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 MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, without par value,
outstanding as of March 31, 2003 was 2,278,000.
Union Community Bancorp
Form 10-Q
Index
Page No.
--------
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 16
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
- -----------------------------
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
March 31, December 31,
2003 2002
------------- --------------
(Unaudited)
Assets
Cash $ 724,391 $ 992,705
Interest-bearing demand deposits 50,292,982 35,593,482
------------ ------------
Cash and cash equivalents 51,017,373 36,586,187
Interest-bearing deposits 145,107
Investment securities
Available for sale 3,005,625
Held to maturity 1,210,903 1,636,513
------------ ------------
Total investment securities 4,216,528 1,636,513
Loans, net of allowance for loan losses of $1,060,000
and $1,030,000 211,270,175 216,703,469
Premises and equipment 3,804,355 3,238,899
Federal Home Loan Bank stock 3,423,600 3,423,600
Investment in limited partnership 846,609 836,609
Foreclosed assets and real estate held for development, net 1,576,948 1,607,146
Goodwill 2,392,808 2,296,927
Core deposit intangible 463,176 484,820
Interest receivable 1,218,163 1,276,538
Other assets 869,903 1,080,502
------------ ------------
Total assets $281,244,745 $269,316,317
============ ============
Liabilities
Deposits
Noninterest-bearing $ 4,460,841 $ 3,849,659
Interest-bearing 197,030,792 186,341,769
------------ ------------
Total deposits 201,491,633 190,191,428
Federal Home Loan Bank advances 39,559,460 39,751,631
Note payable 131,892 302,892
Interest payable 484,262 650,182
Dividends payable 341,700 341,700
Other liabilities 1,638,660 889,967
------------ ------------
Total liabilities 243,647,607 232,127,800
------------ ------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 2,278,000 shares 24,173,686 24,159,185
Retained earnings 15,355,230 15,032,214
Accumulated other comprehensive income 3,397
Unearned employee stock ownership plan (ESOP) shares (1,299,801) (1,323,401)
Unearned recognition and retention plan (RRP) shares (635,374) (679,481)
------------ ------------
Total shareholders' equity 37,597,138 37,188,517
------------ ------------
Total liabilities and shareholders' equity $281,244,745 $269,316,317
============ ============
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
-----------------------------
2003 2002
----------- -----------
Interest and Dividend Income
Loans $4,021,991 $4,452,342
Investment securities 31,823 48,890
Dividends on Federal Home Loan Bank stock 44,000 50,651
Deposits with financial institutions 128,657 68,524
---------- ----------
Total interest and dividend income 4,226,471 4,620,407
---------- ----------
Interest Expense
Deposits 1,468,828 1,695,338
Federal Home Loan Bank advances 452,230 412,062
---------- ----------
Total interest expense 1,921,058 2,107,400
---------- ----------
Net Interest Income 2,305,413 2,513,007
Provision for loan losses 30,000 40,000
---------- ----------
Net Interest Income After Provision for Loan Losses 2,275,413 2,473,007
---------- ----------
Other Income (Losses)
Service charges on deposit accounts 35,738 32,254
Equity in gains (losses) of limited partnerships 10,000 (5,000)
Net realized gains on sales of available for sale securities 5,960
Other income 23,144 43,511
---------- ----------
Total other income 68,882 76,725
---------- ----------
Other Expenses
Salaries and employee benefits 720,284 710,834
Net occupancy expenses 76,002 57,465
Equipment expenses 79,887 71,487
Legal and professional fees 85,525 40,518
Data processing fees 101,250 480,041
Other expenses 279,800 239,984
---------- ----------
Total other expenses 1,342,748 1,600,329
---------- ----------
Income Before Income Tax 1,001,547 949,403
Income tax expense 356,682 302,480
---------- ----------
Net Income $ 644,845 $ 646,923
========== ==========
Basic Earnings per Share $ .31 $ .30
Diluted Earnings per Share .31 .30
Dividends per Share .15 .11
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended March 31, 2003
(Unaudited)
Common Stock Accumulated
------------------------ Other Unearned
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income Shares Compensation Total
--------- ----------- -------- ----------- ---------- ------------ ---------- -----------
Balances, January 1, 2003 2,278,000 $24,159,185 $15,032,214 $(1,323,401) $(679,481) $37,188,517
Comprehensive income
Net income for the period $644,865 644,865 644,865
Other comprehensive
income, net of tax
Unrealized gains on
securities 3,397 3,397 $3,397
--------
Comprehensive income $648,262
========
Cash dividends ($.15 per share) (321,849) (321,849)
Amortization of unearned
compensation expense
44,107 44,107
ESOP shares earned 14,501 23,600 38,101
----------------------- ----------------------------------------------------------------
Balances, March 31, 2003 2,278,000 $24,173,686 $15,355,230 $3,397 (1,299,801) $(635,374) $37,597,138
======================= ================================================================
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
-------------------------------------
2003 2002
------------ -----------
Operating Activities
Net income $ 644,865 $ 646,923
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for loan losses 30,000 40,000
Depreciation and amortization 106,188 76,871
Investment securities accretion, net (216) (825)
Gain on sale of investment securities available for sale ---- (5,960)
Loss on sale of real estate owned 18,435 10,938
Equity in losses (gains) of limited partnerships (10,000) 5,000
Amortization of purchase accounting adjustments (84,844) (226,668)
Amortization of unearned compensation expense 44,107 85,310
ESOP shares earned 38,101 34,713
Net change in:
Interest receivable 58,375 24,255
Interest payable (165,920) (207,500)
Other adjustments 701,948 1,537,446
----------- -----------
Net cash provided by operating activities 1,381,039 2,020,503
----------- -----------
Investing Activities
Net change in interest-bearing deposits ---- 100,000
Investment securities
Purchase of investment securities available for sale (3,000,000)
Proceeds from sales of investment securities available for sale ---- 51,534
Proceeds from maturities of securities held to maturity and
paydowns of mortgage-backed securities 425,826 223,011
Net changes in loans 5,211,813 774,316
Net cash received in acquisition ---- 15,866,825
Additions to real estate owned (33,480) (34,584)
Proceeds from real estate sales 186,565 92,812
Purchases of property and equipment (640,778) (4,702)
Other investing activities (95,881) ----
----------- -----------
Net cash provided by investing activities 2,054,065 17,069,212
----------- -----------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 13,785,845 8,863,199
Certificates of deposit (2,405,140) (16,125,199)
Proceeds from borrowings ---- 20,000,000
Repayment of borrowings (317,890) (20,311,993)
Cash dividends (321,849) (292,183)
Repurchase of common stock ---- (4,714,000)
Net change in advances by borrowers for taxes and insurance 255,116 330,162
----------- -----------
Net cash provided by (used in) financing activities 10,996,082 (12,250,014)
----------- -----------
Net Change in Cash and Cash Equivalents 14,431,186 6,839,701
Cash and Cash Equivalents, Beginning of Period 36,586,187 13,564,902
----------- -----------
Cash and Cash Equivalents, End of Period $51,017,373 $20,404,603
=========== ===========
Additional Cash Flows Information
Interest paid $ 2,086,978 $ 2,314,900
Income tax paid ---- 62,000
Loans transferred to foreclosed real estate 172,188 60,022
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
- -----------------------------
The consolidated financial statements include the accounts of Union Community
Bancorp, an Indiana corporation (the "Company") and its wholly owned subsidiary,
Union Federal Savings and Loan Association, a federally chartered savings and
loan association ("Union Federal"). A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 2002 Annual Report to Shareholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at March 31, 2003, and for the
three months ended March 31, 2003 and 2002, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods. The
results of operations for the three-month period ended March 31, 2003, are not
necessarily indicative of the results which may be expected for the entire year.
The consolidated condensed balance sheet of the Company as of December 31, 2002
has been derived from the audited consolidated balance sheet of the Company as
of that date.
Note 2: Earnings Per Share
- --------------------------
Earnings per share have been computed based upon the weighted-average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
Weighted-
For the Three Months Ended March 31, 2003 Average Per Share
Income Shares Amount
-------- --------- ---------
Basic earnings per share
Income available to common stockholders $644,864 2,091,330 $0.31
Effect of dilutive stock options 15,280
-----------------------------------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $644,864 2,106,610 $0.31
========================================
Weighted-
For the Three Months Ended March 31, 2002 Average Per Share
Income Shares Amount
-------- --------- ---------
Basic earnings per share
Income available to common stockholders $646,923 2,166,623 $0.30
Effect of dilutive stock options ----
-----------------------------------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $646,923 2,166,623 $0.30
========================================
Note 3: Other Comprehensive Income
- ----------------------------------
For the Three Months Ended March 31, 2003 Before-Tax Tax Net-of-Tax
Amount Expense Amount
---------- --------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during the year $5,625 $(2,228) $3,397
Less: reclassification adjustments for gains realized
in net income --- --- ---
-------------------------------------
Other comprehensive income $5,625 $(2,228) $3,397
=====================================
For the Three Months Ended March 31, 2002 Before-Tax Tax Net-of-Tax
Amount Expense Amount
---------- --------- ----------
Unrealized gains on securities:
Unrealized holding gains arising during the year $7,575 $(3,001) $4,574
Less: reclassification adjustments for gains realized
in net income 5,960 (2,361) 3,599
-------------------------------------
Other comprehensive income $1,615 $ (640) $ 975
=====================================
Note 4: Stock Options
- ---------------------
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2002 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Three Months Ended
March 31, 2003 March 31, 2002
------------------ ------------------
Net income, as reported $644,845 $646,923
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes
9,133 12,016
-------------------------------------
Pro forma net income $635,712 $634,907
=====================================
Earnings per share:
Basic - as reported $.31 $.30
Basic - pro forma $.30 $.29
Diluted - as reported $.31 $.30
Diluted - pro forma $.30 $.29
Note 5: Effect of Recent Accounting Pronouncements
- --------------------------------------------------
The Financial Accounting Standards Board ("FASB") adopted SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation. SFAS No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. Under the provisions of SFAS No. 123, companies that adopted the
fair value based method were required to apply that method prospectively for new
stock option awards. This contributed to a "ramp-up" effect on stock-based
compensation expense in the first few years following adoption, which caused
concern for companies and investors because of the lack of consistency in
reported results. To address that concern, SFAS No. 148 provides two additional
methods of transition that reflect an entity's full complement of stock-based
compensation expense immediately upon adoption, thereby eliminating the ramp-up
effect.
SFAS No. 148 also improves the clarity and prominence of disclosures about the
proforma effects of using the fair value based method of accounting for
stock-based compensation for all companies - regardless of the accounting method
used - by requiring that the data be presented more prominently and in a more
user-friendly format in the footnotes to the financial statements. In addition,
SFAS No. 148 improves the timeliness of those disclosures by requiring that this
information be included in interim as well as annual financial statements. In
the past, companies were required to make proforma disclosures only in annual
financial statements.
The transition guidance and annual disclosure provisions of SFAS No. 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. The interim disclosure
provisions are effective for financial reports containing financial statements
for interim periods beginning after December 15, 2002.
The FASB has stated it intends to issue a new statement on accounting for
stock-based compensation and will require companies to expense stock options
using a fair value based method at date of grant. The date of implementation for
this state statement is not known.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others ("FIN 45"). FIN 45 will change current practice in the
accounting for and disclosure of guarantees. Guarantees meeting the
characteristics described in FIN 45 are required to be initially recorded at
fair value, which is different from the general current practice of recording a
liability only when a loss is probable and reasonably estimable, as those terms
are defined in FASB Statement No. 5, Accounting for Contingencies. FIN 45 also
requires a guarantor to make new disclosures for virtually all guarantees even
if the likelihood of the guarantor's having to make payments under the guarantee
is remote.
In general, FIN 45 applies to contracts or indemnification agreements that
contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying asset, liability, or an equity security of the
guaranteed party such as financial standby letters of credit.
Disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 31, 2002. The initial
recognition and measurement provisions are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. The guarantor's previous accounting for guarantees
issued prior to the date of FIN 45 initial applications should not be revised or
restated to reflect the provisions of FIN 45.
The Company adopted FIN 45 on January 1, 2003. The adoption of FIN 45 does not
currently have a material impact on the Company's consolidated financial
statements.
Note 6: Reclassifications
- -------------------------
Certain reclassifications have been made to the 2002 consolidated condensed
financial statements to conform to the March 31, 2003 presentation.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company was organized in September 1997. On December 29, 1997, it acquired
the common stock of Union Federal upon the conversion of Union Federal from a
federal mutual savings and loan association to a federal stock savings and loan
association. The Company acquired Montgomery Financial Corporation
("Montgomery") in a transaction that closed on January 2, 2002. In the
transaction, Montgomery was merged with and into the Company, and Montgomery
Savings, a federally chartered thrift, was merged with and into Union Federal.
Following the merger, MSA Service Corporation ("MSA") became a subsidiary of
Union Federal.
Union Federal was organized as a state-chartered savings and loan association in
1913. Union Federal conducts its business from its main office located in
Crawfordsville, Indiana. In addition, Union Federal has two additional branch
offices in Crawfordsville and branch offices in Covington, Williamsport and
Lafayette, Indiana. Four of the above mentioned branch offices were added in
connection with the acquisition of Montgomery.
Union Federal offers a variety of lending, deposit and other financial services
to its retail and commercial customers. Union Federal's principal business
consists of attracting deposits from the general public and originating
fixed-rate and adjustable-rate loans secured primarily by first mortgage liens
on one- to four-family residential real estate. Union Federal's deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. Union Federal offers a number of
financial services, which include: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans and consumer loans, including single-pay loans, loans
secured by deposits, installment loans and commercial loans; (vi) money market
demand accounts; (vii) passbook savings accounts; and (viii) certificates of
deposit.
Union Federal currently owns two subsidiaries, UFS Service Corp. ("UFS"), whose
sole asset is its investment in Pedcor Investments 1993-XVI, L.P. ("Pedcor") and
MSA, which is a real estate management and development company. Pedcor is an
Indiana limited partnership that was established to organize, build, own,
operate and lease a 48-unit apartment complex in Crawfordsville, Indiana known
as Shady Knoll II Apartments (the "Project"). Union Federal owns the limited
partner interest in Pedcor. The general partner is Pedcor Investments LLC. The
Project, operates a multi-family, low- and moderate-income housing project,
which is completed and is performing as planned. Because UFS engages exclusively
in activities that are permissible for a national bank, OTS regulations permit
Union Federal to include its investment in UFS in its calculation of regulatory
capital. At present, MSA owns a tract of land in Crawfordsville, Indiana, which
is being developed for the construction of seven condominium units. Union
Federal's investment in MSA is excluded from its calculation of regulatory
capital.
Union Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Union Federal's non-interest
income, including fee income and service charges, and the level of its
non-interest expenses, including general and administrative expenses.
Critical Accounting Policies
Note 1 to the consolidated financial statements contains a summary of the
Company's significant accounting policies presented on pages 25 through 27 of
the Annual Report to Shareholders for the year ended December 31, 2002, which
was filed on Form 10-K with the commission on March 28, 2003. Certain of these
policies are important to the portrayal of the Company's financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Management believes that its critical accounting policies include determining
the allowance for loan losses, the valuation of the foreclosed assets and real
estate held for development, and the valuation of intangible assets.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses at least on a quarterly basis. The
evaluation includes a review of payment performance, adequacy of collateral and
financial condition of all major borrowers. A review of all nonperforming loans
and other identified problem loans is performed and the probability of
collecting all amounts due thereunder is determined. In addition, changes in the
composition of the loan portfolio, the total outstanding loans and past loss
experience are reviewed to determine the adequacy of the allowance for loan
losses. Current economic and market conditions and potential negative changes to
economic conditions are also reviewed in determining possible loan losses.
Although it is the intent of management to fully evaluate and estimate the
potential effects of economic and market conditions, changes in the conditions
are susceptible to significant changes beyond those projected. A worsening or
protracted economic decline beyond management's projections would increase the
likelihood of additional losses due to the additional credit and market risk and
could create the need for additional loss reserves. Foreclosed asset and real
estate held for development
Foreclosed assets and real estate held for development are carried at the lower
of cost or fair value less estimated selling costs. Management estimates the
fair value of the properties based on current appraisal information. Reviews of
estimated fair value are performed on at least an annual basis. Economic
environment, market conditions and the real estate market are continually
monitored and decreases in the carried value are written down through current
operations when any of these factors indicate a decrease to the market value of
the assets. Future worsening or protracted economic conditions and a decline in
the real estate market would increase the likelihood of a decline in property
values and could create the need for future write downs of the properties held.
Intangible assets
Management periodically assesses the impairment of its goodwill and the
recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. If
actual external conditions and future operating results differ from management's
judgments, impairment and/or increased amortization charges may be necessary to
reduce the carrying value of these assets to the appropriate value. A review of
the fair value of the Company's goodwill and core deposit intangible was
performed in the fourth quarter of 2002 and it was management's opinion that
there was no impairment to these intangible assets as of the date of the review.
Financial Condition
Total assets increased $11.9 million to $281.2 million at March 31, 2003 from
$269.3 million at December 31, 2002. Net loans decreased $5.4 million to $211.3
million at March 31, 2003. Cash and cash equivalents increased $14.4 million
from December 31, 2002 to March 31, 2003. The increase was primarily due to the
decrease in loans and an increase in deposits partially offset by an investment
of $3.0 million in available for sale securities. Premises and equipment
increased $565,000 to $3.8 million at March 31, 2003 primarily due to the cost
of the current remodeling of Union Federal's home office. In connection with the
Montgomery acquisition, the balance of goodwill and core deposit intangibles are
$2.4 million and $463,000 respectively. Goodwill will be reviewed annually for
impairment and core deposit intangibles are currently being amortized. Deposits
increased by $11.3 million to $201.5 million and borrowed funds decreased by
$363,000 during the first quarter of 2003.
Shareholders' equity increased $409,000 to $37.6 million at March 31, 2003. The
increase was primarily due to net income for the three months ended March 31,
2003 of $645,000, Employee Stock Ownership Plan shares earned of $38,000,
unearned compensation amortization of $44,000 and unrealized gain on available
for sale securities of $3,000 offset by cash dividends of $322,000.
Comparison of Operating Results for the Three Months Ended March 31, 2003 and
2002
Net income decreased $2,000 from $647,000 for the three months ended March 31,
2002 to $645,000 for the three months ended March 31, 2003. The return on
average assets for the three months ended March 31, 2003 was .93% compared to
..94% for the comparable period in 2002. The return on average equity for the
three months ended March 31, 2003 was 6.89% compared to 6.47% for the comparable
period in 2002.
For the three months ended March 31, 2003, interest income was $4.2 million as
compared to $4.6 million for the three months ended March 31, 2002. Interest
income decreased primarily due to a decrease in the yield on interest-earing
assets from 6.98% during the 2002 period to 6.36% during the 2003 period, which
was offset by an increase in average interest-earning asset from $263.3 million
at March 31, 2002 to $276.4 million at March 31, 2003. For the three months
ended March 31, 2003, interest expense was $1.9 million as compared to $2.1
million for the three months ended March 31, 2002. Interest expense decreased
primarily due to a decrease in the cost of interest-bearing liabilities from
3.69% during the 2002 period to 3.30% during the 2003 period, which was offset
by an increase in average interest-bearing liabilities from $228.7 million at
March 31, 2002 to $233.1 million at March 31, 2003. Amortization of purchase
accounting adjustments also impacted interest expense during the 2002 and 2003
periods. The amortization of purchase accounting adjustments reduced interest
expense by $126,000 in the 2003 period compared to a reduction of $276,000 for
the 2002 period.
The provision for loan losses for the three months ended March 31, 2003 was
$30,000 as compared to $40,000 for the comparable period in 2002. A review is
performed quarterly to determine the adequacy of the current balance in the
allowance for loan losses.
Total other expenses decreased from $1,600,000 for the three months ended March
31, 2002 to $1,343,000 for the comparable period in 2003. Expenses decreased in
part due to a one-time $411,000 termination fee for data processing services
charged to expense during the first quarter of 2002 offset by the cost of
additional services being offered and the growth of the Company.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
At both March 31, 2003 and December 31, 2002 Union Federal had $7.0 million in
classified loans. Union Federal had $3.4 million and $2.7 million in loans
classified as special mention as of March 31, 2003 and December 31, 2002
respectively. In addition, Union Federal had $3.5 million and $4.2 million of
loans classified as substandard at March 31, 2003 and December 31, 2002,
respectively. At both March 31, 2003 and December 31, 2002, $103,000 in loans
was classified as doubtful and no loans were classified as loss. At March 31,
2003, and December 31, 2002, respectively, $3.6 million and $3.1 million of the
substandard and doubtful loans were non-accrual loans. The allowance for loan
losses was $1,060,000 or .50% of loans at March 31, 2003 as compared to
$1,030,000 or .47% of loans at December 31, 2002.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of March
31, 2003, Union Federal had liquid assets of $51.1 million and a liquidity ratio
of 21.3%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is http://www.sec.gov.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------------------------------------------------------------------
Presented below, as of December 31, 2002 and 2001, is the most recent available
analyses performed by the OTS of Union Federal's interest rate risk as measured
by changes in net portfolio value ("NPV") for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments.
Union Federal:
At December 31, 2002 At December 31, 2001
----------------------------------- -----------------------------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
---------------- --------------- --------------- --------------- ---------------
+300 bp $(9,699) (22)% $(7,734) (31)%
+200 bp (5,377) (12) (5,185) (20)
+100 bp (1,621) (4) (2,507) (10)
0 bp 0 0 0 0
-100 bp (660) (2) 1,424 6
Management believes that at March 31, 2003, there have been no material changes
in market interest rates or in the Company's interest rate sensitive instruments
which would cause a material change in the market risk exposures which affect
the quantitative and qualitative risk disclosures as presented on pages 17-19 of
the Company's Annual Report on Form 10-K for the period ended December 31, 2002.
Item 4. Controls and Procedures
- -------------------------------
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect its internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Although the Company and its subsidiaries are involved, from time to
time, in various legal proceedings arising in the ordinary course of
business, there are no material legal proceedings to which they are a
party or to which their property is subjejct.
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.
No matter was submitted to a vote of the Company's shareholders during
the first quarter of 2003.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 99.1 Certifications of the Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the first quarter of
2003.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: May 12, 2003 By: /s/ Alan L. Grimble
------------------------------------
Alan L. Grimble
Chief Executive Officer
Date: May 12, 2003 By: /s/ J. Lee Walden
------------------------------------
J. Lee Walden
Chief Financial Officer
CERTIFICATIONS
I, Alan L. Grimble, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Community
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003
/s/ Alan L. Grimble
----------------------------------
Alan L. Grimble
Chief Executive Officer
CERTIFICATIONS
I, J. Lee Walden, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Union Community
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: May 12, 2003
/s/ J. Lee Walden
----------------------------------
J. Lee Walden
Chief Financial Officer