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, 2000
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
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(Formername, 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) nd (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of June 30,2000 there were outstanding 5,873,900 shares, without par
value of the registrant.
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
- ----------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Changes in Shareholders' Equity 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except share and per share data)
June 30, December 31,
2000 1999
---- ----
Assets
Cash and due from banks $ 38,494 $ 41,449
Interest-bearing demand deposits 100 30
Money market fund 13,741 -
Federal funds sold 1,800 400
----------- -----------
Cash and cash equivalents 54,135 41,879
Interest bearing time deposits 991 2,119
Securities
Available for sale 257,672 272,643
Held to maturity 15,374 17,788
Federal Home Loan Bank & Federal Reserve Bank Stock 2,938 2,357
Loans held for sale 9,224 7,881
Loans 768,280 710,695
Less: Allowance for loan losses (8,320) (7,718)
----------- -----------
Net loans 759,960 702,977
Premises and equipment (net) 17,441 17,340
Intangible assets 23,221 24,135
Other assets 27,748 21,132
----------- -----------
Total assets $ 1,168,704 $ 1,110,251
=========== ===========
Liabilities
Deposits $ 991,742 $ 940,905
Short-term borrowings 29,921 40,064
Federal Home Loan Bank advances 37,798 24,484
Notes Payable 6,568 6,885
Other liabilities 9,963 7,316
----------- -----------
Total liabilities 1,075,992 $ 1,019,654
----------- -----------
Guaranteed preferred beneficial interests in
company's subordinated debentures 22,425 22,425
Shareholders' equity Common stock $.50 stated value:
Authorized--10,000,000 shares, Issued and
outstanding, 5,873,900 and 5,856,622 shares 2,937 2,928
Paid-in capital 25,554 25,563
Retained Earnings 47,387 44,775
Accumulated other comprehensive income (5,591) (5,094)
----------- -----------
Total shareholders' equity 70,287 68,172
----------- -----------
Total liabilities and shareholders' equity $ 1,168,704 $ 1,110,251
=========== ===========
See notes to consolidated condensed financial statements
3
INDIANA UNITED BANC INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands except per share data)
Three months ended Six months ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
Interest income:
Loans, including fees $ 16,605 $ 13,261 $ 32,040 $ 26,319
Investment securities 4,329 4,534 8,781 8,300
Other interest earning assets 136 430 236 1,023
-------- -------- -------- --------
Total interest income 21,070 18,225 41,056 35,642
Interest expense:
Deposits 9,816 8,593 18,958 16,888
Trust preferred securities 501 501 1,002 1,002
Other borrowings 788 482 1,579 920
-------- -------- -------- --------
Total interest expense 11,105 9,576 21,539 18,810
-------- -------- -------- --------
Net interest income 9,965 8,649 19,517 16,832
Provision for loan losses 375 336 748 717
-------- -------- -------- --------
Net interest income after
Provision for loan losses 9,590 8,313 18,769 16,115
Non-interest income:
Securities gains (losses) (48) 11 (36) (13)
Other operating income 2,236 1,949 4,111 3,701
-------- -------- -------- --------
Total non-interest income 2,188 1,960 4,075 3,688
Non-interest expense 8,492 7,150 16,238 13,702
-------- -------- -------- --------
Income before income tax 3,286 3,123 6,606 6,101
Income tax expense 825 846 1,810 1,667
-------- -------- -------- --------
Net income $ 2,461 $ 2,277 $ 4,796 $ 4,434
======== ======== ======== ========
Comprehensive income (loss) $ 2,954 ($1,389) $ 4,299 $ 64
======== ======= ======== ========
Net income per share (basic) $ 0.42 $ 0.39 $ 0.82 $ 0.77
Net income per share (diluted) $ 0.42 $ 0.39 $ 0.82 $ 0.76
Cash dividends declared $ 0.165 $ 0.160 $ 0.33 $ 0.32
See notes to consolidated condensed financial statements.
4
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands except share and per share data)
2000 1999
-------- --------
Balance, January 1 $ 68,172 $ 69,063
Comprehensive income:
Net income 4,796 4,434
Unrealized losses on available for sale securities,
net of reclassification adjustments (497) (4,370)
-------- --------
Comprehensive income 4,299 64
Net shares issued 1,385
Cash dividends on common stock (2,184) (2,082)
-------- --------
Balance, June 30 $ 70,287 $ 68,430
======== ========
See notes to consolidated condensed financial statements.
5
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands except share and per share data)
Six months ended
June 30
2000 1999
---- ----
Cash flows from operating activities:
Net income $ 4,796 $ 4,434
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 748 717
Depreciation and amortization 748 914
Amortization of intangibles 914 735
Investment securities losses 36 13
Change in loans held-for-sale (1,343) 3,214
Change in other assets and liabilities (3,261) 720
--------- ---------
Net cash provided by operating activities 2,638 10,747
========= =========
Cash flows from investing activities:
Change in interest bearing time deposits 1,128 571
Purchases of securities held-to-maturity (3,533)
Proceeds from maturities and paydowns
of securities held-to-maturity 2,421 3,141
Purchases of securities available for sale
And restricted stock (12,552) (129,633)
Proceeds from maturities and paydowns
of securities available for sale 25,691 40,178
Proceeds from sales of securities available ----- 10,369
Net change in loans (57,731) (39,584)
Purchases of premises and equipment (846) (2,233)
Cash received from branch acquisitions ----- 92,535
--------- ---------
Net cash (used) by investing activities (41,889) (28,189)
--------- ---------
Cash flows from financing activities:
Net change in deposits 50,837 (11,318)
Short-term borrowings 2,854 (2,607)
Stock issuance (redemption), net (51)
Proceeds of long term debt ----- 8,000
Cash dividends (2,184) (2,082)
--------- ---------
Net cash provided (used) by financing activities 51,507 (8,058)
--------- ---------
Net decrease in cash and cash equivalents 12,256 (25,500)
Cash and cash equivalents, beginning of period 41,879 62,884
--------- ---------
Cash and cash equivalents, end of period $ 54,135 $ 37,384
========= =========
See notes to consolidated condensed financial statements.
6
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
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") People's
Trust Company ("People's") ,and their subsidiaries, and its subsidiaries IUB
Capital Trust and IUB Illinois Holding Company and its subsidiary, Capstone Bank
("Capstone") , 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
Capstone as if the merger had occurred on January 1, 1999
NOTE 2 BRANCH ACQUISITIONS
During the first quarter of 1999, the Company purchased four branches within
target market areas. These branch acquisitions were accounted for using the
purchase method of accounting. Total fair value of assets acquired and
liabilities assumed was $104,700 including cash of $90,800, loans of $1,900 and
deposits of $104,100. The results of operations of the branches have been
included since their acquisition dates. Intangible assets of $11,400 were
recorded and are being amortized over estimated useful lives using the
straight-line method. The Company opened two new branches "de novo" in late
April 1999. These branches are located in Chesterfield, and Anderson Indiana.
NOTE 3 BUSINESS COMBINATIONS
Effective April 1, 1999, the Company acquired the property and casualty
insurance business lines of The Anderson Group of Owensboro, Kentucky ("The
Anderson Group"). The acquisition was effected by the purchase of net assets and
expertise in which the property and casualty insurance business lines of The
Anderson Group were integrated into a newly formed subsidiary, The Insurance
Group, Inc., ("The Insurance Group"). The acquisition was effected by the
purchase method of accounting. In this transaction, the Company issued 80,913
shares of its common stock to The Anderson Group shareholders. Subsequently, the
Company caused The Insurance Group to become a wholly owned subsidiary of Union
Bank and Trust by transferring its ownership in The Insurance Group to that bank
subsidiary. The general lines insurance business previously conducted by Union
Bank and Trust in Greensburg and Portland, Indiana is now conducted through The
Insurance Group subsidiary.
On May 1, 2000 the Company consummated its acquisition of First Affiliated
Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone
Bank N. A. The transaction was accounted for using the pooling-of-interests
method of accounting. The Company issued 1,018,359 shares of its common stock to
the shareholders of First Affiliated Bancorp. The conversion rate was 4.4167
shares of Company stock for each outstanding share of First Affiliated.
Unaudited pro forma results of operations including First Affiliated are as
follows:
Four Months Three Months Six Months
Ended Ended Ended
April 30 June 30 June 30
2000 1999 1999
- ---------------------------------------------------------------------------------------------------
Net interest income
Indiana United Bancorp $11,131 $7,423 $14,455
First Affiliated Bancorp 1,570 1,226 2,377
- ---------------------------------------------------------------------------------------------------
Combined $12,701 $8,649 $16,832
- ---------------------------------------------------------------------------------------------------
Net income
Indiana United Bancorp $2,492 $1,682 $3,302
First Affiliated Bancorp 424 595 1,132
- ---------------------------------------------------------------------------------------------------
Combined $2,914 $2,277 $4,434
- ---------------------------------------------------------------------------------------------------
Basic earnings per share
Indiana United Bancorp $.51 $.35 $.69
First Affiliated Bancorp n/a n/a n/a
- ---------------------------------------------------------------------------------------------------
Combined $.50 $.39 $.77
- ---------------------------------------------------------------------------------------------------
Diluted earnings per share
Indiana United Bancorp $.51 $.35 $.69
First Affiliated Bancorp n/a n/a n/a
- ---------------------------------------------------------------------------------------------------
Combined $.50 $.39 $.76
- ---------------------------------------------------------------------------------------------------
On April 28, 2000 the Company announced the purchase of two branch facilities
and approximately $38,000 in deposits from Harrington Bank, Richmond, Indiana.
The branches, are located in Marion County and will be integrated into Union
Bank during the third quarter. The premium paid for the deposits will result in
approximately $1,200 in intangible assets for Union Bank.
7
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 4 SECURITIES
June 30,2000 December 31,1999
------------ ----------------
Amortized Fair Amortized Fair
Available for sale Cost Value Cost Value
------------ ------------- ------------ -------------
Federal agencies $155,428 $150,953 $163,990 $ 159,822
State and municipal 33,109 31,987 35,167 33,821
Corporate and other securities 31,535 29,304 26,192 24,611
Mortgage-backed securities 46,825 45,428 55,314 54,389
-------- -------- -------- --------
Totals $266,897 $257,672 $280,683 $272,643
======== ======== ======== ========
Held to maturity
State and municipal $14,311 $14,089 $16,753 $16,556
Corporate and other securities 1,063 1,103 1,035 1,076
-------- -------- -------- --------
Totals $15,374 $15,192 $17,788 $17,632
======== ======== ======== ========
NOTE 5 LOANS
June 30, December 31,
2000 1999
-------- ------------
Commercial and industrial loans $ 70,234 $ 58,071
Agricultural production financing 23,090 22,107
Farm real estate 49,680 47,483
Commercial real estate mortgage 108,696 103,318
Residential real estate mortgage 361,659 331,811
Construction and development 59,591 50,721
Consumer 85,817 87,284
State and political 9,513 9,900
--------- ---------
Total loans $ 768,280 $ 710,695
========= =========
Non-performing loans 2000 1999
---- ----
Non-accrual loans $ 1,787 $ 4,139
Accruing loans contractually past due 90 days
or more as to principal or interest payments 1,036 324
--------- ---------
Total non-performing loans $ 2,823 $ 4,463
========= =========
Allowance for loan losses: 2000 1999
---- ----
Balances January 1 $ 7,718 $ 6,600
Provision for losses 748 717
Recoveries on loans 319 342
Loans charged off (465) (510)
--------- ---------
Balance, June 30, $ 8,320 $ 7,149
========= =========
NOTE 6 DEPOSITS June 30 December 31
2000 1999
--------- ---------
Non-interest-bearing demand $ 92,502 $ 96,144
Interest-bearing demand 230,784 226,392
Savings 165,198 131,134
Certificates and other time deposits $100,000 or more 119,550 107,487
Other certificates and time deposits 383,708 379,748
--------- ---------
Total deposits $ 991,742 $ 940,905
========= =========
8
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
. NOTE 7 SHORT-TERM BORROWINGS June 30 December 31
2000 1999
--------- ---------
Federal funds purchased $ 11,150 $ 13,200
Securities sold under repurchase agreements 18,771 25,487
U.S. Treasury demand notes ---- 1,377
--------- ---------
Total short-term borrowings $ 29,921 $ 40,064
========= =========
NOTE 8 -EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For three months ended
June 30 June 30
2000 1999
---- ----
Weighted Per Weighted Per
Basic earnings per Net Average Share Net Average Share
share: Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Income available
to common
Shareholders $2,461 5,868,210 $0.42 $2,277 5,803,536 $.39
------ ------
Effect of dilutive
Shares 5,696 17,278
--------- --------
Diluted earnings per
share: $2,461 5,873,906 $0.42 $2,277 5,820,814 $.39
------ --------- ----- ------ --------- ----
For six months ended
Basic earnings per share
Income available
To common
Shareholders $4,796 5,862,424 $0.82 $4,434 5,787,700 $.77
------ ------
Effect of dilutive
Securities 11,455 17,278
--------- --------
Diluted earnings per
share: $4,796 5,873,879 $0.82 $4,434 5,804,978 $.76
------ --------- ----- ------ --------- ----
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 cost of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
9
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 that will
continue to preserve its community-focused philosophy.
Business Strategy
The Company holds 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. Many larger
mid-west banking companies have had an accelerated program of branch
divestitures. Many of these branch locations have been in communities that are
compatible with the Company's growth strategies. The Company has bid
competitively in order to expand its presence in these targeted markets.
In the quarter ended March 31, 1999 the Company acquired four branches located
in or adjacent to People's market. One of these branches is located in Cambridge
City, which is in Wayne County where People's already operates three offices.
Two offices are in New Castle and one office is in Knightstown and all three are
located in the adjacent county of Henry. This acquisition added $104,100 of
deposits to People's customer base, which now operates 20 offices in nine
eastern and southeastern counties of Indiana. In March of 1999 People's closed
the Arlington, Indiana branch and merged it with the Rushville, Indiana branch
due to the low business volume. Prior to this it had been operated on a
part-time basis.
Effective April 1, 1999, the Company acquired the property and casualty
insurance business lines of The Anderson Group of Owensboro, Kentucky ("The
Anderson Group"). The acquisition was effected by the purchase of net assets and
expertise in which the property and casualty insurance business lines of The
Anderson Group were integrated into a newly formed subsidiary, The Insurance
Group, Inc., (The Insurance Group"). The general lines insurance business
previously managed by Union Bank in Greensburg and Portland, Indiana are
directed through The Insurance Group subsidiary as the Company expands its
insurance offering capabilities. This expansion provided an increased book of
business and additional management expertise and increased product line. With
this base the Company anticipates additional insurance acquisitions throughout
its marketing area.
On May 1, 2000 the Company consummated its acquisition of First Affiliated
Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone
Bank N. A. The transaction was accounted for using the pooling-of-interests
method of accounting. The Company issued 1,018,359 shares of its common stock to
the shareholders of First Affiliated Bancorp. The
10
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
conversion rate as 4.4167 shares of Company stock for each outstanding share of
First Affiliated. 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 Capstone as if the merger had occurred on January
1, 1999
On April 28, 2000 the Company announced the purchase of two branch facilities
and approximately $38,000 in deposits from Harrington Bank, Richmond, Indiana.
The branches are located in Marion County and will be integrated into Union Bank
during the third quarter. The premium paid for the deposits will result in
approximately $1,200 in intangible assets for Union Bank.
Management realized that if the Company was successful in increasing assets
significantly through branch and bank 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
of cumulative Trust Preferred Securities in December 1997. These securities are
used to meet regulatory capital requirements within prescribed limits. The
Company utilized a portion of the net proceeds received to retire its long-term
debt and employed the remaining funds to finance growth which included branch
acquisitions, the establishment of de novo branches and various other corporate
purposes.
While the Company has been successful in achieving the deposit growth levels
anticipated, increases in earnings have lagged as loan growth did not
immediately offset increased deposit and trust preferred costs. Management
believes its growth strategies will lead to increased opportunities and
profitability and is in the best interests of shareholders in the long-term.
Results of Operations
Earnings for the second quarter of 2000 increased 8.08% to $2,461 as compared to
the same quarter of 1999. Earnings for the first half of 2000 increased 8.16% to
$4,796 as compared to the same period in 1999. Net interest income, non-interest
income and non-interest expense all increased for comparable periods disclosed.
Merger expenses of $440 were recorded in the second quarter of 2000. Per share
earnings (diluted) for the second quarter equaled $.42 in 2000, compared to $.39
in 1999. Per share earnings (diluted) for the first half of 2000 and 1999 were
$.82 and $.76 respectively.
The Company's return on average total assets for the second quarter was .87% in
2000 compared to .86% in 1999. Year-to-date return on average assets was .86%
and .86% for 2000 and 1999. Year-to-date return on average shareholders' equity
was 13.83% and 13.17% for 2000 and 1999
11
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Net Interest Income
The volume and yield of earning assets and the cost of interest-bearing
liabilities influences net interest income. Net interest income reflects the mix
of interest-bearing and non-interest-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 $9,965 in 2000 increased 15.22 % from $8,649 in 1999. The first six
months of net interest income increased by $2,685 or 15.95% over the same period
in 1999. Net interest income, on a tax equivalent basis, reflected as a
percentage of average earning assets (net interest margin) was 3.98% for the
quarter ended June 30, 2000 and 3.68% for the comparable period in 1999. The
comparable figures for the first half of 2000 and 1999 were 3.92% and 3.70%
respectively.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the Allowance
and Provision for Possible Loan Losses"
Non-interest Income
Second quarter non-interest income in 2000 exceeded the prior year by $228 or
11.63%. Non-interest income in the first six months of 2000 exceeded the prior
year period by $387 or 10.49%. Security losses of $36 were realized in the first
six months of 2000 compared to $13 in for the same period last year. Service
charges for the respective second quarters of 2000 and 1999 were $854 and $826.
This also increased for the first six months of 2000 over the same period in
1999 by $88 primarily due to continued growth in interest-bearing checking
accounts. Deposit growth and interest rate variables affect service charge
income. Mortgage banking income, which consists of gains (losses) on loan sales
and service fee income was $223 lower for the second quarter of 2000 compared to
the same period in 1999, and $429 less for the six month period ended June 30,
2000 compared to the same period in 1999. Decreased mortgage origination sales
activity began late in 1998 and has continued. During this period of time, the
long-term interest rates charged on mortgages increased and the Company
experienced reduced refinancing and origination activity of a saleable nature.
Non-Interest income Three months Six months
Ended Ended
June 30 June 30
2000 1999 2000 1999
---- ---- ---- ----
Trust fees $ 105 $ 96 $244 $247
Insurance commissions 391 267 750 451
Mortgage banking income 201 424 334 763
Service charges on deposit accounts 854 826 1,623 1,535
Gain (loss) on sales of securities (48) 11 (36) (13)
Other income 685 336 1,160 705
------ ------ ------ ------
Total $2,188 $1,960 $4,075 $3,688
====== ====== ====== ======
12
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Non-interest expense
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the second quarter of 2000 by $530 or 13.67% and in the
first half of 2000 by $1,340 or 17.90 % as compared to the prior year period.
Normal staff salary adjustments and increased benefit costs were incurred in
2000 as well as the cost of staffing 6 new branches (4 purchased and 2 de novo)
and the addition of the Insurance Group for the full 6 months period in 2000.
Amortization of core deposit intangibles and goodwill for the first quarter of
2000 exceeded the comparable period for 1999 as the result of amortization of
premiums paid on The Insurance Group, branches and deposits acquired in February
1999.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing non-interest expense by the total of tax-effected net
interest income plus non-interest income excluding securities gains or losses.
The lower the ratio, the more efficient the Company is in managing net interest
margin, non-interest income and non-interest expense. The Company's efficiency
ratios were 67.37% for the first half of 2000 compared to 65.15% for the same
period in 1999.
Non Interest expense Three months ended Six months ended
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Salaries and employee benefits $4,409 $3,879 $8,830 $7,490
Net occupancy expense 463 453 996 959
Equipment expense 543 525 1,065 1,036
Merger expenses 440 --- 440 ---
Data processing fees 355 279 520 350
Deposit insurance 58 45 96 92
Intangibles amortization 458 456 917 769
Stationery, printing & supplies 191 221 426 444
Other expenses 1,575 1,292 2,948 2,562
------ ------ ------- -------
Total $8,492 $7,150 $16,238 $13,702
====== ====== ======= =======
Income Taxes
The effective tax rate for the first six months was 27.40% for 2000 and 27.32%
for 1999. The Company and its subsidiaries will file consolidated income tax
returns for 2000.
Financial Condition
Total assets at June 30, 2000 increased $53,660 since the end of 1999.
Average earning assets represented 93.22% of average total assets for the first
six months of 2000 compared to 92.66% for the same period of 1999. Average loans
represented approximately 76.84% of average deposits in the first six months of
2000 and 70.84% for a comparable period in 1999. Management intends to continue
its emphasis on loan growth throughout 2000, to increase these averages. Average
loans as a percent of assets were 66.33% and 62.41% for the six month periods
ended June 30, 2000 and 1999 respectively.
13
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
The increase in deposits of $50,837 from December 31, 1999 to June 30, 2000 is
due mainly to more aggressive pricing to support current loan growth. FHLB
advances were obtained while short-term borrowing, primarily federal funds
purchases and repurchases were reduced.
Trust Preferred Securities in the amount of $22,425 were issued on December 12,
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.
In February of 1999 the Company borrowed $8,000 from National City Bank at a
floating rate based upon LIBOR. In July 1999, the Company reduced its debt by
$1,300 in order to obtain a more favorable interest rate. Further reductions
were made in June 2000 to $6,400 as part of the scheduled repayment plan.
Shareholders' equity was $70,287 on June 30,2000 compared to $68,172 on December
31, 1999. Book value per common share increased to $11.97 or 2.84% from $11.64
at year-end 1999. The unrealized loss on securities available for sale, net of
taxes, totaled $5,591 or $.95 per share at June 30, 2000 compared to an
unrealized loss of $5,094 or $.87 per share at December 31, 1999. Excluding the
net unrealized gains and losses on securities available for sale, book value per
share would be $12.92 at June 30, 2000 or an increase of 3.28% over the
comparable book value at year-end 1999.
Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses
Loans remain the Company's largest concentration of assets and, by their nature,
carry a higher degree of risk. The loan underwriting standards observed by the
Company's subsidiaries are viewed by management as a means of controlling
problem loans and the resulting chargeoffs.
The Company's conservative loan underwriting standards have historically
resulted in higher loan quality and lower levels of net charge-offs 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
14
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Directors regularly monitors such concentrations to determine compliance with
its loan allocation policy. The Company believes it has no undue concentrations
of loans.
Total loans increased $57,585 or 8.10% since December 31, 1999 spread across the
variety of loans the Company participates in. The greatest increase is in the
residential mortgage loan portfolio, as more mortgage loan originations are
placed in the Company portfolio to deploy the deposits gained.
Residential real estate loans continue to represent a significant portion of the
total loan portfolio. Such loans represented 47.07% of total loans at June 30,
2000 and 46.69% at December 31, 1999.
Commercial and industrial loans increased 20.95% while construction and
development loans increased 17.49% from year-end 1999 to June 30, 2000.
On June 30, 2000, the Company had $9,224 of residential real estate loans held
for sale. Prior to the merger with People's, 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 had engaged in mortgage banking activities for a period of time.
The Company regards its ability to identify and correct loan quality problems as
one of its greatest strengths. Loans are placed on non-accrual 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 non-accruing 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 non-accrual 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 non-accruing status,
but are charged off when policy-determined delinquent status is reached. The
provision for loan losses was $748 in the first six months of 2000 compared to
$717 for the same period in 1999.
Net charge-offs were $146 for the first six months of 2000 compared to $168 for
the comparable period in 1999. On an annualized basis as a percentage of average
loans, net charge-offs equaled .04% and .05% respectively for the six month
period ended June 30, 2000 and 1999. In prior years, the Company outperformed
its peer group's net loan loss average and that trend is expected to continue in
2000. Management is not aware of any trend which is likely to cause the level of
net charge-offs in 2000 to materially exceed the level of charge-offs
experienced in 1999.
Foreclosed real estate held by the Company at June 30, 2000 was $494 and $339 at
December 31, 1999.
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, non-accrual loans and loans delinquent 30 days
or more.
The ability to promptly identify problem loans is invaluable to a banking
organization. Most often, losses incurred as a result of prompt, aggressive
collection
15
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 quarterly. 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, 2000 is
considered adequate by management.
Investment Securities
Investment securities offer flexibility in the Company's management of interest
rate risk, and are 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, 2000, $266,897 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. An unrealized pre-tax loss of $9,225 was
recorded to adjust the AFS portfolio to current market value at June 30, 2000,
compared to an unrealized pre-tax loss of $8,020 at December 31, 1999.
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
agreement to repurchase ("agreements") 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. Total deposits funded 92.68% and 92.80% of total earning assets
at June 30, 2000 and December 31,1999. Total interest-bearing deposits averaged
90.25% and 90.29% of average total deposits for the periods ending June 30, 2000
and December 31, 1999, respectively. Management constantly strives to increase
the percentage of transaction-related deposits to total deposits due to the
positive effect on earnings.
Short-term borrowings and FHLB advances decreased $10,143 or 25.32% from
year-end 1999 primarily due to the increase in deposits during the quarter. In
February 1999 the Company borrowed $8,000 in long term debt (see Financial
Condition section)
Capital Resources
Total shareholders' equity increased $2,115 to $70,287 at June 30, 2000 as
compared to December 31, 1999.
16
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 adjusted for
AFS adjustment, while Tier 1 consists of core capital less goodwill and
intangibles. 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. Total regulatory capital consists of Tier 1, certain
debt instruments and a portion of the allowance for credit losses. At June 30,
2000, Tier 1 capital to total average assets was 6.73%. Tier 1 capital to
risk-adjusted assets was 10.04%. Total capital to risk-adjusted assets was 11.16
All three ratios substantially exceed all required ratios established for bank
holding companies. Risk-adjusted capital levels of the Company's subsidiary
banks exceed regulatory definitions of well-capitalized institutions.
The Company declared and paid common dividends of $.33 per share in the first
six months of 2000 and $.32 per share for the same period in 1999.
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 AFS securities maturing after
one year, which can be sold to meet liquidity needs.
Maintaining a relatively stable funding base, which is achieved by diversifying
funding sources and extending the contractual maturity of liabilities, supports
liquidity and limits 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 72.13% of total earning assets for the six months ended
June 30, 2000 compared to approximately 73.39% for the comparable period ended
June 30,1999.
Management believes the Company has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. In
addition, the affiliates have access to the Federal Home Loan Bank for borrowing
purposes. The Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
Interest Rate Risk
At June 30, 2000, the Company held approximately $429,009 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 re-pricing categories based upon
historical patterns of re-pricing, which are reviewed periodically by
management. The assumptions regarding these re-pricing characteristics greatly
influence
17
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 the cumulative GAP divided by
total assets shall be plus or minus 20% at the 3-month, 6-month, and 1-year time
horizons.
The Company continues to strive to increase its amount of variable rate assets
in what is generally perceived to be a period of rising interest rates. While
interest rates have trended upward since July 1999, the increases have been
relatively mild and have allowed the company the opportunity to react to the
higher rates. Management believes that the company is well positioned in the
current rate environment and does not foresee its earnings materially impacted
in 2000 regardless of the direction interest rates may take.
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.
18
INDIANA UNITED BANCORP
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollar amounts in thousands except per share data)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk of the Corporation encompasses exposure to both liquidity and
interest rate risk and is reviewed monthly by the Asset/Liability Committee and
the Board of Directors. There have been no material changes in the quantitative
and qualitative disclosures about market risks as of June 30, 2000 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 1999. The table below reflects the changes from December 31,
1999 as the result of the Capstone acquisition.
Table 8 Principal Cash Flows REVISED
There Fair
December 31 2000 2001 2002 2003 2004 after Total Value
Assets
Investment securities
Fixed rate 21,823 42,952 26,865 31,060 48,512 93,493 264,705 256,959
Average interest rate 5.21% 5.50% 5.51% 5.65% 5.68% 6.33% 5.82%
Variable rate 4,390 1,490 - 16 - 27,850 33,746 33,319
Average interest rate 5.03% 6.35% 0.00% 7.00% 0.00% 6.53% 6.33%
Loans
Fixed rate 43,441 23,046 28,191 39,093 21,311 185,498 340,580 334,907
Average interest rate 8.56% 9.02% 8.73% 8.19% 8.08% 7.72% 8.07%
Variable rate 78,044 5,420 3,333 4,152 5,910 281,137 377,996 375,765
Average interest rate 9.09% 9.01% 8.97% 8.52% 8.34% 7.94% 8.22%
Liabilities
Deposits
NOW, money market and
savings deposits
Variable rate 357,526 357,526 357,526
Average interest rate 2.88% 2.88%
Certificates of deposit
Fixed rate 318,199 100,648 29,145 10,705 8,710 556 467,964 473,576
Average interest rate 4.99% 5.35% 5.76% 5.74% 5.38% 4.60% 5.12%
Variable rate 11,433 6,054 1,054 276 409 45 19,271 19,271
Average interest rate 5.14% 5.01% 5.48% 4.95% 4.84% 4.69% 5.11%
Borrowings
Fixed rate 12,926 - - - - - 12,926 12,926
Average interest rate 5.38% - - - - - 5.46%
Variable rate 27,138 - - - - - 27,138 27,138
Average interest rate 4.73% - - - - - 4.73%
Federal Home Loan Bank advances
Fixed rate 2,210 2,000 374 4,584 4,346
Average interest rate 5.52% 5.74% 6.20% 5.35%
Variable rate 9,900 - 10,000 - - - 19,900 19,900
Average interest rate 5.34% - 5.35% - - - 5.35%
Notes payable
Variable rate 6,885 - - - - - 6,885 6,885
Average interest rate 7.10% - - - - - 7.10%
Trust Preferred Securities
Fixed rate 22,425 22,425 18,781
Average interest rate 8.75% 8.75%
19
INDIANA UNITED BANCORP
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
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
A report filed on Form 8-K dated May 1,2000 announced the consummation of the
merger of First Affiliated and Indiana United Bancorp.
No other information is required to be filed under Part II of this form.
20
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 21, 2000
/s/ James L. Saner, Sr.
-----------------------------------
James L. Saner Sr
President and Chief Executive Officer
August 21, 2000
/s/ Donald A. Benziger
-----------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
21