SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of September 30, 1998 was 3,041,750.
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT .....................................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet ........................4
Consolidated Condensed Statement of Income...................5
Consolidated Condensed Statement of Changes in
Stockholders' Equity.........................................6
Consolidated Condensed Statement of Cash Flows...............7
Notes to Consolidated Condensed
Financial Statements.........................................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................9
Item 3. Quantitative and Qualitative Disclosures about Market Risk......12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................14
Item 2. Changes in Securities...........................................14
Item 3. Defaults Upon Senior Securities.................................14
Item 4. Submission of Matters to a Vote of Security Holders.............14
Item 5. Other Information...............................................14
Item 6. Exhibits and Reports on Form 8-K................................14
SIGNATURES....................................................................15
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheet
(Unaudited)
September 30, December 31,
1998 1997
------------- -------------
Assets
Cash and due from banks $ 48,688 $ 22,424
Short-term interest-bearing deposits 8,873,150 44,758,403
------------- -------------
Cash and cash equivalents 8,921,838 44,780,827
Investment securities held to maturity 6,779,432 5,820,069
Loans 90,135,546 78,687,999
Allowance for loan losses (356,258) (252,258)
------------- -------------
Net Loans 89,779,288 78,435,741
Premises and equipment 362,226 367,360
Federal Home Loan Bank of Indianapolis stock 744,500 707,700
Investment in limited partnership 1,085,109 1,176,109
Interest receivable 653,450 581,526
Other assets 111,238 170,925
------------- -------------
Total assets $ 108,437,081 $ 132,040,257
============= =============
Liabilities
Deposits
Noninterest-bearing $ 706,192 $ 1,532,647
Interest-bearing 62,766,409 60,725,398
------------- -------------
Total deposits 63,472,601 62,258,045
Stock subscription refundable 22,687,104
Federal Home Loan Bank of Indianapolis advances 772,226 2,373,051
Note payable 1,020,642 1,200,042
Interest payable 120,973 118,867
Dividends payable 271,487
Other liabilities 669,918 497,271
------------- -------------
Total liabilities 66,327,847 89,134,380
------------- -------------
Commitments and Contingent Liabilities
Stockholders' Equity
Preferred stock, no-par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 3,041,750 shares 29,672,830 29,637,592
Retained earnings 15,891,443 15,108,285
Unearned employee stock ownership plan ("ESOP") shares (1,758,052) (1,840,000)
Unearned compensation (1,696,987)
------------- -------------
Total stockholders' equity 42,109,234 42,905,877
------------- -------------
Total liabilities and stockholders' equity $ 108,437,081 $ 132,040,257
============= =============
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest and Dividend Income:
Loans $ 1,775,517 $ 1,516,000 $ 5,123,543 $ 4,510,235
Investment securities 146,945 105,953 402,834 312,023
Dividends on FHLB stock 15,069 14,717 43,854 39,686
Deposits with financial institutions 97,765 18,227 491,552 68,280
----------- ----------- ----------- -----------
Total interest income 2,035,296 1,654,897 6,061,783 4,930,224
----------- ----------- ----------- -----------
Interest Expense:
Deposits 856,924 846,455 2,484,699 2,500,209
FHLB advances 11,769 83,439 39,804 252,384
----------- ----------- ----------- -----------
Total interest expense 868,693 929,894 2,524,503 2,752,593
----------- ----------- ----------- -----------
Net Interest Income 1,166,603 725,003 3,537,280 2,177,631
Provision for loan losses 6,000 27,000 104,000 138,000
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 1,160,603 698,003 3,433,280 2,039,631
----------- ----------- ----------- -----------
Other Income (Losses)
Equity in losses of limited partnership (30,000) (19,070) (91,000) (132,800)
Other income 13,653 14,031 47,165 32,823
----------- ----------- ----------- -----------
Total other income (losses) (16,347) (5,039) (43,835) (99,977)
----------- ----------- ----------- -----------
Other Expenses
Salaries and employee benefits 225,222 122,722 605,636 374,994
Premises and equipment 15,350 12,364 44,162 39,667
Deposit insurance expense 11,013 9,673 32,190 21,741
Legal and professional fees 35,376 7,200 108,867 26,613
Other expense 73,153 92,609 241,512 230,286
----------- ----------- ----------- -----------
Total other expenses 360,114 244,568 1,032,367 693,301
----------- ----------- ----------- -----------
Income Before Income Tax 784,142 448,396 2,357,078 1,246,353
Income tax expense 280,090 146,459 845,193 381,315
----------- ----------- ----------- -----------
Net Income $ 504,052 $ 301,937 $ 1,511,885 $ 865,038
=========== =========== =========== ===========
Basic earnings per share .18 .53
Diluted earnings per share .18 .53
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Changes in Stockholders' Equity
Common Stock
----------------------------
Shares Retained Unearned Unearned
Outstanding Amount Earnings ESOP Shares Compensation Total
------------- -------------- --------------- -------------- --------------- ----------------
Balances, January 1, 1998 3,041,750 $ 29,637,592 $ 15,108,285 $(1,840,000) $ 42,905,877
Net income for the period 1,511,885 1,511,885
Contribution for unearned
compensation $ (1,753,853) (1,753,853)
Amortization of unearned
compensation 56,866 56,866
Cash dividends ($0.255 per share) (728,727) (728,727)
ESOP shares earned 35,238 81,948 117,186
------------- -------------- --------------- ------------ ------------- ------------
Balances, September 30, 1998 3,041,750 $ 29,672,830 $ 15,891,443 $(1,758,052) $ (1,696,987) $ 42,109,234
============= ============== =============== ============ ============= ============
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
Nine Months Ended
September 30,
-------------------------------
1998 1997
------------ ------------
Operating Activities:
Net income $ 1,511,885 $ 865,038
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Provision for loan losses 104,000 138,000
Depreciation 23,312 20,346
Investment securities accretion, net (6,603) (10,212)
Equity in losses of limited partnership 91,000 132,800
ESOP shares earned 117,186
Amortization of unearned compensation 56,866
Net change in:
Interest receivable (71,924) (4,353)
Interest payable 2,106 40,070
Other assets 14,127 (96,822)
Other liabilities 27,815 24,494
------------ ------------
Net cash provided by operating activities 1,869,770 1,109,361
------------ ------------
Investing Activities:
Purchases of investment securities held to maturity (6,103,586) (900,000)
Proceeds from paydowns and maturities of securities held to maturity 5,150,826 848,657
Other net changes in loans (11,401,987) (2,976,231)
Purchase of FHLB of Indianapolis stock (36,800) (127,600)
Proceeds on sale of foreclosed real estate 32,163
Purchases of property and equipment (18,178) (8,126)
------------ ------------
Net cash used by investing activities (12,409,725) (3,131,137)
------------ ------------
Financing Activities:
Net change in:
Interest-bearing demand and savings deposits (532,450) 1,266,918
Certificates of Deposit 1,747,006 428,961
Stock subscription escrow accounts (22,687,104)
Proceeds from borrowings 4,000,000
Repayment of borrowings (1,780,225) (3,807,278)
Cash dividends paid (457,240)
Contribution for unearned compensation (1,753,853)
Net change in advances by borrowers for taxes and insurance 144,832 126,925
------------ ------------
Net cash provided (used) by financing activities (25,319,034) 2,015,526
------------ ------------
Net Change in Cash and Cash equivalents (35,858,989) (6,250)
Cash and Cash equivalents, Beginning of period 44,780,827 1,465,190
------------ ------------
Cash and Cash equivalents, End of period $ 8,921,838 $ 1,458,940
============ ============
Supplemental cash flow disclosures:
Interest paid 2,522,397 2,712,523
Income taxes paid 685,900 372,033
Loans transferred to foreclosed real estate 163,540
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Union Community
Bancorp (the "Company") and its wholly owned subsidiary, Union Federal Savings
and Loan Association, a federally chartered savings and loan association ("Union
Federal"). A summary of significant accounting policies is set forth in Note 1
of Notes to Financial Statements included in the December 31, 1997 Annual Report
to Shareholders. All significant intercompany accounts and transactions have
been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at September 30, 1998, and for the
nine month and three month periods ended September 30, 1998 and 1997, have not
been audited by independent accountants, but reflect, in the opinion of
management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for such periods.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted average common
shares and potential common shares outstanding during the period subsequent to
Union Federal's conversion to a stock savings and loan association on December
29, 1997. Unearned Employee Stock Ownership Plan shares have been excluded from
the computation of average common shares outstanding.
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $504,052 2,805,067 $ .18 $1,511,885 2,842,010 $ .53
=========== ========
Effect of dilutive RRP awards and
stock options 11
--------- -------------- ------------- ---------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $504,052 2,805,067 $ .18 $1,511,885 2,842,021 $ .53
========= ============== =========== ============= ========= ========
Note 3: Reporting Comprehensive Income
In 1998, the Company adopted Financial Accounting Standards No. 130, Reporting
Comprehensive Income. For the nine months ended September 30, 1998 and 1997, the
Company had no items that were required to be recognized under accounting
standards as components of comprehensive income in the financial statements.
Note 4: Benefit Plans
On June 30, 1998, the stockholders of the Company approved a Stock Option Plan
and a Recognition and Retention Plan and Trust (RRP). These plans allow for the
purchase in the open market or through the issuance of authorized and unissued
shares of up to 304,175 shares of common stock for the Stock Option Plan and
121,670 shares of common stock for the RRP. Under the Stock Option Plan, stock
option rights covering 304,175 shares of stock may be granted to officers, key
employees, and directors of the Company and its subsidiaries and options for
186,000 of such shares have been granted effective June 30, 1998. The options
have an option price per share equal to the market value at date of grant, have
ten year terms, and become exercisable at the rate of 20% per year. Under the
RRP, Stock awards covering 121,670 shares of common stock may be awarded to the
directors and key employees of the Company and its subsidiaries and awards of
78,900 of such shares have been awarded effective June 30, 1998.
These awards vest at the rate of 20% per year.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Union Community Bancorp, an Indiana corporation (the "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"). 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.
Union Federal currently owns one subsidiary, UFS Service Corp. ("UFS"), whose
sole asset is its investment in Pedcor Investments 1993-XVI, L.P. ("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.
Union Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Union Federal's non-interest
income, including fee income and service charges, and the level of its
non-interest expenses, including general and administrative expenses.
Financial Condition
Total assets decreased $23.6 million, or 17.9% at September 30, 1998, compared
to December 31, 1997. The decline was primarily in cash and cash equivalents
which decreased $35.9 million. The decrease in cash and cash equivalents,
principally in short-term interest-bearing deposits, resulted from the payment
of the stock subscriptions refundable of $22.7 million at December 31, 1997. The
decrease in cash and cash equivalents was offset by an increase in net loans and
investment securities held to maturity. Net loans increased by $11.3 million, or
14.5% due to an increase in customer demand. Investment securities held to
maturity increase by $959,000, or 16.5%.
Deposits increased $1.2 million to $63.5 million during the nine months ended
September 30, 1998. Demand and savings deposits decreased $532,000 or 3.3%
between December 31, 1997 and September 30, 1998. Certificates of deposits
increased $1.7 million or 3.8% during this period.
Borrowed funds decreased $1.8 million, or 49.8% from December 31, 1997 to
September 30, 1998. The decline in total borrowed funds was comprised of a
decrease in FHLB advances of $1.6 million, and a decrease in the note payable to
a limited partnership of $179,000.
Stockholders' equity decreased $797,000 from $42.9 million at December 31, 1997
to $42.1 million at September 30, 1998. The decrease was primarily due to the
$1.8 million contribution made to fund the recognition and retention
compensation plan and cash dividends of $729,000. These decreases were offset by
net income for the nine months ended September 30, 1998 of $1.5 million,
Employee Stock Ownership Plan shares earned of $117,000, and unearned
compensation amortization of $57,000.
Comparison of Operating Results for the three months Ended September 30, 1998
and 1997
Net income increased $202,000, or 66.9% from $302,000 for the three months ended
September 30, 1997 to $504,000 for the three months ended September 30, 1998.
The increase is primarily due to an increase in net interest income offset by
increases in other expenses. The return on average assets was 1.86% and 1.43%
for the three months ended September 30, 1998 and 1997, respectively.
Interest income increased $380,000, or 23.0% from $1.7 million for the three
months ended September 30, 1997 to $2.0 million for the same period in 1998.
Interest expense decreased $61,000 or 6.6% from $930,000 for the three months
ended September 30, 1997 to $869,000 for the same period in 1998. As a result,
net interest income for the three months ended September 30, 1998 amounted to
1.2 million, an increase of $442,000, or 61.0% compared to the same period in
1997. The increase in net interest income was due primarily to an increase in
the volume of loans and short-term interest-bearing deposits and a decrease in
the volume of Federal Home Loan Bank advances. The increase in interest-earning
assets and the decrease in interest-bearing liabilities were primarily
attributable to the proceeds received in conjunction with the Company's stock
issuance. Net proceeds of the Company's stock issuance, after costs and
excluding the shares issued for the ESOP, were $27.8 million.
The provision for loan losses for the three months ended September 30, 1998 was
$6,000 as compared to $27,000 for the same period in 1997. The 1998 provision
and the allowance for losses were considered adequate, based on size, condition
and components of the loan portfolio. While management estimates loan losses
using the best available information, no assurance can be given that future
addition to the allowance will not be necessary based on changes in economic and
real estate market conditions, further information obtained regarding problem
loans, identification of additional problem loans and other factors, both within
and outside of management's control.
Other losses increased $11,000 for the three months ended September 30, 1998
compared to the same period in 1997.
Salaries and employee benefits were $225,000 for the three months ended
September 30, 1998 compared to $123,000 for the 1997 period, an increase of
$102,000, or 82.9%. This increase resulted primarily from $93,000 of
compensation expense related to the ESOP and the recognition and retention
compensation plan. Legal and professional fees were $35,000 for the three months
ended September 30, 1998 compared to $7,000 for the 1997 period, an increase of
$28,000. This increase was a result of the additional expenses incurred as a
public company.
Income tax expense increased $134,000, or 91.2% for the three months ended
September 30, 1998 compared to the same period in 1997. The increase was
directly related to the increase in taxable income for the period.
Comparison of Operating Results for the Nine months Ended September 30, 1998 and
1997
Net income increased $647,000, or 74.8%, from $865,000 for the nine months ended
September 30, 1997 to $1.5 million for the nine months ended September 30, 1998.
The increase is primarily due to an increase in net interest income offset by
increases in other expenses. The return on average assets was 1.87% and 1.38%
for the nine months ended September 30, 1998 and 1997, respectively.
Interest income increased $1,132,000, or 23.0% from $4.9 million for the nine
months ended September 30, 1997 to $6.1 million for the same period in 1998.
Interest expense decreased $228,000, or 8.3%, from $2.8 million for the nine
months ended September 30, 1997 to $2.5 million for the same period in 1998. As
a result, net interest income for the nine months ended September 30, 1998
increased $1.4 million, or 62.5%, compared to the same period in 1997. The
increase in net interest income was due primarily to an increase in the volume
of loans and short-term interest-bearing deposits and a decrease in the volume
of Federal Home Loan Bank advances. The increase in interest-earning assets and
the decrease in interest-bearing liabilities were primarily attributable to the
proceeds received in conjunction with the Company's stock issuance.
The provision for loan losses for the nine months ended September 30, 1998 was
$104,000 as compared to $138,000 for the same period in 1997.
Other losses decreased $56,000 for the nine months ended September 30, 1998
compared to the same period in 1997 primarily due to decreased losses of $42,000
from the investment in a low-income housing income tax credit limited
partnership. The investment in the limited partnership represents a 99% equity
in Pedcor. In addition to recording the equity in the losses of Pedcor, a
benefit of low income housing income tax credits in the amount of $134,000 was
recorded for the nine months ended September 31, 1998 and 1997.
Salaries and employee benefits were $606,000 for the nine months ended September
30, 1998 compared to $375,000 for the 1997 period, an increase of $231,000 or
61.6%. This increase resulted primarily from $174,000 of compensation expense
related to the ESOP and the recognition and retention compensation plan. Legal
and professional fees were $109,000 for the nine months ended September 30, 1998
compared to $27,000 for the 1997 period, an increase of $82,000. This increase
was a result of the additional expenses incurred as a public company.
Income tax expense increased $464,000, or 121.7%, for the nine months ended
September 30, 1998 compared to the same period in 1997. The increase was
directly related to the increase in taxable e income for the period.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
Union Federal had $1.1 million and $98,000 of loans classified as substandard at
September 30, 1998 and December 31, 1997, respectively. At September 30, 1998
and December 31, 1997, no loans were classified as doubtful or loss. At
September 30, 1998, and December 31, 1997, respectively, $575,000 and $98,000 of
the substandard loans were non-accrual loans. The allowance for loan losses was
$356,000 or .4% of net loans at September 30, 1998 and $252,000 or .3% of net
loans at December 31, 1997. Approximately $492,000 of the increase in classified
loans is a result of a regulatory examination. Union Federal does not believe
that at this time any loss exists on this loan classified by the examiners. In
addition, loans of $40,000 are considered impaired under Statement of Financial
Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of
September 30, 1998, Union Federal had liquid assets of $11.5 million and a
liquidity ratio of 15.5%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is (http://www.sec.gov).
Year 2000 Compliance
Union Federal's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. Union Federal is
addressing the potential problems associated with the possibility that the
computers that it uses to control its operating systems, facilities and
infrastructure may not be programmed to read four-digit date codes. This could
cause some computer applications to be unable to recognize the change from the
year 1999 to the year 2000, which could cause computer systems to generate
erroneous data or to fail.
Union Federal is actively monitoring its Year 2000 computer compliance issues.
Union Federal intends to replace its current electronic data service provider,
On-Line Financial Services, Inc., of Oak Brook, Illinois ("On-Line"), during the
first quarter of 1999. At that time, Intrieve Incorporated ("Intrieve") will
become Union Federal's electronic data service provider. Because of the pending
transfer of data processing responsibility, Union Federal has not tested the
electronic data that On-Line currently maintains on its system for Year 2000
compliance. Union Federal intends to begin testing its electronic data for Year
2000 compliance within 30 days of March 23, 1999, the date that Intrieve assumes
the responsibility for processing Union Federal's electronic data. Union Federal
has received written confirmation from Intrieve that testing will occur within
30 days of Union Federal's conversion to its system. Banker's Systems, which
maintains Union Federal's loan documentation system, will conduct tests for Year
2000 compliance which are expected to be completed during December, 1998.
The Company's Board of Directors reviews on a monthly basis its progress in
addressing Year 2000 issues and has appointed three executive officers to
address all aspects of Year 2000 compliance. The Company believe that its
expenses related to upgrading its systems and software for Year 2000 compliance
will not exceed $10,000. At September 30, 1998, the Company had spent
approximately $6,000 in connection with Year 2000 compliance. Although the
Company believes it is taking the necessary steps to address the Year 2000
compliance issue, no assurances can be given that some problems will not occur
or that it will not incur significant additional expenses in future periods. In
the event that the Company is ultimately required to purchase replacement
computer systems, programs and equipment, or to incur substantial expenses to
make its current systems, programs and equipment Year 2000 compliant, its net
income and financial condition could be adversely affected.
In addition to possible expenses related to its own systems and those of its
service providers, Union Federal could incur losses if Year 2000 problems affect
any of its depositors or borrowers. Such problems could include delayed loan
payments due to Year 2000 problems affecting any of its significant borrowers or
impairing the payroll systems of large employers in its market area. Union
Federal has contacted its commercial borrowers with outstanding loans in excess
of $500,000 to request that they certify by the end of December, 1998 that their
computer systems are, or soon will be, Year 2000 compliant. In addition, Union
Federal currently require that borrowers under new commercial loans that it
originates to certify that they are aware of the Year 2000 issue and will give
all necessary attention to insure that their information technology will be Year
2000 compliant. Because Union Federal's loan portfolio to individual borrowers
is diversified and its market area does not depend significantly upon one
employer or industry, Union Federal does not expect any such Year 2000 related
difficulties that may affect its depositors and borrowers to significantly
affect its net earnings or cash flow.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
An important component of Union Federal's asset/liability management policy
includes examining the interest rate sensitivity of its assets and liabilities
and monitoring the expected effects of interest rate changes on its net
portfolio value.
An asset or liability is interest rate sensitive within a specific time period
if it will mature or reprice within that time period. If Union Federal's assets
mature or reprice more quickly or to a greater extent than its liabilities,
Union Federal's net portfolio value and net interest income would tend to
increase during periods of rising interest rates but decrease during periods of
falling interest rates. Conversely, if Union Federal's assets mature or reprice
more slowly or to a lesser extent than its liabilities, its net portfolio value
and net interest income would tend to decrease during periods of rising interest
rates but increase during periods of falling interest rates.
Management believes it is critical to manage the relationship between interest
rates and the effect on Union Federal's net portfolio value ("NPV"). This
approach calculates the difference between the present value of expected cash
flows from assets and the present value of expected cash flows from liabilities,
as well as cash flows from off-balance sheet contracts. Union Federal manages
assets and liabilities within the context of the marketplace, regulatory
limitations and within limits established by its Board of Directors on the
amount of change in NPV which is acceptable given certain interest rate changes.
The OTS issued a regulation, which uses a net market value methodology to
measure the interest rate risk exposure of savings associations. Under this OTS
regulation, an institution's "normal" level of interest rate risk in the event
of an assumed change in interest rates is a decrease in the institution's NPV in
an amount not exceeding 2% of the present value of its assets. Savings
associations with over $300 million in assets or less than a 12% risk-based
capital ratio are required to file OTS Schedule CMR. Data from Schedule CMR is
used by the OTS to calculate changes in NPV (and the related "normal" level of
interest rate risk) based upon certain interest rate changes (discussed below).
Associations which do not meet either of the filing requirements are not
required to file OTS Schedule CMR, but may do so voluntarily. As Union Federal
does not meet either of these requirements, it is not required file Schedule
CMR, although it does so voluntarily. Under the regulation, associations which
must file are required to take a deduction (the interest rate risk capital
component) from their total capital available to calculate their risk based
capital requirement if their interest rate exposure is greater than "normal."
The amount of that deduction is one-half of the difference between (a) the
institution's actual calculated exposure to a 200 basis point interest rate
increase or decrease (whichever results in the greater pro forma decrease in
NPV) and (b) its "normal" level of exposure which is 2% of the present value of
its assets.
Presented below, as of September 30, 1998, is an analysis performed by the OTS
of Union Federal's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts in the yield curve, in 100 basis
points increments, up and down 400 basis points. At September 30, 1998, 2% of
the present value of Union Federal's assets was approximately $2.2 million.
Because the interest rate risk of a 200 basis point increase in market rates
(which was greater than the interest rate risk of a 200 basis point decrease)
was $4.0 million at September 30, 1998. Union Federal would have been required
to deduct $928,000 from its total capital available to calculate its risk based
capital requirement if it had been subject to the OTS' reporting requirements
under this methodology. This amount represents an increase of $78,000 over the
$850,000 calculated at December 31, 1997. Union Federal's exposure to interest
rate risk results from a concentration of fixed rate mortgage loans in its
portfolio.
Net Portfolio Value NPV as % of PV of Assets
Change ---------------------------------- ------------------------
in Rates $ Amount $ Change % Change NPV Ratio Change
- -------- -------- -------- -------- --------- ------
+400 bp 24,402 -9,058 -27% 23.94% -596 bp
+300 bp 26,948 -6,513 -19% 25.73% -417 bp
+200 bp 29,436 -4,024 -12% 27.40% -250 bp
+100 bp 31,709 -1,751 -5% 28.84% -106 bp
0 bp 33,460 29.90%
-100 bp 34,644 1,184 4% 30.57% +67 bp
-200 bp 35,698 2,438 7% 31.27% +137 bp
-300 bp 37,398 3,938 12% 32.10% +220 bp
-400 bp 39,014 5,554 17% 32.98% +308 bp
This chart illustrates, for example, that a 200 basis point (or 2%) increase in
interest rates would result in a $4.0 million, or 12%, decrease in the net
portfolio value of Union Federal's assets compared to a $3.9 million, or 12%
decrease, at December 31, 1997. This hypothetical increase in interest rates
would also result in a 250 basis point, or 2.50%, decrease in the ratio of the
net portfolio value to the present value of Union Federal's assets compared to a
246 basis point, or 2.46%, decrease at December 31, 1997.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the methods of analysis presented above. For example, although
certain assets and liabilities may have similar maturities or periods to
repricing, they may react in different degrees to changes in market interest
rates. Also the interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of a change in interest rates, expected rates of prepayments on loans
and early withdrawals from certificates could likely deviate significantly from
those assumed in calculating the table.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 The Articles of Incorporation of the Registrant
are incorporated by reference to Exhibit 3.1 to
the Registration Statement on Form S-1
(Registration No. 333-35799)
3.2 The Code of Bylaws of the Registrant are
incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1 (Registration
No. 333-35799)
10.1 The Union Community Bancorp Stock Option Plan is
incorporated by reference to Exhibit A of the
Registrant's Proxy Statement filed with the
Commission May 15, 1998
10.2 Union Federal Savings and Loan Association
Recognition and Retention Plan and Trust is
incorporated by reference to Exhibit B of the
Registrant's Proxy Statement filed with the
Commission May 15, 1998
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: November 11, 1998 By: /s/ Joseph E. Timmons
----------------- -------------------------
Joseph E. Timmons
President and
Chief Executive Officer
Date: November 11, 1998 By: /s/ Denise E. Swearingen
----------------- ----------------------------
Denise E. Swearingen
Treasurer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
3.1 The Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1 (Registration No. 333-35799)
3.2 The Code of Bylaws of the Registrant are incorporated by
reference to Exhibit 3.2 to the Registration Statement on
Form S-1 (Registration No. 333-35799)
10.1 The Union Community Bancorp Stock Option Plan is
incorporated by reference to Exhibit A of the Registrant's
Proxy Statement filed with the Commission May 15, 1998
10.2 Union Federal Savings and Loan Association Recognition and
Retention Plan and Trust is incorporated by reference to
Exhibit B of the Registrant's Proxy Statement filed with the
Commission May 15, 1998
27 Financial Data Schedule