SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
Commission file number: 000-23543
UNION COMMUNITY BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, without par value,
outstanding as of March 31, 2004 was 2,100,000.
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
CERTIFICATIONS 15
2
FORWARD LOOKING STATEMENT
This Quarterly Report on Form 10-Q ("Form 10-Q") contains statements which
constitute forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements appear in a number of
places in this Form 10-Q and include statements regarding the intent, belief,
outlook, estimate or expectations of the Company (as defined in the notes to the
consolidated condensed financial statements), its directors or its officers
primarily with respect to future events and the future financial performance of
the Company. Readers of this Form 10-Q are cautioned that any such forward
looking statements are not guarantees of future events or performance and
involve risks and uncertainties, and that actual results may differ materially
from those in the forward looking statements as a result of various factors. The
accompanying information contained in this Form 10-Q identifies important
factors that could cause such differences. These factors include changes in
interest rates; loss of deposits and loan demand to other financial
institutions; substantial changes in financial markets; changes in real estate
values and the real estate market; or regulatory changes.
3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Balance Sheets
March 31, December 31,
2004 2003
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 834,752 $ 784,673
Interest-bearing demand deposits 11,524,005 11,103,669
------------------ -------------------------
Cash and cash equivalents 12,358,757 11,888,342
Interest-bearing deposits 2,150,239 150,239
Investment securities
Available for sale 4,997,810 5,908,437
Held to maturity 315,533 493,801
------------------ -------------------------
Total investment securities 5,313,343 6,402,238
Loans, net of allowance for loan losses of $1,196,000 and $1,221,000 223,577,013 221,230,152
Premises and equipment 4,346,755 4,627,766
Federal Home Loan Bank stock 3,600,700 3,556,100
Investment in limited partnership 2,215,109 2,215,109
Foreclosed assets and real estate held for development, net 1,323,737 1,347,824
Goodwill 2,392,808 2,392,808
Interest receivable 1,147,161 1,128,342
Cash value of life insurance 5,213,420 5,149,394
Other assets 1,268,365 1,488,457
------------------ -------------------------
Total assets $264,907,407 $ 261,576,771
================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,710,598 $ 3,929,724
Interest-bearing 189,731,663 186,262,428
------------------ -------------------------
Total deposits 193,442,261 190,192,152
Borrowings 33,666,561 33,946,109
Interest payable 422,757 572,487
Other liabilities 1,579,494 1,336,501
------------------ -------------------------
Total liabilities 229,111,073 226,047,249
------------------ -------------------------
Commitments and Contingent Liabilities
Shareholders' Equity
Preferred stock, no par value
Authorized and unissued - 2,000,000 shares
Common stock, no-par value
Authorized - 5,000,000 shares
Issued and outstanding - 2,100,000 shares 22,414,503 22,395,104
Retained earnings 15,131,802 14,984,757
Accumulated other comprehensive loss (1,322) (55,295)
Unearned employee stock ownership plan (ESOP) shares (1,205,664) (1,228,998)
Unearned recognition and retention plan (RRP) shares (542,985) (566,046)
------------------ -------------------------
Total shareholders' equity 35,796,334 35,529,522
------------------ -------------------------
Total liabilities and shareholders' equity $264,907,407 $ 261,576,771
================== =========================
See notes to consolidated condensed financial statements.
4
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
------------------- -------------------
2004 2003
------------------- -------------------
Interest and Dividend Income
Loans $ 3,448,091 $ 4,021,991
Investment securities 35,827 31,823
Dividends on Federal Home Loan Bank stock 44,684 44,000
Deposits with financial institutions 25,748 128,657
------------------- -------------------
Total interest and dividend income 3,554,350 4,226,471
------------------- -------------------
Interest Expense
Deposits 1,177,891 1,468,828
Federal Home Loan Bank advances 420,266 452,230
------------------- -------------------
Total interest expense 1,598,157 1,921,058
------------------- -------------------
Net Interest Income 1,956,193 2,305,413
Provision for loan losses 110,047 30,000
------------------- -------------------
Net Interest Income After Provision for Loan Losses 1,846,146 2,275,413
------------------- -------------------
Other Income
Service charges on deposit accounts 37,592 35,738
Equity in gains of limited partnerships --- 10,000
Other income 121,309 23,144
------------------- -------------------
Total other income 158,901 68,882
------------------- -------------------
Other Expenses
Salaries and employee benefits 746,153 720,284
Net occupancy expenses 80,686 76,002
Equipment expenses 90,231 79,887
Legal and professional fees 95,627 85,525
Data processing fees 101,190 101,250
Other expenses 274,650 279,800
------------------- -------------------
Total other expenses 1,388,537 1,342,748
------------------- -------------------
Income Before Income Tax 616,510 1,001,547
Income tax expense 172,900 356,682
------------------- -------------------
Net Income $ 443,610 $ 644,865
=================== ===================
Basic Earnings per Share $ .23 $ .31
Diluted Earnings per Share .23 .31
Dividends per Share .15 .15
See notes to consolidated condensed financial statements.
5
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Three Months Ended March 31, 2004
(Unaudited)
Accumulated
Common Stock Other Unearned
-----------------------
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income(Loss) Shares Compensation Total
----------- ----------- -------------- ---------- ------------- ----------- ------------- -------------
Balances, January 1, 2004 2,100,000 $ 22,395,104 $14,984,757 $(55,295) $(1,228,998) $(566,046) $ 35,529,522
Comprehensive income
Net income for the period $443,610 443,610 443,610
Other comprehensive
income, net of tax
Unrealized gains on
securities 53,973 53,973 53,973
------------
Comprehensive income $497,583
============
Cash dividends ($.15 per (296,565) (296,565)
share)
Amortization of unearned
compensation expense 3,085 23,061 26,146
ESOP shares earned 16,314 23,334 39,648
----------- ------------- ----------- ------------ ------------ ------------- -------------
Balances, March 31, 2004 2,100,000 $22,414,503 $15,131,802 $ (1,322) (1,205,664) $(542,985) $35,796,334
=========== ============= =========== ============ ============ ============= =============
See notes to consolidated condensed financial statements.
6
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
---------------- ---------------
2004 2003
---------------- ---------------
Operating Activities
Net income $ 443,610 $ 644,865
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 110,047 30,000
Depreciation and amortization 93,158 106,188
Investment securities accretion, net (116) (216)
Loss on sale of real estate owned 43,333 18,435
Gain on sale of premises and equipment (22,746) ----
Equity in losses (gains) of limited partnerships ---- (10,000)
Amortization of purchase accounting adjustments 9,334 (84,844)
Amortization of unearned compensation expense 26,146 44,107
ESOP shares earned 39,648 38,101
Net change in:
Interest receivable (18,819) 58,375
Interest payable (149,730) (165,920)
Other adjustments 193,138 701,948
---------------- ---------------
Net cash provided by operating activities 767,003 1,381,039
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits (2,000,000) ----
Investment securities
Purchase of investment securities available for sale ---- (3,000,000)
Proceeds from maturities and sales of investment securities available for sale 1,000,000 ----
Proceeds from maturities of securities held to maturity and paydowns of mortgage-
backed securities 178,384 425,826
Net changes in loans (2,684,852) 5,211,813
Additions to real estate owned (2,645) (33,480)
Proceeds from real estate sales 188,160 186,565
Purchases of property and equipment (46,426) (640,778)
Proceeds from sale of premises and equipment 264,130 ----
Other investing activities ---- (95,881)
---------------- ---------------
Net cash provided by (used in) investing activities (3,103,249) 2,054,065
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (2,514,075) 13,785,845
Certificates of deposit 5,764,184 (2,405,140)
Repayment of borrowings (252,892) (317,890)
Cash dividends (296,565) (321,849)
Net change in advances by borrowers for taxes and insurance 106,009 225,116
---------------- ---------------
Net cash provided by financing activities 2,806,661 10,996,082
---------------- ---------------
Net Change in Cash and Cash Equivalents 470,415 14,431,186
Cash and Cash Equivalents, Beginning of Period 11,888,342 36,586,187
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 12,358,757 $ 51,017,373
================ ===============
Additional Cash Flows Information
Interest paid $ 1,747,887 $ 2,086,978
Income tax paid 12,583 ----
Loans transferred to foreclosed real estate 211,866 172,188
See notes to consolidated condensed financial statements.
7
UNION COMMUNITY BANCORP AND SUBSIDIARY
Notes to Unaudited Consolidated Condensed Financial Statements
Note 1: Basis of Presentation
The consolidated financial statements include the accounts of Union Community
Bancorp, an Indiana corporation (the "Company") and its wholly owned subsidiary,
Union Federal Savings and Loan Association, a federally chartered savings and
loan association ("Union Federal"). A summary of significant accounting policies
is set forth in Note 1 of Notes to Financial Statements included in the December
31, 2003 Annual Report to Shareholders. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The interim consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q, and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles.
The interim consolidated financial statements at March 31, 2004, and for the
three months ended March 31, 2004 and 2003, have not been audited by independent
accountants, but reflect, in the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows for such periods. The
results of operations for the three-month period ended March 31, 2004, are not
necessarily indicative of the results which may be expected for the entire year.
The consolidated condensed balance sheet of the Company as of December 31, 2003
has been derived from the audited consolidated balance sheet of the Company as
of that date.
Note 2: Earnings Per Share
Earnings per share have been computed based upon the weighted-average common
shares outstanding. Unearned Employee Stock Ownership Plan shares have been
excluded from the computation of average common shares outstanding.
Weighted-
For the Three Months Ended March 31, 2004 Average Per Share
Income Shares Amount
Basic earnings per share
Income available to common stockholders $443,610 1,937,973 $0.23
Effect of dilutive stock options 31,129
------------------- ---------------- ----------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $443,610 1,969,102 $0.23
=================== ================ ================
Weighted-
For the Three Months Ended March 31, 2003 Average Per Share
Income Shares Amount
Basic earnings per share
Income available to common stockholders $644,864 2,091,330 $0.31
Effect of dilutive stock options 15,280
------------------- ---------------- ----------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $644,864 2,106,610 $0.31
=================== ================ ================
8
Note 3: Stock Options
The Company has a stock-based employee compensation plan, which is described
more fully in the Notes to Financial Statements included in the December 31,
2003 Annual Report to shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
Three Months Ended Three Months Ended March
March 31, 2004 31, 2003
-----------------------------------------------------
Net income, as reported $ 443,610 $ 644,845
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 5,133 9,133
-----------------------------------------------------
Pro forma net income $ 438,477 $ 635,712
=====================================================
Earnings per share:
Basic - as reported
$ .23 $ .31
Basic - pro forma
$ .23 $ .30
Diluted - as reported
$ .23 $ .31
Diluted - pro forma
$ .22 $ .30
Note 4: Reclassifications
Certain reclassifications have been made to the 2003 consolidated condensed
financial statements to conform to the March 31, 2004 presentation.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company was organized in September 1997. On December 29, 1997, it acquired
the common stock of Union Federal upon the conversion of Union Federal from a
federal mutual savings and loan association to a federal stock savings and loan
association. The Company acquired Montgomery Financial Corporation
("Montgomery") in a transaction that closed on January 2, 2002. In the
transaction, Montgomery was merged with and into the Company, and Montgomery
Savings, a federally chartered thrift, was merged with and into Union Federal.
Following the merger, MSA Service Corporation ("MSA") became a subsidiary of
Union Federal.
Union Federal was organized as a state-chartered savings and loan association in
1913. Union Federal conducts its business from its main office located in
Crawfordsville, Indiana. In addition, Union Federal has two additional branch
offices in Crawfordsville and branch offices in Covington, Williamsport and
Lafayette, Indiana. Four of the above mentioned branch offices were added in
connection with the acquisition of Montgomery.
Union Federal offers a variety of lending, deposit and other financial services
to its retail and commercial customers. Union Federal's principal business
consists of attracting deposits from the general public and originating
fixed-rate and adjustable-rate loans secured primarily by first mortgage liens
on one- to four-family residential real estate. Union Federal's deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. Union Federal offers a number of
financial services, which include: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans and consumer loans, including single-pay loans, loans
secured by deposits, installment loans and commercial loans; (vi) money market
demand accounts; (vii) passbook savings accounts; and (viii) certificates of
deposit.
9
Union Federal currently owns two subsidiaries, UFS Service Corp. ("UFS"), whose
sole asset is its investment in Pedcor Investments 1993-XVI, L.P. ("Pedcor") and
MSA, which is a real estate management and development company. Pedcor is an
Indiana limited partnership that was established to organize, build, own,
operate and lease a 48-unit apartment complex in Crawfordsville, Indiana known
as Shady Knoll II Apartments (the "Project"). Union Federal owns the limited
partner interest in Pedcor. The general partner is Pedcor Investments LLC. The
Project, operates a multi-family, low- and moderate-income housing project,
which is completed and is performing as planned. Because UFS engages exclusively
in activities that are permissible for a national bank, OTS regulations permit
Union Federal to include its investment in UFS in its calculation of regulatory
capital. At present, MSA owns a tract of land in Crawfordsville, Indiana, which
is being developed for the construction of seven condominium units. Union
Federal's investment in MSA is excluded from its calculation of regulatory
capital.
Union Federal's results of operations depend primarily upon the level of net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and investments, and costs incurred with
respect to interest-bearing liabilities, primarily deposits and borrowings.
Results of operations also depend upon the level of Union Federal's non-interest
income, including fee income and service charges, and the level of its
non-interest expenses, including general and administrative expenses.
Critical Accounting Policies
Note 1 to the consolidated financial statements contains a summary of the
Company's significant accounting policies presented on pages 24 through 26 of
the Annual Report to Shareholders for the year ended December 31, 2003, which
was filed on Form 10-K with the commission on March 29, 2004. Certain of these
policies are important to the portrayal of the Company's financial condition,
since they require management to make difficult, complex or subjective
judgments, some of which may relate to matters that are inherently uncertain.
Management believes that its critical accounting policies include determining
the allowance for loan losses, the valuation of the foreclosed assets and real
estate held for development, and the valuation of intangible assets.
Allowance for loan losses
The allowance for loan losses is a significant estimate that can and does change
based on management's assumptions about specific borrowers and current general
economic and business conditions, among other factors. Management reviews the
adequacy of the allowance for loan losses at least on a quarterly basis. The
evaluation includes a review of payment performance, adequacy of collateral and
financial condition of all major borrowers. A review of all nonperforming loans
and other identified problem loans is performed and the probability of
collecting all amounts due thereunder is determined. In addition, changes in the
composition of the loan portfolio, the total outstanding loans and past loss
experience are reviewed to determine the adequacy of the allowance for loan
losses. Current economic and market conditions and potential negative changes to
economic conditions are also reviewed in determining possible loan losses.
Although it is the intent of management to fully evaluate and estimate the
potential effects of economic and market conditions, changes in the conditions
are susceptible to significant changes beyond those projected. A worsening or
protracted economic decline beyond management's projections would increase the
likelihood of additional losses due to the additional credit and market risk and
could create the need for additional loss reserves.
Foreclosed asset and real estate held for development
Foreclosed assets and real estate held for development are carried at the lower
of cost or fair value less estimated selling costs. Management estimates the
fair value of the properties based on current appraisal information. Reviews of
estimated fair value are performed on at least an annual basis. Economic
environment, market conditions and the real estate market are continually
monitored and decreases in the carried value are written down through current
operations when any of these factors indicate a decrease to the market value of
the assets. Future worsening or protracted economic conditions and a decline in
the real estate market would increase the likelihood of a decline in property
values and could create the need for future write downs of the properties held.
Intangible assets
Management periodically assesses the impairment of its goodwill and the
recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. If
actual external conditions and future operating results differ from management's
judgments, impairment and/or increased amortization charges may be necessary to
reduce the carrying value of these assets to the appropriate value. A review of
the fair value of the Company's goodwill and core deposit intangible was
performed in the fourth quarter of 2003 and it was management's opinion that
there was no impairment to these intangible assets as of the date of the review.
10
Financial Condition
Total assets increased $3.3 million to $264.9 million at March 31, 2004 from
$261.6 million at December 31, 2003. Net loans increased $2.3 million to $223.6
million at March 31, 2004. Cash and cash equivalents increased $470,000 from
December 31, 2003 to March 31, 2004. Interest-bearing deposits increased $2.0
million while investment securities available for sale decreased $911,000 during
the three month period. Premises and equipment decreased $281,000 to $4.3
million at March 31, 2004 primarily due to the sale of an office building
previously used as Montgomery's home office. In connection with the Montgomery
acquisition, the balance of goodwill and core deposit intangibles are $2.4
million and $378,000 respectively. Goodwill is reviewed annually for impairment
and core deposit intangibles are being amortized. Deposits increased by $3.3
million to $193.4 million and borrowed funds decreased by $280,000 during the
first quarter of 2004.
Shareholders' equity increased $267,000 to $35.8 million at March 31, 2004. The
increase was primarily due to net income for the three months ended March 31,
2004 of $444,000, Employee Stock Ownership Plan shares earned of $40,000,
unearned compensation amortization of $26,000 and unrealized gain on available
for sale securities of $54,000 offset by cash dividends of $297,000.
Comparison of Operating Results for the Three Months Ended March 31, 2004 and
2003
Net income decreased $201,000 from $645,000 for the three months ended March 31,
2003 to $444,000 for the three months ended March 31, 2004. The return on
average assets for the three months ended March 31, 2004 was .68% compared to
..93% for the comparable period in 2003. The return on average equity for the
three months ended March 31, 2004 was 4.97% compared to 6.89% for the comparable
period in 2003.
For the three months ended March 31, 2004, interest income was $3.6 million as
compared to $4.2 million for the three months ended March 31, 2003. Interest
income decreased primarily due to a decrease in the yield on interest-earning
assets from 6.36% during the 2003 period to 5.82% during the 2004 period and a
decrease in average interest-earning asset from $276.4 million at March 31, 2003
to $244.3 million at March 31, 2004. The decrease in average interest-earning
assets was due to a decrease in interest- earning deposits of $32.9 million
partially offset by an increase in loans receivable of $7.7 million. For the
three months ended March 31, 2004, interest expense was $1.6 million as compared
to $1.9 million for the three months ended March 31, 2003. Interest expense
decreased primarily due to a decrease in the cost of interest-bearing
liabilities from 3.30% during the 2003 period to 2.90% during the 2004 period
and a decrease in average interest-bearing liabilities from $233.1 million at
March 31, 2003 to $220.5 million at March 31, 2004. Amortization of purchase
accounting adjustments also impacted interest expense during the 2003 and 2004
periods. The amortization of purchase accounting adjustments reduced interest
expense by $27,000 in the 2004 period compared to a reduction of $126,000 for
the 2003 period.
The provision for loan losses for the three months ended March 31, 2004 was
$110,000 as compared to $30,000 for the comparable period in 2003. The increase
was due to a review performed at quarter end to determine the adequacy of the
current balance in the allowance for loan losses. During the three month period
ending March 31, 2004 a charge to the loan loss reserve was made in the amount
of $135,000 to write down a participation loan secured by a nursing home. A
previous loss of $240,000 had been taken on this loan to write down the loan
balance to the appraised value which was expected to be received upon
liquidation of the security. A sale price below the appraised and expected value
was negotiated by all interested parties which caused the additional estimated
loss of the $135,000. Upon review of the loan portfolio including classified
loans it was determined $110,000 was required to be added to the loan loss
reserve for the 2004 three-month period.
Total other income increased $90,000 from $69,000 for the three months ended
March 31, 2003 to $159,000 for the 2004 three month period primarily due to cash
value income on life insurance of $64,000 during the 2004 period compared to no
income of this type in the 2003 three month period. Increases in other
miscellaneous fees contributed the additional increase in other income. Other
expenses increased $46,000 from $1,343,000 for the three months ended March 31,
2003 to $1,389,000 for the comparable period in 2004. Expenses increased
primarily due to by the cost of additional services being offered and the growth
of the Company.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
11
At March 31, 2004 Union Federal had $6.4 million in classified loans as compared
to $5.7 million at December 31, 2003. Union Federal had $2.3 million and $1.7
million in loans classified as special mention as of March 31, 2004 and December
31, 2003 respectively. In addition, Union Federal had $3.6 million and $3.2
million of loans classified as substandard at March 31, 2004 and December 31,
2003, respectively. At both March 31, 2004 and at December 31, 2003, $546,000
and $781,000, respectively, in loans were classified as doubtful and no loans
were classified as loss for either period end. At March 31, 2004, and December
31, 2003, respectively, $4.1 million and $3.6 million of the substandard and
doubtful loans were non-accrual loans. The allowance for loan losses was
$1,196,000 or .53% of loans at March 31, 2004 as compared to $1,221,000 or .55%
of loans at December 31, 2003.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash
and eligible investments to a certain percentage of net withdrawable savings
accounts and borrowings due within one year. The minimum required ratio is
currently set by the Office of Thrift Supervision regulation at 4%. As of March
31, 2003, Union Federal had liquid assets of $11.9 million and a liquidity ratio
of 5.2%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is http://www.sec.gov.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of December 31, 2003 and 2002, is the most recent available
analyses performed by the OTS of Union Federal's interest rate risk as measured
by changes in net portfolio value ("NPV") for instantaneous and sustained
parallel shifts in the yield curve, in 100 basis point increments.
Union Federal:
At December 31, 2003 At December 31, 2002
-------------------- --------------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
---------------- --------------- --------------- --------------- ---------------
+300 bp $ (13,627) (34)% $ (9,699) (22)%
+200 bp (8,638) (22) (5,377) (12)
+100 bp (3,835) (10) (1,621) (4)
0 bp 0 0 0 0
-100 bp 1,037 3 (660) (2)
Management believes that at March 31, 2004, there have been no material changes
in market interest rates or in the Company's interest rate sensitive instruments
which would cause a material change in the market risk exposures which affect
the quantitative and qualitative risk disclosures as presented on pages 17-18 of
the Company's Annual Report on Form 10-K for the period ended December 31, 2003.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and chief financial officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the
Securities Exchange Act of 1934, as amended), as of the end of the most recent
fiscal quarter covered by this quarterly report (the "Evaluation Date"), have
concluded that as of the Evaluation Date, the Company's disclosure controls and
procedures were adequate and are designed to ensure that material information
relating to the Company would be made known to such officers by others within
the Company on a timely basis.
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Although the Company and its subsidiaries are involved, from time to
time, in various legal proceedings arising in the ordinary course of
business, there are no material legal proceedings to which they are a
party or to which their property is subject.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
No matter was submitted to a vote of the Company's shareholders during
the first quarter of 2004.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31(1) Certification required by 17 C.F.R. ss. 240.13a-14(a)
31(2) Certification required by 17 C.F.R. ss. 240.13a-14(a)
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
1. Earnings release for the quarter ended December 31, 2003
filed on January 28, 2004.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: May 14, 2004 By: /s/ Alan L. Grimble
-------------------------------------
Alan L. Grimble
Chief Executive Officer
Date: May 14, 2004 By: /s/ J. Lee Walden
------------------------------------
J. Lee Walden
Chief Financial Officer
14