FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 0-12422
INDIANA UNITED BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562245
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
(Address of principal executive offices) (Zip Code)
(812) 663-0157
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
As of September 30, 1996 there were outstanding 1,250,897 shares,
without par value of the registrant.
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet 3
Consolidated Condensed Statement of Income 4
Consolidated Condensed Statement of Changes in
Shareholders' Equity 5
Consolidated Condensed Statement of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
INDIANA UNITED BANCORP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
Sep 30, Dec 31,
1996 1995
Assets
Cash and due from banks $ 7,935 $ 11,707
Interest-bearing demand deposits 37 72
Federal funds sold 6,000 7,150
Cash and cash equivalents 13,972 18,929
Short-term investments 100 5,100
Securities available for sale 85,042 80,651
Loans:
Loans 215,028 201,354
Less: Allowance for loan losses 2,823 2,754
Net loans 212,205 198,600
Premises and equipment 5,926 6,025
Federal Home Loan Bank stock 1,138 1,138
Core deposit intangibles 115 142
Accrued interest receivable 2,113 1,974
Other real estate - 45
Other assets 786 463
Total assets $321,397 $313,067
Liabilities
Deposits:
Non-interest bearing $ 23,046 $ 30,335
Interest bearing 247,985 232,011
Total deposits 271,031 262,346
Short-term borrowings 14,778 13,240
Long-term debt 5,500 6,000
Accrued interest payable 1,321 1,389
Other liabilities 2,029 1,847
Total liabilities 294,659 284,822
Shareholders' equity
Preferred stock, no par value:
Authorized-- 400,000 shares
Issued and outstanding--0 shares and 20,000 shares - 2,000
Common stock $1 stated value:
Authorized--3,000,000 shares
Issued and outstanding--1,250,897 shares 1,251 1,251
Paid-in surplus 10,677 10,677
Valuation adjustment-Securities AFS (298) 195
Retained earnings 15,108 14,122
Total shareholders' equity 26,738 28,245
Total liabilities and shareholders' equity $321,397 $313,067
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
Interest income:
Loans, including fees $4,639 $4,362 $13,458 $12,510
Investment securities:
Taxable 1,323 1,286 3,835 4,094
Tax-exempt 44 50 141 166
Federal funds sold 62 84 247 152
Interest-bearing deposits 2 2 11 5
Total interest income 6,070 5,784 17,692 16,927
Interest expense:
Deposits 2,775 2,713 8,025 7,595
Short-term borrowings 182 205 500 735
Long-term debt 111 142 343 474
Total interest expense 3,068 3,060 8,868 8,804
Net interest income 3,002 2,724 8,824 8,123
Provision for loan losses 30 9 90 18
Net interest income after provision
for loan losses 2,972 2,715 8,734 8,105
Noninterest income:
Securities gains - 5 - 16
Other operating income 359 329 1,093 1,098
Total noninterest income 359 334 1,093 1,114
Noninterest expense 2,562 2,002 6,608 6,269
Income before income tax 769 1,047 3,219 2,950
Income tax expense 451 417 1,420 1,166
Net income $ 318 $ 630 $ 1,799 $ 1,784
Per common share:
Net income $0.25 $0.47 $1.40 $1.34
Cash dividends declared 0.21 0.17 0.61 0.49
Avg common shares outstanding 1,250,897 1,250,897 1,250,897 1,250,897
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES TO SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
1996 1995
Balance, January 1 $28,245 $24,282
Net income 1,799 1,784
Net change in unrealized gains (losses)
on securities available for sale (493) 2,446
Redemption of preferred stock (2,000) (400)
Cash dividends:
Preferred stock (50) (108)
Common stock (763) (612)
Balance, September 30 $26,738 $27,392
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine months ended
September 30
1996 1995
Cash flows from operating activities:
Net income $ 1,799 $ 1,784
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 90 18
Depreciation and amortization 495 475
Premiums and discounts amort on inv securities 81 56
Accretion of loan and deposit fair value adjustments 76 139
Amort and reduction of core deposit intangibles 27 30
Securities gains - (16)
Net change in
Income receivable (139) (70)
Interest payable (68) 450
Other adjustments 800 775
Net cash provided by operating activities 3,161 3,641
Cash flows from investing activities:
Proceeds from int-bearing time deposit maturities 5,035 147
Purchases of securities available for sale (15,717) (6,064)
Proceeds from maturities and paydowns
of securities available for sale 11,326 5,274
Proceeds from sales of securities avail for sale - 9,779
Purchases of securities held to maturity (324)
Proceeds from maturities and paydowns
of securities held to maturity - 571
Net change in loans (13,674) (9,838)
Purchases of premises and equipment (396) (952)
Proceeds from sales of other real estate 45 100
Other investment activities 1,429 2,800
Net cash provided (used) by
investing activities (11,952) 1,493
Cash flows from financing activities:
Net change in:
Noninterest bearing, NOW, money market
and savings deposits (6,923) (10,396)
Certificates of deposit 15,608 5,131
Short-term borrowings (1,538) 2,493
Payments on long-term debt (500) (1,000)
Redemption of preferred stock (2,000) (400)
Cash dividends (813) (720)
Net cash provided (used) by financing activities 3,834 (4,892)
Net increase (decrease) in cash and cash equivalents (4,957) 242
Cash and cash equivalents, beginning of period 18,929 11,580
Cash and cash equivalents, end of period $13,972 $11,822
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollars amounts in thousands)
NOTE 1.
The significant accounting policies followed by Indiana United Bancorp
("Company") and its subsidiaries, Union Bank and Trust Company of Indiana
("Union Bank") and Regional Federal Savings Bank ("Regional Bank") for
interim financial reporting are consistent with the accounting policies
followed for annual financial reporting. All adjustments, consisting only
of normal recurring adjustments, which in the opinion of management are
necessary for a fair presentation of the results for the periods reported,
have been included in the accompanying consolidated financial statements.
The results of operations for the nine months ended September 30, 1996 are
not necessarily indicative of those expected for the remainder of the year.
NOTE 2.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available for Sale at September 30, 1996
U.S. Treasury $ 2,009 $ 4 $ 10 $ 2,003
Federal Agencies 27,581 223 306 27,498
State and Municipal 3,614 26 20 3,620
Corporate and other securities 309 21 288
Mortgage-backed securities 52,013 346 726 51,633
Totals $85,526 $599 $1,083 $85,042
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available for Sale at December 31, 1995
U.S. Treasury $ 3,016 $ 12 $ 10 $ 3,018
Federal Agencies 12,257 259 104 12,412
State and Municipal 3,955 80 1 4,034
Corporate and other securities 480 60 420
Mortgage-backed securities 60,610 582 425 60,767
Totals $80,318 $933 $600 $80,651
Beyond
Within 1-5 5-10 10
1 Year Years Years Years Totals
Maturity Distributions at
at September 30, 1996
U.S. Treasury $2,003 $ 2,003
Federal Agencies $7,059 $ 9,976 $10,463 27,498
State and Municipal 356 1,634 1,305 $ 325 3,620
Corp and other securities 288 288
Mortgage-backed securities 38 4,850 3,422 43,323 51,633
Totals $9,456 $16,460 $15,478 $43,648 $85,042
Weighted average yields 4.92% 5.90% 7.07% 6.62% 6.37%
*Amounts in the tables above are based on scheduled maturity or call dates.
INDIANA UNITED BANCORP
FORM 10-Q
NOTE 3.
Sep 30 Dec 31
1996 1995
Loans:
Commercial $ 9,468 $ 7,796
Agricultural production financing
and other loans to farmers 11,490 9,996
Farm real estate 25,827 28,910
Commercial real estate mortgage 25,048 24,129
Residential real estate mortgage 110,971 103,238
Construction and development 5,806 6,863
Consumer 24,537 18,342
Government guaranteed loans purchased 1,881 2,080
Total loans $215,028 $201,354
Underperforming loans:
Nonaccruing loans $1,456 $1,569
Accruing loans contractually past due 90 days
or more as to principal or interest payments - $34
Allowance for loan losses:
Balances, January 1 $2,754 $2,784
Provision for losses 90 30
Recoveries on loans 47 100
Loans charged off (68) (160)
Balances, end of period $2,823 $2,754
NOTE 4.
Deposits:
Noninterest bearing $ 23,046 $ 30,335
NOW accounts 25,753 30,837
Money market deposit accounts 38,735 33,811
Savings 29,142 28,616
Certificates of deposit $100,000 or more 28,835 20,385
Other certificates and time deposits 125,520 118,362
Total deposits $271,031 $262,346
NOTE 5.
Short-term borrowings:
Securities sold under repurchase agreements $12,100 $10,735
U.S. Treasury demand notes 2,678 505
Federal Home Loan Bank advances - 2,000
Total short-term borrowings $14,778 $13,240
INDIANA UNITED BANCORP
FORM 10-Q
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Indiana United Bancorp ("Company) is a registered bank holding company
incorporated under the laws of Indiana in 1983, commensurate with its
acquisition of Union Bank and Trust Company of Greensburg, Indiana. The
Company acquired The Peoples Bank, Portland, Indiana in 1987, and Regional
Federal Savings Bank, New Albany, Indiana ("Regional Bank") at the end of
1991. With the latter, Indiana United Bancorp became one of a small group
of holding companies throughout the nation to operate both commercial
banking and thrift subsidiaries. Union Bank and Trust Company of Indiana
("Union Bank") was created by the consolidation of the Greensburg and
Portland operations in 1994. It's history traces back to 1873, and it
holds Indiana state banking charter #1. At September 30, 1996, Union Bank
held assets totaling $212 million and through its nine banking offices,
ranked first in market share in Decatur County and second in Jay County.
Regional Bank's assets totaled $109 million held by three banking offices
in Floyd and Clark counties. Both subsidiaries offer competitive
commercial and consumer loan deposit related services. Union Bank also
operates a general line insurance agency and offers a broad range of
personal and business trust services.
Forward-Looking Statements
Except for historical information contained herein, the discussion in this
Quarterly Report on Form 10-Q includes certain forward-looking statements
based upon management expectations. Factors which could cause future
results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; deposit flows; the costs of
funds; general market rates of interest; interest rates on competing
investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition the Company's loan and investment portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of
anticipated or unanticipated events or circumstances after the date of such
statements.
Overview
The Company operates under the broad tenets of a long-term strategic plan
("Plan") designed to improve the Company's financial performance, expand
its competitive ability and enhance long-term shareholder value. The Plan
is premised on the belief of the Company's board of directors that the
Company can best promote long-term shareholder interests by continuing as
an independently owned community banking organization.
In conformance with the plan, during 1994, the Company consolidated the
operations of its two commercial banking subsidiaries to form Union Bank,
and sold three underperforming branches of Regional Bank. The Company
believes each of those actions increased its operating efficiency and the
latter improved its net interest margin. The plan also focused on
improving net interest margin by reducing the Company's dependence on
expensive, non-core deposits.
INDIANA UNITED BANCORP
FORM 10-Q
During 1995, the Company initiated actions which are expected to build a
stronger customer base in its primary markets. The Company invested
approximately $500,000 to renovate Regional Bank's main office and $500,000
to open two new branch offices. The renovation allows for direct lobby
access of all customer service and loan personnel, and greatly improves
drive-up and electronic banking service.
The Allison Lane branch in Jeffersonville was opened by Regional Bank to
provide greater access to present and prospective customers in Clark
County. Due to the recent completion of road improvements near this
branch, management considers 1996 to be the appropriate period to measure
the success of this branch. Union Bank opened the IGA supermarket branch
in Greensburg, exclusively providing seven-day banking and extended hours
to the community. Entry into new markets will be pursued through
exploration of acquisition opportunities.
A continuing tenet of the plan is to establish and cultivate more pro-
active relationships with financial analysts and market makers in the
Company's stock. Management met with prominent financial analysts in 1995,
and additional contacts have taken place in 1996 with those same financial
analysts and potential market makers as we continue to share Indiana United
Bancorp's success story.
The Company initiated a sales philosophy in 1995, supported by a
performance-based employee incentive program. The initial phase of this
program included sales-oriented training for all customer service
personnel. During 1996, many technological improvements have been
initiated. Certain of these improvements, such as upgrading communication
lines, has provided faster response time for customer transactions. Others
represent capital investments which will allow the Company to continue to
effectively compete in the financial services industry. The dynamics of
the plan assure continually evolving objectives, and the extent of the
Company's success will depend upon how well it anticipates and responds to
competitive changes within its markets, the interest rate environment and
other external forces.
Results of Operations
The 1997 omnibus spending package enacted on September 30, together with
companion legislation enacted earlier in the quarter, resulted in a
$474,000 reduction of net income. The legislation required a special
assessment on thrift institutions, based on March 1995 deposit levels, in
order to recapitalize the Savings Association Insurance Fund ("SAIF"),
resulting in a pre-tax charge of $545,000. Additionally, a tax advantage
thrift institutions enjoyed in the calculation of allowable bad debt
reserves was eliminated, granting forgiveness of any tax liability prior to
1987, but resulting in an income tax expense of $145,000 on the bad debt
reserve recapture since January 1, 1987.
Earnings for the third quarter of 1996 decreased 50% to $318,000 as
compared to the same quarter of 1995. Earnings for the first nine months
of 1996 increased 1% to $1,799,000 as compared to the same period in 1995.
Before the non-recurring charges, net income for the year would have been
$2,273,000, a 27% increase over the prior year. Earnings for the third
quarter of 1996 would have increased by 26% to $792,000.
INDIANA UNITED BANCORP
FORM 10-Q
Noninterest income in 1995 reflects approximately $25,000 of nonrecurring
income. Generally speaking, only minimal changes have occurred in
noninterest income in the third quarter and the first nine months of 1996
as compared to the same periods last year. Noninterest expense reflects
reduced Federal Deposit Insurance Corporation ("FDIC") assessments
(excluding the special assessment mentioned previously) due to a lower
deposit insurance assessment rate.
Net income per common share for the third quarter equaled $.25 in 1996,
compared to $.47 in 1995. Per share earnings for the first nine months of
1996 and 1995 were $1.40 and $1.34 respectively. Net income was reduced by
$.38 per common share due to non-recurring charges. Net income per common
share for the third quarter would have equaled $.63 in 1996, compared to
$.47 in 1995. Per share earnings for the first nine months of 1996 would
have been $1.78 compared to $1.34 for the same 1995 period.
The Company's return on average total assets for the third quarter was .40%
in 1996 and .81% in 1995. Year-to-date return on average total assets was
.77% and .78% for 1996 and 1995. Before the non-recurring charges, return
on average assets would have been .99% for the third quarter of 1996 and
.97% for 1996 year-to-date.
The return on average common shareholders' equity for the third quarter was
4.66% in 1996 and 9.39% in 1995. Year-to-date return on average common
shareholders' equity was 8.82% and 9.28% in 1996 and 1995. Without the non-
recurring charges, return on average common shareholders' equity would have
been 11.69% for the third quarter of 1996 and 11.21% year-to-date.
Net Interest Income
Net interest income is influenced by the volume and yield of earning assets
and the cost of interest-bearing liabilities. Net interest margin reflects
the mix of interest-bearing and noninterest-bearing liabilities that fund
earning assets, as well as interest spreads between the rates earned on
these assets and the rates paid on interest-bearing liabilities. Third
quarter net interest income of $3,002,000 in 1996 increased 10% from
$2,724,000 in 1995. The first nine months net interest income increased by
$701,000 or 9% over the same period in 1995.
Throughout much of 1995, many of the Company's local competitors offered
interest rates on long-term certificates of deposit significantly above
national market averages. The Company believed this strategy would depress
future years earnings of these competitors and elected not to engage in
such activity. The Company instead employed a deposit pricing strategy
focused on retaining and attracting shorter-term funds in anticipation of a
lower interest rate environment in 1995 and 1996. The Company believes its
ability to reprice these deposits in the near term has continued to improve
its net interest margin relative to average peer performance. As expected,
by mid 1995, many of these competitors had reduced or eliminated rate
premiums on long-term deposits and, by year end 1995, the Company's
competitive disadvantage in attracting these funds was minimal.
Although many of the Company's peer group competitors reported flat or
marginally changed net interest margins for the full year 1995, the Company
increased its net interest margin by 20 basis points. In the first nine
months of 1996, the Company increased its net interest margin to 3.98%, or
26 basis points higher than the same period last year.
INDIANA UNITED BANCORP
FORM 10-Q
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the
Allowance and Provision for Possible Loan Losses".
Noninterest Income
Noninterest income in 1996 for the first nine months and the third quarter
has changed only slightly in all categories from the same periods last
year. Securities transactions in the first nine months of 1995 resulted in
a gain of $16,000 compared to no gain or loss in the same 1996 period.
Insurance commissions continue to represent one of the largest components
of recurring year-to-date noninterest income, equaling approximately 31% in
both 1996 and 1995. Service charges on deposit accounts increased in the
first nine months of 1996 by $39,000, primarily reflecting increased
regular service charge income and NSF fees. Deposit growth and interest
rate variables are also affecting service charge income in 1996.
(Dollars in thousands)
1996 1995
Nine Nine
3rd Qtr Months 3rd Qtr Months
Insurance commissions $ 90 $ 343 $ 92 $ 349
Trust fees 50 150 44 144
Service charges on deposit accounts 136 378 116 339
Gains on sales of securities - - 5 16
Other income 83 222 77 266
Total $359 $1,093 $334 $1,114
Noninterest Expense
The largest component of noninterest expense is personnel expense.
Personnel expenses in the first nine months of 1996 decreased by $4,000, or
less than 1%, as compared to the prior year period. Normal staff salary
adjustments and increased benefit costs have been incurred in both 1996 and
1995, including amounts earned by employees in connection with the
performance incentive compensation plan. Personnel expenses in 1996 are
not expected to change materially from 1995.
Effective January 1, 1995, the Company adopted SFAS No.106, Employers'
Accounting for Postretirement Benefits Other Than Pensions, which focuses
principally on postretirement health care benefits. SFAS No.106 requires
the accrual of these benefits over the period the employee performs the
service to earn the benefits rather than the prior practice of accounting
for these benefits on the cash basis. The adoption of SFAS No.106 has not
had any material effect on operations or financial condition in 1995 and
1996.
INDIANA UNITED BANCORP
FORM 10-Q
Expenses related to premises and equipment expense, professional fees, and
stationery, printing and supplies expense increased minimally in 1996 as
compared to the first nine months of 1995.
Deposit insurance (excluding the $545,000 special assessment) was $181,000
less in the first nine months of 1996 than the prior year, due to a lower
rate and lower volume of deposits on which the insurance premium is
calculated. In mid 1995, the FDIC reduced deposit insurance premiums paid
by soundly managed banks, including Union Bank, by 83%. Since the bank
insurance fund reached a mandated funding level in 1995, the assessment
rate for the Company's commercial bank has been further reduced to the
$2,000 minimum level permissible in 1996.
After two long years of debate, Congress finally agreed to a legislative
package that would shore-up the Savings Association Insurance Fund
("SAIF"). This legislative fix was included in the 1997 omnibus spending
package enacted on September 30, 1996. It requires the thrift industry to
recapitalize SAIF with a one-time assessment, based on March 31, 1995
deposits, and delays a pro rata sharing of the FICO interest payments for
three years. The one-time assessment imposed on Regional Bank equals
approximately $545,000 and has been recorded in the third quarter earnings.
For the next three years, thrift institutions will pay approximately five
times higher assessment rates than commercial banks, 6.44 cents versus 1.29
cents per $100 of deposits, but this is a significant reduction from the 23
cents per $100 of deposits that is currently assessed. After the three
year period, commercial banks and thrifts will pay the same assessment rate
of 2.43 cents per $100 of deposits. Based on current deposit levels and
projected growth, Regional Bank will save approximately $540,000 in the
next three years due to the lower assessment rate.
(Dollars in thousands) 1996 1995
Nine Nine
3rd Qtr Months 3rd Qtr Months
Salaries and employee benefits $1,118 $3,378 $1,140 $3,382
Premises and equipment expenses 365 1,124 362 1,112
Professional fees 54 163 43 159
Amortization of core deposit intangibles 9 27 10 30
Deposit insurance/supervisory assessment 63 191 50 372
FDIC special assessment 545 545
Stationery, printing, supplies 73 222 66 217
Insurance 22 80 29 97
Postage 41 140 42 140
Other operating expenses 272 738 260 760
Total $2,562 $6,608 $2,002 $6,269
Income Taxes
On August 20, 1996 President Clinton signed into law the Small Business Job
Protection Act of 1996. Included within this tax legislation was the
repeal of bad debt provisions applicable to thrifts. The bill eliminated
the percent-of-taxable-income method for computing additions to the thrift
tax
INDIANA UNITED BANCORP
FORM 10-Q
bad debt reserves for years beginning after December 31, 1995. The bill
also required that thrift institutions recapture all or a portion of their
tax bad debt reserves added since December 31, 1987. Accordingly, the
Company recorded a $145,000 income tax expense related to the bad debt
reserve recapture for Regional Bank. The unrecaptured base year (1987)
will not be subject to recapture, as long as the institution continues to
carry on the business of banking.
Income tax expense (excluding the aforementioned bad debt reserve
recapture) for the first nine months of 1996 was $1,275,000 compared to
$1,166,000 for the same period in 1995, and the effective rate was 40% for
1996 and 1995. The Company and its subsidiaries will file a consolidated
federal income tax return for 1996
Financial Condition
September 30, 1996 total assets increased to $321,397,000 from $313,067,000
at December 31, 1995, and increased from $306,267,000 on September 30,
1995. Short-term investments were primarily used to provide funding for
loans and for the customary January withdrawals of public funds
Total average assets increased to $312,903,000 at September 30, 1996
compared to $306,079,000 at September 30, 1995. Average earning assets
represent 95% of average total assets for the first nine months of 1996 and
96% for the first nine months of 1995. Average loans represent
approximately 66% of average assets for the first nine months of 1996 and
65% for the same period in 1995. Management is continuing its emphasis on
loan growth for the remainder of 1996.
As compared to September 30, 1995, average noninterest-bearing deposits
have increased approximately $454,000 and interest-bearing deposits have
increased approximately $10,076,000. Since December 31, 1995 actual total
deposits have increased by $8,685.000 or 3%.
Long-term debt is the Company's loan for the purchase of Regional Bank and
Union Bank and is secured by the capital stock of the Company's
subsidiaries. Interest adjusts quarterly to the lender's prime rate, less
25 basis points. The Company successfully renegotiated the rate with the
lender in mid 1995 and the new rate became effective July 1, 1995. The
Company believes it has complied with all terms and covenants of the loan
agreement. The Company prepaid its scheduled payment of $375,000,
originally due June 30, 1996, plus an additional $125,000 in March 1996.
The Company intends to make an additional prepayment later this year.
Shareholders' equity was $26,738,000 on September 30, 1996 compared to
$28,245,000 on December 31, 1995 and $27,392,000 on September 30, 1995.
Book value per common share increased to $21.37 or 5% from $20.30 at
September 30, 1995 and $20.98 at year end 1995. The unrealized loss on
securities available for sale, net of taxes, totaled $298,000 or $.24 per
share at September 30, 1996 compared to an unrealized loss of $195,000 or
$.15 per share at September 30, 1995 and an unrealized gain of $195,000 or
$.15 at December 31, 1995. Excluding the net unrealized gains or losses on
securities available for sale, book value per share was $21.61 at September
30, 1996, or an increase of 6% over the comparable book value at September
30, 1995. The Company redeemed $1,000,000 of its preferred stock in March
1996, $500,000 in June 1996, and the remaining $500,000 on September 30,
1996. All future earnings will now accrue solely to the common
shareholders.
INDIANA UNITED BANCORP
FORM 10-Q
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
(Taxable equivalent basis)(1)
Nine months ended
September 30, 1996 September30, 1995
Avg. Yield/ Avg. Yield/
Bal. Int Rate Bal. Int Rate
ASSETS
Interest-bearing deposits $ 293 $ 11 5.01% $ 100 $ 5 6.68%
Federal funds sold 6,170 247 5.35% 3,432 152 5.92%
Securities(2):
Taxable 82,085 3,835 6.23% 87,580 4,094 6.23%
Tax-exempt 3,806 214 7.50% 4,427 252 7.59%
Total securities 85,891 4,049 6.29% 92,007 4,346 6.30%
Loans(3):
Commercial 62,032 4,451 9.58% 64,682 4,546 9.40%
Real estate mortgage 120,576 7,201 7.96% 115,881 6,501 7.48%
Instalment 20,789 1,688 10.85% 15,171 1,308 11.53%
Govt. guaranteed loans 1,979 118 7.96% 2,476 155 8.37%
Total loans 205,376 13,458 8.74% 198,210 12,510 8.43%
Total earning assets 297,730 17,765 7.96% 293,749 17,013 7.73%
Allowance for loan losses (2,784) (2,729)
Unrealized losses on sec (315) (1,392)
Cash and due from banks 9,490 7,489
Premises and equipment 5,970 5,753
Other assets 2,812 3,209
Total assets $312,903 $306,079
LIABILITIES
Interest-bearing deposits:
NOW and Super NOW accts $ 27,786 502 2.41% $ 30,984 627 2.71%
Money market invest accts 35,965 974 3.62% 35,608 968 3.63%
Savings 29,131 706 3.24% 25,888 632 3.26%
Certificates of deposit and
other time deposits 146,193 5,843 5.34% 136,519 5,368 5.26%
Tot int-bearing deposits 239,075 8,025 4.48% 228,999 7,595 4.43%
Short-term borrowings 12,943 500 5.16% 16,677 735 5.89%
Long-term debt 5,644 343 8.12% 7,104 474 8.92%
Tot int-bearing liab 257,662 8,868 4.60% 252,780 8,804 4.66%
Nonint bearing demand dep 24,251 23,797
Other liabilities 3,402 3,081
Total liabilities 285,315 279,658
Shareholders' equity 27,588 26,421
Total liabilities and (4) (4)
shareholders' equity $312,903 8,868 3.98% $306,079 8,804 4.01%
Net interest income $ 8,897 3.98% $ 8,209 3.72%
Adjustment to convert tax exempt
securities and loans to a fully
taxable equivalent basis using
a marginal rate of 34% $ 73 $ 86
(1) Adjusted to reflect income related to securities and loans exempt from
Federal income taxes reduced by nondeductible portion on interest expenses.
(2) Yields for investment securities available for sale are computed
based upon amortized cost.
(3) Nonaccruing loans have been included in the average balances.
(4) Total interest expense divided by total earning assets.
INDIANA UNITED BANCORP
FORM 10-Q
Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses
Loans remain the Company's largest concentration of assets and continue to
represent the greatest risk. The loan underwriting standards observed by
each of the Company's subsidiaries are viewed by management as a deterrent
to the emergence of an abnormal level of problem loans and a subsequent
increase in net chargeoffs. The Company's conservative loan underwriting
standards have historically resulted in higher loan quality and lower
levels of net chargeoffs than peer bank averages. The Company also
believes credit risks are elevated by undue concentrations of loans in
specific industry segments and loans to out of area borrowers.
Accordingly, the Company's board of directors regularly monitors such
concentrations to determine compliance with its restrictive loan allocation
policy.
Total loans increased 5% over September 30, 1995 loan totals, primarily
reflecting the expansion of the consumer loan portfolio and management's
emphasis on indirect automobile financing beginning in late 1995 and
continuing to the present. Consumer loans increased 38% at September 30,
1996 compared to the same period in 1995. The Company is continuing this
emphasis on increasing consumer loans the remainder of 1996 to provide
greater diversification within the portfolio and to generate higher yields
than residential real estate loans. Although the Company limits its
exposure to long-term fixed rate residential mortgage loans and generally
observes 20% downpayment guidelines, it is originating both fixed rate
loans and loans with little or no downpayment for a noncompeting mortgage
lender during 1996. This program will assist the Company in serving all
segments of the community without incurring unacceptable levels of credit
exposure or interest rate risk. The origination of these loans will also
provide additional fee income.
The Company regards its ability to identify and correct loan quality
problems as one of its greatest strengths. Loans are placed in a
nonaccruing status when in management's judgment the collateral value
and/or the borrower's financial condition does not justify accruing
interest. As a general rule, commercial and real estate loans are
reclassified to nonaccruing status at or before becoming 90 days past due.
Interest previously recorded but not deemed collectible is reversed and
charged against current income. Subsequent interest income on nonaccrual
loans is thereafter recognized only when collected. Non-real estate
secured consumer loans are not placed in nonaccruing status, but are
chargedoff when policy-determined delinquent status is reached.
Net chargeoffs were $21,000 at September 30, 1996 compared to $82,000 at
September 30, 1995. In prior periods the Company has historically
outperformed its peer group's net loan loss average, and although peer data
has yet to be released for the current period, that trend should continue.
The determination of the provision in any period is based on management's
continuing review and evaluation of loan loss experience, changes in the
composition of the loan portfolio, current economic conditions and the
amount of loans outstanding
Management maintains a listing of loans warranting either the assignment of
a specific reserve amount or other special administrative attention. This
listing, together with a listing of all classified loans, nonaccrual loans
and loans delinquent 30 days or more, is reviewed monthly by the board of
directors of each subsidiary.
INDIANA UNITED BANCORP
FORM 10-Q
Summary of Allowance for Loan Losses
(Dollars in thousands) 1996 Year ended
thru December 31,
Sept 30 1995
Balance at beginning of period $2,754 $2,784
Chargeoffs:
Commercial 16 91
Real-estate mortgage - 38
Installment 52 31
Total chargeoffs 68 160
Recoveries:
Commercial 30 61
Real-estate mortgage 1 27
Installment 16 12
Total recoveries 47 100
Net chargeoffs 21 60
Provision for loan losses 90 30
Balance at end of period $2,823 $2,754
Ratio of net chargeoffs to average loans
outstanding during the period .01% .03%
Ratio of provision for loan losses to average
loans outstanding during the period .04% .02%
Ratio of allowance to total loans at
end of period 1.31% 1.37%
Allocation of the Allowance for Loan Losses
(Dollars in thousands) September 30, 1996 December 31,1995
Amount Percent Amount Percent
Real estate:
Residential $ 141 5% $ 134 5%
Agricultural 13 1 14
Commercial 743 26 575 21
Construction and development 59 2 75 3
Total real estate 956 34 798 29
Commercial:
Agribusiness 144 5 117 4
Other commercial 219 8 445 16
Total commercial 363 13 562 20
Consumer 182 6 131 5
Unallocated 1,322 47 1,263 46
Total $2,823 100% $2,754 100%
INDIANA UNITED BANCORP
FORM 10-Q
The ability to absorb loan losses promptly when problems are identified is
invaluable to a banking organization. Most often, losses incurred as a
result of quick collection action are much lower than losses incurred after
prolonged legal proceedings. Accordingly, the Company observes the
practice of quickly initiating stringent collection efforts in the early
stages of loan delinquency.
The adequacy of the allowance for loan losses in each subsidiary is
reviewed at least monthly. The determination of the provision amount in
any period is based on management's continuing review and evaluation of
loan loss experience, changes in the composition of the loan portfolio,
current economic conditions, the amount of loans presently outstanding, and
the amount and composition of growth expectations. The allowance for loan
losses as of September 30, 1996, is considered adequate by management.
The Company adopted SFAS No.114 and No.118, Accounting by Creditors for
Impairment of a Loan and Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures, on January 1, 1995. Impaired loans are
measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent. The amount
of impaired loans at September 30, 1995 and 1996 was not material.
Investment Securities
Investment securities offer flexibility in the Company's management of
interest rate risk, and is the primary means by which the Company provides
liquidity and responds to changing maturity characteristics of assets and
liabilities. The Company's investment policy prohibits trading activities
and does not allow investment in high risk derivative products or junk
bonds.
Effective January 1, 1994, the Company adopted new accounting rules for
securities. The rules require that each security must be individually
designated as a "held to maturity" (HTM) security or as an "available for
sale" (AFS) security.
Late in 1995, the Financial Accounting Standards Board allowed an
unprecedented "one time" transition reclassification. While the vast
majority of the Company's investments were already designated AFS, the
Company took this opportunity to reclassify all remaining HTM securities to
AFS to provide even greater management flexibility in responding to changes
within financial markets.
As of September 30, 1996, all investment securities are classified as AFS
and are carried at fair value with unrealized gains and losses, net of
taxes, excluded from earnings and reported as a separate component of
shareholders' equity. A net unrealized loss of $298,000 was recorded to
adjust the AFS portfolio to current market value at September 30, 1996,
compared to a net unrealized loss of $195,000 at September 30, 1995.
At September 30, 1996, the yield of the investment securities portfolio was
6.37%, representing a slight increase from 6.36% at September 30, 1995 and
6.33% at year end 1995.
INDIANA UNITED BANCORP
FORM 10-Q
Variable rate securities comprised 48% of the total portfolio on September
30, 1996 compared to 55% on September 30, 1995. The weighted average life
of the portfolio was 1.96 years on September 30, 1996 as compared to 1.13
years on September 30, 1995.
SFAS No.119, Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments, requires disclosures about derivative
financial instruments - futures, forward swap and option contracts, and
other financial instruments with similar characteristics, was effective for
1995 for the Company. The Company does not have any derivative financial
instruments as defined in SFAS No.119.
Sources of Funds
The Company relies primarily on customer deposits and securities sold under
repurchase agreements, along with shareholders' equity to fund earning
assets. On an infrequent basis, Federal Home Loan Bank ("FHLB") advances
are used to provide additional funds. The Company is not aware of any
recommendations by regulatory authorities which would materially affect
liquidity, capital resources or operations.
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 88% and 86% of total
earning assets at September 30, 1996 and 1995. Total interest-bearing
deposits averaged 91% of average total deposits at September 30, 1996 and
1995. Management is continuing efforts to increase the percentage of
transaction-related deposits to total deposits due to the positive effect
on earnings.
Securities sold under repurchase agreements ("repos") are high denomination
investments utilized by public entities and commercial customers as an
element of their cash management responsibilities. Repos are not subject
to FDIC assessment so they are less costly than large certificates of
deposit. With the reduction in the FDIC assessment, repos do not have the
cost advantage previously held. Management has utilized large denomination
certificates of deposit thus far in 1996 to replace a portion of the funds
previously invested in repos. Repurchase agreement totals however, have
remained fairly steady as many long-time users still prefer this product.
Short-term borrowings increased 11% at September 30, 1996 compared to the
same period last year. The Company decreased average repos and other short-
term borrowings at September 30, 1996 to $12,943,000 or 22% below the
$16,677,000 at September 30, 1995.
The Company has continued to prepay long-term debt in 1996. Long-term debt
decreased $500,000 at September 30, 1996, of which $125,000 represented
reductions in excess of scheduled payments. Management expects to continue
its history of accelerated payments yet again in late 1996.
Capital Resources
Total shareholders' equity was $26,738,000 at September 30, 1996. The
Company redeemed $1,000,000 of preferred stock in March 1996, $500,000 in
June 1996 and the remaining $500,000 on September 30, 1996.
INDIANA UNITED BANCORP
FORM 10-Q
The Federal Reserve Board has adopted risk-based capital guidelines which
assign risk weightings to assets and off-balance sheet items. The
Company's core capital (Tier 1) consists of shareholders' equity less
goodwill, while total capital consists of core capital, certain debt
instruments and a portion of the allowance for credit losses. At September
30, 1996, Tier 1 capital to total assets was 8.30%. Total capital to risk-
adjusted assets was 15.22%. Both ratios substantially exceed all
regulatory definitions of a well-capitalized institution.
Shareholders' equity was impacted by the Company's initial decision to
categorize a large portion of its securities portfolio as AFS under
accounting rules adopted January 1, 1994. Securities in this category are
carried at fair value, and shareholders' equity is adjusted to reflect
unrealized gains and losses, net of taxes. On November 29, 1995, in
accordance with the transition reclassification allowed by the Financial
Accounting Standards Board, securities previously classified at HTM were
transferred to AFS. As of September 30, 1996, 100% of the investment
portfolio is designated as AFS.
The Company declared and paid common dividends of $.21 per share in the
third quarter of 1996 and $.17 for the same quarter last year. Book value
per common share increased 5% to $21.37 from $20.30 on September 30, 1995.
The net adjustment for AFS securities decreased book value by $.24 and $.15
at September 30, 1996 and 1995. Depending on market conditions, the
adjustment for AFS securities can cause significant fluctuations in equity.
The dividend payment rate on preferred stock was 6.34% during each of the
past two years.
Liquidity
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and
creditors. Higher levels of liquidity bear higher corresponding costs,
measured in terms of lower yields on short-term, more liquid earning
assets, and higher interest expense involved in extending liability
maturities. Liquid assets include cash and cash equivalents, money market
instruments, and securities maturing within one year. In addition, the
Company holds $75,586,000 of AFS securities maturing after one year which
can be sold to meet liquidity needs.
Liquidity is reinforced by maintaining a relatively stable funding base,
which is achieved by diversifying funding sources, extending the
contractual maturity of liabilities, and limiting reliance on volatile
short-term purchased funds. The Company's strategy is to fund assets to
the maximum extent possible with core deposits, which provide a sizable
source of relatively stable and low-cost funds. Average core deposits
funded approximately 88% of total earning assets at September 30, 1996.
Shareholders' equity and long-term debt also contribute to liquidity by
reducing the need to continually rely on short-term purchased funds. At
the end of September 1996, long-term debt totaled 2% of total assets and
21% of total shareholders' equity versus 2% of total assets and 24% of
total shareholders' equity at September 30, 1995.
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor, and creditor needs in the present economic
environment.
INDIANA UNITED BANCORP
FORM 10-Q
Interest Rate Risk
At September 30, 1996 the Company held approximately $180,549,000 in
assets, comprised of securities, loans, short-term investments, and federal
funds sold, which were interest sensitive in one year or less time
horizons. The Company's interest rate sensitivity analysis for the period
ended September 30, 1996 is presented below. Core deposits are distributed
or spread among the various repricing categories based upon historical
patterns of repricing which are reviewed periodically by management. The
assumptions regarding these repricing characteristics greatly influence
conclusions regarding interest sensitivity. Management believes its
assumptions regarding these liabilities are reasonable.
Effective asset/liability management requires the maintenance of a proper
ratio between maturing or repriceable interest-earning assets and interest-
bearing liabilities. It is the policy of the Company that rate-sensitive
assets less rate-sensitive liabilities to total assets be kept within a
range of 80% to 130%. The Company's strategy is to maintain near neutral
when rates are likely to remain stable and shifting slightly toward a
negative gap when rate are expected to decline and a positive gap when
rates are expected to rise.
The Company is continuing to pursue a strategy to attain a neutral to a
slightly negative gap position in the belief that the current interest rate
cycle has peaked. In any event, the Company does not anticipate that its
earnings will be materially impacted the remainder of 1996 regardless of
the direction interest rates may trend.
Rate Sensitivity Analysis at September 30, 1996
(Dollars in thousands) Maturing or Repricing
Over 3 -
3 Months 1 Year 3 Years 5 Years
Rate-sensitive assets $ 95,883 $ 84,666 $ 37,307 $ 35,173
Rate-sensitive liabilities 118,138 77,071 45,954 23,933
Rate sensitivity gap (assets
less liabilities) $ (22,255) $ 7,595 $ (8,647) $ 11,240
Rate sensitivity gap (cumulative) $ (22,255) $(14,660) $(23,307) $(12,067)
Percent of total assets (cumulative) (6.9%) (4.6%) (7.3%) (3.8%)
Rate-sensitive assets/
liabilities (cumulative) 81.2% 92.5% 90.3% 95.4%
*Interest-bearing transaction and savings accounts are not presented as
immediately repriceable in the above table.
Effects of Changing Prices
The Company's asset and liability structure is substantially different from
that of an industrial company in that most of its assets and liabilities
are monetary in nature. Management believes the impact of inflation on
financial results depends upon the Company's ability to react to changes in
interest rate and, by such reaction, reduce the inflationary impact on
performance. Interest rates do
INDIANA UNITED BANCORP
FORM 10-Q
not necessarily move in the same direction at the same time, or at the
same magnitude, as the prices of other goods and services. As discussed
previously, management relies on its ability to manage the relationship
between interest-sensitive assets and liabilities to protect against wide
interest rate fluctuations, including those resulting from inflation.
Accounting Changes
The FASB has issued SFAS No.121, Accounting for the Impairment of Long-
Lived Assets to be Disposed Of. This Statement establishes guidance for
recognizing and measuring impairment losses and requires that the carrying
amount of impaired assets be reduced to fair value. Long-lived assets and
certain identifiable intangibles must be reviewed for impairment whenever
events indicate that the carrying amount of the assets may not be
recoverable.
SFAS No.121 was effective in 1996 for the Company. The adoption of SFAS
No.121 did not have any material effect on results of operation or
financial condition in 1996.
SFAS No.122, Accounting for Mortgage Servicing Rights, pertains to mortgage
banking and financial institutions that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. The Statement eliminates the accounting distinction between
mortgage servicing rights that are acquired through loan origination
activities and those acquired through purchase transactions. Under this
Statement, if the Company enters into mortgage banking activities and sells
or securitizes loans and retains the mortgage servicing rights, the Company
must allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the rights) based on their relative
fair values.
SFAS No.122 was effective for the Company in 1996. Since the Company does
not currently engage in mortgage banking activities, the adoption of this
Statement did not have any material effect on 1996 operations or financial
position.
SFAS No.123, Stock Based Compensation, was effective for the Company in
1996. This Statement requires expanded disclosures rather than recognition
of compensation cost as was originally required by the exposure draft of
this Statement for fixed, at the money, options. However, employers are
encouraged to recognize the cost of stock-based compensation plans in their
financial statements. Currently, the Company has no stock-based
compensation plans and adoption of SFAS No.123 did not have any effect on
1996 financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are furnished in accordance with the provisions
of Item 601 of Regulation S-K.
20: The Financial Report dated September 30, 1996 and furnished to
Registrant's shareholders is attached to this Form 10-Q.
27: Financial Data Schedule
b) No report on Form 8-K was filed during the quarter for which this
Quarterly Report is filed.
No other information is required to be filed under Part II of this form.
INDIANA UNITED BANCORP
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INDIANA UNITED BANCORP
November 13, 1996 By: /s/Robert E. Hoptry
Robert E. Hoptry
Chairman and President
November 13, 1996 By: /s/Jay B. Fager
Jay B. Fager
Chief Financial Officer,
Treasurer and Principal
Accounting Officer
INDIANA UNITED BANCORP
FORM 10-Q
EXHIBIT INDEX
Exhibit Page
20 The Financial Report dated September 30, 1996 and 26-30
furnished to Registrant's shareholders is attached
27 Financial Data Schedule 31