SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 2002 was 2,433,197.
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
June 30, December 31,
2002 2001
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 792,008 $ 375,349
Interest-bearing demand deposits 18,134,671 13,189,553
------------------------ -------------------------
Cash and cash equivalents 18,926,679 13,564,902
Interest-bearing deposits 144,652
Investment securities held to maturity 2,496,084 2,848,411
Loans, net of allowance for loan losses of $958,554 and $519,554 234,159,883 121,749,210
Premises and equipment 2,937,274 398,857
Federal Home Loan Bank stock 3,423,600 1,530,300
Investment in limited partnership 844,109 856,609
Foreclosed assets and real estate held for development, net 1,717,263 8,500
Goodwill 2,260,044
Interest receivable 1,423,278 903,040
Other assets 1,724,388 531,599
------------------------ -------------------------
Total assets $ 270,057,254 $ 142,391,428
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 2,886,301 $ 1,397,380
Interest-bearing 183,510,691 80,304,133
------------------------ -------------------------
Total deposits 186,396,992 81,701,513
Federal Home Loan Bank advances 42,784,781 25,405,633
Note payable 302,892 477,142
Interest payable 507,734 186,119
Other liabilities 1,274,405 880,868
------------------------ -------------------------
Total liabilities 231,266,804 108,651,275
------------------------ -------------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 2,433,197 and 2,100,000 shares 25,582,299 20,547,581
Retained earnings 15,377,919 15,556,661
Unearned employee stock ownership plan (ESOP) shares (1,372,089) (1,420,777)
Unearned recognition and retention plan (RRP) shares (797,679) (943,312)
------------------------ -------------------------
Total shareholders' equity 38,790,450 33,740,153
------------------------ -------------------------
Total liabilities and shareholders' equity $ 270,057,254 $ 142,391,428
======================== =========================
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------- ----------------- --------------
2002 2001 2002 2001
------------------ ------------------- ----------------- --------------
Interest and Dividend Income
Loans $ 4,448,635 $ 2,221,355 $ 8,873,844 $ 4,393,124
Investment securities 105,155 93,114 154,045 212,310
Dividends on Federal Home Loan Bank stock 53,347 22,814 103,998 45,804
Deposits with financial institutions 78,316 42,410 146,840 120,287
------------------ ------------------- ----------------- --------------
Total interest and dividend income 4,685,453 2,379,693 9,278,727 4,771,525
------------------ ------------------- ----------------- --------------
Interest Expense
Deposits 1,615,994 1,028,747 3,311,332 2,060,096
Federal Home Loan Bank advances 488,808 161,444 900,870 380,466
------------------ ------------------- ----------------- --------------
Total interest expense 2,104,802 1,190,191 4,212,202 2,440,562
------------------ ------------------- ----------------- --------------
Net Interest Income 2,580,651 1,189,502 5,066,525 2,330,963
Provision for loan losses 20,000 15,000 60,000 30,000
------------------ ------------------- ----------------- --------------
Net Interest Income After Provision for Loan Losses 2,560,651 1,174,502 5,006,525 2,300,963
------------------ ------------------- ----------------- --------------
Other Income (Losses)
Equity in losses of limited partnerships (7,500) (10,000) (12,500) (35,000)
Net realized gains on sales of available for sale
securities 2,574 8,534
Other income 28,239 40,036 131,137 84,184
------------------ ------------------- ----------------- --------------
Total other income 23,313 30,036 127,171 49,184
------------------ ------------------- ----------------- --------------
Other Expenses
Salaries and employee benefits 714,776 307,531 1,425,610 618,061
Net occupancy expenses 42,728 18,340 100,193 29,878
Equipment expenses 80,035 9,364 151,522 15,836
Legal and professional fees 36,905 49,440 77,423 80,815
Data processing fees 69,205 30,241 549,246 48,530
Other expenses 270,530 116,458 510,514 234,989
------------------ ------------------- ----------------- --------------
Total other expenses 1,214,179 531,374 2,814,508 1,028,109
------------------ ------------------- ----------------- --------------
Income Before Income Tax 1,369,785 673,164 2,319,188 1,322,038
Income tax expense 476,702 223,430 779,182 436,458
------------------ ------------------- ----------------- --------------
Net Income $ 893,083 $ 449,734 $ 1,540,006 $ 885,580
================== =================== ================= ==============
Basic Earnings per Share $ .39 $ .22 $ .69 $ .43
Diluted Earnings per Share .39 $ .22 .69 $ .43
Dividends per Share .12 $ .15 .23 $ .30
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended June 30, 2002
(Unaudited)
Common Stock
---------------------------- Unearned
Shares Retained ESOP Unearned
Outstanding Amount Earnings Shares Compensation Total
------------ --------------- ------------- -------------- ---------------- --------------
Balances, January 1, 2002 2,100,000 $20,547,581 $15,556,661 $(1,420,777) $(943,312) $33,740,153
Net income for the period 1,540,006 1,540,006
Cash dividends ($.23 per share) (528,134) (528,134)
Shares issued in acquisition, net of 678,897 8,954,487 8,954,487
cost
Shares cancelled in acquisition (20,000) (257,111) (257,111)
Purchase of common stock (325,700) (3,684,956) (1,190,614) (4,875,570)
Amortization of unearned compensation
expense 145,633 145,633
ESOP shares earned 22,298 48,688 70,986
------------ --------------- ------------- -------------- ---------------- --------------
Balances, June 30, 2002 2,433,197 $25,582,299 $15,377,919 $(1,372,089) $(797,679) $38,790,450
============ =============== ============= ============== ================ ==============
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
---------------- ---------------
2002 2001
---------------- ---------------
Operating Activities
Net income $ 1,540,006 $ 885,580
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 60,000 30,000
Depreciation and amortization 158,550 17,624
Investment securities accretion, net (1,649) (1,664)
Gain on sale of investment securities available for sale (8,534)
Loss on sale of real estate owned 22,399
Equity in losses of limited partnerships 12,500 35,000
Amortization of purchase accounting adjustments (453,847)
Amortization of unearned compensation expense 145,633 113,733
ESOP shares earned 70,986 66,297
Net change in:
Interest receivable 154,426 173,240
Interest payable (194,788) (40,604)
Other adjustments 934,322 (23,409)
---------------- ---------------
Net cash provided by operating activities 2,440,004 1,255,797
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits 94,976
Investment securities
Proceeds from sales of investment securities available for sale
75,613 Proceeds from maturities of securities held to maturity and
paydowns of mortgage-backed securities 353,976 2,498,401
Net changes in loans 4,328,598 (6,346,977)
Net cash received in acquisition 15,866,825
Additions to real estate owned (42,923)
Proceeds from real estate sales 356,769
Purchases of property and equipment (155,070) (62,977)
Purchases of Federal Home Loan Bank of Indianapolis stock (137,000)
---------------- ---------------
Net cash provided by (used in) investing activities 20,878,764 (4,048,553)
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 12,030,961 3,232,372
Certificates of deposit (24,264,383) 1,667,922
Proceeds from borrowings 20,000,000 4,000,000
Repayment of borrowings (20,311,993) (6,306,660)
Cash dividends (545,383) (644,467)
Repurchase of common stock (4,875,570) (976,775)
Net change in advances by borrowers for taxes and insurance 9,377 22,273
---------------- ---------------
Net cash provided by (used in) financing activities (17,956,991) 994,665
---------------- ---------------
Net Change in Cash and Cash Equivalents 5,361,777 (1,798,091)
Cash and Cash Equivalents, Beginning of Period 13,564,902 4,754,686
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 18,926,679 $ 2,956,595
================ ===============
Additional Cash Flows Information
Interest paid $ 4,406,990 $ 2,481,166
Income tax paid 455,991 524,000
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Union Community
Bancorp, an Indiana corporation (the "Company") and its wholly owned subsidiary,
Union Federal Savings and Loan Association, a federally chartered savings and
loan association ("Union Federal"). A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 2001 Annual Report to Shareholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at June 30, 2002, and for the
three and six months ended June 30, 2002 and 2001, have not been audited by
independent accountants, but reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows for
such periods. The results of operations for the six-month period ended June 30,
2002, are not necessarily indicative of the results which may be expected for
the entire year. The consolidated condensed balance sheet of the Company as of
December 31, 2001 has been derived from the audited consolidated balance sheet
of the Company as of that date.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted-average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
Three Months Ended Three Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $893,083 2,278,959 $ .39 $449,734 2,031,714 $ .22
========= =========
Effect of dilutive RRP awards
and stock options 3,900
-------------- --------------- ------------ -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 893,083 2,282,859 $ .39 $449,734 2,031,614 $ .22
============== =============== ======== ============ ============= ==========
Six Months Ended Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 1,540, 006 2,222,956 $ .69 $885,580 2,054,427 $ .43
=========== =============
Effect of dilutive RRP awards
and stock options 1,950
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 1,540,006 2,224,906 $ .69 $885,580 2,054,427 $ .43
============== =============== =========== ============= ============= =============
Note 3: Other Comprehensive Income
Tax
Before-Tax Benefit Net-of-Tax
For the Three Months Ended June 30, 2002 Amount (Expense) Amount
------ --------- ------
Unrealized gains on securities:
Unrealized holding gains arising during the year $ 959 $ (380) $ 579
Less: reclassification adjustments for gains realized
in net income 2,574 (1,020) 1,554
---------------- ---------------- ----------------
Other comprehensive loss $ (1,615) $ 640 $ (975)
================ ================ ================
Tax
Before-Tax Benefit Net-of-Tax
For the Six Months Ended June 30, 2002 Amount (Expense) Amount
------ --------- ------
Unrealized gains on securities:
Unrealized holding gains arising during the year $ 8,534 $ (3,380) $ 5,154
Less: reclassification adjustments for gains realized
in net income 8,534 (3,380) 5,154
---------------- ---------------- ----------------
Other comprehensive income $ 0 $ 0 $ 0
================ ================ ================
Note 4: Business Combination
On January 2, 2002, the Company acquired Montgomery Financial Corporation a
federally chartered thrift ("Montgomery"), which is the holding company of
Montgomery Savings, a Federal Association ("Montgomery Savings"). Montgomery was
merged with and into the Company and immediately thereafter Montgomery Savings
was merged into Union Federal. MSA Service Corporation ("MSA"), an Indiana
corporation and wholly-owned subsidiary of Montgomery Savings, will continue as
a subsidiary of Union Federal.
On January 2, 2002, the company issued 678,897 shares of its common stock at a
cost of approximately $8,954,000, net of registration costs of $113,000, and
paid cash of approximately $9,059,000 to Montgomery's shareholders. As of the
merger date, Montgomery owned 20,000 shares of the Company's common stock with a
net book value of approximately $257,000. The shares were cancelled as part of
this transaction. The Company paid an additional $452,000 in merger related
expenses.
The acquisition was accounted for under the purchase method of accounting, and
accordingly, the net assets were recorded at their estimated fair values at the
date of acquisition. Fair value adjustments on the assets and liabilities
purchased are being amortized over the estimated useful lives of the related
assets and liabilities. The excess of the purchase price over the estimated fair
value of the underlying net assets of $2,260,000 was allocated to goodwill and
is not deductible for tax purposes. Additionally, core deposit intangibles of
$590,000 were recognized and are being amortized over seven years using the 125%
declining balance method. Montgomery's results of operations and financial
position were included in the Company's consolidated financial statements
beginning January 3, 2002. The following table summarizes the estimated fair
values of the assets acquired and liabilities assumed at the date of
acquisition.
(In thousands)
Cash and cash equivalents $ 25,490
Loans, net of allowance for loan losses 117,029
Premises and equipment 2,530
Goodwill 2,260
Core deposit intangible 590
Other assets 6,564
--------------
Total assets acquired 154,463
--------------
Deposits 117,390
Federal Home Loan Bank advances 17,607
Other liabilities 1,145
--------------
Total liabilities acquired 136,142
--------------
Net assets acquired $ 18,321
==============
The following pro forma information, including the effect of the purchase
accounting adjustments, depicts the results of operations as though the merger
had taken place at the beginning of each period.
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
Net Interest Income $ 2,581 $ 2,408 $ 5,067 $ 4,728
Net Income 893 633 580 1,312
Net Income Per Share
Basic .39 .24 .26 .48
Diluted .39 .24 .26 .48
The pro forma results of operations do not purport to be indicative of the
results which would actually have been obtained had the merger occurred on the
date indicated or which may be obtain in the future.
The Financial Accounting Standards Board recently adopted Statement of Financial
Accounting Standards ("SFAS") 142, Goodwill and Other Intangible Assets. This
Statement establishes new financial accounting and reporting standards for
acquired goodwill and other intangible assets. The Statement addresses how
intangible assets that are acquired individually or with a group of other assets
(but not those acquired in a business combination) should be accounted for in
financial statements upon their acquisition. It also addresses how goodwill and
other intangible assets (including those acquired in a business combination)
should be accounted for after they have been initially recognized in the
financial statements. SFAS 142 was effective for fiscal years beginning after
December 15, 2001. In adopting SFAS 142, the goodwill recorded on January 2,
2002 from the acquisition of Montgomery will not be amortized but will be
subject to testing for impairment.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company was organized in September 1997. On December 29, 1997, it acquired
the common stock of Union Federal upon the conversion of Union Federal from a
federal mutual savings and loan association to a federal stock savings and loan
association. The Company acquired Montgomery in a transaction that closed on
January 2, 2002. In the transaction, Montgomery was merged with and into the
Company, and Montgomery Savings was merged with and into Union Federal.
Following the merger, MSA became a subsidiary of Union Federal.
Union Federal was organized as a state-chartered savings and loan association in
1913. Union Federal conducts its business from its main office located in
Crawfordsville, Indiana. In addition, Union Federal has three additional branch
offices in Crawfordsville and branch offices in Covington, Williamsport and
Lafayette, Indiana. Five of the above mentioned branch offices were added in
connection with the acquisition of Montgomery. 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 of
the Federal Deposit Insurance Corporation. 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 and consumer loans, including single-pay loans, loans
secured by deposits, installment loans and commercial loans; (vi) money market
demand accounts; (vii) passbook savings accounts; and (viii) certificates of
deposit.
Union Federal currently owns two subsidiaries, UFS Service Corp. ("UFS"), whose
sole asset is its investment in Pedcor Investments 1993-XVI, L.P. ("Pedcor") and
MSA, which is a real estate management and development company. Pedcor 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. At present, MSA owns a tract of land, which is being developed for the
construction of seven condominium units. Union Federal's investment in MSA is
excluded from its calculation of regulatory capital.
Union Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Union Federal's non-interest
income, including fee income and service charges, and the level of its
non-interest expenses, including general and administrative expenses.
Critical Accounting Policies
Note 1 to the consolidated financial statements contains a summary of the
Company's significant accounting policies presented on pages 22 through 24 of
the Annual Report to Shareholders for the year ended December 31, 2001, which
was filed on Form 10-K with the Commission on March 29, 2002. Certain of these
policies are important to the portrayal of the Company's financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Management believes that its critical accounting policies include determining
the allowance for loan losses, the valuation of the foreclosed assets and real
estate held for development, and the valuation of intangible assets.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses at least on a quarterly basis. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the loan portfolio, the current economic condition, the
amount of loans outstanding, certain identified problem loans, and the
probability of collecting all amounts due.
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. A worsening or protracted economic
decline would increase the likelihood of additional losses due to credit and
market risk and could create the need for additional loan loss reserves.
Foreclosed asset and real estate held for development
Foreclosed assets and real estate held for development are carried at the lower
of cost or fair value less estimated selling costs. Management estimates the
fair value of the properties based on current appraisal information. Fair value
estimates are particularly susceptible to significant changes in the economic
environment, market conditions, and real estate market. A worsening or
protracted economic decline would increase the likelihood of a decline in
property values and could create the need to write down the properties through
current operations.
Intangible assets
Management periodically assesses the impairment of its goodwill and the
recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. If
actual external conditions and future operating results differ from management's
judgments, impairment and/or increased amortization charges may be necessary to
reduce the carrying value of these assets to the appropriate value.
Financial Condition
Total assets increased $127.7 million to $270.1 million at June 30, 2002
primarily due to the acquisition of Montgomery. Net loans increased $112.4
million to $234.2 million at June 30, 2002. During the six months ended June 30,
2002, net loans of $117.0 million were added as a result of the acquisition
while loan payoffs exceeded new loan production, net of other adjustments, by
4.6 million. Cash and cash equivalents increased $5.4 million from December 31,
2001 to June 30, 2002. The increase was primarily due to net cash received in
the acquisition offset by cash used for stock repurchases and the outflow of
deposits. Premises and equipment increased from $399,000 at December 31, 2001 to
$2.9 million at June 30, 2002 also due to the acquisition. The acquisition of
Montgomery increased Union Federal's full-service offices from two to seven. Due
to the transaction, foreclosed assets and real estate held for development
increased from $9,000 at December 31, 2001 to $1.7 million at June 30, 2002. In
connection with the acquisition, these properties were marked to market and are
currently for sale. Also in connection with the acquisition, Goodwill of $2.3
million and core deposit intangibles of $590,000 were recorded. Goodwill will be
reviewed annually for impairment and core deposit intangibles will be amortized
over seven years.
Deposits increased by $104.7 million to $186.4 million during the six months
ended June 30, 2002, of which $117.4 million were added as a result of the
Montgomery acquisition. Excluding the deposits acquired, deposits decreased
$12.7 million with certificates of deposit decreasing approximately $24.7
million and other deposits increasing approximately $12.0 million.
Borrowed funds increased by $17.2 million from December 31, 2001 to June 30,
2002. The Montgomery acquisition added $17.6 million of borrowed funds.
Shareholders' equity increased $5.1 million to $38.8 million at June 30, 2002.
The net cost of the shares issued in connection with the Montgomery acquisition
of $9.0 million, the net income for six months ended June 30, 2002 of
$1,540,000, the Employee Stock Ownership Plan shares earnings of $71,000 and the
unearned compensation amortization of $146,000 predominately accounted for the
increases to the shareholder's equity. These increases were offset by stock
repurchases of $4.9 million, cancellation of shares of Company stock owned by
Montgomery of $257,000 and cash dividends of $528,000.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
Net income increased $443,000 from $450,000 for the three months ended June 30,
2001 to $893,000 for the three months ended June 30, 2002. The increase in net
income was primarily attributable to the acquisition of Montgomery on January 2,
2002 with an increase of $1.4 million in net interest income offset in part by
an increase of $683,000 in total other expenses. The return on average assets
for the three months ended June 30, 2002 was 1.32% compared to 1.43% for the
comparable period in 2001. The return on average equity for the three months
ended June 30, 2002 was 9.25% compared to 5.05% for the comparable period in
2001.
For the three months ended June 30, 2002, interest income was $4.7 million as
compared to $2.4 million for the three months ended June 30, 2001. Interest
income increased primarily due to an increase in average interest-earning asset
from $124.2 million for the second quarter of 2001 to $259.6 million for the
comparable period in 2002 offset by a decrease in the yield on interest-earning
assets from 7.67% during the 2001 period to 7.22% during the 2002 period. For
the three months ended June 30, 2002, interest expense was $2.1 million as
compared to $1.2 million for the three months ended June 30, 2001. Interest
expense increased primarily due to an increase in average interest-bearing
liabilities from $89.1 for the second quarter of 2001 to $226.5 million for the
comparable period in 2002 offset by a decrease in the cost of interest-bearing
liabilities from 5.34% during the 2001 period to 3.72% during the 2002 period.
The decrease in the cost of funds was due to the rate environment during the
2002 period as compared to 2001 and amortization of purchase accounting
adjustments totaling $276,000 which decreased interest expense during the three
months ended June 30, 2002.
The provision for loan losses for the three months ended June 30, 2002 was
$20,000 as compared to $15,000 for the comparable period in 2001. A review is
performed quarterly to determine the adequacy of the current balance in the
allowance for loan losses.
Total other expenses increased from $531,000 for the three months ended June 30,
2001 to $1,214,000 for the comparable period in 2002. Expenses increased
primarily due to the growth of the Company through the acquisition of
Montgomery.
Comparison of Operating Results for the Six Months Ended June 30, 2002 and 2001
For the six months ended June 30, 2002, net income was $1,540,000, which
represents a 73.8% increase in earnings as compared to the six months ended June
30, 2001. As mentioned previously, the increase in net income was primarily
attributable to the acquisition of Montgomery with an increase of $2.7 million
in net interest income offset in part by an increase of $1.8 million in total
other expenses. The return on average assets for the six months ended June 30,
2002 was 1.13% compared to 1.40% for the comparable period in 2001. The return
on average equity for the six months ended June 30, 2002 was 7.84% compared to
5.01% for the comparable period in 2001.
For the six months ended June 30, 2002, interest income was $9.3 million as
compared to $4.8 million for the six months ended June 30, 2001. Interest income
increased primarily due to an increase in average interest-earning asset from
$124.1 million for the six months ended June 30, 2001 to $261.4 million for the
comparable period in 2002 offset by a decrease in the yield on interest-earning
assets from 7.69% during the 2001 period to 7.10% during the 2002 period. For
the six months ended June 30, 2002, interest expense was $4.2 million as
compared to $2.4 million for the six months ended June 30, 2001. Interest
expense increased primarily due to an increase in average interest-bearing
liabilities from $88.2 million for the six months ended June 30, 2001 to $225.6
million for the comparable period in 2002 offset by a decrease in the cost of
interest-bearing liabilities from 5.54% during the 2001 period to 3.73% during
the 2002 period. The decrease in the cost of funds was due to the rate
environment during the 2002 period as compared to 2001 and amortization of
purchase accounting adjustments totaling $552,000 which decreased interest
expense during the six months ended June 30, 2002.
The provisions for loan losses made for the six months ended June 30 2002 was
$60,000 as compared to $30,000 for the comparable period in 2001. As mentioned
previously, a review is performed quarterly to determine the adequacy of the
current balance in the allowance for loan losses. The 2002 provision and the
allowance for loan losses were considered appropriate, based on size, condition
and components of the loan portfolio. While management estimates loan losses
using the best available information, no assurance can be given that future
addition to the allowance will not be necessary based on changes in economic and
real estate market conditions, further information obtained regarding problem
loans, identification of additional problem loans and other factors, both within
and outside of management's control.
Total other expenses increased from $1,028,000 for the six months ended June 30,
2001 to $2,815,000 for the comparable period in 2002. Expenses increased in part
due to the growth of the Company through the acquisition of Montgomery and due
to a one-time $411,000 termination fee for data processing services charged to
expense during the first quarter of 2002.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies in the
loans are not corrected. Doubtful loans possess the characteristics of
substandard loans, but collection or liquidation in full is doubtful based upon
existing facts, conditions and values. A loan classified as a loss is considered
uncollectible. Union Federal had $2.0 million of loans classified as special
mention as of June 30, 2002 and no loans classified as special mention at
December 31, 2001. In addition, Union Federal had $3.9 million and $1.6 million
of loans classified as substandard at June 30, 2002 and December 31, 2001,
respectively. At June 30, 2002 and December 31, 2001, no loans were classified
as doubtful or loss. The increase in classified loans was primarily due to the
addition of substandard loans from the Montgomery acquisition and $1.3 million
of additional substandard loans to a single borrower secured by 12 properties
with favorable loan to value ratios. At June 30, 2002, and December 31, 2001,
respectively, $2.8 million and $682,000 of the substandard loans were
non-accrual loans. The allowance for loan losses was $959,000 or .41% of loans
at June 30, 2002 as compared to $520,000 or .43% of loans at December 31, 2001.
Liquidity and Capital Resources
The Financial Regulatory Relief and Economic Efficiency Act of 2000, which was
signed into law on December 27, 2000, repealed the former statutory requirement
that all savings associations maintain an average daily balance of liquid assets
in a minimum amount of not less than 4% or more than 10% of their withdrawable
accounts plus short-term borrowings. The OTS adopted an interim final rule in
March 2001 that implemented this revised statutory requirement, although savings
associations remain subject to the OTS regulation that requires them to maintain
sufficient liquidity to ensure their safe and sound operation.
Pursuant to OTS capital regulations in effect at June 30, 2002, savings
associations were required to maintain a 1.5% tangible capital requirement, a 4%
leverage ratio (or core capital) requirement, and a total risk-based capital to
risk-weighted assets ratio of 8%. At June 30, 2002, Union Federal's capital
levels exceeded all applicable regulatory capital requirements in effect as of
that date.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is http://www.sec.gov.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of March 31, 2002 and 2001, is the most recent available
analyses performed by the OTS of Union Federal's and Montgomery Savings'
interest rate risk as measured by changes in net portfolio value ("NPV") for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments.
March 31, 2002
--------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
+300 bp $ 27,616 -16,375 -37% 10.41% -492 bp
+200 bp 33,332 -10,659 -24 12.22 -310 bp
+100 bp 38,956 -5,035 -11 13.91 -141 bp
0 bp 43,991 15.32
-100 bp 47,069 3,078 7 16.10 +77 bp
-200 bp 0 0 0 0 0
-300 bp 0 0 0 0 0
March 31, 2001
--------------
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
+300 bp $ 31,999 -7,053 -18% 26.90% -331 bp
+200 bp 34,374 -4,678 -12 28.09 -212 bp
+100 bp 36,831 -2,221 -6 29.26 -96 bp
0 bp 39,052 30.21
-100 bp 40,390 1,338 3 30.64 +43 bp
-200 bp 41,234 2,183 6 30.79 +57 bp
-300 bp 42,161 3,109 8 30.95 +74 bp
Management believes that at June 30, 2002 and March 31, 2002, there have been no
material changes in market interest rates or in the Company's interest rate
sensitive instruments which would cause a material change in the market risk
exposures which affect the quantitative and qualitative risk disclosures as
presented in Item 7A of the Company's Annual Report on Form 10-K for the period
ended December 31, 2001.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
On April 17, 2002, Union Community Bancorp held its Annual
Meeting of Shareholders. Three directors were elected to terms
expiring in 2005 by the following votes:
Marvin L. Burkett For: 2,375,499 Withheld: 100,501
Phillip E. Grush For: 2,380,860 Withheld: 95,140
Joseph E. Timmons For: 2,312,930 Withheld: 163,070
The terms of office of the following directors of Union Community
Bancorp continued after the Annual Shareholder Meeting:
Name Term Expires In
---- ---------------
C. Rex Henthorn 2003
Samuel H. Hildebrand 2003
Joseph M. Mallott 2003
Harry A. Siamas 2003
.. Philip L. Boots 2004
Mark E. Foster 2004
John M. Horner 2004
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June
30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: August 13, 2002 By: /s/ Alan L. Grimble
---------------------------------
Alan L. Grimble
Chief Executive Officer
Date: August 13, 2002 By: /s/ J. Lee Walden
---------------------------------
J. Lee Walden
Chief Financial Officer
CERTIFICATION
By signing below, each of the undersigned officers hereby certifies pursuant to
18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that, to his knowledge, (i) this report fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and (ii)
the information contained in this report fairly presents, in all material
respects, the financial condition and results of operations of Union Community
Bancorp.
Signed this 13th day of August 2002.
/s/ J. Lee Walden /s/ Alan L. Grimble
- ------------------------------------ --------------------------------------
J. Lee Walden Alan L. Grimble
Chief Financial Officer Chief Executive Officer