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, 2003
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 2003 was 2,100,000.
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
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
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
CERTIFICATIONS 17
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,
2003 2002
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 670,028 $ 992,705
Interest-bearing demand deposits 37,295,429 35,593,482
------------------------ -------------------------
Cash and cash equivalents 37,965,457 36,586,187
Interest-bearing deposits 145,107 145,107
Investment securities
Available for sale 5,006,250 ----
Held to maturity 759,372 1,636,513
------------------------ -------------------------
Total investment securities 5,765,622 1,636,513
Loans, net of allowance for loan losses of $1,097,787 and $1,030,000 209,646,063 216,703,469
Premises and equipment 4,628,011 3,238,899
Federal Home Loan Bank stock 3,468,900 3,423,600
Investment in limited partnership 846,609 836,609
Foreclosed assets and real estate held for development, net 1,464,163 1,607,146
Goodwill 2,392,808 2,296,927
Core deposit intangible 441,532 484,820
Interest receivable 1,208,379 1,276,538
Other assets 6,032,666 1,080,502
------------------------ -------------------------
Total assets $ 274,005,317 $ 269,316,317
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,691,567 $ 3,849,659
Interest-bearing 193,532,436 186,341,769
------------------------ -------------------------
Total deposits 197,224,003 190,191,428
Federal Home Loan Bank advances 39,514,178 39,751,631
Note payable 131,892 302,892
Interest payable 491,998 650,182
Dividends payable 315,000 341,700
Other liabilities 1,379,581 889,967
------------------------ -------------------------
Total liabilities 239,056,652 232,127,800
======================== =========================
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 - 2,100,000 and 2,278,000 shares 22,361,852 24,159,185
Retained earnings 14,439,199 15,032,214
Accumulated other comprehensive income 4,270 ----
Unearned employee stock ownership plan (ESOP) shares (1,276,200) (1,323,401)
Unearned recognition and retention plan (RRP) shares (580,456) (679,481)
------------------------ -------------------------
Total shareholders' equity 34,948,665 37,188,517
------------------------ -------------------------
Total liabilities and shareholders' equity $ 274,005,317 $ 269,316,317
======================== =========================
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
------------------ ------------------- ----------------- ---------------
2003 2002 2003 2002
------------------ ------------------- ----------------- ---------------
Interest and Dividend Income
Loans $ 3,723,641 $ 4,421,951 $ 7,745,632 $ 8,873,844
Investment securities 47,748 77,665 79,571 154,045
Dividends on Federal Home Loan Bank stock 47,477 53,347 91,476 103,998
Deposits with financial institutions 133,330 105,807 261,987 146,840
------------------ ------------------- ----------------- ---------------
Total interest and dividend income 3,952,196 4,658,770 8,178,666 9,278,727
------------------ ------------------- ----------------- ---------------
Interest Expense
Deposits 1,327,926 1,615,994 2,796,754 3,311,332
Federal Home Loan Bank advances 456,898 488,808 909,128 900,870
------------------ ------------------- ----------------- ---------------
Total interest expense 1,784,824 2,104,802 3,705,882 4,212,202
------------------ ------------------- ----------------- ---------------
Net Interest Income 2,167,372 2,553,968 4,472,784 5,066,525
Provision for loan losses 30,000 20,000 60,000 60,000
------------------ ------------------- ----------------- ---------------
Net Interest Income After Provision for Loan Losses 2,137,372 2,533,968 4,412,784 5,006,525
------------------ ------------------- ----------------- ---------------
Other Income (Losses)
Service charges on deposit accounts 35,345 39,822 71,083 72,076
Equity in income (losses) of limited partnerships --- (7,500) 10,000 (12,500)
Net realized gains on sales of available for sale
securities --- 2,574 --- 8,534
Other income 49,151 15,100 72,295 59,061
------------------ ------------------- ----------------- ---------------
Total other income 84,496 49,996 153,378 127,171
------------------ ------------------- ----------------- ---------------
Other Expenses
Salaries and employee benefits 759,072 714,776 1,479,355 1,425,610
Net occupancy expenses 70,655 42,728 146,657 100,183
Equipment expenses 78,305 80,035 158,192 151,522
Legal and professional fees 88,551 68,462 174,076 108,981
Data processing fees 102,988 69,205 204,237 549,246
Other expenses 294,496 238,973 574,297 478,966
------------------ ------------------- ----------------- ---------------
Total other expenses 1,394,067 1,214,179 2,736,814 2,814,508
------------------ ------------------- ----------------- ---------------
Income Before Income Tax 827,801 1,369,785 1,829,348 2,319,188
Income tax expense 276,817 476,702 633,500 779,182
------------------ ------------------- ----------------- ---------------
Net Income $ 550,984 $ 893,083 $ 1,195,848 $ 1,540,006
================== =================== ================= ===============
Basic Earnings per Share $ .28 $ .39 $ .59 $ .69
Diluted Earnings per Share .28 .39 .58 .69
Dividends per Share .15 .12 .30 .23
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, 2003
(Unaudited)
Accumulated
Common Stock Other Unearned
-----------------------
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income Shares Compensation Total
----------- ----------- -------------- ---------- ------------- ---------- ------------- -----------
Balances, January 1, 2003 2,278,000 $24,159,185 $15,032,214 $(1,323,401) $(679,481) $37,188,517
Comprehensive income
Net income for the period $1,195,848 1,195,848 1,195,848
Other comprehensive
income, net of tax
Unrealized gains on 4,270 $ 4,270 4,270
securities
----------
Comprehensive income $1,200,118
==========
Cash dividends ($.15 per (616,997) (616,997)
share)
Purchase of common stock 178,000 (1,828,434) (1,171,866) (3,000,300)
Amortization of unearned
compensation expense 99,025 99,025
ESOP shares earned 31,101 47,201 78,302
----------- ------------- ----------- ------------ ------------ ------------- -----------
Balances, June 30, 2003 2,100,000 $22,361,852 $14,439,199 $ 4,270 $(1,276,200) $(580,456) 34,948,665
=========== ============= =========== ============ ============ ============= ===========
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
---------------- ---------------
2003 2002
---------------- ---------------
Operating Activities
Net income $ 1,195,848 $ 1,540,006
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 67,787 60,000
Depreciation and amortization 162,152 158,550
Investment securities accretion, net (432) (1,649)
Gain on sale of investment securities available for sale --- (8,534)
Loss on sale of real estate owned 14,045 22,399
Equity in losses of limited partnerships (10,000) 12,500
Amortization of purchase accounting adjustments (169,689) (453,847)
Amortization of unearned compensation expense 99,025 145,633
ESOP shares earned 78,302 70,986
Net change in:
Interest receivable 68,159 154,426
Interest payable (158,184) (194,788)
Other adjustments (4,951,785) 934,322
---------------- ---------------
Net cash provided by (used in) operating activities (3,604,772) 2,440,004
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits --- 94,976
Investment securities
Purchase of investment securities available for sale (8,000,000)
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 3,877,573 353,976
Net changes in loans 6,800,243 4,328,598
Net cash received in acquisition --- 15,866,825
Additions to real estate owned (124,138) (42,923)
Proceeds from real estate sales 389,657 356,769
Purchases of property and equipment (1,537,055) (155,070)
Other investing activities (95,881) ----
---------------- ---------------
Net cash provided by investing activities 1,310,399 20,878,764
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 13,278,109 12,030,961
Certificates of deposit (6,084,534) (24,264,383)
Proceeds from borrowings ---- 20,000,000
Repayment of borrowings (317,890) (20,311,993)
Cash dividends (616,997) (545,383)
Repurchase of common stock (3,000,300) (4,875,570)
Net change in advances by borrowers for taxes and insurance 415,255 9,377
---------------- ---------------
Net cash provided by (used in) financing activities 3,673,643 (17,956,991)
---------------- ---------------
Net Change in Cash and Cash Equivalents 1,379,270 5,361,777
Cash and Cash Equivalents, Beginning of Period 36,586,187 13,564,902
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 37,965,457 $ 18,926,679
================ ===============
Additional Cash Flows Information
Interest paid $ 3,864,066 $ 4,406,990
Income tax paid 696,913 455,991
Loans transferred to foreclosed real estate 150,790 184,399
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, 2002 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, 2003, and for the
three and six months ended June 30, 2003 and 2002, 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,
2003, 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, 2002 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, 2003 June 30, 2002
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $550,984 1,973,814 $ .28 $893,083 2,278,959 $ .39
=========== =============
Effect of dilutive RRP awards
and stock options 23,577 3,900
-------------- --------------- ------------ -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 550,984 1,997,391 $ .28 $ 893,083 2,282,859 $ .39
============== =============== =========== ============ ============= =============
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 1,195,848 2,032,240 $ .59 $ 1,540,006 2,222,956 $ .69
=========== =============
Effect of dilutive RRP awards
and stock options 19,381 1,950
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 1,195,848 2,051,621 $ .58 $ 1,540,006 2,224,906 $ .69
============== =============== =========== ============= ============= =============
Note 4: Stock Options
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2002 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended June Three Months Ended
30, 2003 June 30, 2002
-----------------------------------------------------
Net income, as reported $ 550,984 $ 893,083
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 9,133 12,016
-----------------------------------------------------
Pro forma net income $ 541,851 $ 881,067
=====================================================
Earnings per share:
Basic - as reported $ .28 $ .39
Basic - pro forma $ .27 $ .39
Diluted - as reported $ .28 $ .39
Diluted - pro forma $ .27 $ .39
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
-----------------------------------------------------
Net income, as reported $ 1,195,848 $1,540,006
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 18,267 24,032
-----------------------------------------------------
Pro forma net income $ 1,177,581 $1,515,974
=====================================================
Earnings per share:
Basic - as reported $ .59 $ .69
Basic - pro forma $ .58 $ .68
Diluted - as reported $ .58 $ .69
Diluted - pro forma $ .57 $ .68
Note 5: Effect of Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") adopted SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation.
Under the provisions of SFAS No. 123, companies that adopted the fair value
based method were required to apply that method prospectively for new stock
option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The date of implementation for
this proposed statement is not known.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 will change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in FIN 45 are required to be initially recorded at
fair value, which is different from the general current practice of recording a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying asset, liability, or an equity security of the
guaranteed party such as financial standby letters of credit.
Disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002. The initial
recognition and measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the date of FIN 45 initial applications should not be revised or
restated to reflect the provisions of FIN 45.
The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does not
currently have a material impact on the Company's consolidated financial
statements.
Note 6: Reclassifications
Certain reclassifications have been made to the 2002 consolidated condensed
financial statements to conform to the June 30, 2003 presentation.
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 Financial Corporation
("Montgomery") in a transaction that closed on January 2, 2002. In the
transaction, Montgomery was merged with and into the Company, and Montgomery
Savings, a federally chartered thrift, was merged with and into Union Federal.
Following the merger, MSA Service Corp ("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 two branch offices in
Crawfordsville and branch offices in Covington, Williamsport and Lafayette,
Indiana. Four of the above mentioned branch offices were added in connection
with the acquisition of Montgomery.
Union Federal offers a variety of lending, deposit and other financial services
to its retail and commercial customers. Union Federal's principal business
consists of attracting deposits from the general public and originating
fixed-rate and adjustable-rate loans secured primarily by first 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, which include: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans and consumer loans, including single-pay loans, loans
secured by deposits, installment loans and commercial loans; (vi) money market
demand accounts; (vii) passbook savings accounts; and (viii) certificates of
deposit.
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,
which 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 in Crawfordsville, Indiana, 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 25 through 27 of
the Annual Report to Shareholders for the year ended December 31, 2002, which
was filed on Form 10-K with the Commission on March 28, 2003. 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 includes a review of payment performance, adequacy of collateral and
financial condition of all major borrowers. A review of all nonperforming loans
and other identified problem loans is performed and the probability of
collecting all amounts due thereunder is determined. In addition, changes in the
composition of the loan portfolio, the total outstanding loans and past loss
experience are reviewed to determine the adequacy of the allowance for loan
losses. Current economic and market conditions and potential negative changes to
economic conditions are also reviewed in determining possible loan losses.
Although it is the intent of management to fully evaluate and estimate the
potential effects of economic and market conditions, changes in the conditions
are susceptible to significant changes beyond those projected. A worsening or
protracted economic decline beyond management's projections would increase the
likelihood of additional losses due to the additional credit and market risk and
could create the need for additional loss reserves.
Foreclosed assets 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. Reviews of
estimated fair value are performed on at least an annual basis. Economic
environment, market conditions and the real estate market are continually
monitored and decreases in the carried value are written down through current
operations when any of these factors indicate a decrease to the market value of
the assets. Future worsening or protracted economic conditions and a decline in
the real estate market would increase the likelihood of a decline in property
values and could create the need for future write downs of the properties held.
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. A review of
the fair value of the Company's goodwill and core deposit intangible was
performed in the fourth quarter of 2002 and it was management's opinion that
there was no impairment of these intangible assets as of the date of the review.
Financial Condition
Total assets increased $4.7 million to $274.0 million at June 30, 2003 from
$269.3 million at December 31, 2002. Net loans decreased $7.1 million to $209.6
million at June 30, 2003. Cash and cash equivalents increased $1.4 million from
December 31, 2002 to June 30, 2003. Investment securities increased $4.1 million
from $1.6 million at December 31, 2002 to $5.7 million at June 30, 2003. This
increase was due to an increase in available for sale investments of $5.0
million and a decrease in held to maturity investments $877,000 in payments on
mortgage-backed securities. Premises and equipment increased $1.4 million to
$4.6 million at June 30, 2003 primarily due to the cost of the current
remodeling of Union Federal's home office. Real estate owned and held for
investment decreased $143,000 to $1.5 million at June 30, 2003. In connection
with the Montgomery acquisition, the balance of goodwill and core deposit
intangibles are $2.4 million and $442,000 respectively. Goodwill will be
reviewed annually for impairment and core deposit intangibles are currently
being amortized. Other assets increased from $1.1 million at December 31, 2002
to $6.0 million at June 30, 2003. This increase is primarily due to a $5.0
million purchase of bank owned life insurance.
Total liabilities increased $6.9 million from $232.1 million at December 31,
2002 to $239.0 million at June 30, 2003. Deposits increased by $7.0 million to
$197.2 million during the six months ended June 30, 2003 primarily accounting
for the change in total liabilities.
Shareholders' equity decreased $2.2 million to $34.9 million at June 30, 2003.
The decrease was primarily due to repurchase of 178,000 shares of common stock
at a total cost of $3.0 million, or an average cost of $16.86 per share, and the
payment of cash dividends in the amount of $617,000 partially offset by net
income of $1.2 million, Employee Stock Ownership Plan shares earned of $78,000
and unearned compensation amortization of $99,000.
Comparison of Operating Results for the Three Months Ended June 30, 2003 and
2002
Net income decreased $342,000 from $893,000 for the three months ended June 30,
2002 to $551,000 for the three months ended June 30, 2003. The return on average
assets for the three months ended June 30, 2003 was .79% compared to 1.32% for
the comparable period in 2002. The return on average equity for the three months
ended June 30, 2003 was 6.02% compared to 9.25% for the comparable period in
2002.
For the three months ended June 30, 2003, interest income was $4.0 million as
compared to $4.7 million for the three months ended June 30, 2002. Interest
income decreased primarily due to a decrease in the yield on interest-earning
assets from 7.22% during the 2002 period to 5.96% during the 2003 period, which
was partially offset by an increase in average interest-earning asset from
$256.2 million at June 30, 2002 to $265.2 million at June 30, 2003. For the
three months ended June 30, 2003, interest expense was $1.8 million as compared
to $2.1 million for the three months ended June 30, 2002. Interest expense
decreased primarily due to a decrease in the cost of interest-bearing
liabilities from 3.72% during the 2002 period to 3.02% during the 2003 period,
which was offset by an increase in average interest-bearing liabilities from
$226.8 million at June 30, 2002 to $236.5 million at June 30, 2003. Amortization
of purchase accounting adjustments also impacted interest expense during the
2002 and 2003 periods. The amortization of purchase accounting adjustments
reduced interest expense by $126,000 in the 2003 period compared to a reduction
of $276,000 for the 2002 period.
The provision for loan losses for the three months ended June 30, 2003 was
$30,000 as compared to $20,000 for the comparable period in 2002. A review is
performed quarterly to determine the adequacy of the current balance in the
allowance for loan losses.
Total other income increased $35,000 from $50,000 for the three months ended
June 30, 2002 to $85,000 for the 2003 comparable period. Total other expenses
increased $180,000 from $1,214,000 for the three months ended June 30, 2002 to
$1,394,000 for the comparable period in 2003. Salaries and employee benefits
increased $44,000 during the comparable three-month periods primarily due to an
increase in expense in funding the defined benefit pension plan in the amount of
$19,000, an increase of $16,000 in employee insurance expense and an $8,000
increase in employee compensation. Net occupancy expense increased $28,000
during the comparable periods primarily due to general increases in expenses and
the loss of office rental income due to the Montgomery acquisition. Legal and
professional fees increased $20,000 to $89,000 for the three-months ended June
30, 2003. This increase was due to an increase in legal fees of $6,000 and an
increase in consulting fees of $31,000 primarily due to the use of consultants
for daily monitoring of information technology service and needs, this being
partially offset by a decrease in audit and accounting expense in the amount of
$17,000. Data processing expense increased $34,000 for the comparative periods
due to an increase in services provided by the service bureau. Other expenses
increased $55,000 from $239,000 for the three months ended June 30, 2002 to
$294,000 for the 2003 comparable period. The two major increases in other
expenses was an increase in advertising expense of $35,000 and an increase in
directors compensation of $11,000.
Comparison of Operating Results for the Six Months Ended June 30, 2003 and 2002
Net income decreased $344,000 from $1,540,000 for the six months ended June 30,
2002 to $1,196,000 for the six months ended June 30, 2003. The return on average
assets for the six months ended June 30, 2003 was .86% compared to 1.13% for the
comparable period in 2002. The return on average equity for the six months ended
June 30, 2003 was 6.46% compared to 7.84% for the comparable six-month period in
2002.
For the six months ended June 30, 2003, interest income was $8.2 million as
compared to $9.3 million for the six months ended June 30, 2002. Interest income
decreased primarily due to a decrease in the yield on interest-earning assets
from 7.10% during the 2002 period to 6.16% during the 2003 period, which was
partially offset by an increase in average interest-earning asset from $261.4
million at June 30, 2002 to $265.6 million at June 30, 2003. For the six months
ended June 30, 2003, interest expense was $3.7 million as compared to $4.2
million for the six months ended June 30, 2002. Interest expense decreased
primarily due to a decrease in the cost of interest-bearing liabilities from
3.73% during the 2002 period to 3.16% during the 2003 period, which was offset
by an increase in average interest-bearing liabilities from $225.6 million at
June 30, 2002 to $234.8 million at June 30, 2003. Amortization of purchase
accounting adjustments also impacted interest expense during the 2002 and 2003
periods. The amortization of purchase accounting adjustments reduced interest
expense by $252,000 in the 2003 period compared to a reduction of $552,000 for
the 2002 period.
The provision for loan losses for both six-month periods was $60,000. A review
is performed quarterly to determine the adequacy of the current balance in the
allowance for loan losses.
Total other income increased $26,000 from $127,000 for the six months ended June
30, 2002 to $153,000 for the 2003 comparable period. Total other expenses
decreased $78,000 from $2,815,000 for the six months ended June 30, 2002 to
$2,737,000 for the comparable period in 2003. Salaries and employee benefits
increased $54,000 during the comparable six-month periods primarily due to an
increase in expense in funding the defined benefit pension plan in the amount of
$49,000, an increase of $25,000 in employee insurance expense and a $21,000
increase in employee compensation partially offset by a decrease in unearned
compensation expense of $47,000. Net occupancy expense increased $47,000 during
the comparable periods primarily due to general increases in expenses and the
loss of office rental income due to the Montgomery acquisition. Legal and
professional fees increased $65,000 to $174,000 for the six-months ended June
30, 2003. This increase was due to an increase in legal fees of $6,000 and an
increase in consulting fees of $66,000 primarily due to the use of consultants
for daily monitoring of information technology service and needs this being
partially offset by a decrease in audit and accounting expense in the amount of
$7,000. Data processing expense decreased $345,000 for the comparative periods
due to a one-time terminations fee for data processing services charged to
expense during the 2002 comparative period offset by the cost of additional
services being offered. Other expenses increased $96,000 from $479,000 for the
six months ended June 30, 2002 to $575,000 for the 2003 comparable period. The
three major increases in other expenses was an increase in advertising expense
of $45,000, an increase in directors compensation of $21,000 and an increase in
real estate owned expense of $15,000.
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 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.
At June 30, 2003 Union Federal had $6.6 million in classified assets as compared
to $7.0 million at December 31, 2002. Union Federal had $2.9 million and $2.7
million in loans classified as special mention as of June 30, 2003 and December
31, 2002 respectively. In addition, Union Federal had $3.4 million and $4.2
million of loans classified as substandard at June 30, 2003 and December 31,
2002, respectively. At June 30, 2003 and December 31, 2002 Union Federal had
$214,000 and $103,000, respectively, in loans classified as doubtful and no
loans were classified as loss at either period end. At June 30, 2003, and
December 31, 2002, respectively, $3.6 million and $3.1 million of the
substandard and doubtful loans were non-accrual loans. The allowance for loan
losses was $1,098,000 or .52% of loans at June 30, 2003 as compared to
$1,030,000 or .47% of loans at December 31, 2002.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of June
30, 2003, Union Federal had liquid assets of $38.2 million and a liquidity ratio
of 15.7%.
Off-balance Sheet Arrangements
As of the date of this Report, Union Federal does not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the Union Federal's financial condition, change in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors. The term
"off-balance sheet arrangement" generally means any transaction, agreement, or
other contractual arrangement to which an entity unconsolidated with Union
Federal is a party under which Union Federal has (i) any obligation arising
under a guarantee contract, derivative instrument or variable interest; or (ii)
a retained or contingent interest in assets transferred to such entity or
similar arrangement that serves as credit, liquidity or market risk support for
such assets.
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, 2003 and 2002, is the most recent available
analyses performed by the OTS of Union Federal's 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.
Union Federal:
At March 31, 2003 At March 31, 2002
----------------- -----------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
---------------- --------------- --------------- --------------- ---------------
+300 bp $ (9,982) (22)% $ (16,375) (37)%
+200 bp (5,577) (13) (10,659) (24)
+100 bp (1,841) (4) (5,035) (11)
0 bp 0 0 0 0
-100 bp (612) (1) 3,078 7
Management believes that at June 30, 2003 and March 31, 2003, 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 on pages 17-19 of the Company's Annual Report on Form 10-K for the
period ended December 31, 2002.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
Securities Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and are designed to ensure that material information
relating to the Company would be made known to such officers by others within
the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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 16, 2003, Union Community Bancorp held its Annual Meeting
of Shareholders. Four directors were elected to terms expiring in
2006 by the following votes:
C. Rex Henthorn For: 1,823,930 Withheld: 240,901
Samuel H. Hildebrand For: 1,877,689 Withheld: 187,142
Joseph M. Malott For: 1,877,862 Withheld: 186,969
Harry A. Siamas For: 1,966,176 Withheld: 98,655
The terms of office of the following directors of Union Community
Bancorp continued after the Annual Shareholder Meeting:
Name Term Expires In
---- ---------------
Philip L. Boots 2004
Mark E. Foster 2004
John M. Horner 2004
Marvin L. Burkett 2005
Phillip E. Grush 2005
Joseph E. Timmons 2005
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31(1)Certification required by 17 C.F.R. Section 240.13a-14(a)
31(1) Certification required by 17 C.F.R. Section 240.13a-14(a)
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Earnings release for the quarter ended March 31, 2003 filed
on April 22, 2003.
2. Press release announcing the completion of the stock
repurchase program that began on March 25, 2003 filed on May
30, 2003.
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.
LINCOLN BANCORP
Date: August 13, 2003 By: /s/ Alan L. Grimble
---------------------------------------
T. Tim Unger
President and Chief Executive Officer
Date: August 13, 2003 By: /s/ John M. Baer
-------------------------------
John M. Baer
Treasurer