FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NUMBER 0-12422
INDIANA UNITED BANCORP
(Exact name of registrant as specified in its charter)
INDIANA 35-1562245
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
(Address of principal executive offices) (Zip Code)
(812) 663-0157
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No
As of June 30, 1998 there were outstanding 2,387,314 shares, without
par value of the registrant.
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet 3
Consolidated Condensed Statement of Income 4
Consolidated Condensed Statement of Changes in
Shareholders' Equity 5
Consolidated Condensed Statement of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 22-23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
INDIANA UNITED BANCORP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
June 30, December 31,
1998 1997
Assets
Cash and due from banks $ 21,917 $ 41,805
Interest-bearing demand deposits 1,553 1,057
Federal funds sold 30,200 31,350
------ ------
Cash and cash equivalents 53,670 74,212
Securities
Available for sale 106,763 102,808
Held to maturity 21,398 24,182
Loans held for sale 4,105 1,580
Loans 493,720 472,627
Less: Allowance for loan losses 5,817 5,452
------- -------
Net loans 487,903 467,175
Premises and equipment 10,537 10,384
Core deposit intangibles and goodwill 1,577 1,629
Other assets 10,030 11,774
-------- --------
Total assets $695,983 $693,744
======== ========
Liabilities
Deposits $589,535 $583,663
Short-term borrowings 9,575 14,669
Federal Home Loan Bank advances 10,000 10,000
Other liabilities 7,191 7,981
------- -------
Total liabilities 616,301 616,313
------- -------
Guaranteed Preferred Beneficial Interests in
Company's Subordinated Debentures 22,425 22,425
Shareholders' equity
Common stock $1 stated value:
Authorized--10,000,000 shares
and 3,000,000 shares
Issued and outstanding-2,387,314 and
2,354,278 shares 2,387 2,354
Paid-in surplus 21,532 21,045
Accumulated other comprehensive income 868 762
Retained earnings 32,470 30,845
------ ------
Total shareholders' equity 57,257 55,006
------- -------
Total liabilities and shareholders' equity $695,983 $693,744
======== ========
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands)
Three months ended Six months ended
June 30, June 30,
----------------- ------------------
1998 1997 1998 1997
------ ------- ------- -------
Interest income:
Loans, including fees $10,829 $ 9,835 $21,302 $19,086
Investment securities 1,887 2,173 3,771 4,366
Federal funds sold 603 197 1,173 362
Interest-bearing deposits 22 1 39 2
Total interest income 13,341 12,206 26,285 23,816
Interest expense:
Deposits 6,135 5,867 12,172 11,395
Short-term borrowings 103 151 235 333
Trust preferred securities 501 - 1,002 -
Long-term debt 135 110 270 218
Total interest expense 6,874 6,128 13,679 11,946
Net interest income 6,467 6,078 12,606 11,870
Provision for loan losses 292 290 565 525
Net interest income after provision
for loan losses 6,175 5,788 12,041 11,345
Noninterest income:
Securities gains 12 - 12 3
Other operating income 1,478 1,436 2,840 2,570
Total noninterest income 1,490 1,436 2,852 2,573
Noninterest expense 5,491 4,237 9,862 8,178
Income before income tax 2,174 2,987 5,031 5,740
Income tax expense 1,108 1,069 2,117 2,039
Net income $ 1,066 $ 1,918 $ 2,914 $ 3,701
Net income per share (basic) $0.45 $0.82 $1.23 $1.57
Net income per share (diluted) $0.45 $0.81 $1.22 $1.56
Cash dividends declared $0.29 $0.25 $0.57 $0.48
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CHANGES TO SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
1998 1997
Balances, January 1 $55,006 $49,402
Comprehensive income:
Net income 2,914 3,701
Other comprehensive income, net of tax
Unrealized gains (losses)
on securities available for sale
Unrealized holding gains (losses)
arising during period 113 (60)
Reclassification adjustment for (gains)
included in net income (7) (2)
----- -----
Net unrealized gains (losses) 106 (62)
----- -----
Comprehensive income 3,020 3,639
Exercise of stock options 520 2
Cash dividends on common stock (1,289) (1,000)
------- -------
Balance, June 30 $57,257 $52,043
======= =======
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30
1998 1997
----- ------
Cash flows from operating activities:
Net income $ 2,914 $ 3,701
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 565 525
Depreciation and amortization 590 602
Amortization and reduction of
core deposit intangibles 127 131
Investment securities (gains) losses (12) (3)
Change in loans held-for-sale (2,525) -
Other adjustments 985 63
----- -----
Net cash provided by operating activities 2,644 5,019
----- -----
Cash flows from investing activities:
Net change in short-term investments - 91
Purchases of held-to-maturity securities (1,301) (3,416)
Proceeds from maturities and paydowns
of securities held-to-maturity 4,085 1,936
Purchases of securities available for sale (19,047) (4,358)
Proceeds from maturities and paydowns
of securities available for sale 12,096 11,559
Proceeds from sales of securities
available for sale 3,008 488
Net change in loans (21,293) (37,591)
Purchases of premises and equipment (743) (1,205)
Proceeds from sale of other real estate - 975
Net change in deposits with other
financial institutions - 499
Other investment activities - (726)
----- ------
Net cash used by investing activities (23,195) (31,748)
----- ------
Cash flows from financing activities:
Net change in deposits 5,872 3,599
Deposits assumed in branch
acquisition, net of premium paid - 6,548
Short-term borrowings (5,094) (201)
Payments on long-term debt - (625)
Proceeds from issuance of stock 520 2
Cash dividends (1,289) (1,000)
----- -----
Net cash provided (used)
by financing activities (9) 8,323
------ ------
Net decrease in cash and cash equivalents (20,542) (18,406)
Cash and cash equivalents, beginning of period 74,212 45,381
------- -------
Cash and cash equivalents, end of period $53,670 $26,975
======= =======
See notes to consolidated condensed financial statements.
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 1.
The significant accounting policies followed by Indiana United Bancorp
("Company"), its wholly owned bank subsidiaries, Union Bank and Trust
Company of Indiana ("Union Bank"), Regional Federal Savings Bank ("Regional
Bank") and People's Trust Company ("People's), and its subsidiary IUB
Capital Trust, for interim financial reporting are consistent with the
accounting policies followed for annual financial reporting. Company
results reported herein include the financial position and results of
operations of the Company combined with the financial position and results
of operations of P.T.C. Bancorp as if the merger had occurred on January 1,
1997. All adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary for a fair presentation of
the results for the periods reported, have been included in the
accompanying consolidated financial statements. The results of operations
for the six months ended June 30, 1998 are not necessarily indicative of
those expected for the remainder of the year.
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Comprehensive income includes unrealized
gains on securities available for sale, net of tax. Accumulated other
comprehensive income and income tax on such income reported are as follows:
Six Months Ended
June 30
1998 1997
Accumulated comprehensive income
Balance, January 1 $762 $293
Net unrealized gains (losses) 106 (62)
--- ---
Balance, June 30 868 231
Income tax expense (benefit):
Unrealized holding gains (losses) 75 (40)
Reclassification adjustments 5 1
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 2. June 30, 1998 December 31, 1997
---------------- ------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- -------
Securities Available for Sale
Federal agencies $ 40,555 $ 41,527 $ 45,036 $45,954
State and municipal 8,140 8,276 7,063 7,205
Corporate and other securities 9,159 9,243 4,257 4,255
Mortgage-backed securities 47,461 47,717 45,179 45,394
-------- -------- -------- --------
Totals $105,315 $106,763 $101,535 $102,808
======== ======== ======== ========
June 30, 1998 December 31, 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
Securities Held to Maturity
Federal agencies - - - -
State and municipal $20,431 $20,670 $22,741 $23,012
Corporate and other securities 967 967 1,441 1,563
Mortgage-backed securities - - - -
------- ------- ------- -------
Totals $21,398 $21,637 $24,182 $24,575
======= ======= ======= =======
NOTE 3. June 30 Dec 31
1998 1997
Loans: -------- --------
Commercial and industrial loans $ 40,653 $ 44,341
Agricultural production financing 18,027 15,991
Farm real estate 37,784 38,802
Commercial real estate mortgage 84,871 81,549
Residential real estate mortgage 218,536 208,327
Construction and development 24,846 15,797
Consumer 67,847 66,479
Government guaranteed loans purchased 1,156 1,341
-------- --------
Total loans $493,720 $472,627
======== ========
Underperforming loans:
Nonaccruing loans $653 $755
Accruing loans contractually past due 90 days
or more as to principal or interest payments 267 375
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 3 (continued).
June 30 June 30
1998 1997
Allowance for loan losses: ---- ----
Balances, January 1 $5,452 $4,506
Provision for losses 565 525
Recoveries on loans 120 212
Loans charged off (320) (805)
------ ------
Balances, end of period $5,817 $4,438
====== ======
NOTE 4. June 30 Dec 31
1998 1997
Deposits: ----- ------
Noninterest-bearing demand $ 60,898 $ 66,841
Interest-bearing demand 96,871 89,497
Money market deposit accounts 36,604 36,564
Savings 60,724 57,937
Certificates of deposit $100,000 or more 50,017 38,377
Other certificates and time deposits 284,421 294,447
------- -------
Total deposits $589,535 $583,663
======== ========
NOTE 5. June 30 Dec 31
1998 1997
Short-term borrowings: ---- ----
Securities sold under repurchase agreements $6,859 $11,825
U.S. Treasury demand notes 2,716 2,844
------ -------
Total short-term borrowings $9,575 $14,669
====== =======
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 6.
Earnings per share (EPS) were computed as follows:
For the three months ended June 30, 1998 1997
---------------------- ------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------- ------ ------ ------- ------
Basic earnings per share:
Income available to
common shareholders $1,066 2,377,149 $0.45 $1,918 2,352,183 $0.82
----- -----
Effect of dilutive securities - 6,016 - 15,630
------ --------- ------ ---------
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $1,066 2,383,165 $0.45 $1,918 2,367,813 $0.81
====== ========= ===== ====== ========= -----
For the six months ended June 30, 1998 1997
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
Basic earnings per share:
Income available to
common shareholders $2,914 2,365,777 $1.23 $3,702 2,352,119 $1.57
----- ----
Effect of dilutive securities - 13,146 - 15,962
------ --------- ------ ---------
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $2,914 2,378,923 $1.22 $3,702 2,368,081 $1.56
====== ========= ===== ====== ========= =====
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 7.
Business Combination
On April 30, 1998, the Company completed the merger with P.T.C. Bancorp
("PTC"), Brookville, Indiana. The transaction was accounted for using the
pooling-of-interests method of accounting. The Company issued 1,136,417
shares of its common stock to shareholders of PTC. Merger and related
costs of $926,446 were charged against net income during the quarter ended
June 30, 1998.
The financial information contained herein reflects the merger and reports
the financial condition and results of operations as though the merger
occurred as of January 1, 1997. Separate operating results of the combined
enterprises for the periods prior to the merger were as follows:
(Dollars in thousands)
Three months ended Six months ended
June 30 June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Net interest income:
Indiana United Bancorp $5,441 $3,301 $ 8,606 $ 6,447
P.T.C. Bancorp 1,026 2,777 4,000 5,423
------ ------ ------- -------
Combined $6,467 $6,078 $12,606 $11,870
====== ====== ======= =======
Net income:
Indiana United Bancorp $ 665 $1,069 $ 1,445 $ 1,961
P.T.C. Bancorp 401 849 1,469 1,740
------ ------ ------- -------
Combined $1,066 $1,918 $ 2,914 $ 3,701
====== ====== ======= =======
Basic earnings per share:
Indiana United Bancorp $ .28 $ .46 $ .61 $ .83
P.T.C. Bancorp .17 .36 .62 .74
----- ----- ----- -----
Combined $ .45 $ .82 $1.23 $1.57
===== ===== ===== =====
Diluted earnings per share:
Indiana United Bancorp $ .28 $ .45 $ .61 $ .83
P.T.C. Bancorp .17 .36 .61 .73
----- ----- ----- -----
Combined $ .45 $ .81 $1.22 $1.56
===== ===== ===== =====
INDIANA UNITED BANCORP
FORM 10-Q
ITEM 2. Management's Discussion and Analysis (Table Dollar Amounts in
Thousands)
Forward-Looking Statements
Except for historical information contained herein, the discussion in this
Form 10-Q quarterly report includes certain forward-looking statements
based upon management expectations. Factors which could cause future
results to differ from these expectations include the following: general
economic conditions; legislative and regulatory initiatives; monetary and
fiscal policies of the federal government; deposit flows; the costs of
funds; general market rates of interest; interest rates on competing
investments; demand for loan products; demand for financial services;
changes in accounting policies or guidelines; and changes in the quality or
composition 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 Combination
On April 30, 1998, the Company completed the merger with P.T.C. Bancorp
("PTC"), Brookville, Indiana. The transaction was accounted for using the
pooling-of-interests method of accounting. The Company issued 1,136,417
shares of its common stock to shareholders of PTC. Merger and related
costs of $926,446 were charged against net income during the quarter ended
June 30, 1998. The financial information contained herein reflects the
merger and reports the financial condition and results of operations as
though the merger occurred as of January 1, 1997.
Business Strategy
The Company holds either first or second market share positions as measured
by total deposits in several of the 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.
INDIANA UNITED BANCORP
FORM 10-Q
In conformity with this strategy, the Company on April 30, 1998 merged with
PTC, a bank holding company headquartered in Brookville, Indiana with total
assets of $322 million. The transaction was regarded by both companies as
a merger of equals and has integrated the management and directors of both
organizations.
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 previously reported an agreement to acquire two branches in
Alexandria and Anderson, Indiana having deposits of approximately $32
million. Subsequently, the Company agreed to acquire branches in Frankton
and Fortville, Indiana. To compliment this geographic symmetry of
locations within 15 miles of Anderson, the Company has also agreed to
acquire a closed branch in Chesterfield, Indiana. Three of these branch
purchases will be completed on July 17, 1998, with the remaining purchases
expected to be completed in September or October. These branches will be
integrated into Union Bank and represent deposits of approximately $70
million in the greater Anderson market.
The Company has also recently agreed to acquire three branches
strategically located in Regional Bank's market. These branches are
located in Charlestown, Georgetown, and Galena, Indiana and are expected to
add more than $50 million of deposits to Regional Bank's customer base in
Clark and Floyd counties. Subject to regulatory approval, these branch
acquisitions are scheduled to be completed in September.
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 is employing the
remaining funds to finance growth which includes 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.
INDIANA UNITED BANCORP
FORM 10-Q
Year 2000 Computer Issues
In the next eighteen months, 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 is currently conducting 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.
Results of Operations
Earnings for the second quarter of 1998 decreased 45% to $1,066,000 as
compared to the same quarter of 1997. Earnings for the first half of 1998
decreased 21% to $2,914,000 as compared to the same period in 1997.
Noninterest income in 1997 reflects approximately $179,000 of nonrecurring
other income. Mortgage banking activities increased $245,000 over the
prior year.
Service charge income increased a total of $26,000 over the prior year
period. Merger expenses of $926,000 were recorded in the second quarter of
1998. Other noninterest expense reflects increases in several areas.
Per share earnings (diluted) for the second quarter equaled $.45 in 1998,
compared to $.81 in 1997. Per share earnings (diluted) for the first half
of 1998 and 1997 were $1.22 and $1.56 respectively.
The Company's return on average total assets for the second quarter was
.58% in 1998 compared to 1.19% in 1997. Year-to-date return on average
assets was .82% and 1.15% for 1998 and 1997. Return on average common
shareholders' equity for the second quarter was 7.00% in 1998 and 14.75% in
1997. Year-to-date return on average shareholders' equity was 9.93% and
14.23% for 1998 and 1997.
INDIANA UNITED BANCORP
FORM 10-Q
Net Interest Income
Net interest income is influenced by the volume and yield of earning assets
and the cost of interest-bearing liabilities. Net interest margin reflects
the mix of interest-bearing and noninterest-bearing liabilities that fund
earning assets, as well as interest spreads between the rates earned on
these assets and the rates paid on interest-bearing liabilities. Second
quarter net interest income of $6,467,000 in 1998 increased 6% from
$6,078,000 in 1997. The first six months of net interest income increased
by $736,000 or 6% over the same period in 1997.
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 this period. The Company believes this strategy
greatly enhanced net interest income and will also have a positive effect
on current year earnings.
Due to the impact of the interest expense associated with the trust
preferred securities issued in December of 1997, net interest margin
decreased to 3.93% or 16 basis points less than the same period last year.
As indicated previously, the interest cost of the regulatory capital these
funds represent will have an adverse effect on 1998 results of operations.
Even if management achieves its short-term growth goals, it is likely that
earnings will be adversely affected since the cost of the trust preferred
securities will not be offset immediately.
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
Second quarter noninterest income in 1998 exceeded the prior year by
$54,000 or 4%, and as previously mentioned, was impacted in 1997 by
nonrecurring noninterest income of $179,000. Noninterest income in the
first six months of 1998 exceeded the prior year period by $279,000 or 11%.
Nonrecurring noninterest income of $179,000 was realized on the sale of
real estate acquired in lieu of foreclosure in 1997. Security gains of
$12,000 were realized in 1998 compared to a $3,000 gain for the same period
last year.
Service charges on deposit accounts increased in 1998 by $26,000 primarily
due to continued growth in interest-bearing checking accounts. Deposit
growth and interest rate variables affect service charge income. Trust
income increased $18,000 over 1997 due to estate income and a strong stock
market. The level of estate assets administered may cause trust income to
fluctuate significantly from year to year.
Mortgage banking income, which consists of gains (losses) on loan sales and
service fee income was $115,000 higher for the second quarter of 1998
compared to the same period in 1997, and $245,000 more for the six month
period ended June 30, 1998 compared to the same period in 1997. Increased
mortgage origination activity began early in 1997 and has continued.
During this period of time, the long-term interest rates charged on
mortgages eased and the Company experienced significant refinancing and
originations.
INDIANA UNITED BANCORP
FORM 10-Q
(Dollars in thousands) 1998 1997
--------------- --------------
Six Six
2nd Qtr Months 2nd Qtr Months
------- ------ ------ ------
Insurance commissions $ 156 $ 266 $ 154 $ 264
Trust fees 73 144 65 126
Mortgage banking income 323 650 208 405
Service charges on deposit accounts 456 895 441 869
Gain on sales of securities 12 12 - 3
Other income 470 885 568 906
------ ------ ------ ------
$1,490 $2,852 $1,436 $2,573
====== ====== ====== ======
Noninterest Expense
The largest component of noninterest expense is personnel expense.
Personnel expenses increased in the first half of 1998 by $448,000, or 10%
as compared to the prior year period. Improvements in technology
implemented throughout the past two years have enabled the Company to
effectively control staffing levels. Normal staff salary adjustments and
increased benefit costs were incurred in both 1998 and 1997. Personnel
expenses in 1998 are expected to increase more than in 1997 due to a
corporate-wide initiative to restructure salary ranges.
Deposit insurance premiums for the first six months were $15,000 more in
1998 than the prior year period due to higher levels of deposits. Since
the Bank Insurance Fund ("BIF") reached a mandated funding level in 1995,
the assessment rate for the Company's commercial banks was reduced to the
$2,000 minimum level permissible in 1996, and increased to 1.29 cents per
$100 of deposits in 1998 and 1997, which is 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 tax-
effected 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 62.68% for the first half of 1998
compared to 55.46% for the same period in 1997. The first six months
efficiency ratio in 1998 has been adversely impacted by the issuance of the
Trust Preferred Securities in late 1997 and merger expense of $926,000
recorded in the second quarter of 1998.
INDIANA UNITED BANCORP
FORM 10-Q
(Dollars in thousands) 1998 1997
--------------- ---------------
Six Six
2nd Qtr Months 2nd Qtr Months
------- ------ ------- ------
Salaries and employee benefits $2,488 $4,920 $2,302 $4,472
Premises and equipment expenses 685 1,384 706 1,377
Professional fees 114 203 138 225
Amortization of core deposit intangibles
and goodwill 75 127 40 77
Deposit insurance/supervisory assessmen 53 99 44 84
Stationery, printing, supplies 176 324 162 301
Insurance 38 75 37 73
Postage 100 206 87 181
Merger expenses 926 926
Other operating expenses 836 1,598 721 1,388
------ ------ ------ ------
$5,491 $9,862 $4,237 $8,178
====== ====== ====== ======
Income Taxes
The effective tax rate for the first six months was 42% for 1998 and 36%
for 1997. The Company and its subsidiaries will file consolidated income
tax returns for 1998.
Financial Condition
Total average assets in the 1998 period increased $63,614,000 over the
comparable period in the prior year.
June 30, 1998 assets increased to $695,983,000 from $693,744,000 at
December 31, 1997. Securities maturities and repayments, as well as
decreased levels of federal funds sold and cash and due from banks, funded
loan growth in 1998.
Average earning assets represented 95% of average total assets for the
first half of 1998 and 1997. Average loans represented approximately 70%
of average assets in the first six months of 1998 and 1997. Management
intends to continue its emphasis on loan growth throughout 1998.
Average noninterest-bearing deposits at June 30, 1998 increased 9% in 1998
compared to the same period in 1997. Average interest-bearing deposits
increased $28,439,000 or 6% in the first six months of 1998 compared to the
same period in 1997. Average interest-bearing demand deposits increased
$7,547,000 or 9% in the 1998 period compared to the 1997 period, primarily
due to the continued growth of an interest-bearing checking account
introduced early in 1996. Average money market investment accounts
increased 5% as compared to the prior year. Average certificates of
deposit and other time deposits increased 6% at June 30, 1998 compared to
the same date in 1997.
INDIANA UNITED BANCORP
FORM 10-Q
Average long-term debt in 1997 represented the Company's loan for the
purchase of Regional Bank in 1991. The remaining balance was paid on
December 31,1997. The Company had negotiated the refinancing of the
remaining balance but elected to pay off the long-term debt with a portion
of the proceeds from the issuance of the Trust Preferred Securities in late
1997. Federal Home Loan Bank ("FHLB") advances represented the balance of
long-term debt in the 1998 period. The FHLB advances were used to fund
loans and other earning assets of Regional Bank.
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
core 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 $57,257,000 on June 30, 1998 compared to
$52,043,000 on June 30, 1997. Book value per common share increased to
$23.98 or 3% from $23.36 at year-end 1997. The unrealized gain on
securities available for sale, net of taxes, totaled $868,000 or $.36 per
share at June 30, 1998 compared to an unrealized gain of $762,000 or $.32
per share at December 31, 1997. Excluding the net unrealized gains or
losses on securities available for sale, book value per share was $23.62 at
June 30, 1998 or an increase of 3% over the comparable book value at year-
end 1997.
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.
INDIANA UNITED BANCORP
FORM 10-Q
Total loans increased $21,093,000 or 4% since December 31, 1997, primarily
reflecting the expansion of the mortgage loan portfolio due to originations
and refinancing in the current mortgage interest rate environment.
Residential real estate loans continue to represent a significant portion
of the total loan portfolio. Such loans represented 44% of total loans at
June 30, 1998 and 1997. The Company's recent emphasis on increasing
consumer loans has provided greater diversification within the portfolio
and generated higher gross yields than residential real estate loans.
On June 30, 1998, the Company had $4,105,000 of residential real estate
loans held for sale. Prior to the merger with PTC, the Company
traditionally made loans only for its own portfolio and did not follow the
practice of many other financial institutions of originating loans for sale
in the secondary market. People's has engaged in mortgage banking
activities for a period of time. In early 1997, mortgage loan origination
activity increased and has continued to the present time. This program
assists the Company in serving all segments of the community without
incurring unacceptable levels of credit exposure or interest rate risk and
provides additional fee income.
The Company regards its ability to identify and correct loan quality
problems as one of its greatest strengths. Loans are placed in a
nonaccruing status when in management's judgment the collateral value
and/or the borrower's financial condition 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 $565,000 in 1998 compared to $525,000 in
1997. The provisions in 1998 and 1997 reflected both overall loan growth
and an increase in greater risk-profile consumer loans.
Net chargeoffs were $200,000 at June 30, 1998 compared to $593000 on June
30, 1997. As a percentage of average loans, net chargeoffs equaled .04%
and .14% respectively for June 30, 1998 and 1997. In prior years, the
Company outperformed its peer group's net loan loss average and that trend
is expected to continue in 1998. 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 purchase of branches.
Foreclosed real estate held by the Company at June 30, 1998 was $24,000.
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.
INDIANA UNITED BANCORP
FORM 10-Q
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 June 30, 1998 is considered adequate by management.
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 June 30, 1998, $106,763,000 of 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 $1,448,000 was recorded to adjust the AFS portfolio to current
market value at June 30, 1998, compared to a net unrealized gain of
$392,000 at June 30, 1997.
Since 1997, the Company has lengthened the maturity of security purchases,
relative to the present balance of the portfolio. In the current interest
rate environment, with a flat yield curve, most security purchases have had
a stated maturity not exceeding five years.
Sources of Funds
The Company relies primarily on customer deposits, securities sold under
repurchase agreements ("Repos") and shareholders' equity to fund earning
assets. 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 89% and 93% of total
earning assets at June 30, 1998 and 1997. Total interest-bearing deposits
averaged 91% of average total deposits at June 30, 1998 and 1997.
Management constantly strives to increase the percentage of transaction-
related deposits to total deposits due to the positive effect on earnings.
Average short-term borrowings decreased $3,091,000 or 25% due mainly to the
decrease in the use of Repos. 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 has utilized large denomination
certificates of deposit since year end 1996 to replace a portion of
customer funds previously invested in Repos.
INDIANA UNITED BANCORP
FORM 10-Q
Average long-term debt increased $4,233,000 at June 30, 1998 compared to
June 30, 1997. FHLB advances that mature in early 1999 represented all of
the increase. The FHLB advances were used to fund loans and other earnings
assets of Regional Bank. Depending upon the level of loan demand,
management may again elect to use additional FHLB advances in 1998 as part
of its cash management strategy. The Company paid off its long-term debt
on December 31, 1997.
Capital Resources
Total shareholders' equity increased $5,214,000 to $57,257,000 at June 30,
1998 as compared to June 30, 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 consists of shareholders'
equity less AFS adjustment, while Tier 1 consists of core capital less
goodwill and intangibles. Total regulatory capital consists of Tier 1,
certain debt instruments and a portion of the allowance for credit losses.
At June 30, 1998, Tier 1 capital to total average assets was 11.82%. Total
capital to risk-adjusted assets was 18.11%. 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 core 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 $.29 per share in the
second quarter of 1998 and $.25 for the same quarter in 1997. Common
dividends declared and paid year-to-date total $.57 and $.48 per share
respectively for 1998 and 1997. Book value per common share at June 30,
1998 increased to $23.98 from $23.36 at year-end 1997. The net adjustment
for AFS securities increased book value by $.36 at June 30, 1998 and
increased book value by $.32 at December 31, 1997. Depending on market
conditions, the adjustment for AFS securities can cause significant
fluctuations in equity.
On July 31, 1998, the Company announced it has approved a two-for-one stock
split with respect to its common shares. The stock split will be effected
in the form of a share dividend, with a dividend of one common share
declared issuable on August 31, 1998 for each common share outstanding to
shareholders of record as of August 17, 1998. Starting in the third
quarter of 1998, per share data will be restated to reflect the additional
shares issued.
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
INDIANA UNITED BANCORP
FORM 10-Q
cash equivalents, loans and securities maturing within one year, and money
market instruments. In addition, the Company holds 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 89% of total earning assets at June 30, 1998 compared to
approximately 93% at June 30, 1997.
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 June 30, 1998, the Company held approximately $371,073,000 in assets
comprised of securities, loans, short-term investments, and federal funds
sold, which were interest sensitive in one year or less time horizons.
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. Strategies are
developed that impact asset/liability committee activities based on
interest rate risk sensitivity, board policy limits, desired sensitivity
gaps and interest rate trends.
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.
INDIANA UNITED BANCORP
FORM 10-Q
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Principal Cash Flows and Weighted Average Interest Rates By Maturity Dates
(Dollars in thousands)
There Fair
June 30 1998 1999 2000 2001 2002 after Total value
(Maturity date)
Assets
Investment securities
Fixed rate $ 8,119 $19,196 $11,635 $13,076 $5,582 $24,490 $ 82,098 $ 82,337
Avg interest rate 6.42% 6.43% 6.83% 6.48% 6.94% 7.38% 6.77%
Variable rate $ 17 $ 4,401 $59 $ 783 $40,803 $ 46,063 $ 46,063
Avg interest rate 7.00% 5.19% 7.42% 7.68% 6.76% 6.63%
Loans
Fixed rate $20,370 $19,613 $14,854 $23,960 $20,972 $109,170 $208,939 $210,221
Avg interest rate 8.96% 8.97% 8.95% 7.93% 8.65% 8.03% 8.31%
Variable rate $95,367 $65,153 $23,103 $11,479 $ 2,015 $ 87,664 $284,781 $284,781
Avg interest rate 9.11% 8.53% 8.46% 8.35% 8.36% 8.25% 8.62%
Liabilities
NOW, money market
and savings deposits
Variable rate $194,199 $194,199 $194,199
Avg interest rate 2.95% 2.95%
Certificates of deposit
Fixed rate $239,351 $54,623 $25,403 $ 6,982 $ 4,654 $ 551 $331,564 $333,616
Avg interest rate 5.51% 5.74% 5.75% 6.01% 6.01% 6.64% 5.51%
Variable rate $ 2,874 $ 2,874 $ 2,874
Avg interest rate 5.51% 5.51%
Borrowings
Fixed rate $ 6,859 $ 6,859 $ 6,859
Avg interest rate 4.63% 4.63%
Variable rate $ 2,716 $ 2,716 $ 2,716
Avg interest rate 5.40% 5.40%
Trust preferred securities
Fixed rate $22,425 $22,425 $ 24,107
Avg interest rate 8.75% 8.75%
INDIANA UNITED BANCORP
FORM 10-Q
The preceding table provides information about the Company's significant
financial instruments at June 30, 1998 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.
INDIANA UNITED BANCORP
FORM 10-Q
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant held a Special Meeting of shareholders on April 28, 1998
to approve the merger with P.T.C. Bancorp. Of the 1,250,897 shares
outstanding, 1,019,549 shares were represented at the meeting and
1,018,299 shares voted in favor the merger, 769 shares voted against
the merger, and 481 shares abstained.
The Registrant held its Annual Meeting of shareholders on June 23, 1998
at which the following persons were (re)elected to the Board of
Directors for a one year term.
William G. Barron
Philip A. Frantz
Robert E. Hoptry
Martin G. Wilson
Edward J. Zoeller
Robert S. Dunevant
James L. Saner, Sr.
Dale E. Smith
John E. Back
Dale J. Deffner
The selection of Olive LLP as the Registrant's independent auditors for
1998 was ratified and approved. An increase in the number of
authorized shares from 3,000,000 shares to 10,000,000 shares was also
ratified and approved.
At the Annual Meeting, of the 2,387,314 shares outstanding, there were
1,783,354 shares represented, and at least 99.6% were cast for each of
the persons elected as directors.
Olive LLP was ratified by 1,779,591 shares for, 874 shares against, and
2,888 shares abstained. The increase in the authorized number of shares
was ratified by 1,736,479 shares for, 40,944 shares against, and 5,931
shares abstained.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
27: Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K
Report on Form 8-K was filed on May 13, 1998 related to the merger
with P.T.C. Bancorp.
No other information is required to be filed under Part II of this form.
INDIANA UNITED BANCORP
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INDIANA UNITED BANCORP
August 14, 1998 By: /s/Robert E. Hoptry
Robert E. Hoptry
Chairman and Chief
Executive Officer
August 14, 1998 By: /s/Jay B. Fager
Jay B. Fager
Chief Financial Officer
and Treasurer
INDIANA UNITED BANCORP
FORM 10-Q
EXHIBIT INDEX
Exhibit Page
27 Financial Data Schedule (electronic filing only)