FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2000
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COMMISSION FILE NUMBER 0-12422
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INDIANA UNITED BANCORP
----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1562245
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
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(Address of principal executive offices) (Zip Code)
(812) 663-0157
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of March 31,2000 there were outstanding 4,855,541 shares, without par
---------
value of the registrant.
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
INDEX
- ----------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Changes in Shareholders' Equity 5
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 2000 1999
--------- ------------
<S> <C> <C>
Cash and due from banks $ 25,951 $ 33,530
Interest-bearing demand deposits 29 30
Federal funds sold 1,600 400
--------- ---------
Cash and cash equivalents 27,580 33,960
Interest bearing time deposits 4,000 998
Securities
Available for sale 222,526 225,486
Held to maturity 15,755 17,788
Federal Home Loan Bank Stock 2,231 2,231
Loans held for sale 9,421 7,881
Loans 661,062 643,227
Less: Allowance for loan losses (7,336) (7,049)
--------- ---------
Net loans 653,726 636,178
Premises and equipment (net) 14,847 15,015
Intangible assets 23,676 24,135
Other assets 15,846 15,221
--------- ---------
Total assets $ 989,608 $ 978,893
========= =========
Liabilities
Deposits $ 851,443 $ 824,385
Short-term borrowings 32,106 40,064
Federal Home Loan Bank advances 10,000 19,900
Notes Payable 6,888 6,885
Other liabilities 6,775 6,025
--------- ---------
Total liabilities 907,212 $ 897,259
--------- ---------
Guaranteed preferred beneficial interests in
company's subordinated debentures 22,425 22,425
Shareholders' equity Common stock $.50 stated value:
Authorized--10,000,000 shares, Issued and
outstanding, 4,855,541 shares 2,428 2,428
Paid-in capital 23,065 23,065
Retained Earnings 39,405 38,350
Accumulated other comprehensive income (4,927) (4,634)
--------- ---------
Total shareholders' equity 59,971 59,209
--------- ---------
Total liabilities and shareholders' equity $ 989,608 $ 978,893
========= =========
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands except share and per share data)
Three months ended
March 31
2000 1999
---- ----
Interest income:
Loans, including fees $ 13,933 $ 11,474
Investment securities 3,665 3,209
Other 68 500
-------- --------
Total interest income 17,666 15,183
Interest expense:
Deposits 8,057 7,272
Trust preferred securities 501 501
Other borrowings 740 378
-------- --------
Total interest expense 9,298 8,151
-------- --------
Net interest income 8,368 7,032
Provision for loan losses 353 381
-------- --------
Net interest income after provision for loan losses 8,015 6,651
Non-interest income:
Securities gains (losses) 12 (24)
Other operating income 1,553 1,410
-------- --------
Total non-interest income 1,565 1,386
-------- --------
Non-interest expense 6,771 5,571
-------- --------
Income before income tax 2,809 2,466
Income tax expense 978 846
-------- --------
Net income $ 1,831 $ 1,620
======== ========
Net income per share (basic) $ 0.38 $ 0.34
Net income per share (diluted) $ 0.38 $ 0.34
Cash dividends declared $ 0.16 $ 0.16
See notes to consolidated condensed financial statements.
4
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands except share and per share data)
2000 1999
-------- --------
Balance, January 1 $ 59,209 $ 59,196
Comprehensive income:
Net income 1,831 1,620
Unrealized losses on available for sale securities,
net of reclassification adjustments (293) (528)
-------- --------
Comprehensive income 1,538 1,092
Cash dividends on common stock (776) (764)
-------- --------
Balance, March 31 $ 59,971 $ 59,524
======== ========
See notes to consolidated condensed financial statements.
5
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands except share and per share data)
Three months ended
March 31
Cash flows from operating activities: 2000 1999
---- ----
Net income $ 1,831 $ 1,620
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 353 381
Depreciation and amortization 339 416
Amortization of intangibles 459 313
Investment securities (gains) losses (12) 24
Change in loans held-for-sale (1,540) 1,548
Change in other assets and liabilities (9,585) 4,391
-------- --------
Net cash provided by operating activities (8,155) 8,693
-------- --------
Cash flows from investing activities:
Change in interest bearing time deposits (3,002) (3,533)
Proceeds from maturities and paydowns
of securities held-to-maturity 2,036 2,081
Purchases of securities available for sale (9,486) (93,620)
Proceeds from maturities and paydowns
of securities available for sale 11,975 20,578
Proceeds from sales of securities available for sale -- 9,568
Net change in loans (17,901) (13,931)
Purchases of premises and equipment (171) (1,856)
Net change in deposits with other financial institutions -- 472
Cash received from branch acquisitions -- 92,535
-------- --------
Net cash provided (used) by investing activities (16,549) 12,294
-------- --------
Cash flows from financing activities:
Net change in deposits 27,058 (7,453)
Short-term borrowings (7,958) (4,000)
Proceeds of long term debt -- 8,000
Cash dividends (776) (764)
-------- --------
Net cash provided (used) by financing activities 18,324 (4,217)
-------- --------
Net decrease in cash and cash equivalents (6,380) 16,770
Cash and cash equivalents, beginning of period 33,960 45,435
-------- --------
Cash and cash equivalents, end of period $ 27,580 $ 62,205
======== ========
See notes to consolidated condensed financial statements.
6
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except share and per share data)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by Indiana United Bancorp
("Company"), its wholly owned bank subsidiaries, Union Bank and Trust Company of
Indiana ("Union Bank"), Regional Federal Savings Bank ("Regional Bank") and
People's Trust Company ("People's"),and their subsidiaries, and its subsidiary
IUB Capital Trust, for interim financial reporting are consistent with the
accounting policies followed for annual financial reporting.
NOTE 2 BRANCH ACQUISITIONS
During the first quarter of 1999, the Company purchased four branches within
target market areas. These branch acquisitions were accounted for using the
purchase method of accounting. Total fair value of assets acquired and
liabilities assumed was $104,700 including cash of $90,800, loans of $1,900 and
deposits of $104,100. The results of operations of the branches have been
included since their acquisition dates. Intangible assets of $11,400 were
recorded and are being amortized over estimated useful lives using the
straight-line method. The Company opened two new branches "de novo" in late
April 1999. These branches are located in Chesterfield, and Anderson, Indiana.
NOTE 3 BUSINESS COMBINATIONS
Effective April 1, 1999, the Company acquired the property and casualty
insurance business lines of The Anderson Group of Owensboro, Kentucky ("The
Anderson Group"). The acquisition was effected by the purchase of net assets and
expertise in which the property and casualty insurance business lines of The
Anderson Group were integrated into a newly formed subsidiary, The Insurance
Group, Inc., ("The Insurance Group"). The acquisition was effected by the
purchase method of accounting. In this transaction, the Company issued 80,913
shares of its common stock to The Anderson Group shareholders. Subsequently, the
Company caused The Insurance Group to become a wholly owned subsidiary of Union
Bank and Trust by transferring its ownership in The Insurance Group to that bank
subsidiary. The general lines insurance business previously conducted by Union
Bank and Trust in Greensburg and Portland, Indiana is now conducted through The
Insurance Group subsidiary.
On May 1, 2000 the Company consummated its acquisition of First Affiliated
Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone
Bank N. A. The transaction was accounted for using the pooling-of-interests
method of accounting. The Company will issue approximately 1,020,000 shares of
its common stock to the shareholders of First Affiliated Bancorp. The conversion
rate will be 4.4167 shares of Company stock for each outstanding share of First
Affiliated. As of March 31, 2000, First Affiliated had $134,067 in assets and
$117,523 in deposits with four banking offices in Illinois and one in Indiana.
These financial statements exclude the effects of the merger. Unaudited pro
forma results of operations including First Affiliated are as follows:
7
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except share and per share data)
Quarter ended March 31 2000 1999
- --------------------------------------------------------------------------
Net interest income
Indiana United Bancorp $8,368 $7,032
First Affiliated Bancorp 1,183 1,158
- --------------------------------------------------------------------------
Combined $9,551 $8,190
- --------------------------------------------------------------------------
Net income
Indiana United Bancorp $1,831 $1,620
First Affiliated Bancorp 527 524
- --------------------------------------------------------------------------
Combined $2,358 $2,144
- --------------------------------------------------------------------------
Basic earnings per share
Indiana United Bancorp $.38 $.34
First Affiliated Bancorp N/A N/A
- --------------------------------------------------------------------------
Combined $.40 $.37
- --------------------------------------------------------------------------
Diluted earnings per share
Indiana United Bancorp $.38 $.34
First Affiliated Bancorp N/A N/A
- --------------------------------------------------------------------------
Combined $.40 $.37
- --------------------------------------------------------------------------
On April 28, 2000 the Company announced the purchase of two branch facilities
and approximately $38,000 in deposits from Harrington Bank, Richmond, Indiana.
The branches, which are located in Marion County, will be integrated into Union
Bank at the end of the second quarter. The premium paid for the deposits will
result in approximately $1,200 in intangible assets for Union Bank.
NOTE 4 SECURITIES
March 31,2000 December 31,1999
Amortized Fair Amortized Fair
Available for sale Cost Value Cost Value
----------- ---------- ----------- ----------
Federal agencies $134,743 $130,709 $142,194 $ 138,410
State and municipal 23,581 22,205 24,870 23,320
Corporate and other securities 31,932 30,119 24,514 22,945
Mortgage-backed securities 40,311 39,493 41,468 40,811
-------- -------- -------- ---------
Totals $230,567 $222,526 $233,046 $ 225,486
======== ======== ======== =========
Held to maturity
State and municipal $14,706 $14,487 $16,753 $16,556
Corporate and other securities 1,049 1,085 1,035 1,076
-------- -------- -------- ---------
Totals $15,755 $15,572 $17,788 $17,632
======= ======= ======= =======
NOTE 5 LOANS
March 31, December 31,
2000 1999
-----------------------
Commercial and industrial loans $ 42,626 $ 39,539
Agricultural production financing 16,628 14,863
Farm real estate 42,180 42,604
Commercial real estate mortgage 97,517 98,814
Residential real estate mortgage 320,074 307,632
Construction and development 55,019 50,721
Consumer 77,312 79,154
State and political 9,706 9,900
-------- --------
Total loans $661,062 $643,227
======== ========
8
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Dollar amounts in thousands except share and per share data)
NOTE 5 LOANS (CONT'D)
Non-performing loans 2000 1999
---- ----
Non-accrual loans $1,609 $3,465
Accruing loans contractually past due 90 days
or more as to principal or interest payments 355 373
------ ------
Total non-performing loans $1,964 $3,838
====== ======
Allowance for loan losses: 2000 1999
---- ----
Balances January 1 $7,049 $6,099
Provision for losses 353 381
Recoveries on loans 102 56
Loans charged off (168) (175)
------ ------
Balance, March 31, $7,336 $6,361
=== ====== ======
NOTE 6 DEPOSITS
March 31 December 31
2000 1999
-------- -----------
Non-interest-bearing demand $ 82,672 $ 84,468
Interest-bearing demand 213,321 220,268
Savings 75,225 74,320
Certificates and other time deposits $100,000 or more 115,593 99,074
Other certificates and time deposits 364,632 346,255
-------- --------
Total deposits $851,443 $824,385
======== ========
NOTE 7 SHORT-TERM BORROWINGS
. March 31 December 31
2000 1999
-------- -----------
Federal funds purchased $ 9,500 $ 13,200
Securities sold under repurchase agreements 21,976 25,487
U.S. Treasury demand notes 630 1,377
-------- --------
Total short-term borrowings $ 32,106 $ 40,064
======== ========
NOTE 8 EARNINGS PER SHARE
Three months ended
March 31 March 31
2000 1999
---- ----
Weighted Per Weighted Per
Basic earnings per Net Average Share Net Average Share
share: Income Shares Amount Income Shares Amount
Income available
to common
Shareholders $1,831 4,855,541 $0.38 $1,620 4,774,628 $0.34
====== ========= ===== ====== ========= =====
9
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Forward-Looking Statements
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; deposit flows; the cost of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect the occurrence of anticipated
or unanticipated events or circumstances after the date of such statements.
OVERVIEW
Strategic Plan
The Company operates under the broad tenets of a long-term strategic plan
("Plan") designed to improve the Company's financial performance, expand its
competitive ability and enhance long-term shareholder value. The Plan is
premised on the belief of the Company's board of directors that the Company can
best promote long-term shareholder interests by pursuing strategies that will
continue to preserve its community-focused philosophy.
Business Strategy
The Company holds first or second market share positions as measured by total
deposits in several of the markets it serves and intends to pursue growth
strategies that result in meaningful market share positions in other rural or
suburban communities. The Company has sought to identify potential acquisitions
in markets that offer prospects of benefiting from its community banking
philosophy and will likely result in meaningful market share. Many larger
mid-west banking companies have had an accelerated program of branch
divestitures. Many of these branch locations have been in communities that are
compatible with the Company's growth strategies. The Company has bid
competitively in order to expand its presence in these targeted markets.
In the quarter ended March 31, 1999 the Company acquired four branches located
in or adjacent to People's market. One of these branches is located in Cambridge
City, which is in Wayne County where People's already operates three offices.
Two offices are in New Castle and one office is in Knightstown and all three are
located in the adjacent county of Henry. This acquisition added $104,100 of
deposits to People's customer base, which now operates 20 offices in nine
eastern and southeastern counties of Indiana. In March of 1999 People's closed
the Arlington, Indiana branch and merged it with the Rushville, Indiana branch
due to the low business volume. Prior to this it had been operated on a
part-time basis.
Effective April 1, 1999, the Company acquired the property and casualty
insurance business lines of The Anderson Group of Owensboro, Kentucky ("The
Anderson Group"). The acquisition was effected by the purchase of net assets and
expertise in which the property and casualty insurance business lines of The
Anderson Group were integrated into a newly formed
10
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
subsidiary, The Insurance Group, Inc., (The Insurance Group"). The general lines
insurance business previously managed by Union Bank in Greensburg and Portland,
Indiana are directed through The Insurance Group subsidiary as the Company
expands its insurance offering capabilities. This expansion provided an
increased book of business and additional management expertise and increased
product line. With this base the Company anticipates additional insurance
acquisitions throughout its marketing area.
On May 1, 2000 the Company consummated its acquisition of First Affiliated
Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone
Bank N. A. The transaction was accounted for using the pooling-of-interests
method of accounting. The Company will issue approximately 1,020,000 shares of
its common stock to the shareholders of First Affiliated Bancorp. The conversion
rate will be 4.4167 shares of Company stock for each outstanding share of First
Affiliated. As of March 31, 2000, First Affiliated had $134,067 in assets and
$117,523 in deposits with four banking offices in Illinois and one in Indiana.
On April 28, 2000 the Company announced the purchase of two branch facilities
and approximately $38,000 in deposits from Harrington Bank, Richmond, Indiana.
The branches, which are located in Marion County, will be integrated into Union
Bank at the end of the second quarter. The premium paid for the deposits will
result in approximately $1,200 in intangible assets for Union Bank.
Management realized that if the Company was successful in increasing assets
significantly through branch and bank acquisitions, the regulatory capital of
the Company would have been below levels acceptable to management and regulatory
authorities. In preparation for significant growth, the Company issued $22,425
of cumulative Trust Preferred Securities in December 1997. These securities are
used to meet regulatory capital requirements within prescribed limits. The
Company utilized a portion of the net proceeds received to retire its long-term
debt and employed the remaining funds to finance growth which included branch
acquisitions, the establishment of de novo branches and various other corporate
purposes.
While the Company has been successful in achieving the deposit growth levels
anticipated, the interest cost of the Trust Preferred Securities had an adverse
affect on 1999 results because the integration of more than $225,000 of deposits
into the Company was not immediately offset by a like amount of quality credits.
Management believes its growth strategies will lead to increased opportunities
and profitability and is in the best interests of shareholders in the long-term.
Year 2000 ("Y2K") Computer Issues
The Company did not encounter any Y2K related problems nor is management aware
of any customers who encountered significant Y2K problems. The Company incurred
approximately $150 in capital and other expenditures for Y2K preparations.
Management is not aware of any remaining uncertainties or contingencies with
respect to Y2K.
Results of Operations
Earnings for the first quarter of 2000 increased $211 to $1,831 as compared to
the same quarter of 1999, with net interest income, non-interest income and
non-interest expense all increased for comparable periods disclosed.
Per share earnings (diluted) for the first quarter equaled $.38 in 2000,
compared to $.34 in 1999.
The Company's return on average total assets for the first quarter was .76% in
2000 compared to .73% in 1999. Return on average shareholders' equity for the
first quarter was 12.47% in
11
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
2000 and 10.62% in 1999.
Net Interest IncomeThe volume and yield of earning assets and the cost of
interest-bearing liabilities influence net interest income. Net interest income
reflects the mix of interest-bearing and non-interest-bearing liabilities that
fund earning assets, as well as interest spreads between the rates earned on
these assets and the rates paid on interest-bearing liabilities. First quarter
net interest income of $8,368 in 2000 increased 19.00% from $7,032 in 1999. Net
interest income, on a tax equivalent basis, reflected as a percentage of average
earning assets (net interest margin) was 3.56% for the quarter ended March 31,
2000 and 3.53% for the same time frame in 1999.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the Allowance
and Provision for Possible Loan Losses".
Non-interest Income
First quarter non-interest income in 2000 exceeded the prior year by $179 or
12.91%. Security gains were $12 in the first three months of 2000 compared to a
$24 loss for the same three month period last year.
Insurance commissions increased from $125 in the first quarter of 1999 to $311
in the comparable period of 2000 due to The Insurance Group acquisition
discussed previously.
Service charges for the respective first quarters of 2000 and 1999 were $596 and
$474, an increase of $122 primarily due to continued growth in non-interest
bearing and interest-bearing checking accounts.
Mortgage banking income, which consists of gains (losses) on loan sales and
service fee income was $206 lower for the first quarter of 2000 compared to the
same period in 1999. Decreased mortgage sales activity began late in 1998 and
has continued. During this period of time, the long-term interest rates charged
on mortgages increased and the Company experienced reduced refinancing and
origination activity of a saleable nature.
Non-Interest income
Three months ended
March 31
--------
2000 1999
---- ----
Trust fees $84 $83
Insurance commissions 311 125
Mortgage banking income 133 339
Service charges on deposit accounts 596 474
Gain (loss) on sales of securities 12 (24)
Other income 429 389
------ ------
Total $1,565 $1,386
====== ======
12
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Non-interest expense
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the first three months of 2000 by $723, or 22.88% as
compared to the prior year period. Normal staff salary adjustments and increased
benefit costs were incurred in 2000 as well as the cost of staffing 6 new
branches (4 purchased and 2 de novo) and the addition of the Insurance Group.
The increase in net occupancy expense for the current quarter of 2000 over 1999
is due to the increase in the number of branches and The Insurance Group as
discussed earlier.
The increase in equipment expenses of $30 in 2000 over 1999 is due to the
increased number of branches, The Insurance Group and the upgrades necessitated
by the decision to convert People's from a service bureau environment to the
in-house system within the holding company. This conversion will occur during
the fourth quarter of 2000.
Amortization of core deposit intangibles and goodwill for the first quarter of
2000 exceeded the comparable period for 1999 as the result of amortization of
premiums paid on The Insurance Group, branches and deposits acquired in
February, 1999.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing non-interest expense by the total of tax-effected net
interest income plus non-interest income excluding securities gains or losses.
The lower the ratio, the more efficient the Company is in managing net interest
margin, non-interest income and non-interest expense. The Company's efficiency
ratios were 66.81% for the first quarter of 2000 compared to 64.83% for the same
period in 1999. The change in the efficiency ratio is due largely to the
increased cost of the newly acquired branches and formation of The Insurance
Group.
Non Interest income Three months ended
March 31
--------
2000 1999
---- ----
Salaries and employee benefits $3,883 $3,160
Net occupancy expense 477 367
Equipment expense 451 421
Data processing fees 165 173
Deposit insurance 32 41
Intangibles amortization 459 313
Stationery, printing & supplies 205 186
Other expenses 1,099 910
------ ------
Total $6,771 $5,571
====== ======
Income Taxes
The effective tax rate for the first three months was 34.82% for 2000 and 34.31%
for 1999. The Company and its subsidiaries will file consolidated income tax
returns for 2000.
Financial Condition
Total assets at March 31, 2000 increased $10,715 since the end of 1999.
13
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Average earning assets represented 92.91% of average total assets for the first
three months of 2000 compared to 93.36% for the same period of 1999. The
addition of new fixed assets and deposit premium connected with the branch
acquisitions has been the major factor in the decrease of this ratio. Average
loans represented approximately 79.12% of average deposits in the first three
months of 2000 and 77.32% for a comparable period in 1999. Management intends to
continue its emphasis on loan growth throughout 2000, to increase these
averages. Average loans as a percent of assets were 67.81% and 60.44% for the
three month period ended March 31, 2000 and 1999 respectively.
The increase in deposits of $27,058 from December 31, 1999 to March 31, 2000 is
due mainly to the normal first quarter build up in anticipation of income and
property taxes due in April and May. A portion of this increase was used to pay
down Federal Home Loan Bank advances and other short term borrowings in the form
of repurchase agreements
Trust Preferred Securities in the amount of $22,425 were issued on December 12,
1997. The holders of the Trust Preferred Securities are entitled to receive
preferential cumulative cash distributions, payable quarterly, at the annual
rate of 8.75% of the liquidation amount of $10 per security. The Company has the
right, so long as no default has occurred, to defer payment of interest at any
time, or from time to time for a period not to exceed 20 consecutive quarters
with respect to each deferral period. Currently, management has no intention of
deferring the payment of interest. The Trust Preferred Securities have a
preference under certain circumstances with respect to cash distributions and
amounts payable on liquidation, redemption or otherwise over the common stock.
The holders of the Trust Preferred Securities have no voting rights except in
limited circumstances.
The Trust Preferred Securities are traded on the NASDAQ National Market under
the symbol "IUBCP". The Trust Preferred Securities are not insured by the BIF,
SAIF or FDIC, or by any other governmental agency. The Trust Preferred
Securities qualify as Tier 1 capital or core capital with respect to the Company
under the risk based capital guidelines established by the Federal Reserve.
Under such guidelines, the Trust Preferred Securities cannot constitute more
than 25% of the total core capital of the Company. The amount of Trust Preferred
Securities in excess of the 25% limitation will constitute Tier 2 capital, or
supplementary capital, of the Company.
In February of 1999 the Company borrowed $8,000 from National City Bank at a
floating rate based upon LIBOR. In July 1999, the Company reduced its debt by
$1,300 in order to obtain a more favorable interest rate. In addition, the
Company established a $3,000 line of credit as a cash management tool. The line
of credit expired December 31,1999.
Shareholders' equity was $59,971 on March 31,2000 compared to $59,209 on
December 31, 1999. Book value per common share increased to $12.35 or 1.31% from
$12.19 at year-end 1999. The unrealized loss on securities available for sale,
net of taxes, totaled $4,927 or $1.01 per share at March 31, 2000 compared to an
unrealized loss of $ 4,634 or $.95 per share at December 31, 1999. Excluding the
net unrealized gains and losses on securities available for sale, book value per
share would be $13.36 at March 31, 2000 or an increase of 1.67% over the
comparable book value at year-end 1999.
14
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses
Loans remain the Company's largest concentration of assets and, by their nature,
carry a higher degree of risk. The loan underwriting standards observed by the
Company's subsidiaries are viewed by management as a means of controlling
problem loans and the resulting chargeoffs.
The Company's conservative loan underwriting standards have historically
resulted in higher loan quality and lower levels of net charge-offs than peer
bank averages. The Company also believes credit risks may be elevated if undue
concentrations of loans in specific industry segments and to out of area
borrowers are incurred. Accordingly, the Company's Board of Directors regularly
monitors such concentrations to determine compliance with its loan allocation
policy. The Company believes it has no undue concentrations of loans.
Total loans increased $17,835 or 2.77% since December 31, 1999 spread across the
variety of loans the Company participates in. The greatest increase is in the
residential mortgage loan portfolio, as more mortgage loan originations are
placed in the portfolio to deploy the deposits gained through new products and
acquisitions.
Residential real estate loans continue to represent a significant portion of the
total loan portfolio. Such loans represented 48.42% of total loans at March 31,
2000 and 47.83% at December 31, 1999.
Construction and development loans increased 8.47% from year-end 1999 to March
31, 2000.
On March 31, 2000, the Company had $9,421 of residential real estate loans held
for sale. Prior to the merger with People's, the Company traditionally made
loans only for its own portfolio and did not follow the practice of many other
financial institutions of originating loans for sale in the secondary market.
People's had engaged in mortgage banking activities for a period of time.
The Company regards its ability to identify and correct loan quality problems as
one of its greatest strengths. Loans are placed on non-accrual status when in
management's judgment the collateral value and/or the borrower's financial
condition do not justify accruing interest. As a general rule, commercial and
real estate loans are reclassified to non-accruing status at or before becoming
90 days past due. Interest previously recorded but not deemed collectible is
reversed and charged against current income. Subsequent interest payments
collected on non-accrual loans may thereafter be recognized as interest income
or may be applied as a reduction of the loan balance, as circumstances warrant.
Non-real estate secured consumer loans are not placed in non-accruing status,
but are charged off when policy-determined delinquent status is reached. The
provision for loan losses was $353 in the first three months of 2000 compared to
$381 for the same period in 1999.
Net charge-offs were $66 for the first three months of 2000 compared to $119 for
the comparable period in 1999. On an annualized basis as a percentage of average
loans, net charge-offs equaled .04% and .08% respectively for the three month
period ended March 31, 2000 and 1999. In prior years, the Company outperformed
its peer group's net loan loss average and that trend is expected to continue in
2000. Management is not aware of any trend which is likely to cause the level of
net charge-offs in 2000 to materially exceed the level of charge-offs
experienced in 1999.
15
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Foreclosed real estate held by the Company at March 31, 2000 was $2,071 and $194
at December 31, 1999.
Management maintains a listing of loans warranting either the assignment of a
specific reserve amount or other special administrative attention. The Board of
Directors of each subsidiary reviews this listing monthly, together with a
listing of all classified loans, non-accrual loans and loans delinquent 30 days
or more.
The ability to absorb loan losses promptly when problems are identified is
invaluable to a banking organization. Most often, losses incurred as a result of
prompt, aggressive collection actions are much lower than losses incurred after
prolonged legal proceedings. Accordingly, the Company observes the practice of
quickly initiating stringent collection efforts in the early stages of loan
delinquency.
The adequacy of the allowance for loan losses in each subsidiary is reviewed at
least quarterly. The determination of the provision amount in any period is
based on management's continuing review and evaluation of loan loss experience,
changes in the composition of the loan portfolio, current economic conditions,
the amount of loans presently outstanding, and the amount and composition of
growth expectations. The allowance for loan losses as of March 31, 2000 is
considered adequate by management.
Investment Securities
Investment securities offer flexibility in the Company's management of interest
rate risk, and are an important source of liquidity as a response to changing
characteristics of assets and liabilities. The Company's investment policy
prohibits trading activities and does not allow investment in high-risk
derivative products, junk bonds or foreign investments.
As of March 31, 2000, $230,567 of investment securities are classified as
"available for sale" ("AFS") and are carried at fair value with unrealized gains
and losses, net of taxes, excluded from earnings and reported as a separate
component of shareholders' equity. An unrealized pre-tax loss of $8,041 was
recorded to adjust the AFS portfolio to current market value at March 31, 2000,
compared to an unrealized pre-tax loss of $7,560 at December 31, 1999.
Since 1997, the Company has lengthened the maturity of security purchases,
relative to the present balance of the portfolio. In the current interest rate
environment, with a flat yield curve, most security purchases have had a stated
maturity not exceeding five years.
Sources of Funds
The Company relies primarily on customer deposits, securities sold under
agreement to repurchase ("agreements") and shareholders' equity to fund earning
assets. FHLB advances are also used to provide additional funding.
Deposits generated within local markets provide the major source of funding for
earning assets. Total deposits funded 92.08% and 91.03% of total earning assets
at March 31, 2000 and December 31,1999. Total interest-bearing deposits averaged
90.40% and 90.88% of average total deposits for the periods ending March 31,
2000 and December 31, 1999, respectively. Management constantly strives to
increase the percentage of transaction-related deposits to total deposits due to
the positive effect on earnings.
16
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Short-term borrowings decreased $7,958 or 19.86% from year-end 1999 primarily
due to the increase in deposits during the quarter. The Company has one FHLB
advance for $10,000 that matures in late 2002. In February 1999 the Company
borrowed $8,000 in long term debt (see Financial Condition section)
Capital Resources
Total shareholders' equity increased $762 to $59,971 at March 31, 2000 as
compared to December 31, 1999.
The Federal Reserve Board and other regulatory agencies have adopted risk-based
capital guidelines that assign risk weightings to assets and off-balance sheet
items. The Company's core capital consists of shareholders' equity adjusted for
AFS adjustment, while Tier 1 consists of core capital less goodwill and
intangibles. Trust preferred securities qualify as Tier 1 capital or core
capital with respect to the Company under the risk-based capital guidelines
established by the Federal Reserve. Under such guidelines, capital received from
the proceeds of the sale of trust preferred securities cannot constitute more
than 25% of the total core capital of the Company. Consequently, the amount of
trust preferred securities in excess of the 25% limitation will constitute Tier
2 capital of the Company. Total regulatory capital consists of Tier 1, certain
debt instruments and a portion of the allowance for credit losses. At March 31,
2000, Tier 1 capital to total average assets was 6.57%. Tier 1 capital to
risk-adjusted assets was 9.79%. Total capital to risk-adjusted assets was
11.05%. All three ratios substantially exceed all required ratios established
for bank holding companies. Risk-adjusted capital levels of the Company's
subsidiary banks exceed regulatory definitions of well-capitalized institutions.
The Company declared and paid common dividends of $.16 per share in the first
three months of 2000 and $.16 per share for the same period in 1999.
Liquidity
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and creditors.
Higher levels of liquidity bear higher corresponding costs, measured in terms of
lower yields on short-term, more liquid earning assets, and higher interest
expense involved in extending liability maturities. Liquid assets include cash
and cash equivalents, loans and securities maturing within one year, and money
market instruments. In addition, the Company holds AFS securities maturing after
one year, which can be sold to meet liquidity needs.
Maintaining a relatively stable funding base, which is achieved by diversifying
funding sources and extending the contractual maturity of liabilities, supports
liquidity and limits reliance on volatile short-term purchased funds. Short-term
funding needs arise from declines in deposits or other funding sources, funding
of loan commitments and requests for new loans. The Company's strategy is to
fund assets to the maximum extent possible with core deposits that provide a
sizable source of relatively stable and low-cost funds. Average core deposits
funded approximately 80.34% of total earning assets for the three months ended
March 31, 2000 compared to approximately 82.81% for the comparable period ended
December 31, 1999.
Management believes the Company has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. In
addition, the affiliates
17
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
have access to the Federal Home Loan Bank for borrowing purposes. The Company
has not received any recommendations from regulatory authorities that would
materially affect liquidity, capital resources or operations.
Interest Rate Risk
At March 31, 2000, the Company held approximately $ 362,673 in assets comprised
of securities, loans, short-term investments, and federal funds sold, which were
interest sensitive in one year or less time horizons. Core deposits are
distributed or spread among the various re-pricing categories based upon
historical patterns of re-pricing, which are reviewed periodically by
management. The assumptions regarding these re-pricing characteristics greatly
influence conclusions regarding interest sensitivity. Management believes its
assumptions regarding these liabilities are reasonable.
Effective asset/liability management requires the maintenance of a proper ratio
between maturing or repriceable interest-earning assets and interest-bearing
liabilities. It is the policy of the Company that the cumulative GAP divided by
total assets shall be plus or minus 20% at the 3-month, 6-month, and 1-year time
horizons.
The Company continues to strive to increase its amount of variable rate assets
in what is generally perceived to be a period of rising interest rates. While
interest rates have trended upward since July 1999, the increases have been
relatively mild and have allowed the company the opportunity to react to the
higher rates. Management believes that the company is well positioned in the
current rate environment and does not foresee its earnings materially impacted
in 2000 regardless of the direction interest rates may take
Asset/liability management strategies are developed by the Company to manage
market risk. Market risk is the risk of loss in financial instruments including
investments, loans, deposits and borrowings arising from adverse changes in
prices/rates. Interest rate risk is the Company's primary market risk exposure,
and represents the sensitivity of earnings to changes in market interest rates.
Strategies are developed that impact asset/liability committee activities based
on interest rate risk sensitivity, board policy limits, desired sensitivity gaps
and interest rate trends.
Other
The Securities and Exchange Commission ("Commission") maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company. That address is http://www.sec.gov.
18
<PAGE>
INDIANA UNITED BANCORP
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollar amounts in thousands except per share data)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk of the Corporation encompasses exposure to both liquidity and
interest rate risk and is reviewed monthly by the Asset/Liability Committee and
the Board of Directors. There have been no material changes in the quantitative
and qualitative disclosures about market risks as of March 31, 2000 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 1999.
19
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are furnished in accordance with the
provisions of Item 601 of Regulation S-K.
27: Financial Data Schedule (electronic filing only)
b) Reports on Form 8-K
There were no reports filed on Form 8-K for the first quarter of 2000.
No other information is required to be filed under Part II of this form.
20
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INDIANA UNITED BANCORP
May 11, 2000
By: /s/James L. Saner Sr
----------------------------------
James L. Saner Sr
President and Chief Executive Officer
May 11, 2000
By: /s/Donald A. Benziger
----------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED BALANCE SHEET AND THE CONSOLIDATED CONDENSED INCOME
STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 27,592
<INT-BEARING-DEPOSITS> 29
<FED-FUNDS-SOLD> 1,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 222,526
<INVESTMENTS-CARRYING> 15,755
<INVESTMENTS-MARKET> 15,572
<LOANS> 661,544
<ALLOWANCE> 7,336
<TOTAL-ASSETS> 989,608
<DEPOSITS> 851,453
<SHORT-TERM> 32,106
<LIABILITIES-OTHER> 16,755
<LONG-TERM> 6,888
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<COMMON> 2,428
<OTHER-SE> 57,543
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<INTEREST-TOTAL> 17,666
<INTEREST-DEPOSIT> 8,057
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<EPS-BASIC> .34
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<LOANS-NON> 1,609
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