-----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, J8h/z4SabXd+euoQJE12y0v/HhvYAoqjKRhBIQgJoVSc3WBUdtTae4J7bXzRcles 1Q0cempnxiTcwn4JbjRDfA== 0000926274-02-000129.txt : 20020415 0000926274-02-000129.hdr.sgml : 20020415 ACCESSION NUMBER: 0000926274-02-000129 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020325 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-12422 FILM NUMBER: 02584650 BUSINESS ADDRESS: STREET 1: 201 N BROADWAY STREET 2: PO BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 BUSINESS PHONE: 8126630157 MAIL ADDRESS: STREET 1: 201 NORTH BROADWAY STREET 2: P O BOX 87 CITY: GREENSBURG STATE: IN ZIP: 47240 10-K405 1 iub-10k.txt 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, 2001 Commission file number 0-12422 INDIANA UNITED BANCORP (Exact name of registrant as specified in its charter) Indiana 35-1562245 (State or other jurisdiction (I.R.S. Employer of 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. [ ] 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 $127,303,646 as of March 20, 2002. As of March 20, 2002, there were outstanding 6,495,084 common shares, without par value, of the registrant. DOCUMENTS INCORPORATED BY REFERENCE Part of Form 10-K Documents Into Which Incorporated --------- ----------------------- 2001 Annual Report to Shareholders Part II (Items 5 through 8) Definitive Proxy Statement for Annual Part III (Items 10 through 13) Meeting of Shareholders to be held April 24, 2002 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 Related 9 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 10 Part III Item 10 Directors and Executive Officers of the Registrant See below Item 11 Executive Compensation See below Item 12 Security Ownership of Certain Beneficial Owners and See below 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 (which effective January 31, 2001 was converted to an Indiana commercial bank). 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 89,207 shares of its common stock to The Anderson Group shareholders, valued at $1,364. Assets totaled $2,180 (including cash of $250) and liabilities assumed of $780. Assets acquired include goodwill of $1,628. 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 is now conducted through The Insurance Group subsidiary. In February 2000, the Company formed a subsidiary of the holding company called IUB Reinsurance Company, Ltd. This subsidiary is incorporated in Turks and Caicos and is a credit life insurance company. On May 1, 2000 the Company consummated its acquisition of First Affiliated Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank, N. A. The transaction was accounted for using the pooling-of-interests method of accounting. The Company issued 1,122,741 shares of its common stock to the shareholders of First Affiliated Bancorp (adjusted for stock dividends). This includes shares issued to redeem First Affiliated Bancorp stock options. The conversion rate was 4.4167 shares of Company stock for each outstanding share of First Affiliated at the effective date of the merger. Merger and related costs were charged against net income during 2000. The financial information contained herein includes First Affiliated Bancorp for all periods presented. In September 2000, the company purchased two branches in Marion County. These two facilities were integrated into Union Bank and resulted in the purchase of over $40,000 in deposits. 3 Also in September 2000, the Company formed two investment subsidiaries, People's Investment Company, Ltd. and Union Investment Company, Ltd. Incorporated in Bermuda, these subsidiaries hold a large portion of both Union Bank's and People's Trust's investment portfolios. In April 2001, the Company consummated its acquisition of the insurance agencies of Vollmer & Associates, Inc. ("Vollmer"). The transaction was accounted for using the purchase method of accounting. The purchase price consisted of $635 in cash and 24,184 shares of Company stock. The acquisition resulted in goodwill of approximately $1,000. The results of operations have been included since the acquisition date. The Vollmer agencies were subsequently merged into The Insurance Group. The Company operates 47 offices in Indiana and Illinois. As of December 31, 2001, the Company had consolidated assets of $1,178,392, consolidated deposits of $1,014,687 and shareholders' equity of $87,872. 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. 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 2000 all affiliates originated for the secondary market as well as continued to grow their internal portfolios. At December 31, 2001, the Company was servicing a $293,640 portfolio, which increased from $201,056 and $181,150 at year-end 2000 and 1999. 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. The principal source of revenues for the Company is interest and fees on loans, which accounted for 69.6% of total revenues in 2001, 70.2% in 2000 and 67.9% in 1999. 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 97.0% 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 16.1% of total revenues in 2001, 18.5% in 2000 and 21.1% in 1999. As of December 31, 2001, 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 depositors, the Banks market various programs for demand, savings and 4 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 competitor. 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. 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 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, 2001, the Company and its subsidiaries had approximately 452 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. 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. 5 The Company is under the jurisdiction of the Securities and Exchange Commission ("SEC") and state securities commission for matters relating to the offering and sale of its securities. The Company is subject to the SEC's rules and regulations relating to periodic reporting, reporting to shareholders, proxy solicitation and insider trading. The Company's income is principally derived from dividends paid on the common stock of its subsidiaries. The payment of these dividends is subject to certain regulatory restrictions. Under FRB policy, the Company is expected to act as a source of financial strength to, and commit resources to support, its affiliates. As a result of such policy, the Company may be required to commit resources to its affiliate banks in circumstances where it might not otherwise do so. REGULATION AND SUPERVISION OF THE SUBSIDIARY BANKS Union Bank, People's Trust, and Regional Bank are supervised, regulated and examined by the Indiana Department of Financial Institutions ("DFI") and the Federal Deposit Insurance Corporation ("FDIC"). Capstone Bank is supervised, regulated and examined by the Office of the Comptroller of the Currency ("OCC"). 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 all four banking subsidiaries are insured by the Bank Insurance Fund ("BIF") of the FDIC. The FDIC has the authority to change premiums twice per year. Branching by banks in Indiana is subject to the jurisdiction, and requires the prior approval, of the 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. 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 6 rate risk at individual banks. Banks may use an internal model that provides a measure of the change in a bank's economic value. The results of the supervisory and internal models would be one factor regulators 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 helped pay for the Financing Corp. ("FICO") bond interest payments at an assessment rate that was one-fifth the rate paid by thrifts. Beginning January 1, 2000, the FICO interest payments were 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 adopted procedures 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 file elections to become financial holding companies at any time. IUB has chosen not to become a financial holding company and remains a bank holding company. 7 CAPITAL REQUIREMENTS The Company and its subsidiary Banks must meet certain minimum capital requirements mandated by the FRB, FDIC 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 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, 2001, the Company's leverage ratio of capital to total assets was 7.4%. The FRB 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 11.4% and its Total Capital to Risk-Weighted Assets Ratio was 12.6% at December 31, 2001. The Company's Banks had capital to asset ratios and risk-adjusted capital ratios at December 31, 2001, 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. 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) VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME The table on page 8a 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 2001 over 2000 and 2000 over 1999. AVERAGE DEPOSITS The table on page 8b discloses the average deposits for the Company for 2001, 2000 and 1999 and the maturity schedule of the over $100 certificates of deposit at December 31,2001. MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES OF COMMERCIAL AND CONSTRUCTION LOANS AT DECEMBER 31, 2001 Maturities and sensitivity to changes in interest rates of commercial and construction loans at December 31, 2001 are disclosed in the table on page 8c. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The table on page 8d discloses the allocation of the allowance for loan losses to the major loan categories. 8 Volume/Rate Analysis of Changes in Net Interest Income (Tax Equivalent Basis)
- ------------------------------------------------------------------------------------------------ ---------------------------------- 2001 OVER 2000 2000 OVER 1999 - ------------------------------------------------------------------------------------------------ ---------------------------------- Volume Rate Total Volume Rate Total - ------------------------------------------------------------------------------------------------ ---------------------------------- Interest income Loans 2,449 (2,713) $ (264) $ 9,625 $ 1,906 $ 11,531 Securities (1,755) 90 (1,665) (178) (117) (295) Federal funds sold and money market funds 1,409 (355) 1,054 (687) 445 (242) Short-term investments 3 3 6 (2) (44) (46) - ------------------------------------------------------------------------------------------------ ---------------------------------- Total interest income 2,106 (2,975) (869) 8,758 2,190 10,948 - ------------------------------------------------------------------------------------------------ ---------------------------------- Interest expense Interest-bearing DDA, savings, and money market accounts $ 845 $ (3,573) (2,728) $ 328 $ 1,602 $ 1,930 Certificates of deposit $ 278 $ (599) (321) 3,203 2,075 5,278 Borrowings (362) (621) (983) 870 318 1,188 Trust preferred securities -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------ ---------------------------------- Total interest expense 761 (4,793) (4,032) 4,401 3,995 8,396 - ------------------------------------------------------------------------------------------------ ---------------------------------- Change in net interest income $ 1,345 $ 1,818 3,163 $ 4,357 $ (1,805) 2,552 -------------------- --------------------- Change in tax equivalent adjustment 484 (720) - ------------------------------------------------------------------------------------------------ ---------------------------------- Change in net interest income before tax equivalent adjustment $ 2,679 $ 3,272 - ------------------------------------------------------------------------------------------------ ----------------------------------
8a Average Deposits
- ------------------------------------------------ ------------------------- ------------------------- 2001 2000 1999 - ------------------------------------------------ ------------------------- ------------------------- Amount Rate Amount Rate Amount Rate - ------------------------------------------------ ------------------------- ------------------------- Demand $ 85,317 $ 93,987 $ 88,752 Interest Bearing Demand 182,557 1.55% 216,303 3.52% 231,633 2.77% Savings 218,792 2.69 146,102 2.64 112,839 2.76 Certificates of Deposit 545,458 5.45 540,353 5.56 482,500 5.13 - ------------------------------------ ------------ ------------- Totals $1,032,124 3.72% $ 996,745 4.16% $ 915,724 3.74% ========== ========== ==========
As of December 31, 2000, 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 $26,470 $26,209 $21,226 $13,575 $87,480 Percent 30% 30% 24% 16% 8b Maturities and Sensitivity to Changes in Interest Rates of Commercial and Construction Loans at December 31, 2000
- ---------------------------------------------------------------------------------------------------------------------- Due: Within 1 Year 1 - 5 Years Over 5 years Total - ---------------------------------------------------------------------------------------------------------------------- Loan Type Commercial and industrial $ 34,408 $ 36,036 $ 11,364 81,808 Agricultural production financing and other loans to farmers 12,826 6,524 1,376 20,726 Construction and development 27,175 2,887 4,068 34,130 - ---------------------------------------------------------------------------------------------------------------------- Totals $ 74,409 $ 45,447 $ 16,808 $136,664 - ---------------------------------------------------------------------------------------------------------------------- Percent 54% 33% 12% 100% - ---------------------------------------------------------------------------------------------------------------------- Rate Sensitivity Fixed Rate $ 18,374 $ 15,363 $ 11,204 $ 44,941 Variable Rate 85,072 6,651 -- 91,723 - ---------------------------------------------------------------------------------------------------------------------- Totals $103,446 $ 22,014 $ 11,204 $136,664 - ----------------------------------------------------------------------------------------------------------------------
8c Allocation of the Allowance for Loan Losses
- ------------------------------------------- ----------------- ----------------- ----------------- ----------------- 2001 2000 1999 1998 1997 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 $2,159 43% $1,076 47% $ 598 46% $ 445 45% $ 331 44% Farm real estate 301 6 442 6 397 6 325 7 20 8 Commercial 2,453 20 1,004 16 829 15 765 18 327 18 Construction and development 858 7 909 6 965 7 830 6 66 3 - ------------------------------------------------------------- ---------------- ----------------- ----------------- Total real estate 5,771 75 3,431 75 2,789 74 2,365 76 744 73 - ------------------------------------------------------------- ---------------- ----------------- ----------------- Commercial Agribusiness 368 3 965 3 1,011 3 962 3 407 3 Other commercial 1,349 11 1,204 12 812 11 516 8 591 9 - ------------------------------------------------------------- ---------------- ----------------- ----------------- Total Commercial 1,717 14 2,169 15 1,823 14 1,478 11 998 13 - ------------------------------------------------------------- ---------------- ----------------- ----------------- Consumer 952 11 1,349 10 1,413 12 1,155 13 611 14 Unallocated 554 1,767 1,693 1,602 3,619 - ------------------------------------------------------------- ---------------- ----------------- ----------------- Total $8,994 100% $8,716 100% $7,718 100% $6,600 100% $5,972 100% - ------------------------------------------------------------- ---------------- ----------------- -----------------
8d INVESTMENT SECURITIES The composition and maturity of the investment portfolio is depicted in the table on page 8e. ITEM 2. PROPERTIES - ------------------- (Dollars in Thousands) Indiana United Bancorp owns no physical properties. In February 2002, the Company entered into a five-year lease of 28,000 square feet of space to be used as an operations center in Greensburg, Indiana. Its subsidiaries own, or lease, all of the facilities from which they conduct business. The Company has 47 locations of which People's Trust has 20, Union Bank has 16, Regional Bank has 6, and Capstone has 5. At December 31, 2001, the Company had $16,840 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 2001 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 information provided in the "Shareholder Information" section on the inside back cover page of the Company's Annual Report to Shareholders filed with this report as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- The information required under this item is incorporated by reference to the information provided on page 11 of the Company's Annual Report to Shareholders filed with this report as 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 information provided on pages 10 through 21 of the Company's Annual Report to Shareholders filed with this report as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. - -------------------------------------------------------------------- The information required under this item is incorporated by reference to the information provided on pages 19 and 20 of the Company's Annual Report to Shareholders filed with this report as 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 information provided on pages 22 through 39 of the Company's Annual Report to Shareholders filed with this report as Exhibit 13. 9 ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. - ------------------------------------------------------------- In connection with its audits for the three most recent fiscal years ended December 31, 2001, there have been no disagreements with the Company's independent certified public accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. PART IV ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. Included in (a) 1. Financial statements Annual Report Indiana United Bancorp and Subsidiary Independent auditor's report 22 Consolidated balance sheets at December 31, 2001 and 2000 23 Consolidated statements of income, years ended December 24 31, 2001, 2000 and 1999. Consolidated statements of shareholders' equity, years 25 ended December 31, 2001, 2000 and 1999 Consolidated statements of cash flows, years ended 26 December 31, 2001, 2000 and 1999 Notes to consolidated financial statements 27-39 (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: 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 amended by Articles of Amendment to Articles of Incorporation effective August 6, 1998 (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K 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 April 28, 1998 (incorporated by reference to Exhibit 3.2 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)). 10 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 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)). 10.1 Form of Employment Agreement between the Registrant and James L. Saner, Sr. (incorporated by reference to Annex A to the Proxy Statement/Prospectus that is part of the Registration Statement on Form S-4 filed March 18, 1998 with the Commission (Registration No. 333-48057)). 10.2 Form of Executive Severance Agreement dated January 16, 2001 between the Registrant and James L. Saner, Sr. (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31,2000 filed March 30, 2001 with the Commission (Commission File No. 0-12422)). 10.3 Form of Executive Severance Agreement dated January 16, 2001 between the Registrant and the following Named Executive Officers: Michael K. Bauer, Donald A. Benziger and Daryl R. Tressler (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31,2000 filed March 30, 2001 with the Commission (Commission File No. 0-12422)). 13 2001 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). 21 List of subsidiaries of the Registrant. 23.1 Consent of Crowe, Chizek and Company LLP (b) Reports on Form 8-K None 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 25th day of March, 2002. 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 --------- -------- ---- /s/ Eric E. Anderson - -------------------------------- Eric E. Anderson Director March 18, 2002 /s/ William G. Barron - -------------------------------- William G. Barron Director March 18, 2002 /s/ Dale J. Deffner - -------------------------------- Dale J. Deffner Director March 18, 2002 /s/ Don Dunevant - -------------------------------- Don Dunevant Director March 18, 2002 /s/ Philip A. Frantz - -------------------------------- Philip A. Frantz Director March 18, 2002 /s/ Rick S. Hartman - -------------------------------- Rick S. Hartman Director March 18, 2002 /s/ Robert E. Hoptry - -------------------------------- Robert E. Hoptry Director March 18, 2002 Chairman of the Board /s/ Edward J. Zoeller - -------------------------------- Edward J. Zoeller Director March 18, 2002 /s/ James M. Anderson - -------------------------------- James M. Anderson Controller & March 18, 2002 Principal Accounting Officer /s/ Donald A. Benziger - -------------------------------- Donald A. Benziger Senior Vice March 18, 2002 President & Chief Financial Officer /s/ James L. Saner, Sr. - -------------------------------- James L. Saner, Sr. Director March 18, 2002 President & Chief Executive Officer EX-13 3 ex13.txt EXHIBIT 13 Indiana United Bancorp 2001 Annual Report CORPORATE PROFILE Indiana United Bancorp (IUB) is an Indiana-based, multi-bank holding company that is focused on providing complete financial services to small-town America. These services go beyond traditional bank products and include such services and products as insurance, investment brokerage, mutual funds, wealth management and financial planning. At 2001 year end, IUB was operating 43 offices in 17 Indiana counties and four banking centers in two Illinois counties. Subsequent to year-end 2001, IUB acquired a branch in Illinois and reached an agreement to buy four additional branch offices, three in Illinois, and one in Indiana. In addition, IUB also operates six insurance offices, five in Indiana and one in Kentucky. Effective February 1, 2002, IUB management was authorized by its board of directors to purchase up to 165,000 shares of its common stock as part of a larger strategy to enhance long-term shareholder value. At year-end 2001, - - IUB's common stock was quoted at approximately 10.0 times earnings. - - IUB's common stock was paying a cash dividend of $0.63 per share, and the company declared a five percent stock dividend in December 2001. - - IUB's earnings increased 13.4% in 2001. The common shares of the company are listed on The Nasdaq Stock Market The trading symbol is IUBC. In newspaper listings, IUB shares are frequently listed as IndUtd. For additional information, log on to our website at www.2iub.com. FINANCIAL HIGHLIGHTS DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA - ---------------------------------------------------------------------------- YEARS ENDED DECEMBER 31 2001 2000 % CHANGE Results of Operations Net interest income $ 41,768 $ 39,089 + 6.9 Provision for loan losses 2,136 1,658 + 28.8 Net income 11,177 9,854 + 13.4 Per Common Share * Earnings per share (basic) $ 1.72 $ 1.52 + 13.2 Earnings per share (diluted) 1.72 1.52 + 13.2 Cash earnings per share (basic)** 1.91 1.71 + 11.7 Cash earnings per share (diluted)** 1.91 1.71 + 11.7 Dividends paid *** 0.633 0.594 + 6.6 Book value - end of period Excluding SFAS No. 115 adjustment 13.30 12.20 + 9.0 Including SFAS No. 115 adjustment 13.52 12.05 + 12.2 Market price - end of period 17.55 14.75 + 19.0 At Year End Total assets $ 1,178,392 $1,216,936 - 3.2 Loans, excluding held for sale 760,785 790,550 - 3.8 Mortgage loans serviced 293,640 201,056 + 46.0 Allowance for loan losses 8,894 8,716 + 2.0 Total deposits 1,014,687 1,053,570 - 3.7 Common shareholders' equity 87,872 78,005 + 12.6 Financial Ratios Return on average assets 0.93% 0.85% + 8.8 Return on average common shareholders' equity 13.24 13.76 - 3.8 Tier one capital to average assets **** 7.37 6.73 + 9.5 Total capital to risk-adjusted assets **** 12.59 10.80 + 16.6 Shares outstanding at year end * 6,500,794 6,167,048 + 5.4 Number of common shareholders 2,819 2,762 + 2.1 Number of full-time equivalent employees 452 481 - 6.0 * Adjusted for stock 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 1 REPORT TO SHAREHOLDERS OUR news is excellent. Earnings increased for the third year in a row--this time by 13 percent to a record $11.2 million, or $1.72 per share, from $1.52 per share in 2000. Return on average equity improved to 13.47 percent from 12.88 percent in 2000. In addition, we increased our net interest margin to 3.87 percent from 3.70 percent; acquired an insurance agency in Indiana; and raised our cash dividend 6.6 percent to $0.63 per share. We also made the decision to install a Marketing Customer Information File software program (MCIF). It will help us to reach customers with more precisely-targeted financial products and simultaneously reduce our marketing costs. In addition, we selected a highly sophisticated computer platform system for installation in 2002. It will link all our back office functions together for the first time, reduce our processing costs, and increase our processing and record-keeping capacity. Thus, we anticipate increased operating efficiencies in 2002 and thereafter. Our decision to become the community banker to small-town America is being validated every day in the marketplace. In the past four years we've grown to more than 60,000 customers; increased our assets from $350 million to $1.2 billion; and acquired 20 additional banking locations, 16 in Indiana and four in Illinois. In short, we've found our niche: we can prosper where megabanks cannot--acquiring and operating banking offices with assets of $15 million to $150 million in small towns in Indiana and Illinois where a full range of modern financial services is only just in its infancy. At 2001 year-end, we were operating 43 banking centers in 17 Indiana counties and four centers in two Illinois counties. Through our insurance group, we were operating five offices in Indiana and one in Kentucky. Subsequent to year-end 2001, we increased our size again. In February 2002, we acquired a branch in Grant Park, Illinois and agreed to buy four branch offices from Old National Bancorp, subject to regulatory approval. Three are in Illinois, and one is in Indiana. These acquisitions illustrate our ongoing drive to add to our presence in the small towns of Indiana and Illinois. After several years of market testing a variety of products at several of our banking offices, we have chosen this year to begin the process of transforming them into financial service centers. They will offer much more than a traditional bank and provide products such as insurance, investment brokerage, mutual funds, wealth management and financial planning. To reflect this fundamental expansion, we will change the names of two of our four banking affiliates as we merge them together to form MainSource Bank in mid- to late-2002. Our other two banks--Capstone Bank in Watseka, Illinois, and 2 Effective February 1, 2002, your board of directors authorized PHOTO management to purchase up to 165,000 shares of our common stock OF through January 31, 2003. Inasmuch as the company had increased its earnings three years in a row, the board concluded our stock JAMES L. was an attractive investment. As of Jan. 31, 2002, it was selling SANER, SR. at less than 11.0 times 2001 earnings and paying a dividend of 63 cents a share, plus five percent stock dividends in 2000 and 2001. We believe this stock repurchase plan illustrates our commitment to enhancing long-term shareholder value. -- James L. Saner, Sr., President and Chief Executive Officer Regional Bank in New Albany, Indiana,-- will retain their present names, as they are well known in their markets. In addition, at the upcoming annual meeting, we will ask our shareholders to approve a change of name for our holding company from Indiana United Bancorp to MainSource Financial Group. Building Relationships We intend to build relationships with customers as never before. Putting the customer first in all things is the cornerstone of our relationship strategy. We face two challenges: first, to leverage the trust of customers so they will instinctively turn to us for solutions to their financial needs; and second, to develop products they need and at prices they can afford to achieve their financial goals. On Main Street USA this usually means three things: owning a home, getting children through college, and having enough funds for a comfortable retirement. There is no question that we can help our customers achieve these goals, particularly if we know their overall financial picture. Our MCIF system will enable us to introduce customers to financial and insurance products that meet their needs more precisely than they might be able to obtain by shopping at a variety of institutions that offer only partial solutions to their financial requirements. Independent Auditing In view of the questions that have arisen following the collapse of Enron Corporation and Global Crossing, our audit committee has met with our external auditors to discuss required audit communications and independence. The report of the audit committee is presented in the 2001 proxy statement provided to shareholders. Conclusion What we have long sought is now falling into place. We've achieved a track record where our stock is viewed as a sound currency for acquisitions. We've reached a size where the costs of state-of-the-art computers and sophisticated software can be readily absorbed. We've developed an operating style that provides us with a competitive edge in small-town America. As a result, I am abundantly confident about the future of this company. James L. Saner, Sr. March 8, 2002 Our growth during the past several years is the result of the long-term approach we take in all our planning, whether it be facilities, products or services. Implementation of this philosophy builds slowly at first and then more rapidly as each new component falls into place. This approach should benefit our company for years to come. 3 Presently, small-town banks in the $30 million to $150 million asset category can be acquired at reasonable prices because the megabanks have little interest in them. Our lower overhead enables us then to operate these smaller banks quite profitably. In the past three years, the company's net income increased by 47%, net interest income by 39%, and non-interest income by 74%. With the introduction of advanced back office processing systems and more sophisticated market data bases, the company expects to achieve double-digit earnings per share growth in 2002. [GRAPHS APPPEAR HERE] Net Income* Net Interest Income* ($-Millions) ($-Millions) 1999 2000 2001 1999 2000 2001 $8.1 $9.9 $11.2 $35.8 $39.1 $41.8 *3-year compounded growth rate: 13.8% *3-year compounded growth rate: 11.6% Non-Interest Income* ($-Millions) 1999 2000 2001 $7.6 $9.6 $11.5 *3-year compounded growth rate: 20.4% 1. We have many special services for our mature market customers. Among them are preferred checking accounts, instructions on accessing the Internet, and a very popular group travel program that averages 10 trips a year--in the U.S. and abroad. 2. Offering homeowners' insurance to our bank customers when they get their mortgages is just one of the many ways we expect to increase our revenues and provide a wider array of financial services to customers in 2002 and beyond. [PHOTO APPEARS HERE] 4 [PHOTO APPEARS HERE] The appeal of small-town banks. Our commercial customers know they don't have to compete with huge conglomerates to get the personal attention they need and the respect they deserve. David Stemler and his wife, Karen, customers of Regional Bank in New Albany, Indiana, are the owner-operators of PC Building Materials, Inc., which has experienced solid growth for many years in the southern Indiana area. UNDERLYING FORCES THAT DRIVE OUR GROWTH OUR TOTAL FOCUS is on small-town America and for some very sound reasons. First, many of our officers and employees grew up in small towns. They understand what goes with the territory. They intuitively grasp what most customers want and will pay for, and what they will not. Thus, our product development can be targeted more accurately and marketed at reduced costs. Second, geography favors our small-town, community banking approach. We happen to be in a part of the country where smaller banks are numerous and are struggling with costly federal compliance regulations. They are encountering growing competition for their customers' savings from bank holding companies such as ours, investment brokerage firms, mutual funds and Internet banks. In addition, many small-town banks, which are often family-owned, face estate tax and/or management succession problems. Consequently, many have become receptive to acquisition overtures they previously would have dismissed out of hand. As a result, many can be acquired more easily now than perhaps at any other time in the past 30 years. This is especially true in neighboring Illinois, where in an earlier time, branch banking was prohibited and thus sheltered small town bankers from big city banks. Although these regulations were overturned many years ago, they were instrumental in creating the more than 700 small banks that are now operating in Illinois as compared to many less in Indiana. Fortunately for us, the large megabanks presently don't want to operate in small towns. In fact they are selling off branches they may have acquired in earlier acquisition binges as they simply cannot operate branches profitably in the $15 million to $30 million asset category. We can, and we have identified many as prime acquisition candidates. Hence we have an opportunity to grow through acquisitions of small banks or branches that can now be purchased at reasonable prices. And, as a $1.2 billion, publicly-traded bank holding company, we have the financial resources to act quickly. We can offer cash or stock to effect the deal. We can pay cash should the seller so desire. Or, we can use our common stock as currency since many sellers prefer to exchange stocks to avoid triggering an immediate taxable event for the seller. By accepting our stock in an acquisition, a capital gain can be postponed, and the seller simultaneously receives dividend income as well as the potential for further capital appreciation should our stock continue to increase in market value. 5 One of the ways we expect to increase our revenue and earnings is to change our banking offices into one-stop financial service centers that provide many more products to meet the complete financial and insurance needs of our customers. SOPHISTICATED RESOURCES TO MEET CUSTOMER EXPECTATIONS Today, bank customers have unprecedented choices, knowledge and power. They expect more from their bank, and if they don't get it, they will move their accounts. Consequently, the banks that will prosper will provide alternate investment products that go well beyond traditional bank CDs and savings accounts. On the other hand, today's two-income families want timesaving conveniences. Thus, the opportunity for a bank to sell insurance and investment products has never been greater. 1. We are presently updating our website in order to provide more timely information to shareholders. 2. Trust services are becoming increasingly important to customers as they seek to tailor their financial strategies to the new changes in the federal tax code, which include substantial tax breaks for those who set aside savings for college tuition costs. [PHOTO APPEARS HERE] 6 [PHOTO APPEARS HERE] Critical Mass Attained. By the end of 2001, we had reached a size where a major upgrade to our back office computerized processing system would enable us to reduce our per unit processing costs substantially. We are now in the process of installing a technological platform that will not only reduce our back office costs, but also materially expand our capacity. Our Strategy to Increase Earnings OUR PRIMARY GOAL is to increase earnings. They provide the additional funds to improve what we do for customers and the fuel to elevate the price of our stock. One of the ways we expect to increase our future earnings is to change our banking offices into one-stop financial service centers. This will give us many more useful products to sell our customers, thereby expanding our revenue. Such a program is already underway. New products and services will include insurance of all types as well as mutual funds, investment brokerage and financial planning services. This is, for example, why we acquired five insurance agencies in the past several years and, in 2001, helped many of our bank officers to obtain their state insurance licenses. Now when we provide a mortgage loan, we expect to include a homeowner's insurance policy as part of the total package--and by combining the two together provide the customer with material savings. When we make a car loan, we expect to provide an automobile insurance policy, as well. In addition, the new products and marketing approaches we develop should have greater relevance to our customers. We are installing an MCIF system that will enable us to analyze customer data far more effectively. In turn, this will enable us to develop products tailored to specific customer needs, thereby helping us to reduce marketing and mailing costs and considerably improve customer responses. Further, our strategy is to better serve the approximate 60,000 customers we already have doing business with us. And this strategy is based on solid research. Studies show that when a bank develops a relationship with a customer, that person is far more likely to respond favorably to a new product offering than would a customer of another bank. 7 Developing deep customer relationships is number one on our list with the customer at the absolute center of our world. Even though we will use technology to help our customers, our style will hearken back to an earlier era when bankers knew every customer by name. INCREASING REVENUE is one way we plan to boost earnings in 2002 and thereafter; the other is to reduce our back office costs, which have been a drag on earnings in recent years, a fact not immediately apparent as our earnings have increased at an average annual compounded rate of 13.8 percent during the past three years. Even so, we are confident we can improve efficiencies even more with the state-of-the-art processing equipment we are presently installing. Thus, we devoted thousands of man hours last year researching and analyzing the market for the optimum technological platform to automate our back office operations. Late in the year we decided on a system that will be implemented in 2002 and should begin to produce substantial savings as early as 2003. Apart from reducing back office operating costs, the new system will increase our capacity. This capacity increase will enable us to increase the volume of business we can do with each customer as well as accommodate future acquisitions. Outlook OUR OUTLOOK IS FAVORABLE. We have found a profitable niche in banking that we can readily expand for many years. We have a plan already in place to increase our revenue and reduce our processing costs. We have a solid balance sheet that will facilitate acquisitions, which are one of the keys to our long-range growth strategy. Presently we are encountering little competition from big city banks. Their higher fixed overhead makes it difficult for them to derive a profit from a small bank, and they find it difficult to staff a small-town bank with the knowledgeable and experienced personnel that we can simply because our people choose to live and develop their entire careers in small towns. Consequently we are very confident that building a powerhouse of small banks is sound and will pay off handsomely. [MAP OF ILLINOIS, INDIANA & KENTUCKY APPEARS HERE] Our bank holding company operates primarily in 17 counties in Indiana and two in Illinois, which are shown at right opposite. A wholly-owned insurance subsidiary operates in Indiana, Illinois and Kentucky. The company is expanding aggressively into small towns chiefly in eastern Illinois because there are five times as many small banks in Illinois as there are in Indiana, thus giving us a greater opportunity to make a sound and profitable acquisition. 8 SELECTED FINANCIAL DATA (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Results of Operations Net interest income $ 41,768 $ 39,089 $ 35,817 $ 30,067 $ 28,646 Provision for loan losses 2,136 1,658 1,826 1,293 1,979 Noninterest income 11,486 9,591 7,605 6,589 5,843 Noninterest expense 34,311 33,168 29,903 23,777 19,991 Income before income tax 16,807 13,854 11,693 11,586 12,519 Income tax 5,630 4,000 3,605 3,955 4,290 Net income 11,177 9,854 8,088 7,631 8,229 Dividends paid on common stock 4,114 4,121 3,932 3,181 2,337 - ------------------------------------------------------------------------------------------------------------------------- Per Common Share* Earnings per share (basic) $ 1.72 $ 1.52 $ 1.26 $ 1.21 $ 1.30 Earnings per share (diluted) 1.72 1.52 1.26 1.20 1.30 Cash earnings per share (basic)** 1.91 1.71 1.44 1.26 1.32 Cash earnings per share (diluted)** 1.91 1.71 1.44 1.25 1.31 Dividends paid *** 0.633 0.594 0.581 0.531 0.458 Book value - end of period Excluding accumulated other comprehensive income 13.30 12.20 11.34 10.52 9.86 Including accumulated other comprehensive income 13.52 12.05 10.55 10.73 10.04 Market price - end of period 17.55 14.75 17.86 21.08 21.67 - ------------------------------------------------------------------------------------------------------------------------- At Year End Total assets $1,178,392 $1,216,936 $1,110,252 $957,144 $810,082 Investment securities 276,304 294,395 290,337 231,787 156,749 Loans, excluding held for sale 760,785 790,550 710,661 607,840 538,388 Allowance for loan losses 8,894 8,716 7,718 6,600 5,972 Total deposits 1,014,687 1,053,570 940,905 823,769 685,040 Notes payable 4,062 6,510 6,885 425 1,250 Federal Home Loan Bank advances 20,346 22,463 24,484 13,710 13,823 Trust preferred securities 22,425 22,425 22,425 22,425 22,425 Shareholders' equity 87,872 78,005 68,172 69,063 63,147 - ------------------------------------------------------------------------------------------------------------------------- Financial Ratios Return on average assets 0.93% 0.85% 0.76% 0.89% 1.09% Return on average common shareholders' equity 13.24 13.76 11.67 11.32 13.57 Allowance for loan losses to total loans (year end, excluding held for sale) 1.17 1.10 1.09 1.09 1.11 Shareholders' equity to total assets (year end) 7.46 6.41 6.14 7.16 7.80 Average equity to average total assets 7.04 6.20 6.55 7.90 8.06 Dividend payout ratio 36.81 41.82 48.62 41.69 28.40
* 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 9 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 cost of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; and changes in the quality or composition of the Company's loan and investment portfolios. The forward-looking statements included in the Management's Discussion and Analysis ("MD&A") relating to certain matters involve risks and uncertainties, including anticipated financial performance, business prospects, and other similar matters, and reflect management's best judgment based on factors currently known. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements as a result of a number of factors, including but not limited to those discussed in the MD&A. OVERVIEW Indiana United Bancorp ("Company") is a bank holding company whose principal activity is the ownership and management of its four wholly owned subsidiary banks ("Banks"). People's Trust Company ("People's"), headquartered in Brookville, Indiana, Union Bank and Trust Company of Indiana ("Union Bank"), headquartered in Greensburg, Indiana, and Regional Bank ("Regional"), headquartered in New Albany, 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"). Capstone Bank, N.A. ("Capstone"), headquartered in Watseka, Illinois, operates under a national charter and is subject to regulation by the Office of the Comptroller of the Currency (OCC). The Insurance Group, Inc. ("The Insurance Group") is a wholly owned subsidiary of Union Bank operating five offices in Indiana and one in Kentucky and is 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 ("Preferred Securities"). The Company owns all of the common stock of IUB Capital Trust. During 2000, People's and Union Bank each formed wholly owned subsidiaries to hold investment securities. These investment subsidiaries are incorporated in Bermuda. Additionally, the Company formed IUB Reinsurance Company, Ltd., a credit life insurance company, during 2000. 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. The dynamics of the Plan assure continually evolving goals, with the continued enhancement of shareholder value being the constant, overriding objective. The extent of the Company's success will depend upon how well it anticipates and responds to competitive changes within its markets, the interest rate environment, developing and enhancing customer relationships, and other external forces. 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 a 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 were 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 area. 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 expanded People's Trust Company's Wayne County market share and made Henry County the Bank's ninth county of operation. In April 1999, the Company acquired the property and casualty insurance business lines of The Anderson Group of Owensboro, Kentucky (see Business Strategy section for further details on this transaction). Also in 1999, 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 helped solidify the Madison County position for Union Bank. 10 In February 2000, the Company formed a subsidiary of the holding company called IUB Reinsurance Company, Ltd. This subsidiary is incorporated in Turks and Caicos and is a credit life insurance company. The reinsurance company's operating results for 2001 included revenues of $225 with net income of $137 compared to 2000 when revenues were $145 with net operating income of $65. On May 1, 2000, the Company completed the acquisition of First Affiliated Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank N.A. The transaction was accounted for using the pooling-of-interests method of accounting. To complete the transaction, the Company issued 1,122,741 shares of its common stock to the shareholders of First Affiliated Bancorp. At the date of acquisition, First Affiliated had $133,000 in assets, $117,000 in deposits, and operated four banking offices in Illinois and one in Indiana. This acquisition represented the Company's first penetration into the Illinois market. The Company's financial statements include First Affiliated Bancorp for all periods presented. In September 2000, the company purchased two branches in Marion County, Indiana. These two facilities were integrated into Union Bank and resulted in the purchase of over $40,000 in deposits. This purchase pushed Union into its fifth county of operation and represented the Company's first foray into the greater Indianapolis-area market. Also in September 2000, the Company formed two investment subsidiaries, People's Investment Company, Ltd. and Union Investment Company, Ltd. Incorporated in Bermuda, these subsidiaries hold a large portion of both Union Bank's and People's Trust's investment portfolios. BUSINESS STRATEGY The Company's main focus in 2002 and beyond is its continuing effort to consolidate its operational functions while maintaining a high degree of customer service. During 2002, the Company expects to make two major strides in achieving this goal. The first is the establishment of a state-of-the-art operations center located near its corporate headquarters in Greensburg, Indiana. By consolidating and centralizing a large portion of its operations in one facility, the Company expects to realize improved efficiencies through a more focused use of its physical, human, and technological resources. The second major event in 2002 will be the merger of the Company's two largest banking affiliates, People's and Union Bank. Based on the geographic proximity of the two banks, the Company recognized that the merger of these two entities would be beneficial for the Company as well as its customers. The newly formed bank, which will be called MainSource Bank, will provide customers with a significant number of new outlets to utilize the products and services offered. After completion of the merger and upon approval by the Company's shareholders at its annual meeting in April 2002, the holding company expects to change its name to MainSource Financial Group. In addition to the initiatives above, the Company anticipates capital investments related to document and check imaging, replacing its loan and deposit processing systems and the installation of customer profile software. These investments are expected to occur in the second and third quarters of 2002. The Company holds first, second or third market share positions as measured by total deposits in nine of the seventeen Indiana counties it serves and intends to pursue growth strategies that result in meaningful market share positions in other rural or suburban communities. The Company continues to seek and identify potential whole bank acquisitions in markets that offer opportunities to benefit from its community banking philosophy or additional branch purchases that will likely result in a meaningful market share presence. 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. The first major step in becoming a full-service financial provider for its customers was the acquisition of The Anderson Group in April 1999. 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 are now directed through The Insurance Group subsidiary as the Company expands its insurance offering capabilities. In addition to the acquisition of The Anderson Group, the Company consummated its acquisition of the insurance agencies of Vollmer & Associates, Inc. ("Vollmer") in April 2001. At the time of acquisition, Vollmer operated four offices servicing Madison, Batesville, Osgood and Brookville, Indiana. Subsequent to the acquisition of Vollmer, the Company closed the Madison, Indiana office. The Company has also formed The Trust Investment Group, which operates as a division of Union Bank. The Trust Investment Group is comprised of the former Union Bank trust department and the trust businesses acquired from People's and Capstone. At December 31, 2001, the Trust Investment Group's assets under management exceed $135 million. The Trust Investment Group continues to assist the Company's customers in their asset management and wealth formation. During 2000, the Company declared a five percent stock dividend to shareholders of record on December 29. This represented the Company's first stock dividend since 1994. In addition to the 2000 stock dividend, the Company also declared a five percent stock dividend to shareholders of record on December 31, 2001. It is the Company's intention to establish a consistent practice of awarding periodic stock dividends in addition to maintaining and/or increasing its regular cash dividends. On January 31, 2002, the Company announced the authorization of a common stock repurchase plan effective February 1, 2002. Under the provisions of the plan, the Company may purchase up to 165,000 shares, or approximately 2.5%, of its common shares over a twelve-month period of time. The purchase of shares will generally occur in the open market but may involve unsolicited negotiated transactions. The shares repurchased will be used for general corporate purposes. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) TABLE 2 - NON-INTEREST INCOME AND EXPENSE
Percent Change 2001 2000 1999 01/00 00/99 - -------------------------------------------------------------------------------------------------------------------- Non-interest income Insurance commissions $ 1,993 $ 1,344 $ 1,166 48.3% 15.3% Fiduciary activities 506 474 455 6.8 4.2 Mortgage banking 2,767 859 1,016 222.1 (15.5) Service charges on deposit accounts 3,835 3,652 2,944 5.0 24.0 Securities losses (111) (11) (7) 909.1 57.1 Other 2,496 3,273 2,031 (23.7) 61.2 --------------------------------------- Total non-interest income $11,486 $ 9,591 $ 7,605 19.8 26.1 --------------------------------------- Non-interest expense Salaries and employee benefits $19,061 $18,117 $16,615 5.2% 9.0% Net occupancy 2,247 1,995 1,776 12.6 12.3 Equipment 2,489 2,352 2,077 5.8 13.2 Telephone 855 791 720 8.1 9.9 Intangible amortization 1,966 1,922 1,834 2.3 4.8 Stationery, printing, and supplies 839 957 916 (12.3) 4.5 Other 6,854 7,034 5,965 (2.6) 17.9 --------------------------------------- Total non-interest expense $34,311 $33,168 $29,903 3.4 10.9 ---------------------------------------
RESULTS OF OPERATIONS Annual net income was $11,177 in 2001, $9,854 in 2000 and $8,088 in 1999. Net income per common share on a fully diluted basis was $1.72 in 2001 compared to $1.52 in 2000, which represents a 13.2% increase. After accounting for the acquisition of First Affiliated Bancorp, earnings per share were $1.26 in 1999. Originally reported earnings per share were $1.33 in 1999. The Company strives for annual double-digit percentage increases in earnings per share. Key measures of the financial performance of the Company are cash earnings per share, which is calculated by taking net income plus the after-tax effect of the amortization of intangible assets, and return on average shareholders' equity (excluding accumulated other comprehensive income). 2001 cash earnings per share were $1.91. For 2000 and 1999 cash earnings per share were $1.71 and $1.44, respectively. Return on average shareholders' equity (excluding accumulated other comprehensive income) was 13.47% in 2001, 12.88% in 2000, and 11.44% in 1999. The Company's return on average assets was .93% in 2001, .85% in 2000 and .76% in 1999. The increase is representative of the Company's continuing effort to improve profitability and reap the benefits of the merger of equals with P.T.C. Bancorp in 1998. The Company believes that its steady improvement in performance validates its course of action and will continue to provide increased shareholder value. NET INTEREST INCOME Net interest income and net interest margin are influenced by the volume and yield or cost of earning assets and interest-bearing liabilities. Tax equivalent net interest income of $42,979 in 2001 increased 7.9% from $39,816 in 2000, which was 6.8% above 1999 (See Table 3). With the overall interest rate environment declining significantly in 2001, the Company experienced a decrease in the average yield on earning assets from 8.04% in 2000 to 7.72% in 2001. Offsetting the decrease in yield, the Company aggressively repriced its deposits and was able to significantly reduce its cost of funds from 4.77% in 2000 to 4.22% in 2001. The overall effect was an increase in the Company's spread, which represents the difference between the yield on earning assets versus the cost of funds. The Company's spread in 2001 was 3.50% compared to 3.27% in 2000. PROVISION FOR LOAN LOSSES The Company expensed $2,136 in provision for loan losses in 2001. 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". 12 NON-INTEREST INCOME Non-interest income increased in 2001 to $11,486 compared to $9,591 in 2000, which represents a 19.8% increase. With the rapid decline in interest rates throughout the majority of 2001, the Company realized a significant increase in its mortgage banking activity. Mortgage banking income, which consists of gains and losses on loan sales and service fee income, was $2,767 in 2001 compared to $859 in 2000, an increase of $1,908, or 222.1%. As many customers refinanced their existing loans, the Company elected to sell the majority of these loans while maintaining the servicing rights. Insurance commissions increased to $1,993 in 2001 versus $1,344 in 2000 due to the acquisition of Vollmer in the second quarter of 2001. Offsetting the increases in mortgage banking and insurance commissions was a decrease in other non-interest income. Non-interest income increased 26.1%, or $1,986, from 1999 to 2000. This increase was attributable to several factors. Insurance commissions related to The Anderson Group increased in 2000 as the Company recognized a full year of income versus only nine months in 1999. In addition, service charges on deposit accounts increased due to the acquisition of approximately $150,000 of deposits over the last two years. Also, service charges were adjusted in the first half of 2000 to reflect current market conditions and to be standard throughout the Company's banking subsidiaries. Other income increased from 1999 due to proceeds from a key man life insurance policy, a refund of 1999 state income taxes, the formation of a reinsurance subsidiary and an increase in interchange income. Offsetting these increases in non-interest income was a decrease in mortgage banking activity. The higher level of mortgage rates in 2000 slowed the housing market and affected the Company's volume of saleable new loans. NON-INTEREST EXPENSE Non-interest expense as a percentage of average assets was 2.86% in 2001, 2.87% in 2000 and 2.83% in 1999. Total non-interest expense increased 3.4% in 2001 to $34,311 compared to $33,168 in 2000, or an increase of $1,143. The largest component of non-interest expense is salaries and benefits. These expenses increased 5.2%, or $944, in 2001 due to the acquisition of Vollmer, the full year of the two Union branch acquisitions and normal merit increases (see Table 2 for detail of non-interest expense). The increase in non-interest expense in 2000 compared to 1999 is mainly due to the impact of expansion and acquisitions (i.e. personnel, occupancy, equipment, and merger expenses). Other factors that caused the increase in non-interest expense were a change in the company's vacation policy and the impact of aligning Capstone Bank's employee benefit package with the Company's. Also, the Company incurred additional training expenses in 2000 in connection with the systems conversion at People's Trust. INCOME TAXES The effective tax rate was 33.5% in 2001, 28.9% in 2000 and 30.8% in 1999. The increase in the Company's effective tax rate in 2001 was a direct result of higher pre-tax income, which was generally taxable at the highest tax rate, and the effect of establishing a deferred tax asset in conjunction with the acquisition of First Affiliated in 2000, which reduced income tax expense in that year. Disregarding the establishment of the deferred tax asset at First Affiliated, the effective tax rate for 2000 would have been 31.8%. FINANCIAL CONDITION Assets decreased to $1.18 billion at year-end 2001 compared to $1.22 billion at year-end 2000. The decrease in assets from year-end to year-end was expected given the interest rate environment for 2001. The drop in interest rates during the year caused the Company to have a significant number of investment securities called. A portion of the proceeds from these calls was used to reduce short-term borrowings instead of being reinvested. In addition, the Company allowed higher-rate deposits to mature and not renew. This caused a decrease of approximately $39 million in total deposits from December 31, 2000 to December 31, 2001. Guaranteed Preferred Beneficial Interests in the Company's Subordinated Debentures ("Preferred Securities") in the amount of $22,425 were issued on December 9, 1997 and were still outstanding as of year-end 2001. 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 repayment 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. Common Shareholders' Equity was $87,872 on December 31, 2001 compared to $78,005 at December 31, 2000. Book value per common share increased to $13.52 or 12.2% from $12.05 at year-end 2000. [GRAPH APPEARS HERE] Shareholders' Equity ($-Millions) 1999 2000 2001 $68.2 $78.0 $87.9 13 MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) LOANS, CREDIT RISK AND THE ALLOWANCE AND PROVISION FOR LOAN LOSSES Loans remain the Company's largest concentration of assets and continue to represent the greatest potential risk. The loan underwriting standards observed by the Company 's subsidiaries are viewed by management as a means of controlling problem loans and the resulting charge-offs. The Company's conservative loan underwriting standards have historically resulted in higher loan quality and lower levels of net chargeoffs than peer bank averages. The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out-of-area borrowers are incurred. Accordingly, the Company's board of directors regularly monitors such concentrations to determine compliance with its loan concentration policy. The Company believes it has no undue concentrations of loans. Total loans (excluding those held for sale) decreased $30 million from year-end 2000. The Company experienced a $60 million decrease in its residential real estate portfolio as customers took advantage of the decrease in mortgage interest rates and refinanced their existing loans. The Company, in turn, elected not to retain new fixed rate loans in its own portfolio and instead, sold these in the secondary market while maintaining the servicing. Offsetting this decrease in residential real estate loans was an increase in commercial and construction and development loans. Despite the decrease mentioned above, residential real estate loans continue to represent the largest portion of the total loan portfolio. Such loans represented 43.3% and 49.3% of total loans at December 31, 2001 and 2000, respectively. 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 non-accrual status at or before becoming 90 days past due. Interest previously recorded but not deemed collectible is reversed and charged against current income. Subsequent interest payments collected on non-accrual loans may thereafter be recognized as interest income or may be applied as a reduction of the loan's principal balance, as circumstances warrant. The provision for loan losses was $2,136 in 2001, $1,658 in 2000 and $1,826 in 1999. The increase in the Company's provision is directly related to the increase in non-performing loans and the increase in net charge-offs in 2001. Non-accrual loans increased to $10,406 compared to $3,454 a year ago. During the second quarter of 2001, the Company placed a large commercial credit on non-accrual status. This single credit contributed to approximately $4,000 of the increase in non-accrual loans. Management has reviewed the credit and an allowance allocation has been provided for this loan. Net charge-offs were $1,958 in 2001, $660 in 2000 and $708 in 1999. As a percentage of average loans, net chargeoffs equaled .25%, .09%, and .11% in 2001, 2000 and 1999. Management maintains a list of loans warranting either the assignment of a specific reserve amount or other special administrative attention. This list, together with a listing of all classified loans, nonaccrual loans and delinquent loans, is reviewed monthly by the board of directors of each subsidiary. Additionally, the Company evaluates its consumer and residential real estate loan pools for probable losses incurred based on historical trends, adjusted by current delinquency and non-performing loan levels. The ability to absorb loan losses promptly when problems are identified is invaluable to a banking organization. Most often, losses incurred as a result of prompt, aggressive collection actions are much lower than losses incurred after prolonged legal proceedings. Accordingly, the Company observes the practice of quickly initiating stringent collection efforts in the early stages of loan delinquency. The adequacy of the Allowance for Loan Losses in each subsidiary is reviewed at least quarterly. The determination of the provision amount in any period is based upon management's continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio, classified loans including non-accrual and impaired loans, current economic conditions, the amount of loans presently outstanding, and the amount and composition of loan growth. [GRAPH APPEARS HERE] Loan Loss Reserve ($-Millions) 1999 2000 2001 $7.7 $8.7 $8.9 14 TABLE 3 - AVERAGE BALANCE SHEET AND NET INTEREST ANALYSIS (TAXABLE EQUIVALENT BASIS)*
2001 2000 1999 ---------------------------- --------------------------- --------------------------- Average Avg. Average Avg. Average Avg. Balance Interest Rate Balance Interest Rate Balance Interest Rate - -------------------------------------------------------------------------------------------------------------------- Assets Short-term investments $ 2,172 $ 80 3.68% $ 2,097 $ 74 3.53% $ 2,164 $ 120 5.55% Federal funds sold and money market accounts 50,534 2,139 4.23 17,217 1,085 6.30 28,140 1,327 4.72 Securities Taxable 227,759 13,683 6.01 272,869 16,864 6.18 250,088 14,985 5.99 Non-taxable* 34,933 2,762 7.91 17,867 1,246 6.97 43,628 3,420 7.84 ---------------------------------------------------------------------------------------- Total securities 262,692 16,445 6.26 290,736 18,110 6.23 293,716 18,405 6.27 Loans ** Commercial 377,386 31,680 8.39 335,641 30,633 9.13 276,965 24,065 8.69 Residential real estate 296,709 24,194 8.15 313,058 24,951 7.97 281,326 22,540 8.01 Consumer 121,866 11,218 9.21 118,209 11,772 9.96 98,867 9,220 9.33 ---------------------------------------------------------------------------------------- Total loans 795,961 67,092 8.43 766,908 67,356 8.78 657,158 55,825 8.49 ---------------------------------------------------------------------------------------- Total earning assets 1,111,359 85,756 7.72 1,076,958 86,625 8.04 981,178 75,677 7.71 ---------------------------------------------------------------------------------------- Cash and due from banks 29,981 30,609 29,146 Unrealized gains (losses) on securities 2,102 (7,467) (2,269) Allowance for loan losses (9,143) (8,351) (7,170) Premises and equipment, net 16,883 17,199 16,485 Intangible assets 23,482 24,050 22,380 Accrued interest receivable and other assets 25,246 21,692 18,418 ---------- ---------- ---------- Total assets $1,199,910 $1,154,690 $1,058,168 ---------------------------------------------------------------------------------------- Liabilities Interest-bearing deposits DDA, savings and money market accounts $ 401,349 $ 8,728 2.17 $ 362,405 $11,456 3.16 $ 344,472 $ 9,526 2.77 Certificates of deposit 545,458 29,716 5.45 540,353 30,037 5.56 482,500 24,759 5.13 ---------------------------------------------------------------------------------------- Total interest- bearing deposits 946,807 38,444 4.06 902,758 41,493 4.60 826,972 34,285 4.15 Short-term borrowings 19,149 611 3.19 28,611 1,210 4.23 19,925 869 4.36 Trust preferred securities 22,425 2,023 9.02 22,425 2,023 9.02 22,425 2,023 9.02 Notes payable and FHLB borrowings 26,362 1,699 6.44 27,292 2,083 7.63 20,693 1,236 5.97 ---------------------------------------------------------------------------------------- Total interest- bearing liabilities 1,014,743 42,777 4.22 981,086 46,809 4.77 890,015 38,413 4.32 Demand deposits 85,317 93,987 88,752 Other liabilities 15,452 8,003 10,075 ---------------------------------------------------------------------- Total liabilities 1,115,512 1,083,076 988,842 Shareholders' equity 84,398 71,614 69,326 ---------------------------------------------------------------------- Total liabilities and shareholders' equity $1,199,910 42,777 3.85*** $1,154,690 46,809 4.35*** $1,058,168 38,413 3.91*** ---------- ---------- ---------- Net interest income $42,979 3.87**** $39,816 3.70**** $37,264 3.80**** ---------------------------------------------------------------------------------------- Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35% in 2001 and 2000 and 34% in 1999 $ 1,211 $ 727 $ 1,447
* 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. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
TABLE 4 - LOAN PORTFOLIO DECEMBER 31 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------- Types of loans Commercial $ 83,143 $ 77,648 $ 65,426 $ 51,741 $ 49,985 Agricultural production financing and other loans to farmers 20,726 20,744 22,107 23,653 23,690 Commercial real estate mortgage 149,099 138,132 104,150 101,568 89,938 Residential real estate mortgage 329,660 389,622 326,720 267,404 230,614 Farm real estate 46,549 49,284 44,367 39,078 41,058 Construction and development 53,753 40,813 50,721 30,881 15,956 Consumer 69,957 64,548 87,270 80,053 75,647 State and political 7,898 9,759 9,900 13,462 11,500 ----------------------------------------------------------------------- Total loans $760,785 $790,550 $710,661 $607,840 $ 538,388 -----------------------------------------------------------------------
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, 2001, 97.0% 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 shareholders' equity. A net unrealized gain of $2,228 was recorded to adjust the AFS portfolio to current market value at December 31, 2001 compared to a net unrealized loss of $1,590 at December 31, 2000. The remaining 3.0% 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. For 2001 the tax equivalent yield of the investment securities portfolio was 6.26%, compared to 6.23% and 6.27% for 2000 and 1999, respectively. Variable rate securities comprised 9.0% of the total portfolio on December 31, 2001 with the remaining 91.0% 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 attempts to purchase local deposits through branch acquisitions 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 92.9% and 92.6% of total average earning assets in 2001 and 2000. Total interest-bearing deposits averaged 91.7% and 90.6% of average total deposits during 2001 and 2000. 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. During 2001, short-term borrowings averaged $19,149 with repurchase agreements representing $15,798 of the total. Another source of funding is the Federal Home Loan Bank (FHLB). The Company had FHLB advances of $20,346 outstanding at December 31, 2001. These advances have interest rates ranging from 6.20% to 6.70%. The Company has $10,000 of advances maturing in both 2005 and 2007. The Company averaged $21,078 in FHLB advances during 2001 compared to $20,445 during 2000. In February of 1999 the Company borrowed $8,000 from National City Bank at a floating rate based upon LIBOR. At year-end 2001, the balance on this note was $4,000 with an effective interest rate of 4.73%. [GRAPH APPEARS HERE] Book Value Per Share 1999 2000 2001 $10.55 $12.05 $13.52 16 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, 2001, Tier 1 capital to average assets was 7.4%. Total capital to risk-weighted assets was 12.6%. Both ratios substantially exceed all 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 $.633 per share in 2001, $.594 in 2000 and $.581 in 1999. Book value per common share increased to $13.52 from $12.05. The net adjustment for AFS securities increased book value by $.22 at December 31, 2001 and decreased book value by $.15 at December 31, 2000. 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. In addition, the Company declared separate five percent stock dividends for shareholders of record as of December 29, 2000 and December 31, 2001. All financial information used throughout this report has been adjusted to reflect these transactions.
TABLE 5 - UNDERPERFORMING LOANS 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Nonaccruing loans $10,406 $3,454 $4,187 $4,095 $ 1,362 Accruing loans contractually past due 90 days or more 766 532 978 500 1,376 ------------------------------------------------------------- Total $11,172 $3,986 $5,165 $4,595 $ 2,738 % of total loans 1.47% 0.50% 0.73% 0.76% 0.51% -------------------------------------------------------------
TABLE 6 - SUMMARY OF THE ALLOWANCE OR LOAN LOSSES 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Balance at January 1 8,716 7,718 6,600 5,972 5,119 Chargeoffs Commercial 1,392 403 321 274 904 Commercial real estate mortgage 100 107 458 - - Agricultural - - - - 9 Residential real estate mortgage 266 164 77 99 81 Consumer 621 443 589 732 595 ------------------------------------------------------------- Total Chargeoffs 2,379 1,117 1,445 1,105 1,589 ------------------------------------------------------------- Recoveries Commercial 127 201 278 116 144 Commercial real estate mortgage 24 7 - - 19 Residential real estate mortgage 40 35 63 25 27 Consumer 230 214 396 299 273 ------------------------------------------------------------- Total Recoveries 421 457 737 440 463 ------------------------------------------------------------- Net Chargeoffs 1,958 660 708 665 1,126 Provision for loan losses 2,136 1,658 1,826 1,293 1,979 ------------------------------------------------------------- Balance at December 31 8,894 8,716 7,718 6,600 5,972 ------------------------------------------------------------- Net Chargeoffs to average loans 0.25% 0.09% 0.11% 0.12% 0.22% Provision for loan losses to average loans 0.27% 0.22% 0.28% 0.23% 0.39% Allowance to total loans at year end 1.17% 1.10% 1.09% 1.09% 1.11% -------------------------------------------------------------
17 MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 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 $252,456 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 may 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. The Company defines core deposits as all deposits except certificates of deposits greater than $100. Average core deposits funded approximately 82.7% of total earning assets during 2001 and approximately 80.9% in 2000. 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 that would materially affect liquidity, capital resources or operations.
TABLE 7 - RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 2001 OVER 5 YEARS OR 3 MONTHS 1 YEAR 2 YEARS 5 YEARS INSENSITIVE TOTAL - --------------------------------------------------------------------------------------------------------------------- Interest-earning assets Loans $ 207,316 $ 184,572 $ 119,937 $ 144,308 $ 127,908 $ 784,041 Securities 19,297 26,539 41,273 103,669 85,526 276,304 Federal funds sold and money market fund 5,351 - - - - 5,351 Interest-bearing deposits in banks 599 - - - - 599 Restricted Stock 5,109 - - - - 5,109 ----------------------------------------------------------------------- Total Interest-earning assets 237,672 211,111 161,210 247,977 213,434 1,071,404 ----------------------------------------------------------------------- Other assets - - - - 115,882 115,882 Allowance for loan losses - - - - (8,894) (8,894) ----------------------------------------------------------------------- Total assets $ 237,672 $ 211,111 $ 161,210 $ 247,977 $ 320,422 $1,178,392 ----------------------------------------------------------------------- Interest-bearing liabilities Interest-bearing demand $ 212,812 $ - $ - $ - $ - $ 212,812 Savings 223,640 - - - - 223,640 Certificates of deposit 105,121 254,288 62,943 49,862 2,630 474,844 Short term borrowings 15,478 - - - - 15,478 Notes payable 4,000 50 11 1 - 4,062 Federal Home Loan Bank advances 20,346 - - - - 20,346 Trust preferred securities - - - - 22,425 22,425 ----------------------------------------------------------------------- Total Interest-bearing liabilities 581,397 254,338 62,954 49,863 25,055 973,607 ----------------------------------------------------------------------- Demand deposits - - - - 103,391 103,391 Other liabilities - - - - 13,522 13,522 Stockholders' equity - - - - 87,872 87,872 ----------------------------------------------------------------------- Total Liabilities and stockholders' equity $581,397 $ 254,338 $ 62,954 $ 49,863 $ 229,840 $1,178,392 ----------------------------------------------------------------------- Rate sensitivity gap (assets less liabilities) $(343,725) $ (43,227) $ 98,256 $ 198,114 ----------------------------------------------------------------------- Rate sensitivity gap (cumulative) (343,725) (386,952) (288,696) (90,582) ----------------------------------------------------------------------- Percent of total assets (cumulative) (29.17)% (32.84)% (24.50)% (7.69)% Rate sensitive assets/liabilities (cumulative) 40.88% 53.70% 67.88% 90.45% -----------------------------------------------------------------------
18 INTEREST RATE RISK At year-end 2001, the Company held approximately $449,000 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, 2001 appears in Table 7. A significant assumption that creates the large negative gap in the 0 to 3 month category is that all interest-bearing demand and savings accounts are subject to immediate repricing. While it is true that, contractually, those accounts are subject to immediate repricing, the rates paid on those accounts are generally not tied to specific indices and are influenced by market conditions and other factors. Accordingly, a general movement in interest rates, either up or down, may not have any immediate effect on the rates paid on these deposit accounts. The foregoing table illustrates only one source of information about sensitivity to interest rate movements, Our asset and liability management process also uses simulations that take into account the time that various assets and liabilities may reprice and the degree to which various categories of such assets and liabilities will respond to general interest rate movements. Interest rate risk can only be represented by a measurement of the effects of changing interest rates given the capacity for and magnitude of change on specific assets and liabilities. Effective asset/liability management requires the maintenance of a proper ratio between maturing or repriceable interest-earning assets and interest-bearing liabilities. Management believes that the Company has taken steps to position itself to react to changes occurring in the current rate environment. Short-term interest rates are at historically low levels and the Company expects them to remain relatively stable with a possible slight upward bias toward the second half of 2002. The Company has attempted to identify the correlation between the repricing of assets and liabilities so as to maintain an acceptable net interest margin during interest rate fluctuations. Economic forecasts anticipate improving conditions throughout 2002. This would generally indicate higher loan growth rates than levels achieved during the economic downturn experienced in 2001. The Company does not foresee its earnings materially impacted in 2002 regardless of the direction interest rates may trend. 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, 2001 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 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. Adoption of this standard on January 1, 2001 did not have a material effect on the Company's financial statements. A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Amounts previously recorded as goodwill from depository institution acquisitions are not presently considered to be goodwill under the new standard and these amounts will continue to be amortized. Management is currently evaluating the impact of this new standard, but management expects to continue amortizing approximately 90% of the Company's intangible assets. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
TABLE 8 - PRINCIPAL CASH FLOWS (DOLLARS IN THOUSANDS) THERE FAIR DECEMBER 31 2002 2003 2004 2005 2006 AFTER TOTAL VALUE - --------------------------------------------------------------------------------------------------------------------- Assets Investment securities Fixed rate $ 18,906 $ 18,161 $ 23,958 $ 35,548 $ 24,554 $128,603 $249,730 $ 251,675 Average interest rate 5.46% 5.96% 4.77% 5.28% 5.53% 5.68% 5.52% Variable rate - - - - $ 84 $ 24,420 $ 24,504 $ 24,753 Average interest rate - - - - 3.58% 4.82% 4.82% Loans Fixed rate $ 4,476 $ 33,260 $ 16,307 $ 34,566 $ 31,566 $189,063 $309,238 $ 317,357 Average interest rate 9.54% 9.53% 9.79% 9.16% 9.07% 7.72% 8.35% Variable rate $ 7,352 $ 67,970 $ 3,705 $ 3,742 $ 7,104 $384,930 $474,803 $ 475,378 Average interest rate 6.59% 5.74% 7.41% 7.80% 7.33% 6.80% 6.66% Liabilities Deposits NOW, money market and savings deposits Variable rate $436,452 - - - - - $436,452 $ 436,452 Average interest rate 1.24% - - - - - 1.24% Certificates of deposit Fixed rate $343,642 $ 56,602 $ 40,213 $ 6,924 $ 2,544 $ 708 $450,633 $ 456,179 Average interest rate 4.37% 4.93% 4.65% 6.27% 4.64% 5.02% 4.49% Variable rate $ 5,578 $ 12,229 $ 4,074 $ 1,271 $ 622 $ 437 $ 24,211 $ 24,211 Average interest rate 3.08% 3.57% 4.59% 4.64% 5.14% 4.81% 3.75% Borrowings Variable rate $ 15,478 - - - - - $15,478 $ 15,478 Average interest rate 1.64% - - - - - 1.64% FHLB advances Variable rate - - - $ 10,000 - $ 10,000 $ 20,000 $ 21,047 Average interest rate - - - 6.58% - 6.27% Fixed rate $ 112 $ 38 $ 34 $ 31 $ 131 - $ 346 $ 291 Average interest rate 6.48% 6.20% 6.20% 6.20% 6.20% - 6.29% Long-term debt Variable rate $ 1,650 $ 1,611 $ 801 - - - $ 4,062 $ 4,062 Average interest rate 8.04% 8.02% 8.02% - - - 8.03% Trust Preferred Securities Fixed rate - - - - - $ 22,425 $22,425 $ 22,425 Average interest rate - - - - - 8.75% 8.75%
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 internal control, the 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 auditing standards generally accepted in the United States of America 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 21 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Indiana United Bancorp Greensburg, Indiana We have audited the accompanying consolidated balance sheets of Indiana United Bancorp as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Indiana United Bancorp as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Crowe, Chizek and Company LLP Indianapolis, Indiana January 30, 2002 22 CONSOLIDATED BALANCE SHEETS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
DECEMBER 31 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 54,068 $ 45,413 Money market fund 5,351 6,373 Interest bearing demand deposits - 79 Federal funds sold - 16,050 ---------------------------- Cash and cash equivalents 59,419 67,915 Interest bearing time deposits 599 594 Investment securities Available for sale 268,136 281,716 Held to maturity (fair value of $8,292 and $12,749) 8,168 12,679 ---------------------------- Total investment securities 276,304 294,395 Loans held for sale 23,256 1,883 Loans, net of allowance for loan losses of $8,894 and $8,716 751,891 781,834 Premises and equipment (net) 16,840 17,558 Restricted stock, at cost 5,109 3,267 Intangible assets 22,815 23,739 Other assets 22,159 25,751 ---------------------------- Total assets $1,178,392 $ 1,216,936 ---------------------------- Liabilities Deposits Noninterest bearing $ 103,391 $ 103,067 Interest bearing 911,296 950,503 ---------------------------- Total deposits 1,014,687 1,053,570 Short-term borrowings 15,478 20,645 Federal Home Loan Bank advances 20,346 22,463 Notes payable 4,062 6,510 Other liabilities 13,522 13,318 ---------------------------- Subtotal 1,068,095 1,116,506 ---------------------------- 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, 6,191,232 and 5,873,900 shares 3,096 2,937 Common stock to be distributed, 309,562 and 293,148 shares 155 147 Additional paid-in capital 35,385 29,739 Retained earnings 47,806 46,176 Accumulated other comprehensive income 1,430 (994) ---------------------------- Total shareholders' equity 87,872 78,005 ---------------------------- Total liabilities and shareholders' equity $1,178,392 $ 1,216,936 ----------------------------
See notes to consolidated financial statements. 23 CONSOLIDATED INCOME STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Interest income: Loans receivable Taxable $66,394 $66,524 $54,990 Tax exempt 454 541 551 Investment securities Taxable 13,683 16,864 14,985 Tax exempt 1,795 810 2,257 Federal funds sold and money market funds 2,139 1,085 1,327 Deposits with financial institutions 80 74 120 -------------------------------------- Total interest income 84,545 85,898 74,230 -------------------------------------- Interest expense: Deposits 38,444 41,493 34,285 Short-term borrowings 611 1,210 1,420 Trust preferred securities 2,023 2,023 2,023 Other borrowings 1,699 2,083 685 -------------------------------------- Total interest expense 42,777 46,809 38,413 -------------------------------------- Net interest income 41,768 39,089 35,817 Provision for loan losses 2,136 1,658 1,826 -------------------------------------- Net interest income after provision for loan losses 39,632 37,431 33,991 Non-interest income: Insurance commissions 1,993 1,344 1,166 Mortgage banking 2,767 859 1,016 Fiduciary activities 506 474 455 Service charges on deposit accounts 3,835 3,652 2,944 Net realized losses on securities (111) (11) (7) Other income 2,496 3,273 2,031 -------------------------------------- Total non-interest income 11,486 9,591 7,605 -------------------------------------- Non-interest expense: Salaries and employee benefits 19,061 18,117 16,615 Net occupancy expenses 2,247 1,995 1,776 Equipment expenses 2,489 2,352 2,077 Merger expenses - 440 - Intangibles amortization 1,966 1,922 1,834 Telephone 855 791 720 Stationery printing and supplies 839 957 916 Other expenses 6,854 6,594 5,965 -------------------------------------- Total non-interest expense 34,311 33,168 29,903 -------------------------------------- Income before income tax 16,807 13,854 11,693 Income tax expense 5,630 4,000 3,605 -------------------------------------- Net income $11,177 $9,854 $ 8,088 -------------------------------------- Net income per share (basic and diluted) $ 1.72 $ 1.52 $ 1.26
See notes to consolidated financial statements. 24 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED OTHER ADDITIONAL COMPRE- COMPRE- COMMON STOCK PAID-IN RETAINED HENSIVE HENSIVE SHARES AMOUNT CAPITAL EARNINGS INCOME TOTAL INCOME - ---------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1999 5,772,939 $ 2,887 $ 24,225 $ 40,619 $ 1,332 $ 69,063 Net income 8,088 8,088 $ 8,088 Unrealized losses on securities net of reclassification adjustment (6,426) (6,426) (6,426) --------- Total comprehensive income $ 1,662 ========= Cash dividends - $.581 per share (3,932) (3,932) Issuance of common stock 94,022 46 1,468 1,514 Retirement of common stock (10,322) (5) (130) (135) ------------------------------------------------------------------------ Balance, December 31, 1999 5,856,639 2,928 25,563 44,775 (5,094) 68,172 Net income 9,854 9,854 $ 9,854 Unrealized gains on securities net of reclassification adjustment 4,100 4,100 4,100 --------- Total comprehensive income $ 13,954 ========= Cash dividends - $.594 per share (4,121) (4,121) Stock dividend 293,148 147 4,185 (4,332) - Issuance of common stock to redeem stock options 17,261 9 (9) - ------------------------------------------------------------------------ Balance, December 31, 2000 6,167,048 3,084 29,739 46,176 (994) 78,005 Net income 11,177 11,177 $ 11,177 Unrealized gains on securities net of reclassification adjustment 2,424 2,424 2,424 --------- Total comprehensive income $ 13,601 ========= Cash dividends - $.633 per share (4,114) (4,114) Stock dividend and fractional shares 309,562 155 5,271 (5,433) (7) Issuance of common stock in acquisition 24,184 12 375 387 ------------------------------------------------------------------------ Balance, December 31, 2001 6,500,794 $ 3,251 $ 35,385 $ 47,806 $ 1,430 $87,872 ------------------------------------------------------------------------
See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
YEARS ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 11,177 $ 9,854 $ 8,088 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 2,136 1,658 1,826 Depreciation and amortization 1,971 1,823 1,727 Amortization of mortgage servicing rights 1,117 392 399 Securities amortization, net 546 241 300 Amortization of intangibles 1,966 1,922 1,834 Investment securities losses 111 11 7 Change in loans held for sale (21,373) 6,032 3,057 Change in other assets and liabilities 1,175 (1,367) (1,444) ----------------------------------------- Net cash provided (used) by operating activities (1,174) 20,566 15,794 Investing Activities Net change in short term investments (5) 1,525 602 Proceeds from maturities and payments on securities held to maturity 4,556 5,127 1,766 Purchases of securities available for sale (199,629) (41,681) (137,267) Proceeds from maturities and payments on securities available for sale 205,928 38,030 54,591 Proceeds from sales of securities available for sale 10,507 622 12,074 Purchases of FHLB Stock (1,842) (856) (111) Loan originations and payments, net 27,807 (83,018) (103,892) Purchases of premises and equipment (1,888) (1,786) (3,935) Proceeds from sale of other real estate - 2,265 296 Cash (paid) received from acquisitions, net (655) 42,037 91,134 Proceeds from sale of premises and equipment 635 - - ----------------------------------------- Net cash provided (used) by investing activities 45,414 (37,735) (84,742) Financing Activities Net change in deposits (38,883) 69,141 14,789 Net change in short-term borrowings (5,167) (19,419) 20,022 Proceeds from notes payable - - 8,000 Repayment of notes payable (2,448) (375) (1,725) Proceeds from FHLB advances - 22,000 11,900 Repayment of FHLB advances (2,117) (24,021) (1,126) Proceeds from issuance of stock - - 150 Retirement of common stock - - (135) Cash dividends and fractional stock dividends (4,121) (4,121) (3,932) ----------------------------------------- Net cash provided (used) by financing activities (52,736) 43,205 47,943 ----------------------------------------- Net change in cash and cash equivalents (8,496) 26,036 (21,005) Cash and cash equivalents, beginning of period 67,915 41,879 62,884 ----------------------------------------- Cash and cash equivalents, end of period $ 59,419 $ 67,915 $ 41,879 ----------------------------------------- Additional Cash Flows Information Interest paid $ 44,435 $ 45,380 $ 38,472 Income tax paid 6,076 5,622 3,664 Loan balances transferred to foreclosed real estate - 2,491 397
See notes 2 and 3 regarding noncash transactions included in business combinations and branch acquisitions. See notes to consolidated financial statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations and Principles of Consolidation: The consolidated financial statements include Indiana United Bancorp ("Company") and its wholly-owned subsidiaries, People's Trust Company ("People's"), Union Bank and Trust Company of Indiana ("Union Bank"), Regional Bank ("Regional"), Capstone Bank, N.A. ("Capstone"), and IUB Reinsurance Company, Ltd. The Insurance Group, Inc. ("The Insurance Group") is a wholly owned subsidiary of Union Bank. During 2000, People's and Union Bank each formed wholly owned subsidiaries to hold investment securities. These investment subsidiaries are incorporated in Bermuda. IUB Capital Trust is a business trust formed in 1997 to issue the guaranteed preferred beneficial interests in the Company's subordinated debentures ("Preferred Securities"). The Company owns all of the common stock of IUB Capital Trust. The Company provides financial services through its offices in Indiana, Illinois, and Kentucky. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold. Intercompany transactions and balances are eliminated in consolidation. Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on 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, fair values of financial instruments, (and status of contingencies) are particularly subject to change. Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for loan and deposit transactions. Securities: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Other securities such as Federal Home Loan Bank stock are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or market, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Payments received on such loans are reported as principal reductions. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at the lower of cost or fair value when acquired, establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed over the asset useful lives on an accelerated basis, except for buildings for which the straight line basis is used. Servicing Assets: Servicing assets represent purchased rights and the allocated value of retained servicing rights on loans sold. Servicing assets are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the assets, using groupings of the underlying loans as to interest rates and then, secondarily, as to geographic and prepayment characteristics. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Any impairment of a grouping is reported as a valuation allowance. Intangibles: Purchased intangibles, primarily goodwill and core deposit value, are recorded at cost and amortized over the estimated life. Goodwill amortization is straight-line over 15 to 20 years, and core deposit amortization is accelerated and straight-line methods over 10 to 15 years. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED Long-term Assets: Premises and equipment and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. 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 deferred tax assets to the amount expected to be realized. Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Derivatives: Effective January 1, 2001, a new accounting standard required all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values are recorded in the income statement. Fair value changes involving hedges are generally recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Adoption of this standard on January 1, 2001 did not have a material effect on the Company's financial statements. Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issue of the financial statements. Comprehensive Income: 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. New Accounting Pronouncements: A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company must be recorded at fair value at date of acquisition, and the excess of cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets must be separated from goodwill. Identifiable intangible assets with finite useful lives will be amortized under the new standard, whereas goodwill, both amounts previously recorded and future amounts purchased, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. Amounts previously recorded as goodwill from depository institution acquisitions are not presently considered to be goodwill under the new standard and these amounts will continue to be amortized. Management is currently evaluating the impact of this new standard, but management expects to continue amortizing approximately 90% of the Company's intangible assets. Loss Contingencies: 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 now are 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 bank to the holding company or by the holding company to shareholders. Fair Value of Financial Instruments: 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. Operating Segments: While the Company's chief decision-makers monitor the revenue streams of the various Company products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's financial service operations are considered by management to be aggregated in one reportable operating segment. Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. 28 NOTE 2 - ACQUISITIONS Effective April 1, 1999, the Company acquired the property and casualty insurance business lines of The Anderson Group of Owensboro, Kentucky ("The Anderson Group"). The property and casualty insurance business lines of The Anderson Group were integrated into The Insurance Group, Inc. The acquisition was recorded under the purchase method of accounting. In this transaction, the Company issued 89,207 shares of its common stock to The Anderson Group shareholders (adjusted for stock dividends). 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 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. 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. On May 1, 2000 the Company consummated its acquisition of First Affiliated Bancorp of Watseka, Illinois and its wholly owned banking subsidiary, Capstone Bank, N. A. The transaction was accounted for using the pooling-of-interests method of accounting. The Company issued 1,122,741 shares of its common stock to the shareholders of First Affiliated Bancorp (adjusted for stock dividends). At the effective date of the merger, the conversion rate was 4.4167 shares of Company stock for each outstanding share of First Affiliated. Merger and related costs were charged against net income during 2000. The financial information contained herein includes Capstone for all periods presented. During 2000, the Company purchased two 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 $43,794 including cash of $42,037 and deposits of $43,524. The results of operations of the branches have been included since their acquisition dates. Intangible assets of $1,458 were recorded and are being amortized over estimated useful lives using the straight-line method. During 2001, the Company consummated its acquisition of the insurance agencies of Vollmer & Associates, Inc. ("Vollmer"). The transaction was accounted for using the purchase method of accounting. The purchase price consisted of $655 in cash and 25,393 shares of Company stock. The acquisition resulted in goodwill of approximately $1,000. The results of operations have been included since the acquisition date. The Vollmer agencies were subsequently merged into The Insurance Group. In October 2001, the Company signed a letter of intent to acquire one branch located in Illinois. The transaction will be accounted for using the purchase method of accounting and is expected to close in the first quarter of 2002. The total fair value of assets acquired and liabilities assumed is estimated at $20,412 including cash of $15,812, loans of $3,199 and deposits of $20,324. A core deposit intangible will be recorded, which is estimated at $525. This branch will be merged into Capstone. In February of 2002, the Company was the successful bidder to acquire four branches. The acquisition will be accounted for under the purchase method of accounting. Total assets and liabilities to be acquired are estimated at $50,000. The transaction is expected to close in the second or third quarter of 2002. NOTE 3 - RESTRICTION ON CASH AND DUE FROM BANKS The Banks are required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2001 and 2000 was $10,138 and $4,264, respectively. NOTE 4 - INVESTMENT SECURITIES The fair value of securities available for sale and related gains/losses recognized in accumulated other comprehensive income (loss) were as follows:
Gross Gross Fair Unrealized Unrealized Value Gains Losses - --------------------------------------------------------------------------------------------------------------------- 2001 - ------------------ Available for Sale Federal agencies $ 97,654 $ 2,205 $ (113) State and municipal 41,920 558 (600) Mortgage-backed securities 102,086 970 (505) Corporate obligations 18,765 250 (852) Equity and other securities 7,711 315 - ------------------------------------------ Total available for sale $268,136 $ 4,298 $ (2,070) ------------------------------------------ 2000 - ------------------ Available for Sale Federal agencies $167,887 $ 842 $ (880) State and municipal 32,247 504 (655) Mortgage-backed securities 49,008 229 (446) Corporate obligations 24,203 117 (1,061) Equity and other securities 8,371 30 (270) ------------------------------------------ Total available for sale $281,716 $ 1,722 $ (3,312) ------------------------------------------
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 4 - INVESTMENT SECURITIES, CONTINUED The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows:
GROSS GROSS CARRYING UNRECOGNIZED UNRECOGNIZED FAIR AMOUNT GAINS LOSSES VALUE - --------------------------------------------------------------------------------------------------------------------- 2001 - ------------------ Held to Maturity State and municipal $ 7,018 $ 68 $ (38) $ 7,048 Corporate obligations 499 14 - 513 Other securities 651 80 - 731 ---------------------------------------------------------- Total held to maturity $ 8,168 $ 162 $ (38) $ 8,292 ---------------------------------------------------------- 2000 - ------------------ Held to Maturity State and municipal $ 11,587 $ 37 $ (65) $ 11,559 Corporate obligations 498 4 - 502 Other securities 594 94 - 688 ---------------------------------------------------------- Total held to maturity $ 12,679 $ 135 $ (65) $ 12,749 ----------------------------------------------------------
Contractual maturities of securities for 2001 were as follows. Securities not due at a single maturity date are shown separately.
AVAILABLE HELD TO MATURITY FOR SALE ------------------------------------------- CARRYING FAIR FAIR AMOUNT VALUE VALUE - -------------------------------------------------------------------------------------------------------------------- Within one year $ 3,418 $ 3,464 $ 15,680 Two through five years 2,016 2,047 100,207 Six through ten years 2,006 2,076 19,841 After ten years 728 705 22,611 Mortgage-backed securities - - 102,086 Equity and other securities - - 7,711 ------------------------------------------- Total investment securities $ 8,168 $ 8,292 $ 268,136 -------------------------------------------
Gross proceeds from sales of securities available for sale during 2001, 2000 and 1999 were $10,507, $622, and $12,074. Gross gains of $72, $24, and $9 and gross losses of $232, $35, and $16 were realized on those sales in 2001, 2000 and 1999, respectively. In addition, the Company realized $49 of gains on called securities in 2001. Securities with a carrying value of $49,085 and $58,348 were pledged at December 31, 2001 and 2000 to secure certain deposits and for other purposes as permitted or required by law. NOTE 5 - LOANS AND ALLOWANCE
DECEMBER 31 2001 2000 - ---------------------------------------------------------------------------------------------------- Commercial and industrial loans $ 81,808 $ 77,285 Agricultural production financing 20,726 20,717 Farm real estate 46,524 49,155 Commercial real estate 96,747 92,077 Hotel 74,888 60,398 Residential real estate 328,107 387,994 Construction and development 34,130 28,617 Consumer 69,957 64,548 State and political 7,898 9,759 ------------------------ Total loans 760,785 790,550 Allowance for loan losses (8,894) (8,716) ------------------------ Net loans $751,891 $781,834 ------------------------
30
DECEMBER 31 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Allowance for loan losses Balance, January 1 $ 8,716 $ 7,718 $ 6,600 Provision for losses 2,136 1,658 1,826 Recoveries on loans 421 457 737 Loans charged off (2,379) (1,117) (1,445) ---------------------------------------- Balance, December 31 $ 8,894 $ 8,716 $ 7,718 ---------------------------------------- DECEMBER 31 2001 2000 1999 - --------------------------------------------------------------------------------------------------------------------- Impaired loans with an allowance $ 5,989 $ 1,220 $ 3,334 Impaired loans with no allocated allowances - 198 - ---------------------------------------- Total impaired loans $ 5,989 $ 1,418 $ 3,334 ---------------------------------------- Allowance allocated for impaired loans $ 898 $ 47 $ 197 ---------------------------------------- Average balance of impaired loans $ 4,174 $ 1,779 $ 3,526 Interest income recognized on impaired loans - - 97 Cash basis interest included above - - 97
NOTE 6 - PREMISES & EQUIPMENT
DECEMBER 31 2001 2000 - -------------------------------------------------------------------------------------------------------------------- Land $ 2,726 $ 3,128 Buildings 17,139 17,190 Equipment 15,874 14,700 ----------------------------- Total cost 35,739 35,018 ----------------------------- Accumulated depreciation (18,899) (17,460) ----------------------------- Net $ 16,840 $ 17,558 -----------------------------
Depreciation expense was $1,971, $1,823 and $1,727 for 2001, 2000 and 1999. NOTE 7 - DEPOSITS
DECEMBER 31 2001 2000 - -------------------------------------------------------------------------------------------------------------------- Noninterest-bearing $ 103,391 $ 103,067 Interest-bearing demand 212,812 173,495 Savings deposits 223,640 214,443 Certificates and other time deposits of $100 or more 87,480 113,287 Other certificates and time deposits 387,364 449,278 ----------------------------- Total deposits $1,014,687 $1,053,570 -----------------------------
Certificates and other time deposits maturing in years ending after December 31, 2001 2002 $ 359,086 2003 62,943 2004 41,585 2005 7,546 2006 - Thereafter 3,684 ---------- Total $ 474,844 ---------- NOTE 8 - SHORT TERM BORROWINGS
DECEMBER 31 2001 2000 - -------------------------------------------------------------------------------------------------------------------- Federal funds purchased $ - $ 3,400 Securities sold under repurchase agreements 15,478 17,245 ----------------------------- Total short-term borrowings $ 15,478 $ 20,645 -----------------------------
Securities sold under repurchase agreements ("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 2001 and 2000 totaled $19,175 and $26,676. The daily average of such agreements during 2001 and 2000 totaled $15,798 and $19,884. The weighted average rate was 1.64% and 4.41% at December 31, 2001 and 2000, while the weighted average rate during 2001 and 2000 was approximately 3.27% and 4.78%, respectively. The majority of the agreements at December 31, 2001 mature within 30 days. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 9 - FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank ("FHLB") advances at year end were: 2001 2000 - -------------------------------------------------------------------------- Maturities May 2001 through September 2007, with rates from 6.2% to 6.9%, averaging 6.5% $ - $ 22,463 Maturities February 2002 through September 2007, with rates from 6.2% to 6.7%, averaging 6.4% 20,346 - -------------------- $ 20,346 $ 22,463 -------------------- The FHLB advances are secured by first mortgage loans totaling approximately 145% of the advance under a blanket security agreement. The advances are subject to restrictions or penalties in the event of prepayment. Maturities over the next five years are: 2002 $ 112 2003 38 2004 34 2005 10,031 2006 131 Thereafter 10,000 NOTE 10 - NOTES PAYABLE Notes payable include a term note secured by 100% of the common stock of the bank subsidiaries with a balance of $4,000 and $6,400 at December 31, 2001 and 2000. 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 4.73% at December 31, 2001. The loan matures July 1, 2004. The scheduled annual principal reductions will be $1,600 per year in years 2002 and 2003 with a final payment of $800 in 2004. The Company has various installment loans secured by equipment. Balances outstanding as of December 31, 2001 and 2000 totaled $62 and $110. The loans call for monthly payments totaling $5, with interest accruing at rates ranging from 8.25% to 9.45%. Maturities range from March 2002 through January 2004. Required principal payments of $42, $11, and $9 are due in 2002, 2003 and 2004. NOTE 11 - 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 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 estimated life of the securities. The securities and distributions are guaranteed by the Company, which is reflected in the guaranteed preferred beneficial interest in the Company's subordinated debentures on the balance sheet. Distributions on the securities are payable quarterly in arrears at the annual rate of 8.75% 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 12 - 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 $293,640 and $201,056 at December 31, 2001 and 2000. The fair value of capitalized mortgage servicing rights 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. 2001 2000 1999 - ------------------------------------------------------------------------------ Mortgage servicing rights Balance, January 1 $ 881 $ 995 $ 924 Servicing rights capitalized 1,341 278 470 Amortization of servicing rights (1,117) (392) (399) ----------------------------- Balance, December 31 $ 1,105 $ 881 $ 995 ----------------------------- 32 NOTE 13 - INCOME TAX 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 Bank stock or excess dividends, or loss of "bank" status for Regional Bank would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for Regional at December 31, 2001 was approximately $735.
YEAR ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Income tax expense Currently payable $5,378 $5,941 $4,373 Deferred 252 (1,541) (768) Capstone change in tax status - (400) - ----------------------------------- Total income tax expense $5,630 $4,000 $3,605 ----------------------------------- Reconciliation of federal statutory to actual tax expense Federal statutory income tax rate 35% 35% 34% Federal statutory income tax $5,883 $4,849 $3,976 Tax exempt interest (672) (766) (671) Effect of state income taxes 351 490 634 Non-deductible expenses 109 186 74 Tax exempt income on life insurance (66) (178) - Capstone deferred tax asset - (400) - Capstone Subchapter S income - - (345) Other 25 (181) (63) ----------------------------------- Actual tax expense $5,630 $4,000 $3,605 -----------------------------------
The components of the net deferred tax asset are as follows:
DECEMBER 31 2001 2000 - ----------------------------------------------------------------------------------------------------- Assets Allowance for loan losses $3,507 $ 3,081 Core deposit intangibles 320 269 Deferred compensation 533 548 Accrued expenses 406 350 Unrealized loss on securities AFS - 596 Other 60 280 -------------------- Total assets $4,826 $ 5,124 -------------------- Liabilities Accretion on securities (42) (55) Depreciation (503) (543) Fair value adjustments in accounting for assets acquired (381) (413) Goodwill (204) (140) Mortgage servicing rights (433) (346) Deferred loan fees/costs (342) (197) Unrealized gain on securities AFS (798) - Other (360) (21) -------------------- Total liabilities $(3,063) $(1,715) -------------------- $1,763 $ 3,409 --------------------
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 14 - OTHER COMPREHENSIVE INCOME
BEFORE-TAX TAX (EXPENSE) NET-OF-TAX YEAR ENDED DECEMBER 31, 2001 AMOUNT /BENEFIT AMOUNT - ------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities Unrealized holding gains arising during the year $3,707 $(1,355) $ 2,352 Less: reclassification adjustment for losses realized in net income (111) 39 (72) ----------------------------------- Other comprehensive income $3,818 $(1,394) $ 2,424 ----------------------------------- BEFORE-TAX TAX (EXPENSE) NET-OF-TAX YEAR ENDED DECEMBER 31, 2000 AMOUNT /BENEFIT AMOUNT - ------------------------------------------------------------------------------------------------------------------- Unrealized gains on securities Unrealized holding gains arising during the year $6,419 $(2,326) $ 4,093 Less: reclassification adjustment for losses realized in net income (11) 4 (7) ----------------------------------- Other comprehensive income $6,430 $(2,330) $ 4,100 ----------------------------------- 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 $(9,878) $3,448 $(6,430) Less: reclassification adjustment for losses realized in net income (7) 3 (4) ----------------------------------- Other comprehensive loss $(9,871) $3,445 $(6,426) -----------------------------------
NOTE 15 - 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: 2001 2000 - -------------------------------------------------------- Commitments to extend credit $123,639 $86,622 Standby letters of credit 584 794 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 predominantly short-term or 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 16 - STOCK DIVIDENDS On December 12, 2000, the Company announced a 5% stock dividend to be paid on January 19, 2001 to shareholders of record as of December 29, 2000. The stock dividend was recorded in 2000, and all share and per share amounts have been retroactively adjusted for all prior years to reflect this stock dividend. On December 19, 2001, the Company announced a 5% stock dividend to be paid on January 25, 2002 to shareholders of record as of December 31, 2001. The stock dividend was recorded in 2001, and all share and per share amounts have been retroactively adjusted for all prior years to reflect this stock dividend. NOTE 17 - 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, 2001, total shareholders' equity of the Banks was $105,096 of which $94,861 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. 34 NOTE 18 - DIVIDEND REINVESTMENT PLAN The Company maintains an Automatic Dividend Reinvestment Plan. The plan enables 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. NOTE 19 - 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, 2001 and 2000, the Banks are categorized as well capitalized and met all subject capital adequacy requirements.
REQUIRED FOR TO BE WELL ACTUAL ADEQUATE CAPITAL CAPITALIZED ---------------------------------------------------------- DECEMBER 31, 2001 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - --------------------------------------------------------------------------------------------------------------------- Indiana United Bancorp Total capital (to risk-weighted assets) $94,946 12.6% $60,323 8.0% N/A N/A Tier 1 capital (to risk-weighted assets) 86,052 11.4 30,161 4.0 N/A N/A Tier 1 capital (to average assets) 86,052 7.4 46,698 4.0 N/A N/A People's Total capital (to risk-weighted assets) $35,377 11.9% $23,805 8.0% $29,757 10.0% Tier 1 capital (to risk-weighted assets) 31,657 10.6 11,903 4.0 17,854 6.0 Tier 1 capital (to average assets) 31,657 6.9 18,292 4.0 22,865 5.0 Union Bank Total capital (to risk-weighted assets) $26,961 11.8% $18,344 8.0% $22,931 10.0% Tier 1 capital (to risk-weighted assets) 24,383 10.6 9,172 4.0 13,758 6.0 Tier 1 capital (to average assets) 24,383 7.0 13,836 4.0 17,295 5.0 Regional Total capital (to risk-weighted assets) $16,970 11.5% $11,820 8.0% $14,776 10.0% Tier 1 capital (to risk-weighted assets) 15,133 10.2 5,910 4.0 8,865 6.0 Tier 1 capital (to average assets) 15,133 7.0 8,652 4.0 10,815 5.0 Capstone Total risk-based capital (to risk-weighted assets) $10,972 14.9% $5,873 8.0% $7,341 10.0% Tier 1 capital (to risk-weighted assets) 10,301 14.0 2,936 4.0 4,405 6.0 Tier 1 capital (to average assets) 10,301 7.4 5,559 4.0 6,949 5.0 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 19 - REGULATORY CAPITAL, CONTINUED REQUIRED FOR TO BE WELL ACTUAL ADEQUATE CAPITAL CAPITALIZED ---------------------------------------------------------- DECEMBER 31, 2000 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO - --------------------------------------------------------------------------------------------------------------------- Indiana United Bancorp Total capital (to risk-weighted assets) $86,408 10.8% $63,920 8.0% N/A N/A Tier 1 capital (to risk-weighted assets) 77,692 9.7 31,960 4.0 N/A N/A Tier 1 capital (to average assets) 77,692 6.7 48,181 4.0 N/A N/A People's Total capital (to risk-weighted assets) $34,582 11.3% $24,478 8.0% $30,597 10.0% Tier 1 capital (to risk-weighted assets) 30,846 10.1 12,239 4.0 18,358 6.0 Tier 1 capital (to average assets) 30,846 6.5 19,072 4.0 23,844 5.0 Union Bank Total capital (to risk-weighted assets) $25,671 12.0% $17,155 8.0% $21,444 10.0% Tier 1 capital (to risk-weighted assets) 23,214 10.8 8,578 4.0 12,867 6.0 Tier 1 capital (to average assets) 23,214 6.6 14,074 4.0 17,592 5.0 Regional Total risk-based capital (to risk-weighted assets) $16,317 11.1% $ 11,712 8.0% $14,640 10.0% Core capital (to risk-weighted assets) 14,522 9.8 5,856 4.0 8,784 6.0 Core capital (to adjusted total assets) 14,522 6.7 8,601 4.0 10,752 5.0 Capstone Total risk-based capital (to risk-weighted assets) $ 9,988 11.1% $7,180 8.0% $8,975 10.0% Tier 1 capital (to risk-weighted assets) 9,260 10.3 3,590 4.0 5,385 6.0 Tier 1 capital (to average assets) 9,260 6.9 5,398 4.0 6,748 5.0
NOTE 20 - 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 $1,337 in 2001, $1,133 in 2000, and $1,023 in 1999. NOTE 21 - RELATED PARTY TRANSACTIONS The Company has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or associates (related parties). The aggregate amount of loans, as defined, to such related parties were as follows: Balances, January 1, 2001 $ 8,404 Changes in composition of related parties (712) New loans, including renewals and advances 8,694 Payments, etc. including renewals 7,187 ------- Balances, December 31, 2001 $ 9,199 ------- Deposits from related parties held by the company at December 31, 2001 and 2000 totaled $4,495 and $3,878. NOTE 22 - STOCK OPTION PLANS Under stock option plans effective through May 1, 2000, options were issued to shareholders of the Company in exchange for shares held in retirement accounts (to facilitate Capstone's 1998 conversion to an S-Corporation), and the pro forma disclosures of SFAS No. 123 regarding stock-based compensation are not applicable. These options were redeemed in the acquisition of First Affiliated Bancorp in 2000, and a stock option plan is no longer maintained. 36
YEAR ENDED DECEMBER 31 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS (RESTATED FOR STOCK DIVIDENDS) SHARES PRICE SHARES PRICE SHARES PRICE - ------------------------------------------------------------------------------------------------------------------- Outstanding, beginning of year - - 52,794 $ 9.65 52,794 $ 9.65 Granted - - - - - - Exercised or redeemed - - (52,794) 9.65 - - Outstanding, end of year - - - - 52,794 9.65 Options exercisable at year end - - - - 52,794 9.65
NOTE 23 - EARNINGS PER SHARE EARNINGS PER SHARE WERE COMPUTED AS FOLLOWS:
WEIGHTED AVERAGE PER-SHARE YEAR ENDED DECEMBER 31, 2001 INCOME SHARES AMOUNT - ------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 11,177 6,494,532 $ 1.72 Effect of dilutive stock options - --------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 11,177 6,494,532 $ 1.72 ----------------------------------------------- YEAR ENDED DECEMBER 31, 2000 - ------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 9,854 6,469,109 $ 1.52 Effect of dilutive stock options 6,291 --------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 9,854 6,475,400 $ 1.52 ----------------------------------------------- YEAR ENDED DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share Net income available to common shareholders $ 8,088 6,420,001 $ 1.26 Effect of dilutive stock options 19,049 --------- Diluted Earnings Per Share Net income available to common shareholders and assumed conversions $ 8,088 6,439,050 $ 1.26 -----------------------------------------------
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) NOTE 24 - FAIR VALUES OF FINANCIAL INSTRUMENTS
DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------------------------------------------ CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 59,149 $ 59,149 $ 67,915 $ 67,915 Interest-bearing time deposits 599 599 594 594 Securities available for sale 268,136 268,136 281,716 281,716 Securities held to maturity 8,168 8,292 12,679 12,749 Loans including loans held for sale, net 775,147 783,841 783,717 785,527 Restricted stock 5,109 5,109 3,267 3,267 Income receivable 7,970 7,970 10,505 10,505 Liabilities Deposits (1,014,687) (1,020,233) (1,053,570) (1,058,401) Borrowings Short-term (15,478) (15,478) (20,645) (20,645) FHLB advances (20,346) (21,338) (22,463) (22,463) Notes payable (4,062) (4,062) (6,510) (6,510) Interest payable (4,084) (4,084) (5,742) (5,742) Trust preferred securities (22,425) (22,425) (22,425) (20,463)
The methods and assumptions used to estimate fair value are described as follows. Carrying amount is the estimated fair value of cash and cash equivalents, interest-bearing time deposits, restricted stock, accrued interest receivable and payable, demand deposits, short-term borrowings, variable rate notes payable, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. Fair value of trust preferred securities is based on market price. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or terminate such arrangements, and are not considered significant. NOTE 25 - QUARTERLY FINANCIAL DATA (UNAUDITED)
INTEREST NET INTEREST NET EARNINGS PER SHARE INCOME INCOME INCOME BASIC FULLY DILUTED - ------------------------------------------------------------------------------------------------------------------- 2001 First quarter $22,312 $9,854 $2,574 $0.40 $0.40 Second quarter 21,407 9,903 2,786 0.42 0.42 Third quarter 20,775 10,476 2,843 0.44 0.44 Fourth quarter 20,051 11,535 2,974 0.46 0.46 2000 First quarter $19,987 $9,553 $2,336 $0.36 $0.36 Second quarter 21,070 9,965 2,461 0.38 0.38 Third quarter 21,796 9,775 2,473 0.38 0.38 Fourth quarter 23,045 9,796 2,584 0.40 0.40
38 NOTE 26 - PARENT ONLY CONDENSED FINANCIAL STATEMENTS Parent Only Condensed Balance Sheets
DECEMBER 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------- Assets Cash and cash equivalents $ 4,914 $ 3,878 Investment securities - AFS 850 850 Investment in subsidiaries 106,606 101,356 Other assets 4,051 2,326 ------------------------- Total assets $ 116,421 $ 108,410 ------------------------- Liabilities Subordinated debentures payable to IUB Capital Trust $ 23,119 $ 23,119 Notes payable 4,000 6,400 Other liabilities 1,430 886 ------------------------- Total liabilities 28,549 30,405 Shareholders' equity 87,872 78,005 ------------------------- Total liabilities and shareholders' equity $ 116,421 $ 108,410 -------------------------
Parent Only Condensed Statement of Income YEAR ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Income Dividends from subsidiaries $ 11,020 $ 9,883 $ 8,702 Fees from subsidiaries 4,016 1,598 438 Other Income 207 313 205 ----------------------------------------- Total income 15,243 11,794 9,345 Expenses Interest expense 2,395 2,569 2,514 Salaries and benefits 3,890 2,456 1,418 Professional fees 503 403 276 Other expenses 1,967 1,517 598 ----------------------------------------- Total expenses 8,755 6,945 4,806 ----------------------------------------- Income (loss) before income tax and equity in undistributed income of subsidiaries 6,488 4,849 4,539 Income tax expense (benefit) (1,844) (2,016) (1,656) ----------------------------------------- Income (loss) before equity in undistributed income of subsidiaries 8,332 6,865 6,195 Equity in undistributed income of subsidiaries 2,845 2,989 1,893 ----------------------------------------- Net income $ 11,177 $ 9,854 $ 8,088 -----------------------------------------
Condensed Statement of Cash Flows Parent Only YEAR ENDED DECEMBER 31 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Operating Activities Net income $ 11,177 $ 9,854 $ 8,088 Undistributed income of subsidiaries (2,845) (2,989) (1,893) Changes in other assets and liabilities 989 2,453 (1,589) ----------------------------------------- Net cash provided by operating activities 9,321 9,318 4,606 Investing Activities Capital contributed to subsidiary - (2,300) (14,879) Purchases of equipment (1,764) (456) (218) Proceeds from sale of equipment - - 14 Purchase of security AFS - (100) - ----------------------------------------- Net cash used by investing activities (1,764) (2,856) (15,083) Financing Activities Payments on notes payable (2,400) (300) (1,300) Proceeds from notes payable - - 8,000 Proceeds from issuance of stock - - 1,514 Retirement of common stock - - (135) Cash dividends and fractional stock dividends (4,121) (4,121) (3,932) ----------------------------------------- Net cash provided (used) by financing activities (6,521) (4,421) 4,147 Net change in cash and cash equivalents 1,036 2,041 (6,330) Cash and cash equivalents, beginning of period 3,878 1,837 8,167 ----------------------------------------- Cash and cash equivalents, end of period $ 4,914 $ 3,878 $ 1,837 -----------------------------------------
39 DIRECTORS AND OFFICERS INDIANA UNITED BANCORP: Robert E. Hoptry, Chairman Retired President and CEO Indiana United Bancorp Eric E. Anderson President and CEO Anderson Insurance and Financial Services William G. Barron, CCIM Chairman and President Wm. G. Barron Enterprises, Inc. Dale J. Deffner Retired Partner Deffner and Tebbe Don Dunevant, M.D. Family Physician Portage Medical Group Philip A. Frantz Attorney at Law; Partner Coldren and Frantz Rick S. Hartman, CPA President, HRH Group, Ltd. James L. Saner, Sr. President and CEO Indiana United Bancorp Edward J. Zoeller President E.M. Cummings Veneer, Inc. INDIANA UNITED BANCORP SENIOR MANAGEMENT James L. Saner, Sr. President and CEO Donald A. Benziger Senior Vice President and CFO John C. Parker Senior Vice President of Operations PEOPLE'S TRUST COMPANY James L. Saner, Sr., Chairman President and CEO Indiana United Bancorp Dale J. Deffner, Secretary Retired Partner Deffner and Tebbe Dieter K. H. Johnsen Owner Dieter K.H. Johnsen, Inc. Larry A. Johnson Retired Small Business Owner John G. Seale, CPA Partner Rettig, Blankman, Mack and Seale Accounting Firm Norman L. Winkler Farmer PEOPLE'S TRUST COMPANY SENIOR MANAGEMENT James L. Saner, Sr. Chairman, President & CEO L. Les Estep Senior Vice President - Commercial Lending Mark W. Dunevant Senior Vice President - Mortgage Lending UNION BANK Daryl R. Tressler, Chairman President and CEO Union Bank and Trust Company of Indiana Philip A. Frantz Attorney at Law; Partner Coldren and Frantz Robert E. Hoptry Retired President and CEO Indiana United Bancorp David L. Miers President Miers Farm Corporation Lawrence R. Rueff, D.V.M. President Swine Veterinary Services John G. Young Retired Chairman Jay Garment Corporation UNION BANK SENIOR MANAGEMENT Daryl R. Tressler Chairman, President and CEO Glenn Raver Senior Vice President - Retail Services Brent Hoptry Senior Vice President - Commercial Lending REGIONAL BANK Michael K. Bauer, Chairman President and CEO Regional Bank William G. Barron, CCIM Chairman and President Wm. G. Barron Enterprises, Inc. D.J. Hines President Schuler Bauer Realty Michael J. Kapfhammer President Buckhead Mountain Grill Edward J. Zoeller President E.M. Cummings Veneer, Inc. REGIONAL BANK SENIOR MANAGEMENT Michael K. Bauer Chairman, President and CEO James S. Honour Vice President - Retail Services Larry W. Brumley Senior Vice President - Commercial Lending CAPSTONE BANK: John R. Rodda, Chairman President and CEO Capstone Bank Rick S. Hartman, CPA President, HRH Group, Ltd. Roy A. Koester Farmer George D. Williams Retired Sales Representative Telescope Casual Furniture Company Dennis F. Nardoni Owner and CEO Chicago Steel Tape Co., Inc and Affiliates Donald A. Benziger Senior Vice President and CFO Indiana United Bancorp CAPSTONE BANK SENIOR MANAGEMENT John R. Rodda Chairman, President and CEO David West Senior Vice President - Commercial Lending THE INSURANCE GROUP, INC. James L. Saner, Sr., Chairman President and CEO Indiana United Bancorp C. Todd Anderson President The Insurance Group, Inc. William G. Barron, CCIM Chairman and President Wm. G. Barron Enterprises, Inc. Daryl R. Tressler President and CEO Union Bank and Trust Company of Indiana Jerry Vollmer Insurance Sales Manager - Indiana, The Insurance Group THE INSURANCE GROUP SENIOR MANAGEMENT C. Todd Anderson President Sales Manager - Kentucky Jerry Vollmer Vice President Sales Manager - Indiana 40 SHAREHOLDER INFORMATION ANNUAL MEETING Wednesday, April 24th, 2002, 10:00 AM Knights of St. John 312 S. Wilder Greensburg, IN 47240 CORPORATE ADDRESS Indiana United Bancorp 201 North Broadway P.O. Box 87 Greensburg, Indiana 47240 Tel: 812-663-0157 Fax : 812-663-4812 Fax www.2iub.com FORM 10-K Copies of the Company's 2001 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. Howe Barnes Investments, Inc. Midwest Research The range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below. 2001 Q4 Q3 Q2 Q1 - ------------------------------------------------------- High $ 18.50 $ 17.86 $15.86 $15.95 Low $ 15.12 $ 15.38 $15.19 $14.05 Last Sale $ 17.55 $ 15.52 $15.71 $15.91 2000 Q4 Q3 Q2 Q1 - ------------------------------------------------------- High $ 14.29 $ 14.51 $15.19 $17.23 Low $ 12.70 $ 13.38 $14.06 $14.51 Last Sale $ 14.05 $ 14.17 $14.51 $15.19 The following dividends per share were paid by Indiana United Bancorp: 2001 Q4 Q3 Q2 Q1 - -------------------------------------------------------- $ .162 $ .157 $ .157 $ .157 2000 Q4 Q3 Q2 Q1 - -------------------------------------------------------- $ .150 $ .150 $ .150 $ .144 Amounts have been adjusted to reflect the 5% stock dividends declared in 2000 and 2001. EX-21 4 ex21.txt EXHIBIT (21)--SUBSIDIARIES OF THE REGISTRANT - -------------------------------------------- State of Name Incorporation ---- ------------- People's Trust Company Indiana Union Bank and Trust Company of Indiana Indiana Regional Bank Indiana Kentucky United Bancorp, Inc. Kentucky IUB Capital Trust Delaware IUB Illinois Holdings, Inc. Indiana IUB Reinsurance Company, Ltd. Turks and Caicos The Insurance Group, Inc. Indiana People's Investment Company, Ltd. Bermuda Union Investment Company, Ltd. Bermuda EX-23.1 5 ex23-1.txt EXHIBIT 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement on Form S-8 of Indiana United Bancorp (No. 33-45395) of our report, dated January 30, 2002, on the consolidated financial statements of Indiana United Bancorp as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. /s/ Crowe, Chizek and Company LLP Indianapolis, Indiana March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----