UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the fiscal year ended December 31, 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 as specified in its charter)
INDIANA 35-2025237
(State or other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
221 East Main Street, Crawfordsville, Indiana 47933
(Address of Principal Executive Offices) (Zip Code)
(765) 362-2400
(Registrant's telephone number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES _X_ NO___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405,
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES ___ NO _X_
The aggregate market value of the Registrant's voting stock held by
non-affiliates, as of June 30, 2003, was $29,340,000.
The number of shares of the Registrant's Common Stock, without par value,
outstanding as of March 26, 2004, was 2,100,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
2003, are incorporated into Part II. Portions of the Proxy Statement for the
2004 Annual Meeting of Shareholders are incorporated in Part I and Part III.
Exhibit Index on Page E-1
Page 1 of 35 pages
UNION COMMUNITY BANCORP
Form 10-K
INDEX
Page
----
FORWARD LOOKING STATEMENT ......................................................... 3
PART I
Item 1. Business ............................................................ 3
Item 2. Properties .......................................................... 29
Item 3. Legal Proceedings ................................................... 30
Item 4. Submission of Matters to a Vote of Security Holders ................. 30
Item 4.5 Executive Officers of the Registrant................................. 30
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters 30
Item 6. Selected Financial Data ............................................. 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 30
Item 7A. Quantitative and Qualitative Disclosures about Market Risk .......... 30
Item 8. Financial Statements and Supplementary Data ......................... 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure .............................................. 31
Item 9A. Controls and Procedures ............................................. 31
PART III
Item 10. Directors and Executive Officers of the Registrant .................. 31
Item 11. Executive Compensation .............................................. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ....................................... 32
Item 13. Certain Relationships and Related Transactions ...................... 32
Item 14. Principal Accountant Fees and Services .............................. 32
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .... 33
SIGNATURES 34
EXHIBITS E-1
FORWARD LOOKING STATEMENT
This Annual Report on Form 10-K ("Form 10-K") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief,
outlook, estimate or expectations of the Holding Company (as defined below), its
directors or its officers primarily with respect to future events and the future
financial performance of the Holding Company. Readers of this Form 10-K are
cautioned that any such forward looking statements are not guarantees of future
events or performance and involve risks and uncertainties, and that actual
results may differ materially from those in the forward looking statements as a
result of various factors. The accompanying information contained in this Form
10-K identifies important factors that could cause such differences. These
factors include changes in interest rates; loss of deposits and loan demand to
other savings and financial institutions; substantial changes in financial
markets; changes in real estate values and the real estate market; regulatory
changes; or unanticipated results in pending legal proceedings.
Item 1. Business
General
Union Community Bancorp (the "Holding Company") is an Indiana corporation
organized in September 1997 to become a savings and loan holding company upon
its acquisition of all the issued and outstanding capital stock of Union Federal
Savings and Loan Association ("Union Federal," and together with the Holding
Company, the "Company") in connection with Union Federal's conversion from
mutual to stock form. The Holding Company became Union Federal's holding company
on December 29, 1997. The principal asset of the Holding Company currently
consists of 100% of the issued and outstanding shares of capital stock, $.01 par
value per share, of Union Federal.
Union Federal was organized as a state-chartered savings and loan
association in 1913. Union Federal's principal business consists of attracting
deposits from the general public and originating fixed-rate and adjustable-rate
loans secured primarily by first mortgage liens on one- to four-family
residential real estate. Union Federal's deposit accounts are insured up to
applicable limits by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC").
On January 2, 2002, the Company acquired Montgomery Financial Corporation
("Montgomery"), the holding company of Montgomery Savings, a Federal Association
("Montgomery Savings"), a federally chartered thrift. Montgomery was merged with
and into the Company and Montgomery Savings was merged with and into Union
Federal. MSA Service Corporation ("MSA"), an Indiana corporation and
wholly-owned subsidiary of Montgomery Savings, will continue as a subsidiary of
Union Federal.
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 mortgages on
one- to four-family residential real estate. Union Federal's deposits accounts
are insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") of the Federal Deposit Insurance Corporation ("FDIC"). Union Federal
offers a number of other 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) savings accounts; and (viii)
certificates of deposit.
Lending Activities
Union Federal has historically concentrated its lending activities on the
origination of loans secured by first-mortgage liens for the purchase,
construction or refinancing of one- to four-family residential real property.
One- to four-family residential mortgage loans continue to be the major focus of
Union Federal's loan origination activities, representing 69.0% of its total
loan portfolio at December 31, 2003. Union Federal also offers multi-family
mortgage loans, commercial real estate loans, construction loans, commercial
loans and consumer loans consisting of loans secured by deposits and home
improvement loans. Mortgage loans secured by multi-family properties and
commercial real estate totaled approximately 5.4% and 18.7%, respectively, of
Union Federal's total loan portfolio at December 31, 2003. Construction loans
totaled approximately 2.1% of Union Federal's total loans as of December 31,
2003. Commercial loans totaled approximately 4.5% of Union Federal's total loans
as of December 31, 2003. Consumer loans, which consist of personal installment
loans and savings account loans, constituted approximately 0.4% of Union
Federal's total loan portfolio at December 31, 2003.
Loan Portfolio Data. The following table sets forth the composition of
Union Federal's loan portfolio by loan type and security type as of the dates
indicated, including a reconciliation of gross loans receivable after
consideration of the allowance for loan losses and loans in process.
At December 31,
-----------------------------------------------------------------------------------
2003 2002 2001
----------------------- ---------------------- ----------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
--------- -------- -------- -------- -------- --------
(Dollars in thousands)
TYPE OF LOAN
Real estate mortgage loans:
One- to four-family ........... $154,297 68.97% $163,890 75.03% $ 91,796 74.37%
Multi-family .................. 11,982 5.36 7,098 3.25 7,095 5.75
Commercial .................... 41,884 18.72 37,957 17.38 14,777 11.97
Real estate construction loans ......... 4,740 2.12 2,429 1.11 2,230 1.80
Commercial loans ....................... 9,992 4.47 6,433 2.95 7,342 5.95
Consumer loans ......................... 817 0.36 614 0.28 198 .16
-------- ------ --------- ------ -------- ------
Gross loans receivable $223,712 100.00% $218,421 100.00% $123,438 100.00%
======== ====== ======== ====== ======== ======
TYPE OF SECURITY
One- to four-family real estate $159,037 71.09% $166,144 76.07% $ 93,275 75.56%
Multi-family real estate ...... 11,982 5.36 7,098 3.25 7,095 5.75
Commercial real estate ........ 41,884 18.72 38,132 17.46 15,528 12.58
Deposits ...................... 40 0.02 104 0.05 35 .03
Other ......................... 10,769 4.81 6,943 3.17 7,505 6.08
-------- ------ --------- ------ -------- ------
Gross loans receivable 223,712 100.00% 218,421 100.00% 123,438 100.00
Deduct:
Allowance for loan losses .............. 1,221 0.55 1,030 0.47 520 .43
Deferred loan fees (costs) ............. (345) (0.15) (126) (0.05) 333 .27
Loans in process ....................... 1,606 0.71 814 0.37 836 .69
-------- ------ --------- ------ -------- ------
Net loans receivable .......... $221,230 98.89% $216,703 99.21% $121,749 98.61%
======== ====== ======== ====== ======== ======
Mortgage Loans:
Adjustable-rate ............... $ 45,326 21.29% $ 38,464 18.20% $ 24,001 20.71%
Fixed-rate .................... 167,577 78.71 172,910 81.80 91,897 79.29
-------- ------ --------- ------ -------- ------
Total ................ $212,903 100.00% $211,374 100.00% $115,898 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth certain information at December 31, 2003,
regarding the dollar amount of loans maturing in Union Federal's loan portfolio
based on the contractual terms to maturity. Demand loans having no stated
schedule of repayments and no stated maturity are reported as due in one year or
less. This schedule does not reflect the effects of possible prepayments or
enforcement of due-on-sale clauses. Management expects that prepayments will
cause actual maturities to be shorter.
Due During Years Ended December 31,
Balance ---------------------------------------------------------------------------
Outstanding at 2007 2009 2014 2019
December 31, to to to and
2003 2004 2005 2006 2008 2013 2018 following
-------------- ------ ------ ------ ------ ------ ------ ---------
(In thousands)
Real estate mortgage loans:
Residential loans ............... $154,297 $ 1,647 $ 144 $ 547 $ 3,676 $33,125 $49,988 $65,170
Multi-family loans ........... 11,982 390 50 -- 165 5,970 3,052 2,355
Commercial loans ................ 41,884 4,701 869 414 2,550 8,162 12,278 12,910
Construction loans ................. 4,740 4,740 -- -- -- -- -- --
Commercial loans ................... 9,992 5,755 107 1,098 2,120 912 -- --
Loans secured by deposits .......... 40 40 -- -- -- -- -- --
Personal loans ..................... 777 136 91 65 441 44 -- --
-------- ------- ------- ------- ------- ------- ------- -------
Total ..................... $223,712 $17,409 $ 1,261 $ 2,124 $ 8,952 $48,213 $65,318 $80,435
======== ======= ======= ======= ======= ======= ======= =======
The following table sets forth, as of December 31, 2003, the dollar amount
of all loans due after one year that have fixed interest rates and floating or
adjustable interest rates.
Due After December 31, 2004
--------------------------------------------
Fixed Rates Variable Rates Total
----------- -------------- ---------
(In thousands)
Real estate mortgage loans:
Residential loans ...... $138,863 $13,787 $152,650
Multi-family loans ..... 9,240 2,352 11,592
Commercial loans ....... 14,862 22,321 37,183
Construction loans ........ -- -- --
Commercial loans .......... 1,919 2,318 4,237
Installment loans ......... -- -- --
Loans secured by deposits . 641 -- 641
-------- ------- --------
Total ............ $165,525 $40,778 $206,303
======== ======= ========
One- to Four-Family Residential Loans. Union Federal's primary lending
activity consists of originating one- to four-family residential mortgage loans
secured by property located in its primary market area. Union Federal generally
does not originate one- to four-family residential mortgage loans if the ratio
of the loan amount to the lesser of the current cost or appraised value of the
property (the "Loan-to-Value Ratio") exceeds 95%. Union Federal requires private
mortgage insurance on loans with a Loan-to-Value Ratio in excess of 80%, and
factors the cost of such insurance into the annual percentage rate on such
loans. Union Federal originates and retains fixed rate loans which provide for
the payment of principal and interest over a 15-, 20- or 30-year period.
Union Federal also offers adjustable-rate mortgage ("ARM") loans. The
interest rate on ARM loans is indexed to the one-, three- or five-year U.S.
Treasury securities yields adjusted to a constant maturity. Union Federal may
offer discounted initial interest rates on ARM loans, however, it requires that
the borrower qualify for the ARM loan at the fully-indexed rate (the index rate
plus the margin). A substantial portion of the ARM loans in Union Federal's
portfolio at December 31, 2003 provide for maximum rate adjustments per year and
over the life of the loan of 2% and 6%, respectively. Union Federal's
residential ARMs are amortized for terms up to 30 years.
ARM loans decrease the risk associated with changes in interest rates by
periodically repricing, but involve other risks because, as interest rates
increase, the underlying payments by the borrower also increase, thus increasing
the potential for default by the borrower. At the same time, the marketability
of the underlying collateral may be adversely affected by higher interest rates.
Upward adjustment of the contractual interest rate is also limited by the
maximum periodic and lifetime interest rate adjustment permitted by the loan
documents, and, therefore, is potentially limited in effectiveness during
periods of rapidly rising interest rates. At December 31, 2003, approximately
21.3% of Union Federal's real estate mortgage loans had adjustable rates of
interest.
All of the one- to four-family residential mortgage loans that Union
Federal originates include "due-on-sale" clauses, which give it the right to
declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to
the mortgage and the loan is not repaid. However, Union Federal occasionally
permits assumptions of existing residential mortgage loans on a case-by-case
basis.
At December 31, 2003, approximately $154.3 million, or 69.0% of Union
Federal's portfolio of loans, consisted of one- to four-family residential
loans. Approximately $1.2 million, or 0.8% of total residential loans, were
included in non-performing assets as of that date. See "--Non-Performing and
Problem Assets."
Multi-Family Loans. At December 31, 2003, approximately $12.0 million, or
5.4% of Union Federal's total loan portfolio, consisted of mortgage loans
secured by multi-family dwellings (those consisting of more than four units).
Union Federal's multi-family loans are generally written as fixed-rate loans
with a maximum term of 15 years or as one-year adjustable rate loans indexed to
the one-year U.S. Treasury rate with an original term of up to 30 years. Union
Federal writes multi-family loans with maximum Loan-to-Value ratios of 80%.
Union Federal's largest multi-family loan as of December 31, 2003 had a balance
of approximately $4.0 million and was secured by 32 properties located in
Lafayette, Indiana. On the same date, Union Federal did not have any
multi-family loan(s) included in non-performing assets.
Multi-family loans, like commercial real estate loans, involve a greater
risk than do residential loans. See "-- Commercial Real Estate Loans" below.
Commercial Real Estate Loans. Union Federal's commercial real estate loans
are secured by churches, office buildings, and other commercial properties.
Union Federal generally originates commercial real estate loans as one-year
adjustable rate loans indexed to the one-year U.S. Treasury securities yield
adjusted to a constant maturity, with a maximum term of 20 years and a maximum
Loan-to-Value ratio of 80%. At December 31, 2003, Union Federal's largest
commercial loan had an outstanding balance of $1.5 million and was secured by a
warehouse in Crawfordsville, Indiana. At December 31, 2003, approximately $41.9
million, or 18.7% of Union Federal's total loan portfolio, consisted of
commercial real estate loans. On the same date, Union Federal had ten loans
totaling $2.4 million of commercial real estate loans included in non-performing
assets.
Loans secured by commercial real estate generally are larger than one- to
four-family residential loans and involve a greater degree of risk. Commercial
real estate loans often involve large loan balances to single borrowers or
groups of related borrowers. Payments on these loans depend to a large degree on
results of operations and management of the properties and may be affected to a
greater extent by adverse conditions in the real estate market or the economy in
general. Accordingly, the nature of the loans makes them more difficult for
management to monitor and evaluate.
Construction Loans. Union Federal offers construction loans with respect to
residential and commercial real estate and, in certain cases, to builders or
developers constructing such properties on a speculative basis (i.e., before the
builder/developer obtains a commitment from a buyer). At December 31, 2003,
approximately $4.7 million, or 2.1% of Union Federal's total loan portfolio,
consisted of construction loans. At December 31, 2003, the largest construction
loan had an outstanding balance of $238,000, an unused commitment of $78,000,
and was secured by a single-family residence in Lafayette, Indiana. None of
Union Federal's construction loans were included in non-performing assets on
that date.
Construction loans generally match the term of the construction contract,
are written as fixed-rate or adjustable-rate loans with interest calculated on
the amount disbursed under the loan and are payable monthly. The maximum
Loan-to-Value Ratio for a construction loan is based upon the nature of the
construction project. For example, a construction loan for a one- to four-family
residence may be written with a maximum Loan-to-Value Ratio of 95%, while a
construction loan for a multi-family project may be written with a maximum
Loan-to-Value Ratio of 80%. Inspections are made prior to any disbursement under
a construction loan. Union Federal does not normally charge commitment fees for
construction loans.
Construction loans may provide a comparable, and in some cases higher,
yield than conventional mortgage loans, however, they also involve a higher
level of risk. For example, if a project is not completed and the borrower
defaults, Union Federal may have to hire another contractor to complete the
project at a higher cost. Also, a project may be completed, but may not be
salable, resulting in the borrower defaulting and Union Federal's taking title
to the project.
Commercial Loans. Union Federal offers commercial loans, which consist
primarily of loans to businesses that are secured by assets other than real
estate. As of December 31, 2003, commercial loans amounted to $10.0 million, or
4.5% of Union Federal's total loan portfolio. Commercial loans tend to bear
somewhat greater risk than residential mortgage loans, depending on the ability
of the underlying enterprise to repay the loan. Although commercial loans have
not historically comprised a large portion of Union Federal's portfolio, Union
Federal intends to increase the amount of loans it makes to small businesses in
the future in order to increase its rate of return and diversify its portfolio.
As of December 31, 2003, two of Union Federal's commercial loans totaling
$29,000 were included in nonperforming assets.
Consumer Loans. Union Federal's consumer loans, consisting of savings
account loans and personal installment loans, aggregated approximately $817,000
at December 31, 2003, or 0.4% of its total loan portfolio. Union Federal's
savings account loans are made up to 90% of the deposit account balance and, at
December 31, 2003, accrued at a rate of 6.4%. This rate may change but will
always be at least 2% over the underlying passbook or certificate of deposit
rate. Interest on loans secured by deposits is paid semi-annually. At December
31, 2003, one of Union Federal's consumer loans totaling $8,000 was included in
non-performing assets. See "-- Non-Performing and Problem Assets."
Origination, Purchase and Sale of Loans. Union Federal historically has
originated its mortgage loans pursuant to its own underwriting standards which
do not conform with the standard criteria of the Federal Home Loan Mortgage
Corporation ("FHLMC") or the Federal National Mortgage Association ("FNMA"). In
the event that Union Federal begins originating fixed-rate residential mortgage
loans for sale to the FHLMC in the secondary market, such loans will be
originated in accordance with the guidelines established by the FHLMC and will
be sold promptly after they are originated. Union Federal is currently
investigating the process to originate loans for sale to the FHLMC.
Union Federal confines its loan origination activities primarily to
Montgomery County and the surrounding counties of Boone, Hendricks, Putnam,
Parke, Tippecanoe, Warren and Fountain. Union Federal has also originated
several loans in Marion County. At December 31, 2003, Union Federal also had
nine loans which it originated, totaling approximately $1.8 million, secured by
property located outside of Indiana. Union Federal's loan originations are
generated from referrals from existing customers, real estate brokers, and
newspaper and periodical advertising. Loan applications are underwritten and
processed at Union Federal's office.
Union Federal's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. To assess the borrower's
ability to repay, Union Federal evaluates the employment and credit history and
information on the historical and projected income and expenses of its
mortgagors. All mortgage loans are approved or ratified by Union Federal's board
of directors.
Union Federal generally requires appraisals on all real property securing
its loans and requires a title insurance policy or an attorney's opinion and a
valid lien on the mortgaged real estate. Appraisals for all real property
securing mortgage loans are performed by independent appraisers who are
state-licensed. Union Federal requires fire and extended coverage insurance in
amounts at least equal to the principal amount of the loan and also requires
flood insurance to protect the property securing its interest if the property is
in a flood plane. Union Federal also generally requires private mortgage
insurance for all residential mortgage loans with Loan-to-Value Ratios of
greater than 80%, and escrow accounts for insurance premiums and taxes for loans
that require private mortgage insurance.
Union Federal's underwriting standards for consumer loans are intended to
protect against some of the risks inherent in making consumer loans. Borrower
character, paying habits and financial strengths are important considerations.
Union Federal occasionally purchases participation interests in loans
originated by other financial institutions in order to diversify its portfolio,
supplement local loan demand and to obtain more favorable yields. The
participations that Union Federal purchases normally represent a portion of
residential or commercial real estate loans originated by other Indiana
financial institutions, most of which are secured by property located in
Indiana. As of December 31, 2003, Union Federal held in its loan portfolio
participations in mortgage loans aggregating $5.7 million that it purchased, all
of which were serviced by others. Included within this amount were
participations in the aggregate amount of $500,000 which were secured by
property located outside of Indiana. The largest participation loan in Union
Federal's portfolio at December 31, 2003 was a $1.0 million interest in an
unsecured loan to a local school district.
The following table shows Union Federal's loan origination and repayment
activity during the periods indicated:
Year Ended December 31,
------------------------------------------
2003 2002 2001
---------- ---------- ----------
(In thousands)
Gross loans receivable at beginning of period ....... $218,421 $123,438 $111,459
Loans originated:
Real estate mortgage loans:
One-to-four family loans ...................... 95,233 41,958 27,980
Multi-family loans ............................ 8,523 1,177 0
Commercial loans .............................. 23,708 16,645 3,277
Construction loans ............................... 3,810 3,607 2,129
Commercial loans ................................. 11,470 10,695 15,748
Loans secured by deposits ........................ 54 189 97
Personal installment loans ....................... 620 184 421
-------- -------- --------
Total originations ........................ 143,418 74,455 49,652
Loans acquired in acquisition ....................... -- 117,033 --
Purchases (sales) of participation loans, net ....... -- 450 376
Reductions:
Principal loan repayments ........................ 137,847 96,292 38,049
Loans transferred to (from) foreclosed real estate 280 663 0
-------- -------- --------
Total reductions ......................... 138,127 96,955 38,049
-------- -------- --------
Total gross loans receivable at end of period ....... $223,712 $218,421 $123,438
======== ======== ========
Union Federal's residential loan originations during the year ended
December 31, 2003 totaled $95.2 million, compared to $42.0 million and $28.0
million in the years ended December 31, 2002 and 2001, respectively.
Origination and Other Fees. Union Federal realizes income from late
charges, checking account service charges, and fees for other miscellaneous
services. Union Federal currently charges a commitment fee of $250 on all loans.
Union Federal also may charge points on a mortgage loan as consideration for a
lower interest rate, although it does so infrequently. Late charges are
generally assessed if payment is not received within a specified number of days
after it is due. The grace period depends on the individual loan documents.
Non-Performing and Problem Assets
After a mortgage loan becomes 30 days past due, Union Federal delivers a
delinquency notice to the borrower. When loans are 30 to 60 days in default,
Union Federal sends additional delinquency notices and makes personal contact by
telephone with the borrower to establish an acceptable repayment schedule. When
loans become 60 days in default, Union Federal again contacts the borrower, this
time in person, to establish an acceptable repayment schedule. When a mortgage
loan is 90 days delinquent, Union Federal will have either entered into a
workout plan with the borrower or referred the matter to its attorney for
collection. Management is authorized to commence foreclosure proceedings for any
loan upon making a determination that it is prudent to do so.
Union Federal reviews mortgage loans on a regular basis and places such
loans on a non-accrual status when they become 90 days delinquent. Generally,
when loans are placed on a non-accrual status, unpaid accrued interest is
written off and further income is recognized only to the extent received.
Non-performing Assets. At December 31, 2003, $4.0 million, or 1.5% of the
Company's total assets, were non-performing (non-performing loans, non-accruing
loans and foreclosed real estate) compared to $3.5 million or 1.3%, of its total
assets at December 31, 2002. At December 31, 2003, residential loans accounted
for $1.2 million of Union Federal's non-performing assets. Union Federal had
real estate owned ("REO") properties in the amount of $359,000 as of December
31, 2003.
The table below sets forth the amounts and categories of Union Federal's
non-performing assets (non-performing loans, foreclosed real estate and troubled
debt restructurings) for the last three years. It is Union Federal's policy to
review all earned but uncollected interest on all loans monthly to determine if
any portion thereof should be classified as uncollectible for any loan past due
in excess of 90 days. Delinquent loans that are 90 days or more past due are
considered non-performing assets.
At December 31,
---------------------------------
2003 2002 2001
-------- -------- -------
(Dollars in thousands)
Non-performing assets:
Non-performing loans ............. $3,638 $3,069 $ 682
Foreclosed real estate ........... 359 432 9
------ ------ ------
Total non-performing assets ... $3,997 $3,501 $ 691
====== ====== ======
Non-performing loans to total loans . 1.63% 1.41% .55%
Non-performing assets to total assets 1.53% 1.30% .49%
Interest income of $75,000, $40,000 and $39,000 was recognized on the
non-performing loans summarized above for the years ended December 31, 2003,
2002 and 2001, respectively. Interest income of $295,000, $328,000 and $57,000
would have been recognized under the original terms of these non-performing
loans for the years ended December 31, 2003, 2002 and 2001, respectively.
At December 31, 2003, Union Federal held loans delinquent from 30 to 89
days totaling approximately $2.9 million. Other than in connection with these
loans and the other delinquent loans disclosed elsewhere in this section,
management was not aware of any other borrowers who were experiencing financial
difficulties.
Delinquent Loans. The following table sets forth certain information at
December 31, 2003, 2002 and 2001, relating to delinquencies in Union Federal's
portfolio. Delinquent loans that are 90 days or more past due are considered
non-performing assets.
At December 31, 2003 At December 31, 2002
------------------------------------------- -------------------------------------------
30-89 Days 90 Days or More 30-89 Days 90 Days or More
-------------------- -------------------- -------------------- --------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
One- to four-family loans ..... 38 $1,766 21 $1,182 51 $2,441 39 $2,686
Commercial real estate loans .. 6 1,062 10 2,419 3 1,172 2 245
Multi-family loans ............ -- -- -- -- -- -- 1 131
Personal installment loans .... -- -- 3 8 5 73 1 7
Commercial loans .............. 2 27 2 29 1 31 -- --
-- ------ -- ------ -- ------ -- ------
Total ............... 46 $2,855 36 $3,638 60 $3,717 43 $3,069
== ====== == ====== == ====== == ======
Delinquent loans to total loans 2.93% 3.13%
==== ====
(TABLE CONTINUED BELOW)
At December 31, 2001
-------------------------------------------
30-89 Days 90 Days or More
-------------------- --------------------
Principal Principal
Number Balance Number Balance
of Loans of Loans of Loans of Loans
-------- -------- -------- --------
(Dollars in thousands)
One- to four-family loans ..... 13 $ 742 5 $194
Commercial real estate loans .. 1 83 2 488
Multi-family loans ............ 2 1,008 -- --
Personal installment loans .... -- -- -- --
Commercial loans ..............
-- ------ -- ----
Total ............... 16 $1,833 7 $682
== ====== == ====
Delinquent loans to total loans 2.06%
====
Classified Assets. Federal regulations and Union Federal's Asset
Classification Policy provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser quality
as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
An insured institution is required to establish general allowances for loan
losses in an amount deemed prudent by management for loans classified
substandard or doubtful, as well as for other problem loans. General allowances
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies problem assets as "loss," it is required either to
establish a specific allowance for losses equal to 100% of the amount of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS which can order the establishment of
additional general or specific loss allowances.
At December 31, 2003, the aggregate amount of Union Federal's classified
assets were as follows:
At December 31, 2003
--------------------
(In thousands)
Substandard assets ............. $3,474
Doubtful assets ................ 781
Loss assets .................... --
------
Total classified assets $4,255
======
Union Federal regularly reviews its loan portfolio to determine whether any
loans require classification in accordance with applicable regulations. Included
in substandard and doubtful assets at December 31, 2003, Union Federal had two
commercial real estate loans in the aggregate sum of $360,000 that were
performing. In addition, one property classified as foreclosed real estate is
included in the above table. The loans and foreclosed real estate were
classified as substandard and doubtful as a result of a regulatory examination.
Allowance for Loan Losses
The allowance for loan losses is maintained through the provision for loan
losses, which is charged to earnings. The allowance for loan losses is
determined in conjunction with Union Federal's review and evaluation of current
economic conditions (including those of its lending area), changes in the
character and size of the loan portfolio, loan delinquencies (current status as
well as past and anticipated trends) and adequacy of collateral securing loan
delinquencies, historical and estimated net charge-offs, and other pertinent
information derived from a review of the loan portfolio. In management's
opinion, Union Federal's allowance for loan losses is adequate to absorb
probable losses inherent in the loan portfolio at December 31, 2003. However,
there can be no assurance that regulators, when reviewing Union Federal's loan
portfolio in the future, will not require increases in Union Federal's
allowances for loan losses or that changes in economic conditions will not
adversely affect its loan portfolio.
Summary of Loan Loss Experience. The following table analyzes changes in
the allowance during the past three fiscal years ended December 31, 2003.
Year Ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period ...................... $ 1,030 $ 520 $ 480
Recoveries .......................................... 8 -- --
Gross charge-offs - residential loans ............... (55) (241) --
Allowance acquired in acquisition ................... -- 379 --
Provision for losses on loans ....................... 238 372 40
------- ------- -------
Balance end of period ...................... $ 1,221 $ 1,030 $ 520
======= ======= =======
Allowance for loan losses as a percent of total loans
outstanding ................................ .55% .47% .43%
Ratio of net charge-offs to average loans outstanding .02% .10% --
Allocation of Allowance for Loan Losses. The following table presents an
analysis of the allocation of Union Federal's allowance for loan losses at the
dates indicated. The allocation of the allowance to each category is not
necessarily indicative of future loss in any particular category and does not
restrict Union Federal's use of the allowance to absorb losses in other
categories.
At December 31,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- --------------------
Percent Percent Percent
of loans of loans of loans
in each in each in each
category category category
to total to total to total
Amount loans Amount loans Amount loans
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Balance at end of period applicable to:
Real estate mortgage loans:
Residential .................... $ 292 68.97% $ 378 75.03% $ 117 74.37%
Commercial ..................... 626 18.72 507 17.38 165 5.75
Multi-family ................... 60 5.36 50 3.25 108 11.97
Construction loans ................ 4 2.12 1 1.11 4 1.80
Commercial loans .................. 155 4.47 81 2.95 121 5.95
Loans secured by deposits ......... -- 0.02 -- 0.05 -- .03
Personal installment loans ........ 18 0.34 12 0.23 5 .13
Unallocated ........................ 66 -- 1 -- -- --
------ ------ ------ ------ ------ ------
Total ........................ $1,221 100.00% $1,030 100.00% $ 520 100.00%
====== ====== ====== ====== ====== ======
Investments
Investments. The Company's investment portfolio generally consists of U.S.
Treasury and federal agency securities, mortgaged-backed securities, marketable
equity securities, FHLB stock, an investment in Pedcor Investments - 2003 - LIX,
L.P. ("Pedcor 2003"), and an investment in Pedcor Investments - 1993 - XVI, L.P.
("Pedcor 1993"). At December 31, 2003, approximately $12.3 million, or 4.7%, of
the Company's total assets consisted of such investments. The Company also had
$11.3 million, or 4.3% of its assets, in interest-earning deposits as of that
date.
The Pedcor 2003 and Pedcor 1993 investments are in limited partnerships
that were established to organize, build, own, operate and lease multi-family,
low- and moderate-income residential rental projects. A low- and moderate-income
housing project qualifies for certain federal income tax credits if (i) it is a
residential rental property, (ii) the units are used on a nontransient basis,
and (iii) 20% or more of the units in the project are occupied by tenants whose
incomes are 50% or less of the area median gross income, adjusted for family
size, or alternatively, at least 40% of the units in the project are occupied by
tenants whose incomes are 60% of the area median gross income. Qualified low
income housing projects generally must comply with these and other rules for
fifteen years, beginning with the first year the project qualified for the tax
credit, or some or all of the tax credit together with interest may be
recaptured. The tax credit is subject to the limitations on the use of general
business credit, but no basis reduction is required for any portion of the tax
credit claimed. In 2003, Union Federal invested $1.4 million in Pedcor 2003,
which is establishing a project known as Knollwood Crossing II in Hamilton,
Butler County, Ohio. A subsidiary of Union Federal, UFS Service Corp., invested
in Pedcor 1993. See "--Service Corporation Subsidiary."
The following table sets forth the amortized cost and the market value of
the Company's investment portfolio at the dates indicated.
At December 31,
------------------------------------------------------------------------------
2003 2002 2001
-------------------- -------------------- ---------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- ------
(In thousands)
Investment securities:
Available for sale:
Federal agencies ................... $ 6,000 $5,908 $ -- $ -- $ -- $ --
Held to maturity:
Federal agencies ................... -- -- 300 308 700 728
Mortgage-backed securities ......... 494 526 1,337 1,424 2,148 2,240
------- ------- ------- ------- ------- -------
Total investment securities 6,494 6,434 1,637 1,732 2,848 2,968
Investment in limited partnership (1) . 2,215 -- 837 -- 857 --
FHLB stock (2) ........................ 3,556 3,556 3,424 3,424 1,530 1,530
------- ------- -------
Total investments ..................... $12,265 $ 5,898 $ 5,235
======= ======= =======
- -----------------------
(1) Market values are not available
(2) Market value is based on the price at which stock may be resold to the FHLB
of Indianapolis.
The following table sets forth the amount of investment securities
(excluding mortgage-backed securities, marketable equity securities, FHLB stock
and investment in limited partnership) which mature during each of the periods
indicated and the weighted average yields for each range of maturities at
December 31, 2003.
Amount at December 31, 2003 which matures in
---------------------------------------------------------------------------------------
One Year One Year Five Years
or Less to Five Years to Ten Years After Ten Years
-------------------- ------------------- ------------------- --------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- --------- --------
(Dollars in thousands)
Federal agency securities........... $-- --% $6,000 2.59% $-- --% $-- --%
Mortgage-backed Securities
The following table sets forth the composition of Union Federal's
mortgage-backed securities portfolio at the dates indicated.
December 31,
-------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- -----------------------------
Amortized Percent Market Amortized Percent Market Amortized Percent Market
Cost of Total Value Cost of Total Value Cost of Total Value
--------- -------- ------ --------- -------- ------ --------- -------- ------
(In thousands)
Governmental National
Mortgage Corporation ............... $ 152 30.8% $ 167 $ 275 20.6% $ 304 $ 477 22.2% $ 533
Federal Home Loan Mortgage
Corporation ........................ 305 61.7 322 1,019 76.2 1,077 1,619 75.4 1,657
Federal National Mortgage
Corporation ........................ 33 6.7 33 38 2.8 38 45 2.1 43
Other ................................ 4 0.8 4 5 0.4 5 7 .3 7
------ ----- ------ ------ ----- ------ ------ ----- ------
Total mortgage-backed securities... $ 494 100.0% $ 526 $1,337 100.0% $1,424 $2,148 100.0% $2,240
====== ===== ====== ====== ===== ====== ====== ===== ======
The following table sets forth the amount of mortgage-backed securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 2003.
Amount at December 31, 2003 which matures in
---------------------------------------------------------------
One Year to Five Years to After
Five Years Ten Years Ten Years
------------------- ------------------- -------------------
Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- --------
(Dollars in thousands)
Mortgage-backed securities... $96 8.08% $-- --% $398 7.05%
The following table sets forth the changes in Union Federal's
mortgage-backed securities portfolio for the years ended December 31, 2003, 2002
and 2001.
For the Year Ended December 31,
-------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Beginning balance .................... $ 1,337 $ 2,148 $ 2,582
Purchases ............................ -- -- --
Repayments ........................... (846) (827) (437)
Premium and discount amortization, net 3 16 3
------- ------- -------
Ending balance ....................... $ 494 $ 1,337 $ 2,148
======= ======= =======
Sources of Funds
General. Deposits have traditionally been Union Federal's primary source of
funds for use in lending and investment activities. In addition to deposits,
Union Federal derives funds from scheduled loan payments, investment maturities,
loan prepayments, retained earnings, income on earning assets and borrowings.
While scheduled loan payments and income on earning assets are relatively stable
sources of funds, deposit inflows and outflows can vary widely and are
influenced by prevailing interest rates, market conditions and levels of
competition. Borrowings from the FHLB of Indianapolis may be used in the
short-term to compensate for reductions in deposits or deposit inflows at less
than projected levels.
Deposits. Union Federal attracts deposits principally from within
Montgomery, Fountain, Tippecanoe and Warren Counties through the offering of a
broad selection of deposit instruments, including fixed-rate savings accounts,
NOW accounts, variable rate money market accounts, fixed-term certificates of
deposit and savings accounts. Union Federal does not actively solicit or
advertise for deposits outside of the four counties, and substantially all of
its depositors are residents of those counties. Deposit account terms vary, with
the principal differences being the minimum balance required, the amount of time
the funds remain on deposit and the interest rate. Union Federal does not pay
broker fees for any deposits it receives.
Union Federal establishes the interest rates paid, maturity terms, service
fees and withdrawal penalties on a periodic basis. Determination of rates and
terms are predicated on funds acquisition and liquidity requirements, rates paid
by competitors, growth goals, and applicable regulations. Union Federal relies,
in part, on customer service and long-standing relationships with customers to
attract and retain its deposits. Union Federal also closely prices its deposits
to the rates offered by its competitors.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and other prevailing interest rates and
competition. The variety of deposit accounts that Union Federal offers has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. Union Federal has become more susceptible to
short-term fluctuations in deposit flows as customers have become more interest
rate conscious. Union Federal manages the pricing of its deposits in keeping
with its asset/liability management and profitability objectives. Based on Union
Federal's experience, management believes that its savings accounts, NOW and
MMDAs are relatively stable sources of deposits. However, the ability to attract
and maintain certificates of deposit, and the rates paid on these deposits, has
been and will continue to be significantly affected by market conditions.
An analysis of the Company's deposit accounts by type, maturity, and rate
at December 31, 2003, is as follows:
Minimum Balance at Weighted
Opening December 31, % of Average
Type of Account Balance 2003 Deposits Rate
- --------------- ------- ------------ -------- --------
(Dollars in thousands)
Withdrawable:
Fixed rate, savings accounts $ 10 $ 29,756 15.64% 1.48%
Variable rate, money market . 500 54,807 28.82 1.70
NOW accounts ................ 100 7,675 4.04 1.00
Demand deposits ............. 100 3,930 2.07 --
-------- ------ ----
Total withdrawable . 96,168 50.57 1.51
Certificates (original terms):
3 months or less ............ 1,000 295 0.15 1.05
6 months .................... 1,000 3,155 1.66 1.34
12 months ................... 1,000 8,427 4.43 2.13
18 months ................... 1,000 7,100 3.73 2.56
24 months ................... 1,000 5,917 3.11 2.97
30 months ................... 1,000 5,593 2.94 3.27
36 months ................... 1,000 6,328 3.33 3.84
48 months ................... 1,000 4,416 2.32 4.34
60 months ................... 1,000 15,990 8.41 4.93
Jumbo certificates - $100,000 and over 100,000 36,803 19.35 3.55
-------- ------ ----
Total certificates ................... 94,024 49.43 3.50
-------- ------ ----
Total deposits ....................... $190,192 100.00% 2.49%
======== ====== ====
The following table indicates the amount of the Company's other
certificates of deposit of $100,000 or more by time remaining until maturity as
of December 31, 2003.
At December 31, 2003
--------------------
Maturity Period (In thousands)
Three months or less ........................ $12,320
Greater than three months through six months 4,497
Greater than six months through twelve months 8,752
Over twelve months .......................... 11,234
-------
Total ................................. $36,803
=======
The following table sets forth the dollar amount of savings deposits in the
various types of deposits that the Company offers at the dates indicated, and
the amount of increase or decrease in such deposits as compared to the previous
period.
DEPOSIT ACTIVITY
-------------------------------------------------------------------------------------------
Balance Increase Balance Increase Balance
at (Decrease) at (Decrease) at
December 31, % of from December 31, % of from December 31, % of
2003 Deposits 2002 2002 Deposits 2001 2001 Deposits
------------ -------- ---------- ------------ -------- --------- ------------ --------
(Dollars in thousands)
Withdrawable:
Fixed rate, savings
accounts ................ $ 29,756 15.64% $ (2,658) $ 32,414 17.04% $ 29,130 $ 3,284 4.02%
Variable rate, money
market .................. 54,807 28.82 11,714 43,093 22.66 18,860 24,233 29.66
NOW accounts .............. 7,675 4.04 1,306 6,369 3.35 3,935 2,434 2.98
Demand deposits ........... 3,930 2.07 80 3,850 2.02 2,817 1,033 1.26
-------- ------ -------- -------- ------ -------- ------- ------
Total withdrawable .... 96,168 50.57 10,442 85,726 45.07 54,742 30,984 37.92
-------- ------ -------- -------- ------ -------- ------- ------
Certificates (original terms):
3 months .................. 295 0.15 146 149 0.08 128 21 .03
6 months .................. 3,155 1.66 (1,442) 4,597 2.42 1,813 2,784 3.41
12 months ................. 8,427 4.43 227 8,200 4.31 3,516 4,684 5.73
18 months ................. 7,100 3.73 (2,004) 9,104 4.79 5,023 4,081 4.99
24 months ................. 5,917 3.11 (3,051) 8,968 4.72 5,013 3,955 4.84
30 months ................. 5,593 2.94 (1,700) 7,293 3.83 (47) 7,340 8.98
36 months ................. 6,328 3.33 (615) 6,943 3.65 2,282 4,661 5.71
48 months ................. 4,416 2.32 1,873 2,543 1.34 1,518 1,025 1.26
60 months ................. 15,990 8.41 1,555 14,435 7.59 9,640 4,795 5.87
Jumbo certificates ........... 36,803 19.35 (5,430) 42,233 22.20 24,861 17,372 21.26
-------- ------ -------- -------- ------ -------- ------- ------
Total certificates ........... 94,024 49.43 (10,441) 104,465 54.93 53,747 50,718 62.08
-------- ------ -------- -------- ------ -------- ------- ------
Total deposits ............... $190,192 100.00 $ 1 $190,191 100.00% $108,489 $81,702 100.00%
======== ====== ======== ======== ====== ======== ======= ======
Total deposits were approximately $190.2 million at December 31, 2003 and
2002. Union Federal's deposit base depends somewhat upon the manufacturing
sector of Montgomery County's economy. Although Montgomery County's
manufacturing sector is relatively diversified and does not significantly depend
upon any industry, a loss of a material portion of the manufacturing workforce
could adversely affect Union Federal's ability to attract deposits due to the
loss of personal income attributable to the lost manufacturing jobs and the
attendant loss in service industry jobs.
In the unlikely event of Union Federal's liquidation after the Conversion,
all claims of creditors (including those of deposit account holders, to the
extent of their deposit balances) would be paid first followed by distribution
of the liquidation account to certain deposit account holders, with any assets
remaining thereafter distributed to the Holding Company as the sole shareholder
of Union Federal.
Borrowings. Management focuses on generating high quality loans and then
seeking the best source of funding from deposits, investments or borrowings. At
December 31, 2003, Union Federal had borrowings in the amount of $33.8 million
from the FHLB of Indianapolis which bear fixed and variable interest rates and
are due at various dates through 2015. Union Federal is required to maintain
eligible loans in its portfolio of at least 160% of outstanding advances as
collateral for advances from the FHLB of Indianapolis. Union Federal does not
anticipate any difficulty in obtaining advances appropriate to meet its
requirements in the future. Union Federal also owes Pedcor Investments 1993-XVI,
L.P. ("Pedcor") $132,000 under a note payable that is not included in the
following table.
The following table presents certain information relating to Union
Federal's borrowings at or for the years ended December 31, 2003, 2002 and 2001.
At or for the Year
Ended December 31,
-----------------------------------
2003 2002 2001
-------- ------- -------
(Dollars in thousands)
FHLB Advances:
Outstanding at end of period ................... $33,814 $39,752 $25,406
Average balance outstanding for period ......... 38,399 40,579 14,143
Maximum amount outstanding at any month-end
during the period ........................... 40,186 42,875 25,406
Weighted average interest rate during the period 4.69% 4.58% 5.13%
Weighted average interest rate at end of period 5.25 5.03 3.35
Return on Equity and Assets
2003 2002 2001
-------- ------- -------
Return on assets (net income divided by average
total assets) ................................. 0.85% 1.03% 1.44%
Return on equity (net income divided by average
equity) ....................................... 6.45 7.19 5.38
Dividend payout ratio (dividends per share divided
by net income per share) ...................... 51.78 41.94 64.52
Equity to assets ratio (average equity divided by
average total assets) ......................... 13.26 14.29 26.80
Service Corporation Subsidiary
OTS regulations permit federal savings associations to invest in the
capital stock, obligations or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of the association's assets, plus an
additional 1% of assets if the amount over 2% is used for specified community or
inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special purpose finance subsidiaries) in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
regulatory capital if the association's regulatory capital is in compliance with
applicable regulations. A savings association that acquires a non-savings
association subsidiary, or that elects to conduct a new activity within a
subsidiary, must give the FDIC and the OTS at least 30 days advance written
notice. The FDIC may, after consultation with the OTS, prohibit specified
activities if it determines such activities pose a serious threat to the SAIF.
Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries).
Union Federal currently has two wholly-owned subsidiaries. MSA Service
Corporation ("MSA") engages in real estate development and is currently
completing the sale of a seven-unit condominium project located in
Crawfordsville, Indiana. Union Federal also owns UFS Service Corp. ("UFS"),
whose sole asset is its investment in Pedcor 1993, which is an Indiana limited
partnership that was established to organize, build, own, operate and lease a
48-unit apartment complex in Crawfordsville, Indiana known as Shady Knoll II
Apartments (the "Shady Knoll Project"). Union Federal owns the limited partner
interest in Pedcor 1993. The general partner is Pedcor Investments LLC. The
Shady Knoll Project, operated as a multi-family, low- and moderate-income
housing project, is completed and is performing as planned. Because UFS engages
exclusively in activities that are permissible for a national bank, OTS
regulations permit Union Federal to include its investment in UFS in its
calculation of regulatory capital.
UFS committed to invest approximately $1.8 million in Pedcor 1993 at the
inception of the project in November 1993. Through December 31, 2003, UFS had
invested cash of approximately $1.7 million in Pedcor 1993 with one additional
annual capital contribution remaining to be paid in January 2004, totaling
$132,000. The additional contributions will be used for operating and other
expenses of the partnership. In addition, Union Federal borrowed funds from the
FHLB of Indianapolis to advance to Pedcor 1993, and Pedcor 1993 currently owes
Union Federal $121,000 pursuant to a promissory note payable in installments
through January 1, 2004 and bearing interest at an annual rate of 9%.
UFS transferred the tax credits resulting from Pedcor 1993's operation of
the Shady Knoll Project to Union Federal. These tax credits were available to
Union Federal through 2003. Although Union Federal has reduced income tax
expense by the full amount of the tax credit available each year, it has not
been able to fully utilize available tax credits to reduce income taxes payable
because it may not use tax credits that would reduce its regular corporate tax
liability below its alternative minimum tax liability. Union Federal may carry
forward unused tax credits for a period of fifteen years and management believes
that Union Federal will be able to utilize the available tax credits during the
carry forward period. Additionally, Pedcor 1993 has incurred operating losses in
the early years of its operations primarily due to its accelerated depreciation
of assets. UFS has accounted for its investment in Pedcor 1993 on the equity
method and, accordingly, has recorded its share of these losses as reductions to
its investment in Pedcor 1993, which at December 31, 2003, was $815,000. As of
December 31, 2003, 88% of the units in the Shady Knoll Project were occupied,
and 100% of the tenants met the income test required for the tax credits. UFS
does not engage in any activity or hold any assets other than its investment in
Pedcor 1993.
Employees
As of December 31, 2003, Union Federal employed 61 persons on a full-time
basis and 2 part-time employees. None of Union Federal's employees are
represented by a collective bargaining group. Management considers its employee
relations to be good.
Employee benefits for Union Federal's full-time employees include, among
other things, an employee stock ownership plan, participation in the Financial
Institutions Thrift Plan, hospitalization/major medical insurance, dental and
eye care insurance, long-term disability insurance and life insurance. Also, a
Pentegra Group (formerly known as Financial Institutions Retirement Fund)
defined benefit pension plan, which is a noncontributory, multiple-employer
comprehensive pension plan (the"Pension Plan"), covers those full-time employees
who were participants in the Pension Plan on January 2, 2002. The Pension Plan
was frozen as of January 2, 2002.
Management considers its employee benefits to be competitive with those
offered by other financial institutions and major employers in the area. See
"Executive Compensation" and "Certain Relationships and Related Transactions of
Union Federal" in the Companys Proxy Statement for the Annual Meeting of
Shareholders to be held on April 21, 2004, which sections are incorporated
herein by reference.
COMPETITION
Union Federal originates most of its loans to and accepts most of its
deposits from residents of Montgomery, Fountain, Tippecanoe and Warren Counties,
Indiana. The home office of Union Federal is located in Crawfordsville,
Montgomery County, Indiana and its branch offices are in Montgomery, Fountain,
Tippecanoe and Warren Counties. Union Federal is subject to competition from
various financial institutions, including state and national banks, state and
federal savings associations, credit unions and certain nonbanking consumer
lenders that provide similar services in the four county area. In total, there
are approximately 26 other financial institutions located in the four county
area. Union Federal also competes with money market funds with respect to
deposit accounts.
The primary factors influencing competition for deposits are interest
rates, service and convenience of office locations. Union Federal competes for
loan originations primarily through the efficiency and quality of the services
that it provides borrowers and through interest rates and loan fees charged.
Competition is affected by, among other things, the general availability of
lendable funds, general and local economic conditions, current interest rate
levels, and other factors that management cannot readily predict.
REGULATION
General
As a federally chartered, SAIF-insured savings association, Union Federal
is subject to extensive regulation by the OTS and the FDIC. For example, Union
Federal must obtain OTS approval before it may engage in certain activities and
must file reports with the OTS regarding its activities and financial condition.
The OTS periodically examines Union Federal's books and records and, in
conjunction with the FDIC in certain situations, has examination and enforcement
powers. This supervision and regulation are intended primarily for the
protection of depositors and federal deposit insurance funds. A savings
association must pay a semi-annual assessment to the OTS based upon a marginal
assessment rate that decreases as the asset size of the savings association
increases, and which includes a fixed-cost component that is assessed on all
savings associations. The assessment rate that applies to a savings association
depends upon the institution's size, condition, and the complexity of its
operations. During 2003, Union Federal's assessment was $31,000.
Union Federal is also subject to federal and state regulation as to such
matters as loans to officers, directors, or principal shareholders, required
reserves, limitations as to the nature and amount of its loans and investments,
regulatory approval of any merger or consolidation, issuances or retirements of
Union Federal's securities, and limitations upon other aspects of banking
operations. In addition, Union Federal's activities and operations are subject
to a number of additional detailed, complex and sometimes overlapping federal
and state laws and regulations. These include state usury and consumer credit
laws, state laws relating to fiduciaries, the Federal Truth-In-Lending Act and
Regulation Z, the Federal Equal Credit Opportunity Act and Regulation B, the
Fair Credit Reporting Act, the Community Reinvestment Act, anti-redlining
legislation, antitrust laws and regulations protecting the confidentiality of
consumer financial information.
Savings and Loan Holding Company Regulation
The Holding Company is regulated as a "non-diversified savings and loan
holding company" within the meaning of the Home Owners' Loan Act, as amended
(the "HOLA"), and subject to regulatory oversight of the Director of the OTS. As
such, the Holding Company is registered with the OTS and is thereby subject to
OTS regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, Union Federal is subject to
certain restrictions in its dealings with the Holding Company and with other
companies affiliated with the Holding Company.
In general, the HOLA prohibits a savings and loan holding company, without
obtaining the prior approval of the Director of the OTS, from acquiring control
of another savings association or savings and loan holding company or retaining
more than 5% of the voting shares of a savings association or of another holding
company which is not a subsidiary. The HOLA also restricts the ability of a
director or officer of the Holding Company, or any person who owns more than 25%
of the Holding Company's stock, from acquiring control of another savings
association or savings and loan holding company without obtaining the prior
approval of the Director of the OTS.
The Holding Company currently operates as a unitary savings and loan
holding company. Prior to the enactment of the Gramm-Leach-Bliley Act (the "GLB
Act") in 1999, there were no restrictions on the permissible business activities
of a unitary savings and loan holding company. The GLB Act included a provision
that prohibits any new unitary savings and loan holding company, defined as a
company that acquires a thrift after May 4, 1999, from engaging in commercial
activities. This provision also includes a grandfather clause, however, that
permits a company that was a savings and loan holding company as of May 4, 1999,
or had an application to become a savings and loan holding company on file with
the OTS as of that date, to acquire and continue to control a thrift and to
continue to engage in commercial activities. Because the Holding Company
qualifies under this grandfather provision, the GLB Act did not affect the
Holding Company's authority to engage in diversified business activities.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings association
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
("QTL") test, then such unitary holding company would be deemed to be a bank
holding company subject to all of the provisions of the Bank Holding Company Act
of 1956 and other statutes applicable to bank holding companies, to the same
extent as if the Holding Company were a bank holding company and Union Federal
were a bank. See "-Qualified Thrift Lender." At December 31, 2003, Union
Federal's asset composition was in excess of that required to qualify as a
Qualified Thrift Lender.
If the Holding Company were to acquire control of another savings
association other than through a merger or other business combination with Union
Federal, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
association meets the QTL test, the activities of the Holding Company and any of
Union Federal's subsidiaries (other than Union Federal or other subsidiary
savings associations) would thereafter be subject to further restrictions. The
HOLA provides that, among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings association shall commence
or continue for a limited period of time after becoming a multiple savings and
loan holding company or subsidiary thereof, any business activity other than (i)
furnishing or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings association, (iv) holding or managing properties used or occupied by a
subsidiary savings association, (v) acting as trustee under deeds of trust, (vi)
those activities in which multiple savings and loan holding companies were
authorized (by regulation) to directly engage on March 5, 1987, or (vii) those
activities authorized by the Federal Reserve Board (the "FRB") as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities for savings and loan holding companies.
Those activities described in (vii) above must also be approved by the Director
of the OTS before a multiple savings and loan holding company may engage in such
activities.
The Director of the OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
associations in more than one state, if the multiple savings and loan holding
company involved controls a savings association which operated a home or branch
office in the state of the association to be acquired as of March 5, 1987, or if
the laws of the state in which the association to be acquired is located
specifically permit associations to be acquired by state-chartered associations
or savings and loan holding companies located in the state where the acquiring
entity is located (or by a holding company that controls such state-chartered
savings associations). Also, the Director of the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
Indiana law permits federal and state savings association holding companies
with their home offices located outside of Indiana to acquire savings
associations whose home offices are located in Indiana and savings association
holding companies with their principal place of business in Indiana ("Indiana
Savings Association Holding Companies") upon receipt of approval by the Indiana
Department of Financial Institutions. Moreover, Indiana Savings Association
Holding Companies may acquire savings associations with their home offices
located outside of Indiana and savings association holding companies with their
principal place of business located outside of Indiana upon receipt of approval
by the Indiana Department of Financial Institutions.
No subsidiary savings association of a savings and loan holding company may
declare or pay a dividend or make a capital distribution on its permanent or
nonwithdrawable stock unless it first gives the Director of the OTS 30 days
advance notice of such declaration and payment. Any dividend declared during
such period or without giving notice shall be invalid.
Federal Home Loan Bank System
Union Federal is a member of the FHLB system, which consists of 12 regional
banks. The Federal Housing Finance Board ("FHFB"), an independent agency,
controls the FHLB System including the FHLB of Indianapolis. The FHLB System
provides a central credit facility primarily for member financial institutions.
At December 31, 2003, Union Federal's investment in stock of the FHLB of
Indianapolis was $3.6 million. For the fiscal year ended December 31, 2003, the
FHLB of Indianapolis paid approximately $176,000 in cash and stock dividends to
Union Federal.
All 12 FHLB's are required to provide funds to establish affordable housing
programs through direct loans or interest subsidies on advances to members to be
used for lending at subsidized interest rates for low- and moderate-income,
owner-occupied housing projects, affordable rental housing, and certain other
community projects. These contributions and obligations could adversely affect
the value of FHLB stock in the future. A reduction in the value of such stock
may result in a corresponding reduction in Union Federal's capital.
The FHLB of Indianapolis serves as a reserve or central bank for its member
institutions. It is funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes advances to members in
accordance with policies and procedures established by the FHLB and the Board of
Directors of the FHLB of Indianapolis.
All FHLB advances must be fully secured by sufficient collateral as
determined by the FHLB. Eligible collateral includes first mortgage loans not
more than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured or guaranteed
by the federal government or any agency thereof, cash or FHLB deposits, certain
small business and agricultural loans of smaller institutions and real estate
with readily ascertainable value in which a perfected security interest may be
obtained. Other forms of collateral may be accepted as additional security or,
under certain circumstances, to renew outstanding advances. All long-term
advances are required to provide funds for residential home financing and the
FHLB has established standards of community service that members must meet to
maintain access to long-term advances.
Interest rates charged for advances vary depending upon maturity, the cost
of funds to the FHLB of Indianapolis and the purpose of the borrowing.
Insurance of Deposits
Deposit Insurance. The FDIC is an independent federal agency that insures
the deposits, up to prescribed statutory limits, of banks and thrifts and
safeguards the safety and soundness of the banking and thrift industries. The
FDIC administers two separate insurance funds, the BIF for commercial banks and
state savings banks and the SAIF for savings associations such as Union Federal
and banks that have acquired deposits from savings associations. The FDIC is
required to maintain designated levels of reserves in each fund.
Assessments. The FDIC is authorized to establish separate annual assessment
rates for deposit insurance for members of the BIF and members of the SAIF. The
FDIC may increase assessment rates for either fund if necessary to restore the
fund's ratio of reserves to insured deposits to the target level within a
reasonable time and may decrease these rates if the target level has been met.
The FDIC has established a risk-based assessment system for both SAIF and BIF
members. Under this system, assessments vary depending on the risk the
institution poses to its deposit insurance fund. An institution's risk level is
determined based on its capital level and the FDIC's level of supervisory
concern about the institution.
In addition to the assessment for deposit insurance, savings institutions
are required to pay on bonds issued in the late 1980s by the Financing
Corporation ("FICO"), which is a federally-chartered corporation that was
organized to provide some of the financing to resolve the thrift crisis in the
1980s. By law, payments on FICO obligations have been shared equally between BIF
members and SAIF members since January 1, 2000. For the four quarters of 2003,
the FICO rates were 1.68, 1.62, 1.60 and 1.52 basis points, respectively.
Although Congress has considered merging the SAIF and the BIF, until then,
savings associations with SAIF deposits may not transfer deposits into the BIF
system without paying various exit and entrance fees. Such exit and entrance
fees need not be paid if a SAIF institution converts to a bank charter or merges
with a bank, as long as the resulting bank continues to pay applicable insurance
assessments to the SAIF, and as long as certain other conditions are met.
Savings Association Regulatory Capital
Currently, savings associations are subject to three separate minimum
capital-to-assets requirements: (i) a leverage limit, (ii) a tangible capital
requirement, and (iii) a risk-based capital requirement. The leverage limit
requires that savings associations maintain "core capital" of at least 3% of
total assets. Core capital is generally defined as common shareholders' equity
(including retained income), noncumulative perpetual preferred stock and related
surplus, certain minority equity interests in subsidiaries, qualifying
supervisory goodwill, purchased mortgage servicing rights and purchased credit
card relationships (subject to certain limits) less nonqualifying intangibles.
The OTS requires a core capital level of 3% of total adjusted assets for savings
associations that receive the highest rating for safety and soundness, and 4% to
5% for all other savings associations. Under the tangible capital requirement, a
savings association must maintain tangible capital (core capital less all
intangible assets except purchased mortgage servicing rights which may be
included after making the above-noted adjustment in an amount up to 100% of
tangible capital) of at least 1.5% of total assets. Under the risk-based capital
requirements, a minimum amount of capital must be maintained by a savings
association to account for the relative risks inherent in the type and amount of
assets held by the savings association. The risk-based capital requirement
requires a savings association to maintain capital (defined generally for these
purposes as core capital plus general valuation allowances and permanent or
maturing capital instruments such as preferred stock and subordinated debt, less
assets required to be deducted) equal to 8.0% of risk-weighted assets. Assets
are ranked as to risk in one of four categories (0-100%). A credit risk-free
asset, such as cash, requires no risk-based capital, while an asset with a
significant credit risk, such as a non-accrual loan, requires a risk factor of
100%. Moreover, a savings association must deduct from capital, for purposes of
meeting the core capital, tangible capital and risk-based capital requirements,
its entire investment in and loans to a subsidiary engaged in activities not
permissible for a national bank (other than exclusively agency activities for
its customers or mortgage banking subsidiaries). At December 31, 2003, Union
Federal was in compliance with all capital requirements imposed by law.
The OTS issued a final rule in 1993 which sets forth a methodology for
calculating an interest rate risk component to be used by savings associations
in calculating regulatory capital. The OTS delayed the implementation of this
rule, however, and in 2002 deleted this interest rate risk component from
capital requirements applicable to savings associations. The OTS has also
revised its standards regarding the management of interest rate risk to include
summary guidelines to assist savings associations in determining their exposures
to interest rate risk. If an association is not in compliance with the capital
requirements, the OTS is required to prohibit asset growth and to impose a
capital directive that may restrict, among other things, the payment of
dividends and officers' compensation. In addition, the OTS and the FDIC
generally are authorized to take enforcement actions against a savings
association that fails to meet its capital requirements. These actions may
include restricting the operating activities of the association, imposing a
capital directive, cease and desist order, or civil money penalties, or imposing
harsher measures such as appointing a receiver or conservator or forcing the
association to merge into another institution.
Prompt Corrective Regulatory Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FedICIA") requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to institutions that do
not meet minimum capital requirements. For these purposes, FedICIA establishes
five capital tiers: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized. At December 31,
2003, Union Federal was categorized as "well capitalized," meaning that its
total risk-based capital ratio exceeded 10%, its Tier I risk-based capital ratio
exceeded 6%, its leverage ratio exceeded 5%, and it was not subject to a
regulatory order, agreement or directive to meet and maintain a specific capital
level for any capital measure.
The FDIC may order savings associations which have insufficient capital to
take corrective actions. For example, a savings association which is categorized
as "undercapitalized" would be subject to growth limitations and would be
required to submit a capital restoration plan, and a holding company that
controls such a savings association would be required to guarantee that the
savings association complies with the restoration plan. "Significantly
undercapitalized" savings associations would be subject to additional
restrictions. Savings associations deemed by the FDIC to be "critically
undercapitalized" would be subject to the appointment of a receiver or
conservator.
Dividend Limitations
The OTS also restricts the amount of "capital distributions" that may be
made by savings associations. The regulation defines a capital distribution as a
distribution of cash or other property to a savings association's owners, made
on account of their ownership. This definition includes a savings association's
payment of cash dividends to shareholders, or any payment by a savings
association to repurchase, redeem, retire, or otherwise acquire any of its
shares or debt instruments that are included in total capital, and any extension
of credit to finance an affiliate's acquisition of those shares or interests.
The amended regulation does not apply to dividends consisting only of a savings
association's shares or rights to purchase such shares.
The regulation exempts certain savings associations from filing either a
notice or an application with the OTS before making any capital distribution and
requires a savings association to file an application for approval of a proposed
capital distribution with the OTS if the association is not eligible for
expedited treatment under OTS's application processing rules, or the total
amount of all capital distributions, including the proposed capital
distribution, for the applicable calendar year would exceed an amount equal to
the savings association's net income for that year to date plus the savings
association's retained net income for the preceding two years (the "retained net
income standard"). Based on Union Federal's retained net income standard at
December 31, 2003, Union Federal would be required to file an application with
the OTS before making any capital distributions. A savings association must also
file an application for approval of a proposed capital distribution if,
following the proposed distribution, the association would not be at least
adequately capitalized under the OTS prompt corrective action regulations, or if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation, or agreement between the association and the OTS
or the FDIC.
The regulation requires a savings association to file a notice of a
proposed capital distribution in lieu of an application if the association or
the proposed capital distribution do not meet the conditions described above,
and: (1) the savings association will not be at least well capitalized (as
defined under the OTS prompt corrective action regulations) following the
capital distribution; (2) the capital distribution would reduce the amount of,
or retire any part of the savings association's common or preferred stock, or
retire any part of debt instruments such as notes or debentures included in the
association's capital under the OTS capital regulation; or (3) the savings
association is a subsidiary of a savings and loan holding company. Because Union
Federal is a subsidiary of a savings and loan holding company, this latter
provision requires, at a minimum, that Union Federal file a notice with the OTS
30 days before making any capital distributions to the Holding Company.
In addition to these regulatory restrictions, Union Federal's Plan of
Conversion imposes additional limitations on the amount of capital distributions
it may make to the Holding Company. The Plan of Conversion requires Union
Federal to establish and maintain a liquidation account for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders and prohibits
Union Federal from making capital distributions to the Holding Company if its
net worth would be reduced below the amount required for the liquidation
account.
Limitations on Rates Paid for Deposits
Regulations promulgated by the FDIC pursuant to FedICIA place limitations
on the ability of insured depository institutions to accept, renew or roll over
deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository
institutions having the same type of charter in the institution's normal market
area. Under these regulations, "well-capitalized" depository institutions may
accept, renew or roll such deposits over without restriction, "adequately
capitalized" depository institutions may accept, renew or roll such deposits
over with a waiver from the FDIC (subject to certain restrictions on payments of
rates) and "undercapitalized" depository institutions may not accept, renew or
roll such deposits over. The regulations contemplate that the definitions of
"well-capitalized," "adequately-capitalized" and "undercapitalized" will be the
same as the definition adopted by the agencies to implement the corrective
action provisions of FedICIA. Management does not believe that these regulations
will have a materially adverse effect on Union Federal's current operations.
Liquidity
The Financial Regulatory Relief and Economic Efficiency Act of 2000
repealed the former statutory requirement that all savings associations maintain
an average daily balance of liquid assets in a minimum amount of not less than
4% or more than 10% of their withdrawable accounts plus short-term borrowings.
The OTS adopted an interim final rule in March 2001 that implemented this
revised statutory requirement, although savings associations remain subject to
the OTS regulation that requires them to maintain sufficient liquidity to ensure
their safe and sound operation.
Safety and Soundness Standards
The federal banking agencies have adopted final safety and soundness
standards for all insured depository institutions. The standards, which were
issued in the form of guidelines rather than regulations, relate to internal
controls, information systems, internal audit systems, loan underwriting and
documentation, compensation, interest rate exposure, asset quality and earnings
standards. In general, the standards are designed to assist the federal banking
agencies in identifying and addressing problems at insured depository
institutions before capital becomes impaired. If an institution fails to meet
these standards, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan may
result in enforcement proceedings.
Real Estate Lending Standards
OTS regulations require savings associations to establish and maintain
written internal real estate lending policies. Each association's lending
policies must be consistent with safe and sound banking practices and be
appropriate to the size of the association and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards; establish prudent underwriting standards, including loan-to-value
limits, that are clear and measurable; establish loan administration procedures
for the association's real estate portfolio; and establish documentation,
approval, and reporting requirements to monitor compliance with the
association's real estate lending policies. The association's written real
estate lending policies must be reviewed and approved by the association's Board
of Directors at least annually. Further, each association is expected to monitor
conditions in its real estate market to ensure that its lending policies
continue to be appropriate for current market conditions.
Loans to One Borrower
Under OTS regulations, Union Federal may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Additional amounts may be lent, not in excess of 10% of
unimpaired capital and surplus, if such loans or extensions of credit are fully
secured by readily marketable collateral, including certain debt and equity
securities but not including real estate. In some cases, a savings association
may lend up to 30% of unimpaired capital and surplus to one borrower for
purposes of developing domestic residential housing, provided that the
association meets its regulatory capital requirements and the OTS authorizes the
association to use this expanded lending authority. At December 31, 2003, Union
Federal did not have any loans or extensions of credit to a single or related
group of borrowers in excess of its regulatory lending limits. Management does
not believe that the loans-to-one-borrower limits will have a significant impact
on Union Federal's business operations or earnings.
Qualified Thrift Lender
Savings associations must meet a QTL test that requires the association to
maintain an appropriate level of qualified thrift investments ("QTIs")
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise to qualify as a QTL. The required
percentage of QTIs is 65% of portfolio assets (defined as all assets minus
intangible assets, property used by the association in conducting its business
and liquid assets equal to 10% of total assets). Certain assets are subject to a
percentage limitation of 20% of portfolio assets. In addition, savings
associations may include shares of stock of the FHLBs, FNMA, and FHLMC as QTIs.
Compliance with the QTL test is determined on a monthly basis in nine out of
every twelve months. As of December 31, 2003, Union Federal was in compliance
with its QTL requirement, with approximately 80.6% of its assets invested in
QTIs.
A savings association which fails to meet the QTL test must either convert
to a bank (but its deposit insurance assessments and payments will be those of
and paid to the SAIF) or be subject to the following penalties: (i) it may not
enter into any new activity except for those permissible for a national bank and
for a savings association; (ii) its branching activities shall be limited to
those of a national bank; and (iii) it shall be bound by regulations applicable
to national banks respecting payment of dividends. Three years after failing the
QTL test the association must dispose of any investment or activity not
permissible for a national bank and a savings association. If such a savings
association is controlled by a savings and loan holding company, then such
holding company must, within a prescribed time period, become registered as a
bank holding company and become subject to all rules and regulations applicable
to bank holding companies (including restrictions as to the scope of permissible
business activities).
Acquisitions or Dispositions and Branching
The Bank Holding Company Act specifically authorizes a bank holding
company, upon receipt of appropriate regulatory approvals, to acquire control of
any savings association or holding company thereof wherever located. Similarly,
a savings and loan holding company may acquire control of a bank. Moreover,
federal savings associations may acquire or be acquired by any insured
depository institution. Regulations promulgated by the FRB restrict the
branching authority of savings associations acquired by bank holding companies.
Savings associations acquired by bank holding companies may be converted to
banks if they continue to pay SAIF premiums, but as such they become subject to
branching and activity restrictions applicable to banks.
Subject to certain exceptions, commonly-controlled banks and savings
associations must reimburse the FDIC for any losses suffered in connection with
a failed bank or savings association affiliate. Institutions are commonly
controlled if one is owned by another or if both are owned by the same holding
company. Such claims by the FDIC under this provision are subordinate to claims
of depositors, secured creditors, and holders of subordinated debt, other than
affiliates.
The OTS has adopted regulations which permit nationwide branching to the
extent permitted by federal statute. Federal statutes permit federal savings
associations to branch outside of their home state if the association meets the
domestic building and loan test in Section 7701(a)(19) of the Code or the asset
composition test of Section 7701(c) of the Code. Branching that would result in
the formation of a multiple savings and loan holding company controlling savings
associations in more than one state is permitted if the law of the state in
which the savings association to be acquired is located specifically authorizes
acquisitions of its state-chartered associations by state-chartered associations
or their holding companies in the state where the acquiring association or
holding company is located. Moreover, Indiana banks and savings associations are
permitted to acquire other Indiana banks and savings associations and to
establish branches throughout Indiana.
Finally, The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") permits bank holding companies to acquire banks in
other states and, with state consent and subject to certain limitations, allows
banks to acquire out-of-state branches either through merger or de novo
expansion. The State of Indiana enacted legislation establishing interstate
branching provisions for Indiana state-chartered banks consistent with those
established by the Riegle-Neal Act (the "Indiana Branching Law"). The Indiana
Branching Law, which became effective in 1996, authorizes Indiana banks to
branch interstate by merger or de novo expansion, provided that such
transactions are not permitted to out-of-state banks unless the laws of their
home states permit Indiana banks to merge or establish de novo banks on a
reciprocal basis.
Transactions with Affiliates
Union Federal is subject to Sections 22(h), 23A and 23B of the Federal
Reserve Act, which limits credit transactions between a bank or savings
association and its executive officers and its affiliates. These provisions also
prescribe terms and conditions for bank affiliate transactions deemed to be
consistent with safe and sound banking practices, and restrict the types of
collateral security permitted in connection with a bank's extension of credit to
an affiliate.
Federal Securities Law
The shares of Common Stock of the Holding Company have been registered with
the SEC under the 1934 Act and, as a result, the Holding Company is subject to
the information, proxy solicitation, insider trading restrictions and other
requirements of the 1934 Act and the rules of the SEC thereunder. After three
years following Union Federal's conversion to stock form, if the Holding Company
has fewer than 300 shareholders, it may deregister its shares under the 1934 Act
and cease to be subject to the foregoing requirements.
Shares of Common Stock held by persons who are affiliates of the Holding
Company may not be resold without registration unless sold in accordance with
the resale restrictions of Rule 144 under the 1933 Act. If the Holding Company
meets the current public information requirements under Rule 144, each affiliate
of the Holding Company who complies with the other conditions of Rule 144
(including those that require the affiliate's sale to be aggregated with those
of certain other persons) would be able to sell in the public market, without
registration, a number of shares not to exceed, in any three-month period, the
greater of (i) 1% of the outstanding shares of the Holding Company or (ii) the
average weekly volume of trading in such shares during the preceding four
calendar weeks.
Sarbanes-Oxley Act of 2002
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all
companies with equity or debt securities registered under the Securities
Exchange Act of 1934. In particular, the Sarbanes-Oxley Act establishes: (i) new
requirements for audit committees, including independence, expertise, and
responsibilities; (ii) additional responsibilities regarding financial
statements for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) new standards for auditors and regulation of audits;
(iv) increased disclosure and reporting obligations for the reporting company
and their directors and executive officers; and (v) new and increased civil and
criminal penalties for violation of the securities laws. Although the Holding
Company anticipates that additional expense will be incurred to comply with the
provisions of the Sarbanes-Oxley Act and the resulting regulations, management
does not expect that such compliance will have a material impact on our results
of operations or financial condition.
Community Reinvestment Act Matters
Federal law requires that ratings of depository institutions under the
Community Reinvestment Act of 1977 ("CRA") be disclosed. The disclosure includes
both a four-unit descriptive rating -- outstanding, satisfactory, needs to
improve, and substantial noncompliance -- and a written evaluation of an
institution's performance. Each FHLB is required to establish standards of
community investment or service that its members must maintain for continued
access to long-term advances from the FHLBs. The standards take into account a
member's performance under the CRA and its record of lending to first-time home
buyers. The OTS has designated Union Federal's record of meeting community
credit needs as satisfactory.
Predatory Lending
The Federal Reserve Board issued a regulation that became effective on
October 1, 2002 that is aimed at curbing "predatory lending." The term
"predatory lending" encompasses a variety of practices, but the term generally
is used to refer to abusive lending practices involving fraud, deception or
unfairness. Predatory lending typically involves one or more of the following:
(i) making unaffordable loans based on the assets of the borrower rather than on
the borrower's ability to repay an obligation ("asset-based lending"); (ii)
inducing a borrower to refinance a loan repeatedly in order to charge high
points and fees each time the loan is refinanced ("loan flipping"); or (iii)
engaging in fraud or deception to conceal the true nature of the loan obligation
from an unsuspecting or unsophisticated borrower. The Federal Reserve Board's
new regulation, which amends Regulation Z, broadens the scope of loans subject
to the protections of the Home Ownership and Equity Protection Act of 1994
("HOEPA"). Among other things, the regulation brings within the scope of HOEPA
first-lien mortgage loans with interest rates that are at least 8 percentage
points above Treasury securities having a comparable maturity. In addition, the
regulation requires that the cost of optional insurance and similar debt
protection products paid by a borrower at closing be included in calculating the
finance charge paid by the borrower. HOEPA coverage is triggered if such finance
charges exceed 8 percent of the total loan. Finally, the regulation restricts
creditors from engaging in repeated refinancings of their own HOEPA loans over a
short time period when the transactions are not in the borrower's interest.
Lenders that violate the rules face cancellation of loans and penalties equal to
the finance charges paid. Union Community is unable at this time to determine
the impact that these new regulations, or any similar state predatory lending
regulations, may have on its financial condition or results of operation.
USA Patriot Act of 2001
On October 26, 2001, President Bush signed the USA Patriot Act of 2001. The
Patriot Act is intended to strengthen U.S. law enforcement's and the
intelligence communities' abilities to work cohesively to combat terrorism on a
variety of fronts. The potential impact of the Act on financial institutions of
all kinds is significant and wide ranging. The Act contains sweeping anti-money
laundering and financial transparency laws. On April 30, 2003, the Treasury
Department adopted final regulations requiring institutions to incorporate into
their written money laundering plans a board-approved customer identification
program implementing reasonable procedures for: (i) verifying the identity of
any person seeking to open an account, to the extent reasonable and practicable;
(ii) maintaining records of the information used to verify the person's
identity; and (iii) determining whether the person appears on any list of known
or suspected terrorists or terrorist organizations. The Bank does not anticipate
that these requirements will materially affect its operations.
Fair Credit Reporting Act Amendment
The Fair and Accurate Credit Transactions Act of 2003 (the "FACT Act") was
signed into law by President Bush on December 4, 2003. The FACT Act amends the
Fair Credit Reporting Act and makes permanent certain federal preemptions that
form the basis for a national credit reporting system. The FACT Act is also
intended to (i) address identity theft, (ii) increase access to credit
information, (iii) enhance the accuracy of credit reporting, (iv) facilitate the
opt-out by consumers from certain marketing solicitations, (v) protect medical
information, and (vi) promote financial literacy. The statute will affect credit
reporting agencies (commonly referred to as "credit bureaus"), financial
institutions, other users of credit reports and those who furnish information to
credit bureaus. Union Community does not anticipate that this legislation will
have a significant adverse effect on its business.
TAXATION
Federal Taxation
Historically, savings associations, such as Union Federal, have been
permitted to compute bad debt deductions using either the bank experience method
or the percentage of taxable income method. However, for years beginning after
December 31, 1995, no savings association may use the percentage of taxable
income method of computing its allowable bad debt deduction for tax purposes.
Instead, all savings associations are required to compute their allowable
deduction using the experience method. In addition, the pre-1988 reserve, for
which no deferred taxes have been recorded, need not be recaptured into income
unless (i) the savings association no longer qualifies as a bank under the Code,
or (ii) the savings association pays out excess dividends or distributions.
Depending on the composition of its items of income and expense, a savings
association may be subject to the alternative minimum tax. A savings association
must pay an alternative minimum tax on the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased or decreased by certain tax preferences and adjustments, including
depreciation deductions in excess of that allowable for alternative minimum tax
purposes, tax-exempt interest on most private activity bonds issued after August
7, 1986 (reduced by any related interest expense disallowed for regular tax
purposes), the amount of the bad debt reserve deduction claimed in excess of the
deduction based on the experience method and 75% of the excess of adjusted
current earnings over AMTI (before this adjustment and before any alternative
tax net operating loss). AMTI may be reduced only up to 90% by net operating
loss carryovers, but alternative minimum tax paid can be credited against
regular tax due in later years.
For federal income tax purposes, the Company has been reporting its income
and expenses on the accrual method of accounting. The Company's federal income
tax returns have not been audited in recent years.
State Taxation
The Company is subject to Indiana's Financial Institutions Tax ("FIT"),
which is imposed at a flat rate of 8.5% on apportioned "adjusted gross income."
"Adjusted gross income," for purposes of FIT, begins with taxable income as
defined by Section 63 of the Code and, thus, incorporates federal tax law to the
extent that it affects the computation of taxable income. Federal taxable income
is then adjusted by several Indiana modifications. Other applicable state taxes
include generally applicable sales and use taxes plus real and personal property
taxes.
The Company's state income tax returns have not been audited in recent
years.
Item 2. Properties.
The following table provides certain information with respect to the
Company's offices as of December 31, 2003:
Net Book
Value of
Year Property, Approximate
Owned or Opened or Total Furniture & Square
Description and Address Leased Acquired Deposits Fixtures Footage
- ---------------------------- -------- ------------ -------- ----------- -----------
(Dollars in thousands)
Main Office:
221 East Main Street
Crawfordsville, IN 47933 Owned 1888 $137,526 $2,450 19,100
Mall Office:
1688 Crawfordsville Square Drive
Crawfordsville, IN 47933 Leased 2001 $ 1,795 $ 54 1,100
Mill Street Office:
816 South Mill Street
Crawfordsville, IN 47933 Owned 2002 $ 6,353 $ 347 3,200
Covington Office:
417 Liberty Street
Covington, IN 47932 Owned 2002 $ 15,384 $ 399 2,800
Williamsport Office:
118 North Monroe Street
Williamsport, IN 47993 Owned 2002 $ 20,647 $ 326 5,100
Lafayette Office:
50 West 250 South
Lafayette, IN 47909 Owned 2002 $ 8,487 $ 812 3,700
Union Federal also owned one building located at 119 East Main Street,
Crawfordsville, Indiana, which was acquired in the acquisition of Montgomery
Savings, A Federal Association ("Montgomery"). This building was sold in January
2004 with a gain on the sale of $23,000 being recorded. The building contained
approximately 16,000 square feet and was previously used by Montgomery as its
main office. The net book value of the building at December 31, 2003 was
$240,000. The accounting, compliance, and a portion of the item processing
functions were housed in this facility until the completion of the remodeling of
the 221 East Main Street location when the 119 East Main Street location was
vacated.
Union Federal has also contracted for data processing and reporting
services from Aurum Technology in Plano, Texas. The cost of these data
processing services is approximately $33,000 per month.
Union Federal has also executed a Correspondent Services Agreement with the
FHLB of Indianapolis under which it receives item processing and other services
for a fee of approximately $5,500 per month.
Item 3. Legal Proceedings.
Although the Company is involved, from time to time, in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which it presently is a party or to which any of its property is
subject.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4.5. Executive Officers of the Registrant.
The executive officers of the Holding Company are identified below. The
executive officers of the Holding Company are elected annually by the Holding
Company's Board of Directors.
Name Position with Holding Company
---------------------- ----------------------------------------
Joseph E. Timmons Chairman of the Board and President
Alan L. Grimble Chief Executive Officer
J. Lee Walden Chief Financial Officer
Denise E. Swearingen Secretary and Treasurer
Joseph E. Timmons (age 69) has served as Chairman and President of the
Holding Company since 1997 and President of Union Federal since 1974. He has
also served as President of UFS Service Corp. since its inception in 1994 and of
MSA Service Corp. since its acquisition in 2002. He has been an employee of
Union Federal since 1954.
Alan L. Grimble (age 48) has served as the Chief Executive Officer of the
Holding Company and Union Federal since 2002. He has worked for Union Federal
since 1998.
J. Lee Walden (age 56) has served as Chief Financial Officer of the Holding
Company and Union Federal since the 2002 acquisition of Montgomery Financial
Corp. and Montgomery Savings. He had previously worked for Montgomery Savings
since 1984.
Denise E. Swearingen (age 45) has served as the Holding Company' Secretary
and Treasurer since 1997 and as Chief Operations Officer of Union Federal since
2002. She has worked for Union Federal since 1983.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.
The information required by this item is included in the material under the
heading "Shareholder Information" on page 44 of the Holding Company's 2003
Shareholder Annual Report (the "Shareholder Annual Report"), which is
incorporated herein by this reference.
Item 6. Selected Financial Data.
The information required by this item is included in the material under the
heading "Selected Consolidated Financial Data of Union Community Bancorp and
Subsidiary" on pages 2 and 3 of the Shareholder Annual Report, which is
incorporated herein by this reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.
The information required by this item is included on pages 3 through 18 of
the Shareholder Annual Report, which is incorporated herein by this reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.
The information required by this item is included on pages 17 and 18 of the
Shareholder Annual Report, which is incorporated herein by this reference.
Item 8. Financial Statements and Supplementary Data.
The Holding Company's Consolidated Financial Statements and Notes thereto
contained on pages 20 through 41 of the Shareholder Annual Report are
incorporated herein by this reference. The Holding Company's supplementary
financial information required by this item is included on page 16 of the
Shareholder Annual Report, which is incorporated herein by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no such changes or disagreements during the applicable period.
Item 9A. Controls and Procedures.
As of December 31, 2003, an evaluation was carried out under the
supervision and with the participation of the Holding Company's management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the Holding Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934). Based on their evaluation, the Holding Company's Chief
Executive Officer and Chief Financial Officer have concluded that the Holding
Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Holding 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.
The Holding Company's management, including its Chief Executive Officer and
Chief Financial Officer, also have concluded that during the Holding Company's
fiscal quarter ended December 31, 2003, there have been no significant changes
in the Holding Company's internal controls or in other factors that could
significantly affect the internal controls including any corrective action with
regard to significant deficiencies and material weaknesses.
PART III
Certain information in this Part III is incorporated by reference to the
Holding Company's Proxy Statement for its Annual Meeting of Shareholders to be
held on April 20, 2004, to be filed within 120 days after the year ended
December 31, 2003 (the "2004 Proxy Statement").
Item 10. Directors and Executive Officers of the Registrant.
The Holding Company has adopted a Code of Ethics that applies to all
employees, including the principal executive, financial and accounting officers,
and to all directors. A copy of the Code of Ethics is attached to this Annual
Report on Form 10-K as Exhibit 14. The other information required by this item
is incorporated by reference to the sections in the 2004 Proxy Statement with
the captions "Proposal I - Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance."
Item 11. Executive Compensation.
The information required by this item is incorporated by reference to the
section of the 2004 Proxy Statement with the caption "Proposal I - Election of
Directors- Management Remuneration and Related Transactions."
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Equity Compensation Plans
The following table provides information, as of December 31, 2003,
regarding the securities authorized for issuance under the company's equity
compensation plan.
Number of Securities
Number of Remaining Available For
Securities To Be Weighted-Average Future Issuance Under
Issued Upon Exercise Exercise Price of Equity Compensation Plans
of Outstanding Options, Outstanding Options, (Excluding Securities
Warrants and Rights Warrants and Rights Reflected In Column (a))
Plan Category (a) (b) (c)
- -------------------------- ----------------------- --------------------- --------------------------
Equity compensation plans
approved by security holders:
Union Community Bancorp
Stock Option Plan ....... 203,000 $14.85 93,175
Union Community Bancorp
Recognition and Retention
Plan and Trust ("RRP") .. 121,670 -- 12,270(1)
Equity compensation plans not
approved by security holders .. None -- --
------- ------ -------
Total ................... 324,670 $14.85(2) 105,445
======= ====== =======
- ----------------
(1) Column (a) includes 28,000 shares granted to directors and management that
have not yet vested. In addition, 81,400 shares granted to directors and
management have fully vested and shares have been issued in connection
therewith.
(2) The total in column (b) includes only the weighted-average price of stock
options, as the restricted shares awarded under the RRP have no exercise
price.
The other information required by this item is incorporated by reference to
the sections in the 2004 Proxy Statement with the captions "Voting Securities
and Principal Holders Thereof" and "Proposal I - Election of Directors."
Item 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated by reference to the
section of the 2004 Proxy Statement with the caption "Proposal I - Election of
Directions - Transactions With Certain Related Persons."
Item 14. Principal Accountant Fees and Services.
The information required by this item is incorporated by reference to the
section of the 2004 Proxy Statement with the caption "Proposal II - Ratification
of Auditors - Accountants' Fees."
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
Annual Report
Page No.
(1) Financial Statements:
Independent Accountants' Report ...................................... 19
Consolidated Balance Sheets at December 31, 2003 and 2002 ............ 20
Consolidated Statements of Income for the Years Ended December 31,
2003, 2002 and 2001 ............................................... 21
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001 ..................................... 22
Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001 ............................................... 23
Notes to Consolidated Financial Statements ........................... 24-41
(2) Schedules:
(3) Exhibits:
The Exhibits listed in the Exhibit Index are incorporated by
reference herein.
(b) Reports on Form 8-K.
The Holding Company filed a Current Report on Form 8-K on October 22,
2003, to furnish a copy of the press release announcing its results of
operations for the quarter ended September 30, 2003.
(c) The exhibits filed herewith or incorporated by reference herein are
set forth on the Exhibit Index on page E-1.
(d) All schedules are omitted as the required information either is not
applicable or is included in the Consolidated Financial Statements or
related notes.
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on behalf of the undersigned, thereto duly authorized.
UNION COMMUNITY BANCORP
Date: March 29, 2004 By: /s/ Alan L. Grimble
------------------------------------
Alan L. Grimble,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on this 29th day of March, 2004.
Signatures Title
Date
(1) Principal Executive Officer: )
)
)
/s/ Alan L. Grimble Chief Executive Officer )
---------------------------------- )
Alan L. Grimble )
)
)
(2) Principal Financial and Accounting )
Officer: )
)
) March 29, 2004
)
/s/ J. Lee Walden Chief Financial Officer )
---------------------------------- )
J. Lee Walden )
)
)
)
(3) The Board of Directors: )
)
)
/s/ Philip L. Boots Director )
---------------------------------- )
Philip L. Boots )
)
)
/s/ Marvin L. Burkett Director )
---------------------------------- )
Marvin L. Burkett )
)
)
/s/ Mark E. Foster Director )
---------------------------------- )
Mark E. Foster )
)
)
/s/ Phillip E. Grush Director )
---------------------------------- )
Phillip E. Grush )
)
)
/s/ Samuel H. Hildebrand Director )
---------------------------------- )
Samuel H. Hildebrand )
)
)
/s/ John M. Horner Director )
---------------------------------- )
John M. Horner )
)
)
/s/ C. Rex Henthorn Director ) March 29, 2004
---------------------------------- )
C. Rex Henthorn )
)
)
/s/ Joseph M. Malott Director )
---------------------------------- )
Joseph M. Malott )
)
)
/s/ Harry A. Siamas Director )
---------------------------------- )
Harry A. Siamas )
)
)
/s/ Joseph E. Timmons Director )
---------------------------------- )
Joseph E. Timmons )
)
EXHIBIT INDEX
Exhibit No. Description
----------- ----------------------------------------------------------------
3(1) Registrant's Articles of Incorporation (incorporated by reference to
Exhibit 3(1) to the Registrant's Registration Statement on form S-1
filed with the Commission on September17, 1997 (the "Registration
Statement")).
(2) Registrant's Code of By-Laws (incorporated by reference to Exhibit
3(2) to the Registration Statement).
10(2)* Union Community Bancorp Stock Option Plan (incorporated by reference
to Exhibit 10(2) to the Registration Statement).
(3)* Union Federal Savings and Loan Association Recognition and Retention
Plan and Trust (incorporated by reference to Exhibit 10(3) to the
Registration Statement).
(4) Union Community Bancorp Employee Stock Ownership Plan and Trust
Agreement (incorporated by reference to Exhibit 10(4) to the
Registration Statement).
(5)* Employment Agreement, between Union Federal Savings and Loan
Association and Joseph E. Timmons (incorporated by reference to
Exhibit 10(5) to the Registration Statement).
(6) Exempt Loan and Share Purchase Agreement, between Trust Under Union
Community Bancorp Exempt Stock Ownership Plan and Trust Agreement and
Union Community Bancorp (incorporated by reference to Exhibit 10(6) to
the Registration Statement).
(7)* Employment Agreement, between Union Federal Savings and Loan
Association and Alan L. Grimble, dated July 1, 2001, and the first
amendment thereto dated as of April 17, 2002 (incorporated by
reference to Exhibit 10(7) to the Registrants 2003 Annual Report on
Form 10-K filed with the Commission on March 28, 2003 ("2003 Form
10-K")).
(8)* Employment Agreement, between Union Federal Savings and Loan
Association and J. Lee Walden, dated January 2, 2002 (incorporated by
reference to Exhibit 10(8) of the 2003 Form 10-K).
13 2003 Annual Report
14 Code of Ethics
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
31(1) Certification
31(2) Certification
32 Certification
*Compensation plans or arrangements in which directors or executive officers are
eligible to participate.