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 MARCH 31, 1999
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COMMISSION FILE NUMBER 0-12422
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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
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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 X No
--- ---
As of March 31, 1999 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 7-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21-23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Exhibit Index 26
2
INDIANA UNITED BANCORP
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
Mar 31 Dec 31
1999 1998
------- -------
Assets
Cash and due from banks $20,942 $25,549
Interest-bearing demand deposits 28 31
Federal funds sold 41,235 19,855
-------- --------
Cash and cash equivalents 62,205 45,435
Interest-bearing time deposits 1,026 1,498
Securities
Available for sale 241,059 178,008
Held to maturity 21,028 19,591
Loans held for sale 9,424 10,972
Loans 553,216 539,404
Less: Allowance for loan losses 6,361 6,099
-------- --------
Net loans 546,855 533,305
Premises and equipment 14,011 12,498
Intangible assets 23,883 12,818
Other assets 11,482 13,820
-------- --------
Total assets $930,973 $827,945
======== ========
Liabilities
Deposits $806,331 $709,871
Short-term borrowings 16,032 20,032
Federal Home Loan Bank advances 10,000 10,000
Long-term debt 8,000 ---
Other liabilities 8,661 6,421
-------- --------
Total liabilities 849,024 746,324
-------- --------
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--4,774,628 shares 2,387 2,387
Paid-in capital 21,742 21,742
Retained earnings 35,219 34,363
Accumulated other comprehensive income 176 704
Total shareholders' equity 59,524 59,196
-------- --------
Total liabilities and shareholders' equity $930,973 $827,945
======== ========
See notes to consolidated condensed financial statements.
3
INDIANA UNITED BANCORP
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands)
Three months ended
March 31
----------------------
1999 1998
---- ----
Interest income:
Loans, including fees $11,474 $10,580
Investment securities 3,209 1,864
Other interest earning assets 500 589
------- -------
Total interest income 15,183 13,033
======= =======
Interest expense:
Deposits 7,272 6,070
Trust preferred securities 501 501
Notes payable 378 267
------- -------
Total interest expense 8,151 6,838
------- -------
Net interest income 7,032 6,195
Provision for loan losses 381 273
------- -------
Net interest income after provision
for loan losses 6,651 5,922
------- -------
Non-interest income:
Securities (losses) (24) ----
Other operating income 1,410 1,307
------- -------
Total non-interest income 1,386 1,307
------- -------
Non-interest expense 5,572 4,371
------- -------
Income before income tax 2,465 2,858
Income tax expense 845 1,010
------- -------
Net income $ 1,620 $ 1,848
======= =======
Net income per share (basic) $0.34 $0.39
Net income per share (diluted) $0.34 $0.39
Cash dividends declared $0.16 $0.14
See notes to consolidated condensed financial statements.
4
INDIANA UNITED BANCORP
CONSOLIDATED CONDENSED STATEMENT OF CHANGES TO SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands)
1999 1998
------ ------
Balances, January 1 $59,196 $55,006
Comprehensive income:
Net income 1,620 1,848
Other comprehensive income, net of tax
Unrealized gains (losses)
on securities available for sale
Unrealized holding gains (losses) arising during period (552) 94
Reclassification adjustment for losses (gains)
included in net income 24 0
------- -------
Net unrealized gains (losses) (528) 94
------- -------
Comprehensive income 1,092 1,942
Cash dividends on common stock (764) (597)
------- -------
Balances, March 31 $59,524 $56,351
======= =======
See notes to consolidated condensed financial statements.
5
INDIANA UNITED BANCORP
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three
months ended
March 31,
1999 1998
Cash flows from operating activities:
Net income $ 1,620 $ 1,848
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 381 273
Depreciation and amortization 416 324
Amortization of intangibles 313 92
Investment securities losses 24 ---
Change in loans held-for-sale 1,548 (2,887)
Other adjustments 4,391 644
------- -------
Net cash provided by operating activities 8,693 294
------- -------
Cash flows from investing activities:
Net change in short-term investments --- 11
Purchases of held-to-maturity securities (3,533) (299)
Proceeds from maturities and paydowns
of securities held-to-maturity 2,081 3,015
Purchases of securities available for sale (93,620) (4,165)
Proceeds from maturities and paydowns
of securities available for sale 20,578 5,258
Proceeds from sales of securities available for sale 9,568 36
Net change in loans (13,931) (3,664)
Purchases of premises and equipment (1,856) (152)
Proceeds from sale of other real estate - (50)
Net change in deposits with other financial institutions 472 999
Cash received in branch acquisitions 92,535 ---
Other investment activities --- 924
------- -------
Net cash provided by investing activities 12,294 1,913
------- -------
Cash flows from financing activities:
Net change in deposits (7,453) (10,518)
Short-term borrowings (4,000) (1,657)
Proceeds of long-term debt 8,000 ---
Cash dividends (764) (597)
------- -------
Net cash provided (used) by financing activities (4,217) (12,772)
------- -------
Net decrease in cash and cash equivalents 16,770 (10,565)
Cash and cash equivalents, beginning of period 45,435 73,213
------- -------
Cash and cash equivalents, end of period $62,205 $62,648
======= =======
See notes to consolidated condensed financial statements.
6
INDIANA UNITED BANCORP
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. 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. 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, 1998. 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 three months ended March
31, 1999 are not necessarily indicative of those expected for the remainder of
the year.
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.
NOTE 3.
- -------
During 1999, the Company purchased four branches within its target market areas.
The branch acquisitions were completed during the quarter ended March 31,1999
and resulted in the purchase of $ 104.1 million in deposits, $ 0.6 million in
fixed assets and $1.9 million in loans. The premium paid for these branches was
$ 11.5 million. The Company will open two new branches "de novo" in the early
part of the second quarter.
NOTE 4.
- -------
March 31,1999 December 31,1998
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Securities Available for Sale
Federal agencies $146,583 147,031 $ 96,903 $ 97,975
State and municipal 20,479 20,487 9,627 9,822
Corporate and other securities 31,247 30,861 29,590 29,382
Mortgage-backed securities 42,409 42,680 40,665 40,829
------------------ -------- --------
Totals $240,718 $241,059 $176,785 $178,008
======== ======== ======== ========
7
INDIANA UNITED BANCORP
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 4 (CON'TD).
- ----------------
March 31,1999 December 31,1998
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Securities Held to Maturity
State and municipal $20,035 $20,269 $18,609 $18,936
Corporate and other securities 993 909 982 1,080
------- ------- ------- -------
Totals $21,028 $21,178 $19,591 $20,016
------- ------- ------- -------
NOTE 5.
- -------
March 31 December 31
1999 1998
-------- -----------
Loans:
Commercial and industrial loans $ 34,852 29,084
Agricultural production financing 14,977 14,983
Farm real estate 36,563 36,906
Commercial real estate mortgage 100,566 95,800
Residential real estate mortgage 251,089 246,491
Construction and development 32,398 30,772
Consumer 71,287 70,966
State and political 10,630 13,249
Government guaranteed loans purchased 854 1,083
--------- --------
Total loans 553,216 539,404
========= ========
Non performing loans:
Non-accruing loans $3,424 $3,709
Accruing loans contractually past due 90 days
or more as to principal or interest payments 2,045 195
Allowance for loan losses 1999 1998
---- ----
Balances, January 1 $6,099 $5,451
Provision for losses 381 273
Recoveries on loans 56 48
Loans charged off 175 151
--------- --------
Balances, end of period $6,361 $5,621
========= ========
NOTE 6.
- -------
March 31 December 31
1999 1998
Deposits:
Non-interest-bearing demand $ 73,513 $66,102
Interest-bearing demand 166,480 159,661
Savings 120,878 75,272
Certificates of deposit $100,000 or more 74,858 68,821
Other certificates and time deposits 370,602 340,015
--------- --------
Total deposits $806,331 $709,871
========= ========
8
INDIANA UNITED BANCORP
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 7.
- -------
March 31 December 31
1999 1998
-------- -----------
Short-term borrowings:
Securities sold under repurchase agreements $ 15,408 $ 19,607
U.S. Treasury demand notes 624 425
--------- --------
Total short-term borrowings $ 16,032 $ 20,032
========= ========
NOTE 8.
- -------
Earnings per share (EPS) were computed as follows:
For the three months ended March 31
1999 1998
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 $1,620 4,774,628 $0.34 1,848 4,708,556 $0.39
Effect of dilutive securities 37,754
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $1,620 4,774,628 $0.34 1,848 4,746,310 $0.39
9
INDIANA UNITED BANCORP
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 its 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,
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, 1998.
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.
10
INDIANA UNITED BANCORP
FORM MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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 21 offices located in the Indiana counties
of Dearborn, Franklin, Henry, 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 acquiring three branches in Alexandria,
Anderson, and Fortville, Indiana having deposits of approximately $32 million.
Subsequently, the Company acquired a branch in Frankton , Indiana. To complement
this geographic symmetry of locations within 15 miles of Anderson, the Company
acquired two closed branches: one in Chesterfield, Indiana and the other in
Anderson. These branches will be opened "de-novo" as no deposits accompanied the
purchase. Alexandria , Anderson and Fortville were converted on July 17, 1998,
with the Frankton purchase completed in December. These branches are now
integrated into Union Bank and represent deposits of approximately $70 million
in the greater Anderson market.
The Company also acquired 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.
In the quarter ended March 31, 1999 the Company acquired four branches
strategically located in or adjacent to People's Trust Company's market. One of
these branches is located in Cambridge City, which is in Wayne County where
People's Trust Company 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 $100 million of deposits to
People's Trust Company's customer base which now operates 21 offices in nine
eastern and southeastern counties of Indiana.
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.
11
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
While the Company has been successful in achieving the deposit growth levels
anticipated, the interest cost of the Trust Preferred Securities will have an
adverse affect on 1999 results because the integration of more than $225 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 the long-term.
Year 2000 Computer Issues
In the next nine 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 first quarter of 1999 decreased 12.4% to $1,620,000 as compared
to the same quarter of 1998. Non-interest expense increased primarily as the
result of branch acquisitions. As the deposits acquired are invested in loans
these non-interest increases will be offset by increased net interest income.
Service charge income increased $147,000 over the prior year period. due to the
increased customer base. Mortgage banking income decreased $186,000 as the
result of decreased mortgage refinancing activity compared to the same period a
year ago.
The Company's return on average total assets for the first quarter was .7% in
1999 compared to 1.1% in 1998. Return on average shareholders' equity for the
first quarter was 10.6% in 1999 and 12.9% in 1998.
12
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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. First quarter net interest
income of $7,032,000 in 1999 increased 13.5% from $6,195,000 in 1998.
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 this year's earnings.
Due to the impact of the interest expense associated with the trust preferred
securities issued in December of 1997 and the increase in new deposits, net
interest margin decreased to 3.5% in the first quarter of 1999 or 37 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 1999 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".
Non-interest Income
First quarter non-interest income in 1999 exceeded the prior year by $79,000 or
6.0%. Security losses of $24,000 were realized for the three months ended March
31,1999 compared to no loss for the same period last year.
Service charges on deposit accounts increased in 1999 by $147,000 primarily due
to continued growth in interest-bearing checking accounts. Deposit growth and
interest rate variables affect service charge income. Trust income increased
$13,000 over 1998 due to estate income and a strong stock market. The level of
estate assets administered may cause trust income to fluctuate significantly
from year to year.
Mortgage banking income, which consists of gains (losses) on loan sales and
service fee income was $186,000 lower for the first quarter of 1999 compared to
the same period in 1998. Increased mortgage origination and refinance activity
began early in 1997 and continued through early 1998, but has since eased as
rates have stabilized.
13
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
NON-INTEREST INCOME Qtr ended
Mar 31 Mar 31
1999 1998
------ ------
Insurance commissions $ 125 $ 110
Trust fees 83 70
Mortgage banking income 339 525
Service charges on deposit accounts 585 438
Gain (loss) on sales of securities (24) ---
Other income 278 164
------ ------
$1,386 $1,307
====== ======
Non-interest Expense
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the first three months of 1999 by $701,000, or 28.8% as
compared to the prior year period. Normal staff salary adjustments and increased
benefit costs were incurred in both 1999 and 1998. In addition, the Company has
added new personnel, which were incorporated with the new branch purchases.
The new branch purchases were purchased at a premium which is being amortized
over lives that management deems appropriate resulting in an increase in
intangible expense of $261,000 over 1998.
Deposit insurance premiums for the first three months were $11,000 more in 1999
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 non-interest expense by the total of net interest income on
a fully tax equivalent basis 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 64.8% for the first three months of 1999 compared to
57.2% for the same period in 1998. The variance in the ratio from 1998 to 1999
is the decreased margin due to the increased deposits without a corresponding
increase in loans and the increased salary expense level compared to that lower
margin.
14
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
NON-INTEREST EXPENSE Qtr ended
Mar 31 Mar 31
1999 1998
------ -------
Salaries and employee benefits $3,134 $2,432
Premises and equipment expenses 864 699
Professional fees 99 90
Amortization of core deposit intangibles
and goodwill 313 52
Deposit insurance/supervisory assessment 41 30
Other operating expenses 1,121 1,068
------ ------
$5,572 $4,371
====== ======
Income Taxes
The effective tax rate for the first three months was 34% for 1999 and 35% for
1998. The Company and its subsidiaries will file consolidated income tax returns
for 1999.
Financial Condition
Total assets at the end of March, 1999 increased $103,028,000 since the first of
the year.
Average earning assets represented 93% of average total assets for the first
three months of 1999 compared to 95% for the same period of 1998. The addition
of new fixed assets and deposit premium connected with the branch acquisitions
has been the major factor in the decrease of this ratio. Average loans
represented approximately 74.1% of average deposits in the first three months of
1999 and 83.1% for a comparable period in 1998. Management intends to continue
its emphasis on loan growth throughout 1999.
The increase in deposits of $96,000,000 from December 31, 1998 to March 31, 1999
is due mainly to the branch acquisitions mentioned previously.
Average long-term debt in 1999 represented the Company's loan for the purchase
of the PTC branches in 1999. In February the Company borrowed $8,000,000 from
National City Bank at a floating rate based upon LIBOR. In addition the Company
established a $3,000,000 line of credit as a cash management tool. Federal Home
Loan Bank ("FHLB") advances represented the balance of long-term debt in the
1999 and 1998 period. The FHLB advances were used to fund loans and other
earning assets of Regional Bank.
Trust Preferred Securities in the amount of $22,425,000 were issued on December
9, 1997. The holders of the Trust Preferred Securities are entitled to receive
preferential cumulative cash distributions, payable quarterly, at the annual
rate of 8.75% of the liquidation amount of $10 per security. The Company has the
right, so long as no default has occurred, to defer payment of interest at any
time, or from time to time for a period not to exceed 20 consecutive quarters
with respect to each deferral period. Currently, management has no intention of
deferring the payment of interest. The Trust Preferred Securities have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the common stock.
The holders of the Trust Preferred Securities have no voting rights except in
limited
15
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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 $59,524,000 on March 31, 1999 compared to $59,196,000
on December 31, 1998. Book value per common share increased to $12.47 or .5%
from $12.40 at year-end 1998. The unrealized gain on securities available for
sale, net of taxes, totaled $176,000 or $.04 per share at March 31, 1999
compared to an unrealized gain of $704,000 or $.15 per share at December 31,
1998. Excluding the net unrealized gains on securities available for sale, book
value per share was $12.43 at March 31, 1999 or an increase of 2.3% over the
comparable book value at year-end 1998.
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
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 increased $13,812,000 or 2.6% since December 31, 1998 spread across
the variety of loans the Company participates in, with the greatest increase in
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 March 31, 1999 and 46% at December 31, 1998.
The Company's recent emphasis on increasing consumer loans has provided greater
diversification within the portfolio and generated higher gross yields than
residential real estate loans.
On March 31, 1998, the Company had $9,424,000 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 had 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
16
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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 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 $381,000 in the first three months of 1999
compared to $273,000 the same period in 1998. The provisions in 1999 and 1998
reflected both overall loan growth and an increase in greater risk-profile
consumer loans.
Net charge-offs were $119,000 for the first quarter of 1999 compared to $103,000
for the comparable period in 1998. As a percentage of average loans, net
charge-offs equaled .02% and .02% respectively for the period ended March 31,
1999 and 1998. In prior years, the Company outperformed its peer group's net
loan loss average and that trend is expected to continue in 1999. Management is
not aware of any trend which is likely to cause the level of net charge-offs in
1999 to materially exceed the level of charge-offs experienced in 1998, beyond
the impact of loans acquired as the result of the purchase of branches.
Foreclosed real estate held by the Company at March 31,1999 was $54,000.
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, non-accrual 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 March 31, 1999 is
considered adequate by management.
17
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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 March 31, 1999, $241,059,000 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 pre-tax gain of $341,000 was
recorded to adjust the AFS portfolio to current market value at March 31, 1999,
compared to an unrealized pre-tax gain of $1,223,000 at December 31, 1998.
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. Total deposits were 91.5% and 86.8% of total earning assets at
March 31, 1999 and 1998. Total interest-bearing deposits averaged 90.9% and
90.8% of average total deposits for the periods ending March 31, 1999 and
1998, 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 decreased $4,000,000 or 20% 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 2002 and recently borrowed
$8,000,000 in long term debt (see Financial Condition section).
Capital Resources
Total shareholders' equity increased $328,000 to $59,524,000 at March 31,1999 as
compared to December 31, 1998.
18
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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.
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 March 31, 1999, Tier 1
capital to total average assets was 6.69%. Tier 1 capital to risk-adjusted
assets was 10.48% Total capital to risk-adjusted assets was 11.63%. 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 $.16 per share in the first
quarter of 1999 and $.14 for the same quarter in 1998. Book value per common
share at March 31, 1999 increased to $12.47 from $12.40 at year-end 1998. The
net adjustment for AFS securities increased book value by $.04 at March 31, 1999
and increased book value by $.15 at December 31, 1998. 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 85.2% of total earning assets for the quarter
ended March 31, 1999 compared to approximately 80.8% for the period ended
December 31, 1998.
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
19
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
Company has not received any recommendations from regulatory authorities that
would materially affect liquidity, capital resources or operations.
Rate Sensitivity and Interest Rate Risk
At March 31, 1999, the Company held approximately $290,000,000 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 re-pricing which are reviewed periodically by management.
The assumptions regarding these re-pricing 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 1999 based upon
its belief that the current interest rate environment will remain relatively
stable throughout 1999. In any event, the Company does not anticipate that its
earnings will be materially impacted in 1999, 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.
20
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Principal Cash Flows and Weighted Average Interest Rates By Maturity Dates
ASSETS:
- ------- Fair
Investments 1999 2000 2001 2002 2003 Thereafter Total Value
- ----------- ---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rates:
------------------------------------------------------------------------------------------------------
Total Fixed 9,356 19,014 38,895 21,912 26,799 105,922 221,898 223,706
5.14% 5.20% 5.57% 5.45% 5.57% 6.02% 5.72%
------------------------------------------------------------------------------------------------------
Variable Rates:
------------------------------------------------------------------------------------------------------
Total Variable 8 4,004 1,510 0 26 33,337 39,848 38,531
6.25% 5.15% 5.35% 4.87% 6.31% 6.20%
------------------------------------------------------------------------------------------------------
Total Investments 261,746 262,237
Fair
Loans 12 Months 13-24 25-36 37-48 49-60 Thereafter Total Value
- ----- --------- ----- ----- ----- ----- ---------- ----- -----
------------------------------------------------------------------------------------------------------
Total Fixed 43,084 19,098 20,391 25,854 26,309 129,966 264,702 266,528
8.67% 9.03% 9.11% 8.61% 8.49% 7.66% 8.21%
------------------------------------------------------------------------------------------------------
Variable Rates:
------------------------------------------------------------------------------------------------------
Total Variable 194,496 43,169 26,747 9,614 10,588 5,356 289,970 290,260
8.20% 8.13% 8.04% 7.81% 7.80% 7.67% 8.14%
------------------------------------------------------------------------------------------------------
Total Loans 554,672 556,788
LIABILITIES:
NOW, MMDA & 287,358 287,358 287,358
- ------------
SAVINGS:
2.76% 2.76%
Fair
CERTIFICATES OF 1999 2000 2001 2002 2003 Thereafter Total Value
- ---------------- ---- ---- ---- ---- ---- ---------- ----- -----
DEPOSIT:
Fixed & Variable Rates:
------------------------------------------------------------------------------------------------------
Total Fixed 310,986 85,938 27,717 10,034 9,625 1,160 445,460 449,558
5.24% 5.31% 5.37% 5.53% 5.46% 5.52% 5.26%
------------------------------------------------------------------------------------------------------
21
Variable Rates:
Total Certificates 445,460 449,558
Total Interest Bearing Deposits 732,818 736,916
Borrowings:
- ----------- Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rates:
------------------------------------------------------------------------------------------------------
Total Fixed 1,887 0 0 0 0 0 1,887 1,887
4.26% 4.40%
------------------------------------------------------------------------------------------------------
Variable Rates:
------------------------------------------------------------------------------------------------------
Total Variable 14,145 0 0 0 0 0 14,145 14,145
4.11% 4.16%
------------------------------------------------------------------------------------------------------
Total 16,032 16,032
FHLB Advances
------------------------------------------------------------------------------------------------------
Fixed Rate 10,000 10,000
5.35% 5.35%
------------------------------------------------------------------------------------------------------
Trust Preferred Securites
Market
Price # Shares
-----------------------------------------
10.5000 22,425 22,425 23,546
8.75% 8.75%
-----------------------------------------
22
INDIANA UNITED BANCORP
FORM 10-Q
The preceding table provides information about the Company's significant
financial instruments at March 31, 1999 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.
23
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
1. On March 2, 1999 the Registrant filed an 8K announcing the
acquisition of four new branches by its affiliate PTC.
2. On March 31, 1999 the Registrant filed an 8K regarding the
appointment of Crowe, Chizek and Company LLP ("Crowe
Chizek"), Indianapolis, Indiana, as the registrant's
independent accountants for the fiscal year ending December
31, 1999. This is a change in accountants recommended by
registrant's Audit Committee and approved by registrant's
Board. Crowe Chizek was engaged by registrant on March 31,
1999. Olive LLP ("Olive"), formerly known as Geo. S. Olive &
Co. LLC, has served as registrant's independent accountants
since registrant's formation in 1983.
No other information is required to be filed under Part II of this form.
24
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
May 12, 1999 By: /s/ Robert E. Hoptry
------------------------
Robert E. Hoptry
Chairman and Chief
Executive Officer
May 12, 1999 By: /s/ Donald A. Benziger
------------------------
Donald A. Benziger
Senior Vice President &
Chief Financial Officer
25
INDIANA UNITED BANCORP
FORM 10-Q
EXHIBIT INDEX
Exhibit Page
- ------- ----
27 Financial Data Schedule (electronic filing only)
26