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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 JUNE 30, 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: 333-35799
UNION COMMUNITY BANCORP
(Exact name of registrant specified in its charter)
Indiana 35-2025237
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
221 East Main Street
Crawfordsville, Indiana 47933
(Address of principal executive offices,
including Zip Code)
(765) 362-2400
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such report), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares of the Registrant's common stock, without par value,
outstanding as of June 30, 2004 was 1,988,000.
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
CERTIFICATIONS 17
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
June 30, December 31,
2004 2003
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 742,459 $ 784,673
Interest-bearing demand deposits 10,843,250 11,103,669
------------------------ -------------------------
Cash and cash equivalents 11,585,709 11,888,342
Interest-bearing deposits 2,126,140 150,239
Investment securities
Available for sale 4,903,430 5,908,437
Held to maturity 273,110 493,801
------------------------ -------------------------
Total investment securities 5,176,540 6,402,238
Loans, net of allowance for loan losses of $1,156,000 and $1,221,000 222,062,432 221,230,152
Premises and equipment 4,276,538 4,627,766
Federal Home Loan Bank stock 3,640,800 3,556,100
Investment in limited partnership 2,215,109 2,215,109
Foreclosed assets and real estate held for development, net 906,287 1,347,824
Goodwill 2,392,808 2,392,808
Interest receivable 1,045,500 1,128,342
Cash value life insurance 5,277,446 5,149,394
Other assets 834,481 1,488,457
------------------------ -------------------------
Total assets $ 261,539,790 $ 261,576,771
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,319,910 $ 3,929,724
Interest-bearing 188,733,910 186,262,428
------------------------ -------------------------
Total deposits 192,053,820 190,192,152
Federal Home Loan Bank advances 33,639,904 33,946,109
Interest payable 482,908 572,487
Other liabilities 1,456,944 1,336,501
------------------------ -------------------------
Total liabilities 227,633,576 226,047,249
------------------------ -------------------------
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 - 1,988,000 and 2,100,000 shares 21,246,283 22,395,104
Retained earnings 14,451,174 14,984,757
Accumulated other comprehensive loss (88,513) (55,295)
Unearned employee stock ownership plan (ESOP) shares (1,182,806) (1,228,998)
Unearned recognition and retention plan (RRP) shares (519,924) (566,046)
------------------------ -------------------------
Total shareholders' equity 33,906,214 35,529,522
------------------------ -------------------------
Total liabilities and shareholders' equity $ 261,539,790 $ 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 Six Months Ended
June 30 June 30
------------------ ------------------- ----------------- ----------------
2004 2003 2004 2003
------------------ ------------------- ----------------- ----------------
Interest and Dividend Income
Loans $ 3,411,146 $ 3,723,641 $ 6,859,236 $ 7,745,632
Investment securities 25,680 47,748 61,508 79,571
Dividends on Federal Home Loan Bank stock 37,160 47,477 81,844 91,476
Deposits with financial institutions 39,077 133,330 64,824 261,987
------------------ ------------------- ----------------- ----------------
Total interest and dividend income 3,513,063 3,952,196 7,067,412 8,178,666
------------------ ------------------- ----------------- ----------------
Interest Expense
Deposits 1,128,490 1,327,926 2,306,381 2,796,754
Federal Home Loan Bank advances 420,094 456,898 840,359 909,128
------------------ ------------------- ----------------- ----------------
Total interest expense 1,548,584 1,784,824 3,146,740 3,705,882
------------------ ------------------- ----------------- ----------------
Net Interest Income 1,964,479 2,167,372 3,920,672 4,472,784
Provision for loan losses 2,772 30,000 112,819 60,000
------------------ ------------------- ----------------- ----------------
Net Interest Income After Provision for Loan Losses 1,961,707 2,137,372 3,807,853 4,412,784
------------------ ------------------- ----------------- ----------------
Other Income
Service charges on deposit accounts 68,491 35,345 106,083 71,083
Equity in income of limited partnerships --- --- --- 10,000
Other income 116,452 49,151 237,761 72,295
------------------ ------------------- ----------------- ----------------
Total other income 184,943 84,496 343,844 153,378
------------------ ------------------- ----------------- ----------------
Other Expenses
Salaries and employee benefits 812,978 759,072 1,559,131 1,479,355
Net occupancy expenses 74,851 70,655 155,537 146,657
Equipment expenses 81,677 78,305 171,908 158,192
Legal and professional fees 96,904 88,551 192,532 174,076
Data processing fees 107,244 102,988 208,434 204,237
Other expenses 407,288 294,496 681,937 574,297
------------------ ------------------- ----------------- ----------------
Total other expenses 1,580,942 1,394,067 2,969,479 2,736,814
------------------ ------------------- ----------------- ----------------
Income Before Income Tax 565,708 827,801 1,182,218 1,829,348
Income tax expense 157,700 276,817 330,600 633,500
------------------ ------------------- ----------------- ----------------
Net Income $ 408,008 $ 550,984 $ 851,618 $ 1,195,848
================== =================== ================= ================
Basic Earnings per Share $ .22 $ .28 $ .45 $ .59
Diluted Earnings per Share .21 .28 .44 .58
Dividends per Share .15 .15 .30 .30
See notes to consolidated condensed financial statements.
5
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Six Months Ended June 30, 2004
(Unaudited)
Common Stock Accumulated
----------------------- Other Unearned
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings 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 $851,618 851,618 851,618
Other comprehensive
income, net of tax
Unrealized losses on
securities (33,218) $(33,218) (33,218)
----------
Comprehensive income $818,400
==========
Cash dividends ($.30 per (576,331) (576,331)
share)
Purchase of common stock 112,000 (1,188,884) (808,870) (1,997,754)
Amortization of unearned
compensation expense 6,171 46,122 52,293
ESOP shares earned 33,892 46,192 80,084
------------------------- -----------------------------------------------------------------
Balances, June 30, 2004 1,988,000 $21,246,283 $14,451,174 $(88,513) $(1,182,806) $(519,924) $33,906,214
========================= =================================================================
See notes to consolidated condensed financial statements.
6
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
---------------- ---------------
2004 2003
---------------- ---------------
Operating Activities
Net income $ 851,618 $ 1,195,848
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 65,000 67,787
Depreciation and amortization 184,048 162,152
Investment securities accretion, net (233) (432)
Loss on sale of real estate owned 143,294 14,045
Gain on sale of premises and equipment (22,746) ---
Equity in losses of limited partnerships --- (10,000)
Amortization of purchase accounting adjustments 18,667 (169,689)
Amortization of unearned compensation expense 52,293 99,025
ESOP shares earned 80,084 78,302
Net change in:
Interest receivable 82,842 68,159
Interest payable (89,579) (158,184)
Other adjustments 337,641 (4,951,785)
---------------- ---------------
Net cash provided by (used in) operating activities 1,702,929 (3,604,772)
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits (1,975,901) ---
Investment securities
Purchase of investment securities available for sale (50,000) (8,000,000)
Proceeds from sales of investment securities available for sale 1,000,000 ---
Proceeds from maturities of securities held to maturity and paydowns of mortgage-
backed securities 220,924 3,877,573
Net changes in loans (1,465,558) 6,800,243
Additions to real estate owned (3,477) (124,138)
Proceeds from real estate sales 824,178 389,657
Purchases of property and equipment (60,539) (1,537,055)
Proceeds from sale of property and equipment 264,130 ---
Other investing activities (95,881)
---------------- ---------------
Net cash provided by (used in) investing activities (1,246,243) 1,310,399
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (2,498,361) 13,278,109
Certificates of deposit 4,360,029 (6,084,534)
Repayment of borrowings (252,892) (317,890)
Cash dividends (576,331) (616,997)
Repurchase of common stock (1,997,754) (3,000,300)
Net change in advances by borrowers for taxes and insurance 205,990 415,255
---------------- ---------------
Net cash provided by (used in) financing activities (759,319) 3,673,643
---------------- ---------------
Net Change in Cash and Cash Equivalents (302,633) 1,379,270
Cash and Cash Equivalents, Beginning of Period 11,888,342 36,586,187
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 11,585,709 $ 37,965,457
================ ===============
Additional Cash Flows Information
Interest paid $ 3,236,319 $ 3,864,066
Income tax paid 184,583 696,913
Loans transferred to foreclosed real estate 536,123 150,790
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 June 30, 2004, and for the
three and six months ended June 30, 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 six-month period ended June 30,
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.
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $408,008 1,880,160 $ .22 $550,984 1,973,814 $ .28
=========== =============
Effect of dilutive RRP awards
and stock options 30,330 23,577
-------------- --------------- ------------ -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 408,008 1,910,490 $ .21 $ 550,984 1,997,391 $ .28
============== =============== =========== ============ ============= =============
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
------------- -------------
Weighted Weighted
Average Per Share Average Per Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share
Income available to common
shareholders $ 851,618 1,908,900 $ .45 $ 1,195,848 2,032,240 $ .59
=========== =============
Effect of dilutive RRP awards
and stock options 30,730 19,381
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 851,618 1,939,630 $ .44 $ 1,195,848 2,051,621 $ .58
============== =============== =========== ============= ============= =============
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
June 30, 2004 June 30, 2003
-----------------------------------------------
Net income, as reported $408,008 $ 550,984
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 $402,875 $ 541,851
===============================================
Earnings per share:
Basic - as reported $ .22 $ .28
Basic - pro forma $ .21 $ .27
Diluted - as reported $ .21 $ .28
Diluted - pro forma $ .21 $ .27
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
-----------------------------------------------
$851,618 $1,195,848
Net income, as reported
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 10,267 18,267
-----------------------------------------------
$841,351 $1,177,581
Pro forma net income
===============================================
Earnings per share:
Basic - as reported $ .45 $ .59
Basic - pro forma $ .44 $ .58
Diluted - as reported $ .44 $ .58
Diluted - pro forma $ .43 $ .57
Note 4: Reclassifications
Certain reclassifications have been made to the 2003 consolidated condensed
financial statements to conform to the June 30, 2004 presentation.
9
Note 5: Repurchase of Common Stock
The Company, from time to time, repurchases common stock on the open market. The
following table represents the repurchases for the six months ended June 30,
2004.
Number of Shares Remaining Total Average Price
Date of Repurchase Repurchased Outstanding Per Share Name*
------------------ ----------- ----------- --------- -----
05/03/2004 24,000 2,076,000 $17.90 N/A
05/10/2004 50,000 2,026,000 $17.80 N/A
05/17/2004 13,000 2,013,000 $17.85 N/A
05/24/2004 15,000 1,998,000 $17.85 N/A
06/01/2004 10,000 1,988,000 $17.835 N/A
* For Repurchase from Insiders or Related Parties
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The Company was organized in September 1997. On December 29, 1997, it acquired
the common stock of Union Federal upon the conversion of Union Federal from a
federal mutual savings and loan association to a federal stock savings and loan
association. The Company acquired Montgomery Financial Corporation
("Montgomery") in a transaction that closed on January 2, 2002. In the
transaction, Montgomery was merged with and into the Company, and Montgomery
Savings, a federally chartered thrift, was merged with and into Union Federal.
Following the merger, MSA Service Corp ("MSA") became a subsidiary of Union
Federal.
Union Federal was organized as a state-chartered savings and loan association in
1913. Union Federal conducts its business from its main office located in
Crawfordsville, Indiana. In addition, Union Federal has two branch offices in
Crawfordsville and branch offices in Covington, Williamsport and Lafayette,
Indiana. Four of the above mentioned branch offices were added in connection
with the acquisition of Montgomery.
Union Federal offers a variety of lending, deposit and other financial services
to its retail and commercial customers. Union Federal's principal business
consists of attracting deposits from the general public and originating
fixed-rate and adjustable-rate loans secured primarily by first mortgage liens
on one- to four-family residential real estate. Union Federal's deposit accounts
are insured up to applicable limits by the Savings Association Insurance Fund of
the Federal Deposit Insurance Corporation. Union Federal offers a number of
financial services, which include: (i) residential real estate loans; (ii)
multi-family loans; (iii) commercial real estate loans; (iv) construction loans;
(v) home improvement loans and consumer loans, including single-pay loans, loans
secured by deposits, installment loans and commercial loans; (vi) money market
demand accounts; (vii) passbook savings accounts; and (viii) certificates of
deposit.
Union Federal previously owned two subsidiaries, UFS Service Corp. ("UFS"),
whose sole asset was its investment in Pedcor Investments 1993-XVI, L.P.
("Pedcor") and MSA, which is a real estate management and development company.
Pedcor is an Indiana limited partnership that was established to organize,
build, own, operate and lease a 48-unit apartment complex in Crawfordsville,
Indiana known as Shady Knoll II Apartments (the "Project"). Union Federal owns
the limited partner interest in Pedcor. The general partner is Pedcor
Investments LLC. The Project, operated as a multi-family, low- and
moderate-income housing project, which is completed and is performing as
planned. Because UFS engages exclusively in activities that are permissible for
a national bank, OTS regulations permit Union Federal to include its investment
in UFS in its calculation of regulatory capital. MSA owned a tract of land in
Crawfordsville, Indiana, which was being developed for the construction of seven
condominium units. Union Federal's investment in MSA was previously excluded
from its calculation of regulatory capital. The assets and liabilities of UFS
were transferred to Union Federal during the quarter ended June 30, 2004 and UFS
Service Corp. was dissolved. Also during the second quarter of 2004 the MSA
condominium development was completed and the remaining assets of MSA were
transferred to Union Federal and the corporation was dissolved.
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.
10
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 assets and real estate held for development
Foreclosed assets and real estate held for development are carried at the lower
of cost or fair value less estimated selling costs. Management estimates the
fair value of the properties based on current appraisal information. Reviews of
estimated fair value are performed on at least an annual basis. Economic
environment, market conditions and the real estate market are continually
monitored and decreases in the carried value are written down through current
operations when any of these factors indicate a decrease to the market value of
the assets. Future worsening or protracted economic conditions and a decline in
the real estate market would increase the likelihood of a decline in property
values and could create the need for future write downs of the properties held.
Intangible assets
Management periodically assesses the impairment of its goodwill and the
recoverability of its core deposit intangible. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. If
actual external conditions and future operating results differ from management's
judgments, impairment and/or increased amortization charges may be necessary to
reduce the carrying value of these assets to the appropriate value. A review of
the fair value of the Company's goodwill and core deposit intangible was
performed in the fourth quarter of 2003 and it was management's opinion that
there was no impairment to these intangible assets as of the date of the review.
Financial Condition
Total assets decreased $37,000 to $261.5 million from December 31, 2003 to June
30, 2004. Net loans increased $832,000 to $222.1 million at June 30, 2004. Cash
and cash equivalents decreased $303,000 from December 31, 2003 to June 30, 2004.
Interest-bearing deposits increased $2.0 million from $150,000 at December 31,
2003 to $2.1 million at June 30, 2004. This increase was primarily due to the
decrease in cash and cash equivalents and a decrease in investment securities
from $6.4 million at December 31, 2003 to $5.2 million at June 30, 2004.
Premises and equipment decreased $351,000 to $4.3 million at June 30, 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 $358,000
respectively. Goodwill is reviewed annually for impairment and core deposit
intangibles are being amortized. Deposits increased by $1.9 million to $192.1
million and borrowed funds decreased by $306,000 during the first six months of
2004.
Shareholders' equity decreased $1.6 million to $33.9 million at June 30, 2004.
The decrease was primarily due to repurchase of 112,000 shares of common stock
at a total cost of $2.0 million, or an average cost of $17.84 per share, and the
payment of cash dividends in the amount of $576,000 partially offset by net
income of $852,000, Employee Stock Ownership Plan shares earned of $80,000 and
unearned compensation amortization of $52,000.
11
Comparison of Operating Results for the Three Months Ended June 30, 2004 and
2003
Net income decreased $143,000 from $551,000 for the three months ended June 30,
2003 to $408,000 for the three months ended June 30, 2004. The return on average
assets for the three months ended June 30, 2004 was .62% compared to .79% for
the comparable period in 2003. The return on average equity for the three months
ended June 30, 2004 was 4.61% compared to 6.02% for the comparable period in
2003.
For the three months ended June 30, 2004, interest income was $3.5 million as
compared to $4.0 million for the three months ended June 30, 2003. Interest
income decreased primarily due to a decrease in the yield on interest-earning
assets from 5.96% during the 2003 period to 5.69% during the 2004 period and a
decrease in average interest-earning asset from $265.2 million at June 30, 2003
to $247.1 million at June 30, 2004. For the three months ended June 30, 2004,
interest expense was $1.5 million as compared to $1.8 million for the three
months ended June 30, 2003. Interest expense decreased primarily due to a
decrease in the cost of interest-bearing liabilities from 3.02% during the 2003
period to 2.78% during the 2004 period and a decrease in average
interest-bearing liabilities from $236.5 million at June 30, 2003 to $229.0
million at June 30, 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 June 30, 2004 was
$3,000 as compared to $30,000 for the comparable period in 2003. A review is
performed quarterly to determine the adequacy of the current balance in the
allowance for loan losses.
Total other income increased $100,000 from $85,000 for the three months ended
June 30, 2003 to $185,000 for the 2004 comparable period. This increase was
primarily due to an increase in service charges on deposit accounts from $35,000
for the three months ended June 30, 2003 to $68,000 for the 2004 three month
period and an increase in income on bank owned life insurance of $40,000. Total
other expenses increased $187,000 from $1,394,000 for the three months ended
June 30, 2003 to $1,581,000 for the comparable period in 2004. This increase was
primarily due to net losses on real estate owned of $100,000 during the 2004
three month period compared to a net gain of $4,000 during the 2003 comparable
period. Other increases in noninterest expenses were primarily due to the costs
of new services being offered.
Comparison of Operating Results for the Six Months Ended June 30, 2004 and 2003
Net income decreased $344,000 from $1,196,000 for the six months ended June 30,
2003 to $852,000 for the six months ended June 30, 2004. The return on average
assets for the six months ended June 30, 2004 was .65% compared to .86% for the
comparable period in 2004. The return on average equity for the six months ended
June 30, 2004 was 4.79% compared to 6.46% for the comparable six-month period in
2003.
For the six months ended June 30, 2004, interest income was $7.1 million as
compared to $8.2 million for the six months ended June 30, 2003. Interest income
decreased primarily due to a decrease in the yield on interest-earning assets
from 6.16% during the 2003 period to 5.75% during the 2004 period and a decrease
in average interest-earning asset from $265.6 million at June 30, 2003 to $245.7
million at June 30, 2004. For the six months ended June 30, 2004, interest
expense was $3.1 million as compared to $3.7 million for the six months ended
June 30, 2003. Interest expense decreased primarily due to a decrease in the
cost of interest-bearing liabilities from 3.16% during the 2003 period to 2.84%
during the 2004 period and a decrease in average interest-bearing liabilities
from $234.8 million at June 30, 2003 to $221.8 million at June 30, 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 $53,000 in the 2004 period compared to a
reduction of $252,000 for the 2003 period.
The provision for loan losses for the six-month period ending June 30, 2004 was
$113,000 compared to a provision of $60,000 for the comparable 2003 period. A
review is performed quarterly to determine the adequacy of the current balance
in the allowance for loan losses.
Total other income increased $191,000 from $153,000 for the six months ended
June 30, 2003 to $344,000 for the 2004 comparable period. This increase was
primarily due to an increase in service charges on deposit account of $35,000
and an increase in income on bank owned life insurance of $128,000 for the
comparable periods. Total other expenses increased $232,000 from $2,737,000 for
the six months ended June 30, 2003 to $2,969,000 for the comparable period in
2004. Other expenses increased $108,00 for the comparable periods primarily due
to net losses on the sale of real estate owned totaling $121,000 for the six
months ended June 30, 2004 compared to $14,000 for the 2003 six month period.
Other noninterest expenses increased primarily due to the cost and growth of
additional services being offered.
12
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
At June 30, 2004 Union Federal had $5.6 million in classified loans as compared
to $5.7 million at December 31, 2003. Union Federal had $1.1 million and $1.7
million in loans classified as special mention as of June 30, 2004 and December
31, 2003 respectively. In addition, Union Federal had $4.5 million and $3.2
million of loans classified as substandard at June 30, 2004 and December 31,
2003, respectively. At June 30, 2004 Union Federal had no loans classified as
doubtful compared to $781,000 classified as doubtful at December 31, 2003. No
loans were classified as loss at either period end. At June 30, 2004, and
December 31, 2003, respectively, $4.2 million and $3.6 million of the
substandard and doubtful loans were non-accrual loans. The allowance for loan
losses was $1,156,000 or .52% of loans at June 30, 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 June
30, 2004, Union Federal had liquid assets of $13.6 million and a liquidity ratio
of 6.0%.
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 March 31, 2004 and 2003, 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 March 31, 2004 At March 31, 2003
----------------- -----------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
---------------- --------------- --------------- --------------- ---------------
+300 bp $ (13,035) (33)% $ (9,982) (22)%
+200 bp (7,837) (20) (5,577) (13)
+100 bp (3,135) (8) (1,841) (4)
0 bp 0 0 0 0
-100 bp 153 0 (612) (1)
Management believes that at June 30, 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.
13
(b) Changes in internal controls. There were no significant changes in the
Company's internal control over financial reporting identified in connection
with the Company's evaluation of controls that occurred during the Company's
last fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities.
Purchases of common stock made by or on behalf of the Company
during the three months ended June 30, 2004 are set forth below:
Total Number of Maximum Number (or
Shares (or Units) Approximate Dollar
Total Number of Average Price Purchased as Part Value) of Shares (or
Period Shares (or Units) Paid Per Share of Publicly Units) that May Yet Be
Purchased (1) (or Unit) Announced Plans Purchased Under the
or Programs (2) Plans or Programs
April, 2004
(4/1/04 thru 4/30/04) ---- ---- ---- ----
May, 2004
(5/1/04 thru 5/31/04) 102,000 $17.84 102,000 98,000
June, 2004
(6/1/04 thru 6/30/04) 10,000 $17.84 10,000 88,000
------- ------ ------- ------
Total 112,000 $17.84 112,000 88,000
======= ====== ======= ======
(1) During the periods reported above, there were no shares of
Common Stock which were repurchased by the Company other
than through a publicly announced plan or program.
(2) On April 29, 2004, the Company announced the approval by the
Board of Directors to repurchase, from time to time, on the
open market of up to 200,000 of the Company's outstanding
shared of common stock.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to Vote of Security Holders.
The following matters were submitted to a vote of the security
holders during the Company's Annual Meeting of Shareholders held
on April 21, 2004:
(a) Three directors were elected to terms expiring in 2007 by the
following votes:
Philip L. Boots For: 1,858,380 Withheld: 67,278
Mark E. Foster For: 1,857,006 Withheld: 68,652
John M. Horner For: 1,748,866 Withheld: 176,792
The terms of office of the following directors of Union Community
Bancorp continued after the Annual Shareholder Meeting:
Name Term Expires In
---- ---------------
Marvin L. Burkett 2005
Phillip E. Grush 2005
Joseph E. Timmons 2005
C. Rex Henthorn 2006
Samuel H. Hildebrand 2006
Joseph M. Malott 2006
Harry A. Siamas 2006
14
For Against Abstentions
--------- ------- -----------
(b) Ratification of appointment
of BKD, LLP as auditors 1,900,406 13,522 11,730
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(1) 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 March 31, 2004 filed
on April 29, 2004.
2. Stock repurchase program announcement filed on April 29,
2004
15
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: August 11, 2004 By: /s/ Alan L. Grimble
---------------------------------------
Alan L. Grimble
Chief Executive Officer
Date: August 11, 2004 By: /s/ J. Lee Walden
---------------------------------------
J. Lee Walden
Chief Financial Officer
16