FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 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
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
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(Address of principal executive offices) (Zip Code)
(812) 663-0157
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of June 30, 1999 there were outstanding 4,855,541 shares, without
par value of the registrant.
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
Page
No.
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
Consolidated Condensed Balance Sheet 3
Consolidated Condensed Statement of Income 4
Consolidated Condensed Statement of Changes in
Shareholders' Equity 5
Consolidated Condensed Statement of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-23
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24-25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
2
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEET
(Unaudited)
(Dollars in thousands)
June 30, December 31,
1999 1998
-------- ------------
Assets
Cash and due from banks $ 23,971 $ 25,549
Interest-bearing demand deposits 30 31
Federal funds sold 7,760 19,855
--------- ---------
Cash and cash equivalents 31,761 45,435
Interest bearing time deposits 1,029 1,498
Securities
Available for sale 239,310 178,008
Held to maturity 19,959 19,591
Loans held for sale 7,758 10,972
Loans 578,909 539,404
Less: Allowance for loan losses 6,578 6,099
--------- ---------
Net loans 572,331 533,305
Premises and equipment (net) 14,052 12,498
Intangible assets 24,863 12,818
Other assets 12,796 13,820
--------- ---------
Total assets $ 923,859 $ 827,945
========= =========
Liabilities
Deposits $ 801,743 $ 709,871
Short-term borrowings 17,951 20,032
Federal Home Loan Bank advances 10,000 10,000
Long-term debt 8,000 --
Other liabilities 4,809 6,421
--------- ---------
Total liabilities 842,503 746,324
========= =========
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
Issued and outstanding--4,855,541 shares 2,428 2,387
Paid-in capital 23,137 21,742
Retained Earnings 36,124 34,363
Accumulated comprehensive income (2,758) 704
--------- ---------
Total shareholders' equity 58,931 59,196
--------- ---------
Total liabilities and shareholders' equity $ 923,859 $ 827,945
========= =========
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 Six months ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------
Interest income:
Loans, including fees $ 11,774 $ 10,938 $ 23,248 $ 21,518
Investment securities 3,803 1,907 7,012 3,771
Other interest earning assets 360 623 860 1,212
-------- -------- -------- --------
Total interest income 15,937 13,468 31,120 26,501
Interest expense:
Deposits 7,586 6,168 14,858 12,238
Trust preferred securities 501 501 1,002 1,002
Other borrowings 427 238 805 505
-------- -------- -------- --------
Total interest expense 8,515 6,907 16,666 13,745
-------- -------- -------- --------
Net interest income 7,423 6,561 14,455 12,756
Provision for loan losses 336 292 717 565
-------- -------- -------- --------
Net interest income after
provision for loan losses 7,087 6,269 13,738 12,191
Noninterest income:
Securities gains (losses) 11 12 (13) 12
Other operating income 1,691 1,383 3,101 2,690
-------- -------- -------- --------
Total noninterest income 1,702 1,395 3,088 2,702
Noninterest expense 6,285 5,491 11,857 9,862
-------- -------- -------- --------
Income before income tax 2,504 2,173 4,969 5,031
Income tax expense 822 1,107 1,667 2,117
-------- -------- -------- --------
Net income $ 1,682 $ 1,066 $ 3,302 $ 2,914
======== ======== ======== ========
Net income per share (basic) $ 0.35 $ 0.22 $ 0.69 $ 0.61
Net income per share (diluted) $ 0.35 $ 0.22 $ 0.69 $ 0.61
Cash dividends declared $ 0.16 $ 0.145 $ .320 $ 0.285
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)
1999 1998
---- ----
Balance, January 1 $ 59,196 $ 55,006
Comprehensive income:
Net income 3,302 2,914
Change in unrealized gains (losses) on
available for sale securities (3,462) 113
-------- --------
Comprehensive income (160) 3,020
Additional shares issued 1,436 --
Exercise of stock options -- 520
Cash dividends on common stock (1,541) (1,289)
-------- --------
Balance, June 30 $ 58,931 $ 57,264
======== ========
See notes to consolidated condensed financial statements.
5
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six months ended
June 30
1999 1998
Cash flows from operating activities:
Net income $ 3,302 $ 2,914
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 717 565
Depreciation and amortization 771 590
Amortization of core deposit intangibles 735 127
Investment securities (gains) losses 13 (12)
Change in loans held-for-sale 3,214 (2,525)
Other adjustments 785 985
--------- ---------
Net cash provided by operating activities 9,537 2,644
--------- ---------
Cash flows from investing activities:
Purchases of held-to-maturity securities (3,533) (1,301)
Proceeds from maturities and paydowns
of securities held-to-maturity 3,141 4,085
Purchases of securities available for sale (105,921) (19,047)
Proceeds from maturities and paydowns
of securities available for sale 29,212 12,096
Proceeds from sales of securities
available for sale 10,369 3,008
Net change in loans (39,632)
Purchases of premises and equipment (2,188) (743)
Net change in deposits with other financial institutions 469
Cash received from branch acquisitions 92,535 --
--------- ---------
Net cash used by investing activities (15,548) (23,195)
--------- ---------
Cash flows from financing activities:
Net change in deposits (12,041) 5,872
Short-term borrowings (2,081) (5,094)
Proceeds of long term debt 8,000 --
Proceeds from issuance of stock -- 520
Cash dividends (1,541) (1,289)
--------- ---------
Net cash provided (used)
by financing activities (7,663) 9
--------- ---------
Net decrease in cash and cash equivalents (13,674) (20,542)
Cash and cash equivalents, beginning of period 45,435 74,212
--------- ---------
Cash and cash equivalents, end of period $ 31,761 $ 53,670
========= =========
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. 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 six months ended June
30, 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 opened two new branches "de novo" in late April,
1999. These branches are located in Chesterfield, and Anderson, Indiana.
NOTE 4.
- -------
On May 31, 1999, the Company acquired the property and casualty insurance
business of Andy Anderson Insurance Agency, Inc. d/b/a/ The Anderson Group,
Owensboro, Kentucky ("The Anderson Group"). The acquisition was effected through
a merger transaction in which The Anderson Group was merged into a newly formed
subsidiary of the Company, The Insurance Group, Inc. ("The Insurance Group"),
formed for the purpose of effecting the merger transaction. In this merger
transaction, the Company issued 80,913 shares of its common stock to The
Anderson Group shareholders, increasing the number of outstanding shares of
common stock to 4,855,541. The transaction has been accounted for under the
purchase method of accounting.
Subsequently, the Company caused The Insurance Group to become a wholly owned
subsidiary of Union Bank and Trust by transferring its ownership in The
Insurance Group to that bank subsidiary. The general lines insurance business
previously conducted by Union Bank and Trust in Greensburg and Portland, Indiana
will be conducted through The Insurance Group subsidiary.
Note 5.
- -------
June 30,1999 December 31,1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Securities Available for Sale
Federal agencies $145,630 142,478 $ 96,903 $ 97,975
State and municipal 24,716 23,756 9,627 9,822
Corporate and other securities 28,725 28,399 29,590 29,382
Mortgage-backed securities 44,858 44,677 40,665 40,829
-------- -------- -------- --------
Totals $243,929 $239,310 $176,785 $178,008
======== ======== ======== ========
7
INDIANA UNITED BANCORP
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Table dollar amounts in thousands)
NOTE 5 (CON'TD).
- ----------------
June 30, 1999 December 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Securities Held to Maturity
State and municipal $18,954 $18,927 $18,609 $18,936
Corporate and other securities 1,005 1,084 982 1,080
------- ------- ------- -------
Totals $19,959 $20,011 $19,591 $20,016
------- ------- ------- -------
NOTE 6.
- -------
June 30 December 31
1999 1998
---- ----
Loans:
Commercial and industrial loans $ 38,201 29,084
Agricultural production financing 16,996 14,983
Farm real estate 40,827 36,906
Commercial real estate mortgage 94,736 95,800
Residential real estate mortgage 257,805 246,491
Construction and development 35,427 30,772
Consumer 83,729 70,966
State and political 10,374 13,249
Government guaranteed loans purchased 814 1,153
--------- ---------
Total loans 578,909 539,404
========= =========
8
NOTE 6. (CONT'D)
Under performing loans:
Non-accruing loans $ 3,843 $ 3,709
Accruing loans contractually past due 90 days
or more as to principal or interest payments 609 195
--------- ---------
Total under performing loans 4,452 3,904
========= =========
Allowance for loan losses: 1999 1998
---- ----
Balance, January 1 $ 6,099 $ 5,451
Provision for losses 717 565
Recoveries on loans 213 121
Loans charged off (451) (320)
--------- ---------
Balance, June 30 $ 6,578 $ 5,817
========= =========
NOTE 7.
- -------
June 30 December 31
1999 1998
---- ----
Deposits:
Non-interest-bearing demand $ 77,118 $ 66,102
Interest-bearing demand 171,092 159,661
Savings 127,147 75,272
Certificates of deposit $100,000 or more 62,699 68,821
Other certificates and time deposits 363,687 340,015
-------- --------
Total deposits $801,743 $709,871
======== ========
NOTE 8.
- -------
June 30 December 31
1999 1998
---- ----
Short-term borrowings:
Securities sold under repurchase agreements $15,767 $19,607
U.S. Treasury demand notes 2,184 425
------- -------
Total short-term borrowings $17,951 $20,032
======= =======
9
NOTE 9.
- -------
Earnings per share (EPS) were computed as follows:
For three months ended
June 30, June 30,
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 $1,682 4,801,303 $0.35 $1,066 4,754,298 $0.22
------ ------
Effect of dilutive securities 12,032
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $1,682 4,801,303 $0.35 $1,066 4,766,330 $0.22
====== ========= ===== ====== ========= =====
For six months ended June 30,
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 $3,302 4,788,039 $0.69 $2,914 4,731,554 $0.61
------ ------
Effect of dilutive securities 26,292
Diluted earnings per share:
Income available to
common shareholders and
assumed conversion $3,302 4,788,039 $0.69 $2,914 4,757,846 $0.61
====== ========= ===== ====== ========= =====
10
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 cost of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
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 $926,000
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.
Acquisition of Property and Casualty Insurance Business
On May 31, 1999, the Company acquired the property and casualty insurance
business of Andy Anderson Insurance Agency, Inc. d/b/a/ The Anderson Group,
Owensboro, Kentucky ("The Anderson Group"). The acquisition was effected through
a merger transaction in which The Anderson Group was merged into a newly formed
subsidiary of the Company, The Insurance Group, Inc. ("The Insurance Group"),
formed for the purpose of effecting the merger transaction. In this merger
transaction, the Company issued 80,913 shares of its common stock to The
Anderson Group shareholders, increasing the number of outstanding shares of
common stock to 4,855,541. The transaction has been accounted for under the
purchase method of accounting.
Subsequently, the Company caused The Insurance Group to become a wholly owned
subsidiary of Union Bank and Trust by transferring its ownership in The
Insurance Group to that bank subsidiary. The general lines insurance business
previously conducted by Union Bank and Trust in Greensburg and Portland, Indiana
will be conducted through The Insurance Group subsidiary.
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.
11
INDIANA UNITED BANCORP
FORM 10Q 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 was also community focused, serving rural communities with populations of
10,000 or less in markets contiguous to the Company's existing locations. PTC
conducted its banking business through 17 offices located in the Indiana
counties of Dearborn, Franklin, Henry, Jefferson, Ripley, Rush, Fayette,
Switzerland and Wayne.
Many larger mid-west banking companies have had an accelerated program of branch
divestitures. Many of these branch locations have been in communities that are
compatible with the Company's growth strategies. The Company has bid
competitively in order to expand its presence in these targeted markets.
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 opened "de-novo" as no deposits accompanied the
purchase in late April of this year. 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 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 customer base, which now
operates 20 offices in nine eastern and southeastern counties of Indiana. In
March of 1999 PTC closed the Arlington, Indiana branch and merged with the
Rushville, Indiana branch due to the lack of business. Prior to this it has been
on part-time basis.
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 are 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 employed the remaining funds to finance growth
which included branch acquisitions, the establishment of de novo branches,
possible acquisitions of other financial institutions and various other
corporate purposes.
12
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
The Year 2000 Issue refers to a number of date-related problems that may affect
software applications, including codes imbedded in chips and other hardware
devices. These problems include software programs that identify a year by the
last two digits so that a year identified as "00" would be recognized as the
year "1900" rather than the year "2000."
State of Readiness
The company has completed the process of identifying and assessing the extent to
which its equipment, business systems, and products could be affected by the
Year 2000 Issue. As part of its Year 2000 Issue assessment, the company has
taken into account whether third parties with which the Company has material
relationships, including the U.S. Government and Federal Reserve System, are
Year 2000 compliant. The Company's formalized plan is comprised of the following
phases; (1) Development of plan; (2) development of an inventory and assessment
of risks; (3) Identification of internally developed software; (4) Testing of
all vendor and non-vendor developed software; (5) implementation of upgrades or
replacement of non-compliance items; and (6) developing of a contingency and
recovery plan for unforeseen events. The Company has completed the first five
phases and is currently in the process of finalizing the sixth phase for
completion by year end 1999.
Costs
The Company's expenses have been limited to internal costs incurred in the Year
2000 issue assessment process. The Company does not separately track such
internal costs which are principally associated with payroll expenses, but
estimates that the Year 2000 compliance costs for 1998 and the first half of
1999 were minimal. The Company estimates that the total costs of the Company's
formalized plan, as described above, will be approximately $150,000. However,
there can be no assurance that the Company will not incur any unanticipated
costs in completing its Year 2000 Compliance Project.
Risks
As a result of completing the first two phases of its formalized plan, the
Company has identified and developed remediation plans for some significant
risks. These risks relate to vendors, supplies, distributors, customers, and
other third parties, as well as the Company's own internal information and
operation systems. Any failure by the Company
13
or third parties to ensure that the applicable computer systems are Year 2000
compliant could have a material adverse effect on the Company's operations,
liquidity and financial position. Any failure of the Company's products to
perform could result in claims against the Company.
Contingency Plans
The Company will continue to develop contingency strategies, as appropriate, as
part of its Year 2000 plan. These contingency strategies include identifying
alternate suppliers, developing procedures to override internal computer
systems, increasing inventory levels, and reallocating internal resources as
necessary.
Results of Operations
Earnings for the second quarter of 1999 increased 58% to $1,682,000 as compared
to the same quarter of 1998. Earnings for the first half of 1999 increased 13%
to $3,302,000 as compared to the same period in 1998.
Net interest income, non-interest income and non-interest expense all increased
for comparable periods disclosed. Merger expenses of $926,000 were recorded in
the second quarter of 1998.
Per share earnings (diluted) for the second quarter equaled $.35 in 1999,
compared to $.22 in 1998. Per share earnings (diluted) for the first half of
1999 and 1998 were $.69 and $.61 respectively. Per share earnings adjusted for
926,000 of merger expenses would be $.41 per share for the 2nd quarter of 1998
and $.80 per share for 1st half of 1998.
The Company's return on average total assets for the second quarter was .72% in
1999 compared to .58% in 1998. Year-to-date return on average assets was .72%
and .82% for 1999 and 1998. Return on average shareholders' equity for the
second quarter was 11.28% in 1999 and 7.00% in 1998. Year-to-date return on
average shareholders' equity was 11.14% and 9.93% for 1999 and 1998.
INDIANA UNITED BANCORP
FORM 10-Q
Net Interest Income
Net interest income is influenced by the volume and yield of earning assets and
the cost of interest-bearing liabilities. Net interest margin reflects the mix
of interest-bearing and non-interest-bearing liabilities that fund earning
assets, as well as interest spreads between the rates earned on these assets and
the rates paid on interest-bearing liabilities. Second quarter net interest
income of $7,423,000 in 1999 increased 13% from $6,561,000 in 1998. The first
six months of net interest income increased by $1,699,000 or 13% over the same
period 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
14
correctly anticipated a relatively flat rate interest rate environment
throughout this period. The Company believes this strategy greatly enhanced net
interest income and will also have a positive effect on current year earnings.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the Allowance
and Provision for Possible Loan Losses".
Noninterest Income
Second quarter non-interest income in 1999 exceeded the prior year by $307,000
or 22%. Non-interest income in the first six months of 1999 exceeded the prior
year period by $386,000 or 14%. Security losses of $13,000 were realized in the
first six months of 1999 compared to a $12,000 gain for the same six month
period last year.
Service charges for the respective second quarters of 1999 and 1998 were
$666,000 and $457,000. This also increased for the first six months of 1999 over
the same period in 1998 by $356,000, primarily due to continued growth in
interest-bearing checking accounts. Deposit growth and interest rate variables
affect service charge income. Trust income for the six months increased $24,000
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 $78,000 lower for the second quarter of 1999 compared to
the same period in 1998, and $414,000 less for the six month period ended June
30, 1999 compared to the same period in 1998. Decreased mortgage origination
sales activity began late in 1998 and has continued. During this period of time,
the long-term interest rates charged on mortgages increased and the Company
experienced reduced refinancing and origination activity of a saleable nature.
INDIANA UNITED BANCORP
FORM 10-Q
(Dollars in thousands) 1999 1998
-------------- --------------
Non Interest income Three months Six Months
ended 30-Jun ended 30-Jun
1999 1998 1999 1998
Insurance commissions 246 196 329 266
Trust Fees 42 33 167 143
Mortgage banking income 424 502 763 1,027
15
Service charges on deposit accounts 666 457 1,251 895
Gain (loss) on sales of securities 11 12 (13) 12
Other income 313 195 591 359
Total 1,702 1,395 3,088 2,702
Non-interest Expense
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the first half of 1999 by $1,581,000, or 32% as compared
to the prior year period. Normal staff salary adjustments and increased benefit
costs were incurred in both 1999 and 1998 as well as the addition of 12 new
branches since June 30 of last year. Salary expense for the net additional
branches accounts for $1.2 million of the increase to date.
The increases in premises and equipment expense for both the current quarter and
year to date 1999 over 1998 are due to the increase in the number of branches
discussed earlier.
The increase in professional fees for the three months ended June 30, 1999
versus the same period in 1998 are the result of cost allocations between merger
costs and regular professional fees in 1998 as the first six months of 1999 and
1998 are nearly equal.
Amortization of core deposit intangibles and goodwill for both the quarter and
half year of 1999 exceeded comparable periods 1998 as the result of amortization
of premiums paid on branches and deposits acquired (net 12) over the past year.
Deposit insurance premiums for the first six 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.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing non-interest expense by the total of tax-effected net
interest income plus non-interest income excluding securities gains or losses.
The lower the ratio, the more efficient the Company is in managing net interest
margin, non-interest income and non-interest expense. The Company's efficiency
ratios were 66.0% for the first half of 1999 compared to 62.7% for the same
period in 1998.
16
INDIANA UNITED BANCORP
FORM 10-Q
Non Interest expense Three months Six Months
ended 30-Jun ended 30-Jun
1999 1998 1999 1998
Salaries and employee benefits 3,367 2,488 6,501 4,920
Premises and equipment expenses 874 685 1,738 1,384
Professional fees 115 (37) 214 203
Amortization of core deposit intangibles
and goodwill 456 75 769 127
Deposit insurance/supervisory assessment 39 39 80
69
Merger expenses 926 926
Other operating expenses 1,434 1,315 2,555 2,233
------ ------ ------ ------
Total 6,285 5,491 11,857 9,862
====== ====== ====== ======
Income Taxes
The effective tax rate for the first six months was 36% for 1999 and 42% for
1998. The Company and its subsidiaries will file consolidated income tax returns
for 1999.
Financial Condition
Total assets at June 30, 1999 increased $95,914,000 since the end of 1998.
Average earning assets represented 93.1% of average total assets for the first
six months of 1999 compared to 94.9% 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 72.5% of average deposits in the first six months of
1999 and 83.1% for a comparable period in 1998. Management intends to continue
its emphasis on loan growth throughout 1999, to increase these averages. Average
loans as a percent of assets were 61.7% for June, 1999 and 69.5% for June,1998.
The increase in deposits of $91,872,000 from December 31, 1998 to June 30, 1999
is due mainly to the branch acquisitions mentioned previously. 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 as of the 1999 and 1998
dates. 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
17
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.
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
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 $58,931,000 on June 30,1999 compared to $59,196,000 on
December 31, 1998. Book value per common share decreased to $12.14 or 2.1% from
$12.40 at year-end 1998. The unrealized loss on securities available for sale,
net of taxes, totaled $2,758,000 or $.57 per share at June 30, 1999 compared to
an unrealized gain of $ 704,000 or $.15 per share at December 31, 1998.
Excluding the net unrealized losses on securities available for sale, book value
per share should be $12.70 at June 30, 1999 or an increase of 3.7% 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 $39,505,000 or 7.3% since December 31, 1998 spread across
the variety of loans the Company participates in. The greatest increase is in
the mortgage loan portfolio due largely to originations in the current mortgage
interest rate environment. Residential real estate loans continue to represent a
significant portion of the total loan
18
portfolio. Such loans represented 45% of total loans at June 30, 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 June 30, 1998, the Company had $7,758,000 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 1998, mortgage loan sales activity stagnated and has continued to the
present time. This program assists the Company in serving all
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 $717,000 in the first six months of 1999 compared
to $565,000 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 $238,000 for the first half of 1999 compared to $ 200,000
for the comparable period in 1998. As a percentage of average loans, net
charge-offs equaled .04% and .04% respectively for the period ended June 30,
1999 and 1998. On a quarter to quarter basis the net charge-offs were $119,000
and $97,000 for 1999 and 1998 respectively. 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 June 30, 1999 was $164,000 and
$54,000 at December 31, 1998.
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
19
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 June 30, 1999 is
considered adequate by management.
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 June 30, 1999, $239,310,000 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 loss of $4,619,000 was
recorded to adjust the AFS portfolio to current market value at June 30, 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 92.3% and 86.8% of total earning assets at
June 30, 1999
20
and 1998. Total interest-bearing deposits averaged 90.2% and 90.5% of average
total deposits for the periods ending June 30, 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 $2,081,000 or 10.4% 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 decreased $265,000 to $58,931,000 at June 30, 1999 as
compared to December 31, 1998.
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 June 30, 1999, Tier 1
capital to total average assets was 6.52%. Tier 1 capital to risk-adjusted
assets was 10.74%. Total capital to risk-adjusted assets was 11.93%. 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 $.32 per share in the first
half of 1999 and $.285 for the same period in 1998. Book value per common share
at June 30, 1999 decreased to $12.14 from $12.40 at year-end 1998. The net
adjustment for AFS securities decreased book value by $.57 at June 30, 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.
21
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 85.4% of total earning assets for the six
months ended June 30, 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 Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
Rate Sensitivity and Interest Rate Risk
At June 30, 1999, the Company held approximately $ ____________ 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 experience
incremental changes but will not be volatile in 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,
22
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.
23
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: 7,584 18,989 38,313 19,905 26,797 115,061 226,649 221,269
- ------------
5.18% 5.23% 5.55% 5.39% 5.57% 6.01% 5.73%
Variable Rates: 5 4,000 1,509 0 23 31,702 37,239 38,052
- ---------------
6.25% 5.02% 5.59% 0.00% 4.84% 6.29% 6.12%
Total Investments 263,888 259,321
- -----------------
Fair
Loans-Months 12 31-24 25-36 37-48 49-60 Thereafter Total Value
- ------------- -- ----- ----- ----- ----- ---------- ----- -----
Fixed Rates: 38,008 21,953 20,328 25,466 27,020 137,518 270,293 272,158
- ------------
8.63% 8.72% 9.07% 8.52% 8.42% 8.24% 8.40%
Variable Rates: 178,980 68,006 25,929 20,383 11,994 7,314 312,606 312,919
- ---------------
8.13% 7.96% 8.03% 7.72% 7.73% 7.48% 8.03%
Total Loans 582,899 585,077
LIABILITIES:
- ------------
NOW, MMDA & SAVINGS: 298,238 289,238 298,238
- --------------------
2.71% 2.71%
Fair
CERTIFICATES OF DEPOSIT: 1999 2000 2001 2002 2003 Thereafter Total Value
- ------------------------ ---- ---- ---- ---- ---- ---------- ----- -----
Fixed & Variable
- ----------------
Rates 253,123 115,310 35,997 10,519 9,589 1,849 426,387 430,310
- -----
4.97% 5.10% 5.20% 5.45% 5.47% 5.34% 5.04%
Total CD's 426,387 430,310
Total Interest Bearing
Deposits 724,625 728,548
24
Borrowings:
- -----------
Fair
(Rep. Agree. & Demand Note) 1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Fixed Rates: 4,596 4,596 4,596
- ------------
4.20% 4.39%
INDIANA UNITED BANCORP
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Table Dollar Amounts in Thousands)
Variable Rates: 13,355 13,355 13,355
- ---------------
4.14 4.14%
Total 17,951 17,951
FHLB Advances
- -------------
Fixed Rate 10,000 10,000
5.35% 5.35%
Long-term debt 8,000 8,000
- --------------
Variable Rates 6.56% 6.56%
- --------------
Trust Preferred Securites
- -------------------------
Market
Price # Shares
10.125 22,425 22,425 23,546
8.75% 8.75%
The preceding table provides information about the Company's significant
financial instruments at June 30, 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.
25
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
There were no reports filed on Form 8-K for the second quarter
of 1999.
No other information is required to be filed under Part II of this form.
26
INDIANA UNITED BANCORP
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIANA UNITED BANCORP
August 16, 1999 By: /s/James L. Saner Sr
--------------------
James L. Saner Sr
President and Chief
Executive Officer
August 16, 1999 By: /s/ Donald A. Benziger
---------------------
Donald A. Benziger
Senior Vice President &
Chief Financial Officer
27