FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 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 September 30, 1998 there were outstanding 4,774,628 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 7-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-22
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 23-24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
INDIANA UNITED BANCORP
FORM 10-Q
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
September 30, December 31,
1998 1997
------------- ------------
Assets
Cash and due from banks $ 21,638 $ 41,805
Interest-bearing demand deposits 1,535 1,057
Federal funds sold 41,850 31,350
-------- --------
Cash and cash equivalents 65,023 74,212
Securities
Available for sale 139,897 102,808
Held to maturity 20,324 24,182
Loans held for sale 4,332 1,580
Loans 519,312 472,627
Less: Allowance for loan losses 5,931 5,452
-------- --------
Net loans 513,381 467,175
Premises and equipment 12,257 10,384
Core deposit intangibles and goodwill 11,371 1,629
Other assets 13,169 11,774
-------- --------
Total assets $779,754 $693,744
-------- --------
Liabilities
Deposits $672,180 $583,663
Short-term borrowings 8,501 14,669
Federal Home Loan Bank advances 10,000 10,000
Other liabilities 7,658 7,981
-------- --------
Total liabilities 698,339 616,313
-------- --------
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--4,774,628 and
4,708,556 shares 4,775 4,709
Paid-in surplus 19,145 18,690
Accumulated other comprehensive income 1,564 762
Retained earnings 33,506 30,845
-------- --------
Total shareholders' equity 58,990 55,006
-------- --------
Total liabilities and shareholders' equity $779,754 $693,744
-------- --------
See notes to consolidated condensed financial statements.
3
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
-------------------- --------------------
Interest income:
Loans, including fees $11,191 $10,349 $32,493 $29,704
Investment securities 2,186 2,032 5,957 6,398
Other interest earning assets 349 166 1,561 530
------- ------- ------- -------
Total interest income 13,726 12,547 40,011 36,632
------- ------- ------- -------
Interest expense:
Deposits 6,465 6,024 18,637 17,485
Trust preferred securities 511 - 1,513 -
Notes payable 234 281 739 833
------- ------- ------- -------
Total interest expense 7,210 6,305 20,889 18,318
------- ------- ------- -------
Net interest income 6,516 6,242 19,122 18,314
Provision for loan losses 293 268 858 793
------- ------- ------- -------
Net interest income after provision
for loan losses 6,223 5,974 18,264 17,521
------- ------- ------- -------
Noninterest income:
Securities gains (losses) 24 (75) 36 (72)
Other operating income 1,361 1,165 3,938 3,301
------- ------- ------- -------
Total noninterest income 1,385 1,090 3,974 3,229
------- ------- ------- -------
Noninterest expense 4,942 4,173 14,541 12,119
------- ------- ------- -------
Income before income tax 2,666 2,891 7,697 8,631
Income tax expense 938 1,023 3,055 3,062
------- ------- ------- -------
Net income $ 1,728 $ 1,868 $ 4,642 $ 5,569
------- ------- -------- -------
Net income per share (basic) $0.36 $0.40 $0.98 $1.18
Net income per share (diluted) $0.36 $0.39 $0.97 $1.18
Cash dividends declared $0.145 $0.13 $0.43 $0.37
See notes to consolidated condensed financial statements.
4
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 4,642 5,569
Other comprehensive income, net of tax
Unrealized gains (losses)
on securities available for sale
Unrealized holding gains (losses) arising during period 824 316
Reclassification adjustment for losses (gains) included in net income (22) 43
------- -------
Net unrealized gains (losses) 802 359
------- -------
Comprehensive income 5,444 5,928
Exercise of stock options 520 28
Cash dividends on common stock (1,980) (1,535)
------- -------
Balances, September 30 $58,990 $53,823
------- -------
See notes to consolidated condensed financial statements.
5
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine months ended
September 30
-----------------
1998 1997
------ ------
Cash flows from operating activities:
Net income $ 4,642 $ 5,569
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 858 793
Depreciation and amortization 895 904
Amortization of intangibles 184 196
Investment securities (gains) losses (36) 72
Change in loans held-for-sale (2,752) -
Other adjustments (2,594) (136)
------- -------
Net cash provided by operating activities 1,197 7,398
------- -------
Cash flows from investing activities:
Net change in short-term investments - 86
Purchases of held-to-maturity securities (959) (3,416)
Proceeds from maturities and paydowns
of securities held-to-maturity 4,817 2,873
Purchases of securities available for sale (59,606) (4,358)
Proceeds from maturities and paydowns
of securities available for sale 17,809 17,834
Proceeds from sales of securities available for sale 6,040 6,541
Net change in loans (25,278) (49,054)
Purchases of premises and equipment (1,495) (1,767)
Proceeds from sale of other real estate - 1,000
Net change in deposits with other financial institutions - 499
Cash received in branch acquisitions 64,871 6,548
Other investment activities 271 (638)
------- -------
Net cash provided (used) by investing activities 6,470 (23,852)
------- -------
Cash flows from financing activities:
Net change in deposits (9,228) 7,122
Short-term borrowings (6,168) 2,202
Payments on long-term debt - (625)
Proceeds from issuance of stock 520 28
Cash dividends (1,980) (1,535)
------- -------
Net cash provided (used) by financing activities (16,856) 7,192
------- -------
Net decrease in cash and cash equivalents (9,189) (9,262)
Cash and cash equivalents, beginning of period 74,212 45,381
------- -------
Cash and cash equivalents, end of period $65,023 $36,119
------- -------
See notes to consolidated condensed financial statements.
6
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 nine months ended September 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:
Nine Months Ended
September 30
-----------------
1998 1997
------ ------
Accumulated comprehensive income
Balance, January 1 $ 762 $ 293
Net unrealized gains (losses) 802 (359)
----- -----
Balance, September 30 1,564 (66)
Income tax expense (benefit):
Unrealized holding gains (losses) 549 211
Reclassification adjustments 14 (29)
NOTE 2.
- -------
On July 31, 1998, the Company approved a 2 for 1 stock split, under which each
share of its common stock outstanding at the close of business on August 17,
1998 was converted into two shares of common stock. The additional certificates
were distributed to stockholders on August 31, 1998. As a result of the stock
split, the number of shares outstanding increased from 2,387,314 to 4,774,628
shares. Unless otherwise noted, all share and per share data have been restated
for the 2 for 1 stock split.
7
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 3.
- -------
During 1998, the Company purchased six branches within their target market
areas. The branch acquisitions were completed during the quarter ended September
30, 1998 and resulted in the purchase of $98 million in deposits, $2 million in
fixed assets and $22 million in loans. The premium paid for these branches was
$9,927,000.
The Company has further agreed to purchase an additional five branches within
their target market areas. One branch is scheduled to close in December 1998 and
the other four in January, 1999. Deposits expected to be purchased are estimated
at $150 million.
NOTE 4.
- -------
September 30, 1998 December 31, 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Securities Available for Sale
Federal agencies $ 63,406 $ 65,227 $ 45,036 $ 45,954
State and municipal 7,879 8,065 7,063 7,205
Corporate and other securities 25,660 25,875 4,257 4,255
Mortgage-backed securities 40,346 40,730 45,179 45,394
-------- -------- -------- --------
Totals $137,291 $139,897 $101,535 $102,808
-------- -------- -------- --------
September 30, 1998 December 31, 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Securities Held to Maturity
State and municipal $ 19,355 $ 19,690 $22,741 $23,012
Corporate and other securities 969 1,158 1,441 1,563
-------- -------- -------- -------
Totals $ 20,324 $ 20,848 $24,182 $24,575
-------- -------- -------- -------
NOTE 5.
- -------
September 30 December 31
1998 1997
------------ -----------
Loans:
Commercial and industrial loans $ 41,050 $ 44,341
Agricultural production financing 17,056 15,991
Farm real estate 36,530 38,802
Commercial real estate mortgage 89,705 81,549
Residential real estate mortgage 233,423 208,327
Construction and development 28,390 15,797
Consumer 72,035 66,479
Government guaranteed loans purchased 1,123 1,341
-------- --------
Total loans $519,312 $472,627
-------- --------
8
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 5 (continued).
- -------------------
Underperforming loans:
Nonaccruing loans $915 $755
Accruing loans contractually past due 90 days
or more as to principal or interest payments 243 375
September 30
1998 1997
------ ------
Allowance for loan losses:
Balances, January 1 $5,452 $4,506
Provision for losses 858 793
Recoveries on loans 239 279
Loans charged off (618) (939)
------ ------
Balances, end of period $5,931 $4,639
------ ------
NOTE 6.
- -------
September 30 December 31
1998 1997
------ ------
Deposits:
Noninterest-bearing demand $ 60,863 $ 66,841
Interest-bearing demand 97,165 89,497
Money market deposit accounts 37,503 36,564
Savings 71,124 57,937
Certificates of deposit $100,000 or more 65,377 38,377
Other certificates and time deposits 340,148 294,447
-------- --------
Total deposits $672,180 $583,663
-------- --------
NOTE 7.
- -------
September 30 December 31
1998 1997
------ ------
Short-term borrowings:
Securities sold under repurchase agreements $ 8,112 $ 11,825
U.S. Treasury demand notes 389 2,844
------- --------
Total short-term borrowings $ 8,501 $ 14,669
------- --------
9
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 8.
- -------
Earnings per share (EPS) were computed as follows:
For the three months ended September 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 $1,728 4,774,628 $0.36 $1,868 4,704,638 $0.40
----- -----
Effect of dilutive securities - - - 31,158
----------------- ------------------
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $1,728 4,774,628 $0.36 $1,868 4,735,796 $0.39
------------------------- --------------------------
For the nine months ended September 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 $4,642 4,746,070 $0.98 $5,569 4,704,400 $1.18
----- -----
Effect of dilutive securities - 16,596 - 31,670
----------------- ------------------
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $4,642 4,762,666 $0.97 $5,569 4,736,070 $1.18
------------------------- --------------------------
10
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 9.
- -------
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 (or
2,272,834 after stock split) 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:
Three months ended Nine months ended
September 30 September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Net interest income:
Indiana United Bancorp $6,516 $3,312 $15,158 $ 9,759
P.T.C. Bancorp - 2,930 3,964 8,555
------ ------ ------- -------
Combined $6,516 $6,242 $19,122 $18,314
------ ------ ------- -------
Net income:
Indiana United Bancorp $1,728 $ 906 $ 3,173 $ 2,867
P.T.C. Bancorp - 962 1,469 2,702
------ ------ ------- -------
Combined $1,728 $1,868 $ 4,642 $ 5,569
------ ------ ------- -------
Basic earnings per share:
Indiana United Bancorp $ .36 $ .19 $ .67 $ .61
P.T.C. Bancorp - .21 .31 .57
------ ------ ------- -------
Combined $ .36 $ .40 $ .98 $ 1.18
------ ------ ------- -------
Diluted earnings per share:
Indiana United Bancorp $ .36 $ .19 $ .66 $ .61
P.T.C. Bancorp - .20 .31 .57
------ ------ ------- -------
Combined $ .36 $ .39 $ .97 $ 1.18
------ ------ ------- -------
11
INDIANA UNITED BANCORP
FORM 10-Q
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; deposit flows; the costs of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
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 2,272,834 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.
12
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, 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 complement 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 were converted on July
17, 1998, with the remaining purchase expected to be completed in December.
These branches will be integrated into Union Bank and represent deposits of
approximately $70 million in the greater Anderson market.
The Company also agreed to acquire three branches strategically located in
Regional Bank's market. These branches are located in Charlestown, Georgetown,
and Galena, Indiana and have added more than $55 million of deposits to Regional
Bank's customer base in Clark and Floyd counties. These branches were converted
in September, 1998.
The Company has also agreed to acquire four branches strategically located in or
adjacent to People's Trust Company's market. These branches are located in
Cambridge City, which is in Wayne County where People's Trust Company already
operates three offices, and two offices in New Castle and the fourth branch in
Knightstown are located in the adjacent county of Henry. This acquisition will
add $120 million of deposits to People's Trust Company's customer base which
will then operate 21 offices in nine eastern and southeastern counties of
Indiana. Subject to regulatory approval, these branch acquisitions are scheduled
to be completed in the first quarter of 1999.
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.
13
INDIANA UNITED BANCORP
FORM 10-Q
While the Company has been successful in achieving the growth levels
anticipated, the interest cost of the Trust Preferred Securities will have an
adverse affect on 1998 results of operations. In addition, management expects
the results of operations to be adversely affected through 1999 because the
integration of more than $240 million of deposits into the Company cannot be
immediately offset by a like amount of quality credits. Management believes its
growth strategies will lead to increased opportunities and profitability and is
in the best interests of shareholders in long-term.
YEAR 2000 COMPUTER ISSUES
In the next fifteen 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 third quarter of 1998 decreased 7.5% to $1,728,000 as compared
to the same quarter of 1997. Noninterest expense increases as the result of
branch acquisitions contributed to the decline. As the deposits acquired are
invested in loans these increases will be offset by interest income. Earnings
for the first nine months of 1998 decreased $927,000 to $4,642,000 as compared
to the same period in 1997. The primary reason for this decrease was due to
merger expenses of $926,000 recorded in the second quarter of 1998.
Noninterest income in 1997 reflects approximately $179,000 of nonrecurring other
income. Mortgage banking income increased $167,000 and service charge income
increased a total of $53,000 over the prior year period. Other noninterest
expense reflects increases in several areas.
14
INDIANA UNITED BANCORP
FORM 10-Q
The Company's return on average total assets for the third quarter was .91% in
1998 compared to 1.06% in 1997. Year-to-date return on average assets was .85%
and 1.15% for 1998 and 1997. Return on average shareholders' equity for the
third quarter was 12.00% in 1998 and 14.00% in 1997. Year-to-date return on
average shareholders' equity was 10.45% and 14.06% for 1998 and 1997.
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. Third quarter net interest
income of $6,516,000 in 1998 increased 4% from $6,242,000 in 1997. The first
nine months of net interest income increased by $808,000 or 4.4% 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 have a positive effect on next year's 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 3.92% or
19 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 though management has
achieved 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
Third quarter noninterest income in 1998 exceeded the prior year by $295,000 or
27%. Noninterest income in the first nine months of 1998 exceeded the prior year
period by $745,000 or 23%. Security gains of $36,000 were realized for the nine
months ended September 30, 1998 compared to a $75,000 loss for the same period
last year.
Service charges on deposit accounts increased in 1998 by $53,000 primarily due
to continued growth in interest-bearing checking accounts. Deposit growth and
interest rate variables affect service charge income. Trust income increased
$26,000 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.
15
INDIANA UNITED BANCORP
FORM 10-Q
Mortgage banking income, which consists of gains (losses) on loan sales and
service fee income was $78,000 lower for the third quarter of 1998 compared to
the same period in 1997, but $167,000 more for the nine month period ended
September 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.
(Dollars in thousands) 1998 1997
---- ----
Nine Nine
3rd Qtr Months 3rd Qtr Months
------- ------ ------- ------
Insurance commissions $ 131 $ 397 $ 127 $ 391
Trust fees 71 215 63 189
Mortgage banking income 283 933 361 766
Service charges on deposit accounts 474 1,369 447 1,316
Gain (loss) on sales of securities 24 36 (75) (72)
Other income 402 1,024 167 639
------ ------ ------ ------
$1,385 $3,974 $1,090 $3,229
------ ------ ------ ------
NONINTEREST EXPENSE
The largest component of noninterest expense is personnel expense. Personnel
expenses increased in the first nine months of 1998 by $864,000, or 12.7% 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. In addition, the Company has added new personnel which were
incorporated with the new branch purchases.
Deposit insurance premiums for the first nine months were $19,000 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 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
63.06% for the first nine months of 1998 compared to 56.06% for the same period
in 1997. The first nine 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.
16
INDIANA UNITED BANCORP
FORM 10-Q
(Dollars in thousands) 1998 1997
---- ----
Nine Nine
3rd Qtr Months 3rd Qtr Months
------- ------ ------- ------
Salaries and employee benefits $2,766 $ 7,686 $2,350 $ 6,822
Premises and equipment expenses 723 2,107 699 2,076
Professional fees 91 294 111 336
Amortization of core deposit intangibles
and goodwill 151 278 127 204
Deposit insurance/supervisory assessment 46 145 42 126
Stationery, printing, supplies 193 517 138 439
Insurance 38 113 35 108
Postage 104 310 94 275
Merger expenses - 926 - -
Other operating expenses 820 2,165 577 1,733
------ ------- ------ -------
$4,942 $14,541 $4,173 $12,119
------ ------- ------ -------
INCOME TAXES
The effective tax rate for the first nine months was 40% for 1998 and 36% for
1997. The Company and its subsidiaries will file consolidated income tax returns
for 1998.
FINANCIAL CONDITION
Total assets at the end of September,1998 increased $86,010,000 since the first
of the year.
Average earning assets represented 95% of average total assets for the first
nine months of 1998 and 1997. Average loans represented approximately 70% of
average assets in the first nine months of 1998 and 1997. Management intends to
continue its emphasis on loan growth throughout 1998.
The increase in deposits of $89,000,000 from December 31, 1997 to September 30,
1998 is due mainly to the branch acquisitions mentioned previously. These
additions totaled $98,000,000 in deposit increase. The remaining $9,000,000
reduction is due primarily to a an unusually high level of noninterest deposits
at December 31, 1997 and a reduction in the reliance on over $100,000
certificates of deposit prior to the acquisitions.
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.
17
INDIANA UNITED BANCORP
FORM 10-Q
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 $58,990,000 on September 30, 1998 compared to
$55,006,000 on December 31, 1997. Book value per common share increased to
$12.35 or 3% from $11.68 at year-end 1997. The unrealized gain on securities
available for sale, net of taxes, totaled $1,564,000 or $.33 per share at
September 30, 1998 compared to an unrealized gain of $762,000 or $.16 per share
at December 31, 1997. Excluding the net unrealized gains or losses on securities
available for sale, book value per share was $12.03 at September 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.
Total loans increased $46,685,000 or 9.9% since December 31, 1997. An increase
of $21,786,000 was due to branch purchases and $25,319,000, 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 45% of total loans at September 30, 1998 and 44% at December
31, 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.
18
INDIANA UNITED BANCORP
FORM 10-Q
On September 30, 1998, the Company had $4,332,000 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 $858,000 in 1998 compared to $793,000 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 $379,000 at September 30, 1998 compared to $660,000 at
September 30, 1997. As a percentage of average loans, net chargeoffs equaled
.09% and .14% respectively for the period ended September 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 September 30, 1998 was $92,000.
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.
The adequacy of the allowance for loan losses in each subsidiary is reviewed at
least monthly. The determination of the provision amount in any period is based
on management's continuing review and evaluation of loan loss experience,
changes in the composition of the loan portfolio, current economic conditions,
the amount of loans presently outstanding, and the amount and composition of
growth expectations. The allowance for loan losses as of September 30, 1998 is
considered adequate by management.
19
INDIANA UNITED BANCORP
FORM 10-Q
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 September 30, 1998, $139,897,000 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. An unrealized gain of $1,564,000 was
recorded to adjust the AFS portfolio to current market value at September 30,
1998, compared to an unrealized gain of $762,000 at December 31, 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 90% and 93% of total earning assets
at September 30, 1998 and 1997. Total interest-bearing deposits averaged 91% of
average total deposits at September 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.
Short-term borrowings decreased $6,168,000 or 42% 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.
The Company has a FHLB advance that matures in early 1999 and paid off its
long-term debt on December 31, 1997.
CAPITAL RESOURCES
Total shareholders' equity increased $3,984,000 to $58,990,000 at September 30,
1998 as compared to December 31, 1997.
20
INDIANA UNITED BANCORP
FORM 10-Q
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 September 30, 1998, Tier 1
capital to total average assets was 9.24%. Total capital to risk-adjusted assets
was 14.88%. 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 $.145 per share in the third
quarter of 1998 and $.13 for the same quarter in 1997. Common dividends declared
and paid year-to-date total $.43 and $.37 per share respectively for 1998 and
1997. Book value per common share at September 30, 1998 increased to $12.35 from
$11.68 at year-end 1997. The net adjustment for AFS securities increased book
value by $.33 at September 30, 1998 and increased book value by $.16 at December
31, 1997. Depending on market conditions, the adjustment for AFS securities can
cause significant fluctuations in equity.
LIQUIDITY
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and creditors.
Higher levels of liquidity bear higher corresponding costs, measured in terms of
lower yields on short-term, more liquid earning assets, and higher interest
expense involved in extending liability maturities. Liquid assets include cash
and cash equivalents, loans and securities maturing within one year, and money
market instruments. In addition, the Company holds 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 81% of total earning assets at September 30,
1998 compared to approximately 82% at September 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.
21
INDIANA UNITED BANCORP
FORM 10-Q
RATE SENSITIVITY AND INTEREST RATE RISK
At September 30, 1998, the Company held approximately $387,967,000 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.
22
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
September 30 1998 1999 2000 2001 2002 after Total value
(Maturity date)
ASSETS
INVESTMENT SECURITIES
Fixed rate $ 2,431 $13,804 $15,927 $30,737 $15,794 $ 46,010 $124,703 $127,461
Avg interest rate 5.20% 5.20% 5.40% 5.69% 5.73% 6.50% 5.95%
Variable rate - $ 14 $ 4,008 $ 36 $ 50 $ 28,804 $ 32,912 $ 33,284
Avg interest rate - 6.97% 5.00% 6.99% 6.87% 8.06% 6.67%
LOANS
Fixed rate $ 7,482 $27,385 $15,683 $18,332 $25,516 $136,322 $230,720 $231,504
Avg interest rate 8.89% 9.02% 9.02% 8.36% 8.43% 7.90% 8.26%
Variable rate $62,898 $95,613 $20,854 $13,007 $ 4,028 $ 92,192 $288,592 $288,099
Avg interest rate 9.17% 8.42% 8.45% 8.50% 8.00% 8.22% 8.52%
LIABILITIES
NOW, MONEY MARKET
AND SAVINGS DEPOSITS
Variable rate $205,792 $205,792 $205,792
Avg interest rate 2.96% 2.96%
CERTIFICATES OF DEPOSIT
Fixed rate $ 83,475 $218,623 $47,586 $18,604 $ 6,972 $6,859 $382,119 $383,276
Avg interest rate 5.31% 5.50% 5.42% 5.71% 6.14% 5.82% 5.48%
Variable rate $ 8,845 $ 12,767 $ 4,420 $ 2,388 $ 458 $ 228 $ 29,106 $ 29,106
Avg interest rate 5.13% 5.22% 5.44% 5.58% 5.74% 5.24% 5.27% -
BORROWINGS
Fixed rate $ 2,067 - - - - - $ 2,067 $ 2,067
Avg interest rate 5.08% - - - - - 5.08%
Variable rate $ 6,434 - - - - - $ 6,434 $ 6,434
Avg interest rate 4.53% - - - - - 4.53%
TRUST PREFERRED SECURITIES
Fixed rate $22,425 $ 22,425 $ 23,266
Avg interest rate 8.75% 8.75%
23
INDIANA UNITED BANCORP
FORM 10-Q
The preceding table provides information about the Company's significant
financial instruments at September 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.
24
INDIANA UNITED BANCORP
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
27: Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K
On July 13, 1998, the Company filed Form 8-K/A which included
financial statements and pro forma financial information related
to the merger with P.T.C. Bancorp completed on April 30, 1998.
On July 31, 1998, the Company filed Form 8-K reporting the
two-for-one stock split of its common stock for shareholders of
record as of August 17, 1998.
No other information is required to be filed under Part II of this form.
25
INDIANA UNITED BANCORP
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIANA UNITED BANCORP
November 12, 1998 By: /s/ Robert E. Hoptry
--------------------
Robert E. Hoptry
Chairman and Chief
Executive Officer
November 12, 1998 By: /s/ Douglas D. Deppen
---------------------
Douglas D. Deppen
Principal Accounting Officer
26
INDIANA UNITED BANCORP
FORM 10-Q
EXHIBIT INDEX
Exhibit Page
- ------- ----
27 Financial Data Schedule (electronic filing only)
27