interest thereon may become or be due and payable in the manner and with the effect provided in the Loan Agreement. The collection and enforcement of this Trust Note are subject to the provisions and limitations of Section 9.1 of the Loan Agreement. To the extent not preempted by ERISA, this Trust Note and the obligations of the Trust hereunder shall be governed by the laws of the State of Indiana without regard to principles of conflict of laws. All parties to this Trust Note, including endorsers, sureties and guarantors, if any, hereby waive presentment, demand, protest, notice, relief from valuation and appraisement laws and any and all other notices and demands in connection with the delivery, acceptance, performance and enforcement of this Trust Note and also hereby assent to extensions of the time of payment or forbearance or other indulgences without notice, and agree to remain bound until the principal, premium, if any, and interest are paid in full, notwithstanding any extensions of time for payment which may be granted, even though the period or periods of extension may be indefinite, and notwithstanding any inaction by, or failure to assert any legal rights available to, the holder of this Trust Note. IN WITNESS WHEREOF, the Trust has caused this instrument to be executed by the Trustee, the day and year first above written. TRUST UNDER UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: Home Federal Savings Bank, Trustee By: -15- Exhibit B SHARE PLEDGE AGREEMENT between TRUST UNDER UNION COMMUNITY BANCORP STOCK OWNERSHIP PLAN AND TRUST AGREEMENT and UNION COMMUNITY BANCORP Dated: December ___, 1997 -1- SHARE PLEDGE AGREEMENT THIS SHARE PLEDGE AGREEMENT (this "Agreement" or "Share Pledge Agreement"), dated as of December 29, 1997, between the Trust (the "Trust") established pursuant to the provisions of UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT (EFFECTIVE AS OF JANUARY 1, 1997) (the "Plan") by HOME FEDERAL SAVINGS BANK, as Trustee ("Trustee"), and UNION COMMUNITY BANCORP, an Indiana corporation (the "Company"). WITNESSETH: WHEREAS, contemporaneously herewith, the Trust and the Company have entered into that certain Exempt Loan and Share Purchase Agreement (the "Loan Agreement"; definitions of terms appearing in which have the same meanings herein, unless a clear contrary intention appears), dated December 29, 1997, pursuant to which the Company has agreed to lend to the Trust, and the Trust has agreed to borrow from the Company, the Trust Loan, and the Trust, to evidence its indebtedness to the Company with respect to the Trust Loan, has executed and delivered the Trust Note to the Company; and WHEREAS, it is a condition precedent to the obligation of the Company to make the Trust Loan that, among other things, the Trust execute and deliver this Agreement to the Company, NOW, THEREFORE, in consideration of the Loan Agreement and the Trust Loan and other good and valuable consideration (the receipt, adequacy and sufficiency of which the Trust acknowledges by its execution hereof, the Trust intending to be legally bound does hereby covenant and agree with the Company as follows: Section 1. Pledge. To secure the due and punctual payment and performance of the obligations of the Trust hereunder and under the Loan Agreement and the Trust Note (collectively, the "Liabilities"), the Trustee on behalf of the Trust hereby pledges, hypothecates, assigns, transfers, sets over and delivers unto the Company, its successors and assigns and hereby grants to the Company, its successors and assigns a security interest in: (a) All Shares of Company Common Stock purchased or to be purchased with the proceeds of the Trust Loan (collectively, the "Pledged Shares") and the certificates representing or evidencing the Pledged Shares, and, to the extent permitted by Section 4975(e)(7) of the Internal Revenue Code of 1986, as amended, and Reg. ss. 54.4975-7(b)(5) promulgated thereunder, all cash, securities, interest, dividends, rights and other property at any time and from time to time received in respect of or in exchange for any or all of the Pledged Shares; and (b) all proceeds of all of the foregoing -2- (all such Pledged Shares, certificates, cash, securities, interest, dividends, rights and other property, and proceeds thereof, other than as released, sold or otherwise applied by the Company pursuant to the' terms hereof, being herein collectively called the "Collateral"), TO HAVE AND TO HOLD such Collateral, together with all rights, titles, interests, privileges and preferences appertaining or incidental thereto, forever, subject, however, to the terms, covenants and conditions hereafter set forth. Section 2. Warranties and Covenants. (a) The Trust represents and warrants to the Company that the Trust is, or at the time of any future delivery, pledge, assignment or transfer will be, the lawful owner of the Collateral, free of all claims and liens other than the security interest hereunder, with full right to deliver, pledge, assign and transfer the Collateral to the Company as Collateral hereunder. (b) So long as any of the Liabilities remain outstanding, the Trust will, unless the Company shall otherwise consent in writing: (i) promptly deliver to the Company from time to time certificates representing Pledged Shares as the Trustee acquires them and, upon request of the Company, such stock powers and other documents, satisfactory in form and substance to the Company, with respect to the Collateral as the Company may reasonably request to preserve and protect, and to enable the Company to enforce, its rights and remedies hereunder; (ii) not create or suffer to exist any lien, security interest or other charge or encumbrance against, in or with respect to any of the Collateral except for the pledge hereunder and the security interest created hereby; (iii) not make or consent to any amendment or other modification or waiver with respect to any of the Collateral or enter into any agreement or permit to exist any restriction with respect to any of the Collateral other than pursuant hereto; and (iv) not take or fail to take any action which would in any manner impair the value or enforceability of the Company's security interest in any of the Collateral. Section 3. Care of Collateral. The Company shall be deemed to have exercised reasonable care with respect to the interest of the Trust in the custody and preservation of the Collateral if it takes such action for that purpose as the Trust shall request in writing or as it would with respect to similar assets of its own, but failure of the Company to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. -3- Section 4. Certain Rights Regarding Collateral and Liabilities. (a) The Company may from time to time, whether before or after any of the Liabilities shall become due and payable, without notice to the Trust, to the extent otherwise permitted (i) retain or obtain a security interest in the Collateral, to secure payment and performance of any of the Liabilities, (ii) retain or obtain the primary or secondary liability of any party or parties, in addition to the Trust, with respect to any of the Liabilities, (iii) extend or renew for any period (whether or not longer than the original period) or exchange any of the Liabilities or release or compromise any obligation of any nature of any party with respect thereto, and (iv) surrender, release or exchange all or any part of any property, in addition to the Collateral, securing payment and performance of any of the Liabilities, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect to any such property. (b) The Company shall have no right to vote the Pledged Shares prior to the occurrence of an Event of Default (hereinafter in Section 6(a) hereof defined). After the occurrence of an Event of Default, the Trust shall have the right to vote any and all of the Pledged Shares in accordance with the Plan unless and until it receives notice from the Company that such right has been terminated with respect to shares subject to execution as a result of the Default. Section 5. Dividends, etc. (a) So long as no Default or Event of Default, shall have occurred and be continuing, the Trust shall be entitled to receive any and all cash dividends on the Pledged Shares which it is otherwise entitled to receive, and to vote the Pledged Shares in accordance with the terms of the Plan and to give consents, waivers and ratifications in respect of the Pledged Shares, but any and all stock and/or liquidating dividends, distributions in property, returns of capital or other distributions made on or in respect of the Pledged Shares, whether resulting from a subdivision, combination or reclassification of the outstanding capital stock of any issuer thereof or received in exchange for the Pledged Shares or any part thereof or as a result of any merger, consolidation, acquisition or other exchange of assets to which any issuer may be a party or otherwise, and any and all cash and other property received in exchange for any Collateral shall be, and become part of the Collateral pledged hereunder and, if received by the Trust, shall forthwith be delivered to the Company or its designated nominee (accompanied, if appropriate, by proper instruments of assignment and/or stock powers executed by the Trust in accordance with the Company's instructions) to be held subject to the terms of this Agreement and the Plan. (b) Upon the occurrence and during the continuance of an Event of Default, subject to the terms of Section 4(b) hereof, all rights of the Trust pursuant to Section 5(a) hereof shall cease and the Company shall have the sole and exclusive right and authority to receive and retain the dividends which the Trust would otherwise be authorized to retain and, to the extent permitted by law, to vote and give consents, waivers and ratifications pursuant to Section 5(a) hereof. Any and all money and other property paid over to or received by the Company pursuant to the provisions -4- of this paragraph (b) shall be retained by the Company as additional Collateral hereunder and be applied in accordance with the provisions hereof. Section 6. Event of Default. (a) The occurrence of any of the following shall constitute an Event of Default hereunder nonpayment, when due, whether by acceleration or otherwise, of any amount payable on any of the Liabilities; an Event of Default as defined in the Loan Agreement; any representation or warranty of the Trust contained herein or given pursuant hereto being untrue in any material respect; or the Trust's failure to perform any covenant or agreement contained herein. (b) Upon the occurrence of an Event of Default, (i) the Company may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code as in effect from time to time in Indiana or otherwise available to it, including, but not limited to, sale, assignment, or other disposal of the Pledged Shares in exchange for cash or credit, and (ii) the Company may, without demand or notice of any kind, but subject to Section 7, appropriate and apply toward the payment of such of the Liabilities, and in such order of application, as the Company may from time to time elect, any balances, credits, deposits, accounts or moneys of the Trust. If any notification of intended disposition of any of the Collateral is required by law, such notification, if mailed, shall be deemed reasonably and properly given if mailed at least five (5) days before such disposition, postage prepaid, addressed to the Trust, either at the address of the Trust shown below, or at any other address of the Trust appearing on the records of the Company. Any proceeds of any disposition of Collateral shall be applied as provided in Section 7 hereof. All rights and remedies of the Company expressed hereunder are in addition to all other rights and remedies possessed by it, including those under any other agreement or instrument relating to any of the Liabilities or security therefor. No delay on the part of the Company in the exercise of any right or remedy shall operate as a waiver thereof, and no single or partial exercise by the Company of any right or remedy shall preclude other or further exercise thereof or the exercise of any other right or remedy. No action of the Company permitted hereunder shall impair or affect the rights of the Company in and to the Collateral. (c) The Trust agrees that in any sale of any of the Collateral whenever an Event of Default hereunder shall have occurred and be continuing, the Company is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualification, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Trust further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall -5- the Company be liable nor accountable to the Trust for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. (d) Notwithstanding anything to the contrary herein or in the Trust Note or the Loan Agreement contained or implied, if an Event of Default occurs with respect to the Trust Loan by the Trust, the value of Trust assets transferred in satisfaction thereof shall not exceed the amount of such default. In addition, such a transfer of such Trust assets shall only occur upon, and to the extent of the failure of, the Trust to meet the payment schedule of the Trust Loan provided in Article II of the Loan Agreement. Section 7. Application of Proceeds of Sale or Cash Held as Collateral. The proceeds of sale of Collateral sold pursuant to the terms of Section 6 hereof and/or, after an Event of Default, the cash held as Collateral hereunder, shall be applied by the Company, to the extent permitted by applicable law, as follows: First: to payment of the costs and expenses of such sale, including the out-of-pocket costs and expenses of the Company and the reasonable fees and out-of-pocket costs and expenses of counsel employed in connection therewith, and to the payment of all advances made by the Company for the account of the Trust hereunder and the payment of all costs and expenses incurred by the Company in connection with the administration and enforcement of this Agreement, to the extent that such advances, costs and expenses shall not have been reimbursed to the Company; Second: to the payment in full of the Liabilities; and Third: the balance, if any, of such proceeds shall be paid to the Trust, its successors and assigns, or as a court of competent jurisdiction may direct. Section 8. Authority of Company. The Company shall have and be entitled to exercise all such powers hereunder as are specifically delegated to the Company by the terms hereof, together with such powers as are incidental thereto. The Company may execute any of its duties hereunder by or through agents or employees and shall be entitled to retain counsel and to act in reliance upon the advice of such counsel concerning all matters pertaining to its duties hereunder. Neither the Company, nor any director, officer or employee of the Company, shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or wilful misconduct. The Trust hereby agrees, to the extent permitted by applicable law, to reimburse the Company, on demand, for all costs and expenses incurred by the Company in connection with the enforcement of this Agreement (including costs and expenses incurred by any agent employed by the Company). Section 9. Termination. This Agreement shall terminate when all the Liabilities have been fully paid and performed, at which time the Company shall reassign and redeliver (or cause to be reassigned and redelivered) to the Trust, or to such person or persons as the Trust shall designate, -6- against receipt, such of the Collateral (if any) as shall not have been theretofore released, sold or otherwise applied by the Company pursuant to the terms hereof and shall still be held by it hereunder, together with any appropriate instruments of reassignment and release. Any such reassignment shall be without recourse upon, or representation or warranty by, the Company. Section 10. Required Release of Collateral. Notwithstanding any provision of this Agreement or the Loan Agreement to the contrary, the Company from time to time will release from the pledge and security interest under the Loan Agreement, such Collateral as must be allocated to participants under the Plan pursuant to Section 8.7(h) of the Plan and otherwise under the Code, the Exempt Loan Rules or other applicable law. Section 11. Limited Recourse. Notwithstanding anything to the contrary herein or in the Trust Note, the Loan Agreement or any other instrument, agreement or document contained or implied, the Liabilities shall be enforceable to the extent permitted under applicable law, including, without limitation, the Exempt Loan Rules, only against the Trust to the extent of the Collateral not theretofore released from the pledge and security interest under this Agreement as provided herein and contributions (other than contributions of employer securities) made to the Trust in accordance with the Plan to enable the Trust to pay and satisfy the Liabilities and from earnings attributable to the Shares and the investment of such contributions (collectively, the "'Trust Loan Collateral"). No recourse shall be had to or against the Trust or the assets thereof (other than the Trust Loan Collateral) for any deficiency judgment against the Trust for the purpose of obtaining payment or other satisfaction of the Liabilities. Without limiting the foregoing, the Trustee of the Trust shall have no personal liability for any of the Liabilities, other than as required by or arising under applicable law. Section 12. Notices. All communications and notices hereunder shall be in writing and, if mailed, shall be deemed to be given when sent by registered or certified mail, postage prepaid, return receipt requested, or by telecopier, duly confirmed, and addressed to such party at the address indicated below or to such other address as such party may designate in writing pursuant to this Section 12. UNION COMMUNITY BANCORP 221 East Main Street P.O. Box 151 Crawfordsville, Indiana 47933 Attention: Joseph E. Timmons, President HOME FEDERAL SAVINGS BANK P. O. Box 408 501 Washington Street Columbus, Indiana 47201 Attention: David L. Fisher -7- Section 13. Binding Agreement Assignment. This Agreement, and the terms, covenants and conditions hereof, shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and assigns, except the Trust shall not be permitted to assign this Agreement or any interest herein or in the Collateral, or any part thereof, or otherwise grant any option with respect to the Collateral, or any part thereof and the Company shall not assign any interest herein or in the Collateral unless such assignment is expressly made subject to the terms of the Loan Documents. Section 14. Miscellaneous Provisions. Neither this Agreement nor any provision hereof may be amended, modified, waived, discharged or terminated nor may any of the Collateral be released or the pledge or the security interest created hereby extended, except by an instrument in writing duly signed by or on behalf of the Company hereunder. The section headings used herein are for convenience of reference only and shall not define or limit the provisions of this Agreement. This Agreement may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Section 15. Governing Law; Interpretation. This Agreement has been made and delivered at Spencer, Indiana, and, except to the extent preempted by ERISA, shall be governed by the internal laws of the State of Indiana, without regard to principles of conflict of laws. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. Section 16. Filing as a Financing Statement. At the option of the Company, this Agreement, or a carbon, photographic or other reproduction of this Agreement or of any Uniform Commercial Code financing statement covering the Collateral or any portion thereof shall be sufficient as a Uniform Commercial Code financing statement and may be filed as such. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective representatives thereunto duly authorized as of the date first above written. TRUST UNDER UNION COMMUNITY BANCORP EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT By: Home Federal Savings Bank, Trustee By: Printed: Its: -8- UNION COMMUNITY BANCORP By: /s/ Joseph E. Timmons Printed: Joseph E. Timmons Its: President -9- Exhibit C CERTIFICATE OF TRUSTEE The undersigned, Home Federal Savings Bank, a federal savings bank, in its capacity as Trustee ("Trustee") of the Trust under Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1997) (the "Trust") hereby certifies, pursuant to Section 5.1(c) of that certain Exempt Loan and Share Purchase Agreement between the Trust and Union Community Bancorp of even date herewith (the "Loan Agreement") that: (i) it has determined that the Trust Loan, as defined in the Loan Agreement, is primarily for the benefit of ESOP participants and their beneficiaries and bears interest at a rate not in excess of a reasonable rate and that the terms of the loan are at least as favorable to the Trust and the ESOP participants as the terms of a comparable loan resulting from arm's-length negotiations between completely independent parties; (ii) the other representations and warranties of the Trust contained in the Loan Agreement are true in all material respects as of the date of this Certificate; and (iii) the conditions set forth in Article V of the Loan Agreement, to the extent their satisfaction depends upon action on the part of the Trust or the Trustee, have been satisfied as of the date of this Certificate. EXECUTED this ____ day of December, 1997. Home Federal Savings Bank, as Trustee of the Trust under the Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1997) By: -10- Exhibit D CERTIFICATE OF THE COMPANY The undersigned, Union Community Bancorp, an Indiana corporation (the "Company"), pursuant to Section 5.3(b) of that certain Exempt Loan and Share Purchase Agreement between Home Federal Savings Bank, a federal savings bank, in its capacity as Trustee of the Trust under the Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement (Effective as of January 1, 1997) and the Company of even date herewith (the "Loan Agreement"), hereby certifies that the representations and warranties of the Company contained in the Loan Agreement are true and correct in all material respects, and the Company is in compliance with its covenants set forth in the Loan Agreement in all material respects, as of the date of this Certificate. EXECUTED as of this ___ day of December, 1997. UNION COMMUNITY BANCORP By: /s/ Joseph E. Timmons Joseph E. Timmons, President -11- EX-21 4 SUBSIDIARIES OF UNION COMMUNITY BANCORP SUBSIDIARIES OF UNION COMMUNITY BANCORP Subsidiaries of Union Community Bancorp: Name Jurisdiction of Incorporation Union Federal Savings and Loan Association Federal UFS Service Corp. Indiana EX-27 5 FDS FOR UNION COMMUNITY BANCORP
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INOORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCETO SUCH FINANCIAL STATEMENTS. 0001046183 UNION COMMUNITY BANCORP 1,000 U.S. DOLLARS 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 1,000 44,758 0 0 0 0 5,820 6,003 78,688 252 132,040 62,258 0 23,303 3,573 29,638 0 0 13,268 132,040 6,090 411 300 6,801 3,366 3,836 2,965 165 0 470 1,743 1,198 0 0 1,198 0 0 3.50 52 52 0 0 159 72 165 252 252 0 0
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