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, 1999
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: 000-23543
UNION COMMUNITY BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the Registrant's common stock, without par value,
outstanding as of September 30, 1999 was 2,600,700.
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 (Unaudited) 4
Consolidated Condensed Statement of Income
(Unaudited) 5
Consolidated Condensed Statement of Shareholders'
Equity (Unaudited) 6
Consolidated Condensed Statement of Cash Flows
(Unaudited) 7
Notes to Unaudited 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,
1999 1998
------------------------ -------------------------
Assets
Cash $ 254,867 $ 32,153
Interest-bearing demand deposits 2,466,691 6,158,927
------------------------ -------------------------
Cash and cash equivalents 2,721,558 6,191,080
Investment securities
Available for sale 286,875
Held to maturity 8,325,713 8,026,162
------------------------ -------------------------
Total investment securities 8,612,588 8,026,162
Loans, net of allowance for loan losses of $407,258 and $362,258 104,727,685 90,900,269
Premises and equipment 363,137 355,194
Federal Home Loan Bank stock 1,043,700 744,500
Investment in limited partnership 977,609 1,055,109
Interest receivable 785,978 714,691
Other assets 243,354 174,687
------------------------ -------------------------
Total assets $ 119,475,609 $ 108,161,692
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 1,187,112 $ 656,796
Interest-bearing 66,563,374 64,188,836
------------------------ -------------------------
Total deposits 67,750,486 64,845,632
Federal Home Loan Bank advances 11,658,526 772,226
Note payable 837,442 1,020,642
Interest payable 143,059 109,337
Dividends payable 291,315 270,567
Other liabilities 809,775 612,427
------------------------ -------------------------
Total liabilities 81,490,603 67,630,831
------------------------ -------------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no-par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 2,600,700 and 2,889,663 shares 25,384,174 28,193,644
Retained earnings 15,702,739 15,708,073
Accumulated other comprehensive income 18,631
Unearned employee stock ownership plan ("ESOP") shares (1,651,017) (1,730,736)
Unearned recognition and retention plan ("RRP") shares (1,469,521) (1,640,120)
------------------------ -------------------------
Total shareholders' equity 37,985,006 40,530,861
------------------------ -------------------------
Total liabilities and shareholders' equity $ 119,475,609 $ 108,161,692
======================== =========================
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
---------------- ----------------- ---------------- ----------------
1999 1998 1999 1998
---------------- ----------------- ---------------- ----------------
Interest and Dividend Income
Loans $ 1,963,021 $ 1,775,517 $ 5,683,315 $ 5,123,543
Investment securities 144,256 146,945 427,806 402,834
Dividends on Federal Home Loan Bank stock 17,475 15,069 49,043 43,854
Deposits with financial institutions 27,929 97,765 100,986 491,552
---------------- ----------------- ---------------- ----------------
Total interest and dividend income 2,152,681 2,035,296 6,261,150 6,061,783
---------------- ----------------- ---------------- ----------------
Interest Expense
Deposits 872,768 856,924 2,597,486 2,484,699
Federal Home Loan Bank advances 109,825 11,769 167,865 39,804
---------------- ----------------- ---------------- ----------------
Total interest expense 982,593 868,693 2,765,351 2,524,503
---------------- ----------------- ---------------- ----------------
Net Interest Income 1,170,088 1,166,603 3,495,799 3,537,280
Provision for loan losses 15,000 6,000 45,000 104,000
---------------- ----------------- ---------------- ----------------
Net Interest Income After Provision for Loan Losses 1,155,088 1,160,603 3,450,799 3,433,280
---------------- ----------------- ---------------- ----------------
Other Income (Losses)
Equity in losses of limited partnerships (25,000) (30,000) (77,500) (91,000)
Gain on sales of securities available for sale 73,150 73,150
Other income 25,354 13,653 77,567 47,165
---------------- ----------------- ---------------- ----------------
Total other income (losses) 73,504 (16,347) 73,217 (43,835)
---------------- ----------------- ---------------- ----------------
Other Expenses
Salaries and employee benefits 252,499 225,222 767,744 605,636
Net occupancy and equipment expenses 15,999 15,350 52,545 44,162
Deposit insurance expense 16,260 11,013 38,255 32,190
Data processing expense 19,510 16,107 105,385 52,495
Legal and professional fees 18,747 35,376 101,409 108,867
Other expenses 65,066 57,046 225,745 189,017
---------------- ----------------- ---------------- ----------------
Total other expenses 388,081 360,114 1,291,083 1,032,367
---------------- ----------------- ---------------- ----------------
Income Before Income Tax 840,511 784,142 2,232,933 2,357,078
Income tax expense 300,671 280,090 787,557 845,193
---------------- ----------------- ---------------- ----------------
Net Income $ 539,840 $ 504,052 $ 1,445,376 $ 1,511,885
================ ================= ================ ================
Basic Earnings per Share $ .22 $ .18 $ .58 $ .53
================ ================= ================ ================
Diluted Earnings per Share .22 $ .18 $ .58 $ .53
================ ================= ================ ================
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
(Unaudited)
Common Stock Accumulated
----------------------- Other Unearned
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income Shares Compensation Total
-------------- --------- ------------- ----------- ------------- ----------- ------------- -----------
Balances, January 1, 1999 2,889,663 28,193,644 $15,708,073 $(1,730,736) $(1,640,120) $40,530,861
Comprehensive income
Net income for the period $ 1,445,376 1,445,376 1,445,376
Other comprehensive
income, net of tax
Unrealized gains on
securities, net of
reclassification
adjustment 18,631 $ 18,631 18,631
-------------
Comprehensive income $ 1,464,007
=============
Cash dividends
($.335 per share) (847,012) (847,012)
Purchase of common stock (288,963) (2,820,059) (603,698) (3,423,757)
Amortization of unearned
compensation expense 170,599
170,599
ESOP shares earned 10,589 79,719 90,308
---------- ----------- ----------- --------- ----------- ------------- -----------
Balances, September 30, 1999 2,600,700 $25,384,174 $15,702,739 $ 18,631 $(1,651,017) $(1,469,521) $37,985,006
========== =========== =========== ========= =========== ============= ===========
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------- ---------------
1999 1998
---------------- ---------------
Operating Activities
Net income $ 1,445,376 $ 1,511,885
Adjustments to reconcile net income to net cash
provided (used) by operating activities
Provision for loan losses 45,000 104,000
Depreciation and amortization 24,981 23,312
Investment securities accretion, net (8,844) (6,603)
Gain on sales of securities available for sale (73,150)
Gain on sale of foreclosed assets (284)
Equity in losses of limited partnerships 77,500 91,000
Amortization of unearned compensation expense 170,599 56,866
ESOP shares earned 90,308 117,186
Net change in:
Interest receivable (71,287) (71,924)
Interest payable 33,722 2,106
Other assets 15,637 14,127
Other liabilities 84,835 27,815
---------------- ---------------
Net cash provided by operating activities 1,834,393 1,869,770
---------------- ---------------
Investing Activities
Investment securities
Purchase of securities available for sale (778,529)
Purchase of securities held to maturity (1,415,000) (6,103,586)
Proceeds from sales of securities available for sale 595,655
Proceeds from maturities of securities held to maturity and paydowns of
mortgage-backed securities 1,124,293 5,150,826
Net changes in loans (14,066,286) (11,401,987)
Purchase of FHLB of Indianapolis stock (299,200) (36,800)
Purchases of property and equipment (32,924) (18,178)
Proceeds from sale of foreclosed assets 100,357
Other investing activities (2,726)
---------------- ---------------
Net cash used by investing activities (14,774,360) (12,409,725)
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 4,976,478 (532,450)
Certificates of deposit (2,071,624) 1,747,006
Stock subscription escrow accounts (22,687,104)
Proceeds from borrowings 11,000,000
Repayment of borrowings (296,900) (1,780,225)
Cash dividends (826,265) (457,240)
Contribution for unearned compensation (1,753,853)
Repurchase of common stock (3,423,757)
Net change in advances by borrowers for taxes and insurance 112,513 144,832
---------------- ---------------
Net cash provided (used) by financing activities 9,470,445 (25,319,034)
---------------- ---------------
Net Change in Cash and Cash Equivalents (3,469,522) (35,858,989)
Cash and Cash Equivalents, Beginning of Period 6,191,080 44,780,827
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 2,721,558 $ 8,921,838
================ ===============
Additional Cash Flows Information
Interest paid $ 2,731,629 $ 2,522,397
Income tax paid 791,301 685,900
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Union Community
Bancorp (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 the Notes to Financial Statements included in the December 31, 1998 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, 1999, and for the
nine and three months ended September 30, 1999 and 1998, 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 outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
Three Months Ended Three Months Ended
September 30, 1999 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 $ 539,840 2,403,355 $ .22 $ 504,052 2,805,067 $ .18
=========== =============
Effect of dilutive RRP awards
and stock options
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 539,840 2,403,355 $ .22 $ 504,052 2,805,067 $ .18
============== =============== =========== ============= ============= =============
Nine Months Ended Nine Months Ended
September 30, 1999 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 $ 1,445,376 2,482,219 $ .58 $ 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 $ 1,445,376 2,482,219 $ .58 $ 1,511,885 2,860,482 $ .53
============== =============== =========== ============= ============= =============
Note 3: Other Comprehensive Income
Before-Tax Tax (Expense) Net-of-Tax Amount
Nine months ended September 30, 1999 Amount Benefit
------ -------
Unrealized gains on securities
Unrealized holding gains arising during the period $ 151,980 $ (60,199) $ 91,781
Less: reclassification adjustment for gains realized
in net income 121,129 (47,979) 73,150
=================== ================== ===================
Net unrealized gains $ 30,851 $ (12,220) $ 18,631
=================== ================== ===================
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 all of the outstanding
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 increased approximately $11.3 million, or 10.4%, to $119.5 million
at September 30, 1999, from $108.2 million at December 31, 1998. The increase
was primarily due to loan growth of $13.8 million offset by a decrease in cash
and cash equivalents of $3.5 million. Net loans increased by 15.2% to $104.7
million due to an increase in customer demand and an increased focus by the
Company in the areas of commercial and consumer lending. Investment securities
available for sale and held to maturity also increased by $587,000, or 7.3%
during the nine months ended September 30, 1999.
Deposits increased by $2.9 million to $67.8 million during the nine months ended
September 30, 1999. Demand and savings deposits increased $5.0 million, or
31.0%, from December 31, 1998 to September 30, 1999 primarily due to an increase
in money market savings of $4.6 million. Certificates of deposit decreased $2.1
million, or 4.2%, during this period.
Borrowed funds increased by $10.7 million from December 31, 1998 to September
30, 1999. The increase in total borrowed funds resulted from an increase in FHLB
advances of $10.9 million and a decrease in the note payable to a limited
partnership of $184,000. The increases in borrowings were primarily used to fund
loan growth.
Stockholders' equity decreased $2.5 million to $38.0 million at September 30,
1999. The decrease was primarily due to stock repurchases of $3.4 million and
cash dividends of $847,000. These decreases were offset by net income for nine
months ended September 30, 1999 of $1,445,000, Employee Stock Ownership Plan
shares earned of $90,000 and unearned compensation amortization of $171,000.
Comparison of Operating Results for the Three Months Ended September 30, 1999
and 1998
Net income increased approximately $36,000 from $504,000 for the three months
ended September 30, 1998 to $540,000 for the three months ended September 30,
1999. The return on average assets was 1.85% and 1.86 % for the three months
ended September 30, 1999 and 1998, respectively.
Interest income was $2,153,000 for the three months ended September 30, 1999 as
compared to $2,035,000 for the comparable period in 1998. Interest expense
increased approximately $114,000, or 13.1%, from $869,000 for the three months
ended September 30, 1998 to $983,000 for the same period in 1999. As a result,
net interest income for the three months ended September 30, 1999 amounted to
$1,170,000, approximately a $4,000 increase from the third quarter of 1998.
The provision for loan losses made for the three months ended September 30, 1999
was $15,000 as compared to $6,000 for the same period in 1998. The 1999
provision and the allowance for loan 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.
Total other income (losses) was $74,000 for the three months ended September 30,
1999 compared to losses of $16,000 for the same period in 1998. This increase in
total other income was primarily due to $73,000 of gains on sales of securities
available for sale. Securities available for sale with a cost of $523,000 were
sold during the third quarter of 1999. Other income (losses) also includes the
equity in losses of the Company's investment in a limited partnership, 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 $45,000 was recorded for the
three months ended September 30, 1999 and 1998. The increase in other income was
due to nominal increases in a variety of income categories.
Total other expenses increased approximately $27,000 for three months ended
September 30, 1999 compared to the same period in 1998. The increase in total
other expense was primarily due to nominal increases in a variety of expense
categories.
Income tax expense increased $21,000, or 7.3%, for the three months ended
September 30, 1999 compared to the same period in 1998. The increase was
directly related to the decrease in taxable income for the period.
Comparison of Operating Results for the Nine Months Ended September 30, 1999 and
1998
Net income decreased $67,000, or 4.4%, from $1,512,000 for the nine months ended
September 30, 1998 to $1,445,000 for the nine months ended September 30, 1999.
The decreases were primarily attributable to a decline in the Company's net
interest income and increases in non-interest expenses offset by an increase in
non-interest income. The return on average assets was 1.71% and 1.87% for the
nine months ended September 30, 1999 and 1998, respectively.
Interest income was $6,261,000 for the nine months ended September 30, 1999 as
compared to $6,062,000 for the nine months ended September 30, 1998. Interest
expense increased $240,000, or 9.5%, from $2,525,000 for the nine months ended
September 30, 1998 to $2,765,000 for the same period in 1999. As a result, net
interest income for the nine months ended September 30, 1999 amounted to
$3,496,000, a 1.2% decrease from nine months ended September 30, 1998. The
Company's net interest margin decreased from 4.5% for the nine months ended
September 30, 1998 to 4.2% for the comparable period in 1999.
The provision for loan losses made for the nine months ended September 30, 1999
was $45,000 as compared to $104,000 for the same period in 1998. The 1999
provision and the allowance for loan 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.
Total other income (losses) was $73,000 for the nine months ended September 30,
1999 compared to losses of $44,000 for the same period in 1998. This increase in
total other income was primarily due to $73,000 of gains on sales of securities
available for sale. Other income (losses) also includes the equity in losses of
the Company's investment in a limited partnership, 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 $135,000 was recorded for the nine months
ended September 30, 1999 and 1998. The increase in other income was due to
nominal increases in a variety of income categories.
Salaries and employee benefits were $768,000 for the nine months ended September
30, 1999 compared to $606,000 for the 1998 period, and increase of $162,000, or
26.7%. This increase was primarily due to compensation expense related to the
management recognition and retention plan that began effective on June 30, 1998.
Data processing expense also increased from $52,000 for the nine months ended
September 30, 1998 to $105,000 for the comparable period in 1999, an increase of
$53,000. This increase was in part due to approximately $45,000 of non-recurring
expenses related to the Company's data processing conversion during the first
quarter of 1999. Other expenses, consisting primarily of expenses related to
advertising, directors' fees, supervisory examination fees, supplies, and
postage increased approximately $37,000 for nine months ended September 30, 1999
compared to the same period in 1998. The increase in other expenses was due to
nominal increases in a variety of expense categories.
Income tax expense decreased $58,000, or 6.8%, for the nine months ended
September 30, 1999 compared to the same period in 1998. The decease was directly
related to the decrease in taxable 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 no loans classified as special mention as of September 30,
1999 while there were $1.2 million of special mention loans at December 31,
1998. In addition, Union Federal had $620,000 and $840,000 of loans classified
as substandard at September 30, 1999 and December 31, 1998, respectively. At
September 30, 1999 and December 31, 1998, no loans were classified as doubtful
or loss. At September 30, 1999, and December 31, 1998, respectively, $132,000
and $349,000 of the substandard loans were non-accrual loans. The allowance for
loan losses was $407,000 or .4% of loans at September 30, 1999 as compared to
$362,000 or .4% of loans at December 31, 1998.
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, 1999, Union Federal had liquid assets of $5.9 million and a
liquidity ratio of 6.36%.
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
The Company's lending and deposit activities, like those of most financial
institutions, depend significantly upon computer systems. The Company 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.
The Company is actively monitoring its compliance with making its computer
equipment and other information systems Year 2000 compliant. During the first
week of March 1999, the Company switched its electronic data service provider
from On-Line Financial Services, Inc. in Oak Brook, Illinois to Intrieve
Incorporated ("Intrieve"), located in Cincinnati, Ohio. The Company changed data
service providers in order to improve the quality of its computer and networking
technology. Testing conducted during the second week of March 1999 indicates
that the data that the Company maintains on Intrieve's system is Year 2000
compliant. The Company incurred expenses of approximately $45,000 in converting
its data processing to Intrieve's system. It is not expected that data
processing expense incurred by the Company in the future will differ materially
from prior periods. Bankers' Systems, which maintains the Company's loan
documentation system, conducted tests during December 1998 that indicated that
its systems are Year 2000 compliant. The Company will continue to conduct tests
during the remainder of 1999 to ensure that its data processing and information
systems are Year 2000 compliant.
The Company contacted 49 companies that supply or service its material
operations requesting that they certify by December 31, 1998 that they have
plans to make their respective systems Year 20000 compliant and received
responses from all of these companies confirming that their systems are Year
2000 compliant. Notwithstanding these efforts that the Company has made, no
assurances can be given that the systems of its service providers will be timely
renovated to address the Year 2000 issue.
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 believes that its
expenses related to upgrading its systems and software for Year 2000 compliance
will not exceed $10,000. At September 30, 1999, the Company had spent
approximately $7,000 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 the Company's own systems and those
of its service providers, the Company 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. The Company has contacted the approximately 18 commercial borrowers with
outstanding loans in excess of $500,000 for confirmation that their computer
systems are, or soon will be, Year 2000 compliant. All 18 confirmations have
been received and no items of concern were noted. In addition, the Company
requires that borrowers under new commercial loans that it originates 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
the Company's loan portfolio to individual borrowers is diversified and its
market area does not depend significantly upon one employer or industry, the
Company 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, 1999 and December 31,1998, are analyses
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 300 basis points. At
September 30, 1999, 2% of the present value of Union Federal's assets was
approximately $2.4 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 $6.1 million at September 30, 1999, Union Federal
would have been required to deduct $1.9 million 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 $500,000 over the $1.4 million calculated at December 31, 1998.
Union Federal's exposure to interest rate risk results from a concentration of
fixed rate mortgage loans in its portfolio.
September 30, 1999
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
+300 bp 23,950 -9,230 -28% 21.91% -576 bp
+200 bp 27,076 -6,084 -18% 23.99% -368 bp
+100 bp 30,235 -2,925 -9% 25.96% -171 bp
0 bp 33,160 27.67%
- -100 bp 35,578 2,418 7% 28.99% +132 bp
- -200 bp 37,562 4,402 13% 30.01% +234 bp
- -300 bp 39,592 6,432 19% 31.00% +333 bp
December 31, 1998
Net Portfolio Value NPV as % of PV of Assets
Changes
In Rates $ Amount $ Change % Change NPV Ratio Change
-------- -------- --------- -------- --------- ------
+300 bp 25,730 -7,687 -23% 25.18% -498 bp
+200 bp 28,509 -4,907 -15% 27.08% -308 bp
+100 bp 31,161 -2,256 -7% 28.79% -137 bp
0 bp 33,417 30.16%
- -100 bp 35,042 1,625 +5% 31.08% +92 bp
- -200 bp 36,542 3,125 +9% 31.90% +175 bp
- -300 bp 38,272 4,855 +15% 32.84% +268 bp
The chart at September 30, 1999 illustrates, for example, that a 200 basis point
(or 2%) increase in interest rates would result in a $6.1 million, or 18%,
decrease in the net portfolio value of Union Federal's assets compared to a $4.9
million, or 15% decrease, at December 31, 1998. This hypothetical increase in
interest rates at September 30, 1999 would also result in a 368 basis point, or
3.68% decrease in the ratio of the net portfolio value to the present value of
Union Federal's assets compared to a 308 basis point, or 3.08%, decrease at
December 31, 1998.
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 Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 27. Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter
ended September 30, 1999.
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 12, 1999 By: /s/ Joseph E. Timmons
---------------------- -------------------------
Joseph E. Timmons
President and
Chief Executive Officer
Date: November 12, 1999 By: /s/ Denise E. Swearingen
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Denise E. Swearingen
Treasurer