-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LchRHO+TYzlBrUOenUNiXOh4RTQklyS38pUt1bAzcbYDS4D32x7iVnmkvdC7wyLK Q7kxDKn9sRZYRbVpXWMMjA== 0000720002-97-000002.txt : 19970401 0000720002-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000720002-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDIANA UNITED BANCORP CENTRAL INDEX KEY: 0000720002 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 351562245 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-12422 FILM NUMBER: 97569299 BUSINESS ADDRESS: STREET 1: 201 N BROADWAY STREET 2: PO BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 BUSINESS PHONE: 8126634711 MAIL ADDRESS: STREET 1: 201 NORTH BROADWAY STREET 2: P O BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1996 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 (I.R.S. Employer incorporation or organization) Identification No.) 201 North Broadway Greensburg, Indiana 47240 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (812) 663-4711 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common shares, no-par value (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x 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 The aggregate market value (not necessarily a reliable indication of the price at which more than a limited number of shares would trade) of the voting stock held by non-affiliates of the registrant was $25,678,500 as of March 20, 1997. As of March 20, 1997, there were outstanding 1,250,897 common shares, without par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Into Which Incorporated 1996 Annual Report to Shareholders Part II (Items 5 through 8) Definitive Proxy Statement fo Annual Meeting of Shareholders to be held May 20, 1997 Part III (Items 10 through 13) EXHIBIT INDEX: Page 9
FORM 10-K TABLE OF CONTENTS Page Part I Item 1 - Business 3 Item 2 - Properties 6 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders 6 Part II Item 5 - Market For the Registrant's Common Equity and related Stockholder Matters 6 Item 6 - Selected Financial Data 6 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 8 - Financial Statements and Supplementary Data 7 Item 9 - Disagreements on Accounting and Financial Disclosure 7 Part III Item 10 - Directors and Executive Officers of the Registrant (See below) Item 11 - Executive Compensation (See below) Item 12 - Security Ownership of Certain Beneficial Owners and Management (See below) Item 13 - Certain Relationships and Related Transactions (See below) Part IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 8 Signatures 10
Pursuant to General Instruction G, the information called for by Items 10, 11, 12 and 13 is omitted by Indiana United Bancorp since Indiana United Bancorp will file with the Commission a definitive proxy statement pursuant to regulation 14A not later than 120 days after the close of the fiscal year containing the information required by Items 10, 11, 12 and 13. PART I ITEM 1. BUSINESS. General Indiana United Bancorp ("Company") was initially formed in Owensboro, Kentucky, in 1982 as First Commonwealth Bancorp. The Company reincorporated under the laws of the State of Indiana under its present name in 1983, and relocated in Greensburg, Indiana, in anticipation of acquiring Union Bank and Trust Company of Greensburg. In 1987, Peoples Bank in Portland, Indiana was acquired and as of December 31, 1991, Regional Federal Savings Bank, New Albany, Indiana ("Regional Bank") was acquired. Effective July 1, 1994, the Company merged Union Bank and Trust Company of Greensburg into Peoples Bank, Portland, and renamed the combined bank, Union Bank and Trust Company of Indiana ("Union Bank"). Through these subsidiaries ("Banks"), the Company operates twelve offices with 143 full-time equivalent employees in eastern and southern Indiana. As of December 31, 1996, the Company had consolidated assets of $328 million, consolidated deposits of $276 million and shareholders' equity of $28 million. Through its subsidiaries, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agri-business and real estate mortgage loans; issuing credit cards; renting safe deposit facilities; providing general agency personal and business insurance services; providing personal and corporate trust services; and providing other corporate services such as payroll processing, letters of credit and repurchase agreements. Currently, national retailing and manufacturing subsidiaries, brokerage and insurance firms, and credit unions are fierce competitors within the financial services industry. The relaxation of regulatory constraints as to geographic expansion has also intensified competition among more traditional providers of banking services. The permissibility of banks and bank holding companies to acquire thrift institutions will undoubtedly further redefine the competitive marketplace. The Company's subsidiaries are located in non-metropolitan areas and their business is centered in loans and deposits generated within markets considered to be largely rural in nature. In addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies located within their service areas, they also compete, directly and indirectly, with all providers of financial services. Employees As of December 31, 1996, the Company and its subsidiaries had approximately 143 full-time equivalent employees to whom it provides a variety of benefits and with whom it enjoys excellent relations. Regulation and Supervision of the Company The Company is a bank holding company ("BHC") within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"). This Act subjects BHCs to regulations of the Federal Reserve Board ("FRB") and restricts the business of BHCs to banking and related activities. In addition, Indiana United is a nondiversified unitary savings and loan holding company subject to regulations, examinations, supervision and reporting requirements of the Office of Thrift Supervision ("OTS"). Under the BHCA, a BHC is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of voting stock of any company which is not a bank or engaging in any activity other than managing or controlling banks. A BHC may, however, own shares of a company engaged in activities which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Acquisitions by the Company of banks and savings associations are subject to federal and state regulation. Any acquisition by the Company of more than five percent of the voting stock of any bank requires prior approval of the FRB. Acquisition of savings associations is also subject to the approval of the OTS. Indiana law permits BHCs to acquire BHCs and banks out of state on a reciprocal basis, subject to certain limitations. Under current law, the Company may acquire banks, and may be acquired by BHCs, located in any state in the United States which permits reciprocal entry by Indiana BHCs. Under the BHCA, BHCs may acquire savings associations without geographic restrictions. A BHC and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with the extension of credit, lease or sale of property, or the provision of any property or service. The Company is under the jurisdiction of the Securities and Exchange Commission ("SEC) and state securities commission for matters relating to the offering and sale of its securities. The Company is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Company's income is principally derived from dividends paid on the common stock of its subsidiaries. The payment of these dividends is subject to certain regulatory restrictions. Under FRB policy, the Company is expected to act as a source of financial strength to, and commit resources to support, its affiliates. As a result of such policy, the Company may be required to commit resources to its affiliate banks in circumstances where it might not otherwise do so. Regulation and Supervision of the Subsidiary Banks Union Bank is supervised, regulated and examined by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Regional Bank is supervised, regulated and examined by the OTS. A cease-and-desist order may be issued against the banks, if the respective agency finds that the activities of the bank represents an unsafe and unsound banking practice or violation of law. The deposits of Union Bank are insured by the Bank Insurance Fund ("BIF") of the FDIC. The deposits of Regional Bank are insured by the Savings Association Insurance Fund ("SAIF") of the FDIC. The FDIC has the authority to change premiums twice per year. Commencing in 1997 through 1999, thrift institutions will pay approximately five times higher assessment rates than commercial banks (6.44 cents versus 1.29 cents per $100). After the three year period, BIF and SAIF-insured institutions will pay the same assessment rate of 2.43 cents per $100 of deposits. Based on Current deposit levels, Union Bank deposit insurance expense will increase approximately $22,000 and Regional Bank will save approximately $155,000 compared to the assessment rates paid in 1996 as a result of these changes. Branching by banks in Indiana is subject to the jurisdiction, and requires the prior approval, of the bank's or savings bank's primary federal regulatory authority and, if the branching bank is a state bank, of the DFI. Under Indiana law, the banks may branch anywhere in the state. The Company is a legal entity separate and distinct from its subsidiary Banks. There are various legal limitations on the extent to which the Banks can supply funds to the Company. The principal source of the Company's funds consists of dividends from its subsidiary Banks. State and Federal law restrict the amount of dividends which may be paid by banks and savings banks. In addition, the Banks are subject to certain restrictions on extensions of credit to the Company, on investments in the stock or other securities of the Company and in taking such stock or securities as collateral for loans. Legislation The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA") represented a comprehensive and fundamental change to banking supervision and mandates the development of additional regulations governing almost every aspect of the operations, management and supervision of banks and BHCs. FDICIA also included several supervisory reforms related to the frequency of regulatory examinations and audit requirements. FDICIA also required the adoption of safety and soundness standards on matters such as loan underwriting and documentation, and compensation and other employee benefits; mandated consumer protection disclosures with respect to deposit accounts; and the establishment of a risk-based deposit insurance system. To date, many of the provisions of FDICIA have been implemented. FDICIA requires banking regulators to take prompt corrective actions with respect to depository institutions that fall below certain capital levels and prohibit any depository institution from making a capital distribution that would cause it to be considered undercapitalized. Banking regulators were also required to revise their capital standards to take into account interest rate risk. A policy statement has been proposed providing a supervisory framework to measure and monitor interest rate risk at individual banks. Banks may use an internal model which provides a measure of the change in a bank's economic value. The results of the supervisory and internal models would be one factor regulators will consider in their assessment of capital adequacy. Other factors will also be considered. Certain regulations define relevant capital measures for five capital categories. A "well capitalized" institution is one that has a total risk- based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a leverage ratio of at least 5% and is not subject to regulatory direction to maintain a specific level for any capital measure. An "adequately capitalized" institution is one that has ratios greater than 8%, 4% and 4%. An institution is "undercapitalized" if its respective ratios are less than 8%, 4% and 4%. "Significantly undercapitalized" institutions have ratios of less than 6%, 3% and 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity to total assets that is 2% or less. Institutions with capital ratios at levels of "undercapitalized" or lower are subject to various limitations which, in most situations, will reduce the competitiveness of the institution. The Riegle Community Development and Regulatory Improvement Act of 1994 ("Act") was signed into law in 1994. The Act contains seven titles pertaining to community development and home ownership protection, small business capital formation, paperwork reduction and regulatory improvement, money laundering and flood insurance. No regulations have yet been approved. In September, 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Branching Act") was enacted. In general, the Branching Act permits BHCs that are adequately capitalized and adequately managed to acquire banks located in any other state after September 1995, subject to certain total deposit limitations. The Branching Act permits full interstate branching after June 1, 1997. States may elect to prohibit interstate branching and merger transactions if they enact legislation before June 1, 1997 that applies equally to all out-of-state banks and expressly prohibits mergers involving out-of-state banks. The monetary policies of regulatory authorities have a significant effect on the operating results of banks and BHCs. The nature of future monetary policies and the effect of such policies on the future business and earnings of the Company and its subsidiaries cannot be predicted. The Deposit Insurance Funds Act was enacted in 1996 and contained several major provisions. The new law recapitalized the SAIF by a one-time assessment on all SAIF-insured deposits. For 1997 through 1999 the banking industry will help pay for the Financing Corp. ("FICO") bond interest payments at an assessment rate that is one-fifth the rate paid by thrifts. Beginning January 1, 2000, the FICO interest payments will be paid pro-rata by banks and thrifts. Deposit shifting is prohibited for three years and the $2,000 annual minimum deposit insurance assessment were repealed. The BIF and SAIF will be merged on January 1, 1999 providing a law is passed by that date merging the bank and thrift charters. In addition, there were more than forty regulatory relief provisions in this bill. Capital Requirements The Company and its subsidiary Banks must meet certain minimum capital requirements mandated by the FRB, FDIC, OTS and DFI. These regulatory agencies require BHCs and banks to maintain certain minimum ratios of primary capital to total assets and total capital to total assets. The FRB requires BHCN to maintain a minimum Tier 1 leverage ratio to 3 percent capital to total assets; however, for all but the most highly rated institutions which do not anticipate significant growth, the minimum Tier 1 leverage ratio is 3 percent plus an additional cushion of 100 to 200 basis points. As of December 31, 1996, the Company's leverage ratio of capital to total assets was 8.33 percent. The FRB, OTS and FDIC each have approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company and its subsidiaries had capital to assets ratios and risk-adjusted capital ratios at December 31, 1996, in excess of the applicable regulatory minimum requirements. ITEM 2. PROPERTIES. Indiana United Bancorp owns no physical properties and has no need for space other than is available at the offices of its subsidiaries. Its subsidiaries own, free of encumbrances, all of the facilities from which they conduct business, except for a portion of the land upon which the Union Bank has constructed its principal office and drive-in facility in Portland, which is under long term lease arrangements and the IGA supermarket branch in Greensburg. The Company is considering relocating certain Union Bank branches and intends to relocate the Grantline Branch of Regional Bank. Relocating the Grantline Branch and the possibility of relocating certain Union Bank branches is intended to increase visibility, enhance drive-thru banking and ATM accessibility and improve ingress and egress. The Company has 12 locations of which Union Bank has 9 locations and Regional Bank has 3 locations. At December 31, 1996, the Company had $5,919,000 invested in premises and equipment. ITEM 3. LEGAL PROCEEDINGS. The subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of business. Management is presently not aware of any such claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted during the fourth quarter of 1996 to a vote of security holders, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information required under this item is incorporated by reference to the inside back cover of the Company's Annual Report to Shareholders, Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA. The information required under this item is incorporated by reference to page 4 of the Company's Annual Report to Shareholders, Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required under this item is incorporated by reference to pages 4 through 16 of the Company's Annual Report to Shareholders, Exhibit 13. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements and supplementary data required under this item are incorporated herein by reference to pages 17 through 27 of the Company's Annual Report to Shareholders, Exhibit 13. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. In connection with its audits for the two most recent fiscal years ended December 31, 1996, there have been no disagreements (as defined in Item 4(b) of Form 8-K) with the Company's independent certified public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Annual Report Form 10-K Page Number Page Number (a)1. Financial statements Indiana United Bancorp and Subsidiary Independent auditor's report 17 28 Consolidated balance sheet at December 31, 1996 and 1995 18 29 Consolidated statement of income, years ended December 31, 1996, 1995 and 1994 19 30 Consolidated statement of cash flows, years ended December 31, 1996, 1995 and 1994 20 31 Consolidated statement of changes in shareholders' equity, years ended December 31, 1996, 1995 and 1994 21 32 Notes to consolidated financial 21-27 32-38 financial statements 21-27 32-38 (a)2. Financial statement schedules All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes. (a)3. Exhibits: 3.1 Articles of Incorporation (incorporated by reference to Registrant's Registration Statement on Form S-1 (Registration No. 33-06334), filed June 16, 1986, Exhibit 3.1), as amended by Articles of Incorporation and that certain Statement of Designation of Rights and Preferences of Series M-1987 Preferred Shares of Registrant (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1987, Exhibit 3(c) and Exhibit 3(d), Commission File No.0- 12422) 3.2 Bylaws of the Registrant (incorporated by reference to the Registrant's annual Report on Form 10-K for the fiscal year ended December 31, 1992, Exhibit 3.2, Commission File No. 0-12422) 10.1 Loan Agreement dated December 31, 1991 between Registrant and Merchants National Bank and Trust Company, Indianapolis, Indiana (incorporated by reference to the Registrants' Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Exhibit 10.1, Commission File No. 0-12422) 10.2 Employment Agreement dated as of July 1, 1989 between Registrant's subsidiary, Regional Federal Savings Bank, and director and executive officer Robert E. Kleehamer, as amended by that Amendment to Employment Agreement dated as of September 19, 1991 (incorporated by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991, Exhibit 10.2, Commission File No. 0-12422) 13 1996 Annual Report to Shareholders (except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Shareholders is provided solely for the information of the Securities and Exchange Commission and is not deemed "filed" as part of this Form 10-K) 10-41 21 List of subsidiaries of the Registrant 42 23 Consent of Geo. S. Olive & Co. LLC 43 27 Financial Data Schedule 44 (b) Reports on Form 8-K No reports on Form 8-K were filed for the three months ended December 31, 1996
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26th day of March, 1997. INDIANA UNITED BANCORP By /s/ Robert E. Hoptry Robert E. Hoptry, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities with the Company and on the dates indicated.
Signature Capacity Date /s/ William G. Barron Director March 26, 1997 William G. Barron /s/ Jay B. Fager Treasurer March 26, 1997 Jay B. Fager [Chief Financial Officer] /s/ Philip A. Frantz Director March 26, 1997 Philip A. Frantz /s/ Glenn D. Higdon Director March 26, 1997 Glenn D. Higdon /s/ Robert E. Hoptry Chairman of the March 26, 1997 Robert E. Hoptry the Board and President [Chief Executive Officer] /s/ Martin G. Wilson Director March 26, 1997 Martin G. Wilson /s/ Edward J. Zoeller Director March 26, 1997 Edward J. Zoeller
EX-13 2 FRONT COVER World class banking . . . . . . hometown service Indiana United Bancorp 1996 Annual Report
INSIDE FRONT COVER Contents Financial Highlights 1 Message to Shareholders 2 Management's Discussion and Analysis 4 Report of Management on Responsibility for Financial information 17 Report of Independent Certified Public Accounts 17 Financial Statements 18 Notes to Financial Statements 21 Management Directory 28 Shareholder Information IBC
Indiana United Bancorp ("Company") is a registered bank holding company incorporated under the laws of Indiana in 1983, commensurate with its acquisition of Union Bank and Trust Company of Greensburg, Indiana. The Company acquired The Peoples Bank, Portland, Indiana in 1987, and Regional Federal Savings Bank, New Albany, Indiana ("Regional Bank") at the end of 1991. Union Bank and Trust Company of Indiana ("Union Bank") was created by the consolidation of the Greensburg and Portland operations in 1994. It's history traces back to 1873, and it holds Indiana state banking charter #1. As of December 31, 1996, Union Bank held assets totaling $221 million and through its nine banking offices, ranked first in market share in Decatur County and second in Jay County. Regional Bank's assets totaled $107 million, held by three banking offices in Floyd and Clark counties. Both subsidiaries offer competitive commercial and consumer loan and deposit related services. Union Bank also operates general line insurance agencies in both Decatur and Jay counties and offers a broad range of personal and business trust services.
Financial Highlights (Dollar amounts in thousands, Percent except per share data) 1996 1995 Change For the Year Net interest income $11,961 $10,983 8.9 Provision for loan losses 150 30 400.0 Net income 2,693 2,529 6.5 Common dividends paid 1,038 863 20.3 Per Common Share Net income $2.11 $1.91 10.5 Dividends paid .83 .69 20.3 Book value - end of period Excluding SFAS No. 115 adjustment 22.11 20.83 6.1 Including SFAS No. 115 adjustment 22.18 20.98 5.7 Market price - end of period 29.06 25.00 16.2 At Year End Total assets $328,346 $313,067 4.9 Total loans 219,483 201,355 9.0 Allowance for loan losses 2,506 2,754 (9.0) Total deposits 276,402 262,346 5.4 Long-term debt 5,000 6,000 (16.7) Preferred stock 2,000 Shareholders' equity 27,749 28,245 (1.8) Financial Ratios Return on average assets .85% .82% 3.7 Return on average common shareholders' equity 9.86 9.71 1.5 Allowance for loan losses to total loans (year end) 1.14 1.37 16.8) Shareholders' equity to total assets (year end) 8.45 9.02 (6.3) Tier 1 capital to total assets 8.33 8.84 (5.8) Total capital to risk- adjusted assets 15.60 16.57 (5.9) Number of common shares outstanding 1,250,897 1,250,897 Number of common shareholders 1,438 1,452 (1.0) Number of full-time equivalent employees 143 154 (7.1)
WORLD CLASS BANKING . . . HOMETOWN SERVICE [Picture of Robert Hoptry] _____________________________________ " . . . . our vision of world class banking is quickly becoming a reality within the communities we serve." _____________________________________ Dear Shareholders and Friends: If my message included a headline, it would be: Indiana United Bancorp Exceeded Every Significant Performance Objective It Targeted For 1996. Our performance steadily improved throughout the year, and finished with a strong fourth quarter. And like most strong finishes, it was shaped by a well-conceived strategy, nurtured by a dedicated and focused management team. A significant event reducing 1996 income was the passage of legislation in the third quarter which materially diminishes the disparate laws and regulations between the thrift and banking industries. This legislation provided for one-time assessments to the thrift industry to recapitalize the deposit insurance fund and to standardize the tax accounting treatment between banks and thrifts for the reserve for loan losses. As a result, Regional Bank's 1996 after-tax earnings were reduced by $474,000, or $.38 per common share. However, deposit insurance premiums are greatly reduced in 1997 and beyond and we are very pleased this long-awaited legislation was finally enacted. These one-time charges are reflected in financial data throughout the pages that follow in this report, so my discussion of our performance will focus on normalized operating results, excluding the effect of these charges. On this basis, net income increased by 25.3%, fueled by a 23 basis point gain in our net interest margin. Net income was also favorably impacted by improving our efficiency ratio from 66.24% to 59.97% Return on average assets gained 18 basis points while return on average equity increased from 9.71% to 11.58% While these ratios do not yet meet our long-term expectations, we are pleased that 1996 provided the second consecutive year of progress toward long-term objectives since we refocused the Company in 1994. This performance translates to net earnings of $2.49 per common share and represents an increase of 30.4% over 1995. Dividends in 1996 increased from $.69 to $.83 per share, marking the eighth consecutive year dividends have increased by 15% or more. The Company redeemed the remaining $2,000,000 of its preferred stock in 1996, allowing all future earnings to accrue exclusively to common shareholders. During the first quarter, deposits and loans reflected larger than normal seasonal declines. Thereafter, balance sheet growth exceeded our projections. Deposit growth was propelled by our new Foundation account, an above-market interest-bearing checking account that accesses other products and services at reduced or fully waived fees. Loan growth reflected gains in commercial lending at Union Bank and non-real estate consumer lending at Regional Bank. These "Growing Relationships" are expected to continue in 1997. At Indiana United, technology remains a high priority, and several hundred thousand dollars are budgeted for technology investment in 1997. During the first six months, this investment will improve transaction response times and increase the power and memory of our data systems. Later in the year, customers will also benefit from improved deposit statements, additional ATMs and a new automated voice response system. Future years are likely to include similar investments in technology, targeted primarily at improving and expanding the ways in which products and services are accessed by our customers. This focus on technology will enhance the personal service upon which our community banking philosophy is so deeply rooted. Unlike many of the large super regional banks which are closing branches in record numbers, we believe it is important to maintain community banking centers staffed with local lenders, tellers and deposit service personnel. This commitment to service excellence sets us apart from many of our competitors. When combined with our technological expansion, our vision of world class banking is quickly becoming a reality within the communities we serve. In November, Stifel, Nicolaus and Company, Inc. became a market maker in Indiana United shares. Based in St. Louis, this highly regarded investment firm specializes in bank and thrift stocks. We look forward to the advantages of this expanded distribution base in Indiana United shares and are complimented by their confidence in our financial future. In response to shareholder requests, I am pleased to report that Indiana United will introduce an automatic dividend reinvestment plan during the first quarter. This plan offers an excellent opportunity to acquire additional shares without incurring brokerage commissions or other charges. Most economists agree an economy comprised of modest growth and subdued inflation is sustainable throughout 1997. Such an outlook suggests interest rates will fluctuate within a narrow range throughout the year. Indiana United is well positioned to prosper in such an environment. But more importantly, even if interest rate volatility is greater than currently forecast, our risk aversion and liquidity strategies should still provide improved earnings. I believe 1997 will be a very important year in Indiana United's history, with the potential to add significantly to shareholder value. Management's Discussion and Analysis (Table Dollar Amounts in Thousands) Forward-Looking Statements Except for historical information contained herein, the discussion in this Annual Report includes certain forward-looking statements based upon management expectations. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the costs of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; and changes in the quality or composition 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 The Company operates under the broad tenets of a long-term strategic plan ("Plan") designed to improve the Company's financial performance, expand its competitive ability and enhance long-term shareholder value. The Plan is premised on the belief of the Company's board of directors that the Company can best promote long-term shareholder interests by pursuing strategies which will continue to preserve it's community-focused philosophy. In conformance with the Plan, during 1994, the Company consolidated the operations of its two commercial banking subsidiaries to form Union Bank, and sold three underperforming branches of Regional Bank. The Company believes each of those actions increased its operating efficiency and the latter improved its net interest margin. The Plan also focused on improving net interest margin by reducing the Company's dependence on expensive, non-core deposits. During 1995, the Company initiated actions intended to build a stronger customer base in its primary markets. The Company invested approximately $500,000 to renovate Regional Bank's main office, providing direct lobby access of all deposit and loan service personnel, and greatly improving drive-up and electronic banking services. Unlike many of the large super regional banks, which are closing branches in record numbers, the Company believes it is important to maintain community banking centers. Accordingly, an additional $500,000 was invested to create two new branch offices. The Allison Lane branch in Jeffersonville was opened by Regional Bank to provide greater access to present and prospective customers in Clark County. Union Bank opened the IGA supermarket branch in Greensburg, exclusively providing seven- day banking and extended hours to the community. In an effort to make its services more accessible and convenient, the Company intends to relocate the Grantline Branch of Regional Bank. The Company is also considering the relocation of certain Union Bank branches. These potential changes will increase visibility, enhance drive-thru banking and ATM accessibility, and improve ingress and egress. A continuing tenet of the Plan is to establish and cultivate more proactive relationships with financial analysts and market makers in the Company's stock. As a result of our relationship-building efforts, Stifel, Nicolaus & Company, Incorporated, based in St. Louis, Missouri, became a market maker in Indiana United Bancorp shares in November, 1996, joining current market makers J.J.B. Hilliard/W.L. Lyons, Inc. and NatCity Investments, Inc.. The Company initiated a sales philosophy in 1995 supported by a performance- based employee incentive program. The initial phase of this program included sales training for all customer service personnel. In 1996, sales training evolved to encompass all customer contact personnel. Customer service personnel have now received advanced training, and have become more effective in cross-selling techniques. The performance-based employee incentive program earned over $121,000 in 1996 for employees engaged in all facets of the Company. During 1996, many technological improvements were initiated. Certain of these improvements, such as upgrading communication lines, have provided faster response time for customer transactions. Others represent capital investments which allow the Company to continue to effectively compete within a financial services industry that is becoming increasingly dependent upon technology. In 1997, several hundred thousand dollars are budgeted for additional technology enhancements, such as an automated voice response information system, additional ATMs, laser printed deposit statements, optical disk storage, and an increase in the power and memory of the AS400 computer system which will allow for improved efficiency in the management of computer resources. The dynamics of the Plan assure continually evolving goals, and the extent of the Company's success will depend upon how well it anticipates and responds to competitive changes within its markets, the interest rate environment and other external forces. Results of Operations Annual net income ranged between $2,529,000 and $2,870,000 for the past three years. Significant non-recurring items impacted net income in 1994 and 1996. In 1994, earnings included a $1,229,000 gain on the sale of three under- performing Regional Bank branches and a loss of $154,000 on the sale of securities. These non-recurring items resulted in additional net income of $650,000. The Federal omnibus spending package enacted on September 30, 1996, together with companion legislation enacted earlier in the year, resulted in a $474,000 reduction of 1996 net income. The legislation imposed a special assessment on thrift institutions to recapitalize the Savings Association Insurance Fund ("SAIF"), resulting in a pre-tax charge of $545,000. Additionally, a tax advantage thrift institutions enjoyed in the calculation of allowable tax bad debt reserves was substantially eliminated (see heading "Income Taxes" for further discussion). Excluding these non-recurring charges, net income for 1996 was $3,166,727, a 25% increase over the prior year. There were no significant non-recurring income or expense items in 1995. Non-interest income in 1996 reflects a decline in insurance commissions due mainly to lower levels of profit sharing received from participating companies based on claims experience for the year. Trust income and service charge income increased over the prior year. Non-interest expense reflects reduced Federal Deposit Insurance Corporation ("FDIC") assessments, excluding the special assessment mentioned previously, due to a lower deposit insurance assessment rate. Professional fees increased in 1996 as compared to the prior year. Net income per common share from recurring operations equaled $2.49 in 1996, compared to $1.91 in 1995, and $1.58 in 1994. Including the FDIC special assessment and bad debt recapture, 1996 earnings equaled $2.11 per share. The gain realized on the sale of Regional Banks branches increased 1994 earnings per share by $0.59. The Company's return on average total assets was .85% in 1996, .82% in 1995, and .86% in 1994. Excluding non-recurring charges, return on average assets for 1996 was 1.00%. Return on average common shareholders' equity during these three years was 9.86%, 9.71%, and 12.18%, respectively. Excluding non-recurring charges, return on average common shareholders' equity for 1996 was 11.58%. Net Interest Income Net interest income is influenced by the volume and yield of earning assets and the cost of interest-bearing liabilities. Net interest margin reflects the mix of interest-bearing and noninterest-bearing liabilities that fund earning assets, as well as interest spreads between the rates earned on these assets and the rates paid on interest-bearing liabilities. Net interest income of $12,056,000 in 1996 increased 9% from $11,095,000 in 1995, which was 3% below 1994 (see Tables 2 and 5). Throughout 1996, the Company employed a deposit-pricing strategy focused on retaining and attracting lower cost short-to-moderate term funds. Management correctly anticipated a relatively flat rate environment throughout 1996 and into 1997. The Company believes this strategy greatly enhanced 1996 net interest income and will also have a positive effect on 1997 earnings. Although many of the Company's peer group competitors reported flat or marginally changed net interest margins for the full year 1996, the Company increased its net interest margin by 23 basis points. Since year-end 1993, the Company has increased its net interest margin by 48 basis points. The changes in interest income and interest expense resulting from changes in volume and rate are summarized in Tables 2 and 3. Variances have been allocated on the basis of the absolute relationship between volume and rate. Provision for Loan Losses This topic is discussed under the heading "Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses". Non-interest Income Non-interest income normalized in 1996 and 1995 after benefiting from a gain of $1,229,000 from the sale of branches in 1994. Non-interest income in 1996 exceeded 1995 by $45,000 or 3%. Excluding the sale of branches, non- interest income in 1995 exceeded 1994 by $98,000 or 7%. There were no security gains or losses in 1996, versus a $16,000 gain in 1995 and a loss of $154,000 in 1994. Insurance commissions continue to represent the largest component of recurring non-interest income, equaling 29%, 32% and 37% in 1996, 1995 and 1994. Declines of $36,000 and $71,000 in 1995 and 1994 primarily reflected reorganization and relocation disruptions of insurance operations in Jay County. The current year decline of $35,000 represents the loss of year-end profit sharing programs from primary carriers due to 1996 claims experience. Trust income increased $43,000 over 1995, fueled by a $12,000 increase in estate income and a strong stock market in 1996. The level of estate assets administered may cause trust income to fluctuate significantly from year to year. Service charges on deposit accounts increased in 1996 by $70,000, or 16%, primarily due to the strong growth in a new interest-bearing checking account introduced in early 1996. Service charges on deposit accounts decreased in both 1995 and 1994 compared to prior years. Deposit growth and interest rate variables also affected service charge income in 1996. It is anticipated that in 1997 the Company will experience additional deposit growth, generating even higher service charge income. Non-interest Expense The largest component of non-interest expense is personnel expense. Personnel expenses increased in 1996 by $15,000, or less than 1%, after declining by $86,000 in 1995. The average number of full-time equivalent employees in 1996 was four persons less than the average 1995 staffing level, which was fifteen persons less than 1994. Improvements in technology implemented throughout 1996 enabled the Company to effectively control staffing levels. Normal staff salary adjustments and increased benefit costs were incurred in both 1996 and 1995, including $121,000 and $53,000 in 1996 and 1995, respectively, earned by employees in connection with the performance incentive compensation plan. Although certain employee benefit costs increased in 1996, health care benefit costs decreased. Personnel expenses in 1997 are not expected to change materially from 1996. Deposit insurance, excluding the $545,000 special assessment, was $205,000 less in 1996 than the prior year, due to a lower rate on which the insurance premium was calculated. In mid 1995, the FDIC reduced deposit insurance premiums paid by soundly managed banks, including Union Bank, by 83%. Since the bank insurance fund reached a mandated funding level in 1995, the assessment rate for the Company's commercial bank was further reduced to the $2,000 minimum level permissible in 1996. After two long years of debate, Congress finally agreed to a legislative package to adequately capitalize the SAIF. This legislation was included in the Federal omnibus spending package enacted on September 30, 1996. It required the thrift industry to recapitalize the SAIF with a one-time assessment and delayed a pro rata sharing of the Financing Corp. bond interest payments for three years. The one-time assessment imposed on Regional Bank equaled approximately $545,000. For the next three years, thrift institutions will pay approximately five times higher assessment rates than commercial banks (6.44 cents versus 1.29 cents per $100 of deposits), but this is a significant reduction from the 23 cents per $100 of deposits assessed prior to September 30, 1996. After the three year period, commercial banks and thrifts will pay the same assessment rate of 2.43 cents per $100 of deposits. Based on current deposit levels and projected growth, Regional Bank will save approximately $540,000 in the next three years due to the lower assessment rate. Income Taxes On August 20, 1996 President Clinton signed into law the Small Business Job Protection Act of 1996. Included within this tax legislation was the repeal of certain tax advantages to thrifts applicable to tax bad debt provision calculations. The bill eliminated the percent-of-taxable-income method for computing tax liability on additions to thrift's bad debt reserves for years beginning after December 31, 1995. The bill also required that thrift institutions recapture all or a portion of their tax bad debt reserves added since December 31, 1987. Accordingly, income tax expense of $145,000 was recorded on the tax bad debt recapture in 1996, resulting primarily from the decrease in loans included in the sale of Regional Bank's branches in 1994. The unrecaptured base year tax reserve will not be subject to recapture, as long as the institution continues to carry on the business of banking and meets other criteria. The effective tax rate was 40% for 1996, 40% in 1995 and 39% in 1994. The Company and its subsidiaries will file consolidated income tax returns for 1996. Financial Condition Total average assets in 1996 increased $9,244,000 over the prior year. Average assets declined by $27,188,000 in 1995 as compared to 1994, primarily due to deposit pricing strategies and the sale of branches in October, 1994. For comparability, average assets in 1994 would have been $20,000,000 less if the branch sale had occurred on January 1, 1994. Changes in average assets in 1995 and 1996 reflect normalized operations. Year-end assets increased to $328,346,000 from $313,067,000 at December 31, 1995. Cash, cash equivalents and short-term investments increased at year-end 1995 to provide funding for loans scheduled to close shortly after December 31, 1995. Securities maturities and repayments, as well as increased levels of interest-bearing deposits, were used to fund loan growth in 1996. Average earning assets have represented 95% of average total assets for the past three years. Average loans represent approximately 66% of average assets in 1996 compared to 65% in 1995 and 62% in 1994. Management intends to continue it's emphasis on loan growth in 1997. Average noninterest-bearing deposits increased less than 1% in 1996 compared to a 4% increase in 1995. Average interest-bearing deposits increased $11,981,000 or 5% in 1996 compared to 1995. Average interest-bearing demand deposits increased $1,924,000, primarily due to the success of a new interest- bearing checking account introduced early in 1996. Average savings accounts increased 8% due to the continued success of a premium passbook savings account introduced in 1995. Average money market investment accounts decreased 11% as compared to the prior year due to the shifting of funds to the new interest-bearing demand deposit and the premium savings passbook. Average certificates of deposit and other time deposits increased approximately $11,557,000 in 1996, primarily in certificates of deposits of $100,000 and over. Long-term debt is primarily the Company's loan for the purchase of Regional Bank and is secured by the capital stock of the Company's subsidiaries. The Company successfully renegotiated the rate with the lender, effective July 1, 1995. Interest adjusts quarterly to the lender's prime rate, less 25 basis points. The Company believes it has complied with all terms and covenants of the loan agreement. The Company prepaid $250,000 on long-term debt in 1996, and $750,000 in 1995. A principal payment of $375,000 is due June 30, 1997 and the balance of the loan is due December 31, 1997. Prior to that time, the Company intends to negotiate the refinancing of its long-term borrowing needs. Shareholders' equity was $27,749,000 on December 31 1996 compared to $28,245,000 on December 31, 1995. Book value per common share increased to $22.18 or 6% from $20.98 at year end 1995. The unrealized gain on securities available for sale, net of taxes, totaled $95,000 or $.07 per share at December 31, 1996 compared to an unrealized gain of $195,000 or $.15 at December 31, 1995. Excluding the net unrealized gains or losses on securities available for sale, book value per share was $22.11 at December 31, 1996, or an increase of 6% over the comparable book value at year end 1995. The Company redeemed the remaining $2,000,000 of its preferred stock in 1996. In 1995, $400,000 of preferred stock was redeemed. All future earnings will now accrue solely to the common shareholders. Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses Loans remain the Company's largest concentration of assets and continue to represent the greatest risk. The loan underwriting standards observed by each of the Company's subsidiaries are viewed by management as a deterrent to the emergence of an abnormal level of problem loans and a subsequent increase in net chargeoffs. The Company's conservative loan underwriting standards have historically resulted in higher loan quality and lower levels of net chargeoffs than peer bank averages. The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out of area borrowers are incurred. Accordingly, the Company's board of directors regularly monitors such concentrations to determine compliance with its restrictive loan allocation policy. The Company believes it has no undue concentrations of loans. Total loans increased 9%, primarily reflecting the expansion of the consumer loan portfolio and management's emphasis on indirect automobile financing which began in late 1995 and has continued to the present. Consumer loans increased 50% in 1996. The Company's emphasis on increasing consumer loans provides greater diversification within the portfolio and generate higher yields than residential real estate loans. Although the Company limits its exposure to long-term fixed rate residential mortgage loans and generally observes 20% minimum downpayment guidelines, it originated both fixed rate loans and loans with little or no downpayment for a noncompeting mortgage lender during 1996. This program assisted the Company in serving all segments of the community without incurring unacceptable levels of credit exposure or interest rate risk. The origination of these loans provides fee income. The Company regards its ability to identify and correct loan quality problems as one of its greatest strengths. Loans are placed in a nonaccruing status when in management's judgment the collateral value and/or the borrower's financial condition does not justify accruing interest. As a general rule, commercial and real estate loans are reclassified to nonaccruing status at or before becoming 90 days past due. Interest previously recorded but not deemed collectible is reversed and charged against current income. Subsequent interest payments collected on nonaccrual loans may thereafter be recognized as interest income or may be applied as a reduction of the loan balance, as circumstances warrant. Non-real estate secured consumer loans are not placed in nonaccruing status, but are charged off when policy-determined delinquent status is reached. Net chargeoffs were $398,000 in 1996, $60,000 in 1995 and $13,000 in 1994. As a percentage of average loans, net chargeoffs equaled .19%, .03% and .01% in 1996, 1995 and 1994. The increase in 1996 was caused primarily by the $334,000 chargeoff of portions of two loans currently held by Regional Bank. In each of the previous two periods, the Company significantly outperformed its peer group's net loan loss average. Peer group data for year-end 1996 is not yet available. Foreclosed real estate held by the Company at December 31, 1996 consisted of a single property. The property is expected to be sold by mid-year 1997 with minimal gain or loss realized. After the sale, foreclosed real estate will decrease to a level more closely mirroring prior years. Management maintains a listing of loans warranting either the assignment of a specific reserve amount or other special administrative attention. This listing, together with a listing of all classified loans, nonaccrual loans and loans delinquent 30 days or more, is reviewed monthly by the board of directors of each subsidiary. The ability to absorb loan losses promptly when problems are identified is invaluable to a banking organization. Most often, losses incurred as a result of prompt, aggressive collection actions are much lower than losses incurred after prolonged legal proceedings. Accordingly, the Company observes the practice of quickly initiating stringent collection efforts in the early stages of loan delinquency. The adequacy of the allowance for loan losses in each subsidiary is reviewed at least monthly. The determination of the provision amount in any period is based on management's continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio, current economic conditions, the amount of loans presently outstanding, and the amount and composition of growth expectations. The allowance for loan losses as of December 31, 1996, is considered adequate by management. See Tables 8, 9, 10, 11 and 12 for quantitative support of this narrative loan analysis. Statement of Financial Accounting Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights, pertains to mortgage banking and financial institutions that conduct operations that are substantially similar to the primary operations of a mortgage banking enterprise. The Statement eliminates the accounting distinction between mortgage servicing rights that are acquired through loan origination activities and those acquired through purchase transactions. Under this Statement, if the Company enters into mortgage banking activities and sells or securitizes loans and retains the mortgage servicing rights, the Company must allocate the total cost of the mortgage loans to the mortgage servicing rights and the loans (without the rights) based on their relative fair values. SFAS No. 122 was effective for the Company in 1996. Since the Company does not currently engage in mortgage banking activities, the adoption of this Statement did not have any material effect on 1996 operations or financial position. Investment Securities Investment securities offer flexibility in the Company's management of interest rate risk, and is the primary means by which the Company provides liquidity and responds to changing maturity characteristics of assets and liabilities. The Company's investment policy prohibits trading activities and does not allow investment in high risk derivative products or junk bonds. In 1994, the Company adopted new accounting rules for securities. The rules require that each security must be individually designated as a held to maturity ("HTM") security or as an available for sale ("AFS") security. Late in 1995, the Financial Accounting Standards Board ("FASB") allowed an unprecedented "one time" transition reclassification. While more than 90% of the Company's investments were already designated AFS, the Company took this opportunity to reclassify all remaining HTM securities to AFS to provide even greater management flexibility in responding to changes within financial markets. As of December 31, 1996, all investment securities are classified as AFS and are carried at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as a separate component of shareholders' equity. A net unrealized gain of $95,000 was recorded to adjust the AFS portfolio to current market value at December 31, 1996, compared to a net unrealized gain of $195,000 at December 31, 1995. At year end 1996, the tax equivalent yield of the investment securities portfolio was 6.45%, representing an increase from 6.33% at year end 1995, and 6.16% at year end 1994. In 1994, management began to reduce the variable portion of the investment securities portfolio. Variable rate securities comprised 50% of the total portfolio on December 31, 1996 compared to 55% and 65% on December 31, 1995 and 1994. The reduction of variable rate securities extended the year end weighted average repriceable life of the portfolio to 2.06 years compared to 1.14 years in 1995. Sources of Funds The Company relies primarily on customer deposits and securities sold under repurchase agreements, along with shareholders' equity to fund earning assets. On an infrequent basis, Federal Home Loan Bank ("FHLB") advances are used to provide additional funds. Deposits generated within local markets provide the major source of funding for earning assets. Average total deposits were 88% and 86% of total earning assets in 1996 and 1995. Total interest-bearing deposits averaged 91%, 90% and 92% of average total deposits during 1996, 1995 and 1994. Management is continuing efforts to increase the percentage of transaction-related deposits to total deposits due to the positive effect on earnings. Securities sold under repurchase agreements ("repos") are high denomination investments utilized by public entities and commercial customers as an element of their cash management responsibilities. Repos are not subject to FDIC assessment so they are less costly than large certificates of deposit. With the reduction in the FDIC assessment, repos do not offer as much cost advantage as previously experienced. Management utilized large denomination certificates of deposit in 1996 to replace a portion of customer funds previously invested in repos. Even though short-term borrowings temporarily increased 18% at year end 1996 compared to 1995, the Company decreased average repos and other short-term borrowings in 1996 to $13,316,000 or 17% below 1995. FHLB advances which matured in early 1996 represented most of the decrease. The FHLB advances were used to fund loans and other earnings assets of Regional Bank in 1995. Depending upon the level of loan demand, management may again elect to use FHLB advances in 1997 as part of its cash management strategy. The Company continued to prepay long-term debt in 1996. Long-term debt decreased $1,000,000 in 1996 of which $250,000 represented reductions in excess of scheduled payments. On December 31, 1997 the remaining balance is due. Prior to that time, the Company intends to negotiate the refinancing of its long-term borrowing needs. Capital Resources Common shareholders' equity increased $1,504,000 to $27,749,000 at December 31, 1996. Total shareholders' equity declined by $496,000 due primarily to the early redemption of $2,000,000 of preferred stock in 1996. Redemptions in 1995 and 1994 totaled $400,000 and $300,000. All of the preferred shares have now been redeemed. The Federal Reserve Board and other regulatory agencies have adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items. The Company's core capital ("tier 1") consists of shareholders' equity less goodwill, while total capital consists of core capital, certain debt instruments and a portion of the allowance for credit losses. At December 31, 1996, tier 1 capital to total assets was 8.33%. Total capital to risk-adjusted assets was 15.60%. Both ratios substantially exceed all required ratios established for bank holding companies. Risk-adjusted capital levels of the Company's subsidiary banks exceed regulatory definitions of well-capitalized institutions. Shareholders' equity is impacted by the Company's decision to categorize its entire securities portfolio as AFS under accounting rules adopted January 1, 1994. Securities in this category are carried at fair value, and shareholders' equity is adjusted to reflect unrealized gains and losses, net of taxes. The Company declared and paid common dividends of $.83 per share in 1996 and $.69 in 1995. Book value per common share increased to $22.18 from $20.98 in 1995. The net adjustment for AFS securities increased book value by $.07 and $.15 at December 31, 1996 and 1995. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in equity. The dividend payment rate on preferred stock was 6.34% during each of the past two years. Liquidity Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors, and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets, and higher interest expense involved in extending liability maturities. Liquid assets total $47,810,000, and include cash and cash equivalents, loans and securities maturing within one year, and money market instruments. In addition, the Company holds $75,667,000 of AFS securities maturing after one year which can be sold to meet liquidity needs. Liquidity is supported by maintaining a relatively stable funding base, which is achieved by diversifying funding sources, extending the contractual maturity of liabilities, and limiting reliance on volatile short-term purchased funds. Short-term funding needs can arise from declines in deposits or other funding sources, drawdowns of loan commitments and requests for new loans. The Company's strategy is to fund assets to the maximum extent possible with core deposits, which provide a sizable source of relatively stable and low-cost funds. Average core deposits funded approximately 89% of total earning assets at December 31 in each of the last three years. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. The Company has not received any recommendations from regulatory authorities which would materially affect liquidity, capital resources or operations. Interest Rate Risk At year end 1996, the Company held approximately $169,349,000 in assets comprised of securities, loans, short-term investments, and federal funds sold, which were interest sensitive in one year or less time horizons. The Company's interest rate sensitivity analysis for the year ended December 31, 1996 appears in Table 14. Core deposits are distributed or spread among the various repricing categories based upon historical patterns of repricing which are reviewed periodically by management. The assumptions regarding these repricing characteristics greatly influence conclusions regarding interest sensitivity. Management believes its assumptions regarding these liabilities are reasonable. Effective asset/liability management requires the maintenance of a proper ratio between maturing or repriceable interest-earning assets and interest- bearing liabilities. It is the policy of the Company that rate-sensitive assets less rate-sensitive liabilities to total assets be kept within a range of 80% to 130%. The Company will seek to attain a more neutral gap position in 1997 based upon its the belief that the current interest rate environment will remain relatively stable throughout 1997. In any event, the Company does not anticipate that its earnings will be materially impacted in 1997, regardless of the direction interest rates may trend. Effects of Changing Prices The Company's asset and liability structure is substantially different from that of an industrial company in that most of its assets and liabilities are monetary in nature. Management believes the impact of inflation on financial results depends upon the Company's ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction at the same time, or at the same magnitude, as the prices of other goods and services. As discussed previously, management relies on its ability to manage the relationship between interest-sensitive assets and liabilities to protect against wide interest rate fluctuations, including those resulting from inflation. Accounting Changes The FASB has issued SFAS No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed Of. This Statement establishes guidance for recognizing and measuring impairment losses and requires that the carrying amount of impaired assets be reduced to fair value. Long-lived assets and certain identifiable intangibles must be reviewed for impairment whenever events indicate that the carrying amount of the assets may not be recoverable. SFAS No. 121 was effective in 1996 for the Company. The adoption of SFAS No. 121 did not have any material effect on results of operation or financial condition in 1996. SFAS No. 123, Stock Based Compensation, was effective for the Company in 1996. This Statement requires expanded disclosures rather than recognition of compensation cost as was originally required by the exposure draft of this Statement for fixed, at the money, options. However, employers are encouraged to recognize the cost of stock-based compensation plans in their financial statements. Currently, the Company has no stock-based compensation plans and adoption of SFAS No. 123 did not have any effect on 1996 financial statements. SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are considered secured borrowings. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The transferor has surrendered control over transferred assets only if certain conditions are met. This statement provides detailed measurement standards for assets and liabilities included in these transactions. It also includes implementation guidance for assessing isolation of transferred assets and for accounting for transfers of many specific types of transactions. Except as amended by SFAS No. 127, this statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. Earlier or retroactive application is not permitted. SFAS No. 127 defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and (b) for repurchase agreement, dollar-roll, securities lending, and similar transactions, of paragraphs 9-12 and 237(b) of SFAS No. 125. SFAS No. 127 provides additional guidance on the types of transactions for which the effective date of SFAS No. 125 has been deferred. It also requires that if it is not possible to determine whether a transfer occurring during calendar-year 1997 is part of a repurchase agreement, dollar-roll,securities lending, or similar transaction, then paragraphs 9-12 of SFAS No. 125 should be applied to that transfer. Management does not expect adoption of these statements to have any material effect on 1997 financial statements.
Table 1 - Selected Financial Data Summary* 1996 1995 1994 1993 1992 RESULTS OF OPERATIONS FOR THE YEAR Net interest income $11,961 $10,983 $11,301 $11,881 $12,484 Provision for loan losses 150 30 115 357 686 Non-interest income 1,502 1,456 2,588 1,628 1,572 Non-interest expense 8,619 8,229 9,040 9,243 8,834 Income before income tax and accounting method change 4,694 4,180 4,734 3,909 4,536 Income tax 2,001 1,651 1,864 1,438 1,674 Income before accounting method change 2,693 2,529 2,870 2,472 2,862 Accounting method change 450 Net income 2,693 2,529 2,870 2,922 2,862 Dividends paid on common stock 1,038 863 683 580 478 Dividends paid on preferred stock 50 139 157 185 190 PER COMMON SHARE Income before accounting method change** $2.11 $1.91 $2.17 $1.83 $2.14 Net income** 2.11 1.91 2.17 2.19 2.14 Dividends paid .83 .69 .60 .51 .42 Book value - end of period** Excluding SFAS No. 115 adjustment 22.11 20.83 19.60 17.99 16.27 Including SFAS No. 115 adjustment 22.18 20.98 17.49 Market price - end of period** 29.06 25.00 21.00 22.28 19.80 AT YEAR END Total assets $328,346 $313,067 $306,047 $355,992 $368,924 Securities and other investments 88,384 94,110 96,270 133,747 146,593 Total loans 219,483 201,355 194,736 205,508 204,000 Allowance for loan losses 2,506 2,754 2,784 2,682 2,686 Total deposits 276,402 262,346 261,371 310,063 323,777 Long-term debt 5,000 6,000 7,500 9,375 10,645 Preferred stock 2,000 2,400 2,700 3,000 Shareholders' equity 27,749 28,245 24,282 25,203 23,347 FINANCIAL RATIOS Return on average assets .85% .82% .86% .81% .79% Return on average common shareholders' equity 9.86 9.71 12.18 12.61 13.88 Allowance for loan losses to total loans (year end) 1.14 1.37 1.43 1.31 1.32 Shareholders' equity to total assets (year end) 8.45 9.02 7.93 7.08 6.33 Tier I capital to total assets 8.33 8.84 8.69 7.01 6.25 Total capital to risk- adjusted assets 15.60 16.57 17.11 14.12 13.34 Average equity to average total assets 8.69 8.70 7.39 6.83 6.11 Dividend payout ratio 39.29 36.12 25.15 21.16 17.89
* The Company sold three of Regional Bank's branches in October, 1994. The sale affects comparative analysis of certain information in this table. **Amounts prior to 1994, excluding dividends paid, have been adjusted for the 10% stock dividend in 1994.
Table 2 - Changes in Net Interest Income and Net Interest Margin (Taxable Equivalent Basis)* Percent Change 1996 1995 1994 1996/95 1995/94 Interest income Loans $18,266 $16,938 $15,941 7.8 6.3 Investment securities 5,403 5,655 6,265 (4.5) (9.7) Federal funds sold 380 305 116 24.6 162.9 Short-term investments 13 49 15 (73.5) 226.7 Total interest income 24,062 22,947 22,337 4.9 2.7 Interest expense Interest-bearing demand accounts 868 833 832 4.2 0.1 Money market investment accounts 1,133 1,297 1,216 (12.6) 6.7 Savings deposits 944 894 742 5.6 20.5 Certificates of deposit and other time deposits 7,918 7,284 6,997 8.7 4.1 Borrowings 1,143 1,544 1,114 (26.0) 38.6 Total interest expense 12,006 11,852 10,901 1.3 8.7 Net interest income $12,056 $11,095 $11,436 8.7 (3.0) Net interest margin 4.00% 3.77% 3.57% 6.1 5.6
*Adjusted to reflect income related to securities and loans exempt from Federal income taxes reduced by nondeductible portion of interest expense.
Table 3 - Changes in Net Interest Income and Net Interest Margin (Taxable Equivalent Basis)* 1996 vs.1995 1995 vs. 1994 Volume Rate Total Volume Rate Total Interest income Loans $ 904 $ 424 $1,328 $ (505) $1,502 $ 997 Investment securities (259) 7 (252) (1,270) 660 (610) Federal funds sold 104 (29) 75 131 58 189 Short-term investments (29) (7) (36) 17 17 34 Total interest income 720 395 1,115 (1,627) 2,237 610 Interest expense Interest-bearing demand accounts 51 (16) 35 (114) 115 1 Money market investment accounts (136) (28) (164) (255) 33 81 Savings deposits 74 (24) 50 (38) 190 152 Certificates of deposit and other time deposits 616 18 634 (886) 1,173 287 Borrowings (255) (146) (401) 60 370 430 Total interest expense 350 (196) 154 (1,233) 2,184 951 Changes in net interest income $ 370 $ 591 $ 961 $ (394) $53 $(341) Change in taxable equivalent adjustments 17 23 Change in net interest income after taxable equivalent adjustments $ 978 $(318)
*Adjusted to reflect income related to securities and loans exempt from Federal income taxes reduced by nondeductible portion of interest expense.
Table 4 - Non-interest Income and Expense Percent Change 1996 1995 1994 1996/95 1995/94 Non-interest income Insurance commissions $ 438 $ 190 $ 200 (7.4) (7.1) Fiduciary activities 233 190 200 22.6 (5.0) Service charges on deposit accounts 520 450 475 15.6 (5.3) Securities gains (losses) 16 (154) Gain on sale of branches 1,229 Other income 311 328 329 (5.2) (0.3) Total non- interest income $1,502 $1,457 $2,588 3.1 (43.7) Non-interest expense Salaries and employee benefits $4,482 $4,467 $4,553 0.3 (1.9) Premises and equipment expense 1,477 1,469 1,521 0.5 (3.4) Professional fees 222 205 395 8.3 (48.1) Deposit insurance 190 395 666 (51.9) (40.7) FDIC special assessment 545 Amortization of intangibles 35 40 46 (12.5) (13.0) Other expense 1,667 1,653 1,859 0.8 (11.1) Total non- interest expense $8,618 $8,229 $9,040 4.7 (9.0) Net non-interest expense, excluding non-recurring items, as a percent of average assets 2.07% 2.20% 2.29%
Table 5 - Average Balance Sheet and Net Interest Analysis (Taxable equivalent basis)* December 31, 1996 Average Yield/ Balance Interest Rate ASSETS Short-term investments $ 257 $ 13 5.06% Federal funds sold 7,094 380 5.36 Securities Taxable 81,971 5,123 6.25 Tax-exempt 3,755 280 7.46 Total securities 85,726 5,403 6.30 Loans** Commercial 62,983 6,059 9.62 Real estate mortgage 121,232 9,660 7.97 Instalment 22,349 2,392 10.70 Govt. guaranteed loans 1,948 155 7.96 Total loans 208,512 18,266 8.76 Total earning assets 301,589 24,062 7.98 Allowance for loan losses (2,760) Unrealized losses on securities (224) Cash and due from banks 9,456 Premises and equipment 5,953 Other assets 2,893 Total assets $316,907 LIABILITIES Interest-bearing deposits Interest-bearing demand accounts $ 32,830 868 2.64 Money market investment accounts 31,584 1,133 3.59 Savings 29,264 944 3.23 Certificates of deposit and other time deposits 148,509 7,918 5.33 Total interest- bearing deposits 242,187 10,863 4.49 Short-term borrowings 13,316 689 5.17 Long-term debt 5,606 454 8.10 Total interest- bearing liabilities 261,109 12,006 4.60 Noninterest-bearing demand deposits 24,714 Other liabilities 3,540 Total liabilities 289,363 Shareholders' equity 27,544 Total liabilities and shareholders' equity $316,907 12,006 3.98*** Net interest income $12,056 4.00% Adjustment to convert tax exempt securities and loans to a fully taxable equivalent basis using a marginal rate of 34% $ 95
* Adjusted to reflect income related to securities and loans exempt from Federal income taxes. ** Nonaccruing loans have been included in the average balances. *** Total interest expense divided by total earning assets.
Table 5 - Average Balance Sheet and Net Interest Analysis (Taxable equivalent basis)* December 31, 1995 Average Yield/ Balance Interest Rate ASSETS Short-term investments $ 812 $ 49 6.03% Federal funds sold 5,196 305 5.87 Securities Taxable 85,421 5,326 6.24 Tax-exempt 4,327 329 7.60 Total securities 89,748 5,655 6.30 Loans** Commercial 64,589 6,116 9.47 Real estate mortgage 116,314 8,815 7.58 Instalment 15,760 1,807 11.47 Govt. guaranteed loans 2,383 200 8.39 Total loans 199,046 16,938 8.51 Total earning assets 294,802 22,947 7.79 Allowance for loan losses (2,732) Unrealized losses on securities (1,054) Cash and due from banks 7,744 Premises and equipment 5,799 Other assets 3,104 Total assets $307,663 LIABILITIES Interest-bearing deposits Interest-bearing demand accounts $ 30,906 833 2.70 Money market investment accounts 35,369 1,297 3.67 Savings 26,979 894 3.31 Certificates of deposit and other time deposits 136,952 7,284 5.32 Total interest- bearing deposits 230,206 10,308 4.48 Short-term borrowings 15,947 932 5.84 Long-term debt 6,950 612 8.81 Total interest- bearing liabilities 253,103 11,852 4.68 Noninterest-bearing demand deposits 24,545 Other liabilities 3,243 Total liabilities 280,891 Shareholders' equity 26,772 Total liabilities and shareholders' equity $307,663 11,852 4.02*** Net interest income $11,095 3.77% Adjustment to convert tax exempt securities and loans to a fully taxable equivalent basis using a marginal rate of 34% $ 112
* Adjusted to reflect income related to securities and loans exempt from Federal income taxes. ** Nonaccruing loans have been included in the average balances. *** Total interest expense divided by total earning assets.
Table 5 - Average Balance Sheet and Net Interest Analysis (Taxable equivalent basis)* December 31, 1994 Average Yield/ Balance Interest Rate ASSETS Short-term investments $ 451 $ 15 3.33% Federal funds sold 2,751 116 4.22 Securities Taxable 105,941 5,871 5.54 Tax-exempt 4,916 394 8.01 Total securities 110,857 6,265 5.65 Loans** Commercial 66,002 5,697 8.63 Real estate mortgage 123,423 8,521 6.90 Instalment 14,179 1,530 10.79 Govt. guaranteed loans 3,064 193 6.30 Total loans 206,668 15,941 7.71 Total earning assets 320,727 22,337 6.97 Allowance for loan losses (2,760) Unrealized losses on securities (1,471) Cash and due from banks 7,633 Premises and equipment 6,297 Other assets 4,425 Total assets $334,851 LIABILITIES Interest-bearing deposits Interest-bearing demand accounts $ 35,435 832 2.35 Money market investment accounts 43,527 1,216 2.79 Savings 28,357 742 2.62 Certificates of deposit and other time deposits 155,317 6,997 4.50 Total interest- bearing deposits 262,636 9,787 3.73 Short-term borrowings 11,694 483 4.13 Long-term debt 8,835 631 7.14 Total interest- bearing liabilities 283,165 10,901 3.85 Noninterest-bearing demand deposits 23,678 Other liabilities 3,250 Total liabilities 310,093 Shareholders' equity 24,758 Total liabilities and shareholders' equity $334,851 10,901 3.40*** Net interest income $11,436 3.57% Adjustment to convert tax exempt securities and loans to a fully taxable equivalent basis using a marginal rate of 34% $ 135
* Adjusted to reflect income related to securities and loans exempt from Federal income taxes. ** Nonaccruing loans have been included in the average balances. *** Total interest expense divided by total earning assets.
Table 6 - Average Deposits 1996 1995 1994 Amount Rate Amount Rate Amount Rate Non-interest bearing $ 24,714 $ 24,545 $ 23,678 Interest-bearing accounts 32,830 2.64% 30,906 2.70% 35,435 2.35% Money market investment accounts 31,584 3.59 35,369 3.67 43,527 2.79 Savings 29,264 3.23 26,979 3.31 28,357 2.62 Certificates of deposit and other time deposits 148,509 5.33 136,952 5.32 155,317 4.50 Totals $266,901 4.07% $254,751 4.05% $286,314 3.42%
As of December 31, 1996, certificates of deposit of $100,000 or more mature as follows: 3 Months 3-6 6-12 Over 12 or less Months Months Months Total Amount $18,001 $6,463 $4,441 $3,178 $32,083 Percent 56% 20% 14% 10% 100%
Table 7 - Short-term Borrowings 1996 1995 1994 Repurchase Agreements Balance at December 31 $12,989 $10,735 $ 9,977 Maximum outstanding at any month end 15,903 15,174 16,384 Daily average amount outstanding 11,564 10,162 9,041 Weighted daily average interest rate 5.14% 5.67% 3.99% Weighted daily interest rate at December 31 5.12 5.28 5.39
Information related to repurchase agreements is shown in the table above and information on other short-term borrowings is not required since the average balances outstanding during the periods were less than 30% of shareholders' equity. Table 8 - Loan Portfolio December 31 1996 1995 1994 1993 1992 Types of Loans Commercial $ 7,834 $ 7,796 $ 7,595 $ 11,028 $ 16,300 Agricultural production financing and other loans to farmers 11,178 9,996 7,859 8,845 7,471 Commercial real estate mortgage 27,691 24,129 25,619 27,036 32,645 Residential real estate mortgage 109,962 103,239 101,455 111,600 101,953 Farm real estate 26,843 28,910 28,358 25,483 22,064 Construction and development 6,589 6,863 7,161 3,455 1,786 Consumer 27,567 18,342 13,870 14,752 17,992 Government guaranteed loans purchased 1,819 2,080 2,819 3,309 3,789 Total loans $219,483 $201,355 $194,736 $205,508 $204,000
Table 9 - Maturities and Sensitivities of Commercial and Construction Loans to Changes in Interest Rates at December 31, 1996 Within 1-5 Over 1 Year Years 5 Years Total Maturities by loan type Commercial $ 6,554 $ 817 $ 463 $ 7,834 Agricultural production financing and other loans to farmers 10,130 598 450 11,178 Construction 6,310 135 144 6,589 Government guaranteed loans 0 461 1,358 1,819 Totals $22,994 $2,011 $2,415 $27,420 Percent 84% 7% 9% 100% Rate Sensitivity Fixed rate $ 2,445 $1,160 $1,057 $ 4,662 Variable rate 20,549 851 1,358 22,758 Totals $22,994 $2,011 $2,415 $27,420
TABLE 10 - Underperforming Loans 1996 1995 1994 1993 1992 Nonaccruing loans $1,245 $1,569 $1,030 $1,208 $2,543 Accruing loans con- tractually past due 90 days or more 5 34 113 Restructured loans 16 267 Total $1,250 $1,603 $1,143 $1,224 $2,810 Percent of total loans .6% .8% .6% .6% 1.4%
TABLE 11 - Summary of Allowance for Loan Losses 1996 1995 1994 1993 1992 Balance at January 1 $2,754 $2,784 $2,682 $2,686 $3,008 Chargeoffs Commercial 352 91 6 239 1,123 Real estate mortgage 38 65 189 44 Consumer 104 31 21 17 95 Total chargeoffs 456 160 92 445 1,262 Recoveries Commercial 33 61 37 52 199 Real estate mortgage 1 27 15 7 Consumer 24 12 27 32 47 Total recoveries 58 100 79 84 253 Net chargeoffs 398 60 13 361 1,009 Provision for loan losses 150 30 115 357 687 Balance at December 31 $2,506 $2,754 $2,784 $2,682 $2,686 Net chargeoffs to average loans .19% .03% .01% .18% .48% Provision for loan losses to average loans .07 .02 .06 .17 .33 Allowance to total loans at year end 1.14 1.37 1.43 1.31 1.32
Table 12 - Allocation of the Allowance for Loan Losses 1996 1995 1994 December 31 Amount Percent Amount Percent Amount Percent Real estate Residential $ 144 6% $ 134 5% $ 146 5% Farm real estate 13 1 14 14 1 Commercial 313 12 575 21 702 25 Construction and development 71 3 75 3 52 2 Total real estate 541 22 798 29 914 33 Commercial Agribusiness 151 6 117 4 151 5 Other commercial 203 8 445 16 131 5 Total commercial 354 14 562 20 282 10 Consumer 207 8 131 5 66 2 Unallocated 1,404 56 1,263 46 1,522 55 Total $2,506 100% $2,754 100% $2,784 100%
Table 12 - Allocation of the Allowance for Loan Losses 1993 1992 December 31 Amount Percent Amount Percent Real estate Residential $ 142 5% $ 87 3% Farm real estate Commercial 468 18 705 26 Construction and development 35 1 16 1 Total real estate 645 24 808 30 Commercial Agribusiness 182 7 191 7 Other commercial 226 8 323 12 Total commercial 408 15 514 19 Consumer 83 3 109 4 Unallocated 1,546 58 1,255 47 Total $2,682 100% $2,686 100%
The allocation is based primarily on previous credit loss experience, adjusted for changes in the risk characteristics of each category. Additional amounts are allocated based on an evaluation of the loss potential of individual troubled loans and the anticipated effect of economic conditions on both individual loans and loan categories. Because the allocation is based on estimates and subjective judgment, it is not necessarily indicative of the specific amounts or loan categories in which losses may ultimately occur. Table 13 - Investment Securities (Carrying Values at December 31) Beyond Within 1-5 5-10 10 1 Year Years Years Years Totals Available for sale U.S. Treasury $2,004 $ 2,004 Federal Agencies 3,087 $10,048 $11,689 24,824 State and Municipal 396 1,586 1,765 $ 328 4,075 Mortgage-backed securities 33 4,670 3,304 42,035 50,042 Corporate and other securities 242 242 Total available for sale $5,520 $16,304 $17,000 $42,363 $81,187 Weighted average yield* 5.14% 5.87% 6.94% 6.66% 6.45%
Amounts in the table above are based on scheduled maturity dates. Variable interest rates are subject to change not less than annually based upon certain interest rate indexes. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. As of December 31, 1996, there are no corporate bonds and other securities which represent more than 10% of shareholders' equity. *Adjusted to reflect income related to securities exempt from Federal income taxes reduced by nondeductible portion of interest expense. Table 14 - Rate Sensitivity Analysis at December 31, 1996 Maturing or Repricing Over 5 Years or Insens- 3 Months 1 Year 3 Years 5 Years itive Total Rate-sensitive assets $ 88,660 $ 80,689 $ 42,413 $ 36,530 $80,054 $328,346 Rate-sensitive liabilities 109,123 79,800 53,989 22,258 63,176 $328,346 Rate sensitivity gap (assets less liabilities) $(20,463) $ 889 $(11,576) $ 14,272 $16,878 Rate sensitivity gap (cumulative) $(20,463) $(19,574) $(31,150) $(16,878) Percent of total assets (cumulative) (6.2%) (6.0%) (9.5%) (5.1%) Rate-sensitive assets/ liabilities (cumulative) 81.2% 89.6% 87.2% 93.6%
Table 15 - Quarterly Financial Information 1996 Fourth Third Second First Total interest income $6,275 $6,070 $5,884 $5,737 Total interest expense 3,138 3,068 2,921 2,879 Net interest income 3,137 3,002 2,963 2,858 Provision for loan losses 60 30 33 27 Net interest income after provision for loan losses 3,077 2,972 2,930 2,831 Non-interest income 409 359 413 321 Non-interest expense 2,010 2,562 2,045 2,001 Income before income tax 1,476 769 1,298 1,151 Income tax 582 451 514 454 Net income 894 318 784 697 Net income per common share .71 .25 .61 .54 Dividends paid per common share .22 .21 .20 .20
Table 15 - Quarterly Financial Information 1995 Fourth Third Second First Total interest income $5,908 $5,784 $5,658 $5,485 Total interest expense 3,047 3,060 2,986 2,758 Net interest income 2,861 2,724 2,672 2,727 Provision for loan losses 12 9 6 3 Net interest income after provision for loan losses 2,849 2,715 2,666 2,724 Non-interest income 343 334 430 350 Non-interest expense 1,961 2,003 2,103 2,163 Income before income tax 1,231 1,046 993 911 Income tax 485 417 392 357 Net income 746 629 601 554 Net income per common share .57 .47 .45 .41 Dividends paid per common share .20 .17 .16 .16
Graphs Included in the Annual Report
Dividends Per Common Share Common Dividend Payout Ratio (Dollars) (Percent) Year Dollars Year Percent 1992 .42 1992 17.9% 1993 .51 1993 21.2 1994 .60 1994 25.2 1995 .69 1995 36.1 1996 .83 1996 39.3
Common Share Market Value Net Interest Margin (Dollars) (Percent) Year Dollars Year Percent 1992 19.80 1992 3.66% 1993 22.28 1993 3.52 1994 21.00 1994 3.57 1995 25.00 1995 3.77 1996 29.06 1996 4.00
Overhead Expense to Net Loan Losses to Average Assets Average Loans (Percent) (Percent) Year IUB Peer Year IUB Peer 1992 2.43 3.76 1992 .48 .62 1993 2.57 3.64 1993 .18 .39 1994 2.70 3.42 1994 .01 .25 1995 2.67 3.39 1995 .03 .20 1996 2.72 * 1996 .19 * (*1996 Peer Group Data (*1996 Peer Group Data unavailable unavailable
Non-Performing Assets Comparison of Income to Total Assets ($ Millions) (Percent) Net Recurring Year IUB Peer Year Income Income 1992 1.13 1.88 1992 2.862 2.862 1993 .81 1.25 1993 2.922 2.472 1994 .41 .98 1994 2.870 2.125 1995 .52 .75 1995 2.529 2.529 1996 .69 * 1996 2.693 3.167 (*1996 Peer Group Data unavailable)
Tier 1 Capital to Total Assets Long-Term Debt (Percent) ($ Million) Year Percent Year Dollars 1992 6.25 1992 10.6 1993 7.01 1993 9.4 1994 8.69 1994 7.5 1995 8.84 1995 6.0 1996 8.33 1996 5.0
Report of Management on Responsibility for Financial Information The consolidated financial statements and related financial information presented in this annual report have been prepared by the management of Indiana United Bancorp in accordance with generally accepted accounting principles, and include amounts based on management's best estimates and judgments at the time of preparation. In presenting this financial information, management is responsible for its integrity, content and consistency of preparation. To meet this responsibility, management maintains a system of internal controls, policies, and administrative procedures designed to provide reasonable assurance that transactions are recorded accurately. As an integral part of the internal control structure, the Company maintains a professional staff of internal auditors who monitor compliance with regulations, policies and procedures, and assess the effectiveness of the internal control structure. In addition, the Company's audit committee, which is comprised entirely of outside directors, meets periodically with management, internal auditors and/or independent auditors to review the scope and results of audit activities and the responses thereto by management, internal auditors, independent auditors and banking regulators have unrestricted access to the audit committee. Management believes the Company's system provides a basis for the preparation of reliable financial statements. The Company's consolidated financial statements have been audited by Geo. S. Olive & Co. LLC. Their responsibility is to express an opinion as to the integrity of the Company's consolidated financial statements and, in performing their audit, to evaluate the Company's internal control structure to the extent they deem necessary in order to issue such opinion. As described further in their report that follows, their opinion is based on their audit, which wads conducted in accordance with generally accepted auditing standards and is believed by them to provide a reasonable basis for their opinion. The selection of Geo. S. Olive & Co. LLC was approved by the Board of Directors and ratified by shareholders. /s/ Robert E. Hoptry /s/ Jay B. Fager Robert E. Hoptry Jay B. Fager Chief Executive Officer Chief Financial Officer Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Indiana United Bancorp Greensburg, Indiana We have audited the consolidated balance sheet of Indiana United Bancorp and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of Indiana United Bancorp and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in the notes to the financial statements, the Company changed its method of accounting for investments in securities in 1994. /s/ Geo. S. Olive & Co. LLC Geo. S. Olive & Co. LLC Indianapolis, Indiana February 3, 1997
Consolidated Balance Sheet December 31 1996 1995 Assets Cash and due from banks $ 13,236,256 $ 11,707,236 Interest-bearing demand deposits 59,658 71,698 Federal funds sold 5,900,000 7,150,000 Cash and cash equivalents 19,195,914 18,928,934 Short-term investments 100,000 5,100,000 Investment securities available for sale 81,186,867 80,650,912 Loans 219,483,489 201,354,517 Allowance for loan losses (2,505,853) (2,754,227) Net loans 216,977,636 198,600,290 Premises and equipment 5,918,643 6,024,994 Federal Home Loan Bank stock 1,137,815 1,137,815 Income receivable 1,951,803 1,974,331 Core deposit intangibles 106,228 141,638 Foreclosed real estate 1,000,000 45,000 Other assets 771,242 463,094 Total assets $328,346,148 $313,067,008 Liabilities Deposits Noninterest bearing $ 29,001,245 $ 30,335,037 Interest bearing 247,400,928 232,011,066 Total deposits 276,402,173 262,346,103 Short-term borrowings 13,240,300 15,683,491 Long-term debt 5,000,000 6,000,000 Interest payable 1,271,737 1,388,635 Other liabilities 2,239,784 1,846,551 Total liabilities 300,597,185 284,821,589 Commitments and Contingencies Shareholders' Equity Preferred stock Authorized-400,000 shares Issued and outstanding-20,000 shares Series M-1987 convertible preferred shares 2,000,000 Common stock, $1 par value Authorized-3,000,000 Issued and outstanding-1,250,897 shares 1,250,897 1,250,897 Paid-in capital 10,677,045 10,677,045 Retained earnings 14,122,382 15,726,495 Net unrealized gain on securities available for sale 94,526 195,095 Total shareholders' equity 28,245,419 27,748,963 Total liabilities and shareholders' equity $328,346,148 $313,067,008
See notes to consolidated financial statements.
Consolidated Statement of Income Year Ended December 31 1996 1995 1994 Interest Income Loans receivable $18,266,420 $16,938,330 $15,940,601 Investment securities Taxable 5,122,743 5,326,297 5,871,583 Tax exempt 185,231 216,816 259,772 Federal funds sold 379,965 304,619 115,626 Short-term investments 12,469 49,002 15,075 Total interest income 23,966,828 22,835,064 22,202,657 Interest Expense Deposits 10,862,835 10,307,724 9,787,434 Short-term borrowings 689,789 931,944 482,907 Long-term debt 453,527 611,978 630,901 Total interest expense 12,006,151 11,851,646 10,901,242 Net Interest Income 11,960,677 10,983,418 11,301,415 Provision for loan losses 150,000 30,000 115,000 Net Interest Income After Provision for Loan Losses 11,810,677 10,953,418 11,186,415 Noninterest Income Insurance commissions 438,405 472,998 508,935 Fiduciary activities 232,494 189,417 200,241 Service charges on deposit accounts 519,609 450,060 474,896 Net realized gains (losses) on securities 16,296 (154,297) Gain on sale of branches 1,228,751 Other income 311,204 328,032 329,346 Total noninterest income 1,501,712 1,456,803 2,587,872 Noninterest Expense Salaries and employee benefits 4,481,548 4,467,408 4,552,848 Net occupancy expenses 764,086 804,977 835,351 Equipment expenses 712,683 664,109 685,805 Professional fees 221,927 204,578 395,383 Deposit insurance expense 735,576 394,672 666,402 Amortization of core deposit intangibles 35,410 40,468 45,527 Other expenses 1,667,259 1,653,251 1,858,864 Total noninterest expense 8,618,489 8,229,463 9,040,180 Income Before Income Tax 4,693,900 4,180,758 4,734,107 Income tax expense 2,001,351 1,651,366 1,863,756 Net Income $2,692,549 $2,529,392 $2,870,351 Net income per common share $2.11 $1.91 $2.17 Weighted Average Shares Outstanding 1,250,897 1,250,897 1,250,897
See notes to consolidated financial statements.
Consolidated Statement of Cash Flows Year Ended December 31 1996 1995 1994 Operating Activities Net income $2,692,549 $2,529,392 $2,870,351 Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 150,000 30,000 115,000 Depreciation and amortization 644,673 623,686 621,777 Deferred income tax 188,387 (60,950) (158,955) Securities amortization, net 72,066 105,445 128,563 Amortization of fair value adjustments on loans and deposits 90,600 81,544 (34,768) Amortization of core deposit intangibles 35,410 40,468 45,527 Investment securities (gains) losses (16,296) 154,297 Net change in Income receivable 22,528 (78,370) 68,069 Interest payable (116,898) 524,295 52,213 Gain on sale of branches (1,228,751) Other adjustments (496,966) 44,534 152,967 Net cash provided by operating activities 3,282,349 3,823,748 2,786,290 Investing Activities Net change in short-term investments 5,000,000 (4,952,843) 100,825 Purchases of securities available for sale (16,850,769) (5,738,936) (24,219,400) Proceeds from maturities and paydowns of securities available for sale 16,531,638 11,841,444 27,871,655 Proceeds from sales of securities available for sale 9,369,943 26,477,204 Purchases of securities held to maturity (324,520) (2,429,679) Proceeds from maturities and paydowns of securities held to maturity 752,427 791,211 Net change in loans (19,617,946) (6,833,403) (2,475,422) Purchases of premises and equipment (556,117) (1,195,505) (454,942) Proceeds from sale of other real estate 50,000 63,177 1,579,817 Net cash and cash equivalents paid in branch sales (9,019,963) Other investing activities 17,000 10,000 17,573 Net cash provided (used) by investing activities (15,426,194) 2,991,784 18,238,879 Financing Activities Net change in Noninterest-bearing, NOW, money market and savings deposits 1,534,086 (3,040,069) (7,872,722) Certificates of deposit 12,521,984 4,036,023 (16,212,020) Short-term borrowings 4,443,191 439,426 2,331,938 Repayment of long-term debt (1,000,000) (1,500,000) (1,875,000) Proceeds from FHLB advances 5,190,000 Repayment of FHLB advances (2,000,000) (3,190,000) Cash dividends (1,088,436) (1,002,599) (839,461) Redemption of preferred stock (2,000,000) (400,000) (300,000) Other financing activities (10,424) Net cash provided (used) by financing activities 12,410,825 532,781 (24,777,689) Net Change in Cash and Cash Equivalents 266,980 7,348,313 (3,752,520) Cash and Cash Equivalents, Beginning of Year 18,928,934 11,580,621 15,333,141 Cash and Cash Equivalents, End of Year $19,195,914 $18,928,934 $11,580,621 Additional Cash Flows Information Interest paid $12,123,049 $11,327,351 $10,931,300 Income tax paid 1,885,288 1,943,281 1,628,500 Loan balances transferred to foreclosed real estate 1,000,000
See notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity Preferred Stock Common Stock Shares Amount Shares Amount Balances, January 1, 1994 27,000 $2,700,000 1,137,578 $1,137,578 Net income for 1994 Cash dividends Preferred stock-$6.34 per share Common stock-$.60 per share 10% stock dividend 113,319 113,319 Adjustment for cash paid in lieu of issuing fractional shares Cumulative effect of change in method of accounting for securities Net change in unrealized gain (loss) on securities available for sale Redemption of preferred stock (3,000) (300,000) Balances, December 31, 1995 24,000 2,400,000 1,250,897 1,250,897 Net income for 1995 Cash dividends Preferred stock - $6.34 per share Common stock - $.69 per share Net change in unrealized gain (loss) on securities available for sale Redemption of preferred stock (4,000) (400,000) Balances, December 31, 1995 20,000 2,000,000 1,250,897 1,250,897 Net income for 1996 Cash dividends Preferred stock-$6.34 per share Common stock-$.83 per share Net change in unrealized gain (loss) on securities available for sale Redemption of preferred stock (20,000) (2,000,000) Balances, December 31, 1996 1,250,897 $1,250,897
See notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity Net Unrealized Gain (Loss) on Securities Paid-in Retained Available Capital Earnings For Sale Total Balances, January 1, 1994 $8,099,038 $13,266,449 $25,203,065 Net income for 1994 2,870,351 2,870,351 Cash dividends Preferred stock-$6.34 per share (156,915) (156,915) Common stock-$.60 per share (682,546) (682,546) 10% stock dividend 2,578,007 (2,691,326) Adjustment for cash paid in lieu of issuing fractional shares (10,424) (10,424) Cumulative effect of change in method of accounting for securities $846,177 846,177 Net change in unrealized gain (loss) on securities available for sale (3,487,650) (3,487,650) Redemption of preferred stock (300,000) Balances, December 31, 1994 10,677,045 12,595,589 (2,641,473) 24,282,058 Net income for 1995 2,529,392 2,529,392 Cash dividends Preferred stock - $6.34 per share (139,480) (139,480) Common stock - $.69 per share (863,119) (863,119) Net change in unrealized gain (loss) on securities available for sale 2,836,568 2,836,568 Redemption of preferred stock (400,000) Balances, December 31, 1995 10,677,045 14,122,382 195,095 28,245,419 Net income for 1996 2,692,549 2,692,549 Cash dividends Preferred stock-$6.34 per share (50,192) (50,192) Common stock-$.83 per share (1,038,244) (1,038,244) Net change in unrealized gain (loss) on securities available for sale (100,569) (100,569) Redemption of preferred stock (2,000,000) Balances, December 31, 1996 $10,677,045 $15,726,495 $94,526 $27,748,963
Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Indiana United Bancorp ("Company"), and its wholly owned subsidiaries, ("Banks"), conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The Company is a bank holding company whose principal activity is the ownership and management of the Banks. Union Bank and Trust Company of Indiana ("Union Bank") headquartered in Greensburg, Indiana operates under a state charter and is subject to regulation by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Regional Federal Savings Bank ("Regional Bank"), headquartered in New Albany, Indiana is a federally-chartered thrift and is subject to regulation by the Office of Thrift Supervision ("OTS") and the FDIC. The Banks generate commercial, mortgage and consumer loans and receive deposits from customers located primarily in Decatur, Floyd, Clark and Jay Counties, Indiana, and surrounding counties. The Banks' loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Although the Banks have diversified loan portfolios, a substantial portion of their debtors' ability to honor their contracts is dependent upon economic conditions in the agricultural industry. Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Consolidation-The consolidated financial statements include the accounts of the Company and the Banks after elimination of all material intercompany transactions and accounts. Investment securities-Debt securities are classified as held to maturity ("HTM") when the Company has the positive intent and ability to hold the securities to maturity. Securities HTM are carried at amortized cost. Debt securities not classified as HTM are classified as available for sale ("AFS"). Securities AFS are carried at fair value with unrealized gains and losses reported separately through shareholders' equity, net of tax. Amortization of premiums and accretion of discounts are recorded as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. At January 1, 1994, investment securities with an approximate carrying value of $125,081,000 were reclassified as AFS. This reclassification resulted in an increase in total shareholders' equity, net of tax, of $846,177. Loans are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received unless such amounts are applied to principal amounts outstanding. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans. Provision for loan losses and the adequacy of the allowance for loan losses are based on management's continuing review and evaluation of the loan portfolio, current economic conditions, past loss experience and other pertinent factors. Impaired loans are measured by the present value of expected cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 1996, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the area within which the Company operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method for premises and the declining-balance method for equipment based principally on the estimated useful lives of the assets. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank ("FHLB") system. The required investment in the common stock is based on a predetermined formula. Foreclosed real estate is carried at the lower of cost or fair value less estimated selling costs. When foreclosed real estate is acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Core deposit intangibles resulting from the value of the future stream of income allocated to customer deposits acquired in acquisitions is being amortized over a period of 15 years using accelerated methods. Income tax in the consolidated statement of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with its subsidiaries. Earnings per share have been computed based upon the weighted average common shares outstanding during each year. RESTRICTION ON CASH AND DUE FROM BANKS The Banks are required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 1996, was $1,565,000. INVESTMENT SECURITIES Securities with a carrying value of $25,009,600 and $23,621,600 were pledged at December 31, 1996 and 1995 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities AFS during 1995 and 1994 were $9,369,943 and $26,477,204. Gross gains of $160,945 and $71,348 and gross losses of $144,649 and $225,645 were realized on those sales in 1995 and 1994, respectively.
Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) INVESTMENT SECURITIES 1996 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value Available for sale U.S. Treasury $ 2,006 $ 3 $ 5 $ 2,004 Federal agencies 24,556 416 148 24,824 State and municipal 4,057 35 17 4,075 Mortgage-backed securities 50,157 489 604 50,042 Corporate obligations 244 2 242 Total investment securities $81,020 $943 $776 $81,187
1995 Gross Gross Amortized Unrealized Unrealized Fair December 31 Cost Gains Losses Value Available for sale U.S. Treasury $ 3,016 $ 12 $ 10 $ 3,018 Federal agencies 12,257 259 104 12,412 State and municipal 3,955 80 1 4,034 Mortgage-backed securities 60,610 582 425 60,767 Corporate obligations 480 60 420 Total investment securities $80,318 $933 $600 $80,651
The amortized cost and fair value of securities AFS at December 31, 1996 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity Distribution at December 31, 1996 Amortized Cost Fair Value Within one year $ 5,509 $ 5,487 Two through five years 11,703 11,634 Six through ten years 13,327 13,696 After ten years 324 328 Subtotal 30,863 31,145 Mortgage-backed securities 50,157 50,042 Totals $81,020 $81,187
The tax expense (benefit) for gains (losses) on security transactions for the years ended December 31, 1995 and 1994 was $6,400 and $(61,100).
LOANS AND ALLOWANCE December 31 1996 1995 Commercial and industrial loans $ 7,834 $ 7,796 Agricultural production financing 11,178 9,996 Farm real estate 26,843 28,910 Commercial real estate 27,691 24,129 Residential real estate 109,962 103,239 Construction and development 6,589 6,863 Consumer 27,567 18,342 Government guaranteed loans 1,819 2,080 Total loans $219,483 $201,355
December 31 1996 1995 1994 Allowance for loan losses Balances, January 1 $2,754 $2,784 $2,682 Provision for losses 150 30 115 Recoveries on loans 58 100 79 Loans charged off (456) (160) (92) Balances, December 31 $2,506 $2,754 $2,784
Information on impaired loans is summarized below.
December 31 1996 1995 Impaired loans with an allowance $ 535 $ 573 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 613 Total impaired loans $1,148 $573 Allowance for impaired loans (included in the Company's allowance for loan losses) $120 $250 Year Ended December 31 1996 1995 Average balance of impaired loans $1,996 $148 Interest income recognized on impaired loans 112 20 Cash-basis interest included above 112 20
The Banks have entered into transactions with certain directors, executive officers, significant shareholders and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans, as defined, to such related parties were as follows:
Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) 1996 1995 Balances, January 1 $5,941 $5,124 Changes in composition of related parties (416) (399) New loans, including renewals 2,986 2,382 Payments, etc., including renewals (547) (1,166) Balances, December 31 $7,964 $5,941
PREMISES AND EQUIPMENT December 31 1996 1995 Land $ 909 $ 909 Buildings 7,030 7,054 Equipment 5,115 4,720 Total cost 13,054 12,683 Accumulated depreciation (7,135) (6,658) Net $ 5,919 $ 6,025
DEPOSITS December 31 1996 1995 Noninterest-bearing $ 29,001 $ 30,335 Interest-bearing demand 67,726 64,649 Savings deposits 28,619 28,828 Certificates and other time deposits of $100,000 or more 32,083 23,512 Other certificates and time deposits 118,973 115,022 Total deposits $276,402 $262,346
Certificates and other time deposits maturing in years ending after December 31, 1996
1997 $ 98,392 1998 36,087 1999 9,803 2000 4,839 2001 1,462 Thereafter 473 Total $151,056
SHORT-TERM BORROWINGS December 31 1996 1995 Federal funds purchased $ 750 FHLB advances $ 2,000 Securities sold under repurchase agreements 12,989 10,735 U. S. Treasury demand notes 1,944 505 Total short-term borrowings $15,683 $13,240
Securities sold under agreements to repurchase consist of obligations of the Company to other parties. The obligations are secured by U. S. Treasury securities and Federal agencies, and such collateral is held by a safekeeping agent. The maximum amount of outstanding agreements at any month-end during 1996 and 1995 totaled $15,903,000 and $15,174,000 and the daily average of such agreements totaled $11,564,000 and $10,270,000. The weighted average yield was 5.12% and 5.19% at December 31, 1996 and 1995 while the weighted average yield during 1996 and 1995 was approximately 5.14% and 5.84%. The Company had a FHLB advance of $2,000,000 outstanding at December 31, 1995 which was repaid during 1996. LONG-TERM DEBT Long-term debt at December 31, 1996 consisted of a $5,000,000 secured term loan. In January, 1992, the Company converted a line of credit to an $11,200,000 six-year secured term loan. Interest is payable quarterly and was at the lender's base rate through June 30, 1995. Commencing July 1, 1995, the interest rate converted to the lender's base rate, less .25%. Principal payments are due semiannually. The loan is secured by all stock of the Banks and the loan agreement contains restrictions on debt, guarantees and mergers, in addition to other affirmative and negative covenants. A principal payment of $375,00 is due June 30, 1997 with the remaining loan balance due December 31, 1997. Management intends to refinance all or a portion of the remaining balance during 1997.
INCOME TAX Year Ended December 31 1996 1995 1994 Income tax expense Currently payable Federal $1,408 $1,317 $1,560 State 405 395 463 Deferred Federal 179 (50) (128) State 9 (11) (31) Total income tax expense $2,001 $1,651 $1,864
Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $1,596 $1,421 $1,610 Tax exempt interest (57) (63) (77) Effect of state income taxes 273 253 285 Change in tax law 144 Other 45 40 46 Actual tax expense $2,001 $1,651 $1,864
A cumulative net deferred tax liability is included in other liabilities. The components of the liability are as follows:
December 31 1996 1995 Differences in accounting for loans $(223) $(263) Differences in accounting for securities (39) (49) Differences in accounting for premises and equipment (675) (730) Differences in depreciation methods (210) (160) Differences in accounting for loan losses 289 506 Differences in accounting for securities available for sale (72) (138) State income tax 15 13 Other (39) (11) Total $(954) $(832) Assets $ 304 $ 519 Liabilities (1,258) (1,351) Total $(954) $(832)
No valuation allowance was necessary at anytime during 1996, 1995 and 1994. Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Retained earnings include approximately $2,162,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank" status, would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount at December 31, 1996 was approximately $735,000. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Banks' exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Banks use the same credit policies in making such commitments as they do for instruments that are included in the consolidated balance sheet. Financial instruments whose contract amount represents credit risk as of December 31 were as follows:
1996 1995 Commitments to extend credit $26,694 $21,097 Standby letters of credit 222 155
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. The Company and Banks may from time to time be subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is presently not aware of any such claims. PREFERRED SHARES In 1987, the Company issued 30,000 shares of no-par value, $100 stated value, convertible preferred stock. The Company redeemed 20,000 shares of preferred stock in 1996, 4,000 shares in 1995 and 3,000 shares in 1994. The total redemption price was $2,000,000 in 1996, $400,000 in 1995 and $300,000 in 1994. For 1994 through 1996, cash dividends were paid at the rate of 6.34% per annum. The Company's Articles of Incorporation permit the Board of Directors, without further shareholder approval, to establish the relative rights, designations, preferences and limitations or restrictions of the Company's preferred stock prior to the issuance thereof. RESTRICTIONS ON DIVIDENDS Without prior approval, Union Bank is restricted by Indiana law and regulations of the DFI, and the FDIC as to the maximum amount of dividends Union Bank can pay to the parent in any calendar year to Union Bank's retained net profits (as defined) for that year and the two preceding years. The OTS regulations provide that a savings bank which meets fully phased-in 1994 capital requirements and is subjected only to "normal supervision", such as Regional Bank, may pay out 100% of net income to date over the calendar year and 50% of surplus capital existing at the beginning of the calendar year without supervisory approval, but with 30 days prior notice to OTS. As a result of limitations relating to tax bad debt deductions, Regional Bank's nontaxable dividends to the Company are limited to an amount approximately equal to net income commencing in 1997. At December 31, 1996, total shareholders' equity of the Banks was $31,075,000 of which $29,504,000 was restricted or limited from dividend distribution to the Company. As a practical matter, the Banks may restrict dividends to a lesser amount because of the need to maintain an adequate capital structure. REGULATORY CAPITAL The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate actions by the regulatory agencies that, if undertaken, could have a material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the Company's and Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. At December 31, 1996, management of the Company believes that it meets all capital adequacy requirements to which it is subject. The most recent notification from the regulatory agencies categorized the Banks as well capitalized under the regulatory framework for prompt corrective action. There have been no conditions or events since that notification that management believes have changed this categorization. Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) The Company's and Banks' actual and required capital amounts and ratios are as follows:
1996 Required for To Be Well Actual Adequate Capital(1) Capitalized December 31 Amount Ratio Amount Ratio Amount Ratio Indiana United Bancorp Total capital (1) (to risk-weighted assets) $29,934 15.6% $15,312 8.0% N/A Tier I capital (1) (to risk-weighted assets) 27,540 14.4 7,656 4.0 N/A Tier I capital (1) (to average assets) 27,540 8.4 13,152 4.0 N/A Union Bank Total capital (1) (to risk-weighted assets) 21,224 15.8 10,718 8.0 $13,398 10.0% Tier I capital (1) (to risk-weighted assets) 19,547 14.6 5,359 4.0 8,039 6.0 Tier I capital (1) (to average assets) 19,547 9.0 8,708 4.0 10,885 5.0 Regional Bank Total risk-based capital (1) (to risk-weighted assets) 12,076 19.2 5,021 8.0 6,277 10.0 Core capital (1) (to adjusted tangible assets) 11,415 10.6 3,219 3.0 6,437 6.0 Core capital (1) (to adjusted total assets) 11,415 10.6 3,219 3.0 5,369 5.0
(1) As defined by regulatory agencies Regional Bank's tangible capital at December 31, 1996 was $11,415,000, which amount was 10.6 percent of tangible assets and exceeded the required ratio of 1.5 percent. LOAN SERVICING Mortgage loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of mortgage loans serviced for others totaled $2,960,000 and $2,302,000 at December 31, 1996 and 1995. EMPLOYEE BENEFIT PLANS The Company has a defined-contribution retirement plan in which substantially all employees may participate. The Company matched employees' contributions at the rate of $.70 for 1996, $.65 for 1995, and $.60 for 1994 for each dollar contributed. In addition, the Company contributed 6.5% of total compensation plus an additional 5.7% of each participant's compensation in excess of $62,700 in 1996, $61,200 in 1995 and $60,600 in 1994. Expense for the plan was $283,518 in 1996, $295,862 in 1995 and $273,053 in 1994. DEPOSIT INSURANCE EXPENSE Regional Bank's deposits are presently insured by the Savings Association Insurance Fund ("SAIF"). A recapitalization plan for the SAIF was signed into law on September 30, 1996, which provided for a special assessment on all SAIF-insured institutions to enable the SAIF to achieve the required level of reserves. The assessment of .065% was based on March 31, 1995 deposits. Regional Banks' special assessment totaled $545,000 before taxes, and was charged against current income and included with deposit insurance expense. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: Cash and Cash Equivalents-The fair value of cash and cash equivalents approximates carrying value. Short-term Investments-The fair value of short-term investments approximates carrying value. Securities-Fair values are based on quoted market prices. Loans-For both short-term loans and variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Income Receivable/Interest Payable-The fair value of these amounts approximates carrying values. FHLB Stock-Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Deposits-The fair values of noninterest-bearing, interest-bearing demand, and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Short-term Borrowings-The interest rates for short-term borrowings approximate market rates, thus the fair value approximates carrying value. Notes to Consolidated Financial Statements (Table Dollar Amounts in Thousands) Long-term Debt-Long-term debt consists of an adjustable instrument tied to a variable market interest rate. Fair value approximates carrying value. The estimated fair values of the Company's financial instruments are as follows:
December 31 1996 1995 Carrying Fair Carrying Fair Amount Value Amount Value Assets Cash and cash equivalents $ 19,196 $ 19,196 $ 18,929 $ 18,929 Short-term investments 100 100 5,100 5,100 Securities available for sale 81,187 81,187 80,651 80,651 Loans, net 216,978 217,690 198,600 199,316 Stock in FHLB 1,138 1,138 1,138 1,138 Income receivable 1,952 1,952 1,974 1,974 Liabilities Deposits 276,402 277,180 262,346 262,831 Borrowings Short-term 15,683 15,683 13,240 13,240 Long-term 5,000 5,000 6,000 6,000 Interest payable 1,272 1,272 1,389 1,389
OTHER MATTERS In October, 1994, the Company sold three underperforming branches of Regional Bank including loans, deposits and fixed assets in order to concentrate Regional Bank's resources in its primary market area. The sale resulted in a gain of $1,228,751 which is shown separately in the consolidated statement of income. CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheet December 31 1996 1995 Assets Cash on deposit and repurchase agreements $ 1,584 $ 1,940 Investment in subsidiaries 31,171 32,325 Other assets 186 128 Total assets $32,941 $34,393 Liabilities Long-term debt $ 5,000 $ 6,000 Other liabilities 192 148 Total liabilities 5,192 6,148 Shareholders' Equity 27,749 28,245 Total liabilities and shareholders' equity $32,941 $34,393
Condensed Statement of Income Year Ended December 31 1996 1995 1994 Income Dividends from subsidiaries $4,500 $4,000 $2,425 Fees from subsidiaries 33 55 88 Other income 102 73 77 Total income 4,635 4,128 2,590 Expenses Interest expense 454 612 631 Salaries and benefits 682 506 413 Professional fees 94 84 117 Other expenses 224 236 210 Total expenses 1,454 1,438 1,371 Income before income tax and equity in undistributed income of subsidiaries 3,181 2,690 1,219 Income tax benefit 565 511 463 Income before equity in undistributed income of subsidiaries 3,746 3,201 1,682 Equity in undistributed income ofsubsidiaries (1,053) (672) 1,188 Net Income $2,693 $2,529 $2,870
Condensed Statement of Cash Flows Year Ended December 31 1996 1995 1994 Operating Activities Net income $2,693 $2,529 $2,870 (Undistributed) income of subsidiaries 1,053 672 (1,188) Other adjustments 71 52 13 Net cash provided by operating activities 3,817 3,253 1,695 Investing Activities Purchase of equipment (102) (17) (34) Proceeds from sale of equipment 17 18 Net cash used by investing activities (85) (17) (16) Financing Activities Payments on long-term debt (1,000) (1,500) (1,800) Cash dividends (1,088) (1,003) (839) Redemption of preferred stock (2,000) (400) (300) Other financing activities (10) Net cash used by financing activities (4,088) (2,903) (2,949) Net Change in Cash on Deposit and Repurchase Agreements (356) 333 (1,270) Cash on Deposit and Repurchase Agreements, Beginning of Year 1,940 1,607 2,877 Cash on Deposit and Repurchase Agreements, End of Year $1,584 $1,940 $1,607
Indiana United Bancorp Directory Directors William G. Barron Chairman and President Barron Homes, Inc. Philip A. Frantz Attorney; Partner Coldren and Frantz Glenn D. Higdon President Marlin Enterprises, Inc. Robert E. Hoptry Chairman and President Indiana United Bancorp Martin G. Wilson Farmer Edward J. Zoeller President E.M. Cummings Veneer Officers Robert E. Hoptry Chairman and President Jay B. Fager Treasurer and Chief Financial Officer Michael K. Bauer Vice President Sue Fawbush Vice President and Secretary Dennis M. Flack Vice President Dawn M. Schwering Marketing Coordinator Daryl R. Tressler Vice President Suzanne Kendall Auditor Subsidiaries Directory Union Bank and Trust Company Directors William G. Barron Chairman and President Barron Homes, Inc. Philip A. Frantz Attorney; Partner Coldren and Frantz Robert E. Hoptry Chairman and President Indiana United Bancorp Lawrence R. Rueff, D.V.M. Veterinarian Daryl R. Tressler Chairman and President Union Bank and Trust Company John G. Young Chairman and Chief Executive Officer Jay Garment Co. Executive Administration Daryl R. Tressler Chairman and President Division Managers W. Brent Hoptry Senior Vice President Lending Division Glenn R. Raver Senior Vice President Retail Services and Operation Division Dee M. Knueven Senior Insurance Officer and Manager Insurance Division Daniel F. Anderson Senior Trust Officer Trust Division James L. Green Controller Financial Planning and Control Regional Federal Savings Bank Directors William G. Barron Chairman and President Barron Homes, Inc. Michael K. Bauer President and Chairman Regional Federal Savings Bank D.J. Hines President Schuler Realty, Inc. Robert E. Hoptry Chairman and President Indiana United Bancorp Michael J. Kapfhammer President Buckhead Grill Charles E. MacGregor Attorney Wyatt, Tarrant, Combs and Orbison Marvin L. Slung Sales Representative Jeb Advertising Edward J. Zoeller President E.M. Cummings Veneer Executive Administration Michael K. Bauer Chairman and President Division Managers Dennis R. Morrison Senior Vice President Lending Division Carmen L. Glenn Vice President and Treasurer Financial Planning and Operations Division James S. Honour, Jr. Vice President Retail Services Division Inside Back Cover Indiana United Bancorp Board of Directors (Picture) (Picture) (Picture) William G. Barron Philip A. Frantz Glenn D. Higdon (Picture) (Picture) (Picture) Robert E. Hoptry Martin G. Wilson Edward J. Zoeller Shareholder Information Annual Meeting Tuesday, May 20, 1997, 10:00AM Conference Center, Second Floor Union Bank and Trust Company 201 N. Broadway Greensburg, Indiana 47240 Corporate Address Indiana United Bancorp 201 N. Broadway Street Post Office Box 87 Greensburg, Indiana 47240 Form 10-K Copies of the Company's 1996 Form 10-K filed with the Securities and Exchange Commission are available without charge to all shareholders upon request. Please direct requests to Jay B. Fager, Treasurer and Chief Financial Officer. Transfer Agent Securities Transfer Department Mid America Bank of Louisville Post Office Box 1497 Louisville, Kentucky 40201-1497 (800) 925-0810 Common Shares The common shares of the Company are listed on the NASDAQ National Market System. In newspaper listings, company shares are frequently listed as IndUtd. The trading symbol is IUBC. Market Makers Market Makers in the Company's common stock include: J.J.B. Hilliard/W.L. Lyons, Inc. NatCity Investments, Inc. Stifel, Nicolaus & Company, Inc. The range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below. 1996 Q4 Q3 Q2 Q1 High 29 1/16 27 25 1/2 26 1/4 Low 25 25 23 1/4 24 1/4 Last Sale 29 1/16 25 3/4 24 1/2 24 1/4
1995 Q4 Q3 Q2 Q1 High 28 27 1/2 23 23 Low 25 19 1/2 20 19 1/2 Last Sale 25 27 20 1/2 22 1/2 BACK COVER Indiana United Bancorp 201 N. Broadway P.O. Box 87 Greensburg, Indiana 47240
EX-21 3 EXHIBIT (21)--SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation Union Bank and Trust Company of Indiana Indiana Regional Federal Savings Bank United States Kentucky United Bancorp, Inc. Kentucky EX-23 4 EXHIBIT (23)--CONSENT OF GEO. S. OLIVE & CO. LLC We consent to the incorporation by reference in the Registration Statement on Form S-8, File No.33-45395, of our report dated February 3, 1997 contained in the 1996 Annual Report to Shareholders of Indiana United Bancorp, which is incorporated by reference in this Form 10-K. GEO. S. OLIVE & CO. LLC Indianapolis, Indiana March 26, 1997 EX-27 5
9 This schedule contains summary financial information extracted from Consolidated Statement of Income and Balance Sheet and is qualified in its entirety by reference to such financial statements. 12-MOS 3-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 13,236 0 160 0 5,900 0 0 0 81,187 0 0 0 0 0 219,483 0 2,506 0 328,346 0 276,402 0 15,683 0 3,512 0 5,000 0 0 0 0 0 1,251 0 26,498 0 328,346 0 18,266 4,808 5,308 1,332 393 135 23,967 6,275 10,863 2,838 12,006 3,138 11,961 3,137 150 60 0 0 8,619 2,010 4,694 1,476 4,694 1,476 0 0 0 0 2,693 894 2.11 0.71 2.11 0.71 7.98 0 1,245 0 5 0 0 0 0 0 2,754 0 456 0 58 0 2,506 0 1,102 0 0 0 1,404 0
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