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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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to _______________
Commission File Number 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone numberincluding area code:
(765) 362-2400
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES _____ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (N/A)
The aggregate market value of the issuer's voting stock held by non-affiliates,
as of March 26 1999 was $29,758,300.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of December 31, 1998, was 2,889,663 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Exhibit Index on Page E-1
Page 1 of 29 Pages
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
Forward Looking Statement................................................... 3
PART I
Item 1 Business.................................................... 3
Item 2. Properties.................................................. 25
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
Item 4.5. Executive Officers of the Registrant........................ 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters....................................... 26
Item 6. Selected Financial Data..................................... 26
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 26
Item 7A. Quantitative and Qualitative Disclosures about Market Risks. 26
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 27
PART III
Item 10. Directors and Executive Officers of Registrant.............. 27
Item 11. Executive Compensation...................................... 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................................... 27
Item 13. Certain Relationships and Related Transactions.............. 27
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K................................... 27
SIGNATURES ........................................................ 28
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Union Community Bancorp, an Indiana corporation (the "Holding
Company"), was organized in September, 1997. On December 29, 1997, it acquired
the common stock of Union Federal Savings and Loan Association ("Union Federal")
upon the conversion of Union Federal from a federal mutual savings and loan
association to a federal stock savings and loan association.
Union Federal was organized as a state-chartered savings and loan
association in 1913. Since then, Union Federal has conducted its business from
its full-service office located in Crawfordsville, Indiana. Union Federal's
principal business consists of attracting deposits from the general public and
originating fixed-rate and adjustable-rate loans secured primarily by first
mortgage liens on one- to four-family residential real estate. Union Federal's
deposit accounts are insured up to applicable limits by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
Management believes that it has developed a solid reputation among its
loyal customer base because of its commitment to personal service and because of
strong support of the local community. Union Federal offers a number of
financial services, including: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans; (vi) money market demand accounts ("MMDAs"); (vii)
passbook savings accounts; and (viii) certificates of deposit.
Lending Activities
Union Federal has historically concentrated its lending activities on the
origination of loans secured by first-mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Union Federal's loan origination activities, representing 77.2% of its total
loan portfolio at December 31, 1998. Union Federal also offers multi-family
mortgage loans, commercial real estate loans, construction loans, and, to a
limited extent, consumer loans consisting of loans secured by deposits and home
improvement loans. Mortgage loans secured by multi-family properties and
commercial real estate totaled approximately 11.4% and 6.8%, respectively, of
Union Federal's total loan portfolio at December 31, 1998. Construction loans
totaled approximately 4.3% of Union Federal's total loans as of December 31,
1998. Consumer loans, which consist of home improvement loans and passbook
loans, constituted approximately .2% of Union Federal's total loan portfolio at
December 31, 1998.
Loan Portfolio Data. The following table sets forth the composition of
Union Federal's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
At December 31,
-------------------------------------------------------------------------
1998 1997 1996
--------------------- -------------------- --------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ --------
(Dollars in thousands)
TYPE OF LOAN Real estate mortgage loans:
One-to-four-family............... $71,823 77.19% $62,436 76.95% $57,031 77.46%
Multi-family..................... 10,609 11.40 10,197 12.57 10,920 14.83
Commercial....................... 6,355 6.83 3,627 4.47 3,593 4.88
Real estate construction loans...... 3,993 4.29 4,652 5.73 1,740 2.36
Commercial loans.................... 51 .06 --- --- --- ---
Consumer loans ..................... 213 .23 223 .28 346 .47
------- ------ ------- ------ ------- ------
Gross loans receivable......... $93,044 100.00% $81,135 100.00% $73,630 100.00%
======= ====== ======= ====== ======= ======
TYPE OF SECURITY
One-to-four-family real estate... $73,130 78.60% $64,730 79.78% $58,271 79.14%
Multi-family real estate......... 12,037 12.93 11,172 13.77 11,520 15.65
Commercial real estate........... 7,666 8.24 5,094 6.28 3,593 4.88
Deposits......................... 160 .17 139 .17 246 .33
Other............................ 51 .06 --- --- --- ---
------- ------ ------- ------ ------- ------
Gross loans receivable......... 93,044 100.00 81,135 100.00 73,630 100.00
======= ====== ======= ====== ======= ======
Deduct:
Allowance for loan losses........... 362 .39 252 .31 159 .22
Deferred loan fees.................. 334 .36 325 .40 356 .48
Loans in process.................... 1,448 1.55 2,122 2.62 418 .57
------- ------ ------- ------ ------- ------
Net loans receivable............. $90,900 97.70% $78,436 96.67% $72,697 98.73%
======= ====== ======= ====== ======= ======
Mortgage Loans:
Adjustable-rate.................. $19,954 21.51% $ 20,683 25.56% $24,238 33.07%
Fixed-rate....................... 72,826 78.49 60,229 74.44 49,046 66.93
------- ------ ------- ------ ------- ------
Total.......................... $92,780 100.00% $80,912 100.00% $73,284 100.00%
======= ====== ======= ====== ======= ======
The following table sets forth certain information at December 31, 1998,
regarding the dollar amount of loans maturing in Union Federal's loan portfolio
based on the contractual terms to maturity. Demand loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects that prepayments will
cause actual maturities to be shorter.
Balance Due During Years Ended December 31,
Outstanding at 2002 2004 2009 2014
December 31, to to to and
1998 1999 2000 2001 2003 2008 2013 following
---- ---- ---- ---- ---- ---- ---- ---------
(In thousands)
Real estate mortgage loans:
Residential loans.................. $71,823 $97 $485 $237 $1,119 $22,254 $29,191 $18,440
Multi-family loans.................... 10,609 --- 465 --- 285 3,826 4,269 1,764
Commercial loans................... 6,355 --- 9 9 88 1,151 1,414 3,684
Construction loans.................... 3,993 --- 914 514 --- 648 1,067 850
Commercial loans...................... 51 51 --- --- --- --- --- ---
Loans secured by deposits............. 160 160 --- --- --- --- --- ---
Home improvement loans................ 53 1 2 11 9 18 12 ---
------- ---- ------ ---- ------ ------- ------- -------
Total............................ $93,044 $309 $1,875 $771 $1,501 $27,897 $35,953 $24,738
======= ==== ====== ==== ====== ======= ======= =======
The following table sets forth, as of December 31, 1998, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
Due After December 31, 1999
Fixed Rates Variable Rates Total
----------- -------------- -----
(In thousands)
Real estate mortgage loans:
Residential loans................................. $63,466 $8,260 $71,726
Multi-family loans................................ 4,021 6,588 10,609
Commercial loans.................................. 2,625 3,730 6,355
Construction loans................................... 2,619 1,374 3,993
Commercial loans..................................... --- --- ---
Installment loans.................................... --- --- ---
Loans secured by deposits............................ --- --- ---
Home improvement loans............................... 52 --- 52
------- ------- -------
Total............................................. $72,783 $19,952 $92,735
======= ======= =======
One- to Four-Family Residential Loans. Union Federal's primary lending
activity consists of originating one- to four-family residential mortgage loans
secured by property located in its primary market area. Union Federal generally
does not originate one- to four-family residential mortgage loans if the ratio
of the loan amount to the lesser of the current cost or appraised value of the
property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private
mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and
factors the cost of such insurance into the annual percentage rate on such
loans. Union Federal originates and retains fixed rate loans which provide for
the payment of principal and interest over a 15- or 20-year period, or balloon
loans having terms of up to 15 years with principal and interest payments
calculated using a 30-year amortization period.
Union Federal also offers adjustable-rate mortgage ("ARM") loans. The
interest rate on ARM loans is indexed to the one-year U.S. Treasury securities
yields adjusted to a constant maturity. Union Federal may offer discounted
initial interest rates on ARM loans, but requires that the borrower qualify for
the ARM loan at the fully-indexed rate (the index rate plus the margin). A
substantial portion of the ARM loans in Union Federal's portfolio at December
31, 1998 provide for maximum rate adjustments per year and over the life of the
loan of 1% and 5%, respectively. Union Federal's residential ARMs are amortized
for terms up to 25 years.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 1998, approximately
21.5% of Union Federal's real estate mortgage loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Union
Federal originates include "due-on-sale" clauses, which give it the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, Union Federal occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At December 31, 1998, approximately $71.8 million, or 77.2% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $50,000, or .07% of total residential loans, were included
in non-performing assets as of that date. See "--Non-Performing and Problem
Assets."
Multi-Family Loans. At December 31, 1998, approximately $10.6 million, or
11.4% of Union Federal's total loan portfolio, consisted of mortgage loans
secured by multi-family dwellings (those consisting of more than four units).
Union Federal's multi-family loans are generally written as one-year adjustable
rate loans indexed to the one-year U.S. Treasury rate with an original term of
up to 20 years. Union Federal writes multi-family loans with maximum
Loan-to-Value ratios of 80%. Union Federal's largest multi-family loan as of
December 31, 1998 had a balance of approximately $1.0 million and was secured by
28 duplexes located in Crawfordsville, Indiana. On the same date, Union Federal
had $210,000 in multi-family loans included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a greater
risk than do residential loans. See "-- Commercial Real Estate Loans" below.
Commercial Real Estate Loans. Union Federal's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Union Federal generally originates commercial real estate loans as one-year
adjustable rate loans indexed to the one-year U.S. Treasury securities yield
adjusted to a constant maturity, with a maximum term of 20 years and a maximum
Loan-to-Value ratio of 80%. At December 31, 1998, Union Federal's largest
commercial loan had an outstanding balance of $782,000 and was secured by
commercial property in Crawfordsville, Indiana. At December 31, 1998,
approximately $6.4 million, or 6.8% of Union Federal's total loan portfolio,
consisted of commercial real estate loans. On the same date, Union Federal had
$89,000 or 15.7% of commercial real estate loans included in non-performing
assets.
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate.
Construction Loans. Union Federal offers construction loans with respect
to residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). Union Federal provides
construction loans only to borrowers who commit to permanent financing on the
finished project. At December 31, 1998, approximately $4.0 million, or 4.3% of
Union Federal's total loan portfolio, consisted of construction loans. The
largest construction loan had a balance of $914,000 on December 31, 1998 and was
secured by a condominium project and golf course in Pittsboro, Indiana. None of
Union Federal's construction loans were included in non-performing assets on
that date.
Construction loans generally match the term of the construction contract
and are written as fixed-rate loans with interest calculated on the amount
disbursed under the loan and payable monthly. The maximum Loan-to-Value Ratio
for a construction loan is based upon the nature of the construction project.
For example, a construction loan for a one- to four-family residence may be
written with a maximum Loan-to-Value Ratio of 95%, while a construction loan for
a multi-family project may be written with a maximum Loan-to-Value Ratio of 80%.
Inspections are made prior to any disbursement under a construction loan. Union
Federal does not normally charge commitment fees for construction loans.
While providing Union Federal with a comparable, and in some cases higher,
yield than conventional mortgage loans, construction loans involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Union Federal may have to hire another contractor to complete the
project at a higher cost. Also, a project may be completed, but may not be
salable, resulting in the borrower defaulting and Union Federal's taking title
to the project.
Consumer Loans. Union Federal's consumer loans, consisting of passbook
loans and home improvement loans, aggregated approximately $213,000 at December
31, 1998, or .2% of its total loan portfolio. Union Federal's home improvement
loans generally have a fixed rate and a term of up to seven years. Union
Federal's passbook loans are made up to 90% of the deposit account balance and,
at December 31, 1998, accrued at a rate of 8.8%. This rate may change but will
always be at least 3% over the underlying passbook or certificate of deposit
rate. Interest on loans secured by deposits is paid semi-annually. At December
31, 1998, none of Union Federal's consumer loans were included in non-performing
assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. Union Federal historically has
originated its mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In
the event that Union Federal begins originating fixed-rate residential mortgage
loans for sale to the FHLMC in the secondary market, such loans will be
originated in accordance with the guidelines established by the FHLMC and will
be sold promptly after they are originated. Union Federal has no intention to
originate loans for sale to the FHLMC at this time, however.
Union Federal confines its loan origination activities primarily to
Montgomery County and the surrounding counties of Boone, Hendricks, Putnam,
Parke and Fountain. Union Federal has also originated several loans in Marion
County. At December 31, 1998, Union Federal also had six loans which it
originated, totaling approximately $641,000, secured by property located outside
of Indiana. Union Federal's loan originations are generated from referrals from
existing customers, real estate brokers, and newspaper and periodical
advertising. Loan applications are underwritten and processed at Union Federal's
office.
Union Federal's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, Union Federal studies the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved or ratified by Union Federal's board
of directors.
Union Federal generally requires appraisals on all real property securing
its loans and requires an attorney's opinion and a valid lien on the mortgaged
real estate. Appraisals for all real property securing mortgage loans are
performed by independent appraisers who are state-licensed. Union Federal
requires fire and extended coverage insurance in amounts at least equal to the
principal amount of the loan and also requires flood insurance to protect the
property securing its interest if the property is in a flood plain. Union
Federal also generally requires private mortgage insurance for all residential
mortgage loans with Loan-to-Value Ratios of greater than 80%, and escrow
accounts for insurance premiums and taxes for loans that require private
mortgage insurance.
Union Federal's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Union Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Union Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 1998, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $7.8 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $713,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 1998 was a $914,000 interest in a loan
secured by a condominium project and golf course located in Pittsboro, Indiana.
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
Year Ended December 31,
------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
Gross loans receivable
at beginning of period..................................... $81,135 $73,630 $63,024
Loans originated:
Real estate mortgage loans:
One-to-four family loans............................... 24,763 18,116 19,332
Multi-family loans..................................... 1,052 654 1,532
Commercial loans....................................... 3,763 483 45
Construction loans....................................... 3,163 5,284 2,220
Commercial loans......................................... 51 --- ---
Loans secured by deposits................................ 155 161 322
Home improvement loans................................... 30 85 36
Total originations................................... 32,977 24,783 23,487
Purchases (sales) of participation loans, net................. 800 500 1,350
Reductions:
Principal loan repayments................................ 21,853 17,541 14,211
Transfers from loans to real estate owned................ 15 237 20
Total reductions..................................... 21,868 17,778 14,231
------- ------- -------
Total gross loans receivable at
end of period.............................................. $93,044 $81,135 $73,630
======= ======= =======
Union Federal's residential loan originations during the year ended
December 31, 1998 totaled $24.8 million, compared to $18.1 million and $19.3
million in the years ended December 31, 1997 and 1996, respectively.
Origination and Other Fees. Union Federal realizes income from late
charges, checking account service charges, and fees for other miscellaneous
services. Union Federal currently charges a commitment fee of $200 on all loans
and an additional $500 origination fee on construction loans. Union Federal also
may charge points on a mortgage loan as consideration for a lower interest rate,
although it does so infrequently. Late charges are generally assessed if payment
is not received within a specified number of days after it is due. The grace
period depends on the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 30 days past due, Union Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Union Federal sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Union Federal again contacts the borrower, this
time in person, to establish an acceptable repayment schedule. When a mortgage
loan is 90 days delinquent, Union Federal will have either entered into a
workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Union Federal reviews mortgage loans on a regular basis and places such
loans on a non-accrual status when they become 90 days delinquent. Generally,
when loans are placed on a non-accrual status, unpaid accrued interest is
written off, and further income is recognized only to the extent received.
Non-performing Assets. At December 31, 1998, $349,000, or .3% of Union
Federal's total assets, were non-performing (non-performing loans, non-accruing
loans and foreclosed real estate) compared to $98,000, or .07%, of its total
assets at December 31, 1997. At December 31, 1998, residential loans accounted
for $50,000 of Union Federal's non-performing assets. Union Federal had no real
estate owned ("REO") properties as of December 31, 1998.
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
At December 31,
------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Non-performing assets:
Non-performing loans..................... $349 $52 $ 489
Foreclosed real estate................... --- 46 ---
Total non-performing assets............ $349 $98 $489
Non-performing loans to total loans......... .38% .07% .67%
Non-performing assets to total assets....... .32% .07% .59%
Interest income of $30,000, $4,000 and $10,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, was recognized on the
non-performing loans summarized above. Interest income of $33,000, $5,000 and
$33,000 for the years ended December 31, 1998, 1997 and 1996, respectively,
would have been recognized under the original terms of these non-performing
loans.
At December 31, 1998, Union Federal held loans delinquent from 30 to 89
days totaling approximately $423,000. Other than in connection with these loans
and the other delinquent loans disclosed elsewhere in this section, management
was not aware of any other borrowers who were experiencing financial
difficulties.
Delinquent Loans. The following table sets forth certain information at
December 31, 1998, 1997 and 1996, relating to delinquencies in Union Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
At December 31, 1998 At December 31, 1997 At December 31, 1996
-------------------------------------- ----------------------------------- --------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More 30-89 Days 90 Days or More
------------------ ------------------ ----------------- ---------------- -------------- ----------------
Principal Principal Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loansof Loans of Loans of Loansof Loans of Loans of Loans of Loansof Loans of Loans
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
One- to four-
family loans........ 6 $406 3 $50 9 $300 4 $ 47 7 $226 8 $377
Commercial
real estate loans... 1 17 2 89 1 48 --- --- --- --- --- ---
Multi-family
loans............... --- --- 1 210 1 207 --- --- --- --- 1 112
Loans secured
by deposits......... --- --- --- --- --- --- --- --- --- --- --- ---
Home improvement loans. --- --- --- --- --- --- 1 5 --- --- --- ---
----- ---- ---- ---- ----- ---- - --- ---- ---- ---- ----
Total............... 7 $423 6 $349 11 $555 5 $52 7 $226 9 $489
= ==== = ==== == ==== = === = ==== = ====
Delinquent loans to
total loans......... .85% .77% .98%
=== === ===
Classified assets. Federal regulations and Union Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for
loan losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At December 31, 1998, the aggregate amount of Union Federal's classified
assets and its general and specific loss allowances were as follows:
At December 31, 1998
--------------------
(In thousands)
Substandard assets.......................................... $840
Doubtful assets............................................. ---
Loss assets................................................. ---
-----
Total classified assets................................. $840
=====
General loss allowances..................................... $362
Specific loss allowances.................................... ---
-----
Total allowances........................................ $362
=====
Union Federal regularly reviews its loan portfolio to determine whether
any loans require classification in accordance with applicable regulations.
Included in substandard assets at December 31, 1998, Union Federal had a
multi-family loan in the amount of $491,000 that was performing. The loan was
classified as substandard as a result of a regulatory examination.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Union Federal's review and evaluation of current
economic conditions (including those of its lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Union Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 1998. However,
there can be no assurance that regulators, when reviewing Union Federal's loan
portfolio in the future, will not require increases in Union Federal's
allowances for loan losses or that changes in economic conditions will not
adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended December 31, 1998.
Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Balance at beginning of period............................ $252 $159 $111
Gross charge-offs - Multi-family loans.................... (72)
Provision for losses on loans............................. 110 165 48
Balance end of period.................................. $362 $252 $159
Allowance for loan losses as a percent of
total loans outstanding................................ .40% .32% .22%
Ratio of net charge-offs to average
loans outstanding...................................... --- .10% ---
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Union Federal's allowance for loan losses at the
dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict Union Federal's use of the allowance to absorb losses in other
categories.
At December 31,
---------------------------------------------------------------------------------
1998 1997 1996
--------------------- ----------------------- --------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Balance at end of period applicable to:
Real estate mortgage loans:
Residential............... $75 77.19% $ 65 76.95% $60 77.46%
Commercial................ 67 6.83 29 4.47 13 4.88
Multi-family.............. 134 11.40 82 12.57 75 14.83
Construction loans.......... 19 4.29 10 5.73 11 2.36
Commercial loans............ --- .06
Loans secured by deposits... --- .17 --- .17 --- .33
Home improvement loans...... --- .06 --- .11 --- .14
Unallocated................. 67 66 --- --- ---
---- ------ ---- ------ ---- ------
Total....................... $362 100.00% $252 100.00% $159 100.00%
==== ====== ==== ====== ==== ======
Investments
Investments. Union Federal's investment portfolio generally consists of
U.S. Treasury and federal agency securities, FHLB stock and an investment in
Pedcor Investments - 1993 - XVI, L.P. See "--Service Corporation Subsidiary." At
December 31, 1998, approximately $9.8 million, or 9.1%, of Union Federal's total
assets consisted of such investments. Union Federal also had $6.2 million, or
5.7% of its assets, in interest-earning deposits as of that date.
The amount of interest-earning deposits held by Union Federal increased
significantly during 1997 as a result of the Conversion. Because the
subscription offering for the Holding Company's Common Stock was oversubscribed,
Union Federal delivered refund checks during the last week of December, 1997 to
those subscribers whose purchase orders were not filled. Many of those checks
had not cleared as of December 31, 1997, thereby increasing the amount of funds
held by Union Federal in interest-bearing deposits. In addition, Union Federal
invested some of the proceeds that it received from the stock offering in
interest-bearing overnight accounts at the FHLB Indianapolis, which also
increased the amount of its interest-bearing deposits at December 31, 1997. The
amount of interest-earning deposits decreased to $6.2 million at December 31,
1998 as a result of the payment of the stock subscription of $22.7 million and
increased investment in loans and investment securities during 1998.
The following table sets forth the amortized cost and the market value of
Union Federal's investment portfolio at the dates indicated.
At December 31,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
(In thousands)
Investment securities held to maturity:
U.S. Treasury.......................$ --- $ --- $ 350 $ 350 $ 350 $ 348
Federal agencies.................... 4,500 4,479 3,346 3,351 2,645 2,611
Mortgage-backed securities.......... 3,526 3,696 2,124 2,302 2,752 2,933
Total investment securities
held to maturity................ 8,026 8,175 5,820 6,003 5,747 5,892
Investment in limited partnership...... 1,055 (1) 1,176 (1) 1,334 (1)
FHLB stock (2)......................... 745 745 708 708 580 580
------ ------ ------
Total investments...................... $9,826 $7,704 $7,661
====== ====== ======
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the
FHLB of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, FHLB stock and investment in limited
partnership) which mature during each of the periods indicated and the weighted
average yields for each range of maturities at December 31, 1998.
Amount at December 31, 1998 which matures in
------------------------------------------------------------------------------------
One Year One Year Five Years
or Less to Five Years to Ten Years After Ten Years
------------------------------------------------------------------------------------
Amortized Average Amoritzed Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- -------
(Dollars in thousands)
Federal agency securities............. $100 2.47% $1,800 6.21% $500 6.10% $2,100 6.63%
Mortgage-backed Securities
The following table sets forth the composition of Union Federal's
mortgage-backed securities portfolio at the dates indicated.
December 31,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- --------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
--------- ------- ------ --------- -------------- --------- ------- ------
(In thousands)
Governmental National
Mortgage Corporation.................... $991 28.1% $1,095 $1,223 57.6% $1,348 $1,391 50.5% $1,511
Federal Home Loan Mortgage Corporation..... 2,395 67.9 2,464 635 29.9 691 1,039 37.8 1,103
Federal National
Mortgage Corporation.................... 123 3.5 120 243 11.4 240 294 10.7 291
Other...................................... 17 .5 17 23 1.1 23 28 1.0 28
------ ----- ------ ------ ----- ------ ------ ----- ------
Total mortgage- backed securities....... $3,526 100.0% $3,696 $2,124 100.0% $2,302 $2,752 100.0% $2,933
====== ===== ====== ====== ===== ====== ====== ===== ======
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1998.
Amount at December 31, 1998 which matures in
------------------------------------------------------------------------------
One Year One Year to After
or Less Five Years Five Years
----------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
Mortgage-backed securities...................... $37 7.00% $11 8.95% $3,478 7.44%
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 1998, 1997
and 1996.
For the Year Ended
December 31,
-----------------------------------------
1998 1997 1996
------ ------ ------
(In thousands)
Beginning balance.......... $2,124 $2,752 $3,423
Purchases.................. 2,004 --- ---
Repayments................. (607) (639) (676)
Premium and discount
amortization, net....... 5 11 5
------ ------ ------
Ending balance............. $3,526 $2,124 $2,752
====== ====== ======
Sources of Funds
General. Deposits have traditionally been Union Federal's primary source
of funds for use in lending and investment activities. In addition to deposits,
Union Federal derives funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings, income on earning assets and borrowings.
While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis may be used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Union Federal attracts deposits principally from within
Montgomery County through the offering of a broad selection of deposit
instruments, including fixed-rate passbook accounts, NOW accounts, variable rate
money market accounts, fixed-term certificates of deposit and savings accounts.
Union Federal does not actively solicit or advertise for deposits outside of
Montgomery County, and substantially all of its depositors are residents of that
county. Deposit account terms vary, with the principal differences being the
minimum balance required, the amount of time the funds remain on deposit and the
interest rate. Union Federal does not pay broker fees for any deposits it
receives.
Union Federal establishes the interest rates paid, maturity terms, service
fees and withdrawal penalties on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and applicable regulations. Union Federal relies,
in part, on customer service and long-standing relationships with customers to
attract and retain its deposits. Union Federal also closely prices its deposits
to the rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Union Federal offers has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. Union Federal has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. Union Federal manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on Union
Federal's experience, management believes that its passbook, NOW and MMDAs are
relatively stable sources of deposits. However, the ability to attract and
maintain certificates of deposit, and the rates paid on these deposits, has been
and will continue to be significantly affected by market conditions.
An analysis of Union Federal's deposit accounts by type, maturity, and
rate at December 31, 1998, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 1998 Deposits Rate
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Withdrawable:
Fixed rate, passbook accounts.............................. $ 10 $3,410 5.26% 4.00%
Variable rate, money market................................ 10 10,794 16.65 4.87
NOW accounts and other transaction accounts................ 500 1,845 2.84 1.93
------- ------
Total withdrawable....................................... 16,049 24.75 4.35
Certificates (original terms):
3 months or less........................................... 1,000 101 .16 4.13
6 months................................................... 1,000 3,186 4.91 4.75
12 months.................................................. 1,000 3,931 6.06 5.41
18 months.................................................. 1,000 8,055 12.42 5.57
24 months.................................................. 1,000 5,444 8.40 5.79
30 months.................................................. 1,000 8,990 13.86 5.78
36 months ................................................. 1,000 3,468 5.35 5.89
48 months.................................................. 1,000 509 .78 5.99
60 months.................................................. 1,000 5,762 8.89 6.08
Jumbo certificates - $100,000 and over........................ 100,000 9,351 14.42 6.00
------- ------
Total certificates............................................ 48,797 75.25 5.73
------- ------
Total deposits................................................ $64,846 100.00% 5.39%
======= ======
The following table sets forth by various interest rate categories the
composition of time deposits of Union Federal at the dates indicated:
At December 31,
1998 1997 1996
----------------------------------------
(In thousands)
4.00 to 4.99%.............. $ 4,193 $ 3,622 $ 4,760
5.00 to 5.99%.............. 27,459 19,245 19,400
6.00 to 6.99%.............. 17,119 22,894 20,954
7.00 to 7.99%.............. 26 420 1,941
------- ------- -------
Total................... $48,797 $46,181 $47,055
======= ======= =======
The following table represents, by various interest rate categories, the
amounts of time deposits maturing during each of the three years following
December 31, 1998. Matured certificates, which have not been renewed as of
December 31, 1998, have been allocated based upon certain rollover assumptions.
Amounts at December 31, 1998 Maturing In
----------------------------------------------------------------------------
One Year Two Three Greater Than
or Less Years Years Three Years
------- ----- ----- -----------
(In thousands)
4.00 to 4.99%.... $ 3,482 $ 711
5.00 to 5.99%.... 15,086 7,831 $2,882 $1,660
6.00 to 6.99%.... 10,481 4,148 775 1,714
7.00 to 7.99%.... 10 17 --- ---
------- ------- ------ ------
Total......... $29,059 $12,707 $3,657 $3,374
======= ======= ====== ======
The following table indicates the amount of Union Federal's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 1998.
At December 31, 1998
--------------------
Maturity Period (In thousands)
Three months or less.............................. $2,707
Greater than three months through six months...... 1,259
Greater than six months through twelve months..... 1,985
Over twelve months................................ 3,400
------
Total........................................ $9,351
======
The following table sets forth the dollar amount of savings deposits in
the various types of deposits that Union Federal offers at the dates indicated,
and the amount of increase or decrease in such deposits as compared to the
previous period.
DEPOSIT ACTIVITY
-----------------------------------------------------------------------------------------
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
1998 Deposits 1997 1997 Deposits 1996 1996 Deposits
---- -------- ---- ---- -------- ---- ---- --------
(Dollars in thousands)
Withdrawable:
Fixed rate, passbook accounts...... $3,410 5.26% $(1,169) $ 4,579 7.35% $ 712 $3,867 6.40%
Variable rate, money market........ 10,794 16.65 1,669 9,125 14.66 510 8,615 14.25
NOW accounts and other
transaction accounts............. 1,845 2.84 (528) 2,373 3.81 1,474 899 1.49
------- ------ ------ ------- ------ ------ ------- ------
Total withdrawable............... 16,049 24.75 (28) 16,077 25.82 2,696 13,381 22.14
Certificates (original terms):
3 months........................... 101 .16 101 .16 (48) 149 .25
6 months........................... 3,186 4.91 (592) 3,778 6.07 (489) 4,267 7.06
12 months.......................... 3,931 6.06 (1,546) 5,477 8.80 244 5,233 8.66
18 months.......................... 8,055 12.42 69 7,986 12.83 (204) 8,190 13.55
24 months.......................... 5,444 8.40 270 5,174 8.31 678 4,496 7.44
30 months.......................... 8,990 13.86 2,375 6,615 10.62 1,133 5,482 9.07
36 months ......................... 3,468 5.35 (386) 3,854 6.19 (1,344) 5,198 8.60
48 months.......................... 509 .78 188 321 .52 (55) 376 .62
60 months.......................... 5,762 8.89 (53) 5,815 9.34 (793) 6,608 10.93
Jumbo certificates.................... 9,351 14.42 2,291 7,060 11.34 4 7,056 11.68
------- ------ ------ ------- ------ ------ ------- ------
Total certificates.................... 48,797 75.25 2,616 46,181 74.18 (874) 47,055 77.86
------- ------ ------ ------- ------ ------ ------- ------
Total deposits........................ $64,846 100.00% $2,588 $62,258 100.00% $1,822 $60,436 100.00%
======= ====== ====== ======= ====== ====== ======= ======
Total deposits at December 31, 1998 were approximately $64.8 million,
compared to approximately $60.4 million at December 31, 1996. Union Federal's
deposit base depends somewhat upon the manufacturing sector of Montgomery
County's economy. Although Montgomery County's manufacturing sector is
relatively diversified and does not significantly depend upon any industry, a
loss of a material portion of the manufacturing workforce could adversely affect
Union Federal's ability to attract deposits due to the loss of personal income
attributable to the lost manufacturing jobs and the attendant loss in service
industry jobs.
In the unlikely event of Union Federal's liquidation after the Conversion,
all claims of creditors (including those of deposit account holders, to the
extent of their deposit balances) would be paid first followed by distribution
of the liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Union Federal.
Borrowings. Management focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 1998, Union Federal had borrowings in the amount of $772,000 from
the FHLB of Indianapolis which bear fixed and variable interest rates and are
due at various dates through 2004. Union Federal is required to maintain
eligible loans in its portfolio of at least 160% of outstanding advances as
collateral for advances from the FHLB of Indianapolis. Union Federal does not
anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI,
L.P. ("Pedcor") $1.0 million under a note payable that is not included in the
following table. See "--Service Corporation Subsidiary."
The following table presents certain information relating to Union
Federal's borrowings at or for the years ended December 31, 1998, 1997 and 1996.
At or for the Year
Ended December 31,
1998 1997 1996
---------------------------------------
(Dollars in thousands)
FHLB Advances:
Outstanding at end of period.................... $772 $2,373 $6,482
Average balance outstanding for period.......... 873 5,748 3,566
Maximum amount outstanding at any
month-end during the period................... 1,272 6,873 6,482
Weighted average interest rate
during the period............................. 5.84 % 5.90% 5.36 %
Weighted average interest rate
at end of period.............................. 5.71 % 5.71% 5.52 %
Return on Equity and Assets
1998 1997 1996
---------------------------------------
Return on assets (net income
divided by average total assets)............. 1.82 % 1.38% 1.13 %
Return on equity (net income
divided by average equity)................... 4.65 8.10 6.54
Dividend payout ratio (dividends
per share divided by net
income per share)............................ 50.71 --- ---
Equity to assets ratio (average
equity divided by average
total assets)................................ 39.24 17.03 17.31
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"),
whose sole asset is its investment in Pedcor, which is an Indiana limited
partnership that was established to organize, build, own, operate and lease a
48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II
Apartments (the "Project"). Union Federal owns the limited partner interest in
Pedcor. The general partner is Pedcor Investments LLC. The Project, operated as
a multi-family, low- and moderate-income housing project, is completed and is
performing as planned. Because UFS engages exclusively in activities that are
permissible for a national bank, OTS regulations permit Union Federal to include
its investment in UFS in its calculation of regulatory capital.
A low- and moderate-income housing project qualifies for certain federal
income tax credits if (i) it is a residential rental property, (ii) the units
are used on a nontransient basis, and (iii) 20% or more of the units in the
project are occupied by tenants whose incomes are 50% or less of the area median
gross income, adjusted for family size, or alternatively, at least 40% of the
units in the project are occupied by tenants whose incomes are 60% of the area
median gross income. Qualified low income housing projects generally must comply
with these and other rules for fifteen years, beginning with the first year the
project qualified for the tax credit, or some or all of the tax credit together
with interest may be recaptured. The tax credit is subject to the limitations on
the use of general business credit, but no basis reduction is required for any
portion of the tax credit claimed.
UFS committed to invest approximately $1.8 million in Pedcor at the
inception of the project in November, 1993. Through December 31, 1998, UFS had
invested cash of approximately $789,000 in Pedcor with five additional annual
capital contributions remaining to be paid in January of each year through
January, 2004, totaling $1,021,000. The additional contributions will be used
for operating and other expenses of the partnership. In addition, Union Federal
borrowed funds from the FHLB of Indianapolis to advance to Pedcor, and Pedcor
currently owes Union Federal $772,000 pursuant to a promissory note payable in
installments through January 1, 2004 and bearing interest at an annual rate of
9%.
UFS transfers the tax credits resulting from Pedcor's operation of the
Project to Union Federal. These tax credits will be available to Union Federal
through 2003. Although Union Federal has reduced income tax expense by the full
amount of the tax credit available each year, it has not been able to fully
utilize available tax credits to reduce income taxes payable because it may not
use tax credits that would reduce its regular corporate tax liability below its
alternative minimum tax liability. Union Federal may carry forward unused tax
credits for a period of fifteen years and management believes that Union Federal
will be able to utilize available tax credits during the carry forward period.
Additionally, Pedcor has incurred operating losses in the early years of its
operations primarily due to its accelerated depreciation of assets. UFS has
accounted for its investment in Pedcor on the equity method and, accordingly,
has recorded its share of these losses as reductions to its investment in
Pedcor, which at December 31, 1998, was $1.1 million. As of December 31, 1998,
98% of the units in the Project were occupied, and all of the tenants met the
income test required for the tax credits. UFS does not engage in any activity or
hold any assets other than its investment in Pedcor.
The following summarizes UFS's equity in Pedcor's losses and tax credits
recognized in Union Federal's consolidated financial statements.
Year Ended December 31,
---------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Investment in Pedcor:
Net of equity in losses.................. $1,055 $1,176 $1,334
Equity in losses, net
of income tax effect..................... $ (73) $ (95) $ (104)
Tax credit.................................. 178 178 178
Increase in after-tax net income from
Pedcor investment........................ $ 105 $ 83 $ 74
Employees
As of December 31, 1998, Union Federal employed 14 persons on a full-time
basis. Union Federal does not have any part-time employees. None of Union
Federal's employees is represented by a collective bargaining group. Management
considers its employee relations to be good.
Employee benefits for Union Federal's full-time employees include, among
other things, an employee stock ownership plan, a Pentegra Group (formerly known
as Financial Institutions Retirement Fund) defined benefit pension plan, a
noncontributory, multiple-employer comprehensive pension plan (the"Pension
Plan"), and hospitalization/major medical insurance, dental and eye care
insurance, long-term disability insurance, life insurance, and participation in
the Financial Institutions Thrift Plan.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in the area. See
"Executive Compensation" and "Certain Relationships and Related Transactions of
Union Federal."
COMPETITION
Union Federal originates most of its loans to and accepts most of its
deposits from residents of Montgomery County, Indiana. Union Federal is subject
to competition from various financial institutions, including state and national
banks, state and federal savings associations, credit unions, and certain
nonbanking consumer lenders that provide similar services in Montgomery County
with significantly larger resources than are available to Union Federal. In
total, there are 12 other financial institutions located in Montgomery County,
including eight banks, two credit unions and two other savings associations.
Union Federal also competes with money market funds with respect to deposit
accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Union Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Union Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Union
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Union Federal's books and records and, in
conjunction with the FDIC in certain situations, has examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and the federal deposit insurance funds. Union
Federal's semi- annual assessment owed to the OTS, which is based upon a
specified percentage of assets, is approximately $16,000.
Union Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of loans and investments,
regulatory approval of any merger or consolidation, issuance or retirements of
securities, and limitations upon other aspects of banking operations. In
addition, Union Federal's activities and operations are subject to a number of
additional detailed, complex and sometimes overlapping federal and state laws
and regulations. These include state usury and consumer credit laws, state laws
relating to fiduciaries, the Federal Truth-In-Lending Act and Regulation Z, the
Federal Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting
Act, the Community Reinvestment Act, anti-redlining legislation and antitrust
laws.
The United States Congress is considering legislation that would require
all federal savings associations, such as Union Federal, to either convert to a
national bank or a state-chartered bank by a specified date to be determined. In
addition, under the legislation, the Holding Company likely would not be
regulated as a savings and loan holding company but rather as a bank holding
company. This proposed legislation would abolish the OTS and transfer its
functions among the other federal banking regulators. Certain aspects of the
legislation remain to be resolved and, therefore, no assurance can be given as
to whether or in what form the legislation will be enacted or its effect on the
Holding Company and Union Federal.
Savings and Loan Holding Company Regulation
As the holding company for Union Federal, the Holding Company will be
regulated as a "non-diversified savings and loan holding company" within the
meaning of the Home Owners' Loan Act of 1933, as amended ("HOLA"), and subject
to regulatory oversight of the Director of the OTS. As such, the Holding Company
is registered with the OTS and thereby subject to OTS regulations, examinations,
supervision and reporting requirements. As a subsidiary of a savings and loan
holding company, Union Federal is subject to certain restrictions in its
dealings with the Holding Company and with other companies affiliated with the
Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
prior approval of the Director of the OTS, from acquiring control of another
savings association or savings and loan holding company or retaining more than
5% of the voting shares of a savings association or of another holding company
which is not a subsidiary. The HOLA also restricts the ability of a director or
officer of the Holding Company, or any person who owns more than 25% of the
Holding Company's stock, from acquiring control of another savings association
or savings and loan holding company without obtaining the prior approval of the
Director of the OTS.
The Holding Company's Board of Directors presently intends to operate the
Holding Company as a unitary savings and loan holding company. There are
generally no restrictions on the permissible business activities of a unitary
savings and loan holding company.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. (Additional
restrictions on securing advances from the FHLB also apply.) See "--Qualified
Thrift Lender." At December 31, 1998, Union Federal's asset composition was in
excess of that required to qualify as a Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Union
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
its subsidiaries (other than Union Federal or other subsidiary savings
associations) would thereafter be subject to further restrictions. The HOLA
provides that, among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings association shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (v) acting as trustee under deeds of trust, (vi)
those activities previously directly authorized by the FSLIC by regulation as of
March 5, 1987, to be engaged in by multiple holding companies, or (vii) those
activities authorized by the Federal Reserve Board (the "FRB") as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS before a multiple holding company may engage in such activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding
companies with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company
may declare or pay a dividend on its permanent or nonwithdrawable stock unless
it first gives the Director of the OTS 30 days advance notice of such
declaration and payment. Any dividend declared during such period or without
giving notice shall be invalid.
Federal Home Loan Bank System
Union Federal is a member of the FHLB of Indianapolis, which is one of
twelve regional FHLBs. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from funds deposited
by savings associations and proceeds derived from the sale of consolidated
obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of
the FHLB. All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. The Federal Housing Finance Board ("FHFB"), an
independent agency, controls the FHLB System, including the FHLB of
Indianapolis.
As a member, Union Federal is required to purchase and maintain stock in
the FHLB of Indianapolis in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts, or similar
obligations at the beginning of each year. At December 31, 1998, Union Federal's
investment in stock of the FHLB of Indianapolis was $745,000. The FHLB imposes
various limitations on advances such as limiting the amount of certain types of
real estate-related collateral to 30% of a member's capital and limiting total
advances to a member. Interest rates charged for advances vary depending upon
maturity, the cost of funds to the FHLB of Indianapolis and the purpose of the
borrowing.
The FHLBs are required to provide funds for the resolution of troubled
savings associations and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could continue to do so
in the future. For the fiscal year ended December 31, 1998, dividends paid by
the FHLB of Indianapolis to Union Federal totaled approximately $59,000, for an
annual rate of 8.0%.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations such as Union Federal
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund. As of September
30, 1996, the reserves of the SAIF were below the level required by law,
primarily because a significant portion of the assessments paid into the SAIF
have been used to pay the cost of prior thrift failures, while the reserves of
the BIF met the level required by law in May, 1995. However, on September 30,
1996, provisions designed to recapitalize the SAIF and eliminate the premium
disparity between the BIF and SAIF were signed into law. See "-- Assessments"
below.
Assessments. The FDIC is authorized to establish separate annual
assessment rates for deposit insurance for members of the BIF and members of the
SAIF. The FDIC may increase assessment rates for either fund if necessary to
restore the fund's ratio of reserves to insured deposits to the target level
within a reasonable time and may decrease these rates if the target level has
been met. The FDIC has established a risk-based assessment system for both SAIF
and BIF members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
On September 30, 1996, President Clinton signed into law legislation which
included provisions designed to recapitalize the SAIF and eliminate the
significant premium disparity between the BIF and the SAIF. Under the new law,
Union Federal was charged a one-time special assessment equal to $.657 per $100
in assessable deposits at March 31, 1995. Union Federal recognized this one-time
assessment as a non-recurring operating expense of $362,000 ($219,000 after tax)
during the three-month period ending September 30, 1996, and Union Federal paid
this assessment on November 27, 1996. The assessment was fully deductible for
both federal and state income tax purposes. Beginning January 1, 1997, Union
Federal's annual deposit insurance premium was reduced from .23% to .0644% of
total assessable deposits. BIF institutions pay lower assessments than
comparable SAIF institutions because BIF institutions pay only 20% of the rate
paid by SAIF institutions on their deposits with respect to obligations issued
by the federally-chartered corporation which provided some of the financing to
resolve the thrift crisis in the 1980's ("FICO"). The 1996 law also provides for
the merger of the SAIF and the BIF by 1999, but not until such time as bank and
thrift charters are combined. Until the charters are combined, savings
associations with SAIF deposits may not transfer deposits into the BIF system
without paying various exit and entrance fees, and SAIF institutions will
continue to pay higher FICO assessments. Such exit and entrance fees need not be
paid if a SAIF institution converts to a bank charter or merges with a bank, as
long as the resulting bank continues to pay applicable insurance assessments to
the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS recently amended this requirement to require a core capital level of 3%
of total adjusted assets for savings associations that receive the highest
rating for safety and soundness, and 4% to 5% for all other savings
associations. This amendment becomes effective April 1, 1999. Under the tangible
capital requirement, a savings association must maintain tangible capital (core
capital less all intangible assets except purchased mortgage servicing rights
which may be included after making the above-noted adjustment in an amount up to
100% of tangible capital) of at least 1.5% of total assets. Under the risk-based
capital requirements, a minimum amount of capital must be maintained by a
savings association to account for the relative risks inherent in the type and
amount of assets held by the savings association. The risk-based capital
requirement requires a savings association to maintain capital (defined
generally for these purposes as core capital plus general valuation allowances
and permanent or maturing capital instruments such as preferred stock and
subordinated debt less assets required to be deducted) equal to 8.0% of
risk-weighted assets. Assets are ranked as to risk in one of four categories
(0-100%). A credit risk-free asset, such as cash, requires no risk-based
capital, while an asset with a significant credit risk, such as a non-accrual
loan, requires a risk factor of 100%. Moreover, a savings association must
deduct from capital, for purposes of meeting the core capital, tangible capital
and risk-based capital requirements, its entire investment in and loans to a
subsidiary engaged in activities not permissible for a national bank (other than
exclusively agency activities for its customers or mortgage banking
subsidiaries). At December 31, 1998, Union Federal was in compliance with all
capital requirements imposed by law.
The OTS has promulgated a rule which sets forth the methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS has delayed the implementation of
this rule, however. The rule requires savings associations with "above normal"
interest rate risk (institutions whose portfolio equity would decline in value
by more than 2% of assets in the event of a hypothetical 200-basis-point move in
interest rates) to maintain additional capital for interest rate risk under the
risk-based capital framework. If the OTS were to implement this regulation,
Union Federal would be exempt from its provisions because it has less than $300
million in assets and its risk-based capital ratio exceeds 12%. Union Federal
nevertheless measure its interest rate risk in conformity with the OTS
regulation and, as of December 31, 1998, Union Federal would have been required
to deduct $1.4 million from its total capital available to calculate its
risk-based capital requirement. See "Item 7A. Quantitative and Qualitative
Disclosures about Market Risk."
If an association is not in compliance with the capital requirements, the
OTS is required to prohibit asset growth and to impose a capital directive that
may restrict, among other things, the payment of dividends and officers'
compensation. In addition, the OTS and the FDIC generally are authorized to take
enforcement actions against a savings association that fails to meet its capital
requirements. These actions may include restricting the operations activities of
the association, imposing a capital directive, cease and desist order, or civil
money penalties, or imposing harsher measures such as appointing a receiver or
conservator or forcing the association to merge into another institution.
Prompt Corrective Regulatory Action.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequatelycapitalized, under capitialized,
significantly undercapitalzied, and critically undercapitalized. At December 31,
1998, Union Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and Union Federal was not subject
to a regulatory order, agreement or directive to meet and maintain a specific
capital level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS recently adopted a regulation, which becomes effective on April
1, 1999, that revises the current restrictions that apply to "capital
distributions" by savings associations. The amended regulation defines a capital
distribution as a distribution of cash or other property to a savings
association's owners, made on account of their ownership. This definition
includes a savings association's payment of cash dividends to shareholders, or
any payment by a savings association to repurchase, redeem, retire, or otherwise
acquire any of its shares or debt instruments that are included in total
capital, and any extension of credit to finance an affiliate's acquisition of
those shares or interests. The amended regulation does not apply to dividends
consisting only of a savings association's shares or rights to purchase such
shares.
The amended regulation exempts certain savings associations from the
current requirement that all savings associations file either a notice or an
application with the OTS before making any capital distribution. As revised, the
regulation requires a savings association to file an application for approval of
a proposed capital distribution with the OTS if the association is not eligible
for expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). At December 31, 1998, Union Federal's retained net income
standard was approximately $3.1 million. A savings association must also file an
application for approval of a proposed capital distribution if, following the
proposed distribution, the association would not be at least adequately
capitalized under the OTS prompt corrective action regulations, or if the
proposed distribution would violate a prohibition contained in any applicable
statute, regulation, or agreement between the association and the OTS or the
FDIC.
The amended regulation requires a savings association to file a notice
of a proposed capital distribution in lieu of an application if the association
or the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because Union
Federal is a subsidiary of a savings and loan holding company, this latter
provision will require, at a minimum, that Union Federal file a notice with the
OTS 30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Union Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Union
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Union Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well capitalized," "adequately capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Union Federal's current operations.
Safety and Soundness Standards
On February 2, 1995, the federal banking agencies adopted final safety and
soundness standards for all insured depository institutions. The standards,
which were issued in the form of guidelines rather than regulations, relate to
internal controls, information systems, internal audit systems, loan
underwriting and documentation, compensation and interest rate exposure. In
general, the standards are designed to assist the federal banking agencies in
identifying and addressing problems at insured depository institutions before
capital becomes impaired. If an institution fails to meet these standards, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan may result in enforcement
proceedings. On August 27, 1996, the federal banking agencies added asset
quality and earning standards to the safety and soundness guidelines.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Union Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30 percent of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 1998, Union
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its lending limits. Management does not believe
that the loans-to-one-borrower limits will have a significant impact on Union
Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test. If Union Federal maintains an
appropriate level of qualified thrift investments ("QTIs") (primarily
residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL, it will continue
to enjoy full borrowing privileges from the FHLB of Indianapolis. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 1998, Union Federal was in compliance
with its QTL requirement, with approximately 90.04% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; (iii) it shall not be eligible for any new FHLB
advances; and (iv) it shall be bound by regulations applicable to national banks
respecting payment of dividends. Three years after failing the QTL test the
association must (i) dispose of any investment or activity not permissible for a
national bank and a savings association and (ii) repay all outstanding FHLB
advances. If such a savings association is controlled by a savings and loan
holding company, then such holding company must, within a prescribed time
period, become registered as a bank holding company and become subject to all
rules and regulations applicable to bank holding companies (including
restrictions as to the scope of permissible business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in ss.7701(a)(19) of the Code or the asset
composition test of ss.7701(c) of the Code. Branching that would result in the
formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks
in other states and, with state consent and subject to certain limitations,
allows banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law authorizes Indiana banks to branch interstate by merger or de novo
expansion, provided that such transactions are not permitted to out-of-state
banks unless the laws of their home states permit Indiana banks to merge or
establish de novo banks on a reciprocial basis. The Indiana Branching Law became
effective March 15, 1996.
Transactions with Affiliates
Union Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which restrict financial transactions between banks and affiliated
companies. The statute limits credit transactions between a bank or savings
association and its executive officers and its affiliates, prescribes terms and
conditions for bank affiliate transactions deemed to be consistent with safe and
sound banking practices, and restricts the types of collateral security
permitted in connection with a bank's extension of credit to an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered
with the SEC under the 1934 Act. The Holding Company is therefore subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Union Federal's conversion to stock form, if the Holding Company
has fewer than 300 shareholders, it may deregister its shares under the 1934 Act
and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Union Federal's record of meeting community
credit needs as satisfactory.
TAXATION
Federal Taxation
Historically, savings associations, such as Union Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. As a result of the repeal of the
percentage of taxable income method, reserves taken after 1987 using the
percentage of taxable income method generally must be included in future taxable
income over a six-year period, although a two-year delay may be permitted for
associations meeting a residential mortgage loan origination test. Union Federal
will recapture approximately $55,000 over a six-year period that began with the
year ended December 31, 1996. In addition, the pre-1988 reserve, for which no
deferred taxes have been recorded, need not be recaptured into income unless (i)
the savings association no longer qualifies as a bank under the Code, or (ii)
the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, Union Federal has been reporting its
income and expenses on the accrual method of accounting. Union Federal's federal
income tax returns have not been audited in recent years.
State Taxation
Union Federal is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on "adjusted gross income." "Adjusted
gross income," for purposes of FIT, begins with taxable income as defined by
Section 63 of the Code and, thus, incorporates federal tax law to the extent
that it affects the computation of taxable income. Federal taxable income is
then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
Union Federal's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to Union
Federal's office as of December 31, 1998:
Net Book
Value of
Property, Approximate
Description Owned or Year Total Furniture & Square
and Address leased Opened Deposits Fixtures Footage
----------- ------ ------ -------- -------- -------
(Dollars in thousands)
221 East Main Street Owned 1913 $64,846 $355 19,065
Crawfordsville, Indiana 47933
Union Federal owns computer and data processing equipment which it uses
for transaction processing, loan origination, and accounting. The net book value
of Union Federal's electronic data processing equipment was approximately $2,200
at December 31, 1998.
Union Federal has also contracted for data processing and reporting
services from Intrieve, Incorporated in Cincinnati, Ohio. The cost of these data
processing services is approximately $5,500 per month.
Union Federal has also executed a Correspondent Services Agreement with
the FHLB of Indianapolis under which it receives item processing and other
services for a fee of approximately $1,100 per month.
Union Federal also receives income from leasing office space on the second
floor of its building and parking spaces located behind its building. Union
Federal's gross income from renting the office space was $28,000 for fiscal year
ended December 31, 1998 and December 31, 1997. Union Federal's gross income from
renting the parking spaces was approximately $10,000 for the fiscal year ended
December 31, 1998 and approximately $9,000 for the year ended December 31, 1997.
Item 3. Legal Proceedings.
Although Union Federal is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which it presently is a party or to which any of its property is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of the Holding Company's shareholders
during the quarter ended December 31, 1998.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---- -----------------------------
Joseph E. Timmons Chairman of the Board, President
and Chief Executive Officer
Denise E. Swearingen Secretary and Treasurer
Ronald L. Keeling Vice President
Joseph E. Timmons (age 64) has served as President and Chief Executive
Officer of the Holding Company since 1997, of Union Federal since 1974 and of
UFS Service Corp. since its inception in 1994. He has been an employee of Union
Federal since 1954.
Denise E. Swearingen (age 40) has served as the Holding Company's
Secretary and Treasurer since 1997 and as Union Federal's Secretary and
Controller/Treasurer since 1995. She has worked for Union Federal since 1983.
Ronald L. Keeling (age 47) has served as the Holding Company's Vice
President since 1997, as Union Federal's Vice President and Assistant Secretary
since 1984 and as Senior Loan Officer since 1979. He has worked for Union
Federal since 1971.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is incorporated by reference to
the material under the heading "Shareholder Information" on page 42 of the
Holding Company's 1998 Shareholder Annual Report (the "Shareholder Annual
Report").
Item 6. Selected Financial Data.
The information required by this item is incorporated by reference to
the material under the heading "Selected Consolidated Financial Data" on pages 2
and 3 of the Shareholder Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is incorporated by reference to
pages 3 through 18 of the Shareholder Annual Report.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The information required by this item is incorporated by reference to
pages 16 through 18 of the Shareholder Annual Report.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and
Notes thereto contained on pages 19 through 39 of the Shareholder Annual
Report are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable
period.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this item with respect to Directors is
incorporated by reference to pages 2 to 4 of the Holding Company's Proxy
Statement for its Annual Shareholder meeting to be held April 21, 1999 (the
"1999 Proxy Statement"). The information concerning the Holding Company's
executive officers is included in Item 4.5 in Part I of this report.
Item 11. Executive Compensation.
The information required by this item with respect to Directors is
incorporated by reference to pages 5 to 7 of the Holding Company's 1999 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item with respect to Directors is
incorporated by reference to pages 3 to 4 of the Holding Company's 1999 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this item with respect to Directors is
incorporated by reference to page 7 of the Holding Company's 1999 Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List the following documents filed as part of the report:
Annual Report
Page No.
--------
Financial Statements 19
Consolidated Balance Sheet at December 31, 1998, and 1997 20
Consolidated Statement of Income for the Years Ended
December 31, 1998, 1997, and 1996 21
Consolidated Statement of Shareholders'
Equity for the Years Ended
December 31, 1998, 1997, and 1996. 22
Consolidated Statement of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 23
Notes to Consolidated Financial Statements 24
(b) Reports on Form 8-K.
The Holding Company filed no reports on Form 8-K during the quarter
ended December 31, 1998.
(c) The exhibits filed herewith or incorporated by reference herein are set
forth on the Exhibit Index on page E-1. Included in those exhibits is
an executive compensation plan and arrangement which is identified as
Exhibit 10(5).
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
UNION COMMUNITY BANCORP
Date: March 29, 1999 By: /s/ Joseph E. Timmons
------------------------------------
Joseph E. Timmons, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 29th day of March, 1999.
Signatures Title Date
(1) Principal Executive Officer:
/s/ Joseph E. Timmons )
--------------------------- )
Joseph E. Timmons President and )
Chief Executive Officer)
)
)
(2) Principal Financial and )
Accounting Officer: )
)
)
)
/s/ Denise E. Swearingen Treasurer )
--------------------------- )
Denise E. Swearingen )
)
) March 29, 1999
)
(3) The Board of Directors: )
)
)
/s/ Philip L. Boots Director )
Philip L. Boots )
)
)
/s/ Marvin L. Burkett Director )
--------------------------- )
Marvin L. Burkett )
)
)
/s/ Phillip E. Grush Director )
--------------------------- )
Phillip E. Grush )
)
)
/s/ Samuel H. Hillenbrand )
--------------------------- )
Samuel H. Hillenbrand Director )
)
)
/s/ John M. Horner Director )
--------------------------- )
John M. Horner )
)
) March 29, 1999
/s/ Harry A. Siamas Director )
--------------------------- )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
--------------------------- )
Joseph E. Timmons )
)
EXHIBIT INDEX
Exhibit No. Description
3(1) Registrant's Articles of Incorporation are incorporated by
reference to to Exhibit 3(1) to the Registration Statement
(2) Registrant's Code of By-Laws is incorporated by reference to
to Exhibit 3(2) to the Registration Statement
10(4) Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement
(5) Employment Agreement between Union Federal Savings and Loan
Association and Joseph E. Timmons incorporated by reference to
to Exhibit 10(5) to the Registration Statement
(6) Exempt Loan and Share Purchase Agreement between Trust under
Union Community Bancorp Employee Stock Ownership Plan and
Trust Agreement and Union Community Bancorp
13 1998 Shareholder Annual Report
21 Subsidiaries of the Registrant
23 Consent of independent certified public accountants
27 Financial Data Schedule (filed electronically)