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,
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: 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 [ ]
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 September 30, 2003 was 2,100,000.
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. 10
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 17
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
September 30, December 31,
2003 2002
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 848,116 $ 992,705
Interest-bearing demand deposits 16,228,707 35,593,482
------------------------ -------------------------
Cash and cash equivalents 17,076,823 36,586,187
Interest-bearing deposits 145,107 145,107
Investment securities
Available for sale 5,944,688 ----
Held to maturity 574,507 1,636,513
------------------------ -------------------------
Total investment securities 6,519,195 1,636,513
Loans, net of allowance for loan losses of $1,161,000 and $1,030,000 222,151,832 216,703,469
Premises and equipment 4,502,390 3,238,899
Federal Home Loan Bank stock 3,512,000 3,423,600
Investment in limited partnership 2,246,609 836,609
Foreclosed assets and real estate held for development, net 1,319,961 1,607,146
Goodwill 2,392,808 2,296,927
Core deposit intangible 419,889 484,820
Interest receivable 1,262,305 1,276,538
Other assets 6,028,988 1,080,502
------------------------ -------------------------
Total assets $ 267,577,907 $ 269,316,317
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,839,582 $ 3,849,659
Interest-bearing 187,841,052 186,341,769
------------------------ -------------------------
Total deposits 191,680,634 190,191,428
Federal Home Loan Bank advances 37,868,897 39,751,631
Note payable 131,892 302,892
Interest payable 526,241 650,182
Dividends payable 315,000 341,700
Other liabilities 1,724,334 889,967
------------------------ -------------------------
Total liabilities 232,246,998 232,127,800
------------------------ -------------------------
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 - 2,100,000 and 2,278,000 shares 22,378,130 24,159,185
Retained earnings 14,812,032 15,032,214
Accumulated other comprehensive income (33,403) ----
Unearned employee stock ownership plan (ESOP) shares (1,252,599) (1,323,401)
Unearned recognition and retention plan (RRP) shares (573,251) (679,481)
------------------------ -------------------------
Total shareholders' equity 35,330,909 37,188,517
------------------------ -------------------------
Total liabilities and shareholders' equity $ 267,577,907 $ 269,316,317
======================== =========================
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ ------------------- ----------------- ---------------
2003 2002 2003 2002
------------------ ------------------- ----------------- ---------------
Interest and Dividend Income
Loans $ 3,658,487 $ 4,285,779 $ 11,404,119 $ 13,159,623
Investment securities 59,989 43,455 139,560 197,500
Dividends on Federal Home Loan Bank stock 40,112 53,933 131,589 157,931
Deposits with financial institutions 64,301 81,813 326,287 228,653
------------------ ------------------- ----------------- ---------------
Total interest and dividend income 3,822,889 4,464,980 12,001,555 13,743,707
------------------ ------------------- ----------------- ---------------
Interest Expense
Deposits 1,201,281 1,554,617 3,998,035 4,865,949
Federal Home Loan Bank advances 468,063 481,570 1,377,191 1,382,440
------------------ ------------------- ----------------- ---------------
Total interest expense 1,669,344 2,036,187 5,375,226 6,248,389
------------------ ------------------- ----------------- ---------------
Net Interest Income 2,153,545 2,428,793 6,626,329 7,495,318
Provision for loan losses 118,431 30,000 178,431 90,000
------------------ ------------------- ----------------- ---------------
Net Interest Income After Provision for Loan Losses 2,035,114 2,398,793 6,447,898 7,405,318
------------------ ------------------- ----------------- ---------------
Other Income (Losses)
Service charges on deposit accounts 36,758 43,579 107,841 115,656
Equity in income (losses) of limited partnerships --- (7,500) 10,000 (20,000)
Net realized gains on sales of available for sale
securities --- --- --- 8,534
Other income 95,794 29,119 168,089 88,179
------------------ ------------------- ----------------- ---------------
Total other income 132,552 65,198 285,930 192,369
------------------ ------------------- ----------------- ---------------
Other Expenses
Salaries and employee benefits 563,792 675,787 2,043,147 2,101,397
Net occupancy expenses 73,526 147,772 220,183 247,964
Equipment expenses 80,604 78,697 238,797 230,219
Legal and professional fees 66,768 72,772 240,844 181,753
Data processing fees 93,924 127,955 298,161 677,201
Other expenses 286,770 267,795 861,066 746,752
------------------ ------------------- ----------------- ---------------
Total other expenses 1,165,384 1,370,778 3,902,198 4,185,286
------------------ ------------------- ----------------- ---------------
Income Before Income Tax 1,002,282 1,093,213 2,831,630 3,412,401
Income tax expense 334,300 394,705 967,800 1,173,887
------------------ ------------------- ----------------- ---------------
Net Income $ 667,982 $ 698,508 $ 1,863,830 $ 2,238,514
================== =================== ================= ===============
Basic Earnings per Share $ .35 $ .31 $ .93 $ 1.00
Diluted Earnings per Share .34 .31 .92 1.00
Dividends per Share .15 .14 .45 .37
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 30, 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 $1,863,830 1,863,830 1,863,830
Other comprehensive
income, net of tax
Unrealized gains on
securities (33,403) $(33,403) (33,403)
-----------
Comprehensive income $1,830,427
===========
Cash dividends ($.15 per (912,146) (912,146)
share)
Purchase of common stock 178,000 (1,828,434) (1,171,866) (3,000,300)
Amortization of unearned
compensation expense 106,230 106,230
ESOP shares earned 47,379 70,802 118,181
----------- ------------ ----------- ---------- ------------ ------------- ------------
Balances, September 30, 2003 2,100,000 $22,378,130 $14,812,032 $(34,403) $(1,252,599) $(573,251) $35,330,909
=========== ============ =========== ========== ============ ============= ============
See notes to consolidated condensed financial statements.
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------- ---------------
2003 2002
---------------- ---------------
Operating Activities
Net income $ 1,863,830 $ 2,238,514
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 178,431 90,000
Depreciation and amortization 241,847 240,619
Investment securities accretion, net (647) (2,064)
Gain on sale of investment securities available for sale --- (8,534)
Loss on sale of real estate owned 10,196 28,834
Equity in losses (income) of limited partnerships (10,000) 20,000
Amortization of purchase accounting adjustments (254,534) (680,772)
Amortization of unearned compensation expense 106,230 203,507
ESOP shares earned 118,181 106,560
Net change in:
Interest receivable 14,233 177,069
Interest payable (123,941) (141,693)
Other adjustments (4,794,667) 910,169
---------------- ---------------
Net cash provided by (used in) operating activities (2,650,841) 3,182,209
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits --- 94,976
Investment securities
Purchase of investment securities available for sale (9,000,000)
Proceeds from sales of investment securities available for sale 3,000,000 75,613
Proceeds from maturities of securities held to maturity and paydowns of mortgage-
backed securities 1,062,653 741,690
Investment in limited partnership (1,400,000) ---
Net changes in loans (5,860,787) 8,042,082
Net cash received in acquisition --- 15,866,825
Additions to real estate owned (134,134) (73,357)
Proceeds from real estate sales 565,923 775,726
Purchases of property and equipment (1,484,024) (289,708)
Other investing activities (95,881) ----
---------------- ---------------
Net cash provided by (used in) investing activities (13,346,250) 25,233,847
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits 13,217,963 16,336,976
Certificates of deposit (11,487,257) (24,209,451)
Proceeds from borrowings 1,400,000 20,000,000
Repayment of borrowings (3,317,890) (22,311,993)
Cash dividends (912,146) (800,426)
Repurchase of common stock (3,000,300) (5,743,667)
Net change in advances by borrowers for taxes and insurance 587,357 215,028
---------------- ---------------
Net cash provided by (used in) financing activities 3,512,273 (16,513,533)
---------------- ---------------
Net Change in Cash and Cash Equivalents (19,509,364) 11,902,523
Cash and Cash Equivalents, Beginning of Period 36,586,187 13,564,902
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 17,076,823 $ 25,467,425
================ ===============
Additional Cash Flows Information
Interest paid $ 5,499,167 $ 6,390,082
Income tax paid 915,230 790,241
Loans transferred to foreclosed real estate 176,114 ----
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 September 30, 2003, and for the
three and nine months ended September 30, 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 nine-month period ended
September 30, 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.
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $667,982 1,933,290 $ .35 $698,508 2,266,123 $ .31
=========== =============
Effect of dilutive RRP awards
and stock options 20,930 427
-------------- --------------- ------------ -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $667,982 1,954,220 $ .34 $698,508 2,266,550 $ .31
============== =============== =========== ============ ============= =============
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
------------------ ------------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 1,863,830 1,998,826 $ .93 $ 2,238,514 2,237,337 $ 1.00
=========== =============
Effect of dilutive RRP awards
and stock options 19,897 1,442
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 1,863,830 2,018,723 $ .92 $ 2,238,514 2,238,779 $1.00
============== =============== =========== ============= ============= =============
Note 3: 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
September 30, 2003 September 30, 2002
--------------------------------------------
Net income, as reported $667,982 $698,508
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 $658,849 $686,492
============================================
Earnings per share:
Basic - as reported $ .35 $ .31
Basic - pro forma $ .34 $ .30
Diluted - as reported $ .34 $ .31
Diluted - pro forma $ .34 $ .30
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
--------------------------------------------
Net income, as reported $1,863,830 $2,238,514
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 27,400 36,048
--------------------------------------------
Pro forma net income $1,836,430 $2,202,466
============================================
Earnings per share:
Basic - as reported $ .93 $ 1.69
Basic - pro forma $ .92 $ .98
Diluted - as reported $ .92 $ 1.00
Diluted - pro forma $ .91 $ .98
Note 4: 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 SFAS 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 expensing of stock options
is expected to become mandatory in 2005.
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 5: Reclassifications
Certain reclassifications have been made to the 2002 consolidated condensed
financial statements to conform to the September 30, 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 Corp ("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 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, operated as 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 assets 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 decreased $1.7 million to $267.6 million at September 30, 2003 from
$269.3 million at December 31, 2002. Net loans increased $5.4 million to $222.2
million at September 30, 2003. Cash and cash equivalents decreased $19.5 million
from $36.6 million at December 31, 2002 to $17.1 million at September 30, 2003.
This decrease was primarily used to reduce excess liquidity for use in funding
loan growth, investments in available for sale securities, reducing borrowings
and the purchase of bank owned life insurance. Investment securities increased
$4.9 million from $1.6 million at December 31, 2002 to $6.5 million at September
30, 2003. This increase was due to the investment of short-term liquidity in
available for sale investments of $5.9 million and a decrease in held to
maturity investments of $1.0 million consisting of the maturity of one
investment and payments on mortgage-backed securities. Premises and equipment
increased $1.3 million to $4.5 million at September 30, 2003 primarily due to
the cost of the current remodeling of Union Federal's home office. The
investment in limited partnerships increased $1.4 million primarily due to an
investment by Union Federal with Pedcor Investments-2003-LIX, L.P., an Indiana
limited partnership that was established to organize, build, own, operate and
lease a 128-unit residential rental community in Hamilton, Butler County, Ohio,
known as Knollwood Crossing II. Knollwood Crossing II will be operated as a
multi-family, low- and moderate-income housing project. Real estate owned and
held for investment decreased $287,000 to $1.3 million at September 30, 2003. In
connection with the Montgomery acquisition, the balance of goodwill and core
deposit intangibles are $2.4 million and $420,000 respectively. Goodwill will be
reviewed annually for impairment and core deposit intangibles are currently
being amortized. Other assets increased from $1.1 million at December 31, 2002
to $6.0 million at September 30, 2003. This increase is primarily due to a $5.0
million purchase of bank owned life insurance.
Total liabilities increased $119,000 to $232.2 million at September 30, 2003.
Deposits increased by $1.5 million to $191.7 million during the nine months
ended September 30, 2003 while net borrowings decreased $2.1 million from $40.1
million at December 31, 2002 to $38.0 million at September 30, 2003.
Shareholders' equity decreased $1.9 million to $35.3 million at September 30,
2003. The decrease was primarily due to the repurchase of 178,000 shares of
common stock at a total cost of $3.0 million, or an average cost of $16.86 per
share, and the payment of cash dividends in the amount of $912,000 and was
partially offset by net income of $1.9 million, Employee Stock Ownership Plan
shares earnings of $118,000 and unearned compensation amortization of $106,000.
Comparison of Operating Results for the Three Months Ended September 30, 2003
and 2002
Net income decreased $31,000 from $699,000 for the three months ended September
30, 2002 to $668,000 for the three months ended September 30, 2003. The return
on average assets for the three months ended September 30, 2003 was .99%
compared to 1.03% for the comparable period in 2002. The return on average
equity for the three months ended September 30, 2003 was 7.59% compared to 7.19%
for the comparable period in 2002.
For the three months ended September 30, 2003, interest income was $3.8 million
as compared to $4.5 million for the three months ended September 30, 2002.
Interest income decreased primarily due to a decrease in the yield on
interest-earning assets from 6.86% during the 2002 period to 6.02% during the
2003 period and a decrease in average interest-earning asset from $260.2 million
at September 30, 2002 to $254.1 million at September 30, 2003. For the three
months ended September 30, 2003, interest expense was $1.7 million as compared
to $2.0 million for the three months ended September 30, 2002. Interest expense
decreased primarily due to a decrease in the cost of interest-bearing
liabilities from 3.59% during the 2002 period to 2.91% during the 2003 period,
which was offset by an increase in average interest-bearing liabilities from
$226.7 million at September 30, 2002 to $229.6 million at September 30, 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 September 30, 2003 was
$118,000 as compared to $30,000 for the comparable period in 2002. The increase
was primarily due to a one-time loan charge-off in the amount of $55,000 and an
increase in the general allowance of $63,000 due to the loan portfolio growth
primarily in nonresidential mortgage loans. A review is performed quarterly to
determine the adequacy of the current balance in the allowance for loan losses.
Total other income increased $67,000 from $65,000 for the three months ended
September 30, 2002 to $132,000 for the 2003 comparable period. The increase was
primarily due to the increase in cash value on bank owned life insurance in the
amount of $62,000 for the 2003 period. The Company did not own any bank owned
life insurance during the 2002 period. Total other expenses decreased
approximately $206,000 from $1,371,000 for the three months ended September 30,
2002 to $1,165,000 for the comparable period in 2003. Salaries and employee
benefits decreased $112,000 during the comparable three-month periods primarily
due to a decrease of $51,000 in recognition and retention plan expense and the
booking of deferred loan fee compensation expense in the amount of $145,000 in
connection with FASB 91 offset by an increase in expense in funding the defined
benefit pension plan in the amount of $21,000, an increase of $20,000 in
employee insurance expense and an $38,000 increase in employee compensation. Net
occupancy expense decreased $74,000 during the comparable periods primarily due
to a decrease in real estate tax expense of $72,000 caused by a one time
adjustment to accrual for real estate taxes during the 2002 period. Legal and
professional fees decreased $6,000 to $67,000 for the three-months ended
September 30, 2003. Data processing expense decreased $34,000 for the
comparative periods due to one-time costs during the 2002 period for the
expansion of services provided by the service bureau. Other expenses increased
$19,000 from $268,000 for the three months ended September 30, 2002 to $287,000
for the 2003 comparable period. The two major increases in other expenses were
an increase in advertising expense of $23,000 and an increase in directors'
compensation of $11,000 partially offset by a reduction in charitable
contributions of $16,000.
Comparison of Operating Results for the Nine Months Ended September 30, 2003 and
2002
Net income decreased $375,000 from $2,239,000 for the nine months ended
September 30, 2002 to $1,864,000 for the nine months ended September 30, 2003.
The return on average assets for the nine months ended September 30, 2003 was
..90% compared to 1.10% for the comparable period in 2002. The return on average
equity for the nine months ended September 30, 2003 was 6.83% compared to 7.60%
for the comparable nine-month period in 2002.
For the nine months ended September 30, 2003, interest income was $12.0 million
as compared to $13.7 million for the nine months ended September 30, 2002.
Interest income decreased primarily due to a decrease in the yield on
interest-earning assets from 7.02% during the 2002 period to 6.11% during the
2003 period. Average interest-earning assets were $261.0 million for the
September 30, 2002 nine-month period compared to $261.7 million for the
September 30, 2003 nine-month period. For the nine months ended September 30,
2003, interest expense was $5.4 million as compared to $6.2 million for the nine
months ended September 30, 2002. Interest expense decreased primarily due to a
decrease in the cost of interest-bearing liabilities from 3.68% during the 2002
period to 3.08% during the 2003 period, which was partially offset by an
increase in average interest-bearing liabilities from $226.2 million at
September 30, 2002 to $233.0 million at September 30, 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 $377,000 in the 2003 period compared to a reduction of
$827,000 for the 2002 period.
The provision for loan losses was $178,000 for the nine months ended September
30, 2003 compared to $90,000 for the nine months ended September 30, 2002. The
increase was primarily due to a one-time charge off of $55,000 and an increase
due to loan growth as determined by the quarterly reviews. A review is performed
quarterly to determine the adequacy of the current balance in the allowance for
loan losses.
Total other income increased $94,000 from $192,000 for the nine months ended
September 30, 2002 to $286,000 for the 2003 comparable period. This increase was
primarily due to the increase in cash value of bank owned life insurance in the
amount of $86,000. The Company did not have bank owned life insurance during the
2002 comparable period. Total other expenses decreased $283,000 from $4,185,000
for the nine months ended September 30, 2002 to $3,902,000 for the comparable
period in 2003. Salaries and employee benefits decreased $58,000 and net
occupancy expense decreased $28,000 during the comparable periods. Legal and
professional fees increased $59,000 to $241,000 for the nine-months ended
September 30, 2003. This increase was due to an increase in consulting fees of
$67,000 primarily due to the use of consultants for daily monitoring of
information technology services and needs, this being partially offset by a
decrease in audit and accounting expense in the amount of $7,000. Data
processing expense decreased $379,000 for the comparative periods due to a
one-time terminations fee in the amount of $411,000 for data processing services
charged to expense during the 2002 comparative period offset by the cost of
additional services being offered. Other expenses increased $114,000 from
$747,000 for the nine months ended September 30, 2002 to $861,000 for the 2003
comparable period. The three major increases in other expenses were an increase
in advertising expense of $68,000, an increase in directors' compensation of
$32,000 and an increase in real estate owned expense of $19,000.
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 September 30, 2003 Union Federal had $5.8 million in classified assets as
compared to $7.0 million at December 31, 2002. Union Federal had $1.4 million
and $2.7 million in loans classified as special mention as of September 30, 2003
and December 31, 2002 respectively. In addition, Union Federal had $3.4 million
and $4.2 million of loans classified as substandard at September 30, 2003 and
December 31, 2002, respectively. At September 30, 2003 and December 31, 2002
Union Federal had $773,000 and $103,000, respectively, in loans classified as
doubtful and no loans were classified as loss at either period end. At September
30, 2003, and December 31, 2002, respectively, $4.2 million and $3.1 million of
the substandard and doubtful loans were non-accrual loans. The allowance for
loan losses was $1,161,000 or .52% of loans at September 30, 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
September 30, 2003, Union Federal had liquid assets of $17.4 million and a
liquidity ratio of 7.4%.
Off-balance Sheet Arrangements
As of the date of this Report, Union Federal does not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on the Union Federal's financial condition, change in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors. The term
"off-balance sheet arrangement" generally means any transaction, agreement, or
other contractual arrangement to which an entity unconsolidated with Union
Federal is a party under which Union Federal has (i) any obligation arising
under a guarantee contract, derivative instrument or variable interest; of (ii)
a retained or contingent interest in assets transferred to such entity or
similar arrangement that serves as credit, liquidity or market risk support for
such assets.
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 June 30, 2003 and 2002, 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 June 30, 2003 At June 30, 2002
---------------- ----------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
---------------- --------------- --------------- --------------- ---------------
+300 bp $ (9,416) (24)% $ (15,171) (32)%
+200 bp (5,313) (14) (9,908) (21)
+100 bp (1,703) (4) (4,954) (11)
0 bp 0 0 0 0
-100 bp (747) (2) 253 1
Management believes that at September 30, 2003 and June 30, 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
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
Securities Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and are designed to ensure that material information
relating to the Company would be made known to such officers by others within
the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
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
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a)
31(2) Certification required by 17 C.F.R. ss. 240.13a-14(a)
32 Certification 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
1. Earnings release for the quarter ended June 30, 2003 filed on
July 25, 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: November 7, 2003 By: /s/ Alan L. Grimble
--------------------------------
Alan L. Grimble
Chief Executive Officer
Date: November 7, 2003 By: /s/ J. Lee Walden
--------------------------------
J. Lee Walden
Chief Financial Officer