FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 0-12422
INDIANA UNITED BANCORP
----------------------
(Exact name of registrant as specified in its charter)
INDIANA 35-1562245
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
-----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 663-0157
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of November 14, 2000 there were outstanding 5,873,900 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 Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
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
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
2000 1999
----------- -----------
Assets
<S> <C> <C>
Cash and due from banks $ 31,770 $ 41,449
Interest-bearing demand deposits 33 30
Money market fund 839 --
Federal funds sold 12,860 400
----------- -----------
Cash and cash equivalents 45,502 41,879
Interest bearing time deposits 891 2,119
Securities
Available for sale 266,977 272,643
Held to maturity 13,155 17,788
Federal Home Loan Bank & Federal Reserve Bank Stock 3,214 2,357
Loans held for sale 3,020 7,881
Loans 783,136 710,695
Less: Allowance for loan losses (8,595) (7,718)
----------- -----------
Net loans 774,541 702,977
Premises and equipment (net) 17,759 17,340
Intangible assets 24,217 24,135
Other assets 25,344 21,132
----------- -----------
Total assets $ 1,174,620 $ 1,110,251
----------- -----------
Liabilities
Deposits $ 1,025,280 $ 940,905
Short-term borrowings 13,124 40,064
Federal Home Loan Bank advances 22,480 24,484
Notes Payable 6,542 6,885
Other liabilities 11,497 7,316
----------- -----------
Total liabilities 1,078,923 1,019,654
----------- -----------
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, 5,873,900 and 5,857,655 shares 2,937 2,928
Paid-in capital 25,554 25,563
Retained Earnings 48,878 44,775
Accumulated other comprehensive income (4,097) (5,094)
----------- -----------
Total shareholders' equity 73,272 68,172
----------- -----------
Total liabilities and shareholders' equity $ 1,174,620 $ 1,110,251
=========== ===========
</TABLE>
See notes to consolidated condensed financial statements
3
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF INCOME
(Unaudited)
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 17,260 $ 14,321 $ 49,300 $ 40,640
Investment securities 4,310 4,622 13,091 12,922
Other interest earning assets 226 87 462 1,110
-------- -------- -------- --------
Total interest income 21,796 19,030 62,853 54,672
Interest expense:
Deposits 10,554 8,553 29,512 25,441
Trust preferred securities 470 501 1,472 1,503
Other borrowings 997 573 2,576 1,493
-------- -------- -------- --------
Total interest expense 12,021 9,627 33,560 28,437
-------- -------- -------- --------
Net interest income 9,775 9,403 29,293 26,235
Provision for loan losses 410 387 1,158 1,104
-------- -------- -------- --------
Net interest income after
Provision for loan losses 9,365 9,016 28,135 25,131
Non-interest income:
Securities gains (losses) -- 5 (36) (8)
Other operating income 2,399 1,639 6,510 5,340
-------- -------- -------- --------
Total non-interest income 2,399 1,644 6,474 5,332
Non-interest expense 8,079 8,027 24,317 21,729
-------- -------- -------- --------
Income before income tax 3,685 2,633 10,292 8,734
Income tax expense 1,212 932 3,022 2,599
-------- -------- -------- --------
Net income $ 2,473 $ 1,701 $ 7,270 $ 6,135
======== ======== ======== ========
Comprehensive income (loss) $ 3,967 $ 1,312 $ 8,267 $ 1,376
======== ======== ======== ========
Net income per share (basic) $ 0.42 $ 0.29 $ 1.24 $ 1.06
Net income per share (diluted) $ 0.42 $ 0.29 $ 1.24 $ 1.05
Cash dividends declared $ 0.165 $ 0.160 $ 0.49 $ 0.48
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
(Dollars in thousands except share and per share data)
<TABLE>
<CAPTION>
Nine months ended
September 30
-----------------------
2000 1999
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,270 $ 6,135
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,158 1,104
Depreciation and amortization 1,325 1,403
Amortization of intangibles 1,376 1,223
Investment securities losses 36 8
Change in loans held-for-sale 1,861 6,507
Change in other assets and liabilities (277) 813
--------- ---------
Net cash provided by operating activities 12,749 17,193
--------- ---------
Cash flows from investing activities:
Change in interest bearing time deposits 1,228 513
Purchases of securities held-to-maturity -- (3,533)
Proceeds from maturities and paydowns
of securities held-to-maturity 4,646 4,759
Purchases of securities available for sale and restricted
Stock (26,747) (134,094)
Proceeds from maturities and paydowns
Of securities available for sale 32,488 45,651
Proceeds from sales of securities available -- 10,697
Net change in loans (69,700) (66,680)
Purchases of premises and equipment (1,489) (3,236)
Cash received from branch acquisitions 42,037 92,535
--------- ---------
Net cash (used) by investing activities (17,537) (53,388)
--------- ---------
Cash flows from financing activities:
Net change in deposits 40,851 (8,633)
Short-term borrowings and FHLB advances (28,944) 10,443
Stock issuance (redemption), net -- (40)
Proceeds of long term debt -- 8,000
Pay-down of long-term debt (343) (1,300)
Cash dividends (3,153) (3,087)
--------- ---------
Net cash provided (used) by financing activities 8,411 5,383
--------- ---------
Net decrease in cash and cash equivalents 3,623 (30,812)
Cash and cash equivalents, beginning of period 41,879 62,884
--------- ---------
Cash and cash equivalents, end of period $ 45,502 $ 32,072
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Dollar amounts in thousands except 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") People's
Trust Company ("People's") ,and their subsidiaries, and its subsidiaries IUB
Capital Trust and IUB Illinois Holding Company and its subsidiary, Capstone Bank
("Capstone") , for interim financial reporting are consistent with the
accounting policies followed for annual financial reporting. Company results
reported herein include the financial position and results of operations of the
Company combined with the financial position and results of operations of
Capstone as if the merger had occurred on January 1, 1999 under the pooling of
interests method. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods reported have
been included in the accompanying unaudited consolidated financial statements
and all such adjustments are of a normal recurring nature.
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 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.
On September 11, 2000 the Company purchased two branch facilities and $43,500 in
deposits from Harrington Bank, Richmond, Indiana. The branches are located in
Marion County and were integrated into Union Bank. The premium paid for the
deposits resulted in $1,458 in intangible assets for Union Bank.
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 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 recorded under 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 issued 1,018,359 shares of its common stock to
the shareholders of First Affiliated Bancorp. The conversion rate was 4.4167
shares of Company stock for each outstanding share of First Affiliated.
Unaudited pro forma results of operations including First Affiliated are as
follows:
6
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
Four Months Three Months Nine Months
Ended Ended Ended
April 30 September 30 September 30
2000 1999 1999
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
Indiana United Bancorp $11,131 $8,189 $22,644
First Affiliated Bancorp 1,570 1,214 3,591
-------------------------------------------------------------------------------------------
Combined $12,701 $9,403 $26,235
-------------------------------------------------------------------------------------------
Net income
Indiana United Bancorp $2,492 $1,850 $5,152
First Affiliated Bancorp 424 (149) 983
-------------------------------------------------------------------------------------------
Combined $2,916 $1,701 $6,135
-------------------------------------------------------------------------------------------
Basic earnings per share
Indiana United Bancorp $.51 $.38 $1.07
First Affiliated Bancorp n/a n/a n/a
-------------------------------------------------------------------------------------------
Combined $.50 $.29 $1.06
-------------------------------------------------------------------------------------------
Diluted earnings per share
Indiana United Bancorp $.51 $.38 $1.07
First Affiliated Bancorp n/a n/a n/a
-------------------------------------------------------------------------------------------
Combined $.50 $.29 $1.05
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
NOTE 4 SECURITIES September 30,2000 December 31,1999
Amortized Fair Amortized Fair
Available for sale Cost Value Cost Value
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal agencies $159,921 $156,534 $163,990 $ 159,822
State and municipal 32,814 31,748 35,167 33,821
Corporate and other securities 31,914 28,384 26,192 24,611
Mortgage-backed securities 49,351 50,311 55,314 54,389
-------- -------- -------- --------
Totals $274,000 $266,977 $280,663 $272,643
======== ======== ======== ========
Held to maturity
State and municipal $12,077 $11,956 $16,753 $16,556
Corporate and other securities 1,078 1,173 1,035 1,076
-------- -------- -------- --------
Totals $13,155 $13,129 $17,788 $17,623
======== ======== ======== ========
</TABLE>
7
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Dollar amounts in thousands except per share data)
<TABLE>
<CAPTION>
NOTE 5 LOANS September 30, December 31,
2000 1999
-------------------------------------------
<S> <C> <C>
Commercial and industrial loans $73,833 $58,071
Agricultural production financing 23,665 22,107
Farm real estate 49,504 47,483
Commercial real estate mortgage 112,746 103,318
Residential real estate mortgage 372,012 331,811
Construction and development 56,900 50,721
Consumer 85,349 87,284
State and political 9,127 9,900
-------- --------
Total loans $783,136 $710,695
======== ========
Non-performing loans 2000 1999
---- ----
Non-accrual loans $3,606 $5,004
Accruing loans contractually past due 90 days
or more as to principal or interest payments 379 892
-------- --------
Total non-performing loans $3,985 $5,896
======== ========
Allowance for loan losses: 2000 1999
---- ----
Balances January 1 $7,718 $6,600
Provision for losses 1,158 1,104
Recoveries on loans 403 391
Loans charged off (684) (704)
-------- --------
Balance, September 30, $8,595 $7,391
======== ========
NOTE 6 DEPOSITS September 30 December 31
2000 1999
---- ----
Non-interest-bearing demand $91,728 $96,144
Interest-bearing demand 228,030 226,392
Savings 135,554 131,134
Certificates and other time deposits $100,000 or more 129,104 107,487
Other certificates and time deposits 440,864 379,748
---------- ---------
Total deposits $1,025,280 $940,905
========== =========
NOTE 7 SHORT-TERM BORROWINGS September 30 December 31
2000 1999
---- ----
Federal funds purchased $ -- $ 13,200
Securities sold under repurchase agreements 13,124 25,487
U.S. Treasury demand notes -- 1,377
-------- --------
Total short-term borrowings $13,124 $ 40,064
========== =========
</TABLE>
8
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
NOTES TO CONSOLIDATED CONDENSED FINANCIAL
STATEMENTS (Dollar amounts in thousands except per share data)
NOTE 8 EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For three months ended
<TABLE>
<CAPTION>
September 30 September 30
2000 1999
---- ----
Weighted Per Weighted Per
Basic earnings per Net Average Share Net Average Share
share: Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Income available
to common
shareholders $2,473 5,873,900 $0.42 $1,701 5,860,378 $.29
Effect of dilutive
shares - 17,278
--------- --------------
Diluted earnings per share: $2,473 5,873,900 $0.42 $1,701 5,877,656 $.29
====== ========= ===== ====== ========= ====
For nine months ended
Basic earnings per share
Income available
To common
shareholders $7,270 5,866,277 $1.24 $6,135 5,812,192 $1.06
Effect of dilutive
securities 7,623 17,278
--------- --------------
Diluted earnings per share: $7,270 5,873,900 $1.24 $6,135 5,829,470 $1.05
====== ========= ===== ====== ========= ====
</TABLE>
NOTE 9 NEW ACCOUNTING PRONOUNCEMENTS
Beginning January 1, 2001 a new accounting standard will require all derivatives
to be recorded at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value changes involving
hedges will generally be recorded by offsetting gains and losses on the hedge
and on the hedged item, even if the fair value of the hedged item is not
otherwise recorded. Adoption of this pronouncement is not expected to have a
material effect on the Corporation's financial results, but the effect will
depend on derivative holdings when this standard is adopted.
9
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Forward-Looking Statements
In addition to historical information, 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
or adoption of accounting standards; 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 could result in meaningful market share. Many larger mid-west
banking companies have had an accelerated program of branch divestitures 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 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 general lines insurance
10
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
business previously managed by Union Bank in Greensburg and Portland, Indiana
is 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 issued 1,018,359 shares of its common stock to
the shareholders of First Affiliated Bancorp. The conversion rate was 4.4167
shares of Company stock for each outstanding share of First Affiliated. Company
results reported herein include the financial position and results of operations
of the Company combined with the financial position and results of operations of
Capstone as if the merger had occurred on January 1, 1999.
On September 11, 2000 the Company purchased two branch facilities and $43,500 in
deposits from Harrington Bank, Richmond, Indiana. The branches are located in
Marion County and were integrated into Union Bank. The premium paid for the
deposits resulted in $1,458 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. Management believes its growth strategies will lead to increased
opportunities and profitability and are in the best interests of shareholders in
the long-term.
Results of Operations
Earnings for the third quarter of 2000 increased 45.4% to $2,473 as compared to
the same quarter of 1999. Earnings for the first nine months of 2000 increased
18.5% to $7,270 as compared to the same period in 1999. Net interest income and
non-interest income both increased while non-interest expense remained
relatively flat for comparable periods disclosed. Per share earnings (diluted)
for the third quarter equaled $.42 in 2000, compared to $.29 in 1999. Per share
earnings (diluted) for the first nine months of 2000 and 1999 were $1.24 and
$1.05 respectively.
The Company's return on average total assets for the third quarter was .86% in
2000 compared to .64% in 1999. Year-to-date return on average assets was .86%
and .75% for 2000 and 1999. Year-to-date return on average shareholders' equity
was 14.19% and 11.52% for 2000 and 1999.
11
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Net Interest Income
The volume and yield of earning assets and the cost of interest-bearing
liabilities influences 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. Third quarter net interest
income of $9,775 in 2000 increased 4.0% from $9,403 in 1999. The first nine
months of net interest income increased by $3,058 or 11.7% over the same period
in 1999. Net interest income, on a tax equivalent basis, reflected as a
percentage of average earning assets (net interest margin) was 3.73% for the
quarter ended September 30, 2000 and 3.66% for the comparable period in 1999.
The comparable figures for the first nine months of 2000 and 1999 were 3.77% and
3.70% respectively.
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
Third quarter non-interest income in 2000 exceeded the prior year by $755 or
45.9%. Non-interest income in the first nine months of 2000 exceeded the prior
year period by $1,142 or 21.4%. The increase in non-interest income is due
primarily to the continued growth of interest-bearing checking accounts, the
standardization of certain deposit service charges across the company's
affiliates, and the full year effect of The Insurance Group in 2000.
<TABLE>
<CAPTION>
Non-Interest income Three months Nine months
Ended Ended
September 30 September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Trust fees $ 97 $103 $341 $350
Insurance commissions 380 251 1,130 702
Mortgage banking income 280 44 614 807
Service charges on deposit accounts 958 858 2,581 2,393
Gain (loss) on sales of securities - 5 (36) (8)
Other income 684 383 1,844 1,088
------ ------ ------ ------
Total $2,399 $1,644 $6,474 $5,332
====== ====== ====== ======
</TABLE>
Non-interest expense
The largest component of non-interest expense is personnel expense. Personnel
expenses increased in the first nine months of 2000 by $1,045 or 8.65% as
compared to the prior year period. Normal staff salary adjustments and increased
benefit costs were incurred in 2000
12
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
as well as the cost of staffing 6 new branches (4 purchased and 2 de novo) and
the addition of The Insurance Group for the full year in 2000.
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 66.89% for the first nine months of 2000 compared to 65.67% for the
same period in 1999.
<TABLE>
<CAPTION>
Non Interest expense Three months ended Nine months ended
September 30 September 30
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Salaries and employee benefits $4,299 $4,594 $13,129 $12,084
Net occupancy expense 565 501 1,561 1,460
Equipment expense 522 507 1,587 1,543
Merger expenses -- -- 440 --
Data processing fees 226 201 746 551
Deposit insurance 49 46 145 138
Intangibles amortization 462 499 1,379 1,268
Stationery, printing & supplies 257 258 684 702
Other expenses 1,699 1,421 4,646 3,983
------ ------ ------- -------
Total $8,079 $8,027 $24,317 $21,729
====== ====== ======= =======
</TABLE>
Income Taxes
The effective tax rate for the first nine months was 29.36% for 2000 and 29.76%
for 1999. The effective tax rate is less than the statutory rate due primarily
to tax-exempt income and the combination of Capstone Bank which was an
S-Corporation prior to merger. The Company and its subsidiaries will file
consolidated income tax returns for 2000.
Financial Condition
Total assets at September 30, 2000 increased $64,369 since the end of 1999.
Average earning assets represented 93.43% of average total assets for the first
nine months of 2000 compared to 92.69% for the same period of 1999. Average
loans represented 77.50% of average deposits in the first nine months of 2000
and 72.20% 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 66.85% and 64.48% for the nine-month periods
ended September 30, 2000 and 1999 respectively.
The increase in deposits of $84,375 from December 31, 1999 to September 30, 2000
is due primarily to the acquisition of the two branch facilities in September
2000 and more aggressive pricing to support current loan growth. As a result of
the increase in deposits, both FHLB advances and short-term borrowings,
primarily federal funds purchased and repurchase agreements, were reduced.
13
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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. Further reductions
were made in June 2000 as part of the scheduled repayment plan.
Shareholders' equity was $73,272 on September 30, 2000 compared to $68,172 on
December 31, 1999. Book value per common share increased to $12.47 or 7.13% from
$11.64 at year-end 1999. The unrealized loss on securities available for sale,
net of taxes, totaled $4,097 or $.70 per share at September 30, 2000 compared to
an unrealized loss of $5,094 or $.87 per share at December 31, 1999. Excluding
the net unrealized gains and losses on securities available for sale, book value
per share would be $13.17 at September 30, 2000 or an increase of 5.28% over the
comparable book value at year-end 1999.
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 charge offs.
The Company's conservative loan underwriting standards have historically
resulted in higher loan quality and lower levels of net charge-offs than peer
bank averages. The Company also believes credit risks may be elevated if undue
concentrations of loans are made in specific industry segments and to out of
area borrowers. 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 $72,441 or 10.19% since December 31, 1999 spread across
the variety of loans in which the Company participates. The greatest increase is
in the residential mortgage
14
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
loan portfolio as more mortgage loan originations are placed in the Company's
portfolio to deploy the deposits gained.
Residential real estate loans continue to represent a significant portion of the
total loan portfolio. Such loans represented 47.50% of total loans at September
30, 2000 and 46.69% at December 31, 1999.
Commercial and industrial loans increased 27.14% while construction and
development loans increased 12.18% from year-end 1999 to September 30, 2000.
On September 30, 2000, the Company had $3,020 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. This
practice has now been implemented at all affiliates. Loans held for sale are
carried at the lower of cost or fair value and are generally sold with servicing
rights retained.
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 $1,158 in the first nine months of 2000
compared to $1,104 for the same period in 1999. Net charge-offs were $281 for
the first nine months of 2000 compared to $313 for the comparable period in
1999. On an annualized basis as a percentage of average loans, net charge-offs
equaled .05% and .06% respectively for the nine-month period ended September 30,
2000 and 1999. In prior years, the Company outperformed its peer group's net
charge-off average and that trend is expected to continue in 2000. Management is
not aware of any trend that is likely to cause the level of net charge-offs in
2000 to materially exceed the level of charge-offs experienced in 1999.
Foreclosed real estate held by the Company at September 30, 2000 was $255 and
$339 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.
15
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 September 30, 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. During the third quarter
of 2000, both Union Bank and People's Trust formed investment subsidiaries.
These subsidiaries now hold a large portion of both Union's and People's
investment portfolios. They were formed with the intent to enhance the
organization's tax position.
As of September 30, 2000, $266,977 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 $7,023 was
recorded to adjust the AFS portfolio to current market value at September 30,
2000, compared to an unrealized pre-tax loss of $8,020 at December 31, 1999.
Sources of Funds
The Company relies primarily on customer deposits, securities sold under
agreement to repurchase ("repurchase agreements") and shareholders' equity to
fund earning assets. FHLB advances and federal funds purchased are also used to
provide additional funding.
Deposits generated within local markets provide the major source of funding for
earning assets. Total average deposits funded 92.33% and 92.80% of total average
earning assets at September 30, 2000 and December 31,1999. Average
interest-bearing deposits were 90.39% and 90.29% of average total deposits for
the periods ending September 30, 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.
Short-term borrowings and FHLB advances decreased $28,944 or 44.84% from
year-end 1999 primarily due to the increase in deposits during the quarter.
Capital Resources
Total shareholders' equity increased $5,100 to $73,272 at September 30, 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
16
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 September 30, 2000, Tier 1 capital to total
average assets was 6.49%. Tier 1 capital to risk-adjusted assets was 9.72%.
Total capital to risk-adjusted assets was 10.87%. All three ratios 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 $.49 per share in the first
nine months of 2000 compared to $.48 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 relatively stable and low-cost
funds generated within local markets.
Management believes the Company has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. In
addition, the affiliates have access to the Federal Home Loan Bank for borrowing
purposes. The Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
Interest Rate Risk
At September 30, 2000, the Company held approximately $506,632 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.
17
<PAGE>
INDIANA UNITED BANCORP
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
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 September 30, 2000 from the
analysis and disclosures provided in the Corporation's Form 10-Q for the period
ended June 30, 2000.
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)
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
November 14, 2000
/s/ James L. Saner, Sr.
-----------------------------------
James L. Saner, Sr.
President and Chief Executive Officer
November 14, 2000
/s/ Donald A. Benziger
-----------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
21
