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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code:
(765) 362-2400
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 20, 1998 was $42,175,144.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 29, 1997, was 3,041,750 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 69 Pages
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................. 3
PART I
Item 1 Business.................................................. 3
Item 2. Properties................................................ 25
Item 3. Legal Proceedings......................................... 25
Item 4. Submission of Matters to a Vote of Security Holders....... 25
Item 4.5. Executive Officers of the Registrant...................... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................... 26
Item 6. Selected Financial Data................................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 29
Item 7A. Quantitative and Qualitative Disclosures
about Market Risks.................................... 40
Item 8. Financial Statements and Supplementary Data............... 42
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 64
PART III
Item 10. Directors and Executive Officers of Registrant............ 64
Item 11. Executive Compensation.................................... 65
Item 12. Security Ownership of
Certain Beneficial Owners and Management.............. 66
Item 13. Certain Relationships and Related Transactions............ 67
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................... 67
SIGNATURES ...................................................... 68
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Union Community Bancorp, an Indiana corporation (the "Holding
Company"), was organized in September, 1997. On December 29, 1997, it acquired
the common stock of Union Federal Savings and Loan Association ("Union Federal")
upon the conversion of Union Federal from a federal mutual savings and loan
association to a federal stock savings and loan association.
Union Federal was organized as a state-chartered savings and loan
association in 1913. Since then, Union Federal has conducted its business from
its full-service office located in Crawfordsville, Indiana. Union Federal's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Union Federal's
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Management believes that it has developed a solid reputation among its
loyal customer base because of its commitment to personal service and because of
strong support of the local community. Union Federal offers a number of
financial services, including: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans; (vi) money market demand accounts ("MMDAs"); (vii)
passbook savings accounts; and (viii) certificates of deposit.
Lending Activities
Union Federal has historically concentrated its lending activities on the
origination of loans secured by first-mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Union Federal's loan origination activities, representing 77.0% of its total
loan portfolio at December 31, 1997. Union Federal also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and, to a
limited extent, consumer loans consisting of loans secured by deposits and home
improvement loans. Mortgage loans secured by multi-family properties and
commercial real estate totaled approximately 12.6% and 4.5%, respectively, of
Union Federal's total loan portfolio at December 31, 1997. Construction loans
totaled approximately 5.7% of Union Federal's total loans as of December 31,
1997. Consumer loans, which consist of home improvement loans and passbook
loans, constituted approximately .3% of Union Federal's total loan portfolio at
December 31, 1997.
Loan Portfolio Data. The following table sets forth the composition of
Union Federal's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
At December 31,
1997 1996 1995
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
One-to-four-family............... $62,436 76.95% $57,031 77.46% $48,295 76.64%
Multi-family..................... 10,197 12.57 10,920 14.83 9,617 15.26
Commercial....................... 3,627 4.47 3,593 4.88 2,814 4.46
Real estate construction loans...... 4,652 5.73 1,740 2.36 2,107 3.34
Consumer loans ..................... 223 .28 346 .47 191 .30
------- ------ ------- ------ ------- ------
Gross loans receivable......... $81,135 100.00% $73,630 100.00% $63,024 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family real estate... $64,730 79.78% $58,271 79.14% $49,762 78.96%
Multi-family real estate......... 11,172 13.77 11,520 15.65 10,367 16.45
Commercial real estate........... 5,094 6.28 3,593 4.88 2,814 4.46
Deposits......................... 139 .17 246 .33 81 .13
------- ------ ------- ------ ------- ------
Gross loans receivable......... 81,135 100.00 73,630 100.00 63,024 100.00
======= ====== ======= ====== ======= ======
Deduct:
Allowance for loan losses........... 252 .31 159 .22 111 .18
Deferred loan fees.................. 325 .40 356 .48 379 .60
Loans in process.................... 2,122 2.62 418 .57 1,255 1.99
------- ------ ------- ------ ------- ------
Net loans receivable............. $78,436 96.67% $72,697 98.73% $61,279 97.23%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $ 20,683 25.56% $24,238 33.07% $27,057 43.06%
Fixed-rate....................... 60,229 74.44 49,046 66.93 35,776 56.94
------- ------ ------- ------ ------- ------
Total.......................... $80,912 100.00% $73,284 100.00% $62,833 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth certain information at December 31, 1997,
regarding the dollar amount of loans maturing in Union Federal's loan portfolio
based on the contractual terms to maturity. Demand loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects that prepayments will
cause actual maturities to be shorter.
Balance Due During Years Ended December 31,
Outstanding at 2001 2003 2008 2013
December 31, to to to and
1997 1998 1999 2000 2002 2007 2012 following
(In thousands)
Real estate mortgage loans:
Residential loans.................. $62,436 $307 $174 $ 296 $ 965 $18,401 $23,656 $18,637
Multi-family loans.................... 10,197 1 --- 473 --- 3,726 4,812 1,185
Commercial loans................... 3,627 --- --- 15 70 1,318 921 1,303
Construction loans.................... 4,652 154 --- 975 --- 610 1,118 1,795
Loans secured by deposits............. 139 139 --- --- --- --- --- ---
Home improvement loans................ 84 8 6 13 31 26 --- ---
------- ---- ---- ------ ------ ------- ------- -------
Total............................ $81,135 $609 $180 $1,772 $1,066 $24,081 $30,507 $22,920
======= ==== ==== ====== ====== ======= ======= =======
The following table sets forth, as of December 31, 1997, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
Due After December 31, 1998
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
Residential loans................. $50,649 $11,480 $62,129
Multi-family loans................ 5,446 4,750 10,196
Commercial loans.................. 1,450 2,177 3,627
Construction loans................... 2,905 1,593 4,498
Installment loans.................... --- --- ---
Loans secured by deposits............ --- --- ---
Home improvement loans............... 76 --- 76
------- ------- -------
Total............................. $60,526 $20,000 $80,526
======= ======= =======
One- to Four-Family Residential Loans. Union Federal's primary lending
activity consists of originating one- to four-family residential mortgage loans
secured by property located in its primary market area. Union Federal generally
does not originate one- to four-family residential mortgage loans if the ratio
of the loan amount to the lesser of the current cost or appraised value of the
property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private
mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and
factors the cost of such insurance into the annual percentage rate on such
loans. Union Federal originates and retains fixed rate loans which provide for
the payment of principal and interest over a 15- or 20-year period, or balloon
loans having terms of up to 15 years with principal and interest payments
calculated using a 30-year amortization period.
Union Federal also offers adjustable-rate mortgage ("ARM") loans. The
interest rate on ARM loans is indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity. Union Federal may offer discounted
initial interest rates on ARM loans, but requires that the borrower qualify for
the ARM loan at the fully-indexed rate (the index rate plus the margin). A
substantial portion of the ARM loans in Union Federal's portfolio at December
31, 1997 provide for maximum rate adjustments per year and over the life of the
loan of 1% and 5%, respectively. Union Federal's residential ARMs are amortized
for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 1997, approximately
25.6% of Union Federal's real estate mortgage loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Union
Federal originates include "due-on-sale" clauses, which give it the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, Union Federal occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At December 31, 1997, approximately $62.4 million, or 77.0% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $47,000, or .1% of total residential loans, were included
in non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At December 31, 1997, approximately $10.2 million, or
12.6% of Union Federal's total loan portfolio, consisted of mortgage loans
secured by multi-family dwellings (those consisting of more than four units).
Union Federal's multi-family loans are generally written as one-year adjustable
rate loans indexed to the one-year U.S. Treasury rate with an original term of
up to 20 years. Union Federal writes multi-family loans with maximum
Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of
December 31, 1997 had a balance of approximately $1.1 million and was secured by
28 duplexes located in Crawfordsville, Indiana. On the same date, none of Union
Federal's multi-family loans were included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a greater
risk than do residential loans. See "-- Commercial Real Estate Loans" below.
Commercial Real Estate Loans. Union Federal's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Union Federal generally originates commercial real estate loans as one-year
adjustable rate loans indexed to the one-year U.S. Treasury securities yield
adjusted to a constant maturity, with a maximum term of 20 years and a maximum
Loan-to-Value ratio of 80%. At December 31, 1997, Union Federal's largest
commercial loan had an outstanding balance of $497,000 and was secured by a
nursing home in Richmond, Indiana. At December 31, 1997, approximately $3.6
million, or 4.5% of Union Federal's total loan portfolio, consisted of
commercial real estate loans. On the same date, Union Federal had no commercial
real estate loans included in non-performing assets.
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate.
Construction Loans. Union Federal offers construction loans with respect
to residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). Union Federal provides
construction loans only to borrowers who commit to permanent financing on the
finished project. At December 31, 1997, approximately $4.7 million, or 5.73% of
Union Federal's total loan portfolio, consisted of construction loans. The
largest construction loan had a balance of $975,000 on December 31, 1997 and was
secured by a condominium project and golf course in Pittsboro, Indiana. None of
Union Federal's construction loans were included in non-performing assets on
that date.
Construction loans generally match the term of the construction contract
and are written as fixed-rate loans with interest calculated on the amount
disbursed under the loan and payable monthly. The maximum Loan-to-Value Ratio
for a construction loan is based upon the nature of the construction project.
For example, a construction loan for a one- to four-family residence may be
written with a maximum Loan-to-Value Ratio of 95%, while a construction loan for
a multi-family project may be written with a maximum Loan-to-Value Ratio of 80%.
Inspections are made prior to any disbursement under a construction loan. Union
Federal does not normally charge commitment fees for construction loans.
While providing Union Federal with a comparable, and in some cases higher,
yield than conventional mortgage loans, construction loans involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Union Federal may have to hire another contractor to complete the
project at a higher cost. Also, a project may be completed, but may not be
salable, resulting in the borrower defaulting and Union Federal's taking title
to the project.
Consumer Loans. Union Federal's consumer loans, consisting of passbook
loans and home improvement loans, aggregated approximately $223,000 at December
31, 1997, or .3% of its total loan portfolio. Union Federal's home improvement
loans generally have a fixed rate and a term of up to seven years. Union
Federal's passbook loans are made up to 90% of the deposit account balance and,
at December 31, 1997, accrued at a rate of 8.8%. This rate may change but will
always be at least 3% over the underlying passbook or certificate of deposit
rate. Interest on loans secured by deposits is paid semi-annually. At December
31, 1997, none of Union Federal's consumer loans were included in non-performing
assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. Union Federal historically has
originated its mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In
the event that Union Federal begins originating fixed-rate residential mortgage
loans for sale to the FHLMC in the secondary market, such loans will be
originated in accordance with the guidelines established by the FHLMC and will
be sold promptly after they are originated. Union Federal has no intention to
originate loans for sale to the FHLMC at this time, however.
Union Federal confines its loan origination activities primarily to
Montgomery County and the surrounding counties of Boone, Hendricks, Putnam,
Parke and Fountain. Union Federal has also originated several loans in Marion
County. At December 31, 1997, Union Federal also had six loans which it
originated, totaling approximately $671,000, secured by property located outside
of Indiana. Union Federal's loan originations are generated from referrals from
existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten and processed at Union Federal's
office.
Union Federal's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, Union Federal studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved or ratified by Union Federal's board
of directors.
Union Federal generally requires appraisals on all real property securing
its loans and requires an attorney's opinion and a valid lien on the mortgaged
real estate. Appraisals for all real property securing mortgage loans are
performed by independent appraisers who are state-licensed. Union Federal
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing its interest if the property is in a flood plain. Union
Federal also generally requires private mortgage insurance for all residential
mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow
accounts for insurance premiums and taxes for loans that require private
mortgage insurance.
Union Federal's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Union Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Union Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 1997, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $7.6 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $736,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 1997 was a $975,000 interest in a loan
secured by a condominium project and golf course located in Pittsboro, Indiana.
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
Year Ended December 31,
1997 1996 1995
(In thousands)
Gross loans receivable
at beginning of period............................. $73,630 $63,024 $61,880
Loans originated:
Real estate mortgage loans:
One-to-four family loans....................... 18,116 19,332 9,655
Multi-family loans............................. 654 1,532 ---
Commercial loans............................... 483 45 139
Construction loans............................... 5,284 2,220 2,135
Loans secured by deposits........................ 161 322 95
Home improvement loans........................... 85 36 50
------- ------- -------
Total originations........................... 24,783 23,487 12,074
Purchases (sales) of participation loans, net......... 500 1,350 742
Reductions:
Principal loan repayments........................ 17,541 14,211 11,672
Transfers from loans to real estate owned........ 237 20 ---
Total reductions............................. 17,778 14,231 11,672
------- ------- -------
Total gross loans receivable at
end of period...................................... $81,135 $73,630 $63,024
======= ======= =======
Union Federal's residential loan originations during the year ended
December 31, 1997 totaled $18.1 million, compared to $19.3 million and $9.7
million in the years ended December 31, 1996 and 1995, respectively.
Origination and Other Fees. Union Federal realizes income from late
charges, checking account service charges, and fees for other miscellaneous
services. Union Federal currently charges a commitment fee of $200 on all loans
and an additional $500 origination fee on construction loans. Union Federal also
may charge points on a mortgage loan as consideration for a lower interest rate,
although it does so infrequently. Late charges are generally assessed if payment
is not received within a specified number of days after it is due. The grace
period depends on the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 30 days past due, Union Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Union Federal sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Union Federal again contacts the borrower, this
time in person, to establish an acceptable repayment schedule. When a mortgage
loan is 90 days delinquent, Union Federal will have either entered into a
workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Union Federal reviews mortgage loans on a regular basis and places such
loans on a non-accrual status when they become 90 days delinquent. Generally,
when loans are placed on a non-accrual status, unpaid accrued interest is
written off, and further income is recognized only to the extent received.
Non-performing Assets. At December 31, 1997, $98,000, or .07% of Union
Federal's total assets, were non-performing (non-performing loans and
non-accruing loans) compared to $489,000, or .59%, of its total assets at
December 31, 1996. At December 31, 1997, residential loans accounted for $52,000
of Union Federal's non-performing assets. Union Federal had real estate owned
("REO") properties in the amount of $46,000 as of December 31, 1997.
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
At December 31,
1997 1996 1995
(Dollars in thousands)
Non-performing assets:
Non-performing loans.................... $52 $ 489 $ 156
Foreclosed real estate.................. 46 --- ---
Total non-performing assets........... $98 $489 $ 156
Non-performing loans to total loans........ .07% .67% .25%
Non-performing assets to total assets...... .07% .59% .21%
Interest income of $4,000, $10,000 and $14,000 for the years ended
December 31, 1997, 1996 and 1995, respectively, was recognized on the
non-performing loans summarized above. Interest income of $5,000, $33,000 and
$17,000 for the years ended December 31, 1997, 1996 and 1995, respectively,
would have been recognized under the original terms of these non-performing
loans.
At December 31, 1997, Union Federal held loans delinquent from 30 to 89
days totaling approximately $555,000. Other than in connection with these loans
and the other delinquent loans disclosed elsewhere in this section, management
was not aware of any other borrowers who were experiencing financial
difficulties.
Delinquent Loans. The following table sets forth certain information at
December 31, 1997, 1996 and 1995, relating to delinquencies in Union Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
Classified assets. Federal regulations and Union Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At December 31, 1997, the aggregate amount of Union Federal's classified
assets and its general and specific loss allowances were as follows:
At December 31, 1997
(In thousands)
Substandard assets..................................... $ 98
Doubtful assets........................................ ---
Loss assets............................................ ---
Total classified assets............................ $ 98
General loss allowances................................ $252
Specific loss allowances............................... ---
Total allowances................................... $252
Union Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations. All
of Union Federal's classified assets constitute non-performing assets.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Union Federal's review and evaluation of current
economic conditions (including those of its lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Union Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1997. However,
there can be no assurance that regulators, when reviewing Union Federal's loan
portfolio in the future, will not require increases in Union Federal's
allowances for loan losses or that changes in economic conditions will not
adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended December 31, 1997.
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
Balance at beginning of period................ $159 $111 $ 87
Gross charge-offs - Multi-family loans........ (72)
Provision for losses on loans................. 165 48 24
Balance end of period...................... $252 $159 $111
Allowance for loan losses as a percent of
total loans outstanding.................... .32% .22% .18%
Ratio of net charge-offs to average
loans outstanding.......................... .10% --- ---
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Union Federal's allowance for loan losses at the
dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict Union Federal's use of the allowance to absorb losses in other
categories.
At December 31,
1997 1996 1995
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period applicable to:
Real estate mortgage loans:
Residential............... $ 65 76.95% $60 77.46% $57 76.64%
Commercial................ 29 4.47 13 4.88 11 4.46
Multi-family.............. 82 12.57 75 14.83 39 15.26
Construction loans.......... 10 5.73 11 2.36 4 3.34
Loans secured by deposits... --- .17 --- .33 --- .13
Home improvement loans...... --- .11 --- .14 --- .17
Unallocated................. 66 --- --- --- --- ---
---- ------ ---- ------ ---- ------
Total....................... $252 100.00% $159 100.00% $111 100.00%
==== ====== ==== ====== ==== ======
Investments
Investments. Union Federal's investment portfolio consists of U.S. Treasury
and federal agency securities, FHLB stock and an investment in Pedcor
Investments - 1993 - XVI, L.P. See "--Service Corporation Subsidiary." At
December 31, 1997, approximately $7.7 million, or 5.8%, of Union Federal's total
assets consisted of such investments. Union Federal also had $44.8 million, or
33.9% of its assets, in interest-earning deposits as of that date.
The amount of interest-earning deposits held by Union Federal increased
significantly as a result of the Conversion. Because the subscription offering
for the Holding Company's Common Stock was oversubscribed, Union Federal
delivered refund checks during the last week of December, 1997 to those
subscribers whose purchase orders were not filled. Many of those checks had not
cleared as of December 31, 1997, thereby increasing the amount of funds held by
Union Federal in interest-bearing deposits. In addition, Union Federal invested
some of the proceeds that it received from the stock offering in
interest-bearing overnight accounts at the FHLB Indianapolis, which also
increased the amount of its interest-bearing deposits at December 31, 1997.
The following table sets forth the amortized cost and the market value of
Union Federal's investment portfolio at the dates indicated.
At December 31,
1997 1996 1995
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---- ----- ---- ----- ---- -----
(In thousands)
Investment securities held to maturity:
U.S. Treasury....................... $ 350 $ 350 $ 350 $ 348 $1,050 $1,051
Federal agencies.................... 3,346 3,351 2,645 2,611 2,950 2,944
Mortgage-backed securities.......... 2,124 2,302 2,752 2,933 3,423 3,668
Total investment securities
held to maturity................ 5,820 6,003 5,747 5,892 7,423 7,663
Investment in limited partnership...... 1,176 (1) 1,334 (1) 1,506 (1)
FHLB stock (2)......................... 708 708 580 580 563 563
Total investments...................... $7,704 $7,661 $9,492
====== ====== ======
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, FHLB stock and investment in limited
partnership) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1997.
Amount at December 31, 1997 which matures in
One Year One Year Five Years
or Less to Five Years to Ten Years
Amortized Average Amoritzed Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
U.S. Treasury securities........................$ 350 5.14% $ --- ---% $ --- ---%
Federal agency securities....................... 1,050 4.41 2,296 6.49 --- ---
$1,400 4.59% $2,296 6.49%
Mortgage-backed Securities
The following table sets forth the composition of Union Federal's
mortgage-backed securities portfolio at the dates indicated.
December 31,
1997 1996 1995
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
---- -------- ----- ---- -------- ----- ---- -------- -----
(In thousands)
Governmental National
Mortgage Corporation................. $1,223 57.6% $1,348 $1,391 50.5% $1,511 $1,707 49.9% $1,856
Federal Home Loan Mortgage Corporation.. 635 29.9 691 1,039 37.8 1,103 1,338 39.1 1,431
Federal National
Mortgage Corporation................. 243 11.4 240 294 10.7 291 341 9.9 343
Other................................... 23 1.1 23 28 1.0 28 37 1.1 38
Total mortgage- backed securities.... $2,124 100.0% $2,302 $2,752 100.0% $2,933 $3,423 100.0% $3,668
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1997.
Amount at December 31, 1997 which matures in
One Year One Year to After
or Less Five Years Five Years
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities...................... $--- ---% $283 8.40% $1,841 8.59%
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 1997, 1996
and 1995.
For the Year Ended
December 31,
1997 1996 1995
---------------------------------------------
(In thousands)
Beginning balance.......... $2,752 $3,423 $4,079
Repayments/sales........ (639) (676) (663)
Premium and discount
amortization, net....... 11 5 7
Ending balance............. $2,124 $2,752 $3,423
====== ====== ======
Sources of Funds
General. Deposits have traditionally been Union Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Union Federal derives funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings, income on earning assets and borrowings.
While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis may be used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Union Federal attracts deposits principally from within
Montgomery County through the offering of a broad selection of deposit
instruments, including fixed-rate passbook accounts, NOW accounts, variable rate
money market accounts, fixed-term certificates of deposit and savings accounts.
Union Federal does not actively solicit or advertise for deposits outside of
Montgomery County, and substantially all of its depositors are residents of that
county. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate.
Union Federal does not pay broker fees for any deposits it receives.
Union Federal establishes the interest rates paid, maturity terms, service
fees and withdrawal penalties on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and applicable regulations. Union Federal relies,
in part, on customer service and long-standing relationships with customers to
attract and retain its deposits. Union Federal also closely prices its deposits
to the rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Union Federal offers has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. Union Federal has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. Union Federal manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on Union
Federal's experience, management believes that its passbook, NOW and MMDAs are
relatively stable sources of deposits. However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
An analysis of Union Federal's deposit accounts by type, maturity, and
rate at December 31, 1997, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1997 Deposits Rate
- - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
Fixed rate, passbook accounts.............................. $ 10 $ 4,579 7.35% 4.00%
Variable rate, money market................................ 10 9,125 14.66 4.58
NOW accounts and other transaction accounts................ 500 2,373 3.81 2.94
------- ------ ----
Total withdrawable....................................... 16,077 25.82 4.17
Certificates (original terms):
3 months or less........................................... 1,000 101 .16 4.23
6 months................................................... 1,000 3,778 6.07 5.02
12 months.................................................. 1,000 5,477 8.80 5.57
18 months.................................................. 1,000 7,986 12.83 5.73
24 months.................................................. 1,000 5,174 8.31 5.95
30 months.................................................. 1,000 6,615 10.62 5.95
36 months ................................................. 1,000 3,854 6.19 6.09
48 months.................................................. 1,000 321 .52 5.97
60 months.................................................. 1,000 5,815 9.34 6.02
Jumbo certificates - $100,000 and over........................ 100,000 7,060 11.34 6.18
------- ------ ----
Total certificates............................................ 46,181 74.18 5.84
------- ------ ----
Total deposits................................................ $62,258 100.00% 5.41%
======= ====== ====
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
At December 31,
1997 1996 1995
------------------------------------------------
(In thousands)
4.00 to 4.99%....... $ 3,622 $ 4,760 $ 5,432
5.00 to 5.99%....... 19,245 19,400 11,330
6.00 to 6.99%....... 22,894 20,954 21,991
7.00 to 7.99%....... 420 1,941 6,516
------- ------- --------
Total............ $46,181 $47,055 $ 45,269
======= ======= ========
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1997. Matured certificates, which have not been renewed as of
December 31, 1997, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1997 Maturing In
One Year Two Three Greater Than
or Less Years Years Three Years
(In thousands)
4.00 to 4.99%....... $ 3,622
5.00 to 5.99%....... 12,548 $ 5,427 $ 953 $ 317
6.00 to 6.99%....... 10,806 7,817 2,733 1,538
7.00 to 7.99%....... 394 10 16 ---
------- ------- ------ ------
Total............ $27,370 $13,254 $3,702 $1,855
======= ======= ====== ======
The following table indicates the amount of Union Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1997.
At December 31, 1997
--------------------
Maturity Period (In thousands)
Three months or less................................... $2,471
Greater than three months through six months........... 583
Greater than six months through twelve months.......... 1,585
Over twelve months..................................... 2,421
------
Total............................................. $7,060
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Union Federal offers at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
DEPOSIT ACTIVITY
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1997 Deposits 1996 1996 Deposits 1995 1995 Deposits
(Dollars in thousands)
Withdrawable:
Fixed rate, passbook accounts...... $ 4,579 7.35% $ 712 $3,867 6.40% $356 $3,511 6.11%
Variable rate, money market........ 9,125 14.66 510 8,615 14.25 218 8,397 14.63
NOW accounts and other
transaction accounts............. 2,373 3.81 1,474 899 1.49 669 230 .40
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............... 16,077 25.82 2,696 13,381 22.14 1,243 12,138 21.14
Certificates (original terms):
3 months........................... 101 .16 (48) 149 .25 19 130 .23
6 months........................... 3,778 6.07 (489) 4,267 7.06 (265) 4,532 7.89
12 months.......................... 5,477 8.80 244 5,233 8.66 (131) 5,364 9.34
18 months.......................... 7,986 12.83 (204) 8,190 13.55 1,152 7,038 12.26
24 months.......................... 5,174 8.31 678 4,496 7.44 (94) 4,590 8.00
30 months.......................... 6,615 10.62 1,133 5,482 9.07 273 5,209 9.07
36 months ......................... 3,854 6.19 (1,344) 5,198 8.60 113 5,085 8.86
48 months.......................... 321 .52 (55) 376 .62 (29) 405 .71
60 months.......................... 5,815 9.34 (793) 6,608 10.93 79 6,529 11.37
Jumbo certificates.................... 7,060 11.34 4 7,056 11.68 669 6,387 11.13
------- ------ ------ ------- ------ ------ ------- ------
Total certificates.................... 46,181 74.18 (874) 47,055 77.86 1,786 45,269 78.86
------- ------ ------ ------- ------ ------ ------- ------
Total deposits........................ $62,258 100.00% $1,822 $60,436 100.00% $3,029 $57,407 100.00%
======= ====== ====== ======= ====== ====== ======= ======
Total deposits at December 31, 1997 were approximately $62.3 million,
compared to approximately $57.4 million at December 31, 1995. Union Federal's
deposit base depends somewhat upon the manufacturing sector of Montgomery
County's economy. Although Montgomery County's manufacturing sector is
relatively diversified and does not significantly depend upon any industry, a
loss of a material portion of the manufacturing workforce could adversely affect
Union Federal's ability to attract deposits due to the loss of personal income
attributable to the lost manufacturing jobs and the attendant loss in service
industry jobs.
In the unlikely event of Union Federal's liquidation after the Conversion,
all claims of creditors (including those of deposit account holders, to the
extent of their deposit balances) would be paid first followed by distribution
of the liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Union Federal.
Borrowings. Management focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 1997, Union Federal had borrowings in the amount of $2.4 million
from the FHLB of Indianapolis which bear fixed and variable interest rates and
are due at various dates through January 2, 2004. Union Federal is required to
maintain eligible loans in its portfolio of at least 170% of outstanding
advances as collateral for advances from the FHLB of Indianapolis. Union Federal
does not anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI,
L.P. ("Pedcor") $1.2 million under a note payable that is not included in the
following table. See "--Service Corporation Subsidiary."
The following table presents certain information relating to Union
Federal's borrowings at or for the years ended December 31, 1997, 1996 and 1995.
At or for the Year
Ended December 31,
1997 1996 1995
---------------------------------------
(Dollars in thousands)
FHLB Advances:
Outstanding at end of period.................... $2,373 $6,482 $1,065
Average balance outstanding for period.......... 5,748 3,566 1,857
Maximum amount outstanding at any
month-end during the period................... 6,873 6,482 3,065
Weighted average interest rate
during the period............................. 5.90% 5.36% 6.03%
Weighted average interest rate
at end of period.............................. 5.71% 5.52% 5.46%
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"),
whose sole asset is its investment in Pedcor, which is an Indiana limited
partnership that was established to organize, build, own, operate and lease a
48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II
Apartments (the "Project"). Union Federal owns the limited partner interest in
Pedcor. The general partner is Pedcor Investments LLC. The Project, operated as
a multi-family, low- and moderate-income housing project, is completed and is
performing as planned. Because UFS engages exclusively in activities that are
permissible for a national bank, OTS regulations permit Union Federal to include
its investment in UFS in its calculation of regulatory capital.
A low- and moderate-income housing project qualifies for certain federal
income tax credits if (i) it is a residential rental property, (ii) the units
are used on a nontransient basis, and (iii) 20% or more of the units in the
project are occupied by tenants whose incomes are 50% or less of the area median
gross income, adjusted for family size, or alternatively, at least 40% of the
units in the project are occupied by tenants whose incomes are 60% of the area
median gross income. Qualified low income housing projects generally must comply
with these and other rules for fifteen years, beginning with the first year the
project qualified for the tax credit, or some or all of the tax credit together
with interest may be recaptured. The tax credit is subject to the limitations on
the use of general business credit, but no basis reduction is required for any
portion of the tax credit claimed.
UFS committed to invest approximately $1.8 million in Pedcor at the
inception of the project in November, 1993. Through December 31, 1997, UFS had
invested cash of approximately $610,000 in Pedcor with six additional annual
capital contributions remaining to be paid in January of each year through
January, 2004, totaling $1,200,000. The additional contributions will be used
for operating and other expenses of the partnership. In addition, Union Federal
borrowed funds from the FHLB of Indianapolis to advance to Pedcor, and Pedcor
currently owes Union Federal $873,000 pursuant to a promissory note payable in
installments through January 1, 2004 and bearing interest at an annual rate of
9%.
UFS transfers the tax credits resulting from Pedcor's operation of the
Project to Union Federal. These tax credits will be available to Union Federal
through 2003. Although Union Federal has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it may not
use tax credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. Union Federal may carry forward unused tax
credits for a period of fifteen years and management believes that Union Federal
will be able to utilize available tax credits during the carry forward period.
Additionally, Pedcor has incurred operating losses in the early years of its
operations primarily due to its accelerated depreciation of assets. UFS has
accounted for its investment in Pedcor on the equity method and, accordingly,
has recorded its share of these losses as reductions to its investment in
Pedcor, which at December 31, 1997, was $1.2 million. As of December 31, 1997,
83% of the units in the Project were occupied, and all of the tenants met the
income test required for the tax credits. UFS does not engage in any activity or
hold any assets other than its investment in Pedcor.
The following summarizes UFS's equity in Pedcor's losses and tax credits
recognized in Union Federal's consolidated financial statements.
Year Ended December 31,
1997 1996 1995
---------------------------------
(In Thousands)
Investment in Pedcor:
Net of equity in losses.................. $1,176 $1,334 $1,506
Equity in losses, net
of income tax effect..................... $ (95) $ (104) $(150)
Tax credit.................................. 178 178 178
Increase in after-tax net income from
Pedcor investment........................ $ 83 $ 74 $ 28
Employees
As of December 31, 1997, Union Federal employed 12 persons on a full-time
basis. Union Federal does not have any part-time employees. None of Union
Federal's employees is represented by a collective bargaining group. Management
considers its employee relations to be good.
Employee benefits for Union Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, a
noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, dental and eye care
insurance, long-term disability insurance, life insurance, and participation in
the Financial Institutions Thrift Plan.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in the area. See
"Executive Compensation" and "Certain Relationships and Related Transactions of
Union Federal."
COMPETITION
Union Federal originates most of its loans to and accepts most of its
deposits from residents of Montgomery County, Indiana. Union Federal is subject
to competition from various financial institutions, including state and national
banks, state and federal savings associations, credit unions, and certain
nonbanking consumer lenders that provide similar services in Montgomery County
with significantly larger resources than are available to Union Federal. In
total, there are 13 other financial institutions located in Montgomery County,
including nine banks, two credit unions and two other savings associations.
Union Federal also competes with money market funds with respect to deposit
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Union Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Union Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Union
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Union Federal's books and records and, in
conjunction with the FDIC in certain situations, has examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and the federal deposit insurance funds. Union
Federal's semi- annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $14,135.
Union Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, Union Federal's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as Union Federal, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Union Federal.
Savings and Loan Holding Company Regulation
As the holding company for Union Federal, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, Union Federal is subject to certain restrictions in its
dealings with the Holding Company and with other companies affiliated with the
Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to operate the
Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At December 31, 1997, Union Federal's asset composition was in
excess of that required to qualify as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Union
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Union Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the Federal Reserve Board (the "FRB") as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS before a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
Union Federal is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, Union Federal is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At December 31, 1997, Union Federal's
investment in stock of the FHLB of Indianapolis was $708,000. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate-related collateral to 30% of a member's capital and limiting total
advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1997, dividends paid by
the FHLB of Indianapolis to Union Federal totaled approximately $54,000, for an
annual rate of 7.99%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations such as Union Federal
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. As of September
30, 1996, the reserves of the SAIF were below the level required by law,
primarily because a significant portion of the assessments paid into the SAIF
have been used to pay the cost of prior thrift failures, while the reserves of
the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law. See "-- Assessments"
below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Union Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Union Federal recognized this one-time
assessment as a non-recurring operating expense of $362,000 ($219,000 after tax)
during the three-month period ending September 30, 1996, and Union Federal paid
this assessment on November 27, 1996. The assessment was fully deductible for
both federal and state income tax purposes. Beginning January 1, 1997, Union
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
Under the tangible capital requirement, a savings association must maintain
tangible capital (core capital less all intangible assets except purchased
mortgage servicing rights which may be included after making the above-noted
adjustment in an amount up to 100% of tangible capital) of at least 1.5% of
total assets. Under the risk-based capital requirements, a minimum amount of
capital must be maintained by a savings association to account for the relative
risks inherent in the type and amount of assets held by the savings association.
The risk-based capital requirement requires a savings association to maintain
capital (defined generally for these purposes as core capital plus general
valuation allowances and permanent or maturing capital instruments such as
preferred stock and subordinated debt less assets required to be deducted) equal
to 8.0% of risk-weighted assets. Assets are ranked as to risk in one of four
categories (0-100%). A credit risk-free asset, such as cash, requires no
risk-based capital, while an asset with a significant credit risk, such as a
non-accrual loan, requires a risk factor of 100%. Moreover, a savings
association must deduct from capital, for purposes of meeting the core capital,
tangible capital and risk-based capital requirements, its entire investment in
and loans to a subsidiary engaged in activities not permissible for a national
bank (other than exclusively agency activities for its customers or mortgage
banking subsidiaries). At December 31, 1997, Union Federal was in compliance
with all capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation,
Union Federal would be exempt from its provisions because it has less than $300
million in assets and its risk-based capital ratio exceeds 12%. Union Federal
nevertheless measure its interest rate risk in conformity with the OTS
regulation and, as of December 31, 1997, Union Federal would have been required
to deduct $1.7 million from its total capital available to calculate its
risk-based capital requirement. See "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk."
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequatelycapitalized, under capitialized,
significantly undercapitalzied, and critically undercapitalized. At December 31,
1997, Union Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was not subject
to a regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
An OTS regulation imposes limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by an association to
repurchase or otherwise acquire its shares, payments to shareholders of another
institution in a cash-out merger and other distributions charged against
capital. The regulation establishes a three-tiered system of regulation, with
the greatest flexibility being afforded to well-capitalized associations. A
savings association which has total capital (immediately prior to and after
giving effect to the capital distribution) that is at least equal to its fully
phased-in capital requirements would be a Tier 1 institution ("Tier 1
Institution"). An association that has total capital at least equal to its
minimum capital requirements, but less than its fully phased-in capital
requirements, would be a Tier 2 institution ("Tier 2 Institution"). An
institution having total capital that is less than its minimum capital
requirements would be a Tier 3 institution ("Tier 3 Institution"). However, an
institution which otherwise qualifies as a Tier 1 Institution may be designated
by the OTS as a Tier 2 or Tier 3 Institution if the OTS determines that the
institution is "in need of more than normal supervision." Union Federal is
currently a Tier 1 Institution.
A Tier 1 Institution may, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year up to the greater of
(a) 100% of its net income to date during the calendar year plus the amount that
would reduce by one-half its "surplus capital ratio" at the beginning of the
calendar year (the smallest excess over its capital requirements), or (b) 75% of
its net income over the most recent four-quarter period. Any additional amount
of capital distributions would require prior regulatory approval. Accordingly,
at December 31, 1997, Union Federal had available approximately $13,004,000 for
distribution, without consideration of the restrictions on its capital
distributions as a result of the establishment of a liquidation account in
connection with the Conversion.
The OTS has proposed revisions to these regulations which would permit a
savings association, without filing a prior notice or application with the OTS,
to make a capital distribution to its shareholders in an amount that does not
exceed the association's undistributed net income for the prior two years plus
the amount of its undistributed income from the current year. This proposed rule
would require a savings association, such as Union Federal, that is a subsidiary
of a savings and loan holding company to file a notice with the OTS before
making a capital distribution up to the "maximum amount" described above. The
proposed rule would also require all savings associations, whether under a
holding company or not, to file an application with the OTS prior to making any
capital distribution where the association is not eligible for expedited
processing under the OTS "Expedited Processing Regulation," or where the
proposed distribution, together with any other distributions made in the same
year, would exceed the "maximum amount" described above.
Pursuant to the Plan of Conversion, Union Federal established a
liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders. Union Federal will not be permitted to pay dividends
to the Holding Company if its net worth would be reduced below the amount
required for the liquidation account. In addition, Union Federal must file
either a notice or an application with the OTS 30 days before declaring a
dividend to the Holding Company, as described above.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Union Federal's current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Union Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 1997, Union
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its lending limits. Management does not believe
that the loans-to-one-borrower limits will have a significant impact on Union
Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Union Federal maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 1997, Union Federal was in compliance
with its QTL requirement, with approximately 93.3% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
Union Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the 1934 Act. The Holding Company is therefore subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Union Federal's conversion to stock form, if the Holding Company
has fewer than 300 shareholders, it may deregister its shares under the 1934 Act
and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Union Federal's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Union Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Union Federal
will recapture approximately $55,000 over a six-year period that began with the
year ended December 31, 1996. In addition, the pre-1988 reserve, for which no
deferred taxes have been recorded, need not be recaptured into income unless (i)
the savings association no longer qualifies as a bank under the Code, or (ii)
the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Union Federal has been reporting its
income and expenses on the accrual method of accounting. Union Federal's federal
income tax returns have not been audited in recent years.
State Taxation
Union Federal is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Union Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to Union
Federal's office as of December 31, 1997:
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
(Dollars in thousands)
221 East Main Street Owned 1913 $62,258 $367 19,065
Crawfordsville, Indiana 47933
Union Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Union Federal's electronic data processing equipment was approximately $4,000
at December 31, 1997.
Union Federal has also contracted for the data processing and reporting
services of On-Line Financial Services, Inc. in Oak Brook, Illinois. The cost of
these data processing services is approximately $5,000 per month.
Union Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $1,100 per month.
Union Federal also receives income from leasing office space on the second
floor of its building and parking spaces located behind its building. Union
Federal's gross income from renting the office space was $28,000 for fiscal year
ended December 31, 1997 and $27,000 for the year ended December 31, 1996. Union
Federal's gross income from renting the parking spaces was approximately $9,000
for the fiscal year ended December 31, 1997 and approximately $9,000 for the
year ended December 31, 1996.
Item 3. Legal Proceedings.
Although Union Federal is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which it presently is a party or to which any of its property is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1997.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
Joseph E. Timmons Chairman of the Board, President
and Chief Executive Officer
Denise E. Swearingen Secretary and Treasurer
Ronald L. Keeling Vice President
Joseph E. Timmons (age 63) has served as President and Chief Executive
Officer of the Holding Company since 1997, of Union Federal since 1974 and of
UFS Service Corp. since its inception in 1994. He has been an employee of Union
Federal since 1954.
Denise E. Swearingen (age 39) has served as the Holding Company's
Secretary and Treasurer since 1997 and as Union Federal's Secretary and
Controller/Treasurer since 1995. She has worked for Union Federal since 1983.
Ronald L. Keeling (age 46) has served as the Holding Company's Vice
President since 1997, as Union Federal's Vice President and Assistant Secretary
since 1984 and as Senior Loan Officer since 1979. He has worked for Union
Federal since 1971.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
a) The Holding Company's common stock, without par value ("Common
Stock"), is listed on the NASDAQ National Market System under the symbol "UCBC"
The Holding Company shares began to trade on December 29, 1997. The high and low
bid prices for the period December 29, 1997 to March 20, 1998, were $13.75 and
$14.88, respectively. Since the Holding Company has no independent operation or
other subsidiaries to generate income, its ability to accumulate earnings for
the payment of cash dividends to shareholders directly depends upon the ability
of Union Federal to pay dividends to the Holding Company and upon the earnings
on its investment securities. On March 30, 1998, there were 425 shareholders of
record.
Under current federal income tax law, dividend distributions to the
Holding Company, to the extent that such dividends paid are from the current or
accumulated earnings and profits of Union Federal (as calculated for federal
income tax purposes), will be taxable as ordinary income to the Holding Company
and will not be deductible by Union Federal. Any dividend distributions in
excess of current or accumulated earnings and profits will be treated for
federal income tax purposes as a distribution from Union Federal's accumulated
bad debt reserves, which could result in increased federal income tax liability
for Union Federal. Moreover, Union Federal may not pay dividends to the Holding
Company if such dividends would result in the impairment of the liquidation
account established in connection with the Conversion.
Generally, there is no OTS regulatory restriction on the payment of
dividends by the Holding Company unless there is a determination by the Director
of the OTS that there is reasonable cause to believe that the payment of
dividends constitutes a serious risk to the financial safety, soundness or
stability of Union Federal. The FDIC also has authority under current law to
prohibit a financial institution from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice in light of
the financial condition of the financial institution. Indiana law, however,
would prohibit the Holding Company from paying a dividend if, after giving
effect to the payment of that dividend, the Holding Company would not be able to
pay its debts as they become due in the usual course of business or the Holding
Company's total assets would be less than the sum of its total liabilities plus
preferential rights of holders of preferred stock, if any.
The Holding Company paid no dividends to its shareholders in the fiscal
year ended December 31, 1997.
b) Use of Proceeds.
The Registration Statement filed by the Company pursuant to the
Securities Act of 1933 was declared effective by the Securities and Exchange
Commission on November 12, 1997 (SEC File No. 333-35799). The offering of the
Company's common stock (the "Common Stock") commenced on November 19, 1997 and
terminated at 12:00 noon, Crawfordsville, Indiana time, on December 10, 1997.
The Company sold each of the 3,041,750 shares of Common Stock registered
pursuant to the Registration Statement at $10 per share. The Union Community
Bancorp Employee Stock Ownership Plan and Trust (the "ESOP") purchased 184,000
shares of the Common Stock with the proceeds of a loan it received from the
Company. Trident Securities, Inc. acted as the Company's exclusive agent in
marketing the Common Stock on a best efforts basis.
The following table indicates the net proceeds from the offering of the
Common Stock by the Company:
Gross proceeds from sale of
3,041,750 shares at $10/share $30,417,500
Expenses:
Underwriting commissions $ 394,397
Underwriting expenses 31,903
Other expenses 353,608
Total expenses 779,908
Net proceeds $29,637,592
As described in the prospectus, the Company used 50% of the net
proceeds (or $14,818,796) to purchase all of the capital stock of the Bank. From
the proceeds that it retained, the Company made a loan to the ESOP for the
purchase of 184,000 shares of the Common Stock. After providing for this loan
and for the purchase of the Bank's capital stock, the Company retained
$12,978,796 of the net proceeds, as the following table indicates:
Net proceeds $29,637,592
Purchase of Bank capital stock $14,818,796
Loan to ESOP 1,840,000
Total 16,658,796
Net proceeds retained by Company $12,978,796
The Company deposited the remainder of the net proceeds that it
retained in an account with the Bank, thereby increasing the Bank's working
capital.
The Bank used $4,500,000 of its portion of the net proceeds to repay
short-term advances from the FHLB of Indianapolis. The Bank deposited the
remainder of the net proceeds it received in an overnight account with the FHLB
of Indianapolis to be used for daily operations.
The payments described above reflect reasonable estimates of amounts
paid by the Company and the Bank. Neither the Company nor the Bank paid any of
the expenses indicated above, either directly or indirectly, to its directors,
officers or their associates, or to any person owning 10% or more of any class
of its securities, or to any affiliate. The Company's and the Bank's use of the
proceeds from the offering of the Common Stock described above does not
represent a material change in the use of proceeds described in the prospectus.
Item 6. Selected Financial Data.
The following selected consolidated financial data of Union Federal and
its subsidiary is qualified in its entirety by, and should be read in
conjunction with, the consolidated financial statements, including notes
thereto, included elsewhere in this Form 10-K.
AT DECEMBER 31,
1997 1996 1995 1994 1993
(In thousands)
Summary of Selected Consolidated
Financial Condition Data:
Total assets..................................... $132,040 $82,789 $73,631 $72,540 $66,833
Loans, net....................................... 78,436 72,697 61,279 60,059 55,256
Cash and interest-bearing
deposits in other banks (1)................. 44,781 1,465 1,993 1,329 963
Investment securities held to maturity........... 5,820 5,747 7,423 7,985 9,355
Deposits......................................... 62,258 60,436 57,407 54,886 55,076
Stock subscriptions refundable................... 22,687 --- --- --- ---
Borrowings....................................... 3,573 7,880 2,642 4,943 ---
Shareholders' equity............................. 42,906 13,910 13,024 12,033 10,878
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993
(In thousands)
Summary of Operating Data:
Total interest and dividend income............... $6,801 $6,112 $5,729 $5,249 $5,334
Total interest expense........................... 3,836 3,424 3,148 2,507 2,594
Net interest income........................... 2,965 2,688 2,581 2,742 2,740
Provision for loan losses........................ 165 48 24 24 15
Net interest income after
provision for loan losses................... 2,800 2,640 2,557 2,718 2,725
Other income (losses):
Equity in losses of limited partnership....... (158) (173) (249) (54) ---
Investment securities gains................... --- --- --- --- ---
Other......................................... 62 57 32 14 13
Total other losses.......................... (96) (116) (217) (40) 13
Other expenses:
Salaries and employee benefits................ 480 461 481 489 434
Net occupancy expenses........................ 39 39 66 44 57
Equipment expenses............................ 22 20 20 17 17
Deposit insurance expense..................... 31 495 127 126 94
Other......................................... 389 287 328 208 234
Total other expenses........................ 961 1,302 1,022 884 836
Income before income taxes and cumulative effect
of change in accounting principle............. 1,743 1,222 1,318 1,794 1,902
Income taxes..................................... 545 336 326 639 755
Cumulative effective of change
in accounting principle....................... --- --- --- --- 12
Net income.................................... $1,198 $ 886 $ 992 $1,155 $1,159
Supplemental Data:
Interest rate spread during period............... 2.55% 2.54% 2.69% 3.25% 3.45%
Net yield on interest-earning assets (2) ........ 3.50 3.53 3.67 4.01 4.23
Return on assets (3)............................. 1.38 1.13 1.36 1.63 1.77
Return on equity (4)............................. 8.10 6.54 7.84 10.02 11.19
Other expenses to average assets (5)............. 1.11 1.66 1.41 1.25 1.28
Equity to assets (6)............................. 32.49 16.80 17.69 16.59 16.28
Average interest-earning assets to average
interest-bearing liabilities.................. 120.98 121.94 121.83 120.63 119.42
Non-performing assets to total assets (6)........ .07 .59 .21 .20 .31
Allowance for loan losses to total loans
outstanding (6)............................... .32 .22 .18 .15 .11
Allowance for loan losses to
non-performing loans (6)...................... 484.62 32.52 71.15 60.84 30.88
Net charge-offs to average
total loans outstanding ...................... .10 --- --- --- ---
Number of full service offices (6)............... 1 1 1 1 1
- - --------------
(1) Includes certificates of deposit in other financial institutions.
(2) Net interest income divided by average interest-earning assets.
(3) Net income divided by average total assets.
(4) Net income divided by average total equity.
(5) Other expenses divided by average total assets.
(6) At end of period.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
General
The Holding Company was incorporated for the purpose of owning all of
the outstanding shares of Union Federal. The following discussion and analysis
of the Holding Company's financial condition as of December 31, 1997 and Union
Federal's results of operations should be read in conjunction with and with
reference to the consolidated financial statements and the notes thereto
included herein.
In addition to the historical information contained herein, the
following discussion contains forward-looking statements that involve risks and
uncertainties. The Holding Company's operations and actual results could differ
significantly from those discussed in the forward-looking statements. Some of
the factors that could cause or contribute to such differences are discussed
herein but also include changes in the economy and interest rates in the nation
and the Holding Company's general market area. The forward-looking statements
contained herein include, but are not limited to, those with respect to the
following matters:
1. Management's determination of the amount of loan loss allowance;
2. The effect of changes in interest rates;
3. Changes in deposit insurance premiums; and
4. Proposed legislation that would eliminate the federal thrift charter
and the separate federal regulation of thrifts.
Average Balances and Interest Rates and Yields
The following tables present for the years ended December 31, 1997,
1996 and 1995, the balances, interest rates and average monthly balances of each
category of Union Federal's interest-earning assets and interest-bearing
liabilities, and the interest earned or paid on such amounts. Management
believes that the use of month-end average balances instead of daily average
balances has not caused any material difference in the information presented.
Year Ended December 31,
1997 1996 1995
Average Average Average Average Average Average
Balance Interest (1)Yield/Cost BalanceInterest (1) Yield/Cost BalanceInterest (1)Yield/Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Interest-earning deposits............ $3,821 $246 6.44% $ 959 $ 67 6.99% $ 1,089 $ 71 6.52%
Mortgage-backed securities
held to maturity................... 2,421 214 8.84 3,061 263 8.59 3,777 321 8.50
Other investment securities
held to maturity................... 3,487 197 5.65 3,169 175 5.52 3,918 227 5.79
Loans receivable (2)................. 74,382 6,090 8.19 68,346 5,562 8.14 60,950 5,066 8.31
FHLB stock........................... 676 54 7.99 576 45 7.81 562 44 7.83
Total interest-earning assets...... 84,787 6,801 8.02 76,111 6,112 8.03 70,296 5,729 8.15
Non-interest earning assets, net of
allowance for loan losses............ 2,039 2,152 2,391
Total assets.......................$86,826 $78,263 $72,687
Liabilities and retained earnings:
Interest-bearing liabilities:
Savings deposits..................... $3,845 159 4.14 $ 3,754 148 3.94 $ 3,650 146 4.00
Interest-bearing demand.............. 10,350 444 4.29 9,061 369 4.07 8,594 385 4.48
Certificates of deposit.............. 47,403 2,764 5.83 46,035 2,716 5.90 43,597 2,505 5.75
Stock subscriptions refundable....... 2,737 130 4.75 --- --- --- --- --- ---
FHLB advances........................ 5,748 339 5.90 3,566 191 5.36 1,857 112 6.03
Total interest-bearing liabilities. 70,083 3,836 5.47 62,416 3,424 5.49 57,698 3,148 5.46
Other liabilities....................... 1,960 2,303 2,333
Total liabilities.................. 72,043 64,719 60,031
Shareholders' equity.................... 14,783 13,544 12,656
Total liabilities and
stockholders' equity...........$86,826 $78,263 $ 72,687
Net interest-earning assets.............$14,704 $13,695 $ 12,598
Net interest income..................... $2,965 $2,688 $2,581
Interest rate spread (3)................ 2.55% 2.54% 2.69%
Net yield on weighted average
interest-earning assets (4).......... 3.50% 3.53% 3.67%
Average interest-earning assets to
average interest-bearing liabilities. 120.98% 121.94% 121.83%
(1) Interest income on loans receivable includes loan fee income of $97,000,
$97,000 and $101,000 for the years ended December 31, 1997, 1996 and 1995.
(2) Total loans less loans in process.
(3) Interest rate spread is calculated by subtracting weighted average
interest rate cost from weighted average interest rate yield for the
period indicated.
(4) The net yield on weighted average interest-earning assets is calculated by
dividing net interest income by weighted average interest-earning assets
for the period indicated.
Interest Rate Spread
Union Federal's results of operations have been determined primarily by
net interest income and, to a lesser extent, fee income, miscellaneous income
and general and administrative expenses. Union Federal's net interest income is
determined by the interest rate spread between the yields Union Federal earns on
interest-earning assets and the rates it pays on interest-bearing liabilities,
and by the relative amounts of interest-earning assets and interest-bearing
liabilities.
The following table sets forth the weighted average effective interest
rate that Union Federal earned on its loan and investment portfolios, the
weighted average effective cost of its deposits and advances, the interest rate
spread, and net yield on weighted average interest-earning assets for the
periods and as of the dates shown. Average balances are based on average
month-end balances. Management believes that the use of month-end average
balances instead of daily average balances has not caused any material
difference in the information presented.
At December 31, Year Ended December 31,
1997 1997 1996 1995
--------------------------------------------------------
Weighted average interest rate earned on:
Interest-earning deposits.............................. 5.13% 6.44% 6.99% 6.52%
Mortgage-backed securities held to maturity............ 8.57 8.84 8.59 8.50
Other investment securities held to maturity........... 5.77 5.65 5.52 5.79
Loans receivable....................................... 8.11 8.19 8.14 8.31
FHLB stock............................................. 7.99 7.99 7.81 7.83
Total interest-earning assets........................ 7.02 8.02 8.03 8.15
Weighted average interest rate cost of:
Savings deposits....................................... 4.00 4.14 3.94 4.00
Interest-bearing demand................................ 4.32 4.29 4.07 4.48
Certificates of deposit................................ 5.87 5.83 5.90 5.75
Stock subscriptions refundable......................... 4.00 4.75 --- ---
FHLB advances.......................................... 5.71 5.90 5.36 6.03
Total interest-bearing liabilities................... 5.09 5.47 5.49 5.46
Interest rate spread (1).................................. 1.93 2.55 2.54 2.69
Net yield on weighted average
interest-earning assets (2)............................ --- 3.50 3.53 3.67
(1) Interest rate spread is calculated by subtracting combined weighted
average interest rate cost from combined weighted average interest rate
earned for the period indicated. Interest rate spread figures must be
considered in light of the relationship between the amounts of
interest-earning assets and interest-bearing liabilities.
(2) The net yield on weighted average interest-earning assets is calculated
by dividing net interest income by weighted average interest-earning
assets for the period indicated.
The following table describes the extent to which changes in interest
rates and changes in volume of interest-related assets and liabilities have
affected Union Federal's interest income and expense during the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to (1) changes in
rate (changes in rate multiplied by old volume) and (2) changes in volume
(changes in volume multiplied by old rate). Changes attributable to both rate
and volume which cannot be segregated have been allocated proportionally to the
change due to volume and the change due to rate.
Increase (Decrease) in Net Interest Income
Total
Due to Due to Net
Rate Volume Change
(In thousands)
Year ended December 31, 1997 compared
to year ended December 31, 1996
Interest-earning assets:
Interest-earning deposits.................................. $ (6) $ 185 $ 179
Mortgage-backed securities held to maturity................ 7 (56) (49)
Other investment securities held to maturity............... 4 18 22
Loans receivable........................................... 34 494 528
FHLB stock................................................. 1 8 9
Total.................................................... 40 649 689
Interest-bearing liabilities:
Savings deposits........................................... 7 4 11
Interest-bearing demand.................................... 20 55 75
Certificates of deposit.................................... (32) 80 48
Stock subscriptions refundable............................. --- 130 130
FHLB advances.............................................. 21 127 148
Total.................................................... 16 396 412
Net change in net interest income............................ $ 24 $ 253 $ 277
Year ended December 31, 1996 compared
to year ended December 31, 1995
Interest-earning assets:
Interest-earning deposits.................................. $ 5 $ (9) $ (4)
Mortgage-backed securities held to maturity................ 3 (61) (58)
Other investment securities held to maturity............... (10) (42) (52)
Loans receivable........................................... (108) 604 496
FHLB stock................................................. --- 1 1
Total.................................................... (110) 493 383
Interest-bearing liabilities:
Savings deposits........................................... (2) 4 2
Interest-bearing demand.................................... (36) 20 (16)
Certificates of deposit.................................... 68 143 211
FHLB advances.............................................. (14) 93 79
Total.................................................... 16 260 276
Net change in net interest income............................ $ (126) $ 233 $ 107
Year ended December 31, 1995 compared
to year ended December 31, 1994
Interest-earning assets:
Interest-earning deposits.................................. $ 26 $ (16) $ 10
Mortgage-backed securities held to maturity................ (3) (66) (69)
Other investment securities held to maturity............... (13) 7 (6)
Loans receivable........................................... 304 229 533
FHLB stock................................................. 11 1 12
Total.................................................... 325 155 480
Interest-bearing liabilities:
Savings deposits........................................... 23 (36) (13)
Interest-bearing demand.................................... 81 (60) 21
Certificates of deposit.................................... 436 144 580
FHLB advances.............................................. 20 33 53
Total.................................................... 560 81 641
Net change in net interest income............................ $(235) $ 74 $ (161)
Financial Condition at December 31, 1997 Compared to Financial Condition at
December 31, 1996
Total assets increased $49.3 million, or 59.5% at December 31, 1997,
compared to December 31, 1996. The largest increases were primarily in cash and
cash equivalents which increased $43.3 million, and net loans which increased
$5.7 million. The increase in cash and cash equivalents was principally in
short-term interest-bearing deposits due to net proceeds from the conversion and
stock subscriptions refundable. Net proceeds of the Holding Company's stock
issuance, after costs and excluding the shares issued for the ESOP, were $27.8
million and stock subscriptions refundable were $22.7 million. The increase in
net loans was principally in real estate mortgage loans, and a result of
increased customer demand.
Average assets increased $8.5 million from $78.3 million for the period
ended December 31, 1996, to $86.8 million for the period ended December 31,
1997, an increase of 10.9%. Average interest-earning assets represented 97.3% of
average assets for the period ended December 31, 1996 compared to 97.7% for the
period ended December 31, 1997. Although the average of most interest-earning
assets increased during 1997, average loans experienced the largest increase
amounting to $6.0 million, or 8.8%, compared to 1996. Average interest-earning
assets as a percentage of average interest-bearing liabilities were 121.9% for
1996 and 121.0% for 1997.
Average balances of mortgage-backed securities held to maturity
decreased $640,000, or 20.9%, from December 31, 1996 to December 31, 1997 as a
result of principal repayments, while other investment securities held to
maturity increased $318,000, or 10.0%, from $3.2 million for the period ended
December 31, 1996 to $3.5 million for the period ended December 31, 1997 due to
purchases. Although no mortgage-backed securities have been purchased for
several years, mortgage-backed securities have been purchased on occasion and
are considered for purchase on an ongoing basis because such instruments offer
liquidity and lower credit risk than other types of investments. The primary
risk associated with these instruments is that in a declining interest rate
environment the prepayment level of the loans underlying these securities will
accelerate, which reduces the effective yield and exposes the association to
interest rate risk on the prepaid amounts. In an increasing rate environment,
the primary risk associated with these securities is that the fixed-rate portion
of such securities will not adjust to market rates which reduces our spread. See
"Business -- Investments -- Mortgage-Backed Securities."
Loans and Allowance for Loan Losses. Average loans increased $6.0
million, or 8.8%, from the period ended December 31, 1996, to December 31, 1997.
The growth in loans was in part funded by increased average deposits of $2.7
million and increased average FHLB advances of $2.2 million. Average loans were
$68.3 million for the 1996 period and $74.4 million for the 1997 period. The
average rates on loans were 8.14% for 1996 and 8.19% for 1997, an increase of 5
basis points. The allowance for loan losses as a percentage of total loans
increased from .22% to .32% due to an increase in the allowance for loan losses
from $159,000 at December 31, 1996 to $252,000 at December 31, 1997. The
increase in our allowance for loan losses was a result of a $165,000 provision
for loan losses for the year ended December 31, 1997 offset by a $72,000
charge-off. The ratio of the allowance for loan losses to non-performing loans
was 32.5% at December 31, 1996 compared to 484.6% at December 31, 1997.
Nonperforming loans decreased from $489,000 at December 31, 1996 to $52,000 at
December 31, 1997. Nonperforming loans of $203,000 were transferred to
foreclosed real estate during the period ended December 31, 1997 and a
charge-off of $72,000 relating to a multi-family loan taken at the time of the
transfer. In response to this loss, the risk factor used to calculate the
necessary allowance for loan losses related to loans secured by multi-family and
commercial real estate was increased. Union Federal has experienced minimal
residential loan losses in the past with no losses recorded in over five years
and does not expect this experience in this area to change in future years;
therefore, the risk factor used on the residential loan portfolio has not been
adjusted.
Premises and Equipment. Premises and equipment decreased slightly from
December 31, 1996 to December 31, 1997 due to depreciation for the period
exceeding purchases. Union Federal has no branches, and it leases to other
businesses a portion of its main office and parking lot. See "Business --
Properties."
Deposits. Deposits increased $1.8 million to $62.3 million during 1997,
an increase of 3.0%. Increased deposits were utilized to fund loan growth.
Demand and savings deposits increased $2.7 million, or 20.1%, between December
31, 1996 and December 31, 1997. Certificates of deposits decreased $874,000, or
1.9%, during this period. Average total deposits increased $2.7 million, or
4.6%, from $58.9 million for the year ended December 31, 1996 compared to $61.6
million for the year ended December 31, 1997.
Borrowed Funds. Borrowed funds decreased $4.3 million, or 54.7%, from
December 31, 1996 to December 31, 1997. The decline in total borrowed funds was
comprised of a decrease in FHLB advances of $4.1 million, 63.4%, and a decrease
in the note payable to Pedcor Investments - 1993-XVI, LP ("Pedcor"), a limited
partnership organized to build, own and operate a 48-unit apartment complex, of
$198,000, or 14.0%. The note to Pedcor was used to fund an investment in the
Pedcor low-income housing income tax credit limited partnership and bears no
interest so long as there exists no event of default. Average FHLB advances
increased to $5.7 million for 1997 compared to $3.6 million for 1996, an
increase of $2.1 million, or 58.3%.
Shareholders' Equity. Shareholders' equity increased $29.0 million from
$13.9 million at December 31, 1996 to $42.9 million at December 31, 1997. The
increase was due to net proceeds of the Holding Company's stock issuance, after
costs and excluding the shares issued for the ESOP, of $27.8 million and net
income for 1997 of $1.2 million.
Financial Condition at December 31, 1996 Compared to Financial Condition at
December 31, 1995
Total assets increased $9.2 million, or 12.4%, at December 31, 1996,
compared to December 31, 1995. The largest increase was in net loans which
increased $11.4 million, or 18.6%. This increase was funded in part by an
increase in deposits of $3.0 million, or 5.3%, and an increase in FHLB advances
of $5.4 million, or 508.6%. The increase in net loans of $11.4 million was
primarily in one-to-four family loans and resulted from a strong local demand
for residential financing.
Average assets increased from $72.7 million for the period ended
December 31, 1995, to $78.3 million for the period ended December 31, 1996, an
increase of $5.6 million, or 7.7%. Average interest-earning assets represented
97.3% of average assets for the period ended in 1996 compared to 96.7% for the
period ended in 1995. The increase in average earning assets was primarily in
the loan portfolio. Average interest-bearing assets as a percentage of average
interest-bearing liabilities was 121.9% and 121.8% for 1996 and 1995,
respectively.
Average balances of mortgage-backed securities held to maturity
decreased $716,000, or 19.0%, for the year ended December 31, 1996 as a result
of principal repayments, while other investment securities held to maturity
decreased $749,000, or 19.1%, from $3.9 million for the period ended December
31, 1995 to $3.2 million for the period ended December 31, 1996 due to
maturities.
Loans and Allowance for Loan Losses. The increase in Union Federal's
net loans of $11.4 million, or 18.6% from December 31, 1995 to December 31, 1996
was primarily in real estate mortgage loans. Average loans increased from $61.0
million to $68.3 million while the average rates earned on such loans decreased
17 basis points to 8.14%. The allowance for loan losses as a percentage of total
loans increased to 0.22% from 0.18% as a result of an increase in loans and no
charge-offs. The allowance for loan losses as a percentage of non-performing
loans was 32.5% and 71.15% at December 31, 1996 and 1995 respectively.
Non-performing loans were $489,000 and $156,000 at each date, respectively.
Included in non-performing loans at December 31, 1996 was an impaired loan of
$112,000. A provision for loss of $37,000 had been recorded on this loan.
Premises and Equipment. Premises and equipment decreased slightly from
December 31, 1995 to December 31, 1996 due to depreciation for the period
exceeding purchases.
Deposits. Deposits increased approximately $3.0 million, or 5.3%,
during the period ended December 31, 1996. Interest-bearing demand and savings
deposits increased $1.2 million, or 10.2%, while certificates of deposit
increased $1.8 million, or 3.9%. Average deposits increased $3.0 million, or
5.4%, during the period ended December 31, 1996. Average interest-bearing demand
and savings deposits increased $571,000, or 4.7%, while certificates of deposits
increased $2.4 million, or 5.6%. Although Union Federal did not offer any
special deposit programs during 1996, it increased its deposits by offering
rates that were competitive with the rates offered by other institutions in the
area. The rates paid on interest-bearing demand and saving deposits decreased 41
and 6 basis points, respectively, while the rate paid on certificates of
deposits increased 15 basis points.
Borrowed Funds. The growth in loans was partially funded by the
increase in FHLB advances of $5.4 million, or 508.6% from December 31, 1995 to
December 31, 1996. Union Federal elected to utilize FHLB advances available at
rates comparable to the cost of acquiring local deposits to partially fund the
increase in loans. The majority of these FHLB advances matured in less than one
year. Average FHLB advances increased from $1.9 million at December 31, 1995 to
$3.6 million at December 31, 1996.
Retained Earnings. Retained earnings increased $886,000, or 6.8%, from
$13.0 million at December 31, 1995 to $13.9 million at December 31, 1996. The
increase was due to net income during the period.
Comparison of Operating Results For Years Ended December 31, 1997 and 1996
General. Net income increased $312,000, or 35.2%, from $886,000 for the
year ended December 31, 1996 to $1,198,000 for the year ended December 31, 1997.
The increase is primarily due to an increase in net interest income and a
decrease in deposit insurance expense. The return on average assets was 1.38%
and 1.13 % for the years ended December 31, 1997 and 1996, respectively.
Interest Income. Our total interest income was $6.8 million for 1997
compared to $6.1 million for 1996. The increase in interest income was due
primarily to an increase in volume. Average earning assets increased $8.7
million, or 11.4%, from $76.1 million for 1996 compared to $84.8 for 1997. The
average yield on interest-earning assets decreased slightly from 8.03% for the
year ended December 31, 1996 to 8.02% for the comparable period in 1997.
Interest Expense. Interest expense increased $412,000, or 12.0%, for
the year ended December 31, 1997 compared to the year ended December 31,1996.
Average interest-bearing liabilities increased $7.7 million, or 12.3%, from
$62.4 million for the 1996 period to $70.1 million during the 1997 period. The
average balance of each deposit type increased from the 1996 period to the 1997
period with a $2.7 million, or 4.6%, increase in total average deposits. Average
FHLB advances increased $2.1 million, or 58.3%, from $3.6 million for the 1996
period to $5.7 million during the 1997 period.
Net Interest Income. Net interest income increased $277,000, or 10.3%,
for the year ended December 31, 1997 compared to the year ended December 31,
1996. The increase was primarily due to the $253,000 increase due to volume
increases. The interest spread was 2.55% for the year ended December 31, 1997
compared to 2.54% for the comparable 1996 period.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1997 was $165,000 compared to $48,000 for the same period in
1996. The provision for loan losses increased due to the increase in outstanding
loans and the losses recorded in 1997 associated with non-performing loans
secured by multi-family real estate. In response to the loss experienced in
1997, the risk factor used on multi-family and commercial real estate loans was
increased.
Other Losses. Other losses decreased $20,000, or 17.2%, for the year
ended December 31, 1997 compared to the 1996 period primarily due to decreased
losses of $15,000 from our investment in a low-income housing income tax credit
limited partnership. The investment in the limited partnership represents a 99%
equity in Pedcor. In addition to recording the equity in the losses of Pedcor, a
benefit of low income housing income tax credits in the amount of $178,000 for
both 1997 and 1996 was recorded.
Salaries and Employee Benefits. Salaries and employee benefits were
$480,000 for the year ended December 31, 1997 compared to $461,000 for the 1996
period, and increase of $19,000, or 4.1%. This increase resulted from the
addition of 3 full-time employees to our staff and normal increases in employee
compensation and related payroll taxes.
Net Occupancy and Equipment Expenses. Occupancy expenses and equipment
expenses increased $2,000, or 3.4%, during 1997 compared to 1996.
Deposit Insurance Expense. Deposit insurance expense decreased
$464,000, or 93.7%, from $495,000 for the year ended December 31, 1996 to
$31,000 for the same period in 1997. This decrease was due to the one time
Savings Association Insurance Fund ("SAIF") special assessment of approximately
$362,000 expensed in the fourth quarter of 1996. The recapitalization of SAIF
resulted in a decline in the assessment for 1997. Prior to the recapitalization
of SAIF, an assessment of $.23 per $100 of deposits was paid. Subsequent to the
recapitalization, the assessment was reduced to $.0644 per $100 of deposits.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, professional fees,
supervisory examination fees, supplies, and postage increased $102,000, or 35.5%
for 1997 compared to 1996. The increase was primarily due to an increase in
director fees of $26,000 and a $30,000 charitable contribution. The remaining
increase resulted from nominal increases in a variety of expense categories.
Income Tax Expense. Income tax expense increased $209,000, or 62.2%,
during 1997 compared to 1996. The increase was directly related to the increase
in taxable income for the period. The effective tax rate was 31.3% and 27.5% for
the respective 1997 and 1996 periods.
Comparison of Operating Results For Years Ended December 31, 1996 and 1995
General. Net income for the year ended December 31, 1996 decreased
$106,000, or 10.7%, to $886,000 compared to $992,000 for 1995. Return on average
assets for the years ended December 31, 1996, and 1995 was 1.13% and 1.36%,
respectively. Return on average equity was 6.54% for 1996 and 7.84% for 1995.
Interest Income. Total interest income was $6.1 million for 1996
compared to $5.7 million for 1995. Average earning assets increased $5.8
million, or 8.3%, from $70.3 million to $76.1 million from 1995 to 1996. Volume
increases, primarily from loans, accounted for $493,000 of the increase while
lower interest rates offset the increase by $110,000.
Interest Expense. Interest expense increased $276,000, or 8.8%, during
1996 compared to 1995. The increase in interest expense was primarily the result
of an increase in average interest-bearing liabilities of $4.7 million, or 8.1%,
from $57.7 million to $62.4 million. The growth in average interest-bearing
liabilities was primarily attributable to the growth in certificates of deposit
and FHLB advances. The average balance of certificates of deposit increased $2.4
million, or 5.6%, while average FHLB advances increased $1.7 million, or 92.0%.
The deposit growth and increased borrowings from the FHLB were used to fund loan
growth.
Net Interest Income. Net interest income increased $107,000, or 4.1%,
from $2.6 million for 1995 to $2.7 million for 1996. Interest rate spread was
2.54% and 2.69% for 1996 and 1995, respectively.
Provision for Loan Losses. The provision for loan losses for the year
ended December 31, 1996 was $48,000. The 1996 provision and the related increase
in the allowance for loan losses was considered adequate, based on growth, size,
condition and components of the loan portfolio. The provision of $24,000 for
1995 reflected a more moderate growth of the loan portfolio.
Other Losses. Other losses decreased $101,000, or 46.5%, from 1995 to
1996 primarily due to a decrease in losses of $76,000 from the investment in a
limited partnership.
Salaries and Employee Benefits. Salaries and employee benefits were
$461,000 for 1996 compared to $481,000 for 1995, a decrease of $20,000, or 4.2%.
This decrease was primarily a result of a $5,000 decrease in retirement plan
contributions and a $13,000 increase loan origination costs which are deferred
over the lives of the related loans.
Net Occupancy and Equipment Expenses. Occupancy expenses decreased
$27,000, or 40.9%, and equipment expenses remained constant during 1996 as
compared to 1995. The decrease in occupancy expenses was primarily attributable
to an additional $32,000 of repairs and maintenance expenses in 1995 as compared
to 1996.
Deposit Insurance Expense. Deposit insurance expense increased
$368,000, or 289.8%, from $127,000 for 1995 to $495,000 for 1996 due to the one
time SAIF special assessment of approximately $362,000.
Other Expense. Other expenses, consisting primarily of expenses related
to service center fees, advertising, directors' fees, professional fees,
supervisory examination fees, supplies, and postage decreased $41,000, or 12.5%,
from 1995 to 1996. The decrease resulted from decreases in a variety of expense
categories.
Income Tax Expense. Income tax expense increased $10,000, or 3.1%, from
1995 to 1996. The effective tax rate were 27.5% and 24.7% for 1996 and 1995,
respectively.
Liquidity and Capital Resources
The following is a summary of Union Federal's cash flows, which are of
three major types. Cash flows from operating activities consist primarily of net
income generated by cash. Investing activities generate cash flows through the
origination and principal collection on loans as well as purchases and sales of
securities. Investing activities will generally result in negative cash flows
when Union Federal experiences loan growth. Cash flows from financing activities
include savings deposits, withdrawals and maturities and changes in borrowings.
The following table summarizes cash flows for each year in the three-year period
ended December 31, 1997.
Year Ended December 31,
1997 1996 1995
(In thousands)
Operating activities................................. $1,367 $ 1,088 $1,160
Investing activities:
Investment securities
Proceeds from maturities and
paydowns of mortgage-backed
securities held to maturity..................... 639 676 663
Purchases of other investment
securities held to maturity................... (1,200) (994) (100)
Proceeds from maturities of
investment securities held to maturity........ 500 2,000 ---
Purchase of loans............................... (500) (1,350) (742)
Other net change in loans....................... (5,517) (10,116) (502)
Purchase of FHLB of
Indianapolis Stock............................ (128) (18) (1)
Proceeds on sale of foreclosed real estate........... 73 --- ---
Purchases of premises and equipment............. (23) (3) (38)
Net cash used by investing activities........... (6,156) (9,805) (720)
Financing activities:
Net change in
Interest-bearing demand and savings deposits...... 2,696 1,243 (1,375)
Certificates of deposits.......................... (874) 1,786 3,896
Stock subscription escrow accounts................ 22,687 --- ---
Proceeds from borrowings.......................... 1,500 10,500 2,500
Repayment of borrowings........................... (5,807) (5,261) (4,801)
Net change in advances by borrowers
for taxes and insurance....................... 20 (79) 4
Proceeds from sale of common stock,
net of costs.................................... 27,883 --- ---
Net cash provided by financing activities....... 48,105 8,189 224
Net increase(decrease) in cash
and cash equivalents.............................. $43,316 $ (528) $ 664
Federal law requires that savings associations maintain an average daily
balance of liquid assets in an amount not less than 4% or more than 10% of their
withdrawable accounts plus short-term borrowings. Liquid assets include cash,
certain time deposits, certain bankers' acceptances, specified U.S. government,
state or federal agency obligations, certain corporate debt securities,
commercial paper, certain mutual funds, certain mortgage-related securities, and
certain first-lien residential mortgage loans. The OTS recently amended its
regulation that implements this statutory liquidity requirement to reduce the
amount of liquid assets a savings association must hold from 5% of net
withdrawable accounts and short-term borrowings to 4%. The OTS also eliminated
the requirement that savings associations maintain short-term liquid assets
constituting at least 1% of their average daily balance of net withdrawable
deposit accounts and current borrowings. The revised OTS rule also permits
savings associations to calculate compliance with the liquidity requirement
based upon their average daily balance of liquid assets during each quarter
rather than during each month, as was required under the prior rule. The OTS may
impose monetary penalties on savings associations that fail to meet these
liquidity requirements. As of December 31, 1997, Union Federal had liquid assets
of $48.6 million, and a regulatory liquidity ratio of 49.4%.
Pursuant to OTS capital regulations, savings associations must currently
meet a 1.5% tangible capital requirement, a 3% leverage ratio (or core capital)
requirement, and a total risk-based capital to risk-weighted assets ratio of 8%.
At December 31, 1997, Union Federal's tangible capital ratio was 22.7%, its core
capital ratio was 22.7%, and its risk-based capital to risk-weighted assets
ratio was 56.5%. Therefore, at December 31, 1997, Union Federal's capital levels
exceeded all applicable regulatory capital requirements currently in effect. The
following table provides the minimum regulatory capital requirements and Union
Federal's capital ratios as of December 31, 1997:
At December 31, 1997
OTS Requirement Union Federal's Capital Level
% of % of Amount
Capital Standard Assets Amount Assets(1) Amount of Excess
(Dollars in thousands)
Tangible capital............ 1.5% $29,969 22.7% $1,981 $27,988
Core capital (2)............ 3.0 29,969 22.7 3,961 26,008
Risk-based capital.......... 8.0 30,221 56.5 4,279 25,942
(1) Tangible and core capital levels are shown as a percentage of total
assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) The OTS has proposed and is expected to adopt a core capital
requirement for savings associations comparable to that recently
adopted by the OCC for national banks. The new regulation, as proposed,
would require at least 3% of total adjusted assets for savings
associations that received the highest supervisory rating for safety
and soundness, and 4% to 5% for all other savings associations. The
final form of such new OTS core capital requirement may differ from
that which has been proposed. Union Federal expects to be in compliance
with such new requirements. See "Regulation -- Regulatory Capital."
For definitions of tangible capital, core capital and risk-based
capital, see "Regulation -- Savings Association Regulatory Capital."
As of December 31, 1997, management is not aware of any current
recommendations by regulatory authorities which, if they were to be implemented,
would have, or are reasonably likely to have, a material adverse effect on Union
Federal's liquidity, capital resources or results of operations.
Current Accounting Issues
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
per Share, establishing standards for computing and presenting earnings per
share ("EPS") and applies to entities with publicly held common stock or
potential common stock, such as the shares issuable under the proposed stock
option plan, as well as any other entity that chooses to present EPS in its
financial statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards. It
eliminates the presentation of primary EPS and requires presentation of basic
EPS (the principal difference being that common stock equivalents are not
considered in the computation of basic EPS). It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to that of fully
diluted EPS pursuant to Opinion No. 15. The adoption of SFAS No. 128 will not
have a material impact on financial position or results of operations.
The Statement is effective for the financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Statement requires restatement of all
prior-period EPS data presented.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, continuing the current requirements to
disclose certain information about an entity's capital structure found in APB
Opinion No. 10, Omnibus Opinion--1966, Opinion No. 15, and SFAS No. 47,
Disclosure of Long-Term Obligations. It consolidates specific disclosure
requirements from those standards. SFAS No. 129 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The adoption of SFAS No. 129 will not have a material impact on the
Holding Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, establishing standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 will also require the (a) classification of items of other
comprehensive income by their nature in a financial statement and (b) displaying
of the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
The Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. The adoption of SFAS No. 130 will not have
a material impact on financial condition or results of operations.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, establishing standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This Statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries. This Statement does not apply to nonpublic business
enterprises or to not-for-profit organizations.
SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
This Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items,
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. This Statement also requires that a public business enterprise
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. The adoption of SFAS No. 131 will not have a
material impact on financial condition or results of operations.
Impact of Inflation
The consolidated financial statements presented herein have been
prepared in accordance with generally accepted accounting principles. These
principles require the measurement of financial position and operating results
in terms of historical dollars, without considering changes in the relative
purchasing power of money over time due to inflation.
The Holding Company's primary assets and liabilities are monetary in
nature. As a result, interest rates have a more significant impact on the
Holding Company's performance than the effects of general levels of inflation.
Interest rates, however, do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturities structures of Union Federal's assets and liabilities
are critical to the maintenance of acceptable performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of noninterest expense. Such expense items as
employee compensation, employee benefits and occupancy and equipment costs may
be subject to increases as a result of inflation. An additional effect of
inflation is the possible increase in the dollar value of the collateral
securing loans that Union Federal has made. Union Federal is unable to determine
the extent, if any, to which properties securing its loans have appreciated in
dollar value due to inflation.
Year 2000 Compliance
Because computer memory was so expensive on early mainframe computers,
some computer programs used only the final two digits for the year in the date
field and assumed that the first two digits were "19." As a result, some
computer applications may be unable to interpret the change from year 1999 to
year 2000. The Holding Company is actively monitoring its year 2000 computer
compliance issues. The bulk of the Holding Company's computer processing is
provided under contract by On-Line Financial Services, Inc., Oak Brook, IL.
("On-Line") On-Line expects to be in year 2000 compliance by June 1999. The
Holding Company's loan documentation system is provided by Banker's Systems and
is also expected to be in year 2000 compliance within the next year. The Holding
Company has also appointed the three executive officers to address all aspects
of year 2000 compliance. The Holding Company's expense in connection with year
2000 compliance is not expected to be material to its overall financial
condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
An important component of Union Federal's asset/liability management
policy includes examining the interest rate sensitivity of its assets and
liabilities and monitoring the expected effects of interest rate changes on its
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If Union Federal's
assets mature or reprice more quickly or to a greater extent than its
liabilities, Union Federal's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. Conversely, if Union Federal's assets mature
or reprice more slowly or to a lesser extent than its liabilities, its net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates.
Union Federal's policy has been to mitigate the interest rate risk inherent in
the historical business of savings associations, the origination of long-term
loans funded by short-term deposits, by pursuing certain strategies designed to
decrease the vulnerability of its earnings to material and prolonged changes in
interest rates.
Because of the lack of customer demand for adjustable rate loans in its
market area, Union Federal primarily originates fixed-rate real estate loans,
which accounted for approximately 74.4% of its loan portfolio at December 31,
1997. To manage the interest rate risk of this type of loan portfolio, Union
Federal limits maturities of fixed-rate loans to no more than 20 years. In
addition, Union Federal continues to offer and attempts to increase its volume
of adjustable rate loans when market interest rates make these type loans more
attractive to customers.
Management believes it is critical to manage the relationship between
interest rates and the effect on Union Federal's net portfolio value ("NPV").
This approach calculates the difference between the present value of expected
cash flows from assets and the present value of expected cash flows from
liabilities, as well as cash flows from off-balance sheet contracts. Union
Federal manages assets and liabilities within the context of the marketplace,
regulatory limitations and within limits established by its Board of Directors
on the amount of change in NPV which is acceptable given certain interest rate
changes.
The OTS issued a regulation, which uses a net market value methodology
to measure the interest rate risk exposure of savings associations. Under this
OTS regulation, an institution's "normal" level of interest rate risk in the
event of an assumed change in interest rates is a decrease in the institution's
NPV in an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal
does not meet either of these requirements, it is not required to file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of December 31, 1997, is an analysis performed by
the OTS of Union Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
point increments, up and down 400 basis points. At December 31, 1997, 2% of the
present value of Union Federal's assets was approximately $2.2 million. Because
the interest rate risk of a 200 basis point increase in market rates (which was
greater than the interest rate risk of a 200 basis point decrease) was $3.9
million at June 30, 1997, Union Federal would have been required to deduct
$850,000 from its total capital available to calculate its risk based capital
requirement if it had been subject to the OTS' reporting requirements under this
methodology. Union Federal's exposure to interest rate risk results from the
concentration of fixed rate mortgage loans in our portfolio.
The following table sets forth Union Federal's interest rate
sensitivity as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100 basis point increments in market interest rates as of
December 31, 1997).
Change Net Portfolio Value NPV as % of PV of Assets
In Rates $ Amount $ Change % Change NPV Ratio Change
- - -------------------------------------------------------------------------------------------
(Dollars in thousands)
+ 400 bp * $24,383 $(8,362) (26)% 23.94% (555) bp
+ 300 bp 26,661 (6,084) (19)% 25.55% (394) bp
+ 200 bp 28,860 (3,885) (12)% 27.03% (246) bp
+ 100 bp 30,947 (1,799) (5)% 28.37% (111) bp
0 bp 32,746 29.49%
- 100 bp 33,973 1,227 4 % 30.21% 73 bp
- 200 bp 34,782 2,036 6 % 30.67% 118 bp
- 300 bp 35,809 3,064 9 % 31.25% 177 bp
- 400 bp 37,247 4,501 14 % 32.08% 259 bp
* Basis points (1 basis point equals .01%).
This chart illustrates, for example, that a 200 basis point (or 2%)
increase in interest rates would result in a $3.9 million (or 12%) decrease in
the net portfolio value of Union Federal's assets. This hypothetical increase in
interest rates would also result in a 246 basis point (or 2.46%) decrease in the
ratio of the net portfolio value to the present value of Union Federal's assets.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the methods of analysis presented above. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, expected rates
of prepayments on loans and early withdrawals from certificates could likely
deviate significantly from those assumed in calculating the table.
Item 8. Financial Statements and Supplementary Data.
Independent Auditor's Report
Board of Directors
Union Community Bancorp
Crawfordsville, Indiana
We have audited the accompanying consolidated balance sheet of Union
Community Bancorp (formerly Union Federal Savings and Loan Association)
and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in retained earnings, and
cash flows for each of the three years in the period ended December 31,
1997. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of Union Community Bancorp and subsidiary as of December 31,
1997 and 1996, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 20, 1998
UNION COMMUNITY BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31 1997 1996
- - -------------------------------------------------------------------------------------------
Assets
Cash $ 22,424 $ 29,297
Short-term interest-bearing deposits 44,758,403 1,435,893
Total cash and cash equivalents 44,780,827 1,465,190
Investment securities held to maturity 5,820,069 5,747,347
Loans 78,687,999 72,856,009
Allowance for loan losses (252,258) (159,000)
Net loans 78,435,741 72,697,009
Premises and equipment 367,360 371,364
Federal Home Loan Bank stock 707,700 580,100
Investment in limited partnership 1,176,109 1,333,909
Interest receivable
Loans 440,641 385,530
Mortgage-backed securities 18,036 23,600
Other investment securities
and interest-bearing deposits 122,849 44,474
Deferred income tax 38,674 75,424
Other assets 132,251 64,813
Total assets $ 132,040,257 $ 82,788,760
Liabilities
Deposits
Noninterest bearing $ 1,532,647 $ 321,523
Interest bearing 60,725,398 60,114,919
Total deposits 62,258,045 60,436,442
Stock subscriptions refundable 22,687,104
Federal Home Loan Bank advances 2,373,051 6,482,478
Note payable 1,200,042 1,397,892
Interest payable 118,867 91,452
Other liabilities 497,271 470,663
Total liabilities 89,134,380 68,878,927
Stockholders' Equity Preferred stock,
without par value Authorized and
unissued--2,000,000 shares Common stock,
without par value Authorized--5,000,000 shares
Issued and outstanding--3,041,750 shares 29,637,592
Retained earnings 15,108,285 13,909,833
Unearned employee stock ownership plan ("ESOP") shares (1,840,000)
Total stockholders' equity 42,905,877 13,909,833
Total liabilities and stockholders' equity $ 132,040,257 $ 82,788,760
See notes to consolidated financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Income
Year Ended December 31 1997 1996 1995
Interest and Dividend Income
Loans $6,090,003 $5,561,735 $5,065,944
Investment securities
Mortgage-backed securities 214,121 262,711 321,262
Other investment securities 196,937 175,332 227,154
Dividends on Federal Home Loan Bank stock 53,956 45,027 44,291
Deposits with financial institutions 245,927 66,886 70,575
Total interest and dividend income 6,800,944 6,111,691 5,729,226
Interest Expense
Deposits 3,366,097 3,232,877 3,036,215
Stock subscription escrow accounts 130,411
Federal Home Loan Bank advances 339,258 190,800 111,569
Total interest expense 3,835,766 3,423,677 3,147,784
Net Interest Income 2,965,178 2,688,014 2,581,442
Provision for loan losses 165,000 48,000 24,000
Net Interest Income After Provision for Loan Losses 2,800,178 2,640,014 2,557,442
Other Income (Losses)
Equity in losses of limited partnership (157,800) (172,552) (249,092)
Other income 61,952 56,457 31,346
Total other losses (95,848) (116,095) (217,746)
Other Expenses
Salaries and employee benefits 479,726 460,615 480,770
Net occupancy expenses 39,159 39,103 65,698
Equipment expenses 22,436 19,886 20,460
Deposit insurance expense 31,482 494,679 127,053
Other expenses 388,519 287,654 328,184
Total other expenses 961,322 1,301,937 1,022,165
Income Before Income Tax 1,743,008 1,221,982 1,317,531
Income tax expense 544,556 336,286 326,018
Net Income $1,198,452 $ 885,696 $ 991,513
See notes to consolidated financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
Common Stock
Shares Retained Unearned
Outstanding Amount Earnings ESOP Shares Total
Balances, January 1, 1995 $12,032,624 $12,032,624
Net income for 1995 991,513 991,513
Balances, December 31, 1995 13,024,137 13,024,137
Net income for 1996 885,696 885,696
Balances, December 31, 1996 13,909,833 13,909,833
Net income for 1997 1,198,452 1,198,452
Common stock issued in conversion,
net of costs 3,041,750 $29,637,592 29,637,592
Contribution for unearned ESOP shares $(1,840,000) (1,840,000)
Balances, December 31, 1997 3,041,750 $29,637,592 $15,108,285 $(1,840,000) $42,905,877
See notes to consolidated financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31 1997 1996 1995
Operating Activities
Net income $ 1,198,452 $ 885,696 $ 991,513
Adjustments to reconcile net income to net cash provided
by operating activities
Provision for loan losses 165,000 48,000 24,000
Depreciation 27,335 25,913 25,005
Deferred income tax 36,750 (13,910) 40,462
Investment securities accretion, net (11,677) (6,181) (812)
Gains on sale of foreclosed real estate (5,565)
Equity in losses of limited partnership 157,800 172,552 249,092
Net change in
Interest receivable (127,922) (83,459) (103,132)
Interest payable 27,415 (1,964) 12,260
Other assets (21,878) (24,199) 59,003
Other liabilities (78,749) 85,879 (137,157)
Net cash provided by operating activities 1,366,961 1,088,327 1,160,234
Investing Activities
Investment securities
Purchases of investment securities held to maturity (1,200,000) (994,342) (100,000)
Proceeds from maturities and paydowns of mortgage-backed
securities held to maturity 638,955 675,913 663,446
Proceeds from maturities of investment securities held to maturity 500,000 2,000,000
Net change in loans (6,017,272) (11,466,414) (1,243,891)
Purchases of premises and equipment (23,331) (2,602) (38,381)
Proceeds on sale of foreclose real estate 73,546
Purchase of Federal Home Loan Bank of Indianapolis stock (127,600) (17,500) (1,000)
Net cash used by investing activities (6,155,702) (9,804,945) (719,826)
Financing Activities
Net change in
Interest-bearing demand and savings deposits 2,695,812 1,243,027 (1,375,313)
Certificates of deposit (874,209) 1,786,193 3,896,285
Stock subscription escrow accounts 22,687,104
Proceeds from borrowings 1,500,000 10,500,000 2,500,000
Repayment of borrowings (5,807,277) (5,261,331) (4,801,291)
Net change in advances by borrowers for taxes and insurance 19,981 (79,558) 4,201
Proceeds from sale of common stock, net of costs 27,882,967
Net cash provided by financing activities 48,104,378 8,188,331 223,882
Net Increase (Decrease) in Cash and Cash Equivalents 43,315,637 (528,287) 664,290
Cash and Cash Equivalents, Beginning of Year 1,465,190 1,993,477 1,329,187
Cash and Cash Equivalents, End of Year $44,780,827 $1,465,190
$1,993,477
Additional Cash Flows Information
Interest paid $3,808,351 $3,425,641 $3,135,524
Income tax paid 527,433 375,405 227,747
Stock issuance costs included in other liabilities 85,375
Common stock issued to ESOP leveraged with an employer loan 1,840,000
Loans transferred to foreclosed real estate 163,540
See notes to consolidated financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Union Community Bancorp ("Company") and
its wholly owned subsidiary, Union Federal Savings and Loan Association
("Association") and the Association's wholly owned subsidiary, UFS Service Corp.
("UFS"), conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the policies
are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Association. The Association operates under a
federal thrift charter and provides full banking services. As a federally
chartered thrift, the Association is subject to regulation by the Office of
Thrift Supervision and the Federal Deposit Insurance Corporation.
The Association generates mortgage and consumer loans and receives deposits from
customers located primarily in Montgomery County, Indiana and surrounding
counties. The Association's loans are generally secured by specific items of
collateral including real property, consumer assets and business assets. UFS
invests in a low income housing partnership.
Consolidation--The consolidated financial statements include the accounts of the
Company, the Association and UFS after elimination of all material intercompany
transactions.
Investment Securities--Debt securities are classified as held to maturity when
the Association has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Association will
be unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The
Association considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual lives of the loans. When a
loan is paid off or sold, any unamortized loan origination fee balance is
credited to income.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997 and 1996, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Association operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based principally on the
estimated useful lives of the assets which range from 5 to 31.5 years.
Maintenance and repairs are expensed as incurred while major additions and
improvements are capitalized. Gains and losses on dispositions are included in
current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank ("FHLB") system. The required investment
in the common stock is based on a predetermined formula.
Investment in limited partnership is recorded using the equity method of
accounting. Losses due to impairment are recorded when it is determined that the
investment no longer has the ability to recover its carrying amount. The
benefits of low income housing tax credits associated with the investment are
accrued when earned.
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The Company
files consolidated income tax returns with its subsidiary.
Earnings per share will be computed based upon the weighted average common and
common equivalent shares outstanding during the period subsequent to the
Association's conversion to a stock savings and loan association on December 29,
1997. Net income per share for the periods before the conversion, is not
meaningful.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Conversion
On December 29, 1997, the Association completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings and loan
association and the formation of the Company as the holding company of the
Association. As part of the conversion, the Company issued 3,041,750 shares of
common stock at $10 per share. Net proceeds of the Company's stock issuance,
after costs of $779,908 and excluding the shares issued for the ESOP, were
$27,797,592, of which $14,861,484 was used to acquire 100% of the stock and
ownership of the Association. The transaction was accounted for at historical
cost in a manner similar to that utilized in a pooling of interests.
- - - Investment Securities Held to Maturity
1997
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
U.S. Treasury $ 350 $ 350
Federal agencies 3,346 $ 8 $3 3,351
Mortgage-backed securities 2,124 183 5 2,302
Total investment securities $5,820 $191 $8 $6,003
1996
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
U.S. Treasury $ 350 $ 2 $ 348
Federal agencies 2,645 $ 1 35 2,611
Mortgage-backed securities 2,752 186 5 2,933
Total investment securities $5,747 $187 $42 $5,892
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity at December 31,
1997, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
1997
Amortized Fair
December 31 Cost Value
Within one year $1,400 $1,398
One to five years 2,296 2,303
3,696 3,701
Mortgage-backed securities 2,124 2,302
Totals $5,820 $6,003
Securities with a carrying value of $2,194,000 and $2,832,000 were pledged at
December 31, 1997 and 1996 to secure FHLB advances.
Mortgage-backed securities included in investment securities held to maturity
above consist of the following:
1997
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
Government National Mortgage Corporation $1,223 $125 $1,348
Federal Home Loan Mortgage Corporation 635 56 691
Federal National Mortgage Corporation 243 2 $5 240
Other 23 23
Total mortgage-backed securities $2,124 $183 $5 $2,302
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1996
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
Government National Mortgage Corporation $1,391 $120 $1,511
Federal Home Loan Mortgage Corporation 1,039 64 1,103
Federal National Mortgage Corporation 294 2 $5 291
Other 28 28
Total mortgage-backed securities $2,752 $186 $5 $2,933
- - - Loans and Allowance
December 31 1997 1996
Real estate mortgage loans
One-to-four family $62,436 $57,031
Multi-family 10,197 10,920
Commercial 3,627 3,593
Real estate construction loans 2,530 1,322
Individuals' loans for household and other personal expenditures 223 346
79,013 73,212
Deferred loan fees (325) (356)
Total loans $78,688 $72,856
Year Ended December 31 1997 1996 1995
Allowance for loan losses
Balances, Beginning of Period $159 $111 $ 87
Provision for losses 165 48 24
Loans charged off (72)
Balances, End of Period $252 $159 $111
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At December 31, 1997, the Association had no impaired loans. At December 31,
1996, the Association had an impaired loan of $112,000 and had recorded an
allowance for losses of $37,000. The average balance of impaired loans for the
years ended December 31, 1997 and 1996 was $33,000 and $110,000. The Association
had no interest income or cash receipts of interest on impaired loans during the
years ended December 31, 1997 and 1996. The Association has no loans that were
impaired during 1995.
In addition, at December 31, 1997, 1996 and 1995, the Association had nonaccrual
loans of $52,000, $377,000 and $156,000, for which impairment had not been
recognized. If interest on these loans had been recognized at the original
interest rates, interest income would have increased approximately $1,000,
$14,000 and $3,000 for the years ended December 31, 1997, 1996 and 1995.
The Association has no commitments to loan additional funds to the borrowers of
impaired or nonaccrual loans.
The Association has entered into transactions with certain directors and
officers and their affiliates or associates (related parties). Such transactions
were made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans, as defined, to such related
parties was as follows:
Balances, January 1, 1997 $1,528
New loans, including renewals 1,291
Payments, etc. including renewals (461)
Balances, December 31, 1997 $2,358
- - - Premises and Equipment
December 31 1997 1996
Land $146 $146
Buildings
553 538 Equipment 142 134
Total cost 841 818
Accumulated depreciation (474) (447)
Net $367 $371
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Investment in Limited Partnership
The investment in limited partnership of $1,176,000 and $1,334,000 at December
31, 1997 and 1996 represents a 99 percent equity in Pedcor Investments -
1993-XVI, LP ("Pedcor"), a limited partnership organized to build, own and
operate a 48-unit apartment complex. In addition to recording its equity in the
losses of Pedcor, the Company has recorded the benefit of low income housing tax
credits of $178,000 for the years ended December 31, 1997, 1996 and 1995.
Condensed financial statements for Pedcor are as follows:
December 31 1997 1996
Condensed statement of financial condition
Assets
Cash $ 5 $ 29
Land and property 2,292 2,350
Other assets 55 30
Total assets $2,352 $2,409
Liabilities
Notes payable--Association $ 873 $ 982
Notes payable--other 1,274 1,290
Other liabilities 165 173
Total liabilities 2,312 2,445
Partners' equity 40 (36)
Total liabilities and partners' equity $2,352 $2,409
Year Ended December 31 1997 1996 1995
Condensed statement of operations
Total revenue $219 $219 $222
Total expenses 340 435 454
Net loss $(121) $(216) $(232)
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Deposits
December 31 1997 1996
Noninterest-bearing demand $ 1,533 $ 322
Interest-bearing demand 9,965 9,192
Savings deposits 4,579 3,867
Certificates and other time deposits of $100,000 or more 7,060 7,056
Other certificates and time deposits 39,121 39,999
Total deposits $62,258 $60,436
Certificates and other time deposits maturing
in years ending December 31
1998 $27,369
1999 13,254
2000 3,703
2001 774
2002 1,081
v $46,181
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was approximately $7,060,000 and $7,056,000 at December 31, 1997 and
1996. Deposits in excess of $100,000 are not federally insured.
Year Ended December 31 1997 1996 1995
Interest expense on deposits
Interest-bearing demand $ 444 $ 369 $ 385
Savings deposits 159 148 146
Certificates 2,763 2,716 2,505
$3,366 $3,233 $3,036
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Federal Home Loan Bank Advances
1997
Weighted
Average
December 31 Amount Rate
Advances from FHLB
Maturities in years ending
1998 $1,601 5.71%
1999 114 5.33
2000 123 5.49
2001 129 5.67
2002 138 5.80
2003 147 5.90
2004 121 6.03
$2,373 5.71%
The FHLB advances are secured by first-mortgage loans and investment securities
totaling $62,517,000 and $57,954,000 at December 31, 1997 and 1996. Advances are
subject to restrictions or penalties in the event of prepayment.
- - - Note Payable
The note payable to Pedcor dated February 1, 1994 in the original amount of
$1,809,792 bears no interest so long as there exists no event of default. In the
instances where an event of default has occurred, interest shall be calculated
at a rate equal to the lesser of 14% per annum or the highest amount permitted
by applicable law.
December 31 1997
Note payable to Pedcor Maturities in years ending:
1998 $ 179
1999 184
2000 183
2001 177
2002 174
Thereafter 303
$1,200
The Association has an available line of credit with the FHLB totaling
$1,000,000. The line of credit expires September 16,1998 and bears interest at a
rate equal to the current variable advance rate. There were no drawings on this
line of credit at December 31, 1997.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Income Tax
Year Ended December 31 1997 1996 1995
Income tax expense
Currently payable
Federal $353 $246 $184
State 155 104 102
Deferred
Federal 37 (20) 32
State 6 8
Total income tax expense $545 $336 $326
Reconciliation of federal
statutory to actual tax expense
Federal statutory income tax at 34% $593 $415 $448
Effect of state income taxes 102 73 73
Tax credits (178) (178) (178)
Other 28 26 (17)
Actual tax expense $545 $336 $326
Effective tax rate 31.2% 27.5% 24.7%
The components of the cumulative net deferred tax asset are as follows:
December 31 1997 1996
Assets
Allowance for loan losses $92 $49
Loan fees 37 66
Business income tax credits 29 68
Other 2 13
Total assets 160 196
Liabilities
Depreciation 26 28
State income tax 2 2
FHLB stock dividend 23 23
Equity in partnership losses 70 67
Total liabilities 121 120
$39 $76
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
At December 31, 1997 and 1996, the Association had an unused business income tax
credit carryforward of $29,000 and $68,000 expiring in 2011.
Retained earnings at December 31, 1997 and 1996 include approximately $2,632,000
for which no deferred income tax liability has been recognized. This amount
represents an allocation of income to bad debt deductions as of December 31,
1987 for tax purposes only. Reduction of amounts so allocated for purposes other
than tax bad debt losses or adjustments arising from carryback of net operating
losses or loss of "bank" status, would create income for tax purposes only,
which income would be subject to the then-current corporate income tax rate. The
unrecorded deferred income tax liability on the above amounts was approximately
$1,043,000 at December 31, 1997 and 1996.
- - - Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Association's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual or notional amount
of those instruments. The Association uses the same credit policies in making
such commitments as it does for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk were as
follows:
December 31 1997 1996
Mortgage and consumer loan commitments
At variable rates $ 773 $ 107
At fixed rates ranging from
7.13 to 8.25% for 1997 and 2,136
7.38 to 9.25% for 1996 697
Standby letters of credit 2,014 1,500
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Association evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Association upon extension of credit is based on
management's credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Association
to guarantee the performance of a customer to a third party.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Association has entered into an employment agreement with the president
which provides for the continuation of salary and certain benefits for a
specified period of time under certain conditions. Under the terms of the
agreements, these payments could occur in the event of a change in control of
the Association, as defined, along with other specific conditions. The
contingent liability under these agreements in the event of a change in control
is approximately $300,000. The Association is not required to pay any amounts
under these agreements which cannot be deducted for federal income tax purposes.
The Company, Association and UFS are also subject to claims and lawsuits which
arise primarily in the ordinary course of business. It is the opinion of
management that the disposition or ultimate resolution of such claims and
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company.
- - - Dividend and Capital Restrictions
The Company is not subject to any regulatory restrictions on the payment of
dividends to its stockholders.
The OTS regulations provide that savings associations which meet fully phased-in
capital requirements and are subject only to "normal supervision" may pay out,
as a dividend, 100 percent of net income to date over the calendar year and 50
percent of surplus capital existing at the beginning of the calendar year
without supervisory approval, but with 30 days prior notice to the OTS. OTS
regulations also prohibit a savings association from declaring or paying any
dividends if, as a result, the regulatory capital of the Association would be
reduced below the minimum amount required to be maintained for the liquidation
account established in connection with the conversion. Any additional amount of
capital distributions would require prior regulatory approval. Savings
associations failing to meet current capital standards may only pay dividends
with supervisory approval.
At the time of conversion, a liquidation account was established in an amount
equal to the Association's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Association after conversion. In the event
of a complete liquidation, and only in such event, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution may
be made to stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the use or
application of net worth. The initial balance of the liquidation account was
$14,472,934.
At December 31, 1997, the stockholder's equity of the Association was
$29,969,000, of which approximately $13,004,000 was available for the payment of
dividends.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Regulatory Capital
The Association is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier 1 capital, and Tier 1 leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and
off-balance sheet exposures of the entity. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At December 31, 1997 and 1996,
the Association is categorized as well capitalized and meets all subject capital
adequacy requirements. There are no conditions or events since December 31, 1997
that management believes have changed the Association's classification.
The Association's actual and required capital amounts and ratios are as follows:
1997
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
December 31 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital 1
(to risk weighted assets) $30,221 56.5% $4,279 8.0% $5,349 10.0%
Core capital 1 (to adjusted tangible assets) 29,969 22.7 3,961 3.0 7,922 6.0
Core capital 1 (to adjusted total assets) 29,969 22.7 3,961 3.0 6,602 5.0
1 As defined by regulatory agencies
1996
Required for To Be Well
Actual Adequate Capital (1) Capitalized (1)
December 31 Amount Ratio Amount Ratio Amount Ratio
Total risk-based capital 1
(to risk weighted assets) $14,069 33.6% $3,346 8.0% $4,183 10.0%
Core capital 1 (to adjusted tangible assets) 13,910 16.8 2,484 3.0 4,967 6.0
Core capital 1 (to adjusted total assets) 13,910 16.8 2,484 3.0 4,139 5.0
1 As defined by regulatory agencies
The Association's tangible capital at December 31, 1997 and 1996 was $29,629,000
and $13,910,000, which amount was 22.7% and 16.8% of tangible assets and
exceeded the required ratio of 1.5%.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Employee Benefit Plans
The Company provides pension benefits for substantially all of its employees,
and is a participant in a pension fund known as the Pentegra Group (formerly
known as the Financial Institutions Retirement Fund). This plan is a
multi-employer plan; separate actuarial valuations are not made with respect to
each participating employer. Pension expense (benefit) was $(4,000), $47,000 and
$53,000 for 1997, 1996, 1995.
The Company has a retirement savings 401(k) plan in which substantially all
employees may participate. The Company matches employees' contributions at the
rate of 50% for the first 5% of base salary contributed by participants. The
Company's expense for the plan was $11,000, $10,000 and $11,000 for 1997, 1996,
and 1995.
As part of the conversion in 1997, the Company established an ESOP covering
substantially all employees of the Company and Association. The ESOP acquired
184,000 shares of the Company common stock at $10 per share in the conversion
with funds provided by a loan from the Company. Accordingly, the $1,840,000 of
common stock acquired by the ESOP is shown as a reduction of stockholders'
equity. Shares are released to participants proportionately as the loan is
repaid. Dividends on allocated shares are recorded as dividends and charged to
retained earnings. Dividends on unallocated shares, which will be distributed to
participants, are treated as compensation expense. Compensation expense is
recorded equal to the fair market value of the stock when contributions, which
are determined annually by the Board of Directors of the Association, are made
to the ESOP. There was no expense under the ESOP for the year ended December 31,
1997. At December 31, 1997, the ESOP had no allocated shares, 184,000 suspense
shares and no committed-to-be released shares.
In connection with the conversion, the Board of Directors approved a Stock
Option Plan and a Recognition and Retention Plan ("RRP"). The Plans are subject
to stockholder's approval. Under the stock option plan, stock options covering
shares representing an aggregate of up to 10% of the common stock issued in the
conversion may be granted to directors and executive officers. Restricted stock
awards covering up to 4% of the common stock issued in the conversion may be
awarded to directors and executive officers under the RRP.
- - - Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents--The fair value of cash and cash equivalents
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
Loans--The fair value for loans is estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Interest Receivable/Payable--The fair value of accrued interest
receivable/payable approximates carrying values.
Deposits--Fair values for certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently being
offered on certificates to a schedule of aggregated expected monthly maturities
on such time deposits.
Stock Subscriptions Refundable and Advance Payments by Borrowers for Taxes and
Insurance--The fair value approximates carrying value.
Federal Home Loan Bank Advances--The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current rates for
similar debt.
Note Payable--Limited Partnership--The fair value of the borrowing is estimated
using a discounted cash flow calculation, based on current rates for similar
debt.
Off-Balance Sheet Commitments--Commitments include commitments to originate
mortgage and consumer loans, and are generally of a short-term nature. The fair
value of such commitments are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing. The carrying amounts of these
commitments, which are immaterial, are reasonable estimates of the fair value of
these financial instruments.
The estimated fair values of the Company's financial instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
Assets
Cash and cash equivalents $44,781 $44,781 $1,465 $1,465
Investment securities held to maturity 5,820 6,003 5,747 5,892
Loans, net 78,436 79,611 72,697 73,220
Stock in FHLB 708 708 580 580
Interest receivable 582 582 454 454
Liabilities
Deposits 62,258 62,476 60,436 60,683
Stock subscriptions refundable 22,687 22,687
Borrowings
FHLB advances 2,373 2,345 6,482 6,587
Notes payable--limited partnership 1,200 1,170 1,398 1,343
Interest payable 119 119 91 91
Advances by borrowers for taxes and insurance 221 221 201 201
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
- - - Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1997
Assets
Cash $13,022
Investment in subsidiary 29,927
Total assets $42,949
Liability--other $ 43
Stockholders' Equity 42,906
Total liabilities and stockholders' equity $42,949
Condensed Statement of Income
Year Ended December 31 1997
Net Income--equity in undistributed income of subsidiaries $ 7
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
December 31 1997
Operating Activities
Net income $ 7
Adjustments to reconcile net income to
net cash provided by operating activities (7)
Net cash provided by operating activities 0
Financing Activities
Net proceeds from issuance of stock 27,883
Capital contribution to Association (14,861)
Net cash provided by financing activities 13,022
Net Change in Cash 13,022
Cash at Beginning of Year 0
Cash at End of Year $13,022
Additional Cash Flow and Supplementary Information
Common stock issued to ESOP leveraged with an employee loan $1,840
Stock issuance cost included in other liabilities 43
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information concerning the Holding Company's executive officers is
included in Item 4.5 in Part I of this report. Section 16(a) of the Securities
Exchange Act of 1934 ("1934 Act") requires that the Holding Company's officers
and directors and persons who own more than 10% of the Holding Company's Common
Stock file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulations to furnish the Holding Company with
copies of all Section 16(a) forms that they file.
Based solely on the Holding Company's review of the copies of such forms
received by it, and/or written representations from certain reporting persons
that no Forms 5 were required for those persons, the Holding Company believes
that during the fiscal year ended December 31, 1997, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
with respect to Section 16(a) of the 1934 Act were complied with.
Presented below is certain information concerning the directors of the
Holding Company:
Director of Director of Position Position
Holding Company Union Federal Expiration with Holding with
Director Since Since of Term Company Union Federal
Philip L. Boots 1997 1991 1998 Director Director
Marvin L. Burkett 1997 1975 1999 Director Director
Phillip E. Grush 1997 1982 1999 Director Director, Vice
Chairman of the
Board and Vice
President
Samuel H. Hildebrand 1997 1995 2000 Director Director
John M. Horner 1997 1979 1998 Director Director,
Chairman of the
Board and Vice
President
Harry A. Siamas 1997 1994 2000 Director Director
Joseph E. Timmons 1997 1973 1999 Director, Director,
President and President and
Chief Executive Chief Executive
Officer Officer
Presented below is certain information concerning the directors of Union
Federal:
Philip L. Boots (age 51) has served since 1985 as President of Boots
Brothers Oil Company, Inc., a petroleum marketer that operates gasoline outlets,
convenience grocery stores and car washes in the Crawfordsville area.
Marvin L. Burkett (age 70) has worked as a self-employed farmer in
Montgomery County since 1956. He currently is semi-retired from farming.
Phillip E. Grush (age 66) worked as a self-employed optometrist in
Crawfordsville from 1960 until September, 1996 when he sold his practice. He
currently works for Dr. Michael Scheidler in Crawfordsville as a full-time
employee/consultant.
Samuel H. Hildebrand, II (age 58) was Executive Vice President of Atapco
Custom Products Division, a manufacturer of custom decorated looseleaf ring
binders in Crawfordsville from 1987-1995. Since 1995, he has served as President
of Village Traditions, Inc., a home builder located in Crawfordsville.
John M. Horner (age 61) has served as the president of Horner Pontiac
Buick, Inc. in Crawfordsville since 1974.
Harry A. Siamas (age 47) has practiced law in Crawfordsville since 1976 and
has served as Union Federal's attorney for 18 years.
Joseph E. Timmons (age 63) has served as President and Chief Executive
Officer of Union Federal since 1974 and of UFS Service Corp. since its inception
in 1994. He has been an employee of Union Federal since 1954.
Union Federal also has a director emeritus program pursuant to which its
former directors may continue to serve as advisors to the Board of Directors
upon their retirement or resignation from the Board. Currently, Lester B. Sommer
serves as a director emeritus. Mr. Sommer receives the same directors' fees as
the other directors of Union Federal.
Item 11. Executive Compensation.
No cash compensation is paid directly by the Holding Company to any of
its executive officers. Each of such officers is compensated by Union Federal.
The following table sets forth information as to annual, long-term and
other compensation for services in all capacities paid to Union Federal's
President and Chief Executive Officer for the fiscal year ended December 31,
1997. Other than Mr. Timmons, Union Federal had no other executive officers who
earned over $100,000 in salary and bonuses during that fiscal year.
Summary Compensation Table
Annual Compensation
Name and Principal Fiscal Other Annual All Other
Position Year Salary Bonus Compensation (1) Compensation
Joseph E. Timmons, President 1997 $108,300 (1)(2) $25,000 -- --
and Chief Executive Officer
(1) Mr. Timmons received certain perquisites, but the incremental cost of
providing such perquisites did not exceed the lesser of $50,000 or 10% of
his salary and bonus.
(2) This column includes $8,300 directors fees paid to Mr. Timmons.
Employment Contract
Union Federal has entered into a three-year employment contract with Mr.
Timmons. The contract with Mr. Timmons, which became effective as of the
effective date of the Conversion, extends annually for an additional one-year
term to maintain its three-year term if Union Federal's Board of Directors
determines to so extend it, unless notice not to extend is properly given by
either party to the contract. Mr. Timmons receives an initial salary under the
contract equal to his current salary subject to increases approved by the Board
of Directors. The contract also provides, among other things, for participation
in other fringe benefits and benefit plans available to Union Federal's
employees. Mr. Timmons may terminate his employment upon 60 days' written notice
to Union Federal. Union Federal may discharge Mr. Timmons for cause (as defined
in the contract) at any time or in certain specified events. If Union Federal
terminates Mr. Timmons' employment for other than cause or if Mr. Timmons
terminates his own employment for cause (as defined in the contract), Mr.
Timmons will receive his base compensation under the contract for an additional
three years if the termination follows a change of control in the Holding
Company, and for the balance of the contract if the termination does not follow
a change in control. In addition, during such period, Mr. Timmons will continue
to participate in Union Federal's group insurance plans and retirement plans, or
receive comparable benefits. Moreover, within a period of three months after
such termination following a change of control, Mr. Timmons will have the right
to cause Union Federal to purchase any stock options he holds for a price equal
to the fair market value (as defined in the contract) of the shares subject to
such options minus their option price. If the payments provided for in the
contract, together with any other payments made to Mr. Timmons by Union Federal,
are deemed to be payments in violation of the "golden parachute" rules of the
Code, such payments will be reduced to the largest amount which would not cause
Union Federal to lose a tax deduction for such payments under those rules. As of
the date hereof, the cash compensation which would be paid under the contract to
Mr. Timmons if the contract were terminated either after a change of control of
the Holding Company, without cause by Union Federal, or for cause by Mr.
Timmons, would be $300,000. For purposes of this employment contract, a change
of control of the Holding Company is generally an acquisition of control, as
defined in regulations issued under the Change in Bank Control Act and the
Savings and Loan Holding Company Act.
The employment contract protects Union Federal's confidential business
information and protects Union Federal from competition by Mr. Timmons should he
voluntarily terminate his employment without cause or be terminated by Union
Federal for cause.
Compensation of Directors
Union Federal pays its directors and director emeritus a monthly retainer
of $250 plus $300 for each month in which they attend one or more meetings.
Total fees paid to Union Federal's directors and advisory directors for the year
ended December 31, 1997 were approximately $64,000. Beginning in July, 1997,
Union Federal began paying its directors a monthly retainer of $500 plus $250
for each monthly meeting attended.
Directors of the Holding Company and UFS are not currently paid directors'
fees. The Holding Company may, if it believes it is necessary to attract
qualified directors or is otherwise beneficial to the Holding Company, adopt a
policy of paying directors' fees.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of March 20, 1998, by each person
who is known by the Holding Company to own beneficially 5% or more of the Common
Stock. Unless otherwise indicated, the named beneficial owner has sole voting
and dispositive power with respect to the shares.
Number of Shares
Name and Address of Common Stock Percent of
of Beneficial Owner(1) Beneficially Owned Class
---------------------- ------------------ -----
Home Federal Savings Bank 184,000(2) 6.05%
501 Washington Street
Columbus, IN 47201
(1) The information in this chart is based on Schedule 13D and 13G
Report(s) filed by the above-listed person(s) with the SEC containing
information concerning shares held by them. It does not reflect any
changes in those shareholdings which may have occurred since the date
of such filings.
(2) These shares are held by the Trustee of the Union Community Bancorp
ESOP. The Employees participating in the ESOP are entitled to instruct
the Trustee how to vote shares held in their accounts under the ESOP.
Unallocated shares held in a suspense account under the ESOP are
required to be voted by the Trustee in the same proportion as allocated
shares are voted.
The following table sets forth certain information regarding the
nominees for the position of director of the Holding Company, including the
number and percent of shares of Common Stock beneficially owned by such persons
as of March 20, 1998. Unless otherwise indicated, each nominee has sole
investment and/or voting power with respect to the shares shown as beneficially
owned by him. The table also sets forth the number of shares of Holding Company
Common Stock beneficially owned by all directors and executive officers of the
Holding Company as a group.
Common Stock
Expiration of Director of the Beneficially
Term as Holding Owned as of Percentage
Name Director Company Since March 20, 1998 of Class(1)
- - ------------------------------------ ------------- -----------------------
Philip Boots 1998 1997 12,100 (2) (3) .40%
Marvin L. Burkett 1999 1997 6,000 (2) .20
Phillip E. Grush 1999 1997 15,550 (2) .51
Samuel H. Hildebrand 2000 1997 16,418 (2) .54
John M. Horner 1998 1997 22,500 (2) (3) (4) .74
Harry A. Siamas 2000 1997 11,300 (4) (5) .37
Joseph E. Timmons 1999 1997 30,417 (2) 1.00
All directors and
executive officers
as a group (9 persons) 119,773 3.94%
footnotes on following page.
(1) Based upon information furnished by the respective director nominees.
Under applicable regulations, shares are deemed to be beneficially
owned by a person if he or she directly or indirectly has or shares the
power to vote or dispose of the shares, whether or not he or she has
any economic power with respect to the shares. Includes shares
beneficially owned by members of the immediate families of the
directors residing in their homes.
(2) Includes shares owned by director and his spouse.
(3) Includes shares owned by a company deemed to be controlled by director.
(4) Includes shares held by spouse of director as custodian for a minor.
(5) Includes shares held jointly by director and his aunt.
Item 13. Certain Relationships and Related Transactions.
Union Federal has followed a policy of offering to its directors,
officers, and employees real estate mortgage loans secured by their principal
residence as well as other loans. All of Union Federal's loans to its directors,
officers and employees are made on substantially the same terms, including
interest rates and collateral as those prevailing at the time for comparable
transactions, and do not involve more than minimal risk of collectibility. Loans
to directors, executive officers and their associates totaled approximately $2.4
million, or approximately 5.5% of consolidated shareholders' equity at December
31, 1997.
Current law authorizes Union Federal to make loans or extensions of credit
to its executive officers, directors, and principal shareholders on the same
terms that are available with respect to loans made to all of its employees. At
present, Union Federal's loans to executive officers, directors, principal
shareholders and employees are made on the same terms generally available to the
public. Union Federal may in the future, however, adopt a program under which it
may waive loan application fees and closing costs with respect to loans made to
such persons. Loans made to a director or executive officer in excess of the
greater of $25,000 or 5% of its capital and surplus (up to a maximum of
$500,000) must be approved in advance by a majority of the disinterested members
of the Board of Directors. Union Federal's policy regarding loans to directors
and all employees meets the requirements of current law.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Financial Statements
Consolidated Balance Sheet at December 31, 1997, and 1996
Consolidated Statement of Income for the Years Ended December 31,
1997, 1996, and 1995
Consolidated Statement of Changes in Shareholders' Equity for the
Years Ended December 31, 1997, 1996, and 1995.
Consolidated Statement of Cash Flows for the Years Ended December 31,
1997, 1996, and 1995
Notes to Consolidated Financial Statements
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1997.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
UNION COMMUNITY BANCORP
Date: March 31, 1998 By: /s/ Joseph E. Timmons
Joseph E. Timmons, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 31st day of March, 1998.
Signatures Title Date
(1) Principal Executive Officer:
/s/ Joseph E. Timmons )
Joseph E. Timmons President and )
Chief Executive Officer)
)
)
(2) Principal Financial and Accounting )
Officer: )
)
)
/s/ Denise E. Swearingen Treasurer )
Denise E. Swearingen )
)
)March 31, 1998
)
(3) The Board of Directors: )
)
)
/s/ Philip L. Boots Director )
Philip L. Boots )
)
)
/s/ Marvin L. Burkett Director )
Marvin L. Burkett )
)
)
/s/ Phillip E. Grush Director )
Phillip E. Grush )
)
)
/s/ Samuel H. Hillenbrand )
Samuel H. Hillenbrand Director )
)
)
/s/ John M. Horner Director )
John M. Horner )
)
)March 31, 1998
/s/ Harry A. Siamas Director )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
Joseph E. Timmons )
)
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to to Exhibit 3(1) to the Registration Statement
(2) Registrant's Code of By-Laws is incorporated by reference to
to Exhibit 3(2) to the Registration Statement
10(4) Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement
(5) Employment Agreement between Union Federal Savings and Loan
Association and Joseph E. Timmons incorporated by reference to
to Exhibit 10(5) to the Registration Statement
(6) Exempt Loan and Share Purchase Agreement between Trust under
Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement and Union Community Bancorp
21 Subsidiaries of the Registrant
27 Financial Data Schedule (filed electronically)