<PAGE>
PROSPECTUS
1,950,000 PREFERRED SECURITIES
IUB CAPITAL TRUST
8.75% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10 PER PREFERRED SECURITY)
[LOGO]
GUARANTEED, AS DESCRIBED HEREIN, BY
INDIANA UNITED BANCORP
----------------
$19,500,000 8.75% SUBORDINATED DEBENTURES OF
INDIANA UNITED BANCORP
----------------
The 8.75% Cumulative Trust Preferred Securities (the "Preferred Securities")
offered hereby represent preferred undivided beneficial interests in the assets
of IUB Capital Trust, a statutory business trust created under the laws of the
State of Delaware ("IUB Trust"). Indiana United Bancorp, an Indiana corporation
(the "Company"), will own all the common securities (the "Common Securities"
and, together with the Preferred Securities, the "Trust Securities")
representing undivided beneficial interests in the assets of IUB Trust.
(CONTINUED ON PAGE 1)
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol "IUBCP."
------------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 14 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SAVINGS OR DEPOSIT ACCOUNTS,
ARE NOT OBLIGATIONS OF OR GUARANTEED BY ANY BANKING OR NON-BANKING AFFILIATE
OF THE COMPANY (EXCEPT TO THE EXTENT THAT PREFERRED SECURITIES ARE
GUARANTEED BY THE COMPANY AS DESCRIBED HEREIN), ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY
AND INVOLVE INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
PRINCIPAL.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO IUB
PRICE TO PUBLIC COMMISSION(1) TRUST(2)(3)
<S> <C> <C> <C>
Per Preferred Security................................... $10.00 (2) $10.00
Total(3)................................................. $19,500,000 (2) $19,500,000
</TABLE>
(1) IUB Trust and the Company have each agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) In view of the fact that the proceeds of the sale of the Preferred
Securities will be invested in the Subordinated Debentures (as defined
herein), the Company has agreed to pay the Underwriter as compensation for
its arranging the investment therein of such proceeds $0.40 per Preferred
Security, or $780,000 in the aggregate, ($897,000 if the over-allotment
option is exercised in full). See "Underwriting." The Company has also
agreed to pay the expenses of the offering, estimated to be $375,000.
(3) IUB Trust has granted the Underwriter an option exercisable within 30 days
from the date of this Prospectus to purchase up to 292,500 additional
Preferred Securities on the same terms and conditions set forth above to
cover over-allotments, if any. If all such additional Preferred Securities
are purchased, the total Price to Public and Proceeds to IUB Trust will be
$22,425,000. See "Underwriting."
------------------------------
THE PREFERRED SECURITIES ARE OFFERED BY THE UNDERWRITER SUBJECT TO RECEIPT
AND ACCEPTANCE BY IT, PRIOR SALE AND THE UNDERWRITER'S RIGHT TO REJECT ANY ORDER
IN WHOLE OR IN PART AND TO WITHDRAW, CANCEL OR MODIFY THE OFFER WITHOUT NOTICE.
IT IS EXPECTED THAT DELIVERY OF THE PREFERRED SECURITIES WILL BE MADE ON OR
ABOUT DECEMBER 12, 1997.
STIFEL, NICOLAUS & COMPANY
INCORPORATED
December 8, 1997
<PAGE>
(CONTINUED FROM COVER PAGE)
State Street Bank and Trust Company is the Property Trustee (as defined
herein) of IUB Trust. IUB Trust exists for the purpose of issuing the Trust
Securities and investing the proceeds thereof in an equivalent amount of 8.75%
Subordinated Debentures (the "Subordinated Debentures") of the Company. The
Subordinated Debentures will mature on December 31, 2027, which date may be (i)
shortened to a date not earlier than December 31, 2002, or (ii) extended to a
date not later than December 31, 2036, in each case if certain conditions are
met (including, in the case of shortening the Stated Maturity (as defined
herein), the Company having received prior approval of the Board of Governors of
the Federal Reserve System ("Federal Reserve") to do so if then required under
applicable capital guidelines or policies of the Federal Reserve). The Preferred
Securities will have a preference under certain circumstances with respect to
cash distributions and amounts payable on liquidation, redemption or otherwise
over the Common Securities. See "Description of the Preferred
Securities--Subordination of Common Securities."
The holders of the Preferred Securities are entitled to receive preferential
cumulative cash distributions, at the annual rate of 8.75% of the liquidation
amount of $10 per Preferred Security (the "Liquidation Amount"), accruing from
December 12, 1997, the date of original issuance, and payable quarterly in
arrears on the last day of March, June, September and December of each year,
commencing December 31, 1997 (the "Distributions"). The Company has the right,
so long as no Debenture Event of Default (as defined herein) has occurred and is
continuing, to defer payment of interest on the Subordinated Debentures at any
time or from time to time for a period not to exceed 20 consecutive quarters
with respect to each deferral period (each, an "Extension Period"); provided
that no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. Upon the termination of any such Extension Period and
the payment of all amounts then due, the Company may elect to begin a new
Extension Period subject to the requirements set forth herein. If interest
payments on the Subordinated Debentures are so deferred, Distributions on the
Preferred Securities will also be deferred, and the Company will not be
permitted, subject to certain exceptions described herein, to declare or pay any
cash distributions with respect to its capital stock or debt securities that
rank PARI PASSU with or junior to the Subordinated Debentures. WHILE THE COMPANY
INTENDS TO TAKE THE POSITION THAT THE SUBORDINATED DEBENTURES WILL NOT BE DEEMED
TO BE ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID"), INTEREST ON THE SUBORDINATED
DEBENTURES DURING AN EXTENSION PERIOD WILL CONTINUE TO ACCRUE (AND THE AMOUNT OF
DISTRIBUTIONS TO WHICH THE HOLDERS OF THE PREFERRED SECURITIES ARE ENTITLED WILL
ACCUMULATE) AT THE RATE OF 8.75% PER ANNUM, COMPOUNDED QUARTERLY, AND THE
HOLDERS OF THE PREFERRED SECURITIES WILL BE REQUIRED TO INCLUDE INTEREST INCOME
AS OID IN THEIR GROSS INCOME FOR UNITED STATES FEDERAL INCOME TAX PURPOSES IN
ADVANCE OF RECEIPT OF THE CASH DISTRIBUTIONS WITH RESPECT TO SUCH DEFERRED
INTEREST PAYMENTS. A HOLDER OF PREFERRED SECURITIES THAT DISPOSES OF ITS
PREFERRED SECURITIES BETWEEN RECORD DATES FOR PAYMENTS OF DISTRIBUTIONS (AND
CONSEQUENTLY DOES NOT RECEIVE A DISTRIBUTION FROM IUB TRUST FOR THE PERIOD PRIOR
TO SUCH DISPOSITION) WILL NEVERTHELESS BE REQUIRED TO INCLUDE ACCRUED BUT UNPAID
INTEREST OR OID, IF ANY, ON THE SUBORDINATED DEBENTURES THROUGH THE DATE OF
DISPOSITION IN INCOME AS ORDINARY INCOME AND TO ADD THE AMOUNT OF ANY ACCRUED
OID TO ITS ADJUSTED TAX BASIS IN ITS PRO RATA SHARE OF THE UNDERLYING
SUBORDINATED DEBENTURES DEEMED DISPOSED OF. See "Description of the Subordinated
Debentures--Option to Extend Interest Payment Period," "Certain Federal Income
Tax Consequences--Potential Extension of Interest Payment Period and Original
Issue Discount" and "--Disposition of the Preferred Securities."
The Company and IUB Trust believe that, taken together, the obligations of
the Company under the Guarantee, the Trust Agreement, the Subordinated
Debentures, the Indenture and the Expense Agreement (each as defined herein)
provide, in the aggregate, a full, irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of IUB Trust under the Preferred
Securities. See "Relationship Among the Preferred Securities, the Subordinated
Debentures and the Guarantee--Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions
(CONTINUED ON NEXT PAGE)
1
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
and payments on liquidation or redemption of the Preferred Securities, but only
in each case to the extent of funds held by IUB Trust, as described herein. See
"Description of the Guarantee--General." If the Company does not make interest
payments on the Subordinated Debentures held by IUB Trust, IUB Trust will have
insufficient funds to pay Distributions on the Preferred Securities. The
Guarantee does not cover payments of Distributions when IUB Trust does not have
sufficient funds to pay such Distributions. In such event, a holder of Preferred
Securities may institute a legal proceeding directly against the Company
pursuant to the terms of the Indenture to enforce payments of amounts equal to
such Distributions to such holder. See "Description of the Subordinated
Debentures--Enforcement of Certain Rights by Holders of the Preferred
Securities." The obligations of the Company under the Guarantee and the
Preferred Securities are subordinate and junior in right of payment to all
Senior Debt, Subordinated Debt and Additional Senior Obligations (each as
defined herein) of the Company. The Subordinated Debentures are unsecured
obligations of the Company and are subordinated to all Senior Debt, Subordinated
Debt and Additional Senior Obligations of the Company.
The Preferred Securities are subject to mandatory redemption, in whole or in
part, upon repayment of the Subordinated Debentures at maturity or their earlier
redemption. Subject to Federal Reserve approval, if then required under
applicable capital guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to maturity at the option of the
Company (i) on or after December 31, 2002, in whole at any time or in part from
time to time, or (ii) at any time, in whole (but not in part), within 180 days
following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Subordinated Debentures so
redeemed to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Preferred Securities--Redemption."
The Company has the right at any time to dissolve, wind-up or terminate IUB
Trust subject to the Company having received prior approval of the Federal
Reserve to do so if then required under applicable capital guidelines or
policies of the Federal Reserve. In the event of the voluntary or involuntary
dissolution, winding up or termination of IUB Trust, after satisfaction of
liabilities to creditors of IUB Trust as required by applicable law, the holders
of the Preferred Securities will be entitled to receive a Liquidation Amount of
$10 per Preferred Security, plus accumulated and unpaid Distributions thereon to
the date of payment, which may be in the form of a Subordinated Debenture having
an aggregate principal amount equal to the Liquidation Amount of such Preferred
Securities (and carrying with it accumulated interest in an amount equal to the
accumulated and unpaid Distributions then due on such Preferred Securities),
subject to certain exceptions. See "Description of the Preferred
Securities--Redemption" and "--Liquidation Distribution upon Termination."
The information concerning P.T.C. Bancorp, an Indiana corporation ("PTC"),
contained in this Prospectus, including financial information, has been derived
from or is based upon publicly available documents and records on file with the
Securities and Exchange Commission (the "Commission") and other public sources.
The Company and the Underwriter assume no responsibility for the accuracy or
completeness of the information concerning PTC contained in such documents and
records or for any failure by PTC to disclose events that may have occurred or
may affect the significance or accuracy of any such information but that are
unknown to the Company or the Underwriter.
------------------------
The Company will provide quarterly reports containing unaudited financial
statements to the holders of Preferred Securities if such reports are furnished
to the holders of the Company's common stock, and annual reports containing
financial statements audited by the Company's independent auditors. The Company
will also furnish annual reports on Form 10-K and quarterly reports on Form 10-Q
free of charge to holders of Preferred Securities who so request in writing
addressed to the Treasurer and Chief Financial Officer of the Company.
2
<PAGE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING
TRANSACTIONS, THE PURCHASE OF PREFERRED SECURITIES TO COVER SHORT POSITIONS AND
THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF SUCH ACTIVITIES, SEE
"UNDER-
WRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY BE DISCONTINUED AT
ANY TIME.
------------------------
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus or in certain documents incorporated
by reference herein, including without limitation statements under the headings
"Risk Factors," "Company Management's Discussion and Analysis of Financial
Condition and Results of Operations," "PTC Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business of the Company,"
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results, performance or achievements of the
Company or PTC to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements.
Such factors include, among other things, the following: the factors set
forth in the section entitled "Risk Factors;" general and local 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.
3
<PAGE>
[MAP]
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE (OR INCORPORATED BY REFERENCE) IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITER'S OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
THE HEADING "RISK FACTORS."
THE COMPANY
GENERAL
Indiana United Bancorp (the "Company") is a bank and thrift holding company
headquartered in Greensburg, Indiana. Through its subsidiaries, Union Bank and
Trust Company of Indiana, a commercial bank organized under the laws of Indiana
("Union Bank"), and Regional Federal Savings Bank, a Federal savings bank
("Regional Bank"), the Company operates twelve offices in four eastern and
southern Indiana counties. (Union Bank and Regional Bank are sometimes
individually referred to herein as a "Bank" and collectively as the "Banks.")
Both subsidiaries offer a broad range of loan and deposit services to consumer,
agricultural and commercial customers. Union Bank also offers a full line of
personal and business trust services and property and casualty insurance
services. The principal executive office of the Company is located at 201 N.
Broadway, Greensburg, Indiana 47240 and its telephone number is (812) 663-0157.
During the past five years the Company has focused on improving its net
interest margin by reducing its cost of funds and reallocating its assets.
Pursuit of this objective included divestiture of three Regional Bank branches
in 1994. Since 1993, total loans as a percentage of total assets have increased
from 58% to 71%, with the greatest percentage of growth concentrated in higher
yielding consumer loans. As a result, the Company's net interest margin since
1993 has increased from 3.52% to 4.13% per annum.
FINANCIAL SUMMARY
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net income................................... $ 2,868 $ 1,799 $ 2,693 $ 2,529 $ 2,870 $ 2,922 $ 2,862
Net income per share(1)...................... 2.29 1.40 2.11 1.91 2.17 2.19 2.14
Efficiency ratio(2).......................... 55.32% 66.64% 64.01% 66.24% 61.37% 68.69% 63.22%
Net interest margin(2)....................... 4.13 3.98 4.00 3.77 3.57 3.52 3.66
Return on average assets(2).................. 1.14 0.77 0.85 0.82 0.86 0.81 0.79
Return on average common equity(2)........... 13.39 8.82 9.89 9.73 12.18 12.61 13.88
</TABLE>
- ------------------------
(1) Adjusted for 10% stock dividend in 1994.
(2) Ratios for the nine-month periods are annualized.
OPERATING PHILOSOPHY
The Company operates in predominately rural and suburban markets and
embraces a community banking philosophy that emphasizes personal service and
convenience, community involvement, local decision-making authority, quick
responses to loan requests, and customized services.
The Company endeavors to provide its branch managers, lending officers,
tellers and deposit service personnel with the authority to act promptly in
service of its customers within the scope of Company
5
<PAGE>
policies. This highly responsive service attitude is enhanced by an efficient
corporate support staff and an investment in technology.
The Company believes the benefits of this operating philosophy contribute to
its success while providing improved operating efficiencies, sound internal
controls and high credit underwriting standards.
BUSINESS STRATEGY
The most fundamental and constant element of the Company's business strategy
has been to originate and maintain asset quality exceeding state and national
peer quality averages. The Company believes that maintaining high asset quality
is critical to creating long-term shareholder value and the Company has a
history of maintaining asset quality that has consistently placed it among peer
leaders.
The Company holds either first or second market share positions as measured
by total deposits in two of the three markets it serves and intends to pursue
growth strategies that result in meaningful market share positions in other
rural or suburban communities. Such a strategy emphasizes growth by acquisition
over de novo expansion. The Company is seeking to identify potential
acquisitions in markets that offer opportunities to benefit from its community
banking philosophy and that will likely result in meaningful market share. In
conformity with this strategy, the Company has entered into an agreement to
acquire PTC, a bank holding company headquartered in Brookville, Indiana with
total assets of $300 million. PTC is also community focused, serving rural
communities with populations of 10,000 or less in markets contiguous to the
Company's existing locations. The transaction is regarded by both companies as a
merger of equals and will integrate management and directors of both
organizations. See "--Recent Developments."
The Company also believes many larger banking companies operating in, or
contiguous to, Indiana will begin an accelerated program of branch divestitures.
The Company further believes many of these branch locations will be in
communities which are compatible with its growth strategies. In such event, the
Company intends to bid competitively in seeking to expand through branch
acquisitions.
OWNERSHIP
As of November 1, 1997, the directors and executive officers of the Company
and their immediate families owned approximately 26% of the Company's stock.
Immediately after the PTC Merger, the directors and executive officers of the
Company and their immediate families are expected to own approximately 32% of
the Company's stock.
RECENT DEVELOPMENTS
The Company is a party to an Agreement and Plan of Merger with PTC dated as
of October 8, 1997 (the "Merger Agreement") pursuant to which PTC would merge
with and into the Company, PTC's commercial bank subsidiary, People's Trust
Company, Brookville, Indiana, a commercial bank organized under the laws of
Indiana ("People's Trust"), would become a wholly owned subsidiary of the
Company, and each outstanding share of PTC at the effective time of the merger
would be converted into the right to receive 1.075 shares of common stock of the
Company (the "PTC Merger"). The Company expects to issue in the aggregate up to
1,136,417 shares of common stock in the PTC Merger. The PTC Merger is expected
to be completed in the first quarter of 1998.
At September 30, 1997, PTC had total assets of $302.7 million, total
deposits of $275.7 million and total shareholders' equity of $23.7 million. PTC
had net income of $2.7 million for the nine months ended September 30, 1997,
compared to net income of $2.4 million for the nine months ended September 30,
1996. See "PTC Selected Financial Data" and "PTC Management's Discussion and
Analysis of Financial Condition and Results of Operations." People's Trust
engages in a general full-service commercial and
6
<PAGE>
consumer banking business. People's Trust conducts its banking business through
17 offices located in the Indiana counties of Dearborn, Franklin, Jefferson,
Ripley, Rush, Fayette, Decatur, Switzerland and Wayne.
PTC is subject to the informational reporting requirements of the Exchange
Act. Information about PTC may be obtained from the Public Reference Section of
the Commission or accessed through electronic means, including the Commission's
home page on the Internet (http://www.sec.gov), in the same manner that
information about the Company may be obtained. See "Available Information."
The PTC Merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. See "Summary of Pro Forma
Consolidated Financial Data," "Pro Forma Selected Financial Data" and "Index to
Consolidated Financial Statements and Pro Forma Consolidated Financial
Statements." The PTC Merger is intended to be a tax free reorganization so that
no gain or loss would be recognized by the Company or PTC, and no gain or loss
would be recognized by shareholders of PTC except in respect of cash received
for fractional shares or pursuant to the exercise of statutory dissenters'
rights. The PTC Merger is subject to various conditions, including requisite
shareholder and regulatory approvals. Accordingly, no assurance can be given
that the PTC Merger will be consummated. If the PTC Merger is not consummated,
the anticipated significant increase in the Company's capital base due to the
PTC Merger will not be realized. Consequently, due to regulatory capital
requirements, the Company's ability to utilize a portion of the offering
proceeds for future acquisitions and other growth would be adversely affected if
the PTC Merger is not consummated.
Following the PTC Merger, pursuant to the Merger Agreement, the Board of
Directors of the Company will consist of ten members, five of which will have
been designated by the Company and five of which will have been designated by
PTC. The Merger Agreement also provides that the Company's Chairman of the
Board, President and Chief Executive Officer, Robert E. Hoptry, will continue to
be the Company's Chairman of the Board and Chief Executive Officer and that
PTC's President and Chief Executive Officer, James L. Saner, will be President
and Chief Operating Officer of the Company following the PTC Merger.
IUB TRUST
IUB Trust is a statutory business trust formed under Delaware law pursuant
to (i) a trust agreement, dated as of November 14, 1997, executed by the
Company, as depositor, and the trustees of IUB Trust (together with the Property
Trustee, the "Trustees"), and (ii) a certificate of trust filed with the
Secretary of State of the State of Delaware with an effective date of November
14, 1997. The initial trust agreement will be amended and restated in its
entirety (as so amended and restated, the "Trust Agreement") substantially in
the form filed as an exhibit to the Registration Statement of which this
Prospectus forms a part. The Trust Agreement will be qualified as an indenture
under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act").
Upon issuance of the Preferred Securities, the purchasers thereof will own all
of the Preferred Securities. The Company will acquire all of the Common
Securities which will represent an aggregate liquidation amount equal to at
least 3% of the total capital of IUB Trust. The Common Securities will rank PARI
PASSU, and payments will be made thereon pro rata, with the Preferred
Securities, except that upon the occurrence and during the continuance of an
Event of Default (as defined herein) under the Trust Agreement resulting from a
Debenture Event of Default, the rights of the Company as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Preferred Securities. See "Description of the Preferred
Securities--Subordination of the Common Securities." IUB Trust exists for the
exclusive purposes of (i) issuing the Trust Securities representing undivided
beneficial interests in the assets of IUB Trust, (ii) investing the gross
proceeds of the Trust Securities in the Subordinated Debentures issued by the
Company, and (iii) engaging in only those other activities necessary, advisable,
or incidental thereto. The Subordinated Debentures and payments thereunder will
be the only assets of IUB Trust and payments under the Subordinated Debentures
will be the only revenue of IUB Trust. IUB Trust has a term of 55 years, but may
terminate earlier as provided in the Trust Agreement. The principal
7
<PAGE>
executive office of IUB Trust is 201 North Broadway, Greensburg, Indiana 47240,
and its telephone number is (812) 663-0157.
The number of Trustees will, pursuant to the Trust Agreement, initially be
five. Three of the Trustees (the "Administrative Trustees") will be persons who
are employees or officers of, or who are affiliated with, the Company. The
fourth trustee will be a financial institution that is unaffiliated with the
Company, which trustee will serve as institutional trustee under the Trust
Agreement and as indenture trustee for the purposes of compliance with the
provisions of the Trust Indenture Act (the "Property Trustee"). State Street
Bank and Trust Company, a state chartered trust company organized under the laws
of the Commonwealth of Massachusetts, will be the Property Trustee until removed
or replaced by the holder of the Common Securities. For purposes of compliance
with the provisions of the Trust Indenture Act, State Street Bank and Trust
Company will also act as trustee (the "Guarantee Trustee") under the Guarantee
and as Debenture Trustee (as defined herein) under the Indenture. The fifth
trustee will be an entity that maintains its principal place of business in the
State of Delaware (the "Delaware Trustee"). Wilmington Trust Company, a Delaware
chartered trust company, will act as Delaware Trustee.
The Property Trustee will hold title to the Subordinated Debentures for the
benefit of the holders of the Trust Securities and in such capacity will have
the power to exercise all rights, powers and privileges under the Indenture. The
Property Trustee will also maintain exclusive control of a segregated non-
interest-bearing bank account (the "Property Account") to hold all payments made
in respect of the Subordinated Debentures for the benefit of the holders of the
Trust Securities. The Property Trustee will make payments of Distributions and
payments on liquidation, redemption and otherwise to the holders of the Trust
Securities out of funds from the Property Account. The Guarantee Trustee will
hold the Guarantee for the benefit of the holders of the Preferred Securities.
The Company, as the holder of all the Common Securities, will have the right to
appoint, remove or replace any Trustee and to increase or decrease the number of
Trustees. The Company will pay all fees and expenses related to IUB Trust and
the offering of the Trust Securities.
The rights of the holders of the Preferred Securities, including economic
rights, rights to information and voting rights, are set forth in the Trust
Agreement, the Delaware Business Trust Act (the "Trust Act") and the Trust
Indenture Act. See "Description of the Preferred Securities."
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................. 1,950,000 Preferred Securities having a Liquidation
Amount of $10 per Preferred Security. The Preferred
Securities represent preferred undivided beneficial
interests in the assets of IUB Trust, which will
consist solely of the Subordinated Debentures and
payments thereunder. IUB Trust has granted the
Underwriter an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to
an additional 292,500 Preferred Securities at the
initial offering price, solely to cover
over-allotments, if any.
Distributions....................... The Distributions payable on each Preferred Security
will be fixed at a rate per annum of 8.75% of the
Liquidation Amount of $10 per Preferred Security,
will be cumulative, will accrue from December 12,
1997, the date of original issuance of the Preferred
Securities, and will be payable quarterly in arrears,
on March 31, June 30, September 30 and December 31 of
each year, commencing December 31, 1997. See
"Description of the Preferred
Securities--Distributions-- Payment of
Distributions."
Option to Extend Interest Payment
Period............................ The Company has the right, at any time, so long as no
Debenture Event of Default has occurred and is
continuing, to defer payments of interest on the
Subordinated Debentures for a period not exceeding 20
consecutive quarters; provided, that no Extension
Period may extend beyond the Stated Maturity of the
Subordinated Debentures. As a consequence of the
extension by the Company of the interest payment
period, quarterly Distributions on the Preferred
Securities will be deferred (though such
Distributions would continue to accrue with interest
thereon compounded quarterly, since interest will
continue to accrue and compound on the Subordinated
Debentures) during any such Extension Period. During
an Extension Period, the Company will be prohibited,
subject to certain exceptions described herein, from
declaring or paying any cash distributions with
respect to its capital stock or debt securities that
rank PARI PASSU with or junior to the Subordinated
Debentures. Upon the termination of any Extension
Period and the payment of all amounts then due, the
Company may commence a new Extension Period, subject
to the foregoing requirements. See "Description of
the Preferred Securities-- Distributions--Extension
Period" and "Description of the Subordinated
Debentures--Option to Extend Interest Payment
Period." Should an Extension Period occur, the
holders of Preferred Securities will be required to
accrue interest income in their gross income for
United States Federal income tax purposes in advance
of receipt of the cash distributions with respect to
such deferred interest payments.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
See "Certain Federal Income Tax
Consequences--Potential Extension of Interest Payment
Period and Original Issue Discount."
Optional Redemption................. The Preferred Securities are subject to mandatory
redemption, in whole or in part, upon repayment of
the Subordinated Debentures at maturity or their
earlier redemption. Subject to Federal Reserve
approval, if then required under applicable capital
guidelines or policies of the Federal Reserve, the
Subordinated Debentures are redeemable prior to
maturity at the option of the Company (i) on or after
December 31, 2002, in whole at any time or in part
from time to time, or (ii) at any time, in whole (but
not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event
or an Investment Company Event, in each case at the
redemption price equal to 100% of the principal
amount of the Subordinated Debentures, together with
any accrued but unpaid interest to the date fixed for
redemption. See "Description of the Subordinated
Debentures--Redemption or Exchange."
Distribution of Subordinated
Debentures........................ The Company has the right at any time to terminate
the Preferred Securities and cause the Subordinated
Debentures to be distributed to the holders of the
Preferred Securities in liquidation of IUB Trust,
subject to the Company having received prior approval
of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of
the Federal Reserve. See "Description of the
Preferred Securities--Redemption" and "--Liquidation
Distribution upon Termination."
Guarantee........................... The Company has guaranteed the payment of
Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in
each case to the extent of funds held by IUB Trust,
as described herein. The Company and IUB Trust
believe that, taken together, the obligations of the
Company under the Guarantee, the Trust Agreement, the
Subordinated Debentures, the Indenture and the
Expense Agreement provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a
subordinated basis, of all of the obligations of IUB
Trust under the Preferred Securities. The obligations
of the Company under the Guarantee and the Preferred
Securities are subordinate and junior in right of
payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. If the
Company does not make principal or interest payments
on the Subordinated Debentures, IUB Trust will not
have sufficient funds to make distributions on the
Preferred Securities; in which event, the Guarantee
will not apply to such Distributions until IUB Trust
has sufficient funds available therefor. See
"Description of the Guarantee."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Voting Rights....................... The holders of the Preferred Securities will have no
voting rights except in limited circumstances. See
"Description of the Preferred Securities--Voting
Rights; Amendment of Trust Agreement."
Use of Proceeds..................... The proceeds from the sale of the Preferred
Securities offered hereby will be used by IUB Trust
to purchase the Subordinated Debentures issued by the
Company. The net proceeds to be received by the
Company from the sale of the Subordinated Debentures
to IUB Trust will be used for financing growth, which
may include branch acquisitions, the establishment of
de novo branches and/or acquisitions of other
financial institutions, and for general corporate
purposes. Pending any such use, the net proceeds will
be invested in short-to-medium term investment grade
financial instruments. See "Use of Proceeds."
Nasdaq National Market Symbol....... The Preferred Securities have been approved for
quotation on the Nasdaq National Market under the
symbol "IUBCP."
</TABLE>
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The consolidated financial data below summarizes historical consolidated
financial information of the Company for the periods indicated and should be
read in conjunction with the financial statements and other information included
elsewhere in this Prospectus and in the Company's annual report on Form 10-K for
the year ended December 31, 1996, which is incorporated by reference in this
Prospectus. The unaudited consolidated financial data below for the interim
periods indicated has been derived from the Company's quarterly report on Form
10-Q for the nine-month period ended September 30, 1997, which is incorporated
by reference in this Prospectus, and should be read in conjunction with the
unaudited financial statements and other information for such interim periods
included elsewhere in this Prospectus or incorporated herein by reference. See
"Company Selected Financial Data," "Company Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Incorporation of Certain
Documents by Reference" and "Index to Consolidated Financial Statements and Pro
Forma Consolidated Financial Statements." All adjustments considered necessary
for a fair presentation have, in the opinion of management, been included in the
unaudited interim data. Interim results for the nine months ended September 30,
1997 are not necessarily indicative of results that may be expected for future
periods, including the year ending December 31, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED RESULTS OF OPERATIONS:
Interest income................................................... $ 19,398 $ 17,692 $ 23,967 $ 22,835 $ 22,202
Interest expense.................................................. 9,639 8,868 12,006 11,852 10,901
---------- ---------- ---------- ---------- ----------
Net interest income............................................... 9,759 8,824 11,961 10,983 11,301
Provision for loan losses......................................... 183 90 150 30 115
---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses............... 9,576 8,734 11,811 10,953 11,186
Non-interest income............................................... 1,370 1,093 1,502 1,456 2,588
Non-interest expense.............................................. 6,201 6,608 8,619 8,229 9,040
---------- ---------- ---------- ---------- ----------
Income before income tax expense and cumulative effect of change
in accounting method............................................ 4,745 3,219 4,694 4,180 4,734
Income tax expense................................................ 1,877 1,420 2,001 1,651 1,864
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in accounting method.... 2,868 1,799 2,693 2,529 2,870
Cumulative effect of change in accounting method.................. -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Net income........................................................ $ 2,868 $ 1,799 $ 2,693 $ 2,529 $ 2,870
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
PER SHARE DATA:(1)
Earnings per common share......................................... $ 2.29 $ 1.40 $ 2.11 $ 1.91 $ 2.17
Cash dividends declared........................................... 0.74 0.61 0.83 0.69 0.60
Book value........................................................ 24.05 21.38 22.18 20.98 17.49
Dividend payout ratio(2).......................................... 32.28% 42.42% 39.29% 36.12% 25.15%
SELECTED BALANCE SHEET DATA:(3)
Assets............................................................ $ 342,051 $ 321,397 $ 328,346 $ 313,067 $ 306,047
Securities........................................................ 71,422 85,042 81,187 80,651 91,954
Loans............................................................. 244,237 215,028 219,483 201,355 194,736
Allowance for loan losses......................................... 2,670 2,823 2,506 2,754 2,784
Deposits.......................................................... 285,760 271,031 276,402 262,346 261,371
Long-term debt.................................................... 4,625 5,500 5,000 6,000 7,500
Preferred stock................................................... -- -- -- 2,000 2,400
Total shareholders' equity........................................ 30,084 26,738 27,749 28,245 24,282
PERFORMANCE RATIOS:(4)
Return on average equity.......................................... 13.39% 8.82% 9.89% 9.73% 12.18%
Return on average assets.......................................... 1.14 0.77 0.85 0.82 0.86
Net interest margin (fully taxable equivalent).................... 4.13 3.98 4.00 3.77 3.57
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(3)............................. 1.09% 1.31% 1.14% 1.37% 1.43%
Non-performing loans to total loans(3)............................ 0.09 0.68 0.57 0.80 0.59
Net loan losses to average loans.................................. 0.01 0.01 0.19 0.03 0.01
CAPITAL RATIOS:
Average equity to average assets.................................. 8.55% 8.82% 8.69% 8.70% 7.39%
Tier 1 risk-based capital ratio(3)................................ 13.46 13.94 13.81 15.32 15.86
Total risk-based capital ratio(3)................................. 14.68 15.18 15.05 16.57 17.11
Leverage ratio(3)................................................. 8.58 8.29 8.31 8.84 8.69
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS:(5)
Including interest on deposits.................................... 1.49x 1.36x 1.39x 1.35x 1.42x
Excluding interest on deposits.................................... 6.88 4.45 4.82 3.36 4.45
<CAPTION>
1993 1992
---------- ----------
<S> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income................................................... $ 24,226 $ 28,029
Interest expense.................................................. 12,345 15,545
---------- ----------
Net interest income............................................... 11,881 12,484
Provision for loan losses......................................... 357 686
---------- ----------
Net interest income after provision for loan losses............... 11,524 11,798
Non-interest income............................................... 1,628 1,572
Non-interest expense.............................................. 9,243 8,834
---------- ----------
Income before income tax expense and cumulative effect of change
in accounting method............................................ 3,909 4,536
Income tax expense................................................ 1,437 1,674
---------- ----------
Income before cumulative effect of change in accounting method.... 2,472 2,862
Cumulative effect of change in accounting method.................. 450 --
---------- ----------
Net income........................................................ $ 2,922 $ 2,862
---------- ----------
---------- ----------
PER SHARE DATA:(1)
Earnings per common share......................................... $ 2.19 $ 2.14
Cash dividends declared........................................... 0.51 0.42
Book value........................................................ 17.99 16.27
Dividend payout ratio(2).......................................... 21.16% 17.89%
SELECTED BALANCE SHEET DATA:(3)
Assets............................................................ $ 355,992 $ 368,924
Securities........................................................ 125,081 131,372
Loans............................................................. 205,508 204,000
Allowance for loan losses......................................... 2,682 2,686
Deposits.......................................................... 310,063 323,777
Long-term debt.................................................... 9,375 10,645
Preferred stock................................................... 2,700 3,000
Total shareholders' equity........................................ 25,203 23,347
PERFORMANCE RATIOS:(4)
Return on average equity.......................................... 12.61% 13.88%
Return on average assets.......................................... 0.81 0.79
Net interest margin (fully taxable equivalent).................... 3.52 3.66
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(3)............................. 1.31% 1.32%
Non-performing loans to total loans(3)............................ 0.60 1.38
Net loan losses to average loans.................................. 0.18 0.49
CAPITAL RATIOS:
Average equity to average assets.................................. 6.83% 6.11%
Tier 1 risk-based capital ratio(3)................................ 12.87 12.09
Total risk-based capital ratio(3)................................. 14.12 13.34
Leverage ratio(3)................................................. 7.01 6.25
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS:(5)
Including interest on deposits.................................... 1.31x 1.29x
Excluding interest on deposits.................................... 4.14 4.34
</TABLE>
- ----------------------------------------
(1) Per share data has been restated to give retroactive effect to a 10% stock
dividend in 1994.
(2) For all periods except for the nine months ended September 30, 1997, common
stock cash dividends as a percentage of net income adjusted for preferred
stock dividends. All preferred stock of the Company was redeemed in late
1996.
(3) At period end.
(4) Performance ratios for the nine month periods are annualized.
(5) Earnings consist of income before income tax expense plus interest expense.
Fixed charges consist of interest expense. The portion of rent expense
deemed to be interest has been excluded since it is not material in any of
the periods presented. Preferred stock dividends represent the pretax
earnings required to cover preferred stock dividends.
12
<PAGE>
SUMMARY OF PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited pro forma condensed
combined financial data for the Company giving effect to the PTC Merger, which
will be accounted for as a pooling of interests, as if it had occurred as of the
beginning of the periods indicated herein, after giving effect to the pro forma
adjustments described in the notes to the Company and PTC Unaudited Pro Forma
Consolidated Financial Statements. This information should be read in
conjunction with the historical consolidated financial statements of the Company
and PTC, including the respective notes thereto, which are included elsewhere in
this Prospectus, and in conjunction with the consolidated historical financial
data for the Company and PTC and the other pro forma financial information,
including the notes thereto, appearing elsewhere in this Prospectus. See "Index
to Consolidated Financial Statements and Pro Forma Consolidated Financial
Statements," "Company Selected Financial Data," "PTC Selected Financial Data"
and "Pro Forma Selected Financial Data." The unaudited pro forma condensed
combined financial data are not necessarily indicative of the results that
actually would have occurred had the PTC Merger occurred as of the beginning of
the periods indicated herein, or that may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY PTC PRO FORMA(1) COMPANY PTC PRO FORMA(1)
----------- --------- ------------- ----------- --------- -------------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income.......................... $ 19,398 $ 17,234 $ 36,632 $ 23,967 $ 21,319 $ 45,286
Interest expense......................... 9,639 8,679 18,318 12,006 10,897 22,903
----------- --------- ------------- ----------- --------- -------------
Net interest income...................... 9,759 8,555 18,314 11,961 10,422 22,383
Provision for loan losses................ 183 610 793 150 828 978
----------- --------- ------------- ----------- --------- -------------
Net interest income after provision for
loan losses............................ 9,576 7,945 17,521 11,811 9,594 21,405
Non-interest income...................... 1,370 1,860 3,230 1,502 2,349 3,851
Non-interest expense..................... 6,201 5,918 12,119 8,619 7,104 15,723
----------- --------- ------------- ----------- --------- -------------
Income before income tax expense......... 4,745 3,887 8,632 4,694 4,839 9,533
Income tax expense....................... 1,877 1,185 3,062 2,001 1,563 3,564
----------- --------- ------------- ----------- --------- -------------
Net income............................... $ 2,868 $ 2,702 $ 5,570 $ 2,693 $ 3,276 $ 5,969
----------- --------- ------------- ----------- --------- -------------
----------- --------- ------------- ----------- --------- -------------
PER COMMON SHARE DATA:
Earnings per common share................ $ 2.29 $ 2.64 $ 2.33 $ 2.11 $ 3.17 $ 2.49
Cash dividends........................... 0.74 0.60 0.74 0.83 0.66 0.83
Book value............................... 24.05 23.13 22.55 22.18 21.14 20.77
Dividend payout ratio.................... 32.28% 22.58% 31.72% 39.29% 20.72% 33.35%
SELECTED BALANCE SHEET DATA:
Total assets............................. $ 342,051 $ 302,734 $ 644,785 $ 328,346 $ 296,576 $ 624,922
Securities............................... 71,422 53,893 125,315 81,187 63,594 144,781
Loans.................................... 244,237 220,653 464,890 219,483 196,963 416,446
Allowance for loan losses................ 2,670 1,969 4,639 2,506 2,000 4,506
Deposits................................. 285,760 275,679 561,439 276,402 271,127 547,529
Long-term debt........................... 4,625 250 4,875 5,000 500 5,500
Total shareholders' equity............... 30,084 23,740 53,824 27,749 21,653 49,402
PERFORMANCE RATIOS:(2)
Return on average equity................. 13.39% 15.97% 14.54% 9.89% 16.05% 12.56%
Return on average assets................. 1.14 1.23 1.19 0.85 1.21 1.02
Net interest margin (fully taxable
equivalent)............................ 4.13 4.46 4.30 4.00 4.39 4.18
ASSET QUALITY RATIOS:
Allowance for loan losses to loans....... 1.09% 0.89% 1.00% 1.14% 1.02% 1.08%
Non-performing loans to total loans...... 0.09 1.09 0.56 0.57 0.93 0.74
Net loan losses to average loans......... 0.01 0.41 0.15 0.19 0.30 0.24
CAPITAL RATIOS:
Average equity to average assets......... 8.55% 7.71% 8.16% 8.69% 7.55% 8.17%
Tier 1 risk-based capital ratio.......... 13.46 10.73 12.15 13.81 10.54 12.22
Total risk-based capital ratio........... 14.68 11.70 13.24 15.05 11.60 13.38
Leverage ratio........................... 8.58 7.26 7.96 8.31 6.73 7.57
</TABLE>
- ------------------------------
(1) Pro forma income statement data assumes the acquisition of PTC occurred on
January 1, 1996. Pro forma balance sheet data assumes the acquisition of PTC
occurred at the end of the period presented.
(2) Interim period annualized.
13
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER
INFORMATION CONTAINED AND INCORPORATED BY REFERENCE IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS AND IUB TRUST
BEFORE PURCHASING THE PREFERRED SECURITIES OFFERED HEREBY. CERTAIN STATEMENTS IN
THIS SECTION CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE
COMPANY OR PTC TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
RISK FACTORS RELATING TO THE PREFERRED SECURITIES
RANKING OF SUBORDINATED OBLIGATIONS UNDER THE GUARANTEE AND THE SUBORDINATED
DEBENTURES
The obligations of the Company under the Guarantee issued for the benefit of
the holders of Preferred Securities and under the Subordinated Debentures are
unsecured and rank subordinate and junior in right of payment to all Senior
Debt, Subordinated Debt and Additional Senior Obligations of the Company,
whether now existing or hereafter incurred. At September 30, 1997, the aggregate
outstanding Senior Debt, Subordinated Debt and Additional Senior Obligations of
the Company was approximately $4.6 million. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any Subsidiary Bank (as defined herein) upon such Subsidiary Bank's
liquidation or reorganization or otherwise (and thus the ability of the holders
of the Preferred Securities to benefit indirectly from such distribution) is
subject to the prior claims of creditors of that Subsidiary Bank, except to the
extent that the Company may itself be recognized as a creditor of that
Subsidiary Bank. The Subordinated Debentures, therefore, will be effectively
subordinated to all existing and future liabilities of the Subsidiary Banks and
the holders of the Subordinated Debentures and the Preferred Securities should
look only to the assets of the Company for payments on the Subordinated
Debentures. Neither the Indenture, the Guarantee nor the Trust Agreement places
any limitation on the amount of secured or unsecured debt, including Senior
Debt, Subordinated Debt and Additional Senior Obligations, that may be incurred
by the Company. See "Description of the Subordinated Debentures--Subordination"
and "Description of the Guarantee--Status of the Guarantee."
The ability of IUB Trust to pay amounts due on the Preferred Securities is
dependent solely upon the Company making payments on the Subordinated Debentures
as and when required.
OPTION TO EXTEND INTEREST PAYMENT PERIOD; TAX CONSEQUENCES; MARKET PRICE
CONSEQUENCES
The Company has the right under the Indenture, so long as no Debenture Event
of Default has occurred and is continuing, to defer the payment of interest on
the Subordinated Debentures at any time or from time to time for a period not
exceeding 20 consecutive quarters with respect to each Extension Period;
PROVIDED that no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. As a consequence of any such deferral, quarterly
Distributions on the Preferred Securities by IUB Trust will be deferred (and the
amount of Distributions to which holders of the Preferred Securities are
entitled will accumulate additional Distributions thereon at the rate of 8.75%
per annum, compounded quarterly from the relevant payment date for such
Distributions) during any such Extension Period. During any such Extension
Period, the Company may not (i) declare or pay any dividends or distributions
on, or redeem, purchase, acquire, or make a liquidation payment with respect to,
any of the Company's capital stock, (ii) make any payment of principal, interest
or premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank PARI PASSU with or junior in interest to the Subordinated
Debentures or make any guarantee payments with respect to any guarantee by the
Company of the debt securities of any subsidiary of the Company if such
guarantee ranks PARI PASSU with or junior in interest to the Subordinated
Debentures (other than payments under the Guarantee), or (iii) redeem, purchase
or acquire less than all of the Subordinated Debentures or any of the Preferred
Securities. Prior to the
14
<PAGE>
termination of any such Extension Period, the Company may further defer the
payment of interest; provided that no Extension Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of the Subordinated Debentures.
Upon the termination of any Extension Period and the payment of all interest
then accrued and unpaid (together with interest thereon at the annual rate of
8.75% compounded quarterly, to the extent permitted by applicable law), the
Company may elect to begin a new Extension Period, subject to the above
requirements. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period. See "Description
of the Preferred Securities--Distributions--Extension Period" and "Description
of the Subordinated Debentures--Option to Extend Interest Payment Period."
Should an Extension Period occur, each holder of Preferred Securities will
be required to accrue and recognize income (in the form of original issue
discount) in respect of its pro rata share of the interest accruing on the
Subordinated Debentures held by IUB Trust for United States Federal income tax
purposes. As a result, a holder of Preferred Securities must include such income
in gross income for United States Federal income tax purposes in advance of the
receipt of cash and will not receive the cash related to such income from IUB
Trust if the holder disposes of the Preferred Securities prior to the record
date for the payment of the related Distributions. See "Certain Federal Income
Tax Consequences-- Potential Extension of Interest Payment Period and Original
Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures. Should the Company elect, however, to exercise such
right in the future, the market price of the Preferred Securities is likely to
be adversely affected. A holder that disposes of its Preferred Securities during
an Extension Period, therefore, might not receive the same return on its
investment as a holder that continues to hold its Preferred Securities. In
addition, as a result of the existence of the Company's right to defer interest
payments, the market price of the Preferred Securities may be more volatile than
the market prices of other securities on which original issue discount accrues
that are not subject to such optional deferrals.
TAX EVENT, CAPITAL TREATMENT EVENT OR INVESTMENT COMPANY EVENT; REDEMPTION
The Company has the right to redeem the Subordinated Debentures in whole
(but not in part) within 180 days following the occurrence of a Tax Event, a
Capital Treatment Event or an Investment Company Event (whether occurring before
or after December 31, 2002), and, therefore, cause a mandatory redemption of the
Preferred Securities. The exercise of such right is subject to the Company
having received prior approval of the Federal Reserve to do so if then required
under applicable capital guidelines or policies of the Federal Reserve.
"Tax Event" means the receipt by IUB Trust of an opinion of counsel,
rendered by a law firm having a recognized tax and securities practice, to the
effect that, as a result of any amendment to, or change (including any announced
prospective change) in the laws (or any regulations thereunder) of the United
States or any political subdivision or taxing authority thereof or therein, or
as a result of any official administrative pronouncement or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or such pronouncement or decision is announced on or after the date of
issuance of the Preferred Securities under the Trust Agreement, there is more
than an insubstantial risk that (i) IUB Trust is, or will be within 90 days of
the date of such opinion, subject to United States Federal income tax with
respect to income received or accrued on the Subordinated Debentures, (ii)
interest payable by the Company on the Subordinated Debentures is not, or,
within 90 days of such opinion, will not be, deductible by the Company, in whole
or in part, for United States Federal income tax purposes, or (iii) IUB Trust
is, or will be within 90 days of the date of the opinion, subject to more than a
de minimis amount of other taxes, duties or other governmental charges. The
Company must request and receive an opinion with regard to such matters within a
reasonable period of time after it becomes aware of the possible occurrence of
any of the events described in clauses (i) through (iii) above.
15
<PAGE>
"Capital Treatment Event" means the receipt by IUB Trust of an opinion of
counsel, rendered by a law firm having a recognized banking law practice, to the
effect that, as a result of any amendment to or any change (including any
announced prospective change) in the laws (or any regulations thereunder) of the
United States or any political subdivision thereof or therein, or as a result of
any official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such proposed change, pronouncement or decision is announced on or after the
date of issuance of the Preferred Securities under the Trust Agreement, there is
more than an insubstantial risk of impairment of the Company's ability to treat
the aggregate Liquidation Amount of the Preferred Securities (or any substantial
portion thereof) as "Tier 1 capital" (or the then equivalent thereof) for
purposes of the capital adequacy guidelines of the Federal Reserve, as then in
effect and applicable to the Company, provided, however, that the inability of
the Company to treat all or any portion of the Liquidation Amount of the
Preferred Securities as Tier 1 capital shall not constitute the basis for a
Capital Treatment Event if such inability results from the Company having
cumulative preferred capital in excess of the amount which may qualify for
treatment as Tier 1 capital under applicable capital adequacy guidelines of the
Federal Reserve.
"Investment Company Event" means the receipt by IUB Trust of an opinion of
counsel, rendered by a law firm having a recognized tax and securities law
practice, to the effect that, as a result of the occurrence of a change in law
or regulation or a change in interpretation or application of law or regulation
by any legislative body, court, governmental agency or regulatory authority, IUB
Trust is or will be considered an "investment company" that is required to be
registered under the Investment Company Act of 1940, as amended (the "Investment
Company Act"), which change becomes effective on or after the date of original
issuance of the Preferred Securities. See "--Possible Tax Law Changes" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to December 31, 2002.
SHORTENING OR EXTENSION OF STATED MATURITY OF THE SUBORDINATED DEBENTURES
The Company has the right, at any time, to shorten the maturity of the
Subordinated Debentures to a date not earlier than December 31, 2002. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company also has the right to extend the
maturity of the Subordinated Debentures (whether or not IUB Trust is terminated
and the Subordinated Debentures are distributed to the holders of the Preferred
Securities) to a date no later than December 31, 2036, the 39th anniversary of
the initial issuance of the Preferred Securities. Such right may only be
exercised, however, if at the time such election is made and at the time of such
extension (i) the Company is not in bankruptcy, otherwise insolvent or in
liquidation, (ii) the Company is not in default in the payment of any interest
or principal on the Subordinated Debentures, (iii) IUB Trust is not in arrears
on payments of Distributions on the Preferred Securities and no deferred
Distributions are accumulated, and (iv) the Company has a Senior Debt rating of
investment grade. See "Description of the Subordinated Debentures--General."
RIGHTS UNDER THE GUARANTEE
The Guarantee guarantees to the holders of the Preferred Securities, to the
extent not paid by IUB Trust, (i) any accrued and unpaid Distributions required
to be paid on the Preferred Securities, to the extent that IUB Trust has funds
available therefor at such time, (ii) the Redemption Price (as defined herein)
with respect to any Preferred Securities called for redemption, to the extent
that IUB Trust has funds available therefor at such time, and (iii) upon a
voluntary or involuntary dissolution, winding-up or liquidation of IUB Trust
(other than in connection with the distribution of Subordinated Debentures to
the holders of the Preferred Securities or a redemption of all of the Preferred
Securities), the lesser of (a) the amount of the Liquidation Distribution (as
defined herein), to the extent IUB Trust has funds available therefor at such
time, and (b) the amount of assets of IUB Trust remaining available for
distribution to the
16
<PAGE>
holders of the Preferred Securities in liquidation of IUB Trust. The holders of
not less than a majority in Liquidation Amount of the Preferred Securities have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Guarantee Trustee in respect of the Guarantee or to
direct the exercise of any trust power conferred upon the Guarantee Trustee
under the Guarantee. Any holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against IUB Trust, the
Guarantee Trustee or any other Person (as defined in the Guarantee). If the
Company were to default on its obligation to pay amounts payable under the
Subordinated Debentures, IUB Trust would lack funds for the payment of
Distributions or amounts payable on redemption of the Preferred Securities or
otherwise, and, in such event, the holders of the Preferred Securities would not
be able to rely upon the Guarantee for such amounts. In the event, however, that
a Debenture Event of Default has occurred and is continuing and such event is
attributable to the failure of the Company to pay interest on or principal of
the Subordinated Debentures on the payment date on which such payment is due and
payable, then a holder of Preferred Securities may institute a legal proceeding
directly against the Company for enforcement of payment to such holder of the
principal of or interest on such Subordinated Debentures having a principal
amount equal to the aggregate Liquidation Amount of the Preferred Securities of
such holder (a "Direct Action"). The exercise by the Company of its right, as
described herein, to defer the payment of interest on the Subordinated
Debentures does not constitute a Debenture Event of Default. In connection with
such Direct Action, the Company will have a right of set-off under the Indenture
to the extent of any payment made by the Company to such holder of Preferred
Securities in the Direct Action. Except as described herein, holders of
Preferred Securities will not be able to exercise directly any other remedy
available to the holders of the Subordinated Debentures or assert directly any
other rights in respect of the Subordinated Debentures. See "Description of the
Subordinated Debentures--Debenture Events of Default," "--Enforcement of Certain
Rights by Holders of Preferred Securities," and "Description of the Guarantee."
The Trust Agreement provides that each holder of the Preferred Securities by
acceptance thereof agrees to the provisions of the Guarantee and the Indenture.
NO VOTING RIGHTS EXCEPT IN LIMITED CIRCUMSTANCES
Holders of Preferred Securities will have no voting rights except in limited
circumstances relating only to the modification of the Preferred Securities and
the exercise of the rights of IUB Trust as holder of the Subordinated Debentures
and the Guarantee. Holders of Preferred Securities will not be entitled to vote
to appoint, remove or replace the Property Trustee or the Delaware Trustee, as
such voting rights are vested exclusively in the holder of the Common Securities
(except upon the occurrence of certain events described herein). The Property
Trustee, the Administrative Trustees and the Company may amend the Trust
Agreement without the consent of holders of Preferred Securities to ensure that
IUB Trust will be classified for United States Federal income tax purposes as a
grantor trust even if such action adversely affects the interests of such
holders. See "Description of the Preferred Securities--Removal of IUB Trust
Trustees," and "--Voting Rights; Amendment of Trust Agreement."
POSSIBLE TAX LAW CHANGES
Certain legislative proposals were made in 1996 and 1997 which were designed
to eliminate the ability of issuers of certain instruments to deduct interest
paid on those instruments. These proposals were not, however, incorporated into
the legislation recently enacted as the Taxpayer Relief Act of 1997.
Nevertheless, there can be no assurance that other legislation enacted after the
date hereof will not otherwise adversely affect the ability of the Company to
deduct the interest payable on the Subordinated Debentures, and such legislation
could be retroactive in effect. Consequently, there can be no assurance that a
Tax Event will not occur. A Tax Event would permit the Company, upon approval of
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, to cause a redemption of the Preferred
Securities before, as well as after, December 31, 2002. See "Description of the
Preferred Securities--Redemption--Tax Event Redemption, Capital Treatment Event
Redemption or Investment
17
<PAGE>
Company Event Redemption" and "Description of the Subordinate
Debentures--Redemption or Exchange" and "Certain Federal Income Tax
Consequences--Effect of Recent Changes in Tax Laws."
REDEMPTION; EXCHANGE OF PREFERRED SECURITIES FOR SUBORDINATED DEBENTURES
The Company has the right at any time to dissolve, wind-up or terminate IUB
Trust and cause the Subordinated Debentures to be distributed to the holders of
the Preferred Securities in exchange therefor in liquidation of IUB Trust. The
exercise of such right is subject to the Company having received prior approval
of the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve. The Company will have the right, in certain
circumstances, to redeem the Subordinated Debentures in whole or in part, in
lieu of a distribution of the Subordinated Debentures by IUB Trust, in which
event IUB Trust will redeem the Trust Securities on a pro rata basis to the same
extent as the Subordinated Debentures are redeemed by the Company. Any such
distribution or redemption prior to the Stated Maturity will be subject to prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. See "Description of the Preferred
Securities-- Redemption--Tax Event Redemption, Capital Treatment Event
Redemption or Investment Company Event Redemption."
Under current United States Federal income tax law, a distribution of
Subordinated Debentures upon the dissolution of IUB Trust would not be a taxable
event to the holders of the Preferred Securities. If, however, IUB Trust were to
be recharacterized as an association taxable as a corporation at the time of the
dissolution of IUB Trust, the distribution of the Subordinated Debentures would
likely constitute a taxable event to IUB Trust and the holders of the Preferred
Securities. Moreover, a dissolution of IUB Trust in which holders of the
Preferred Securities receive cash will be a taxable event to such holders. See
"Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures or
Cash Upon Liquidation of IUB Trust."
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities upon a dissolution or liquidation of IUB Trust. The
Preferred Securities or the Subordinated Debentures, may trade at a discount to
the price that the investor paid to purchase the Preferred Securities offered
hereby. Because holders of Preferred Securities may receive Subordinated
Debentures, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Subordinated Debentures and should
carefully review all the information regarding the Subordinated Debentures
contained herein.
If the Subordinated Debentures are distributed to the holders of the
Preferred Securities upon the liquidation of IUB Trust, the Company will use its
best efforts to list the Subordinated Debentures on the Nasdaq National Market
or such stock exchanges, if any, on which the Preferred Securities are then
listed.
TRADING PRICE; ABSENCE OF PRIOR PUBLIC MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities may trade at prices that do not fully reflect the
value of accrued but unpaid interest with respect to the underlying Subordinated
Debentures. A holder of Preferred Securities that disposes of its Preferred
Securities between record dates for payments of Distributions (and consequently
does not receive a Distribution from IUB Trust for the period prior to such
disposition) will nevertheless be required to include accrued but unpaid
interest on the Subordinated Debentures through the date of disposition in
income as ordinary income and to add such amount to its adjusted tax basis in
its pro rata share of the underlying Subordinated Debentures deemed disposed of.
Such holder will recognize a capital loss to the extent the selling price (which
may not fully reflect the value of accrued but unpaid interest) is less than its
adjusted tax basis (which will include all accrued but unpaid interest). Subject
to certain limited exceptions, capital losses cannot be applied to offset
ordinary income for United States Federal income tax purposes. See "Certain
Federal Income Tax Consequences--Disposition of Preferred Securities."
18
<PAGE>
There is no current public market for the Preferred Securities. Although the
Preferred Securities have been approved for quotation on the Nasdaq National
Market, there can be no assurance that an active public market will develop for
the Preferred Securities or that, if such market develops, the market price will
equal or exceed the public offering price set forth on the cover page of this
Prospectus. The public offering price for the Preferred Securities has been
determined through negotiations between the Company and the Underwriter (as
defined herein). Prices for the Preferred Securities will be determined in the
marketplace and may be influenced by many factors, including prevailing interest
rates, the liquidity of the market for the Preferred Securities, investor
perceptions of the Company and general industry and economic conditions.
PREFERRED SECURITIES ARE NOT INSURED
The Preferred Securities are not insured by the Bank Insurance Fund (the
"BIF") or the Savings Association Insurance Fund (the "SAIF") of the Federal
Deposit Insurance Corporation (the "FDIC") or by any other governmental agency.
RISK FACTORS RELATING TO THE COMPANY
NO ASSURANCE OF PTC MERGER
The PTC Merger is subject to various conditions, including requisite
shareholder and regulatory approvals. Accordingly, no assurance can be given
that the PTC Merger will be consummated. If the PTC Merger is not consummated,
the anticipated significant increase in the Company's capital base due to the
PTC Merger will not be realized. Consequently, due to regulatory capital
requirements, the Company's ability to utilize a portion of the offering
proceeds for future acquisitions and other growth would be adversely affected if
the PTC Merger is not consummated.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF PTC
Based on September 30, 1997 financial information, the PTC Merger would
increase the assets of the Company by approximately 89% to $645 million. See
"Business of the Company--Recent Developments." The Company's ability to
integrate the business and operations of PTC into its operations following the
PTC Merger without adversely affecting the level of profitability of the Company
cannot be assured.
STATUS OF THE COMPANY AS A BANK HOLDING COMPANY
The Company is a legal entity separate and distinct from the Banks, although
the principal source of the Company's cash revenues is dividends from the Banks.
The ability of the Company to pay the interest on, and principal of, the
Subordinated Debentures will be significantly dependent on the ability of the
Banks to pay dividends to the Company and the ability of the Company to realize
a return on its investments in amounts sufficient to service the Company's debt
obligations. Payment of dividends by the Banks is restricted by various legal
and regulatory limitations.
The right of the Company to participate in the assets of any subsidiary upon
the latter's liquidation, reorganization or otherwise (and thus the ability of
the holders of Preferred Securities to benefit indirectly from any such
distribution) will be subject to the claims of the subsidiaries' creditors,
which will take priority except to the extent that the Company may itself be a
creditor with a recognized claim. As of September 30, 1997, the Company had
indebtedness of $4.6 million at the Company level and, through its subsidiaries,
indebtedness and other liabilities of approximately $307.3 million.
The Banks are also subject to restrictions under Federal law that limit the
transfer of funds by them to the Company, whether in the form of loans,
extensions of credit, investments, asset purchases or otherwise. Such transfers
by the Banks to the Company or any nonbank subsidiary of the Company are limited
in amount to 10% of such Bank's capital and surplus and, with respect to the
Company and all its nonbank
19
<PAGE>
subsidiaries, to an aggregate of 20% of such Bank's capital and surplus.
Furthermore, such loans and extensions of credit are required to be secured in
specified amounts. Federal law also prohibits the Banks from purchasing
"low-quality" assets from affiliates.
GROWTH STRATEGY
The Company intends to pursue a growth strategy that includes acquisitions
of commercial banks in non-urban areas. There are risks associated with the
Company's acquisition strategy that could adversely affect net income. These
risks include, among others, inaccurately assessing the asset quality of a
particular institution or branch being acquired, encountering greater than
anticipated costs of incorporating acquired businesses or branches into the
Company, and being unable to deploy profitably funds acquired in an acquisition.
There can be no assurances that the Company will be successful in implementing,
or will have the necessary regulatory capital or acquisition opportunities to
implement, its growth strategy. Moreover, the Company anticipates that it will
be in substantial competition with other financial institutions for potential
acquisition candidates and branches.
ADEQUACY OF ALLOWANCE FOR LOAN LOSSES
The risk of loan losses varies with, among other things, general economic
conditions, the type of loan being made, the creditworthiness of the borrower
over the term of the loan and, in the case of a collateralized loan, the value
of the collateral for the loan. Management maintains an allowance for loan
losses based upon, among other things, historical experience, an evaluation of
economic conditions and regular review of delinquencies and loan portfolio
quality. Based upon such factors, management makes various assumptions and
judgments about the ultimate collectibility of the loan portfolio and provides
an allowance for loan losses based upon a percentage of the aggregate balance of
outstanding loans and specific loans for which ultimate collectibility is
considered questionable. If management's assumptions and judgments prove to be
incorrect and the allowance for loan losses is inadequate to absorb future
credit losses, or if the bank regulatory authorities require any Bank to
increase the allowance for loan losses, such Bank's earnings (and consequently
the Company's earnings) could be significantly and adversely affected. Because
certain lending activities involve greater risks, the percentage applied to
specific loan types may vary.
The Company actively manages its nonperforming loans in an effort to
minimize credit losses and monitors its asset quality to maintain an adequate
allowance for loan losses. Although management believes that its allowance for
loan allowances is adequate, there can be no assurance that the allowance will
prove sufficient to cover future credit losses. Further, although management
uses the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ substantially from the assumptions used or if adverse
developments arise with respect to the Company's nonperforming or performing
loans. Material additions to the Company's allowance for loan losses would
result in a decrease in the Company's net income, possibly its capital, and
could result in the inability to pay dividends, among other adverse
consequences.
EFFECT OF INTEREST RATE FLUCTUATIONS AND ECONOMIC CONDITIONS
The Company's consolidated results of operations depend to a large extent on
the level of its net interest income, which is the difference between interest
income from interest-earning assets (such as loans and investments) and interest
expense on interest-bearing liabilities (such as deposits and borrowings). If
interest-rate fluctuations cause its cost of funds to increase faster than the
yield on its interest-earning assets, net interest income will be reduced. The
Company measures its interest-rate risks monthly using static gap analyses. The
differences between an institution's interest-rate sensitive assets and its
interest-rate sensitive liabilities at a point in time is its gap position. A
negative gap indicates that cumulative interest-rate sensitive liabilities
exceed cumulative interest-rate sensitive assets for that period. A positive gap
indicates that cumulative interest-rate assets exceed interest-rate sensitive
liabilities for that period.
20
<PAGE>
Fluctuations in interest rates are not predictable or controllable. The
Company endeavors to structure its asset and liability management strategies to
mitigate the impact on net interest income of changes in market interest rates.
However, there can be no assurance that the Company will be able to manage
interest rate risk so as to avoid significant adverse effects in net interest
income. At September 30, 1997, the Company had a one year cumulative negative
gap of 8.9%. This negative one year gap position may have a negative impact on
earnings in an increasing interest rate environment. While the Company uses
various monitors of interest-rate risk, it is unable to predict future
fluctuations in interest rates or the specific impact thereof.
COMPETITION
Banking institutions operate in a highly competitive environment. The
Company and the Banks compete with other bank or thrift holding companies,
commercial banks, credit unions, savings institutions, finance companies,
mortgage companies, mutual funds, and other financial institutions, many of
which have substantially greater financial resources than the Company. Certain
of these competitors offer products and services that are not offered by the
Company and certain competitors are not subject to the same extensive laws and
regulations as the Company. Federal and state legislation and/or regulations
also affect the Company's competitiveness in the financial services business. It
is impossible to predict the competitive impact on the Company of certain
Federal and state legislation and/or regulations relating to the banking
industry and interstate banking.
ECONOMIC CONDITIONS AND MONETARY POLICY
The operating results of the Company will depend to a great extent upon the
rate differentials that result from the difference between the income it
receives from its loans, securities and other interest-earning assets and the
interest expense it pays on its deposits and other interest-bearing liabilities.
These rate differentials are highly sensitive to many factors beyond the control
of the Company, including general economic conditions and the policies of
various governmental and regulatory authorities, in particular the Federal
Reserve.
Like other depository institutions, the Company is affected by the monetary
policies implemented by the Federal Reserve. A primary instrument of monetary
policy employed by the Federal Reserve is the restriction of the expansion of
the money supply through open market operations, including the purchase and sale
of government securities and the adjustment of reserve requirements. These
actions may at times result in significant fluctuations in interest rates, which
could have adverse effects on the operations of the Company. In particular, the
Company's ability to make loans and attract deposits, as well as public demand
for loans, could be adversely affected.
LOCAL ECONOMIC CONDITIONS
The success of the Company is dependent to a certain extent upon the general
economic conditions in the geographic markets served by the Banks. Although the
Company expects that economic conditions will be favorable in these markets, no
assurance can be given that favorable economic conditions will prevail. Adverse
changes in economic conditions in the geographic markets that the Banks serve
could result in lower lending activity, impair the Bank's ability to collect
existing loans, or otherwise have a negative effect on the operating results and
financial condition of the Company.
GOVERNMENT REGULATION
The Company and the Banks each are subject to extensive state and Federal
governmental supervision, regulation and control. Future legislation and
government policy could adversely affect the banking industry and the operations
of the Company and the Bank. See "Business of the Company -- Regulation and
Supervision of the Company," "-- Regulation and Supervision of the Subsidiary
Banks" and "--Legislation."
21
<PAGE>
USE OF PROCEEDS
IUB Trust will use the gross proceeds received from the sale of the
Preferred Securities to purchase Subordinated Debentures from the Company. The
Company will receive approximately $18.3 million ($21.2 million if the
Underwriter's over-allotment option is exercised in full) from the sale of the
Subordinated Debentures to IUB Trust. Approximately $9.8 million, or 50% of the
aggregate amount of the Preferred Securities offered hereby, is expected to
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 the Preferred
Securities cannot constitute more than 25% of the total Tier 1 capital of the
Company (the "25% Capital Limitation"). Consequently the amount of Preferred
Securities in excess of the 25% Capital Limitation (approximately $9.7 million
or 50% of the aggregate amount of the Preferred Securities) will constitute Tier
2 capital, or supplementary capital, of the Company. Subsequent to the PTC
Merger, approximately $17.1 million, or 88% of the aggregate amount of the
Preferred Securities, are expected to qualify as Tier 1 capital and $2.4
million, or 12% of the aggregate amount of the Preferred Securities, will
constitute Tier 2 capital. The net proceeds to be received by the Company from
the sale of the Subordinated Debentures will be used for financing growth, which
may include branch acquisitions, the establishment of de novo branches and/or
acquisitions of other financial institutions. Other than the PTC Merger, the
Company does not have any specific plans, arrangements, agreements or
understandings with any other person for any acquisitions at the current time.
In addition, a portion of the proceeds may be used for general corporate
purposes, including investments in or advances to Union Bank and/or Regional
Bank and/or, following the completion of the PTC Merger, People's Trust. Pending
any such use, the net proceeds may be invested in short-to-medium-term
obligations. The precise amounts and timing of the application of proceeds will
depend upon the funding requirements of the Company and its subsidiaries and the
availability of other funds.
MARKET FOR THE PREFERRED SECURITIES
The Preferred Securities have been approved for quotation on the Nasdaq
National Market under the symbol "IUBCP." Although the Underwriter has informed
the Company that it presently intends to make a market in the Preferred
Securities, there can be no assurance that an active and liquid trading market
will develop or, if developed, that such a market will continue. The offering
price and distribution rate have been determined by negotiations among
representatives of the Company and the Underwriter, and the offering price of
the Preferred Securities may not be indicative of the market price following the
offering. See "Underwriting."
ACCOUNTING TREATMENT
IUB Trust will be treated, for financial reporting purposes, as a subsidiary
of the Company and, accordingly, the accounts of IUB Trust will be included in
the consolidated financial statements of the Company. The Preferred Securities
will be presented as a separate category of long-term debt in the consolidated
balance sheet of the Company under the caption "Guaranteed preferred beneficial
interests in the Company's Subordinated Debentures," and appropriate disclosures
about the Preferred Securities, the Guarantee and the Subordinated Debentures
will be included in the notes to consolidated financial statements. The Company
will record Distributions payable on the Preferred Securities as interest
expense in its consolidated statements of income for financial reporting
purposes.
All future reports of the Company filed under the Exchange Act while the
Preferred Securities are outstanding will (a) present the Trust Securities
issued by IUB Trust on the balance sheet as a separate category of long-term
debt item entitled "Guaranteed preferred beneficial interests in the Company's
Subordinated Debentures," (b) include in a footnote to the financial statements
disclosure that the sole assets of IUB Trust are the Subordinated Debentures
(including the outstanding principal amount, interest rate and maturity date of
such Subordinated Debentures), and (c) include in a footnote to the financial
statements disclosure that the Company owns all of the Common Securities of IUB
Trust, the sole assets of IUB Trust are the Subordinated Debentures, and the
back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by the Company of the obligations of IUB Trust under the Preferred
Securities.
22
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited historical consolidated
capitalization of the Company as of September 30, 1997, the unaudited pro forma
consolidated capitalization of the Company as of September 30, 1997, as if the
PTC Merger had taken place as of that date, and such historical consolidated and
pro forma capitalization as adjusted in each case to give effect to the
consummation of the Offering (assuming the Underwriter's over-allotment option
is not exercised). The following data should be read in conjunction with the
financial information included in this Prospectus or incorporated herein by
reference. See "Company Selected Financial Data," "PTC Selected Financial Data,"
"Pro Forma Selected Financial Data," "Incorporation of Certain Documents by
Reference" and "Index to Consolidated Financial Statements and Pro Forma
Consolidated Financial Statements."
<TABLE>
<CAPTION>
PRO FORMA CONSOLIDATED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997
---------------------- ----------------------
ACTUAL AS ADJUSTED ACTUAL AS ADJUSTED
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
LONG-TERM DEBT:
Notes payable.................................................. $ 4,625 $ 4,625 $ 4,875 $ 4,875
Guaranteed preferred beneficial interests in the Company's
Subordinated Debentures(1)................................... 19,500 19,500
--------- ----------- --------- -----------
Total long-term debt....................................... 4,625 24,125 4,875 24,375
--------- ----------- --------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock, 400,000 shares authorized, none issued and
outstanding
Common stock, $1.00 par value, 3,000,000 shares authorized,
1,250,897 shares issued, actual; 2,387,314 issued, pro forma
combined..................................................... 1,251 1,251 2,387 2,387
Paid-in capital................................................ 10,677 10,677 21,006 21,006
Retained earnings.............................................. 17,669 17,669 29,778 29,778
Net unrealized gains on investment securities available for
sale......................................................... 487 487 653 653
--------- ----------- --------- -----------
Total shareholders' equity................................. 30,084 30,084 53,824 53,824
--------- ----------- --------- -----------
Total capitalization....................................... $ 34,709 $ 54,209 $ 58,699 $ 78,199
--------- ----------- --------- -----------
--------- ----------- --------- -----------
CAPITAL RATIOS:
Shareholders' equity to total assets........................... 8.80% 8.33% 8.35% 8.10%
Leverage ratio(2)(3)........................................... 8.58 11.41 7.96 10.60
Risk-based capital ratios(3)(4)................................
Tier 1 capital to risk-weighted assets....................... 13.46 16.48 12.15 12.63
Total risk-based capital to risk-weighted assets............. 14.68 23.57 13.24 17.85
</TABLE>
- ------------------------------
(1) In connection with the issuance of the preferred beneficial interest in the
Company's Subordinated Debentures, the Company estimates it will incur
expenses of $1,155,000 (including Underwriter's compensation of $780,000).
The Subordinated Debentures will mature on December 31, 2027, which date may
be, if certain conditions are met, (a) shortened to a date not earlier than
December 31, 2002, or (b) extended to a date not later than December 31,
2036.
(2) The leverage ratio is Tier 1 capital divided by adjusted total assets after
deducting intangible assets.
(3) The capital ratios, as adjusted, are computed including the total estimated
proceeds from the sale of the Preferred Securities, in a manner consistent
with Federal Reserve guidelines.
(4) Federal Reserve guidelines for calculation of Tier 1 capital to
risk-weighted assets limit the amount of cumulative preferred stock which
can be included in Tier 1 capital to 25% of total Tier 1 capital.
Approximately $9.8 million (or $17.1 million following the PTC Merger) of
the aggregate amount of the Preferred Securities offered hereby will be
included as Tier 1 capital for the Company.
23
<PAGE>
COMPANY SELECTED FINANCIAL DATA
The following table sets forth on a consolidated basis certain selected
financial data of the Company and is based on the consolidated financial
statements of the Company, including the notes thereto, included elsewhere in
this Prospectus, and should be read in conjunction therewith. See "Index to
Consolidated Financial Statements and Pro Forma Consolidated Financial
Statements." Interim unaudited data for the nine months ended September 30, 1997
and 1996 reflect, in the opinion of management of the Company, all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of such data. Results for the nine months ended September 30, 1997
are not necessarily indicative of results that may be expected for any other
interim period or for the entire year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SELECTED RESULTS OF OPERATIONS:
Interest income....................................... $ 19,398 $ 17,692 $ 23,967 $ 22,835 $ 22,202 $ 24,226
Interest expense...................................... 9,639 8,868 12,006 11,852 10,901 12,345
---------- ---------- ---------- ---------- ---------- ----------
Net interest income................................... 9,759 8,824 11,961 10,983 11,301 11,881
Provision for loan losses............................. 183 90 150 30 115 357
---------- ---------- ---------- ---------- ---------- ----------
Net interest income after provision for loan losses... 9,576 8,734 11,811 10,953 11,186 11,524
Non-interest income................................... 1,370 1,093 1,502 1,456 2,588 1,628
Non-interest expense.................................. 6,201 6,608 8,619 8,229 9,040 9,243
---------- ---------- ---------- ---------- ---------- ----------
Income before income tax expense and cumulative effect
of change in accounting method...................... 4,745 3,219 4,694 4,180 4,734 3,909
Income tax expense.................................... 1,877 1,420 2,001 1,651 1,864 1,437
---------- ---------- ---------- ---------- ---------- ----------
Income before cumulative effect of change in
accounting method................................... 2,868 1,799 2,693 2,529 2,870 2,472
Cumulative effect of change in accounting method...... -- -- -- -- -- 450
---------- ---------- ---------- ---------- ---------- ----------
Net income............................................ $ 2,868 $ 1,799 $ 2,693 $ 2,529 $ 2,870 $ 2,922
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
PER SHARE DATA:(1)
Earnings per common share............................. $ 2.29 $ 1.40 $ 2.11 $ 1.91 $ 2.17 $ 2.19
Cash dividends declared............................... 0.74 0.61 0.83 0.69 0.60 0.51
Book value............................................ 24.05 21.38 22.18 20.98 17.49 17.99
Dividend payout ratio(2).............................. 32.28% 42.42% 39.29% 36.12% 25.15% 21.16%
SELECTED BALANCE SHEET DATA:(3)
Assets................................................ $ 342,051 $ 321,397 $ 328,346 $ 313,067 $ 306,047 $ 355,992
Securities............................................ 71,422 85,042 81,187 80,651 91,954 125,081
Loans................................................. 244,237 215,028 219,483 201,355 194,736 205,508
Allowance for loan losses............................. 2,670 2,823 2,506 2,754 2,784 2,682
Deposits.............................................. 285,760 271,031 276,402 262,346 261,371 310,063
Long-term debt........................................ 4,625 5,500 5,000 6,000 7,500 9,375
Preferred stock....................................... -- -- -- 2,000 2,400 2,700
Total shareholders' equity............................ 30,084 26,738 27,749 28,245 24,282 25,203
PERFORMANCE RATIOS:(4)
Return on average equity.............................. 13.39% 8.82% 9.89% 9.73% 12.18% 12.61%
Return on average assets.............................. 1.14 0.77 0.85 0.82 0.86 0.81
Net interest margin (fully taxable equivalent)........ 4.13 3.98 4.00 3.77 3.57 3.52
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(3)................. 1.09% 1.31% 1.14% 1.37% 1.43% 1.31%
Non-performing loans to total loans(3)................ 0.09 0.68 0.57 0.80 0.59 0.60
Net loan losses to average loans...................... 0.01 0.01 0.19 0.03 0.01 0.18
CAPITAL RATIOS:
Average equity to average assets...................... 8.55% 8.82% 8.69% 8.70% 7.39% 6.83%
Tier 1 risk-based capital ratio(3).................... 13.46 13.94 13.81 15.32 15.86 12.87
Total risk-based capital ratio(3)..................... 14.68 15.18 15.05 16.57 17.11 14.12
Leverage ratio........................................ 8.58 8.29 8.31 8.84 8.69 7.01
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS:(5)
Including interest on deposits........................ 1.49x 1.36x 1.39x 1.35x 1.42x 1.31x
Excluding interest on deposits........................ 6.88 4.45 4.82 3.36 4.45 4.14
<CAPTION>
1992
----------
<S> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income....................................... $ 28,029
Interest expense...................................... 15,545
----------
Net interest income................................... 12,484
Provision for loan losses............................. 686
----------
Net interest income after provision for loan losses... 11,798
Non-interest income................................... 1,572
Non-interest expense.................................. 8,834
----------
Income before income tax expense and cumulative effect
of change in accounting method...................... 4,536
Income tax expense.................................... 1,674
----------
Income before cumulative effect of change in
accounting method................................... 2,862
Cumulative effect of change in accounting method...... --
----------
Net income............................................ $ 2,862
----------
----------
PER SHARE DATA:(1)
Earnings per common share............................. $ 2.14
Cash dividends declared............................... 0.42
Book value............................................ 16.27
Dividend payout ratio(2).............................. 17.89%
SELECTED BALANCE SHEET DATA:(3)
Assets................................................ $ 368,924
Securities............................................ 131,372
Loans................................................. 204,000
Allowance for loan losses............................. 2,686
Deposits.............................................. 323,777
Long-term debt........................................ 10,645
Preferred stock....................................... 3,000
Total shareholders' equity............................ 23,347
PERFORMANCE RATIOS:(4)
Return on average equity.............................. 13.88%
Return on average assets.............................. 0.79
Net interest margin (fully taxable equivalent)........ 3.66
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(3)................. 1.32%
Non-performing loans to total loans(3)................ 1.38
Net loan losses to average loans...................... 0.49
CAPITAL RATIOS:
Average equity to average assets...................... 6.11%
Tier 1 risk-based capital ratio(3).................... 12.09
Total risk-based capital ratio(3)..................... 13.34
Leverage ratio........................................ 6.25
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS:(5)
Including interest on deposits........................ 1.29x
Excluding interest on deposits........................ 4.34
</TABLE>
- ------------------------
(1) Per share data has been restated to give retroactive effect to a 10% stock
dividend in 1994.
(2) For all periods except for the nine months ended September 30, 1997, common
stock cash dividends as a percentage of net income adjusted for preferred
stock dividends. All preferred stock of the Company was redeemed in late
1996.
(3) At period end.
(4) Performance ratios for the nine-month periods are annualized.
(5) Earnings consist of income before income tax expense plus interest expense.
Fixed charges consist of interest expense. The portion of rent expense
deemed to be interest has been excluded since it is not material in any of
the periods presented. Preferred stock dividends represent the pretax
earnings required to cover preferred stock dividends.
24
<PAGE>
PTC SELECTED FINANCIAL DATA
The following table sets forth on a consolidated basis certain selected
financial data of PTC and is based on the consolidated financial statements of
PTC, including the notes thereto, included elsewhere in this Prospectus, and
should be read in conjunction therewith. See "Index to Consolidated Financial
Statements and Pro Forma Consolidated Financial Statements." Interim unaudited
data for the nine months ended September 30, 1997 and 1996 reflect, in the
opinion of management of PTC, all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such data. Results
for the nine months ended September 30, 1997 are not necessarily indicative of
results that may be expected for any other interim period or for the entire
year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income.......................... $ 17,234 $ 15,804 $ 21,319 $ 19,420 $ 15,938 $ 13,750 $ 12,461
Interest expense......................... 8,679 8,121 10,897 9,835 7,255 6,216 6,104
--------- --------- --------- --------- --------- --------- ---------
Net interest income...................... 8,555 7,683 10,422 9,585 8,683 7,534 6,357
Provision for loan losses................ 610 616 828 740 450 560 505
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for
loan losses............................ 7,945 7,067 9,594 8,845 8,233 6,974 5,852
Non-interest income...................... 1,860 1,762 2,349 1,902 1,876 1,847 1,230
Non-interest expense..................... 5,918 5,272 7,103 6,639 6,629 5,627 4,521
--------- --------- --------- --------- --------- --------- ---------
Income before income tax expense and
cumulative effect of change in
accounting method...................... 3,887 3,557 4,840 4,107 3,480 3,194 2,561
Income tax expense....................... 1,185 1,166 1,564 1,200 1,079 1,025 793
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of change
in accounting method................... 2,702 2,391 3,276 2,907 2,401 2,169 1,768
Cumulative effect of change in accounting
method................................. -- -- -- -- -- 186 --
--------- --------- --------- --------- --------- --------- ---------
Net income............................... $ 2,702 $ 2,391 $ 3,276 $ 2,907 $ 2,401 $ 2,355 $ 1,768
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PER SHARE DATA:(1)
Earnings per common share................ $ 2.64 $ 2.31 $ 3.17 $ 2.86 $ 2.51 $ 2.57 $ 1.93
Cash dividends declared.................. 0.60 0.48 0.66 0.53 0.41 0.35 0.32
Book value............................... 23.13 20.22 21.14 18.91 15.52 14.37 12.08
Dividend payout ratio.................... 22.58 20.49 20.72% 18.66% 16.33% 13.71% 16.83%
SELECTED BALANCE SHEET DATA:(2)
Assets................................... $ 302,734 $ 272,776 $ 296,576 $ 264,712 $ 241,577 $ 198,669 $ 191,486
Securities............................... 53,893 65,092 63,594 57,927 55,925 44,152 39,005
Loans.................................... 220,653 188,770 196,963 173,179 159,096 134,778 119,330
Allowance for loan losses................ 1,969 2,155 2,000 1,722 1,601 1,359 1,026
Deposits................................. 275,679 248,642 271,127 241,734 222,299 181,437 175,905
Long-term debt........................... 250 608 500 1,000 1,408 2,200 2,200
Total shareholders' equity............... 23,740 20,753 21,653 19,218 15,767 13,155 11,058
PERFORMANCE RATIOS:(3)
Return on average equity................. 15.97% 15.84% 16.05% 16.48% 16.78% 19.53% 17.27%
Return on average assets................. 1.23 1.19 1.21 1.18 1.07 1.27 1.20
Net interest margin (fully taxable
equivalent)............................ 4.46 4.38 4.39 4.37 4.37 4.58 4.88
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(2).... 0.89% 1.14% 1.02% 0.99% 1.01% 1.00% 0.86%
Non-performing loans to total loans(2)... 1.09 1.25 0.93 0.84 0.19 0.50 0.58
Net loan losses to average loans......... 0.41 0.13 0.30 0.36 0.14 0.19 0.31
CAPITAL RATIOS:
Average equity to average assets......... 7.71% 7.54% 7.55% 7.14% 6.37% 6.51% 6.97%
Tier 1 risk-based capital ratio(2)....... 10.73 10.78 10.54 10.19 (4) 9.76 (4)
Total risk-based capital ratio(2)........ 11.70 12.00 11.60 11.21 (4) 10.90 (4)
Leverage ratio........................... 7.26 7.05 6.73 6.55 (4) 5.87 (4)
</TABLE>
- ------------------------------
(1) Per share data has been restated to give retroactive effect for stock
dividends and splits.
(2) At period end.
(3) Performance ratios for the nine-month periods are annualized.
(4) Information not readily available.
25
<PAGE>
PRO FORMA SELECTED FINANCIAL DATA
The following table sets forth certain unaudited pro forma condensed
combined financial data for the Company giving effect to the PTC Merger, which
will be accounted for as a pooling of interests, as if it had occurred as of the
beginning of the periods indicated herein, after giving effect to the pro forma
adjustments described in the notes to the Company and PTC Unaudited Pro Forma
Consolidated Financial Statements. This information should be read in
conjunction with the historical consolidated financial statements of the Company
and PTC, including the respective notes thereto, which are included elsewhere in
this Prospectus, and in conjunction with the consolidated historical financial
data for the Company and PTC and the other pro forma financial information,
including the notes thereto, appearing elsewhere in this Prospectus. See "Index
to Consolidated Financial Statements and Pro Forma Consolidated Financial
Statements," "Company Selected Financial Data" and "PTC Selected Financial
Data." The unaudited pro forma condensed combined financial data are not
necessarily indicative of the results that actually would have occurred had the
PTC Merger occurred as of the beginning of the periods indicated herein, or that
may be obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31, 1996
------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
PRO PRO
COMPANY PTC FORMA(1) COMPANY PTC FORMA(1)
--------- --------- --------- --------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED RESULTS OF OPERATIONS:
Interest income.................................. $ 19,398 $ 17,234 $ 36,632 $ 23,967 $ 21,319 $ 45,286
Interest expense................................. 9,639 8,679 18,318 12,006 10,897 22,903
--------- --------- --------- --------- --------- -----------
Net interest income.............................. 9,759 8,555 18,314 11,961 10,422 22,383
Provision for loan losses........................ 183 610 793 150 828 978
--------- --------- --------- --------- --------- -----------
Net interest income after provision for loan
losses......................................... 9,576 7,945 17,521 11,811 9,594 21,405
Non-interest income.............................. 1,370 1,860 3,230 1,502 2,349 3,851
Non-interest expense............................. 6,201 5,918 12,119 8,619 7,104 15,723
--------- --------- --------- --------- --------- -----------
Income before income tax expense................. 4,745 3,887 8,632 4,694 4,839 9,533
Income tax expense............................... 1,877 1,185 3,062 2,001 1,563 3,564
--------- --------- --------- --------- --------- -----------
Net income....................................... $ 2,868 $ 2,702 $ 5,570 $ 2,693 $ 3,276 $ 5,969
--------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- -----------
PER SHARE DATA:(2)
Earnings per common share........................ $ 2.29 $ 2.64 $ 2.33 $ 2.11 $ 3.17 $ 2.49
Cash dividends declared.......................... 0.74 0.60 0.74 0.83 0.66 0.83
Book value....................................... 24.05 23.13 22.55 22.18 21.14 20.77
Dividend payout ratio(3)......................... 32.28% 22.58% 31.72% 39.29% 20.72% 33.35%
SELECTED BALANCE SHEET DATA:(4)
Assets........................................... $ 342,051 $ 302,734 $ 644,785 $ 328,346 $ 296,576 $ 624,922
Securities....................................... 71,422 53,893 125,315 81,187 63,594 144,781
Loans............................................ 244,237 220,653 464,890 219,483 196,963 416,446
Allowance for loan losses........................ 2,670 1,969 4,639 2,506 2,000 4,506
Deposits......................................... 285,760 275,679 561,439 276,402 271,127 547,529
Long-term debt................................... 4,625 250 4,875 5,000 500 5,500
Shareholders' equity............................. 30,084 23,740 53,824 27,749 21,653 49,402
PERFORMANCE RATIOS:(5)
Return on average equity......................... 13.39% 15.97% 14.54% 9.89% 16.05% 12.56%
Return on average assets......................... 1.14 1.23 1.19 0.85 1.21 1.02
Net interest margin (fully taxable equivalent)... 4.13 4.46 4.30 4.00 4.39 4.18
ASSET QUALITY RATIOS:
Allowance for loan losses to loans(4)............ 1.09% 0.89% 1.00% 1.14% 1.02% 1.08%
Non-performing loans to total loans(4)........... 0.09 1.09 0.39 0.57 0.93 0.72
Net loan losses to average loans................. 0.01 0.41 0.15 0.19 0.30 0.24
CAPITAL RATIOS:
Average equity to average assets................. 8.55% 7.71% 8.16% 8.69% 7.55% 8.17%
Tier 1 risk-based capital ratio(4)............... 13.46 10.73 12.15 13.81 10.54 12.22
Total risk-based capital ratio(4)................ 14.68 11.70 13.24 15.05 11.60 13.38
Leverage ratio................................... 8.58 7.26 7.96 8.31 6.73 7.57
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS:(6)
Including interest on deposits................... 1.49x 1.45x 1.47x 1.39x 1.44x 1.41x
Excluding interest on deposits................... 6.88 150.50 11.36 4.82 81.65 8.39
</TABLE>
- ------------------------------
(1) Pro forma income statement data assumes the acquisition of PTC occurred on
January 1, 1996. Pro forma balance sheet data assumes the acquisition of PTC
occurred at the end of the period presented.
(2) Per share data has been restated to give retroactive effect to PTC's 10%
stock dividend in 1996.
(3) For the year ended December 31, 1996, common stock cash dividends as a
percentage of net income adjusted for preferred stock dividends. All
preferred stock of the Company was redeemed in late 1996.
(4) At period end.
(5) Performance ratios for the nine-month period are annualized.
(6) Earnings consist of income before income tax expense plus interest expense.
Fixed charges consist of interest expense. The portion of rent expense
deemed to be interest has been excluded since it is not material in any of
the periods presented. Preferred stock dividends represent the pretax
earnings required to cover preferred stock dividends.
26
<PAGE>
COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS SECTION CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY OR PTC TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
RESULTS OF OPERATIONS
Earnings for the third quarter of 1997 increased 185% to $906,000 compared
to the same quarter of 1996. Earnings for the first nine months of 1997
increased 59% to $2,868,000 compared to the same period in 1996.
Legislation enacted on September 30, 1996 together with companion
legislation enacted earlier in the quarter resulted in a $474,000 reduction in
1996 net income for the three-month and nine-month periods ended September 30,
1996. The legislation required a special assessment on thrift institutions,
based on March 1995 deposit levels, in order to recapitalize the SAIF, resulting
in a pre-tax charge of $545,000. Additionally, a tax advantage available to
thrift institutions in the calculation of allowable tax bad debt reserves was
eliminated, granting forgiveness of any tax liability prior to 1987, but
resulting in an income tax expense of $145,000 on the bad debt reserve recapture
since January 1, 1987.
Before the nonrecurring charges, net income for the first nine months of
1996 would have been $2,273,000 and earnings for the third quarter would have
been $792,000. Compared with adjusted 1996 income, earnings for the third
quarter of 1997 increased 14% and year-to-date earnings increased 26%.
Non-interest income in 1997 reflects approximately $179,000 of nonrecurring
income from the sale of other real estate owned. Insurance commissions in 1997
declined due mainly to lower levels of profit sharing income based on claims
experience. Trust income and service charge income for 1997 increased over the
prior year period. Non-interest expense reflects increased salaries and employee
benefits and reduced FDIC assessments (excluding the special 1996 assessment)
due to a lower insurance assessment rate.
Net income per common share for the third quarter equaled $0.72 in 1997,
compared to $0.25 in 1996. Per share earnings for the first nine months of 1997
and 1996 were $2.29 and $1.40 respectively. Net income for 1996 was reduced by
$0.38 per common share due to the nonrecurring charges for the special SAIF
assessment and expense related to the tax law change. Excluding the nonrecurring
charges, net income per common share for the third quarter of 1996 would have
equaled $0.63 and nine-month net income per common share would have equaled
$1.78.
The Company's return on average total assets for the third quarter was 1.06%
in 1997, and 0.40% in 1996. Year-to-date return on average total assets was
1.14% and 0.77% for 1997 and 1996. Before the nonrecurring charges, return on
average assets in 1996 would have been 0.99% for the third quarter and 0.97%
year-to-date.
Return on average common shareholders' equity for the third quarter was
12.17% in 1997 and 4.66% in 1996. Year-to-date return on average shareholders'
equity was 13.39% and 8.82% for 1997 and 1996, respectively. Without the
nonrecurring charges, return on average common shareholders' equity in 1996
would have been 11.69% for the third quarter and 11.21% year-to-date.
NET INTEREST INCOME
The volume and yield of earning assets and the cost of interest-bearing
liabilities influence net interest income. 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
27
<PAGE>
on interest-bearing liabilities. Third quarter net interest income of $3,312,000
in 1997 increased 10% from $3,002,000 in 1996. The first nine months of net
interest income increased by $935,000 or 11% over the same period in 1996.
Throughout 1996 and the current year, the Company has employed a
deposit-pricing strategy focused on retaining and attracting lower cost
short-to-medium term funds. Management correctly anticipated a relatively flat
rate environment throughout 1996 and thus far into 1997. The Company believes
this strategy greatly enhanced 1996 net interest income and has had a positive
effect on the first nine months of 1997 earnings, even though interest rates
have increased slightly since year-end 1996. In the first nine months of 1997,
the Company increased its net interest margin to 4.13% or 15 basis points over
the same period last year.
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
Non-interest income in the first nine months of 1997 exceeded the prior year
period by $277,000 or 25%. Nonrecurring non-interest income of $179,000 was
realized on the sale of real estate acquired in 1996 in lieu of foreclosure. Net
security losses of $80,000 were realized in the first nine months of 1997
compared to no gain or loss for the same period in 1996. Third quarter
non-interest income declined from the same period last year by $16,000 primarily
as a result of securities losses of $83,000 during the third quarter of 1997.
Service charges on deposit accounts represent the largest component of the
first nine months of 1997 recurring non-interest income, equaling 32% in 1997
and 35% in 1996. Service charges on deposit accounts in the first nine months of
1997 increased by $84,000, or 22%, primarily due to the strong growth in a new
interest-bearing checking account introduced in early 1996. Deposit growth,
interest rate variables and non-sufficient funds charges have also affected
service charge income in 1997. Management believes that throughout the remainder
of 1997 the Company will experience additional deposit growth, generating even
higher service charge income. Insurance commissions declined $27,000 in the
first nine months of 1997 compared to the same period last year. This decline
represents the loss of year-end profit sharing programs from primary carriers
due to poor claims experience and to a lower volume of business. Trust income
increased $19,000 over 1996 due to an increase in estate income and assets under
management. The level of estate assets administered may cause trust income to
fluctuate significantly from year to year.
NON-INTEREST INCOME
<TABLE>
<CAPTION>
1997 1996
---------------------- ----------------------
NINE NINE
3RD QTR MONTHS 3RD QTR MONTHS
----------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Insurance commissions.................................. $ 102 $ 316 $ 90 $ 343
Trust fees............................................. 56 169 50 150
Service charges on deposit accounts.................... 157 462 136 378
Loss on sales of securities............................ (83) (80) -- --
Other income........................................... 111 503 83 222
----- --------- ----- ---------
$ 343 $ 1,370 $ 359 $ 1,093
----- --------- ----- ---------
----- --------- ----- ---------
</TABLE>
28
<PAGE>
NON-INTEREST EXPENSE
The largest component of non-interest expense is personnel expense.
Personnel expenses increased in the first nine months of 1997 by $105,000, or
3%. Improvements in technology implemented in the past 21 months have enabled
the Company to effectively control staffing levels during the periods presented.
Normal staff salary adjustments and increased benefit costs have been incurred
in both 1997 and 1996. Both periods include amounts accrued in connection with
the employee performance incentive compensation plan. Personnel expenses for the
full year in 1997 are not expected to change materially from 1996.
The 1997 omnibus-spending package enacted on September 30, 1996 required the
thrift industry to recapitalize SAIF with a one-time assessment, based on March
31, 1995 deposits, and delayed a pro rata sharing of the Financing Corp.
("FICO") bond interest payments for three years. The one-time assessment imposed
on Regional Bank equaled approximately $545,000 and reduced 1996 third quarter
earnings.
Deposit insurance premiums (excluding the $545,000 special assessment in
1996) were $87,000 less in 1997 compared to the same prior year period due to an
overall lower rate on which the insurance premium was calculated. Since the bank
insurance fund reached a mandated funding level in 1995, the 1996 assessment
rate for the Company's commercial bank was reduced to the $2,000 per year
minimum level permissible increasing to 1.29 cents per $100 of deposits in 1997.
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 prior to September 30, 1996. Commencing in the year
2000, commercial banks and thrifts will pay the same assessment rate of 2.43
cents per $100 of deposits. Based on current deposit levels and projected
growth, Regional Bank will save approximately $540,000 in the three-year period
through 1999 due to the lower assessment rate.
NON-INTEREST EXPENSE
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
NINE NINE
3RD QTR MONTHS 3RD QTR MONTHS
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and employee benefits......................... $ 1,198 $ 3,483 $ 1,118 $ 3,378
Premises and equipment expenses........................ 390 1,168 365 1,124
Professional fees...................................... 55 161 54 163
Amortization of core deposit intangibles............... 7 23 9 27
Deposit insurance/supervisory assessment............... 35 104 63 191
FDIC special assessment................................ -- -- 545 545
Stationery, printing, supplies......................... 86 259 73 222
Insurance.............................................. 25 77 22 80
Postage................................................ 43 138 41 140
Other operating expenses............................... 258 788 272 738
--------- --------- --------- ---------
$ 2,097 $ 6,201 $ 2,562 $ 6,608
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
INCOME TAXES
In August 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996. Included within that tax legislation was the repeal of
certain bad debt provisions applicable to thrifts. The percent-of-taxable-income
method for computing additions to the thrift tax bad debt reserves for years
beginning after December 31, 1995 was eliminated. The bill also required that
thrift institutions recapture all or a portion of their tax bad debt reserves
added since December 31, 1987. Accordingly, the Company recorded a $145,000
income tax expense in the third quarter of 1996 related to the tax bad debt
reserve recapture for Regional Bank. The unrecaptured base year reserve at
December 31, 1987 will not be subject to recapture as long as the institution
continues to carry on the business of banking.
29
<PAGE>
The effective tax rate (excluding the aforementioned bad debt reserve
recapture) for the first nine months was approximately 40% for both 1997 and
1996. The Company and its subsidiaries will file consolidated income tax returns
for 1997.
FINANCIAL CONDITION
Total assets at September 30, 1997 increased $13,705,000 to $342,051,000
from $328,346,000 at December 31, 1996.
Total average loans for the first nine months of 1997 have increased
$27,210,000 or 13% and average instalment loans have increased $14,569,000 or
70% compared to the same period in 1996. Average loans represent approximately
69% of average assets in the first nine months of 1997 compared to 66% for the
same period in 1996. Management intends to continue to emphasize loan growth
throughout the remainder of 1997. Securities maturities and increased deposits
have been used to fund loan growth in 1997.
Average earning assets represented 95% of average total assets for the first
nine months of 1997 and 1996.
Average non-interest-bearing deposits for the first nine months of 1997
increased 7% compared to the same period in 1996. Average interest-bearing
deposits increased $19,721,000 or 8% for the 1997 period compared to 1996.
Average interest-bearing demand deposits increased $10,098,000 for the nine
months in 1997 compared to 1996, primarily due to the success of a new
interest-bearing checking account introduced early in 1996. Average savings
accounts have decreased slightly for the 1997 period compared to 1996. Average
money market investment accounts decreased $5,437,000 or 15% compared to the
prior year due to the shifting of funds to the new interest-bearing demand
deposit. Average certificates of deposit and other time deposits increased
approximately $15,501,000 for the nine months in 1997 compared to the prior year
period.
Long-term debt is primarily the balance of the Company's loan for the
purchase of Regional Bank. A principal payment of $375,000 was paid on June 30,
1997. During the third quarter of 1997, the Company negotiated the refinancing
of the balance of its outstanding debt of $4,625,000, which was originally due
December 31, 1997. The new note will mature on July 1, 2002 and requires a
principal payment of $125,000 on January 1, 1998 and $500,000 semiannual
payments thereafter on July 1 and January 1 until maturity. Interest will be
paid quarterly. The loan shall bear interest at a rate equal to the lender's
prime rate, less 25 basis points and at the Company's option, all or any portion
of the outstanding balance may bear interest at a fixed rate equal to 150 basis
points above LIBOR for one, two, three, six or twelve month interest periods.
The loan is secured by the capital stock of the Company's subsidiaries and the
loan agreement contains restrictions on debt, guarantees and mergers, in
addition to other affirmative and negative covenants. The Company believes it
has complied with all terms and covenants of the loan agreement.
Shareholders' equity was $30,084,000 on September 30, 1997 compared to
$27,749,000 at year-end 1996. Book value per common share increased to $24.05 or
8% from $22.18 at December 31, 1996. The unrealized gain on securities available
for sale, net of taxes, totaled $487,000 or $0.39 per share at September 30,
1997 compared to an unrealized gain of $95,000 or $0.07 at year end 1996.
Excluding the net unrealized gains on securities available for sale, book value
per share was $23.66 at September 30, 1997 or an increase of 7% over the
comparable book value at year end 1996. The Company redeemed $1,000,000 of its
preferred stock in March 1996, $500,000 in June 1996 and the remainder in
September 1996. Commencing October 1, 1996, all earnings accrue solely to the
common shareholders.
LOANS, CREDIT RISK AND THE ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Total loans increased $24,754,000 or 11% since December 31, 1996 primarily
reflecting the expansion of the consumer loan portfolio and management's
emphasis on indirect automobile financing, which began in late 1995 and has
continued to the present. Consumer loans increased to $42,340,000 or 54% since
December 31, 1996. The Company's emphasis on increasing consumer loans provides
greater diversification within the portfolio and generates higher yields than
residential real estate loans.
30
<PAGE>
Net chargeoffs were $19,000 at September 30, 1997 compared to net chargeoffs
of $21,000 at September 30, 1996. As a percentage of average loans, net
chargeoffs equaled 0.01% respectively for September 30, 1997 and 1996. In prior
periods, the Company has historically outperformed its peer group's net loan
loss average. Although peer group data for the third quarter of 1997 is not yet
available, management believes that trend should continue.
The adequacy of the allowance for loan losses in each subsidiary is reviewed
at least monthly. The determination of the provision amount in any period is
based on management's continuing review and evaluation of loan loss experience,
changes in the composition of the loan portfolio, current economic conditions,
the amount of loans presently outstanding, and the amount and composition of
growth expectations. The allowance for loan losses as of September 30, 1997 is
considered adequate by management.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period............................... $ 2,506 $ 2,754
Chargeoffs................................................... (189) (456)
Recoveries................................................... 170 58
Provision for loan losses.................................... 183 150
------ ------
Balance at end of period..................................... $ 2,670 $ 2,506
------ ------
------ ------
Ratio of net chargeoffs to average loans outstanding during
the period................................................. .01% .19%
Ratio of provision for loan losses to average loans
outstanding during the period.............................. .08% .07%
Ratio of allowance to total loans at end of period........... 1.09% 1.14%
</TABLE>
INVESTMENT SECURITIES
The Company's investment policy prohibits trading activities and does not
allow investment in high-risk derivative products or junk bonds. All 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. A net
unrealized gain of $815,000 was recorded to adjust the AFS portfolio to current
market value at September 30, 1997 compared to a net unrealized gain of $167,000
at December 31, 1996.
At September 30, 1997, the tax equivalent yield of the investment securities
portfolio was 6.60%, compared to 6.45% at December 31, 1996.
Variable rate securities comprised 49% of the total portfolio on September
30, 1997 compared to 50% on December 31, 1996. The weighted average repriceable
life of the portfolio at quarter end was 2.26 years in 1997 compared to 2.06
years at year-end 1996.
SOURCES OF FUNDS
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 90% and 88% of total earning
assets at September 30, 1997 and 1996, respectively. Total interest-bearing
deposits averaged 91% of average total deposits at September 30, 1997 and 1996.
Management is continuing efforts to increase the percentage of
transaction-related deposits to total deposits due to the positive effect on
earnings.
31
<PAGE>
CAPITAL RESOURCES
Common shareholders' equity increased $2,335,000 to $30,084,000 at September
30, 1997 compared to December 31, 1996. The Company redeemed $1,000,000 of its
preferred stock in March 1996, $500,000 in June 1996 and the remaining $500,000
in September 1996.
The Federal Reserve and other regulatory agencies have adopted risk-based
capital guidelines, which assign risk weightings to assets and off-balance sheet
items. Tier 1 capital consists of shareholders' equity less goodwill, while
total capital consists of core capital, certain debt instruments and a portion
of the loan losses. At September 30, 1997, Tier 1 capital to total assets was
8.58%. Total capital to risk-adjusted assets was 14.68%. Both ratios
substantially exceed all required ratios established for bank holding companies.
Risk-adjusted capital levels of the Company's subsidiary Banks exceed regulatory
definitions of well-capitalized institutions.
The Company declared and paid common dividends of $0.26 per share in the
third quarter of 1997 and $0.21 for the same quarter in 1996. Common dividends
declared and paid year-to-date total $0.74 and $0.61 per share respectively for
1997 and 1996. Book value per common share increased to $24.05 from $22.18 at
year-end 1996. The net adjustment for AFS securities increased book value by
$0.39 at September 30, 1997 compared to $0.07 at December 31, 1996.
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 $69,766,000 of 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 may arise from declines in deposits or other
funding sources, drawdowns of loan commitments and requests for new loans. The
Company's strategy is to fund assets to the maximum extent possible with core
deposits, which provide a sizable source of relatively stable and low-cost
funds. Average core deposits funded approximately 90% and 88% of total earning
assets at September 30, 1997 and 1996, respectively.
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor, and creditor needs in the present economic
environment. The Company has not received any recommendations from regulatory
authorities, which would materially affect liquidity, capital resources or
operations.
INTEREST RATE RISK
At September 30, 1997 the Company held approximately $174,179,000 in assets
comprised of securities, loans, short-term investments, and federal funds sold,
which were interest sensitive in one year or less time horizons. The Company's
interest rate sensitivity analysis at September 30, 1997 appears below. Core
deposits are distributed or spread among the various repricing categories based
upon historical patterns of repricing which are reviewed periodically by
management. The assumptions regarding these repricing characteristics greatly
influence conclusions regarding interest sensitivity. Management believes its
assumptions regarding these liabilities are reasonable.
Effective asset/liability management requires the maintenance of a proper
ratio between maturing or repriceable interest-earning assets and
interest-bearing liabilities. It is the policy of the Company that rate-
sensitive assets less rate-sensitive liabilities to total assets are kept within
a range of 80% to 130%.
32
<PAGE>
RATE SENSITIVITY ANALYSIS AT SEPTEMBER 30, 1997
MATURING OR REPRICING
<TABLE>
<CAPTION>
OVER 3-5
3 MONTHS 1 YEAR 3 YEARS YEARS
---------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Rate-sensitive assets......................................... $ 97,319 $ 76,860 $ 41,380 $ 40,711
Rate-sensitive liabilities(1)................................. 108,452 96,198 51,308 24,036
---------- ---------- ---------- -------------
Rate sensitivity gap (assets less liabilities)................ $ (11,133) $ (19,338) $ (9,928) $ 16,675
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Rate sensitivity gap (cumulative)............................. $ (11,133) $ (30,471) $ (40,399) $ (23,724)
---------- ---------- ---------- -------------
---------- ---------- ---------- -------------
Percent of total assets (cumulative).......................... (3.3%) (8.9%) (11.8%) (6.9%)
Rate-sensitive assets/liabilities (cumulative)................ 89.7% 85.1% 84.2% 91.5%
</TABLE>
- ------------------------
(1) Interest-bearing transaction and savings accounts are not presented as
immediately repriceable.
FACILITIES AND TECHNOLOGY
In an effort to make its services more accessible and convenient, the
Company intends to relocate the Grantline Branch of Regional Bank. Construction
of the new facility is currently in progress, and should be completed in the
fourth quarter of 1997. The Company is also considering the relocation of
certain Union Bank branches. These potential changes will increase visibility,
enhance drive-thru banking and ATM accessibility, and improve ingress and
egress.
During 1996, many technological improvements were initiated. Certain of
these improvements, such as upgrading communication lines, have provided faster
response time for customer transactions. Others represent capital investments,
which allow the Company to continue to effectively compete within a financial
services industry that is becoming increasingly dependent upon technology. In
1997, several hundred thousand dollars is being invested in additional
technology enhancements, such as an automated voice response information system,
additional ATMs, laser printed deposit statements, optical disk storage, and an
increase in the power and memory of the AS400 computer system which will allow
for improved efficiency in the management of computer resources.
ACCOUNTING CHANGES
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, is effective for the Company's 1997 annual financial statements. This
statement simplifies the calculations of earnings per share. The Company does
not expect the new disclosure for basic earnings per share will be different
from primary earnings per share as currently calculated and disclosed.
Additional disclosures related to the potential dilution that could occur from
unexercised stock options will not affect the Company since it currently has no
stock options plans.
SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, continues
the current requirements to disclose certain information about an entity's
capital structure found in various standards. This statement consolidates
specific disclosure requirements from those standards. SFAS No. 129 is effective
for the Company's 1997 annual financial statements.
Management does not expect adoption of these statements to have any material
effect on 1997 financial statements.
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement does not require a specific format for that financial
statement but requires that an enterprise display an amount representing total
comprehensive income for the period in that financial statement.
33
<PAGE>
SFAS No. 130 will also require the Company to (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, establishes standards for the way public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers.
SFAS No. 131 does not apply to nonpublic enterprises or to not-for-profit
organizations.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items and segment
assets. It requires reconciliation of total segment revenues, total segment
profit or loss, total segment assets and other amounts disclosed for segments to
corresponding amounts in the enterprise's general purpose financial statements.
SFAS No. 131 also requires that a public business report descriptive information
about the way that the operating segments used in reporting were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general purpose financial statements and changes in the measurement
of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years is to be restated. SFAS No. 131 need not be
applied to interim financial statements in the initial year of its application,
but comparative information for interim periods in the initial year of
application is to be reported in financial statements for interim periods in the
second year of application.
Management has not yet determined the effect of implementing SFAS Nos. 130
and 131.
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
OVERVIEW
The Company operates under the broad tenets of a long-term strategic plan
("Plan") designed to improve the Company's financial performance, expand its
competitive ability and enhance long-term shareholder value. The Plan is
premised on the belief of the Company's board of directors that the Company can
best promote long-term shareholder interests by pursuing strategies which will
continue to preserve it's community-focused philosophy.
In conformance with the Plan, during 1994, the Company consolidated the
operations of its two commercial banking subsidiaries to form Union Bank, and
sold three underperforming branches of Regional Bank. The Company believes each
of those actions increased its operating efficiency and the latter improved its
net interest margin. The Plan also focused on improving net interest margin by
reducing the Company's dependence on expensive, non-core deposits.
34
<PAGE>
During 1995, the Company initiated actions intended to build a stronger
customer base in its primary markets. The Company invested approximately
$500,000 to renovate Regional Bank's main office, providing direct lobby access
of all customer service and loan personnel, and greatly improving drive-up and
electronic banking services. Unlike many of the large super regional banks,
which are closing branches in record numbers, the Company believes it is
important to maintain community banking centers. Accordingly, an additional
$500,000 was invested to create two new branch offices. The Allison Lane branch
in Jeffersonville was opened by Regional Bank to provide greater access to
present and prospective customers in Clark County. Union Bank opened the IGA
supermarket branch in Greensburg, exclusively providing seven-day banking and
extended hours to the community. In an effort to make its services more
accessible and convenient, the Company intends to relocate the Grantline Branch
of Regional Bank. The Company is also considering the relocation of certain
Union Bank branches. These potential changes are designed to increase
visibility, enhance drive-thru banking and ATM accessibility, and improve
ingress and egress.
A continuing tenet of the Plan is to establish and cultivate more proactive
relationships with financial analysts and market makers in the Company's stock.
As a result of our relationship-building efforts, Stifel, Nicolaus & Company,
Incorporated, based in St. Louis, Missouri, became a market maker in Indiana
United Bancorp shares in November, 1996, joining current market makers J.J.B.
Hilliard/W.L. Lyons, Inc. and NatCity Investments, Inc.
The Company initiated a sales philosophy in 1995 supported by a
performance-based employee incentive program. The initial phase of this program
included sales training for all customer service personnel. In 1996, sales
training evolved to encompass all customer contact personnel. Customer service
personnel now receive advanced sales training in order to become more effective
in cross-selling techniques. The performance-based employee incentive program
earned over $121,000 in 1996 for employees engaged in all facets of the Company.
During 1996, many technological improvements were initiated. Certain of
these improvements, such as upgrading communication lines, have provided faster
response time for customer transactions. Others represent capital investments
which allow the Company to continue to effectively compete within a financial
services industry that is becoming increasingly dependent upon technology. In
1997, several hundred thousand dollars are budgeted for additional technology
enhancements, such as an automated voice response information system, additional
ATMs, laser printed deposit statements, optical disk storage, and an increase in
the power and memory of the AS400 computer system which will allow for improved
efficiency in the management of computer resources.
The dynamics of the Plan assure continually evolving goals, and the extent
of 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.
RESULTS OF OPERATIONS
Annual net income ranged between $2,529,000 and $2,870,000 for the past
three years. Significant nonrecurring items impacted net income in 1994 and
1996. In 1994, earnings included a $1,229,000 gain on the sale of three
under-performing Regional Bank branches and a loss of $154,000 on the sale of
securities. These nonrecurring items resulted in additional net income of
$650,000. The Federal omnibus spending package enacted on September 30, 1996,
together with companion legislation enacted earlier in the year, resulted in a
$474,000 reduction of 1996 net income. The legislation imposed a special
assessment on thrift institutions to recapitalize the SAIF, resulting in a
pre-tax charge of $545,000. Additionally, a tax advantage available to thrift
institutions in the calculation of allowable tax bad debt reserves was
eliminated, granting forgiveness of any tax liability prior to 1987, but
resulting in an income tax expense of $145,000 on the bad debt reserve recapture
since January 1, 1987. See "--Income Taxes." Excluding these nonrecurring
35
<PAGE>
charges, net income for 1996 was $3,166,727, a 25% increase over the prior year.
There were no significant nonrecurring income or expense items in 1995.
Non-interest income in 1996 reflects a decline in insurance commissions due
mainly to lower levels of profit sharing received from participating companies
based on claims experience for the year. Trust income and service charge income
increased over the prior year. Non-interest expense reflects reduced FDIC
assessments, excluding the special assessment mentioned previously, due to a
lower deposit insurance assessment rate. Professional fees increased in 1996 as
compared to the prior year.
Net income per common share from recurring operations equaled $2.49 in 1996,
compared to $1.91 in 1995, and $1.58 in 1994. Including the FDIC special
assessment and bad debt recapture expense, 1996 earnings equaled $2.11 per
share. The gain realized on the sale of Regional Bank's branches increased 1994
earnings per share by $0.59.
The Company's return on average total assets was 0.85% in 1996, 0.82% in
1995, and 0.86% in 1994. Excluding nonrecurring charges, return on average
assets for 1996 was 1.00%. Return on average common shareholders' equity during
these three years was 9.89%, 9.73%, and 12.18%, respectively. Excluding non-
recurring charges, return on average common shareholders' equity for 1996 was
11.58%.
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. Net interest income of
$12,056,000 in 1996 reflects a 9% increase from $11,095,000 in 1995, which was
3% below 1994.
Throughout 1996, the Company employed a deposit-pricing strategy focused on
retaining and attracting lower cost, short-to-medium term funds. Management
correctly anticipated a relatively flat rate environment throughout 1996 and
into 1997. The Company believes this strategy greatly enhanced 1996 net interest
income and will also have a positive effect on 1997 earnings. Although many of
the Company's peer group competitors reported flat or marginally changed net
interest margins for the full year 1996, the Company increased its net interest
margin by 23 basis points. Since year-end 1993, the Company has increased its
net interest margin by 48 basis points.
The changes in interest income and interest expense resulting from changes
in volume and rate are summarized in the following tables. Variances have been
allocated on the basis of the absolute relationship between volume and rate.
36
<PAGE>
CHANGES IN NET INTEREST INCOME AND NET INTEREST MARGIN
(TAXABLE EQUIVALENT BASIS)(1)
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1996/95 1995/94
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest income
Loans....................................................... $ 18,266 $ 16,938 $ 15,941 7.8 6.3
Investment securities....................................... 5,403 5,655 6,265 (4.5) (9.7)
Federal funds sold.......................................... 380 305 116 24.6 162.9
Short-term investments...................................... 13 49 15 (73.5) 226.7
--------- --------- ---------
Total interest income..................................... 24,062 22,947 22,337 4.9 2.7
--------- --------- ---------
Interest expense
Interest-bearing demand accounts............................ 868 833 832 4.2 0.1
Money market investment accounts............................ 1,133 1,297 1,216 (12.6) 6.7
Savings deposits............................................ 944 894 742 5.6 20.5
Certificates of deposit and other time deposits............. 7,918 7,284 6,997 8.7 4.1
Borrowings.................................................. 1,143 1,544 1,114 (26.0) 38.6
--------- --------- ---------
Total interest expense.................................... 12,006 11,852 10,901 1.3 8.7
--------- --------- ---------
Net interest income........................................... $ 12,056 $ 11,095 $ 11,436 8.7 (3.0)
--------- --------- ---------
--------- --------- ---------
Net interest margin........................................... 4.00% 3.77% 3.57% 6.1 5.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Adjusted to reflect income related to securities and loans exempt from
Federal income taxes reduced by nondeductible portion of interest expense.
37
<PAGE>
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
(TAXABLE EQUIVALENT BASIS)(1)
<TABLE>
<CAPTION>
1996 VS. 1995 1995 VS. 1994
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Interest income
Loans.................. $ 904 $ 424 $ 1,328 $ (505) $ 1,502 $ 997
Investment
securities........... (259) 7 (252) (1,270) 660 (610)
Federal funds sold..... 104 (29) 75 131 58 189
Short-term
investments.......... (29) (7) (36) 17 17 34
----- --------- --------- --------- --------- ---------
Total interest
income............. 720 395 1,115 (1,627) 2,237 610
----- --------- --------- --------- --------- ---------
Interest expense
Interest-bearing demand
accounts............. 51 (16) 35 (114) 115 1
Money market investment
accounts............. (136) (28) (164) (255) 336 81
Savings deposits....... 74 (24) 50 (38) 190 152
Certificates of deposit
and other time
deposits............. 616 18 634 (886) 1,173 287
Borrowings............. (255) (146) (401) 60 370 430
----- --------- --------- --------- --------- ---------
Total interest
expense............ 350 (196) 154 (1,233) 2,184 951
----- --------- --------- --------- --------- ---------
Changes in net interest
income................. $ 370 $ 591 961 $ (394) $ 53 (341)
----- --------- --------- ---------
----- --------- --------- ---------
Change in taxable
equivalent
adjustments............ 17 23
--------- ---------
Change in net interest
income after taxable
equivalent
adjustments............ $ 978 $ (318)
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) Adjusted to reflect income related to securities and loans exempt from
Federal income taxes reduced by nondeductible portion of interest expense.
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
Non-interest income normalized in 1996 and 1995 after benefiting from a gain
of $1,229,000 from the sale of branches in 1994. Non-interest income in 1996
exceeded 1995 by $45,000 or 3%. Excluding the sale of branches, non-interest
income in 1995 exceeded 1994 by $98,000 or 7%. There were no securities gains or
losses in 1996, versus a $16,000 gain in 1995 and a loss of $154,000 in 1994.
Insurance commissions continue to represent the largest component of
recurring non-interest income, equaling 29%, 32% and 37% in 1996, 1995 and 1994.
Declines of $36,000 and $71,000 in 1995 and 1994 primarily reflected
reorganization and relocation disruptions of insurance operations in Jay County.
The current year decline of $35,000 represents the loss of year-end profit
sharing programs from primary carriers due to 1996 claims experience. Trust
income increased $43,000 over 1995, fueled by a $12,000 increase in estate
income and a strong stock market in 1996. The level of estate assets
administered may cause trust income to fluctuate significantly from year to
year. Service charges on deposit accounts increased in 1996 by $70,000, or 16%,
primarily due to the strong growth in a new interest-bearing checking account
introduced in early 1996. Deposit growth and interest rate variables also
affected service charge income in 1996. Service charges on deposit accounts
decreased in both 1995 and 1994 compared to
38
<PAGE>
prior years. It is anticipated that in 1997 the Company will experience
additional deposit growth, generating even higher service charge income.
NON-INTEREST EXPENSE
The largest component of non-interest expense is personnel expense.
Personnel expenses increased in 1996 by $15,000, or less than 1%, after
declining by $86,000 in 1995. The average number of full-time equivalent
employees in 1996 was four persons less than the average 1995 staffing level,
which was fifteen persons less than 1994. Improvements in technology implemented
throughout 1996 enabled the Company to effectively control staffing levels.
Normal staff salary adjustments and increased benefit costs were incurred in
both 1996 and 1995, including $121,000 and $53,000 in 1996 and 1995,
respectively, earned by employees in connection with the performance incentive
compensation plan. Although certain employee benefit costs increased in 1996,
health care benefit costs decreased. Personnel expenses in 1997 are not expected
to change materially from 1996.
Deposit insurance, excluding the $545,000 special assessment, was $205,000
less in 1996 than the prior year, due to a lower rate on which the insurance
premium was calculated. In mid-1995, the FDIC reduced deposit insurance premiums
paid by soundly managed banks, including Union Bank, by 83%. Since the bank
insurance fund reached a mandated funding level in 1995, the assessment rate for
the Company's commercial bank was further reduced to the $2,000 minimum level
permissible in 1996.
After two long years of debate, Congress finally agreed to a legislative
package to adequately capitalize the SAIF. This legislation was included in the
Federal omnibus spending package enacted on September 30, 1996. It required the
thrift industry to recapitalize the SAIF with a one-time assessment and delayed
a PRO RATA sharing of the FICO bond interest payments for three years. The
one-time assessment imposed on Regional Bank equaled approximately $545,000.
For the next three years, 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 prior to September 30, 1996. After the three
year period, commercial banks and thrifts will pay the same assessment rate of
2.43 cents per $100 of deposits. Based on current deposit levels and projected
growth, Regional Bank will save approximately $540,000 in the next three years
due to the lower assessment rate.
39
<PAGE>
NON-INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
PERCENT CHANGE
------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1996/95 1995/94
--------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
NON-INTEREST INCOME
Insurance commissions........................................... $ 438 $ 473 $ 509 (7.4)% (7.1)%
Fiduciary activities............................................ 233 190 200 22.6 (5.0)
Service charges on deposit accounts............................. 520 450 475 15.6 (5.3)
Securities gains (losses)....................................... 16 (154)
Gain on sale of branches........................................ 1,229
Other income.................................................... 311 328 329 (5.2) (0.3)
--------- --------- ---------
Total non-interest income..................................... $ 1,502 $ 1,457 $ 2,588 3.1% (43.7)%
--------- --------- ---------
--------- --------- ---------
NON-INTEREST EXPENSE
Salaries and employee benefits.................................. $ 4,482 $ 4,467 $ 4,553 0.3% (1.9)%
Premises and equipment expense.................................. 1,477 1,469 1,521 0.5 (3.4)
Professional fees............................................... 222 205 395 8.3 (48.1)
Deposit insurance............................................... 190 395 666 (51.9) (40.7)
FDIC special assessment......................................... 545
Amortization of intangibles..................................... 35 40 46 (12.5) (13.0)
Other expense................................................... 1,667 1,653 1,859 0.8 (11.1)
--------- --------- ---------
Total non-interest expense.................................... $ 8,618 $ 8,229 $ 9,040 4.7% (9.0)%
--------- --------- ---------
--------- --------- ---------
Net non-interest expense, excluding nonrecurring items, as a
percent of average assets....................................... 2.07% 2.20% 2.29%
</TABLE>
INCOME TAXES
On August 20, 1996, President Clinton signed into law the Small Business Job
Protection Act of 1996. Included within this tax legislation was the repeal of
certain tax advantages to thrifts applicable to tax bad debt provision
calculations. The bill eliminated the percent-of-taxable-income method for
computing tax liability on additions to thrift's bad debt reserves for years
beginning after December 31, 1995. The bill also required that thrift
institutions recapture all or a portion of their tax bad debt reserves added
since December 31, 1987. Accordingly, income tax expense of $145,000 was
recorded on the tax bad debt recapture in 1996, resulting primarily from the
decrease in loans included in the sale of Regional Bank's branches in 1994. The
unrecaptured base year tax reserve will not be subject to recapture, as long as
the institution continues to carry on the business of banking and meets other
criteria.
The effective tax rate was 40% for 1996, 40% in 1995 and 39% in 1994. The
Company and its subsidiaries filed consolidated income tax returns for 1996.
FINANCIAL CONDITION
Total average assets in 1996 increased $9,244,000 over the prior year.
Average assets declined by $27,188,000 in 1995 as compared to 1994, primarily
due to deposit pricing strategies and the sale of branches in October 1994. For
comparability, average assets in 1994 would have been $20,000,000 less if the
branch sale had occurred on January 1, 1994. Changes in average assets in 1995
and 1996 reflect normalized operations.
Year-end assets increased to $328,346,000 from $313,067,000 at December 31,
1995. Cash, cash equivalents and short-term investments increased at year-end
1995 to provide funding for loans scheduled
40
<PAGE>
to close shortly after December 31, 1995. Securities maturities and repayments,
as well as increased levels of interest-bearing deposits, were used to fund loan
growth in 1996.
Average earning assets have represented 95% of average total assets for the
past three years. Average loans represent approximately 66% of average assets in
1996 compared to 65% in 1995 and 62% in 1994. Management intends to continue its
emphasis on loan growth in 1997.
Average non-interest-bearing deposits increased less than 1% in 1996
compared to a 4% increase in 1995. Average interest-bearing deposits increased
$11,981,000 or 5% in 1996 compared to 1995. Average interest-bearing demand
deposits increased $1,924,000, primarily due to the success of a new interest-
bearing checking account introduced early in 1996. Average savings accounts
increased 8% due to the continued success of a premium passbook savings account
introduced in 1995. Money market investment accounts decreased 11% as compared
to the prior year due to the shifting of funds to the new interest-bearing
demand account and the premium savings passbook account. Average certificates of
deposit and other time deposit increased approximately $11,557,000 in 1996,
primarily in certificates of deposit of $100,000 and over.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Non-interest bearing.............................. $ 24,714 -- $ 24,545 -- $ 23,678 --
Interest-bearing accounts......................... 32,830 2.64% 30,906 2.70% 35,435 2.35%
Money market investments accounts................. 31,584 3.59 35,369 3.67 43,527 2.79
Savings........................................... 29,264 3.23 26,979 3.31 28,357 2.62
Certificates of deposit and other time deposits... 148,509 5.33 136,952 5.32 155,317 4.50
---------- ---------- ----------
Totals.......................................... $ 266,901 4.07% $ 254,751 4.05% $ 286,314 3.42%
---------- --- ---------- --- ---------- ---------
---------- --- ---------- --- ---------- ---------
</TABLE>
As of December 31, 1996, certificates of deposit of $100,000 or more were
scheduled to mature as follows:
<TABLE>
<CAPTION>
3 MONTHS 3-6 6-12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Amount.................................... $ 18,001 $ 6,463 $ 4,441 $ 3,178 $ 32,083
Percent................................... 56% 20% 14% 10% 100%
</TABLE>
Long-term debt is primarily the Company's loan for the purchase of Regional
Bank and is secured by the capital stock of the Company's Subsidiary Banks. The
Company successfully renegotiated the rate with the lender, effective July 1,
1995. Interest adjusts quarterly to the lender's prime rate, less 25 basis
points. The Company believes it has complied with all terms and covenants of the
loan agreement. The Company prepaid $250,000 on long-term debt in 1996, and
$750,000 in 1995. A principal payment of $375,000 is due June 30, 1997 and the
balance of the loan is due December 31, 1997. Prior to that time, the Company
intends to negotiate the refinancing of its long-term borrowing needs. See
"--Nine Months Ended September 30, 1996 and 1997--Financial Condition."
Shareholders' equity was $27,749,000 on December 31, 1996 compared to
$28,245,000 on December 31, 1995. Book value per common share increased to
$22.18 or 6% from $20.98 at year end 1995. The unrealized gain on securities
available for sale, net of taxes, totaled $95,000 or $.07 per share at December
31, 1996 compared to an unrealized gain of $195,000 or $.15 at December 31,
1995. Excluding the net unrealized gains or losses on securities available for
sale, book value per share was $22.11 at
41
<PAGE>
December 31, 1996, or an increase of 6% over the comparable book value at year
end 1995. In 1995, $400,000 of preferred stock was redeemed. The Company
redeemed the remaining $2,000,000 of its preferred stock in 1996. All future
earnings available to shareholders will now accrue solely to the common
shareholders until such time, if any, as the Company sells additional preferred
stock.
AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS
(TAXABLE EQUIVALENT BASIS)(1)
<TABLE>
<CAPTION>
DECEMBER
DECEMBER 31, 1996 DECEMBER 31, 1995 31, 1994
--------------------------------- --------------------------------- ---------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE
--------- ----------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Short-term investments................. $ 257 $ 13 5.06% $ 812 $ 49 6.03% $ 451
Federal funds sold..................... 7,094 380 5.36 5,196 305 5.87 2,751
Securities
Taxable.............................. 81,971 5,123 6.25 85,421 5,326 6.24 105,941
Tax-exempt........................... 3,755 280 7.46 4,327 329 7.60 4,916
--------- ----------- --------- ----------- ---------
Total securities................... 85,726 5,403 6.30 89,748 5,655 6.30 110,857
Loans(2)
Commercial........................... 62,983 6,059 9.62 64,589 6,116 9.47 66,002
Real estate mortgage................. 121,232 9,660 7.97 116,314 8,815 7.58 123,423
Consumer............................. 22,349 2,392 10.70 15,760 1,807 11.47 14,179
Government guaranteed loans.......... 1,948 155 7.96 2,383 200 8.39 3,064
--------- ----------- --------- ----------- ---------
Total loans........................ 208,512 18,266 8.76 199,046 16,938 8.51 206,668
--------- ----------- --------- ----------- ---------
Total earning assets............... 301,589 24,062 7.98 294,802 22,947 7.79 320,727
--------- ----------- --------- ----------- ---------
Allowance for loan losses.............. (2,760) (2,732) (2,760)
Unrealized losses on securities........ (224) (1,054) (1,471)
Cash and due from banks................ 9,456 7,744 7,633
Premises and equipment................. 5,953 5,799 6,297
Other assets........................... 2,893 3,104 4,425
--------- --------- ---------
Total assets....................... $ 316,907 $ 307,663 $ 334,851
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits
Interest-bearing demand accounts..... $ 32,830 $ 868 2.64% $ 30,906 $ 833 2.70% $ 35,435
Money market investment accounts..... 31,584 1,133 3.59 35,369 1,297 3.67 43,527
Savings.............................. 29,264 944 3.23 26,979 894 3.31 28,357
Certificates of deposit and other
time deposits...................... 148,509 7,918 5.33 136,952 7,284 5.32 155,317
--------- ----------- --------- ----------- ---------
Total interest-bearing deposits.... 242,187 10,863 4.49 230,206 10,308 4.48 262,636
Short-term borrowings.................. 13,316 689 5.17 15,947 932 5.84 11,694
Long-term debt......................... 5,606 454 8.10 6,950 612 8.81 8,835
--------- ----------- --------- ----------- ---------
Total interest-bearing
liabilities...................... 261,109 12,006 4.60 253,103 11,852 4.68 283,165
Non-interest-bearing demand deposits... 24,714 24,545 23,678
Other liabilities...................... 3,540 3,243 3,250
--------- --------- ---------
Total liabilities.................. 289,363 280,891 310,093
Shareholders' equity................... 27,544 26,772 24,758
--------- ----------- --------- ----------- ---------
Total liabilities and shareholders'
equity........................... $ 316,907 12,006 3.98%(3) $ 307,663 11,852 4.02(3) $ 334,851
--------- ----------- --------- ----------- ---------
--------- --------- ---------
Net interest income.................. $ 12,056 4.00% $ 11,095 3.77%
----------- -----------
----------- -----------
Conversion of tax exempt income to a
fully taxable equivalent basis
using a marginal rate of 34%....... $ 95 $ 112
----------- -----------
----------- -----------
<CAPTION>
YIELD/
INTEREST RATE
----------- ---------
<S> <C> <C>
Short-term investments................. $ 15 3.33%
Federal funds sold..................... 116 4.22
Securities
Taxable.............................. 5,871 5.54
Tax-exempt........................... 394 8.01
-----------
Total securities................... 6,265 5.65
Loans(2)
Commercial........................... 5,697 8.63
Real estate mortgage................. 8,521 6.90
Consumer............................. 1,530 10.79
Government guaranteed loans.......... 193 6.30
-----------
Total loans........................ 15,941 7.71
-----------
Total earning assets............... 22,337 6.97
-----------
Allowance for loan losses..............
Unrealized losses on securities........
Cash and due from banks................
Premises and equipment.................
Other assets...........................
Total assets.......................
Interest-bearing deposits
Interest-bearing demand accounts..... $ 832 2.35%
Money market investment accounts..... 1,216 2.79
Savings.............................. 742 2.62
Certificates of deposit and other
time deposits...................... 6,997 4.50
-----------
Total interest-bearing deposits.... 9,787 3.73
Short-term borrowings.................. 483 4.13
Long-term debt......................... 631 7.14
-----------
Total interest-bearing
liabilities...................... 10,901 3.85
Non-interest-bearing demand deposits...
Other liabilities......................
Total liabilities..................
Shareholders' equity...................
-----------
Total liabilities and shareholders'
equity........................... 10,901 3.40(3)
Net interest income.................. $ 11,436 3.57%
-----------
-----------
Conversion of tax exempt income to a
fully taxable equivalent basis
using a marginal rate of 34%....... $ 135
-----------
-----------
</TABLE>
- ------------------------
(1) Adjusted to reflect income related to securities and loans exempt from
Federal income taxes.
(2) Nonaccruing loans have been included in the average balances.
(3) Total interest expense divided by total earning assets.
42
<PAGE>
LOANS, CREDIT RISK AND THE ALLOWANCE AND PROVISION FOR POSSIBLE LOAN LOSSES
Loans remain the Company's largest concentration of assets and continue to
represent the greatest risk. The loan underwriting standards observed by each of
the Company's subsidiaries are viewed by management as a deterrent to the
emergence of an abnormal level of problem loans and a subsequent increase in net
chargeoffs. The Company's conservative loan underwriting standards have
historically resulted in higher loan quality and lower levels of net chargeoffs
than peer bank averages. The Company also believes credit risks may be elevated
if undue concentrations of loans in specific industry segments and to
out-of-area borrowers are incurred. Accordingly, the Company's board of
directors regularly monitors such concentrations to determine compliance with
its restrictive loan allocation policy. The Company believes it has no undue
concentrations of loans.
Total loans increased 9%, primarily reflecting the expansion of the consumer
loan portfolio and management's emphasis on indirect automobile financing which
began in late 1995 and has continued to the present. Consumer loans increased
50% in 1996. The Company's emphasis on increasing consumer loans provides
greater diversification within the portfolio and generates higher yields than
residential real estate loans. Although the Company limits its exposure to
long-term fixed rate residential mortgage loans and generally observes 20%
minimum downpayment guidelines, it originated both fixed rate loans and loans
with little or no downpayment for a noncompeting mortgage lender during 1996.
This program assisted the Company in serving all segments of the community
without incurring unacceptable levels of credit exposure or interest rate risk.
The origination of these loans provides fee income.
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Types of Loans
Commercial......................................... $ 7,834 $ 7,796 $ 7,595 $ 11,028 $ 16,300
Agricultural production financing and other loans
to farmers....................................... 11,178 9,996 7,859 8,845 7,471
Commercial real estate mortgage.................... 27,691 24,129 25,619 27,036 32,645
Residential real estate mortgage................... 109,962 103,239 101,455 111,600 101,953
Farm real estate................................... 26,843 28,910 28,358 25,483 22,064
Construction and development....................... 6,589 6,863 7,161 3,455 1,786
Consumer........................................... 27,567 18,342 13,870 14,752 17,992
Government guaranteed loans purchased.............. 1,819 2,080 2,819 3,309 3,789
---------- ---------- ---------- ---------- ----------
Total loans...................................... $ 219,483 $ 201,355 $ 194,736 $ 205,508 $ 204,000
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
43
<PAGE>
MATURITIES AND SENSITIVITIES OF COMMERCIAL AND CONSTRUCTION
LOANS TO CHANGES IN INTEREST RATES AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
WITHIN 1-5 OVER
1 YEAR YEARS 5 YEARS TOTAL
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
MATURITIES BY LOAN TYPE
Commercial............................................................ $ 6,554 $ 817 $ 463 $ 7,834
Agricultural production financing and other loans to farmers.......... 10,130 598 450 11,178
Construction.......................................................... 6,310 135 144 6,589
Government guaranteed loans........................................... 0 461 1,358 1,819
--------- --------- --------- ---------
Totals.............................................................. $ 22,994 $ 2,011 $ 2,415 $ 27,420
--------- --------- --------- ---------
--------- --------- --------- ---------
Percent............................................................... 84% 7% 9% 100%
--------- --------- --------- ---------
--------- --------- --------- ---------
RATE SENSITIVITY
Fixed rate............................................................ $ 2,445 $ 1,160 $ 1,057 $ 4,662
Variable rate......................................................... 20,549 851 1,358 22,758
--------- --------- --------- ---------
Totals.............................................................. $ 22,994 $ 2,011 $ 2,415 $ 27,420
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The Company regards its ability to identify and correct loan quality
problems as one of its greatest strengths. Loans are placed in a nonaccruing
status when in management's judgment the collateral value and/or the borrower's
financial condition does not justify accruing interest. As a general rule,
commercial and real estate loans are reclassified to nonaccruing status at or
before becoming 90 days past due. Interest previously recorded but not deemed
collectible is reversed and charged against current income. Subsequent interest
payments collected on nonaccrual loans may thereafter be recognized as interest
income or may be applied as a reduction of the loan balance, as circumstances
warrant. Non-real estate secured consumer loans are not placed in nonaccruing
status, but are charged off when policy-determined delinquent status is reached.
Net chargeoffs were $398,000 in 1996, $60,000 in 1995 and $13,000 in 1994.
As a percentage of average loans, net chargeoffs equaled 0.19%, 0.03% and 0.01%
in 1996, 1995 and 1994, respectively. The increase in 1996 was caused primarily
by the $334,000 chargeoff of portions of two loans currently held by Regional
Bank. In each of the previous two periods, the Company significantly
outperformed its peer group's net loan loss average.
Foreclosed real estate held by the Company at December 31, 1996 totaled
$1,000,000 and consisted of a single property. The property is expected to be
sold by mid-year 1997 with minimal gain or loss realized. After the sale,
foreclosed real estate will decrease to a level more closely mirroring prior
years. See
"--Nine Months Ended September 30, 1996 and 1997--Results of Operations."
Management maintains a listing of loans warranting either the assignment of
a specific reserve amount or other special administrative attention. This
listing, together with a listing of all classified loans, nonaccrual loans and
loans delinquent 30 days or more, is reviewed monthly by the board of directors
of each subsidiary.
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
44
<PAGE>
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 December 31, 1996, is considered adequate by
management.
UNDERPERFORMING LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Nonaccruing loans................................................ $ 1,245 $ 1,569 $ 1,030 $ 1,208 $ 2,543
Accruing loans contractually past due 90 days or more............ 5 34 113
Restructured loans............................................... 16 267
--------- --------- --------- --------- ---------
Total.......................................................... $ 1,250 $ 1,603 $ 1,143 $ 1,224 $ 2,810
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Percent of total loans......................................... .6% .8% .6% .6% 1.4%
</TABLE>
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at January 1............................................. $ 2,754 $ 2,784 $ 2,682 $ 2,686 $ 3,008
--------- --------- --------- --------- ---------
Chargeoffs
Commercial..................................................... 352 91 6 239 1,123
Real estate mortgage........................................... 38 65 189 44
Consumer....................................................... 104 31 21 17 95
--------- --------- --------- --------- ---------
Total chargeoffs............................................. 456 160 92 445 1,262
--------- --------- --------- --------- ---------
Recoveries
Commercial..................................................... 33 61 37 52 199
Real estate mortgage........................................... 1 27 15 7
Consumer....................................................... 24 12 27 32 47
--------- --------- --------- --------- ---------
Total recoveries............................................. 58 100 79 84 253
--------- --------- --------- --------- ---------
Net chargeoffs................................................... 398 60 13 361 1,009
Provision for loan losses........................................ 150 30 115 357 687
--------- --------- --------- --------- ---------
Balance at December 31........................................... $ 2,506 $ 2,754 $ 2,784 $ 2,682 $ 2,686
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net chargeoffs to average loans.................................. .19% .03% .01% .18% .49%
Provision for loan losses to average loans....................... .07 .02 .06 .17 .33
Allowance to total loans at year end............................. 1.14 1.37 1.43 1.31 1.32
</TABLE>
45
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------------------------
1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
Residential............ $ 144 6% $ 134 5% $ 146 5% $ 142 5%
Farm real estate....... 13 1 14 14 1
Commercial............. 313 12 575 21 702 25 468 18
Construction and
development.......... 71 3 75 3 52 2 35 1
----------- --- ----------- --- ----------- --- ----------- ---
Total real estate.... 541 22 798 29 914 33 645 24
----------- --- ----------- --- ----------- --- ----------- ---
Commercial
Agribusiness........... 151 6 117 4 151 5 182 7
Other commercial....... 203 8 445 16 131 5 226 8
----------- --- ----------- --- ----------- --- ----------- ---
Total commercial..... 354 14 562 20 282 10 408 15
----------- --- ----------- --- ----------- --- ----------- ---
Consumer................. 207 8 131 5 66 2 83 3
Unallocated.............. 1,404 56 1,263 46 1,522 55 1,546 58
----------- --- ----------- --- ----------- --- ----------- ---
Total................ $ 2,506 100% $ 2,754 100% $ 2,784 100% $ 2,682 100%
----------- --- ----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- --- ----------- ---
<CAPTION>
1992
------------------------
AMOUNT PERCENT
----------- -----------
<S> <C> <C>
Real estate
Residential............ $ 87 3%
Farm real estate.......
Commercial............. 705 26
Construction and
development.......... 16 1
----------- ---
Total real estate.... 808 30
----------- ---
Commercial
Agribusiness........... 191 7
Other commercial....... 323 12
----------- ---
Total commercial..... 514 19
----------- ---
Consumer................. 109 4
Unallocated.............. 1,255 47
----------- ---
Total................ $ 2,686 100%
----------- ---
----------- ---
</TABLE>
The allocation is based primarily on previous credit loss experience,
adjusted for changes in the risk characteristics of each category. Additional
amounts are allocated based on an evaluation of the loss potential of individual
troubled loans and the anticipated effect of economic conditions on both
individual loans and loan categories. Because the allocation is based on
estimates and subjective judgment, it is not necessarily indicative of the
specific amounts or loan categories in which losses may ultimately occur.
SFAS No. 122, ACCOUNTING FOR MORTGAGE SERVICING RIGHTS, pertains to mortgage
banking and financial institutions that conduct operations that are
substantially similar to the primary operations of a mortgage banking
enterprise. SFAS No. 122 eliminates the accounting distinction between mortgage
servicing rights that are acquired through loan origination activities and those
acquired through purchase transactions. Under SFAS No. 122, if the Company
enters into mortgage banking activities and sells or securitizes loans and
retains the mortgage servicing rights, the Company must allocate the total cost
of the mortgage loans to the mortgage servicing rights and the loans (without
the rights) based on their relative fair values.
SFAS No. 122 was effective for the Company in 1996. Since the Company does
not currently engage in mortgage banking activities, the adoption of SFAS No.
122 did not have any material effect on 1996 operations or financial position.
INVESTMENT SECURITIES
Investment securities offer flexibility in the Company's management of
interest rate risk, and are the primary means by which the Company provides
liquidity and responds to changing maturity characteristics of assets and
liabilities. The Company's investment policy prohibits trading activities and
does not allow investment in high risk derivative products or junk bonds.
In 1994, the Company adopted new accounting rules for securities. The rules
require that each security must be individually designated as a held to maturity
("HTM") security or as an AFS security. Late in 1995, the Financial Accounting
Standards Board ("FASB") allowed an unprecedented "one time" transition
reclassification. While more than 90% of the Company's investments were already
designated AFS, the Company took this opportunity to reclassify all remaining
HTM securities to AFS to provide even greater management flexibility in
responding to changes within financial markets.
46
<PAGE>
As of December 31, 1996, all investment securities are classified as AFS and
are carried at fair value with unrealized gains and losses, net of taxes,
excluded from earnings and reported as a separate component of shareholders'
equity. An unrealized gain of $167,000 was recorded to adjust the AFS portfolio
to current market value at December 31, 1996, compared to an unrealized gain of
$333,000 at December 31, 1995.
At year end 1996, the tax equivalent yield of the investment securities
portfolio was 6.45%, representing an increase from 6.33% at year end 1995, and
6.16% at year end 1994.
In 1994, management began to reduce the variable portion of the investment
securities portfolio. Variable rate securities comprised 50% of the total
portfolio on December 31, 1996 compared to 55% and 65% on December 31, 1995 and
1994. The reduction of variable rate securities extended the year end weighted
average repriceable life of the portfolio to 2.06 years compared to 1.14 years
in 1995.
INVESTMENT SECURITIES
(CARRYING VALUES AT DECEMBER 31)
<TABLE>
<CAPTION>
WITHIN 1-5 5-10 BEYOND
1 YEAR YEARS YEARS 10 YEARS TOTALS
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury............................................. $ 2,004 $ 2,004
Federal agencies.......................................... 3,087 $ 10,048 $ 11,689 24,824
State and municipal....................................... 396 1,586 1,765 $ 328 4,075
Mortgage-backed securities................................ 33 4,670 3,304 42,035 50,042
Corporate and other securities............................ 242 242
--------- --------- --------- --------- ---------
Total available for sale................................ $ 5,520 $ 16,304 $ 17,000 $ 42,363 $ 81,187
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average yield(1)................................... 5.14% 5.87% 6.94% 6.66% 6.45%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
(1) Adjusted to reflect income related to securities exempt from Federal income
taxes reduced by nondeductible portion of interest expense.
Amounts in the table above are based on scheduled maturity dates. Variable
interest rates are subject to change not less than annually based upon certain
interest rate indexes. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
As of December 31, 1996, there are no corporate bonds and other securities
which represent more than 10% of shareholders' equity.
SOURCES OF FUNDS
The Company relies primarily on customer deposits and securities sold under
repurchase agreements, along with shareholders' equity, to fund earning assets.
On an infrequent basis, Federal Home Loan Bank ("FHLB") advances are used to
provide additional funds.
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 88% and 86% of total earning
assets in 1996 and 1995. Total interest-bearing deposits averaged 91%, 90% and
92% of average total deposits during 1996, 1995 and 1994. Management is
continuing efforts to increase the percentage of transaction-related deposits to
total deposits due to the positive effect on earnings.
47
<PAGE>
Securities sold under repurchase agreements ("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 utilized large denomination certificates of
deposit in 1996 to replace a portion of customer funds previously invested in
repos.
Even though short-term borrowings temporarily increased 18% at year end 1996
compared to 1995, the Company decreased average repos and other short-term
borrowings in 1996 to $13,316,000 or 17% below 1995. FHLB advances which matured
in early 1996 represented most of the decrease. The FHLB advances were used to
fund loans and other earning assets of Regional Bank in 1995. Depending upon the
level of loan demand, management may again elect to use FHLB advances in 1997 as
part of its cash management strategy.
Information related to repurchase agreements is shown in the table below and
information on other short-term borrowings is not required since the average
balances outstanding during the periods were less than 30% of shareholders'
equity.
REPURCHASE AGREEMENTS
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31....................................... $ 12,989 $ 10,735 $ 9,977
Maximum outstanding at any month end......................... 15,903 15,174 16,384
Daily average amount outstanding............................. 11,564 10,162 9,041
Weighted daily average interest rate......................... 5.14% 5.67% 3.99%
Weighted daily interest rate at December 31.................. 5.12 5.28 5.39
</TABLE>
The Company continued to prepay long-term debt in 1996. Long-term debt
decreased $1,000,000 in 1996 of which $250,000 represented reductions in excess
of scheduled payments. Management may continue its history of accelerated
payments in 1997. On December 31, 1997 the remaining balance is due. Prior to
that time, the Company intends to negotiate the refinancing of its long-term
borrowing needs.
CAPITAL RESOURCES
Common shareholders' equity increased $1,504,000 to $27,749,000 at December
31, 1996. Total shareholders' equity declined by $496,000 due primarily to the
early redemption of $2,000,000 of preferred stock in 1996. Redemptions in 1995
and 1994 totaled $400,000 and $300,000. All of the preferred shares have now
been redeemed.
The Federal Reserve and other regulatory agencies have adopted risk-based
capital guidelines which assign risk weightings to assets and off-balance sheet
items. The Company's Tier 1 capital consists of shareholders' equity less
goodwill, while total capital consists of core capital, certain debt instruments
and a portion of the allowance for credit losses. At December 31, 1996, Tier 1
capital to total assets was 8.31%. Total capital to risk-adjusted assets was
15.05%. Both ratios substantially exceed all required ratios established for
bank holding companies. Risk-adjusted capital levels of the Company's subsidiary
banks exceed regulatory definitions of well-capitalized institutions.
Shareholders' equity is impacted by the Company's decision to categorize its
entire securities portfolio as AFS under accounting rules adopted January 1,
1994. Securities in this category are carried at fair value, and shareholders'
equity is adjusted to reflect unrealized gains and losses, net of taxes.
The Company declared and paid common dividends of $0.83 per share in 1996
and $0.69 in 1995. Book value per common share increased to $22.18 from $20.98
in 1995. The net adjustment for AFS securities increased book value by $0.07 and
$0.15 at December 31, 1996 and 1995. Depending on market
48
<PAGE>
conditions, the adjustment for AFS securities can cause significant fluctuations
in equity. The dividend payment rate on preferred stock was 6.34% during each of
the past two years.
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 total
$47,810,000, and include cash and cash equivalents, loans and securities
maturing within one year, and money market instruments. In addition, the Company
holds $75,667,000 of 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 can arise from declines in deposits or other
funding sources, drawdowns of loan commitments and requests for new loans. The
Company's strategy is to fund assets to the maximum extent possible with core
deposits, which provide a sizable source of relatively stable and low-cost
funds. Average core deposits funded approximately 89% of total earning assets at
December 31 in each of the last three years.
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor, and creditor needs in the present economic
environment. The Company has not received any recommendations from regulatory
authorities which would materially affect liquidity, capital resources or
operations.
INTEREST RATE RISK
At year end 1996, the Company held approximately $169,349,000 in assets
comprised of securities, loans, short-term investments, and federal funds sold,
which were interest sensitive in one year or less time horizons. The Company's
interest rate sensitivity analysis for the year ended December 31, 1996 appears
in the following table. Core deposits are distributed or spread among the
various repricing categories based upon historical patterns of repricing which
are reviewed periodically by management. The assumptions regarding these
repricing characteristics greatly influence conclusions regarding interest
sensitivity. Management believes its assumptions regarding these liabilities are
reasonable.
Effective asset/liability management requires the maintenance of a proper
ratio between maturing or repriceable interest-earning assets and
interest-bearing liabilities. It is the policy of the Company that rate-
sensitive assets less rate-sensitive liabilities to total assets be kept within
a range of 80% to 130%.
The Company will seek to attain a more neutral gap position in 1997 based
upon the belief that the current interest rate environment will remain
relatively stable throughout 1997. In any event, the Company does not anticipate
that its earnings will be materially impacted in 1997, regardless of the
direction interest rates may trend.
49
<PAGE>
RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1996
MATURING OR REPRICING
<TABLE>
<CAPTION>
OVER 5
YEARS OR
3 MONTHS 1 YEAR 3 YEARS 5 YEARS INSENSITIVE TOTAL
------------- ------------- ------------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets........... $ 88,660 $ 80,689 $ 42,413 $ 36,530 $ 80,054 $ 328,346
Rate-sensitive liabilities...... 109,123 79,800 53,989 22,258 63,176 $ 328,346
------------- ------------- ------------- ------------- ------------ -------------
Rate sensitivity gap (assets
less liabilities)............. $ (20,463) $ 889 $ (11,576) $ 14,272 $ 16,878
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
Rate sensitivity gap
(cumulative).................. $ (20,463) $ (19,574) $ (31,150) $ (16,878)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Percent of total assets
(cumulative).................. (6.2)% (6.0)% (9.5)% (5.1)%
Rate-sensitive assets/
liabilities (cumulative)...... 81.2% 89.6% 87.2% 93.6%
</TABLE>
EFFECTS OF CHANGING PRICES
The Company's asset and liability structure is substantially different from
that of an industrial company in that most of its assets and liabilities are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the Company's ability to react to changes in interest rates
and, by such reaction, reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction at the same time, or at the
same magnitude, as the prices of other goods and services. As discussed
previously, management relies on its ability to manage the relationship between
interest-sensitive assets and liabilities to protect against wide interest rate
fluctuations, including those resulting from inflation.
ACCOUNTING CHANGES
The FASB has issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS TO BE DISPOSED OF. This statement establishes guidance for
recognizing and measuring impairment losses and requires that the carrying
amount of impaired assets be reduced to fair value. Long-lived assets and
certain identifiable intangibles must be reviewed for impairment whenever events
indicate that the carrying amount of the assets may not be recoverable.
SFAS No. 121 was effective in 1996 for the Company. The adoption of SFAS No.
121 did not have any material effect on results of operation or financial
condition in 1996.
SFAS No. 123, STOCK BASED COMPENSATION, was effective for the Company in
1996. This statement requires expanded disclosures rather than recognition of
compensation cost as was originally required by the exposure draft of this
statement for fixed, at the money, options. However, employers are encouraged to
recognize the cost of stock-based compensation plans in their financial
statements. Currently, the Company has no stock-based compensation plans and
adoption of SFAS No. 123 did not have any effect on 1996 financial statements.
SFAS No. 125, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES, provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are considered
secured borrowings.
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is
50
<PAGE>
received in exchange. The transferor has surrendered control over transferred
assets only if certain conditions are met.
This statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of many specific types of transactions.
Except as amended by SFAS No. 127, SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and is to be applied prospectively. Earlier or
retroactive application is not permitted. SFAS No. 127 defers for one year the
effective date (a) of paragraph 15 of SFAS No. 125 and, (b) for repurchase
agreement, dollar-roll, securities lending, and similar transactions, of
paragraphs 9-12 and 237(b) of SFAS No. 125.
SFAS No. 127 provides additional guidance on the types of transactions for
which the effective date of SFAS No. 125 has been deferred. It also requires
that if it is not possible to determine whether a transfer occurring during
calendar-year 1997 is part of a repurchase agreement, dollar-roll, securities
lending, or similar transaction, then paragraphs 9-12 of SFAS No. 125 should be
applied to that transfer.
Management does not expect adoption of these statements to have any material
effect on 1997 financial statements.
QUARTERLY FINANCIAL INFORMATION FOR 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ ------------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income.............. $ 6,275 $ 6,070 $ 5,884 $ 5,737 $ 5,908 $ 5,784 $ 5,658 $ 5,485
Total interest expense............. 3,138 3,068 2,921 2,879 3,047 3,060 2,986 2,758
Net interest income................ 3,137 3,002 2,963 2,858 2,861 2,724 2,672 2,727
Provision for loan losses.......... 60 30 33 27 12 9 6 3
Net interest income after provision
for loan losses.................. 3,077 2,972 2,930 2,831 2,849 2,715 2,666 2,724
Non-interest income................ 409 359 413 321 343 334 430 350
Non-interest expense............... 2,010 2,562 2,045 2,001 1,961 2,003 2,103 2,163
Income before income tax........... 1,476 769 1,298 1,151 1,231 1,046 993 911
Income tax......................... 582 451 514 454 485 417 392 357
--------- --------- --------- --------- --------- --------- --------- ---------
Net income......................... $ 894 $ 318 $ 784 $ 697 $ 746 $ 629 $ 601 $ 554
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Net income per common share........ $ 0.71 $ 0.25 $ 0.61 $ 0.54 $ 0.57 $ 0.47 $ 0.45 $ 0.41
Dividends paid per common share.... 0.22 0.21 0.20 0.20 0.20 0.17 0.16 0.16
</TABLE>
51
<PAGE>
PTC MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CERTAIN STATEMENTS IN THIS SECTION CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE
EXCHANGE ACT. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS OF THE COMPANY OR PTC TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS,
PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS.
GENERAL
The business of PTC consists of holding and administering its interest in
People's Trust. The principal business of People's Trust consists of attracting
deposits from consumer and commercial customers and making loans to individuals
and businesses. People's Trust offers various products for depositors, including
checking and savings accounts, certificates of deposit and safe deposit boxes.
Loans consist principally of loans to individuals secured by mortgage liens on
residential properties, consumer loans generally secured by liens on personal
property, and loans to businesses generally secured by liens on business assets
such as inventory, accounts receivable, commercial real estate and other
property. People's Trust also offers trust services to individuals, businesses
and institutions.
People's Trust operates 17 banking offices in nine eastern and southeastern
counties in Indiana. In 1996, People's Trust opened new banking offices in the
Greensburg and Connersville markets and in the first quarter of 1997 purchased
an office in Hanover. People's Trust will continue to take advantage of
opportunities to expand its number of locations if the expansion appears to
represent a profitable opportunity, however, there is no assurance this
expansion will occur.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
RESULTS OF OPERATIONS
Net income for the nine months ended September 30, 1997 was $2,702,000
compared to $2,391,000 for the same period in 1996, which represented a $311,000
or 13.0% increase. Earnings per share also increased from $2.31 per share to
$2.64 per share for the same period. Higher net interest income, which was
partially offset by higher non-interest expense, accounted for most of the
increase in net income. Net income and earnings per share for the third quarter
of 1997 versus the third quarter of 1996 were also higher. Again, higher net
interest income, offset by higher non-interest expenses, were the main
contributors.
For the nine-month period ended September 30, 1997, as compared to the same
period in 1996, net interest income increased by $872,000 or 11.3%. A similar
proportional increase also occurred during the third quarter of 1997 versus the
third quarter of 1996. Higher volumes (average balances) of financial assets and
liabilities, rather than changes in underlying interest rates, were the main
reason for increased interest income and interest expense. Average loans were
$209,000,000 for the nine months ended September 30, 1997 compared to
$181,300,000 for the same period in 1996, or about $27,700,000 higher. Average
deposits were $266,900,000 for the nine-month period ended September 30, 1997
versus $243,900,000 for 1996, or about $23,000,000 higher. Net interest margin
(net interest income on a tax equivalent basis divided by average total earnings
assets) was 4.46% for the nine-month period ended September 30, 1997 and 4.38%
for the same period in 1996.
Non-interest income was relatively stable for the nine-month period ended
September 30, 1997 versus 1996; however, certain components of non-interest
income did change significantly. Mortgage banking income, which consists of
gains (losses) on loan sales and service fee income, was $103,000 higher for the
third quarter of 1997 versus 1996, and $189,000 higher for the nine-month period
ended September 30,
52
<PAGE>
1997 versus 1996. During the second and third quarters, the long-term interest
rates charged on mortgages declined and PTC saw an increase in refinancing and
new originations take place. Gains on securities included a sale of common stock
in 1996, but was a one-time gain and therefore not reported in 1997.
Non-interest expense increased from $5,272,000 for the nine months ended
September 30, 1996 to $5,918,000 for the same period in 1997, or a $646,000
increase. Most of this increase was related to higher salaries and benefits and
higher occupancy and equipment expense. Higher salary and benefit costs were
directly attributed to a revised management structure which was implemented on
January 1, 1997; and called for the hiring of several new commercial lenders, a
financial controller, an executive vice president, and several regional sales
managers so PTC could be better positioned for additional growth and loan
production activity.
Higher occupancy and equipment expenses were directly attributed to PTC's
expansion of its current ATM program which included the refurbishing of four
existing ATM's, the addition of four new ATM's and the addition of one cash
dispenser at an Indiana convenience store. PTC also converted to a new network
and service provider in order to attain long term cost reductions in driving the
ATM network. In addition, PTC expanded its branch network by acquiring a full
service branch in March 1997 in Hanover, Indiana, and establishing a de novo
branch in Madison, Indiana in September 1997.
FINANCIAL CONDITION
Total assets increased slightly by $6,158,000 or 2.1% from December 31, 1996
to September 30, 1997. Gross loans increased by $23,690,000 or 12.0% during the
same period. A decline in cash equivalents of $7,904,000 was used to fund the
increase in loans, along with sales and maturities of available-for-sale
securities. Loan demand continued to be strong in 1997. PTC believes it has
positioned itself to grow its loan portfolio by adding employees to increase
originations. As of September 30, 1997, PTC had obtained an 80.0% loan to
deposit ratio. A detailed presentation of loans by category follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996 $ CHANGE % CHANGE
------------- ------------ --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Construction loans.............................................. $ 13,462 $ 13,650 (188) (1.4)%
Real estate--farmland........................................... 11,948 8,302 3,646 43.9
Real estate--1-4 family residential............................. 88,473 79,808 8,665 10.8
Real estate--non-farm, non-residential.......................... 48,917 35,068 13,849 39.5
Commercial and industrial....................................... 17,932 22,986 (5,054) (22.0)
Consumer loans.................................................. 22,227 24,543 (2,266) (9.2)
Tax-exempt loans................................................ 11,347 8,390 2,957 35.2
Other loans..................................................... 6,297 4,216 2,081 49.3
------------- ------------ ---------
Total loans..................................................... $ 220,653 $ 196,963 $ 23,690 12.0%
------------- ------------ --------- -----
------------- ------------ --------- -----
</TABLE>
53
<PAGE>
ASSET QUALITY
Provision for loan losses was relatively stable for 1997 versus 1996. An
analysis of activity in the allowance for loan losses follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at January 1...................................................... $ 2,000 $ 1,722
Provision for loan losses................................................. 610 616
Losses charged to allowance............................................... (750) (327)
Recoveries credited to allowance.......................................... 109 144
------ ------
Balance at September 30................................................... $ 1,969 $ 2,155
------ ------
------ ------
</TABLE>
PTC maintains a watch list and performs an ongoing loan review function. On
a quarterly basis the allowance for loan loss calculation is completed. While
management believes that the allowance is adequate as of September 30, 1997, it
intends to significantly fund the provision during the fourth quarter because
PTC's overall loan growth exceeded 13.5% in 1996 and will exceed 14% growth in
1997. A comparative review of the PTC's allowance for loan loss to its peer
group, which consists of financial institutions between $150,000,000 and
$300,000,000 in assets, was completed. Through this analysis, it was determined
that PTC's allowance to total loans percentage relationship was significantly
less than its peer group. Management will fund the reserve during the fourth
quarter of 1997 to bring PTC closer to its peer group and to recognize the
tremendous growth experienced during the past two years.
A summary of non-performing loans follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans................................................................... $ 2,349 $ 1,794
Restructured loans.................................................................. -- --
Accruing loans 90 days or more past due............................................. 56 34
------ ------
Total non-performing loans........................................................ $ 2,405 $ 1,828
------ ------
------ ------
Allowance for loan losses........................................................... $ 1,969 $ 2,000
Allowance/total loans............................................................... 0.89% 1.02%
Allowance/non-performing loans...................................................... 81.9 109.4
Non-performing loans/total loans.................................................... 1.09 0.93
</TABLE>
Chargeoffs were $750,000 for 1997, of which $550,000 was related to one loan
relationship. As of September 30, 1997, the carrying value of loans to a
bankrupt commercial borrower was $750,000, which is included in non-accrual
loans. An agreed settlement has been approved through the bankruptcy courts and
payment is expected before year end. No additional loss is expected.
CAPITAL
Shareholders' equity increased from $21,653,000 at December 31, 1996 to
$23,740,000 at September 30, 1997. The increase of $2,087,000 was almost solely
due to retained earnings--net income less cash dividends.
PTC and People's Trust are subject to regulatory capital requirements
administered by the federal banking agencies. "Consolidated" actual and minimum
required capital ratios for capital adequacy and prompt corrective action
purposes are presented below. ("Bank only" ratios are substantially the same as
54
<PAGE>
"consolidated"). PTC and People's Trust are both considered "well-capitalized"
for prompt corrective action purposes.
<TABLE>
<CAPTION>
MINIMUM REQUIRED TO
BE "WELL-
MINIMUM REQUIRED FOR CAPITALIZED" UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION REGULATIONS
--------- ----------------------- ---------------------
<S> <C> <C> <C>
AS OF SEPTEMBER 30, 1997
- -----------------------------------------------------------------
Tier 1 capital to average assets............................... 7.26% 4.0% 5.0%
Tier 1 capital to risk-weighted assets......................... 10.73 4.0 6.0
Total capital to risk-weighted assets.......................... 11.70 8.0 10.0
AS OF DECEMBER 31, 1996
- -----------------------------------------------------------------
Tier 1 capital to average assets............................... 6.73% 4.0% 5.0%
Tier 1 capital to risk-weighted assets......................... 10.54 4.0 6.0
Total capital to risk-weighted assets.......................... 11.60 8.0 10.0
</TABLE>
LIQUIDITY
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors and creditors.
High levels of liquidity bear higher corresponding costs, measured in terms of
lower yields on short-term investments, 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, PTC holds $20,972,000 of 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 may arise from declines in deposits or other
funding sources, draw downs of loan commitments and requests for new loans.
PTC's strategy is to fund assets to the maximum extent possible with core
deposits, which provide a sizable source of relatively stable and low-cost
funds. Average core deposits funded approximately 87% of total earning assets at
September 30, 1997.
Management believes PTC has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. PTC
has not received any recommendations from regulatory authorities, which would
materially affect liquidity, capital resources or operations.
INTEREST RATE RISK
At September 30, 1997, PTC held approximately $178,606,000 in assets
comprised of securities, loans, short-term investments, and federal funds sold,
which were interest sensitive in one year or less time horizons. PTC's interest
rate sensitivity analysis at September 30, 1997 appears below. Core deposits are
distributed or spread among the various repricing categories based upon
historical patterns of repricing which are reviewed periodically by management.
The assumptions regarding these repricing characteristics greatly influence
conclusions regarding interest sensitivity. Management believes its assumptions
regarding these liabilities are reasonable.
Effective asset/liability management requires the maintenance of a proper
ratio between maturing or repriceable interest-earning assets and
interest-bearing liabilities. It is the policy of PTC that rate-sensitive
55
<PAGE>
assets less rate-sensitive liabilities to total assets are kept within a range
of 85% to 115% for all time periods one year and longer.
<TABLE>
<CAPTION>
MATURING OR REPRICING
(DOLLARS IN THOUSANDS)
3 MONTHS ONE YEAR 5 YEARS 5 YEARS
------------- ------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Rate-sensitive assets.................................. $ 63,131 115,475 85,065 $ 25,335
Rate-sensitive liabilities............................. 88,169 111,064 47,496 29,396
------------- ------------- ------------ ------------
Rate-sensitive GAP (assets less liabilities)........... $ (25,038) $ 4,411 $ 37,569 $ (4,061)
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Rate-sensitive GAP (cumulative)........................ $ (25,038) $ (20,627) $ 16,942 $ 12,881
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
Percent of total assets (cumulative)................... (8.3)% (6.8)% 5.6 % 4.3 %
Rate-sensitive assets/liabilities (cumulative)......... 71.6 89.6 106.9 104.7
</TABLE>
EFFECTS OF CHANGING PRICES
PTC's asset and liability structure is substantially different from that of
an industrial company in that most of its assets and liabilities are monetary in
nature. Management believes the impact of inflation on financial results depends
upon PTC's ability to react to changes in interest rates and, by such reaction,
reduce the inflationary impact on performance. Interest rates do not necessarily
move in the same direction at the same time, or at the same magnitude, as the
prices of other goods and services, As discussed previously, management relies
on its ability to manage the relationship between interest-sensitive asset and
liabilities to protect against wide interest rate fluctuations, including those
resulting from inflation.
FACILITIES AND TECHNOLOGY
In an effort to make its service more accessible and convenient, PTC is
considering renovating its main banking facility in Rushville. This renovation
will enhance customer accessibility to the bank's various products and services
as well as enhance drive-through banking, ATM accessibility and customer
parking.
During 1997, PTC initiated many technological improvements. Certain of these
improvements represent capital investments, which allows PTC to continue to
efficiently compete within the financial services industry which is becoming
increasingly dependent upon technology. Investments are being made in additional
ATM's, cash dispensers, Automated Voice Response System, debit cards, and
additional state-of-the-art personal computers which will allow for improved
efficiencies in customer service.
YEAR ENDED DECEMBER 31, 1995 AND 1996
The following discussion and analysis provides information regarding PTC's
consolidated financial condition and results of operations as of and for the
years ended December 31, 1995 and 1996.
EARNINGS SUMMARY
PTC's net income for 1996 was $3,276,000 compared with net income for 1995
of $2,907,000, an increase of $369,000 or 12.7%. Earnings per share were $3.17
in 1996 compared to $2.86 for 1995.
NET INTEREST INCOME
Net interest income is the principal component of net income for PTC and is
determined by the relative size and characteristics of interest-earning assets
and interest-bearing liabilities. The increase in net income in 1996 resulted
primarily from an increase in net interest income. For the years ended December
31, 1996 and 1995 net interest income was $10,422,000 and $9,585,000,
respectively. This represents an increase in 1996 of $837,000 (8.03%).
56
<PAGE>
Growth in net interest income is drawn primarily from growth in earning
assets. Average earning assets increased to $257,011,000 in 1996 from
$234,731,000 in 1995, an increase of $22,280,000 (9.5%). The most significant
increase in average earning assets occurred in average loans which increased
$16,943,000 (10.1%) to $184,447,000 in 1996. Increasing loan balances were the
primary cause of the increase in net interest income during 1996. The following
table sets forth, for the periods indicated, information regarding the average
balances of interest-earning assets and interest-bearing liabilities, the dollar
amount of interest income and interest expense, and the resulting yield on
average interest-earning assets and rates on average interest-bearing
liabilities. Average balances are also provided for non-earning assets, non-
interest-bearing liabilities and shareholders' equity.
Net interest income also depends on the rates paid on assets and the rates
paid on liabilities. The net interest margin represents net interest income as a
percent of average earning assets. The net interest margin, or margin on earning
assets, was 4.39% in 1996 and 4.37% in 1995. Interest rates were low and
stable during this time period and the result has been about the same margins.
57
<PAGE>
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
1996 1995
---------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
---------- --------- ----------- ---------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Short-term investments
Interest-bearing balances with banks................. $ 2,274 $ 130 5.72% $ 1,034 $ 62 6.00%
Federal funds sold................................... 7,317 433 5.92 7,923 473 5.97
Securities:
Taxable.............................................. 38,224 2,440 6.38 39,394 2,498 6.34
Non-taxable(1)....................................... 24,749 1,805 7.29 18,876 2,424 7.54
Loans and leases:(2)
Taxable(3)........................................... 176,529 16,658 9.44 160,915 15,062 9.36
Non-taxable(1)....................................... 7,918 708 8.94 6,589 582 8.83
---------- --------- ----- ---------- --------- ---------
Total earning assets................................. 257,011 22,174 8.63 234,731 20,101 8.56
---------- --------- ----- ---------- --------- ---------
Cash and due from banks................................ 6,992 6,196
Premises and equipment, net............................ 3,246 2,971
Intangible assets...................................... 1,678 1,899
Accrued interest receivable and other assets........... 3,384 3,051
Less: Allowance for loan losses........................ (1,976) (1,607)
---------- ----------
Total assets......................................... $ 270,335 $ 247,241
---------- ----------
---------- ----------
INTEREST-BEARING LIABILITIES
Savings and interest-bearing demand deposits........... $ 78,529 2,247 2.86 75,087 2,155 2.87
Time deposits.......................................... 148,079 8,590 5.80 132,604 7,579 5.72
Notes payable.......................................... 782 60 7.67 1,247 102 8.18
---------- --------- ---------- ---------
Total interest-bearing liabilities................... 227,390 10,897 4.79 208,938 9,836 4.71
---------- --------- ----- ---------- --------- ---------
Demand deposit accounts................................ 20,136 18,778
Other liabilities...................................... 2,396 1,879
---------- ----------
Total liabilities.................................... 249,922 229,595
Shareholders' equity................................... 20,413 17,646
---------- ----------
Total liabilities and shareholders' equity........... $ 270,335 $ 247,241
---------- ----------
---------- ----------
Net interest/spread.................................... $ 11,277 3.84% $ 10,265 3.85%
--------- ----- --------- ---------
--------- ----- --------- ---------
Margin................................................. 4.39% 4.37%
----- ---------
----- ---------
</TABLE>
- ------------------------------
(1) Effective tax rates were determined as though interest earned on PTC's
investments in municipal bonds and loans was fully taxable. Interest yields
on state and municipal securities are presented on a fully taxable
equivalent basis using a 34% tax rate.
(2) Interest income on loans included fees of $437,000 and $370,000 for 1996 and
1995.
(3) Non-accrual loans are included in average balance.
58
<PAGE>
The following table presents information regarding PTC's interest income and
interest expense for the periods indicated. The table presents the amount of
change in interest income or interest expense which is attributable to the
change in the average balance (volume) and the amount of change which is related
to change in rates. The net change, attributable to the combined impact of
volume and rate, has been allocated proportionately to the change due to volume
and the change due to rate. Increases in balances were responsible for an
increase in net interest income of $1,058,000 during 1996, however, this was
offset by a decrease in spread of $46,000 resulting in a $1,012,000 increase in
net interest income.
<TABLE>
<CAPTION>
1996-1995
---------------------------------
<S> <C> <C> <C>
CHANGE CHANGE
TOTAL DUE TO DUE TO
CHANGE VOLUME RATE
--------- --------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
EARNING ASSETS
Short-term investments
Interest-bearing balances with banks............................................... $ 68 $ 71 $ (3)
Federal funds sold................................................................. (40) -- (40)
Securities
Taxable............................................................................ (58) (75) 17
Non-taxable........................................................................ 381 430 (49)
Loans and leases
Taxable............................................................................ 1,596 1,472 124
Non-taxable........................................................................ 126 119 7
--------- --------- -----
Total earning assets............................................................. 2,073 2,017 56
--------- --------- -----
INTEREST-BEARING LIABILITIES
Savings and interest-bearing demand deposits......................................... 92 99 (7)
Time deposits........................................................................ 1,011 896 115
Notes payable........................................................................ (42) (36) (6)
--------- --------- -----
Total interest-bearing liabilities............................................... 1,061 959 102
--------- --------- -----
Net interest/spread.............................................................. $ 1,012 $ 1,058 $ (46)
--------- --------- -----
--------- --------- -----
</TABLE>
NON-INTEREST INCOME
Total non-interest income was $2,349,000 in 1996 and $1,902,000 in 1995.
This reflected an increase in 1996 of $447,000 (23.5%). Service charges on
deposit accounts were relatively flat in 1996 compared to 1995. The amounts were
$1,199,000 in 1996 compared to $1,192,000 in 1995.
Mortgage banking revenues included net gains and losses realized when
mortgage loans were sold into the secondary market, service fee revenue earned
from servicing those loans after they were sold and points paid by customers at
time of closing. Mortgage banking revenue, as reflected in PTC's financial
statements, has not been reduced by the associated costs, such as compensation
expense, which is shown elsewhere within non-interest expense. Total mortgage
banking revenue was $795,000 in 1996 and $447,000 in 1995. This reflects an
increase in 1996 of $348,000 (78%). The majority of this increase is from PTC
adopting SFAS No. 122 which recognizes the income value of servicing rights.
This accounting change increased income in mortgage banking $225,000 in 1996.
People's Trust sold its travel agency in April, 1996 so it could concentrate
its focus on additional banking facilities, products and services. As a result,
travel commission revenues decreased from $178,000 in 1995 to $66,000 in 1996
(62.8%). PTC does not engage in the purchase and sale of securities with the
intent to generate gains. PTC may sell available-for-sale securities for
liquidity or to manage its asset/
59
<PAGE>
liability position. During 1996, such sales, as well as gains and losses
realized when securities were called prior to their maturity, generated net
gains of $104,000 compared to losses in 1995 of $76,000.
NON-INTEREST EXPENSE
Non-interest expense, or overhead, includes the costs of personnel,
occupancy, data processing equipment, insurance, and other costs of sustaining
operations. Overhead for the years ended December 31, 1996 and 1995 was
$7,103,000 and $6,639,000, respectively. This reflects increases of $464,000
(7%) in 1996. More than half of total non-interest expense was comprised of
salaries and employee benefits. During 1996 and 1995 salaries and employee
benefits were $4,137,000 and $3,725,000 respectively. This represents an 11%
increase which was due to People's Trust opening and staffing two new branches
during 1996. The new branches are expected to have a positive effect on net
income by the beginning of 1998.
FDIC insurance expense decreased $249,000 in 1996 as a result of a decrease
in the premium rates charged to insured banks. Other operating expenses
increased $208,000 from 1995 to 1996 for a variety of reasons, including higher
advertising and promotional expenses, legal and professional fees, and charge
card expenses.
INCOME TAXES
PTC's income tax expense was affected primarily by the level of pre-tax
income. As income increased, tax expense did as well. Tax expense for 1996
increased $364,000 over 1995. PTC can and does purchase tax-free investments and
originates tax-free loans as a means of generating tax-free income, effectively
mitigating tax expense.
ASSET AND LIABILITY MANAGEMENT
PTC engages in a formal process of measuring and defining the amount of
interest rate risk. Interest rate risk is the effect on net interest income
resulting from changes in interest rates. The goal of the asset and liability
management process is to maintain a high, yet stable, net interest margin by
identifying the degree of interest rate risk and developing tactics and
strategies to mitigate the extent to which net interest income will be affected
by changes in interest rates.
The following table illustrates the repricing opportunities, or "rate
sensitivity" of interest-earning assets and interest bearing liabilities. A
repricing may occur if the rate on the asset or liability changes as interest
rates change, or, when the rate is fixed, at the time they mature. The "gap" is
the difference between rate sensitive assets and rate sensitive liabilities
within a specific time frame. Gap is considered an indicator of the effect a
change in interest may have on net interest income.
As of December 31, 1996, PTC's rate-sensitive liabilities exceeded
rate-sensitive assets through one year. This would indicate that if rates
increase, net interest income may decrease. In order to determine accurately the
effect of changes in interest rates, the repricing effect of each type of
interest-earning asset and interest-bearing liability must be measured. Assets
and liabilities have different characteristics and the magnitude of change
differs for each. Management continually monitors the changes to net interest
income which may result from changing interest rates.
60
<PAGE>
INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
4-12 1-5 AFTER NON-INTEREST
0-3 MONTHS MONTHS YEARS 5 YEARS BEARING TOTAL
---------- ---------- --------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks.......................... $ 10,772 $ 2,213 $ 12,985
Federal funds sold............................... 13,200 13,200
Interest bearing balances with financial
institutions................................... $ 898 $ 999 1,897
Securities....................................... 3,460 5,538 46,828 $ 7,768 63,594
Loans............................................ 40,103 100,731 36,897 17,337 1,895 196,963
Allowance for loan losses........................ (2,000) (2,000)
Other assets..................................... 9,936 9,936
---------- ---------- --------- --------- ----------- ----------
Total assets................................... 67,535 107,167 84,724 25,105 12,044 $ 296,575
---------- ---------- --------- --------- ----------- ----------
----------
Non-interest-bearing deposits.................... $ 32,350 $ 32,350
Passbook savings................................. $ 30,114 30,114
Interest bearing deposits........................ $ 57,654 -- 57,654
CD's >100M....................................... 9,232 12,330 $ 7,388 28,950
CD's >100M....................................... 22,296 47,173 39,924 $ 12 109,405
IRA's............................................ 2,115 3,369 7,169 12,653
Note payable..................................... 500 500
Other liabilities................................ 3,296 3,296
Capital.......................................... 21,653 21,653
---------- ---------- --------- --------- ----------- ----------
Total liabilities.............................. 91,797 92,986 54,481 12 57,299 $ 296,575
---------- ---------- --------- --------- ----------- ----------
----------
Periodic gap....................................... $ (24,262) $ 14,181 $ 30,243 $ 25,093 $ (45,255)
---------- ---------- --------- --------- -----------
---------- ---------- --------- --------- -----------
Cumulative gap..................................... $ (24,262) $ (10,081) $ 20,162 $ 45,255
---------- ---------- --------- ---------
---------- ---------- --------- ---------
</TABLE>
A significant assumption that creates the large negative gap in the 0 to 3
month category is that all interest-bearing demand accounts are subject to
immediate repricing. While it is true that contractually, those accounts are
subject to immediate repricing, the rates paid on those accounts are not
generally tied to specific indices and are influenced by market conditions and
other factors. Accordingly, a general movement in interest rates, either up or
down, may not have any immediate effect on the rates paid on these deposit
accounts. The foregoing table illustrates only one source of information about
sensitivity to interest rate movements. The core of PTC's asset and liability
management process consists of simulations that take into account the time that
various assets and liabilities may reprice and the degree to which various
categories of such assets and liabilities will respond to general interest rate
movements. Interest rate risk can only be represented by a measurement of the
effects of changing interest rates given the capacity for, and magnitude of,
change of specific assets and liabilities.
LIQUIDITY
Liquidity refers to the availability of funds to meet deposit withdrawals,
fund loan commitments and pay expenses. During 1996, PTC's loan portfolio
increased to $197,000,000 at December 31, 1996 from $173,000,000 at December 31,
1995, an increase of $24,000,000 or 13.7%. Increases in deposits provided one
source of funding for loan growth in 1996. Average deposits increased
$20,000,000 (10%) between 1995 and 1996. Additional funding for loan growth was
provided through sales and maturities of securities.
61
<PAGE>
A common measure of liquidity is the loan to deposit ratio. As of December
31, PTC had a loan to deposit ratio of 72.6% in 1996, and 71.7% in 1995.
Increasing this ratio was an important goal for PTC's management during 1996,
and significantly added to PTC's profitability.
Loan commitments include unfunded portions of lines of credit and commercial
letters of credit. These unfunded commitments may or may not require funding. At
December 31, 1996 and 1995, such commitments totaled $29,000,000 and
$18,000,000, respectively. Loan commitments generate fee income for PTC.
LOAN QUALITY
PTC has maintained a high level of quality in the loan portfolio.
Non-performing loans are those loans which are past due more than 90 days and
still accruing interest and those loans on which PTC no longer accrues interest.
As of December 31, 1996 and 1995, non-performing loans totaled $1,828,000 and
$1,464,000, respectively. As a percent of total loans, non-performing loans were
0.93% at December 31, 1996 and 0.84% at December 31, 1995.
The provision for loan losses is a charge to earnings to provide for
potential loan losses. The provision for loan losses was $828,000 in 1996 and
$740,000 in 1995. Coverage of potential loan losses is provided by the allowance
for loan losses. The adequacy of the allowance for loan losses is evaluated at
least quarterly by the credit review function and management based upon a review
of identified loans with more than a normal degree of risk, historical loss
percentages, and present and forecasted economic conditions affecting borrowers.
At December 31, the allowance for loan losses was $2,000,000 for 1996 and
$1,722,000 for 1995. As a percent of total loans, the allowance for loan losses
was 1.02% and 0.99% at those points in time. Management's analysis indicates
that the allowance for loan losses at December 31, 1996, was adequate to cover
potential losses on identified loans with credit problems and on the remaining
portfolio. Contained within the general allowance for loan loss specific
allocations can be made if management can determine a loss. In the case of loans
to a bankrupt commercial borrower, management had specifically reserved
$475,000.
Gross loan chargeoffs in 1996 and 1995 were $726,000 and $855,000,
respectively. As a percentage of average loans, gross loan chargeoffs were 0.39%
and 0.51% for those periods.
Effective January 1, 1995, PTC was required to adopt SFAS No. 114 which
required recognition of loan impairment. Loans are considered impaired if full
principal or interest payments are not anticipated. Impaired loans are carried
at the present value of expected cash flows discounted at the loan's effective
interest rate or at the fair value of the collateral if the loan is collateral
dependent. A portion of the allowance for loan losses is allocated to impaired
loans. PTC's average investment in impaired loans during 1996 was $844,000. At
December 31, 1996, $1,300,000 of loans were deemed to be impaired and $475,000
of the allowance for loan losses was allocated to those loans. At December 31,
1995, impaired loans were $129,000. The large increase in impaired loans was
related to loans to Bennett Funding.
CAPITAL
In June, 1994, PTC completed a rights offering of its common shares at
$25.00 per share ($15.50 per share when adjusted for a subsequent stock split
and stock dividend). The net proceeds after commissions and expenses from the
sale of 60,000 shares were approximately $1,453,000. This rights offering
included options which were exercised in January 1996, resulting in the issuance
of 28,449 shares for a total of $485,000 at $17.05 per share ($15.50 when
adjusted for a subsequent stock dividend). In April, 1996, PTC repurchased
22,634 shares at a market price of $30 per share ($27.27 when adjusted for a
subsequent stock dividend).
Both PTC and People's Trust are required to comply with capital requirements
promulgated by their primary regulators. Those regulations require the
maintenance of specified levels of capital to total assets
62
<PAGE>
(the leverage ratio) and to risk-weighted assets (the risk-based capital ratio).
These regulations require maintaining a leverage ratio of at least 5% for
"well-capitalized" entities and a total risk-based capital ratio of at least
10%.
PTC and People's Trust were in full compliance with all regulatory capital
requirements at December 31, 1996. The following table indicates PTC's actual
capital levels at the dates indicated.
REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
MINIMUM REQUIRED
TO BE WELL-
CAPITALIZED
MINIMUM REQUIRED UNDER PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY PURPOSES ACTION REGULATIONS
ACTUAL
-------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
Total capital (to
risk-weighted assets)
PTC.................... $ 21,836 11.60% $ 15,055 8.0% $ 18,819 10.0%
People's Trust......... 21,487 11.46 14,995 8.0 18,744 10.0
Tier 1 capital (to
risk-weighted assets)
PTC.................... 19,836 10.54 7,528 4.0 11,291 6.0
People's Trust......... 19,487 10.40 7,498 4.0 11,246 6.0
Tier 1 capital (to
average assets)
PTC.................... 19,836 6.73 11,795 4.0 14,744 5.0
People's Trust......... 19,487 6.63 11,753 4.0 14,692 5.0
</TABLE>
PTC and People's Trust at year-end 1996 were categorized as
well-capitalized.
SELECTED FINANCIAL RATIOS
The following table indicates certain key financial ratios for PTC for the
years indicated:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Return on assets............................................................. 1.21% 1.18%
Return on equity............................................................. 16.05 16.48
Dividend payout ratio........................................................ 21 19
Equity to assets ratio....................................................... 7.55 7.14
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
SFAS No. 125 was issued by the FASB in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
of PTC and People's Trust is not expected to be material.
63
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company was initially formed in Owensboro, Kentucky in 1982 as First
Commonwealth Bancorp. The Company reincorporated under the laws of the State of
Indiana under its present name in 1983, and relocated to Greensburg, Indiana in
anticipation of acquiring Union Bank. In 1987, The Peoples Bank, in Portland,
Indiana ("Peoples Bank"), was acquired and as of December 31, 1991, Regional
Bank was acquired. Effective July 1, 1994, the Company merged Union Bank with
Peoples Bank, with the resulting bank renamed Union Bank and Trust Company of
Indiana ("Union Bank"). Through Union Bank and Regional Bank, the Company
operates twelve offices with 143 full-time equivalent employees in eastern and
southern Indiana. As of September 30, 1997, the Company had consolidated assets
of $342 million, consolidated deposits of $286 million and shareholders' equity
of $30 million.
Through its subsidiaries, the Company offers a broad range of financial
services, including: accepting time and transaction deposits; making consumer,
commercial, agri-business and real estate mortgage loans; issuing credit cards;
renting safe deposit facilities; providing general agency personal and business
insurance services; providing personal and corporate trust services; and
providing other corporate services such as payroll processing, letters of credit
and repurchase agreements.
The Company's subsidiaries are located in non-metropolitan areas and their
business is centered in loans and deposits generated within markets considered
to be largely rural in nature. In addition to competing with other banks, thrift
institutions, credit unions and finance companies located within their service
areas, they also compete, directly and indirectly, with all providers of
financial services.
RECENT DEVELOPMENTS
The Company is a party to an Agreement and Plan of Merger with PTC dated as
of October 8, 1997 (the "Merger Agreement") pursuant to which PTC would merge
with and into the Company and People's Trust would become a wholly owned
subsidiary of the Company, and each outstanding share of PTC at the effective
time of the merger would be converted into the right to receive 1.075 shares of
common stock of the Company (the "PTC Merger"). The Company expects to issue in
the aggregate up to 1,136,417 shares of common stock in the PTC Merger. The PTC
Merger is expected to be completed late in the fourth quarter of 1997 or early
in the first quarter of 1998.
At September 30, 1997, PTC had total assets of $302.7 million, total
deposits of $275.7 million and total shareholders' equity of $23.7 million. PTC
had net income of $2.7 million for the nine months ended September 30, 1997,
compared to net income of $2.4 million for the nine months ended September 30,
1996. See "PTC Selected Financial Data" and "PTC Management's Discussion and
Analysis of Financial Condition and Results of Operations." People's Trust
engages in a general full-service commercial and consumer banking business.
People's Trust conducts its banking business through 17 offices located in the
Indiana counties of Dearborn, Franklin, Jefferson, Ripley, Rush, Fayette,
Decatur, Switzerland and Wayne.
PTC is subject to the informational reporting requirements of the Exchange
Act. Information about PTC may be obtained from the Public Reference Section of
the Commission or accessed through electronic means, including the Commission's
home page on the Internet (http://www.sec.gov), in the same manner that
information about the Company may be obtained. See "Available Information."
The PTC Merger is expected to qualify as a "pooling of interests" for
accounting and financial reporting purposes. See "Summary of Pro Forma
Consolidated Financial Data," "Pro Forma Selected Financial Data" and "Index to
Consolidated Financial Statements and Pro Forma Consolidated Financial
Statements." The PTC Merger is intended to be a tax free reorganization so that
no gain or loss would be recognized by the Company or PTC, and no gain or loss
would be recognized by shareholders of PTC except in respect of cash received
for fractional shares or pursuant to the exercise of statutory dissenters'
rights. The PTC Merger is subject to various conditions, including requisite
shareholder and regulatory approvals. Accordingly, no assurance can be given
that the PTC Merger will be consummated. If the PTC
64
<PAGE>
Merger is not consummated, the anticipated significant increase in the Company's
capital base due to the PTC Merger will not be realized. Consequently, due to
regulatory capital requirements, the Company's ability to utilize a portion of
the offering proceeds for future acquisitions and other growth would be
adversely affected if the PTC Merger is not consummated.
Following the PTC Merger, pursuant to the Merger Agreement, the Board of
Directors of the Company will consist of ten members, five of which will have
been designated by the Company and five of which will have been designated by
PTC. The Merger Agreement also provides that the Company's Chairman of the
Board, President and Chief Executive Officer, Robert E. Hoptry, will continue to
be the Company's Chairman of the Board and Chief Executive Officer and that
PTC's President and Chief Executive Officer, James L. Saner, will be President
and Chief Operating Officer of the Company following the PTC Merger.
EMPLOYEES
As of September 30, 1997, the Company and its subsidiaries had approximately
151 full-time equivalent employees to whom it provides a variety of benefits.
Management believes that its relationship with its employees is good.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company ("BHC") within the meaning of the Bank
Holding Company Act of 1956, as amended ("BHCA"). This Act subjects BHCs to
regulations of the Federal Reserve and restricts the business of BHCs to banking
and related activities. In addition, the Company is a nondiversified unitary
savings and loan holding company subject to regulations, examinations,
supervision and reporting requirements of the Office of Thrift Supervision
("OTS").
Under the BHCA, a BHC is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of voting stock of any company which is
not a bank or engaging in any activity other than managing or controlling banks.
A BHC may, however, own shares of a company engaged in activities which the
Federal Reserve has determined to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto.
Acquisitions by the Company of banks and savings associations are subject to
federal and state regulation. Any acquisition by the Company of more than five
percent of the voting stock of any bank requires prior approval of the Federal
Reserve. Acquisition of savings associations is also subject to the approval of
the OTS.
Indiana law permits BHCs to acquire BHCs and banks out of state on a
reciprocal basis, subject to certain limitations. Under current law, the Company
may acquire banks, and may be acquired by BHCs, located in any state in the
United States which permits reciprocal entry by Indiana BHCs. Under the BHCA,
BHCs may acquire savings associations without geographic restrictions.
A BHC and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with the extension of credit, lease or sale of
property, or the provision of any property or service.
The Company is under the jurisdiction of the Commission and state securities
commission for matters relating to the offering and sale of its securities. The
Company is subject to the Commission's rules and regulations relating to
periodic reporting, reporting to shareholders, proxy solicitation and insider
trading. See "Available Information."
The Company's income is principally derived from dividends paid on the
common stock of its subsidiaries. The payment of these dividends is subject to
certain regulatory restrictions.
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength to, and commit resources to support, its affiliates. As a
result of such policy, the Company may be required to commit resources to its
affiliate banks in circumstances where it might not otherwise do so.
65
<PAGE>
REGULATION AND SUPERVISION OF THE SUBSIDIARY BANKS
Union Bank is supervised, regulated and examined by the Indiana Department
of Financial Institutions ("DFI") and the FDIC. Regional Bank is supervised,
regulated and examined by the OTS. A cease-and-desist order may be issued
against the banks, if the respective agency finds that the activities of the
bank represents an unsafe and unsound banking practice or violation of law.
The deposits of Union Bank are insured by the BIF of the FDIC. The deposits
of Regional Bank are insured by the SAIF of the FDIC. The FDIC has the authority
to change premiums twice per year. Commencing in 1997 and until 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). After the
three year period, BIF and SAIF-insured institutions will pay the same
assessment rate of 2.43 cents per $100 of deposits. Based on 1996 year end
deposit levels, Union Bank's deposit insurance expense will increase
approximately $22,000 and Regional Bank will save approximately $155,000
compared to the assessment rates paid in 1996 as a result of these changes.
Branching by banks in Indiana is subject to the jurisdiction, and requires
the prior approval, of the bank's or savings bank's primary federal regulatory
authority and, if the branching bank is a state bank, of the DFI. Under Indiana
law, the banks may branch anywhere in the state.
The Company is a legal entity separate and distinct from its subsidiary
Banks. There are various legal limitations on the extent to which the Banks can
supply funds to the Company. The principal source of the Company's funds
consists of dividends from its subsidiary Banks. State and Federal law restrict
the amount of dividends which may be paid by banks and savings banks. In
addition, the Banks are subject to certain restrictions on extensions of credit
to the Company, on investments in the stock or other securities of the Company
and in taking such stock or securities as collateral for loans.
LEGISLATION
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
represented a comprehensive and fundamental change to banking supervision and
mandates the development of additional regulations governing almost every aspect
of the operations, management and supervision of banks and BHCs.
FDICIA also included several supervisory reforms related to the frequency of
regulatory examinations and audit requirements. FDICIA also required the
adoption of safety and soundness standards on matters such as loan underwriting
and documentation, and compensation and other employee benefits; mandated
consumer protection disclosures with respect to deposit accounts; and the
establishment of a risk-based deposit insurance system. To date, many of the
provisions of FDICIA have been implemented.
FDICIA requires banking regulators to take prompt corrective actions with
respect to depository institutions that fall below certain capital levels and
prohibit any depository institution from making a capital distribution that
would cause it to be considered undercapitalized. Banking regulators were also
required to revise their capital standards to take into account interest rate
risk. A policy statement has been proposed providing a supervisory framework to
measure and monitor interest rate risk at individual banks. Banks may use an
internal model which provides a measure of the change in a bank's economic
value. The results of the supervisory and internal models would be one factor
regulators will consider in their assessment of capital adequacy. Other factors
will also be considered.
Certain regulations define relevant capital measures for five capital
categories. A "well capitalized" institution is one that has a total risk-based
capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%,
a leverage ratio of at least 5% and is not subject to regulatory direction to
maintain a specific level for any capital measure. An "adequately capitalized"
institution is one that has ratios greater than 8%, 4% and 4%. An institution is
"undercapitalized" if its respective ratios are less than 8%, 4% and 4%.
"Significantly undercapitalized" institutions have ratios of less than 6%, 3%
and 3%. An institution is deemed to be "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is 2% or
66
<PAGE>
less. Institutions with capital ratios at levels of "undercapitalized" or lower
are subject to various limitations which, in most situations, will reduce the
competitiveness of the institution.
The Riegle Community Development and Regulatory Improvement Act of 1994
("Riegle Act") was signed into law in 1994. The Riegle Act contains seven titles
pertaining to community development and home ownership protection, small
business capital formation, paperwork reduction and regulatory improvement,
money laundering and flood insurance.
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Branching Act") was enacted. In general, the Branching
Act permits BHCs that are adequately capitalized and adequately managed to
acquire banks located in any other state, subject to certain total deposit
limitations. The Branching Act also permits full interstate branching. States,
however, may have elected to prohibit interstate branching and merger
transactions by enacting legislation prior to June 1, 1997 that applies equally
to all out-of-state banks and expressly prohibits mergers involving out-of-state
banks. Indiana did not enact such legislation.
The monetary policies of regulatory authorities have a significant effect of
the operating results of banks and BHCs. The nature of future monetary policies
and the effect of such policies on the future business and earnings of the
Company and its subsidiaries cannot be predicted.
The Deposit Insurance Funds Act was enacted in 1996 and contained several
major provisions. The new law recapitalized the SAIF by a one-time assessment on
all SAIF-insured deposits. For 1997 through 1999 the banking industry will help
pay for the Financing Corp. ("FICO") bond interest payments at an assessment
rate that is one-fifth the rate paid by thrifts. Beginning January 1, 2000, the
FICO interest payments will be paid pro-rata by banks and thrifts. Deposit
shifting is prohibited for three years and the $2,000 annual minimum deposit
insurance assessment was repealed. The BIF and SAIF will be merged on January 1,
1999 providing a law is passed by that date merging the bank and thrift
charters. In addition, there were more than forty regulatory relief provisions
in this bill.
CAPITAL REQUIREMENTS
The Company and its subsidiary Banks must meet certain minimum capital
requirements mandated by the Federal Reserve, FDIC, OTS and DFI. These
regulatory agencies require BHCs and banks to maintain certain minimum ratios of
primary capital to total assets and total capital to total assets. The Federal
Reserve requires BHCs to maintain a minimum Tier 1 leverage ratio of 3% capital
to total assets; however, for all but the most highly rated institutions which
do not anticipate significant growth, the minimum Tier 1 leverage ratio is 3%
plus an additional cushion of 100 to 200 basis points. As of September 30, 1997,
the Company's leverage ratio of capital to total assets was 8.58%.
The Federal Reserve, OTS and FDIC each have approved the imposition of
"risk-adjusted" capital ratios on BHCs and financial institutions. The Company
and its subsidiaries had capital to assets ratios and risk-adjusted capital
ratios at September 30, 1997, in excess of the applicable regulatory minimum
requirements.
YEAR 2000 COMPUTER ISSUES
In the next two years, most large companies will face a potentially serious
information systems (computer) problem because many software application 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. The Company began the
process of identifying the changes required to its computer programs and
hardware, in consultation with software and hardware providers and bank
regulators, in early 1997. 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 contemplates a program of testing compliance. The
Company estimates that
67
<PAGE>
its costs related to year 2000 compliance will be at least $50,000 and may be
significantly more. The "year 2000" problem is persuasive 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.
DESCRIPTION OF THE PREFERRED SECURITIES
The Preferred Securities will be issued pursuant to the terms of the Trust
Agreement. The Trust Agreement will be qualified as an indenture under the Trust
Indenture Act. The Property Trustee, State Street Bank and Trust Company, will
act as indenture trustee for the Preferred Securities under the Trust Agreement
for purposes of complying with the provisions of the Trust Indenture Act. The
terms of the Preferred Securities will include those stated in the Trust
Agreement and those made part of the Trust Agreement by the Trust Indenture Act.
The following summary of the material terms and provisions of the Preferred
Securities and the Trust Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Agreement, the Trust Act, and the Trust Indenture Act. Wherever particular
defined terms of the Trust Agreement are referred to, but not defined herein,
such defined terms are incorporated herein by reference. The form of the Trust
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, the Trustees, on behalf of IUB
Trust, will issue the Trust Securities. All of the Common Securities will be
owned by the Company. The Preferred Securities will represent preferred
undivided beneficial interests in the assets of IUB Trust and the holders
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities, as well as other benefits as described in the Trust
Agreement. The Trust Agreement does not permit the issuance by IUB Trust of any
securities other than the Trust Securities or the incurrence of any indebtedness
by IUB Trust.
The Preferred Securities will rank PARI PASSU, and payments will be made
thereon pro rata, with the Common Securities, except as described under
"--Subordination of the Common Securities." Legal title to the Subordinated
Debentures will be held by the Property Trustee in trust for the benefit of the
holders of the Trust Securities. The Guarantee executed by the Company for the
benefit of the holders of the Preferred Securities will be a guarantee on a
subordinated basis with respect to the Preferred Securities, but will not
guarantee payment of Distributions or amounts payable on redemption or
liquidation of such Preferred Securities when IUB Trust does not have funds on
hand available to make such payments. State Street Bank and Trust Company, as
Guarantee Trustee, will hold the Guarantee for the benefit of the holders of the
Preferred Securities. See "Description of the Guarantee."
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS. Distributions on each Preferred Security will be
payable at the annual rate of 8.75% of the stated Liquidation Amount of $10,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year, to the holders of the Preferred Securities on the relevant record
dates (each date on which Distributions are payable in accordance with the
foregoing, a "Distribution Date"). The record date will be the 15th day of the
month in which the relevant Distribution Date occurs. Distributions will
accumulate from December 12, 1997, the date of original issuance. The first
Distribution Date for the Preferred Securities will be December 31, 1997. The
amount of Distributions payable for any period will be computed on the basis of
a 360-day year of twelve 30-day months. In the event that any date on which
Distributions are payable on the Preferred Securities is not a Business Day,
then payment of the Distributions payable on such date will be made on the next
succeeding day that is a Business Day (and without any additional Distributions,
interest or other payment in respect of any such
68
<PAGE>
delay) with the same force and effect as if made on the date such payment was
originally due and payable. "Business Day" means any day other than a Saturday
or a Sunday or a day on which Federal or state banking institutions in the
Borough of Manhattan, the City of New York, are authorized or required by law,
executive order or regulation to close, or a day on which the corporate trust
office of the Property Trustee or the corporate trust office of the Debenture
Trustee is closed for business.
EXTENSION PERIOD. The Company has the right under the Indenture, so long as
no Debenture Event of Default has occurred and is continuing, to defer the
payment of interest on the Subordinated Debentures at any time, or from time to
time (each, an "Extension Period"), which, if exercised, would defer quarterly
Distributions on the Preferred Securities during any such Extension Period.
Distributions to which the holders of the Preferred Securities are entitled will
accumulate additional Distributions thereon at the rate per annum of 8.75%
thereof, compounded quarterly from the relevant Distribution Date.
"Distributions," as used herein, includes any such additional Distributions. The
right to defer the payment of interest on the Subordinated Debentures is
limited, however, to a period, in each instance, not exceeding 20 consecutive
quarters and no Extension Period may extend beyond the Stated Maturity of the
Subordinated Debentures. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock, (ii) make any payment of principal, interest or premium, if any,
on or repay, repurchase or redeem any debt securities of the Company that rank
PARI PASSU with or junior in interest to the Subordinated Debentures or make any
guarantee payments with respect to any guarantee by the Company of the debt
securities of any subsidiary of the Company if such guarantee ranks PARI PASSU
with or junior in interest to the Subordinated Debentures (other than payments
under the Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided that such Extension Period may not exceed 20
consecutive quarters or extend beyond the Stated Maturity of the Subordinated
Debentures. Upon the termination of any such Extension Period and the payment of
all amounts then due, the Company may elect to begin a new Extension Period,
subject to the above requirements. Subject to the foregoing, there is no
limitation on the number of times that the Company may elect to begin an
Extension Period.
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the
Subordinated Debentures.
SOURCE OF DISTRIBUTIONS. The funds of IUB Trust available for distribution
to holders of its Preferred Securities will be limited to payments under the
Subordinated Debentures in which IUB Trust will invest the proceeds from the
issuance and sale of its Trust Securities. See "Description of the Subordinated
Debentures." Distributions will be paid through the Property Trustee who will
hold amounts received in respect of the Subordinated Debentures in the Property
Account for the benefit of the holders of the Trust Securities. If the Company
does not make interest payments on the Subordinated Debentures, the Property
Trustee will not have funds available to pay Distributions on the Preferred
Securities. The payment of Distributions (if and to the extent IUB Trust has
funds legally available for the payment of such Distributions and cash
sufficient to make such payments) is guaranteed by the Company. See "Description
of the Guarantee." Distributions on the Preferred Securities will be payable to
the holders thereof as they appear on the register of holders of the Preferred
Securities on the relevant record dates, which will be the 15th day of the month
in which the relevant Distribution Date occurs.
REDEMPTION
GENERAL. The Subordinated Debentures will mature on December 31, 2027. The
Company will have the right to redeem the Subordinated Debentures (i) on or
after December 31, 2002, in whole at any time or in part from time to time, or
(ii) at any time, in whole (but not in part), within 180 days following the
occurrence of a Tax Event, a Capital Treatment Event or an Investment Company
Event, in each case subject to receipt of prior approval by the Federal Reserve
if then required under applicable capital
69
<PAGE>
guidelines or policies of the Federal Reserve. The Company will not have the
right to purchase the Subordinated Debentures, in whole or in part, from IUB
Trust until after December 31, 2002. See "Description of the Subordinated
Debentures--General."
MANDATORY REDEMPTION. Upon the repayment or redemption, in whole or in
part, of any Subordinated Debentures, whether at Stated Maturity or upon earlier
redemption as provided in the Indenture, the proceeds from such repayment or
redemption will be applied by the Property Trustee to redeem a Like Amount (as
defined herein) of the Trust Securities, upon not less than 30 nor more than 60
days notice, at a redemption price (the "Redemption Price") equal to the
aggregate Liquidation Amount of such Trust Securities plus accumulated but
unpaid Distributions thereon to the date of redemption (the "Redemption Date").
See "Description of the Subordinated Debentures--Redemption or Exchange." If
less than all of the Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption will be
allocated to the redemption of the Trust Securities pro rata.
DISTRIBUTION OF SUBORDINATED DEBENTURES. Subject to the Company having
received prior approval of the Federal Reserve if so required under applicable
capital guidelines or policies of the Federal Reserve, the Company will have the
right at any time to dissolve, wind-up or terminate IUB Trust and, after
satisfaction of the liabilities of creditors of IUB Trust as provided by
applicable law, cause the Subordinated Debentures to be distributed to the
holders of Trust Securities in liquidation of IUB Trust. See "--Liquidation
Distribution upon Termination."
TAX EVENT REDEMPTION, CAPITAL TREATMENT EVENT REDEMPTION OR INVESTMENT
COMPANY EVENT REDEMPTION. If a Tax Event, a Capital Treatment Event or an
Investment Company Event in respect of the Trust Securities occurs and is
continuing, the Company has the right to redeem the Subordinated Debentures in
whole (but not in part) and thereby cause a mandatory redemption of such Trust
Securities in whole (but not in part) at the Redemption Price within 180 days
following the occurrence of such Tax Event, Capital Treatment Event or
Investment Company Event. In the event a Tax Event, a Capital Treatment Event or
an Investment Company Event has occurred with respect to the Trust Securities
and the Company does not elect to redeem the Subordinated Debentures and thereby
cause a mandatory redemption of such Trust Securities or to liquidate IUB Trust
and cause the Subordinated Debentures to be distributed to holders of such Trust
Securities in liquidation of IUB Trust as described below under "--Liquidation
Distribution upon Termination," such Preferred Securities will remain
outstanding and Additional Payments (as defined herein) may be payable on the
Subordinated Debentures.
"Additional Payments" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by IUB Trust on the
outstanding Trust Securities will not be reduced as a result of any additional
taxes, duties and other governmental charges to which IUB Trust has become
subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Subordinated Debentures to be contemporaneously redeemed in
accordance with the Indenture, which will be used to pay the Redemption Price of
such Trust Securities, and (ii) with respect to a distribution of Subordinated
Debentures to holders of Trust Securities in connection with a dissolution or
liquidation of IUB Trust, Subordinated Debentures having a principal amount
equal to the Liquidation Amount of the Trust Securities of the holder to whom
such Subordinated Debentures are distributed. Each Subordinated Debenture
distributed pursuant to clause (ii) above will carry with it accumulated
interest in an amount equal to the accumulated and unpaid interest then due on
such Subordinated Debentures.
"Liquidation Amount" means the stated amount of $10 per Trust Security.
After the liquidation date fixed for any distribution of Subordinated
Debentures for Preferred Securities (i) such Preferred Securities will no longer
be deemed to be outstanding, and (ii) any certificates representing Preferred
Securities will be deemed to represent the Subordinated Debentures having a
principal amount equal to the Liquidation Amount of such Preferred Securities,
and bearing accrued and
70
<PAGE>
unpaid interest in an amount equal to the accrued and unpaid Distributions on
the Preferred Securities until such certificates are presented to the
Administrative Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Preferred
Securities or the Subordinated Debentures that may be distributed in exchange
for Preferred Securities if a dissolution and liquidation of IUB Trust were to
occur. The Preferred Securities that an investor may purchase, or the
Subordinated Debentures that an investor may receive on dissolution and
liquidation of IUB Trust, may, therefore, trade at a discount to the price that
the investor paid to purchase the Preferred Securities offered hereby.
REDEMPTION PROCEDURES
Preferred Securities redeemed on each Redemption Date will be redeemed at
the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Subordinated Debentures. Redemptions of the Preferred
Securities will be made and the Redemption Price will be payable on each
Redemption Date only to the extent that IUB Trust has funds on hand available
for the payment of such Redemption Price. See "--Subordination of the Common
Securities."
If IUB Trust gives a notice of redemption in respect of its Preferred
Securities, then, by 12:00 noon, eastern standard time, on the Redemption Date,
to the extent funds are available, the Property Trustee will irrevocably deposit
with the paying agent for the Preferred Securities funds sufficient to pay the
aggregate Redemption Price and will give the paying agent for the Preferred
Securities irrevocable instructions and authority to pay the Redemption Price to
the holders thereof upon surrender of their certificates evidencing such
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
will be payable to the holders of such Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption will
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price and any Distribution payable on or
prior to the Redemption Date, but without interest on such Redemption Price, and
such Preferred Securities will cease to be outstanding. In the event that any
date fixed for redemption of Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding day which is a Business Day (and without any additional Distribution,
interest or other payment in respect of any such delay) with the same force and
effect as if made on such date. In the event that payment of the Redemption
Price in respect of Preferred Securities called for redemption is improperly
withheld or refused and not paid either by IUB Trust, or by the Company pursuant
to the Guarantee, Distributions on such Preferred Securities will continue to
accrue at the then applicable rate, from the Redemption Date originally
established by IUB Trust for such Preferred Securities to the date such
Redemption Price is actually paid, in which case the actual payment date will be
considered the date fixed for redemption for purposes of calculating the
Redemption Price. See "Description of the Guarantee."
Subject to applicable law (including, without limitation, United States
Federal securities law), and further provided that the Company does not and is
not continuing to exercise its right to defer interest payments, the Company or
its subsidiaries may at any time and from time to time purchase outstanding
Preferred Securities by tender, in the open market or by private agreement.
Payment of the Redemption Price on the Preferred Securities and any
distribution of Subordinated Debentures to holders of Preferred Securities will
be made to the applicable holders thereof as they appear on the register for the
Preferred Securities on the relevant record date, which date will be the date 15
days prior to the Redemption Date or liquidation date, as applicable.
If less than all of the Trust Securities are to be redeemed on a Redemption
Date, then the aggregate Liquidation Amount of such Trust Securities to be
redeemed will be allocated pro rata to the Trust Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed will be selected by the Property Trustee from the
outstanding Preferred Securities not
71
<PAGE>
previously called for redemption, by such method as the Property Trustee deems
fair and appropriate and which may provide for the selection for redemption of
portions (equal to $10 or an integral multiple of $10 in excess thereof) of the
Liquidation Amount of the Preferred Securities of a denomination larger than
$10. The Property Trustee will promptly notify the registrar for the Preferred
Securities in writing of the Preferred Securities selected for redemption and,
in the case of any Preferred Securities selected for partial redemption, the
Liquidation Amount thereof to be redeemed. For all purposes of the Trust
Agreement, unless the context otherwise requires, all provisions relating to the
redemption of the Preferred Securities will relate to the portion of the
aggregate Liquidation Amount of the Preferred Securities which has been or is to
be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities to be
redeemed at its registered address. Unless the Company defaults in payment of
the redemption price on the Subordinated Debentures, on and after the Redemption
Date interest will cease to accrue on such Subordinated Debentures or portions
thereof (and Distributions will cease to accrue on the related Preferred
Securities or portions thereof) called for redemption.
SUBORDINATION OF THE COMMON SECURITIES
Payment of Distributions on, and the Redemption Price of, the Preferred
Securities and Common Securities, as applicable, will be made pro rata based on
the Liquidation Amount of the Preferred Securities and Common Securities;
provided, however, that if on any Distribution Date or Redemption Date a
Debenture Event of Default has occurred and is continuing, no payment of any
Distribution on, or Redemption Price of, any of the Common Securities, and no
other payment on account of the redemption, liquidation or other acquisition of
such Common Securities, will be made unless payment in full in cash of all
accumulated and unpaid Distributions on all of the outstanding Preferred
Securities for all Distribution periods terminating on or prior thereto, or in
the case of payment of the Redemption Price the full amount of such Redemption
Price on all of the outstanding Preferred Securities then called for redemption,
will have been made or provided for, and all funds available to the Property
Trustee will first be applied to the payment in full in cash of all
Distributions on, or Redemption Price of, the Preferred Securities then due and
payable.
In the case of any Event of Default resulting from a Debenture Event of
Default, the Company as holder of the Common Securities will be deemed to have
waived any right to act with respect to any such Event of Default under the
Trust Agreement until the effect of all such Events of Default with respect to
the Preferred Securities have been cured, waived or otherwise eliminated. Until
any such Events of Default under the Trust Agreement with respect to the
Preferred Securities has been so cured, waived or otherwise eliminated, the
Property Trustee will act solely on behalf of the holders of the Preferred
Securities and not on behalf of the Company, as holder of the Common Securities,
and only the holders of the Preferred Securities will have the right to direct
the Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON TERMINATION
The Company will have the right at any time to dissolve, wind-up or
terminate IUB Trust and cause the Subordinated Debentures to be distributed to
the holders of the Preferred Securities. Such right is subject, however, to the
Company having received prior approval of the Federal Reserve if then required
under applicable capital guidelines or policies of the Federal Reserve.
Pursuant to the Trust Agreement, IUB Trust will automatically terminate upon
expiration of its term and will terminate earlier on the first to occur of (i)
certain events of bankruptcy, dissolution or liquidation of the Company, (ii)
the distribution of a Like Amount of the Subordinated Debentures to the holders
of its Trust Securities, if the Company, as depositor, has given written
direction to the Property Trustee to terminate IUB Trust (which direction is
optional and wholly within the discretion of the Company, as depositor), (iii)
redemption of all of the Preferred Securities as described under "--Redemption--
72
<PAGE>
Mandatory Redemption," or (iv) the entry of an order for the dissolution of IUB
Trust by a court of competent jurisdiction.
If an early termination occurs as described in clause (i), (ii) or (iv) of
the preceding paragraph, IUB Trust will be liquidated by the Trustees as
expeditiously as the Trustees determine to be possible by distributing, after
satisfaction of liabilities to creditors of IUB Trust as provided by applicable
law, to the holders of such Trust Securities a Like Amount of the Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to receive out of
the assets of IUB Trust available for distribution to holders, after
satisfaction of liabilities to creditors of IUB Trust as provided by applicable
law, an amount equal to, in the case of holders of Preferred Securities, the
aggregate of the Liquidation Amount plus accrued and unpaid Distributions
thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because IUB Trust has insufficient assets available to pay in full the aggregate
Liquidation Distribution, then the amounts payable directly by IUB Trust on the
Preferred Securities will be paid on a pro rata basis. The Company, as the
holder of the Common Securities, will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that, if a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a priority over the Common Securities. See
"--Subordination of the Common Securities."
Under current United States Federal income tax law and interpretations and
assuming, as expected, that IUB Trust is treated as a grantor trust, a
distribution of the Subordinated Debentures should not be a taxable event to
holders of the Preferred Securities. Should there be a change in law, a change
in legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Preferred Securities.
See "Certain Federal Income Tax Consequences--Receipt of Subordinated Debentures
or Cash Upon Liquidation of IUB Trust." If the Company elects neither to redeem
the Subordinated Debentures prior to maturity nor to liquidate IUB Trust and
distribute the Subordinated Debentures to holders of the Preferred Securities,
the Preferred Securities will remain outstanding until the repayment of the
Subordinated Debentures.
If the Company elects to liquidate IUB Trust and thereby causes the
Subordinated Debentures to be distributed to holders of the Preferred Securities
in liquidation of IUB Trust, the Company will continue to have the right to
shorten or extend the maturity of such Subordinated Debentures, subject to
certain conditions. See "Description of the Subordinated Debentures--General."
LIQUIDATION VALUE
The amount of the Liquidation Distribution payable on the Preferred
Securities in the event of any liquidation of IUB Trust is $10 per Preferred
Security plus accrued and unpaid Distributions thereon to the date of payment,
which may be in the form of a distribution of such amount in Subordinated
Debentures, subject to certain exceptions. See "--Liquidation Distribution upon
Termination."
EVENTS OF DEFAULT; NOTICE
Any one of the following events constitutes an event of default under the
Trust Agreement (an "Event of Default") with respect to the Preferred Securities
(whatever the reason for such Event of Default and whether voluntary or
involuntary or effected by operation of law or pursuant to any judgment, decree
or order of any court or any order, rule or regulation of any administrative or
governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
the Subordinated Debentures--Debenture Events of Default");
73
<PAGE>
(ii) default by IUB Trust or the Property Trustee in the payment of any
Distribution when it becomes due and payable, and continuation of such
default for a period of 30 days;
(iii) default by IUB Trust or the Property Trustee in the payment of any
Redemption Price of any Trust Security when it becomes due and payable;
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a covenant or warranty a default in the performance of which or the breach
of which is dealt with in clauses (ii) or (iii) above), and continuation of
such default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the defaulting Trustee(s) by the holders
of at least 25% in aggregate Liquidation Amount of the outstanding Preferred
Securities, a written notice specifying such default or breach and requiring
it to be remedied and stating that such notice is a "Notice of Default"
under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by the Company to appoint a
successor Property Trustee within 60 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of the Preferred Securities, the
Administrative Trustees and the Company, as depositor, unless such Event of
Default has been cured or waived. The Company, as depositor, and the
Administrative Trustees are required to file annually with the Property Trustee
a certificate as to whether or not they are in compliance with all the
conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the
Preferred Securities will have a preference over the Common Securities upon
termination of IUB Trust. See "--Liquidation Distribution upon Termination." The
existence of an Event of Default does not entitle the holders of Preferred
Securities to accelerate the maturity thereof.
REMOVAL OF IUB TRUST TRUSTEES
Unless a Debenture Event of Default has occurred and is continuing, any
Trustee may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Preferred Securities. In no
event, however, will the holders of the Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in the Company as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee will be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default has occurred and is continuing, at any time or
times, for the purpose of meeting the legal requirements of the Trust Indenture
Act or of any jurisdiction in which any part of the Trust Property (as defined
in the Trust Agreement) may at the time be located, the Company, as the holder
of the Common Securities, will have power to appoint one or more Persons (as
defined in the Trust Agreement) either to act as a co-trustee, jointly with the
Property Trustee, of all or any part of such Trust Property, or to act as
separate trustee of any such Trust Property, in either case with such powers as
may be provided in the instrument of appointment, and to vest in such Person or
Persons in such capacity any property, title, right or power deemed necessary or
desirable, subject to the provisions of the Trust Agreement. In case a Debenture
Event of Default has occurred and is continuing, the Property Trustee alone will
have power to make such appointment.
74
<PAGE>
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person into which the Property Trustee, the Delaware Trustee or any
Administrative Trustee that is not a natural person may be merged or converted
or with which it may be consolidated, or any Person resulting from any merger,
conversion or consolidation to which such Trustee is a party, or any Person
succeeding to all or substantially all the corporate trust business of such
Trustee, will be the successor of such Trustee under the Trust Agreement,
provided such Person is otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF IUB TRUST
IUB Trust may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, except as described below. IUB Trust
may, at the request of the Company, with the consent of the Administrative
Trustees and without the consent of the holders of the Preferred Securities, the
Property Trustee or the Delaware Trustee, merge with or into, consolidate,
amalgamate, or be replaced by or convey, transfer or lease its properties and
assets substantially as an entirety to a trust organized as such under the laws
of any state; provided, that (i) such successor entity either (a) expressly
assumes all of the obligations of IUB Trust with respect to the Preferred
Securities, or (b) substitutes for the Preferred Securities other securities
having substantially the same terms as the Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Preferred
Securities rank in priority with respect to distributions and payments upon
liquidation, redemption and otherwise, (ii) the Company expressly appoints a
trustee of such successor entity possessing the same powers and duties as the
Property Trustee in its capacity as the holder of the Subordinated Debentures,
(iii) the Successor Securities are listed, or any Successor Securities will be
listed upon notification of issuance, on any national securities exchange or
other organization on which the Preferred Securities are then listed (including,
if applicable, the Nasdaq National Market), if any, (iv) such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease does not
adversely affect the rights, preferences and privileges of the holders of the
Preferred Securities (including any Successor Securities) in any material
respect, (v) prior to such merger, consolidation, amalgamation, replacement,
conveyance, transfer or lease, the Company has received an opinion from
independent counsel to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect, and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither IUB Trust nor such successor entity will be required
to register as an "investment company" under the Investment Company Act, and
(vi) the Company owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee, the Indenture, the
Subordinated Debentures, the Trust Agreement and the Expense Agreement.
Notwithstanding the foregoing, IUB Trust will not, except with the consent of
holders of 100% in Liquidation Amount of the Preferred Securities, consolidate,
amalgamate, merge with or into, or be replaced by or convey, transfer or lease
its properties and assets substantially as an entirety to any other Person or
permit any other Person to consolidate, amalgamate, merge with or into, or
replace it if such consolidation, amalgamation, merger, replacement, conveyance,
transfer or lease would cause IUB Trust or the successor entity to be classified
as other than a grantor trust for United States Federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF TRUST AGREEMENT
Except as provided below and under "Description of the Guarantee--Amendments
and Assignment" and as otherwise required by the Trust Act and the Trust
Agreement, the holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the Company, the
Property Trustee and the Administrative Trustees, without the consent of the
holders of the Preferred Securities (i) with respect to acceptance of
appointment by a successor trustee, (ii) to cure any ambiguity, correct or
supplement any
75
<PAGE>
provisions in such Trust Agreement that may be inconsistent with any other
provision, or to make any other provisions with respect to matters or questions
arising under the Trust Agreement (provided such amendment is not inconsistent
with the other provisions of the Trust Agreement), (iii) to modify, eliminate or
add to any provisions of the Trust Agreement to such extent as is necessary to
ensure that IUB Trust will be classified for United States Federal income tax
purposes as a grantor trust at all times that any Trust Securities are
outstanding or to ensure that IUB Trust will not be required to register as an
"investment company" under the Investment Company Act, or (iv) to reduce or
increase the Liquidation Amount per Trust Security and simultaneously to
increase or reduce the number of Trust Securities issued and outstanding solely
for the purpose of maintaining the eligibility of the Preferred Securities for
listing or quotation on any national securities exchange or other organization
on which the Preferred Securities are then listed or quoted (including, if
applicable, the Nasdaq National Market); provided, however, that in the case of
clause (ii), such action may not adversely affect in any material respect the
interests of any holder of Trust Securities and that, in the case of clause
(iv), the aggregate Liquidation Amount of the Trust Securities outstanding, upon
completion of any such reduction or increase, must be the same as the aggregate
Liquidation Amount of the Trust Securities outstanding immediately prior to any
such reduction or increase, and any amendments of such Trust Agreement will
become effective when notice thereof is given to the holders of Trust Securities
(or, in the case of an amendment pursuant to clause (iv), as of the date
specified in the notice). The Trust Agreement may be amended by the Trustees and
the Company with (i) the consent of holders representing not less than a
majority in the aggregate Liquidation Amount of the outstanding Trust
Securities, and (ii) receipt by the Trustees of an opinion of counsel to the
effect that such amendment or the exercise of any power granted to the Trustees
in accordance with such amendment will not affect IUB Trust's status as a
grantor trust for United States Federal income tax purposes or IUB Trust's
exemption from status as an "investment company" under the Investment Company
Act. Notwithstanding anything in this paragraph to the contrary, without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (a) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date, or (b)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
The Trustees will not, so long as any Subordinated Debentures are held by
the Property Trustee, (i) direct the time, method and place of conducting any
proceeding for any remedy available to the Debenture Trustee, or executing any
trust or power conferred on the Property Trustee with respect to the
Subordinated Debentures, (ii) waive any past default that is waivable under the
Indenture, (iii) exercise any right to rescind or annul a declaration that the
principal of all the Subordinated Debentures will be due and payable, or (iv)
consent to any amendment, modification or termination of the Indenture or the
Subordinated Debentures, where such consent is required, without, in each case,
obtaining the prior approval of the holders of a majority in aggregate
Liquidation Amount of all outstanding Preferred Securities; provided, however,
that where a consent under the Indenture requires the consent of each holder of
Subordinated Debentures affected thereby, no such consent will be given by the
Property Trustee without the prior consent of each holder of the Preferred
Securities. The Trustees may not revoke any action previously authorized or
approved by a vote of the holders of the Preferred Securities except by
subsequent vote of the holders of the Preferred Securities. The Property Trustee
will notify each holder of Preferred Securities of any notice of default with
respect to the Subordinated Debentures. In addition to obtaining the foregoing
approvals of the holders of the Preferred Securities, prior to taking any of the
foregoing actions, the Trustees must obtain an opinion of counsel experienced in
such matters to the effect that IUB Trust will not be classified as an
association taxable as a corporation for United States Federal income tax
purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at a
meeting of holders of Preferred Securities convened for such purpose or pursuant
to written consent. The Property Trustee will cause a notice of any meeting at
which holders of Preferred Securities are entitled to vote, or of any matter
76
<PAGE>
upon which action by written consent of such holders is to be taken, to be given
to each holder of record of Preferred Securities in the manner set forth in the
Trust Agreement.
No vote or consent of the holders of Preferred Securities will be required
for IUB Trust to redeem and cancel its Preferred Securities in accordance with
the Trust Agreement.
Notwithstanding the fact that holders of Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Trustees or any
affiliate of the Company or any Trustee will, for purposes of such vote or
consent, be treated as if they were not outstanding.
PAYMENT AND PAYING AGENCY
Payments in respect of the Preferred Securities will be made by check mailed
to the address of the holder entitled thereto as such address will appear on the
register of holders of the Preferred Securities. The paying agent for the
Preferred Securities will initially be the Property Trustee and any co-paying
agent chosen by the Property Trustee and acceptable to the Administrative
Trustees and the Company. The paying agent for the Preferred Securities may
resign as paying agent upon 30 days' written notice to the Property Trustee and
the Company. In the event that the Property Trustee no longer is the paying
agent for the Preferred Securities, the Administrative Trustees will appoint a
successor (which must be a bank or trust company acceptable to the
Administrative Trustees and the Company) to act as paying agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as the registrar and the transfer agent for
the Preferred Securities. Registration of transfers of Preferred Securities will
be effected without charge by or on behalf of IUB Trust, but upon payment of any
tax or other governmental charges that may be imposed in connection with any
transfer or exchange. IUB Trust will not be required to register or cause to be
registered the transfer of Preferred Securities after such Preferred Securities
have been called for redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, upon the occurrence and
during the continuance of an Event of Default, must exercise the same degree of
care and skill as a prudent person would exercise or use in the conduct of his
or her own affairs. Subject to this provision, the Property Trustee is under no
obligation to exercise any of the powers vested in it by the Trust Agreement at
the request of any holder of Preferred Securities unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby. If no Event of Default has occurred and is continuing and the
Property Trustee is required to decide between alternative causes of action,
construe ambiguous provisions in the Trust Agreement or is unsure of the
application of any provision of the Trust Agreement, and the matter is not one
on which holders of Preferred Securities are entitled under the Trust Agreement
to vote, then the Property Trustee will take such action as is directed by the
Company and if not so directed, will take such action as it deems advisable and
in the best interests of the holders of the Trust Securities and will have no
liability except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate IUB Trust in such a way that IUB Trust will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States Federal income tax purposes and so that the Subordinated
Debentures will be treated as indebtedness of the Company for United States
Federal income tax purposes. The Company and the
77
<PAGE>
Administrative Trustees are authorized, in this connection, to take any action,
not inconsistent with applicable law, the certificate of trust of IUB Trust or
the Trust Agreement, that the Company and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes.
Holders of the Preferred Securities have no preemptive or similar rights.
The Trust Agreement and the Preferred Securities will be governed by, and
construed in accordance with, the internal laws of the State of Delaware.
DESCRIPTION OF THE SUBORDINATED DEBENTURES
Concurrently with the issuance of the Preferred Securities, IUB Trust will
invest the proceeds thereof, together with the consideration paid by the Company
for the Common Securities, in the Subordinated Debentures issued by the Company.
The Subordinated Debentures will be issued as unsecured debt under the
Indenture, to be dated as of December 12, 1997 (the "Indenture"), between the
Company and State Street Bank and Trust Company, as trustee (the "Debenture
Trustee"). The Indenture will be qualified as an indenture under the Trust
Indenture Act. The following summary of the material terms and provisions of the
Subordinated Debentures and the Indenture does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Indenture and
the Trust Indenture Act. Wherever particular defined terms of the Indenture are
referred to, but not defined herein, such defined terms are incorporated herein
by reference. The form of the Indenture has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
GENERAL
The Subordinated Debentures will be limited in aggregate principal amount to
approximately $20,103,100 (or $23,118,560 if the option described under the
heading "Underwriting" is exercised by the Underwriter), such amount being the
sum of the aggregate stated Liquidation Amount of the Trust Securities. The
Subordinated Debentures will bear interest at the annual rate of 8.75% of the
principal amount thereof, payable quarterly in arrears on March 31, June 30,
September 30, and December 31 of each year (each, an "Interest Payment Date")
beginning December 31, 1997, to the Person (as defined in the Indenture) in
whose name each Subordinated Debenture is registered, subject to certain
exceptions, at the close of business on the fifteenth day of the last month of
the calendar quarter. It is anticipated that, until the liquidation, of IUB
Trust, the Subordinated Debentures will be held in the name of the Property
Trustee in trust for the benefit of the holders of the Preferred Securities. The
amount of interest payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. In the event that any date on which
interest is payable on the Subordinated Debentures is not a Business Day, then
payment of the interest payable on such date will be made on the next succeeding
day that is a Business Day (and without any interest or other payment in respect
of any such delay), with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 8.75% thereof,
compounded quarterly. The term "interest," as used herein, includes quarterly
interest payments, interest on quarterly interest payments not paid on the
applicable Interest Payment Date and Additional Payments, as applicable.
The Subordinated Debentures will mature on December 31, 2027 (such date, as
it may be shortened or extended as hereinafter described, the "Stated
Maturity"). Such date may be shortened at any time by the Company to any date
not earlier than December 31, 2002, subject to the Company having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Such date may also be extended at
any time at the election of the Company but in no event to a date later than
December 31, 2036, provided that at the time such election is made and at the
time of extension (i) the Company is not in bankruptcy, otherwise insolvent or
in liquidation, (ii) the Company is not in default in the payment of any
interest or principal on the Subordinated Debentures, (iii) IUB Trust is not in
arrears on payments of Distributions on the Preferred Securities and no deferred
78
<PAGE>
Distributions are accumulated, and (iv) the Company has a Senior Debt rating of
investment grade. In the event that the Company elects to shorten or extend the
Stated Maturity of the Subordinated Debentures, it will give notice thereof to
the Debenture Trustee, IUB Trust and to the holders of the Subordinated
Debentures no more than 180 days and no less than 90 days prior to the
effectiveness thereof. The Company will not have the right to purchase the
Subordinated Debentures, in whole or in part, from IUB Trust until after
December 31, 2002, except if a Tax Event, a Capital Treatment Event or an
Investment Company Event has occurred and is continuing.
The Subordinated Debentures will be unsecured and will rank junior and be
subordinate in right of payment to all Senior Debt, Subordinated Debt and
Additional Senior Obligations of the Company. Because the Company is a holding
company, the right of the Company to participate in any distribution of assets
of any Subsidiary Bank, upon any such Subsidiary Bank's liquidation or
reorganization or otherwise (and thus the ability of holders of the Subordinated
Debentures to benefit indirectly from such distribution), is subject to the
prior claim of creditors of such Subsidiary Bank, except to the extent that the
Company may itself be recognized as a creditor of such Subsidiary Bank. The
Subordinated Debentures will, therefore, be effectively subordinated to all
existing and future liabilities of the Subsidiary Banks, and holders of
Subordinated Debentures should look only to the assets of the Company for
payments on the Subordinated Debentures. The Indenture does not limit the
incurrence or issuance of other secured or unsecured debt of the Company,
including Senior Debt, Subordinated Debt and Additional Senior Obligations,
whether under the Indenture or any existing indenture or other indenture that
the Company may enter into in the future or otherwise. See "--Subordination."
The Indenture does not contain provisions that afford holders of the
Subordinated Debentures protection in the event of a highly leveraged
transaction or other similar transaction involving the Company that may
adversely affect such holders.
OPTION TO EXTEND INTEREST PAYMENT PERIOD
The Company has the right under the Indenture at any time during the term of
the Subordinated Debentures, so long as no Debenture Event of Default has
occurred and is continuing, to defer the payment of interest at any time, or
from time to time (each, an "Extension Period"). The right to defer the payment
of interest on the Subordinated Debentures is limited, however, to a period, in
each instance, not exceeding 20 consecutive quarters and no Extension Period may
extend beyond the Stated Maturity of the Subordinated Debentures. At the end of
each Extension Period, the Company must pay all interest then accrued and unpaid
(together with interest thereon at the annual rate of 8.75%, compounded
quarterly, to the extent permitted by applicable law). During an Extension
Period, interest will continue to accrue and holders of Subordinated Debentures
(or the holders of Preferred Securities if such securities are then outstanding)
will be required to accrue and recognize income for United States Federal income
tax purposes. See "Certain Federal Income Tax Consequences--Potential Extension
of Interest Payment Period and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock, (ii)
make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank PARI PASSU
with or junior in interest to the Subordinated Debentures or make any guarantee
payments with respect to any guarantee by the Company of the debt securities of
any subsidiary of the Company if such guarantee ranks PARI PASSU or junior in
interest to the Subordinated Debentures (other than payments under the
Guarantee), or (iii) redeem, purchase or acquire less than all of the
Subordinated Debentures or any of the Preferred Securities. Prior to the
termination of any such Extension Period, the Company may further defer the
payment of interest; provided that no Extension Period may exceed 20 consecutive
quarters or extend beyond the Stated Maturity of the Subordinated Debentures.
Upon the termination of any such Extension Period and the payment of all amounts
then due on any Interest Payment Date, the Company may elect to
79
<PAGE>
begin a new Extension Period subject to the above requirements. No interest will
be due and payable during an Extension Period, except at the end thereof. The
Company has no present intention of exercising its rights to defer payments of
interest on the Subordinated Debentures. The Company must give the Property
Trustee, the Administrative Trustees and the Debenture Trustee notice of its
election of such Extension Period at least two Business Days prior to the
earlier of (i) the next succeeding date on which Distributions on the Trust
Securities would have been payable except for the election to begin such
Extension Period, or (ii) the date the Trust is required to give notice of the
record date, or the date such Distributions are payable, to the Nasdaq National
Market (or other applicable self-regulatory organization) or to holders of the
Preferred Securities, but in any event at least one Business Day before such
record date. Subject to the foregoing, there is no limitation on the number of
times that the Company may elect to begin an Extension Period.
ADDITIONAL SUMS
If IUB Trust or the Property Trustee is required to pay any additional
taxes, duties or other governmental charges as a result of the occurrence of a
Tax Event, the Company will pay to the holders of the Subordinated Debentures as
additional amounts (referred to herein as "Additional Payments") on the
Subordinated Debentures such additional amounts as may be required so that the
net amounts received and retained by IUB Trust after paying any such additional
taxes, duties or other governmental charges will not be less than the amounts
IUB Trust would have received had such additional taxes, duties or other
governmental charges not been imposed.
REDEMPTION OR EXCHANGE
The Company will have the right to redeem the Subordinated Debentures prior
to maturity (i) on or after December 31, 2002, in whole at any time or in part
from time to time, or (ii) at any time in whole (but not in part), within 180
days following the occurrence of a Tax Event, a Capital Treatment Event or an
Investment Company Event, in each case at a redemption price equal to the
accrued and unpaid interest on the Subordinated Debentures so redeemed to the
date fixed for redemption, plus 100% of the principal amount thereof. Any such
redemption prior to the Stated Maturity will be subject to prior approval of the
Federal Reserve if then required under applicable capital guidelines or policies
of the Federal Reserve.
"Tax Event" means the receipt by IUB Trust of an opinion of counsel
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein, or as a result of any official
administrative pronouncement or judicial decision interpreting or applying such
laws or regulations, which amendment or change is effective or which
pronouncement or decision is announced on or after the date of issuance of the
Preferred Securities under the Trust Agreement, there is more than an
insubstantial risk that (i) interest payable by the Company on the Subordinated
Debentures is not, or within 90 days of the date of such opinion will not be,
deductible by the Company, in whole or in part, for United States Federal income
tax purposes, (ii) IUB Trust is, or will be within 90 days after the date of
such opinion of counsel, subject to United States Federal income tax with
respect to income received or accrued on the Subordinated Debentures, or (iii)
IUB Trust is, or will be within 90 days after the date of such opinion of
counsel, subject to more than a de minimis amount of other taxes, duties,
assessments or other governmental charges. The Company must request and receive
an opinion with regard to such matters within a reasonable period of time after
it becomes aware of the possible occurrence of any of the events described in
clauses (i) through (iii) above.
"Capital Treatment Event" means the receipt by IUB Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of any
amendment to or any change (including any announced prospective change) in the
laws (or any regulations thereunder) of the United States or any political
subdivision thereof or therein, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such
80
<PAGE>
proposed change, pronouncement or decision is announced on or after the date of
issuance of the Preferred Securities under the Trust Agreement, there is more
than an insubstantial risk of impairment of the Company's ability to treat the
aggregate Liquidation Amount of the Preferred Securities (or any substantial
portion thereof) as "Tier 1 capital" (or the then equivalent thereof) for
purposes of the capital adequacy guidelines of the Federal Reserve, as then
applicable to the Company, provided, however, that the inability of the Company
to treat all or any portion of the Liquidation Amount of the Preferred
Securities as Tier 1 capital shall not constitute the basis for a Capital
Treatment Event if such inability results from the Company having cumulative
preferred capital in excess of the amount which may qualify for treatment as
Tier 1 capital under applicable capital adequacy guidelines of the Federal
Reserve.
"Investment Company Event" means the receipt by IUB Trust of an opinion of
counsel experienced in such matters to the effect that, as a result of the
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, IUB Trust is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act, which change becomes effective on or after the date of original
issuance of the Preferred Securities.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each holder of Subordinated Debentures to
be redeemed at its registered address. Unless the Company defaults in payment of
the redemption price for the Subordinated Debentures, on and after the
redemption date interest ceases to accrue on such Subordinated Debentures or
portions thereof called for redemption.
The Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Preferred Securities--Liquidation
Distribution upon Termination," under certain circumstances involving the
termination of IUB Trust, the Subordinated Debentures may be distributed to the
holders of the Preferred Securities in liquidation of IUB Trust after
satisfaction of liabilities to creditors of IUB Trust as provided by applicable
law. Any such distribution will be subject to receipt of prior approval by the
Federal Reserve if then required under applicable policies or guidelines of the
Federal Reserve. If the Subordinated Debentures are distributed to the holders
of Preferred Securities upon the liquidation of IUB Trust, the Company will use
its best efforts to list the Subordinated Debentures on the Nasdaq National
Market or such stock exchanges, if any, on which the Preferred Securities are
then listed. There can be no assurance as to the market price of any
Subordinated Debentures that may be distributed to the holders of Preferred
Securities.
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there has occurred a Debenture Event of Default, (ii) the
Company is in default with respect to its obligations under the Guarantee, or
(iii) the Company has given notice of its election of an Extension Period as
provided in the Indenture with respect to the Subordinated Debentures and has
not rescinded such notice, or such Extension Period, or any extension thereof,
is continuing, the Company will not (1) declare or pay any dividends or
distributions on, or redeem, purchase, acquire, or make a liquidation payment
with respect to, any of the Company's capital stock, (2) make any payment of
principal, interest or premium, if any, on or repay or repurchase or redeem any
debt securities of the Company that rank PARI PASSU with or junior in interest
to the Subordinated Debentures or make any guarantee payments with respect to
any guarantee by the Company of the debt securities of any subsidiary of the
Company if such guarantee ranks PARI PASSU or junior in interest to the
Subordinated Debentures (other than payments under the Guarantee), or (3)
redeem, purchase or acquire less than all of the Subordinated Debentures or any
of the Preferred Securities.
81
<PAGE>
SUBORDINATION
The Indenture provides that the Subordinated Debentures are subordinated and
junior in right of payment to all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company. Upon any payment or distribution of assets to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors, marshaling of assets or any bankruptcy,
insolvency, debt restructuring or similar proceedings in connection with any
insolvency or bankruptcy proceedings of the Company, the holders of Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company will first be
entitled to receive payment in full of principal of (and premium, if any) and
interest, if any, on such Senior Debt, Subordinated Debt and Additional Senior
Obligations of the Company before the holders of Subordinated Debentures will be
entitled to receive or retain any payment in respect of the principal of or
interest on the Subordinated Debentures.
In the event of the acceleration of the maturity of any Subordinated
Debentures, the holders of all Senior Debt, Subordinated Debt and Additional
Senior Obligations of the Company outstanding at the time of such acceleration
will first be entitled to receive payment in full of all amounts due thereon
(including any amounts due upon acceleration) before the holders of the
Subordinated Debentures will be entitled to receive or retain any payment in
respect of the principal of or interest on the Subordinated Debentures.
No payments on account of principal or interest in respect of the
Subordinated Debentures may be made if there has occurred and is continuing a
default in any payment with respect to Senior Debt, Subordinated Debt or
Additional Senior Obligations of the Company or an event of default with respect
to any Senior Debt, Subordinated Debt or Additional Senior Obligations of the
Company resulting in the acceleration of the maturity thereof, or if any
judicial proceeding is pending with respect to any such default.
"Debt" means, with respect to any Person, whether recourse is to all or a
portion of the assets of such Person and whether or not contingent, (i) every
obligation of such person for money borrowed, (ii) every obligation of such
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses, (iii) every reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) every obligation of such Person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business), (v) every capital lease obligation of such Person, and (vi) and every
obligation of the type referred to in clauses (i) through (v) of another Person
and all dividends of another Person the payment of which, in either case, such
Person has guaranteed or is responsible or liable, directly or indirectly, as
obligor or otherwise.
"Senior Debt" means, with respect to the Company, the principal of (and
premium, if any) and interest, if any (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Company whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt, whether incurred on or prior to the date of the Indenture
or thereafter incurred, unless, in the instrument creating or evidencing the
same or pursuant to which the same is outstanding, it is provided that such
obligations are not superior in right of payment to the Subordinated Debentures
or to other Debt which is PARI PASSU with, or subordinated to, the Subordinated
Debentures; provided, however, that Senior Debt will not be deemed to include
(i) any Debt of the Company which when incurred and without respect to any
election under section 1111(b) of the United States Bankruptcy Code of 1978, as
amended, was without recourse to the Company, (ii) any Debt of the Company to
any of its subsidiaries, (iii) any Debt to any employee of the Company, (iv) any
Debt which by its terms is subordinated to trade accounts payable or accrued
liabilities arising in the ordinary course of business to the extent that
payments made to the holders of such Debt by the holders of the Subordinated
Debentures as a result of the subordination provisions of the Indenture would be
greater than they otherwise would have been as a result of any obligation of
such holders to pay amounts over to the obligees on such trade accounts payable
or accrued liabilities arising in the ordinary course of business as a result of
subordination provisions to which such Debt is subject, and (v) Debt which
constitutes Subordinated Debt.
82
<PAGE>
"Subordinated Debt" means, with respect to the Company, the principal of
(and premium, if any) and interest, if any (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization relating to
the Company whether or not such claim for post-petition interest is allowed in
such proceeding), on Debt, whether incurred on or prior to the date of the
Indenture or thereafter incurred, which is by its terms expressly provided to be
junior and subordinate to other Debt of the Company (other than the Subordinated
Debentures).
"Additional Senior Obligations" means, with respect to the Company, all
indebtedness, whether incurred on or prior to the date of the Indenture or
thereafter incurred, for claims in respect of derivative products such as
interest and foreign exchange rate contracts, commodity contracts and similar
arrangements; provided, however, that Additional Senior Obligations do not
include claims in respect of Senior Debt or Subordinated Debt or obligations
which, by their terms, are expressly stated to be not superior in right of
payment to the Subordinated Debentures or to rank PARI PASSU in right of payment
with the Subordinated Debentures. "Claim," as used herein, has the meaning
assigned thereto in Section 101(4) of the United States Bankruptcy Code of 1978,
as amended.
The Indenture places no limitation on the amount of additional Senior Debt,
Subordinated Debt or Additional Senior Obligations that may be incurred by the
Company. The Company expects from time to time to incur additional indebtedness
constituting Senior Debt, Subordinated Debt and Additional Senior Obligations.
As of September 30, 1997, the Company had aggregate Senior Debt, Subordinated
Debt and Additional Senior Obligations of approximately $4.6 million. Because
the Company is a holding company, the Subordinated Debentures are effectively
subordinated to all existing and future liabilities of the Company subsidiaries,
including obligations to depositors of Union Bank, Regional Bank and any other
bank that may become a subsidiary of the Company.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Subordinated Debentures will
be made at the office of the Debenture Trustee in Boston, Massachusetts, except
that, at the option of the Company, payment of any interest may be made (i) by
check mailed to the address of the Person entitled thereto as such address
appears in the register of holders of the Subordinated Debentures, or (ii) by
transfer to an account maintained by the Person entitled thereto as specified in
the register of holders of the Subordinated Debentures, provided that proper
transfer instructions have been received by the regular record date. Payment of
any interest on Subordinated Debentures will be made to the Person in whose name
such Subordinated Debenture is registered at the close of business on the
regular record date for such interest, except in the case of defaulted interest.
The Company may at any time designate additional paying agents for the
Subordinated Debentures or rescind the designation of any paying agent for the
Subordinated Debentures; however, the Company will at all times be required to
maintain a paying agent in Boston, Massachusetts and each place of payment for
the Subordinated Debentures.
Any moneys deposited with the Debenture Trustee or any paying agent for the
Subordinated Debentures, or then held by the Company in trust, for the payment
of the principal of or interest on the Subordinated Debentures and remaining
unclaimed for two years after such principal or interest has become due and
payable will be repaid to the Company on May 31 of each year or (if then held in
trust by the Company) will be discharged from such trust and the holder of such
Subordinated Debenture will thereafter look, as a general unsecured creditor,
only to the Company for payment thereof.
REGISTRAR AND TRANSFER AGENT
The Debenture Trustee will act as the registrar and the transfer agent for
the Subordinated Debentures. Subordinated Debentures may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the registrar in Boston, Massachusetts. The Company may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts. The
83
<PAGE>
Company may at any time designate additional transfer agents with respect to the
Subordinated Debentures. In the event of any redemption, neither the Company nor
the Debenture Trustee will be required to (i) issue, register the transfer of or
exchange Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Subordinated
Debentures and ending at the close of business on the day of mailing of the
relevant notice of redemption, or (ii) transfer or exchange any Subordinated
Debentures so selected for redemption, except, in the case of any Subordinated
Debentures being redeemed in part, any portion thereof not to be redeemed.
MODIFICATION OF INDENTURE
The Company and the Debenture Trustee may, from time to time without the
consent of the holders of the Subordinated Debentures, amend, waive or
supplement the Indenture for specified purposes, including, among other things,
curing ambiguities, defects or inconsistencies and qualifying, or maintaining
the qualification of, the Indenture under the Trust Indenture Act. The Indenture
contains provisions permitting the Company and the Debenture Trustee, with the
consent of the holders of not less than a majority in principal amount of the
outstanding Subordinated Debentures, to modify the Indenture; provided, that no
such modification may, without the consent of the holder of each outstanding
Subordinated Debenture affected by such proposed modification, (i) extend the
fixed maturity of the Subordinated Debentures, or reduce the principal amount
thereof, or reduce the rate or extend the time of payment of interest thereon,
or (ii) reduce the percentage of principal amount of Subordinated Debentures,
the holders of which are required to consent to any such modification of the
Indenture; provided that so long as any of the Preferred Securities remain
outstanding, no such modification may be made that requires the consent of the
holders of the Subordinated Debentures, and no termination of the Indenture may
occur, and no waiver of any Debenture Event of Default may be effective, without
the prior consent of the holders of at least a majority of the aggregate
Liquidation Amount of the Preferred Securities and that if the consent of the
holder of each Subordinated Debenture is required, such modification will not be
effective until each holder of Trust Securities has consented thereto.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Subordinated Debentures that has occurred and is
continuing constitutes an event of default (each, a "Debenture Event of
Default") with respect to the Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Subordinated
Debentures, when due (subject to the deferral of any due date in the case of
an Extension Period);
(ii) failure to pay any principal on the Subordinated Debentures when
due whether at maturity, upon redemption by declaration or otherwise;
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to the
Company from the Debenture Trustee or the holders of at least 25% in
aggregate outstanding principal amount of the Subordinated Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of the
Company.
The holders of a majority in aggregate outstanding principal amount of the
Subordinated Debentures have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee. The
Debenture Trustee, or the holders of not less than 25% in aggregate outstanding
principal amount of the Subordinated Debentures, may declare the principal due
and payable immediately upon a Debenture Event of Default. The holders of a
majority in aggregate outstanding principal amount of the Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Subordinated Debentures
which has become due solely by such acceleration) has been cured and a sum
sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Debenture Trustee.
Should the holders of the Subordinated Debentures fail to annul such declaration
and waive such default, the holders of a majority in aggregate Liquidation
Amount of the Preferred Securities will have such right.
84
<PAGE>
The Company is required to file annually with the Debenture Trustee a
certificate as to whether or not the Company is in compliance with all the
conditions and covenants applicable to it under the Indenture.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on such
Subordinated Debentures, and any other amounts payable under the Indenture, to
be forthwith due and payable and to enforce its other rights as a creditor with
respect to such Subordinated Debentures.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF THE PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay interest on or
principal of the Subordinated Debentures on the payment date on which such
payment is due and payable, then a holder of Preferred Securities may institute
a legal proceeding directly against the Company for enforcement of payment to
such holder of the principal of or interest on such Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the
Preferred Securities of such holder (a "Direct Action"). In connection with such
Direct Action, the Company will have a right of set-off under the Indenture to
the extent of any payment made by the Company to such holder of Preferred
Securities in the Direct Action. The Company may not amend the Indenture to
remove the foregoing right to bring a Direct Action without the prior written
consent of the holders of all of the Preferred Securities. If the right to bring
a Direct Action is removed, IUB Trust may become subject to the reporting
obligations under the Exchange Act. The Company has the right under the
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
The holders of the Preferred Securities will not be able to exercise
directly any remedies, other than those set forth in the preceding paragraph,
available to the holders of the Subordinated Debentures unless there has been an
Event of Default under the Trust Agreement. See "Description of the Preferred
Securities--Events of Default; Notice."
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Company may not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, and any Person may not consolidate with or merge into the Company or
sell, convey, transfer or otherwise dispose of its properties and assets
substantially as an entirety to the Company, unless (i) in the event the Company
consolidates with or merges into another Person or conveys or transfers its
properties and assets substantially as an entirety to any Person, the successor
Person is organized under the laws of the United States or any State or the
District of Columbia, and such successor Person expressly assumes by
supplemental indenture the Company's obligations on the Subordinated Debentures,
(ii) immediately after giving effect thereto, no Debenture Event of Default, and
no event which, after notice or lapse of time or both, would become a Debenture
Event of Default, has occurred and is continuing, and (iii) certain other
conditions as prescribed in the Indenture are met.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to the Company's
obligations to pay certain sums due pursuant to the Indenture and to provide
certain officers' certificates and opinions of counsel described therein) and
the Company will be deemed to have satisfied and discharged the Indenture when,
among other things, all Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable, or (ii) will
become due and payable at their Stated Maturity within one year or are to be
called for redemption within one year, and the Company deposits or causes to be
deposited with the Debenture Trustee funds, in trust, for the purpose and in an
amount sufficient to pay and discharge the entire indebtedness on the
Subordinated Debentures not previously delivered to the Debenture Trustee for
cancellation, for the principal and interest to the date of the deposit or to
the Stated Maturity or redemption date, as the case may be.
85
<PAGE>
GOVERNING LAW
The Indenture and the Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Indiana.
INFORMATION CONCERNING THE DEBENTURE TRUSTEE
The Debenture Trustee has and is subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Debenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Subordinated Debentures, unless offered reasonable
indemnity by such holder against the costs, expenses and liabilities which might
be incurred thereby. The Debenture Trustee is not required to expend or risk its
own funds or otherwise incur personal financial liability in the performance of
its duties if the Debenture Trustee reasonably believes that repayment or
adequate indemnity is not reasonably assured to it.
MISCELLANEOUS
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of IUB Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily
terminate, wind up or liquidate IUB Trust, except upon prior approval of the
Federal Reserve if then so required under applicable capital guidelines or
policies of the Federal Reserve, and (a) in connection with a distribution of
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of IUB Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause IUB Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States Federal income
tax purposes.
DESCRIPTION OF THE GUARANTEE
The Preferred Securities Guarantee Agreement (the "Guarantee") will be
executed and delivered by the Company concurrently with the issuance of the
Preferred Securities for the benefit of the holders of the Preferred Securities.
The Guarantee will be qualified as an indenture under the Trust Indenture Act.
The Guarantee Trustee will act as indenture trustee under the Guarantee for
purposes of complying with the provisions of the Trust Indenture Act. The
Guarantee Trustee, State Street Bank and Trust Company, will hold the Guarantee
for the benefit of the holders of the Preferred Securities. The following
summary of the material terms and provisions of the Guarantee does not purport
to be complete and is subject to, and qualified in its entirety by reference to,
all of the provisions of the Guarantee and the Trust Indenture Act. Wherever
particular defined terms of the Guarantee are referred to, but not defined
herein, such defined terms are incorporated herein by reference. The form of the
Guarantee has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part.
GENERAL
The Company will, pursuant to the Guarantee, irrevocably agree to pay in
full on a subordinated basis, to the extent set forth therein, the Guarantee
Payments (as defined herein) to the holders of the Preferred Securities, as and
when due, regardless of any defense, right of set-off or counterclaim that IUB
Trust may have or assert other than the defense of payment. The following
payments with respect to the Preferred Securities, to the extent not paid by or
on behalf of IUB Trust (the "Guarantee Payments"), will be subject to the
Guarantee: (i) any accrued and unpaid Distributions required to be paid on the
Preferred Securities, to the extent that IUB Trust has funds available therefor
at such time, (ii) the Redemption Price with respect to any Preferred Securities
called for redemption to the extent that IUB Trust has funds available therefor
at such time, and (iii) upon a voluntary or involuntary dissolution, winding up
or liquidation of
86
<PAGE>
IUB Trust (other than in connection with the distribution of Subordinated
Debentures to the holders of Preferred Securities or a redemption of all of the
Preferred Securities), the lesser of (a) the amount of the Liquidation
Distribution, to the extent IUB Trust has funds available therefor at such time,
and (b) the amount of assets of IUB Trust remaining available for distribution
to holders of Preferred Securities in liquidation of IUB Trust. The obligation
of the Company to make a Guarantee Payment may be satisfied by direct payment of
the required amounts by the Company to the holders of the Preferred Securities
or by causing IUB Trust to pay such amounts to such holders.
The Guarantee will not apply to any payment of Distributions except to the
extent IUB Trust has funds available therefor. If the Company does not make
interest payments on the Subordinated Debentures held by IUB Trust, IUB Trust
will not pay Distributions on the Preferred Securities and will not have funds
legally available therefor.
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company in the same
manner as the Subordinated Debentures. The Guarantee does not place a limitation
on the amount of additional Senior Debt, Subordinated Debt or Additional Senior
Obligations that may be incurred by the Company. The Company expects from time
to time to incur additional indebtedness constituting Senior Debt, Subordinated
Debt and Additional Senior Obligations.
The Guarantee will constitute a guarantee of payment and not of collection
(that is, the guaranteed party may institute a legal proceeding directly against
the Company to enforce its rights under the Guarantee without first instituting
a legal proceeding against any other Person). The Guarantee will not be
discharged except by payment of the Guarantee Payments in full to the extent not
paid by IUB Trust or upon distribution of the Subordinated Debentures to the
holders of the Preferred Securities. Because the Company is a holding company,
the right of the Company to participate in any distribution of assets of any
Subsidiary Bank upon such Subsidiary Bank's liquidation or reorganization or
otherwise is subject to the prior claims of creditors of that Subsidiary Bank,
except to the extent the Company may itself be recognized as a creditor of that
Subsidiary Bank. The Company's obligations under the Guarantee, therefore, will
be effectively subordinated to all existing and future liabilities of the
Company subsidiaries, and claimants should look only to the assets of the
Company for payments thereunder.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Preferred Securities (in which case no vote will be
required), the Guarantee may not be amended without the prior approval of the
holders of not less than a majority of the aggregate Liquidation Amount of the
outstanding Preferred Securities. See "Description of the Preferred
Securities--Voting Rights; Amendment of Trust Agreement." All guarantees and
agreements contained in the Guarantee will bind the successors, assigns,
receivers, trustees and representatives of the Company and will inure to the
benefit of the holders of the Preferred Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee will occur upon the failure of the
Company to perform any of its payment or other obligations thereunder. The
holders of not less than a majority in aggregate Liquidation Amount of the
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee in
respect of the Guarantee or to direct the exercise of any trust or power
conferred upon the Guarantee Trustee under the Guarantee.
Any holder of Preferred Securities may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against IUB Trust, the Guarantee Trustee or any
other Person.
87
<PAGE>
The Company, as guarantor, is required to file annually with the Guarantee
Trustee a certificate as to whether or not the Company is in compliance with all
the conditions and covenants applicable to it under the Guarantee.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by the Company in performance of the Guarantee, undertakes to perform
only such duties as are specifically set forth in the Guarantee and, after
default with respect to the Guarantee, must exercise the same degree of care and
skill as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to such provisions, the Guarantee Trustee is under no
obligation to exercise any of the powers vested in it by the Guarantee at the
request of any holder of any Preferred Securities, unless it is offered
reasonable indemnity against the costs, expenses and liabilities that might be
incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon (a)
full payment of the Redemption Price of the Preferred Securities, (b) full
payment of the amounts payable upon liquidation of IUB Trust, or (c)
distribution of the Subordinated Debentures to the holders of the Preferred
Securities. The Guarantee will continue to be effective or will be reinstated,
as the case may be, if at any time any holder of the Preferred Securities must
restore payment of any sums paid under such Preferred Securities or the
Guarantee.
GOVERNING LAW
The Guarantee will be governed by and construed in accordance with the laws
of the State of Indiana.
EXPENSE AGREEMENT
The Company will, pursuant to the Agreement as to Expenses and Liabilities
entered into by it under the Trust Agreement (the "Expense Agreement"),
irrevocably and unconditionally guarantee to each person or entity to whom IUB
Trust becomes indebted or liable, the full payment of any costs, expenses or
liabilities of IUB Trust, other than obligations of IUB Trust to pay to the
holders of the Preferred Securities or other similar interests in IUB Trust of
the amounts due such holders pursuant to the terms of the Preferred Securities
or such other similar interests, as the case may be. Third party creditors of
IUB Trust may proceed directly against the Company under the Expense Agreement,
regardless of whether such creditors had notice of the Expense Agreement.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE SUBORDINATED
DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Preferred Securities
(to the extent IUB Trust has funds available for the payment of such
Distributions) are irrevocably guaranteed by the Company as and to the extent
set forth under "Description of the Guarantee." The Company and IUB Trust
believe that, taken together, the obligations of the Company under the
Subordinated Debentures, the Indenture, the Trust Agreement, the Expense
Agreement, and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee, on a subordinated basis, of payment of Distributions
and other amounts due on the Preferred Securities. No single document standing
alone or operating in conjunction with fewer than all of the other documents
constitutes such guarantee. It is only the combined operation of these documents
that has the effect of providing a full, irrevocable and unconditional guarantee
of the obligations of IUB Trust under the Preferred Securities. If and to the
extent that the Company does not make payments on the Subordinated Debentures,
IUB Trust will not pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of Distributions when IUB Trust
does not have sufficient funds to pay such Distributions. In such event, the
remedy of a holder of Preferred
88
<PAGE>
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of such Distributions to such holder. The obligations of
the Company under the Guarantee are subordinate and junior in right of payment
to all Senior Debt, Subordinated Debt and Additional Senior Obligations of the
Company.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Subordinated Debentures, such payments will be sufficient to cover Distributions
and other payments due on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Subordinated Debentures will be equal to the
sum of the aggregate stated Liquidation Amount of the Trust Securities, (ii) the
interest rate and interest and other payment dates on the Subordinated
Debentures will match the Distribution rate and Distribution and other payment
dates for the Preferred Securities, (iii) the Company will pay for all and any
costs, expenses and liabilities of IUB Trust (except the obligations of IUB
Trust to holders of the Preferred Securities), and (iv) the Trust Agreement
further provides that IUB Trust will not engage in any activity that is not
consistent with the limited purposes of IUB Trust.
ENFORCEMENT RIGHTS OF HOLDERS OF PREFERRED SECURITIES
A holder of any Preferred Security may institute a legal proceeding directly
against the Company to enforce its rights under the Guarantee without first
instituting a legal proceeding against the Guarantee Trustee, IUB Trust or any
other Person. A default or event of default under any Senior Debt, Subordinated
Debt or Additional Senior Obligations of the Company would not constitute a
default or Event of Default. In the event, however, of payment defaults under,
or acceleration of, Senior Debt, Subordinated Debt or Additional Senior
Obligations of the Company, the subordination provisions of the Indenture
provide that no payments may be made in respect of the Subordinated Debentures
until such Senior Debt, Subordinated Debt or Additional Senior Obligations has
been paid in full or any payment default thereunder has been cured or waived.
Failure to make required payments on the Subordinated Debentures would
constitute an Event of Default.
LIMITED PURPOSE OF IUB TRUST
The Preferred Securities evidence a preferred undivided beneficial interest
in the assets of IUB Trust. IUB Trust exists for the exclusive purposes of (i)
issuing the Trust Securities representing undivided beneficial interests in the
assets of IUB Trust, (ii) investing the gross proceeds of the Trust Securities
in the Subordinated Debentures issued by the Company, and (iii) engaging in only
those other activities necessary, advisable, or incidental thereto. A principal
difference between the rights of a holder of a Preferred Security and the rights
of a holder of a Subordinated Debenture is that a holder of a Subordinated
Debenture is entitled to receive from the Company the principal amount of and
interest accrued on Subordinated Debentures held, while a holder of Preferred
Securities is entitled to receive Distributions from IUB Trust (or from the
Company under the Guarantee) if and to the extent IUB Trust has funds available
for the payment of such Distributions.
RIGHTS UPON TERMINATION
Upon any voluntary or involuntary termination, winding-up or liquidation of
IUB Trust involving the liquidation of the Subordinated Debentures, the holders
of the Preferred Securities will be entitled to receive, out of assets held by
IUB Trust, the Liquidation Distribution in cash. See "Description of the
Preferred Securities--Liquidation Distribution upon Termination." Upon any
voluntary or involuntary liquidation or bankruptcy of the Company, the Property
Trustee, as holder of the Subordinated Debentures, would be a subordinated
creditor of the Company, subordinated in right of payment to all Senior Debt,
Subordinated Debt and Additional Senior Obligations of the Company (as set forth
in the Indenture), but entitled to receive payment in full of principal and
interest before any shareholders of the Company receive payments or
distributions. Since the Company is the guarantor under the Guarantee and
89
<PAGE>
has agreed to pay for all costs, expenses and liabilities of IUB Trust (other
than the obligations of IUB Trust to the holders of its Preferred Securities),
the positions of a holder of the Preferred Securities and a holder of the
Subordinated Debentures relative to other creditors and to shareholders of the
Company in the event of liquidation or bankruptcy of the Company are expected to
be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a summary of the material United States Federal income tax
considerations that may be relevant to the purchasers of Preferred Securities
which has been passed upon by Greenebaum Doll & McDonald PLLC, special counsel
to the Company and IUB Trust insofar as it relates to matters of law and legal
conclusions. The conclusions expressed herein are based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change at any time, with possible retroactive effect. Subsequent
changes may cause tax consequences to vary substantially from the consequences
described below. See "Possible Changes in Tax Laws." Furthermore, the
authorities on which the following summary is based are subject to various
interpretations, and it is therefore possible that the United States Federal
income tax treatment of the purchase, ownership, and disposition of Preferred
Securities may differ from the treatment described below.
No attempt has been made in the following discussion to comment on all
United States Federal income tax matters affecting purchasers of Preferred
Securities. Moreover, the discussion generally focuses on holders of Preferred
Securities who are individual citizens or residents of the United States and who
acquire Preferred Securities on their original issue at their offering price and
hold Preferred Securities as capital assets. The discussion has only limited
application to dealers in securities, corporations, estates, trusts or
nonresident aliens and does not address all the tax consequences that may be
relevant to holders who may be subject to special tax treatment, such as, for
example, banks, thrifts, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors, or persons that will hold the Preferred Securities as a position in a
"straddle," as part of a "synthetic security" or "hedge," as part of a
"conversion transaction" or other integrated investment, or as other than a
capital asset. The following summary also does not address the tax consequences
to persons that have a functional currency other than the U.S. dollar or the tax
consequences to shareholders, partners or beneficiaries of a holder of Preferred
Securities. Further, it does not include any description of any alternative
minimum tax consequences or the tax laws of any state or local government or of
any foreign government that may be applicable to the Preferred Securities.
Each prospective investor should consult, and should rely exclusively on,
such investor's own tax advisors in analyzing the federal, state, local and
foreign tax consequences of the purchase, ownership or disposition of Preferred
Securities.
CLASSIFICATION OF THE SUBORDINATED DEBENTURES
The Company intends to take the position that the Subordinated Debentures
will be classified for United States Federal income tax purposes as indebtedness
of the Company under current law and, by acceptance of a Preferred Security,
each holder covenants to treat the Subordinated Debentures as indebtedness and
the Preferred Securities as evidence of an indirect beneficial ownership
interest in the Subordinated Debentures. No assurance can be given, however,
that such position of the Company will not be challenged by the Internal Revenue
Service or, if challenged, that such a challenge will not be successful. The
remainder of this discussion assumes that the Subordinated Debentures will be
classified for United States Federal income tax purposes as indebtedness of the
Company.
90
<PAGE>
CLASSIFICATION OF IUB TRUST
Under current law and assuming full compliance with the terms of the Trust
Agreement and Indenture (and certain other documents described herein), IUB
Trust will be classified for United States Federal income tax purposes as a
grantor trust and not as an association taxable as a corporation. Accordingly,
for United States Federal income tax purposes, each holder of Preferred
Securities generally will be treated as owning an undivided beneficial interest
in the Subordinated Debentures, and each holder will be required to include in
its return any income, gain, loss or expense with respect to its allocable share
of the Subordinated Debentures whether or not cash is actually distributed to
such holder.
Because income on the Preferred Securities will constitute interest income
for United States Federal income tax purposes, corporate holders of Preferred
Securities will not be entitled to claim a dividends received deduction in
respect of such income.
POTENTIAL EXTENSION OF INTEREST PAYMENT PERIOD AND ORIGINAL ISSUE DISCOUNT
The Company's option to extend the interest payment period on the
Subordinated Debentures may cause the indebtedness to be issued with original
issue discount ("OID"). Under Treasury regulations (the "Regulations"),a
contingency that stated interest will not be timely paid that is "remote" will
be ignored in determining whether such debt instrument is issued with OID.
Because the exercise by the Company of its option to defer the payment of stated
interest on the Subordinated Debentures would prevent the Company from declaring
dividends on any class of equity, the Company believes that the likelihood of
its exercising the option is "remote" within the meaning of the Regulations. As
a result, the Company intends to take the position that the Subordinated
Debentures will not be deemed to be issued with OID at the time of their initial
issuance. If this position is sustained, a holder of the Preferred Securities
should include in gross income such holder's allocable share of interest on the
Subordinated Debentures.
There can be no assurance, however, that the Internal Revenue Service will
not successfully contest the Company's position. If the Internal Revenue Service
were successful in such a contention, then all of the stated interest payments
on the Subordinated Debentures would be treated as OID. In such case, the
holders of the Preferred Securities would be required to include OID in income
on the basis of a constant yield method regardless of whether any interest is
actually paid or their method of tax accounting, but will not be required to
report actual payments of interest as taxable income.
If the Company's position that there is no OID initially is upheld, but the
Company exercises its option to defer any payment of interest, the Subordinated
Debentures would at the time of such exercise be treated as issued with OID, and
all stated interest thereafter payable on the Subordinated Debentures would be
treated as OID. In such event, the holders of the Preferred Securities would be
required to account for the OID as stated in the immediately preceding
paragraph. Consequently, a holder of Preferred Securities would be required to
include in gross income OID even though the Company would not make any actual
interest payments during an Extension Period.
MARKET DISCOUNT AND ACQUISITION PREMIUM
Holders of Preferred Securities other than a holder who purchased the
Preferred Securities upon original issuance may be considered to have acquired
their undivided interests in the Subordinated Debentures with "market discount"
or "acquisition premium" as such phrases are defined for United States Federal
income tax purposes. Such holders are advised to consult their tax advisors as
to the income tax consequences of the acquisition, ownership and disposition of
the Preferred Securities.
RECEIPT OF SUBORDINATED DEBENTURES OR CASH UPON LIQUIDATION OF IUB TRUST
Under certain circumstances, as described under "Description of the
Preferred Securities--Redemption or Exchange" and "--Liquidation Distribution
upon Termination," the Subordinated Debentures may be distributed to holders of
Preferred Securities upon a liquidation of IUB Trust. Under current United
States Federal income tax law, such a distribution would be treated as a
nontaxable event to each such
91
<PAGE>
holder and would result in such holder having an aggregate adjusted tax basis in
the Subordinated Debentures received in the liquidation equal to such holder's
aggregate adjusted tax basis in the Preferred Securities immediately before the
distribution. A holder's holding period for the Subordinated Debentures so
received in liquidation of IUB Trust would include the period for which such
holder held the Preferred Securities.
If, however, a Tax Event occurs which results in IUB Trust being treated as
an association taxable as a corporation, the distribution would likely
constitute a taxable event to IUB Trust and holders of the Preferred Securities.
Each holder of a Preferred Security would recognize gain or loss if such holder
exchanged the Preferred Securities for the Subordinated Debentures it received
upon liquidation of IUB Trust. Under certain circumstances described herein, the
Subordinated Debentures may be redeemed for cash and the proceeds of such
redemption distributed to holders in redemption of their Preferred Securities.
Under current law, such a redemption would, for United States Federal income tax
purposes, constitute a taxable disposition of the redeemed Preferred Securities,
and a holder would recognize gain or loss as if the holder sold such Preferred
Securities for cash. See "Description of the Preferred Securities-- Redemption
or Exchange" and "--Liquidation Distribution upon Termination."
DISPOSITION OF PREFERRED SECURITIES
Upon the sale of the Preferred Securities, a holder will recognize a gain or
loss in an amount equal to the difference between its adjusted tax basis in the
Preferred Securities and the amount realized on the sale of such Preferred
Securities (except to the extent of any amount received in respect of accrued
but unpaid interest not previously included in income). Assuming that the
Company's position that there is no OID initially is upheld, and that the
Company does not exercise its option to defer payment of interest on the
Subordinated Debentures, a holder's adjusted tax basis for the Preferred
Securities generally will be its initial purchase price. If the Subordinated
Debentures are deemed to have been issued initially with OID, or OID results due
to the Company's deferral of any interest payment, a holder's adjusted tax basis
for the Preferred Securities generally will be its initial purchase price
increased by OID previously includible in the holder's gross income to the date
of disposition and decreased by payments received on the Preferred Securities
since the date the Subordinated Debentures were deemed to have OID. Such gain or
loss generally will be a capital gain or loss. As a result of the recently
enacted Taxpayer Relief Act of 1997, in the case of noncorporate taxpayers, the
tax rates applicable to capital gains from the disposition of Preferred
Securities generally will vary depending upon whether, at the time of
disposition, the Preferred Securities have been held for more than twelve months
or more than eighteen months.
The Preferred Securities may trade at a price that does not accurately
reflect the value of accrued but unpaid interest (or OID if the Subordinated
Debentures are treated as having been issued, or reissued, with OID) with
respect to the underlying Subordinated Debentures. A holder that disposes of its
Preferred Securities between record dates for payment of distributions thereon
will be required to include as ordinary income either OID (if applicable) or
accrued but unpaid interest on the Subordinated Debentures through the date of
disposition. To the extent that the amount realized on the sale is less than the
holder's adjusted tax basis, a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States Federal income tax purposes.
POSSIBLE CHANGES IN TAX LAWS
Certain legislative proposals were made in 1996 and 1997 which were designed
to eliminate the ability of issuers of certain instruments from deducting
interest paid on those instruments. These proposals were not, however,
incorporated into the legislation recently enacted as the Taxpayer Relief Act of
1997. Nevertheless, there can be no assurance that other legislation enacted
after the date hereof will not adversely affect the ability of the Company to
deduct the interest payable on the Subordinated Debentures, and such legislation
could be retroactive in effect. Consequently, there can be no assurance that a
Tax Event will not occur. A Tax Event would permit the Company, upon approval of
the Federal Reserve if then required under applicable capital guidelines or
policies of the Federal Reserve, to cause a redemption
92
<PAGE>
of the Preferred Securities before, as well as after, December 31, 2002. See
"Description of the Subordinated Debentures--Redemption" and "Description of the
Preferred Securities--Redemption--Tax Event Redemption, Capital Treatment Event
Redemption or Investment Company Event Redemption."
BACKUP WITHHOLDING AND INFORMATION REPORTING
Interest paid on the Subordinated Debentures, or the amount of OID accrued
on the Subordinated Debentures, if applicable, deemed held of record by
individual citizens or residents of the United States, or certain trusts,
estates, and partnerships, will be reported to the Internal Revenue Service on
Forms 1099, which forms should be mailed to such holders of Preferred Securities
by January 31 following each calendar year. Payments made on, and proceeds from
the sale of, the Preferred Securities may be subject to a "backup" withholding
tax (currently at 31%) unless the holder complies with certain identification
and other requirements. Any amounts withheld under the backup withholding rules
will be allowed as a credit against the holder's United States Federal income
tax liability, provided the required information is provided to the Internal
Revenue Service.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON THE
PARTICULAR SITUATION OF A HOLDER OF PREFERRED SECURITIES. HOLDERS OF PREFERRED
SECURITIES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Plans"), generally may purchase Preferred Securities, subject to the investing
fiduciary's determination that the investment in Preferred Securities satisfies
ERISA's fiduciary standards and other requirements applicable to investments by
the Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain plans
(generally, Plans maintained or sponsored by, or contributed to by, any such
persons with respect to which the Company or an affiliate is a fiduciary or
Plans for which the Company or an affiliate provides services). The acquisition
and ownership of Preferred Securities by a Plan (or by an individual retirement
arrangement or other Plans described in Section 4975(e)(1) of the Code) with
respect to which the Company or any of its affiliates is considered a party in
interest or a disqualified person may constitute or result in a prohibited
transaction under ERISA or Section 4975 of the Code, unless such Preferred
Securities are acquired pursuant to and in accordance with an applicable
exemption.
As a result, Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Preferred Securities unless such Preferred Securities are acquired pursuant to
and in accordance with an applicable exemption. Any other Plans or other
entities whose assets include Plan assets subject to ERISA or Section 4975 of
the Code proposing to acquire Preferred Securities should consult with their own
counsel.
UNDERWRITING
Stifel, Nicolaus & Company, Incorporated (the "Underwriter") has agreed,
subject to the terms and conditions set forth in the Underwriting Agreement, the
form of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part, to purchase 1,950,000 Preferred Securities from IUB
Trust. The Underwriter has agreed in the Underwriting Agreement, subject to the
terms and conditions set forth therein, to purchase all the Preferred Securities
offered hereby if any of the Preferred Securities are purchased.
93
<PAGE>
The Underwriter has reserved approximately 140,000 Preferred Securities for
sale, at the initial public offering price, to directors, officers and employees
of the Company and its affiliates, directors of the Banks and family members of
the foregoing, in order to permit such persons to purchase such Preferred
Securities in the offering. The Company's Chairman, President and Chief
Executive Officer has informed the Company and the Underwriter of his intention
to purchase 100,000 Preferred Securities, and these securities are included in
the 140,000 Preferred Securities so reserved for sale. The number of Preferred
Securities available for sale to the general public will be reduced to the
extent such persons purchase such reserved Preferred Securities. Any reserved
Preferred Securities not so purchased will be offered by the Underwriter to the
general public on the same basis as the Preferred Securities offered pursuant to
the offering.
The Underwriter has advised IUB Trust that it proposes initially to offer
the Preferred Securities to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $0.20 per Preferred Security. The Underwriter may
allow, and such dealers may reallow, a discount not in excess of $0.05 per
Preferred Security to certain other dealers. After the initial public offering,
the public offering price, concession and discount may be changed. Because the
National Association of Securities Dealers, Inc. ("NASD") is expected to view
the Preferred Securities as interests in a direct participation program, the
offering of the Preferred Securities is being made in compliance with the
applicable provisions of Rule 2810 of the NASD's Conduct Rules.
In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Subordinated Debentures of the Company,
the Underwriting Agreement provides that the Company will pay as compensation to
the Underwriter for arranging the investment therein of such proceeds $0.40 per
Preferred Security (or $780,000 in the aggregate) for the account of the
Underwriter.
IUB Trust has granted the Underwriter an option to purchase up to an
additional 292,500 Preferred Securities at the initial public offering price.
Such option, which expires 30 days from the date of this Prospectus, may be
exercised solely to cover over-allotments. To the extent that the Underwriter
exercises its option to purchase additional Preferred Securities, IUB Trust will
issue and sell to the Company additional Common Securities in an aggregate
Liquidation Amount equal to at least 3% of the total capital of IUB Trust and
the Company will issue and sell to IUB Trust Subordinated Debentures in an
aggregate principal amount equal to the aggregate Liquidation Amount of the
additional Preferred Securities being purchased pursuant to the option.
The Preferred Securities have been approved for quotation on the Nasdaq
National Market. The Underwriter has advised IUB Trust that it presently intends
to make a market in the Preferred Securities after the commencement of trading
on the Nasdaq National Market, but no assurances can be made as to the liquidity
of such Preferred Securities or that an active and liquid trading market will
develop or, if developed, that it will continue. The offering price and
distribution rate have been determined by negotiations among representatives of
the Company and the Underwriter, and the offering price of the Preferred
Securities may not be indicative of the market price following the offering. The
Underwriter will have no obligation to make a market in the Preferred
Securities, however, and may cease market-making activities, if commenced, at
any time.
IUB Trust and the Company have agreed to indemnify the Underwriter against,
or contribute to payments that the Underwriter may be required to make in
respect of, certain liabilities, including liabilities under the Securities Act.
In connection with the offering of the Preferred Securities, the Underwriter
and any selling group members and their respective affiliates may engage in
transactions effected in accordance with Rule 104 of the Commission's Regulation
M that are intended to stabilize, maintain or otherwise affect the market price
of the Preferred Securities. Such transactions may include over-allotment
transactions in which the Underwriter creates a short position for its own
account by selling more Preferred Securities than it is committed to purchase
from IUB Trust. In such case, to cover all or part of the short position, the
Underwriter may exercise the over-allotment option described above or may
purchase Preferred Securities
94
<PAGE>
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriter also may engage in stabilizing transactions in which
it bids for, and purchases, Preferred Securities at a level above that which
might otherwise prevail in the open market for the purpose of preventing or
retarding a decline in the market price of the Preferred Securities. The
Underwriter also may reclaim any selling concessions allowed to a dealer if the
Underwriter repurchases Preferred Securities distributed by that dealer. Any of
the foregoing transactions may result in the maintenance of a price for the
Preferred Securities at a level above that which might otherwise prevail in the
open market. Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Preferred Securities. The
Underwriter is not required to engage in any of the foregoing transactions and,
if commenced, such transactions may be discontinued at any time without notice.
MISCELLANEOUS
The Company has agreed, pursuant to the Indenture, for so long as Trust
Securities remain outstanding, (i) to maintain directly or indirectly 100%
ownership of the Common Securities of IUB Trust (provided that certain
successors which are permitted pursuant to the Indenture may succeed to the
Company's ownership of the Common Securities), (ii) not to voluntarily
terminate, wind up or liquidate IUB Trust, except upon prior approval of the
Federal Reserve if then so required under applicable capital guidelines or
policies of the Federal Reserve, and (a) in connection with a distribution of
Subordinated Debentures to the holders of the Preferred Securities in
liquidation of IUB Trust, or (b) in connection with certain mergers,
consolidations or amalgamations permitted by the Trust Agreement, and (iii) to
use its reasonable efforts, consistent with the terms and provisions of the
Trust Agreement, to cause IUB Trust to remain classified as a grantor trust and
not as an association taxable as a corporation for United States Federal income
tax purposes.
VALIDITY OF SECURITIES
Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the formation of IUB
Trust will be passed upon by Richards, Layton & Finger, special Delaware counsel
to the Company and IUB Trust. Certain legal matters for the Company and IUB
Trust, including the validity of the Guarantee and the Subordinated Debentures,
will be passed upon for the Company and IUB Trust by David W. Harper, Esq.,
Louisville, Kentucky, counsel to the Company and IUB Trust, and Greenebaum Doll
& McDonald PLLC, Louisville, Kentucky, special counsel to the Company and IUB
Trust. Certain legal matters will be passed upon for the Underwriter by Bryan
Cave LLP, St. Louis, Missouri. Counsel for the Company, IUB Trust and the
Underwriter will rely on the opinion of Richards, Layton & Finger as to matters
of Delaware law. Certain matters relating to United States Federal income tax
considerations will be passed upon for the Company by Greenebaum Doll & McDonald
PLLC.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1996
and 1995, and for each of the years in the three year period ended December 31,
1996, included in this Prospectus have been audited by Geo. S. Olive & Co. LLC,
independent accountants, to the extent and for the periods set forth in its
report appearing elsewhere herein. The consolidated financial statements of the
Company are included herein in reliance upon such report given upon the
authority of such firm as an expert in auditing and accounting.
The consolidated financial statements of PTC as of December 31, 1996 and
1995, and for each of the years in the two year period ended December 31, 1996,
included in this Prospectus have been audited by Crowe, Chizek and Company LLP,
independent accountants, to the extent and for the periods set forth in its
report appearing elsewhere herein. The consolidated financial statements of PTC
are included herein in reliance upon such report given upon the authority of
such firm as an expert in auditing and accounting.
95
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by the Company with the Commission
under the Exchange Act, or where indicated certain portions thereof, are
incorporated herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
2. The Company's Quarterly Reports on Form 10-Q for the periods ended
March 31, 1997, June 30, 1997 and September 30, 1997; and
3. The Company's Current Report on Form 8-K dated October 20, 1997.
Any statement contained in a document incorporated or deemed to be
incorporated by reference shall be deemed to be modified or superseded for
purposes hereof to the extent that a statement contained herein (or in any other
subsequently filed document that is or is deemed to be incorporated by reference
herein) modifies or supersedes such previous statement. Any statement so
modified or superseded shall not be deemed to constitute a part hereof except as
so modified or superseded.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS
PROSPECTUS IS DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY
OF ANY OR ALL OF THE FOREGOING DOCUMENTS INCORPORATED BY REFERENCE HEREIN (OTHER
THAN EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
IN SUCH DOCUMENTS). REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO INDIANA
UNITED BANCORP, 201 N. BROADWAY, P.O. BOX 87, GREENSBURG, INDIANA 47240-0087,
ATTN: JAY B. FAGER, CHIEF FINANCIAL OFFICER (TELEPHONE (812) 663-0157).
As used herein, the terms "Prospectus" and "herein" mean this Prospectus,
including the documents incorporated or deemed to be incorporated herein by
reference, as the same may be amended, supplemented or otherwise modified from
time to time. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein do not purport to be complete, and
where reference is made to the particular provisions of such contract or other
document, such provisions are qualified in all respects by reference to all of
the provisions of such contract or other document.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the following
Regional Offices of the Commission: 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 at prescribed rates. The Company files its reports, proxy
statements and other information electronically with the Commission and such
information also may be accessed through the Commission's electronic data
gathering, analysis and retrieval system ("EDGAR") via electronic means,
including the Commission's home page on the Internet (http://www.sec.gov). The
Company's shares of common stock are traded on the Nasdaq National Market
(trading symbol: IUBC) and such information relating to the Company may also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K. Street N.W., Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-2 (together with all amendments, exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement filed by the Company with
the Commission, certain portions of which are omitted in accordance with the
rules and regulations of the Commission. Such additional information is
available for inspection and copying at the offices of the Commission.
Statements contained in this
96
<PAGE>
Prospectus or in any document incorporated into this Prospectus by reference as
to the contents of any contract or other document referred to herein or therein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
No separate financial statements of IUB Trust have been included herein. The
Company does not consider that such financial statements would be material to
the holders of the Preferred Securities because (i) all of the voting securities
of IUB Trust will be owned by the Company, a reporting company under the
Exchange Act, (ii) IUB Trust has no independent operations and exists for the
sole purpose of issuing securities representing undivided beneficial interest in
the assets of IUB Trust and investing the proceeds thereof in the Subordinated
Debentures issued by the Company, and (iii) the obligations of the Company
described herein to provide certain indemnities in respect of and be responsible
for certain costs, expenses, debts and liabilities of IUB Trust under the
Indenture and pursuant to the Trust Agreement, the guarantee issued by the
Company with respect to the Preferred Securities, and the Subordinated
Debentures purchased by IUB Trust and the related Indenture, taken together,
constitute, in the belief of the Company and IUB Trust, a full and unconditional
guarantee of payments due on the Preferred Securities. See "Description of the
Subordinated Debentures" and "Description of the Guarantee".
IUB Trust is not currently subject to the information reporting requirements
of the Exchange Act. IUB Trust will become subject to such requirements upon the
effectiveness of the Registration Statement, although it intends to seek and
expects to receive an exemption therefrom.
97
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
COMPANY UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Interim Consolidated Balance Sheet as of September 30, 1997 (unaudited) and December
31, 1996............................................................................ F-3
Interim Consolidated Statement of Income for the nine months ended September 30, 1997
and 1996 (unaudited)................................................................ F-4
Interim Consolidated Statement of Cash Flows for the nine months ended September 30,
1997 and 1996 (unaudited)........................................................... F-5
Interim Consolidated Statement of Changes to Shareholders' Equity for the nine months
ended September 30, 1997 and 1996 (unaudited)....................................... F-6
Notes to Interim Consolidated Financial Statements (unaudited)....................... F-7
COMPANY AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report......................................................... F-8
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-9
Consolidated Statement of Income for each of the years ended December 31, 1996, 1995
and 1994............................................................................ F-10
Consolidated Statement of Cash Flows for each of the years ended December 31, 1996,
1995 and 1994....................................................................... F-11
Consolidated Statement of Changes in Shareholders' Equity for each of the years ended
December 31, 1996, 1995 and 1994.................................................... F-12
Notes to Consolidated Financial Statements........................................... F-13
PTC UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Interim Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December
31, 1996............................................................................ F-26
Interim Consolidated Statements of Income for the nine months ended September 30,
1997 and 1996 (unaudited)........................................................... F-27
Interim Consolidated Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 (unaudited)........................................................... F-28
Interim Consolidated Statements of Changes in Shareholders' Equity for the nine
months ended September 30, 1997 and 1996 (unaudited)................................ F-29
Notes to Interim Consolidated Financial Statements (unaudited)....................... F-30
PTC AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report......................................................... F-31
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-32
Consolidated Statements of Income for each of the years ended December 31, 1996 and
1995................................................................................ F-33
Consolidated Statements of Cash Flows for each of the years ended December 31, 1996
and 1995............................................................................ F-34
Consolidated Statements of Changes in Shareholders' Equity for each of the years
ended December 31, 1996 and 1995.................................................... F-35
Notes to Consolidated Financial Statements........................................... F-36
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
COMPANY AND PTC PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Pro Forma Combined Condensed Balance Sheet as of September 30, 1997 (unaudited)...... F-46
Pro Forma Combined Condensed Statement of Income for the nine months ended September
30, 1997 (unaudited)................................................................ F-47
Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1996
(unaudited)......................................................................... F-48
Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1995
(unaudited)......................................................................... F-49
Pro Forma Combined Condensed Statement of Income for the year ended December 31, 1994
(unaudited)......................................................................... F-50
Notes to Pro Forma Combined Condensed Financial Statements (unaudited)............... F-51
</TABLE>
F-2
<PAGE>
COMPANY INTERIM CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
SEPTEMBER 30, 1997 -----------------
------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks.................................................. $ 10,464 $ 13,236
Interest-bearing demand deposits......................................... 74 60
Federal funds sold....................................................... 7,300 5,900
-------- --------
Cash and cash equivalents.............................................. 17,838 19,196
Short-term investments................................................... -- 100
Securities available for sale............................................ 71,422 81,187
Loans.................................................................... 244,237 219,483
Less: Allowance for loan losses.......................................... 2,670 2,506
-------- --------
Net loans.............................................................. 241,567 216,977
Premises and equipment................................................... 6,355 5,919
Federal Home Loan Bank stock............................................. 1,138 1,138
Core deposit intangibles................................................. 83 106
Accrued interest receivable.............................................. 2,186 1,952
Other real estate........................................................ -- 1,000
Other assets............................................................. 1,462 771
-------- --------
Total assets........................................................... $ 342,051 $ 328,346
-------- --------
-------- --------
LIABILITIES
Deposits
Non-interest bearing................................................... $ 25,263 $ 29,001
Interest bearing....................................................... 260,497 247,401
-------- --------
Total deposits....................................................... 285,760 276,402
Short-term borrowings.................................................. 17,885 15,683
Long-term debt......................................................... 4,625 5,000
Accrued interest payable............................................... 1,404 1,272
Other liabilities...................................................... 2,293 2,240
-------- --------
Total liabilities.................................................... 311,967 300,597
-------- --------
SHAREHOLDERS' EQUITY
Preferred stock
Authorized--400,000 shares
Issued and outstanding--None........................................... -- --
Common stock $1 stated value
Authorized--3,000,000 shares
Issued and outstanding--1,250,897 shares............................... 1,251 1,251
Paid-in surplus.......................................................... 10,677 10,677
Valuation adjustment-Securities available for sale....................... 487 95
Retained earnings........................................................ 17,669 15,726
-------- --------
Total shareholders' equity............................................. 30,084 27,749
-------- --------
Total liabilities and shareholders' equity............................. $ 342,051 $ 328,346
-------- --------
-------- --------
</TABLE>
See notes to consolidated condensed financial statements.
F-3
<PAGE>
COMPANY INTERIM CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income
Loans, including fees................................... $5,332 $4,639 $15,388 $13,458
Investment securities:
Taxable............................................... 1,150 1,323 3,616 3,835
Tax-exempt............................................ 46 44 143 141
Federal funds sold...................................... 104 62 250 247
Interest-bearing deposits............................... -- 2 1 11
---------- ---------- ---------- ----------
Total interest income............................... 6,632 6,070 19,398 17,692
---------- ---------- ---------- ----------
Interest expense
Deposits................................................ 3,048 2,775 8,832 8,025
Short-term borrowings................................... 177 182 510 500
Long-term debt.......................................... 95 111 297 343
---------- ---------- ---------- ----------
Total interest expense.............................. 3,320 3,068 9,639 8,868
---------- ---------- ---------- ----------
Net interest income....................................... 3,312 3,002 9,759 8,824
Provision for loan losses............................... 58 30 183 90
---------- ---------- ---------- ----------
Net interest income after provision for loan losses....... 3,254 2,972 9,576 8,734
Non-interest income
Securities losses....................................... (83) -- (80) --
Other operating income.................................. 426 359 1,450 1,093
---------- ---------- ---------- ----------
Total non-interest income........................... 343 359 1,370 1,093
---------- ---------- ---------- ----------
Non-interest expense...................................... 2,097 2,562 6,201 6,608
---------- ---------- ---------- ----------
Income before income tax.................................. 1,500 769 4,745 3,219
Income tax expense...................................... 594 451 1,877 1,420
---------- ---------- ---------- ----------
Net income................................................ $ 906 $ 318 $2,868 $1,799
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per common share
Net income.............................................. $0.72 $0.25 $2.29 $1.40
Cash dividends declared................................. 0.26 0.21 0.74 0.61
Average common shares outstanding......................... 1,250,897 1,250,897 1,250,897 1,250,897
</TABLE>
See notes to consolidated condensed financial statements.
F-4
<PAGE>
COMPANY INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income............................................................................. $ 2,868 $ 1,799
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses............................................................ 183 90
Depreciation and amortization........................................................ 537 495
Premiums and discounts amortization on investment securities......................... 42 81
Amortization of loan and deposit fair value adjustments.............................. 79 76
Amortization and reduction of core deposit intangibles............................... 23 27
Securities losses.................................................................... 80 --
Net change in
Income receivable.................................................................. (234) (139)
Interest payable................................................................... 132 (68)
Other adjustments.................................................................... 186 (705)
--------- ---------
Net cash provided by operating activities.......................................... 3,896 1,656
--------- ---------
Cash flows from investing activities
Net change in short-term investments................................................... 86 5,035
Purchases of securities available for sale............................................. (2,376) (15,717)
Proceeds from maturities and paydowns of securities available for sale................. 10,106 11,326
Proceeds from sales of securities available for sale................................... 2,035 --
Net change in loans.................................................................... (24,754) (13,674)
Purchases of premises and equipment.................................................... (973) (396)
Proceeds from other real estate........................................................ 1,000 45
Other investment activities............................................................ (638) (141)
--------- ---------
Net cash used by investing activities.............................................. (15,514) (13,522)
--------- ---------
Cash flows from financing activities
Net change in
Noninterest bearing, NOW, money market and savings deposits.......................... (1,550) (6,923)
Certificates of deposit.............................................................. 10,908 15,608
Short-term borrowings................................................................ 2,202 1,538
Payments on long-term debt............................................................. (375) (500)
Redemption of preferred stock.......................................................... -- (2,000)
Cash dividends......................................................................... (925) (814)
--------- ---------
Net cash provided by financing activities............................................ 10,260 6,909
--------- ---------
Net decrease in cash and cash equivalents................................................ (1,358) (4,957)
Cash and cash equivalents, beginning of period........................................... 19,196 18,929
--------- ---------
Cash and cash equivalents, end of period................................................. $ 17,838 $ 13,972
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-5
<PAGE>
COMPANY INTERIM CONSOLIDATED STATEMENT OF CHANGES
TO SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Balance, January 1....................................................................... $ 27,749 $ 28,245
Net income............................................................................... 2,868 1,799
Net change in unrealized gains (losses) on securities available for sale................. 392 (493)
Redemption of preferred stock............................................................ -- (2,000)
Cash dividends:
Preferred stock........................................................................ -- (50)
Common stock........................................................................... (925) (763)
--------- ---------
Balance, September 30.................................................................... $ 30,084 $ 26,738
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated condensed financial statements.
F-6
<PAGE>
COMPANY NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLARS AMOUNTS IN THOUSANDS)
NOTE 1.
The significant accounting policies followed by Indiana United Bancorp
("Company") and its subsidiaries, Union Bank and Trust Company of Indiana
("Union Bank") and Regional Federal Savings Bank ("Regional Bank") for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. All adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary for a fair
presentation of the results for the periods reported, have been included in the
accompanying consolidated financial statements. The results of operations for
the nine months ended September 30, 1997 are not necessarily indicative of those
expected for the remainder of the year.
NOTE 2:
On October 8, 1997, the Company signed a definitive agreement to acquire
P.T.C. Bancorp ("PTC"), Brookville, Indiana in a proposed transaction viewed as
a merger of equals with the combined entity retaining the name of Indiana United
Bancorp. The definitive agreement provides that PTC shareholders (including
option holders) will receive 1.075 shares of Company common stock in exchange
for each share owned or option held of PTC common stock.
The consolidated company will hold assets totaling almost $650 million and
will have market capitalization of more than $100 million based upon current
market values. Upon completion of the merger, Indiana United Bancorp will
operate 29 offices in 12 counties throughout the eastern and southern regions of
Indiana.
The proposed transaction is subject to various regulatory approvals and the
approval of the shareholders of both organizations. It is expected that the
transaction will be accounted for as a "pooling of interests". Although the
Company anticipates that the merger will be consummated during the first quarter
of 1998, there can be no assurance that the transaction will be completed.
NOTE 3:
The Company is in process of preparing a registration statement to be filed
with the Securities and Exchange Commission ("SEC") for the purpose of issuing
$18,500,000 Cumulative Trust Preferred Securities ("Preferred Securities"). The
Preferred Securities will represent undivided beneficial interests in the assets
of a statutory business trust being established by the Company. The Company will
acquire all the common securities of the business trust. The assets of the
business trust will consist solely of Subordinated Debentures issued by the
Company and purchased with the proceeds from the issuance of the Preferred
Securities. The Company will guarantee the payment of the Preferred Securities.
Under the risk-based guideline established by the Federal Reserve, a portion
of the proceeds from the sale of Preferred Securities are expected to qualify as
Tier 1 or core capital. These guidelines provide that the Preferred Securities
cannot exceed 25% of total Tier 1 capital of the Company, however; the amount in
excess of the 25% limitation will constitute Tier 2, or supplementary capital.
For financial reporting purposes, the business trust will be treated as a
wholly owned subsidiary of the Company and the accounts of the business trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be presented as a separate line item in the
consolidated balance sheet and interest on the Preferred Securities will be
recorded as an expense in the consolidated statement of income. In addition,
appropriate disclosures in the footnotes to the consolidated financial
statements describing the Preferred Securities, Subordinated Debentures,
business trust and the guarantee will be presented.
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and
Board of Directors
Indiana United Bancorp
Greensburg, Indiana
We have audited the consolidated balance sheet of Indiana United Bancorp and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial position of
Indiana United Bancorp and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in the notes to the financial statements, the Company changed
its method of accounting for investments in securities in 1994.
Geo. S. Olive & Co. LLC
Indianapolis, Indiana
February 3, 1997
F-8
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks........................................................ $ 13,236,256 $ 11,707,236
Interest-bearing demand deposits............................................... 59,658 71,698
Federal funds sold............................................................. 5,900,000 7,150,000
-------------- --------------
Cash and cash equivalents.................................................... 19,195,914 18,928,934
Short-term investments......................................................... 100,000 5,100,000
Investment securities available for sale....................................... 81,186,867 80,650,912
Loans.......................................................................... 219,483,489 201,354,517
Allowance for loan losses.................................................... (2,505,853) (2,754,227)
-------------- --------------
Net loans.................................................................. 216,977,636 198,600,290
Premises and equipment......................................................... 5,918,643 6,024,994
Federal Home Loan Bank stock................................................... 1,137,815 1,137,815
Income receivable.............................................................. 1,951,803 1,974,331
Core deposit intangibles....................................................... 106,228 141,638
Foreclosed real estate......................................................... 1,000,000 45,000
Other assets................................................................... 771,242 463,094
-------------- --------------
Total assets................................................................. $ 328,346,148 $ 313,067,008
-------------- --------------
-------------- --------------
LIABILITIES
Deposits
Non-interest bearing......................................................... $ 29,001,245 $ 30,335,037
Interest bearing............................................................. 247,400,928 232,011,066
-------------- --------------
Total deposits............................................................. 276,402,173 262,346,103
Short-term borrowings.......................................................... 15,683,491 13,240,300
Long-term debt................................................................. 5,000,000 6,000,000
Interest payable............................................................... 1,271,737 1,388,635
Other liabilities.............................................................. 2,239,784 1,846,551
-------------- --------------
Total liabilities.......................................................... 300,597,185 284,821,589
-------------- --------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock
Authorized--400,000 shares
Issued and outstanding--20,000 shares
Series M-1987 convertible preferred shares................................. 2,000,000
Common stock, $1 par value
Authorized--3,000,000
Issued and outstanding--1,250,897 shares..................................... 1,250,897 1,250,897
Paid-in capital................................................................ 10,677,045 10,677,045
Retained earnings.............................................................. 15,726,495 14,122,382
Net unrealized gain on securities available for sale........................... 94,526 195,095
-------------- --------------
Total shareholders' equity............................................... 27,748,963 28,245,419
-------------- --------------
Total liabilities and shareholders' equity............................... $ 328,346,148 $ 313,067,008
-------------- --------------
-------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable.................................................. $ 18,266,420 $ 16,938,330 $ 15,940,601
Investment securities
Taxable......................................................... 5,122,743 5,326,297 5,871,583
Tax exempt...................................................... 185,231 216,816 259,772
Federal funds sold................................................ 379,965 304,619 115,626
Short-term investments............................................ 12,469 49,002 15,075
------------- ------------- -------------
Total interest income......................................... 23,966,828 22,835,064 22,202,657
------------- ------------- -------------
INTEREST EXPENSE
Deposits.......................................................... 10,862,835 10,307,724 9,787,434
Short-term borrowings............................................. 689,789 931,944 482,907
Long-term debt.................................................... 453,527 611,978 630,901
------------- ------------- -------------
Total interest expense........................................ 12,006,151 11,851,646 10,901,242
------------- ------------- -------------
NET INTEREST INCOME................................................. 11,960,677 10,983,418 11,301,415
Provision for loan losses......................................... 150,000 30,000 115,000
------------- ------------- -------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES................. 11,810,677 10,953,418 11,186,415
------------- ------------- -------------
NON-INTEREST INCOME
Insurance commissions............................................. 438,405 472,998 508,935
Fiduciary activities.............................................. 232,494 189,417 200,241
Service charges on deposit accounts............................... 519,609 450,060 474,896
Net realized gains (losses) on securities......................... 16,296 (154,297)
Gain on sale of branches.......................................... 1,228,751
Other income...................................................... 311,204 328,032 329,346
------------- ------------- -------------
Total non-interest income....................................... 1,501,712 1,456,803 2,587,872
------------- ------------- -------------
NON-INTEREST EXPENSE
Salaries and employee benefits.................................... 4,481,548 4,467,408 4,552,848
Net occupancy expenses............................................ 764,086 804,977 835,351
Equipment expenses................................................ 712,683 664,109 685,805
Professional fees................................................. 221,927 204,578 395,383
Deposit insurance expense......................................... 735,576 394,672 666,402
Amortization of core deposit intangibles.......................... 35,410 40,468 45,527
Other expenses.................................................... 1,667,259 1,653,251 1,858,864
------------- ------------- -------------
Total non-interest expense...................................... 8,618,489 8,229,463 9,040,180
------------- ------------- -------------
INCOME BEFORE INCOME TAX............................................ 4,693,900 4,180,758 4,734,107
Income tax expense................................................ 2,001,351 1,651,366 1,863,756
------------- ------------- -------------
NET INCOME.......................................................... $ 2,692,549 $ 2,529,392 $ 2,870,351
------------- ------------- -------------
------------- ------------- -------------
Net income per common share......................................... $ 2.11 $ 1.91 $ 2.17
Weighted Average Shares Outstanding................................. 1,250,897 1,250,897 1,250,897
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................................. $ 2,692,549 $ 2,529,392 $ 2,870,351
Adjustments to reconcile net income to net cash provided by operating
activities Provision for loan losses................................. 150,000 30,000 115,000
Depreciation and amortization........................................ 644,673 623,686 621,777
Deferred income tax.................................................. 188,387 (60,950) (158,955)
Securities amortization, net......................................... 72,066 105,445 128,563
Amortization of fair value adjustments on loans and deposits......... 90,600 81,544 (34,768)
Amortization of core deposit intangibles............................. 35,410 40,468 45,527
Investment securities (gains) losses................................. (16,296) 154,297
Net change in
Income receivable.................................................. 22,528 (78,370) 68,069
Interest payable................................................... (116,898) 524,295 52,213
Gain on sale of branches............................................. (1,228,751)
Other adjustments.................................................... (496,966) 44,534 152,967
----------- ----------- -----------
Net cash provided by operating activities........................ 3,282,349 3,823,748 2,786,290
----------- ----------- -----------
INVESTING ACTIVITIES
Net change in short-term investments................................... 5,000,000 (4,952,843) 100,825
Purchases of securities available for sale............................. (16,850,769) (5,738,936) (24,219,400)
Proceeds from maturities and paydowns of securities available for
sale................................................................. 16,531,638 11,841,444 27,871,655
Proceeds from sales of securities available for sale................... 9,369,943 26,477,204
Purchases of securities held to maturity............................... (324,520) (2,429,679)
Proceeds from maturities and paydowns of securities held to maturity... 752,427 791,211
Net change in loans.................................................... (19,617,946) (6,833,403) (2,475,422)
Purchases of premises and equipment.................................... (556,117) (1,195,505) (454,942)
Proceeds from sale of other real estate................................ 50,000 63,177 1,579,817
Net cash and cash equivalents paid in branch sales..................... (9,019,963)
Other investing activities............................................. 17,000 10,000 17,573
----------- ----------- -----------
Net cash provided (used) by investing activities................... (15,426,194) 2,991,784 18,238,879
----------- ----------- -----------
FINANCING ACTIVITIES
Net change in
Non-interest-bearing, NOW, money market and savings deposits......... 1,534,086 (3,040,069) (7,872,722)
Certificates of deposit.............................................. 12,521,984 4,036,023 (16,212,020)
Short-term borrowings................................................ 4,443,191 439,426 2,331,938
Repayment of long-term debt............................................ (1,000,000) (1,500,000) (1,875,000)
Proceeds from FHLB advances............................................ 5,190,000
Repayment of FHLB advances............................................. (2,000,000) (3,190,000)
Cash dividends......................................................... (1,088,436) (1,002,599) (839,461)
Redemption of preferred stock.......................................... (2,000,000) (400,000) (300,000)
Other financing activities............................................. (10,424)
----------- ----------- -----------
Net cash provided (used) by financing activities................... 12,410,825 532,781 (24,777,689)
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................................. 266,980 7,348,313 (3,752,520)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................. 18,928,934 11,580,621 15,333,141
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR................................... $19,195,914 $18,928,934 $11,580,621
----------- ----------- -----------
----------- ----------- -----------
ADDITIONAL CASH FLOWS INFORMATION
Interest paid.......................................................... $12,123,049 $11,327,351 $10,931,300
Income tax paid........................................................ 1,885,288 1,943,281 1,628,500
Loan balances transferred to foreclosed real estate.................... 1,000,000
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
ON
PREFERRED STOCK COMMON STOCK SECURITIES
-------------------- -------------------- PAID-IN RETAINED AVAILABLE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS FOR SALE TOTAL
--------- --------- --------- --------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1994........ 27,000 $2,700,000 1,137,578 $1,137,578 $8,099,038 $13,266,449 $25,203,065
Net income for 1994............ 2,870,351 2,870,351
Cash dividends.................
Preferred stock--$6.34 per
share...................... (156,915) (156,915)
Common stock--$.60 per
share...................... (682,546) (682,546)
10% stock dividend............. 113,319 113,319 2,578,007 (2,691,326)
Adjustment for cash paid in
lieu of issuing fractional
shares....................... (10,424) (10,424)
Cumulative effect of change in
method of accounting for
securities................... $ 846,177 846,177
Net change in unrealized gain
(loss) on securities
available for sale........... (3,487,650) (3,487,650)
Redemption of preferred
stock........................ (3,000) (300,000) (300,000)
--------- --------- --------- --------- ---------- ----------- ----------- ----------
BALANCES, DECEMBER 31, 1994...... 24,000 2,400,000 1,250,897 1,250,897 10,677,045 12,595,589 (2,641,473) 24,282,058
Net income for 1995............ 2,529,392 2,529,392
Cash dividends.................
Preferred stock-- $6.34 per
share...................... (139,480) (139,480)
Common stock--$.69 per
share...................... (863,119) (863,119)
Net change in unrealized gain
(loss) on securities
available for sale........... 2,836,568 2,836,568
Redemption of preferred
stock........................ (4,000) (400,000) (400,000)
--------- --------- --------- --------- ---------- ----------- ----------- ----------
BALANCES, DECEMBER 31, 1995...... 20,000 2,000,000 1,250,897 1,250,897 10,677,045 14,122,382 195,095 28,245,419
Net income for 1996............ 2,692,549 2,692,549
Cash dividends
Preferred stock--$6.34 per
share...................... (50,192) (50,192)
Common stock--$.83 per
share...................... (1,038,244) (1,038,244)
Net change in unrealized gain
(loss) on securities
available for sale........... (100,569) (100,569)
Redemption of preferred
stock........................ (20,000) (2,000,000) (2,000,000)
--------- --------- --------- --------- ---------- ----------- ----------- ----------
BALANCES, DECEMBER 31, 1996 $ 0 1,250,897 $1,250,897 $10,677,045 $15,726,495 $ 94,526 $27,748,963
--------- --------- --------- --------- ---------- ----------- ----------- ----------
--------- --------- --------- --------- ---------- ----------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Indiana United Bancorp ("Company"),
and its wholly owned subsidiaries, ("Banks"), conform to generally accepted
accounting principles and reporting practices followed by the banking industry.
The more significant of the policies are described below.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
The Company is a bank holding company whose principal activity is the
ownership and management of the Banks. Union Bank and Trust Company of Indiana
("Union Bank") headquartered in Greensburg, Indiana operates under a state
charter and is subject to regulation by the Indiana Department of Financial
Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC").
Regional Federal Savings Bank ("Regional Bank"), headquartered in New Albany,
Indiana is a federally-chartered thrift and is subject to regulation by the
Office of Thrift Supervision ("OTS") and the FDIC.
The Banks generate commercial, mortgage and consumer loans and receive
deposits from customers located primarily in Decatur, Floyd, Clark and Jay
Counties, Indiana, and surrounding counties. The Banks' loans are generally
secured by specific items of collateral including real property, consumer assets
and business assets. Although the Banks have diversified loan portfolios, a
substantial portion of their debtors' ability to honor their contracts is
dependent upon economic conditions in the agricultural industry.
CONSOLIDATION--The consolidated financial statements include the accounts of
the Company and the Banks after elimination of all material intercompany
transactions and accounts.
INVESTMENT SECURITIES--Debt securities are classified as held to maturity
("HTM") when the Company has the positive intent and ability to hold the
securities to maturity. Securities HTM are carried at amortized cost.
Debt securities not classified as HTM are classified as available for sale
("AFS"). Securities AFS are carried at fair value with unrealized gains and
losses reported separately through shareholders' equity, net of tax.
Amortization of premiums and accretion of discounts are recorded as interest
income from securities. Realized gains and losses are recorded as net security
gains (losses). Gains and losses on sales of securities are determined on the
specific-identification method.
At January 1, 1994, investment securities with an approximate carrying value
of $125,081,000 were reclassified as AFS. This reclassification resulted in an
increase in total shareholders' equity, net of tax, of $846,177.
LOANS are carried at the principal amount outstanding. Interest income is
accrued on the principal balances of loans. The accrual of interest on impaired
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is subsequently recognized
only to the extent cash payments are received unless such amounts are applied to
principal amounts outstanding. Certain loan fees and direct costs are being
deferred and amortized as an adjustment of yield on the loans.
F-13
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
PROVISION FOR LOAN LOSSES and the adequacy of the allowance for loan losses
are based on management's continuing review and evaluation of the loan
portfolio, current economic conditions, past loss experience and other pertinent
factors. Impaired loans are measured by the present value of expected cash
flows, or the fair value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is based
on estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
December 31, 1996, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the area within which the Company operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method for premises and the
declining-balance method for equipment based principally on the estimated useful
lives of the assets. Maintenance and repairs are expensed as incurred while
major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that
are members of the Federal Home Loan Bank ("FHLB") system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED REAL ESTATE is carried at the lower of cost or fair value less
estimated selling costs. When foreclosed real estate is acquired, any required
adjustment is charged to the allowance for loan losses. All subsequent activity
is included in current operations.
CORE DEPOSIT INTANGIBLES resulting from the value of the future stream of
income allocated to customer deposits acquired in acquisitions is being
amortized over a period of 15 years using accelerated methods.
INCOME TAX in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax purposes.
The Company files consolidated income tax returns with its subsidiaries.
EARNINGS PER SHARE have been computed based upon the weighted average common
shares outstanding during each year.
RESTRICTION ON CASH AND DUE FROM BANKS
The Banks are required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 1996, was
$1,565,000.
F-14
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
INVESTMENT SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury.................................................... $ 2,006 $ 3 $ 5 $ 2,004
Federal agencies................................................. 24,556 416 148 24,824
State and municipal.............................................. 4,057 35 17 4,075
Mortgage-backed securities....................................... 50,157 489 604 50,042
Corporate obligations............................................ 244 2 242
----------- ----- ----- ---------
Total investment securities.................................. $ 81,020 $ 943 $ 776 $ 81,187
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------- ------------- ---------
<S> <C> <C> <C> <C>
Available for sale
U.S. Treasury.................................................... $ 3,016 $ 12 $ 10 $ 3,018
Federal agencies................................................. 12,257 259 104 12,412
State and municipal.............................................. 3,955 80 1 4,034
Mortgage-backed securities....................................... 60,610 582 425 60,767
Corporate obligations............................................ 480 60 420
----------- ----- ----- ---------
Total investment securities.................................. $ 80,318 $ 933 $ 600 $ 80,651
----------- ----- ----- ---------
----------- ----- ----- ---------
</TABLE>
The amortized cost and fair value of securities AFS at December 31, 1996 by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Within one year............................................................................ $ 5,509 $ 5,487
Two through five years..................................................................... 11,703 11,634
Six through ten years...................................................................... 13,327 13,696
After ten years............................................................................ 324 328
----------- ---------
30,863 31,145
Mortgage-backed securities................................................................. 50,157 50,042
----------- ---------
Totals............................................................................... $ 81,020 $ 81,187
----------- ---------
----------- ---------
</TABLE>
Securities with a carrying value of $25,009,600 and $23,621,600 were pledged
at December 31, 1996 and 1995 to secure certain deposits and for other purposes
as permitted or required by law.
F-15
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Proceeds from sales of securities AFS during 1995 and 1994 were $9,369,943
and $26,477,204. Gross gains of $160,945 and $71,348 and gross losses of
$144,649 and $225,645 were realized on those sales in 1995 and 1994,
respectively.
The tax expense (benefit) for gains (losses) on security transactions for
the years ended December 31, 1995 and 1994 was $6,400 and $(61,100).
LOANS AND ALLOWANCE
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Commercial and industrial loans........................................................... $ 7,834 $ 7,796
Agricultural production financing......................................................... 11,178 9,996
Farm real estate.......................................................................... 26,843 28,910
Commercial real estate.................................................................... 27,691 24,129
Residential real estate................................................................... 109,962 103,239
Construction and development.............................................................. 6,589 6,863
Consumer.................................................................................. 27,567 18,342
Government guaranteed loans............................................................... 1,819 2,080
---------- ----------
Total loans......................................................................... $ 219,483 $ 201,355
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Allowance for loan losses
Balances, January 1................................................................ $ 2,754 $ 2,784 $ 2,682
Provision for losses............................................................... 150 30 115
Recoveries on loans................................................................ 58 100 79
Loans charged off.................................................................. (456) (160) (92)
--------- --------- ---------
Balances, December 31.............................................................. $ 2,506 $ 2,754 $ 2,784
--------- --------- ---------
--------- --------- ---------
</TABLE>
Information on impaired loans is summarized below.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Impaired loans with an allowance.......................................... $ 535 $ 573
Impaired loans for which the discounted cash flows or collateral value
exceeds the carrying value of the loan.................................. 613
--------- ---------
Total impaired loans.................................................. $ 1,148 $ 573
--------- ---------
--------- ---------
Allowance for impaired loans (included in the Company's allowance for loan
losses)................................................................. $ 120 $ 250
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Average balance of impaired loans......................................... $ 1,996 $ 148
Interest income recognized on impaired loans.............................. 112 20
Cash-basis interest included above........................................ 112 20
</TABLE>
F-16
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
The Banks have entered into transactions with certain directors, executive
officers, significant shareholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The aggregate
amount of loans, as defined, to such related parties were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Balances, January 1....................................................... $ 5,941 $ 5,124
Changes in composition of related parties................................. (416) (399)
New loans, including renewals............................................. 2,986 2,382
Payments, etc., including renewals........................................ (547) (1,166)
--------- ---------
Balances, December 31..................................................... $ 7,964 $ 5,941
--------- ---------
--------- ---------
</TABLE>
PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land.................................................................... $ 909 $ 909
Buildings............................................................... 7,030 7,054
Equipment............................................................... 5,115 4,720
--------- ---------
Total cost.......................................................... 13,054 12,683
Accumulated depreciation................................................ (7,135) (6,658)
--------- ---------
Net................................................................. $ 5,919 $ 6,025
--------- ---------
--------- ---------
</TABLE>
DEPOSITS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Non-interest-bearing.................................................. $ 29,001 $ 30,335
Interest-bearing demand............................................... 67,726 64,649
Savings deposits...................................................... 28,619 28,828
Certificates and other time deposits of $100,000 or more.............. 32,083 23,512
Other certificates and time deposits.................................. 118,973 115,022
---------- ----------
Total deposits.................................................... $ 276,402 $ 262,346
---------- ----------
---------- ----------
</TABLE>
F-17
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
Certificates and other time deposits maturing in years ending after December
31, 1996
<TABLE>
<S> <C>
1997.............................................................. $ 98,392
1998.............................................................. 36,087
1999.............................................................. 9,803
2000.............................................................. 4,839
2001.............................................................. 1,462
Thereafter........................................................ 473
---------
$ 151,056
---------
---------
</TABLE>
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Federal funds purchased................................................. $ 750
FHLB advances........................................................... $ 2,000
Securities sold under repurchase agreements............................. 12,989 10,735
U. S. Treasury demand notes............................................. 1,944 505
--------- ---------
Total short-term borrowings......................................... $ 15,683 $ 13,240
--------- ---------
--------- ---------
</TABLE>
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. The obligations are secured by U. S. Treasury
securities and Federal agencies, and such collateral is held by a safekeeping
agent. The maximum amount of outstanding agreements at any month-end during 1996
and 1995 totaled $15,903,000 and $15,174,000 and the daily average of such
agreements totaled $11,564,000 and $10,162,000. The weighted average yield was
5.12% and 5.28% at December 31, 1996 and 1995 while the weighted average yield
during 1996 and 1995 was approximately 5.14% and 5.67%.
The Company had a FHLB advance of $2,000,000 outstanding at December 31,
1995 which was repaid during 1996.
LONG-TERM DEBT
Long-term debt at December 31, 1996 consisted of a $5,000,000 secured term
loan. In January, 1992, the Company converted a line of credit to an $11,200,000
six-year secured term loan. Interest is payable quarterly and was at the
lender's base rate through June 30, 1995. Commencing July 1, 1995, the interest
rate converted to the lender's base rate, less .25%. Principal payments are due
semiannually. The loan is secured by all stock of the Banks and the loan
agreement contains restrictions on debt, guarantees and mergers, in addition to
other affirmative and negative covenants.
A principal payment of $375,000 is due June 30, 1997 with the remaining loan
balance due December 31, 1997. Management intends to refinance all or a portion
of the remaining balance during 1997.
F-18
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
INCOME TAX
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal...................................................... $ 1,408 $ 1,317 $ 1,560
State........................................................ 405 395 463
Deferred
Federal...................................................... 179 (50) (128)
State........................................................ 9 (11) (31)
--------- --------- ---------
Total income tax expense................................. $ 2,001 $ 1,651 $ 1,864
--------- --------- ---------
--------- --------- ---------
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34%............................ $ 1,596 $ 1,421 $ 1,610
Tax exempt interest............................................ (57) (63) (77)
Effect of state income taxes................................... 273 253 285
Change in tax law.............................................. 144
Other.......................................................... 45 40 46
--------- --------- ---------
Actual tax expense....................................... $ 2,001 $ 1,651 $ 1,864
--------- --------- ---------
--------- --------- ---------
</TABLE>
A cumulative net deferred tax liability is included in other liabilities.
The components of the liability are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Differences in accounting for loans...................................... $ (223) $ (263)
Differences in accounting for securities................................. (39) (49)
Differences in accounting for premises and equipment..................... (675) (730)
Differences in depreciation methods...................................... (210) (160)
Differences in accounting for loan losses................................ 289 506
Differences in accounting for securities available for sale.............. (72) (138)
State income tax......................................................... 15 13
Other.................................................................... (39) (11)
--------- ---------
$ (954) $ (832)
--------- ---------
--------- ---------
Assets................................................................... $ 304 $ 519
Liabilities.............................................................. (1,258) (1,351)
--------- ---------
$ (954) $ (832)
--------- ---------
--------- ---------
</TABLE>
No valuation allowance was necessary at anytime during 1996, 1995 and 1994.
Retained earnings include approximately $2,162,000 for which no deferred
income tax liability has been recognized. This amount represents an allocation
of income to bad debt deductions as of December 31, 1987 for tax purposes only.
Reduction of amounts so allocated for purposes other than tax bad debt losses
including redemption of bank stock or excess dividends, or loss of "bank"
status, would create
F-19
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
income for tax purposes only, which income would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount at December 31, 1996 was approximately $735,000.
COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Banks use the same credit policies in making such commitments
as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Commitments to extend credit............................................ $ 26,694 $ 21,097
Standby letters of credit............................................... 222 155
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and income-producing
commercial properties. Standby letters of credit are conditional commitments
issued by the Banks to guarantee the performance of a customer to a third party.
The Company and Banks may from time to time be subject to claims and
lawsuits which arise primarily in the ordinary course of business. Management is
presently not aware of any such claims.
PREFERRED SHARES
In 1987, the Company issued 30,000 shares of no-par value, $100 stated
value, convertible preferred stock. The Company redeemed 20,000 shares of
preferred stock in 1996, 4,000 shares in 1995 and 3,000 shares in 1994. The
total redemption price was $2,000,000 in 1996, $400,000 in 1995 and $300,000 in
1994. For 1994 through 1996, cash dividends were paid at the rate of 6.34% per
annum.
The Company's Articles of Incorporation permit the Board of Directors,
without further shareholder approval, to establish the relative rights,
designations, preferences and limitations or restrictions of the Company's
preferred stock prior to the issuance thereof.
RESTRICTIONS ON DIVIDENDS
Without prior approval, Union Bank is restricted by Indiana law and
regulations of the DFI, and the FDIC as to the maximum amount of dividends Union
Bank can pay to the parent in any calendar year to Union Bank's retained net
profits (as defined) for that year and the two preceding years.
The OTS regulations provide that a savings bank which meets fully phased-in
1994 capital requirements and is subjected only to "normal supervision", such as
Regional Bank, may pay out 100% of net income to date over the calendar year and
50% of surplus capital existing at the beginning of the calendar
F-20
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
year without supervisory approval, but with 30 days prior notice to OTS. As a
result of limitations relating to tax bad debt deductions, Regional Bank's
nontaxable dividends to the Company are limited to an amount approximately equal
to net income commencing in 1997.
At December 31, 1996, total shareholders' equity of the Banks was
$31,075,000 of which $29,504,000 was restricted or limited from dividend
distribution to the Company. As a practical matter, the Banks may restrict
dividends to a lesser amount because of the need to maintain an adequate capital
structure.
REGULATORY CAPITAL
The Company and Banks are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate actions by the regulatory agencies that, if
undertaken, could have a material effect on the Company's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and Banks must meet specific capital guidelines
that involve quantitative measures of the Company's and Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company's and Banks' capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
At December 31, 1996, management of the Company believes that it meets all
capital adequacy requirements to which it is subject. The most recent
notification from the regulatory agencies categorized the Banks as well
capitalized under the regulatory framework for prompt corrective action. There
have been no conditions or events since that notification that management
believes have changed this categorization.
The Company's and Banks' actual and required capital amounts and ratios are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------------------------------
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
-------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INDIANA UNITED BANCORP
Total capital(1) (to risk-weighted assets)... $ 29,934 15.6% $ 15,312 8.0% N/A
Tier 1 capital(1) (to risk-weighted assets).. 27,540 14.4 7,656 4.0 N/A
Tier 1 capital(1) (to average assets)........ 27,540 8.4 13,152 4.0 N/A
UNION BANK
Total capital(1) (to risk-weighted assets)... 21,224 15.8 10,718 8.0 $ 13,398 10.0%
Tier 1 capital(1) (to risk-weighted assets).. 19,547 14.6 5,359 4.0 8,039 6.0
Tier 1 capital(1) (to average assets)........ 19,547 9.0 8,708 4.0 10,885 5.0
REGIONAL BANK
Total risk-based capital(1) (to risk-weighted
assets)...................................... 12,076 19.2 5,021 8.0 6,277 10.0
Core capital(1) (to adjusted tangible assets).. 11,415 10.6 3,219 3.0 6,437 6.0
Core capital(1) (to adjusted total assets)..... 11,415 10.6 3,219 3.0 5,369 5.0
</TABLE>
- ------------------------
(1) As defined by regulatory agencies
Regional Bank's tangible capital at December 31, 1996 was $11,415,000, which
amount was 10.6 percent of tangible assets and exceeded the required ratio of
1.5 percent.
F-21
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others totaled $2,960,000 and $2,302,000 at December 31, 1996 and
1995.
EMPLOYEE BENEFIT PLANS
The Company has a defined-contribution retirement plan in which
substantially all employees may participate. The Company matched employees'
contributions at the rate of $.70 for 1996, $.65 for 1995, and $.60 for 1994 for
each dollar contributed. In addition, the Company contributed 6.5% of total
compensation plus an additional 5.7% of each participant's compensation in
excess of $62,700 in 1996, $61,200 in 1995 and $60,600 in 1994. Expense for the
plan was $283,518 in 1996, $295,862 in 1995 and $273,053 in 1994.
DEPOSIT INSURANCE EXPENSE
Regional Bank's deposits are presently insured by the Savings Association
Insurance Fund ("SAIF"). A recapitalization plan for the SAIF was signed into
law on September 30, 1996, which provided for a special assessment on all
SAIF-insured institutions to enable the SAIF to achieve the required level of
reserves. The assessment of .0657% was based on March 31, 1995 deposits.
Regional Banks' special assessment totaled $545,000 before taxes, and was
charged against current income and included with deposit insurance expense.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
CASH AND CASH EQUIVALENTS--The fair value of cash and cash equivalents
approximates carrying value.
SHORT-TERM INVESTMENTS--The fair value of short-term investments
approximates carrying value.
SECURITIES--Fair values are based on quoted market prices.
LOANS--For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are based
on carrying values. The fair value for other loans are estimated using
discounted cash flow analyses, using interest rates currently being offered for
loans with similar terms to borrowers of similar credit quality.
INCOME RECEIVABLE/INTEREST PAYABLE--The fair value of these amounts
approximates carrying values.
FHLB STOCK--Fair value of FHLB stock is based on the price at which it may
be resold to the FHLB.
DEPOSITS--The fair values of non-interest-bearing, interest-bearing demand,
and savings accounts are equal to the amount payable on demand at the balance
sheet date. The carrying amounts for variable rate, fixed-term certificates of
deposit approximate their fair values at the balance sheet date. Fair values for
fixed-rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on certificates
to a schedule of aggregated expected monthly maturities on such time deposits.
F-22
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(TABLE DOLLAR AMOUNTS IN THOUSANDS)
SHORT-TERM BORROWINGS--The interest rates for short-term borrowings
approximate market rates, thus the fair value approximates carrying value.
LONG-TERM DEBT--Long-term debt consists of an adjustable instrument tied to
a variable market interest rate. Fair value approximates carrying value.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents...................................... $ 19,196 $ 19,196 $ 18,929 $ 18,929
Short-term investments......................................... 100 100 5,100 5,100
Securities available for sale.................................. 81,187 81,187 80,651 80,651
Loans, net..................................................... 216,978 217,690 198,600 199,316
Stock in FHLB.................................................. 1,138 1,138 1,138 1,138
Income receivable.............................................. 1,952 1,952 1,974 1,974
LIABILITIES
Deposits....................................................... 276,402 277,180 262,346 262,831
Borrowings
Short-term................................................... 15,683 15,683 13,240 13,240
Long-term.................................................... 5,000 5,000 6,000 6,000
Interest payable............................................... 1,272 1,272 1,389 1,389
</TABLE>
OTHER MATTERS
In October, 1994, the Company sold three underperforming branches of
Regional Bank including loans, deposits and fixed assets in order to concentrate
Regional Bank's resources in its primary market area. The sale resulted in a
gain of $1,228,751 which is shown separately in the consolidated statement of
income.
F-23
<PAGE>
CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash on deposit and repurchase agreements................................................. $ 1,584 $ 1,940
Investment in subsidiaries................................................................ 31,171 32,325
Other assets.............................................................................. 186 128
--------- ---------
Total assets.......................................................................... $ 32,941 $ 34,393
--------- ---------
--------- ---------
LIABILITIES
Long-term debt............................................................................ $ 5,000 $ 6,000
Other liabilities......................................................................... 192 148
--------- ---------
Total liabilities..................................................................... 5,192 6,148
SHAREHOLDERS' EQUITY........................................................................ 27,749 28,245
--------- ---------
Total liabilities and shareholders' equity............................................ $ 32,941 $ 34,393
--------- ---------
--------- ---------
</TABLE>
CONDENSED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
INCOME
Dividends from subsidiaries....................................................... $ 4,500 $ 4,000 $ 2,425
Fees from subsidiaries............................................................ 33 55 88
Other income...................................................................... 102 73 77
--------- --------- ---------
Total income.................................................................. 4,635 4,128 2,590
--------- --------- ---------
EXPENSES
Interest expense.................................................................. 454 612 631
Salaries and benefits............................................................. 682 506 413
Professional fees................................................................. 94 84 117
Other expenses.................................................................... 224 236 210
--------- --------- ---------
Total expenses................................................................ 1,454 1,438 1,371
--------- --------- ---------
INCOME BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES......... 3,181 2,690 1,219
Income tax benefit................................................................ 565 511 463
--------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES........................ 3,746 3,201 1,682
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARIES...................................... (1,053) (672) 1,188
--------- --------- ---------
NET INCOME.......................................................................... $ 2,693 $ 2,529 $ 2,870
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-24
<PAGE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................................................... $ 2,693 $ 2,529 $ 2,870
(Undistributed) income of subsidiaries.......................................... 1,053 672 (1,188)
Other adjustments............................................................... 71 52 13
--------- --------- ---------
Net cash provided by operating activities................................... 3,817 3,253 1,695
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of equipment........................................................... (102) (17) (34)
Proceeds from sale of equipment................................................. 17 18
--------- --------- ---------
Net cash used by investing activities....................................... (85) (17) (16)
--------- --------- ---------
FINANCING ACTIVITIES
Payments on long-term debt...................................................... (1,000) (1,500) (1,800)
Cash dividends.................................................................. (1,088) (1,003) (839)
Redemption of preferred stock................................................... (2,000) (400) (300)
Other financing activities...................................................... (10)
--------- --------- ---------
Net cash used by financing activities....................................... (4,088) (2,903) (2,949)
--------- --------- ---------
NET CHANGE IN CASH ON DEPOSIT AND REPURCHASE AGREEMENTS........................... (356) 333 (1,270)
CASH ON DEPOSIT AND REPURCHASE AGREEMENTS, BEGINNING OF YEAR...................... 1,940 1,607 2,877
--------- --------- ---------
CASH ON DEPOSIT AND REPURCHASE AGREEMENTS, END OF YEAR............................ $ 1,584 $ 1,940 $ 1,607
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
PTC INTERIM CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
SEPTEMBER 30, ------------
1997
-------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................................... $ 18,281 $ 26,185
Interest-bearing balances with financial institutions............................... 1,398 1,897
Available-for-sale securities....................................................... 28,132 38,376
Held-to-maturity securities......................................................... 25,761 25,218
Total loans......................................................................... 220,653 196,963
Less: Allowances for loan losses................................................ (1,969) (2,000)
------------- ------------
Net loans.................................................................. 218,684 194,963
Premises and equipment, net......................................................... 3,939 3,512
Accrued interest receivable and other assets........................................ 6,539 6,425
------------- ------------
Total assets.................................................................... $ 302,734 $ 296,576
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits........................................................................ $ 275,679 $ 271,127
Notes payable................................................................... 250 500
Accrued interest payable and other liabilities.................................. 3,065 3,296
------------- ------------
Total liabilities............................................................. 278,994 274,923
Shareholders' equity
Common Stock.................................................................... 1,026 1,024
Additional paid-in capital...................................................... 10,439 10,413
Retained earnings............................................................... 12,109 10,018
Net unrealized gain or loss on available-for-sale securities.................... 166 198
------------- ------------
Total shareholders' equity.................................................... 23,740 21,653
------------- ------------
Total liabilities and shareholders' equity.................................... $ 302,734 $ 296,576
------------- ------------
------------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
PTC INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans................................. $5,017 $4,312 $14,316 $12,648
Interest on securities..................................... 836 946 2,639 2,696
Other interest............................................. 62 135 279 460
---------- ---------- ---------- ----------
Total interest income.................................... 5,915 5,393 17,234 15,804
INTEREST EXPENSE
Interest on deposits....................................... 2,976 2,752 8,653 8,074
Interest on notes payable.................................. 9 13 26 47
---------- ---------- ---------- ----------
Total interest expense................................... 2,985 2,765 8,679 8,121
---------- ---------- ---------- ----------
Net interest income.......................................... 2,930 2,628 8,555 7,683
Provision for loan losses.................................. (210) (227) (610) (616)
Net interest income after provision for loan losses.......... 2,720 2,401 7,945 7,067
NON-INTEREST INCOME
Service charges and fees on deposit accounts............... 331 299 944 887
Mortgage banking income.................................... 360 257 766 577
Gain (loss) on securities.................................. 8 4 8 103
Other income............................................... 48 49 142 195
---------- ---------- ---------- ----------
Total non-interest income................................ 747 609 1,860 1,762
NON-INTEREST EXPENSE
Salaries and benefits...................................... 1,156 1,045 3,346 3,117
Occupancy and equipment, net............................... 306 230 895 682
FDIC insurance............................................. 7 1 22 2
Data processing expense.................................... 98 88 289 266
Other operating expenses................................... 509 437 1,366 1,205
---------- ---------- ---------- ----------
Total non-interest expense............................... 2,076 1,801 5,918 5,272
---------- ---------- ---------- ----------
Income before income taxes................................... 1,391 1,209 3,887 3,557
Less: income taxes....................................... (429) (363) (1,185) (1,166)
---------- ---------- ---------- ----------
Net income................................................... $ 962 $ 846 $ 2,702 $ 2,391
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per share........................................... $ .94 $ .82 $ 2.64 $ 2.31
Average shares outstanding................................... 1,025,102 1,032,129 1,024,629 1,034,244
Dividends per share.......................................... $ .205 $ .165 $ .595 $ .475
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
PTC INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.............................................................. $ 2,702 $ 2,391
Adjustments to reconcile net income to net cash from operating
activities
Depreciation.......................................................... 367 274
Provision for loan losses............................................. 610 616
(Gain)/loss on sale of securities..................................... (8) (103)
Amortization of intangible assets..................................... 173 164
Other adjustments..................................................... (342) (787)
------- -------
Net cash from operating activities.................................. 3,502 2,555
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from paydowns and maturities of held-to-maturity securities.... 2,873 5,470
Proceeds from sales of available-for-sale securities.................... 4,506 3,381
Proceeds from paydowns and maturities of available-for-sale
securities............................................................ 7,728 12,874
Purchases of held-to-maturity securities................................ (3,416) (11,774)
Purchases of available-for-sale securities.............................. (1,982) (17,116)
Net change in loans..................................................... (24,300) (16,207)
Net change in deposits with other financial institutions................ 499 294
Property and equipment expenditures..................................... (794) (616)
------- -------
Net cash from investing activities.................................... (14,886) (23,694)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits.................................................. (2,236) 6,907
Deposits assumed in branch acquisition, net of premium paid............. 6,548 --
Dividends paid.......................................................... (610) (490)
Payments on note payable................................................ (250) (392)
Proceeds from issuance of stock......................................... 28 485
Redemption of stock..................................................... -- (620)
------- -------
Net cash from financing activities.................................... 3,480 5,890
------- -------
Net change in cash and cash equivalents................................... (7,904) (15,249)
Cash and cash equivalents at beginning of period.......................... 26,185 24,474
------- -------
Cash and cash equivalents at end of period................................ $ 18,281 $ 9,225
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
PTC INTERIM CONSOLIDATED STATEMENTS OF CHANGE IN
SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
------------------ ------------------
<S> <C> <C>
Balance January 1......................................................... $ 21,653 $ 19,218
Net income................................................................ 2,702 2,391
Issuance of stock......................................................... 28 485
Redemption of stock....................................................... -- (620)
Cash dividends paid....................................................... (610) (490)
Change in net unrealized gain or loss on available-for-sale securities.... (33) (231)
------- -------
Balance September 30...................................................... $ 23,740 $ 20,753
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-29
<PAGE>
PTC NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The consolidated financial statements include the accounts of PTC Bancorp
(the "Company") and its wholly owned subsidiary, Peoples Trust Company (the
"Bank"). All significant intercompany accounts and transactions have been
eliminated.
These financial statements were prepared in accordance with the instructions
for Form 10-QSB and, therefore, do not include all of the disclosures necessary
for a complete presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting principles. These
financial statements have been prepared on a basis consistent with the annual
financial statements and include, in the opinion of management, all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of the results of operations and financial position at the end of
and for the periods presented.
NOTE 2--PENDING ACCOUNTING CHANGES
The Company does not expect the anticipated adoption of any newly issued
accounting standards to have a material impact on future operations or financial
position.
NOTE 3--EARNINGS PER SHARE
Earnings per share have been computed based upon the weighted average number
of shares outstanding during the periods presented, adjusted for any stock
dividends. Common stock equivalents are not materially dilutive.
NOTE 4--PENDING BUSINESS COMBINATION
On October 8, 1997, the Company agreed to merge with Indiana United Bancorp
("IUB"). IUB is a bank and thrift holding company located in Greensburg,
Indiana. Under terms of the agreement, each outstanding common share of PTC
Bancorp, including shares outstanding under option plans, will be converted into
1.075 common shares of IUB. The proposed transaction requires approval by
regulatory authorities and shareholders of both companies. The proposed
transaction is expected to be consummated during the first quarter of 1998. It
is expected to be accounted for as a pooling-of-interests.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
P.T.C. Bancorp
Brookville, Indiana
We have audited the accompanying consolidated balance sheets of P.T.C.
Bancorp as of December 31, 1996 and 1995, and the related consolidated
statements of income, cash flows, and changes in shareholders' equity for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of P.T.C.
Bancorp as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
Crowe, Chizek and Company LLP
Indianapolis, Indiana
January 23, 1997
F-31
<PAGE>
P.T.C. BANCORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Cash and cash equivalents....................................................... $ 26,185,347 $ 24,474,107
Interest bearing balances with financial institutions.......................... 1,897,000 2,386,369
Securities available for sale, at fair value................................... 38,375,826 38,426,368
Securities held to maturity.................................................... 25,218,575 19,500,690
Loans, net of deferred loan fees............................................... 196,963,140 173,178,986
Allowance for loan losses...................................................... (2,000,324) (1,721,947)
-------------- --------------
Net loans.................................................................... 194,962,816 171,457,039
Premises and equipment, net.................................................... 3,511,742 3,066,738
Intangible assets.............................................................. 1,619,480 1,838,483
Accrued interest receivable and other assets................................... 4,805,212 3,561,956
-------------- --------------
Total assets............................................................. $ 296,575,998 $ 264,711,750
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing deposits.............................................. $ 32,349,585 $ 19,752,746
Interest bearing deposits.................................................. 238,777,267 221,981,686
-------------- --------------
Total deposits........................................................... 271,126,852 241,734,432
Notes payable................................................................ 500,000 1,000,000
Accrued interest payable and other liabilities............................... 3,295,811 2,759,219
-------------- --------------
Total liabilities........................................................ 274,922,663 245,493,651
-------------- --------------
Commitments and contingencies
Shareholders' equity
Preferred stock, no par value; 1,000,000 shares authorized, no shares issued
and outstanding
Common stock, $1 stated value: 2,000,000 shares authorized, 1,024,276 and
924,069 shares issued and outstanding...................................... 1,024,276 924,069
Additional paid-in capital................................................... 10,413,146 7,908,794
Retained earnings............................................................ 10,017,584 10,208,434
Unrealized gain on securities available for sale, net........................ 198,329 176,802
-------------- --------------
Total shareholders' equity............................................... 21,653,335 19,218,099
-------------- --------------
Total liabilities and shareholders' equity............................... $ 296,575,998 $ 264,711,750
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
P.T.C. BANCORP
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans..................................................... $ 17,125,228 $ 15,446,482
Interest on investment securities
Taxable...................................................................... 2,440,146 2,497,641
Non-taxable.................................................................. 1,190,681 940,240
Interest on balances with financial institutions............................... 129,627 62,347
Interest on federal funds sold................................................. 433,394 473,399
-------------- --------------
Total interest income.................................................... 21,319,076 19,420,109
INTEREST EXPENSE
Interest on deposits........................................................... 10,837,329 9,733,562
Interest on notes payable...................................................... 59,968 101,717
-------------- --------------
Total interest expense................................................... 10,897,297 9,835,279
-------------- --------------
NET INTEREST INCOME.............................................................. 10,421,779 9,584,830
Provision for loan losses...................................................... 828,000 740,000
-------------- --------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES...................... 9,593,779 8,844,830
NON-INTEREST INCOME
Service charges on deposit accounts............................................ 1,198,556 1,192,275
Mortgage banking income........................................................ 795,208 446,859
Securities gains/(losses)...................................................... 103,650 (76,367)
Travel commission income....................................................... 66,249 177,906
Other income................................................................... 185,480 161,004
-------------- --------------
Total non-interest income................................................ 2,349,143 1,901,677
NON-INTEREST EXPENSES
Salaries and employee benefits................................................. 4,136,754 3,724,693
Occupancy and equipment expense................................................ 832,571 763,126
Data processing expense........................................................ 372,441 349,613
FDIC assessment................................................................ 2,000 250,796
Other operating expenses....................................................... 1,759,694 1,551,058
-------------- --------------
Total non-interest expense............................................... 7,103,460 6,639,286
-------------- --------------
INCOME BEFORE INCOME TAXES....................................................... 4,839,462 4,107,221
Provision for income taxes..................................................... 1,563,693 1,199,964
-------------- --------------
NET INCOME....................................................................... $ 3,275,769 $ 2,907,257
-------------- --------------
-------------- --------------
Net income per share............................................................. $ 3.17 $ 2.86
-------------- --------------
-------------- --------------
Weighted average common shares outstanding....................................... 1,031,922 1,016,476
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
P.T.C. BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................................................... $ 3,275,769 $ 2,907,257
Adjustments to reconcile net income to net cash from operating activities:
Depreciation................................................................. 282,456 294,920
Provision for loan losses.................................................... 828,000 740,000
(Gain)/loss on sale of securities............................................ (103,650) 76,367
Amortization of intangible assets............................................ 219,003 230,006
Change in accrued interest receivable and other assets....................... (1,257,376) 17,776
Net amortization/(accretion) on securities................................... 115,337 (86,123)
Change in accrued interest payable and other liabilities..................... 536,591 655,718
-------------- --------------
Net cash from operating activities....................................... 3,896,130 4,835,921
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment expenditures............................................ (727,460) (633,368)
Loans made to customers and principal collections thereon...................... (24,333,777) (14,701,975)
Proceeds from sales, maturities, and principal paydowns of securities available
for sale..................................................................... 17,658,091 21,903,216
Proceeds from maturities and principal paydowns of securities held to
maturity..................................................................... 7,121,140 5,514,261
Purchases of securities available for sale..................................... (17,615,607) (20,898,559)
Purchases of securities held to maturity....................................... (12,807,006) (6,712,188)
Net change in deposits with other financial institutions....................... 489,369 (1,102,398)
-------------- --------------
Net cash from investing activities....................................... (30,215,250) (16,631,011)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposit accounts................................................. 29,392,420 19,435,429
Payments on note payable....................................................... (500,000) (407,500)
Dividends paid................................................................. (678,929) (542,520)
Redemption of shares of stock.................................................. (689,590) --
Proceeds from issuance of stock................................................ 506,459 --
-------------- --------------
Net cash from financing activities....................................... 28,030,360 18,485,409
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......................................... 1,711,240 6,690,319
Cash and cash equivalents at beginning of year................................... 24,474,107 17,783,788
-------------- --------------
Cash and cash equivalents at end of year......................................... $ 26,185,347 $ 24,474,107
-------------- --------------
-------------- --------------
Cash paid during the period for:
Interest....................................................................... $ 10,879,210 $ 9,223,655
Income taxes................................................................... 1,721,825 1,224,500
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
P.T.C. BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS)
ON
ADDITIONAL SECURITIES TOTAL
COMMON PAID-IN RETAINED TREASURY AVAILABLE SHAREHOLDERS'
STOCK CAPITAL EARNINGS STOCK FOR SALE EQUITY
------------ ------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1, 1995........ $ 857,627 $ 6,155,621 $ 9,868,073 $ (204,761) $ (909,344) $ 15,767,216
Net income....................... 2,907,257 2,907,257
Cash dividends ($.53 per
share)......................... (542,520) (542,520)
Cancellation of treasury
shares......................... (17,907) (186,854) 204,761 --
10% stock dividend (Note 1)...... 84,349 1,940,027 (2,024,376) --
Change in unrealized gain/ (loss)
on securities.................. 1,086,146 1,086,146
------------ ------------- ------------- ----------- ------------ -------------
BALANCES AT DECEMBER 31, 1995...... 924,069 7,908,794 10,208,434 -- 176,802 19,218,099
Net income....................... 3,275,769 3,275,769
Cash dividends ($.66 per
share)......................... (678,929) (678,929)
10% stock dividend (Note 1)...... 92,923 2,694,767 (2,787,690) --
Redemption of shares (22,634
shares)........................ (22,634) (666,956) (689,590)
Exercised stock options (1,469
shares)........................ 1,469 19,934 21,403
Issuance of shares to existing
shareholders (28,449 shares)... 28,449 456,607 485,056
Change in unrealized gain/ (loss)
on securities.................. 21,527 21,527
------------ ------------- ------------- ----------- ------------ -------------
BALANCES AT DECEMBER 31, 1996...... $ 1,024,276 $ 10,413,146 $ 10,017,584 $ -- $ 198,329 $ 21,653,335
------------ ------------- ------------- ----------- ------------ -------------
------------ ------------- ------------- ----------- ------------ -------------
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of P.T.C. Bancorp (Company) and its wholly-owned subsidiary, People's
Trust Company (Bank). All significant intercompany transactions have been
eliminated in consolidation.
DESCRIPTION OF BUSINESS: P.T.C. Bancorp generates mortgage, commercial, and
installment loans and receives deposits from customers located primarily in
southeastern Indiana. The majority of the Company's loans are secured by
specific items of collateral including business assets, consumer assets and real
property.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. Estimates that are more
susceptible to change in the near term include the allowance for loan losses and
fair values of certain securities.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds are sold
for one-day periods. The Company reports net cash flows for customer loan
transactions, deposit transactions, and deposits made with other institutions.
SECURITIES: Securities are classified by management at date of purchase as
available for sale or held to maturity. Securities classified as available for
sale are securities that might be sold in response to changes in interest rates,
changes in prepayment risk, or other similar factors, and which are carried at
fair value. The unrealized gain/(loss) on securities available for sale is
reflected as a separate component of shareholders' equity, net of tax.
Securities classified as held to maturity are securities that the Company has
both the ability and positive intent to hold to maturity and are carried at
amortized cost (cost adjusted for amortization of premium or accretion of
discounts). Interest income on securities is recognized using the level yield
basis. Gains and losses on sales of securities are computed on a specific
identification basis.
LOANS HELD FOR SALE: During the normal course of business, the Company
originates certain mortgage loans for the purpose of selling them in certain
secondary markets. These loans are carried at the lower of aggregate cost or
market value.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs, the allowance for loan losses, and charge-offs.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Interest received on such
loans is recognized on the cash basis or reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions, and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
F-36
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate. Loans are
evaluated for impairment when payments are delayed, typically 90 days or more,
or when the internal grading system indicates a doubtful classification.
SERVICING RIGHTS: Upon adopting Financial Accounting Standard No. 122 at
the start of 1996, servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates and term. Any impairment of a grouping is
reported as a valuation allowance.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, net of
accumulated depreciation. Depreciation is charged to operating expense over the
useful lives of assets and is computed on straight-line and accelerated methods.
Maintenance and repairs are charged to operations as incurred. Improvements are
capitalized and disposals are recorded in the year sold or abandoned.
INTANGIBLE ASSETS: Intangible assets consist of goodwill and core deposit
intangibles. Goodwill is being amortized on a straight-line method over fifteen
years. The core deposit is being amortized based on the estimated life of the
deposits assumed, which is ten years.
STOCK OPTIONS: Expenses for compensation under stock option plans is based
on APB Opinion 25, with expense reported only if options are granted below
market price at date of grant. Proforma disclosures of net income and earnings
per share as required by FASB Statement No. 123 are not presented, because the
fair value of options granted during 1996 and 1995 is not material.
INCOME TAXES: Deferred tax liabilities and assets are determined at each
balance sheet date. They are measured by applying enacted tax laws to future
amounts that will result from differences in the financial statement and tax
basis of assets and liabilities. Recognition of deferred tax assets is limited
by the establishment of a valuation reserve unless management concludes that
they are more likely than not going to result in future tax benefits to the
Company. Income tax expense is the amount paid for the current year income tax
liability plus or minus the change in deferred taxes.
EARNINGS PER SHARE: Earnings per share is based on the weighted average
common shares outstanding. The Company declared a 10 percent stock dividend in
November, 1995 and 1996. Earnings and dividend per share amounts have been
retroactively restated. Stock options are not materially dilutive for earnings
per share purposes.
F-37
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2 -- SECURITIES
The amortized cost and fair values of securities available for sale are as
follows at December 31:
<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency securities............. $ 30,066,088 $ 255,260 $ (42,771) $ 30,278,577
State and political subdivisions........................... 1,971,500 63,384 (338) 2,034,546
Mortgage-backed and other asset-backed securities.......... 2,582,657 46,082 (7,177) 2,621,562
Corporate debt securities.................................. 1,906,294 38,374 (24,399) 1,920,269
Equity securities.......................................... 1,520,872 -- -- 1,520,872
------------- ----------- ----------- -------------
Totals............................................... $ 38,047,411 $ 403,100 $ (74,685) $ 38,375,826
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency securities............. $ 27,892,354 $ 232,387 $ (51,533) $ 28,073,208
State and political subdivisions........................... 2,336,997 78,183 (4,562) 2,410,618
Mortgage-backed and other asset-backed securities.......... 2,782,970 50,560 (6,849) 2,826,682
Corporate debt securities.................................. 3,599,169 8,896 (14,315) 3,593,750
Equity securities.......................................... 1,522,110 -- -- 1,522,110
------------- ----------- ----------- -------------
Totals............................................... $ 38,133,600 $ 370,026 $ (77,259) $ 38,426,368
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
F-38
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2 -- SECURITIES (CONTINUED)
The amortized cost and fair values of securities held to maturity are as follows
at December 31:
<TABLE>
<CAPTION>
1996
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency securities $ 167,763 $ 29,632 $ -- $ 197,395
State and political subdivisions........................... 24,187,781 228,516 (50,568) 24,365,729
Mortgage-backed securities................................. 296,915 37,800 (223) 334,492
Other debt securities...................................... 566,116 94 (2,846) 563,364
------------- ----------- ----------- -------------
Totals............................................... $ 25,218,575 $ 296,042 $ (53,637) $ 25,460,980
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury and government agency securities............. $ 154,914 $ 41,972 $ -- $ 196,886
State and political subdivisions........................... 17,895,268 244,728 (32,592) 18,107,406
Mortgage-backed securities................................. 950,508 61,933 -- 1,012,441
Other debt securities...................................... 500,000 -- -- 500,000
------------- ----------- ----------- -------------
Totals............................................... $ 19,500,690 $ 348,633 $ (32,592) $ 19,816,733
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and fair value of securities at December 31, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- ----------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Due in one year or less............................. $ 5,061,467 $ 5,065,127 $ 3,411,075 $ 3,432,023
Due after one year through five years............... 27,210,079 27,418,423 18,374,449 18,492,951
Due after five years through ten years.............. 1,303,734 1,344,787 1,957,637 1,977,253
Due after ten years................................. 368,602 405,055 1,178,499 1,224,261
------------- ------------- ------------- -------------
Total fixed maturity debt securities................ 33,943,882 34,233,392 24,921,660 25,126,488
Mortgage-backed securities.......................... 2,582,657 2,621,562 296,915 334,492
Equity securities................................... 1,520,872 1,520,872 -- --
------------- ------------- ------------- -------------
$ 38,047,411 $ 38,375,826 $ 25,218,575 $ 25,460,980
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Proceeds from sales of securities during 1996 and 1995 were $3,736,825 and
$3,573,149. Gross gains of $122,427 and gross losses of $18,777 were realized on
sales of available for sale securities in 1996. Gross gains of $8,408 and gross
losses of $84,775 were realized on sales of available for sale securities in
1995.
F-39
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 2 -- SECURITIES (CONTINUED)
At December 31, 1996 and 1995, securities carried at $2,263,725 and
$5,773,900 were pledged to secure public deposits and for other purposes.
NOTE 3 -- LOANS
Loans are comprised of the following classifications:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Real estate--residential......................................................... $ 74,433,000 $ 61,544,000
Real estate--commercial.......................................................... 43,370,000 36,140,000
Real estate construction......................................................... 13,650,000 9,583,000
Commercial....................................................................... 41,655,000 39,518,000
Consumer......................................................................... 21,325,000 23,723,000
Other............................................................................ 2,875,000 2,987,000
Deferred loan fees............................................................... (345,000) (316,000)
-------------- --------------
Total loans, net of deferred loan fees..................................... $ 196,963,000 $ 173,179,000
-------------- --------------
-------------- --------------
</TABLE>
Residential real estate loans include loans held for sale of $430,000 and
$2,117,000.
Mortgage loans serviced for others are not reported as assets. These loans
totaled $86,495,000 and $69,090,000 at year-end 1996 and 1995. At year-end 1996,
mortgage servicing rights were $225,000. Activity during 1996 included $258,000
of additions and amortization expense of $33,000. There was no valuation
allowance at year-end 1996.
NOTE 4 -- ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Beginning balance..................................................................... $ 1,721,947 $ 1,600,551
Provision for loan losses............................................................. 828,000 740,000
Losses charged to the allowance....................................................... (725,569) (855,690)
Recoveries credited to the allowance.................................................. 175,946 237,086
------------ ------------
Ending balance.................................................................. $ 2,000,324 $ 1,721,947
------------ ------------
------------ ------------
Impaired loans were as follows:
Year-end loans with no allowance for loan losses allocated............................ $ -- $ 128,797
Year-end loans with allowance for loan losses allocated............................... 1,300,000 --
Amount of the allowance allocated..................................................... 475,000 --
Average of impaired loans during the year............................................. 844,059 490,179
Interest income recognized during impairment.......................................... 27,756 --
Cash-basis interest income recognized................................................. 27,756 --
</TABLE>
F-40
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 5 -- PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Land.................................................................................. $ 351,916 $ 351,916
Buildings and improvements............................................................ 3,738,630 3,418,627
Equipment and furniture............................................................... 2,481,732 2,090,435
------------ ------------
Total........................................................................... 6,572,278 5,860,978
Less accumulated depreciation......................................................... 3,060,536 2,794,240
------------ ------------
Total premises and equipment, net............................................... $ 3,511,742 $ 3,066,738
------------ ------------
------------ ------------
</TABLE>
NOTE 6 -- DEPOSITS
Certificates of deposits in denominations of $100,000 or more as of December
31, 1996 and 1995 were $28,948,860 and $24,318,073.
At year-end 1996, stated maturities of time deposits were:
<TABLE>
<S> <C>
1997.......................................................... $96,265,835
1998.......................................................... 36,673,139
1999.......................................................... 9,893,852
2000.......................................................... 6,163,774
2001.......................................................... 1,955,978
Thereafter.................................................... 29,172
-----------
$150,981,750
-----------
-----------
</TABLE>
NOTE 7 -- NOTES PAYABLE
The Company has a note payable maturing on December 31, 1998, which is
secured by 100% of the Bank's common stock. Payments are due each quarter,
consisting of $92,500 principal plus accrued interest. Interest is calculated
based on the LIBOR rate plus 2.85% (7.44% at December 31, 1996).
NOTE 8 -- BENEFIT PLANS
The Company maintains a 401(K) profit-sharing plan covering substantially
all employees. Under this plan, employer matching contributions are 50% of
employee contributions, up to 6% of eligible salary, plus a profit sharing
allocation to all eligible employees. Annual contributions are at the discretion
of the Board of Directors. Contributions provided for the 401(K) plan and
charged to operations totaled $157,893 and $148,657 in 1996 and 1995.
The Company maintains a stock option plan covering directors and executive
officers. Options are granted at no less than fair value of the Company's stock.
Accordingly, no compensation cost has been recognized. Options under the officer
plan are generally subject to a 4-year vesting schedule, and expire five years
from date of vesting. There were 5,060 options granted during 1995, and 2,365
during 1996. At year-end 1996, there were 32,731 options outstanding under the
officer plan with a weighted average exercise price of $16.93, and range of
exercise prices of $14.65 - $27.27. There were no options granted in 1995 or
1996 under the director's plan. At year-end 1996, there were 2,096 options
outstanding with an effective price of $13.23 per share.
F-41
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 9 -- INCOME TAXES
An analysis of the components of income taxes follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current income taxes.............................................. $ 1,551,766 $ 1,354,446
Deferred income taxes............................................. 11,927 (154,482)
------------ ------------
Total income taxes.............................................. $ 1,563,693 $ 1,199,964
------------ ------------
------------ ------------
</TABLE>
The difference between the financial statement tax provision and amounts
computed by applying the federal income tax rate of 34% to pretax income is
reconciled as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Expected provision................................................ $ 1,645,417 $ 1,396,455
Tax effect of:
Tax-exempt interest income...................................... (545,956) (448,220)
Non-deductible interest expense................................. 94,244 74,669
State income tax, net........................................... 278,603 231,799
Other items..................................................... 91,385 (54,739)
------------ ------------
Applicable income tax......................................... $ 1,563,693 $ 1,199,964
------------ ------------
------------ ------------
</TABLE>
The net deferred tax asset is comprised of the following components:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses......................................... $ 549,957 $ 439,692
Deferred compensation............................................. 55,737 60,490
Core deposit intangibles.......................................... 67,258 53,394
Other............................................................. 5,348 117,030
----------- -----------
678,300 670,606
Deferred tax liabilities:
Unrealized gain on securities available-for-sale.................. (130,085) (115,965)
Depreciation...................................................... (32,575) (16,113)
Accretion on securities........................................... (20,553) (17,394)
----------- -----------
(183,213) (149,472)
Valuation allowance................................................. -- --
----------- -----------
Net deferred tax asset............................................ $ 495,087 $ 521,134
----------- -----------
----------- -----------
</TABLE>
NOTE 10 -- COMMITMENTS AND CONTINGENCIES
The Company, in the ordinary course of business, has loans, commitments and
contingent liabilities, such as guarantees, commitments to extend credit, etc.,
which are not reflected in the accompanying consolidated balance sheets. The
Company's exposure to credit loss in the event of nonperformance by the
F-42
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 10 -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
other party to the financial guarantees is represented by the contractual
amounts of those instruments. The Company uses the same credit policy to make
such commitments as it uses for on-balance-sheet items.
The contractual amount of these financial instruments are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Commitments to extend credit................................... $ 26,634,000 $ 15,879,000
Standby letters of credit...................................... 2,349,000 2,111,000
</TABLE>
The commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established under the contract.
Generally, such commitments are for no more than one year, and most are variable
rate contracts. These commitments are primarily credit card, overdraft
protection, and commercial lines of credit.
Since many commitments expire without being used, the amounts do not
necessarily represent future cash commitments. Collateral obtained upon exercise
of the commitment is determined using management's credit evaluation of the
borrower, and may include accounts receivable, inventory, property, land and
other items.
At December 31, 1996 and 1995, the Company was required by the Federal
Reserve to have $3,542,000 and $2,704,000 on deposit or as cash in hand. These
reserves do not earn interest.
NOTE 11 -- RELATED PARTY TRANSACTIONS
Certain directors, officers and principal shareholders of the Company were
also customers of the Bank. The aggregate amount of loans to these persons
totaled $2,139,417 and $2,520,434 at December 31, 1996 and 1995.
Related party deposits totaled $1,337,157 at year-end 1996.
NOTE 12 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
CASH AND SHORT-TERM INVESTMENTS: For those short-term instruments, the
carrying amount is a reasonable estimate of fair value.
SECURITIES: For securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar instruments.
LOANS RECEIVABLE: The fair value of loans is estimated by discounting
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES: The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity
F-43
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 12 -- DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
NOTES PAYABLE: Carrying value is a reasonable estimate of fair value for
this adjustable rate instrument.
OFF-BALANCE SHEET ITEMS: Carrying value is a reasonable estimate of fair
value. These instruments are short term in nature.
The estimated fair values of financial instruments at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1996
CARRYING VALUE FAIR VALUE
--------------- ---------------
<S> <C> <C>
Financial assets:
Cash and short-term investments.......................... $ 28,082,000 $ 28,082,000
Securities available for sale............................ 38,376,000 38,376,000
Securities held to maturity.............................. 25,219,000 25,461,000
Loans.................................................... 196,963,000 196,816,000
Financial liabilities:
Deposits................................................. (271,127,000) (271,807,000)
Notes payable............................................ (500,000) (500,000)
Off balance sheet items.................................... -- --
</TABLE>
<TABLE>
<CAPTION>
1995 1995
CARRYING VALUE FAIR VALUE
--------------- ---------------
<S> <C> <C>
Financial assets:
Cash and short-term investments.......................... $ 26,860,000 $ 26,860,000
Securities available for sale............................ 38,426,000 38,426,000
Securities held to maturity.............................. 19,500,000 19,817,000
Loans.................................................... 171,457,000 172,189,000
Financial liabilities:
Deposits................................................. (241,735,000) (242,814,000)
Notes payable............................................ (1,000,000) (1,000,000)
Off balance sheet items.................................... -- --
</TABLE>
NOTE 13 -- REGULATORY MATTERS
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weightings, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
F-44
<PAGE>
P.T.C. BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 13 -- REGULATORY MATTERS (CONTINUED)
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required. The minimum
requirements are:
<TABLE>
<CAPTION>
CAPITAL TO RISK-
WEIGHTED ASSETS
-------------------------- TIER 1 CAPITAL
TOTAL TIER 1 TO AVERAGE ASSETS
----- ------ ----------------------
<S> <C> <C> <C>
Well capitalized................................... 10% 6% 5%
Adequately capitalized............................. 8% 4% 4%
Undercapitalized................................... 6% 3% 3%
</TABLE>
At year end 1996, consolidated actual capital levels (in thousands) and
minimum required levels were:
<TABLE>
<CAPTION>
MINIMUM REQUIRED TO BE
MINIMUM REQUIRED FOR
WELL CAPITALIZED UNDER
CAPITAL ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION REGULATIONS
---------------------- ---------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted
assets)
Consolidated.................. $ 21,836 11.60% $ 15,055 8.0% $ 18,819 10.0%
Bank.......................... $ 21,487 11.46% $ 14,995 8.0% $ 18,744 10.0%
Tier 1 capital (to risk-weighted
assets)
Consolidated.................. $ 19,836 10.54% $ 7,528 4.0% $ 11,291 6.0%
Bank.......................... $ 19,487 10.40% $ 7,498 4.0% $ 11,246 6.0%
Tier 1 capital (to average
assets)
Consolidated.................. $ 19,836 6.73% $ 11,795 4.0% $ 14,744 5.0%
Bank.......................... $ 19,487 6.63% $ 11,753 4.0% $ 14,692 5.0%
</TABLE>
The Company and Bank at year-end 1996 were categorized as well capitalized.
NOTE 14 -- PENDING ACCOUNTING CHANGES
Financial Accounting Standard No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, was issued by
the Financial Accounting Standards Board in 1996. It revises the accounting for
transfers of financial assets, such as loans and securities, and for
distinguishing between sales and secured borrowings. It is effective for some
transactions in 1997 and others in 1998. The effect on the financial statements
is not expected to be material.
F-45
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
P.T.C. BANCORP AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
COMPANY PTC ADJUSTMENTS CONSOLIDATED
---------- ---------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 17,838 $ 18,281 $ 36,119
Short-term investments...................................... 1,398 $ 18,345(3) 19,743
Investment securities available-for-sale.................... 71,422 28,132 99,554
Investment securities held-to-maturity...................... 25,761 25,761
Loans....................................................... 244,237 220,653 464,890
Less: Allowance for loan losses............................. (2,670) (1,969) (4,639)
---------- ---------- ------------
Net loans................................................. 241,567 218,684 460,251
Premises and equipment, net................................. 6,355 3,939 10,294
Accrued interest receivable and other assets................ 4,869 6,539 1,155(3) 12,563
---------- ---------- ----------- ------------
Total assets............................................ $ 342,051 $ 302,734 $ 19,500 $ 664,285
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
LIABILITIES
Deposits.................................................... $ 285,760 $ 275,679 $ 561,439
Short-term borrowings....................................... 17,885 17,885
Long-term debt.............................................. 4,625 250 4,875
Guaranteed preferred beneficial interests in the Company's
subordinated debentures................................... $ 19,500(3) 19,500
Accrued interest payable and other liabilities.............. 3,697 3,065 6,762
---------- ---------- ----------- ------------
Total liabilities....................................... 311,967 278,994 19,500 610,461
---------- ---------- ----------- ------------
SHAREHOLDERS' EQUITY
Common stock................................................ 1,251 1,026 110(2) 2,387
Paid-in capital............................................. 10,677 10,439 (110)(2) 21,006
Retained earnings........................................... 17,669 12,109 29,778
Net unrealized gain on securities available-for-sale........ 487 166 653
---------- ---------- ----------- ------------
Total shareholders' equity.............................. 30,084 23,740 53,824
---------- ---------- ----------- ------------
Total liabilities and shareholders' equity.............. $ 342,051 $ 302,734 $ 19,500 $ 664,285
---------- ---------- ----------- ------------
---------- ---------- ----------- ------------
</TABLE>
F-46
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
P.T.C. BANCORP AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY PTC CONSOLIDATED
----------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Interest Income
Loans, including fees....................................................... $ 15,388 $ 14,316 $ 29,704
Investment securities....................................................... 3,759 2,639 6,398
Other interest.............................................................. 251 279 530
----------- --------- ------------
Total interest income..................................................... 19,398 17,234 36,632
----------- --------- ------------
Interest Expense
Deposits.................................................................... 8,832 8,653 17,485
Short-term borrowings....................................................... 510 510
Long-term debt.............................................................. 297 26 323
----------- --------- ------------
Total interest expense.................................................... 9,639 8,679 18,318
----------- --------- ------------
Net interest income....................................................... 9,759 8,555 18,314
Provision for loan losses................................................... 183 610 793
----------- --------- ------------
Net interest income after provision for loan losses......................... 9,576 7,945 17,521
----------- --------- ------------
Non-interest Income
Insurance commissions....................................................... 316 75 391
Fiduciary activities........................................................ 169 20 189
Service charges on deposit accounts......................................... 462 944 1,406
Mortgage banking activities................................................. 766 766
Net realized gains (losses) on securities................................... (80) 8 (72)
Other....................................................................... 503 47 550
----------- --------- ------------
Total non-interest income................................................. 1,370 1,860 3,230
----------- --------- ------------
Non-interest Expense
Salaries and employees benefits............................................. 3,483 3,346 6,829
Net occupancy and equipment expense......................................... 1,168 895 2,063
Deposit insurance expense................................................... 104 22 126
Data processing expense..................................................... 289 289
Other....................................................................... 1,446 1,366 2,812
----------- --------- ------------
Total non-interest expense................................................ 6,201 5,918 12,119
----------- --------- ------------
Income Before Income Taxes.................................................... 4,745 3,887 8,632
Income Taxes.................................................................. 1,877 1,185 3,062
----------- --------- ------------
NET INCOME.................................................................... $ 2,868 $ 2,702 $ 5,570
----------- --------- ------------
----------- --------- ------------
Net Income Per Common Share................................................... $ 2.29 $ 2.64 $ 2.33
Weighted Average common Shares Outstanding.................................... 1,251 1,025 2,387
</TABLE>
F-47
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
P.T.C. BANCORP AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY PTC CONSOLIDATED
----------- --------- ------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
Interest Income
Loans, including fees....................................................... $ 18,266 $ 17,125 $ 35,391
Investment securities....................................................... 5,308 3,631 8,939
Federal funds sold.......................................................... 380 433 813
Other interest.............................................................. 13 130 143
----------- --------- ------------
Total interest income..................................................... 23,967 21,319 45,286
----------- --------- ------------
Interest Expense
Deposits.................................................................... 10,863 10,837 21,700
Short-term borrowings....................................................... 689 689
Long-term debt.............................................................. 454 60 514
----------- --------- ------------
Total interest expense.................................................... 12,006 10,897 22,903
----------- --------- ------------
Net interest income....................................................... 11,961 10,422 22,383
Provision for loan losses................................................... 150 828 978
----------- --------- ------------
Net interest income after provision for loan losses......................... 11,811 9,594 21,405
----------- --------- ------------
Non-interest Income
Customer service fees, insurance commissions................................ 438 102 540
Fiduciary activities........................................................ 232 31 263
Service charges on deposit accounts......................................... 520 1,199 1,719
Mortgage banking income..................................................... 795 795
Net realized gains on securities............................................ 104 104
Other....................................................................... 312 118 430
----------- --------- ------------
Total non-interest income................................................. 1,502 2,349 3,851
----------- --------- ------------
Non-interest Expense
Salaries and employees benefits............................................. 4,482 4,137 8,619
Net occupancy and equipment expense......................................... 1,477 833 2,310
Deposit insurance expense................................................... 736 2 738
Data processing expense..................................................... 372 372
Other....................................................................... 1,924 1,760 3,684
----------- --------- ------------
Total non-interest expense................................................ 8,619 7,104 15,723
----------- --------- ------------
Income Before Income Taxes.................................................... 4,694 4,839 9,533
Income Taxes.................................................................. 2,001 1,563 3,564
----------- --------- ------------
NET INCOME.................................................................... $ 2,693 $ 3,276 $ 5,969
----------- --------- ------------
----------- --------- ------------
Net Income Per Common Share................................................... $ 2.11 $ 3.17 $ 2.49
Weighted Average Common Shares Outstanding.................................... 1,251 1,032 2,378
</TABLE>
F-48
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
P.T.C. BANCORP AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY PTC CONSOLIDATED
----------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Interest Income
Loans, including fees................................................. $ 16,938 $ 15,446 $ 32,384
Investment securities................................................. 5,543 3,438 8,981
Federal funds sold.................................................... 305 473 778
Other interest........................................................ 49 63 112
----------- --------- ------------
Total interest income............................................. 22,835 19,420 42,255
----------- --------- ------------
Interest Expense
Deposits.............................................................. 10,308 9,733 20,041
Short-term borrowings................................................. 932 932
Long-term debt........................................................ 612 102 714
----------- --------- ------------
Total interest expense............................................ 11,852 9,835 21,687
----------- --------- ------------
Net interest income............................................... 10,983 9,585 20,568
Provision for loan losses............................................. 30 740 770
----------- --------- ------------
Net interest income after provision for loan losses................... 10,953 8,845 19,798
----------- --------- ------------
Non-interest Income
Insurance commissions................................................. 473 99 572
Fiduciary activities.................................................. 189 27 216
Service charges on deposit accounts................................... 450 1,192 1,642
Mortgage banking income............................................... 447 447
Net realized gains (losses) on securities............................. 16 (76) (60)
Other................................................................. 329 212 541
----------- --------- ------------
Total non-interest income......................................... 1,457 1,901 3,358
----------- --------- ------------
Non-interest Expense
Salaries and employees benefits....................................... 4,467 3,725 8,192
Net occupancy and equipment expense................................... 1,469 763 2,232
Deposit insurance expense............................................. 395 251 646
Data processing expense............................................... 350 350
Other................................................................. 1,898 1,550 3,448
----------- --------- ------------
Total non-interest expense........................................ 8,229 6,639 14,868
----------- --------- ------------
Income Before Income Taxes.............................................. 4,181 4,107 8,288
Income Taxes............................................................ 1,652 1,200 2,852
----------- --------- ------------
NET INCOME.............................................................. $ 2,529 $ 2,907 $ 5,436
----------- --------- ------------
----------- --------- ------------
Net Income Per Common Share............................................. $ 1.91 $ 2.86 $ 2.23
Weighted Average common Shares Outstanding.............................. 1,251 1,016 2,372
</TABLE>
F-49
<PAGE>
INDIANA UNITED BANCORP AND SUBSIDIARIES
P.T.C. BANCORP AND SUBSIDIARY
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
COMPANY PTC CONSOLIDATED
----------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Interest Income
Loans, including fees................................................. $ 15,941 $ 12,535 $ 28,476
Investment securities................................................. 6,131 3,038 9,169
Federal funds sold.................................................... 115 252 367
Other interest........................................................ 15 113 128
----------- --------- ------------
Total interest income............................................. 22,202 15,938 38,140
----------- --------- ------------
Interest Expense
Deposits.............................................................. 9,787 7,117 16,904
Short-term borrowings................................................. 483 483
Long-term debt........................................................ 631 138 769
----------- --------- ------------
Total interest expense............................................ 10,901 7,255 18,156
----------- --------- ------------
Net interest income............................................... 11,301 8,683 19,984
Provision for loan losses............................................. 115 450 565
----------- --------- ------------
Net interest income after provision for loan losses................... 11,186 8,233 19,419
----------- --------- ------------
Non-interest Income
Insurance commissions................................................. 509 111 620
Fiduciary activities.................................................. 200 38 238
Service charges on deposit accounts................................... 475 1,024 1,499
Mortgage banking income............................................... 463 463
Net realized gains (losses) on securities............................. (154) (15) (169)
Gain on sale of branches.............................................. 1,229 1,229
Other................................................................. 329 255 584
----------- --------- ------------
Total non-interest income......................................... 2,588 1,876 4,464
----------- --------- ------------
Non-interest Expense
Salaries and employees benefits....................................... 4,553 3,344 7,897
Net occupancy and equipment expense................................... 1,521 899 2,420
Deposit insurance expense............................................. 666 430 1,096
Data processing expense............................................... 352 352
Other................................................................. 2,300 1,604 3,904
----------- --------- ------------
Total non-interest expense........................................ 9,040 6,629 15,669
----------- --------- ------------
Income Before Income Taxes.............................................. 4,734 3,480 8,214
Income Taxes............................................................ 1,864 1,079 2,943
----------- --------- ------------
NET INCOME.............................................................. $ 2,870 $ 2,401 $ 5,271
----------- --------- ------------
----------- --------- ------------
Net Income Per Common Share............................................. $ 2.17 $ 2.51 $ 2.25
Weighted Average common Shares Outstanding.............................. 1,251 957 2,273
</TABLE>
F-50
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
On October 8, 1997, the Company entered into a Merger Agreement to acquire
PTC and its subsidiary, Peoples Trust, in a stock-for-stock merger. The Merger
Agreement, which is subject to the approval of Company and PTC shareholders and
various banking regulatory authorities, provides that the Company will issue
1,136,417 shares of Company common stock to the shareholders of PTC in exchange
for all of the issued and outstanding shares of stock of PTC. The transaction is
expected to be accounted for as a pooling of interests.
The Pro Forma Consolidated Balance Sheet as of September 30, 1997, and
Consolidated Statements of Income for the three years ended December 31, 1996
and the nine months ended September 30, 1997 combine the historical consolidated
financial statements of the Company and PTC and are presented as if the Merger
had occurred on January 1, 1994, 1995, 1996 and 1997, after giving effect to the
pro forma adjustments described in the accompanying notes. In addition, the Pro
Forma Balance Sheet as of September 30, 1997, gives effect to the Offering
assuming the Underwriter's over-allotment option was not exercised.
The pro forma consolidated financial statements are not necessarily
indicative of the consolidated financial position or results of future
operations of the combined entity or of the actual results that would have been
achieved had the PTC Merger and the Offering been consummated as of the dates
indicated.
NOTE 2
Represents the acquisition adjustment which includes the elimination of
1,057,132 shares of common stock (including 30,731 options exercised) of PTC and
the issuance of 1,136,417 shares of the Company's common stock. The excess par
value of the issued shares over the retired shares has been adjusted to paid-in
capital.
NOTE 3
Represents the temporary investment of the net proceeds of $18,345,000, debt
issue costs of $1,155,000, and $19,500,000 long-term debt incurred, all of which
are related to the issuance of the Preferred Securities.
F-51
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 14
Use of Proceeds........................................................... 22
Market for the Preferred Securities....................................... 22
Accounting Treatment...................................................... 22
Capitalization............................................................ 23
Company Selected Financial Data........................................... 24
PTC Selected Financial Data............................................... 25
Pro Forma Selected Financial Data......................................... 26
Company Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 27
PTC Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 52
Business of the Company................................................... 64
Description of the Preferred Securities................................... 68
Description of the Subordinated Debentures................................ 78
Description of the Guarantee.............................................. 86
Expense Agreement......................................................... 88
Relationship Among the Preferred Securities, the Subordinated Debentures
and the Guarantee....................................................... 88
Certain Federal Income Tax
Consequences............................................................ 90
ERISA Considerations...................................................... 93
Underwriting.............................................................. 93
Validity of Securities.................................................... 95
Experts................................................................... 95
Incorporation of Certain Documents by Reference........................... 96
Available Information..................................................... 96
Index to Consolidated Financial Statements and Pro Forma Consolidated
Financial Statements.................................................... F-1
</TABLE>
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY IUB CAPITAL
TRUST, INDIANA UNITED BANCORP OR THE UNDERWRITER. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF INDIANA UNITED
BANCORP OR IUB CAPITAL TRUST SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL.
1,950,000 PREFERRED SECURITIES
IUB CAPITAL TRUST
8.75% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $10
PER PREFERRED SECURITY)
GUARANTEED, AS DESCRIBED HEREIN, BY
[LOGO]
INDIANA UNITED BANCORP
------------------
$19,500,000
8.75% SUBORDINATED DEBENTURES
OF
INDIANA UNITED BANCORP
---------------------
Prospectus
December 8, 1997
---------------------
STIFEL, NICOLAUS & COMPANY
INCORPORATED
- --------------------------------------------------------------------------------
