FRONT COVER
Indiana United Bancorp
1997 Annual Report
INSIDE FRONT COVER
Contents
Financial Highlights 1
Message to Shareholders 2
Management's Discussion and Analysis 4
Report of Management on Responsibility
for Financial Information 19
Report of Independent Certified Public Accountants 19
Financial Statements 20
Notes to Financial Statements 23
Management Directory 31
Shareholder Information IBC
Indiana United Bancorp ("Company") is a registered bank holding company
incorporated under the laws of Indiana in 1983, concurrent 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 December 31, 1997, Union
Bank held assets totaling $234 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 $135 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.
Financial Highlights
(Dollar amounts in thousands, Percent
except per share data) 1997 1996 Change
For the Year
Net interest income $13,144 $11,961 9.9
Provision for loan losses 283 150 88.7
Net income 3,775 2,693 40.2
Per Common Share
Net income $3.02 $2.11 43.1
Dividends paid 1.01 .83 21.7
Book value - end of period
Excluding SFAS No. 115 adjustment 24.12 22.11 9.1
Including SFAS No. 115 adjustment 24.60 22.18 10.9
Market price - end of period 45.50 29.06 56.6
At Year End
Total assets $371,751 $328,346 13.2
Total loans 247,454 219,483 12.7
Allowance for loan losses 2,731 2,506 9.0
Total deposits 289,821 276,402 4.9
Common shareholders' equity 30,777 27,749 10.9
Financial Ratios
Return on average assets 1.11% .85% 30.6
Return on average common
shareholders' equity 12.97 9.86 31.5
Net interest margin 4.12 4.00 3.0
Tier 1 capital to total assets 10.71 8.36 28.1
Total capital to risk-adjusted assets 24.00 15.60 53.8
Number of common shares outstanding 1,250,897 1,250,897
Number of common shareholders 2,032 1,888 7.6
Number of full-time equivalent employees 148 143 3.5
World Class Banking...Hometown Service
[Picture of Robert Hoptry]
"...our strategic initiatives are expected to ignite
the greatest period of growth in the history of
our Company"
Dear Shareholders and Friends:
By any measure, 1997 was an exciting and rewarding year for Indiana United
Bancorp. The most obvious measurement of our success was our ability to
again exceed every short-term financial objective we established. And from
a strategic perspective, a more important accomplishment was our success in
launching major initiatives to enhance the long range performance of the
Company.
A Solid Performance
Net income of $3,775,232 and earnings per share of $3.02 both established new
records for Indiana United. Earnings per share increased by $.91 or 43.1% in
1997 and total shareholder return for the year was 60.1% These strong gains
supported a 21.7% increase in common dividends, marking the ninth consecutive
year dividends have increased by 15% or more.
Excellence in Asset Quality
Our financial performance was fueled by continued gains in our net interest
margin, efficiency ratio, return on average assets and return on average equity.
These four ratios are generally regarded as the most critical to the success of
any banking organization. While I subscribe to the importance of these
criteria, I believe that asset quality is equally important. Our exceptionally
high asset quality is a hallmark of our Company and ranks among the best of any
banking organization in the country. As of December 31, 1997, our year end ratio
of non-performing assets to total assets equaled only .06% compared to the
latest peer group average of .67%.
Focused on Growth
Looking ahead, our strategic initiatives are expected to ignite the greatest
period of growth in the history of our Company.
In October, we entered into a merger agreement with P.T.C. Bancorp ("PTC") which
will nearly double the asset totals of Indiana United. PTC is a one bank
holding company headquartered in Brookville, Indiana, with assets exceeding
$320 million. The merger, which is expected to be completed by April 30, 1998,
will significantly strengthen our market share in eastern and southern Indiana.
The consolidated organization will operate 29 banking offices in 12 Indiana
counties.
We view the transaction as a merger of equals, and five PTC directors will join
the board of Indiana United. James Saner, PTC's President and Chief Executive
Officer, will become President and Chief Operating Officer of Indiana United. I
will continue to serve as Chairman and Chief Executive Officer. Shareholders,
customers and employees of both organizations are expected to benefit from this
new partnership.
In December, we raised over $22 million in regulatory capital through a public
offering of 8.75% trust preferred securities. The issue was very successful,
with nearly a 50% over-subscription. A portion of these funds were used to
prepay all of the Company's long-term debt outstanding on December 31, 1997.
The remaining proceeds will be used for general business purposes and will be
held in temporary investments until needed to support our aggressive growth
strategy. This additional capital will strengthen our position to negotiate as
a potential acquirer of branches from one or more large regional banking
organizations which have publicly announced plans to curtail or eliminate retail
operations in smaller communities. These opportunities are likely to occur
within a narrow time frame and will probably not extend materially beyond 1998.
World Class Banking . . . Hometown Service
As many large banks direct their focus toward urban and suburban markets, the
need for strong service driven community banks has never been greater. I believe
Indiana United is better prepared and more dedicated to preserving community
banking ideals than many of our competitors. Our people are deeply involved in
our communities and are empowered with high levels of decision making authority
and strong capital support. Simply stated, we are dedicated to making our
communities a better place in which to raise our families and improving our
quality of life.
Other accomplishments in 1997 include the relocation of Regional Bank's Grant
Line office, the purchase of land to relocate Union Bank's Westport office, and
the introduction of telebanking services in both banking subsidiaries. Both
relocations will greatly enhance customer service and will provide increased
growth opportunities. Telebanking services provide customers with 24 hour access
to vital account information, while offering the added convenience of a variety
of transfer options. These service enhancements, together with the dedication
and involvement of our employees, is what World Class Banking . . . Hometown
Service is all about.
A Promising Outlook
During 1997, inflation was moderate, most areas of the country attained nearly
full employment, and consumer confidence soared to its highest level in three
decades. Most economists, however, view 1998 cautiously. They believe interest
rates may nudge upward, inflationary pressures may intensify and the Asian
financial crisis will negatively affect the U.S. economy. Whether or not these
assumptions prove correct, I expect Indiana United to prosper. Our high asset
quality should comfortably withstand any impact of higher unemployment and
higher interest rates. In addition, we do not speculate in foreign currencies
or hold foreign assets, and the economies of the communities we serve are
dominated by domestic enterprises.
On behalf of our entire staff, thank you for your trust and confidence in our
vision. We will diligently strive to earn your continued support.
Robert E. Hoptry
Chairman and President
January 16, 1998
Management's Discussion and Analysis (Table Dollar Amounts in Thousands)
Forward-Looking Statements
Except for historical information contained herein, the discussion in this
Annual 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 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
Strategic Plan
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. The dynamics of the
Plan assure continually evolving goals and 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.
Business Strategy
The Company holds either first or second market share positions as measured by
total deposits in two of the three markets it serves and intends to pursue
growth strategies that result in meaningful market share positions in other
rural or suburban communities. The Company has sought to identify potential
acquisitions in markets that offer prospects of benefiting from its community
banking philosophy and will likely result in meaningful market share.
In conformity with this strategy, the Company has entered into an agreement to
acquire P.T.C. Bancorp ("PTC"), a bank holding company headquartered in
Brookville, Indiana with total assets of $322 million. The transaction
is regarded by both companies as a merger of equals and will integrate
management and directors of both organizations. The merger is expected to
qualify as a "pooling of interests" for accounting and financial reporting
purposes and is subject to various conditions, including requisite shareholder
and regulatory approvals.
PTC would become a wholly owned subsidiary of the Company, and each outstanding
share of PTC at the effective time of the merger would be converted into the
right to receive 1.075 shares of common stock of the Company. The Company
expects to issue in the aggregate up to 1,136,417 shares of common stock in the
merger. The merger is to be completed by the end of April 1998.
PTC is also community focused, serving rural communities with populations of
10,000 or less in markets contiguous to the Company's existing locations. PTC
conducts its banking business through 17 offices located in the Indiana counties
of Dearborn, Franklin, Jefferson, Ripley, Rush, Fayette, Decatur, Switzerland
and Wayne.
Many larger midwest banking companies have begun an accelerated program of
branch divestitures. The Company believes many of these branch locations will
be in communities that are compatible with its growth strategies. The Company
intends to bid competitively in seeking to expand through branch acquisitions.
The Company was recently informed it has been selected, on the basis of a
bidding process, as the purchaser of two such branches in Madison County,
Indiana. Consummation of the branch acquisitions was subject to due diligence
review of the assets of the branches and execution of a definitive agreement.
The definitive agreement, executed in March 1998, contains customary conditions
for transactions of this type. While there can be no assurance that these
branch acquisitions will occur, the Company expects consummation late in the
second quarter 1998. The branch acquisitions will be integrated into the
operations of the Company's subsidiary, Union Bank, and will include
approximately $13.6 million of loans and approximately $32.2 million of
deposits.
Management realized that if the Company was successful in increasing assets
significantly through branch acquisitions, the regulatory capital of the Company
would have been below levels acceptable to management and regulatory
authorities. In preparation for significant growth, the Company issued
$22,425,000 of cumulative trust preferred securities in December 1997. These
securities can be used to meet regulatory capital requirements within prescribed
limits. The Company has utilized a portion of the net proceeds received to
retire its long-term debt and intends to employ remaining funds to finance
growth which may include branch acquisitions, the establishment of de novo
branches, acquisitions of other financial institutions and various other
corporate purposes.
Should the Company be unsuccessful in achieving the growth levels anticipated or
be unable otherwise to substantially deploy the regulatory capital these funds
represent, the interest cost will have an adverse affect on 1998 results of
operations. Even if management achieves its short-term goals, it is likely that
1998 results of operations will be adversely affected since the cost of the
trust preferred securities will not be fully offset immediately.
Management believes its growth goals are attainable in the near term and that
the issuance of the trust preferred securities is in the long-term best
interests of shareholders.
Facilities
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. In conformance with this portion of the Plan, starting in
1995, 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. Also
in 1995, two new branch offices were opened at a cost of $500,000. The Allison
Lane branch in Jeffersonville was opened by Regional Bank to provide greater
access to present and prospective customers in Clark County. 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, Regional Bank expended over $600,000 in 1997 to
relocate its Grantline Branch. In 1998, the Company will relocate the Westport
branch of Union Bank to increase visibility, provide drive-thru banking and ATM
accessibility, and improve ingress and egress. Additional property improvements
are being considered.
Technology
During the past two years, 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 that allow the Company to continue to effectively compete
within a financial service industry that is becoming increasingly dependent upon
technology. The installation of Anytime Access, an automated voice response
information system which allows balance inquiries, transfers, transaction
verification, accesses interest rate and other product information, was
completed in 1997. Also, additional ATMs, laser printers, optical disk storage
and an increase in the power and memory of the AS400 computer system were
acquired.
Year 2000 Computer Issues
In the next two years, many businesses will face a potentially serious
information systems (computer) problem because many software applications and
operational programs written in the past may not properly recognize calendar
dates beginning in the year 2000. This problem could force computers to either
shut down or provide incorrect data or information. In early 1997, in
consultation with software and hardware providers and bank regulators, the
Company began the process of identifying any changes that may be required to its
computer programs and hardware to become year 2000 compliant. While the Company
believes it is taking all appropriate steps to assure year 2000 compliance, it
is dependent on vendor compliance to some extent. The Company is requiring its
systems and software vendors to represent that the services and products
provided are, or will be, year 2000 compliant, and contemplates a program of
testing compliance. The Company estimates that its costs related to year 2000
compliance will not be material.
The "year 2000" problem is pervasive and complex as virtually every computer
operation will be affected in some way by the rollover of the two-digit year
value to 00. Consequently, no assurance can be given that year 2000 compliance
can be achieved without costs and uncertainties that might affect future
financial results or cause reported financial information not to be necessarily
indicative of future operating results or future financial condition.
Dividend Reinvestment Plan
In response to shareholder requests, the Company introduced an Automatic
Dividend Reinvestment Plan in early 1997. The plan enables shareholders to
elect to have their cash dividends on all or a portion of shares held
automatically reinvested in additional shares of the Company's common stock.
The stock is purchased on the open market by the Company's transfer agent and
credited to participant accounts at fair value. Dividends are reinvested on a
quarterly basis.
Results of Operations
Net income for 1997 was $3,775,000 compared to $2,693,000 for 1996 and
$2,529,000 for 1995. Significant non-recurring items impacted net income in
1996. The Federal omnibus spending package enacted on September 30, 1996,
together with companion legislation enacted earlier in the year, resulted in a
$474,000 reduction of 1996 net income. The legislation imposed a special
assessment on thrift institutions 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 substantially eliminated (see heading
"Income Taxes" for further discussion).
Excluding these nonrecurring charges, net income for 1996 was $3,167,000, a 25%
increase over the prior year. Noninterest income in 1997 reflects approximately
$179,000 of nonrecurring income due to sale of real estate acquired in lieu of
foreclosure.
Noninterest income in 1997 reflects continued decline in insurance commissions
due mainly to lower levels of profit sharing received from participating
companies based on claims experience for the year. Trust income and service
charge income increased over the prior year. Noninterest expense reflects
increased salaries and employee benefits and reduced Federal Deposit Insurance
Corporation ("FDIC") assessments, excluding the special assessment mentioned
previously, due to a lower deposit insurance assessment rate. Professional fees
decreased in 1997 as compared to the prior year.
Net income per common share from recurring operations equaled $3.02 in 1997,
compared to $2.49 in 1996, and $1.91 in 1995. Including the FDIC special
assessment and bad debt recapture, 1996 earnings equaled $2.11 per share.
The Company's return on average total assets was 1.11% in 1997, .85% in 1996,
and .82% in 1995. Excluding non-recurring charges, return on average assets for
1996 was 1.00%. Return on average common shareholders' equity during these
three years was 12.97%, 9.86%, and 9.71%, respectively. Excluding non-recurring
charges, return on average common shareholders' equity for 1996 was 11.58%.
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. Tax equivalent net interest
income of $13,241,000 in 1997 increased 10% from $12,056,000 in 1996, which was
9% above 1995 (see Tables 2 and 5).
Throughout the past two years, the Company 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 1997. The Company believes this strategy greatly enhanced net interest
income and will also have a positive effect on 1998 earnings. Although many of
the Company's peer group competitors reported flat or marginally changed net
interest margins for the full year 1997, the Company increased its net interest
margin by 12 basis points. Since year-end 1994, the Company has increased its
net interest margin by 55 basis points.
The changes in interest income and interest expense resulting from changes in
volume and rate are summarized in Tables 2 and 3. Variances have been allocated
on the basis of the absolute relationship between volume and rate.
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 1997 exceeded the prior year by $254,000 or 17%.
Nonrecurring noninterest income of $179,000 was realized on the sale of real
estate acquired at the end of 1996 in lieu of foreclosure. Security losses of
$80,000 were realized in 1997 compared to no gain or loss in 1996 and a $16,000
gain in 1995.
Service charges on deposit accounts represented the largest component of
recurring non-interest income, equaling 36%, 35% and 31% in 1997, 1996 and 1995.
Service charges on deposit accounts increased in 1997 by $104,000, or 20%,
primarily due to continued strong growth in an interest-bearing checking
account introduced in early 1996. Service charges on deposit accounts increased
$70,000, or 16% in 1996 after declining slightly in 1995. Deposit growth and
interest rate variables also affected service charge income in 1997. It is
anticipated that in 1998 the Company will experience additional deposit growth,
generating higher service charge income. Insurance commissions have declined in
each of the past three years. The most recent declines of $22,000 and $35,000
in 1997 and 1996, represent the loss of year-end profit sharing bonuses from
primary carriers due to claims experience and to an overall lower level of
premiums written. The decline of $36,000 in 1995 primarily reflected
reorganization and relocation disruptions of insurance operations in Jay County.
Trust income increased $11,000 over 1996 after increasing $43,000 or 23% in
1996. Estate income and a strong stock market fueled increases in 1997 and
1996. The level of estate assets administered may cause trust income to
fluctuate significantly from year to year.
Noninterest Expense
The largest component of noninterest expense is personnel expense. Personnel
expenses increased in 1997 by $272,000, or 6%, after increasing by $15,000 in
1996. The average number of full-time equivalent employees in 1997 was one
person less than the average 1996 staffing level, which was four persons less
than 1995. Improvements in technology implemented throughout 1997 and 1996
enabled the Company to effectively control staffing levels. Normal staff salary
adjustments and increased benefit costs were incurred in both 1997 and 1996,
including $180,000 and $121,000 in 1997 and 1996, respectively, earned by
employees in connection with the performance incentive compensation plan.
In the third quarter of 1997, to avert a significant healthcare premium
increase, the Company changed from a "claims paid" plan to a "partially self-
funded" plan. Although the Company-paid portion of the premium increased, the
increase is significantly less than what would have been absorbed if the old
plan were continued. Personnel expenses in 1998 are expected to increase due to
a corporate-wide initiative to restructure salary ranges.
The 1997 omnibus-spending package enacted on September 30, 1996 required the
thrift industry to recapitalize SAIF with a one-time assessment 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 was recorded against 1996 third quarter earnings.
Deposit insurance premiums (excluding the $545,000 special assessment in 1996)
were $107,000 less in 1997 than the prior year due to an overall lower rate on
which the insurance premium was calculated. Since the Bank Insurance Fund
("BIF") reached a mandated funding level in 1995, the assessment rate for the
Company's commercial bank was reduced to the $2,000 minimum level permissible in
1996, and increased to 1.29 cents per $100 of deposits in 1997, which was the
lowest prevailing assessment rate.
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 against thrifts prior to September 30, 1996. After
the period ending in 1999, commercial banks and thrifts will pay the same
assessment rate, currently calculated to be 2.43 cents per $100 of deposits.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing noninterest expense by the total of net interest income
plus noninterest income excluding securities gains or losses. The lower the
ratio, the more efficient the Company is in managing net interest margin,
noninterest income and noninterest expense. The Company's efficiency ratios
were 55.9% for 1997, 60.0% for 1996 and 66.2% for 1995. The Company's ratio for
1996 has been adjusted to exclude the one-time SAIF assessment of $545,000.
The efficiency ratio for the Company's peer group was 61.4% at September 30,
1997 (most recent information available), 63.4% for 1996 and 64.8% for 1995.
Income Taxes
In 1996 the Small Business Job Protection Act of 1996 was signed into law.
Included within this tax legislation was the repeal of certain tax advantages to
thrifts applicable to tax bad debt provision calculations. The bill, among
other provisions, 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 bad debt reserve recapture for Regional Bank. The base year
amount 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)
was 40% for 1997, 1996 and 1995. The Company and its subsidiaries will file
consolidated income tax returns for 1997.
Financial Condition
Total average assets in 1997 increased $22,289,000 over the prior year. Average
assets increased by $9,244,000 in 1996 as compared to 1995.
Year-end assets increased to $371,751,000 from $328,346,000 at December 31,
1996. Securities maturities and repayments, as well as increased levels of
interest-bearing deposits, funded loan growth in 1997.
Average earning assets have represented 95% of average total assets for the past
three years. Average loans represent approximately 70% of average assets in
1997 compared to 66% in 1996 and 65% in 1995. Management intends to continue its
emphasis on loan growth in 1998.
Average noninterest-bearing deposits increased 7% in 1997 compared to less than
a 1% increase in 1996. Average interest-bearing deposits increased $19,438,000
or 8% in 1997 compared to 1996. Average interest bearing demand deposits
increased $6,385,000 or 19%, primarily due to the continued success of an
interest-bearing checking account introduced early in 1996. Average savings
accounts decreased 1%. Average money market investment accounts decreased 3% as
compared to the prior year due to the shifting of funds to the interest-bearing
demand deposit. Average certificates of deposit and other time deposits
increased approximately $14,231,000 in 1997, primarily in certificates of
deposits of $100,000 and over. A significant portion of the growth in
certificates of deposit of $100,000 and over was a result of reducing the use of
securities sold under repurchase agreements ("Repos").
Long-term debt was the Company's loan for the purchase of Regional Bank. A
principal payment of $375,000 was paid on June 30, 1997 and the remaining
balance of $4,625,000 was paid on December 31,1997. The Company had negotiated
the refinancing of the remaining balance of $4,625,000, but elected to pay off
the long-term debt with a portion of the proceeds from the issuance of the trust
preferred securities.
Guaranteed preferred beneficial interests in Company's subordinated debentures
("Trust Preferred Securities") in the amount of $22,425,000 were issued on
December 9, 1997. The holders of the Trust Preferred Securities are entitled
to receive preferential cumulative cash distributions, payable quarterly, at the
annual rate of 8.75% of the liquidation amount of $10 per security. The Company
has the right, so long as no default has occurred, to defer payment of interest
at any time, or from time to time for a period not to exceed 20 consecutive
quarters with respect to each deferral period. Currently, management has no
intention of deferring the payment of interest. The Trust Preferred Securities
have a preference under certain circumstances with respect to cash distributions
and amounts payable on liquidation, redemption or otherwise over the common
stock. The holders of the Trust Preferred Securities have no voting rights
except in limited circumstances. The Trust Preferred Securities are traded on
the NASDAQ National Market under the symbol "IUBCP". The Trust Preferred
Securities are not insured by the BIF, SAIF or FDIC, or by any other
governmental agency. The Trust Preferred Securities qualify as Tier 1 capital
or core capital with respect to the Company under the risk based capital
guidelines established by the Federal Reserve. Under such guidelines, the Trust
Preferred Securities cannot constitute more than 25% of the total Tier 1 capital
of the Company. The amount of Trust Preferred Securities in excess of the 25%
limitation will constitute Tier 2 capital, or supplementary capital, of the
Company.
Shareholders' equity was $30,777,000 on December 31, 1997 compared to
$27,749,000 on December 31, 1996. Book value per common share increased to
$24.60 or 11% from $22.18 at year-end 1996. The unrealized gain on securities
available for sale, net of taxes, totaled $611,000 or $.48 per share at
December 31, 1997 compared to an unrealized gain of $95,000 or $.07 per share at
December 31, 1996. Excluding the net unrealized gains or losses on securities
available for sale, book value per share was $24.12 at December 31, 1997 or an
increase of 9% over the comparable book value at year-end 1996. The Company
redeemed the remaining $2,000,000 of its preferred stock in 1996. Commencing
October 1, 1996 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
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 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 $27,971,000 or 13% since December 31, 1996, primarily
reflecting the expansion of the consumer loan portfolio and management's
emphasis on indirect automobile financing that began in late 1995 and has
continued to the present. Consumer loans increased 61% in 1997 following a 50%
increase in 1996. The Company's emphasis on increasing consumer loans provides
greater diversification within the portfolio and generates higher gross yields
than residential real estate loans. Residential real estate loans continue to
represent a significant portion of the total loan portfolio. Such loans
represented 48.6% and 50.1% of total loans at December 31, 1997 and 1996. Of
the total residential real estate portfolio, approximately 53% are fixed rate
and 47% are variable rate loans at December 31, 1997. The Company has
traditionally made loans only for its own portfolio and has not followed the
practice of many other financial institutions of originating loans for sale in
the secondary market. Although the Company limits its exposure to long-term
fixed rate residential mortgage loans and generally observes 20% minimum
downpayment guidelines, it originated fixed rate loans and loans with little or
no downpayment for a noncompeting mortgage lender during 1997 and 1996. This
program assisted the Company in serving all segments of the community without
incurring unacceptable levels of credit exposure or interest rate risk and
provided additional fee income. To meet its commitment to serve all segments of
the community, the Company intends to continue originating similar residential
mortgage loans for, and on behalf of, noncompeting lenders.
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 do 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.
The provision for loan losses was $283,000 in 1997 compared to $150,000 in 1996
and $30,000 in 1995. Increases in 1997 and 1996 reflected both overall loan
growth and an increase in greater risk-profile consumer loans.
Net chargeoffs were $58,000 in 1997, $398,000 in 1996 and $60,000 in 1995. As a
percentage of average loans, net chargeoffs equaled .02%, .19% and .03% in 1997,
1996 and 1995. The increase in 1996 was caused primarily by the $334,000
chargeoff of portions of two loans held by Regional Bank. In 1996 and 1995, the
Company outperformed its peer group's net loan loss average and that trend is
expected to continue in 1997. Management is not aware of any trend which is
likely to cause the level of net chargeoffs in 1998 to materially exceed the
level of chargeoffs experienced in 1997, beyond the impact of loans acquired as
the result of the proposed PTC merger or the purchase of branches.
There was no foreclosed real estate at December 31, 1997. Foreclosed real
estate held by the Company at December 31, 1996 consisted of a single property.
The property was sold in the second quarter of 1997 and a $179,000 gain was
recognized.
Management maintains a listing of loans warranting either the assignment of a
specific reserve amount or other special administrative attention. The Board of
Directors of each subsidiary reviews this listing monthly, together with a
listing of all classified loans, nonaccrual loans and loans delinquent 30 days
or more.
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 December 31, 1997 is
considered adequate by management. See Tables 8, 9, 10, 11 and 12 for
quantitative support of this narrative loan analysis.
Investment Securities
Investment securities offer flexibility in the Company's management of interest
rate risk, and is an important source of liquidity as a response to changing
characteristics of assets and liabilities. The Company's investment policy
prohibits trading activities and does not allow investment in high-risk
derivative products, junk bonds or foreign investments.
As of December 31, 1997, 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 $1,023,000 was
recorded to adjust the AFS portfolio to current market value at December 31,
1997, compared to a net unrealized gain of $167,000 at December 31, 1996.
At year end 1997, the tax equivalent yield of the investment securities
portfolio was 6.63%, representing an increase from 6.45% at year end 1996, and
6.33% at year end 1995. The increase in 1997 was primarily the result of
selling certain lower-yielding securities at a loss and lengthening the
maturity of 1997 purchases compared to the balance of the portfolio.
Variable rate securities comprised 47% of the total portfolio on December 31,
1997 compared to 50% and 55% on December 31,1996 and 1995. The reduction of
variable rate securities extended the year-end weighted average repriceable life
of the portfolio to 2.28 years compared to 2.06 years in 1996.
Sources of Funds
The Company relies primarily on customer deposits, Repos and shareholders'
equity to fund earning assets. Federal Home Loan Bank ("FHLB") advances are
also used to provide additional funding.
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
in 1997 and 1996. Total interest-bearing deposits averaged 91%, 91% and 90% of
average total deposits during 1997, 1996 and 1995. Management constantly strives
to increase the percentage of transaction-related deposits to total deposits due
to the positive effect on earnings.
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 utilized
large denomination certificates of deposit in 1997 to replace a portion of
customer funds previously invested in Repos.
Even though short-term borrowings temporarily increased 57% at year-end 1997
compared to 1996, the Company decreased average Repos and other short-term
borrowings in 1997 to $12,025,000 or 10% below 1996. FHLB advances that mature
in early 1999 represented most of the increase at year-end. The FHLB advances
were used to fund loans and other earnings assets of Regional Bank in 1997.
Depending upon the level of loan demand, management may again elect to use FHLB
advances in 1998 as part of its cash management strategy.
The Company paid off its long-term debt on December 31, 1997. Long-term debt
decreased $1,000,000 in 1996 of which $250,000 represented reductions in excess
of scheduled payments.
Capital Resources
Total shareholders' equity increased $3,028,000 to $30,777,000 at December 31,
1997.
The Federal Reserve Board and other regulatory agencies have adopted risk-based
capital guidelines that 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 December 31,
1997, Tier 1 capital to total average assets was 10.71%. Total capital to
risk-adjusted assets was 24.00%. 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 Trust Preferred Securities qualify as Tier 1 capital or core capital with
respect to the Company under the risk-based capital guidelines established by
the Federal Reserve. Under such guidelines, capital received from the proceeds
of the sale of Trust Preferred Securities cannot constitute more than 25% of the
total Tier 1 capital of the Company. Consequently, the amount of Trust Preferred
Securities in excess of the 25% limitation will constitute Tier 2 capital of the
Company.
The Company declared and paid common dividends of $1.01 per share in 1997 and
$.83 in 1996. Book value per common share increased to $24.60 from $22.18 in
1997. The net adjustment for AFS securities increased book value by $.48 and
$.07 at December 31, 1997 and 1996. Depending on market conditions, the
adjustment for AFS securities can cause significant fluctuations in equity.
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 $67,937,000 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 arise from declines in deposits or other funding
sources, funding of loan commitments and requests for new loans. The Company's
strategy is to fund assets to the maximum extent possible with core deposits
that provide a sizable source of relatively stable and low-cost funds. Average
core deposits funded approximately 90% of total earning assets at December 31,
1997 and approximately 89% in 1996 and 1995.
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
that would materially affect liquidity, capital resources or operations.
Rate Sensitivity and Interest Rate Risk
At year end 1997, the Company held approximately $191,929,000 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 year ended December 31, 1997 appears
in Table 14. 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%. The Company will seek to attain a neutral gap position in 1998 based upon
its the belief that the current interest rate environment will remain relatively
stable throughout 1998. In any event, the Company does not anticipate that its
earnings will be materially impacted in 1998, regardless of the extent or the
direction interest rates may vary.
Asset/liability management strategies are developed by the Company to manage
market risk. Market risk is the risk of loss in financial instruments including
investments, loans, deposits and borrowings arising from adverse changes in
prices/rates. Interest rate risk is the Company's primary market risk exposure,
and represents the sensitivity of earnings to changes in market interest rates.
Stategies are developed that impact asset/liability committee activities based
on interest rate risk sensitivity, board policy limits, desired sensitivity gaps
and interest rate trends.
Table 15 provides information about the Company's significant financial
instruments at December 31, 1997 that are sensitive to changes in interest
rates. The table presents principal cash flows and related weighted average
interest rates by maturity dates.
The table presents only a static measurement of asset and liability volumes
based on maturity, cash flow estimates and interest rates. It does not reflect
the differences in the timing and degree of repricing of assets and liabilities
due to interest rate changes. In analyzing interest rate sensitivity,
management considers these differences and incorporates other assumptions and
factors, such as balance sheet growth and prepayments, to better measure
interest rate risk. The Company cannot make any assurances as to the outcome of
these assumptions, nor can it assess the impact of customer product preference
changes and competitive factors as well as other internal and external
variables. In addition, this analysis cannot reflect actions taken by the
asset/liability management committees; therefore, this analysis should not be
relied upon as indicative of expected operating results.
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
During 1997 the Financial Accounting Standards Board ("FASB") issued Statement
No. 130, Reporting Comprehensive Income, establishing standards for the
reporting of comprehensive income and its components in financial statements.
Statement No. 130 is applicable to all entities that provide a full set of
financial statements. Enterprises that have no items of other comprehensive
income in any period presented are excluded from the scope of this Statement.
Statement No. 130 is effective for interim and annual periods beginning after
December 15, 1997. Earlier application is permitted. The Company will adopt
Statement No. 130 during fiscal year 1998.
Also in 1997, the FASB issued Statement No. 131, Disclosures About Segments of
an Enterprise and Related Information, which supersedes Statement No. 14,
Financial Reporting for Segments of a Business Enterprise. Statement No. 131
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires reporting
of selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. Statement No. 131
defines operating segments as 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.
This standard is effective for financial statement periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Due to the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, it may have on the Company's future
financial statement disclosures.
OTHER
The Securities and Exchange Commission ("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. That address is http://www.sec.gov.
Table 1 - Selected Financial Data Summary*
1997 1996 1995 1994 1993
RESULTS OF OPERATIONS
FOR THE YEAR
Net interest income $13,144 $11,961 $10,983 $11,301 $11,881
Provision for loan losses 283 150 30 115 357
Non-interest income 1,756 1,502 1,456 2,588 1,628
Non-interest expense 8,374 8,619 8,229 9,040 9,243
Income before income tax and
accounting method change 6,243 4,694 4,180 4,734 3,909
Income tax 2,468 2,001 1,651 1,864 1,438
Income before accounting
method change 3,775 2,693 2,529 2,870 2,472
Accounting method change 450
Net income 3,775 2,693 2,529 2,870 2,922
Dividends paid on common stock 1,263 1,038 863 683 580
Dividends paid on
preferred stock 50 139 157 185
PER COMMON SHARE
Income before accounting
method change** $3.02 $2.11 $1.91 $2.17 $1.83
Net income** 3.02 2.11 1.91 2.17 2.19
Dividends paid 1.01 .83 .69 .60 .51
Book value - end of period**
Excluding SFAS No. 115
adjustment 24.12 22.11 20.83 19.60 17.99
Including SFAS No. 115
adjustment 24.60 22.18 20.98 17.49
Market price - end of period** 45.50 29.06 25.00 21.00 22.28
AT YEAR END
Total assets $371,751 $328,346 $313,067 $306,047 $355,992
Securities and other
Investments 102,992 88,384 94,110 96,270 133,747
Total loans 247,454 219,483 201,355 194,736 205,508
Allowance for loan losses 2,731 2,506 2,754 2,784 2,682
Total deposits 289,821 276,402 262,346 261,371 310,063
Long-term debt 5,000 6,000 7,500 9,375
Trust preferred securities 22,425
Preferred stock 2,000 2,400 2,700
Common shareholders' equity 30,777 27,749 28,245 24,282 25,203
FINANCIAL RATIOS
Return on average assets 1.11% .85% .82% .86% .81%
Return on average common
shareholders' equity 12.97 9.86 9.71 12.18 12.61
Allowance for loan losses to total
loans (year end) 1.10 1.14 1.37 1.43 1.31
Shareholders' equity to total assets
(year end) 8.28 8.45 9.02 7.93 7.08
Tier 1 capital to total assets 10.71 8.36 8.84 8.69 7.01
Total capital to risk-
adjusted assets 24.00 15.60 16.57 17.11 14.12
Average equity to
average total assets 8.58 8.69 8.70 7.39 6.83
Dividend payout ratio 33.47 39.29 36.12 25.15 21.16
*The Company sold three of Regional Bank's branches in October, 1994 and there
was a special SAIF assessment in 1996. These transactions affect comparative
analysis of certain information in this table.
**Amounts prior to 1994, excluding dividends paid, have been adjusted for the
10% stock dividend in 1994.
Table 2 - Changes in Net Interest Income and Net Interest
Margin (Taxable Equivalent Basis)*
Percent Change
1997 1996 1995 1997/96 1996/95
Interest income
Loans $20,889 $18,266 $16,938 14.4 7.8
Investment securities 4,994 5,403 5,655 (7.6) (4.5)
Federal funds sold 442 380 305 16.3 24.6
Short-term investments 2 13 49 (84.6) (73.5)
Total interest income 26,327 24,062 22,947 9.4 4.9
Interest expense
Interest-bearing
demand accounts 1,110 868 833 27.9 4.2
Money market
investment accounts 1,130 1,133 1,297 (0.3) (12.6)
Savings deposits 920 944 894 (2.5) 5.6
Certificates of deposit
and other time deposits 8,796 7,918 7,284 11.1 8.7
Borrowings 1,025 1,143 1,544 (10.3) (26.0)
Trust preferred securities 105
Total interest expense 13,086 12,006 11,852 9.0 1.3
Net interest income $13,241 $12,056 $11,095 9.8 8.7
Net interest margin 4.12% 4.00% 3.77% 3.0 6.1
*Adjusted to reflect income related to securities and loans exempt from Federal
income taxes reduced by nondeductible portion of interest expense.
Table 3 - Changes in Net Interest Income and Net Interest
Margin (Taxable Equivalent Basis)*
1997 vs.1996 1996 vs. 1995
Volume Rate Total Volume Rate Total
Interest income
Loans $2,683 ($60) $2,623 $ 904 $ 424 $1,328
Investment securities (580) 171 (409) (259) 7 (252)
Federal funds sold 48 14 62 104 (29) 75
Short-term investments (6) (5) (11) (29) (7) (36)
Total interest income 2,145 120 2,265 720 395 1,115
Interest expense
Interest-bearing
demand accounts 178 64 242 51 (16) 35
Money market
investment accounts (30) 27 (3) (136) (28) (164)
Savings deposits (11) (13) (24) 74 (24) 50
Certificates of deposit
and other time deposits 768 110 878 616 18 634
Borrowings (133) 15 (118) (255) (146) (401)
Trust preferred securities 105 105
Total interest expense 877 203 1,080 350 (196) 154
Changes in net
interest income $1,268 ($83) 1,185 $370 $591 961
Change in taxable
equivalent adjustments (2) 17
Change in net interest
income after taxable
equivalent adjustments $1,183 $978
*Adjusted to reflect income related to securities and loans exempt from Federal
income taxes reduced by nondeductible portion of interest expense.
Table 4 - Noninterest Income and Expense
Percent Change
1997 1996 1995 1997/96 1996/95
Noninterest income
Insurance commissions $ 416 $ 438 $ 473 (5.0) (7.4)
Fiduciary activities 243 233 190 4.3 22.6
Service charges on
deposit accounts 624 520 450 20.0 15.6
Securities gains (losses) (80) 16
Other income 553 311 328 77.8 (5.2)
Total non-
interest income $1,756 $1,502 $1,457 16.9 3.1
Noninterest expense
Salaries and
employee benefits $4,754 $4,482 $4,467 6.1 0.3
Premises and
equipment expense 1,525 1,477 1,469 3.2 0.5
Professional fees 217 222 205 (2.3) 8.3
Deposit insurance 83 190 395 (56.3) (51.9)
FDIC special
assessment 545
Amortization
of intangibles 30 35 40 (14.3) (12.5)
Other expense 1,765 1,667 1,653 5.9 0.8
Total non-
interest expense $8,374 $8,618 $8,229 (2.8) 4.7
Net noninterest expense,
excluding non-recurring
items, as a percent of
average assets 1.95% 2.07% 2.20%
Table 5 - Average Balance Sheet and Net Interest Analysis
(Taxable equivalent basis)*
December 31, 1997
Average Yield/
Balance Interest Rate
ASSETS
Short-term investments $ 98 $ 2 2.04%
Federal funds sold 7,962 442 5.55
Securities
Taxable 72,840 4,707 6.46
Tax-exempt 3,833 287 7.49
Total securities 76,673 4,994 6.51
Loans**
Commercial 71,238 6,876 9.65
Real estate mortgage 125,885 10,123 8.04
Instalment 37,770 3,769 9.98
Govt. guaranteed loans 1,489 121 8.13
Total loans 236,382 20,889 8.84
Total earning assets 321,115 26,327 8.20
Allowance for loan losses (2,593)
Unrealized gains on securities 339
Cash and due from banks 10,101
Premises and equipment 6,204
Other assets 4,030
Total assets $339,196
LIABILITIES
Interest-bearing deposits
Interest-bearing demand accounts $ 39,215 1,110 2.83
Money market investment accounts 30,752 1,130 3.67
Savings 28,918 920 3.18
Certificates of deposit and
other time deposits 162,740 8,796 5.40
Total interest-bearing deposits 261,625 11,956 4.57
Short-term borrowings 12,025 645 5.36
Trust preferred securities 1,229 105 8.54
Long-term debt 4,797 380 7.92
Total interest-bearing liabilities 279,676 13,086 4.68
Noninterest-bearing demand deposits 26,431
Other liabilities 3,975
Total liabilities 310,082
SHAREHOLDERS' EQUITY 29,114
Total liabilities and
shareholders' equity $339,196 13,086 4.08%***
Net interest income $13,241 4.12%
Adjustment to convert tax exempt
securities and loans to a fully
taxable equivalent basis using a
marginal rate of 34% $ 97
*Adjusted to reflect income related
to securities and loans exempt from
Federal income taxes.
**Nonaccruing loans have been included in the average
balances.
***Total interest expense divided by
total earning assets.
Table 5 - Average Balance Sheet and Net Interest Analysis
(Taxable equivalent basis)*
December 31, 1996
Average Yield/
Balance Interest Rate
ASSETS
Short-term investments $ 257 $ 13 5.06%
Federal funds sold 7,094 380 5.36
Securities
Taxable 81,971 5,123 6.25
Tax-exempt 3,755 280 7.46
Total securities 85,726 5,403 6.30
Loans**
Commercial 62,983 6,059 9.62
Real estate mortgage 121,232 9,660 7.97
Instalment 22,349 2,392 10.70
Govt. guaranteed loans 1,948 155 7.96
Total loans 208,512 18,266 8.76
Total earning assets 301,589 24,062 7.98
Allowance for loan losses (2,760)
Unrealized losses on securities (224)
Cash and due from banks 9,456
Premises and equipment 5,953
Other assets 2,893
Total assets $316,907
LIABILITIES
Interest-bearing deposits
Interest-bearing demand accounts $ 32,830 868 2.64
Money market investment accounts 31,584 1,133 3.59
Savings 29,264 944 3.23
Certificates of deposit and
other time deposits 148,509 7,918 5.33
Total interest-bearing deposits 242,187 10,863 4.49
Short-term borrowings 13,316 689 5.17
Long-term debt 5,606 454 8.10
Total interest-bearing liabilities 261,109 12,006 4.60
Noninterest-bearing demand deposits 24,714
Other liabilities 3,540
Total liabilities 289,363
SHAREHOLDERS' EQUITY 27,544
Total liabilities and
shareholders' equity $316,907 12,006 3.98%***
Net interest income $12,056 4.00%
Adjustment to convert tax exempt
securities and loans to a fully
taxable equivalent basis using
a marginal rate of 34% $ 95
*Adjusted to reflect income related to
securities and loans exempt from
Federal income taxes.
** Nonaccruing loans have been included
in the average balances.
***Total interest expense divided by
total earning assets.
Table 5 - Average Balance Sheet and Net Interest Analysis
(Taxable equivalent basis)*
December 31, 1995
Average Yield/
Balance Interest Rate
ASSETS
Short-term investments $ 812 $ 49 6.03%
Federal funds sold 5,196 305 5.87
Securities
Taxable 85,421 5,326 6.24
Tax-exempt 4,327 329 7.60
Total securities 89,748 5,655 6.30
Loans**
Commercial 64,589 6,116 9.47
Real estate mortgage 116,314 8,815 7.58
Instalment 15,760 1,807 11.47
Govt. guaranteed loans 2,383 200 8.39
Total loans 199,046 16,938 8.51
Total earning assets 294,802 22,947 7.79
Allowance for loan losses (2,732)
Unrealized losses on securities (1,054)
Cash and due from banks 7,744
Premises and equipment 5,799
Other assets 3,104
Total assets $307,663
LIABILITIES
Interest-bearing deposits
Interest-bearing demand accounts $ 30,906 833 2.70
Money market investment accounts 35,369 1,297 3.67
Savings 26,979 894 3.31
Certificates of deposit and
other time deposits 136,952 7,284 5.32
Total interest-bearing deposits 230,206 10,308 4.48
Short-term borrowings 15,947 932 5.84
Long-term debt 6,950 612 8.81
Total interest-bearing liabilities 253,103 11,852 4.68
Noninterest-bearing demand deposits 24,545
Other liabilities 3,243
Total liabilities 280,891
SHAREHOLDERS' EQUITY 26,772
Total liabilities and
shareholders' equity $307,663 11,852 4.02%***
Net interest income $11,095 3.77%
Adjustment to convert tax exempt
securities and loans to a fully
taxable equivalent basis using
a marginal rate of 34% $ 112
*Adjusted to reflect income related to
securities and loans exempt from Federal
income taxes.
**Nonaccruing loans have been included
in the average balances.
***Total interest expense divided by
total earning assets.
Table 6 - Average Deposits
1997 1996 1995
Amount Rate Amount Rate Amount Rate
Non-interest bearing $ 26,431 $ 24,714 $ 24,545
Interest-bearing
accounts 39,215 2.83% 32,830 2.64% 30,906 2.70%
Money market
investment accounts 30,752 3.67 31,584 3.59 35,369 3.67
Savings 28,918 3.18 29,264 3.23 26,979 3.31
Certificates of
deposit and other
time deposits 160,740 5.40 148,509 5.33 136,952 5.32
Totals $288,056 4.15% $266,901 4.07% $254,751 4.05%
As of December 31, 1997, certificates of deposit and other time deposits
of $100,000 or more mature as follows:
3 Months 3-6 6-12 Over 12
or less Months Months Months Total
Amount $13,923 $4,635 $3,195 $4,036 $25,789
Percent 54% 18% 12% 16% 100%
Table 7 - Short-term Borrowings
1997 1996 1995
Repurchase Agreements
Balance at December 31 $11,825 $12,989 $10,735
Maximum outstanding
at any month end 12,489 15,903 15,174
Daily average amount outstanding 9,394 11,564 10,162
Weighted daily average interest rate 5.22% 5.14% 5.67%
Weighted daily interest rate
at December 31 5.22 5.12 5.28
Information related to repurchase agreements is shown in the table above and
information on other short-term borrowings is not required since the average
balances outstanding during the periods were less than 30% of shareholders'
equity.
Table 8 - Loan Portfolio
December 31
1997 1996 1995 1994 1993
Types of Loans
Commercial $ 10,473 $ 7,834 $ 7,796 $ 7,595 $ 11,028
Agricultural production
financing and other
loans to farmers 10,551 11,178 9,996 7,859 8,845
Commercial real
estate mortgage 27,538 27,691 24,129 25,619 27,036
Residential real
estate mortgage 120,342 109,962 103,239 101,455 111,600
Farm real estate 27,652 26,843 28,910 28,358 25,483
Construction and
development 5,288 6,589 6,863 7,161 3,455
Consumer 44,269 27,567 18,342 13,870 14,752
Government guaranteed
loans purchased 1,341 1,819 2,080 2,819 3,309
Total loans $247,454 $219,483 $201,355 $194,736 $205,508
Table 9 - Maturities and Sensitivities of Commercial and Construction Loans to
Changes in Interest Rates at December 31, 1997
Within 1-5 Over
1 Year Years 5 Years Total
Loan Type
Commercial $ 8,451 $1,220 $ 802 $10,473
Agricultural production financing
and other loans to farmers 9,491 671 389 10,551
Construction 4,997 128 163 5,288
Government guaranteed loans 0 133 1,208 1,341
Totals $22,939 $2,152 $2,562 $27,653
Percent 83% 8% 9% 100%
Rate Sensitivity
Fixed rate $ 1,874 $1,644 $1,342 $ 4,860
Variable rate 21,065 508 1,220 22,793
Totals $22,939 $2,152 $2,562 $27,653
TABLE 10 - Underperforming Loans
1997 1996 1995 1994 1993
Nonaccruing loans $255 $1,245 $1,569 $1,030 $1,208
Accruing loans con-
tractually past due
90 days or more 8 5 34 113 0
Restructured loans 16
Total $263 $1,250 $1,603 $1,143 $1,224
Percent of total loans 0.1% 0.6% 0.8% 0.6% 0.6%
TABLE 11 - Summary of Allowance for Loan Losses
1997 1996 1995 1994 1993
Balance at January 1 $2,506 $2,754 $2,784 $2,682 $2,686
Chargeoffs
Commercial 26 18 91 6 112
Commercial real
estate mortgage 334 242
Residential real
estate mortgage 26 38 65 74
Consumer 197 104 31 21 17
Total chargeoffs 249 456 160 92 445
Recoveries
Commercial 108 33 61 37 52
Residential real
estate mortgage 25 1 27 15
Consumer 58 24 12 27 32
Total recoveries 191 58 100 79 84
Net chargeoffs 58 398 60 13 361
Provision for loan losses 283 150 30 115 357
Balance at December 31 $2,731 $2,506 $2,754 $2,784 $2,682
Net chargeoffs to
average loans .02% .19% .03% .01% .18%
Provision for loan losses
to average loans .12 .07 .02 .06 .17
Allowance to total loans at
year end 1.10 1.14 1.37 1.43 1.31
Table 12 - Allocation of the Allowance for Loan Losses
December 31 1997 1996 1995
Percent of Percent of Percent of
Loans in Loans in Loans in
Category to Category to Category to
Total Total Total
Amount Loans Amount Loans Amount Loans
Real estate
Residential $ 137 49% $ 144 50% $ 134 51%
Farm real estate 14 11 13 12 14 15
Commercial 300 11 313 13 575 12
Construction and
development 55 2 71 3 75 3
Total real estate 506 73 541 78 798 81
Commercial
Agribusiness 142 4 151 5 117 5
Other commercial 169 4 203 4 445 4
Total commercial 311 8 354 9 562 9
Consumer 369 18 207 12 131 9
Government guaranteed
loans purchased 1 1 1
Unallocated 1,545 1,404 1,263
Total $2,731 100% $2,506 100% $2,754 100%
December 1994 1993
Percent of Percent of
Loans in Loans in
Category to Category to
Total Total
Amount Loans Amount Loans
Real estate
Residential $ 146 52% $ 142 55%
Farm real estate 14 15 12
Commercial 702 13 468 13
Construction and
development 52 4 35 2
Total 914 84 645 82
Commercial
Agribusiness 151 4 182 4
Other commercial 131 4 226 5
Total commercial 282 8 408 9
Consumer 66 7 83 7
Government guaranteed
loans purchased 1 2
Unallocated 1,522 1,546
Total $2,784 100% $2,682 100%
The allocation 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.
Table 13 - Investment Securities
(Carrying Values at December 31)
Beyond
Within 1-5 5-10 10
1 Year Years Years Years Totals
Available for sale
Federal agencies $1,998 $ 8,815 $13,018 $23,831
State and municipal 372 2,236 894 $ 227 3,729
Mortgage-backed
securities 139 3,731 5,184 32,709 41,763
Corporate and
other securities 36 1,087 1,123
Total available for sale $2,509 $14,782 $19,132 $34,023 $70,446
Weighted average yield* 5.43% 6.04% 6.85% 6.85% 6.63%
Amounts in the table above are based on scheduled maturity dates. Variable
interest rates are subject to change not less than annually based upon certain
interest rate indices. Actual maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties. As of December 31, 1997, there are no
corporate bonds and other securities which represent more than 10% of
shareholders' equity.
*Adjusted to reflect income related to securities exempt from Federal income
taxes reduced by nondeductible portion of interest expense.
Table 14 - Rate Sensitivity Analysis at December 31, 1997
Maturing or Repricing
Over 5
Years or
3 Months 1 Year 3 Years 5 Years Insensitive Total
Interest-earning assets
Loans $ 54,930 $ 65,585 $ 36,303 $ 33,440 $ 57,196 $247,454
Securities 28,206 10,662 9,633 6,175 15,770 70,446
Federal funds sold 31,350 31,350
Interest-bearing
deposits in banks 58 58
FHLB stock 1,138 1,138
Total interest-
earning assets 115,682 76,247 45,936 39,615 72,966 350,446
Other assets 24,036 24,036
Allowance for
loan losses (2,731) (2,731)
Total assets $115,682 $ 76,247 $ 45,936 $39,615 $ 94,271 $371,751
Interest-bearing
liabilities
Interest-bearing
demand $ 16,781 $ 8,254 $ 8,254 $ 8,255 $ 41,544
Savings 8,209 5,473 6,840 6,841 27,363
Money market 14,828 14,828 29,656
Certificate of deposit 40,865 61,469 39,827 11,167 $ 528 153,856
Funds borrowed 14,589 10,080 24,669
Trust preferred
securities 22,425 22,425
Total interest-
bearing liabilities 95,272 100,104 54,921 26,263 22,953 299,513
Demand deposits 37,402 37,402
Other liabilities 4,059 4,059
Stockholders' equity 30,777 30,777
Total liabilities
and Shareholders'
equity $ 95,272 $100,104 $54,921 $26,263 $95,191 $371,751
Rate-sensitive gap (assets
less liabilities) $ 20,410 ($23,857) ($8,985) $13,352 ( $920)
Rate-sensitive gap
(cumulative) $ 20,410 ( $3,447)($12,432) $920
Percent of total
assets (cumulative) 17.6% (1.8%) (5.2%) 0.3%
Rate-sensitive assets/
liabilities (cumulative) 121.4% 98.2% 95.0% 100.3%
Table 15 - Principal Cash Flows and Weighted Average Interest Rates By
Maturity Dates
There Fair
December 31 1998 1999 2000 2001 2002 after Total value
(Maturity date)
Assets
Investment
securities
Fixed rate $ 2,509 $ 2,734 $ 1,791 $ 4,360 $ 1,737 $24,054 $ 37,185 $ 37,185
Average
interest rate 5.43% 5.69% 6.97% 6.21% 7.39% 7.16% 6.82%
Variable rate $ 23 $ 3,962 $61 $ 114 $29,101 $33,261 $33,261
Average
interest rate 7.00% 5.01% 7.00% 7.63% 6.63% 6.44%
Loans
Fixed rate $ 4,754 $ 4,471 $ 7,192 $11,987 $20,251 $78,624 $127,279 $128,060
Average
interest rate 9.51% 8.83% 8.94% 8.17% 8.67% 8.26% 8.42%
Variable rate $15,490 $ 1,669 $ 3,040 $ 2,234 $ 2,225 $95,517 $120,175 $120,175
Average
interest rate 9.41% 9.16% 8.83% 9.27% 8.38% 8.44% 8.60%
Liabilities
Deposits
NOW, money
market and
savings
deposits
Variable rate $135,965 $135,965 $135,965
Average
interest rate 3.24% 3.24%
Certificates
of deposit
Fixed rate $102,376 $31,461 $11,647 $ 4,740 $ 3,160 $ 472 $153,856 $154,800
Average
interest rate 5.36% 5.71% 5.82% 6.02% 6.02% 6.78% 5.51%
Borrowings
Fixed rate $ 21,825 $21,825 $ 21,825
Average
interest rate 5.27% 5.27%
Variable rate $ 2,844 $2,844 $ 2,844
Average
interest rate 6.00% 6.00%
Trust
preferred
securities
Fixed rate $22,425 $22,425 $22,705
Average
interest rate 8.75% 8.75%
Table 16 - Quarterly Financial Information
1997
Fourth Third Second First
Total interest income $6,832 $6,632 $6,544 $6,222
Total interest expense 3,447 3,320 3,243 3,076
Net interest income 3,385 3,312 3,301 3,146
Provision for loan losses 100 58 80 45
Net interest income after
provision for loan losses 3,285 3,254 3,221 3,101
Non-interest income 387 343 641 385
Non-interest expense 2,173 2,097 2,090 2,014
Income before income tax 1,499 1,500 1,772 1,472
Income tax 591 594 703 580
Net income 908 906 1,069 892
Net income per common share .73 .72 .86 .71
Dividends paid per common share .27 .26 .25 .23
Table 16 - Quarterly Financial Information
1996
Fourth Third Second First
Total interest income $6,275 $6,070 $5,884 $5,737
Total interest expense 3,138 3,068 2,921 2,879
Net interest income 3,137 3,002 2,963 2,858
Provision for loan losses 60 30 33 27
Net interest income after
provision for loan losses 3,077 2,972 2,930 2,831
Non-interest income 409 359 413 321
Non-interest expense 2,010 2,562 2,045 2,001
Income before income tax 1,476 769 1,298 1,151
Income tax 582 451 514 454
Net income 894 318 784 697
Net income per common share .71 .25 .61 .54
Dividends paid per common share .22 .21 .20 .20
Graphs Included in the Annual Report
Dividends Per Common Share Common Dividend Payout Ratio
Year Dollars Year Percent
1993 $ .51 1993 21.2%
1994 .60 1994 25.2
1995 .69 1995 36.1
1996 .83 1996 39.3
1997 1.01 1997 33.5
Year End Market Value
Of Common Shares Net Interest Margin
Year Dollars Year Percent
1993 $22.28 1993 3.52%
1994 21.00 1994 3.57
1995 25.00 1995 3.77
1996 29.06 1996 4.00
1997 45.50 1997 4.12
Overhead Expense to Net Loan Losses to
Average Assets Average Loans
(Percent) (Percent)
Year IUB Peer* Year IUB Peer*
1993 2.57 3.64 1993 .18 .39
1994 2.70 3.42 1994 .01 .25
1995 2.67 3.39 1995 .03 .20
1996 2.72 3.34 1996 .19 .23
1997 2.47 3.18 1997 .02 .19
*1997 Peer as of 9/30/97 *Peer as of 9/30/97
Non-Performing Assets
to Total Assets
(Percent)
IUB Peer
1993 .81 1.25
1994 .41 .98
1995 .52 .75
1996 .69 .71
1997 .07 .67
*Peer as of 9/30/97
Efficiency Ratio Long-Term Debt
($ Million)
Year Percent Year Dollars
1993 68.79 1993 $9.4
1994 64.37 1994 7.5
1995 66.24 1995 6.0
1996 63.63 1996 5.0
1997 55.89 1997 0.0
Report of Management on Responsibility for Financial Information
The consolidated financial statements and related financial information
presented in this annual report have been prepared by the management of Indiana
United Bancorp in accordance with generally accepted accounting principles, and
include amounts based on management's best estimates and judgments at the time
of preparation. In presenting this financial information, management is
responsible for its integrity, content and consistency of preparation.
To meet this responsibility, management maintains a system of internal controls,
policies, and administrative procedures designed to provide reasonable assurance
that transactions are recorded accurately. As an integral part of the internal
control structure, the Company maintains a professional staff of internal
auditors who monitor compliance with regulations, policies and procedures, and
assess the effectiveness of the internal control structure. In addition, the
Company's audit committee, which is comprised entirely of outside directors,
meets periodically with management, internal auditors and/or independent
auditors to review the scope and results of audit activities and the responses
thereto by management. Internal auditors, independent auditors and banking
regulators have unrestricted access to the audit committee. Management
believes the Company's system provides a basis for the preparation of reliable
financial statements.
The Company's consolidated financial statements have been audited by Geo. S.
Olive & Co. LLC. Their responsibility is to express an opinion as to the
integrity of the Company's consolidated financial statements and, in performing
their audit, to evaluate the Company's internal control structure to the extent
they deem necessary in order to issue such opinion. As described further in
their report that follows, their opinion is based on their audit, which was
conducted in accordance with generally accepted auditing standards and is
believed by them to provide a reasonable basis for their opinion. The selection
of Geo. S. Olive & Co. LLC was approved by the Board of Directors and ratified
by shareholders.
/s/ Robert E. Hoptry /s/ Jay B. Fager
Robert E. Hoptry Jay B. Fager
Chief Executive Officer Chief Financial Officer
Report of Independent Certified Public Accountants
To the Shareholders and
Board of Directors
Indiana United Bancorp
Greensburg, Indiana
We have audited the consolidated balance sheet of Indiana United Bancorp and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
Indiana United Bancorp and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Geo. S. Olive & Co. llc
Indianapolis, Indiana
February 24, 1998
Consolidated Balance Sheet
December 31 1997 1996
Assets
Cash and due from banks $ 12,609,136 $ 13,236,256
Interest-bearing demand deposits 57,860 59,658
Federal funds sold 31,350,000 5,900,000
Cash and cash equivalents 44,016,996 19,195,914
Short-term investments 100,000
Investment securities available for sale 70,445,918 81,186,867
Loans 247,453,905 219,483,489
Allowance for loan losses (2,730,642) (2,505,853)
Net loans 244,723,263 216,977,636
Premises and equipment 6,402,379 5,918,643
Federal Home Loan Bank stock 1,137,815 1,137,815
Income receivable 2,074,336 1,951,803
Foreclosed real estate 1,000,000
Other assets 2,950,019 877,470
Total assets $371,750,726 $328,346,148
Liabilities
Deposits
Noninterest bearing $ 37,401,710 $ 29,001,245
Interest bearing 252,419,171 247,400,928
Total deposits 289,820,881 276,402,173
Short-term borrowings 14,669,262 15,683,491
Federal Home Loan Bank advances 10,000,000
Note payable 5,000,000
Interest payable 1,429,623 1,271,737
Other liabilities 2,629,044 2,239,784
Total liabilities 318,548,810 300,597,185
Guaranteed preferred beneficial interests in
Company's subordinated debentures 22,425,000
Commitments and Contingencies
Shareholders' Equity
Preferred stock, no-par value
Authorized-400,000 shares
Issued and outstanding-none
Common stock, $1 stated value
Authorized-3,000,000
Issued and outstanding-1,250,897 shares 1,250,897 1,250,897
Paid-in capital 10,677,045 10,677,045
Retained earnings 18,238,321 15,726,495
Net unrealized gain on securities available
for sale 610,653 94,526
Total shareholders' equity 30,776,916 27,748,963
Total liabilities and shareholders' equity $371,750,726 $328,346,148
See notes to consolidated financial statements.
Consolidated Statement of Income
Year Ended December 31 1997 1996 1995
Interest Income
Loans receivable $20,888,868 $18,266,420 $16,938,330
Investment securities
Taxable 4,707,789 5,122,743 5,326,297
Tax exempt 189,732 185,231 216,816
Federal funds sold 442,117 379,965 304,619
Short-term investments 1,777 12,469 49,002
Total interest income 26,230,283 23,966,828 22,835,064
Interest Expense
Deposits 11,956,128 10,862,835 10,307,724
Short-term borrowings 629,959 689,789 931,944
Trust preferred securities 105,266
Long-term debt 395,138 453,527 611,978
Total interest expense 13,086,491 12,006,151 11,851,646
Net Interest Income 13,143,792 11,960,677 10,983,418
Provision for loan losses 283,000 150,000 30,000
Net Interest Income After Provision
for Loan Losses 12,860,792 11,810,677 10,953,418
Noninterest Income
Insurance commissions 416,208 438,405 472,998
Fiduciary activities 243,000 232,494 189,417
Service charges on deposit accounts 624,290 519,609 450,060
Net realized gains (losses)
on securities (79,758) 16,296
Other income 552,534 311,204 328,032
Total noninterest income 1,756,274 1,501,712 1,456,803
Noninterest Expense
Salaries and employee benefits 4,753,519 4,481,548 4,467,408
Net occupancy expenses 757,790 764,086 804,977
Equipment expenses 767,036 712,683 664,109
Professional fees 217,032 221,927 204,578
Deposit insurance expense 83,342 735,576 394,672
Other expenses 1,795,369 1,702,669 1,693,719
Total noninterest expense 8,374,088 8,618,489 8,229,463
Income Before Income Tax 6,242,978 4,693,900 4,180,758
Income tax expense 2,467,746 2,001,351 1,651,366
Net Income $ 3,775,232 $ 2,692,549 $ 2,529,392
Net Income Per Common Share $3.02 $2.11 $1.91
Weighted Average Shares Outstanding 1,250,897 1,250,897 1,250,897
See notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity
Preferred Stock Common Stock
Shares Amount Shares Amount
Balances, January 1, 1995 24,000 $2,400,000 1,250,897 $1,250,897
Net income for 1995
Cash dividends
Preferred stock-$6.34 per share
Common stock-$.69 per share
Net change in unrealized gain
on securities available for
sale
Redemption of preferred stock (4,000) (400,000)
Balances, December 31, 1995 20,000 2,000,000 1,250,897 1,250,897
Net income for 1996
Cash dividends
Preferred stock-$6.34 per share
Common stock-$.83 per share
Net change in unrealized gain
on securities available for
sale
Redemption of preferred stock (20,000) (2,000,000)
Balances, December 31, 1996 1,250,897 1,250,897
Net income for 1997
Cash dividends-$1.01 per share
Net change in unrealized gain
on securities available for
sale
Balances, December 31, 1997 0 $ 0 1,250,897 $1,250,897
See notes to consolidated financial statements.
<CAPTIONS>
Consolidated Statement of Changes in Shareholders' Equity
Net Unrealized
Gain(Loss) on
Securities
Paid-in Retained Available
Capital Earnings For Sale Total
Balances, January 1, 1995 $10,677,045 $12,595,589 $(2,641,473) $24,282,058
Net income for 1995 2,529,392 2,529,392
Cash dividends
Preferred stock-$6.34
per share (139,480) (139,480)
Common stock-$.69 per share (863,119) (863,119)
Net change in unrealized gain
on securities available for
sale 2,836,568 2,836,568
Redemption of preferred stock (400,000)
Balances, December 31, 1995 10,677,045 14,122,382 195,095 28,245,419
Net income for 1996 2,692,549 2,692,549
Cash dividends
Preferred stock-$6.34
per share (50,192) (50,192)
Common stock-$.83 per share (1,038,244) (1,038,244)
Net change in unrealized gain
on securities available for
sale (100,569) (100,569)
Redemption of preferred stock (2,000,000)
Balances, December 31, 1996 10,677,045 15,726,495 94,526 27,748,963
Net income for 1997 3,775,232 3,775,232
Cash dividends-$1.01 per share (1,263,406) (1,263,406)
Net change in unrealized gain
on securities available for
sale 516,127 516,127
Balances, December 31, 1997 $10,677,045 $18,238,321 $ 610,653 $30,776,916
See notes to consolidated statements.
Consolidated Statement of Cash Flows
Year Ended December 31 1997 1996 1995
Operating Activities
Net income $ 3,775,232$ 2,692,549 $ 2,529,392
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 283,000 150,000 30,000
Depreciation and amortization 695,343 644,673 623,686
Deferred income tax (170,590) 188,387 (60,950)
Securities amortization, net 51,525 72,066 105,445
Amortization of fair value adjustments
on loans and deposits 90,600 90,600 81,544
Investment securities (gains) losses 79,758 (16,296)
Foreclosed real estate gains (179,375)
Net change in
Income receivable (122,533) 22,528 (78,370)
Interest payable 157,886 (116,898) 524,295
Other adjustments (573,046) (461,556) 85,002
Net cash provided
by operating activities 4,087,800 3,282,349 3,823,748
Investing Activities
Net change in short-term investments 100,000 5,000,000 (4,952,843)
Purchases of securities
available for sale (3,006,972)(16,850,769) (5,738,936)
Proceeds from maturities and paydowns of
securities available for sale 12,901,562 16,531,638 11,841,444
Proceeds from sales of securities
available for sale 1,574,319 9,369,943
Purchases of securities
held to maturity (324,520)
Proceeds from maturities and paydowns
of securities held to maturity 752,427
Net change in loans (28,183,535)(19,617,946) (6,833,403)
Purchases of premises and equipment (1,361,765) (556,117) (1,195,505)
Proceeds from sale of other real estate 1,227,507 50,000 63,177
Other investing activities 143,000 17,000 10,000
Net cash provided (used)
by investing activities (16,605,884)(15,426,194) 2,991,784
Financing Activities
Net change in
Noninterest-bearing, NOW,
money market and savings deposits 10,619,014 1,534,086 (3,040,069)
Certificates of deposit 2,799,694 12,521,984 4,036,023
Short-term borrowings (1,014,229) 4,443,191 439,426
Repayment of long-term debt (5,000,000) (1,000,000) (1,500,000)
Proceeds from FHLB advances 12,500,000 5,190,000
Repayment of FHLB advances (2,500,000) (2,000,000) (3,190,000)
Cash dividends (1,263,406) (1,088,436) (1,002,599)
Redemption of preferred stock (2,000,000) (400,000)
Net proceeds from issuance of trust
preferred securities 21,198,093
Net cash provided by
financing activities 37,339,166 12,410,825 532,781
Net Change in Cash and Cash Equivalents 24,821,082 266,980 7,348,313
Cash and Cash Equivalents,
Beginning of Year 19,195,914 18,928,934 11,580,621
Cash and Cash Equivalents,
End of Year $44,016,996 $19,195,914 $18,928,934
Additional Cash Flows Information
Interest paid $12,928,605 $12,123,049 $11,327,351
Income tax paid 2,608,182 1,885,288 1,943,281
Loan balances transferred to
foreclosed real estate 1,000,000
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of Indiana United Bancorp ("Company"),
its wholly owned bank subsidiaries ("Banks") and its subsidiary, IUB Capital
Trust, conform to generally accepted accounting principles and reporting
practices followed by the banking industry. The more significant of the
policies are described below.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the ownership
and management of the Banks. Union Bank and Trust Company of Indiana ("Union
Bank") headquartered in Greensburg, Indiana operates under a state charter and
is subject to regulation by the Indiana Department of Financial Institutions
("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Regional
Federal Savings Bank ("Regional Bank"), headquartered in New Albany, Indiana is
a federally-chartered thrift and is subject to regulation by the Office of
Thrift Supervision ("OTS") and the FDIC.
IUB Capital Trust is a business trust formed in 1997 to issue the guaranteed
preferred beneficial interests in the Company's subordinated debentures ("Trust
Preferred Securities"). The Company owns all of the common stock of IUB Capital
Trust.
The Banks generate commercial, mortgage and consumer loans and receive deposits
from customers located primarily in Decatur, Floyd, Clark and Jay Counties,
Indiana, and surrounding counties. The Banks' loans are generally secured by
specific items of collateral including real property, consumer assets and
business assets. Although the Banks have diversified loan portfolios, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in the agricultural industry.
Consolidation-The consolidated financial statements include the accounts of the
Company, Banks and IUB Capital Trust after elimination of all material
intercompany transactions.
Investment securities-Debt securities are classified as held to maturity
("HTM") when the Company has the positive intent and ability to hold the
securities to maturity. Securities HTM are carried at amortized cost. Debt
securities not classified as HTM are classified as available for sale ("AFS").
Securities AFS are carried at fair value with unrealized gains and losses
reported separately through shareholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans are carried at the principal amount outstanding. A loan is impaired when,
based on current information or events, it is probable that the Company will be
unable to collect all amounts due (principal and interest) according to the
contractual terms of the loan agreement. Payments with insignificant delays not
exceeding 90 days outstanding are not considered impaired. Certain nonaccrual
and substantially delinquent loans may be considered to be impaired. The
Company considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
identification of evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired loans is
discontinued when, in management's opinion, the borrower may be unable to meet
payments as they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently recognized only
to the extent cash payments are received unless such amounts are applied to
principal amounts outstanding. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans.
Provision for loan losses and the adequacy of the allowance for loan losses are
based on management's continuing review and evaluation of the loan portfolio,
current economic conditions, past loss experience and other pertinent factors.
Impaired loans are measured by the present value of expected cash flows, or the
fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1997, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method for premises and the
declining-balance method for equipment based principally on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are
members of the Federal Home Loan Bank ("FHLB") system. The required investment
in the common stock is based on a predetermined formula.
Foreclosed real estate is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
Income tax in the consolidated statement of income includes deferred income tax
provisions or benefits for all significant temporary differences in recognizing
income and expenses for financial reporting and income tax purposes. The
Company files consolidated income tax returns with its subsidiaries.
Earnings per share have been computed based upon the weighted average common
shares outstanding during each year.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Proposed Merger
The Company is a party to an Agreement and Plan of Merger with P.T.C. Bancorp
("PTC") dated as of October 8, 1997 pursuant to which PTC would merge with and
into the Company. PTC's commercial bank subsidiary, People's Trust Company,
Brookville, Indiana, a commercial bank organized under the laws of Indiana,
would become a wholly owned subsidiary of the Company, and each outstanding
share of PTC at the effective time of the merger would be converted into the
right to receive 1.075 shares of common stock of the Company. The Company
expects to issue in the aggregate up to 1,136,417 shares of common stock in
the merger.
It is expected that the merger will be accounted for under the pooling of
interests method of accounting. Consolidated assets, deposits and shareholders'
equity of PTC approximated $322.0 million, $293.8 million and $24.2 million at
December 31, 1997. Costs related to the merger incurred by the Company through
December 31, 1997 totaling $176,000, and any additional costs incurred
subsequent to December 31, 1997, will be charged against net income upon
consummation. The proposed transaction is subject to various regulatory
approvals and the approvals of the shareholders of both organizations. Although
the Company expects the merger to be completed by May 1998, there can be no
assurance that the transaction will be consummated.
Branch Acquisitions
On February 24, 1998, the Company was informed that it had been selected, on the
basis of competitive bidding, to acquire two branches in Madison County,
Indiana. Consummation is subject to a due diligence review and execution of a
definitive agreement. The acquisitions include assumption of deposits of
approximately $32.2 million and purchase of loans of approximately $13.6
million. A premium of 9.25% will be paid on the deposits acquired.
Consummation is expected to occur late in the second quarter or early in the
third quarter of 1998.
Restriction on Cash and Due From Banks
The Banks are required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at December 31, 1997, was
$2,495,000.
Investment Securities
1997
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
Available for sale
Federal agencies $23,061 $ 813 $ 43 $23,831
State and municipal 3,656 76 3 3,729
Mortgage-backed securities 41,583 530 350 41,763
Corporate obligations 1,123 1,123
Total investment securities $69,423 $1,419 $396 $70,446
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
1996
Gross Gross
Amortized Unrealized Unrealized Fair
December 31 Cost Gains Losses Value
Available for sale
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
Mortgage-backed securities 50,157 489 604 50,042
Corporate obligations 244 2 242
Total investment securities $81,020 $943 $776 $81,187
The amortized cost and fair value of securities AFS at December 31, 1997 by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
Within one year $ 2,375 $ 2,370
Two through
five years 10,976 11,051
Six through ten years 13,187 13,948
After ten years 1,302 1,314
27,840 28,683
Mortgage-backed securities 41,583 41,763
Totals $69,423 $70,446
Securities with a carrying value of $25,207,600 and $25,009,600 were pledged
at December 31, 1997 and 1996 to secure certain deposits and for other purposes
as permitted or required by law.
Proceeds from sales of securities AFS during 1997 and 1995 were $1,574,319 and
$9,369,943. Gross gains of $3,474 and $160,945 and gross losses of $83,232 and
$144,649 were realized on those sales in 1997 and 1995, respectively.
The tax expense (benefit) for gains (losses) on security transactions for the
years ended December 31, 1997 and 1995 was $(31,592) and $6,400.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<CAPTIONS>
Loans and Allowance
December 31 1997 1996
Commercial and industrial loans $ 10,473 $ 7,834
Agricultural production financing 10,551 11,178
Farm real estate 27,652 26,843
Commercial real estate 27,538 27,691
Residential real estate 120,342 109,962
Construction and development 5,288 6,589
Consumer 44,269 27,567
Government guaranteed loans 1,341 1,819
Total loans $247,454 $219,483
December 31 1997 1996 1995
Allowance for loan losses
Balances, January 1 $2,506 $2,754 $2,784
Provision for losses 283 150 30
Recoveries on loans 191 58 100
Loans charged off (249) (456) (160)
Balances, December 31 $2,731 $2,506 $2,754
Information on impaired loans is summarized below.
December 31 1997 1996
Impaired loans with an allowance $113 $535
Impaired loans for which the discounted cash flows or
collateral value exceeds the carrying value of the loan 613
Total impaired loans $113 $1,148
Allowance for impaired loans (included in the Company's
allowance for loan losses) $20 $120
Year Ended December 31 1997 1996
Average balance of impaired loans $374 $1,996
Interest income recognized on impaired loans 29 112
Cash-basis interest included above 29 112
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Banks have entered into transactions with certain directors, executive
officers, significant shareholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
1997 1996
Balances, January 1 $7,964 $5,941
Changes in composition of related parties (5,776) (416)
New loans, including renewals 552 2,986
Payments, etc., including renewals (747) (547)
Balances, December 31 $1,993 $7,964
Premises and Equipment
December 31 1997 1996
Land $ 774 $ 909
Buildings 7,490 7,030
Equipment 5,635 5,115
Total cost 13,899 13,054
Accumulated depreciation (7,497) (7,135)
Net $6,402 $5,919
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Deposits
December 31 1997 1996
Noninterest-bearing $ 37,402 $ 29,001
Interest-bearing demand 70,929 67,726
Savings deposits 27,634 28,619
Certificates and other time deposits of
$100,000 or more 25,789 32,083
Other certificates and time deposits 128,067 118,973
Total deposits $289,821 $276,402
Certificates and other time deposits maturing in years ending after
December 31, 1997
1998 $101,018
1999 32,578
2000 11,799
2001 3,589
2002 4,399
Thereafter 473
$153,856
Short-Term Borrowings
December 31 1997 1996
Federal funds purchased $ 750
Securities sold under repurchase agreements $11,825 12,989
U. S. Treasury demand notes 2,844 1,944
Total short-term borrowings $14,669 $15,683
Securities sold under agreements to repurchase ("agreements") consist of
obligations of the Company to other parties. The obligations are secured by
U.S. Treasury and Federal agency securities, and such collateral is held by a
safekeeping agent. The maximum amount of outstanding agreements at any month-
end during 1997 and 1996 totaled $12,489,000 and $15,903,000 and the daily
average of such agreements totaled $9,394,000 and $11,564,000. The weighted
average yield was 5.22% and 5.12% at December 31, 1997 and 1996 while the
weighted average yield during 1997 and 1996 was approximately 5.22% and 5.14%.
The majority of the agreements at December 31, 1997 mature within 30 days.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Federal Home Loan Bank Advances
The Company had an FHLB advance of $10,000,000 outstanding at December 31, 1997.
The advance has an interest rate of 5.35% and matures on December 30, 2002. The
FHLB advance is secured by first mortgage loans and investment securities
totaling $53,407,000. The advance is subject to restrictions or penalties in
the event of prepayment.
Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures
On December 12, 1997, Trust Preferred Securities totaling $22,425,000 were
issued. On such date, IUB Capital Trust completed the public offering of
2,242,500 shares of Trust Preferred Securities with a liquidation preference of
$10 per security. The proceeds of the offering were loaned to the Company in
exchange for subordinated debentures with terms that are similar to the Trust
Preferred Securities, which subordinated debentures are the sole asset of IUB
Capital Trust. Issuance costs paid from the proceeds of $1,227,000 are being
amortized over the life of the securities. The securities and distributions
are guaranteed by the Company. Distributions on the securities are payable
quarterly in arrears at the annual rate of 8.75% of the liquidation preference
and are included in interest expense in the consolidated statement of income.
The Trust Preferred Securities, which mature December 31, 2027, are subject to
mandatory redemption, in whole or in part, upon repayment of the subordinated
debentures at maturity or their earlier redemption at the liquidation
preference. The subordinated debentures are redeemable prior to the maturity
date at the option of the Company on or after December 31, 2002. The
subordinated debentures are also redeemable in whole at any time or in part from
time to time, or at any time, in whole, but not in part, upon the occurrence of
specific events defined within the trust indenture. The Company has the option
to defer distributions on the subordinated debentures from time to time for a
period not to exceed 20 consecutive quarters.
Note Payable
Long-term debt at December 31, 1996 consisting of a $5,000,000 secured term loan
was paid during 1997. The Company paid $375,000 in June and $4,625,00 in
December.
The loan was a secured term loan with interest payable quarterly. The loan was
secured by all stock of the Banks, and the loan agreement contained restrictions
on debt, guarantees and mergers, in addition to other affirmative and negative
covenants.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Income Tax
Year Ended December 31 1997 1996 1995
Income tax expense
Currently payable
Federal $2,042 $1,408 $1,317
State 597 405 395
Deferred
Federal (131) 179 (50)
State (40) 9 (11)
Total income tax expense $2,468 $2,001 $1,651
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $2,123 $1,596 $1,421
Tax exempt interest (58) (57) (63)
Effect of state income taxes 368 273 253
Change in tax law 144
Other 35 45 40
Actual tax expense $2,468 $2,001 $1,651
A cumulative net deferred tax liability is included in other liabilities. The
components of the liability are as follows:
December 31 1997 1996
Assets
Allowance for loan losses $ 380 $ 289
State income tax 2 15
Total assets 382 304
Liabilities
Depreciation (250) (210)
Fair value adjustments in accounting for loans (182) (223)
Fair value adjustments in accounting for securities (27) (39)
Fair value adjustments in accounting for
premises and equipment (563) (675)
Other (71) (39)
Unrealized gain on securities AFS (412) (72)
Total liabilities (1,505) (1,258)
$(1,123) $ (954)
No valuation allowance was necessary at anytime during 1997, 1996 and 1995.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Retained earnings include approximately $2,162,000 for which no deferred income
tax liability has been recognized. This amount represents an allocation of
income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock or excess dividends, or loss of "bank"
status, would create income for tax purposes only, which income would be subject
to the then-current corporate income tax rate. The unrecorded deferred income
tax liability on the above amount at December 31, 1997 was approximately
$735,000.
Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby
letters of credit, which are not included in the accompanying financial
statements. The Banks' exposure to credit loss in the event of nonperformance
by the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Banks use the same credit policies in making
such commitments as they do for instruments that are included in the
consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
1997 1996
Commitments to extend credit $39,784 $26,694
Standby letters of credit 362 222
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties. Standby letters of credit are conditional commitments
issued by the Banks to guarantee the performance of a customer to a third party.
The Company and Banks may from time to time be subject to claims and lawsuits
which arise primarily in the ordinary course of business. Management is
presently not aware of any such claims.
Preferred Shares
In 1987, the Company issued 30,000 shares of no-par value, $100 stated value,
convertible preferred stock. The Company redeemed 20,000 shares of preferred
stock in 1996 and 4,000 shares in 1995. The total redemption price was
$2,000,000 in 1996 and $400,000 in 1995. For 1996 and 1995, cash dividends
were paid at the rate of 6.34% per annum.
The Company's Articles of Incorporation permit the Board of Directors, without
further shareholder approval, to establish the relative rights, designations,
preferences and limitations or restrictions of the Company's preferred stock
prior to the issuance thereof.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Dividends and Capital Restrictions
Without prior approval, Union Bank is restricted by Indiana law and regulations
of the DFI, and the FDIC as to the maximum amount of dividends Union Bank can
pay to the parent in any calendar year to Union Bank's retained net profits (as
defined) for that year and the two preceding years.
The OTS regulations provide that a savings bank which meets fully phased-in 1994
capital requirements and is subjected only to "normal supervision", such as
Regional Bank, may pay out 100% of net income to date over the calendar year and
50% of surplus capital existing at the beginning of the calendar year without
supervisory approval, but with 30 days prior notice to OTS. As a result of
limitations relating to tax bad debt deductions, Regional Bank's nontaxable
dividends to the Company are limited to an amount approximately equal to net
income commencing in 1997.
At December 31, 1997, total shareholders' equity of the Banks was $32,804,000
of which $30,320,000 was restricted or limited from dividend distribution to the
Company. As a practical matter, the Banks may restrict dividends to a lesser
amount because of the need to maintain an adequate capital structure.
Dividend Reinvestment Plan
The Company approved an Automatic Dividend Reinvestment Plan in February 1997.
The plan enabled shareholders to elect to have their cash dividends on all or a
portion of shares held automatically reinvested in additional shares of the
Company's common stock. The stock is purchased by the Company's transfer agent
on the open market and credited to participant accounts at fair market value.
Dividends are reinvested on a quarterly basis commencing with the March 1997
dividend payment.
Regulatory Capital
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies and are assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations. The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures. The capital category assigned to an entity can
also be affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the calculated
ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on operations. At December 31, 1997 and 1996, the Company and
its Banks are categorized as well capitalized and met all subject capital
adequacy requirements. There are no conditions or events since December 31,
1997 that management believes have changed the Company's or Banks'
classification.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Company's and Banks' actual and required capital amounts and ratios are
as follows:
1997
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
December 31 Amount Ratio Amount Ratio Amount Ratio
Indiana United Bancorp
Total capital 1 (to risk-
weighted assets) $55,246 24.0% $18,416 8.0% N/A
Tier 1 capital 1 (to risk-
weighted assets) 40,120 17.4 9,208 4.0 N/A
Tier 1 capital 1 (to
average assets) 40,120 10.7 14,979 4.0 N/A
Union Bank
Total capital 1 (to risk-
weighted assets) 23,074 16.2 11,392 8.0 $14,240 10.0%
Tier 1 capital 1 (to risk-
weighted assets) 21,294 15.0 5,696 4.0 8,544 6.0
Tier 1 capital 1 (to
average assets) 21,294 9.5 8,992 4.0 11,240 5.0
Regional Bank
Total risk-based capital 1
(to risk-weighted assets) 12,376 14.5 6,811 8.0 8,514 10.0
Core capital 1 (to adjusted
tangible assets) 11,433 8.4 4,082 3.0 8,165 6.0
Core capital 1 (to adjusted
total assets 11,433 8.4 4,082 3.0 6,804 5.0
Regional Bank's tangible capital at December 31, 1997 was $11,433,000, which
amount was 8.4 percent of tangible assets and exceeded the required ratio of
1.5 percent.
1996
Required for To Be Well
Actual Adequate Capital 1 Capitalized 1
December 31 Amount Ratio Amount Ratio Amount Ratio
Indiana United Bancorp
Total capital 1 (to risk-
weighted assets) $29,934 15.6% $15,312 8.0% N/A
Tier 1 capital 1 (to risk-
weighted assets) 27,540 14.4 7,656 4.0 N/A
Tier 1 capital 1 (to
average assets) 27,540 8.4 13,152 4.0 N/A
Union Bank
Total capital 1 (to risk-
weighted assets) 21,224 15.8 10,718 8.0 $13,398 10.0%
Tier 1 capital 1 (to risk-
weighted assets) 19,547 14.6 5,359 4.0 8,039 6.0
Tier 1 capital 1 (to
average assets) 19,547 9.0 8,708 4.0 10,885 5.0
Regional Bank
Total risk-based capital 1
(to risk-weighted assets) 12,076 19.2 5,021 8.0 6,277 10.0
Core capital 1 (to adjusted
tangible assets) 11,415 10.6 3,219 3.0 6,437 6.0
Core capital 1 (to adjusted
total assets) 11,415 10.6 3,219 3.0 5,369 5.0
1 As defined by regulatory agencies
Regional Bank's tangible capital at December 31, 1996 was $11,415,000, which
amount was 10.6 percent of tangible assets and exceeded the required ratio of
1.5 percent.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Employee Benefit Plans
The Company has a defined-contribution retirement plan in which substantially
all employees may participate. The Company matched employees' contributions at
the rate of $.75 for 1997, $.70 for 1996, and $.65 for 1995 for each dollar
contributed. In addition, the Company contributed 6.5% of total compensation
plus an additional 5.7% of each participant's compensation in excess of $65,400
in 1997, $62,700 in 1996, and $61,200 in 1995. Expense for the plan was
$346,279 in 1997, $283,518 in 1996 and $295,862 in 1995.
Deposit Insurance Expense
Regional Bank's deposits are presently insured by the Savings Association
Insurance Fund ("SAIF"). A recapitalization plan for the SAIF was signed into
law on September 30, 1996, which provided for a special assessment on all SAIF-
insured institutions to enable the SAIF to achieve the required level of
reserves. The assessment of.065% was based on March 31, 1995 deposits.
Regional Bank's special assessment in 1996 totaled $541,000 before taxes, and
was charged against current income and included with deposit insurance expense.
Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash and Cash Equivalents-The fair value of cash and cash equivalents
approximates carrying value.
Short-term Investments-The fair value of short-term investments approximates
carrying value.
Securities-The fair values are based on quoted market prices.
Loans-For both short-term loans and variable-rate loans that reprice frequently
and with no significant change in credit risk, fair values are based on carrying
values. The fair value for other loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
FHLB Stock-The fair value of FHLB stock is based on the price at which it may
be resold to the FHLB.
Income Receivable/Interest Payable-The fair value of these amounts approximates
carrying values.
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Deposits-The fair values of noninterest-bearing, interest-bearing demand, and
savings accounts are equal to the amount payable on demand at the balance sheet
date. The carrying amounts for variable rate, fixed term certificates of
deposit approximate their fair values at the balance sheet date. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on such
time deposits.
Short-term Borrowings-The interest rates for short-term borrowings approximate
market rates, thus the fair value approximates carrying value.
FHLB Advances-The fair value of this borrowing is established using a discounted
cash flow calculation, based on current rates for similar debt. Fair value
approximates carrying value.
Note Payable-The note consists of an adjustable instrument tied to a variable
market interest rate. Fair value approximates carrying value.
Trust Preferred Securities-The fair value is based on quoted market values.
The estimated fair values of the Company's financial instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
December 31 Amount Value Amount Value
Assets
Cash and cash equivalents $ 44,017 $ 44,017 $ 19,196 $ 19,196
Short-term investments 100 100
Securities available for sale 70,446 70,446 81,187 81,187
Loans, net 244,723 245,504 216,978 217,690
Stock in FHLB 1,138 1,138 1,138 1,138
Income receivable 2,074 2,074 1,952 1,952
Liabilities
Deposits 289,821 290,765 276,402 277,180
Borrowings
Short-term 14,669 14,669 15,683 15,683
FHLB advances 10,000 10,000
Note payable 5,000 5,000
Interest payable 1,430 1,430 1,272 1,272
Trust preferred securities 22,425 22,705
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
December 31 1997 1996
Assets
Cash on deposit and repurchase agreements $17,588 $ 1,584
Investment security-AFS 1,087
Investment in subsidiaries 34,110 31,171
Other assets 1,629 186
Total assets $54,414 $32,941
Liabilities
Subordinated debentures payable to
IUB Capital Trust $23,119
Other long-term debt $ 5,000
Other liabilities 518 192
Total liabilities 23,637 5,192
Shareholders' Equity 30,777 27,749
Total liabilities and shareholders' equity $54,414 $32,941
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
Year Ended December 31 1997 1996 1995
Income
Dividends from subsidiaries $2,925 $4,500 $4,000
Fees from subsidiaries 45 33 55
Other income 137 102 73
Total income 3,107 4,635 4,128
Expenses
Interest expense 488 454 612
Salaries and benefits 786 682 506
Professional fees 91 94 84
Other expenses 260 224 236
Total expenses 1,625 1,454 1,438
Income before income tax and equity in
undistributed income of subsidiaries 1,482 3,181 2,690
Income tax benefit 564 565 511
Income before equity in undistributed income
of subsidiaries 2,046 3,746 3,201
Equity in undistributed income
of subsidiaries 1,729 (1,053) (672)
Net Income $3,775 $2,693 $2,529
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Cash Flows
Year Ended December 31 1997 1996 1995
Operating Activities
Net income $ 3,775 $ 2,693 $ 2,529
(Undistributed) income of subsidiaries (1,729) 1,053 672
Other adjustments 125 71 52
Net cash provided by operating activities 2,171 3,817 3,253
Investing Activities
Purchase of equipment (15) (102) (17)
Proceeds from sale of equipment 17
Purchase of security AFS (1,087)
Net cash used by investing activities (1,102) (85) (17)
Financing Activities
Payments on long-term debt (5,000) (1,000) (1,500)
Cash dividends (1,263) (1,088) (1,003)
Redemption of preferred stock (2,000) (400)
Net proceeds from issuance of debentures 21,892
Purchase of IUB Capital Trust common shares (694)
Net cash provided (used) by financing
activities 14,935 (4,088) (2,903)
Net Change in Cash on Deposit
and Repurchase Agreements 16,004 (356) 333
Cash on Deposit and Repurchase Agreements,
Beginning of Year 1,584 1,940 1,607
Cash on Deposit and Repurchase Agreements,
End of Year $17,588 $ 1,584 $ 1,940
Indiana United Bancorp Directory
Directors
Robert E. Hoptry
Chairman and President
Indiana United Bancorp
William G. Barron
Chairman and President
Barron Homes, Inc.
Philip A. Frantz
Attorney; Partner
Coldren and Frantz
Martin G. Wilson
Farmer
Edward J. Zoeller
President
E.M. Cummings Veneer
Executive Administration
Robert E. Hoptry
Chairman and President
Officers
Jay B. Fager
Treasurer and Chief Financial Officer
Sue Fawbush
Vice President and Secretary
Michael K. Bauer
Vice President
Dennis M. Flack
Vice President
Daryl R. Tressler
Vice President
Suzanne Kendall
Auditor
Union Bank and Trust Company of Indiana
Directors
Daryl R. Tressler
Chairman and President
Union Bank and Trust Company
William G. Barron
Chairman and President
Barron Homes, Inc.
Phillip A. Frantz
Attorney; Partner
Coldren and Frantz
Robert E. Hoptry
Chairman and President
Indiana United Bancorp
David L. Miers
Manager
Miers Farm Corporation
Lawrence R. Rueff, D.V.M.
Veterinarian
John G. Young
Chairman
Jay Garment Co.
Executive Administration
Daryl R. Tressler
Chairman and President
Division Managers
W. Brent Hopty
Senior Vice President
Lending Division
Glenn R. Raver
Senior Vice President
Retail Services and Operations Divisions
Daniel F. Anderson
Vice President and
Senior Trust Officer
Regional Federal Savings Bank
Directors
Michael K. Bauer
Chairman and President
Regional Federal Savings Bank
William G. Barron
Chairman and President
Barron Homes, Inc.
D.J. Hines
President
Schuler Realty, Inc.
Robert E. Hoptry
Chairman and President
Indiana United Bancorp
Michael J. Kapfhammer
President
Buckhead Mountain Grill
Charles E. MacGregor
Attorney
Wyatt, Tarrant & Combs
Marvin L. Slung
Sales Representative
Jeb Advertising
Edward J. Zoeller
President
E.M. Cummings Veneer
Executive Administration
Michael K. Bauer
Chairman and President
Division Managers
Larry W. Brumley
Senior Vice President
Commercial Lending Division
Dennis R. Morrison
Senior Vice President
Consumer Lending Division
Carmen L. Glenn
Vice President and Treasurer
Financial Planning and Operations Division
James S. Honour, Jr.
Vice President
Retail Services Division
Indiana United Bancorp Board of Directors
(Picture) (Picture)
William G. Barron Philip A. Frantz
Director since 1989 Director since 1987
(Picture)
Robert E. Hoptry
Director since 1983
(Picture) (Picture)
Martin G. Wilson Edward J. Zoeller
Director since 1983 Director since 1994
Inside Back Cover
Shareholder Information
Annual Meeting
Tuesday, June 23, 1998, 10:00AM
Conference Center, Second Floor
Union Bank and Trust Company
201 N. Broadway
Greensburg, Indiana 47240
Corporate Address
Indiana United Bancorp
201 N. Broadway Street
Post Office Box 87
Greensburg, Indiana 47240
Form 10-K
Copies of the Company's 1997 Form 10-K filed with the Securities and Exchange
Commission are available without charge to all shareholders upon request.
Please direct requests to Jay B. Fager, Treasurer and Chief Financial Officer.
Transfer Agent
Securities Transfer Department
Mid America Bank of Louisville
Post Office Box 1497
Louisville, Kentucky 40201-1497
Common Shares
The common shares of the Company are listed on the NASDAQ National Market
System. In newspaper listings, company shares are frequently listed as IndUtd.
The trading symbol is IUBC.
Market Makers
Market Makers in the Company's common stock include:
J.J.B. Hilliard/W.L. Lyons, Inc.
NatCity Investments, Inc.
Stifel, Nicolaus & Company, Inc.
The range of known per share prices by calendar quarter, based on actual
transactions, excluding commissions, is shown below.
1997 Q4 Q3 Q2 Q1
High 46 1/4 41 1/2 41 34
Low 40 1/2 37 1/2 31 3/4 28 1/2
Last Sale 45 1/2 41 38 33 1/4
1996 Q4 Q3 Q2 Q1
High 29 1/16 27 25 1/2 26 1/4
Low 25 25 23 1/4 24 1/4
Last Sale 29 1/16 25 3/4 24 1/2 24 1/4
BACK COVER
Indiana United Bancorp
201 N. Broadway
P.O. Box 87
Greensburg, Indiana 47240