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 MARCH 31, 1997
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 March 31, 1997 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 9-21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
INDIANA UNITED BANCORP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
Mar 31, Dec 31,
1997 1996
Assets
Cash and due from banks $ 10,881 $ 13,236
Interest-bearing demand deposits 66 60
Federal funds sold 350 5,900
Cash and cash equivalents 11,297 19,196
Short-term investments 100 100
Securities available for sale 80,046 81,187
Loans 228,575 219,483
Less: Allowance for loan losses 2,493 2,506
Net loans 226,082 216,978
Premises and equipment 5,920 5,919
Federal Home Loan Bank stock 1,138 1,138
Core deposit intangibles 98 106
Accrued interest receivable 2,043 1,952
Other real estate 1,000 1,000
Other assets 1,502 771
Total assets $329,226 $328,346
Liabilities
Deposits:
Non-interest bearing $ 22,625 $ 29,001
Interest bearing 255,773 247,401
Total deposits 278,398 276,402
Short-term borrowings 14,378 15,683
Long-term debt 5,000 5,000
Accrued interest payable 1,269 1,272
Other liabilities 2,081 2,240
Total liabilities 301,126 300,597
Shareholders' equity
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 (159) 95
Retained earnings 16,331 15,726
Total shareholders' equity 28,100 27,749
Total liabilities and shareholders' equity $329,226 $328,346
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
March 31,
1997 1996
Interest income:
Loans, including fees $4,885 $4,359
Investment securities:
Taxable 1,250 1,228
Tax-exempt 48 49
Federal funds sold 37 93
Interest-bearing deposits 2 8
Total interest income 6,222 5,737
Interest expense:
Deposits 2,795 2,590
Short-term borrowings 182 167
Long-term debt 99 122
Total interest expense 3,076 2,879
Net interest income 3,146 2,858
Provision for loan losses 45 27
Net interest income after provision
for loan losses 3,101 2,831
Noninterest income:
Securities gains 3 -
Other operating income 382 321
Total noninterest income 385 321
Noninterest expense 2,014 2,001
Income before income tax 1,472 1,151
Income tax expense 580 454
Net income $ 892 $ 697
Per common share:
Net income $0.71 $0.54
Cash dividends declared 0.23 0.20
Average common shares outstanding 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)
1997 1996
Balance, January 1 $27,749 $28,245
Net income 892 697
Net change in unrealized gains (losses)
on securities available for sale (254) (262)
Redemption of preferred stock - (1,000)
Cash dividends:
Preferred stock - (26)
Common stock (287) (250)
Balance, March 31 $28,100 $27,404
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three months ended
March 31
1997 1996
Cash flows from operating activities:
Net income $ 892 $ 697
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 45 27
Depreciation and amortization 183 165
Premiums and discounts amortization
on investment securities 17 27
Accretion of loan and deposit
fair value adjustments 23 25
Amortization and reduction of
core deposit intangibles 8 9
Securities gains (3) -
Net change in
Income receivable (91) 5
Interest payable (3) (56)
Other adjustments 159 (384)
Net cash provided by operating activities 1,230 515
Cash flows from investing activities:
Net change in interest-bearing time
deposit maturities (6) 5,017
Purchases of securities available for sale (2,515) (7,836)
Proceeds from maturities and paydowns
of securities available for sale 1,045 4,612
Proceeds from sales of securities available for sale 329 -
Net change in loans (9,092) 1,566
Purchases of premises and equipment (184) (106)
Other investment activities 890 (33)
Net cash provided (used) by
investing activities (9,533) 3,220
Cash flows from financing activities:
Net change in:
Noninterest bearing, NOW, money market
and savings deposits (6,420) (7,052)
Certificates of deposit 8,416 557
Short-term borrowings (1,305) (1,889)
Payments on long-term debt - (500)
Redemption of preferred stock - (1,000)
Cash dividends (287) (276)
Net cash provided (used) by financing activities 404 (10,160)
Net decrease in cash and cash equivalents (7,899) (6,425)
Cash and cash equivalents, beginning of period 19,196 18,929
Cash and cash equivalents, end of period $11,297 $12,504
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 three months ended March 31, 1997 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 March 31, 1997
U.S. Treasury $ 2,004 $ 1 $ 4 $ 2,001
Federal Agencies 25,398 170 301 25,267
State and municipal 4,011 36 15 4,032
Corporate and other securities 198 12 186
Mortgage-backed securities 48,689 480 609 48,560
Totals $80,300 $687 $941 $80,046
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Securities Available for Sale
at December 31, 1996
U.S. Treasury $ 2,006 $ 3 $ 5 $ 2,004
Federal Agencies 24,556 416 148 24,824
State and municipal 4,057 35 17 4,075
Corporate and other securities 244 2 242
Mortgage-backed securities 50,157 489 604 50,042
Totals $81,020 $943 $776 $81,187
Beyond
Within 1-5 5-10 10
1 Year Years Years Years Totals
Maturity Distributions
at March 31, 1997
U.S. Treasury $2,001 $ 2,001
Federal Agencies 2,097 $10,859 $12,311 25,267
State and municipal 522 1,863 1,319 $ 328 4,032
Corporate and
other securities 186 186
Mortgage-backed
securities 425 4,084 3,178 40,873 48,560
Totals $5,045 $16,806 $16,994 $41,201 $80,046
Weighted average yields 5.37% 5.97% 6.92% 6.66% 6.49%
*Amounts in the table above are based on scheduled maturity or call dates.
INDIANA UNITED BANCORP
FORM 10-Q
NOTE 3. Mar 31 Dec 31
1997 1996
Loans:
Commercial $ 11,084 $ 7,834
Agricultural production financing
and other loans to farmers 10,474 11,178
Commercial real estate mortgage 26,800 27,691
Residential real estate mortgage 114,632 109,962
Farm real estate 26,904 26,843
Construction and development 6,595 6,589
Consumer 30,532 27,567
Government guaranteed loans purchased 1,554 1,819
Total loans $228,575 $219,483
Underperforming loans:
Nonaccruing loans $ 320 $1,245
Accruing loans contractually past due 90 days
or more as to principal or interest payments 7 5
Allowance for loan losses:
Balances, January 1 $2,506 $2,754
Provision for losses 45 150
Recoveries on loans 20 58
Loans charged off (78) (456)
Balances, end of period $2,493 $2,506
NOTE 4.
Deposits:
Noninterest-bearing demand $ 22,625 $ 29,001
Interest-bearing demand 36,639 36,514
Money market deposit accounts 30,486 31,212
Savings 28,784 28,619
Certificates of deposit $100,000 or more 35,043 32,083
Other certificates and time deposits 124,821 118,973
Total deposits $278,398 $276,402
NOTE 5.
Short-term borrowings:
Federal funds purchased $ 2,000 $ 750
Securities sold under repurchase agreements 10,002 12,989
U.S. Treasury demand notes 2,376 1,944
Total short-term borrowings $14,378 $15,683
INDIANA UNITED BANCORP
FORM 10-Q
Item 2. Management's Discussion and Analysis (Table Dollar Amounts in
Thousands)
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. 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. As of March 31, 1997, Union Bank held assets totaling $218
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
$112 million, held by three banking offices in Floyd and Clark counties.
Both subsidiaries offer competitive commercial and consumer loan and
deposit related services. Union Bank also operates general line insurance
agencies in both Decatur and Jay counties and offers a broad range of
personal and business trust services.
Forward-Looking Statements
Except for historical information contained herein, the discussion in this
Form 10-Q quarterly report 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 of 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 pursuing
strategies which will continue to preserve it's community-focused
philosophy.
In conformance with the Plan, during 1995, the Company initiated actions
intended to build a stronger customer base in its primary markets. The
Company invested approximately $500,000 to renovate Regional Bank's main
office, providing direct lobby access of all customer service and loan
personnel, and greatly improving drive-up and electronic banking services.
Unlike many of the large super regional banks, which are closing branches
in record numbers, the Company believes it is important to maintain
community banking centers. Accordingly, an additional $500,000 was
invested to create two new branch offices. The Allison Lane branch in
Jeffersonville was opened by Regional Bank to provide greater access to
present and prospective customers in Clark County.
INDIANA UNITED BANCORP
FORM 10-Q
Union Bank opened the IGA supermarket branch in Greensburg, exclusively
providing seven-day banking and extended hours to the community. In an
effort to make its services more accessible and convenient, the Company
intends to relocate the Grantline Branch of Regional Bank. The Company is
also considering the relocation of certain Union Bank branches. These
potential changes will increase visibility, enhance drive-thru banking and
ATM accessibility, and improve ingress and egress.
A continuing tenet of the Plan is to establish and cultivate more proactive
relationships with financial analysts and market makers in the Company's
stock. As a result of our relationship-building efforts, Stifel, Nicolaus
& Company, Incorporated, based in St. Louis, Missouri, became a market
maker in Indiana United Bancorp shares in November, 1996, joining current
market makers J.J.B. Hilliard/W.L. Lyons, Inc. and NatCity Investments,
Inc..
During 1996, many technological improvements were initiated. Certain of
these improvements, such as upgrading communication lines, have provided
faster response time for customer transactions. Others represent capital
investments which allow the Company to continue to effectively compete
within a financial services industry that is becoming increasingly
dependent upon technology. In 1997, several hundred thousand dollars are
budgeted for additional technology enhancements, such as an automated voice
response information system, additional ATMs, laser printed deposit
statements, optical disk storage, and an increase in the power and memory
of the AS400 computer system which will allow for improved efficiency in
the management of computer resources.
The dynamics of the Plan assure continually evolving goals, 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
Earnings for the first quarter of 1997 increased 28% to $892,000 as
compared to the same quarter of 1996.
Noninterest income in 1997 reflects a decline in insurance commissions due
mainly to lower levels of profit sharing received from participating
companies based on claims experience. Trust income and service charge
income increased over the prior year period. Non-interest expense reflects
reduced Federal Deposit Insurance Corporation ("FDIC") assessments due to a
lower deposit insurance assessment rate.
Net income per common share for the first quarter equaled $.71 in 1997,
compared to $.54 in 1996.
The Company's return on average total assets for the first quarter was
1.11% in 1997, and .92% in 1996. Return on average common shareholders'
for the first quarter was 12.96% in 1997 and 10.23 in 1996.
INDIANA UNITED BANCORP
FORM 10-Q
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. First
quarter net interest income of $3,146,000 in 1997 increased 10% from
$2,858,000 in 1996.
Throughout 1996 and into the current year, the Company has employed a
deposit-pricing strategy focused on retaining and attracting lower cost
short-to-moderate term funds. Management correctly anticipated a
relatively flat rate environment throughout 1996 and into 1997. The
Company believes this strategy greatly enhanced 1996 net interest income
and has had a positive effect on first quarter 1997 earnings, even though
interest rates have increased slightly since year-end 1996. Although many
of the Company's peer group competitors reported flat or marginally changed
net interest margins for the full year 1996, the Company increased its net
interest margin by 23 basis points. For the first quarter of 1997, the
Company increased its net interest margin to 4.09%, or 13 basis points over
the same period last year.
INDIANA UNITED BANCORP
FORM 10-Q
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
(Taxable equivalent basis)(1) Three months ended
March 31,1997 March 31,1996
Avg. Yield/ Avg. Yield/
Bal. Interest Rate Bal. Interest Rate
ASSETS
Interest-bearing deposits $ 176 $ 2 4.61% $ 590 $ 8 5.45%
Federal funds sold 2,901 37 5.17% 6,974 93 5.36%
Securities(2):
Taxable 78,173 1,250 6.40% 79,037 1,228 6.21%
Tax-exempt 3,941 73 7.41% 3,950 74 7.49%
Total securities 82,114 1,323 6.44% 82,987 1,302 6.28%
Loans(3):
Commercial 67,794 1,601 9.58% 62,229 1,466 9.48%
Real estate mortgage 124,212 2,492 8.02% 117,954 2,349 7.97%
Instalment 30,099 761 10.25% 18,199 503 11.12%
Govt. guaranteed
loans purchased 1,605 31 7.83% 2,045 41 8.06%
Total loans 223,710 4,885 8.79% 200,427 4,359 8.72%
Total earning assets 308,901 6,247 8.13% 290,978 5,762 7.94%
Allowance for loan losses (2,500) (2,758)
Unrealized losses
on securities 36 279
Cash and due from banks 9,586 9,107
Premises and equipment 5,917 5,966
Other assets 4,226 2,737
Total assets $326,166 $306,309
LIABILITIES
Interest-bearing deposits:
Interest-bearing
demand deposits $ 36,635 254 2.81% $ 29,183 175 2.41%
Money market
investment accounts 30,394 274 3.66% 34,545 309 3.60%
Savings 28,509 226 3.21% 28,797 233 3.25%
Certificates of deposit and
other time deposits 155,449 2,041 5.32% 139,123 1,873 5.41%
Total interest-
bearing deposits 250,987 2,795 4.52% 231,648 2,590 4.50%
Short-term borrowings 14,274 182 5.17% 12,785 167 5.25%
Long-term debt 5,000 99 8.03% 5,934 122 8.27%
Total interest-
bearing liabilities 270,261 3,076 4.62% 250,367 2,879 4.62%
Noninterest bearing
demand deposits 24,336 23,980
Other liabilities 3,661 3,784
Total liabilities 298,258 278,131
Shareholders' equity 27,908 28,178
Total liabilities and
shareholders' equity $326,166 3,076 4.04%(4)$306,309 2,879 3.98%
Net interest income $3,171 4.09% $2,883 3.96%
Adjustment to convert tax exempt
securities and loans to a fully
taxable equivalent basis using
a marginal rate of 34% $ 25 $ 25
(1) Adjusted to reflect income related to securities and loans exempt
from Federal income taxes.
(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
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
First quarter noninterest income in 1997 exceeded 1996 by $64,000 or 20%.
Security gains of $3,000 were realized in the first quarter of 1997
compared to no gain or loss for the same period in 1996.
Insurance commissions continue to represent the largest component of first
quarter recurring noninterest income, equaling 23% in 1997 and 31% in
1996. The current quarter decline of $10,000 represents the loss of year-
end profit sharing programs from primary carriers due to claims experience.
Trust income increased $6,000 over 1996, due to an increase in estate
income and assets under management. The level of estate assets
administered may cause trust income to fluctuate significantly from year to
year. Service charges on deposit accounts increased in 1997 by $32,000, or
28%, primarily due to the strong growth in a new interest-bearing checking
account introduced in early 1996. Deposit growth and interest rate
variables will also affect service charge income in 1997. It is
anticipated that throughout the remainder of 1997 the Company will
experience additional deposit growth, generating even higher service charge
income.
(Dollars in thousands)
1997 1996
1st Qtr 1st Qtr
Insurance commissions $ 88 $ 98
Trust fees 56 50
Service charges on deposit accounts 148 116
Gains on sales of securities 3 -
Other income 90 57
$385 $321
Noninterest Expense
The largest component of noninterest expense is personnel expense.
Personnel expenses increased in the first quarter of 1997 by $3,000, or
less than 1%. Improvements in technology implemented throughout 1996 has
enabled the Company to effectively control staffing levels. Normal staff
salary adjustments and increased benefit costs have been incurred in both
1997 and 1996, including amounts accrued in connection with the employee
performance incentive compensation plan. Personnel expenses in 1997 are
not expected to change materially from 1996.
Deposit insurance premiums were $28,000 less in 1997 as compared to the
same prior year period, due to an overall lower rate on which the insurance
premium was calculated. Since the bank insurance fund reached a mandated
funding level in 1995, the 1996 assessment rate for the Company's
commercial bank was reduced to the $2,000 per year minimum level
permissible, but in 1997 has increased to 1.29 cents per $100 of deposits.
INDIANA UNITED BANCORP
FORM 10-Q
Through the year 1999, 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 assessed prior to September 30, 1996. After
this 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)
1997 1996
1st Qtr 1st Qtr
Salaries and employee benefits $1,118 $1,115
Premises and equipment expenses 391 382
Professional fees 52 51
Amortization of core deposit intangibles 8 9
Deposit insurance/supervisory assessment 35 63
Stationery, printing, supplies 82 67
Insurance 25 29
Postage 33 52
Other operating expenses 270 233
$2,014 $2,001
Income Taxes
The effective tax rate for the first quarter was 39% for both 1997 and
1996. The Company and its subsidiaries will file consolidated income tax
returns for 1997.
Financial Condition
Total average assets in 1997 increased $19,857,000 over the prior year.
March 31, 1997 assets increased to $329,226,000 from $328,346,000 at
December 31, 1996. Securities maturities and repayments have been used to
fund loan growth in 1997.
Average earning assets represented 95% of average total assets for the
first quarter of 1997 and 1996. Average loans represent approximately 69%
of average assets in the first quarter of 1997 compared to 65% in 1996 for
the same period. Management intends to continue it's emphasis on loan
growth throughout the remainder of 1997.
Average noninterest-bearing deposits at March 31, 1997 increased slightly
more than 1% in 1997 compared to March 31, 1996. Average interest-bearing
deposits increased $19,339,000 or 8% at March 31, 1997 compared to the same
date in 1996. Average interest-bearing demand deposits increased
$7,452,000 since March 31, 1996, primarily due to the success of a new
interest-bearing checking account introduced early in 1996. Average
savings accounts have remained stable since March 31, 1996. Average money
market investment accounts decreased $4,151,000 or 12% as compared to the
prior year due to the shifting of funds to the new interest-bearing demand
deposit. Average certificates of deposit and other time deposits increased
approximately $16,326,000 at March 31, 1997 compared to the prior year.
INDIANA UNITED BANCORP
FORM 10-Q
Long-term debt is primarily the Company's loan for the purchase of Regional
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 believes it has complied with all terms and covenants
of the loan agreement. A principal payment of $375,000 is due June 30,
1997 and the balance of the loan is due December 31, 1997. Prior to that
time, the Company intends to negotiate the refinancing of its long-term
borrowing needs.
Shareholders' equity was $28,100,000 on March 31, 1997 compared to
$27,404,000 on March 31, 1996. Book value per common share increased to
$22.46 or 6% from $21.11 at March 31, 1996 The unrealized loss on
securities available for sale, net of taxes, totaled $159,000 or $.13 per
share at March 31, 1997 compared to an unrealized loss of $67,000 or $.05
at March 31, 1996. Excluding the net unrealized losses on securities
available for sale, book value per share was $22.59 at March 31, 1997, or
an increase of 6% over the comparable book value at quarter end 1996. The
Company redeemed $1,000,000 of its preferred stock in the first quarter of
1996. The remainder of the preferred stock was redeemed in September,
1996. Commencing October 1, 1996 all earnings accrue solely to the common
shareholders.
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 ofthe 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 may be elevated
if undue concentrations of loans in specific industry segments and to out
of area borrowers are incurred. Accordingly, the Company's board of
directors regularly monitors such concentrations to determine compliance
with its restrictive loan allocation policy. The Company believes it has
no undue concentrations of loans.
Total loans increased $9,092,000 or 4% since December 31, 1996 primarily
reflecting the expansion of the consumer loan portfolio and management's
emphasis on indirect automobile financing which began in late 1995 and has
continued to the present. Total loans increased $28,788,000 or 14%, since
March 31, 1996 and consumer loans increased $11,486,000 or 60% since that
same date. The Company's emphasis on increasing consumer loans provides
greater diversification within the portfolio and 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% minimum downpayment guidelines, it does originate both fixed
rate loans and loans with little or no downpayment for a noncompeting
mortgage lender. This program assisted 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 provides fee income.
INDIANA UNITED BANCORP
FORM 10-Q
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 payments collected on
nonaccrual loans may thereafter be recognized as interest income or may be
applied as a reduction of the loan balance, as circumstances warrant. Non-
real estate secured consumer loans are not placed in nonaccruing status,
but are charged off when policy-determined delinquent status is reached.
Net chargeoffs were $58,000 at March 31, 1997 compared to $21,000 on March
31, 1996. As a percentage of average loans, net chargeoffs equaled .03%
and .01% respectively for March 31, 1997 and 1996. In prior periods, the
Company has historically outperformed its peer group's net loan loss
average. Although peer group data for the first quarter of 1997 is not yet
available, that trend should continue.
Foreclosed real estate held by the Company at March 31, 1997 consisted of a
single property. The property is expected to be sold by mid-year 1997 with
minimal gain or loss realized.
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.
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 prompt, aggressive collection actions 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 March 31, 1997, is considered adequate by management.
INDIANA UNITED BANCORP
FORM 10-Q
Summary of Allowance for Loan Losses
(Dollars in thousands) 1997 Year ended
thru December 31,
March 31 1996
Balance at beginning of period $2,506 $2,754
Chargeoffs:
Commercial 11 352
Real-estate mortgage 19 -
Consumer 48 104
Total chargeoffs 78 456
Recoveries:
Commercial - 33
Real-estate mortgage 2 1
Consumer 18 24
Total recoveries 20 58
Net chargeoffs 58 398
Provision for loan losses 45 150
Balance at end of period $2,493 $2,506
Ratio of net chargeoffs to average loans
outstanding during the period .03% .19%
Ratio of provision for loan losses to average
loans outstanding during the period .02% .07%
Ratio of allowance to total loans at
end of period 1.09% 1.14%
Allocation of the Allowance for Loan Losses
(Dollars in thousands)
March 31, 1997 December 31, 1996
Amount Percent Amount Percent
Real estate:
Residential $ 134 5% $ 144 6%
Farm real estate 13 - 13 1
Commercial 288 12 313 12
Construction and development 68 3 71 3
Total real estate 503 20 541 22
Commercial:
Agribusiness 144 6 151 6
Other commercial 128 5 203 8
Total commercial 272 11 354 14
Consumer 238 10 207 8
Unallocated 1,480 59 1,404 56
Total $2,493 100% $2,506 100%
INDIANA UNITED BANCORP
FORM 10-Q
The allocation presented in the preceding table is based primarily on
previous credit loss experience, adjusted for changes in the risk
characteristics of each category. Additional amounts are allocated based
on an evaluation of the loss potential of individual troubled loans and the
anticipated effect of economic conditions on both individual loans and loan
categories. Because the allocation is based on estimates and subjective
judgment, it is not necessarily indicative of the specific amounts or loan
categories in which losses may ultimately occur.
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.
As of December 31, 1996, all investment securities were 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 $159,000 was recorded to
adjust the AFS portfolio to current market value at March 31, 1997,
compared to a net unrealized loss of $67,000 at March 31, 1996.
At March 31, 1997, the tax equivalent yield of the investment securities
portfolio was 6.49%, representing an increase from 6.28% at March 31, 1996.
Variable rate securities comprised 49% of the total portfolio on March 31,
1997 compared to 52% on March 31, 1996. The reduction of variable rate
securities extended the weighted average repriceable life of the portfolio
at quarter end to 2.24 years in 1997 compared to 1.50 years in 1996.
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.
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 89% and 88% of total
earning assets at March 31, 1997 and 1996 respectively. Total interest-
bearing deposits averaged 91% of average total deposits at March 31, 1997
and 1996. 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 offer as
much cost advantage as previously experienced. Management is utilizing
large denomination certificates of deposit to replace a portion of customer
funds previously invested in repos.
Average short-term borrowings increased 12% at March 31, 1997 compared to
March 31, 1996.
INDIANA UNITED BANCORP
FORM 10-Q
On June 30, 1997 a $375,000 principal payment on long-term debt is due and
on December 31, 1997, the remaining balance is due. Prior to that time,
the Company intends to negotiate the refinancing of its long-term borrowing
needs.
Capital Resources
Common shareholders' equity increased $1,696,000 to $28,100,000 at March
31, 1997 as compared to March 31, 1996. Total shareholders' equity
increased by $696,000 after the redemption of $1,000,000 of preferred stock
in 1996. All of the preferred shares have now been redeemed.
The Federal Reserve Board and other regulatory agencies have 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 March 31, 1997, tier 1 capital to total assets was 8.49%.
Total capital to risk-adjusted assets was 15.09%. Both ratios
substantially exceed all required ratios established for bank holding
companies. Risk-adjusted capital levels of the Company's subsidiary banks
exceed regulatory definitions of well-capitalized institutions.
Shareholders' equity is impacted by the Company's decision to categorize
its entire 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.
The Company declared and paid common dividends of $.23 per share in the
first quarter of 1997 and $.20 for the same quarter in 1996. Book value
per common share increased to $22.46 from $21.11 in 1996. The net
adjustment for AFS securities decreased book value by $.13 and $.05 at
March 31, 1997 and 1996. 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% in 1996.
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, loans and
securities maturing within one year, and money market instruments. In
addition, the Company holds $75,001,000 of AFS securities maturing after
one year which can be sold to meet liquidity needs.
Liquidity is supported 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. Short-term funding needs can arise from
declines in deposits or other funding sources, drawdowns of loan
commitments and requests for new loans. 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 89% of total earning assets at March 31 in
each of the last two years.
INDIANA UNITED BANCORP
FORM 10-Q
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor, and creditor needs in the present economic
environment. The Company has not received any recommendations from
regulatory authorities which would materially affect liquidity, capital
resources or operations.
Interest Rate Risk
At March 31, 1997 the Company held approximately $165,208,000 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 quarter ended March
31, 1997 appears 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 will seek to attain a more neutral gap position in 1997 based
upon its the belief that the current interest rate environment will remain
relatively stable throughout 1997. In any event, the Company does not
anticipate that its earnings will be materially impacted in 1997,
regardless of the direction interest rates may trend.
Rate Sensitivity Analysis at March 31, 1997
(Dollars in thousands)
Maturing or Repricing
Over 3 -
3 Months 1 Year 3 Years 5 Years
Rate-sensitive assets $ 85,493 $ 79,715 $ 43,560 $37,839
Rate-sensitive liabilities 108,063 84,647 56,506 22,743
Rate sensitivity gap (assets
less liabilities) $(22,570) $ (4,932) $(12,946) $15,096
Rate sensitivity gap (cumulative) $(22,570) $(27,502) $(40,448) $(25,352)
Percent of total assets (cumulative) (6.9%) (8.4%) (12.3%) (7.7%)
Rate-sensitive assets/
liabilities (cumulative) 79.1% 85.7% 83.8% 90.7%
*Interest-bearing transaction and savings accounts are not presented as
immediately repriceable in the above table.
INDIANA UNITED BANCORP
FORM 10-Q
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 rates and, by such reaction, reduce the inflationary impact on
performance. Interest rates do 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
SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers
that are considered secured borrowings.
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over
transferred assets only if certain conditions are met.
This statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes
implementation guidance for assessing isolation of transferred assets and
for accounting for transfers of many specific types of transactions.
Except as amended by SFAS No. 127, this statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996 and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS
No. 127 defers for one year the effective date (a) of paragraph 15 of SFAS
No. 125 and (b) for repurchase agreement, dollar-roll, securities lending,
and similar transactions, of paragraphs 9-12 and 237(b) of SFAS No. 125.
SFAS No. 127 provides additional guidance on the types of transactions for
which the effective date of SFAS No. 125 has been deferred. It also
requires that if it is not possible to determine whether a transfer
occurring during calendar-year 1997 is part of a repurchase agreement,
dollar-roll, securities lending, or similar transaction, then paragraphs 9-
12 of SFAS No. 125 should be applied to that transfer.
Management does not expect adoption of these statements to have any
material effect on 1997 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: Report to Shareholders - First Quarter, 1997 and furnished to
Registrant's shareholders is attached to this Form 10-Q.
27: Financial Data Schedule (electronic filing only)
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
May 14, 1997 By: /s/Robert E. Hoptry
Robert E. Hoptry
Chairman and President
May 14, 1997 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 Report to Shareholders - First Quarter, 1997 and 25-26
furnished to Registrant's shareholders is attached
27 Financial Data Schedule (electronic filing only) 27