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, 2001
COMMISSION FILE NUMBER 0-12422
INDIANA UNITED BANCORP
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(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
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(Address of principal executive offices) (Zip Code)
(812) 663-0157
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(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 No X
--- ---
As of August 10, 2001 there were outstanding 6,191,232 shares, without
par value of the registrant.
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
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PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income and Comprehensive Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands except per share data)
(Unaudited)
June 30, December 31,
2001 2000
----------- -----------
Assets
Cash and due from banks $ 43,705 $ 47,586
Money market fund 42,352 6,373
Interest-bearing demand deposits -- 79
Federal funds sold 2,265 16,050
----------- -----------
Cash and cash equivalents 88,322 70,088
Interest-bearing time deposits 995 594
Securities
Available for sale 249,922 281,716
Held to maturity (fair value of $9,449 and $12,749) 9,280 12,679
Loans held for sale 11,523 1,883
Loans, net of allowance for loan losses of $9,169 and $8,716 773,808 781,834
Premises and equipment (net) 16,759 17,558
Restricted stock, at cost 3,612 3,267
Intangible assets 23,805 23,739
Other assets 22,544 23,578
----------- -----------
Total assets $ 1,200,570 $ 1,216,936
=========== ===========
Liabilities
Deposits
Noninterest-bearing $ 85,276 $ 103,067
Interest-bearing 943,485 950,503
----------- -----------
Total deposits 1,028,761 1,053,570
Short-term borrowings 23,301 20,645
Federal Home Loan Bank advances 20,381 22,463
Notes payable 4,891 6,510
Other liabilities 16,432 13,318
----------- -----------
1,093,766 1,116,506
Guaranteed preferred beneficial interests in
company's subordinated debentures 22,425 22,425
Shareholders' equity
Preferred stock no par value
Authorized - 400,000
Issued and outstanding - none -- --
Common stock $.50 stated value:
Authorized-10,000,000 shares, Issued and
outstanding-6,191,232 and 5,873,900 shares 3,096 2,937
Common stock to be distributed -- 147
Additional Paid-in capital 30,106 29,739
Retained earnings 49,497 46,176
Accumulated other comprehensive income (loss) 1,680 (994)
----------- -----------
Total shareholders' equity 84,379 78,005
----------- -----------
Total liabilities and shareholders' equity $ 1,200,570 $ 1,216,936
=========== ===========
See notes to consolidated condensed financial statements.
3
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands except per share data)
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
-------- -------- -------- --------
Interest income:
Loans, including fees $ 16,828 $ 16,605 $ 34,150 $ 32,040
Investment securities 3,822 4,329 7,957 8,781
Other 757 136 1,612 235
-------- -------- -------- --------
Total interest income 21,407 21,070 43,719 41,056
-------- -------- -------- --------
Interest expense:
Deposits 10,414 9,816 $ 21,699 $ 18,958
Trust preferred securities 505 501 1,011 1,002
Other borrowings 585 788 1,252 1,579
-------- -------- -------- --------
Total interest expense 11,504 11,105 23,962 21,539
-------- -------- -------- --------
Net interest income 9,903 9,965 19,757 19,517
Provision for loan losses 369 375 738 748
-------- -------- -------- --------
Net interest income after
provision for loan losses 9,534 9,590 19,019 18,769
Non-interest income:
Securities losses (137) (48) (124) (36)
Other income 3,033 2,236 5,576 4,111
-------- -------- -------- --------
Total non-interest income 2,896 2,188 5,452 4,075
Non-interest expense 8,267 8,492 16,501 16,238
-------- -------- -------- --------
Income before income tax 4,163 3,286 7,970 6,606
Income tax expense 1,377 825 2,610 1,810
-------- -------- -------- --------
Net income $ 2,786 $ 2,461 $ 5,360 $ 4,796
======== ======== ======== ========
Comprehensive income $ 3,287 $ 2,954 $ 8,034 $ 4,299
======== ======== ======== ========
Net income per share (basic and diluted) $ 0.45 $ 0.40 $ 0.87 $ 0.78
Cash dividends declared 0.165 0.157 0.330 0.309
See notes to consolidated condensed financial statements.
4
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
2001 2000
--------- ---------
Operating Activities
Net income $ 5,360 $ 4,796
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 738 748
Depreciation and amortization 1,179 748
Amortization of intangibles 976 914
Investment securities losses 124 36
Change in loans held for sale (9,640) (1,343)
Change in other assets and liabilities 3,089 (3,261)
--------- ---------
Net cash provided by operating activities 1,826 2,638
Investing Activities
Net change in short term investments (401) 1,128
Proceeds from maturities and payments
on securities held to maturity 3,421 2,421
Purchases of securities available for sale (102,632) (12,552)
Proceeds from sales, maturities and payments
on securities available for sale 138,421 25,691
Net change in loans 7,288 (57,731)
Cash disbursed for acquisitions (655) --
Purchases of restricted stock (345) --
Purchases of premises and equipment (796) (846)
--------- ---------
Net cash provided (used) by investing activities 44,301 (41,889)
Financing Activities
Net change in deposits (24,809) 50,837
Short-term borrowings 2,656 2,854
Repayment of notes payable (1,619) --
Repayment of FHLB advances (2,082) --
Cash dividends (2,039) (2,184)
--------- ---------
Net cash provided (used) by financing activities (27,893) 51,507
--------- ---------
Net change in cash and cash equivalents 18,234 12,256
Cash and cash equivalents, beginning of period 70,088 41,879
--------- ---------
Cash and cash equivalents, end of period $ 88,322 $ 54,135
========= =========
See notes to consolidated condensed financial statements.
5
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"), Regional Bank ("Regional"), People's Trust Company
("People's"), and their subsidiaries, and its subsidiaries IUB Capital Trust,
IUB Reinsurance Co., Ltd. and IUB Illinois Holding Company and its subsidiary,
Capstone Bank, N.A. ("Capstone"), for interim financial reporting are consistent
with the accounting policies followed for annual financial reporting. All
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results for the periods reported have been included in the
accompanying unaudited consolidated financial statements and all such
adjustments are of a normal recurring nature.
Effective January 1, 2001, a new accounting pronouncement required all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded by offsetting gains and losses on the
hedge and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. Adoption of this standard on January 1, 2001, did not have a
material effect on the Company's financial statements.
NOTE 2 BRANCH ACQUISITIONS
During the third quarter of 2000, the Company purchased two branch facilities
and $43,500 in deposits from Harrington Bank, Richmond, Indiana. The branches
are located in Marion County, Indiana and were integrated into Union. The
premium paid for the deposits resulted in $1,458 in intangible assets for Union.
These branch acquisitions were accounted for using the purchase method of
accounting and the results of operations of the branches have been included
since their acquisition dates.
NOTE 3 BUSINESS COMBINATIONS
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 1,069,277 shares of its common stock to
the shareholders of First Affiliated Bancorp (adjusted for stock dividend). This
includes shares issued to redeem First Affiliated Bancorp stock options. The
conversion rate was 4.4167 shares of Company stock for each outstanding share of
First Affiliated at the effective date of the merger. Merger and related costs
were charged against net income during 2000. The financial information contained
herein includes Capstone for all periods presented.
Effective April 1, 2001, the Company consummated its acquisition of the
insurance agencies of Vollmer & Associates, Inc. The transaction was accounted
for using the purchase method of accounting. The purchase price consisted of
$655 cash and 24,184 shares of Company stock, and the acquisition resulted in
intangible assets of approximately $1,000.
6
NOTE 4 SECURITIES
June 30, 2001 December 31,2000
------------- ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Available for Sale
Federal agencies 82,584 84,172 167,925 167,887
State and municipal 32,284 32,691 32,398 32,247
Corporate and other securities 29,350 29,075 33,758 32,574
Mortgage-backed securities 103,058 103,984 49,225 49,008
------- ------- ------- -------
Totals 247,276 249,922 283,306 281,716
June 30, 2001 December 31,2000
------------- ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Held to Maturity
State and municipal $ 8,159 $ 8,231 11,587 $ 11,559
Corporate and other securities 1,121 1,218 1,092 1,190
------- ------- ------- -------
Totals $ 9,280 $ 9,449 12,679 $ 12,749
NOTE 5 LOANS
June 30, December 31,
2001 2000
--------- ---------
Loans:
Commercial and industrial loans $ 82,475 $ 77,648
Agricultural production financing 25,008 20,744
Farm real estate 44,262 49,284
Commercial real estate mortgage 145,591 138,132
Residential real estate mortgage 359,475 389,622
Construction and development 45,817 40,813
Consumer 71,651 64,548
State & political 8,698 9,759
--------- ---------
Gross loans 782,977 790,550
Less: Allowance for loan losses (9,169) (8,716)
--------- ---------
Net loans $ 773,808 $ 781,834
========= =========
7
NOTE 5 LOANS (CONT'D)
June 30, December 31,
2001 2000
--------- ---------
Non-performing loans:
Nonaccruing loans $ 8,790 $ 3,454
Accruing loans contractually past
due 90 days or more 1,192 532
--------- ---------
Total $ 9,982 $ 3,986
========= =========
% of total loans 1.27% 0.50%
NOTE 6 DEPOSITS
June 30, December 31,
2001 2000
------------- -------------
Noninterest-bearing demand $ 85,276 $ 103,067
Interest-bearing demand 185,535 173,495
Savings 219,384 214,443
Certificates of deposit of $100,000 or more 95,964 113,287
Other certificates and time deposits 442,602 449,278
------------- -------------
Total deposits $ 1,028,761 $ 1,053,570
============= =============
8
NOTE 7 SHORT-TERM BORROWINGS
June 30, December 31,
2001 2000
------------- -------------
Short-term borrowings:
Federal funds purchased $ 4,500 $ 3,400
Securities sold under repurchase agreements 18,801 17,245
------------- -------------
Total short-term borrowings $23,301 $20,645
============= =============
NOTE 8 EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For the three months ended June 30, 2001 June 30, 2000
------------------------------------ ------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share:
Net Income available to
common shareholders $2,786 6,191,232 $0.45 $2,461 6,161,067 $0.40
------ ----- ------ -----
Effect of dilutive stock options - 5,981
--------- ---------
Diluted earnings per share $2,786 6,191,232 $0.45 $2,461 6,167,048 $0.40
====== ========= ===== ====== ========= =====
For the six months ended June 30, 2001 June 30, 2000
------------------------------------ ------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share:
Net Income available to
common shareholders $5,360 6,179,207 $0.87 $4,796 6,155,020 $0.78
------ ----- ------ -----
Effect of dilutive stock options - 12,028
--------- ---------
Diluted earnings per share $5,360 6,179,207 $0.87 $4,796 6,167,048 $0.78
====== ========= ===== ====== ========= =====
9
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Overview
Indiana United Bancorp ("Company") is a multi-bank, bank holding company that
provides an array of financial services and is headquartered in Greensburg,
Indiana. On June 30, 2001, the Company controlled four bank subsidiaries,
People's Trust Company ("People's"), Union Bank and Trust Company of Indiana
("Union"), Regional Bank ("Regional"), and Capstone Bank, N.A. ("Capstone"). In
addition to the banking subsidiaries, the Company owned, either directly or
indirectly, the following subsidiaries: The Insurance Group, Inc., IUB Capital
Trust, IUB Reinsurance Company, Ltd., People's Investment Company, Ltd., and
Union Investment Company, Ltd.
Forward-Looking Statements
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; deposit flows; the costs of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
The forward-looking statements included in the Management's Discussion and
Analysis ("MD&A") relating to certain matters involve risks and uncertainties,
including anticipated financial performance, business prospects, and other
similar matters, which reflect management's best judgment based on factors
currently known. Actual results and experience could differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements as a result of a number of factors, including but not
limited to those discussed in the MD&A.
Results of Operations
Net income for the second quarter of 2001 increased $325, or 13.2%, to $2,786
compared to the second quarter of 2000 due mainly to a significant increase in
the Company's non-interest income and a slight decrease in non-interest expense.
Net income for the first six months of 2001 was $5,360, which represents an
increase of 11.8% over the same period last year. Earnings per share for the
second quarter equaled $.45 in 2001, compared to $.40 in 2000, an increase of
12.5%. For the first six months of 2001, earnings per share were $.87, or an
increase of 11.6% over the $.78 reported for the same period in 2000. The
Company's return on average total assets for the second quarter was .92% in 2001
compared to .87% in 2000. Return on average shareholders' equity (excluding
accumulated other comprehensive income) for the second quarter was 13.54% in
2001 and 13.09% in 2000. For the first half of 2001, return on average
shareholders' equity (excluding accumulated other comprehensive income) was
13.30% versus 12.95% for the same period last year.
10
Net Interest Income
The volume and yield of earning assets and interest-bearing liabilities
influence 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 $9,903 in 2001 remained relatively flat compared to the second quarter of
2000. This was expected as interest rates have decreased significantly from the
previous year. Net interest income on a tax equivalent basis, reflected as a
percentage of average earning assets (net interest margin), was 3.68% for the
second quarter of 2001 and 3.86% for the same time frame in 2000. For the first
six months of 2001, the Company's net interest margin was 3.66% compared to
3.83% for the first six months of 2000. With the significant drop in interest
rates, this compression of the net interest margin was common throughout the
industry.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the Allowance
and Provision for Loan Losses".
Non-interest Income
Second quarter non-interest income in 2001 exceeded the prior year by $708 or
32.4%. For the first six months of 2001, non-interest income increased $1,377,
or 33.8%, to $5,452.
Service charges for the respective second quarters of 2001 and 2000 were $999
and $854, an increase of 17.0% primarily due to continued growth in
transactional-based, interest-bearing checking accounts as the Company
introduced and promoted a standard package checking account across all
affiliates.
Mortgage banking income, which consists of gains and losses on loan sales and
service fee income, was $719 for the second quarter of 2001 compared to $201 for
the same period in 2000, an increase of $518, or 257.8%. For the first six
months of 2001, mortgage banking income was $1,056 versus $334 for the same
period in 2000, an increase of 316.2%. This increase was due to the significant
decrease in mortgage interest rates during the first half of 2001, which led
many customers to refinance their existing loans. The Company elected to sell
the majority of these loans while maintaining the servicing rights.
Insurance commissions increased in the second quarter of 2001 to $565 versus
$391 for the same period last year. The increase of 44.5% was primarily due to
the acquisition of the Vollmer & Associates insurance agencies in April 2001.
Non-Interest income
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Trust fees $ 114 $ 105 $ 279 $ 244
Insurance commissions 565 391 946 750
Mortgage banking income 719 201 1,056 334
Service charges on deposit accounts 999 854 1,875 1,623
Gain (loss) on securities (137) (48) (124) (36)
Other income 636 685 1,420 1,160
------- ------- ------- -------
Total $ 2,896 $ 2,188 $ 5,452 $ 4,075
======= ======= ======= =======
11
Non-interest expense
Total non-interest expense was $8,267 for the second quarter of 2001, which
represented a decrease of $225 from the second quarter of 2000. In 2000, the
Company had one-time charges related to the acquisition of First Affiliated of
$440.
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the second quarter of 2001 by $235, or 5.4% compared to
the prior year period. For the first half of 2001, personnel expense was $9,374,
which represented an increase of 6.2% over the comparable period in 2000. Normal
staff salary adjustments and increased benefit costs were incurred in 2001. In
addition, the Company incurred personnel costs related to the staffing of the
new branches acquired from Harrington and the insurance agencies of Vollmer &
Associates.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing non-interest expense by the total of tax-equivalent 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 64.54% for the first half of 2001 compared to 67.37% for the same
period in 2000. The improvement in the efficiency ratio is primarily due to the
increase in mortgage banking income and the Company's continued attention to
cost controls.
Non-Interest expense
Three months ended Six months ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Salaries and employee benefits $ 4,644 $ 4,409 $ 9,374 $ 8,830
Net occupancy 510 463 1,053 996
Equipment expense 658 543 1,223 1,065
Merger expenses -- 440 -- 440
Deposit insurance 63 58 135 96
Intangible amortization 494 458 976 917
Stationary, printing, and supplies 207 191 434 426
Other expenses 1,691 1,930 3,306 3,468
------- ------- ------- -------
Total non-interest expense $ 8,267 $ 8,492 $16,501 $16,238
======= ======= ======= =======
Income Taxes
The effective tax rate for the first six months was 32.8% for 2001 and 27.4% for
2000. The effective tax rate increased compared to the prior year, as First
Affiliated was an S-corporation with no corporate income tax during the first
four months of 2000. The Company and its subsidiaries will file consolidated
income tax returns for 2001.
12
Financial Condition
Total assets at June 30, 2001 decreased $16,366 since the end of 2000. The
decrease was primarily in securities as declining interest rates during the
first half of 2001 caused the Company to have a significant number of investment
securities called. The Company elected to allow higher-priced deposits to mature
and not renew in order to offset the decrease in assets. In addition, the
Company's loan portfolio decreased slightly in the first half of 2001 (see
section titled "Loans, Credit Risk, and the Allowance and Provision for Loan
Losses" for a discussion of the Company's loan portfolio).
Average earning assets represented 92.7% of average total assets for the first
six months of 2001 compared to 93.22% for the same period of 2000. Average loans
represented approximately 75.9% of average deposits in the first six months of
2001 and 76.84% for the comparable period in 2000. Management intends to
emphasize quality loan growth throughout 2001, to attempt to increase these
averages. Average loans as a percent of assets were 65.6% and 66.33% for the
six-month periods ended June 30, 2001 and 2000 respectively.
The decrease in deposits of $24,809 from December 31, 2000 to June 30, 2001 is
due mainly to the seasonal fluctuation of deposits as many corporate customers
build up cash balances for year-end. In addition, the Company has become less
aggressive in competing for higher priced funds.
Shareholders' equity was $84,379 on June 30, 2001 compared to $78,005 on
December 31, 2000. Book value per common share increased to $13.63 or 7.7% from
$12.65 at year-end 2000. The unrealized gain on securities available for sale,
net of taxes, totaled $1,680 or $.27 per share at June 30, 2001 compared to an
unrealized loss of $994 or $.16 per share at December 31, 2000. Excluding the
net unrealized gains and losses on securities available for sale, book value per
share would be $13.36 at June 30, 2001 or an increase of 4.3% over the
comparable book value at year-end 2000.
Loans, Credit Risk and the Allowance and Provision for 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 charge-offs.
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 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, excluding those held for sale, decreased $7,573 since December 31,
2000. The commercial real estate portfolio, construction and development loans,
and consumer loans all grew from December 31, 2000. Offsetting the increases in
these portfolios was a decrease in residential real estate loans of
approximately $30 million as customers took advantage of the decrease in
mortgage interest rates and refinanced their existing loans. The Company, in
turn, experienced an increase in mortgage origination volume, but elected to
sell the majority of these new loans in the secondary market.
13
Residential real estate loans continue to represent a significant portion of the
total loan portfolio. Such loans represented 45.9% of total loans at June 30,
2001 and 49.3% at December 31, 2000.
On June 30, 2001, the Company had $11,523 of residential real estate loans held
for sale. The Company generally retains the servicing rights on mortgages sold.
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 $738 in the first six months of 2001 compared to
$748 for the same period in 2000.
Net charge-offs were $285 for the first six months of 2001 versus $146 for the
comparable period in 2000. On an annualized basis as a percentage of average
loans, net charge-offs equaled .07% for the six month period ended June 30,
2001.
Foreclosed real estate held by the Company at June 30, 2001 was $812 and $449 at
December 31, 2000.
As of June 30, 2001, the Company had $8,790 of loans on nonaccrual status
compared to $3,454 at December 31, 2000, which represents an increase of $5,336.
During the second quarter of 2001, the Company placed a large commercial credit
on nonaccrual status. This single credit contributed approximately $4.8 million
of the increase in nonaccrual loans. Management has reviewed the credit and is
of the opinion that adequate allowance allocations have been provided for this
loan.
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, 2001 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.
14
As of June 30, 2001, $249,922 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 gain of $2,646 was
recorded to adjust the AFS portfolio to current market value at June 30, 2001,
compared to an unrealized pre-tax loss of $1,590 at December 31, 2000.
In September 2000, the Company formed two investment subsidiaries, People's
Investment Company, Ltd. and Union Investment Company, Ltd. Incorporated in
Bermuda, these subsidiaries now hold a large portion of both People's and
Union's investment portfolios and were formed with the intent to enhance the
organization's profitability.
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 93.6% and 94.9% of total earning assets at
June 30, 2001 and December 31, 2000. Total interest-bearing deposits averaged
91.9% and 90.6% of average total deposits for the periods ending June 30, 2001
and December 31, 2000, 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 increased $2,656 or 12.9% from year-end 2000 as
higher-rate certificates of deposit matured and were not aggressively pursued.
The Company had FHLB advances of $20,381 outstanding at June 30, 2001. These
advances have interest rates ranging from 6.20% to 6.95%. Approximately $20,000
of these advances mature in 2005 or later.
Capital Resources
Total shareholders' equity increased $6,374 to $84,379 at June 30, 2001 as
compared to December 31, 2000.
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, excluding
accumulated other comprehensive income, 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 6.90%. Tier
1 capital to risk-adjusted assets was 10.59%. Total capital to risk-adjusted
assets was 11.79%. All three ratios 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.
15
The Company declared and paid common dividends of $.165 per share in the second
quarter of 2001 versus $.157 for the second quarter of 2000. For the first six
months of 2001 the Company declared and paid common dividends of $.33 per share
versus $.309 for the same period in 2000.
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 83.8% and 82.2% of total earning assets for the six months
ended June 30, 2001 and 2000.
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
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.
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.
16
At June 30, 2001, the Company held approximately $429,282 in assets comprised of
securities, loans, short-term investments, and federal funds sold, which were
interest sensitive in one year or less time horizons.
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.
17
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, 2001 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 2000.
18
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.
a) None
b) Reports on Form 8-K
There were no reports filed on Form 8-K for the second quarter
of 2001.
No other information is required to be filed under Part II of this form.
19
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 10, 2001
/s/ James L. Saner Sr
-----------------------------------
James L. Saner Sr
President and Chief Executive Officer
August 10, 2001
/s/ Donald A. Benziger
-----------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
20