10-Q 1 iub-10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 2002 COMMISSION FILE NUMBER 0-12422 INDIANA UNITED BANCORP (Exact name of registrant as specified in its charter) INDIANA 35-1562245 ------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 201 NORTH BROADWAY GREENSBURG, INDIANA 47240 --------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (812) 663-0157 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------- (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of May 10, 2002 there were outstanding 6,495,084 shares, without par value of the registrant. INDIANA UNITED BANCORP FORM 10-Q INDEX ------------------------------------------------------------------------------ PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Income and Comprehensive Income 4 Consolidated Condensed Statements of Cash Flows 5 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 10 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 2 INDIANA UNITED BANCORP FORM 10-Q CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in thousands except per share data)
(Unaudited) March 31, December 31, 2002 2001 ----------- ----------- Assets Cash and due from banks $ 35,560 $ 54,068 Money market fund 23,943 5,351 Federal funds sold 1,975 -- ----------- ----------- Cash and cash equivalents 61,478 59,419 Interest-bearing time deposits -- 599 Securities Available for sale 289,908 268,136 Held to maturity (fair value of $7,227 and $8,292) 7,098 8,168 Loans held for sale 7,976 23,256 Loans, net of allowance for loan losses of $9,236 and $8,894 743,080 751,891 Premises and equipment (net) 18,104 16,840 Restricted stock, at cost 5,674 5,109 Goodwill 2,673 2,673 Intangible assets 20,247 20,142 Other assets 21,013 22,159 ----------- ----------- Total assets $ 1,177,251 $ 1,178,392 =========== =========== Liabilities Deposits Noninterest-bearing $ 89,321 $ 103,391 Interest-bearing 902,318 911,296 ----------- ----------- Total deposits 991,639 1,014,687 Securities sold under agreement to repurchase 17,957 15,478 Federal Home Loan Bank advances 40,287 20,346 Notes payable 4,050 4,062 Other liabilities 11,930 13,522 ----------- ----------- Subtotal 1,065,863 1,068,095 Guaranteed preferred beneficial interests in company's subordinated debentures 22,425 22,425 Shareholders' equity Preferred stock no par value Authorized - 400,000 shares Issued and outstanding - none -- -- Common stock $.50 stated value: Authorized - 10,000,000 shares, Issued 6,500,084 and 6,191,232 and outstanding - 6,495,084 and 6,191,232 shares 3,251 3,096 Common stock to be distributed -- 155 Treasury stock - 5,000 shares (93) -- Additional paid-in capital 35,385 35,385 Retained earnings 50,026 47,806 Accumulated other comprehensive income 394 1,430 ----------- ----------- Total shareholders' equity 88,963 87,872 ----------- ----------- Total liabilities and shareholders' equity $ 1,177,251 $ 1,178,392 =========== ===========
See notes to consolidated condensed financial statements. 3 INDIANA UNITED BANCORP FORM 10-Q CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited) (Dollars in thousands except per share data)
Three months ended March 31, --------- 2002 2001 ------- ------- Interest income: Loans, including fees $14,610 $17,322 Investment securities 3,600 4,135 Other 155 855 ------- ------- Total interest income 18,365 22,312 ------- ------- Interest expense: Deposits 6,295 11,285 Trust preferred securities 506 506 Other borrowings 501 667 ------- ------- Total interest expense 7,302 12,458 ------- ------- Net interest income 11,063 9,854 Provision for loan losses 550 369 ------- ------- Net interest income after provision for loan losses 10,513 9,485 Non-interest income: Securities gains 128 13 Other income 3,371 2,543 ------- ------- Total non-interest income 3,499 2,556 Non-interest expense 8,882 8,234 ------- ------- Income before income tax 5,130 3,807 Income tax expense 1,794 1,233 ------- ------- Net income $ 3,336 $ 2,574 ======= ======= Comprehensive income $ 2,300 $ 4,747 ======= ======= Net income per share (basic and diluted) $ 0.51 $ 0.40 Cash dividends declared 0.170 0.157
See notes to consolidated condensed financial statements 4 INDIANA UNITED BANCORP FORM 10-Q CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW (Unaudited) (Dollars in thousands)
Three months ended March 31, --------- 2002 2001 --------- --------- Operating Activities Net income $ 3,336 $ 2,574 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 550 369 Depreciation and amortization 594 529 Amortization of intangibles 433 482 Investment securities gains (128) (13) Change in loans held for sale 15,280 (7,323) Change in other assets and liabilities 48 3,460 --------- --------- Net cash provided by operating activities 20,113 78 Investing Activities Net change in short term investments 599 (998) Proceeds from maturities and payments on securities held to maturity 1,077 3,146 Purchases of securities available for sale (62,047) (28,046) Proceeds from maturities and payments on securities available for sale 27,932 97,640 Proceeds from sales of securities available for sale 10,757 Loan originations and payments, net 11,460 2,759 Purchases of restricted stock (565) -- Purchases of premises and equipment (940) (365) --------- --------- Net cash provided (used) by investing activities (11,727) 74,136 Financing Activities Net change in deposits (43,180) (20,663) Short-term borrowings 2,479 (7,345) Repayment of notes payable (12) (806) Repayment of FHLB advances (59) (64) Proceeds from FHLB borrowings 20,000 -- Purchase of treasury shares (93) -- Cash dividends and fractional shares (1,116) (1,026) Cash received from branch acquisitions 15,654 -- --------- --------- Net cash used by financing activities (6,327) (29,904) --------- --------- Net change in cash and cash equivalents 2,059 44,310 Cash and cash equivalents, beginning of period 59,419 70,088 --------- --------- Cash and cash equivalents, end of period $ 61,478 $ 114,398 ========= =========
See notes to consolidated condensed financial statements. 5 NOTE 1 SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies followed by Indiana United Bancorp ("Company") for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. NOTE 2 BRANCH ACQUISITIONS During the first quarter of 2002, the Company acquired one branch located in Grant Park, Illinois. The transaction was accounted for using the purchase method of accounting. The results of operations have been included since the transaction date. The total fair value of assets acquired and liabilities assumed was $20,244 including cash of $15,654, loans of $3,199 and deposits of $20,132. A core deposit intangible was recorded of $538. This branch was 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. 6 NOTE 3 BUSINESS COMBINATIONS Effective April 1, 2001, the Company consummated its acquisition of the insurance agencies of Vollmer & Associates, Inc. The transaction was accounted for using the purchase method of accounting. The purchase price consisted of $655 cash and 25,393 shares of Company stock. NOTE 4 - INVESTMENT SECURITIES The fair value of securities available for sale and related gains and losses recognized in accumulated other comprehensive income were as follows:
Gross Gross Fair Unrealized Unrealized As of March 31, 2002 Value Gains Losses -------------------------------------------------------------------------------------------- Available for Sale Federal agencies $101,381 $1,419 ($677) State and municipal 45,405 614 (168) Mortgage-backed securities 121,295 915 (602) Equity and other securities 21,827 188 (1,082) -------------------------------------------------------------------------------------------- Total available for sale $289,908 $3,136 ($2,529) -------------------------------------------------------------------------------------------- As of December 31, 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) Equity and other securities 26,476 565 (852) -------------------------------------------------------------------------------------------- Total available for sale $268,136 $4,298 ($2,070) --------------------------------------------------------------------------------------------
The carrying amount, unrecognized gains and losses, and fair value of securities held to maturity were as follows: 7
Gross Gross Carrying Unrecognized Unrecognized Fair As of March 31, 2002 Amount Gains Losses Value ----------------------------------------------------------------------------------------------------------- Held to Maturity State and municipal $5,937 $ 70 $(12) $5,995 Other securities 1,161 71 - 1,232 ----------------------------------------------------------------------------------------------------------- Total held to maturity $7,098 $141 ($12) $7,227 ----------------------------------------------------------------------------------------------------------- As of December 31, 2001 ---------------------------------------- Held to Maturity State and municipal $7,018 $68 ($38) $7,048 Other securities 1,150 94 - 1,244 ----------------------------------------------------------------------------------------------------------- Total held to maturity $8,168 $162 ($38) $8,292 -----------------------------------------------------------------------------------------------------------
NOTE 5 - LOANS AND ALLOWANCE March 31 December 31 2002 2001 ----------------------------------------------------------------------------- Commercial and industrial loans $ 91,820 $ 89,706 Agricultural real estate and production 64,488 67,250 Commercial real estate 103,470 106,522 Hotel 75,657 74,888 Residential real estate 324,985 318,332 Construction and development 20,376 34,130 Consumer 71,520 69,957 --------- --------- Total loans 752,316 760,785 Allowance for loan lossess (9,236) (8,894) ----------------------------------------------------------------------------- Net loans $ 743,080 $ 751,891 ============================================================================= NOTE 6 - DEPOSITS March 31, December 31, 2002 2001 ---- ---- Noninterest-bearing demand $ 89,321 $ 103,391 Interest-bearing demand 186,975 212,812 Savings 232,623 223,640 Certificates of deposit of $100 or more 94,366 87,480 Other certificates and time deposits 388,354 387,364 ------------ ------------- Total deposits $ 991,639 $ 1,014,687 ============ ============= 8 NOTE 7 EARNINGS PER SHARE Earnings per share (EPS) were computed as follows:
For the three months ended March 31, 2002 March 31, 2001 ------------------------------------------ ------------------------------------------ Weighted Per Weighted Per Net Average Share Net Average Share Income Shares Amount Income Shares Amount ------ ------ ------ ------ ------ ------ Basic earnings per share: Income available to common shareholders $3,336 6,497,028 $0.51 $2,574 6,474,853 $0.40 =========== =========== Effect of dilutive shares - - - - ------------ ------------- ----------- ------------ Diluted earnings per share $3,336 6,497,028 $0.51 $2,574 6,474,853 $0.40 ============ ============= =========== =========== ============ ===========
Weighted average shares are restated for all stock dividends and exclude treasury shares. Note 8 New Accounting Pronouncements A new accounting standard requires all business combinations to be recorded using the purchase method of accounting. 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 cost over fair value of net assets acquired is recorded as goodwill. Identifiable intangible assets with finite useful lives will continue to amortize under the new standard, whereas goodwill ceased 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 branch acquisitions are not presently considered to be goodwill under the new standard and these amounts will continue to be amortized. The Corporation expects to complete the first step of its impairment testing of goodwill by the end of the second quarter. Goodwill is not being amortized in 2002, but was amortized in 2001. If goodwill had not been amortized in 2001, the effect on March 31, 2001 net income would have been a net increase of $32, consisting of reduced amortization expense of $53 and increased income tax expense of $21, and earnings per share would have been unchanged. All intangible assets are subject to amortization, and amortization expense was $433 and $482 for the first quarter of 2002 and 2001. Estimated amortization expense for the next five years is as follows: 2002 $1,741, 2003 $1,687, 2004 $1,655, 2005 $1,655, 2006 $1,655. Intangible assets subject to amortization are as follows: Gross Accumulated Amount Amortization March 31, 2002: Core deposit intangible $ 9,597 $ 3,105 Unidentified branch acquisition intangible 16,358 2,603 -------- -------- Total $ 25,955 $ 5,708 December 31, 2001: Core deposit intangible $ 9,059 $ 2,879 Unidentified branch acquisition intangible 16,358 2,396 -------- -------- Total $ 25,417 $ 5,275 Effective January 1, 2002, the Corporation adopted a new accounting standard on impairment and disposal of long-lived assets. The effect of this new standard was not material to the financial statements. A new accounting standard regarding asset retirement obligations will apply for 2003. Management does not believe this standard will have a material effect on the Corporation's financial statements. 9 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) Overview Indiana United Bancorp ("Company") is a multi-bank, bank holding company that provides an array of financial services and is headquartered in Greensburg, Indiana. On March 31, 2002, the Company controlled four bank subsidiaries, People's Trust Company ("People's"), Union Bank and Trust Company of Indiana ("Union"), Regional Bank ("Regional"), and Capstone Bank, N.A. ("Capstone"). In addition to the banking subsidiaries, the Company owned, either directly or indirectly, the following subsidiaries: The Insurance Group, Inc., IUB Capital Trust, IUB Reinsurance Company, Ltd., People's Investment Company, Ltd., PTC Investments, Inc., RB Investments, Inc. and Union Investment Company, Ltd. Forward-Looking Statements Except for historical information contained herein, the discussion in this Form 10-Q quarterly report includes certain forward-looking statements based upon management expectations. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the costs of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; and changes in the quality or composition of the Company's loan and investment portfolios. The 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, which 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. Results of Operations Net income for the first quarter of 2002 increased $762, or 29.6%, to $3,336 compared to the first quarter of 2001 due primarily to a significant increase in the Company's non-interest income and an improvement in net interest income. Earnings per share for the first quarter equaled $.51 in 2002, compared to $.40 in 2001, an increase of 27.5%. The Company realized after-tax gains related to sales of investment securities and the sale of its merchant credit card processing portfolio of approximately $175, which represents $.03 per share on an after-tax basis. Excluding these items, the Company's earnings per share would have been $.48 per share, an increase of 20.0% as compared to the first quarter of 2001. The Company's return on average total assets for the first quarter was 1.15% in 2002 compared to .87% in 2001. Return on average shareholders' equity for the first quarter was 15.09% in 2002 and 13.06% in 2001. 10 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) Net Interest Income The volume and yield of earning assets and interest-bearing liabilities influence net interest income. Net interest income reflects the mix of interest-bearing and non-interest-bearing liabilities that fund earning assets, as well as interest spreads between the rates earned on these assets and the rates paid on interest-bearing liabilities. First quarter net interest income of $11,063 in 2002 was an increase of 12.3% over the first quarter of 2001. Net interest income on a tax equivalent basis, reflected as a percentage of average earning assets (net interest margin), was 4.23% for the first quarter of 2002 and 3.65% for the same time frame in 2001. The increase in the Company's net interest margin was primarily due to the repricing and runoff of higher priced CDs and the repricing of core deposits at market rates. Provision for Loan Losses This topic is discussed under the heading "Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses". Non-interest Income First quarter non-interest income for 2002 was $3,499, which was an increase over the same period a year ago of $943 and 36.8%. Mortgage banking income, which consists of gains and losses on loan sales and service fee income, was $1,065 for the first quarter of 2002 compared to $337 for the same period in 2001, an increase of $728, or 216.0%. This increase was due to the significant decrease in mortgage interest rates over the past twelve months, which caused a high demand for mortgage loans. The Company elected to sell the majority of the fixed rate loans while maintaining the servicing rights. Insurance commissions increased in the first quarter of 2002 to $559 versus $381 for the same period last year. The increase of 46.7% was primarily due to the acquisition of the Vollmer & Associates insurance agencies in April 2001. Non-interest Income Three months ended March 31, ------------------ 2002 2001 ------ ------ Insurance commissions $ 559 $ 381 Fiduciary activities 197 165 Mortgage banking income 1,065 337 Service charges on deposit accounts 905 876 Gain (loss) on sales of securities 128 13 Other income 645 784 ------ ------ Total $3,499 $2,556 ====== ====== 11 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) Non-interest expense Total non-interest expense was $8,882 for the first quarter of 2002, which represented an increase of $648 from the first quarter of 2001. The largest component of non-interest expense is personnel expense. Personnel expenses increased in the first quarter of 2002 by $272, or 5.8% compared to the prior year period. Normal staff salary adjustments and increased benefit costs were incurred in 2002. In addition, the Company incurred personnel costs related to the acquisition of the insurance offices of Vollmer & Associates. A ratio frequently used to measure the efficiency of a financial institution is computed by dividing non-interest expense by the total of tax-effected net interest income plus non-interest income excluding securities gains or losses. The lower the ratio, the more efficient the Company is in managing net interest margin, non-interest income and non-interest expense. The Company's efficiency ratios were 60.1% for the first quarter of 2002 compared to 65.2% for the same period in 2001. The improvement in the efficiency ratio is due to the increase in mortgage banking income and the Company's continued attention to cost controls. Non-interest Expense Three months ended March 31, ------------------ 2002 2001 ------ ------ Salaries and employee benefits $5,002 $4,730 Net occupancy 505 543 Equipment 599 565 Intangible amortization 433 482 Stationary, printing, and supplies 254 227 Telephone 240 184 Other 1,849 1,503 ------ ------ Total non-interest expense $8,882 $8,234 ====== ====== Income Taxes The effective tax rate for the first three months was 35.0% for 2002 and 32.4% for 2001. The increase in the effective tax rate compared to the prior year was a direct result of higher pre-tax income of which the incremental portion was generally taxable at the highest tax rate. The Company and its subsidiaries will file consolidated income tax returns for 2002. 12 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) Financial Condition Total assets at March 31, 2002 were $1,177,251 compared to $1,178,392 as of December 31, 2001. Average earning assets represented 92.7% of average total assets for the first three months of 2002 compared to 92.5% for the same period of 2001. Average loans represented approximately 76.7% of average deposits in the first three months of 2002 and 75.6% for the comparable period in 2001. Management continues to emphasize quality loan growth to increase these averages. Average loans as a percent of average assets were 65.2% and 65.4% for the three-month period ended March 31, 2002 and 2001 respectively. The decrease in deposits of $23,048 from December 31, 2001 to March 31, 2002 is due mainly to the seasonal fluctuation of deposits as many corporate customers build up cash balances for year-end. In addition, the Company has become less aggressive in competing for higher-priced funds. Shareholders' equity was $88,963 on March 31, 2002 compared to $87,872 on December 31, 2001. Book value per common share was $13.70 versus $13.52 at year-end 2001. The unrealized gain on securities available for sale, net of taxes, totaled $394 or $.06 per share at March 31, 2002 compared to $1,430 or $.22 per share at December 31, 2001. Excluding the net unrealized gains and losses on securities available for sale, book value per share would have been $13.64 at March 31, 2002 or an increase of 2.6% over the comparable book value at year-end 2001. Loans, Credit Risk and the Allowance and Provision for Possible Loan Losses Loans remain the Company's largest concentration of assets and, by their nature, carry a higher degree of risk. The loan underwriting standards observed by the Company's subsidiaries are viewed by management as a means of controlling problem loans and the resulting charge-offs. The Company's loan underwriting standards have historically resulted in lower levels of net charge-offs than peer bank averages. The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out-of-area borrowers are incurred. Accordingly, the Company's Board of Directors regularly monitors such concentrations to determine compliance with its loan allocation policy. The Company believes it has no undue concentrations of loans. 13 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) Residential real estate loans continue to represent a significant portion of the total loan portfolio. Such loans represented 43.2% of total loans at March 31, 2002 and 41.8% at December 31, 2001. On March 31, 2002, the Company had $7,976 of residential real estate loans held for sale, which was a decrease from the year-end balance of $23,256 as new loan originations slowed during the first quarter. The Company generally retains the servicing rights on mortgages sold. The provision for loan losses was $550 in the first three months of 2002 compared to $369 for the same period in 2001. Net charge-offs were $208 for the first three months of 2002 compared to $90 for the comparable period in 2001. On an annualized basis as a percentage of average loans, net charge-offs equaled ..11% for the three-month period ended March 31, 2002, compared to .05% for the comparable period in 2001. Foreclosed real estate held by the Company at March 31, 2002 was $858 and $733 at December 31, 2001. Total non-performing assets were $12.5 million as of March 31, 2002 compared to $4.7 million as of March 31, 2001 and represented 1.07% of total assets at March 31, 2002 versus 0.39% one year ago. The increase in non-performing assets is primarily related to two commercial credits totaling $5.7 million that were classified as non-accrual loans during 2001. The Company's management has reviewed these two credits and an allowance allocation has been provided for these loans. The adequacy of the allowance for loan losses in each subsidiary is reviewed at least quarterly. The determination of the provision amount in any period is based on management's continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio, current economic conditions, the amount of loans presently outstanding, and information about specific borrower situations. The allowance for loan losses as of March 31, 2002 is considered adequate by management. Investment Securities Investment securities offer flexibility in the Company's management of interest rate risk, and are an important source of liquidity as a response to changing characteristics of assets and 14 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) liabilities. The Company's investment policy prohibits trading activities and does not allow investment in high-risk derivative products, junk bonds or foreign investments. As of March 31, 2002, $289,908 of investment securities are classified as "available for sale" ("AFS") and are carried at fair value with unrealized gains and losses, net of taxes, reported as a separate component of shareholders' equity. An unrealized pre-tax gain of $607 was recorded to adjust the AFS portfolio to current market value at March 31, 2002, compared to an unrealized pre-tax gain of $2,228 at December 31, 2001. AFS securities increased $21,777. With favorable interest rates, the Company determined that it would have a favorable impact on net interest income by increasing borrowings and investing in securities. Much of the increase in AFS securities and FHLB advances is attributable to this activity. In September 2000, the Company formed two investment subsidiaries, People's Investment Company, Ltd. and Union Investment Company, Ltd., which are incorporated in Bermuda. Effective January 1, 2002 the Company formed two additional investment subsidiaries, PTC Investments, Inc. and RB Investments, Inc., which are incorporated in Nevada. These subsidiaries hold a large portion of the Company's investment portfolios and were formed with the intent to enhance the organization's profitability. Sources of Funds The Company relies primarily on customer deposits, securities sold under agreement to repurchase ("agreements") and shareholders' equity to fund earning assets. FHLB advances are also used to provide additional funding. Deposits generated within local markets provide the major source of funding for earning assets. Total deposits funded 91.8% and 93.8% of total earning assets at March 31, 2002 and December 31, 2001. Total interest-bearing deposits averaged 90.8% and 91.7% of average total deposits for the periods ending March 31, 2002 and December 31, 2001, respectively. Management constantly strives to increase the percentage of transaction-related deposits to total deposits due to the positive effect on earnings. Repurchase agreements increased $2,479 or 16.0% from year-end 2001 as higher-rate certificates of deposit matured and were not aggressively pursued. The Company had FHLB advances of $40,287 outstanding at March 31, 2002. These advances have interest rates ranging from 2.26% to 6.95% with $10,000 maturing in the third quarter of 2002 and the first quarter of 2004. Approximately $20,000 of these advances mature in 2005 or later. Capital Resources Total shareholders' equity increased $1,091 to $88,963 at March 31, 2002 as compared to December 31, 2001. The Federal Reserve Board and other regulatory agencies have adopted risk-based capital guidelines that assign risk weightings to assets and off-balance sheet items. The Company's core capital consists of shareholders' equity, excluding accumulated other comprehensive income, while Tier 1 consists of core capital less goodwill and intangibles. Trust preferred securities qualify as Tier 1 capital or core capital with respect to the Company under the risk-based capital guidelines established by the Federal Reserve. Under such guidelines, capital received from the proceeds of the sale of trust preferred securities cannot constitute more than 25% of the total core capital of the Company. Consequently, the amount of trust preferred securities in excess of the 25% limitation constitutes Tier 2 capital of the Company. Total regulatory capital consists of Tier 1, certain debt instruments and a portion of the allowance for credit losses. At March 31, 2002, Tier 1 capital to total average assets was 7.22%. Tier 1 15 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) capital to risk-adjusted assets was 11.14%. Total capital to risk-adjusted assets was 12.39%. All three ratios exceed all required ratios established for bank holding companies. Risk-adjusted capital levels of the Company's subsidiary banks exceed regulatory definitions of well-capitalized institutions. The Company declared and paid common dividends of $.17 per share in the first quarter of 2002 versus $.157 for the first quarter of 2001. Liquidity Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors, and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets, and higher interest expense involved in extending liability maturities. Liquid assets include cash and cash equivalents, loans and securities maturing within one year, and money market instruments. In addition, the Company holds AFS securities maturing after one year, which can be sold to meet liquidity needs. Maintaining a relatively stable funding base, which is achieved by diversifying funding sources and extending the contractual maturity of liabilities, supports liquidity and limits reliance on volatile short-term purchased funds. Short-term funding needs arise from declines in deposits or other funding sources, funding of loan commitments and requests for new loans. The Company's strategy is to fund assets to the maximum extent possible with core deposits that provide a sizable source of relatively stable and low-cost funds. Average core deposits funded approximately 83.6% of total earning assets for the three months ended March 31, 2002 and 82.6% for the same period in 2001. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. In addition, the affiliates have access to the Federal Home Loan Bank for borrowing purposes. The Company has not received any recommendations from regulatory authorities that would materially affect liquidity, capital resources or operations. Interest Rate Risk 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. Effective asset/liability management requires the maintenance of a proper ratio between maturing or repriceable interest-earning assets and interest-bearing liabilities. It is the policy of the Company that the cumulative GAP divided by total assets shall be plus or minus 20% at the 3-month, 6-month, and 1-year time horizons. 16 INDIANA UNITED BANCORP FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS (Dollar amounts in thousands except per share data) At March 31, 2002, the Company held approximately $390,910 in assets comprised of securities, loans, short-term investments, and federal funds sold, which were interest sensitive in one year or less time horizons. Other The Securities and Exchange Commission ("Commission") maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission, including the Company. That address is http://www.sec.gov. 17 INDIANA UNITED BANCORP QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollar amounts in thousands except per share data) Item 3. Quantitative and Qualitative Disclosures about Market Risk Market risk of the Corporation encompasses exposure to both liquidity and interest rate risk and is reviewed monthly by the Asset/Liability Committee and the Board of Directors. There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2002 from the analysis and disclosures provided in the Corporation's Form 10-K for the year ended December 31, 2001. 18 INDIANA UNITED BANCORP FORM 10-Q PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K The following exhibits are furnished in accordance with the provisions of Item 601 of Regulation S-K. a) None b) Reports on Form 8-K There were no reports filed on Form 8-K for the first quarter of 2002. No other information is required to be filed under Part II of this form. 19 INDIANA UNITED BANCORP FORM 10-Q SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INDIANA UNITED BANCORP May 10, 2002 /s/ James L. Saner Sr ------------------------------------------------- James L. Saner Sr President and Chief Executive Officer May 10, 2002 /s/ Donald A. Benziger ------------------------------------------------- Donald A. Benziger Senior Vice President & Chief Financial Officer May 10, 2002 /s/ James M. Anderson ------------------------------------------------- James M. Anderson Controller & Principal Accounting Officer 20