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, 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 September 30, 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 9-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
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,
1997 1996
Assets
Cash and due from banks $ 10,464 $ 13,236
Interest-bearing demand deposits 74 60
Federal funds sold 7,300 5,900
Cash and cash equivalents 17,838 19,196
Short-term investments 0 100
Securities available for sale 71,422 81,187
Loans 244,237 219,483
Less: Allowance for loan losses 2,670 2,506
Net loans 241,567 216,977
Premises and equipment 6,355 5,919
Federal Home Loan Bank stock 1,138 1,138
Core deposit intangibles 83 106
Accrued interest receivable 2,186 1,952
Other real estate - 1,000
Other assets 1,462 771
Total assets $342,051 $328,346
Liabilities
Deposits:
Non-interest bearing $ 25,263 $ 29,001
Interest bearing 260,497 247,401
Total deposits 285,760 276,402
Short-term borrowings 17,885 15,683
Long-term debt 4,625 5,000
Accrued interest payable 1,404 1,272
Other liabilities 2,293 2,240
Total liabilities 311,967 300,597
Shareholders' equity
Preferred stock
Authorized-400,000 shares
Issued and outstanding-None - -
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 487 95
Retained earnings 17,669 15,726
Total shareholders' equity 30,084 27,749
Total liabilities and shareholders' equity $342,051 $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 Nine months ended
September 30, September 30,
1997 1996 1997 1996
Interest income:
Loans, including fees $5,332 $4,639 $15,388 $13,458
Investment securities:
Taxable 1,150 1,323 3,616 3,835
Tax-exempt 46 44 143 141
Federal funds sold 104 62 250 247
Interest-bearing deposits 0 2 1 11
Total interest income 6,632 6,070 19,398 17,692
Interest expense:
Deposits 3,048 2,775 8,832 8,025
Short-term borrowings 177 182 510 500
Long-term debt 95 111 297 343
Total interest expense 3,320 3,068 9,639 8,868
Net interest income 3,312 3,002 9,759 8,824
Provision for loan losses 58 30 183 90
Net interest income after provision
for loan losses 3,254 2,972 9,576 8,734
Noninterest income:
Securities losses (83) - (80) -
Other operating income 426 359 1,450 1,093
Total noninterest income 343 359 1,370 1,093
Noninterest expense 2,097 2,562 6,201 6,608
Income before income tax 1,500 769 4,745 3,219
Income tax expense 594 451 1,877 1,420
Net income $ 906 $ 318 $ 2,868 $ 1,799
Per common share:
Net income $0.72 $0.25 $2.29 $1.40
Cash dividends declared 0.26 0.21 0.74 0.61
Average 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)
1997 1996
Balance, January 1 $27,749 $28,245
Net income 2,868 1,799
Net change in unrealized gains (losses)
on securities available for sale 392 (493)
Redemption of preferred stock - (2,000)
Cash dividends:
Preferred stock - (50)
Common stock (925) (763)
Balance, September 30 $30,084 $26,738
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
1997 1996
Cash flows from operating activities:
Net income $ 2,868 $ 1,799
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 183 90
Depreciation and amortization 537 495
Premiums and discounts amortization
on investment securities 42 81
Amortization of loan and deposit
fair value adjustments 79 76
Amortization and reduction of
core deposit intangibles 23 27
Securities losses 80 -
Net change in
Income receivable (234) (139)
Interest payable 132 (68)
Other adjustments 186 (705)
Net cash provided by operating activities 3,896 1,656
Cash flows from investing activities:
Net change in short-term investments 86 5,035
Purchases of securities available for sale (2,376) (15,717)
Proceeds from maturities and paydowns
of securities available for sale 10,106 11,326
Proceeds from sales of securities
available for sale 2,035 -
Net change in loans (24,754) (13,674)
Purchases of premises and equipment (973) (396)
Proceeds from other real estate 1,000 45
Other investment activities (638) (141)
Net cash used by
investing activities (15,514) (13,522)
Cash flows from financing activities:
Net change in:
Noninterest bearing, NOW, money market
and savings deposits (1,550) (6,923)
Certificates of deposit 10,908 15,608
Short-term borrowings 2,202 1,538
Payments on long-term debt (375) (500)
Redemption of preferred stock - (2,000)
Cash dividends (925) (814)
Net cash provided by financing activities 10,260 6,909
Net decrease in cash and cash equivalents (1,358) (4,957)
Cash and cash equivalents, beginning of period 19,196 18,929
Cash and cash equivalents, end of period $17,838 $13,972
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, 1997 are
not necessarily indicative of those expected for the remainder of the year.
NOTE 2:
On October 8, 1997, the Company signed a definitive agreement to acquire
P.T.C. Bancorp ("PTC"), Brookville, Indiana in a proposed transaction
viewed as a merger of equals with the combined entity retaining the name of
Indiana United Bancorp. The definitive agreement provides that PTC
shareholders (including option holders) will receive 1.075 shares of
Company common stock in exchange for each share owned or option held of PTC
common stock.
The consolidated company will hold assets totaling almost $650 million and
will have market capitalization of more than $100 million based upon
current market values. Upon completion of the merger, Indiana United
Bancorp will operate 29 offices in 12 counties throughout the eastern and
southern regions of Indiana.
The proposed transaction is subject to various regulatory approvals and the
approval of the shareholders of both organizations. It is expected that
the transaction will be accounted for as a "pooling of interests".
Although the Company anticipates that the merger will be consummated during
the first quarter of 1998, there can be no assurance that the transaction
will be completed.
Note 3:
The Company is in process of preparing a registration statement to be filed
with the Securities and Exchange Commission ("SEC") for the purpose of
issuing $18,500,000 Cumulative Trust Preferred Securities ("Preferred
Securities"). The Preferred Securities will represent undivided beneficial
interests in the assets of a statutory business trust being established by
the Company. The Company will acquire all the common securities of the
business trust. The assets of the business trust will consist solely of
Subordinated Debentures issued by the Company and purchased with the
proceeds from the issuance of the Preferred Securities. The Company will
guarantee the payment of the Preferred Securities.
Under the risk-based guideline established by the Federal Reserve, a
portion of the proceeds from the sale of Preferred Securities are expected
to qualify as Tier 1 or core capital. These guidelines provide that the
Preferred Securities cannot exceed 25% of total Tier 1 capital of the
Company, however; the amount in excess of the 25% limitation will
constitute Tier 2, or supplementary capital.
INDIANA UNITED BANCORP
FORM 10-Q
For financial reporting purposes, the business trust will be treated as a
wholly owned subsidiary of the Company and the accounts of the business
trust will be included in the consolidated financial statements of the
Company. The Preferred Securities will be presented as a separate line
item in the consolidated balance sheet and interest on the Preferred
Securities will be recorded as an expense in the consolidated statement of
income. In addition, appropriate disclosures in the footnotes to the
consolidated financial statements describing the Preferred Securities,
Subordinated Debentures, business trust and the guarantee will be
presented.
INDIANA UNITED BANCORP
FORM 10-Q
Item 2. Management's Discussion and Analysis (Table Dollar Amounts in
Thousands)
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.
Recent Developments
PTC Merger
On October 8, 1997, the Company signed a definitive agreement to acquire
P.T.C. Bancorp ("PTC"), Brookville, Indiana in a proposed transaction
viewed as a merger of equals, with the combined entity retaining the name
of Indiana United Bancorp. The definitive agreement provides that PTC
shareholders (including option holders) will receive 1.075 shares of
Company common stock in exchange for each share owned or option held of PTC
common stock.
The consolidated company will hold assets totaling almost $650 million and
will have market capitalization of more than $100 million based upon
current market values. Upon completion of the merger, Indiana United
Bancorp will operate 29 offices in 12 counties throughout the eastern and
southern regions of Indiana.
The proposed transaction is subject to various regulatory approvals and the
approval of the shareholders of both organizations. It is expected that
the transaction will be accounted for as a "pooling of interests".
Although the Company anticipates that the merger will be consummated during
the first quarter of 1998, there can be no assurance that the transaction
will be completed.
Proposed Issuance of Cumulative Trust Preferred Securities
The Company is in process of preparing a registration statement to be filed
with the SEC for the purpose of issuing $18,500,000 Cumulative Trust
Preferred Securities ("Preferred Securities"). The Preferred Securities
will represent undivided beneficial interests in the assets of a statutory
business trust being established by the Company. The Company will acquire
all the common securities of the business trust. The assets of the
business trust will consist solely of Subordinated Debentures issued by the
Company and purchased with the proceeds from the issuance of the Preferred
Securities. The Company will guarantee the payment of the Preferred
Securities.
INDIANA UNITED BANCORP
FORM 10-Q
Under the risk-based guideline established by the Federal Reserve, proceeds
from the sale of Preferred Securities are expected to qualify as Tier 1 or
core capital. These guidelines provide that the Preferred Securities
cannot exceed 25% of total Tier 1 capital of the Company, however; the
amount in excess of the 25% limitation will constitute Tier 2, or
supplementary capital.
The net proceeds to be received by the Company from these transactions will
be used for financing growth, which may include branch acquisitions, the
establishment of de novo branches and/or acquisitions of other financial
institutions. In addition, a portion of the proceeds may be used for
general corporate purposes, including investments in or advances to Union
Bank and/or Regional Bank and/or, following the completion of the PTC
Merger, People's Trust. Pending any such use, the net proceeds may be
invested in short-to-medium-term investments
Facilities and Technology
In an effort to make its services more accessible and convenient, the
Company intends to relocate the Grantline Branch of Regional Bank.
Construction of the new facility is currently in progress, and should be
completed in the fourth quarter of 1997. 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.
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 financial services industry that is becoming increasingly dependent
upon technology. In 1997, several hundred thousand dollars is being
invested in 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.
Results of Operations
Summary. Earnings for the third quarter of 1997 increased 185% to $906,000
compared to the same quarter of 1996. Earnings for the first nine months
of 1997 increased 59% to $2,868,000 compared to the same period in 1996.
Legislation enacted on September 30, 1996 together with companion
legislation enacted earlier in the quarter resulted in a $474,000 reduction
in 1996 net income for the three-month and nine-month periods ended
September 30, 1996. 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 tax 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.
Before the nonrecurring charges, net income for the first nine months of
1996 would have been $2,273,000 and earnings for the third quarter would
have been $792,000. Compared with adjusted 1996 income, earnings for the
third quarter of 1997 increased 14% and year-to-date earnings increased
26%.
INDIANA UNITED BANCORP
FORM 10-Q
Noninterest income in 1997 reflects approximately $179,000 of nonrecurring
income from the sale of other real estate owned. Insurance commissions in
1997 declined due mainly to lower levels of profit sharing income based on
claims experience. Trust income and service charge income for 1997
increased over the prior year period. Noninterest expense reflects
increased salaries and employee benefits and reduced Federal Deposit
Insurance Corporation ("FDIC") assessments (excluding the special 1996
assessment) due to a lower assessment rate.
Net income per common share for the third quarter equaled $.72 in 1997,
compared to $.25 in 1996. Per share earnings for the first nine months of
1997 and 1996 were $2.29 and $1.40 respectively. Net income for 1996 was
reduced by $.38 per common share due to the nonrecurring charges for the
special SAIF assessment and expense related to the tax law change.
Excluding the nonrecurring charges, net income per common share for the
third quarter of 1996 would have equaled $.63 and nine-month net income per
common share would have equaled $1.78.
The Company's return on average total assets for the third quarter was
1.06% in 1997, and .40% in 1996. Year-to-date return on average total
assets was 1.14% and 0.77% for 1997 and 1996. Before the nonrecurring
charges, return on average assets in 1996 would have been .99% for the
third quarter and .97% year-to-date.
Return on average common shareholders' equity for the third quarter was
12.17% in 1997 and 4.66% in 1996. Year-to-date return on average
shareholders' equity was 13.39% and 8.82% for 1997 and 1996. Without the
nonrecurring charges, return on average common shareholders' equity in 1996
would have been 11.69% for the third quarter and 11.21% year-to-date.
Net Interest Income
The volume and yield of earning assets and the cost of interest-bearing
liabilities influence net interest income. 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 $3,312,000 in 1997 increased 10% from
$3,002,000 in 1996. The first nine months of net interest income increased
by $935,000 or 11% over the same period in 1996.
Throughout 1996 and 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 thus far into 1997. The Company
believes this strategy greatly enhanced 1996 net interest income and has
had a positive effect on the first nine months of 1997 earnings, even
though interest rates have increased slightly since year-end 1996. In the
first nine months of 1997, the Company increased its net interest margin to
4.13% or 15 basis points over the same period last year.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the
Allowance and Provision for Possible Loan Losses".
INDIANA UNITED BANCORP
FORM 10-Q
Noninterest Income
Noninterest income in the first nine months of 1997 exceeded the prior year
period by $277,000 or 25%. Nonrecurring noninterest income of $179,000 was
realized on the sale of real estate acquired in 1996 in lieu of
foreclosure. Net security losses of $80,000 were realized in the first
nine months of 1997 compared to no gain or loss for the same period in
1996. Third quarter noninterest income declined from the same period last
year by $16,000 primarily as a result of securities losses of $83,000
during the third quarter of 1997.
Service charges on deposit accounts represent the largest component of the
first nine months of 1997 recurring noninterest income, equaling 32% in
1997 and 35% in 1996. Service charges on deposit accounts in the first
nine months of 1997 increased by $84,000, or 22%, primarily due to the
strong growth in a new interest-bearing checking account introduced in
early 1996. Deposit growth, interest rate variables, and NSF charges have
also affected 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. Insurance
commissions declined $27,000 in the first nine months of 1997 compared to
the same period last year. This decline represents the loss of year-end
profit sharing programs from primary carriers due to poor claims experience
and to a lower volume of business. Trust income increased $19,000 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.
(Dollars in thousands)
1997 1996
Nine Nine
3rd Qtr Months 3rd Qtr Months
Insurance commissions $102 $ 316 $ 90 $ 343
Trust fees 56 169 50 150
Service charges on deposit accounts 157 462 136 378
Loss on sales of securities (83) (80) - -
Other income 111 503 83 222
$343 $1,370 $359 $1,093
Noninterest Expense
The largest component of noninterest expense is personnel expense.
Personnel expenses increased in the first nine months of 1997 by $105,000,
or 3%. Improvements in technology implemented in the past 21 months has
enabled the Company to effectively control staffing levels during the
periods presented. Normal staff salary adjustments and increased benefit
costs have been incurred in both 1997 and 1996. Both periods include
amounts accrued in connection with the employee performance incentive
compensation plan. Personnel expenses in 1997 are not expected to change
materially from 1996.
The 1997 omnibus-spending package enacted on September 30, 1996 required
the thrift industry to recapitalize SAIF with a one-time assessment, based
on March 31, 1995 deposits, and delayed a pro rata sharing of the Financing
Corp. bond interest payments for three years. The one-time assessment
imposed on Regional Bank equaled approximately $545,000 and reduced 1996
third quarter earnings.
INDIANA UNITED BANCORP
FORM 10-Q
Deposit insurance premiums (excluding the $545,000 special assessment in
1996) were $87,000 less in 1997 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 increasing to 1.29 cents per $100
of deposits in 1997.
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.
Commencing in the year 2000, 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 three-year period through 1999 due to the lower assessment
rate.
(Dollars in thousands) 1997 1996
Nine Nine
3rd Qtr Months 3rd Qtr Months
Salaries and employee benefits $1,198 $3,483 $1,118 $3,378
Premises and equipment expenses 390 1,168 365 1,124
Professional fees 55 161 54 163
Amortization of core deposit intangibles 7 23 9 27
Deposit insurance/supervisory assessment 35 104 63 191
FDIC special assessment - - 545 545
Stationery, printing, supplies 86 259 73 222
Insurance 25 77 22 80
Postage 43 138 41 140
Other operating expenses 258 788 272 738
$2,097 $6,201 $2,562 $6,608
Income Taxes
In August 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996. Included within that tax legislation was the
repeal of certain bad debt provisions applicable to thrifts. The percent-
of-taxable-income method for computing additions to the thrift tax bad debt
reserves for years beginning after December 31, 1995 was eliminated. 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 in the third quarter of
1996 related to the tax bad debt reserve recapture for Regional Bank. The
unrecaptured base year reserve at December 31, 1987 will not be subject to
recapture as long as the institution continues to carry on the business of
banking.
The effective tax rate (excluding the aforementioned bad debt reserve
recapture) for the first nine months was approximately 40% for both 1997
and 1996. The Company and its subsidiaries will file consolidated income
tax returns for 1997.
INDIANA UNITED BANCORP
FORM 10-Q
Financial Condition
Total assets at September 30, 1997 increased $13,705,000 to $342,051,000
from $328,346,000 at December 31, 1996.
Total average loans for the first nine months of 1997 have increased
$27,210,000 or 13% and average instalment loans have increased $14,569,000
or 70% compared to the same period in 1996. Average loans represent
approximately 69% of average assets in the first nine months of 1997
compared to 66% for the same period in 1996. Management intends to
continue to emphasize loan growth throughout the remainder of 1997.
Securities maturities and increased deposits have been used to fund loan
growth in 1997.
Average earning assets represented 95% of average total assets for the
first nine months of 1997 and 1996.
Average noninterest-bearing deposits for the first nine months of 1997
increased 7% compared to the same period in 1996. Average interest-bearing
deposits increased $19,721,000 or 8% for the 1997 period compared to 1996.
Average interest-bearing demand deposits increased $10,098,000 for the nine
months in 1997 compared to 1996, primarily due to the success of a new
interest-bearing checking account introduced early in 1996. Average
savings accounts have decreased slightly for the 1997 period compared to
1996. Average money market investment accounts decreased $5,437,000 or 15%
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 $15,501,000 for the nine months in 1997
compared to the prior year period.
Long-term debt is primarily the balance of the Company's loan for the
purchase of Regional Bank. A principal payment of $375,000 was paid on
June 30, 1997. During the third quarter of 1997, the Company negotiated
the refinancing of the balance of its outstanding debt of $4,625,000, which
was originally due December 31, 1997. The new note will mature on July 1,
2002 and requires a principal payment of $125,000 on January 1, 1998 and
$500,000 semiannual payments thereafter on July 1 and January 1 until
maturity. Interest will be paid quarterly. The loan shall bear interest
at a rate equal to the lender's prime rate, less 25 basis points and at the
Company's option, all or any portion of the outstanding balance may bear
interest at a fixed rate equal to 150 basis points above
LIBOR for one, two, three, six or twelve month interest periods. The loan
is secured by the capital stock of the Company's subsidiaries and the loan
agreement contains restrictions on debt, guarantees and mergers, in
addition to other affirmative and negative covenants. The Company believes
it has complied with all terms and covenants of the loan agreement.
Shareholders' equity was $30,084,000 on September 30, 1997 compared to
$27,749,000 at year-end 1996. Book value per common share increased to
$24.05 or 8% from $22.18 at December 31, 1996 The unrealized gain on
securities available for sale, net of taxes, totaled $487,000 or $.39 per
share at September 30, 1997 compared to an unrealized gain of $95,000 or
$.07 at year end 1996. Excluding the net unrealized gains on securities
available for sale, book value per share was $23.66 at September 30, 1997
or an increase of 7% over the comparable book value at year end 1996. The
Company redeemed $1,000,000 of its preferred stock in March 1996, $500,000
in June 1996 and the remainder in September 1996. Commencing October 1,
1996 all earnings accrue solely to the common shareholders.
INDIANA UNITED BANCORP
FORM 10-Q
Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses
Total loans increased $24,754,000 or 11% 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. Consumer loans increased to $42,340,000 or 54%
since December 31,1996. The Company's emphasis on increasing consumer loans
provides greater diversification within the portfolio and generates higher
yields than residential real estate loans.
Net chargeoffs were $19,000 at September 30, 1997 compared to net
chargeoffs of $21,000 at September 30, 1996. As a percentage of average
loans, net chargeoffs equaled .01% respectively for September 30, 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 third
quarter of 1997 is not yet available, that trend should continue.
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, 1997 is considered adequate by management.
Summary of Allowance for Loan Losses
(Dollars in thousands) 1997 Year ended
Through December 31,
Sep 30 1996
Balance at beginning of period $2,506 $2,754
Chargeoffs (189) (456)
Recoveries 170 58
Provision for loan losses 183 150
Balance at end of period $2,670 $2,506
Ratio of net chargeoffs to average loans
outstanding during the period .01% .19%
Ratio of provision for loan losses to average
loans outstanding during the period .08% .07%
Ratio of allowance to total loans at
end of period 1.09% 1.14%
Investment Securities
The Company's investment policy prohibits trading activities and does not
allow investment in high-risk derivative products or junk bonds. All
investment securities are classified as "available for sale" ("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 gain of $815,000 was recorded to
adjust the AFS portfolio to current market value at September 30, 1997
compared to a net unrealized gain of $167,000 at December 31, 1996.
INDIANA UNITED BANCORP
FORM 10-Q
At September 30, 1997, the tax equivalent yield of the investment
securities portfolio was 6.60%, compared to 6.45% at December 31, 1996.
Variable rate securities comprised 49% of the total portfolio on September
30, 1997 compared to 50% on December 31, 1996. The weighted average
repriceable life of the portfolio at quarter end was 2.26 years in 1997
compared to 2.06 years at year-end 1996.
Sources of Funds
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 90% and 88% of total
earning assets at September 30, 1997 and 1996 respectively. Total interest-
bearing deposits averaged 91% of average total deposits at September 30,
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.
Capital Resources
Common shareholders' equity increased $2,335,000 to $30,084,000 at
September 30, 1997 compared to December 31, 1996. The Company redeemed
$1,000,000 of its preferred stock in March 1996, $500,000 in June 1996 and
the remaining $500,000 in September 1996.
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 September 30, 1997, Tier 1 capital to total assets was 8.56%.
Total capital to risk-adjusted assets was 14.62%. 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.
The Company declared and paid common dividends of $.26 per share in the
third quarter of 1997 and $.21 for the same quarter in 1996. Common
dividends declared and paid year-to-date total $.74 and $.61 per share
respectively for 1997 and 1996. Book value per common share increased to
$24.05 from $22.18 at year-end 1996. The net adjustment for AFS securities
increased book value by $.39 at September 30, 1997 compared to $.07 at
December 31, 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 $69,766,000 of AFS securities maturing after
one year which can be sold to meet liquidity needs.
INDIANA UNITED BANCORP
FORM 10-Q
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 may 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 90% and 88% of total earning assets at
September 30, 1997 and 1996 respectively.
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 September 30, 1997 the Company held approximately $174,179,000 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 at September 30, 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 are kept within a
range of 80% to 130%.
Rate Sensitivity Analysis at September 30, 1997
(Dollars in thousands) Maturing or Repricing
Over 3 -
3 Months 1 Year 3 Years 5 Years
Rate-sensitive assets $ 97,319 $ 76,860 $ 41,380 $ 40,711
Rate-sensitive liabilities 108,452 96,198 51,308 24,036
Rate sensitivity gap (assets
less liabilities) $(11,133) $(19,338) $( 9,928) $ 16,675
Rate sensitivity gap (cumulative) $(11,133) $(30,471) $(40,399) $(23,724)
Percent of total assets (cumulative) (3.3%) (8.9%) (11.8%) (6.9%)
Rate-sensitive assets/
liabilities (cumulative) 89.7% 85.1% 84.2% 91.5%
*Interest-bearing transaction and savings accounts are not presented as
immediately repriceable in the above table.
Other
The Securities and Exchange Commission maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission, including the
Company, and that address is (http://www.sec.gov).
INDIANA UNITED BANCORP
FORM 10-Q
Accounting Changes
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share, is effective for the Company's 1997 annual financial statements.
This statement simplifies the calculations of earnings per share. The
Company does not expect the new disclosure for basic earnings per share
will be different from primary earnings per share as currently calculated
and disclosed. Additional disclosures related to the potential dilution
that could occur from unexercised stock options will not affect the Company
since it currently has no stock options plans.
SFAS No. 129, Disclosure of Information about Capital Structure, continues
the current requirements to disclose certain information about an entity's
capital structure found in various standards. This statement consolidates
specific disclosure requirements from those standards. SFAS No. 129 is
effective for the Company's 1997 annual financial statements.
Management does not expect adoption of these statements to have any
material effect on 1997 financial statements.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
SFAS No. 130 will also require us to (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of a statement of financial position.
This Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods, if
provided for comparative purposes, is required.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for the way public business enterprises
report information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
This Statement does not apply to nonpublic enterprises or to not-for-profit
organizations.
SFAS NO. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that it is used internally for evaluating segment
performance and deciding how to allocate resources to segments.
INDIANA UNITED BANCORP
FORM 10-Q
This Statement requires that a public business enterprise report a measure
of segment profit or loss, certain specific revenue and expense items and
segment assets. It requires reconciliation of total segment revenues,
total segment profit or loss, total segment assets and other amounts
disclosed for segments to corresponding amounts in the enterprise's general
purpose financial statements. This Statement also requires that a public
business report descriptive information about the way that the operating
segments used in reporting were determined, the products and services
provided by the operating segments, differences between the measurements
used in reporting segment information and those used in the enterprise's
general purpose financial statements and changes in the measurement of
segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. This Statement need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial
year of application is to be reported in financial statements for interim
periods in the second year of application.
Management has not yet determined the effect of implementing SFAS Nos. 130
and 131.
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.
10.2: First Amendment to Loan Documents dated September 23, 1997
between Indiana United Bancorp and National City Bank of
Indiana (f/k/a Merchants National Bank and Trust Company
of Indianapolis).
10.3: Commercial Note dated September 23, 1997 in the face
principal amount of $4,625,000 made by Indiana United
Bancorp to the order of National City Bank of Indiana.
20: Report to Shareholders - Third 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
November 12, 1997 By: /s/Robert E. Hoptry
Robert E. Hoptry
Chairman and President
November 12, 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
10.2 First Amendment to Loan Documents dated 23-27
September 23, 1997 between Indiana United
Bancorp and National City Bank of Indiana
(f/k/a Merchants National Bank and Trust
Company of Indianapolis)
10.3 Commercial Note dated September 23, 1997 in the 28-37
face principal amount of $4,625,000 made by
Indiana United Bancorp to the order of National
City Bank of Indiana
20 Report to Shareholders - Third Quarter, 1997 and 38-39
furnished to Registrant's shareholders is attached
27 Financial Data Schedule (electronic filing only)