-----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, U+LZza4KTVw/YbDIODwAgUWA1TUBs1rrPhA6yoNAm3nnxUqVgIRv0NV5XcxXa5vI ija2kJJ1xHHw98CegIdoMg== 0000908834-99-000114.txt : 19990403 0000908834-99-000114.hdr.sgml : 19990403 ACCESSION NUMBER: 0000908834-99-000114 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION COMMUNITY BANCORP CENTRAL INDEX KEY: 0001046183 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [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: 99583477 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, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to _______________ Commission File Number 333-35799 UNION COMMUNITY BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-2025237 (State or other Jurisdiction (I.R.S. Employer Identification of Incorporation or Organization) Number) 221 East Main Street Crawfordsville, Indiana 47933 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone numberincluding area code: (765) 362-2400 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, Without Par Value (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES _____ NO ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (N/A) The aggregate market value of the issuer's voting stock held by non-affiliates, as of March 26 1999 was $29,758,300. The number of shares of the Registrant's Common Stock, without par value, outstanding as of December 31, 1998, was 2,889,663 shares. DOCUMENTS INCORPORATED BY REFERENCE None. Exhibit Index on Page E-1 Page 1 of 29 Pages UNION COMMUNITY BANCORP Form 10-K INDEX Page Forward Looking Statement................................................... 3 PART I Item 1 Business.................................................... 3 Item 2. Properties.................................................. 25 Item 3. Legal Proceedings........................................... 26 Item 4. Submission of Matters to a Vote of Security Holders......... 26 Item 4.5. Executive Officers of the Registrant........................ 26 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters....................................... 26 Item 6. Selected Financial Data..................................... 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 26 Item 7A. Quantitative and Qualitative Disclosures about Market Risks. 26 Item 8. Financial Statements and Supplementary Data................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................... 27 PART III Item 10. Directors and Executive Officers of Registrant.............. 27 Item 11. Executive Compensation...................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management..................................... 27 Item 13. Certain Relationships and Related Transactions.............. 27 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................... 27 SIGNATURES ........................................................ 28 FORWARD LOOKING STATEMENT This Annual Report on Form 10-K ("Form 10-K") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief, outlook, estimate or expectations of the Holding Company (as defined below), its directors or its officers primarily with respect to future events and the future financial performance of the Holding Company. Readers of this Form 10-K are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-K identifies important factors that could cause such differences. These factors include changes in interest rates; loss of deposits and loan demand to other savings and financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; regulatory changes; or unanticipated results in pending legal proceedings. Item 1. Business General Union Community Bancorp, an Indiana corporation (the "Holding Company"), was organized in September, 1997. On December 29, 1997, it acquired the common stock of Union Federal Savings and Loan Association ("Union Federal") upon the conversion of Union Federal from a federal mutual savings and loan association to a federal stock savings and loan association. Union Federal was organized as a state-chartered savings and loan association in 1913. Since then, Union Federal has conducted its business from its full-service office located in Crawfordsville, Indiana. Union Federal's principal business consists of attracting deposits from the general public and originating fixed-rate and adjustable-rate loans secured primarily by first mortgage liens on one- to four-family residential real estate. Union Federal's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). Management believes that it has developed a solid reputation among its loyal customer base because of its commitment to personal service and because of strong support of the local community. Union Federal offers a number of financial services, including: (i) residential real estate loans; (ii) multi-family loans; (iii) commercial real estate loans; (iv) construction loans; (v) home improvement loans; (vi) money market demand accounts ("MMDAs"); (vii) passbook savings accounts; and (viii) certificates of deposit. Lending Activities Union Federal has historically concentrated its lending activities on the origination of loans secured by first-mortgage liens for the purchase, construction or refinancing of one- to four-family residential real property. One- to four-family residential mortgage loans continue to be the major focus of Union Federal's loan origination activities, representing 77.2% of its total loan portfolio at December 31, 1998. Union Federal also offers multi-family mortgage loans, commercial real estate loans, construction loans, and, to a limited extent, consumer loans consisting of loans secured by deposits and home improvement loans. Mortgage loans secured by multi-family properties and commercial real estate totaled approximately 11.4% and 6.8%, respectively, of Union Federal's total loan portfolio at December 31, 1998. Construction loans totaled approximately 4.3% of Union Federal's total loans as of December 31, 1998. Consumer loans, which consist of home improvement loans and passbook loans, constituted approximately .2% of Union Federal's total loan portfolio at December 31, 1998. Loan Portfolio Data. The following table sets forth the composition of Union Federal's loan portfolio by loan type and security type as of the dates indicated, including a reconciliation of gross loans receivable after consideration of the allowance for loan losses and loans in process.
At December 31, ------------------------------------------------------------------------- 1998 1997 1996 --------------------- -------------------- -------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ------ -------- ------ -------- ------ -------- (Dollars in thousands) TYPE OF LOAN Real estate mortgage loans: One-to-four-family............... $71,823 77.19% $62,436 76.95% $57,031 77.46% Multi-family..................... 10,609 11.40 10,197 12.57 10,920 14.83 Commercial....................... 6,355 6.83 3,627 4.47 3,593 4.88 Real estate construction loans...... 3,993 4.29 4,652 5.73 1,740 2.36 Commercial loans.................... 51 .06 --- --- --- --- Consumer loans ..................... 213 .23 223 .28 346 .47 ------- ------ ------- ------ ------- ------ Gross loans receivable......... $93,044 100.00% $81,135 100.00% $73,630 100.00% ======= ====== ======= ====== ======= ====== TYPE OF SECURITY One-to-four-family real estate... $73,130 78.60% $64,730 79.78% $58,271 79.14% Multi-family real estate......... 12,037 12.93 11,172 13.77 11,520 15.65 Commercial real estate........... 7,666 8.24 5,094 6.28 3,593 4.88 Deposits......................... 160 .17 139 .17 246 .33 Other............................ 51 .06 --- --- --- --- ------- ------ ------- ------ ------- ------ Gross loans receivable......... 93,044 100.00 81,135 100.00 73,630 100.00 ======= ====== ======= ====== ======= ====== Deduct: Allowance for loan losses........... 362 .39 252 .31 159 .22 Deferred loan fees.................. 334 .36 325 .40 356 .48 Loans in process.................... 1,448 1.55 2,122 2.62 418 .57 ------- ------ ------- ------ ------- ------ Net loans receivable............. $90,900 97.70% $78,436 96.67% $72,697 98.73% ======= ====== ======= ====== ======= ====== Mortgage Loans: Adjustable-rate.................. $19,954 21.51% $ 20,683 25.56% $24,238 33.07% Fixed-rate....................... 72,826 78.49 60,229 74.44 49,046 66.93 ------- ------ ------- ------ ------- ------ Total.......................... $92,780 100.00% $80,912 100.00% $73,284 100.00% ======= ====== ======= ====== ======= ======
The following table sets forth certain information at December 31, 1998, regarding the dollar amount of loans maturing in Union Federal's loan portfolio based on the contractual terms to maturity. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. Management expects that prepayments will cause actual maturities to be shorter.
Balance Due During Years Ended December 31, Outstanding at 2002 2004 2009 2014 December 31, to to to and 1998 1999 2000 2001 2003 2008 2013 following ---- ---- ---- ---- ---- ---- ---- --------- (In thousands) Real estate mortgage loans: Residential loans.................. $71,823 $97 $485 $237 $1,119 $22,254 $29,191 $18,440 Multi-family loans.................... 10,609 --- 465 --- 285 3,826 4,269 1,764 Commercial loans................... 6,355 --- 9 9 88 1,151 1,414 3,684 Construction loans.................... 3,993 --- 914 514 --- 648 1,067 850 Commercial loans...................... 51 51 --- --- --- --- --- --- Loans secured by deposits............. 160 160 --- --- --- --- --- --- Home improvement loans................ 53 1 2 11 9 18 12 --- ------- ---- ------ ---- ------ ------- ------- ------- Total............................ $93,044 $309 $1,875 $771 $1,501 $27,897 $35,953 $24,738 ======= ==== ====== ==== ====== ======= ======= =======
The following table sets forth, as of December 31, 1998, the dollar amount of all loans due after one year that have fixed interest rates and floating or adjustable interest rates.
Due After December 31, 1999 Fixed Rates Variable Rates Total ----------- -------------- ----- (In thousands) Real estate mortgage loans: Residential loans................................. $63,466 $8,260 $71,726 Multi-family loans................................ 4,021 6,588 10,609 Commercial loans.................................. 2,625 3,730 6,355 Construction loans................................... 2,619 1,374 3,993 Commercial loans..................................... --- --- --- Installment loans.................................... --- --- --- Loans secured by deposits............................ --- --- --- Home improvement loans............................... 52 --- 52 ------- ------- ------- Total............................................. $72,783 $19,952 $92,735 ======= ======= =======
One- to Four-Family Residential Loans. Union Federal's primary lending activity consists of originating one- to four-family residential mortgage loans secured by property located in its primary market area. Union Federal generally does not originate one- to four-family residential mortgage loans if the ratio of the loan amount to the lesser of the current cost or appraised value of the property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and factors the cost of such insurance into the annual percentage rate on such loans. Union Federal originates and retains fixed rate loans which provide for the payment of principal and interest over a 15- or 20-year period, or balloon loans having terms of up to 15 years with principal and interest payments calculated using a 30-year amortization period. Union Federal also offers adjustable-rate mortgage ("ARM") loans. The interest rate on ARM loans is indexed to the one-year U.S. Treasury securities yields adjusted to a constant maturity. Union Federal may offer discounted initial interest rates on ARM loans, but requires that the borrower qualify for the ARM loan at the fully-indexed rate (the index rate plus the margin). A substantial portion of the ARM loans in Union Federal's portfolio at December 31, 1998 provide for maximum rate adjustments per year and over the life of the loan of 1% and 5%, respectively. Union Federal's residential ARMs are amortized for terms up to 25 years. ARM loans decrease the risk associated with changes in interest rates by periodically repricing, but involve other risks because, as interest rates increase, the underlying payments by the borrower also increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustment permitted by the loan documents, and, therefore, is potentially limited in effectiveness during periods of rapidly rising interest rates. At December 31, 1998, approximately 21.5% of Union Federal's real estate mortgage loans had adjustable rates of interest. All of the one- to four-family residential mortgage loans that Union Federal originates include "due-on-sale" clauses, which give it the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. However, Union Federal occasionally permits assumptions of existing residential mortgage loans on a case-by-case basis. At December 31, 1998, approximately $71.8 million, or 77.2% of Union Federal's portfolio of loans, consisted of one- to four-family residential loans. Approximately $50,000, or .07% of total residential loans, were included in non-performing assets as of that date. See "--Non-Performing and Problem Assets." Multi-Family Loans. At December 31, 1998, approximately $10.6 million, or 11.4% of Union Federal's total loan portfolio, consisted of mortgage loans secured by multi-family dwellings (those consisting of more than four units). Union Federal's multi-family loans are generally written as one-year adjustable rate loans indexed to the one-year U.S. Treasury rate with an original term of up to 20 years. Union Federal writes multi-family loans with maximum Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of December 31, 1998 had a balance of approximately $1.0 million and was secured by 28 duplexes located in Crawfordsville, Indiana. On the same date, Union Federal had $210,000 in multi-family loans included in non-performing assets. Multi-family loans, like commercial real estate loans, involve a greater risk than do residential loans. See "-- Commercial Real Estate Loans" below. Commercial Real Estate Loans. Union Federal's commercial real estate loans are secured by churches, office buildings, and other commercial properties. Union Federal generally originates commercial real estate loans as one-year adjustable rate loans indexed to the one-year U.S. Treasury securities yield adjusted to a constant maturity, with a maximum term of 20 years and a maximum Loan-to-Value ratio of 80%. At December 31, 1998, Union Federal's largest commercial loan had an outstanding balance of $782,000 and was secured by commercial property in Crawfordsville, Indiana. At December 31, 1998, approximately $6.4 million, or 6.8% of Union Federal's total loan portfolio, consisted of commercial real estate loans. On the same date, Union Federal had $89,000 or 15.7% of commercial real estate loans included in non-performing assets. Loans secured by commercial real estate generally are larger than one- to four-family residential loans and involve a greater degree of risk. Commercial real estate loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on results of operations and management of the properties and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of the loans makes them more difficult for management to monitor and evaluate. Construction Loans. Union Federal offers construction loans with respect to residential and commercial real estate and, in certain cases, to builders or developers constructing such properties on a speculative basis (i.e., before the builder/developer obtains a commitment from a buyer). Union Federal provides construction loans only to borrowers who commit to permanent financing on the finished project. At December 31, 1998, approximately $4.0 million, or 4.3% of Union Federal's total loan portfolio, consisted of construction loans. The largest construction loan had a balance of $914,000 on December 31, 1998 and was secured by a condominium project and golf course in Pittsboro, Indiana. None of Union Federal's construction loans were included in non-performing assets on that date. Construction loans generally match the term of the construction contract and are written as fixed-rate loans with interest calculated on the amount disbursed under the loan and payable monthly. The maximum Loan-to-Value Ratio for a construction loan is based upon the nature of the construction project. For example, a construction loan for a one- to four-family residence may be written with a maximum Loan-to-Value Ratio of 95%, while a construction loan for a multi-family project may be written with a maximum Loan-to-Value Ratio of 80%. Inspections are made prior to any disbursement under a construction loan. Union Federal does not normally charge commitment fees for construction loans. While providing Union Federal with a comparable, and in some cases higher, yield than conventional mortgage loans, construction loans involve a higher level of risk. For example, if a project is not completed and the borrower defaults, Union Federal may have to hire another contractor to complete the project at a higher cost. Also, a project may be completed, but may not be salable, resulting in the borrower defaulting and Union Federal's taking title to the project. Consumer Loans. Union Federal's consumer loans, consisting of passbook loans and home improvement loans, aggregated approximately $213,000 at December 31, 1998, or .2% of its total loan portfolio. Union Federal's home improvement loans generally have a fixed rate and a term of up to seven years. Union Federal's passbook loans are made up to 90% of the deposit account balance and, at December 31, 1998, accrued at a rate of 8.8%. This rate may change but will always be at least 3% over the underlying passbook or certificate of deposit rate. Interest on loans secured by deposits is paid semi-annually. At December 31, 1998, none of Union Federal's consumer loans were included in non-performing assets. See "-- Non-Performing and Problem Assets." Origination, Purchase and Sale of Loans. Union Federal historically has originated its mortgage loans pursuant to its own underwriting standards which do not conform with the standard criteria of the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In the event that Union Federal begins originating fixed-rate residential mortgage loans for sale to the FHLMC in the secondary market, such loans will be originated in accordance with the guidelines established by the FHLMC and will be sold promptly after they are originated. Union Federal has no intention to originate loans for sale to the FHLMC at this time, however. Union Federal confines its loan origination activities primarily to Montgomery County and the surrounding counties of Boone, Hendricks, Putnam, Parke and Fountain. Union Federal has also originated several loans in Marion County. At December 31, 1998, Union Federal also had six loans which it originated, totaling approximately $641,000, secured by property located outside of Indiana. Union Federal's loan originations are generated from referrals from existing customers, real estate brokers, and newspaper and periodical advertising. Loan applications are underwritten and processed at Union Federal's office. Union Federal's loan approval process is intended to assess the borrower's ability to repay the loan, the viability of the loan and the adequacy of the value of the property that will secure the loan. To assess the borrower's ability to repay, Union Federal studies the employment and credit history and information on the historical and projected income and expenses of its mortgagors. All mortgage loans are approved or ratified by Union Federal's board of directors. Union Federal generally requires appraisals on all real property securing its loans and requires an attorney's opinion and a valid lien on the mortgaged real estate. Appraisals for all real property securing mortgage loans are performed by independent appraisers who are state-licensed. Union Federal requires fire and extended coverage insurance in amounts at least equal to the principal amount of the loan and also requires flood insurance to protect the property securing its interest if the property is in a flood plain. Union Federal also generally requires private mortgage insurance for all residential mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow accounts for insurance premiums and taxes for loans that require private mortgage insurance. Union Federal's underwriting standards for consumer loans are intended to protect against some of the risks inherent in making consumer loans. Borrower character, paying habits and financial strengths are important considerations. Union Federal occasionally purchases participation interests in loans originated by other financial institutions in order to diversify its portfolio, supplement local loan demand and to obtain more favorable yields. The participations that Union Federal purchases normally represent a portion of residential or commercial real estate loans originated by other Indiana financial institutions, most of which are secured by property located in Indiana. As of December 31, 1998, Union Federal held in its loan portfolio participations in mortgage loans aggregating $7.8 million that it purchased, all of which were serviced by others. Included within this amount were participations in the aggregate amount of $713,000 which were secured by property located outside of Indiana. The largest participation loan in Union Federal's portfolio at December 31, 1998 was a $914,000 interest in a loan secured by a condominium project and golf course located in Pittsboro, Indiana. The following table shows Union Federal's loan origination and repayment activity during the periods indicated:
Year Ended December 31, ------------------------------------------------ 1998 1997 1996 ---- ---- ---- (In thousands) Gross loans receivable at beginning of period..................................... $81,135 $73,630 $63,024 Loans originated: Real estate mortgage loans: One-to-four family loans............................... 24,763 18,116 19,332 Multi-family loans..................................... 1,052 654 1,532 Commercial loans....................................... 3,763 483 45 Construction loans....................................... 3,163 5,284 2,220 Commercial loans......................................... 51 --- --- Loans secured by deposits................................ 155 161 322 Home improvement loans................................... 30 85 36 Total originations................................... 32,977 24,783 23,487 Purchases (sales) of participation loans, net................. 800 500 1,350 Reductions: Principal loan repayments................................ 21,853 17,541 14,211 Transfers from loans to real estate owned................ 15 237 20 Total reductions..................................... 21,868 17,778 14,231 ------- ------- ------- Total gross loans receivable at end of period.............................................. $93,044 $81,135 $73,630 ======= ======= =======
Union Federal's residential loan originations during the year ended December 31, 1998 totaled $24.8 million, compared to $18.1 million and $19.3 million in the years ended December 31, 1997 and 1996, respectively. Origination and Other Fees. Union Federal realizes income from late charges, checking account service charges, and fees for other miscellaneous services. Union Federal currently charges a commitment fee of $200 on all loans and an additional $500 origination fee on construction loans. Union Federal also may charge points on a mortgage loan as consideration for a lower interest rate, although it does so infrequently. Late charges are generally assessed if payment is not received within a specified number of days after it is due. The grace period depends on the individual loan documents. Non-Performing and Problem Assets After a mortgage loan becomes 30 days past due, Union Federal delivers a delinquency notice to the borrower. When loans are 30 to 60 days in default, Union Federal sends additional delinquency notices and makes personal contact by telephone with the borrower to establish an acceptable repayment schedule. When loans become 60 days in default, Union Federal again contacts the borrower, this time in person, to establish an acceptable repayment schedule. When a mortgage loan is 90 days delinquent, Union Federal will have either entered into a workout plan with the borrower or referred the matter to its attorney for collection. Management is authorized to commence foreclosure proceedings for any loan upon making a determination that it is prudent to do so. Union Federal reviews mortgage loans on a regular basis and places such loans on a non-accrual status when they become 90 days delinquent. Generally, when loans are placed on a non-accrual status, unpaid accrued interest is written off, and further income is recognized only to the extent received. Non-performing Assets. At December 31, 1998, $349,000, or .3% of Union Federal's total assets, were non-performing (non-performing loans, non-accruing loans and foreclosed real estate) compared to $98,000, or .07%, of its total assets at December 31, 1997. At December 31, 1998, residential loans accounted for $50,000 of Union Federal's non-performing assets. Union Federal had no real estate owned ("REO") properties as of December 31, 1998. The table below sets forth the amounts and categories of Union Federal's non-performing assets (non-performing loans, foreclosed real estate and troubled debt restructurings) for the last three years. It is Union Federal's policy to review all earned but uncollected interest on all loans monthly to determine if any portion thereof should be classified as uncollectible for any loan past due in excess of 90 days. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, ------------------------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in thousands) Non-performing assets: Non-performing loans..................... $349 $52 $ 489 Foreclosed real estate................... --- 46 --- Total non-performing assets............ $349 $98 $489 Non-performing loans to total loans......... .38% .07% .67% Non-performing assets to total assets....... .32% .07% .59%
Interest income of $30,000, $4,000 and $10,000 for the years ended December 31, 1998, 1997 and 1996, respectively, was recognized on the non-performing loans summarized above. Interest income of $33,000, $5,000 and $33,000 for the years ended December 31, 1998, 1997 and 1996, respectively, would have been recognized under the original terms of these non-performing loans. At December 31, 1998, Union Federal held loans delinquent from 30 to 89 days totaling approximately $423,000. Other than in connection with these loans and the other delinquent loans disclosed elsewhere in this section, management was not aware of any other borrowers who were experiencing financial difficulties. Delinquent Loans. The following table sets forth certain information at December 31, 1998, 1997 and 1996, relating to delinquencies in Union Federal's portfolio. Delinquent loans that are 90 days or more past due are considered non-performing assets.
At December 31, 1998 At December 31, 1997 At December 31, 1996 -------------------------------------- ----------------------------------- -------------------------------- 30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More ------------------ ------------------ ----------------- ---------------- -------------- ---------------- Principal Principal Principal Principal Principal Principal Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance of Loans of Loans of Loansof Loans of Loans of Loansof Loans of Loans of Loans of Loansof Loans of Loans ------------------------------------------------------------------------------------------------------------- (Dollars in thousands) One- to four- family loans........ 6 $406 3 $50 9 $300 4 $ 47 7 $226 8 $377 Commercial real estate loans... 1 17 2 89 1 48 --- --- --- --- --- --- Multi-family loans............... --- --- 1 210 1 207 --- --- --- --- 1 112 Loans secured by deposits......... --- --- --- --- --- --- --- --- --- --- --- --- Home improvement loans. --- --- --- --- --- --- 1 5 --- --- --- --- ----- ---- ---- ---- ----- ---- - --- ---- ---- ---- ---- Total............... 7 $423 6 $349 11 $555 5 $52 7 $226 9 $489 = ==== = ==== == ==== = === = ==== = ==== Delinquent loans to total loans......... .85% .77% .98% === === ===
Classified assets. Federal regulations and Union Federal's Asset Classification Policy provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful" or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. An insured institution is required to establish general allowances for loan losses in an amount deemed prudent by management for loans classified substandard or doubtful, as well as for other problem loans. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS which can order the establishment of additional general or specific loss allowances. At December 31, 1998, the aggregate amount of Union Federal's classified assets and its general and specific loss allowances were as follows: At December 31, 1998 -------------------- (In thousands) Substandard assets.......................................... $840 Doubtful assets............................................. --- Loss assets................................................. --- ----- Total classified assets................................. $840 ===== General loss allowances..................................... $362 Specific loss allowances.................................... --- ----- Total allowances........................................ $362 ===== Union Federal regularly reviews its loan portfolio to determine whether any loans require classification in accordance with applicable regulations. Included in substandard assets at December 31, 1998, Union Federal had a multi-family loan in the amount of $491,000 that was performing. The loan was classified as substandard as a result of a regulatory examination. Allowance for Loan Losses The allowance for loan losses is maintained through the provision for loan losses, which is charged to earnings. The allowance for loan losses is determined in conjunction with Union Federal's review and evaluation of current economic conditions (including those of its lending area), changes in the character and size of the loan portfolio, loan delinquencies (current status as well as past and anticipated trends) and adequacy of collateral securing loan delinquencies, historical and estimated net charge-offs, and other pertinent information derived from a review of the loan portfolio. In management's opinion, Union Federal's allowance for loan losses is adequate to absorb probable losses inherent in the loan portfolio at December 31, 1998. However, there can be no assurance that regulators, when reviewing Union Federal's loan portfolio in the future, will not require increases in Union Federal's allowances for loan losses or that changes in economic conditions will not adversely affect its loan portfolio. Summary of Loan Loss Experience. The following table analyzes changes in the allowance during the past three fiscal years ended December 31, 1998.
Year Ended December 31, ------------------------------------------------------ 1998 1997 1996 ---- ---- ---- (Dollars in thousands) Balance at beginning of period............................ $252 $159 $111 Gross charge-offs - Multi-family loans.................... (72) Provision for losses on loans............................. 110 165 48 Balance end of period.................................. $362 $252 $159 Allowance for loan losses as a percent of total loans outstanding................................ .40% .32% .22% Ratio of net charge-offs to average loans outstanding...................................... --- .10% ---
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, --------------------------------------------------------------------------------- 1998 1997 1996 --------------------- ----------------------- -------------------- Percent Percent Percent of loans of loans of loans in each in each in each category category category to total to total total Amount loans Amount loans Amount loans ------ ----- ------ ----- ------ ----- (Dollars in thousands) Balance at end of period applicable to: Real estate mortgage loans: Residential............... $75 77.19% $ 65 76.95% $60 77.46% Commercial................ 67 6.83 29 4.47 13 4.88 Multi-family.............. 134 11.40 82 12.57 75 14.83 Construction loans.......... 19 4.29 10 5.73 11 2.36 Commercial loans............ --- .06 Loans secured by deposits... --- .17 --- .17 --- .33 Home improvement loans...... --- .06 --- .11 --- .14 Unallocated................. 67 66 --- --- --- ---- ------ ---- ------ ---- ------ Total....................... $362 100.00% $252 100.00% $159 100.00% ==== ====== ==== ====== ==== ======
Investments Investments. Union Federal's investment portfolio generally consists of U.S. Treasury and federal agency securities, FHLB stock and an investment in Pedcor Investments - 1993 - XVI, L.P. See "--Service Corporation Subsidiary." At December 31, 1998, approximately $9.8 million, or 9.1%, of Union Federal's total assets consisted of such investments. Union Federal also had $6.2 million, or 5.7% of its assets, in interest-earning deposits as of that date. The amount of interest-earning deposits held by Union Federal increased significantly during 1997 as a result of the Conversion. Because the subscription offering for the Holding Company's Common Stock was oversubscribed, Union Federal delivered refund checks during the last week of December, 1997 to those subscribers whose purchase orders were not filled. Many of those checks had not cleared as of December 31, 1997, thereby increasing the amount of funds held by Union Federal in interest-bearing deposits. In addition, Union Federal invested some of the proceeds that it received from the stock offering in interest-bearing overnight accounts at the FHLB Indianapolis, which also increased the amount of its interest-bearing deposits at December 31, 1997. The amount of interest-earning deposits decreased to $6.2 million at December 31, 1998 as a result of the payment of the stock subscription of $22.7 million and increased investment in loans and investment securities during 1998. The following table sets forth the amortized cost and the market value of Union Federal's investment portfolio at the dates indicated.
At December 31, ----------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------- Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value (In thousands) Investment securities held to maturity: U.S. Treasury.......................$ --- $ --- $ 350 $ 350 $ 350 $ 348 Federal agencies.................... 4,500 4,479 3,346 3,351 2,645 2,611 Mortgage-backed securities.......... 3,526 3,696 2,124 2,302 2,752 2,933 Total investment securities held to maturity................ 8,026 8,175 5,820 6,003 5,747 5,892 Investment in limited partnership...... 1,055 (1) 1,176 (1) 1,334 (1) FHLB stock (2)......................... 745 745 708 708 580 580 ------ ------ ------ Total investments...................... $9,826 $7,704 $7,661 ====== ====== ======
(1) Market values are not available (2) Market value is based on the price at which stock may be resold to the FHLB of Indianapolis. The following table sets forth the amount of investment securities (excluding mortgage-backed securities, FHLB stock and investment in limited partnership) which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1998.
Amount at December 31, 1998 which matures in ------------------------------------------------------------------------------------ One Year One Year Five Years or Less to Five Years to Ten Years After Ten Years ------------------------------------------------------------------------------------ Amortized Average Amoritzed Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield Cost Yield --------- ------- --------- ------- --------- ------- --------- ------- (Dollars in thousands) Federal agency securities............. $100 2.47% $1,800 6.21% $500 6.10% $2,100 6.63%
Mortgage-backed Securities The following table sets forth the composition of Union Federal's mortgage-backed securities portfolio at the dates indicated.
December 31, ----------------------------------------------------------------------------------- 1998 1997 1996 -------------------------- ------------------------- -------------------------- Amortized Percent Market Amortized Percent Market Amortized Percent Market Cost of Total Value Cost of Total Value Cost of Total Value --------- ------- ------ --------- -------------- --------- ------- ------ (In thousands) Governmental National Mortgage Corporation.................... $991 28.1% $1,095 $1,223 57.6% $1,348 $1,391 50.5% $1,511 Federal Home Loan Mortgage Corporation..... 2,395 67.9 2,464 635 29.9 691 1,039 37.8 1,103 Federal National Mortgage Corporation.................... 123 3.5 120 243 11.4 240 294 10.7 291 Other...................................... 17 .5 17 23 1.1 23 28 1.0 28 ------ ----- ------ ------ ----- ------ ------ ----- ------ Total mortgage- backed securities....... $3,526 100.0% $3,696 $2,124 100.0% $2,302 $2,752 100.0% $2,933 ====== ===== ====== ====== ===== ====== ====== ===== ======
The following table sets forth the amount of mortgage-backed securities which mature during each of the periods indicated and the weighted average yields for each range of maturities at December 31, 1998.
Amount at December 31, 1998 which matures in ------------------------------------------------------------------------------ One Year One Year to After or Less Five Years Five Years ----------------------- ----------------------- ---------------------- Weighted Weighted Weighted Amortized Average Amortized Average Amortized Average Cost Yield Cost Yield Cost Yield --------- -------- --------- -------- --------- -------- (Dollars in thousands) Mortgage-backed securities...................... $37 7.00% $11 8.95% $3,478 7.44%
The following table sets forth the changes in Union Federal's mortgage-backed securities portfolio for the years ended December 31, 1998, 1997 and 1996. For the Year Ended December 31, ----------------------------------------- 1998 1997 1996 ------ ------ ------ (In thousands) Beginning balance.......... $2,124 $2,752 $3,423 Purchases.................. 2,004 --- --- Repayments................. (607) (639) (676) Premium and discount amortization, net....... 5 11 5 ------ ------ ------ Ending balance............. $3,526 $2,124 $2,752 ====== ====== ====== Sources of Funds General. Deposits have traditionally been Union Federal's primary source of funds for use in lending and investment activities. In addition to deposits, Union Federal derives funds from scheduled loan payments, investment maturities, loan prepayments, retained earnings, income on earning assets and borrowings. While scheduled loan payments and income on earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. Borrowings from the FHLB of Indianapolis may be used in the short-term to compensate for reductions in deposits or deposit inflows at less than projected levels. Deposits. Union Federal attracts deposits principally from within Montgomery County through the offering of a broad selection of deposit instruments, including fixed-rate passbook accounts, NOW accounts, variable rate money market accounts, fixed-term certificates of deposit and savings accounts. Union Federal does not actively solicit or advertise for deposits outside of Montgomery County, and substantially all of its depositors are residents of that county. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds remain on deposit and the interest rate. Union Federal does not pay broker fees for any deposits it receives. Union Federal establishes the interest rates paid, maturity terms, service fees and withdrawal penalties on a periodic basis. Determination of rates and terms are predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals, and applicable regulations. Union Federal relies, in part, on customer service and long-standing relationships with customers to attract and retain its deposits. Union Federal also closely prices its deposits to the rates offered by its competitors. The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that Union Federal offers has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. Union Federal has become more susceptible to short-term fluctuations in deposit flows as customers have become more interest rate conscious. Union Federal manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on Union Federal's experience, management believes that its passbook, NOW and MMDAs are relatively stable sources of deposits. However, the ability to attract and maintain certificates of deposit, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. An analysis of Union Federal's deposit accounts by type, maturity, and rate at December 31, 1998, is as follows:
Minimum Balance at Weighted Opening December 31, % of Average Type of Account Balance 1998 Deposits Rate - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts.............................. $ 10 $3,410 5.26% 4.00% Variable rate, money market................................ 10 10,794 16.65 4.87 NOW accounts and other transaction accounts................ 500 1,845 2.84 1.93 ------- ------ Total withdrawable....................................... 16,049 24.75 4.35 Certificates (original terms): 3 months or less........................................... 1,000 101 .16 4.13 6 months................................................... 1,000 3,186 4.91 4.75 12 months.................................................. 1,000 3,931 6.06 5.41 18 months.................................................. 1,000 8,055 12.42 5.57 24 months.................................................. 1,000 5,444 8.40 5.79 30 months.................................................. 1,000 8,990 13.86 5.78 36 months ................................................. 1,000 3,468 5.35 5.89 48 months.................................................. 1,000 509 .78 5.99 60 months.................................................. 1,000 5,762 8.89 6.08 Jumbo certificates - $100,000 and over........................ 100,000 9,351 14.42 6.00 ------- ------ Total certificates............................................ 48,797 75.25 5.73 ------- ------ Total deposits................................................ $64,846 100.00% 5.39% ======= ======
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, 1998 1997 1996 ---------------------------------------- (In thousands) 4.00 to 4.99%.............. $ 4,193 $ 3,622 $ 4,760 5.00 to 5.99%.............. 27,459 19,245 19,400 6.00 to 6.99%.............. 17,119 22,894 20,954 7.00 to 7.99%.............. 26 420 1,941 ------- ------- ------- Total................... $48,797 $46,181 $47,055 ======= ======= =======
The following table represents, by various interest rate categories, the amounts of time deposits maturing during each of the three years following December 31, 1998. Matured certificates, which have not been renewed as of December 31, 1998, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1998 Maturing In ---------------------------------------------------------------------------- One Year Two Three Greater Than or Less Years Years Three Years ------- ----- ----- ----------- (In thousands) 4.00 to 4.99%.... $ 3,482 $ 711 5.00 to 5.99%.... 15,086 7,831 $2,882 $1,660 6.00 to 6.99%.... 10,481 4,148 775 1,714 7.00 to 7.99%.... 10 17 --- --- ------- ------- ------ ------ Total......... $29,059 $12,707 $3,657 $3,374 ======= ======= ====== ======
The following table indicates the amount of Union Federal's other certificates of deposit of $100,000 or more by time remaining until maturity as of December 31, 1998. At December 31, 1998 -------------------- Maturity Period (In thousands) Three months or less.............................. $2,707 Greater than three months through six months...... 1,259 Greater than six months through twelve months..... 1,985 Over twelve months................................ 3,400 ------ Total........................................ $9,351 ====== The following table sets forth the dollar amount of savings deposits in the various types of deposits that Union Federal offers at the dates indicated, and the amount of increase or decrease in such deposits as compared to the previous period.
DEPOSIT ACTIVITY ----------------------------------------------------------------------------------------- Balance Increase Balance Increase Balance at (Decrease) at (Decrease) at December 31, % of from December 31, % of from December 31, % of 1998 Deposits 1997 1997 Deposits 1996 1996 Deposits ---- -------- ---- ---- -------- ---- ---- -------- (Dollars in thousands) Withdrawable: Fixed rate, passbook accounts...... $3,410 5.26% $(1,169) $ 4,579 7.35% $ 712 $3,867 6.40% Variable rate, money market........ 10,794 16.65 1,669 9,125 14.66 510 8,615 14.25 NOW accounts and other transaction accounts............. 1,845 2.84 (528) 2,373 3.81 1,474 899 1.49 ------- ------ ------ ------- ------ ------ ------- ------ Total withdrawable............... 16,049 24.75 (28) 16,077 25.82 2,696 13,381 22.14 Certificates (original terms): 3 months........................... 101 .16 101 .16 (48) 149 .25 6 months........................... 3,186 4.91 (592) 3,778 6.07 (489) 4,267 7.06 12 months.......................... 3,931 6.06 (1,546) 5,477 8.80 244 5,233 8.66 18 months.......................... 8,055 12.42 69 7,986 12.83 (204) 8,190 13.55 24 months.......................... 5,444 8.40 270 5,174 8.31 678 4,496 7.44 30 months.......................... 8,990 13.86 2,375 6,615 10.62 1,133 5,482 9.07 36 months ......................... 3,468 5.35 (386) 3,854 6.19 (1,344) 5,198 8.60 48 months.......................... 509 .78 188 321 .52 (55) 376 .62 60 months.......................... 5,762 8.89 (53) 5,815 9.34 (793) 6,608 10.93 Jumbo certificates.................... 9,351 14.42 2,291 7,060 11.34 4 7,056 11.68 ------- ------ ------ ------- ------ ------ ------- ------ Total certificates.................... 48,797 75.25 2,616 46,181 74.18 (874) 47,055 77.86 ------- ------ ------ ------- ------ ------ ------- ------ Total deposits........................ $64,846 100.00% $2,588 $62,258 100.00% $1,822 $60,436 100.00% ======= ====== ====== ======= ====== ====== ======= ======
Total deposits at December 31, 1998 were approximately $64.8 million, compared to approximately $60.4 million at December 31, 1996. Union Federal's deposit base depends somewhat upon the manufacturing sector of Montgomery County's economy. Although Montgomery County's manufacturing sector is relatively diversified and does not significantly depend upon any industry, a loss of a material portion of the manufacturing workforce could adversely affect Union Federal's ability to attract deposits due to the loss of personal income attributable to the lost manufacturing jobs and the attendant loss in service industry jobs. In the unlikely event of Union Federal's liquidation after the Conversion, all claims of creditors (including those of deposit account holders, to the extent of their deposit balances) would be paid first followed by distribution of the liquidation account to certain deposit account holders, with any assets remaining thereafter distributed to the Holding Company as the sole shareholder of Union Federal. Borrowings. Management focuses on generating high quality loans and then seeking the best source of funding from deposits, investments or borrowings. At December 31, 1998, Union Federal had borrowings in the amount of $772,000 from the FHLB of Indianapolis which bear fixed and variable interest rates and are due at various dates through 2004. Union Federal is required to maintain eligible loans in its portfolio of at least 160% of outstanding advances as collateral for advances from the FHLB of Indianapolis. Union Federal does not anticipate any difficulty in obtaining advances appropriate to meet its requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI, L.P. ("Pedcor") $1.0 million under a note payable that is not included in the following table. See "--Service Corporation Subsidiary." The following table presents certain information relating to Union Federal's borrowings at or for the years ended December 31, 1998, 1997 and 1996.
At or for the Year Ended December 31, 1998 1997 1996 --------------------------------------- (Dollars in thousands) FHLB Advances: Outstanding at end of period.................... $772 $2,373 $6,482 Average balance outstanding for period.......... 873 5,748 3,566 Maximum amount outstanding at any month-end during the period................... 1,272 6,873 6,482 Weighted average interest rate during the period............................. 5.84 % 5.90% 5.36 % Weighted average interest rate at end of period.............................. 5.71 % 5.71% 5.52 % Return on Equity and Assets 1998 1997 1996 --------------------------------------- Return on assets (net income divided by average total assets)............. 1.82 % 1.38% 1.13 % Return on equity (net income divided by average equity)................... 4.65 8.10 6.54 Dividend payout ratio (dividends per share divided by net income per share)............................ 50.71 --- --- Equity to assets ratio (average equity divided by average total assets)................................ 39.24 17.03 17.31
Service Corporation Subsidiary OTS regulations permit federal savings associations to invest in the capital stock, obligations or other specified types of securities of subsidiaries (referred to as "service corporations") and to make loans to such subsidiaries and joint ventures in which such subsidiaries are participants in an aggregate amount not exceeding 2% of the association's assets, plus an additional 1% of assets if the amount over 2% is used for specified community or inner-city development purposes. In addition, federal regulations permit associations to make specified types of loans to such subsidiaries (other than special purpose finance subsidiaries) in which the association owns more than 10% of the stock, in an aggregate amount not exceeding 50% of the association's regulatory capital if the association's regulatory capital is in compliance with applicable regulations. A savings association that acquires a non-savings association subsidiary, or that elects to conduct a new activity within a subsidiary, must give the FDIC and the OTS at least 30 days advance written notice. The FDIC may, after consultation with the OTS, prohibit specified activities if it determines such activities pose a serious threat to the SAIF. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"), whose sole asset is its investment in Pedcor, which is an Indiana limited partnership that was established to organize, build, own, operate and lease a 48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II Apartments (the "Project"). Union Federal owns the limited partner interest in Pedcor. The general partner is Pedcor Investments LLC. The Project, operated as a multi-family, low- and moderate-income housing project, is completed and is performing as planned. Because UFS engages exclusively in activities that are permissible for a national bank, OTS regulations permit Union Federal to include its investment in UFS in its calculation of regulatory capital. A low- and moderate-income housing project qualifies for certain federal income tax credits if (i) it is a residential rental property, (ii) the units are used on a nontransient basis, and (iii) 20% or more of the units in the project are occupied by tenants whose incomes are 50% or less of the area median gross income, adjusted for family size, or alternatively, at least 40% of the units in the project are occupied by tenants whose incomes are 60% of the area median gross income. Qualified low income housing projects generally must comply with these and other rules for fifteen years, beginning with the first year the project qualified for the tax credit, or some or all of the tax credit together with interest may be recaptured. The tax credit is subject to the limitations on the use of general business credit, but no basis reduction is required for any portion of the tax credit claimed. UFS committed to invest approximately $1.8 million in Pedcor at the inception of the project in November, 1993. Through December 31, 1998, UFS had invested cash of approximately $789,000 in Pedcor with five additional annual capital contributions remaining to be paid in January of each year through January, 2004, totaling $1,021,000. The additional contributions will be used for operating and other expenses of the partnership. In addition, Union Federal borrowed funds from the FHLB of Indianapolis to advance to Pedcor, and Pedcor currently owes Union Federal $772,000 pursuant to a promissory note payable in installments through January 1, 2004 and bearing interest at an annual rate of 9%. UFS transfers the tax credits resulting from Pedcor's operation of the Project to Union Federal. These tax credits will be available to Union Federal through 2003. Although Union Federal has reduced income tax expense by the full amount of the tax credit available each year, it has not been able to fully utilize available tax credits to reduce income taxes payable because it may not use tax credits that would reduce its regular corporate tax liability below its alternative minimum tax liability. Union Federal may carry forward unused tax credits for a period of fifteen years and management believes that Union Federal will be able to utilize available tax credits during the carry forward period. Additionally, Pedcor has incurred operating losses in the early years of its operations primarily due to its accelerated depreciation of assets. UFS has accounted for its investment in Pedcor on the equity method and, accordingly, has recorded its share of these losses as reductions to its investment in Pedcor, which at December 31, 1998, was $1.1 million. As of December 31, 1998, 98% of the units in the Project were occupied, and all of the tenants met the income test required for the tax credits. UFS does not engage in any activity or hold any assets other than its investment in Pedcor. The following summarizes UFS's equity in Pedcor's losses and tax credits recognized in Union Federal's consolidated financial statements.
Year Ended December 31, --------------------------------- 1998 1997 1996 ---- ---- ---- (In Thousands) Investment in Pedcor: Net of equity in losses.................. $1,055 $1,176 $1,334 Equity in losses, net of income tax effect..................... $ (73) $ (95) $ (104) Tax credit.................................. 178 178 178 Increase in after-tax net income from Pedcor investment........................ $ 105 $ 83 $ 74
Employees As of December 31, 1998, Union Federal employed 14 persons on a full-time basis. Union Federal does not have any part-time employees. None of Union Federal's employees is represented by a collective bargaining group. Management considers its employee relations to be good. Employee benefits for Union Federal's full-time employees include, among other things, an employee stock ownership plan, a Pentegra Group (formerly known as Financial Institutions Retirement Fund) defined benefit pension plan, a noncontributory, multiple-employer comprehensive pension plan (the"Pension Plan"), and hospitalization/major medical insurance, dental and eye care insurance, long-term disability insurance, life insurance, and participation in the Financial Institutions Thrift Plan. Management considers its employee benefits to be competitive with those offered by other financial institutions and major employers in the area. See "Executive Compensation" and "Certain Relationships and Related Transactions of Union Federal." COMPETITION Union Federal originates most of its loans to and accepts most of its deposits from residents of Montgomery County, Indiana. Union Federal is subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, and certain nonbanking consumer lenders that provide similar services in Montgomery County with significantly larger resources than are available to Union Federal. In total, there are 12 other financial institutions located in Montgomery County, including eight banks, two credit unions and two other savings associations. Union Federal also competes with money market funds with respect to deposit accounts. The primary factors influencing competition for deposits are interest rates, service and convenience of office locations. Union Federal competes for loan originations primarily through the efficiency and quality of the services that it provides borrowers and through interest rates and loan fees charged. Competition is affected by, among other things, the general availability of lendable funds, general and local economic conditions, current interest rate levels, and other factors that management cannot readily predict. REGULATION General As a federally chartered, SAIF-insured savings association, Union Federal is subject to extensive regulation by the OTS and the FDIC. For example, Union Federal must obtain OTS approval before it may engage in certain activities and must file reports with the OTS regarding its activities and financial condition. The OTS periodically examines Union Federal's books and records and, in conjunction with the FDIC in certain situations, has examination and enforcement powers. This supervision and regulation are intended primarily for the protection of depositors and the federal deposit insurance funds. Union Federal's semi- annual assessment owed to the OTS, which is based upon a specified percentage of assets, is approximately $16,000. Union Federal is also subject to federal and state regulation as to such matters as loans to officers, directors, or principal shareholders, required reserves, limitations as to the nature and amount of loans and investments, regulatory approval of any merger or consolidation, issuance or retirements of securities, and limitations upon other aspects of banking operations. In addition, Union Federal's activities and operations are subject to a number of additional detailed, complex and sometimes overlapping federal and state laws and regulations. These include state usury and consumer credit laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining legislation and antitrust laws. The United States Congress is considering legislation that would require all federal savings associations, such as Union Federal, to either convert to a national bank or a state-chartered bank by a specified date to be determined. In addition, under the legislation, the Holding Company likely would not be regulated as a savings and loan holding company but rather as a bank holding company. This proposed legislation would abolish the OTS and transfer its functions among the other federal banking regulators. Certain aspects of the legislation remain to be resolved and, therefore, no assurance can be given as to whether or in what form the legislation will be enacted or its effect on the Holding Company and Union Federal. Savings and Loan Holding Company Regulation As the holding company for Union Federal, the Holding Company will be regulated as a "non-diversified savings and loan holding company" within the meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject to regulatory oversight of the Director of the OTS. As such, the Holding Company is registered with the OTS and thereby subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, Union Federal is subject to certain restrictions in its dealings with the Holding Company and with other companies affiliated with the Holding Company. In general, the HOLA prohibits a savings and loan holding company, without prior approval of the Director of the OTS, from acquiring control of another savings association or savings and loan holding company or retaining more than 5% of the voting shares of a savings association or of another holding company which is not a subsidiary. The HOLA also restricts the ability of a director or officer of the Holding Company, or any person who owns more than 25% of the Holding Company's stock, from acquiring control of another savings association or savings and loan holding company without obtaining the prior approval of the Director of the OTS. The Holding Company's Board of Directors presently intends to operate the Holding Company as a unitary savings and loan holding company. There are generally no restrictions on the permissible business activities of a unitary savings and loan holding company. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings association subsidiary of such a holding company fails to meet the Qualified Thrift Lender ("QTL") test, then such unitary holding company would become subject to the activities restrictions applicable to multiple holding companies. (Additional restrictions on securing advances from the FHLB also apply.) See "--Qualified Thrift Lender." At December 31, 1998, Union Federal's asset composition was in excess of that required to qualify as a Qualified Thrift Lender. If the Holding Company were to acquire control of another savings association other than through a merger or other business combination with Union Federal, the Holding Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings association meets the QTL test, the activities of the Holding Company and any of its subsidiaries (other than Union Federal or other subsidiary savings associations) would thereafter be subject to further restrictions. The HOLA provides that, among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings association shall commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity other than (i) furnishing or performing management services for a subsidiary savings association, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings association, (iv) holding or managing properties used or occupied by a subsidiary savings association, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by the FSLIC by regulation as of March 5, 1987, to be engaged in by multiple holding companies, or (vii) those activities authorized by the Federal Reserve Board (the "FRB") as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of the OTS before a multiple holding company may engage in such activities. The Director of the OTS may also approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings associations in more than one state, if the multiple savings and loan holding company involved controls a savings association which operated a home or branch office in the state of the association to be acquired as of March 5, 1987, or if the laws of the state in which the association to be acquired is located specifically permit associations to be acquired by state-chartered associations or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings associations). Also, the Director of the OTS may approve an acquisition resulting in a multiple savings and loan holding company controlling savings associations in more than one state in the case of certain emergency thrift acquisitions. Indiana law permits federal and state savings association holding companies with their home offices located outside of Indiana to acquire savings associations whose home offices are located in Indiana and savings association holding companies with their principal place of business in Indiana ("Indiana Savings Association Holding Companies") upon receipt of approval by the Indiana Department of Financial Institutions. Moreover, Indiana Savings Association Holding Companies may acquire savings associations with their home offices located outside of Indiana and savings association holding companies with their principal place of business located outside of Indiana upon receipt of approval by the Indiana Department of Financial Institutions. No subsidiary savings association of a savings and loan holding company may declare or pay a dividend on its permanent or nonwithdrawable stock unless it first gives the Director of the OTS 30 days advance notice of such declaration and payment. Any dividend declared during such period or without giving notice shall be invalid. Federal Home Loan Bank System Union Federal is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by savings associations and proceeds derived from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an independent agency, controls the FHLB System, including the FHLB of Indianapolis. As a member, Union Federal is required to purchase and maintain stock in the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans, home purchase contracts, or similar obligations at the beginning of each year. At December 31, 1998, Union Federal's investment in stock of the FHLB of Indianapolis was $745,000. The FHLB imposes various limitations on advances such as limiting the amount of certain types of real estate-related collateral to 30% of a member's capital and limiting total advances to a member. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the borrowing. The FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have adversely affected the level of FHLB dividends paid and could continue to do so in the future. For the fiscal year ended December 31, 1998, dividends paid by the FHLB of Indianapolis to Union Federal totaled approximately $59,000, for an annual rate of 8.0%. Insurance of Deposits Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of banks and thrifts and safeguards the safety and soundness of the banking and thrift industries. The FDIC administers two separate insurance funds, the BIF for commercial banks and state savings banks and the SAIF for savings associations such as Union Federal and banks that have acquired deposits from savings associations. The FDIC is required to maintain designated levels of reserves in each fund. As of September 30, 1996, the reserves of the SAIF were below the level required by law, primarily because a significant portion of the assessments paid into the SAIF have been used to pay the cost of prior thrift failures, while the reserves of the BIF met the level required by law in May, 1995. However, on September 30, 1996, provisions designed to recapitalize the SAIF and eliminate the premium disparity between the BIF and SAIF were signed into law. See "-- Assessments" below. Assessments. The FDIC is authorized to establish separate annual assessment rates for deposit insurance for members of the BIF and members of the SAIF. The FDIC may increase assessment rates for either fund if necessary to restore the fund's ratio of reserves to insured deposits to the target level within a reasonable time and may decrease these rates if the target level has been met. The FDIC has established a risk-based assessment system for both SAIF and BIF members. Under this system, assessments vary depending on the risk the institution poses to its deposit insurance fund. An institution's risk level is determined based on its capital level and the FDIC's level of supervisory concern about the institution. On September 30, 1996, President Clinton signed into law legislation which included provisions designed to recapitalize the SAIF and eliminate the significant premium disparity between the BIF and the SAIF. Under the new law, Union Federal was charged a one-time special assessment equal to $.657 per $100 in assessable deposits at March 31, 1995. Union Federal recognized this one-time assessment as a non-recurring operating expense of $362,000 ($219,000 after tax) during the three-month period ending September 30, 1996, and Union Federal paid this assessment on November 27, 1996. The assessment was fully deductible for both federal and state income tax purposes. Beginning January 1, 1997, Union Federal's annual deposit insurance premium was reduced from .23% to .0644% of total assessable deposits. BIF institutions pay lower assessments than comparable SAIF institutions because BIF institutions pay only 20% of the rate paid by SAIF institutions on their deposits with respect to obligations issued by the federally-chartered corporation which provided some of the financing to resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for the merger of the SAIF and the BIF by 1999, but not until such time as bank and thrift charters are combined. Until the charters are combined, savings associations with SAIF deposits may not transfer deposits into the BIF system without paying various exit and entrance fees, and SAIF institutions will continue to pay higher FICO assessments. Such exit and entrance fees need not be paid if a SAIF institution converts to a bank charter or merges with a bank, as long as the resulting bank continues to pay applicable insurance assessments to the SAIF, and as long as certain other conditions are met. Savings Association Regulatory Capital Currently, savings associations are subject to three separate minimum capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital requirement, and (iii) a risk-based capital requirement. The leverage limit requires that savings associations maintain "core capital" of at least 3% of total assets. Core capital is generally defined as common shareholders' equity (including retained income), noncumulative perpetual preferred stock and related surplus, certain minority equity interests in subsidiaries, qualifying supervisory goodwill, purchased mortgage servicing rights and purchased credit card relationships (subject to certain limits) less nonqualifying intangibles. The OTS recently amended this requirement to require a core capital level of 3% of total adjusted assets for savings associations that receive the highest rating for safety and soundness, and 4% to 5% for all other savings associations. This amendment becomes effective April 1, 1999. Under the tangible capital requirement, a savings association must maintain tangible capital (core capital less all intangible assets except purchased mortgage servicing rights which may be included after making the above-noted adjustment in an amount up to 100% of tangible capital) of at least 1.5% of total assets. Under the risk-based capital requirements, a minimum amount of capital must be maintained by a savings association to account for the relative risks inherent in the type and amount of assets held by the savings association. The risk-based capital requirement requires a savings association to maintain capital (defined generally for these purposes as core capital plus general valuation allowances and permanent or maturing capital instruments such as preferred stock and subordinated debt less assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four categories (0-100%). A credit risk-free asset, such as cash, requires no risk-based capital, while an asset with a significant credit risk, such as a non-accrual loan, requires a risk factor of 100%. Moreover, a savings association must deduct from capital, for purposes of meeting the core capital, tangible capital and risk-based capital requirements, its entire investment in and loans to a subsidiary engaged in activities not permissible for a national bank (other than exclusively agency activities for its customers or mortgage banking subsidiaries). At December 31, 1998, Union Federal was in compliance with all capital requirements imposed by law. The OTS has promulgated a rule which sets forth the methodology for calculating an interest rate risk component to be used by savings associations in calculating regulatory capital. The OTS has delayed the implementation of this rule, however. The rule requires savings associations with "above normal" interest rate risk (institutions whose portfolio equity would decline in value by more than 2% of assets in the event of a hypothetical 200-basis-point move in interest rates) to maintain additional capital for interest rate risk under the risk-based capital framework. If the OTS were to implement this regulation, Union Federal would be exempt from its provisions because it has less than $300 million in assets and its risk-based capital ratio exceeds 12%. Union Federal nevertheless measure its interest rate risk in conformity with the OTS regulation and, as of December 31, 1998, Union Federal would have been required to deduct $1.4 million from its total capital available to calculate its risk-based capital requirement. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk." If an association is not in compliance with the capital requirements, the OTS is required to prohibit asset growth and to impose a capital directive that may restrict, among other things, the payment of dividends and officers' compensation. In addition, the OTS and the FDIC generally are authorized to take enforcement actions against a savings association that fails to meet its capital requirements. These actions may include restricting the operations activities of the association, imposing a capital directive, cease and desist order, or civil money penalties, or imposing harsher measures such as appointing a receiver or conservator or forcing the association to merge into another institution. Prompt Corrective Regulatory Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FedICIA") requires, among other things, that federal bank regulatory authorities take "prompt corrective action" with respect to institutions that do not meet minimum capital requirements. For these purposes, FedICIA establishes five capital tiers: well capitalized, adequatelycapitalized, under capitialized, significantly undercapitalzied, and critically undercapitalized. At December 31, 1998, Union Federal was categorized as "well capitalized," meaning that its total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The FDIC may order savings associations which have insufficient capital to take corrective actions. For example, a savings association which is categorized as "undercapitalized" would be subject to growth limitations and would be required to submit a capital restoration plan, and a holding company that controls such a savings association would be required to guarantee that the savings association complies with the restoration plan. "Significantly undercapitalized" savings associations would be subject to additional restrictions. Savings associations deemed by the FDIC to be "critically undercapitalized" would be subject to the appointment of a receiver or conservator. Dividend Limitations The OTS recently adopted a regulation, which becomes effective on April 1, 1999, that revises the current restrictions that apply to "capital distributions" by savings associations. The amended regulation defines a capital distribution as a distribution of cash or other property to a savings association's owners, made on account of their ownership. This definition includes a savings association's payment of cash dividends to shareholders, or any payment by a savings association to repurchase, redeem, retire, or otherwise acquire any of its shares or debt instruments that are included in total capital, and any extension of credit to finance an affiliate's acquisition of those shares or interests. The amended regulation does not apply to dividends consisting only of a savings association's shares or rights to purchase such shares. The amended regulation exempts certain savings associations from the current requirement that all savings associations file either a notice or an application with the OTS before making any capital distribution. As revised, the regulation requires a savings association to file an application for approval of a proposed capital distribution with the OTS if the association is not eligible for expedited treatment under OTS's application processing rules, or the total amount of all capital distributions, including the proposed capital distribution, for the applicable calendar year would exceed an amount equal to the savings association's net income for that year to date plus the savings association's retained net income for the preceding two years (the "retained net income standard"). At December 31, 1998, Union Federal's retained net income standard was approximately $3.1 million. A savings association must also file an application for approval of a proposed capital distribution if, following the proposed distribution, the association would not be at least adequately capitalized under the OTS prompt corrective action regulations, or if the proposed distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the association and the OTS or the FDIC. The amended regulation requires a savings association to file a notice of a proposed capital distribution in lieu of an application if the association or the proposed capital distribution do not meet the conditions described above, and: (1) the savings association will not be at least well capitalized (as defined under the OTS prompt corrective action regulations) following the capital distribution; (2) the capital distribution would reduce the amount of, or retire any part of the savings association's common or preferred stock, or retire any part of debt instruments such as notes or debentures included in the association's capital under the OTS capital regulation; or (3) the savings association is a subsidiary of a savings and loan holding company. Because Union Federal is a subsidiary of a savings and loan holding company, this latter provision will require, at a minimum, that Union Federal file a notice with the OTS 30 days before making any capital distributions to the Holding Company. In addition to these regulatory restrictions, Union Federal's Plan of Conversion imposes additional limitations on the amount of capital distributions it may make to the Holding Company. The Plan of Conversion requires Union Federal to establish and maintain a liquidation account for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders and prohibits Union Federal from making capital distributions to the Holding Company if its net worth would be reduced below the amount required for the liquidation account. Limitations on Rates Paid for Deposits Regulations promulgated by the FDIC pursuant to FedICIA place limitations on the ability of insured depository institutions to accept, renew or roll over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions having the same type of charter in the institution's normal market area. Under these regulations, "well-capitalized" depository institutions may accept, renew or roll such deposits over without restriction, "adequately capitalized" depository institutions may accept, renew or roll such deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates) and "undercapitalized" depository institutions may not accept, renew or roll such deposits over. The regulations contemplate that the definitions of "well capitalized," "adequately capitalized" and "undercapitalized" will be the same as the definition adopted by the agencies to implement the corrective action provisions of FedICIA. Management does not believe that these regulations will have a materially adverse effect on Union Federal's current operations. Safety and Soundness Standards On February 2, 1995, the federal banking agencies adopted final safety and soundness standards for all insured depository institutions. The standards, which were issued in the form of guidelines rather than regulations, relate to internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation and interest rate exposure. In general, the standards are designed to assist the federal banking agencies in identifying and addressing problems at insured depository institutions before capital becomes impaired. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan. Failure to submit a compliance plan may result in enforcement proceedings. On August 27, 1996, the federal banking agencies added asset quality and earning standards to the safety and soundness guidelines. Real Estate Lending Standards OTS regulations require savings associations to establish and maintain written internal real estate lending policies. Each association's lending policies must be consistent with safe and sound banking practices and appropriate to the size of the association and the nature and scope of its operations. The policies must establish loan portfolio diversification standards; establish prudent underwriting standards, including loan-to-value limits, that are clear and measurable; establish loan administration procedures for the association's real estate portfolio; and establish documentation, approval, and reporting requirements to monitor compliance with the association's real estate lending policies. The association's written real estate lending policies must be reviewed and approved by the association's Board of Directors at least annually. Further, each association is expected to monitor conditions in its real estate market to ensure that its lending policies continue to be appropriate for current market conditions. Loans to One Borrower Under OTS regulations, Union Federal may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Additional amounts may be lent, not in excess of 10% of unimpaired capital and surplus, if such loans or extensions of credit are fully secured by readily marketable collateral, including certain debt and equity securities but not including real estate. In some cases, a savings association may lend up to 30 percent of unimpaired capital and surplus to one borrower for purposes of developing domestic residential housing, provided that the association meets its regulatory capital requirements and the OTS authorizes the association to use this expanded lending authority. At December 31, 1998, Union Federal did not have any loans or extensions of credit to a single or related group of borrowers in excess of its lending limits. Management does not believe that the loans-to-one-borrower limits will have a significant impact on Union Federal's business operations or earnings. Qualified Thrift Lender Savings associations must meet a QTL test. If Union Federal maintains an appropriate level of qualified thrift investments ("QTIs") (primarily residential mortgages and related investments, including certain mortgage-related securities) and otherwise qualifies as a QTL, it will continue to enjoy full borrowing privileges from the FHLB of Indianapolis. The required percentage of QTIs is 65% of portfolio assets (defined as all assets minus intangible assets, property used by the association in conducting its business and liquid assets equal to 10% of total assets). Certain assets are subject to a percentage limitation of 20% of portfolio assets. In addition, savings associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs. Compliance with the QTL test is determined on a monthly basis in nine out of every twelve months. As of December 31, 1998, Union Federal was in compliance with its QTL requirement, with approximately 90.04% of its assets invested in QTIs. A savings association which fails to meet the QTL test must either convert to a bank (but its deposit insurance assessments and payments will be those of and paid to the SAIF) or be subject to the following penalties: (i) it may not enter into any new activity except for those permissible for a national bank and for a savings association; (ii) its branching activities shall be limited to those of a national bank; (iii) it shall not be eligible for any new FHLB advances; and (iv) it shall be bound by regulations applicable to national banks respecting payment of dividends. Three years after failing the QTL test the association must (i) dispose of any investment or activity not permissible for a national bank and a savings association and (ii) repay all outstanding FHLB advances. If such a savings association is controlled by a savings and loan holding company, then such holding company must, within a prescribed time period, become registered as a bank holding company and become subject to all rules and regulations applicable to bank holding companies (including restrictions as to the scope of permissible business activities). Acquisitions or Dispositions and Branching The Bank Holding Company Act specifically authorizes a bank holding company, upon receipt of appropriate regulatory approvals, to acquire control of any savings association or holding company thereof wherever located. Similarly, a savings and loan holding company may acquire control of a bank. Moreover, federal savings associations may acquire or be acquired by any insured depository institution. Regulations promulgated by the FRB restrict the branching authority of savings associations acquired by bank holding companies. Savings associations acquired by bank holding companies may be converted to banks if they continue to pay SAIF premiums, but as such they become subject to branching and activity restrictions applicable to banks. Subject to certain exceptions, commonly-controlled banks and savings associations must reimburse the FDIC for any losses suffered in connection with a failed bank or savings association affiliate. Institutions are commonly controlled if one is owned by another or if both are owned by the same holding company. Such claims by the FDIC under this provision are subordinate to claims of depositors, secured creditors, and holders of subordinated debt, other than affiliates. The OTS has adopted regulations which permit nationwide branching to the extent permitted by federal statute. Federal statutes permit federal savings associations to branch outside of their home state if the association meets the domestic building and loan test in ss.7701(a)(19) of the Code or the asset composition test of ss.7701(c) of the Code. Branching that would result in the formation of a multiple savings and loan holding company controlling savings associations in more than one state is permitted if the law of the state in which the savings association to be acquired is located specifically authorizes acquisitions of its state-chartered associations by state-chartered associations or their holding companies in the state where the acquiring association or holding company is located. Moreover, Indiana banks and savings associations are permitted to acquire other Indiana banks and savings associations and to establish branches throughout Indiana. Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in other states and, with state consent and subject to certain limitations, allows banks to acquire out-of-state branches either through merger or de novo expansion. The State of Indiana enacted legislation establishing interstate branching provisions for Indiana state-chartered banks consistent with those established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana Branching Law authorizes Indiana banks to branch interstate by merger or de novo expansion, provided that such transactions are not permitted to out-of-state banks unless the laws of their home states permit Indiana banks to merge or establish de novo banks on a reciprocial basis. The Indiana Branching Law became effective March 15, 1996. Transactions with Affiliates Union Federal is subject to Sections 22(h), 23A and 23B of the Federal Reserve Act, which restrict financial transactions between banks and affiliated companies. The statute limits credit transactions between a bank or savings association and its executive officers and its affiliates, prescribes terms and conditions for bank affiliate transactions deemed to be consistent with safe and sound banking practices, and restricts the types of collateral security permitted in connection with a bank's extension of credit to an affiliate. Federal Securities Law The shares of Common Stock of the Holding Company have been registered with the SEC under the 1934 Act. The Holding Company is therefore subject to the information, proxy solicitation, insider trading restrictions and other requirements of the 1934 Act and the rules of the SEC thereunder. After three years following Union Federal's conversion to stock form, if the Holding Company has fewer than 300 shareholders, it may deregister its shares under the 1934 Act and cease to be subject to the foregoing requirements. Shares of Common Stock held by persons who are affiliates of the Holding Company may not be resold without registration unless sold in accordance with the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company meets the current public information requirements under Rule 144, each affiliate of the Holding Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Community Reinvestment Act Matters Federal law requires that ratings of depository institutions under the Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes both a four-unit descriptive rating -- outstanding, satisfactory, needs to improve, and substantial noncompliance -- and a written evaluation of an institution's performance. Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLBs. The standards take into account a member's performance under the CRA and its record of lending to first-time home buyers. The OTS has designated Union Federal's record of meeting community credit needs as satisfactory. TAXATION Federal Taxation Historically, savings associations, such as Union Federal, have been permitted to compute bad debt deductions using either the bank experience method or the percentage of taxable income method. However, for years beginning after December 31, 1995, no savings association may use the percentage of taxable income method of computing its allowable bad debt deduction for tax purposes. Instead, all savings associations are required to compute their allowable deduction using the experience method. As a result of the repeal of the percentage of taxable income method, reserves taken after 1987 using the percentage of taxable income method generally must be included in future taxable income over a six-year period, although a two-year delay may be permitted for associations meeting a residential mortgage loan origination test. Union Federal will recapture approximately $55,000 over a six-year period that began with the year ended December 31, 1996. In addition, the pre-1988 reserve, for which no deferred taxes have been recorded, need not be recaptured into income unless (i) the savings association no longer qualifies as a bank under the Code, or (ii) the savings association pays out excess dividends or distributions. Depending on the composition of its items of income and expense, a savings association may be subject to the alternative minimum tax. A savings association must pay an alternative minimum tax on the amount (if any) by which 20% of alternative minimum taxable income ("AMTI"), as reduced by an exemption varying with AMTI, exceeds the regular tax due. AMTI equals regular taxable income increased or decreased by certain tax preferences and adjustments, including depreciation deductions in excess of that allowable for alternative minimum tax purposes, tax-exempt interest on most private activity bonds issued after August 7, 1986 (reduced by any related interest expense disallowed for regular tax purposes), the amount of the bad debt reserve deduction claimed in excess of the deduction based on the experience method and 75% of the excess of adjusted current earnings over AMTI (before this adjustment and before any alternative tax net operating loss). AMTI may be reduced only up to 90% by net operating loss carryovers, but alternative minimum tax paid can be credited against regular tax due in later years. For federal income tax purposes, Union Federal has been reporting its income and expenses on the accrual method of accounting. Union Federal's federal income tax returns have not been audited in recent years. State Taxation Union Federal is subject to Indiana's Financial Institutions Tax ("FIT"), which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted gross income," for purposes of FIT, begins with taxable income as defined by Section 63 of the Code and, thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications. Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. Union Federal's state income tax returns have not been audited in recent years. Item 2. Properties. The following table provides certain information with respect to Union Federal's office as of December 31, 1998:
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 $64,846 $355 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 $2,200 at December 31, 1998. Union Federal has also contracted for data processing and reporting services from Intrieve, Incorporated in Cincinnati, Ohio. The cost of these data processing services is approximately $5,500 per month. Union Federal has also executed a Correspondent Services Agreement with the FHLB of Indianapolis under which it receives item processing and other services for a fee of approximately $1,100 per month. Union Federal also receives income from leasing office space on the second floor of its building and parking spaces located behind its building. Union Federal's gross income from renting the office space was $28,000 for fiscal year ended December 31, 1998 and December 31, 1997. Union Federal's gross income from renting the parking spaces was approximately $10,000 for the fiscal year ended December 31, 1998 and approximately $9,000 for the year ended December 31, 1997. Item 3. Legal Proceedings. Although Union Federal is involved, from time to time, in various legal proceedings in the normal course of business, there are no material legal proceedings to which it presently is a party or to which any of its property is subject. Item 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to a vote of the Holding Company's shareholders during the quarter ended December 31, 1998. Item 4.5. Executive Officers of the Registrant. The executive officers of the Holding Company are identified below. The executive officers of the Holding Company are elected annually by the Holding Company's Board of Directors. Name Position with Holding Company ---- ----------------------------- Joseph E. Timmons Chairman of the Board, President and Chief Executive Officer Denise E. Swearingen Secretary and Treasurer Ronald L. Keeling Vice President Joseph E. Timmons (age 64) has served as President and Chief Executive Officer of the Holding Company since 1997, of Union Federal since 1974 and of UFS Service Corp. since its inception in 1994. He has been an employee of Union Federal since 1954. Denise E. Swearingen (age 40) has served as the Holding Company's Secretary and Treasurer since 1997 and as Union Federal's Secretary and Controller/Treasurer since 1995. She has worked for Union Federal since 1983. Ronald L. Keeling (age 47) has served as the Holding Company's Vice President since 1997, as Union Federal's Vice President and Assistant Secretary since 1984 and as Senior Loan Officer since 1979. He has worked for Union Federal since 1971. PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters. The information required by this item is incorporated by reference to the material under the heading "Shareholder Information" on page 42 of the Holding Company's 1998 Shareholder Annual Report (the "Shareholder Annual Report"). Item 6. Selected Financial Data. The information required by this item is incorporated by reference to the material under the heading "Selected Consolidated Financial Data" on pages 2 and 3 of the Shareholder Annual Report. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. The information required by this item is incorporated by reference to pages 3 through 18 of the Shareholder Annual Report. Item 7A. Quantitative and Qualitative Disclosures about Market Risks The information required by this item is incorporated by reference to pages 16 through 18 of the Shareholder Annual Report. Item 8. Financial Statements and Supplementary Data. The Holding Company's Consolidated Financial Statements and Notes thereto contained on pages 19 through 39 of the Shareholder Annual Report are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. There were no such changes or disagreements during the applicable period. PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item with respect to Directors is incorporated by reference to pages 2 to 4 of the Holding Company's Proxy Statement for its Annual Shareholder meeting to be held April 21, 1999 (the "1999 Proxy Statement"). The information concerning the Holding Company's executive officers is included in Item 4.5 in Part I of this report. Item 11. Executive Compensation. The information required by this item with respect to Directors is incorporated by reference to pages 5 to 7 of the Holding Company's 1999 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by this item with respect to Directors is incorporated by reference to pages 3 to 4 of the Holding Company's 1999 Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this item with respect to Directors is incorporated by reference to page 7 of the Holding Company's 1999 Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List the following documents filed as part of the report: Annual Report Page No. -------- Financial Statements 19 Consolidated Balance Sheet at December 31, 1998, and 1997 20 Consolidated Statement of Income for the Years Ended December 31, 1998, 1997, and 1996 21 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997, and 1996. 22 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997, and 1996 23 Notes to Consolidated Financial Statements 24 (b) Reports on Form 8-K. The Holding Company filed no reports on Form 8-K during the quarter ended December 31, 1998. (c) The exhibits filed herewith or incorporated by reference herein are set forth on the Exhibit Index on page E-1. Included in those exhibits is an executive compensation plan and arrangement which is identified as Exhibit 10(5). (d) All schedules are omitted as the required information either is not applicable or is included in the Consolidated Financial Statements or related notes. SIGNATURES Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on behalf of the undersigned, thereto duly authorized. UNION COMMUNITY BANCORP Date: March 29, 1999 By: /s/ Joseph E. Timmons ------------------------------------ Joseph E. Timmons, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on this 29th day of March, 1999. Signatures Title Date (1) Principal Executive Officer: /s/ Joseph E. Timmons ) --------------------------- ) Joseph E. Timmons President and ) Chief Executive Officer) ) ) (2) Principal Financial and ) Accounting Officer: ) ) ) ) /s/ Denise E. Swearingen Treasurer ) --------------------------- ) Denise E. Swearingen ) ) ) March 29, 1999 ) (3) The Board of Directors: ) ) ) /s/ Philip L. Boots Director ) Philip L. Boots ) ) ) /s/ Marvin L. Burkett Director ) --------------------------- ) Marvin L. Burkett ) ) ) /s/ Phillip E. Grush Director ) --------------------------- ) Phillip E. Grush ) ) ) /s/ Samuel H. Hillenbrand ) --------------------------- ) Samuel H. Hillenbrand Director ) ) ) /s/ John M. Horner Director ) --------------------------- ) John M. Horner ) ) ) March 29, 1999 /s/ Harry A. Siamas Director ) --------------------------- ) Harry A. Siamas ) ) ) /s/ Joseph E. Timmons Director ) --------------------------- ) Joseph E. Timmons ) ) EXHIBIT INDEX Exhibit No. Description 3(1) Registrant's Articles of Incorporation are incorporated by reference to to Exhibit 3(1) to the Registration Statement (2) Registrant's Code of By-Laws is incorporated by reference to to Exhibit 3(2) to the Registration Statement 10(4) Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement (5) Employment Agreement between Union Federal Savings and Loan Association and Joseph E. Timmons incorporated by reference to to Exhibit 10(5) to the Registration Statement (6) Exempt Loan and Share Purchase Agreement between Trust under Union Community Bancorp Employee Stock Ownership Plan and Trust Agreement and Union Community Bancorp 13 1998 Shareholder Annual Report 21 Subsidiaries of the Registrant 23 Consent of independent certified public accountants 27 Financial Data Schedule (filed electronically) EX-13 2 SHAREHOLDER ANNUAL REPORT Message to Shareholders................................................... 1 Selected Consolidated Financial Data...................................... 2 Management's Discussion and Analysis...................................... 3 Report of Independent Auditor............................................. 19 Consolidated Balance Sheet................................................ 20 Consolidated Statement of Income.......................................... 21 Consolidated Statement of Shareholders' Equity............................ 22 Consolidated Statement of Cash Flows...................................... 23 Notes to Consolidated Financial Statements................................ 24 Directors and Officers.................................................... 40 Shareholder Information................................................... 42 ================================================================================ Union Community Bancorp (the "Holding Company" and together with the Association, as defined below, the "Company") is an Indiana corporation organized in September, 1997, to become a savings and loan holding company upon its acquisition of all the issued and outstanding capital stock of Union Federal Savings and Loan Association ("Union Federal" or the "Association") in connection with the Association's conversion from mutual to stock form. The Holding Company became the Association's holding company on December 29, 1997; therefore, all historical financial and other data contained for periods prior to December 29, 1997 herein relate solely to the Association while historical financial and other data contained herein for the period after December 29, 1997 relate to the Company. The principal asset of the Holding Company currently consists of 100% of the issued and outstanding shares of capital stock, $.01 par value per share, of the Association. The Association is a federal savings and loan association which conducts its business from a full-service office located in Crawfordsville, Indiana. The Association offers a variety of lending, deposit and other financial services to its retail and commercial customers. The Association's principal business consists of attracting deposits from the general public and originating mortgage loans, most of which are secured by one- to four-family residential real property in Montgomery County. The Association also offers multi-family loans, construction loans, non-residential real estate loans, home equity loans and consumer loans, including single-pay loans, loans secured by deposits, and installment loans. The Association derives most of its funds for lending from deposits of its customers, which consist primarily of certificates of deposit, demand accounts and savings accounts. TO OUR SHAREHOLDERS: On behalf of our employees and Board of Directors, I take great pleasure in providing you with the 1998 Annual Report to Shareholders of Union Community Bancorp, the holding company for Union Federal Savings and Loan Association. We have now completed one year as a stock company and look forward to the future with great enthusiasm. The Board of Directors, officers and employees of Union Community remain committed to enhancing the value of your investment with us. To that end, the Board increased the quarterly dividends paid by Union Community throughout 1998 and authorized the repurchase of shares of Union Community's outstanding common stock. During November 1998, we repurchased 5% of our outstanding common stock, and we have received approval from the Office of Thrift Supervision to repurchase up to an additional 10% of our outstanding common stock during 1999. These share repurchases reduce the number of our outstanding shares of common stock, which is intended to improve the book value of the remaining outstanding shares and positively impact our return on equity. We also introduced several new products and services during 1998, including home equity loans, commercial loans and commercial lines of credit. We also increased our electronic banking during 1998 by adding two new automatic teller machines. We expect to further expand our ATM network in the future and to increase our participation in debit card programs. In addition, we hope to expand the types of checking accounts that we currently offer to our customers. We appreciate the continued support and confidence of our customers and shareholders as we look to the future. Remember, this is your financial institution, so be sure to use us for all of your personal and business needs and to recommend us to your friends and neighbors. Sincerely, /s/ Joseph E. Timmons Joseph E. Timmons, President & Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL DATA OF UNION COMMUNITY BANCORP AND SUBSIDIARY The following selected consolidated financial data of the Company is qualified in its entirety by, and should be read in conjunction with, the consolidated financial statements, including notes thereto, included elsewhere in this Annual Report.
At December 31, ---------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) Summary of Selected Consolidated Financial Condition Data: Total assets....................................... $108,162 $132,040 $82,789 $73,631 $72,540 Loans, net......................................... 90,900 78,436 72,697 61,279 60,059 Cash and interest-bearing deposits in other banks (1)............................ 6,191 44,781 1,465 1,993 1,329 Investment securities held to maturity............. 8,026 5,820 5,747 7,423 7,985 Deposits........................................... 64,846 62,258 60,436 57,407 54,886 Stock subscriptions refundable..................... --- 22,687 --- --- --- Borrowings......................................... 1,793 3,573 7,880 2,642 4,943 Shareholders' equity............................... 40,531 42,906 13,910 13,024 12,033 Year Ended December 31, 1998 1997 1996 1995 1994 ------ ------ ------- ------- ------ Summary of Operating Data: Total interest and dividend income................. $8,105 $6,801 $6,112 $5,729 $5,249 Total interest expense............................. 3,415 3,836 3,424 3,148 2,507 ------ ------ ------- ------- ------ Net interest income............................. 4,690 2,965 2,688 2,581 2,742 Provision for loan losses.......................... 110 165 48 24 24 ------ ------ ------- ------- ------ Net interest income after provision for loan losses............................... 4,580 2,800 2,640 2,557 2,718 ------ ------ ------- ------- ------ Other income (losses): Equity in losses of limited partnership......... (121) (158) (173) (249) (54) Other........................................... 73 62 57 32 14 ------ ------ ------- ------- ------ Total other losses............................ (48) (96) (116) (217) (40) ------ ------ ------- ------- ------ Other expenses: Salaries and employee benefits.................. 850 480 461 481 489 Legal and professional fees..................... 128 34 29 47 21 Net occupancy expenses.......................... 39 39 39 66 44 Equipment expenses.............................. 28 22 20 20 17 Deposit insurance expense....................... 46 31 495 127 126 Other........................................... 373 355 258 281 187 ------ ------ ------- ------- ------ Total other expenses.......................... 1,464 961 1,302 1,022 884 ------ ------ ------- ------- ------ Income before income taxes and cumulative effect of change in accounting principle............... 3,068 1,743 1,222 1,318 1,794 Income taxes....................................... 1,094 545 336 326 639 ------ ------ ------- ------- ------ Net income...................................... $1,974 $1,198 $ 886 $ 992 $1,155 ====== ====== ======= ======= ======
Table continued on following page
Year Ended December 31, 1998 1997 1996 1995 1994 Supplemental Data: Interest rate spread during period................. 2.23 %2.55 %2.54 %2.69 %3.25 % Net yield on interest-earning assets (2) .......... 4.42 3.50 3.53 3.67 4.01 Return on assets (3)............................... 1.82 1.38 1.13 1.36 1.63 Return on equity (4)............................... 4.65 8.10 6.54 7.84 10.02 Other expenses to average assets (5)............... 1.35 1.11 1.66 1.41 1.25 Equity to assets (6)............................... 37.47 32.49 16.80 17.69 16.59 Average interest-earning assets to average interest-bearing liabilities.................... 167.89 120.98 121.94 121.83 120.63 Non-performing assets to total assets (6).......... .32 .07 .59 .21 .20 Allowance for loan losses to total loans outstanding (6)................................. .40 .32 .22 .18 .15 Allowance for loan losses to non-performing loans (6)........................ 103.72 484.62 32.52 71.15 60.84 Net charge-offs to average total loans outstanding ........................ --- .10 --- --- --- Number of full service offices (6)................. 1 1 1 1 1
(1) Includes certificates of deposit in other financial institutions. (2) Net interest income divided by average interest-earning assets. (3) Net income divided by average total assets. (4) Net income divided by average total equity. (5) Other expenses divided by average total assets. (6) At end of period. ================================================================================ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Holding Company was incorporated for the purpose of owning all of the outstanding shares of Union Federal. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with and with reference to the consolidated financial statements and the notes thereto included herein. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. The Company's operations and actual results could differ significantly from those discussed in the forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company's general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to the following matters: 1. Management's determination of the amount of loan loss allowance; 2. The effect of changes in interest rates; 3. Changes in deposit insurance premiums; and 4. Proposed legislation that would eliminate the federal thrift charter and the separate federal regulation of thrifts. Average Balances and Interest Rates and Yields The following tables present for the years ended December 31, 1998, 1997 and 1996, the balances, interest rates and average monthly balances of each category of the Company's interest-earning assets and interest-bearing liabilities, and the interest earned or paid on such amounts. Management believes that the use of month-end average balances instead of daily average balances has not caused any material difference in the information presented.
AVERAGE BALANCE SHEET/YIELD ANALYSIS Year Ended December 31, ------------------------------------------------------------------------------------------------ 1998 1997 1996 ----------------------------- -------------------------------- ------------------------------- Average Average Average Average Average Average Balance Interest(1) Yield/Cost Balance Interest(1) Yield/Cost Balance Interest(1) Yield/Cost ------- ---------- ---------- ------- ----------- ---------- ------- ----------- ---------- (Dollars in thousands) Assets: Interest-earning assets: Interest-earning deposits.......$11,441 $ 600 5.24% $3,821 $246 6.44% $ 959 $ 67 6.99% Mortgage-backed securities held to maturity.............. 3,304 257 7.78 2,421 214 8.84 3,061 263 8.59 Other investment securities held to maturity.............. 4,301 257 5.98 3,487 197 5.65 3,169 175 5.52 Loans receivable (2)............ 86,421 6,932 8.02 74,382 6,090 8.19 68,346 5,562 8.14 FHLB stock...................... 735 59 8.03 676 54 7.99 576 45 7.81 Total interest-earning assets.106,202 8,105 7.63 84,787 6,801 8.02 76,111 6,112 8.03 Non-interest earning assets, net of allowance for loan losses....... 2,030 2,039 2,152 Total assets.................$108,232 $86,826 $ 78,263 Liabilities and shareholder's equity: Interest-bearing liabilities: Savings deposits................ $3,466 139 4.01 $3,845 159 4.14 $ 3,754 148 3.94 Interest-bearing demand......... 11,920 496 4.16 10,350 444 4.29 9,061 369 4.07 Certificates of deposit......... 46,999 2,729 5.81 47,403 2,764 5.83 46,035 2,716 5.90 Stock subscriptions refundable.. --- --- --- 2,737 130 4.75 --- --- --- FHLB advances................... 873 51 5.84 5,748 339 5.90 3,566 191 5.36 Total interest-bearing liabilities.............. 63,258 3,415 5.40 70,083 3,836 5.47 62,416 3,424 5.49 Other liabilities.................. 2,504 1,960 2,303 Total liabilities............. 65,762 72,043 64,719 Shareholders' equity............... 42,470 14,783 13,544 Total liabilities and shareholders' equity.....$108,232 $86,826 $ 78,263 Net interest-earning assets........$42,944 $14,704 $ 13,695 Net interest income................ $4,690 $2,965 $2,688 Interest rate spread (3)........... 2.23% 2.55% 2.54% Net yield on weighted average interest-earning assets (4)..... 4.42% 3.50% 3.53% Average interest-earning assets to average interest-bearing liabilities 167.89% 120.98% 121.94%
(1) Interest income on loans receivable includes loan fee income of $88,000 for the year ended December 31, 1998 and $97,000 for each of the years ended December 31, 1997 and 1996. (2) Total loans less loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. Interest Rate Spread The Company's results of operations have been determined primarily by net interest income and, to a lesser extent, fee income, miscellaneous income and general and administrative expenses. The Company's net interest income is determined by the interest rate spread between the yields the Company earns on interest-earning assets and the rates it pays on interest-bearing liabilities, and by the relative amounts of interest-earning assets and interest-bearing liabilities. The following table sets forth the weighted average effective interest rate that the Company earned on its loan and investment portfolios, the weighted average effective cost of its deposits and advances, the interest rate spread, and net yield on weighted average interest-earning assets for the periods and as of the dates shown. Average balances are based on average month-end balances. Management believes that the use of month-end average balances instead of daily average balances has not caused any material difference in the information presented.
At December 31, Year Ended December 31, 1998 1998 1997 1996 ---- ---- ---- ---- Weighted average interest rate earned on: Interest-earning deposits....................... 4.60% 5.24% 6.44% 6.99% Mortgage-backed securities held to maturity..... 7.44 7.78 8.84 8.59 Other investment securities held to maturity.... 6.30 5.98 5.65 5.52 Loans receivable................................ 7.85 8.02 8.19 8.14 FHLB stock...................................... 8.00 8.03 7.99 7.81 Total interest-earning assets................. 7.58 7.63 8.02 8.03 Weighted average interest rate cost of: Savings deposits................................ 4.00 4.01 4.14 3.94 Interest-bearing demand......................... 4.52 4.16 4.29 4.07 Certificates of deposit......................... 5.73 5.81 5.83 5.90 Stock subscriptions refundable.................. --- --- 4.75 --- FHLB advances................................... 5.71 5.84 5.90 5.36 Total interest-bearing liabilities............ 5.41 5.40 5.47 5.49 Interest rate spread (1)........................... 2.18 2.23 2.55 2.54 Net yield on weighted average interest-earning assets (2)..................... N/A 4.42 3.50 3.53
(1) Interest rate spread is calculated by subtracting combined weighted average interest rate cost from combined weighted average interest rate earned for the period indicated. Interest rate spread figures must be considered in light of the relationship between the amounts of interest-earning assets and interest-bearing liabilities. (2) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected the Company's interest income and expense during the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to (1) changes in rate (changes in rate multiplied by old volume) and (2) changes in volume (changes in volume multiplied by old rate). Changes attributable to both rate and volume which cannot be segregated have been allocated proportionally to the change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income ---------------------------------------------------- Total Due to Due to Net Rate Volume Change (In thousands) Year ended December 31, 1998 compared to year ended December 31, 1997 Interest-earning assets: Interest-earning deposits.................................. $ (53) $407 $354 Mortgage-backed securities held to maturity................ (28) 71 43 Other investment securities held to maturity............... 12 48 60 Loans receivable........................................... (126) 968 842 FHLB stock................................................. --- 5 5 ------ ----- -------- Total.................................................... (195) 1,499 1,304 ------ ----- -------- Interest-bearing liabilities: Savings deposits........................................... (5) (15) (20) Interest-bearing demand.................................... (14) 66 52 Certificates of deposit.................................... (12) (23) (35) Stock subscriptions refundable............................. --- (130) (130) FHLB advances.............................................. (3) (285) (288) ------ ----- -------- Total.................................................... (34) (387) (421) ------ ----- -------- Net change in net interest income............................ $ (161) $1,886 $1,725 ====== ====== ====== Year ended December 31, 1997 compared to year ended December 31, 1996 Interest-earning assets: Interest-earning deposits.................................. $ (6) $ 185 $ 179 Mortgage-backed securities held to maturity................ 7 (56) (49) Other investment securities held to maturity............... 4 18 22 Loans receivable........................................... 34 494 528 FHLB stock................................................. 1 8 9 ------ ----- -------- Total.................................................... 40 649 689 ------ ----- -------- Interest-bearing liabilities: Savings deposits........................................... 7 4 11 Interest-bearing demand.................................... 20 55 75 Certificates of deposit.................................... (32) 80 48 Stock subscriptions refundable............................. --- 130 130 FHLB advances.............................................. 21 127 148 ------ ----- -------- Total.................................................... 16 396 412 ------ ----- -------- Net change in net interest income............................ $ 24 $ 253 $ 277 ====== ===== ======== Year ended December 31, 1996 compared to year ended December 31, 1995 Interest-earning assets: Interest-earning deposits.................................. $ 5 $ (9) $ (4) Mortgage-backed securities held to maturity................ 3 (61) (58) Other investment securities held to maturity............... (10) (42) (52) Loans receivable........................................... (108) 604 496 FHLB stock................................................. --- 1 1 ------ ----- -------- Total.................................................... (110) 493 383 ------ ----- -------- Interest-bearing liabilities: Savings deposits........................................... (2) 4 2 Interest-bearing demand.................................... (36) 20 (16) Certificates of deposit.................................... 68 143 211 FHLB advances.............................................. (14) 93 79 ------ ----- -------- Total.................................................... 16 260 276 ------ ----- -------- Net change in net interest income............................ $ (126) $ 233 $ 107 ====== ===== ========
Financial Condition at December 31, 1998 Compared to Financial Condition at December 31, 1997 Total assets decreased $23.9 million, or 18.1% at December 31, 1998, compared to December 31, 1997. The decline was primarily in cash and cash equivalents, which decreased $38.6 million as the result of the Company's payment of the stock subscriptions refundable of $22.7 million at December 31, 1997. This decrease in cash and cash equivalents was offset by increases in net loans and investment securities held to maturity. Net loans increased $12.5 million, or 15.9%, due primarily to an increase in customer demand. Investment securities held to maturity increased by $2.2 million, or 37.9%. Average assets increased $21.4 million from $86.8 million for the year ended December 31, 1997, to $108.2 million for the year ended December 31, 1998, an increase of 24.7%. Average interest-earning assets represented 97.7% of average assets for the period ended December 31, 1997 compared to 98.1% for the period ended December 31, 1998. Although the average of each interest-earning asset increased during 1998, average interest-earning deposits and loans experienced the largest increases amounting to $7.6 million and $12.0 million, or 199.4% and 16.2%, respectively. The increase in average interest-earning assets was a result of the proceeds received from the stock conversion in the fourth quarter of 1997. Average interest-earning assets as a percentage of average interest-bearing liabilities were 121.0% for 1997 and 167.9% for 1998. Loans and Allowance for Loan Losses. Average loans increased $12.0 million, or 16.2%, from the period ended December 31, 1997 to December 31, 1998. The growth in loans was funded by stock conversion proceeds. Average loans were $74.4 million for the 1997 period and $86.4 million for the 1998 period. The allowance for loan losses as a percentage of total loans increased from .32% to .40% due to an increase in the allowance for loan losses from $252,000 at December 31, 1997 to $362,000 at December 31, 1998. The increase in the allowance for loan losses was a result of a $110,000 provision for loan losses for the year ended December 31, 1998. This increase in the allowance was due to loan growth and an increase in non-performing loans. The ratio of the allowance for loan losses to non-performing loans was 484.6% at December 31, 1997 compared to 103.7% at December 31, 1998. Nonperforming loans increased from $52,000 at December 31, 1997 to $349,000 at December 31, 1998. Included in nonperforming loans at December 31, 1998 were $322,000 of impaired loans. Deposits. Deposits increased $2.6 million to $64.8 million during 1998, an increase of 4.2%. Increased deposits were utilized to fund loan growth. Certificates of deposits accounted for the majority of the growth with an increase of $2.6 million, or 5.7%, during this period. Average total deposits increased $787,000, or 1.3%, from $61.6 million for the year ended December 31, 1997 compared to $62.4 million for the year ended December 31, 1998. Borrowed Funds. Borrowed funds decreased $1.8 million, or 49.8%, from December 31, 1997 to December 31, 1998. The decline in total borrowed funds was comprised of a decrease in FHLB advances of $1.6 million, 67.5%, and a decrease in the note payable to Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and operate a 48-unit apartment complex, of $179,000, or 14.9%. The note to Pedcor was used to fund an investment in the Pedcor low-income housing income tax credit limited partnership and bears no interest so long as there exists no event of default. Due to the conversion proceeds available to fund loan growth, it was not necessary to renew advances as they matured. Average FHLB advances decreased to $873 million for 1998 compared to $5.7 million for 1997, a decrease of $4.9 million, or 84.8%. Shareholders' Equity. Shareholders' equity decreased $2.4 million from $42.9 million at December 31, 1997 to $40.5 million at December 31, 1998. The decrease was primarily due to the $1.8 million contribution made to fund the recognition and retention compensation plan, stock repurchases of $1.9 million and cash dividends of $1.3 million. These decreases were offset by net income for the year ended December 31, 1998 of $2.0 million, Employee Stock Ownership Plan shares earned of $149,000 and unearned compensation amortization of $114,000. Financial Condition at December 31, 1997 Compared to Financial Condition at December 31, 1996 Total assets increased $49.3 million, or 59.5% at December 31, 1997, compared to December 31, 1996. The largest increases were primarily in cash and cash equivalents which increased $43.3 million, and net loans which increased $5.7 million. The increase in cash and cash equivalents was principally in short-term interest-bearing deposits due to net proceeds from the conversion and stock subscriptions refundable. Net proceeds of the Holding Company's stock issuance, after costs and excluding the shares issued for the ESOP, were $27.8 million and stock subscriptions refundable were $22.7 million. The increase in net loans was principally in real estate mortgage loans, and a result of increased customer demand. Average assets increased $8.5 million from $78.3 million for the period ended December 31, 1996, to $86.8 million for the period ended December 31, 1997, an increase of 10.9%. Average interest-earning assets represented 97.3% of average assets for the period ended December 31, 1996 compared to 97.7% for the period ended December 31, 1997. Although the average of most interest-earning assets increased during 1997, average loans experienced the largest increase amounting to $6.0 million, or 8.8%, compared to 1996. Average interest-earning assets as a percentage of average interest-bearing liabilities were 121.9% for 1996 and 121.0% for 1997. Average balances of mortgage-backed securities held to maturity decreased $640,000, or 20.9%, from December 31, 1996 to December 31, 1997 as a result of principal repayments, while other investment securities held to maturity increased $318,000, or 10.0%, from $3.2 million for the period ended December 31, 1996 to $3.5 million for the period ended December 31, 1997 due to purchases. Although no mortgage-backed securities have been purchased for several years, mortgage-backed securities have been purchased on occasion and are considered for purchase on an ongoing basis because such instruments offer liquidity and lower credit risk than other types of investments. The primary risk associated with these instruments is that in a declining interest rate environment the prepayment level of the loans underlying these securities will accelerate, which reduces the effective yield and exposes the association to interest rate risk on the prepaid amounts. In an increasing rate environment, the primary risk associated with these securities is that the fixed-rate portion of such securities will not adjust to market rates which reduces our spread. See "Business -- Investments -- Mortgage-Backed Securities." Loans and Allowance for Loan Losses. Average loans increased $6.0 million, or 8.8%, from the period ended December 31, 1996, to December 31, 1997. The growth in loans was in part funded by increased average deposits of $2.7 million and increased average FHLB advances of $2.2 million. Average loans were $68.3 million for the 1996 period and $74.4 million for the 1997 period. The allowance for loan losses as a percentage of total loans increased from .22% to .32% due to an increase in the allowance for loan losses from $159,000 at December 31, 1996 to $252,000 at December 31, 1997. The increase in our allowance for loan losses was a result of a $165,000 provision for loan losses for the year ended December 31, 1997 offset by a $72,000 charge-off. The ratio of the allowance for loan losses to non-performing loans was 32.5% at December 31, 1996 compared to 484.6% at December 31, 1997. Nonperforming loans decreased from $489,000 at December 31, 1996 to $52,000 at December 31, 1997. Nonperforming loans of $203,000 were transferred to foreclosed real estate during the period ended December 31, 1997 and a charge-off of $72,000 relating to a multi-family loan was taken at the time of the transfer. In response to this loss, the risk factor used to calculate the necessary allowance for loan losses related to loans secured by multi-family and commercial real estate was increased. Union Federal has experienced minimal residential loan losses in the past with no losses recorded in over five years and does not expect this experience in this area to change in future years; therefore, the risk factor used on the residential loan portfolio has not been adjusted. Deposits. Deposits increased $1.8 million to $62.3 million during 1997, an increase of 3.0%. Increased deposits were utilized to fund loan growth. Demand and savings deposits increased $2.7 million, or 20.1%, between December 31, 1996 and December 31, 1997. Certificates of deposits decreased $874,000, or 1.9%, during this period. Average total deposits increased $2.7 million, or 4.6%, from $58.9 million for the year ended December 31, 1996 compared to $61.6 million for the year ended December 31, 1997. Borrowed Funds. Borrowed funds decreased $4.3 million, or 54.7%, from December 31, 1996 to December 31, 1997. The decline in total borrowed funds was comprised of a decrease in FHLB advances of $4.1 million, 63.4%, and a decrease in the note payable to Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and operate a 48-unit apartment complex, of $198,000, or 14.0%. The note to Pedcor was used to fund an investment in the Pedcor low-income housing income tax credit limited partnership and bears no interest so long as there exists no event of default. Average FHLB advances increased to $5.7 million for 1997 compared to $3.6 million for 1996, an increase of $2.1 million, or 58.3%. Shareholders' Equity. Shareholders' equity increased $29.0 million from $13.9 million at December 31, 1996 to $42.9 million at December 31, 1997. The increase was due to net proceeds of the Holding Company's stock issuance, after costs and excluding the shares issued for the ESOP, of $27.8 million and net income for 1997 of $1.2 million. Comparison of Operating Results For Years Ended December 31, 1998 and 1997 General. Net income increased $776,000, or 64.8%, from $1.2 million for the year ended December 31, 1997 to $2.0 million for the year ended December 31, 1998. The increase was primarily due to an increase in net interest income which was primarily attributable to the Company's stock issuance on December 29, 1997 which resulted in net proceeds to the Company in the amount of approximately $27.8 million after costs and excluding the shares issued for the Employee Stock Ownership Plan. The Company primarily used the proceeds of the stock offering to invest in loans and short-term interest-bearing deposits and for the repayment of Federal Home Loan Bank advances, which resulted in increased net interest income. The return on average assets was 1.82% and 1.38 % for the years ended December 31, 1998 and 1997, respectively. Interest Income. Our total interest income was $8.1 million for 1998 compared to $6.8 million for 1997. The increase in interest income was due primarily to an increase in volume. Average earning assets increased $21.4 million, or 25.3%, from $84.8 million for 1997 compared to $106.2 million for 1998. The average yield on interest-earning assets decreased from 8.0% for the year ended December 31, 1997 to 7.6% for the comparable period in 1998. Interest Expense. Interest expense decreased $421,000, or 11.0%, for the year ended December 31, 1998 compared to the year ended December 31, 1997. Average interest-bearing liabilities decreased $6.8 million, or 9.7%, from $70.1 million for the 1997 period to $63.3 million during the 1998 period. Average deposits increased by $787,000, or 1.3%, from $61.6 million for the 1997 period to $62.4 million for the 1998 period. Average FHLB advances decreased $4.9 million, or 84.8%, from $5.8 million for the 1997 period to $873,000 during the 1998 period. Net Interest Income. Net interest income increased $1.7 million, or 58.2%, for the year ended December 31, 1998 compared to the year ended December 31, 1997. $1.9 million of the increase was primarily due to the increase in volume of earning assets. The net yield of weighted average interest-earning assets was 4.4% for the year ended December 31, 1998 compared to 3.5% for the comparable 1997 period. Provision for Loan Losses. The provision for loan losses for the year ended December 31, 1998 was $110,000 compared to $165,000 for the same period in 1997. The provision and the related increase in the allowance for loan losses were considered adequate, based on growth, size, condition and components of the loan portfolio. Other Losses. Other losses decreased $48,000, or 50.0%, for the year ended December 31, 1998 compared to the 1997 period primarily due to decreased losses of $37,000 from Union Federal's investment in a low-income housing income tax credit limited partnership. The investment in the limited partnership represents a 99% equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a benefit of low-income housing income tax credits in the amount of $178,000 for both 1998 and 1997 was recorded. Salaries and Employee Benefits. Salaries and employee benefits were $850,000 for the year ended December 31, 1998 compared to $480,000 for the 1997 period, an increase of $370,000, or 77.1%. This increase resulted primarily from $263,000 of compensation expense related to the ESOP and the recognition and retention compensation plan. The remaining increase resulted from an increase in the number of full-time equivalent employees and normal increases in employee compensation and related payroll taxes. Net Occupancy and Equipment Expenses. Occupancy expenses and equipment expenses increased $6,000, or 9.8%, during 1998 compared to 1997. Deposit Insurance Expense. Deposit insurance expense increased $15,000, or 48.4%, from $31,000 for the year ended December 31, 1997 to $46,000 for the same period in 1998. Legal and Professional Fees. Legal and professional fees were $128,000 for the year ended December 31, 1998 compared to $34,000 for the 1997 period, an increase of $94,000. This increase was a result of the additional expenses incurred as a public company. Other Expense. Other expenses, consisting primarily of expenses related to service center fees, advertising, directors' fees, supervisory examination fees, supplies, and postage increased $18,000, or 5.1% for 1998 compared to 1997. The increase resulted from nominal increases in a variety of expense categories. Income Tax Expense. Income tax expense increased $549,000, or 100.7%, during 1998 compared to 1997. The increase was directly related to the increase in taxable income for the period. The effective tax rate was 35.7% and 31.2% for the respective 1998 and 1997 periods. Comparison of Operating Results For Years Ended December 31, 1997 and 1996 General. Net income increased $312,000, or 35.2%, from $886,000 for the year ended December 31, 1996 to $1,198,000 for the year ended December 31, 1997. The increase is primarily due to an increase in net interest income and a decrease in deposit insurance expense. The return on average assets was 1.38% and 1.13 % for the years ended December 31, 1997 and 1996, respectively. Interest Income. Our total interest income was $6.8 million for 1997 compared to $6.1 million for 1996. The increase in interest income was due primarily to an increase in volume. Average earning assets increased $8.7 million, or 11.4%, from $76.1 million for 1996 compared to $84.8 for 1997. The average yield on interest-earning assets decreased slightly from 8.03% for the year ended December 31, 1996 to 8.02% for the comparable period in 1997. Interest Expense. Interest expense increased $412,000, or 12.0%, for the year ended December 31, 1997 compared to the year ended December 31,1996. Average interest-bearing liabilities increased $7.7 million, or 12.3%, from $62.4 million for the 1996 period to $70.1 million during the 1997 period. The average balance of each deposit type increased from the 1996 period to the 1997 period with a $2.7 million, or 4.6%, increase in total average deposits. Average FHLB advances increased $2.1 million, or 58.3%, from $3.6 million for the 1996 period to $5.7 million during the 1997 period. Net Interest Income. Net interest income increased $277,000, or 10.3%, for the year ended December 31, 1997 compared to the year ended December 31, 1996. The increase was primarily due to the $253,000 increase due to volume increases. The interest spread was 2.55% for the year ended December 31, 1997 compared to 2.54% for the comparable 1996 period. Provision for Loan Losses. The provision for loan losses for the year ended December 31, 1997 was $165,000 compared to $48,000 for the same period in 1996. The provision for loan losses increased due to the increase in outstanding loans and the losses recorded in 1997 associated with non-performing loans secured by multi-family real estate. In response to the loss experienced in 1997, the risk factor used on multi-family and commercial real estate loans was increased. Other Losses. Other losses decreased $20,000, or 17.2%, for the year ended December 31, 1997 compared to the 1996 period primarily due to decreased losses of $15,000 from our investment in a low-income housing income tax credit limited partnership. The investment in the limited partnership represents a 99% equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a benefit of low income housing income tax credits in the amount of $178,000 for both 1997 and 1996 was recorded. Salaries and Employee Benefits. Salaries and employee benefits were $480,000 for the year ended December 31, 1997 compared to $461,000 for the 1996 period, and increase of $19,000, or 4.1%. This increase resulted from the addition of 3 full-time employees to our staff and normal increases in employee compensation and related payroll taxes. Net Occupancy and Equipment Expenses. Occupancy expenses and equipment expenses increased $2,000, or 3.4%, during 1997 compared to 1996. Deposit Insurance Expense. Deposit insurance expense decreased $464,000, or 93.7%, from $495,000 for the year ended December 31, 1996 to $31,000 for the same period in 1997. This decrease was due to the one time Savings Association Insurance Fund ("SAIF") special assessment of approximately $362,000 expensed in the fourth quarter of 1996. The recapitalization of SAIF resulted in a decline in the assessment for 1997. Prior to the recapitalization of SAIF, an assessment of $.23 per $100 of deposits was paid. Subsequent to the recapitalization, the assessment was reduced to $.0644 per $100 of deposits. Legal and Professional Fees. Legal and professional fees increased $5,000, or 17.2%, during 1997 compared to 1996. Other Expense. Other expenses, consisting primarily of expenses related to service center fees, advertising, directors' fees, supervisory examination fees, supplies, and postage increased $97,000, or 37.6% for 1997 compared to 1996. The increase was primarily due to an increase in director fees of $26,000 and a $30,000 charitable contribution. The remaining increase resulted from nominal increases in a variety of expense categories. Income Tax Expense. Income tax expense increased $209,000, or 62.2%, during 1997 compared to 1996. The increase was directly related to the increase in taxable income for the period. The effective tax rate was 31.3% and 27.5% for the respective 1997 and 1996 periods. Liquidity and Capital Resources The following is a summary of the Company's cash flows, which are of three major types. Cash flows from operating activities consist primarily of net income generated by cash. Investing activities generate cash flows through the origination and principal collection on loans as well as purchases and sales of securities. Investing activities will generally result in negative cash flows when the Company experiences loan growth. Cash flows from financing activities include savings deposits, withdrawals and maturities and changes in borrowings. The following table summarizes cash flows for each year in the three-year period ended December 31, 1998.
Year Ended December 31, ---------------------------------------------------- 1998 1997 1996 -------- ------- ------- (In thousands) Operating activities.......................................... $2,355 $1,367 $ 1,088 -------- ------- ------- Investing activities: Investment securities Proceeds from maturities and paydowns of mortgage-backed securities held to maturity.............. 607 639 676 Purchases of other investment securities held to maturity............................ (9,204) (1,200) (994) Proceeds from maturities of investment securities held to maturity................. 6,400 500 2,000 Purchase of loans............................................. (500) (1,350) Other net change in loans..................................... (12,529) (5,517) (10,116) Purchase of FHLB of Indianapolis Stock........................ (37) (128) (18) Proceeds on sale of foreclosed real estate............................. 5 76 --- Purchases of premises and equipment........................... (18) (23) (3) Other investing activities.................................... (2) (3) --- -------- ------- ------- Net cash used by investing activities.................... (14,778) (6,156) (9,805) -------- ------- ------- Financing activities: Net change in Interest-bearing demand and savings deposits............... (28) 2,696 1,243 Certificates of deposits................................... 2,616 (874) 1,786 Stock subscription escrow accounts......................... (22,687) 22,687 --- Proceeds from borrowings...................................... 1,500 10,500 Repayment of borrowings....................................... (1,780) (5,807) (5,261) Net change in advances by borrowers for taxes and insurance.................................... 54 20 (79) Cash dividends................................................ (729) --- --- Contribution of unearned compensation ........................ (1,754) --- --- Repurchase of common stock.................................... (1,859) --- --- Proceeds from sale of common stock, net of costs.............. 27,883 --- -------- ------- ------- Net cash provided (used) by financing activities......... (26,167) 48,105 8,189 -------- ------- ------- Net increase(decrease) in cash and cash equivalents.......... $(38,590) $43,316 $ (528) ======== ======= =======
Federal law requires that savings associations maintain an average daily balance of liquid assets in an amount not less than 4% or more than 10% of their withdrawable accounts plus short-term borrowings. Liquid assets include cash, certain time deposits, certain bankers' acceptances, specified U.S. government, state or federal agency obligations, certain corporate debt securities, commercial paper, certain mutual funds, certain mortgage-related securities, and certain first-lien residential mortgage loans. The OTS recently amended its regulation that implements this statutory liquidity requirement to reduce the amount of liquid assets a savings association must hold from 5% of net withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated the requirement that savings associations maintain short-term liquid assets constituting at least 1% of their average daily balance of net withdrawable deposit accounts and current borrowings. The revised OTS rule also permits savings associations to calculate compliance with the liquidity requirement based upon their average daily balance of liquid assets during each quarter rather than during each month, as was required under the prior rule. The OTS may impose monetary penalties on savings associations that fail to meet these liquidity requirements. As of December 31, 1998, Union Federal had liquid assets of $8.1 million, and a regulatory liquidity ratio of 10.8%. Pursuant to OTS capital regulations, savings associations must currently meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital) requirement, and a total risk-based capital to risk-weighted assets ratio of 8%. At December 31, 1998, Union Federal's capital levels exceeded all applicable regulatory capital requirements currently in effect. The following table provides the minimum regulatory capital requirements and Union Federal's capital ratios as of December 31, 1998:
At December 31, 1998 --------------------------------------------------------------------------- OTS Requirement Union Federal's Capital Level -------------------- ----------------------------------------- % of % of Amount Capital Standard Assets Amount Assets(1) Amount of Excess - ---------------- ------ ------ --------- ------ --------- (Dollars in thousands) Tangible capital.................... 1.5% $1,610 28.3% $30,331 $28,721 Core capital (2).................... 3.0 3,219 28.3 30,331 27,112 Risk-based capital.................. 8.0 4,325 56.7 30,693 26,368
(1) Tangible and core capital levels are shown as a percentage of total assets; risk-based capital levels are shown as a percentage of risk-weighted assets. (2) The OTS has adopted a core capital requirement for savings associations comparable to that recently adopted by the OCC for national banks. The new regulation, which becomes effective on April 1, 1999, requires at least 3% of total adjusted assets for savings associations that receive the highest supervisory rating for safety and soundness, and 4% to 5% for all other savings associations. Union Federal will be in compliance with the revised regulation when it takes effect. As of December 31, 1998, management is not aware of any current recommendations by regulatory authorities which, if they were to be implemented, would have, or are reasonably likely to have, a material adverse effect on Union Federal's liquidity, capital resources or results of operations. Current Accounting Issues The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires companies to record derivatives on the balance sheet at their fair value. SFAS No. 133 also acknowledges that the method of recording a gain or loss depends on the use of the derivative. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign-currency- denominated forecasted transaction. o For a derivative designated as hedging the exposure to changes in the fair value of a recognized asset or liability or a firm commitment (referred to as a fair value hedge), the gain or loss is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. The effect of that accounting is to reflect in earnings the extent to which the hedge is not effective in achieving offsetting changes in fair value. o For a derivative designated as hedging the exposure to variable cash flows of a forecasted transaction (referred to as a cash flow hedge), the effective portion of the derivative's gain or loss is initially reported as a component of other comprehensive income (outside earnings) and subsequently reclassified into earnings when the forecasted transaction affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. o For a derivative designated as hedging the foreign currency exposure of a net investment in a foreign operation, the gain or loss is reported in other comprehensive income (outside earnings) as part of the cumulative translation adjustment. The accounting for a fair value hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of an unrecognized firm commitment or an available-for-sale security. Similarly, the accounting for a cash flow hedge described above applies to a derivative designated as a hedge of the foreign currency exposure of a foreign-currency-denominated forecasted transaction. o For a derivative not designated as a hedging instrument, the gain or loss is recognized in earnings in the period of change. The new Statement applies to all entities. If hedge accounting is elected by the entity, the method of assessing the effectiveness of the hedging derivative and the measurement approach of determining the hedge's ineffectiveness must be established at the inception of the hedge. SFAS No. 133 amends SFAS No. 52 and supercedes SFAS Nos. 80, 105, and 119. SFAS No. 107 is amended to include the disclosure provisions about the concentrations of credit risk from SFAS No. 105. Several Emerging Issues Task Force consensuses are also changed or nullified by the provisions of SFAS No. 133. SFAS No. 133 will be effective for all fiscal years beginning after June 15, 1999. Early application is encouraged; however, this Statement may not be applied retroactively to financial statements of prior periods. FASB has issued Statement of Financial Accounting Standards No. 134, Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. This Statement establishes accounting standards for certain activities of mortgage banking enterprises and for other enterprises with similar mortgage operations. This Statement amends Statement of Financial Accounting Standards (SFAS) No. 65. SFAS No. 65, as previously amended by SFAS Nos. 115 and 125, required a mortgage banking enterprise to classify a mortgage-backed security as a trading security following the securitization of the mortgage loan held for sale. This Statement further amends SFAS No. 65 to require that after the securitization of mortgage loans held for sale, an entity engaged in mortgage banking activities must classify the resulting mortgage-backed security or other retained interests based on the entity's ability and intent to sell or hold those investments. The determination of the appropriate classification for securities retained after the securitization of mortgage loans by a mortgage banking enterprise now conforms to SFAS No. 115. The only requirement the new Statement adds is that if an entity has a sales commitment in place, the security must be classified into trading. This Statement is effective for the first fiscal quarter beginning after December 15, 1998. On the date this Statement is initially applied, an entity may reclassify mortgage-backed securities and other beneficial interests retained after the securitization of mortgage loans held for sale from the trading category, except for those with sales commitments in place. Those securities and other interests shall be classified based on the entity's present ability and intent to hold the investments. Impact of Inflation The consolidated financial statements presented herein have been prepared in accordance with generally accepted accounting principles. These principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. The Company's primary assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on the Company's performance than the effects of general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturities structures of the Company's assets and liabilities are critical to the maintenance of acceptable performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of noninterest expense. Such expense items as employee compensation, employee benefits and occupancy and equipment costs may be subject to increases as a result of inflation. An additional effect of inflation is the possible increase in the dollar value of the collateral securing loans that the Company has made. The Company is unable to determine the extent, if any, to which properties securing its loans have appreciated in dollar value due to inflation. Year 2000 Compliance The Company's lending and deposit activities, like those of most financial institutions, depend significantly upon computer systems. The Company is addressing the potential problems associated with the possibility that the computers that it uses to control its operating systems, facilities and infrastructure may not be programmed to read four-digit date codes. This could cause some computer applications to be unable to recognize the change from the year 1999 to the year 2000, which could cause computer systems to generate erroneous data or to fail. The Company is actively monitoring its compliance with making its computer equipment and other information systems Year 2000 compliant. During the first week of March 1999, the Company switched its electronic data service provider from On-Line Financial Services, Inc. in Oak Brook, Illinois to Intrieve Incorporated, located in Cincinnati, Ohio ("Intrieve"). The Company changed data service providers in order to improve the quality of its computer and networking technology. Testing conducted during the second week of March 1999 indicates that the data that the Company maintains on Intrieve's system is Year 2000 compliant. The Company incurred expenses of approximately $34,000 in converting its data processing to Intrieve's system. It is not expected that data processing expenses incurred by the Company in the future will differ materially from prior periods. Banker's Systems, which maintains the Company's loan documentation system, conducted tests during December 1998 that indicated that its systems are Year 2000 compliant. The Company will continue to conduct tests during the remainder of 1999 to ensure that its data processing and information systems are Year 2000 compliant. The Company has also contacted the approximately 49 companies that supply or service its material operations requesting that they certify by December 31, 1998 that they have plans to make their respective systems Year 2000 compliant. The Company received responses from 29 of these companies confirming that their systems are Year 2000 compliant. Followup letters have been delivered to the parties that did not respond to this initial inquiry and, in some cases, the Company has contacted them by telephone requesting that confirmation that their systems are Year 2000 compliant. A deadline of May 1, 1999 has been established for venders to respond to this second inquiry. Notwithstanding these efforts that the Company has made, no assurances can be given that the systems of its service providers will be timely renovated to address the Year 2000 issue. The Company's Board of Directors reviews on a monthly basis its progress in addressing Year 2000 issues and has appointed three executive officers to address all aspects of Year 2000 compliance. The Company believes that its expenses related to upgrading its systems and software for Year 2000 compliance will not exceed $10,000. At December 31, 1998, the Company had spent approximately $5,000 in connection with Year 2000 compliance. Although the Company believes it is taking the necessary steps to address the Year 2000 compliance issue, no assurances can be given that some problems will not occur or that it will not incur significant additional expenses in future periods. In the event that the Company is ultimately required to purchase replacement computer systems, programs and equipment, or to incur substantial expenses to make its current systems, programs and equipment Year 2000 compliant, its net income and financial condition could be adversely affected. In addition to possible expenses related to the Company's own systems and those of its service providers, the Company could incur losses if Year 2000 problems affect any of its depositors or borrowers. Such problems could include delayed loan payments due to Year 2000 problems affecting any of its significant borrowers or impairing the payroll systems of large employers in its market area. The Company has contacted the approximately 18 commercial borrowers with outstanding loans in excess of $500,000 for confirmation that, by June 1, 1999, their computer systems are, or soon will be, Year 2000 compliant. In addition, the Company requires that borrowers under new commercial loans that it originates certify that they are aware of the Year 2000 issue and will give all necessary attention to insure that their information technology will be Year 2000 compliant. Because the Company's loan portfolio to individual borrowers is diversified and its market area does not depend significantly upon one employer or industry, the Company does not expect any such Year 2000 related difficulties that may affect its depositors and borrowers to significantly affect its net earnings or cash flow. Quantitative and Qualitative Disclosures about Market Risks An important component of Union Federal's asset/liability management policy includes examining the interest rate sensitivity of its assets and liabilities and monitoring the expected effects of interest rate changes on its net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If Union Federal's assets mature or reprice more quickly or to a greater extent than its liabilities, Union Federal's net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. Conversely, if Union Federal's assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. Union Federal's policy has been to mitigate the interest rate risk inherent in the historical business of savings associations, the origination of long-term loans funded by short-term deposits, by pursuing certain strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. Because of the lack of customer demand for adjustable rate loans in its market area, Union Federal primarily originates fixed-rate real estate loans, which accounted for approximately 78.5% of its loan portfolio at December 31, 1998. To manage the interest rate risk of this type of loan portfolio, Union Federal limits maturities of fixed-rate loans to no more than 20 years. In addition, Union Federal continues to offer and attempts to increase its volume of adjustable rate loans when market interest rates make these type loans more attractive to customers. Management believes it is critical to manage the relationship between interest rates and the effect on Union Federal's net portfolio value ("NPV"). This approach calculates the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. Union Federal manages assets and liabilities within the context of the marketplace, regulatory limitations and within limits established by its Board of Directors on the amount of change in NPV which is acceptable given certain interest rate changes. The OTS issued a regulation, which uses a net market value methodology to measure the interest rate risk exposure of savings associations. Under this OTS regulation, an institution's "normal" level of interest rate risk in the event of an assumed change in interest rates is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Savings associations with over $300 million in assets or less than a 12% risk-based capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is used by the OTS to calculate changes in NPV (and the related "normal" level of interest rate risk) based upon certain interest rate changes (discussed below). Associations which do not meet either of the filing requirements are not required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal does not meet either of these requirements, it is not required to file Schedule CMR, although it does so voluntarily. Under the regulation, associations which must file are required to take a deduction (the interest rate risk capital component) from their total capital available to calculate their risk based capital requirement if their interest rate exposure is greater than "normal." The amount of that deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of the present value of its assets. It is estimated that at December 31, 1998, NPV would decrease 15% and 31% in the event of 200 and 400 basis point increases in market interest rates, respectively, compared to 12% and 26% for the same increases at December 31, 1997. Union Federal's NPV at December 31, 1998 would increase 9% and 19% in the event of 200 and 400 basis point decreases in market rates, respectively. A year earlier, 200 and 400 basis point decreases in market rates would have increased NPV 6% and 14%, respectively. Presented below, as of December 31, 1998 and 1997, is an analysis performed by the OTS of Union Federal's interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts in the yield curve, in 200 basis point increments, up and down 400 basis points. At December 31, 1998, 2% of the present value of Union Federal's assets was approximately $2.2 million. Because the interest rate risk of a 200 basis point increase in market rates (which was greater than the interest rate risk of a 200 basis point decrease) was $4.9 million at December 31, 1998, Union Federal would have been required to deduct $1.4 million from its total capital available to calculate its risk based capital requirement if it had been subject to the OTS' reporting requirements under this methodology. Union Federal's exposure to interest rate risk results from the concentration of fixed rate mortgage loans in its portfolio.
Change Net Portfolio Value NPV as % of PV of Assets In Rates $ Amount $ Change % Change NPV Ratio Change - ------------------------------------------------------------------------------------------------ (Dollars in thousands) + 400 bp * $22,919 $(10,498) (31)% 23.14% (702) bp + 200 bp 28,509 (4,907) (15) 27.08 (308) bp 0 bp 33,417 30.16 - 200 bp 36,542 3,125 9 31.90 175 bp - 400 bp 39,871 6,454 19 33.68 352 bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets..................... 30.16% Exposure Measure: Post-Shock NPV Ratio............................ 27.08% Sensitivity Measure: Change in NPV Ratio.......................... 308 bp Change in NPV as % of PV of Assets................................ 10.21%
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 + 200 bp 28,860 (3,885) (12)% 27.03% (246) bp 0 bp 32,746 29.49% - 200 bp 34,782 2,036 6 % 30.67% 118 bp - 400 bp 37,247 4,501 14 % 32.08% 259 bp
Interest Rate Risk Measures: 200 Basis Point Rate Shock Pre-Shock NPV Ratio: NPV as % of PV of Assets...................... 29.49% Exposure Measure: Post-Shock NPV Ratio............................. 27.03% Sensitivity Measure: Change in NPV Ratio........................... 246 bp Change in NPV as % of PV of Assets................................. 8.34% * Basis points (1 basis point equals .01%) As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented above. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could likely deviate significantly from those assumed in calculating the table. Independent Auditor's Report Board of Directors Union Community Bancorp Crawfordsville, Indiana We have audited the consolidated balance sheet of Union Community Bancorp and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Union Community Bancorp and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Indianapolis, Indiana February 19, 1999 UNION COMMUNITY BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
December 31 1998 1997 ------------- ------------- Assets Cash $ 32,153 $ 22,424 Interest-bearing demand deposits 6,158,927 44,758,403 ------------- ------------- Cash and cash equivalents 6,191,080 44,780,827 Investment securities held to maturity (fair value of $8,175,000 and $6,003,000) 8,026,162 5,820,069 Loans, net of allowance for loan losses of $362,258 and $252,258 90,900,269 78,435,741 Premises and equipment 355,194 367,360 Federal Home Loan Bank stock 744,500 707,700 Investment in limited partnership 1,055,109 1,176,109 Interest receivable 714,691 581,526 Other assets 174,687 170,925 ------------- ------------- Total assets $ 108,161,692 $ 132,040,257 ============= ============= Liabilities Deposits Noninterest bearing $ 656,796 $ 1,532,647 Interest bearing 64,188,836 60,725,398 ------------- ------------- Total deposits 64,845,632 62,258,045 Stock subscriptions refundable 22,687,104 Federal Home Loan Bank advances 772,226 2,373,051 Note payable 1,020,642 1,200,042 Interest payable 109,337 118,867 Dividends payable 270,567 Other liabilities 612,427 497,271 ------------- ------------- Total liabilities 67,630,831 89,134,380 ------------- ------------- Commitments and contingent liabilities Shareholders' Equity Preferred stock, without par value Authorized and unissued--2,000,000 shares Common stock, without par value Authorized--5,000,000 shares Issued and outstanding--2,889,663 and 3,041,750 shares 28,193,644 29,637,592 Retained earnings 15,708,073 15,108,285 Unearned employee stock ownership plan ("ESOP") shares (1,730,736) (1,840,000) Unearned recognition and retention plan ("RRP") shares (1,640,120) ------------- ------------- Total shareholders' equity 40,530,861 42,905,877 ------------- ------------- Total liabilities and shareholders' equity $ 108,161,692 $ 132,040,257 ============= =============
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Income
Year Ended December 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------- Interest and Dividend Income Loans $ 6,932,194 $ 6,090,003 $ 5,561,735 Investment securities Mortgage-backed securities 256,870 214,121 262,711 Other investment securities 257,305 196,937 175,332 Dividends on Federal Home Loan Bank stock 58,866 53,956 45,027 Deposits with financial institutions 599,612 245,927 66,886 ----------- ----------- ----------- Total interest and dividend income 8,104,847 6,800,944 6,111,691 ----------- ----------- ----------- Interest Expense Deposits 3,364,222 3,366,097 3,232,877 Stock subscription escrow accounts 130,411 Federal Home Loan Bank advances 50,952 339,258 190,800 ----------- ----------- ----------- Total interest expense 3,415,174 3,835,766 3,423,677 ----------- ----------- ----------- Net Interest Income 4,689,673 2,965,178 2,688,014 Provision for loan losses 110,000 165,000 48,000 ----------- ----------- ----------- Net Interest Income After Provision for Loan Losses 4,579,673 2,800,178 2,640,014 ----------- ----------- ----------- Other Income (Losses) Equity in losses of limited partnership (121,000) (157,800) (172,552) Other income 73,126 61,952 56,457 ----------- ----------- ----------- Total other losses (47,874) (95,848) (116,095) ----------- ----------- ----------- Other Expenses Salaries and employee benefits 849,909 479,726 460,615 Net occupancy expenses 38,741 39,159 39,103 Equipment expenses 28,182 22,436 19,886 Deposit insurance expense 45,847 31,482 494,679 Legal and professional fees 128,193 33,813 28,880 Other expenses 372,314 354,706 258,774 ----------- ----------- ----------- Total other expenses 1,463,186 961,322 1,301,937 ----------- ----------- ----------- Income Before Income Tax 3,068,613 1,743,008 1,221,982 Income tax expense 1,094,377 544,556 336,286 ----------- ----------- ----------- Net Income $ 1,974,236 $ 1,198,452 $ 885,696 =========== =========== =========== Basic Earnings per Share $ .70 Diluted Earnings per Share .70
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Shareholders' Equity
Common Stock Shares Retained Unearned Unearned Outstanding Amount Earnings ESOP Shares Compensation Total - --------------------------------------------------------------------------------------------------------------------------- Balances, January 1, 1996 $13,024,137 $13,024,137 Net income for 1996 885,696 885,696 Balances, December 31, 1996 13,909,833 13,909,833 Net income for 1997 1,198,452 1,198,452 Common stock issued in conversion, net of costs 3,041,750 $29,637,592 29,637,592 Contribution for unearned ESOP shares $(1,840,000) (1,840,000) --------------------------------------------------------------------------------------- Balances, December 31, 1997 3,041,750 29,637,592 15,108,285 (1,840,000) 42,905,877 Net income for 1998 1,974,236 1,974,236 Cash dividends ($.355 per share) (999,293) (999,293) Purchase of common stock (152,087) (1,483,829) (375,155) (1,858,984) Contribution for unearned RRP shares $(1,753,853) (1,753,853) Amortization of unearned compensation expense 113,733 113,733 ESOP shares earned 39,881 109,264 149,145 --------------------------------------------------------------------------------------- Balances, December 31, 1998 2,889,663 $28,193,644 $15,708,073 $(1,730,736) $(1,640,120) $40,530,861 =======================================================================================
See notes to consolidated financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Cash Flows Year Ended December 31 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 1,974,236 $ 1,198,452 $ 885,696 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 110,000 165,000 48,000 Depreciation 30,344 27,335 25,913 Deferred income tax (40,926) 36,750 (13,910) Investment securities accretion, net (9,223) (11,677) (6,181) Gains on sale of foreclosed real estate (2,500) (5,565) Equity in losses of limited partnership 121,000 157,800 172,552 Amortization of unearned compensation expense 113,733 ESOP shares earned 149,145 Net change in Interest receivable (133,165) (127,922) (83,459) Interest payable (9,530) 27,415 (1,964) Other assets (8,396) (21,878) (24,199) Other liabilities 60,780 (78,749) 85,879 ------------ ------------ ------------ Net cash provided by operating activities 2,355,498 1,366,961 1,088,327 ------------ ------------ ------------ Investing Activities Investment securities Purchases of investment securities held to maturity (9,203,586) (1,200,000) (994,342) Proceeds from maturities and paydowns of mortgage-backed securities held to maturity 606,716 638,955 675,913 Proceeds from maturities of investment securities held to maturity 6,400,000 500,000 2,000,000 Net change in loans (12,529,034) (6,017,272) (11,466,414) Purchases of premises and equipment (18,178) (23,331) (2,602) Proceeds on sale of foreclose real estate 4,500 76,274 Purchase of Federal Home Loan Bank of Indianapolis stock (36,800) (127,600) (17,500) Other investing activity (1,934) (2,728) ------------ ------------ ------------ Net cash used by investing activities (14,778,316) (6,155,702) (9,804,945) ------------ ------------ ------------ Financing Activities Net change in Interest-bearing demand and savings deposits (28,493) 2,695,812 1,243,027 Certificates of deposit 2,616,080 (874,209) 1,786,193 Stock subscription escrow accounts (22,687,104) 22,687,104 Proceeds from borrowings 1,500,000 10,500,000 Repayment of borrowings (1,780,225) (5,807,277) (5,261,331) Cash dividends (728,726) Contribution of unearned compensation (1,753,853) Repurchase of common stock (1,858,984) Net change in advances by borrowers for taxes and insurance 54,376 19,981 (79,558) Proceeds from sale of common stock, net of costs 27,882,967 ------------ ------------ ------------ Net cash provided (used) by financing activities (26,166,929) 48,104,378 8,188,331 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents (38,589,747) 43,315,637 (528,287) Cash and Cash Equivalents, Beginning of Year 44,780,827 1,465,190 1,993,477 ------------ ------------ ------------ Cash and Cash Equivalents, End of Year $ 6,191,080 $ 44,780,827 $ 1,465,190 ============ ============ ============ Additional Cash Flows Information Interest paid $ 3,424,704 $ 3,808,351 $ 3,425,641 Income tax paid 984,063 527,433 375,405 Stock issuance costs included in other liabilities 85,375 Common stock issued to ESOP leveraged with an employer loan 1,840,000 Loans transferred to foreclosed real estate 13,619 163,540
See notes to consolidated financial statements. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Note 1 -- Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of Union Community Bancorp ("Company") and its wholly owned subsidiary, Union Federal Savings and Loan Association ("Association") and the Association's wholly owned subsidiary, UFS Service Corp. ("UFS"), conform to generally accepted accounting principles and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership and management of the Association. The Association operates under a federal thrift charter and provides full banking services. As a federally chartered thrift, the Association is subject to regulation by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. The Association generates mortgage and consumer loans and receives deposits from customers located primarily in Montgomery County, Indiana and surrounding counties. The Association's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. UFS invests in a low income housing partnership. Consolidation--The consolidated financial statements include the accounts of the Company, the Association and UFS after elimination of all material intercompany transactions. Investment Securities--Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Association will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Loans with payment delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Association considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual lives of the loans. When a loan is paid off or sold, any unamortized loan origination fee balance is credited to income. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1998, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Association operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets which range from 5 to 31.5 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank ("FHLB") system. The required investment in the common stock is based on a predetermined formula. Investment in limited partnership is recorded using the equity method of accounting. Losses due to impairment are recorded when it is determined that the investment no longer has the ability to recover its carrying amount. The benefits of low income housing tax credits associated with the investment are accrued when earned. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Stock options are granted for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Bank accounts for and will continue to account for stock option grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for the stock option grants. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiary. Earnings per share have been computed based upon the weighted average common shares outstanding during 1998. Unearned ESOP shares have been excluded from the computation of average shares outstanding. Net income per share for the periods before and including the conversion to a stock savings and loan association on December 29, 1997, is not meaningful. UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Note 2 -- Conversion On December 29, 1997, the Association completed the conversion from a federally chartered mutual institution to a federally chartered stock savings and loan association and the formation of the Company as the holding company of the Association. As part of the conversion, the Company issued 3,042,000 shares of common stock at $10 per share. Net proceeds of the Company's stock issuance, after costs of $780,000 and excluding the shares issued for the ESOP, were $27,798,000, of which $14,861,000 was used to acquire 100% of the stock and ownership of the Association. The transaction was accounted for at historical cost in a manner similar to that utilized in a pooling of interests. o Note 3 -- Investment Securities Held to Maturity
1998 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------- Federal agencies $4,500 $ 7 $28 $4,479 Mortgage-backed securities 3,526 174 4 3,696 ------ ---- --- ------ Total investment securities $8,026 $181 $32 $8,175 ====== ==== === ====== 1997 ------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------- U.S. Treasury $ 350 $ 350 Federal agencies 3,346 $ 8 $3 3,351 Mortgage-backed securities 2,124 183 5 2,302 ------ ---- -- ------ Total investment securities $5,820 $191 $8 $6,003 ====== ==== == ======
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The amortized cost and fair value of securities held to maturity at December 31, 1998, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 1998 ------------------------------ Amortized Fair December 31 Cost Value - -------------------------------------------------------------------- Within one year $ 100 $ 100 One to five years 1,800 1,807 Five to ten years 500 500 After ten years 2,100 2,072 ------ ------ 4,500 4,479 Mortgage-backed securities 3,526 3,696 ------ ------ Totals $8,026 $8,175 ====== ====== Securities with a carrying value of $3,597,000 and $2,194,000 were pledged at December 31, 1998 and 1997 to secure FHLB advances. Mortgage-backed securities included in investment securities held to maturity above consist of the following:
1998 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------- Government National Mortgage Corporation $ 991 $104 $1,095 Federal Home Loan Mortgage Corporation 2,395 69 2,464 Federal National Mortgage Corporation 123 1 $4 120 Other 17 17 ------ ---- -- ------ Total mortgage-backed securities $3,526 $174 $4 $3,696 ====== ==== == ====== 1997 ------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value - ---------------------------------------------------------------------------------------------------------------------- Government National Mortgage Corporation $1,223 $125 $1,348 Federal Home Loan Mortgage Corporation 635 56 691 Federal National Mortgage Corporation 243 2 $5 240 Other 23 23 ------ ---- -- ------ Total mortgage-backed securities $2,124 $183 $5 $2,302 ====== ==== == ======
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Note 4 -- Loans and Allowance
December 31 1998 1997 - -------------------------------------------------------------------------------------------- Real estate mortgage loans One-to-four family $ 71,823 $ 62,436 Multi-family 10,609 10,197 Commercial 6,355 3,627 Real estate construction loans 2,545 2,530 Commercial loans 51 Individuals' loans for household and other personal expenditures 213 223 -------- -------- 91,596 79,013 Deferred loan fees (334) (325) Allowance for loan losses (362) (252) -------- -------- Total loans $ 90,900 $ 78,436 ======== ========
Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Allowance for loan losses Balances, Beginning of Period $ 252 $ 159 $ 111 Provision for losses 110 165 48 Loans charged off (72) ----- ----- ----- Balances, End of Period $ 362 $ 252 $ 159 ===== ===== ===== Information on impaired loans is summarized below. December 31 1998 1997 - -------------------------------------------------------------------------------- Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan $322 $ 0 Year Ended December 31 1998 1997 - -------------------------------------------------------------------------------- Average balance of impaired loans $110 $ 33 Interest income recognized on impaired loans 10 Cash basis interest included above 10 o Note 5 -- Premises and Equipment December 31 1998 1997 - -------------------------------------------------------------------------------- Land $ 146 $ 146 Buildings 569 553 Equipment 140 142 Total cost 855 841 Accumulated depreciation (500) (474) ----- ----- Net $ 355 $ 367 ===== ===== Union Community Bancorp and Subsidiary Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Note 6 -- Investment in Limited Partnership The investment in limited partnership of $1,055,000 and $1,176,000 at December 31, 1998 and 1997 represents a 99 percent equity in Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and operate a 48-unit apartment complex. In addition to recording its equity in the losses of Pedcor, the Company has recorded the benefit of low income housing tax credits of $178,000 for the years ended December 31, 1998, 1997 and 1996. Condensed financial statements for Pedcor are as follows: December 31 1998 1997 - ----------------------------------------------------------------- Condensed statement of financial condition Assets Cash $ 31 $ 5 Land and property 2,235 2,292 Other assets 19 55 ------ ------ Total assets $2,285 $2,352 ====== ====== Liabilities Notes payable-- Association $ 772 $ 873 Notes payable--other 1,256 1,274 Other liabilities 159 165 ------ ------ Total liabilities 2,187 2,312 Partners' equity 98 40 ------ ------ Total liabilities and partners' equity $2,285 $2,352 ====== ====== Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------- Condensed statement of operations Total revenue $232 $219 $219 Total expenses 354 340 435 ----- ----- ----- Net loss $(122) $(121) $(216) ===== ===== ===== o Note 7 -- Deposits December 31 1998 1997 - --------------------------------------------------------------------------- Noninterest-bearing demand $ 657 $ 1,533 Interest-bearing demand 11,982 9,965 Savings deposits 3,410 4,579 Certificates and other time deposits of $100,000 or more 9,351 7,060 Other certificates and time deposits 39,446 39,121 ------- ------- Total deposits $64,846 $62,258 ======= ======= Certificates and other time deposits maturing in years ending December 31: 1999 $29,059 2000 12,707 2001 3,657 2002 1,207 2003 2,167 ------- $48,797 ======= UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Interest expense on deposits Interest-bearing demand $ 496 $ 444 $ 369 Savings deposits 139 159 148 Certificates 2,729 2,763 2,716 ------ ------ ------ $3,364 $3,366 $3,233 ====== ====== ====== o Note 8-- Federal Home Loan Bank Advances 1998 Weighted Average December 31 Amount Rate - ------------------------------------------------------- Advances from FHLB Maturities in years ending 1999 $114 5.33% 2000 123 5.49 2001 129 5.67 2002 138 5.80 2003 147 5.90 2004 121 6.03 ---- $772 5.71% ==== The Association has an available line of credit with the FHLB totaling $1,000,000. The line of credit expires September 16, 1999 and bears interest at a rate equal to the current variable advance rate. There were no drawings on this line of credit at December 31, 1998. FHLB advances are secured by first-mortgage loans and investment securities totaling $73,501,000 and $62,517,000 at December 31, 1998 and 1997. Advances are subject to restrictions or penalties in the event of prepayment. o Note 9-- Note Payable The note payable to Pedcor dated February 1, 1994 in the original amount of $1,809,792 bears no interest so long as there exists no event of default. In the instances where an event of default has occurred, interest shall be calculated at a rate equal to the lesser of 14% per annum or the highest amount permitted by applicable law. December 31 1998 - ---------------------------------------------------------------------- Note payable to Pedcor Maturities in years ending: 1999 $ 183 2000 184 2001 177 2002 174 2003 171 Thereafter 132 -------- $ 1,021 ======== o Note 10 -- Income Tax Year Ended December 31 1998 1997 1996 - -------------------------------------------------------------------------------- Income tax expense Currently payable Federal $ 848 $ 353 $ 246 State 287 155 104 Deferred Federal (27) 37 (20) State (14) 6 Total income tax expense $ 1,094 $ 545 $ 336 Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 1,043 $ 593 $ 415 Effect of state income taxes 180 102 73 Tax credits (178) (178) (178) Other 49 28 26 Actual tax expense $ 1,094 $ 545 $ 336 Effective tax rate 35.7% 31.2% 27.5% The components of the cumulative net deferred tax asset are as follows: December 31 1998 1997 - -------------------------------------------------------------------------------- Assets Allowance for loan losses $144 $ 92 Loan fees 15 37 Business income tax credits 29 Pensions and employee benefits 63 Other 2 ---- ---- Total assets 222 160 ---- ---- Liabilities Depreciation 21 26 State income tax 6 2 FHLB stock dividend 23 23 Equity in partnership losses 87 70 Other 5 ---- ---- Total liabilities 142 121 ---- ---- $ 80 $ 39 ==== ==== Retained earnings include approximately $2,632,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $1,043,000. o Note 11 -- Commitments and Contingent Liabilities In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Association's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Association uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated balance sheet. Financial instruments whose contract amount represents credit risk as of December 31 were as follows: December 31 1998 1997 - ------------------------------------------------------- Commitments to extend credit $2,566 $2,909 Standby letters of credit 2,514 2,014 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Association evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Association upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Association to guarantee the performance of a customer to a third party. The Company and Association have entered into an employment agreement with the president which provides for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreements, these payments could occur in the event of a change in control of the Company, as defined, along with other specific conditions. The contingent liability under these agreements in the event of a change in control is approximately $300,000. The Company and Association are not required to pay any amounts under these agreements which cannot be deducted for federal income tax purposes. The Company, Association and UFS are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. o Note 12 -- Year 2000 Like all entities, the Company and subsidiary are exposed to risks associated with the Year 2000 Issue, which affects computer software and hardware; transactions with vendors, and other entities; and equipment dependent on microchips. The Company has begun, but not yet completed, the process of identifying and remediating potential Year 2000 problems. It is not possible for any entity to guarantee the results of its own remediation efforts or to accurately predict the impact of the Year 2000 Issue on third parties with which the Company and subsidiary do business. If remediation efforts of the Company or third parties with which the Company and subsidiary do business are not successful, the Year 2000 Issue could have negative effects on the Company's financial condition and results of operation in the near term. o Note 13 -- Dividend and Capital Restrictions The OTS regulations provide that savings associations which meet fully phased-in capital requirements and are subject only to "normal supervision" may pay out, as a dividend, 100 percent of net income to date over the calendar year and 50 percent of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to the OTS. OTS regulations also prohibit a savings association from declaring or paying any dividends if, as a result, the regulatory capital of the Association would be reduced below the minimum amount required to be maintained for the liquidation account established in connection with the conversion. Any additional amount of capital distributions would require prior regulatory approval. Savings associations failing to meet current capital standards may only pay dividends with supervisory approval. At the time of conversion, a liquidation account was established in an amount equal to the Association's net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Association after conversion. In the event of a complete liquidation, and only in such event, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to shareholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $14,473,000. At December 31, 1998, the shareholders' equity of the Association was $30,332,000, of which approximately $13,184,000 was available for the payment of dividends. o Note 14 -- Regulatory Capital The Association is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of an association in any of the undercapitalized categories can result in actions by regulators that could have a material effect on an association's operations. At December 31, 1998 and 1997, the Association is categorized as well capitalized and meets all subject capital adequacy requirements. There are no conditions or events since December 31, 1998 that management believes have changed the Association's classification. The Association's actual and required capital amounts and ratios are as follows:
1998 ---------------------------------------------------------------------- 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) $30,693 56.7% $4,325 8.0% $5,406 10.0% Core capital 1 (to adjusted tangible assets) 30,331 28.3 3,219 3.0 6,438 6.0 Core capital 1 (to adjusted total assets) 30,331 28.3 3,219 3.0 5,365 5.0 1 As defined by regulatory agencies
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
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Association's tangible capital at December 31, 1998 and 1997 was $30,331,000 and $29,969,000, which amount was 28.3% and 22.7% of tangible assets and exceeded the required ratio of 1.5%. o Note 15 -- Employee Benefit Plans The Company provides pension benefits for substantially all of its employees, and is a participant in a pension fund known as the Pentegra Group. This plan is a multi-employer plan; separate actuarial valuations are not made with respect to each participating employer. Pension expense (benefit) was $2,000, ($4,000) and $47,000 for 1998, 1997, 1996. The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The Company matches employees' contributions at the rate of 50% for the first 5% of base salary contributed by participants. The Company's expense for the plan was $10,000, $11,000 and $10,000 for 1998, 1997, and 1996. As part of the conversion in 1997, the Company established an ESOP covering substantially all employees of the Company and Association. The ESOP acquired 184,000 shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $1,840,000 of common stock acquired by the ESOP is shown as a reduction of shareholders' equity. Unearned ESOP shares totaled 173,074 and 184,000 at December 31, 1998 and 1997 and had a fair value of $1,947,000 and $2,691,000 at December 31, 1998 and 1997. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which may be distributed to participants or used to repay the loan, are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Association, are made to the ESOP. ESOP expense for the year ended December 31, 1998 was $149,000. There was no expense under the ESOP for the year ended December 31, 1997. At December 31, 1998, the ESOP had 10,926 allocated shares, 173,074 suspense shares and no committed-to-be released shares. At December 31, 1997, the ESOP had 184,000 suspense shares. In connection with the conversion, the Board of Directors established a Recognition and Retention Plan and Trust ("RRP"). The Bank contributed $1,753,853 to the RRP for the purchase of 121,670 shares of Company common stock, and effective June 30, 1998, awards of grants for 78,900 of these shares were issued to various directors, officers and employees of the Association. These awards generally are to vest and be earned by the recipient at a rate of 20 percent per year, commencing June 30, 1999. The unearned portion of these stock awards is presented as a reduction of shareholders' equity. o Note 16 -- Stock Option Plan Under the Company's stock option plan (Plan), which is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, the Company grants selected executives and other key employees stock option awards which vest at a rate of 20 percent a year. During 1998, the Company authorized the grant of options for up to 304,175 shares of the Company's common stock. Effective June 30, 1998, the Company granted 186,000 of the options. The exercise price of each option, which has a ten-year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: 1998 - ----------------------------------------------------- Risk-free interest rates 5.5% Dividend yields 2.7% Volatility factors of expected market price of common stock 14.0 Weighted-average expected life of the options 7 years Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows: 1998 - --------------------------------------------------------------------------- Net income As reported $1,974 Pro forma 1,876 Basic earnings per share As reported .70 Pro forma .67 Diluted earnings per share As reported .70 Pro forma .67 The following is a summary of the status of the Company's stock option plan and changes in that plan as of and for the year ended December 31, 1998. Year Ended December 31 1998 Weighted- Average Exercise Options Shares Price - -------------------------------------------------------------------------- Outstanding, beginning of year Granted $186,000 $14.59 -------- ------ Outstanding, end of year $186,000 $14.59 ======== ====== Options exercisable at year end 0 Weighted-average fair value of options granted during the year $2.94 As of December 31, 1998, the 186,000 options outstanding have an exercise price of $14.59 and a weighted-average remaining contractual life of 9.5 years. o Note 17 -- Related Party Transactions The Association has entered into transactions with certain directors, executive officers, significant shareholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. Balances, January 1, 1998 $2,358 - ------------------------------------------------------ New loans, including renewals 266 Payments, etc. including renewals (531) ------- Balances, December 31, 1998 $2,093 ======= Deposits from related parties held by the Association at December 31, 1998 totaled $1,826,000. o Note 18 -- Earnings Per Share Earnings per share (EPS) were computed as follows:
Year Ended December 31, 1998 -------------------------------------------------- Weighted Average Per-Share Income Shares Amount - --------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Income available to common shareholders $1,974 2,804,584 $.70 Effect of Dilutive Securities Stock options 9 ------------------------------- Diluted Earnings Per Share Income available to common shareholders and assumed conversions $1,974 2,804,593 $.70 ==============================================
o Note 19 -- Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents--The fair value of cash and cash equivalents approximates carrying value. Investment Securities--Fair values are based on quoted market prices. Loans--The fair value for loans is estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB Stock--Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Interest Receivable/Payable--The fair value of accrued interest receivable/payable approximates carrying values. Deposits--Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Stock Subscriptions Refundable and Advance Payments by Borrowers for Taxes and Insurance--The fair value approximates carrying value. Federal Home Loan Bank Advances--The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt. Note Payable--Limited Partnership--The fair value of the borrowing is estimated using a discounted cash flow calculation, based on current rates for similar debt. Off-Balance Sheet Commitments--Commitments include commitments to originate mortgage and consumer loans, and are generally of a short-term nature. The fair value of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amounts of these commitments, which are immaterial, are reasonable estimates of the fair value of these financial instruments. The estimated fair values of the Company's financial instruments are as follows:
1998 1997 -------------------------------------------------------------- Carrying Fair Carrying Fair December 31 Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------ Assets Cash and cash equivalents $ 6,191 $ 6,191 $44,781 $44,781 Investment securities held to maturity 8,026 8,175 5,820 6,003 Loans, net 90,900 92,365 78,436 79,611 Stock in FHLB 745 745 708 708 Interest receivable 715 715 582 582 Liabilities Deposits 64,846 61,460 62,258 62,476 Stock subscriptions refundable 22,687 22,687 Borrowings FHLB advances 772 781 2,373 2,345 Notes payable--limited partnership 1,021 835 1,200 944 Interest payable 109 109 119 119 Advances by borrowers for taxes and insurance 275 275 221 221
UNION COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) o Note 20-- Condensed Financial Information (Parent Company Only) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: Condensed Balance Sheet December 31 1998 1997 - -------------------------------------------------------------------------------- Assets Cash $10,243 $13,022 Investment in subsidiary 30,332 29,927 Other assets 238 ------- ------- Total assets $40,813 $42,949 ======= ======= Liability--other $ 282 $ 43 Shareholders' Equity 40,531 42,906 ------- ------- Total liabilities and shareholders' equity $40,813 $42,949 ======= ======= Condensed Statement of Income December 31 1998 1997 - -------------------------------------------------------------------------------- Income Interest income $ 4 ------- Other income 81 ------- 85 Expenses Salaries and employee benefits 65 Legal and professional fees 97 Other expenses 14 Total expenses 176 ------- Loss before income tax and equity in undistributed income of subsidiaries (91) Income tax benefit (20) ------- Loss before equity in undistributed income of subsidiaries (71) Equity in undistributed income of subsidiaries 2,045 $ 1,198 ------- ------- Net Income $ 1,974 $ 1,198 ======= ======= Condensed Statement of Cash Flows
Year Ended December 31 1998 1997 Operating Activities Net income $ 1,974 $ 1,198 Adjustments to reconcile net income to net cash provided by operating activities (2,165) (1,198) -------- -------- Net cash used by operating activities (191) 0 -------- -------- Financing Activities Net proceeds from issuance of stock 27,883 Capital contribution to Association (14,861) Cash dividend (729) Repurchase of common stock (1,859) -------- -------- Net cash provided (used) by financing activities (2,588) 13,022 -------- -------- Net Change in Cash (2,779) 13,022 Cash at Beginning of Year 13,022 0 -------- -------- Cash at End of Year $ 10,243 $ 13,022 ======== ======== Additional Cash Flow and Supplementary Information Common stock issued to ESOP leveraged with an employee loan $ 1,840 Stock issuance cost included in other liabilities 43
BOARD OF DIRECTORS Joseph E. Timmons Chairman of the Board President and Chief Executive Officer Union Federal Savings and Loan Association Philip L. Boots Samuel H. Hildebrand President, Boots Brothers President, Village Oil Company, Inc. Traditions, Inc. Marvin L. Burkett John M. Horner Farmer (Retired) President, Horner Pontiac Buick, Inc. Phillip E. Grush Harry A. Siamas Optometrist Attorney ================================================================================ OFFICERS OF UNION COMMUNITY BANCORP Joseph E. Timmons Ronald L. Keeling Denise E. Swearingen Chairman of the Board Vice President Secretary and Treasurer President and Chief Executive Officer ================================================================================ OFFICERS OF UNION FEDERAL SAVINGS AND LOAN ASSOCIATION Joseph E. Timmons Ronald L. Keeling President and Senior Loan Officer Chief Executive Officer Vice President and Assistant Secretary Denise E. Swearingen Alan L. Grimble Secretary, Controller/ Vice President Treasurer Philip L. Boots (age 52) has served since 1985 as President of Boots Brothers Oil Company, Inc., a petroleum marketer that operates gasoline outlets, convenience grocery stores and car washes in the Crawfordsville area. Marvin L. Burkett (age 71) has worked as a self-employed farmer in Montgomery County since 1956. He currently is semi-retired from farming. Phillip E. Grush (age 67) worked as a self-employed optometrist in Crawfordsville from 1960 until September, 1996 when he sold his practice. He currently works for Dr. Michael Scheidler in Crawfordsville as a part-time employee/consultant. Samuel H. Hildebrand, II (age 59) was Executive Vice President of Atapco Custom Products Division, a manufacturer of custom decorated looseleaf ring binders in Crawfordsville from 1987-1995. Since 1995, he has served as President of Village Traditions, Inc., a home builder located in Crawfordsville. John M. Horner (age 62) has served as the president of Horner Pontiac Buick, Inc. in Crawfordsville since 1974. Harry A. Siamas (age 48) has practiced law in Crawfordsville since 1976 and has served as Union Federal's attorney for 18 years. Joseph E. Timmons (age 64) has served as President and Chief Executive Officer of Union Federal since 1974 and of UFS Service Corp. since its inception in 1994. He has been an employee of Union Federal since 1954. MARKET INFORMATION The Association converted from a federal mutual savings and loan association to a federal stock savings and loan associaiton effective December 29, 1997, and simultaneously formed a savings and loan holding company, the Holding Company. The Holding Company's Common Stock, is traded on the NASDAQ National Market System under the symbol "UCBC." As of March 30, 1999, there were approximately 550 record holders of the Holding Company's Common Stock. Any dividends paid by the Holding Company will be subject to determination and declaration by the Board of Directors in its discretion. In determining the level of any future dividends, the Board of Directors will consider, among other factors, the following: tax considerations; industry standards; economic conditions; capital levels; regulatory restrictions on dividend payments by the Association to the Holding Company; and, general business practices. The Holding Company is not subject to OTS regulatory restrictions on the payment of dividends to its shareholders although the source of such dividends will depend in part upon the receipt of dividends from the Association. The Holding Company is subject, however, to the requirements of Indiana law, which generally limit the payment of dividends to amounts that will not affect the ability of the Holding Company, after the dividend has been distributed, to pay its debts in the ordinary course of business and will not exceed the difference between the Holding Company's total assets and total liabilities plus preferential amounts payable to shareholders with rights superior to those of the holders of the Holding Company's common stock. In addition to the foregoing, the portion of the Association's earnings which has been appropriated for bad debt reserves and deducted for federal income tax purposes cannot be used by the Association to pay cash dividends to the Holding Company without the payment of federal income taxes by the Associaiton at the then current income tax rate on the amount deemed distributed, which would include any federal income taxes attributable to the distribution. The Holding Company does not contemplate any distribution by the Assciation that would result in a recapture of the Association's bad debt reserve or otherwise create federal tax liabilities. Stock Price Dividends Month Ended High Low Per Share - ----------- ------------ --------- --------- January 31, 1998 $14 13/16 $14 1/16 February 28, 1998 14 5/8 14 March 31, 1998 15 7/8 14 1/2 $.075 April 30, 1998 15 1/2 14 11/16 May 31, 1998 15 5/8 14 1/2 June 30, 1998 15 1/8 14 1/8 .085 July 31, 1998 14 7/8 13 7/8 August 31, 1998 14 3/4 11 1/4 September 30, 1998 13 10 3/4 .095 October 31, 1998 12 13/16 9 13/16 November 30, 1998 12 3/8 10 1/2 December 31, 1998 13 10 1/2 .10 TRANSFER AGENT AND REGISTRAR The Fifth Third Bank Corporate Trust Operations 38 Fountain Square Plaza, MD - 1090F5 Cincinnati, Ohio 45202 (513) 579-5320 or (800) 837-2755 GENERAL COUNSEL Barnes & Thornburg 11 South Meridian Street Indianapolis, Indiana 46204 INDEPENDENT AUDITOR Olive LLP 201 N. Illinois Street, Suite 700S Indianapolis, Indiana 46204 SHAREHOLDERS AND GENERAL INQUIRIES The Company filed an Annual Report on Form 10-K for its fiscal year ended December 31, 1998 with the Securities and Exchange Commission. Copies of this annual report may be obtained without charge upon written request to: Joseph E. Timmons President and Chief Executive Officer Union Community Bancorp 221 East Main Street Crawfordsville, Indiana 47933 EX-23 3 CONSENTS OF INDEPENDENT AUDITORS EXHIBIT 23 -- CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference to the Registration Statement on Form S-8, File Number 333-68837, of our report dated February 19, 1999, on the consolidated financial statements of Union Community Bancorp and subsidiary, Crawfordsville, Indiana, which report is incorporated by reference in the Annual Report on Form 10-K of Union Community Bancorp and subsidiary, Crawfordsville, Indiana. /s/ Olive LLP Indianapolis, Indiana March 30, 1999 EX-27 4 FDS FOR UNION COMMUNITY BANCORP
9 (Replace this text with the legend) 0001046183 Union Community Bancorp 1,000 U.S.Dollars 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 32 6,159 0 0 0 8,026 8,175 91,262 362 108,162 64,846 297 992 1,496 28,193 0 0 12,338 108,162 6,932 514 659 8,105 3,364 3,415 4,690 110 0 1,463 3,069 3,069 0 0 1,974 .70 .70 4.40 349 0 0 491 252 0 0 362 362 0 67
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