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, 2005
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, 2005 was 1,939,000.
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. Unregistered Sales of Equity Securities and Use of Proceeds 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 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,
2005 2004
------------------------ -------------------------
(Unaudited)
Assets
Cash $ 804,101 $ 706,107
Interest-bearing demand deposits 11,572,104 12,781,907
------------------------ -------------------------
Cash and cash equivalents 12,376,205 13,488,014
Interest-bearing deposits 115,647 115,647
Investment securities
Available for sale 2,995,180 3,037,390
Held to maturity 130,807 151,749
------------------------ -------------------------
Total investment securities 3,125,987 3,189,139
Loans, net of allowance for loan losses of $959,952 and $910,000 222,913,574 217,055,756
Premises and equipment 4,110,776 4,180,346
Federal Home Loan Bank stock 3,760,200 3,720,600
Investment in limited partnership 2,022,991 2,184,092
Foreclosed assets and real estate held for development, net 1,733,303 1,622,516
Goodwill 2,392,808 2,392,808
Interest receivable 1,116,780 1,085,532
Cash value of life insurance 6,970,746 6,899,927
Other assets 674,551 965,034
------------------------ -------------------------
Total assets $ 261,313,568 $ 256,899,411
======================== =========================
Liabilities
Deposits
Noninterest-bearing $ 3,508,359 $ 4,515,065
Interest-bearing 184,126,020 183,945,975
------------------------ -------------------------
Total deposits 187,634,379 188,461,040
Borrowings 37,881,242 32,907,898
Interest payable 476,498 651,355
Other liabilities 1,665,425 1,442,176
------------------------ -------------------------
Total liabilities 227,657,544 223,462,469
------------------------ -------------------------
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 - 1,939,000 and 1,928,000 shares 20,836,947 20,654,353
Retained earnings 14,416,483 14,401,571
Accumulated other comprehensive loss (33,106) (7,615)
Unearned employee stock ownership plan (ESOP) shares (1,115,451) (1,137,566)
Unearned recognition and retention plan (RRP) shares (448,849) (473,801)
------------------------ -------------------------
Total shareholders' equity 33,656,024 33,436,942
------------------------ -------------------------
Total liabilities and shareholders' equity $ 261,313,568 $ 256,899,411
======================== =========================
See notes to consolidated condensed financial statements.
4
UNION COMMUNITY BANCORP AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)
Three Months Ended
March 31
------------------- -------------------
2005 2004
------------------- -------------------
Interest and Dividend Income
Loans $ 3,364,481 $ 3,448,091
Investment securities 25,717 35,827
Dividends on Federal Home Loan Bank stock 39,647 44,684
Deposits with financial institutions 59,122 25,748
------------------- -------------------
Total interest and dividend income 3,488,967 3,554,350
------------------- -------------------
Interest Expense
Deposits 1,190,842 1,177,891
Federal Home Loan Bank advances 431,254 420,266
------------------- -------------------
Total interest expense 1,622,096 1,598,157
------------------- -------------------
Net Interest Income 1,866,871 1,956,193
Provision for loan losses 60,000 110,047
------------------- -------------------
Net Interest Income After Provision for Loan Losses 1,806,871 1,846,146
------------------- -------------------
Other Income
Service charges on deposit accounts 66,690 37,592
Equity in losses of limited partnerships (114,000) --
Other income 148,693 121,309
------------------- -------------------
Total other income 101,383 158,901
------------------- -------------------
Other Expenses
Salaries and employee benefits 839,806 746,153
Net occupancy expenses 91,600 80,686
Equipment expenses 79,486 90,231
Legal and professional fees 71,719 95,627
Data processing fees 105,353 101,190
Other expenses 292,592 274,650
------------------- -------------------
Total other expenses 1,480,556 1,388,537
------------------- -------------------
Income Before Income Tax 427,698 616,510
Income tax expense 139,000 172,900
------------------- -------------------
Net Income $ 288,698 $ 443,610
=================== ===================
Basic Earnings per Share $ .16 $ .23
Diluted Earnings per Share .16 .23
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, 2005
(Unaudited)
Common Stock Accumulated
----------------------- Other Unearned
Shares Comprehensive Retained Comprehensive ESOP Unearned
Outstanding Amount Income Earnings Income(Loss) Shares Compensation Total
----------- ---------- ------------- ---------- ------------- ----------- ------------- ------------
Balances, January 1, 2005 1,928,000 $20,654,353 $14,401,571 $ (7,615) $(1,137,566) $(473,801) $33,436,942
Comprehensive income
Net income for the period $288,698 288,698 288,698
Other comprehensive
income, net of tax
Unrealized losses on
securities (25,491) (25,491) (25,491)
----------
Comprehensive income $263,207
==========
Cash dividends ($.15 per
share) (273,786) (273,786)
Stock options exercised 11,000 161,800 161,800
Amortization of unearned
compensation expense 3,668 24,952 28,620
ESOP shares earned 17,126 22,115 39,241
----------- ----------- ----------- --------- ------------ ----------- -------------
Balances, March 31, 2005 1,939,000 $20,836,947 $14,416,483 $(33,106) $(1,115,451) $(448,849) $33,656,024
=========== =========== =========== ========= ============ =========== =============
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,
---------------- ---------------
2005 2004
---------------- ---------------
Operating Activities
Net income $ 288,698 $ 443,610
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 60,000 110,047
Depreciation and amortization 84,090 93,158
Investment securities accretion, net (91) (116)
Loss (gain) on sale of real estate owned (4,120) 43,333
Gain on sale of premises and equipment ---- (22,746)
Amortization of purchase accounting adjustments 6,118 9,334
Amortization of unearned compensation expense 28,620 26,146
ESOP shares earned 39,241 39,648
Net change in:
Interest receivable (31,248) (18,819)
Interest payable (174,857) (149,730)
Other adjustments 188,583 193,138
---------------- ---------------
Net cash provided by operating activities 485,034 767,003
---------------- ---------------
Investing Activities
Net change in interest-bearing deposits ---- (2,000,000)
Investment securities
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 21,033 178,384
Net changes in loans (6,129,485) (2,684,852)
Additions to real estate owned 6,666 (2,645)
Proceeds from real estate sales 80,000 188,160
Purchases of property and equipment (9,048) (46,426)
Proceeds from sale of premises and equipment ---- 264,130
Other investment activities 47,101 ----
---------------- ---------------
Net cash used in investing activities (5,983,733) (3,103,249)
---------------- ---------------
Financing Activities
Net change in
Interest-bearing demand and savings deposits (901,215) (2,514,075)
Certificates of deposit 74,554 5,764,184
Proceeds from borrowings 5,000,000 ----
Repayment of borrowings ---- (252,892)
Cash dividends (272,136) (296,565)
Stock options exercised 161,800 ----
Net change in advances by borrowers for taxes and insurance 323,887 106,009
---------------- ---------------
Net cash provided by financing activities 4,386,890 2,806,661
---------------- ---------------
Net Change in Cash and Cash Equivalents (1,111,809) 470,415
Cash and Cash Equivalents, Beginning of Period 13,488,014 11,888,342
---------------- ---------------
Cash and Cash Equivalents, End of Period $ 12,376,205 $ 12,358,757
================ ===============
Additional Cash Flows Information
Interest paid $ 1,796,953 $ 1,747,887
Income tax paid 175,000 12,583
Loans transferred to foreclosed real estate 198,805 211,866
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 Consolidated Financial Statements included in
the 2004 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, 2005, and for the
three months ended March 31, 2005 and 2004, 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, 2005, 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, 2004
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, 2005 Average Per Share
Income Shares Amount
Basic earnings per share
Income available to common stockholders $288,698 1,785,497 $0.16
Effect of dilutive stock options 29,107
------------------- ---------------- ----------------
Diluted earnings per share
Income available to common stockholders
and assumed conversions $288,698 1,814,604 $0.16
=================== ================ ================
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
=================== ================ ================
Options to purchase 97,175 shares of common stock at $18.15 per share were
outstanding at March 31, 2005, but were not included in the computation of
diluted earnings per share because the option price was greater than the average
market price of the common shares.
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,
2004 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, 2005 31, 2004
-----------------------------------------------------
Net income, as reported $288,698 $443,610
Less: Total stock-based employee compensation cost
determined under the fair value based method, net of
income taxes 21,888 5,133
-----------------------------------------------------
Pro forma net income $266,810 $438,477
=====================================================
Earnings per share:
Basic - as reported $ .16 $ .23
Basic - pro forma
$ .15 $ .23
Diluted - as reported
$ .16 $ .23
Diluted - pro forma
$ .15 $ .22
In December, 2004, the Financial Accounting Standards Board (FASB) issued an
amendment to SFAS 123 (SFAS 123R) which eliminates the ability to account for
share-based compensation transactions using Accounting Principles Board Opinion
No. 25 and generally requires that such transactions be accounted for using a
fair value-based method. SFAS 123R will be effective for the Company beginning
January 1, 2006. SFAS123R applies to all awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. The cumulative effect of initially applying this Statement, if any, is
recognized as of the required effective date.
As of the required effective date, the Company will apply SFAS 123R using either
the modified version of prospective application or the modified version of
retrospective application. Under prospective transition method, compensation
cost is recognized on or after the required effective date for the portion of
outstanding awards for which the requisite service has not yet been rendered,
based on the grant-date fair value of those awards calculated under SFAS 123 for
either recognition or pro forma disclosures. For periods before the required
effective date, a company may elect to apply a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods by
SFAS 123.
The Company is currently evaluating the effect of the recognition and
measurement provisions of SFAS 123R but believes the adoption of SFAS 123R will
not result in a material impact on the Company's results of operations or
financial condition.
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. became a subsidiary of Union Federal
until it was dissolved in 2004.
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.
9
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 had two wholly-owned subsidiaries. MSA Service Corp.
("MSA") engaged in real estate development for the construction of a seven-unit
condominium project located in Crawfordsville, Indiana. Union Federal's
investment in MSA was excluded from the calculation of regulatory capital under
OTS regulations. During the second quarter of 2004, MSA's condominium
development was completed and the remaining assets of MSA were transferred to
Union Federal. Effective as of June 23, 2004, MSA was dissolved. Union Federal
also owns UFS Service Corp. ("UFS"), whose sole asset was its investment in
Pedcor 1993, which is an Indiana limited partnership that was established to
organize, build, own, operate and lease a 48-unit apartment complex in
Crawfordsville, Indiana, known as Shady Knoll II Apartments (the "Project"). UFS
did not engage in any activity or hold any assets other than its investment in
Pedcor. During the second quarter of 2004, the assets and liabilities of UFS
were transferred to Union Federal and Union Federal is in the process of
voluntarily dissolving UFS.
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 of the Notes to Consolidated Financial Statements, presented on pages 26
through 29 of the 2004 Annual Report to Shareholders filed on March 29, 2005
with the Company's Form 10-K for the year ended December 31, 2004, contains a
summary of the Company's significant accounting policies. 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.
10
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 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 increased $4.4 million to $261.3 million at March 31, 2005 from
$256.9 million at December 31, 2004. Net loans increased $5.9 million to $222.9
million at March 31, 2005. Cash and cash equivalents decreased $1.1 million from
December 31, 2004 to March 31, 2005. Investment securities available for sale
decreased $42,000 during the three month period. Premises and equipment
decreased $70,000 to $4.1 million at March 31, 2005. In connection with the
Montgomery acquisition, the balance of goodwill and core deposit intangibles are
$2.4 million and $299,000 respectively. Goodwill is reviewed annually for
impairment and core deposit intangibles are being amortized. Deposits decreased
by $827,000 to $187.6 million and borrowed funds increased by $5.0 million to
$37.9 million during the first quarter of 2004. These borrowings were primarily
used to fund loan growth.
Shareholders' equity increased $219,000 to $33.7 million at March 31, 2005. The
increase was primarily due to net income for the three months ended March 31,
2005 of $289,000, Employee Stock Ownership Plan shares earned of $39,000,
unearned compensation amortization of $28,000, stock options exercised of
$162,000 offset by unrealized loss on available for sale securities of $25,000
and cash dividends of $274,000.
Comparison of Operating Results for the Three Months Ended March 31, 2005 and
2004
Net income decreased $155,000 from $444,000 for the three months ended March 31,
2004 to $289,000 for the three months ended March 31, 2005. The return on
average assets for the three months ended March 31, 2005 was .45% compared to
..68% for the comparable period in 2004. The return on average equity for the
three months ended March 31, 2005 was 4.26% compared to 3.44% for the comparable
period in 2004.
For the three months ended March 31, 2005, interest income was $3.5 million as
compared to $3.6 million for the three months ended March 31, 2004, a decrease
of $65,000. Interest income decreased primarily due to a decrease in the yield
on interest-earning assets from 5.82% during the 2004 period to 5.81% during the
2005 period and a decrease in average interest-earning assets from $244.3
million at March 31, 2004 to $240.4 million at March 31, 2005. The decrease in
average interest-earning assets was due to a decrease in other investment
securities of $2.5 million and a decrease in loans receivable of $1.5 million.
For the three months ended March 31, 2005, interest expense was $1,622,000 as
compared to $1,598,000 for the three months ended March 31, 2004. Interest
expense increased primarily due to an increase in the cost of interest-bearing
liabilities from 2.90% during the 2004 period to 2.96% during the 2005 period
partially offset by a decrease in average interest-bearing liabilities from
$220.5 million at March 31, 2004 to $219.1 million at March 31, 2005. The
amortization of purchase accounting adjustments reduced interest expense by
$27,000 in both the 2004 and 2005 reporting periods.
The provision for loan losses for the three months ended March 31, 2005 was
$60,000 as compared to $110,000 for the comparable period in 2004. 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. Upon review of the loan portfolio including classified loans it
was determined the balance in the allowance for loan losses was adequate at
March 31, 2005.
Total other income decreased by $58,000 from $159,000 for the three months ended
March 31, 2004 to $101,000 for the 2005 month period due to the recognition of
losses related to investments in limited partnerships offset by increases in
service charges on deposit accounts and other fee income. Due to the operating
results of the limited partnerships, equity in losses of the limited
partnerships increased to $114,000 for the three months ended March 31, 2005 as
compared to no losses recorded in the first quarter of 2004. In addition to
recording the equity in the losses of these limited partnerships, the Company
receives low income housing income tax credits. Based on expected occupancy
percentages, the Company expects to receive full tax credits by 2006. Increases
in services charges on deposit accounts of $29,000 and other income of $27,000
were primarily due to increases in services offered and other miscellaneous
fees.
Other expenses increased $92,000 from $1,389,000 for the three months ended
March 31, 2004 to $1,481,000 for the comparable period in 2005. Expenses
increased primarily due to an increase in salaries and employee benefits of
$94,000. This increase was due to an increase in employee salaries based on the
annual reviews and normal increases in the cost of benefits, primarily medical
insurance, provided to employees.
11
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 March 31, 2005 Union Federal had $3.5 million in classified loans as compared
to $3.8 million at December 31, 2004. Union Federal had $1.5 million and $1.8
million in loans classified as special mention as of March 31, 2005 and December
31, 2004 respectively. In addition, Union Federal had $1.6 million and $1.7
million of loans classified as substandard at March 31, 2005 and December 31,
2004, respectively. At both March 31, 2005 and at December 31, 2004, $325,000 in
loans was classified as doubtful and no loans were classified as loss for either
period end. At March 31, 2005 and December 31, 2004 all of the substandard and
doubtful loans totaling $1,973,000 and $2,050,000, respectively, were
non-accrual loans. The allowance for loan losses was $960,000 or .43% of loans
at March 31, 2005 as compared to $910,000 or .42% of loans at December 31, 2004.
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, 2005, Union Federal had liquid assets of $12.4 million and a liquidity ratio
of 5.6%.
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, 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 December 31, 2004 At December 31, 2003
------------------------------- -------------------------------
Changes In Rates $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
- ---------------- --------------- --------------- --------------- ---------------
+300 bp $ (9,887) (26)% $ (13,627) (34)%
+200 bp (5,970) (16) (8,638) (22)
+100 bp (2,411) (6) (3,835) (10)
0 bp 0 0 0 0
-100 bp 115 0 1,037 3
Management believes that at March 31, 2005, 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 18-20 of
the Company's 2004 Annual Report to Shareholders filed with the Company's Annual
Report on Form 10-K for the period ended December 31, 2004.
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.
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(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 have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
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. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a 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
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
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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 16, 2005 /s/ Alan L. Grimble
---------------------------------------
Alan L. Grimble
Chief Executive Officer
Date: May 16, 2005 /s/ J. Lee Walden
---------------------------------------
J. Lee Walden
Chief Financial Officer
14