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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 SEPTEMBER 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 September 30, 2004 was 1,935,000.
Union Community Bancorp
Form 10-Q
Index
Page No.
FORWARD LOOKING STATEMENT 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements 4
Consolidated Condensed Balance Sheets 4
Consolidated Condensed Statements of Income 5
Consolidated Condensed Statement of Shareholders' Equity 6
Consolidated Condensed Statements of Cash Flows 7
Notes to Unaudited Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
EXHIBITS
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
September 30, December 31,
2004 2003
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 841,515 $ 784,673
Interest-bearing demand deposits 8,774,526 11,103,669
------------------------ -------------------------
Cash and cash equivalents 9,616,041 11,888,342
Interest-bearing deposits 2,131,122 150,239
Investment securities
Available for sale 5,002,020 5,908,437
Held to maturity 205,185 493,801
------------------------ -------------------------
Total investment securities 5,207,205 6,402,238
Loans, net of allowance for loan losses of $1,083,514 and $1,221,000 219,597,916 221,230,152
Premises and equipment 4,257,385 4,627,766
Federal Home Loan Bank stock 3,681,400 3,556,100
Investment in limited partnership 2,215,109 2,215,109
Foreclosed assets and real estate held for development, net 1,467,745 1,347,824
Goodwill 2,392,808 2,392,808
Interest receivable 1,117,660 1,128,342
Cash value life insurance 5,337,349 5,149,394
Other assets 731,392 1,488,457
------------------------ -------------------------
Total assets $ 257,753,132 $ 261,576,771
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,706,548 $ 3,929,724
Interest-bearing 184,930,077 186,262,428
------------------------ -------------------------
Total deposits 188,636,625 190,192,152
Federal Home Loan Bank advances 33,532,652 33,946,109
Interest payable 566,591 572,487
Other liabilities 1,764,557 1,336,501
------------------------ -------------------------
Total liabilities 224,500,425 226,047,249
------------------------ -------------------------
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 - 1,935,000 and 2,100,000 shares 20,703,764 22,395,104
Retained earnings 14,234,613 14,984,757
Accumulated other comprehensive loss (28,976) (55,295)
Unearned employee stock ownership plan (ESOP) shares (1,159,832) (1,228,998)
Unearned recognition and retention plan (RRP) shares (496,862) (566,046)
------------------------ -------------------------
Total shareholders' equity 33,252,707 35,529,522
------------------------ -------------------------
Total liabilities and shareholders' equity $ 257,753,132 $ 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 Nine Months Ended
September 30 September 30
------------------ ------------------- ----------------- ----------------
2004 2003 2004 2003
------------------ ------------------- ----------------- ----------------
Interest and Dividend Income
Loans $ 3,311,308 $ 3,658,487 $10,190,544 $11,404,119
Investment securities 34,939 59,989 96,447 139,560
Dividends on Federal Home Loan Bank stock 40,632 40,112 122,475 131,589
Deposits with financial institutions 40,103 64,301 104,928 326,287
------------------ ------------------- ----------------- ----------------
Total interest and dividend income 3,446,982 3,822,889 10,514,394 12,001,555
------------------ ------------------- ----------------- ----------------
Interest Expense
Deposits 1,147,832 1,201,281 3,454,213 3,998,035
Federal Home Loan Bank advances 423,918 468,063 1,264,278 1,377,191
------------------ ------------------- ----------------- ----------------
Total interest expense 1,571,750 1,669,344 4,718,491 5,375,226
------------------ ------------------- ----------------- ----------------
Net Interest Income 1,875,232 2,153,545 5,795,903 6,626,329
Provision for loan losses 60,000 118,431 172,818 178,431
------------------ ------------------- ----------------- ----------------
Net Interest Income After Provision for Loan Losses 1,815,232 2,035,114 5,623,085 6,447,898
------------------ ------------------- ----------------- ----------------
Other Income
Service charges on deposit accounts 72,466 36,758 178,549 107,841
Equity in income of limited partnerships --- --- --- 10,000
Other income 126,498 95,794 364,259 168,089
------------------ ------------------- ----------------- ----------------
Total other income 198,964 132,552 542,808 285,930
------------------ ------------------- ----------------- ----------------
Other Expenses
Salaries and employee benefits 758,784 563,792 2,317,915 2,043,147
Net occupancy expenses 79,931 73,526 235,468 220,183
Equipment expenses 79,742 80,604 251,650 238,797
Legal and professional fees 82,548 66,768 275,080 240,844
Data processing fees 108,781 93,924 317,215 298,161
Other expenses 246,107 286,770 928,044 861,066
------------------ ------------------- ----------------- ----------------
Total other expenses 1,355,893 1,165,384 4,325,372 3,902,198
------------------ ------------------- ----------------- ----------------
Income Before Income Tax 658,303 1,002,282 1,840,521 2,831,630
Income tax expense 207,400 334,300 538,000 967,800
------------------ ------------------- ----------------- ----------------
Net Income $ 450,903 $ 667,982 $ 1,302,521 $ 1,863,830
================== =================== ================= ================
Basic Earnings per Share $ .25 $ .35 $ .69 $ .93
Diluted Earnings per Share .24 .34 .68 .92
Dividends per Share .15 .15 .45 .45
See notes to consolidated condensed financial statements.
5
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statement of Shareholders' Equity
For the Nine Months Ended September 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 $1,302,521 1,302,521 1,302,521
Other comprehensive
income, net of tax
Unrealized gains on
securities 26,319 26,319 26,319
------------
Comprehensive income $1,328,840
============
Cash dividends ($.45 per (848,145) (848,145)
share)
Purchase of common stock (165,000) (1,751,784) (1,204,520) (2,956,304)
Amortization of unearned
compensation expense 9,257 69,184 78,441
ESOP shares earned 51,187 69,166 120,353
----------- ------------- ----------- ------------ ------------ ------------- -----------
Balances, September 30, 2004 1,935,000 $20,703,764 $14,234,613 $(28,976) $(1,159,832) $(496,862) $33,252,707
=========== ============= =========== ============ ============ ============= ===========
See notes to consolidated condensed financial statements.
6
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
---------------- ---------------
2004 2003
---------------- ---------------
Operating Activities
Net income $ 1,302,521 $ 1,863,830
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 172,818 178,431
Depreciation and amortization 268,872 241,847
Investment securities accretion, net (350) (647)
Loss on sale of real estate owned 89,539 10,196
Gain on sale of premises and equipment (22,746) ---
Equity in losses of limited partnerships --- (10,000)
Amortization of purchase accounting adjustments 28,001 (254,534)
Amortization of unearned compensation expense 78,441 106,230
ESOP shares earned 120,353 118,181
Net change in:
Interest receivable 10,682 14,233
Interest payable (5,896) (123,941)
Other adjustments 399,072 (4,794,667)
---------------- ---------------
Net cash provided by (used in) operating activities 2,441,307 (2,650,841)
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits (1,980,883) ---
Investment securities
Purchase of investment securities available for sale (50,000) (9,000,000)
Proceeds from sales of investment securities available for sale 1,000,000 3,000,000
Proceeds from maturities of securities held to maturity and paydowns of
mortgage-backed securities 288,966 1,062,653
Investment in limited partnership --- (1,400,000)
Net changes in loans (849,400) (5,860,787)
Additions to real estate owned (3,477) (134,134)
Proceeds from real estate sales 2,035,465 565,923
Purchases of property and equipment (120,738) (1,484,024)
Proceeds from sale of property and equipment 264,130 ---
Other investing activities --- (95,881)
---------------- ---------------
Net cash provided by (used in) investing activities 584,063 (13,346,250)
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (8,847,061) 13,217,963
Certificates of deposit 7,291,534 (11,487,257)
Proceeds from borrowings --- 1,400,000
Repayment of borrowings (333,488) (3,317,890)
Cash dividends (848,145) (912,146)
Repurchase of common stock (2,956,304) (3,000,300)
Net change in advances by borrowers for taxes and insurance 395,793 587,357
---------------- ---------------
Net cash used in financing activities (5,297,671) (3,512,273)
---------------- ---------------
Net Change in Cash and Cash Equivalents (2,272,301) (19,509,364)
Cash and Cash Equivalents, Beginning of Period 11,888,342 36,586,187
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 9,616,041 $ 17,076,823
================ ===============
Additional Cash Flows Information
Interest paid $ 4,724,387 $ 5,499,167
Income tax paid 415,583 915,230
Loans transferred to foreclosed real estate 2,260,585 176,114
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 September 30, 2004, and for the
three and nine months ended September 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 nine-month period ended
September 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.
8
Three Months Ended Three Months Ended
September 30, 2004 September 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 $450,903 1,819,752 $ .25 $667,982 1,933,290 $ .35
=========== =============
Effect of dilutive RRP awards
and stock options 30,198 20,930
-------------- --------------- ------------ -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 450,903 1,849,950 $ .24 $ 667,982 1,954,220 $ .34
============== =============== =========== ============ ============= =============
Nine Months Ended Nine Months Ended
September 30, 2004 September 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 $ 1,302,521 1,878,687 $ .69 $ 1,863,830 1,998,826 $ .93
=========== =============
Effect of dilutive RRP awards
and stock options 29,849 19,897
-------------- --------------- ------------- -------------
Diluted earnings per share
Income available to common
shareholders and assumed
conversions $ 1,302,521 1,908,687 $ .68 $ 1,863,830 2,018,723 $ .92
============== =============== =========== ============= ============= =============
9
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
September 30, 2004 September 30, 2003
-----------------------------------------------------
Net income, as reported $450,903 $667,982
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 $445,770 $658,849
=====================================================
Earnings per share:
Basic - as reported $ .25 $ .35
Basic - pro forma $ .24 $ .34
Diluted - as reported $ .24 $ .34
Diluted - pro forma $ .24 $ .34
Nine Months Ended Nine Months Ended
September 30, 2004 September 30, 2003
-----------------------------------------------------
$1,302,521 $1,863,830
Net income, as reported
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 15,400 27,400
-----------------------------------------------------
$1,287,121 $1,836,430
Pro forma net income
=====================================================
Earnings per share:
Basic - as reported $ .69 $ .93
Basic - pro forma $ .69 $ .92
Diluted - as reported $ .68 $ .92
Diluted - pro forma $ .67 $ .91
10
Note 4: Reclassifications
Certain reclassifications have been made to the 2003 consolidated condensed
financial statements to conform to the September 30, 2004 presentation.
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 three months ended September
30, 2004.
Number of Shares Remaining Total Average Price
Date of Repurchase Repurchased Outstanding Per Share Name*
- ------------------ ----------- ----------- --------- -----
07/21/2004 5,000 1,983,000 $17.90 N/A
09/03/2004 35,000 1,948,000 $18.07 N/A
09/22/2004 13,000 1,935,000 $18.20 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.
11
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.
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.
12
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 as of September 30, 2004 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 $3.8 million to $257.8 million from December 31, 2003 to
September 30, 2004. Net loans decreased $1.6 to $219.6 million at September 30,
2004. Cash and cash equivalents decreased $2.3 million from December 31, 2003 to
September 30, 2004. Interest-bearing deposits increased $2.0 million from
$150,000 at December 31, 2003 to $2.1 million at September 30, 2004. This
increase was primarily due to the decrease in cash and cash equivalents.
Investment securities decreased from $6.4 million at December 31, 2003 to $5.2
million at September 30, 2004. Premises and equipment decreased $370,000 to $4.3
million at September 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 $338,000 respectively. Goodwill is reviewed annually for impairment
and core deposit intangibles are being amortized. Deposits decreased by $1.6
million to $188.6 million and borrowed funds decreased by $413,000 during the
first nine months of 2004.
Shareholders' equity decreased $2.3 million to $33.3 million at September 30,
2004. The decrease was primarily due to repurchase of 165,000 shares of common
stock at a total cost of $3.0 million, or an average cost of $17.92 per share,
and the payment of cash dividends in the amount of $848,000 partially offset by
net income of $1.3 million, Employee Stock Ownership Plan shares earned of
$120,000 and unearned compensation amortization of $78,000.
Comparison of Operating Results for the Three Months Ended September 30, 2004
and 2003
Net income decreased $217,000 from $668,000 for the three months ended September
30, 2003 to $451,000 for the three months ended September 30, 2004. The return
on average assets for the three months ended September 30, 2004 was .70%
compared to .99% for the comparable period in 2003. The return on average equity
for the three months ended September 30, 2004 was 5.31% compared to 7.59% for
the comparable period in 2003.
13
For the three months ended September 30, 2004, interest income was $3.4 million
as compared to $3.8 million for the three months ended September 30, 2003.
Interest income decreased primarily due to a decrease in the yield on
interest-earning assets from 6.02% during the 2003 period to 5.68% during the
2004 period and a decrease in average interest-earning asset from $254.1 million
at September 30, 2003 to $242.6 million at September 30, 2004. For the three
months ended September 30, 2004, interest expense was $1.6 million as compared
to $1.7 million for the three months ended September 30, 2003. Interest expense
decreased primarily due to a decrease in the cost of interest-bearing
liabilities from 2.91% during the 2003 period to 2.86% during the 2004 period
and a decrease in average interest-bearing liabilities from $229.6 million at
September 30, 2003 to $220.1 million at September 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 September 30, 2004 was
$60,000 as compared to $118,000 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 $66,000 from $133,000 for the three months ended
September 30, 2003 to $199,000 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 September 30, 2003 to $72,000 for the 2004 three
month period. Total other expenses increased $191,000 from $1,165,000 for the
three months ended September 30, 2003 to $1,356,000 for the comparable period in
2004. This increase was primarily due to a $195,000 increase in salary and
employee benefits during the 2004 three month period. The $195,000 increase
consisted of an increase in employee salaries of $96,000 due to changes in
staffing, a $19,000 increase in expense to amortize recognition and retention
plan grants, a $20,000 increase in employee insurance expense and an increase of
$60,000 for the expense adjustment in connection with FASB 91 deferred costs
amortization as compared to the 2003 three-month period. Legal and professional
fees increased $16,000 and data processing expense increased $15,000 for the
2004 period compared to the 2003 period. Other noninterest expenses decreased
$41,000 primarily due to a net gain on the sale of repossessed real estate owned
of $54,000 being partially offset by expenses related to the costs of new
services being offered.
Comparison of Operating Results for the Nine Months Ended September 30, 2004 and
2003
Net income decreased $561,000 from $1,864,000 for the nine months ended
September 30, 2003 to $1,303,000 for the nine months ended September 30, 2004.
The return on average assets for the nine months ended September 30, 2004 was
..66% compared to .90% for the comparable period in 2003. The return on average
equity for the nine months ended September 30, 2004 was 4.96% compared to 6.83%
for the comparable nine-month period in 2003.
For the nine months ended June 30, 2004, interest income was $10.5 million as
compared to $12.0 million for the nine months ended September 30, 2003. Interest
income decreased primarily due to a decrease in the yield on interest-earning
assets from 6.11% during the 2003 period to 5.73% during the 2004 period and a
decrease in average interest-earning asset from $261.7 million at September 30,
2003 to $244.7 million at September 30, 2004. For the nine months ended
September 30, 2004, interest expense was $4.7 million as compared to $5.4
million for the nine months ended September 30, 2003. Interest expense decreased
primarily due to a decrease in the cost of interest-bearing liabilities from
3.08% during the 2003 period to 2.84% during the 2004 period and a decrease in
average interest-bearing liabilities from $233.0 million at September 30, 2003
to $221.4 million at September 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
$80,000 in the 2004 period compared to a reduction of $377,000 for the 2003
period.
14
The provision for loan losses for the nine-month period ending September 30,
2004 was $173,000 compared to a provision of $178,000 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 $257,000 from $286,000 for the nine months ended
September 30, 2003 to $543,000 for the 2004 comparable period. This increase was
primarily due to an increase in service charges on deposit account of $71,000
and an increase in income on bank owned life insurance of $102,000 for the
comparable periods. Total other expenses increased $423,000 from $3.9 million
for the nine months ended September 30, 2003 to $4.3 million for the comparable
period in 2004. Salaries and employee related expense increased $275,000 with
$48,000 being due to increased employee insurance costs and $60,000 due to the
expense adjustment in connection with FASB 91 deferred costs amortization as
compared to the 2003 nine month period with the balance being primarily due to
an increase in staffing. Other noninterest expenses increased primarily due to
the cost and growth of additional services being offered.
Asset Quality
Union Federal currently classifies loans as special mention, substandard,
doubtful and loss to assist management in addressing collection risks and
pursuant to regulatory requirements which are not necessarily consistent with
generally accepted accounting principles. Special mention loans represent
credits that have potential weaknesses that deserve management's close
attention. If left uncorrected, these potential weaknesses may result in
deterioration of the repayment prospects or Union Federal's credit position at
some future date. Substandard loans represent credits characterized by the
distinct possibility that some loss will be sustained if deficiencies are not
corrected. Doubtful loans possess the characteristics of substandard loans, but
collection or liquidation in full is doubtful based upon existing facts,
conditions and values. A loan classified as a loss is considered uncollectible.
At September 30, 2004 Union Federal had $3.3 million in classified loans as
compared to $5.7 million at December 31, 2003. Union Federal had $353,000 and
$1.7 million in loans classified as special mention as of September 30, 2004 and
December 31, 2003 respectively. In addition, Union Federal had $2.6 million and
$3.2 million of loans classified as substandard at September 30, 2004 and
December 31, 2003, respectively. At September 30, 2004 Union Federal had
$325,000 of 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 September 30, 2004, and December 31, 2003, respectively, $2.9 million
and $3.6 million of the substandard and doubtful loans were non-accrual loans.
The allowance for loan losses was $1,084,000 or .49% of loans at September 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
September 30, 2004, Union Federal had liquid assets of $11.9 million and a
liquidity ratio of 5.3%.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy information statements, and other information regarding
registrants that file electronically with the Commission, including the Company.
The address is http://www.sec.gov.
15
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Presented below, as of June 30, 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 June 30, 2004 At June 30, 2003
---------------- ----------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
- ---------------- --------------- --------------- --------------- ---------------
+300 bp $(13,152) (35)% $ (9,416) (24)%
+200 bp (8,353) (22) (5,313) (14)
+100 bp (3,829) (10) (1,703) (4)
0 bp 0 0 0 0
-100 bp 1,284 3 (747) (2)
Management believes that at September 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.
(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.
16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of common stock made by or on behalf of the Company during
the three months ended September 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
July, 2004
(7/1/04 thru 7/31/04) 5,000 $17.90 117,000 83,000
August, 2004
(8/1/04 thru 8/31/04) ---- ---- ---- ----
September, 2004
(9/1/04 thru 9/30/04) 48,000 $18.11 165,000 35,000
------ ------ ------- ------
Total 53,000 $18.09 165,000 35,000
====== ====== ======= ======
(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 up to 200,000 of the Company's outstanding shares of
common stock.
17
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
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
18
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNION COMMUNITY BANCORP
Date: November 12, 2004 By: /s/ Alan L. Grimble
-------------------------------------
Alan L. Grimble
Chief Executive Officer
Date: November 12, 2004 By: /s/ J. Lee Walden
-------------------------------------
J. Lee Walden
Chief Financial Officer
19