-----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, MvaWxOprh6ZxwC4t+XMfIhUjIySqbQHNNO5Ld/FSkyUqlDvPJMbLEGEcpwxmJpjI LRm9ybhVtEooFUtfNdFyLg== 0000926274-00-000215.txt : 20000331 0000926274-00-000215.hdr.sgml : 20000331 ACCESSION NUMBER: 0000926274-00-000215 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: SEC FILE NUMBER: 000-12422 FILM NUMBER: 588388 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, 1999 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) 663-0157 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 $80,116,427 as of March 18, 2000. As of March 18, 2000, there were outstanding 4,855,541 common shares, without par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Into Which Incorporated --------- ----------------------- 1999 Annual Report to Shareholders Part II (Items 5 through 9) Definitive Proxy Statement for Annual Meeting of Shareholders to be held May 31, 2000 Part III (Items 10 through 13) EXHIBIT INDEX: Page 9 FORM 10-K TABLE OF CONTENTS - --------------------------------------------------------------------------- Part I Page Item 1 Business 3 Item 2 Properties 9 Item 3 Legal Proceedings 9 Item 4 Submission of Matters to a Vote of Security Holders 9 Part II Item 5 Market For the Registrant's Common Equity and 9 Related Stockholder Matters Item 6 Selected Financial Data 9 Item 7 Management's Discussion and Analysis of Financial 9 Condition and Results Of Operations Item 7A Quantitative and Qualitative Disclosures About Market Risk 9 Item 8 Financial Statements and Supplementary Data 9 Item 9 Disagreements on Accounting and Financial Disclosure 9 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 See below and Management Item 13 Certain Relationships and Related Transactions See below Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports See below on Form 8-K Pursuant to General Instruction G, the information called for by Items 10-13 is omitted by Indiana United Bancorp since Indiana United Bancorp will file with the Commission a definitive proxy statement to shareholders pursuant to regulation 14A not later than 120 days after the close of the fiscal year containing the information required by Items 10-13 2 PART I ITEM 1. BUSINESS - ----------------- (Dollars in thousands except per share data) 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 to 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"). On April 30, 1998, the Company completed a merger of equals with P.T.C. Bancorp, Brookville, Indiana. People's Trust Company, ("People's Trust"), the wholly owned subsidiary of P.T.C. Bancorp, had more than $300,000 in assets. This transaction was regarded by both companies as a merger of equals and was accounted for as a "pooling of interests" for accounting and financial reporting purposes. Effective April 1, 1999, the Company acquired the property and casualty insurance business lines of Andy Anderson Insurance Agency, Inc. d/b/a The Anderson Group, Owensboro, Kentucky ("The Anderson Group"). The results of operations have been included in these financial statements since the acquisition date under the purchase method of accounting. The acquisition was effected by the purchase of net assets and expertise and The Anderson Group was integrated into a newly formed subsidiary of the Company, The Insurance Group, Inc. ("The Insurance Group"). The Company issued 80,913 shares of its common stock to The Anderson Group shareholders, valued at $1,364. Assets total $2,180 (including cash of $250) and liabilities assumed of $780. Assets acquired include goodwill of $1,628, which is being amortized over 15 years under the straight-line method. Under the agreement, the acquirees will obtain additional shares of company stock as defined in the agreement if certain financial targets are attained during the measurement period, which ends March 31, 2002. Subsequently, the Company caused The Insurance Group to become a wholly owned subsidiary of Union Bank by transferring its ownership in The Insurance Group to that bank subsidiary. The general lines insurance business previously conducted by Union Bank in Greensburg and Portland, Indiana will be is now conducted through The Insurance Group subsidiary. On November 9, 1999 the Company announced a definitive agreement to acquire First Affiliated Bancorp ("First Affiliated") of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank N. A. The transaction will be accounted for using the pooling-of-interests method of accounting. The Company will issue approximately 1,020,000 shares of its common stock to the in this acquisition. The conversion rate will be 4.4167shares of Company stock for each outstanding share of First Affiliated. As of December 31, 1999 First Affiliated had $131,358 in assets and, $116,520 in deposits with four banking offices in Illinois and one in Indiana. The Company operates 40 offices in 15 Indiana counties with 404 employees. As of December 31, 1999, the Company had consolidated assets of $978,893, consolidated deposits of $824,385 and shareholders' equity of $59,209. Through its Banks, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agribusiness 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 letters of credit and repurchase agreements. 3 The lending activities of the Banks are separated into primarily the categories of commercial/agricultural, real estate and consumer. Loans are originated by the lending officers of the Banks subject to limitations set forth in lending policies. The Board of Directors reviews and approves loans up to the Banks' legal lending limit, monitors concentrations of credit, problem and past due loans and charge-offs of uncollectible loans and formulates loan policy. The Banks maintain conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include granting loans on a sound and collectible basis, serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category and developing and applying adequate collection policies. Commercial loans include secured and unsecured loans, including real estate loans, to individuals and companies and to governmental units within the market area of the Banks for a myriad of business purposes. Agricultural loans are generated in the Banks' markets. Most of the loans are real estate loans on farm properties. Loans are also made for agricultural production and such loans are generally reviewed annually. Residential real estate lending has been the largest component of the loan portfolio for many years. All affiliate banks have generated residential mortgages for their own portfolios. In addition, People's Trust has been originating residential mortgages for sale into the secondary market since 1990 and has extended its expertise to the other affiliates so that in 1999 all affiliates originate for the secondary market as well as continue to grow their internal portfolios. At December 13, 1999, the Company was servicing a $181,150 portfolio, which increased from $150,523 and $110,341 at year-end 1998 and 1997. By originating loans for sale in the secondary market, the Company can more fully satisfy customer demand for fixed rate residential mortgages and increase fee income. Consumer lending includes secured and unsecured loans for personal, family or household purposes, such as automobile installment loans and personal lines of credit. Consumer lending has increased throughout 1999 allowing the Company to grow its portfolio to $79,154. In addition to providing greater diversification within the loan portfolio, consumer loans also provide a higher gross yield than residential real estate mortgages. The principal source of revenues for the Company is interest and fees on loans, which accounted for 69.5% of total revenues in 1999, 73.7% in 1998 and 74.4% in 1997. The Company's investment securities portfolio is primarily comprised of U. S. Treasuries, federal agencies, state and municipal bonds, mortgage-backed securities and corporate securities. The Company has classified 92.7% of its investment portfolio as available for sale, with market value changes reported separately in shareholders' equity. Funds invested in the investment portfolio generally represent funds not immediately required to meet loan demand. The Company's investment portfolio accounted for 20.4% of total revenues in 1999, 14.6% in 1998 and 15.4% in 1997. As of December 31, 1999, the Company had not identified any securities as being "high risk" as defined by the FFIEC Supervisory Policy Statement on Securities Activities. The primary sources of funds for the Banks are deposits generated in local market areas. To attract and retain stable deposits, the Banks market various programs for demand, savings and time deposit accounts. These programs include interest and non-interest bearing demand and individual retirement accounts. The Company also purchased four branch facilities and their deposits in the first quarter of 1999 from a large regional competitors. In all, more than $104,000 in deposits were acquired, together with approximately $2,000 in consumer and small business loans. Union Bank purchased two former branch facilities and opened them "de novo" in April 1999 to expand its market. 4 Currently, national retailing and manufacturing subsidiaries, brokerage and insurance firms and credit unions are fierce competitors within the financial services industry. Mergers between financial institutions within Indiana and neighboring states, which became permissible under the Interstate Banking and Branching Efficiency Act of 1994, have added competitive pressure. The permissibility of banks and bank holding companies to acquire thrift institutions will undoubtedly further redefine the competitive marketplace. The Company's Banks are located in predominantly non-metropolitan areas and their business is centered in loans and deposits generated within markets considered 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, 1999, the Company and its subsidiaries had approximately 404 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 ("ACT"). 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, the Company is a non-diversified unitary savings and loan holding company subject to regulations, examinations, supervision and reporting requirements of the Office of Thrift Supervision ("OTS"). Under the ACT, a BHC is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of voting stock of any company that 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. These activities include: operating a savings association, mortgage company, finance company, credit card or factoring company; performing certain data processing operations; providing investment and financial advice; and, acting as an insurance agent for certain types of credit-related insurance. 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 that permits reciprocal entry by Indiana BHCs. Under the ACT, 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. 5 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 and People's Trust are 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 represent an unsafe and unsound banking practice or violation of law. The deposits of Union Bank and People's Trust 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, thrift institutions paid approximately five times higher assessment rates than commercial banks (6.44 cents versus 1.29 cents per $100 of deposits). Beginning in the year 2000, BIF and SAIF-insured institutions will pay the same assessment rate of 2.43 cents per $100 of deposits. 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, 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. The federal banking agencies have issued guidelines establishing standards for safety and soundness, for operational and managerial standards and compensation standards. The federal banking agencies have issued guidelines for asset quality and earnings. 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 that provides a measure of the change in a bank's economic value. 6 The results of the supervisory and internal models would be one factor regulators would 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 that, in most situations, will reduce the competitiveness of the institution. The Riegle Community Development and Regulatory Improvement Act of 1994 ("1994 Act") made several changes in existing law affecting bank holding companies. These include a reduction in the minimum post-approval antitrust review waiting period for depository institution mergers and acquisitions, and the substitution of a notice for an application when a bank holding company proposes to engage in, or acquire a company to engage in, non-bank activities. The 1994 Act also 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. The Riegle-Neal interstate Banking and Branching Efficiency Act of 1994 ("Branching Act") substantially changed the geographic constraints applicable to the banking industry. In general, the Branching Act permits BHCs that are adequately capitalized and adequately managed to acquire banks located in any other state, subject to certain total deposit limitations. Effective June 1, 1997, the Branching Act also allows banks to establish interstate branch networks through acquisitions of other banks. Establishment of de novo interstate branches or the acquisition of individual branches of a bank in another state is also allowed if authorized by state law. Institutions must maintain a loan activity-to-deposit ratio within a state at least equal to one-half of the average percentage for all banks in the state or the institution's federal regulator may close the branch and restrict the institution from opening new branches in the state. The Branching Act allowed individual states to "opt out" of certain provisions by enacting appropriate legislation prior to June 1, 1997. 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 assessment was repealed. The Federal Reserve Board has approved interim procedures, effective March 11, 2000 for bank holding companies and foreign banks with U.S. offices to be treated as financial holding companies. Financial holding companies may engage in a broad range of securities, insurance and other financial activities under the Gramm-Leach-Bliley Act. Bank holding companies and foreign banks that meet the relevant qualifications may begin filing elections to become financial holding companies at any time. 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 BHCs to maintain a minimum Tier 1 leverage ratio of 3 percent capital 7 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, 1999, the Company's leverage ratio of capital to total assets was 6.5%. The FRB, OTS and FDIC each have approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company's Tier 1 Capital to Risk-Weighted Assets Ratio was 9.6% and its Total Capital to Risk-Weighted Assets Ratio was 10.9% at December 31, 1999. The Company's Banks had capital to asset ratios and risk-adjusted capital ratios at December 31, 1999, in excess of the applicable regulatory minimum requirements. An assessment of a bank's exposure to declines in the economic value of its capital due to changes in interest rates is included in evaluations of capital adequacy by federal regulators. A joint policy statement has been issued by federal regulators to provide guidance on sound practices for managing interest rate risk. The policy statement contains the various factors to be considered and describes the board of directors' responsibilities in implementing a risk management process. The requirements of a bank's senior management in ensuring the effective management of interest rate risk is described and the elements to be contained in a risk management process are specified. Federal regulators have issued final regulations revising risk-based capital standards and the regulatory framework for measuring market risk. Any BHC or bank with significant exposure to market risk must measure such risk internally and maintain adequate capital to support that exposure. YEAR 2000 ("Y2K") COMPUTER ISSUES The Company did not encounter any Y2K related problems nor is management aware of any customers who encountered significant Y2K problems. The effort to assure such success did not go unnoticed in terms of our employee's time, effort and dedication to a task. We commend those individuals for their diligence. The Company incurred approximately $150 in capital and other expenditures for Y2K preparations. Management is not aware of any remaining uncertainties or contingencies with respect to Y2K issues. STATISTICAL DISCLOSURES The following statistical data should be read in conjunction with Management's Discussion and Analysis (Item 7), Selected Financial Data (Item 6) and the Financial Statements and Supplementary Data (Item 8). The following table analyzes the change in net interest income due to rate and volume. Changes due to both rate and volume have been allocated in proportion to the absolute dollar value of rate and volume changes. Volume of loans, securities and deposits primarily account for the increase in net interest income of 1999 over 1998 and 1998 over 1997 VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
Volume/Rate Analysis of Changes in Net Interest Income (Tax Equivalent Basis) - ----------------------------------------------------------------------------------------------------------------------------- 1999 OVER 1998 1998 OVER 1997 - ----------------------------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total - ----------------------------------------------------------------------------------------------------------------------------- Interest income Loans $ 7,466 $ (1,952) $ 5,514 $ 4,591 $ (716) $ 3,875 Securities 6,441 (377) 6,064 451 (113) 338 Federal funds sold (557) (205) (762) 944 (64) 880 Short-term investments (21) - (21) (16) 7 (9) - ----------------------------------------------------------------------------------------------------------------------------- Total interest income 13,329 (2,534) 10,795 5,970 (886) 5,084 - ----------------------------------------------------------------------------------------------------------------------------- Interest expense Interest-bearing demand 1,313 (553) 760 221 (19) 202 Savings 1,163 (11) 1,152 166 (92) 74 Certificates of deposit 4,050 (1,604) 2,446 1,817 (104) 1,713 Borrowings 857 58 915 184 (266) (82) Trust preferred securities - (20) (20) 1,913 5 1,918 - ----------------------------------------------------------------------------------------------------------------------------- Total interest expense 7,383 (2,130) 5,253 4,301 (476) 3,825 - ----------------------------------------------------------------------------------------------------------------------------- Change in net interest income $ 5,946 $ (404) 5,542 $ 1,669 $ (410) 1,259 ======================= =================== Change in tax equivalent adjustment 187 (27) - ----------------------------------------------------------------------------------------------------------------------------- Change in net interest income before tax equivalent adjustment $ 5,355 $ 1,286 - -----------------------------------------------------------------------------------------------------------------------------
The following table discloses the allocation of the allowance for loan losses to the major loan categories. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 Percent Percent Percent Percent Percent of loans of loans of loans of loans of loans to total to total to total to total to total December 31 Amount loans Amount loans Amount loans Amount loans Amount loans - -------------------------------------------------------------------------------------------------------------------------------- Real estate Residential $ 369 48% $ 294 45% $ 181 44% $ 223 45% $ 181 47% Farm real estate 328 7 275 7 20 8 21 8 20 10 Commercial 737 15 715 18 327 18 348 15 327 14 Construction and development 1,365 8 830 6 66 3 139 5 66 4 - -------------------------------------------------------------------------------------------------------------------------------- Total real estate 2,799 78 2,114 76 594 73 731 74 594 75 - -------------------------------------------------------------------------------------------------------------------------------- Commercial Agribusiness 912 2 912 3 186 3 224 4 186 4 Other commercial 360 8 316 8 441 9 677 9 441 10 - -------------------------------------------------------------------------------------------------------------------------------- Total Commercial 1,272 10 1,228 11 627 13 901 13 627 14 - -------------------------------------------------------------------------------------------------------------------------------- Consumer 1,285 12 1,155 13 611 14 514 13 612 12 Unallocated 1,693 1,602 3,619 2,360 2,643 - -------------------------------------------------------------------------------------------------------------------------------- Total $ 7,049 100% $ 6,099 100% $ 5,451 100% $ 4,506 100% $ 4,476 100% - --------------------------------------------------------------------------------------------------------------------------------
The composition and maturity of the investment portfolio is depicted in the following table. INVESTMENT SECURITIES
Investment Securities (Carrying Values at December 31) Beyond Within 10 Total 1 Year 2-5 Yrs 6-10 Yrs Years 1999 - ------------------------------------------------------------------------------------------------------------------ Available for sale Federal agencies $14,362 $101,380 $ 22,668 $ - $ 138,410 State and municipal 2,651 6,323 4,150 10,196 23,320 Mortgage-backed securities 1,837 25,599 13,375 - 40,811 Corporate obligations 2,681 5,577 5,720 4,212 18,190 Equity and other securities 162 547 - 4,046 4,755 - ------------------------------------------------------------------------------------------------------------------ Total available for sale $21,693 $139,426 $ 45,913 $18,454 $ 225,486 ================================================================================================================== Weighted average yield* 5.62% 5.93% 6.76% 7.00% 6.16% Held to Maturity - ------------------------------------------------------------------------------------------------------------------ State and municipal $ 4,995 $ 9,268 $ 1,175 $ 1,315 $ 16,753 Corporate obligations - 497 - - 497 Other securities - - 538 538 - ------------------------------------------------------------------------------------------------------------------ Total held to maturity $ 4,995 $ 9,765 $ 1,713 $ 1,315 $ 17,788 ================================================================================================================== Weighted average yield* 7.04% 6.81% 6.91% 7.80% 6.96%
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, 1999, 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 The following table discloses the average deposits for the Company for 1999, 1998 and 1997 and the maturity schedule of the over $100,000 certificates of deposit. AVERAGE DEPOSITS
Average Deposits - -------------------------------------------------------------- ------------------------------ ----------------------- 1999 1998 1997 - -------------------------------------------------------------- ------------------------------ ----------------------- Amount Rate Amount Rate Amount Rate - -------------------------------------------------------------- ------------------------------ ----------------------- Demand $77,210 $58,407 $49,817 Interest Bearing Demand 179,427 2.63% 131,263 3.01% 123,914 3.03% Savings 105,170 2.89 64,990 2.91 59,386 3.06 Certificates of Deposit 437,662 5.12 360,295 5.55 327,541 5.58 - ---------------------------------------------- ---------- ---------- Totals $799,469 3.78% $614,955 4.20% $560,658 4.25% ========== ========== ==========
As of December 31, 1999, certificates of deposit and other time deposits of $100 or more mature as follows
3 months or less 4-6 months 6-12 months over 12 months Total ---------------- ---------- ----------- -------------- ------- Amount $36,917 $18,792 $22,496 $20,869 $99,074 Percent 37% 19% 23% 21% 100%
Maturities and sensitivity to changes in interest rates of commercial and construction loans at December 31, 1999 are disclosed in the following table. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES OF COMMERCIAL AND CONSTRUCTION LOANS AT DECEMBER 31, 1999
Maturities and Sensitivity to Changes in Interest Rates of Commercial and Construction Loans at December 31, 1999 - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Due: Within 1 Year 1 - 5 Years Over 5 years Total - -------------------------------------------------------------------------------------------------------------------------------- Loan Type Commercial and industrial $23,884 $11,630 $4,025 $39,539 Agricultural production financing and other loans to farmers 12,412 2,095 356 14,863 Construction and development 48,515 2,206 - 50,721 - -------------------------------------------------------------------------------------------------------------------------------- Totals $84,811 $15,931 $4,381 $105,123 - -------------------------------------------------------------------------------------------------------------------------------- Percent 81% 15% 4% 100% - -------------------------------------------------------------------------------------------------------------------------------- Rate Sensitivity Fixed Rate $13,792 $8,369 $4,022 $26,183 Variable Rate 71,019 7,562 359 78,940 - -------------------------------------------------------------------------------------------------------------------------------- Totals $84,811 $15,931 $4,381 $105,123 - --------------------------------------------------------------------------------------------------------------------------------
8 ITEM 2. PROPERTIES - ------------------- Indiana United Bancorp owns no physical properties and has no need for space other than what is available at the offices of its subsidiaries. Its subsidiaries own, or lease, all of the facilities from which they conduct business. The Company has 40 locations of which People's Trust has 20, Union Bank has 14 and Regional Bank has 6. At December 31, 1999, the Company had $15,015 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 material claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ No matters were submitted during the fourth quarter of 1999 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 Company's Annual Report to Shareholders, Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA - ------------------------------- The information required under this item is incorporated by reference to 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 the Company's Annual Report to Shareholders, Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- The information required under this item is incorporated by reference to 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 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, 1999, 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. 9 PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Included in (a) 1. Financial statements Annual Report Indiana United Bancorp and Subsidiary Independent auditor's report 21 Consolidated balance sheets at December 31, 1999 and 1998 22 Consolidated statements of income, years ended December 31, 23 1999,1998 and 1997. Consolidated statements of cash flows, years ended December 31, 24 1999, 1998 and 1997 Consolidated statements of shareholders' equity, years ended 25 December 31, 1999, 1998 and 1997 Notes to consolidated financial statements 26-39 (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: 2. Amended and Restated Agreement and Plan of Merger dated as of November 5, 1999, among Registrant, FAB Merger Corporation and First Affiliated Bancorp, Inc.(incorporated by reference to Appendix A to the Proxy Statement/Prospectus filed March 29,2000 with the Commission)(Registration No.3333-33032)) 3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 of the Registrant filed June 16,1986 with the Commission (Registration Statement No. 33-06334), as amended by Articles of Amendment to Articles of Incorporation incorporated by reference to Exhibit 3 (c) to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31, 1987 filed on or about March 30, 1988 with the Commission (Commission File No. 0-12422)), and as further amended by Articles of Amendment to Articles of Incorporation dated July 27,1998(incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31,1998 filed March 29, 1999 with the Commission (Commission File No. 0-12422)). . 3.2 Amended and Restated Bylaws dated adopted April 28, 1998 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K of the Registrant for the fiscal year ended December 31,1998 filed March 29, 1999 with the Commission (Commission File No. 0-12422)). 4.1 Form of Indenture dated as of December 12, 1997 between Registrant and State Street Bank and Trust Company, as Trustee, with respect to 8.75% Subordinated Debentures due 2027 (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.2 Form of Subordinated Debenture Certificate (incorporated by reference to such Certificate (included as an exhibit to Exhibit 4.1 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.3 Form of IUB Capital Trust Amended and Restated Trust Agreement dated as of December 12, 1997 among the Registrant, as Depositor, State Street Bank and Trust Company, as Property Trustee, Wilmington Trust Company, as Delaware Trustee and the Administrative Trustees named therein (incorporated by reference to Exhibit 4.5 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.4 Form of Preferred Securities Guarantee Agreement dated as of December 12, 1997 between the Registrant and State Street Bank and Trust Company (incorporated by reference to Exhibit 4.7 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 4.5 Form of Agreement as to Expenses and Liabilities dated as of December 12, 1997 between Registrant and IUB Capital Trust (incorporated by reference to to such Agreement included as an exhibit to Exhibit 4.5 to the Registration Statement on Form S-2 of the Registrant filed November 19, 1997 with the Commission (Registration No. 333-40579)). 10 13 1999 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). 16 Letter re: change in certifying accountant (incorporated by reference to Exhibit 16 to the Current Report on Form 8-K of Indiana United Bancorp filed April7, 1999 with the Commission (Commission File No.0-12422)) 21 List of subsidiaries of the Registrant. 23.1 Consent of Crowe, Chizek and Company LLP 23.2 Consent of Olive LLP. 27 Financial Data Schedule. 99 Opinion of Olive LLP (b) Reports on Form 8-K The Registrant filed a Form 8-K on November 5, 1999 disclosing a definitive agreement to acquire First Affiliated Bancorp, Inc. Watseka, Illinois. 11 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 29th day of March, 2000. INDIANA UNITED BANCORP /s/James L. Saner, Sr ---------------------------------- James L. Saner, Sr., President and Chief Executive Officer 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 - ------------------------------ Eric E. Anderson Director March 21, 2000 - ------------------------------ John E. Back Director March 21, 2000 - ------------------------------ William G. Barron Director March 21, 2000 - ------------------------------ Dale J. Deffner Director March 21, 2000 - ------------------------------ Robert S. Dunevant Director March 21, 2000 - ------------------------------ Philip A. Frantz Director March 21, 2000 - ------------------------------ Director Robert E. Hoptry Chairman of the Board March 21, 2000 - ------------------------------ Edward J. Zoeller Director March 21, 2000 - ------------------------------President and Chief Executive Officer James L. Saner Sr. Director March 29, 2000 - ------------------------------ Donald A. Benziger Senior Vice President & Chief Financial Officer March 29, 2000 - ---------------------------- Douglas D Deppen Vice President & Principal Accounting Officer March 29, 2000 EX-13 2 Exhibit 13 Indiana United Bancorp 1999 Annual Report Hometown Service World Class Banking Indiana United Bancorp is a registered financial services holding company incorporated under the laws of Indiana. Through its three banking subsidiaries, People's Trust Company, Brookville, Indiana; Regional Bank, New Albany, Indiana; and Union Bank, Greensburg, Indiana, it operates 40 offices in 15 eastern and southeastern Indiana counties. All three banking subsidiaries offer a full array of competitive commercial and consumer loans and deposit related services, as well as a full-service trust division. Through its insurance subsidiary, it operates a total of three agencies in Greensburg and Portland, Indiana as well as Owensboro, Kentucky. Contents Letter to Shareholders 2 [LOCATION MAP APPEARS HERE] How Are We Different? 4 Management's Discussion and Analysis 9 Management's Report 21 Auditor's Report 21 Financial Statements 22 Notes to Financial Statements 26 Directors and Officers 40 Corporate and Investor Information 41
Financial Highlights (Dollar amounts in thousands except share and Percent per share data) 1999 1998 Change - ---------------------------------------------------------------------------------------------------------------------- Results of Operations Net interest income $31,247 $25,892 20.68% Provision for loan losses 1,641 1,218 34.73 Net income 7,082 6,448 9.83 Per Common Share * Earnings per share (basic) $1.47 $1.36 8.09% Earnings per share (diluted) 1.47 1.35 8.89 Cash earnings per share (basic)** 1.71 1.42 20.42 Cash earnings per share (diluted)** 1.71 1.42 20.42 Dividends paid *** 0.64 0.59 8.47 Book value - end of period Excluding SFAS No.115 adjustment 13.15 12.25 7.35% Including SFAS No.115 adjustment 12.19 12.40 (1.69) Market price - end of period 18.75 22.13 (15.27) - ---------------------------------------------------------------------------------------------------------------------- At Year End Total assets $978,893 $827,945 18.23% Loans, excluding held for sale 643,227 539,404 19.25 Allowance for loan losses 7,049 6,099 15.58 Total deposits 824,385 709,871 16.13 Common shareholders' equity 59,209 59,196 0.02 - ---------------------------------------------------------------------------------------------------------------------- Financial Ratios Return on average assets 0.76% 0.89% (14.61%) Return on average common shareholders' equity 11.85 11.23 5.57 Tier one capital to average assets*** 6.50 8.30 (21.69) Total capital to risk-adjusted assets*** 10.90 13.71 (20.50) - ---------------------------------------------------------------------------------------------------------------------- Shares outstanding at year end 4,855,541 4,774,628 1.69 Number of common shareholders 2,662 2,517 5.76 Number of full-time equivalent employees 404 360 12.22
* Adjusted for stock split and dividends ** Net income plus the after tax effect of the amortization of intangible assets for the period. *** Dividends paid by Indiana United Bancorp without restatement for pooling of interests **** As defined by regulatory agencies [GRAPHS APPEAR HERE] Dear Shareholders and Friends: Several key events over the course of 1999 have laid the foundation for the future success of Indiana United Bancorp. [PHOTO OF JAMES L. SANER, SR. APPEARS HERE] [PHOTO OF ROBERT E. HOPTRY APPEARS HERE] There is no doubt that 1999 was filled with growth and expansion for our Company as we continued our journey toward becoming a complete financial service provider. In reviewing this report, you will quickly see that every area of the Company grew. Branch acquisition and expansion activities filled the first two quarters of 1999. People's Trust Company completed its acquisition of four Indiana banking offices in Henry and Wayne counties in February, and Union Bank opened two de novo banking facilities in Madison County, Indiana in April. These transactions completed our strategic objective of acquiring a total of eleven offices from various large regional banks, which began back in the third quarter of 1998. The Company now operates a total of 40 banking offices in 15 Indiana counties, and ended the year with $979 million in total assets. We also began the process of expanding our insurance division. Early in the second quarter, the Company formed a new subsidiary - The Insurance Group, Inc., which purchased the Anderson Insurance Company, headquartered in Owensboro, Kentucky. The new agency, combined with the two other agencies already operated by the Company, doubled its total premium for The Insurance Group, Inc. over the previous year. As we move into the year 2000, we envision broadening our pursuit of offering more non-traditional financial services to our customers, such as: life insurance, health insurance, and long term care insurance. The expansion of the existing commercial and personal lines of our property and casualty insurance business is also part of our strategic planning for 2000. This year's growth, while fueled by branch acquisitions on the deposit side, was outstanding on the loan side as well. Total loans grew by more than $103 million, which represented a 19.2% increase over the previous year. It is important to note that with this tremendous amount of growth, the asset quality remains strong. As you will see elsewhere in this report, Indiana United continues its long history of outperforming its peers in both non-performing assets and chargeoffs. We anticipate no change in this trend for the future. While many times growth and expansion can stall increased earnings, our Company increased its overall net profits to $7.082 million compared to $6.448 million for 1998; representing a 9.8% increase. Earnings per share were $1.47 compared to $1.35 for the 1998 year, an increase of more than 8.8%. We see this bottom line earnings increase continuing into the next year. Our strategic plan projects our bottom line earnings to increase a minimum of 10% for each year through at least 2002. 2 Indiana United just marked its twelfth consecutive year of increasing dividends. Our 1999 dividend rose to $.64 per share compared to $.59 per share for 1998, an 8.5% increase. Indiana United just marked its twelfth consecutive year of increasing dividends. Our 1999 dividend rose to $.64 per share compared to $.59 per share for 1998, an 8.5% increase. Then, there was the Y2K issue that seemed to be in every headline and on everyone's mind as we approached that eventful day of December 31, 1999. Our Company as well as our entire industry was extremely well prepared and the New Year came without issue. Our management and employees worked many months to ensure that smooth transition. Our Company continues to focus on the future and will be introducing Internet banking products to both commercial and retail customers during the second quarter of 2000. This, as well as other product enhancements, will continue to deploy technology to allow our Company to offer various products and services through many different delivery channels; thus allowing our customers access to our services through the Internet, telephone, or ATM's, and yet still provide personal contact through our extensive branch network. Indiana United's continued success will include various other acquisitions and opportunities, such as the acquisition of First Affiliated Bancorp and its wholly owned subsidiary, Capstone Bank, which is headquartered in Watseka, Illinois. This $130 million asset, five-office acquisition will propel the Company to $1.1 billion in assets by the end of the second quarter, 2000. This acquisition also provides entry into the state of Illinois, which has more independent community bank charters than all of Indiana, Kentucky, and Ohio combined. Capstone Bank will become the fourth banking affiliate in our Company and will allow us the opportunity to strategically build a several hundred million-dollar affiliate in Illinois with additional acquisitions. We experienced a changing of the guard in May of 1999 as I was appointed President and Chief Executive Officer of Indiana United Bancorp replacing the founder of this corporation, Bob Hoptry. While Bob continues to serve as the Chairman of our Board, he retired officially on June 30, 1999. Bob's wisdom and strong credit savvy will be difficult to replace in the day-to-day management of the Company. We wish he and his wife, Norma, well after serving not only this Company since 1983 but also his many years in the banking industry. We stand poised for the future. We have an excellent management team in place. We have laid the foundation for our future success. We have the support of loyal shareholders. So on behalf of my management staff, officers, directors and employees, we wish to thank you for your support, trust and confidence in our company and our vision. James L. Saner, Sr. President and Chief Executive Officer 3 As Indiana United Bancorp continues to grow and expand, it's important to remain focused on what has sustained us over the past sixteen years: our commitment to community values and our desire to differentiate ourselves from mega-banking organizations. How are we different? The growth of our organization is not dependent on acquisitions into a larger whole - but, through partnerships with other independent community banks committed to preserving the elements associated with home-town service: quality products, local decision making, local loan servicing, quick response-time - just to name a few. Indiana United Bancorp ("IUB") offers the opportunity for these partners to retain those elements which are so important while providing the benefits of increased capital and technological resources. The increase in mergers and acquisitions within the banking industry has resulted in a decline in the number of banks with roots in their communities. This shouldn't mean that the citizens and business interests of small and medium-sized communities no longer have the right to expect state-of-the-art banking products and services. The challenge today is not so much in providing these contemporary conveniences as it is to provide them without compromising the core values, local flavor and decision-making autonomy that have traditionally been so important to the clients of these community-based banks. IUB is able to offer a strong foundation of resources within our corporate structure that allows smaller independent banks to eliminate the red-tape hassles of backroom functions and remain focused on the people and communities that they so vehemently want to support. Each of these communities has unique aspects requiring specialized banking products or services to meet the local needs. Our independent partners can continue to be a major force in fostering community prosperity. Our strength lies not with the sum of each of our parts; but, within the diversity and interdependence of each of our banking and non-banking partners. People's Trust Company - People's Trust Company, ("People's"), is IUB's single largest banking subsidiary. People's is a family of 20 banking offices in nine Indiana counties. Built through a [SIDEBAR] "People's Trust Company prides itself in getting to know its communities and the people who live there. Because we truly focus on the needs of our customers, I believe we are able to lift customer service to a new level of excellence and to offer products that meet the financial needs of those that bank with us. In exchange, People's Trust Company has gained strong customer relation-ships and a true belonging in the communities that we serve." Lynn T. Gordon, President and CEO, People's Trust Company People's Trust Company Main Office Address: 9014 State Road 101 P.O. Box 7 Brookville, IN 47012-0007 Tel: 765-647-3591 Fax: 765-647-3531 www.peoplestrustco.com Number of Offices: 20 Number of Employees: 220 Total Deposits: $401,931,000 Total Loans: $307,497, 000 Total Assets: $455,541,000 4 series of partnerships with small community banks, this organization prides itself on building and fostering strong, long-term relationships with its customers. People's success comes from offering customers solutions they do not get anywhere else. By taking the time to understand each customer's entire financial picture, People's professionals can respond with complete and formative financing and investment strategies. This is a primary reason that People's continues to work with customers who have done business here for many decades. Some families and businesses have been with People's for generations. Every day, People's is driven to exceed the expectations of its customers in terms of value delivered. This is accomplished by strategy, investment and execution along two paths: 1.) A commitment to listening to customers and asking the right questions, resulting in the recommendation of specific alternatives and solutions to their individualized situations, and 2.) Diversification of products and services that are rich in features and flexibility tailored to meet the needs and desires of its customers. In addition to the traditional banking role of facilitating commerce in its communities, People's delivers value in other ways. People's and its associates contribute both their time and resources to their communities. Officers are expected to take leadership roles in local organizations and requests for volunteers are typically met with an overwhelming response throughout the organization. People's makes charitable contributions to a broad array of community services and programs with the majority being allocated to local community enhancements at all levels. Vital, growing communities with a high quality of life are essential for People's to continue to excel. Union Bank and Trust Company of Indiana - Union Bank and Trust Company of Indiana, ("Union Bank"), is IUB's oldest banking subsidiary. Union Bank was the first bank purchased by IUB commensurate with the holding company's inception in 1983. However, Union Bank's history dates back to 1873 with the distinction of having Indiana State Banking Charter #1, issued on March 1st of the same year. Union Bank's home office is located in Greensburg, Indiana, along I-74, approximately 55 miles between Indianapolis, Indiana and Cincinnati, Ohio. Concentrated in three distinct clusters, Union Bank operates five offices in Decatur County, in southeastern Indiana; three offices in Jay County, in northeastern Indiana; and six offices in Madison and Hancock counties, in east central Indiana. Local leadership with the power to make local decisions makes this unique grouping work. Small and mid-sized businesses find that Union Bank can serve as a tremendous resource. Working as a team, branch managers, loan officers, trust officers and insurance agents strive to meet virtually any financial need a client may present. [SIDEBAR] "With the creation of The Trust Investment Group, Union Bank will be able to expand our customer service as we continue to become a full service financial provider with a community based focus. That added benefit definitely brings our organization to a new level by offering even more financial services without losing the local orientation vital for community success." Daryl R. Tressler, Chairman, President and CEO, Union Bank and Trust Company of Indiana Union Bank and Trust Company of Indiana Main Office Address: 201 North Broadway P.O. Box 87 Greensburg, IN 47240-0087 Tel: 812-663-4711 Fax: 812-663-4904 www.2unionbank.com Number of Offices: 14 Number of Employees: 135 Total Deposits: $260,048,000 Total Loans: $200,733,000 Total Assets: $320,881,000. 5 From business banking services to investments to employee benefit plans, Union Bank's team of professionals can respond with the flexible, innovative and personalized solutions that its business clients have come to expect. At mid-year, Union Bank expanded its trust department and created The Trust Investment Group. The re-formation of this division allows Union Bank to take advantage of the expertise of qualified trust professionals in the area of trust and investment services and to focus on growth in that area throughout its various markets. The Trust Investment Group administers assets with a market value in excess of $90 million. Serving as a financial partner to individuals and families as well as small to mid-sized businesses, public funds and foundations, The Trust Investment Group provides integrated solutions from one trusted source. Union Bank has long enjoyed strong partnerships with the communities it serves. Union Bank employees enthusiastically support the whole life of their communities - from being involved with youth sports to "walking" in support of a good cause to serving on the boards of various civic, philanthropic and business organizations. Union Bank is truly a community-oriented organization with character and history. Regional Federal Savings Bank - Regional Federal Savings Bank, ("Regional Bank"), is IUB's most concentrated banking subsidiary. With six offices in Clark and Floyd counties, Regional Bank serves Southern Indiana just across the Ohio River from Louisville, Kentucky. Chartered as a thrift, Regional Bank has struggled to shake its image of being strictly a mortgage lender and savings bank. During 1999, Regional Bank adopted a "We Mean Business" marketing campaign. Devised to draw attention to the competencies of its commercial lending division, this campaign canvassed the market area with newspaper advertising, direct mail and billboards. The success of this campaign has seen the formation of new and exciting commercial relationships which are continuing to change the perception of Regional Bank in both the business and personal sectors. Looking forward, some of the key areas of revenue synergies that will propel Regional Bank into the new millennium include middle-market commercial banking as well as its existing strength in residential mortgage lending. Regional Bank's customers can benefit greatly from local decision making by local people. While its size dictates personalized service on every level, its partnership with Indiana United Bancorp creates the ability to handle large corporate funding requests with the same attention to detail and efficiency that is expected with even the smallest loan request. The end result is always quick credit decisions and personal attention. [SIDEBAR] "Regional Bank's decision to devise a strategic marketing campaign has gained our organization a more positive reputation as being a full service financial institution. Our strong commitment to local, personalized service has not waned with our more aggressive approach, but has strengthened our organization against its competition." Michael K. Bauer, Chairman, President and CEO, Regional Federal Savings Bank Regional Federal Savings Bank Main Office Address: 100 East Spring Street P.O. Box 1207 New Albany, IN 47151-1207 Tel: 812-948-5500 Fax: 812-948-5537 www.regionalbank.com Number of Offices: 6 Number of Employees: 70 Total Deposits: $164,518,000 Total Loans: $134,998,000 Total Assets: $197,947,000. 6 The hard work and dedication of Regional Bank's nearly 70 employees is not exhausted at the workplace. Directors, executive management, officers, department supervisors and front-line associates can all be found volunteering their time to support various community organizations. The education of area youth and fund-raising for local and nation research organizations are just a few of the areas in which Regional Bank employees choose to devote countless hours of volunteer service. Doing business with Regional Bank offers a combination of business savvy, a determination to understand the needs of the customer and a dose of true Southern Indiana hospitality. You will find that at Regional Bank a friendly smile and a warm handshake are still the most important part of closing any deal. The Insurance Group, Inc. - In 1999, Indiana United Bancorp announced the acquisition of The Anderson Group, a full-service, independent insurance agency located in Owensboro, Kentucky. This acquisition presented the opportunity to expand IUB's insurance operations. This new venture saw the formation of The Insurance Group, Inc. - a financial services subsidiary of Union Bank, which consists of three member agencies: Union Insurance in Greensburg, Indiana; Union Insurance in Portland, Indiana; and The Anderson Group in Owensboro, Kentucky. Union Insurance has established a solid insurance line. With the acquisition of The Anderson Group and the formation of The Insurance Group, Inc., IUB hopes to expand its non-banking financial services lines of business. Services provided through The Insurance Group, Inc. and its member agencies include: property and casualty coverage, consisting of personal lines for home and auto; commercial lines, including business package policies; worker's compensation; business auto; employee benefit packages; life; disability; senior care and many other financial services. The Insurance Group, Inc. is actively seeking to partner with other independent insurance agencies throughout the market areas already serviced by the banking subsidiaries of IUB. This enhancement of products and services and the leadership provided by the management team of The Anderson Group will create synergies between IUB's banking and non-banking financial services divisions that will benefit personal and business customers alike well into the new millennium. [SIDEBAR] "The Anderson Group's decision to align with Indiana United Bancorp has helped our newly formed organization, The Insurance Group to offer a wider array of services while maintaining our existing level of customer service. Our overlapping customer oriented philosophies have provided a unique bond that creates a win-win situation for not only our corporation, but for our customers as well." C. Todd Anderson, President and CEO, The Insurance Group, Inc. The Insurance Group, Inc. Main Office Address: 1925 Frederica Street P.O. Box 1627 Owensboro, KY 42302 Tel: 270-926-4550 Fax: 603-761-1698 Member Agencies: 3 Number of Employees: 35 Partial Listing of Companies Represented: Reliance Ins. Co., Ohio Casualty, Indiana Insurance Company, Cincinnati Ins., St. Paul/USF&G, Meridian Mutual Ins., Westfield, State Auto, Progressive, Hastings Mutual, Auto Owners, SAFECO, and many others. 7 A Year in Review February 19 - o People's Trust Company purchases three banking offices in Henry County and one office in Wayne County. Total deposits acquired in the purchase equaled $104 million. March 19 - o The Board of Directors of IUB paid a $.16 per share dividend for the first quarter. April 1 - o IUB announces that it purchased The Anderson Group - an independent insurance agency in Owensboro, Kentucky. April 16 - o Union Bank and Trust Company of Indiana opens a de novo banking facility in Chesterfield, Indiana. This brings their total offices in Madison County to four. April 23 - o Union Bank and Trust Company of Indiana opens a second de novo banking facility in Anderson, Indiana. The Madison County offices now total five. April 29 - o Don Benziger is named CFO of Indiana United Bancorp. May 18 - o IUB holds its 16th Annual Meeting of Shareholders. o Following the retirement of Charter Board Member, Martin G. Wilson, after 16 years of service, IUB elects Eric E. Anderson to the Board of Directors. o IUB promotes James L. Saner, Sr., President and COO to President and CEO pursuant to the retirement of Robert E. Hoptry on June 30, 1999. June 21 - o The Board of Directors of IUB paid a $.16 per share dividend for the second quarter. June 30 - o IUB announces the retirement of President and CEO, Robert E. Hoptry. Hoptry remains as Chairman of the Board. September 1 - o IUB establishes Captive Re-Insurance Company for accident/health and credit life insurance. o IUB establishes corporate Information Technology (IT) Department. September 20 - o The Board of Directors of IUB paid a $.16 per share dividend for the third quarter. November 9 - o IUB announces that it has entered into a definitive agreement to purchase First Affiliated Bancorp of Watseka, Illinois and its wholly-owned banking subsidiary, Capstone Bank. December 1 - o IUB chooses a new transfer agent - Registrar and Transfer Company December 20 - o The Board of Directors of IUB paid a $.16 per share dividend for the fourth quarter. [SIDEBAR] Donald A. Benziger, Senior Vice President and CFO, Indiana United Bancorp. 8 Management's Discussion and Analysis (Dollar Amounts in Thousands except Per Share Data) Forward-Looking Statements Except for historical information contained herein, the discussion in this 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 of the Company's loan and investment portfolios. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. Overview The Company operates under the broad tenets of a long-term strategic plan ("Plan") designed to improve the Company's financial performance, expand its competitive ability and enhance long-term shareholder value. The Plan is premised on the belief of the Company's board of directors that the Company can best promote long-term shareholder interests by pursuing strategies which will continue to preserve its community- focused philosophy. In conformance with the Plan, the Company issued $22,425 of cumulative trust preferred securities in December 1997. The net proceeds received by the Company were anticipated to be used for financing growth, which would include branch acquisitions, the establishment of de novo branches and/or acquisitions of other financial institutions and for general corporate purposes. To that end, the Company immediately deployed these funds to pay off its long-term loan and acquired seven branch facilities and related deposits in the third and fourth quarters of 1998. The Company integrated three of these branches into its Regional Bank subsidiary and four were integrated into its Union Bank subsidiary. In all, more than $121,000 in deposits were acquired, together with approximately $21,000 in consumer and small business loans. These acquisitions allowed Regional Bank to improve its market share and penetration within its two-county geographical area of Floyd and Clark counties in Indiana. Union Bank entered two new counties with its purchases and spread its geographical boundaries to include Madison and Hancock counties in addition to its traditional base of Decatur and Jay counties in Indiana. In April 1998, the Company merged with P.T.C. Bancorp, a one-bank holding company headquartered in Brookville, Indiana with total assets of more than $300,000. People's Trust Company, the wholly owned subsidiary of P.T.C. Bancorp had seventeen office locations spread throughout eight counties in eastern and southeastern Indiana. These counties were contiguous to the Company's existing locations. The transaction was regarded by both companies as a merger of equals and the management and directors of both organizations have been integrated. This transaction was accounted for as a "pooling of interests" and the Company's financial statements include P.T.C. Bancorp for all periods presented. During 1999, the Company purchased four branches within its target market areas. These four branches were integrated into People's Trust Company during the first quarter of 1999 and resulted in the purchase of $104,000 in deposits. The offices are located in Cambridge City in Wayne County, and Knightstown and New Castle (2) in Henry County. This acquisition expands People's Trust Company's Wayne County market share and makes Henry County the bank's ninth county of operation. The Company, through its Union Bank subsidiary, purchased two facilities in Anderson and Chesterfield. The newly renovated structures were opened de novo and became operational branches in April 1999. The branches will help solidify the Madison County position for Union Bank. During the past three years, 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 that allow the Company to continue to effectively compete within the financial services industry that is becoming increasingly dependent upon technology. In 1997, a significant investment was made in 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 allows for improved efficiency in the management of computer resources. In 1998, additional investments were made to expand and upgrade the use of personal computers throughout the Company as well as upgrading communication lines for speed of data delivery. These improvements allow the Company to improve efficiency as well as provide better quality services to its customers. In 1999, the decision was made to utilize the company's existing software and mainframe for all affiliates. This decision necessitates conversion of People's Trust Company's data processing system from a service bureau environment to the Company's in-house system. This conversion will occur in the fourth quarter of 2000, but planning and certain upgrades have already occurred and staff training and orientation will accelerate in the months ahead. 2000 will witness the introduction of Internet banking at all of the Company's affiliates. The company views the Internet as another distribution channel to provide a wide range of products and services to its customers. By the second quarter of this year the Company will introduce Corporate Cash Management to all of its commercial customers via this medium. The dynamics of the Plan assure continually evolving goals, and the extent of the Company's success will depend upon how well 9 Management's Discussion and Analysis (Dollar Amounts in Thousands except Per Share Data) Table 1 - Selected Financial Data
- ---------------------------------------------------------------------------------------------------------------------------- December 31 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- Results of Operations Net interest income $ 31,247 $ 25,892 $ 24,606 $ 22,260 $ 20,568 Provision for loan losses 1,641 1,218 1,789 978 770 Noninterest income 6,108 5,122 4,501 3,974 3,358 Noninterest expense 25,036 19,672 16,203 15,722 14,868 Income before income tax 10,678 10,124 11,115 9,534 8,288 Income tax 3,596 3,676 3,910 3,565 2,852 Net income 7,082 6,448 7,205 5,969 5,436 Dividends paid on common stock 3,095 2,721 2,104 1,717 1,406 Dividends paid on preferred stock - - - 50 139 - ---------------------------------------------------------------------------------------------------------------------------- Per Common Share * Earnings per share (basic) $ 1.47 $ 1.36 $ 1.53 $ 1.25 $ 1.13 Earnings per share (diluted) 1.47 1.35 1.52 1.25 1.12 Cash earnings per share (basic)** 1.71 1.42 1.57 1.29 1.14 Cash earnings per share (diluted)** 1.71 1.42 1.56 1.28 1.13 Dividends paid *** 0.64 0.59 0.51 0.42 0.35 Book value - end of period Excluding SFAS No.115 adjustment 13.15 12.25 11.52 10.44 10.05 Including SFAS No.115 adjustment 12.19 12.40 11.68 10.50 10.13 Market price - end of period 18.75 22.13 22.75 14.53 12.50 - ---------------------------------------------------------------------------------------------------------------------------- At Year End Total assets $ 978,893 $ 827,945 $ 693,168 $ 624,922 $ 577,779 Investment securities 243,274 197,599 126,104 151,978 152,037 Loans, excluding held for sale 643,227 539,404 472,627 416,016 374,534 Allowance for loan losses 7,049 6,099 5,451 4,506 4,476 Total deposits 824,385 709,871 583,168 547,529 504,080 Notes payable 6,885 - - 5,500 7,000 Federal Home Loan Bank advances 19,900 10,000 10,000 - - Trust preferred securities 22,425 22,425 22,425 - - Preferred stock - - - - 2,000 Shareholders' equity 59,209 59,196 55,006 49,402 47,463 - ---------------------------------------------------------------------------------------------------------------------------- Financial Ratios Return on average assets 0.76% 0.89% 1.13% 1.02% 0.98% Return on average common shareholders' equity 11.85 11.23 13.83 12.57 12.55 Allowance for loan losses to total loans (year end,excluding held for sale) 1.10 1.13 1.15 1.08 1.20 Shareholders' equity to total assets (year end) 6.05 7.15 7.94 7.91 8.21 Average equity to average total assets 6.45 7.96 8.18 8.11 8.01 Dividend payout ratio 43.70 42.20 29.22 29.01 26.54
* Adjusted for stock split and dividends ** Net income plus the after tax effect of the amortization of intangible assets for the period. *** Dividends paid by Indiana United Bancorp without restatement for pooling of interests 10 it anticipates and responds to competitive changes within its markets, the interest rate environment and other external forces. Year 2000 ("Y2K") Computer Issues The Company did not encounter any Y2K related problems nor is management aware of any customers who encountered significant Y2K problems. The effort to assure such success did not go unnoticed in terms of our employee's time, effort and dedication to a task. We commend those individuals for their diligence. The Company incurred approximately $150 in capital and other expenditures for Y2K preparations. Management is not aware of any remaining uncertainties or contingencies with respect to Y2K. Business Strategy The Company holds first or second market share positions as measured by total deposits in five of the fifteen counties it serves and intends to pursue growth strategies that result in meaningful market share positions in other rural or suburban communities. The Company is seeking to identify potential whole bank acquisitions in markets that offer opportunities to benefit from its community banking philosophy and that will likely result in meaningful market share. In addition, the Company believes it needs to expand other financial services and products in an attempt to offer a full array of financial services to its customer base. Effective April 1, 1999, the Company acquired the property and casualty insurance business lines of The Anderson Group of Owensboro, Kentucky ("The Anderson Group"). The acquisition was effected by the purchase of assets and expertise. The property and casualty insurance business lines of The Anderson Group were integrated into a newly formed subsidiary of the Company, The Insurance Group, Inc., ("The Insurance Group") a wholly owned subsidiary of Union Bank. The general lines insurance business previously managed by Union Bank in Greensburg and Portland, Indiana will be directed through The Insurance Group subsidiary as the Company expands its insurance offering capabilities. This expansion means an increased book of business and additional management expertise, immediately, and later an increased product line. With this base the Company anticipates additional insurance acquisitions throughout its marketing area. The Company plans to enter the brokerage services arena during 2000 by integrating brokers into the mainstream of its banking operations. The Company has also formed The Trust Investment Group that operates as a division of Union Bank. The Trust Investment Group is comprised of the former Union Bank trust department and the trust business acquired from People's Trust Company. The Trust Investment Group plans to expand its services throughout 2000 and beyond into larger market areas of the Company. On November 9, 1999 the Company announced a definitive agreement to acquire First Affiliated Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank N. A. The transaction will be accounted for using the pooling-of-interests method of accounting. The Company will issue approximately 1,020,000 shares of its common stock to the shareholders of First Affiliated Bancorp. The conversion rate will be 4.4167 shares of Company stock for each outstanding common share of First Affiliated. As of December 31, 1999 First Affiliated had $131,000 in assets, $116,000 in deposits with four banking offices in Illinois and one in Indiana. It is anticipated that this transaction will be concluded in the second quarter of 2000. Results of Operations Annual net income was $7,082 in 1999 compared to $6,448 in 1998 and $7,205 in 1997. The major factors impacting 1999's earnings were the purchase of the branches and deposits and the de novo branch openings. Significant non-recurring merger expenses of $700 net of taxes impacted 1998 earnings and the Company recorded $118 after-tax non-recurring income in 1997 from the sale of real estate property acquired in lieu of foreclosure. Excluding these non-recurring items, net income of $7,148 would have been recorded in 1998 and $7,087 in 1997. Net income per common share from recurring operations equaled $1.47 in 1999 and $1.50 in 1998 and 1997. Including the merger expenses for 1998 and the special real estate owned income for 1997, actual earnings per share were $ 1.47 for 1999, $1.35 for 1998, and $1.52 for 1997. Another measure of an organization's performance is "cash earnings per share". Cash earnings are defined as net income plus the after tax effect of the amortization of intangible assets for the period. Per share (basic) cash earnings for 1999 equaled $1.71. For 1998 and 1997 cash earnings per share were $1.42 and $1.57, respectively. The Company's return on average total assets was .76% in 1999 compared to .89% in 1998, and 1.13% in 1997. In planning for the future, management understood there would be such an impact in the short term, however, they feel that this expansion will provide greater future earnings potential for the Company. 11 Management's Discussion and Analysis (Continued) Table 2 - Non-interest Income and Expense
- -------------------------------------------------------------------------------------------------------------------- Percent Change - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1999/98 1998/97 - -------------------------------------------------------------------------------------------------------------------- Non-interest income Insurance commissions $ 1,166 $ 530 $ 515 120.0% 2.9% Fiduciary activities 310 261 278 18.8 (6.1) Mortgage banking 1,016 1,356 1,116 (25.1) 21.5 Service charges on deposit accounts 2,316 1,895 1,780 22.2 6.5 Securities losses (8) (13) (76) (38.5) (82.9) Other 1,308 1,093 888 19.7 23.1 -------------------------------------- Total non-interest income $ 6,108 $ 5,122 $ 4,501 19.3 13.8 ====================================== - -------------------------------------------------------------------------------------------------------------------- Non-interest expense Salaries and employee benefits $13,707 $ 10,852 $ 9,252 26.3% 17.3% Net occupancy 1,556 1,382 1,284 12.6 7.6 Equipment 1,818 1,457 1,323 24.8 10.1 Data processing 758 855 797 (11.3) 7.3 Deposit insurance 136 129 109 5.4 18.3 Intangible amortization 1,775 459 238 286.7 92.9 Stationary, printing, and supplies 805 635 503 26.8 26.2 Merger - 806 - (100.0) 100.0 Other 4,481 3,097 2,697 44.7 14.8 -------------------------------------- Total non-interest expense $25,036 $ 19,672 $ 16,203 27.3 21.4 ======================================
Net Interest Income Net interest income and net interest margin are influenced by the volume and yield on earning assets and the cost of interest-bearing liabilities. Tax equivalent net interest income of $32,449 in 1999 increased 20.6% from $26,907 in 1998, which was 4.9% above 1997 (See Table 3). This increase is: (1) due to the increased volume of earning assets obtained with funds received in our branch acquisitions and (2) to the lower cost of deposits. Tax equivalent interest income increased $10,795 or 19.4% from 1998 to 1999 and $5,084 or 10.0% from 1997 to 1998. Interest expense increased $5,253 or 18.2% from 1998 to 1999 and $3,826 or 15.3% from 1997 to 1998. The Company's interest expense as a percent of earning assets was 3.95% in 1999 compared to 4.23% in 1998 or a 6.6% decrease. From 1997 to 1998 the same factor increased 2.4% from 4.13% to 4.23%. Throughout the past three years, the Company has employed a deposit-pricing strategy focused on retaining and attracting lower cost short-to-moderate term funds. In addition, the Company has competed more aggressively for high quality loans to fully deploy the deposits purchased over the last 18 months. With the rapid influx of deposits due to the branch purchases, the Company's net interest margin decreased to 3.76% in 1999 from 3.95% in 1998 and 4.25% in 1997. In spite of this annual decrease in margin, the Company experienced an increase in net interest margin during the final two quarters of 1999, and the Company foresees maintaining or improving upon that level in 2000. Provision for Loan Losses The Company expensed $1,641 in provision for loan losses in 1999. This level of provision allowed the Company to maintain its allowance for loan losses in proportion to its risk and growth of gross loans. This topic is discussed in detail under the heading "Loans, Credit Risk and the Allowance and Provision for Loan Losses". Non-interest Income The increase in mortgage rates over the last six months has slowed the housing market and has affected the company's volume of saleable new loans. This increase in rates has impacted our mortgage banking activity to the detriment of our non-interest income. The increase in non-interest income in 1998 was largely a result of increased mortgage banking activity, while mortgage banking income declined $340 in 1999. In spite of this, total non-interest income increased to $6,108 from $5,122 in 1998 and $4,501 in 1997. The increase in 1999 over 1998 was $986 or 19.3%. Of this increase, $636 was due to our expanded insurance business as discussed earlier and $421 was attributable to service charges on newly acquired deposit relationships. The Company also experienced a $215 increase from other income which includes fee income from its debit cards, surcharges of foreign card users on its ATMs and fees generated from several cash dispensers distributed throughout the Company's trade area. Non-interest income increased by $621 from 1997 to 1998 primarily due to increases in mortgage banking and service charge income and other income increases as outlined in the previous paragraph. 12 Interest Expense Total interest expense increased from $24,997 in 1997 and $28,823 in 1998 to $34,076 in 1999. The majority of the increases was the result of the deposit acquisitions made by the Company in the third and fourth quarters of 1998 and the first quarter of 1999. The Company also absorbed the interest expense on the Trust Preferred Securities for twelve months in 1998 as compared to less than a month in 1997. Non-interest Expense The largest component of non-interest expense is personnel and benefits cost. The Company experienced an increase of $2,855 or 26.3% over 1998's total and $1,600, or 17.3% in this area over 1997. The 1999 increase was a direct result of a full year of staffing the seven new branch facilities acquired in 1998, nine months of the six branches acquired and/or started in 1999 and the acquisition of the Anderson Group. The number of full-time equivalent employees at year-end 1999 was 404 compared to 360 in 1998 and 299 in 1997. All but one area of non-interest expense increased in 1999 over 1998 and in 1998 over 1997. Total non-interest expense to average assets for 1999 was 2.70% compared to 2.73% in 1998 and 2.54% in 1997. The increases were a direct result of expanding facilities and personnel related to the acquisitions made throughout 1999 and 1998. Another impact of expansion is the amortization of premiums paid for the deposits. In 1999, 1998 and 1997, respectively, the intangible amortization was $1,775, $459 and $238. Total non-interest expense reduced by intangible amortization and merger costs expressed as percent-age of average assets would have been 2.51% for 1999, 2.55% for 1998 and 2.50% for 1997. The Company historically has been able to control its overhead costs when compared to its peers (see Table 2 and graph). Income Taxes The effective tax rate was 33.7% for 1999, 36.3% for 1998, and 35.2% for 1997. Generally, the change in income tax expense reflects the change in income before income tax adjusted for tax-exempt income and non-deductible expenses, such as certain merger costs. During 1999, tax-exempt income from state and municipal securities increased. In 1998 the Company incurred $806 in merger expenses of which nearly $700 were non-deductible. The Company and its subsidiaries file consolidated income tax returns. Financial Condition Total average assets in 1999 increased $204,833 over the prior year and 1998 increased $83,607 over 1997. Assets increased to $978,893 at year-end 1999 compared to $827,945 at year-end 1998, which compared to $693,168 for 1997. Acquired deposits, repayments of loans, as well as internal growth of interest-bearing deposits, funded loan and securities growth in 1999 and 1998. Average non-interest bearing deposits increased 32.2% in 1999 following a 17.2% increase in 1998. Average interest-bearing deposits increased $165,711 or 29.8% in 1999 compared to 8.9% in 1998. The majority of this growth is attributable to deposit acquisitions made during the third and fourth quarters of 1998 and the first quarter of 1999. When comparing deposit growth from December 31, 1998 to December 31, 1999, the Company experienced a total deposit growth of $114,514 or a 16.1% increase. Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures ("Preferred Securities") in the amount of $22,425 were issued on December 9, 1997. The holders of the Preferred Securities are entitled to receive preferential cumulative cash distributions, payable quarterly, at the annual rate of 8.75% of the liquidation amount of $10 per Preferred Security. The Company has the right, so long as no default has occurred, to defer payment of interest at any time or from time to time, for a period not to exceed 20 consecutive quarters with respect to each deferral period. Currently, management has no intention of deferring the payment of interest. The Preferred Securities have a preference under certain circumstances with respect to cash distributions and amounts payable on liquidation, redemption or otherwise of the common stock. The holders of the Preferred Securities have no voting rights except in limited circumstances. The Preferred Securities are traded on the NASDAQ National Market under the symbol "IUBCP" and are not insured by the BIF, SAIF or FDIC, or by any other government agency. The Preferred Securities qualify as Tier 1 capital or core capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. Under such guidelines, the Preferred Securities cannot constitute more than 25% of the total Tier 1 capital of the Company. Consequently, the amount of Preferred Securities in excess of the 25% limitation constitutes Tier 2 capital, or supplementary capital, of the Company. Common Shareholders' Equity was $59,209 on December 31, 1999 compared to $59,196 at December 31, 1998. Book value per common share decreased to $12.19 or 1.7% from $12.40 at year-end 1998. [CHART APPEARS HERE] Overhead As Percent of Average Assets (1999 as of 9/30) 1995 1996 1997 1998 1999 ---------------------------- Peer Group Average 2.68 2.68 2.54 2.73 2.70 Indiana United Bancorp 3.44 3.35 3.32 3.26 3.24 13 Management's Discussion and Analysis (Continued) Loans, Credit Risk and the Allowance and Provision for Loan Losses. Loans remain the Company's largest concentration of assets and, by their nature, carry a higher degree of risk. The loan underwriting standards observed by the Company's subsidiaries are viewed by management as a means of controlling problem loans and the resulting chargeoffs. The Company's conservative loan underwriting standards have historically resulted in higher loan quality and lower levels of net chargeoffs than peer bank averages (see graph). The Company also recognizes credit risk is increased if undue concentrations of loans in specific industry segments and to out-of-area borrowers are incurred. Accordingly, the Company's board of directors regularly monitors such concentrations to determine compliance with its loan concentration policy. The Company believes it has no undue concentrations of loans. Total loans increased $103,823 or 19.2% over year-end 1998, largely reflecting the growth and development of real estate mortgages, both commercial and residential. The Company experienced modest growth in its commercial real estate portfolio of $3,014 or 3.1% and increased its residential portfolio by $61,141 or 24.8% compared to year-end 1998. The increase was largely the result of continuing strength in the economy and expansion into new and existing markets. Non-real estate related commercial lending increased 30.8% as the Company expanded its efforts in that sector. The Company also increased its construction and development loans from $30,772 to $50,721 or 64.8% from December 31, 1998 to December 31, 1999. The Company also experienced an increase in consumer loans over 1998, with an 11.5% increase. The Company increased its out-standing loans by $5,698 or 15.4% in farm real estate and decreased its agricultural production financing slightly compared to 1998. The decrease in tax-free loans is a function of the market's demand for tax-exempt products rather than any change in philosophy on the Company's part. (table 4 and graph). Residential real estate loans continue to represent the largest portion of the total Management's Discussion and Analysis (Continued) loan portfolio. Such loans represented 47.8% and 45.7% of total loans at December 31, 1999 and 1998, respectively. Of the total residential real estate portfolio, 52.2% are fixed rate and 47.8% are variable rate loans as of December 31, 1999. The Company also originates and sells loans into the secondary market but retains the portfolio's servicing rights. As previously discussed, the Company's mortgage banking non-interest income decreased $340 from 1998 to 1999 having increased $240 or 21.5% from 1997 to 1998. The Company limits its exposure to long-term fixed rate residential mortgage loans and generally observes 20% minimum down payment guidelines. The Company held some shorter term fixed rate mortgages in its own portfolio during 1997, 1998 and 1999 to help deploy the deposits gained through new products and acquisitions. This strategy assisted the Company in obtaining its profit goals for 1999. The Company intends to continue its plan of holding some fixed rate mortgages without incurring unacceptable levels of interest rate risk. The Company regards its ability to identify and correct loan quality problems as one of its greatest strengths. Loans are placed on "non-accrual status" when, in management's judgment, the collateral value and/or the borrower's financial condition does not justify accruing interest. As a general rule, commercial and real estate loans are reclassified to nonaccrual 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's principal balance, as circumstances warrant. The provision for loan losses was $1,641 in 1999 compared to $1,218 in 1998 and $1,789 in 1997. The additional provisions for 1997 through 1999 reflect increases in the allowance primarily due to the Company's overall loan growth and to replenish the allowance for chargeoffs incurred. Net charges were $691 in 1999, $570 in 1998,and $844 in 1997. As a percentage of average loans, net charges equaled .12%, .11% and .19% in 1999, 1998 and 1997, respectively. The Company has outperformed its peer group's net loan loss average and that trend is expected to continue in 2000 (see graph) 14 Table 3-Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)*
1999 1998 Average Average Average Average Assets Balance Interest Rate Balance Interest Rate - ------------------------------------------------------------------------------------------------------------------------------ Short-term investments $ 1,057 $ 60 5.68% $ 1,431 $ 81 5.66% Federal funds sold 22,451 1,070 4.77 33,713 1,832 5.43 Securities Taxable 214,727 12,767 5.95 116,262 7,408 6.37 Non-taxable* 35,131 2,697 7.68 27,783 1,992 7.17 - ------------------------------------------------------------------------------------------------------------------------------ Total securities 249,858 15,464 6.19 144,045 9,400 6.53 Loans ** Commercial 245,074 21,246 8.67 200,693 18,266 9.10 Residential real estate 275,457 21,801 7.91 238,594 19,898 8.34 Consumer 68,698 6,884 10.02 62,423 6,253 10.02 - ------------------------------------------------------------------------------------------------------------------------------ Total loans 589,229 49,931 8.47 501,710 44,417 8.85 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets 862,595 66,525 7.71 680,899 55,730 8.18 - ------------------------------------------------------------------------------------------------------------------------------ Cash and due from banks 23,934 19,189 Unrealized gains (losses) on securities (2,352) 1,657 Allowance for loan losses (6,590) (5,806) Premises and equipment,net 14,044 11,045 Intangible assets 22,375 2,957 Accrued interest receivable and other assets 12,604 11,836 - ---------------------------------------------------------- ---------------- Total assets $ 926,610 $ 721,777 ========================================================== ================ Liabilities Interest-bearing deposits Interest-bearing demand accounts $ 179,427 $ 4,713 2.63 $ 131,263 $ 3,953 3.01 Savings 105,170 3,044 2.89 64,990 1,892 2.91 Certificates of deposit 437,662 22,429 5.12 360,295 19,983 5.55 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 722,259 30,186 4.18 556,548 25,828 4.64 Short-term borrowings 20,087 883 4.40 9,307 429 4.61 Trust preferred securities 22,425 2,004 8.94 22,425 2,024 9.03 Notes payable and FHLB borrrowings 16,352 1,003 6.13 10,000 542 5.42 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 781,123 34,076 4.36 598,280 28,823 4.82 Demand deposits 77,210 58,407 Other liabilities 8,525 7,647 - ---------------------------------------------------------- ---------------- Total liabilities 866,858 664,334 Shareholders' equity 59,752 57,443 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 926,610 34,076 3.95*** $ 721,777 28,823 4.23*** ===============---------------------------================------------------------- Net interest income $ 32,449 3.76**** $ 26,907 3.95**** and net interest margin - ------------------------------------------------------------------------------------------------------------------------------ Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 34% $ 1,202 $ 1,015
1997 Average Average Assets Balance Interest Rate - ---------------------------------------------------------------------------------------- Short-term investments $ 1,713 $ 90 5.25% Federal funds sold 16,414 952 5.80 Securities Taxable 106,557 6,865 6.44 Non-taxable* 30,122 2,197 7.29 - ---------------------------------------------------------------------------------------- Total securities 136,679 9,062 6.63 Loans ** Commercial 180,903 17,063 9.43 Residential real estate 208,869 17,417 8.34 Consumer 59,493 6,062 10.19 - ---------------------------------------------------------------------------------------- Total loans 449,265 40,542 9.02 - ---------------------------------------------------------------------------------------- Total earning assets 604,071 50,646 8.38 - ---------------------------------------------------------------------------------------- Cash and due from banks 18,464 Unrealized gains (losses) on securities 562 Allowance for loan losses (4,621) Premises and equipment,net 10,014 Intangible assets 1,664 Accrued interest receivable and other assets 8,016 - -------------------------------------------------------------- Total assets $ 638,170 ============================================================== Liabilities Interest-bearing deposits Interest-bearing demand accounts $ 123,914 $ 3,751 3.03 Savings 59,386 1,818 3.06 Certificates of deposit 327,541 18,270 5.58 - ---------------------------------------------------------------------------------------- Total interest-bearing deposits 510,841 23,839 4.67 Short-term borrowings 12,349 630 5.10 Trust preferred securities 1,229 105 8.54 Notes payable and FHLB borrrowings 4,797 423 8.82 - ---------------------------------------------------------------------------------------- Total interest-bearing liabilities 529,216 24,997 4.72 Demand deposits 49,817 Other liabilities 7,032 - -------------------------------------------------------------- Total liabilities 586,065 Shareholders' equity 52,105 - -------------------------------------------------------------- Total liabilities and shareholders' equity $ 638,170 24,997 4.13*** ===================-------------------------- Net interest income $ 25,649 4.25**** and net interest margin - ---------------------------------------------------------------------------------------- Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 34% $ 1,042
* 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. **** Net interest income divided by total earning assets.
Table 4 - Loan Portfolio - ------------------------------------------------------------------------------------------------------------------------- December 31 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- Types of loans Commercial $39,539 $30,237 $34,442 $32,748 $30,242 Agricultural production financing and other loans to farmers 14,863 14,983 15,991 16,073 15,167 Commercial real estate mortgage 98,814 95,800 81,549 62,501 52,843 Residential real estate mortgage 307,632 246,491 208,327 188,716 170,590 Farm real estate 42,604 36,906 38,802 35,145 36,188 Construction and development 50,721 30,772 15,797 20,239 16,446 Consumer 79,154 70,966 66,357 52,106 44,651 State and political 9,900 13,249 11,362 8,488 8,407 - ------------------------------------------------------------------------------------------------------------------------- Total loans $ 643,227 $539,404 $472,627 $416,016 $374,534 - -------------------------------------------------------------------------------------------------------------------------
15 Management's Discussion and Analysis (Continued) Management maintains a list of loans warranting either the assignment of a specific reserve amount or other special administrative attention. This list, together with a listing of all classified loans, nonaccrual loans and delinquent loans, 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 quarterly. The determination of the provision amount in any period is based on management's continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio with general allocations made by loan type, classified loans including non-accrual and impaired loans, current economic conditions, the amount of loans presently outstanding, and the amount and composition of loan growth. The Allowance for Loan Losses as of December 31, 1999 is considered adequate by management. See Tables 4, 5, and 6 for quantitative support of this narrative loan analysis. Investment Securities Investment securities offer flexibility in the Company's management of interest rate risk, and are the primary means by which the Company provides liquidity and responds to changing maturity characteristics of assets and liabilities. The Company's investment policy prohibits trading activities and does not allow investment in high-risk derivative products or junk bonds. As of December 31, 1999, 92.7% of the investment securities are classified as "available for sale" ("AFS") and are carried at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as a separate component of share-holders' equity. A net unrealized loss of $7,560 is recorded to adjust the AFS portfolio to current market value at December 31, 1999 compared to a net unrealized gain of $1,223 at December 31, 1998. The remaining 7.3% of the investment portfolio is classified as "held to maturity" ("HTM") and is carried at book value. The majority of the Company's HTM portfolio consists of tax-exempt municipal bonds. Variable rate securities comprised 13.6% of the total portfolio on December 31, 1999 with the remaining 86.4% invested in fixed rate investments. Sources of Funds The Company relies primarily on customer deposits and securities sold under agreement to repurchase ("repurchase agreements"), along with shareholders' equity to fund earning assets. Federal Home Loan Bank ("FHLB") advances are used to provide additional funding. The Company also purchased $104,000 and $121,000 of local deposits during the first quarter of 1999 and the last half of 1998 respectively, from major regional banks exiting smaller markets. Deposits generated within local markets provide the major source of funding for earning assets. Average total deposits were 92.7% and 90.3% of total average earning assets in 1999 and 1998. Total interest-bearing deposits averaged 90.3% and 90.5% of average total deposits during 1999 and 1998, respectively. Management is continuing efforts to increase the percentage of transaction-related deposits to total deposits due to the positive effect on earnings. Repurchase agreements are high denomination investments utilized by public entities and commercial customers as an element of their cash management responsibilities. Repurchase agreements are not subject to FDIC assessment so they are less costly than large certificates of deposit. During 1999, short-term borrowings averaged $20,087 with repurchase agreements representing $17,221 of the total as the strong economy continued and the demand for short term investments increased combined with the Company's funding needs. At year-end 1999 the short-term borrowings were $40,064. Even though short-term borrowings temporarily increased 32% at year-end 1998 compared to 1997, the Company decreased average repurchase agreements and other short-term borrowings in 1998 to $9,307 or 25% below 1997. Repurchase agreements comprised 98% of short-term borrowings on December 31, 1998 and 63.6% of short-term borrowings on December 31, 1999. Another source of funding is the Federal Home Loan Bank (FHLB). The Company had FHLB advances of $19,900 out-standing at December 31, 1999. One $10,000 advance has a quarterly floating interest rate which was 6.18% at year-end and matures on December 30, 2002. The other two advances of $4,900 and $5,000 have interest rates of 5.13% and 5.54% and mature on January 7, 2000. The Company averaged $10,241 in FHLB advances during 1999 compared to $10,000 during 1998 and $4,797 in 1997. 16 Table 5 - Non-Performing Loans
- ------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------ Non-accrual loans $3,465 $3,709 $755 $3,039 $2,198 Accruing loans contractually past due 90 days or more 373 195 375 39 174 - ------------------------------------------------------------------------------------------------------------------------ Total $3,838 $3,904 $1,130 $3,078 $2,372 - ------------------------------------------------------------------------------------------------------------------------ % of total loans 0.60% 0.72% 0.24% 0.74% 0.63% - ------------------------------------------------------------------------------------------------------------------------
Table 6 - Summary of Allowance for Loan Losses - --------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Balance at January 1 $6,099 $5,451 $4,506 $4,476 $4,385 Chargeoffs Commercial 88 191 695 315 339 Commercial real estate mortgage 458 0 0 334 166 Residential real estate mortgage 72 99 32 10 54 Consumer 461 582 452 523 456 - --------------------------------------------------------------------------------------------------------------------- Total chargeoffs 1,079 872 1,179 1,182 1,015 - --------------------------------------------------------------------------------------------------------------------- Recoveries Commercial 15 83 134 47 121 Residential real estate mortgage 21 25 25 17 46 Consumer 352 194 176 170 169 - --------------------------------------------------------------------------------------------------------------------- Total recoveries 388 302 335 234 336 - --------------------------------------------------------------------------------------------------------------------- Net chargeoffs 691 570 844 948 679 Provision for loan losses 1,641 1,218 1,789 978 770 - --------------------------------------------------------------------------------------------------------------------- Balance at December 31 $7,049 $6,099 $5,451 $4,506 $4,476 - --------------------------------------------------------------------------------------------------------------------- Net chargeoffs to average loans .12% 0.11% 0.19% 0.24% 0.19% Provision for loan losses to average loans .28 0.24 0.40 0.25 0.21 Allowance to total loans at year end 1.10 1.13 1.15 1.08 1.20 - ---------------------------------------------------------------------------------------------------------------------
In February of 1999 the Company borrowed $8,000 from National City Bank at a floating rate based upon LIBOR. In July, the Company reduced its debt by $1,300 in order to obtain a more favorable interest rate. In addition, the Company established a $3,000 line of credit as a cash management tool. Capital Resources The Federal Reserve Board and other regulatory agencies have adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items. The Company's core capital ("Tier 1") consists of common shareholders' equity adjusted for unrealized gains or losses on available for sale (AFS) securities plus limited amounts of Preferred Securities less core deposit and goodwill intangibles. Total capital consists of core capital, certain debt instruments and a portion of the allowance for loan losses. At December 31, 1999, Tier 1 capital to average assets was 6.5%. Tier 1 capital to risk-weighted assets was 9.7%. Total capital to risk-weighted assets was 11.0%. All ratios substantially exceed required ratios established for bank holding companies. Risk-adjusted capital levels of each of the Company's subsidiary banks exceed regulatory definitions of well-capitalized institutions. The Preferred Securities qualify as Tier 1 capital or core capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. Under such guidelines, capital received from the proceeds of the sale of these securities cannot constitute more than 25% of the total Tier 1 capital of the Company. Consequently, the amount of Preferred Securities in excess of the 25% limitation constitutes Tier 2 capital, or supplementary capital, of the Company. Common shareholders' equity is impacted by the Company's decision to categorize a portion of its securities portfolio as available for sale (AFS). Securities in this category are carried at fair value, and common shareholders' equity is adjusted to reflect unrealized gains and losses, net of taxes. The Company declared and paid common dividends of $.64 per share in 1999, $.59 in 1998 and $.51 in 1997. Book value per common share decreased to $12.19 from $12.40 in 1998. The net adjustment for AFS securities decreased book value by $.95 and increased book value by $.15 at December 31, 1999 and 1998, respectively. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in equity. The Company declared a 2 for 1 common stock split for those shareholders of record as of August 17, 1998. All financial information used throughout this report has been adjusted to reflect this stock split. 17 Management's Discussion and Analysis (Continued) Liquidity Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets and higher interest expense involved in extending liability maturities. Liquid assets include cash and cash equivalents, loans and securities maturing within one year and money market instruments. In addition, the Company holds $203,791 of AFS securities maturing after one year, which can be sold to meet liquidity needs. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, supports liquidity, extends the contractual maturity of liabilities, and limits reliance on volatile short-term purchased funds. Short-term funding needs can arise from declines in deposits or other funding sources, funding of loan commitments and requests for new loans. The Company's strategy is to fund assets to the maximum extent possible with core deposits, which provide a sizable source of relatively stable low-cost funds. Average core deposits funded approximately 85% of total earning assets during 1999 and approximately 90% in 1998. 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 directives from regulatory authorities which would materially affect liquidity, capital resources or operations. Interest Rate Risk At year end 1999, the Company held approximately $388,000 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, 1999 appears in Table 7. 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
Table 7- Rate Sensitivity Analysis at December 31, 1999 - -------------------------------------------------------------------------------------------------------------------------------- Over 5 Years or 3 Months 1 Year 2 Years 5 Years Insensitive Total - -------------------------------------------------------------------------------------------------------------------------------- Interest-earning assets Loans $170,234 $160,822 $45,921 $131,973 $134,277 $643,227 Securities 36,633 16,879 37,165 85,219 67,378 243,274 Federal funds sold 400 - - - - 400 Interest-bearing deposits in banks 1,028 - - - - 1,028 FHLB Stock 2,231 - - - - 2,231 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest-earning assets 210,526 177,701 83,086 217,192 201,655 890,160 - -------------------------------------------------------------------------------------------------------------------------------- Other assets - - - - 95,782 95,782 Allowance for loan losses - - - - (7,049) (7,049) - -------------------------------------------------------------------------------------------------------------------------------- Total assets $210,526 $177,701 $83,086 $217,192 $290,388 $978,893 - -------------------------------------------------------------------------------------------------------------------------------- Interest-bearing liabilities Interest-bearing demand $53,520 $26,760 $26,760 $26,760 - $133,800 Savings 22,296 14,864 18,580 18,580 - 74,320 Money market 43,234 43,234 - - - 86,468 Certificates of deposit 108,641 189,927 99,218 40,001 7,542 445,329 Short term borrowings 40,064 - - - - 40,064 Notes payable 6,750 75 60 - - 6,885 Federal Home Loan Bank advances 19,900 - - - - 19,900 Trust preferred securities - - - - 22,425 22,425 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing liabilities 294,405 274,860 144,618 85,341 29,967 829,191 - -------------------------------------------------------------------------------------------------------------------------------- Demand deposits 84,468 84,468 Other liabilities 6,025 6,025 Stockholders equity 59,209 59,209 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and stockholders' equity $294,405 $274,860 $144,618 $85,341 $179,669 $978,893 - -------------------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap (assets less liabilities) ($83,879) ($97,159) ($61,532) $131,851 - -------------------------------------------------------------------------------------------------------------------------------- Rate sensitivity gap(cumulative) (83,879) (181,038) (242,570) (49,998) - -------------------------------------------------------------------------------------------------------------------------------- Percent of total assets (cumulative) (8.57)% (18.49)% (24.78)% (5.11)% Rate sensitive assets/liabilities (cumulative) 71.51% 68.20% 66.02% 86.15% - --------------------------------------------------------------------------------------------------------------------------------
18 Company that the cumulative GAP divided by total assets shall be plus or minus 20% at the 3-month, 6-month, and 1-year time horizon. The Company continues to strive to increase its amount of variable rate assets in what is generally perceived to be a period of rising interest rates. While interest rates have trended upward since July 1999, the increases have been relatively mild and have allowed the company the opportunity to react to the higher rates. Management believes that the company is well positioned in the current rate environment and does not foresee its earnings materially impacted in 2000 regardless of the direction interest rates may take. Asset/liability management strategies are developed by the Company to manage market risk. Market risk is the risk of loss in financial instruments including investments, loans, deposits and borrowings arising from adverse changes in prices/rates. Interest rate risk is the Company's primary market risk exposure and represents the sensitivity of earnings to changes in market interest rates. Strategies are developed that impact asset/liability committee activities based on interest rate risk sensitivity, board policy limits, desired sensitivity gaps and interest rate trends. Table 8 provides information about the Company's significant financial instruments at December 31, 1999 that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted average interest rates by maturity dates. The table presents only a static measurement of asset and liability volumes based on maturity, cash flow estimates and interest rates. It does not reflect the differences in the timing and degree of repricing of assets and liabilities due to interest rate changes. In analyzing interest rate sensitivity, management considers these differences and incorporates other assumptions and factors, such as balance sheet growth and prepayments, to better measure interest rate risk. The Company cannot make any assurances as to the outcome of these assumptions, nor can it assess the impact of customer product preference changes and competitive factors as well as other internal and external variables. In addition, this analysis cannot reflect actions taken by the asset/liability management committees; therefore, this analysis should not be relied upon as indicative of expected operating results. 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. New Accounting Matters Disclosures about Segments of an Enterprise and Related Information Statement No. 131 established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in financial reports issued to shareholders. Statement No. 131 is effective for financial statements for periods beginning after December 15, 1997, but the Company operates only one reportable segment, banking. Accounting for Derivative Instruments and Hedging Activities In June, 1998 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("Statement") No. 133, "Accounting For Derivative Instruments and Hedging Activities" which requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for hedges. Statement No. 133 is effective for 2001. The Company believes that the adoption of Statement No. 133 will not have material impact on the Company's financial condition or results of operations. 19 Management's Discussion and Analysis (Continued)
Table 8 Principal Cash Flows - ----------------------------------------------------------------------------------------------------------------------------- There Fair December 31 2000 2001 2002 2003 2004 after Total Value - ----------------------------------------------------------------------------------------------------------------------------- Assets Investment securities Fixed rate 20,621 37,505 19,887 26,798 41,319 71,348 217,478 210,189 Average interest rate 5.20% 5.51% 5.40% 5.59% 5.56% 6.08% 5.75% Variable rate 4,000 1,490 - 16 - 27,850 33,356 32,929 Average interest rate 5.03% 6.35% - 7.00% - 6.53% 6.34% Loans Fixed rate 31,445 17,920 21,673 34,421 13,528 169,494 288,481 283,939 Average interest rate 8.53% 9.09% 8.74% 8.12% 7.94% 7.72% 8.02% Variable rate 62,675 5,420 3,333 4,152 5,910 281,137 362,627 360,487 Average interest rate 9.10% 9.01% 8.97% 8.52% 8.34% 7.94% 8.18% Liabilities Deposits NOW, money market and savings deposits Fixed rate Average interest rate Variable rate 294,588 294,588 294,588 Average interest rate 2.76% 2.76% Certificates of deposit Fixed rate 287,138 93,164 27,637 9,440 8,123 556 426,058 431,656 Average interest rate 5.01% 5.36% 5.78% 5.74% 5.43% 4.60% 5.14% Variable rate 11,433 6,054 1,054 276 409 45 19,271 19,271 Average interest rate 5.14% 5.01% 5.48% 4.95% 4.84% 4.69% 5.11% Borrowings Fixed rate 12,926 12,926 12,926 Average interest rate 5.38% 5.38% Variable rate 27,138 27,138 27,138 Average interest rate 4.73% 4.73% Federal Home Loan Bank advances Variable rate 9,900 10,000 19,900 19,900 Average interest rate 5.34% 5.35% 5.35% Notes payable Variable rate 6,885 6,885 6,885 Average interest rate 7.10% 7.10% Trust Preferred Securities Fixed rate 22,425 22,425 18,781 Average interest rate 8.75% 8.75% - -----------------------------------------------------------------------------------------------------------------------------
TABLE 9 - QUARTERLY FINANCIAL INFORMATION - --------------------------------------------------------------------------------------------------------------------------------- 1999 1998 ------------------------------------------------------------------------------------------------ Fourth Third Second First Fourth Third Second First - --------------------------------------------------------------------------------------------------------------------------------- Total interest income $17,449 $16,754 $15,937 $15,183 $14,388 $13,826 $13,468 $13,033 Total interest expense 8,846 8,565 8,514 8,151 7,833 7,245 6,907 6,838 Net interest income 8,603 8,189 7,423 7,032 6,555 6,581 6,561 6,195 Net income 1,930 1,850 1,682 1,620 1,806 1,728 1,066 1,848 Earnings per share (basic) 0.40 0.38 0.35 0.34 0.38 0.36 0.23 0.39 Earnings per share (diluted) 0.40 0.38 0.35 0.34 0.38 0.36 0.22 0.39 - ---------------------------------------------------------------------------------------------------------------------------------
The above quarterly amounts reflect reclassifications which increased net interest income by $275 for 1998 on an annual basis from amounts previously reported. 20 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 control, policies and administrative procedures designed to provide reasonable assurance that transactions are recorded accurately. As an integral part of the internal control, he Company maintains a professional staff of internal auditors who monitor compliance with regulations, policies and procedures, and assess the effectiveness of internal control. In addition, the Company's audit committee, which is comprised entirely of outside directors, meets periodically with management, internal auditors and/or 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 Crowe, Chizek and Company LLP. 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 to the extent they deem necessary in order to issue such an opinion. As described further in their report that follows, their opinion is based on their audit, which was conducted in accordance with generally accepted accounting standards and is believed by them to provide a reasonable basis for their opinion. The selection of Crowe, Chizek and Company LLP was approved by the Board of Directors and ratified by shareholders. James L. Saner, Sr. President and Chief Executive Officer Donald A. Benziger Senior Vice President and Chief Financial Officer Independent Auditor's Report To the Shareholders and Board of Directors Indiana United Bancorp Greensburg, Indiana We have audited the consolidated balance sheet of Indiana United Bancorp as of December 31, 1999, and the related consolidated statements of income, shareholder's equity and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements as of December31, 1998, and for the two years then ended, except for amounts included for P.T.C. Bancorp for the year ended December 31, 1997, were audited by other auditors whose report dated January 29, 1999 expressed an unqualified opinion on those statements. The financial statements for the year ended December 31, 1997 were restated to reflect the pooling of interests with P.T.C. Bancorp as described in Note 2 to the financial statements. We audited the 1997 financial statements of P. T. C. Bancorp, which statements reflected net income of $3,430 for the year ended December 31, 1997, and our report dated January 22, 1998 expressed an unqualified opinion on those statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the 1999 financial statements referred to above present fairly, in all material respects, the financial position of Indiana United Bancorp as of December 31, 1999, and the results of its operations and its cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP. Indianapolis, Indiana February 4, 2000.22 21
Consolidated Balance Sheets - ------------------------------------------------------------------------------------------------- December 31 (In thousands except share and per share data) - ------------------------------------------------------------------------------------------------- Assets 1999 1998 - ------------------------------------------------------------------------------------------------- Cash and due from banks $ 33,530 $ 25,549 Interest-bearing demand deposits 30 31 Federal funds sold 400 19,855 - ------------------------------------------------------------------------------------------------- Cash and cash equivalents 33,960 45,435 Interest bearing time deposits 998 1,498 Investment securities Available for sale 225,486 178,008 Held to maturity (fair value of $17,632 and $20,016) 17,788 19,591 - ------------------------------------------------------------------------------------------------- Total investment securities 243,274 197,599 Loans held for sale 7,881 10,972 Loans, net of allowance for loan losses of $7,049 and $6,099 636,178 533,305 Premises and equipment (net) 155,015 12,498 Federal Home Loan Bank stock 2,231 2,120 Income receivable 8,532 7,044 Intangible assets 24,135 12,818 Other assets 6,689 4,656 - ------------------------------------------------------------------------------------------------- Total assets $ 978,893 $ 827,945 Liabilities Deposits Non-interest bearing $ 84,468 $ 66,102 Interest bearing 739,917 643,769 - ------------------------------------------------------------------------------------------------- Total deposits 824,835 709,871 Short-term borrowings 40,064 20,032 Federal Home Loan Bank advances 19,900 10,000 Notes payable 6,885 - Interest payable 4,010 4,032 Other liabilities 2,015 2,389 - ------------------------------------------------------------------------------------------------- Total liabilities 897,259 746,324 - ------------------------------------------------------------------------------------------------- Guaranteed preferred beneficial interests in company's subordinated debentures 22,425 22,425 Shareholders' equity Preferred stock no par value Authorized - 400,000 Issued and outstanding - none - - Common stock $.50 stated value: Authorized--10,000,000 shares, Issued and outstanding, 4,855,541 and 4,774,628 shares 2,428 2,387 Paid-in capital 23,065 21,742 Retained Earnings 38,350 34,363 Accumulated other comprehensive income (4,634) 704 - ------------------------------------------------------------------------------------------------- Total shareholders' equity 59,209 59,196 - ------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 978,893 $ 827,945 - -------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 22
Consolidated Statements of Income - ----------------------------------------------------------------------------------------------------- Years Ended December 31 (In thousands 1999 1998 1997 except share and per share data) - ----------------------------------------------------------------------------------------------------- Interest income: Loans receivable Taxable $ 49,095 $ 43,423 $ 39,674 Tax exempt 551 656 572 Investment securities Taxable 12,767 7,408 6,865 Tax exempt 1,780 1,315 1,450 Federal funds sold 1,070 1,832 952 Deposits with financial institutions 60 81 90 - ----------------------------------------------------------------------------------------------------- Total interest income 65,323 54,715 49,603 - ----------------------------------------------------------------------------------------------------- Interest expense: Deposits 30,186 25,828 23,839 Short-term borrowings 1,412 429 630 Trust preferred securities 2,004 2,024 105 Other borrowings 474 542 423 - ----------------------------------------------------------------------------------------------------- Total interest expense 34,076 28,823 24,997 - ----------------------------------------------------------------------------------------------------- Net interest income 31,247 25,892 24,606 Provision for loan losses 1,641 1,218 1,789 - ----------------------------------------------------------------------------------------------------- Net interest income after Provision for loan losses 29,606 24,674 22,817 - ----------------------------------------------------------------------------------------------------- Non-interest income: Insurance commissions 1,166 530 515 Mortgage banking 1,016 1,356 1,116 Fiduciary activities 310 261 278 Service charges on deposit accounts 2,316 1,895 1,780 Net realized losses on securities (8) (13) (76) Other income 1,308 1,093 888 - ----------------------------------------------------------------------------------------------------- Total non-interest income 6,108 5,122 4,501 - ----------------------------------------------------------------------------------------------------- Non-interest expense Salaries and employee benefits 13,707 10,852 9,252 Net occupancy expenses 1,556 1,382 1,284 Equipment expenses 1,818 1,457 1,323 Data processing fees 758 855 797 Deposit insurance expense 136 129 109 Intangibles amortization 1,775 459 238 Stationery printing and supplies 805 635 503 Merger expenses - 806 - Other expenses 4,481 3,097 2,697 - ----------------------------------------------------------------------------------------------------- Total non-interest expense 25,036 19,672 16,203 - ----------------------------------------------------------------------------------------------------- Income before income tax 10,678 10,124 11,115 - ----------------------------------------------------------------------------------------------------- Income tax expense 3,596 3,676 3,910 - ----------------------------------------------------------------------------------------------------- Net income $ 7,082 $ 6,448 $ 7,205 ===================================================================================================== Net income per share (basic) $ 1.47 $ 1.36 $ 1.53 Net income per share (diluted) $ 1.47 $ 1.35 $ 1.52
See notes to consolidated financial statements 23
Consolidated Statements of Shareholders' Equity - -------------------------------------------------------------------------------------------------------------------------------- Accumulated Other Total Comprehen- (In Thousands Except Share and Per Share Data) Common Stock Paid - in Retained Comprehensive Shareholder's sive Shares Amount Capital Earnings Income Equity Income - -------------------------------------------------------------------------------------------------------------------------------- Balance, January 1,1997 4,703,988 $ 2,352 $ 21,222 $25,536 $292 $49,402 Net income 7,205 7,205 $7,205 Unrealized gains on securities net of reclassification adjustment 470 470 470 ------ Total comprehensive income $7,675 ====== Cash dividends -$ .51 per share (2,105) (2,105) Exercise of stock options 4,568 2 32 34 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31,1997 4,708,556 2,354 21,254 30,636 762 55,006 Net income 6,448 6,448 $6,448 Unrealized gains on securities net of reclassification adjustment (58) (58) (58) ------ Total comprehensive income $6,390 ====== Cash dividends -$ .59 per share (2,721) (2,721) Exercise of stock options 66,072 33 488 521 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 4,774,628 2,387 21,742 34,363 704 59,196 Net income 7,082 7,082 $7,082 Unrealized gains (losses) net of reclassification adjustment (5,338) (5,338) (5,338) ------ Total comprehensive income $1,744 ====== Cash dividends -$ .64 per share (3,095) (3,095) Additional shares issued 80,913 41 1,323 1,364 - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31,1999 4,855,541 $ 2,428 $ 23,065 $38,350 $ (4,634) $ 59,209 - --------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements 24
Consolidated Statement of Cash Flows - -------------------------------------------------------------------------------------------------- Years Ended December 31 (In Thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Operating Activities Net income $ 7,082 $ 6,448 $7,205 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,641 1,218 1,789 Depreciation and amortization 1,852 1,198 1,062 Capitalize mortgage servicing rights (470) (690) (469) Securities amortization, net 172 181 155 Amortization of intangibles 1,775 746 322 Investment securities losses 8 13 76 Foreclosed real estate gains - - (179) Net loans sold gains (149) (590) (323) Mortgage loans originated for sale (58,480) (91,194) (38,277) Proceeds from sale of mortgage loans 61,720 82,392 37,450 Net change in Income receivable (1,488) (1,363) (420) Interest payable (22) 351 633 Change on other assets and liabilities 615 (1,423) (403) - -------------------------------------------------------------------------------------------------- Net cash provided (used) by operating activities 14,256 (2,713) 8,621 - -------------------------------------------------------------------------------------------------- Investing Activities Net change in short term investments 500 (499) 998 Purchases of securities held-to-maturity - (2,189) (4,021) Proceeds from maturities and payments on securities held-to-maturity 1,766 6,732 4,997 Purchases of securities available for sale (110,734) (109,618) (10,426) Proceeds from maturities and payments on securities available for sale 43,369 27,219 20,577 Proceeds from sales of securities available for sale 11,073 6,040 7,075 Purchasing of FHLB Stock (111) Net change in loans (104,814) (45,976) (57,609) Purchases of premises and equipment (3,878) (1,851) (2,199) Proceeds from sale of other real estate 260 146 1,228 Cash received from acquisitions 91,134 86,802 - Other investment activities 58 143 - -------------------------------------------------------------------------------------------------- Net cash (used) by investing activities (71,435) (33,136) (39,237) - -------------------------------------------------------------------------------------------------- Financing Activities Net change in deposits 12,167 5,403 35,834 Short-term borrowings 20,032 4,868 (1,014) Proceeds from notes payable 8,000 - Repayment of notes payable (1,300) - (5,500) Proceeds from FHLB advances 9,900 - 12,500 Repayment of FHLB advances - - (2,500) Proceeds from issuance of stock - 521 34 Cash dividends (3,095) (2,721) (2,104) Net proceeds from issuance of trust preferred securities - - 21,198 - -------------------------------------------------------------------------------------------------- Net cash provided by financing activities 45,704 8,071 58,448 Net change in cash and cash equivalents (11,475) (27,778) 27,832 Cash and cash equivalents, beginning of period 45,435 73,213 45,381 - -------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $33,960 $45,435 $73,213 ================================================================================================== Additional Cash Flows Information Interest paid $ 34,054 $ 28,472 $ 24,364 Income tax paid 3,541 4,019 4,028 Loan balances transferred to foreclosed real estate 300 - -
See notes 2 and 3 regarding noncash transactions included in business combinations and branch acquisitions See notes to consolidated condensed financial statements. 25 Notes to Consolidated Financial Statements (In Thousands Except Per Share Data) Note 1 -- Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Indiana United Bancorp ("Company") is a bank holding company whose principal activity is the ownership and management of its three wholly owned subsidiary banks ("Banks"). People's Trust Company ("People's"), headquartered in Brookville, Indiana, and Union Bank and Trust Company of Indiana ("Union Bank"), headquartered in Greensburg, Indiana, operate under state charters and are 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 Insurance Group ("The Insurance Group") is a wholly owned subsidiary of Union Bank operating agencies in Greensburg and Portland, Indiana and Owensboro, Kentucky subject to regulation by the Kentucky and Indiana Commissioners of Insurance. IUB Capital Trust is a business trust formed in 1997 to issue the guaranteed preferred beneficial interests in the Company's subordinated debentures ("Trust Preferred Securities"). The Company owns all of the common stock of IUB Capital Trust. The Banks generate commercial, mortgage and consumer loans and receive deposits from customers located primarily in Clark, Dearborn, Decatur, Fayette, Floyd, Franklin, Hancock, Henry, Jay, Jefferson, Madison, Ripley, Rush, Switzerland and Wayne counties, Indiana, and surrounding counties. The Banks' loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Summary of Significant Accounting Policies The accounting and reporting policies of the Company, the Banks and IUB Capital Trust conform to generally accepted accounting principles and reporting practices followed by the banking industry. The more significant of the policies are described below. Consolidation - The consolidated financial statements include the accounts of the Company, Banks, The Insurance Group and IUB Capital Trust after elimination of all material inter-company transactions. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions based upon available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and future results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change. Investment securities - 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. 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 as accumulated other comprehensive income. Restricted stocks such as Federal Home Loan Bank stock and other securities without readily determinable fair values are carried at cost. 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. Securities are written down to fair value when a decline in fair value is not temporary. Cash Flows - Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions. Loans held for sale are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated fair value and aggregate cost. Loans are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Loans with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Company considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate identification of evaluation of impairment. 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 net loan fees are being deferred and amortized as an adjustment of yield on the loans. Allowance for loan losses is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. Allocations of the allowance may be made for a specific loan, but the entire allowance is 26 available for any loan that, in management's judgment, should be charged off. Intangible assets consist of core deposit intangibles and goodwill. Core deposit intangibles are being amortized using accelerated and straight-line methods over 10 to 15 years; goodwill is being amortized using the straight-line method over 15 to 20 years. Such assets are periodically evaluated as to the recoverability of their carrying value. Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line and declining-balance methods based 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. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. When foreclosed assets are acquired, any required adjustment is charged to the allowance for loan losses. All subsequent activity is included in current operations. Mortgage servicing rights on originated loans are capitalized by allocating the total costs of the mortgage loans between the mortgage servicing rights and the loans based on their relative fair values. Capitalized servicing rights are amortized in proportion to and over the period of estimated servicing revenues. Impairment is evaluated based on the fair value of the rights using groupings of the underlying loans as to interest rates and other prepayment characteristics. Any impairment of a grouping is reported as a valuation allowance. Income Taxes - Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces tax assets to the amount expected to be realized. The Company files consolidated income tax returns with its subsidiaries. Comprehensive Income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as separate components of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable. New Accounting Pronouncements - Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise record-ed. This is not expected to have a material effect but the effect will depend on derivative holdings when this standard applies. Loss Contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are now such matters that will have a material effect on the financial statements. Dividend Restriction - Banking regulations require maintaining certain capital levels and may limit the dividends paid by the banks to the holding company or by the holding company to shareholders. Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. Earnings per share have been computed based upon the weighted average common and potential common shares outstanding during each year. Industry Segments - Internal financial information is reported and aggregated in one line of business, banking. Reclassifications of certain amounts in the 1998 and 1997 consolidated financial statements have been made to conform to the 1999 presentation. Note 2 -- Business Combinations On April 30, 1998, the Company completed a merger with P.T.C. Bancorp ("PTC"), Brookville, Indiana, in which PTC was merged with and into the Company. The transaction was accounted for using the pooling-of-interests method of accounting. The Company issued 2,272,834 shares (adjusted for stock split) of its common stock to the shareholders of PTC. Each outstanding share of PTC at the effective date of the merger was exchanged for 1.075 shares of common stock of the Company. Merger and related costs were charged against net income during 1998. The financial information contained herein includes PTC for all periods presented. Effective April 1, 1999, the Company acquired the property and casualty insurance business lines of Andy Anderson Insurance Agency, Inc. d/b/a/ The Anderson Group, Owensboro, Kentucky ("The Anderson Group"). The results of operations have been included in these financial statements since the acquisition date under the purchase method of accounting. The acquisition was effected by the purchase of net assets and expertise in which The Anderson Group was integrated into a newly formed subsidiary of the Company, The Insurance Group, Inc. ("The Insurance Group"). The Company issued 80,913 shares of its common stock to The Anderson Group shareholders. Assets acquired totaled $2,180 (including cash of $250) and liabilities assumed totaled $780. Assets acquired included goodwill of $1,628, which is being amortized over 15 years under the straight-line method. Under the agreement, the 27 acquirees will obtain additional shares of company stock as defined in the agreement if certain financial targets are attained during the measurement period, which ends March 31, 2002. Subsequently, the Company caused The Insurance Group to become a wholly owned subsidiary of Union Bank by transfer-ring its ownership in The Insurance Group to that bank subsidiary. The general lines insurance business previously conducted by Union Bank in Greensburg and Portland, Indiana will be conducted through The Insurance Group subsidiary. On November 9, 1999 the Company announced a definitive agreement to acquire First Affiliated Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank N. A. The transaction will be accounted for using the pooling-of-interests method of accounting. The Company will issue approximately 1,020,000 shares of its common stock to the shareholders of First Affiliated Bancorp. The conversion rate will be 4.4167 shares of Company stock for each outstanding share of First Affiliated. As of December 31, 1999 First Affiliated had $131,358 in assets and $116,520 in deposits with four banking offices in Illinois and one in Indiana. These financial statements exclude the effects of the merger. Unaudited pro forma results of operations including First Affiliated are as follows:
- ---------------------------------------------------------------------------------------------- Year Ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------- Net interest income Indiana United Bancorp $31,247 $25,892 $24,606 First Affiliated Bancorp 4,570 4,175 4,040 - ---------------------------------------------------------------------------------------------- Combined 35,817 30,067 28,646 - ---------------------------------------------------------------------------------------------- Net income Indiana United Bancorp 7,082 6,448 7,205 First Affiliated Bancorp 820 1,106 1,024 - ---------------------------------------------------------------------------------------------- Combined 7,902 7,554 8,229 - ---------------------------------------------------------------------------------------------- Basic earnings per share Indiana United Bancorp 1.47 1.36 1.53 First Affiliated Bancorp n/a n/a n/a - ---------------------------------------------------------------------------------------------- Combined 1.35 1.32 1.44 - ---------------------------------------------------------------------------------------------- Diluted earnings per share Indiana United Bancorp 1.47 1.35 1.52 First Affiliated Bancorp n/a n/a n/a - ---------------------------------------------------------------------------------------------- Combined 1.34 1.31 1.43 - ----------------------------------------------------------------------------------------------
* First Affiliated net income and earnings per share for 1998 and 1997 reflects the adjustment of First Affiliated income taxes from S-corporation election method to C-corporation election method Note 3 -- Branch Acquisitions During 1999, the Company purchased four branches within target market areas. These branch acquisitions were accounted for using the purchase method of accounting. Total fair value of assets acquired and liabilities assumed was $104,700 including cash of $90,800, loans of $1,900 and deposits of $104,100. The results of operations of the branches have been included since their acquisition dates. Intangible assets of $11,400 were recorded and are being amortized over estimated useful lives using the straight-line method. During 1998, the Company purchased seven branches within target market areas. These branch acquisitions were accounted for using the purchase method of accounting. Total fair value of assets acquired, and liabilities assumed was $121,900 including cash of $86,800, loans of $21,300 and deposits of $121,300. The results of operations of the branches have been included since their acquisition dates. Intangible assets are being amortized over estimated useful lives. Note 4 -- 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, 1999 and 1998 was $7,488 and $4,889, respectively. Note 5 -- Investment Securities Securities with a carrying value of $45,697 and $28,853 were pledged at December 31, 1999 and 1998 to secure certain deposits and for other purposes as permitted or required by law. 28
- ----------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------------- Available for sale Federal Agencies $142,194 $ 132 $ (3,916) $138,410 State and municipal 24,870 66 (1,616) 23,320 Mortgage-backed securities 41,468 243 (900) 40,811 Corporate obligations 19,399 7 (1,216) 18,190 Equity and other securities 5,115 (360) 4,755 - ----------------------------------------------------------------------------------------------------- Total available for sale 233,046 448 (8,008) 225,486 - ----------------------------------------------------------------------------------------------------- Held to maturity State and municipal 16,753 44 (241) 16,556 Corporate obligations 497 (3) 494 Other securities 538 44 582 - ----------------------------------------------------------------------------------------------------- Total held to maturity 17,788 88 (244) 17,632 - ----------------------------------------------------------------------------------------------------- Total investment securites $250,834 $ 536 $ (8,252) $243,118 - ----------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Values - ----------------------------------------------------------------------------------------------------- Available for sale Federal agencies $ 96,903 $ 1,451 $ (379) $ 97,975 State and municipal 9,627 210 (15) 9,822 Mortgage-backed securities 40,665 421 (257) 40,829 Corporate obligations 28,428 370 (593) 28,205 Equity and other securities 1,162 16 (1) 1,177 - ----------------------------------------------------------------------------------------------------- Total available for sale 176,785 2,468 (1,245) 178,008 - ----------------------------------------------------------------------------------------------------- Held to maturity State and municipal 18,609 327 - 18,936 Corporate obligations 497 23 - 520 Other securities 485 75 - 560 Total held to maturity 19,591 425 - 20,016 - ----------------------------------------------------------------------------------------------------- Total investment securities $196,376 $ 2,893 $ (1,245) $198,024 - -----------------------------------------------------------------------------------------------------
Contractual maturities of securities for 1999 were as follows. Securities not due at a single maturity date, primarily mortgage back securities, are shown separately.
- --------------------------------------------------------------------------- ------------------------ Held to Maturity Available for Sale ----------------------------------- ------------------------ Amortized Fair Amortized Fair Cost Value Cost Value - --------------------------------------------------------------------------- ------------------------ Within one year $ 4,995 $ 5,007 $ 19,758 $ 19,694 Two through five years 9,765 9,745 116,406 113,280 Six through ten years 1,713 1,699 34,399 32,538 After ten years 1,315 1,181 15,900 14,408 - --------------------------------------------------------------------------- ------------------------ 17,788 17,632 186,463 179,920 Mortgage backed securites - - 41,468 40,811 Equity and other securities - - 5,115 4,755 - --------------------------------------------------------------------------- ------------------------ Total investment securities $ 17,788 $ 17,632 $233,046 $225,486 - --------------------------------------------------------------------------- ------------------------
Gross proceeds from sales of securities available for sale during 1999, 1998 and 1997 were $11,073, $6,040,and $7,075. Gross gains of $8, $40,and $18 and gross losses of $16, $53, and $94 were realized on those sales in 1999, 1998 and 1997, respectively. The tax expense (benefit) for gains (losses) on security transactions for the years ended December 31, 1999, 1998 and 1997 was $ (3), $(5), and $(30).30 29 Notes to Consolidated Financial Statements (Continued) (In Thousands Except Per Share Data)
Note 6 Loans and Allowance - ----------------------------------------------------------------------------------------------- December 31 1999 1998 - ----------------------------------------------------------------------------------------------- Commercial and industrial loans $ 39,539 $ 30,237 Agricultural production financing 14,863 14,983 Farm real estate 42,604 36,906 Commercial real estate 98,814 95,800 Residential real estate 307,632 246,491 Construction and development 50,721 30,772 Consumer 79,154 70,966 State and political 9,900 13,249 - ----------------------------------------------------------------------------------------------- Total loans 643,227 539,404 Allowance for loan lossess (7,049) (6,099) - ----------------------------------------------------------------------------------------------- Net loans $ 636,178 $ 533,305 - ----------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- December 31 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $ 6,099 $ 5,451 $ 4,506 Provision for losses 1,641 1,218 1,789 Recoveries on loans 388 302 335 Loans charged off (1,079) (872) (1,179) - --------------------------------------------------------------------------------------------------------------- Balances, December 31 $ 7,049 $ 6,099 $ 5,451 - --------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------- December 31 1999 1998 - ----------------------------------------------------------------------------------------------- Impaired loans with an allowance $ 2,611 $ 2,635 Impaired loans with no allocated allowances. - 607 - ----------------------------------------------------------------------------------------------- Total impaired loans $ 2,611 $ 3,242 - ----------------------------------------------------------------------------------------------- Allowance allocated for impaired loans $ 77 $ 600 - ----------------------------------------------------------------------------------------------- Average balance of impaired loans $ 2,933 990 Interest income recognized on impaired loans - 57 Cash basis interest included above - 57
Note 7 Premises & equipment - ------------------------------------------------------------------- December 31 1999 1998 - ------------------------------------------------------------------- Land $ 2,906 $ 1,943 Buildings 13,973 12,542 Equipment 10,958 9,457 - ------------------------------------------------------------------- Total cost 27,837 23,942 Accumulated depreciation (12,822) (11,444) - ------------------------------------------------------------------- Net $ 15,015 $ 12,498 - ------------------------------------------------------------------- 30 Note 8 -- Deposits
- --------------------------------------------------------------------------------------------------------------------------- December 31 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 84,468 $ 66,102 Interest-bearing demand 220,268 159,661 Savings deposits 74,320 75,272 Certificates and other time deposits of $100,000 or more 99,074 68,821 Other certificates and time deposits 346,255 340,015 - --------------------------------------------------------------------------------------------------------------------------- Total deposits $824,385 $ 709,871 - --------------------------------------------------------------------------------------------------------------------------- Certificates and other time deposits maturing in years ending after December 31, 1999 2000 $298,573 2001 99,218 2002 27,696 2003 9,715 2004 8,566 Thereafter 1,561 - -------------------------------------------------------------------------------------------------------- $445,329 - --------------------------------------------------------------------------------------------------------
Note 9 Short Term Borrowings - ------------------------------------------------------------------------------------------------ December 31 1999 1998 - ------------------------------------------------------------------------------------------------ Fed funds purchased $ 13,200 $ - Securities sold under repurchase agreements 25,487 19,607 U.S. Treasury demand notes 1,377 425 - ------------------------------------------------------------------------------------------------ Total short-term borrowings $ 40,064 $ 20,032 - ------------------------------------------------------------------------------------------------
Note 9 -- Short-Term Borrowings Securities sold under agreements to repurchase ("agreements") consist of obligations secured by U. S. Treasury and Federal agency securities, and a safekeeping agent holds such collateral. The maximum amount of outstanding agreements at any month-end during 1999 and 1998 totaled $25,487 and $19,607. The daily average of such agreements totaled $17,221 and $8,627. The weighted average rate was 4.75% and 4.15% at December 31, 1999 and 1998, while the weighted average rate during 1999 and 1998 was approximately 4.70% and 4.32%,respectively. The majority of the agreements at December 31, 1999 mature within 30 days. Note 10 -- Federal Home Loan Bank Advances The Company had FHLB advances of $19,900 and $10,000 outstanding at December 31, 1999 and 1998. One $10,000 advance outstanding at both year ends has a floating interest rate which was 6.18% at December 31, 1999 and matures on December 30, 2002. The other two advances outstanding at December 31,1999 of $4,900 and $5,000 have interest rates of 5.13% and 5.54% and mature on January 7, 2000. The FHLB advances are secured by first mortgage loans and investment securities totaling approximately 160% of the advance under a blanket security agreement. The advance is subject to restrictions or penalties in the event of prepayment. Note 11 -- Notes payable include a term note secured by 100% of the common stock of the bank subsidiaries with a balance of $6,700.The note requires semi-annual principal payments of $800 plus quarterly interest payments. Interest accrues at LIBOR+1.2%, which resulted in a rate of 7.10% at year-end. The loan matures July 1, 2005. The scheduled annual principal reductions will be $1,600 per year in years 2000 through 2003 with a final payment of $300 in 2004. The Company had a revolving credit facility for $3,000 with a maturity of December 31, 1999 as a standby for future funding needs. The agreement was convertible to a five year term loan at the same rate as the loan discussed previously and had an interest rate of 1/8 of 1% per year on the unused portion. There was no outstanding balance at December 31, 1999. The Company has a $200 note payable on demand with $95 outstanding at 12/31/99. The note requires quarterly interest payments and interest accrues at the prime rate plus .50%, which resulted in a rate of 9% at year end. The loan is unsecured. The Company has various installment loans secured by equipment. Balances outstanding at 12/31/99 totaled $90. The loans call for monthly payments totaling $4, with interest accruing at rates ranging from 8.25% to 9.45%. Maturities range from March 2001 through January 2004. Required principal payments of $37, $29, $12, $11 and $1 are due in 2000, 2001, 2002, 2003, and 2004. Note 12 -- Guaranteed Preferred Beneficial Interests in Company's Subordinated Debentures On December 12, 1997, Trust Preferred Securities totaling $22,425 were issued. On such date, IUB Capital Trust completed the public offering of 2,242,500 shares of Trust Preferred 31 Notes to Consolidated Financial Statements (Continued) (In Thousands Except Per Share Data) Securities with a liquidation preference of $10 per security. The proceeds of the offering were loaned to the Company in exchange for subordinated debentures with terms that are similar to the Trust Preferred Securities, which subordinated debentures are the sole asset of IUB Capital Trust. Issuance costs of $1,227 paid from the proceeds are being amortized over the life of the securities. The securities and distributions are guaranteed by the Company. Distributions on the securities are payable quarterly in arrears at the annual rate of 8.75% (with an effective rate of 8.94%) of the liquidation preference and are included in interest expense in the consolidated statement of income. The Trust Preferred Securities, which mature December 31, 2027, are subject to mandatory redemption, in whole or in part, upon repayment of the subordinated debentures at maturity or their earlier redemption at the liquidation preference. The subordinated debentures are redeemable prior to the maturity date at the option of the Company on or after December 31, 2002. The subordinated debentures are also redeemable in whole at any time or in part from time-to-time, or at any time, in whole, but not in part, upon the occurrence of specific events defined within the trust indenture. The Company has the option to defer distributions on the subordinated debentures from time-to-time for a period not to exceed 20 consecutive quarters. Note 13 -- Loan Servicing Loans serviced for others are not included in the accompanying consolidated balance sheet. The unpaid principal balances of loans serviced for others totaled $181,150 and $150,523 at December 31, 1999 and 1998. The fair value of capitalized mortgage servicing rights at December 31, 1999 and 1998 is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type, investor type and interest rates. - ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- Mortgage servicing rights Balance, January 1 $ 924 $ 529 $ 225 Servicing rights capitalized 470 690 469 Amortization of servicing rights (399) (295) (165) - ----------------------------------------------------------------------- Balance, December 31 $ 995 $ 924 $ 529 - ----------------------------------------------------------------------- Note 14 -- Income Tax No valuation allowance was necessary at anytime during 1999, 1998 and 1997. Retained earnings of Regional Bank include approximately $2,162 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 Regional Federal Savings Bank stock or excess dividends, or loss of "bank" status for Regional Federal Savings Bank 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 for Regional Federal Savings Bank at December 31, 1999 was approximately $735.
Note 14 -- Income Tax - ---------------------------------------------------------------------------------------------------------------- Year Ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Income tax expense Currently payable Federal $ 3,355 $ 2,642 $ 3,271 State 1,009 955 1,080 Deferred Federal (705) 119 (343) State (63) (40) (98) - ---------------------------------------------------------------------------------------------------------------- Total income tax expense $ 3,596 $ 3,676 $ 3,910 - ---------------------------------------------------------------------------------------------------------------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 3,631 $ 3,442 $ 3,779 Tax exempt interest (671) (573) (558) Effect of state income taxes 625 604 648 Non-deductible expenses 74 234 58 Other (63) (31) (17) - ---------------------------------------------------------------------------------------------------------------- Actual tax expense $ 3,596 $ 3,676 $ 3,910 - ----------------------------------------------------------------------------------------------------------------
32
The components of the net deferred tax asset are as follows: - -------------------------------------------------------------------------------------------------- December 31 1999 1998 - -------------------------------------------------------------------------------------------------- Assets Allowance for loan losses $ 2,078 $ 1,602 Core deposit intangibles 200 100 Deferred compensation 124 21 Unrealized loss on securities AFS 2,964 - - -------------------------------------------------------------------------------------------------- Total assets $ 5,366 $ 1,723 - -------------------------------------------------------------------------------------------------- Liabilities Appreciation on securities (85) (22) Depreciation (441) (427) Fair value adjustments in accounting for assets acquired (482) (586) Goodwill (65) (48) Mortgage servicing rights (394) (393) Unrealized gain on securities AFS - (481) Other (63) (143) - -------------------------------------------------------------------------------------------------- Total liabilities $ (1,530) $ (2,100) - -------------------------------------------------------------------------------------------------- $ 3,836 $ (377) - --------------------------------------------------------------------------------------------------
Note 15 -- Other Comprehensive Income
- --------------------------------------------------------------------------------------------------------------------------- Before-Tax Tax (Expense)/ Net-of-Tax Year Ended December 31, 1999 Amount Benefit Amount - --------------------------------------------------------------------------------------------------------------------------- Unrealized losses on securities Unrealized holding losses arising during the year $ (8,791) $ 3,448 $ (5,343) Less: reclassification adjustment for losses realized in net income (8) 3 (5) - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (8,783) 3,445 (5,338) - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Before-Tax Tax (Expense)/ Net-of-Tax Year Ended December 31, 1998 Amount Benefit Amount - --------------------------------------------------------------------------------------------------------------------------- Unrealized losses on securities Unrealized holding losses arising during the year $ (109) $ 43 $ (66) Less: reclassification adjustment for losses realized in net income (13) 5 (8) - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ (96) $ 38 $ (58) - --------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------- Before-Tax Tax (Expense)/ Net-of-Tax Year Ended December 31, 1997 Amount Benefit Amount - --------------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities Unrealized holding gains arising during the year $ 702 $ (278) $ 424 Less: reclassification adjustment for losses realized in net income (76) 30 (46) - --------------------------------------------------------------------------------------------------------------------------- Other comprehensive income $ 778 $ (308) $ 470 - ---------------------------------------------------------------------------------------------------------------------------
Note 16 -- 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: - --------------------------------------------------------------------- 1999 1998 - --------------------------------------------------------------------- Commitments to extend credit $92,942 $84,352 Standby letters of credit 624 517 33 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. Commitments are normally short-term and variable in rate. 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 that arise primarily in the ordinary course of business. Management is presently not aware of any such material claims. Note 17 -- Stock Split On July 31, 1998, the Company approved a 2-for-1 stock split n which each share of its common stock outstanding at the close of business on August 17, 1998, was converted into two shares of common stock. The additional 2,387,314 shares were distributed to shareholders on August 31, 1998. The stated value of shares was changed from $1 to $.50. Share, per share and stock option data have been restated for the 2-for-1 stock split. Note 18 -- Dividends and Capital Restrictions Without prior approval, the Banks are restricted by Indiana law and regulatory agencies as to the maximum amount of dividends the Banks can pay to the parent in any calendar year to their retained net profits (as defined) for that year and the two preceding years. At December 31, 1999, total shareholders' equity of the Banks was $82,279 of which $72,775 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. Note 19 -- Dividend Reinvestment Plan The Company approved an Automatic Dividend Reinvestment Plan in February 1997. The plan enabled shareholders to elect to have their cash dividends on all or a portion of shares held automatically reinvested in additional shares of the Company's common stock. The stock is purchased by the Company's transfer agent on the open market and credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis commencing with the March 1997 dividend payment. Note 20 -- Regulatory Capital The Company and Banks are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification in any of the undercapitalized categories can result in actions by regulators that could have a material effect on operations. At December 31, 1999 and 1998, the Banks are categorized as well capitalized and met all subject capital adequacy requirements. 34 Note 20 -- Regulatory Capital
Required for To Be Well Actual Adequate Capital Capitalized - ------------------------------------------------------------------------------------------------------------------ December 31, 1999 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ Indiana United Bancorp Total capital (to risk-weighted assets) 68,941 10.9 50,641 8.0 N/A N/A Tier 1 capital (to risk-weighted assets) 60,678 9.6 25,320 4.0 N/A N/A Tier 1 capital (to average assets) 60,678 6.5 37,502 4.0 N/A N/A People's Total capital (to risk-weighted assets) 32,798 11.7 22,444 8.0 28,055 10.0 Tier 1 capital (to risk-weighted assets) 29,410 10.5 11,222 4.0 16,833 6.0 Tier 1 capital (to average assets) 29,410 6.8 17,246 4.0 21,558 5.0 Union Bank Total capital (to risk-weighted assets) 22,810 11.0 16,596 8.0 20,745 10.0 Tier 1 capital (to risk-weighted assets) 20,656 10.0 8,298 4.0 12,447 6.0 Tier 1 capital (to average assets) 20,656 6.7 12,395 4.0 15,494 5.0 Regional Total risk-based capital (to risk-weighted assets) 14,213 10.9 10,410 8.0 13,012 10.0 Core capital (to adjusted tangible assets) 12,707 6.5 7,806 4.0 11,709 6.0 Core capital (to adjusted total assets) 12,707 6.5 7,806 4.0 9,758 5.0 - ------------------------------------------------------------------------------------------------------------------ Regional Bank's tangible capital at December 31, 1999 was $12,707, which amount was 6.5 percent of tangible assets and exceeded the required ratio of 1.5 percent Required for To Be Well Actual Adequate Capital Capitalized - ------------------------------------------------------------------------------------------------------------------ December 31, 1998 Amount Ratio Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------------ Indiana United Bancorp Total capital (to risk-weighted assets) 74,199 13.7 43,285 8.0 N/A N/A Tier 1 capital (to risk-weighted assets) 65,171 12.1 21,642 4.0 N/A N/A Tier 1 capital (to average assets) 65,171 8.3 31,365 4.0 N/A N/A People's Total capital (to risk-weighted assets) 28,324 12.5 18,102 8.0 22,628 10.0 Tier 1 capital (to risk-weighted assets) 25,495 11.2 9,051 4.0 13,577 6.0 Tier 1 capital (to average assets) 25,495 7.8 13,006 4.0 16,258 5.0 Union Bank Total capital (to risk-weighted assets) 20,969 11.4 14,707 8.0 18,384 10.0 Tier 1 capital (to risk-weighted assets) 18,993 10.3 7,354 4.0 11,030 6.0 Tier 1 capital (to average assets) 18,993 6.9 11,063 4.0 13,829 5.0 Regional Total risk-based capital (to risk-weighted assets) 14,174 12.9 8,792 8.0 10,990 10.0 Core capital (to adjusted tangible assets) 13,135 7.3 7,240 4.0 10,860 6.0 Core capital (to adjusted total assets) 13,135 7.3 7,240 4.0 9,050 5.0 - ------------------------------------------------------------------------------------------------------------------ Regional Bank's tangible capital at December 31, 1998 was $13,135, which amount was 7.3 percent of tangible assets and exceeded the required ratio of 1.5 percent
35 Note 21 -- Employee Benefit Plans The Company has a defined-contribution retirement plan in which substantially all employees may participate. The Company matches a portion of employees' contributions and makes additional Company contributions based on employee compensation. Expense was $951 in 1999, $736 in 1998, and $529 in 1997. Note 22 -- Related Party Transactions The Company has entered into transactions with certain directors, executive officers, significant stockholders 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: - ------------------------------------------------------ Balances, January 1, 1999 $3,000 Changes in composition of related parties (161) New loans, including renewals and advances 1,133 Payments etc., including renewals (1,926) - ------------------------------------------------------ Balances, December 31, 1999 $2,046 - ------------------------------------------------------ Deposits from related parties held by the company at December 31, 1999 and 1998 totaled $1,126 and $763 Note 23 -- Stock Option Plans Under the stock option plans effective through April 30, 1998 which were accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations, options were granted to selected executive officers and directors which vested and became fully exercisable generally at the end of four years of continued employment. The exercise price of each option was equal to the fair value of the Company's stock on the date of grant; therefore, no compensation expense was recognized. Although the Company has elected to follow APB No. 25, Statement of Financial Accounting Standards (SFAS) No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using a present value calculation with the following assumptions:
- ------------------------------------------------------------------------------------- Assumptions applicable to options in 1996 - ------------------------------------------------------------------------------------- Risk-free interest rates 6.50% Dividend yields 2.31% Volatility factors of expected market price of commons stock 1.00% Weighted-average expected life of the options 9 years Fair value of options granted in 1996 $3.23
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense of the options vesting period. The pro forma effect on net income and earnings per share of this statement as follows:
- ------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------- Net income As reported $ 7,082 $ 6,448 $ 7,205 Pro forma 7,082 6,433 7,194 Basic earnings per share As reported 1.47 1.36 1.53 Pro forma 1.47 1.35 1.53 Diluted earnings per share As reported 1.47 1.35 1.52 Pro forma 1.47 1.35 1.52 - -------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------- Year Ended December 31 1999 1998 - ------------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Options Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------- Outstanding, beginning of year - - 66,072 7.88 Granted - - - Exercised - - (66,072) 7.88 -------------- --------------- Outstanding, end of year - Options exercisable at year end - - -------------------------------------------------------------------------------------------------------
36 Note 24 - Earnings Per Share Earnings per share were computed as follows:
- --------------------------------------------------------------------------------------------------------------------- Weighted Average Per- Share Year Ended December 31, 1999 Income Shares Amount - --------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 7,082 4,822,069 $ 1.47 Effect of dilutive stock options - --------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 7,082 4,822,069 $ 1.47 --------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 - --------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 6,448 4,753,268 $ 1.36 Effect of dilutive stock options 12,446 --------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 6,448 4,765,714 $ 1.35 --------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Year Ended December 31, 1997 - --------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 7,205 4,705,699 $ 1.53 Effect of dilutive stock options 32,596 --------------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 7,205 4,738,295 $ 1.52 ---------------------------------------------------
37 Note 25 -- 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 - The 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. FHLB Stock - The fair value of FHLB stock is based on the price at which it may be resold to the FHLB. Income Receivable/Interest Payable - The fair value of these amounts approximates carrying values. Deposits - The fair values of non-interest-bearing, interest-bearing demand, and savings accounts are equal to the amount payable on demand at the balance sheet date. The carrying amounts for variable rate, fixed-term certificates of deposit approximate their fair values at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. Short-term Borrowings and Notes Payable - The interest rates for short-term borrowings and variable rate notes payable approximate market rates; thus the fair value approximates carrying value. FHLB Advances - The fair value of this borrowing is established using a discounted cash flow calculation, based on current rates for similar debt. Fair value approximates carrying value for 1999. Trust Preferred Securities - The fair value is based on quoted market values. The estimated fair values of the Company's financial instruments are as follows: Note 25 Fair Values of Financial Instruments
- ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 33,960 $ 33,960 $ 45,435 $45,435.00 Interest-bearing time deposits 998 998 1,498 1,498 Securities available for sale 225,486 225,486 178,008 178,008 Securities held to maturity 17,788 17,632 19,591 20,016 Loans including loans held for sale, net 644,059 637,377 544,277 546,419 Stock in FHLB 2,231 2,231 2,120 2,120 Income receivable 8,532 8,532 7,044 7,044 Deposits (824,385) (829,983) (709,871) (713,412) Borrowings Short-term (40,064) (40,064) (20,032) (20,032) FHLB advances (19,900) (19,900) (10,000) (10,270) Long term (6,885) (6,885) - - Interest payable (4,010) (4,010) (4,032) (4,032) Trust preferred secutities (22,425) (18,781) (22,425) (23,827)
Note 26 -- Condensed Financial Information (Parent only) Presented on the opposite page is condensed financial information as to financial position, results of operations and cash flows of the Company:. 38 Condensed Statement of Cash Flows Parent Only
Year Ended December 31 (In Thousands) 1999 1998 1997 - -------------------------------------------------------------------------------------------- Operating Activities Net income $ 7,082 $ 6,448 $7,205 (Undistributed) income of subidiaries (1,724) (7,738) (3,867) Changes in other assets and liabilities (1,589) (177) 120 ----------------------------------- Net cash provided (used) by operating activities 3,769 (1,467) 3,458 Investing Activities Capital contributed to subsidiary (13,500) (7,000) - Purchases of equipment (218) (154) (15) Proceeds from sale of equipment 14 - - Proceeds from sale of security AFS - 1,087 - Purchase of security AFS - - (1,087) ----------------------------------- Net cash provided (used) by investing activities (13,704) (6,067) (1,102) Financing Activities Payments on notes payable (1,300) - (5,500) Proceeds from notes payable 8,000 - - Net proceeds from issuance of debentures - - 21,892 Purchase of IUB Capital Trust common shares - - (694) Proceeds from issuance of stock - 521 34 Cash dividends (3,095) (2,721) (2,104) ----------------------------------- Net cash provided (used) by financing activities 3,605 (2,200) 13,628 Net change in cash and cash equivalents (6,330) (9,734) 15,984 Cash and cash equivalents, beginning of period 8,167 17,901 1,917 ----------------------------------- ----------------------------------- Cash and cash equivalents, end of period $1,837 $8,167 $17,901 ===================================
39 Officers and Directors Indiana United Bancorp Directors Robert E. Hoptry Chairman Indiana United Bancorp Robert S. Dunevant Vice Chairman Indiana United Bancorp President Unity Company James L. Saner, Sr. President and CEO Indiana United Bancorp Eric E. Anderson President and CEO Anderson Insurance and Financial Services John E. Back Retired William G. Barron Chairman and President Wm. G. Barron Enterprises, Inc. Dale J. Deffner Retired Philip A. Frantz Attorney at Law; Partner Coldren and Frantz Edward J. Zoeller President E.M. Cummings Veneer, Inc. Officers Robert E. Hoptry Chairman James L. Saner, Sr. President and CEO Michael K. Bauer Vice President Donald A. Benziger Senior Vice President and CFO C. Brian Coy Chief Information Officer B. Sue Fawbush Vice President, Director of Human Resources Dennis M. Flack Vice President, Director of Training and Sales Management Lynn T. Gordon Vice President Suzanne Kendall Corporate Auditor Dawn M. Schwering Director of Marketing Daryl R. Tressler Vice President Union Bank Directors Daryl R. Tressler Chairman, President and CEO Union Bank and Trust Company of Indiana William G. Barron Chairman and President Wm. G. Barron Enterprises Philip A. Frantz Attorney at Law; Partner Coldren and Frantz Robert E. Hoptry Chairman Indiana United Bancorp David L. Miers Manager Miers Farm Corporation Lawrence R. Rueff, D.V.M. President Swine Veterinary Services John G. Young Retired Division Managers W. Brent Hoptry Senior Vice President Lending Division Glenn R. Raver Senior Vice President Retail Services Divisions Daniel F. Anderson Vice President Senior Trust Officer People's Trust Company Directors Dale J. Deffner Chairman People's Trust Company Retired Lynn T. Gordon President and CEO People's Trust Company Mark W. Dunevant Senior Vice President, Retail Lending People's Trust Company Dieter Johnsen Owner Dieter K.H. Johnsen, Inc. Larry A. Johnson Retired James L. Saner, Sr. President and CEO Indiana United Bancorp John G. Seale Partner Rettig, Blankman, Mack and Seale Accounting Firm Norman Winkler Farmer Division Managers Elaine Cook Senior Vice President Retail /Deposit Services Division Mark W. Dunevant Senior Vice President Retail Lending Division L. Les Estep Senior Vice President Commercial Lending Division John C. Parker Senior Vice President Data Processing and Operations Division Regional Bank Directors Michael K. Bauer Chairman, President and CEO Regional Federal Savings Bank William G. Barron Chairman and President Wm. G. Barron Enterprises D.J. Hines President Schuler Bauer Realty Michael J. Kapfhammer President Buckhead Mountain Grill Charles E. MacGregor Attorney at Law Wyatt, Tarrant and Combs Edward J. Zoeller President E.M. Cummings Veneer, Inc. Division Managers Larry W. Brumley Senior Vice President Lending Division James S. Honour, Jr. Vice President Retail Services Division The Insurance Group, Inc. Directors James L. Saner, Sr. Chairman The Insurance Group, Inc. President and CEO Indiana United Bancorp C. Todd Anderson President The Insurance Group, Inc. Daryl R. Tressler Chairman, President and CEO Union Bank and Trust Company of Indiana Michael K. Bauer Chairman, President and CEO Regional Federal Savings Bank Lynn T. Gordon President and CEO People's Trust Company Division Managers Doug Loy Coordinator Union Insurance Agency - Portland, IN Dee Knueven Coordinator Union Insurance Agency - Greensburg, IN Lisa Rudd Coordinator The Anderson Group - Owensboro, KY. Report designed by Black & White Design, Louisville, Kentucky Shareholder Information Annual Meeting Wednesday, May 31, 2000, 10:00 AM Conference Center, Second Floor Union Bank and Trust Company 201 N. Broadway Greensburg, IN 47240 Corporate Address Indiana United Bancorp 201 N. Broadway PO Box 87 Greensburg, IN 47240-9979 Tel: 812-663-0157 Fax: 812-663-4812 www.2iub.com Form 10-K Copies of the Company's 1999 Form 10-K filed with the Securities and Exchange Commission are available without charge to all shareholders upon request. Please direct requests to the attention of the Chief Financial Officer. Transfer Agent Investor Relations Department Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-9982 Tel: (800) 368-5948 Common Shares The Common shares of the Company are listed on The Nasdaq Stock Market(R). The trading symbol is IUBC. In newspaper listings, Company shares are frequently listed as IndUtd. Market Makers Market Makers in the Company's common stock include: Stifel, Nicolaus & Company, Inc. J.J.B. Hilliard/W.L. Lyons, Inc. NatCity Investments, Inc. Sandler O'Neill & Partners, L.P. The range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below. 1999 Q4 Q3 Q2 Q1 - ------------------------------------------------------------- High $20.69 $23.00 $21.13 $23.50 Low $17.13 $18.13 $17.00 $21.00 Last Sale $18.75 $20.63 $18.88 $21.00 1998 Q4 Q3 Q2 Q1 - ------------------------------------------------------------- High $26.50 $28.00 $30.38 $32.47 Low $21.00 $23.00 $26.75 $21.25 Last Sale $22.13 $25.75 $27.63 $29.06 The following dividends per share were paid by Indiana United Bancorp. 1999 Q4 Q3 Q2 Q1 - ----------------------------------------------------------------- $ .160 $ .160 $ .160 $ .160 1998 Q4 Q3 Q2 Q1 - ----------------------------------------------------------------- $ .155 $ .145 $ .145 $ .140 Amounts have been adjusted to reflect a 2 for 1 stock split to shareholders of record as of August 17, 1998. Indiana United Bancorp 201 North Broadway P.O. Box 87 Greensburg, Indiana 47240 Tel: 812-663-0157 Fax: 812-663-4812 www.2iub.com201 EX-21 3 EXHIBIT (21)--SUBSIDIARIES OF THE REGISTRANT - -------------------------------------------- State of Name Incorporation People's Trust Company Indiana Union Bank and Trust Company of Indiana Indiana Regional Federal Savings Bank United States Kentucky United Bancorp, Inc. Kentucky IUB Capital Trust Delaware The Insurance Group, Inc. Indiana Regional Pioneer Indiana IUB Reinsurance Co., Ltd., a Turks and Caicos Islands corporation EX-23.1 4 EXHIBIT (23.1)--CONSENT OF CROWE, CHIZEK AND COMPANY LLP We consent to the incorporation by reference in the Registration Statements on Form S-8 and Form S-4 of Indiana United Bancorp, File Nos. 33-45395 and 333-33032, respectively, of our report, dated February 4, 2000, on the consolidated financial statements of Indiana United Bancorp as of and for the year ended December 31, 1999, which report is incorporated by reference in this Form 10-K. Crowe, Chizek and Company LLP Indianapolis, Indiana March 30, 2000 EX-23.2 5 EXHIBIT (23.2)--CONSENT OF OLIVE LLP We consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 33-45395, of our report dated January 29, 1999 contained in the 1999 Annual Report on Form 10-K of Indiana United Bancorp. Olive LLP Indianapolis, Indiana March 27, 2000 EX-27 6
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 DEC-31-1999 33,530 1,028 400 0 225,486 17,788 17,632 643,227 7,049 978,893 824,385 40,064 48,350 6,885 0 0 2,428 56,781 978,893 49,646 14,547 1,130 65,323 30,186 34,076 31,247 1,641 (8) 25,036 10,678 7,082 0 0 7,082 1.47 1.47 3.76 3,465 373 0 0 6,099 1,079 388 7,049 5,357 0 1,692
EX-99 7 EXHIBIT (99)--OPINION OF OLIVE LLP Independent Auditor's Report To the Shareholders and Board of Directors Indiana United Bancorp Greensburg, Indiana We have audited the consolidated balance sheet of Indiana United Bancorp and subsidiaries as of December 31, 1998, and the related consolidated statements of income, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1998. 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. The consolidated financial statements as of December 31, 1997, and for the year then ended have been restated to reflect the pooling of interest with P.T.C. Bancorp as described in Note 2 to the consolidated financial statements. We did not audit the 1997 financial statements of P.T.C. Bancorp, which statements reflect total assets of $321,993 as of December 31, 1997, and total revenues of $26,118 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for P.T.C. Bancorp as of December 31, 1997, and for the year then ended, is based solely on the report of the other auditors. 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, based on our audits and the report of other auditors, the consolidated financial statements referred to in the first paragraph present fairly, in all material respects, the consolidated financial position of Indiana United Bancorp and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Olive LLP Indianapolis, Indiana January 29, 1999 -----END PRIVACY-ENHANCED MESSAGE-----